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, February 27, 1947, at 10:35 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Eccles, Chairman

Sproul, Vice Chairman

Draper

Evans

Vardaman

Clayton

Leach

McLarin

Young

Peyton (alternate for Mr. Clerk, who died

on September 28, 1946)

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Townsend, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Rauber, Wheeler, and John H.

Williams, Associate Economists

Mr. Rouse, Manager of the System Open

Market Account

Mr. Thurston, Assistant to the Chair

man of the Board of Governors of

the Federal Reserve System

Mr. Sherman, Assistant Secretary of

the Board of Governors

Messrs. Ralph A. Young and Morse,

Assistant Directors of the Di

vision of Research and Statistics,

Board of Governors

Mr. Musgrave, Chief, and Mr. Smith,

Economist, Government Finance

Section, Division of Research and

Statistics, Board of Governors

Messrs. Whittemore and Gidney, alternate

members of the Federal Open Market

Committee

2/27/47

-2

Messrs. Alfred H. Williams, Leedy, Gilbert,

and Earhart, Presidents of the Federal

Reserve Banks of Philadelphia, Kansas

City, Dallas, and San Francisco,

respectively

Mr. Stead, Vice President of the Federal

Reserve Bank of St. Louis

Mr. Johnson, General Counsel of the

Federal Reserve Bank of Dallas

Chairman Eccles called for the reports of the economists.

Mr. Thomas made a statement on the economic prospects for 1947-1948

and also presented a paper which analyzed the structure of the public

debt and problems connected with its

management.

Mr. Wheeler then

made a statement on means of increasing the effectiveness of actions

taken by the Federal Reserve to influence credit conditions, and,

following a discussion of the remarks of Messrs. Thomas and Wheeler,

Mr. John H. Williams reviewed the current domestic and international

economic situation and discussed the outlook.

ments by Messrs.

Copies of the state

Thomas, Wheeler, and Williams have been placed in

the files of the Federal Open Market Committee and are attached here

to.

Following a general discussion of questions raised by the

economists'

statements,

the meeting recessed and reconvened at

10:10 a.m. on February 28, with the same attendance as at the ses

sion on February 27,

except that Mr.

Davis, President of the Fed

eral Reserve Bank of St. Louis and alternate member of the Federal

2/27/47

-3

Open Market Committee, Mr. Kincaid, Associate Economist, and Mr.

Smead, Director of the Division of Bank Operations of the Board

of Governors, were present, and Messrs. Wheeler, Ralph A. Young,

Morse, Townsend, and Johnson were not present.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on October 3, 1946, were ap

proved.

The progress of the program for retirement of the Govern

ment debt since the last meeting of the full Committee and its

ef

fects on the Government securities and money markets and on the

Treasury cash position were discussed, and Chairman Eccles stated

that current receipts of the Treasury had held up better than had

been anticipated, and that it

appeared that another billion dol

lars of certificates could be retired April 1 and perhaps an ad

ditional amount before the end of this fiscal year.

He noted that

the Treasury desired renewal of the authority of the Federal Re

serve Banks to purchase up to five billion dollars in securities

direct from the Treasury, that a bill had been introduced in Con

gress continuing this authority after March 31, 1947, and that he

had been called to appear at hearings on the bill to be held be

ginning Monday, March 3, 1947, before the House Banking and Cur

rency Committee.

2/27/47

-4

All of the members of the Committee had been furnished a

draft of the letter

to the Treasury with respect to the savings

bond program, which had been prepared but which, in accordance

with the decision reached at the meeting of the executive

mittee on February 17, 1947, had not been sent.

stated that it

com

Mr. Sproul

was the intention of the executive committee of

the Federal Open Market Committee to ask that the full Commit

tee, at a meeting in

the autumn of this year, consider what sug

gestions should be made to the Treasury before it reached a de

cision with respect to its policy during 1948 regarding the of

fering of a special security which would encourage holders of

maturing savings bonds to reinvest their funds.

Chairman Eccles said that the matter would be of consider

able importance from the longer range standpoint when Series E sav

ings bonds started to mature in 1951, and that it should be given

a great deal of study before a recommendation was made to the Treas

ury.

In connection with a discussion of proposals that the Treas

ury issue a long-term security, Chairman Eccles reviewed the letter

and memorandum sent to the Treasury under date of January 22, 1947,

and which had been approved by the executive committee at its

ing on February 17.

meet

He also said it might be desirable to send

2/27/47

-5

another letter to the Treasury which would answer some of the argu

ments recently presented to the Treasury by insurance and banker

groups in support of a long-term marketable issue.

A draft of a

memorandum prepared under date of February 27, 1947, for consider

ation in this connection was then distributed by Mr. Musgrave and

read by Mr.

Carpenter.

