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TWENTY-FIFTH ANNUAL REPORT
OF THE

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
COVERING OPERATIONS

FOR THE YEAR 1938

UNITED STATES OF AMERICA
WASHINGTON: 1939

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ANNUAL REPORT OF BOARD OF GOVERNORS

system's influence toward the maintenance of orderly market conditions,
should not be interpreted as in conflict with or as counteracting the
Government's recent program to increase excess reserves; and that in
order to meet its responsibility more effectively under prevailing con
ditions the executive committee should have authority to sell securities
or allow maturities to run off without replacement.
The majority voted against the substitute motion on the ground
that a reduction in the system account would effect a corresponding
reduction of excess reserves of member banks from the amount that
would exist otherwise; that such action at this time would be regarded
as inconsistent with the Government's announced program and par
ticularly with the action of the Board of Governors in reducing reserve
requirements; and that such action should not be taken unless there
were developments subsequent to this meeting which would require a
reconsideration of the general policy, in which event another meeting
of the Committee should be called.
The unanimous action of the full Committee on the original mo
tion was taken in the light of the position of the majority on the
substitute resolution, it being agreed that in these circumstances the
executive committee should have the usual authority to replace matur
ing securities and to make shifts of securities in the account subject to
the limitation that maturing Treasury bills should be replaced only
with Treasury bills or notes maturing within two years to the extent
that they could be purchased without paying a premium over a no-yield
basis; and that in order to meet unforseen conditions that might arise
in the interval before another meeting of the full Committee could be
convened, the executive committee should be in position to act promptly
with approval of a majority of the full Committee to increase or de
crease the system account as circumstances might warrant.
MEETING ON

AUGUST

2. 1938

Members present: Mr. Eccles, Chairman; Mr. Harrison, Vice Chair
man; Mr. Szymczak, Mr. McKee, Mr. Ransom, Mr. Davis, Mr, Draper,
Mr. Sinclair, Mr. Schaller, Mr. Newton, Mr. Peyton.
Authority (1) to Replace Maturing Securities and to Make Shifts of Securities
in the System Open Market Account and (2) to Increase or Decrease the
System Open Market Account.

Upon motion duly made and seconded, and by unanimous
vote, the following resolutions were adopted:
"That the executive committee be directed, until otherwise di
rected by the Federal Open Market Committee, to arrange for the
replacement of maturing securities in the system open market ac
count with other Government securities and for such shifts in
maturities as may be necessary in the proper administration of the
account, provided (1) that maturing Treasury bills shall be re
placed 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 maintained at not less
than $1,000,000,000; and (3) that the amount of bonds in the ac
count having maturities in excess of five years be maintained at not
less than $500,000,000 nor more than $850,000,000.

FEDERAL RESERVE SYSTEM

81

"That, in addition to such authority as may be contained in other
resolutions of the Federal Open Market Committee and until other
wise directed by the Committee, the executive committee be author
ized, 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 to allow
maturities to run off without replacement) of Government securities
in the open market from time to time for the system open market
account to such extent as the executive committee shall find to
be necessary for the purpose of exercising an influence toward main
taining 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
account having maturities over five years be maintained at not less
than $500,000,000 nor more than $850,000,000."
The members of the Committee agreed that the resolutions containing
instructions to the executive committee which were adopted at the
previous meeting of the full Committee should be renewed and for the
same reasons, but that the new resolutions should contain a modification
with respect to the replacement of maturing Treasury bills. In June,
1938, considerable difficulty was experienced in replacing maturing bills
with Treasury obligations maturing within two years (as required by
the authority granted at the meeting of the Federal Open Market Com
mittee on April 29) without paying a premium over a no-yield basis for
the new securities and it appeared that further replacements with
Treasury bills and notes within the two-year limitation would be ex
tremely difficult if not impossible without paying such a premium for the
replacement securities. In these circumstances the members of the
Federal Open Market Committee (except Mr. Davis who was absent),
on July 1, 1938, agreed to waive, until otherwise directed by the Com
mittee, the requirement contained in the first resolution adopted at the
meeting of the Committee on April 29 that Government securities pur
chased in replacement of maturing Treasury bills have maturities within
two years and this action was ratified by unanimous vote at the meeting
of the Committee on August 2. As it was thought that there might be
a continuation of the difficulties in obtaining replacement securities with
maturities up to two years without paying a premium over a no-yield
basis the Committee decided that the resolution adopted at this meet
ing authorizing replacement of maturing securities should provide that
maturing bills be replaced with bills and notes without limitation as to
maturity, but only to the extent that they could be obtained without
paying a premium over a no-yield basis.
MEETING ON SEPTEMBER 21, 1938

Members present: Mr. Harrison, Vice Chairman; Mr. Szymczak, Mr.
McKee, Mr. Ransom, Mr. Davis, Mr. Sinclair, Mr. Newton, Mr. Schaller,
Mr. Peyton.
Authority (1) to Replace Maturing Securities and to Make Shifts of Securities
in the System Open Market Account and (2) to Increase or Decrease the
System Open Market Account.

