September 27, 1941 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 Saturday, September 27, 1941, at 10:05 a.m. PRESENT: Mr. Eccles, Chairman Mr. Sproul, Vice Chairman Mr. Szymczak Mr. McKee Mr. Ransom Mr. Draper Mr. Fleming Mr. Leach Mr. Davis Mr. Peyton Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Wyatt, General Counsel Mr. Goldenweiser, Economist Mr. Williams, Associate Economist Mr. Dreibelbis, Assistant General Counsel Mr. Rouse, Manager of the System Open Market Account Mr. Piser, Senior Economist in the Divi sion of Research and Statistics of the Board of Governors Messrs. Roy A. Young, Alfred H. Williams, C. S. Young, Leedy, and Gilbert, alternate members of the Federal Open Market Committee Messrs. McLarin and Day, Presidents of the Federal Reserve Banks of Atlanta and San Francisco, respectively Mr. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chairman Sienkiewicz, Secretary of the Presi Mr. dents' Conference Mr. Leedy had been appointed and had Mr. Morrill stated that assumed his duties as President of the Federal Reserve Bank of Kansas
City, that in February of this year the Federal Reserve Banks of Min neapolis, Kansas City, and San Francisco elected the President of the Kansas City Bank, when appointed, as an alternate to Mr. Peyton as a member of the Federal Open Market Committee, that a record had been received of the election of Alfred H. Williams to serve as an alternate to Mr. Fleming as a member of the Federal Open Market Committee, and that it was the opinion of counsel that Messrs. Williams and Leedy were qualified to take the oath of office and assume their duties as alter nate members of the Committee. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Commit tee held on June 10, 1941, were approved. 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 minutes of the meeting of the executive committee on June 10, 1941, were approved, ratified and confirmed. Those present were then furnished with copies of a report pre pared at the Federal Reserve Bank of New York relating to the System open market account and the Government security market. Mr. Rouse re viewed the important points in the report and stated that there were no transactions in the account since the last meeting of the Committee so that the usual action with respect to the ratification of transac tions in the account would not be necessary. He also stated that, in connection with the October first reallocation of securities in the
System account, some study had been given to the earnings and expenses of the Federal Reserve Banks for the current year and that from the estimates that had been made it appeared that total expenses would ex ceed earnings by approximately $500,000 which would be offset by profits of $504,000 realized from sales from the System account during the year. Mr. Szymczak read a memorandum dated September 26, 1941, from Mr. Smead with respect to the earnings and expenses of the Federal Re serve Banks during 1941, which was in substantial agreement with the comments made by Mr. Rouse, and Mr. Szymczak stated that the memorandum would be checked and copies thereof furnished to the Presidents before they left Washington. A copy of the memorandum has been placed in the files of the Federal Open Market Committee. It was understood that the question of the earnings and expenses of the Federal Reserve Banks would receive consideration by the Presidents of the Federal Reserve Banks in their separate conference which would be held following this meeting. Upon motion duly made and seconded, the report submitted by Mr. Rouse was accepted and ordered filed. Eccles stated that, before the reports of Messrs. Chairman Goldenweiser and John H. Williams and the consideration of open market suggest that Mr. Ransom make a statement with policy, he would like to respect to the discussions at the Treasury relating to action on reserve
requirements and the subject of Treasury financing. Mr. Ransom reviewed the discussions which he and Mr. Golden weiser had had with representatives of the Treasury which culminated in action by the Board on September 23, 1941, to increase reserve re quirements of member banks to the maximum of the Board's authority and the issuance of a joint statement by Chairman Eccles and the Secretary of the Treasury with respect to the granting of further authority over bank reserves to the Board of Governors. Mr. Ransom concluded his state ment with a suggestion that it would be helpful, in further discussions which were to be had with the Treasury, if the Presidents would adopt some statement with respect to the desirability of having a pattern of rates for the financing of the defense program and which the monetary authorities would support by such measures as might be necessary, in cluding open market operations by the Federal Reserve System. A copy of the substance of Mr. Ransom's statement has been placed in the files of the Federal Open Market Committee. In a discussion of what might be regarded as reasonable rates at which Treasury financing could be done, Mr. Ransom referred to the steady decline in rates that had occurred during recent years and stated that he had expressed the opinion in the discussions with the Treasury representatives that it was extremely important that a policy be adopted which would put a floor under interest rates in order to prevent their decline to a point which would bring disastrous results. He also said
that he felt the question of the broader application of selective credit controls should be faced and disposed of. Mr. Sproul stated that it had been contemplated that before final action was taken by the Board to increase reserve requirements a meeting of the Federal Open Market Committee and the Presidents of Federal Reserve Banks would be held for the purpose of discussing the matter with them, but that circumstances arose, including the appear ance of the Secretary of the Treasury at hearings on the price control bill, which made it necessary for the Board to take action on September Messrs. Goldenweiser and Williams were then called upon for statements with respect to the present business and credit situation. Mr. Goldenweiser, after stating that copies of the review of the month which would appear in the Federal Reserve Bulletin for Oc tober and would contain a review of current developments in industry would be furnished to those present, referred briefly and agriculture said clearly indicated the existence of to the developments which he situation at the present time and the need for further an inflationary action to fight inflation. the remainder of his remarks to some of the prob He addressed According to esti with Treasury financing. lems arising in connection of this fiscal year and the fiscal available, during the rest mates now have to borrow approximately $30,000,000,000 year 1943, the Treasury would in fiscal 1943) in fiscal 1942 and $16,500,000,000 ($13,500,000,000
and, if nothing more were done than was being done at present to sell Government securities to others than banks, the banks would probably take not less than $15,000,000,000 of this total. The expansion in bank deposits that would take place, he said, raised acutely the ques tion as to the desirability of further powers over reserve require ments and as to the kind of financing that should be done by the Treas ury. He stated that the heart of the problem was the rates of interest at which the Treasury would borrow, that interest rates had declined to a record low level, but that, in view of the growing demand for funds by the Government and industry and the decrease in the supply of funds due to growth of currency in excess of gold imports, there would probably be no further decline, but a firming tendency. On the other hand, there was no reason to expect a general or substantial rise in rates. He suggested that the alternative courses of action before the System were: (1) To do nothing and let the market rise or fall as it saw fit, which he thought was not a policy that should be seri ously considered. (2) To continue the policy that had been pursued during the last three or four years of attempting to maintain orderly market conditions, which implied an underlying conception of a natural market, a conception which he said did not accord with conditions as they exist today. In his opinion the orderly market policy was about as much out of line with reality now as discount rate policy had become some years ago.
