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A meeting of the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System in Wash

ington on Tuesday, August 2, 1938, at 10:40 a.m.
PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Eccles, Chairman
Harrison, Vice Chairman
Szymczak
McKee
Ransom
Davis
Draper
Sinclair
Schaller
Newton
Peyton

Mr. Morrill, Secretary
Mr. Carpenter, Assistant Secretary
Mr. Wyatt, General Counsel
Mr. Williams, Associate Economist
Mr. Dreibelbis, Assistant General Counsel
Mr. Thomas, Assistant Director of the Divi
sion of Research and Statistics of the
Board of Governors of the Federal Reserve
System
Mr. Thurston, Special Assistant to the
Chairman of the Board of Governors of
the Federal Reserve System
Chairman Eccles stated, in view of the absence in Europe of Mr.
Goldenweiser, Economist for the Federal Open Market Committee, that, if
agreeable to the other members of the Committee, Mr. Thomas, Assistant
Director of the Division of Research and Statistics of the Board of Gov
ernors, would be present at the meeting and at the proper time make a
statement with respect to business and credit conditions.

There being

no objection, Mr. Thomas was requested to attend the meeting.
Upon motion duly made and seconded, and by
unanimous vote, the minutes of the meetings of
the Federal Open Market Committee held on April
21-22 and April 29, 1938, were approved.

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-2
Upon motion duly made and seconded, and
by unanimous vote, the actions of the execu
tive committee of the Federal Open Market
Committee as set forth in the minutes of the
meetings of the executive committee on April
19, 22 and 29, and May 31, 1938, were approved,
ratified, and confirmed.
It was stated that on July 1, 1938, all of the members of the

Federal Open Market Committee, with the exception of Mr. Davis who was
away, had agreed to waive, until otherwise directed by the Committee,
the requirement contained in the first resolution adopted at the meet
ing of the Comittee on April 29, 1938, that Treasury bills or Treasury
notes purchased in replacement of maturing Treasury bills have maturi
ties within two years.

Mr. Harrison reviewed the conditions which ex

isted when this action was taken pointing out that the New York bank
had experienced considerable difficulty in replacing maturing bills in
view of this restriction and that it had appeared that further replace
ments without paying a premium for bills or notes within the two-year
limitation would be extremely difficult if not impossible.

Mr. Harrison

added, however, that while the New York bank had experienced some diffi
culty in replacing subsequent maturities it had not gone beyond the two
year limitation.
Upon motion duly made and seconded, and
by unanimous vote, the action of the members
of the Committee in waiving the two-year lim
itation was approved, ratified, and confirmed.
Prior to this meeting there had been sent by the Federal Reserve
Bank of New York to each member of the Committee a copy of a report prepared

8/2/38

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at the bank covering open market operations in the system open market
account during the period from April 27 through July 27,

1938, and at

this meeting Mr. Harrison described the transactions which had taken
place in the account during the period from July 27 to the close of
business on August 1,

1938.

In discussing the report Mr. Harrison re

viewed the difficulties which had been experienced by the bank in ef
fecting exceptionally large Treasury bill replacements during the per
iod and expressed the opinion that the problem of replacement would
continue to be difficult.notwithstanding the fact that the Treasury
contemplates issuing $50,000,000 of new bills each week during August.
He stated that the difficulties had been increased to some extent by
the practice on the part of some banks with large excess reserves of
investing idle funds in bills regardless of the small return and of
suggesting to depositors with large idle balances that they invest such
balances in bills, thereby giving the depositors a small return which
they would not otherwise receive and reducing the deposit base for in
surance assessment by the Federal Deposit Insurance Corporation.

In

connection with the discussion of the problem of replacing maturing se
curities, there was also a discussion of Treasury financing in relation
to the operation of the system open market account.
Upon motion duly made and seconded, and
by unanimous vote, the transactions in the
system open market account for the period
from April 28 to August 1, 1938, inclusive,
were approved, ratified, and confirmed.

8/2/38

-4

At the request of the Committee, Mr. Thomas discussed business
and credit developments as outlined in a memorandum prepared in the
Board's Division of Research and Statistics under date of August 1,

1938, copies of which were handed to the members of the Committee dur
ing the meeting.
Mr. Williams.

Mr. Thomas' remarks were followed by a statement by

Copies of the memorandum prepared by the Division of Re

search and Statistics and a summary of Mr. Williams' statement have been
placed in the files of the Federal Open Market Committee.

