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Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority . [0^6\ Form F. R. 567 END SH EET KI O MATERIAL O NUMBER 333.3 ND F R 4 NAME O subject R System Open Market Account Federal Open Market Committee Open Market Operations DATES (Inclusive) 1935 - PART NUMBER Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority j£,0 . ( KE0 'I> IN FILES SECTldS' APR 1 31 9 5 4 fr/ ' Federal OF r e s e r v e N E W b a n k YORK N ew Y ork 45, N. Y. April 7, 1954 Mr* !• F* Leonard, Director, Division of Bank Operations, Board of Governors of the Federal Reserve System, Washington 25, D. C. Dear Mr* Leonard: In accordance with telephone conversation between Mr. Daniels and Mr. Mount, there is enclosed table showing losses and profits on sales of T * S. Government securities J from System Open Market Account for the period September 30, 194-7 to March 31, 1954-* S y s te m Open Market Account* Enclosure NOTE: The schedule attached supplements the one enclosed with letter from Mr. Rouse __of,Q.Qjpb§r 9» giving data for the"period June 30, 1936, to October 9> 19U7• CONFIDENTIAL F. R. TABLE SHOW1 J LOSSES AND PROFITS ON SALES OF U. S. GOVERN1CENT SECURITIES FROM SYSTEM OPEN MARKET ACCOUNT FOR THE PERIOD FROM SF-PT 30, 19ll7 - MARCH 31, 195U 191*8 19b7 31*, 1*07.1*3 ,* 959.85 78.985.9U $ ,* . * 78 1 26 61 31 31 6.86 lit,911.60 11)6.103.72 , 80 310.58 31,668.58 1*5,386.51* . _____ Profits Losses January February March April May June July August September October November December $1,01*0,705*03 281,1*20*13 368,70^*68 59,21*8.83 106,569*19 297,^56*27 Totals Deduct Profit Net Loss $2,l5U,l6l„88 568.037.61* $T,W7i5T.2lI 57.75 $ 56,202.81* $ 10,515.70 6,993.1*9 1,380.10 9,397.01* 11*,289.99 1*1,667.03 28,683.88 5,988.1*7 11,037.78 151*,21*3.93 210,792.27 1*1*.387.07 $568,037.61* $27,51*1.95 Deduct Losses Het Profit (a) Excludes profits and losses from January 1, 191*7 to Sept. 30, 19U7 (b) 3 months only Federal Reserve Bank of New York Securities Department April 7, 1951* 5, 8 6 3 ,571*.75 3 ,0 6 2 ,8 6 6 .5 0 5,859,999.39 3,30U,lli9.75 U, 861,1*18.05 I*,l58,351;.66 661*,3 6 2 .65 966 ,3 2 0 . 1 1 558,338.17 111*,327.87 807,201.1*3 1.167.01*9.1*0 $ 3,818,11* 3.50 7,031,836.1.7 9,908.59 2 * 722. 50 1, 1,763.15 3,761t.5l 1,657,386.18 1,081*,109.53 21*1,1*92.58 1,3U*,615.28 2.21*7.902.19 1*,116,057.35 1,979,58^.08 * 2,212,565.71 6,722,71*2.1*2 5,517,51*9.56 1,381,981.33 59,316.15 11*9,186.16 86.01*1*.06 131,387,962.73 $6,625,1*19.69 26.276.73 , , 16,571,065.60 $26,276.73 356,227.1*1* I 5 7 5 i £ t 3 0 5 -------- $ l*3,521,17l*.60 6,625.10.9.69 '55,§CT3S79i 131 361 6 0 86.0 Profits Losses W*5,257.79 $ 9l*0,211*.86 12,930.19 205,708.1*3 188,836.99 139,720.37 35,1*51*.59 5,72l*.55 37,826.71* 3,81*0.66 3,67l*.l;0 $2,019,189.57 27.51*1.95 $1,991,61*7.62 Total Profit $ , ** , 7 116 168.01 195h 1953 Profits Profits 9 ,251 * 06 . 1.12 JSSx8 7 5 .1 9 1952 1951 Losses 1950 Losses Profits , . . 16 158 1*6 $192,362.18 $356,227.10* 80 310.58 5i l 2, 05l . 60(a1 Losses 159, 681*.89 $21*,105.99 8,166.38 18, 221.16 1.98 1*62.1)9 17, 21* ,553.1*6 0 625, 1*88.29 71,51*1.52 2,073.75 11 5 181.99 *, 30 0 ,298.10 6 - 636.67 71 , 986 955.U6 95.01 25, 877.91* 1*0,885.22 31*, 791.09 3,752.99 1*6.69 36l*.79 191*9 Profits $ I!,825.86 ** January February March April May June July August September October November December Totals Deduct Losses Net Profit Lossegr Profit* Losses Losses Profits 869.1*3 117.75 215,305.67 l * * 666.1*2 i!, 12,509.35 I----Deduct Losses I8,69l*.07 3ft, ^l. i'* ll 987.18 $ • ; BHugS( ) m b 1,678,678.85 851*.897. 62 L,952,270.51* ,952,270.51 W H S * ! , w — 8ep ieeto *r S y-19$5- - J Mr. Leonard It M. 5. Daniels Attached is a statement showing an estimate of fiscal year 1951 earnings from the System Open Market Account on the basis of Mr. Toungdahl's forecasts as to exchanges of maturing issues* There is given below a rough estimate of interest payments to the Treasury by the Federal Reserve Banks for the fiscal year 195k* This Is based on the assumption that the System Open Market Account will average out at the present volume* Fiscal Tear 195k (Millions of dollars) Earnings - System Account Other Total Expenses (£2,000,000 more than 1953 budget) Reserve for losses from fire and allied risks Special payments to retirement system Profit and loss (transferred to reserve for registered mail losses and charge-offs) Dividends Snecial transfer to Surplus (Dallas and San Francisco) 5U5 8 55J 116 6 3 1 16 i|| ii Available for interest payments U09 Interest payments (90 per cent) 368 Paid in July for second quarter of 1953 82 Ho systematic estimate is being made of interest payments far the fiscal year 1955* Earnings from the System Account reflecting both its size and the interest rate and also other earnings will depend on policy decisions as to reserve requirements, open market operations, etc., which can be only speculation at this tine* An estimate of interest payments of from $365 million to $375 million might be as good as any. Attachment F £ f o r ;f i l e s D. L. Werner Reproduced from the Unclassified / Declassified Holdings of the National Archives | D E C L A S S IF IE D J A u th o r ity j L______ i 1v h i- 1 ______ 0 • SF.P 8 1^53 Estiaated Earnings froa 8 ystea Open Msrket Account Septeaber 1953 * June 1 9 5 * /c (in thousands of dollars) August 19# 1953 Annual rata of earning# 5 1 3 ,7*11 Septeaber-Jtme earning* 303/365 of above *26, *75 Add: (1) (2) Increased earnings froa exchange of 2$ bonds aaturing Septeaber 15** 288/365 of 5/©jt of (It) (5) Increased earnings from exchange of 1 *3 / 8 * notes aaturing March 1 5 — 107/365 of 1-1/tyl of 7,*91,750 21, 6 5 * 21* , 6 5 0 Increased earnings froa exchange of 2-l/** certificates aaturing February 15-135/365 of 3/8* of 3,687,550 Increased earnings froa exchange of 2* bonds aaturing June 1 5 -1 5 / 3 6 5 Of 5/8* of Sub-total Earnings July - August * ,2 2 1 Increased earnings from exchange of 2 - 1 /8 * notea aaturing Deceaber 1 — 211/365 of 1 /2 * of (3) 8 5 5 ,8 2 5 Total 1*61,900 896 5,11* 119 * 5 6 ,4 7 9 8 6 ,8 2 9 5*5,308 R ep rod uced from the U nclassified / D ecla ssified H o ldings of the N ational A rchives 19B3 Mr. V. D. Pulton, First Vice President, Federal Reserve Bank of Cleveland, Cleveland, Ohio. Dear Mr. Pol tom In a letter dmfrfl 'ialprmmiAmnt Gidne* transst1 request of tha Director* of your Bank that, in view of the tlal anount of depreciation on securities held la the Systen tin narket account, the Board ef Qotemors ooaalder nesting tha either by further increasing the anount set aside a* r*eer«a* contingencies or by having the Open Market Covilttee earrj dH tlona which would readjust €ba naturltlea of the aooo*n* and eeft'rert Into realised loaa sone of tha paper in** w le nov exists in Ike fc fc account. As you know, this matter was tha anfetfect of t*e fear** s letter to President friary-an i fry 16 ^ IfrS&JLat whleh tUle t e Board te took the position that in view of the aubataattsl net eefctiage af the Reserve Banks availabla for leaaee there was no «e#d for inoreaeing these reeervea. Tha Board of Qovernora appreciates tha continued of your Directors in this natter. Although tha anouat of depi*ole~ tion has increased substantially, in view of the ©opposition af account there is little likelihood wader preaent or pro< tan credit policy that any eubatentiai portion of this will devalop into raaliaed lossee. Pntfthemore, any addiii<Mia te reserves or tha actual eatabliehneot ef Xoaeet in President Gidney's letter would re salt in re<taetlattfi in being nede to tha Treasury under tha ejciatdn^ Board questions whether any auoh nation should f e e i ir Approval, \ First to Cn>v. Got. Srymczak .. Gov. E tan s ... Gov. Vardaman The Board will continue to veto* tha natter tine in the future it la felt that action along ttw fated t r your Directors la oalled for it will net fcenttate to preq W e d accordingly* ▼ety inly yours, Oof. Mills Got. R+bertson ^ 'APlTa *HilC Chm. Martin If yon approvi initial and Mr. Bre: 4 v* FOI; M. B. Treakle Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D r ‘ Authority t O . I0^6\ iHjr n IN FILES SECTION I Z-3553 f Board of Governors M. B. Daniels This memorandum is for contingencies -which have of the Federal Reserve Banks ury under the policy adopted 1. £ 3 3 . a>vOctober S', 1952- Reserve for Contingencies of Federal Reserve Banks. intended to review the history of the reserves been set up as deductions from the net earnings before computation of the payments to the Treas by the Board in April 19U7. History of how procedure for payment of 90 per pent of Reserve Bank net earnings to Treasury was set up.: r : K ' Tm I"r"l' r" ■ y n--" 1 " T ' ' r'' vr ' - Additions to surplus of the Reserve Banks at the end of 191*6 were such that all Banks had a surplus equal to 100 per cent of their subscribed capital stock, and the Board gave consideration to meeting the problem caused by the increased earnings of the Federal Reserve Banks derived largely . . r m holdings of Government securities. .fo As an alternative £0 restoration of the franchise tax, which would have required further legislation, it was suggested that, under the authority contained in Section 16 of the Federal Reserve Act, the Board levy an interestcharge on the amount of Federal Reserve notes issued to the Reserve Bank not covered by gold certificates pledged with the Federal Reserve Agent, in such manner that the Banks would pay to the Government an amount commensurate with that ■which might be payable under a franchise tax provision, i.e., approxiv mately 90 per cent of net earnings after dividends. The suggestion was dis cussed with the Treasury, and Chairman Eccles mentioned it in testimony before the Senate and House Banking and Currency Committees. A procedure to carry out this suggestion was adopted by the Board on April 23, 19i*7* and there is attached a copy of the Board*s statement for the press which was issued at that time. 2. Description of contingency reserves set up before computing interest payments, r r-..II l r,,.„.i.. 1T; v .-^.rrr irl. I, T a. Why contingency reserve was set up; informal discussion with Treasury. In 19^8,, consideration was given by the Board and the Presidents’ Conference to increasing the capital accounts of the Federal Reserve Banks. This was because of changed conditions since the arrangement was adopted of paying 90 per cent of net earnings after dividends to the Treasury. On June 16, 191*8, Reserve Bank holdings of Government securities included over S billion in maturities over five years, compared with $580,000 in April 19i*7. The premium account in June 19U8 totaled $71 million, compared with $9 minion, in April J 9 i . Lt7 Reproduced from the Unclassified I Declassified Holdings of the National Archives ^ DECLASSIFIED Authority f c O . l 0*?6\ -2 - / This situation was discussed informally with Mr. Bartelt, Fiscal Assistant Secretary of the Treasury, who concurred in a proposal to build up the Reserve Bank capital accounts by setting aside, quarterly, amounts before computing the interest payments to the Treasury, with the understanding that t i method for handling the accounts -would not be 3uch as to give rise to ie questions as to continuation of the System policy with, respect to support of the Government bond market. As a result, beginning with the interest payment for the second quarter of 191*3, lump-sum amounts totaling |80 million, as shown in Vne table belcw, wrre dsdacied before the interest payments were computed, and at the •.c o * the calendar y a . the amount;-! withheld "were added to reserves for con** 31 * i . e?' tingencies. Thio method was adopted because it was felt that if the amounts had been added to surplus accounts, it would have been necessary to amend the April 19hi press statement. Amounts Deducted from Net Earnings before Computation of Interest Payments (In Millions of Dollars) 1s j8 \ Payment Secend quarter Third quarter Fourth quarter* b. 19h9 Payment for— for* First quarter Second quarter Third quarter 10 1$ 1> 5 15 It 10 Pi'oposal by New York Bank in December 1946 for modification of procedure and reasons why not adopted. Hr. Sproal's letter of December 6 , 191*8, referred to prior discussion as to whether the amounts being deducted from net earnings before computing interest payments should be added to surplus of the Reserve Banks or to TfPerves for contingencies. The directors and officers of the New York Baak urged that the addition be to surplus. They believed that this would ba better accounting, rould run the least risk of adverse publicity and adverse public reaction, and would help to avoid possible repercussions in the Gov ernment security market. The Nev; York Bank did not believe it would be technically necessary for the Board to issue a statement amending its press statement of April 2 3 , 191*7? if less than approximately 90 per cent of net naming j was paid to the Treasury. If an amending statement were issued, tbsy believed there would be less comment about an increase in the surplus than about an increase in reserves for contingencies, inasmuch as a reserve for contingencies is generally interpreted to be a reserve for possible losses, and the only substantial losses to which the Banks might be exposed v/eie l.wes on long-ttrm G ernrae.n bonds. 0 7 0 The Board’s letter of December’ 28, 191*8, to President Sproul stated that regardless of any question of technicality, the Board felt that the whole tenor of the Board’s press statement of April 23, 191*7, was that of a Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority . (0^6 '. r -3- / continuing arranternent made in lieu of payment of the franchise tax. The • *0 letter stated that the Board did not believe the crediting of $1 million to contingent reserves during the year would call for the issuance of an explanatory statement, as this would be consistent with practices currently followed by both banks and business organizations and the amounts were not out of line with the size of the Reserve Banks. The letter also stated that, if a question were raised, it might be pointed out in addition that Reserve Banks shipped many millions of dollars of currency daily and carry their own risk, and that they then had premium accounts of approximately #80 million. The letter stated further that the method of deductions for transfer to reserves for contingencies was satisfactory to the Treasury, The Board enclosed with its letter an illustration of how it proposed to show the profit and loss account of the Reserve Banks in the annual report. c. Changes made in contingency reserve procedure while it was in effect. The deduction of . 1 million made from earnings before computing $0 the interest payment for the second quarter of 19)48 was increased to $ 5 1> million for the next four quarterly payments so that the contingent reserves might sooner be brought up to the premium account on Government securities. This was discussed at the joint meeting of the Board and the Presidents on December 1, 191$, at which time it was understood that the $15 million quarterly deductions would be continued through the second quarter of 191*9 but would be reviewed in connection with the payment for the third quarter of that year. The question of discontinuing deductions for reserves for contin gencies was discussed in June 191*9 at a meeting of the Open Market Committee, and the Presidents not at the meeting were also asked for their opinions0 Some Presidents felt that anaiditional amount should be set aside, at least for the third quarter. The Board’s telegram of October 19, 191*9, to the Presidents of the Reserve Banks summarized the consideration given to this matter and stated the Board’s decision to make a deduction of $10 million for the third quarter, which would bring the total to $80 million0 d„ Discontinuance of contingent reserves. As indicated above, the Board decided in October 191*9 to reduce to < . million the deduction for contingent reserves in computing the $0 interest payment for the third quarter of 191*9. Subsequently, the Board and the Presidents agreed that the quarterly deductions should be discon tinued* At the joint meeting of the Presidents and the Board on December I 4.1 191*9* consideration was given to whether the $1* million deducted in I 0 19l*9 should be transferred to reserves for contingencies at the end of the year, or whether it should be restored to earnings and thus be paid in part to the Treasury and in part transferred to surplus. It was concluded Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority jC ' O (0^6\ Er -4that the $4-0 million should be added to reserves for contingencies, bringing the amount to |B0 million so accumulated. 3. Suggestions made since discontinuance of deductions for contingency re serves that similar procedure be resumed. During 1950 and 1951> as the appreciation in the System Account, which had existed throughout 194-9, disappeared and depreciation in the account continued to grow, the Presidents and the Board gave consideration to the adequacy of reserves for contingencies. Early in 1950 the Presidents1 Conference discussed the matter of whether additional amounts should be deducted from 19 5 0 earnings on a basis similar to that used in 194-S and 194-9. It was the sense of the Con ference that there was insufficient basis for definite recommendations as to method or amount of such deductions. The Board took a similar position, stating in a letter of March 21, 1950, to Mr, Brainard, Chairman of the Board of Directors of the Cleveland Federal Reserve Bank, that the situation had not changed sufficiently to make a resumption of the deductions desirable. In 1951 the question was again raised as to whether deductions from earnings should be resumed before making payments to the Treasury. The Board gave consideration to the matter at several meetings, and it was discussed ty the Presidents. At a joint meeting of the Presidents and the Board in May 1951 there was a brief discussion of whether any action should be taken to increase reserves for contingencies or to change the arrangement under which 90 per cent of net earnings after dividends is paid to the Treasury. The suggestion was made that it would be desirable to increase the permanent capital accounts of the Reserve Banks. Chairman Martin indicated that the Board questioned whether any action should be taken at the time to reopen the existing arrangement with the Treasury. In a letter of June 13, 1951? to the Presidents the Board stated that, in view of the substantial net warnings of the Reserve Banks available for losses, it felt there was no need at the time for increasing reserves for contingencies. This year consideration,has again been given to reserves for contingencies of the Federal Reserve Banks. Governor Mills' memorandum of May 5> 1952, raised the question whether the $98 million reserve for contingencies (including the $18 million on the books before the interest payments were begun) was adequate against market depreciation in Government securities in the System account, which was £73 million on April 23, 1952, as shown in the weekly Open Market report. The memorandum concluded that there appeared to be no need at the time to resume additions to reserves for contingencies, and at a meeting on May 8, 1952, the Board concurred in this suggestion. On October 22, 1952, net depreciation in the System Account, as shown in the weekly report of Open Market Operations, was as follows: Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D \ Authority jj s O . ( n r- Notes Bonds / $106,683,406 66,317,310 Total $173,000,716 Net appreciation in certificates of indebtedness (not shown in the weekly Open Market report) Net depreciation 2,34-6,892 $170,6.53,82-4 Depreciation shown in the weekly Open Market Reports now reflects all depreciation, since the last of the 2-3//+ per cent nonmarketable bonds were exchanged on October 1. While these bonds were held they were valued at par in the weekly reports. (Had the amount converted on October 1 still been held on October 22 the depreciation shown in the weekly report would have been $22,307,750 less.) Since July 1951 there has been a shortening in the maturity of long-term security holdings through conversion of all $2,713,£48,000 of the nonmarketable 2-3/4- per cent bonds, which were acquired in exchange for the restricted 2-1/2 per cent bonds. The last step was the recent exchange of the remaining $713,84.8,000 of the 2-3/4- per cent bonds. Maturity distributions of Government security holdings before and since the conversion are shown in the following tabulation: Holdings of U. S. Government Securities Maturing in: One year 1 year to 5 years 5 years to 10 years Over 10 years Total July 3, 1951 October 22, 1952. $13,957,04.2,000 3,878,166,000 1,031,904-, 000 4 ,110,580,000 - $7,087,141,000 14,146,950,000 1.070.224.000 1.358.247.000 $22,977,692,000 $23,662,562,000 Earnings on the Open Market Account are now running at an annual rate of $460 million, and net earnings of the Federal Reserve Banks after dividends, available for losses, are running at the rate of about $340 million a year, based on results for the third quarter. Profits on sales of Government securities have totaled $1,987,973 this year to October 22, compared with losses of $1,586,124 in the year 1951* For convenient reference, there is attached a summary tabulation of holdings of Government securities, maturities, premium, and net appre ciation or depreciation, on selected dates since April 1947, when the policy was adopted of paying the Treasury 90 per cent of the Reserve Banks’ net earnings after dividends. There is also attached a tabulation showing interest payments which have been made to the Treasury under the policy adopted in April 1947. Attachments Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority jj / Q . ( 0 ^ 6 \ Interest Payments to U. S. Treasury on Federal Reserve Notes Outstanding Not Covered by Gold Certificates Pledged With the Federal Reserve Agents Quarterly payment m Total for year Cumulative amount i First quarter Second quarter Third quarter Fourth quarter $ 1 5 ,2 6 3 ,8 8 3 .4 7 1 3 ,9 3 7 ,4 -6 0 .4 2 1 8 ,4 7 5 ,2 7 7 .0 0 2 7 .5 4 2 ,1 9 6 .6 5 $75,223,317.54 $75,223,817.54 3 4 ,4 0 3 ,0 1 1 .8 7 36,777,742.54 5 5 ,6 8 2 ,9 7 7 .2 7 I6 6 j6 9 0 ,3 5 6 .4 8 2 4 1 ,9 -1 4 ,1 7 4 .0 2 1 9 49 First quarter Second quarter Third quarter Fourth quarter ^60,156,349.43 47.838.812.71 39,500,916.44 45.649.758.72 193,145,837.30 4 3 5 ,0 6 0 ,0 1 1 .3 2 1950 First quarter Second quarter Third quarter Fourth quarter $58,885,542.95 50,125,686.69 49,225,808.36 38,391,819.43 196,628,857.93 631,688,869.25 1951 First quarter Second quarter Third quarter Fourth quarter t51,092,993.06 61,268,208.54 66,971,079.52 75,541,306.40 2 5 4 ,8 7 3 ,5 8 7 .5 2 886,562,456.77 1952 First quarter Second quarter Third quarter •7 3 ,8 7 1 ,3 2 8 .6 3 7 1 ,5 6 0 ,8 7 4 .7 0 7 0 ,6 0 1 ,4 9 9 .7 2 1 948 First quarter Second quarter Third quarter Fourth quarter $39 , , 826 624.80 Totals through end of third quarter 1952 . . . . . . . $216,033,703.05 *1,102,596,159.82 Reproduced from the Unclassified / Declassified Holdings of the National Archives i D E C L A S S IF IE D Authority / . 1 1 W «6 . . m S r i i c n p J U L 1 ? B52 _ Mr. Leonard July 15, 1952 1 ' / _. v \ i DepwctrtfMT'in System Open M. B. Daniels Market Account. Governor Mills has asked what the estimated depreciation in the System Open Market Account would be in the event the 2-1/2 per cent bonds of 1967-72 were selling on a 3 per cent yield. The fol lowing comparisons shew the estimated depreciation in the System Account as of July 2, 1952, (1) on market quotations for that date, and (2) on the assumed basis. The amounts on the assumed basis reflect prices supplied by the Government Finance Section, which used a range of yields running from 2.25 per cent on bills to 3 per cent on the longest-term bonds. A list of the estimated prices used is attached. The depreciation shown by the weekly Report of Open Market Operations covers only depreciation in notes and bonds and includes as depreciation in the nonmarketable 2-3A per cent bonds the differ ence between book value and par. (The premium on the bonds exchanged was carried over as applicable to the noxsaarketable bonds.) In the following comparison an additional amount of depreciation has been shown for these nonmarketable bonds based on the estimated market price of the longest five-year note outstanding. Depreciation has also been figured on certificates. Depreciation July 2 quotations Assumed basis (In thousands of dollars) Notes Bonds 7MS5 32,90$ 107,290 123,972 11*5,145 269,117 Additional depreciation, valuing 2-3/ii$ bonds at price of longest five-year note Total 11**277 121,567 19,631 288, 71*8 Depreciation in certificates of indebtedness Total » 1,629 119*738 22,057 310,805 Total ♦"’ ipprecJ 333pn. |=J r FORj FILES D. L. Werner Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D ' M r, Leonard J Authority - 2 - For the first half of 1952 the Reserve Banks will retain about $16,300,000 of net earnings* The Section 7 surplus accounts may be expected to increase about $65,000,000 during the calendar years 1952 and 1953# This is based on the present rate of earnings of the System Open Market Account, $1*33,000,000, expenses of $101*,000,000 a year, and dividends of $15,000,000 a year . Attachment HOTEi The estimate of an increase of $65,000,000 in Section ? surplus in the two calendar years 1952 and 1953 is based upon present procedure* As mentioned in earlier discussions, I think the Board would be justified in making provision at the end of this year that the surplus of the Federal Reserve Banks of Balias and San Francisco be brought up to twlee the mount of the paid-in capital before distributing earnings between the Treasury and the regular transfer to surplus. On the basis of present capital holdings, this would mean an increase of about $5,600,000 for Dallas and of about $5# 300,000 for San Francisco, or a total of $11,1*00,000, Increase in surplus for 1952 and 1955 would then be about $75,000,000 , The Federal Reserve Banks of Dallas and San Francisco are the only Banks with surplus less than twlee the amount of paid-in capital. The franchise tax before it was repealed permitted the individual " eserve Banks to build up their surplus to twice the amount of paid-in apital before becoming subject to the franchise tax. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Q . (0^6 \ im c m I m piles z m n m l J U L 171952 Estimated Market Prices on Securities iiT'~ System Open Market Account* July 2, 1952, On Assumption That Bill Rate is 2.25 per cent and Long-Term Restricted Bonds Sell at a 3 per cent Yield Basis Certificates of indebtedness — 99-7/8 .. B » 7 a n y s $ ......... ■ 2/15/53 " 6 / 1/53 99-3A 99-5/8 Treasury Notes 98-1/2 98-3/1* 98 97-3/1* 97-1/2 97-1/U i I * S’ £ Due » * » » * " " • » " 9a l ---- -E 5 T -5 7 I5 M " 3/15/5S » 12/15/55 ■ 1/ l/ 5 6 -»Ek" • 10 / 1/56-"EO* ■ li/ V 57-"EA" 98-3/8 99-1/1* 99-3/1* 99 99-5/8 99-1/2 97-1/2 98-1/2 96 95-3/1*. 93-1/1* 12/15/52-55 12/15/52-6/15/51* 12/15/52-6/15/55 12/15/52-51* 3/15/53-9/15/53 3/15/56-58 9/15/56-5? 3/15/57-59 6/15/59-62 6/15/62-67 9/15/67-72 Restricted Bonds .. ' Kii’I27T5/59-62 " 12/15/63-68 ■ 6/15/6U-69 " 12/15/6U-69 ■ liil/dlw 7-U*-52 F 3/15/65-70 " « » 95-1/2 9U-3/1* 9U-3/8 9U-1/8 9 1* 93-1/2 93-1/1* 93-1/8 3/15/66-71 6/15/67-72 12/15/67-72 B L E C O P Y Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D A u th o rity j i 0 ^ ( ) \ • e Mr , R a y a . Gidney, President Federal Reserve Bank of 01 ere land, % ^ ■1 < • Cleveland 1, Ohio. Bear Mr. Oidneyt fhis ref ere to your letter of Marnh concerning the resolution adopted by tBeT directore of ike Cincinnati Branch on February 11, 1952* The resolution urges that the Board of Governors pernit eaeh Reaerre Bank to set up a reserve seeount out of earnings eaoh year to cover its proportion of any depreciation in th» Open Market Account at the end of the year, Xt is noted that your directors found thenselres In agreement with the rise of the Cincinnati Branch directors and requested that you transmit a copy of the resolution and a letter stating that they continue to be of the opinion that further additions to surplus or to reserves for contingencies should be made out of the very substantial earnings which are now accruing to the Beserre Banks, X 3 / 1% Am you know, this subject was discussed at the joint meet ing of the Board and the Presidents on May 18, 1?$1, at which ti*e it was stated that the Board questioned whether any action should be taken to reopen the existing sroingenent with the Treasuxy, In the Baird,l» letter 11» I f S l A ** »•* Btated that the Board alec felt, in n e w of the substantial net earnings of the Beeeanre Banks available for losses, that there was no pressnt need for increasing reeenres for contingencies. The Board has again considered the natter* in the light of the suggeetien of the Cincinnati Branch directors, but feels that there has been no change in the situation which would warrant taking a different position at tikis tins, Bswercr, the Board will keep the natter under consideration. In this eoaneetien it was noted that the depreciation in the Systea Account* ss shown in tbe Open Market Beport, was $76,kOO,OQO on April 16, 1951* ss oaepared with a total ef #11*8, 61*1, 000 as shea* # in ths Open Market report of March It* 195t, which was referred t» in jl I Reproduced from the Unclassified / Declassified Holdings of the National Archives | !' * D E C L A S S IF IE D | Authority 1 L I0 h b \ L . _ ___ __________________ . . your letter. It w u ale© noted that net profits of |1,U79,000 oa •alts of Government securities hare boon realised this year through April 16, compared with the $1,$66,000 not losses sustained 1b 19$1* which was the first year sines 1929 shoving a loss oa sales of Govern■ent securities. Tory traly yours, 8. R. Carpenter, Secretary. • • • • I'eRbers of the Board (Individ j&lly) Governor Bill® Heaponding to tho Board19 recant direction, the writer ha® prepared for its diaeuaaion the attached study of the Federal Keaerve Syatea Hsaerres for Contingencies. Attachment cct Mr. Mr. Mr* Mr* Carpenter Leonard Riefler Thurston A tM sb Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D ^Authority J - l0^6\ > * > May 5, 1952 ftJSC’D IKFILES SECTION MAY 5 RESERVES FOR CONTINGENCIES FEDERAL RESERVE BANKS The Statement of Condition of the Federal Reserve Banks includes as a component part of their capital structure $106,1*00,000 in Reserves for Contingencies, of which $3,1*00,000 is a reserve for registered mail losses, while the remainder of $98,000,000 is available as a reserve against present or future depreciation in the value of U. S. Government securities held in the System Open Market Account, Two questions have been posed regarding the £98,000,000 segment of the total Reserves for Contingencies: 1. Is $98,000,000 an adequate reserve against market depre ciation in the U. S. Government securities held in the System Open Market Account? 2. Would the Federal Reserve System be better served by a transfer of some portion of the aforementioned $98,000,000 from Reserves for Contingencies to Surplus (Sec. 7)? Question 1 The following schedule sets out the current depreciation in the System Open Market Account: As shown in Open Market Committee Report April 9 April 16 April 23 $ 97,Q92,000 78,1*00,000 72, £ 1 ,000 8* *As adjusted to appraise nonmarketable 2-3/1* at 98-Il*/32 $116,0^8,000 S9,5$h,000 83,738,000 “The above adjustments value the System Open Market Account investment in nonmarketable 2-3/U per cent bonds at what would be the value of an equal amount of marketable 1-1/2 per cent notes if so converted* Hold ings of the nonmarketable 2-3/U per cent Series fB” Bonds of 1975-1980 , amounted to $1,213,81*8,000 on April 9, subsequent to which $500,000,000 were exchanged on April l * into marketable 1-1/2 per cent notes of l li/1/1957. Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D ^Authority J J . I0 ^6\ J J - 2 - Reference to the above schedule reveals that on April 23 the $93,000,000 segment of Reserves for Contingencies was more than sufficient to cover the depreciation existing in the System Open Market Account both on the reported and on an adjusted basis. Moreover, the weekly reports of the Open Market Committee do not include either appreciation or deprecia tion in the System Open Market Account investment in U. S. Treasury certificates, which on April 23 amounted to $11,668,306,000 or 5 2 per cent > of the entire account. As of that date the undisclosed appreciation in this investment in certificates came to $18,667,000. It is readily apparent that at the present time $98,000,000 is an adequate amount to be held in Reserves for Contingencies against deprecia tion in the System Open Market Account investment in U. S. Government securities. However, further reference to the preceding schedule also clearly reveals how rapidly somevyhat minor fluctuations in the market value of the System Open Market Account total investments of more than $22,300,000,000 in U. S. Government securities are reflected in either de preciation or appreciation in the total account. Bearing that fact in mind poses the question of the all-time sufficiency of a $98,000,000 Reserve for Contingencies and whether its increase to a higher level would be a matter of prudent policy. Viewed theoretically, no such increase is necessary inasmuch as the power of note issue insures that the Federal Reserve Banks have an un disputed ability to meet their liabilities upon demand. By the same token, there is no theoretical reason for the Federal Reserve Banks to accumulate Reproduced from the Unclassified I Declassified Holdings of the National Archives | d e c l a s s if ie d j Authority 0 . | I J ^ j J - 3 - capital. However, as a check against improvident practices and as a means of reassuring a public that is relatively uninitiated in central banking theory, it is highly advisable that the Federal Reserve Banks should main tain adequate Reserves for Contingencies against depreciation in the U. S. Government securitd.es held in the System Open Market Account and that their operations should be conducted against a background of ample capital funds. These assertions are made with the thought that the public likens the operations of the Federal Reserve Banks to those of private banks and that, therefore, its confidence in the entire banking system is strengthened by having the Federal Reserve Banks adhere to reserves and capital accumulation policies consistent to those followed in conservative private banking practice. "Tith that thought in raind, a sound and realistic case can be presented to the Treasury that the public interest will best be served by conceding that the Federal Reserve Banks should transfer continuing amounts from their earnings to their Reserves for Contingencies against depreciation in the System Open Market Account investment in U. S. Government securities even though it would be at the expense of a smaller distribution to the Treasury of such earnings via the transfer of interest charged the Federal Reserve Banks on their note issues. As far as the Treasury is concerned, the amount of Federal Reserve Bank earnings thus withheld would be nominal as compared to the benefit inuring public policy-wise and, in any event, the Treasury would not be releasing its residual claim to earnings thus re tained. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED > Authority j ^ 0 . |D ^ \ j - u - Notwithstanding the ultimate case that can be made for increasing the Reserves for Contingencies, their present adequacy argues strongly against moving in that direction at the present time, for to do so would needlessly raise an issue with the Treasury that would have to be decided on a formal basis and as a matter of public record. Furthermore, the fact should not be overlooked that the Capital and Surplus Accounts of the Fed eral Reserve Banks are steadily increasing through the capital stock sub scriptions of member banks and through the retention of earnings. As the Federal Reserve Banks presently hold only a minimum of what might be classi fied as risk assets, their Capital Accounts offer ample protection to risks of that character and consequently stand as a further protective cushion against depreciation in the System Open Market Account investment in U. S. Government securities. The protection provided in this manner is illustrated in the following schedule showing the growth that has taken place in the Fed eral Reserve Banks' Capital and Surplus Accounts over a period of years: Dec. 31, 1932 Capi tal Paid In Surplus (Sec. 7) Percentage increase over 1932 Dec. 315 19l)6 Dec. 31, 19,51 1955 19gl $ 151,292,000 $ 186,830,000 $ 236,613,000 23 56 278,599,000 109,823,000 538,31*2,000 58 93 The growth in Federal Reserve Bank capital funds as above set out is under stated as true evidence of their entire growth trend, in that $1 3 9 ,3 0 0 ,0 0 0 of Surplus (Sec. ?) was "appropriated by Congress” in 1932 for the purchase of stock in the Federal Deposit Insurance Corporation. Furthermore, the sched ule does not include Surplus (Sec. 13b) which at the end of 1951 amounted to 127,500,000. Reproduced from the Unclassified / Declassified Holdings of the National Archives j D E C L A S S IF IE D ^Authority j ^ O . 10 ^ 6 \ - 5 - A final factor of importance should also be borne in mind; namely, that the very substantial earning power of the Federal Reserve Banks stands continuously available as a means of absorbing losses that may be in curred, including losses in excess of profits arising from the sale of U. S. Government securities carried in the System Open Market Account. Therefore, all factors considered, there would appear to be no need at this time to re sume Federal Reserve Banks1 appropriations from earnings to Reserves for Contingencies held against depreciation in the System Open Market Account. Action of that sort can, of course, be taken at such future date as policy might seem to dictate. Question 2 "Whether the Federal Reserve System would best be served by a transfer to the Surplus Accounts of the Federal Reserve Banks of some portion of the $98,000,000 now held in Reserves for Contingencies is debatable. On an over-all basis, there is no distinction between funds carried in the Capital and Surplus Accounts of the Federal Reserve Banks and those held in Reserves for Contingencies as far as the protection they afford against the liabilities of the Banks. If a transfer v r s made from Reserves for Con \a tingencies to the Surplus Accounts of the Federal Reserve Banks, the result would be almost irretrievably to freeze the amount thus transferred into the Surplus Accounts of the Banks and would limit their ultimate availability to the Treasury solely to the claim it has upon them in the event of the actual liquidation of the Federal Reserve Banks. By not making a transfer from Reserves for Contingencies to the Surplus Accounts of the Federal Reserve Reproduced from the Unclassified / Declassified Holdings of the National Archives | D E C L A S S IF IE D ^Authority \ s Q . 1 ' '■J ^ - 6 J - Banks, the funds thus withheld are retained on a flexible basis in that 90 per cent of them can be freely transferred to the IT. s. Treasury from their position as temporarily deferred earnings> and in the event the purposes for which the Reserves for Contingencies had been created did not eventuate. The Treasury’ fiduciary and ultimate right to the amounts now s held in the Reserves for Contingencies carried by the Federal Reserve Banks deserves recognition, and as neither the Federal Reserve Banks nor the gen eral. public would benefit materially by their transfer to the Surplus Ac counts of the Federal Reserve Banks, there is no good reason to change their status at this time. Reproduced from the Unclassified I Declassified Holdings of the National Archives | D E C L A S S IF IE D ^Authority L BDARD /D IN FILES SECTION -> y / - n m i o 1951 s DF G D V E R N D R S □ F THE FEDERAL RESERVE SYSTEM W A S H I N G T O N 2 5 , D. C. ADDRESS Z-3170 (On office ) -f copies only) DFFICIAL TO THE CORRESPONDENCE BDARD -S-SUj.iJ.S)-1 ' 5 August 9j 1951. Dear Sir: You were advised in a telegram dated June 28, 1951, that the Board had deferred action on the question of charging off unamortised premium on the nonmarketable 2-3/4 per cent bonds of 1975-80 held in the open market account and that no such charge-off would be made during the second quarter. Since then the Board of Governors has given further consideration to the matter and would prefer to let it rest without further action, in view of the differences of opinion that have been expressed and the arguments that might be made in support of or against such special charge-offs. However, should the Presidents wish to renew consideration of the question, the Board will be glad to discuss it at the meeting of the Presidents and the Board in October. Secretary. TO THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS Reproduced from the Unclassified I Declassified Holdings of the National Archives j 1 r D E C L A S S IF IE D ^Authority . 10 ^ 6 \ REC'D IN file ? se c tio n I JUN15195K BDARD □ F GDVERNDRS nrrniittiir ,t, □ F THE FEDERAL RESERVE £ ©3Iy/ *P<«|i u v c llSaHfc" = jI* ri f 5 c D & * IT:*vWrH B $ s a (V » SYSTEM id Z-3I18 (On office copies only) W A S H I N G T O N 2 5 , D. C. ADDRESS OFFICIAL TO THE CDRRE PDNDENCE 5 BOARD June 13? 1951* Dear Sir: At the recent joint meeting of the Presidents and the Board there was a brief discussion of whether any action should be taken to increase the reserves for contingencies of the Federal Reserve Banks or to change the present arrangement under which 90 per cent of their net earnings after dividends are paid to the U. S. Treasury as interest on outstanding Federal Reserve notes. The suggestion was made that it would be desirable to increase the permanent capital accounts of the Reserve Banks. How ever, it was stated that the Board questioned whether any action should be taken at this time to reopen the existing arrangement with the Treasury, particularly since the depreciation in the Open Market Account resulted from a decline in prices of Government securities which was permitted to occur in accordance with Federal Reserve views advanced during recent discussions with the Treasury. The Board also feels, in view of the substantial net earn ings of the Reserve Banks available for losses, that there is no present need for increasing reserves for contingencies. It has been suggested, however, that the unamortized premium of <19,720,758 (on June 6 1951) on the nonmarketable 2 - 3 / k per cent bonds of 1975-80 , be charged off. This premium was carried over from the restricted 2-1/2 per cent bonds which were exchanged for the nonmarketable 2-3/14-’ s. It has been pointed out that insurance companies and savings banks in New York State have been authorized to carry over the premium and that this method is consistent with the 1938 Super visory Agreement, which permits the carrying of securities of invest ment quality at amortized book value. On the other hand, it may be contended that the remaining premium carried over from the 2-1/2's should be charged off, since the Open Market Account differs in purpose from an investment portfolio. The 1938 Supervisory Agreement contains no prohibition against charging off premium or making other charge-downs in the carrying value of securities. *9 1 w J Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority . | M* M -2- The Board would like to have your views on the suggestion that the amount now being carried as premium on the 2—3/U P6* cent 1 bonis, Investment Series B-1975-80, be eliminated. If a majority of the Presidents approve, the premium could be charged off this quarter. It is proposed to show the charge-off, if made, in the statement of earnings and expenses of the Federal Reserve Banks in the Board’ s 195>1 Annual Report as a separate item under deductions from current net earnings opposite the caption "Losses on U. S. Government secu rities exchanged before call date.1 ' Secretary. TO THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS Reproduced from the Unclassified I Declassified Holdings of the National Archives declassified A u th o rity j ^ Q . * * kiw SKCTio]^ • I 0 0 MAR 2 a 1951 March 23, 1951 Ur. ^eon&rd ana Mr. Carpenter A. b u w On M&ich 21, 195l,^market depreciation in the System Open Market Account totaled $109,390,199, as follows; ... Treasury notes to one year Treasury notes one to five years $13, 121,722 Total depreciation on notes »U7,098,61*3 Bank eligible bonds Restricted bonds, June 15/67-72 Restricted bonds, December 15/67-72 Other restricted bonds Total depreciation on bonds TOTAL DEPRECIATION Premium balance on the two longest res trietea issues 33,976,921 $ 2,61*0,669 18,287,015 17,150,513 2U,213,359 $62,291,556 $109,390,199 $12,618, 81*5 During 1950 net profits on sales of securities from the System Account amounted to $36,895,755* This amount reflected profits of i l 3 1*70,251 tad losses of $6,571*,1*96. Beginning with the week ?*, ending September 20, 1950, System Account transactions have resulted in a net los^ each week. This year to ^arch l * net losses have l totaled $1,308,14148* On the same date the annual rate of earnings on the account was $356,389,000. Beginning in June 191*8 and continuing through the third quarter of 191*9, amounts totaling $80,000,000 were deducted from current net earnings before computing payments to the U. S. Treasury of interest on Federal Reserve notes. These amounts were added to reserves for contingencies, which now aggregate $98,000,000.* Com parisons of premium and market appreciation or depreciation on the System Account are shown belows # Exclusive ot reserves for registered mail losses. a . a /s / Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority jp _0 I # ir, Leonard and Mr. Carpenter 2. Prmmtm Karkttt appreciation (+) or depreciation (-) (Thousands of dollars) •tana 9, 19k8 October 27, 19U8 1/ November 3, 19U8 "ij October 18, 1950 March Xli, 1951 71,669 81,987 83,863 17,693 27,38b •^7,691 855 551 - 6,667 -100,509 1/ First net depreciation on weekly statement date. 2/ Hlghes t premium and last net depreciation ~ until October 1950. For the first two months of this year net earnings of the Federal Reserve Banks after dividends but before losses on sales of securities amounted to about $37,000,000* At this rate, the total for the year would be about 1222 ,000,000 . Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority £ 0 . I056* S«pt«*b«r 26, 19SO, Hr. S . 8 * liarah, Jr., Sacuritiaa Department* Federal Reserve Bank of Seiw Terk, Hmr lork k S § N«w Tork* D«ar Marsh* 1 aa returning herewith the »ea»randu* on *!fcnMenber Accounts with Dealers in Gknrerniseat Bonds," dated Fa&roary l 6 f 1918 which you loais%o m w m m r m 1 months ago. Thank you very for making this available* Very truly yours. Richard Toungdahl, Chief, Government Finance Section* Enclosure TELEGRAM B O A R D OF G O V E R N O R S / OF THE FEDERAL RESERVE SYSTEM LEASE D W IR E SE RVIC E WASHINGTON MAY 6 - 1947 LEACH MCLAiUN YOUNG DAVIS - RICHMOND ATLANTA CHICAGO ST. LOUIS PEYTON - MINNEAPOLIS LEEDY - KANSAS CITT GILBERT - DALLAS EAHHAET - SAN FBAECISCO Following reply has been made to inquiry from a Federal Reserve Bank in connsction with procedure fo r tranafer of oatur- ing Treaauiy b i l l s to System account: (1) Weakly wire to Manager of System aecount should state amount of maturing b i l l s held a t head o ffic e and branches, separately. (2) Federal Reserve Bank of New York w i l l wire shipment numbers to your head o ffic e . (Signed) S R C . . GASPENTER Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D A u th o rity •9TELEGRAM IREO' IN PILES SECTION D B O A R D OF G O V E R N O R S MAY 1 3 1947 OF TH E FEDERAL RESERVE SYSTEM LEA SE D W IR E SE R V IC E WASHINGTON MY ft A ROtfSE NFW YORK Following wire sent today to Federal Reserve . a i s with 'rk branches* (Here quote attached wire) £ / Signed) s. Be Carpenter CARPENTER SRC/mg m • • • TELEGRAM • BOARD OF GOVERNORS w«OF • n > T HcE ^ M . j ....... . „ FEDERAL RESERVE S Y S T E IT ^ rx a F itE S S E c r** ■ r A S r D W I n r SERVICE B\/a/ae >> L E^ e En uii R E eea k # A lAjLA WASHINGTON MAY 6 - 194? 7SC X LTHR GLmUXD Tour wilt* Vooklgr wiro to Kanagor of Syaton account •hould atato M o u n t of aaturing bills hold at hoad offloo and toranoboa, ooparatoly. fodoral Roaorrt Bank of Row Toxic will wlro •hlpaont nuabor® to your hoad offloo* roCarpt* $ CAKPENTER fi • f m T E L of' G - K A M "Board Governors or t i i© Federal Reserve System Leased Wire Service Received at Washington, 0 C, , REC’ IN FILES SECTION D W A31G C 25B D WASH LONG D 5 2 C LEVE 6 - 1 1 0 2 CARPENTER WE ASSUME FEDERAL RESERVE SA N K OF NEWYORK W IL L F U R N IS H THE R ESER VE BANKS W IT H S H IP P IN G NUMBERS FOR FO RW ARDING TREA SU RY B I L L S FOR THE ACCOUNT OF NEW YORK. AS THE B IL L S HELD AT THE C L E V E L A N D , C IN C IN N A T I OF S H IP P IN G A D V IC E NUMBERS W H IC H TO THE TREA SU RY IN OUR O P T IO N ACCOUNT MAY BE OR P IT T S B U R G H O F F IC E S , THE NUMBER I T WOULD SEEM NECESSARY TO A S S IG N TO US M IG H T VARY EACH WEEK FROM ONE TO T H R E E . THE Q U E S T IO N R A IS E D , T H E R E FO RE, IS SHOULD OUR W IR E TO THE OPEN MARKET C O M M ITTE E A D V IS IN G THEM OF THE AMOUNT OF B I L L S H E LD IN THE O P T IO N ACCOUNT IN D IC A T E THE NUMBER OF S H IP P IN G A D V IC E NUMBERS TO B E A S S IG N E D TO US OR SHOULD SUCH IN FO R M A T IO N B E W IR E D TO T H E ‘ FEDERA L RESERVE BANK OF NEW YORK. ANOTHER Q U E S T IO N R A IS E D CLE VE LA N D O F F IC E IS WHETHER THE NUMBERS SHOULD B E W IR E D TO THE (W H IC H WE B E L IE V E P R E F E R A B L E ) OR SHOULD TH EY BE W IR E D D IR E C T L Y TO EACH O F F IC E , FLE TC H E R Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority j \ , Q . lD ^ 6 \ KEC'D IN piles section 0 Apr 18194? ^«, y 5 BOARD OF GDVERNDRS a*******- O F THE FEDERAL RESERVE SYSTEM # W A S H I N G T O N 2 5 . D. C. AD DRESS Z-2029 (On office copies only) O FFIC IA L C O R R E S P O N D E N C E TO T H E BOARD April 15, 1947. Dear Sir: Item B, page 1 , of the Board’s Instructions Governing the Preparation of Earnings and Expense Reports and Profit and Loss State ments ty the Federal Reserve Banks contains instructions regarding the accrual of earnings, as follows: ’Earnings on Government securities and other earn ’ ing assets should be accrued at least as of each Wednesday and the last day of each month unless in nominal amounts, in which case they may be credited when received.” The objective of this provision is, of course, to have pub lished condition statements of the Federal Reserve Banks reflect cur rent earnings as of the date of publication and to have reports of earnings on Form F. R. 95 represent actual earnings during the calendar month and for the calendar year to the end of the report month* It will be noted that the above instructions do not indicate the basis on which accruals of earnings shall be made. Some of the Federal Reserve Banks adopted the practice of omitting the accrual of earnings on the date an earning asset is acquired and, accordingly, of accruing earnings on such asset beginning on the day following the date o t which such asset is acquired and continuing daily accrual up to and r including the day on which such asset is disposed of. •These entries conform with the entries made by the Federal Reserve Banks covering their earnings on participations of U. S. Government securities held in the System Open Market Account only in the sense that entries for Sys tem Account^ earnings on all but the last business day of the month are made one day late (in the morning). This is done in order to facili tate the accounting work related to the System Open Market Account, > Reproduced from the Unclassified I Declassified Holdings of the National Archives r , i d e c l a s s if ie d Authority j ^ 0 . |Q£>6\ -2- especially to avoid sending telegrams late in the day. Actually, how ever, the daily entries made by the Federal Reserve Banks covering their participations in the System Open Market Account, except for the additional entries made at the end of each month, have represented pre mium amortization, discount accumulation, interest accrual and earnings on their participations in the System Open Market Account at the close of business on the preceding day. It is believed that it would be desirable to have the Federal Reserve Banks follow a uniform basis in making accruals of earnings on all types of earning assets and with this in view it will be appreciated if you will advise us at your convenience whether you would favor the adoption of the plan outlined below: 1. Calculate earnings on all types of earning assets for each calendar day on the basis of holdings of earning assets at opening of business on such day or at close of business on the last preceding business day if the day in question is a Sunday or a holiday. 2. Make entry of such accruals on books of the Federal Reserve Bank, either daily or as of each Wednesday, and on the last day of each month, provided that if the last day of the month is a Sunday, or a holiday, entries made on the last business day shall include accruals for any day or days there after during the calendar month on which the Federal Reserve Bank will be closed. For example, should the 29th day of the month fall on a Friday and the 30th and 31st on a holiday and a Sunday, entries for accrual of earnings on Friday the 29th would include one day1s earnings on the opening balance on that day, and two days’ earnings on the closing balance of the 29th. 3. If the first day of the month is not a business day entries of accruals on the first business day shall include accruals for the day or days prior thereto within the calen dar month on which the Federal Reserve Bank was closed. If entry of accruals is not made daily the entry made on the first Wednesday in the month should include, of course, ac cruals for any day or days prior thereto within that calendar month. 4. In so far as earnings on securities in the Federal Open Market Account are concerned, amend the present plan so that the Federal Reserve Bank of Now York will wire accruals of earnings as of Wednesday and as of the last day of the Reproduced from the Unclassified / Declassified Holdings of the National Archives d e c l a s s if ie d Authority lO ^f) -3rnonth, instead of daily, as at present. 5. In any calculation of average rates of earnings on earning assets, use holdings as at beginning of business rather than at close of business for each day included in the period under consideration in computing average daily holdings. Very truly your S. F. varperjter, i Secretary, TO THE P R E S ID E N T S OF ALL FEDERAL RESERVE BANKS* Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D ^Authority ju -0 . 10 ^ 6 \ February 27, 1947. Hr. Thurston REC’ 1 ^ D ! Mr fm t! t ei i '* FEB 2 B 1947 ij. With the exception of a few m i l amounts the Government securities purchased in the market (other then repurchase agree ments) daring the three souths ending January 194?, were made from the folloelng dealer* and banket Purchases of U. S. Gcrrarna&ent securities by System Open Market Account From Beelers January 1946 December Havember $28, 300,000 ♦ 35, 600,000 ♦31,100,000 Blair & Co., Inc. 6,199,000 5, 660,000 5, 676,000 Briggs Schaedle & C o ., Inc. 56, 600,000 62,200,000 87, 200,000 C. F. Childs & C o ., Inc. 000,000 622,000,000 $80, 350,000 587, C. J. Bevine I Co.,Inc. t 622, 000,000 698, 000,000 670 500,000 Discount Corp. 586 000,000 607, 000,000 622,000,000 First Boston Corp. 46,650,000 1 2,150,000 * * 12, 900,000 * B. W. Blch & C o ., Inc. 576 000,000 622,000,000 Solomon Bros. & Hutiler 2,63l*,U*9,000 2,573,360,000 2,607, Total , , , Txtm Banks Bsnksrs fn»st Co. Quaranty Trust Co, Continontal Illinois ■at'l Be. I Tr. Co. t Chicago, HI. First Bat'l Bk. a t Chicago Total. , 127 500,000 87,750,000 92,250,000 l5S,5oo,ooo 220, 500,030 388,575,000 353, 610,000 357, 360,000 82,100,000 89.k50.000 81t.000.000 713,925,000 755,810,000 794,860,000 226, 000,000 3 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority j(/ O . ( Q 6 6 \ r "UC'D II FILES SECTIObT 5 1343 BDARD □ F GDVERNDRS .N "ft^ E r V □ F THE FEDERAL RESERVE SYSTEM W ASHING TO N S-683 ADDRESS OFFICIAL TO THE CORRESPONDENCE BDARD September 4, 1943* Dear Sir: The plan for securing Federal Reserve notes by pledges of par ticipations in direct obligations of the United States in the System Open Market Account which had been approved by the Board of Governors of the Federal Reserve System and was set forth in a memorandum enclosed in the Board’s letter of July 19? 1943, as amended by the Board’s telegram of July 20, 1943, has now been approved by all Federal Reserve Banks and all Federal Reserve Agents and will become effective at 10 a.m. Eastern War Time on Friday, September 17, 1943• In order that the plan may be put into operation simultaneously with respect to all Federal Reserve Banks which have specific securities in the System Open Market Account pledged as collateral for Federal Reserve notes, it is important that all such Federal Reserve Banks and the Federal Reserve Agents at all such Banks take all necessary steps to obtain the release of the specific securities in the System Open Market Account pre viously pledged as collateral for Federal Reserve notes and, if necessary, to substitute a pledge of a specified dollar amount of such Bank's partic ipation in the System Open Market Account in lieu thereof effective Septem ber 17a 1943. Drafts of messages which may be used for this purpose are enclosed herewith. It is suggested that the messages to the Federal Reserve Bank of New York and the Federal Reserve Agent at New York be sent by tele gram on September 16, 1943, the day before the effective date of the plan, after the close of business or after it is definitely known that there will be no change that day in the amount of System Account securities pledged. The following code words have been adopted for use in connection with the operation of the plan after it has been put into effect: IWERA FQBJ/ICTORY This bank today pledged as collateral security for its Federal Reserve notes (A) $______ of its participation in direct obligations of the United States in the System Open Market Account held in joint custody of the Federal Reserve Bank of New York and the Federal Reserve Agent at New York pur suant to the provisions of the plan for securing Federal Reserve notes which became effective on September 17, 1943* The total amount of such participation of this bank now so pledged is (B) $_____ . Reproduced from the Unclassified I Declassified Holdings of the National Archives “ f DECLASSIFIED Authority -2- ■l 0 ^ 6 \ S-683 IW3SCO Receipt is acknowledged of your telegram dated advising that on that date your bank pledged as collateral security for its Federal Reserve notes part of its participation in direct obligations of the United States in the System Open Market Account and that the total amount of such participa tion of your bank now so pledged is $ _ ___ . IWEDE This bank today pledged as collateral security for its Federal Reserve notes an additional (A) $ ____ of its participation in direct obligations of the United States in the. System Open Market Account held in joint custody of tho Federal Re serve Bank of New York and the Federal Reserve Agent at New York pursuant to the plan for securing Federal Reserve notes which became effective September 17, 1943* After giving ef fect to the pledge of this additional amount, the total amount of such participation of this bank so pledged is (B) | ____ . IWj SEP Receipt is acknowledged of your telegram dated_advising that on that date your bank pledged as collateral security for its Federal Reserve notes an additional portion of its participation in direct obligations of the United States in the System Open Market Account and that after giving effect to the pledge of this additional amount, the total amount of such participation of your bank so pledged is # * IWIAC The undersigned Federal. Reserve Agent has this day released from pledge as collateral security for the Federal Reserve notes of this bank (A) $ of the participation of this bank in direct obligations of the United States in the System Open Market Account held in the joint custody of the Federal Reserve Bank of New York and the Federal Reserve Agent at New York pursuant to the provisions of the plan for securing Federal Reserve notes which became effective September 17> 1943* After giving effect to this release, the total amount of such participation of this bank so pledged is (B) $ * IWIBE Receipt is acknowledged of your telegram dated advising that on such date the Federal Reserve Agent at your bank re leased from pledge as collateral security for the Federal Reserve notes of your bank part of its participation in di rect obligations of the United States in the System Open Market Account, and that after giving effect to this release, the total amount of such participation of your bank so pledged is $ ____ . All messages going to New York should be addressed jointly to the Federal Reserve Bank of New York and the Federal Reserve Agent at New York and should be signed by both the sending Bank and the Federal Reserve Agent at the sending Bank; and all messages going from New York to other Federal Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority t O . 1056' ■3- Reserve Banks should be addressed jointly to the Federal Reserve Bank and the Federal Reserve Agent at the Bank to which they are sent, and should be signed by both the Federal Reserve Bank of New York a d the Federal Re n. serve Agent at New York. Very truly yours, L. P. Bethea, Assistant Secretary. Enclosures 2 TO THE FEDERAL RESERVE AGENTS AND PRESIDENTS OF ALL FEDERAL, RESERVE BANKS. Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D > . Authority . ( Q^?6\ S-683-a I - DRAFT OF SUGGESTED TELEGRAM TO BE SENT B ' OTHER FEDERAL RESERVE BANKS Y AND THEIR FEDERAL RESERVE AGENTS TO THE FEDERAL RESERVE BANK OF NEW YORK. AND THE FEDERAL RESERVE AGENT AT NEW YORK BEFORE THE DAY THE " P M " BECOMES EFFECTIVE, IN CASES IN M I C H SUCH OTHER FEDERAL RESERVE BANKS THEN HAVE SYSTEk ACCOUNT SECURITIES UNDER PLEDGE AS COLLATERAL FOR TtlEIR FEDERAL RESERVE NOTES. Dated To Federal Reserve Bank of New York and Federal Reserve Agent at New York: Referring letter dated September 4, 1943> of Board of Governors fixing September 17, 1943> as effective date of new plan for securing Federal Reserve notes by pledges of participations in direct obligations of the United States in the System Open Market Account: (1) Effective when said plan becomes effective, the under signed Federal Reserve Agent, at the request of the undersigned Federal Re serve Bank releases, and authorizes the Federal Reserve Agent at New York to release, from pledge as collateral security for Federal Reserve notes of the undersigned Federal Reserve Bank tho direct obligations of the United States held by the Federal Reserve Agent at New York under power of attorney for account of the undersigned Federal Reserve Agent as such col lateral security. (2) The undersigned Federal Reserve Bank and Agent hereby instruct and direct that upon such release delivered into the joint custody of the Federal Reserve and the Federal Reserve Agent at New York in accordance sions of the first paragraph of said plan. Federal Reserve such securities be Bank of New York with the provi (3) Effective simultaneously with such release and delivery of securities, the undersigned bank pledges as collateral security for its __ _ of its participation in direct obligations Federal Reserve notes I of the United States in the System Open Market Account held pursuant to the provisions of said plan. As indicated above, it is contemplated that all three of the foregoing steps shall become effective simultaneously when said plan be comes effective. FEDERAL RESERVE BANK OF _________________ and , FEDERAL RESERVE AGENT AT Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ■ 1D^ 6\ S-683-b / DRAFTS OF SUGGESTED TELEGRAMS TO BE SENT BY FEDERAL RESERVE BANK OF NEW YORK AND THE FEDERAL RESERVE AGENT AT HEW YORK TO OTHER FEDERAL RESERVE BANKS AND FEDERAL RESERVE AGENTS ON THE DATE THE "PLAN1 BECOitES EFFECTIVE 1 When Part of Participation of Other Federal Reserve Bank is Pledged, when Plan Becomes Effective* Dated To Federal Reserve Bank of and Federal Reserve Agent at : Referring letter dated September 4, 1943, of Board of Governors fixing September 17, 1943, as effective date of new plan for securing Fed eral Reserve notes by pledges of participations in direct obligations of the United States in System Open Market Account, and your telegram dated , 1943. you are herebv advised that, in accordance with oaraeranh I T T of such plan, all securities in the System Open Market Account have today been delivered into the joint custody of the Federal Reserve Bank of New York and the Federal Reserve Agent at New York, and that such bank and Federal Reserve Agent now hold such securities subject to the provi sions of such plan. In accordance with your said telegram, we understand that the amount of your participation in the direct obligations of the United States in the System Open Market Account now pledged as collateral security for Federal Reserve notes pursuant to such plan is I FEDERAL RESERVE BANK OF NEW YORK and BEARDSLEY RUML, FEDERAL RESERVE AGENT AT NEW YORK. When No Part of Participation of the Federal Reserve Bank is Pledged when Plan Becomes Effective. Dated To Federal Reserve Bank of ___ and Federal Reserve Agent at Referring letter dated September 4, 1943, of Board of Governors fixing September 17, 1943, effective date of new plan for securing Fed eral Reserve notes by pledges of participations in direct obligations of Reproduced from the Unclassified I Declassified Holdings of the National Archives j DECLASSIFIED ^Authority / . (0^6\ ~ S-683-b V the United States in System Open Market Account, you are hereby advised that, in accordance with paragraph (I) of such plan, ail securities in the System Open Market Account have today been delivered into the joint custody of the Federal Reserve Bank of New York and the Federal Reserve Agent at New York, and that such bank and Federal Reserve Agent now hold such securities subject to the provisions of such plan. We understand that no part of your participation in direct ob ligations of the United States in the System Open Market Account is now pledged as collateral security for Federal Reserve notes. FEDERAL RESERVE BANK OP’NEW YORK and BEARDSLEY WML, FEDERAL RESERVE AGENT AT NEW YORK. Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D , P Authority Q . (Q ^6 \ j28Q*B II 9|>f$ i■■ p " « ’’ » J f v w L 9, X > { J B O A R D OF G D V E R N D R S □ F TH E ’ FEDERAL RESERVE SYSTEM W a s h in g to n .... . ■’r: Z-1134 (On office copies only) ADDRESS OFFICIAL TO THE CORRESPONDENCE BOARD July 19, 1943, Dear Sir: There is enclosed herewith a memorandum of a plan for securing Federal Reserve notes by pledges of participations in direct obligations of the United States in the System Open Market Account which was approved in principle a t the meeting of the Federal Open Market Committee on June . 28, 1943? with the understanding that, after such refinements as were found to be necessary by the staffs of the Board, the Federal Open Market Committee and the Federal Reserve Bank of New York had been made, and after it had been approved by all of the Federal Reserve Banks and Federal Re serve Agents and by the Board of Governors, it would become effective. Such refinements as were found to be necessary by the staffs of the Board, the Federal Open Market Committee and the Federal Reserve Bank of New York have been made; and the plan as set forth in the enclosed memo randum has been approved by the Board of Governors after consultation with its Counsel. You are requested to advise the Board at your early conven ience whether or not it is approved by you and your Bank. As explained at the meeting of the Federal Open Market Committee, the proposal of this plan grows out of the fact that some of the Federal Re serve Banks are finding it necessary to pledge increasing amounts of direct obligations of the United States in the System Open Market Account as col lateral for Federal Reserve notes and the present arrangement, which in volves the segregation of specific securities for this purpose, results in a great amount of labor and expense which could be avoided under the pro posed plan whereby each bank may pledge a portion of its undivided interest in the System Account without any segregation of the securities. If you and your Bank approve of the proposed plan, it is requested that you so advise the Board at your early convenience with the understanding that such advice will constitute an agreement on your part and on the part of your Bank to operate in accordance with the proposed plan snd an authori zation for the Federal Reserve Agent at New York and the Federal Reserve Bank of New York to take all actions contemplated by the plan. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED ^Authority j ^ Q . | Q ^ 6 \ - 2- When the Board has received advice of the approval of the plan by all Federal Reserve Banks and all Federal Reserve Agents it will notify you of the effective date. Very truly yours, tjL - A .W iJ f l n Chester Morrill, Secretary. Enclosure TO ALL CHAIRMEN AND FEDERAL RESERVE AGENTS COPIES TO PRESIDENTS OF ALL FEDERAL RESERVE BANKS A d C j Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D - '* Authority ^ D . ( Q^ 6 \ r PLAN FOR SECURING FEDERAL RESERVE MOTES BY PLEDGE OF PARTICIPATIONS (UNDIVIDED INTERESTS) IN DIRECT OBLIGATIONS OF THE UNITED STATES IN SYSTEM OPEN MARKET ACCOUNT (1) The Federal Reserve Bank of New York shall deliver into and hold in joint custody with the Federal Reserve Agent at New York all securities in the System. Open Market Account, direct obligations of the United States to be so held for the account of each of the twelve Feder al Reserve Banks and of the Federal Reserve Agent at each such bank as their respective interests may appear, and other securities to be so held for the account of each of the twelve Federal Reserve Banks as their respective interests may appear. Specific securities will not be allo cated to individual Federal Reserve Banks; but securities in the System Open Market Account (hereinafter referred to as "System Account") will be owned by the Federal Reserve Banks subject to any pledge that may exist under the provisions of this plan. The participations of the re spective Federal Reserve Banks in the securities in the System Account shall be determined as provided from time to time by the Federal Open Market Committee. (2) Any Federal Reserve Bank (hereinafter referred to as the ’Pledging Bank”) may pledge a specified dollar amount of its participa ’ tion in direct obligations of the United States (hereinafter referred to as "direct obligations”) in the System Account with the Federal Reserve Agent at such Bank as collateral security for Federal Reserve notes, and such Federal Reserve Agent may accept such pledges and release participa tions from such pledges, in accordance with the provisions of this plan; provided, however, that each Federal Reserve Bank shall whenever practic able leave unpledged a portion of its said participation equal to at least 5 per cent thereof, and shall take such steps as may be practicable to obtain the release of a portion of its said participation if at any time the unpledged portion of its said participation shall become less than 5 per cent thereof. (3) Whenever any Pledging Bank wishes to pledge as collateral security for its Federal Reserve notes a specified dollar amount of Its participation in such direct obligations, it will deliver to the Federal Reserve Agent at the Pledging Bank an appropriate document evidencing the fact that p specified dollar amount of such participation is thereby pledged as collateral security for its Federal Reserve notes. (4) Whenever any Pledging Bank wishes to obtain the release from such pledge of a specified dollar .mount of its participation in such direct obligations and such release will not reduce the collateral for the outstanding Federal Reserve notes of such bank below the require ments of section 16 of the Federal Reserve Act, the Federal Reserve Agent at such bank may execute and deliver to such bank an appropriate document evidencing such release. (5) Whenever there is any such pledge by, or such release to, any Federal Reserve Bank of any such participation In direct obligations Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D , Authority j ^ O . -2R kuaojl in the System Account, such bank^(unless it be the Federal Reserve Bank of New York) shall immediately give telegraphic notice to the Federal Re serve Bank of New York and the Federal Reserve Agent at New York of such pledge or release and of the amount under pledge after effecting such change. Any such pledge or release shall be effective when the Federal Reserve Bank of New York and the Federal Reserve Agent at New York shall have received notice thereof. (6) The Federal Reserve Bank of New York and the federal Reserve Agent at New York shall permit additional System Account securities to be delivered into their joint custody to be held pursuant to the provisions of this plan, and shall (subject to the relevant conditions of paragraph 7 hereof) permit any System Account securities to be withdrawn from their joint custody in order to effectuate authorized System Account trans actions . (7) If any transaction in the System Account (including any reallocation of the securities) would reduce the participation of a Pledging Bank in direct obligations in the System Account below the spec ified dollar amount of such participation which shall have been pledged in accordance with the provisions of this plan (as indicated in the notice given to the Federal Reserve Bank of New York and the Federal Reserve Agent at New York as provided in paragraph 5 of this plan), one or the other of the following procedures, at the option of the Federal Reserve Bank of New York, shall be followed: (a) The Federal Reserve Bank of New York shall notify the Pledging Bank and the Federal Reserve Agent at such Pledging Bank of such contemplated reduction, and the Pledging Bank and the Federal Reserve Agent at such Bank shall take the necessary steps to reduce the specified dollar amount of the participation of the Pledging Bank which shall have been pledged to an amount not in excess of the amount which the participa tion of the Pledging Bank in direct obligations in the System Account will be after the consummation of such transaction and shall notify the Federal Reserve Bank of New York and the Federal Reserve Agent at New York that this has been done, before the transaction in the System Account shall be effected; or (b) The Federal Reserve Bank of New York shall, contempora neously with and as a part of such transaction, make a deposit in the Agents' Gold Certificate Fund to the credit of the Federal Reserve Agent at such Pledging Bank in an amount equivalent to the amount by which such transaction reduces the participation of the Pledging Bank in direct ob ligations in the System Account below the specified dollar amount of such participation which shall have been pledged in accordance with the provi sions of this plan. The difference between the amount so deposited and the Pledging Bank's share in the proceeds of such transaction shall be adjusted by credit from the Federal Reserve Bank of New York to the Pledg ing Bank, or by credit from the Pledging Bank to the Federal Reserve Bank Reproduced from the Unclassified / Declassified Holdings of the National Archives | DECLASSIFIED ^Authority j^ Q . | 0 ^ 6 \ -3of New York, as the case may be, through the Interdistrict Settlement Fund. The Board*of Governors, the Pledging Bank, and the Agent at the Pledging Bank will take such action as may be necessary or appropriate to effect, complete, or confirm any credit from the Pledging Bank to the Federal Reserve Bank of New York incident to such adjustment. (8) This plan shall become effective on such date as may be fixed by the Board of Governors of the Federal Reserve System after it has been approved by the Board and has been agreed to by all Federal Re serve Banks and all Federal Reserve Agents. Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority ^ 0 . lD^6\ i f FILES SSCTIOI 16 1343 J'j t 16 1343^^ J m e 26, 1943. PLAN FOR SECURING FEDERAL RESERVE NOTES BY PLEDGE OF PARTICIPATlONSjUNDIVIDED INTERESTS) IN SlRECT OBLIGATIONS QF THE UNITED STATES IN SYSTEM P P M MARKET ACCOUNT (l) The Federal Reserve Bank of New York shall deliver into and hold in joint custody with the Federal Reserve Agent at New York all se curities in the System Open Market Account, direct obligations of the United States to be so held for the account of each of the twelve Federal Reserve _ ^ Banks and of the Federal Reserve Agent at each such bank as their respective interests may appear, and other securities to be so held for the account of each of the twelve Federal Reserve Banks as their respective interests may appear. Specific securities will not be allocated to individual Federal Re serve Banks; but securities in the System Open Market Account (hereinafter referred to as "System Account”) will be owned by the Federal Reserve Banks subject to any pledge that may exist under the provisions of this plan. The participations of the respective Federal Reserve Banks in the securities in the System Account shall be determined as provided from time to time by the Federal Open Market Committee. (2) Any Federal Reserve Bank (hereinafter referred to as the "Pledging Bank") may pledge a specified dollar amount of its participation in direct obligations of the United States (hereinafter referred to as "direct obligations") in the System Account with the Federal Reserve Agent at such Bank as collateral security for Federal Reserve notes, and such Federal Reserve Agent may accept such pledges and release participations from such pledges, in accordance with the provisions of this plan; provided, I Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Q . 1D ^ 6 \ however, that each Federal Reserve Bank shall whenever practicable leave unpledged a portion of its participation equal to at least 5 per cent thereof, and shall take such steps as may be practicable to obtain the re lease of a portion of its said participation if at any time the unpledged portion of its said participation shall become less than 5 per cent there of. {3} .Whenever any Pledging Bank wishes to pledge as collateral security for its Federal Reserve notes a specified dollar amount of its participation in such direct obligations, it will deliver to the Federal Reserve Agent at the Pledging Bank an appropriate document evidencing the fact that a specified dollar amount of such participation is thereby pledged as collateral security for its Federal Reserve notes. (4) Whenever any Pledging Bank wishes to obtain the release from such pledge of a specified dollar amount of its participation in such direct obligations and such release will not reduce the collateral for the outstand ing Federal Reserve notes of such bank below the requirements of section 16 of the Federal Reserve Act, the Federal Reserve Agent at such bank may execute and deliver to such bank an appropriate document evidencing such release. (5) Whenever there is any such pledge by, or such release to, any Federal Reserve Bank of any such participation in direct obligations in the System Account, such bank (unless it be the Federal Reserve Bank of New York) shall immediately give telegraphic notice to the Federal Reserve Bank of New York and the Federal Reserve Agent at f l w York of such pledge or release ie and of the amount under pledge after effecting such change. Any such Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D r Authority 0 . ( Q ^>6 \ -3- pledge or release shall be effective when the Federal Reserve Bank of New York and the Federal Resfsrve Agent at New York shall have received / notice thereof. (6) The Federal Reserve Bank of New York and the Federal Reserve Agent at New York, in accordance with the orders of the Federal Open Market Committee or the Manager of the System Account, shall permit additional System Account securities to be delivered into their joint custody to be held pursuant to the provisions of this plan, and shall permit any System Account securities to be withdrawn from their joint custody subject to the provisions of paragraph (7) hereof. (7) No transaction in the System Account shall be effected which would reduce the participation of a Pledging Bank in direct obliga tions in the System Account below the specified dollar amount of such par ticipation which shall have been pledged in accordance with the provisions of this plan (as indicated in the notice given to the Federal Reserve Bank of New York and the Federal Reserve Agent at New York as provided in para graph {5) of this plan), unless the Federal Reserve Bank of New York shall, contemporaneously with and as part of such transaction, make a deposit in the Agents’ Gold Certificate Fund to the credit of the Federal Reserve Agent at such Pledging Bank in an amount equivalent to the amount by which such transaction reduces the Pledging Bank1s participation in the direct obligations in the System Account below the amount of the participation pledged in accordance with the provisions of this plan. The difference between the amount so deposited and the amount payable to the Pledging Bank as a result of such transaction shall be adjusted by credit from the Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D ^Authority j . (0^6\ -4- Federal Reserve Bank of New York to the Pledging Bank, or by credit from the Pledging Bank to the Federal Reserve Bank of New York, as the case may be, through the Inter-District Settlement Fund. The Board of Governors, the Pledging Bank, and the Agent at the Pledging Bank will take such action as may be necessary or appropriate to effect, complete, or confirm any credit from the Pledging Bank to the Federal Reserve Bank of New York incident to any such adjustment. (8) This plan shall become effective when it has been approved by the Board of Governors of the Federal Reserve System and has been agreed to by all Federal Reserve Banks and all Federal Reserve Agents. IF— 'D IN n!I . SECT IOH \ Fe JUN 25 1943"" Ju m 2 S 19^* M r* Van Koooon, Ur* y % t t , t> ou»ral C ou n ao l* ''lo d g in g p a r t i ©1 p a tIo n a I n t>y»to» Jpon J ia rk o t A ooount a« C o l* l a t o r a l f o r f o d a r a l U o o o rro ‘o t * o . 1 aa* .landing you honraith a draft of a »u&£s«tod oubotituto for para^rarh (?) of tho tar.tativo plan wnioh oos^blnao tho auA£«atod rorlsioa of tills par^ i^raph ooataiuod in your nwKoraiuiuis of *.una 2i* , wit:. a ravlaod aubatltuto for th« laot aontaneo thoroof* X b a lio v o t h a t V i t a w i l l whan ro»i p ro p a ro d th o s u b s t it u t e « « t - . i a r o m l n g and w i i 1 c o n t a in i b i l l t y t h a t t r a n s a c t i o n * i n th e f l o i a n o y i n th o c o l l a t e r a l * ao oorcplloh w h a t you had i n w ind f o r th o l a o t a o n te n o * w h ich you «%nt b a t t e r a a f« £ u a rd a * g a l n o t t h a p o s t* ~ y a to n Aooount o i . h t o r a a te a d o * w a it o r * y a t t # > « t i* r a l o u n a o l* ;»ttao.H uiont ^ ^ ln FILES SSCTIO I JUN 25 1943 (7 ) t ld f t t iM I f a n y t ra n M o tio n la th o g y s ta a i A o o o u n t w o u ld ro d u o o th o p t r - o f a F le d g in g B onk I n d ir o o t o b llg r t io B f I n th o ^ t « i A o o o u s t b e lo w th o a p o o iflo d d o lla r a n o in t o f auah p a r t ia l p a t io n w h le h s h a ll h a re boon p le d g e d la a o o o rd a n o o w ith th o p r o r ia io n a o f t h is p la n (a a in d io a to d in th o n o tlo o g ir e n t o th o F .H . B ank o f Mow Y o rk and F e d e ra l fto s e rre A g e n t a t Vow Y o rk aa p ro v id e d in p a ra g ra p h (5 ^ o f t h la p la n ) , th o F «JLB ank o f *o w Y o rk a h a ll* o o n tw p o ra a o o u a ly w ith and aa p a r t o f th o eane tr a n s a c tio n * ta k o ono o f th o fo llo w in g s to p a t o p r o th o c r e a tio n o f ▼ o n l/« n y d e fic ie n c y la th o o o lla t o r a l p le d g e d b y th o P le d g in g B ank a a a o o u r ity fo r it s F *8 * n o te s • (a ) M oke a d o p o a lt I n th o A g e n t'a G o ld t e r t l f i o a t e fu n d to th o o r o d lt o f th o F .R * A g e n t a t s u ch P le d g in g B ank la a a n a o u n t e q u iv a le n t t o th o e s u n a t b y w h io h s u c h tr a n a a o tlo n re d u o e e th o P le d g in g B a n k 'a p a r * t i o lp a tio n l a th o d ir e c t o b lig a tio n s la th o * y a ta « Accou n t b o lo w th o a a m n t o f th o p a r t i o lp a tio n p lo d g o d la a o o o rd a a o o w it h th o p r o r ia lo n a o f t h la p la n and a d ju s t th o d lffo r a n o o b e tw een th o a im n t ao d o p o a lto d an d th o a n o u n t p a y a b le t o th o P le d g in g B onk aa a r * s u lt o f auah tra n a a o t lo n b y g iv in g o r o d lt t o th o P le d g in g B ank o r o b ta in in g o r o d lt from th o P le d g in g B o n k , a s th o oa oo n a y b e f th ro u g h th o Ia te r « J > ie tr i© t S e ttle n s n t fu n d i (b ) ( M a la fra a i th o F .K . A g o n t a t th o F lo d g ln g B ank a d v io e t h a t th o s p o o lflo d d o lla r i a i a i t o f th o F lo d g ln g B o n k 's p a r t ic ip a t io n I n th o d ir o o t o b lig a tio n s i n th o * y o t i A aaaw n t p lo d g o d a s o o lla t o r a l f o r F e d o r a l l aesn ro n s t os h a s bo on re d u c e d (th ro u g h s u b s tit u tio n o f o o lla t o r a l • r e th s a v ls e ) t o a s p o o lf lo d d o lla r a m o k n o t p » e n to r th a n th o a n a u n t w h ic h th o F lo d g in g B o n k 's p ar t i o lp a tio n i n th o d lr o o t o b lig a tio n s l a th o V i t s i I a m i I w i l l b o a f t o r th o o o n m a n M k ls n o f s a s h tr a n s e c tio n mm V I WywwUm J W W H I t FOL I I ion m s s B—» A. Ji DECLASSIFIED j A u th o rity ! • » taw ait. I9k3. Mr. Vyttt Mr, Tii Fm m i H a m our dissuasion taday af tk« 16 draft af tha plan far ssaurlng X t M n t notos by pladga of partlaipa~ ti ans 1a tho S/it«i Opan Markat isocount, It has ooourrad to a* that thoro wight bo i o m adrostago In a oo^.»or at lost rigid ro* t\ f u l r f sat with ragard to tho aargin than is proridad in tho aboro■■■antionad draft. This is for tho reason that it it asstaaad, as is lapliod I bailor* 1a paragraph U of tho draft, that thoro oould ho no roloaso of oollataral which would rod»*o the oollatoral pledged bolow tho roqulr— ants of soot ion 16 of tho Federal Rottrn Aat# Presumably, tho provisions of seat ion 16 would override any provision In tho proposed arrange ment In tho evant that tho Federal Reserve Beaak, as a setter of faet, found it nooeasary to pledge wore than 95 par aoat of it* participation in order %a m l tho aallataral ro^ulr— awts of seation 16. My ldsa would bo to sabstitwte for tha first 6 llaas at tha top of pago 2 f■oathlag llko tho fallowing i "in aaoordanao with tho provisions of this plaai proTided, howwvor, that oaoh Federal Ressrfe Bank la as far as praatiaabla shall Maintain an unpledged port Isa of Its said partiolpatlea equal to aot loot thaa 5 par oent thereof.* If this is dene, sons aodi float lea of tho last aeatonoo of paragraph 7 would appear ta ba noooooary. I bellava it Is also daoirablo to substitute "transaatlon” for "with drawal" in paragraph 7 aherwrer it ooours, with suah inoldontal othor ehaagee as ara invwlved, in ordar that tho previsions of paragraph 7 way apply to roduotions 1a part iolpat Ions result ing f m tho parladloal roalloaation of tho Syston Opon Market Aaoount. Fallowing is a suggastad revision of paragraph 7 with this in *lnd| "(7) If any transaatien in tha Systea Aeoouat would reduce tho partioipation of a Pledging Bank 1a dir oat obligations in tho Systea Aaoouot bolow tho total specified dollar amount of suoh partiolpatian whloh shall have boon plodgad in accordance with tho prorricion* of this plan (as indioatad in tho notioo given to tho Fodaral Rasarro Bank of Mow York and Fodoral Reoerve Agent at Mow York as proridad la para graph (5) of this plan), tho Fodoral Reserve Bank of Saw York shall, cont— poranoously with and as a part of suoh tranaaetien, aako a dopos it la tho Agent's i ^ n n ^ ( H f t P Y Toi Mr. Wyatt -2- Golri Cert ifioat# Fund to th# credit of the Federal Re serve Agent at sueh Pledging Bank in an anount equiva lent to the amount by nhich sueh transaction raduoas the Pledging Bank* participation in tha direct obligation* in tha yston Account balow th# amount of tha participa tion pledged in aeoordanoe with tha provisions of this plan* Tha diffarenee between tha aaount to deposited and tha amount payable to tha Pledging Bank at a result of such tranaaation shall ba araditad to tha Pledging Bank or to tha Fadaral Reserve Bank of Mm York, as tha ease nay be, through tha Inter-District Settles ant Fund*" 1 di sous sad this natter briefly with Mr. Saead and ha fa▼ors tha suggested change in tha margin requirement. 1 alao mentioned it to Cy Millar of Mew York, but while his offhand raaation was favor able, 1 do not know what he would think about it after further coneiderati c m. From what wa have heretofore reeerred from New York, it is perhaps likely that the Federal keserve bank of New York would not ba disposed to accept the arrangement set forth in th# last sentenae of paragraph 7* such aase, it would be necessary, of course, to provide some alternatiTS method of dealing with eases where the se curities were sold at leas than par* l' • • JLR K 1 J J S S S JK C T IO S JUN 25 1943"' *iun* aU« 19^5* itr» Sand • J r Vast £. Flan for ;»aourin« *adaral no••rr« ICetoa by Plod&o of Undlrldod lator**t» In <iy*taa Jpan Warkat Aioount. J r Wyatt, -4«u«r*l Gouaaol* ** ?ur*-*ant t i tho undor*tanding r«aehod during our ooni'*r*nea on tho abov^ subjaot yoatorday aftnrnoan, Hr* Van Gossan and 2 di«ou*aod orer tho tslaphoa* with -*r* Logan and fcr* Tiobout th oir rovi*ad d ra ft of Juno 22, 19i<J# with tho follow ing r **ult* i Thoy agrood to tho raaowal of tho word "jo in t ly " fr o * tho aid d la of paragraph (1 ), although thoy wora sonowhat roluotant to do so* Thoy also abroad that tho la s t saatanoo of paragraph (1 ) was wrong, and s 4 «t «d that i t to ohan^od to r«ad ai fo llo w *i "tho poro«ntafa* o f tho ;» p artiei pat1on* o f tho roapoetivo radoral ;**onra Bank* in tho *o o u ritlo * la tha &y*t*p -ecount sh all bo datoralnod aa provided from t l » # to tin * by tha Fodoral Jpan *arkot Oonalttoa*" On pago 2, paragraph (2 ), lin o 9, a fto r tho word "pladgo" thoy wi*h to Ins art tho ward* ‘ or por Kit to r*K *ln uador plod^o** Thoy oontooplftt* that, i f a aalo of bond* should a lln ln a to , or roduo# Oolow 1 por cant, tho uaplod^od portioa o f a bank*a p artiolpation in tha *y*to*i Aooount, tho bank would bo required ianodiatwly to provide tho Federal .Hoaerre Ageat with othor c o lla t e r a l, ao a* to restoro tho Marcia to at le a s t 1 por oont before tho next day, thus restoring tho protootlon against tha eroatlon o f a defloienoy tiirough tho sala of bonds at loas than par* As 1 undorvtand it * tha ln so rtlo a o f tho words "or porait to r t r a in uni or plodgo” is intoadod to aake th is oloar* Thoy abroad to tho o lla ln a tlo n of tho words " i t s entire p a r t ic i pation tharoin or” fro a paragraph (3 )« Thoy also agreed to our su&’estad ohan&e of phraseology in tho la s t two lin os of paragraph (U) at tho top of pai;o $• Thoy ro ad ily abroad to add at tha and o f paragraph ( 5 ) a r.ew sentanoe reading *oK«ahat as follow st "Any suoh pled*;* or roloasa shall bo e ffe c tiv e wt\«n advloo o f tho rooolpt o f notloo thoroof ha* boon di*patahad by tha Kodaral *ioso-To Bank and Kadaral Keserve A*«mt at Now Tork to tho Pledging bank." Thoy did not wish to restore at tho ond o f paragraph (5) tho s ta te siant that "no raoord* *howing amount* o f p articu lar issues pledged or re leased n*od bo Maintained", because thoy do not intond to Maintain any *uoh raoord* and think that suoh lan^ua^e would iRi^ly that suoh rooords »i&ht bo Maintained* Thoy ccmalder suoh language inoonsictont with othor part* of tho uaaoranduia and think that i t * presenoe in tho Ktouoraadua J 1 • Mr* M • • Hr. T#it • - • 2 - Ia diseusainc; paragraph (7) m 4iiMV«r«4 that they 414 B*t uader« U a d 1% m oiwit w p H t l i ^ that, when eeeuritlea trt sold froa the Account at lees than par, it it contemplated that the New York Bank Bight rewit the face anount thereof to tha federal Kee»rve Agent at the Pledging hank and oolleot tha differeaee from the Fledging fcenkf and they doubted whether the other Federal xeservc Banka weald look with f a w upon this suggestion* Thejr think that any possibility af creating a defieleney la aollateral as a result of a sale af beads at lass than par ia obviated by tha previstsm that no bask shall pledge or permit to rswain under pledge an amount la eneeas of 99 per oent of Its total participation. They also eonstme the language af paragraph (7) as requiring thee to rssdt to the Agent at the Pledging Beak not the total proceeds of the tale of beads at lee# than par bat only seek amsunt as weald be aeaeeaary to prevent a defieleney la the collateral* To lllaetrate, If a bank had a participation af 11,090,000* af wUleh it had pledged $1,000,000, aad bonds having a par valaa of $100,000 ware sold, the effect would be to reduoe the beak's rcsadalag participation to 990,000, aad they weald rcait only 410,000 to the Agent aad would remit the remainder of the preeeeds af the sale to the beak* 1 believe this la a oorreet interpretation ef the following language of paragraph (7) of their draft af June 28, which appears at the top of page Ui "make a depealt la tha Agent's <3eld Certiflemte m a d to the credit of tha Federal Keeerve Agent at sueh Pledglag Bank in an amount act loaa than the anouwt by whleh such withdrawal would reduoe the FI ad ring Bank's parti oiput i on in The' -i i r *c t. obTTjafcioRs In ' \ ~ Systea Xoeount ?eiow the aaaami Of the parti ci pet ion pledged {o Tk aecSrtianoo e it h i!,o provisions of this plea*1 tr, sueh a case, koeeverTxhe * ?Ie2JInw liVik would Ee rVjuIredf l;v m\lately to provide the Agent with other aollateral aad to obtain the release from pledge of I per oent ef ita remain* lag partlelpetlem la the Account* They stated that they had Jeet eowpleted another revised draft ef the plea which they mere Bailing to aa last night| bat, in view af the latemeae af the hour, weald net wadartake to retype it ae ae to incorpor ate therein the ehaages agreed upon daring ear telepheoa conversation* Oomeral fcf i a cad ouneel* -C’ T» FILES 3ECTI0I D • • • JUN 22 1943 / _______ *1, *9i3. H M i « l Filao flodging*! * is Ofii Markot i M t o t u Mr* • r t l ftr Im n l f lw m t l M * r «l t w ir w Yhia noraing 1 diaomaaod m r t fco with Hr* Logan* ▼too Frootdovt n 4 toaoal Counaol of tho Fodoral lank of H « York, tho » W t « aabjaet and particularly tho rariaod draft of a plan praparod Jointly by M m r i . gaaad# tia r M N B « Toot and tho w 4 » rolgaod, droftod by Mr* Yoat# and a«at by Mr* Snoad to Mooara. Logon and it M M aa / « m 16tfa. I aakod Mr*Logan what ho thought about it and ho rap11 ad that ho thought it wao "all right". Ho l U t o ^ hovovor, that ho had not ytt had a* opportunity to diooxioo it with Mooora* Moaaa aad Tiabowt and that ho plaaaod to do so and oall ua baok aaaotiao aoan. Xo lndiaatod that ho had a«ao alight nodi float! out to oug^aat and might hat o othora aftar talJdng to thaa^ f cmt that ho was in gonoral a y ooamt with t^o prlnoiplaa of tho plan and thought wo had iaprorod tholr propooal o i » aidorably. Oao of tho dotailod ohangoo whioh Mr.Logan haa in mind io that tho Fodoral looorro at tho plodding hank should not aotually iaaua Fadoral looorro notoa against a plodgo of a partiolpation in tho opon nark at aaaouat until ho haa roooirad froa tho Fodoral Eoaorro Agoat at low York an aoknowlodgaoat of tho notloo of tho plodgo* Mr. Logan aaid that thla la noaaoaary to guard against tho poooiblllty that tho low York Boak alght haro oold aaao of tho ooouritiao in tho aaantiao* Mr* Logan aloo atatad that Mr* Tiobout had swggootod a ohaago in tho phraooology of paragraph 7* *• waata to otriko out tho word "aiaaltaasausly* and subotituto " o o a t o f or ano a u a l y and aa part of tho s s a o transaatlaa". T h ia l a for tho roaaan that tho Fodoral fto o a rv o •aak la aaking dollt o t loo and rooolving p t j o a i t i of hoado oold all day loag and dooa not aako lta daily aottlaaa with tho othor Fodoral loat a a r r a lanka through tho Intor*Diatriot f ottlaaaat pond until tho olooo o f tho day ' a b u o la o o a at } p * a * 1 told Mr.Logan that 1 thought Mr. Tlokavt'i propo o ad ahango would h o all right* Mr* Logan aloo aoatioaod tho faot that all oottloaonto ho* twooa Fodoral looorro Banka aro now aado through tho Intor*»Biotrlot gfttlaoaat fund and that oottlsoMnto through tho Agont'a fund would ho a now proooduro and night, in aoao lnatanftoo, raoult in low York roaolrlag orodito froa a Fodoral looorro Bank through tho mtor-Diatriot Sottlaaaat fund whilo glrint orodito to tho Agoat at tho aiao hank uU«l» ' T ot •o m o r a l F l l a a throotk tfc* Ajaaifc** ftawA, whoraaio two t m i M t i o u waul 4 offoot othor if they W i both pvt th n *«*k tho i u m fumA* somorar, fco 4i4 ro t fa a l th at t h i i would aomotituto a* inow^orablo barriar to tho aaopti Ml of tho plan now prOpoaa4« I* thio ooaaootloa, I o a llo 4 n r. L o fa a ’ a ottomti m to tho f M i tfcat m t < r t f t o f tfco p la a ha4 room fa r * l a t a f f l e x i b i l i t y , oiaoo 1% la alwojra p oaalk la f o r th o A* oat at %!*• yla<£ in * bank ta t a ia othar a o l l a t a r a l am* r « l * « H a p a r t it a o f tho plad^Ln* baak*a fo r t ia lp a t la n in tho opoa marfeot aaaoant, i f th la i t bom • « T « l w r t ia omy g lr m m t l n w r t o i M . 1 to l4 him that X thought th at, a ft o r U « plan ia put in to oporatloa, « i j ^ r i « M « w i l l Aorolo? tha boot moth©4 o f o jo ra tln ^ i t , 2a aoamad lm oliao4 to a£roo with thio yiaw. Mr* Logan raiaad a qoaotioa aa ta tho p ra a a ± «r* far o b tain * ia * approval a f tho p la a am4 potting i t in to o ffo a t * 1 to ld him thot 1 414 mat km — what m y aaaaaiataa horo thought abovt that| Uit ay « m impraaaiao was that tha s t a f f * o f tka Board, tha Opoa ttarkot C o m it t M , am4 tho vov Tork laok wora a io p ly p roporin * aoaw*hinc fa r tho a a a a i4 a r a t io s af tho Board, tho fo d a ra l Opaa Marhat Cdmalttoo, tka law York Bank am tho IS . TWdoral loaorva m rn k froaidam ta, an4 tkat aa farmal d a a tio a woul4 ba taxaa u n ti1 tk ia tomtatlTO plan haa kaao aocaidarad ami i t la fo*ftd that tka aa ra rla u a p a r t it a wora l a fo o o ra l atroomoat* A fto r that, 1 t h o u g h t tha p la a shoal 4 ho appro rad kjr tka Board and tho fo d a ra l upaa hark a t C ovtittoo oad autmittod to tho 12 fo4oral kooorro Banka and tha 12 pa4oral ttoaorwo A£«mtk with a ra^u^at that thoy * k g ~ a i t y th a lr aaaaptamoa o f i t i f thay a r * o a t la fio d with i t « t r . Locaa aaamad to th lak that that wwuld ko a £0*4 praaadara# Wr ia^rao aian g mao that ho waa r a lia r a d t a la a rn that wa ara not axpaatin$ tha lim m .nl to approra tha plan u n til a ft a r i t had toon conaidarad and diaauaaad Igr tha Opam Majntat committaa aad tha Freoldamta oi u l l tho fajita, i thiak hi a ahia f aonaara ia tha naad fo r mora timo to oanaid ar a l l o f tka taakniaal da t a l i a and to ^o rfo at tha oxaot wording o f tho pla c * I o a llo 4 Mr. Lo^an * a a t t o a t io » ta tha fa a t that tho a t a ffa Of tho Board, tha VOw Tark Bank, and tha O^aa Maurkat Comaittoo wara axpaotad to kavo oomothiac road/ fo r aoaai^oratiocv by tha froaldmnta at t k a ir a a o t in f ia Chioa^a tha 1at ta r part af th ia waak aad fo r o«m* a ld a ra tia a b j tho fod oral Opaa Markot Committo« at it a aoatin^ hora aaxt Mon da/, M a flOth* ao ra p lio 4 that ha would dlaouaa i t w itk koaara. Tlobout aad touao aa4 a a l l « a baok aa aoao aa ha aoul4| kwt ko 414 a at thiak ho aould 4o aa Woa/ kaoauao U r * Tiokout haa an appoiataont with tha dantiat tk ia aftam o o n . WW*am Mr* Sme^jJ Mr* Van Fossen ••••«r. V6R iir.Wya r D IH FILES SSCTI01 I JUN 16 1943 \ L *7 ? lm » ^ ' * 0 i / ________________________________ 1*» 1*** Mr. T. 0. f i about, Assists at ttenerei. Counsel, Federal Reserve 4enk of Mew To f t i, New York, Mew York. Deer Ur. Tlebout! Many thanka for your ntgomadag of Jud» 11, IJ[igJtrsa»nlttlng a topy of Mr. Gordon* s mmmoTfmCxm of June 10, 194? regard ing tha legislative history of section £08 of Tftle II of E.R. 5557, S. 1715, and H.R. 741?, of the ?4th Congress, which became the Banking Act of 1935 with certain ofe»nges Including the 7*1 •»Ion of section t08. I have read this wich mudt interest but do not teller# that It is aontrolling on the question whether an undivided inter est I * the direct obligations of the United 8tat*« In tha SyMtlft : 0pen Market Account ©an be pledged as collateral for Federwl. Reserve notes. The real Issue there wes whether collateral, should ba abol ished entlrelyi and that la not what la being proposed now. On the contrary, the present proposal contemplates that. tha Federal JRase're notea will always ba fully aecurad by collateral; and the only ques tion la whether suoh collateral f ^ y consist of an undivided interest fa in tha dlreet obligation/* of the United States held for all Federal Reaervs Banks In the Systav Ones Market Account. It has long been the praatlae to count credits in tha Amenta* Gold Certificate Fund aa collateral for Federal Reserve notes, although each federal Reeerve Agent eerely haa a book credit for an undivided Interest 1c tha fund ecd there Is no segregation whatever of the gold certificate* in tha fund. It wonld seas that what is now proposed with reference te the pledging of securities In the System Open Market Account la the earns In prlncipls. For this and othsr reasons, I have no misgivings about permitting • Federal Reeerve Bank te pledge lta undivided Interest in the dlrset obligations in the Bye t e r Open Market Account aa col lateral for Federal Reserve notes, provided th*t all transactions are handled in suoh a way as to preclude any possibility of trans actions in the account ever creating any deficiency In the collateral pledged My any Federal Reserve Bank for Its outstanding Federal Meaerve netes. A j x. n i . , t ' ^ 0 . . "V-5 Mr. T. 0. Tiebout Messrs. Swead, Van Fossen, Test end the undersigned have been doing considerable work on this; and I believe tbat ve here w o r k M out a modification of your tentative plan of May 11* 194? which will be entirely workable, will assure that the Federal Reserve notes will be fully secured at all times, and will constitute a sub stantial compliance with the law, A tentative dr*ft of a m.enoranduB describing this plan is now being prepared und we hope to sutmlt It to you and Mr. Logan within a day or two. In the meantlwe, two of the men In the Le;nl Division have been doing some research work on some of the technical questions; and I enclose for your information soae notes on whet they have found. With kindest personal regards tnd all be-t wishes, I aw C o r d ia lly yourp, / / / 'c / Walter Wyatt, General Counsel Federal 0 en Market Committee. Enclosure WW/wg cc: Mr. Vest Mr. Smead ' ■ n D I? FILES SECTI03 I • * tr Mr. So*ad JU N - 5 1943 1 i -J** J*. X9U?. 6lnpllfloption of prooedure In pledging 8 yate® Open Markat Mr. Tan Fossen Aooount securities as oollataral for Federal Reserve notes. I hara four nota auggeetlng that by having a a ah Bank1a anti ra parti olpatlan in tha System Opan Markat Aeooxmt hald In tha joint custody of tha Federal Reserve Bank of law Tork and lta Fadaral Raaarra Agent for tha aooount of tha respective Federal Reserve Banka and Agents aa thalr lntaraata nay appaar, eaah Feder»l Reserve Bank oould pladga all, or any part, of ita parti cipation with lta Agent without notifying tha Fadaral Raaarra Bank af Vaw York, and reouesting that a aemorandum ha praparad praaanting a plan to accompliah thaaa raaulta. Bafora undertaking to do this, I ahould lika to point out that whan the total arwur.t o f tha 8yatex Opan Markat Aooount it reduced by tha sale or redem ption o f s e o u r lt ie e there ie a release of tha securities frca jo i n t custody without any ooneurrent pay ment to e it h e r tha F e d era l Reservo !%ank or tha Fadaral Peserve Apant for whose Joint aooount tha aaouritiaa would ba hald, in asmuch at paysaent fo r tha s e c u r it ie s ia not r'ade by tha Federal Raaarra Bani. of Raw York \ » t i l tha followinf day. In tha event of a tight eituation aa regards oollataral, i t would ba neeeseary for tha F a d ara l Reserve Bank: o f Sew York to naira a spool a l trar.afar on tha day tha s e c u r it ie s war- d e liv e r e d , that ia on tha day * preceding tha one on w hi ah payment would noraally ba nade through tha Interdiatriet Settleaent Fuad Clearing. Aside fro* thia obataala af ralaaae o f tha securities without tanediate payment, thera la tha additional difficulty that whan payment ia made under pres art eadditions it is m d e not to tho Fadaral Reserve Bank and Agent Jointly t*ut to tha Federal Reserve Bank. It rould seen that to permit tha Federal Reserve Bank and Vgent at Raw York te ralaaae securities, theoretically it sight be the Bank's entire pcrtielpmti on, and make payment therefor to tha Faderal Reserve Bank aloae would make meaningless any arrangaaasnt for Joint custody ef the teouritiet by than for tho aooount of that Federal Reaerve Bank and its Agsnt. I f you would like to have a neat arrangssaent to solve this p re hi an. It ooo ure to me that tho answer would be to have pay ment te a Faderal Reserve Bank whan Its parti cipatiar la reduced be aade to the Federal Reaerve Agent in the Federal Reaerre Agent'a fold Certificate Fund instead of to the Federal Reserve Bank, ttoder aueh an arrangemant, Instead of the securities In joint custody that had been sold there would be substituted an equal volume ef geld certificate collateral alao in joint cuetedy. S pecifically thia plaa would a e ll fe r Hm f a ll^ ria * prae*durat t t n m r f f t j M t t t i s a U t b y t h a F e d e r a l H e e a r r e Bank e f le v T « it fb r N M i i t l N , M t • f f w t by a m 1 «( th e F e d e ra l B e c e r r a A g a n t a t l e w Y o r k , w hen t h e a a a w r i t l a * w e r e d e l i v e r e d an * tak en In to t t o fa o e u l u i J e i n t c u s t o d y , w o u ld w i t h d r e w an — l i t e q u a l t e e f t h e s e e t r i t l e a f r t a t h e g e l d c e r t i f i c a t e fw a d fer t r a n s f e r t o th e B e a k In t h a I t e t e r d i s t r i c t l o t t l — a n t F un d * As soon aa tha securities were allocated te the ether Federal Beeerve Banks, eaeh Faia al Beeerre Agaart weuld withdraw fraa r the Gold Cartlfloata Fxnd tha face anoxaxt ef tha aeeiaritlee alleeated fbr depea it to the oredlt of the Federal Baaar^ a Agent r at Vew Tet%. A rererec procedure would be followed where teew* ltlea are sold without corresponding purchases. This is, no doubt, a soocwhat noral suggestion 1ecsamch aa se far as T know there hara never baen any trensaetiens of this aart In aoena stlcn with the Agent* s Geld Cartiflaate Fmd, but my offhand belief is that It Is anti rely practicable* The prin cipal advantage of this proposal would bo that regardless ef he* ■neh a Bank* a parti olpation In tho System Open Ifcrket Aoooiat night fluctuate it would hare no affeat on tha total aetovnt of eollataral pledged against its Federal |*«enra not as and, of eourae, on its reeervea availabla against deposits. In ether war Aa, any redaction in seourltlas pled^ad would be offset by a aorraspending Increase In gold oartifiaates pledged and riee ▼area without any off©at sc deposit reeerrce* Itoder sueh an arrangaaawt I de net believe it would even be necessary fer the Faiar al h u m Banks and Agents to perfom sasy paper work in eeeneetlen with the adbetltutlon of collateral due te ftysteai Aocount taraneaetlane. Reproduced from the Unclassified / Declassified Holdings of the National Archives d e c l a s s if ie d Authority fc O . lD^f)\ Ih e c ' 'IK FILES SECTION ’ d GCT 15 1942 October 12, 1942* f*O.M*C. Files Mr. Carpenter At 3*40 this afternoon Messrs* feccles, hansom, Saymcsak, McKee, Draper, Morrill, Carpenter, Clayton, and Piser met in the Board Hoom to hear a further report by Chairman Scdea with respect to the current Treasury financing operation* Chairman &cclea m d e a statement sub* atantially aa followsi On the night of Friday, October 9* the 6*00 o* clock report received at the Treasury showed that there was; a total of only $2,700,000,000 of subscriptions to the two issues of securities* that aid not include m i l subscrip tions or the subscriptions that were received at acme of the western banks and vshich, because of the difference in time, had not been tabulated* It was apparent, however, at that time that we were not goin& to gfc the 14,000,000,000, t I talked to Secretary Morgonthau four or five times durir^g the afternoon, and it tf&a a feeling after the 6;00 o'clock sy report thfct we woul l get between 13,500,000,000 and $4 ,000 , , , 000 000 but that $3 ,$00 ,000,000 was the safest figure to count on* Secretary Uorgenthau wanted the System to puu in a sub* acrlptlon for a total of *1 ,500,000,000 equally divided be tween the two issues* I talked to Mr* Sprout about the rat ter and he felt as I did that 11,500,000,000 would be a lit tle high and that a subscription of 11,000 ,000,000 would be ample, but we agreed that we should put in the subscription for 11,500,000,000 with the understanding thi*t we would with draw what was not needed. 1 called Secretary Uorgenthau back and told him we would put in n subscription for the t1 ,500, , , 000 000 which we did* With the approval of the Washington members of the Federal Open Market Committee, Mr. Merrill wJred the representative members of the full Committee and obtained additional authority for the executive committee to purchase $1,000,000,000 of Governsent securities, and we wired the Mew fork Bank authorising the purchase of the $1,500,000,000 so that the Bank could put In the subscription* I talked to the Presidents of all the Banks on Friday a rternoon, with the exception of Dallaa and Atlanta, and they confirmed the fact that the subscriptions were falling down and that the issue would not be subscribed* 1 told them how the situation appeared here and aaked them to contact some of * Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority j \/0 . ( 0 ^ ( ) \ 10/12/42 —2— the bigger banke In their districts which could place subscrip tions that would amount to something and let them know that after all It was a question of the banks underwriting the issue or the Federal Reserve Bank® doin& It but that we much preferred to have the banks do ltf that the jaoney ftoula not be called for until the 15th in the ease of one issue and t i 19th la the cate re of the other, that the money would then be transferred into the war loan account and would not be drawn down until the treasury called*-and that if the banks underwrote the financing the Fed eral Eeserve Banks, in the event the purchasing banks desired, would take the securities off their ham** I don't know how many additional subscriptions caste in, but we will know in the next day or two* Between ^*00 and 3*00 o1clock on Saturday afternoon they had $3,660,000,000* Messrs* Bell and Gaston were at Secretary mo rgenth&u* a hutae, and the three of thea felt that they should get the $4 ,000 ,000,000 from the banks and not have the Federal Reserve Banks take anything* 1 told Mr* Bell I did not feel vary atro%*ly one way or the other, thaw we had obtained the authority to purchase the secu rities, and tliat to let the market know that we had taken that many jaight servo aa a lesson to the banks, but that if the Secretary felt strongly the other way X would not object* Mr* Ball a&id that he had talked to Mr* Sproul, who had stated that he did not have much feeling one way or the other and that the Ho* tork Bank could get another $200,000,000# With the Sec retary feeling the way he did, th» re was nothing for us to do but get tho rest of the money, Mr* Sproul goi $200,000,000, £«n Francisco about $50,000,000, and Chicago about $100,000,000* I told Mr# Bell that I thought these three Banks and Cleveland could get additional aaount3 , Mr* Bell talked to Mr* /loaing at Cleveland, and he said that he couldn* t do anything, that the banks in Pittsburgh and Cleveland said that they did not want any more, and that they had wanted a 2-1/4 par cent bond* le now have $4*120,000,000 of subscriptions. Mr* Bell feels that when everything is in it might amount to $4*150^300p00» ihey are going to take it all a t the Federal aeserre Banks will ’ zf not take anything* the Secretary called m this mornii^ and said that he felt 'satisfied with the operation, that he was going to h»vo a press conference at 41OO o* clock, a*id that if 1 agreed he would not say anything to the press about the financing, but if the press asked questions he would say that under all the circumstances he waa veiy well pleased, that he thought the financing had been Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority j ^ Q 10 A 2/42 1 -> w r y auoceseful and had had fine enpport, and that, in ifiew of tha Iarge lseue, the abort notice given, end the fact that the market had expected aosiethiag else, the operation was ae sue easeful ae eottldi be expected* Me asked aa* if X agreed with that, and I said I thought that would be * fin# »i*te»»ist« The Secretary eajUt he wanted i» to know that be appreciated the floe help and cooperation i m m the bye tea, He said th*t he bad learned aoae thing and bid obtained t o m experience that be oould profit Iron in the next t i m w i n g * le arc advising all of the Federal Jieaerve Bank® except Cleveland to eeaa in isanediataiy the naa^e of the banka which put in eabecriptioGs in response to our telephone oaHa and the **«*tttt of the a t aorlption in each eaee* The*« baitka are te being advised that if they want to sell tha late e i scriptlone tb tha Federal Meaerve Banka will take them in tha field rather than have thea aola through the dealers* Before tha ti«a caaeo for payaeact, m w i n hav© the iafora&tion and will send lt to Mr# Bouse, and if any of tha a f acrlptiona come in over te the next week or two the Federal fceaervw Bank will taka tha subscription at par and wire Hew Xork* X m going to talk to Mr* Sproul tomorrow andt euggost that we hate a meeting of the laambora of tha executive oo** ttlttae i&o aay be available on Thursday or Friday of thia week! I have aleo talked to Mr* Bell and he will get hia fel* Iowa together* 1 am going to have an outline of a program . for the Heveaber and Decoder financing prepared ao that we can have & program for the rest o * Uio year and diecusa it i «ith the Treaemy* Following Chairman Iccle*1 atatenant, there waa a general in* fozmal diacueaion, darir^ rhicn a telegram waa delivered to Mr* Morrill from Mr* Attebery stating that come of the banka in the f t Louis District i* had reqtaaetod advice aa to how loag the commiti * f to pwrehaao the addi *nc tional securities that tha baake had eobacribed for would be open, and Mr* Morrill was requested to inform all the Eeaerre Bank# inrolved that the cofstltaeab would extend to Moveaber 1* SRCtpbb Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority j £0 , . (0^6 This memorandum is prepared at the request of the Board of Directors of the Federal Reserve Bank of Philadelphia* 1# Its principal purposes are: To appraise the position of the Federal Reserve System with respect to (a) Its part in the war financing program, and (b) Its pelicy and methods of providing adequate reserves to member banks, thus enabling them to aid the Treas ury in meeting financial requirements of the war# 2. To examine the Reserve Bank discount rate structure, specifically as to . (a) The need for changing present rate levels, and (b) The desirability of lowering the existing general discount rate, or establishing preferential rates on Government securities maturing in one year or less* For the sake of brevity, those aspects of the problem that are not sub ject to any substantial disagreement will be presented without supporting data, while more controversial phases will be discussed as extensively as is deemed necessary* Reproduced from the Unclassified I Declassified Holdings of the National Archives | DECLASSIFIED j Authority \ s 0 . ( 0 h t ) \ -2- Appraisal of the role of the Reserve System in the war-financing program. The Government must raise whatever sums are necessary to finance the war. It cannot permit the war effort to he impeded by lack of funds* The sources of funds in the order of their preference are: 1* 2* 3* 4* 5* Taxation* Borrowing Borrowing Borrowing Borrowing savings from current income. accumulated savings* from commercial "banks. from the Federal Reserve Banks. The Federal Reserve System has no direct control over the first three sources - the first two of which are the most desirable ways of securing the funds* The advice of the Reserve authorities with the Treasury and with Congres sional committees on tax legislation is significant, but the final control rests with Congress, not with the Reserve System* Similarly, advice with the Treasury concerning types, terms, and conditions of Government security issues and the as sistance in the sales of such securities to others than commercial "banks accepting demand deposits is important; but here, as with taxation, the Reserve authorities facilitate but do not control. It is not the purpose of this memorandum to dis cuss ways and means of increasing the amount of funds that may be secured from the first three sources* It is realized that, if these sources do not produce adequate funds, the alternatives are essentially inflationary* Nevertheless, whenever their yield is not sufficient the Reserve System has a direct responsibility to see that the difference between needs and receipts from those sources is met by making basic reserve credit available to the banking system* Inflation is a much lesser evil than defeat. Supplying additional reserves to member banks* If the war continues and war expenditures and taxation equal current anticipations, the Government debt may exceed $100 billion at the end of 1942, Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D > Authority D . [ 0 bb \ -3- $150 billion at the end of 1943, and $200 billion at the end of 1944. Current estimates suggest that nonbank purchases of securities will not greatly exceed 60 per cent of the increase and may be only 40 per cent.' Everything possible should be done to increase this proportion; but, even so, v e must face squarely the pos r sibility that banks may hold between $85 and $100 billion of Government securities by the end of 1944* Banks face the prospect of buying $9 billion of Governments in the re mainder of this year and $20~$30 billion in 1943 and again in 1944. to do so depends upon their reserves. since the end of 1940. Their ability Excess reserves have been declining rapidly Furthermore, they are not evenly distributed. At the pres ent time the proportion varies inversely with the size of the communities in which the banks are located. Banks in New York City have the smallest, in Chicago next, in Reserve cities next, country banks in larger communities next, and those in small centers have the largest proportion of excess reserves. The general reason is that funds that have been secured by the Treasury in cities have been spent throughout the nation, especially in the country areas. It is clear that certain classes of banks already need additional reserves, and this need will presently be greatly accelerated# (Charts of the reserve position of banks for the country in general and for the Philadelphia Reserve District in particular are shown in Appendix A.) The amount of reserves needed in the aggregate depends primarily upon the increase of currency in circulation and the requirements against deposits arising out of bank purchases of Government securities# For the purpose of this memorandum, it is assumed that the currency drain will continue at a rate of about $4 billion a year, and that banks will buy $9 billion of Governments during the remainder of this year and $20-$30 billion in 1943 and in 1944. These assumptions should not be considered accurate predictions but only reasonable approximations Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority 10 ^ 6 \ -4- based on present and prospective developments* In general they indicate the im mensity of the problem* How to provide the banks with the necessary reserves. It should be repeated that if the Treasury does not secure sufficient funds from noncommercial banking sources, the Reserve System has no alternative but to provide reserves so that banks can buy Government securities* Reserves may be supplied by the System in three ways? 1* 2* 3* By reducing reserve requirements* By purchasing securities, or open market operations* By discounting for member banks* These instruments are alike in that each increases the ability of banks to buy Government securities, but they differ in other important effects* (The operation of these instruments is summarized in Appendix B.) 1 * Reduction in reserve requirements* If the need for reserves to meet currency withdrawals and to buy Govern ment securities is met entirely through reductions in reserve requirements, it would be necessary to lower average requirements to 17 per cent by the end of this year, to 8 or 9 per cent by the end of 1943, and to about 2^**3 per cent by the end of 1944* These ratios assume that holdings of Government securities will be distri buted among banks so that none holds any excess reserves. On July 7, 1942 the Federal Reserve Act was amended to permit the Board of Governors to reduce the reserve requirements at central reserve city and reserve city banks independently of each other* Requirements were reduced in New York and Chicago from 26 to 24 per cent on August 19, to 22 per cent on September 14, and to 20 per cent on October 3* These reductions added about $1*2 billion to excess re serves at member banks in these two cities* Although the Board has legal authori ty to reduce reserve requirements in these cities still further, such a step would Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D I Authority 0 . ( 0 £?() \ -5- not be advisable as it would create disturbing repercussions unless similar reduc tions were made in requirements at banks in reserve cities, where there is at present no urgent need for additional reserves* This illustrates an important shortcoming of reductions in reserve re quirements as a means of providing excess reserves* They create reserves indis criminately -''where they are not needed as well as where they are needed* device has additional shortcomings* The Although the Reserve Banks are the ultimate source of funds in the banking system, that system would be too sensitive to shock if reserve requirements were very small# Fluctuations in reserves would involve deposit changes 40 times as great if reserves, for instance, were reduced to as low a level as per cent* This suggests that, as a practical matter, it would be extremely difficult to reverse the operation by increasing requirements if future conditions should require such a reversal. The reserve authorities will be in a stronger position of control at the end of the period considered here if the reserve ratio is 20 per cent with an expansion ratio of 5 to 1 than if it is 2 \ per cent with the expansion ratio of 40 to 1. 