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Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Form F. R. 567 END KIND OF MATERIAL OR NUMBER na m e or s u b j e c t 333* Open Market Operations Operations of FRBanks - FKBanks OATES ( I n c l u s i v e ) 1937 — X PART NUMBER Part 3 SHEET Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IT , m ^ n f r e c ’d i m T 'i l A S ] s B 8 t i o n NOV8 TO: Executive Committee of the Federal Open Market Committee FROM: Mr# Solomon 1954 November l'vi 195k Subject: "Approval and Ratificationn of Open Market Transactions Already Carried Out# At the meeting of the executive committee of the Federal Open Market Committee on October 20, 195kf there was discussion of the question whether "approval and ratification11 of open market transactions since the preceding meeting, one of the items on the agenda for such meetings, was necessary or desirable, and Counsel was requested to con sider this matter. Since the full Federal Open Market Committee similarly "approves and ratifies" open market transactions as well as actions of the execu tive committee that take place between meetings of the full Committee, this memorandum treats these matters together# Discussion History of "Approval and Ratification" The draft minutes of the October 20, 195k meeting of the Executive committee, in terms which are identical (except for the period covered) with those of other recent meetings of the executive committee and full Committee, state that: "* # . upon motion duly made and seconded, and by unanimous vote, the open market transactions during the period October 5-19, 195k > were approved, ratified, and confirmed#" Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 2- The minutes of the executive Committee and the full Committee have been reviewed since early 1936, when the Federal Open Market Com mittee, as now organized, began operations. It appears that there was some slight variation in the pro cedure and terminology at the first few meetings. However, at each of those early meetings where there was a report of open market transactions, there was some resolution ''approving11 or ’ 'ratifying” them. Furthermore, within the first year of operation the practice was adopted of "approving, ratifying, and confirming” such transactions as well as the actions of the executive committee5 and that practice has since been followed continuously. Effect of Transactions Being "Approved, Ratified, and Confirmed”. When the transactions in the System account are "approved, ratified,and confirmed” the result, in legal terms, is a "ratification” of the transactions. Such a "ratification”has certain legal con sequences under the principles of the law of agency. Accordingly, it is convenient to discuss them in terms of those principles. Vhen a principal "ratifies" the contract of his agent, the effect, in general, is to provide (or perfect) authorization from the principal to the agent for the action which the agent has already taken. In legal contemplation, the authorization resulting from the ratification relates back to the time when the action was taken. It binds the prin cipal as to both (1 ) the party with whom the contract was made, and (2) the agent who made it. If the action of the agent was within authority previously granted him, the principal is already fully bound even without a Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority F.fi. -3ratification” and, of course, cannot legally repudiate the transaction. In such a case a Hratification” is, of course, legally superfluous; but it can do no harm* Questions as to Legal Necessity. - To apply these principles to a transaction in the System account, suppose there has been a particular purchase of Government securities which is made for the System account by the Federal Reserve Bank of New York, and then ratified by the execu tive committee and the full Committee, If the transaction was within the scope of the authority granted, the System account (i.e., the 12 Reserve Banks) would be bound by the transaction even without the ratifications. If there were by some chance any doubt as to whether the transaction was within the authority, and therefore as to whether the System account was bound, the ratifica tions would remove any such doubts. It would remove them both (1) as to the right of the seller to require the System account to carry out and abide by the contract, and (2) as to the right of the New York Reserve Bank to make the contract and be protected in carrying it out. In so far as the rights of the seller are concerned, it is most unlikely that there would be any appreciable doubt to be removed. Since it is a principle of the law of agency that the agent warrants his authority, the seller could require the New York Reserve Bank to carry out the contract if the System account refused to accept it. Thus he would rarely if ever find it necessary to assert his rights against the System account. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED ■ Authority -4 - If the seller should proceed against the System account, it is likely that, except in a most extraordinary case, a court would hold that the transaction was within the authority expressly granted in the relevant directives* Even if the court by some chance concluded that such express authority was not sufficient to cover the particular transaction, it would most probably find that at least for the purposes of the seller adequate authority had been conferred in some other fashion, such as by implication, by a holding out, by estoppel, or by an implied ratification. For example, a court might very well hold that the purchase for the System account had been ratified even without a formal motion of ratification. As stated in Restatement of the Law of Agency: "An affirmance of an unauthorized transaction may be inferred from a failure to repudiate it,11 [sec# 943 “Ordinarily, the receipt by a purported principal who knows the facts, of things to which he would not be entitled unless the transaction were ratified and to which he makes no claim independently of the act of the purported agent, in dicates his consent to become a party to the transaction as it was lTlade.,, [sec. 9&, Comment] Thus, the formal ratification probably has little legal effect of any consequence in so far as the rights of the person selling to the account are concerned. With respect to the rights of the New York Reserve Bank or the executive committee, there is perhaps slightly more chance that a ratifi cation might have some practical legal effect. For example, some forms of authority, such as by holding out or estoppel, are recognized more for the protection of innocent third parties than of agents. However, as indicated above, the transaction would probably be held to have been authorized by the relevant directives, or ratified by implication. Accordingly, even here, it is highly unlikely that any substantial rights or liabilities would depend upon whether or not a formal motion of ratification is adopted. Reproduced from the Unclassified / Declassified Holdings of the National Archives d e c l a s s if ie d Authority -5Questions as to Desirability, - However, such a motion of ratification may be desirable notwithstanding the fact that its legal effect would probably be quite limited# It is often desirable to take certain actions as a precautionary measure even though the risk against which they insure may be slight# Such action may be desirable in the case of transactions in the System account, since the directives under which they are carried out are necessarily general in terms. The nature of these directives, as well as the heavy re sponsibilities resting upon the Open Market Committee, the executive committee, and the New York Reserve Bank, require close cooperation and collaboration between principal and agent# In such a difficult and responsible relationship* it can often be important that all parties con cerned not only carry out their responsibilities diligently but that they also maintain a suitable record that will reflect, so far as practicable, the full extent of their diligence* A formal motion of ratification can help to serve the purpose of maintaining such a record, since it gives at least some indication that the principal has speci fically considered the acts of the agent and that the acts have been found satisfactory. Such a motion of ratification coxild, therefore, be helpful not merely before a court but* perhaps of more moment9 before the bar of public opinion0 This would appear to be particularly true in the case of open market operations, since they have such an important relation to the public interest and can so easily be the subject of later discussion or criticism® If the principal or agent for some Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - iT.tf. j 6- reason should later be called upon to explain or justify their stewardship, it might possibly prove regrettable for both if such an explicit ratification had been omitted* It is probably for such reasons that it is customary for a corporate board of directors to ratify the acts of its executive com mittee. As stated in Fletcher on Corporations, sec. 9028; ,nJhere the corporation has an actively functioning executive committee, to which the management of the cor poration is intrusted between meetings of the directors, the meetings of the directors may be very few and far between, particularly if the board is a large one, the members of which are widely scattered as to location, oo* In such case the meetings, even when held, are apt to be formal in their nature, the principal business being the ratification of the acts of the executive committee*" '/hen a member of the executive committee or full Committee votes to "approve" or "ratify" open market transactions, it could perhaps be argued that he approves the directives under which they were carried out. It is believed, however, that this would not necessarily be the case, and that it clearly would not be the case if he indicated that he merely intended to accept the transactions as being in accord with the directives, or if there was a resolution or understanding by the members that such was the effect of such a vote* Form of Motion As indicated above, some form of motion ratifying the trans actions seems desirable, and such a motion can take various forms*. It is not imperative that it use the terminology of "approving* ratify ing, and confirming", which has customarily been used by the executive committee and the full Committee. Actually, the three words have similar meanings in the present context, and any one of them probably Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority -7 - would be sufficient, However, the present form of motion seems to be satisfactory to accomplish the purpose; and since it has become customary to use it, any change might be misunderstood in the absence of some persuasive reason for making the change. If some different phraseology were desired, it probably would serve the purpose to adopt a motion to the effect that the trans actions "as carried out were within the authority previously granted", or that the transactions are "adopted as transactions authorized" by the Federal Open Market Committee (or the executive committee), or that they are "accepted" as transactions so authorized# However, as already Indicated, the present motion would also seem to serve the purpose an:, would not necessarily need to be changed* A related aspect of this matter is the way in which the item "approval and ratification" is listed on the agenda of the meetings. It would seem preferable, especially since the question has been raised, that the subject should be listed in a manner which does not seem to suggest or anticipate the conclusion which may be reached at the meeting. R eproduced from the U nclassified / D eclassified H oldings of the N ational A rchives DECLASSIFIED Authority /~~V,j Q ^ p Q i m FiLEt) sEcrno.N i iff: fvlAR 4 i*p m ii&z*1/ Woodlief IhoTBi&a 1054 " RecaaBaandations of X* I , A* Conmittao on Treasury Financing. the axacutiva cowsittaa o f tbe Bond Cow&ttee o f tha I.B*/U today »* * • t® tha Treasury wltlt respect to (1) asar-ter» financing, and (2 ) policing o f subscriptions fo r near m m y issues o f loaf-fcerm aecurttiee* t it li r e fle c t to the financing, three attem atiir* programs wera suggested. Tha f i r at includad a lon*-*©rm bood and a June tax c e rtific a te ! t ie second, to be meed in case bo iomfwtenft bond* were offered, tbe Jane tas e e rtifie a te and * *# l* o f about 19$7j aad tha third waa fo r a ll monqr to % raised throutfi a m®diu»-t«rm note It*sue. Tha proposals vara based on t ie aesuaption that something lika #5 b illio n womM be needed and that a ll o f that sight bo obtained in Iferoh. the cowaittae d e fin ite ly favored 'Ik# fir s t of thasa p w * poeals with only ona aeaber, Mr, Pattberg, believing that a long bond w m M not be apjropiriate at t his tliae, $fc fa it that tba lim f-tena bonds should ba offarad ia an aaount o f § jW/SI to |t biXltoa, m M on a farm la basis, ffith raapact to tha rata, thay presented thraa alternatives. lha fir s t choice *m# fo r it 3 par cant 'bond at par with a Maturity that sight extend as fa r a# 3$ years. In case tha aarket did not Justify that high a coupon with maturity o f not over J$ years, then the second choice would ba a 3 $er cant bond o f shorter maturity to ba offarad at * premium. Tha third choica was fo r a 2-7/8 par cant bond at par, which thay thought aight be of about maturity. Ihay believe that $1-1/2 to $2 b illio n o f long-tera funds could ba raieed at thia tia e aitliott^* thay recognise that I t would require sowa witching# Hie amount o f awiieM llf ©o**M 'ba reduced 'by providing fo r dafarrad payments and fo r formula allotments. lir. Pattbarg «s ch ief objection to tha long-term bond at this time was tbat since tha recant issue o f #11 b illio n l£ $ l bonds tha p o s s ib ility fo r in stitu tion al investors to sh ift lntem adiate holdings to banks was much sore lim ited. the ambers o f the o «ta itte e seemed t# b e lie f* that pen*!©** fund* and tnart funds wasted aad needed tbe lei*g-4«r* $?ea*i*ry: bonds. Uiar* was sooe dieeuaeioa o f the p o s s ib ility o f a Series I bond seizing the purpose but ap** parent^ there are teohnical disadvantages to that bond fur trust accounts, Tha oonmittee bad no concam about the possible e ffe c ts on the economic situation o f a long-term bond o fferin g at this time, they iixlicat.ad^hflwawer, t hat ^he narkat w^s-not m m i M m auch an issue aad W , an^^«a»i#L-a<*ild Such ' : R ep rod uced from the U nclassified DECLASSIFIED I D eclassified H oldings o f the N ational Archives A u th o rity i^ r Sfcn imam* mi, m i 0 k wm Tbmwmmm. tm i3ar & *■ twinnt £** i& p i4 4 *r f*m a»n innnwbwwp n? * ! » W M # f % m w * ® * * Hm m& wm. sat t i» #31 M£&mi iisatWMwai Inn#** ttefc I mm* JN«1- %M» *fe£41NI iS*n 'A **it* i f not #*«# 1*4/8 j*Bf u*nt m i *ii!i*i<*NNt &» fe# fpprspplnt# fe r i»ril#$&#%n mm f*#rti*£.. 'tun *mi tot* <ai**Mn 'wmm gimseu inm* in M l arp cw it *drw**<i In. I^wear ##" U s ##ai»$n*Msn £f * ’l itt f* t<am !«**£ «&$ * $*a* *m waMftmk# *m Wmk It wmM mmM* In a amTim #£ ttooh»ak %oy4n§ "mi t b» IM tfttl u m p h , fi*fiin nn* nn #ii$8*ini#n t»f i&# i#s*4i*!r ffai# to# n*£4# h m m m t tfenl ^ *»*& !• of fw f ppt&liw* «C an I# ** * f*f*ani#n I#' &# 'It *m #f£it£af f^pM JNg ;i » * Hi a n i t a o t i o c n iir h t b « *l$nl itonmp&n **& .#iimfe m itmt&mm w&Mwm* l_ a t « r r a * * ,tr«d flyfe mmM In n mmtm H?.* SurgMa ajjc*d abcttt th* p o * »iM lltx of ta*ulng 1utx b llia tb * CCBK BittM m m m Hfo*& uni '^#1 M^ln iwaM $*rc£«r*t4 in iupil^f ^ 'i^fctn ik iksbni lei^yrMSsl w m M :kmm. 'I# %# 1^ # ite m i .iiNm#. pttigfa. f M $ m k % & 'Unt w kM mb m #1 M lM m i » «n$ i « M im iii ^ i t * « 1#^# fwgm m . m n i I # taft fm«B»3r k > 0 ^ « 1m&&m mmmmmi^ Hhi #n«iMl9«i, #£ win f#i0l n p0*ntoi^ %&£$&■ n ll«rw ^ iiw ' ta l ^ n iM a# m immmmM.t mmtyg Igr t h e ^ « r u i i «f * tm&*mm. temA mi m . wm&X wwunt ^ai# %m notea in ?J«p«h tnl 3te&*r in i&t i^prlfig the viiwlM$ * « » fa m ilM I of >y*ar oot«s. fli^L f^ p ^ i m i$m 'pbtMimit ® g$m$M. mkmm* *&mm %m im$m4. wk M O M -pmpmM im m *U#%mmk f mmM niWi it mwM, 1m&&'%# m£ mlm' * m M p r t % m lb* m m 4 * & * M * type of m to# wb>ct lit %amn: pr®p«p^ Hal wm M #<mt 'I# the U *r. M m m * The M M r «U3t ttk « It up with « » 'H&n .# i<»^; wnl# p*n$H3«ifcln ikuimm % k * m - m w m r n H m n t r w m ii M #11* m I h»T8 on w *>***> W fmm fmm.# 4 * o r i ... . to n^tt m bo g3M t# m * M obtain m m «wl R eproduced from the U nclassified I D ecla ssified H oldings o f the N ational A rchives To | Chairman Martin Addenda* to MBaoraartua on EaeonBiaendat ions I*B.A. Coflaadttee on frtfMTf' Financing fH prirate converaation, th* banker members of tha committee M « 9 » d to real irery strongly that tha Federal Reeerre policy haa been roaponsible for undue lowering of intaraat rates, lbey ware particu larly critical of operations since December. WT:edn R e p ro d u c e d fro m th e U n c la s s ifie d I 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 /Q^Qj November 10. 1953 Chairman Martin Wood lief Thoiaas The other day Noire 11 Childs, accompanied President of th« Midwest Stock Exchange, came in to inform ua about developments with respect to plans far formation of a futures si&rket 1& Government ae~ curities. They said that they particularly wanted to keep you informed about tho plans and progress. Recent publicity with respect to then was premature, they said. Apparently the iildwett 3 % m k Exchange* which is a ooraaolldatie** of the Chicago .Exchange and exchanges lm other cities in the midwest, is interested in $ra«atiiig the idea and is trying to work out sometMjag to be carried out on their ©xehaiigQ#. They have a committee of Chicago and presumably som other midwest business and fluanesial leaders who are working with them. The only name I recognized was that of John Fennelly •of Glore Forgan. They want to hare a study made of the problem by some academic pera cm or group in Shleafo aad reported that one la alr&a^r being undertaken by the Harvard easiness School and another Is being con sidered by sobsone in Princeton. We did not endeavor to discuss to any great extent the merits of the proposal. Apparently the principal questions that have been raised about the possibility of operating such an exchange concern the difficulty of finding buyers for the future contracts. They can see how there might well be a number of sellers— corporations and others wanting to have money on a particular day. The principal potential buyers are. insurance companies and pension funds, they mentioned also corporations that may be floating a big issue ©a a certain day; specifically the American Telephone Comparer &ad expressed an Interest* Mr. Childs indicated that he wanted to keep the Board informed and know whether there waa any objection £*<m the Fedeml ieaerve to such a scheme. I indicated that the ^pates*a interest was primarily in the short-term market. He thought that perhaps a futures market In bonds might be used by soae short-term investors. The effect* therefore., might tend to briag short-term *&A loftgHarm rates cloi# together# It should, however, teai to iaoreas* rather than to decrease the total amount of funds invested in Go^eroaaent securities* I did not mention it to them, but X believe that to locate the operation of the market In Chicago rather than 'in 'Sew Tork would be a great handicap to ita success, if on other grounds It were decided that aueh a market were feasible. ccj Messrs, WTredn Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 1ARD D F G O V E R N O R S DF THE FEDERAL RESERVE SYSTE Office Correspondence To_ Chairman Martin 1?rftm Woodlief Thomas RcC D IN Kt 'A \ VOCT -■ -RDS SECTION 71955 Date November 10, 1 £ 3 . . Subject: The other ds$\Newell Childs, accompanied by James Day, President of the Midwest Stock Exchange, came in to inform us about developments with respect to plans fqr formation of a futures market in Government se curities . \ T h e y said tjar&t they particularly wanted to keep you informed about the p m o s 3 J^f&*ogress. Recent publicity with respect to them was premature, they said. Apparently the Midwest Stock Exchange, which is a consolidation of the Chicago Exchange and exchanges in other cities in the midwest, is interested in promoting the idea and is trying to work out something to be carried out on their exchanges. They have a committee of Chicago and presumably some other midwest business and financial leaders who are working with them* The only name I recognized was that of John Fennelly of Glore Forgan. They want to have a study made of the problem by some academic person or group in Chicago and reported that one is already being undertaken by the Harvard Business School and another is being con sidered by someone in Princeton, We did not endeavor to discuss to any great extent the merits of the proposal. Apparently the principal questions that have been raised about the possibility of operating such an exchange concern the difficulty of finding buyers for the future contracts. They can see how there might well be a number of sellers— corporations and others wanting to have money on a particular day. The principal potential buyers are insurance companies and pension funds. They mentioned also corporations that may be floating a big issue on a certain day; specifically the American Telephone Company had expressed an interest, Mr. Childs indicated that he wanted to keep the Board informed and know whether there was any objection from the Federal Reserve to such a scheme. I indicated that the system* s interest was primarily in the short-term market. He thought that perhaps a futures market in bonds might be used by some short-term investors. The effect, therefore, might tend to bring short-term and long-term rates close together. It should, however, tend to increase rather than to decrease the total amount of funds invested in Government securities. I did not mention it to them, but I believe that to locate the operation of the market in Chicago rather than in New York would be a great handicap to its success, if on other grounds it were decided that> such a market were feasible. p. / cc: Messrs, Riefler and Youngdahl . X. s Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority t ~.0.trtGOj REC’O INRECORDS SfCTlON 5 .DEC 3 11962 FEDERAL RESERVE B A NK of N e w York N ew Y ork 4 5 , N . Y. September 9, 1953 Mr. Woodlief Thomas Economic Adviver to the Board of Governors of the Federal Reserve System Washington 25, D. C. Dear Mr. Thomas, In accordance with your request to Tilford Gaines, I am forwarding a copy of Mr. Treiber* s seminar paper on "Open Market Operations of the Federal Reserve System". Very best regards, Sincerely, Charles A. Coombs, Manager, Research Department Enclosure Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Not for publication FEDERAL RESERVE BANK OF N E W YORK February 2, 1953 Open Market Operations of the Federal Reserve System (This material has been prepared in connection with a discussion of open market operations at the central banking seminar of the Federal Reserve Bank of New York on February 17, 1953, b y William F. Treiber, First Vice President, Federal Reserve Bank of New York.) SIZE AND NATURE OF PUBLIC DEBT U. Sc Government debt is one of the most significant features of American economic life. Size of U. S. Government debt Roughly $267 billion (12 / 31 / 52 ). Almost as large as total personal income for 1952. Monthly Federal Reserve Chart Book, p, 5 2 0 Over three-fourths of gross national product for 1952. Monthly Federal Reserve Chart Book, p. 48. Over twice the market value of all stocks on New York Stock Exchange . $ 1,688 per capita. NOT FOR PUBLICATION Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED j Authority Growth of U. S. Government debt (Growth of Government debt in last three decades shown in chart on page 57 of , Federal Reserve Chart Book, Historical Supplement, September 1952) $ 1 9 1 6 .................. ... Dec. 1919 . . . . . 1 billion 26 billion 0 . 1—1 VO billion 1930 . ............ .. Jan. 1940 42 billion .............. Feb. 1946 (all-time high) 279 billion Dec. 31, 1951 . . . . . 259 billion Dec. 31, 1952 . . . . . 267 billion Public and private debt (Growth of public and private debt in last three decades shown in chart on page 56 of Federal Reserve Chart Book, Historical Supplement, September 1952) 1916 U. So Government debt 1 $ of total debt 1929 10# 1952 almost 50# Short comment on U. S. Government debt Principal investment medium for most financial institutions and individuals. Yields on Government securities most influential factor in money market and long-term capital market. Ability to carry debt depends less on size than on: Composition Distribution Cost in terms of annual interest charges in relation to national income Size of debt has direct effect on: Annual interest cost Tax policy Credit policy and interest rates Volume of bank deposits. 