October 3, 1946 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 Thursday, October 3, 1946, at 10:45 a.m. PRESENT: Mr. Eccles, Chairman Mr. Sproul, Vice Chairman Mr. Ransom Mr. Draper Mr. Evans Mr. Vardaman Mr. Leach Mr. McLarin Mr. Young Mr. Peyton (alternate for Mr. Clerk who died on September 28) Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Vest, General Counsel Mr. Townsend, Assistant General Counsel Mr. Thomas, Economist Messrs. Kincaid, Rauber, Wheeler, and John H. Williams, Associate Economists Mr. Rouse, Manager of the System Open Market Account Mr. Thurston, Assistant, and Mr. Kennedy, Special Assistant, to the Chairman of the Board of Governors of the Federal Reserve System Mr. Sherman, Assistant Secretary of the Board of Governors Mr. Musgrave, Chief of the Government Finance Section of the Division of Research and Statistics of the Board of Governors Messrs. Whittemore, Gidney, and Davis, alternate members of the Federal Open Market Committee Messrs. Alfred H. Williams, Leedy, and Gilbert, Presidents of the Federal Reserve Banks of Philadelphia, Kansas City, and Dallas, respectively
Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Commit tee held on June 10, 1946, were approved. 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 meeting of the executive com mittee on June 10, 1946, were approved, ratified, and confirmed. Mr. Rouse, as Manager of the System Open Market Account, reviewed the report prepared by the Federal Reserve Bank of New York of open market operations in the System open market account covering the period from June 11, 1946, to September 30, 1946, inclusive, and a supplementary report prepared by the New York Bank covering commit ments executed on October 1 and 2, 1946. During the course of Mr. Rouse's statement copies of the report first mentioned were distri present and copies of both reports have been placed buted to those in the files of the Federal Open Market Committee. a brief discussion, upon motion After duly made and seconded, and by unanimous vote, the transactions in the System account for the period from June 10, 1946, to October 2, 1946, inclusive, were approved, ratified, and confirmed. Procedure Act passage of the Administrative Following the prepared drafts of Fed counsel for the Committee on June 11, 1946, on organization and information Open Market Committee rules eral Committee in compliance be issued by the on procedure to and rules
with the provision of section 3 of that Act. Copies of these drafts were sent to the members of the Committee and other Presidents of the Federal Reserve Banks for their comments, following which the rules were revised in the light of the comments and suggestions received. Thereafter, the revised rules were sent to the members of the Com mittee and, after approval by the members who were in Washington and the five Presidents who were members of the Committee, to become ef fective September 11, 1946, the rules were published in the Federal Register and copies were sent to the Presidents of all of the Federal Reserve Banks. Upon motion duly made and seconded, and by unanimous vote, the action of the members of the Federal Open Market Com mittee in approving the rules, to become effective September 11, 1946, was approved, ratified, and confirmed. The rules as approved by the Committee were in the following form: "RULES ON ORGANIZATION AND INFORMATION "Sec. 1. Basis and Scope. - These rules are issued by the Federal Open Market Committee (hereinafter sometimes called the Committee) pursuant to the Administrative Pro cedure Act and the Federal Reserve Act. Included therein are the rules specified by sections 3(a)(1), 3(b), and Procedure Act. 3(c) of the Administrative "COMPOSITION AND MEETINGS OF COMMITTEE The Federal Open Market Comittee "Sec. 2(a) Members. consists of the members of the Board of Governors of the System and five representatives of the Fed Federal Reserve or First Vice Presi Reserve Banks who are Presidents eral of the Federal of such banks. The representatives dents
"Reserve Banks, and an alternate for each representative, are elected in accordance with section 12A of the Federal Reserve Act for terms of one year commencing on March 1 of each year. "(b) Chairman and Vice Chairman. - At its first meet ing on or after March 1 of each year, the Committee selects a Chairman and a Vice Chairman from among its membership. "(c) Meetings. - The Committee meets at Washington, D. C., on call by the Chairman of the Board of Governors of the Federal Reserve System or at the request of three members of the Committee, at least four times each year and oftener if deemed necessary. "EXECUTIVE COMMITTEE "Sec. 3(a) Members. - At its first meeting on or after March 1 of each year, the Federal Open Market Com mittee selects from among its membership an Executive Committee consisting of three members of the Board of Governors of the Federal Reserve System and two of the representatives of the Federal Reserve Banks. Alter nates to serve in the absence of members of each group represented on the Executive Committee are likewise selected. The Chairman of the Federal Open Market Committee is one of the members of the Executive Com mittee and serves as its Chairman. "(b) Meetings. - The Executive Committee meets of the Chairman or at the re periodically, on call members, as necessary in the performance quest of two of the duties assigned to it. - The duties of the Executive Committee "(c) Duties. are: execution of transactions in the "(1) To direct the with open-market policies adopted open market in accordance the Federal Open Market Committee; by securities and other To allocate the Government "(2) Market Account among held in the System Open obligations accordance with the Reserve Banks in the several Federal Federal Open Market Committee; determined by the principles Open Market of the Federal keep the members "(3) To executed under the informed of all transactions Committee and of all Open Market Committee of the Federal direction of Government securities allocations and reallocations System Open Market held in the and other obligations Account; and
