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, June 5,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

1947, at 2:45 p.m.

Eccles, Chairman

Sproul, Vice Chairman

Szymczak

Draper

Evans

Clayton

Whittemore

Mr. Gidney

Mr. Davis

Mr. Peyton

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. McCracken and Stead, Associate

Economists

Mr. Rouse, Manager of the System Open

Market Account

Mr. Thurston, Assistant to the Chairman

of the Board of Governors

Mr. Sherman, Assistant Secretary of the

Board of Governors

Mr. Musgrave, Chief, and Mr. Smith,

Economist, Government Finance Section,

Division of Research and Statistics,

Board of Governors

Messrs. Alfred H. Williams, Young, Gilbert,

and Leedy, alternate members of the Fed

eral Open Market Committee

Messrs. Leach, McLarin, and Earhart, Presi

dents of the Federal Reserve Banks of

Richmond, Atlanta, and San Francisco,

respectively

Upon motion duly made and seconded,

and by unanimous vote, the minutes of

the meetings of the Federal Open Market

6/5/47

Committee held on February 27-28 and

March 1, 1947, 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

minutes of the meetings of the executive

committee on February 27, March 1, April

1, and May 2, 1947, were approved, rati

fied, and confirmed.

Upon motion duly made and seconded,

and by unanimous vote, the action taken

by the members of the Federal Open Market

Committee on April 2, 1947, pursuant to a

recommendation of the executive committee,

to increase from 1-1/2 billion to 2 billion

dollars the limitation on the authority of

the executive committee with respect to

increasing or decreasing the total amount

of securities in the System account, con

tained in the first

paragraph of the direc

tion issued at the meeting on March 1,

1947, was approved, ratified, and confirmed.

Upon motion duly made and seconded,

and by unanimous vote, the actions of the

members of the Federal Open Market Commit

tee on April 24, 1947, (a) authorizing each

Federal Reserve Bank to place weekly

tenders for new Treasury bills in an amount

not exceeding the amount of weekly maturi

ties in the option account and authorizing

the Federal Reserve Bank of New York to

in an

place tenders for new Treasury bills

amount not exceeding the amount of weekly

maturities in the System open market account,

and (b) amending the direction issued by the

Committee on March 1, 1945, with respect to

the purchase of Treasury bills to read as

follows, were approved, ratified, and con

firmed. The circumstances under which these

actions were taken are set forth in the

minutes of the meeting of the executive com

mittee on May 2, 1947:

Until otherwise directed by the Federal Open Market Commit

tee, the 12 Federal Reserve Banks are directed to purchase all

6/5/47

-3-

Treasury bills that may be offered to such Banks on a discount

basis at the rate of 3/8 per cent per annum, any such pur

chases to be upon the condition that the Federal Reserve Bank,

upon the request of the seller on or before the last business

day preceding the closing day on which the Treasury will accept

tenders of the bills for new Treasury bills, will sell to him

Treasury bills of like amount and maturity at the same rate of

discount. All bills purchased under this direction are to be

held by the purchasing Federal Reserve Bank in its own account

and prompt reports of all transactions in Treasury bills are to

be made to the Manager of the System Open Market Account.

Upon motion duly made and seconded,

and by unanimous vote, the action of the

members of the Federal Open Market Com

mittee on May 5, 1947, in issuing the

following direction to the Federal Re

serve Banks was approved, ratified, and

confirmed. The reasons for the direction

are referred to in the minutes of the

meeting of the executive committee on May

2, 1947:

On the morning of the closing day for the receipt of tend

ers for new Treasury bills (generally Monday), each Federal

Reserve Bank will send advice to reach the Manager of the Sys

tem open market account, not later than one p.m. (on Monday,

May 5, not later than 2 p.m.) New York time, the amount of all

maturing bills subject to the option and the amount of all

maturing bills not subject to the option held in the Bank's

option account, which will be transferred at par on the

maturity date of the bills (generally Thursday) to the System

open market account. Bills acquired on May 1 in exchange for

maturing bills will, as a separate transaction, be transferred

to System account at book value on Wednesday, May 7, and pay

ment therefor will be made through interdistrict settlement

fund.

