FOMC Minutes
A meeting of the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System in
Washington on Wednesday, June 20, 1945,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
at 10:15 a.m.
Eccles, Chairman
Sproul, Vice Chairman
Szymczak
McKee
Ransom
Draper
Evans
Alfred H. Williams
Gidney
Leedy
Gilbert
Mr. Morrill, Secretary
Mr. Carpenter, Assistant Secretary
Mr. Goldenweiser, Economist
Messrs. Hardy, Sienkiewicz, Thomas, and
John H. Williams, Associate Economists
Mr. Wyatt, General Counsel
Mr. Vest, Assistant General Counsel
Mr. Rouse, Manager of the System Open Market
Account
Mr. Thurston, Assistant to the Chairman of
the Board of Governors
Messrs. Piser and Kennedy, Chief and Assist
ant Chief, respectively, of the Government
Securities Section, Division of Research
and Statistics of the Board of Governors
Messrs. Flanders, Young, McLarin, and Day, alter
nate members of the Federal Open Market Com
mittee
Messrs. Leach, Davis, and Peyton, Presidents of
the Federal Reserve Banks of Richmond, St.
Louis, and Minneapolis, respectively
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meetings
of the Federal Open Market Committee held on
February 28 and March 1, 1945, were approved.
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6/20/45
Mr. Gidney stated that Mr. K. H. Mackenzie, who was elected an
associate economist of the Federal Open Market Committee at the March
meeting of the Committee, had resigned as Vice President of the Federal
Reserve Bank of Cleveland,
and suggested that in
his place Mr. L. Merle
Hostetler, the financial economist at the Cleveland Bank, be elected an
associate economist of the Committee.
Mr. Gilbert said that Mr. James C. Dolley, who also was elected
an associate economist at the March meeting of the Federal Open Market
Committee, had resigned as Director of Research at the Federal Reserve
Bank of Dallas, and that it
was suggested that Mr. Watrous H. Irons be
elected an associate economist of the Committee,
effective as of the
date upon which he assumes his duties as Director of Research at the
Federal Reserve Bank of Dallas which was expected to take place on July
1, 1945.
Upon motion duly made and seconded, and
by unanimous vote, Messrs. ostetler and
Irons were elected associate economists of
the Federal Open Market Committee to serve
until the election of their successors at the
first
meeting of the Committee after February
28, 1946, it being understood that the elec
tion of Mr. Irons would become effective as
of the date upon which he assumes his duties
as Director of Research at the Federal Re
serve Bank of Dallas.
Upon motion duly made and seconded, and
by unanimous vote, the actions of the execu
tive committee of the Federal Open Market
Committee, as set forth in the minutes of
the meetings of the executive committee on
February 28 and March 1, 1945, were approved,
ratified, and confirmed.
Mr. Rouse presented a report prepared at the Federal Reserve
6/20/45
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Bank of New York covering open market operations during the period from
March 2 to June 16, 1945, inclusive.
report covering operations in
He also presented a supplemental
the System account on June 18 and 19,
1945, and discussed the principal matters covered by the two reports.
Following his statement copies of the principal report were distributed
to the members of the Committee and others present and copies of both
reports have been placed in
the files of the Federal Open Market Commit
tee.
At the conclusion of the discussion of
the reports, upon motion duly made and sec
onded, and by unanimous vote, the transac
tions in the System account, during the
period from February 28 to June 19, 1945,
inclusive, were approved, ratified, and con
firmed.
During the presentation of Mr. Rouse's report, Mr. Hostetler,
Associate Economist,
joined the meeting.
Chairman Eccles then called for the reports of the Economists
and Mr. Goldenweiser stated that Mr. Thomas would make the principal
statement.
Mr. Thomas discussed the prospects during the transition period
under conditions of (1) a well balanced reconversion with a minimum of
unemployment and the economy operating at near capacity without infla
tion, (2)
rapid inflation and collapse, and (3)
leading to depression
and subsequent unemployment.
Mr. Thomas'
weiser and John H.
statement was followed by comments by Messrs. Golden
Williams.
Thereupon the meeting recessed and reconvened at 2:15 p.m. with
6/20/45
-4
the same attendance as at the morning session.
Mr. Flanders contributed some pertinent observations with respect
to the situations projected by Mr.
Thomas and his comments were followed
by supplementary statements by Messrs. Hardy and Sienkiewicz.
