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 Thursday, October 3, 1946, at 10:45 a.m.

PRESENT:

Mr. Eccles, Chairman

Mr. Sproul, Vice Chairman

Mr. Ransom

Mr. Draper

Mr. Evans

Mr. Vardaman

Mr. Leach

Mr. McLarin

Mr. Young

Mr. Peyton (alternate for Mr. Clerk who

died on September 28)

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Townsend, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Kincaid, Rauber, Wheeler, and

John H. Williams, Associate Economists

Mr. Rouse, Manager of the System Open

Market Account

Mr. Thurston, Assistant, and Mr. Kennedy,

Special Assistant, to the Chairman of

the Board of Governors of the Federal

Reserve System

Mr. Sherman, Assistant Secretary 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 Davis, 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

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10/3/46

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Commit

tee held on June 10, 1946, were approved.

Upon motion duly made and seconded,

and by unanimous vote, the actions of the

executive committee of the Federal Open

Market Committee as set forth in the min

utes of the meeting of the executive com

mittee on June 10, 1946, were approved,

ratified, and confirmed.

Mr. Rouse, as Manager of the System Open Market Account,

reviewed the report prepared by the Federal Reserve Bank of New York

of open market operations in the System open market account covering

the period from June 11, 1946, to September 30, 1946, inclusive, and

a supplementary report prepared by the New York Bank covering commit

ments executed on October 1 and 2, 1946.

During the course of Mr.

Rouse's statement copies of the report first mentioned were distri

buted to those present and copies of both reports have been placed

in the files of the Federal Open Market Committee.

After a brief discussion, upon motion

duly made and seconded, and by unanimous

vote, the transactions in the System account

for the period from June 10, 1946, to

October 2, 1946, inclusive, were approved,

ratified, and confirmed.

Following the passage of the Administrative Procedure Act

on June 11, 1946,

counsel for the Committee prepared drafts of Fed

eral Open Market Committee rules on organization and information

and rules on procedure to be issued by the Committee in compliance

10/3/46

-3

with the provision of section 3 of that Act.

Copies of these drafts

were sent to the members of the Committee and other Presidents of the

Federal Reserve Banks for their comments,

following which the rules

were revised in the light of the comments and suggestions received.

Thereafter, the revised rules were sent to the members of the Com

mittee and, after approval by the members who were in Washington and

the five Presidents who were members of the Committee, to become ef

fective September 11, 1946, the rules were published in the Federal

Register and copies were sent to the Presidents of all of the Federal

Reserve Banks.

Upon motion duly made and seconded,

and by unanimous vote, the action of the

members of the Federal Open Market Com

mittee in approving the rules, to become

effective September 11, 1946, was approved,

ratified, and confirmed. The rules as

approved by the Committee were in the

following form:

"RULES ON ORGANIZATION AND INFORMATION

"Sec. 1. Basis and Scope. - These rules are issued

by the Federal Open Market Committee (hereinafter sometimes

called the Committee) pursuant to the Administrative Pro

cedure Act and the Federal Reserve Act. Included therein

are the rules specified by sections 3(a)(1), 3(b), and

3(c) of the Administrative Procedure Act.

"COMPOSITION AND MEETINGS OF COMMITTEE

"Sec. 2(a) Members. The Federal Open Market Comittee

consists of the members of the Board of Governors of the

Federal Reserve System and five representatives of the Fed

eral Reserve Banks who are Presidents or First Vice Presi

The representatives of the Federal

dents of such banks.

10/3/46

"Reserve Banks, and an alternate for each representative,

are elected in accordance with section 12A of the Federal

Reserve Act for terms of one year commencing on March 1

of each year.

"(b) Chairman and Vice Chairman. - At its first meet

ing on or after March 1 of each year, the Committee selects

a Chairman and a Vice Chairman from among its membership.

"(c)

Meetings. - The Committee meets at Washington,

D. C., on call by the Chairman of the Board of Governors

of the Federal Reserve System or at the request of three

members of the Committee, at least four times each year

and oftener if deemed necessary.

"EXECUTIVE COMMITTEE

"Sec. 3(a) Members. - At its first

meeting on or

after March 1 of each year, the Federal Open Market Com

mittee selects from among its membership an Executive

Committee consisting of three members of the Board of

Governors of the Federal Reserve System and two of the

Alter

representatives of the Federal Reserve Banks.

nates to serve in the absence of members of each group

represented on the Executive Committee are likewise

selected.