"( ) To perform such other functions and duties in connection with open-market operations as may be assigned to it from time to time by the Federal Open Market Committee. "OTHER PERSONNEL "Sec. 4(a) Official Staff. - The official staff of the Federal Open Market Committee includes its Secretary, ssistant Secretary, General Counsel, Assistant General Counsel, Economist, and Associate Economists, who perform the duties indicated by their titles. These staff members are selected from among the officers and employees of the Board of Governors of the Federal Reserve System and the Federal Reserve Banks. "(b) System Open Market Account. - One of the Federal Reserve Banks is selected by the Committee to execute transactions for the System Open Market Account. Such bank selects a Manager of the System Open Market Account, satisfactory to the Committee. "(c) Others. - The services of other officers and employees of the Board of Governors of the Federal Reserve System and Federal Reserve Banks are made available and are utilized by the Committee as required. "SUBMITTALS, PETITIONS AND REQUESTS , "Sec. 5(a) Place. - The mailing address of the Fed eral Open Market Committee is: Federal Reserve Building, 20th Street and Constitution Avenue, Washington 25, D. C. The Committee custonarily meets at the offices of the Board of Governors of the Federal Reserve System at that address. "(b) Method. - All submittals, petitions, and requests, including requests for access to information, shall be made in writing and mailed to the Committee at the address stated in section 5(a) of these rules. Any petition or request shall be signed by the person making it, or his duly author ized agent, and shall, in so far as practicable, clearly, completely and concisely state his full name and address, the facts involved (including the purposes for which any unpublished information requested will be used if made available), the action desired, the person's interest in matter, and the reasons why the petition or request the should be granted.
"AVAILBILITY OF INFORMATION "Sec. 6(a) Federal Register. - Rules describing the Committee's organization and procedure and any substantive rules or statement of policy which are formulated and adopted by the Committee for the guidance of the public will be published in the Federal Register. "(b) Policy Record. - A complete record of the actions taken by the Committee during the preceding year upon all matters of policy relating to open market operations, show ing the votes taken and the reasons underlying the actions, is included in each annual report made to Congress by the Board of Governors of the Federal Reserve System in accord ance with Section 10 of the Federal Reserve Act. "(c) Unpublished Information. - Except as may be specifically authorized by the Committee or its Executive Committee, or as may be required in the performance of duties for, or pursuant to the direction of, the Committee, no person shall disclose, or permit the disclosure of, any unpublished information of the Committee to anyone, whether by giving out or furnishing such information or copy thereof, by allowing any person to inspect, examine or copy such in formation or copy thereof, or by any other means. Unpub lished information of the Committee shall include all in formation concerning the proceedings, deliberations, dis cussions, and actions of the Committee and all information or advice coming to the Committee or to any member of the Committee or any officer, employee or agent of the Commit tee, the Board of Governors of the Federal Reserve System, or any Federal Reserve Bank, in the performance of duties for, or pursuant to the direction of, the Committee, whether contained in files, memoranda, documents, reports, records, or papers or otherwise acquired books, accounts, and whether located at the offices of the Board of Governors Reserve System, the Federal Reserve Banks, of the Federal Provided, That it shall not include infor or elsewhere: which has been published in accordance with sections mation rules or information which is avail 6(a) and 6(b) of these able to the public through other sources. Reasons for Non-disclosure. - The non-disclosure "(d) of unpublished information of the Committee generally is for one or more of the fol required in the public interest lowing reasons: Disclosure of unpublished information concerning "(1) to future open market operations policies with respect
