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Form ^ \ ft. 131 BDARD DF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence To Chairman Eccles From Mr« Groldenweisej ^ Date Subject:. In connection with your Treasury meeting* APm is, 1937 Cc. 21 A p r i l 1 3 , 1937 CONFIDENTIAL CURRENT COMMENTS Excess reserves Largely as a result of purchases of Government securities for System Account, excess reserves increased by $UU, 000,000 in the week ended April 7 sad amounted to $l,UUo,OOO,OOO. In the current statement week ending April ik a further substantial rise in excess reserves is anticipated. As payments for gold of about $90*000,000 are scheduled this week, i t i s expected that the Treasury balance with the Reserve banks will be drann down to below $150f000»000f which has recently been the customary minimum. Excess reserves of leading New York City banks now amount to about $500,000,000 and this total may be augmented by Treasury payments during this week. As the increase in requirements i s about $310*000,000 for these banks, they would appear to be generally well prepared to meet the new requirements even with further withdrawals of bankers1 balances. Reportixv£ member banks Commercial loans increased by $8^,000,000 at reporting member banks in leading cities during the two weeks ending April 7t *hil© loans to brokers and dealers declined by $53,000,000. About half of the increase in commercial loans occurred in New York City, but there were also considerable increases in Chicago and in the Cleveland district. Confidential - 2 Variations in holdings of United States Government obligations and in deposits daring the past two weeks have reflected large shifts in Chicago around April 1, the date on which personal-property tax assessments are made. For the two-week period as a whole, holdings of U. S. Government direct obligations declined in New York by $80,000,000, in Chicago by nearly $60,000,000, and at other reporting banks by $Uo,OOO,OOO* Other securities at New York banks declined by $^0,000,000. Adjusted demand deposits declined by $170,- 000,000, reflecting decreases principally in New York and Chicago. Qonmodity prices Daring the past week prices of commodities traded in on organized markets have shown the sharpest decline since the beginning of the broad upward movement last autumnf The decline was general in both domestic and foreign markets, following sharp speculative advances in March* Domestic dopper declined from 17 cents per pound to 15J- cents and prices of other nonferrous metals were reduced considerably. There were decreases also in the prices of steel scrap, cotton, silk, rubber, and wheat* Corn prices, however, continued to advance. Cash wheat and May futures declined about 5 cents a bushel, following an advance of 10 cents during the previous month* The official estimate on the condition of winter wheat as of April 1 was in line with trade expectations and indicated a crop of 656,000,000 bushels, about 1^0,000,000 more than last season. The spring wheat crop i s also expected to show a marked in- crease to afrout 260,000,000 bushels. The total crop in prospect i s consider- ably in excess of domestic requirements and domestic prices of some grades are now adjusted to an export basis for*the first time in four years. Confidential — x — Bond market Treasury bond prices showed l i t t l e change last week. Following an advance on Monday prices declined slowly through Thursday and then recovered "by Saturday to about the level of the preceding week. At Saturday1 s close the average y i e l d on Treasury bonds callable in more than eight years was 2.76 percent, as compared with the peak of 2*79 percent reached on April 1, and a low of 2.22 percent in December* The average y i e l d on Treasury notes maturing in 3-5 years rose to a new high level of 1*70 percent on Thursday. High-grade corporate bonds showed a generally downward tendency during the week and Moody1s average of Aaa corporate issues closed with a yield of 3 ^ 8 percent, as compared with 3 »^2 percent on the preceding Saturday. Lower-grade corporate bonds declined even more substantially during the week, showing a y i e l d of U.92 percent, as compared with U.85 percent a week earlier. Prices of municipal bonds also declined about 3 A of a point; the declines of the past three weeks have been successively smaller in amount. Ihe volume of new security issues offered during the week was about $15,000,000, which i s l e s s than half of the amount pf the preceding week. Confidential . kStock market The stock market was more active during the week ending April 10 and the general level of stock prices declined for the week "by reason of a sharp break on Wednesday which was shared "by all major groups. This break was associated with declines in prices in organized commodity marketsi which appear to have started in London, and with a widely pub*licized rumor to tho effect that the Treasury would cut its buying price for gold. Official denials of this rumor were an important factor in the steadiness of the market towards the end of the week. Prices of British stocks in London, after having shown little change for more than two weeks, declined on Friday. Reports from tondon indicate that British banks have been restricting credit accommodation not only to speculators in securities but also to traders in certain commodities for which prices have recently been irregular* Foreign buying of American stocks Foreign dealing in American stocks was somewhat irregular during the past week, with the week as a whole showing small net purchases* There were substantial net purchases on April g, following the sharp "break in American stock prices on the previous day, but net foreign sales were almost as large on the 9*k* Tk© French were net sellers on each day of the past week and have been buyers on only two days since March 2f. The Dutch were also slightly on the selling side, while the British were fairly substantial buyers after having sold moderately in the previous week* Confidential • 5Sold movements In the week ending April 10 reported monetary gold stock increased $52,000,000 to a total of $11,63^,000,000, Known shipments of gold not yet added to the monetary stock amount to $66fOOOfOOO« Engagements