September 27, 1941 FOMC Minutes

FOMC minutes

excess reserves he felt that the important point was what the effect would be on the Government security market, that if excess reserves were going to be reduced in any event by currency withdrawals and an increase in bank loans and investments the rate of interest could not be expected to decline much further, that we could not avoid the con clusion that further increases in reserve requirements would increase interest rates and create a need for open market action that would not otherwise exist, and that before any action in that direction was taken we should examine the motives behind it. Mr. Williams' statement was followed by a discussion of the possible effects of the Board's recent action to increase reserve re quirements, the further steps that might be taken in the field of credit control, the place that selective credit controls might play in the picture, and what the immediate future policy of the Federal Open Mar ket Committee might be. Mr. Sproul stated that the immediate problem before the Com mittee was what action was to be taken with respect to open market op erations, that in his opinion there would be further reactions in the market over the next few weeks to the increase in reserve requirements which might necessitate some action by the Open Market Committee, but that any transactions necessitated by that situation undoubtedly could be handled under existing authorities. Mr. Sproul also stated that he favored exploration with the Treasury of the possibility of determining upon a pattern of rates, that the present might be a desirable time to

undertake such a program, but that no commitment should be made by the System to support such a pattern of rates without regard to what might be the financing policies of the Treasury, and that any agreement with respect to rates should be coupled with the adoption by the Treas ury of a plan of financing designed to attract as many non-banking funds as possible. Mr. Ransom stated that any program agreed upon should not be in the nature of an unconditional commitment by the System to maintain in terest rates, but that it would not be possible to reach an agreement on the matter with the Treasury without some commitment on the part of the System that it would take action within its power to support the pattern of rates agreed upon. Mr. Sproul suggested that arrangements be made to have a repre sentative member of the Federal Open Market Committee participate in the further discussions with representatives of the Treasury, and there was unanimous agreement that that should be done. There followed a discussion of various questions involved in the matters which were to be the subject of further consideration with the Treasury and of Mr. Ransom's suggestion that a statement be agreed upon with respect to a pattern of rates at which the financing of the defense program would be undertaken and which the monetary authorities would undertake to support by such measures within their power as might be necessary. It was the consensus that this suggestion was a matter which should be taken up at the meeting of the Presidents' Conference

with the Board of Governors to be held tomorrow. Consideration was then given to the authority to be granted to the Executive Committee to direct the execution of transactions in the System account and Mr. Sproul stated that, in his opinion, a renew al of existing authorities would be adequate to meet any situation that could be foreseen at the present time and that in the event further ac tion became necessary another meeting of the Federal Open Market Com mittee should be called. Thereupon, upon motion duly made and seconded, the following resolution, which was in the same form as the reso lution adopted at the meeting of the Committee on June 10, 1941, was adopted by unanimous vote: 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 purchases, sales, exchanges, replacement of maturing securi ties, and letting maturities run off without re placement) 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 date shall not be increased or decreased by more than $200,000,000. Mr. Morrill referred to the fact that under date of August 15, 1941, a letter was received from Under Secretary of the Treasury Bell stating that there was being published in the monthly Treasury Bulletin a tabulation showing the ownership, by issues, of direct and guaranteed of the United States, that in this tabulation the securities obligations

held in the System account were included with securities held by in vestors other than banks and insurance companies and Government agencies and trust funds, and that authority was desired to include the System's holdings with the holdings of Government agencies and trust funds under the caption "Held by Government Agencies and Trust Funds and by Federal Reserve Banks". After conferring with Mr. Rouse, and with the approval of Chairman Eccles, Mr. Morrill sent a letter to Mr. Bell, on August 21, 1941, stating that there would be no objection to the publication of these figures in the manner indicated, with the understanding that separate figures showing the holdings of Government agencies and trust funds would not be released in some other connection in such manner as to make it possible by subtraction to determine the Federal Reserve Banks' holdings of individual outstanding issues, and that it would be preferable as long as the publication of the figures was continued in the form proposed, to continue the lag of approximately two months the date as of which the figures were published and the release between of the Treasury Bulletin. The action of Chairman Eccles in au thorizing the letter to Mr. Bell was ap proved and ratified by unanimous vote. Thereupon the meeting adjourned. Secretary. Chairman.