"which are under consideration or have been adopted by the Committee, and of unpublished information which might aid in anticipating action by the Committee, would: "(i) Interfere with the accomplishment of the object ives of the Committee's actions taken with a view to ac commodating commerce and business and with regard to their bearing upon the general credit situation of the country; "(ii) Permit speculators and others to reap unfair profits or other unfair advantages by speculative trading in securities and otherwise; "(iii) Interfere with the orderly execution of pol icies adopted by the Committee; "(iv) Result in unnecessary and unwarranted disturb ances in the securities markets; "(v) Make open market operations more costly to the Federal Reserve Banks; "(vi) Interfere with the orderly execution and ac complishment of the objectives of policies adopted by other Government agencies concerned with economic and fiscal matters; and "(vii) Cause misinterpretations and misunderstand ings, with possible resultant impairment of public con fidence in the nation's financial structure. Committee's unpublished information includes "(2) The much that is furnished to it on a secret or confidential basis and its disclosure would: "(i) Have the effects described in section 6(d)(1) of these rules; the necessary collection of information "(ii) Impede cannot be obtained except on a and advice, much of which confidential and voluntary basis; and unnecessarily disturb and "(iii) Unreasonably and and confidential busi with individual privacy interfere ness relationships. - Re for Unpublished Information. "(e) Requests will be to unpublished information quests for access of that disclosure clearly appears only if it granted to the public in will not be contrary the information set forth in section 6(d) terest for any of the reasons of these rules. "SUBPOENAS - If any person, by Person Served. "Sec. 7(a) Advice of the Committee, an officer or employee whether or not
"of the Board of Governors of the Federal Reserve System or of a Federal Reserve Bank, has unpublished information of the Committee and in connection therewith is served with a subpoena, order, or other process requiring his personal attendance as a witness or the production of documents or information upon any proceeding, he shall promptly advise the Committee of such service and of all relevant facts, including the documents and information requested and any facts which may be of assistance in determining whether such documents or information should be made available; and he shall take action at the ap propriate time to advise the court or tribunal which issued the process, and the attorney for the party at whose instance the process was issued, if known, of the substance of these rules. "(b) Appenrance by Person Served. - Except as disclosure of the relevant information has been author ized pursuant to these rules, any such person who has unpublished information of the Committee and is re quired to respond to a subpoena or other legal pro cess shall attend at the time and place therein men tioned and respectfully decline to produce any docu ments or disclose any information or give any testi mony with respect thereto, basing his refusal upon If, notwithstanding, the court or other these rules. the production of any documents, dis body orders of any information, or giving of any testi closure having such unpublished information mony, the person shall promptly report the facts to of the Committee the Committee." "RULES ON PROCEDURE rules are issued and Scope. - These "Sec. 1. Basis (hereinafter some Open Market Committee by the Federal to the Administra Committee) pursuant called the times Reserve Act. They Act and the Federal tive Procedure 3(a)(2) of the by section the rules specified include Administrative Procedure Act. of the - The function Committee Action. "Sec. 2. of open market and regulation is the direction Committee Federal Reserve by the which are conducted operations of the policies the determination This involves Banks. to the purchase with respect are to be pursued which Reserve Banks by the Federal sale of securities and
"with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country, together with con sideration and action upon incidental matters relating to the manner in which such operations are to be con ducted. The discharge of the Committee's responsibil ities requires the continuous gathering of information and study of changing financial, economic, and credit conditions and other pertinent considerations by the members of the Committee and its personnel. These activities are closely interrelated with other activ ities of the Board of Governors of the Federal Reserve System and the Federal Reserve Banks and all relevant information and views developed by these organizations are available to the Committee. With this background, action is taken by the Committee upon its own initi ative at periodic meetings held at least four times each year and oftener if deemed necessary. Attendance at Committee meetings is restricted to members of the Committee and its official staff, the Manager of the System Open Market Account, the Presidents of Federal Reserve Banks who are not at the time members of the Committee, and such other advisers as the Committee may invite from time to time. The Committee acts through the adoption and transmittal of directives and regulations to its Executive Committee or to the Federal Reserve Banks. Operations in the System Open Market Account are conducted under the direction of the Executive Committee pursuant to directives issued by the Committee. "Sec. 3. Notice and Public Procedure. - There ordinarily will be no published notice of proposed action by the Committee or public procedure thereon, as described in section 4 of the Administrative Pro cedure Act, because such notice and procedure is unnecessary, or contrary to the public impracticable, for one or both of the following reasons: interest Non-disclosure of information is required "(a) in the public interest for reasons stated in section Rules on Organization and 6(d) of the Committee's Information; and and timely action, without the "(b) Expeditious and procedure, is re incident to such notice delay cuired in the public interest.
