April 21–22, 1938 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Wash ington on Thursday, April 21, 1938, at 10:25 a.m. PRESENT: Mr. Eccles, Chairman Mr. Harrison, Vice Chairman Mr. Szymczak Mr. McKee Mr. Ransom Mr. Davis Mr. Draper Mr. Sinclair Mr. Newton Mr. Schaller Mr. Peyton Mr. Morrill, Secretary Mr. Wyatt, General Counsel Mr. Goldenweiser, Economist Mr. Dreibelbis, Assistant General Counsel Mr. Burgess, Manager, System Open Market Account For the purpose of the Committee's records, Chairman Eccles re ferred to the recent developments in connection with the Government's program for the encouragement of business recovery, including the Presi dent's message of April 14 to the Congress of the United States, the President's radio address which was broadcast from the White House on the evening of April 14, the action of the Board of Governors on April on all classes of deposits for all 15 in reducing reserve requirements on April 16 and the effective at the opening of business member banks press for morning newspapers of thereof, released to the announcement to this action as a part of the Government's April 16, which referred recovery, and to the announce the encouragement of business program for 18 for release in the Department on April ment made by the Treasury
morning papers of April 19, that the inactive gold account had been dis continued. In the President's message to the Congress on April 14 the following statement was made: "The Administration proposes immediately to make addi tional bank resources available for the credit needs of the country. This can be done without legislation. It will be done through the desterilization of approximately one billion four hundred million dollars of Treasury gold, accompanied by action on the part of the Federal Reserve Board to reduce re serve requirements by about three-quarters of a billion dol lars. The Federal Reserve Board informs me that they are willing to do so. These measures will make more abundant the supply of funds for commerce, industry and agriculture. By themselves, however, monetary measures are insufficient to start us on a sustained upward movement." The Chairman stated that he had discussed with the Secretary of the Treasury this morning the considerations involved in such decision as the Treasury might make with respect to the utilization of the gold released from the inactive gold account; that he had an appointment to with the Secretary of the Treasury at 12:30 discuss the matter further Treasury had in view a press con and that the Secretary of the today; to make a statement as to at 5:00 o'clock at which he expected ference be with respect to replacing or the program of the Treasury would what maturing Treasury bills. paying off the question of the stated that he felt that The Chairman then Federal Open Market Committee hereafter by the policy to be pursued of very great im had become one of the changed situation in the light reserves had an volume of excess the greatly increased portance; that
important bearing upon the market for Government securities, and that in spite of the fact that there had been sold from the system account with a view to preventing a disorderly market more than $100,000,000 of bonds with corresponding purchases of bills and notes, the market had advanced very rapidly during the past few days and the short-term market particularly had gone up until the yield was negligible on notes and some bills were selling on a no-yield basis. He referred to the fact that the Treasury had announced the complete desterilization of gold in an amount aggregating approximately $1,392,000,000, together with the discontinuance of further sterilization, and that the result ing Treasury deposits had increased the Treasury balances at the Federal reserve banks and depository banks to approximately $2,300,000,000. He observed that the desterilization action had not yet created excess and would not do so until the Treasury began making disburse reserves ments from its balances with the Federal reserve banks; that there were falling due each week $100,000,000 of Treasury bills until June 22, falling due each week until after which there would be $150,000,000 would be $250,000,000 of tax bills 20 and that, in addition, there July of June and $620,000,000 of notes maturing falling due in the middle on the 15th of June. that the Treasury proposed He stated that it was understood week until further bills each of the maturing to retire $50,000,000 in the middle tax bills maturing $250,000,000 of as well as the notice
of June. The result of this, he said, would be to increase excess re serves of member banks until the middle of June at the rate of $50,000,000 a week faster than would result from current net expenditures of the Treasury. He summed up the situation by saying that it appeared that with the retirement in June of the tax bills, about $600,000,000 would be added to excess reserves, sooner than would be the case if the Trea sury were to wait until net expenditures produced that result, and that approximately $1,000,000,000 of the total of $1,400,000,000 of desteril ized gold would be in excess reserves of member banks by the middle of June. He added that there very likely would also be additions to excess reserves by reason of further gold imports. He pointed out that the proposed weekly retirement of bills would reduce the amount of such paper available in the market and at time increase the ability and desire of banks to make addi the same tional investments, with the result that, in the absence of opportuni the banks would bid up the prices of the ties to invest funds elsewhere, on the market. He added that the Re Government securities remaining would have $39,500,000 of bills falling due on April 27; serve system on May 11, $59,000,000 on May 18, $36,500,000 on May 4; $54,500,000 May 25, $48,500,000 on June 1, $34,500,000 on June 8, $55,500,000 on 16, and $45,000,000 on 15, $31,000,000 on June $19,000,000 on June bills would not be in replacing these 17, and that the difficulty June market the full to refund in the the Treasury were as great if nearly
