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FEDERAL RESERVE BOARD WASHINGTON X-6484 ADDRESS OFFICIAL. CORRESPONDENCE T O THE FEDERAL RESERVE BOARD J a n u a r y 23, 1930. SUBJ3CT: Open Market P r o c e d u r e . Dear S i r : This l e t t e r i n v i t e s the a t t e n t i o n of your "bank to changes which t h e F e d e r a l Reserve Board, a f t e r p r o l o n g e d cons i d e r a t i o n of the m a t t e r , has concluded should "be made i n t h e e x i s t i n g p r o c e d u r e governing open market o p e r a t i o n s . I t may he r e c a l l e d t h a t i t was i n A p r i l , 1923, t h a t the p r e s e n t p r o c e d u r e w i t h r e g a r d to open market o p e r a t i o n s was a d o p t e d . I n the p r e c e d i n g y e a r many of t h e r e s e r v e hanks, i n o r d e r t o m a i n t a i n p o r t f o l i o s of e a r n i n g a s s e t s , e n t e r e d the mark e t on t h e i r own s e p a r a t e a c c o u n t s to p u r c h a s e U n i t e d S t a t e s Government s e c u r i t i e s , w i t h o u t much r e g a r d to the e f f e c t s of t h e i r o p e r a t i o n s on the market f o r Government s e c u r i t i e s or on c r e d i t c o n d i t i o n s . I t was found n e c e s s a r y , i n consequence, to g i v e t o open market o p e r a t i o n s a s t a t u s which r e c o g n i z e d t h e i r c r e d i t e f f e c t s and economic consequences and a l s o t h e i r e f f e c t s on t h e p o s i t i o n of each F e d e r a l r e s e r v e hank. A copy of t h e B o a r d ' s r e s o l u t i o n c o n t a i n i n g an o u t l i n e of t h e p r o c e d u r e a d o p t e d i n 1923 i s h e r e w i t h e n c l o s e d . Under t h i s p r o c e d u r e the p r i n c i p l e governing open market o p e r a t i o n s was d e f i n e d and i t s a p p l i c a t i o n and p r a c t i c e l e f t to a Committee c o n s i s t i n g of f i v e r e s e r v e banks a c t i n g under t h e g e n e r a l s u p e r v i s i o n of t h e F e d e r a l Reserve Board. The p r i n c i p l e was s t a t e d a s f o l l o w s ; "That t h e time, manner, c h a r a c t e r and volume of open market i n v e s t m e n t s p u r c h a s e d hy F e d e r a l r e s e r v e banks be governed w i t h p r i m a r y r e g a r d t o the accommod a t i o n of commerce and b u s i n e s s , and to the e f f e c t of such p u r c h a s e s or s a l e s on the g e n e r a l c r e d i t s i t u a tion." The f i v e banks c o n s t i t u t i n g the Open Market Investment Committee were the f o l l o w i n g : Federal Federal Federal Federal Federal Reserve Reserve Reserve Reserve Reserve Bank Bank Bank Bank Bank of of of of of Boston New York Philadelphia Cleveland Chicago. X-6484 ~ 2 — Although the n e c e s s i t y of g i v i n g to open market operat i o n s a System s t a t u s was r e c o g n i z e d i n 1923, i t was not t h e n f o r e s e e n how much use would he made of the open market o p e r a t i o n a s an i n s t r u m e n t of F e d e r a l r e s e r v e c r e d i t p o l i c y . As a m a t t e r of f a c t , f r e q u e n t r e s o r t has "been t a k e n to open market o p e r a t i o n s e i t h e r by p u r c h a s e or s a l e of U n i t e d S t a t e s Government s e c u r i t i e s as a mode of p o l i c y i n the f i v e y e a r s f o l l o w i n g the 1923 a r r a n g e ment s . The e x p e r i e n c e of t h i s p e r i o d shows t h a t the open market o p e r a t i o n , when i n v o l v i n g o t h e r than t r i f l i n g amounts, may be of f i r s t - r a t e importance i n a l t e r i n g c r e d i t c o n d i t i o n s even when viewed on a n a t i o n a l s c a l e . I t i s not s u r p r i s i n g , t h e r e f o r e , t h a t s u g g e s t i o n s should have been made t h a t the System c h a r a c t e r of open market o p e r a t i o n s s h o u l d be f u l l y r e c o g n i z e d by h a v i n g a l l twelve F e d e r a l r e s e r v e banks, i n