September 27, 1940 FOMC Minutes

FOMC minutes

Be it resolved that the Federal Open Market Commit tee instruct the executive committee to direct the New York Bank to make sales from the System's portfolio when ever such sales can be made without adversely affecting the market, provided that: (1) the total of such sales does not exceed $400,000,000, and (2) that sales of United States bonds maturing in more than ten years do not ex ceed $100,000,000. Following a brief discussion Vice Chairman Harrison suggested that the language of the present resolution might be changed by strik ing out the words "necessary for the purpose of exercising an influence toward maintaining orderly market conditions" and substituting therefor the words "advisable in the light of existing conditions", Thereupon Mr. Ransom moved that the following resolution be adopted: "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 Ac count (including purchases, sales, exchanges, replacement of maturing securities, and letting maturities run off without replacement) as in its judgment from time to time may be advisable in the light of existing conditions; pro vided that the aggregate amount of securities held in the Account at the close of this date shall not be increased nor decreased by more than 500,000,000." Mr. Ransom's motion was seconded by Mr. Sinclair. point Mr. McKee and Mr. Davis raised the question At this whether the Manager of the System Open Market Account should not be selling some of the notes maturing in March 1941, which otherwise might have to be exchanged for a new issue of Treasury obligations, so as to relieve the portfolio to that extent of the necessity for such an exchange.

Mr. Draper said that in the light of the discussion he would vote against the proposed new instructions because the change might be misconstrued by the public as a change in policy with deflationary implications. Mr. Parker said that occasionally there is heard some criti cism of the System for keeping its portfolio up to the present level when the banks want securities and they would like to see some reduc tion in the portfolio. Mr. Ransom said that he did not have in mind the desire of banks for additional securities as the reason for the line of action that he was suggesting. He then asked whether the New York Bank would continue in the market under the proposed change in instructions in exactly the same manner as it had been operating in the market under existing in structions. Mr. Harrison said he did not think there would be any difference in the attitude of the New York Bank under its instructions in view of the interpretation unanimously agreed to at the last meet ing of the full Committee, his only point in the matter being that he felt that it was wiser to have the language of the directions of the full Committee to the executive committee and of the executive commit tee to the New York Bank changed to conform to the interpretation placed upon those directions rather than rely solely upon the inter pretation which would appear in the minutes of the Committee but not in the public record.

Mr. McKee said that he thought that the portfolio would have been reduced to a greater extent under the existing instructions to the executive committee and from the executive committee to the New York Bank if it had not been for the fact that during the intervening period there had been substantial sales of Government securities by the Treasury. During the foregoing discussion Mr. Young withdrew from the meeting. Mr. Ransom's motion, having been duly seconded, was put by the chair and carried, Messrs. Harrison, Szymczak, McKee, Ransom, Davis, Sinclair, Parker, Schaller and Day voting "aye", and Mr. Draper voting "no". There was then presented a report by Messrs. Smead and Rouse on the basis for the allocation of securities in the System Open Market Account and the various accounting procedures that might be adopted for the account. Copies of the report were distributed to all members of the Board of Governors and to all Presidents of Federal Reserve Banks, and, upon motion duly made and seconded, it was agreed that it should be placed upon the docket for considera tion at the next meeting of the Federal Open Market Committee. Mr. Ransom reported that Mr. Eccles had requested him to say that Mr. Eccles was very much concerned about the provisions of the Revenue Act of 1940 which would earmark certain taxes for the payment of certain new Government obligations under the defense program, and

that he would like to have the members of the executive committee con sider that problem when they are called to consult with the Treasury Department, for the purpose of determining what if anything they will want to say about it. In that connection Mr. Harrison called atten tion to his letter of September 4, 1940, to the Secretary of the Treas ury on this subject. Thereupon the meeting adjourned. Secretary. Approved: Vice Chairman.