amount of its outstanding maturities as would be the case under the contemplated plan of retiring $50,000,000 each week. On the other hand, the Chairman stated, if the system were to allow the bills in its portfolio to run off without replacement, the effect on excess reserves would be practically to offset the reduction in reserve requirements which had been made by the Board of Governors, and he felt that such action would be regarded as in effect nullifying the action of the Board in reducing reserve requirements or as nullify ing to an equivalent extent the action of the Treasury in paying off maturing bills as a means of giving effect to the gold desterilization policy, with its consequent increase in the lending power of banks. The Chairman recognized the fact that the replacement by the system open market account of the maturing bills held by it would have a upset the market further but expressed the opinion that tendency to not be held at fault for such a consequence; the Reserve system should that the system could not should be fully advised that the Treasury in the Government bond market accept responsibility for the condition off maturing bills; and determination to pay created by the Treasury's for market conditions only the system could accept responsibility that He pointed out that of the Treasury. had the full cooperation if it a temporary reduc the Treasury involved action of while the proposed be under the Treasury would debt, the public in the outstanding tion rate by at a much greater the debt on of increasing necessity later
reason of increased expenditures than would be the case if it replaced the maturing bills currently; that no one could foresee what the con dition of the market would be when new borrowing became necessary; and that, in these circumstances, he saw no reason why the committee should assume responsibility for attempting to prevent the anticipated dis orderly condition in the Government security market due to rapidly rising prices. He expressed the further view that, if banks continue to buy bonds in these circumstances, the system should not be held re sponsible for not interfering in the market; that the trend in the market was in the direction of much lower yields for Goverment bonds; and that, even if the system were to sell its entire portfolio of Government bonds, such action might not be sufficient to control the expected rise, and therefore might strip the system of practically all its earning assets without achieving the desired result. There ensued a discussion of the policy to be adopted by the to meet the situation. The opinion was expressed and con Committee curred in by some of the members of the Committee that the system its existing portfolio beyond the could not be expected to maintain that replacement securities could be purchased on a no-yield extent consideration of the question whether basis or better. There was also securities if such in replacing maturing System would be justified the with maturities up to two reduce bills as well as notes action would since such replace basis, and particularly years or more to a no-yield short- and long-term relationship between tend to distort the ments would
rates, which relationship is as important an element in an orderly mar ket as the general level of rates. It was pointed out that notes were being quoted at the present time on a no-yield or minus-yield basis for maturities up to a year and a half and that it was extremely dif ficult to get sufficient blocks of notes for replacement purchases. With respect to the Board's action in increasing reserve re quirements, the statement was made that while, following that action, there remained a large volume of excess reserves accompanied by ex tremely low rates of interest and an abundance of available funds, many people were under the impression that the Board's action was unduly deflationary, that therefore the System was in a position, in the opinion of a portion of the public at least, of resisting the recovery for that reason the Board of Governors could not be program, that economic factors in the situation and motivated exclusively by the factors, and that the subsequent reduction disregard the psychological the best interests of the was believed to be in of reserve requirements members of the Committee referred Reserve System. Some of the Federal the Committee were dif of Governors and the fact that the Board to separate statutory responsibilities, bodies, with ferently constituted the Committee was under they felt that, therefore, and stated that it should follow regardless determining what course the necessity of was created. it was confronted with which how the situation of that, while it Committee stated members of the Some of the to have the entire of the Administration was the desire apparently
addition to excess reserves resulting from the termination of the in active gold account made effective as promptly as possible, they felt that the Treasury should operate on a week-to-week basis and determine, in the light of developments, whether the policy of retiring bills should be continued. There was also discussion of the questions whether, if no ac tion be taken by the system to influence the market during the period of an advance, such action should be taken during a period of market decline, and whether, in view of the fact that up to the present time the policy of the system had been to endeavor to maintain orderly con ditions in the Government securities markets, a reduction of from $200,000,000 to $400,000,000 in the System portfolio for the purpose that policy could reasonably be interpreted of effectively continuing reduction in reserve requirements. In as an effort to nullify the the Committee took the posi some of the members of this connection, its responsibility for should not abdicate tion that the Committee securities market and conditions in the Government maintaining orderly Administration would Treasury or the not believe that the that they did as to the were fully informed to do so if they wish the Committee of the Treasury therefore the Secretary of the problem; that nature from the Committee's of the difficulties be put on notice should that the and it was confronted; with which of the position standpoint to with respect its program to modify be requested should Treasury
maturing bills, thereby giving the Committee an opportunity to meet its responsibility not only because of the effect of the program upon the condition of the Government bond market in the first instance but also its ultimate effect upon member banks. The meeting recessed for lunch, and reconvened at 3:00 p.m. with the same attendance as at the morning session except that Chair man Eccles and Mr. McKee were not in attendance. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on February 28 and March 1, 1938, 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 meeting of the executive committee on February 28 and March 1, 1938, were approved, ratified and con firmed. Mr. Burgess reviewed the operations which had taken place in since the last meeting of the Federal the system open market account including the sales of bonds and replacements Open Market Committee, which had resulted in a notes during the recent period, by bills and maturities in ex in the account with of the bond holdings reduction cess of five years to approximately $600,000,000. Upon motion duly made and seconded, unanimous vote, the transactions and by the system open market account since in the close of the 28, 1938, up to February ratified and were approved, market today, confirmed.