The memorandum,after stating the circum

stances under which a long-term security would be desirable, pointed

out the reasons why the objective sought would not be served by a

marketable issue and the reasons for the recommendation that a non

marketable issue of the Series G type be made available.

Messrs. Eccles and Sproul reported briefly on their discus

sion of this matter with Fiscal Assistant Secretary Bartelt at their

luncheon meeting yesterday.

They had gotten the impression from the

discussion that the Treasury had not yet reached a decision on the

issuance of a long-term security, and that in their discussion Mr.

Bartelt had seemed impressed with the statement that merely putting

out a 2-1/2 per cent bond for the purpose of keeping the long-term

interest rate from declining would be dealing with the effects and

not the basic causes,

under pressure,

it

since, if

the long-term rate should again come

would probably be not because of an excess of sav

ings but because of further monetization of the debt as a result of

member banks "playing the pattern of rates".

Chairman Eccles also

-6

2/27/47

said that, with the debt retirement program coming to an end, the

pressure on the long-term interest rate would likely be resumed,

and that, in

the absence of the enactment by Congress of legis

lation such as that proposed in the Board's Annual Report for

1945, the Federal Open Market Committee and the Treasury would

be faced with two alternatives as a means of preventing a decline

in the long-term rate, (1)

issuing enough 2-1/2 per cent long-term

bonds to satisfy the demand for that type of security, a move which

would cost the Treasury more than a rise in

short-term interest

rates, or (2) permitting a rise in short-term rates so as to re

move the incentive to "play the pattern of rates".

Chairman Eccles

also suggested that the Committee write a letter to the Treasury

along the lines of the memorandum mentioned above so that the Treas

ury would have this view as well as the views being presented by the

groups recommending a long-term marketable security.

After some further discussion, during which

certain changes were suggested in the language

of the memorandum, upon motion duly made and

seconded, and by unanimous vote, the executive

to

committee was authorized to send a letter

the Treasury transmitting substantially the

recommendations contained in the memorandum

on the issuance of a long-term security.

Reference was then made to the draft of a memorandum on changes

in Treasury bill

policies which had been discussed informally by Chair

man Eccles and Mr.

Sproul with the Treasury on February 17, 1947, in

2/27/47

-7

accordance with the action taken at the meeting of the executive com

mittee on February 17, 1947.

Subsequently Mr. Sproul had suggested

several clarifying changes in

the memorandum, which he had sent to

Chairman Eccles with a letter dated February 21, 1947.

Chairman

Eccles stated that all of the changes except one were changes in

form only and were acceptable to him.

The one exception would elimi

nate a statement that any change in the rate at which bills were sup

ported by the System would be made only after "concurrence by the

Treasury",

and Chairman Eccles felt

He stated that it

that change should not be made.

was generally agreed that a change in the bill

would not be made without the concurrence of the Treasury,

rate

that in

asmuch as the preliminary memorandum discussed with the Treasury had

contained the words "concurrence by the Treasury" its

elimination

now might raise a question as to whether the System intended to act

without Treasury concurrence,

that to raise such a question at this

time would be a mistake, and that he believed the elimination would

be an assertion of independence of the System which would not in

practice be carried out.

Mr. Sproul said that he felt it

whatever independence we have,

was important not to abandon

by giving our proxy to the Treasury

in advance, that he agreed that it

was extremely unlikely the System

would take action on this matter without concurrence by the Treasury,

-8

2/27/47

that the Committee should not feel it

had been committed as to word

ing and action by a preliminary memorandum prepared in haste and for

exploratory discussions, and that he believed the relations with the

Treasury were now such that the reason for the elimination of these

words need not and would not cause any suspicion on the part of the

Treasury that the System presently has in mind increasing short-term

rates on the public debt against the wishes of the Treasury.

During a discussion of the matter, Mr. Clayton suggested a

change in the memorandum which would eliminate the paragraph con

taining the words to which Mr. Sproul objected and which would state

in the opening paragraph of the memorandum that policies followed

during the war years needed to be reviewed "with the view to reach

ing an agreement for an adjustment of policies and action to changed

conditions".

Mr. Sproul said that this wording would be acceptable to him,

and Chairman Eccles stated that he preferred the original wording

under the circumstances,

ing if

it

but that he would not object to the reword

was approved with the understanding that he might say to

Mr. Bartelt that the wording of the preliminary memorandum had been

changed in order to enable the Committee to approve the memorandum

without the statement of a minority view, and that the change did

not mean that the Treasury would not have the complete cooperation

2/27/47

-9-

of the Federal Reserve System.

Mr. Evans said he did not favor the proposed change because

it was of no practical significance,

and the retention of the lan

guage used in the preliminary memorandum would avoid the possibility

of needlessly raising an issue between the Board and the Treasury.

