September 18, 1939 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 Monday, September 18, 1939, at 10:30 a.m. PRESENT: Mr. Eccles, Chairman Mr. Harrison, Vice Chairman Mr. Ransom Mr. Szymczak Mr. McKee Mr. Davis Mr. Draper Mr. Fleming Mr. Leach Mr. Martin Mr. Hamilton 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 Mr. Piser, Senior Economist in the Division of Research and Statistics of the Board of Governors Messrs. Young, Sinclair, Parker, Schaller, Peyton, Gilbert and Day, Presidents of the Federal Reserve Banks of Boston, Philadelphia, Atlanta, Chicago, Minne apolis, Dallas, and San Francisco, respectively Mr. Kimball, Secretary of the Presidents' Conference discussed the credit and Messrs. Goldenweiser and Williams have been placed in Copies of their statements business situation. files of the Federal Open Market Committee. the
At the end of Mr. Goldenweiser's statement Chairman Eccles joined the meeting. At the request of Mr. Goldenweiser, Mr. Piser discussed the trend of prices and yields of Government securities as shown by a num ber of charts which he displayed during his discussion. Mr. Sproul then presented a report which had been prepared at the Federal Reserve Bank of New York covering open market operations for the System account since the meeting of the Federal Open Market Committee on June 20-21, 1939, up to and including September 15, Mr. Sproul discussed the operations reflected by the report and stated that there were no transactions in the account on Saturday, September 16, 1939. Following the presentation of the report Mr. Sproul explained briefly the instructions under which the bank was operating today and said that, while for the last two or three days the outside bids on the market had been higher than the bids of the New York bank in most issues, quotations on many issues had dropped today to the bids of the Reserve bank and that the bank had bought $2,351,000 of bonds. The latest report, he said, was that the selling had dried up and that the market was in a static condition for the moment. of Mr. Sproul's report, Chairman Eccles sug After a discussion on the reaction in his dis each of the presidents report gested that securities market. The to developments in the Government trict in their opinion, while indicated that statements of the presidents
there had been some selling of Government securities on the part of smaller banks, there had been relatively little selling on the part of larger banks except for the account of customers and trust estates, that many banks and other institutions were ready to buy but were hes itant to go into the market just at this time, that the market was in a stronger position because of the decline in prices, that there was a feeling in some quarters that there is now beginning a period of higher interest rates, that, while banks had suffered a loss of ap preciation in their Government security holdings, such loss might be substantially counteracted by increases in the amounts of and returns from their loans and other investments, that the System should not at tempt to hold prices of securities at any particular level but should allow the market to seek its own level, that there was little likeli hood of panic selling at present prices, and that the System had done a good job in the way in which it had handled the market. It was stated, however, that there had been some criticism of the practice of requiring names of large sellers of securities and of the action taken by the Federal Reserve Bank of New York in getting dealers to close at 4:00 o'clock. In this connection Mr. Harrison and Mr. Sproul in detail the reasons for the adoption of the practice for discussed a short period of requiring the names of sellers in connection with offerings to the Federal Reserve bank, pointing out certain types of no longer made. They also explained the that such requirements are pointing out the desirability of situation as to the hour of closing,
having a uniform time for discontinuing operations in the over-the counter market. It appeared from the statements of the presidents that no Federal Reserve bank had made an advance to a bank on Government ob ligations under the policy recently announced by the Board, and it was the consensus that, while there had been some selling on the part of banks throughout the country as a whole, the total sales by all holders were not large in view of the disturbed conditions to which the market had been subject. After a further general discussion a recess was taken and the meeting was reconvened at 2:30 p.m. with the same attendance as at the morning session. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on June 20-21, 1939, were ap proved. 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 min utes of the meeting of the executive com mittee on June 20-21, 1939, were approved, ratified, and confirmed. It was stated that on September 8, 1939, it was decided by of the executive committee, with the approval of the mem the members bers of the Board of Governors who were not members of the executive ask the other members of the full Committee (Messrs. committee, to for their concurrence in granting au Fleming, Martin, and Hamilton) market account by a second to increase the System open thority
$500,000,000 as provided in the last resolution adopted at the meet ing of the Federal Open Market Committee on June 21, 1939, and that the granting of such authority was approved by Messrs. Fleming, Martin and Hamilton on September 9, 1939. Upon motion duly made and seconded, and by unanimous vote, the action of the members of the Federal Open Market Com mittee in granting the additional author ity referred to was approved, ratified, and confirmed. Upon motion duly made and seconded, and by unanimous vote, the transactions for the System open market account, includ ing the purchases of obligations guaranteed by the United States Government, during the period since that covered by similar action at the meeting of the Federal Open Market Committee on June 20, 1939, to and includ ing September 16, 1939, were approved, rati fied, and confirmed. There ensued a discussion of the questions of policy with re spect to the authority to be granted to the executive committee to arrange for transactions in the System open market account. Consid eration was given in this connection to a revision of the resolutions adopted by the Federal Open Market Committee at its last meeting and to the question whether the authority granted to the committee to in crease or decrease the System account for the purpose of exercising an influence toward the maintenance of orderly market conditions the executive committee to in should be so worded as to authorize irrespective of the bills which crease the account by a stated amount authority should be for run off or whether the might be allowed to
