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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 Washington on Monday,


September 18, 1939,

at 10:30 a.m.

Eccles, Chairman
Harrison, Vice Chairman

Morrill, Secretary
Carpenter, Assistant Secretary
Wyatt, General Counsel
Goldenweiser, Economist
Williams, Associate Economist
Dreibelbis, Assistant General Counsel
Sproul, Manager of the System Open
Market Account
Mr. Thurston, Special Assistant to the
Chairman of the Board of Governors
Mr. Piser, Senior Economist in the Division
of Research and Statistics of the Board
of Governors
Messrs. Young, Sinclair, Parker, Schaller,
Peyton, Gilbert and Day, Presidents of
the Federal Reserve Banks of Boston,
Philadelphia, Atlanta, Chicago, Minne
apolis, Dallas, and San Francisco,
Mr. Kimball, Secretary of the Presidents'
Messrs. Goldenweiser and Williams discussed the credit and
business situation.

Copies of their statements have been placed in

the files of the Federal Open Market Committee.


-2At the end of Mr. Goldenweiser's statement Chairman Eccles

joined the meeting.
At the request of Mr. Goldenweiser, Mr. Piser discussed the
trend of prices and yields of Government securities as shown by a num
ber of charts which he displayed during his discussion.
Mr. Sproul then presented a report which had been prepared at
the Federal Reserve Bank of New York covering open market operations
for the System account since the meeting of the Federal Open Market
Committee on June 20-21,

1939, up to and including September 15, 1939.

Mr. Sproul discussed the operations reflected by the report and stated
that there were no transactions in the account on Saturday, September
16, 1939.
Following the presentation of the report Mr. Sproul explained
briefly the instructions under which the bank was operating today and
said that, while for the last two or three days the outside bids on
the market had been higher than the bids of the New York bank in most
issues, quotations on many issues had dropped today to the bids of the
Reserve bank and that the bank had bought $2,351,000 of bonds.


latest report, he said, was that the selling had dried up and that the
market was in a static condition for the moment.
After a discussion of Mr. Sproul's report,

Chairman Eccles sug

gested that each of the presidents report on the reaction in his dis
trict to developments in

the Government securities market.


statements of the presidents indicated that in their opinion, while



there had been some selling of Government securities on the part of
smaller banks, there had been relatively little

selling on the part of

larger banks except for the account of customers and trust estates,
that many banks and other institutions were ready to buy but were hes
itant to go into the market just at this time, that the market was in
a stronger position because of the decline in prices, that there was
a feeling in

some quarters that there is

now beginning a period of

higher interest rates, that, while banks had suffered a loss of ap
preciation in their Government security holdings, such loss might be
substantially counteracted by increases in the amounts of and returns
from their loans and other investments,

that the System should not at

tempt to hold prices of securities at any particular level but should
allow the market to seek its

own level, that there was little


hood of panic selling at present prices, and that the System had done
a good job in

the way in

stated, however,

which it

had handled the market.



that there had been some criticism of the practice

of requiring names of large sellers of securities and of the action
taken by the Federal Reserve Bank of New York in getting dealers to
close at 4:00 o'clock.
discussed in

In this connection Mr. Harrison and Mr. Sproul

detail the reasons for the adoption of the practice for

a short period of requiring the names of sellers in

connection with

certain types of offerings to the Federal Reserve bank, pointing out
that such requirements are no longer made.

They also explained the

situation as to the hour of closing, pointing out the desirability of



having a uniform time for discontinuing operations in the over-the
counter market.


appeared from the statements of the presidents that

no Federal Reserve bank had made an advance to a bank on Government ob
ligations under the policy recently announced by the Board, and it


the consensus that, while there had been some selling on the part of
banks throughout the country as a whole, the total sales by all holders
were not large in

view of the disturbed conditions to which the market

had been subject.
After a further general discussion a recess was taken and the
meeting was reconvened at 2:30 p.m. with the same attendance as at
the morning session.
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on June 20-21, 1939, were ap
Upon motion duly made and seconded,
and by unanimous vote, the actions of the
executive committee of the Federal Open
Market Committee as set forth in the min
utes of the meeting of the executive com
mittee on June 20-21, 1939, were approved,
ratified, and confirmed.

