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A meeting of the executive committee of the Federal Open Mar
ket Committee was held in

the offices of the Board of Governors of the

Federal Reserve System in Washington on Friday, July 28, 1944, at 10:10
a.m.

PRESENT:

Mr. Eccles, Chairman
Mr.
Mr.
Mr.
Mr.

Sproul, Vice Chairman
McKee
Leach
Evans (alternate for Mr. Draper)
Mr.
Mr.
Mr.
Mr.
Mr.

Carpenter, Assistant Secretary
Goldenweiser, Economist
Wyatt, General Counsel
Dreibelbis, Assistant General Counsel
Rouse, Manager of the System Open
Market Account
Messrs. Piser and Kennedy, Chief and
Assistant Chief, respectively, of
the Government Securities Section,
Division of Research and Statistics
of the Board of Governors
Mr. Berntson, Clerk in the Office of the
Secretary of the Board of Governors
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the executive committee of the
Federal Open Market Committee held on May
4, 1944, were approved.
Mr. Rouse presented a summary of the reports which had been
sent to the members of the executive committee covering transactions
in the System account since the last meeting of the committee up to
and including commitments as of the close of business on July 26, 1944,
and the redemption of Treasury bills on July 27.

A copy of a report

of open market operations, prepared at the Federal Reserve Bank of New
York and used by Mr. Rouse as the basis for his summary, has been placed

7/28/44
in the files of the Federal Open Market Committee.
Upon motion duly made and seconded,
and by unanimous vote, the transactions
in the System account during the period
May 4 to July 27, 1944, inclusive, were
approved, ratified, and confirmed.
There was then presented a letter received under date of May
31, 1944, from Mr. Sproul as President of the Federal Reserve Bank of
New York reading as follows:
"Referring to Secretary Morrill's letter of May 6,
transmitting to this bank the instructions of the executive
committee of the Federal Open Market Committee concerning
the formalization of the terms on which this bank transacts
business with brokers and dealers for System Open Market
Account, I wish to advise you that:
(1) This bank has furnished each broker and
dealer in United States Government securities,
with whom this bank has been transacting busi
ness, a copy of the statement of terms on which
this bank will transact business with brokers
and dealers in United States Government securi
ties for the System Open Market Account. At
the opening of business on May 15, 1944, executed
agreements and oral acceptances of the statement
of terms had been received from the principal
dealers so that beginning on that day there was
no question of this bank's ability to function
under the instructions issued to it by the ex
ecutive committee of the Federal Open Market
Committee. Since that time executed agreements
have been received from all of the dealers and
brokers who in our opinion meet the qualifica
tions set forth. The bank-dealers generally
signed the statement on the understanding that
requirement 2 (d) was not applicable to member
banks, and two of the brokers whose business
in United States Government securities is
primarily as brokers on the New York Stock
Exchange signed on the understanding that the
requirements listed in 2 (a) 1 to 4 were not

7/28/44

-3"applicable in their case. In addition, one of
the dealer-banks, acting under advice of its coun
sel, substituted the words 'buy and sell' for
'make markets' in paragraph 1 (c) owing to a
feeling that the term 'make markets' has the con
notation of pegging the market, and deleted the
words 'both long and short' in paragraph 2 (a)(3)
inasmuch as a bank legally could not go short.
All these exceptions appear reasonable to us.
The dealers, without exception, accepted the
terms as being a fair presentation of their oral
understanding with this bank, although a number
expressed the view that the formalization of
this understanding was unnecessary.
(2) On May 16, I met with representatives of
the press and made the statement of terms avail
able for their reading and inspection, and dis
cussed with them the reasons for their formaliza
tion. So far the press has handled the matter
well.
(3) There is enclosed data descriptive of each
qualified broker and dealer with whom this bank
is prepared to transact business on behalf of the
System Open Market Account. These contain a sum
marization of the information on which this bank
based its qualification of such dealers and brokers.
The list of dealers and brokers covered is as fol
lows:

(a) For over-the-counter business
Govt. Bond Dept. - Bankers Trust Company - New
York City
C. F. Childs and Company
Chicago, Ill.
Govt. Bond Dept. - Continental Illinois National
Bank and Trust Company of
Chicago - Chicago, Ill.
C. J. Devine and Company
New York City
Discount Corporation of New
York - New York City
The First Boston Corporation
New York City
Govt. Bond Dept. - The First National Bank of
Chicago, Chicago, Ill.

