October 6–7, 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 Monday, October 6, 1947, at 10:30 a.m. PRESENT: Mr. Eccles, Chairman Mr. Sproul, Vice Chairman Mr. Szymczak Mr. Draper Mr. Evans Mr. Vardaman Mr. Clayton Mr. Whittemore Mr. Gidney Mr. Davis Mr. Peyton Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Vest, General Counsel Mr. Thomas, Economist Messrs. Thompson, Stead, and John H. Williams, Associate Economists Mr. Rouse, Manager of the System Open Market Account Mr. Thurston, Assistant to the Chairman, Board of Governors Mr. Sherman, Assistant Secretary, Board of Governors Mr. Smith, Economist, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Arthur Willis, Special Assistant, Securities Department, Federal Reserve Bank of New York Messrs. Alfred H. Williams, Young, Gilbert, and Leedy, alternate members of the Federal Open Market Committee Leach, McLarin, and Earhart, Presi Messrs. dents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively
Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on June 5-6, 1947, 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 minutes of the meetings of the executive committee held on June 5 and 6, June 30, and August 6, 1947, were approved, rati fied, and confirmed. Upon motion duly made and seconded, and by unanimous vote, the action taken by the members of the Federal Open Market Committee on July 2, 1947, approving the following amended direction to the Federal Reserve Banks which discontinued the posted rate on Treasury bills issued on or after July 10, 1947, was approved, ratified, and confirmed: Until otherwise directed by the Federal Open Market Committee, the 12 Federal Reserve Banks are directed to purchase all Treasury bills issued prior to July 10, 1947, that may be offered to such Banks on a discount basis at the rate of 3/8 per cent per annum, any such purchases the condition that the Federal Reserve Bank, to be upon of the seller on or before the last upon the request business day preceding the closing day on which the tenders of the bills for new Treas Treasury will accept to him Treasury bills of like amount ury bills, will sell rate of discount. All bills pur and maturity at the same are to be held by the pur chased under this direction Federal Reserve Bank in its own account and chasing transactions in Treasury bills prompt reports of all of the System Open Market are to be made to the Manager Account.
Upon motion duly made and seconded, and by unanimous vote, the action taken by the members of the Federal Open Mar ket Committee on August 8, 1947, approv ing an amendment to the direction issued to the executive committee on June 6, 1947, to provide that transactions in the System account shall be for the purpose of supporting the current issuing rate on Treasury certificates instead of an issuing rate of 7/8 per cent, was ap proved, ratified, and confirmed. The direction as revised read as follows: The executive committee be directed, until otherwise 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, replacement of maturing securities, and letting maturities run off with out replacement), as may be necessary in the practical administration of the account or for the purpose of main taining an orderly market in Treasury securities and a general level of prices and yields of Government secu rities which will support the Treasury current issuing certificates and 2-1/2 per cent for 27-year rate for bonds restricted as to ownership; provided that the held in the account at aggregate amount of securities the close of this date [other than (1) maturing bills transferred to the System account from the option ac of the Federal Reserve Banks pursuant to the counts issued by the Federal Open Market Committee direction purchased outright in the market on May 5, 1947, bills basis at the rate of 3/8 per cent per on a discount annum, bills redeemed or exchanged at maturity, and exchange for maturing bills, and (2) bills taken in short-term certificates of indebtedness pur special the temporary accommoda chased from time to time for shall not be increased or de tion of the Treasury] creased by more than $2,000,000,000. The executive committee be further directed, un Open Market Com directed by the Federal til otherwise for the System open to arrange for the purchase mittee, Treasury of such amounts direct from the market account
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 $1,500,000,000. Upon motion duly made and seconded, and by unanimous vote, the action of the Federal Open Market Committee on Sep tember 4, 1947, increasing from $2 bil lion to $2.75 billion the authority of the executive committee contained in the first paragraph of the direction issued at the meeting of the full Committee on June 6 and amended on August 8, 1947, was approved, ratified, and confirmed. Mr. Rouse presented, and read the important parts of, a on open market operations prepared by the Federal Reserve report Bank of New York covering the period from June 5 to October 1, a supplementary report cover 1947, inclusive. He also presented 1947. Copies of these re on October 2 and 3, ing transactions in the files of the Federal Open Market ports have been placed Committee. a brief discussion of the Following motion duly made and sec reports, upon vote, the trans onded and by unanimous account for the actions in the System ,to October 3, 1947, inclu period June were approved, ratified, and sive, confirmed. to the attention had been brought this meeting there Before of examination of the System of the Committee a report of each member in connection with the of June 27, 1947, made open market account as