was stated that on September 8, 1939, it

was decided by

the members of the executive committee, with the approval of the mem
bers of the Board of Governors who were not members of the executive
committee, to ask the other members of the full Committee (Messrs.
Fleming, Martin, and Hamilton) for their concurrence in granting au
thority to increase the System open market account by a second



$500,000,000 as provided in the last resolution adopted at the meet
ing of the Federal Open Market Committee on June 21, 1939,

and that

the granting of such authority was approved by Messrs. Fleming, Martin
and Hamilton on September 9, 1939.
Upon motion duly made and seconded,
and by unanimous vote, the action of the
members of the Federal Open Market Com
mittee in granting the additional author
ity referred to was approved, ratified,
and confirmed.
Upon motion duly made and seconded,
and by unanimous vote, the transactions
for the System open market account, includ
ing the purchases of obligations guaranteed
by the United States Government, during the
period since that covered by similar action
at the meeting of the Federal Open Market
Committee on June 20, 1939, to and includ
ing September 16, 1939, were approved, rati
fied, and confirmed.
There ensued a discussion of the questions of policy with re
spect to the authority to be granted to the executive committee to
arrange for transactions in the System open market account.
eration was given in


this connection to a revision of the resolutions

adopted by the Federal Open Market Committee at its

last meeting and

to the question whether the authority granted to the committee to in
crease or decrease the System account for the purpose of exercising
an influence toward the maintenance of orderly market conditions
should be so worded as to authorize the executive committee to in
crease the account by a stated amount irrespective of the bills which
might be allowed to run off or whether the authority should be for



the purchase or sale of a stated amount of securities without regard
to the amounts of Treasury bills that might be allowed to mature with
out replacement.
Chairman Eccles stated that the principal question that had
been discussed by the members of the executive committee during the
recent period was the rapidity with which the market should be al
lowed to decline, the amounts of securities that should be purchased
for the System account during declines, and the timing of such purchases.
He stated his position that in

view of the existing large amounts of

excess reserves he would rather have remained out of the market en
tirely than to have been in

and permitted the market to decline too

rapidly, that he felt that the System should increase its
as the market declined,


that, since a substantial decline had taken

place and Government securities were getting close to their issuing
prices the Committee should take either the position that it
charged its

responsibility and that the market should stand on its

feet or the position that, if

had dis


was going to be in


the market at all,

was more important now than when the market was very much higher

that the market show no substantial declines, that he did not think
it would take much buying to give the market stability, that in view
of that situation it

would be a mistake to let the market go through

par without considerable resistance on the part of the System, and
that he would favor a policy of resistance.
Mr. Harrison stated that the Secretary of the Treasury on



September 12, 1939, advised the members of the executive committee
that he thought that if there were any criticism of the System's op
erations it
that it

was that it

had given the market too vigorous support and

was the feeling in the Treasury that the System should let the

market go down towards a natural level more quickly and with less ex
penditure of funds for the reasons (1) that the Treasury might be in
terested in going into the market to do some financing but it

did not

want to do so until the market was a more natural one and (2) that
private financing had been delayed because of the desire of issuers
to wait until the market had found what they deemed to be a more nat
ural level.

Mr. Harrison felt that in these circumstances it might

be preferable to select a course between the two extremes suggested
by Chairman Eccles, that is,

to let the System get out of the market

entirely but to be prepared, as in the past, to attempt to avoid dis
order in the market by placing bids under particular issues, whenever

appeared that there was heavy pressure on those issues without any

outside bids.

