December 30, 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 Washington on Friday, December 30, 1938, at 10:00 a.m. PRESENT: Mr. Harrison, Vice Chairman Mr. Szymczak Mr. McKee Mr. Ransom Mr. Davis Mr. Draper Mr. Sinclair Mr. Schaller Mr. Peyton Mr. Leach (alternate for Mr. Newton) Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Wyatt, General Counsel Mr. Goldenweiser, Economist Mr. Williams, Associate Economist Mr. Dreibelbis, Assistant General Counsel Mr. Sproul, Manager of the System Open Market Account Mr. Thurston, Special Assistant to the Chairman of the Board of Governors Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on September 21, 1938, were approved. Upon motion duly made and seconded, and by unanimous vote, the actions of the execu tive committee of the Federal Open Market Committee as set forth in the minutes of the meetings of the executive committee on Sep tember 15 and 21 and December 7, 1938, were approved, ratified and confirmed. With the consent of the members of the Committee, Mr. Piser, Senior Economist in the Division of Research and Statistics of the Board of Governors, was requested to attend this meeting. the members of the Committee Mr. Sproul distributed among
copies of a report prepared at the Federal Reserve Bank of New York of open market operations conducted by the bank since the meeting of the Committee on September 21, 1938. He referred briefly to the prin cipal transactions in the account during the period covered by the report and stated that the bank had experienced considerable diffi culty during the last three weeks in carrying out the instructions of the executive committee to replace maturing bills by purchases of like amounts of Treasury bills or Treasury notes without paying a premium above a no-yield basis. In this connection, he said that, due to a special and insistent demand for Treasury bills in recent weeks, the discount on outstanding Treasury bills had been eliminated completely and bills were being traded in at prices at or above par, the most recent issue of bills having been sold at par or above. He added that a somewhat similar situation existed in the Treasury note market, all issues of notes maturing within two years traded in as "rights" on a negative yield basis with being currently maturities declining. This condition, he said, the return on longer the inability of the reserve bank to obtain had been aggravated by of bills to replace maturities and the resulting sufficient amounts the market and making replacements with notes. necessity of going into supply of notes freely that there had not been a sufficient He said and the bank had to make these replacements available in the market and through dealers and others directly to solicit banks been forced investment accounts. or from their advanced prices sell notes at to
This, he stated, had established a presumption in the market that the Federal Open Market Committee would maintain the existing portfolio at all cost, which, so long as the present situation in the bill mar ket continued, would result in cumulative pressure on the market for notes and in a tendency toward forced lengthening of the maturity of holdings in the system account. He stated further that, as outlined in the report referred to above, it was necessary on December 14 to purchase $3,000,000 of notes to complete replacement of maturing Treasury bills, that on December 21, $12,904,000 of notes were acquired, and that on Decem ber 28 a total of $30,044,000 of notes were added to the portfolio, the notes purchased amounting to more than 62% of the replacement purchases as of that date. He anticipated that, because of the ex pected heavy demand for bills for tax purposes in the early weeks of the new year and the increase in excess reserves which will occur after the situation described above would con the first of the new year, some extent, during the immediate future. tinue, at least to At the conclusion of Mr. Sproul's re duly made and seconded and port, upon motion vote, the transactions in the by unanimous account for the period from September system 1938, inclusive, were ap 20 to December 29, proved, ratified and confirmed. Goldenweiser and Williams then called upon Messrs. Mr. Harrison and credit situa the present business with respect to for statements tion.
