December 12, 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 Friday, December 12, 1941, at 10:40 a.m. PRSENT: 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. Piser, Senior Economist in the Division of Research and Statistics of the Board of Governors Mr. Clayton, Assistant to Chairman Eccles Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Commit tee held on September 27, 1941, were ap proved. 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 meetings of the executive committee on September 27 and November 24, 1941, were approved, ratified, and confirmed. Reference was made to the informal action of the members of the Federal Open Market Committee on December 8, 1941, fol lowing the outbreak of war with Japan, in
increasing to $400,000,000 the limit on the authority granted to the executive com mittee to arrange for such transactions for the System account as in its judgment from time to time might be advisable in the light of existing conditions, and up on motion duly made and seconded, and by unanimous vote, this action on the part of the members of the Committee was ap proved, ratified, and confirmed. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System account during the period from September 27 to December 11, 1941, both dates inclusive, as reported by Mr. Sproul at the meeting of the executive committee which immediately preceded this meeting, were approved, ratified, and confirmed. Statements were then made by Messrs. Goldenweiser and Williams with respect to certain aspects of the business and monetary picture which they felt the Committee should have in mind and summaries of these statements have been placed in the files of the Federal Open Market Committee. Following these statements, there was a discussion of the kinds, degrees, and causes of inflation; possible conditions follow in the war; and the kinds of controls that might be applied during and after the war period. Mr. Davis made a brief statement of his reasons for not feeling that there would be a general food shortage but that it might be necessary to apply controls to agricultural Eccles referred to some of the matters that had prices, and Chairman in conferences which he had attended with other Government been discussed
officials in connection with the Government's tax program. There was general concurrence in the suggestion that, in order adequately to meet the problems that would arise during the war period, it was highly desirable that a general economic program be developed under which all elements of the situation could be integrated effectively. At 12:50 p.m. the meeting recessed and reconvened at 2:20 p.m. with the same attendance as at the morning session except that Mr. Thurston, Special Assistant to Chairman Eccles, was in attend ance. Reference was made to the discussion had by members of the Board of Governors yesterday with Mr. Bell, Under Secretary of the Treasury, on the question which had been raised at the Treasury whether something should be done about issues of Government securities which were out of line in the market in relation to the two new issues which were being purchased by the System at par, and to the understanding had at that time that Mr. Bell might attend the meeting of the Fed eral Open Market Committee today for the purpose of expressing any views that he might wish the Committee to consider. Chairman Eccles Mr. Bell on the telephone and the latter advised that sev talked to had come up which made it inadvisable for him to be away eral matters from his desk today. from Chairman Eccles that Mr. Sproul In response to a request open market policy of the he felt should be the future discuss what
System in relation to Treasury financing, the latter stated that the Treasury and the System are in a better position now, from the stand point of the rate structure and the national situation, to establish a pattern of rates which the Federal Reserve System would undertake to maintain within a range that would be fair to the Treasury as to the cost of funds and would provide a living return to banks and in vestment institutions. He pointed out that the attitude of the Open Market Committee had been that a 30-year bond at 2-1/2 per cent was perhaps a maturity which placed on the market the burden of taking risks which it should not be asked to take, and that the pattern of rates eventually adopted, while retaining the long-term 2-1/2 per cent rate, should have a shorter maturity, possibly 20-25 years. He felt that unless the market again moved upward substantially the System and the Treasury were in a position where such a pattern of rates could be established without serious dislocation in the market, that if such a pattern were established the new issue of 67-72s would sell above 98 which would not be serious from the standpoint of Treasury financing or the banks, and that, therefore, the present was an appropriate time for the Committee to go back to the Treasury with its suggestion re lating to the establishment of a pattern of rates. With such a pattern, he said, the Committee could watch with equanimity the further decline in excess reserves, being prepared through open market operations or bor rowing by member banks to maintain an easy position so that the banking system would be in a position at all times to take whatever Government
securities might be necessary at a reasonable rate. He added that such a situation would be possible without the existing volume of excess reserves if it were clearly understood that the System intended to maintain an easy position and if the respectability of borrowing from the Reserve Banks were restored. Mr. McKee raised the question whether, because of the psycho logical effect on the public, the Committee should permit quotations on Government securities to fall below par, and there ensued a dis cussion of whether the new 67-72s should be maintained at par, which would require that future long-term 2-1/2 per cent issues have a maturity of 20-25 years in order to give them the necessary premium in the market, or whether the pattern of rates should be based on a 15-20 year maturity which might result in the new 67-72 falling below connection it was agreed that if an adjustment downward par. In this be made very clear to the market that were made in the rate it should of a fundamental adjustment and one that would it was in the nature establish rates to be maintained during the war period. that regardless of the tech Draper expressed the opinion Mr. it would be a serious mistake for nical necessities of the situation its war financing program by allowing long-term the country to begin a discount and that, therefore, the Government bonds to sell at than par to the seller for be supported at not less 1967-72s should a period of time as this policy would be effective. as long