With respect to maturing Treasury bills sold to any Fed

eral Reserve Bank prior to April 25, 1947, for which the seller

still

retains the option to repurchase at any time before

maturity, the Federal Reserve Bank will honor any request by

the seller to repurchase such bills and immediately advise the

Manager of the System open market account the amount of bills

repurchased by the seller. The amount of bills transferred by

the Federal Reserve Bank to the System open market account on

the maturity date will be reduced by the amount of bills re

purchased by the seller. The Manager of the System open market

account will provide for such contingencies from bills avail

able by reason of partial allotment and by tendering for

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exchange a smaller amount of bills

than the total holdings in

the System account.

On the maturity date of the bills transferred to the Sys

tem open market account, the Federal Reserve Bank of New York

will credit each other Federal Reserve Bank, through the

interdistrict settlement fund, the amount of maturity value of

the bills transferred with immediate advice of the amount so

credited and the disposition to be made of the maturing bills

(which will be cancelled and shipped to the Treasury for re

demption or in settlement for allotment on exchange tender in

New York for the System open market account, and the Federal

Reserve Bank of New York will furnish the other Federal Reserve

Banks with shipment numbers).

A report of open market operations prepared by the Federal Reserve

Bank of New York covering the period from March 1 to June 3, 1947, inclu

sive, was presented by Mr. Rouse, who read the principal portions of the

report.

A copy of the report has 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 February

28 to June 3, 1947, inclusive, were

approved, ratified, and confirmed,

Mr.

Sproul stated that the Presidents of the Federal Reserve Banks

had been advised of the recommendations made to the Treasury since the

last meeting with respect to debt retirement and that the Treasury had

followed substantially the program recommended by the Federal Open Market

Committee and its

executive committee up to the end of May.

In connection

Sproul's comment, there were distributed copies of a memorandum

with Mr.

prepared by Mr. Musgrave under date of June 6, 1947, entitled "Financing

outlook".

With

respect to the discontinuance of the posted rate on Treasury

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bills, Mr. Sproul stated that following the meeting of the executive

committee on May 2,

1947, at which he reported on discussions with

representatives of the Treasury during the period between that meeting

and the meeting of the full Committee on March 1,

1947, further in

formal discussions had taken place and that there were certain aspects

of the matter,

including the possible effect on the certificate rate,

that the Treasury wished to consider further.

He also said that when

the executive committee met with Under Secretary Wiggins at luncheon

on May 2, 1947,

the latter suggested possible alternatives to an

announcement that the posted rate would be discontinued and expressed

concern that any action, looking to an increase in the short term

rate, might cause some outstanding obligations to sell at less than

par.

Mr. Wiggins asked, Mr. Sproul said, that the members of the ex

ecutive committee consider the possibility of substituting 180-day

bills (to which the posted rate would not apply) for existing 90-day

bills with the thought that by this procedure any announcement of the

elimination of the posted rate could be avoided.

Mr. Sproul went on

to say that, when Chairman Eccles and he met with Messrs. Snyder,

Wiggins,

and Bartelt on June 3,

the opinion was expressed to the Treas

ury representatives that their suggestions would not be effective in

solving the problems at which they would be directed,

confuse the market, and that they might make it

achieve the agreed objectives.

that they might

more difficult to

They were also told, Mr. Sproul said,

that the Federal Open Market Committee was still

of the opinion that

the posted rate should be eliminated as soon as possible, that any

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repercussions resulting from that action would be minor ones, that when

the time came to change the rate on certificates the System had weapons

in its hands effectively to meet any adverse reaction that might take

place, and that any fear of certificates selling below par was un

realistic because certificates were considered in terms of yield and a

slight dip below par would not concern anyone.

Mr.