Mr. Goldenweiser stated that the present recovery movement, which had carried the index of industrial production up from 75 to about 103, was quite general, taking in all the major industrial groups; that the rate of recovery was almost unequalled except for a short period in the early part of 1933; and that the conclusion which he felt could be drawn from the movement was that the decline in business last year and the early part of 1938 was more radical than underlying economic conditions appeared to justify and was principally an adjustment of an inventory situation. He said that the severe downturn did not spread to the whole economic system, as the decline in consumption, indicated by department store sales, was not nearly as sharp as the decline in production, and that the decline in income was considerably less. He pointed out that throughout the year the rate of consumption was greater than that of production and that, therefore, inventories were being cut down, and he said that at the present time the best estimate was that about the same level, that if and consumption were at production movement might continue for some this condition continued the upward would continue to in that it was the hope that production time, and would increase at a comparable gradually and that consumption crease rate. Mr. Goldenweiser said, point in the situation, The crucial upturn in the durable goods whether there would be a continued was
industries that supply the greater portion of employment, and, if steel, automobiles, and building continued to advance, the coming year would be a good one, reaching a higher level of production for the year as a whole than the present level. The weak point at pres ent, he added, was the low level of agricultural prices which was not likely to rise in the next year although there might be some im provement. He concluded with an expression of his opinion that, aside from agricultural prices, the fact that prices had been fairly steady during recent months was an element of strength instead of weakness in the situation. At this point Chairman Eccles joined the meeting. Mr. Williams expressed general agreement with the statement made by Mr. Goldenweiser. He felt that recent stability of prices was a point of strength as contrasted with the condition existing during the latter part of 1936 when prices advanced very rapidly, re sulting in accumulation of inventories and forward buying and creating a situation which lent itself to downward adjustment. He said he had been interested in the rather general expec be a decline in activity during the first tation that there would that such declines had occurred in other recent years, quarter of 1939, should not be attached to such a but that he felt too much importance he said, that a downturn The strongest single indication, movement. been so rapid that it the rate of recovery has might occur was that and if such should decline somewhat be surprising if it would not
was the result it would mean that the economy was merely marking time and that activity might be considerably higher by the end of next year than it was at this time. His own opinion was that 1939 might turn out to be a considerably better year than the estimates which, he felt, contained an element of pessimism, that since the late re cession was fundamentally an adjustment of inventories it could be expected to be of short duration, and that, inasmuch as building and the durable goods industries were better than they had been, the first quarter of the new year should be a satisfactory one. While we now have the elements of a genuine recovery, he said, he could not venture a guess as to how long it would last. The out look in the durable goods industries for the next few years appeared good so far as the demand for such goods was concerned. He referred to the facts that there were no unhealthy speculative elements of any and that the banking situation was better importance in the situation as being among the reasons for it had been at times in the past than own power. He felt the economy under its a recovery of expecting the moment was a anything else at was needed more than that what of staging a recovery, the economy was capable demonstration that should stop its feel that the Government while he did not and that, to the extent did feel that, power, he maintain consuming efforts to be one policy should the primary appear, of recovery that evidences that the a demonstration and giving Federal deficits off of tapering its own power. on about a recovery able to bring economy is
During the discussion which followed of the problems to be considered by the Committee in determining its future open market policy, Mr. Williams made the further statement that he recognized that the country was faced with several important specific problems which presented substantial difficulties such as the railroad situa tion, social security and public utilities, but that he felt that there was a real possibility that a solution of these problems was not going to be found as long as the temporary expedient of deficit spending was used rather than to work out a sound economic solution of the difficulties. Chairman Eccles stated that Mr. Sproul had reported to him currently the difficulty that was being experienced by the New York bank in acquiring Treasury bills and notes to replace maturing bills, but that he had been unable to discuss the matter with the Secretary of the Treasury until this morning when he (Chairman Eccles) had gone to the Treasury and reviewed the problem with the Secretary and Assistant Secretary of the Treasury Taylor. He said he had explained that the situation had been brought about by the substantial reduc tion in the amount of bills in the market following the reduction in the inactive gold account in April, that the total amount of bills now outstanding was about half of what it was formerly, that the account held approximately half of the bills maturing currently, system at the present time by the situation was being aggravated and that