2* Purchases of securities by the Reserve Banks, or open market operations* If the need for reserves is met exclusively through the purchase of se curities by the Reserve Banks, it is estimated that it will be necessary for them to buy an additional $3/4 billion by the end of this year and $6j-$8i billion annually in 1943 and 1944. Consequently, by the end of 1944 it would be neces sary for the Reserve Banks to purchase between $14 and $17^- billion of additional securities, and the total holdings of the System at that time would be between $17| and $21 billion. The Reserve Banks are empowered to purchase securities either directly from the Treasury or from the market. erally are objectionable. Purchases directly from the Treasury gen In the first place, they would have serious psychologi- Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D r Authority , I0 h\ b -6- cal repercussions* The experiences of Germany and Prance during and after World War I indicate that not too much energy is devoted to securing a wide distribution of Government securities when the only "penalty” for not doing so is that the funds can be raised even more cheaply by simply selling securities to the central bank. This method is tantamount to the direct printing of money. Secondly, this method is objectionable from the standpoint of proper and continuous functioning of the market which should absorb a very substantial portion of Government securities, depending upon circumstances prevailing at the time of issue. Thirdly, the Reserve Banks at present are limited by law to a maximum of $5 billion of direct purchases from the Treasury, although this restriction can readily be removed by the legis lative fiat. Current purchases of securities in the open market generally have been limited to New York City, This is an advantage at the present time because it is primarily banks there that need reserves* But this is a fortuitous circumstance, and it is not always true that funds can be placed exactly where they are needed or withdrawn where they are in excess through open market operations. Furthermore, although we shall end the war with a permanently larger deposit structure, there may be times when the Reserve Banks will wish to reduce their extension of credit to the market. If at such times the earning assets of the Reserve Banks consist predominantly of Governments, the reduction can be ac complished only through sales of such securities. Should this result in any con siderable break in Government bond prices, the Reserve Banks may well, be subjected to unwarranted accusations by politically powerful groups. Certainly the Treasury would step in and exert its pressure upon the. Reserve Banks. It is also clear that declines in the prices of Government securities have enormous repercussions, especially for the financial system. Any considerable declines would result in technical insolvency of many banks, even though super- Reproduced from the Unclassified I Declassified Holdings of the National Archives j r D E C L A S S IF IE D j Authority 0 , (0 ^ ? 6 \ I_____________________ r . -7- visory authorities may disregard such depreciation in their valuation of these se curities. Bankers as a rule are extremely sensitive to this possibility, remember ing the experiences of the early 1920’s in this respect* (For concentration of ownership of Government securities, see Appendix C,) In spite of the possible complications in the future, it seems that in the present crisis the open market instrument is the most potent measure that the Federal Reserve System has at its disposal* It is flexible, is quick in meeting strained situations, and at present results in no disturbing publicity* As a practical matter the statutory provisions for issuing notes and creating deposits giv« the Reserve Banks almost unlimited means with which to meet critical situa tions at present and in the future. And it is reasonable to suppose that they will not be permitted to play a passive or negative role in the event imminence of economic collapse* of any They will have to assume positive leadership, if their status and influence are to continue effective in our economy. 3* Borrowing by banks. An important difference between open market operations and borrowing by member banks is that the former is undertaken at the initiative of the Reserve System which determines the amount of funds, whereas, in the case of the latter the Reserve System sets the price for credit, and the initiative as to whether member banks will avail themselves of the credit comes from the member banks themselves* Most member banks have a tradition against rediscounting; and it is, therefore, reasonably accurate to say that funds will be borrowed only as they are needed, that is to replenish their reserves* as soon as possible. Banks also attempt to repay their borrowings In other words, Reserve Bank credit extended in this way is kept at a minimum because it is extended only where needed. Since discounts are for comparatively short periods, the process of ex tending credit could be reversed in short order as occasion demands through in- Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D I" Authority - creases in the rate. terest rates 0 (0 b b \ 8- It is quite possible also that the post-war structure of in may contain a much wider differential between yields on Government bonds and those on other securities, so that this operation could be undertaken with less political repercussions than sales of Governments. To encourage borrowings by banks, the discount rate of the Reserve Bank must be attractive, or in line with the open market rates on sl\ort-term paper. The ruling rates at present are those represented primarily by Treasury Bills and Certificates 6f Indebtedness. If these rates are taken as a guide, the prevail ing reserve discount rate may be considered as out of line and requiring adjustment if gjember bank borrowing is to be encouraged or made attractive. Desirability of altering the present rate structure of the Reserve Banks* Ordinarily, the major factor in the consideration of a possible reduc tion in discount rates is a desire to increase the total volume of credit extended by the Reserve Banks. At present that is not the case. The prime factor that de termines the amount of credit that will be extended at this time is the need of the Treasury. The question of policy concerns the method by which the credit shall be extended. At the present time the only method by which credit is being extended at the initiative of the market is under the 3/8 per cent rate on bills, with option to repurchase. This means is being used to an increasing extent, and will continue as long as there is any difference between the bill rate and the discount rate. If it is desired to encourage borrowing under Sections 13 and 13a, the discount rate must be at least as low as the bill rate, because of the tradi tion against borrowing* The two rates can be brought into line either through a reduction in the discount rate, through an increase in the bill rate, or a combina tion of both* If it is desired to align them in part through the reduction of the discount rate, a further question arises as to whether the reduction should apply to all discounts or whether preferential rates should be established for discount- Reproduced from the Unclassified I Declassified Holdings of the National Archives j 1 D E C L A S S IF IE D ^Authority ju O . ( 0 ^ 6 \ r -9- ing on short-term Government securities. The experience with preferential rates in the last war and the post-war period on the whole was not satisfactory. The general conclusion of Reserve offi cials and analysts is that the particular paper used to secure an advance has no relation at all to the disposition that the bank will make of the funds it secures. The primary effect of preferential rates is merely to change the paper used by the borrower to obtain credit rather than to influence the disposition of the proceeds. In other words, a structure of preferential rates, unless the preferred paper is limited in amount, is a structure in name only, while in fact practically all dis counting would be done at the lowest rate. (The whole problem was discussed by the Conference of Governors on November 12-15, 1923* See excerpts from the Proceedings in Appendix D.) Conditions today, of course, are different from those in World War I. However, to the extent that these differences are significant for the problem at hand they strengthen the case for a uniform flat rate. Banks are devoting a much larger portion of their facilities to the war effort than they did in the last war, This is true of many private loans and loans under Regulation V as well as -ourchases of Government securities* It is estimated that more than one-half, and possibly two-thirds, of all new loans now made are for war purposes. Even this high proportion will increase further as consumer and other loans are reduced and war financing is expanded* It is difficult to say why certain efforts should be accorded favored treatment when all are needed in the total effort. It does not seem to be sound in principle and may be objectionable in practice, particularly because of its long-range implications. Preferential rates might have some effect upon the maturities of Govern ment securities purchased by banks. They would tend to place a premium upon pre ferred securities, that is those of exceptionally short term. The spacing of Reproduced from the Unclassified / Declassified Holdings of the National Archives | f D E C L A S S IF IE D ^Authority - . 10 ^ 6 \ 10- maturities is an important problem of bank policy* But it does not seem sensible for the Reserve Banks to join so many others in fostering excessive emphasis upon extremely short maturities. It is inevitable that banks, will have large port folios of Governments not only during the war but for a considerable period there after* To emphasize very short maturities under these conditions is to speculate upon a rise in the rate on longer term Governments* Yet the solvency of our whole financial mechanism - that of banks and insurance companies especially - depends upon a 2 or 2| per cent long-term rate on Governments* Apparently it is not recognized that the Government - through forced savings if necessary - can main tain that rate* Preferential rates would encourage an unwise spacing of maturi ties through excessive emphasis upon very short-term securities. The extension of the preferential idea to a complex series of rates on bills, Certificates of Indebtedness, and notes similar to the 3/8 per cent rate on bills will add confusion to the reserve rate structure without accomplishing posi tive benefits* A borrower secures the greatest profit by using the collateral on which the rate is lowest not that on which the differential in rates is greatest. Por example, suppose that a member bank has a portfolio of 3/8 per cent bills, 3/4 per cent Certificates of Indebtedness, and 2 per cent bonds, and that the Reserve Bank has a schedule of rates of 3/8 per cent on bills, \ per cent on certificates, and lj per cent on bonds* If the member bank needs reserves, it will use its bills and secure accommodation at 3/8 per cent rather than pay 1^ per cent for the accommodation via bonds, even though the differential is greater on the bonds. Another way to view the matter is that the bank has part of its funds invested at 3/8 per cent* It would surely be more profitable to liquidate this low-yielding security rather than borrow the additional funds at 1j per cent to “carry1 the -r * 3/8 per cent bill. in Appendix B*) (The present rate structures at the Reserve Banks are given Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D r Authority - . [0 h b \ 11 - Probably the most important reason advanced for establishing preferen tial rates instead of a general reduction in the over-all discount rate is that it would tend to broaden the market for short-term Treasury securities* This may be true to some extent with respect to large city banks, although these are al ready substantial purchasers of short-term paper; but it is to be seriously ques tioned with regard to country banks that carry a large volume of costly time de posits and are in need of earnings to cover their operating expenses and to build up their capital funds* It is even probable that country banks might view such rates as discriminatory in that they would favor larger banks whose deposits are predominantly demand liabilities* Another factor favoring preferential rates as against a flat discount rate may lie in the traditional objection by the banks to a general reduction in the over-all rate on the ground that such a reduction invites pressure from cus tomers to lower the rates on loans by the banks. The validity of this objection had not been satisfactorily demonstrated in the past, and it is most unlikely that it can be so demonstrated at present. Prevailing conditions in the market certainly can not support such a claim. The question of advances under Section 10(b) of the Federal Reserve Act calls for special consideration because, although the same logic applies, the law requires the Reserve Banks to charge a rate on such advances at least ^ per cent above the rate on discounts and advances -under Sections 13 and 13a. As a prac tical matter, it is not particularly important where this rate is established since banks will not pay a penalty rate as long as they have adequate eligible paper. Under the enlarged lending provisions of the Federal Reserve Act, banks may obtain credit on any sound assets, and for purposes of securing access to the Reserve Banks the distinction between eligible and ineligible paper has practical ly ceased to exist* Therefore, in applying the principle of a uniform rate as Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority ji s U . ( 0 ^ 6 \ - 12- closely as is legally possible and as conditions permit, the differential should be kept at the minimum permitted by law. It is rather difficult to justify any greater penalty against advances under Section 10(b) than is at present prescribed by the statute* Decision on policy and course of action• The foregoing considerations suggest the following major questions of policy that call for definite answers! 1, Should the Reserve Banks supply reserves to member banks (a) (b) (c) (d) 2* Through reductions in reserve requirements, Through further operations in the open market, Through member bank borrowing, or Through a combination of these in proportions to be determined by specified conditions? Should the discount rate structure be altered (a) Through a flat reduction in the rate, or (b) Through the establishment of preferential rates on advances secured by Government obligations maturing in one year or less? 3. Should the rate on advances under Section 10(b) be reduced to the legal minimum, that is, J per cent above the prevailing discount rate? The significance of the answers to these questions is that they will reflect the attitude of this Bank toward the policy and program with respect to the supply of reserve funds and discount rates. It is hoped that considerations developed in this memorandum will stimulate further discussion and the formulation and execution of appropriate policy. Prepared by the Department of Research and Statistics, Federal Reserve Bank of Philadelphia. Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority j x D . ( Q^? 6 \ A P P 2 N D I X A Re.jervj Position cf Ilsrtber B f j s atc m m THX^D m m U L RESERVE DISTRICT STATES PHILAOELPilXA BAHKS Millions $ 600 550 500 450 400 350 300 250 200 EESEBTE CITY BANKS 150 Toted 100 Required ____ COUNTRY BANKS 250 200 Required COUWTBY BANKS 150 Total 10 0 Required iOCS LCCS .JL__ t__t__ 1 !_ 1 1 __ _ __ ___L 19 4 1 -J__i _l _!__i...•_.. j __I__..I________ J _X. 19 4 2 Excess 50 J __>.„t....I . J __u 19 4 1 • i - > _1 —J —i v j i _! _s — - U 19 4 2 0 Reproduced from the Unclassified I Declassified Holdings of the National Archives ^ T DECLASSIFIED Authority f c O . 1 0 ^ 6 \ A P P E N D I X B Bank Reserves Reductions in reserve requirements > open market purchases and bank borrow ings are alternative methods of supplying excess reserves to member banks. They differ, however, in their adaptability to particular situations. The major effects of each instrument are summarized in the following table. Effects of Alternative Methods of SuuDlvinf? Excess Reserves 3FFSCTS UPON: Reduction in Requirements Purchases in the open market Bank Borrowing Member bank excess reserves (i.e. abil ity to buy Gov'ts,), Increase Increase Increase Member bank deposit expansion per C 1 of > reserves.... ..... Increase Neutral" Ncutrcl Minima of 3%, 7-10-13$ Unlimited Unlimited Limits on use,.. Attitude of member banks toward... Applicability.. . Earnings of l eservo i Banks ...... Earnigs of Members...... Tradition against General: creates excess reserves for banks that do not need as well as for banks that do Neutral Immediate effect neutral Long-run effoet increase Confined primar ily to money mar ket centers Increase Immediate effect neutral or .reduce Long-run effect increase Specific: moots immediate needs of individual banks Increase Immodiate effect reduce Long-run effect indeter minate, probably increase Bill Transaction under 3/8% Policy Specific: meets immediate needs of individual banks. Reproduced from the Unclassified I Declassified Holdings of the National Archives j 1 T D E C L A S S IF IE D | Authority t O . ( 0 ^ 6 \ ■- L A P P E N D I X .. z r C O f M S H I P OF OBLIGATIONS O th e r / F.H. agen. & Tr.fds. Insurance companies // / Banks -------------- /______________________ __________ _____________ _________________ _______ 1914 1919 1932 F.B.Bartks 1940 1942 (In millions of dollars) _i H OC D Type of Solder 799* 7 17 Insuxance coniponxes.................. 500** 145 068 Type of Holder June 30, 1919 292 3,020# 1,050# 20.372 25,234 Percentage Aistrlbution June 30, June 30, 1914 1919 82.4 .8 1.8 1.2 12.0 4.1 2.0 Total......................... 15.0 100.0 80.7 100.0 ♦National ‘ bonks only. #In addition banks held $2,495 oillion of so-called War Paper. **Estinatod. June 30, 1932 1,784 5,628 590 680 800 601 9.078 19,161 June 30, 1940 2,466 14,722 1,830 3,110 6,500 7,070 12.176 47,874 June 30, 1932 June 30, 1940 9.3 29.4 3.1 3.6 4.2 3.1 47.3 100.0 5.2 30.7 3.9 6.5 13.6 14.8 25.3 100.0 June 30, 1942 2,646 24,086 2,000 3.900 8.900 10,601 24.384 76,517 luHe~30,.. 1942 3.5 31.5 2.6 5.1 11.5 13.8 32.0 100.0 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED r Authority A P P E N D I X . 10 ^ 6 \ D Opinions of those who administered preferential rates from 1917 to 1921. With one exception, the governors of the Reserve Banks voted unanimously that preferential rates should not be reintroduced and agreed that c:cperiencc with then had been unfortunate. This opinion was shared by those members of the Federal Reserve Board who participated in the discussion. (The following quotations are taken from the Proceedings of tho Conference with the Federal Reserve Boo„rd of Gov ernors and Chairmen and Federal Reserve Agents of tho Federal Reserve Banks on Kovonbcr 12-15, 1923.) Governor Strong comen teds (p. 1 - ) ’This same will -0 -tho -wisp of 43 ’ reducing buying rates and of preferential discount rates was pursued, vigorously and with disastrous results during 1919 by tho Treasury and you have their written recommendations of that tine in your files, as I have in nine, urging that we reduce rates on bills and Treasury certificates, as an alternative to our own roconnendations....” and again: (pp. 14.8-14-9) "In a.11 consideration of special discount rates under Section 13 for special collateral, like treasury certificates and bills, it must always be borne in nind that such a rate sinplv induces our members to use the kind of paper for which tho lowest rate is charged. Line of credit paper would dis appear from our portfolios in favor of Treasury obligations if the rate wrs donror. Nothing whatever beyond that would be accomplished, excepting possibly to put sone sr.all premium in value upon the paper to which wo extended tho preferential rate. Our effective rate, that is, tho ono which the members would use, would always bo the lowest ono. During tho war or later, at one tine over eighty per cent of our earning assets was var paper, solely because of the rate preference. whon that pre , ference was ended, t e other kinds of paper reached us , because of the convonicnco h; and smaller risk and oiipensc of handling by nail, etc.... There is sonething sacred in a uniform rate, however, because it places our resources at the command of all of our members, at the same rate to each, whether the member offers a Treasury obliga tion, or a banker’s bill, or a merchant's note. That is as it should be under Sec tion 13, whore we lend to a member m tho member’ obligation and credit.” (p. 152), s "It boils down to a suggestion to advance discount rates only on business paper, and let present, or lower rates apply to Treasury certificates and bills. Wo should not consider such a courso for one moment. Whatever the argument may now'be, tho result is the sane, 1919 all ^vor again, tho Reserve Banks carrying all the Troasuiy cer tificates at profitable rates for member banks. Wo hr<d our lesson once and I am amazed that the proposal should bo seriously advanced again.... We know from post experience that once those preferential rates are established, the large City (especially row York City) banks, are the only ones which can promptly and fully avail themselves of them. The country bank is neither a holder nor dealer in those luxuiies that pay only (Sic!) four per cent, or even loss.... Our safe course will be to observe tho real intent and spirit of the act, and furnish credit to all our members at the same rate in our respective districts, no matter what the collateral, not the size, strength or location of tho bank, so long as the member simply borrows for a fixed tern under Section 13*" A P P E N D I X e Federal Reserve Bank Discount Rates Discounts and advances to member banks * Secured by U.S. Other se cured ad Gov’t, oblig. or elig. paper vances matur. not matur. not ex ceeding 90 days exceeding (Sec. 13 J+ mos. (Sec.lO(b) and 13 a) Advances to in Industrial advances div.,etc. secured by direct oblig. and commit, of the U.S .Matur. matur. not exceeding 5 years (Sec. 13b) not exceed .90 days To industrial and (last oar. Sec.13) commercial businesses To to nonmember others On advances On commit. banks 2 1 Boston...... 1 2 New York.... 1 2 Philadelphia. 2 1 Cleveland.... 2 1 Richmond.... 1 2 Atlanta..... 1 Chicago...... ig 1 St, Louis.... 2 1 Minneapolis.. . 1 2 Kansas City. . 1 2 Dallas..... 1 2 San Francisco ; --------- — ---te charged borrower less commitment rate. - - ' n t charged borrower. "'-ae xFinancing institution is charged 1 1 1 1 1 1 1 1 1 1 1 1 22 Discounts or purchases On portion On re for which maining institution portion is obligated 22-5 22-5 2£-5 22-5 2 2-5 2 2-5 22-5 22-5 22-5 22~5 22 -5 A 2% 4 3 3 2* 2? i U On commit. X - 2 2“5 32 2* 3i To financing institutions W2 2-I4 ^-i4 2-I4 t-U 2-J-4 2-I4 2— 14 2~^-4 2 ~ I4 1-1 -«■ )* 2-I4 * * A 2^-5 l-l£ -B )c 2*-5 xx --~xx * Kit- 2“I4 ■ 2”I4 ^ 1 2 J4 x-^-l* 8“1* ‘ 4— 14 2~I4 X-£-l4 X.,-14 charge same rate as charged borrower by financing institution, if lower. g per cent on undisbursed portion of loan under commitment. Federal Reserve Bank Buying Kates On Bills Maturity nate on August 31 3/3 Bankers’ acceptances:*-' 5 ' 1- 90 days............ 2 91-120 days............... 3M 1 121'-180 days............ -'Established rate at which F . f i . Banks stand ready to buy all Treasury bills offered. -**^iniraum buying rates on prime bankers’ acceptances. 1 Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority t. o 10%\ riro, ii P i u s suRf i \ 'ARD OF GO V E R N O R S □ F TH E I MAR 1 1944 /J- FEDERAL RESERVE SYSTEM Office Correspondence To. Date__October 15> I 9hl____ M r. G olderareiser Subject: T-. M. P is e r -------------------------- ----------------------------------------------------------------- CONFIDENTIAL The attach ed t a b le shows as o f October 8 f o r each is s u e in the System Account, h o ld in g s , annual income, and the d iffe r e n c e between book v a lu e and market v a lu e * I t w i l l be noted from the t a b l e , f o r example, t h a t th e annual income re c e iv e d from notes amounts t o $8 , 200,000 and th a t th e a p p re c ia tio n on th e note p o r t f o l i o amounts t o fl i+ , 300, 000. In oth er w o rd s, s a le o f the e n t ir e note p o r t f o l i o a t e x is t in g p r ic e s would r e s u lt in s u f f i c i e n t p r o f i t s to o f f s e t th e annual income f o r n e a r ly two y e a r s # The notes may have some r i g h t s v a lu e , s in c e re fu n d in g o f the notes in to 2 l /2 p er cen t bonds could in c re a s e income from the Account. In view o f t h e statem ents i n G o ld sm ith 's l e t t e r t h is week, w hich he obtain ed from Mr. B e l l , th e re i s a t l e a s t a p o s s i b i l i t y th at th e Treasury w i l l d isc o n tin u e the g iv in g o f r i g h t s i n the fu t u r e * If t h is i s done the fu t u r e advantage o f h o ld in g r ig h t s f o r the purpose o f o b ta in in g a d d it io n a l income w i l l d isap p e ar and a l s o the p r o f i t th a t w i l l be made b y s e l l i n g the r i g h t s * The annual income on the band p o r t f o l i o i s $32* 000, 000, ■while the a p p r e c ia tio n amounts to $87, 900* 000* S a le o f the bond p o r t f o l i o w ould le a v e s u f f i c i e n t p r o f i t s to o f f s e t the annual income f o r n e a r ly th re e y e a rs * For th e e n t ir e Account, annual income i s $10 , 300, 000, and th e a p p re c ia tio n in th e Account i s $102, 300, 000. + Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority ■ 10 ^ 6 \ SY^^M ACCOUNT - OCTOBER 8 , 1 91+1 4xn '^usands o f d o l l a r s ) Par v a lu e |4 I T# P P P'' C Annual income T reasu ry b o n d s: 19I4I+-U6 19W4.-5U 19 +5-^7 1 30,1+00 1+6,500 53,000 35,000 62,300 I9h5 28,700 191+6-56 19U6-U8 24,500 72,800 23,600 10,600 31,800 6 +, 800 1 90,800 21,400 29,500 90,300 1943-U 7 19U3- 1 5 + 19U6- 1 9 + 19U7-52 19i+7 191+8-50 T axable 191+8-51 191+ 9-52 1 1 9-53 9+ 1950-52 1951- 5 U 1951-55 1951-55 1952- 5 + Taxable 1 1953-55 1955-60 1956-58 T axable 1956-59 1958-63 1960-65 T o ta l Treasury n o t e s : 12-15-1+1 3-15J+2 9- 15- 1 2 + 12-15-1+2 3-15-1+3 T axable 6-15-I+3 9- 15- 1 3 + 12- 15- 1 3 + 3-I5-I4I+ 6- 15- 14+ 9- 15- 11 ++ 9- 15- 11 T axable ++ 3-15-1+5 T o ta l Guaranteeds: 7- 1- 1 2 14+ HOLC 4— 5- 1- 2 4— 52 HOLC 4. I-I5-I4J2— 1 .7 FFMC 4 5- 15- 44— 49 ffmc T o ta l Grand t o t a l 554 1,063 1,272 859 1,886 2,627 724 1,307 1,599 3,347 587 574 1,627 1,861 460 5,766 234 615 1,296 2,168 1+26 742 2,163 80,000 1,890 98,800 1 +, 000 4 77,900 29,000 36,700 69,300 57,000 50,1+00 52,800 47,300 2,462 1,137 1,735 722 732 1,579 1,201 620 1,721 2,167 6,254 1,082 2,278 6,229 5,366 7,376 3,558 4,637 1,579 1,670 1,855 5,999 2,1+24 1, 359,200 1,417 1,31+8 1,1+31 1,246 32,021 43,000 448 84,800 66,200 1,198 1,031 410 30,800 39,300 102,400 35,700 69,800 109,900 76,i+00 60,600 6,000 281 1,028 216 661 1,078 561 4,753 5,323 4,332 87,359 1,005 1,706 1,734 771 312 1, 7 4 1+ 375 1,256 2,113 1,019 582 43 1,143 694 8,231 1,118 ii +,316 2,000 1,000 1,000 23 16 20 36 17 600 4,600 12 10 22 2 , 184,100 40,331 102,259 95,400 620,300 72. 20 84 Reproduced from the Unclassified I Declassified Holdings of the National Archives | D E C L A S S IF IE D j Authority ju O ' I0 b 0 \ October 11, 191*1 Mr* Goldenweiser System Account polioy L. M. Piser tad D. II* Kennedy COHFIDUTTIAL Question has been raised regarding the System Account polioy that i« "advisable in the 1 i^ht> of existing ocsidl1>loQi^ | to use th# wording of the P.O.M.C. resolution* Specifically, the question it whether or sot the System Aeoount should be reduced at tho present time. If it should be reduced the further question arises as to tho amount of the reduotlon and tho issues that should be sold* There are tiro valid reasons that might b o advanced for reducing tho Account* First, a reduction would decrease excess reserve* and would bo a furth«r stop in the program of seeking to prevent inflation* It would show that tho System is willing to use ail of its powers in this direction. Action for this purpose deserves consideration as a part of the System*s polioy, but it should be deferred until after the Increase in reserve requirements becomes effective and member banks have adjusted to the new conditions* Second, a reduction in the Account would be a step in the direc tion of socking to prevent a further decline in Interest rates. The 1956-58 taxables arc l/2 point below tho all-time high, and the I9 6 O-6 5 S are only 3/^2 below* If these Issues break through their previous highs there Is a strong argument for selling aggressively from the Account. While the Treasury might object to action by tho System that resulted In increased interest rates, it would be difficult to object to action that only prevented rates ft*cm declining further, particularly in view of the ourront inflationary trend* The questions of credit polioy and of the Maintenance of a pattern of rates, however, are now a subject of negotiation with tho Treasury* A n agreement should include the extent to which all of the instruments of Federal Reserve policy are to be used in order to further the objectives. These instrumsnts include open-market policy ss well ss polioy on reserve requirements* Until an agreement is r eaohed that is mutually satisfactory it would appear inadvisable to sell securities in the present situation* The Treasury reaction might possibly be that the System should be given no further powers. This reaction would be particu larly likely if sales from the Aooount should oolnclde with a peak in the market, since the Treasury might figure that additional powers would un justifiably result in increased Interest costs to tho Treasury. F. COPY Reproduced from the Unclassified I Declassified Holdings of the National Archives j DECLASSIFIED j Authority Tot Mr. Goldeiareiscr 0 . |0^6\ *2- Other arguments that have been advanced both for and against fro* tho Aooount should not be given muoh weight. tho argument that *alee now would better enable tho Aooounfc to purchase later 1« not of muoh practical significance, since tho M o u n t of securities that tho Aooount can purohase i« praotioally unlimited. Tho argument against tolling on tho grounds that It would not bo effective In preventing tho market fro* rlolng ohowo a defeatist attitudo. fhi* argument, that tho 8ystem should do nothing because it oannot do everything, if oarriod to tho logioal conclusion i» roally an argument that tho Systo* should never have a policy, oineo no policy is otor completely effective, tho argu*ont that the System should not soli booauso it has insufficient earnings runs counter to tho faot that tho System should dotormino its policy with a view to furtherance of tho public intorost and not with an oyo to tho expense aooount j tho System has operated at a loss in a number of years and in other years has built up a substantial surplus whioh oan bo drawn on now* the argument that the System should save ammunition for an emer gency is invalidated by tho faot that the time to use anti-inflation powers is in tho early stages of an inflationary movement rather than after the inflation is beyond control. iU m If it should be decided to reduoe tho Aooount sales should be limited as far *s possible to taxable issues. Sales of tax-exempt issues would run counter to the Treasury policy of reducing tho supply of suoh Issues in the hands of the publio* Swaps that tho System Aooount might mates to improve earnings would also bo undesirable* particularly at this time* Tho swaps that would improve earnings would involve either a lengthening of maturities or the swap of low-yield for high-yield issues of comparable maturity. The latter typo would furnish the market with issues that are particularly attractive to commercial banks and thereby would add to some extent to the expansion of bank orodit« The former type of swap would not only add to the market supply of securities that are attraotive to banks but would deprive the System Aooount of short Issues that may be needed in the future for money market adjustments and also would tend to raise long bond prloes further. Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D ^Authority . (Q^6\ :C{D IN F1I MU SECTION | FormF. R. Ill ’ A R D OF G O V E R N O R S O F THE FEDERAL RESERVE SYSTEM Office Correspondence To_ Mr. Ooldenweiser From. Date Iienry I . Bdmiston I Subject: Attached is a copy of the memorandum -which I mentioned in our telephone conversation. February 28. IQlxl Reproduced from the Unclassified / Declassified Holdings of the National Archives j D E C L A S S IF IE D j Authority Chairman Eooles Henry H* Edmiston 0 . ( Q &)b \ Publication of System Account holdings of direct end guaranteed obligations in Treasury Bulletin Last December the Treasury requested authority to publish in the Secretary’s Annual Report the System Account holdings of direct and guaranteed obligations by issuers for certain June 30 dates. The Treasury also requested authority to continue current publication of raonth-end figures on System Aooount holdings of direct obligations in the Treasury Bulletin, which had pre viously been obtained from the confidential open-raarket letters and published without authorisation* The publication of the material requested for the Secretary* s Annual Report m s authorised at the time by you as Chairman of the Federal Open Market Committee* With regard to the request for publication of monthly data in the Treasury Bulletin, however, it was suggested to Mr. Bell by telephone that System holdings of dircot obligations be combined with the holdings of market issues by Government agencies and trust funds* It was understood that Mr. Bell mnald give consideration to this suggestion and would communicate with Mr* Merrill in ample time to enable him to submit the matter to the Open Market Committee for approval * The Treasury has informally indicated that it would like to continue to publish the System Aocount holdings separately rather than combine them with other items shown in the table* In view of the fact that Mr. Rouse originally raised the strongest objections to this prooedure, it was sug gested that he and I discuss the question with the Treasury people before a formal request for such authority was made* Mr* Rouse had planned to come to Washington some ten days ago, but was unable to do so* The Treasury1s February Bulletin is now about to go to press, and they have just requested permission by telephone to publish year-end System Aocount holdings of direct obligations in order that their table will not be three months be hind, whioh might cause Inquiry from the press or other readers of the Treasury Bulletin* With regard to the first question of permitting regular publication by the Treasury of month-end data on System Account holdings, Mr* Rouse still feels that this is undesirable for the same reasons outlined in his letter of December 23 to Mr* Morrill whioh is attached* The members of the Board’s staff who have considered this question arc not oonvinoed of the importance of Mr* Rouse*s arguments, although it is recognised that a final dcoision on the question rests with the full Open Market Committee* Fending the Committee’s review of this broader question, however, we feel, aad Mr* Rouse agrees, that as a praotioal solution of the immediate problem raised by the approaching deadline for sending the February issue of the Treasury Bulletin to the printer, those members of the Executive Committee of the Open Market Committee who are in 'Washington should authorise the in clusion of figures on System Aocount holdings of direct obligations as of December 31» 19^0* eproduced from the Unclassified / Declassified Holdings of the National Archives d e c l a s s if ie d Authority fc Q . lD^fS\ REC’D IN FtU 5 $ S'"* J 55 & J ± October 19, 1940 Wt* Robert D* Brewer, President, The Merchants National Bank of Boston, 28 Stats Street, Boston, Masaaehueetts« Coar Hr* Brewer t this Is in reply to your J*C.J&tober 11 j concerning reoent changes In the Govcnsaent seourity portfolio of tho Federal Reserve System* the increase of 181,500,000 in the Bystaa’s holdings of G o v e m n s n t bonds shown in the statenent for the week ending October 9, that you referred to in your letter, did not result from purchases in the aarket but froa the conversion of notes into bonds under the terms of the reoent treasury financing operation* She Systea exohanged its entire holdings of Deoaaber notes, amounting to $9 2 ,5 0 0 ,* 000, for the new 2 per oent bonds of 1953*55* These seeurities nere delivered Ootober 7« After taking this conversion into account, tha statement for the week of October 9 showed that the Systea actually sold $11,000,000 of bonds in the aarket during the week* For soaetiae the Systea has been following a policy of flexibility in its Ooveranent seourity holdings in ordar to contribute to the oaintenanoe of orderly conditions in the Gevwrznent seourity aarket* In aooordanoe with thia policy, wa bars acid G o v e m a e n t seeurities in the reoent strong aarkets to relieve soae of the pressure created by insistent investment deaands. This purpose has also been served in reoent months by salee, through the Treasury and the lew York Federal Reserve Bank, of nearly $100,000,000 of bonds for various fara oredit agenciea in connection with their prograss for retirswsnt of Goveraaent^-owned capital* X night add that the reoent substantial sales of aeouritiea by Ifce Systea have not been necessary in order for us to be prepared to support a weak Oove m aen t security aarket Reproduced from the Unclassified / Declassified Holdings of the National Archives d e c la s si f ie d Authority %1M fUM S SECTICttf O T2 1 1 9 4 0 C Mr# Robert B* Brewer 2 in the event suoh action should becowm desirable* The $ys tea's ability to buy securities In the future is not dependent upon a prior reduction In its present holdings. Instead* it is re lated to the reserve position of the Federal Reserve banks thsaselves# At present the Reserve banks own a record volume of gold certificates and lawful swney above the amount which they are required by lav to hold against Federal Reserve notes in oiroulation and against meaber bank reserve balances# In fact, the trsaiendous amount of these *free reserves* of the Federal Reserve banks would provide the basis for the ptxnofease by the System of so many billions of Government securities that in practice the liaits imposed by statutory refuire»snts have beesas almost meaningless* I appreciate your Interest in writing ma and trust the points raised in your letter have been answered t© your satisfaction# Very truly yours» (Signed) M„ S r ■ « M, S. Eooles, Chairman. KS/jh Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority c-o 'TLo '0 - . ( 0^?6\ Reproduced from the Unclassified / Declassified Holdings of the National Archives | D E C L A S S IF IE D Authority t O . 1056 — IflSC'D IN FILES BOARD OF GOVERNORS OF TEE FEDERAL RESERVE SYSTEM NOV 2 -1940 tl f .KfiS I0 0 - 1 3 U October 18, 19^-0 A Board of G o v e r n o r s Ajmual rate of earnings on System Account l/ 0o o * n J) 4 l/ L. M. Piser STRICTLY CONFIDENTIAL The annual rate] of earnings from the System* s present holdings of Gov ernment securities is $1+2,200,000* The annual earnings needed to mee y <expenses and dividends, less earnings from other sources, amounts to about $35*700,000,^“ ( “* leaving excess earnings from the System Account of $6,500,000* This memorandum considers the effect on earnings of various possible reductions in the Account. JL (- w r f> Earnings from Treasury notes maturing through December 1 ^ - now amount * " e 943 to $6,500,000; in other words, the System Account could dispose of the entire $610 *000,000 of notes maturing within this period before earnings would be down to'"the amount needed. Earnings from guaranteeds and from Treasury notes and bonds due or callable through December 19lj2 now amount to $5*800*000; the System Account could, therefore, dispose^Qf the $1+60,000,000 included in this category and still have a surplus of $700,|x>5& over requirements. If instead of the short term issues long-term bonds were sold, the amount of reduction that could be made 0 f6 . before earnings were below requirements v/ould be much smaller. The annual rate of earnings on the four longest bonds, for example, is §6 ,900,000; if the $260,000,000 of these issues should be sold, earnings would be below requirements. If holdings of each issue in the Account were reducod by tho same percentage, the Account could be reduced by $370*000,000 before earnings would be down to re quirements. The attached table shows the annual earnings from each issue in the Account and provides the basis for calculating the effect of a reduction in any issue or group of issues. It may be assumed that issues due or callable in the next few years will be refunded. Since the short-term issues now provide the System with a low rate of return, the System's earnings could be maintained at present levels even though part of the maturing issues were not exchanged. Assuming that maturing issues arc refunded into 2 per cent issues, the table shows the amount of the new issues noedod to maintain earnings at the present level. For example, since the March 191+1 notes return the System Account less than 1 per cent, earnings could be maintained even though less than one-half of this issue were refunded into a 2 per cent issue; specifically, only $1+0,800,000 of the &QQr800yQQ0 would need to be refunded. Over the five-y6ar period, under these assumptions, ti^e System would need to refund only $830,000,000 of the $1,320,000,000 of issues\ due or callable. The remaining $1+90,000,000 could be sold, and the System’s annual earnings would still be $142,200 ,000. This memorandum has been prepared at the suggestion of Governor McKee *&/■' a . Reproduced from the Unclassified I Declassified Holdings of the National Archives | D E C L A S S IF IE D | Authority 0 . 1Q ^>6 \ HEC'D IN r ’.ES ^ECTI0*$ s 100-130 October 18, 191+0 STRICTLY CONFIDENTIAL SYSTEM OPEN MARKET AC( 10UNT NOV “ IbH-U October l6 , I9I O .... fl .... ......_j + i ------ -- — ber cent Annual Holdings issues needed to earnings maintain earnings Actual Cumulated Actual Cumulated Cumulated Actual (In millions of $) (In millions of t) f (In thousands of $) Treasury notes: 3 A l ---- 6A l ................ 12 /Ul........ 3A 2 ................... 9 /|j2 ................ 12 /Zj2 ....... 6 A 5 ........ 9/1+3............... 1 ^ 4 3 ........ 3 $ ........ ....... 9/bb....... 3/45................ Total notes••«. G-uaranteeds: FFMC I42-I47 3s FFMC l+M+9... HOLC U 2 -1 4 !+... HOLC II+-52 ... 4 99.8 58.3 1+3-0 81+.8 66.2 3 1.8 117.6 35-7 69.8 113.1+ 79-U 60.6 125-1+ .985.8 . . 1.0 0,6 815 99.8 15 8 .1 2 0 1.1 51+6 II 4+8 1,199 285.9 352.1 383.9 501.5 537.2 1.0 1 .6 l+.o 5.6 1.0 6.6 6.6 — 9.711 59.0 7,633 33.0 55.6 8,799 9,711 — U5.6 .. 1+85.7 . . 8,216 583 . 22.4 60.0 5 1.6 2 1.2 5,860 6,521 912 985.8 27.3 5 ,61+1+ U23 1 ,1 8 1 216 661 1,112 583 799.8 860.14 . 1+ 0.8 1,809 3,008 1+,0U 0 14,463 1,032 607.0 720 .1+ ... 815 1,361 . 17 12 1+6 21 96 17 '9 2 75 96 ™ 10.8 29.2 29.2 1+ 0.8 6 8 .1 90.5 150.5 202.1 223.3 282.3 293.1 326 .1 381.7 1+10.9 llo 1 ++. 1+ 85.7 0.8 0.6 0.8 1 .1+ 2.3 3.7 1+.7 1.0 k.7 Treasury bonds: 191+ - 1+3.......... 1 191+1................ 191+ - 1+7.......... 3 191+ - 1+5.......... 3 19UU-U&..... H +.6 57.0 30 .1+ 46.5 53.0 35.0 I9iil+-5i+.......... 63.6 191+5-1+7.......... 191+5................ 30.7 191+ 6-56 .......... 21+.5 19 1 + -1+8..... 6 71.8 19 I6 - + ..... + I9 30.9 10 .6 191+7-52..... 142.1 191+7....... 92.8 19l|B-51..... 19 I8 ......... + 21+.1+ 191+9-52..... 27.5 191+9-53..... 90.3 1 9 5 0 - 5 2 ..... 80.0 97.0 1951-51+..... il. ++o 1951-55..... 86.7 1951-53..... 8 1.6 1953-55..... 19 5 5 - 6 0 ..... 79.3 53.2 195^59..... 1 9 5 8 - 6 3 ..... 57-3 19 6 0 - 6 5 ..... 60.3 Total bonds•••• 1*391.1 Grand total.... 2,383.5 lii.6 71.6 102.0 11+8.5 201.5 236.5 300,1 330.8 355.3 I 427.1 1+58.0 I. 8.6 4 6 510.7 603.5 627.9 655.1+ 71+5.7 825.7 922.7 171+ 1,088 551+ 1,063 2,879 1,273 721+ 1,335 1+,152 629 571+ 1,850 603 23I + 815 2,216 1+87 707 2,1614- 1,890 ...... 2,1+71+ 1,137 1,931 1,627 2,127 1,1+23 1,553 1,750 32 .j I.02 ------ 142,206 966.7 1,053.1+ 1,135.0 l,2ll+.3 1,267.5 l,32i +.8 1,391.1 171+ 1,262 1,8 16 l+,876 6 ,2 11 6840 ,1. 7,l+ll+ 9,26b 9,867 10 ,10 1 10,916 13 ,13 2 13,6 19 l + 326 l, 16 ,14.90 16,380 20,851+ 21,991 23,922 25,51+9 27,676 29,099 30,652 32 ,1+02 — — 8.7 5+1 1.+ 27.7 53.2 63.6 36.2 66.8 31*1+ 8.7 6 3 .1 90.8 1 II+.O 4 207.6 2i. j3.8 310.6 31+ 2.0 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority jj-U ■I 0^/6 \ * UUI10W4U \ ,-N 4 3 ■^ ? . Ml--- f . • 0 * October 16, 19i|0, /V C Mr, G. J. Schaller, President, Federal Reserve Bank of Chicago, Chicago, Illinois, Pear Mr, Schallers In your letter of October 9 you say that your Board of Directors would like to credit a siibstantial amount from your earnings against your share of the premium, on the System Open Market Account, and would like to know whether such action would be satisfactory to this office. This is & matter we have given considerable thought to in recent months and, as you know, Mr. House and I submitted a report to the members of the Presidents* Conference and the Federal Open Market Committee at their recent meetings whioh dealt with this subject among others in some detail. Yihen this subject m s assigned to Mr. Rouse and a$rself we were asked to suggest alter native means of handling certain questions in connection with tho System Open Market Aooount, and to be prepared to make recommen dations in case they were asked for. I understand that each of the Presidents now has a copy of our report and that the matter will receive early consideration. X hope that action on this matter will be taken before the end of the year, but if not the Board will, of course, act on the individual reeommendat ions of the respective Federal Reserve Banks. My omt views are that it is desirable for each Bank to build up its reserve for contingencies within a reasonable period to an amount at least equal to its premium account on securities, but that the advisability of using earnings to write down the premium account is doubtful, as to do so would distort our earn ings figures. I do not know l r a attitude the Board might take if the fit question were presented to it, but I am sure it will be glad to consider any recommendation that you may wish to make with respect to the disposition of earnings not required to cover expenses and dividends. Very truly yours. h 'E L S is a h & I J U F ) W s -archiif, ank Opsraticma. d Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority X / 0 . ( 0^?6\ REC'D m F M s SBCtXQH O T2 1 1 9 4 0 * C ALFRED L. R I P L E Y , CHAIRMAN ! ROBERT D. BREW ! ROBERT D. BREWER, PRESIDENT OFBOSTCB^ S tre et 2 8 B 0 S T 0 5 r , l > l A S IS A C fH F S E T T S O ffice of th e P r esid en t October 11, 194-0 Mr, Marriner S. Eccles, Chairman, Board of Governors, Federal Reserve System, Washington, D. C. Dear Mr. Eccles: The figures released by the Federal Reserve Bank of Boston show that the Federal Reserve Banks combined have been selling notes and buying bonds during the past two weeks. for two reasons. To me, that is a most surprising attitude In the first place, it is common knowledge that there is sustained buying by the insurance companies whose cash position has been mounting. This has been sufficient to drive the market to a point which, after their buying ceases, may not be easy to hold. In the second place, I repeat my opinion expressed often before, that it is the principal function of the Federal Reserve Banks to so handle their investments that they are prepared to support a weak government market when it develops. I merely submit my views once more, as one chiefly interested in the stability of the banking system. Sincerely yours, Vi A RDB:HVE fO / i f f y O F O B F IL E S F, Gh Ritter s P Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority j o (0 % \ •D IN FILES SBCTION O T1 6 C F E D E R A L R E S E R V E BANK O F C J 330 SOUTH LASALLE O F F IC E O F T H E P R E S I D E N T AG< f ^ ___ m STREET October 9, 194-0. r1& '4 Mr. E. L. Smead, Chief, Division of Bank Operations, Board of Governors of the Federal Reserve System, Washington, D. G. Dear Mr. Smead: As you undoubtedly know, there has at various times been a discussion in the Open Market Committee about applying the profits derived from the sale of securities in the System Open Market Account on the premium carried by the various Federal Reserve banks under "Other assets.*1 Looking forward to the closing of business at the end of the current year, I am sure that our Board of Directors would like to credit a substantial amount from our earnings against our share of this premium account, and I am writing to ascertain if such action would be satisfactory to your office. I am aware that we can continue to add to the Surplus Account, bat it seems to me it would be much better if that account did not grow until such time as this large premium in our bonds was at least substantially reduced. I appreciate that it might be better if uniform action were taken by all of the banks, but as I am not sure this will be done, I should like your views before discussing the matter further with our Board of Directors. tO ^ 1940 rO v ' CL*# Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority . 10^ ? 6 \ S '** * j * '7 ' Oototoor t# 19U0 IWC’ D W n U S SECTION Q^nmpiiw S l ymifc ^ L . *# ^ F isa r OCT9 - 1 9 4 0 153 COHFIDJkiTiAL. Th* following tabla shows th• infonaatlen oa Systsa M m m m % transactions, liilik you raqusstadi pcRiSTStEM OFKY MARKS? ACCOWf s#pt.^50# X9bO * Ot%* 3 b 19 U0 Traastxnf i w n IS Traasury Srajod Mar* #t»w £*•« JtmA Doo. Total bonds total 19U3 isbi igl4 X9l4. 19 5 3 -5 5 8#pt* 3©#** 1*0 Ofit* I * * * 5*0 Total for W t f t * ** 4 6*0 Sie* Oit# S * #• 1.0 tOs%# 3**# 2.0 0®t* Oat* 5 .•* J.O o*t. SN*5* •••** 6*0 Total t«p%* 3 0 -Oat. 3 lt*0 1.0 £.0 WWW TOTr 1*0 2.0 2*0 1,0 2*0 *"*■ 2*0 1 .0 1*0 1*0 — yirm 1*0 £.0 1*0 2*0 £.0 2.0 xo.o — 1.0 4*0 2.0 3.0 — ^ .. .. 1*0 3.0 1.0 10*0 3 .0 5 .0 5 .0 4 .0 10*0 - .7.0.. 1 7 .0 20.0 87.0 7.0 ^ Reproduced from the Unclassified I Declassified Holdings of the National Archives T T ‘ ‘ ' D E C L A S S IF IE D ^Authority . 10 \ REC'D IN FILES SECTION F. S .131 MAR 2 9 1940 bOARD DFGDVERNORS ± o r THE FEDERAL RESERVE SYSTEM Office Correspondence To. The F i l e s From. Mr* Tffyattj G eneral Counsel D a te March 25. 1940______ Subject - C o n v e rsatio n w it h Mr* Lawrence L *^G o u rley re purch ases and s a le s f o r System Open Market Account* Mr* Lawrence L* G o u rle y , A tto rn e y a t Law o f 806 15t h S t r e e t , N* W *, W ashington, D* C * , c a l l e d on me b y appointment t h i s morning t o d is c u s s th e above s u b je c t * Mr* G o u rley s t a t e d t h a t he re p re se n te d a c l i e n t who i s a bond b r o k e r , h an d les a la r g e volume o f Government bonds and has one man who devotes a l l o f h i s time t o Government bon ds, and t h a t t h i s c l i e n t , whose name Mr* Gour le y was not p re p a re d t o d i s c lo s e , i s con s id e r in g th e p o s s i b i l i t y o f f i l i n g an a p p li c a t i o n t o o b ta in some o f th e b u sin e s s o f th e F e d e ra l E eserve banks i n co n n ectio n w it h t h e i r purchases and s a le s of*^Gover nment bonds* Mr* G ourley wanted t o know how th e b u s in e s s i s tr a n s a c t e d and how h i s c l i e n t should proceed t o f i l e such an a p p lic a t io n * ^ A t my r e q u e s t , Mr* F i s e r jo in e d us and we e x p la in e d t o Mr* r l e y the s e t -u p o f th e F e d e r a l Open Market Committee and t h e f a c t t a l l purchases and s a le s f o r th e System open market account a re h an d led by the F e d e ra l R eserve Bank o f Hew T ork under the g e n e r a l d i r e s t io n o f th e Committee. We fu r t h e r e x p la in e d t h a t th e Committee erm ines g e n e ra l p o li c y as t o th e tim e , manner and amount o f p u r h ases and s a le s o f s e c u r i t i e s and t h a t th e d e t a i l s o f th e e x e c u tio n th e t r a n s a c t io n s a re l e f t t o th e F e d e ra l R eserve Bank o f New Y ork * J Mr* P i s e r fu r t h e r e x p la in e d t h a t the F e d e ra l R eserve Bank o f New Y o rk d e a ls p r i n c i p a l l y w it h d e a le r s i n Government bon ds, as d is t in g u is h e d fro m b r o k e r s , alth ou gh i t o c c a s io n a lly p la c e s o rd e rs through b ro k e rs on t h e New York S tock Exchange* I n respon se t o a q u e s tio n as t o how th e d e a le r s w ith whom th e F e d e ra l R eserve Bank t r a n s a c t s b u s in e s s a re s e le c t e d , Mr* P i s e r s t a t e d t h a t i t i s l a r g e l y b ased on th e amount o f c a p i t a l which th e d e a le r employs i n h i s b u s in e s s , i n v ie w o f th e f a c t t h a t th e t r a n s a c t io n s o f th e F e d e r a l R eserve Bank a r e u s u a lly i n r a t h e r l a r g e amounts i t has t o u t i l i z e th e s e r v ic e s o f d e a le r s who have adequate amounts o f c a p i t a l t o a f f o r d the F e d e r a l R eserve Bank r e a s o n a b le p r o t e c t io n i n such t r a n s a c t io n s * Mr* G o u rley thereupon in d ic a t e d some doubt as t o whether h is c l i e n t had s u f f i c i e n t c a p i t a l t o q u a l i f y on t h i s b a s i s * A f t e r some fu r t h e r d is c u s s io n o f a g e n e r a l n a tu re , we sug g e ste d t h a t , i f h i s c l i e n t d e s ir e d t o f i l e an a p p li c a t i o n , he ad d ress a l e t t e r t o Mr* R* G* Rouse, Manager o f th e System Open Market A ecou nt, c a re o f th e F e d e r a l R eserve Bank o f New Y ork* Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D v '* Tos The Files Authority j ^ Q . I0^6\ - 2 - I further advised Mr* Gourley that, if he was not satisfied with the consideration given to his client's request by Mr# Rouse and desired to press the matter further, he could address a letter on the subject to the Board, which would refer it to the Federal Open Market Committee for further consideration* 'Mr* Gourley thanked 2320 for the information which I had given him and departed without indicating whether or not he would address a letter to Mr* Rouse* General Counsel* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority &0 . 10P6\ REC*D IN FILES SECTION JibrmF. R. 1 1 3 \RD D F G O V E R N O R S 1< Q: D F THE FEDERAL RESERVE SYSTEM Office Correspondence To_ Mr* Goldenweiser D ate_Febru ary Subject:. .. 1 9I1Q, Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority DRAFT Febr PROFITS OH SALES OF SECURITIES l/ In carrying out tho policies of tho Fodoral Opon Market Cooesittoo seeking to maintain orderly market conditions, it it fre quently desirable to make shifts in the Syston Open Market Account by selling individual issues that are in considerable demand and buying issues in considerable supply, particularly if the shift would b e advantageous to the Account. Those shifts can properly be made &t tines when tho market as a whole does not need outright purchases or sales by the Systea Account* In tho recent past, how ever, most opportunities of this typo have boon refused, in part at least because under the existing accounting practice each shift would (1) increase the book value of the System Account, although the par value remained unchanged, (2) reduce the future income from the Account, and (3 ) take an immediate profit on tho Account, Suoh changes oa the bocks of tho Account have been considered undesirable, because (1) the extent to which the book value is written up and immediate profits are taken Increases the possibility of having to take lessee in the future and (2) the extent to which current income from the Account is reduced makes more difficult the problem of neeting System expenses in the future* This problem is important 1^/ Tkis meraorandua has boon prepare<£ljy the s t a & at the Moarl c£ Governors for tho Information of tho Fodoral Open Market Com mittee* Its purpose is to examine various methods of handling the profits obtained from sales of securities froa the Systea Opon Market Account froa the point of view both of their sound ness as an accounting procedure and of their effect on tho freedom of the Account in carrying out System policy as deter mined b y the Conradttee* Tho memorandtst is purely informative and is not intended to present definite recommendations* Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D ^Authority 0 ■ lP ^ 6 \ - 2 - not only because of the refusal of some current shift* that would be helpful to the market and to the Aecount but also beoause there is at least a possibility that future desirable transactions nay be refused beoause of an unwillingness to take aubstantial losses on sales or beoause of a wish to bring tho current rate of earnings to the level of expenses and dividends. For example, at gone future time when the credit situation called for a reduction in the port folio, the System might hesitate to make sales that meant taking substantial losses* the System might also seek to improve the cur rent rate of earnings b y holding a larger portfolio of long-term bonds than desirable for the market or for the Aooount* To meet this situation the proposal has been advanced that profits on switches should be used to vrite down the issue purchased in replacement. Under suoh an accounting policy it is likely that the Aooount mould b e sore free to make shifts at present and more free also to operate in accordance with sound principles in the future* To the extent that such profits were used to write down the book value of the portfolio they would constitute in effect a reserve fund that would reduoe the possibility of having to take losses or of failing to pursue a proper policy beoause of unwilling ness to take losses in the event of a future decline in the market* Reproduced from the Unclassified / Declassified Holdings of the National Archives j ' ' D E C L A S S IF IE D ^Authority , | ~ 3 ~ Some question may b e rad sod as to whether tbs us# of profits osi shifts to writs dona tho oost of tho issue purchased would b o in accordance with sound accounting practice#. Ihen an individual issue is originally purchased outright at a prsBadua, obviously it w o l d mot bo sound accounting to write tho issue down to par immediately, since such a praotioe would give tho Account & fictitious loss sad an unjustifiably high earning rats for tho future* To use an extreme example, if tho 1/5* por oont Treasury bonds of 1 9 ^ 7 - 5 2 should now bo purchased at 120, the yiold of this issue to the first oall date would be about 1 l/2 per oont* tinder present praotioe the 20-point premium would bo amortised at suoh a rate that lt would bo extinguished on the first oall date* To do this, of the 1* I/I4. por oent interest that accrues annually 1 l/2 por oont would b e taken into e * m l n g 8 and th > r m&irdng 2 $/k por oent would be used to write dona the premium. X.fhowever, tho premium were iwtodiately written off , the Acoount would show a 20 per oent loss on the trans&otlon and would subsequently show annual earnings at a rate sore than twloe that actually earned* In addi tion to being unsound from an aooounting point of view, suoh a praotioe slight work against the best interests of the Account and the aarket, sinoe it would militate against the purchase of highpremium Issues, evoa though their purchase might be desirable from the point of view of both the aarket and the Account* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 0 . [0^6^ -u- Similarly, th* us* of profit* oa outright talas to write down tho book value of other issues would bo open to question* Leaving aside the problem of determining which partieular issues irould be written down, the Systea would not be showing an aotoal realised profit and would again be aooruing an unreasonably high amount of earnings* In this oase the total investment of the Ac count in Government securities has been reduced* Switehee in ths Account are, however* more of a border* line oase* From m m point of view a switeh Involves two separate transactions, a purohase and a sale* Under the present accounting procedure it is so regarded* on the issue sold the difference be tween the selling priee and the book value is transferred to profit and loss* and the issue purchased is entered on the books at its cost prioe* From another point of view a switch is somewhat in the nature of an exchange, since the total Investment of tho Account in Government securities has not b een altered* It is merely a shift between investments of almost identical character, and the present practice amounts in effect to a write-up of the System9s portfolio, the Account at times exchanges maturing social ties for new securities issued by the treasury under an exchange offer, and for a time when it was thought that such exchanges were perhaps prohibited by the Federal Reserve Act the same thing was accomplished b y selling the Reproduced from the Unclassified / Declassified Holdings of the National Archives declassified Authority & Q , - 5 * aaturing securities and purchasing the new securities in tha mar ket. Obviously if any profit realised on the tala of maturing securities were used to write down the cost of the securities pur chased, the net result would be about the saxae as if a direct ex change had been effected* Prom this point of view any switoh in the market nay be considered as an exchange of issues rather than as a separate purchase and sale, and as such the profit should be used to write down the cost price of the issue purchased. It may be noted in this connection thfct profits and losses are distributed among individual Reserve barks on the basis of average holdings in the Aooount since June 30# 1 9 3 6 . The premium account and current earnings, however, are distributed on the basis of the current participation. A write-down of the prendxn account presumably would be allocated on the first basis* Reproduced from the Unclassified / Declassified Holdings of the National Archives j declassified I Authority \ t : j u (yb \ L........... • • V Hr* F. Ouy Hitt, 1 (L, First Vi©e President, Federal Reserve Bank of St* Louis, St* Louis, Missouri* Dsar Hr. Hitti Referenoe is nade to your letter of Deeesfcer 18,/1929, la regard to the prospective increases in expensee of your Bank in I9C0 incident to the installation of air conditioning equipBMBt in tha head of flo e and branch buildings* A a n b e r of the other Federal Reserve banks which hare Installed air conditioning equiposnt in reoent years hare set aside a epeoial reserve at the «nd of the ywar in which the in stallation was collated equal to the entire oost of the Installa tion end hate charged suah oost to profit and loss rather than currsnt expenses* It would seem that whenever a Federal Reserve bank wishes to dapreoiate new equipment over a period of ten years the charge should be nade to current expenses, but when it wishes to write off substantial asounts within the course of ons or two years that it is preferable to sake the charge to profit and loss, as otherwise current expanses are unduly inflated during such years* It is suggested, therefore, that if you wish to charge the oost of the air conditioning off within a two-year period that you males the oharge direct to profit and loss* In order to allow for approximately half of this cost’s being written off in 19U0, we shall include $150,000 for this purpose in our estimate of ex penses of your Bank in the January 1, 19^*0, reallocation of Securities in the System Open Market Account* Very truly yours. ^ •i J v-' S* L. Sm ad. Chief, s Division of Bank Operations, Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D ^Authority j k Q . ( Q ^ 6 \ E E C ’ i n I t O s s e c t Io n ; D Form F. R. 131 I 1A R D D F G O V E R N □ RB Dr THE FEDERAL RESERVE SYSTEM Office Correspondence Dljj 3 5 3 . Date 1949 3 October 15* 1939 To_______Mr. .Goidenweiser___________Subject; System Account______________________ From M. Piser_______________ The System Account in the past has always maintained, a large amount of short-terra securities. The reason for this, of course, has been to Bnabls the System to reduce excess reserves rapidly or to put member banks in debt by allowing securities to run off at maturity. Such a course is as effective on the reserve position of banks as direct sales in the market and does not subject the System to the risk of price depreciation, which might occur on market sales. With the present and prospective high level of excess re serves the System cannot hope to control an inflationary boom either through use of its existing powers to raise reserve requirements or through liquidation even of the entire System portfolio. Perhaps this inadequacy of powers is not as important as it appears to be, since in the past fluctuations in short-term interest rates have not been a major factor in changes in business conditions. Changes in the long-term rate of interest are a much more important factor, since they influence the capital markets. This suggests that the System might in the future, or at least until adequate powers are obtained to absorb excess reserves, seek to influence long-term rather than short-term interest rates. Long-term bonds could be sold in the market in the event of an infla tionary increase in business, and this would exert a powerful influ ence on the long-term rate of interest. It might be possible by this method to exert as much influence on business conditions as could be done through the absorption of excess reserves. Even with large ex cess reserves bonds will not be issued on a declining market. If this analysis is correct the System Account could well continue to reduce its holdings of short-term securities, not only by allowing bills to run off at maturity but also by selling at least part of its holdings of Treasury notes and short-term guaranteed ob ligations. From the standpoint of earnings this would not have an important effect, since relatively small earnings are received from holdings of short-term securities and the earnings rate on the entire Account at present is well in excess of the System’s requirements. The System*s portfolio would then consist largely of long-term bonds, and these holdings could be increased or decreased depending on whether or not the System wished to influence the long-term rate of interest. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Tos Mr* Goldenweiser - 2 - 1 October 1 3 # 1939 One Important objection may be raised to such a practice* The System would subject itself to a considerable risk of price de preciation* If an inflationary boom does develop long-term bond prices will decline farther of their own accord, and 1 16 market 3 would soon be below the prices at which these bonds are held on the System’s books* Sales by the System would depress the market further, and substantial losses would be taken. While this is a serious objection the responsibilities of the System are suffici ently great that it may be worth while for the System to run this risk in order to exert its influence against an inflationary boom* Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority . ( 0G6\ i: Beptmber SO$ 19S9 Mr. Allan Sproul, Ftrit Via* Fraaidaat, Fadaral taaarva Bank of Haw Yosft, Nmw Yoifc, Maw York. Daar Mr, Sprouli Yaatarday Mr. Barriaon aho*ad one of tha Board siarabara a copy of the statamaat prepared la your . bank fivt&f total holfiin^a of aaoh Iasm# ia tha Syata* Account, tha book val*# and tha appreciation or dapraoiiitloa. The Board maabar referred to aaid that ha would appraoiet* it if we oould have a copy each week aad, therefore, wa would ba glad if you would aend it to Mr* Pi ear* Vary truly youra, Cheater Morrill Secretary. UtF-^-akia 4 Ju*-F om c-& JL Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ■ Saptaffibar Qovaraor Bnvia too dllaf fhom&B Th* attaohad tabulation praparad by Mr, Plsar glvaa purohasaa by the Sy&tm end el^git la Traaaury boad prlcae by days during tha Muni oh crisis a yaur &®o* She result 8 a r not aa psrti eulurly conclusive as to lb® praaoat aliustloa# La*t Saptantbar lb# prlca ehsaga* mara relatively »all and it would appear that thara vaa fraqjuaatly a good bit of outaida buying ia tha isarkat* On tha 19th and 20th, for axa«|s4#, the Syttan wa» able to «all sacurltla® from tha Account oa a rising maxfcat* Ob tha 88thf mhon the crisis ee&a dafiaitaly to * conclusion, t tha gyatan mada heavy purch»sas la tha ooraiag oa s daellalag aaxtcat and *ib#a?pa»tly mada substantial a&lea oa a rapidly rising mmtteat* la this situation tha erlaia »aa duddaaly brought to aa and by a settlement and therefore it mould not be considered us iadicativa of mfcat mould happaa la a market which found ita om bottom aad attracted buyara from outalda* Aa analysis ia being a»da of developments la tho sprlag of 1937 1*1 eh any b# eoasi dared m m nearly lika tha present altu&tloa* Attaohaaata 1ft l t * 13, 1939 Reproduced from the Unclassified I Declassified Holdings of the National Archives ^ f D E C L A S S IF IE D Authority 0 . 10 h b \ STRICTLY CONFIDENTIAL MARKET OPERATIONS IN NOTES AND BONDS OF THE SYSTEM OPEN MARKET ACCOUNT AND TREASURY ________(In thousands of dollars)_________ System Open Market Account September 1933 Total +500 +7,387 +8,303 ... +1,000 +1,575 -7,000 -20,250 +500 +12,588 +19,923 +4,756 -14,200 -20,250 +550 +9,862 +1,160 2/+1,475 “ -2,125 -2,000 ■*43* —.. . +550 +10,562 +1,320 +3,985 -6,135 -2,000 +11,599 mm mm mm 12 13 14 15 16 17 19 20 21 22 23 24 26 27 28 29 30 Total Total Treasury Bonds Notes +5,201 +11,620 -1,000 +3,181 -7,200 -+700 +160 l/+2,510 .-4,010 +11,162 mm mm mm +500 +25,176 +39,845 +9,511 -14,200 -20,250 ... ---... +550 +10,562 +1,320 +3,985 -6,135 -2,000 +48,864 +12,588 +19,922 — 44,755 ---... -+37,56$ Price change, Treasury bonds 1958-63 (In 32nds) -.18 + .07 -.08 + .02 -.04 -.07 + .04 + .15 + .15 -.05 - .11 -.08 -.16 0 + .24 + .19 + .06 + .15 Note: Net purchases +; net sales l/ Purchases of $7,510,000 offset by sales of $5,000,000* T/ Purchases of $14,796,000 offset by sales of $13,321,000. MARKET OPERATIONS IN NOTES AND BONDS OF THE SYSTEM OPEN MARKET ACCOUNT AND TREASURY (in thousands of dollars)_________ System Open Market Account 1939 Notes Aug. 28 29 30 31 Sept. 1 2 Total Note: Bonds +3,000 +1,370 Guaranteeds - Total +4,370 Treasury Direct bonds +1,497 Guaranteeds - Total Total +1,497 +5,867 ~— ~ ' ^m +400 +400 +600 +35,927 +42,162 +27,667 +105,756 +9,225 +3,876 +14,845 +1,237 +19,958 +3,107 +42,803 +58,777 +28,904 +130,484 +14,429 Net purchases +5 net sales +600 +1,000 +654 +9,879 +115,635 +123 +3,230 +23,188 +777 +15,206 +145,690 Price change, Treasury bonds 1960-65 (in 32nds) -.22 +.22 -.03 -.09 -.31 — .12 -1.23 Reproduced from the Unclassified / Declassified Holdings of the National Archives j D E C L A S S IF IE D J Authority ^ 0 . 1Q ^ () \ AUG 7 June 29, 19139, Mr. Hobert B, Brewer, President, The Merchants National Bank, 28 State Street, Boston, Massachusetts* Dear Mr* Brewer; I have £our letter , 16fand realise that what you have in .mind isThaF'the System, by divesting itself of its long-term bonds, would then be in position to support the market in case of a decline* You say that you had not thou^t of the System as merely selling Government bonds, but as changing from long to short. You will recognise, I know, that the selling off of long-term bonds would invite, and I think no doubt would pre cipitate, a very sharp break in the market* It is a fact, though contrary to frequent statements, or, I should say, misstatements, that appear in the press, that the Reserve Systea has concerned itself with doing what it could to main tain orderly conditions in the capital markets and not to supporting the Government bond market* I a® of the opinion that the course you suggest would bring about a disorderly market * As for shifting from long to short, I am sure you will realize on reflection that this is not feasible for the short-term rates have already approached so close to zero as to aake replacement of maturing bills in the System account at times extremely difficult without paying a premium above a no-yield basis* I can see no possibility of acquiring several hundred million dollars further in bills and notes when the supply of both has proved insufficient to meet market demands* The System would be in a position to exert a steadying influence on the market whether or not it retained its present holdings of long-term Governments. To sell them off, apart froa the disruptive effects upon the market, would, 1952 Reproduced from the Unclassified I Declassified Holdings of the National Archives | D E C L A S S IF IE D r ^ iC U 0 M i fJ Mr* Hobart B* Brawar -£•> * r s r ? r u » » ic m N ] Jtsne 29, 1*39 la my Judgment, simply divest the Systea of aost of itare~ saining amannition to deal with market conditions* I appreciate haviag yowr candid views and 1 am writing to p m in tha same spirit marely for your own Infozmtlosi* Sincerely yours. X* S, Xcoles, Chftixnaa. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED j Authority t O . 1056' •5 s A «D IK n i & ' s E c n o T q Reproduced from the Unclassified I Declassified Holdings of the National Archives rsm t& DECLASSIFIED Authority j O . 10^ 6 ' ;j Cr ^ FILES SEClXQti JUL 5 3 1939 H ..... R-496 STATEMENT BY TEE FEDERAL 0 P M MARKET COMMITTEE For release in morning newspapers of Friday, June 30, 1939. June 29, 1939 As a result of a reduction in holdings of Treasury bills, this week's statement of condition of Federal Reserve banks shows a decline of $13,378*000 in the System Open Market Account. This is in accordance with action taken by the Federal Open Market Committee on June 21, 1939. For some time past, Treasury bills have been purchased for the System's account at or near a no-yield basis and the account at times has had difficulty in replacing its maturing bills. It was decided that it would serve no useful purpose to con tinue full replacement of maturing bills, the supply of which is not always equal to the market demand. This action is in response to technical conditions in the bill market and does not represent a change in general credit policy. Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority ALFRED L. R IP L E Y , . (0^6\ ROBERT CHAIRMAN B o O ffice of t h e stccsv M PRESIDENT i i ‘H [i i n ■i 11 » ii » |i i W HEC’D IN PILES SECTION 0 F B 0 ST 0 5 T 2 8 S m T K D, B R E W E R , S t r e e t a s s a c h it s e t t s WB1 1S52 t if f '' June 16, 1959 P r esid en t Mr. Marriner S. Eccles, Chairman, Board of Governors, Federal Reserve System, Washington, D. G. Dear Mr. Eccles: Thank you for your most courteous and thorough treatment of my suggestion that the Federal Reserve System sell some of its long-term government bonds. I don*t wish to prolong the argument and weary you, but I would like to make clear what I had in mind, which evidently you have not understood. In 1953 the Federal Reserve System, organized to support the banking system, was unable to function by reason of the fact that it was clogged with loans and 'T •* government bonds. I suspect that the time may come again when the banks may want to turn to the Federal Reserve System to support a falling market. The presence of 900 millions of long government bonds in the portfolios of the Federal Reserve System reduces by 900 million dollars the ability of the System to come to the support of a falling government bond market. I am thinking not of transferring earning assets from the Federal Reserve System to member banks, but of preparing the Federal Reserve System to come to the support of the banks if a financial or international crisis should arise. I had not thought of the System as merely selling government bonds, but as changing from long to short. I recognize, and I think mentioned in my letter, the drawback of the failure of earnings in the System. Of the two evils — that is to say — remaining surfeited Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority f c O . I 0 ^ 6 \ 1 MEt ANTS NA TIO NAL BAN K OF BOS V S' fH E E T NO: with long bonds for earning purposes, or charging member banks for the expenses of the Federal Reserve System, I much prefer the latter. Nor do I think the sale in an orderly fashion of long bonds by the Federal Reserve System would substantially change the market if, as I suggested in my other letter, the sales were limited to a few millions a week* If the Qpen-Market outside of the member banks cannot absorb long-tern governments, with the plethera of deposits in the banking system and with the demand for income-yielding securities, I foresee that the time will never come when the Federal Reserve System will be able to clear its decks to prepare for its primary function of supporting a falling market* Very truly, RDBjHVE Z Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED I Authority I ______ . (0 ^ 6 \ ______________ FILES SECTION < * AUG 7 1952 June 14, 1939* Hr. Robert D* Brewer, President, The Merchants National Bank, 28 State Street* Boston, Massachusetts* Dear Mr* Brewers 1 lave your letter of June l( suggesting the sale of long-term Ck>vera»ent~bonds bythe Federal Open Market Con* mittee* Let ate say to you, as expressing my personal views frankly and off the record, that I fall to see that this would accomplish any desirable public purpose* The present abnormally low level of interest rates Is primarily due to the unprecedented volume of excess re serves, sow exceeding sore than #4,000,000,000* If the Open Market Gomittee should sell a n of its holdings of longterm Governments— scaetMag, of course, that could not be ac complished without seriously disturbing effects upon the capital markets*— the excess reserves remaining would still exceed f3,000,000,000* Moreover, they would continue to rise again as a reamIt of gold and silver acquisitions by the Treasury. Tims, there would be no assurance that interest rates would not again revert to present or even lower levels after being temporarily disturbed by the open~market selling* For the 3ystem at this juncture to sell off its portfolio of long-term bonds would, in my opinion, merely dissipate such powers as the System has left for helping to maintain orderly market conditions* Such action could only be construed as a reversal of policy for which there Is no justification in the existing business situation. Accordingly, I cannot see any reasonable grounds upon which such action could be based as a matter of public policy* Hot only would it tend to dissipate the System’s remaining powers, but it would deprive it of its earning assets, which are now scarcely adequate to cover ea$enses, Including y ' 7 t ^ /* jA'dt# '' ■r t Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED IV - 1 Authority Mr* Robert D* Brewer 0 . |Q \ June;14, 1939 the payment of statutory dividends to Member banks* The Sys~ ten would be obliged to discontinue these dividend payments aad, in addition, would either have to impose service chargee upon the wmber banks with the result of tending to drive ex* 1stlag members out of the System aad to discourage new aumbershift or the Systea would hare to turn to Congress to sake the necessary appropriations to carry on its operations* If the System were under the necessity of applying to Congress for appropriations, it would no longer be able to retain its Independence* 1 am, of course, entirely sympathetic with the earn* ing position of the banks, but the conditions which now pre* ▼all are neither due to nor can they be remedied by any action within the present authority of this System* The remedy lies primarily with Congress, and recognising this, the Board in Its annual report laid before Congress the facts of the situation and recommended that appropriate action be taken promptly to meet the pressing problems in the banking, credit, and monetary fields* 1 appreciate the spirit in which you write and I am glad to have your views* X felt, however, that I should tell you candidly for your own intonation why I believe that the course you suggest would not be good public policy, though it might transfer to member banks the only earning assets now held by this System* Sincerely yours, X* s* Iccles, Chairman* Reproduced from the Unclassified / Declassified Holdings of the National Archives j 7* ■ „ 4 D E C L A S S IF IE D j Authority t O . i d 4 i ?!> IN FILES SECTION AUG 7 1952 mm I w « 14* itst* ■r* Robart B* Brswar, Praaidant, Tfce Merchants national Bank* 28 Stete Street, Boston, Massachusetts. Dear Mr* Brewers 1 bare your letter of June 7 suggesting the sal# of long-torn Government bonds by tha Federal Open Market Com mittee. Lat me say to you, aa expressing sty personal views frankly and off tha record, that I fail to aaa that this would accomplish any desirable public purpoae* The present abnormally low level of interest rates is primarily duo to tha unprecedented volume of excess re serves, sow exceeding store than $4, 000,000* 000* If tha Open Markat Conaittae should sail all of its holdings of long* ter* (kFrernmeatm— soeiethingv of course, that could not ba accomplished without seriously disturbing affects m p m tha capital markets— the excess reserves remaining would still ex ceed $3,000,000, 000* Moreover, they would continue to rise again aa axresult of gold and silver acquisitions by tha Treasury, Thus, thara would be no assurance that interest rates would not again revart to present or avaxt lower levels after being temporarily disturbed by tha opea~ma?icet selling* wkle^i h m & T » explained se weal f y « »e e . i r t | weald tm i » m in innimn 111—rririr^'rrnifn'i'TTnHrTTi^ u r tw iu m tn« I f W t o . /furthermore, if tha Treasury^wrfre to disbttps* tbs' gold it now h^ldain tha Stabilias^fcttMi Fuad and eJL<rwhere and lasuB^irlver oertifioates^aggalnst tha sil'CfKfbullion in its p£*s£ssion pilad For tha %at«n at this juncture to sail off its portfolio of long-term bonds would, In ay opinion, merely dissipate such powers as tha System has left for halplng to maintain orderly Market conditions. Suoh action could Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority t O . O ffice of t h e 1056' P resid en t June 7, 1939 Mr. Marriner S. Eccles, Chairman, Federal Open-Market Committee, Washington, D. C. Dear Mr. Ecclesj You will not mind my making a suggestion, I am sure, even though it be of no value. The time may come when the government bond market may need the support of the Federal Reserve Banks as it did in the Spring of 1937. Would it not be a wise thing at the present time for the Federal Reserve Banks to lighten their holdings of long-term government bonds in order to put themselves in position to come into the market again if and when needed? I should suppose that sales could be made in this manner without breaking prices, but if the mere fact that the Federal Reserve Banks were selling long governments would prove a disturbing factor in this market, the effect could be minimized by public announcement that sales would not exceed so many millions per week. Very trulv. Reproduced from the Unclassified / Declassified Holdings of the National Archives j DECLASSIFIED ^Authority fc Q . ( Q ^ 6 \ / l a a 17, li39# irh Tha fadaral Qpaa Mark** Cossalttaa mat on Marah 80 and aoaaldarad tha quaatloa of whathar tha Syataa would ha -c vllllag to partialpata with tha fraaaury la tha aala of boada for tha puxpoaa of ahaoklag a too rapid rlaa la tha Oovaxnaaat aaaurltlaa narkat* Xt la tha oplaloa of tha Ooanlttaa that tha raaaat rlaa la tha Oovanmaat eacurlty maskat rapraaantad primarily aa adjaateaat to a highar laval of prlaaa la vlaw of ftaidaaaatal ehmgas la tha *a*teat aad waa aot a auddaa apart of a apaaulatin aatura llkaly to ha followad la tha aaar futura hy oorraapoadlag liquidation* tha fuadaaaatal faotora la tha rlaa ara tha larfa aad laoraaalag roluaa of axaaaa raaarraa crallahla to haaka aad a growing hallaf that aoaay rata* ara llkaly to atay ' at aaar tha praaant low larala for aona tl»a« tha adraaaa haa raaaJLtad to a larga artant froa purohaaaa of f ad hy Haw T r c co a ot City haakaf which h n a larga mount* of axoasa raaarraa aad tr ralatlraly a*all Mount* of loag-tasn ohllgatloaa aad w e o ara flh ts d r aona praaaara to laeraaaa thair aar&lnga* la tha four aa waaka aadlag Marah IS Haw Tork City haaka lacraaaad thalr holdlaga of tialtad gtataa Oovazaaaat hoada hy #990,000,000, whila thalr aoldlaga of aotaa and bllla daallaad hy #110,000,000* Hia rlaa haa aot haan dlaordarly aad a good two-way saxfcat haa axlatad praatlaally all tha tlaa* Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D ^Authority . 10f ?6\ *• £ -» Since tha re Is no indication that the growth in hank reserves Is likely to he reversed la the neer future, aithsr because of an outflow of gold or by action of monetary authorities, ther*> seecia to be no reason for attempting to check a rise In bond prices which is a normal result of that growth. It is en tirely unlikely that there will be a sustained outward i30vera<iat of gold *hich mould i ' v a substantial effect on the volume of U.e bank reserves. On the contrary, a continuation of the gold flow to titis country is more likely* In view of the feet that we have still not hed the full measure of recovery in business that ia needed and since there »re no indications of excessive use of credit for speculative purposes but rather & need for encouraging greater volume of credit expansion, there would appear to be no occasion for e reversal of the current easy money policy followed by the Federal he serve System. Action by the Qonsnittee to sell mall mounts of bonds from the System account would probably t e e only a temporary effect on the bond market and would not remove the fundamental causes of the advance in prices* These can be corrected only by dealing com prehensively with the problem of excess reserves and related problems, ?he Committee believes that the Syataro should not use the limited resources of its present open-market portfolio for snort-terra market adjustment a until It has obtained more adequate powers to deni with Reproduced from the Unclassified / Declassified Holdings of the National Archives j ‘ ’• d e c l a s s if ie d J Authority - 3 - the situation from a long-time viewpoint* The need for such 'powers was discussed b% some length in the Board’s twenty-fifth armusl report and does not require further comment by the Committee. It la the Committee’s opinion that purchases and sales of securities from the System’s Open Market Account should be de termined on the basis of reserve policy considerations or should represent adjustments to changing noney-msrket condition®. At til© present time, in view of the large volume o f excess r e s e r v e s , the System is out of touch with the money Tnurket, and, therefore, changes in its portfolio would have no significant effect on member bank re serves or on the money market, except a s an indication of a reversal in policy* If tbs action were interpreted by the market as a re . versal in System policy then it aight t e followed by a i t c larger » suh liquidation of securities than would bo desirable t t this time* a Bank© might consider it ts f n indication that the long decline in e interest rates has ended and consequently decide to sell some of their bond holdings* At the present time it is better to encourage banka to make more active use of available funds than to take action which would give them an excuse for holding funds idle until there should be a higher level of interest rates* The Committee believes that s o t ion by the System purely for the purpose of influencing the level of Government bond prices might have a different effect upon the market than similar action taken by the Treasury. The Treasury can sell bonds from its various — „ „ „ me unclassified Declassified Holdings of the National A f c j DECLASSIFIED Authority j ^ Q , ( Q ^ f y « 4 — * investnent accounts and Increase its cash holding®. This w u l d be in effect simply anticipating future sales of new Issues which %/ill need to be made to provide for Treasury cash requirements* Sales by the Federal Reserve System, however, would mean using for temporary market purposes part of its portfolio that will be needed for more effective use at some later date and is re quired at the present time as a means of subsistence for the Reserve banks* Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority . ( Q^?6\ l: STATEMENT BY THE FEDERAL OPEN MARKET COMMITTEE For release in morning newspapers of Saturday, December 31, 1938 December 30, 1938 The Federal Open Market Committee announced, following a meeting today, that weekly statements of the total holdings in the Federal Reserve System’s Open Market Account may at times show some fluctuation depending upon conditions in the market affecting the Committee’s ability to replace maturing Treasury bills held in its portfolio. The volume of Treasury bills available on the market has declined materially during the year and, owing to the large and in creasing demand, such bills are already selling either on a no yield basis or at a premium above a no yield basis. It has, therefore, be come difficult and in some v/eeks impossible for the System to find sufficient bills on the market to replace those that mature. Short term notes are also selling on a no yield basis and longer term notes have at times been difficult to obtain. In these circumstances, it may be necessary from time to time to permit bills held in the port folio to mature without replacement, not because of any change in Federal Reserve policy but solely because of the technical situation in the market. Because no change in Federal Reserve policy Is con templated at this time, maturing bills will be replaced to the extent that market conditions warrant. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 0 . L: Form F . R . 131 ARD DF GOVERNORS * * 's . / D F T H E FEDERAL RESERVE SYSTEM Office Correspondence T o ___ __ Mr* Goldenweiser Fi D ate ---Deeeraber 28, -1953 Subject: System Account L. M* Piser During the past three weeks the System Account has found it necessary to replace maturing bills by Treasury notes in part* On December 14, $>40,100,000 of maturing bills w e r e replaced by §37,100,000 of bills and f>3,000,000 of I/aroh 1941 notes# On December 21, $44,290,000 of matur5.ng bills were replaced by - ) 1 386,000 of bills and $12,904,000 of notes |3, maturing in 1940, 1941, and 1943, Today*s maturities of o48,544,000 of bills ha^^been replaced by *18,500,000 of bills and ^30,044,000 of notes* It will be seen from these figures that the proportion that it has been possible to replace in bills has declined progressively* Over the next few weeks this situation is likely to become more difficult, partly because of increasing demands for n e w bill issues for tax avoidance and partly because the effect of continued large purchases of notes is likely to be cumulative in running up the market quotations on Treasury notes* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £ , 0 . | 0 ^ 6 \ HEC’D IN FILES SECTIOK DEO 1.. 1349 33. 34- December 38, 1938 sBOBEfiOB oy m s A & m bills Paring the pa&t three weeks the Federal i ©serve System Open. £serket * Account b&s had considerable difficulty la replaeing maturing Mil*. This difficulty 1® likely to be even gee*ter this week and early in January. 111 bills are now selling o * & no yield or a pressing basis, and r lest week not ail .par bids were accepted, and pert of the l a m e was sold at a premiusu Aside from th« general fact that the supply of Tre&surr bills has been considerably reduced during for t h e current shortage* the year, there are special reasons One is purchases by individuals for tax avoidance; another p a r e h & a e t by corporation® and individuals of bills from banks at the request or suggestion of the beaks, in order to re duce the banks* maesmmt for the Federal Deposit Insurance Ctorporetioz:*. In January the situation will be aggravated by & spaetsi deaaad for bills for tax avoidance in the State of Illinois* On December M , 21 , and 28 the System was not able to replace all its maturing bills with, bills and had to buy an incre&aing amount of tote®. On the latest date it had to buy $3 0 *0 0 0 ,0 0 0 of note® out of a total of $49 «OOOfQQO of iseturities* t further replacements by notes will become increasingly difficult with out disrupting the market for notes, vfcieb is already very high* Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D J Authority O . 10 ^ 6 \ Pag© 2 The System, therefore, face© the alternative of either {1 } allowing ita totel account t - decline, or (2 ) purchasing bonds in o p&rtiel replacement of naturing bills* (1 ) It would not be good policy at thla tl»e to reduce the System Account, because thla would be Interpreted aa a restrictive action, when no suoh action is deaired or eoBtea plated# It certainly would not look sensible to have reduced restive requirements by 1750*000,000 last spring and now to cut down the System Account in order to absorb some of the resulting excess reserves, (2) To purchase bonds in the m rket at thia time would also have disadvantages. .Bond prices are high, and certainly require no support, and a further advance may result sooner or later in a wave of profit-taking by present holders* If the System.*® boldines of «bort~tlme securities are allowed to decline substantially the System will not be in aa gaod a position to support the long-time bond snarket when it needs support* In view of all these considerations, it would be highly desirable If the Treasury could increase the volume of bills , the s&arkat by in raising the weekly offerings to, say, |l50t000 #000# this action would be helpful not only from the point of view of the System Account, but also from the point of view of the banka and of the money market as a whole, which la clearly suffering from a shortage of available shorttime material* Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority f c Q . | 0 ^ 6 \ Form F . B . 131 ; — i a J ■'ARD OF □ FEDERAL FT H E RESERVE SYSTE Office Correspondence T o _______ Mr* Goldenweiser__________ From. ■DUDject: TOSC’D IN FILES SE C TK ^ - L* M* Piser UhC I . 19^3 . In the management of the System Open Market Aocount decisions on shifts of securities are sometimes hampered by the accounting procedure used in handling the System Account* Whenever an issue is sold at more than its amortised cost a profit is taken, and the average yield on the Aocount is reduced* This prevents the taking of profits on certain issues which happen to have been purchased at relatively low cost, and in some instances this accounting pro cedure may result in the Manager of the Account failing to make desirable shifts* It is suggested, therefore, that -whenever an issue is sold the profit be used to write down the cost of the is sues purchased* By this means profits would not be taken, and shifts would not alter materially the average yield on the Account* [j U J f > ^ A c t A & Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority t O - Form F. R. 131 1056 BJ ARD DF GO V E R N O R S "D IN FILES SECTION / 1( OF THE FEDERAL RESERVE Office Correspondence SYSTEM DEC 1 .. 1949 STRICTLY CONFIDENTIAL Date Ap r il To Mr* G oldenw eiser Sub j ec t : From. Henry Edmiston Treasu ry b i l l s This i s to e la b o r a t e a l i t t l e S u g g e stio n f o r r e t a in in g maturad in the System Account on the s u g g e stio n I made v e r b a l l y t h i s m orning. The a n t ic ip a t e d d i f f i c u l t y o f m ain ta in in g the System Account un changed might be so lv e d by r e t a i n in g in the Acoount such amounts o f the c u rre n t w eekly b i l l m a t u r itie s as would be n e ce ssary when r e p la c e ment cannot be o b ta in ed by b id d in g o n ly t o par f o r th e new w eekly and o th er o u tstan d in g b i l l it ie s is s u e s o r f o r o th e r e l i g i b l e s h o rt-te rm s e c u r such as In te rm e d iate C r e d it Bank d e b en tu res, Commodity C r e d it C o rp oratio n n o te s , HOLC and FFMC d e b en tu res* This program would r e q u ir e c u rren t purchases o f the new b i l l is s u e and o th er s e c u r i t ie s s u f f i c i e n t o n ly t o cover the a c t u a l s a le s o f bonds in the m ark et. Any matured b i l l s thus accumulated could be redeemed whenever an e a s i e r tendency developed in the" market th a t would perm it the System Account to purchase T reasu ry notes o r bonds w ith o u t running up p r i c e s . U". Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ■ (0 ^ 6 \ EFO.'D IN FILES SECTION 1 A R D □ F G O V E R N □ RS OF THE FEDERAL RESERVE Office Correspondence SYSTEM DEC 1 .. 1949 33 3 ’-f Date ApriT IBy-lgS'S' T o ________ D r. G oldenw eiser_____________ S u b jec t- The O utlook i n the Govern Frnm ment S e c u r it y Market and Suggested M e ss rs. P i s e r and Edmiston System Account P o lic y ,. The o u tlo o k in the Government S e c u r it y market has been com pletely changed w ith the announcement o f the A d m in is tra tio n ’ s R ecovery Program* Every s ig n now p o in ts to a s u b s t a n t ia l r i s e in p r i c e s . How f a s t the r i s e w i l l b e , how f a r i t w i l l go , and how lo n g i t w i l l be s u s ta in e d a re q u e s tio n s t o which no c o n c lu s iv e answer can be give n a t the p re se n t tim e. In la r g e p a r t the answersdepend^ on the p s y c h o lo g ic a l r e a c t io n s o f in v e s t o r s in Government s e c u r i t i e s , which a re s u s c e p t ib le to change o ver n i g h t . Bankers p a r t i c u l a r l y have shown them selves to be extrem ely nervous h o ld e r s o f Government s e c u r i t i e s and a p e rio d o f s u s ta in e d advance in p r ic e s may be s u b je c t to tem porary s e t -b a c k s o f some magni tu de. A ls o as Government bond p r ic e s approach o r pa ss the h igh s o f l a t e 1956, the market w i l l become i n c r e a s i n g ly v u ln e r a b le t o the p e r io d ic development o f s e l l i n g p r e s s u r e . The p o t e n t ia l bank bu yin g o f Government s e c u r i t i e s in the immediate fu t u r e w i l l , o f c o u rse , be tremendous. Excess r e s e r v e s a lr e a d y amount to n e a r ly $2,500,000,000 and w i l l be in c re a s e d in the n e x t th ree o r fo u r months to about | 4 ,000,000,000, a new r e c o r d h ig h l e v e l . This volume o f ex cess r e s e r v e s i n i t s e l f should b r in g a s te a d y flo w o f bank bu yin g o rd e rs in t o the Government m arket. On the o th er hand, o f f e r i n g s a re l i k e l y to be sc a rc e as o th er i n s t i t u t i o n a l in v e s t o r s a re a ls o fa c e d w ith Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority j^ O . l O ^ f n - 2- the d i f f i c u l t t a s k o f k eep in g t h e i r i d l e funds in v e s te d in h igh q u a li t y s e c u r it ie s . Insu rance companies have in re c e n t months reduced the amount o f Government s e c u r i t i e s c u r r e n t ly added to t h e i r p o r t f o l i o s , bu t have s t i l l been n et p u rc h a s e rs . I t i s u n li k e ly th a t th ese companies as a group w i l l r e le a s e governments t o the market even w ith the s u b s t a n t ia l in c re a s e in p r i c e s . It seems more p ro b a b le th a t th ey w i l l add m oderately to t h e i r p re s e n t h o ld in g s . Although o f f e r i n g s from o th e r h o ld e rs w i l l be a t t r a c t e d as p r ic e s r i s e , the amount from t h i s source w i l l p ro b a b ly a n o t be s u f f i c i e n t to keep the expectant r i s e in p r ic e s o r d e r ly . I t would appear t h a t the most im portant c o n s id e r a tio n to p reven t a runaway advance in Government s e c u r it y p r ic e s w i l l be th e m arket1s a n t ic i p a t i o n o f the l a r g e volume o f new fin a n c in g t h a t w i l l be n e c e ss a ry to c a r r y out the proposed re c o v e ry program . T his fin a n c in g w i l l not appear on the market f o r s e v e r a l months, however, and i t i s n o t y e t c l e a r how much w i l l be a c t u a l l y r e q u ir e d , Kxr th e se re a s o n s ^ ££s im portance as a market f a c t o r o ver the next few months must be d is c o u n te d . In v ie w o f th ese circu m stan ces, i t i s su ggested t h a t the System Account should be prep ared t o s e l l up t o ap p ro xim ate ly $150,000,000 o f bonds from the account whenever the market shows e x c e p t io n a l s t r e n g t h . In the p a s t any change in c o n d itio n s which r e s u lt e d in a m a t e ria l a l t e r a t io n in the p r ic e l e v e l o f G overn m en tsecu rities has alm ost i n v a r i a b ly proceeded fu r t h e r than was w arran ted by the lo n g -te rm p o s it io n o f the m arket. I n view o f the sudden change which occu rred l a s t week in the J Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority j^ Q . ( Q ^ 6 \ -3 - o u tlo o k f o r Government s e c u r i t i e s , i t seems l i k e l y t h a t the market in the n ear fu t u r e w i l l advance t o a h ig h e r l e v e l than can be s u sta in e d o ver a p e rio d o f tim e. I f the System Account does n o t s e l l s e c u r i t i e s f o r the purpose o f r e s t r a i n i n g the advance, i t i s p o s s ib le th a t the market w i l l r i s e to an u n re a so n a b ly h i g g le v e l and w i l l have a sh arp r e a c t io n . In t h a t event i t might be n e c e ssa ry f o r the System Account to purchase a l a r g e amount o f T re a su ry bonds in o rd e r to p reven t d i s o r d e r l y c o n d itio n s in the m arket. I t would seem d e s i r a b l e , t h e r e fo r e , t h a t the System Account continue to s e l l T rea su ry bonds on a r i s i n g market and t r u s t t h a t b e fo r e the end o f the y e a r p r ic e s w i l l have re a c t e d to such an ex t e n t th a t i t w i l l be p o s s ib le to repu rch ase p a rt o f the bonds s o ld . The r e a l t e s t o f the Government s e c u r it y market w i l l p ro b a b ly come l a t e in 1938 and e a r l y 1939 when the a c t u a l d e f i c i t fin a n c in g i s resumed and we know the amount o f income ta x r e c e i p t s f o r the c a le n d a r y e a r 1938. I f both o f th ese f a c t o r s tu rn out to be u n fa v o ra b le from a market stan d p o in t , i t i s p ro b a b le th a t the System and T re a su ry may have to e n te r the market a t fre q u e n t i n t e r v a ls in o rd e r to preven t a d r a s t i c drop in p ric e s . T his danger w i l l , o f c o u rs e , be enhanced i f p r ic e s have r i s e n to new h ig h l e v e l s o v er the l a s t y o a g * » . In a d d it io n , i t i s suggested th a t the Board re q u e s t the T re a su ry to make s im ila r s a le s from the p o r t f o l i o o f the FDIC and the P o s t a l S avin gs System . These two a g e n c ie s a t the p re s e n t time h o ld about $1,150,000,000 o f open market Government s e c u r i t ie s which would be l i q u i d a t e d . The s a le o f some o f th ese s e c u r i t i e s would have the advantage from the p o in t o f Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority . 10 ^ 6 \ -4 - view o f the two a g e n c ie s mentioned o f p r o v id in g investm ents which may be more r e a d i l y li q u i d a t e d in the event o f la r g e demands f o r cash e x p en d itu res th a t may m a t e r ia liz e in the f u t u r e . From the p o in t o f view o f the Govern ment s e c u r it y m arket, i t would a ls o have the advantage o f p ro v id in g a sub s t a n t i a l b a c k lo g f o r purchases o f T re a su ry bonds in the event o f fu t u r e weakness in the m arket. The q u e stio n o f making a d d it io n a l s a le s o f bonds from the System Account r a i s e s the p o s s i b i l i t y th a t e a rn in g s may be reduced below what i s n e c e ss a ry t o co v er expenses and d iv id e n d s . On the b a s is o f a p re lim in a r y c a lc u la t io n i t appears t h a t a f t e r d e li v e r y tod ay o f the bonds s o ld on S atu rd ay , the a v e ra g e annual income from the System Account has been reduced t o about #5 5 ,0 0 0,00 0 , On th e b a s is o f a f u l l y e a r i t i s estim ated th a t the System Account needs t o earn about $36,000,000 to co ver expenses and d iv id e n d s . In v ie w o f the h ig h e r income r e c e iv e d d u rin g the y e a r to d a t e , to g e th e r w ith the p r o f i t s which have been taken on s a le s o f s e c u r it ie s , in c lu d in g about $1,200,000 o f p r o f i t s taken S atu rd ay , i t ap pears th a t ea rn in g s f o r th e rem ainder o f the y e a r co u ld be reduced t o $52,000,000 and s t i l l cover requ irem en ts f o r expenses and d iv id e n d s . On t h is b a s is the System Account co u ld s e l l an a d d it io n a l $150,000,000 o f T re a su ry bonds from the Account and break even f o r the c u rre n t y e a r as a w h o le . The System Account, o f c o u rse , would s t a r t the y e a r 1939 w ith a c o n s id e ra b le d e fic ie n c y i n e a r n in g s . Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc O . | 0 ^ 6 \ BEC’D IN FILES SECTION Form F. R. 181 "ARD DF GO V E R N O R S DEC 1.. 1949 DF THE FEDERAL RESERVE SYSTEM Office Correspondence Tn M r. G o ld en w eiser____________________ Date April 18, 1938 SnKjprt; From W o o d lie f Thomas O u tlook in the Government s e c u r it y market and su g ge sted System account p o l i c y <vr 5 v 'Af * ' I w ould a g re e i n g e n e ra l w ith the ^ a n a ly s is b y P l s e r and Idm iston \ o f the Government s e c u r it y m arket o u tlo o k , b u t I b e l i e v e th a t th e Open M arket Committee sh ould s e l l bonds from th e System account a t a s lo w e r r a t e than i t d id on S atu rd ay and tod ay . It seems t h a t becau se o f the in c re a s e in excess r e s e r v e s and the p o s s i b i l i t y o f the rem oval o f t a x exemption on fu t u r e is s u e s o f s e c u r i t i e s , Government bond p r i c e s m ight i n the n e a r fu t u r e become e s t a b lis h e d upon a h ig h e r l e v e l than th a t which h a s r e c e n t ly p r e v a i le d . B ecause o f o th e r f a c t o r s , how ever, wfaich a r e m entioned b y P l s e r and I& a ls t o n , i t i s l i k e l y th a t the m arket w i l l b e e r r a t i c , d e c lin e s . and w i l l a t tim es b e s u b je c t to sharp The System should b e In a p o s it io n to m oderate th e se flu c t u a t io n s . I t w ould seem a d v is a b le f o r the immediate p re se n t to s e l l bonds o n ly on days when the m arket i s r i s i n g at an e x c e e d in g ly r a p id r a t e , S atu rd ay , b u t n o t to t r y to keep the market from r i s i n g . as on l a s t There would seem to c u b e no p o in t in s e l l i n g In fc&e market -such a s t h a t o f today when p r i c e s were no t r i s i n g r a p id ly * A f t e r t h e mairito»t^hajgitreached] d e f i n i t e l y h ig h e r l e v e l , say on a £ l / t ^ y i e l d b a s i s , then th e System co u ld adopt a more a g g r e s s iv e p o li c y i n s e l l i n g on f i n a m ark ets. i/ Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED S' ^ Authority . | Q^6\ \ Mf* $ , 3 3 , 3^. Hnvfrry 28, 1938 Mr* Goldenwelser Systs* Open Iferkst Aooount L« I * Plitr I This w m & r m A x m presents a sonewhat different approach to the problem of distributing holding* In the System Open Market Aeoottxt SMong individual Issues * If t « Mthod appear* to be sound and you think that the Board ii wight be interested* It eould be Mimeographed end distributed snong the Mss&ers* Thsre are *> er**ape two criteria which Might be followed in distributing holdings of t k %*t*M Open Market Aooount among individual issues# First, ie the SystCM Account Might hold approximately tise sane percentage of mu>h *yp« of issue outstanding* In the ease of bonds# for exasiple* the f s s i ly t e Aooount now holds about 3 1/4 percent of the total outstanding •Mount* Sifstsi Aooount holdings of individual bend Issues night therefore oonslst of 8 \/Z percent of the satount of eaeh issue that Is outstanding* The at tached table ooMpares actual holdings in the System Aooount with aa amount equal to about 3 1ft percent of the outstanding anowtt of eaoh issue and shows the excess or dafielsooy in Systsn Aooount holdings as coopered with this amount* The sxtrt ease* indloate that the S^sten Aooount is defiol* io mat In Its holdings of the t T/B's by about $38,000,000 and has aa eaeoees of nbout #3^,000-000 in holding* of th* old 2 Another criterion wuld be that the System Aooount should tend to in* orease its holdings of issues that appear to be underpriced in the Market and to reduoe holdings of issues that are overpriced* Such a shift would improve earnings in the Aooount and would also tend to keep individual Reproduced from the Unclassified / Declassified Holdings of the National Archives | DECLASSIFIED ^Authority \ 0 .l P ^ 6 \ s - I - Im In 11a* with th* rest of the sarket* The present pollay followed u m by tho Bow York Reserve Bsnk Is to nako no trtd«« until bids or offspr ings are reoolTod fro» tho sstrket* Beoause of this prooedure thoro Is a tendency at tines to soil tho underpriced Issuos sad to buy tho oiwrprlood Issuos* whereas logically tho System Aooount ehould do tho opposite* Recently, for example, the Syatam Aooount has sold Treasury bonds of 1948*61 and of 1966-80, two issuos whloh woro In dsswod In tho narket beoause thsy wwre underprleed relative to other oonparable issuos« Tho attaohod tablo also shorn for oaoh Issue whether the juries appears to be high or low rela tive to the prlee of oos$arable Issues* There Is also shorn In the table a tentative list of suggested hold ings of Treasury bonds* Where the Systws Aooount holds less than 3 i f t percent of an individual Issue and the Issue also appears to bo under— prloed In the narkot. It Is suggested that S(yst«a Aooount holdings should be raised to 3 1f t pereeat of the outstanding mount of the Issue* Con versely, where tho System Aooount holds more than 9 1f t peroont of an issue and the Issue appears to be ovarprleed In the warket, it Is suggested that holdings be redwood to 3 l f percent of the outstanding mount of the issue* /e In other eases where Issues appear to be overpriced, it Is suggested tfmt holdings I e redueed slightly and where issues are uaderprloed that holdings r bo Inereased slightly wren though suoh a procedure tends to bring holdings of individual issues further froa the 3 1f t percent level* t i d r this plan there wntld be relatively sdnor shifts saong individual fae Issues in the narkot* The largest inorease would be in the 2 7/8* s and the largest deollne in the old Z lf t * 9 * Reproduced from the Unclassified / Declassified Holdings of the National Archives j declassified ^Authority 0 . 1Q ^ f ) \ Actual listen 'tooount IJoldir*|*s of Treasury ?*onds Issues Compared with Possible Holdings under Various Criteria January” 2 7 , 1938 * .......< r Is sue ■prar isccess I 1 Actual loutstand- i “ [holdings [holdings J Price ine j amount 2 8 53 IB 1940-43 1941-43 1941 1943-47 1943-45 1944-46 37 1944-64 20 1945-4? 1945 1946-56 1946-48 1946-49 1947-62 1948-51 32 41 14 46 13 2 1949-52 1949-53 1951—64 1951-56 1055-30 1956-59 Total 32 70 28 93 55 29 56 56 no 10 20 30 20 50 50 40 40 20 20 30 30 30 40 20 60 60 30 00 30 720 1/ * Ittgh price* * low price -S -12 +23 -2 -18 -13 -20 —5 +21 -6 +16 -17 -28 +30 +8 +33 +9 -1 -35 +26 + « » + • + m V « * + 1/ Suffigasted hoi'lings'j Actual J f'ltang© 0 20 60 20 30 50 20 40 20 20 - 40 30 + 0 * + 70 30 + 90 30 60 70 20 720 -2 +12 +7 +2 -2 +13 0 +8 -21 +6 -6 +17 -2 0 +2 -33 +1 -9 +35 -26 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED j Q.{ / Authority j L ' F o rm F . R . 131 HARD DF G D V E R N □ RS □ F TH E FEDERAL RESERVE SYSTEM Office Correspondence To G oldenw eiser Fr Date December 10. 1937 if* P is e r _______ Subject r System Open Market Account There a r e perhaps two d i s t i n c t view s which could b e h e ld re g a rd in g the d i s t r i b u t io n o f the System Open Market Account by m a t u r it ie s * F ir s t # i t might be h e ld th a t the System Account should be composed l a r g e l y o f Treasury bonds on the assum ption th a t purchases and s a le s o f bonds r a t h e r than sh o rt-te rm s e c u r i t ie s have a much l a r g e r e f f e c t upon market c o n d itio n s * For example, the continued o f f e r i n g o f lo n g -te rm bonds might be s u f f i c i e n t to break even the most o p t im is t ic bond market and to put a deadening in flu e n c e on s p e c u la tio n * S ale s o f sh o rt-te rm Government s e c u r i t i e s , however, have o n ly an in d i r e c t in flu e n c e on th e lo n g -te rm bond m arket* I t may be h e ld , on th e o th er hand, th a t h o ld in g s o f s h o rt-te rm Governments i n th e System Account should be adequate to perm it r a p id re d u c tio n o f the Account by a llo w in g s e c u r it ie s to run o f f a t m a tu rity * P a r t i a l liq u i d a t io n o f the Account could then be accom plished w ith o ut the lo s s which might r e s u l t from making a c t u a l s a le s and w ith o ut d is t u r b in g e f f e c t on th e s e c u r it y m arket* In o rd er to p la c e member banks h e a v ily i n debt i t m ight be n e ce ssary to li q u i d a t e as much as $2,500,000,000 from the Account* On th e b a s is o f th e second c r i t e r i o n , i t would appear th a t something l i k e $2,500,000,000 o f the $2,600,000,000 o f Government s e c u r i t ie s in the System Account should be h e ld i n sh o rt-te rm a s s e t s , w h ile o n ly the rem aining $100,000,000 could be con sid ered in the n a tu re o f a permanent investm ent to b e kept i n th ose is s u e s having th e h ig h e s t y i e l d , namely, lo n g -te rm bonds* n e ith e r I t i s b e lie v e d t h a t/ o f th ese two methods should be used e x c lu s iv e ly in determ in ing the d i s t r i b u t io n o f the Account by m a t u r it ie s * I f a l l h o ld in g s in Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED * Authority - 0 . 1Q C6 \ ) 2- the Account were in bonds, the Account would be in danger of sustaining sub stantial losses which might affect the independence of the System* If holdings in the Account were entirely in short-term securities, earnings of the System would be entirely inadequatefand the Open Market Committee could influence bond yields to only a limited degree* Perhaps a position between these two extremes is the most practical for the Account to follow* A reasonable distribution of the Account might be to have $800,000,000 mature within six months, $400,000,000 each in from six months to one year, one year to two years, and two to five years, and $600,000,000 in more than five years* At the present time, maturities in six months total $700,000,000, maturities in from six months to one year total only $300,000,000, and maturities between one and three years total only $200,000,000* On the other hand, there wer*- maturities of $600,000,000 between two and five years, a period which serves the purpose neither of maintaining liquidity in the Account nor of securing maximum yields# Some maturities should be held in this period in order to avoid the necessity of making large purchases whenever an outstanding issue enters the two*year classification, but there would seem to be no necessity for holding such large amounts as at present* A sub stantial liquidation of 2-5 year securities probably could not be accomplished without dist^bance to the market* While such liquidation may therefore be too large to be accomplished in an orderly manner during the next few months, it would a seem to be/desirable goal toward which the System Account might work* A sub stantial part of the suggested redistribution of the Account could be accomplished by replacing all maturities with short-term issues* In addition, sales of 2- to 5-year notes could be timed as market conditions permitted* Holdings of long-term bonds now total $700,000,000# This is perhaps a little larger than is desirable, particularly in view of the fact that the System may need to absorb some excess reserves arising from gold imports or otherwise* Reproduced from the Unclassified / Declassified Holdings of the National Archives d e c l a s s if ie d " Authority . l0^6\ -3 - Other reaso n s f o r d e c re a s in g th e amount o f bonds h e ld i n th e Account a re th e lo n g -te rm market i s (1 ) s tro n g a t p re se n t and fu r t h e r in c re a s e s -which p ro b a b ly co u ld not b e h e ld might have an u n s e t t lin g e f f e c t , ( 2 ) such re d u c tio n -would p ro v id e a la r g e r m argin f o r su p p o rtin g th e market i n th e event o f another b r e a k , and ( 3 ) -with the System e a rn in g s now somewhat above e x p e n d itu re s , i t would be p o s s i b le to s e l l a m oderate amount o f bonds w ith o u t red u c in g ea rn in g s to an u n d e s ir a b le l e v e l * As re g a rd s h o ld in g s o f i n d iv id u a l is s u e s i n the A ccount, th e re a r e perhaps th re e p r i n c ip le s which should be f o llo w e d : F i r s t , i t i s d e s i r a b le to h o ld a f a i r l y even amount o f each o u tstan d in g is s u e i n th e A ccount, s in c e in th a t event th e System cou ld a t any time s t a r t to a l lo w i t s h o ld in g s to rim o f f a t a fa irly even pace# Second, th e System might h o ld sm a lle r amounts o f is s u e s which a r e o v e r p r ic e d i n th e m arket and l a r g e r amounts o f is s u e s which a re u n d e rp ric ed w it h a v ie w to k eeping th e market f o r each is s u e i n l i n e w ith the r e s t o f the m ark et. T h ird , th e System should h o ld no more t a x p e rio d b i l l s sin c e th e purpose o f th e se b i l l s than a re n e c e s s a ry , i s to p ro v id e the market w ith m a t u r it ie s , and co n seq u en tly to in c re a s e excess r e s e r v e s a t a tim e when b a la n c e s a re b e in g drawn down by o th e r f a c t o r s * F o llo w in g th ese p r i n c i p l e s , s a le s among in d iv id u a l is s u e s o f bonds might be co n fin e d to ( 1 ) is s u e s w hich a re o v e r p r ic e d , such as the 4 1/4*8 o f 1947-52, th e 2 l/ 2 * s o f 1949-53, th e 3 *s o f 1951-55, and the 2 3/4*s o f 1956-59, and ( 2 ) is s u e s o f which th e S y s tto Account has an u n u s u a lly la r g e amount, such as th e 2 3/4*8 o f 1948-51 and the 2 l/ 2 * s o f 1949-53* in c re a s e i t s h o ld in g s o f b i l l s p e rio d b i l l s * The System Account might to an even |20,000,000 o f each is s u e except ta x The System Account might a ls o h o ld 1800,000,000 o f T rea su ry notes m aturing by th e end o f 1939, d i s t r i b u t i n g the h o ld in g s among the e ig h t is s u e s as ev e n ly as p o s s ib le i n v ie w o f th e amount o f each is s u e o u tstan d in g and th e Reproduced from the Unclassified I Declassified Holdings of the National Archives j j - 4- condition of the market ffcr each issue DECLASSIFIED Authority 0 . 