7/28/44

-4-

"Govt. Bond Dept. - Guaranty Trust Company of
New York - New York City
Harriman Ripley & Co. Incor
porated - New York City
D. W. Rich & Company, Incor
porated - New York City
Salomon Brothers & Hutzler
New York City
(b) Brokers on New York Stock Exchange
Asiel & Co. - New York City
Mabon & Co. - New York City
Chas. E. Quincey & Co. - New York City
Salomon Brothers and Hutzler - New York City
There are five other dealers with whom this bank has done
business, occasionally and in limited volume, who do not
clearly qualify because of the relatively small volume and
restricted scope of their business and the limited amount of
capital at the risk of their business. They have been ad
vised that they do not qualify, although there may be situa
tions in the future when, with the knowledge of the executive
committee, we shall find it to the advantage of the System
Open Market Account to deal with them. These dealers are:
Briggs, Schaedle and Company, Inc.
Harvey Fisk and Sons, Inc.
R. W. Pressprich and Company
Chas. E. Quincy and Company
J. B. Roll and Company, Inc.
The firm of Charles E. Quincey and Company, however, does
qualify for the transaction of business as a broker on the
New York Stock Exchange and has executed the required agree
ment as indicated above. The only other dealer in United
States Government securities with whom this bank had occa
sionally done business is Blair and Company, Inc. (Blair
Securities Corporation). However, there have been no trans
actions since December 1943 with this concern, other than
the purchase of Treasury bills at the 3/8 per cent rate, as
in the opinion of the officers of this bank, its portfolio
consistently has been too large in relation to its capital,
and it failed to report promptly a large contingent liability
that appeared in its annual statement.
"It was considered undesirable to include even dealers
with whom some business has been transacted at times in the
past, if they do not clearly qualify under the written terms
and conditions now effective. The line of demarcation must
be as clearly defined as possible, if our practice is to

7/28/44

-5

"be understood and defensible, and if future requests
for qualification are to be capable of determination.
"We believe it is important that the names of the
qualified dealers and brokers be held in strict confi
dence, in order that our action may not adversely affect
the business or reflect in any way upon the integrity,
knowledge, and capacity and experience of management of
the firms that do not qualify."
In a discussion of the reaction to the formalized procedure,
Mr. Rouse stated that there had been no important developments since
the date of Mr. Sproul's letter, that the procedure had been accepted
without question and had worked very well, and that the Bank had re
ceived several inquiries from people who were considering entering the
field.

One firm, Schroder Rockefeller & Co.,

Incorporated,

a company

with substantial capital, had already gone into business and, upon
inquiry, had been informed that when the officers of the firm thought
it could meet the qualifications prescribed in the statement of terms
they should communicate with the Federal Reserve Bank again.

Mr. Rouse

also said that the officers had felt that the company should have further
experience before undertaking to comply with the statement of terms
and were keeping the Bank advised of their progress.
There was unanimous agreement that
no further action needed to be taken by
the committee in this matter at the pres
ent time.
At this point, Mr. Smead, Director of the Division of Bank Op
erations of the Board of Governors, joined the meeting.

-6

7/28/44

Following the meeting of the Federal Open Market Committee on
May 4, 1944, the memorandum which had been prepared by Messrs. Smead
and Rouse and which was presented at that meeting, with respect to
possible procedures that might be adopted for the allocation among
the Federal Reserve Banks of securities in

the System open market ac

count, was read by all of the members of the full Committee, and the
matter was given further consideration by Messrs. Smead and Rouse in
the light of the suggestions made by the Committee members.

