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, D. C., on Tuesday, November 30, 1948, at 10:35 a.m.

PRESENT:

Mr. McCabe, Chairman

Mr. Clayton

Mr.

Mr.

Mr.

Mr.

Mr.

Draper

Eccles

Evans

Gilbert

Leedy

Mr.

Mr.

Mr.

Mr.

Mr.

Szymczak

Vardaman

Williams

Young

Rounds (alternate for Mr. Sproul)

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Townsend, Assistant General Counsel

Mr. Thomas, Economist

Messrs. Bopp, Irons, Robb, and John H.

Williams, Associate Economists

Mr. Rouse, Manager of the System Open

Market Account

Mr. Thurston, Assistant to the Board of

Governors

Mr. Riefler, Assistant to the Chairman,

Board of Governors

Mr. Sherman, Assistant Secretary, Board

of Governors

Mr. Ralph Young, Associate Director, Divi

sion of Research and Statistics, Board

of Governors

Mr. T. L. Smith, Chief, Government Finance

Section, Division of Research and Sta

tistics, Board of Governors

Mr. Arthur Willis, Special Assistant,

Securities Department, Federal Reserve

Bank of New York

Messrs. Gidney, Leach, McLarin, and Earhart,

alternate members of the Federal Open

Market Committee

Messrs. Davis and Peyton, Presidents of the

Federal Reserve Banks of St. Louis and

Minneapolis, respectively, and Mr. Willett,

First Vice President of the Federal Reserve

Bank of Boston.

Upon motion duly made

and by unanimous vote, the

the meeting of the Federal

Committee held on November

were approved.

and seconded,

minutes of

Open Market

15, 1948,

Upon motion duly made and seconded,

and by unanimous vote, the actions set

forth in the minutes of the meeting of

the executive committee of the Federal

Open Market Committee held on October 4,

1948, were approved, ratified, and con

firmed.

Mr. Rouse read a report of operations in the System open

market account covering the period November 12 to 24, 1948, inclu

sive, and a supplemental report covering transactions for the period

November 25 to 29, inclusive.

Before presentation of these reports,

there had been distributed copies of a report prepared at the Fed

eral Reserve Bank of New York of open market operations covering

the period October 4 to November 24, 1948,

inclusive.

Copies of

the three reports have been placed in the files of the Federal

Open Market Committee.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account for the period

November 13, 1943, to November 29, 1948,

inclusive, were approved, ratified, and

confirmed.

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11/30/48

Chairman McCabe then called upon Mr. Thomas, who reviewed

the background of public debt management and Federal Reserve policy

and discussed the problems now confronting the Federal Open Market

Committee with respect to policies to be followed in the future.

During the course of his discussion, Mr. Thomas stated that the

alternatives available to the Committee were:

To continue the past policy of rigid support of a

fixed pattern of rates which would make the economy

highly susceptible to unrestricted inflation in a

period of full production and employment when invest

ment demand was in excess of current savings;

To change Federal Reserve policy so as to permit a

completely flexible market (Mr. Thomas added that it

was questionable whether any such policy would be

feasible in view of the large public debt and the at

titude of holders toward the debt);

To move toward a more effective immobilization of

public debt holdings so that they will not be thrown

on the market.

In commenting on the last mentioned alternative, Mr. Thomas

stated that various measures which might be used in such a program

would include:

(a) Additional authority to raise reserve requirements of

member banks.

This might take the form of (1) a straight increase

in requirements on the present basis, (2) a set of reserve require

ments with variations as to classes of deposits, but with uniformity

as to type and location of banks, (3) optional or security reserves

which would permit banks to hold reserves in the form of earning

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assets and thus help to maintain earnings, and (4) payment of in

terest by the Federal Reserve Banks on a part of the reserve bal

ances which banks were required to hold.

(b) Flexibility in short-term rates.

He thought this was

essential in a long-term program of monetary controls, not because

the rates were important in themselves but because of the fact that

when the System adopts a policy of decreasing member bank reserves

it

should not be hampered by a policy of maintaining rigid short

term rates.

(c) Adoption of a long range conversion program.

The pres

ent policy of support was essentially an inflationary one, he said,

and it

would not be possible to solve this dilemma unless long-term

restricted issues were converted into issues which would be so held

that System support would not be necessary.

In this connection he

discussed briefly the program outlined in the memorandum of Novem

ber 12, 1948, copies of which were distributed at the meeting of

the Committee on November 15, 1948.

In making his remarks, Mr. Thomas referred to a memorandum

on the outlook for bank reserves and Treasury financing dated Novem

ber 29, 1948, and to a memorandum on the economic outlook prepared

under date of November 30, 1948, for use at this meeting of the

Committee.