Sproul added that

he had the impression that the Treasury representatives agreed that the

posted rate should be discontinued but still

it should be done.

had questions as to when

While Under Secretary Wiggins indicated that a de

cision would be forthcoming from the Treasury this week, nothing further

had been heard.

Mr. Sproul made the further comment that, in addition

to discussing these problems with the Treasury officials, he and Chair

man Eccles had continued to advocate the issuance by the Treasury of a

long-term series G-type security, and that the Treasury had also seemed

receptive to this idea but thus far had been reluctant to put it

into

effect.

Following Mr.

Sproul's report, Mr. Musgrave's memorandum on the

financing outlook was read and there was a discussion of the further

recommendations to be made to the Treasury with respect to debt retire

ment.

At the conclusion of the discussion,

upon motion duly made and seconded, and

by unanimous vote, the following letter

to the Secretary of the Treasury was

approved and it was understood that during

the period before the next meeting of the

full Committee and in accordance with the

practice that had been followed during the

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Treasury debt retirement program, the ex

ecutive committee would continue to sub

mit monthly recommendations with respect

to further debt retirement:

"At the meeting of the Federal Open Market Committee which

was held yesterday, the Committee discussed the outlook for the

Treasury debt retirement program with particular reference to

the July 1 maturity.

After examination of the estimated posi

tion of the Treasury at the end of the month and the uncer

tainty pertaining to such position, the Committee recommends

that the Treasury offer to exchange the maturing certificates

for a like amount of new 12-months 7/8 per cent certificates.

If it should develop later in this month that additional funds

will be available and the fiscal outlook justifies their immedi

ate use for debt retirement, it is the Committee's view that

the retirement of additional Treasury bills provide a more

flexible as well as a particularly suitable means of utilizing

such funds.

In that case, the Executive Committee should be

glad to discuss with you the further retirement of Treasury

bills."

Chairman Eccles then stated that, at its

meeting earlier today,

the executive committee discussed briefly the suggestion that the July,

August, and September certificate maturities be replaced as they matured

with certificates maturing July 1, 1948,

the October issue of certificates it

rate to, say,

so that if

in

connection with

should be determined to increase the

one per cent, the longest outstanding certificate issue

would be nine months and the rate could be increased without any of the

outstanding issues falling below par.

Chairman Eccles added that no con

clusions had been reached by the executive committee on this question,

but suggested that it

might be desirable for the full Committee to author

ize the executive committee to make a recommendation to the Treasury along

these lines if,

Mr.

after further study,

such a procedure seemed desirable.

Evans stated that he was opposed to increasing the rate on

certificates because the burden of such an increase would fall on the

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farmers,

the small businessmen, and the taxpayers.

He recalled the

situation after World War I when the Federal Reserve System was blamed

for increasing interest rates, tightening credit, and causing a fall

in prices, and he said that in some places the Federal Reserve System

was still

held responsible.

He further stated that, in his opinion,

an increase in the certificate rate would have no effect on the infla

tionary pressures, that the lifting of controls had removed whatever

brakes the Government had on inflationary pressures, that we now have

inflation, and that an increase in the certificate rate would have no

noticeable effect upon these pressures and would be about as effective

as a slingshot against a grizzly bear.

He also stated that an increase

in the certificate rate would not endanger the long-term rate on E, F,

and G bonds which individuals purchase.

low as it

should go.

This rate is

fixed and it

The banks would be the only group to gain if

certificate rate were increased.

is

as

the

He stated that this would be very un

fortunate from a public relations standpoint, and that as long as the

banks are getting such a large part of their revenue from interest on

Government securities they could ill

afford to ask for increased taxes

in order to increase these earnings.

He stated that there were other

ways, as outlined in the Board's Annual Report, for handling the situa

tion and that the arguments for increasing the certificate rate were not

acceptable to him and he was opposed to such an increase.

He favored,

as in the past, eliminating the repurchase agreement for bills and also

allowing the bill rate to fluctuate under the present certificate rate.

6/5/47

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Mr.