Summaries of the statements made by Messrs. Thomas, Goldenweiser,
Williams, Flanders, Hardy, and Sienkiewicz have been placed in
the files
of the Federal Open Market Committee.
There was a general discussion of possible variations in the
projections referred to by Mr. Thomas,
the difference in the situation
existing at the end of the last war and the current conflict, and the
policies that should be adopted to meet whatever situation might arise.
Consideration was also given to certain of the questions raised by the
statements of the Economists including the extent to which technological
improvements would add to the peacetime production capacity, the neces
sity for profits as an incentive to private initiative, the relationship
between high levels of consumption and capital formation, the possibil
ity of individuals preferring more leisure to increased income and pur
chasing power,
and the responsibility of the Government for full employ
ment and whether that could be discharged effectively by deficit financ
ing.
During the discussion, Mr. Thomas distributed copies of a pre
liminary draft of the Review of the Month for the July Federal Reserve
Bulletin under the title
of "Economic Effects of Changing War Program".
Chairman Eccles reviewed the discussions which members of the
executive committee had had with representatives of the Treasury follow-
6/20/45
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ing the last meeting of the Federal Open Market Committee with respect
to securities to be offered in the Seventh War Loan Drive and the
reasons for his letter of March 9 and Mr. Sproul's telegram of March 27
to Mr. Bell, of which the Presidents of all of the Federal Reserve Banks
had been informed.
He also referred to the discussions with Treasury
representatives in April of the Treasury's suggestion that there be a
further increase of at least $600 million in the volume of outstanding
Treasury bills.
He said that the members of the executive committee
had taken the position that there appeared to be no need for additional
offerings at the time but that if
the Treasury felt that additional funds
should be obtained before the next drive there would be no objection to
an increase of $600 million.
He also said that the Treasury had decided
to hold the increase in abeyance subject to further consideration at a
later date if
there were sufficient change in
conditions to warrant re
consideration.
Attention was then directed to the progress of the Seventh War
Loan Drive and Mr. Rouse stated that when the plans for the restriction
of speculation in the drive were worked out it
was felt at the Federal
Reserve Bank of New York that they would be effective and easily carried
out but that there had been one complication after another resulting in
inequities until the Bank found itself
policing job.
involved in
a most complicated
Therefore, Mr. Rouse said, he asked Mr. Harris, Manager
of the Securities Department of the Bank, to jot down his comments and
that he had made the following points:
The certification procedure had not been effective
(1)
and there probably would be as much speculation in this drive
6/20/45
as in any previous drive.
(2)
The recent strength of the market gave assurance to
the free rider.
(3)
Many banks had not taken seriously the various re
quests of the Treasury nor the certification which they had
to sign, which had resulted in competition between banks to
the extent that many banks were very bitter about the whole
arrangement.
(4)
A better job could not be expected from the banks
unless definite yardsticks were established for each class of
investor, which was not practicable under the prevailing drive
technique.
As a means of holding down the volume of subscrip
tions most banks would prefer not to make loans to facilitate
subscriptions or at rates lower than the coupon rate. Many banks
had stated that the "carrying profit" was a greater inducement
than the "premium profit".
(5)
The difference in rates on loans between banks was
a sore subject, especially in places where there were small
banks and branches of large banks.
(6)
The request not to sell old securities in order to
buy securities offered in the current drive had not been taken
seriously.
(7) If a thorough policing job were done it would
greatly impair the morale of the selling organization as well
as of commercial banks.
(8) Banks were reluctant to ask their customers for a
financial statement if they had had no occasion to do so in
their previous relationships.
Mr. Rouse concluded his statement with the comment that the
situation had grown to be a serious one and that something should be done
about it
promptly.
It
was clear from the comments of most of the Presidents that
the problem of speculation and indirect buying had reached considerable
proportions during the drive in their respective districts.
In response to a question as to what should be done to combat
6/20/45
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the speculative activities which he had outlined, Mr. Rouse referred
to the decline in the yields on long-term securities which he thought
would continue under present conditions to a point where the Treasury
would be unable to continue the issuance of long-term 2-1/2 per cent
bonds.
He also pointed out that the yields on short-term securities
had increased because of the efforts of the banks to maintain an aver
age rate of earnings.
To meet this situation in the long-term market
he suggested that the Treasury might announce now that the Eighth War
Loan Drive would take place in the fall and that a 2-1/2 per cent bond
of substantially the same term as the long-term bond offered in the
Seventh War Loan Drive would be included in the basket, or that the
2-1/2 per cent bond would be put on tap and taken out of the financing
drives entirely, which would have the effect of creating a supply of
securities and counteracting the tendency toward higher prices on long
terms.