the heavy demand for bills for tax purposes and by the pressure for investment of idle deposit balances in bills to enable banks to reduce the expense of assessments of the Federal Deposit Insurance Corporation, He advised the Secretary, he said, that this condition placed the Fed eral Open Market Committee in a situation where it must choose between the alternative of allowing some of the bills held in the system account to run off without replacement to the extent that replacements cannot be made in bills or short term notes without paying a premium above a no yield basis and the alternative of buying longer term Goverment securi ties. He stated that he had pointed out the difficulty that would fol low from replacing maturing bills with bonds, as the bond market was strong and additional purchases would drive it higher with possible ad verse reactions later on when the system account might be in a less effective position to lend support to the market. On the other hand, if bills were allowed to run off, Chairman Eccles said, because of the the account would show a reduction from system's inability to replace, difficult to explain in the light of other week to week which might be and the System and might be con monetary actions taken by the Treasury of policy. Chairman Eccles added strued by the public as a reversal the Treasury Department could to the Secretary that that he suggested additional amounts of bills, that avoid the entire situation by issuing not appear to be bills did in the amount of outstanding the reduction were increased from the weekly bill offering and that if necessary,
$100,000,000 to $150,000,000 for ten weeks the Treasury would thereby obtain the additional funds needed between now and the first of June, probably without cost to the Treasury. The reply of the Secretary in which Mr. Taylor concurred, Chairman Eccles said, was that he did not think it would be desirable to issue more bills at this time as to do so would increase Treasury balances beyond their already high level, which would create what would amount to a ridiculous situation, that he was beginning to favor the suggestion that a further increase in the Federal debt be avoided in the near future by having the Reconstruction Finance Corporation borrow in the market to the extent of $500,000,000 and use the pro ceeds to pay its indebtedness to the Treasury, that if that were done he believed it might be well to have it done before the March refunding of June notes, possibly in February, and that the Treasury $500,000,000 of bills with the funds re might retire an additional Finance Corporation. The Secretary ceived from the Reconstruction see any objection, Chairman Eccles stated, to re did not seem to bills, as it was thought the the total amount of outstanding ducing it would be assured of a then be in a position where Treasury would continued favorable bill market. Secretary had stated that the Chairman Eccles added that the should allow ma Federal Open Market Committee decision whether the with bonds replace current maturities to run off or should turities
to the extent necessary, with a resultant increase in bond prices, was a responsibility of the Committee and that he would have no com ment or criticism to offer at this time or later regarding the deci sion reached by the Committee in that connection. However, Mr. Taylor felt, Chairman Eccles said, that it would be a mistake for the account to acquire bonds, that the account should be allowed to run off to the extent that it was not possible to acquire bills or notes without paying a premium above a no-yield basis, and that a reduction in the account for this reason could be explained easily. There followed a considerable discussion of the policy to be adopted by the Committee in the light of the information before during which Mr. Harrison suggested the adoption of a the Committee resolution to instruct the executive committee to replace maturing bills in the account with other bills or with Treasury notes, or to allow such bills to run off without replacement or pending such re conditions are such as to make it impos placement, (a) when market without paying a premium above a sible to procure bills or notes other bills or notes are not obtain no-yield basis or (b) when such market. In making this sug undue disturbance to the able without important that the New said that he felt it was gestion Mr. Harrison in which it found again in the position should not be placed York bank solicit banks and of having to last three weeks during the itself replacements, a proce with which to make for bills or notes dealers market and, if long government security disturbs the whole dure which
continued, runs the risk of driving up the price of even the longer term notes to a no-yield basis. During the discussion there were distributed to the members copies of a draft of a statement which had been prepared by Messrs. Goldenweiser and Thurston at the suggestion of the Chairman as a basis for consideration of a decision not to replace all bills maturing In the system account. At 1:15 p.m. the meeting recessed with the understanding that it would reconvene in the afternoon and that during the interim Messrs. Eccles and Harrison would prepare drafts of a resolution and press statement for consideration at the afternoon session. The meeting reconvened at 2:30 p.m. with the same attendance as at the close of the morning session. Consideration was given to a draft of press statement offered by Messrs. Eccles and Harrison which had been prepared on the theory that there might be a reduction in the system account because of in ability to replace maturing bills. At Mr. Ransom's suggestion Messrs. Goldenweiser and Williams action contemplated by the draft requested to comment on the were of statement. Goldenweiser stated that he was not in favor of reducing Mr. in the system account at the present the amount of securities held which had been advocated of he did not favor the policy time; that