Sproul said that the proposal referred to by Chairman Eccles

would be for the purpose of "clearing the decks" in the event it

decided later to increase the short-term rate but that it

was

did not con

template an immediate recommendation that the rate be increased.

Chairman Eccles stated that while the steps that had been taken

by the System and the Treasury had stopped temporarily the decline in

yields on long-term securities resulting from "playing the pattern of

rates", it

could be expected that the long-term issues would continue to

be under pressure, that the sale of securities from trust accounts or

the issuance of a long-term restricted security would not correct the

situation, that the Treasury representatives felt it

would be a mistake

for the long-term savings rate to decline further, and that, if

there

were an increase in the short-term rate to prevent further monetization

of the debt, it

would be possible to determine whether the pressure on

the long-term rate represented an excess of savings funds over the demand

for such funds or whether the pressure resulted from the difference in

long- and short-term rates.

seen fit

He also said that, since Congress had not

to give the System the additional powers suggested in the

Board's Annual Report for 1945, the Committee was faced with the alterna

tives of allowing the long-term rate to decline further or permitting

the short-term rate to rise to a point where there would be no incentive

for banks to continue to "play the pattern of rates".

He recognized

that such an increase would not be effective in combating inflationary

conditions and that any increase in

rates for that purpose would have to

6/5/47

-10

be so large that it

would completely upset the Government securities

market.

Mr. Sproul stated that an increase in the short-term rate would

not be for the purpose of combating present inflation but rather for the

purpose of preventing further increases in the already excessive money

supply.

Action would be taken in the light of the System's responsi

bility for general monetary and credit conditions, and not for the

advantage or disadvantage of any group or segment of the community.

It

is the only action available to the System which will help prevent

further playing of the "pattern of rates" and further monetization of

the public debt, by narrowing the spread between short and long rates

and by creating some uncertainty with respect to rates.

In a discussion of the possible effects of an increase in short

term rates, Mr. Evans questioned whether it

would be effective in achiev

ing the desired results and suggested that all other possible alterna

tives should first

be thoroughly explored.

He also questioned whether

there should be an increase in the short-term rate at a time when

Congress was acting to cut Government expenses, decrease taxes, and dis

continue other existing instruments for combating inflation such as the

authority to regulate consumer credit.

In response to Mr. Evans'

inquiry as to how high it

was thought

the short-term rate would have to go to have the desired effect, Chair

man Eccles stated that the rate should be permitted to go up by steps

to perhaps 1-1/4 per cent as a maximum.

The reason for his opinion was

that the yield on securities held by banks which would mature over the

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next five years would not average more than 1-1/4 per cent and,

if

they

could refund these maturities into a 1-1/4 per cent obligation, the

pressure on the long-term rate would cease.

Chairman Eccles also said that the Treasury was considering the

problem of refunding the bonds and the notes which mature this fall,

that some of the members of the Treasury staff had suggested a 1-1/2

per cent market issue, but that he would be opposed to such an issue

because it

would establish rights in

the maturing securities and, as

long as the System was supporting the market and in effect making all

issues of Government securities demand obligations,

there was no point

in the Treasury paying 1-1/2 per cent for a 7-year obligation which

would be eligible for purchase by the banks.

Mr. Evans stated that he would regard an increase in the short

term rate with greater favor if

there could be an agreement by the

banks and the Treasury as to what securities the banks would hold, and

the interest rate they would receive.

He questioned whether an in

crease in the short-term rate would be very effective in preventing

banks from selling short-term and purchasing long-term issues.

Chairman Eccles commented that the short-term rates on Govern

ment securities tended to establish the rates on private borrowing,

that these rates were so low at the present time that banks were taking

risks at rates which would not give them sufficient cushion for the

absorption of losses, and that as long as they were under pressure

because of low rates to maintain earnings they would continue to make

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6/5/47

such loans and would sell short-term Governments if necessary to obtain

the required funds.

Chairman Eccles also said that at hearings before committees of

Congress recently he had discussed the proposal to increase the short

term rate and that there was no unfavorable reaction to the proposal.