These memoranda were distributed at the meeting and

copies have been placed in the files of the Federal Open Market

Committee.

11/30/48

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Chairman McCabe referred to the memorandum dated November 12,

1948, with respect to a conversion operation for restricted bonds,

stating that, in a conversation following that meeting, Secretary

of the Treasury Snyder indicated an interest in having members of

the Treasury staff get together informally with members of the Com

mittee's staff to study the question with a view to the formulation

of a program for consideration by the Treasury and the Committee.

Chairman McCabe also said that he had asked that Messrs. Thomas,

Morrill, and Riefler serve as representatives of the Committee in

these discussions.

In response to a question from Chairman McCabe as to prog

ress made by the committee appointed to study the advisability of

the Treasury refunding some of the long-term securities held by

the System account with special short-term issues at a lower in

terest rate, Mr. Thomas stated that the committee, which was ap

pointed following the meeting on October 4, 1948, had under con

sideration a draft of memorandum prepared at the Federal Reserve

Bank of New York but that it did not have anything to present at

this time.

He also commented that this problem would be related

in some respects to the conversion operation referred to above.

Chairman McCabe stated that, when he presented to Secretary

Snyder the letter approved at the last meeting of the Committee, he

stressed the desire of the Committee to work toward a free market

1l/30/48

in

-6.

Treasury bills and that, therefore,

it

was allowing the rate to

rise gradually in relation to the 1-1/4 per cent certificate rate,

with the result that the System's holdings of Treasury bills had

declined to about 40 per cent of the total outstanding.

Chairman McCabe referred to the present policy of support

ing the longest term restricted issues at 8/32 above par and the

longest term bank eligible issue at 1 point above par.

He re

viewed the discussion at the meeting of the executive committee

of the suggestion that these premiums be eliminated, at which

time it

was understood that there would be further discussion

of the problem at this meeting of the full Committee.

There was a discussion of the suggestion, in the course

of which members of the Committee and the Presidents of the Fed

eral Reserve Banks who were not members of the Committee expressed

their views as to the policy that should be followed.

It

was the

majority view that, for substantially the reasons stated at the

meeting of the executive committee, the present policy should be

continued for the time being.

however, that it

It

was suggested in this connection,

might be understood that in a period of pressure

on the support price Mr. Rouse might let the support price on the

bank eligibles of September 1967-1972 drop somewhat below 101 on

the ground that, since the policy was to support a long-term rate

of 2-1/2 per cent, that issue should not be supported at a premium.

11/30/48

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With that understanding,

Mr. Rouse said, the issue might decline

to a premium of 8/32, at which the longest term restricted issues

were being supported.

The members of the Committee concurred in

this understanding.

In a short discussion of the use of balances in war loan

accounts, Chairman McCabe referred again to the recommendation

made to the Treasury that it use funds available in its balances

to purchase securities from the System account as a means of con

tinuing pressure on member bank reserves.

Instead of adopting

this suggestion, he said, the Treasury was following a policy of

retiring $100 million of bills each week, a large part of which

were held outside the Federal Reserve Banks.

Turning to a discussion of a possible further increase in

the short-term interest rate, it was stated that this question had

been settled for the December and January financing, but that it

should be considered again in January in connection with the re

funding of February and March maturities.

In this connection it

was suggested that a meeting of the executive committee might be

held around the beginning of the new year to consider recommenda

tions that might be made to the Treasury at that time.

During this discussion, Mr. Clayton suggested that the

Committee authorize the executive committee to renew the recom

mendations made to the Treasury at the last two meetings of the

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Committee if, in the judgment of the executive committee, such

action

seemed desirable before another meeting of the full Committee.

Upon motion duly made and seconded,

and by unanimous vote, Mr. Clayton's

suggestion was approved.

Reference was then made to the direction to be issued to the

executive committee for effecting transactions in the System open

market account and it was suggested that the direction issued at

the meeting on October 4, 1948, be renewed.

Thereupon, upon motion duly made and

seconded, the following direction 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:

The executive committee is 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 secu

rities, and letting maturities run off without 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 maintenance of stable and orderly

conditions in the Government security market, and for the

purpose of relating the supply of funds in the market 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 certificates

of indebtedness purchased from time to time for the temporary

accommodation of the Treasury shall not be increased or de

creased by more than $2,000,000,000.

The executive committee is further directed, until other

wise directed by the Federal Open Market Committee, to ar

range for the purchase for the System open market account

direct from the Treasury of such amounts of special short

term certificates of indebtedness as may be necessary from

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time to time for the temporary accommodation 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.

It was tentatively agreed that, in the absence of unforeseen

developments, the next meetings of the Committee would be held on

February 28 and March 1, 1949.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.