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 Friday, August 5, 1949, at 10:10 a.m.

PRESENT:

Mr. McCabe, Chairman

Mr. Sproul, Vice Chairman

Mr. Clayton

Mr. Draper

Mr. Earhart

Mr.

Mr.

Mr.

Mr.

Eccles

Gidney

Leach

McLarin

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Vest, General Counsel

Mr. Thomas, Economist

Messrs. Thompson and Williams, Associate

Economists

Mr. Rouse, Manager of the System Open

Market Account

Mr. Riefler, Assistant to the Chairman,

Board of Governors

Mr. Leonard, Director of the Division of

Bank Operations, Board of Governors

Mr. Young, Associate Director of the Divi

sion of Research and Statistics, Board

of Governors

Mr. Miller, Assistant

eral Reserve Bank

Mr. Smith, Economist,

Section, Division

Vice President, Fed

of New York

Government Finance

of Research and

Statistics, Board of Governors

Mr. Raisty, Economist, Federal Reserve Bank

of Atlanta

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Commit

tee held on June 28, 1949, were approved.

Upon motion duly made and seconded,

and by unanimous vote, the action of the

executive committee of the Federal Open

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8/5/49

Market Committee, as set forth in the

minutes of the meeting of the executive

committee held on June 28, 1949, were

approved, ratified, and confirmed.

Mr. Rouse then read the important sections of a report of

open market operations prepared by the Federal Reserve Bank of New

York, covering the period June 28 to August 2, 1949, inclusive.

He

also presented a supplemental report covering commitments executed

on behalf of the System account on August 3 and 4, 1949.

In submit

ting these reports, Mr. Rouse called attention to the fact that lead

ing banks in the country in their current publications had interpreted

the action of the Federal Open Market Committee on June 28 as the

termination of the policy of maintaining a fixed pattern of rates

for Government securities and of the close relationship of System

open market policies to Treasury financing policies that had existed

during and since the war and as an important forward step.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account for the period June

28 to August 4, 1949, inclusive, were ap

proved, ratified, and confirmed.

Mr. Morrill stated that recently, because of the absence of

members and alternate members of the executive committee of the Fed

eral Open Market Committee, it

had been necessary to call on Mr.

Szymczak, who was not an alternate member of the committee, in connec

tion with consideration of some of the problems coming before the com

mittee even though he did not have a vote, and that Mr. Szymczak had

suggested that consideration be given by the Federal Open Market

8/5/49

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Committee, either at this meeting or at the organization meeting in

March of next year, to the desirability of amending the by-laws so

that every member of the Federal Open Market Committee would be a

principal or alternate member of the executive committee.

rill

Mr. Mor

also said that, if this suggestion were approved, Section 1 of

Article III of the by-laws might be amended to read as follows:

"ARTICLE III.

EXECUTIVE COMMITTEE

"Section 1. How constituted - The Committee at its

first meeting after March 1 of each calendar year shall

select from its own members an Executive Committee of

five members, including the Chairman of the Committee who

shall be Chairman of the Executive Committee. The Execu

tive Committee shall consist of three members of the Board

of Governors of the Federal Reserve System and two repre

sentatives of the Federal Reserve banks. At any duly

called meeting, a majority of the Executive Committee shall

constitute a quorum for the transaction of business. Four

alternates to serve in the absence of members of the Board

and three to serve in the absence of representatives of

the Federal Reserve banks shall be selected at the same

time and in the same manner as members of the Executive

Committee and they shall serve during such absences in the

order prescribed at the time of their selection."

Inasmuch as the by-laws provided

that they could be amended at any meeting

of the Committee by a vote of the majority

of the members of the entire Committee,

upon motion duly made and seconded, it was

voted unanimously to adopt the amendment

as set forth above, effective immediately.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, Mr.

Szymczak was elected to serve until the

selection of his successor at the first

meeting of the Federal Open Market Commit

tee after February 28, 1950, as the fourth

alternate for Messrs. McCabe, Eccles, and

Vardaman as members of the executive

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committee, and Mr. Earhart was selected

to serve until the selection of his suc

cessor at the first

meeting of the Fed

eral Open Market Committee after February

28, 19.0, as the third alternate for

Messrs. Sproul and Leach as members of

the executive committee.

Chairman McCabe reviewed important developments since the

meeting of the Committee on June 28, 1949, and the reception and

effect of the announcement following that meeting.

he and Mr.