"Sec. 4. Effective Date. - Committee action ordi narily will be made effective on the date the action is taken because the nature of the subject matter and the action taken is such that the public interest and the proper discharge of the Committee's responsibilities so require. "Sec. 5. Submittals, Petitions, and Requests. - Submittals, petitions, and requests may be made to the Committee at any time in the manner stated in section 5 of the Committee's Rules on Organization and Information, They will be considered by members of the Committee's official staff and, where appropriate, will be brought to the attention of the members of the Committee or its Executive Committee for consideration and any necessary action." In accordance with the request made by the Federal Open Market Committee at its meeting on June 21, 1939, an examination of the System open market account was made by the examiners for the Board of Governors as of June 28, 1946, at the time of the examination of the Federal Reserve Bank of New York. A report of the examination of the System account was submitted to the Secretary of the Committee under date of August 22, 1946, and copies of the report were brought to the attention of all of the members of the Committee. The report stated that the accounting procedures, records, and system of internal control maintained and the degree Federal Reserve Bank of New York in con of care exercised by the were reviewed and that the examiner nection with the System account to the efficient administration to regard them as adequate continued to the manner in which and no exception was taken of the account, function was handled in the period reviewed. the
Upon motion duly made and seconded, and by unanimous vote, the report was received end ordered filed. At this point Messrs. Ralph Young and Chandler Morse, Assistant Directors of the Division of Research and Statistics of the Board of Governors of the Federal Reserve System, joined the meeting. The reports of the economists were then called for. Mr. Thomas made a statement regarding the economic prospects over the next several months and Mr. Williams commented on some of the con ditions which gave rise to doubts as to the course of future devel opments that made it difficult to forecast what might happen. Copies of the two statements have been placed in the files of the Federal Open Market Committee and are attached hereto. Mr. Williams' statement was followed by a discussion of (1) the suggestion in his remarks that another effort be made by management and labor, with the assistance of Government, to reach an agreement as to what their respective policies should be, and of management with respect to prices and profits (2) the policies in the event of increased productivity. The meeting then recessed and reconvened at 2:40 p.m. with the same attendance as at the end of the morning session except that Messrs. A. H. Williams, Gidney, Gilbert, Ralph Young, and Chandler Morse were not present.
