March 1, 1950 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 Wednesday, March 1, 1950, at 9:40 a.m. PRESENT: Mr. Sproul, Vice Chairman Mr. Davis Mr. Draper Mr. Eccles Mr. Erickson Mr. Peyton Mr. Szymczak Mr. Young Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Thomas, Economist Messrs. Stead and John H. Williams, Associate Economists Mr. Rouse, Manager of the System Open Market Account Mr. Thurston, Assistant to the Board of Governors Mr. Sherman, Assistant Secretary, Board of Governors Mr. Young, Director of the Division of Research and Statistics, Board of Governors Mr. Youngdahl, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Mr. Arthur illis, Special Assistant, Securities Department, Federal Reserve Bank of New York Messrs. Williams, Gidney, Gilbert, and Leedy, alternate members of the Federal Open Market Committee and Earhart, Presidents Messrs. Leach, McLarin, of the Federal Reserve Banks of Richmond, and San Francisco, respectively Atlanta, election for a advices of the reported that The Secretary of members and alternate March 1, 1950, of one year commencing period
members of the Federal Open Market Committee representing the Federal Reserve Banks had been received, that each newly elected member and alternate member had executed the required oath of office, and that it was the opinion of the Committee's counsel, on the basis of advices received, that the following members and alternate members were legally qualified to serve: Allan Sproul, President of the Federal Reserve Bank of New York, with L. R. Rounds, First Vice President of the Federal Reserve Bank of New York, as alternate member; Joseph A. Erickson, President of the Federal Reserve Bank of Boston, with Alfred H. Williams, President of the Federal Reserve Bank of Philadelphia, as alternate member; C. S. Young, President of the Federal Reserve Bank of Chicago, with Ray M. Gidney, President of the Federal Reserve Bank of Cleveland, as alternate member; Chester C. Davis, President of the Federal Reserve Bank of St. Louis, with R. Randle Gilbert, President of the Federal Reserve Bank of Dallas, as alternate member; of the Federal Reserve Bank of J. N. Peyton, President with H. G. Leedy, President of the Minneapolis, Bank of Kansas City, as alternate Federal Reserve member. Upon motions duly made and seconded, and by unanimous votes, the following of the Federal Open Market Committee officers until the election of were elected to serve at the first meeting of the their successors 28, 1951, with the Committee after February in the event of the dis understanding that their official connection continuance of
with the Board of Governors or a Federal Reserve Bank, as the case might be, they would cease to have any official connection with the Federal Open Market Committee. In connection with the election of Mr. Morrill, it was agreed unanimously that the by-laws of the Federal Open Market Committee, which provide that the Secretary of the Board of Governors shall be Secretary of the Committee, should not be changed but that Mr. Morrill should continue to serve as Secretary notwithstanding the applicable provision of the by-laws: Thomas B. McCabe, Chairman Allan Sproul, Vice Chairman Chester Morrill, Secretary S. R. Carpenter, Assistant Secretary George B. Vest, General Counsel Woodlief Thomas, Economist John K. Langum, Alfred C. Neal, J. Marvin Peterson, William H. Stead, and John H. Williams, Associate Economists Upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System open market account until the adjournment of the first meeting of the Committee after February 28, that the board of directors of the Federal Mr. Sproul stated of New York had selected Mr. Rouse as Manager of the Reserve Bank System Open Market Account, subject to the selection of the Federal of New York by the Federal Open Market Committee as the Reserve Bank for the System account and his approval Bank to execute transactions by the Federal Open Market Committee.