He also said that

Sproul had not conferred with the Secretary of the Treas

ury since that meeting and, therefore, had not had an opportunity to

discuss the problem of refunding of issues of Government securities

maturing during the balance of this year, but that in preparation

for this meeting there had been several discussions by members of

the Board and the staff, including a conference in Washington last

week attended by Mr.

Rouse and members of the Board's staff, for

the purpose of discussing the problem of reserve requirements of

member banks and their relationship to open market operations and

other instruments of credit control, so that the Federal Open Market

Committee would be in a position to determine what action should be

taken with respect to open market policy at this meeting.

In that connection,

he stated that at a meeting of the Board

yesterday the members present were of the opinion that, if the Fed

deral Open Market Committee should be willing to act to allow the

System's holding of Treasury securities to go into the market in

amounts sufficient to absorb the reserves that would be released by

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a reduction in reserve requirements, the Board should reduce reserve

requirements by 2 percent of demand deposits of all member banks,

to become effective for central reserve and reserve cities at the

rate of 1/2 percentage point each on August 11, August 18, August

25, and September 1,

1949,

and for nonreserve city banks at the rate

of 1 percentage point each on August 1 and August 16, 1949.

The Chairman also said that, in

the discussions of the ef

fect of this reduction on the Government securities market,

the sug

gestion had been made, having in mind that maturing certificates

might be refunded at 1-1/8 percent, that the range of yields at

which bills should be purchased and sold by the System account might

be in the neighborhood of .95 to 1.05, with the exact range to be de

termined from time to time by the executive committee to meet chang

ing conditions, it being understood that, as the yield moves away

from the average of the range, purchases or sales, as the case may

be, would be made in increasing amounts.

It

had also been suggested,

Chairman McCabe said, that a desirable range for certificate yields

might be from 1.08 to 1.12.

He made the further statement that it was the view of the

Board that action to reduce the discount rates now in effect at the

Federal Reserve Banks might well be deferred until shortly after the

first of September when the matter could be considered again.

There was a general discussion of the reasons that might be

advanced for and against a reduction in reserve requirements at this

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time.

It

was the unanimous view that developments since the meeting

on June 28 had clearly demonstrated that it

was not possible to keep

a stated amount of excess reserves in the market, in addition to op

erating requirements as determined by the market, without substan

tially

lowering short-term rates, and that a reduction in reserve re

quirements should not be made for that purpose.

It was agreed that

a reduction was not necessary for the purpose of affecting the level

of interest rates in the market as that could be brought about by

open market transactions,

that for the purposes of present policy

the existing multiple credit factor of bank reserves need not be in

creased, and that changes in reserve requirements should not be used

to effect short-term credit policies but should be reserved to meet

fundamental changes in the economy and the financial situation.

There was also agreement that a reduction should be made only with

the understanding that the reserves thus released would be absorbed

the System account to go into the market

by allowing securities in

so that there would be no material decline in interest rates as the

result of the reduction.

It

was pointed out that money rates had

been at a low level during and since the war,

Committee on June 28, 1949,

that the action of the

had resulted in a reduction of approxi

mately one-eighth of 1 percent in short-term rates, and that there

was no need, in

carrying out the System's policy of monetary ease,

to allow short-term rates to go lower.

Some members of the Committee questioned whether a reduction

8/5/49

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could be justified at the present time.

It was suggested that a

period of freedom from frequent changes would be welcomed, even

though no bank would object to a reduction in its requirements, and

that such action could well be deferred until some future date when

it would meet a real need for funds.

Others felt that a reduction

should be made now in order to emphasize the reversal of our anti

inflationary policy which had led to increases in reserve require

ments last year, to bring reserve requirements to a level from which

they could be raised in the event of a return of inflationary con

ditions, to offset the decline in banks'

earnings that would result

from lower interest rates, to relieve the System account of the

necessity of bidding each week to replace the System's holdings of

maturing bills and thereby work toward a freer bill market, to

take advantage of the present favorable conditions, and (as an inci

dental reason not associated with credit policy) to place member

banks on a more favorable competitive basis with nonmembers which

are subject to lower reserve requirements.

During the discussion, Chairman McCabe referred to a letter

which he received from Mr. Rounds, First Vice President of the Fed

eral Reserve Bank of New York, under date of July 26, 1949, with

respect to the present low prices of bank stocks in relation to

book values and suggested that all members of the Committee read the

letter.

It was agreed that as long as the condition of declining

8/5/49

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economic activity continued the System should see to it

that a con

dition of monetary ease and low money rates was maintained as a

means of encouraging business activity, and that, because of the im

portance of the American economy in the world picture and the danger

to the rest of the world of a serious depression in this country,

every effort should be made to prevent such a condition from concur

ring.

