December 18, 1940 FOMC Minutes

FOMC minutes

that defense financing will take, the extent to which defense expendi tures will be met by taxation, and the problems growing out of the large and increasing volume of excess reserves. Consideration was given to whether the changes in the situation since the last meeting of the Committee were such as to require any change from the existing policy of making sales of securities from the account when such sales could be made without adversely affecting the market, whether the policy adopted should contemplate transactions only for the purpose of exercising an influence toward maintaining orderly market condi tions, or whether the authority of the executive committee should be limited to purchases of securities and to making shifts of securities in the account. The question was raised as to whether it would be wise to per mit the account to be reduced to or below an amount, the income from which would be sufficient to meet the expense and dividend requirements of the System. It was stated that the amount that would be necessary for the purpose would depend upon the maturities of securities held and that, if it should become necessary materially to shorten the ma turities in the account, earnings on an amount of securities equal to the present total holdings might be inadequate to meet the expenses of the System. Several of the members of the Committee were of the opinion that under present conditions there was no occasion for further sales

from the account at this time for the purpose of reducing the account but that the authority to make purchases and sales for the purpose of exercising an influence toward maintaining orderly market conditions should be continued, with the understanding that the whole question of policy would be reviewed sometime after the first of the year. Mr. Harrison inquired whether any consideration was being given by the Board of Governors to the exercise of its remaining authority to increase reserve requirements. Mr. Eccles replied that the Board had not recently discussed that question. There was also discussion of the conditions under which further sales from the account might be called for and of the possible effects on the market of the statement proposed to be submitted to Congress by the Board, the Presidents, and the Federal Advisory Council. As a result of the various discussions the suggestion was made that there were many uncertainties in the situation at the present time which could not be appraised satisfactorily and that therefore the ex ecutive committee should be in position to act in accordance with its best judgment in the light of developments from time to time, especial ly when it might be deemed desirable to exercise an influence toward preventing disorderly conditions in the market during the interval be fore another meeting of the full Committee, but that, in view of the large reduction in the portfolio that had been accomplished during the past several months, there was no need for making further sales for the sole purpose of reducing the account, and that, therefore, the

resolution adopted at the last meeting might be renewed, with a limita upon the extent to which the holdings in the Sys tion of 200,000,000 tem account might be increased or decreased. There was general concurrence in this suggestion and, after a reading by Mr. Morrill of the resolution adopted at the meeting on September 27, Mr. Harrison offered a motion, which was duly seconded, that the following resolution be adopted: That the executive committee be directed un til otherwise directed by the Federal Open Market Committee to arrange for such transactions for the System open market account (including pur chases, 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 condi tions; provided that the aggregate amount of se curities held in the account at the close of this shall not be increased or decreased by more date than $200,000,000. Mr. Harrison's motion was put by the chair and carried, Mr. Draper voting "no". Mr. Draper stated that he voted "no" on the above resolution for the following reasons which were broader in scope than those outlined by him when voting in the negative on a similar resolution adopted at the meeting of the Federal Open Market Committee on September 27, 1940: believe that in the present circumstances "I do not are necessary in order to maintain sales from the portfolio I have seen no recent evidence orderly market conditions. disorderly. In my judgment, also, of the market being sales from the portfolio for the purpose of maintaining be resorted to much less fre an orderly market should purchases at a time when quently and less vigorously than is declining rapidly. Rapid declines are apt the market to panic, which I to result in a selling wave amounting

"believe should be prevented when possible. On the other hand, there is little danger of a panic when the market advances, and it makes little difference whether a rise is rapid or slow, so long as the level it reaches is ap propriate to existing conditions and is not the result of purely speculative purchases. "A still more important reason for my belief that there is no occasion to sell is that our portfolio has been reduced very substantially and that we shall need all the ammunition we can muster when reserve require ments will have been increased and the time comes to adopt a policy of credit restriction in order to pre vent inflation." Thereupon the meeting adjourned. Approved: Chairman.