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 Tuesday, December 9, 1947, at 10:00 a.m.

PRESENT:

Mr. Eccles, Chairman

Mr.

Mr.

Mr.

Mr.

Mr.

Sproul, Vice Chairman

Szymczak

Draper

Evans

Vardaman

Mr. Clayton

Mr.

Mr.

Mr.

Mr.

Whittemore

Gidney

Peyton

Gilbert (alternate for Mr. Davis)

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Neal, Thompson, Stead, and John

H. Williams, Associate Economists

Mr. Rouse, Manager of the System Open

Market Account

Mr. Sherman, Assistant Secretary, Board

of Governors

Mr. Smith, Economist, Government Finance

Section, Division of Research and

Statistics, Board of Governors

Mr. Arthur Willis, Special Assistant,

Securities Department, Federal Reserve

Bank of New York

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

alternate members of the Federal Open

Market Committee

Messrs. Leach and Earhart, Presidents of the

Federal Reserve Banks of Richmond and San

Francisco, respectively

Messrs. Clark and Hitt, First Vice Presidents

of the Federal Reserve Banks of Atlanta

and St. Louis, respectively

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12/9/47

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 6-7, 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 held on October 6-7 and 14,

1947, were approved, ratified, and con

firmed.

A report of open market operations during the period October

7, 1947, to December 3, 1947, was read and commented upon by Mr. Rouse.

He also presented a supplementary report covering transactions executed

on December 4, 5, and 8, 1947.

Copies of these reports have been placed

in the file of the Federal Open Market Committee.

Mr. Rouse stated in connection with his report that the recent

period had been a very difficult one from the standpoint of handling

open market operations, that on two or three occasions, because of

psychological factors, the market was dangerously close to an avalanche

of selling, but that it was to be expected that there would be a con

siderable amount of selling while the present unsettling influences,

including discussions of possible anti-inflation measures,

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account for the period

October 4 to December 8, 1947, inclusive,

were approved, ratified, and confirmed.

continued.

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Chairman Eccles stated that he felt there should be no concern

about the substantial amount of selling of Treasury bonds that had taken

place, that the Committee had been anticipating for a long time that

yields on long-term bonds should increase, and that to whatever extent

action in raising short-term rates had contributed to this development

it represented a step toward the objectives of open market policy dur

ing recent months.

He felt, however,

that the increase in short-term

rates was a negligible factor and that because of increased opportuni

ties for investment and great demands for capital funds there would

have been pressure on the long-term market if nothing had been done

to increase the short rate.

He also referred to retirement of securities held by the Fed

eral Reserve Banks as a further cause of pressure on the banks to

sell Government securities to the Reserve Banks to provide needed

reserves.

He stated that the commercial banks apparently were sell

ing long-term and buying short-term issues, and that the fact that

there had been a net decrease in the System's holdings of securities

was evidence of the fact that on balance the commercial banks were

not "running away" from Government securities but rather that the

policy of the System of keeping the banks under pressure was having

the desired effect of causing them to reverse the practice that they

had been following for a considerable period of selling short-term

and buying long-term issues.

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12/9/47

Chairman Eccles questioned whether the System, through the

purchase of unrestricted issues and the Treasury by the purchase of

restricted issues,

Treasury bonds,

should continue to maintain existing prices of

thereby providing an opportunity to holders to sell

securities at a substantial premium, and outlined reasons why it

would be better to permit the prices of such securities to decline

to a level nearer par.

Mr. Sproul agreed that selling of Governments would continue

as long as there was a gap between savings and the demand for funds.

He felt that if,

by a combined program of debt management and Fed

eral Reserve action the purchase by the System of long-term issues

could continue to be offset by the sale of short-terms,

it

would be

a very successful operation in terms of the situation that the Sys

tem has been facing.

He was of the opinion that the level of mar

ket prices of securities was not a question of how much profit

might accrue to banks and other holders but of how the System could

continue to exercise its

influence so that this selling of long and

buying of short Governments might continue without accelerating the

fears of holders to a point at which there would be selling of Gov

ernment securities at a rate which would force the System to put an

excessive amount of funds into the market.

He stated that, while

he favored bringing the prices of bonds down, it

should not be done

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12/9/47

at the risk of bringing about a fear psychology that would affect

adversely Treasury financing operations,

the System's credit pro

gram, and the confidence in Government securities of a wide variety

of holders.

