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FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE TO CONFIDENTIAL FILES DATE AUGUST 27, 1937, SUBJECT: FROM GEORGE L. HARRISON When I telephoned Mr. Sproul from Prout's Neck, Maine, on Monday morning, August 16, he told me that Mr. Eccles had tried to reach me about a possible meeting of the executive committee in Washington the next day, August 17. I told Mr. Sproul that I would talk to Mr. Eccles directly by telephone which I did. Mr. Eccles explained that he was leaving the end of the week and that he thought it would be a good idea to have a meeting of the committee to go over things before he departed. I agreed. He had planned to have a meeting on Tuesday but apparently had not yet been in touch with Mr. Sinclair of Philadelphia and because of the distance he agreed to postpone the meeting until Wednesday, August 18, making it easier for me to get there then. I arrived at Washington Wednesday morning, August 18, on the Federal and met Mr. Sinclair for breakfast at the Carlton. We went to the new Federal Reserve Board building about 10:30 a.m. and spent about a half hour going over the building, and at 11:00 a.m. convened as an executive committee with Messrs. Eccles, Szymczak, McKee, Ransom and Davis present. Mr. Sproul had for- warded to me in Washington the necessary memoranda of operations and also a memorandum of his own comments about the bond market. On the basis of these, I made a report of our transactions through August 17. These were approved in due course and the usual resolutions were then renewed. MISC.3.260MI-37FEDERALRESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE TO CONFIDENTIAL FILES DATE AUGUST 27, 1937 SUBJECT: FROM GEORGE L. HARRISON -2At that point Mr. Eccles made a statement of what he expected would happen in the credit situation during the fall. He emphasized particularly the possible absorption of excess reserves through currency expansion and through a demand for agricultural and commercial loans. I had with me a memorandum of Mr. Roelse which Mr. Sproul had sent to me and on the basis of that memorandum agreed with Mr. Eccles that it was likely that excess reserves of the country might go down below $300,000,000 before Christmas and that it was not impossible that excess reserves might be pretty well wiped out in New York in the face of this possibility. Mr. Eccles said that he thought the System should buy Treasury bills, maybe $200,000,000 or $300,000,000, but with the understanding with the Treasury that they would be allowed to run off immediately after Christmas when the return flow of currency started. He said if this were not done it was possible that the Treasury would have to desterilize gold, but certainly that one or the other would have to be done. I then made a statement that even assuming that our estimate for the fall period were correct, I saw no occasion for us to buy any more Governments; that we knew from experience that there was little likelihood of our disposing of them, certainly not before the budget is balanced; that in any event I would look askance at increasing our portfolio merely for the purpose of taking care of a seasonal demand for loans and cur MISC. 3.2 60M I-37 FEDERAL RESERVE BANK OF NEW YORK OFFICE TO CORRESPONDENCE CONFIDENTIAL FILES DATE: AUGUST 27, 1937 SUBJECT: FROM GEORGE L. HARRISON -S- rency; that excess reserves had been reduced deliberately by the Board's act increasing reserve requirements and that there was no reason now to be concerned merely because we were facing the natural consequence of that action; that we had a Federal Reserve System and Federal Reserve banks ready to make loans and that I thought it would be better the quicker the Board and perhaps some of the banks got out of the frame of mind that we must now always have excess reserves. I much preferred, I said, to see the System function again as a System and to have the banks borrow and to show bills payable. I was confident that if the New York money market got to a point where excess reserves were pretty well wiped out and funds were short that the principal tanks in New York would be willing to borrow from the Federal rather than to force liquidation of their Governments, particularly their long time Governments. I said that I would take that up with some of the bankers as soon as I got back to New York. Everyone present seemed to express agreement with this suggestion, that is, that if we could get some of the principal New York banks to borrow when the time comes, it would be the best thing that could happen for banks all over the country and that it would help to overcome the reluctance to show bills payable. In discussing the New York money market in the light of my trip out West, I asked whether it was not possible that MISC..3.2 60M 1-37 FEDERAL RESERVE BANK OF NEW YORK DATE OFFICE CORRESPONDENCE TO CONFIDENTIAL FILES AUGUST 27, 1 9 3 7 . SUBJECT: FROM GEORGE L . HARRISON -4out-of-town balances were being drawn down in New York and perhaps money borrowed there by out-of-town banks. Not having been back to the bank, I did notknow[notknow]the answer myself. The conference thought that was true. Mr. Ransom pointed out that he knew of some country banks which were borrowing from city correspondents rather than from the Federal Reserve bank. I said that was no doubt true because they could get accommodation at their correspondent bank cheaper than the 2% rate in Atlanta. I brought up the question of discount rates. At this point I said that if there was a drain of funds away from New York, whether because of a reduction of balances or borrowing new money, and if excess reserves in New York are being reduced to a point where there is evidence of a strain, then might it not be well to reduce the discount rates in the other districts in order to minimize this strain by encouraging banks to borrow at home rather than in New York. I said it was a perfectly logical step to consider at this time andthatI[thatI]would favor that action as a means of removing the[possibilityo strain on the money market on