At the request of the Committee for his views regarding the situation discussed by the Committee, Mr. Goldenweiser stated that ap proximately $4,000,000,000 in excess reserves might be expected before the end of the year, that this amount is larger than in 1936 when the Board increased reserve requirements, but that the situation had changed materially from the boom conditions that existed at that time to a con dition of depression the end of which was not yet in sight. He ex pressed the opinion that the large amount of excess reserves would have the effect of reducing going rates on Government securities possibly to a no-yield basis on bills, to 1/4% to 1/2% on notes, and to 2% on bonds, and that, in these circumstances, the reduction of the system portfolio in an attempt to maintain rates would be a futile gesture which might deprive the system of its earning assets without accomplishing any useful purpose. Under these circumstances, and in the light of the determination of the Treasury to retire maturing bills, he felt that the system portfolio should be retained without making shifts to in fluence the market until such time as the securities purchased to replace maturing securities reach a no-yield basis. He thought it was clear that the system could not be expected to purchase replacement securi ties at a premium. He added that in his opinion the course to be that everything that could followed was essentially one of inaction, and that the system should field had been done, be done in the monetary future developments what further and determine on the basis of stand by action might be required.
Following Mr. Goldenweiser's statement there was a further discussion of the question whether, if the system takes no action to influence market conditions during the period of advancing prices, it should take such action during a period of market decline and it was stated by some of the members of the Committee that, regardless of the desire of the system to influence the market in the present situation and regardless of the policy followed in a period of market decline, the system was without the necessary power to prevent a decline in security yields at the present time and that, therefore, no purpose in reducing the system portfolio even though it might would be served be felt that under ordinary conditions the system had some responsi bility to act. Eccles returned to the meeting. At this point Chairman from a very thorough dis that he had just returned He stated of the Treasury and problem with the Secretary cussion of the entire out the problem before the whole subject, pointing that, after reviewing the Treasury situation Committee, recognizing the Federal Open Market Board were in a very the Treasury and the recognizing that both and disagreement as to was not the slightest position, there difficult said that he Chairman Eccles facts of the situation. the essential Committee had Federal Open Market that the advised the Secretary had did not know because it it should take course that on the not decided also said He by the Treasury. would be followed what program exactly
be had reviewed, for the information of the Secretary, the discussions which the Committee had had and that the Secretary understood the posi tion in which the Committee was placed. Chairman Eccles then stated that the Secretary had outlined quite fully the Administration conferences that had taken place at which it had been recognized that if the Treasury retired maturing bills it would create a difficult problem for the Federal Reserve System for the reason that there would be fewer bills in the market which could be used for replacement purposes, that the retirement of bills at the present time in addition to the effort of the Federal Reserve System to replace maturing securities would very likely put the Government securities market up when it was felt that it was already high enough, if not too high, and that this might have an adverse effect at a sub sequent time. Notwithstanding these considerations, Chairman Eccles said, it was decided during the conferences referred to that the pro ceeds of the desterilized gold should be put into the banking situation, that this could be done more rapidly by paying off $50,000,000 of bills a week between now and June, and that, therefore, an announcement should be made that until further notice the Treasury would sell $50,000,000 of bills weekly. The Secretary stated, Mr. Eccles said, that it was this week, because tele do anything to change that position too late to reserve banks that sent to the Federal had already been graphic advices week. Mr. Eccles added would be offered next $50,000,000 of bills only
that the Secretary felt that the press announcement would leave the Treasury free to change its policy during the succeeding week if it desired to do so. Chairman Eccles stated further that the Secretary had given assurance that, if the System desired, the entire matter would be considered again next week in the light of intervening devel opments. Chairman Eccles' statement was followed by a consideration of the availability of bankers acceptances and other eligible securities in addition to Government obligations for purchase for the system ac count. There was also a discussion of the extent of the authority which should be given to the executive committee to effect transactions in the system account pending another meeting of the Committee. At 5:05 p.m. Mr. Williams, who had not attended the meeting be cause of illness, entered the room. There was a discussion of the question how far the Committee should permit the amount of bonds held in the System account to be the view that it should not go below reduced. Some members expressed that it might very well be main $500,000,000 in present circumstances; committee should level; but that the executive tained at the present let bills run off without replacement. Follow have some authority to like to have that he would the Chairman stated ing this discussion a policy of not letting the Committee had adopted the record show that make it which would developed a condition run off unless the portfolio
unreasonable to expect the system to replace its maturing bills; that the situation might change considerably during the next two or three weeks; and therefore that it would be advisable to review the matter with the Secretary of the Treasury again next week. At 5:30 p.m. the meeting recessed with the understanding that it would reconvene on Friday, April 22, at 10:30 a.m. Secretary.