1Q^>6\ d e c l a s s if ie d rL d in g e n e r a l f il e s NOV 2 9 1937 5 3 3« J ¥' ^ ...toveahar 26,■-1937— *r. Wyatt Distribution of earnings aad profit* and losses in Systea Open Market.. Account, , ^ .iB.T. ■im ■,,, M ■v< tm — | yB | | Mr. Van Foseen * In order to determine the earnings on securities suck as compose the Systea Open Market Account, it is necessary that any preaiua paid be amortised over the period from time of aurchase to aaturitgr, or to the first call date if callable before aatarity, and that anjp discount .fro* par in the purchase price be accuaulated over t i period from the ie date of purchase to aaturity of the securities* While this does sot ae&n that tbe same baais mast be used in fixing tha book value of seourities it is the ^resent praetloe to carry securities in the Systea Open Market Account at cost modified by the amortisation of premtass aad the accuiulation of discounts, ani this aodified cost basis is commonly used by banks in determining book values of securities owned, fhe actual earaiag* Account © o ald , o f cedar® .oa the securities i . the Systea Open Market n course, as im p lie d above be determined under this p r o - irrespective of the practice followed as regards book value. For example, even though the securities were carried on the books at par, or at original cost, it would be proper to determine actual earnings under th e aodified cost basis and the distribution of each earnings among the Federal leserve banks « o o ld not necessarily h® affected by th e nee o f original coat or par as the basis for book value* In othsr eords, it would be practicable for ths Federal Reserve banks to revalue the Systea Account periodically, for exanple on quarterly reallocation dates, so as to permit the transfer of securities within the account at market price j Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority to. io < a » j v jf' Hr. Wyatt - #2 without affecting in any way the true earnings on the account or without necessarily a feeting the distribution of such earnings. It has always been the practice to distribute earnings in the System Account currently on the basis of actual participations in the Account althougn prior to January 1 , 1937, until which time the Federal Reserve Bank of New York carried on its own books the entire premium and discount account, the otrier eleven Federal Reserve banks were given somewhat larger participations in the System Account than were warranted by the actual amount of money inv vested by them. In the beginning it was the practice to distribute currently profits and losses resulting from sales of seeurities from the Account and to do so in proportion to the oarticipatlons of the various Federal Reserve banks just prior to the sale of the securities. This arrangement was discontinued effective January 1, 1930, for the reason that any profit or loss resulting from the sale of securities could more properly be regarded as a profit or loss resulting from the bolding of the securities in question from date of purchase to date of sale. Theoretically it would, therefore, be more equitable to distribute the profit or loss on a given security a^ong the Federal Reserve banks on the basis of their average participations in that particular security over the entire period from purchase to sale. To follow this procedure, how-* ever, would involve very complicated accounting and it waa thought, for practical purposes, that satisfactory results would be obtained by carrying profits and losses in suspense until the end of the year and then distributing the net profit or loss in proportion to average participations in the System Account during the calendar year. This procedure was followed from January 1 , 1930, to December 31, 1936* At the beginning of 1937 this procedure was modified slightly in that profits and losses were again distributed currently Reproduced from the Unclassified I Declassified Holdings of the National Archives j d e c l a s s if ie d j Authority £ o .1 Q 5 6 ' J r Wyatt - #3 f. but, instead of in proportion to participations just prior to the sale of the securities, they are distributed in proportion to average participations in the System Account during the twelve souths immediately preceding the month in which the sale of the securities takes place* Inasmuch as the securities on which substantial profits or losses are likely to b incurred are securities of jygyygj^aoturity it is believed that eit would be more equitable to extend this twelve month period to include either the entire period since the System Open Market Account m s established on January 1, 1924, or since all Government securities held by the Federal Reto serve banks were transferred to the System Account on July lf 1936, up/a maxis u n of five years, and it is believed that such a . arrangement would be likely tr n to reduce to a minimum the objections of any Federal Reserve lank to taking an increased participation in the Account at any tine because of any fear of pro spective loss* If| instead of maintaining a System Account, the various Federal Reserve bailks were required by the Open Market Coiamittee to purchase and sell securi ties 'for their own account from time to time and transfers of securities between the federal Reserve tanks were accordingly made at the market, earnings on total holdings of Government securities would not be affected, i.e. they would be identical with total earnings under the present arrangement* The distribution of such earnings would be affected, however, in that the average cost price of any given issue of *ecurities would not be identical for all Federal Reserve banks as it is in effect under the present arrangement* Similarly with a System Account, if transfers of securities by the Federal Reserve hanks on account of periodical reallocations were made at the market it would be possible to achieve Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ^ 0 . ( 0 ^ 6 \ *r. Wyatt * #4 • results identical with those that would follow from individual parebases by the various Federal He serve banks under the control of the Open Market Co®* aittee* In view of the periodical reallocations the average cost of any given Government security to the various Federal Reserve banks under this arrange ment would vary and be subject to reputed fluctuations, and this would involve a very complicated accounting procedure. Inasmuch as the average cost of securi ties would this not m identical for all banks the average rate of return would . also not be identical and these fluctuations would be largely a matter of chance, i.e. they would depend upon the relationship of the aarket value of the account to the modified cost value at reallocation dates* For example, when the market value of the securities in the Account was above the modified cost value on a reallocation date banks increasing their participations would have the average cost of their securities increased in relation to the aver age cost to the System Account as a whole and banks receiving the reduced participation would have the average cost of their securities reduced as coapared with the average cost to the Systea as a whole. Results would be the reverse of this if, on a reallocation date, the market price of the securi ties held in the System Account was below their modified cost price. Such variations i , average cost of securities and resulting average return- thereon n being entirely fortuitous in character, it would seem that any arrangement that would elmiaate such variations would not only be equitable to all Fed eral Reserve banks but would be generally desired by the banks* are, of course, produced by the present arrangement* Such results Similar results could be c' .j obtained also if, should transfers between the federal Eeserve banks be aade at the market, the entire Account were revalued at the aarket at the same time, Reproduced from the Unclassified I Declassified Holdings of the National Archives j ■r DECLASSIFIED ^Authority . ( 0bb \ h «r. lyatt * #5 aad the indicated profit or loss in the case of each Federal Reserve bank carried in suspense until such tine as the securities in question were actually sold, provided that the profit or loss realised when sale of secup~ itlea in the a&rket occurred vere distributed in the same Banner as under the present arrangement, i.e., in proportion to average participations over some previous period* Under such an arrangement the unrealised profit or loss carried on the books of a Reserve bank would be of no significance except to serve as an indication of the profit or loss that would be sustadned by the bank if the entire Systea Account were liquidated at the then book value, which vould be Basket value as of soae recent date* Fro* the standpoint of earnings, profits, and losses, the Systea Account say be regarded as an Investment trust* participations in which are allotted to the various Federal Beserve banks by I e Open Market Coaalttee dl under such conditions as to insure to each Federal Beserve bank a share la the earnings as accrued in proportion to its current participation and a share in the profits and losses as realised distributed, insofar as practi cable, in proportion to its average participation over the period that any given security is held in the Account* UDistribating profits and losses in proportion to average participations over a period of five years vould, it is believed, veiy closely approximate the foregoing* V F /lw h f Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority . (0Q6\ ^ '• " D IN GENERAL FILES V VI. 1 193? > y ' ffr Wyatt ic. Mr* Yan Fossen r Referring to your telephone request to Mr* Ssaead, the plan for the distribution of profits aad losses in the Sygj ferred to in paragraph 2 on page 2 of the^proposal aade by Governor Harrison at the Governors* Conference held in December, 1929, and which was adopted effective January 1, 1930, provided for the holding in a suspense account at the Federal Eeserve Bank of Sew Xork of any profits or losses on sales of securities froa the account until the end of the year, and the distribution of the net profit or loss among the Federal Eeserve banks on December $1 in proportion to their average holdings in the open market account daring the calendar year* This plan was followed until the end of 1936* It a&ght be inferred froa the language used in the plan submitted by Governor Harrison that it was contemplated that distribution of the net profit or loss should be based on average holdings in the account for the entire period since the establishment of the special investment account (now Systea Open Market Account) on January 1, 1924* That zaethod of dis tribution, however, m s never actually followed and Mr* S. A. Miller, Manager of the Securities Department at the Federal Eeserve Bank of Sew Tork, says that the' expression "over the entire period* was intended to refer to the period during which profit® or losses were held la suspense, i»e* the calendar year* Since January 1, 1937, profits and losses have been distributed among the Federal Reserve banks currently, i«e* as of the day on which the profit or loss occurred and in proportion to the average daily participation of each Federal Reeerve bank in the Systea account over the twelve month period ending with the calendar aonth preceding the date of the sale of the securities* It will be no&ed that the present method of distributing profit# aad losses differs froa the one adopted effective January 1, 1930, in accordance with Governor Harrison1s suggestion, in that profits and losses are now distributed currently whereas under the plan formerly in effect they were held in suspense until the end of the calendar year and the net profit or loss distributed at that time, and second, in that distribution of profits and losses is now based on average participations in the System Account in the twelve months preceding the month in which the profit or loss occurs, whereas under the former plan the net profit or less for the year was distributed on the basis of average participations in the System Account during the calendar year* Reproduced from the Unclassified / Declassified Holdings of the National Archives j v • DECLASSIFIED Authority t. O t056\ Form F. B. 131 3 NFILES E HARD DF G D V E R N D R S □ F THE FEDERAL RESERVE DEC 5 SYSTEM J 3 J. 3 + Office Correspondence To Date M r. Golderrweiaer_________________ Frnm 1949 November 3 . 1937 Subject:___ L * M* P i s e r __________ _____________ The r e s o lu t io n o f th e open-market committee rea d s i n p a r t as f o l l o w s : "The E x ecu tiv e Committee i s a u th o riz e d to d i r e c t th e p u r c h a s e * .• • • o f T rea su ry b i l l s or o th e r sh o rt-te rm T reasu ry o b l i g a t i o n s ........ " The com position o f th e System open-m arket account as o f October 27 m s as sho-wn in the f o llo w i n g t a b le * The com position a t th e p re se n t time i s p r a c t i c a l l y the same as on O ctober 27. ( i n m illio n s o f d o l l a r s ) T reasu ry b i l l s 630 T rea su ry n o t e s • • • • • • • • • • 1,158 T reasu ry b o n d s . . • • • • • • • • 738 M aturing w it h in : S ix months• • • • • • • • • 600 One y e a r .................... 997 Two y e a r s . . . . * ........ 1,207 F iv e y e a r s . * • • • • • • • 1,839 T o t a l• • • • • • • « . 2,526 A cco rdin g t o th e r e s o lu t i o n i t would be n e ce ssary to purchase e it h e r T rea su ry b i l l s two y e a r s . o f any m atu rity o r T reasu ry n otes m aturing w it h in perhaps Such purchase would a ls o b e d e s i r a b le from the p o in t o f v ie w o f having s u f f i c i e n t m a t u r itie s to a l lo w h o ld in g s to run o f f a f t e r C h ristm as. The d i f f i c u l t y comes, however, in the f a c t th a t th e se i s s u e s a r e c lo s e ly h e ld and could not be e a s i l y purchased in la r g e volum e. I t m igh t, however, b e p o s s ib le to purchase sm all amounts o f b i l l s m aturing around March 15 a t 0 .20 p e rc e n t, and perhaps m oderate amounts o f the lo n g e r b i l l s m aturing in June and July a t 0*30 p e rc en t or l e s s . T reasu ry n otes m aturing i n February and March 1938 a re now s e l l i n g on a n o -y ie ld b a s i s , and th e y i e l d on June* and 4 Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority - 2 , 10 ^ 6 \ - Sejitember 1938 notes is less than l/4 of one percent* It might be possible to purchase some of the 1939 notes, particularly the issue of June 1S39• Longer maturities could be more readily purchased in the market but it would appear that they may not be purchased without a meeting of the full committee. I doubt if it is important enough to call a meeting of the full committee for this purpose. In case the question of the December financing comes up in the discus sion, I have a few tentative suggestions. First, it appears that the Trea sury in order to maintain a balance of f600,000,000 between now and the March financing will need to raise something like $500,000,000 of cash in December* It would also appeal* desirable to refund the February 1 maturity of 1277,000,000 of notes* In view of marked preferences, it would seem de sirable to give holders of the maturing notes an option of refunding into perhaps a one-year issue or a 5-year issue. It would also seem likely that the full amount of cash needed could be raised under current market condi tions by an issue of 5-year notes* For the shorter maturity an additional offering of the December 1938 notes at perhaps 100 l/2 and a new offering of December 1942 notes having a coupon rate of perhaps 1 7/8 percent is suggested * Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority f c O . I0 4 6 > m r~ Mr* $»ead Accounting In connection with V ) \ Hr* fan Fossen the System Open Market Account* The first purchase of Onited States Government .securities by the Federal Heserv* Bank of Sew lark for the System Open Market Account vas aade on Beceaber 15, 1923* Total purchases of United States Government securities for the System Account to the end of 1923 amounted to #9,058,500* These securities were allocated to the various Federal Reserve banks on January 2, 1924, as of January 1* Allocations! The initial allocation was designed to affect reserve percentages equally. This arrangement *aa continued until May 31, 1934, *it'i special additional allotments to individual banka needing additional earnings* Froa June 1, 1924 to Hay 2B, 1933 allocations were made on the basis of estimated requirements inr earnings to -cover expenses, dividends and charge-offs* Froa lay 29, 1933 to February, 1935, allocations were made In accordance with the ratio of each baak*B reserves above a 55 percent (later fQ percent) reserve ratio to the Systea total* Froa February, 1935, to June 30 , 1936, allocations were baaed on estimated earnings requirements to cover expenses, dividends and ■ charge-offs* Fro® July 1, 1935, to date allocations have been made on the basis or first providing for expenses, including normal depreciation, and then distributing any excess earnings in proportion to dividend requirements* Alloca tions on July I and October 1, 193% did not take into account actual results during the calendar year to date but were computed on the basis of estimated re quirements if the allocation had been ? mde on January 1, 1936* Price* United States Government securities held In the Systea Open Market Account have teen carried on th» books of the Federal Reserve banks at par and Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority &Q . ( Mr. Smead - #2 until January I, 1937 the orealua and discount aocount* were carried by the F e d e ra l R eserve Bank of Sew York* Since January 1, 1937, the premium and discount accounts have been allocated t - the v a r io u s Federal Reserve banks* o Earnings, p r o f i t s and lo s s e s were distributed as to produoe the same result as if allocations to each Federal Reserve bank had been made on the basis of book value* There nave been three instances, however, where Federal Reserve banks have s o ld a proportion of t h e i r participations for re-allotaent to o th e r Federal R eserve banks a t current market values as follows* 1925, St,Louis sold 110,000,000 at a loss o f approxlsately f7,000* 192S Kansas City sold $5,122,000 sold $2,200,000 a t market v a lu e , at In September In October a lo s s of $13,620*22. In March, 1929, 8 t*i»ouiS the amount o f the l o s s , i f any, not being known* faralngai Earnings have alw ay s been distributed daily by the Federal l j Reserve Bank of le w tork* If has been the practice to amortise premiums to Maturity or to the call date and' to amortize discounts to maturity* SlafcdLtetUftftM ^rom January 1, 1924 to Deoeaber 31, Jgga&LU 1929, profits and losses were distributed currently in proportion to partici pations in tha account at the time* From January 1, 1929, to December 31, 1936, profits and losses were distributed at the end of each calendar year on the basis of average holdings during the year. From January 1, 1937, to date profits and losses have been distributed currently in proportion to average participations during the twelve calendar months preceding the month in which the securities were sold, except that premiums received on maturing securities have been used to write«dowft the cost of securities purchased in replacement thereof* http://fraser.stlouisfed.org/* wA Federal Reserve Bank of St. Louis Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority fc Q . ( 0 ^ 6 \ 1 IN GENERAL FILES IF •v MAY 1 9 1937 **, 18, 1937 nr. s*«*d Dlstrlfcution of profits and losses on, sales of securities in the Systea Opia Market Account* Hr* Van Fossen At the preseat ti*© holdings of Salted States Government securities ia the Systea Open Market Account are reallocated quarterly with a view to distributing^ earnings aad profits froa the Systen accouat ia such aannar as to give the Federal Heserve banks uniform coverage of dividend require aenta* This arraageaeat ia quite satisfactory so long as ao substantial losses are sustained fron sales of Governaent securities but at tines whan substantial losses nay be anticipated the Federal Reserve banks are reluctant to accept increased participations aad if substantial losses are actually sustained an increased allocation would have the reverse effect froa that _ $ .* Intended inasanoh as It would result In reduced net earning** Accordingly, It would be desirable to devise some aore satisfactory way of distributing losses»?bere In of course sone question as to legality of an arrangement under which losses would be distributed without reference to foldings and perhaps In a different aaaner than profits are distributed. Leaving oat of account such considerations It Is believed that 4£*> aore equitable way of distributing losses would be to base the distribution on the anottnt of reservesjpor contingencies since any deficiency In earnings as a result of such losses would ordinarily be charged to such reserves* Inananch, however, as no naifora policy has been adopted with respect to setting aside reserves for contingencies it would no doubt be soaewhat aore equitable to base distribution on reserves for contingencies plus all or a portion of Section 7 narplas* Per naps the aost satisfactory plan would be to bane the dUtribatioa oa reserves for contingencies plan Seotion 7 m v plas in excess of paid-in capital* If such a plaa were adopted at tiaes whoa earning# wore nore tiayn sufficient to cover dividend# the Federal Ra~ Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority t o . Hr* Snead * §2 lay 18, 1937 serve tanka could transfer the excess earnings either to surplus or to re* serves for contingencies without having say effect upon the distribution of future losses. In other words it would not be a watter of concern to one Fed eral Reserve bank whether another Federal Reserve bank transferred its net earnings after payment of dividends to surplus or to reserves for losses* Incidentallyt if very heavy losses were sustained the effect of this plan would be to -absorb all reserves for lo ses and redone Section 7 surplus to the amount of paid~$n capital, at which point all banks would be on an e^ual footing, before surplus was farther reduced and it would also place the Federal Reserve basics on a uni for* footing as regards their ability to pay dividends out of surplus* Any arrangement based upon the amount of paid-in capital or the total anount of Section 7 surplus or the sun of these two accounts would not have a similar result and night even result in the im pairment of the capital account of one or more Federal Reserve banks while other Federal Reserve banks still had substantial surplus accounts* It nay be somewhat illogical to distribute profit# and loafres on a differemt basis but it is believed that it would be desirable to centime to distribute profits under the present arrangement whereby profits as well as earnings are distributed in such a manner as to equalise dividends* Unless this is done one or more Federal Reserve banks may be unable to meet dividend reqairenemts while other banks have earnings in excess of dividends* The present arrangement would of course obviate this whereas to distribute profits in the same manner as is suggested for losses would not only prevent uniform dividend coverage but would tsnd to accentuate differences in surplus and reserves for contingencies• Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority . I REC’D IN FILES SECTIOJ^, DEC 1.. ly'w .r; ~ • » CONFIDENTIAL SYSTEM OPEN MARKET ACCOUNT L. M. Piser March 2, 1937 - T v — Reproduced from the Unclassified I Declassified Holdings of the National Archives | DECLASSIFIED ^Authority - . I0^6\ 1 - With the approach of a time when it may be necessary for the System to begin liquidating a portion of its holdings of Government securities, it seems desirable to examine the composition of the System Open Market Account. It appears that the composition of the System account should be based principally upon two considerations. First, holdings of short-term Government’s should be adequate to permit rapid reduction of the account through allowing securities to run off at maturity. Liquidation of the account could then be accomplished without the loss that might result from making actual sales in the market. Second, there should be a sufficient amount of long-term securities in the account to give the Reserve System earnings adequate to meet current expenses and dividends. At the present time it does not appear that the System account ade quately meets either of these requirements. As nearly as can be estimated at present, the maximum likely liquidation of securities from the System account would be about $1,400,000,000. Following the increase in reserve requirements on May 1, it is estimated that excess reserves will total approximately $500,000,000. It is estimated further that because of various inflexibilities in the banking system and possibly a greater desire for liquidity, banks may more or less permanently carry something like $100,000,000 of excess reserves. A sale of $400,000,000 of Government securities under existing conditions would, therefore, result in a beginning of member bank borrowing. Although it may not be necessary in the future to force banks in debt to the extent of $1,000,000,000 in order to make effective the policy of the Federal Reserve System, it would seem desirable for the System to place Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority j itself in a position to do so. . 1Q£?6\ In order to accomplish this it would be necessary to sell an additional $1,000,000,000 of Government securities or a total of #1,400,000,000. This n e o n s that of the $2,400,000,000 of Gov ernment securities in the System account something like £1,400,000,000 should be held in short-term liquid securities, while the remaining $1,000,000,000^may be considered in the nature of a permanent investment, which could be kept in those issues having the highest yield. In arranging the distribution of the £-1,400,000,000, it should be borne in mind that in periods when Government securities were liquidated the entire liquidation was accomplished within two years end generally the bulk of the liquidation was accomplished 'within six months from the be ginning of liquidation. A reasonable distribution might be to have $700,- 000,000 nature within six months, $400,000,000 in from six months to one year, and $300,000,000 in from one to two years. At the present time, maturities between six months and two years roughly equal these amounts, but maturities within six months total only $420,000,000, or $280,000,000 short of the desirable figure. There are maturities of $850,000,000 between two and five years, a period which serves the purpose neither of maintaining liquidity in the account nor of securing adequate yields. The actual liquidation of an amount even approaching this figure could not be accom plished without disturbing the market. Part of the redistribution of the a mma could be accomplished in a more orderly manner, however, by re at placing all note maturities with bills. Between now and December 15, 1937, this would involve maturities of $130,000,000 of notes. Reproduced from the Unclassified I Declassified Holdings of the National Archives j P ‘ DECLASSIFIED ^Authority . (0^6 \ -3- The earnings on this $150,00J,000 of notes at the present time total about f2,600,000. Earnings on the Treasury bills which would be purchased would total, only about $500,000. Earnings on the System account would be increased during this period, however, by an increase in the average yield on Treasury bills as present low-yield holdings mature and are replaced by new bills having higher yields. An increase in average_earnings on present holdings of bills from the existing level of about 0.25 percent to around 0.40 percent would increase earnings on the account by about $>900,000. The net effect of the shift from notes to bills would be a decrease of §1,200,000 in earnings. If these transactions were unaccompanied by other transactions, earnings on the account would be $5,800,000 below estimated expenses in cluding dividends. The level of earnings could be brought up to expenses by selling $310,000,000 of notes maturing and. bonds callable in 1940 and 1941 and replacing these issues with bonds yielding 2 1 / 2 percent. These transactions could be accompanied by sales of issues that are overvalued in the market, such as the 4 1/4!s of 1947-52 and the 2 1/2's of 1949-55 and their replacement with bonds yielding 2 1/2 percent. If such a program could be accomplished the System account would be in a sufficiently liquid condition by December 15 to place considerable pressure on banks by allowing maturities to run off without making soles in the market. Earnings of the System would also be adequate to meet dividends and expenses. In addition, these transactions would be a powerful factor in keeping long-term interest rates at low levels. While Reproduced from the Unclassified I Declassified Holdings of the National Archives | DECLASSIFIED ^Authority . IQ ^ 6 t “4 - this m ig h t j too large 'to be completed in an orderly manner in the time Mentioned, it would seem to be a desirable goal toward which the System account might work. The following table shows the present distribution of the System Open Market Account and the suggested distribution after the completion of such a rearrangement of the account. SYSTEM O P M MARKKT ACCOUNT AiiRANGED BY MATURITIES (In millions of dollars) Within 6 months Six months to 1 year One to two years 2 to 5 years Over 5 years Total Present distribution Treasury bills.... 385 Treasury notes.... 54 Treasury bonds...._~ Total......... — — — 298 794 _____ ____55______ -79 592 1,304 298 479 2,430 416 507 —■ — — 284 95 286 207 — — ________ _______________________ 55______780 723 872 835 419 207 178 ___— 385 849 534 Distribution on December 15, 1937 after completion of program outlined Treasury bills.... Treasury notes.... Treasury bonds.... Total......... 700 402 286 262 780 2,430 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority \ yQ . |0 ^ 6 \ L ; February £5, 19S7 Mr. Goldenweiser System O p m Market Account [ r e c / d i n f il e s s e c t io n JAN 18 1950 fith short-term intertat rates beginning to rise sloi ti and with the approach of & time ahea It may be necessaxy for the ^jrstem to begin licuidafcing a portion of ite holdings of Government securities, it seems desirable to examine the composition of the System Open Market Accomt* It appear# that the composition of the System accomt should be backed principally upon t r considers tione . First, holdings of short-term Government*6 should be io adequate to permit rapid reduction of the System accomt through allowing securities to m off at maturity* Liquidation of the account could then be accomplished without the loss that might result frois making actual sales in the market* Second, there should be a sufficient aj&ount of long-term securities in the accomt to give the Reserve System earnings adequate to meet current expenses and dividends* In addition, there is a minor consideration thct purchases and salt;a of individual issues of Government securities might be determined In part by a desire to keep the yield on each individual issue at a reasonable level in relation to the yield on other Issues. Another minor consideration might be to confine all transactions in the System accomt to even a&omts, such as in millions of dollars, and to reduce the amomt in the accomt to an even 12,430,000,000* This could be accomplished by selling f£26,850 of the various odd amounts held* At the present time it does not appear that the System accomt adequately meets either of the first two requirements* The maximum likely Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority COHFIBHmU* )0 . j , (0^6 \ Februaiy 25, 1957 liquidation of securities froa the System account would be about $1,400,000*000* Following the increase in reserve requirements on May 1, it is estimated that excess reserves will total approximately $500,000,000. It is estimated further that became of various inflexibilities in the banking system and possibly a greater desire for liquidity# banks say sore or less permanently carry something like $100,000,000 of excess reserves* A sale of $400,000,000 of Government securities under existing conditions would, therefore, result in a beginning of member bank borrowing* In 1928 and 1929 banks were placed In debt to the extent of about $1,003,000,000* It may not be necessary in the future to force banks in debt to this m o m t in order to make effective the policy of the Federal Reserve System, but it would seem desirable for the System to place itself in a position to do so* In order to accomplish this it would be neeessaiy to sell an additional $1,000,000,000 of Government securities or a total of $1,400,000,000* this means tost of the $2,400,000,000 of Government securities In the System account something like $1,000,000,000 may be con sidered in toe nature of a permanent investment to be kept In those issues having toe highest yield* In arranging the distribution of the remaining $1,400,000,000, it is helpful to consider the rapidity of sales of securities from the account in the past* There have been three periods of important liquidation of securities, 1928-1923, 1924-1925, and 1927-1929* The following table shows the total liquidation of Government securities by the Federal Be serve £ystea during each of these periods, together with the proportion of toe total liquidation which was carried out within six months, from six months to Reproduced from the Unclassified I Declassified Holdings of the National Archives | DECLASSIFIED ^Authority jjyO . (Q ^ ()\ February 25, 19ST — 5— CaOTMlTIAL on® year, and fro® one to two years after the beginning of the liquidation* Liquidation JtoldLsUtiLBS-ww Within 6 months to JL.XSSI:... May 1922....... November 1924**# December 1927,.. 278 227 574 879 161 May 1922*....... November 1924* •• December 1927*•• 54 79 31 is& m l ~ JL Total, One to two .. XS-Jfi... 25 10 0 152 29 110 50 ..J 5.... ...... 225 Percent 520 286 A53L 1,265 a u 19 It will be noted that on the average about 70 percent of the total liquidation occurred within six months, that about 15 percent occurred between six months and one year, and that tho remainder occurred between one end two years after the beginning of liquidation* On this basis it appears that about fl,000,000,000 should be held in the fora of securities maturing within six months, about 1200f000,000 should mature between six aonths and one year, and an additional $200,000,000 between (me year and two years* It will be noted further, however, that the aoounts involved in these various past liquidations were much smaller than the possible future aaounts* Sine# there would be question as to the ability of the market to absorb such a rapid liquidation as $1 ,000 ,000,000 in six months, a more reasonable distri bution might be to have #800,000,000 mature within six months, $400,000,000 fro* six aonths to erne year, and $300,000,000 from one to two years* At the present time, maturities between six months and two years roughly equal Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority a m m m U L 0 . |Q^>()\ ~4~ February £5* L U 7 these amounts* but maturities within six months total only $480f000*000* or $540*000*000 short of the desirable figure* There ere aaturlties of $880*000*000 between two an<! five years* * period which serves the purpose neither of a&lntaining liquidity in the account nor of securing adequate yield©* If this $©50*000*000 ef two to five year maturities should be liquidated* something like #510*000*000 might be used to purchase Treasury bond# end the remaining #320*000*000 to acquire Treasury bill© arturing within six months* #850*000*000 of maturities at the present H m The earnings on this total about #11*800*000* E&mlags on the Treasuxy bonds which sight be purchased would aggregate southing like |12*750*000* Mid earnings cm the Treasury bills would a*aount to en addition*! $800*000* Earnings ou the System accomt* therefore* would be increased by approximately $1* 750,000, which would bring the totel to within f850*000 of estimated expenses including dividends* would probably be w * a up % 4 The remainder an increase in the average yield on Treasury bill# ss present lowryleld holdings mature &nd are replaced % ne% bill* having considerably higher yields* An increase in average earning* on present holdings of bills t r m the existing level of between *£0 and *25 percent to around ,55 to *40 percent would fcccoaplish this purpose* S l M u n t h bills under this program would aaount to about 4700*0QQ*003* which could be distributed mtmg individual issues in the moxmt of between $25*000*000 m d #50*000*000 in each issue* Six to nine-ap&th bills woult1 regain at about, # 210*000*000* milch could be distributed with about $15*000,000 In each Issue* Tre&stsy notes amounting to about #550*000*000 vould mature within two years* end assuming six issues during such period* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority CONFIDENTIAL 0 .I -5- February 25, 1957 an average of $90,003,000 of each issue could be held* It might he desirable however, to vary the aaomt of each issue held depending upon th® relative attractiveness of each issue in the market* Is regards individual issues of Treasury bonds, most of the new pur chases presumably would be made in the last four issues outstanding and particularly the % 7/8 »s of 1955-60* the holdings of this issue might be increased frosi the present amount of arotsid $20,000,000 to perhaps #200,000,000* yield* The 2 5/4*© of 195J*-54 are also selliag on: ^ relatively high Holdings of this issue might be increased from #@0,000,000 to $200,000,000* The remaining #£00,000,030 could be distributed among these or other bond issues depending v & m market conditions* At the same time holdings of some issues iMch are selling cm a lo*~ yield basis might be liquidated. The $000,000 of 4 1/4*0 of 1947-52 could be liquidated and reductions might be a?-de in holdings of the B 1/ 2 *s of 1949-53, both of shich are selling on & relatively low-yield basis* Such a policy would not only give the System maximum earnings on its bond portfolio but would also tend to make issues sell in line with other com parable issues* Holdings of individual issues could henceforth be adjusted from time to time depending upon market conditions* It is believed that something like tiie above distribution of maturities would prove a desirable goal toward which the System account might work* Such a large magnitude of transactions would necessarily be ©Extended over a long period of time, in order to prevent aa unfavorable reaction snd to cany out the operations in an orderly manner* A start on this program mi|$it be made by disposing of the System's holdings of the 4 1/4 percent Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED ? Authority . 1 Q &)6 \ -S- bonds of 1947-52 and by reducing holdings of December 1941 notes and of the 2 1/2 percent bonds* These sales could be replaced by purchasing Treasury bills maturing within six months and Treasury bonds of 1955-00* After the®e particular Issues became readjusted to a nor* reasonable relationship to the rest of the market, purchases md. sales could be ex tended to other issues* The following table shows the present distribution of the %stem Open Market Accotmt and the suggested distribution after the completion of such • rearrangement of the account* SISTM OPEN MAKSES ACCOttBP 1KMBGEB BX MjOTRITI&S (In Millions of dollars) fithin 6 months Treasury bills** S80L Treasury notes** 75 Treasury bcaids..i S - „ ir Six months U l jLxaag.. One to two years 2 to 5 Over m m u Lmm, 211 179 294 785 50. 590 294 853 Total 592 1,531 507L-457 _ 457 2,430 Deelriible dlstrlbtttion 210 180 290 390 290 910 550 _ 97Q 1 11 Treasury bills** 700 Treasury notes.• 80 Treasury bonds** « — 970 2,430 Reproduced from the Unclassified I Declassified Holdings of the National Archives ! DECLASSIFIED ^Authority D v s o o Bank O e a o Fl iiin f p r ti ns ie February 6* 1937 Hr. Morrill Mr. Smesd With respect toj^our m m o r m d x m of February 1 in connection with the procedure both as to llgtriBution of profits on securities held in the System Open Market Account and to the accounting procedure in con nection with securities held in the account, there Is attached a copy of a letter seat to the President of each Federal Eeserve bank by Dr# Burgess, under date of December &4, .1936* You also have the correspon dence between Dr* Burgess and Mr* Peyton and Mr* Hamilton which Dr* Burgess sent you recently with respect to certain phases of the proposed account ing procedure* Tou will note froa Dr. Burgess* letter of December 24 that since the proposal relating to the distribution of profits on securities sold at Treasury financing periods will not become operative before the March financing tnere will be further opportunity to reconsider that part of the plan* I understand that in the future the coraittee will exchange securities direct with the Treasury when such exchanges are permitted for new issues of securities and, If so, the proposed accomting procedure in connection with profits arising froa the sale of securities at Treasury / financing periods will not become effective* Since the members of the Board of Governors constitute a majority of the Federal Open Market Committee, and since the proposed procedure with respect to the allocation of securities between the Federal Reserve banks and the carrying on the books of individual Reserve banks of premium and discount accounts, etc* has been approved by the Federal 0p m Market Committee and ty the Federal Reserve banks m d has be°n put into effect, I assumed that no further actios f y the Board wap necessary* c ELS/jbs R ep rod uced from the U ncla ssified / D ecla ssified H o ldings o f the N ational A rchives DECLASSIFIED A u th o r ity , [ 0 ^ 6 \ Diyjsloft at Baqfr QpfittwttiUe February 5, 1937 Mr* Saaad Profits m . #*Xm of Ooveraaent .ir* Van Im m b Attached is f statement ooapiled froa Information received over the t telephone froa % m Federal Reserve Bank of Sew York, and froa available iaformation in regard to otner Federal Reserve bank*, showing * breakdown of the total profit, $9,902*507, on sales of Dnited States securities by the Federal llaerva banka in 1936. It will be noted that of the total profit 12*451*610 arosa froa sales by eight Federal Reserve banks to the Systea Open Market Account la June lH§6t t n $3,260,774 arose froa the sal® of aaturing securities exchangeable id for saw issues, and that all other profits aaoonted to $3*169,121* Mr* Miller of the Federal Reserve Bank of Kew York advised aa that a preaiua of |3,473*277.74 was paid on securities purobased to raplaoa maturing securities exchangeable for new issues sold by the Systea Opan Market Account sod that $52,318*75 i l l prealoas was fa!4 on sluil**1 geo&Plties sold by the Federal &e*#rva B**&' of Haw York froa Its own investaent account• He accounted for the fact 'that prealuae paid exceed profits on such transaction® for the Systea account, while the rerersa was trae 'la the cate of Saw Tork*s account, by the fact that securities jwebaoed by Hew lork for Its invef t f B lstt notes on whAdi thare was a relatively lot pfeaiaa* Attaoheent, ao ^ ^c t jo u i were ^roooo^y Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority jj^D . ( 0 ^ 6 \ l,K‘f n ,’ S 0 Operations Fuk February 1, 1957 Memorandum to Mr. Sinead: On page 10 of the minutes of the meeting of the Conference of Presidents held in Washington on November 18, 1936,^ reference is made to the accounting procedure for the system open market account, with special reference to the plan for the distribution of profits from sales of Govern ment securities. You will note that it was voted to approve the procedure both as to accounting and distribution of profits to become effective January 1, 1957, with the under standing that each reserve bank would send a written confirma tion of its views to the Federal Reserve Bank of New York. The proposed plan has also been approved by the Federal Open Market Committee. I wonder if the Board of Governors should not advise the Presidents1 Conference of its action on this matter and whether, prior thereto, we should not have copies of the views sent to the Federal Reserve Bank of New York by the individual Federal reserve banks. Secretary CM yd m u u m m m m m rm m ? m m vw m m u w m im is s m m £*rat*ig* m turner *om m m * m m i , 1937 $%*%&* Oov#rxMHMit **earltie# ootpaUd at 1.45* ? r »# (JtoMtttft In tihw8»MBd* of lell*w) B ozU m . j ^ * T ' mi*- CXsw M«b~ _______ L J b d L Htaa- stlABt*} Chicago SaiUlAB ■«aaaU,«, _ s $ z _ MLlttl — r ToUl ^E^9fi*E*e » 38Bc2S9l - * m £*tl*Aiv& eurreat *xp#ti*#af normal d«~ pr»elftticft allOWftlteaft, furtti tW T < U « *ftd •qalpsanty «fd fte&rg building t> &*©•*# •** c r - •B* w-r *,3*0 2f 730 3,3^0 1*960 1,510 3,*90 1,630 1,230 1,930 1.350 ? t960 180 610 330 150 WO 60 300 70 do J® 100 200 2,220 ixetpt o r uov^rxut-atj* 2,400 7,6* 2,390 3,190 1,450 3,590 1,560 1,140 1,250 5,760 86,207 190,345 X,780 1,71)0 33,r m 2^ m i of {fcv^raaant* r^airad (oa b&#is t ! » 153,103 » Eatio of divitiwad r^.uir«***it* of *ach • b i * to igrsi** total «>. 7.2* 527,5*6 16^,828 220,000 XJ?2,?59 100,000 247,536 107,5* 38.5* 9.4* 9.7* 3.« 3.3* 78,621 117,931 9.** 2.9* 2.# 3.0* 2.9* 7.8* 29,485 9,097 7,215 9,410 9,097 24,467 85,836 127,341 95,304 214,81? > Allocation of b*l*zio* of mymtm boldlog* . (§2 ,4 3 0 ,2 2 7 ,0 0 0 * #2 , 1 6 ,5 5 2 , 0 0 ) ©a 1 0 22,5*5 120,765 29,485 30,4:36 XXt292 10,351 b*sl» o f * d n ti U f^rosstism® of total ia parti ©ipufcioe of t«eh t>*ok 7.2* 35.7* e.cn 10.3* 5.51 4.6* 11.4* 3.9* 8.8* 90,707 125,855 100,637 214,396 ♦ 874 -4,871 ♦1,486 * -w « * ^ *"71 t 7 T -5,333 •►416 - 'T t'j i t~)y 4.S* 17^,190 645,2*3 308,990 24?,769 X25,*>10 99,188 763,933 XX5,«09 alloe.itioft ♦1,498 2am, * in ftliee«iloi»i 175,6*8 648,351 194,313 250,436 X34,OSX 110,351 317,071 116,603 y <• ¥ 7 * /*/f? ♦3,108 -14,677 ♦4,657 «*,54l ♦11*163 -6,062 4.* ^ t'/9*}sT3 - 7*Tv 3 7 a # * t»n -i v i 3 ■ 3.5* 5.3* uthority j > U . ToUl eXloc«t loB of 0ov* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority M J M J Division of Bank Operations \ i i/ V \ Hr* Stearin lr* Bmmtkd &#£©#H 8f to ytror mmo&mfym of January U , I s« submitting herewith certain c o j a a e n on l#t%«r# received by Hr. Borges* from Messrs* Peyton and $p«& SarketAoaount. $r* Hamilton nude two suggestIona. The aoggoetion was that raaliaed on the aale of r*aturing securities in the aarket at tiaei of ■ new Treasury financing and by new Treasury issues for whtoh they are exahaageable be diatributed aaoa# the Federal ReBerre banka rather than uaed to write dowi the ooet of the replacement seouritiea* I f the ,£*#& la borme in aind that auoh aales of securities have been »ade in the paat solely for the reaaon that thare was prorialoaa of about turning m w mm hesitation, in riew of tha 3(b) of Section 14 of the Federal f © ®nr« Aet, t2 to the Treasury aaturing iiauea of securities for t e h* new aeourities offered in exchange therefor, there would see* to be no logical baaia for It# Hamilton* s auggeation* It ia underatood that in the ft&ss* direct exciiang<=a will be Bade with the Treasury and, accordingly, . %kmm presumably will be - o pirofit# of M s n ffcara&tar* Mr. 3Nft£&fca#* aeoend auggeatloa waa that the- .lew lork bank wire the other eleven banka onca a week, on Wedneaday, only in regard to the aaooat of preaiua aaortiiation, discount aoorual, interest aoorued, and latereat earned in order to reduoe the nosber of telegrams and of antjrlaa* The f>o#ii4bil%r ha# been suggested to lew York previoualy of wiring auoh information froa time to time when the ftfiif** change father than daily, but the *tt lork bank did not think Reproduced from the Unclassified / Declassified Holdings of the National Archives j «* - DECLASSIFIED J Authority f c O . |0 ^>6 \ Mr# Morrill * #2 well of this suggestion* Mr* Hamilton1s suggestion is believed to bare less to ooamend it than the one above mentioned, and in any event it will be \ necessary to wire the information as of the last day ef each month* Mr. Peyton made a number of suggestions* chiefly having to do with the distribution of profits and losses* His suggestion that the distribution of profits be based upon the entire period of time within which a given issue has been held In the System Open Market Aooount was considered before the adoption of the present arrangement, as you no doubt recall* The accounting under suoh a plan would be tremendously increased, and it is not believed it would be worthwhile, particularly in view of the fact that participations based on earning requirements would, generally speaking, overcome any short comings in the method of distributing profits* Mr* Peyton points out the possibility that losses on Government securities may exceed earnings and# accordingly, that under the present arrangement a bank whose expenses were In excess of earnings might be adversely affeoted by the increased partici pation in the System Account that would be occasioned thereby* There ls9 of course9 no reason why the allocation of Government securities should be based on an assumed animal rate of earnings if It were known that an actual loss was either certain or probable* In other words* the method used In allocating Government securities could and should be modified If at aqy time the present procedure should result in an inequitable allotment of securities among the Federal Reserve banks* Mr# Peyton* s further suggestions have to do with the treatment by the Federal Reserve banks of profits and losses on Government securities allocated to them* He recommends that profits be transferred to reserves for losses aad that losses in excess of such reserves be charged to surplus in order that the result of suoh losses may not be to o«po the bank Keproauced from the Unclassified / Declassified Holdings of the National Archives declassified Hr* Morrill * #? to receive an inoreaeed participation In Government securities and therebjr possibly bo plaoed In position to incur larger losses* Profits and losses on salts of ssourities* or otherwise, are not now taken into consideration in fixing participations in the Systea Aooount* I think that tbs aethod of handling profits m d losses on sales of securities should be loft with each Federal Eeserve bank, with the approval of the Board of Governors* This would permit of the use of a fexltiLe procedure depending on the earning position of the bank. Reproduced from the Unclassified I Declassified Holdings of the National Archives j DECLASSIFIED ^Authority tO. 10%\ "N D ^ if' £ 3 BOARD DF GOVERNORS Dhjhi, □ F THE FEDERAL R E S E R V E S Y S T E M Batik Fils WASHINGTON ADDRESS RECEIVED OFFICIAL TO THE CORRESPONDENCE BOARD JAN 181937 J Mr. Smead; Attached is a r file of correspondence $ with Mr. Burgess regarding certain correspondence '1 that he has had with Messrs. Peyton and Hamilton with respect to the changed accounting procedure for the system open market account. I shall be glad if you will let me have a memorandum of any comments that you may have to offer. Secretary. Attachment. CM yd Reproduced from the Unclassified / Declassified Holdings of the National Archives j" DECLASSIFIED j Authority 0 . ( 0 ^>6 \ 3 V - % Jf V Division of Bank Operations File mwwmMmKF Jmj &yjQ Dr* W. it Burgeas, floe President, Federal Reserve Bank of i w York, lew f t f * *# I* Ofe B u r Dr* Burg*#*! there it inclosed & letter received froai fresident Sohaller of the Federal Eeserve Bank of Chicago, mder date of Hormber 23 j in shieh he itat•# that the changes ia a©~ cotaoting procedure affecting the open aarket aecomt* as suggested in your a**or&nd\» of Sovesfter 19, are agreeable to hie hank* ▼ery truly yours, 1* L. Is m 4| Chief, B1vision of Bank Operations* Inclosure Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED 0. Authority {0^6 C O P Y FEDERAL RESERVE BANK OF CHICAGO November 23, 1936 Mr. E. L. Smead, Chief Division of Bank Operations Board of Governors of the Federal Reserve System Washington, D* C. Dear Mr. Smeads We have considered the changes in account ing procedure affecting the open market account, as suggested in the mrmorandum prepared by the Federal Reserve Bank of New York, under date of November 1 9 , 1936, and we are agree able to making the changes as proposed therein* Very truly yours, /s/ Geo J. Schaller President, Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority . l Q^6\ CONFIDENTIAL Excerpt from the minutes of the meeting of the executive committee of the Federal Open Market Committee held on _____________ $ ?y&mbe£ J 1 . . , ______ _____________ 95$ Attention was directed to the fact that, as the Federal Open Market Committee had approved the recommendation of the executive committee with respect to the readjustment of the participations of the Federal reserve banks in the System Open Market Account as of January 1, 1937, it would be necessary for the executive committee to direct the Federal Reserve Bank of New York to make the readjust ment. Accordingly, upon motion duly made and seconded and by unanimous vote, the Committee directed the Federal Reserve Bank of New York to make a readjustment as of January 1, 1957, in the participations of the Federal reserve banks in the System Open Market Account, using the same plan as that followed in making the readjustment on October 1, 1956; it being understood that before it is actually made the proposed readjustment will be submitted to all Federal reserve banks and the Board for any comments that they may desire to make. Reproduced from the Unclassified I Declassified Holdings of the National Archives | DECLASSIFIED ^Authority ■ ( 0 ^?6 \ DMsfen o Bank O r t o s f ? f pe a i n ! t 'iy CONFIDENTIAL Excerpt from the minutes of the meeting of the Federal _ Qpgn Earket Jk>mm.ltte^_held on November 19. 1956 In connection with the foregoing action it was stated that the executive committee at its meeting yesterday had voted to recom mend to the Federal Open Market Committee that the executive commit tee be authorized to follow, as of January 1, 1957, the same plan as that followed on October 1, 1956, in making readjustments of the participations of the Federal reserve banks in the System Open Mar ket Account; it being understood that before it is actually made the proposed readjustment of participations as of January 1, 1957, will be submitted to the Federal reserve banks for any comments that they may desire to make. Upon motion duly made and seconded, and by unanimous vote, the foregoing recom mendation of the executive committee was approved. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED S ' A Authority . { D^?6 \ L: Federal Resei'fe i .k of New York November 19,,1936. ACCOUNTING PROCEDURE FOR SYSTEM 63?EN MARKET ACCOUNT Recently some questions have been raised with respect to the accounting procedure in the System Open Market Account, with particular reference to the prem ium account carried on the books of the New York bank. As this procedure has not been critically examined in many years and as the banks are at this time reviewing the procedure for handling profits realized on sales of securities, the present is an opportune time to review the entire procedure• The present procedure was approved by the Reserve Banks in 1923 and amended in 1929 with respect to the method of handling profits. Under this procedure any premium or discount, and accrued interest on securities held in the Account are car ried solely on the books of the New York bank and the other Reserve Banks carry on their books simply the par value of their share of the securities held in the Account. The New York bank credits other reserve banks daily through the inter district settlement fund with their share of accrued earnings on the Account and advances funds for this purpose, reimbursing itself when interest is actually col lected. Profits or losses on the System Account are held in a Suspense Account on the books of the New York bank until the end of the year when they are distributed among the participants in relation to their average daily holdings in the System Account during the year. This plan was adopted as a matter of convenience at a time when the amounts involved were not large. This is no longer true. The total amounts now carried on the books of the New York bank for these premium and accrued interest accounts range over a six months* period from about $26 to $31 million, of which $19 to $23 million pertains to securities owned by the other eleven banks. These items are reflected in the statements of the New York bank under ”111 Other Assets,” and do not appear in the statements of the other banks. Thus, under this practice of carrying the premium, discount, and accrued interest accounts on the books of • Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority j j Q. / ( 0^6\ J 2 the New York hank, the statements of the individual banks do not reflect precisely the correct amount of their assets and liabilities although, of course, the consoli dated statement reflects a true picture for the System. Should it be deemed advisable to change the present procedure so that the books of each bank would reflect their full share of the System Account holdings it could be accomplished without adding greatly to the amount of bookkeeping work in volved, by having each bank carry on its books, in total amounts only, its pro rata share of premium, discount, and accrued interest. A procedure of accounting for sueh a plan is detailed in the attached memorandum. This suggested procedure also includes a change in the method of carrying and distributing profits in general accordance with the memorandum which was sent to all members of the open market committee and to all presidents on October 1. Un der the suggested procedure all profits or losses on^transactions in the Account would be distributed among the several Reserve Banks as they occur on the basis of average daily holdings in the Account during the twelve full calendar months last preceding the operation resulting in a profit or loss, except that profits realized on sales of maturing issues in connection with new Treasury financing would be used to write down the cost price of replacement purchases. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED r Authority jp Q . ( Q^ 6 \ No. Jiber 19, 1936. PROPOSAL FOR REVISION OF ACCOUNTING PROCEDURE FOR HANDLING _______ TRANSACTIONS IN SYSTEM OPEN MARKET ACCOUNT_______ 1. As securities are purchased or sold the New York bank will charge or credit the cost or proceeds of all purchases or sales to accounts carried on its books as follows: "A" System Open Market Account (with the par value only). t»B» Premium on Securities* ”C” Discount on Securities. ”D” Interest Accrued♦ 2. ^e (a) par amount, (b) premium, (c) discount, and (d) interest accrued on all securities purchased or sold will be pro rated by the New York bank to each reserve bank on percentages based on formula approved by the Federal Open Market Committee; and settlement therefore, will be made with each reserve bank through the inter-district settlement fund. 3. Each reserve bank will carry on its books the following accounts: "A” Participation in System Open Market Account (with the par value only). «B« Premium on Securities. ”C” Discount on Securities* ”D” Interest Accrued. and on its balance sheet form 34, the par value of its participation will be carried under caption ’Participation in System Open Market Account,” the premium and interest ’ accrued under caption ’Miscellaneous Assets,” and the discount under caption ’ ’Miscellaneous Liabilities.” ’ 4. Adjustments in participation will be made at book values, the New York bank debiting or crediting the banks through the inter-district settlement fund with the total cost or proceeds of the adjustment in the same manner that purchases and sales are handled. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority . I 2 5. The New York bank will maintain memorandum bookkeeping records showing (1) the amount of premium, discount, and interest accrued daily on each issue of securities held in the Account, (2) for the entire account the total amount of premium, discount, and interest accrued (separately), and each reserve bank’s pro rata share of the total of each of these three items. (Premium is amortized to earliest callable date and discount to maturity.) 6. The New York bank will figure the accruals of earnings each day on the entire amount of holdings in the System Open Market Account and each reserve bank's pro rata share, and will advise each bank by telegram the amounts of (1) Premium Amortization, (2) Discount Accrual, (3) Interest Accrued, and (4) Interest Earned on U. S. Government Direct Obligations, on its participation. bank will accrue earnings on its books daily on this basis. Each reserve (In order to facilitate handling the System Account, this information will be furnished one day late, except on the last day of the month when two days earnings will be accrued,*) Upon the col lection of coupons on interest payment dates, the New York bank will credit each bank through the inter-district settlement fund with its pro rata share of such payments, and each bank will credit this amount in its Accrued Interest Account, 7. Profits or losses on sales of securities will be distributed among the reserve banks as they occur on the basis of daily average holdings in the Account during the 12 full calendar months last preceding, except that profits realized on sales of maturing issues at times of, or in anticipation of, new Treasury financing will be used to write down the cost price of replacement purchases. (The amount of profit or loss on a sale is determined by the difference between the book value and the sale price at the time of sale .) . 8. When purchases and sales are made in other districts, cash settlement in full will be made with the New York bank and the operation will be carried through in the same manner as though it had been made in New York in the first instance. Reproduced from the Unclassified I Declassified Holdings of the National Archives j * DECLASSIFIED ^ Authority D . ( Q &)5 \ 3 9 4 Securities purchased for the Account, or vault receipts in case the securities are held by other Federal reserve banks, will be retained at the New York bank, The securities will be lodged in a vault compartment apart from all other securities of the bank, except that on proper authority amounts will be held in the joint custody of the Federal Reserve Bank and the Federal Reserve Agent as security for note issues. 10. Upon adoption of the aforegoing procedure, the New York bank will transfer to each other bank its pro rata share of Premium, Discount, and Interest Accrued, on securities in the System Open Market Account carried on the books of the New York bank. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority F o i n f . S . 131 RESERVE 10%\ *BBC’ XI PIIES SECS.I0B D " ' A R D DF G D V E R N D R S FEDERAL to. SYSTEM , Office Correspondence To FEB -11944 November 14, 19110* Mr. Goldenweiser Subject: System Portfolio ser From. SRTICTLI CONFIDENTIAL It is believed to be highly undesirable for the System to allow any of its short-term securities to run off at the present time. There are a mamber of reasons for taking this position. 1. The primary object of the System is the pursuit of an appropriate credit policy not the stabilization of the Government security market. If, in the opinion of the Treasury, the price of Government securities has risen more rapidly thaft is desirable, it would appear the sales should be made ty some of the Treasury agencies that have recently been purchasing securities. £. If Federal Reserve security operations are desirable at the present time, the System Account might sell some of the holdings of long-term bonds and purchase either short-term bonds or notes. The System’s present holdings of bonds are largely concentrated in long-term issues and some shortening of maturities might be desirable. The objection to this procedure, of course, is that l t will reduce the profits of the Account. i In view of the present size of the surplus, nearly $150,000,000, it is not believed that the earAings position of the System should be a determining factor in Federal Reserve policy. Question might be raised as to whether it should ever be a determining factor. Certainly with the present large surplus there would seem to be no reason to determine policy on the basis of reducing profits by a few million dollars. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED ^Authority & 0 ■ | 0 ^ 6 \ STRICTLY CONFIDENTIAL Mr. Goldenweiser 3* November 14, 1936 If it is desirable that the System take action at the present time with a view to reversing credit policy, the desirable method would appear to be through a further increase in reserve requirements. By the end of January excess reserves may have risen to $2,300,000,000 or more by a seasonal return of currency from circulation. Additional inflow of gold may possibly have increased excess reserves even further by this time. If the Board considers that the statement of July 15 commits it to use increases in reserve requirements to decrease excess reserves to a level of not below $1,900,000,000, there would still be the possibility of absorbing perhaps $500,000,000 by a further increase in reserve requirements. In other words, the statement of July 15 could be interpreted to permit a reduction of excess reserves from $2,400,000,000 to $1,900,000,000 by in creasing reserve requirements. This would permit an increase in reserve requirements to 165 percent of their previous level. If the Board does not feel that it is committed by the statement of July 15, it might be desirable to raise reserve requirements to the full amount permitted by law, which might reduce excess reserves at the end of January to a level of perhaps $900,000,000. Such action would probably raise short-term interest rates moderately, but it would be possible from that time to exert pressure readily by reducing the System portfolio. Reproduced from the Unclassified I Declassified Holdings of the National Archives | DECLASSIFIED | Authority ■ c O . f 1056' __________ ____________ 1 Form F. R. 181 OARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence To November 13 , 1936 SubjectA /Comments on New York memoranda on A c counting BrQCedureln.System )pen Market Account._________ M r. Sinead From Date Mr. Van Fossen SPO V f\ 1 8— 8 52 WWtlBg In paragraph 5 it is stated that adjustments in participations are made at book values. This apparently should be "Par values”. In paragraph B it is stated that each bank is advised each Wed' nesday night by the New York bank as to the division of its participation into bills, notes and bonds. Beginning January X# 1937 the bank^will have to show^ information daily on their balance sheets in accordance with Form 3U as revised for 1937, and I understand the New York bank will thereafter advise the other banks currently when ever a change occurs in the composition of their participation, instead of each Wednesday night. Memorandum on proposed accounting procedu^: In paragraph 2 it is stated that the Hew York bank will charge or credit each Reserve bank in the Interdistrict Settlement Fund with its pro rata share of (a) par amount, (b) premium, (c) discount, and (d) accrued interest, advising each Reserve bank by telegram ac cordingly; and in paragraph 3 it is stated that each other Reserve bank will credit or debit the Federal Reserve Bank of New York through the Interdistrict Settlement Fund. This appears to involve a duplica tion of payment although, of course, not so intended. As a practical matter, while either New York or the other Federal Reserve banks could take care of these payments by means of debits or credits in the Inter, district Settlement Fund it might be better to have the bank by which Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED . , 4 v i Authority t ‘ O- 1056' Mr. Sinead - #2 the payment is to be made in all cases credit the bank to which payment is to be made. In paragraph U> in connection with adjustments in participations, it is stated that the lew York bank will debit or credit the other banks through the Interdistrict Settlement Fund. No reference in this para graph or elsewhere is made to debits or credits by the other Federal Reserve banks* In paragraph 6 it is stated that the New York bank will advise each bank by telegram the amounts of (l) premium amortization, (2) dis count accrual, (3) interest accrued, and (4) interest earned on its participation. This may be necessary although the amounts involved presumably would not change from day to day unless there was a change ^ in securities held in the System account or in the participations of the various banks. Accordingly it would seem that the banks might be advised that these amounts would continue unchanged until further notice or, if preferred, a wire might be sent daily simply stating that there was no change from the preceding day. In paragraph 7 reference is made to advising each bank each Wed nesday night as to the division of its participation into bills, notes and bonds. As stated in the comment on the other memorandum, beginning January 1, 1937, it will be necessary for the banks to have information at all times as to this division and presumably it will be feasible to advise them only when changes occur. Reproduced from the Unclassified / Declassified Holdings of the National Archives j DECLASSIFIED j Authority Q . lQ^(S\ MISC. 136 2BM 5 -3 6 FEDERAL. RESERVE BANK OF NEW YORK INTERO FF = ______ _______ ROUTE SLIP it TO. DEPARTMENT DIVISION -SECTION REM A R KS 1 FROM Z , : et A v ^ -j d e par tm en t ,,. DIVISION --- SECTION N . B . USE THIS FORM INSTEAD OF OFFICE ENVELOPE WHEN POSSIBLE. TO INSURE PROMPT AND ACCURATE DELIVERY A LL COMMUNICATIONS SHOULD BE DISTINCTLY LABELED. d Holdings of the National Archives DECLASSIFIED Authority D . 