2 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ■ Composition of interest-bearing debt More than half marketable„ Amount 12/ 31 /52 Non-marketable: U. S. Savings Bonds Treasury Savings Notes Depositary Bonds Treas. Bonds-Invest. Series Per cent $ 57*9 billion 5.8 " .4 " 13 •5 " $"~77.6 billion Special Issues to Govt, Trust Funds Marketable: Total interest-bearing securities 22 2 __ 5 29 39*1 " 15 1 4 8 .6 " 56 $ 265 .3 billion 100 In this seminar we are interested in the marketable debt ($149 b i l lion) --in the Government securities market which deals with such debt. Desire of public to b u y (and hold) non-marketable debt is affected b y developments in the Government securities market, but this is beyond the scope of present discussion,, Types of marketable issues (Total amount of various types of issues in last decade shown in chart on page 30 of monthly Federal Reserve Chart Book) Treasury bills Non-interest-bearing obligations issued b y Treasury on discount basis, payable at par; usually issued with maturities of 91 days; 13 issues with one maturing each week, each issue currently between $ 1.2 billion and $ 1 .5 billion in amount; public submits tenders every Monday for issue to be paid for b y purchasers on Thursday, which is same day Treasury must pay maturing bills. The 13 regular issues outstanding on December 31, 1952 totaled about $17.2 billion. In October and November 1951, an(l again in October and November 1952, the Treasury sold special issues of Treasury tax anticipation bills 3 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority QJO^Qj maturing in March and June, respectively. The issues due March 1.8 and June 19, 1953> totaling $4.5 billion, remain outstanding. Certificates of indebtedness Maturity of 1 year or less when issued; customarily issued at par b y Treasury; entire interest payable at maturity. As of December 31> 1952, three issues out standing totaled $16.7 billion. The largest of these ($ 8.9 billion) matures February 15, 1953» Notes Maturity more than 1 yea,r but not more than 5 years when issued; customarily issued at par b y Treasury; interest payable semi-annually (except when maturity close to one year, in which case interest payable at maturity as in case of certificates of indebtedness). Eight issues now outstanding--$30*3 billion. Bonds Maturity ordinarily more than 5 years when issued; cus tomarily issued at par b y Treasury; usually callable b y Treasury at an option date a few years before maturity; option date generally mentioned in name of issue--e.g., 2 l / 2 per cent Treasury Bonds of D e c a 15, 1967-72. Twenty-six issues now outstanding, totaling $79 •8 billion. Partially tax-exempt bonds Government bonds issued before 1941 partially exempt from Federal income taxes; supply, of course, diminishing; all P 0T . E 0 (partially tax-exempt) bonds eligible for purchase b y commercial banks. Federal normal tax. Interest on P„ToE. bonds exempt from For most large corporations, normal Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority iT'fr/d^Oj tax is 30 per cent and surtax is 22 per cent, exempt from 30 per cent normal tax. PoToE„ bonds In the case of individ uals, interest on P„T.E. bonds exempt from normal tax and also from surtax to extent holdings do not exceed $ 5*000 principal amount. Because of advantage of tax exemption, P.T.Eo bond customarily sells at higher price than taxable bond of comparable maturity and coupon. All Treasury bills, certificates of indebtedness and Treasury notes now outstand ing have been issued since 1941 and hence all such securities fully taxable. Six P „T„E 0 issues now outstanding, totaling $7*4 billion. Bank-eligible taxable bonds Fully taxable bonds eligible for purchase b y commercial banks can be divided into three maturity groups. ing $24.5 billion mature in 5 years. Five issues total Seven issues mature between 5 and 10 years: 2 2 2 2 2 2 l/2s l/ 2 s 3/8s 3/ 8 s l/ 2 s 56-58 . $ 1,449 million 56-59 3,822 57-59 • • • 926 1958 __ 4,245 l/4s (J.&. D . ) 59-62 ....8,752 6 2 - 6 7 ____ 2,118 $ 21,312 million Only two issues mature in more than 10 years: 2 l/ 2 s 63-68 .... $ 2,830 million 2 l/2s Sept. 67-72 „... 2,716 " $ 5 ,546 million All bank-eligible taxable bonds involve fourteen issues, totaling $ 51.3 billion. Restricted bonds Some bonds, when issued, have stated date before which commercial banks cannot purchase, e.g., 2 l/2s Dec. 67-72 5 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Q./QGOj. (the last issue of restricted bonds) eligible for com mercial bank ownership 12 / 15 / 62 . During 1952, four issues of restricted bonds became bank-eligible. Six issues of restricted bonds are currently outstanding, totaling $21 billion. Original issue of Government securities Treasury bills are sold at a discount on a competitive basis for cash. Other securities--certificates of indebtedness, notes and bonds— are generally sold at par (sometimes plus accrued interest if not paid for on date on face of security) for cash or in exchange for maturing securities other than Treasury bills. Treasury bills Each week, generally on Thursday, the Treasury invites tenders for a specified amount of Treasury bills to be dated and issued the following Thursday. Tenders m a y be submitted to any Reserve Bank or branch at or before 2 o'clock p.m., Eastern time, Monday. As bids are received b y a Reserve Bank, they are placed in a locked tin b o x a At closing time, the box is sealed with a time stamp on the seal. The box is opened b y a specially designated operating officer in the presence of the General Auditor. are sorted as to competitive and non-competitive. Tenders A tabulation of details regarding the tenders is furnished the Treasury immediately b y telephone, and subsequently confirmed b y telegram, followed b y a detailed typewritten tabu lation of all tenders. Late on Monday, the Treasury determines the extent to which tenders are accepted; gives the press a statement announcing the resuits--showing total bills applied for, total accepted, average price, high bid, low b i d accepted, and percentage of low bid accepted--for publication 6 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £ Tuesday morning. tCK j O ^ O j Won-competitive bids up to $200,000 are automatically awarded at average price of accepted competitive bids; this arrangement is very helpful to country banks and others who do not keep in constant contact with the market. Other issues The last offering of marketable securities for cash, other than Treasury bills, was the 2 3/8$ Treasury Bonds of June 15, 1958, issued on July 1, 1952„ Since 1945, all other marketable certificates of indebtedness, notes and bonds have been issued in exchange for maturing securities (certif icates, notes or bonds) on a par-for-par basis,, with adjustments to the extent necessary on account of accrued interest. (Except that holders of the non- marketable 2 3/4$ bonds of 1975-80 are able to convert to marketable 1 l/ 2$ five-year n o t e s 0) Maturity distribution of marketable debt Maturity distribution, of marketable debt has important bearing on Treasury borrowing problem. Also affects directly rates of interest and ownership stability of different segments of marketable debt. turity relatively short. Average m a Heavy concentration of debt due or callable in five years ($104.4 billion - 70 per cent). Floating debt (Treasury bills, certificates, notes, and bonds due or callable in one year) also large, amounting to $74.2 billion (50 per cent). Provides some idea of the magnitude of the Tr e a s u r y ’ s immediate refunding problem. Amount Due or first callable Within 1 - 5 5-10 10 - 15 Over 15 Per cent 1 year years years years years $ 7 4 °2 billion 30.2 17.5 billion 7 12 18 2.6o6 Total 50 20 100 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Rates At the present writing {l/26/53)> market yields range from 1.90 per cent ("bid) for three-month Treasury bills and 1„94 per cent (bid) for eightmonth certificates of indebtedness to 2.80 per cent for longest term Treasury bond (19 years, 1.1 months to maturity). Rates ascend as maturity increases, forming a well-defined and fairly smooth curve of yields--the level and slope of which are subject to constant change, depending on the influences at work at any given time. Classes of investors and ownership distribution (Ownership of Government securities in last three decades shown in chart on page 58 of Federal Reserve Chart Book, Historical Supplement, September 1952) Breakdown of marketable debt b y types of issue and b y groups of holders is significant with respect to debt management problem .0 Major groups of investors ares Commercial banks Mutual savings banks Insurance companies, and "All other", a miscellaneous group including corporations, individuals, trust funds, securities houses, etc. Also--not "investors”, but very important holders: Federal agencies and trust funds Federal Reserve Banks (Ownership of Government marketable securities b y class of security and b y earliest callable or due date, in last decade shown in charts on pages 32 and 33 monthly Federal Reserve Chart Book) Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority Wide variations in types of securities held b y various types of investors; different investors have different needs; Commercial banks - ideal investment; safety, market sta bility, ready convertibility into cash, collateral (loan at Federal Reserve Bank), diversity of maturity scheduleo Hold 27 per cent of marketable debt; 83 per cent of holdings due or callable within 5 years. Mutual savings banks, insurance companies, and pension and other trust funds (institutional investors) minimum risk for income, and limited supply of other securities. Business corporation - temporary funds (tax accruals, funds accrued for dividend disbursements, proceeds of newfinancing until used for capital outlays, e t c , ) Treasury bills quite important„ Mutual savings banks - hold 5 per cent of marketable debt; 62 per cent of their holdings are due or callable in 10,-20 years. Insurance companies - hold 8 per cent of marketable debt (.12 per cent three years ago); 53 per cent of their holdings are due or callable in 10-20 years. "All others1* (excludes Federal Reserve System and Treasury) - hold 31 per cent of marketable debt; 66 per cent of their holdings are due or callable in 5 years. ■ # 9 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED . Authority Investment needs of various groups influence Treasury in financing operations. One group may constitute most important factor in one segment of market, and another group in another segment; commercial banks histori cally most important re Treasury bills and certificates of indebtednesst but recently corporations have assumed increasing importance in markets for these issues. ORGANIZATION AND OPERATION OF GOVERNMENT SECURITIES MARKET Over-the-counter market Purchases and sales of marketable United States Government securi ties are generally effected in the "over-the-counter”market. The over-the- counter market is that broad market in securities which takes place outside of the organized securities exchanges; it is a trading market maintained by several thousand securities houses throughout the United States. principal market for many types of securities. It is the This market has no organized meeting place or tangible center such as the New York Stock Exchange* Within the over-the-counter market are various specialized markets, of which the Government securities market is one of the most important.* The Government securities market exists and is given substance through the operations of a relatively small group of securities dealers specializing in Government securities. For many years United States Government bonds have been listed on the New York Stock Exchange but, at least in recent years, the trading in such bonds on the Exchange has been negligible. Shorter term Government securities (Treasury bills, certificates of indebtedness and notes) are not listed or traded on any securities exchange. * Another large and important specialized market is the' municipal securities market. 10 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Ed.jO^Oj The over-the-counter market is a negotiated, market; a certain amount of negotiation is necessary between buyer and seller before a sale can be effected. In the organized markets (the exchanges), the auction principle is used; securities are purchased by the highest bidders and sold by the lowest offerors. Location of market The principal market for Government securities is located in Hew York City and a smaller one in Chicago. The market is centered in the business of a relatively small number of Government securities dealers who have their principal offices in either city. The other principal cities of the country are served directly through the branch offices of the large Government securities dealers; direct wire connections maintained by these dealers bring the larger cities into direct contact with the New York market. Other areas are served directly by these dealers through the use of tele phone and teletype contact with, the main offices or branches. In addition, dealers in other types of securities and brokers operate in most of the larger cities, and indeed in any city where the volume of business available makes possible their profitable operations; they satisfy their customers 1 wants with respect to Government securities by dealing with the large Government securities dealers and their customers pay them for their services. Many banks throughout the country also have trading departments that in turn deal with the Government securities dealers. Many other banks encourage their correspondent banks and other customers to place orders through them. Except for orders usually amall in size, which are matched off by banks and securities firms in local markets, the trading is done ultimately with or through the offices or branches of the Government securities dealers in New York City and Chicago. 11 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED I ^ ^O f Authority An "over-the-telephone11 market Most business in Government securities is done over the telephone; indeed a more correct name for the market might be an "over-the-telephone" market. The dealer has elaborate telephone connections involving private vires with other dealers and also with important customers. There is active communication by dealers with other dealers and with customers. The tele phone is a primary factor in the operation of the Government securities market. General function of dealer Broadly speaking, dealers in Government securities bring buyers and sellers together; they facilitate ownership change. name indicates) buys from A and sells to B. A dealer (as the A dealer makes a market by establishing bid and offer prices at which he is willing to buy or sell as principal; he normally keeps a substantial investment in a variety of issues (his portfolio). Sometimes a dealer may act as the agent of a buyer in dealing with a seller, or as the agent of a seller in dealing with a buyer; in such a case the dealer is acting as a broker. Dealer*s legal form As to legal form, a Government securities dealer may be an in dividual, a partnership or a corporation (including a bank). frequent form is that of partnership or corporation. The most If a dealer is a bank, it is frequently referred to as a "dealer bank". Dealer's, capital The capital funds which a nonbank dealer has in the business are actually small in relation to the portfolio of securities generally carried by the dealer. It is customary to borrow extensively from commercial banks and others at rates that are lower than those on other types of loans. 12 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority The dealer banks are very large member banks of the Federal Reserve System with large capital funds, and with general banking powers including the power to create deposits. Sources of dealer’ s income A dealer makes his principal income by selling at higher prices than he buys; he frequently makes l/32nd or l/64th, which is $312*50 or $ 156.25 respectively, per $1 million par value of longer-term securities. On short-term securities he may make $100 per $1 million, or less. The dealer also receives some income from interest on M s portfolio in excess of carrying charges. He may have capital gains or losses in connection with the sale of securities carried in, his portfolio. When a dealer acts as a broker his compensation is a commission. Customers The customers of the Government securities dealers are chiefly business corporations, institutional investors (such as savings banks, life insurance companies, pension and retirement funds and charitable foundations) and commercial banks and securities houses acting for their own account or for account of customers. As a rule, individuals do not deal directly with a Government securities dealer; individuals generally arrange their trans actions through banks or securities houses. Thus the customers of Government securities dealers generally are informed and experienced in business matters; indeed, many of them are informed and experienced investors but some, e.g., small country banks, have only occasional contact with the Government securities market. Quotations There is no published report of purchases and sales in the oyer* the-counter market. There is no ticker, nor are there daily reports of 13 Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authonty E l K l O ^ O j sales and quotations such as are published with respect to transactions on national securities exchanges. The large dealers, however, do issue quota tion sheets at the close of business each day,* and they make quotations, upon request, throughout the day. The dealers mail, their quotation sheets to a broad list of customers and business prospects. The closing quota tions of the principal dealers are printed in the metropolitan newspapers. Form of quotations Longer-term securities Under present practices Treasury notes maturing in more than one year and bonds** are quoted in terms of price--in l/32nds, sometimes l/64ths. For example, a quotation of 100.2-100.6 with respect to a particular bond means that $.100 and 2 / 32nds ($100 .0625) is bid b y the dealer for each $100 par value of the bond, and $100 and 6/ 32nds ($100 .1875 ) is asked b y the dealer.*** The dealer is willing to buy the bond at the "bid price", and he is willing to sell the bond at the "asked price*'. Payment is made in this amount plus the amount of interest accrued to the date of delivery, * The spread between the bid and offer (i,e., the difference between the bid price and the offering price) shown in the quotation sheets is an "outside market spread" which is generally greater than the actual spread at which the dealer is willing to make quotations and do business during business hours. ** Quotation practices with respect to short-term bonds have not always been uniform. Although currently all bonds are quoted on. a price basis, at times in the past bonds maturing or callable within one year have been quoted on a yield basis (which will be described shortly in the tex t ) . *** In the pricing of securities which do not mature and are not callable within one year, it is customary to use the decimal system indicated in the text. The digits appearing after the decimal point are custom arily 32nds^ when these 32nds are translated into dollars and cents (an infrequent occurrence) a dollar sign is placed in front of the quotation,or there is some other special indication that the figure is in terms of dollars and cents. If, in the example given in the text, the dealer were bidding 100-5/64ths, the bid would be expressed: 100.2+ 14 Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority IT #. )n G n f Short-term securities Treasury bills are traded at a discount from par; they are quoted in terms of a rate of discount, e.g., 1.6o$-1.53$> or 1.60-1.53* This means that the dealer is willing to pay an amount less than the face amount of the bill so that the income return on the purchase pri6e (assuming the bill is held to maturity, at which time it is paid at par) brings a return at the rate of 1.60 per cent per annum. Similarly, the dealer is willing to sell on a basis which would provide a return to the purchaser of 1.53 per cent until maturity. Before payment is actually made, it is of course necessary to convert the yield at which the trade is made into a price expressed in dollars and cents. As the yield goes down the price goes up,, and as the yield gOes up the price goes down. Certificates of indebtedness and notes maturing within one year are customarily quoted on a yield basis, e.g., 1 .72$- 1 .65$> 1 .72-1 .65* This means that the dealer is willing to pay an amount which will produce a yield of I .72 per cent per annum on the investment if it were held to ma turity. He is willing to sell at a yield of I .65 per cent.* When securities are quoted on a yield basis, the unit is called a ’ ’ basis point” — l/lOOth of 1 per cent* If the bid and asked quotations are 1.72^-1.65^, the spread is seven basis points. The value in dollars of a basis point declines as the security approaches maturity.** * As in the case of Treasury bills, in determining the amount of*money to be paid by the purchaser it is necessary to convert the yield at which the trade is made into dollars and cents. The price (of short term securities other than bills) thus determined is customarily expressed as so many dollars and cents (in respect of principal) plus accrued interest (which, in turn, is so many dollars and cents). ** For example, a basis point with respect to a certificate of indebtedness maturing in six months amounts to $50 per $1 million par value; a basis point with respect to a certificate maturing in fifteen days amounts to $4 per $1 million par value. 15 Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED ■ Authority "When issued”securities Quotations may be made, and purchases and sales may be effected, with respect to securities which have been offered by the 'Treasury for sub scription but have not yet been actually issued by the Treasury. Whenever the Treasury offers a new security for subscription, either for cash or in exchange for a maturing security, it is customary for the dealers to trade in the new security on a ‘ V h en issued”basis. Such trading may commence the day the subscription books open, in the case of an exchange offering, and the day after the subscription books close, in the case of a cash offering, even though the security is to be issued some time in the future, normally Within a couple of weeks. Sometimes "when issued" quotations are referred to by the abbreviation f,W .I ." on quotation sheets. Size of trade and duration of quotation In the absence of an agreement to the contrary, it is generally understood that when a dealer makes a quotation to a customer regarding a particular security, he is ready and willing to buy or sell a minimum amount of the security at the bid or asked price quoted by him; the amount depends upon the type of issue, the condition of the market for that issue and the character of the customer relationship. Generally a primary dealer would be willing to make an immediate commitment "over the wire’ 1 for upward of $100,000 par value of longer maturity taxable Treasury bonds,* and $1,000,000 or more in shorter maturities such as Treasury bills and certificates of indebtedness. It is, however, difficult to generalize about the size and reality of dealer markets. They vary not only between different dealers at a given time, but also for the same dealer at different times in accordance with the trend of prices, the volume of trading, Federal Reserve open market * This would include the various issues of restricted bonds which, pursuant to the Treasury offering circulars describing the respective issues, may not be purchased by commercial banks. 16 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ^.0. policy, the dealer’ s position and a variety of other considerations. No really meaningful statement can be made about the size of a dealer’ s quoted market except with reference to a specific set of conditions. Frequently a dealer will make his quotations in such a way a 6 to indicate that they are for information purposes only and that he does not wish to trade at such quotations. He may say, "The market seems to be 100*24 bid 100*28 asked, but I prefer utrt to buy at that level*” There is frequent checking of quotations by telephone all during the day by customers and other dealers. Bids and offers given over the telephone are good "over the wire"! they are firm bids or offers only while the telephone conversation is going on, unless the dealer expressly agrees that the bid or offer will remain good for a specified period of time, e.g., ten minutes. Contracts Purchases and sales are customarily made by oral agreement over the telephone, a written confirmation being dispatched by hand delivery or by mail later in the day. Delivery and payment Purchases and sales in the Government securities market are cus tomarily made for delivery "regular way"— that is, delivery and payment on the next full business day following the day of the contract.