which the Treasury has to rely in large measure. idea. All present seemed to think this an excellent Mr. Davis in particular spoke up, saying that they had not even considered or discussed discount rates for about three months. I interjected a remark to the effect that I understood that they were supposed to approve the discount rates every two weeks. Mr. Morrill spoke up to explain how it was done; that it MISC. 3.2 60M I-37 FEDERAL RESERVE BANK OF NEW YORK OFFICE C O R R E S P O N D E N C E TO DATE CONFIDENTIAL FILES AUGUST 2 7 , 1937. SUBJECT: FROM GEORGE L. HARRISON -5was some sort of an automatic standing resolution. Through all this discussion, as I remember it, I never once referred to the possibility of our reducing the New York rate as a part of this program, at least in this stage. In fact, after outlining the program, Mr. Eccles expounded on its merits because it meant uniformity of rates throughout the System thus indicating that he did not himself at this time expect that New York would also reduce; However, when I got back to New York and began to talk with a number of the bankers about the[responsibility]the money market to adjust its reserve/position by borrowing, if necessary, rather than by attempted forced liquidation of long assets, they commented on the fact that they could not be expected to borrow at a discount rate so far out of line with the market. I had to admit that if and when it appeared likely that banks would need to borrow from us, that we would have to consider our rate which for a long period of time had been purely nominal. Friday afternoon, August 20, Mr. Eccles called me on the telephone saying that he was then in conference with the members of the Board with the loud speaker on and wanted to know how things were going. I told him of my talks with the bankers and that I was convinced that they would be willing to borrow at the Federal but it might mean _that when that time came we would have to reduce our discount rate too. it now being so far out of line that we could not expect bankers to agree to borrow MISC. 3.2 60M I-37 FEDERAL RESERVE BANK OF NEW YORK DATE OFFICE CORRESPONDENCE TO CONFIDENTIAL FILES AUGUST 2 7 , 1 9 3 7 . SUBJECT: FROM GEORGE L. HARRISON -6rather than to sell assets. Mr. Eccles said that was fine and that he hoped we would do it, but even then there was no mention of time and in my own mind I never had any thought of doing it until a little later on when excess reserves began to disappear and it became more likely that banks would have to borrow. I told him that I had planned to see the newspaper men that afternoon; that I had not seen them for a long while and that I thought I would talk with them a little about my trip West and the whole program of excess reserves and the Government bond market, pointing out the natural tendency to use up excess reserves during the fall because of commercial borrowing and increased currency demand and indicating to them the likelihood of bank borrowing from the Reserve bank some time before Christmas and the possibility of our having to reduce our rate. I even said that I would express my own personal opinion to them that I saw no reason why the Treasury should borrow any new money in the September financing. Mr. Eccles thought this was all a fine idea and told me that Wayne Taylor had advised him that on next Tuesday, August 24, the Treasury would issue an encouraging statement of their requirements. I saw the newspaper men Friday afternoon and talked with them along the lines which I had mentioned to Mr. Eccles. them seemed sympathetic and understanding and agreeing; Most of all of them thought our present rate was out of line with the market and MISC. 3.2 60M I-37 FEDERAL RESERVE BANK OF NEW YORK DATE OFFICE CORRESPONDENCE TO CONFIDENTIAL FILES SUBJECT AUGUST 2 7 . 1 9 3 7 . FROM GEORGE L. HARRISON -7that If borrowing was necessary some adjustment was probably in the cards. Later on during the day Friday, after I had talked with the reporters, Mr. Eccles called me back to tell me that Chicago and Atlanta had that day voted to reduce their rates to 1 1/2% and that it would be announced Saturday morning and that he hoped we would act the following Thursday, that is, August 26. I told him I thought that was entirely too early for New York to act, that my objection was that it was too near the date of the Treasury financing; that I would prefer to wait at least until after that was out of the way. He seemed impatient at this suggestion and said he did not see what difference that made. I told him we had always tried to avoid taking rate action immediately prior to an issue. He said no more about it. I returned to the bank yesterday morning, Thursday, August 26, from Manchester, and found the bond market still in a slump and general newspaper expectation that we were going to reduce our rate on that day. In fact, my talk of Friday, August 20, which made no reference to possible action by any other Federal Reserve bank but which was just talking about the future policy of the New York bank, was interpreted, in the light of action the next day by Chicago and Atlanta and the Board's statement accompanying that action, as indicating that we were acting this Thursday. It was an unfortunate interpreta- MISC. 3.2 60M I-37 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE TO DATE CONFIDENTIAL FILES AUGUST 27, 1937 SUBJECT:— FROM GEORGE L. HARRISON -8tion because it was so general and so widespread, but it was not at all consistent with what had been my original plan to delay action in New York until after the others had all acted and until we could see better later on in the fall what, if any, necessity there would be for borrowing in this area. All this publicity put us somewhat on the spot, especially as it was so generally expected that we would act. I talked with Mr. Broderick, who happened to be at the bank[Thursdaymorning],about our quandary. He would not give me any defi action because he said he did not want to influence our own judgment, but I rather gathered from some things he said that he thought it was more