Upon motion duly made and seconded, and by unanimous vote, the selection of Mr. Rouse as Manager of the System Open Market Account was approved. Upon motions duly made and seconded, and by unanimous votes, the following were selected to serve with the Chairman of the Federal Open Market Committee (who under the provisions of the by-laws is also Chairman of the executive committee) as members and alternate members of the executive committee until (except as noted below) the selection of their successors at the first meeting of the Federal Open Market Committee after February 28, 1951: Members Alternate Members S. Eccles *James K. Vardaman, Jr. Marriner K. Vardaman, Jr. M. S. Szymczak *James M. Evans E. G. Draper *Rudolph Successor to Mr. Draper as a member of the Board Successor to Mr. Clayton as a member of the Board (To serve in the order named as alternates for members elected from the Board of Governors) Joseph A. Erickson Allan Sproul Chester C. Davis C. S. Young J. N. Peyton (To serve in the order named as alternates for Messrs. Sproul and Young) member until Mr. to serve as a regular *Mr. Vardaman after which the latter available for service, Evans is the selection of regular member until will serve as a first meeting of the Federal Open his successor at the Market Committee after February 28, 1951. by the Federal resolution adopted referred to the Mr. Sproul each Federal 20, 1936, authorizing on November Market Committee Open
Reserve Bank to purchase and sell, at home or abroad, cable transfers and bills of exchange and bankers' acceptances payable in foreign currencies, to the extent that such purchases and sales may be deemed to be necessary or advisable in connection with the establishment, maintenance, operation, increase, reduction, or discontinuance of accounts of Federal Reserve Banks in foreign countries. He stated that accounts were now maintained with the Bank of Canada ($22,150), the Bank of England ($10,952), and the Bank of France ($42.79), and that, for reasons discussed at previous meetings, it seemed desirable that the authority to effect transactions of the type deferred to be continued. Upon motion duly made and seconded, and by unanimous vote, it was agreed that no action should be taken at this time to amend or terminate the resolution of November 20, Reference was then made to the action of the Committee on November 30, 1937, by which it agreed that since securities acquired by the Federal Reserve Banks in settlement of claims against closed amounts as to be unimportant from the banks would be in such small Federal Open Market Committee would standpoint of credit control, the no objection to a Federal Reserve Bank holding such securi interpose such sale was deemed advisable by the ties or to their sale whenever Mr. Gidney stated that the authority for holding and holding bank. no harm and, conceivably, there selling such securities had done in which it might be useful. could be circumstances
Upon motion duly made and seconded, and by unanimous vote, it was agreed that no action should be taken at this time to amend or terminate the authority granted at the meeting on November 30, 1937. There followed a discussion of the authority granted to the Federal Reserve Banks by the Federal Open Market Committee with respect to repurchase agreements covering short-term Treasury obligations with nonbank dealers in United States Government securities qualified to transact business with the System open market account, Mr. Rouse stated that the authority had been used sparingly during the past year but that it had been helpful in making adjust ments in the market in August and in early October. He went on to say it was one means of putting funds into the market in periods of strain to help in carrying out the policies of the Committee and that it might be particularly helpful in a period like the present when the discount rate was considerably higher than short-term market He suggested that the authority be continued but that, instead rates. of relating the rate on such purchases to the discount rate, it be Government securities. To carry related to the rate on short-term the authority be amended to this suggestion, he proposed that out per cent above the average issuing provide for a rate at least 1/8 of United States Treasury bills, and rate on the most recent issue discrimination as a means be used with care and that the authority Federal Reserve funds money market with sufficient of providing the on a day-to-day basis. to avoid undue strain
Mr. Eccles raised the question whether the Federal Reserve Banks should continue to be in the position of direct lenders to nonbank dealers but stated that he would have no objection to con tinuance of the authority if it was clearly understood that it was to be used only in emergencies. During a discussion of this question, Mr. Thomas expressed the view that the authority was an important money-market instrument which would enable dealers to absorb as much of the buying and selling in the market as possible and to carry the necessary inventory of securities to provide a market, leaving the System as only a residual more extensively than it had been as buyer, that it should be used provide the market with additional bank a means of helping to strictly temporary nature, and that reserves to meet shortages of a banks would favor use of such authority in his opinion the commercial to perform their function more it enabled securities dealers because for banks to borrow from the effectively and reduced the necessity Bank for temporary reserve adjustments. Federal Reserve the proposed arrangement on the manner in which In commenting be used only in the out that it would operate, Mr. Rouse brought would it would be used pri Reserve Banks, that of the Federal discretion Bank of New York, by the Federal Reserve marily if not exclusively In response to which he had outlined. under the conditions and only changes in the would expect that stated that he question, he also a