Thereafter,

a second memorandum was prepared by them outlining a suggested procedure
which provided for separate allocations of interest-bearing securities
and Treasury bills in the System account quarterly in

each year until

October 1 and monthly for the remainder of the year and for adjust
ments of participations in Treasury bills in the System account and op
tion accounts weekly or more often when necessary to adjust reserve ra
tios.

Copies of this memorandum were distributed, and Messrs. Smead and

Rouse explained the details of the plan, stating that it

contemplated

(1) the allocation of interest-bearing securities in the account to
cover operating expenses and dividends and the balance on the basis
of average daily holdings of interest-bearing securities for the five
year period ending on the last day of the preceding month, and (2)
the distribution of bills in the System account, after giving effect
to holdings in option accounts,

on the basis of the average daily

holdings of interest-bearing securities for the same five-year period,

7/28/44

-7

except that bills would not be allocated to a Bank in an amount which
would reduce its

reserve ratio below a percentage agreed upon from

time to time by the Federal Open Market Committee and the Banks.
During a discussion of the suggested procedure, Chairman
Eccles raised the question whether the continuation of the repurchase
option on Treasury bills was justified.

It

appeared to be the feeling

of a majority of the members present that the option privilege was so
well established that it

would be undesirable to discontinue it

at this

time.
Mr. Rouse suggested that the open market operation of the Re
serve Banks would be simplified if

the option accounts were discontinued

at the individual Reserve Banks and the procedure were resumed that was
followed prior to the action of the Federal Open Market Committee on
September 28, 1942, when the option accounts were established for the
purpose of making Treasury bills available at the Federal Reserve Banks
for immediate delivery when repurchase was desired.

The effect of this

change, he said, would mean that the sellers of bills could continue to
get immediate credit upon sale to the Federal Reserve Banks but that
when the bills were repurchased the transaction would be for regular de
livery, i.e., the next full business day.
There was unanimous agreement with this
suggestion, and it was agreed that at the
meeting of the full Committee, which it was
contemplated would be held on September 21,
1944, the executive committee would recommend

-8

7/28/44

that this change be made.
In connection with this action Messrs.
Smead and Rouse were requested to prepare a
memorandum covering a procedure for the re
allocation of securities in the System ac
count in the event the recommendation of the
executive committee were adopted, it being
understood that as soon as the memorandum
was completed it would be sent to the Pres
idents of all the Federal Reserve Banks for
consideration at the next meeting of the
full Committee as a recommendation of the
executive committee. It was also under
stood that the memorandum presented by
Messrs. Smead and Rouse at this meeting
would be sent to the Presidents as an al
ternative procedure to be followed in the
event the recommendation of the executive
committee was not approved by the full
Committee.
At this point Messrs. Smead and Dreibelbis withdrew from the
meeting.
Mr. Rouse stated that in

so far as he could see at this time

the Federal Reserve Bank of New York had ample authority under the ex
isting direction of the executive committee to effect transactions in
the System open market account between now and the next meeting of the
full Committee,

and that the only reason for any increase in that au

thority was the concern of the Treasury expressed by Mr. Bell that the
Bank have whatever authority might be necessary to meet any situation
that might arise.
ment that, in

The members of the executive committee were in

accordance with the customary procedure,

rection to the New York Bank should be renewed.

