February 27–28, 1947 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, February 27, 1947, at 10:35 a.m. PRESENT: Mr. Eccles, Chairman Mr. Sproul, Vice Chairman Mr. Draper Mr. Evans Mr. Vardaman Mr. Clayton Mr. Leach Mr. McLarin Mr. Young Mr. Peyton (alternate for Mr. Clerk, who died on September 28, 1946) Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Vest, General Counsel Mr. Townsend, Assistant General Counsel Mr. Thomas, Economist Messrs. Rauber, Wheeler, and John H. Williams, Associate Economists Mr. Rouse, Manager of the System Open Market Account Thurston, Assistant to the Chair Mr. man of the Board of Governors of the Federal Reserve System Mr. Sherman, Assistant Secretary of the Board of Governors Messrs. Ralph A. Young and Morse, Directors of the Di Assistant vision of Research and Statistics, Board of Governors Mr. Musgrave, Chief, and Mr. Smith, Economist, Government Finance of Research and Section, Division Statistics, Board of Governors Whittemore and Gidney, alternate Messrs. the Federal Open Market members of Committee
Messrs. Alfred H. Williams, Leedy, Gilbert, and Earhart, Presidents of the Federal Reserve Banks of Philadelphia, Kansas City, Dallas, and San Francisco, respectively Mr. Stead, Vice President of the Federal Reserve Bank of St. Louis Mr. Johnson, General Counsel of the Federal Reserve Bank of Dallas Chairman Eccles called for the reports of the economists. Mr. Thomas made a statement on the economic prospects for 1947-1948 and also presented a paper which analyzed the structure of the public debt and problems connected with its management. Mr. Wheeler then made a statement on means of increasing the effectiveness of actions taken by the Federal Reserve to influence credit conditions, and, following a discussion of the remarks of Messrs. Thomas and Wheeler, Mr. John H. Williams reviewed the current domestic and international economic situation and discussed the outlook. Copies of the state ments by Messrs. Thomas, Wheeler, and Williams have been placed in the files of the Federal Open Market Committee and are attached here to. Following a general discussion of questions raised by the economists' statements, the meeting recessed and reconvened at 28, with the same attendance as at the ses 10:10 a.m. on February 27, except that Mr. Davis, President of the Fed sion on February St. Louis and alternate member of the Federal eral Reserve Bank of
Open Market Committee, Mr. Kincaid, Associate Economist, and Mr. Smead, Director of the Division of Bank Operations of the Board of Governors, were present, and Messrs. Wheeler, Ralph A. Young, Morse, Townsend, and Johnson were not present. Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Com mittee held on October 3, 1946, were ap proved. The progress of the program for retirement of the Govern ment debt since the last meeting of the full Committee and its ef fects on the Government securities and money markets and on the Treasury cash position were discussed, and Chairman Eccles stated that current receipts of the Treasury had held up better than had been anticipated, and that it appeared that another billion dol lars of certificates could be retired April 1 and perhaps an ad ditional amount before the end of this fiscal year. He noted that the Treasury desired renewal of the authority of the Federal Re serve Banks to purchase up to five billion dollars in securities direct from the Treasury, that a bill had been introduced in Con gress continuing this authority after March 31, 1947, and that he had been called to appear at hearings on the bill to be held be ginning Monday, March 3, 1947, before the House Banking and Cur rency Committee.
