August 3, 1942 FOMC Minutes

FOMC minutes

large amounts of Government securities, and that the important thing from the standpoint of inflation was the large volume of funds that was being created rather than the level of discount rates. Chairman Eccles suggested that the repurchase arrangement pro posed in the resolutions set forth above would be as effective as member bank borrowing in correcting the feeling that it was necessary to have a minimum amount of excess reserves. Mr. Williams responded that if that were the case he would be willing to withdraw his suggestion, but that he questioned whether the repurchase arrangement would go far enough. Mr. Goldenweiser expressed the opinion that it would be dangerous to try to teach member banks that borrowing in the form of rediscounts was a very desirable thing, that the most important instrument of monetary control was the banks' reluctance to borrow, and that the discount rate had always been below the rate charged by banks to their customers and be made otherwise. While he agreed that it would could not practically be desirable to have no excess reserves and to have member banks borrow the Federal Reserve Banks for a few days to adjust their positions, from he saw no way in which that could be accomplished. Rouse stated that the repurchase ar In a further discussion, Mr. instrument in helping to widen the market rangement would be an effective had been absorbed readily, and he be for bills but that the certificates lieved it would be better to apply the arrangement only to bills, at least until a further distribution of bills had been achieved.

Mr. Rouse also stated that at the request of Secretary Morgenthau he had gone to the Treasury this afternoon for an informal discussion and that there had been no indication on the part of the Secretary during the conference that he would be willing to consider an increase in the rate on bills. Chairman Eccles said that he had come to the conclusion that the Federal Reserve representatives should take the position that the question of the short-term rate would not be raised in future Treasury discussions until such time as reserve requirements of central reserve city banks had been reduced to 20 per cent, when the question would be raised whether a further reduction should be made which would have to be applied to the country as a whole. At that time, he said, the System would have had am ple opportunity to determine the effect of the 3/8 per cent rate, the posted rate, and of the repurchase arrangement, and the Federal Reserve representa tives would be in a better position to discuss the desirability of an in crease in the bill rate to 1/2 per cent. Mr. Ransom inquired whether Mr. Sproul had any opinion with respect to the proposed repurchase arrangement. Mr. Rouse said he did not know. Mr. McKee raised for discussion the question whether the repurchase arrangement should not be one under which the seller would have only a 15-day option to repurchase. This suggestion was discussed, and it was the feeling of a majority of the members that, if adopted, the arrangement would be for the purpose of broadening the market and, therefore, no limi tetion should be placed on the time before maturity within which the

securities sold to a Federal Reserve Bank could be repurchased. Mr. Morrill called attention to the fact that the proposed reso lution contemplated that the purchases under the repurchase arrangement would be for the System account, and he inquired whether that would pre sent any difficulties. Mr. Rouse's response was that he felt that the matter could be handled in that manner with the understanding that the individual Federal Reserve Banks would hold the individual repurchase agreements. Chairman Eccles raised the question whether the repurchase ar rangement should be open only to member banks, and it was agreed that such a restriction should not be applied. Thereupon, upon motion duly made and sec onded, the following resolution was adopted by unanimous vote: Supplementing the direction of April 30, 1942, issued by the Federal Open Market Committee to the Federal Reserve Banks to purchase all Treasury bills that may be offered to such Banks on a discount basis at the rate of 3/8 per cent per annum, any such purchases shall, if desired by the seller, be upon the condition that the Federal Reserve Bank, upon the request of the seller before the maturity of the bills, will sell to him Treasury bills of like amount and maturity at the same rate of discount. point, Mr. Goldenweiser left the meeting. At this given to the authority to be granted to Consideration was then the executive committee to effect transactions in the System account, and agreement that, in order that the executive in that connection there was to meet any situation that could be fore committee might be in a position it would be desirable to increase the limit seen over the next few weeks,

on the committee's authority to $1,000,000,000, which would include any special short-term certificates that might be purchased to prevent tempo rary overdrafts in the Treasury accounts at the Federal Reserve Banks. Thereupon, upon motion duly made and sec onded, the following resolution was adopted by unanimous vote: That the executive committee be directed, until otherwise 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, replacement of maturing securi ties, and letting maturities run off without replacement), as may be necessary in the practical administration of the ac cound [sic], or 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, or for the purpose of granting temporary accom modation to the Treasury; 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 direc tions of the Federal Open Market Committee issued under dates of April 30 and August 3, 1942) shall not be increased or de creased by more than $1,000,000,000. Thereupon the meeting adjourned. Secretary. Approved: Chairman.