the purchase or sale of a stated amount of securities without regard to the amounts of Treasury bills that might be allowed to mature with out replacement. Chairman Eccles stated that the principal question that had been discussed by the members of the executive committee during the recent period was the rapidity with which the market should be al lowed to decline, the amounts of securities that should be purchased for the System account during declines, and the timing of such purchases. He stated his position that in view of the existing large amounts of excess reserves he would rather have remained out of the market en tirely than to have been in and permitted the market to decline too rapidly, that he felt that the System should increase its resistance as the market declined, that, since a substantial decline had taken place and Government securities were getting close to their issuing prices the Committee should take either the position that it had dis charged its responsibility and that the market should stand on its own feet or the position that, if it was going to be in the market at all, it was more important now than when the market was very much higher that the market show no substantial declines, that he did not think it would take much buying to give the market stability, that in view it would be a mistake to let the market go through of that situation resistance on the part of the System, and par without considerable that he would favor a policy of resistance. stated that the Secretary of the Treasury on Mr. Harrison
September 12, 1939, advised the members of the executive committee that he thought that if there were any criticism of the System's op erations it was that it had given the market too vigorous support and that it was the feeling in the Treasury that the System should let the market go down towards a natural level more quickly and with less ex penditure of funds for the reasons (1) that the Treasury might be in terested in going into the market to do some financing but it did not want to do so until the market was a more natural one and (2) that private financing had been delayed because of the desire of issuers to wait until the market had found what they deemed to be a more nat ural level. Mr. Harrison felt that in these circumstances it might be preferable to select a course between the two extremes suggested by Chairman Eccles, that is, to let the System get out of the market entirely but to be prepared, as in the past, to attempt to avoid dis order in the market by placing bids under particular issues, whenever it appeared that there was heavy pressure on those issues without any outside bids. Under this procedure, he said, bids would be placed up to, say, $250,000 on any particular issue and some bonds would be having than drive the market down. If taken if necessary to avoid had not found its own level, he conditions showed that the market down with purchases only to maintain said, it should be followed orderly conditions. for the future policy to be adopted question of the The questions whether the and particularly the was discussed at length
Committee should give vigorous support to the market at this point, whether, if the market had not found a level where it would be inde pendent of Federal Reserve buying, the Committee should permit it to decline slowly, taking a substantial amount of bonds on the decline, or rapidly, taking only a few bonds, or whether, if the market should break through the present levels with substantial selling, a strong stand should be taken by the System at some point in order to dry up offerings. Consideration was also given to the desire of the Treasury to have a reasonable period of stability in the market and of freedom from official support before announcing any new financing. Mr. Ransom referred to the close attention which the execu tive committee had given to the market during the preceding three weeks and suggested that, if possible while the whole Committee was in Washington, some more definite formula be worked out than had ex in order that the executive committee might not be isted heretofore under the necessity of giving the matter the constant attention that had been required during the recent period. Mr. Ransom's suggestion at some length but it was stated by a majority of the was discussed because of the unusual conditions under members that they felt that account was being operated anything more than a very which the System was not possible at this time. general statement of objective it should not be the expressed, however, that The opinion was the market at any pre Committee to "peg" or maintain purpose of the determined level.
In response to a request from Chairman Eccles that the presi dents who were not on the executive committee of the Federal Open Mar ket Committee express their views with respect to the problem before the Committee, a number of them discussed the matter. Mr. Young said that he would let the market seek its own level and if that appeared to be two or three points lower he would let it go that far before putting in orders, that if it did not hold its own at that point he would let it continue as far as another three points be fore he would give it strong support, and that he would not be concerned with the speed with which it was allowed to drop. Mr. Day said he would not like to see a precipitous drop and if the market went down he would want to ease it down in order not to create the impression that there was no support and to prevent it from breaking away. Mr. Gilbert did not favor complete withdrawal from the market. He did not see any reason for varying the program that had been followed. He said that the extent to which the market should be supported would developments and that he thought the procedure that had been depend on followed up to date had worked well. stated that he would not hesitate to spend enough Mr. Martin too fast and that in his opinion the market from going down to keep of stabilizing the market and bring such action would have the effect ing in buyers. in the points any great variance he did not see Mr. Peyton said
of view that had been expressed, that no one was suggesting withdrawal from the market altogether, that it was a matter of practical operation from day to day, that there was a point at which the market should be bolstered, and that he doubted that that point had been reached. He also said that psychology plays an important part in the market and that the prices of securities are determined by many outside factors including the influence of the views of financial writers and bankers and others that give free advice. Mr. Sinclair was inclined to stay away from the market a little and see if the buyers would come in. He would be prepared in case of any sudden fluctuations to cushion the market a little but not as ag gressively as had been done. He said that in view of the war situation he would not be in a hurry to do a lot of buying for the reason that he felt that buying was going to do more to frighten buyers away than to encourage them to come in, that he believed the market was going to a lower level, and that if we did not find buyers then he would be prepared to do some buying but that in the meantime he would mark time and see what happened. Mr. Fleming felt that the market would decline if the Neutrality Act were repealed and that a statement of general principles could be drawn. When there are substantial offerings and no purchasers the Sys tem should be prepared to buy. The Committee should not deem it its level of yields or prices. The function to maintain any particular fluctuations in the course should endeavor to prevent violent Committee
