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R&S 216 Board Statements on Easy Money, 1929 - 1940 (largely from Annual Reports) 1929 “ ...At the end of October the drop in security prices was acoompanied by a subsidence in the demand for credit from the stook exchange; a drastic liquidation of security loans} outflow of gold; and an easing oredit policy by the Federal reserve system... In the latter part of the year large purchases of aooeptances by the Federal reserve banks* followed in tho last two months by purohases of Government securities, enabled member banks to reduce their borrowings, and by tho end of the year disoounts wero in the smallest amount for noarly two years; 13x18 low level of indebtedness of member banks was an important factor in the easier condition of the money market... "During the last three months of the year the net liquida tion of loans on securities, by banks and by other lenders, may be estimated in the aggregate at $3,900,000,000... This liqui dation was accompanied by a reversal of the credit policy of the Federal reserve system. Over a period of about two years in crease in the volume of credit utiliEed in the security market had been the principal consideration determining the firm money policy of the system; and -the diminution in the demand for such credit was followed by a reversal of the system's policy. Dur ing the first week of liquidation, when the member banks were taking over in large volume loans previously carried by nonbank ing lenders, the reserve banks bought $150,000,000 of United States Government securities, thereby reducing for member banks tho necessity of borrotfing at the reserve banks. The reserve banks continued this policy of open-market purchases throughout November and tho larger part of December, with the oonsequenoe that member banks were able to meet the seasonal demand for currency, as well as considerable withdrawals of gold for export, and at tho same time to decrease their indebtedness to the re serve banks... Reserve system policy, therefore, during the last two months of the year, in oontrast to the two preceding years, was oxorted in the direotion of easier money conditions. "This reversal of policy, made possible by diminution in the demand for credit in the security markets, appeared desir able also in view of the sharp reduotion in business activity. Industry, which had been operating in record volume up to June, and notwithstanding some recession had remained at an exception ally high level in the following four months, declined abruptly in November and still further in December... Liquidation of bank credit in tho last two months of 1929 and the easing policy of the resorve system were refleotod in a deoline of money rates in tho Unitod States, and particularly of open-markot rates on call and short-time money." (Annual Report for 1929, pp. 1, 10-12.) 1930 "Tho year 1930 was marked by reduoed demand for bank cred it from trade and industry and by decreasing commodity prioos and money rates, all characteristic of a period of declining activity in business* In those circumstances the Federal re sorve system pursued a polioy of monetary ease. This policy was expressed through the purchase at intervals of additional United States Government securities and in progressive reduc tions of roservo bank disoount and acceptance rates... "While discounts for all member banks wore at a low level throughout the year, banks in tho finanoial centers wore practioally out of dobt during a considerable part of the year. This low level of indebtedness at the resorve banks was an in fluence in the direction of easier money conditions, whioh wore reflected in lower rates both on open-markot paper and on loans made by banks to their customers*" (Annual Report for 1930, pp. 1, 3*) 1931 "During the first nine months of the year the Federal reserve system pursued a polioy of further easing credit conditions through reductions of rates and through openmarket operations. In the autumn of the year, when, following upon the suspension of gold payments in England, the system was subjeoted to heavy withdrawals of gold from abroad and of currency for hoarding in this country, it met these demands freely by discounting paper for member banks and by the pur chase of acceptances in the open market." (Annual Report for 1931, p. 1.) 