On the other hand,

it

was felt that the decline of approxi

mately one-eighth of 1 percent in short-term rates since the June

28 action of the Committee was an important indication of the ef

fectiveness of the easy money policy now being followed by the Com

mittee and that it would be desirable to maintain yields at about

the present level with a view to a rate of 1-1/8 percent on the next

issue of certificates.

Mr. Gidney felt that, regardless of whether a reduction of

reserve requirements was made, the Federal Reserve Banks should

undertake to get member banks to utilize more fully their existing

excess reserves in order to improve their earnings.

He felt that

this could be done without affecting existing market rates in any

way or bringing about a tight money market.

He also felt that steps

should be taken by the System to obtain more complete information

relative to earnings of nonmember banks than is

now available to

the System and which he believed would show that the earning record

for member banks is much more favorable in comparison with nonmem

ber banks than it

has been represented or is

generally supposed to be.

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Reference was made during the discussion to a staff memo

randum on the framework for System credit operations under peace

time conditions.

A draft of the memorandum had been sent to all

members of the Federal Open Market Committee on July 29, 1949, and

copies of a revision of the memorandum, prepared in the light of

comments made in connection with the earlier draft, were distri

buted at this meeting.

Mr. Sproul in commenting upon the memorandum said that he

did not think it

possible to have a free bill market while the

rest of the market is being controlled and that the entire market

was interrelated.

He said the fact that we are working with rates

in all sections of the market, as a measure of central bank influ

ence, was demonstrated by the reaction of the market following the

action of the Committee on June 28.

Be also expressed the view

that, as long as present conditions continued, the System should

not lose contact with the bill market; that, while there should

be flexibility in that market and a willingness on the part of the

System to buy and sell bills at a range of rates, it

was not de

sirable for the System to divorce itself from contact with any part

of the market.

Mr. Eccles agreed with Mr. Sproul's view on this

point.

Messrs. Leach,

Gidney, and Earhart felt that statements in

the memorandum implied a departure from the long-established System

policy under which member banks obtain advances from the Federal

8/5/49

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Reserve Banks for temporary periods and on a day-to-day basis in

order to meet unforeseen or seasonal needs and that it

contemplated

a policy under which the banks hereafter would be permitted to use

the rediscount privilege only in very unusual cases and as a last

resort.

They felt that it

would be very disturbing to member banks

if such a change in policy were advocated or adopted and this be

came known because the banks had been told repeatedly that the Fed

eral Reserve Banks would take care of their reasonable credit needs

both for ordinary operations and in times of difficulty, and that

any departure from this policy would be contrary to the intent of

the Federal Reserve Act and would have a seriously adverse effect

upon the attractive ness of membership in the Federal Reserve Sys

tem.

Messrs.

ments made it

dum and that it

Thomas and Riefler in commenting on the above state

clear that this was not the intention of the memoran

was believed that the differences indicated by the

statements were differences of interpretation rather than of prin

ciple.

It was agreed that the questions raised by the statements

should be discussed at a later point in the meeting.

Mr.

Rouse inquired whether consideration had been given to

reducing reserve requirements on time deposits as well as on demand

deposits, and suggested that, if the reduction was to be made in

recognition of a fundamental change in the situation and as a step

to get back to a point from which the System could again increase

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reserve requirements to meet inflationary conditions, it would ap

pear to be logical to effect some reduction in reserve requirements

on time deposits which were now at the ma imum, authorized by the

law.

This point was discussed and there was general agreement that

it should have consideration by the Board of Governors.

During a discussion of discount rates in relation to short

term rates it was the consensus that there was no need for a re

duction in discount rates at the Federal Reserve Banks at this time

but that such action might be taken in September as a further in

dication of the System's policy of maintaining easy money market

conditions.

In his comment on this point Mr. Earhart called atten

tion to the fact that developments over the past several years

have tended to influence banks to adjust their reserves by trans

actions in the New York market rather than through the local Fed

eral Reserve Bank, that in the earlier period the local banks not

only rediscounted with the Federal Reserve Banks for the purpose

of obtaining needed reserves, but that there was also a local banker's

acceptance market and the Federal Reserve Banks financed the dealers

in acceptances through repurchase agreements and the banks bought

and sold acceptances as a means of adjusting their reserves.

