February 27–28, 1947 FOMC Minutes

FOMC minutes

"bills for the purpose of stabilizing the bill rate at the desired level and would refund its weekly maturities through exchanges as proposed under (A) above. The Treasury would continue to issue Treasury bills weekly in the same amounts now outstanding or increase or decrease the amount to suit its needs. The Reserve System would tender for new bills to replace its maturities and be prepared to buy through the market any additional amount of bills that might be necessary to complete the sale by the Treasury of its weekly offerings at satisfactory rates. Under such con ditions, it is likely that the market would take more bills than at present, which would result in partial al lotments on our exchange subscriptions. Any such increase in holdings of Treasury bills by other than the Reserve System would probably be accompanied by a decrease in hold ings of certificates of indebtedness and, conversely, any reduction in the Reserve System's holdings of Treasury bills would probably be accompanied by an increase in holdings of certificates. "These changes in policies and practices would make the Treasury bills again a useful market instrument and would per mit greater flexibility in monetary and debt management poli cies, without interfering with the general policy of stabi lizing interest rates. Reserve earnings and interest cost to the "(3) Federal Treasury - Elimination of the buying rate and repurchase op tion on Treasury bills raises questions of Treasury financing costs and System earnings. A rise in the bill rate, or the substitution of certificates for bills, would increase Fed eral Reserve earnings, which are already large, and would also increase the interest cost to the Treasury. Federal Re serve earnings will continue at a high level indefinitely, as it is unlikely that there will be any substantial reduction the total amount of the System's holdings of Government in securities in the near future. "In order that the System may pass on to the Treasury of requirements, two approaches may its earnings in excess be considered: a heretofore dormant provision Use may be made of "(a) Paragraph 4 of section 16 of that of the Federal Reserve Act. Board of Governors to charge the Federal Act authorizes the on whatever amount of Federal Reserve Reserve Banks interest of the amount of gold certificates notes they issue in excess Agent as collateral security for held by the Federal Reserve

"such notes. The rate of interest charged at each Federal Reserve Bank could be fixed by the Board, from time to time, so as to absorb some of the earnings of the Reserve Banks, and the amounts collected could be turned over to the Treas ury. This would require no legislation and could be made effective by Board action immediately. "(b) Another possibility is to impose a tax on the earnings of the Federal Reserve Banks (similar to the old franchise tax). This would require legislation. "Either provision would make it possible to return to the Treasury not only any additional earnings obtained by the System from higher rates on Treasury bills (perhaps 50 million dollars or more a year) but also some of the earn System on its present portfolio at existing ings of the rates (from 50 to 75 million dollars a year)." Upon motion duly made and seconded, and by unanimous vote, the actions of the executive committee of the Federal as set forth in the Open Market Committee the meetings of the executive minutes of on October 3 and December 11, committee 1946, and January 10 and February 17, 1947, ratified, and confirmed. were approved, prepared by the Federal of open market operations A report was presented by Mr. Rouse, Manager of the Reserve Bank of New York System Open Market Account covering the period from October 3, 1946, with supplementary reports 24, 1947, inclusive, together to February executed on Feb Bank covering transactions by the New York prepared Mr. Rouse's com the course of 27, 1947. During ruary 25, 26, and were dis first mentioned of the report the reports, copies ments on placed in the files reports have been copies of all tributed, and Federal Open Market Committee. of the upon motion a brief discussion, After and by unanimous made and seconded duly

vote, the transactions in the System ac count for the period from October 3, 1946, to February 27, 1947, inclusive, were ap proved, ratified, and confirmed. Chairman Eccles then referred to the memorandum prepared by the staff group on foreign interests under date of May 1, 1946, which had been presented to the Committee at its meeting on October 3, 1946, and which, in accordance with the action then taken, had been placed on the agenda for consideration at this meeting. He said there was no pressure from the National Advisory Council or from the Aldrich Committee, which advises the President on the International Bank for Reconstruction and Development and the International Monetary Fund, to make securities of the Bank eligible for open market purchases by the System, that the only purpose of such action would be to pro vide a better market, that any legislation for that purpose would have to be initiated by the System, and that it seemed to him it would be a mistake for the Reserve Banks to engage in stabilization operations in securities of the International Bank, since it would for similar operations in other securities and the lead to pressure either stand on their own feet in this market or securities should should not be issued. Upon motion duly made and seconded, and by unanimous vote, it was agreed that legislation to enable the Federal Reserve in stabilization operations Banks to engage

in securities of the International Bank for Reconstruction and Development should not be sought by the System. Thereupon the meeting adjourned. Secretary. Approved: Chairman.