January 25–26, 1943 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, January 25, 1943, 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 r. Young Mr. Leedy Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Goldenweiser, Economist Mr. John H. Williams, Associate Economist Mr. Wyatt, General Counsel Mr. Dreibelbis, Assistant General Counsel Mr. Rouse, Manager of the System Open Market Account Mr. Clayton, Assistant to the Chairman of the Board of Governors Mr. Thurston, Special Assistant to the Chairman 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 Committee held on December 14, 1942, were approved. Upon motion duly made and seconded, and by unanimous vote, the actions of the execu tive committee of the Federal Open Market Committee as set forth in the minutes of the meeting of the executive committee held on December 14, 1942, were approved, ratified, and confirmed. Mr. Rouse read a report prepared at the Federal Reserve Bank of New York of open market operations conducted during the period from December 14, 1942, to January 20, 1943, inclusive. He also made a supplemental report covering the transactions conducted for the System open market account during the period from January 20 to 23, 19 , inclusive. Copies of Mr. Rouse's reports have been placed in the files of the Federal Open Market Committee. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System account during the period from Decem ber 14, 1942, to January 23, 1943, inclusive, were approved, ratified, and confirmed. Under date of December 22, 1942, the Board's examiner in to Mr. Morrill, as Secretary of the Federal Open Mar charge submitted a report of examination of the System account ket Committee, a copy of on October 3, 1942, by the Board's made as of the close of business regular examination of the Federal Reserve examiners as part of the of this report were sent to the members Bank of New York, and copies
of the Federal Open Market Committee on December 29, 1942. The report contained no criticisms or recommendations. Upon motion duly made and seconded, and by unanimous vote, the report was received and ordered filed. Chairman Eccles stated that the Washington members of the Fed eral Open Market Committee would like to suggest that the representa tive members of the Committee bring the economists from their respective Banks to future meetings of the Committee, and that an arrangement be adopted under which one or two of the economists would discuss busi ness and credit conditions at each of these meetings. It was felt, he said, that such a procedure would bring further aid to the Committee would stimulate the interest of the economists and of in its work, and the economic and research staffs of the Federal Reserve Banks. It Eccles said, that a President who would be understood also, Chairman be at liberty to have the not a member of the Committee would was the meetings which he might from his Bank accompany him to economist and when the hotel and he believed it to be desirable attend whenever All of the Presidents situation made it appropriate. transportation would be a desirable one. agreement that such a procedure indicated made and seconded, and Upon motion duly was given to the vote, approval by unanimous members of that the representative suggestion to have the economists the Committee arrange attend future meet respective Banks from their that the other Presi the Committee and ings of economists from to bring the dents be invited meetings which Banks to the Committee their they might attend.
The Chairman then said that in order to facilitate the consid eration at this meeting of Treasury financing and open market policies two memoranda had been prepared, one entitled "Treasury Financing and Open Market Policies" by the Board's staff under date of January 22, 1943, and one by Mr. Sproul under date of December 10, 1942, on the subject "Credit Policy and Treasury Financing". The Chairman said that Mr. Sproul's memorandum was briefly discussed at the last meeting of the Committee and following that meeting copies had been sent to the Presidents of the Federal Reserve Banks who were not members of the Committee. Copies of the memorandum prepared by the Board's staff had been sent to all of the Presidents of the Federal Reserve Banks a few days prior to the present meeting. The two memoranda were read last section of the memorandum prepared by Mr. Sproul) (all but the of the several questions raised by and there was a general discussion the memoranda. while the December financing cam Chairman Eccles stated that, the basis of the total amount success when judged on paign had been a would have to be done were many things that of securities sold, there for the the procedure, particularly campaigns to improve in future sold to banks. proportion of new securities of reducing the purpose of bank subscriptions present volume of the felt that a continuation He to achieve Victory Fund Committees failure of the indicate a would nonbank investors, and selling securities to primary purpose of their as much as to sell would be necessary that it that the assumption
$30,000,000,000 of securities to the banks in the current year should be abandoned. He added that every effort should be made to bring about the adoption by the Government of an adequate program of taxation and compulsory saving. The meeting recessed and reconvened at 2:10 p.m. with the same attendance as at the close of the morning session except that Messrs. McKee and Dreibelbis were delayed, and Mr. Thomas, Assistant Director of the Division of Research and Statistics of the Board of Governors, was in attendance. Chairman Eccles reviewed some of the suggestions that were being considered by the Government with respect to a "pay-as-you-go" income tax plan, a withholding tax, and other fiscal policies, and there was a discussion of Treasury financing and open market policies in the light of a probable budget deficit in excess of $60,000,000,000. that, although it very likely would not There was a unanimous feeling amount of bank purchases of Government secu be possible to hold the rities to the minimum indicated by the chart attached to the memoran staff of the Board of Governors and previously dum prepared by the at this meeting, everything possible should be done to referred to achieve that objective. McKee and Dreibelbis rejoined During this discussion, Messrs. the meeting. previously offered that Reference was made to suggestions discount up to $100,000 to be sold at a fixed rate of Treasury bills