In response to a question as to whether it would be worth while to make another effort to get an agreement between management and labor, Mr. Williams thought that because of changed conditions since the first effort was made there was a possibility that an agreement might be reached in a Conference that dealt with funda mentals of the economic situation, and that the suggestion might be made that management and labor ask for a conference and invite representatives of Government to sit in. It was suggested that if such a conference was to succeed it should at least have Government support. There was a discussion of how such support might be brought about. McLarin inquired whether there would be any objection Mr. giving copies of the of the Federal Reserve Banks to the Presidents Williams to the members of their made by Messrs. Thomas and statements was discussed and it was of directors. This point respective boards be given to the the statements could the substance of concluded that or by the Banks' economists by the Presidents boards of directors reason for this statements. The copies of the without distributing should be in a for the Committee was that theeconomists position with the of the Committee, at the meetings to speak freely position not be dis projections would estimates or that their understanding of misunder of the possibilities outside in view on the tributed of the Committee, official forecasts the figures as being standing of Reserve Banks. of the Federal or Board of Governors, of the
In connection with a review of the progress of the Treasury program for retirement of Government debt since the last meeting of the Committee, Chairman Eccles stated that the program had been more satisfactory in its effects than had been anticipated, that he had not expected that it would result so quickly in stiffening the long term rate, and that it would be fortunate if the program could be continued into At the request of the Committee, Mr. Kennedy read the fol lowing memorandum prepared by him and Mr. Musgrave under date of September 30, 1946, on the subject of debt retirement: "The Treasury cash balance, after allowing for the announced cash retirement of 2 billion dollars of certif icates on October 1, is estimated at somewhat below 7 billion dollars as of the end of October, A further issue of certificates totaling 3.8 billion is maturing on November 1, and it is recommended that 2 billion dol lars of this issue be redeemed for cash, which will leave the Treasury balance at the end of November at about 5 billion. Maturing during December are 3.8 billion dollars of certificates on December 1, and 3.3 billion dollars of 1-1/2 per cent notes on December 15. On the assumption that the balance should not be reduced below 2 billion, it will be possible to retire approximately 3.5 billion of these issues for cash. Cash retirements should be as possible upon the note issue, concentrated as much it is held largely by the banking system, whereas since issue, which was sold in the the maturing certificate is held largely by nonbank investors. Victory Loan, for the entire amount of An exchange offer, therefore, issue should be made, and the the maturing certificate be redeemed for cash. If it December 15 notes should cash balance is not large enough should develop that the which may be the case if the entire note issue to redeem part of the certificate exchange offer is a substantial could be paid off part of the note issue not taken up, into the December 1 and the balance refunded in cash certificates.
"Assuming Treasury balance of 2.5 billion dollars at the close of the year, a substantial continuation of the retirement program should be possible during the first quarter of 1947, since the balance is estimated to increase by approximately 4 billion dollars out of budget surplus and the sale of nonmarketable issues. Maturities during this quarter include 11.4 billion of certificates and 1.9 billion dollars of notes. Conditional upon the continua tion of inflationary pressures, cash retirements should approximately total 4 billion dollars." Chairman Eccles stated that it was expected that within the course of the next two or three days the Treasury would make the usual informal request for the views of the executive committee on the program for further debt retirement and that he would like to dis cuss what the recommendations of the committee should be. It was the consensus of the members of the full committee that, if the Treasury would be willing to reduce its balances by the required amount, it would be desirable to retire $2 billion of the 1 certificate issue, to accept voluntary cash redemptions November of the December 1 issue of certificates which might amount from $5 million to $1 billion, and to pay off the entire $3.261 hundred on December 15, 1946, but that if (be billion of notes maturing substantial voluntary cash redemption cause of the possibility of unwilling to reduce the Treasury was of December 1 certificates) to carry out this program, by the amount necessary its balances should be retired November 1 certificates only of the such amount of the December the entire issue retirement of permit the as would 15 notes.
