April 21–22, 1938 FOMC Minutes

FOMC minutes

memorandum submitted by him relating to the question whether the raising of reserve requirements caused the depression. It was stated that Mr. Williams was absent from this meeting because of illness and that the memorandum was not available at this time. Mr. Harrison reviewed, for the information of Mr. McKee, who was not present at the afternoon session yesterday, the substance of Chairman Eccles' report of his discussion during the afternoon with the Secretary of the Treasury. Chairman Eccles joined the meeting at this point and Mr. Harrison advised him of the instructions which he had given to Mr. Burgess and which had been approved by the other members of the Com mittee. Chairman Eccles stated that he concurred in the action of the Committee. Mr. Harrison advised the Committee from time to time of the reports which he was receiving from the Federal Reserve Bank of New York regarding developments in the Government securities market. The discussion of the problem before the Committee proceeded along the lines of analysis of the existing situation and of points brought out in the consideration of the problem during the preceding session. Mr. Harrison said that he would like to have a vote upon his resolution, believing that it would be inadvisable for the Committee to decide at this time that it had no responsibility with respect to the money market or that it would witness a continued and rapid rise in without any action on its part in the the Government bond market

direction of maintaining an orderly market, since government bond prices were almost at record heights with many issues selling on a no-yield basis, and present and prospective amounts of excess reserves were tending to force the market still higher, thus making it more vulnerable for attack in the future. In the event of a reaction later, he said, the Committee, no doubt, would decide to intervene not only because it had been its policy to exert its influence toward maintaining an orderly market on the decline, but also because it might feel some measure of responsibility for the condition of its member banks. He added that he felt that, in all the circumstances, the executive com mittee should at least have authority to permit some flexibility in the account if that should seem desirable as a factor in restraining a dis orderly rise in the market. In his opinion, some reasonable reduction in the account at such a time could not properly be interpreted as a reversal of the policy of the Government with respect to excess re serves and probably would serve to make the market less vulnerable in the future. Mr. Davis said that he would be opposed to any statement by way indicate that the Committee under of preamble or otherwise that would for the movement of the bond present conditions had any responsibility of actions which had been taken. market or that would imply a criticism could not vote for any resolution Eccles said that he Chairman an orderly market, which responsibility for maintaining that implied a with which the Committee be met under the conditions he felt could not the executive committee would like to see but that he was confronted

instructed to replace the maturing bills in the portfolio with bills to the extent that they could be purchased without paying a premium over a no-yield basis, letting that resolution stand from week to week pending another meeting of the full Committee to consider a change of policy. During the course of the discussion Mr. McKee moved as a substitute for Mr. Harrison's motion that the executive committee be in structed to direct the replacement of the next maturing Treasury bills in the system open mar ket account with Treasury bills or notes having maturities not to exceed two years provided that such securities could be purchased without pay ing a premium above a no-yield basis. Mr. McKee's motion was duly seconded. Mr. McKee stated that his motion was made with the idea that another meeting of the Committee should be held next week in order that the situation might be reviewed again. At the conclusion of the discussion Mr. McKee's motion was put by the chair and carried unanimously. Upon motion duly made and seconded, it was voted unanimously that another meeting of the Committee should be called to convene in Washington on Friday, April 29, 1938, at 10:30 a.m. Upon motion duly made and seconded, and by unanimous vote, the Committee instructed the executive committee, until otherwise instructed by the Committee and subject to the limitations in the motion previously adopted on contained with respect to the next maturing Treas this date account, to direct the replace ury bills in the ment of maturing securities in the system open market account with other Government securities such shifts between maturities in and to make account as may be necessary in the proper the

administration of the account, provided, that the amount of securities maturing within two years be maintained at not less than $1,000,000,000 and that the amount of bonds having maturities in excess of five years be not over $850,000,000 nor less than $500,000,000. Upon motion duly made and seconded, and by unanimous vote, the Committee authorized the executive committee to permit such fluctuations within reasonable limits in the amount of hold ings of Government securities in the system open market account between weekly statement dates as may be desirable for the practical adminis tration of the account in making shifts between and replacements of securities pursuant to the general authority granted by the Federal Open Market Committee. In taking these actions it was understood that the resolution meeting relating to an increase or decrease in adopted at the last account would be treated as being no longer in effect. the system Thereupon the meeting adjourned, Secretary. Approved: Chairman.