In the short-term area he did not think it
would be possible at
this time to discontinue the posted rate on bills, but the System might
well give consideration to increasing to 3/4 per cent the differential
discount rate on advances to member banks,
gations maturing or callable in
secured by Government obli
one year or less, for the purpose of
taking some of the profit incentive out of borrowing for the purpose of
purchasing Government securities.
An essential part of any such program
would be direct offerings to commercial banks.
Mr. Rouse's suggestions were discussed and Chairman Eccles
stated that when the evidence of the speculation in the Seventh War Loan
Drive was available and the representatives of the System were in a po-
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6/20/45
sition to present the picture to the Treasury, there should be an infor
mal conference with the Treasury representatives for the purpose of
meeting the speculative situation and reviewing the future program.
He
also suggested, as another step that might be taken to combat specula
tion, the requirement that collateral for war loan accounts consist of
short-term securities to the extent of not less than 75 per cent.
Mr. Sproul referred to the opinion that had been expressed on
numerous occasions before, that the root of the trouble was the pattern
of rates and that as long as the pattern was continued no way could be
devised effectively to prevent advantage being taken of it.
It
was suggested that if the discount rate on short-term Gov
ernment securities was to be changed, that action should be taken before
the rate is
frozen into the financing structure.
The point was also
made that when the Japanese phase of the war ends the System should be
prepared with a flexible program which would permit it
to meet any situation that might develop,
to act promptly
and that in the absence of
such a program there was danger of the situation being frozen to such
an extent that flexible action might not be possible.
Various possible steps that might be taken in connection with
the discount rate were mentioned and it
was agreed that the whole pro
gram of Treasury financing and future System policies should be consid
ered at the proposed informal meeting with the Treasury.
Chairman Eccles stated that if
the Presidents had any suggestions
that they thought would be helpful in connection with such a meeting he
would appreciate it
if
they would submit them for consideration.
6/20/45
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Mr. Sproul asked if
there were any question on the part of the
Presidents as to the desirability of raising the discount rate on short
term Government securities to 3/4 per cent,
and no objections were ex
pressed.
At the conclusion of the discussion, Mr. Alfred H. Williams sug
gested that the proposed conference with the Treasury representatives
should be held as promptly as possible so that the situation with re
spect to speculative developments in the current drive would be fresh
in everyone's mind.
Turning to the action to be taken by the
Committee to carry out its open market pol
icies pending the next meeting of the Commit
tee, there was unanimous agreement that, in
view of the considerations which had been dis
cussed at this meeting, no action should be
taken at this time to change the direction
issued to the Federal Reserve Banks at the
meeting of the Federal Open Market Committee
on March 1, 1945, with respect to the purchase
of Treasury bills at a discount rate of 3/8
per cent.
Chairman Eccles stated that at the meeting of the executive com
mittee just prior to this meeting of the full Committee,
consideration
was given to the changes that might be made in the procedure for the
allocation of securities in the System open market account in the light
of the enactment of the reserve ratio bill,
S.
510, which reduced to 25
per cent the gold certificate reserves required to be maintained by the
Federal Reserve Banks against deposits and Federal Reserve notes in
actual circulation.
The memorandum which was presented at the meeting
of the executive committee and which discussed the two points considered
by that committee was read and Chairman Eccles stated that the executive
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committee had decided to recommend to the Federal Open Market Committee
that it
be agreed (1) that pursuant to the provisions of paragraph 2(a)
of the allocation procedure now in effect and pending further action by
the Federal Open Market Committee, beginning July 1, 1945, Treasury
bills would not be allocated to any Federal Reserve Bank in an amount
which would reduce its
reserve ratio below 35 per cent and (2) that the
second sentence of paragraph 2(b) of the statement of procedure be
changed to read as follows:
"If, between the weekly and month-end adjustments a Bank's re
serve ratio approaches the legal minimum, the Bank may sell to
the Bank or Banks having the highest reserve ratio or ratios, a
participation or participations in Treasury bills held in its
option account for a period of days to expire on the following
Wednesday or month end, whichever is earlier, except that such
adjustments will be made in the System account in the event
that a Bank does not hold sufficient bills in its option
account."