The Chairman of the Federal Open Market

Committee is one of the members of the Executive Com

mittee and serves as its Chairman.

"(b) Meetings. - The Executive Committee meets

periodically, on call of the Chairman or at the re

quest of two members, as necessary in the performance

of the duties assigned to it.

"(c) Duties. - The duties of the Executive Committee

are:

"(1) To direct the execution of transactions in the

open market in accordance with open-market policies adopted

by the Federal Open Market Committee;

"(2) To allocate the Government securities and other

obligations held in the System Open Market Account among

the several Federal Reserve Banks in accordance with the

principles determined by the Federal Open Market Committee;

"(3) To keep the members of the Federal Open Market

Committee informed of all transactions executed under the

direction of the Federal Open Market Committee and of all

allocations and reallocations of Government securities

and other obligations held in the System Open Market

Account; and

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"(4 ) To perform such other functions and duties in

connection with open-market operations as may be assigned

to it from time to time by the Federal Open Market Committee.

"OTHER PERSONNEL

"Sec. 4(a) Official Staff. - The official staff of

the Federal Open Market Committee includes its Secretary,

ssistant Secretary, General Counsel, Assistant General

Counsel, Economist, and Associate Economists, who perform

the duties indicated by their titles. These staff members

are selected from among the officers and employees of the

Board of Governors of the Federal Reserve System and the

Federal Reserve Banks.

"(b) System Open Market Account. - One of the Federal

Reserve Banks is selected by the Committee to execute

transactions for the System Open Market Account. Such

bank selects a Manager of the System Open Market Account,

satisfactory to the Committee.

"(c) Others. - The services of other officers and

employees of the Board of Governors of the Federal Reserve

System and Federal Reserve Banks are made available and

are utilized by the Committee as required.

"SUBMITTALS, PETITIONS , AND REQUESTS

"Sec. 5(a) Place. - The mailing address of the Fed

eral Open Market Committee is: Federal Reserve Building,

20th Street and Constitution Avenue, Washington 25, D. C.

The Committee custonarily meets at the offices of the

Board of Governors of the Federal Reserve System at that

address.

"(b) Method. - All submittals, petitions, and requests,

including requests for access to information, shall be made

in writing and mailed to the Committee at the address stated

in section 5(a) of these rules. Any petition or request

shall be signed by the person making it, or his duly author

ized agent, and shall, in so far as practicable, clearly,

completely and concisely state his full name and address,

the facts involved (including the purposes for which any

unpublished information requested will be used if made

available), the action desired, the person's interest in

the matter, and the reasons why the petition or request

should be granted.

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"AVAILBILITY OF INFORMATION

"Sec. 6(a) Federal Register. - Rules describing the

Committee's organization and procedure and any substantive

rules or statement of policy which are formulated and

adopted by the Committee for the guidance of the public

will be published in the Federal Register.

"(b) Policy Record. - A complete record of the actions

taken by the Committee during the preceding year upon all

matters of policy relating to open market operations, show

ing the votes taken and the reasons underlying the actions,

is included in each annual report made to Congress by the

Board of Governors of the Federal Reserve System in accord

ance with Section 10 of the Federal Reserve Act.

"(c) Unpublished Information. - Except as may be

specifically authorized by the Committee or its Executive

Committee, or as may be required in the performance of

duties for, or pursuant to the direction of, the Committee,

no person shall disclose, or permit the disclosure of, any

unpublished information of the Committee to anyone, whether

by giving out or furnishing such information or copy thereof,

by allowing any person to inspect, examine or copy such in

formation or copy thereof, or by any other means.

Unpub

lished information of the Committee shall include all in

formation concerning the proceedings, deliberations, dis

cussions, and actions of the Committee and all information

or advice coming to the Committee or to any member of the

Committee or any officer, employee or agent of the Commit

tee, the Board of Governors of the Federal Reserve System,

or any Federal Reserve Bank, in the performance of duties

for, or pursuant to the direction of, the Committee,

whether contained in files, memoranda, documents, reports,

books, accounts, records, or papers or otherwise acquired

and whether located at the offices of the Board of Governors

of the Federal Reserve System, the Federal Reserve Banks,

or elsewhere: Provided, That it shall not include infor

mation which has been published in accordance with sections

6(a) and 6(b) of these rules or information which is avail

able to the public through other sources.

