March 20, 1939 FOMC Minutes

FOMC minutes

action with respect to the problem of excess reserves of member banks should be initiated by the Federal Reserve System. The draft of state ment was read and a copy has been placed in the files of the Federal Open Market Committee. At the conclusion of the discussion, Mr. Harrison moved that the Chairman, either by telephone or personally, advise the Secretary of the Treasury in reply to his question that (1) the Federal Open Market Committee does not regard the present as a proper time for a re duction in the System open market account by the sale of bonds and that, in view of the change in circumstances that has occurred since his question was presented, the Commit tee assumes that the Secretary is of the same opinion as indicated by the cancelation of an outstanding order by the Treasury to the Federal Reserve Bank of New York to sell $10,000,000 of bonds for the account of trusts administered by the Treasury and (2) that the Committee still feels that the continuing and fundamental problem involved is one of excess reserves and that inasmuch as the Secretary of the Treasury expressed the opinion that the primary responsibility for initiating action with respect to ex cess reserves rests upon the Federal Re serve System, the Federal Open Market Com mittee would suggest that representatives of the System consult with the Treasury with a view to determining if a long range attack can be made on the problem. Mr. Harrison's motion, after being duly seconded, was put by the chair and carried unanimously. Chairman Eccles inquired what the answer of the Committee the Committee would be willing would be if the Secretary asked whether of bonds in the event of a further sharp rise to cooperate in the sale the consensus of the members security prices. It was in Government

that the Committee could not commit itself in advance on this point but would be glad to consider the matter in the light of all of the surrounding circumstances when the problem was again presented. Mr. Goldenweiser raised the question whether the Board de sired to renew the suggestion to the Secretary that he meet Treasury expenditures by drawing on balances with depositary banks rather than on the balances held at the Federal Reserve banks. It was felt that this question was a part of the general problem of excess reserves of member banks and that it should be considered in that connection and not as a separate question. Mr. Harrison then moved that the Commit tee adopt the following resolutions: That the executive committee be directed until other wise directed by the Federal Open Market Committee, (1) to arrange for the replacement of maturing Treasury bills in the System open market account with other Treasury bills or Treasury notes, or, from time to time, to allow such bills to mature without replacement or pending subsequent replacement (a) when market conditions are such as to make it impossible to procure other bills or notes without pay ing a premium over a no-yield basis, or (b) when such notes are not obtainable without undue disturbance to the market; (2) to arrange for the replacement of maturing Treasury notes and bonds in the System open market account with other Government securities; and (3) to arrange for such shifts in maturities in the System open market ac count as may be necessary in the proper administration of the account; provided, (a) that the amount of securities in the account maturing within two years be maintained at $1,000,000,000; (b) that the amount of bonds not less than in the account having maturities in excess of five years be maintained at not less than $500,000,000 nor more than and (c) that, if Treasury bills in the ac $900,000,000; count are allowed to mature without replacement, the total the account be not decreased by amount of securities in 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, telephonic or telegraphic approval of a majority of the members 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 Government 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. During the ensuing discussion consideration was given par ticularly to the question whether the System open market account should be allowed to run off to the extent that it was not possible to obtain replacement bills or notes on a better than no-yield basis. At the conclusion of the discussion, Mr. Harrison's motion, having been duly seconded, was put by the chair and carried, Messrs. Harrison, Szymczak, McKee, Davis, Fleming, Leach, Martin and Hamilton voting "aye", and Messrs. Eccles, Ransom and Draper voting "no". Mr. Draper stated that the special committee appointed at the meeting of the Federal Open Market Committee on March 6, 1939, to examine the question whether there is any responsibility on the part of the Committee to audit, or otherwise to verify transactions in, the System open market account, had requested an opinion of the Com to the question, that the opinion had mittee's counsel with respect

been prepared, and that the matter would be considered by the commit tee with the view to making a report at the next meeting of the Federal Open Market Committee. Thereupon the meeting adjourned. Approved: Chairman.