1932 "During 1932 the Federal Reserve System continued to pursue the policy of monetary ease which it had followed sinoe the boginning of the depression. This polioy was expressed through the purohase of United States Government securities in the open markot and through the roduction of rates charged for discounts and for acceptances••• After tho passage of tho Glass-Stoagall Act on F e b ru a ry 27, 1932, tho Federal Reserve System pursuod a policy of large-soalo open-market purchases of United States Government obligations, which oarried thoir total to $1,850,000,000 on August 10, a lovel that was main tained throughout tho rost of tho year*.. "The increase in excess reserves of member banks after February 1932 was accompanied by further easing of the money markfct... Money rates usually tend to decline during a depres sion, because the low level of business activity results in diminished demands on the commercial banks for current finan cing and in an increase in their reserves through the return of currenoy from circulation. During the depression that began in 1929, however, member banks were under the neoessity of meeting foreign demands for gold and domestic demands for currency, both developments which would have tended toward the tighten ing of conditions in tho monoy market, had it not been for the fact that tho Federal Reserve System through purchases of United States Governmont securities enabled member banks to moet these demands and at tho samo time to reduoo their in debtedness to the Reserve banks and to build up a considerable volume of reserves in oxcoss of legal roquiromonts• At the end of 1932 short-term monoy rates wore at record low levels, but low rates did not oxtend to tho long-term markets, where yields on long-torm issues, oxcopt those of the Unitod States Government; continuod high and flotations of new capital issues wore small." (Annual Report for 1932, pp. 10-11, 15-16.) 1933 '•Throughout tho poriod of tho depression the Federal Rosorvo System lent its support to efforts to oountoract defla tionary forces said to facilitate expansion of business activity. With this end in view the System pursuod a polioy of reduoing its discount and opeu-mrkot rates and of purohasing United States Government securities in the opon markot, thereby plac ing a large volume of reserve funds at tho disposal of membor banks... “Open-market operations in 1933 may be described as having been conducted primarily for the direot purpose of building up exooss reserves of tho membor banks with a view to further easing conditions in tiie money markot and encouraging the banks to adopt more liberal lending and investing policios and so to - 4 - facilitate th© recovory of business*«* It is diffieult to say ■what the course of tho depression would have been had the Federal Reserve System not pursued a policy of liberal open-market purchases, which at first helped the banks to meet extraordinary demands upon them and later to build up excess reserves to an unprecedented levol. This policy, together with the concurrent roduotion in discount rates, was an important factor in tho goneral decline of money rates to extreme low levels* Commercial paper, which at th3 open ing of 1930 was at a 5 porcont level, had declined by the end of 1933 to 1-1/2 per cent* Bankers’ acceptances declined from 4 porcent to five eighths of a percent* The oall monoy rate doolined from 6 to 1 percent* The rate on Treasury certificates doolined from 3-1/2 to one fourth porcent, and average rates charged by barks in leading cities to thoir commercial customers declinod from about 6 to 4-1/2 porcont... review of open-market operations by the Federal Re sorve System during the 4 yoars indicates, therefore, that the placing of reserve funds in tho market through the purchase of Unitod Statos Govornment securities has boon an effective moans of preventing exceptional demands upon the member banks from tightening the credit situation and that these funds have been a powerful means toward the establishment and main tenance of ease in the short-tom money market* Although the abundant credit providod was not effectively employed by bus iness, it would appear that the maintenance continuously of a substantial volume of excess reserves through open-market purchases helped to arrost a powerful deflationary movement and created conditions propitious to business recovery." (Annual Roport for 1933, pp. 17-18, 20-21.) 1934 "Developments in 1934 wore all in tho direotion of easier credit conditions* The expansion in excess reserves during tho year, which was caused ohiefly by gold imports, was not accompanied by an increase in bill or security holdings of the Federal Reserve banks that could be sold for the purpose of ab sorbing the excess reserves, if that should become desirable* With this limitation on the System* s power to reduce member bank reserves by the sale of assets in the open market, the System's ability to restrict credit expansion, if it should become excessive, rests chiefly on new powers conferred upon it by recent legislation* Among these are the power in an emergency and with approval of tho President to raise reserve roquiroments of member banks, provided in tho act of May 12, - 5 - 1933} authority to restrain speculativo activities of member banks under difforent provisions of tho Banking Aot of 1933} and control of margin requirements on soourity loans by brokers and by banks, granted by tho Securities Exchange Act of 1934." (Annual Report for 1934, pp. 1-2.) 