"(d) Reasons for Non-disclosure. - The non-disclosure

of unpublished information of the Committee generally is

required in the public interest for one or more of the fol

lowing reasons:

"(1) Disclosure of unpublished information concerning

policies with respect to future open market operations

10/3/46

"which are under consideration or have been adopted by

the Committee, and of unpublished information which might

aid in anticipating action by the Committee, would:

"(i) Interfere with the accomplishment of the object

ives of the Committee's actions taken with a view to ac

commodating commerce and business and with regard to their

bearing upon the general credit situation of the country;

"(ii) Permit speculators and others to reap unfair

profits or other unfair advantages by speculative trading

in securities and otherwise;

"(iii) Interfere with the orderly execution of pol

icies adopted by the Committee;

"(iv) Result in unnecessary and unwarranted disturb

ances in the securities markets;

"(v) Make open market operations more costly to the

Federal Reserve Banks;

"(vi) Interfere with the orderly execution and ac

complishment of the objectives of policies adopted by

other Government agencies concerned with economic and

fiscal matters; and

"(vii) Cause misinterpretations and misunderstand

ings, with possible resultant impairment of public con

fidence in the nation's financial structure.

"(2) The Committee's unpublished information includes

much that is furnished to it on a secret or confidential

basis and its disclosure would:

"(i) Have the effects described in section 6(d)(1)

of these rules;

"(ii) Impede the necessary collection of information

and advice, much of which cannot be obtained except on a

confidential and voluntary basis; and

"(iii) Unreasonably and unnecessarily disturb and

interfere with individual privacy and confidential busi

ness relationships.

"(e) Requests for Unpublished Information. - Re

quests for access to unpublished information will be

granted only if it clearly appears that disclosure of

the information will not be contrary to the public in

terest for any of the reasons set forth in section 6(d)

of these rules.

"SUBPOENAS

"Sec. 7(a) Advice by Person Served. - If any person,

whether or not an officer or employee of the Committee,

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"of the Board of Governors of the Federal Reserve System

or of a Federal Reserve Bank, has unpublished information

of the Committee and in connection therewith is served

with a subpoena, order, or other process requiring his

personal attendance as a witness or the production of

documents or information upon any proceeding, he shall

promptly advise the Committee of such service and of all

relevant facts, including the documents and information

requested and any facts which may be of assistance in

determining whether such documents or information should

be made available; and he shall take action at the ap

propriate time to advise the court or tribunal which

issued the process, and the attorney for the party at

whose instance the process was issued, if known, of

the substance of these rules.

"(b) Appenrance by Person Served. - Except as

disclosure of the relevant information has been author

ized pursuant to these rules, any such person who has

unpublished information of the Committee and is re

quired to respond to a subpoena or other legal pro

cess shall attend at the time and place therein men

tioned and respectfully decline to produce any docu

ments or disclose any information or give any testi

mony with respect thereto, basing his refusal upon

these rules. If, notwithstanding, the court or other

body orders the production of any documents, dis

closure of any information, or giving of any testi

mony, the person having such unpublished information

of the Committee shall promptly report the facts to

the Committee."

"RULES ON PROCEDURE

"Sec. 1. Basis and Scope. - These rules are issued

by the Federal Open Market Committee (hereinafter some

times called the Committee) pursuant to the Administra

They

tive Procedure Act and the Federal Reserve Act.

include the rules specified by section 3(a)(2) of the

Administrative Procedure Act.

"Sec. 2. Committee Action. - The function of the

Committee is the direction and regulation of open market

operations which are conducted by the Federal Reserve

Banks. This involves the determination of the policies

which are to be pursued with respect to the purchase

and sale of securities by the Federal Reserve Banks

10/3/46

"with a view to accommodating commerce and business

and with regard to their bearing upon the general

credit situation of the country, together with con

sideration and action upon incidental matters relating

to the manner in which such operations are to be con

ducted.

The discharge of the Committee's responsibil

ities requires the continuous gathering of information

and study of changing financial, economic, and credit

conditions and other pertinent considerations by the

members of the Committee and its personnel.

These

activities are closely interrelated with other activ

ities of the Board of Governors of the Federal Reserve

System and the Federal Reserve Banks and all relevant

information and views developed by these organizations

are available to the Committee. With this background,

action is taken by the Committee upon its own initi

ative at periodic meetings held at least four times

each year and oftener if deemed necessary. Attendance

at Committee meetings is restricted to members of the

Committee and its official staff, the Manager of the

System Open Market Account, the Presidents of Federal

Reserve Banks who are not at the time members of the

Committee, and such other advisers as the Committee

may invite from time to time.