agree

the existing di-

7/28/4

-9-

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 make such purchases, sales, or exchanges
(including replacement of maturing securities and allow
ing maturities to run off without replacement) for the
System account, either in the open market or directly
from, to, or with the Treasury, as may be necessary in
the practical administration of the account, or for the
purpose of maintaining about the present general level
of prices and yields of Government securities, or of main
taining an adequate supply of funds in the market; pro
vided (a) that the total amount of securities in the ac
count at the close of July 28, 1944, shall not be increased
or decreased by more than $750,000,000 [exclusive of bills
purchased outright in the market on a discount basis at
the rate of 3/8 per cent per annum and bills redeemed at
maturity, and special short-term certificates of indebted
ness purchased for the temporary accommodation of the
Treasury pursuant to paragraph (2) of this direction], and
(b) that this paragraph shall not limit the amount of
Treasury bills purchased pursuant to the direction of the
Federal Open Market Committee issued under date of March
1, 1944, or the redemption of such bills;
(2) To purchase direct from the Treasury for the
System open market account such amounts of special short
term certificates of indebtedness as may be necessary from
time to time for the temporary accommodation of the Treas
ury; provided that the total amount of such certificates
held in the account at any one time shall not exceed
$750,000,000; and
(3) Upon approval by a majority of the members of
the executive committee, which may be obtained by tele
phone, telegraph, or mail, to make such other purchases,
sales, or exchanges 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.
In taking this action, it was under
stood that the limitations contained in the
direction included commitments for purchases
or sales of securities for the System account.

-10

7/28/44

The meeting recessed at this point and reconvened at 2:15
p.m. with the same attendance as at the beginning of the morning ses
sion except that Governor Ransom and Mr. Thomas,

Assistant Director

of the Division of Research and Statistics of the Board of Governors,
were in attendance.
Chairman Eccles reported that the Board of Governors had re
ceived a request from the Chairman of the Senate Banking and Currency
Committee for a report on S. 1892, a bill introduced by Senator Thomas
of Oklahoma, which provided in effect that United States obligations
owned by banks, insurance companies,
should be deemed,

or institutions receiving deposits

for the purposes of Federal law or regulation, to

have a value equal to par, regardless of the market value thereof, and
also required Federal Reserve Banks to purchase such obligations or
accept them for credit at not less than par.
say that it

The Chairman went on to

was the practice of the Board not to make reports in re

sponse to such a request until it

appeared that the bill

was to be given active consideration,
followed that procedure in

involved

and that the Board would have

connection with this request except for the

fact that the Treasury had received a similar request to which it
posed to submit a reply.

pro

He also said that the matter had been dis

cussed by members of the Board's staff with representatives of the
Treasury and that, while the matter had not been considered by Secre
tary Morgenthau or Under Secretary Bell, there was a difference of

-11

7/28/44

opinion in the Treasury staff as to the position that should be taken
and an indication of the possibility that the Treasury might wish to
submit a report which would not be in agreement with the position
that the Board might wish to take.

The Chairman made the further

statement that, inasmuch as the subject matter of the bill and any
report that the Board might make in connection with it

were of in

terest to the Federal Open Market Committee, he had suggested that
the matter be presented for consideration by the executive committee
of the Open Market Committee at this meeting.
During the luncheon recess Messrs. Sproul and Leach had read
a memorandum covering the discussion of the Treasury and a draft of
report which had been prepared but which had not received considera

tion by the Board.

Mr. Ransom stated that the questions involved were (1) the
timing of the Board's report, and (2) what further action should be
taken in the interest of a uniform report by the Treasury and the
Board.
In the consideration of these points, Mr. Sproul expressed
the opinion that a much broader ground for objection to the bill

than

that stated in the draft of the Board's report was that nothing could
be done more effectively to increase possible fears as to the future
of Government security prices than to attempt to hold such prices at
par or above by a legislative mandate.

-12

7/28/44

At the conclusion of the discussion, it
was agreed unanimously that, if a report had
to be made on S. 1892, it should be opposed
without compromise and that the suggestion
would be made to the Board of Governors that
the Treasury be informed that the Board be
lieved that it would be better not to make
a report on the bill unless and until it be
came clear that it was to be given active
consideration in hearings or otherwise, that
in that event it was hoped that the Treasury
and the Board could submit reports which
would be in agreement, and that, if the
Treasury should decide to make a report be
fore it appeared that the bill
was to be
given active consideration, the Board would
like to have an opportunity to discuss the
Treasury draft of report before it was sent.
At this point Messrs.