1935 "Federal Reserve policy during 1935 continuod to be diroctod toward monetary ease... "In viow of tho largo and growing volume of oxcoss rosorvos, no further action dirootod toward obtaining easier monoy con ditions was noccssary during 1935. On tho contrary, tho con tinued growth of oxcoss rosorvos raisod the question of taking measures to roduco Idiom*.. "In the latter part of the year the Board gave frequent consideration to probable future changes in the volume of exoess reserves, to possibilities of excessive credit expansion on the basis of these reserves, to methods of reducing the reserves and controlling credit expansion, and to the proper timing of such action. After a meeting of the Board of Governors with the Federal Open Market Committee on December 17 and 18, at which these matters were considered, the Board and tho Com mittee issued tho following statement: Tho Board of Governors of tho Federal Reserve System and the Fodoral Open Markot Committee have given extended considoration to the gonoral business and credit situation and to the recommendation of tho Federal Advisory Counoil and are of tho opinion: 1. That oontinuod improvement has boon made in businoss and financial conditions but that tho country is still short of a full rooovory* 2* That tho primary objoctivo of tho System at tho prosont time is still to lend its efforts to a furtherance of rocovory* 3* That thoro is at tho prosont time no evidence of ovarexpansion of businoss activity or of tho uso of business ofrodit• - 6 - 4« That the present volume of member bank reserves, which have been greatly inoreased by imports of gold from abroad, continues to be excessive, far beyond the present or prospective requirements of credit for sound business expansion* Therefore, the special problem created by the continuing exoess of reserves has had and will oontinue to have the unremitting study and attention of those charged with the responsibility for crodit policy in order that appropriate action may be taken as soon as it appears to be in the public interest•" (Annual Report for 1935, pp. 2-3«) 1936 "In order to change a part of the excess reserves into required reserves and thus to eliminate the possibility of this part of the reserves becoming the basis of an injurious credit expansion, the Board on July 14 decided to exorcise its power under tho Banking Act of 1935 to raise membor bank reservo requirements...<These excess reservos have resulted almost entirely from the inflow of gold from abroad and not from the System's polioy of encouraging full recovery through the crea tion and maintenance of easy money conditions. This easy monoy polioy remains unchanged and will bo continued... "'The present is an opportuno time for the adoption of such a measuro. VJhilo tiiero is now no excessive oredit ex pansion, since tho excess resorvos have not been utilized, later action when some member banks may have expanded their loans and investments and utilized their excess rosorvos might involve tho risk of bringing about a severe liquidation and of starting a deflationary cycle. It is far bettor to sterilize a part of those superfluous reserves while they are «till unused than to permit a credit structure to be erocted upon them and then to withdraw the foundation of tho structure... "’In the light of recont oxperionce and in view of tho fact that after the increase in requirements goes into effect member banks will still have approximately $1,900,000,000 of excess resorvos, the Board is convinced that this action will not af fect easy monoy conditions now prevailing. It does not consti tute a roversal of tho ersy money policy which has been pursued by the System since tho beginning of the depression. Rather it is an adjustment to a chan god reserve situation brought about through the extraordinary inflow of gold from abroad. "*Tho prevailing level of long-time intorost rates, which has boon an important factor in tho revival of tho capital mar kot, has boon duo principally to the largo accumulations of idlo funds in the hands of individual and institutional investors. The supply of investraont funds is in oxcoss of tho demand. Tho incroaso in resorve requirements of member banks will not dimin ish the volume of deposits held by those banks for thoir custom ers and will, therefore, not diminish the volume of funds availablo for investment. Tho maintenance of an adoquato supply of funds at favorable ratos for capital purposes, inoluding mort gages, is an important factor in bringing about and sustaining a lasting recovery.