The Committee acts

through the adoption and transmittal of directives

and regulations to its Executive Committee or to the

Federal Reserve Banks.

Operations in the System Open

Market Account are conducted under the direction of

the Executive Committee pursuant to directives issued

by the Committee.

"Sec. 3. Notice and Public Procedure. - There

ordinarily will be no published notice of proposed

action by the Committee or public procedure thereon,

as described in section 4 of the Administrative Pro

cedure Act, because such notice and procedure is

impracticable, unnecessary, or contrary to the public

interest for one or both of the following reasons:

"(a) Non-disclosure of information is required

in the public interest for reasons stated in section

6(d) of the Committee's Rules on Organization and

Information; and

"(b) Expeditious and timely action, without the

delay incident to such notice and procedure, is re

cuired in the public interest.

10/3/46

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"Sec. 4. Effective Date. - Committee action ordi

narily will be made effective on the date the action is

taken because the nature of the subject matter and the

action taken is such that the public interest and the

proper discharge of the Committee's responsibilities so

require.

"Sec. 5. Submittals, Petitions, and Requests.

- Submittals, petitions, and requests may be made to the

Committee at any time in the manner stated in section 5

of the Committee's Rules on Organization and Information,

They will be considered by members of the Committee's

official staff and, where appropriate, will be brought

to the attention of the members of the Committee or its

Executive Committee for consideration and any necessary

action."

In accordance with the request made by the Federal Open

Market Committee at its meeting on June 21, 1939, an examination

of the System open market account was made by the examiners for

the Board of Governors as of June 28, 1946, at the time of the

examination of the Federal Reserve Bank of New York.

A report of

the examination of the System account was submitted to the Secretary

of the Committee under date of August 22,

1946, and copies of the

report were brought to the attention of all of the members of the

Committee.

records,

The report stated that the accounting procedures,

and system of internal control maintained and the degree

of care exercised by the Federal Reserve Bank of New York in con

nection with the System account were reviewed and that the examiner

continued to regard them as adequate to the efficient administration

of the account,

and no exception was taken to the manner in which

the function was handled in the period reviewed.

10/3/46

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Upon motion duly made and seconded,

and by unanimous vote, the report was

received end ordered filed.

At this point Messrs. Ralph Young and Chandler Morse,

Assistant Directors of the Division of Research and Statistics of

the Board of Governors of the Federal Reserve System, joined the

meeting.

The reports of the economists were then called for.

Mr.

Thomas made a statement regarding the economic prospects over the

next several months and Mr. Williams commented on some of the con

ditions which gave rise to doubts as to the course of future devel

opments that made it difficult to forecast what might happen.

Copies

of the two statements have been placed in the files of the Federal

Open Market Committee and are attached hereto.

Mr. Williams'

statement was followed by a discussion of

(1) the suggestion in his remarks that another effort be made by

management and labor, with the assistance of Government, to reach

an agreement as to what their respective policies should be, and

(2)

the policies of management with respect to prices and profits

in the event of increased productivity.

The meeting then recessed and reconvened at 2:40 p.m. with

the same attendance as at the end of the morning session except

that Messrs. A. H. Williams, Gidney, Gilbert, Ralph Young, and

Chandler Morse were not present.

10/3/46

-12

In response to a question as to whether it would be worth

while to make another effort to get an agreement between management

and labor, Mr. Williams thought that because of changed conditions

since the first effort was made there was a possibility that an

agreement might be reached in a Conference that dealt with funda

mentals of the economic situation, and that the suggestion might

be made that management and labor ask for a conference and invite

representatives of Government to sit in.

such a conference was to succeed it

support.

It was suggested that if

should at least have Government

There was a discussion of how such support might be brought

about.

Mr. McLarin inquired whether there would be any objection

to the Presidents of the Federal Reserve Banks giving copies of the

statements made by Messrs. Thomas and Williams to the members of their

respective boards of directors.

This point was discussed and it was

concluded that the substance of the statements could be given to the

boards of directors by the Presidents or by the Banks' economists

without distributing copies of the statements.