Upon motion duly made and seconded, and by unanimous vote, it was agreed that the Treasury should be advised accordingly and that the letter of advice would be submitted to the members of the executive committee for approval before it was sent to the Secretary of the Treasury following receipt from the Treasury of the usual informal reouest for the views of the executive committee. Chairman Eccles stated that in accordance with the procedure which had been followed by the American Bankers Association Committee on Treasury financing, he had been invited to meet with the committee when it was in Washington in August for a meeting with the Secretary of the Treasury. He reviewed briefly his discussions with the commit tee on Treasury financing and System credit policies. There were then distributed copies of a statement of recom mendations by representatives of commercial and savings banks, insur ance companies, and investment banks during their recent meetings with the Secretary of the Treasury with respect to Treasury financing policy. This statement was in the following form: "Mr. Bartelt asked that I pass on to you for the use of the Federal Open Market Committee, confidential by the various groups that met the recommendations made times recently with the Secretary. Mr. Bartelt at various Secretary listened to the views and recom said that the mendations of the groups and gave no indication of what of the various proposals. He made it quite he thought any action for the that he was not contemplating clear time being. with Burgess as their spokes "The commercial banks recommendations with an endorsement man, introduced their Press Club statement on the importance of the Secretary's
"of a balanced budget or budget surplus. They felt that the Treasury should get in a position to meet uncertainties of the future by refunding part of the large short-term debt into longer-term debt and to get a broader distribution of the debt outside of the banks. They did not show how a broader distribution of the debt could be effected. The groups made the following specific recommendations: "Lon-term securities. All of the groups recommended a new issue of long-term restricted marketable bonds. The com mercial banks said that such an issue should be made at an appropriate time. Savings banks favored the issue, but indi cated that they did not have any large amount of funds for investment at present. Insurance corpanies stated that they have accumulated funds, but they did not reveal the amount. They also argued that the Treasury should now refund some debt into long-term bonds and take advantage of the present because they see an increasing volume of favorable market, private investments forthcoming to absorb investment funds. bonds. The commercial banks advocated a "Change in E would be eligible as collateral for new savings bond that provisions. This was on the loans under some restricted holders are forced to sell savings bonds grounds that some to meet temporary needs and that at a sacrifice of income savings bonds more attractive and the change would make thus increase sales. bills. The commercial banks recommended "Treasury Reserve of a special the issuance to the Federal against rate of interest, since such an security bearing a low question of direct dealing between issue would raise the Reserve and Treasury. the Federal of the groups formally advocated "Interest rates. None silent on the point, rates. Mostly they were higher interest it was in the tone interest rates were mentioned but when at the present time." nothing need be done that of the above recommendations, connection with a discussion In the statement on the Presidents read sugested that Chairman Eccles at the of the Treasury by the Secretary policy made Government fiscal that copies of and it was understood on Au ust 22, 1946, Press Club before they left handed to the Presidents would be the statement Washington.
Chairman Eccles also inquired what the views of the Committee were with respect to what, if any, action should be taken at this time with respect to the posted rate on Treasury bills, the suggestion that savings bonds be made more attractive, and the suggestion that there be an issue of long-term bonds. In response to this inquiry Mr. Sproul read the following statement which he had presented at the meeting of the Presidents' Conference yesterday: "1. When we met last June the argument on credit policy centered around whether we should follow the modest approach, using the means at our disposal in combatting inflationary trends, or whether we should say that our weapons were no longer usable or effective and that we needed substantial new powers from the Con gress if we were to meet our responsibilities. "2. The fact is that we had been and have been using the modest approach - elimination of preferential discount rate, retirement of Government debt out of Treasury balances, increase in acceptance rates - and that so far this approach has been measurably effective in the economic situation in which it has been used. Aggressive bank bidding for government bonds has ceased, at least temporarily, the banks have been under inter mittent pressure for reserves and short-term rates of interest have risen somewhat. "3. It is true that this is weak medicine in terms of combatting inflation - it has done little to reduce the volume of funds already created and in the hands of and to increase the supply of goods and serv the public ices viz-a-viz the supply of money -- but neither would ambitious proposals have accomplished any the Board's thing of this sort. It has been a holding operation, while it was hoped that increased output per man-hour, our cost-price problem or our the only real answer to wae-price spiral, would come to our rescue. steps in the modest "4. The next contemplated elimination of the 3/8 per cent bill approach were the buying and repurchase rate and the defrosting of the per cent certificate rate. These presently frozen 7/8
