May 8, 1942 FOMC Minutes

FOMC minutes

meet objections made at the Treasury to the program outlined in the memorandum submitted to the Treasury under date of January 28, 1942, was read. In explanation of the direction to the Federal Reserve Banks to purchase bills, Chairman Eccles said that the Treasury's original ap proach to the May financing had been one of increasing excess reserves of banks, preferably through a reduction in reserve requirements, and the use of market issues, relying on the pressure excess of funds in the market to effect distribution of the issues. When this procedure was opposed by the Federal Reserve representatives, the suggestion was made by the Treasury representatives that the Federal Reserve Banks post a buying rate of 3/8 per cent for bills, and, when this was agreed to, the Treasury concurred in the program suggested by the members of the executive committee in the memorandum of April 29 above referred to which was designed to attract as many funds as possible from sources Eccles concluded with the statement that, other than banks. Chairman organization were set up in the various Federal Reserve if an effective Government securities, a great deal districts for the distribution of establishing a program for war of progress would have been made toward financing. Following a discussion of various on during Chairman Eccles' points commented upon motion duly made and seconded, statement, the agreement reached by unanimous vote, and the executive committee by the members of the Treasury as a part of the temporary with discussed and agreed program of war financing Treasury on March meeting at the upon at the ratified, and con 1942, was approved, 20, firmed.

The members of the Committee were in complete agreement that, in accordance with the understanding reached with representatives of the Treasury on April 30, 1942, the direc tion to the Federal Reserve Banks to purchase bills at a rate of 3/8 per cent per annum should be continued, and, upon motion duly made and seconded, it was voted unanimously to approve, ratify, confirm, and continue in effect, until otherwise directed, the direction issued on April 30 to the 12 Federal Reserve Banks to purchase for the System open market account all Treasury bills that might be of fered to such Banks on a discount basis at the rate of 3/8 per cent per annum. The above action was followed by a discussion of the future open market policy of the Committee and the instructions to be issued to the executive committee to implement that policy. Mr. Sproul suggested that it would be desirable to amend the resolution adopted at the last meet ing of the Committee so as to recognize the present authority of the Fed eral Reserve Banks to purchase and sell Government securities directly the Treasury, and, as a means of relating the resolution more from and to conditions, to provide for such transactions as might closely to existing of maintaining about the present general be necessary for the purpose securities or for the purpose of prices and yields of Government level in the market. In connection an adequate supply of funds of maintaining the Treasury regulations Sproul stated that the first point, Mr. with directly to the the Treasury of bills the sale by which had prohibited permit such sales. been revised to Reserve Banks had Federal Federal Re some of the time to time that from Rouse stated Mr. bills for cash purchase Treasury to find it necessary Banks might serve

delivery, and said that there was a question of accounting procedure involved, which might make it necessary for the Banks to carry such purchases temporarily in their investment accounts, with the understand ing that they would be transferred to the System account on the next business day. This point was discussed, and it was agreed unanimously that the procedure should be left to the Manager of the System account and the staff of the Board of Governors to work out. A draft of resolution incorporating the suggestions made by Mr. Sproul was then read, and the opinion was concurred in that it should be further revised so as to make it clear that the resolution imposed no limitation on the amount of bills purchased pursuant to the direction issued to the 12 Federal Reserve Banks, but that it would apply to other bills purchased for the System account by the New York Bank as agent to accomplish the purposes of the resolution. Mr. Ransom inquired what the responsibility of the executive committee was for the bill purchases made by the Federal Reserve Banks in accordance with the direction of the full Committee, and the response was made that the authority for such purchases was given to the Federal Reserve Banks directly by the full Committee and that for that reason by the full Committee to the executive committee should the direction relate to open market transactions other than the purchase of bills pur suant to that authority.

Thereupon, upon motion duly made and seconded, the following resolution was adopted by unanimous vote: That the executive committee be directed until other wise directed by the Federal Open Market Committee to arrange for such transactions for the System open market account, either in the open market or directly with the Treasury (including purchases, sales, exchanges, replace ment of maturing securities, and letting maturities run off without replacement), as may be necessary for the purpose of maintaining about the present general level of prices and yields of Government securities or for the purpose of maintaining an adequate supply of funds in the market; provided that the aggregate amount of securities held in the account at the close of this date (other than Treasury bills purchased pursuant to the direction of the Federal Open Market Committee issued under date of April 30, 1942) shall not be increased or decreased by more than $500,000,000. Thereupon, the meeting adjourned, with the understanding that the Presidents and the Board of Governors would meet immediately to dis to further the distribution of Gov cuss the problem of an organization ernment securities, other than war savings bonds. Secretary. Approved: Chairman.