of a trading day, up or down. As to what those fluctuations should be he was not prepared to say. He would leave the job to the executive committee Mr. Hamilton stated that the general impression prevailed throughout the country that the System and the Treasury would not per mit Government securities to go through par and that was one reason the market had leveled off as it began to get close to par. He also said that he would watch the market closely and if it went off a point or more he would get in the market and if it went below par he would get in pretty strongly because he thought that is what the public ex pected. He felt, however, that it would not be necessary to go in very strongly to maintain prices around par. of the opinion that it was too soon after Sep Mr. Parker was program as we had not yet passed tember 1 to formulate a long range at least the executive com the crisis and that for a period through had pursued up to the same policy that it should pursue the mittee there were any further market so that if time and cushion the present about a wave of selling. a steady one and not bring drop it would be of bonds being of any substantial amount that if there were He felt condition might be found that market could for which no adequate fered buying a con stopped without could not be selling that a wave of start be no other prac there seemed to securities, that volume of siderable down and buying the market that of easing present than course at tical was the Committee that an impression and that scale, on a substantial
not going to support the market might produce a feeling of uncertainty that would deter buying. Chairman Eccles stated that as he got the general view of the presidents it was one of approval of the action of the executive com mittee up to date, broadly speaking, and that the fact that the System had purchased about $450,000,000 of securities up to this time in cushioning the market was not considered by the majority of those present to have been excessive. Consideration was given to the resolution containing author ity to the executive committee to effect transactions in the System open market account and a draft of a revised resolution which had been prepared during the discussion was read, as follows: That the executive committee be directed until other wise directed by the Federal Open Market Committee to ar range for such transactions for the System open market account (including purchases, sales, exchanges, replace ment of maturing securities, and letting maturities run off without replacement) as in its judgment from time to time may be necessary for the purpose of exercising an influence toward maintaining orderly market conditions; provided that the aggregate amount of securities held in the account at the close of this date shall not be in creased nor decreased by more than $500,000,000. Mr. Leach raised the question whether the above resolution would be interpreted as a mandate to the executive committee to spend $500,000,000 or anything like that amount. It was unanimously agreed not be so interpreted and that the amount that the resolution should it was spent would depend on cir spent and the rapidity with which cumstances as they developed.
At the conclusion of the discussion, upon motion duly made and seconded, the resolution set forth above was adopted by unanimous vote. Reference was then made to the report of examination of the System open market account as of the close of business on June 17, 1939, which was submitted by Federal Reserve Examiner Koppang under date of September 7, 1939, in accordance with the request made by the Federal Open Market Committee at its last meeting. A copy of the report had been sent to each member of the Federal Open Market Committee by Mr. Morrill on September 11, 1939. Reference was made to the last paragraph of the report which called attention to the fact that, while the designation of Mr. Sproul as Manager of the Sys tem Open Market Account had been approved by the Federal Open Market Committee, approval did not appear to have been obtained for the designation of Mr. Rounds as alternate for Mr, Sproul. At the conclusion of a discussion dur ing which the opinion was expressed that there was no necessity for the approval of the appointment of an alternate for Mr. Sproul, it was voted unanimously to accept file the report without further action. and had been raised as to Eccles stated that a question Chairman of the decision for making an announcement procedure and the time the Reserve banks that the recently by the Board and the Federal reached Reserve banks advances by Federal with respect to announced policy Government obligations security of banks on the member and nonmember to
includes Federal Home Loan Banks, Federal Intermediate Credit Banks, Federal Land Banks and Banks for Cooperatives and suggested that this matter be discussed at this time. In this connection he stated that an inquiry had been received from the Financial Adviser of the Federal Home Loan Bank Board as to the application of the policy to Federal Home Loan Banks and that the Board was under necessity of making some reply to that communication. During the discussion some of the pres idents stated that they had already advised some of the banks in question in their districts that the policy applied to them. Chairman Eccles reviewed again the reasons for the application of the policy to the Governmental banking institutions. It was suggested that the Board reply to the letter received from the Federal Home Loan Bank Board by stating in effect that the term nonmember bank as used in the Board's announcement includes Federal Home Loan Banks, with the understanding that, if inquiries are received as to other institutions of the classes mentioned, replies would be made in a similar manner, and that if inquiry be made by them at the Federal Reserve banks they the policy applied to them. would be advised that At the conclusion of the discussion the Board of Governors the members of matter should be handled agreed that the in accordance with the foregoing sugges tions. of the it was the intention reported that Chairman Eccles bills of Treasury week's maturities to let this committee executive off without replacement. run
Thereupon the meeting adjourned. Approved: Chairman.
Also: Record of Policy Actions