September 28–29, 1942 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 Monday, September 28, 1942, at 10:15 a.m. PRESENT: Mr. Eccles, Chairman Mr. Sproul, Vice Chairman Mr. Szymczak Mr. McKee Mr. Ransom Mr. Draper Mr. Evans Mr. Alfred H. Williams Mr. Gilbert Mr. Young Mr. Leedy Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Goldenweiser, Economist Mr. John H. ,illiams, Associate Economist Mr. Dreibelbis, Assistant General Counsel Mr. Rouse, Manager of the System Open Market Account Mr. Thurston, Special Assistant to the Chairman of the Board of Governors M r. Smead, Chief of the Division of Bank Operations of the Board of Governors Mr. Thomas, Assistant Director of the Division of Research and Statistics of the Board of Governors Mr. Piser, Chief, Government Securities Section, Division of Research and Statistics of the Board of Governors Mr. Berntson, Clerk in the Office of the Secretary of the Board of Governors Messrs. Paddock, Fleming, McLarin, Davis, and Day, alternate members of the Federal Open Market Committee Messrs. Leach and Peyton, Presidents of the Federal Reserve Banks of Richmond and Minneapolis, respectively Mr. Sienkiewicz, Secretary of the Presidents' Conference
Mr. Edmiston, Assistant Vice President of the Federal Reserve Bank of St. Louis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Commit tee held on August 3, 1942, were approved. Mr. Rouse distributed copies of a report prepared at the Federal Reserve Bank of New York, under date of September 28, 1942, covering open market operations in the System account during the period from Au gust 3 to September 23, 1942, inclusive, and he discussed briefly the principal items in the report. He also presented a supplementary report prepared at the New York Bank covering transactions in the System account during the period from September 24 to September 26, 1942, inclusive, in which it was stated that the total amount of securities held in the Sys tem account had been increased to $3,488,725,000 on the latter date. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System account during the period from August 3 to September 26, 1942, inclusive, were approved, ratified, and confirmed. During the course of the discussion of Mr. Rouse's report, Mr. McKee stated that he would like to hold in reserve for later consider ation the general question of policy which he had brought up at previous meetings with respect to the treatment of premiums on securities held in the System open market account. that at the end of the calendar year 1941, when Mr. Rouse stated Banks, after dividends, were only slightly above expenses, earnings of the Reserve Banks had shown a loss for the year, and it had one of the Federal
been suggested that, in oraer to avoid a situation of this kind in the future, a method of allocation of earnings from the System account be worked out so that when the earnings of the System as a whole were suf ficient to cover expenses and dividends it would not be necessary for any Bank to show a loss. Mr. Rouse said that he had discussed the mat ter with Mr. Smead and that they would suggest that the present procedure, calling for quarterly allocations of securities held in the System ac count, be modified to the extent of providing for two additional alloca tions, in the last quarter of each year, on November 1 and December 1, on the basis prescribed by the existing procedure. Upon motion duly made and seconded, and by unanimous vote, the proposed change in the existing procedure of allocation was approved, with the understanding that it would be applied as of November 1 and December 1, 1942, and annually thereafter in the same manner. Mr. Rouse then said that, in connection with the directions issued by the Federal Open Market Committee to the Federal Reserve Banks to purchase all Treasury bills offered to such Banks on a discount basis at the rate of 3/8 per cent per annum, the Federal Reserve Bank of New York, as agent for the System account, had advised the other Federal Re serve Banks that such purchases would be for delivery on the next busi ness day except in unusual cases, it being understood that in the case of emergency, in order to provide funds to the selling bank, the bills would be purchased for immediate delivery. A number of banks, Mr. Rouse said, that had repurchased bills previously sold to a Federal Reserve Bank on
that basis had felt that they should be able to repurchase for immediate delivery in order that they might have the benefit of the earnings on the bills for the one day. The Federal Reserve Bank of New York had taken the position that the desire of the selling banks for additional earnings did not constitute an emergency and that delivery on the day succeeding the resale, which was the usual practice, was justified, Mr. Rouse made the further statement that some of the Federal Reserve Banks felt that, when requested by the original seller, bills held under an option to re purchase should be sold for immediate delivery, that if such a course were decided upon it could be handled in the System account only if the Federal Reserve Bank of New York maintained a night accounting force, but that the problem might be met by authorizing the Federal Reserve Banks to hold in their own accounts bills purchased under an option to repurchase. In the ensuing discussion, it was stated that the arrangement suggested by Mr. Rouse could be effected by an amendment of the directions issued by the Federal Open Market Committee to the Federal Reserve Banks under dates of April 30 and August 3, 1942, and that an amendment of the Committee's regulation relating to open market operations would not be necessary. In response to an inquiry, Mr. Dreibelbis agreed with this view. The suggestion was then considered in the light of the questions (1) whether such an arrangement would be subject to possible abuse on the part of banks and (2) the extent to which the arrangement would be in line with the effort of the System to obtain a wider distribution of bills. Several of the Presidents said that they had had requests for immediate