In connection with the first point,
Chairman Eccles stated that
consideration had been given to the question whether the reserve ratio
of an individual Federal Reserve Bank should be allowed to decline
immediately to 35 per cent, as would be the case with some of the Banks
if the agreed percentage were fixed at that figure, or whether it
be better if
would
the reduction were made gradually, that while there was
some feeling that the latter course might be the preferable one to
follow it
was agreed that the increased earnings that would accrue to
the Banks with low reserve ratios if the agreed percentage were fixed
at 35 per cent were more important than a higher reserve ratio and that
there would be no objection from the standpoint of public reaction or
otherwise to allowing the reserve ratio of the Banks to drop to that
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6/20/45
point immediately rather than to decline more gradually.
On the second point it
was stated that the second sentence of
paragraph 2(b) of the allocation procedure,
in its
present form and in
its suggested amended form, placed no limit on the point to which the
reserve ratio of a Reserve Bank might be increased between weekly state
ment dates, but that the executive committee felt that inasmuch as the
sentence contemplated the sale of bills only for the purpose of removing
the danger of a deficiency in
pose it
required reserves and,
since for such pur
would not be necessary to increase the Bank's reserve ratio
above 35 per cent, it
would not be expected that any Bank would use the
authority granted by the amended provision to increase its
reserve ratio
above that agreed upon by the Federal Open Market Committee pursuant to
the provisions of paragraph 2(a) of the allocation procedure.
After a brief discussion of these points,
upon motion duly made and seconded, the recom
mendations of the executive committee were ap
proved unanimously.
In response to an inquiry as to the amount of additional funds
that would have to be supplied to the market during the interim before
another meeting of the Federal Open Market Committee, Mr. Rouse stated
that it
had been estimated at the Federal Reserve Bank of New York that
funds aggregating in the neighborhood of $2,750,000,000 would have to
be supplied through open market operations and discounts before the next
drive for the purpose of furnishing needed reserves, maintaining the
pattern of rates and offsetting increased currency in circulation and
that if
the next meeting of the Federal Open Market Committee were held
in October approximately $2,000,000,000 of new funds would be needed.
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In view of that situation it
was Mr. Rouse's suggestion that the Federal
Open Market Committee give the executive committee a greater authority
to increase the amount of securities held in
the System account than was
granted at the last meeting of the full Committee, with the understand
ing that the executive committee would grant to the Bank the usual lim
ited authority to be increased from time to time as conditions might
require.
There was no disagreement with the esti
mated need for funds as outlined by Mr. Rouse,
and upon motion duly made and seconded and by
unanimous vote, the following direction to the
executive committee was approved, with the
understanding that the limitations contained
in the direction would include commitments for
purchases and sales of securities for the
System account:
That the executive committee be directed, until otherwise
directed by the Federal Open Market Committee, to arrange for
such transactions for the System open market account, either in
the open market or directly with the Treasury (including
purchases, sales, exchanges, replacement of maturing securities,
and letting maturities run off without replacement), as may be
necessary in the practical administration of the account, or
for the purpose of maintaining about the present general level
of prices and yields of Government securities, or for the pur
pose of maintaining an adequate supply of funds in the market;
provided that the aggregate amount of securities held in the
account at the close of this date [other than (1) bills pur
chased outright in the market on a discount basis at the rate of
3/8 per cent per annum and bills redeemed at maturity and (2)
special short-term certificates of indebtedness purchased from
time to time for the temporary accommodation of the Treasury]
shall not be increased or decreased by more than $2,000,000,000.
That the executive committee be further directed, until
otherwise directed by the Federal Open Market Committee, to
arrange for the purchase for the System open market account di
rect from the Treasury of such amounts of special short-term
certificates of indebtedness as may be necessary from time to
time for the temporary accommodation of the Treasury; provided
that the amount of such certificates held in the account at any
one time shall not exceed $1,500,000,000.
6/20/45
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The suggestion was made that the next meeting of the Presidents'
Conference might be held on October 1 and 2 and that the meeting of the
Federal Open Market Committee might be held on the following two days.
There was unanimous agreement that October 3 and 4, 1945, should be set
as the tentative dates for the next meeting of the full Committee.
Thereupon the meeting adjourned.
.
Approved:
Chairman.
Secretary.
Cite this document
Federal Reserve (1945, June 19). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19450620
@misc{wtfs_fomc_minutes_19450620,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1945},
month = {Jun},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19450620},
note = {Retrieved via When the Fed Speaks corpus}
}