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The meeting of the executive committee of the Federal Open Market Committee was reconvened in the offices of the Board of Governors of the Federal Reserve System in Washington on Friday, April 14, 1939, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Harrison, Vice Chairman McKee Draper Leach Messrs. Szymczak, Ransom and Davis, Members of the Federal Open Market Committee Mr. Carpenter, Assistant Secretary of the Federal Open Market Committee Mr. Wyatt, General Counsel Mr. Goldenweiser, Economist Mr. Dreibelbis, Assistant General Counsel Upon motion duly made and seconded, and by unanimous vote, the minutes of the meetings of the executive committee held on March 7, 13 and 20, 1939, were approved. Upon motion duly made and seconded, and by unanimous vote, the transactions in the System open market account for the period from March 20 to April 13, 1939, inclusive, were approved, ratified and confirmed. Chairman Eccles stated that following the meeting of the ex ecutive committee yesterday he and Mr. Harrison returned to the Trea sury and advised the Secretary of the Treasury of the decision of the executive committee to ask the Federal Open Market Committee for au thority, in the event of serious disturbance in the Government securities market resulting from armed conflict abroad, to direct the Federal Reserve banks to increase the amount of securities in 4/14/39 -2 the System account by not more than $500,000,000 and to exceed the $900,000,000 limitation on bonds having maturities over five years to the extent made necessary by conditions within the limitations of the $500,000,000 authority to increase the amount of securities in the account. The whole matter was discussed in more detail, Chairman Eccles said, and following the meeting at the Treasury he reached the conclusion that the System should participate equally with the Treasury in all purchases that might be made only until the Treasury had invested the approximately $100,000,000 which it now holds for investment on account of trust funds administered by the Treasury and that thereafter all purchases should be made for the System ac count. He explained to the committee as his reason for this position that any purchases by the Treasury after available trust funds were exhausted would have to be with funds from the stabilization fund which would create in the Treasury an open market portfolio of Gov ernment securities in addition to the System's portfolio. be undesirable, he said, for the reason that it ening the ability of the System to discharge its of credit control. This would would result in less function in the field Furthermore, Chairman Eccles said, the System has adequate authority to purchase large amounts of securities for the purpose of stabilizing the market in the event of a major disturbance and, therefore, he felt that the System should assume responsibility therefor and that the Secretary of the Treasury should be advised -3 4/14/39 that the System will participate on an equal basis with the Treasury until the Treasury has invested the trust funds which it has avail able and that thereafter the System, in consultation with the Treasury, will make such purchases for the System account as appear to be made necessary by developments. During the discussion of this matter, Mr. Harrison mentioned that, in the past, some members of the Committee had felt that the account should not be reduced, under any circumstances, until condi tions warranted a change in the present easy money policy, that even though a lack of available short term obligations or a continued or rapid rise in the bond market made replacements of maturities diffi cult, as a market matter, the account should not be allowed to run off lest it be misunderstood as an assumption of responsibility for the market, a responsibility which those members of the Committee felt could not be assumed until the Federal Reserve System had more complete powers of credit control. these circumstances, if Mr. Harrison asked whether, in purchases of Government securities were made under the authority now being requested, the members of the Committee would object later, to equivalent sales of securities after the emergency had passed, provided market conditions justified such sales. It was the consensus of the members present that, while the question raised by Mr. Harrison would have to be decided on the basis of conditions existing at the time, there would be no objection to such sales solely on the ground that no sales should be made before 4/14/39 conditions warranted a change in the present easy money policy. It was felt, of course, that the Committee should keep an open mind on the question whether securities purchased in could be sold when the emergency is an emergency should or passed. There followed a discussion of the procedure to be followed in lending support to a seriously disturbed Government resulting from armed conflict abroad. securities market Mr. Harrison said that, while any preconceived plan of action could only be provisional and must accommodate itself to events, he would suggest for consideration the following possible plan of action: (1) the System open market account be prepared to place bids in the market at prices slightly below the previous close of the market (or slightly below the prices prevailing in the market, if during a trading session); (2) make purchases of Government securities on a scale down from these prices until certain agreed minimum prices (for the day) have been reached at which time, with the cooperation of all of the prin cipal dealers in Government securities, trading would be stopped, as far as possible, for that day; and (3) on subsequent days trading could then be resumed at the minimum prices of the previous day and the same procedure followed. He said that whatever procedure is adopted it is important, in view of the paper profits which many holders of Govern ment securities now have in their portfolios, that during the first days of the emergency, the System not place bids in the market at such prices as would unduly encourage potential sellers to dump their hold ings for the purpose of realizing profits. The larger holders in the -5 4/14/39 principal money centers, he said, could be advised of the situation and would probably be willing to refrain from trying to dump their holdings, in their own interest, as well as in the public interest, but a flood of sales by small holders, which would be large in the aggregate, be stimulated if prices were supported too rigidly. could He added that it could