At the conclusion of the discussion,

upon motion duly made and seconded, the

proposed change was approved with the

understanding suggested by Chairman Eccles.

On this action Mr. Evans voted "no".

Thereupon, upon motion duly made and

seconded and by unanimous vote, the re

vised memorandum was approved unanimously

as follows for transmission to the Treas

ury:

"CHANGES IN TREASURY BILL POLICIES

"Treasury and Federal Reserve policies and procedures

followed during the war with respect to Treasury bills need

to be reviewed, now that the period of heavy war finance has

passed, with a view to reaching agreement for an adjustment

of policies and action to changed conditions. Two aspects

of these policies should be considered:

(A) Weekly replacement of Federal Reserve maturi

ties, and

(B)

Elimination of the posted buying rate and re

purchase option.

"(A)

Replacement of Federal Reserve Bill Maturities

"Existing arrangements, through which the Federal Reserve

Banks replace their maturing holdings of Treasury bills, involve

a cumbersome procedure initiated by the Secretary of the Treasury

(Mr. Morgenthau) which is unsatisfactory, at least now that most

of the bills are held by the Reserve System.

"The weekly refunding operations could be simplified by

permitting holders of maturing bills to exchange them for the

2/27/47

-10-

"new issue of bills. Under this procedure the Treasury would

provide that bills awarded on tenders could be paid for either

by cash or by surrender of a like face amount of the maturing

issue of bills, with an adjustment for the discount. Pending

any other change in policies, the rate could continue to be

determined as at present. The Federal Reserve System would

tender for the amount of maturing bills held in the System and

option accounts (at a price it would determine-currently

99.905 for ninety-one day bills), and would not need to con

tinue the present arrangement whereby dealers bid for bills

and sell them to the System to replace its maturities. It

would still

be necessary, of course, to see that the total

of each weekly offering of bills

is covered by bids at the

determined rate.

"This change in refunding procedure could be introduced

immediately and without other changes in bill

policy but in

connection with it, a general revision of policy on Treasury

bills may also be considered.

"(B)

Elimination of Posted Buying Rate and Repurchase Option

"The posted rate of 3/8 per cent for the purchase and re

sale of Treasury bills by the Federal Reserve Banks was a war

time measure designed to influence market rates for Government

securities and encourage banks to make full use of their re

serves. Under current conditions these arrangements no longer

serve their original purpose. With a pegged certificate rate

and only 1 1/2

billion dollars of bill holdings outside the Fed

eral Reserve Banks, certificates have replaced bills as the

principal market instrument influencing short-term rates, and

as a medium for investment of short-term funds or the adjust

Affirmatively, the rein

ment of reserve positions of banks.

as a money market instrument

statement of the Treasury bill

would provide increased flexibility in debt management and

reserve adjustment.

"In considering the termination of the buying rate and

repurchase option, decisions need to be made with respect to:

(1) Timing of the actions

issued

(2) New policy regarding amounts of bills

and rates

(3) Added cost to Treasury and effect on System

earnings

"(1) Timing - Because of the emphasis that the market

may place on the elimination of the buying rate, the change

2/27/47

"should be made when it is desired to exert some pressure

or restraining influence.

Accordingly, it might be post

poned until there is a curtailment in the debt retirement

program to the point of lifting the pressure on member

bank reserve positions, which prevailed during the period

of large-scale debt retirement last year, and has been

accentuated by net tax receipts in the first

quarter of

1947; or until private credit expansion appears to be

proceeding at too rapid a rate. April might be a pro

pitious time for such action. The change whenever made

would apply only to bills issued subsequently; existing

privileges would continue to apply to issues of bills out

standing at the time of the change, until they mature.

"(2) Bill policy - If the posted buying rate and re

purchase option on Treasury bills are eliminated, there are

various possibilities as to policies that may be followed

in issuing bills and establishing rates.

"(a) One possibility would be to permit bills to find

It is assumed that the bill rate

their level in the market.

would rise toward the certificate rate which the Federal Re

serve System would continue to maintain at the Treasury is

suing rate of 7/8 per cent. The system would continue to

refund its holdings of bills into new bills to the extent

In view of the

that they were not taken by the market.

probable higher rate on bills, the market probably would

take more bills than at present.

"(b) Another possibility would be for the Treasury to

discontinue entirely the issuance of bills and replace ma

turing bills with additional issues of certificates. With

the certificate rate supported at a fixed level and the bill

rate permitted to rise to approximately the same level, it

reason to have outstanding

may be said that there is little

two short-term instruments serving essentially the same pur

pose.

A third possibility would be for the System to

"(c)

stabilize the market for bills, not at 3/8 per cent but at

whatever rate or rates would permit the Treasury to continue

to issue one-year certificates with a 7/8 per cent coupon.