"are not now urgent steps -- in fact, the setback in the securities markets in recent weeks and the signs of a possible setback in business activity counsel sitting tight for the present. "5. We should, however, be preparing for these next moves. The elimination of the 3/8 per cent bill rate offers certain difficulties, not in a market sense, but with respect to Federal Reserve earnings and the cost of servicing the Federal debt. If the fixed buy ing and selling rate for Treasury bills is removed, we should probably continue to hold most of the bills but the rate, if left to adjust to the market, would rise perhaps to 3/4 per cent. To meet this problem one sug gestion, which Chairman Eccles has promoted, is to ex change our bills for a special Treasury demand obliga tion bearing, say, 1/8 or 1/4 per cent interest. This has the defect, to me the fatal defect, of unnecessarily arousing public fears of direct Treasury financing by the central banks and of placing the initiative as to our holdings and the rate to be paid on them, almost entirely with the Treasury. My own preference would be to let the rate and our earnings increase, and to restore the franchise tax on Federal Reserve Banks which would mean that the Treasury would recover its time and place for the res 'losses'. An appropriate toration of the tax would be as an amendment to the F.D.I.C. bill for return of its capital to the Federal and the Treasury. It was in connection Reserve Banks of this capital that the franchise with the provision If it be argued that this is to tax was abolished. unduly adjustment of the situation, postpone and delay might be possible. I don't like it par a compromise it would be better than the special ticularly, but time, we could obligation. At the appropriate demand at 1/8 or 1/4 of Treasury bills, say begin to bid for our maturing bills in exchange 1 per cent, tendering way we would avoid to us. In this for those awarded in market keep our investments a special certificate, and avoid increasing reduce our earnings, obligations, the public debt. the cost of servicing cent bill rate is of the 3/8 per "6. Elimination except as it procedure, however, a largely meaningless and except to the temporarily create uncertainty might we now get rid of the hocus-pocus that it would extent To have real maturing bills. to replace our go through
"meaning elimination of the 3/8 per cent bill rate should be the prelude to abandonment of the fixed 7/8 per cent certificate rate, and to our partial escape from the straightjacket of the fixed pattern of rates. Admittedly a rise in certificate rate to 1 or 1-1/4 per cent would not halt inflation and we would still have to provide market support, but it would create a new situation in which uncertainty as to future rates would increase, sales of old certificates to us would be made at a loss, the spread between short and long-term yields would be narrowed, and banks would, in my opinion, be more cautious about making longterm investments, term loans, etc. And on the side of cost the to Treasury there is really little argument. The annual interest charge on the $70,000,000,000 of Governments maturing before December, 1950, excluding bills, is about $1,000,000,000 or 1.43 per cent. If all of these securities were refunded at 1-1/4 per cent the annual service cost to the Treasury would be reduced about $125,000,000. "7. That you might say, however, would be the re verse of funding some of the debt, which is what is being widely recommended. In present circumstances, however, the only funding of the debt which has real meaning is the sale of securities to non-bank investors - it is not merely lengthening maturities and raising coupons no matter who buys the securities. Sales within the banking system could well be made at lower rates and with shorter maturities even than during the war. "8. For the non-bank investor, I still think a long-term 2-1/2 per cent obligation without roll-over possibilities would be appropriate and desirable toward the end of the year, and that sales of savings bonds to small investors should be stepped up faster and further - if necessary by reimbursing those who operate pay out-of-pocket expenses and roll reduction plans for terms of the Series 'E' bond it by sweetening up the self. the Treasury should con "9. Finally, of course, of balances, and next year tinue debt redemption out though the budget is in of its cash surplus even out be further strenuous efforts deficit. And there should that deficit into surplus." to convert
There was a discussion of the proposals contained in Mr. Sproul's statement and particularly of the type and timing of a security that might be issued as a medium for investment of accu mulated savings funds. Chairman Eccles inquired whether there was any objection to the sugestion that there be made available a special long-term issue to absorb accumulated savings in cases where that demand was not now met by the Series G savings bond, it being understood that investors in the new security would have to demonstrate that they had accumulated savings in the amount of the securities purchased and were not selling marketable issues in order to acquire the new issue. There was no objection to such a program. In response to an inquiry as to whether Series E bonds should be made eligible as collateral for bank loans, Mr. Young answered in the affirmative and Mr. McLerin suggested that in order to increase the inducement to hold series E bonds to maturity the might offer a more attractive bond in exchange for maturing Treasury This and other possibilities for making series E series E bonds. discussed, such as some change which bonds more attractive were of maturing series E bonds to reinvest would enable the owners was no objection on 2.9 per cent rate. There their funds at the to the adoption by the Treasury of the part of the members present kind, although it was pointed out some suggestion of the latter