delivery of repurchased bills and that, in some cases, the Banks had ob jected to one-day delivery. The suggestion was made that the objective sought might be accomplished by advising the banks that all resales of bills would be on one-day delivery, so as to remove any possible mis understanding as to future transactions. Some of the members of the Committee felt that this would be a satisfactory solution of the matter, that, if arrangements were made for immediate delivery, all that would be accomplished would be to give the holder the additional income for one or two days, and that, if a concession were made on bills, the same con cession might be asked in the future for certificates and possibly other securities. Other members took the position that the broad purpose was to obtain a wider distribution of bills on the basis of the bills being equivalent to cash, and that for that reason an arrangement should be adopted which would permit immediate delivery on resale. At the conclusion of the discussion, Mr. Alfred H. Williams moved that the di rections issued by the Federal Open Market Committee under dates of April 30 and Au gust 3, 1942, be amended to read as follows: otherwise directed by the Federal Open Market Com Until Federal Reserve Banks are directed to pur mittee, the twelve chase 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 by the seller, to be upon the con such purchases, if desired Reserve Bank, upon the request of the dition that the Federal the maturity of the bills, will sell to him seller before of like amount and maturity at the same rate Treasury bills All bills purchased outright are to be pur of discount. chased for the System open market account. All bills pur repurchase are to be held by the chased under option to Reserve Bank in its own account and purchasing Federal such purchases are to be made to the prompt reports of all manager of the System open market account.
The Federal Reserve Bank of New York, as agent for the System account, is directed to transfer to the respective Federal Reserve Banks as promptly as convenient all unmatured bills held in the System account which were purchased by such Banks for System account under an option retained by the sell er to repurchase and such bills shall be received and held by such Federal Reserve Banks subject to the first paragraph of this direction. Mr. Williams' motion having been duly seconded was put by the chair and carried, Messrs. Eccles, Ransom, Draper, Evans, Williams, Gilbert, Young, and Leedy voting "Yes" and Messrs. Sproul, Szymczak, and McKee voting "No". 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 min utes of the.meetings of the executive com mittee held on July 22 and August 3 and 18, were approved, ratified, and confirmed. 1942, For the information of the Presidents of the Reserve Banks who were not members of the executive committee of the Federal Open Market Committee, Mr. Sproul reviewed the discussions had since the last meet with representatives of the Treasury with re ing of the full Committee and the recently announced Series spect to September Treasury financing C tax notes. Mr. Sproul's statement, Mr. Ransom discussed briefly Following the considerations which led to action by the Board to reduce reserve banks in central reserve cities effective requirements of member August 20 and September 13, 1942. Eccles, joined Assistant to Chairman this point, Mr. Clayton, At the meeting. and Mr. John H. made by Mr. Goldenweiser were then Statements of future Treasury financing, respect to the large volume Williams with
the effect of such financing and increased business activity on member bank reserves, and the steps that might be taken to meet this situation. Copies of these statements have been placed in the files of the Federal Open Market Committee. The meeting then recessed and reconvened at 2:15 p.m. with the same attendance as at the end of the morning session except that Messrs. Clayton and Berntson were not present. There was a discussion of some of the questions raised by Messrs. Goldenweiser and Williams in their statements, particularly with respect requirements and the part that changes in the dis to changes in reserve count rate and borrowings by member banks might play in the System credit policies. There appeared to be no disagreement with the thought that there was nothing in the history and experience of the Federal Reserve suggest that the System should abandon any of its powers System that would rely upon any single power to field of credit control or should in the that it should use any or all of its the exclusion of the others, but require. There was agreement that it would powers as circumstances might present policy with respect to logical for the System to continue its be rate, or at a 1/2 per cent Treasury bills at a 3/8 per cent purchases of and at the same time should be agreed to by the Treasury, rate if that discount rate in effect at the to reduce to 1/2 per cent the either advances to member banks under sec Federal Reserve Banks on loans and Act or to establish a preferen 13 and 13a of the Federal Reserve tions by Government secu per cent on advances collateraled tial rate of 1/2 rities with maturities of one year or less.