Ransom and Dreibelbis withdrew from the

meeting and Mr. Robinson, Economist in

the Board's Division of Research

and Statistics, joined the meeting.
Copies were distributed of a memorandum prepared in the Board's
Division of Research and Statistics which indicated that in

the absence

of further developments the combined reserve ratio of the Reserve Banks
would decline to about 50 per cent, or slightly less, by the end of
1944 and to 40 per cent by the end of 1945.

The memorandum also dis

cussed possible solutions of the problem of the declining ratio and
stated that a decision did not have to be made at this time but could
be deferred until the prospects were somewhat clarified and that waiting
had the advantage that with an early termination of the war the problem
might never actively arise.
Mr. Sproul stated that the computations made at the Federal

7/28/44

-13

Reserve Bank of New York were in substantial agreement with the con
clusions reached by the Board's staff with respect to the possible rate
of decline in the reserve ratio.
In the discussion which ensued, all of the members present in
dicated the feeling that, if

action should become necessary, it

should

take the form of legislation by Congress to reduce the present Federal
Reserve Bank reserve requirements on Federal Reserve notes and deposits.
Mr. Sproul suggested a uniform requirement on notes and deposits of
perhaps 25 per cent.

Chairman Eccles expressed the opinion that the

requirement of such reserves should be eliminated altogether.

There

was a question, however, whether the public was prepared to go that
far.

An alternative suggestion was that Congress might vest authority

in the Board of Governors to change the requirements within limits
which would be stated in the law.
Mr. McKee suggested that any legislation to change the require
ments might be coupled with an amendment to the existing law to continue
the authority of the Federal Reserve Banks to pledge Government securi
ties as collateral for Federal Reserve notes, which expires on June

30, 1945.
The statement was also made that if

the reserve ratio continued

to decline there might be public discussion of the matter in such a vein
as to require comment with respect to it,

and that the Reserve System

should be prepared to issue a statement and to take such other steps

7/28/44

-14

as would make it clear to the public that, because of the nature of
the problem and the ways available for meeting it,

it

was not one that

should cause concern.
Mr.

Goldenweiser stated that Mr. Robinson had prepared an ar

ticle on the subject which it

was thought might be published in the

Federal Reserve Bulletin and that this could be edited and released
whenever it was thought desirable to do so.
At the conclusion of the discussion,
upon motion duly made and seconded, it was
voted unanimously to recommend to the full
Committee at its meeting in September that
no action be taken with respect to this matter
until after the first
of next year, that if
action should become necessary at a later
date the position should be taken that it
should be in the form of a reduction by
Congress in existing Federal Reserve Bank
reserve requirements, and that the executive
committee be authorized to make or to join
in any public statement or statements that
may appear to it to be necessary to counter
act any unfavorable comment that might be
made on the continuing decline in the re
serve ratio.
Messrs. Goldenweiser and Robinson withdrew from the meeting at
this point.
Chairman Eccles stated that he had talked with Under Secretary
of the Treasury Bell by telephone regarding decisions that are to be
made in the near future with respect to Treasury financing, that Mr.
Bell had no plans for a meeting of Federal Reserve representatives
with the Treasury,

and that, unless some member of the Committee felt

-15

7/28/44

that a meeting was necessary, one would not be held but the decisions
made by the executive committee with respect to financing plans would
be sent to Mr. Bell.

Chairman Eccles also said that the Treasury was

thinking of increasing the weekly offering of Treasury bills by two
hundred million dollars and that Mr.

Bell would like to have as promptly

as possible any views that the executive committee might have in that
connection.