* In the case of a transaction for "cash”, delivery and payment are made on the day of * A similar rule is applicable to transactions in Government securities on the New York Stock Exchange. Rule 110(b) of Board of Governors Of New York Stock Exchange, N.YoS.E. Directory and Guide, p. E-23. In the case,l however, of other securities sold on the New York Stock Exchange, transactions "regular way" call for delivery on the fourth full business day following the day of the contract; the rule was changed to the fourth full business day from the third full business day, effective March 3# 1952. Rules 109(b), 111(b) and 112(b), id., pp. E-22 - E-23* Trans actions "regular way" in non-Government securities sold in the over-thecounter market call for delivery on the fourth full business day following the date of the contract. NASD Manual. 17 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority the contract. Occasionally a transaction may involve deferred or delayed delivery; in such case delivery and payment are postponed longer than in the case of delivery regular way. In the case of a transaction on a "when issued”basiB, delivery and payment are made on the day the security is issued by the Treasury. Delivery and payment usually take place in the city in which the dealer's head office is located--that is, New York City.* occur at other places. Sotaetimes it may Prices, however, are customarily based on New York delivery, and if delivery is made elsewhere there may be an adjustment in the date of delivery or in the price, or both. Payment of the contract price plus accrued interest (except with respect to Treasury bills which are sold on a discount basis) to the day of delivery may be made in ’ ’ clearing house funds"** * Government securities may be transferred by wire between Federal Reserve Banks and Branches in order to assist in the consummation of the sale of the securities. Thus if a person in Dallas wishes to sell a security to be delivered to a purchaser in New York, the seller may deliver the security to the Federal Reserve Bank of Dallas, and the Federal Reserve Bank of New York will deliver an equivalent amount of the same security to the designated person in New York. A small charge is made by the United States Treasury for this wire transfer service with respect to Treasury bonds where transactions with the Federal Reserve Banks are not involved; no charge is made with respect to Treasury bills, certificates of indebtedness and notes. F.R.B. Memo No. 554 (First Revision dated June 19> 1950, and First Amendment dated September 22, 1950) from Treasury Department. ** "Clearing house funds" are normally evidenced by a check on a member of the clearing house--the New York Clearing House. The check is collected by presentation by or on behalf of the collecting bank to the drawee bank through the clearing house. The net credit or debit balance of each clearing house bank resulting from the total clearings of the day is settled by an appropriate entry in the reserve account of such bank on the books of the Federal Reserve Bank of New York. Thus, in effect, the -reserve balance of the drawee bank is reduced by the amount of the check and the reserve balance of the collecting bank is increased by the amount of the check. Since the latest clearing on any day is at I O 2OO a«m., a check received by a collecting bank on one day Is normally not cleared until the following business day; therefore, the collecting bank does not get credit for the check until the business day following receipt of the check by i t . 18 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority jOQOj or in "Federal funds”.*- When the Federal Reserve Bank is a buyer or seller, payment is made in Federal funds; and when delivery is made through the Federal Reserve wire transfer facilities, payment is made in Federal funds. In the case of transactions not involving the Reserve Bank, the use of clearing house funds has been decreasing in favor of Federal funds. Commer cial banks frequently enter into transactions calling for payment in Federal funds since many of their transactions are for the purpose of effecting adjustments in their reserve balances at the Federal Reserve Bank; in this way the adjustment of reserves can be made one day earlier. Some corporate sellers also seek payment in Federal funds either because they can sell such funds profitably or because payment in this medium enables the seller to reinvest a day earlier. Making and maintenance of market A dealer makes a market when he is prepared both to buy and sell at his quoted price in reasonable amounts. A dealer maintains a market when he continues over a period of time to state prices at which he is ready and willing to buy and sell. He generally owns a substantial quantity of a variety of issues (his portfolio or his position) and normally stands ready to buy and sell in size. He may freely sell a particular issue even though he may have none of the issue in his portfolio; he makes a "short sale”and borrows the security from someone who has it in order to make delivery to * '’ Federal funds”are normally evidenced by a check or other demand order on a Federal Reserve Bank. Upon presentation of the check to the Reserve Bank by a member bank, the member bank may obtain immediate credit to its reserve account. Special arrangements are often made between a dealer and his customer (especially if the customer is a bank) for settlement in Federal funds, but since such funds are themselves traded in a negotiated market at a price an additional charge is normally made for the Federal funds. See article on "Federal Funds" at pp. 13-16 of FRBNY publication entitled “ Money Market Essays", March 1952. 19 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority the purchaser.* T.O^O^Of ■ The size of the transactions into which he is willing to enter is determined by many factors, including his total position, the condi tion of the market, the issue in question, his capital and borrowing capacity, and the customers involved. Dealer positions are not rigidly maintained in periods of changing prices. At any given time, a dealer is generally long certain issues and short certain others; in other words, he owns certain issues and he has sold other issues without owning them at the time of sale. In the latter case he will have to buy an equivalent amount of the securities sometime in the future to replace those he has borrowed in order to make delivery pursuant to his contract of sale. In maintaining such long position and short posi tion the dealer obtains some protection against changes in the general average of Government securities prices.** Usually the long position and the short position are not equal; the dealer may purchase securities, or sell securities short, in order to satisfy the demands of a customer without the dealer’ s undertaking to "hedge" his position by entering into an off setting sale or purchase. The dealer is generally content to be either net long or net short, depending on his judgment of the future course of the market. In the case of day-to-day market fluctuations (as distinct from more sustained basic changes in rates and prices) dealers, in varying de gree, accumulate securities on declining markets and dispose of securities on rising markets. * The lender generally charges a fixed rate, e.g., 1/2 per cent per annum, for the period the securities are loaned, and the borrower pledges cash or other securities as collateral to his obligation to replace the securities he has borrowed. ** If the securities owned decline in market value, the securities sold short are also likely to decline in market value, and the dealer will be able to "cover" his short position by buying the securities at a lower price than that at which he sold them; thus the book loss on the long side is offset, at least in part, by the book profit on the short side. The converse occurs when there is a general rise in the market value of Government securities. 20 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E j Ordinarily, the creation and maintenance of a market is a delicate task and can be done profitably only by constant contact • with investors, other dealers and other segments of the market, and by close study and care ful estimates of current and prospective Federal Reserve credit policy and other Government policies. As a general rule, the market trend is not deter mined by one dealer but by all dealers, who reflect their appraisal of demand and supply by the markets they make (their bid and offered quotations) and constantly refine their quotations through telephone calls from dealer tq dealer. In the case of extraordinary market conditions, such as those which might be precipitated by war, economic crisis, or abrupt and basic changes in Treasury debt management policy and Federal Reserve credit policy, the dealer is not likely to function in the manner outlined in the three pre ceding paragraphs; he tends to act merely as a broker, bringing buyers and sellers together without taking a substantial position of his own in the securities. Under extraordinary market conditions he may operate as a dealer on a limited basis within a wide and sharply fluctuating range of prices, but his willingness and ability to do so generally vary in the light of hsis judgment of prevailing conditions. Dealersr participation in primary and secondary distribution of Government securities While the first function of the dealers is the maintenance of an effective market for outstanding Government securities, the dealers are of substantial importance from time to time in the primary and secondary dis tribution of new Treasury issues. They explain the market position and relative attractiveness of new issues of Government securities to their customers, and, before World War II, acquired large amounts of new securities on original issue in anticipation of selling the securities to their cus tomers. The new securities may be acquired for cash paid to the Treasury 21 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority or in exchange for maturing securities surrendered to the Treasury, depending on the nature of the Treasury offering. The dealers assist in the secondary distribution by promptly making a market for the new issue. When the Treasury offers a new issue in exchange for a maturing issue, the dealers assist in the making of the exchange and the redistribu tion of the new issue. If the holder of a maturing security does not wish to make the exchange (perhaps because the maturity of the new issue is not suited to the holder's investment needs), a dealer will buy the maturing security* and sell it to a person who would like to acquire the new security; or the dealer may sell the new security on a "when issued”basis, meanwhile tendering the old security in exchange for the new security which the dealer will deliver to the buyer. Purchases and sales of new securities on a "when issued" basis as sist in the distribution of the new security among investors. Dealers1 advice to customers The dealers also function to an important degree as a clearing house for information related to Treasury securities and policy and they furnish their customers with an extensive amount of statistical material and investment advice. The dealers have men whose business it is to be familiar with their customers’portfolios and to maintain frequent contact, by telephone and otherwise, with customers. These men are referred to sometimes as "salesmen", "contact men1’ , "account advisers", and the like. A dealer’ s staff generally includes one or more statisticians who are continually analyzing the com parative yields, tax data and other features of various Treasury issues. They pass this information along to the contact men, and the latter use it in conjunction with their knowledge of a particular customer’ s situation * The maturing securities are frequently referred to as "rights" because they entitle the holder to get the new securities. 22 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £7 O.IO^Qj and the conditions in the market. Thus the contact men are in a position to, and do, give advice to customers. The dealers are an important factor in the shaping of public opinion regarding the management of the public debt and related matters. Credit risk not a factor In certain respects the problems of the Government securities market are simpler than those of the over-the-counter market in other se curities, obligor. The Government securities market concerns the issues of only one This obligor has a variety of issues of varying maturities and interest rates. Differences in the various securities result from different maturities, different interest rates, different degrees of taxability and different rules as to eligibility for commercial bank investment. The credit risk which differs so greatly with respect to issues in the corporate and municipal markets is not a factor in the Government securities market. Advantages of over-the-counter market over exchange market Historically, the over-the-counter market for Government securities grew in competition with the market for Government securities on the New York Stock Exchange* The fact that the former has displaced the Exchange as a market mechanism seems to indicate that the over-the-counter market was better adapted to handle the volume and type of business which has developed in Government securities over the past three decades* Some of the advantages which have led to this development are as follows: (1) In trading in the over-the-counter market, the buyer or seller does not have to disclose his "hand'1, as is necessary in the case of an auction on the Exchange; consequently large blocks of Government securities are generally salable at better terms through the; private negotiations which characterize the over-the-counter market. 23 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority (2) jO^Of Since orders to buy and sell on an exchange must be executed in order of receipt, a small order would take precedence over a large order, and at times might materially affect the price of the large block. (3) The over-the-counter market provides the means for a quicker and simpler transaction— generally it in volves only a telephone call. Since a dealer generally acts as principal and "makes a market,f, he immediately furnishes the customer with quotations. The customer may execute many of his trades at the quoted prices "on the wire", frequently on the first call depending on the size of the transaction and the issue involved0* (4) The concentration of marketable Government se curities in the hands of large investors narrows the market in a numerical sense and affords the dealer closer contact with investors. (5) Since the carrying of a portfolio facilitates a dealer’ s service, the dealer has the opportunity to make a profit over and above the trading profit whenever the money needed to cover the cost of the securities is ob tainable at interest rates lower than the coupon rates on the securities held. (6) Dealers assume risks, thereby reducing the pos sibility of a trade going uncompleted, provided the This is especially important in the shorter term issues such as Treasury bills, certificates of indebtedness and notes, which are the principal medium for adjustment of bank reserves; the larger commerical banks frequently find it desirable to sell or buy on very short notice to maintain their reserve positions or to keep as fully invested as possible 24 mar Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority £7 investor does not require execution at a specific price or prices which the dealer will not meet. Supervision of Government securities market Unlike the stock market, the Government securities market is not generally subject to detailed supervision by a Governmental body. The Securities Act of 1933 is generally applicable to the issuance and distribution of securities, and the Securities Exchange Act of 1934 is generally applicable to transactions in securities on national securities exchanges and in the over-the-counter market. Under both Acts, however, United States Government securities are classified as ’ ’ exempted securities”, and the general rules under those Acts do not apply to such securities. Nevertheless, most Government securities dealers are subject to supervision or regulation in varying degrees. The dealer banks are, of course, subject to general supervision by the bank supervisory authorities. Some of the nonbank dealers are members of the New York Stock Exchange, and some are members of the National Association of Securities Dealers, Inc. (sometimes referred to as NASD)*. Dealers who are members of the Exchange are subject to some supervision and disciplinary action by the Exchange, even with respect to transactions involving Government securities. Many of the nonbank dealers are also registered with the Securities and Exchange Commission under section 15(b) of'thS gQsuMtiel^:ElcchangeAct of 1934. In addition, some of the provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934--e.g., those prohibiting fraud— are * The NASD is registered as a national securities association pursuant to subsection (b) of Section 15A of the Securities Exchange Act of 1934. Said section, popularly known as the Maloney Act, which became effective in 1938f was adopted primarily to provide for cooperative regulation of the over-the-counter securities market by placing the burden of such regulation upon representative organizations with the Government (through the Securities and Exchange Commission) exercising supervisory powers. 25 wse* Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority applicable to transactions by dealers even though are involved. "exempted securities" Since some of the nonbank dealers also do business in non- exempted securities, they are subject to supervision in respect of such business and this is a general restraining influence upon their activities. 26 Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority FEDERAL RESERVE PARTICIPATION IN GOVERNMENT SECURITIES MARKET Resume Purchases and sales of Government securities b y the Federal Reserve Banks are effected in the Government securities market b y the Federal Reserve Bank of New York (hereinafter sometimes referred to as the New York B a n k ) . Such transactions are referred to as "open market operations", and are con ducted under the direction of the Federal Open Market Committee. The securi ties acquired pursuant to such operations are held in a "System Open Market Account" in which the twelve Federal Reserve Banks participate. Although conceivably the New York Bank might deal with practically any person wishing to buy or sell Government securities, as a matter of policy and practice established b y the Federal Open Market Committee the Bank deals only with a limited number of Government securities dealers. The Reserve Bank maintains a trading room which has direct telephone connections with such dealers located in New York City. It is through these dealers that primary contact with the Government securities market is maintained. The Bank deals only with the m a r k e t , i.e., with dealers. The satis faction of normal buying and selling desires of investors is carried out by the dealers who endeavor to match off buyers and sellers at prices determined b y the balance of supply and demand, but who are prepared to increase or reduce their own portfolios when necessary to balance what appear to be tem porary excesses of demand or supply. By confining System dealings to the market, the volume of System Account transactions is minimized while their effects on the market are magnified. Federal Reserve objectives The Federal Reserve System is primarily concerned with providing those monetary and credit conditions which, when coupled with sound fiscal 27 Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority and other Governmental policies, will help preserve the integrity of the dollar and facilitate the continuance of a high level of production and employment in the country. Preservation of the integrity of the dollar and its purchasing power seems to the System to be the most important and e f fective method of preserving confidence in Government securities. Traditionally, the Federal Reserve System has sought to provide desirable monetary and credit conditions b y general and impersonal steps affecting member bank reserves. The principal instruments of credit control have been the discount rate, open market operations and changes in reserve requirements.* Open market operations constitute the most flexible and most used instrument in the expression of Federal Reserve policy. These operations affect not only the supply and availability of bank credit b y increasing or reducing member bank reserves, but also the cost of such r e serves; such operations influence the prices and yields of Government securi ties and therefore the terms on which the Treasury can borrow. Their influence is pervasive and reaches out beyond the narrower limits of the Government securities market into the entire securities market and the mortgage market. In addition to its primary responsibility of influencing the money and credit supply in the light of economic conditions, the Federal Reserve System at times undertakes to moderate extreme fluctuations in money market conditions, such as those arising from shifts in the distribution of Treasury balances between Federal Reserve Banks and Treasury Tax and Loan Accounts at * The authority to change reserve requirements, conferred upon the Board of Governors of the Federal Reserve System b y the Banking Act of 1935? was first used in the summer of 1936 . 28 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority the commercial banks, variations in Federal Reserve float*, changes in gold stock, seasonal demands for currency, e t c . Apart from its strictly credit functions, the System has assumed other important responsibilities which have been subject to different de grees of emphasis at different times in the p a s t . Among these a r e : (1) The maintenance of orderly conditions in the Government securities market to (a) provide a sound background for effective implementation of Federal Reserve credit policy, and (b) encourage an atmosphere conducive to investor confidence and interest in Government securi ties as an investment medium. (2) Conditioning the market at times when the Treasury is refunding maturing securities, or selling new securi ties for cash, b y providing, within the limits of Federal Reserve monetary and credit policies, (a) rate stability which will encourage the placement of sub scriptions for the new securities, and (b) whatever funds are needed to accomplish satisfactory placement of the new securities. For a number of years up to March 1951; the Federal Reserve also provided rate stability even to the extent of outright support at times when there was pressure on the rate structure. Effect of open market operations on member bank reserves Purchases of Government securities b y the Federal Reserve Banks increase the supply of reserves available to the commercial banks, while * Federal Reserve "float” is one form of Federal Reserve Bank credit; it is available for use by member banks in meeting reserve requirements. Float arises because under certain circumstances a Reserve Bank credits a member b a n k ’ s reserve account in respect of some of the checks deposited b y the member bank with the Reserve Bank, before the Reserve Bank is able to collect such c h e c k s . Float is the difference between the "uncollected items" on the assets side of a Federal Reserve Bank statement and the "deferred availability items" on the liabilities side. The amount of float is subject to wide variation from day to day. 29 Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority sales have the opposite effect-,* Stated in an oversimplified way, if the Reserve Banks b u y Government securities the check of the Reserve Bank to the seller is deposited in some member bank, and when the member bank presents the check to the Reserve Bank for payment the member bank gets a credit to its reserve account. Banks increase bank reserves. Thus open market purchases b y the Reserve Conversely, if the Reserve Banks sell Government securities, payment b y the purchaser is ultimately effected b y drawing down some member b a n k ’ s reserve account with the Federal Reserve Bank. If a member bank is the ultimate seller or purchaser of securities which are purchased or sold b y the Reserve Bank, there is no change in the total deposits of the commercial banks of the country. The member b a n k ’ s reserves are increased or reduced, but there is no change in its liabili ties; the member bank has merely exchanged one type of asset for another (securities for "cash" or "cash" for securities). But the ability of the member bank to expand its deposits, b y making loans or acquiring investments, is effected several-fold b y the change in its reserves. On the other hand, if a person other than a bank is the ultimate seller or purchaser, funds are deposited in or withdrawn from a member bank and the commercial bank de posits of the country, as well as member bank reserves, are increased or reduced. Speaking more precisely, this is how open market operations a f fect member bank reserve balances. * The Reserve Bank makes its purchase When member banks make loans or purchase investments (except loans to, and purchases from, other banks), the deposits of the banking system are in creased b y the amount of the loans or investments; and since, b y law, every member bank is required to keep on deposit in its Federal Reserve Bank a certain percentage of its deposits, the required reserves of the banking system increase as the banks make loans or purchase investments. Conversely, as loans are repaid or investments are sold or paid, deposits contract and the required reserves are less. Thus b y influencing the amount of availa bility of member bank reserves the Federal Reserve System is able to influ ence the credit policies of the member banks. 