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BDARD DF GDVERNDRS
DF THE

FEDERAL RESERVE SYSTEM
WASHINGTON 2 5 , D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

September 2jj,
FEBSONAL M D CONFIDENTIAL
Dear Chairman Ecclesj
In response to the request that you made before you left
for "the West, members of the Staff have drafted for your consideration a statement which might be adopted by the Executive Committee
of the Federal Open Market Committee for the purpose of making it
clear that the Manager of the System Open Market Account should not
express personal opinions or recommendations to the Treasury with
respect to Treasury financing policies and related matters* We believe this statement is a logical interpretation of the procedure
set out in the Committeefs letters of March 25 and April 25, 19 hh*
to the Secretary of "Hie Treasury which, in effect, made the Chairman and the Tice Chairman of the Committee the spokesmen for the
System in this field*
The Staff members who worked on this statement feel that
it would be preferable, if possible, to avoid the ruffled feelings
that a discussion of the matter at a meeting of the Federal Open
Market Committee or the Executive Committee might cause* It is,
therefore, suggested, if you find the statement to be in satisfactory form, 1hat you talk it over with Mr. Sproul before the meeting
and, if you and he agree, the understanding eould be confirmed by
correspondence between you and him without unnecessary discussion*
In addition, you asked that the Staff prepare for your information, in case such a statement is not agreed upon, a memorandum
showing how the operation of the System account could be brought
more completely under the direct control of the Committee* Such a
memorandum shewing three possible plans, designated A, B and C, is
attached* We believe that, if the point should be reached where
some such plan must be considered, it would be plan A, because that
plan provides for a complete divorce of the Manager and his staff
from the control of any Reserve Bank* However, any such plan would
raise the question what should be done about fiscal agency operations
in the market, as distinguished from those for the System Open Market
Account, and this question is commented upon in the last paragraph of
the attached memorandum*




I am sending you this letter with the thought that you

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Chairman Eccles

-2-

might find time to read the enclosed material before you reach
Washington, so that you can think it over before you see Mr*
Sproul*
Sincerely yours,

Enclosure

Chairman Marrlner S. Eccles,
Hotel Ben Lomond,
Ogden, TJtalu




Chester Morrill,
Special Adviser•

Confidential memorandum for
Chairman Eccles regarding possible
plans for change in official relationship of Manager of System Open
Market Account to the Committee*

In the circumstances which brought up the question of a
change in status, the major objective would be a clarification to
everyone concerned of the Manager*s relation and responsibility
solely to the Committee* At the same time it must be borne in
mind that, under the present arrangement, Mr* Rouse not only acts
as Manager of the account but also handles the fiscal agency operations of Uie Federal Reserve Bank of New York in Government securities* It seems therefore that, while it would be possible to
adopt one of the attached plans, the immediate purpose could be
accomplished much more simply by an agreement that the Manager is
bound by the policy adopted by the Committee in 19i|i| with respect
to the procedure for communicating Federal Reserve System views to
the Treasury*
Attached hereto are drafts of three possible plans (Plans
A, B and C), all of which are designed to bring the Manager directly
under the Open Market Committee and its Executive Committee. Plans
B and C are presented solely for the purpose of showing possible
variations, but, if any of the three plans were to be adopted, it is
believed that Plan A is the only one that should be considered*
Under Plan A, the Manager, Deputy Manager, and the entire
staff engaged in the operation of the account (except for purely
ministerial functions) would be officers or employees of the Committee* They would, on behalf of " h Reserve Banks, make all purchases
te
and sales of securities for the System aocount, the Federal Reserve
Bank of Hew York acting merely as custodian for the account* The
existing dual responsibilities of the Manager would be wholly eliminated* Requiring the complete separation of this organization from
the Reserve Bank, this plan would involve a major departure from the
procedure heretofore followed*
In this connection, it is a well settled principle of law
that a statutory grant of power carries with it the incidental power
to do whatever is necessary to exercise what the power expressly
granted* Therefore, if the Committee should find that it is necessary to employ and compensate a Manager, Deputy Manager, and staff
required to operate the System account in order for the Committee to
carry out effectively the powers expressly granted to itt the Committee would have the incidental power to do so and to require that the
Reserve Banks pay the salaries and expenses of the necessary personnel*