Mr. Rouse stated that he had talked with Mr. Bartelt this

morning regarding new money borrowings of the Treasury, that be

cause of the unusually large sales of tax savings notes it would not

be necessary for the Treasury to borrow any additional new funds

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until December, but that apparently the Treasury had decided to

increase the weekly offerings of Treasury bills to build up Treasury

balances.

He also said that Mr. Bartelt had stated that no use

would be made of the $1 billion of free gold held by the Treasury

without consultation with representatives of the System.

He made the further statement that if reserve requirements

were reduced along the lines discussed it

would be necessary in

the interest of an orderly market for the Federal Reserve Bank of

New York to sell bills, certificates, notes and bonds, that during

this period there probably would be a tendency on the part of the

banks, at least the money market banks, to over-invest, which after

the transition period would result in a tighter condition in the

market, and that the System's buying rate would be the effective

rate on bills.

He added that with the increase in weekly offerings

of Treasury bills it

might be necessary for the Federal Reserve Bank

of New York, as fiscal agent of the Treasury, to arrange with the

dealers to see that there were sufficient bids to cover the offerings.

Referring to the earlier discussion of a change in discount

rates at the Federal Reserve Banks, Mr. Rouse suggested that if

the

discount rate were not to be reduced at this time consideration be

given to amending the authority granted to the Federal Reserve Banks

by the executive committee on January 20, 1948, pursuant to action

by the full Committee on December 9,

1947, to authorize the Federal

Reserve Banks to enter into repurchase agreements with dealers in

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United States Government securities (other than dealer banks),

who are

qualified to transact business with the System open market account,

at rates slightly below the discount rate on advances under sections

13 and 13a of the Federal Reserve Act, so that these dealers could

carry short-term securities during the current period if the bank

lending rates to dealers should get out of line in relationship to

market rates on short-term Government issues.

Turning to the range at which bills should be purchased and

sold for System account Mr. Rouse suggested that there should be sme

leeway in the operation of the range, as it would be necessary for

the Federal Reserve Bank of New York to do some experimenting in the

interest of effective operation.

He raised the question also whether,

as we moved toward a period during the fall of increased currency

circulation, increased business borrowing, and increased need for

reserves arising from Treasury deficit financing, it would be the

policy of the System to allow the influence of these factors to be

reflected in the market.

In the discussion of this latter point it

was suggested that the answer to Mr. Rouse's question would have to

depend on the situation at the time.

Further reference was made to the dates upon which the proposed

reduction of reserve requirements (which if it

included a reduction

of 1 per cent of time deposits would total approximately $1.8 billion)

should be made effective, and it

such as to have as little

was agreed that the timing should be

market effect

as possible and so that the

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released reserves could be absorbed as much as possible by allowing

the System's holdings of maturing bills to run off.

During the

discussion, the members of the Committee indicated that if

the Board

of Governors should act to reduce reserve requirements by the amount

proposed they would favor action to reduce the System's holdings of

securities to absorb the released reserves so that the reduction would

not result in a further lowering of short-term rates.

The members of

the Board of Governors stated that action to reduce reserve require

ments would be taken this afternoon.

With respect to the rates at which the Federal Reserve Bank

of New York would buy and sell Treasury bills, it

was agreed unanimously

that the Bank should sell securities vigorously until the transition to

the lower reserve requirements had been made.

During the discussion

Mr. Miller stated that a desire on the part of the Committee for

flexibility within an agreed range would determine the policy with

respect to purchases and sales within the range.

He pointed out that

substantial sales as the rate moved up or down would reduce the

flexibility of the market and would make it

possible for banks and

others to invest their surplus funds without as great a risk of having

to sell at a loss.

On the other hand, he said, if

the market were

allowed to move freely within the range the greatest degree of

flexibility would be obtained.

Mr. Miller added that conditions might

be such that the System might wish to ease the market, in which case

it

might be desirable to buy bills at something less than the maximum

.15.

8/5/49

of the range, which would also affect the flexibility of the market.

If

the objective, he said, was to discourage banks from maintaining

a fully invested position, sales and purchases of bills should be

made largely at the maximum and minimum of the range.

Consideration was also given to the question raised by Mr.

Rouse as to the desirability of allowing the market to go below or

above the outside limits of the range and then operating vigorously

in the market to bring the rate back within the range.

All of the various aspects of operations under an agreed

upon range within which bills would be purchased and sold were con

sidered.

In connection with a comment by Mr. Eccles that in the

present period of recession the System's operations should be in

short-term securities only, Mr. Rouse expressed the view that the

System holdings of bonds should not become static as had been the case

for a long period in the thirties, that it

would be desirable to make

some change in the System's total holdings for the sake of change,

and that there would be ample opportunity through shifts of issues

to bring about such a change without altering materially the total

holdings in the System account.