30 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority J^ A / d ^ O / from, or sale to, a Government securities dealer. The Government securities dealer maintains an account with one or more local member banks which lend him the funds needed to finance his purchases and to carry his position. In some cases, the bank also acts as clearing agent for his securities transactions. In making or receiving payment for his transactions with the System Account, the dealer arranges with his bank of account to make debits and credits to the b a n k ’ s reserve account at the Federal Reserve Bank. For example, when a dealer delivers securities to the Federal Reserve Bank against payment, he instructs the Reserve Bank to credit payment to the reserve account of the member bank at which he keeps his deposit, and he r e ceives from the Federal Reserve Bank a "certified credit advice”which he presents to that bank. Under certain circumstances, the dealer may prefer to receive payment by check on the Federal Reserve Bank in which case the Reserve Bank issues its officer's check. When a dealer picks up securities at the Federal Reserve Bank he must pay for them with Federal f u n d s . To do this he may arrange with his bank to obtain either a debit to its reserve account or a check drawn by it on the Federal Reserve Bank. The debit to the reserve account is generally in the form of a letter of authorization to the Federal Reserve Bank from the member bank to charge its reserve account. Effect of management of Treasury balances on Federal Reserve operations The way in which the Treasury handles its cash balances has a bearing upon the money market, and upon the Government securities market, especially upon the market for shorter-term Government securities. The Treasury maintains working deposit balances at each Reserve Bank and branch. It also has deposits in depositary accounts designated as "Treasury tax and loan accounts" in more than ten thousand special deposi taries; such depositaries are usually commercial banks and, for purposes 31 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority of simplicity in this memorandum, all such depositaries are considered as "being commercial hanks. With limited exceptions Treasury disbursements are made only out of deposits in the Reserve Banks and branches. The commercial banks serve, in effect, as collection points in which a substantial p r o portion of Treasury receipts is initially deposited. These tax and loan accounts are carried on the books of the depositary in the name of the Federal Reserve Bank as fiscal agent of the Treasury. !3early all such deposits are transferred from the commercial banks to the Reserve Banks before they are spent. These transfers are made pursuant to "calls’ * announced b y the Treasury in advance; member bank reserve balances on the books of the Reserve Banks are transferred to the accounts of the Treasurer of the United States at the Reserve Banks. Thus the flow of re ceipts through the commercial banks into the Treasurer's working accounts from which disbursements are to be made inevitably results in a reduction of member bank rese ves. In addition, a substantial proportion of the Treasury's receipts is deposited b y the collectors of internal revenue directly in the Federal Reserve Banks, and unless special arrangements are made, collection of the items so deposited reduces member bank reserves. In the absence of offset ting factors, member bank reserves remain reduced until the Treasury pays out the funds. When the Treasury spends the money and the recipients deposit the Treasury checks in the commercial banks, the latter collect the checks from the Reserve Banks and member bank reserves are increased. As member bank reserves are reduced or increased as a result of the i routine receipt and disbikrsement of Treasury funds, a corresponding tightening or easing influence is exerted upon the money market. Since it is impracticable to achieve a precise matching of the amount of Treasury receipts and disburse ments on any given day, Treasury transactions must always be expected to exert an important day-to-day influence upon conditions in the money market. During 1952, the flow of funds through the Treasury tax and loan accounts exceeded $42 billion, 32 'T'Wg" Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority K f y / O Z O j The Treasury must be sure that it has adequate balances on hand to assure payment of checks drawn on the Treasurer of the United States, whenever those checks are presented at any Federal Reserve Bank or branch throughout the United States. To meet this operating requirement, the Treasury maintains balances at the Federal Reserve Banks sufficient to cover its estimated daily needs on a regional basis. The Treasury seeks to m ain tain a total of at least $200 million; for operating convenience, $400 m i l lion is desirable. For the scale of expenditures prevailing in 1953> many of them subject to erratic fluctuations, the Treasury should have at least $1 billion of balances in the commercial banks upon which calls can be made to replenish the balances in the Federal Reserve Banks. The Treasury generally has sought to manage its balances in such a manner as to minimize the impact of changes in its cash receipts and disbursements upon the money market and the Government securities market. Forecasting techniques For some time, but particularly during the last decade, the staffs of the Treasury, the Board of Governors of the Federal Reserve System, and the Federal Reserve Bank of New York have devoted considerable effort to developing and refining techniques of forecasting the factors which affect the Trea s u r y ’ s cash receipts and disbursements. Detailed forecasts are now prepared b y each staff on a daily, weekly, monthly and annual b a s i s . The demands of the public for currency, the direction and the amounts of gold flows, changes in foreign accounts at the Reserve Banks and the movement of Federal Reserve float are also estimated on a daily and weekly basis. Prospects for employment, production, national income, and consumer expenditures are considered in order to estimate the tax liabili ties of individuals and businesses, the rate of defense expenditures, unemployment compensation and the like. 33 After yearly or quarterly totals Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority )ftG O f for the various classes of Treasury cash receipts and disbursements have been derived from the estimates of the business situation, monthly and daily distributions of these totals are worked out, and the proportion of the re ceipts which will be deposited in the Reserve Banks or the commercial banks is estimated. The conclusions of the forecasts are exchanged and compared among the three staffs. Although forecasts are still frequently wide of the mark, as actual circumstances develop, they have for several years been very useful. Criteria The projections having given a picture of prospective Treasury re ceipts and disbursements, consideration must be given to (l) other projec tions estimating changes in bank reserves, and (2) System policy regarding the supply, availability and cost of member bank reserves. As a general rule, when bank reserves decline to a point where excess reserves of all member banks are below $600 million some banks are hard put to keep their reserves equal to their requirements, although no firm figure can be used because much depends on the distribution of these excess reserves among the banks (particularly as between Hew York City and the rest of the country). The banks possessing reserve funds above their requirements become reluctant to sell their excess, and rates on Federal funds rise. The banks needing reserve funds hesitate to buy Government securities and, indeed, if the pressure is great enough, may offer Government securities for sale in order to acquire reserves. Developments of this kind result in falling prices for Government securities. On the other hand, when member bank reserves rise above their requirements b y more than about |800 million for more than a day or so, the supply of Federal funds usually becomes flush and some banks become buyers of short-term investments. In 34 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £~tA/0 £ ( 9 / response to these influences prices of short-term securities tend to rise and the rates on such securities tend to decline□ Obviously, from, time to time there will be situations in -which, a reduction or postponement of a Treasury call, or a special call,, or a call in an increased amount will bring about an adjustment in member bank re serves which m a y avert or reduce the need for System, action to reduce or increase bank reserves through sales or purchases of Government securities. Making the calls In order to facilitate the making of calls,, depositaries are clas sified into two grou p s “ Group A includes all depositaries having Treasury tax and loan balances of $ 150,000 or less at the close of business on a date specified b y the Treasury; Group B includes all depositaries having Treasury tax and loan balances of more than $150,000 on that date. The Treasury chooses a new bench mark date from time to time (generally at least onee a year) in order to keep the classification of banks in line with continuous changes in the magnitude of the Treasury accounts on their books.* When frequent calls are made they generally apply only to the Group B banks,, Normally only one call is issued each month for the Group A depositary accounts„ Income and profit tax payments of $10,000 or more are usually deposited in whole or in part in these tax and loan accounts, but they are segregated as HX balances." Separate calls may be made on these X balances, too. There is frequent consultation b y the operating officials of the Treasury and the Federal Reserve officials charged with conducting System open market operations. On the days that calls are announced, officials of the Reserve Bank and of the Treasury consult over the telephone as to the timing and the amount of the calls for the coming period. tomarily are Monday and Thursday, Call days cus Payment days for calls made on Monday are the following Friday and the next M o n d a y <, Payment days for Thursday * For example, see FRBNY Circular No = 3936, January 23, 1953- 35 Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority {T. Ch ) 0 9 0 f calls are Tuesday, Wednesday and Thursday of the next week. phone conversations an In these tele agreement is reached on the funds to be withdrawn and the days on which payment is to be mad e . The details of a call having been determined by the Treasury, it announces that a call is being made on the Group A or Group B banks in an amount equal to a specified percentage of the deposits in their Treasury tax and loan accounts at the close of business on a specified date, and that payment of such amount is to be made on a specified date or dates. Reserve Bank advises each commercial bank The in the district of the amount of the call upon such banks and handles the details of getting payment into the Treasurer’ s account on the books of the Reserve Bank. General Apart from the actual calls themselves, there are a number of other techniques which the Treasury has developed over the past few years to minimize the possibility of unusual stringency in the money market as the result of Treasury cash operations. Several of these techniques have been described briefly in an article entitled "The Treasury's Cash Balances" which was published in the Monthly Review of the Federal Reserve Bank of New York for July 1951* Authority for Federal Reserve operations The Federal Reserve Banks have broad authority to buy and sell in the open market a variety of credit instruments.* In recent years purchases and sales have been confined in practice chiefly to obligations of the United States. In earlier times, however, bankers acceptances played an important role in System operations, and may again. For present purposes, only transactions in United States Government securities need be considered. The Federal Reserve Act provides that these operations "shall be governed * Federal Reserve Act, § 14. 36 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority iT^l with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country".* Open market operations are conducted under the direction of the Federal Open Market Committee, composed of the seven members of the Board of Governors of the Federal Reserve System, the President of the Federal Reserve Bank of New York, and the Presidents of four other Reserve Banks who are chosen in rotation annually.** It has been customary for the Committee to select the Chairman of the Board of Governors and the President of the New York Bank as Chairman and Vice Chairman, respectively, of the Committee. The Committee has issued a Regulation which provides, among other things, for an Executive Committee consisting of five members. The principal function of the Executive Committee is "to direct the execution of trans actions in the open market in accordance with open-market policies adopted by the Federal Open Market Committee."*** In practice the Executive Committee has consisted of the Chairman and Vice Chairman of the full Committee (who also serve as Chairman and Vice Chairman, respectively, of the Executive Committee), two other members of the Board, and one other Reserve Bank President. The full Committee is required to meet at least four times a year; the Executive Committee meets more frequently, generally monthly or oftener. The Federal Open Market Committee selects one of the Federal Reserve Banks to execute transactions for the System Open Market Account. Such Bank selects a Manager of the Account, satisfactory to the Committee.**** 12A(c)". * Id.,.I ** Id., § 12A(d) *** FOMC, Rules on Organization and Information, § 3(c)(1). *•**■* FOMC, Rules on Organization and Information, § 4(b). 37 Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority /Q^Oj The Manager serves at the pleasure of the Committee and attends all meetings of both the Committee and Executive Committee. The Federal Reserve Bank of New York has always been selected by the Federal Open Market Committee to execute transactions for the System Open Market Account, and the Vice President of the Bank in charge of such transactions has always been Manager of the System Open Market Account. No Federal Reserve Bank may engage or decline to engage in open market operations except in accordance with the directions of the Committee.* Delegation of authority by FOMC It has been the practice of the Federal Open Market Committee to delegate broad authority to its Executive Committee, and for the Executive Committee in turn to delegate broad authority to the Federal Reserve Bank of New York to operate the System Open Market Account. The authorizations by the full Committee to its Executive Committee and by the Executive Committee to the New York Bank include, among other things, directions to arrange for transactions for the System Open Market Account, either in the open market or directly with the Treasury*1^ as may be necessary in the light of economic conditions and of the general credit situation of the country, for the practical administration of the Account, for the maintenance of orderly conditions in the Government securities market, and for the purpose of relating the supply of funds in the market to the needs of commerce and business* * Federal Reserve Act, ^ 12A(b). ** It is customary to include authority to purchase for the System Open Market Account direct from the Treasury special short-term cer tificates of indebtedness needed from time to time for the temporary accommodation of the Treasury, provided the total amount of such certificates held at any one time does not exceed a specified amount. T 38 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority The full Committee generally places a limitation, e.g., $2 billion, upon the increase or decrease that may take place (pursuant to the authoriza tion) in the amount of securities held in the System Account, and the Executive Committee generally prescribes a lesser maximum in its directive to the New York Bank. The amount of the limitation depends upon anticipated market and economic conditions and Committee policies. Although the formal authorization to the New York Bank is broad, in practice its operations are directed by the nature of the discussion taking place at the meetings of the FOMC and of the Executive Committee. The consensus expressed at such meetings and the highlights of the discussion are customarily recorded in the minutes of the meetings. The authorizations of the FOMC together with the reasons underlying the action of the Committee are published in the "Record of Policy Actions" of the FOMC which is set forth in the Annual Report of the Board of Governors.* There is, however, no public record of action by the Executive Committee or of the discussion at its meetings. Since the President of the New York Bank is Vice Chairman of both Committees, and since the Manager of the System Open Market Account attends all meetings of both Committees and both receive copies of the minutes of all meetings, they are fully informed of the consensus and discussion, and the New York Bank is able to conduct its operations in the light thereof. There is also timely consultation, oral or otherwise, by the Vice Chairman and the Manager of the Account with the Chairman and other members of the Executive Committee (or of the FOMC), and there is frequent discussion, oral or otherwise, by the Manager of the System Open Market Account and his staff with the Board's staff which is also the staff of the FOMC. * See 1950 Annual Report of b / g FRS, pp. 80 et seq. 39 Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority £ 7 ^ Thus the Federal Reserve Bank of New York acts within broad formal authority, being guided within that authority b y the tenor of the discussion at the meetings of the FOMC and of the Executive Committee, supplemented by informal discussion with members of such Committees and members of the staff. Allocation of securities in System Open Market Account Securities in the System Open Market Account are allocated b y the Federal Open Market Committee among the individual Federal Reserve Banks on the basis of their expense and dividend requirements. The formula is based on estimates for the year of each Federal Reserve Bank's expenses, dividends and earnings from sources other than securities in the System Open Market Account. Ratios of the estimates for each Federal Reserve Bank to those for the twelve Federal Reserve Banks combined are then computed and securities in the System Open Market Account are allocated on the basis of these r a t i o s . Adjustments may be made in the allocations from time to time if the reserve position of a particular Federal Reserve Bank indicates that an adjustment is desirable or if the allocations on the basis of the original estimates are no longer appropriate.* If, for example, the reserve ratio of a particular Reserve Bank should fall below a certain point, the quantity of Treasury bills or other securities allotted to such Bank might be reduced by a transfer to other Reserve Banks with higher reserve ratios. Settlement for such a transfer, through the Interdistrict Settlement Fund, increases the reserves of the Bank whose holdings are reduced, and reduces the reserves of the Banks whose holdings are increased. * The foregoing description appears in Hearings before Subcommittee on Monetary, Credit and Fiscal Policies of the Joint Committee on the Economic Report (pursuant to Sec. 5(a) of P 0 L 0 304, 79th Cong.), 8lst C o ng., 1st S e s s . 38 (1949)• 40 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority F e d e r a l Reserve operations limited to Government securities dealers The Federal R e s erve B a n k of N e w York transacts open market o p e r a tions wi t h dealers in Government securities (including c e r tain dealer banks), and m a y also do business on the N e w Y o r k Stock Exchange wi t h qualified member firms. It does not do business d irectly w i t h banks or other investors, e x cept to a limited extent w i t h the United States Trea s u r y and fo r e i g n central banks and international organizations having accounts w i t h the Federal R eserve B a n k of N e w York. Open market transactions are effected wit h a small number of Government securities dealers w h o do a substantial business on a national scope in the various types of Government securities and who have adequate capital to conduct such business. The F e d eral Open Market Committee has directed the N e w Yor k B a n k to transact business in Government securities for the S y s t e m Open Market Account w i t h responsible dealers (or t h rough responsible brokers) who meet certain qualifications p r e scribed b y the Committee. Underlying these standards of q u a l i f ication are certain basic principles of w h i c h the most important is that there should be an active market for Government securities among investors and dealers, independent of F ederal Reserve t r a n s a c t i o n s . The satisfaction of normal b u y i n g and selling desires of investors should be the pr i m a r y f u nction of the dealers, who e n deavor to m atch off buyers and sellers at prices determined b y the balance of supply and demand, but who are p r e p a r e d to increase or reduce their own portfolios w h e n ne c e s s a r y to balance what appear to be t e m porary excesses of demand or supply. The purposes served b y the System's open market operations have had an important b e aring upo n the System's relations wi t h dealers in Government securities. * As p r e v i o u s l y indicated,* the System's objectives have b e e n At pages £>?‘ -29. 41 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority {T.6K / d > ^ O j. p r i m a r i l y to influence the av a i l a b i l i t y of credit a n d s econdarily to prevent di s orderly conditions in the Government securities market, to condition the market at times of Trea s u r y financing operations, and to provide rate st a b i l ization under ce r t a i n extreme conditions. The S y s t e m aims to conduct its operations so as to p r o mo te the effective functioning of the market mechanism, not to replace that mechanism. The Re s e r v e B a n k has sought to accom p l i s h its p u r p o s e s w i t h a m i n i m u m of b u y i n g and selling. prevent d i sorderly In seeking to market conditions, the S y s t e m has operated in the market to supplement the activities of dealers w h e n imbalances b e t w e e n dema n d for and supply of securities developed. In d e termining those w i t h w h o m the Federal R e s erve S y s t e m might do business, there are two b r o a d approaches: (l) the S y s t e m might deal directly w i t h any investor or dealer w h o wishes to b u y or sell Government securities; or (2) the S y s t e m might deal w i t h that p o r t i o n of the Government securities market w here the final effort at private purchase and sale takes place. it has b e e n the view of the S y s t e m that if the first alternative were f ollowed the S y s t e m w o u l d r u n the r i s k of b e c o m i n g almost the sole market for Government securities and, therefore, of losing the opportunity for d i scretion or initiative in its open market operations for the purpose of affecting the supply of b a n k reserves. Under the second alternative, i n vestors w o u l d continue to effect their transactions in Government securities th r o u g h o rdinary market channels w i t h or t h r ough brokers and dealers of all sizes in all parts of the country, and the b u l k of all transactions w o u l d be effec t e d privately. In order that S y s t e m actions r elating p r i m a r i l y to credit p o l i c y might be re a d i l y completed and that actions r e lating p r i m a r i l y to o r d erly markets, T r e a s u r y operations, and rate s t abilization w o u l d not result in u n necessary recourse to the System, the Federal Open Market 42 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority [ T , 0 . /&£<?