Mr. Peyton inquired whether the Committee was satisfied that a pattern of rates could be determined upon at this time which could be maintained throughout the emergency and there was general agreement that, if the Committee and the Treasury could agree upon a program and that program were carried out, a pattern of rates could be decided upon and maintained and that the basic question was at what point the rates and maturities would be fixed. The discussion indicated a difference of opinion on the part of the members of the Committee whether, if an adjustment in rate were made, it should be to a 2-1/2 per cent bond with a 20-25 year or a 15-20 year maturity. The suggestion was made that a downward adjust ment might necessitate the retirement from the market of the new 67-72s and 51-55s and it was felt by some of the members present that this could be accomplished either by refunding the issue into another security or by the purchase of the issue by the Federal Reserve Banks and the Treasury. In response to the question whether the Treasury would agree to a downward adjustment in rates, Chairman Eccles stated that if it should be decided to maintain the present rates the Committee should propose to the Treasury that in the future as few long-term issues as possible be put on the market, that short-term securities be designed for banks to the extent that it was necessary to depend on the banks the Government's needs, and that other nonmarket issues to finance
be put out to tap savings funds. Mr. Williams suggested that the problem should also be con sidered in the light of the effect of the pattern of rates on the excess reserve position and that the higher the level of rates the easier it would be to maintain a low level of excess reserves. Mr. Sproul raised the question as to what would be best for the market and suggested that the market reaction would be better if the 67-72s were allowed to go below par and future new long-term issues carried a correspondingly shorter maturity. At the conclusion of the discussion Chairman Eccles suggested that the Treasury be advised that it was felt by the Federal Open Market Committee that there were two alternatives that might be adopted, the first of which would contemplate that the 67-72s would be held at par which would make it necessary that future long-term issues have a maturity somewhere in the neighborhood of 20-25 years in order to provide the premium necessary to sell the securities in the market, in which case the Committee would feel that a program should be adopted which would permit of financing with more specialized issues such as short-term securities designed for banks and a tap issue de signed to reach savings funds. Under the second alternative, Chairman Eccles said, the 67-72s would be allowed to go below par to a point, probably not less than 98, where future issues of 2-1/2 per cent bonds a maturity of 15-20 years, the market would be depended would carry
on generally to take these issues, and less emphasis would be placed or. the specialized issues suggested in the first alternative. During the discussion of Chairman Eccles' suggestion there was unanimous agreement that, regardless of the basis finally adopted, before a pattern of rates could be agreed upon it would be necessary for the Treasury to decide upon a general program to be followed in connection with future Treasury financing. It was agreed unanimously that Chair man Eccles would advise Mr. Bell that the executive committee of the Federal Open Market Comrittee would like to have a meet ing with him sometime next week for the purpose of discussing problems relating to Treasury financing and the Government securi ties market which were considered by the Federal Open Market Committee at its meet ing today. Mr. Sproul suggested that, in view of the continued uncer tainty in the market and the possibility that the System might be called upon to buy further substantial amc.mts of Government securi ties, it would be desirable to increase to $500,000,000 the limit in the resolution of authority to the executive committee to direct the purchase or sale of securities in the System account, with the under standing that if it should appear that authority was needed beyond that amount another meeting of the Federal Open Market Committee would be called. upon motion duly made and Thereupon, seconded, and by unanimous vote, the fol lowing resolution was adopted:
That the executive committee be directed until otherwise directed by the Federal Open Market Committee to arrange for such trans actions for the System open market 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 advis able in the light of existing conditions; provided that the aggregate amount of securi ties held in the account at the close of this date shall not be increased or decreased by more than $500,000,000. In connection with the adoption of the above resolution, Chairman Eccles stated that the Treasury had advised that it stood ready to resell the securi ties which had been purchased this week for its account whenever the market was ready to take them, and the action of the Committee in adopting the resolu tion was taken with the unanimous under standing that, when the market recovered and conditions justified, the System would participate equally with the Treas ury in the resale of the bonds purchased during the current week and that the System's holdings of bills would also be disposed of. Mr. McKee referred to the meeting of Treasury and Federal Re serve representatives which had been called by the Secretary of the Treasury in Chicago on Tuesday, December 16, 1941, for the purpose of considering methods that might be adopted to increase the sale of de fense bonds and stated that arrangements were being made to have Mr. Bethea, the Board's liaison officer with the Treasury in connection with the defense bond campaign, attend that meeting. Mr. Sproul said as Chairman of the Defense Savings Bond Committee of the Presidents' that,
Conference, he had asked Mr. Young, President of the Federal Reserve Bank of Chicago, to attend the meeting as a representative of the Presidents' Conference and suggested that Mr. Peyton, because of the special experience which he had had with the campaign in his district, might also be present. Mr. Peyton said that he would be glad to at tend. Thereupon the meeting adjourned. Secretary Approved: Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, November 24, 1941·Minutes of the Executive Committee, December 12, 1941