The meeting of the Federal Open Market Committee was reconvened in the offices of the Board of Governors of the Federal Reserve System in Washington on Friday, April 22, 1938, at 10:35 a.m. PRESENT; Mr. Harrison, Vice Chairman Mr. Szymczak Mr. McKee Mr. Ransom Mr. Davis Mr. Draper Mr. Sinclair Mr. Newton Mr. Schaller Mr. Peyton Mr. Morrill, Secretary Mr. Wyatt, General Counsel Mr. Goldenweiser, Economist Mr. Dreibelbis, Assistant General Counsel Mr. Thurston, Special Assistant to the Chairman of the Board of Governors Mr. Ransom referred to the fact that since action was taken by the Federal Open Market Committee at its meeting on March 1 in appoint McKee and Ransom as alternates for Messrs. Eccles, Szymczak ing Messrs. as members of the executive committee of the Federal Open and Davis had been appointed a member of the Board. Market Committee Mr. Draper Mr. Ransom moved that Mr. Draper Thereupon the first alternate for members be selected as executive committee so that of the Board on the for such members of the executive the alternates in the following orders committee would serve Mr. Draper Mr. McKee Mr. Ransom been duly seconded, Mr. Ransom's Having and carried unani was put by the chair motion mously. discussions at the in view of the stated that, Mr. Harrison Manager of the System instructed Mr. Burgess, yesterday, he had meeting
open market account who had returned to New York following the meeting yesterday, to effect no transactions in the system open market account today until further instructions were received from the Committee, that the market at the present time was from 4/32's to 5/32's higher than yesterday's closing prices, and that if, in these circumstances, the Committee felt that Mr. Burgess should be given different instruc tions it was suggested that the Committee determine the instructions that should be issued. Upon motion duly made and seconded, and by unanimous vote, the instructions given by Mr. Harrison to Mr. Burgess were approved, ratified and confirmed. Mr. Harrison then presented the follow ing resolution and moved that it be adopted. Mr. Harrison's motion was duly seconded: In view of the fact that the present and prospective amounts of excess reserves of member banks are tending to make it more difficult for the System, by means of shifts in the maturities in the open market account, to exercise its influence towards orderliness in the Government securi ties market VOTED that, until otherwise authorized or directed by the Committee, and in addition to the authority to make shifts in the maturities in the system open market account, the executive committee be authorized to permit fluctuations in the total amount of the account in order more effectively, with the means available and in the light of current conditions, to exert its influence towards orderly conditions in the Government bond market, however, that the account shall not be provided, increased or decreased by more than $200,000,000 the present level of the account. from request, the following draft of resolution was At Mr. Ransom's read:
In view of the fact that actions of the Treasury and the Board of Governors in pursuance of the program recently adopted by the Government for the encouragement of business recovery have resulted in the creation of a large volume of actual and prospective excess reserves; and of the further fact that these actions have entirely changed the situation in the money market, it is the judgment of the Federal Open Market Committee that interest rates and bond yields should be permitted to adjust to the new conditions. Consequently, it is VOTED that the executive committee is directed to maintain the system's open market account at its present level until the next meeting of the Federal Open Market Committee, except that, in case it be comes impossible to replace maturities in the account with other securities having a maturity not exceeding two years without paying a premium above a no-yield basis, the executive committee is authorized to per mit the account to fall below its present level by an amount not exceeding $ . After some consideration of the differences between the two discussion thereof was deferred until Chairman resolutions further absent at the beginning of this session, Eccles, who was necessarily could join the meeting. to the action of the Committee on March 1 Reference was made Ransom and Sinclair) to con a committee (Messrs. Davis, in appointing of the Federal Open Market 6 of Article I of the by-laws sider section and it was stated submit a report and recommendation, Committee and to a report at this time. was not prepared to submit that the committee voted unanimously to request the It was its study of the matter. committee to continue at the last meeting also made to the understanding Reference was would submit Associate Economist, that Mr. Williams, of the Committee to the of a supplement be in the nature which would a second memorandum
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.
Also: Record of Policy Actions·Minutes of the Executive Committee, April 19, 1938·Minutes of the Executive Committee, April 22, 1938