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 Monday, June 10, 1946, at 11:05 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Eccles, Chairman

Sproul, Vice Chairman

Szymczak

Draper

Evans

Vardaman

Leach

McLarin

Young

Clerk

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Kincaid, Langum, Rauber, Wheeler,

and John H. Williams, Associate Economists

Mr. Rouse, Manager of the System Open Market

Account

Mr. Kennedy, Special Assistant to the Chair

man of the Board of Governors

Mr. Musgrave, Chief of the Government Finance

Section of the Division of Research and

Statistics of the Board of Governors

Messrs. Whittemore, Gidney, and Peyton, alternate

members of the Federal Open Market Committee

Messrs. Alfred H. Williams, Leedy, and Gilbert,

Presidents of the Federal Reserve Banks of

Philadelphia, Kansas City, and Dallas,

respectively

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meetings of the Federal Open Market Com

mittee held on February 28 and March 1,

1946, were approved.

Upon motion duly made and seconded,

and by unanimous vote, the actions of the

6/10/46

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executive 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, 1946,

were approved, ratified, and confirmed.

Mr. Rouse distributed to all present copies of a report prepared

by the Federal Reserve Bank of New York of open market operations during

the period from March 2 to June 4, 1946, inclusive.

He also presented a

supplemental report covering open market operations, including commit

ments, on June 5, 6, and 7, 1946.

Mr. Rouse discussed the important

sections of the reports, calling particular attention to the statement

of reasons on page 1 of the principal report for the changes in the Sys

tem account since the last meeting, to the transactions by the Federal

Reserve Bank of New York in bankers'

acceptances and the maintenance of

a minimum buying rate at 1/2 per cent for such transactions, and to the

comments on page 3 of the report with respect to the elimination of the

dealer practice of limiting daily price changes in the over-the-counter

market to 1/4 of a point.

In connection with the report of acceptance transactions, Chair

man Eccles inquired why the Federal Reserve Bank of New York should

continue a buying rate of 1/2 per cent on bankers'

acceptances when the

preferential rate on advances secured by short-term Government obliga

tions had been eliminated as a means of discouraging the use of Federal

Reserve Bank credit.

While he realized that the amount of acceptances

available was small, he felt that there was a question of principle in

volved and questioned whether the System should be in the position of

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encouraging the use of Federal Reserve Bank credit through the continua

tion of a 1/2 per cent buying rate on acceptances when by the elimina

tion of the preferential rate it had acted to discourage the use of

Federal Reserve Bank credit in

the form of advances on short-term Gov

ernment securities.

Mr. Sproul stated that the Bank wanted to watch developments in

the market following the elimination of the preferential rate, feeling

that if market rates adjusted to the new situation and if the accept

ances in the market could be sold without recourse to the Federal Re

serve Bank the continuation of the buying rate on bankers' acceptances

would not be important,

but that, if

an increased volume of acceptances

were sold to the Federal Reserve Bank, consideration should be given to

increasing the buying rate.

In this connection he referred to the

special efforts which had been made by the Federal Reserve System years

ago to encourage the use of acceptances,

and stated that if

buying rate were increased to 1 per cent it

the Bank's

would result in an over-all

cost of acceptances sold to the System which would adversely affect

such credits in

relation to other forms of credit, and that the Federal

Reserve Bank did not want to take that action until it

was determined

whether the market would absorb the existing volume of acceptances

without recourse to the Federal Reserve Bank in important amounts.

He

also said that since the Bank could buy bills at rates above the fixed

minimum buying rate, it was in a position quickly to adjust to a change

in market conditions.

6/10/46

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There followed a brief discussion of the question whether it

was any longer necessary or desirable to encourage the creation of

acceptance credits as compared with other forms of commercial credit.

Mr. Sproul referred to the action of the dealers in discon

tinuing the limit of 1/4 of a point on daily price changes in the over

the-counter market and elaborated briefly on the comments contained in

the report referred to above with respect to the situation which led

to that decision by the dealers.

At the conclusion of the discussion,

upon motion duly made and seconded, and

by unanimous vote, the transactions in the

System account during the period from Feb

ruary 28 to June 8, 1946, inclusive, were

approved, ratified, and confirmed.

At this point Mr. Young, Assistant Director of the Division of

Research and Statistics of the Board of Governors,

joined the meeting.

In response to a request for statements by the economists, Mr.