/■ Committee a d o pted the second alternative of dealing w i t h the p o r t i o n of the market where the final effort at private p u rchase and sale takes place, the dealer m a r k e t . The F e d eral Reserve has followed the practice of effecting its purchases and sales of Government securities only w i t h dealers who make p r i m a r y markets, have b r o a d n ational contacts, do a large volume of business in all types of these securities, a n d have the capital to support the r e q u i site volume of credit. The standards of q u a l i f ication are built around these c o n s i d e r a t i o n s . R e s t r i c t i n g Federal Reserve business to dealers who meet these standards (through w h o m in the ordinary course of events the greater part of the business u l timately flows) was considered desirable, for it is better c a lculated to preserve a Government securities market in w h i c h brokers and dealers, b o t h large a n d small, might continue to participate. The p r o b l e m of drawing the line b e t w e e n q u a lified dealers and others is not always easy, but unless the S y s t e m is to undertake to b u y and sell dire c t l y w i t h everyone, a line must be drawn.* Rel a t i o n s h i p of F R B N Y and Gover n m e n t securities dealers In 1944, a ft e r long co n sid eration , the Fed eral Open Market Committee form alized the re la tio n s h ip which had p rev io u sly e x iste d between the Federal Reserve Bank o f New York and the p r in c ip a l brokers and d ealers in Government s e c u r it ie s . At a meeting held February 29, 1944, the Committee approved in substance a statement of proposed terms upon which the Federal Reserve Bank o f New York would tran sact business with brokers and d ea le rs in Government s e c u rit ie s fo r the System Open Market Account. * (Such statement See R e p l y b y Chairman of Federal Open Market Committee (in c o l laboration - w i t h the Vice Chairman) to questionnaire addressed to h i m b y Subcommittee on General Credit Control and Debt Management of Joint Committee on the Economic Report, set f orth in Joint Committee Print, entitled "Monetary P o l i c y a n d Management of the Public D ebt" (82d Cong., 2d Sess.) Part I, pp. 623-625 (Feb. 1952). http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis . 43 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E . O J O ^ O j is sometimes refer r e d to in this m e m o r a n d u m as the "Statement of T e r m s ”.) The r e c o r d of the Committee's acti o n and the Statement of Terms are set forth in the 1944 A n n u a l Report of the Board of Governors, at pages 48-51. A copy of the Statement of Terms is a ttached hereto, mar k e d Exhibit A. The Committee a u thorized its Executive Committee to decide w h e n the appr o v e d procedure should be put into effect and to issue appropriate instructions to the N e w Y o r k Bank. Executive Committee on M y 6. Such instructions were issued b y the By M a y 15 the N e w Yo r k B a n k had concluded w r i t t e n agreements w i t h all brokers and dealers who, in the o p i nion of the Bank, met the qualifications p r e s c r i b e d b y the Committee, and on M a y 15, 1944, the n e w p rocedure was put into effect. Pursuant to the Statement of Terms, the N e w Y o r k B a n k does its Government securities b usiness w i t h reputable brokers and dealers who meet ce r tain qualifications and make c e rtain agreements w i t h the N e w York Bank. There are n o w t e n dealers, including five dealer banks, w h o have met such qualifications a n d have made such a g r e e m e n t s . The R e serve S y s t e m has never p u b l i s h e d the names of the qualified dealers b e cause it felt that it should a v o i d a n y public act w h i c h might be interpreted as disadvantageous to or a re f lection u p o n the dealers who were not "qualified". It is b e l i e v e d that the "qualified" dealers account for about nin e t y per cent of the business t r a n s a c t e d in Government securities b y the dealers in N e w Y o r k City. The factors to be considered in determining w h e ther the Federal R e s erve B a n k of N e w Y o r k will transact business w i t h a p a rticular dealer are set f o r t h in p a r a g r a p h 1 of the Statement of Terms, as follows: (a) Integrity, knowledge, a n d c apacity a n d experience of management; (b) observance of h i g h standards of commercial honor and just a n d equitable principles of trade; (c) willingness (in the case of a dealer) to make markets under all ordinary conditions; 44 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED A u th o rity (d) the volume and scope of business and the contacts such business provides; (e) financial condition and capital at risk of business; and (f) the reliance that can be placed on such person to cooperate w i t h the B a n k and the Fe d e r a l Open Market Committee in m a i n t a i n i n g an orderly market for G overnment securities; to refrain from m a k i n g any recommendations or statements or engaging in any acti v i t y w h i c h w ould encourage or stimulate undue acti v i t y in the mar k e t for Government securities; and to refrain fro m disclosing a n y confidential information w h i c h he obtains from the B a n k or through his transactions w i t h the Bank. H avi n g met these tests, a dealer must then agree in w r i t i n g to c omply w i t h certain terms and conditions set forth in paragraph 2 of the Statement of Terms. These involve pri n c i p a l l y an u ndertaking to furnish certain information to the Fe d e r a l Reserve B a n k on a confidential basis (par. 2 (a)), and generally not to solicit business from others for the p u r pose of p u t ting himself in a position to do business w i t h the Reserve Bank (par. 2 (e)). The information called for under paragraph 2(a) of the Statement of Terms includes a d aily report showing, among other things, the dealer's gross long position, gross short position, net position in Government s e c u r i ties and borrowings as of the close of business each trading day, and the volume of transactions on such day. The information is furnished according to classes of securities, on a form furnished b y the Reserve Bank. A t times, w h e n a Trea s u r y financing operation is under way, the reports are expanded to include data on the dealer's own subscriptions to the new issue or issues and his purchases and sales of such issue or issues.* Three of the factors set forth in p a r a graph 1 of the Statement of Terms are deserving of special comment at this time. They are factors (c), (d ) and (e ). * Similar reports are also received on a v o l u ntary basis fr o m several u n qualified dealers. 45 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority [T , (c ) W illin gn ess (in the case o f a d e a le r) to make markets under a l l ordinary conditions The p o sitio n s which a d e a le r maintains in the various c la sse s o f s e c u ri t ie s (Treasury b i l l s , c e r t ific a t e s o f indebtedness, notes and bonds o f various kinds) are evidence o f h is w illin g n e s s to make a market; hence these fig u r e s are important, although not conclusive. Where a d ealer c o n siste n tly has an in s ig n ific a n t p o s itio n in one or more c la sse s o f Government s e c u r it ie s , one may te n ta t iv e ly conclude that the d e a le r is u n w illin g or unable to make a market in that segment under a l l ordinary condi tio n s; he would probably tran sact an "order b u sin ess" in that segment o f the market. On the other hand, the fa c t that a d e a le r co n sisten tly has a substan t i a l long p o sitio n in ce rta in s e c u rit ie s does not n e c e s sa rily mean that he is w i l li n g to s e l l those s e c u rit ie s fr e e ly and to make a market in those s e c u r it ie s ; perhaps he is merely holding the s e c u rit ie s in a n tic ip a tio n o f s e lli n g them at some fu ture date at a s u b s ta n tia lly higher p ric e , or he is holding them in order to r e a liz e the "c a rry "-~ th e d iffe re n c e between the in te re s t received on the s e c u ritie s and the in te re s t paid to a bank f o r a loan to carry the s e c u r it ie s . (d ) The volume and scope o f business and the contacts such business provides I t is the view of the Reserve System that the s a t is fa c t io n o f normal buying and s e lli n g d esire s o f in vestors should be handled as f a r as p o s s ib le by the dealers who can match o f f buyers and s e lle r s or ( i f necessary) meet th e ir customers' needs by in creasin g or reducing th e ir own p o r t fo lio s . Therefore, i t has been considered e s s e n t ia l that the d ealers with whom the Federal Reserve deals make primary markets, have broad n ation al contacts, and do a la rg e volume of b u s i ness in a l l types o f Government s e c u rit ie s so that the d ealers may reasonably be 46 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority T . O , j O ^ O j expected to handle normal market supply and demand without re s o rtin g to the System and at the same time a ffo r d scope fo r System actio n when i t takes the i n i t i a t i v e . This means d ealin g "by the Federal Reserve only with those d ealers who are n atio n al fa c to rs in the market, since such d ealers proyide the c e n tra l point o f a c t iv it y through which the major p ortion o f the operations o f buyers and s e l le r s is c le a re d , and at which the f i n a l e f f o r t at purchase and sale takes p la c e . In th is way i t is p o s s ib le to maximize the e ffe c tiv e n e s s of System open market operations with a minimum o f tran saction s since they are d ire cted at the gap between market demand and supply ra th er than at the f u l l magnitude o f the market on both s id e s . Thus i f the System is engaged in the market to prevent d is o rd e rly market conditions or to s t a b i li z e r a t e s , there is a b e tte r chance o f keeping the System’s p a rt ic ip a t io n in the market to a minimum consistent with it s c re d it o b je c t iv e s . I f a d ealer does not meet these te s ts there could be a tendency on h is p art to seek to "unwind" with the Reserve Bank many o f the tra n s actions entered in to with h is customers rath er than to d ire c t h is e f f o r t s toward "unwinding" the tran saction s with other customers. The p o s s i b i li t y o f h is "unwinding" the tran saction s with other customers is more lim ited as the geographical lo c atio n o f h is customers is more concentrated and as the business o f h is customers is more concentrated in s p e c ia liz e d lin e s , as would be the case, fo r example, i f most o f h is customers were savings banks. Another important con sid eration in connection with th is fa c to r is the a b i l i t y o f the d e a le r to keep the Reserve Bank informed about the r e la t iv e amount o f buying and s e lli n g in te re s t in a l l segments o f the s e c u rit ie s market The Reserve Bank should know the thinking o f d ealers and o f p o te n tia l buyers and s e lle r s throughout the country; and the most e ffe c t iv e and expeditious way o f obtainin g th is inform ation promptly is from the d e a le rs . 47 In order Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority to be in a p o s itio n to fu rn ish such inform ation, a d ealer must have broad contacts throughout the country and h is coverage must include a l l segments o f the market, (e ) F in an c ial condition and c a p it a l at r is k o f business The need fo r fin a n c ia l strength is t w o fo ld --f i r s t , to protect the Reserve Bank again st lo s s in respect o f any business transacted by i t with the d e a le r, and second, to enable the d ealer to serve the market w e ll. Wider flu c tu a tio n s in market p ric e s o f s e c u rit ie s increase the r is k s and make su b sta n tia l c a p ita l more important. Obviously the Reserve Bank does not want to take any chance on the a b i l i t y o f a d ealer to perform. The gre a te r need fo r fin a n c ia l strength on the p art o f a d ealer is tie d in with and measures h is a b i l i t y to serve the market. in the d iscussion with respect to fa c to r ( d ) , business be n atio n al in scope. s t a n t ia l amount o f c a p it a l. As pointed out i t is important that a d e a le r 's Such a b u sin ess, o f course, re q u ires a sub The more c a p it a l a d e aler has, the g reate r is his freedom and a b i l i t y to do business in the market, the le s s vuln erable is he to market flu c tu a tio n s , and the greater is h is access to la rg e volumes o f c re d it. Open market p o lic y Long-run p o lic y Federal Reserve cre d it p o lic y , determined in the lig h t o f economic conditions (in c lu d in g production, employment and p r ic e s ), and the general cre d it situ a tio n o f the country, g e n e ra lly f a l l s w ithin one o f the fo llo w in g broad p o s itio n s : r e s t r a in t , ease or n e u tra lity . R estrain t When the gen eral c re d it p o lic y is one o f r e s t r a in t , the Federal Reserve System seeks to make member bank reserves le s s r e a d ily a v a ila b le , Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority w i t h a resultant increase in cost. ■ Under such circumstances the Re s e r v e B a n k becomes a reluctant buyer and a willing (sometimes a n active) seller of Government securities. Ease W h e n the general credit p o l i c y is one of ease, the Reserve Syst e m norm a l l y seeks to make member b a n k reserves more r e a d i l y available, w i t h a resultant r e d u c t i o n in cost. Under such circumstances the R e s erve B a n k b ecomes a willing buyer a n d a reluctant seller of Government securities. Neutrality Under a general credit p o l i c y of neutrality, the R e serve System seeks to a void action w h i c h w o u l d make credit harder to obtain or easier to obtain. This m a y involve the absorption b y the Sys t e m of b a n k reserves under c e r tain circumstances or the creat i o n of b a n k reserves under other circumstancesj for example, it m a y involve the a b s orption of reserves created through imports of gold or a retu r n f l o w of currency and reserves f r e e d b y reductions in b a n k loans and investments, or it m a y involve an expansion in Federal Reserve credit in connection wit h the seasonal r e q u i r e ments of business. U n der such circumstances the reserve needs of the member banks are likely to be in a range that can be met b y changes in borrowings f r o m the R e serve Banks without the n e c e s s i t y of substantial intervention t h r ough open market operations. Open market operations may, however, b e involved in the absorption of rele a s e d reserves or in the furnishing of reserves nee d e d for seasonal business p u r p o s e s . Short-run p o l i c y Upon suc h a long-run g e n eral credit p o l i c y of restraint, ease or neutrality, w i t h the appropriate open market p o l i c y o utlined above, there m a y be superimposed a short-run p o l i c y of furnishing member ba n k s w i t h 49 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority K a /O^O / rese r v e s or o f absorbing reserves for the purpose of ironing out sharp dayt o - d a y movements in the m o n e y market. Bank reserves m a y fluctuate greatly f r o m d a y to d a y and f r o m w e e k to week. The reserves of the banks of the c o untry are affec t e d b y the yarious factors shown in the w e e k l y statements p u b l i s h e d b y the Federal Reserve System, such as a n inflow or ou t f l o w of gold, changes in float*, changes in the deposits of f o reign central b a n k s in the Federal R e serve Banks, changes in public demands for currency, net receipts or disbursements b y the T reasury r e f l ected in changes in its balances w i t h the Re s e r v e Banks, shifts b y the T r easury of balan c e s f r o m commercial banks to the R e s erve Banks, and changes in the reserve requirements of the b a n k s . In addition, the reserves of individual b anks m a y be a d v e r s e l y a f fect e d e v e n though there be na change in the aggregate reserve p o s i t i o n of the b a n k i n g system; a particular b a n k may lose funds to other b a n k s t h r ough the acts of its depositors in drawing down t heir depo s i t s and in transferring the funds to other banks. The net balance owing b y one b a n k to another in the clearance of checks is settled b y the transfer of funds on deposit in the R e s erve Bank. Similarly, the reserves of the banks in a particular city, e.g., N e w York, m a y b e r e duced by a flo w of funds to banks in other parts of the c o untry without any substantial change In the total reserve p o s i t i o n of all the banks in the country. Thus it m a y be desirable for the Re s e r v e Banks to f u rnish member banks wit h additional reserves t emporarily e v e n though the over-all F e deral Reserve p o l i c y is to make member b a n k reserves less re a d i l y available. These additional reserves m a y be f u r n ished to the ba n k i n g syst e m th r o u g h loans b y the R e serve Banks to member b anks or through purchases Of Government securdties; b o t h methods are used. # Frequently the reserve needs of the member For a de f i n i t i o n of f l o a t , s e e footnote on page 29 * 50 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E .6 K I ^ O j banks can be met by changes in borrowings from the Reserve Banks.* Sometimes, however, sharp movements in the money market may be a th reat to o rd e rly condi tions in the Government s e c u rit ie s market, and open market operations may be c a lle d f o r . * * The Reserve Bank does not deny reserves to a bank that p ro perly needs them. C ertain reserves are required by law and p e n a ltie s are assessed i f there is a d efic ie n c y . N everth eless, the Reserve Bank does make i t more d i f f i c u l t or c o s tly fo r a member bank to get reserves when such p o lic y seems c a lle d fo r ; th is is an o v e r - a l l deterren t to the bank's in creasin g i t s r e serves and expanding c re d it on the b a s is o f increased re se rv es. In a d d itio n , the Fed eral Reserve may engage in open market opera tions in Government s e c u rit ie s in order to condition or steady the market in connection with the issuance by the Treasury o f a new se c u rity . Purchases o f s e c u rit ie s by the Reserve Bank fo r such purpose, or to f a c i l i t a t e the main tenance o f an o rd e rly market f o r outstanding s e c u r it ie s , fu rn ish member banks w ith reserves even though the o v e r - a ll Fed eral Reserve p o lic y is to make member bank reserves le s s re a d ily a v a ila b le . System c re d it p o lic y would g e n e ra lly c a l l fo r subsequent sale s or redemptions to o ffs e t such purchases. A n alysis o f fa c to rs important to operations The Federal Reserve System must analyze a l l fa c to rs a ffe c t in g the money market and Government s e c u ritie s market, not only as a ^uide to it s * Borrowing from the Reserve Banks has become much more common since short-term market ra tes have been near the F ederal Reserve discount ra te . This g re a te r use o f the discount or loan mechanism is a d e s ira b le development because the p a r t ic u la r member bank that needs reserves gets them, and when the immediate need fo r the Federal Reserve c re d it is p a st, the member bank normally seeks to repay the loan promptly and the Federal Reserve c re d it is extinguished. * * Sometimes the Reserve Bank may avoid o u trigh t purchases by entering Into repurchase agreements with q u a lifie d nonbank d e a le rs , as desci-ibed at pages 54-55- 51 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority long-run p o l i c y but to make allowances for the short-run influences w h i c h result in day-to-day fluctuations caused b y tem p o r a r y f a c t o r s . Financial data As an aid to short-run policy, the Reserve B a n k follows c l o sely the reserve p o s i t i o n of all member banks, w i t h special emphasis up o n the large N e w Y o r k City banks w h i c h are the largest single factor in the m o n e y market; it watches clearings and large wire transfers involving such banks; it keeps close contact w i t h all m o n e y market developments including current and prospective inflow a n d o u t f l o w of funds a n d public and private financing t h r ough the securities markets; and it is familiar w i t h and advises the T rea s u r y w i t h respect to Treasury calls on T r e a s u r y Tax a n d Loan A c c o u n t s . * Thus generally it c a n tell the extent of pressure or ease in the m o n e y market throughout the country a n d in N e w York. Trading r o o m wires The Federal Reserve Ban k of N e w Yo r k has a trading r o o m w i t h private t elephone wires to all of the qualified dealers in N e w Yor k City. Frequent quotations are obtained f r o m the principal dealers, and are p o s t e d on a b o a r d in the trading room. F r o m time to time during the day, dealers inform the R e s erve B a n k regarding significant developments in the market. The tone and c haracteristics of the Government securities market are c ontinually described to the Reserve B a n k through telephone conversations over the private wires. In addition, the dealers report information that has come to their a t t e ntion concerning the m o n e y market. Conferences w i t h dealers and investors E v e r y business day, p rior to the opening of the Government sec u r i ties market at 10:00 a.m., representatives of two or three q u a l ified dealers * Techniques and criteria regarding the d e termination of Treasury calls are discussed at pages 33 - 36 . 52 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority jO ^ Q j c a l l at the Reserve B a n k on a rota t i n g schedule to confer w i t h the R e s er ve Ba n k officers d irectly responsible for the conduct of open market operations. At these conferences the representatives r e v i e w the most important d e v e l o p ments in the market, summarize their transactions, and pass on to the Reserve B a n k any comments or suggestions w h i c h th e y w i s h to make or w h i c h the y have h e a r d in their contacts w i t h investors and in w h i c h th e y t h i n k the Reserve Ba n k w o u l d be interested. Also, the Reserve Ban k officers main t a i n fairly close contact w i t h the officers of large institutional investors w h o have charge of their institutions* investments in Government securities. I n forma ti o n o btained in this w a y amplifies and checks the information r e ceived f r o m the dealers. H o w R e serve Ban k trades F r o m time to time during the day the dealers suggest, over the trading r o o m p rivate wires, transactions to the Reserve Bank, offering to purchase f r o m or sell to the Reserve B a n k a gi v e n quan t i t y of a particular security at a certain price. The Reserve Ban k usually Waits to hear the terms of a dealer's offer and accepts or declines. A t t i m e s , however, the Re s e r v e B a n k m a y on its own initiative solicit an offer or b i d f r o m a dealer or m a y place an order w i t h a dealer. The extent to w h i c h the R e serve Ban k m a y take the initiative depends upon the objective at the time; the initiative is more likely to be t a k e n w h e n credit p o l i c y requires more aggressive efforts to sell or buy. As a general rule, open market operations are accommodated to the different sections of the market and to the actions of investor groups w h i c h make up those sections, w i t h i n the limitations of the general p o l i c y of the Federal Open Market Committee w h i c h the B a n k is trying to e x p r e s s . Meas u r e d in terms of volume, ope n market transactions o r dinarily are p r e d o m i n a n t l y in short-term Trea s u r y obligations (Treasury bills, certificates of indebtedness 53 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED A u th o n ty a n d short-rterm T r e a s u r y notes) which are largely he l d b y commercial banks and w h i c h are the first issues to reflect a changing credit situation. Normally, a cti v i t y in the T reasury b i l l and certificate markets follows the ebb and f l o w of funds be t w e e n banks and the general course of m o n e y market forces; in the short run, Federal Reserve operations have b e e n con d u c t e d so as to moderate extremes in the swings of such f o r c e s — at times anticipating d e v e l opments, and at times wa i t i n g for th e m to be r e f l e c t e d in price a n d market pressures, depending on the size a n d d uration of the forces at w o r k and the p sych o l o g y w h i c h the B a n k has w a n t e d to create in terms of "long-run" Fe deral Reserve policy. Since the Treasury-Federal Re s e r v e acc o r d of M a r c h 1951* the F e deral Reserve has intervened in the market m u c h less frequently, and the market has become more accustomed to substantial fluctuations in prices which, of course, are an attribute of a "free market". R e purchase agreements As one means of smoothing out the operations of the m o n e y market, the Federal Re s e r v e B a n k of N e w Yor k f r o m time to time enters into repurchase agreements w i t h qualified n o n bank dealers. Under such an agreement the R e s erve B a n k buys sh o r t - t e r m Government s e c u rities--generally T reasury b i l l s — f r o m a d e a l e r , pay i n g therefor on the d a y of the a g r e e m e n t . The dealer agrees to b u y b a c k the securities at any time at the opt i o n of either p a r t y w i t h i n a p e r i o d specified in the agreement, not exceeding fifteen days. The dealer pays the same price at w h i c h he sold the securities to the R e serve Ba n k plus a n interest charge for the p e r i o d the Reserve B a n k holds the s e curities. This interest charge has c u stomarily b e e n at or close to the discount rate. Such repurchase agreements are used b y the R e serve B a n k wi t h care a n d d iscrimination as a means of providing the m o n e y market wit h Federal funds in order to lessen a t e m porary stra i n o n the m a r k e t . 