In the course of a discussion of the considerations enter

ing into a determination of the level at which prices of Treasury

obligations should be supported and the timing of changes in ex

isting support levels, it

was suggested that, as was to be ex

pected, the present discussions in Congress and in committee hear

ings of various proposed methods for combating inflation were re

sulting in a sensitive and unsettled Government securities mar

ket, and that for that reason it

might be better to defer any

change in the present support program until the latter part of

December, when prices could again be lowered.

During this discussion Messrs. Vardaman and Vest left

the

meeting to attend the argument before the Supreme Court of the Bank

of Lakewood Village case in which the Board of Governors is

Mr.

involved.

Thomas presented briefly the possible effects on the

market of debt retirement through the first

quarter of 1948 and

commented on a chart showing the yields on various restricted and

unrestricted issues of Government securities on December 30, 1944,

April 6, 1946, August 29, 1947, and December 1, 1947, and on the

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12/9/47

possible effects of a further increase in the short-term rate and

what if

any spread there should be between restricted and unre

stricted and between other individual issues of Government se

curities.

Chairman Eccles renewed his suggestion that the market

should be permitted to decline nearer to par on the long-term

issues even if

Reserve Banks.

it

did result in increased selling to the Federal

He felt that System purchases would be less if

that procedure were followed than would otherwise be the case,

In this connection he expressed the view that the System should

not purchase any additional amounts of partially tax exempt is

sues but that they should be permitted to find their natural

level in relation to other issues.

Mr. Rouse commented that these issues had been acquired

only when they had declined to a level when they were clearly

out of line with prices of other issues.

Mr. Sproul stated that the problem was whether Govern

ment security prices should be permitted to decline further

while the market was subject to the disturbing influences of

current discussions of measures to combat inflation or whether

the present program should be continued until the market had

steadied to a point where a resumption of a downward movement

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could be undertaken without encouraging selling throughout the list

in addition to selling for the purpose of meeting demands for re

serve funds.

Chairman Eccles said he agreed that action to allow market

prices to decline should not be taken immediately but that the Com

mittee should recognize that, because of the retirement of debt out

of Treasury cash balances and other factors which would put pres

sure on the market, there would be continuous selling of securities

over the next several months and the System should not be disturbed

by a situation it

had intentionally helped to bring about.

Mr. Sproul responded that the Committee need not be dis

turbed by that situation but by the temporary situation that might

encourage unnecessary liquidation in addition to the selling re

ferred to by Chairman Eccles.

There was not a difference in ap

proach, he said, but a question when the downward movement should

again be resumed.

Mr. Rouse expressed the view that it

was a question whether

the Committee should run the risk of panicky conditions in the Gov

ernment securities market for the benefit of a 3/8 or 1/2 per cent

decline on the restricted 2-1/2's and he questioned whether such

a move was worth that risk.

He agreed that the market should be

placed on a lower level at the first

such a risk.

opportunity without incurring

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Chairman Eccles stated he had discussed the matter with Under

ecretary Wiggins,

who also questioned the desirability of maintaining

existing premiums on bank eligible securities.

Mr.

Thomas suggested that, if

action to reduce the level of

prices were not taken now, there might not be another opportunity

over the next four months because of pressures resulting from retire

ment of Government debt.

Mr. Rouse stated that if prices were to be reduced the decline

should take place quickly.

After some further discussion of the timing of action and of

the undesirability of permitting banks and other holders to realize

substantial premiums on their holdings of securities, Chairman Eccles

questioned whether, since it

was recognized that insurance companies,

savings banks, and other investors would be forced to sell bank eli

gibles to meet more favorable investment demands,

make it

the System should

possible for them to sell at substantial premiums rather

than to make a downward adjustment quickly and put real support

under the market at the lower prices agreed upon.

He recognized

that the argument would be made that, while anti-inflation measures

were being debated in

the present special session of the Congress,

there was greater uncertainty in the market than otherwise would be

the case,

and that probably after the session had recessed the mar

ket would be quieter and provide a better situation in

which to act.

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12/9/47

He said that if

the System could get through the period of the spe

cial session with purchases of between one and two hundred million

of securities a week action might be deferred that long at which

time if

there was continued selling, indicating an opinion in the

market that the System would not support existing rates, he would

favor letting the market decline immediately.

He felt strongly

that action should not wait as long as four months and Mr. Sproul

agreed that it

was not a question of waiting for any such period

but of choosing our time in the immediate future.