rate on such agreements would be in steps of 1/8 per cent, although it was possible that changes of 1/16 per cent might be desirable at times. At the conclusion of the discussion, upon motion duly made and seconded, and by unanimous vote, the Federal Reserve Banks were authorized, in lieu of all similar previous authorizations, to enter into re purchase agreements with nonbank dealers in United States Government securities who are qualified to transact business with the System open market account, provided that: (1) such agreements (a) are at a rate at least 1/8 per cent above the average issuing rate on the most recent issue of United States Treasury bills, (b) are for periods of not to exceed 15 calendar days, (c) cover only short-term Government securities selling at a yield of not more than the issuing rate for one-year Treasury obliga tions, (d) are used with care and dis crimination as a means of providing the money market with sufficient Federal Reserve funds as to avoid undue strain on a day-to-day reports of such transactions shall basis, (2) be made to the Manager of the System Open to be included in the weekly Market Account open market operations which is report of sent to the Federal Open Market Committee, the event Government securities and (3) in covered by any such agreement are not re by the dealer pursuant to the purchased a renewal thereof, the securi agreement or by the Federal Reserve ties thus acquired the market or transferred Bank are sold in to the System open market account. taken with the understand This action was be reviewed at the authority would ing that the next meeting of the Committee. for the allocation with the existing procedure In connection
of securities in the System open market account adopted by the executive committee of the Federal Open Market Committee on January 20, 1948, pursuant to the action of the full Committee on December 9, 1947, Mr. Rouse stated that there had been no criticism of the procedure and that it was working very satisfactorily. He added that the actual distribution among the twelve Federal Reserve Banks of earnings from securities held in the System open market account during the year 1949 turned out to be very close to the estimate of expenses for the year made at the beginning of 1949. In this connection, Mr. Rouse read the statement submitted to the Joint Committee on the Economic by Mr. Alfred H. Williams Report in November 1949 in response to a request by members of the for a statement of the procedure followed by the System Committee securities in the System open market in allocating interest bearing account. of the Presidents of the Federal Mr. Sproul asked whether any as to a change in the procedure and Reserve Banks had suggestions modify it at this time. them indicated that he would none of upon motion duly made and Thereupon, vote, it was and by unanimous seconded, should be made at agreed that no change in the method of allocating this time forth in the memorandum securities as set of the executive at the meeting approved committee on January 20, 1948. on which the Federal the published terms was made to Reference
Reserve Bank of New York transacts business with qualified dealers in United States Government securities for the open market account of the Federal Reserve System. Mr. Rouse said that the agreement seemed to be working satisfactorily, that there had been no complaints for some time from dealers who were unable to qualify under the statement of terms, and that he had no changes to suggest. In response to a question from Mr. Eccles, he also reviewed the cir cumstances relative to whether certain dealers qualified for trans acting business with the System account. Following a discussion, upon motion duly made and seconded, and by unanimous vote, it was agreed that no change in the statement of terms would be made at this time. With reference to the authority for distribution of the weekly prepared by the Federal Reserve Bank of New York open market report on March 1, 1947, Mr. Davis suggested as agreed upon at the meeting amended to provide that, in addition to those now receiving that it be the economists of the Federal Reserve Banks the report, it be sent to Presidents on the Federal Open which are not represented by their Market Committee. brief discussion, upon Following a motion duly made and seconded, and by the distribution of the unanimous vote, to the following was approved: weekly report of the Board of Governors. 1. The members 12 Federal Reserve Banks. 2. The Presidents of the
3. The Secretary, the Economist, and the Associate Economists of the Federal Open Market Committee. 4. The Secretary of the Treasury. 5. The Under Secretary of the Treasury. 6. The Fiscal Assistant Secretary of the Treasury. 7. The Chief of the Division of Bank Operations of the Board of Governors. 8. The officer in charge of research at each of the Federal Reserve Banks which is not represented by its President on the Federal Open Market Committee. 9. Mr. Rounds, alternate member of the Federal Open Market Committee; the Assistant Vice President of the Federal Reserve Bank of New York working under the Manager of the System Account; the Manager of the Securities Department of the New York Bank; the Manager of the Research Department of the New York Bank; and the confidential files of the New York Bank as agent for the Federal Open Market Committee. Reference was made to the memorandum prepared by the System Research Advisory Committee on New Treasury Financing in 1950 and to the memorandum prepared in the Board's Division of Research and Statistics under date of February 21, 1949, on the outlook for bank reserves and Treasury cash requirements, to which Mr. Thomas referred in his report at the meeting of the Committee on February 28, 1950. There followed a general discussion of the deficit financing to undertake to meet requirements the Government would have which calendar year and of the the last nine months of the current during from which funds might be obtained. sources Thomas expressed the view on the outlook, Mr. In commenting substantial amounts of funds could be obtained from nonbanking that might wish to raise new money by increasing sources, that the Treasury
