May 4, 1944 FOMC Minutes

FOMC minutes

in by the Federal Open Market Committee at its meeting on March 1, 1944, Mr. McKee moved that the suggestions made by Messrs. Sproul and Eccles be referred to them to handle with the Treasury through the medium of a letter or an informal discussion, which ever in their opinion would be the more ef fective. This motion was put by the chair and carried unanimously. Mr. McKee referred to the probable decline in the reserve po sition of the Federal Reserve Banks over the next year and suggested that, in order that the System might be prepared to meet any situation that might develop in the reserve position of the individual Banks, consideration be given to changing the basis upon which securities in the System account are allocated among the 12 Federal Reserve Banks. Mr. Rouse stated that he and Mr. Smead, Director of the Divi sion of Bank Operations of the Board of Governors, had been working on the matter of allocation and had prepared a memorandum which dis cussed various aspects of the problem. Copies of the memorandum, which was dated May 4, 1944, were distributed, and Mr. Rouse made the further comment that the memorandum contained no recommendations it was hoped that the full Committee would indicate its but that preference as to its approach to the matter so that a definite plan could be prepared for approval by the Committee. suggested that as which ensued, Mr. Peyton In the discussion below a satisfactory level in means of meeting a possible reduction a

the reserve position of individual Federal Reserve Banks all bills purchased by the Banks be transferred to the System account so that they could be allocated as a part of that account in such manner as to prevent the reserve ratio of a Reserve Bank from falling below a stated figure. Mr. Sproul proposed (1) that, with respect to the long-range problem of reserve ratios, the executive committee be requested to study and report on the action to be taken, its timing, and the public preparation necessary for its successful execution, so that the full Committee at its next meeting would be in a position to approve a program which would meet the anticipated decline over the next year or two in Federal Reserve Bank reserves, and (2) that, with respect to the short-range problem, the members of the full Committee read the memorandum prepared by Messrs. Smead and Rouse and send in any wish to make with respect to the method suggestions that they might in the reserve ratios of the individual to be used to meet reductions method used in allocating the System open Reserve Banks and to the that the executive committee account, with the understanding market for handling this problem to work out a procedure would be authorized and, if accepted by them, put which would be recommended to the Banks into effect. duly made and seconded, Upon motion vote, Mr. Sproul's pro and by unanimous it being generally posal was approved, the reserve time being for the agreed that

ratio of a Federal Reserve Bank should not be allowed to drop below 45. Inquiry was made whether there might be need for action before the procedure as out lined above could be carried into effect, and it was agreed that if action were called for the situation could be met in the same way as was done recently when bills were purchased from the Federal Reserve Bank of St. Louis by the Chicago and San Francisco Banks. There was unanimous agreement on the part of the members of the Committee that no change should be made at this time in the direction issued to the Federal Reserve Banks at the meeting of the Committee on March 1, 1944, with respect to the purchase by the Banks of Treasury bills at a discount rate of 3/8 per cent with an option on the part of the seller to repurchase. In connection with this decision, upon motion duly made and seconded, it was voted unanimously that, in the event the procedure worked out by the executive committee for allocation of the securities held in the System and option accounts should require any change in that direction, the executive committee would be authorized to make such changes as might be found to be necessary. of the members of the Committee were of the opinion that All there was no occasion at the present time to change in any way the au thority granted to the executive committee at the last meeting of the to direct the execution of transactions for the System full Committee account. Thereupon, upon motion duly made and by unanimous vote, the follow seconded and approved with the under ing direction was limitations contained in standing that the

the direction would include commitments for purchases or sales of securities for the System account: That the executive committee be directed, until other wise directed by the Federal Open Market Committee, to ar range 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 in the prac tical 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 (1) bills purchased outright in the market on a discount basis at the rate of 3/8 per cent per annum and bills redeemed at maturity and (2) special short-term certificates of in debtedness purchased from time to time for the temporary accommodation of the Treasury] shall not be increased or decreased by more than $1,500,000,000. That the executive committee be further directed, until otherwise directed by the Federal Open Market Com mittee, 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 time to time for the temporary accommoda be necessary from tion of the Treasury; provided that the amount of such held in the account at any one time shall certificates not exceed $1,500,000,000. Thereupon the meeting adjourned. Secretary