There was a discussion of the suggestion that the market be

allowed to decline 1/32 or 2/32 before Congress recessed which might

make for an easier adjustment later and Mr. Rouse expressed the view

that that would result in

in price and that it

increased selling to avoid further declines

would be better to be prepared to let prices de

cline by 1/4 or more of a point at one time.

There was general agreement with the suggestion that there

would be less selling if

the market were held at the present level

until action was taken to let prices fall

immediately to a point

at which they would be aggressively supported than would be the

case if prices were allowed to go off more gradually.

At this point Mr. Thurston, Assistant to the Chairman of the

Board of Governors,

joined the meeting.

12/9/47

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During a discussion of these alternatives and of the point to

which prices should be allowed to decline it

was suggested that the

restricted 2-1/2's should be held at par or slightly above and that

the rest of the market should be allowed to find its

level in rela

tion to that price and the 1-1/8 per cent certificate.

Mr. Szymczak inquired whether there had been any discussion

with representatives of the Treasury of the question whether any is

sues should be allowed to decline below par, and it

before a decision was made on this point it

was agreed that

should be taken up with

the Treasury.

At the conclusion of the discussion, it

was agreed that, in

the event the market continued substantially as at present, the ex

ecutive committee should carry out the existing policy with respect

to support of the market until after the Treasury's January refund

ing had been completed, at which time prices of bonds should be per

mitted rapidly to decline, if

the market did not support itself,

to

a level of not more than 100-1/2 and not less than par on the longest

restricted 2-1/2 per cent issue and to not less than par on a 1-1/8

one-year certificate.

If,

in the interim, market selling should in

crease substantially, the executive committee would be authorized

to permit prices to decline as rapidly as was consistent with the

maintenance of orderly market conditions.

If

it

should appear in

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carrying out these instructions that some issues of bonds might go

below par, the Committee would be authorized,

after consultation

with appropriate representatives of the Treasury, to determine

whether these issues would be allowed to decline below par or wheth

er they should be held at or above par.

Chairman Eccles then reviewed the seven point program out

lined at the meeting of the Federal Open Market Committee on Oc

tober 7, 1947, stating that a letter setting forth the program had

been sent to the Secretary of the Treasury under date of October 14,

1947.

With respect to specific steps in the program, he stated that

the Treasury had accepted the Committee's recommendations as to Treas

ury financing during the remainder of this year, that the Treasury

was following the recommendations with respect to transfers of funds

from war loan deposit accounts to the Federal Reserve Banks, that

the statement stressing the dangers inherent in an excessive expan

sion of consumer credit and urging the adoption of self-imposed re

straints had been issued by the Board and each Federal Reserve Bank,

and that a joint statement from the bank supervisory agencies re

lating to credit extensions had been prepared,

received.

issued, and favorably

He went on to say that the only parts of the program which

had not been put into effect were (1) an increase in discount rates

at the Federal Reserve Banks,

(2) an increase in reserve require

ments for central reserve city banks, and (3)

the proposed policy

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1 2/ 9 /47

with respect to refunding maturing savings bonds.

Chairman Eccles stated that the Board of Governors had given

consideration at a recent meeting to action to be taken to increase

the discount rates at the Reserve Banks and felt

that they should

be increased to 1-1/4 per cent within the near future.

He went on

to say that he and Mr. Sproul had had an exchange of correspondence

on the question whether the discount rate should be raised to 1-1/8

or 1-1/4 per cent, Mr.

Sproul taking the position that the increase

should be to 1-1/8 per cent and he taking the position that it should

be to 1-1/4 per cent.

The reasons which Chairman Eccles and Mr. Sproul gave for

their respective positions were discussed and the effect of an in

crease in rates to either suggested level and of its timing was con

sidered in the light of conditions existing in the Government secu

rity market and the possible effects upon System open market oper

ations.

It

was the consensus of those present that, for the rea

sons discussed, an increase in discount rates should be deferred

until after the announcement of refunding of Treasury securities

maturing in January and that action might be taken by the Banks

in time for approval by the Board on Friday, December 19, 1947

for announcement after the market closed, to become effective on

Monday, December 22.

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12/9/47

The meeting then recessed and reconvened at 2:30 p.m. with

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

that Messrs. Vardaman and Vest were present and Mr.

Thurston and

Mr. Stead were not in attendance.