10 ^ 6 \ L. F E D E R A L RESERVE B A N K of n e w DATE— - OFFICE C O R R E S P O N D E N C E October._£4*JSBa s u b je c t:, .......... — Fr .............................................. - Securities Dept Accounting Procedure in--------- t m m M m^ v, . M&rket Account. o m In line with your thought that It ral^ht be desirable to have the Federal Open Market Committee*s approval of the accounting procedure In operation In the System Open Market Account* and also review the ssfethod of handling the several accounts which are carried only on the books of the Sev/ York reserve bank, there is attached herewith a memorandum on the Accounting Procedure in the System Open Market Account with an alt' mate paragraph giving effect to change in the method of handling profits previous l suggested* y which could be submitted to the Committee for approval* and a discussion of th© several accounts carried only on the books of the New York bank follows• Under the present procedure which was adopted bade in 19&5* as a aatter of convenience in handling th© detail work in connection with the System Account* the amount of premium,discount* and accrued interest on the total holdings is carried on the books of the Hew York bank* From the viewpoint of simplicity tills practice perhaps is still the most convenient way in which it sight be handled* Boi ever* in earlier years the amount carried in these accounts was not large and the f ct that the Account was carried by one bank was not material although* no doubt* it was not then expected that the aiaounts Involved would grow to their present levels* For several months in 1924 the premium account amounted to close to f5 million but by the end of 1925 the amount was down to a little over £1 million* Froa that time until May 1931* when it amounted to less than |1 million* the largest amount carried was. under f£*5 million* Since then it has grown to a peak In June of this year of over $19 million and at the present time awaits to over |17 million* The amount of interest ac crued not collected* has likewise Increased to aiaounts which now vary over a six R e p r o d u c e d fro m th e U n c la s s ifie d / D e c la s s ifie d H o ld in g s o f th e N a tio n a l A rc h iv e s MI S C . 3.2 6 0M S-36 FE D E R A L RESERVE B A N K OF NEW Y O R K O FFICE C O R R E S P O N D E N C E f r Burgess t« ]> ~ &tf October $4f l Sfl— * ^ gl, , T. R F^ Accounting Procedure la______ T o - ------------------------------------ ---------- I c s e Open Market Account frt* Securities D*pt FROM--------------------- ---- --------- •oaths* period fro* $6 million to flS allllow while tho amount of diecount was never over fl aillloa, It now baing only thousand. la snaasrlsing these iteme, tho total emount of tbiji accounts ever a six month#* period is ranging fro® about $26 million to |5l aillic®* of which amounts fro* $19 million to $25 million is for pren&an sad accrued interest oo securities owed by other reserre banks# The funds utilised for these accounts are furnished by the lee York bank sad the itens are Included la Its statement under *A11 Other Assets#* I e lew forte bank, of coarse* receives no return te on these funds, earnings on securities being apportioned on a basis of par value participation sad not oo the basis of dollar amount invested* Fam ings are creditor to each bank daily prior to the collection of interest by the law York bank. Although the anount of aocraed interest advanced to the other banks is constantly a fairly substantial figure, relaburg— nt follows at the ead of Interest periods (six months), or when the securities are sold, hot in th# c m o of the pranium aooouat ralmbureonsnt is neeeeisaiiLy gradual (daily amortisation) sad spread over a long parted* except of coarse whoa the securities era sold at hook values or better* Horeorer, the praniua accountf in the event of a aarket deoliae, is a potential liability, of whioh a pro rata share belongs to the other beaks* The present appreciation ($85 million) of market values over book values is a cushion, or a form of rese*^? egaiast a decline, hot oould be wiped oat quickly la a declining market# Of coarse, losses would result only in ease the securities were actually sold, otherwise they would be fully amortised by maturity end re* dee&ed at ' a # pr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority D . I0^6\ L: FED ER A L RESERV E BANK OF N E W YORK OFFICE C O R R E S P O N D E N C E To— bit# Burgeaa ---- d a te ___ October U » 1986 s u b j e c t : _Accounting Procedure la Systam Open MarketAccount F r o m — Se curities Bept On instances la the past where book values exceeded sarket values reserves have been set up by each bank at the end of the year# However, in view of the fact that the reserves set up by the eleven banka were against a depreciation la aa account carried by the Nev; York bank, the question might be raised aa to the correctness of this accounting procedure* Also, owing to the several accounts being carried entirely by the Sew Tork bank, the statements of the Individual banks do not reflect the correct amount of their assets and liabilities although, of course, a true picture Is reflected in a consolidated statement* Perhaps the only feasible method of handily the ^stesa Account so that the books of each bank would reflect a true picture would be to trans fer to each bank it® share of prealun, discount and accrued interest* These accounts could then be maintained on the books of each bank and entries made in accordance with advice received dally from the New York bank* While this procedure would increaae the amount of bookkeeping work for the He > lark bank it would not be burdensome provided, of course, that the Account is continued aa a pool account and only total figures are dealt with* In another memorandum attached an accounting procedure for handling the System Account is detailed giving effect to this change in procedure with an alter nate paragraph giving effect to change in the method of handling profits you previously suggested to the Committee* In the event that the procedure men tioned In tills meujorandm Is adopted the latter mmoranduis of procedure could be rubaitted to the Co®aittee for approval* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED > ---- -------- ' Authority 0 . I066\ _ - — ------------ -—----------- ----------- -—_— — / w u- . •* ' ■ r 1 mmmmm o n ACCOm^im PROCEDURE in SYSTBI oral VAIOCFT ACCOUHT 1* As securities are purchased (the procedure is reversed If securities are sold) the Hew fork bank charge® the par amount of the securities to a special account on its books entitled "System Open Market Account* * The par amount of the purchases (as distinguished from the cost price) is then pro rated among the banks on percentages based on formula approved by the Federal Open Market Committee* The Hew York bank credit® the amount pro rated to the other banks to an account on its books entitled "Participation of Other Federal Reserve Banks in Sestets Open Market Account*" Upon wire advice, Hew York is credited by the other banks for the par amount of their allotment through the inter-district settlement fund* £• The difference between the cost price of the securities and their par value is set up on the books of the Hew York bank, as the case may require, in accounts entitled "Premium on Securities,* •Discount on Securities," and "Interest Accrued*" Ising these sane f accounts, interest is accrued daily at coupon rates, premium is araortised daily to earliest callable date, and discount to maturity* 5* Earnings (the amount of the daily accrual of interest, plus discount amortisation, less premium amortisation) are transferred daily to an account on the books of the Hew York bank styled "Interest Earned on 1 * S* Government Direct Obligations, • and the net earnings 3 distribute d out of this account at once to the several banks on the basis of holding ratios* Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED ^Authority fc-Q lD^6\ -s4« Profits or losses on sales of securities are carried in a "Suspense Account** on the books of the Hew York bank and distributed among the banks at the end of the year on the basis of daily average holdings in the Account during the year. (The aaount of profit or loss on a sal© is determined by the difference between present book value and the sale price). 5. Alternate Paragraph 4 is given below. Adjustments in participation are made at book values, the Hew York bank debiting or crediting the banks through the inter-district settlement fund with the par amount of the adjustment. 6* When purchases are made in other districts, the purchasing bank receives payment in full from the Sew York bank and the operation is carried through in the same manner as though it had been made in Hew York in the first instance. 7. Securities purchased for the Account, or trust receipts in case the securities are held by other Federal reserve banks, are retained at the Hew York bank. The securities are lodged in a vault compartment apart from all other securities of the bank, except that on proper author ity such amounts as are requested are held in the joint custody of the Federal Reserve Bank and the Federal Reserve Agent as security for note Issues. 8* The figures reported in the weekly press statement are against the usual captions *U. S. Treasury Bills,” and *U. S. Treasury Botes,* S* Treasury Bonds,* as the case may be, and each bank is advised each Wednesday night by the Hew York bank as to the division of its par ticipation between these three accounts. ALTERNATE PARAGRAPH 4 Profits or losses on sales of securities a r e carri ed a "Suspense Account** on the books of the Hew York bank and distributed in the Unclassified / Declassified Holdings of the N a t io n a lA r c h iv e s ^ ^ ^ ^ ^ ^ ^ ” ^ ^ " ^ ^ " ^ ^ * ^ ^ ^ ™ " ” j DECLASSIFIED j Authority j^ Q . j Q ^ 6 \ • * - ' * aaong t m bank* at the and of the year on the basis of daily average l holdings in tha Account during tha year, except that effective .. . profits realised on aales of Maturing issues at tines « of m » Treasury financing are to ba used to write down the cost prloe of replacement purchases* (The aaount of profit or loss on a sale Is deteralnOd by tha difference between the book value and tha sale price at the tiaa of sale)* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority . (0 ^6 J -*/i-*■*’" • * w > / > "*1 jsjMi ^ O' Tv f u s Ol m m n m a a m m n » i a m i mabxxt accobit Afo m JC A * /\ (Eaviski to Include Suggested Changes) 1 L /C-C~y v <? m >£ is securities are purchased c r sold the Hew York bank will a charge or credit the cost or proceeds of all purchases or sales to ac counts carried oa ita books as follows t •A* ”B* .■ j?'- • 7- System Open Hsrket Account (with the par value only)* Preaiua on Securities* * - ' -* * %, ;V *C* Discount on Securitiea* •D* Interest Accrued* t• The (a) par amount, (b) premium, (c) discount and (d) inter est accrued on all securities purchased or sold will be pro rated by the Sew Tork bank to each reserve beak on percentages based on fornala approved by the Faderal Open Market " pjn^K^r: f * —* ^ log each reaerve bank l t the Inter^-dlstrict settlement fund eitti Ate pro a 5* gpon rocelp&ef-thcse-telaBynaa, eack other-■reserve bank viil ijMEgai T AATxJtJ T < .\ »v — 1 — « •A* « a a r A^-r-y accounts, Participation la Wystan Open Market Account (with the par value only)* *B» PreadLua on Securities* *C* Discount cm Securities* *D* Interest Accrued* aad aa lta balanat t c a c fat* 84* tti par faf h Im af its parM<l|iittii sill be carried under caption "Participation in Systea Open Market Account,* the pmadam aad latarea* aaatwad adar aaptlaa <ttmllaai«a Aaaeiej" aad U a discount under caption •Miscellaneous Liabilities*w num me unclassified / Declassified Holdings of the National A rc h iv e "--------------------------------------------------------------------------- - r j a> cla s s i f i ! d e 1 Authority J ^ Q , - ~ |Q 2- be 4* Adjustments la i»rtlelpatlo& at book valsc«| tha lav York b a d debiting or crediting the banks through the inter-district settlea*at fund eith tha total cost or proceeds of tha edjustaant in tha ssae aanaar that purchases aad sales are handled « 5« tha Baa York bank will aalataln asaorsadua bookkeeping records showing (1) tha aaount of prealua, discount aad Interest accrued daily on tiar ^ f ** 1 -■■ i.%,j n &* t b e te l a a m m tr o f e a c h la s a e e f s e c u r it ie s h e ld i n th e A c c o u n t / ( 2) tbm t o t a l aaoant ef preaiaa, dlscouat sad L a te r e s t scented (separately), sad each re. * fK) "gaorta beak*e pro rata shareAi 3: '#th»a> items. (Prealua is aaortised to earliest callable date sad discount to aaturltgr)* §• The lea York beak will figure the accruals ef earning - each day on the m t & m oaount of holdings la the Qjrstsi Open Market Account and each reserve baak’s pro rats share, aad will advise each bask by telegrea the aaounts of (1) Preaiua Amortisation, (g) Discount Accrual, (8) Interest Ac crued, sad (4) Interest Famed on 3* 8* Government Direct Obligations, on its partial] a n t h la if * ' & bank will accrue aaralnfii on its books daily by the Hee ^ fi ' J LA. of earnings by the latter beak ealts own order to ftaallitate b o a d a g the 3ystea Account, thla lnforaatlon will be fur- \ I M H T B R R M n )• Upon the collection of coupons on Interest peyasat dates, the lew York bank will credit each bsafe.alth ite pro rata ahara of such pay/ k x A ^ l i / h i x F f& S — ---- • s ' stents ito aarti baak a U X credit tidi aaao aaoant la its Accrued Interest Account* *6r . ?• Ike f%uree reported la the weekly press stateaent will be sgalast tha waesl sayilmu • S* fraasnrj Bills,• «9#8* Treasury totee,* <" r sad *9* 8* Treasury Bonds,* aa tha caae aey be sad each baak will be advised each Wednesday night by tha York beak as to the division ef ite partial-' A patlon between these three accounts* y \ ’ '' A . . v ■* Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED A u t h o r it y t O . 1D £ 6 a : " i, V —5— ' j Profits or losses on saleaof securities will be carried in a "Suspense Account" on the books of the Sew York bank and distributed among the banks at the end of theyear on the basis of daily average holdings in the Account during t M year* (The amount of profit or loss on a sale is determined by the difference between present book value and the sale price) Alternate Paragraph 8 is given below# 9, When purchases and sales are made in other districts, cash settlement in full will be made with the New York bank and the operation will be carried through in the same manner as though it had been made in Hew York in the first instance* ^ JkSS* Securities purchased for the Account, or vault receipts in case the securities are held by other Federal reserve banks, will be re tained at the New York bank* The securities will be lodged in a vault compartment apart from all other securities of the bank, except that on E, t proper authority amounts will be held in the joint custody of the Federal Reserve Bank and the Federal Reserve Agent as security for note issues. g. / ^ ~-H* Upon adoption of the aforegoing procedure, the New York bank will transfer to each other t>ank its pro rata share of Premium, Discount and Interest Accrued, on securities in the System Open Market Account car ried on the books of the Hew York bank* ALTERNATE PARAGRAPH r 7 Its or losses on sales of es will be dis profits realized on sales of matur- s Q be used to write down Ml Ml -P .u u u c e a rrom the Unclassified / Declassified Holdings of the National Archives' j DECLASSIFIED j Authority £ 0 . l o ^ h . the cost price of replacement purchases. (The amount of profit or logs on a sale is determined by the difference between the book value and the sale price at the time of sale)* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority & D . | Q^ 6 \ / / OPEN M AMET ACCOUNTING PROBLEMS Interest. Transfers from New York to other Federal Reserve banks are now made daily covering accrued interest on United States Government securities. Question: Should this plan be continued or should New York transfer interest only as received? If the latter policy is adopted each Federal Reserve bank would accrue interest on its books daily. The amount of the daily accrual would be furnished each bank by New York. 2. Premium. The premium on securities held in the System Open Market Account is all carried on the books of the Federal Reserve Bank of New York. Questions Should not each bank carry its proportion of the premium account on its own books? 3. Profits on sales of securities. In accordance with agreements already M/ arrived at profits on sales of securities on quarterl^periods arising because of the conversion privilege of maturing securities are to be used to write down the book value of newly purchased securities. Question} Should profits resulting from other sales of securities be similarly treated or should they (a) be distributed among the Federal Reserve banks on the basis of holdings on the day the profit is received or, (b) distributed among the Federal Reserve banks on the basis of their average participation in the System account during the 12 calendar months ending on the last day of the month preceding the sale or, (c) should they be distributed among the Federal Reserve banks on the basis of the average participation in such securities during the period they are - - unclassified / Declassified Holdings of the National Archlv“ j DE C L A S S m E D ~ ^A u th o rityj^Q , | Q ^ 6 l - - # held 4, 2r the System? Should losses on sales of securities be handled the same as profits? Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority \ 0 .( , F o r m F . J t . 131 □ ARD DF G O V E R N O R S IN RECORDSW * 0 N □ F THE FEDERAL RESERVE SYSTEM APR 2 51968 Office Correspondence T o ____ Dat Subject ; Mr. Smead____ From_____Mr. Van Fossen Accounl October 16, 1937 Tg in' connection with the System Open Market Account.________ The f i r s t purchase o f United S t a t e s Government s e c u r i t ie s by the F e d e ral R eserve Bank o f New York fo r the System Open Market Account was made on December 15, 1923. T o ta l pu rch ases o f United S t a t e s Government s e c u r i t ie s fo r the System Account to the end o f 1923 amounted to $ 9 ,0 5 3 ,5 0 0 . These s e c u r i t ie s were a llo c a te d to the v a rio u s F e d e ral Reserve banks on Jan uary 2, 1924-, a s o f Jan u ary 1 . A llo c a tio n s : The i n i t i a l a llo c a t io n was design ed to a f f e c t r e se rv e p ercen tages e q u a lly . This arrangement was continued u n t il May 31, 193-4, w ith s p e c ia l a d d itio n a l allo tm en ts to in d iv id u a l banks needing a d d itio n a l e a rn in g s. From June 1 , 1924- to May 28, 1933 a llo c a t io n s were made on the b a s i s o f estim ated requirem ents fo r earn in gs to cover exp en ses, dividen ds and c h a r g e - o ffs . From May 29, 1933 to February, 1935, a llo c a t io n s were made in accordance w ith the r a t i o o f each bank* s re se r v e s above a 55 percen t ( l a t e r 50 percen t) re se rv e r a t i o to the System t o t a l . From F ebruary, 1935, to June 30, 1936, a llo c a t io n s were based on estim ated earn in g s requirem ents to cover ex p en ses, dividen ds and c h a r g e - o ffs . From J u ly 1 , 1936, to d ate a llo c a t io n s have been made on the b a s is o f f i r s t pro vid in g fo r exp en ses, in clu d in g normal d e p re c ia tio n , and then d is t r ib u t in g any excess earn in gs in p ro p ortio n to dividend req u irem en ts. A llo c a tio n s on J u l y 1 and October 1 , 1936, did not tak e in to account a c tu a l r e s u l t s during the calen d ar y ear to d ate but were computed on the b a s i s o f estim ated r e quirem ents i f the a llo c a t io n had been made on Jan u ary 1 , 1936. P r ic e : United S t a t e s Government s e c u r i t ie s held in the System Open Market Account have been c a r r ie d on the books o f the F e d e ra l R eserve banks a t p ar and Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority . |0^6\ Mr. Smead - #2 u n t i l Jan u ary 1 , 1937 the premium and d isco u n t accoun ts were c a r r ie d by the F e d e ra l R eserve Bank o f New York. Sin ce Jan u ary 1 , 1937, the premium and d isco u n t accoun ts have been a llo c a te d to the v a rio u s F e d e ra l R eserve ban ks. E a rn in g s, p r o f i t s and l o s s e s w e re ^ d istrib u te d a s to produce the same r e s u l t a s i f a llo c a t io n s to each J? e d e ra l R eserve bank had been made on the b a s i s o f book v a lu e . There have been th ree in s t a n c e s , however, where F e d e ral R eserve banks have so ld a p ro p o rtio n o f t h e ir p a r t ic ip a t io n s f o r re -a llo tm e n t to oth er F e d e ra l R eserve banks a t cu rren t market v a lu e s a s ’fo llo w s : 192$, S t .L o u is so ld $10,0 0 0 ,0 0 0 a t a l o s s o f ap proxim ately $ 7 ,0 0 0 . In September In October 1928 K ansas C ity so ld $ 5 ,1 2 2 ,0 0 0 a t a l o s s o f $ 1 8 ,6 2 0 .2 2 . In March, 1929, S t .L o u is so ld $ 2 ,2 0 0 ,0 0 0 a t market v a lu e , the amount o f the l o s s , i f any, not bein g known. E a rn in g s: E arn in gs have alw ays been d is t r ib u t e d d a ily by the F e d e ra l R eserve Bank o f New York. It' has been the p r a c t ic e to am ortize premiums to m atu rity or to the c a l l d ate and to am ortize d isc o u n ts to m a tu rity . D istr ib u tio n o f P r o f i t s and L o s s e s : From Jan u ary 1 , 1924. to December 31, 192.9, p r o f i t s and l o s s e s were d is t r ib u t e d c u rr e n tly in p ro p o rtio n to p a r t i c i p a tio n s in the account a t the tim e . From Ja n u a ry 1 , 1929, to December 3 1 , 1936, p r o f i t s and l o s s e s were d is t r ib u t e d a t the end of each ca le n d ar y ear on the b a s i s o f average h oldin gs during the y e a r . From Jan u ary 1 , 1937, to d ate p r o f i t s and l o s s e s have been d is t r ib u t e d c u rr e n tly in p ro p o rtio n to average p a r t ic ip a t io n s during the tw elve ‘calen d ar months preceding the month in which the s e c u r i t i e s were so ld *^ e x c e p t th a t premiums re c e iv e d on m aturing s e c u r i t i e s * ) ^ ? have been used to write-down the c o s t o f s e c u r i t i e s purchased in replacem ent th e re o f) O' ^ J s A k ~tL 0 ^ -w A ) U Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED I ^ !> \ ' ^Authority jO 0 I Q66\ F o j f f . F . B . 131 'ARD DF n w 'v i i f ile s G O V E R N □ RS □ F THE FEDERAL t'FP. RESERVE SYSTEM Office Correspondence To Mr. Goldenweiser From. October 1, 1956 L. M. Pise; Subject: Portfolio of the System Open Market Account_____ It 1? suggested that the proportion of Treasury bonds held in the System Open Market Account be increased and that a small amount of fully guaranteed Government obligations be purchased. This increase could be offset by a decrease in holdings of Treasury notes. A small change along these lines would increase the earnings of the Account to the level of expenses and dividends. An analysis of the distribution of investments in different types banks of member banks indicates that the Federal Reserve/hold a considerably smaller proportion of their Government securities in the form of bonds. This is shown in the following table. Member banks z/ Federal Central reserve Reserve Reserve city banks city banks 1/ New York Chicago banks Percent distribution of investments: Treasury bonds.... 16 28 Treasury notes..... 59 57 Treasury bills..... 25 25 Fully guaranteed... — 12 Country banks 56 55 5 8 45 42 2 15 50 26 1 25 15 85 50 70 46 54 Percent distribution of deposits? — 100 2j 5 95 June 50, 1956. It will be noted from the table that there is a tendency for a con centration of investments in Treasury notes and bills on the part of central reserve city banks^which hold large demand deposits in relation to l Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED j A t oit t O. 10^6\ uh r y Mr. Goldenweiser Page #2 October 1, 1956 time deposits, while there is a tendency toward a concentration on Treas ury bonds and on guaranteed securities in the case of country banks^ which hold a relatively large amount of time deposits. On the basis of the figures for these groups at member banks it would be expected that a member bank holding only demand deposits, such as is the case for Federal Reserve banks, would hold its investments largely in the form of Treasury notes and bills. This, of course, is the case, but it appears that the System Open Market Account holds a relatively small amount of Treasury bonds and a relatively large amount of Treasury notes. Perhaps a reasonable distribution of investments in the Account with a view to securing an increase in earnings without acquiring an unusually large proportion of long-term securities is as followst Treasury bonds, 25 percent; Treasury notes, 40 percent; Treasury bills, 25 percent; fully guaranteed obliga tions, 10 percent. It is estimated that a shift of this extent would raise earnings in the Account by about $6,000,000 a year* Since an increase of only about $2,000,000 is necessary to bring earnings to the level of expenses and dividends, it would not be necessary to carry this program out in full, but the results could be accomplished by the purchase of perhaps $75,000,000 each of Treasury bonds and fully guaranteed obligations and the sale of $150,000,000 of Treasury notes. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority iO- 1056' J~YW Av v m m m m f m ihe k b u i c m maekkt o a w m m and to e w m s m a m of a u n a m i m s m t b m m At its last mating in Washington on September 2 the executive ooumittee of the Federal Open Market Committee discussed the question of the disposition of profits realized on sales of government securities in the System account, and again agreed upon -the conclusion reached at a meeting on June 24 that realized profits should hereafter be used to write down the book value of securities purchased for the account. It was the opinion of the conmittee, however, that action in th is matter should be taken only at a meeting of the full Federal Opm Market O w tittee and after diseussion of the question with the presidents of the federal reserve banks, possibly at the next Presidents Conference. As a preliminary to such di#* GumXmB it was suggested that a memorandum be sent to the coasaittee and to all presidents setting forth the considerations bearing on this question* A major part of the profits uiiich have been realized recently are a W&«* salt of th# aethod of handling the Systems maturities at times of new financing to conform with the spirit of that clause of the talking A&t of 1935 which limit® purchases and sales of securities to the open market. Since the passage of this Act the System has no longer exchanged its maturing issues directly with the ®rea«Qpy t m sew issues, but has sold its maturing issues and purchased new Other issues in the market. Ifcia operation has resulted in a profit on the ing issues, and the purchase of the new issues at about a point or more premium* Hie effect has thus been to take an immediate profit at the expense of an Increased book value for securities acquired, and hence a lower yield rate. put it •nother wagr the result is to mark up the book value of securities held and reduce th# yield rata* It sacrifices future earnings for present profits. Reproduced from the Unclassified / Declassified Holdings of the National Archives j DECLASSIFIED ^Authority £ 0 . | 0 ^6\ 2 I t would appear to be sounder and more co n se rv a tiv e procedure to use th e r e a liz e d p r o f i t s to w rite down the book v alu e o f new s e c u r i t i e s purchased* Tn the case of an exchange offering, the new securities would thus be put on the books at approximately par; higher; their current yield over a period would be a little and the possible danger of a later depreciation be somewhat reduced* A study has been made of the accounting practice involved, and there appears to be no technical difficulty in the way of the new procedure suggested. There a r e , o f co u rse , o th er p o s sib le accounting methods f o r s e t t i n g a sid e r e a liz e d p r o f i t s . They could be p lac e d in re se rv e account e ith e r in the foxm o f a s p e c ia l v a lu a tio n re se rv e or in th e g e n e ra l re se rv e funds c a r r ie d by each bank. There are a number o f o b je c tio n s to t h i s p rocedu re, however. F i r s t , the banks would not g e t the b e n e fit o f the a d d itio n a l current y ie ld which would r e s u lt from the p lan o f w ritin g down th e book v alu e o f s e c u r i t i e s , and which would be d i s t r ib u te d among the re se rv e banks in accordance with t h e ir average d a ily h o ld in gs in the account over the f u l l term o f th e h o ld in g s. Second, th ere would be frequ en t problem s to be s e t t l e d l a t e r a s to the d is p o s it io n and s t a t u s o f any re se rv e so s e t up. The plan of u sin g p r o f i t s to d ecrease book v alu e seems the sim p le st and sound e st. The d e c isio n reached on t h i s m atter w i l l , o f co u rse, have a co n sid e ra b le in flu en ce on th e earn in g s p o s itio n o f the re se rv e banks fo r th e current and succeed ing y e a r s . I f a c tio n i s taken i t w ill be n e c e ssa ry to decide whether the new procedure should be introduced e f f e c t iv e only f o r the fu tu re o r whether i t should be ap p lie d r e t r o a o t iv e ly to some date in 1936. The t o t a l amount o f p r o f i t s r e a liz e d sin c e Janu ary 1 , 1936, and now held in suspense account i s $ 3 ,8 7 2 ,7 2 0 . The e arn in g s p o s itio n o f the s e v e r a l re se rv e banks through August i s shown in the attach ed t a b l e . W Randolph B u rg e ss, . Manager, System Open Market Account. Profit Total Profit ATaiilai.1 • for Gross *arnit**s Boston Jurrent Not Deduction* (Lurrely iJivldaad»)» !&&*&*+* * 1,699 >122 ♦1,511,109 MpreeittioR Allowance* B*s«rv«« sur^las ♦ 380,719 ♦-192,706 On S»l*s Share of Profits haelizod in Kror. O n w Portfolio ♦ bystarn Account0 R ttlif*4 OU Shi.** of 3 * c jr lt l* » d l,669 ♦ 267,795 ♦ 349,664 M York ow 7,217,082 5,3*6,?;3 2,07i,6ia -201,489 1,349,025 1,058,829 2,407,654 Ph. .adslphia 2,100,495 1,763,991 508,658 -172,154 '113,863 314,833 428,696 roland 2,319,943 1,995,010 552,348 -227,415 - 378,341 378,341 M iohm ond 1,370 ,258 1 ,19 3 ,9 5 6 200,448 - 24,146 - 203,562 203,562 Atlanta 1,030 ,162 908,634 163,809 - 42,281 m 165,563 165,563 Chicago 2,978,680 2,484,996 482,620 11,12 4 475,056 463,665 938,721 St* Louis 1,288,168 1,0 16 ,8 0 7 167,055 104,306 9 ,531 2 11,14 8 220,679 Minaoapolis 901,799 818,763 69,181 13,90 5 497,793 12 5 ,5 4 * 623,339 Kansas Oity 1,310 ,20 8 1,226,780 1 4 1 ,1 5 8 -57,730 12,059 196,579 208,636 AS 1,0 6 7,577 889,966 150,479 2 7,132 680,371 142,729 823,100 P nadiM 2 ,12 9 ,3 14 1,878,560 354,378 -10 3,6 24 344,130 344,130 #25,412,808 #21,035,470 #5,242,416 ♦-865,078 ♦3,872,720 #7,092,287 k f Totals - #3,219*567 eluding profits on sseuritiss oithsr in own account or Systsm Account* °Ai of tispt. 30, now held in tuspsnso Account, Reproduced from the Unclassified / Declassified Holdings of the National Archives j DECLASSIFIED ^Authority j yO . ( 0^6\ Division of Bank Operations Fil« U September 17, 1936 Dr* W. Randolph Burgess, Manager* Systea Open Market Account, F e d e ra l R eserve Bank of Hew lork, Hew York, N* I. Dear Dr. Burgesst The aeaoranduB inclosed with your letter o . Septmber f prepared on the instructions of the meeting of the executive committee on September 2, with respect to the handling of profits on sales of securities ia the System account eeens to me to cover the points involved* While I think the Blitter should be given consideration by the full committee, I am inclined to believe that it would be better to make the change with respect to the handling of the profits effective a© of the date approved by the committee rather than retroactively to some prior date in 1936* This procedure would avoid any possible question with respect to how profits already received should be distributed* I also think it might be well to avoid statements to the effect that the danger of later lose is gome** what greater under the -resent procedure than under the proposed* Accord > ingly, I would suggest that the attached be substituted for that part of your meaor&ndua beginning with the last sentence on page 1 and ending oa page 3. The changes are merely in the nature of a suggestion as I think the maaorandu® as you have written it would serve the purpose very well. It is assumed that nhen completed the memorandum will be sent to Mr. Morrill, Secretary of the Committee, and forwarded by Ilia to all Federal Reserve banks* Very truly yours, £* I * Smead, Chief, t Division of Bank Operations* Inclosure* Reproduced from the Unclassified I Declassified Holdings of the National Archives | DECLASSIFIED J Authority ■ 10 h5 \ It treats as profits income which would be Included in current earnings If there was a direct exchange of securities with the Treasury instead of a purchase and sale in the open market* It would appear to be sounder and aore conservative procedure to use the realized profits to write down the book value of new securities pur chased. In the case of an exchange offering the new securities would thus be put on the books at approximately par and the current yield would be a little higher. A study has been made of the accounting practice involved, and there appears to be no technical difficulty in the way of the new pro cedure suggested, There are, of course, other possible accounting methods for dealing with this problem# All profits realized on sales of Government securities could be credited to profit m d loss or to reserves, Heither of these methods, however, would result in a Federal Reserve bank,s obtaining the portion of these profits which are properly creditable to it on the basis of its average daily participation in the System account as would be the case if profits were used to write down the book value of new securities purchased, The decision reached on this matter will, of course, have a con siderable influence on the earnings position of the Reserve banks and, if adopted, it will be necessary to decide whether the new procedure should be introduced effective only for the future or whether it should be applied retroactively to some date in 1936. The total amount of profits realised since January 1, 1936, and now held in suspense account is & ■ , . It has been suggested that this question be discussed at the next Presidents* conference* Reproduced from the Unclassified I Declassified Holdings of the National Archives j DECLASSIFIED j Authority t O . 1056' L r~ / Operations rik received F e d e ra l R e s e rv e B a n k 1 5 1S3Q of N e w Yo r k DIVISION OF t bank operations " September 14, 1936. Dear Mr. Smeads Enclosed herew ith i s a d r a f t o f a memorandum p re pared on the in s t r u c t io n s o f the m eeting o f the exe cu tiv e committee September 2 . I should lik e very much to g e t any su g g e stio n s you may have. Very t r u ly y o u rs, W Randolph Burgess . Manager System Open Market Account j Mr. E. L. Smead, C h ie f, D iv isio n o f Bank O p eratio n s, Board o f Governors o f the F e d e ra l R eserve System , Washington, D. C. WRB.H e n c l. i Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority . (0^6 September 14, 1936. MEMORANDUM FOR THE FEDERAL OPEN MARKET COMMITTEE AND THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS At its last meeting in Washington on September 2 the executive committee of the Federal Open Market Committee discussed the question of the disposition of profits realized on sales of government securities in the System account, and again agreed upon the conclusion reached at a meeting on June 2 4 that realized profits should hereafter be used to write down the book value of securities purchased for the account. It was the opinion of the committee, however, that action in this matter should be taken only at a meeting of the full Federal Open Market Commottee and after discussion of the question with the presidents of the Federal reserve banks. As a preliminary to such discussions it was sug gested that a memorandum be sent to the committee and to all presidents setting forth the considerations bearing on this question. A major part of the profits which have been realized recently are a result of the method of handling the System's maturities at times of new financing to conform with the spirit of that clause of the Banking Act of 1935 which limits purchases and sales of securities to the open market. Since the passage of this Act the System has no longer exchanged its maturing Issues directly with the Treasury for new issues, but has sold its maturing issues and purchased new or other issues in the market. This operation has resulted in a profit on the maturing issues, and the purchase of the new issues at about a point or more premium. The effect has thus been to take an immediate profit at the expense of an increased book value for securities acquired, and hence a lower yield rate. To put it another way the result is to mark up the book value of securities held and reduce the yield rate. j/s s 'iu d . It sacrifices future earnings for present i Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority ~ profits. 2 tO. 1066' - It also increases slightly the danger of later loss. <J u It would appear to he sounder and more conservative procedure tdp.se the realized profits to write down the book value of new securities purchased, fIn the case of an exchange offering, the new securities would thus be put on the books at approximately par; a period would be a little higher; be somewhat their current yield over and the danger of a later depreciation A study has been made of the accounting practice involved, and there appears to be no technical difficulty in the way of the new procedure suggested. There are, of course, other possible accounting methods for dealing with this problem. All profits realized on sales of government securities could be placed in reserve account either in the form of a special valuation reserve or in the general reserve funds carried by each bank. There are a number of objections to this procedure, however. First, it is rather awkward and perhaps embarrassing for the Reserve System to be setting up reserves against government securities. Second, the banks would not get the benefit of the additional current yield which would result from the plan of writing down the book value of securities. Third, there would be frequent accounting problems to be settled later as to the disposition and status of any reserve so set up. The plan of using profits to decrease book value seems the soundest. The decision reached on this matter will, of course, have a considerable influence on the earnings position of the reserve banks for the current and succeeding years. The total amount of profits realized to date this calendar year and now held in suspense account is Without the use of these profits it seems clear that the earnings of the reserve bank® will not be sufficient to meet their expenses, dividends, and chargeoffs. Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority f c Q - 3 (0^6\ - The fig u r e s are shown on the attac h e d t a b le . They have a b earin g upon the q u e stio n whether the new procedure should be introduced e f f e c t iv e only fo r the fu tu re or whether i t should be a p p lie d r e t r o a c t iv e ly to some p a r t o f the year to d a te . I t has been su g gested th a t t h i s q u e stio n be d isc u sse d a t the next P r e s id e n t 's co n feren ce. W Randolph Burgess . Manager. System Open Market Account Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Eorm F. B . 131 1^58 \RD OF G Q V E R N D R B lj FEDERAL r in c . RESERVE S Y S f% W ™ Office Correspondence To Mr. Smead From fWratfon* FN|g ^ Dai-p September 4, 1956. Mr. Carpenter C l 2 Subject: 3 | At a meeting of the executive committee of the Federal Open Market Committee held in Washington on September 2, 1956, approval was given to a suggestion that the secretary of the Committee be requested to address a letter to each member of the Committee sug gesting that there be considered at the next meeting of the full committee, with a view to taking action at that meeting, the pro posal that realized profits on Government securities sold from the System account be used in the future to write down the book values of the securities held in the account* I discussed this matter with Mr. Burgess following the meeting and it was understood that he would prepare a memc^andum regarding the matter which would contain a recommendation as to the action to / be taken, and that he would forward copies of the memorandum to this office for transmission to the membe?>6 of the Federal Open Market Committee with the letter referral to above. When the copies of Mr. Burgess* memorandum are received it will be appreciated if you will prepare for Mr. Morrill1s signature as Secretary of the Committee a draft of letter t® the members of the committee in accordance with I understand Mr. Burgess / / 0 ^ Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 1235B fiMtfon of B k O an perations Fife September 1, 1936 Governor H&nscw Mr* Saead Xa accordance with the suggestion rnde at the Bo.rd mating fhurad&y* 1 c a ll e d president Hamilton o f the Federal Reserve &?xk o f Kansas C ity m the telephone this morning with respect to tha bank’ s holdings o f #181*009 o f securities guaranteed as to both principal and in terest by the United State® Goverfis&oat* I to ld President Hamilton t h a t Ms bank wag the only one that held such securities and the only on© that had my securities ear marked fo r the self-insurance fund# I also referred to the fa ct that the Federal Open Mfericet C o «itt@ e regulations provide that tho tern "Government securities* shaU include obligation© fu lly guaranteed m to principal and in terest by the United States and stated that i t was the understanding o f so«e o f ue that i»hile a l l Govemnsnt securities were supposed to be trans ferred to the System Opm Market Account the Cowalttee decided to take over on July 1 only d irect obligations o f the United State#. X told President fiaallto* that In view o f the above X mm callin g to ask i&efcher 54.a tern intended to s e ll itu security holdings In the near future* He said that the^ had not contwaplated sellin g thm but that he would take the aatter up with Ills executive eenoklttee today and 'that they would probably decide to s e ll them* Ha said that in vi®w o f the previous understandings he assumed the bank would not need to obtain authority to s e ll the securities froa the Federal Opm Market Coanlttee and X told Ills that was my understanding. In ay telephone conversation with President HaolXton X nade i t clear to Mm that X was speaking informally fo r ay s e lf end not fo r the Board. s R ep rod uced from the U nclassified I D ecla ssified H o ldings of the-N afio na A rchives D ECLASSIFIED Authority f c .Q; 1 2 3 5 % lC4Z-_v IS division of Bank O p era tio n * F flf Mr. $. A lillo r.* # Securities l*p*rtme>nt F*a#ri& Heeerre Sank of Hew 201% New York, »#w fork D#*r Mr, ICiMtrt I n m $$m m %# fm r telephone request o f end to n * firaing information glir«» you over th# telephone t#d#y, following #r* flpBNW* Of net jsroifii# on felted $t#te# Government ##OUftti## *#X£ to the %#%*& open m*$*t « n « % l &i reported if* e*ch Federal S # # # rr# other than I#f Xatfe* for lumt 19I&* j qv voa ? miMeli>hi& Chicago | *2*069*0! m 9m « n $$m . M m% V t m 0%# IiOtii# toft#** §i%y Ml## u$m*n The only other profit# on United Slat## Government ffftgrttt## reported during th# flr#t #i» aonth# of If$& by i l federal Reeerve l# tauki#* other thaE How l w m § wore #c follow## Chicago Dalle# $478,954.55 99**97*90 Very truly your#, I. L. Sawd, Chi#f, ^ii.#lon of Bank %#ratio»#. J30$/#b Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 1 2-35B Form P. R. 181 ^OARD OF GOVE RNORS / O F THE ht DE RA L. RESERVE S Y S T E M Office Correspondence To Date August 1 3 , 1936 Subject JlcHEemor- From__ Mr. Van F ossen R e fe rrin g to our telephone co n v e rsa tio n , net p r o f i t s r e a liz e d by the F e d e ra l R eserve banks during 1936 to d a te from the s a le o f Government s e c u r i t i e s from t h e ir own investm ent accou n ts are a s fo llo w s : Boston New York P h ila d e lp h ia Chicago S t.L o u is M inneapolis K ansas C ity D a lla s $ 8 1 ,3 6 9 .0 1 1 ,3 4 9 ,0 2 5 .1 7 1 1 3 ,3 6 3 .3 3 4 7 5 ,0 5 5 .7 2 9 ,5 3 1 .2 5 4 9 7 ,7 9 3 .3 5 1 2 ,0 5 3 .7 2 6 3 0 ,3 7 0 .3 7 These amounts are in clu ded in the amounts shown a s "A v a ila b le f o r d e p re c ia tio n allo w an ces, r e s e r v e s and s u r p lu s ” in the l a s t column o f the Ju ly 1936 mimeographed statem en t on earn in g s and expenses o f the F e d e ra l R eserve ban k s. As s ta te d over the ’ phone, the f ig u r e s in the l a s t column o f t h i s statem en t a ls o in clu d e o th er cu rren t d e b it s or c r e d it s in the p r o f i t and l o s s accounts o f th e F e d e ra l R eserve banks. For example, the F e d e ral R eserve Bank o f M inneapolis in c lu d e s |4 3 ,4 4 0 deducted from the re se rv e s e t a s id e to cover payments to the R etirem ent System on account o f p r io r se rv ic e l i a b i l i t y re p re se n tin g the amount o f p r io r s e r v ic e payments in clu ded in the bankrs cu rren t expen ses to the end o f J u l y . Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority E..Q* 12358 August X§ XW$ O ivision d BtftV Qmrit file m Mr. Tan ?oaa#n In aeoordaaoa with your talaphcfcs r#qua«t w® h*T* prepared ti» Attaobad tabla showing tha aaouat of Unltad Statas GoTarnaant bonds and all otbar United Stata* Qownaent a*auritl«s bald by e*on Fedaral Raaanre bank In its M iBToatnMit fco&oaat on Jaaoary i, 1934 on Juaa 30, 1935, prior t» tha transfar of all QoTaraaant sacurttlee to the Systaa Opan Jtarkat Aooount* Attaob«*nt. n/t» jiewrrf Bmnk B ‘ " •~mi » iii,————« > n i m m m ' L " 1 v»: il^i . • i«w■ i . mmmm* . On /nonary 1, l$$i ; Bond* ■ . Sew forfc Philadelphia _4JX. oth»r. . ,049,500 3»35a,iaa SsitaX 36,937,4.50 3, 3*5,500 j | Bonds $589,000 1,^5,050 1,652,000 da J a m 30, 1936 All other Total » &20»3H3t S5Q 1,733,400 31ci»ond AtlaaU 62,741,700 CfcdLcafo 7, 511, 7,511,650 7,OX ),650 62,741,000 500*000 7,511,650 .lit* 182,200 10, 000,000 1 *5,200 1 1,000 13,900,OX) SV*Loaia K«a*&& City D&ll&s 185,200 207,077,850 •Prior to transfer of securities to the Syetes Open Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc.Q* 12358 *t ***rV • WvMftrw, Mi^ust Z-f 1936 Mr* Koppang Mr* Van V t\ i i following information in regard to Boston* s participation in ls the Federal Open Eirkot account on Jjly 8 is furnished in accordance with your telephone request: aaount July 8 $161,713,000 Forcent of total 6.6542 O . the baai3 of its July 8 participation Boston’s share in the n appreciation of 336,198,554*93 on that date was $2,403,724• 21 ft / t f x f‘l !» R ep rod uced from the U nclassified / D ecla ssified H o ldings o f fhe-N atio nal A rch ive s DECLASSIFIED Authority jl.C * 1 2 3 5 % D n o B k Op*f*$w*f*flle ivisio f an HXr 31, 193$ Mr* M o rrill Mr* t m Fossaa L la accordance with your/re.iueet m have prepared the attached table yre sfcowiag' the amount o f Waited States Oororoaeat bead© held by the Federal R « H m beaks ia th eir owa inTestaeat account* which were replaced by short tern eeouritiei by aoaths froa January 193* to June 1936, inclusive* I t will be acted that the eaount o f Gal ted States Qowasient bands so re placed during this period by each a f the various banka was Bostoa Mew lork Philadelphia Clerelaad Riebaoad Atlaata acme ?61,321,050 1,100,000 aoae aoae ooue Chicago 6t*Louis Miatteapclis City* Dallas Saa Framslsoo TOTAL m, follower $$0,400,000 500,000 511,000 none noae i ya» y S4f43a,0$O Of the total amount of Halted Stata# beads so replaoad, v53,526,350 were c alled Liberty Bond#, of *ftioh t23,OO$#000 were exchanged fo r aew short tera issues aad #10,6^3,850 *ere oold ia the open aarket aad replaoed fcy s^®rt turn seeurities .purchased i a the open aarket. Attached .is & tab ula tloa shcwiag the aaouat of Liberty Boad holdings of the Federal Reserre banka i a their own investment accounta oa January 1# X934, &»d the securi ties with waioh they were replaood* Attachaents* °F IBVMT2EBT ACCOUNTS OF THK FEDERAL M M Y 8 BAMS Mew York April - 1934 Sold or exchanged Heplaoed by Treasury notee Replaced by treasury bills September < 1934 * Sold or exchanged Replaced by treasury note# $7,95M00* 6,95# ,&00 1,000,000 3,042,000** §,042*300 Marsh - 1935 Sold or exchanged Replaced by Treasury note# Replaced by Treasury bills Philadelphia $1,000*000* 1,000,300 700,030* 700,000 Cnio&^o 6 , 100,000 4,600,000** 4,600,000 3.000.3Da{a> 3)000*003 September - 1935 Sold or exchanged .Replaced by Treasury notes 7,765,050* 7,765,050 1935 bonds sold by Treasury notes by Treasury bills 1511,000** 511,000 13,9^4,000 16,664,000 2,320,000 13**53,000 13,£53,000 7.100.000 3.500.000 3,600,000 3,600,000 6,750,000** 6,750,330 4,0^ i,003 4.000, XX) total 115,053,800 7,95M00 7,100,000 3,530*000 Slay - 1935 Treasury bonds sold Replaced by Treasury bills Minneapolis #£,100,000* 7,100,000* April - 1935 Liberty bolide sold or exchanged Replaced by Treasury notes Treasury bonds sold Hepi&ced by treasury bills Soveaber Treasury Replaced Replaced St#I»Otti* #500,000** 500,000 7.250.000 7.250.000 4,000,000 4,000,000 3.000.000 3.000.303 2,600,000** 2,600,000 10.365.000 10.365.000 IS,934,000 16,664,000 £,320,000 | Kew fork l&oeaber - 1935 treasury bands sold Replaced by Treasury not## *4,821,200 4 ,8 2 1,20 0 Totals! Called Liberty far Treasury Called Liberty Replaced by Heplaced by 14,792,000 15,723,850 U , 723,850 1,000,000 bonds exchanged notes bonds sold Treasury not@i Treasury bill# Philadelphia — $*700,000 1,700,000 Cbicago St. Loui* «* «iw #7,200,000 13,230,000 3,500,000 9,700,000 «# Treasury bonds sold Replaced by Treasury not®# Replaced by Treasury bills 30,805,200 21,485,200 9,320,000 —* Total bonds sold or exchanged 61,321,050 1,700,000 20,400, O X «» * $500,000 •a Mt *•**« •M l* *N W* **•» *** mm ♦Called Liberty bead# weehaug* o f called Liberty bonds ( a)Sold to Postal S&viaga Syafcw# Minneapolis 500,000 #511,000 Total 14,821,200 4,821,200 —* 23,003,000 30,623,850 19,923,850 10,700,000 «**» .*** 30,805,200 21,485,200 9,320,000 -**»■ rnmm 511,000 84,432,050 WW W X. JbnU&Bdfc Bald JxaOMTJ 1, Xf54 JSttllbk S&kSBNfSL SfcaStiBiUI JttJtt# j^mui 147,292,350 $2,800,000 *20,400,000 #500,000 #1 ,696,000 #125,000 JEsj&L |K,813,050 Sxobfitt^od for m m sbort tara l i w t 7,200,000 U , 792,000 500,000 511,000 25*005,90C Replmoad by alwri fcar* bought la opa* aarfcat 15,723,850 1,700,000 l6,77S,000 600,000 200 500,000 47,292,050 2,800,000 15,200,000 30,623,850 Exebaaged for m m boad im a m Eaplaead hf — — 18, 521,000 1,145,000 boads loagbt la op^i n r lt t Total galas aai ax&feaagaa of oallad T fhtftlfff to fitptti* t )amr 1*35 40,000 20,400,000 500,000 125,000 £$5,200 1,596,000 125,000 72,813,050 *A 1 1 Liberty bonds outstanding on January 1 , 1934> were called for redemption by October 1 5 , 1935 Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority £..0* 12358 Hr, fan Fossen Mr* S. A* Miller, Manager, Securities Department of the Federal Reserve Bank of Sew Xork, advised me by telephone that th© appreciation in the System Open Market Account holding# of United States Government securities on July 1 and on July S was as follows* t I $34*095*029*19 July * 36,198,554.93 Profits froa the sale of Govemaent securities held in suspense account on July I amounted to |3,323,145*$3* http://fraser.stlouisfed.org/ w/iw hP\ Federal Reserve Bank of St. Louis V Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc.Q* VM58 0 3 ^ t| t Division of ?M 'v V t July 9, 1936 Mr* Leonard S r Van foeaen i* Tbe f©I Lowing information In regard to 11011301x1*8 participation la the Federal Open Market' Account on Juno 27 and July 1 is furnished in accordance with your telephone request* , * « . 27 July 1 " *m /715,500 gSf ! I f lo g f 12A931Q95QQ 5+2670 ***..• ^ a s is *>f i t » ‘ Ju ly 1 p a rtic ip a tio n Richmond* & a hare in the ap p recia tio n o f 134#395 1 029 *19 on ta a t date m s $1,795,931.80. TF/l» ^ Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E..C* 12358 copy TELEGRAM D ivision o f July 2, 1936 TO ALL GOVERNORS TRANS 2414 Paragraph relating to reserve ratios, which you were advised in our Trans 2413 of July 1 would be included in text of weekly Reserve bank statement to be issued today, has been modified to read as follows: "Since the reserve ratios of individual Federal Reserve banks do not reflect conditions in the several Federal Reserve districts because most of the earning assets of the Federal Reserve banks consist of Govern ment securities bought in the open market at the direc tion of the Federal Open Market Committee, the individual ratios of the several Federal Reserve banks are Elimin ated from the weekly statement of condition. The ratio of total reserves to Federal Reserve notec add deposit liabilities will continue to be shown in the consolidated statement of assets and liabilities of all &£ the Federal Reserve banks combined.” MORRILL File copy in 330.23 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc.Q* 1235% G0 P Y ""Zi? •* I / ft J u ly 1 , 1936. TO ALL GOVERNORS TRANS 2413 Follow ing two paragraph s w il l be in clu ded in t e x t accompanying weekly co n d itio n statem ent o f F e d e ral Reserve bsnks to be issu e d tomorrow: M Changes f o r th e week in the h o ld in gs o f government s e c u r i t ie s o f in d iv id u a l F e d e ral re se rv e banks r e s u lte d from th e t r a n s f e r o f a l l government s e c u r i t ie s p re v io u sly h eld in th e se p a ra te investm ent accounts o f th e se banks to th e System Open Market Account and th e r e a llo c a t io n o f p a r t ic ip a t io n s in t h i s account among th e F e d e ral Reserve banks. The t o t a l h o ld in gs o f government s e c u r i t ie s o f th e F ed eral re se rv e banks remain unchanged*# ”As the re se rv e r a t i o s o f in d iv id u a l F e d e ral re se rv e banks have ceased to be s ig n ific e n c e because funds o f th e F ed eral re se rv e banks are in v e ste d in s e c u r i t ie s bought in th e open market by th e F e d e ral Open Market Committee and, th e r e fo r e , in no way r e f l e c t co n d itio n s in th e s e v e r a l d i s t r i c t , th e in d iv id u a l r a t i o s on th e s e v e r a l F e d e ral re se rv e banks are elim in ated from th e weekly statem ent o f c o n d itio n , but th e r a t i o o f t o t a l re se rv e s to F e d e ra l re se rv e note and d e p o sit l i a b i l i t i e s w il l continue to be shown in the co n so l id a te d statem ent o f a s s e t s ' and l i a b i l i t i e s o f a l l o f th e Fed e r a l re se rv e banks combined"• I t i s su g g e ste d th a t your bank c o n sid e r a d v i s a b i l i t y o f e lim in a tin g re se rv e t a t i o from statem ent showing th e c o n d itio n o f your bank r e le a s e d l o c a l l y . MORRILL. R eproduced from the U nclassified / D eclassified H o ldings of the N ational A rchives D ECLASSIFIED Authority \2 3 5 % Mr, I * M. i S#cr*tary of^ th# Board, federal Reserve Beak of Atlanta, Atlanta, $e®J*iin Dear Hr. Clarki Reference 1$ aade to your l#it*r of Jnne 19 Inclosing * t «xc«rpi f fro» tie Minutes of t e la»# 12* 1936, neetlng of the Board of Dlreef* tore ' f the Federal Reserve Beak of Atlanta authorising charge-offs 1m O the aggj*eg&te aaount of $340,000 on bank pr«iiae« at Atlanta, Blmlngha* and Jacksonville, subject to the approval of the Board of Governors of the Federal Reserve $retea» Tou will note fron the naaaraadu* l a p s e d with ny letter of S W M 17, aent to you a# Secretary of the Federal Open Market Coaaittee, t s & it 1# piwpoetd to uee mEtrserdiiiAyy ©fcarge*«ff8 in d#te*»iii*i*jg lst allocations of Government securities a*ong the Federal Reserve banks only In #a#e 1dm e***niiig« &t the Syste* as * whole are m m %sa m f * tsi fldant to -meet estimated reqniramenta for expenses, ooraal depreciation allowances, fixed charges, and dividends. Since 1% Is apparent that earnings will not t e s**ff&eA«nt during 1936 t© meet all of these sh&rgss, » extraordinary charges such m those referred to la your letter of June 19 will not be taken Into co&eld&r&tlon this year In nftklng allocations of Goveroneat aeourltlea held In the 8ystesi Open Market Account* Accord- R ep rod uced from the U nclassified / D ecla ssified H oldings of the N ational A rchives D ECLASSIFIED Authority E..C* 1 2.35% «r. h* I* Clark * #2 ingly, action on the reco*»aadation of your directors with reepect to depreciation oh^rgee in the igipeg&te aaoust of #340*000 0 your beak $ building* in Atlanta, Birmingham aad Jacksonville will be deferred uatil Dece»ber vhoo consideration -lill f * given to the payment of th® dividend e for the last hulf of 1936 aad to th* sotriea with respect to charge-offe and re»#rven usually atade at tha end of the year* Very truly yourn, Chester Borrill, Secretary. R eproduced from the U nclassified I D eclassified H oldings of the N ational A rchives |~ D ECLASSIFIED Authority 12.^5 % ~"i i n , 3 June 29, 1936 Division of B«nV. Q iw ttfo n s FNfe Board of Qoveraora Mr. Snead "9 * 4 .'- 11th respect to the recowaendation of Mr. Goldenweieer and nyaelf that reaerve ratio® o f individual Federal Reeenre banks be no 5m $#t published in the weekly statement of condition of Federal Reserve banks, attention is called to the resolution of the Federal Open Market CoaBittee which provides that participations la. securities held in the Systea Open Market Account he ' allocated to the Federal Reserve banks on the basis o f their need for earnings, provided that such allocations shall sot **eault in reducing the reeerre percentage o f any Federal Reserve bank below 50 percent* of the Federal Reserve banka, fhe reserve ratios as o f June 24 and as they would have been on that date had the securities been reallocated among the Federal Reserve banks on the basis o f the plan adopted fe r the Executire Coaalttee of the Federal g Open Market Coaalttee for allocation of V* 8. securities held in the account on June 30# are shown below* R t m m ratei m l m t M Actual After realloca tion of ®*§. securitiei Boston Sew York Philadelphia Cleveland ’ flu* 62.2 n s 78*9 84*0 68*3 73.2 Richaond Atlanta Chicago St, Louis 71.2 70*5 85*5 68*4 68,3 71*1 #7*1 66*6 Minneapolis Kansas City Dallas San Franciaco 71*8 68.8 63UO 71*6 67*7 67*1 65.9 J 0 *§ 78*7 Total ' 78* 7 . , iOf 3 " 3 Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 12-35% Board of Governors - #2 The adoption of the plan of reallocation, recommended by the Executive Coaanittee of the Federal Open Market Committee, will not result in any Fed eral Reserve bank1s ratio thereto. at this time being so low as to call attention Should, however, at some later date any bank1a ratio approach the 50 percent minimum set by the Committee at a time when the ratios of most of the other banks are in the neighborhood of, say, 80 percent as is the ratio for the System as a whole at this time, attention would undoubtedly be drawn to the reserve position of such bank and considerable comment might be taade thereon by the press. If such proved to be the case, the bank with the low ratio would no doubt be very reluctant to continue Its then existing parti cipation in the account. If the publication of reserve ratio® for individual banks is discon tinued, however, there sdll be nothing in the Board*s weekly press statement to specifically call attention to such ratios, and the press will be much less likely to comment thereon than would otherwise be the case. Further more, since the individual reserve ratios are governed largely by the alloca tions of securities among the Federal Reserve banks the significance of the reserve ratios is no doubt not understood by the public* In the memorandum submitted by Mr. Goldenweiser and myself, under date of May 22, the discontinuance of publication of the ratios was recommended and a paragraph was suggested for inclusion in the text accompanying the weekly statement in case the Board approved the recommendation * Mr* Thurston suggests that the revised paragraph, attached, be used in the weekly state ment in case the discontinuance of the publication of the reserve ratios of the individual Federal Reserve banks is approved by the Board, Attachmeni ELS/j bs Reproduced from the Unclassified / Declassified Holdings of the National Archives ____ DECLASSIFIED Authority 1 2358 c 0 P 1 June 29, 1936* The Board of Governors* Hr* Thurston* It has been agreed that the weakly statement of condition of Federal reserve banks to be issued on Thursday, July 2d, contain in the introductory text the following explanatory paragraph! *C hanges for the week in the holdings of government securities of individual Federal reserve banks resulted froa the transfer of all govemaent securities previously held in the separate investment accounts of these banks to the Sys tem Open Market Account and the reallocation of participations in this account among the Federal reserve bank®* The total holdings of govemaent securities of the Federal reserve banks reaain unchanged** After consulting with Mr* Saead, it is suggested that the following additional ecxplan&tory paragraph also be included in the introductory text! sAs the reserve ratios of individual Federal reserve banks have ceased to be of significance because fund© of the Federal reserve banics are invested in securities bought in the open market by the Federal O p m Market Coraalttee and, therefore, in no way reflect conditions in the several districts, the in d iv id u a l r a t i o s o f the several Federal reserve banks are eliminated from the weekly statement of condition, but the ratio of total reserves ' o Federal reserve not© and deposit liabili t ties will continue to be shown in the consolidated statement of assets and, liabilities of all of the Federal reserve banks com bined* * Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E..O« 12358 COPY F o r m N o . 