the weekly bill offering, but that additional funds would have to be raised by other means in the last half of the year and the question was how that should be done. Mr. Thomas also said that a 1 3/4 per cent bond callable in eight years, which was recommended to the Treasury by the American Bankers Association Committee on Government Borrowing, would be taken almost entirely by the banks, and that the question was what type of security could be issued to attract some of the longer term savings which probably would become available during the second quarter of this year and later. He then referred to the suggestions presented in the memorandum on new Treasury Financing in 1950 of a 2 1/2 per cent investment bond with an 18-year maturity which would be nonmarketable but redeemable at a penalty, and of an instalment retirement bond which would have a maturity of 28 years and would yield 2.52 per cent if held to maturity. There was a discussion of the possible attractiveness of such obligations to various classes of investors, during which Mr. Thomas suggested that it would be desirable to authorize the staff to with Messrs. Bartelt, Fiscal Assistant Sec discuss these proposals Director of the Technical Staff of retary of the Treasury, and Haas, Sproul read the next to the In this connection, Mr. the Treasury. the executive committee to Secretary last paragraph of the letter from 9, 1950, commenting on the of the Treasury Snyder dated February to meet the Treasury deficit problem of raising new money Treasury's
during the remainder of this calendar year and stating that the Open Market Committee would be giving further consideration to this important aspect of Treasury financing and would want to discuss it with him when it had more specific proposals. Mr. Sproul suggested that the Committee authorize the executive committee to proceed with the development of proposals in line with the general statement con tained in that letter and that, as proposed by Mr. Thomas, it also authorize the discussion of the specific proposals in the memorandum on New Treasury Financing in 1950 from the System Research Advisory Committee with the members of the Treasury staff, with the under that if other suggestions of a similar nature were developed standing they would be included in the discussions. Upon motion duly made and seconded, and by unanimous vote, Mr. Sproul's suggestion was approved. to be issued to the In a consideration of the instructions to the understanding at the reference was made executive committee, Federal Reserve Bank of New December 13, 1949, that the meeting on and replacement of System should be guided in the redemption York in the light of what would be required bill holdings by maturing the general credit market to carry out in the money current conditions Following a brief Open Market Committee. policy of the Federal made at this time should be that no change it was agreed discussion, in that understanding.
Mr. Sproul then referred to the action at the meeting on December 13, 1949, at which the executive committee was authorized to determine from time to time the exact ranges within which bills and certificates would be purchased by the Federal Reserve Bank of New York for the System open market account, it being understood that the upper limits of the ranges on bills and certificates could be increased to not to exceed 1.24. He stated that it was understood that this authority was to be exercised within the framework of the general credit policy of the Federal Open Market Committee, and suggested that it be reaffirmed. Upon motion duly made and seconded, and by unanimous vote, this suggestion was approved. There followed a discussion of the understanding at the meet ing on December 13, 1949, that, in the light of the discussion at that meeting, the executive committee would have discretion with respect to the sale of long-term restricted bonds from the System account. stated that the executive committee had been operating Mr. Sproul and reference was made to within the limits of that understanding, the meeting of the executive committee an excerpt from the minutes of the current understanding that on January 6, 1950, concerning System account, whenever an would be sold from the restricted bonds for the primary purpose of absorbing opportunity was presented, reserves.
During a discussion of the sales of long-term securities from the System account since the last meeting of the Committee, Mr. Rouse stated that the demand for these issues had not been large, that the operation had to be handled carefully, that a further decline of prices could take place without loss of confidence in the market, that sales in the succeeding weeks would be in smaller amounts than during the past six or seven weeks, and that it would help in bringing long-term prices down if there could be some further rise in short-term rates. It was suggested that in the interest of placing long-term securities, to be offered by the Government in connection with new financing, in the hands of nonbank investors it would be desirable for long-term yields to move to a higher level. In a further discussion of the securities that should be offered by the Treasury to finance the Government deficit, Mr. Thomas raised the question as to previous instructions that long-term securities should be sold for the purpose of absorbing reserves. While there were additional reserves to absorb year, he said, it was not likely that there after the turn of the any sale of bonds by the System would be in future weeks and hence purchases of short-term securities. to be offset by System would have point, Mr. Sproul suggested consideration of this During the issued by the Federal under the general direction that operating committee, and within the Market Committee to the executive Open and by the necessity the terms of Treasury financing limits imposed by
of avoiding loss of confidence in the long-term Government securities market, the executive committee should have authority to continue to sell long-term securities from the System account unless and until there was a change in the business and credit situation which made it undesirable to pursue that policy. Upon motion duly made and seconded, and by unanimous vote, Mr. Sproul's sug gestion was approved. Mr. Sproul referred to the letter sent to the Treasury by the Board of Governors under date of January 23, 1950, regarding the ex tension of the limited authority of the Federal Reserve Banks to purchase Government securities directly from the Treasury. He in quired whether there had been any developments in connection with the matter. Mr. Szymczak responded that the Treasury favored the ex tension and presumably would propose the necessary legislation. In the ensuing discussion the opinion was concurred in that the continuation of the authority was desirable to meet wide fluctua balances with the Federal Reserve Banks and that the tions in Treasury be used again during the March tax payment authority probably would period. general direction to be was then given to the Consideration to arrange for transactions in the issued to the executive committee agreed that the limits in the direction System account and it was be continued and 13, 1949, should the meeting on December issued at