For the information of the Federal Open Market Committee in the formulation of its open market policies, there was a general informal discussion of the relative merits of a reduction in the general discount rate of the Reserve Banks to 1/2 per cent and of the establishment of a preferential rate of 1/2 per cent, on advances collateraled by Govern ment securities with maturities of one year or less, and what the pos sible attitude of the Reserve Banks and the Board of Governors might be with respect to the establishment by the Reserve Banks of reduced discount rates. A majority of the Presidents indicated that they would favor a preferential rate of 1/2 per cent. All of the Presidents stated that, if desired, they would be glad to present to their directors the question of a reduction in the discount rate or the establishment of a preferential rate as a matter of System policy. In the discussion of this matter, it was made clear that a reduction in the general discount rate or the estab lishment of a preferential rate on Government securities would apply to advances to both member and nonmember banks secured by direct obligations of the United States. It was then suggested that it would be helpful to the members of the Federal Open Market Committee in the determination of its open market policy if general agreements could be reached today by those present on the following matters: 1. What should be done to bring about a wider dis tribution of bills. the Federal Reserve Banks should reduce 2. Whether discount rate to 1/2 per cent or their general a preferential rate of 1/2 per cent. establish
3. What should be done with respect to reductions in reserve requirements. 4. What the open market policy of the System should be for the immediate future. 5. What could be none to increase purchases of Gov ernment securities by nonbank investors. 6. October financing. In a discussion of the first of the six items, it was suggested that a wider distribution of bills might be obtained, and a more effec tive use of existing reserves achieved, (1) by the issuance by the Treasury each week of a stated amount of bills, in addition to the reg ular offering, at a fixed rate for allotment in some limited amount to each bank that desired to purchase them in that way, or (2) by the Sys tem making Treasury bills available for purchase at the 3/8 per cent rate up to a fixed amount by anyone desiring such bills. It was felt by some of those present that the first suggestion would be extremely help ful in broadening the distribution of bills, but it was stated that ac cording to information received from the Treasury it was obliged under present law to issue bills on a competitive basis, and, so far as the members of the Federal Open Market Committee knew, no way of meeting that obstacle had yet been found. There was some discussion of the desirability of Treasury cer for investment of short-term funds of the smaller tificates as a medium banks and of the desirability of the Treasury issuing a security with a four-month maturity to meet this demand of country banks. The objeo tion was made, however, that it would be simpler for the Treasury to
increase the volume of bills and for the System to attempt to get a wider distribution rather than to add another short-term issue to the existing variety of securities now outstanding. The suggestion was offered that the preferable method would be to use one-year certificates in increased amounts which would provide the necessary volume for bank investment, with a higher yield, and, combined with a reduction in the discount rate, would afford a means to banks by which they readily could make temporary adjustments in their positions. During this discussion, Mr. Clayton rejoined the meeting. Reverting to the question of the discount .ate, there was an in formal discussion of the attitude of the members of the Board of Governors toward a reduction in the general rate or the establishment of a preferen tial rate of 1/2 per cent. It was understood that the Board would give further consideration to this matter and that the Federal Reserve Banks would be advised at an early date of its attitude with respect to it. of a further reduction in reserve requirements On the question expressed the opinion that, if a further of member banks, Chairman Eccles reserve requirements of member banks in reduction of 2 per cent in the the System should resist as long as central reserve cities were made, s, on the theory that for any further reductions in requirement possible to the reserves of member at least any further additions the time being or member bank bor be made through open market operations banks should rowings. of larger invest opinion, because that in his Mr. McKee stated balances, member and large interbank reserve balances, ments, reduced
banks in central reserve cities should have higher required reserves than banks in reserve cities. The problem of changes in reserve requirements was discussed in the light of these opinions and the expectation that, if reductions in reserve requirements alone were relied on to furnish needed bank re serves, required reserves would almost reach the vanishing point by the end of next year. During the discussion, a majority of the Presidents indicated a feeling that a further reduction of 2 per cent in reserve requirements of central reserve city banks was expected but that such action would not necessarily be regarded as an indication that still further reductions were to be expected. Most of the Presidents were of the opinion that the System would be justified in taking the position that, after another 2 per cent reduction was made in reserve requirements of central reserve city banks, no further reduction should be made for the time being, with the understanding that needed reserves would be supplied through open market operations. While this discussion was in progress, copies were distributed of a memorandum prepared by Mr. Horbett, Assist ant Chief of the Division of Bank Operations, which contained a current analysis of the reserve position of member banks. stated that the members of the executive committee Chairman Eccles had been invited to a conference at the Treasury tomorrow at 11:00 a.m. for the purpose of discussing Treasury financing, and that, therefore, he would suggest that the members of the Federal Open Market Committee and the other Presidents of the Federal Reserve Banks meet again tomorrow to consider that subject.