The reason for this

position was that theeconomists for the Committee should be in a

position to speak freely at the meetings of the Committee, with the

understanding that their estimates or projections would not be dis

tributed on the outside in view of the possibilities of misunder

standing of the figures as being official forecasts of the Committee,

of the Board of Governors, or of the Federal Reserve Banks.

10/3/46

-13

In connection with a review of the progress of the Treasury

program for retirement of Government debt since the last meeting of

the Committee, Chairman Eccles stated that the program had been more

satisfactory in its effects than had been anticipated, that he had

not expected that it

would result so quickly in

term rate, and that it

would be fortunate if

stiffening the long

the program could be

continued into 1947.

At the request of the Committee, Mr. Kennedy read the fol

lowing memorandum prepared by him and Mr. Musgrave under date of

September 30, 1946, on the subject of debt retirement:

"The Treasury cash balance, after allowing for the

announced cash retirement of 2 billion dollars of certif

icates on October 1, is estimated at somewhat below 7

billion dollars as of the end of October, A further

issue of certificates totaling 3.8 billion is maturing

on November 1, and it is recommended that 2 billion dol

lars of this issue be redeemed for cash, which will leave

the Treasury balance at the end of November at about 5

billion.

Maturing during December are 3.8 billion dollars of

certificates on December 1, and 3.3 billion dollars of

1-1/2 per cent notes on December 15.

On the assumption

that the balance should not be reduced below 2 billion,

it will be possible to retire approximately 3.5 billion

of these issues for cash.

Cash retirements should be

concentrated as much as possible upon the note issue,

since it is held largely by the banking system, whereas

the maturing certificate issue, which was sold in the

Victory Loan, is held largely by nonbank investors.

An exchange offer, therefore, for the entire amount of

the maturing certificate issue should be made, and the

December 15 notes should be redeemed for cash. If it

should develop that the cash balance is not large enough

to redeem the entire note issue which may be the case if

a substantial part of the certificate exchange offer is

not taken up, part of the note issue could be paid off

in cash and the balance refunded into the December 1

certificates.

10/3/46

-14

"Assuming

Treasury balance of 2.5 billion dollars

at the close of the year, a substantial continuation of

the retirement program should be possible during the first

quarter of 1947, since the balance is estimated to increase

by approximately 4 billion dollars out of budget surplus

and the sale of nonmarketable issues. Maturities during

this quarter include 11.4 billion of certificates and 1.9

billion dollars of notes. Conditional upon the continua

tion of inflationary pressures, cash retirements should

approximately total 4 billion dollars."

Chairman Eccles stated that it was expected that within the

course of the next two or three days the Treasury would make the usual

informal request for the views of the executive committee on the

program for further debt retirement and that he would like to dis

cuss what the recommendations of the committee should be.

It was the consensus of the members of the full committee

that, if

the Treasury would be willing to reduce its balances by the

required amount, it

would be desirable to retire $2 billion of the

November 1 certificate issue, to accept voluntary cash redemptions

of the December 1 issue of certificates which might amount from $5

hundred million to $1 billion, and to pay off the entire $3.261

billion of notes maturing on December 15, 1946, but that if (be

cause of the possibility of substantial voluntary cash redemption

of December 1 certificates) the Treasury was unwilling to reduce

its balances by the amount necessary to carry out this program,

such amount only of the November 1 certificates should be retired

as would permit the retirement of the entire issue of the December

15 notes.

10/3/46

-15Upon motion duly made and seconded,

and by unanimous vote, it was agreed that

the Treasury should be advised accordingly

and that the letter of advice would be

submitted to the members of the executive

committee for approval before it was sent

to the Secretary of the Treasury following

receipt from the Treasury of the usual

informal reouest for the views of the

executive committee.

Chairman Eccles stated that in accordance with the procedure

which had been followed by the American Bankers Association Committee

on Treasury financing, he had been invited to meet with the committee

when it

was in Washington in August for a meeting with the Secretary

of the Treasury.

He reviewed briefly his discussions with the commit

tee on Treasury financing and System credit policies.

There were then distributed copies of a statement of recom

mendations by representatives of commercial and savings banks, insur

ance companies, and investment banks during their recent meetings

with the Secretary of the Treasury with respect to Treasury financing

policy.