any one purchaser or that the Federal Reserve Banks purchase bills directly from the Treasury for resale at a fixed discount rate, and to the further suggestions that the Treasury adopt a policy of offer ing its bills at the fixed rate of 3/8 per cent, or that the offerings be at a fixed rate up to a stated amount to any one purchaser and on a bid basis for the balance. The additional suggestion was offered by Mr. McKee that the weekly issues of bills be allotted to the Federal Reserve districts on the basis of excess reserves held by the member banks in the re spective districts with a view to larger sales of bills to banks having excess reserves. In an informal poll of the Presidents as to their attitude toward the purchase of bills by the Federal Reserve Banks directly from the Treasury for resale, a majority of the Presidents were of the opinion that this should not be resorted to at this time but that other suggestions designed to obtain a wider distribution of bills should be adopted. In a further discussion there appeared to be gen eral agreement that at least for the time being, and in view of the established method of issuing bills and the possible attitude of the Treasury on the matter, the best procedure would be for the Treasury to accept all bids for bills at a 3/8 per cent rate up to $100,000 to balance being sold on a competitive bid any one purchaser with the basis. of the problem before the Federal Turning to the question
Open Market Committee of maintaining an agreed pattern of rates on Government securities and supplying reserve funds to the market for the purpose of financing the war, Chairman Eccles felt that a strong case could and should be made to the Treasury for the separation of drives for nonbank funds from offerings to banks, for the reason that during the nonbank campaigns the Committee would be faced only with the problem of maintaining the pattern of rates, that securities could be offered to the banks between drives in relatively small amounts which could be handled with smaller excess reserves than were believed to be necessary in the past, and that greater emphasis could be placed on the sale of securities to nonbank purchasers. There should be a determination also, he said, as to how funds are to be put into the market so as to avoid the condition that existed during the December financing when, in order to maintain a certain volume of reserves in well as to maintain the pattern of rates, the System the market, as an undesirable proportion of bonds selling at sub was forced to buy stantial premiums. It was his opinion that, since we know we shall provide a certain amount of reserve funds during this period have to provision should be made for direct purchases of heavy war financing, the extent believed to be necessary of portions from the Treasury to through the redemption of the weekly offerings of bills, which, of public in the amount of the System's pur maturing bills held by the desired funds directly into the market. chases, would put the
Mr. Sproul stated that in his opinion, and because he be lieved nothing should be done which might create public concern about the credit of the Government, direct purchases of this kind should not be resorted to for the purpose of supplying reserve funds until necessity forced such action, which is not the case at present. He said that a further effort should be made to convince the Treasury and banks that, when the latter hold substantial amounts of Treasury bills that can be immediately realized upon, the amount of excess re serves is no longer of primary importance. He did not believe, there fore, that the Open Market Committee should undertake to determine be forehand the amount of excess reserves needed in connection with financing operations and to supply them in this way. If a particular financing job appears to require that additional funds be supplied to tone up the market, a better way to accomplish the purpose would be to allow Treasury balances to run down before a financing operation and to meet the Treasury's temporary cash requirements during that period through the purchase by the Federal Reserve Banks of special one-day certificates of indebtedness. This practice, he said, has the virtue the automatic extinction of the credit created as of flexibility, of the Treasury's balances are replenished by the sale of securities, and previous experience with it. He added of public acceptance through on a program of direct buying of Treasury bills from that to embark the System in a question of Treasury would unnecessarily involve the be raised at this time. which he felt should not public policy