He added that, while the Treasury appeared to be in accord with such an

increase,

it

was a question of timing and he was satisfied from his

most recent discussion with Under Secretary of the Treasury Wiggins that

the Treasury would not concur in the elimination of the posted rate on

Treasury bills or any action looking toward an increase in the short

term rate until after the end of June.

At the conclusion of the discussion, Chairman Eccles suggested

that the full Committee authorize the executive committee to make a

recommendation to the Treasury with respect to the consolidation at

maturity of existing Treasury certificates into four or five issues

each year if,

after further study, it

seemed to the executive committee

to be desirable that such action be taken as a preliminary step to an

increase in the short-term rate.

Upon motion duly made and seconded,

Chairman Eccles' suggestion was approved,

Mr. Evans voting "no".

Reference was then made to the recommendation approved by the

Committee on February 28, 1947, that a long-term restricted bond be

issued by the Treasury.

Chairman Eccles suggested that the Committee

authorize renewal of the recommendation to the Treasury, and that the

letter containing this recommendation suggest that the Treasury consult

6/5/47

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with the executive committee before making sales of long-term market

issues of Treasury securities from Government accounts, because of the

close relationship of such sales to open market operations which were the

continuing concern of the Committee.

Upon motion duly made and seconded,

and by unanimous vote, the following

letter to the Treasury was approved:

"At the meeting of the Federal Open Market Committee

which was held on June 5, we again considered the desirability

of the Treasury issuing a G-type bond such as was recommended

by the Committee in March of this year.

"The Committee writes to reaffirm its earlier recommenda

tion. For a number of reasons, it appears highly desirable

that prompt action be taken in this matter. In recent months,

there has been an increasing need for meeting pressures on

the long-term yield which can not and should not be met in

definitely by sales of marketable bonds for Government accounts

and we think it important that a policy on the longer term

issue should be formulated prior to dealing with the refunding

of the large volume of fall maturities.

"Mr. Sproul and I are at your disposal for further dis

cussion of the matter, looking to the early issuance of such

securities. We should also like to have the opportunity to

consult with you from time to time if and when further sales

of securities from Government accounts are contemplated because

of their close relationship to the Open Market operations which

are the continuing concern of the Committee."

Upon motion duly made and seconded,

and by unanimous vote, it was agreed that,

pending action to discontinue the posted

rate on Treasury bills, no changes should

be made in the direction issued by the

Federal Open Market Committee to the

twelve Federal Reserve Banks on April 24,

1947, with respect to the purchase of

Treasury bills for the respective Banks'

option accounts.

There was unanimous agreement that the authority issued to the ex

ecutive committee at the last meeting of the full Committee to direct the

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execution of transactions for the System account should be changed (1)

to bring the direction into conformity with the procedure now in effect

for transferring maturing bills held in the option accounts of the Fed

eral Reserve Banks to the Syste

account and the exchange of bills in

the System account for new bills, and (2) to increase from 1-1/2 billion

to 2 billion dollars the limitation contained in

the first

paragraph of

the authority of the executive committee to increase or decrease the

amount of securities held in the System account.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the fol

lowing direction to the executive commit

tee was approved, with the understanding

that the limitations contained in the

direction would include commitments for

purchases and sales of securities for the

System open market 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

purchases, sales, exchanges, replacement of maturing securi

ties, 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 securities and a general level of prices and

yields of Government securities which will support the Treas

ury 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 aggregate amount of securities held in the

account at the close of this date [other than (1) maturing bills

transferred to the System account from the option accounts of

the Federal Reserve Banks pursuant to the direction issued by

the Federal Open Market Committee on May 5, 1947, bills purchased

outright in the market on a discount basis at the rate of 3/8

per cent per annum, bills redeemed or exchanged at maturity, and

bills taken in exchange for maturing bills, and (2) special

short-term certificates of indebtedness purchased from time to

time for the temporary accommodation of the Treasury] shall not

be increased or decreased by more than $2,000,000,000.