This statement was in the following form:

"Mr. Bartelt asked that I pass on to you for the

confidential use of the Federal Open Market Committee,

the recommendations made by the various groups that met

at various times recently with the Secretary. Mr. Bartelt

said that the Secretary listened to the views and recom

mendations of the groups and gave no indication of what

He made it quite

he thought of the various proposals.

action for the

any

clear that he was not contemplating

time being.

"The commercial banks with Burgess as their spokes

man, introduced their recommendations with an endorsement

of the Secretary's Press Club statement on the importance

-16

10/3/46

"of a balanced budget or budget surplus. They felt that the

Treasury should get in a position to meet uncertainties of the

future by refunding part of the large short-term debt into

longer-term debt and to get a broader distribution of the

debt outside of the banks.

They did not show how a broader

distribution of the debt could be effected.

The groups made

the following specific recommendations:

"Lon-term securities.

All of the groups recommended a

new issue of long-term restricted marketable bonds.

The com

mercial banks said that such an issue should be made at an

appropriate time.

Savings banks favored the issue, but indi

cated that they did not have any large amount of funds for

Insurance corpanies stated that they

investment at present.

have accumulated funds, but they did not reveal the amount.

They also argued that the Treasury should now refund some

debt into long-term bonds and take advantage of the present

favorable market, because they see an increasing volume of

private investments forthcoming to absorb investment funds.

"Change in E bonds. The commercial banks advocated a

new savings bond that would be eligible as collateral for

This was on the

loans under some restricted provisions.

grounds that some holders are forced to sell savings bonds

at a sacrifice of income to meet temporary needs and that

the change would make savings bonds more attractive and

thus increase sales.

"Treasury bills. The commercial banks recommended

against the issuance to the Federal Reserve of a special

security bearing a low rate of interest, since such an

issue would raise the question of direct dealing between

the Federal Reserve and Treasury.

"Interest rates. None of the groups formally advocated

higher interest rates. Mostly they were silent on the point,

but when interest rates were mentioned it was in the tone

that nothing need be done at the present time."

In connection with a discussion of the above recommendations,

Chairman Eccles sugested that the Presidents read the statement on

Government fiscal policy made by the Secretary of the Treasury at the

Press Club on Au ust 22, 1946, and it

was understood that copies of

the statement would be handed to the Presidents before they left

Washington.

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-17Chairman Eccles also inquired what the views of the Committee

were with respect to what, if any, action should be taken at this time

with respect to the posted rate on Treasury bills, the suggestion that

savings bonds be made more attractive, and the suggestion that there

be an issue of long-term bonds.

In response to this inquiry Mr. Sproul

read the following statement which he had presented at the meeting of

the Presidents' Conference yesterday:

"1. When we met last June the argument on credit

policy centered around whether we should follow the

modest approach, using the means at our disposal in

combatting inflationary trends, or whether we should

say that our weapons were no longer usable or effective

and that we needed substantial new powers from the Con

gress if we were to meet our responsibilities.

"2. The fact is that we had been and have been

using the modest approach - elimination of preferential

discount rate, retirement of Government debt out of

Treasury balances, increase in acceptance rates - and

that so far this approach has been measurably effective

in the economic situation in which it has been used.

Aggressive bank bidding for government bonds has ceased,

at least temporarily, the banks have been under inter

mittent pressure for reserves and short-term rates of

interest have risen somewhat.

"3. It is true that this is weak medicine in terms

of combatting inflation - it has done little to reduce

the volume of funds already created and in the hands of

the public and to increase the supply of goods and serv

ices viz-a-viz the supply of money -- but neither would

the Board's ambitious proposals have accomplished any

thing of this sort. It has been a holding operation,

while it was hoped that increased output per man-hour,

the only real answer to our cost-price problem or our

wae-price spiral, would come to our rescue.

"4. The next contemplated steps in the modest

approach were the elimination of the 3/8 per cent bill

buying and repurchase rate and the defrosting of the

presently frozen 7/8 per cent certificate rate. These

10/3/46

-18-

"are not now urgent steps -- in fact, the setback in the

securities markets in recent weeks and the signs of a

possible setback in business activity counsel sitting

tight for the present.

"5. We should, however, be preparing for these

next moves.