Among the reasons given by Mr. Bell for increasing the

weekly offering were (1) the desire of the Treasury to keep its

balances

above from eight to ten billion dollars so that the Treasury would be
prepared to meet any situation that might occur in the event of an early
termination of the war in Europe and an accelerated settlement of ter
minated war contracts,

and (2)

the System would have to purchase approx

imately four billion dollars of securities between now and the next
drive to furnish required member bank reserves, and if

bills were not

increased the System would have to purchase something other than bills.
Mr. Bell had also reported that the Treasury expected to set 14 billion
dollars as the goal for the next drive, which was another reason for
its desire to increase the weekly bill offering, that it

was anticipated

that about 16 billion dollars of securities would be sold in the drive,
and that fewer securities would be taken by banks so that the total
increase in bank holdings in 1944 would not be far out of line with
estimates at the beginning of the year.
Before this meeting copies had been distributed of a memorandum
prepared by Mr. Piser under date of July 25, 1944, which stated that the

-16

7/28/44

Fifth War Loan Drive had established a new record in

speculation, with

loans on Government securities to brokers and dealers between June 7
and 28 increasing by 677 million dollars and loans on Government securi
ties to others between June 7 and July 5 increasing by 1.3 billion
dollars, and that there was evidence that a considerable part of these
loans represented subscriptions that were made for the purpose of quick
resale and that banks arranged for subscriptions with the understanding
that they would purchase the securities after the drive.

Between June 7

and July 12 Government security holdings of weekly reporting member banks
increased by 4.9 billion dollars.

The memorandum also discussed ways

in which this situation might be met in the next drive.
Chairman Eccles pointed out that the large volume of sales in
the Fifth War Loan Drive had been made possible by the banks taking a
substantial amount of Government securities but that it
the increase in

appeared that

holdings by the banking system for the calendar year

would be about 20 billion dollars as compared to the Treasury estimate
at the beginning of the year of about 22 billion dollars.
Mr. Leach said that the total purchases by banks were not out
of line but that there was a big question as to how it
that in the Fifth Federal Reserve District for the first

was being done,
time speculative

loans were made in volume during the last drive, that the practice of
making such loans had become widespread throughout the country, and that
banks which did not make speculative loans felt that they were being

-17

7/28/44

discriminated against and forced to pay a premium for the securities
they bought.

He suggested that, if

purchase were included in

market issues eligible for bank

the next drive, consideration should be given

to (1) making the issues available to commercial banks at the end of
the drive in

stated amounts and (2) requiring banks to certify that

each subscriber had paid 25 per cent of his subscription in

cash with

out borrowing for the purpose from the institution entering the sub
scription.
Ways of meeting the speculative situation in the next drive
were discussed, and Chairman Eccles suggested that the executive com
mittee submit to the Treasury a statement of its

views on this point

and the program for the next drive.
This suggestion was agreed to, and it
was understood that Messrs. Thomas, Piser,
and Kennedy would prepare such a statement
for transmission to the Treasury after ap
proval by the members of the executive com
mittee.
Following consideration of a memorandum
prepared by Mr. Piser under date of July 25
and sent to the members of the executive com
mittee on the question whether the weekly
offering of Treasury bills should be increased,
it was agreed unanimously that a statement of
the committee's views should be prepared and
sent to the Treasury as promptly as possible.
It was also agreed that the question of an
increase in the rate or yield on Treasury
bills would not be raised again with the
Treasury at this time.

7/28/44

-18Secretary's note: In accordance with
this action a memorandum was prepared and
sent to Under Secretary Bell on July 31,
1944, in the following form:

