View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

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 Thursday, September 15, 1938,
at 9:30a.m.

PRESENT:

Mr. Harrison, Vice Chairman
Mr.
Mr.
Mr.
Mr.

Szymczak
Davis
Sinclair
Ransom (alternate for Chairman Eccles)
Mr. Draper, Member of the Federal Open
Market Committee
Mr. Carpenter, Assistant Secretary of the
Federal Open Market Committee
Mr. Goldenweiser, Economist
Mr. Williams, Associate Economist
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
Mr. Ransom stated that in view of the resignation of Mr.

W.
R.

Burgess as Vice President of the Federal Reserve Bank of New York and
as Manager of the System Open Market Account and since Mr. Sproul, First
Vice President of the bank,

who has been selected by the bank to succeed

Mr. Burgess as Manager of the system open market account subject to his
selection being satisfactory to the Federal Open Market Committee, had
remained in New York in order to keep in

close touch with the market,

he

(Mr. Ransom) had requested Mr. Piser to come to the meeting for the pur
pose of giving the executive committee information with respect to con
ditions in

the Government securities market and that, if

agreeable to

the other members of the committee, Mr. Piser would attend the meeting.

9/15/38

-2

There being no objection, Mr. Piser was requested to attend the meeting.
Messrs. Harrison and Piser discussed recent developments in the
Government securities market.

Mr. Harrison said that it

was possible

that there might be a strong reversal of the recent weakness in the
market with the result that a favorable opportunity would be presented
to dispose of the notes and bonds purchased for system account during
the last three days, that Mr. Sproul had stated over the telephone that
the Federal Reserve Bank of New York was, in fact, offering securities
for sale in the market at prices only slightly above current quotations,
and that he (Mr. Harrison) would like to suggest that the committee
consider whether, in the event of a strong upturn in prices, advantage
should not be taken of the opportunity to dispose of additional long
term securities from the account.
At this point Mr. Ransom reviewed for the information of the
other members of the Committee the conversations which he had had over
the telephone with Chairman Eccles on September 12 and 13 with respect
to recent developments in the Government securities market and stated
that Chairman Eccles had expressed the opinion that he could find no
justification for a further increase at this time in the total amount
of securities held in the system open market account and that such an
increase would be inevitably construed as a deliberate effort to sup
port the market for Goverment securities.

The Chairman, Mr. Ransom

said, was less opposed to shifts from short-term to long-term securi
ties in the account but felt that such action only reduced the ability

9/15/38

-3

of the committee later to make effective a policy which involved a
reduction in excess reserves of member banks.

Mr. Ransom said also

that, while the Chairman had no criticism to make of the action taken
during the recent period, he questioned whether responsibility for ex
ercising an influence toward an orderly market should be assumed in the
light of the existing conditions and that he also felt that there should
not be an increase in the system account or a substantial lengthening
of maturities without a meeting of the full Committee.
There ensued a discussion of the extent of the responsibility
of the Federal Open Market Committee for orderly conditions in the
Government securities market under conditions which obtain at the pres
ent time.

During the discussion Mr. Harrison stated that in recent

months he had come to question whether the Committee had not gone into
the market too quickly and too frequently to try to moderate movements
which, in

some cases, were merely temporary and not the result of a

definite trend.

He suggested that better results might be obtained

in the future if

the committee were less responsive to minor fluctua

tions than it

has been at times in the past.

question whether it

Mr. Ransom raised the

was not a better procedure to enter the market in

the early stages of a situation, which might develop into a disorderly
rise or fall in the market, as a means of preventing the disorderly
condition.
After further discussion of the advisability of the sale of
bonds and notes purchased during the last two days, it

was agreed that

9/15/38

-4.

Mr. Harrison should call Mr. Sproul on the telephone and advise him
that if

the New York bank saw an opportunity to sell some of the se

curities purchased during the last two days and to replace them with
bills, without such shifts having an unfavorable effect on the market,
the members of the executive committee would favor such action.
At this point Mr. Dreibelbis, Assistant General Counsel,

joined

the meeting.
Mr. Harrison left the meeting to advise Mr. Sproul over the
telephone of the views of the committee, and upon his return informed
the other members of the committee as to the developments in the bond
market as reported by Mr. Sproul.
Mr. Harrison then suggested that the committee should give some
consideration to the policy that might be followed by the Federal Re
serve System in the event war should break out in Europe.
in such an event,

if

the Stock Exchanges should close it

He felt that
would probably

be necessary, in order to prevent panicky disorder in the Government
security market,

either to close the over-the-counter market or else

to have the System prepared to make substantial purchases of Government
securities or freely to make loans upon the collateral of Government
securities or both.

Whether or not the over-the-counter market should

close, he thought that, in order to meet legitimate requirements of
the holders of Government securities, it
Reserve banks to let it

would be wise for the Federal

be known promptly that they were prepared to

make loans to individuals, partnerships and corporations secured by

9/15/38

-5

direct obligations of the United States under the last paragraph
of
Section 13 of the Federal Reserve Act.

In the beginning, he said, it

might be wise to have the rate on such loans the same as the discount
rate or nearer to it

than at present and probably the Reserve banks

should loan at par, - certainly to member banks.

After the markets

began to reopen and quotations were available on Government securities,
such Federal Reserve bank loans might well be made at the market so
far as borrowers other than member banks are concerned.