During a discussion of the program to be followed with re

spect to the retirement of the Government debt, including the re

tirement of securities held by the Federal Reserve Banks, there

was distributed a copy of a memorandum prepared in the Division

of Research and Statistics of the Board of Governors under date

of December 4, 1947, on the financing outlook.

The memorandum

stated that the Treasury cash balances during the period Decem

ber 1, 1947, through June 30, 1948, would be large enough to per

mit the retirement of $100 million of bills each week through the

first

week of January and $200 million a week thereafter through

May and that if

full exchange were offered for every maturing is

sue of certificates and bonds during that period it

would be pos

sible to retire System holdings of these maturing issues except

in June.

If this program were followed, there would be a retire

ment of $4.9 billion of certificates and bonds and $4.7 billion

of bills, all

but $800 million of which would be held by the

Fed

eral Reserve Banks.

Chairman Eccles expressed the opinion that in view of the

changing situation it would be desirable for the full Committee not

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12/9/47

to plan too far ahead but to authorize the executive committee, de

pending on the amount of Treasury balances available,

(1) to retire

Federal Reserve holdings of maturing securities during the first

quarter of 1948, including $100 million of bills through the first

week of December and $200 million a week thereafter,

(2) to pro

pose to the Treasury the refunding of the remaining certificates

and bonds maturing in that period into 12- to 14-month securities

which would have a proper relationship to a 1-1/8 per cent one

year certificate, unless in

the meantime it

should become evident

(which was not expected) that a higher rate would be desirable,

and (3)

to recommend,

in

consultation with representatives of the

Treasury, the amounts to be held in Treasury war loan accounts

during the period.

Messrs. Sproul and Rouse questioned whether the entire

amount of System holdings of January 1 and February 1 certificates

should be retired and whether the program of retirement of System

holdings should be as rapid during the first

quarter of 1948 as

Chairman Eccles had proposed.

Mr. Rouse stated that it

found, after careful analysis,

that the situation in the market

would be such that it

might be

would be desirable to pay off some of the

February certificates and March 15 bonds held outside the Federal

Reserve Banks and thus relieve the pressure on the market result

ing from March tax payments,

and that it

would be desirable to

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12/9/47

examine the situation from week to week to determine what the pro

gram should be.

In a discussion of his suggestion, Mr. Rouse stated that

he agreed that the program followed should be one of keeping un

remitting pressure on the reserve position of member banks during

the first

six months of 1948, with the exception of a short period

around the first

of February when he would put funds back into the

market to relieve the extreme pressure which would exist at that

time.

The matter was also considered in the light of the possible

return flow of currency following the year end and of further gold

imports.

Chairman Eccles indicated that he would not be willing to

follow Mr. Rouse's suggestion unless action were also taken by the

Board of Governors during the period to increase reserve require

ments of banks in

central reserve cities.

The proposal was made that, because of the substantial

changes in the situation that might occur before another meeting

of the full Committee,

the best procedure to follow would be to

have a general understanding with respect to the program which

the executive committee would follow.

to unanimously and it

This suggestion was agreed

was understood that, in carrying out the

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12/9/47

direction of the full Committee with respect to operations in the

System account, the executive committee, in

consultation with repre

sentatives of the Treasury, would follow a program of retirement of

Federal Reserve Bank held securities, and submit recommendations to

the Treasury with respect to the maintenance of Treasury balances

in the war loan accounts and with the Federal Reserve Banks which,

in the judgment of the executive committee in

the light of condi

tions as they develop during the period, would be appropriate to

keep pressure on the market and utilize to the best advantage the

large Treasury cash balances that would be available during the

period.

In a discussion of the authority to be granted by the full

Committee to the executive committee Mr. Rouse suggested that be

cause of conditions that would prevail in

refunding operations and tax collections it

connection with Treasury

would seem desirable

that the executive committee have authority to increase or decrease

the amount of securities held in the System account by as much as

$3 billion.

After a discussion of this sugges

tion, upon motion duly made and seconded,

and by unanimous vote, the following di

rection to the executive committee was

approved with the understanding that the

limitations contained in the direction

would include commitments for the System

open market account:

12/9/47

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The executive committee is directed, until otherwise

directed by the Federal Open Market Committee, to arrange

for such transactions for the System open market account,

either in the open market or directly with the Treasury

(including purchases, sales, exchanges, replacement of

maturing securities, and letting maturities run off with

out replacement), as may be necessary, in the light of

the general credit situation of the country, for the

practical administration of the account, for the main

tenance of stable and orderly conditions in the Govern

ment security market, and for the purpose of relating

the supply of funds in the market more closely to the

needs of commerce and business; provided that the ag

gregate amount of securities held in the account at the

close of this date other than special short-term certif

icates of indebtedness purchased from time to time for

the temporary accommodation of the Treasury shall not

be increased or decreased by more than $3,000,000,000.

