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THIRTY-FOURTH ANNUAL REPORT of the BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM COVERING OPERATIONS THE YEAR 1947 FOR 96 ANNUAL REPORT OF BOARD OF GOVERNORS growth, bank loans were expanding rapidly and the demand for capital funds was strong, and there were further substantial gold imports. Because of the policy of supporting the Government securities market, which the Committee felt was a sound policy and should be continued, banks had ready access to additional reserves by the sale of securities to the System account. There was no prospect of the accumulation of substantial Treasury cash balances that could be used for the retirement of Government debt at this time, and there fore, the restraining influence of such accumulation could not be imposed. It was also recognized that the strongest forces working toward inflation lay outside the field of monetary policy and debt management and that measures available to the System and the Treasury could have only limited effectiveness. It was the view of the Committee that, since further credit expansion would add to the inflationary pressures, the situation was such as to justify the Treasury and the Federal Reserve System taking such actions as were available to them to eliminate or moderate excessive credit expansion. While continuing the existing policy of maintaining orderly conditions in the Government security market, it was agreed that with a view to preventing to the extent possible further expansion of bank credit, there should be action by the appro priate authorities to carry out an anti-inflationary program which would con template (1) continued use of Treasury balances when available to retire Government debt, particularly bills and certificates held by the Federal Reserve Banks, (2) a further increase in the short-term rate on Government securities to 1 1/8per cent, (3) an increase in the discount rates at the Federal Reserve Banks in keeping with the increase in the rate on short-term Govern ment securities, (4) an increase in reserve requirements of member banks in central reserve cities, (5) a statement by the Board of Governors emphasiz ing, in connection with the termination of Regulation W, the dangers of more liberal instalment credit terms and a further growth of outstanding consumer credit, (6) a joint statement by the Federal and State bank supervisory agen cies which would point out the dangers of further overall expansion of bank credit through the medium of bank loans, and (7) a change in the policy with respect to the refunding of maturing savings bonds to encourage the reinvest ment of proceeds of maturing bonds in new issues of savings bonds. The language in the first paragraph of the direction issued by the Commit tee, setting forth the considerations governing transactions for the System account, was changed from the direction previously in effect for the purpose of relating it more closely to the current policies of the Committee in the light of existing monetary and credit conditions. DECEMBER 9, 1947 Members present: Mr. Eccles, Chairman; Mr. Sproul, Vice Chairman; Mr. Clayton; Mr. Draper; Mr. Evans; Mr. Gidney; Mr. Gilbert (alter nate for Mr. Davis); Mr. Peyton; Mr. Szymczak; Mr. Vardaman, Mr. Whittemore. 1. Authority to Effect Transactions in System Account. Upon motion duly made and seconded, and by unanimous vote, the following direction to the executive committee was approved: The executive committee is directed, until otherwise directed by the Federal Open Market Committee, to arrange for such transactions for FEDERAL RESERVE SYSTEM 97 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 without replace ment), as may be necessary, in the light of the general credit situation of the country, for the practical administration of the account, for the maintenance of stable and orderly conditions in the Government 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 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 3 billion dollars. 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 accommodation of the Treasury; provided that the total amount of such certificates held in the account at any one time shall not exceed 1.5 billion dollars. The above direction, which was in the same form as the direction issued at the meeting on October 7, 1947, was adopted for substantially the same rea sons as the earlier direction. Inflationary forces had continued strong, sub stantial amounts of long-term Government securities were being sold to the System to meet the demands for funds, and it was felt that the existing open market policy should be continued as a means, coupled with other actions by the System and with debt-management policies of the Treasury, of keeping pressure on the market and thereby restraining the expansion of bank credit. It was understood that, in carrying out the direction, the executive com mittee would continue the existing prices at which Government securities were being supported until after the Treasury January refunding had been com pleted, at which time prices of bonds should be permitted to decline rapidly, 1/2 and not if the market did not support itself, to a level not more than 100 less than par on the longest restricted 2 1/2 per cent issue and to not less than par on 1 1/8per cent one-year certificates. It was also understood that if, before the completion of the January refunding, market selling should in crease substantially, the executive committee would be authorized to permit prices to decline to the level stated above as rapidly as was consistent with the maintenance of orderly market conditions. The limitation contained in the first paragraph of the direction was in creased from 2 billion to 3 billion dollars because it was felt that it would be desirable for the executive committee to have the enlarged authority, in order to be in position to meet adequately the conditions that were likely to prevail in connection with the Treasury's refunding operations and tax collections before another meeting of the Committee.
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