The certificate rate would be maintained largely and in

rate. Since bills do

directly through the supported bill

not carry a fixed-rate coupon, their rate could be supported

without public announcement of a fixed rate; this would have

the advantage of permitting some flexibility within a narrow

The system would engage in open-market operations in

range.

2/27/47

-12-

"bills for the purpose of stabilizing the bill

rate at the

desired level and would refund its weekly maturities through

exchanges as proposed under (A) above.

The Treasury would

continue to issue Treasury bills weekly in the same amounts

now outstanding or increase or decrease the amount to suit

its needs.

The Reserve System would tender for new bills

to replace its maturities and be prepared to buy through

the market any additional amount of bills that might be

necessary to complete the sale by the Treasury of its

weekly offerings at satisfactory rates. Under such con

ditions, it is likely that the market would take more

bills than at present, which would result in partial al

lotments on our exchange subscriptions. Any such increase

in holdings of Treasury bills by other than the Reserve

System would probably be accompanied by a decrease in hold

ings of certificates of indebtedness and, conversely, any

reduction in the Reserve System's holdings of Treasury bills

would probably be accompanied by an increase in holdings of

certificates.

"These changes in policies and practices would make the

Treasury bills again a useful market instrument and would per

mit greater flexibility in monetary and debt management poli

cies, without interfering with the general policy of stabi

lizing interest rates.

Federal Reserve earnings and interest cost to the

"(3)

Treasury - Elimination of the buying rate and repurchase op

tion on Treasury bills raises questions of Treasury financing

rate, or the

costs and System earnings. A rise in the bill

substitution of certificates for bills, would increase Fed

eral Reserve earnings, which are already large, and would

Federal Re

also increase the interest cost to the Treasury.

serve earnings will continue at a high level indefinitely, as

it is unlikely that there will be any substantial reduction

in the total amount of the System's holdings of Government

securities in the near future.

"In order that the System may pass on to the Treasury

its earnings in excess of requirements, two approaches may

be considered:

"(a) Use may be made of a heretofore dormant provision

of the Federal Reserve Act. Paragraph 4 of section 16 of that

Act authorizes the Board of Governors to charge the Federal

Reserve Banks interest on whatever amount of Federal Reserve

notes they issue in excess of the amount of gold certificates

held by the Federal Reserve Agent as collateral security for

-13-

2/27/47

"such notes. The rate of interest charged at each Federal

Reserve Bank could be fixed by the Board, from time to time,

so as to absorb some of the earnings of the Reserve Banks,

and the amounts collected could be turned over to the Treas

ury. This would require no legislation and could be made

effective by Board action immediately.

"(b) Another possibility is to impose a tax on the

earnings of the Federal Reserve Banks (similar to the old

franchise tax). This would require legislation.

"Either provision would make it possible to return to

the Treasury not only any additional earnings obtained by

the System from higher rates on Treasury bills (perhaps 50

million dollars or more a year) but also some of the earn

ings of the System on its present portfolio at existing

rates (from 50 to 75 million dollars a year)."

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

minutes of the meetings of the executive

committee on October 3 and December 11,

1946, and January 10 and February 17, 1947,

were approved, ratified, and confirmed.

A report of open market operations prepared by the Federal

Reserve Bank of New York was presented by Mr. Rouse, Manager of the

System Open Market Account covering the period from October 3, 1946,

to February 24, 1947, inclusive, together with supplementary reports

prepared by the New York Bank covering transactions executed on Feb

ruary 25,

26, and 27, 1947.

During the course of Mr. Rouse's com

ments on the reports, copies of the report first mentioned were dis

tributed, and copies of all 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

2/27/47

-14

vote, the transactions in the System ac

count for the period from October 3, 1946,

to February 27, 1947, inclusive, were ap

proved, ratified, and confirmed.

Chairman Eccles then referred to the memorandum prepared by

the staff group on foreign interests under date of May 1, 1946, which

had been presented to the Committee at its

meeting on October 3, 1946,

and which, in accordance with the action then taken, had been placed

on the agenda for consideration at this meeting.

He said there was

no pressure from the National Advisory Council or from the Aldrich

Committee, which advises the President on the International Bank for

Reconstruction and Development and the International Monetary Fund,

to make securities of the Bank eligible for open market purchases

by the System, that the only purpose of such action would be to pro

vide a better market, that any legislation for that purpose would

have to be initiated by the System, and that it

seemed to him it

would be a mistake for the Reserve Banks to engage in

stabilization

operations in securities of the International Bank, since it

would

lead to pressure for similar operations in other securities and the

securities should either stand on their own feet in this market or

should not be issued.

Upon motion duly made and seconded,

and by unanimous vote, it was agreed that

legislation to enable the Federal Reserve

Banks to engage in stabilization operations

-15

2/27/47

in securities of the International Bank for

Reconstruction and Development should not be

sought by the System.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.