during the week were comparatively small amounting to only $lU,000f000* Practically all of this gold was engaged in London and is of Russian origin* Since the beginning of the year $^5,000,000 of Russian gold has "been added to our monetary stock* Confidential - 6 RECENT FOHEIGH EXCHANGE ENVELOPMENTS The pound sterling and the French franc, after advancing steadily for several days, reached their highest quotations since early March on Tuesday, April 6* On Wednesday * however, the previous trend was reversed, and on Friday the franc fell sharply in this market to a low of 4.45 5/g cents compared with 4.6l 1/g cents on Tuesday* Sterling and other loading currencies also weakened* The "break in the exchange narket appears to have reflected a speculative demand for dollars "based y on anticipations of a lower Treasury gold price, and of the rise in the exchange value of the dollar that would result unless foreign official gold prices were correspondingly reduced* Though earlier denials had "been ineffective, the speculative pressure on foreign currencies was somewhat relieved on Friday afternoon following the Presidents statement that ho knew of no plan to reduce the gold price. FOREIGN EXCHANGE BATES FOE LEADING CURRENCIES ' (Noon rates in cents per unit) Sterling French franc Guilder Swiss franc Belga March 27 4gg,53 4.59 V 2 54*74 5/g 22,78 1/2 April 6 490*72 ^ 6 l x/g 54.75 5/16 22*81 3/4 l6#g3 7/g 16.85 7/16 April 9 April 12 409.24 99 16 6 ^ 7 !5/ ^ 7A6 5^.64 3/g * 5U.7I 3/4 22.72 1/g 22*74 7/16 16.82 5/16 l6.g4 5/g A combination of factors lent plausibility to the rumor that the American gold price was about to be lowered* In the latter part of March it becameinknown that substantial amounts were being I/A reduction the present $35»OO price couldofboEussian effectedgold without Congressional action. The Gold Reserve Act provides that the Secretary of the Treasury may soil gold and, with the approval of the President, purchase gold in any amounts, at home or abroad* at such rates and upon such terns and conditions as he nay deem oosli advantageous to the public interest* Confidential — 7 *- shipped to the United States through England, and it was reported that aggregate Russian sales would amount to $200>000,000• These shipments were particularly large during the first week of April when sterling was rising against the dollar* Not only did the British Fund fail to purchase the Russian gold in order to prevent the rise in sterling, but stilmfewtial sales of gold were made in the market by "special quarters" — usually considered to "be the Fund — thus creating the impression that the British authorities were extremely reluctant to increase their gold holdings further* The market realized that if this were the case the only ready buyer would be the United States* Adoption of the gold sterilization policy last December, however; the subsequent discussion of proposals to curtail the unwolcome inflow of foreign capital and gold; and the President's recent statement that certain commodity prices were too high, lent support to the view that the attitude of the United States Treasury night be similar to that of the British* Another report appearing at the same time that Russian gold reserves now amount to nearly $7»000|000|000 added to the nervousness of the oarkett It suggested that the U.S«S»R* might endeavor to •unload such enormous amounts of gold on this country as to force a change in the United States buying policy* The figure was fantastic* Russian gold reserves can hardly be much in excess of $l f 0Q0»000 f 000 # The matter was brought to a head last week as the result of a technical situation created in the London bullion market when leading American "banks, fearing that the Treasury!s gold buying price might be reduced while gold was in transit, ceased to buy gold in London for Confidential - g shipment to the United States* Normally American competition for gold serves to prevent the London price from falling ouch "below the point at which it is just profitable to undertake arbitrage transactions, but last week the London price fell substantially below this level. This development, by revealing that important financial interests thought a reduction in our gold price likely, strengthened the speculative demand for dollars. Moreover, the fact that the British did not at first buy gold in the market in order to support the price re-emphasized their reluctance to acquire more gold. On Friday and Saturday, when offerings of gold in the market were unusually large, perhaps reflecting sales by frightened hoarders, the British Fund stabilized the gold price by making extensive purchases. In the absence of private b-uying, therefore, it is probable that future declines in the London price will similarly be limited by official purchases of gold* Through their influence on exchange speculation the developments last week in the bullion market were a factor in the exchange market. The extent to which rates fluctuated, however, reflected the policy or operating technique of the various stabilization funds. The British Fund narrowly limited the decline in sterling by substantial sales of dollars. The low point for sterling was lets than one half of one per- cent below its quotation on April 6. The guilder and the Swiss franc were also held conparatively steady. The French Fund, on the other hand, permitted the franc to fall, virtually without interference, to a point more than 3 percent below last Tuesday's rate. On Friday afternoon the franc temporarily regained about a quarter of this decline, but weakened Confidential - 9subsequently, and was quoted on Monday at not nuch above its previous low* It appears to "be the French policy to allow the franc to fall with little interference, thus conserving the smll gold holdings of the Fiand* On the recovery novenents the Fund steps in to "buy foreign currencies and gold — operations which, while they add to the Fund's reserves, prevent the franc fron rising* This nethod of accwxulating reserves will reach its linlt if the franc is pushed down to U*35 cents, the point at which the law conpels the Fund to use such resources as are necessary to prevent the franc frou declining further.
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