The elimination of the 3/8 per cent bill

rate offers certain difficulties, not in a market sense,

but with respect to Federal Reserve earnings and the

cost of servicing the Federal debt. If the fixed buy

ing and selling rate for Treasury bills is removed, we

should probably continue to hold most of the bills but

the rate, if left to adjust to the market, would rise

perhaps to 3/4 per cent. To meet this problem one sug

gestion, which Chairman Eccles has promoted, is to ex

change our bills for a special Treasury demand obliga

tion bearing, say, 1/8 or 1/4 per cent interest. This

has the defect, to me the fatal defect, of unnecessarily

arousing public fears of direct Treasury financing by

the central banks and of placing the initiative as to

our holdings and the rate to be paid on them, almost

entirely with the Treasury. My own preference would

be to let the rate and our earnings increase, and to

restore the franchise tax on Federal Reserve Banks

which would mean that the Treasury would recover its

An appropriate time and place for the res

'losses'.

toration of the tax would be as an amendment to the

F.D.I.C. bill for return of its capital to the Federal

It was in connection

Reserve Banks and the Treasury.

with the provision of this capital that the franchise

If it be argued that this is to

tax was abolished.

postpone and delay unduly adjustment of the situation,

a compromise might be possible. I don't like it par

ticularly, but it would be better than the special

demand obligation. At the appropriate time, we could

begin to bid for Treasury bills, say at 1/8 or 1/4 of

1 per cent, tendering our maturing bills in exchange

for those awarded to us. In this way we would avoid

a special certificate, keep our investments in market

obligations, reduce our earnings, and avoid increasing

the cost of servicing the public debt.

"6. Elimination of the 3/8 per cent bill rate is

a largely meaningless procedure, however, except as it

might temporarily create uncertainty and except to the

extent that it would get rid of the hocus-pocus we now

go through to replace our maturing bills. To have real

10/3/46

-19-

"meaning elimination of the 3/8 per cent bill rate should

be the prelude to abandonment of the fixed 7/8 per cent

certificate rate, and to our partial escape from the

straightjacket of the fixed pattern of rates. Admittedly

a rise in certificate rate to 1 or 1-1/4 per cent would

not halt inflation and we would still have to provide

market support, but it would create a new situation in

which uncertainty as to future rates would increase,

sales of old certificates to us would be made at a loss,

the spread between short and long-term yields would be

narrowed, and banks would, in my opinion, be more cautious

about making longterm investments, term loans, etc. And

on the side of cost to the Treasury there is really little

argument. The annual interest charge on the $70,000,000,000

of Governments maturing before December, 1950, excluding

bills, is about $1,000,000,000 or 1.43 per cent. If all

of these securities were refunded at 1-1/4 per cent the

annual service cost to the Treasury would be reduced

about $125,000,000.

"7. That you might say, however, would be the re

verse of funding some of the debt, which is what is being

widely recommended. In present circumstances, however,

the only funding of the debt which has real meaning is

the sale of securities to non-bank investors - it is

not merely lengthening maturities and raising coupons

no matter who buys the securities. Sales within the

banking system could well be made at lower rates and

with shorter maturities even than during the war.

"8. For the non-bank investor, I still think a

long-term 2-1/2 per cent obligation without roll-over

possibilities would be appropriate and desirable toward

the end of the year, and that sales of savings bonds to

small investors should be stepped up faster and further

- if necessary by reimbursing those who operate pay

roll reduction plans for out-of-pocket expenses and

by sweetening up the terms of the Series 'E' bond it

self.

"9. Finally, of course, the Treasury should con

tinue debt redemption out of balances, and next year

out of its cash surplus even though the budget is in

deficit. And there should be further strenuous efforts

to convert that deficit into surplus."

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10/3/46

There was a discussion of the proposals contained in Mr.

Sproul's statement and particularly of the type and timing of a

security that might be issued as a medium for investment of accu

mulated savings funds.

Chairman Eccles inquired whether there was any objection

to the sugestion that there be made available a special long-term

issue to absorb accumulated savings in cases where that demand was

not now met by the Series G savings bond, it

being understood that

investors in the new security would have to demonstrate that they

had accumulated savings in the amount of the securities purchased

and were not selling marketable issues in order to acquire the new

issue.

There was no objection to such a program.

In response to an inquiry as to whether Series E bonds

should be made eligible as collateral for bank loans, Mr. Young

answered in the affirmative and Mr. McLerin suggested that in order

to increase the inducement to hold series E bonds to maturity the

Treasury might offer a more attractive bond in exchange for maturing

series E bonds.

This and other possibilities for making series E

bonds more attractive were discussed, such as some change which

would enable the owners of maturing series E bonds to reinvest

their funds at the 2.9 per cent rate.