Thomas said that various proposals had been made for dealing with the

problems in the monetary and credit field which had been created by war

financing,

and that it

was proposed to discuss some of these at this

meeting instead of reviewing the present economic outlook which had not

changed in

any of its

fundamental aspects since the last meeting of the

Committee except to emphasize the dislocations brought about by the war.

He then read a statement in which he discussed principally proposals

that had been suggested for additional controls by authorizing (1) a

further increase in

reserve requirements of banks,

(2) a requirement

6/10/46

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that banks maintain a secondary reserve of Treasury bills and certifi

cates equal to a specified percentage of net demand deposits, and (3)

a limitation on the amount of long-term bonds that commercial banks

could hold.

Mr. Langum amplified the manner in which the secondary reserve

plan referred to by Mr. Thomas could be made more effective and objec

tions to the plan could be eliminated.

Mr. John H. Williams made a statement in which he discussed the

desirability of an approach to the problem of monetary and credit

controls under existing powers which would not call for legislation but

which would result in unfreezing the interest rate structure to a

limited extent, as compared with a more elaborate program requiring

legislation.

He also suggested a possible method of supplementing the

proposals which he understood the Board of Governors was to present to

Congress, so as to remove the guarantee to the Treasury and recapture

interest rate variability without increasing the cost of the debt to

the Treasury.

Copies of the statements by Messrs. Thomas, Langum, and Williams

have been placed in the files of the Federal Open Market Committee.

The meeting then recessed and reconvened at 2:20 p.m. with the

same attendance as at the end of the morning session.

In a discussion of the statements made by the economists, ques

tion was raised as to the commitment made by the Board of Governors,

6/10/46

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with respect to future support of the existing rates on Government secu

rities, in the letter which it

addressed to the Secretary of the Treas

ury on April 19, 1946, regarding the proposed elimination of the

preferential discount rate on advances secured by short-term Government

obligations and in the press release issued by the Board on April 24,

1946, when the preferential rate was discontinued at the Federal Reserve

Banks of New York, Philadelphia,

and San Francisco.

Chairman Eccles stated that the press release made it

clear that

the Board did not favor a higher level of interest rates on United States

securities than the Government was then paying, but that that did not

mean that the Board was committed for all time or in the event conditions

should change to such an extent as to require the adoption of a different

policy.

He did feel that the Board was committed for some time to come

and that nothing would injure the Federal Reserve System more under pres

ent conditions than to let interest rates rise.

He did not think that

was the way in which the problem should be met unless Congress and the

public should favor it,

the problem in

and that, if

it

its

and he stated that the Board proposed to present

annual report so that it

could be discussed publicly,

appeared that the public preferred an increase in rates

to any other solution, then the System should have no hesitancy in taking

that course.

Mr. Sproul expressed the opinion that the Board's letter of April

19, the press release of April 24, and the Treasury press release of the

same date with respect to the preferential discount rate, when taken

6/10/46

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together, constituted a statement that the maintenance of the 7/8 per

cent rate was guaranteed by the System.

He said that he had not been

in favor of any commitment to the Treasury other than for the time be

ing, for the reason that the basic situation might change in such a way

as to make System action desirable, and that any commitment for the

indefinite future would take the initiative out of the hands of the

System and place it

with the Treasury on a matter which was the respon

sibility of the System.

He recognized that credit policy was a sub

ordinate part of the fight against inflation, but felt that it

necessary for the country to use every means at its

would be

disposal to meet

the problem, that to ignore the credit factors in the picture was a

mistake, and that to await the verdict of Congress or the public as to

what should be done, would probably mean failure to meet our responsi

bilities in the immediate future.

He said that there had been two lines

of policy open to us in checking a further increase in bank credit and a

further decline in

(1)

interest rates:

To proceed by modest steps

(a)

Removing the encouragement to borrowing

at Federal Reserve Banks.

(b)

Reintroducing some element of flexibility

and unpredictability in interest rates

by which he meant, at an appropriate

time, permitting some modest increase in

short rates while maintaining the 2-1/2

per cent long-term rate.

(c)

Repaying Government debt out of accumulated

balances and looking forward to a balanced

budget or surplus in the next fiscal year.

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(d)

Stepping up campaign for sale of savings

bonds, and

(e) Later provision of a restricted 2-1/2 per

cent bond which could not be made part

of a "roll-over" operation.

