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A meeting of the executive committee of the Federal Open Market
Committee was held in the offices of the Board of Governors of the
Federal Reserve System in Washington on Tuesday, May 3, 1949, at 9:30
a.m.

PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.

McCabe, Chairman
Sproul, Vice Chairman
Eccles
Vardaman
Leach
Mr.
Mr.
Mr.
Mr.
Mr.

Mr.
Mr.

Mr.

Morrill, Secretary
Carpenter, Assistant Secretary
Vest, General Counsel
Rouse, Manager of the System Open
Market Account
Young, Associate Director of the
Division of Research and Statistics,
Board of Governors
Riefler, Assistant to the Chairman,
Board of Governors
Smith, Economist, Government Finance
Section, Division of Research and
Statistics, Board of Governors
Arthur Willis, Special Assistant,
Securities Department, Federal Reserve
Bank of New York

Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meetings of the executive committee held
on February 28 and March 1, 1949, were ap
proved.
Upon motion duly made and seconded,
and by unanimous vote, the action of the
members of the committee on April 29, 1949,
increasing from $1 billion to $1.75 billion
the limit on the authority of the Federal
Reserve Bank of New York to reduce the total
securities in the System account, as con
tained in the first paragraph of the direc
tion issued by the committee at its meeting
on March 1, 1949, was approved, ratified,
and confirmed.

5/3/49

-2
Upon motion duly made and seconded,
and by unanimous vote, transactions in the
System account as reported to the members
of the executive committee for the period
February 28 to May 2, 1949, inclusive,
were approved, ratified, and confirmed.
Before this meeting there had been distributed to the members

of the Federal Open Market Committee copies of memoranda relating to
(1)

June refunding and possible new money borrowing by the Treasury,

and (2) relative roles of nonmarketable and fully marketable issues
in longer-range debt management and monetary operations.

The latter

memorandum had been prepared in response to the request made by the
Federal Open Market Committee at its last meeting that the staff pre
pare a study of a program for the conversion of long-term Treasury
debt.

It

was the thesis of the memorandum that the long-term re

stricted Government bond had failed to serve the purposes for which
it

was designed; that, in fact, it

tended to accentuate the postwar

inflation and presented problems in connection with debt management
in deflation; that there should be no new financing in this form of
security, and that future financing or refinancing should be in the
forms of bank-eligible-marketable
years'

securities of not more than ten

maturity and nonmarketable securities.
Mr. Sproul stated that the memorandum was in the nature of a

progress report and that the study would be continued.
There was a discussion of what the approach should be to the
refunding of short-term debt and, in this connection, reference was
made to the proposal contained in the first of the two memoranda

5/3/49

referred to above.

It was stated that in the absence of a further in

crease in the rate for one-year Treasury certificates (which would be
a desirable step but presumably unacceptable to the Treasury), the
June 1 certificate maturity and June 15 Treasury bond maturity should
be refunded into a new issue of Treasury notes due in four to five
years to be priced at the market and offered at par.
Mr. Sproul stated that, while such an issue might seem to

freeze the pattern of rates, the issue would have the advantage of
tending to prevent any further widening of the spread between the
short and the long-term rate and, if the short-term rate were raised
at a later date and the issue should decline below par, it would be
helpful in getting away from the position that no issue of intermed
iate or long-term Government securities should be permitted to go be
low par.
There was also a discussion of changes in economic conditions
and factors affecting the Government security market and investment
policies of banks in recent months and of the desirability of a refund
ing policy which would not increase the amount of short-term debt out
standing.
Mr. Rouse stated that the only way long-term rates on Treas
ury bonds could be stabilized under existing conditions would be to in
crease the short-term rate or issue securities in the intermediate
field to relieve the pressure on intermediate and long-term issues.

Be

also commented that the Treasury had been very cooperative in meeting the

5/3/49
market situation accompanying the recent reduction in reserve require
ments and had made available for sale in the market a total of $100
million of long-term eligible bonds.
In a discussion of the suggestion recently made that some of
the restricted issues be made eligible for purchase by banks, it was
the consensus that this step would be undesirable since it would in
crease the price of restricted securities in the hands of present
holders and thus would give them an unjustified "windfall", it would
set a precedent for changing the terms of a contract during its life,
it would fill in maturity dates with bank eligible securities without
advantage to the Treasury, and it would encourage the banks to invest
in longer term securities than is desirable.
Mr. Eccles asked for a discussion of the question whether the
committee should recommend a further increase in the short-term rate.
In the consideration of the question there was agreement with the
view expressed by Mr. Sproul that an increase in the short-term rate

would be preferable but that it would not be possible to get the
agreement of the Treasury or to get the public to understand the in
crease as desirable action in the present business and credit situa
tion.
There was also agreement with a suggestion made by Chairman
McCabe that the executive committee recommend to the full Committee
that the June refunding be done through the medium of a note as out
lined in the memorandum on June refunding.

5/3/49
Thereupon the meeting recessed to reconvene following the
meeting of the full Committee.

Secretary.

Approved:

Chairman.