s t e a d of f i v e a s a t p r e s e n t , r e p r e s e n t e d i n the shaping of open market p o l i c y . Views to t h i s e f f e c t have been e x p r e s s e d i n f o r m a l l y by r e s e r v e banks not i n c l u d e d i n the e x i s t i n g s e t - u p , and f o r m a l l y by the F e d e r a l Advisory Council i n the f o l l o w i n g recommendation a d o p t e d i n September, 1928: "The F e d e r a l Advisory Council w i t h o u t any i n t e n t i o n of c r i t i c i s i n g the p r e s e n t arrangements b u t i n o r d e r t h a t a l l governors of the F e d e r a l r e s e r v e banks may p a r t i c i p a t e i n the d i s c u s s i o n s l e a d i n g up to a c t i o n s of t h e Open Market Committee s u g g e s t s to t h e F e d e r a l Reserve Board to c o n s i d e r t h e a d v i s a b i l i t y of h a v i n g the membership of the Open Market Committee c o n s i s t of a l l t h e g o v e r n o r s of the F e d e r a l r e s e r v e banks w i t h an e x e c u t i v e committee composed of f i v e members w i t h f u l l power to a c t . " For the r e a s o n s b r i e f l y s e t f o r t h above, t h e Board h a s drawn up a r e v i s i o n of t h e 1923 open market p r o c e d u r e , which emb o d i e s a f u l l e r r e c o g n i t i o n of the j o i n t i n t e r e s t and r e s p o n s i b i l i t y of t h e F e d e r a l r e s e r v e banks and the F e d e r a l Reserve Board i n t h e m a t t e r of open market p o l i c y . The elements of t h i s p r o cedure a r e c o n t a i n e d i n a memorandum adopted by t h e F e d e r a l Reserve Board r e a d i n g a s f o l l o w s : " ( l ) The Open Market Investment Committee, a s a t p r e s e n t c o n s t i t u t e d , to be d i s c o n t i n u e d and a new committee, to be known as t h e Open Market P o l i c y Conference, to be s e t up i n i t s p l a c e . ( 2 ) Bach F e d e r a l r e s e r v e bank to be r e p r e s e n t e d on t h e Open Market P o l i c y Conference. X-6484 — 3 r» (3) The Conference to meet w i t h the F e d e r a l Reserve Board, a t such t i m e s a s nay "be a r r a n g e d "by or w i t h the Board. (4) The f u n c t i o n of the Open Market P o l i c y Conference to "be t o c o n s i d e r , develop and recommend p l a n s w i t h r e g a r d t o t h e p u r chase or s a l e of s e c u r i t i e s i n the open m a r k e t . ( 5 ) The time, c h a r a c t e r and volume of such p u r c h a s e s and s a l e s t o he governed w i t h the view of accommodating commerce and "business and w i t h r e g a r d t o t h e i r "bearing upon the c r e d i t s i t u a tion. (6) The c o n c l u s i o n s a n d / o r recommendations of the Open Market P o l i c y Conference to "be s u b m i t t e d to each of t h e F e d e r a l r e s e r v e "banks and t o the F e d e r a l Reserve Board f o r c o n s i d e r a t i o n and/or a c t i o n . ( 7 ) A committee to "be known a s the Open Market Executive Committee to be c o n s t i t u t e d f o r t h e purpose of e x e c u t i n g such p u r c h a s e s and s a l e s of s e c u r i t i e s a s have been approved by Fede r a l r e s e r v e banks and t h e F e d e r a l Reserve Board." Such f u r t h e r working arrangements a s may be f o u n d n e c e s s a r y t o make t h e above o u t l i n e d p l a n o p e r a t i v e w i l l , i n the o p i n i o n of t h e Board, b e s t be determined by the Conference i t s e l f when i t i s organized. The Board b e l i e v e s t h a t t h e above p r o c e d u r e c o n t a i n s the e s s e n t i a l s of a workable p l a n designed to g i v e e x p r e s s i o n to the common i n t e r e s t of the F e d e r a l r e s e r v e banks i n m a t t e r s of open market p o l i c y and to p r o v i d e a r e a s o n a b l e and p r a c t i c a b l e method f o r j o i n t a c t i o n . A f t e r your bank h a s had time t o c o n s i d e r the p l a n , t h e Board w i l l welcome ah e x p r e s s i o n of your v i e w s . By o r d e r of the F e d e r a l Reserve Board. Very t r u l y y o u r s , E . M. McClelland, Assistant Secretary. 