During a discussion of the opinions expressed by Messrs. Eccles and Sproul, the former stated that another aspect of the prob lem was whether the System should continue to replace in the market maturing bills and certificates held in the System account or whether arrangements should be made with the Treasury for the direct replace ment of these maturities which would be in increasing amounts in the future. It was agreed that this point should be considered when the meeting reconvened tomorrow. Thereupon the meeting recessed to reconvene at 9:30 o'clock tomorrow morning. ecretary. 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, January 26, 1943, at 9:40 a.m. PRESENT: Mr. Eccles, Chairman Mr. Sproul, Vice Chairman Mr. Szymczak Mr. Ransom Mr. Draper Mr. Evans Mr. Alfred H. Williams Mr. Gilbert Mr. Young Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Goldenweiser, Economist Mr. John H. Williams, Associate Economist Mr. Wyatt, General Counsel 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 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 Mr. Leach, President of the Federal Reserve Bank of Richmond Mr. Sienkiewicz, Secretary of the Presidents' Conference Chairman Eccles stated that, in view of the increased amount of maturing bills and certificates which it was expected would be held in the System account in the future, he would like to see the Committee
reach an understanding pursuant to which, under the authority given to the executive committee by the Federal Open Market Committee, the ex ecutive committee would arrange with the Treasury for the direct re placement, in full, of such maturities as well as of other maturing issues on which the right of exchange might not be extended to all other purchasers. His reason for this position was that such a procedure would eliminate the necessity of the System competing for replacement securities in the market (on which it would be necessary to pay the dealers' commissions) as well as the disturbance to the market that might result from such purchases which would be in addition to System purchases of some $3,000,000,000 to $9,000,000,000 during the current year for the purpose of supplying the market with needed funds. He stated that in the current offering of certificates of indebtedness bank subscriptions in excess of $100,000 are to be allotted on the basis of only about 14 per cent of the amount subscribed. He added that, in all the circumstances, it would be his suggestion that in future offerings dealers should not be given full allotment but should be given an allotment on the same basis as banks accepting demand deposits. said that the latter suggestion does not involve mere Mr. Sproul of denying full allotment to a few dealers in Government ly the question of how far underground you wish to securities but the broader question to issues of Government securi drive the practice of heavy subscriptions profit will be realizable. Consideration ties on which it appears a quick treatment to be accorded to brokerage must also be given, he said, to the who purchase to resell and who, in houses, corporations, and individuals
many cases, are not now policed strictly as are the so-called Govern ment security dealers with respect to the amount of their subscriptions, With respect to the replacement of maturing securities in the System account, in cases where no exchange offering is made by the Treas ury, Mr. Sproul suggested that the System should not seek a change in the Treasury's offering circulars so as to make possible full replacement by the System under all circumstances. Having regard for his own bias against any extension of direct dealings with the Treasury, he said he thought the better procedure would be to let the market take the securi ties it wanted and, if necessary, to replace System maturities with other securities the market wishes to sell. In the case of the current offer ing of certificates, he said that the small allotment percentage to Fed eral Reserve Banks and other banks accepting demand deposits was an indication that the market does not need the funds which would be sup plied by full replacement of the System's holdings of the maturing certif and that to the extent additional funds are needed Treasury icates, bills are being sold to the Reserve Banks. of the opinions expressed by Messrs. Eccles During the discussion Sproul, Messrs. McKee, Peyton, and Leedy, and Mr. Thomas, Assistant and of Research and Statistics of the Board of Gov Director of the Division ernors, joined the meeting. discussion to the function that Govern Reference was made in the perform in the present war should be expected to ment security dealers suggested that a study be made, in financing situation, and Mr. McKee should perform and of the functions they with the dealers, cooperation
how their operations should be fitted into the financing program. It was his thought in making this suggestion that such a committee might be able to work out a program for the dealers during the war period that would facilitate the Treasury's financing and the operations of the Federal Open Market Committee. Mr. Rouse stated that he met with representatives of the dealers on Friday of each week for the purpose of discussing all phases of the market situation and how the dealers could be most helpful, and that the dealers were trying to cooperate with the Treasury and the Federal Re serve System. Mr. Williams moved that a committee be ap pointed by Chairman Eccles to make a study of the significant aspects of the relationship of the Government security dealers to the Govern ment security market, it being understood (1) that the committee would be a small one and would complete its study promptly, if possible by the next meeting of the Federal Open Market Committee, and (2) that the committee would de termine to what extent representatives of the dealers should be consulted. Mr. Williams' motion was put by the chair and carried unanimously. discussion of the method by which maturing securi In a further ties in the System account should be replaced, reference was made again whether the System should arrange with the Treasury for to the question of new securities when no exchange offering is made. Mr. full allotment favor full replacement in the manner suggested Sproul said he did not reasons which he had previously stated. for the to the purpose of the amendment authorizing Inquiry was made as Eccles stated that in Treasury, and Chairman purchases from the direct