having a fluctuating portfolio; that he did not think that the reasons given in the proposed press statement would be widely accepted; and that the action might be regarded as contemplating a reduction in the portfolio as a matter of policy. He saw no reason why the Federal Open Market Committee should limit itself to the replacement of matur ing bills with other bills or with Treasury notes; and he felt that, while the decision would be a fairly close one, the Committee would be less likely to regret an action requiring the maintenance of the present portfolio than it would action contemplating a reduction. He added that if it were decided to allow bills to run off without re placement a full statement should be made for the reason that there has been no reduction in the portfolio for approximately six years and such action would require something more than a brief explana tion. Mr. Williams said that he favored action allowing maturing bills to run off without replacement to the extent they could not be replaced with bills or notes without paying a premium above a no-yield that he felt it would not be regarded as an important action; basis; a brief statement to the press to the effect and that he would favor action was taken because of the inability to obtain bills that the purposes without paying a premium or with and notes for replacement market for such securities. He expressed out undue disturbance to the present high prices of Government that in view of the the opinion
securities it would not be difficult to explain the Committee's ac tion, and that there was not much danger of its being regarded by anyone as a change of policy, but that if full replacements were con tinued and the prices of Government securities were driven higher the system would be in danger of criticism for having carried its policy beyond reasonable limits, which might result in discrediting the sys tem's open market policy altogether. During a further discussion Mr. McKee suggested that consid eration be given to the question whether it would be desirable to continue during the next week or two the efforts to make full re placement of maturing bills, by purchasing not only bills and notes but also bonds to the extent that bills and notes were not available in the market, for the purpose of seeing what the effect of that pro cedure would be. Chairman Eccles referred to the fact that the President's be delivered next week and that if budget message to Congress would and there were any unfavorable re the system account were reduced market resulting from the budget in the Government securities action the action of the Federal be attributed to the result might message, in reducing the account. Open Market Committee read a revised draft discussion, Mr. Harrison After a further the Committee. He considered by the press, which was of statement for the executive committee of resolution directing also presented a draft
to effect transactions in the System account which he suggested for the consideration of the Federal Open Market Committee. During the discussion of Mr. Harrison's draft, consideration was also given to the desirability of (1) continuing the existing directions to the executive committee to make complete replacements of maturing bills during the coming week or two and of recessing this meeting with the understanding that it would reconvene before January 11, 1939 (on which date there would be a maturity of bills held in the account) for reconsideration of the entire matter in the light of the situation then existing, and (2) directing the executive committee to replace maturing bills with bonds to the extent that bills and notes were not available in the market without paying a premium. At the conclusion of the discussion Mr. Sinclair moved that the resolution offered by Mr. Harrison be adopted as follows: That the executive committee be directed until other wise directed by the Federal Open Market Committee, (1) of maturing Treasury bills to arrange for the replacement system open market account with other Treasury in the from time to time, to allow bills or Treasury notes, or, replacement or pending sub such bills to mature without conditions are such (a) when market sequent replacement procure other bills or notes as to make it impossible to basis, or (b) premium over a no-yield without paying a without undue disturb such notes are not obtainable when the replacement of (2) to arrange for ance to the market; system open market and bonds in the Treasury notes maturing and (3) to ar Government securities; account with other in the system open for such shifts in maturities range the proper adminis necessary in as may be market account amount of (a) that the account; provided, of the tration