6/5/47

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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 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.

There was a discussion of the time for the next meeting of the

Federal Open Market Committee and it

was tentatively agreed that the

meeting should be held on October 2 and 3, 1947.

The meeting then recessed and reconvened at 10:00 a.m. on Friday,

June 6, 1947, with the same attendance as at the earlier session except

that Mr. Townsend,

Assistant General Counsel, Messrs. Neal, John H.

Williams, and Thompson, Associate Economists,

Mr. Parry, Director of

the Division of Security Loans of the Board of Governors,

Ralph A. Young and Morse,

and Messrs.

Assistant Directors of the Division of Research

and Statistics of the Board of Governors, were also present.

Chairman Eccles called for the reports of the economists and Mr.

Thomas asked that Mr. Neal give the first

the future in

industry and trade.

report covering prospects for

This report was followed by a dis

cussion of the agricultural outlook by Mr. McCracken, a report on the

real estate situation by Mr. Thompson, and a statement by Mr. Stead with

respect to employment,

wages, and labor-management relations.

Copies of the economists'

statements have been placed in the

files of the Federal Open Market Committee.

Mr.

Thomas stated that the picture painted by the four statements

of the economists was one of inflation, the kind of condition that the

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System, in considering proper fiscal and monetary policies during the

war, had sought to avoid.

Because of the termination of controls, he

said, inflation had developed although it was not nearly as serious as

it might have been if

certain policies of control had not been adopted.

He added that, although there were differences of opinion as to the

causes of inflation, it

causes,

was important to recognize that the alleged

such as high prices, price support activities, demands of labor,

wage policies of the Government,

high profit margins in the building

industry, etc., were the results as well as causes and none of them

would have caused the rise in prices that had taken place if

been for the war and the resulting shortages of goods.

it

had not

He also said

that the question was what should be done about the existing situation,

and that while it

appeared that the country was approaching or had passed

the peak of inflation the downturn was not evident enough at this time to

justify concern about bolstering the economy against a recession.

It

was his opinion that throughout the war and postwar period there had been

too many fears of postwar deflation, with the result that actions which

should have been taken to counteract inflation were not taken, because of

the fear that they would result in contraction, and that, although any

downturn should be taken care of at the proper time, the important thing

at the moment was to stop abnormal pressures on the inflationary side.

Mr. John H. Williams shared Mr. Thomas'

view, stating that this

was a time when a "hands-off" policy might be pursued and that the coun

try had become so fearful of deflation during the 30's that there was a

tendency to adopt measures to shore up the economy whenever there was an

6/5/47

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indication of contraction.

He referred to the suggestion that national

income should not be permitted to go down too fast, as the decline might

get out of hand.

for one reason,

He felt

that this situation would not occur because,

the business community was never as aware of the nature

of this problem as it

was at the present time, and that there was a

great deal of available buying power and of unfilled demand particularly

for durable goods and it

would not take a very substantial correction in

the situation to make that demand effective.

He thought that there

would and should be a mild recession which would be corrective in nature

and would set the stage for a long period of balanced prosperity.

He

made the further comment that many people were concerned about the

foreign picture and how it

might affect the economy of this country,

but

that we were faced with a similar situation following the First World

War which was largely cleared up and followed by a period of prosperity.

It was his opinion that the foreign situation probably would continue to

be a sustaining factor in our economy for some time to come.

He was very

much concerned about the British and German situation but he did not

think that the foreign picture in

its

entirety would constitute a de

flationary factor as far as the economy of this country was concerned

because the United States would be called upon to supply goods and

services abroad for a long time to come which would help the economy in

a period of adjustment.

Mr.

Rouse presented a supplementary

report (a copy of which has been placed

in the files) covering operations in the

System open market account on June 4 and

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5, 1947, and, upon motion duly made and

seconded, and by unanimous vote, these

transactions were approved,

confirmed.

ratified, and

Thereupon the meeting adjourned.

Secretary,

Approved:

Chairman.