It was agreed that, in view of the discussions at this meeting of the Federal Open Market Committee, substantially larger purchases of securities for the System open market account undoubtedly would be nec essary during the period before another meeting of the full Committee, but that, inasmuch as purchases of Treasury bills at the buying rate were not limited by the resolution adopted at the last meeting of the Committee, the renewal of the authority contained in that resolution would meet the situation for the time being, it being understood that authority for addi tional purchases of Government securities could be granted upon the tel ephonic, telegraphic, or written approval of a majority of the members of the Committee should that be found to be desirable. 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 pur chases, sales, exchanges, replacement of maturing securities, maturities run off without replacement), as may be and letting necessary in the practical administration of the account, or for the purpose of maintaining about the present general level Government securities, or for the pur of prices and yields of an adequate supply of funds in the market, pose of maintaining granting temporary accommodation to the or for the purpose of that the aggregate amount of securities Treasury; provided close of this date (other than held in the account at the to the directions of the bills purchased pursuant Treasury issued under dates of April 30, Federal Open Market Committee shall not be increased or 3, and September 28, 1942) August decreased by more than $1,000,000,000. that it would recessed with the understanding The meeting then tomorrow morning, September 29, for the reconvene at 9:00 o'clock
consideration of problems relating to Treasury financing. Secretary. Approved: Chairman.
The meeting of the Federal Open Market Committee was reconvened in the offices of the Board of Governors of the Federal Reserve System in Washington on Tuesday, September 29, 1942, at 9:15 a.m. PRESENT: Mr. Eccles, Chairman Mr. Sproul, Vice Chairman Mr. Szymczak Mr. McKee Mr. Ransom Mr. Draper Mr. Evans Mr. Alfred H. Williams Mr. Gilbert Mr. Young Mr. Leedy Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Goldenweiser, Economist Mr. Dreibelbis, Assistant General Counsel Mr. Rouse, Manager of the System Open Mar ket Account Mr. Clayton, Assistant to the Chairman of the Board of Governors Mr. Piser, Chief, Government Securities Section, Division of Research and Sta tistics of the Board of Governors Messrs. Fleming, McLarin, Davis, and Day, alternate members of the Federal Open Market Committee Messrs. Leach and Peyton, Presidents of the Federal Reserve Banks of Richmond and Minneapolis, respectively Mr. Sienkiewicz, Secretary of the Presidents' Conference Mr. Edmiston, Assistant Vice President of the Federal Reserve Bank of St. Louis Chairman Eccles referred to a letter addressed by him to the Sec retary of the Treasury under date of August 20, 1942, on the subject of Treasury financing. He reviewed and discussed the suggestions contained
therein with respect to the financing to be done in October. He stated that, in addition to the $400,000,000 of additional funds that would re sult from the continued weekly offering of $400,000,000 of bills, with an increase in the weekly issue to $450,000,000 beginning October 21, and the approximate $500,000,000 that could be obtained from additional sales of the Series C tax note, he would favor the offering in October of a 2 per cent bond, which would be kept open for perhaps as long as a week with the understanding that all offerings would be taken, and a 2-1/2 per cent bond on a coupon basis which would not be available for bank sub scription. A memorandum of suggestions with respect to the forthcoming fi nancing, prepared by Mr. Piser under date of September 28, 1942, was read. Mr. Sproul stated that in his opinion the Treasury financing dur ing October should include, (1) an increase in the weekly offering of bills to $450,000,000 on October 21, (2) an issue of $4,000,000,000 to include a 2-1/4 per cent bond and a 1-5/8 per cent note or a 1-3/4 per cent fixed-maturity bond, this offering not to specify the amount of each issue so that allotments would be in proportion to the total amount of subscriptions received, to be kept open four or five days, and to have dates in order to avoid unnecessary movements of funds into split payment and out of Treasury accounts, and (3) an offering of one-year certificates of indebtedness late in the month to refund the $1,500,000,000 of certif icates maturing on November 1, and perhaps to obtain $500,000,000 in cash. 2 per cent and 2-1/4 per cent bond, Mr. Sproul expressed the As between a view that a 2-1/4 per cent bond combined with a long note, or a short bond,