logical for us not to act until it was more apparent that borrowing would be necessary and especially until after the Treasury financing was out of the way. In his presence I telephoned Mr. Ransom and told him I had just got back; that while I had no idea of recommending a rate reduction as soon as this week, nevertheless, events during the past week and consequent publicity had put us on the spot because of the general expectation that we would act. Mr. Ransom then told me that he assumed we would act;["]thatit was part of the general program which I, myself, had proposed["]; and that he feared that inaction might be interpreted as representing a rift between New York and the rest of the System; and certainly would be regarded as MISC. 3.2 60M I-37 FEDERAL RESERVE BANK OF NEW YORK DATE OFFICE CORRESPONDENCE TO CONFIDENTIAL FILES AUGUST 27, 1937 SUBJECTS FROM GEORGE L . HARRISON -9- an interruption of a program that had been pretty well publicized and would raise questions as to what it was all about. It was clear, he thought, that we should act but he was not very dogmatic about it nor did he urge or insist that we act. He then said that he hoped I would think over the possible misinterpretation of inaction. I told him that my mind was still open to conviction though I favored inaction yesterday. He said he would talk it over with some of the other members of the Board and call me back. At 1:30 p.m., New York time, while I was at lunch with my directors, I was called to the telephone by Mr. Ransom who said he was in session with the Board and with the loud speaker on. He then said he wanted me to make a statement to them of the reasons I had discussed with him earlier that made me think inaction was advisable. He implied that he thought I had changed my mind about the whole program[sincetheme tinginWashington].Itold him not at all; that I was still for the program just as much as I had ever been and that the only single question left for decision was one of timing; that on that question I had never expected to reduce our rate this Thursday or, in fact, before the Treasury financing. He interrupted to say that he and the other members of the Board had thought that we had planned to do it this Thursday and implied that they had indicated in their talks with other Federal Reserve banks that we intended to do so and that MISC. 3.2 60M I-37 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE TO CONFIDENTIAL FILES DATE AUGUST 27, 1937. SUBJECT: FROM GEORGE L. HARRISON -10they might think it strange if we did not act now. I then went on to explain, in answer to his first question about my reasons for inaction, that there being no affirmative need for a reduction this week, I would naturally prefer not to act in view of the forthcoming Treasury financing and the general reluctance of the Treasury in the past ever to do anything artificial to influence the rate situation just prior to a Treasury issue. Mr. Ransom then reminded me that this was a System program and even though there did not appear to be any immediate prospect of borrowing here, that that was no reason to interrupt a program; that he had heard other Federal Reserve bank presidents use the same argument. He seemed a little impatient with it. I then asked him what were the Board's reasons for immediate action. He said, first, the System appears to have taken a position and committed itself to a rate reduction policy; second, New York discount houses have deliberately[attempted]to "bear" the Government bond market (I do not see what this fact, even if true, has to do with our rate action); third, the program, he thinks, is a helpful one and certainly not harmful; that because some of the newspapers have deliberately attacked the policy, the Board does not want New York now not to go ahead with the program because of the attacks, I told him that, apparently, he completely misunderstood my present and past position on the question of timing which I reiterated. Fourth, he said, if the New York bank does not act MISC. 3.2 60M I-37 FEDERAL RESERVE BANK OF NEW YORK DATE OFFICE CORRESPONDENCE TO CONFIDENTIAL FILES AUGUST 2 7 , 1 9 3 7 . SUBJECT: FROM GEORGE L . HARRISON -11- now, then the various unfriendly groups which have been criticizing the action will seize upon that inaction as evidence of a difference of opinion or a split in the System. I told him I saw all those risks but that it was just a question of a balance of judgment as to whether, in view of the circumstances, it was better to act this week. I preferred not to act for the reasons I mentioned though I admitted the possible ill effects of a misunderstanding or the possible charging of a split in the System. He then said he wanted to be sure I understood their position; that they as a Board think that this is a System program and that it must go through; that we cannot stop half way and that he wanted to be sure I got that point. I asked him whether he was trying to infer that if we did not act the Board would disapprove our present rate. He ducked an answer to this. I told him I would rather think that we were mutually trying to reach the right conclusion rather than to assert relative rights and powers. He agreed then that that was the important thing to do and changed his more formalistic tone. At this point Mr. McKee came to the telephone but added nothing very new to the discussion. He did say, however, that, as he saw my position, it represented no change of opinion whatever; the only question being one of timing. I told him that was it precisely and on that question the issue had been made very much more difficult by all of the publicity and talk which MISC. 3.2 6 0 M I-37 FEDERAL RESERVE BANK OF NEW YORK OFFICE C O R R E S P O N D E N C E To DATE CONFIDENTIAL FILES AUGUST 27, 1937. SUBJECT: FROM GEORGE L. HARRISON -12had led the market and the public to expect us to act this week. I then excused myself, saying my directors were in session and I would have to join them. I added that I would be careful to give them the Board's views. GLH:AB
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