It

would also

be desirable, Mr. Harrison said, after conditions became stabilized,
to increase the rate on such loans to individuals, partnerships and
corporations other than member banks.

He felt that it

would be a

mistake to lend at par to individuals and corporations if,
markets were reopened,

after the

Government securities sold at less than par.

Mr. Harrison's suggestions were discussed in the light of the effects
that war might have on the American money market, particularly in the
event the United States were sooner or later involved in the conflict.
Reference was made to the fact that the payment for the
$803,000,000 of new Government securities being issued by the Treasury
today will result in a reduction in excess reserves of member banks to
approximately $2,500,000,000 of which approximately $1,200,000,000
will be in New York City.
it

All of the members indicated that they felt

was very doubtful that the reduction in

excess reserves of member

banks would have any tightening effect on the money market.
Mr. Harrison referred to the suggestion which he had made at

9/15/38

-6

previous meetings of the Federal Open Market Committee and the executive

committee with respect to allowing maturing bills in the system open
market account to run off without replacement.

He said that, since the

Treasury was willing to see a substantial reduction in excess reserves
as a result of member banks using a portion of such reserves to pay
for their allotments of the new issues of Government securities and
since the Treasury was holding approximately $700,000,000 of imported
gold in the general fund which could be expended and thereby increase
excess reserves of member banks, he did not see how some reduction in
the amount of securities in the system open market account, for purposes
of maintaining orderly conditions in a rising market, could now be re
garded as being contrary to the Government program of maintaining large
amounts of excess reserves at member banks.

In this connection he

pointed out that the amount of gold held in the general fund of the
Treasury was approximately the same amount as the amount of the re
duction in reserve requirements of member banks which was effected on
April 15 of this year.

In

connection with this point he made the sug

gestion that what the policy of the Committee should be with respect
to an increase or decrease in the system account was a question to be
decided on its

merits in relation to the money market and that a re

duction in the system portfolio could no longer be regarded as being
contrary to the Government program since the Treasury itself evidently
no longer felt that excess reserves of member banks need necessarily
be maintained at the level of recent months.

9/15/38
Mr. Harrison then referred to the action taken by the board of
directors of the Federal Reserve Bank of New York on September 8 in ap
pointing Mr. Sproul as Manager of the System Open Market Account subject
to the selection being satisfactory to the Federal Open Market Com
mittee.

Mr. Harrison said that pending action by the Committee on the

selection it

would not be possible for Mr. Sproul to serve in that

capacity and that, while under the by-laws of the Federal Open Market
Committee the Federal Reserve Bank of New York is

the agent for the

execution of transactions for the system open market account and, there
fore, there was no absolute necessity for action on the selection of
Mr. Sproul today, he (Mr. Harrison) would like to have the matter
settled as promptly as possible.

All of the members of the executive

committee concurred in the opinion that no action need be taken in the
matter pending the next meeting of the Federal Open Market Committee.
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meet
ing of the executive committee of the Federal
Open Market Committee held on August 2,
1938, were approved.
Upon motion duly made and seconded, and
by unanimous vote, the transactions in the
system open market account during the period
from August 2 to September 14, 1938, in
clusive, were approved, ratified and con
firmed.
There followed a discussion of the action to be taken by the
to the
executive committee with respect to the authority to be granted
Federal Reserve Bank of New York to execute transactions in the system
open market account and it

was agreed that the existing authority

9/15/38
should be renewed with the understanding that the amount of bonds in
the account should not be reduced below $750,000,000 and that, in ac
cordance with the limitation placed on the authority of the executive
committee by the Federal Open Market Committee to make shifts in the
account,

the amount of bonds with maturities over five years should not

be increased above $850,000,000.
Thereupon, upon motion duly made and seconded,
and by unanimous vote, the executive committee
directed the Federal Reserve Bank of New York until
otherwise directed by the executive committee,
(1) To replace maturing securities in the
system open market account by purchases of like
amounts of Treasury bills or Treasury notes provided
such purchases can be made without paying a pre
mium above a no-yield basis;
(2)
To make such other shifts of securities
in the account (which may be accomplished when de

sirable through replacement of maturing securities)
as may be necessary in the practical administration

of the account up to an aggregate of $200,000,000
of purchases and a like amount of sales or redemp
tions, provided that the total amount of bonds
held in the account be not reduced below $750,000,000
and that the total amount of bonds in the account
having maturities over five years be not increased
above $850,000,000;
(3) To increase or decrease temporarily the
amount of securities in the account between weekly
statement dates by not more than $30,000,000 when
necessary in making replacements or shifts pursuant
to the above provisions 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; and
(4) 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 purchases or sales (which would in
clude authority to allow maturities to run off

9/15/38

-9without replacement) for the account as may be
found to be desirable within the limits of the
authority granted to the executive committee by
the Federal Open Market Committee.
There was also discussion as to when the next meeting of the

Federal Open Market Committee might be held and it

was suggested that

a meeting be held in the latter part of October, possibly on October
24.

Mr. Harrison stated that there had been some discussion of the

desirability of calling a Presidents' Conference and he would ascertain
whether that date would be satisfactory to the presidents of other
Federal reserve banks.

Thereupon the meeting adjourned.

Assistant Secretary.

Approved:
Vice Chairman.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102