181 Office Correspondence To. The Board of Governors, From. FEDERAL RESERVE BOARD Subject: 3 p 0rBrr^*"/' Date____ .Tune 9.91 ;n r B *t >V O p e ra tio n * ftk- Mr- Thurston. SVMsior 14- •. r It has been agreed that the weekly statement of condition of Federal reserve banks to be issued on Thursday, July 2d, contain in the introductory text the following explanatory paragraph: "C hanges for the week in the holdings of government securities of individual Federal reserve banks resulted from the transfer of all government securities previously held in the separate investment accounts of these banks to the System Open Market Account and the reallocation of participations in this account among the Federal reserve banka* The total holdings of government securities of the Federal reserve banks remain unchanged.*1 After consulting with Mr* Smead, it is suggested that the following additional explanatory paragraph also be included in the "introductory text: ”As the reserve ratios of individual Federal reserve banks have ceased to be of significance because funds of the Federal reserve banks are invested in securities bought in the open market by the Federal Open Market Committee and, therefore, in no way reflect conditions in the several districts, the individual ratios of the several Federal reserve banks are eliminated from the weekly statement of condition, but the ratio of total reserves to Federal reserve note and deposit liabilities will continue to be shown in the consolidated statement of assets and liabilities of all of the Federal reserve banks combined.” _ 1—82 8 6 R eproduced from the U nclassified / D eclassified H oldings of the N ational A rchives D ECLASSIFIED Authority jL .Q* 1 2 3 5 % ’ Copy to aeabers of Executive the eecretary end the economist.* ^r^r^T of Federal Open M k _, e Committee, ct w D w U \o n of June Z&, 1956. dMr Mr. Cbalraani Changei la th* holding* of go*»nuwBt B*oorltle» In tho Market Account (taring the week completed f m m 24, were m 64, follow*! BmlaffMMnt Purchaaea in tha Market I 8,024,000 - !twi. bill* < a 12/li te 150,300 « » * 100,000 * * * i/zr/sr 6.640.000 « • » & /Z4/S7 » Tree*. bills due fU* »H ,0 00 9»3t» la th* i t e m I 8,000,000 - ?rea». bills dlM 9/ m . R it t lio n f lf t n t f t t r t t h A it f la .. Uud. K a rfra t $ 7 ,7 0 0 ,0 0 0 - Tree®, bill* due 1/27/57 " ‘ $ 7*70®:*®©©- ♦ ? ! There were no transactions during the week In th® outright holdings of securities of this beak*. Although there « M no important selling, for th* second week the governmarket was largely withoot outside buying interest, and prices con tinued to acrre slightly lower. Trading wan very light, and the ©hi#f source of supply appeared to be dealers* portfolios, which remain relatively large. Price* Of the new issues were fairly well maintained until yesterday and today whec the notes and bonds declined several 52nds. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £.*6* 12358 .Son* I * S* Kcdos I Washington 0/25/56 For the week ended last night Treasury bonds showed an average decline of about 5/52nds to a level nearly 1/2 point below record high prices fo r the year and aboat l/8 point below prices prevailing immediately before the announcesent o f the recent financing* net loss o f about 3/52nds* Guaranteed obligations also showed sn average There was * uniform further decline in Treasuxy notes which averaged about 5/52nds, in a negligible volisste o f trading* A fter risin g gredually each wsek since May 6* the trend in Treasury b i l l rates was re versed this week* The average ffcte o f discount on the December 15 b ills de clined fro® 0*191 per cent la s t week to 0*185 per cent, and on the 27&~*day o ffe r ing from 0*242 per cent to 0*240 per cant# Treasury bills were not readily available this weak and thare was some difficulty in completing replaot^i^rit $m»> chase# in System iceomt* Activity in the bankers* M i l market was negligible* ▼cry truly yours, Honorable I * S* lodes, Chairman, K Board of Governors of the Federal Besorte System, Wasblngton, B. C* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc.Q* 12358 Fo r m F. R. 131 \RD □ F G D V E R N □ R S o r THE FEDERAL RESERVE SYSTEM Office Correspondence To From_ Subject: Transfer of Reserve banks* Mr. Goldenweiser own investment accounts to System Piser Open Market Account* It has been suggested that the individual Reserve banks should be prohibited from holding United States Government securities in their own investment accounts. The Federal Reserve Bank of New York, however, has found their investment account valuable for temporary holdings. First, there have been instances where securities were purchased for Treasury account, but upon time for delivery to the Treasury it was discovered that the Treasury balance was insufficient to make full payment- Second, the New York bank frequently acquires securities on a temporary basis in con nection with maturities from the System account; for example, with Treasury bills maturing on a Wednesday it may be possible to purchase replacements in the market more easily on an earlier date. In addition, the Minneapolis Reserve bank, which purchases Government securities for member bank account, frequently has small amounts of securities held over-night, which are distri buted to member banks on the following day* These securities are usually held for only a day or two, but if placed in the Sjystem Open Market Account it would be necessary to reallocate for those days the amounts held in the account and interest accrued and amortiza tion of premiums and discounts. All of this would entail a considerable amount of accounting, and it would be much simpler to place these holdings in the bankfs own investment account. All of these instances, although not necessary to the operations of the Reserve banks, are highly desirable and convenient. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Mr. Goldenweiser -2- 12358 May 19, 1936 A more important factor is the occasional necessity of making emergency purchases. Each Reserve bank should be given permission to purchase a certain amount of securities in the event of any emergency situation in its district* The largest purchases ever made for individual account were made at the time of the stock market collapse in 1929, when the New York Reserve bank in the space of two days purchased approximately $150,OCX),(XX) of Government securities. Consequently it is recommended that the Reserve banks be allowed to purchase for temporary holding in their investment accounts securities in amounts to be established by the Federal Open Market Committee. It is suggested that 100 percent of capital and surplus would provide adequately for this purpose, since the New York bank would be permitted to purchase $110,000,000 under this provision and all Reserve banks could purchase #300,000,000* It is further suggested that these temporary holdings be limited to two weeks, except upon approval of the Federal Open Market ^ Committee. In addition, it appears to be desirable that the Reserve banks continue to have authority to purchase Government securities under resale agreement, since such purchases provide a simple form of temporary loan and are helpful in maintaining a free market in Government securities. Finally, the Reserve banks should have authority to invest their self-insurance reserves. In the list of suggested resolutions provision is made for these excep tions. After such allowance there does not appear to be any reason for continuing the large amounts now held in the banks* own investment accounts. The transfer of these accounts to the System Open Market Account would have the advantage of placing under the immediate and direct control of the Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d r- Mr, Goldenweiser ' Authority -5- 12358 May 19, 1956 Federal Open Market Committee and the executive committee all Government securities held by the Reserve banks except purely temporary holdings, re purchase agreements, and practically permanent holdings acquired for selfinsurance reserves* Present holdings in the open-market account were originally allocated on the basis of the distribution of expenses, dividends, and normal charge-offs. Since these securities were originally purchased there have been a number of changes in allotment, including increases for the purpose of increasing earnings and decreases for the purpose of improving reserve position. The present distribution of the Account by individual banks is not in accordance with this standard. In the following table are shown the participation ratios calculated on the basis of 1935 expenses, dividends, and normal chargeoffs. When these ratios are applied to total holdings in the Account and the results compared with actual holdings, it will be noted that the St. Louis Reserve bank is holding about $17,000,000 in excess of its pro-rata amount, while the Minneapolis bank is short by $15,000,000 and the New York bank by $26,000,000. If all of the System* s holdings of Government securities were placed in the System Open Market Account and the distribution were made on the basis of their participation ratios, the earnings from the Account would be equitably distributed among the Reserve banks and the reserve ratios would in all cases exceed 60 percent. If the reserve ratio of any bank should later decline below a desirable level, say 50 percent, it could be restored without affect ing the bank*s earnings by the transfer of an appropriate amount of bonds Reproduced from the Unclassified I Declassified Holdings of the National Archives " DECLASSIFIED Authority fc.Q* 12358 Mr. Goldenweiser -4- May 19, 1956 from the System account to the bank*s investment account in exchange for the transfer of a larger participation in the System account from the adjusting bank to the other banks. Until such necessity arises, however, there does not appear to be any reason for continuing any sizable amounts in the indi vidual bank* s portfolios. The following table shows in detail the results of transferring all of the Reserve banks* holdings of Governments to the System Open Market Account and of distributing this total on the basis outlined above. Reproduced from the Unclassified / Declassified Holdings of the National Archives UNITED STATES GOVERNMENT SECURITY HOLDINGS . jc_i3trict ^N OA Distribu tion of current expenses, normal charge-off& and divi dends in 1955 Total United St«ites Government secur:Lties System Open Market Account Theoreti cal parti cipation Actual partici pation May 13, 1936 Over or short 7 28 8 9 5 4 11 4 3 5 5 8 Total 100 1/2 1/4 1/2 1/2 1/4 3/4 3/4 1/4 3/4 1/2 Over or short (Thousands of dollars) (Percent) Boston New York Philade1. Cleveland Richmond Atlanta Chicago St* Louis nneapolis Kansas City D*llas .Fran. Actual Theoret ical par partici ticipaticr pation May 13, 1936 Deposit Total re and Federal serves after Reserve note shift liability 155,620 633,598 183,410 211,199 122,273 94,484 244,546 105,600 83,368 116,715 83,368 188,968 156,982 607,318 173,735 218,024 116,715 100,209 258,423 122,700 68,054 116,659 85,000 199,330 2,223,149 2,223,149 +1,362 -26,280 -9,675 +6,825 —5,558 +5,725 +13, 877 +17,100 -15,314 -56 +1,632 +10,362 — 170,118 692,624 200,496 230, 875 133,664 103,286 267,528 115,437 91,135 127,589 91,135 206,572 157,677 729,383 177,120 218,025 116,716 100,209 321,164 123,200 75,590 116,844 95,000 199,351 2,430,259 2,450,259 Reserve ratio after shift (Percent) 677,062 5,819,556 592,750 780,689 595,018 505,429 1,840,747 549,727 244,101 555,572 232,529 708,848 77.5 85.4 68.9 72.9 66.5 68.2 87.2 68.6 64.6 65.2 64.1 75.9 8,067,215 10,501,828 78.5 -12,441 523,342 +56,759 5,187,585 -23,576 408,398 -12,850 568,779 -16,948 262,544 -3,077 208,213 +53,836 1,605,948 +7,763 259,965 -15,545 157,672 -10,745 251,800 +3,865 148,997 -7,241 524,172 — > 5 o , ! 3' Oi ^ W; m p! 'o > « Si ‘: n; )< ■ « w. O. ' Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E..O* 12358 B O A R D D F G D V E R N □ RS X-9565 □ F THE F E D E R A L R E S E R V E S Y S T E M 0W ,o ls- n o( Bank O p e r a s W WASHINGTON ADDRESS April 25, 1936 OFFICIAL TO THE C O R R E SPO N D E NC E BOARD Dear Sir: Under the regulations of the Federal Open Market Com mittee adopted on March 19, 1936, relating to open market transactions of the Federal Reserve banks, the term "System Open Market Account" is designated to apply "to government securities and other obligations heretofore or hereafter pur chased in accordance with open market policies adopted ty the Committee and held for the account of the Federal Reserve banks". To insure uniformity in the use of the new title by the Federal Reserve banks, the name of the account when re ferred to in code words in the Federal Reserve Telegraph Code . book should be changed, effective immediately, from "System Special Investment Account" to "System Open Market Account". The codo words in which the term is used are MOCKLER, MOCKLOVE, NEGROAT, NAPPINTLE, NAVIDE and NEBULONG. Assistant Secretary. TO PRESIDENTS OF ALL F. R. BANKS Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £ .6 * 12358 r _ . nn i O e a i n FW« prtos ‘ 3 S 3 . 3 y - flareh 8| IVW* i Messrs* Clayton* Goldoiwei*ert &aoad# f?y*t% end Bethoa* Ur* Drelbelbis, belbis, Assistant Oaasral Counsel* Psmffe ^ regulations end by**laws of Open Market eow^iitee* Attached hereto ere rorisod copies of taail^tivajbpaft^ of proposed by*»laws And regulations for adoption by SwTFadoriS,"Opea Market Ooasaittee* Copie* of the original draft* used at a ba»t« for tho prepar ation of th* instant oxio* aad refloating tho ehanges aad suggestions of Messrs* Clayton* Geldexxiieiaer, Seeed end Bethea ara also attached* Duo ta Mr* Morrill*« illnee*, M s suggestions were not reeeired in tiae to bo included ia tho draft* suhetitted today* fhs sore substantial suggestions aaida fraa tho«o a» to fora are ao follow*t 1* That seetloa 8 ho transferred to tho end of sootion 4 as paragraph (f) or inserted as tho seeond paragraph of sootion 6* 2* that tha word "underlying" ha iasartod hoforo the vorl "reasons” in tho last lias of paragraph (h) of sootion 4* 5* fhat tho first sontenee of tho seeond paragraph of seotion 6 ho oaitted* aad t&at there ha iasartod between tho words "epos* market operations*1 sad the ward "end* in the last sentenae on page 6 tho wards *in aeeordanee with tho regulations and direction* of tho Csuaittee** 4* fhat oonsidoratioa ho given as to whothor or not tho transactions, as sat out in paragraph (2) of section 7, bo allowed a t all* 5* That oonsidaratloa ho given as to whothor tho question of delegation of authority is raised hy paragraph numbered (2) of sootion f * c 6* fhat all of paragraph 5 of sootion 3 he onitted except that partioa ineluding the last four lines of the paragraph and begin ning "Any Federal Reserve bank aay purchase* ete»** It i* ay understanding that the attaohed tentative draft* are to be used as a basis for discussion at a eonferenee to bo arranged later* Very truly yours* Attachment*. JF&thla J« ?* Dreibelbis, Assistant ciensral Counsel* Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority fc.Q* V2358 Tontativo 8p*ft t a a 5, 1933 trh DMrion of BanV Operations F “1 3 . 3 , w m n u fim mm taoe frf 3 s* m m m m * 19S8 m rm n u P u m a n t to th# ootliorit^ ©oaforrod upon it by oeotion I fA of th# F#3#r*l l<Ml#rvo Aot» mi «a»ndo4g tho Fodor&l %#!& Jc Hwrtcot Canedttoo gn*#rorlb#« tho tho #p#a»m«rk#t trois##otioao &t tho rofu lotion* rolatlng to tl^ral Kooorto banks. fh# Fodorol Opou )$Mrk#t €«a®itt#o #s$r#ii#ly rooorvo# % 'ho rig h t to o lto r , wmm&t ropoal t h ii .rogtilatioa In whole lit part f t aaty tin#* i swticm 2 * : .mxmtxtm (#} ffgyortiaoia o#o*aid1&ot.* «* Tlho torw "OotonawiHi ooou* t ritlo o * olmll im h id m bcnda, netoo, oortifloatoo of IrisSobtoctaoos # Iv m m & y M ilo* mad otbor obltfottoii* ©f tho % it# i itotoo, lm lu A ~ iBg otoligatlo&o fully goorasitood m to prlnoipal oad lntoroot by t i * Ualt#<l Utotoo* (b) Obligation#* Th# tor® •obligation#** olmll iaoltKl# oil bonioro1 ooooptonoo#, billo of #xetoanf<#t oabl# trim*for*, bond#, f aoto## aarraixt#, I v M ^ n t i and otbor o&Ugitioio, Inaiydlag @*v»r&» (p U v w H * ~ > /l L me unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority £ . Q « 12358 - I ~ w n t aaatirltiaa, wfeiah Fadaral &aaar*a banka « r author!iad by law ua to purabaaa In tha opam aarkat. (a) teyataa aooaunt* * Tha tars *ayata« aaaooxit* appllatr to Govmrmmnt oaauritlaa bald for th» aaaoitnt of tha Kadaral R*aarwa banJn unl#r th* aootrol of tha axaoutlra aownittaa* (d) Ca«alttaa» - Tha %ar& *C«nmlttaa" shall M»an tha Fadaral Opaa aiarVat Coaraittaa. (a) g»n»lii» < — iltt— » * Tha tara "aaaoutiva aoacdttaa* h •hall saaa tha axaautlva aoaaittaa of tha Fadaral Qpan ilarkat Caaaittaa* sS£?i'.$ oorosi?» ift;necm.x? t y tha tarna of saotlon I A of tha Fedaral Raaarra A*tt aa t S. aaandad, tha tiaa, ah*r*atar# and r t r a of all pttrahaaaa a * a&laa ol x ^ id in tha opan aarkat hy Fadaral Maaarwa banka chall ba gomn»<$ with a ▼law to aaaawaadatlag; aaaaraa and buainaa* and with ragard to ihair haarlng upon tha fanaral aradit situation of tha aountry. sbsti'i?^ 4. (a) m m «\ i f »m m u tm z m m m ® Qrfta&iaatlon« - Tha Coeaeittaa araatad by aaation ISA of tha Fadaral &aaarva Aot, as anandad by tha Banking Aat of 193&, aotxaiats of tha »o©b«ra of tha Board of Gowarnora of tha *aiaral J a *aarva $y*taa and of fiva rapraaantatlweo of tha Fadaral fteaerva baafca alaotad annually* Aa altaraata to aarp* in tha abaanaa of aaah su»h ra^raean- Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D ' Authority £.»Q" 12358 m$ m teti?w shall be eleeted but m eltertwte aJmXl be entitled te etteisd meeting* o f the CeRmtttee only in the ebeenee o f the repfo r whom «»eh alternate 1s elected. (b) Heeorde* - The Seeretery of tbe Camlttee abell keep minutes of all ite meetings eai shall keep a eo®$>lete reeori o f tbe eetioo taken by t C e e n l t t e e upon ell question* #f policy relating! te epesMGseirfeet operatS-eine end •hall record therein the T©t»s taken la eoaxseetlesi with the &eteralnation o f epeti^iaarket polleles as?! the ptaiosa aeslpied therefor* reeords elmll beeonse a < remain the »3 property of t e ieef*4 of Governors ef the fe&eral ieserre System* Ce) Meet.lace» * Meetings e f tbe Sewalttee elm ll be held at WiMihlnf.toa, &• G*, a t least fotir ti®*ee eaeti year upon tbe e a ll o f the Chairman e f the Beard e f Ceveraere o f the Federal Heeerve bywtom er e t the request o f aay three sMssfeers of the Ccwrsittee* Seitlees o f meetings called ehall be givm* to ell wmbmr* of the Qoeslttee by tbe Heeretary* (41) ?iBi*tlotie« - f t is t n dtaty e f tb» Committee to eoa* ie elder tbe nee&e e f eenaeree end biwiness, the §»*ieraX ered lt situa tion of the country, e M suofc ether matters taring e bearing iheree® as may eotue te Its attention, and to eenelder* adopt, ana transmit te tbe seeeral Federal Beeerve banks, regulation* m M directions* with reepeet te the epenmnarfret operations of eaefe rank# under eeetton 14 e f the Federal leserre Aet* {•} Qpe*»»Market policy* - The Oenadttee will fro® tiae te Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 12358 ■»<£«» m d*terttia* *p*iMiurk*t polio1#* of tha notify tb# **v*na fttdvr*1 8§«trf» m A will of all d**i#ion# whtofc * • ** quir# motion on t l » i r pitrt* ®83T * ft, (* ) illC T lflfl 0 « i ! T 1 t Or^jaadUatioEu * Tho CaMKltt**, mt it * fir s t lastin g *?t#r lar*h 1 in #mh b*r« *n ****'i*tive o&snitt*# j*w?g fthftll * * i* * t frwa it * mm mm* o f thr*# wtsfaNp* ©f t h BmmI m o f C-owrnosr* o f th* ?*<ttr*l % **rt* #yct*» miM two rQj3r*««ntatiTr*# of ft m ¥*4/mt*l Ii*m rm bm0m* Th* Clmlnmn of th * GoBamitt#© ohull b * Q m im ta of th * S 3 P P 0 1 rW B nS 1 9 G B B » 3i wwmmm Th* £*or*tary o f t l* f?«*® itt*« •h all * * t as th* ***r*ta i,y # f tli* #**<rotive ««awdtt*# and *h all k**p u&mit** of *11 its aM tlng* •ad furaiah oopi** tte*r*»f to th* K,*3ife*r* o f t!a* €oMffiltt**« ( e .^aa*tloi3*» - It #tmil b* th# duty of tb* *3C**utl'f« f) *«Mftitt**c I* T* il4 f**t th* *s**uttoxi o f partis**** *«a * * !* • o f G*v*i*nn*ttt * * * a r itt* » *ad otfeey oliitf&tlofs* 1 th* ®pm m wmrk%t In ***®«*i*ii** with its* «p*n«&*rk*t p o ll* !* * *dof>t*ct % tli# O p*®. Market <ktte»itt**i S* fo *& l***t* mwrn^ tli* * »w r a l f*4 * r*i B*#*rv* btxik* th* *G£r<*g*t* ewouat o f &ov*rnn*at **e u riti** *&& *t>\*r obligation* b*ld fo r tb* *ytt*& a*oouat *ad to *«S;hi8t imoh Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc.Q* V235B allocation® frosa tliae to ti&o to noot tbo ohooci8& $oodo of poopootivo fodorol Kooomro banks# ttmfe allocation o M I l to raodo with tho tIow of (a) ormbling; oooh Podoral looorvt bank to usaintaln o «u£fcablo rooorvo $ 00itloo an«J (fc) oqttolioingr oo for ao prootiosbla tho M t aarnixsg pooitioja of oooh orol taoorro h m t ik $ Mm t o % m p tho member* o f tho f^doral Sorfc«t C«»3lttoo inforood o f o i l tpftooftotiono oaoootoi by tho Co*isilttoo and of o i l ollootttloao «M rooiloootiono o f ftovornnont oooorltioo and o tte r obligatieiso hold fo r portiolpotlftf. ba»k«i &%)d 4* To porform oooti oibor foaotiono «nd dot loo In ooariootioB with Qp02>*wark«t oporoAiooo oo « o j bo oooigood to i t f r m tin o to titto bjr tho fodoral 0|m& Haricot CdMdttoof t o t tho oxootxtlvo oomndtteo oh all fr m no authority to d o t*r»iao polio or aofeo dotiolooo upon quwtiono o f polioy* SBCTt.'Vi |» C,W**ST 0»! o^mT!;w look Podorol looorvo bank oholl ongogo in oposw«r1iot operation* ttador M o t i o n 14 of tho f: odoral R m m r m lot only la oo~ with tiiio rogolatio® aad tho dirootlo«o isnued by tho 0o».ittoo f m tlao to tiiao* oad so fodoral tooorwo f a f oholl #oeae ottoo to oiifofo i» oiP*n*, i **rfeot opoowtiofto oo dtroofcod by tho ® m m ittoo* Oriisartly* in tho oaoduoi of opoa-ssorkot opora&iozMi for Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc.C- 12358 <* 0 * • » » the Systesa Aeoo*iatt tbe purohase «r sale ef ligations will be tnade by the ^saager ef the System Opea Sfc ce Aeooant ttarough the rf t Federal S t u m Bank of Hew Tork# la the eonduet of open-r*rk«t operations each federal Beserre b r S , when diraote $ by the Cowesitteo* sir will taake available to tbo ^onager of t>a Syetera Open SSsrket Aeoownt through tho Federal leeerva Sank of Kasr forfe, swih fends *s m y be aeeessftry to aondaot and affOetmte suofc opet*-iaarket operations and e*eh Faderal Eeoerre barJc thrmi&h the Federal Reserve Bartk ef iew York will be credited with ite partielpation i s the purafcese of a e i fll£Atiooi or witb the proeeads of eay eale thereof* section ?. m m & i s s mm m M m w m m m m & m w xsm So Federal Haeerva bm»k shall psxmhrn* e r eell Qmwnamtite a •eeurltles axoept ia eeeordatiee wltli an epea^iaurket poliey adopted by the Federal Open NsrVefc Csamltie* a^d in effaet at the tis**f ex00ft theti (1) In an estergoney, any Federal 1«eeorva bank may pi t rohase OavemBeat securities when xies«*sary to afford relief in * situation i&rol'riag specific bankinf institutions in its flistriatf and (2) After obtaiaiag the oonoent of tbs Ccw&ittee, may Federal 'Saeerve beak ?aay purehese or sell Gowrwaeist seen* ritias for other speoifte purposes* All purchases amd sales of GovenMat securities by any Reproduced from the Unclassified I Declassified Holdings of the National Archives r- J _ ~ -^ ECLASS1FIED Authority fc.Q* -T• Fadaral 1sssrvs barle far its own aoootmt shall bs rsportad promptly to tha Ssseafcary of tbs Fsdsral Opsa ISwrkst C«*w&ttas on ths day thay ara soasiiaisaatsd and to ths «f tbs $y*t«® Assousti sad ths sxssutlve ecauftlttss »ay ?ssk* suoh eaapaaaatory pttrshssss or sslss for ths tysts® aoooimt and suofe raallocations af ths « c11gatIons in f ths Systan Aaoouxtt as way bs appropriate in tbs light of jvarshasss and salss sada far thsir csm asoount by ladiTidual Fsdsral Hsssrvs banks* Tbs Camlttss rsssrvss ths right, 1 t I . diiroration, to f ?* rsq:ilrs that any Q w n m m e t oseuritise no# fesld or fcsrsaftsr ptirshassd by an Individual Fadaral Bassnrs bank for its mm assetrat bs sold or dslivsrsd lists tbs Systss* Asoouat* & W T i m 9* OTia 0F1I ^ Ki . <ri8*Af.L ; A * ? Basfc fedaral Rsssrvs bask aay aagaga In opsa-markat eparatioas othsr than ths purshass or sals of Ssvsnwsot ssetxrltlss, subJast t# ths following soadlHonst (1) 411 susfe transaotlons shall bs rsportsd dally to ths Sssratary of ths Coaoittse on ths day thsy taka plaos* (I) Airobaass of asosr'tassoas a s bills of mmhmngm ni shall bs is asoordanca with ths prerrisio&s of Bagulatlon 1 of tbs Board of *lsirsn»rs of ths Fadsral Bassnr® & s s f sad tbs ytit ratss of Istsrsst or dlsosiast shall bs la assorda^ss with sobsdulos approvad or pras^ribsd by tbs Board of GsnrMrt of ths _ Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc.O* 12358 8 « * Fedor*1 Rooerre Py*ier:t Provided, however, Thet no ©Isligation* payable in foreign otirrei^oy shall be purchased without th* specific conscnt of th* Board of Governor* of th* federal &eeerve System. (3) All fmrchases by 'Federal Boserve ba?s!fes o f b ills , jtotee, revenue bonrts ar* warrants of ftates, counties, district*, d p o litic a l crabdlvislens or au aloip alitles shall be in accordance with tho previsions of legislation X o f the Board o f Governor* of the Federal Reserve Syetew* (4) I o Federal Reserve ban* thall engage In tho par* t ehaee or eale of cable transfers for I t * am aoeotmt without first obtaining the approval of the Board of Governor* of th* Federal Heeervc iryrtora* except that Federal Reserve baa.Vs ja ay purohaeo and sell oable transfers through the Hehena agency in accordance with tho resolution# nr regKla&ions of the Boar< of 3 Covernors of the Federal Keeerve System fovsralng the operations of such agency* ($} £x*ept with the approval o f the Comrdttee, no fed eral Seserve banlr shall *nga§* in asy epex»*«iarfcet transaetien# which are not of the oustoemry olaraeter, which do not occur 1a the ordinary course o f b*aalne#s, which are engaged In fo r the purpeae o f affecting general cred it condition* or which asay have a Material e ffe c t upon general cred it conditions t I*rovidod, however, that any federal Reserve bank may purchase obligations for the purpose o f affording r e lie f in a siteration iflreiving sp ecific banking institution* ia it * d istrict* Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority £..()■ 12358 foRtstiiro draft of rogttistlon * Fodorai Q m &rk#t Committoo a « proparod i s pm offioo thonrisg ohsftgs* oy Moo*r*« ^oXdonwoiitor, Snood* Claytorn and b«thMt EietAMMM ^u^goatod ohAago* of flr* ratidu*~2/fca/€i sudor lixiod ia rod* Saggootod ohangoa of if# */t/%4 ssdorliitod is. bluo* Sa&gootod ohasgoo of lir* l/z /lb wMwllm* is load ponoiX. Im^oatod ehasgoa of lir* aoldonwoieor mi por his aiao« Ssnood a « por felt MB«r«todttt*» i-Xaytoo as por hi* j&oaorandtt*Bothos uadorXl&od in post* IO N f & E M L oeuk ^«r.;f w » mttfei unroll , 19$$ # A IMIlf Q F ^ f l ^ S & * i1CM X* 'C fursuast to tho authority oosforrod ttpoa i t by oootios 114 of tiio Fod«i*al ^ooorto Aot* as oatosdod* tho FodoraX 0po& ^arkot Cowftittoo >ro*orib«« tho follow!*!*, regulations rotating to tho opes«fliarJt«t trfc&aaotio&s of tho FodoraX fo«orvo toanJks* tho FotfaraX Opos Haricot ^osmlttoo o*|iroo*iy rosorros tho r i # i t to a lt a r, ctsosd* or ropoal th i* rsgslstioa is ustioX or is o part at any tino« s m t t m s« ***i JUuis (a ) ^otorisaiost oooarltioo* * fho to r* *3ov»rns**t oootiri* Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority £..Q« m Z - tia s* shall i&olttda boads* aotas* eartifioatas of iiadabtadKSss* iraasury b ills * aad othar obligations of tha imitad Siatas* laalud* obligations fu lly guara&taad as to principal aad latarast by tho mitsd Statas* (b ) ‘ bllaatlofts* * Tho tor® * obligations* shall includa a l l backers' aaooptaaoos* b i l l s of axahaa$a* oablo transfers, bonds* rotes, v arri£ i«| debentures* ftM oth^r obligations* iM lo d is f a w eraaeat seeurltlee* which Federal iseaerre basks ara authorised by leu to purehaae in tho epea aarket* (o i SystoB account. - Tha tara *sy steai aoeouat* applies to itoveraaeat eeeurltles bald for tho aceouat of tha Federal Haaarta banks imuar tha oor«trol of tha exeoutire eeaaittee* (dj Coaaltteo* • the tors "Coaaittee1 shall aeaa tha * Federal *>pen •market €eaaittee» (a ) -xooutlTQ ooaadttoo* « the tera "executive oeaaittea* shall iMiB tha executive ooaalttee of tho Federal upm ISarfcet Ceaaittee* SBCHai 3* 0QV&aiilJ«a m»i,XH.8S % tho tarns of sootlsa 12A of tha Federal Reserve £e% as aaaaAad tha tiaa* oharaotor* aad volume of a l l purchases aad salas la tha epea market by Fadarai keserve bamks shall bo &ov#r»ed with a view to acooaaadatiag aoaaaroa aad business and with regard to thair bearing upea tha geaeral ©radit situation of tha country* eproauced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority E .O * 12358 StiGTlif* 4* F D & U WEM m & m C^OTF.E iS S J . (a j • The ^ooadttaa created by taction 12a of the Federal Haterra Aat# at n »s4 «d by the Bankie^ Act af 193$, contitta of tha member* af tha Beard of £avarnora of tha Fadaral Ha* aarra Syataa and of f i r e rapraaentatlree of tha Fadaral Maianra berka 1 alaatad annually* An ml tartanta ta terra la the abaanea of aaah auah repre»e p t t t lft | ih iU ha 4a-aAa» alaatad annually, bat an alternate]ahall ba entitled ta attend zaaetln&a of tha toanlttaa only in tha abaanaa of the repretentative for whan aaah alternate it alaatad* iha ^haintau a f tha Beard of iorernert af tha Fadaral ftaterra %atam a)tall terra ax o ffie io aa whaiman of tha Coawittea ana in tha abtenoe of tha ^hairnan at any weetii.^ of tha uanuaittaa tha Coaadttaa ahall alaat ♦ Chair*** ora tea », ana af tha m b a r a of tha Board a f . * a r e i s j r j | ^ iha Saaratary af tha Board af ^oreraara af tha Fadaral aa-: terra Syataa ahall ba tha Saaratary of tha Fadaral wpen Market i»a*«* j alttee** and in tha abaaaaa af tha Saaratary at any seating af tha j ^ ~ i t * i t .„ML-_4fttia$ant Saaratary i h a l l .to t, | tha iraetor of tha iiiria ia * af tfaeearah and Statlatloa af tha i^oard sf iavernara of tha Fadaral 4eterra tha yttem ahall ba eoaonitt of tha -oanittee* ■ aiataa ahall aalaat a "* » * eger af tha % a t aa Opa» ^ait but inalada in B y-Lawf* j from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* - ---w feoV^eooaat1 * 4 - aoy SaKall) attaad isootiRg* of bath tho Fodoral upoa JtSarkot Conaittoa «ad I t * .oxocttti'ro vofltttiitoo aad win* shall haadlo ppoa»aarkot operation® for tho *i*aottti*o Coa»ittoo* {bj Kooord*. • Tli# Secretary ftf tho £o«aittoo ahall koop miruto* of a l l i t * aoatifc£o a&d shall Im p * ©owploto rooord of tho ftctloc tokoc by tho woamittaa upon *11 quortioi® ef policy rolatiag to opaa-aarkat oporatioa* atd *hall record tharale tho voto* taken i& eoaaootian with the determination of opo»«a»rkot policies and tho roaoo&o a**igaad tharofor. Sach rooord aha l l booowa tad r< a ila tho property of tho Board of G ororaor*of tho lodor*! Eoaorto % *toa» io; ri^eotio^** • 4ho 6« M l t » aa-afo»3dH^a%--4»--*aafr*»gb«»y -W^~*t- 'looot -fo^ 'ii«oo oool^'y<io*‘ i---~«M-'Of-%o«or.If.ttaoaod aoooo*ary.— bo hoid ttpoa tha e e ll ^ f tho vh i raatt of the fc -Soard-of--*oTorfcoro-of tho > o d e r * l«to*orTo -->y*t»^ or at thoreqaeet of aay threo aoafrer o o f the <aamittoo* abet l ag* of tho C oaaftlttoo •hal l _ bo hold * t aaah.liigtoa» fi» C» at loo*t four time a oooh year apaa tho o a il of tho Chairaam of tho Board of ioToroort of tho Fodoral oaorvo Sy*te» or at tho roquort of aay throo woahar* of tho.^oaaiittoo* aotieo* of B o o tie s oallod shall to ^ifoa to a l l member » of tho Coat* o aiitoo by tho Soeretary* Iotas ^xoo«tiw j2o«aittoo ohoald have authority to do*5^»*to ono or more Fodoral no*«rvo baak*.or o»e or snore o ffic e r* of Fodoral &e*erT* bank* to oxaouto purchase* aad sales. ef ^over&aeat securities la It * behalf* Reproduced from the Unclassified I Declassified Holdings of the National Archives ~ D ECLA SSIFIED " Authority fL»Q‘ 12358 • & • idj friiaotioiio* «* It 1* tho duty of tho wowaittoo t * sidor tho m sAi of ooaaioroo and bustnoss, tho goaoral erodit l i t a i tion of tho eountr*, and oueh other ..*tt#r» fc»T*lfe i frltH M VK»r»«g a* my e o n to ito attention l i f fta| o » ooFiw^ % noyoo* » and to ©ontldor* ftdtpi, And tranoalt to tb « ••▼oral Fodoral ^osorvo bmk«i i yw i frlwi t» o>iooo» l ons r f to»h 1 m mk regulations » oia% a f »o i and with rttp M t to tho »pi i « i r 1wt operations ©f suoh banks sndtr Id of th« F « d « n l Kosonre *ot* lo ) gtll*y> • tho Coaaittoo w ill fro a tin * to tiao dotoraiao tho t y n <asrkot polloios of fefat system and w ill notify tho ••▼oral Fodoral iiosorro bonJto of o i l decisions which require hotion on tholr port* J y i w li po lioy sh a ll "fro subjoot-t<rrw o«i»— m »Ado»nO fcoa op 'Q hoaglo at *ny fcias *f ^ o» fc h f O ao boooao aftfwotlto — d— s m t i m ft* (a ) £ *& U *T m COttltXTT&K Qrgoaliotloa* • Tho Coaaittoo* - a it s f trot swot* fr l&i a fte r waroh 1 la oaoh calendar year, shall ooloot froa Its own members an eaoentlwe ooasdttoo oonsistin* of throo aoaboro of tho Board of woYornoro of tho Fodaral iiooorvo £ystoa and two represent tatiwos of tho fodoral Kesenro banka* Tho whalraaa of tho ^oaaittoo ohall ho vhalraaa of tho ftsaoativa woaaittoo* Tho &oerotary of tho weas&ttoo shall mot ao tho Soorotary Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 123 5 8 of tho i ft— lt t — u d ah *ll koop a ia a t N of *11 it s « • « ! • la^a aad ftaralah ooploa thereof to tho aoabora of tho Coaalttoo* ^ J!252M2S£* * ** tho duty of tho Exootitlwo coailttoti X* To dlroot tho oaootttlm of oa toooto purohaaoa aad oaloa of •'OYonaBBo&t ooourltio* m other o b li-atieaa ia tho ad opea aarkat 1* aooordaaoo with tho epoa-**rket policies aUepted by tho Federal upon iarfeat Coamdttooi Z To Allocate oaoag tho N f i r i l Federal Kotorvo m baska tho a^^regato amount of *roveraaeat securities aad othor obll^atlo^e hold for tho ayatea ooootmt and to adjaat aueh allecatio&o front t i* a to tiae to aeot tho ehaa&iag, aoeda of roipoctiro Federal Booorvo banks* *ueh alleeetiea shall ho aade with tho flow of ia ) onobile* each tederal iieeerv* baak to maiateia o suitable reserve posittea and ib j equal!*!** aa fa r aa praetlcablo tho sot aarala* position of oaoh tho-Fodoral ao serve basket 3* to keep tho oasUters of tho Federal apoa market Coamitteo iaforaod a f o i l trasaootloco exeeeted by tho Coo* ■ittoo tad of a l l allocations aad reallecatieaa of iororaaost seourities end othor obligation* hold fo r partieipatlag banksf aad ] ■«r* Clayton thinks allocation should ho by Ceamilttoa rather tNus by Jiotsutiiro Coaaittee* Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority 12358 « 7 * * 4* o « X k & H t lM it T® p e r f o r m w it h fro a iia o to th # o s o s u t lr o p o llo io s «uch o t h e r f u n c t i o n * & ad d u t i e s o p o a - s i a r k o t o p e r o t l o a s ft* m y t in t by th e e o a n d tte e -J m pi F « d « rtl s h a l l h e ro s m t i m «• a a m e t Q' a m i be s t e l^ a e d « *rk *t no a u t h o r it y o r ssako d o o i o l o a s « p o a q u e r t i o & s of i» v o ssd tto o j to to tent d e t e r m in e p o lit y . a^juuf o m * t 1 .$$ 0 *>aeh Fodoral i t w n o bank ohall oafa&o la opoa— rkot opera* tloas u m t sootlea 14 o f with this rogalatloa mm tim m to tlno* sad bo th Fodoral Booarto &si m th o dirootlo&o issasd Fodoral Mosorto bank sh all o n ly by t h o la accordance tsswltteo from d e c lin e to oa^aga la opea*«iarfcot oporatloas as dlrootod )qr t h o Q o n a l t t o o * 1 ....... ... ■ - ■ "r' ’ 'mh ...... . 1 ~ ordinarily. I n tho eo&duet o f opea-aarket operations fo r tho Systea Account, tho pur«ha#e sr sals of obligations w i ll ho aado by tho ^oi»*or of tho iystoa upon Market Aecouat at II ho m m through & I tho Fodoral fiosorvo Baak of low 3«rk* la tha soadaot of opsninsrkot .. I ? I j | } | oporatloas oooh Fodoral ooooroo back, whoa dlrootod fey tho -om dttoo, | w ill nako available to tho liaaagar of tho aystoa Jpea ^arkot Aoooaat | through tho fodoral aosorto daak of Jso» fork* caoh faads os aay ho aooossory to ooadaot aad offootuato sueh opoa-aarket operations aad I I f oooh Fodoral Moooroo beak through tho Fodoral A m rrm Baaik of M mm ow f | lark w i ll ho orodltod alth Its partlelpotlon la tho gmrohato of oh* j j I llg a tis e * or with tho proooeds of say sals thoroof* Sop ehaagos Soo. 4(aj paragraph j . i Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority E..Q* 12358 V - * - ^ Federal Maoarro beak shall purchase or M i l UoverwaoBt cecurltlee except ia aeeerdaaoe with aa opon-aarket policy adopted • y tho tederel vpea tricot ^oasolttee and in offoot at tho time, j ‘ except that* (1; Xa aa emergency* atiy Federal Meeerpc bank m ay purchase /ovtrsaost eecurlties ahea aeeeecery to ifforti r e lie f 1a • situation la *c iv ic * cpccific baaklcg la stitu * tlena in its district| and (2) ■iw i o n «tm *ft«r obtaining tho concant of the goard of of C io fcedoaal tiysto i Co-alttoo, any federal &•* l a bank nay purchase or c o ll aoveraaeat securities for other specific pur pose s , * « » I t s mm aooeae* . i l l purehacee and sales of ^ovononoftt securities ?y any > Federal fceoerte bank fo r lto « «a eeeeuat ahall bo reported arsaptly to tho Seeretary of tho Federal Opea la ria t CoMBlttee on tho day they are eoaouaaatod aad to tho &aaager of tho System ,-«count| and the executive eonaittoe m m ay ake auch compensatory purchases or aoleo fo r tho i>yote« account aad oueh reallocations of the obll^a~ tione la tho iyctea Aecooat as nay bo appropriate la tho ligh t of pnrehaees aad calee made fo r their mm account by individual Federal Seeorve banka* ’i'ho voaaittoo reserves tho right* la lto dlccrotloa* to Reproduced from the Unclassified I Declassified Holdings of the National Archives " d e c l a s s if ie d ' Authority V2358 • f . raquiro that any (taronoaaBt aaoarttlaa m hald or horaaftar pur* ow chased by an iBdivldaal Fadaral i i t i t m bank fo r Its oam aeooust ba sold or dallvorad lato tha .iyataa Aaaaunt* *»y Fadaral nasarro oao* a»y puronaso uMtad &tataa to*~ . porarjr cartlfioataa of indabtodnass far tha aasowaodatlaa of tha Xraasury of tha Umltad statas la aMouats roquastod by tha iraasury and »sy s a il partialpotions tharalaf bat saah aartlfloataa sh all aot ba haid fa r aora than 7 days without tha approval af tha &aard I of »avaraara af tha iadaral iiasarva »ystaa* s m z x m §• &m : w m M _________ m M m m h Fadaral iaaarva bank asy aB£*go in spaa wsrkat apara* m tlaas athar thaa tha purahftaa ar aala af «e¥araaa®t aaeurltlas* aab» joct ta tha fallowl&g eaedltioBti (I) A ll suah trsftsaotlons shall ba rapartad i s t ly -ta tha Saaratary of tha voaalttaa an tha day thar taka olaaa* (I) rtirataaaaa of aaaaptaaaaa and b i lls of axehaaga shall ba i t aaaardanoa with tha provisions af tagiilatla* B af tha ^aard of ^ovarnors of tha Fadoral iiasarta $yata» aad tha rataa of lataraat ar dlaaau&t sh all ha la acoordanco with sobodttlos a^provad or prasarlbad fc r tha &oard of aovaraora q of tha Fadaral aasarva &yata*i Frovidad* howovor. That no j « l t baaaaaa paragraph 8 of aaatian 14 pro*ids• that purehaaaa o f i altad Stataa >ia, fariiaaat obligati oxa nay ba aada oiuy la tha apaa aarlat# Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 12358 ¥ - - 10 * obligations poyabla in forai^* t fn U bo pardhAMd without tho i p t l f l t ooasaat of th* tfoard of <ioToraors of tha Fadaral Mooorro £jr«taa* i*} All purafcasos by Fadaral baaks of b i l l * , iw ttii r m i 8 » bonds u d n r m t i of ^tataa* oM tatUi, d is tr ic t s , p o litic *! subdivisions or auaiolpalitios shall bo ia aecoraanea with tho provisions of iiagulatioii & of tho Board of governors of tho Fodoral Jiooorro % it m « (4) Bo f'adorai 4 t « « m honk ahall aafa&o ia tbo par- chaaa or sal# of o tllo troaafora fo r it s m aaaoaat without f ir o t obtaining tho a u r o r a l of tho Board of ^©taraara of tho Fadaral A«i<irfO tystoa* axoapt that Vadaral aasorva banks aay puroh*so aad s o il eabla traasfors through tho hahaaa a^aaogr ia aaoordanoa with tho re s o lu tio n or raguimtiosa of tho Soard of iovaraora of tha Fadoral ttaaarva ^ i t s a $onr&i«g tho oporatioaa of saoh igonoyt (5 ) aoopt as providod ia Sootion approoa i .a* 4 fca suprs w 4th tha ssan in ss, ao fadaral laaorwo baak shall ang*6# ia aay apaa^SMrkat transactions which ara aot of tha ststeaerjr <maraetar« whieh do aot ooour ia tha ordinary ooursa of bvtalnaas* which ara aa^a^od ia for tho parposa af a ffa o tli^ gaaaral eradit conditiona or whieh nay haw a aatarial affoot upon gaaaral ora&it conditional Proirldod, howoror, that an/ Fadaral ^osarto Reproduced from the Unclassified I Declassified Holdings of the National Archives “ r- ' d e c l a s s if ie d Authority fc.Q * 12358 / m■ I • IX * bftsk m / porch**# «bli£*tlo& * f « r th* m of *ffordia§ r « U * f ia • *ltnwitt«i iwrolvifife •p»ollk « iM B l M kisifr in itlta tio iii I t i t * 4 l» t r k t t Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority £..Q« 12358 Division ol Bank Operations Tantatlvo draft of %~l«a«s of Pod*raX vpaa im t Cowalttoo as praparad in Caiiaoo!** rkm offlca *howi»£ ou&gootod ohaaga* fey ttoosra* ^oldafrwaisar, 3maad« i>Xaytoa and Bothoa* ■-3, 33 Xut Su^attad ohasgo* aaatoraaduK of s#i^a*tod ohaago* rar*aua of ^a^attad ahaaga* randa* of Suggastad ohaa&a* of &r* uoldoswoioar aa par h it z/tB/i 6 § uadarXiftad la rad* of Hr* aaood aa par hfo mm** uadarllr.od ia blua. af Mr* vXaytoa at par his M o em under llr,*d is load poaoil* of ^r* Bothoa nadorXiaad la pan* ftuyoucr ^ m a n m M-Lm$ ASCnetS, 1 Sootioa 1. MKHBMS urgaal»atloa - i t i » to [At tha f i r s t ®ooti»$ of tha woamittoo f ollow ii^ ^arah 1st aaah yoar, «aoh waafrar of tho tosadttaa raprafaatinn tha FodoraX H t ia m haak* aad aaah aitoraata elaotod to oorvo la tha absoaoo of iu«h ©aabor afeaXX forward pr oooafr the raaord of hi* aXaatloa or a oortifiod copy theroof to tha Soo rotary of tha Oaaaittoai aad# if any qaaatloc bo r&lsod *a to tho eXactlon or aXl^lbiXlty of *uah xMatbar or aXtaraata* tho Coanittoo •haXX dotaraiao suoh quootio* boforo paraittin^ *uoh aoabor or aXtaraata to partiolpata ia tha aaatlu&o* Sa» l « a »*ta^Xl*had tholr rl^ht to »arfo aa aoabar* of tha ooaaittpa, repra**ctatlira» of tha Ftt. Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority 12358 S 2 foo r d ral fioaorto banks tm i their iHwraiWt, In their capacity as repr*sestetIt*s of oil of tho Fodoral * oserve aanks sad with roi m ra to their obligations to tho country at ler^e. the11 thereupon outeriiiiiM »m ii^w iiii» ifc— upon their dutloo* ^ »tonnK rM liM int -iu a awi B n i »m ■ w w nn ■ ■ Section 2* Alternates - Alternates shall be entitled to attoad neotinge of tho Coonlttoo o&l/ Ia the abeenoe from a seating af the nonbor fo r w m oaoh altarnsto ia selected but la such oaooo km tho alternate shall have tho sane status os tho aeaber fo r whoa ho is serving* Seotloa S« Oath - Saoh aeabor of tho Fodoral Q on Markat : p i Cosatittee aad oaoh alternate shall take tho oath of office required | ^.n by tho constitution for offlooro of tho waited States* n....... ............................................................................................................................................................................................. Seotloa 4# ^uoma * Severn a«abers or ooven sortori aad alternates present aad aotltg ia tho absence of aeabers* shall con stitute a quorum for tho transaction of business! but less than a quorua my adjourn fr o * tins to tlieo until a quorum is ia attendance* Beetles 6* ^eatln^s - tho <*saaittee shall aeet ia «ash- lagta&# if* Q* at least four times oaoh year aad of tenor i f dooaod accessary. footings shall ho hold upon tho e a ll »ooi«ost of tho Chair* nan of tho Board of governors of tho Fodoral fceserve Systea or at tho request of asxf throo roeabors of tho Coaalttee* Mottoes of o a lls by tho vhairaaa to othor weathers shall be given by tho Seorotary of tho Coaaitteo* requests of aay throo aestbere of tho Ccsadttee for tho Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority 12358 - 5 * •a ilin g of a « N l l e | aad of tha tt a tharafor shall ba f lla d ia m wiritias with tha Saaratary af tha ^o*w»itt#a who shall forthwith ratify a l l aaatears af tha Caaaittaa* than tha Saaratary ahall hava i,otlfiad a l l »«*b ars of tha Coamittaa that a 3»®atl£& has baaa r a quattaa hy thraa aeisbars aad af tha tins tharafor a awatiag; shall ba daa®ad ta hava baaa aallad* Saatiaa i « €aadaat aad .Palibaratlotis * I ha fraeaa&ings, dallbaratiaas, disaussioas and aotions of tha vowdttaa asd its s ta ff axaapt as r»qiilrad b/ law aad asaapt as way be ralaasad ia o ffic ia l sowuniaations af tha Casadttaa*shall ba stria tly corrida*t ia l, and aa iaforaatiaa sh all ba ralaasad axeapt ia o ffic ia l sea* sfUKioatis&s authorisad by tha Cosndttaa aad ia tha aaaoal rapart r a quirad ta ba aada ta uo&^rass ^ i^at as aaaadad* saction 10 af tha Fadaral Masarta Saaapt as haraia pravldad ao raports aa tha meatiaiLS I Ii.i iin -a iiiiu ir - ^ ^ •- r r i- ^ - y i^ r iW lii>lii>l||l 'M iMi|liil|< llli(rill>(lfT.<li>i'!Tin~riiirrpiriiip-rTiiriir'tri''iiiriT-iT:°~ ' • ' ilK • ' - -T . ? ’ 'v ■ W T ' ............................ hi i ............. ... af tha Canaittaa shall ba aada bi it s awabars to a»y person or persons whatsoavar* Saatioa 7* v*rdar af Busiaass* * Tha following shall ba tha ordar oi praaadara ta ba fallowed at waatifigs of tha wssralttaat 1* tha Saaratary shall §»raaaat tha niimtas af tha last «»atia& * i* fha ^aaagar of tha Systast Upaa larltsta Aaaauat shall aaka his report of a l l aparatia&s af tha Sjrstti Aaaouat occurring siaaa tha praaadiag aaatiag* Saa oaaasaat ia iagulatlaa* ______ Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority 12358 * 4 • 3* the waaaittee i*ea&oaist shall «a»a kit report oa bugles*, banking ead o t h T eeadltieaa* 4» The Um dttm shall thaa eoc*5der epea-ewrlest m m policies* % a a a ja rity vote Piaiialaott* 1oofeoeat of aesfeers preaest, the woaaittae m y adopt a d lffe re a t order « f baaImees fo r *cy p arti cular aeatiag* AWICXJS II OFFJCMES Saetiaa 1* ChaSrw* af the ooaa>lttao. * the Chainaaa of tha Board **f ^o¥armor» of tha Federal Jiaeerve Systesi •hall serve ax offlei® as Chatrasm of tha Caaadttaa* fha Chairm* of tha -<»- aittee shall preside at a ll aaetijifcs thereof aad shell parfera saah other duties as tha woaaittee w $ mrequire# Seatlea % aaN MivM M asaaH HiflaiM M MM M W • la the abseaoe or dla• ktiairaaaN praNta»» Ma MM M M M M iiM ii’ ability of the vhalrasa af tha CasMittaa tha aeaber e preseat shall elect as 4 vbairaaa pra tea aae af tha aeabars af the Board af ^ovi er&ors af tha Fadaral fSeearva %stam aha shell, ia tha absaaaa o f tha Chatraan* eaareise tha paaers aad perfora tha duties af tha '-hairaam* Seetiaa 3* Secretary * Tha Saaratary af tha &oard af iioveraare af tha Fadaral Maserva Systaa •‘ ell be tha Saaratary of the Casesittaa* It shall be his duty te keep aixrotee af a ll aaatia^s Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority • 8 • of tho Goon&ttoo m d o oo«ploto wm*mI of tho aotioa toko* by tho u wossistttoo m pon mil oporotio&o 9 m of policy relating to ©poa*«orkot u th all r««ord tho votos takor* Is oanaootioa with tho d«t«r»in»ti<m of opon-oiorkot polioio* tad tho r t ft iw i tttig B ti thorofor* r©quiro* Ho *h o ll porfora «u«h othor 4 « t lt t ao tho ^oanittoo aoy la tho obooaco or d isa b ility of tha ioorot*ry aa A»».lftajBt *Seorat*ry of tho ioard of S-owuers of tho Foderal aooonrs % oto» shall aot os Soorotayy pro ton* ^ootioa 4* fiaoaoBiist* * vho I’iraetor of tho tiv isio a of iiosoaroh and sta tistic s of tho ®sa#d of <*o*araors of tho Fadaral iiooorro Syoto* oho11 bo tho Eoosittdot of tho Coandttoii* m shall * a i la ao odolsaay aafaalty to tho ilo—rttfcoa-. aaA »aha&l -poaf ot^a onoh ftife aa t h kifciaa i s«o^ 4 » « i aoy H» aholl proparo for tho u»o of tho Cooadttoo «ad orosoat to i t suah i&foraatioa aboat busiboss m crouit conditions op w ill assist tho Oaaaittao is tho 4m ad * toraifiaitos n*iofwar^JfcmiTnu 111 m'im imimirnnP' i imrri imi inj i r rdlni ' aadi i shall ^»arf© rs sitoh othar opo»-«Rrk®t polioios* i'i i ii' iT liinni n ih w in in ir "t " " . v . -•....1r r iiini'in.. .. 1'ltln M th> 'HmlKf Sootioa ft*, BUT r»qalf« ^feppjaor of % s ta » %a& mrkmt Aeootast* * fho members of tha -owaittoo shall soloot a ^ilajsagor of tho % s to » Opaa intrlcot JioooiiB** who shall « t m ot tho ploosuro of tho Camaittaa aai shall atioad o i l mootings of both tho Oomilitoo aad it * -xocutivo Coaaittoo* H sh all b« tho daty of tho ifiaaa^or of tho Systo* apoa «*pkot Aaaaaat to eosdaot* subjoot to tho super?isioa of tho aoaa* tivo *»© *ittao# opon aarlfcot oporatior** dooidad apoa lay tho Caaaittaa Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 12358 / / m $ - t a l to p «r f«ra anah athar dutiaa aa tha Caaartttaa way raquira* m i c i * in* Saatla® 1* w m m n v m e-Minsm Bow aonstitutad * ?h# vowsittae at it a f i r at m m m tlng a f t « r **reh 1 af aaeh eaiasdsr yaar shall aalaat frcna ita & isatera an ixaeut&Ta waa»lttsa of f i t * »a«h«ra o »c a i«tlt^ af m thras *«**bara of tha Im rd af aavaraora af tha Fadarml xiaaarra % at«a and two r*$>raaa»tati*as of tha Fadaral Maaarra feasfca* 4 majority af tha -xaeutiTa -oandttaa *iiinwnnni»wri,iiiiif> icocstituta -a • quartos fa r tha trass* ahall rir<nriH m ^fi--- 1-- i— 'ff rr--, iiw i.iu r»iw r '-irrftt— -in aatian af hmalfcaaf Saatiaa %• vhairssa af tha Sacaautlva vasad-ttss • Tha whalnaas a f tha vasaitttaa shall sarv* as off ieio aa ihairaaa of tha ^saaattra vaoMdttaa. In tha ahaaaaa ar dlaablltty af tha Chair—ai tha aasfrara praaast shall al#at a Chair—m pr* t a »« s Saatlae I * >>aorat«*ry ~ Iha Saarafcary af tha Fadaral Opas ^ rk a t caa»lttaa shall act aa tha .aaratmry af tha iacaentira vast** jaltta# a— it ahall ha his duty ta fcasp ai&utaa af a l l nssti&gs af tha aaamtiva Uaaa<taa* furnish eopias tharasf ta tha assfesrs a f tha f ederal -pan >4*rket wawsittaa* ana jparfsra suoh sthar dutiaa aa way ha raquira«U w Is tha ahaanaa ar d S u t iiiit i af tha Sssratary an AssisnwnasiMiiamtmisw«aps*<tff«— i*t— * • < M Ww Mw a M w iM^ «B«a ia i«w w M w w w Mi«a iiw M a w a w u ^ taut Saaratmyy af that Saard a f ^anaraars af tha Fadaral & assn » yetaa shall aat aa ^aaratarr pro t w > Saatlan 4* Msatlsgs * fha ^xaantlra Caaadttaa ahall maa* Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority E..Q* 1235B m tkm •nil mi %! *• tlMMTMf • #• lh* »*^ri latlti • i. t b® th* lutjr «f <*as*lit*#t X* i « •— •*%% 4Ur— t th« i m u t l w « f p m m m mb mm « » U i <sf **o 'ir5 U *« m other ud im fcim #p*» s»riee* 1 s •*e*r4a»©# with th* np9m«mmrkifc # *ll# i*e *4©pi#<* fey tn« t »eri#% I* I# *ilee*i# *ssea* th* « m r t l f*d*r*l bmmk* %hm m$gpm§•%• Meant of ; *#*w Ji*afc ##«ttriil»e ««£ ®t>»«r •fcitftifatMi *H & i far *«*l< ayrt®* m sewiift *m to 4 t l* * t » % w t# a ««t tha %m k##*rt* tomk** •a*fcll»£ **eli ia«h *li*s«ktf«&* fra* mm4* of the r®«f>**t!v* iliit it lw d ia l I to m m with th* v l* « »f i » ) *& .■ J iirn tomlt t® m ist*in • § u it«^ l* r t i t n t & 4 ifcj & *• fmw tt >r*etleftbl« tte* »•% eera1»$ af *fe# efcs^ f*4 #rel I t t w iv topics# 5* I* keep the i**b«rs af th# *4*r*l w^*» m r to tt j lm t*nm <L o f all %jraa«**tl«ftft m m w it*d by th* €«•» j ■ i ftti af mil *ll©#*fct**Mi «md of *imMr*«#&t #**wri« j S M m m tliim tt#« mid *th*r 4* # h#l4 far pftrtlalp*tl»4; f a f a **£ cecf fa pmrtmrm w m h other fn»eUii»a Mai 4«tia» I i j !<« «ith o^#r-»«rk«t «p*r*tl<»&s *» *% to *»«l$s*4 t# It fr*« y a*l% la >r» but taeittaa ^.n—rf-f.rturmJff-r.-t.rr-. in r j-i % m .* l ym & t thlaMt» allaeatiac ,ih»4l to it r Cawalttoa e r«tk#r th** kxaentiva t'fwrittoa* ; i I j Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority fc.Q» \2 3 5 8 / m * m tinm to tiaso by the Fedor*! Upon lawrfcot w<w®iitteei but t*to ox*e«tl*o committee thall h ’ no authority to d «t«mSM ta SM lliO BI upO qutltio&l of poii«y* R AKi'icui: r*. or m oke ____ _ t-M&aturns Those l ^ - l i v « my bo oaottdod * t any mooting of tho Com* a it too fey * »oJorifcy w t o of tho entire Coowittoof i*rovidoAa Thnt s copy of ouoli omondstont shall hove been d o liw rtd to oooh menbor at least ton days prior to susfe Mooting* Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority V235B ■ t o s Hie ain Moreh 1# l»f6. fontotlT* Sroft f mo m cm m*m m mt u m m tm b i - la ^s Mtms i SftUoB !• mm§m * Prior to t w first li of tho Coas<too following Isroh 1st sosh y « « r t ooofa nonbor « f tho Cowalttoo roprooo»tlAf tho Fotorsl I*ooAr*o books s&6 oooh oltorssto olootod to ssrrs In ths A m b m of t t ^ i nwrhor shall forward tho rooord o f his olootlon or « oortlflod oopy thsroof to ths Soorotory o f tho CombIttooi w i t I f sny quostlcn bo rolsod so to tho t U t t l M or eligibility o f saoJi woabor or sltorAoto, tho CoMtttoo shell deterBine suoh question before p e r*ltti»g eweh Asober or oltAfAAte to p r t l « i | i t i Ia aoetlo&u II«rl»g established their rig h t to sorro «s seaabers o f ths eoanlttee, reprocess tot Iwee o f tho Peters! ^osorro beaks sad thoir alternates, Ia tholr eapeeity as representatives o f o i l o f tho Federel l o sorro banks m4 with rogsrl to tholr obligetioAs te tho eenntry ot lo r go 9 sholl thereupon enter upon thslr duties* SootloA Altorpotos • Alternates shell ho «stitl»4 to ettsasd aootings o f tho Cseeitteo only i m tho ebeotiee from a asetlug of tho aoafeor for utiom mmh alternate Is solootod hot Ia suoh sosoo tho oltOTAsto sholl h c o tho sr •tAtAA oa tho MHsfeor for *taA ho Is sorr *A g * Sootlon S* Ooth * l*eh i o t o of tho Fedors! upeA MorkAt Bwhr Ceaasittee snd osoh alter&ete sholl toko tho oath of offloo rtfiiroi Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 12358 fey the flor e f f i w r * o f the Jaited ^tAtAO* Saatfaa 4* ftparaa * a«fear% or aXtaniAtAc praaaat aa* aattug I» thA ofeeAneA of aemboro* ahmll consti tute a $aer«a for thA traaaaatiAtt o f Im 1bi««| but Xea* thaa a qoerua aey «^ »«r B fro® tiae to tie* watiX A f*Afm io in ettendenee* £eetio& f * fceettnKO - fhm C«a*ittee obeli s n t Ia iaAhlsgtAtt* t D* c*# «t X«Mt Door U s »t AAAh yeat aa* Aftaaar i f floaaai sM H ftry* f'ieatiagA aIiaXX bA bold upon tim aaIX ef the C i Hainan ef tha Bear* of ^e-reraere ef thA FeierAl Eeeerre Syato* at at tit* requeet ef tety three aeahara Af the GAMotttea# SatiAAO ef ealXe by t i Chairaaa to other le a r f e e ohaXX be givea fey the SeArAtary Af te Coaaittee. iefHAata Af oacr eay three aaabort ef tho Caaaittaa far the Aalllig Af a meeting, an! Af thA tlaA therefor ehell f e fila d in aritiag with tha Saaratary Af tha e Caaaittaa who ehalX fortiorifc notify aXX aoabare Af t i* Ceaaittee* Whan b tha Saaratary ahaXX hare aetlfed mil aaabara Af tha Oeaadttaa that a meeting; hee beam requeote* by three maatoa#a aa* af tha tiao therefor, a aaetiag eHaXX ba AooammI te hava baaa eelXed* SAAtien 6« Cen^oAt Aai SoXIbarAtioga • The prAietdi«| > » deliberation*, 4 l t a i a i i « u aa* motion* a f tha Cewmittee, eaeapt aa ra* fn ira * by la v aa* aseept aa aay ba raXaeaa* in o f f ie i e i aowaiwalAAtioaa Af tha Coamittee, shell be a tria tly confidant 1*1, aa Information ahalX be ralaaaa* exeep* ia ef fleiaX eeiwmaloetlono emtfeariaA* by tha CamaittAA « o i ia tho a&aaX report require* te ba mato te C en^rooo by aaatiaa IQ a f thA FadereX Haaarva M t aa aaa&ded* ixoept aa horei» R e p ro d u c e d fro m th e U n c la s s ifie d / D e c la s s ifie d H o ld in g s o f th e N a tio n a l A rc h iv e s DECLASSIFIED Authority •S» provided, m roports m tho asotlngs of tho Ita aosafcor# to say ahall ho m ad® fey or poraoa* ohatooasror* -option T* ^rdor of B*slao»a * fho following shall ho the or dor of prmsdwro to bo followed at asatings of tho Coaaittooi 1. ths £oorotary shall praaont tho sdxnttaa o f tho loot f ioo l g t f tmt S« The «aogor of tho §y#ta* -pon i-‘ar kots Joooa&t ahall aafes hi« report o f a ll operation* of tho Sy»tsa Aoooaat ooour* ring slaoo tho pr seeding *aotin£» 8* Tho ^oraulttoo ^oonoalst ahall m ake hia report. 4. Tho Co«Bittoo shall thee oocsider opoa-aarkot polioio#* Sy a aajorlty TO to of *ee*fcora preaost, th a Coaaaittoo M y adopt a differen t ordar of buaiaeas for any partiaular sooting* j m w t M ii. tfootioa 1* mum.® Chalraan o f tho Soaattto# * tho Cfaairaaa o f tho Hoard of devarattr# of' tho *ed#ral aooorre Syatoa ahall sarra ax a fflo io aa Chairasa o f th# Coialttoi* fha Chairman of tha Coaaitteo ahall pro- •Ida at a l l aeetine# thoroof aad ahall porfara #i*oh othor duties as tho Ooasdttoo say ra%uira. Settle* 2. Chairaaa pro toa - In tho afesoaeo or d isa b ility ©f tho Chairasa of tho Comlttee tha Mahers presont shall alaot a# Chairasa pro tsa ona of tho aeiabora of tho Board of Cie-rernors of ths R e p ro d u c e d fro m th e U n c la s s ifie d / D e c la s s ifie d H o ld in g s o f th e N a tio n a l A rc h iv e s DECLASSIFIED Authority 1 235% r i # n i aaaarra iyataaa wbo ahall, Ia tha abaanoa of tha Chairaaa, •xtr«li« tha p m m r i isd par for* tha dutiaa af tha Chairmaa* %»tl * * Saaratary* * tba Saaratary of tt*a Board of Oar- araors of tha fadaral aasarra Syatsai aha l l ba tha Saaratary of tha cnalttaa* it ahall ba his duty to kaap ainutaa of a l l asati&c* of tha Cooalttaa tad a aoaplata raaard of tha aatloa takaa by tha Caaaittaa upoa a ll quaationa a f polioy ra la tia * to opaa ay lost oparatlona and •hall raaord t o rataa takaa in aaaaaatioa with tha dataraiaation of apaa"-a*rkat palialaa aad tha raaaons assleaad tharafor. fora aaah othar dutiaa as tha Coemlttaa may roquira* Iu Ba ahall par* tha atoaanaa or d isa b ility of tha Saaratary aa Aaaistaat Saaratary af ths Board of Gotaraors of tha Fadaral ttaaarra Systa* ahall aat as saaratary pro ta «* S#atlQn 4# ^aoaoatist.* Tha Idraator of tha Dirlaloa of la* aaarah astd ita tta tia a of tha Board of Cararaara of tha Fadaral Eaaarra Syataa shall ba 'tha n*OAOalst of ths Cavnittaa* M shall ;<rapara for m tha aaa o f tha Ooaa^ttsa aad prasaat to it sash information aboat busi ness aad aradlt aonditloas aa will aasist tha Caaaittaa la tha dataraiaa* tloa of ope aeaar feat palieiee, aad shall parforn saah athar dutiaa aa tha Casadttaa may require. Saatioa I* waaaaar af Syataa Jpaa Market Aaaoust * Tha aanbara of tha oanailttaa shall aalaat a n^aaagar of tha Syataa Ofaa lerkat Aaaount" who ahall aarra at tha pleasure af tha wesadttae aad ahall attaad all aeatiags ®f both tha Casmittaa aad its laaautiv* Cowlttee* It shall ba tha duty of tha Maaagar of tha Syataa Jpec Market R e p ro d u c e d fro m th e U n c la s s ifie d / D e c la s s ifie d H o ld in g s o f th e N a tio n a l A rc h iv e s D ECLASSIFIED Authority A#count 1X^5% to #oi*4uat# #ub>ot to tho ouporrlolon of tho &xooutiro Commit* to©poo-»arkot opormtio&s 4#oido4 upon by tho ton«ittao wad to porfora •uoh othor AitSti on tha Caaalttao aay roqplro* MtZOUt III# Saatioa 1. JttWHHfini C m O t t M How ooiftitut#4 * Tho tonalttoo ot it# firo t mooting o f tor £& aroh 1 of aaab aoloadar yaor ofeali ooloot fro a ito own aossfearo on ,x##utir# Coswlttao of f ir a aoafear# oonoittlag of thraa m b * bar# of tba Soar* of ( ^ m r a r i o f t&# faiaral, toaarra Syston and boo r#pr#o#nt*tira« of tfca F#4#ral .'iooorro banks* A ao^orlty of tho 4*aaa* tiro vonaittoo sltoll oonstltato o y w r a i for tho tr«at«itio & of buslnaos* ootlon 2 * • glMdrasa.of tha jaaaatira Comaltt+o * Th# Choir* moa of tho Caaaittao sholl sarra ax o fflo io as Chalrnaa of tho iaaoutiro Cocsaittao* In tho sbooaao or d isa b ility of th# Chalraan, th# nsnbars ro##r t sh all #l##t o Chairaan pro toa* tS«otloB ?• Saaratary - Th# baar#tary of tho Fadaral Op*n Varfeot Coaaittao shall oat a# tho Saarotary of tho &aautlrn Cmaslttoa •ad it shall bo hi# doty ta kaop aixmta# of oil mooting# of tho ^xoautlra Co»ittaa, fur»i*h eopl## tharaaf bo th# Mnbors o f t e F#4#rol upan f* lar&ot Cais<tao, aad porfora snob oth#r duti»s a# nay bo m^tirad# th# Is *>##n#o or disability of tho Saarotary* an A##i#taat Saaratary of tho fcoard of 'Jmraori of tho F#daral Eoaorra Systaa shall aot aa $#ara* tary pro ton* R e p ro d u c e d fro m th e U n c la s s ifie d / D e c la s s ifie d H o ld in g s o f th e N a tio n a l A rc h iv e s DECLASSIFIED Authority E..O- 1235B gartioa 4* l*attftj£i * th* ajwautiva Con<taa shall m % »m ©a th# oali #f tfa* Chairaaa tharaof• S ^ tio n §* Powars aad datlos * It shall b# th# duty of th# IW iB H V I COWaitta#« 1« To diraat til# #xaautiaa of par#has#s m sal#s o f ad iwot *##urltl#« and othar obligations la th# opaa aark#t la aaaor&aaaa with th# opafr-msrkat palloi#s *dopt#d by tha Fadaral &pm Karkat Csw» ai ttaaj I# I# alloaata aaon* th# sararal F#daral Sasarva books th# agsragata saouirt of Q rm m t #aauritlas and oth#r obligation* hold for & rm m th# Systaa Aaaauat aad to adjust *uoh alloaationa fraa tia * to tiira to tt##t th* ohaaglag a#ad* of th# r# *p aa tlfi F#d#ral koa#r*a bank** Suah allocation sh all ba aada with th* riaw of (a ) aaafcliBg #a#h F#daral A##arra bark t# maintain a suitsbls raaarva paaitioa and (b ) oqwaliain^ as fa r as praatiaafela th# not #araing paaitioa of ###h r#4«r#l tioaarra bankf ?