securities in the account maturing within two years be maintained at not less than $1,000,000,000; (b) that the amount of bonds in the account having maturities in excess of five years be maintained at not less than $500,000,000 nor more than $900,000,000; and (c) that, if Treasury bills in the account are allowed to mature without re placement, the total amount of securities in the account be not decreased by more than $200,000,000. That, in addition to such authority as may be con tained in other resolutions of the Federal Open Market Committee and until otherwise directed by the Committee, the executive committee be authorized, upon written, tele phonic or telegraphic approval of a majority of the mem bers of the Federal Open Market Committee, to arrange for the purchase or sale (which would include authority to allow maturities to run off without replacement) of Gov ernment securities in the open market from time to time for system open market account to such extent as the executive 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 by more than $200,000,000 nor decreased by more than $200,000,000 including such decreases as may result from allowing Treasury bills in the account to mature without replacement, 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 $900,000,000. Mr. Sinclair's motion having been duly seconded, was put by the chair and carried, Messrs. Harrison, Szymczak, McKee, Davis, Sinclair, Schaller, Peyton and Leach voting "Aye", and Messrs. Eccles, Ransom and Draper voting "No". Eccles voted "No" for the fol Chairman lowing reasons: as a part of the Government's program Last spring, recovery, the Board of encouragement of business for the for member banks reduced reserve requirements Governors voted for this action for by $750,000,000. The Chairman in its with the Government purpose of cooperating the The Chairman's view program of last spring. recovery
was that this addition to excess reserves at a time when deflation and credit contraction were in progress could not have an adverse effect and might possibly have a de sirable psychological effect. The Government's recovery program is now being carried out and the business situa tion and prospects are not such as to require a change in policy. Since a failure to replace maturing bills in the System's portfolio would reduce reserves, it might be interpreted as a reversal of policy, which would not be justified under present business conditions, and would be inconsistent with the action taken last spring to in crease reserves. The Chairman thought it particularly inadvisable at this time to fail to replace maturing bills for technical operating reasons, unless an effort had first been made to replace them with bonds or long term notes to the extent that it proved impossible to do so with bills or short-dated notes except by paying a pre mium above a no-yield basis. He also thought that if the effort were made to replace with longer term notes or bonds, it would tend to ease the demand for bills and short-dated notes and thus tend to make them more readily available without paying a premium above a no-yield basis. In voting against the adoption of the resolutions Mr. Ransom stated that, without reviewing all of the considerations that influenced his vote, he felt that it was preferable under existing circumstances to make the portfolio. A reduction should be no reduction in to be used at such time as a reversal of pol reserved icy is intended, or at such other time as conditions or reasons other than those now before the Committee would, in his opinion, require a reduction in the port If the portfolio were now reduced without in folio. tending a change of policy, an explanatory statement would be necessary. If later a change of policy were with a reduction in the portfolio, intended in connection to issue a further ex it would then appear necessary seemed to him that the Commit planatory statement. It to speak for more upon its actions tee should rely the use of statements to give themselves and less upon effect of the actions themselves, effect to or limit the and explain rather should support and that statements than controvert action. Vice President Matteson, Assistant that Mr. Harrison stated Mr.
of the Federal Reserve Bank of New York, had just advised Mr. Sproul over the telephone that because of the reduced demand for bills for year-end statement purposes it appeared that it might be possible to replace next week's maturities of bills with other bills that would be available in the market, Mr. McKee moved that the proposed state ment for the press be approved subject to such changes of form as might be thought necessary by Messrs. Sproul and Thurston. Mr. McKee's motion, having been duly seconded, was put by the chair and carried, Messrs. Eccles, Harrison, Szymczak, McKee, Davis, Sinclair, Schaller, Peyton and Leach voting "Aye", and Mr. Ransom not voting. (Secretary's note. It had been necessary for Mr. Draper to leave the meeting before the foregoing vote was taken and he advised the the Secretary subsequently that, in view of the earlier action of the Committee, he wished to be recorded as approving the statement.) The statement as released to the press was as follows: "The Federal Open Market Committee announced, following a meeting today, that weekly statements of the total hold ings in the Federal Reserve System's Open Market Account may at times show some fluctuation depending upon condi tions in the market affecting the committee's ability to replace maturing Treasury bills held in its portfolio. The volume of Treasury bills available on the market has de clined materially during the year and, owing to the large and increasing demand, such bills are already selling either on a no yield basis or at a premium above a no yield basis. It has, therefore, become difficult and in some weeks impossible for the System to find sufficient bills on the market to replace those that mature. Short term notes are also selling on a no yield basis and longer term notes have at times been difficult to obtain. In it may be necessary from time to time these circumstances,
"to permit bills held in the portfolio to mature without replacement, not because of any change in Federal Reserve policy but solely because of the technical situation in the market. Because no change in Federal Reserve policy is contemplated at this time, maturing bills will be replaced to the extent that market conditions warrant." Thereupon the meeting adjourned. Secretary. Approved: Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, December 7, 1938·Minutes of the Executive Committee, December 30, 1938