All of the members of the Committee had been furnished a draft of the letter to the Treasury with respect to the savings bond program, which had been prepared but which, in accordance with the decision reached at the meeting of the executive com mittee on February 17, 1947, had not been sent. Mr. Sproul stated that it was the intention of the executive committee of the Federal Open Market Committee to ask that the full Commit tee, at a meeting in the autumn of this year, consider what sug gestions should be made to the Treasury before it reached a de cision with respect to its policy during 1948 regarding the of fering of a special security which would encourage holders of maturing savings bonds to reinvest their funds. Chairman Eccles said that the matter would be of consider able importance from the longer range standpoint when Series E sav ings bonds started to mature in 1951, and that it should be given a great deal of study before a recommendation was made to the Treas ury. In connection with a discussion of proposals that the Treas ury issue a long-term security, Chairman Eccles reviewed the letter and memorandum sent to the Treasury under date of January 22, 1947, and which had been approved by the executive committee at its meet 17. He also said it might be desirable to send ing on February
another letter to the Treasury which would answer some of the argu ments recently presented to the Treasury by insurance and banker groups in support of a long-term marketable issue. A draft of a memorandum prepared under date of February 27, 1947, for consider ation in this connection was then distributed by Mr. Musgrave and read by Mr. Carpenter. The memorandum,after stating the circum stances under which a long-term security would be desirable, pointed out the reasons why the objective sought would not be served by a marketable issue and the reasons for the recommendation that a non marketable issue of the Series G type be made available. Messrs. Eccles and Sproul reported briefly on their discus sion of this matter with Fiscal Assistant Secretary Bartelt at their luncheon meeting yesterday. They had gotten the impression from the discussion that the Treasury had not yet reached a decision on the issuance of a long-term security, and that in their discussion Mr. Bartelt had seemed impressed with the statement that merely putting out a 2-1/2 per cent bond for the purpose of keeping the long-term interest rate from declining would be dealing with the effects and since, if the long-term rate should again come not the basic causes, under pressure, it would probably be not because of an excess of sav further monetization of the debt as a result of ings but because of member banks "playing the pattern of rates". Chairman Eccles also
said that, with the debt retirement program coming to an end, the pressure on the long-term interest rate would likely be resumed, and that, in the absence of the enactment by Congress of legis lation such as that proposed in the Board's Annual Report for 1945, the Federal Open Market Committee and the Treasury would be faced with two alternatives as a means of preventing a decline in the long-term rate, (1) issuing enough 2-1/2 per cent long-term bonds to satisfy the demand for that type of security, a move which would cost the Treasury more than a rise in short-term interest rates, or (2) permitting a rise in short-term rates so as to re move the incentive to "play the pattern of rates". Chairman Eccles also suggested that the Committee write a letter to the Treasury along the lines of the memorandum mentioned above so that the Treas ury would have this view as well as the views being presented by the groups recommending a long-term marketable security. After some further discussion, during which certain changes were suggested in the language of the memorandum, upon motion duly made and seconded, and by unanimous vote, the executive committee was authorized to send a letter to the Treasury transmitting substantially the recommendations contained in the memorandum on the issuance of a long-term security. the draft of a memorandum on changes Reference was then made to which had been discussed informally by Chair in Treasury bill policies man Eccles and Mr. Sproul with the Treasury on February 17, 1947, in
accordance with the action taken at the meeting of the executive com mittee on February 17, 1947. Subsequently Mr. Sproul had suggested several clarifying changes in the memorandum, which he had sent to Chairman Eccles with a letter dated February 21, 1947. Chairman Eccles stated that all of the changes except one were changes in form only and were acceptable to him. The one exception would elimi nate a statement that any change in the rate at which bills were sup ported by the System would be made only after "concurrence by the Treasury", and Chairman Eccles felt that change should not be made. He stated that it was generally agreed that a change in the bill rate would not be made without the concurrence of the Treasury, that in asmuch as the preliminary memorandum discussed with the Treasury had contained the words "concurrence by the Treasury" its elimination now might raise a question as to whether the System intended to act without Treasury concurrence, that to raise such a question at this time would be a mistake, and that he believed the elimination would be an assertion of independence of the System which would not in practice be carried out. it was important not to abandon Mr. Sproul said that he felt whatever independence we have, by giving our proxy to the Treasury in advance, that he agreed that it was extremely unlikely the System action on this matter without concurrence by the Treasury, would take
that the Committee should not feel it had been committed as to word ing and action by a preliminary memorandum prepared in haste and for exploratory discussions, and that he believed the relations with the Treasury were now such that the reason for the elimination of these words need not and would not cause any suspicion on the part of the Treasury that the System presently has in mind increasing short-term rates on the public debt against the wishes of the Treasury. During a discussion of the matter, Mr. Clayton suggested a change in the memorandum which would eliminate the paragraph con taining the words to which Mr. Sproul objected and which would state in the opening paragraph of the memorandum that policies followed during the war years needed to be reviewed "with the view to reach ing an agreement for an adjustment of policies and action to changed conditions". Mr. Sproul said that this wording would be acceptable to him, Eccles stated that he preferred the original wording and Chairman he would not object to the reword under the circumstances, but that the understanding that he might say to ing if it was approved with memorandum had been that the wording of the preliminary Mr. Bartelt the Committee to approve the memorandum changed in order to enable and that the change did of a minority view, without the statement not have the complete cooperation mean that the Treasury would not