*” (August 1936 Rrlletin, pp. 613-614.) "During 1936 the Federal Reserve System, as reconstituted, continued to pursue the policy of monetary ease which had been in effect since the beginning of the depression, and money was available in abundance at the lowest rates of interest the country has known... In July 1936 and again in January 1937 the Board of Governors took action to increase reserve require ments and thereby to eliminate a largo part of tbo excess re serves that had accumulated. The combined effect of these two actions of tho Board was to double tho reserve requirements of member banks. Thus tho power conferrod upon the Board by tho Banking Aot of 1985 to increase reserve requirements for tho purpose of provonting injurious crodit expansion was fully utilized. " .. .Monoy ratos declined almost continuously from 1929 to 1935, with briof interruptions in tho autumn of 1931, when England and a number of othor countries suspended spocio pay ments and gold was loaving this country in large volume, and again during tho banking crisis in 1933. From the middle of 1934 to the end of 1936 rates in the open market on short term paper were extremely low and showed little change, and rates charged customers by banks in leading cities and bond yields continued to decline in 1935 and 1936. "Rates on bankers' and Treasury bills were generally below l/4 of 1 percent from the middle of 1934 through 1936. The lowest level reached by bankers' acceptances before 1930 was 2 percent in 1924. The rate on call loans with stock exchange collateral, until recent years the most important open-market rate, declined to l/4 of 1 percent in 1935, but was fixed in May 1936 at 1 percent. There were only six scat tered years in tho period from 1890 to 1930 when this rate averagod below 2 percent and in only one month did it average loss than 1 percent. Open-market commercial paper, which for more than half a century has boen a popular medium for investraont of short-tom funds by country banks, was at a rate o f -3/4 of 1 porcent from oarly in 1935 until early in 1937. The lowost quoted commercial paper rate prior to 1930 was 3 peroont in 1924« "Prioes of bonds continued to rise in 1936, and yields on high-grade long-term bonds, which were at tho lowost levels sinco tho oarly years of this century, declined further* Long-term United States Government bonds sold in the latter half of 1936 on a yield basis of less than 2-1/2 percent* The lowest level reached by these bonds in the twenties was 3-l/4 per cent. Pre-war rates are not comparable because most United States Government bonds then bore the circulation privilege, which was at that time of considerable value. The highest-grade corporate bonds sold in 1936 on a yield basis of 3 to 3-1/4 percent, compared with a low level for the twenties of 4 to 4-1/2 porcent and with 3-1/4 to 3-1/2 porcent in tho years around the turn of tho oontury. "Low money rates prevailing in recent years wero the result of ■the large supply of funds seeking profitable use and the small demand from accoptablo borrowers. Excess reservos of bonks woro tho principal factor of supply in tho short-torm markot end woro also an important influonoo in tho decline in long-term ratos. Tho abundant supply of available funds, togothor with tho small demand for loans, encouraged banks to buy large amounts of socuritios, particularly United States Government obligations, and bank holdings of socuritios woro tho largost on record not only in total amount but also in proportion to total bank assets. wThe abundant supply of investment funds hold by others than banks was also a f aotor in the low yields on long-term obliga tions. Insurance companies, othor institutional investors, corporations, and individuals havo in recent years held a largo volume of idle doposits awaiting investment. Continued businoss rocovery and improved corporate earnings to some extent oncouragod active investment of those funds. Many investors, holding idlo funds awaiting tho return of what they would consider as normal interest rates, gradually began to put funds to use at prevailing rates.” (Annual Report for 1936, pp. 1, 29-30.) 1937 "During 1937 tho principal objectives of Federal Reserve policy wore to assure tho continued availability of bank crodit at low ratos for ourront roquiromonts of businoss and at tho scuno time so to rogulato tho available volume of mombor bank resorvos as to avoid tho likolihood of injurious crodit expansion in the futuro.” (Annual Report for 1937, p. 1.) Inoroaso in rosorvo roquiromonts "On January 30 tho Board announood a further inoroaso in the reserve roquiromonts of mombor banks... ’This action com pletes tho uso of tho Board’s powor undor tho law to raise rosorvo roquiromonts to not raoro than twice tho amount prescribod for mombor banks in section 19 of the Pedoral Rosorvo Act. ?'By its prosont action tho Board eliminates as a basis of possible crodit expansion an estimated $1,500,000,000 of oxcoss rosorvos which aro superfluous for tho prosont or prospoctivo noods of commorco, industry, and agrioulturo and which, in tho Board's judgment, would rosult in an injurious credit expansion if permittod to bocomo tho basis of a multiple expansion of bank crodit. The Board ostimatos that, aftor tho full inoroaso has gono into offoct, mombor banks will have oxcess rosorvos of approximately $500,000,000, an amount amplo to finance fur ther rocovory and to maintain easy monoy conditions* At the same time tho Fodoral