testifying on the bill he had not stated that the authority would be used only for the purpose of purchasing special short-term certificates of indebtedness from the Treasury but rather that it would not be used as a means of financing Treasury requirements. He distinguished between direct purchases for the purpose of supplying funds to the market and for the purpose of replacing maturing securities. In the discussion of this point, reference was made to the opinions submitted by the Committee's Counsel last year that, to the extent that allotments of new securities were permitted to be paid for by the delivery of maturing securities, the transaction would, in fact, be an exchange and should not be charged to the System's authority to purchase direct from the Treas ury. At the conclusion of the discussion, during which it was evi dent that there was a division of opinion as to the course to be followed, Chairman Eccles stated that under the directions issued to the executive had authority to arrange with the Treasury for direct re committee it placement of maturing securities and that he had referred to the matter order to ascertain whether any change should be made in at this time in the executive committee's authority. Governor of the Farm Credit Morrill stated that Mr. Black, Mr. that it would be desir suggested to Mr. Evans Administration, recently were extended to rate on Treasury bills the 3/8 per cent posted able if for the reason that in credit bank debentures cover Federal intermediate handicapped in debentures were somewhat circumstances the the present preference for bills. the market by the
In this connection, Mr. Leedy stated that complaint had been made in his district because the preferential rate of 1/2 per cent established by the Federal Reserve Banks on advances to member banks on short-term Government securities was not extended to advances se cured by Federal intermediate credit bank debentures, the statement being made that this was the first time any distinction had been made on the basis of rate. It was pointed out that the 3/8 rate on Treasury bills and the preferential rate on advances to member banks were established as aids to the war financing program and that therefore there was no reason for applying these privileges to Federal intermediate credit bank de bentures. There was unanimous agreement that no change should be made in the direction issued to the Federal Reserve Banks at the meeting of the Federal Open Market Committee on Sep tember 28, 1942, to purchase all bills offered at the posted rate of 3/8 per cent. All of the members of the Committee were in agreement that the renewal of the authority granted to the executive committee at the last Market Committee would be ample to meet the meeting of the Federal Open the next meeting of the Committee. situation pending upon motion duly made and sec Thereupon, onded, the following resolution was adopted by unanimous vote: be directed, until otherwise That the executive committee to arrange for Open Market Committee, directed by the Federal open market account, either transactions for the System such the Treasury (including or directly with in the open market replacement of maturing securities, purchases, sales, exchanges,
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 securities held in the account at the close of this date (other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury and Treasury bills purchased pursuant to the direc tion of the Federal Open Market Committee issued under date of 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 direct from the Treasury of such amounts of special short term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the amount of such certificates held in the account at any one time shall not exceed $1,000,000,000. Mr. McKee suggested that it be understood that under the author ity granted to the executive committee it would undertake to arrange with the Treasury for an amendment to the terms under which the various securities are offered so as to permit full allot issues of Government System of securities issued to refund all maturing direct ment to the to the extent that replacement of such maturing securities obligations, appeared to the executive committee to be held in the System account desirable. Upon motion duly made and seconded, this suggestion was adopted, Messrs. Sproul and Williams voting "no", the terms of the present representa statement was made that The would expire on Febru the Federal Open Market Committee tive members of of the Presidents' Con indicated that a meeting ary 28, 1943. It was therefore some of at that time and would not be held ference probably
the Presidents who were now members of the Committee would not be in Washington unless their presence was deemed necessary. It was agreed that, inasmuch as the last day of February would fall on Sunday, the next meeting of the Committee should be held on Mon day, March 1, and that the Secretary should obtain from the members whose terms would ex pire at that time advice of their approval of the transactions up to that date, which should be reported at the meeting. Chairman Eccles stated that the special committee of the Ameri can Bankers Association on Treasury financing was anxious to meet with him, Mr. Bell, and some of the Chairmen of the Victory Fund Committees, that the committee had discussed the matter with Mr. Bell, and that it was suggested that the group arrange to meet with the committee some time next week. It was understood that Messrs. Eccles, Sproul, Williams, and Young would attend the meeting. Thereupon the meeting adjourned. Secretary. Approved: Chairman,
Also: Record of Policy Actions·Minutes of the Executive Committee, January 26, 1943