of the Federal Reserve System. Mr. Evans said he did not favor the proposed change because it was of no practical significance, and the retention of the lan guage used in the preliminary memorandum would avoid the possibility of needlessly raising an issue between the Board and the Treasury. At the conclusion of the discussion, upon motion duly made and seconded, the proposed change was approved with the understanding suggested by Chairman Eccles. On this action Mr. Evans voted "no". Thereupon, upon motion duly made and seconded and by unanimous vote, the re vised memorandum was approved unanimously as follows for transmission to the Treas ury: "CHANGES IN TREASURY BILL POLICIES "Treasury and Federal Reserve policies and procedures followed during the war with respect to Treasury bills need to be reviewed, now that the period of heavy war finance has passed, with a view to reaching agreement for an adjustment of policies and action to changed conditions. Two aspects of these policies should be considered: Weekly replacement of Federal Reserve maturi (A) ties, and of the posted buying rate and re (B) Elimination purchase option. "(A) Replacement of Federal Reserve Bill Maturities through which the Federal Reserve "Existing arrangements, their maturing holdings of Treasury bills, involve Banks replace a cumbersome procedure initiated by the Secretary of the Treasury at least now that most which is unsatisfactory, (Mr. Morgenthau) bills are held by the Reserve System. of the refunding operations could be simplified by "The weekly bills to exchange them for the permitting holders of maturing
"new issue of bills. Under this procedure the Treasury would provide that bills awarded on tenders could be paid for either by cash or by surrender of a like face amount of the maturing issue of bills, with an adjustment for the discount. Pending any other change in policies, the rate could continue to be determined as at present. The Federal Reserve System would tender for the amount of maturing bills held in the System and option accounts (at a price it would determine-currently 99.905 for ninety-one day bills), and would not need to con tinue the present arrangement whereby dealers bid for bills and sell them to the System to replace its maturities. It would still be necessary, of course, to see that the total of each weekly offering of bills is covered by bids at the determined rate. "This change in refunding procedure could be introduced immediately and without other changes in bill policy but in connection with it, a general revision of policy on Treasury bills may also be considered. "(B) Elimination of Posted Buying Rate and Repurchase Option "The posted rate of 3/8 per cent for the purchase and re sale of Treasury bills by the Federal Reserve Banks was a war time measure designed to influence market rates for Government securities and encourage banks to make full use of their re serves. Under current conditions these arrangements no longer serve their original purpose. With a pegged certificate rate and only 1 1/2 billion dollars of bill holdings outside the Fed eral Reserve Banks, certificates have replaced bills as the principal market instrument influencing short-term rates, and as a medium for investment of short-term funds or the adjust ment of reserve positions of banks. Affirmatively, the rein statement of the Treasury bill as a money market instrument would provide increased flexibility in debt management and reserve adjustment. "In considering the termination of the buying rate and repurchase option, decisions need to be made with respect to: of the actions (1) Timing amounts of bills issued (2) New policy regarding and rates and effect on System cost to Treasury (3) Added earnings that the market Because of the emphasis "(1) Timing - may place on the elimination of the buying rate, the change
"should be made when it is desired to exert some pressure or restraining influence. Accordingly, it might be post poned until there is a curtailment in the debt retirement program to the point of lifting the pressure on member bank reserve positions, which prevailed during the period of large-scale debt retirement last year, and has been accentuated by net tax receipts in the first quarter of 1947; or until private credit expansion appears to be proceeding at too rapid a rate. April might be a pro pitious time for such action. The change whenever made would apply only to bills issued subsequently; existing privileges would continue to apply to issues of bills out standing at the time of the change, until they mature. "(2) Bill policy - If the posted buying rate and re purchase option on Treasury bills are eliminated, there are various possibilities as to policies that may be followed in issuing bills and establishing rates. would be to permit bills to find "(a) One possibility their level in the market. It is assumed that the bill rate would rise toward the certificate rate which the Federal Re would continue to maintain at the Treasury is serve System suing rate of 7/8 per cent. The system would continue to its holdings of bills into new bills to the extent refund not taken by the market. In view of the that they were on bills, the market probably would probable higher rate take more bills than at present. would be for the Treasury to "(b) Another possibility discontinue entirely the issuance of bills and replace ma issues of certificates. With turing bills with additional at a fixed level and the bill the certificate rate supported to approximately the same level, it rate permitted to rise is little reason to have outstanding may be said that there serving essentially the same pur two short-term instruments pose. for the System to would be "(c) A third possibility not at 3/8 per cent but at stabilize the market for bills, the Treasury to continue rate or rates would permit whatever with a 7/8 per cent coupon. to issue one-year certificates largely and in rate would be maintained The certificate Since bills do supported bill rate. through the directly rate could be supported coupon, their not carry a fixed-rate rate; this would have announcement of a fixed without public within a narrow some flexibility of permitting the advantage operations in engage in open-market The system would range.
"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.
Also: Minutes of the Executive Committee, December 11, 1946·Minutes of the Executive Committee, January 10, 1947·Minutes of the Executive Committee, February 17, 1947·Minutes of the Executive Committee, February 27, 1947