regular examination of the Federal Reserve Bank of New York and submitted by the examiner in charge for the Board of Governors. The report took no exception to the manner in which the account was handled during the period reviewed and stated that the ac counting procedures, records, system of internal control, and degree of care exercised by the Federal Reserve Bank of New York in connection with the account continued to be regarded as ade quate to its efficient administration. Upon motion duly made and seconded, and by unanimous vote, the report was received and ordered filed. Mr. Rouse stated that with the disappearance on October 2, 1947, of option bills he had contemplated suggesting that the state ment of procedure for the allocation of securities in the System open market account among the Federal Reserve Banks be revised to eliminate the references to option bills. The problem had been discussed with Mr. Smead, Director of the Division of Bank Opera tions of the Board of Governors, who felt that the procedure might be simplified somewhat, and Mr. Rouse proposed that Mr. Smead and he review the procedure and submit a recommendation to the Committee. Upon motion duly made and seconded and by unanimous vote, (1) the allocation of securities in the System account on October 1 was approved, ratified, and con firmed, and (2) it was agreed that Messrs. Rouse and Smead should study the procedure
10/6/4 -6 and submit a report to the executive com mittee of the Federal Open Market Commit tee for consideration and recommendation to the full Committee at its next meeting. At this time Mr. Ralph Young, Assistant Director of the Division of Research and Statistics of the Board of Governors entered the meeting. Chairman Eccles called for the reports of the economists. Mr. Thomas read a paper on "Inflation and Credit Policy" which, after discussing the present inflationary development and com menting that the Federal Reserve System now faced the question of placing real restrictions on credit expansion, stated that there were four possible lines of policy which the System might consider for dealing with the situation: (1) Support short-term interest rates at present levels re gardless of what further credit expansion might occur; (2) Permit a gradual further rise in short-term rates for the purpose of creating some uncertainty in the market and endeavoring to find whether credit expansion would thus be discouraged; control and adopt of interest rate Abandon the policy (3) a policy of control of the volume of bank reserves, which would be a return to prewar procedures and might be the only possible means of actually checking expansion, and under which it would be further credit difficult to predict what would be the effect on in terest rates and on the Government security market; more vigorously for enactment of the Board's legis (4) Push which proposals seemed to provide the lative proposals, effective solution to the present problem, only really
but which probably could not be enacted early enough to deal with the current rapidly developing inflationary pressures. Mr. John H. Williams discussed the current outlook, giving special attention to the foreign situation and demands of other countries for goods produced in the United States. He stated that the present situation was not one which could be dealt with satis factorily by use of traditional monetary controls which might op erate to bring about a deflation through reducing production, em ployment, and pay rolls, that restrictions in the money supply should be considered, but that they did not provide the answer to the present problem which called for a further increase in out put of goods. Copies of the statements by Messrs. Thomas and Williams have been placed in the files of the Federal Open Market Committee. Following a discussion of actions that might be taken to combat the inflationary situation, the meeting recessed and re convened at 10:45 a.m. on October 7, 1947, with the same attendance as at the close of the session on October 6, except that Mr. Thomp son and Mr. Ralph Young were not present. Mr. Carpenter read a memorandum dated October 1, 1947, pre of Research and Statistics of the Board of pared in the Division market policies for the near future. The memo Governors on open randum, a copy of which had been furnished each member of the
Committee before this meeting, reviewed current monetary factors and presented questions for System consideration together with an outline of various policies that might be followed in dealing with the present situation. Chairman Eccles discussed briefly the effect of recent gold imports, the possible effects of a further small increase in the short-term rate, and the importance of action to stop the rapid increase in bank credit through the medium of bank loans which were expanding at a rate of about $10 billion a year, thereby adding to the money supply at a more rapid rate than could be offset by the reduction of Government debt. He also mentioned the change in the lending policies of banks re sulting from the recent increase in the short-term rate and stated that, while a further increase might have some psycho logical effect on the banks and on their lending policies, it would not have any effect on the desire of the public to borrow from the banks and that additional steps to meet this problem would be necessary. he was satisfied from a recent He went on to say that with Under Secretary of the Treasury Wiggins that conversation to concur in a further increase the Treasury would not be willing be shown that it would have rate unless it could in the short-term effect that would make it worth the additional an anti-inflationary