(2)

A more ambitious plan to maintain present short

and long rates and to control expansion of bank

credit and combat a further decline in rates by

means of new and substantial powers over bank

investments and reserves.

The modest program, he thought, would have been a possible means

of meeting the situation effectively; the ambitious program would not

unless more prompt legislative action than seems likely was forthcoming,

and unless a more complete control, than the program itself included,

over the credit machinery and capital markets of the country was en

visaged.

He said that in the existing circumstances once the market

became convinced that the existing rates would stand it

previous practice of "playing the pattern of rates".

would resume the

He added that the

response to the elimination of the preferential rate and the program for

the retirement of Government debt indicated that the situation might

have been met by the more modest approach, and he felt that the System

could have given a commitment,

for the time being only, without causing

the Treasury to precipitate a public issue on that point.

He also expressed the opinion that a commitment of that kind

should not be given without a meeting of the Federal Open Market Commit

tee so that there would be an opportunity to exchange views and opinions,

that the Federal Open Market Committee was drifting into a situation in

6/10/46

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which action was being taken by majority caucus without a meeting of the

Committee, and that that was contrary to the intent when the Committee

was created.

It

was his belief that whatever action was necessary to

reverse that tendency should be taken and that if more meetings of the

Federal Open Market Committee and its .executive committee were necessary

they should be held.

If

a commitment had been made to the Treasury which resulted in

the System losing its

freedom of action, Mr. Sproul thought that the

appointment of a new Secretary of the Treasury afforded an excellent

opportunity to seek a reconsideration of the matter, the abandonment of

the commitment,

gested.

and a return to the simpler policy which he bad sug

He added that the decision seemed to be an urgent one for the

reason that the System might soon need to be concerned with the ex

pansion of credit for private use, in

undesirable ways, as well as with

the further monetization of the public debt, and that considerable time

might elapse before the necessary legislation could be enacted to make

possible the more elaborate methods of credit control that had been

proposed.

He also said that if

either policy was to have any right to

be called monetary policy or monetary control it

must aim toward making

credit less easily available and therefore more costly, and that this

could not be done with a frozen pattern of rates.

He said he would like

to have the Federal Open Market Committee take the whole problem up with

the new Secretary of the Treasury as promptly as possible to see if

program could be worked out which would leave the System with some

a

6/10/46

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discretion with which to meet an imminent situation.

He concluded with

the statement that an increase in the rate on certificates from 7/8 to

1 per cent or 1-1/8 per cent would not be a large increase nor a large

price to pay if

it

would help combat inflation, and that it

store flexibility in

would re

the rate structure and get away from a frozen

pattern of rates.

Chairman Eccles stated that there was a fundamental difference

in Mr. Sproul's approach to the problem and his own, and that he would

be opposed to taking the matter up with the new Secretary of the Treas

ury at this time.

He thought that the situation was not one that would

justify such action, that the Government security market was stable at

the present time and prices were at a lower level than in the recent

past, and that any action to reopen the rate question would be con

sidered as an attempt on the part of banks to get a higher rate.

Mr. Sproul did not agree that the step would be so interpreted

if

it

were made clear that it

was for the purpose of exercising proper

credit controls.

Chairman Eccles did not think that a higher rate of interest

unless it

was a very much higher rate-would have any substantial

effect in

curbing the demand for credit for private purposes.

He saw

no way of stopping an expansion of private credit by rate action ex

cept by such high rates as would seriously affect the Government secu

rity market,

and if

such action were taken by the System it

would be

received in much the same way as action to increase rates was received

6/10/46

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following the last war.

He added that to deal with the problem by rate

action would be to overemphasize the importance of credit policy in re

lation to other matters.

Mr. Sproul recognized that there were other things such as a

balanced budget, all out production,

and perhaps temporary maintenance

of some of the war-time controls that were more important than credit

policy but that some of these controls were breaking down rapidly and

that the interest rate would be one of the instruments that should be

used in the whole program against inflationary pressures.

Chairman Eccles referred to the fact that the question of the

preferential discount rate was fully discussed at the last meeting of

the Federal Open Market Committee as well as at previous meetings.

He

also said that the Presidents were furnished with copies of the corre

spondence with the Treasury relating to the matter; that the last letter

from the Treasury regarding it was the result of the position taken by

the Presidents at the time of the last meeting of the Federal Open Market

Committee that they could not give the Treasury the assurance that the

Banks would not act on the preferential rate in the near future; and that

when the action of the Banks came to the Board for decision another meet

ing of the Federal Open Market Committee or its

executive committee was

not called for, as the matter was one for approval or disapproval by the

Board.