Reserve Systom will be placod in a posi tion whore such roduction or oxpansion of mombor bank resorvos as may bo doomed in tho public intorost m y bo effectod through open-market operations, a moro floxiblo instrumont, bettor adaptod for keeping tho reservo position of mombor banks currently in oloso adjustment to credit needs... '"It is the Board's expectation that, with approximately $500,000,000 of oxcess resorvos romaining with the banks, crodit conditions will continue to bo oasy... Tho Board's action doos not roduco tho largo volumo of existing funds avail able for investment by depositors, and should not, therefore, oocasion an advance in long-tom intorost ratos or a rostrictivo policy on tho part of institutional and other invostors in mooting tho noods for sound businoss, industrial and agri cultural orodit.'" (February 1937 Bulletin, pp. 95-97.) Autumn easing "Early in August, total oxcess reserves of mombor banks woro in the neighborhood of $700,000,000, but, owing to sub stantial withdrawals of balances by country banks, oxcoss - 10 - rosorvos at Now York City banks had declined to below $50,000,000 as comparad with $200,000,000 in May. It appoarod, thoroforo, thr.t tho New York banks night oxporicnco sono pressure in mooting tho autumn domnds for curronoy and for crodit. "To avoid tho dovelopmont of such prossuro, casing action in tho noncy m r k o t was undortalcon. Tho Board of Governors in Soptonbor roquestod tho Socrotary of tho Treasury to roloaso $300,000,000 from tho inactive gold account, and at tho sane tine tho Rosorvo Systom anno vineod that it would stand roady to buy additional Government socuritios in order to meet tho ex pected soasonal domnds on tho banks for currency and crodit during the coming weeks. Tho Board stated that the purpose of this action was to maintain at mombor banks on aggro gate volume of oxcoss resorvos adoquato for tho continuation of the Systems polioy of monetary ease for tho furtherance of economic recovery* Tho aotion was in conformity with tho usual polioy of tho Syatoti to faoilitato tli; f i r c . n o .. orderly .f marketing of orops and of autumn trade, and together with tho roduction of discount rates at sovoral Federal Resorve banks it placed tho mombor banks in a position to moot roadily any increased soasonal demands for crodit and curronoy and contri buted to the continuation of oasy crodit conditions••• "’The Board's approval 4of roduotion in discount ratos-) was basod upon tho view that tho roduotion of discount rates at this timo would assist in carrying out the System’s polioy of monetary oaso and make Federal Reservo bank crodit roadily available to riombor banks for tho accommodation of commerce, businoss and agriculturo, without encouraging member banks to borrow outside of thoir districts or to liquidato thoir portfolios in order to be in a position to moot tho needs of prosont or prospective borrowers *.* "’It is tho Board’s view, thoroforo, that at this timo tho Federal Rosorvo Systom can best dischargo its public re sponsibility and promote tho continuance of recovery by making it possible for mombor banks to obtain accommodation from Federal Reserve banks at ratos which will oncourago them to omploy thoir funds to moot the noods of agriculturo, industry ana conmorco.’ "'The Federal Open Market Committee mot in Washington on September 11 and 12 and reviowod the business and crodit situ ation. In viow of tho expected soasonal demands on tho banks for currency and crodit during the coning wooks tho Committee authorized its Executive Committee to purchase in tho open - 11 - markot from time to timo sufficient amounts of short t o m U. S. Government obligations to provide funds to moot seasonal withdrawals of curronoy fron tho banks and othor soasonal requirements • Roduotion of tho additional holdings in tho opon market portfolio is contemplated when tho soasonal influences arc reversed or other circumstances inako thoir retention un necessary. "’The purpose of this action is to maintain at member banks an aggregate volume of excess reserves adequate for the continuation of the System’s policy of monetary ease for the furtherance of eoonomic recovery. "'As a further means of making this polioy effective, the Open Market Committee recommended that the Board of Governors of the Federal Reserve System request the Secretary of the Treasury to release approximately $300,000,000 of gold from the Treasury’s inaotive account. The Board of Governors aoted upon this recommendation and tho Secretary of the Treasury agreed to release at. once the desired amount of gold. This will place an equivalent amount of funds at tho disposal of the banks and correspondingly inoreaso thoir available reserves. "’This aotion is in conformity with the usual policy of the Systom to facilitate tho finanoing of ordorly marketing of crops and of autumn trade. Togethor with the recent reductions of discount rates at the sevoral Federal Rosorvo banks, it will onable tho banks to meet readily any incrcasod seasonal demands for crodit and ourrency and contribute to tho continuation of easy orodit conditions.’ "Tho Committoo had given full consideration to general businoss and credit conditions and it was tho general fooling that tho oxisting volume of oxooss rosorvos was abundant for the continuance of easy crodit conditions and for mooting tho oredit requirements of commerce, businoss and agriculture, that in the light of oxisting businoss and crodit conditions offootive aotion to moot and overcome tho prosont business rocossion should be taken outsido tho field of tho Systom's various monetary powers, and that tho System could best contribute to tho further ance of economic recovory by boing propared in case of any change in conditions to act promptly in pursuance of tho ^enoral objec tives set forth in tho resolution." (Annual Report for 1937, pp. 9, 2^3-206,219-220^ - 12 - 1938 "In considering tho problem.of reserves at this timo tho Board wishes to emphasize that the long-viow problem created by tho existing largo volumo of bank deposits and bank roservos is distinct from tho inuaodiato problem of making ample bank oredit available for the expansion of business from current levels. "In recent years it has been the policy of tho Govornmont and of tho Fedoral Rosorvo Systom to encourage the expansion of credit. This lias constituted tho so-callod policy of monetary ease, which has boon diroctod at keeping banks supplied with an abundant volumo of roservos, so as to oncourago thorn to oxpand their loans and invostmonts. This policy has boon ono of the faotors in the oreation of tho existing largo volumo of doposits in tho hands of business ontorprisos and of individual and cor porate investors, and has rosultod in reducing intorost ratos to the lowest lovols in history. It has boon rofloctod in a decline in tho carrying chargos on mortgage debt for farmers and urban housoholdors, has enablod many corporations to rofund their dobt at lower ratos, and has lightonod the cost of cur rent financing to commerce, industry, and agriculture. "Nor is there any immediate reason for considering a re versal of this policy. Thero is n o t M n g in the prosont monetary or banking situation that would point to a proximato dangor of injurious oredit oxpansion. It is in such a poriod as this, however, whon thero is no call for quiok action to meet emergency situations, that problems that may arise in -fee future should bo analyzod and the efficiency of existing machinery appraised. "It is from this point of view that the System's oxisting powers to absorb oxcoss resorvcs should bo considered* Member banks at presont have excess roservos of $3,600*000,000, and this total may bo doubled in tho future. To absorb these re serves tho Systom has tho power to raise roservo requirements by $800,000,000 and to make sales out of its portfolio of United States Government obligations, whioh amounts to $2,560,000,000. Tho uso of these available moans of absorbing rosorvos, to tho extent that it may be in tho public intorost to do so, would still leave tho banks with a volume of oxcoss reserves upon which it would bo possible for an injurious credit oxpansion to devolop. "The ability of tho banks groatly to oxpand the volume of thoir oredit without rosort to tho Federal Reserve banks would make it possible for a speoulativo situation to got under way that would be beyond tho powor of the System to check or control* - 13 - Tho Rosorvo System, would, therefore, bo unable to dischargo tho responsibility plaood upon it by Congross or to porform tho service that tho country rightly expects from it» "In viow of this situation tho Board has doemod it its duty to point out to Congross tho prosont and prospoctivo rosorvo position of our banking systom and tho limitations on tho powors of "tho Systom to rogulato it*., "This action 4 roduotion in roser/o requirements in April 1938} had boen agrood upon by tho members of tho Board as a part of the program announced by the President of the United Statos on April 14, 1938, for the encouragement of busi ness recovery. Although thero had boon excess reserves in amounts oonsidorod amplo to moot all probable noods of agri culture, commerce and business, tho volumo of businoss activity had declined with such rapidity as to produce injurious defla tionary offoots upon commodity prices, tho oapital market, and industry generally. In those circumstances and in view of the other stops proposed to be taken in tho Government's program for encouraging businoss rooovory, tho Board decided that a roduotion in reserve requirements of member banks might be helpful, as a part of a conoorted effort by tho Govornmont to carry out the purposes of this program, by assuring the continued availability of amplo funds for mooting business requirements and thereby proventing injurious credit contraction." (Annual Report for 1938, pp. 21-22, 73-74.) 1939 No quotations 1940 No quotations