54 The R e serve Ban k Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority pays the d ea le r Federal funds the day the agreement is made; th is i s the only way, other than through member bank borrowing, that the Reserve Bank puts Federal funds into the market im m ediately.* During periods o f such s tr a in , the commercial banks which normally finance the d ealers freq u en tly want th e ir loans p aid and charge p en alty ra te s i f the loans are not paid ; when the cost o f carryin g the s e c u ritie s exceeds the income from them, the d ealers are under pressure to s e l l the s e c u rit ie s . I f the Reserve Bank buys the s e c u ritie s under a repurchase agreement in stead o f o utrigh t fo r the System Open Market Account, the d ealer is o b lig a te d to buy back the s e c u ri t ie s and he pays a charge to the Reserve Bank u n t il he does so; thus he continues to seek to place the s e c u rit ie s in the hands o f in v esto rs. A d ealer might not be as a l e r t and aggressive to place the s e c u rit ie s with in vesto rs i f the d ealer had so ld the s e c u rit ie s ou trigh t to the Reserve Bank. I f the money market continues under s tr a in fo r the en tire p eriod s p e c ifie d in the agreement, the Reserve Bank may renew the agreement. I f the s e c u ri t ie s covered by the agreement are not repurchased by the d e a le r, or i f the agreement is not renewed, the s e c u rit ie s involved are tra n s fe rre d to the System Open Market Account or are sold in the market. Although a l l the Federal Reserve Banks have been authorized by the Federal Open Market Committee to enter into repurchase agreements, in p rac tic e v i r t u a ll y a l l such tran saction s since reinstatement o f th is au th o rity in 1948 have been entered into by the New York Bank. Since the bank d ealers are member banks they can borrow from the Reserve Banks at the discount ra te to carry s e c u rit ie s in th e ir trad in g ac counts. * They have no need fo r the mechanism o f the repurchase agreement. In the case o f an o u trigh t purchase ( i . e . , one not subject to a repurchase agreement) d e liv e ry and payment are custom arily made on the next f u l l business day fo llo w in g the contract o f purchase. 55 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E t A I O ^ O j Federal Reserve operations not e ffe c te d with d ealers Handling maturing issues held by F ederal Reserve The way the Reserve Bank handles maturing issues o f Treasury b i l l s and, to some extent, other maturing Treasury o b lig a t io n s , is a ls o an im portant phase o f Government s e c u rit ie s operations. In the case o f Treasury b i l l s , when the System holds such b i l l s , i t has a weekly d ecision to make as to the d isp o sa l o f i t s holdings o f the maturing issu e . I t i s customary fo r the Treasury each Thursday to in v ite tenders on a competitive b a s is fo r new Treasury b i l l s maturing in 91 days. O rd in a rily , tenders are received up u n t il 2:00 p.m. Eastern time on the fo llo w in g Monday and payment is made on the fo llo w in g Thursday in order to provide the Treasury with funds to meet the issue maturing on that date. I f the System declin es to enter a b id fo r the new is s u e , or i f i t s b id is not accepted, the maturing b i l l s held by the System w i l l be p aid by the Treasury. I f the amount o f such payment is su b sta n tia l the Treasury w i l l p robably draw down i t s balances at the commercial banks to make the payment or to rep len ish i t s General Account with the Reserve Bank; th is w i l l b rin g about a reduction in member bank re se rv e s. Customarily, however, the Reserve Bank enters a b id fo r the new issue in the amount o f the maturing issue held by the Federal Reserve in order to assure the Treasury o f a necessary volume o f tenders at some p ric e . I f the System's holdings are s u b s ta n tia l, the p ric e b id by the Federal Reserve may be very important. By r a is in g or low ering i t s b id in the lig h t o f i t s estimate o f the b id s that w i l l be made by others, the Reserve Bank may be r e la t i v e l y sure o f an award of new b i l l s in about the same amount as i t s maturing b i l l s , o f a s u b s ta n tia lly le s s quan tity or even o f none. or o f an award U n t il recently, when a broader market developed in response to the r i s in g trend in short-term ra te s , 56 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ^ ,0 . j O ^ Q j t he S y s t e m was a large hold e r of T r e a s u r y bills and, depending on its m a t u r i t y schedule, could assume a n active role in affecting reserve b alances and influencing rates. Other issues of T reasury securities (certificates of indebtedness, notes and'bonds) are m aturing f r e q u e n t l y — several times a year. The m aturing issues are g e n erally r e f u n d e d b y the T r easury b y the offering of a n e w issue in exchange for the maturing issue. If the Federal Reserve decides to s u b scribe to the n e w issue for the full amount of the maturing issue it holds, member b a n k reserves will not be affected.. On the other hand, if the Federal R eserve decides to subscribe for a lesser amount of the n e w i ssue— if it lets some of the maturing issue "run o f f " — the Treasury wil l p r o b a b l y have to dra w down its balances at the commercial banks and this will put pressure on member b a n k r e s e r v e s . T rea s u r y "overdrafts" Under limited circumstances the Federal Reserve may purchase an obligation of the Government directly f r o m the Treasury. This is done on a temporary basis at the time of the q u a rterly income t a x payments. he a v y expenditures. For example, on M a r c h 15, 1952 * the T r e a s u r y h a d very In addi t i o n to ordinary T reasury expenditures there were interest payments due that d a y and there were several h u n dred mi l l i o n dollars of marketable Government securities b e c o m i n g due that day. Although large income tax payments were also due M a r c h 15, in the nature of things t h e y could not be c o l l ected that day. It takes a number of days for the various collectors of internal revenue to deposit tax checks and for the checks to b e collected. In such circumstances the Federal R e serve B a n k of N e w Y o r k bought for the Sys t e m op e n market account a special certificate of indebtedness of about $800 million, m aturing at the end of the month, w i t h an opt i o n on the 57 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E . O ^ O ^ O j p art o f the Treasury to repay i t in whole or in p art at any time. I t was paid o f f b efo re the end o f the month. The Federal Reserve Act p ro vid es, in e f f e c t , that when the F ederal Reserve Banks buy Government s e c u r it ie s , the s e c u rit ie s must be bought in the open market, except that up to $5 b i l l i o n may be bought d ir e c t ly from the T reasu ry .* The only Government s e c u rit ie s purchased d ir e c t ly from the Treasury have been these s p e c ia l c e r t ific a t e s o f indebtedness used at tax payment dates. They have never been outstanding more than a few d ays. Summary conclusion Open market operations are one instrument o f general c re d it co n tro l. In recent years they have been the most important instrument. The primary purpose of open market operations is to in flu ence the supply, a v a i l a b i l i t y and cost o f member bank r e s e r v e s , and thus in fluence the p o lic y o f the banks in making lo a n s — in extending bank c r e d it . The System does, however, recognize two other r e s p o n s ib ilit ie s fo r taking action: (1 ) to help see that conditions in the Government s e c u ritie s market do not become disorderly; (2 ) to help condition the market in connection with the flo t a t io n o f a new issue o f s e c u rit ie s by the Treasury. The in d ire c t impersonal method o f re s t ra in in g c re d it through gen eral c re d it con trols is an important instrument in the fig h t again st in fla t io n . complements and * in turn is complemented by, fiscal policy. Fed. Res. A ct, § 1 4 (b ). 58 It Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority . EXHIBIT A TERMS O N W H I C H F E DERAL RE S E R V E B A N K OF NEW Y O R K WI L L T RANSACT B USINESS W I T E B R O KERS A N D DEALERS IN UNI T E D STATES GOVER N M E N T SECURITIES FOR THE S Y S T E M O P E N MAR K E T A C C O U N T The Fe d e r a l O p e n Market Committee has directed the F e deral R e s e r v e B a n k of New Y o r k (hereinafter referred to as the Bank) to transact "business in U n i t e d States Government securities for the S ys t e m open market account w i t h reputable brokers and dealers in such securities who meet the qualifications a n d agree in w r i t i n g to comply w i t h the terms and conditions set forth below. 1. In determining w h ether a pers o n (individual, partnership or corporation, including a bank) is a q ualified broker or dealer w i t h w h o m the B a n k w i l l t r a n s act business, a n d the extent to w h i c h business wil l be transacted w i t h such person, the following factors will be taken into consideration: (a) Integrity, knowledge, and capacity and e x p e r i ence of management; (b) Observance of high standards of commercial honor and just and equitable principles of trade; (c) W i l l i ngness (in the case of a dealer) to make markets under all ordinary conditions; (d) The volume and scope of business and the c o n tacts such business provides; (e) Financial condition and capital at risk of business; and (f) The reliance that can be placed on such per s o n to cooperate w i t h the B a n k and the Federal Op e n Market Committee in maintaining an orderly market for Government securities; to r e frain f r o m making a n y recommendations or statements or engaging in any a ctivity w h i c h w o u l d e n courage or stimulate undue a c t i v i t y in the market for Government securities; and to refrain f r o m disclosing a n y confidential information wh i c h he obtains f r o m the B a n k or through his transactions w i t h the Bank. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 2 2. The Bank w i l l obtain from such person an ag re e ment in w ritin g to comply with the fo llo w in g terms and conditions: (a ) He w i l l fu rn ish the Bank with a statement fo r the c o n fid e n tia l inform ation o f the Bank and the Open Market Committee showing as o f the close o f business each business day: (1 ) The t o t a l amount o f money borrowed (d i r e c t ly and in d ir e c t ly ); (2 ) The par value o f a l l Government s e c u ri tie s borrowed; (3) His p o s itio n , both long and short, in Government s e c u r it ie s , c l a s s if i e d by cla sse s o f s e c u rit ie s and maturity groups (o r by issu e s, i f so requested by the Bank); (4 ) The volume o f tran saction s during the day in Government s e c u r it ie s , c l a s s if i e d by cla sse s o f s e c u rit ie s and maturity groups (o r by is s u e s, i f so requested by the Bank); and (5 ) Such other s t a t i s t i c a l data as in the opinion o f the Bank w i l l a id in the execution o f tran saction s fo r the System open market account. (b ) At or befo re the completion o f each tran saction with the Bank, he w i l l fu rn ish the Bank with a w ritte n n o t ific a t io n d is c lo s in g whether he is actin g as a broker fo r the Bank, as a d ealer fo r h is own account, as a broker fo r some other person, or as a broker fo r both the Bank and some person. In the absence o f a s p e c ia l agree ment to the contrary w ith the Bank with respect to a p a rt ic u la r tran sactio n , he w i l l not act as broker fo r any other person in connection with any tran saction with the Bank, and he w i l l receive no compensation or p r o f i t o f any kind in connection with the tran sactio n other than the s p e c ifie d commission paid him by the Bank. (c ) In the absence o f s p e c ia l arrangements with the Bank, d e liv e ry o f s e c u rit ie s w i l l be made at the o f f i c e of the Bank befo re 2 0 °15 p.m. on the next f u l l business day fo llo w in g the day o f the contract and. a l l payments by the broker or d ealer w i l l be in immediately a v a ila b le funds. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority t T , 0 . /& £& /■ 3 (d ) He w i l l fu rn ish the Bank not le s s freq u en tly than once during each calendar year with a r e port o f h is fin a n c ia l condition as o f a date not more than 45 days p r io r to the d e liv e ry o f the rep o rt to the Bank in form acceptable to the Bank and prepared or c e r t i f ie d by a p u blic accountant acceptable to the Bank; and, upon the request o f the Bank, he w i l l fu rn ish i t with a statement o f condition as shown by h is books as o f a date s p e c ifie d by the Bank. (e ) Unless the Bank s h a ll have informed him o f i t s d e sire to purchase or s e l l a p a r t ic u la r issue o f Government s e c u r it ie s , he w i l l not s o l i c i t from any other person o ffe r in g s o f or b id s fo r any issue o f Government s e c u rit ie s fo r the p ur pose o f p lac in g him self in a p o s itio n to o ffe r to s e l l to or to buy from the Bank s e c u rit ie s o f such issu e . The Federal Open Market Committee has fu rth e r d irected that the Bank d eclin e to tran sact any fu rth e r business with a broker or d ealer in any case in which the Bank has concluded that the broker or d ealer no lon ger meets the q u a lific a t io n s set fo rth above or has w i l l f u l l y v io la te d or f a i le d to perform any o f the terms and conditions se t fo rth in the agreement. To the F ederal Reserve Bank o f New York: The undersigned hereby agrees to meet the q u a lific a t io n s and to comply with the terms and conditions set fo rth above. DatedS ( Signature) •SFQM Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority RBtl'D TN FILES SECTION j JWM371953few J May 29, 1953. PROPOSAL FOR CHANGES IH THE DIRECTIVES OF THE OPEN MARKET COMMITTEE AND TEIE EXECUTIVE COMMITTEE At the meeting of the Federal Open Market Committee on March 4-5, 1953, it was understood that the staff would report on the steps that would be necessary in the way of changing the Com mittee1s directives or issuing new directives to carry out changes in procedures agreed upon. In accordance with this understanding, the staff has prepared a draft of revision of the general directive of the full Committee consisting of general instructions and a separate specific directive. It has also prepared a draft of revision of the directive issued ty the executive committee to the Bank which executes transactions for the System account. The revisions are intended to change only the form of the directives and are not intended to make any changes of substance in the directives. Under the proposed forms of directives, the procedure for their issuance would be somewhat as follows: (1) There would be general instructions issued once a year by the full Committee, which would include the various conditions and terms relating to operations of the System Ac count and cover a substantial portion of the matters hereto fore included in the directive issued at each meeting. (See Exhibit A attached). \ A specific directive stating a more definite W d limited objective would be issued to the executive committee by the full Committee at each of its meetings (Exhibit B)j and a similar, and possibly more specific and limited, directive would be issued by the executive committee at each of its\meet. ings to the Federal Reserve Bank of New York (Exhibit C). For JLr^ example, under certain conditions the specific directive would 'fj "77 refer to restraint upon inflationaiy developments. Under other (2) Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IT ,$ , conditions, however, the objective m i g h t be to r e s t r a i n d e flationary developments, or the directive could be otherwise changed to suit the then existing situation. (3) A paragraph on purchase of special certificates from the Treas u r y w o u l d be included both in the full Committee specific directive and the executive committee specific d i rective. (4) Both the general instructions a n d the specific d i rective of the Federal O p e n Mar k e t Committee would, of course, have to be p u b l ished as a part of the poli c y record of the C o m mittee, but the directive of the executive committee to the N e w York Reserve Bank would not be published. There are a num b e r of m a tters that wo u l d not be comprehended by general instructions or the specific directives f r o m the full C o m mittee to the executive committee, and, as in the past, matters of this type would come u p once a ye a r for revi e w try the full Committee. The y could, of course, be reviewed or changed at any o ther meeting of the full Committee. These would include: (a) C o nditions u n d e r w h ich Federal Re s e r v e Banks are authorized to enter into repurchase agreements w i t h nonbank dealers in U n i t e d States G o vernment securities; (b) Conditions, including m i n i m u m buying rate, u n d e r which Federal Reserve Banks may purchase b a n k e r s 1 acceptances in accordance w i t h the regulations of the F e d eral Op e n M a r k e t Committee; (c) P urchase and sale of cable transfers, bills of e x change, and b a n k e r s ’acceptances payable in foreign currencies; <d) Account; A l l o c a t i o n of securities i n the S y s t e m O p e n M a r k e t (e) P e rsons to w h o m w e e k l y report of op e n market operations prepared b y N e w York Reserve Bank is distributed; (f) A u t h o r i t y of the C hairman to a p p oint a Federal Reserve Bank as agent to operate the Syst e m Account temporarily in case the Federal Reserve Bank of New Y or k is unable to function; (g) Technique of open mar k e t operations and relationships wi t h Government securities dealers. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority F .6 K -3I n connection with paragraph (5) of the p roposed G e n eral Instructions (Exhibit A a t t a c h e d ) ? w hich relates to the necessity in an emergency for executive committee action in order to correct a disorderly situation in the m a r k e t , it h a s b e e n suggested that the following language be added at the end of the paragraph: "and in such circumstances such intervention m a y be initiated by the F e deral R e s er ve Bank selected to execute transactions for the Sys t e m O p e n M a r k e t A c count w i t h the approval of the members of the executive comm it t e e with w h o m it is able to commun i c a t e . ” lTh i l e this suggested additional language is m e r e l y explanatory in character, it h a s not been included in the draft of the proposed General Instructions p e n d ing consideration of the matter, because the instructions and directives attac h e d are intended to conform as closely as possible and w i t h o u t change to the record of act i o n al r e a d y taken. Attachments Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority EXHIBIT A 11 , . P ROPOSED G E N E R A L INSTRUCTIONS F R O M F E D E R A L OPEN MARKET COMMITTEE TO EX E C U T I V E COMMITTEE (1) T h e executive committee of the F e d e r a l Open Market Com m i t t e e is hereby instructed, until otherwise instructed by the Fe d e r a l Open Market Committee, to conduct t r a nsactions and operations for the System Open Market Account in accordance w i t h the conditions and r estrictions set f o rth in the f o l l owing p a r agraphs and in accordance with such operating instructions and w i t h such special directives as m a y be p r e s c r i b e d b y the F e deral Ope n Market Committee f r o m time to time* (2) All such t r a n s a c t i o n s and operations f o r the Account (being hereinafter r e f e r r e d t o as "operations") shall be conducted in the light of current and prospective economic conditions and the general credit situation of the country and w i t h a v i e w to rela t i n g the supply of fu n d s in the market to the n e e d s of commerce and busi n e s s and to the p r a ctical administration of the Account* Operations, under the present policy of the Federal Op e n Market Committee, are not to be conducted to support any pattern of prices and yields in the Government securities market, and intervention in the G o vernment securities market is t o be solely to effectuate the objectives of mone t a r y and credit policy (including intervention t o correct disorderly markets). (3 ) Operations may comprise purchases, s a le s , exchanges of m a t u r i n g securities directly wit h the Treasury, and letting securities mature without replacement, and may include t r a n sactions for the S y s t e m Account w i t h a Fe d e r a l Reserve Bank for f o r e i g n account or for m i s c e l laneous T reasury trust or agency accounts. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £7 f r f f iG r t j. -2 - (U) Securities m a y be p u r c h a s e d directly f r o m the T r e a s u r y in accordance w i t h special directives issued f r o m time to time by the Federal Open Market C o m m i t t e e • (5) Operations may be conducted for the p u r p o s e of correcting a disorderly situation in the Government securities market* b u t in t e r vention in the market for this purpose may be initiated o n l y upon the affirmative vote of the executive committee after t h e existence of a situation seeming to require correction has come to its attention through notice f r o m the M a nager of t h e Account or otherwise; b u t it is recognized that in the event o f a n emergency* such as an international crisis* it m a y not be p o s s i b l e to canvass all members of the executive committee before initiating such intervention. (6 ) Under present conditions, operations should be confined to short-term securities (except in the correction of disorderly markets in accordance with the p r ovisions o f the p r e ceding p a r a g r a p h ) <, During a p e r i o d of Treasury financing (except the issuance o f Treasury bills) the executive committee should refrain f r o m p u r c h a s i n g or arranging for the purchase of (i) any maturing issues for w h i c h an exchange is b e ing offered* (ii) when issued securities, and (iii) any o utstanding issues o f coirparable matur i t y to those being of f e r e d for cash or exchange. 5 -2 9 -5 3 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E X H -...ST B P ROP O S E D SPECIFIC DIR E C T I V E F R O M F E D E R A L O P E N M A R K E T COMMITTEE TO EXECUTIVE CO M M I T T E E G e n e r a l . - (a) Die executive committee is d i r e c t e d u ntil otherwise directed b y the Fe d e r a l O p e n Market Committee to arrange for such transactions and operations for the S y s t e m O p e n Market Account as m a y be nec e s s a r y with a v i e w to exercising restraint u p o n i nflationary d e v e l o p m e n t s * ; (b) The aggregate amount of securities h e l d i n the S y s t e m O p e n M arket Account (including commitments for the purchase o r sale of securi ties for the Account) at the close o f this date shall not be increased o r dec r e a s e d by more than $ ___________ billion; (c) A l l such transactions and operations shall be c o n d ucted i n accordance with the general instructions issued by the F e deral Ope n M a r k e t Committee to the executive committee o n ___________, 195 • Special Certificates o f I n d e b t e d n e s s . - The executive committee is directed, until otherwise d i r e c t e d by the Fe d e r a l O p e n M a r k e t Committee, to arrange f o r the purchase d i r e c t l y f r o m the Treasury for the a c c ount o f the Federal Reserve Bank o f N e w York of such amounts o f special s h o r t - t e r m certificates of indebtedness bearing a rate of l / k of 1 p e r cent p e r a n n u m as m a y be nec e s s a r y f r o m time to time f o r the temporary ^ccciimnda'jaonof the Treasury, The Fe d e r a l Reserve Bank o f New York is a u t horized in its discretion, in cases where it seems desirable, to -->rThe words "with a v i e w to exercising r e s traint u p o n i n f l ationary developments" would, of course, be changed or made more specific to accord with the special objective of operations u n d e r conditions existing at the time. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority _E tA / O ^ O j d2± issu e p a rt ic ip a t io n s in such c e r t i f ic a t e s to one o r more Fed eral Reserve Banks, and such Reserve Banks are authorized to accept such p a r t ic ip a tio n s . Hie t o t a l amount o f such s p e c ia l c e r t i f ic a t e s h eld a t any one time by the Federal Reserve Banks s h a ll not exceed i n the aggregate $ 5 - 29-53 b illio n * Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority £ 7 #, EXHIBIT C PROPOSED SPECIFIC DIRECTIVE F R O M EXE C U T I V E COMMITTEE T O FEDERAL RESERVE BANK O F N E W Y O R K G e n e r a l > - (a) The Federal Reserve Bank of N e w York is d i r ec t e d until otherwise directed b y the executive committee to make such purchases, sales o r exchanges f o r the S y s t e m Open Market A c c ount as m a y b e n e c e s s a r y w i t h a v i e w to exercising restraint upon infla tionary d e v e l o p m e n t s * ; (b) The aggregate amount of securities h e l d in the Sys t e m Open Market Account (including commitments for the purchase or sale of securi ties for the Account) at the close of this date shall n o t be increased or decreased b y more than 4 billion; (c) A l l such purchases, sales a n d exchanges shall be c a rried out in accordance wit h the general instructions issued b y the Federal Open Market Committee to the executive committee on , and the special directive issued b y the Federal Op e n Market Committee on _______, 195_. Special Certificates o f In d e b t e d n e s s # - The Federal Reserve Bank o f N e w York is directed, until otherwise d i r e c t e d by the executive committee, to purchase directly f r o m the Treasury for the account of the Federal Reserve Bank o f N e w York such amounts o f special sh o r t - t e r m *The wo r d s "with a vie w to exercising restraint up o n inflationary developments" would, o f course, be c h a nged or made more specific to a c c o r d w i t h the special objective o f o p e r a t i o n s under conditions existing at the time. W h e r e circumstances require it« the language o f the directive might contain a specific instruction to purchase o r to sell securities up to a stated amount o r within certain ranges. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ^ .0 . ( O ^ O j c ertificates of indebtedness bearing a rate of 1 /k of 1 p e r cent p e r a n n u m as m a y be n e c e s s a r y f r o m time to time for the t e m p orary accommodation o f the Treasury* discretion, The Federal Reserve Bank o f N e w York is autho r i z e d in its in cases where i t seems desirable, to issue participations in such certificates to one o r more Federal R e s e r v e Banks, a n d such Reserve Banks are authorized to accept such participations. The total amo u n t of such special certificates h e l d at a n y one time b y the Federal Reserve Banks shall not e x c e e d in the aggregate <j> 5/ 29/53 billion. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority r.o.ioso] BE IN PILES SEC® MAY 1 1 1 9 5 3 L-1344____ :___________ __ -■ jy / r 3 ^ ■^j- - f 7</ / At the meeting of the executive committee of the Federal PROPOSAL BE OPEN MAKKET DIRECTIVE Open Market Committee on April 8, 1953, it was understood that the staff would prepare a revision of the general directive of the full Committee and of the executive committee for consideration at a sub sequent meeting. Accordingly, the staff has studied this matter and now wishes to suggest for the consideration of the executive committee, and for possible recommendation by the executive committee to the full Committee, the following proposal: (1) There would be general instructions issued once a year by the full Committee, which would include the varioud conditions and terns relating to operations of the System Account and cover a sub stantial portion of the matters heretofore included in the directive issued at each meeting. (2) A special directive stating a more specific and limited objective would be issued to the executive committee by the full Committee at each of its meetings? and a similar, and possibly more specific and limited, directive would be issued by the executive com mittee at each of its meetings to the Federal Reserve Bank of New York. For example under certain conditions the special directive would refer to restraint upon inflationary developments. Under other conditions, however, the objective might be to restrain deflationary developments, or the directive could be otherwise changed to suit the then existing situation. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 2- (3) A paragraph on purchase of special certificates from the Treasuzy would be included both in the full Committee special d i rective and the executive committee special directive. (4) Both the general instructions and the specific directive of the Federal Ope n M a r k e t Committee would, of course, have to be p u b lished as a part of the policy record of the Committee, but the d i rective of the executive committee to the N e w Y o r k Reserve Bank w o u l d not be published. (5) There are a num b e r of m a t ters that w o u l d not be com p r e h e n d e d by general instructions from the full Committee to the executive committee, and these w o u l d also come u p once a y e a r for review by the full Committee. These w o u l d include: (a) Conditions u nder which Fe d e r a l Reserve Banks are a u thorized to enter into repurchase agreements w i t h nonbarik dealers in U n i t e d States Gover n m e n t securities; (b) Conditions, including m i n i m u m baying rate, u n d e r which F e d e r a l Reserve Banks may purchase bankers' acceptances in a c cordance w i t h the regulations of the Federal O p e n M a r k e t C o m m i t t e e ; (c) Purchase and sale of cable transfers, bills of exchange and bankers' acceptances payable in foreign currencies; (d) A l l ocation of securities in the S y s t e m Open M a r k e t A c count; (e) Persons to w h o m w e e k l y report ox open m a r k e t operations prep a r e d by N e w York Reserve Bank is distributed; Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fT .O . j ^ O j - 3(f) Authority of the C h a i r m a n to a p p o i n t a Federal Reserve Bank as agent to operate the S y s t e m A c c ount temporarily in case the Federal Reserve Bank of N e w Y o r k is unable to function; (g) Technique of open mark e t operations and relationships w i t h Government securities dealers, including u s e of technique of reluctant buying; conduct of transactions with dealers as principals on a n e t basis; statement that there should be no refusal to buy bills a cquired by dealers on a cash basis; in forming n o n b a n k dealers in advance w h e n repurchase facilities w i l l be made available; restricting information solicited by the trading desk to eliminate identification; furnishing 011 a v o l u n tary basis of reports by dealers as to their positions; and statement as to asking dealers to report during the trading day in detail. In connection with p a r agraph (5) of the proposed General Instructions, attached, which relates to the nec e s s i t y in an emergency for executive committee a c t i o n in order to correct a d i sorderly situ a t i o n in the market, it has been suggested that the following language be added at the end of the paragraph: "and in such circumstances such intervention m a y be initiated by the Federal R e serve Bank selected to execute transactions for the S y s t e m Ope n M a r k e t Account wi t h the a p proval of the m e mbers of the executive committee with w h o m it is able to c o m m unicate.” W h i l e this suggested addit i o n a l language is m e r e l y explanatory in character, it h a s not been included in the draft of the Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority B . O . I n ^ n f -U - p roposed General Instructions pending consideration of the m a t t e r by the executive committee, because the instructions and directives attached are intended to c o nform as closely as possible and w i t h o u t change to the record of a c t i o n already taken. Attachments 5/8/53 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority PROPOSED GENERAL INSTRUCTIONS F R O M FEDERAL OPEN M'lHKuT COMMITTEE TO EXECUTIVE COMMITTEE (1) The executive committee of the Federal Open Market C o m mittee is h e r e b y instructed, until otherwise instructed b y the Federal Open Market Committee, to conduct transactions a n d operations for the S ystem Open Market Account in accordance wit h the conditions and restrictions set forth in the following p a r agraphs and in accordance with such operating instructions a n d w i t h such special directives as may be p r e s c r i b e d b y the Federal Open Mar k e t Committee f r o m time to time, (2) A l l such transactions and operations f o r the A c count (being hereinafter refe r r e d to as "operations") shall be conducted in t h e l i g h t of current a n d prospective economic conditions a n d the general credit situation of the country a n d wi t h a v i e w to relating the supply of funds in the market to the needs of commerce a n d business and to the practical adm i n i s t r a t i o n of the Account* Operations, u n d e r the p r esent p o l i c y of the Federal Open Market Committee, are not to be conducted to support a n y p a t t e r n of pric e s a n d yie l d s in the Government securities market, and intervention in the Government securities market is to be solely to effectuate the objectives of m o n e t a r y a n d credit p o l i c y (including intervention to correct disorderly markets)* (3) Operations may comprise purchases, sales, exchanges of maturing securities directly wit h the Treasury, and letting securities mature w i thout replacement, and may include transactions for the System Account with a Federal Reserve Bank for foreign account or f o r m i s c e l laneous T r e a s u r y trust or agency accounts* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority -2 - (U) Securities m a y be p u r c h a s e d directly f r o m the T r e a s u r y in accordance with special directives issued f r o m time to time b y the Federal Open Market Committee, (5) Operations may be con d u c t e d f o r the purpose of correcting a disorderly situation in the Government securities market, b u t inter v e ntion in the mar k e t for th i s purpose may be initiated only up o n the affirmative vote of the executive committee after the existence of a situation seeming to require c o r rection h a s come to its attention through notice f r o m the Manager of the A c c o u n t or otherwise, but it is recognized that in the event of an emergency, such as an international crisis, it m a y not be possible to canvass all members of the executive committee b efore initiating such intervention. (6 ) Under present conditions, operations should be confined to short-term securities (except in the correction o f disorderly markets in accordance w i t h the p r ovisions o f the p r e c e d i n g paragraph)* During a p e r i o d o f T reasury fin a n c i n g (except the issuance o f Treas u r y bills) the executive committee should refrain f r o m purch a s i n g or arranging for t h e purchase of (i) any m a t u r i n g issues for w h i c h an exchange is being offered, (ii) w h e n issued securities, a n d (iii) any o u t s t anding issues of comparable m a t u r i t y to those b e i n g offered for cash o r exchange* 5 -8 -5 3 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority PROPOSED S P E CIAL DIR E C T I V E F R O M FEDERAL O P E N M A R K E T COMMITTEE TO EX E C U T I V E COMMITTEE G e n e r a l . - (a) The executive committee is d irected until otherwise directed b y the Fe d e r a l Open Market Committee to arrange for such transactions a n d operations for the S y s t e m O p e n Mark e t Ac c o u n t as m a y be necessary w ith a v i e w to exercising r e s t raint u p o n i nflat i o n a r y developments#; (b) The aggregate amount of securities held i n the Syst e m Open M arket A c count (including commitments for the purchase or sale of securi ties for the Account) at the close of this date shall not be increased or decreased b y more than $ ____________ billion; (c) A l l such transactions and operations shall be conducted in accordance w i t h the general instructions issued b y the Fe d e r a l Open M a r k e t Committee to the e x e cutive committee o n June __ , 1953• S pecial Certificates of I n d e b t e d n e s s , - The executive committee is directed, u ntil otherwise d irected b y the Federal O p e n Mark e t Committee, to arrange for the purchase dire c t l y f r o m the Treasury f o r the account of the Fe d e r a l Reserve Ban k of N e w Y o r k of such amounts of special short-term certificates of indebtedness b e aring a rate of l / h of 1 per cent p e r a n n u m as m a y be nec e s s a r y f r o m time to time for the te m p o r a r y accommodation of the Treasury. The F e deral Reserve Ban k of N e w Yor k is authorized in its discretion, in cases where it seems desirable, to * The w ords ''with a v i e w to exercising r e s traint u p o n inflationary d e v e l o p m e n t s ” would, of course, be changed or made more specific to accord w i t h the special objective of operations u nder conditions existing at the time* Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority ^ ,0 . j n Q O I -2 - issue p a rtic ip a tio n s in such c e r t ific a t e s to one or more Federal Reserve Banks, and such Reserve Banks are authorized to accept such p a r t ic ip a tio n s . The to ta l amount of such s p e c ia l c e r t ific a t e s held at any one time by the Federal Reserve Banks s h a ll not exceed in the aggregate $ 5- 8-53 b illio n . Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority P ROP O S E D SPECIAL DIRECTIVE F R O M E XECUTIVE COMMITTEE' TO FE D E R A L RESERVE BANK O F N E W Y O R K G e n e r a l * - (a) The Federal Reserve Bank of New Yor k is d i rected until otherwise d irected by the executive committee to make such purchases, sales o r exchanges for the S y s t e m O p e n M a r k e t A c c o u n t as m a y be n e c e s s a r y with a v i e w to exercising restraint up o n i n f l a tionary d e v e l o p m e n ts#; (b) Ihe aggregate amount of securities h e l d in the S y s t e m O p e n Market A c c ount (including commitments for the purchase o r sale of securi ties for the Account) at the close of this date shall not be i n c reased o r decreased by more than $ billion; (c) A l l such purchases, sales and exchanges shall be carried out in accordance wi t h the general instructions issued by the Federal O p e n Mar k e t Committee to the executive committee o n June __ , 1953, and the special directive issued by the F e deral Op e n Mar k e t Committee o n June , 1953# Special Certificates of I n d e b t e d n e s s , - Ihe Federal Reserve Bank of New Yo r k is directed, until otherwise d irected by the executive committee, to purchase d i r e c t l y f r o m the Treasury for the account o f the Federal Reserve Bank of N e w Yor k such amounts of special short - t e r m #The words "with a v i e w to exercising restraint upo n i n f l ationary d e v e l o p m e n t s ’1 would, o f course, be changed o r made more specific to accord with the special objective of operations under conditions existing at the time, Wh e r e circumstances require it, the language o f the directive m i g h t contain a specific i n s t ruction to purchase or to sell securities up to a stated amount or w i t h i n certain ranges, Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED A u th o rity - 2- c e r t ific a t e s o f indebtedness bearing a rate o f l/k o f 1 per cent per annum as may be necessary from time to time fo r the temporary accommodation o f the Treasury, The Federal Reserve Bank o f New York i s authorized in i t s d is c re tio n , in cases where i t seems d e s ir a b le , to issu e p a rtic ip a tio n s in such c e r t i fic a t e s to one o r more F ed eral Reserve Banks, and such Reserve Banks are authorized to accept such p a rt ic ip a t io n s . Hie t o t a l amount o f such s p e c ia l c e r t i fic a t e s held a t any one time by the Federal Reserve Banks s h a ll not exceed in the aggregate $ 5/ 8/53 b illio n . “ m m &Fm m m Reproduced from the Unclassified I Declassified Holdings of the National Archives V DECLASSIFIED Authority E o .io ^ o j OF RESEARCH MEMORANDUM To M r . Carr Date M a y 8 , 1952 Subject Me a s u r i n g the "neutrality" of Federal Reserve open market operations From M. M c W h i n n e y Copies To members of the Informal Credit P o l i c y Group The first problems that arises in mea s u r i n g the "neutrality" of F e d eral open market operations is a definition of "neutrality". It m a y be defined as a p o l i c y ded i c a t e d to m aintaining the volume of b a n k reserves available for use on an a p p r o x i m a t e l y stable level, wit h lon g e r - t e r m changes in b a n k reserves resulting f r o m seasonal currency flows and similar factors compensated for b y S y s t e m purchases or sales of securities, and with s hort t e r m (day-to-day and week-to-week) changes adjusted b y increases or decreases in m e m b e r b a n k b o rrowings fro m the System, two questionso Such a definition, however, raises (l) w h e ther Reserve Sys t e m credit should be u s e d to increase the m o n e y supply in response to seasonal demands for commercial loans, and if so, h o w mu c h credit should be supplied; and (2) wh e t h e r Federal Reserve credit should be supplied through op e n market operations, or through an increase in member b an k loans and discounts. W he n deposits are declining as a result of seasonal loan repayments a nd no appreciable amount of borrowings are outstanding, it seems logical to absorb the reserves thus f reed b y means of open market operations, and in the following tables and discu s s i o n changes in required reserves have b e e n in cluded wit h the group of factors geared to op e n market operations. However, a theoretical basis also exists for shifting r equired reserves to the group of irregular factors, losses from w hich the b anks must meet b y borrowing* Table I illustrates this point. At first glance System sales of securities in the p e r i o d August 1, 1951 to M a r c h 5, 1952 (the reasons for the selection mm mm DECLASSIFIED Authority F .0 ./ 0 & .? ! .Table I Net Change in the Factors Affecting Member Bank Reserve Positions August 1, 1951 - March 5, 19$£ (In millions of dollars; (+) denotes increase, (-) denotes decrease in excess reserves) Change Factor 'T v i ^ ■3-1 Items showing seasonal or longer-term trends +■ - 1»IS - 7<f Gold and foreign account Currency circulation Required reserves +1,759 -f 9°* 4- ‘ f - 622 - 736 .Total of items 1,2, and 3 + 401 -h i t f 1-51 b Federal Reserve holdings of securities - 567 -i SI - T 1 1. 2. 3. Widely fluctuating or irregular items ‘ 4. 5. 6. Treasury transactions Float Other F. R. deposits, etc. 38 + 193 , x3 Total of items 4,5, a-nd 6 + 24 - T o J U j } i , ^ * ^ y—v 48 +■i . a T ? -T-fr© +- S * +- fo 1 1 - |<f3 -iff 24 + ? V 5 Excess reserves ' - ^ 3 ■+ b 7 142 Excess reserves less borrowings Federal Reserve discounts and advances + 9-6 9 S' + 3-4. °j + 1 9-7 t H i 4 1 3- -t f ]T- r - t SUl y- /T + oi •f* *7 3 & — 9 /*/■ *x -t | H ^ &K~ \ 1 1 •r /A 3 - + *?3 t /a? Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ^ t 6K j 0 ^ 0 j 2 of these dates are outlined later) appear to have more than offset h a n k reserve gains from long e r - t e r m factors. However, a closer examination of the figures indicates that sales of securities absorbed onl y hal f of the net r e serves gained through gold and foreign account operations and currency flows and that the net increase in r e quired reserves during this p e r i o d was larger than the amount of reserves absorbed b y Syst e m sales of securities. The selection of a starting point for measuring the success of the Reserve System's current n e u t r a l i t y p o l i c y is somewhat difficult. Ideally the starting point should be the coincidence of the b e g i nning or end of a cycle for as m a n y as possible of the factors affecting the volume of b a n k reserves0 It should also be a p e r i o d w h e n the m o n e y market was about in balance wit h no slack in the b a n k s ’reserve positions and at the same time no unusual pressure on them. The per i o d w h i c h comes closest to m e eting these criteria is p r o b a b l y the b e g i nning of last August, just prior to the end-of-year rise in currency circulation and commercial loans, and the start of renewed gold inflow. How ever, the situation has changed somewhat since last August and for analysis of current developments, it seems more appropriate to use a more recent date. The next best starting point, therefore, seems to be M a r c h 5° C u r r e n c y was returned to the' ba n k i n g system in volume in January and th e n the total amount outstanding leveled off in February, although there were still m inor week-towe e k fluctuations. Commercial loans of the w e e k l y reporting member banks also declined in J a n u a r y and l e veled off in F e b r u a r y p r ior to a tem p o r a r y rise over the M a r c h tax date. The Reserve System sold a large amount of securities in Ja n u a r y to compensate for those p u r c hased at the end of 1951 and the n l a r g e l y wi t h d r e w fro m the market. The required reserves of member banks decl i n e d almost steadily for the first two and a half months of 1952 . While most of Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £ ] j P . / 0 ^ 0 / 3 these factors wo u l d suggest a second best starting point as somewhere in the middle of February, the m o n e y market was under considerable pressure during most of that month, so M a r c h 5 w o u l d seem to be a bett e r choice than a F e b r u a r y date. For the p e r i o d M a r c h 5 through April 30> currency, gold a n d foreign account operations, a n d changes in required reserves resulted in a net gain to the banks of 115 m i l l i o n dollars (see Table II). Sales of securities fro m the System Account, on the other hand, a b sorbed 151 m i l l i o n dollars. The other more irregular market f a c t o rs(primarily float and Treasury) absorbed an additional 8l million*, To make up for these losses and increase their excess reserves slightly, the banks b o r r o w e d 293 mi l l i o n dollars from the Reserve Banks. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £7 Table I I Factors A ffe c tin g Member Bank Reserve P o s it io n s , March 5 - A p r il 3Q> 1952 ( i n m illio n s o f d o lla r s ; (+ ) denotes in crease, ( - ) denotes decrease in excess re se rv es) Factor Week ended M arch 12 Items showing seasonal or longerter m trends. 