Under this procedure, he said, bids would be placed

up to, say, $250,000 on any particular issue and some bonds would be
taken if

necessary to avoid having than drive the market down.

conditions showed that the market had not found its
said, it


own level, he

should be followed down with purchases only to maintain

orderly conditions.
The question of the policy to be adopted for the future
was discussed at length and particularly the questions whether the



Committee should give vigorous support to the market at this point,
whether, if

the market had not found a level where it

would be inde

pendent of Federal Reserve buying, the Committee should permit it
decline slowly,


taking a substantial amount of bonds on the decline,

or rapidly, taking only a few bonds, or whether, if

the market should

break through the present levels with substantial selling, a strong
stand should be taken by the System at some point in order to dry up

Consideration was also given to the desire of the Treasury

to have a reasonable period of stability in the market and of freedom
from official support before announcing any new financing.
Mr. Ransom referred to the close attention which the execu
tive committee had given to the market during the preceding three
weeks and suggested that, if
in Washington,

possible while the whole Committee was

some more definite formula be worked out than had ex

isted heretofore in order that the executive committee might not be
under the necessity of giving the matter the constant attention that
had been required during the recent period.
was discussed at some length but it

Mr. Ransom's suggestion

was stated by a majority of the

members that they felt that because of the unusual conditions under
which the System account was being operated anything more than a very
general statement of objective was not possible at this time.
The opinion was expressed, however,

that it

should not be the

purpose of the Committee to "peg" or maintain the market at any pre
determined level.


In response to a request from Chairman Eccles that the presi

dents who were not on the executive committee of the Federal Open Mar
ket Committee express their views with respect to the problem before
the Committee,

a number of them discussed the matter.

Mr. Young said that he would let
and if

the market seek its

own level

that appeared to be two or three points lower he would let



that far before putting in orders, that if it did not hold its own at
that point he would let it
fore he would give it

continue as far as another three points be

strong support, and that he would not be concerned

with the speed with which it was allowed to drop.

Day said he would not like to see a precipitous drop and if

the market went down he would want to ease it

down in order not to

create the impression that there was no support and to prevent it from
breaking away.
Mr. Gilbert did not favor complete withdrawal from the market.
He did not see any reason for varying the program that had been followed.
He said that the extent to which the market should be supported would
depend on developments and that he thought the procedure that had been
followed up to date had worked well.
Mr. Martin stated that he would not hesitate to spend enough
to keep the market from going down too fast and that in

his opinion

such action would have the effect of stabilizing the market and bring
ing in

Mr. Peyton said he did not see any great variance in

the points



of view that had been expressed, that no one was suggesting withdrawal
from the market altogether, that it

was a matter of practical operation

from day to day, that there was a point at which the market should be
bolstered, and that he doubted that that point had been reached.


also said that psychology plays an important part in the market and
that the prices of securities are determined by many outside factors
including the influence of the views of financial writers and bankers
and others that give free advice.
Mr. Sinclair was inclined to stay away from the market a little
and see if

the buyers would come in.

He would be prepared in

any sudden fluctuations to cushion the market a little
gressively as had been done.

case of

but not as ag

He said that in view of the war situation

he would not be in a hurry to do a lot of buying for the reason that
he felt that buying was going to do more to frighten buyers away than
to encourage them to come in,

that he believed the market was going

to a lower level,

we did not find buyers then he would

and that if

be prepared to do some buying but that in the meantime he would mark
time and see what happened.
Mr. Fleming felt that the market would decline if the Neutrality
Act were repealed and that a statement of general principles could be

When there are substantial offerings and no purchasers the Sys

tem should be prepared to buy.

The Committee should not deem it

function to maintain any particular level of yields or prices.


Committee should endeavor to prevent violent fluctuations in the course



of a trading day, up or down.
he was not prepared to say.

As to what those fluctuations should be
He would leave the job to the executive

Mr. Hamilton stated that the general impression prevailed
throughout the country that the System and the Treasury would not per
mit Government securities to go through par and that was one reason
the market had leveled off as it

began to get close to par.

said that he would watch the market closely and if
or more he would get in the market and if


He felt, however, that it

went off a point

went below par he would

get in pretty strongly because he thought that is


He also

what the public ex

would not be necessary to go in

very strongly to maintain prices around par.
was too soon after Sep

Mr. Parker was of the opinion that it

tember 1 to formulate a long range program as we had not yet passed
through the crisis and that for a period at least the executive com
mittee should pursue the same policy that it

had pursued up to the

present time and cushion the market so that if
drop it

there were any further

would be a steady one and not bring about a wave of selling.

