December 14, 1942 FOMC Minutes

FOMC minutes

the part of the members of the Committee that the System alone could not do more in the field of monetary and credit policy than to keep abreast of developments, to exert its influence wherever possible, and to adapt its policies to the needs of the war program. It was agreed that the members of the executive committee should continue the procedure that had been followed in the past of making suggestions to the Treasury with respect to fiscal and financing policies with a view to bringing about the adoption of such changes in these policies from time to time as might result in financing the war effort in the most effective way with the least possible adverse effect on the war and post-war economy, and that this should be one of the matters for discussion at the meet ings to be held next month. In connection with a discussion of whether any change should be made in the existing arrangement under which Federal Reserve Banks pur chase all Government bills offered to them on a discount basis at a rate of 3/8 per cent per annu, there was agreement with the suggestion that consideration should be deferred until the meeting in January of the questions (1) whether bills should be made available by the Treas ury up to a stated amount to any one purchaser at a flat rate of dis count and (2) whether, instead of purchasing bills in the market to re place maturing bills held in the System account, an arrangement should be made with the Treasury for direct replacement of such bills. At the conclusion of the discussion, there was unanimous agreement that no change direction issued to the should be made in the Federal Reserve Banks at the meeting of the

Federal Open Market Committee on September 28, 1942, to purchase all bills offered at the posted rate of 3/8 per cent. In connection with the above action, Mr. McKee stated that he questioned the advisability of permitting the Federal Reserve Banks to hold in their individual accounts instead of the System open market ac count the bills purchased under repurchase options, and that he would like to review the record of the action of the Committee on this ques tion and to reserve the right to bring the matter up for discussion at a later meeting of the Committee. Reference was then made to the authority to be granted to the executive committee to direct the execution of transactions for the Sys tem open market account pending another meeting of the full Committee. There was a discussion of the question as to the amount of securities that it might be necessary to purchase during that period to offset any increase that might occur in currency in circulation, to provide reserves for deposits resulting from bank purchases of Treasury certificates and increased offerings of bills, and to maintain the agreed pattern of rates on Government securities. In this connection, mention was made of the arrangement that had been made under which the Federal Reserve Banks would place in circulation their existing stocks of Federal Reserve Bank notes, amounting to approximately $660,000,000, which would add that amount to member bank reserves. All of the members of the Committee were in agreement that the renewal of the authority granted at the last meeting of the Federal Open Market Committee would be ample to meet the situation pending the next meeting of the Committee, with the understanding,

however, that separate authority should be given to purchase short-term certificates of indebtedness for the temporary accommodation of the Treasury and that, in the event of a contingency requiring authority for additional purchases of Government securities, such authority could be granted upon the telephonic, telegraphic, or written approval of a ma jority of the members of the Federal Open Market Committee. Thereupon, upon motion duly made and seconded, 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 account, 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; provided that the aggregate amount of securi ties held in the account at the close of this date (other than special short-term certificates of indebtedness pur chased from time to time for the temporary accommodation of the Treasury and Treasury bills purchased pursuant to the directions of the Federal Open Market Committee issued under dates of April 30, August 3, and September 28, 1942) shall not be increased or decreased by more than $1,000,000,000. That the executive committee be further directed, until otherwise directed by the Federal Open Market Committee, to arrange for the purchase for the System open market account the Treasury of such amounts of special short airect from term certificates of indebtedness as may be necessary from time for the temporary accommodation of the Treasury; time to provided that the amount of such certificates held in the ac any one time shall not exceed $1,000,000,000. count at Reference was made to certain sugges tions that might be made to the Treasury in connection with future financing opera tions, and there was unanimous agreement should send to the Presi that Mr. Morrill dents of the Federal Reserve Banks who were

not members of the Federal Open Market Committee, for their information pending the discussion of Treasury financing at the meetings to be held in January, copies of (1) the memorandum prepared by Mr. Sproul setting forth his views on credit policy and Treasury financing which he sent to the members of the Federal Open Market Com mittee under date of December 10, 1942, and (2) Mr. Goldenweiser's memorandum entitled "Treasury Financing and the Banks: 1943 and 1944". It was also understood that Chair man Eccles would send a copy of Mr. Sproul's memorandum to the Secretary of the Treasury with the statement that if he had any com ments to make with respect to the questions presented therein the members of the Federal Open Market Committee would be pleased to have them. Thereupon the meeting adjourned. Secretary. Approved: Chairman.