that it might not be desirable to continue such a program into a period of recession when the emphasis would be placed on spending to maintain employment. In connection with the discussion of the question whether any action should be taken at the present time with respect to the buying rate on Treasury bills, Chairman Eccles stated that while the present retirement program continued there was no need for action on the bill rate but that it should not be continued too long. Mr. Sproul suggested that the present arrangement with respect to bills was working without disturbance to the market and that, as the amount of bills held by the Federal Reserve Banks in creased, the posted rate and repurchase option became less important and more within the control of the Federal Open Market Committee. In the course of a discussion of the steps that might be taken in connection with the elimination of the buying rate on Treasury bills, there were distributed copies of (1) a memorandum prepared by Mr. Kennedy discussing actions that might be taken with respect to Treasury bills, and (2) a memorandum prepared at Bank of New York submitting a plan for elimina the Federal Reserve rate on bills and issuing new bills under an arrange ting the buying the payment for new issues by the surrender ment which would permit issues without preferential allotment on exchange tenders. of maturing
Chairman Eccles raised a question as to the date for the next meeting of the Committee and suggested that, inasmuch as it might be desirable to take action on the posted rate on Treasury bills before the end of the year, it might also be desirable for the Committee to meet in December. In the course of a discussion of actions that might be available to the System in carrying out System credit policies, Chairman Eccles stated that, if the debt retirement program were carried into 1947, the buying rate on Treasury bills were eliminated, and reserve requirements of member banks in central reserve cities were increased to the maximum permitted under existing law, it might be possible to exert such an influence in the money market during the period of threatened inflation that further steps such as those the Board's annual report for 1945 would not be nec referred to in essary. At the conclusion of a discussion, duly made and seconded, it upon motion unanimously (1) that no action was voted be taken at this time to change should the direction issued by the Committee with respect to the on March 1, 1945, bills by the Fed purchase of Treasury and (2) to issue eral Reserve Banks, following direction to the execu the tive committee, with the understanding limit.tions contained in the that the would include commitments direction and sales of securities for purchases the System open market account; for
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 purchases, sales, exchanges, replace ment of maturing securities, and letting maturities run off without replacement), as may be necessary in the practical administration of the account or for the pur pose of maintaining an orderly market in Treasury secu rities and a general level of prices and yields of Gov ernment securities which will support the Treasury is suing rates of 7/8 per cent for one-year certificates and 2-1/2 per cent for 27-year bonds restricted as to ownership; provided that the aggregate amount of secu rities held in the account at the close of this date [other than (1) bills purchased outright in the market on a discount bsis at the rate of 3/8 per cent per annum and bills redeemed at maturity end (2) special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury] shall not be increased or decreased by more than $2,000,000,000. 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 indebted ness as may be necessary from time to time for the temporary accomodation of the Treasury; provided that the amount of such certificates held in the account at any one time shall not exceed $1,500,000,000. Chairman Eccles reviewed for the information of the members committee the discussion at the meeting of the executive of the full with the questions presented in committee this morning in connection staff group on foreign interests under the memorandum prepared by the relationships of the Federal Re of May 1, 1946, with respect to date It was stated that to the Bretton Woods institutions. serve System to recommend to the full committee the executive committee had voted
that it authorize direct transactions in Government securities for the System open market account with the International Monetary Fund and International Bank for Reconstruction and Development, for the purposes stated in the memorandum from the staff group, without fol lowing the usual procedure of effecting transactions in the market, and that the memorandum of the staff group be placed on the agenda for consideration at the next meeting of the full committee. After discussion, upon motion duly made and seconded, and by unanimous vote, the recommendation of the executive com mittee was approved. There was a further reference to the time of the next meeting of the Federal Open Market Committee and the members of the Committee in a suggestion by Chairman Eccles that the date for the concurred week of December 9, 1946, with be set tentatively for the meeting the executive committee, not later than the understanding that if a meeting need not be held in 15, 1946, should feel that November would be advised accord of the full Committee December, the members until after the first of meeting would not be held ingly and the next year. Thereupon the meeting adjourned. Approved: Secretary Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, October 3, 1946