He felt that if

there were any substantial amount of bonds being of

fered for which no adequate market could be found that condition might
start a wave of selling that could not be stopped without buying a con
siderable volume of securities, that there seemed to be no other prac
tical course at present than that of easing the market down and buying
on a substantial scale, and that an impression that the Committee



not going to support the market might produce a feeling of uncertainty
that would deter buying.
Chairman Eccles stated that as he got the general view of the
presidents it

was one of approval of the action of the executive com

mittee up to date, broadly speaking, and that the fact that the System
had purchased about $450,000,000 of securities up to this time in
cushioning the market was not considered by the majority of those
present to have been excessive.
Consideration was given to the resolution containing author
ity to the executive committee to effect transactions in the System
open market account and a draft of a revised resolution which had
been prepared during the discussion was read, as follows:
That the executive committee be directed until other
wise directed by the Federal Open Market Committee to ar
range for such transactions for the System open market
account (including purchases, sales, exchanges, replace
ment of maturing securities, and letting maturities run
off without replacement) as in its judgment from time to
time may be necessary for the purpose of exercising an
influence toward maintaining orderly market conditions;
provided that the aggregate amount of securities held in
the account at the close of this date shall not be in
creased nor decreased by more than $500,000,000.
Mr. Leach raised the question whether the above resolution
would be interpreted as a mandate to the executive committee to spend

$500,000,000 or anything like that amount.


was unanimously agreed

that the resolution should not be so interpreted and that the amount
spent and the rapidity with which it
cumstances as they developed.

was spent would depend on cir


-13At the conclusion of the discussion,
upon motion duly made and seconded, the
resolution set forth above was adopted by
unanimous vote.
Reference was then made to the report of examination of the

System open market account as of the close of business on June 17,
1939, which was submitted by Federal Reserve Examiner Koppang under
date of September 7, 1939, in accordance with the request made by
the Federal Open Market Committee at its

last meeting.

A copy of

the report had been sent to each member of the Federal Open Market
Committee by Mr. Morrill on September 11, 1939.

Reference was made

to the last paragraph of the report which called attention to the
fact that, while the designation of Mr. Sproul as Manager of the Sys
tem Open Market Account had been approved by the Federal Open Market
Committee, approval did not appear to have been obtained for the
designation of Mr. Rounds as alternate for Mr, Sproul.
At the conclusion of a discussion dur
ing which the opinion was expressed that
there was no necessity for the approval of
the appointment of an alternate for Mr.
Sproul, it was voted unanimously to accept
and file the report without further action.
Chairman Eccles stated that a question had been raised as to
the procedure and the time for making an announcement of the decision
reached by the Board and the Federal Reserve banks that the recently
announced policy with respect to advances by Federal Reserve banks
to member and nonmember banks on the security of Government obligations



includes Federal Home Loan Banks,

Federal Intermediate Credit Banks,

Federal Land Banks and Banks for Cooperatives and suggested that this
matter be discussed at this time.

In this connection he stated that

an inquiry had been received from the Financial Adviser of the Federal
Home Loan Bank Board as to the application of the policy to Federal
Home Loan Banks and that the Board was under necessity of making some
reply to that communication.

During the discussion some of the pres

idents stated that they had already advised some of the banks in
question in their districts that the policy applied to them.


Eccles reviewed again the reasons for the application of the policy
to the Governmental banking institutions.


was suggested that the

Board reply to the letter received from the Federal Home Loan Bank
Board by stating in effect that the term nonmember bank as used in
the Board's announcement includes Federal Home Loan Banks, with the
understanding that, if

inquiries are received as to other institutions

of the classes mentioned, replies would be made in a similar manner,
and that if

inquiry be made by them at the Federal Reserve banks they

would be advised that the policy applied to them.
At the conclusion of the discussion
the members of the Board of Governors
agreed that the matter should be handled
in accordance with the foregoing sugges
Chairman Eccles reported that it

was the intention of the

executive committee to let this week's maturities of Treasury bills
run off without replacement.



Thereupon the meeting adjourned.