-2If there should be any objection to this particular procedure for paying the expenses, it could be met by placing the Manager
and his staff on the Board's pay roll "where they could be paid out of
the proceeds of the Boardfs assessments on the Reserve Banks*
Plan B would be a less drastic plan* It is presented at
this point because it is similar to one which was discussed in 19^**
It differs from Plan A in that only the Manager and Deputy Manager
(and not the entire staff) would be employed by the Committee* The
Manager and Deputy Manager would control transactions for the account
through the issuance of instructions to the Federal Reserve Bank of
New York pursuant to the directions of the Exeoutive Committee, but
the actual purchase and sale of securities and other services incident
to the operation of the account would continue to be performed by the
Reserve Bank as at present* This plan would make the Manager and
Deputy Manager responsible directly to the Exeoutive Committee and not
to the Reserve Bank of New York. It would therefore eliminate dual
responsibility* However, the services that would be performed by the
employees of the Reserve Bank necessarily would require the exercise
of some judgment and there would also be the danger of administrative
difficulties because of the fact that the Reserve Bank employees would
continue to be on the pay roll of the Reserve Bank and therefore would
not "technically be members of the Manager1 s staff*
Plan C would be still less of a departure from the existing
arrangement because it would provide only that, except with the permission of the Committee, the Manager of the System account would perform no duties and have no responsibilities other than as Manager of
the account and he would be responsible directly and solely to the
Committee and its Executive Coiamittee* This would not accomplish
quit® as much as either of the other two plans but it would be designed within the framework of the existing organization, to separate
the responsibility for System account operations from other operations
of the Reserve Bank of New York, and to make more clear the authority
of the Committee over the Manager* Under this plan, the Managerfs position might be regarded as somewhat analogous to that of Assistant
Federal Reserve Agent*
None of these plans provides expressly for coordination of
System Open Market operations and those of the Treasury in the Government securities market* Under Plan C$ however, and perhaps under Plans
A and B, although that seems doubtful, arrangements might be made for
the Manager of the System account to continue to handle Treasury affairs*
Obviously, however, the result would be i a same as under the present
fe
arrangement and it is questionable whether anything would be gained that
could not be accomplished by specific instructions to the Manager of the
account to refrain from expressing personal opinions and recommendations*

September 2ly 19lj6*



Confidential

PLAN A

SEPARATE MANAGER OF SYSTEM O P M MARKET ACCOUNT

1» The Manager of the System account and a Deputy
Manager would be selected and their salaries fixed by the Federal Open Market Committee* Members of the Manager's staff
would be selected and their salaries fixed in such manner as
the Committee might determine. The salaries of the Manager,
Deputy Manager, and the staff, and all other expenses of the
office, would be paid by the Federal Reserve Bank of New York
on a reimbursable basis, or by ihe Board of Governors*
2* The Manager, Deputy Manager, and the staff would
not be officers or employees of the Board or any Federal Reserve
Bank but would be officers and employees of the Committee and
responsible solely to it and its executive committee acting pursuant to directives of the full Committee*
3» Under the direction of the Committee or its executive committee all purchases and sales of securities for the
System account would be made by the Manager on behalf of the
Federal Reserve Banks*
il* The Federal Reserve Bank of New York would serve
as custodian for the account, having custody of 1he securities
held in the account and paying for securities, delivering and
collecting for securities pursuant to instructions given by the
Managed or the Deputy Manager, and allocating securities held
in the account to the various Federal Reserve Banks*
5* The Committee would make provision for office
space and all other necessary facilities for the Managerfs office,
and consideration could be given to the location of the offices
at some place other than the Federal Reserve Bank of New York*

September 2J4, I9I46.




Confidential

ELAN B

SEPARATE MANAGER OF SYSTEM OFES MARKET ACCOUNT

1* The Manager and the Deputy Manager of the
System account would be selected and their salaries fixed
by the Federal Open Market Committee* Their salaries and
authorized expenses would be paid by the Federal Reserve
Bank of New York on a reimbursable basis or by the Board
of Governors*
2# "While the Manager and Deputy Manager would
be responsible solely to the Committee and its Executive
Committee, and they would control all transactions in the
account, they would perform their functions through the
issuance of instructions to the Federal Reserve Bank of
New York which would continue to carry them out through
the existing staff as at present •
3» The Federal Reserve Bank of New York would
continue to serve as custodian for the account, having
custody of the securities held in the account, and paying
for securities, delivering and collecting for securities,
pursuant to instructions given by the Manager or the Deputy Manager, and allocating securities held in the account
to the various Federal Reserve Banks•

September 2J+, 19l|6*



Confidential

SEPABAIE MAHAfiBR OF SYSTEM Q P M 1CAHKET ACCOUNT

Continue the existing arrangement under which the
Manager of the System Open Market Account is an officer of
the Federal Reserve Bank of New York but provide * •
1*

That the Manager shall perform no duties
and have no responsibilities other than
as Manager of the Accounti and

2#

That the Manager shall be responsible
directly and solely to the Federal Open
Market Committee and to its Executive
Committee acting pursuant to directives
of the full Committee*

September 2i|.-19ij6.