The executive committee is 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 accom

modation of the Treasury; provided that the total amount

of such certificates held in the account at any one time

shall not exceed $1,500,000,000.

Chairman Eccles stated that, in accordance with the action

at the last meeting of the Federal Open Market Committee, the ex

ecutive committee at its meeting just prior to this meeting agreed

to propose to the full Committee that it approve the following rec

ommendation which had been made by Messrs. Rouse and Smead, Director

of the Division of Bank Operations of the Board of Governors, with

the understanding that (1) the complete details would be worked out

and the changed procedure would be put into effect on January 1,

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1948, and (2) a full written statement of the procedure would be

submitted at the next meeting of the executive committee and the

Federal Open Market Committee for ratification:

1.

That interest bearing securities in the Account be

allocated at the first of the year on the basis of

the expense and dividend ratio of each Bank as against

all the Banks; that this allocation be the only one

for the year; and that the same basis of allocation

continue in use. However, profits and losses on in

terest bearing securities would continue to be al

located on the basis of the average holding ratio

for the preceding five years.

2.

Holdings of Treasury bills would likewise be allo

cated on the expense and dividend ratios to the ex

tent that the several Reserve Banks were able to ac

quire such securities within the limits of maintain

ing the reserve ratio of 35 per cent or such other

percentage as the Committee may determine.

Profit

and loss on Treasury bills would be allocated on

the basis of the current Treasury bill holding ratio

of each Bank as of the day profit or loss is realized.

Chairman Eccles also said that the executive committee

would recommend that the executive committee be authorized, should

circumstances develop between meetings of the Federal Open Market

Committee requiring some adjustment in the allocation procedure,

to take such action as appeared to be desirable pending the next

meeting of the Committee.

In discussing the recommendation Mr. Rouse stated that an

effort had been made to simplify the procedure of allocation and

make it

more understandable to those who have to deal with it only

12/9/47

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occasionally and to reduce the amount of work involved in carrying

out the allocations.

Upon motion duly made and seconded,

and by unanimous vote, the recommenda

tions of the executive committee were

approved.

Mr. Leedy suggested that consideration be given to adopting

a procedure of allocation that would tend to equalize the surplus

accounts of the Federal Reserve Banks in relation to their paid

in capital accounts.

Chairman Eccles stated that, in accordance with action taken

at the meeting on October 7, the executive comittee had discussed

the proposal made in a memorandum from Mr. Rouse to Mr. Sproul under

date of September 30, 1947, that the authority given by the Federal

Open Market Committee to the Federal Reserve Banks to purchase Gov

ernment securities under resale agreements be restored, and that,

while it

had not reached agreement as to the action to be taken,

the executive committee had approved unanimously a suggestion that

a memorandum be prepared which would state fully the reasons that

might be advanced for and against action by the Federal Open Mar

ket Committee granting the authority, that the memorandum be sent

to all members of the Federal Open Market Committee before the

next meeting of the executive committee,

and that the recommenda

tion be made at this meeting of the full Committee that the exec-

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12/9/47

utive committee be authorized to grant the authority if,

after con

sideration of the reasons for and against such action, the committee

felt at its

next meeting that the authority should be granted.

Upon motion duly made and seconded,

and by unanimous vote, the recommendation

of the executive committee was approved.

It

was tentatively agreed that the next meetings of the Fed

eral Open Market Committee should be held on February 27 and March

1, 1948, with the understanding that the next meeting of the Presi

dents'

Conference would be held in Washington on February 24-26,

1948.

Chairman Eccles stated that the matters which had been dis

cussed at this meeting were of very great importance from the stand

point of their possible effects on the Government security market,

that there were many people who would like to know the actions the

Committee proposed to take, and that it would be very unfortunate

if anyone present should talk about or make any statement in con

nection with the Committee's discussions which would disclose in

any way the nature of the discussions.

Accordingly, he suggested

that everyone present be on his guard not to make any statements,

inadvertent or otherwise, which might give any indication of what

the future policies of the System might be with respect to open

market operations or discount rates.

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Thereupon the meeting adjourned.

Secretary

Approved:

Chairman.