"The Executive Committee of the Federal Open Market
Committee discussed at a meeting held July 28, 1944, the
suggestion that the Treasury increase its offering of
Treasury bills by 200 million dollars a week beginning
with the weekly offering to be dated August 10. After
discussion, the Committee voted unanimously to recommend
that the Treasury make no further increase at this time
in outstanding Treasury bills. The principal reasons for
the Committee's recommendation are as follows:
"1. There is no net market demand for bills. Be
tween the end of October 1943 and the end of February 1944,
marking in both cases the end of war loan drives, Federal
Reserve holdings of bills increased by about 800 million
dollars, while holdings by other investors declined by
about the same amount.
Between the end of February 1944
and the end of July 1944, Federal Reserve holdings of bills
increased by 2.6 billion dollars, while holdings by others
declined by about 100 million. Holdings outside the Fed
eral Reserve Banks are likely to decline further between
now and the next war loan drive.
"2. A further increase in outstanding bills would
be inflationary, in that it would call Reserve Bank credit
into use regardless of the needs of individual banks and
thus would tend to swell the amount of financing done
through the banks. In supplying bank reserves, it is
generally preferable for the Federal Reserve to purchase
securities from banks that are short of reserves and that
need to replenish them. When the Federal Reserve pur
chases new offerings of bills, the reserves thus created
go in part to banks that already have sufficient reserves.
These banks are, therefore, encouraged to expand credit.
During the recent drive, the shift of deposits to war
loan accounts released nearly 3 billion dollars of funds
to banks. They utilized these funds in part by increasing
their holdings of Government securities by large amounts.
At weekly reporting member banks, the increase was 5.4
billion dollars, of which bills accounted for 1.6 billion.
All banks needing reserves before the next drive can ob
tain them by selling to the Federal Reserve from their
existing holdings of Government securities or by borrow
ing from the Reserve Banks.

7/28/44

-19-

"3. A further increase in outstanding bills would
increase the existing difficulty in maintaining the pattern
of rates, in that it would tend to force up prices and to
reduce yields of longer-term securities for which the banks
are showing a growing appetite. A premium has been estab
lished on the new issues included in the drive, and this
premium has created substantial profits for speculators
in Government securities. The existing pressure has made
it necessary for the Federal Reserve to sell bonds and
notes in the market. If the Federal Reserve forces re
serves into the market by purchasing the increase in out
standing bills rather than purchasing from the banks' ex
isting holdings, banks will be encouraged to add further
to their holdings of longer-term securities. In our opin
ion, the proper time to issue additional bills is when
they are needed by the Federal Reserve for purposes of
supplying reserves and of maintaining the pattern of rates.
This time will arrive when banks have reduced their port
folio of bills to the smallest amount that they wish to
hold and are finding it necessary to sell bonds and notes.
"4. A further increase in outstanding bills at this
time would unnecessarily diminish the Treasury's capacity
to use in time of need its best instrument for emergency
financing. We understand that the Treasury's present es
timates show that at the end of October the Treasury's
balance will be 9.3 billion dollars if there is a further
increase of 200 million a week in outstanding bills. If
no further increase is made, the balance will be 6.9 bil
lion. In our opinion, the latter balance would be adequate
to carry the Treasury through to payment date on whatever
securities are offered in the sixth war loan drive and
to meet any emergencies. If, however, a greater need for
funds did arise, the Treasury would still be able to raise
sufficient funds by offering additional bills at the time.
In the interim, the Treasury would save interest costs.
"We feel strongly that the Treasury should permit all
holders of maturing bills to exchange their holdings for
newly-issued bills. We understand counsel has agreed that
it is within the authority of the Treasury to provide for
such exchange and that the exercise of such rights by the
Federal Reserve would not come within the statutory limita
tion on direct purchases. The increase in outstanding bills
is going to the Federal Reserve through the medium of Govern
ment security dealers, who place tenders at the request of
the Treasury, such request being conveyed to the dealers by

7/28/44

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"the Federal Reserve, In our opinion, this procedure is
open to the criticism that, in substance, the bills are
not being sold in the open market and that their purchase
by the Federal Reserve is, in the circumstances, at least
an avoidance of the intent and spirit of the law."

Consideration was then given to the
views of the members of the executive com
mittee on the problem of refunding the 4.1
billion dollars of certificates maturing
on September 1, 1944, and the two issues
of notes totaling about nine hundred mil
lion dollars and maturing on September 15,
and the unanimous decision was reached that
a memorandum should be prepared on this
subject for submission to the Treasury af
ter approval by the members of the execu
tive committee.

Thereupon the meeting adjourned.

Assistant

Chairman.

Secretary.