cost. It would not be possible, he said, even if Congress were sympathetic, to obtain enactment of the proposals contained in the annual reports of the Board of Governors for 1945 and 1946 in time to be of any value. He questioned the ability of the System to do much to affect the existing situation but said that there were steps that could be taken, including an effort to persuade member banks to look at their loan policies from a national credit standpoint. In this connection, he said it had been suggested that a statement be issued by the Board of Gov ernors, the Comptroller of the Currency, the Federal Deposit In Corporation, and the Association of Supervisors of State surance the banks of the danger of further credit Banks, which would warn and would exercise a restraining influence on further expansion expansion of bank credit. such a statement might con During the discussion of what had been discussions of the Chairman Eccles said that there tain, of the Comptroller of the Currency, matter with representatives and the Association of Deposit Insurance Corporation, the Federal further meetings were being of State Banks, and that Supervisors discussions grew out of a suggestion He added that these arranged. Treasury Wiggins last Under Secretary of the which he had made to of the Federal meeting be called of representatives summer that a purpose of discussing closer agencies for the bank supervisory
cooperation between the agencies, that such a meeting was called at which it was agreed that there should be closer and continuing cooperation, that subsequent meetings were held and that further discussions would be had looking to the issuance of a statement along the lines referred to above. After commenting on the questions presented in the memo randum of October 1, 1947, previously referred to, Mr. Sproul stated that an overall credit policy designed to curtail the primary influences in the present period of maximum utilization of our resources would not be the answer to our problem, and that, therefore, we should first look for the specific sources of trouble and see what could be done about them. In so far as bank credit was a factor, he felt that the System would have to accommodate the powers it already had and not continue to refer itself to that it might have had but which were not forthcoming, to powers and that in formulating policy within the limits of its authority should (1) neither minimize the possible effectiveness the System which he outlined, exaggerate the of its powers nor, for reasons of bank loans, (2) proceed as importance of the recent expansion Treasury caution would permit in the program of raising rapidly as urge on the part of banks to rates so as to lessen the short-term Government securities or to make risky or reach out for long-term Reserve Bank discount rates loans, (3) adjust Federal speculative
to the change in rates on short-term Government securities, (4) take additional steps to offset the effect of the gold inflow un less such inflow resulted in bank purchases of securities from the System account or in the building up of excess reserves, (5) by public statement and by alerting the examiners exercise some influence on the side of cautious lending by banks, and (6) do whatever can be done to head off a rapid relaxation of terms and a rapid increase in the volume of credit following the expiration of consumer credit controls on November 1, 197. Following a further comment by Mr. Sproul that the use of selective credit controls, including consumer credit control and possibly real estate loan control, should be re-examined as one of the effective ways of dealing with the present situation, there was a general discussion of the relative effectiveness of quali tative and quantitative credit controls as anti-inflationary measures. This led to a further discussion of the actions that were available to the System and the Treasury to carry out an anti-inflationary program. consideration of the courses of action that were After available, it was suggested that the following program be put form by the executive committee and discussed by in written Messrs. Eccles and Sproul with appropriate representatives of the Treasury. It was recognized that, in addition to action