20 CHAIRMEN OF LLL F. R. BANKS. X-4586 RESOLUTION'S APPROVED BY FEDERAL RESERVE BOARD AT MEETING- ON MARCH 22, 1923. "Whereas t h e F e d e r a l Reserve Board, under the powers g i v e n i t i n S e c t i o n s 13 and 14 of the F e d e r a l Reserve Act, has a u t h o r i t y to l i m i t and o t h e r w i s e determine t h e s e c u r i t i e s and i n v e s t m e n t s p u r c h a s e d by F e d e r a l r e s e r v e banks; Whereas t h e F e d e r a l Reserve Board h a s never p r e s c r i b e d any l i m i t a t i o n upon open market p u r c h a s e s by F e d e r a l r e s e r v e banks; Whereas the amount, time, c h a r a c t e r , and manner of such p u r c h a s e s may e x e r c i s e an i m p o r t a n t i n f l u e n c e upon t h e money market; Whereas an open market investment p o l i c y f o r t h e twelve banks composing t h e F e d e r a l r e s e r v e system i s n e c e s s a r y i n t h e i n t e r e s t of t h e maintenance of a good r e l a t i o n s h i p between t h e d i s c o u n t and p u r chase o p e r a t i o n s of t h e F e d e r a l r e s e r v e banks and t h e g e n e r a l money market; Whereas heavy i n v e s t m e n t s i n United S t a t e s s e c u r i t i e s , p a r t i c u l a r l y s h o r t - d a t e d c e r t i f i c a t e i s s u e s , have o c c a s i o n e d embarrassment to t h e T r e a s u r y i n a s c e r t a i n i n g t h e t r u e c o n d i t i o n of t h e money and i n v e s t ment m a r k e t s from time to t i m e , THEREFORE, Be I t Resolved, That t h e F e d e r a l Reserve Board, in t h e e x e r c i s e of i t s powers under the F e d e r a l Reserve Act, l a y down and adopt t h e f o l l o w i n g p r i n c i p l e s with r e s p e c t to open market i n v e s t m e n t o p e r a t i o n s of t h e F e d e r a l r e s e r v e banks, t o - w i t ; (1) That t h e time, manner, c h a r a c t e r , and volume of open market i n v e s t m e n t s p u r c h a s e d by F e d e r a l r e s e r v e banks be governed w i t h primary r e g a r d to t h e accommodation of commerce and b u s i n e s s and to t h e e f f e c t of such p u r c h a s e s o r s a l e s on t h e g e n e r a l c r e d i t s i t u a t i o n . (2) That i n making t h e s e l e c t i o n of open market p u r c h a s e s , c a r e f u l r e g a r d be always given to t h e b e a r i n g of p u r c h a s e s of U n i t e d S t a t e s Government s e c u r i t i e s , e s p e c i a l l y t h e s h o r t - d a t e d i s s u e s , upon t h e mark e t f o r such s e c u r i t i e s , and t h a t open market p u r c h a s e s be p r i m a r i l y commercial i n v e s t m e n t s , except t h a t T r e a s u r y c e r t i f i c a t e s be d e a l t i n , a s a t p r e s e n t , under s o - c a l l e d "Repurchase" agreement. Be I t F u r t h e r Resolved, That on and a f t e r A p r i l 1, 1923, t h e p r e s e n t Committee of Governors on C e n t r a l i z e d Execution of P u r c h a s e s and S a l e s of Government S e c u r i t i e s be d i s c o n t i n u e d , and be s u p e r s e d e d by a new committee known a s t h e Open Market Investment Committee f o r t h e F e d e r a l Reserve System, s a i d Committee t o c o n s i s t of f i v e r e p r e s e n t a t i v e s fnom t h e r e s e r v e banks and to be u n d e r t h e g e n e r a l s u p e r v i s i o n of t h e F e d e r a l R e s e r v e Board.;, and t h a t i t be t h e d u t y of t h i s Committee to d e v i s e and recommend p l a n s f o r t h e p u r c h a s e , s a l e and d i s t r i b u t i o n of t h e open market p u r c h a s e s of t h e F e d e r a l r e s e r v e banks i n accordance w i t h t h e above p r i n c i p l e s and such r e g u l a t i o n s a s may f r o m time t o time be l a i d down by t h e F e d e r a l Reserve Board."
@FedFRASER