August 2, 1938 FOMC Minutes

FOMC minutes

At the request of the Committee, Mr. Thomas discussed business and credit developments as outlined in a memorandum prepared in the Board's Division of Research and Statistics under date of August 1, 1938, copies of which were handed to the members of the Committee dur ing the meeting. Mr. Thomas' remarks were followed by a statement by Mr. Williams. Copies of the memorandum prepared by the Division of Re search and Statistics and a summary of Mr. Williams' statement have been placed in the files of the Federal Open Market Committee. At 1:15 p.m. the meeting recessed and reconvened at 2:35 p.m. with the same attendance as at the morning session. There ensued a discussion of the Comittee's policy and various suggestions were considered. Mr. McKee suggested that consideration be given to the desirability, when it becomes difficult to replace maturing securities in any one week, of allowing maturities to run off with the understanding that they should be replaced through the purchase of a sub stantially equal amount of securities during the succeeding week thus in augurating a policy of permitting occasional fluctuations in the size of the system portfolio. Mr. Harrison referred to the view which he had expressed previous to run off to the extent that it is ly that maturities might be allowed the purchase of Treasury bills impracticable to replace them through found paying a premium above a two-year limitation without or notes within the should not be interpreted as basis, as he felt that such action no-yield

being in conflict with the general policy of maintaining a large amount of excess reserves. He added that if such action were not taken at this time he felt that an open mind on the question should be maintained. Chairman Eccles stated that it was his opinion that the present policy of maintaining the system open market account should be continued at least until more information is available during the next few months with respect to the Treasury financing program and other factors affect ing the short term market. There was a discussion also of suggestions as to substituting for the present two-year limitation provisions which would permit the replace ment of maturing securities with bills or notes of any maturity or, if this were not considered desirable, with any Government securities having maturities up to five years. Another suggestion considered was that the Committee might place no limitation on the type or maturity of Government securities purchased of maturing securities provided that the amount of securi in replacement within two years be maintained at not less ties in the account maturing of bonds in the account be main figure and that the amount than a minimum tained at not less nor more than stated amounts. the opinion was ex of these suggestions During the consideration Treasury debt to the total the proportion of the short-term pressed that small and that it would be pos Treasury debt outstanding was relatively increase the amount of bills Treasury substantially to sible for the

outstanding, which would largely, if not entirely, remove the difficulty of the system in making replacements and that, in any event, the problem of the administration of the system account would be affected greatly by the financing program determined by the Treasury during the next few months. At the conclusion of these discussions it was agreed by a majori ty of the members of the Committee that the policy of maintaining the ex isting system portfolio should be continued for the present provided and to the extent that maturing securities could be replaced by the purchase of Treasury bills or notes of any maturity without paying a premium over a no-yield basis. Upon motion duly made and seconded, and by unanimous vote, the following resolutions were adopted: executive committee be directed, until otherwise That the the Federal Open Market Committee, to arrange for directed by securities in the system open mar the replacement of maturing with other Government securities and for such shifts ket account as may be necessary in the proper administration in maturities (1) that maturing Treasury bills shall of the account, provided Treasury bills or notes to the extent that be replaced only with without paying a premium over a no-yield they can be purchased to the foregoing limitation, the amount basis; (2) that, subject maturing within two years be main of securities in the account and (3) that the amount tained at not less than $1,000,000,000; in excess of five years of bonds in the account having maturities $500,000,000 nor more than maintained at not less than be $850,000,000. authority as may be contained in That, in addition to such Open Market Committee and until other resolutions of the Federal the executive committee be otherwise directed by the Committee, or telegraphic approval of authorized, upon written, telephonic the Federal Open Market Committee, majority of the members of a purchase or sale (which would include authority to arrange for the

to allow maturities to run off without replacement) of Gov ernment securities in the open market from time to time for the system open market account to such extent as the execu tive committee shall find to be necessary for the purpose of exercising an influence toward maintaining orderly market conditions, provided (1) that the total amount of securities in the account be not increased or decreased by more than $125,000,000, and (2) that the amount of bonds in the ac count having maturities over five years be maintained at not less than $500,000,000 nor more than $850,000,000. Mr. Harrison moved that the request made of Mr. Williams at the meeting on March 1, 1938, that he prepare a supplement to the memorandum submitted by him, relating to the question whether the rais ing of reserve requirements caused the depression, be withdrawn. Carried unanimously. Mr. Davis stated that the committee (Messrs. Davis, Ransom and Sinclair) appointed at the meeting on March 1, 1938, to consider Section 6 of Article I of the by-laws of the Federal Open Market Committee and to submit a report and recommendation thereon was not yet prepared to submit be made before the next meeting of the Commit a report but that it would tee. Thereupon the meeting adjourned. Secretary. Approved: Chairman.