There was no objection on

the part of the members present to the adoption by the Treasury of

some suggestion of the latter kind, although it was pointed out

10/3/46

-21

that it might not be desirable to continue such

a program into a

period of recession when the emphasis would be placed on spending

to maintain employment.

In connection with the discussion of the question whether

any action should be taken at the present time with respect to the

buying rate on Treasury bills, Chairman Eccles stated that while

the present retirement program continued there was no need for action

on the bill rate but that it should not be continued too long.

Mr.

Sproul suggested that the present arrangement with

respect to bills was working without disturbance to the market and

that, as the amount of bills held by the Federal Reserve Banks in

creased, the posted rate and repurchase option became less important

and more within the control of the Federal Open Market Committee.

In the course of a discussion of the steps that might be

taken in connection with the elimination of the buying rate on

Treasury bills, there were distributed copies of (1) a memorandum

prepared by Mr. Kennedy discussing actions that might be taken

with respect to Treasury bills, and (2) a memorandum prepared at

the Federal Reserve Bank of New York submitting a plan for elimina

ting the buying rate on bills and issuing new bills under an arrange

ment which would permit the payment for new issues by the surrender

of maturing issues without preferential allotment on exchange tenders.

10/3/46

-22

Chairman Eccles raised a question as to the date for the

next meeting of the Committee and suggested that, inasmuch as it

might be desirable to take action on the posted rate on Treasury

bills before the end of the year, it

might also be desirable for

the Committee to meet in December.

In the course of a discussion of actions that might be

available to the System in carrying out System credit policies,

Chairman Eccles stated that, if

the debt retirement program were

carried into 1947, the buying rate on Treasury bills were eliminated,

and reserve requirements of member banks in central reserve cities

were increased to the maximum permitted under existing law, it might

be possible to exert such an influence in the money market during

the period of threatened inflation that further steps such as those

referred to in the Board's annual report for 1945 would not be nec

essary.

At the conclusion of a discussion,

upon motion duly made and seconded, it

was voted unanimously (1) that no action

should be taken at this time to change

the direction issued by the Committee

on March 1, 1945, with respect to the

purchase of Treasury bills by the Fed

eral Reserve Banks, and (2) to issue

the following direction to the execu

tive committee, with the understanding

that the limit.tions contained in the

direction would include commitments

for purchases and sales of securities

for the System open market account;

10/3/46

-23-

The executive committee be directed, until other

wise 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, replace

ment of maturing securities, and letting maturities run

off without replacement), as may be necessary in the

practical administration of the account or for the pur

pose of maintaining an orderly market in Treasury secu

rities and a general level of prices and yields of Gov

ernment securities which will support the Treasury is

suing 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 aggregate amount of secu

rities held in the account at the close of this date

[other than (1) bills purchased outright in the market

on a discount bsis

at the rate of 3/8 per cent per

annum and bills redeemed at maturity end (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 direct from the Treasury of such

amounts of special short-term certificates of indebted

ness as may be necessary from time to time for the

temporary accomodation 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 reviewed for the information of the members

of the full committee the discussion at the meeting of the executive

committee this morning in

connection with the questions presented in

the memorandum prepared by the staff group on foreign

date of May 1,

interests under

1946, with respect to relationships of the Federal Re

serve System to the Bretton Woods institutions.

It was stated that

the executive committee had voted to recommend to the full committee

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10/3/46 1

that it

authorize direct transactions in Government securities for

the System open market account with the International Monetary Fund

and International Bank for Reconstruction and Development,

for the

purposes stated in the memorandum from the staff group, without fol

lowing the usual procedure of effecting transactions in the market,

and that the memorandum of the staff group be placed on the agenda

for consideration at the next meeting of the full committee.

After discussion, upon motion duly

made and seconded, and by unanimous vote,

the recommendation of the executive com

mittee was approved.

There was a further reference to the time of the next meeting

of the Federal Open Market Committee and the members of the Committee

concurred in a suggestion by Chairman Eccles that the date for the

meeting be set tentatively for the week of December 9, 1946, with

the understanding that if

November 15,

December,

1946,

the executive committee, not later than

should feel that a meeting need not be held in

the members of the full Committee would be advised accord

ingly and the meeting would not be held until after the first

of

next year.

Thereupon the meeting adjourned.

Approved:

Secretary

Chairman.