would not only be the best market combination but that, of equal impor tance, it would provide a security which would attract the funds of banks outside the money centers which we want to get into use and the funds of some nonbank investors who, for one reason or another, do not wish to buy registered securities such as the 2-1/2 per cent bonds of 1962-67, Reasons for the programs suggested by Messrs. Eccles and Sproul were discussed, and Mr. McKee suggested that consideration might also be given to a 5-1/2-year obligation which would not be called a bond. Mr. Szymczak raised the question whether a third possible issue might be in the form of a 5-year note. Following comments by the Presidents with respect to the types of issue that would appear to be preferred in the respective Federal Reserve districts, Chairman Eccles summarized the discussion in substantially the following statement: There would seem to be no disagreement on the part of the representatives of the Federal Reserve System if the Treasury should decide to put out a 1-5/8 per cent 5-year note. The disagreement is primarily on the point whether a 2 or a 2-1/4 per cent market issue should be offered. Some of the members of the Federal Open Market Com mittee and Presidents feel that securities designed for banks should not have a maturity beyond 10 years, while others feel that there is no ob jection to exceeding that period to provide an investment for the smaller banks with relatively large amounts of time or savings deposits. A major ity opinion would favor providing for banks with savings deposits a 2-1/2 per cent security in some form, such as the Series G bonds or the 62-67s, up to some stated amount not to exceed the amount of a bank' savings
deposits. There seems to be little support for opening up the 62-67s be fore November since it is believed that funds of that type have not had time since the last offering to accumulate in sufficient amounts to as sure another successful offering, and the preference would be for a 1-5/8 per cent note. If the 62-67s were reopened, the majority opinion was that the issue might well be changed to a coupon bond for the purpose of in creasing the demand. The meeting then recessed to permit the members of the executive committee to attend the conference on Treasury financing at the Treasury, and reconvened at 12:20 p.m. with the same attendance as at the earlier session except that Messrs. Goldenweiser and Rouse were not present and Mr. Thurston, Special Assistant to the Chairman of the Board of Governors, was in attendance. Chairman Eccles reviewed briefly the discussions at the meeting stating that the members of the executive committee had at the Treasury, respective views, that it developed during the discussion stated their that members of the Treasury staff had recommended a 2 per cent bond and for the October financing, but that no decisions had a 1 per cent note been reached. It was agreed, he said, that members of the Treasury staff would meet with Washington members of the Federal Open Market Committee for a further discussion tomorrow and that the members of the executive a.m. for another on Friday at 11:00 go to the Treasury committee would with the Secretary of the Treasury. meeting stated that, if it should report, Chairman Eccles Following his authority to issue a was without legal determined that the Treasury be
stated amount of bills each week at a fixed rate in addition to the regular offering, he would request the Federal Open Market Committee at its next meeting to consider and act on the suggestion that bills held in the System account be made available at a rate of 3/8 per cent to anyone desiring to purchase them. Mr. McKee suggested that, as a means of making available to the members of the executive committee of the Federal Open Market Committee, in connection with discussions of Treasury financing, information and views on that subject from the various Federal Reserve districts, the Presidents designate alternates to participate in such discussions in the absence of the Presidents, and that, if that were not feasible, arrangements be made to request the comments and suggestions of the Presidents to reach the mem bers of the executive committee prior to such discussions. It was agreed that it might not be feasible to have representatives of all of the Banks present at the discussions of the members of the executive committee on but that arrangements might be made to have letter or Treasury financing, wire advice from the Banks whenever time permitted. Thereupon the meeting adjourned. Secretary. Approved: Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, August 18, 1942·Minutes of the Executive Committee, September 28, 1942