by the Federal Open Market Committee, the program would require action by the Treasury, the Board of Governors, the Federal Re serve Banks and others, and that, to the extent that the pro posed actions were within the jurisdictions of the respective agencies, the program would be regarded as a recommendation by the Federal Open Market Committee that the actions be taken: 1. Treasury cash balances would be used for the re tirement of Government debt, particularly certificates and bills held in the System open market account, as a means of offsetting the effects of gold imports and ex ercising a tightening influence on the credit situation. 2. The short-term rate on Government securities would be increased to 1-1/8 per cent by the end of 1947. This would be accomplished by refunding the November 1 certificates into a 14-month 1-1/8 per cent note or an 11-month one per cent certificate, the December 1 cer tificates into a 13-month 1-1/8 per cent note, and the January 1 certificates into a 12-month 1-1/8 per cent certificate. Bank discount rates would be 3. Federal Reserve increased in keeping with the increase in the rate on short-term Government securities. 4. Reserve requirements of member banks in central cities would be increased in three 2 per cent reserve steps. by the Board of would be issued 5. A statement emphasizing, in connection with the termi Governors W on November 1, the danger of nation of Regulation credit terms and of a further more liberal instalment in the outstanding volume of consumer credit. growth released by the Board, would This statement would be wide publicity by the Federal Reserve Banks, be given be sent by the Presidents over their own and would W registrants in their signatures to all Regulation respective districts.
6. The Board of Governors, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Association of Supervisors of State Banks would issue a statement pointing out the danger of further over-all expansion of bank credit through the medium of bank loans and the policies that would be followed by the banking agencies in dealing with this problem in the examination of banks. In connection with the suggestion that short-term rates be increased further, Mr. Evans stated that in the absence of further evidence of the value of such an increase he would not favor it, that the recent increase was not effective as a deterrent to bor rowing from banks, and that, until action could be taken which would be effective, he could not vote to approve a further in crease. In a discussion of this point it was suggested that, while it might not be possible to show definitely what the effect of the recent increase in short-term rates had been, it had had some ef fect in the direction of prompting a more restrictive policy on the part of banks with respect to bank loans, and that a further increase would be an important element in an over-all program that could be presented to the Treasury as the best course of action to follow within the limits of existing powers. Reference was made to the question of Treasury policy in connection with the refunding of maturing savings bonds and Chair man Eccles stated that at its meeting yesterday, the executive
committee voted to suggest to the full Committee that a recommen dation be sent to the Treasury that individual holders of maturing savings bonds be given the option to invest funds received in pay ment for such bonds in (1) new series E bonds without regard to the annual limit of $3,750 or (2) a special non-marketable 10-year issue which would carry a 2-1/2 per cent coupon and be redeemable at any time after one year. Upon motion duly made and seconded, and by unanimous vote, it was agreed that a recommendation along the lines proposed by the executive committee should be submitted to the Treasury. Upon motion duly made and seconded, the 6-point program outlined above was approved, Mr. Evans voting "no" to the extent that the program contemplated a further increase in short-term rates. In taking this action it was understood that when the statement of the program had been prepared by the executive com mittee it would be discussed by Messrs. Eccles and Sproul with representatives of the Treasury and, if no objection were raised by the Treasury to the portion of the program for which it would have responsibility, the various of the program would be initiated. steps Chairman Eccles re a discussion of the program During previously made that the Federal Open ferred to the suggestion a statement of the situation with which Market Committee prepare be submitted to the Congress by the it was confronted which might report. He said that such a statement Board as a part of its annual
might be submitted as a special joint report by the Committee and the Board of Governors which would be sent to the Congress early in January or February and which would point out that the Congress could not expect the System, with the limited powers it now has, to prevent monetary and credit expansion. Chairman Eccles referred to the letter addressed to Mr. Whittemore under date of July 7, 1947, by Mr. Charles E. Spencer, Jr., President of the First National Bank of Boston and a member of the Federal Advisory Council, in which it was proposed that, for the purpose of increasing the attractiveness of Treasury bills to commercial banks, the Open Market Committee each day set a buying rate on Treasury bills which would be paid that day at any Federal Reserve Bank. The letter had been submitted Federal Advisory Council for consideration and Chairman to the meeting on September 23, 1947, at which Eccles stated that at its Council unanimously recommended that Mr. Spencer was present, the He added that the suggestion would the proposal be not adopted. readily available to banks Reserve credit even more make Federal present conditions it was undesirable than at present, that under and that he felt no further facilitate access to such credit, to the proposal at this time. The should be given to consideration with this view. Committee were in agreement other members of the discussion of the Spencer proposal, In connection with the