At 1:15 p.m. the meeting recessed and reconvened at 2:35 p.m.
with the same attendance as at the morning session.
There ensued a discussion of the Comittee's policy and various
suggestions were considered.

Mr. McKee suggested that consideration be

given to the desirability, when it becomes difficult to replace maturing
securities in any one week, of allowing maturities to run off with the
understanding that they should be replaced through the purchase of a sub
stantially equal amount of securities during the succeeding week thus in
augurating a policy of permitting occasional fluctuations in the size of
the system portfolio.
Mr. Harrison referred to the view which he had expressed previous
ly that maturities might be allowed to run off to the extent that it

is

found impracticable to replace them through the purchase of Treasury bills
or notes within the two-year limitation without paying a premium above a
no-yield basis, as he felt that such action should not be interpreted as

8/2/38

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being in conflict with the general policy of maintaining a large amount
of excess reserves.

He added that if

such action were not taken at this

time he felt that an open mind on the question should be maintained.
Chairman Eccles stated that it

was his opinion that the present

policy of maintaining the system open market account should be continued
at least until more information is

available during the next few months

with respect to the Treasury financing program and other factors affect
ing the short term market.
There was a discussion also of suggestions as to substituting for
the present two-year limitation provisions which would permit the replace
ment of maturing securities with bills or notes of any maturity or, if
this were not considered desirable, with any Government securities having
maturities up to five years.
Another suggestion considered was that the Committee might place
no limitation on the type or maturity of Government securities purchased
in replacement of maturing securities provided that the amount of securi
ties in the account maturing within two years be maintained at not less
than a minimum figure and that the amount of bonds in the account be main
tained at not less nor more than stated amounts.
During the consideration of these suggestions the opinion was ex
pressed that the proportion of the short-term Treasury debt to the total
Treasury debt outstanding was relatively small and that it

would be pos

sible for the Treasury substantially to increase the amount of bills

8/2/38
outstanding, which would largely, if not entirely, remove the difficulty
of the system in

making replacements and that,

in

any event,

the problem

of the administration of the system account would be affected greatly by
the financing program determined by the Treasury during the next few
months.
At the conclusion of these discussions it was agreed by a majori
ty of the members of the Committee that the policy of maintaining the ex
isting system portfolio should be continued for the present provided and
to the extent that maturing securities could be replaced by the purchase
or notes of any maturity without paying a premium over

of Treasury bills
a no-yield basis.

Upon motion duly made and seconded, and
by unanimous vote, the following resolutions
were adopted:
That the executive committee be directed, until otherwise
directed by the Federal Open Market Committee, to arrange for
the replacement of maturing securities in the system open mar
ket account with other Government securities and for such shifts
in maturities as may be necessary in the proper administration
shall
of the account, provided (1) that maturing Treasury bills
be replaced only with Treasury bills or notes to the extent that
they can be purchased without paying a premium over a no-yield
basis; (2) that, subject to the foregoing limitation, the amount
of securities in the account maturing within two years be main
tained at not less than $1,000,000,000; and (3) that the amount
of bonds in the account having maturities in excess of five years
be maintained at not less than $500,000,000 nor more than
$850,000,000.
That, in addition to such authority as may be contained in
other resolutions of the Federal Open Market Committee and until
otherwise directed by the Committee, the executive committee be
authorized, upon written, telephonic or telegraphic approval of
a majority of the members of the Federal Open Market Committee,
to arrange for the purchase or sale (which would include authority

8/2/38

to allow maturities to run off without replacement) of Gov
ernment securities in the open market from time to time for
the system open market account to such extent as the execu
tive committee shall find to be necessary for the purpose of
exercising an influence toward maintaining orderly market
conditions, provided (1) that the total amount of securities
in the account be not increased or decreased by more than
$125,000,000, and (2) that the amount of bonds in the ac
count having maturities over five years be maintained at not
less than $500,000,000 nor more than $850,000,000.
Mr. Harrison moved that the request made of

Mr. Williams at the meeting on March 1, 1938, that
he prepare a supplement to the memorandum submitted
by him, relating to the question whether the rais
ing of reserve requirements caused the depression,
be withdrawn.
Carried unanimously.
Mr. Davis stated that the committee (Messrs. Davis, Ransom and
Sinclair) appointed at the meeting on March 1, 1938, to consider Section
6 of Article I of the by-laws of the Federal Open Market Committee and to
submit a report and recommendation thereon was not yet prepared to submit
a report but that it

would be made before the next meeting of the Commit

tee.
Thereupon the meeting adjourned.

Secretary.
Approved:
Chairman.