He added that the release was submitted to Messrs. Sproul and

Leach as members of the executive committee, that they did not agree

that the commitment with respect to rates should be made,

that their

6/10/46

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views were presented to the Board of Governors and considered by it,

that the press release was issued by the Board after it

fit

of their views.

and

had had the bene

He went on to say that, in view of that situation,

he did not want the Presidents of the other Federal Reserve Banks to

get the impression that proper consideration had not been given to the

matter or that the Board had exercised any authority that it

did not

have.

Mr. Sproul stated that in connection with the elimination of the

preferential rate there was a discussion of open market operations to

support the 7/8 per cent rate in the event the preferential rate were

discontinued and that, while the elimination of the rate was a matter

within the authority of the Board, the question of supporting the rate

through open market purchases was a matter for consideration by the Fed

eral Open Market Committee.

He also said that when he and Chairman

Eccles went to the Treasury to discuss the matter with representatives

of the Treasury, the two points of view were expressed but there had

been no action by the Federal Open Market Committee to give the Treasury

a commitment with respect to support of existing rates.

Chairman Eccles suggested that if

any of the members of the Fed

eral Open Market Committee felt that a satisfactory record had not been

made they should make a motion and vote on the matter and, if

the

majority of the Committee wished to vote not to support the rate, that

decision would be controlling.

Mr. Leach said that when the matter of the press release came up

6/10/46

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he suggested that it

take the position that the elimination of the pref

erential rate would not be permitted to disturb the market for the 7/8

per cent certificates, without making the commitment to maintain the 7/8

per cent rate indefinitely.

In a further discussion Mr. Sproul stated that no one knew what

the credit situation might be in the next few months, that a further

movement into real estate,

securities, and commodities might create a

situation that would be difficult to handle, and that in the absence of

further discussion with the Treasury the System's hands would be tied in

the event Congress had not acted to give the System additional powers.

Chairman Eccles said that if

that situation should arise and it

appeared that an increase in rates was desirable and the System could

make a case, the Committee would not be estopped from taking the matter

up with the Treasury and, if

necessary, with the President of the

United States.

Mr. John H. Williams was of the opinion that if

a strong demand for credit from private sources and if

there should be

on top of that

there were a strong demand for business and speculative credit the move

ment could not be controlled by monetary means, but that the large

volume of debt was a new factor in the situation which made the market

more sensitive.

Therefore,

if

some minor flexibility were introduced

in the rate structure-and he did not think the System could do more

than that-it

would have a greater retarding effect than in the past.

He felt that in the adoption of any of the programs that had been

6/10/46

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discussed he would like to see the System recapture some flexibility in

interest rates.

In response to an inquiry, he said this action would

not involve allowing Government securities to go below par.

Chairman Eccles advanced the thought that neither the Board nor

the System had frozen the existing rate structure, but that it

had be

come frozen by the war financing program during the war years and its

accompanying tremendous increase in the public debt.

It

was his

opinion that there was nothing that the System could do to unfreeze the

rate structure, and that the best thing it

could do would be to present

the problem to Congress and point out the basic change that had taken

place since the System's existing powers were conferred which made the

use of those powers under present circumstances entirely inappropriate.

Mr. Thomas observed that the commitment made by the Board was

that the short-term rate would not be permitted to increase which made

it

difficult to keep the yields on long-term securities from declining

further.

However,

he said, there were some things that could be done

that would help in that direction such as debt retirement and increasing

reserve requirements of central reserve city banks, which would keep the

banks under pressure and make them hesitant about expanding further.

Mr. Sproul agreed with the generality of Mr. Thomas'

views,

although not on the specific question of increasing reserve requirements

of central reserve city banks but said that he did not like to have these

steps vitiated by a commitment that would eventually lead the public to

understand that the door was open for expansion at the existing rates.

6/10/46

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After some further discussion, Chairman Eccles stated that the

Presidents had received copies of the correspondence with the Treasury

since the last meeting of the Federal Open Market Committee with re

spect to the elimination of the preferential discount rate, the retire

ment of Government debt, and the authority granted by the Treasury to

commercial banks to hold a limited amount of restricted issues for

trading purposes,

and that there were no other developments with re

spect to these matters since the last meeting that should be reported

at this time.

