The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
STATEMENT BY THE FEDERAL OPEN MARKET COMMITTEE For release in Monday morning newspapers of September 13, 1937 . September 12, 1937 The Federal Open Market Committee met in Washington on September 11 and 1£ and reviewed the business and credit situation. In view of the expected seasonal demands on the banks for currency and credit during the coming weeks the Committee authorized its Executive Committee to purchase in the open market from time to time sufficient amounts of short term U. S. Government obligations to provide funds to meet seasonal)withdrawals of currency from the banks and other seasonal requirements. Reduction of the additional holdings in the open market portfolio is contemplated when the seasonal influences are reversed or other circumstances make their retention unnecessary. 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 economic recovery. As a further means of making this policy 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 inactive account. The Board of Governors acted upon this recommendation and the Secretary of the Treasury agreed to release at once 'the desired amount of gold. This will place an equivalent amount of funds at the disposal of the banks and correspondingly increase their available reserves. c This action is in conformity with the usual policy of the System to facilitate the financing of orderly marketing of crops and of autumn trade. Together with the recent reductions of discount rates at the several Federal Reserve banks, it will enable the banks to meet readily any increased seasonal demands for credit and currency and contribute to the continuation of easy credit conditions. c 1 .• \°\ 1. This action is consistent with the various actions of the System over the past several years. It is a part of the broad policy of monetary ease. 2. Reserve requirements were increased to absorb surplus reserves due to gold inflow. The action was taken at the time when it was possible to do so, but without change in the basic policy of monetary ease, S. It was explained that to meet changing credit conditions, the System would rely upon the instrument of open market operations (which had been made workable in the Banking Act of 1935) because this was a more flexible method. 4. The Treasury helped to make the action effective by sterilizing gold, and the combined action on reserve requirements and sterilization removed the danger of inflation from gold inflow - and, in fact, put the credit situation under complete control. 5. The System used the open market instrument last Spring to restore and maintain orderly conditions in the capital markets, and it was effective. 6. Sincd then the picture has changed—inflation danger is not in the picture now—but the usual seasonal withdrawals of funds and use of credit will reduce the excess reserves in the money markets by several hundred million before the end of the year. 7. The System has reduced discount rates, which were ineffective while excess reserves were redundant and widely diffused. However some banks are reluctant to borrow, and to assure ample funds and a continuance of easy money conditions this fall supplemental action was in order. 8. Customarily central banks at such seasonal points put more funds into the money market as an offset and that is exactly what is being done nov*r by using not only the traditional open-market operations but also by drawing - 2 - down some of the sterilized gold—which reduces the amount of funds which would have to be put in by the open-market operation. 9. In other words, in choosing among instruments to use for this unusual purpose, the System decided to make use, in cooperation with the Treasury, of a portion of the sterilized gold which, of course, will create reserves in the money market promptly and effectively. The Bank of England and the British Treasury have a similar cooperation and draw on gold when necessary. 10. Except for using gold at this time the action would not differ in any respect from that always taken by Central banks at seasonal periods. In the past this resource has not been available, of course. It is new and for that reason not orthodox. 11. The additional seasonal requirements are about |500,00Q,000. The Secretary of the Treasury has consented—as a matter of the cooperation established when he initiated the sterilization program—to release or desterilize $300,000,000 towards this amount. This lessens the amount which the open-market operation will add to the portfolio, and means the Open Market Committee will not have to make purchases in an amount that might tend to disturb money rates. 12. This assures the basic easy money policy by making funds available to the market for all banks, including those which hesitate to borrow. 13. The open market purchases will be in Treasury bills and other short term Government paper. The usual central banking practice is to buy bankers' acceptances to provide seasonal funds, but as there is a relative scarcity c - 3 - of these, the Treasury bills etc., which have the same effect in providing reserves, are naturally the medium to purchase. This emphatically is not an operation to support the Government bond market which does not need support. 14. This relates broadly to the general capital markets. It is in mind to keep reserves at a point where there will be not necessity for selling off portfolios that would be a deterrent to new private financing and refinancing. It is aimed at helping the broad capital market. 15. Entirely off the record, it of course takes some pressure off the Treasury as to its borrowing necessities and such criticism as there has been in and out of Congress against increasing tfoe public debt to sterilize gold. It accomplishes a necessary purpose of the Reserve System and at the same time is of some aid to the Treasury. It is a cooperative action that in itself should give assurance that credit and monetary powers are being exercised by mutual consultation and cooperation. c
@FedFRASER