Chairman Eccles said that the Federal Advisory Council had stated that it understood that the Federal Reserve Bank of New York had requested banks of its district not to purchase and sell Federal funds outside the district, and that the Council was opposed to any action which implied a policy that borrowing by member banks should be confined to Federal Reserve Banks. He added that the Board had informed the Council that the matter was one of System interest because any action in that direction would affect open market and discount policy as well as the reserve position of member banks, and that if action were desirable it should be taken on a System basis and not by one of the Federal Reserve Banks acting alone. He suggested that such action might be con sidered as an additional point in the anti-inflationary program outlined by the Committee, but he questioned whether it would have much influence. Mr. Sproul said that the New York Bank had not regarded one involving System credit policy but as a ques this matter as banks. He said that the prac tion of unsecured loans by member or a Federal Reserve funds within a city tice of lending Federal would know the condi the lending bank presumably district when one, but that inter bank was a useful tion of the borrowing and that, since involve some risks, transactions might district
such transactions were carried on over the Federal Reserve leased wires, failure of the Reserve Bank to take a position with respect to them would, in effect, give them the Bank's blessing. Mr. Sproul went on to say that the policy of the New York Bank had not been one of prohibiting interdistrict transfers but rather, whenever the question was raised by a member bank or the Reserve Bank noticed large transactions going over the leased wires, to call attention to the possible risks involved in making unsecured loans. He added that some banks in New York were making such transfers and others were not. There was a brief discussion of the matter and it was the consensus that it did not call for action by the Committee. There was a discussion of the authority to be given to the executive committee to direct transactions for the System Open Market account. Mr. Sproul suggested that it would be de sirable to revise the existing direction to indicate that opera tions were carried on for the purpose, among others, of maintain ing a supply of funds in the market that would be related to the needs of commerce and business. After a discussion of this suggestion, upon motion duly made and seconded, and by unanimous vote, the following direction to committee was approved, with the executive the understanding that the limitations con direction would include commit tained in the the System open market account: ments for
The executive committee is directed, until otherwise 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, replacement of maturing securities, and letting maturities run off with out replacement), as may be necessary, in the light of the general credit situation of the country, for the practical administration of the account, for the main tenance of stable and orderly conditions in the Govern ment security market, and for the purpose of relating the supply of funds in the market more closely to the needs of commerce and business; provided that the ag gregate 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 shall not be increased or decreased by more than $2,000,000,000. The executive committee is 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 accom modation of the Treasury; provided that the total amount of such certificates held in the account at any one time shall not exceed $1,500,000,000. Mr. Sproul presented a memorandum addressed to him by Mr. Rouse under date of September 30, 1947, in which the latter suggested the reestablishment of the authority given by the Fed eral Open Market Committee to the Federal Reserve Banks in 1936 and terminated in 1945 to make temporary purchases of Government securities under resale agreements for periods of not to exceed 15 days. The reasons for the suggestion were outlined in the memorandum and were discussed at this meeting. Some of the
members of the Committee questioned whether the authority should be granted and suggested that action be deferred to afford an opportu nity for further discussion. Upon motion duly made and seconded and by unanimous vote, it was agreed that the executive committee should study the matter and submit a recommendation at the next meet ing of the full Committee. It was tentatively agreed that the Presidents would be in Washington on December 8 and 9, 1947, and that meetings of the Federal Open Market Committee and the Presidents' Conference would be held at that time. Thereupon the meeting adjourned. Approved: Secretary Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, June 30, 1947·Minutes of the Executive Committee, August 6, 1947·Minutes of the Executive Committee, October 7, 1947