He also suggested that occasion might

arise in which it would be easier to increase or decrease bank

reserves through bond sales or purchases than to effect the operation

through short-term securities.

The consensus was reached that the suggestion that under

certain conditions the bill market be allowed to move two or three

-16points above or below an agreed upon range with the understanding

that it

would be promptly brought back within the range through market

operations should not be followed and that all purchases and sales of

bills should be within the authorized range.

At the conclusion of the discussion,

upon motion duly made and seconded, and

by unanimous vote the following under

standing with respect to operations in

Treasury bills and certificates was

approved:

"Having in mind the desirability of rates in the short

term market which would call for the refunding of maturing

October certificates at 1-1/8 per cent, the range of yields

at which bills would be purchased and sold for the System

account should be in the neighborhood of .94 to 1.06 with

the exact range to be determined from time to time by the

executive committee to meet changing conditions, it being

understood that as the yield moved from the average

toward the maximum or minimum of the range purchases or

sales, as the case might be, would be made in increasing

It was also agreed that a desirable range for

amounts.

certificate yields would be 1.06-1.12 for the time being."

This action was taken with the

understanding that pending action by

the executive committee all bill

transactions would be within the

range of .94-1.06.

Mr. Rouse stated that he understood what was intended to be

accomplished by the above understanding and that the New York Bank

would do its

best to carry it

out, but that the situation in which it

would operate would be a difficult one.

There was a further discussion of the suggestion by Mr. Rouse

that the Federal Reserve Banks be authorized to enter into repurchase

agreements on Government securities at less than the discount rate

8/5/49

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with nonbank dealers pending a decision to reduce the discount rate

at Federal Reserve Banks.

He stated that while it

was not expected

that the authority for such agreements would be used immediately it

would be desirable to have it available for use in the case of need.

In response to an inquiry he suggested that the Committee authorize

the agreements at a rate of 1-3/8 percent.

There was a question whether the Committee should act to

approve the repurchase arrangement at this time or whether the executive

committee should be authorized to approve it if a need therefor should

arise.

There was agreement,

act at this

however,

that the full Committee should

meeting to grant the authority.

Thereupon, upon motion duly made and

seconded, it was voted unanimously to

authorize each Federal Reserve Bank

temporarily, until such time as action

was taken to reduce the discount rates

now in effect at the Federal Reserve

Banks under sections 13 and 13a of the

Federal Reserve Act, to enter into

repurchase agreements with nonbank

dealers in United States Government

securities who are qualified to trans

act business with the System open market

account, provided that (1) such agreements

(a) are at rates not below 1-3/8 percent,

(b) are for periods of not to exceed 15

calendar days, (c) cover only short-term

Government securities selling at a yield

of not more than the issuing rate for

one-year Treasury obligations, (d) are

used only in periods of strain, with

care and discrimination, as a means of

last resort in the special types of

situations and conditions reviewed in

Mr. Rouse's memorandum of January 2, 1948,

which was considered at the meeting of the

executive committee on January 20, 1948,

and (e) that reports of such transactions

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8/5/49

shall be made to the Manager of the

System Open Market Account to be in

cluded in the weekly report of open

market operations which is sent to

the Federal Open Market Committee,

and (2) in the event Government

securities covered by such an agree

ment are not repurchased by the

dealer pursuant to the agreement

or a renewal thereof, the securities

will be sold in the market or

transferred to the System open

market account.

In taking this action it was

understood that after the effective

date of action reducing the existing

discount rates at the Federal Reserve

Banks under sections 13 and 13a of

the Federal Reserve Act, the exist

ing authority with respect to re

purchase agreements with dealers

would again apply.

At this point Chairman McCabe left the meeting to keep another

important appointment,

At Mr. Thomas' suggestion copies of memoranda relating to (1)

economic situation and prospects,

distributed.

and (2) rates on savings notes, were

The latter memorandum recommended that the Committee take

the position in its

advice to the Treasury that no change in the rates

on savings notes is advisable for the time being.

In connection with the second memorandum, Mr. Rouse stated that

he had suggested to Mr. Bartelt that, while the sales of tax savings

notes had increased very materially because of the attractive rate, no

change should be made in the rates on the notes for the reason that

there would be a substantial Treasury deficit and they afforded a means

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8/5/49

of financing from nonbank sources at a rate which was attractive to

the Treasury.

