March 20, 1940 FOMC Minutes

FOMC minutes

In connection with the discussion of the latter point Mr. Young said that it had been the practice of the Federal Reserve Bank of Minneapolis while he was Governor of the bank to buy and sell se curities for the account of member banks, a practice which was not followed by the Boston Bank, and that whenever a bank inquired with respect to the purchase or sale of securities the Boston Bank gave it a list of several dealers. Most of the Presidents of the other Fed eral Reserve banks stated that it was the present practice of their banks to buy and sell Government securities for the account of member banks. At the conclusion of the discussion Mr. Szymczak moved that the Chairman ap point a committee of three to make the study suggested by him. Mr. Szymczak's motion having been duly seconded was put by the Chair and carried unanimously. (Secretary's Note: Following the meeting Chairman Eccles appointed Mr. Ransom as Chairman and Messrs. Harrison and Davis as members of the committee, with Mr. Sinclair as alternate for Mr. Harrison.) At 1:10 p.m. the meeting recessed and reconvened at 2:30 p.m. with the same attendance as at the conclusion of the morning session except that Messrs. Young and Piser were not present. Mr. Harrison stated that, in the absence of a change in open to be no need for a change in the resolu market policy, there appeared last meeting of the Federal Open Market Committee tion adopted at the

directing the executive committee to execute transactions in the System Account. He added that in the more recent period there had been occasions when shifts might have been made between maturities in the System Account which might have been desirable but for which no definite statement of necessity could be made, that these shifts had not been made for the reason that it was felt that, without first discussing the matter with the members of the executive committee, such action should not be taken unless there was more apparent reason therefor, and that the bank would like to feel that the Committee would be liberal in allowing the bank to make shifts of this character when they could be made without disadvantage to the System Account. This point was discussed and Mr. Harrison stated that when another occasion for such a shift was presented the New York Bank would present the facts to the members of the executive committee. Mr. McKee stated that it appeared that shifts may be made in the account in larger amounts in the future than in the recent past for the purpose of exercising a steadying influence in the market, that the securities taken in such transactions might be at high prices, and that he would like to have consideration given to the use of the all sales involved in shift transactions for the purpose profits on of writing down the book value of the replacement securities pur chased. He said that he was not ready to make this suggestion with sales from the System Account but respect to profits from outright

that inasmuch as the premium on securities held in the Account now ex ceeded $42,000,000 he was inclined to the opinion that profits on shifts should be used to write down the cost of new securities acquired as a means of preventing the growth of the premium account by the amount of profits resulting from shifts. Chairman Eccles referred to the fact that had it been some time since a review was made of the basis for the allocation of se curities in the System Account and suggested that Messrs. Smead and Rouse be requested to study the allocation formula as well as the suggestion made by Mr. McKee with respect to the treatment of profits on shifts in the Account. During the consideration of this matter Messrs. Smead, Chief of the Divi sion of Bank Operations of the Board of Governors, and Piser joined the meeting and at the conclusion of the discussion Messrs. Smead and Rouse were requested to study the present basis for allocation of securities in the Account and the ac counting procedure followed in connection with the Account, to make a report at the next meeting of the Federal Open Market Committee which would include a statement of the various accounting procedures that might be adopted, and to be prepared to make recommendations as to the procedure that should be followed. Thereupon Mr. Harrison moved the adoption of the following resolution: the executive committee be directed until "That

"otherwise directed by the Federal Open Market Committee to arrange for such transactions for the System Open Mar ket Account (including purchases, sales, exchanges, re placement 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. Harrison's motion, having been duly seconded, was put by the chair and carried unanimously. Thereupon the meeting adjourned. Secretary. Approved: , Chairman.