that there should be no change in the form of the direction issued at that time. Thereupon, upon motion duly made and seconded, the following direction to the executive committee was approved unanimously with the understanding that the limitations contained in the direction would include commitments for the System open market account: 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 changing economic conditions and the general credit situation of the country, for the practical administra tion of the account, for the maintenance of orderly conditions in the Government security market, and for the purpose of relating the supply of funds in the market to the needs of commerce and business; provided that the aggregate 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. committee is further directed, until The executive directed by the Federal Open Market Committee, otherwise for the purchase for the System open market to arrange Treasury of such amounts of account direct from the certificates of indebtedness as may special short-term to time for the temporary be necessary from time that the total of the Treasury; provided accommodation held in the account at amount of such certificates any one time shall not exceed $1,000,000,000. draft of a memorandum called to a revised Attention was then which had been distributed of System credit operations on the framework and to the underbefore this meeting members of the Committee to the
standing at the meetings on August 5, 1949, and December 13, 1949, that further study would be given to the matter. Mr. Sproul suggested that the Committee authorize the System Research Committee on Banking and Credit Policy to give further study to the principles and practices of a flexible monetary policy with a view to submitting other reports to the Federal Open Market Committee on important aspects of this study, and that it be understood that the members of the Federal Open Market Committee and the Presidents of the Reserve Banks who were not members of the Committee would read the revised memorandum furnished them at this meeting and send any suggestions they might have to the Secretary of the Committee. Upon motion duly made and seconded, and by unanimous vote, this suggestion was approved. Reference was made to a memorandum dated February 23, 1950, with respect to whether Treasury savings bonds should be made eligible as collateral for bank loans. Copies of the memorandum had been sent to the members of the Committee before this meeting and a copy has been placed in the files of the Federal Open Market Committee. the question had been discussed at the Mr. Davis stated that February 27, 1950, and that it was the Presidents' Conference on the Presidents that such bonds should not be made majority view of eligible.
In a discussion of reasons for and against such action, Mr. C. S. Young stated that many banks were, in effect, holding such bonds as collateral for loans and that he felt it would be desirable for the Treasury to recognize this practice by authorizing it, that it would avoid sales of bonds by owners to get funds for temporary purposes, and that it might aid the sale of savings bonds by the Treasury. Mr. Thomas stated that he understood from Mr. Bartelt, Fiscal Assistant Secretary of the Treasury, that the Treasury would not favor such action at this time. Question was raised whether some action should be taken with to the reporting by bank examiners of cases in which savings respect as collateral for loans, but no con bonds are, in effect, pledged clusions were reached. ensuing discussion it was the consensus that no During the time to recommend to the Treasury action should be taken at this which prohibit the acceptance in the existing regulations any change collateral for loans. of savings bonds as report dated February was then made to the progress Reference on the problem on debt management from the ad hoc committee 24, 1950, had been sent to each a copy of which of savings bonds refunding, a copy of which has this meeting and of the Committee before member Committee. It Federal Open Market the files of the been placed in at the Fiscal Agency was to be discussed that this matter was stated
Conference called by the Treasury to meet in April 1950, at which time primary consideration was to be given to the operating problems that will be involved as savings bonds mature, and the suggestion had been made that there might also be discussion, in the light of the operating problems involved, of the policy that might be followed with respect to inducements to reinvest the proceeds of maturing bonds in new savings bonds. In this connection, Mr. Davis stated that the operating officers of the Federal Reserve Banks who attend the fiscal agency conferences have no responsibility for policy on fiscal agency matters, but that since the Federal Reserve Bank of San Francisco was acting as host for the forthcoming conference, the Presidents' Conference had asked President Earhart to represent the Presidents in any discussions involving questions of policy. it was understood that further dis Under the circumstances, Open Market Committee of the refunding of cussion by the Federal until a later meeting of maturing savings bonds would be postponed the Committee. the part the Federal discussion of was also an informal There in future savings bond might be expected to play Reserve Banks be any change in the existing and whether there should campaigns Reserve Banks sponsoring respect to the Federal understanding with in connection with such campaigns. the costs of dinners, etc., and paying
of the Presidents of the Federal Reserve Banks It was the consensus that there should be no change in the existing understanding, and that this would not prevent, for example, a Bank from providing a luncheon with a discussion meeting to which a State chairman in connection to invite some of his key workers. wishes agreed that the next meeting of the It was tentatively during the week beginning June 12, 1950. Committee would be held Thereupon the meeting adjourned. Secretary. Approved: Vice Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, March 1, 1950