Mr. Rouse added that since he first talked with Mr.

Bartelt the latter had indicated a desire to make no changes in the

rates on savings notes and that the matter might be discussed with the

American Bankers Asociation Committee on Government Borrowings later

in the month and with representatives of the savings banks and

insurance companies if

the Treasury should meet with them.

Mr. Young summarized the information contained in the memo

randum on the economic situation and prospects and his statement was

followed by a brief comment by Mr. Williams on the British exchange

situation and the problem of devaluation of the British pound.

There was unanimous agreement

among the members of the Committee

that in discussions with the Treasury

the recommendation should be made that

the rates on tax savings notes should

not be changed for the time being.

The question what comments or recommendations should be made

to the Treasury with respect to September financing was considered in

the light of the action of the Committee at the meeting on June 28,

1949,at which time it authorized the executive committee to make

such recommendations to the Treasury as seemed desirable in the light

of developments over the next few weeks and of the view of the full

Committee that new money should be raised by the Treasury through the

issuance of an

note.

intermediate security, probably a four- or five-year

8/5/49

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It was the consensus that the issuance of an intermediate

security for the September refunding would still

be desirable although

there was considerable doubt whether the Treasury would be willing to

follow that course.

It

was understood that the executive committee

would consider the matter further and make its recommendations to

the Treasury in the light of the comments at this meeting.

Mr.

Sproul stated that it

was too early to reach any de

dision at

[sic]

this time with respect to the refunding of the October

and December maturities.

Reference was then made to the study being made by members

of the staff of the program of long-term debt management and copies

of a further memorandum prepared by Messrs. Rouse,

Thomas, and

Riefler on this subject under date of August 4, 1949, were distributed.

Mr. Riefler reviewed the memorandum and the reasons for the

recommendations contained therein (1)

Committee,

that the Federal Open Market

in its discussions with the Treasury on future financing,

take the position that fully marketable issues be confined to

maturties of ten years or less, and (2) that the executive committee

be authorized to explore with the Treasury and outside the feasibility

of a long-term tap issue ineligible for ownership by banks,

such an

instrument to be shiftable but with limited marketability and either

of the G type or of the instalment retirement type now under analysis

by the staff committee.

8/5/49

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In the discussion of the first recommendation Mr. Eccles

stated that bank eligible securities should have a maturity of

less than ten years and Mr. Riefler stated that the recommendation

contemplated that ten years would be an absolute maximum.

After a brief discussion, upon

motion duly made and seconded, the

recommendations contained in the

memorandum were approved unanimously

with the understanding that the Open

Market Committee was not making any

commitment with respect to the securi

ties contemplated in the second recom

mendation but was approving the recom

mendation as a basis for discussion.

In accordance with the action at a previous meeting of the

Committee there were on the agenda for further consideration at

this meeting the questions (1) whether savings bonds, particularly

series E bonds, should be made eligible as collateral for bank

loans, and (2) whether further inducements should be provided to

holders of E bonds to reinvest in savings bonds.

Because of the

pressure of time it was agreed that these subjects should be con

tinued on the agenda for a later meeting.

Further reference was made to the revised memorandum on the

framework for System credit operations under peacetime conditions,

and approval was given to a suggestion by Mr.

Thomas that the memo

randum be discussed at a meeting of System economists to be held

during the latter part of September, and that comments be prepared

on the criticisms made of the memorandum at this meeting which would

8/5/49

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

Federal Reserve Banks with the understanding that the memorandum would

be considered at the next meeting of the full Committee.

understood that in the meantime if

It was

any of the members of the Committee

had any suggestions or comments with respect to the memorandum they

would send them in.

Mr. Rouse stated that, in view of the proposed action by the

Board of Governors to reduce reserve requirements of member banks by

approximately $1.8 billion, the direction issued by the Committee to

the executive committee covering operations in the System account

should renew the authority of the executive committee to reduce the

securities in the account by $3 billion pending another meeting of

the Committee.

Thereupon, upon motion duly made

and seconded, the following direction

to the executive committee was approved

unanimously 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

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

changing economic conditions and the general credit

situation of the country, for the practical administra

tion of the account, for the maintenance of orderly con

ditions 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 aggregate amount of securities held in

-23the 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 Trea

sury 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.

There was unanimous agreement that the next meeting of the

Committee should be subject to call of the Chairman,

it

being under

stood that it might be desirable to have another meeting before the

meeting of the Presidents of the Federal Reserve Banks which is to

take place in San Francisco during the early part of November.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.