(3) In the event additional powers were obtained, to proceed to tighten credit controls to a point where excess reserves would almost entirely disappear, a substantial number of banks would be short of funds, and interest rates would be allowed to rise. Such a policy would have to be on the theory that higher interest rates were cheap insurance against inflation. In present circumstances this would not be a feasible pol icy for the reason that it would increase the cost of Government bor rowing without being effective in preventing price rises, and it could not be carried out with the approval of other agencies of Government. It would also raise serious problems about the decline in the capital value of outstanding securities. (4) To adopt a policy under which a pattern of interest rates would be agreed upon from time to time and the System would be pledged to support that pattern for a definite period. The pattern of rates would not need to provide for the same range of fluctuation on all types of rates. It might limit fluctuations on long-term rates to a narrow range, and permit intermediate and short term rates to respond more freely to current market influences. This appeared to him to be the wisest and most practicable policy at this time. that the problem presented by the suggestion of He commented was possible effectively to combat a pattern of rates was whether it rates rise more substantially than would be inflation without having pattern, that there were differences of opinion contemplated by the
on that point, but that he felt that rates probably would not go up materially in view of the existence of a large volume of funds and the growth of savings out of a rising income. The support that the System might need to give to the market would not be, in his opinion, on a scale that would offset such restrictive actions as the System might want to take. Mr. Goldenweiser then referred briefly to the preferential rates established during the World War on the rediscount by Federal Reserve Banks of paper secured by Government securities, and expressed the opinion that in supporting a pattern of rates determined by the System and the Treasury in the present situation the System would be following the modern equivalent of that, and that the System would be well advised if it took that course. that in any case it was the pri He made the further statement of a central banking institution in time of war to con mary function efforts toward meeting the needs of the Government, tribute its major of the System in the field and that in his opinion the responsibility as credit control could be could be met, in so far of credit control without interfering with its ability effective in combating inflation, the System and the Treas rates agreed upon by to stand by a pattern of ury. there were statement of Mr. Goldenweiser's At the conclusion for the October Federal review of the month copies of the distributed 1941, from Miss September 26, memoranda dated Bulletin and Reserve
Gunhild Anderson of the Division of Research and Statistics of the Board of Governors on the estimated Treasury cash requirements for the fiscal years 1942 and 1943, and by Mr. Piser on the estimated distribution of the Government debt. The meeting recessed and reconvened at 2:15 p.m. with the same attendance as at the morning session, and in addition, Mr. Thurston. Mr. Williams expressed the opinion that the rise in industrial production would be less rapid than during the past year, and that there was some danger of unemployment resulting from a broad applica tion of priorities, which indicated that the problem of fighting in flation was not one of taking all forms of anti-inflationary action that might be available, but rather a question of the determination of the character and the timing of the action to be taken. He pointed out that the System could attack the problem of inflation in only a limited way, that there were other fronts over which the System had including agricultural prices and wages and on which little no control, and that it was not possible to adopt an ef headway was being made, program which did not include effective policies with respect fective to these matters. felt that the Administration's tax program was progressing He satisfactorily but that sufficient efforts had not been made to tap non-bank funds for the purchase of Government securities, that a great
deal more could be done in that field, that that was a point on which the System in its further negotiations with the Treasury could press for consideration as having a bearing on the System's responsibilities, an, that before the System could adopt an intelligent program with re spect to what, if any, further credit restriction was needed, it would be necessary to ascertain to what extent Treasury needs could be met from non-banking funds and to agree on a financing program which would be attractive to non-banking investors. In connection with references that had been made to what might as an artificial market, Mr. Williams expressed the opinion be regarded the Federal Reserve System to create a that it would be a mistake for which would make it appear in the Government security market situation support as that eventually would that the market had to have continuous something short of public credit. He stated that cast doubt upon the felt that at this stage the Sys be considered, and that he that should would contemplate (1) full itself to a policy which tem should devote program which would tap Treasury in developing a cooperation with the (2) exploration with possible extent, funds to the fullest non-banking interest rates, and (3) the possibility of stabilizing the Treasury of the basis for determining be made in changes that should a study of the to make such excellent time was an as the present reserve requirements, of the money to the stability as would contribute fundamental changes market. in further reduction be a there should question whether On the
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.
Also: Record of Policy Actions·Minutes of the Executive Committee, September 27, 1941