be ascertained at the close of each day on the basis of develop ments during the day how vigorously and how far the market should be supported on the following day. Mr. McKee suggested that if know that the System is the banks and other large holders operating to prevent a rapid decline in the market they will not sell their securities in large amounts because of the necessity of retaining investments for earnings and that he felt that consideration should be given to the advisability of staying close enough to current quotations in the market so that as the market declined the System would take some securities rather than reduce bids as the market declines so as to stay just under current quotations. Mr. Harrison said that the procedure he had in mind contemplated stay ing close to the market and buying securities as the market declined. In connection with the procedure suggested by Mr. Harrison, he also stated that he understood that the New York Stock Exchange and other markets were planning to operate in a similar manner and that the same procedure possibly would be followed in the markets in England. Various aspects of the suggested procedure were considered and it appeared to be the feeling of the members of the Federal Open -6- 4/14/39 Market Committee present that it was a desirable one and that it should be made clear in connection with the procedure that short-selling during any period of disturbed conditions would be strongly objected to. Further consideration was then given to whether any further statement should be made to the Secretary of the Treasury with respect to participations of the System and the Trea sury in any purchases of securities that might be made and it was agreed unanimously that Chairman Eccles should call the absent mem bers of the Federal Open Market Committee on the telephone and, in the event they approved the request of the executive committee for ad ditional authority, the Secretary of the Trea sury be advised when Chairman Eccles and Mr. Harrison go to the Treasury for a further meeting with the Secretary at 4:00 p.m. today that the executive committee has authority to direct the Federal Reserve banks to pur chase up to $500,000,000 of securities, that the System will be glad to participate with the Treasury in the purchase of securities on an equal basis until all of the available trust funds held by the Treasury are invested after which the System will undertake to make all additional purchases required for the purpose of exercising a stabilizing in fluence on the market, with the understanding that if at any time the System needs the assistance of the Treasury it will be called upon and if the Treasury feels that the sit uation is not being handled satisfactorily the Secretary will communicate with the Chairman. The meeting recessed and reconvened at 2:30 p.m. with the same attendance as at the morning session except that Mr. Piser, Senior Economist in the Division of Research and Statistics of the Board of Governors, was in attendance. Chairman Eccles reported that he had talked over the telephone 4/14/39 with Messrs. Fleming, Martin and Hamilton, the absent members of the Federal Open Market Committee, each of whom expressed complete agree ment with the proposed purchase of securities in event of an emergency and approved the grant to the executive committee of the additional authority requested. In a discussion of the authority to be granted by the execu tive committee to the Federal Reserve Bank of New York to execute transactions for the System open market account there was unanimous agreement that any authority given to the bank to increase the amount of securities in the account should be exercised only in the event of serious disturbance in the Government securities market resulting from armed conflict abroad. Thereupon, upon motion duly made and seconded, and by unanimous vote, the execu tive committee directed the Federal Reserve Bank of New York until otherwise directed by the executive committee, (1) To replace maturing Treasury bills in the System open market account by pur chases of like amounts of Treasury bills or Treasury notes with the understanding that the total amount of securities in the account maturing within two years shall not be re duced below $1,000,000,000; or, from time to time, to allow such bills to mature with out replacement or pending subsequent re placement (a) when market conditions are such as to make it impossible to procure other bills or notes without paying a pre mium over a no-yield basis, or (b) when such notes are not obtainable without undue disturbance to the market, provided that if Treasury bills in the account are allowed to mature without replacement the total 4/14/39 amount of securities in the account be not decreased by more than $100,000,000; (2) To make such other shifts of securi ties in the account (which may be accomplished when desirable through replacement of maturing securities) as may be necessary in the prao tical administration of the account, up to an aggregate of $200,000,000 of purchases and a like amount of sales or redemptions, pro vided that in making such shifts the total amount of securities in the account maturing within two years be not reduced below $1,000,000,000 and that the total amount of bonds held in the account be not increased or decreased by more than $100,000,000; (3) To increase or decrease temporarily the amount of securities in the account be tween weekly statement dates by not more than $50,000,000 when necessary in making replace ments or shifts pursuant to the above provi sions of this resolution, provided that the amount of securities in the account as of any weekly statement date shall not be changed from that of the preceding weekly statement date except pursuant to the other provisions of this resolution; (4) To make such outright purchases for the account as may be necessary for the pur pose of exercising an influence toward main taining orderly market conditions, provided that the total amount of securities in the account be not increased by more than $250,000,000; and (5) Upon approval by a majority of the members of the executive committee, which may be obtained by telephone, telegraph, or mail, to make such other shifts or such pur chases or sales (which would include authority to allow maturities to run off without re placement) for the account as may be found to be desirable within the limits of the authority granted to the executive commit tee by the Federal Open Market Committee. 4/14/39 -9 Thereupon the meeting adjourned.
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