Upon motion duly made and seconded, the following
resolutions were adopted by unanimous vote:

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ANNUAL REPORT OF BOARD OF GOVERNORS

"That the executive committee be directed, until otherwise di
rected by the Federal Open Market Committee, to arrange for the
replacement of maturing securities in the system open market ac
count with other Government securities and for such shifts in matu
rities as may be necessary in the proper administration of the account,
provided (1) that maturing Treasury bills shall 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 maintained 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 $900,000,000.
"That, in addition to such authority as may be contained in other
resolutions of the Federal Open Market Committee and until other
wise directed by the Committee, the executive committee be au
thorized, 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
to allow maturities to run off without replacement) of Government
securities in the open market from time to time for the system open
market account to such extent as the executive 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 $200,000,000, and (2) that the amount of bonds in
the account having maturities over five years be maintained at not
less than $500,000,000 nor more than $900,000,000."
The resolutions were adopted for the reasons which prompted the
Committee in adopting the resolutions containing the existing instructions
to the executive committee. However, it was felt that the authority
granted to the executive committee to increase or decrease the system
account upon written, telephonic or telegraphic approval of a majority
of the members of the full Committee should be enlarged for the reason
that, while it appeared that the immediate possibility of war in Europe
had diminished, there was considerable uncertainty in the situation which
might result in the necessity for emergency action before another meeting
of the full Committee could be held. In view of these circumstances, the
limit placed in the second resolution upon such action was increased to
$200,000,000. For the same reason the maximum limit on the amount of
bonds in the account having maturities over five years was increased to
$900,000,000 in both the first and second resolutions.
MEETING ON DECEMBER 30, 1938

Members present: Mr. Eccles, Chairman; Mr. Harrison, Vice Chair
man; Mr. Szymczak, Mr. McKee, Mr. Ransom, Mr. Davis, Mr. Draper,
Mr. Sinclair, Mr. Schaller, Mr. Peyton, Mr. Leach (alternate for Mr.
Newton).
Authority (1) to Replace Maturing Securities and to Make Shifts of Securities
in the System Open Market Account and (2) to Increase or Decrease Sys
tem Open Market Account.

Upon motion duly made and seconded, the following reso
lutions were adopted, Messrs. Harrison, Szymczak, McKee,

FEDERAl RESERVE SYSTEM

83

Davis, Sinclair, Schaller, Peyton and Leach voting "aye"
and Messrs. Eccles, Ransom and Draper voting "no."
"That the executive committee be directed until otherwise directed
by the Federal Open Market Committee, (1) to arrange for the
replacement of maturing Treasury bills in the system open market
account with other Treasury bills or Treasury notes, or, from time
to time, to allow such bills to mature without replacement or pend
ing subsequent replacement (a) when market conditions are such
as to make it impossible to procure other bills or notes without pay
ing a premium over a no-yield basis, or (b) when such notes are
not obtainable without undue disturbance to the market; (2) to
arrange for the replacement of maturing Treasury notes and bonds
in the system open market account with other Government securities;
and (3) to arrange for such shifts in maturities in the system open
market account as may be necessary in the proper administration
of the account; provided, (a) that the amount of securities in the
account maturing within two years be maintained at not less than
$1,000,000,000; (b) 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 $900,000,000; and (c) that, if Treasury
bills in the account are allowed to mature without replacement, the
total amount of securities in the account be not decreased by more
than $200,000,000.
"That, in addition to such authority as may be contained in other
resolutions of the Federal Open Market Committee and until other
wise directed by the Committee, the executive committee be author
ized, 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 to allow
maturities to run off without replacement) of Government securities
in the open market from time to time for system open market
account to such extent as the executive committee shall find to be
necessary for the purpose of exercising an influence toward main
taining orderly market conditions, provided (1) that the total
amount of securities in the account be not increased by more than
$200,000,000 nor decreased by more than $200,000,000 including
such decreases as may result from allowing Treasury bills in the
account to mature without replacement, and (2) that the amount of
bonds in the account having maturities over five years be main
tained at not less than $500,000,000 nor more than $900,000,000."
This action was taken in continuation of the existing policy of the
Committee, the reasons for which have been stated in connection with
resolutions adopted at previous meetings. In adopting this resolution,
however, certain changes were made in the provisions bearing upon the
replacement of maturing Treasury bills held in the System account,
for reasons which are set forth in the following press statement, which
was approved by the Committee following the adoption of the resolution:
"The Federal Open Market Committee announced, following a
meeting today, that weekly statements of the total holdings in
the Federal Reserve System's Open Market Account may at times
show some fluctuation depending upon conditions in the market
affecting the Committee's ability to replace maturing Treasury bills