Consideration was then given to what if

any action should be

taken with respect to the direction issued at the meeting of the Commit

tee on March 1, 1945, relating to the purchase of Treasury bills at a

discount rate of 3/8 per cent per annum.

Chairman Eccles expressed the

belief that the direction should be continued for the time being but

that, inasmuch as bills had ceased to be a market instrument, the dis

continuance of the direction might be discussed with the Treasury when

the current program for retirement of debt had been completed, at which

time he hoped a program could be worked out which would avoid the neces

sity for the weekly offering of bills which were taken from the dealers

by the Federal Reserve Banks.

Mr. Sproul inquired whether, since the market for bills had

almost disappeared, there would be any point in eliminating the buying

rate and repurchase option and raising the question of direct financing

of the Treasury by the central banks.

This point was discussed and

6/10/46

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Mr. Gilbert raised the question whether it

would be desirable to dis

continue the option on the part of sellers of bills to repurchase bills

at the same discount rate.

In the discussion of this point it

consensus that the existing direction should be continued in

ent form until it

was the

its

pres

was eliminated altogether.

Thereupon, it was agreed unanimously

that no action should be taken at this

time to change the direction issued by the

Committee on March 1, 1945.

In a discussion of the authority to be granted to the executive

committee to execute transactions for the System account, it

gested that, in view of the change which had taken place in

was sug

the policy

with respect to the maintenance of market prices, the pertinent portion

of the direction issued to the executive committee should be changed

so as to authorize such transactions for the System account as might be

necessary for the purpose of maintaining an orderly market in Treasury

securities and a general level of prices and yields of Government secu

rities

which would support the Treasury issuing rates of 7/8 per cent

for one-year certificates and 2-1/2 per cent for 27-year bonds re

stricted as to ownership.

Mr. Rouse stated that, while the operations in the account be

fore another meeting of the Committee including redemption of securities

being retired would be substantial, it

was believed that a limitation of

2 billion dollars on the authority of the executive committee to in

crease or decrease the total amount of securities in

the account would

6/10/46

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be adequate to meet the situation, assuming that the next meeting would

be held in September.

Thereupon, upon motion duly made

and seconded, the following direction

to the executive committee was ap

proved unanimously, with the under

standing that the limitations contained

in the direction would include commit

ments for purchases and sales of

securities for the System account:

The executive committee be directed, until otherwise di

rected 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 pur

chases, 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 an orderly market in Treasury securi

ties and a general level of prices and yields of Government

securities which will support the Treasury issuing rates of 7/8

per cent for one-year certificates and 2-1/2 per cent for 27

year bonds restricted as to ownership; provided that the aggre

gate amount of securities held in the account at the close of

this date [other than (1) bills purchased 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 certifi

cates of indebtedness purchased from time to time for the

temporary accommodation of the Treasury] shall not be increased

or decreased by more than $2,000000,00,0.

That the executive committee be further directed, until

otherwise directed by the Federal Open Market Committee, to ar

range for the purchase for the System open market account direct

from the Treasury of such amounts of special short-term certifi

cates 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.

Chairman Eccles stated that the Treasury had been giving consid

eration to the desirability of eliminating the 6-months coupon on Treas

ury certificates and paying the interest at the time of redemption.

If

6/10/46

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this change were made, he said, there would be no change in the 7/8 per

cent rate, although it

slightly, but it

was recognized that it

would reduce the yield

would eliminate a great deal of unnecessary work and

expense in issuing the coupon certificate and paying the coupon when it

became due.

All of the members of the Committee concurred in the opinion

that the change would be a desirable one.

It

was also suggested that it

would be desirable for the Treas

ury to provide for a one million dollar denomination in all issues of

Government securities and Mr. Kennedy stated that that was being done.

Turning to the date for the next meeting of the Federal Open

Market Committee, Mr. Sproul stated that the annual convention of the

American Bankers Association would be held in Chicago on September 22-25,

that some of the Presidents would like to attend the Convention, and

that it

had been suggested that, in the absence of developments calling

for earlier meetings, the meetings of the Presidents'

Conference and the

Federal Open Market Committee be held following September 25.

There was

agreement that the date for the next meeting of the Federal Open Market

Committee should be set tentatively for Thursday, October 3.

Thereupon the meeting adjourned.

Secretary.

Approv

.

Chairman.