• fa to*ap th# m srobar* o f tha Fadaral Opaa karkat &3o*aatiTa Camlttaa iaforaad of a ll transaatioas aaaautad by tha tovnittaa aad of a ll allaaatioaa sad raallaaatioas of Gararaaaat aaauritlas sad othar obligations hold for participating banks* sad 4# fa parfora sash othar fa; at io as aad datias la oaanaatloa with opaa~aark*t oporation* as asy ba aaslpw d to i t fro a tias to tia s by tha Fadaral Jp#a ^ark#t Cocmitt##f bat th# #x#autiT# #oaaltta# shall hav# ao authority to datamiaa palioios or safe* daaisioas upon qaastioas o f polioy. R e p ro d u c e d fro m th e U n c la s s ifie d / D e c la s s ifie d H o ld in g s o f th e N a tio n a l A rc h iv e s DECLASSIFIED Authority 12/^5? ■ AKflCLa m Th#«# b y la w * m b# «M#a4*4 * t w y MMtlag of th# Cowaitt#* ay by ft M jo r lt y rot# o f tfe* «mtlr# Thftt a #opy of au#h m m & m m * ahall h#r# b##n 4#lfr#r*4 to m m k w m tm r «t l# * * t t*n days prior to auali a##tl£g* Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority fc.Q * \2flK58 ~ Division of Bank Operations File March 2 f 1936 -? ' V T V 11 ^ v u ■v * Mr. Dreibelbls Ur* Snead Mr* *y a tt, In his m m m or^ndxm of February asked no to give you any ooanents X bad to nake with regard to tho proposed regulations and by-law* o f tho Open Market Coaadttee* Soso of tho changes X have to suggest are aerely typographical and othoro aro substantive. Section 4 (e ), paragraph 1, lin o 4 — In sert tho word *of* boforo tho word • f i n 1. Sootion 4 (a ) | paragraph 2 — Change words *ie a lso 9 in lin o 2 to "sh a ll bo*. Section 4 (a ), paragraph 3 — Change word *a* in lin o 4 to *a »* and add a fte r word * pro-ton*, *one of the other aenber* o f tho Board o f Governors o f the Federal Heserv* Systen** Sootion 4 (e ) f paragraph 4 — Riould not provision bo aleo nade fo r soneone to aot in tho absence o f the Secretary o f the Board o f Governors! Section 4 (a ) , paragraph 6 While X appreciate the reasons pronpting th is paragraph, i t leoai to no that instead o f having a *a»aaager o f the Open Market CoiKaittee*, the executive eonaittee should have authority to designate one or nore Federal Beserve banks or one or eore o ffic e rs o f Federal Beserve banks to execute purchases and sales o f governnent securities Dn it s behalf* '/a/d( Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority 12358 Hr# D reibelbls — 2 Section 4 (d ) — Sugg®*t that Section 4 (d ) be revised to read as follow si "Functions. - I t Is tha duty of tha Committee to consider tha needs o f c©amerce aad business, tha gaaaral credit situation of tha country, and suoh other matters having a bearing thereon as Bay come to it s attentionf and to consider, adopt9 and transmit to the several Fed* e ra ! Eeserve banks* regulations and directions with respect to the open market operations o f suoh banks under Section 14 o f tha Federal Reserv® 1 st** Section 5 (a ), lin e 1 — Change word *in * to *at*« Section 6 , paragraph 2 — See comment under Section 4 ( a ) f paragraph 6« Section 7, sub-paragraph 2 under paragraph 1 — I t is suggested that the words *fo r it s own account* be omitted fro a lin e 4* Some of the Federal Beserve banks buy and s e ll securities fo r account of their aeaber banks and i t is assumed that i t is not tha intention of this paragraph to prevent thee hereafter fro a rendering such service to aeaber banks. Section 7, paragraph 2 — £1 Ininate the word "promptly* at end o f lin e 2 and in sert words *on the day they are constzaaated* a fte r the word •committee*, lin e 3 * Section 7, la s t paragraph — I t is suggested that th is paragraph be elim inated, since paragraph 3 of Section 14 provides that purchases o f United States Government obligations may be made only in the open market* Section 8 , sub-paragraph under paragraph 1 — I t is suggested that the word “d aily* at the end o f lin e 1 be omitted and that the words eproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D ^k < v Authority > • * 123 5 8 Mr. Dreibelbis — 3 •on the day thqy take place" be added at the end of H u e 2» By-laws Article I, Section 1 — Suggest that the word *at* is line 1 be changed to "Prior io", that the word "present* in line 4 be changed to "forward*, aad that the words *to the Secretary of the Ccanlttee* be added after the word "thereof* in line 5 * Article I, Section 4 — Should not a sentence be added stating the umber of Bankers necessary to constitute a qnorun of the executive coanitteaf Article X, Section 6 — It is suggested that the words "and Its staff* be eliminated fro* lines 2 and 3 , as the preceding words refer to the coanittee and not to the staff* The meaning to be given to the word "released* In line 5 is not clear* Does it wean released to the press, or does It Bean that a representative of the banks on the Cosnlttee is prohibited fron Baking known, to other officers and directors of his bank or if another Federal Reserve bank represented his any of the discussions end actions of the Coanlttee? Article X, Section 7, paragraph 1, sub-paragraph 2 — See eoanmte under Section 4(a), paragraph 6 of "Regulations*. Article 1, Section 7, paragraph 1, sub-paragraph 3 — Change this paragraph to read "The Conodttee econonist shall report on business, banking and other conditions"* Article XX, Section 2 See consent under Section 4 (a), par** Bonds of X/iS t r m m m f Bonds af 3/if t r m & m j Bonds of 3/$f f r m m t y Bonds af 1/45 tfiMsiiry Bonds of 3/4^ treMwry Bonda of 3 / W ?:r»a«tiry Bonds of 3/4JC Treatury Bonds of 2/ 6f tr m mm y Bonds of 1/41 Tr<w**i*y Bond® of 3 3 1 3 3 3 2 3 4 1114,600 $529,000 t 1941- ':;'i ; 1943-43 1941-43 1943-45 1944-46 1943-47 1945-^47 1946-49 1947-52 110,600 162,500 160,000 65,650 total Bonds Treasury Rotes .Tmnsory Bills Total WmB+Smmri%%§$ 1550,000 500,000 14,000 422.000 1,766,000 103,000 165,900 4*5*300 57,600 524.600 4M * 4£ fr«a«ey B w m of 1944*54 3$ Treasury Bond# of 1951-55 3 3/4* treasury Bonds of 1946*56 V W Treasury Bonds of 1955-63 ># Paa*»*g. of 1961 10,450 2,652,700 631.000 40,000 «..< «».• > 210.600 2*000 mm m m,7oo 6,550 695,550 — — 723,000 « W M it2L M W iMS£a — — 7,011,650 1,695,050 1,652,000 — 1500,000 561,000 76,356,550 1,733,400 44,<^2,000 « * ^ $62,741*303 * —* ( » —* 600,000 695,550 122,065,600 3,365,400 62,741,000 500,000 7,572,650 ~~ — — — <— * — —* — — 1795,000 4,000,000 .— 5,205,000 — $643,fOO 10,600 10,450 2,606,700 693,500 40,000 710,000 9$7,650 1,669,000 524,600 795,600 4,37*,500 542,900 6,036,700 1,329,550 1§5,200 .10,000,000 21,239,450 — — 79,152,950 « —» * . 106,753,000 —» 1*5,200 10,000,m 207,145#400 f gp s »• * ¥ £ fcptA/ ly J Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 12358 V r i oi Bank O perations F ile Kob Kesarst Clay tea i Morrill Goldonwaisari Swoad Cionaral OoutatU Draft of Jjgtjat 27,1936# " 4t" 2 3 V"RT I'RGRKT. Thar* ara at too hod hsrato fo r your eonsidoration, oopi«a ef a tontatiro draft of proposad by-law* and regulations of tha rad* oral Opan Marlost Joaaittaa whish hava baas proparad by Mr* braiboIbis In aosordaaaa with a raaaat oo&foraaaa botwwan Hr* oldonwoioor, Mr* M orrill and tha uadartignad* It it important that thaaa ba plaaad ia fora suitabls for oonsidoration by tha Board as toon aa possiblo in ardor that tha Board M abari Kajr hara t ia s ta study thaa and, if aooossary, hava a rariaad $raft praparad, Imform tho f i r s t mooting of tha Fadaral 0p#» Markat Cos** aittaa which way hara to ha aallad ahartly a fta r Marsh 1st* It w ill ha appraoiatad, thorofora, i f you w ill study tho so drafts and 1st Mr* Draibalbis hara tho baaafit of yoar suggostio&s at your sari is st oonwaaiaaaa* It any substantial diffaransas of opinion daralap wa shall andaaror ta a rr a ^ a a oonforaaaa on this subjoot at an aarly data* Vary truly yours. la ! tar % a tt# Oaaaral Jou&sali ittashaoats* < - 2 3 3 £ Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority 12358 ^r*£t m m j k i or^ a m m t 44 *" - Os Bmtim i fwptmiit t# th* i*a m®twrr*& upon it % o * th* ?*ii*r*i i**#r** .£#%« ** i ***tlon ts&# lateral % • » &ar*«t rtUAlng to th* *p*»» p r m m r V b m %fm tr**M*tl&Mi «f tht f’ & m m X timomr** v T m ?»^rft 1 Op«m $*f%*t C««*ltt** r***r**# t£* rt# % t* »it*r* fumA* er m i w & l t‘ l* r*£«l*tt«a in «r im part at <*ay tin*. 6 8 5 T M 2. (a) 3 r tSttnSil m o m r i t l m * • Th* t i s nH m m m m n % «# n ^ #*s rltiaa * shall iatitti* b®w£m§ net**, ##rtifi**t** of i?»t#&t*a^#e*, Trmmwty M i l » t m 4 other •fellgfttleti# fuiif (e f) *il hmkmr** ®f tli# tfettwt £**%••» lF#ii**Sing m t# priMtipml ami l«fc*r**t f y e teiifikXlmw* « Th* $ m m "obJligptlcMis* *fm%% imtmAm • M i l * *f mhlm bm� m t m § 0 w * m n t s § dmlmsbwrm, mud otfe^r o b l i g a t i I m l m t i m 6 m * m * Reproduced from the Unclassified I Declassified Holdings of the National Archives “ d e c l a s s if ie d Authority \2 3 S 8 m t » m erct t# *hi*h < w A # r*t B m m rm m M m rta m d by law p e h * %the mm m » (« ) te *ppllm gyytiM ascent* • ¥fc» tm t am m ltim fmM for th* mtomfc « f th* %*•?-** bmk* mOmt tl« toHtrtl #£ the mmitlv# n iK lltn * (4) 6«tal%t»»« «* Tb* % e:m #fml 1 m s th« . £e4«rAl O e s 3fei"ta»t Cewaitt*#* pn • flit % rm *«*NHMtlv* w b mmi ^ the of tH» ?#dtevml % # « *ferfc*fc C<ttat%te«« tinSTt'S »* T *%m h $ 9 m m t r m m mm ® ml p t h m **!#* & l m t i we m Immrr* Husk* ehtli be gftwraftA with % Is t&» apen r l« « t« m m tm m d h t m m m m o mi m * m kr g r it m ulo A th# %mmrm\ Qm< #lto*tlm &t tfe# oeuafcry* bearing i# (*) ^ t2» m m s i m nwstAt, c m i '% «* fb* nvmfaA by I& & M m m nm tot9 «.* asaiMt by tl# Mmktmg. A of 1*3$# #% •anelito of ; * M :«h cedtors of tfc» »«*ri #f «r*» & tft fui4 f iv* yv% « f ti» F*A#mt ntatten* #f % # y*dtar*l h WaSm •!#•%»& rnsmrnXlfm A eltermfce % •*r*t In % alHMmt * f m m h v m h rm pv#» m # fe» It «!•« ftUwMi ««mftlly# but iWiA, m &% r % »tmii l 9m m be es«tl%l»4 — Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority fc.Q* 1235% to ottoad Mooting* o f tho CoHrotttoo o a ly t* s t h i •% «•»«• o f tbo fo r « N n m ih oXtormto in olootoi* flat Chftiraan o f tho B«or4 o f O oooraoro o f tho FodoroX «ooor*o Syotoo ofeoli ooroo ox o fflo io 00 Ofaoivwon o f tho Cam lttoo fl^td 1» tho 0^00^00 o f tho C te tm n ot on/ oootlt^ o f tho Oomlttoo tho Co&attoo i lf t l l oloot o Cbairmn pro ton* c -/ Tho Soorotory o f tho ftoovi o f SimMmorw o f tfcw FodoroX Booorvo fiyitoo «boXX bo tho Soorwtory o f tho F#4oroX %on *u»&ittoo* Tho Pijroofcor o f tho S it liie e o f Hooooroh *nd * tottotioo o f tho Boord o f Oor orooro o f tho FoioroX tiotorwt Syotai «hoXX bo tho ooooaUt o f tho C «n itto o * Tho Conmittoo oholX ooXoot o *:^osjoc®t o f tho Syotoo Opoo tv iorhot Am o h I* who ifa ilt ut t ir t in II ago o f W D i f in lW i » i l % * * — Horkot Com lttoo o»d ito 1oooottvo Coowittoo oad who ofcoXX hoadlo I f - pp*&m*rk»k oporotloao for tho t e o vt lw Cow<too* (%} &* * f. * te fflS E * * Tkw Soorotory of tho OflMdttoo ohoXX koo?» »ii*yt*o of oXX Ito oootlogo oa®d oftoll koop * vtiwpXoto »ooord of ti» •otic® tokoa by tho Comlttoo aj>on oXX $oootiooo of poller roXotl&g W rfc— gfc y i 1iifc - i l l ‘fr* 1 i j i w*!9Pi WBn f^r 4 ► j o . »i. i , i~n i t i i . f n g u i « * 4 -*r - I Fwwwni w M n i S vZfw wwvmm T m . % Xipii jmw£ 1 •Mftjriii 'ii .-'iL.m % v*- 4*- -^ J* ^ ^ ... In oonnootlon with tiao dbotorwta«ti<» of opwMirktl poXioio* ood tho w m m m m oo#lga*4 tvorofor* (o) * *** OoMoittoo ohoXX noot In '%ohl«rt 0 toa C# ot Xooot foar ttxaoo oooh yoor# ond oltonor If doo^iod nooooooary* r v M Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority 12-35% m % m atoll. to to!4 uptm tto m i l of tto Ctalrafctt of tto towi of »f tto fto#r*i to#*r*w %*%•* m t&rto *»*»tor* of tit* timmittm** loll©** ef as**tin4 * c*l]*0. ctoll to glir*s to *11 mator* of tto C®»itt** ^ *t tto r*<p**t of th* toorttory* £SBSM5ES* * ** *• te eta* •I4*r th* » • * * » ii 1 oo®a»re* *csd to«fm ««s# tto £ «»* r * l *r*4 it t ito t* t 1.*n of tli* MMferyt §mh oth*r mittor*^ »c my eea» to i t « •tt*fttit«(tavift& * to*riH 4 t'tor#<m«j *£4 to ©0K*14*r# *dftpt« *ad T" tr*fc*»H to tli* * «v * r * l f’* # * r * l E***r¥* tonto* r*&ul* t l 0B «/r*l«titi$ c\ 1 ^ ^ t* th* ©p«n~wfcrfc»t tr*i»#ftottoP« of *«#tt to®*k»t Alr*«t4o&* with to tto #p*ii«mrlr«t *|»*r*ti«ni* of *ucb tosfc* «ii«J*r *##tl*» 14 of tli* ?to*r*l M«**rf* Jy*t« (•) policy* • fhm C«w&itto* will f r m it** to t l m d*t*r»im* tto «fpm«a*rtot |»©it«l«# of tto * $ **d will notify tto **v*r*l f*tor*l to**rv» toBk* *f nil 4*#i*l#®i* *hioi» rwqalr* %otlen '*« ttoir p^rt* & each policy itoil to sm&J*«t to r**#»* »sy *id*r*tl*& #r etorn^* *t *»y U m *ft*r it to# to#*** *ff«#%lir* *s4 tofor* it to* to#» fully *x.«#n4*4* m s i m it u'&urm u.iiim <fA' t*) ^n^feltotltft* * fto -oaasitt**, l» it* first tftor A*r*fe I la **#li *ftl*»&Ar y**r* *toll m l m t f r m It* m m ®*astor* * s #***»tlv* ooswltto* «*is*i»ti!% of tfer** »*ator# of tto i Io*r4 af rfotwuon of tto #"*d*r*l %*t«« a*4 two r<&|*r***£~ Reproduced from the Unclassified / Declassified Holdings of the National Archives D ECLA SSIFIED Authority 1235% m i m t totiroo of tho Fodorftl bork«* Tho whtirwu of tho Cotffelitoo i h i l l b* vholrmik of tho 3t#CuCiV0 .0*saltt#O. Tho Soorotary of tho Cwwitto© oholl 00% • « vh* Soeretfery of th# mmwMw Coaolttoo *&d oh* 11 koop adcutoo of » H it * *.oot«* inui ood furttioh « o p l«« thoroof to tho aosbor* of tho Coaaittoo* (b ) Fttttotloao* • It ohaXi bo the dttlgr of tho lx*ottti*o Coaaittooi I. To oaooato purohoooo «*ad **»!•• of u&irorf«o»t ooouritloo Usui othor obll^otlofto ia tho opou w k o t In oo» oordonoo with tho opo»«atrkot poiloioo odoptod fcy tho Kodorol Ufson ^orkot Cowolttoof t* To olloooto oao»$ tho oovorol Fodorol Mooorvo bo&ko tho *g*rogftto **«*a*t of >©Y*ri*ao»t toooritioo *ad othor oblt&fttioiio hold for tho tyotoa ftooount ond to odjuot o«oh ollooot&o&o fro* timo to ti»o to aoot tho oh*sgl»$ **oodo of roopoottoo lodoroi iooorvo bonko* B»oh olloootioa tholl bo i o o with tho vlov of (m) o&ftblim$ o*oh fodorfcl Itooonro sd bosk to solBtolfi f ouitoblo rooorto position o«d (b) oqufciit stag 00 for 00 prootlooblo tho eot oomli^ pooltlae of tho Fodorol looorto bt&koi $« to koof tho aoaboro of tho Fodorol Of#® iiorkot €oa*ittoo iafarwtod of o i l trm&oootloDi oxooutod by tho ^ms* Reproduced from the Unclassified / Declassified Holdings of the National Archives ------------------ — D E C L A S S IF IE D „ Authority 12.35% m 0 m olttoo m A o f t U a oa* f f i l l n t l i t g i o f kuwwnnat w n ffl l l i oo* othor ofcltfofclooo bol* for j>«rtioip o ti»r M •B el u * 4« To jM Tfon ooofe « lh » r t e t l M m ooaaoot loo with opo*«&orkot m dofcloo In ad to «9 «i| ai4 to I t fto a tlwo to tlno Ilf tho Foiorml Opoo Haricot 3<ks tttooj fcwt tho oare.ilttoo Rhall >«ro oo authority to *otorodoo polio lot or so&o siooioioao upon fuootioa* o f polioy* «* aoOTCT or o m M u m OMuerxtm Booh Fo*orol looorro H ak oboil oaf*£9 1* opoo*MOfkot oporotio n i imdor oootloo U o f tho Fo4orol ftooorro Aot »mly ia oooorda&o* • . with th U mmu lo tU a onA t e diroottoa* tooiao* fcy tho Cssoaitfcoo fro® tfc&o to tl«»o* on* oo Fodoral Sonrvo took oh oll doollrjo to oagago in opon novfcot oporatloao o» dlrooto* fcy t e Ccooalttoo* O riia o rily , ia tho ooaduot of opow-asoriteot operation* fo r tho Syotom Aeoo^st* t e ptirteoe or ooto o f tgr t e r Iw ig o r o f tho Sy* to * Opoa S M w t Aooo«**t)will too »o*e teeagfe tho Federal Kotor** 3es& o f % » Tort* lo tho ooaduot of opte»oorfcot epere&iotso «ooh Federal Heeerve took* when <nrooted by t e Gemi&tee, w i ll ttOko available to t e v^hMfior of t e &yete» % « « Hwfcet *eoeuat £>lr t ■ ' ^ f . J/ th re sh t e Federal leeerv* Book of le e to r^ , oooh fO rio oo ®egr bo ntooooory to e*?«a»et ond offootuoto ouofe ojpwa^aayfeet op eration on* Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority fc.Q* 12358 eaah federal ^ « « « m tank through th# Ft4*nl laeenra Beak *f Umm x- tork e111 t * credited with it* partlelpetloa ia the parehaee sf obilo ^atloaa or with the proeaeat of aay «ale thereof* "iictioi ?• m u A m ajs» m i s of m m m m m mmamtm to l«4«rtl iia*enre hex* ohall puruh**» or toil iatera^eiit aeourltie* except Is accordance with a* opea«a*rkat volley adopted ay the >ed«ral wpaa »rket Comsittee aad in effect et the ti&e, cseapt that* ( 1) la tB eaargeaey* any *ader*l .te**r*e bank way purchase joveraaeat securities when accessary to afford re lie f is e situation lurolela^ epeei f |e fceakiat k «U ttt« tlo&e i i it* district) end (i) After obtelair* the eoiseat of the Board of *oweraor* of the federal Besorea System# a**y Federal *a*ar*a fcaak aay purchase or tell aoeenuaoat securities far other specific purpose*, for It* owa eeeonat* All purchases erd oele* of dorertHaairfc *e#%*rltlea &y aay Federal Haserwa taak for lta oaa accouat shell oe reported ^proaptly to the Saaretery of tha Federal Opaa Market vaaalttec^ead to tha *aaa£or of tha feyotea Account! aau the executive committee aay aaka •oeh eaapa&aetery purchase* or oaloa for the Syatea aeeouat ar4 saoh realloeetlea* af the obligation* la tha ^yoten Aecouat a* aay ha Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority T V I * tppr^rltt# th# ll$h% of porehoooe end oeloo a#4« for their ow» If iMilvi4a«l F«4*r»i fcoeerve books* % CeMilttee res«riree Hie rigjht* 1» lie dfeeretlo»# te require that i&jr 6 <nroraiM»t securities no* Held #r horeoft^r par* ohosod by o& lMivi4««tl Foderol *teeer*e ho&it for lit owm oeoouat &e eote or delivered into the Systeo Aoeoumt* iw ?e4orol &eeorwe hook ssoy piwroheee Sotted Stotoo too* ey porif| oertiftootoo of lodefctodtioee fo r tho oeeoKasodetloR of the Troosttty of tho v&itoO Stotee i» o»ou»to requests ay tho Troooury ood aoy ooil pertielpotloao thereto* oat oooh eorttfiootoo shell sot bo held for «oro thos» t doyo without the o#prerel of the Soord of loiror&oro of tHo fedorel **esorwo :ysto»* mavM 8* m m o ® t t m v im m m m m iooli Fedoroi ieser*o hot It «oy eo^e&e Is epoo«e»rket op#retlo i other the* tho pwrelioee or «e ie of ^ooeroieeot eoeurities, tub•% * > Jeet to tho follow ing eoodltio&e* 4 1) A ll oooh trorztoot ions shell ho reported doily to tho sooretery of tho ^owoittoo* ($} , ^ *7 oroho000 of oeeeptooeoe ond hi l i t of e *» oho&^o oholl ho to ftocordomee with the proprietor.* of Sie|^i* lotto* » of the Boord of aoverooro of the Fodirol Boooroo % eto» oo4 tho rotoo of lotereot or dloeoiiot oholl ho is Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 1235% •#©®r4ai**s# with ##h#4ul#« »,>pror*4 & $»r#s#riV#<i r $«*r4 *wmrt*®r$ of th* ?#d#r*I %*t#*t th# »y#Tl4##» h#y#y»r» Xh*% no #bli**t*cm« p#yahl# in f«r«ip nurrtmy #1 n ' b# {wr#h»##4 wlthmi th# m m m m % #f th# §o*rd of «&#*• ill f R o * of t o ?#<i*r#I «#*#rv# Sy#t#»* tr i r t# (*> -4il pur«u*«#« f y F#<£#r#l i#»«rr# e #f t-Hia, eottii r«v#mm \msA* ■**& «»rr**t# #f £tat#«# #aimtl##* ? e lit l* »l «n i» d lv i« t # K t # o r s » u jj i « 1 $ > * li t i # # shftH b# Is ##« orate#• with il pr#vi*io»* of £#£ulfcti«ft £ of th# l# Ii-mr4 of a#*«ri&©r# of th# ?#4#r*i i###rir# %*t#s&» (#} 1# l#6 *r*l ft###rv# fc*»k §h*U #«$***# Im th# purefo*#* or 8#1 # of c*hl# tronsfor# for It# m m *#eott»t with* •at first obtaining, th# approval #f th# to*r4 of 5®wr»8Ti i of th# !'#4«r«l **###rr# %#t#mf #so#$t that F#d#r«l *t#«#rv# *ay f«*r#fc*»# *«ni a#ll eabi* tr*£af#rt through th# $«¥•## in a $aor4a& # with th# r « a$l#ti o sa #r r#<gttlfttior‘# i f «s # th# Bmr4, ®f a#*#r*or« of th# F*4#r*i *i#t#rv# «’/#t«ai th# oporatior.a of auoh #&#s»oy« (6 ) -xoopt with th# approval #f th# woonitt##* ca r#4«r*l i###rt# msJt shall *n*g»%# im m y #p«»-i»rk®t trass* aclim * f ii ire &©t of th# watosarjr «har»#t*r* «*il©h 4# ft th f cot ®eeur in th# #r<ils*rjr court# of bu#it*ssf vhlofc ar# #»• Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 12358 * to - in t w %h* porpot* of t it t le * m y h*> * • « I%1.or** gm m rm l • w d i t «a*s» # ffm t m httitftfi that «iqf t t f & M y pt*r©h**« ©'slS&atiau* far th# purptM ®f otk *ffor4ii*£ Involving Is l t i 4 1 «trl«t* Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority E..O* 12358 *elirmry IT, WM. tsftteti'te i-roft fkiMMh OVfcJ *AIS*£T coiatims a mntm Seetlee I . i ymmm Qrga&lsatloa - At the f ir s t oeetlajK of the Camitt«« fe lle e ia g % n li t it eoeh j t t r , eoeh arab*r of tha Co*talttee representlug the ederol Eeooroe baafcs o&A eoeh alternate eleeteg to serve In the ebeettoe of eoeh aeaber shall preeent the quaetloa bo retse4 *e to the election or eligibility of s e i «m » u! bor or *ltero»tet tho cm ilt too shall determine saeh ^ i e « t i « bo* lore permlttlmi’ suoh *eafeer or slteniate te ijortlelfate la tho ; oeetiAgs* ^eetiea# S* Altetmtao - Alteimtes shell iso entitle* to ette&d KootlEf t of tho Csaalttoe osljr la tho efeseaee free a mootlag of the awritor for whoa suoh alternate is selected hot la sooh eases tho ol|»omoto shall Huyo the soae status as the aeafeer for otise he Is serving* loottea t« ath - iaeh *eabor of tho federal Open driest Cosoiltteo «a4 eaoh alternate shall take the e etSi of offloo ra^iirol by the eoastitotlea f«r officers «f the thsite* Ststoe* seetiee 4. m w na • Seven smbere or seven wanhers os4 oltensotos present end noting its tho ebsenee of aesibers, sh all «o i* stitote o qoonai for the treaoaetlee of boslaoesi hot loss thoa a fuoruo m y edjeuro froa tla e to ttee o a t ll s qu ern Is in sttendanee m Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority E..Q* 12358 / // - t eetion &* »ootInc# - TImi Ceeetlttee shell **eet In ?e#hlnpton, $ • € • » * lenet f«wr tine# eeeh yeor on* ofte**er If l» m l aeeeesory* Meetings efcell f e h e U wren th# requeet of the thnlmnn e ' th# *oen! e f of svemora of tho ieOerel Peeeree Byetem or ot tho reqoest of eny j thro# w m m fcere of tho Committee* U t llio i of eolle f y tho Chelrvmn e to other fwsber# sh ell fee flvem fey the feeretory the Committee. Sequeets e f (uqr three nsmfeer# of the Ccreeltt.ee fo r tho eellln g of e meeting «n4 t f the t l » » therefor sh ell fee file # l » writing eith the Seeretnry of the C o e iU e # olio oho 11 forthwith n otify n il « « # • feera ef the Gonmlttee, I hen the Feeretory shell hnee notified e l l wetter# of the Cosaslttee that n meeting ho# been requested fey three wwtfeere end e f the time therefor n mooting ehell fee 4eeme4 to hove been colled* Soot ion 6* m Hie pr eeee41a§n# Comioot oni n r dellfee«ntleme# 41#c»}#«lent nai notion# of the Committee on* its •tarf" oneent no required fey lav owl except no nny fee reloosed In ? 1 o ff to tel eesmnanleotlame o f the c emmlttee, t e l l fee e trie tly e e n fl- M « • - n u ~ u ~ - i«tai c outrunloot lone authorise* fey tite C m om itte e M i In the oxmtiol report require* to fee *n4e to Cen&rees fey eeotlen l U o m l ieeerve -ot no emenfted* of the e4~ ^ Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority <y. - 12358 , 3 h t lo » fm ifrAmr of Bmlwm*. • Tho foXXovtag ofcaXX bo tiit or or of proootfuro to 1m foU w B d ot mootings of tho o— iitiMi X# Tho r>oor*otory ohoXI prooont tho alnutoo of tho lost aootlag* £» , ^ , « f zk, Tho !fca*for of tho %ot«ft O p m Ifcrtooto Aooount ■ ' 11 rak# hit I m Mf w w ^ m & w 9m m ^ w w r f til w > W » o*« t’ A*)Arfitiona fPfc tha at Ihliw oP«- • » Aoooitttt ooeurriao si noo tho MOMMA lout swetlae* ' ) . 8 * tho Co«oSttoo skjoooolot • ‘toll ts».ko hlo roport# it t)M CoRwlttoo OhoXI thou oonoldor opoa mrtoot :y unoaiaoos ooaoont of 1 intiori prooont, tho Cowotttoo m y m&ept * dtfforont ordor of feuoimoo for oay porttoulor moot* S iS t a m c m u . om esos .motion X# Oholfo* of tho Consulttoo» * Th* 0ho Irma of 4*oa M V i wt 'v»oi«©ri ¥i w w »wcpproX4 wAan t w mww^wm W^j. % wnrw k%o. t 1 h aovwwi ^ood* m •bT ^ 'onkom oI m ox o fflo lo oo Cm lrm>n of tho Cawaittoo* Tim Chaimtt of tho Co»- nittoo ohoXX pro*id* ot oXX aootln&o thoroef aad ohoXX porforwt ettoh othor 3utloo oo tho Coaratttoo my roquiro. sootiao f* Chatman pro t o »» - oblXlty of tho Cholrwon of In tho obooaoo or 4io- Conittoo th* mmhmn jtftoi rt Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority E..C* 12358 / • 4 • eloet a Ohalimaa pro taa who sh a ll, In tho sboaaoo o f tho Chfdnos, oxorelio tho powors and porfom tho dutlos o f tho Chsirasa* Sootion I * Saarataiy# • Tho naoratary o f tho Board of ooromoro o f tho Fodorol ,;ooorro ?yata»* aboil bo tho faorotoiy of tho Coassittoo* I t i ! « l l bo hio doty to fcoop alantao of o i l mootings o f tho Cawaittoo sad o ooaploto rooord of tho ootion t o t e h; tho CoRsnittoo upon o i l questions o f p o ller ro la tla g to opoa*mr)cot operatlona and shall raoard tho wotac takaa in oo®m otion with tho determination o f oosa-mrleet polleio* <m tho d reoeeao assigned thorofor* Ho shall perf om auoh othor datioo oo tho Canmlttee nay require* Beotian 4* •• c mlot* • Tho M rectors of tho Dlwiolon of •o w ^ooooroh and ttotlotioo of tho Board o f ^ereraero of tho Ve&eral reoerse fyotom sh all ho tho Kooncmlst of tho Canaltteo* Ho shall not la aa odwlsory eopeeity to tho Ccmltfcoo sad sh all porfom »uoh othor duties as tha Committee way require* Sootlea §• jfrnsgor of ffystoa Coon ia r fcot *ocourit« - Tho nenbers of ths Coaiittot sh all ssloot a "Haaager of tho Syataa Ops* 'arket ^oeount ...... j a ....... . who shall serve at ths pleesure o f tho Coaalttee nad sh all attoad o i l aeetlags o f both tho Ceonlttee oud i t s l£seewti*e Coaalttee# It sh all ba tho daty a f tho roaagar o f tha Syatoa Opaa ;*rkst leeeaat to ooadaet, nuhjoot te the supervision o f tha Ixeeutlws Coaalttee, opoa market operations dooldod upon fey tha Csanlttee aad to porfons &ueh othor duties so tha Consdttoo way require* M m m «t©»b©r© mm &*©©©ttir* thr©© m b m ®f flit ia©»b©rc »MiUtta| ©f ©f D u firi ©f i « v « f « n of th© f>ir©l t m w n m ©jvt«K &*#© i w r#pr©witjt©x*?©■ « . tnt i©o©r©4 K v n n v »©©«©# i $©©tl«© f* Chains*© oi th© »>©©©t$©© Cwiltt— - Th© €h©lnm ©f th© CennlttM Stull w m ©* offt©l© u ~h©lrma ©f til $4e©©wtl©<© Coswettt©©# # H t l « S* ~ecr©t©ry • Th© $©©r©tftry ©f th© I®4©r*l Dp©© - *%rfe©t Cenitt©e ©»11 met ©© ill© *©©r©tary ©f tha *©ewtiw €©*» «itt©© ©IN 1% thall b© III© dtttf t© fe©©p wlm»t«« ©f ©11 i»©t$i|i ! ©f tli© SaMlttf© C©a»itt©«0 ivrmlah ©©pi*© th©r©«f t© th© mmb©r« 9f t l 9©<l©f©l t© f© H e ’ €©MKItt©©# ©®S- f©ftf©WI tych ©th©!* <fvtl©s e u t ©t ; » « » ©©jf fc© r©q«lr©di« •©tioa 4* m y«#t I , © • Dmi &*©©©ti©© Conitt©© «h©ll n©ft n th© cill ©f tk© Ch©lr«M tti©f©9f« $#©ti«© f * *-ow©r© ©ad dtttl©t • 1% *h©ll b© th© duty ©f th© t Ex©©©tif© C«w©ltt©©« 1* f© ©x«©ut© p©r©h©*©s ©»a ©©I ©• ©f -;";©v©m»©nt *©- ©urltl©* ©ad ©th©r ©bll|©ti«i© im th© ©p©st sarkat Is ©©«©r<§©»©© with th© ©pcamartarfc P©11©1©« ©dopt©d by th© F©6©t*l Op©o w©rfc©t C«©*ltt©©| &• ?© al1oe©t© *•©©£ th© *©*©*©1 r©d©r*l. >©«©r*© bsak* th© ©fcr©«©t© ©*©©at ©f &«v©ra«#at ©©©©TitS** ©«4 <?th«r ©hlljr©tl«n© Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority fc.Q* U 3 5 8 • $ * hold fo r tho s>stom account m I to odjoot oooh t l l m t i o u m irmt t i n t * tioo to moot tho th«S|i»| noods of roopootiwo I odorol rooorvo feanfco# S ueh allocation sh all ho wado with tho vitv o f (o ) oqobltae oooh I odors 1 nooorvo book to *o in to i» o soitablo f t i o m position attd (b) oqualiiinc *• for os prootiooblo tho J? apt oornl4 pOOltlO* «# tk» f M W H l <ooorro t t f f B£ tae 8* To I o p tho jaopbors of tho .odorol ■woo ?«%rkot eo % osrittoo iiti'omod of oil i M M l t e #»«c«tod by tho Cornsittoo A. owl of oil oltoeotioos and roallocations of i>ooonossst soourltios ood othor oblimtloos hold lor portiolpotl&f katof said ': " .'■ f 4# To porfo»* s*aoh othor jfvmottooo owl dutlos is omnootiai with oroiMorkvt oporotions os ssoy bo oooigsod to it fro* tisio to tioo by tho f odorol t>oo 2 %rlest t owwHtooi but tho oxooutivo e m m ittoo shotl hows oo authority to dotoroloo polio too or moles doolsiaoo opon questions of polloy* Attsc ix nr* i w n n n Thoso by*lows aoy bo awoitdod ot asy mootiof of tho €o?s„ » ittoo by o oajority voto of tho ootiro Cotssittooi roridod, Thot o oopy of snolt awondwont shall howo boon doli*orsd to oooh sM ibor H ot loost too doyo prior to sooh oootloc* Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 12358 D ivis. . of B ank Operates fite L-425 f Sw* vw W' February 24, 1936, TO: FROM: Board of Governors SUBJECT: Election of representatives of Federal Reserve banks to FedMr. Dreibelbis, eral Open Market Committee with Assistant General Counsel limited authority. My opinion has been requested as to whether representatives of the Federal Reserve banks upon the Federal Open Market Committee, as provided for in section 121 of the Federal Reserve Act, as amended, may be elected with limited authority and Sfubject to the condition that they will, as members of the Committee, act in accordance with the instructions of the boards of directors electing them. OPINION In my opinion, representatives of the Federal Reserve banks upon the federal Open Market Committee may not be elected with lim~ ited authority to act only in accordance with the instructions of the boards of directors electing such members. DISCUSSION The primary purpose of Congress in creating the Federal Open Market Committee was to fix responsibility for open market operations in one body with a national viewpoint# As a compromise between the views of those who believed such responsibility should be fixed exclusively in the Board of Governors of the Federal Re serve System and those who believed that it should be fixed in a committee consisting exclusively of the then Governors of the Fed eral Reserve banks, section 12A, as amended by the Banking Act of 1935, provided for a committee composed of the members of the Board of Governors of the Federal Reserve System and five representatives of the Federal Reserve banks. None the less, however, was the Com mittee created as a body charged with the entire responsibility for the conduct of open-market operations in accordance with the govern ing principles of the Act. It is significant that section 12A provides that the Com mittee "shall consist of the members of the Board of Governors of the Federal Reserve System and five representatives of the Federal Reserve banks”, and provides that such representatives shall be elected "one by the boards of directors of the Federal Reserve Banks of Boston and New York", etc. The representatives of the banks are elected by the several boards of directors of the Federal Reserve banks as grouped in section 12A, as amended; but, when elected, they are representatives of all of the Federal Reserve banks and not 0 $ $ $ * ^ V J unclassified / Declassified Holdings of the National Archives ' D ECLA SSIFIED , Authority - 2 - 12 3 5 3 L-425 representatives of the particular banks whose directors elected them. Had Congress intended that each representative should be elected as a representative of the group of banks electing such member, it would have so stated rather than to have provided that such members should constitute "representatives of the Federal Reserve banks". It follows, therefore, that tho duties and obligations of the Federal Reserve bank representatives upon tho Federal Open Market Committee are to the country at large and not to any one or group of Federal Reserve banks. Among other things, section 12A of the Federal Reserve Act, as amended, provides that "No Federal Reserve bank shall engage or de cline to engage in open-market transactions under section 14 of this A,ct, except i i accordance with the direction of and regulations adopted r by the Committee. The Committee shall consider, adopt, and transmit to the several Federal Reserve banks, regulations relating to the openmarket transactions of such banks." Thus, rather than receiving direct ions from the Federal Reserve banks or the boards of directors of the Federal Reserve banks, members of the Federal Open Market Committee are charged by law with giving directions to the Federal Reserve banks, and the Federal Reserve banks are charged by law with the duty of following such directions. Certainly it cannot be said, therefore, that repre sentatives of the banks on the Federal Open Market Committee are sub ject to instructions given by the banks electing them when, by the plain terms of the Act, they are charged with the duty of directing the banks in the performance of this particular function. Thus, members of the Federal Open Market Committee are public officers charged with the duty of conducting open-market operations of the Federal Reserve System "with a view to accommodating commerce and business and with regard to their bearing upon the general credit situa tion of the country". Of necessity their deliberations and actions must be confidential. To disseminate information as to open-market policies while being formulated or while in the process of being executed might defeat the results sought in the execution of such policies. Congress must have so considered when it provided in section 10 of the Federal Reserve Act that the Board of Governors of the Federal Reserve System should keep a complete record of the action taken by the Federal Open Market Committee upon all questions of policy relating to open-market operations and should record therein the votes taken in connection with the determination of such policies and the reasons underlying the action of the Committee and should include in its annual report to Congress a full account of the action so taken during the preceding year. Had Congress intended that the consideration and execution of open-market policies be matters of public and current information there would have been no necessity for requiring such report to it. Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority -5- 12-353 L-425 The very fact that Congress provided for the report to be made to it rather than to the Federal Reserve banks or their boards of directors, is significant. Section 12A of the Federal Reserve Act, as amended, requires open-market operations to be conducted "with regard to their bearing upon the general credit situation of the country". Congress, and not the boards of directors of the sev eral Federal Reserve banks, is the body which represents the public interest and Congress, while recognizing the confidential character of open-market operations, has provided for reports to be made to it as the body representing the general welfare of the country. Had Congress intended that the Federal Open Market Committee or any of its members should owe a duty or responsibility to report to the boards of directors of the Federal Reserve banks such duties would have been included in section 10 of the Federal Reserve Act. With respect to public officers it has long been held that any contract or agreement tending to hamper or restrict such officer in the due performance of his duty or which seeks to impose upon such officer a restriction in connection with the exercise of his discretion is illegal and against public policy. In the case of Schneider v. Local Union. 40 So. 700, the court, quoting from Greenhood on Public Policy, stated: "Any contract which contemplates conduct which will amount to an imposition upon a public officer in the exercise of his discretion is void. * * * * Any contract by one acting in a representative capac ity, which restricts the free exercise of a discre tion vested in him for the public good, is void." In the case of Campbell v. Offutt. 151 S. W. 403, the court stated: h* * * * The lav/ requires of a public officer that he shall use his best skill and judgment for the protection of the public interest, and an agreement before his appointment to divide the fees of the of fice with an attorney, if sustained, might seriously cripple the public service: * * * *.« ^ Clearly, any effort to restrict a member of the Federal Open Market Committee in the free exercise of his discretion in the public interest and for tho public welfare, by contract or otherwise, would be illegal and against public policy * In the law of corporations, it is well settled that the dis cretion of directors in performing their duties cannot be limited or Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D r Authority -4- 1235B L-425 restricted by agreements aginst the interest of the corporation with the stockholders or otherwise. Thus, in Manson v. Curtis. 223 N. Y. 513, 119 N. E. 559, it is stated: * * * jn corporate bodies, the powers of the board of directors are, in a very important sense, original and undelegated. The stockholders do not confer, nor can they revoke those powers. * * * * As a general rule, the stockholders cannot act in relation to the ordinary business of the corporation, nor can they control the directors in the exercise of the judgment vested in them by virtue of their of fice. * * * * Clearly the law does not permit the stockholders to create a sterilized board of direc tors. * * * * » » In the case of West v. Camden. 135 U. S. 507, the Supreme Court of the United States held that an agreement by a stockholder of a corporation to keep another person permanently in place as an officer of a corporation was void as against public policy, since such an agree ment might require a stockholder as a director to act contrary to the true interest of a corporation. In Haldeman v. Haldeman. 197 S. W. 376, the court said: h* * * * And he (a stockholder) has the right to demand that each director discharge as such, not in accordance with his personal but in the best interests of the corporation sent. * * * further his duty contract, they repre Other cases to the same effect are Lamb v. Lehmann. 143 N. E. 276, Ohio (1924); Rush v. Aunspaugh. 179 Ala. 542, 60 So. 802 (1912); Scripps v. Sweeney. 160 Mich. 148, 125 N. W. 72 (1910). It is inconceivable that Congress, in creating the Federal Open Market Committee, for the avowed purpose of conducting open-market operations "with regard to their bearing upon the general credit situa tion of the country”. intended to create a body, five members of which might be made obedient to the will of a body or bodies concerned pri marily with local interests. It is my conclusion, therefore, that representatives of the Federal Reserve banks upon the Federal Open Market Committee may not be elected with limited authority to act in accordance with instruc tions of the boards of directors electing such members and that in the Reproduced from the Unclassified I Declassified Holdings of the National Archives , “ d e c l a s s if ie d Authority -5- \2 3 5 8 L-425 conduct of their office such members are public officers exercising public functions in the interest of the public as a whole, and not necessarily in the interest of the particular group electing them* Respectfully submitted, (Signed) J. P. Dreibelbis J. P. Dreibelbis, Assistant General Counsel, I have given careful consideration to the above opinion and concur in it completely. (Signed) Walter Wyatt Walter Wyatt, General Counsel, Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D C * Authority 12358 Division of \ l S Operations ank JAN 14 1936 Hr# I . M* Clark, Secretary, * Federal Reserve Bank of Atlanta, Atlanta, Georgia* Dear S r Clark* i* Receipt ia acknowledged of, and X shall bring to the attention of the aeabers of th© Board of Governors of the Federal Reserve Systea, your letter of Jmuary 11, 195$, advising that the board of directors of your bank, at its regular Jmuary Meeting, selected Hr* Oscar Hertoa, Governor of the Federal Reserve Bank of Atlanta, as a meaber of the Federal Open Market Coaatttee to represent the Sixth » w i— ..... Mini i < iuiimi ml,, nil............. n mi i iiiwin..... i*wWL l Federal Reserve District for the period froa January 1 to February 2$$ 1956, inclusive# Very truly yours, ’ (Signed) S - G arpenter 8 « E, Carpenter, Assistant Secretary. cos M r. Sm ead Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.O« 12358 , ./ Divis JAN 111936 Mr. F* H. Curties, Chairman, Federal Reservo Bank of Boston, Boaton | Haaaachuaetta* Beer Hr. Curtlaas Keoelpt la acknowledged of your letter of January 0, 1956, adviaing that the board of directors of your bank, at ita meeting on January 8 , selected the governor of the Federal Reeerve Bank of Roeton aa a aeaber of t h e Federal Open Market Committee, representing the Firat Federal Re eerve Diatrict, to aerve until the oloae of buelneaa Feb ruary £9, 1956, and appointed the deputy governor of the bank aa an alternate to the governor, to attend any meet ing of the Coeelttee during auoh tern and to participate In the discussion in the ebaence or inability of the governor. four letter la being brought to the attention of the eeabera of the Board of Goveroora of the Federal Heaerve Syetea* Very truly youra, WM ) s. B € g td « S. H* Carpenter, Assistant Secretary. / ccj Mr. Smea Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority 1235% Hr* J* S. Wood, Ch&iraan, Fodoral Kooorro Saak o f Bt# Louis, St# Louis, Hiadourl. D t Hr. Hoods m Kooolpt is aeknowlodgod o f your lo tto r o f January 1, 19S6, ad*islag that tho board o f director# o f your bank, at it# — ting cm January £, solootod Mr* Ba* MoC. Martin, O ow n or o f tho Fodoral Rosorws Bank o f St* Louis, as a aoabor o f tho Fodoral Gpoa Karkot Coaalttoo to roprosoat tho Eighth Fodoral Ho* sorvo D istric t fo r tho poriod fro a January 1 to Feb ruary 21, 1986, ineluai*#. four lo tto r Is bolng brought to tho attention o f tho aoatoors of tho Board o f Oowm ers o f tho Fod o ral B osom Syetoa. fory tru ly yours, B« K. Carpaator, Assistant Boorotaxy* \l ccs Mr. Smead Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q * 12358 3 "3 '3 <"3 7 THE FEDERAL RESERVE BOARD CROSS-REFERENCE SHEET F i l e N o . - J 3 M 1 __________ SubjeCt ... aPJ5IAL.lH^»LEBT..A3SDIffiT.....(QEfiii..l£a.iteJt..Coniml.t.tJJ eeJ......... . SEE F ile N o . ....311.212................. L e tte r of D a t e d .... J*m&cy..a.---1936.------------------------------------------------------------------------ R e m a rk s .JJ amiarjc..21___ Askiiig..Mr^..Smfi£±.Jbo..noJbify..xfiimliiirsfl3DljS..siil)j3r)mmi.t.t££._________ d. a. N n u on r nranns omoi: ism 178151 Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority £..Q» V235B "t 35, §u c gif' Hr* Allan Sproul, Secretary, Fader*l Reserve Bonk of Sew fork, New York, Hew York. Dear Mr* Sproult Keoeipt is acknowledged of, and X shall bring to the attention of tho aeabere of the Board of Governora of th® Federal Itesorve Syetea, your letter of Janmr^ 2, 1956, advising that tho board of directors of your bank, at it* meeting on that date, selected Hr* Georg f I * Harrison, Governor of the Federal Re t * serve Bonk of Hew York, &s a aeaber of the Federal Open Market Committee to represent the Second Fed,ral K,s«rye Patriot for th, period fro* Jmumjt 1 3 to February 28, 1056, inclueive. Very truly youre, S. H. Carpenter, Aaaiet&nt Secretary* cc: Mr, Smead r : Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority FEDERAL RESERVE BOARD 12358 Division of Bank Operations File WASHINGTON ADDRES5 OFFICIAL. CORRESPONDENCE TO THE FEDERAL. RESERVE BOARD X-9410 January 2, 1936 Dear Sir: Recently I received from Mr* Stevens, Chair man of the Federal Reserve Bank of Chicago, a letter quoting a resolution adopted by a clearing house asso ciation recommending that the Federal Reserve Banks of St. Louis and Chicago select as their member of the Open Market Committee a man of wide experience in “ usi b ness and financial affairs who is not an officer of either bank. The letter was considered at a meeting of the Board today and I am inclosing, for the information of the board of directors of your bank, a copy of my reply which was approved by the Board, Very truly yours, Chairman Inclosure. TO CHAIRMEN OF ALL F. R, BANKS EXCEPT CHICAGO Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 12358 COPY X-9410~a January 2, 1936. Mr. E. M. Stevens, Chairman, Federal Reserve Bank of Chicago, Chicago, Illinois. Dear Mr. Stevens: Your letter of December 16 in which you quoted a resolution of a clearing house association recommending that the Federal Reserve Banks of S t Louis and Chicago select as their member of the Open -. Market Committee a man of wide experience in business and financial affairs who is not an officer of either bank was brought to the at tention of the members of the Board. In this connection several in formal innutries which have come to the attention of the members of the Board of Governors indicated that there was doubt at some of the Federal reserve banks as to what course should be followed with re spect to the selection of their representatives to serve after March 1, 1936, as members of the Federal Open Market Committee. The law is silent as to the procedure which shall be fol lowed by the boards of directors in the selection of such representa tives and it does not place upon the Board of Governors of the Federal Reserve System any duty or responsibility with respect to the deter mination of such procedure. However, since the question has arisen the Board feels that it may be of some assistance to the directors of the Federal reserve banks by giving them its views and suggestions regarding these matters. Without reviewing in detail the history of the legislation* it is clear that throughout the discussions the persons whom the Reproduced from the Unclassified I Declassified Holdings of the National Archives D ECLA SSIFIED Authority fc.Q* 12358 -2- X-9410-a proponents of representation of the Federal reserve banks on the Open Market Committee had in mind were the Governors of the Federal reserve banks, as shown for example by the recommendations of the American Bankers' Association, the Reserve City Bankers* Association, and the Federal Advisory Council. When, in addition to this, the fact is taken into consideration that the amendment took away from the Federal reserve banks the power of declining to participate in open market operations recommended by the Federal Open Market Committee and in stead made the decisions of the committee binding upon the banks, it becomes especially significant that the members of the committee to be selected by the banks are referred to in the amendment as "representa tives of the Federal reserve banks". The Board therefore believes that it is clear that the Congress intended that these members should be persons in position to present adequately the views of the Federal reserve banks and to speak authoritatively for them* Aside from these considerations it is evident that any per son having otherwise satisfactory individual qualifications who might be selected from outside the official personnel of the Federal reserve banks would almost certainly have or represent interests of a business or investment character which might affect his action as a member of the committee. Even though not influenced by his personal interests, their existence might affect the public interpretation of the actions of the Federal Open Market Committee in which he participated. More over, he could not be intimately acquainted with the affairs of the Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc.Q* 12358 -3- X-9410-a member banks and the Federal reserve banks, the financial policies of the Government, and other phases of monetary matters to the extent that would be desirable and as fully as would be possible in the case of representatives who served only the Federal reserve banks. Although he would have a vote, his contribution to the deliberations of the committee would be more likely that of a consultant or adviser called in at the meetings than that of a true spokesman for the Federal re serve banks. It is apparent that the situation also presents the question of an appropriate method by which the directors of the banks may con tact each other and determine their selections in a mutually satis factory manner and it seems to the Board that this might be accomplished by preliminary meetings between committees of directors of the banks who could be authorized to formulate procedure and make recommendations for the consideration of the full board of directors of each Federal reserve bank concerned. The Board will be glad to be advised as to the views of the directors of your bank regarding these suggestions. Very truly yours, (Signed) M. S. Eccles M. S. Eccles, Chairman* qg p rsa STATES GOVSKKHgrr SBOOHITiaS OHAMSBS IH SYSTEM OPgT MAHK3T ACCOPIWP - 197? 1 1 Cleveland •a c* 1 Phila. I €0 TTi r Sold by F. H. Bank of ITew York Dallas /W\ Hew York Chicago $7, 500,000 $7,500,000 $ — February 7 $ " — 5,000,000 5,000,000 — 28 — L'arck 7,500,000 7,500,000 8 mm mm # 5 — 16 f>t 2,500,000 2,500,000 — 25 & 2,500,000 2,500,000 13,500.000 13,500,000 27 — — 5,000,000 5,000,000 April 30 mm mm — 6,000,000 — May 15 t — 4 •m — 5,000,000 — June • — 3.153.000 — 7 j — — 5,800.000 — 8 3 -— 10,000,000 — 10 > — — 5,000,000 — July 10 — 5,000,000 — — August -i a — — 5,000,000 5,000,000 September 4 — November 6 3 2,500,000 — — 3 46,000,000 72,653,000 lo p o o .o o o 10,000,000 j — — — — — — — — — 10,000,000 —. — — — 5,000,000 —. — — — — — -- 10,000,000 5,000,000 Purchased by F. R. bank of ® San Fran. UJotal Minneapolis Kansas City Dallas Bichinond St.Louis — $" _ - $15,000,000 $ .. $ $15,000,000 $ _ —— HI — — — 10,000,000 $10,000,000 — -M — * — — 15,000,000 15,000,000 on H’ l w — — 5,000,000 5,000,000 in — — — 5,000,000 5,000,000 •* I 27,030,000 27,000,000 — — — •— — — — 5,000,000 — — — — 6,000,000 6,000,000 —— — — — — 5,000,000 5,000,000 mm mm — — — — 3,153.000 3,153.000 — — — 5,000,000 — — — — — — — 10,000,000 — — — — — 5,000,000 5.000,000 — — 5,000,000 5,000,000 — — — — — 5,000,000 — — ■m ■m i i — — — 2,500,000 2,500,000 500,000 33,000,000 128,653,000 13,153.000 15,000,000 10,000,000 15,000,000 17, a APPEECIATIOK OH U. S. QOVEHICiEHT SECURITIES HSU) U $-<— 7 .‘ H \\ / « « A »v Dec. 26, 193^ <X&n* 2. 1935 Feb, 6. 1935 Mar* 6. 1935 Apr* 3. 1935 May l. 1935 $31,240,394.29 33.675.796.07 4l, 230,522.96 **5.092,550.0? *5.031.oi3.7i * t 46,377.660.45 33^/ V/ Juae 5, 1935 July 3 , 1935 Aug. 7, 1§35 Sept. 4,1935 Oct. i, 1935 % ▼ . 6 1935 , Deo. 4. 1935 Dec.31, 1935 $41,253,149.93 45 ,020,474.11 43.459.527.^1 31,752.731.21 & ,$ V ),V }2 .1 2 33,155.292.37 i 028 794.73 . , ,805.156.64 m n m ) states c&tcttmsm1 securities GEAITG-SS I f SYSTEM 0 P M MARKET ACCOUNT - 1936 f Sold by F. R. Ban3c of few York Chicago January ^ February 1 1 Marck 6 11 28 $5 , 000,000 2 ,500,000 5 ,000,000 $1 0 ,000,000 2 .500.000 1 .025.000 1 0 ,000,000 6.000.000 5 .000.000 1 2 ,500,000 Par chased by F. R. Bank of St. Louis Kansas City Atlanta 3^,525.000 $1 5 ,000,000 Dallas $ $ _ Total 1 0 ,000,000 $ $1 5 ,000,000 5 .000.000 1 ,025,000 1 0 ,000,000 6.000.000 1 0 ,000,000 16 , 025,000 >7 ,025,000 + 5 ,000,000 1 ,025,000 1 0 ,000,000 6,000,000 1 5 ,000,000 6,000,000 AFPHECIATIOH OH U. S GOVEHHMEITT SECURITIES HELD n sysmi ofsh mmm a n - 1916 r m ccou t m —■—m ■■ • M ■ M l I ■ 1 ■ 11 ,■> ■ — — ii ■ December 31, 1935 $3^,805,15 6 .6k February 5 , 19 36 35.227.233.S7 March U, 1936 to,8X2 ,89 9.01 1 0 ,000,000 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fc.Q* 1235B Division of Bank Operations Ffc H ^ '\ ' t # 1* §* § w t $ r * i fp Actta^ ChHlrwi, Fadaral laaarva Bank of Cl***lftndt Ohio* Daar Mr. Bur*e» Eaoolpt |a *o*nooledgod a/ your i*tt«r of Dooeaber 6, 19t6, adding tbat Uni board of dlr*ctora or vour b&ok. at ita sattioji on that d . p to. aelooted Mr. i * J* Flonin*, GoTonwr of $£w Jedoral Roaorf* f Banlt of Cleveland ^ aa a oawtinr of tho Fadaral Opon May3io% OoiiidUM&on ropreaonting tho Fourth Fadaral Bo** aorfo Matriot for tho poriod faron S m m m w I to Fobruary 29, 19£6, inclualTO. Tour lottor la boi*i§ toOtigfe* to tho atten tion of the amabora of Hit Board of l f a n f i of tha io o r o i Fadaral Unaorfn Syeton. f : m ef ywam$ §* 1* Carpoetor, Aaalntant Soorotary, cot Mr* Saoad 1 '• ^ Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority V o rm 1 8b 4 1 2358 T E L E G R A M FEDERAL RESERVE BOARD W A SH IN G TO N July 16, i m McKay - Chicago C m m m % with. Investswmt Co«aitt®e any % i m prior to August 5* PXaaae advise wh©n date lft' dfttttraiaad+ VAH FOSSUf* VF/li Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority fc.Q* 1M58 333 Dvso Q iiin t m r c h 7* 1935 Hr* H* G* Pett, Manager, Division o f Saseareh. wad S ta tis tic s Federal Reserve Basic o f Chicago Chicago* I lli n o i s Dear Hr* P a tti R eferrin g to your le t t e r o f February 28^ the M ount o f Suited States se c u ritie s a llo tte d to four bank trom the Syatatt Special Investaetit Account, as given . s oar la t t e r i of February 19, represents se c u ritie s bought ia the open Market* la addition , $l,644f000 o f treasu ry b i l l s bought from other Federal &m m r m banks were a llo tte d to your bank fr o * the Systea account daring 1934# S e c u ritie s purchased fr o * other Federal Reserve banks are not included in fig u re s pub lish ed by tha Federal Reserve Board ia order to avoid duplica tio n s ia the combined fig u re s fo r a l l Federal Reserve banks. Very truly yours, 1 , L . Sstead, C h ie f, D ivision o f Bank Operations* W /Xm PG Reproduced from the Unclassified I Declassified Holdings of the National Archives _ p ECLASSiFiED Authority 12358 *0/1 v v ^ f ^ t-4»* F E D E R A L R E S E R V E B A N K OF C H I C A G O 230 SOUTH LA S A L LE STREET February 28 1935 Federal Reserve Board Washington, D.C. Attention: Mr. J. R. Van Fossen Assistant Chief— Division of Bank Operations Dear Mr. Van Fossen: In accordance with the instructions con tained in your letter of February 19, 1935 to Mr. Stevens we have added $4,419,250.12 to our comparative volume of openM l l market operations, bringing the 1934 total up to $7,560,000. With respect to United States security allotments in the System's special investment account to the Federal Reserve Bank of Chicago, we are unable to reconcile the data in our records with those reported to you by the Federal Reserve Bank of New York. The individual transactions on the enclosed list give an aggregate in 1934 of $426,666,000— an amount $1,644,000 in excess of that reported by New York. We shall greatly appreciate any information which will reconcile this difference. HGP:J Division of Research and Statistics Reproduced from the Unclassified I Declassified Holdings of the National Archives " DECLASSIFIED Authority ^ ^5% U, S. SECURITIES TRANSACTIONS IN SYSTEM’S SPECIAL INVESTMENT ACCOUNT WITH FEDERAL RESERVE BANK OF CHICAGO 1934 — — — — Jan. 3”-$7,624,500 8 842,500 10 5,434,000 9,115,500 17 22 337,000 24 5 ,038,000 3 9,217,500 1 Feb. 1 337,000 4,641,000 7 0 2,371,500 842,500 9 14 5,442,500 Q] 4,356,000 ~ 28 8,285,000 6,045,000 Mar. 7 5,084,500 9 12 1,044,500 I 4 ,212,500 k 15 22,284,000 16 . 589,500 910,000 19 20 2,948,500 21 8,279,000 22 4,212,500 28 9,241,500 3,370,000 29 A pr. 2 253,000 4 8,972,500 4,221,000 5 4,296,500 6 10 758,500 13 4,992,000 12 2,155,500 16 6,571,500 8,660,500 18 25 6,859,000 February 28, 1935* 1934 _ _ _ _ _ May 2- -$14,743,500 2 ,106,500 3 7,952,000 9 14 498,500 16 4,680,000 461,500 17 5,302,500 23 1 ,080,500 25 28 1,556,500 Junel 331,000 4 165,500 944,000 5 6,126,000 7 8 1,281,000 11 269,500 12 2,483,500 12 1 ,800,000 4,718,000 13 11,011,000 15 828,000 19 4,202,500 20 21 496,500 22 1,738,500 828,000 25 2,692,500 27 28 455,^00 Jul. 2 1 ,498,500 5,190,000 3 795,500 5 82,500 6 165,500 9 10 414,000 2,754,500 11 164,500 13 16 1 ,118,500 18 4,539,000 164,500 23 3,947,000 25 1934 _ _ _ _ _ Aug 1 - -$2,580 8 4,527 1,7 18 9 4,471 15 740 20 21 246 22 1,850 329 27 29 3,905 Sept.5 7,170 6 2,754 10 3,289 3,700 12 5,336 13 14 1,389 15 18 ,213 904 17 18 279 5,427 19 904 20 26 8,173 822 Oct . 1 822 2 4,198 3 4 2,105 164 5 8 1,233 10 2,883 17 2,837 18 493 2,582 24 822 26 2,837 31 Nov . 2 493 246 5 3,197 7 8 575 1,19 2 9 193^ ____ _ . 000 Nov. 1 3 --$411,000 500 I 1 ^ , 231,500 500 .1 814,000 15 000 ! 16 82,000 000 I 986,500 19 500 t 246,500 20 000 ! 21 2,775,000 000 ! 22 164,500 500 1 26 329,000 . 000 l 30 1,644,500 500 000 000 iDec- 500 1 000 1 000 J 500 » 500 1 000 1 5 5,729,500 7 3,151,000 10 986,500 13 15 19 82,000 36,445,000 2,162,500 26 3,577,000 500 000 • 500 500 500 #2T.6^,000 000 500 500 000 000 500 500 500 000 500 500 000 500 500 Division of Research and Statistics Federal Reserve Bank of Chicago Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority 12358 F o rn b .N o . 131 ^ , FEDERAL R E f - FEDERAL RESERVE Office Correspondence To From Federal Heserve Board___ H i v i siin n D lv k o n nf ' o{ V f W ' . t^ tioflS F i!d i n n # F IU k O p- ^ / Dstp *»aniary 198$« Subject:________________ -' r\ V Morrill___________ e p o Advice haa been received of the selection by the board® of directors of the respective Federal reserve banks of the fol lowing members of the Federal Open Market Committee for the year 19551 Diatrlot Ho* 1 No* 2 No. $ No* 4 Hanw and T1U, R. A. Young, Governor •Deputy Governor Gf L« Harrison, Governor G« W« Norris, Governor ♦Deputy Governor M* J# Fleming, Governor $ G* J* Seay* Governor ♦Senior Deputy Governor No* 6 Oscar Newton, Governor No* 7 0* J« Schaller, Governor •R* P* Preston, Deputy Governor No* 8 W* McC. Martin, Governor No. 9 W* B. Geery, Governor No* 10 G* 8 # Hamilton, Governor No, 11 B* A. McKinney, Governor No, 12 * Alternate, J * D* Calkins, Governor T ♦Senior Deputy Governor 16— 852 Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority 12358 / Division of J FEB 1 1935 Mr* !« 8* Burke, Acting Chairman, Federal Reserve Bank of Cleveland, Cleveland, Ohio* Dear Hr* BurkeI Receipt la acknowledged of your letter of Janu-» ary 30, 12$$, advising that th© board of directors of your bank, at its meeting on January 19, selected Mr* S * J* Fl«i«ing, Governor of the Federal Reserve Bank i of Cleveland, to succeed Governor F&ncher as a member of the Federal Open Market Coaalttee representing the Fourth Federal Eeeerve District during the current year* Tour letter is being brought to the attention of the members of the Federal Reserve Board* Very truly yours f (Signed) S. R Carpenter . S* R* Carpenter$ Assistant Secretary. cci Mr. Smead Bank Operati/ns Fil Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority 12358 f ... Division of Bank Operations File ^ U January 18, 1955, Hr, L. 1* Clark, Secretary, Federal Reserve Bazik of Atlanta, Atlanta, Georgia* Dear Hr* Clark* Receipt la acknowledged of your letter of January 14, 19&S, advising that the board of direc tor* of your bank, at ita meeting on January n , eeleeted Hr* Oeear Kewtoaa, Governor of the Federal Reserve Bank of Atlanta, ae a aesber of the Federal Open iarket Co«aittee representing the Sixth Federal Reserve District during the year !$$$« tour letter le being brought to the attention of the oeabers of the Federal Reserve Board* Very truly yours, (Signed) S. R. Carpenter S* R# Carpenter, Asslstent Secretary, cci Hr* Smead Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority fc .Q* 12358 ,Z y ' io ts Division of Bank Operatiems File January 14, 195$. S . 1* P. Brown, ir Deputy Chairoan, Federal Reserve Baak of Kansas City, Kansas City, Missouri* Receipt is acknowledged of your letter of Januaiy II, 1955, advising that the board of dire#» tors of your hank, at it# aeatiag on I m w r ? selected Mr. G* 8* Hamilton, 10, Governor of the Federal Raserve Bank of Kanoaa City, as a aeober of tha Fad* aral Open Market Coaaittee representing tha Tenth Federal Eeserve Bistrict for the year 1015* tour latter is being brought to the atten tion of the aeabers of the Federal Reserve Board* Wary truly .yours, p p s a ) S- ^ varcenlef ' S* 1* Carp«ater, Assistant Secretary* cc: M r. Smead Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority E .6 * m *w * '"* ? # Division oT Bank OperaTiofis Fils JAN 1 2 Mr* ?# I* C u rtiss, Chairman, Federal Reserve Bank of Boston, Boston, Masaachueetts. Bear Mr# Curtiss* Receipt la acknowledged of your letter of Janu ary 10* 19&S, advising that the board of'directors of your bank* at I t * meeting on Janu&ry 9, selected the governor of the Federal Reserve Bank of Bofton ae a mem ber of the Federal Open Market Committee, representing the First Federal Reserve District, to serve until Decem ber 51, 1955, or until hi© successor is appointed and qualified, and appointed the deputy governor of the bank as an alternate ' o the governor, to attend any t meeting of the Coaalttee during such term and to participate in the discussion in the absence or in-ability of the governor* four letter is being brought to the attention of the members of the Federal Reserve Board* Very truly yours, (Signed^ & ^ c r-. ;. £. l # Carpenter, i Assistant Secretary* eel Mr. Snead Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority L O 1 1235B "V - v Lf Division of Bank Operations Filo Mr. E. £. Burfce# Jr., Acting Chairaaa, £#deral R e w m Bank of Cleveland, Cleveland, Ohio. Dear Hr* Bmrke* Reoeipt la acknowledged of your letter of Janu.ary ?# 19&5, advising that the board o f director* of your beak, at It® aeeting on December 7, 1954, selected Hr. I. R, F&neher, Governor of the Federal Reserve Bank of Cleveland, ae a aeaber of the Federal Open Market Coaaittee representing the Tmurib Federal Keserve Dis trict daring the year 1055. Tour letter 1* being brought to the attention of the aeaber* of the Federal Reserve Board. ?ery truly yours, = S. £* Carpenter, Assistant Secretary Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D ' Authority V2358 i JA N 6 Hr* Allan 8 proul# Soerotary, Federal Roaarto Bank of How York, *** Tork, Bov fork* Dtir 1 r* Sprouli Rocaipt la aeknovladgad of your lattar of Jaanary Sf 19&8, advising that tho board of dirooters of your bank, at lta aaottng on that data* solootod *r# Goorgo L« Harrison, Govornor of tha Fodoral Rosorv* Bank of Bow fork, aa a aeafcar of tho Fodoral Opon Karkot Coonlttoo to roprooant tho Soeond Fodoral Boaorfo Dls~ trlet for the yoar 195S. louor lottor la boing brought to tho attention of tho aadbers of tho Fodoral Resorts Board* Vary truly youra, (Signed) S. R. Carpenter 6. R. Carpenter, Assistant Seoretary. cc: Mr. Smead SSS