1, Gold and f o reign account Week Cumulative 2o Currency circulation Week Cumulative 3° R e q u i r e d reserves Week Cumulative Cumulative total, items 1, 2, 3* Federal Reserve securities Week Cumulative W i d e l y fluctuating or irregular items 4. Treasury transactions Week Cumulative 5- Float Week Cumulative 6. Other F. R. accounts, etc» We e k Cumulative Cumulative total, items, 4, 5, 6 * Excess reserves less b o r r owing Week Cumulative F e d e r a l Reserve discounts and advances Week Cumulative Excess Reserves Week Cumulative + + - 35 12 16 + 31 + 16 March 19 + + 20 55 March 26 + + April 9 April 20 36 + + 5 41 + 14 27 + + April 2 1 56 + 16 April 23 40 67 April 30 + + 22 89 + 91 + 103 + 32 + 135 - 116 + 19 - 81 62 + + 90 28 + 103 + 131 - 127 + 4 445 - 461 - 303 + 127 - 334 - 143 + 296 - 38 + IT + + + 88 50 29 + 80 30 25 + 113 + 83 + 281 - 6l + 22 + 115 + 295 + 311 - 297 + 14 - 14 - 20 20 - 27 47 - 95 * 142 9 - 151 - 0 + 31 + 647 + 678 + 4 + 682 - 282 + 400 - 78 + 322 - 153 + 169 - 355 - 186 + 431 + 245 - 95 + 374 + 279 - 550 - 271 + 51 - 220 - 35 - 255 + 289 + 34 - 249 - 215 - 178 - 393 + 22 + + - 42 62 84 +1,041 + 3 - 43 + 87 + 44 + 498.. + 224 + 10 + 54 + 121 - ■ 74 + 7 + - 20 - 13 + + 183 . - 414. - 4 +1,043 +1,047 - 679 + 368 - 128 + 240 - 110 + 130 + 32 + 162 - 438 - 276 + 158 - 118 - 26 - 231 - 257 + 44 - 213 40 - 253 + 38 - 215 + 454 + 239 + 208 + 447 - 154 + 293 - 22 + 812 + 790 - 635 + 155 - 168 - 13 - 72 - 85 + 486 + 401 - 230 + 171 + 4 + 175 "b 80 67 81 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority jQ ^ O j July 13* 1 9 $ i Saar Hr* iloraas I certainly appraciat*\aBSir liic# lattar «f July 10 giving »a th# eonaants of th® individual of til# National Aasoetatiof* of Mutual SaetlftgB Baoka Coamlttao on Owrertmmt **cartttaa «a<£ the Public J^afet* Tfeaaa ar® very helpful, aud I. will be in. touch with you again as m r plan* cryataliaa* With a l l good wtmm9 Slnctraly ym im s J *»■«'?, Sa ... " ^ Jr." Heu KeC* Martin* Jr. Hr. J* &#«d M o m Praal4#Rt Hi# Bo®ton Fit# Cants Saving* Back Toaton, Maaa* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority F l f i , T h e B o s t o n Five C e n t s S a v i n g s BXjRfc’B w ? I N C O R P O R A T E D C A B L E A DD RE S S : A P R I L 1854 BO S TO N FIV E • BOSTON 3 0 SCHOOL STREET j. r e e d B O S T O N , MA SSA C HUS ETT S m o r s s PRESIDENT July 10, 1951 Mr. Wm. McC. Martin, J r . , C h a i r m a n Board of Governors of The Federal Reserve System W a s h i n g t o n , D . C. Dear Mr. Martin: \jour l e t t e r t o m e of J u n e 14 h a s b e e n p r e sented to the i n d i v i d u a l me m b e r s of the N a t i o n a l Association of Mutual Savings Banks Committee on Gover n m e n t Securities and the Public Debt. In view of the m a n y complex and technical considerations n e c e s s a r y f o r a f i n a l c o n c l u s i o n , w e w o u l d l i k e to l imit a n y o b s e r v a t i o n s to the rat h e r d i r e c t effect o n savings banks of any change in p r o c e d u r e in the G o v e r n ment Securities market. If it w e r e p o s s i b l e by a ny m e t h o d to b r o a d e n that market, s u c h w o u l d o b v i o u s l y be a m o s t d e s i r a b l e r e s u l t . It w o u l d be heartily s u pported by the S a v ings B a n k system. We recognize that the pres e n t arrangement of a co m p a r a t i v e l y f e w qualified G o v e r n m e n t Securities dealers m a y appear in some instances as possibly u n d e m o c r a t i c a n d r e s t r i c t i v e a n d so w o r t h y o f review. H o w e v e r , as a p r a c t i c a l m a t t e r t here a p p e a r s to be a real n e e d f o r a g r o u p o f sponsors a n d s p e c i a l i s t s w i l l i n g a n d a b l e to m a k e a m a r k e t o u t o f t h e i r o w n inventory position w i t h o u t waiting in every case for matching orders. The interests of such a specialist gr o u p w i l l be b e s t s e r v e d if t h e y c a n be s u c c e s s f u l in c r e a t i n g a b r o a d i n t e r e s t in g o v e r n m e n t s e c u r ities. A l s o it a p p e a l s to us as a d v a n t a g e o u s f o r the G o v e r n m e n t to be one step r e m o v e d fro m the n o r m a l trading r o u t i n e a n d t o a c t o n l y a s a ”h i d d e n h a n d ” a n d c o n f i d e n t i a l l y w i t h its d e a l e r group w h e n necessary. We recognize too that swings in dealer inventory position may accentuate rather than stabilize market trends and that present money market f a c t o r s a r e w o r k i n g a g a i n s t the a b i l i t y o f d e a l e r s to f?c a r r y f’ a n a d e q u a t e i n v e n t o r y p o s i t i o n . Still, for Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority ^ , Q t l 0 9 0 f T H t B o s t o n F iv e C e n t s Sa v in g s Ba n k Mr. Wm. McC. Martin, Page 2 J u l y 10, 1 9 5 1 Jr. Chairman the time being, w e w o u l d be f i r s t i n c l i n e d to c o n s i d e r w a y s for strengthening and improving the d e aler o r g a n i z a t i o n s r a t h e r t h a n to d i s c u s s t h e i r w e a k e n i n g or possible elimination. A n a d d i t i o n a l p o i n t m i g h t w e l l be as to the enlistment of brokerage support, probably on a com p ensation basis, for the actual retailing of govern m e n t securities to i ndividual buyers. T h e r e w o u l d be so m a n y i n t e r e s t s h e r e i n v o l v e d t h a t w e w o u l d h e s i t a t e to initiate a s t udy w i t h o u t f u r t h e r w o r d that such w o u l d be o f r e a l i n t e r e s t to y o u . Ve r y possibly our imagination has not been sharp e n o u g h to c o n s i d e r the a n g l e s y o u have in mind, so t h a t a b o v e s t a t e m e n t p e r h a p s s h o u l d be m a r k e d "tentative" pending receipt of the further suggestions you mention. We agree that a discussion of this kind m a y w ell be p r o d u c t i v e of improvements of b r o a d benefit. Certainly without provocative discussion and considera t i o n progress is o f t e n too long delayed. As w i l l be the regular practice, I have asked the committee members to contribute o n l y their o w n t h i n k i n g a n d so n o t t o s t i r u p t h i s o r a n y f u t u r e questions into public view. Sincerely, JRM:rcc Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority F . o . / o ^ o j June llj, l?5I D#ar Mr. Morssi Thank you for th# Com*itt## oxi Gov#rni»ant Securities and the Public 9#tit of ilia national Association Mutual Savings Banks st tha disposal of th# Federal Peaerre. I ap* preciate this vary much and can assure you w# will cooperate completely* I an gradually organising a study of tha ader*uacy and scop# of th# Ck>v#rn»©nt Securities Harket. W# har# received a lot of eritlcia* of th# operation# of th# Op#n Market Coamitte# and of th# syst#a of qualified dealers• Ther# has beem son# discussion that perhaps th# market should b# aoved from th# Federal Reserve Bank of H#w Tork to th# Stock Exchange or sost# other neutral point and our operations be conducted by Government brok#r or brok#r* along th# linos of th# British ayston* S#v#ral Congress men haT# been urging that th# »ark#t b# transf#rr#d to Washington, which s#ens inqpraetioai to us* and aany similar suggestions ar# floating around. It s##as to is# that this is a propitious time to rethink and re-examine this whole problem. It would b# v#ry helpful to har# your group participat# with us in such a study and in th# oour## of th# next f«w vseks* I will forward a f#tr specific suggestions for your consideration. In th# meantime, I m passing on what our preliminary thinking is so that you oan discuss it with any member# of your committ*# and let n# have any ld#as which occur to you* I will keep in touch with you and appreciate vary much your eeoptration. With all good wish##* Sincerely yours, Wfc. HOC. Martin, Jr« Mr* J* Used Hors# President Th# Boston f i n G#nts Savings Bank Boston, Hass, WMM: ctc 4 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority F . Q . I O G O ) T h e B o s t o n Five C e n t s Sa v in * IN C O R P O R A T E D A P R I L 1 8 0 4 CABLE ADDRESS : BOSTONFIVE • BOSTON s ix S t S N ^ JUN18 195? 6 ^ 3 0 SCH O OL STREET BO STON, MASSACHUSETTS U.REED M O R 8 S PRESIDENT June 13, 1951 Carded ar. William McC. Martin, Chairman Federal Reserve Board Washington, D.C. Dear Hr, Martin; For the coming year Mr, Henry Bruere of the Bowery Savings Bank, New York, has expressed the wish that he not be re-appointed Chairman of t h^National Association Mutual Savings tfanks Committee on Govern ment securities and the Public Debt, in his stead I have agreed to act as Chairman of that committtee. Enclosed is a list of the membership. The real purpose of this letter is to place this committee at your disposal for any future activity that might serve your purpose. It occurs to me that you might at sometime like to have us gather information or estimates of the savings banks positions as to future loan commitments for instance, or that you might request tne committees position on some future develop ment in order that your file record might be complete. We naturally hesitate to grind out a series of opinions which might be of no interest to you, but we v*ould be glad indeed to serve a useful purpose. In fact, I rather feel that the National Association of iiutual Savings Banks would appreciate a feeling of participation in the national effort and might as a result be more enthusiastically cooperative with future moves. I can guarantee that, if you wish, any inquiry of me can be held in the most strict of con fidence and I believe the same to be true of the other committee members. It is possible that I may see you in the course of the next few months with Bob Fleming1s ktih. committe and i.iay have an opportunity to speak of this matter at that time, in which event you will have at least tr much aavance notice of our thinking. C. Chupka Very truly yours, JBMsnsc Reproduced from the Unclassified I Declassified Holdings ofthe NationalArchives DECLASSIFIED^ Authority E~.0JaGaf **jvw rtLiS'siidlhjfaj JUN1ft 1951 COMiyiITTtti£ ON GOV^itflMaWT bJCiOUinlTC&b & TRd PUjdLiIC UKdT May 1951 - 1952 J. heed Morss, president, The Boston Five Cents Savings Bank, Massachusetts CH k IKM a N Alfred J* Casazza, vice president, Savings Banks Trust Company, New York John H. Duerk, assistant vice president, The Howard Savings Institution, Newark, New Jersey C. Lane Goss, president, Worcester County Institution & r Savings, Massachusetts Richard k. Holton, vice president, isiast New York Savings B&me, crookiyn, New York Charles J, Lyon, president, Society for Savings, Hartford, Connecticut Clifford F. Martin, president, City Savings Ban* of Pittsfield> Mass, Alfred C. Middlebrook, vice president, East River Savings Bank, New York City John Ohlenbusch, vice president, The Bowery Savings Jbank, New YorK City A. Edward Scherr, Jr., vice president-treasurer, The Dime Savings Bank of Brooklyn, New York Levi P. Smith, presiaent, Burlington Savings Bank, Vermont Fran* W. Wrightson, presiaent, Provident Savings Ban* of Baltimore, Md. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fO G O f BEC’D i n f il e s s e c t io n ' ^ VA FEDERAL RESERVE BANK O F PHILADELPHIA ( Z o n e I) A pril 18, 1951 Mr. R a l p h A. Young, D i rector Divi s i o n of R e s e a r c h and Statistics B o a r d of Governors of the Fe d e r a l R e s erve Syst e m W a s h i n g t o n 25, D. C. D e a r Ralphs A t t a c h e d is the t a b u l a r m a t e r i a l that I m e n t i o n e d to y o u ov e r the phone. I hope it m a y be of some h e l p in giving a chron o l o g y of F e d eral R e s erve actions. Sincerely, KRB/b Enc. K a r l R. B o p p V i c e President AUG 2 1954 P R I N C I P A L Date Open Market (in aillions of dollars) 1917 New York Discount Bate + 1918 1-204 6-30 ♦ + 5-21*13-21 - 1-224 5-22 Eougbt 6-22 6-22s 7-23 |400 - Sold $525 + 12-23: 9-24 Bought $510 - 11-24* 3-25 Sold $260 + 1-26 4-26 ♦ Fought $65 - 8-26: 9-26 Sold $80 + 5-27:11-27 Bought $230 — 4 P O L I C Y OPERATI ONS Prevailing Industrial and Credit Conditions to 4$£ Large volume of discounts ($100 million in 1917 to $2,8 'billion in 1920). 4j to 4j£ Potential inflation; unparalleled expansion of credit; prices double prewar 4§ to 7 i* level; reserve ratio near minimum; commodity speculation heavy; "bank credit based upon inflat<^._p rice g; prices., o f .stocks and bonds declining. Deflation in commodity prices and agricultural values; business activity at 7 to 4j* low level; discounts down to $1 billion; prices of bonds advancing sharply; ...stocks., fairly st esdy................. Business recovering from low in early 1921; agriculture still depressed and prices low; prices of other commodities advancing; prices of stocks and Unchanged bonds advancing sharply; discounts declining. Business recovering but somewhat irregularly in first half; discounts down 4| to 4 % to $400 million; prices of bonds high. Excesses developing in business recovery; prices rising; labor shortages ap 4 to 4^ pearing; too rapid expansion in seme industries. (First transaction in joint investment account.) Business and prices reced ed; European countries considering return to gold standard - hoped that 4*r to 3 /6 easy money here would facilitate outflow of gold; stocks and bonds advanc ing. Business at high level; discounts rising; acceptances high; prices rising; 3 to 3jtf stocks and bonds advancing. Business had advanced sharply in late 1925; bills discounted up sharply 3| to 4 % throughout 1925; acceptances up in later months. Food prices up in 1925; stocks and bonds advancing. Business leveling off, following small decline; discounts declining; prices 4 to 3j^fe fairly steady at relatively high level; temporary break in stocks; bonds advancing. Productive activity advancing to peak; prices fairly steady; stocks and 3^ to 4 $ bonds fairly steady. Production down substantially until November; commodity prices weak in early part of year - farm and food prices up sharply in second half; dis 4 to 3|$ counts low all year; stocks advancing sharply; bonds advancing; European finances strained. P R I N C I P A L Date 1.28s 4-29 Ofen Market (ir. millions of dollars) Sold New York Discount Bate $405 + 8-29 + 10-29*12-30 Bought $560 - 5-31: 8-31 Bought $130 9-31:12-31 + 2-32* 8-32 Bought $1,110 - 2-33: 3-33 + 4-33:11-33 Bought $570 - 11-33* 3-37 4-37 5-39* 8-39 9-39 11-39* 1-40 - Bought $96 Bought $38 - $141 bills redeemed* Bought $470 bonds & notes Sold $84 bonds & notes OPERATI ONS Prevailing Industrial and Credit Conditions Industrial production expanding rapidly; prices relatively stable except 3| to 5 % faro products and foods; bills discounted increased fmr. $500 million to $1 billion; prices of stocks increasing sharply; prices of bends declining. 5 to 6 % Stock prices advancing sharply; direct action applied to banks. Outside lenders withdraw funds; production, commodity and stock prices drop 6 to Z % sharply; bonds sustained until last few months; discounts declined sharply to $250 million. Production declining sharply; stocks, speculative bonds, and connodities de 2 to 1^fo clining. Gold flowing out as England abandons gold standard; European financial sys tems strained; bills discounted increase from $^ billion to over billion; 1^ to z]gfc stock, bond, and commodity prices declining sharply; drop in business tem porarily halted. Production and stock and bond prices reach depression low; commodities de 3j to 2 clining; discounts declining. Acceptances and bills discounted increase sharply; stock and bond prices re 2^ to 3^6 ceding after sharp spurt in third quarter of 1932; commodity prices reach depression low; production low but on verge of sharp advance. Production and stock, speculative bond, and commodity prices advance sharply; 3§ to 2 % wage rates increase sharply; discounts and acceptances decline. Production recovers irregularly to peak in November 1936; prices of stocks, bonds, and commodities advance to peak; wage rates reach peak; inventory 2 to 1 ^ speculation heavy in 1936 and early 1937; reserve requirements raised 50$ in August 1936 and farther increases announced; large volume of gold coming into country. Business and prices turn down into sharpest recession in history; shortage of reserves at individual banks feared; market for government bonds breaks. to 1 % Business and prices in a period of sharp decline. Allowed bills to run off because of premium prices; production increasing; prices of connodities weak; bonds near record high. Outbreak of war; government bond market declines sharply. Bond prices recovering; commodity prices declining from earlier war peaks; stock prices stable; production advancing to near end of year, then declining. * $477 in U l l s redeemed between June and December. P O L I C Y Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority BOARD OF GOVERNORS OF Date THE F B *® R A L R ESER V E S YS TE M Febr u a r y 15, 1951 See below To Governor S zymczak From MESSAGE: To: F ' : — n t v f t EC SECTION OuUrf!f9tn--«etJ^ ^ Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Ejacles Y ^51 / EiVans Vardamapv^ Horto^y^ P o w e ll'' / Riefler / .< / Thurstoi^yr Carpenter/^ For y o u r information. A fter circulation, please return Message delivered by_ F .R . R ev. 468 1/47 ■ Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority r» ■"> - L General File® PiEj&rnli... ■< A u t h o r l l ^ o f Secretary of Trea s u r y to issue obligations that do not have a fixed maturity. Mr, T i n sley the first section of the Second L i berty Bond Act (Title 31, §752) , as amended, provide#! "The S e c retary of the T r e a s u r y • •• is h e r e b y authorised to b o r r o w ... and to issue there f o r bonds of the U n i t e d States, "The bondg ••, shall be ... subject to such terms and con d i tions of issue, conversion, redemption, m a t u r i t i e s . payment, and rate or i?ates of interest * • * as the Secretary of the Trea s u r y f r o ® time to time st or before the issue t h e reof m a y prescribe. T h e principal and interest th e r e o f shall be payable in Uni t e d States gold coin .77* (& 6 3 later prohibited payment in o l d ) . [underscoring supplied] T he q uestion h a 5 bee n raised whether the Secretary of the T r e a s u r y has authority u n d e r this provision to issue obligations that do not have a fixed maturity# Any such obligations w o u l d be similar t o the English " c o n s o l s " f i.e., t h e principal is n e v e r reimbursed, the interest only being paid, and the only way the Government can redeem t h e m is by purchase in the open market* O ne of the first arguments that could be made is that such an obligation would not be a "bond* as used in the statute. However, there seems to be no justification for saying that a •bond" mus t have a fixed m a t u r i t y date. I n fact, §751 of T i t l e 31 provided for "bonds* whioh "shall he payable at the pleasure of the Unit e d States a fter t hir t y years fro m the date of t h e i r issue," A n d a similar p r o vision was made b y Act of J u l y 12, 1882, (22 S t a t , 165) providing for the exchange of t h e n o u t s t a n d i n g bonds. T h e statute provides for bonds subject to such t erms and con ditions of m a turities as the Secretary may prescribe# It m a y be argued that this me a n s the Secretary must prescribe a m a t u r i t y date. But were not the "terms and condition" m eant to be flexible! Could not tha Secretary prescribe maturities of 10 years? O r 100 years? O r 1000? O r "at the pleasure o f the U n i t e d States"? T h e statute provides that "the principal a n d Interest thereof shall be payable in *.♦" It may be argued that this means that payment o f principal is mandatory, and, therefore, there most be a matu r i t y date. However, it also m a y be argued that this m e r e l y describes the mode or m a n n e r of payment (i.e., gold}* Moreover, the statute provides for such terms and conditions of payment as the Secretary m a y prescribe. F I L E C Q P Y #on n J> Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E f i . f r t G O j ■ 1“ " i 1 ‘mrjijgirmnwirin'mnrii General Flies Section 75?a provides that if convertible bonds are issued u n d e r the aut h o r i t y of §752, t h e n the bonds Issued u p o n such conver sion "shall have t h e same dates of m atu r i t y ... as the bonds con verted** This w o u l d geem to imply that it was contemplated that bonds issued u n d e r §752 would have a fixed maturity* S e c t i o n 753(a) provides that Uni t e d States notes issued u n d e r the section shall be payable not less than one nor more than five y e a r s f r o m the date of i s s u e j §754 (a) provides that certificates of indebted ness and t r e a s u r y bills issued u n d e r the section "shall be payable at such time not exceeding one y e a r fro m the date of issue • *•'«$ a n d §757c provides th a t savings bonds and T reasury savings certificates i ssu e d u nder the section * shall mature, in the case of bonds, not more t h a n twen t y years, and in the case of certificates, not more th a n t e n years, fr o m the date as of w hich issued.® T h ese three sections provide for time limitations on obliga ti one issued u n d e r them, but t here is no limitation in §752 (authorising the issue of b o n d s ) • The ques t i o n wh e t h e r Congress should prescribe m a t u r i t y dates for b onds issued u n d e r authority of §752, or prescribe a limit beyond w h i c h the Secretary could not fix maturities, was discussed on th© f l o o r of Congress, Amendments were proposed and defeated appar e n t l y b e cause Congress thought the Secretary should-have discretion in pre scribing the terms and conditions of the bonds to be issued. However, f r o m the debates, one gains the impression that it was contemplated that the Secretary w ould fix the m a t u r i t y date at t h i r t y years or less. The debates m a y be f ound at 55 Cong# Pec* 6576, 6639- 40 , 6645# 716^-79* So attempt has bee n ma d e to come to any conclusion on this question* The purpose o f this memo is merely to record arguments that could be used if the question is considered# ,‘' fWHT/«v* 4/18/50 FILE LJ » Novmsber 2k Nosers. Thomas and Young Mr. rhen u n / following Is an excerpt from tbs meeting on Bovomber 21, 19^0# of tha Board with tho Federal vdvisory Council: “ 4. » discussion of tho Treasury refundings for December and January. "The Board Is familiar with the views of the Council, as expressed In previous discussions, re garding the necessity of shifting a portion of the debt to Intermediate and longer maturities. The Council believes that the present is a desirable tine to bring out an intermediate maturity in connection with the refundings of December and January* If the members of the Board wish to express their views, the Council will be pleased to have them. ’ President Brown stated that the Council realised the difficulty of discussing matters affecting the Government security market which the System had under discussion with the Treasury, that the Board was familiar with the recommendations made to the Treasury by the American Bankers issoclatlon Committee on Government Borrowing, and that the Council did not know whether the Board would wish to express any opinion on this matter or whether It would favor the suggestion that the Treasury offer an intermediate issue in the December and January refunding. The objection to such an issue, he said, was that corporations hold a substantial percentage of the maturing issues and might not want to hold an intermediate security, but It appeared to the Council that that situation could be met by the Federal open Market Committee following a liberal policy of making the October and November 19>1 notes available at around 1-1/2 per cent. MThere was a general discussion of the market effect of an intermediate issue and Chairman McCabe asked the Council's view on the action of the Open Market Comlttee in allowing the short-term rate to move to a somewhat higher point. Members of the Council Indicated that the increase was desirable because it put the banks in a position where if the Board should raise reserve requirements the banks could obtain additional reserves through the sale of short-term securities only at a penalty rate which had had a restrictive Influence on credl a • I - 2- "that the apprehension of the Council had been that the increase in the short-term rate above l-l/2 per cent would result in sales of long-tent securities, particularly restricted Issues, and that he did not see how the rate could go above that level at this tias without serious unsettling effects on the long term Market. "In response to an Inquiry by Chairman McCabe as to whether an Interaedlate refunding Issue vould tend to put pressure on the short-term rate and to freeze that rate. President Brown said that he did not want to say that the short-terra rates should never be permitted to move higher, that It might be desirable to examine that question at a later date, that he disagreed with the policy of the Treasury and tne Board that the long term 2-1/2 per cent rate should be supported, and that he felt that the price on longtorn securities should be permitted to go below par. "In a discuselon of these points, Mr. Eccles stated that the purpose of ^ s t e m ’ s actions was to restrict credit, that he did not feel that the actions taken up to this point had accomplished that objective, and that th© Issuance by the Treasury of an intermediate security in connection with the December and January refunding would only tend to reduce flexibility in the market because a further increase of the short term rate would cause the new Issue to go below per. In these circumstances, he thought the current re funding should take the fora of a one-year certificate axid that the short-term rate should be permitted to go Just as high cm possible without putting continuing pressure on the long-terra 2 - 1 /2 per cent rate. "At the conclusion of the discussion, Chairman McCabe stated that yesterday he had conferred with the Treasury with respect to the December and January refunding and that he did not feel free to tell the Council what the rocowinendtttions of the Federal Opon Market Cooalttee had been. However, he said, in the discussion th&t had taken place at this meeting with the Council, he could n o t detect any area o f disagreement. ’ President Brown stated that the next meeting of the Federal advisory Council would be on February 18-20, 10>1, a n d that, if it were found to be desirable to have a meeting of the executive committee of the Council with the Board in the interim, the date for such a meeting could be fixed later.” Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority CONFIDENTIAL OPEN MARKET OPERATIONS TECHNICAL ASPECTS AND MONEY MARKET EFFECTS Your d iscu ssion lead er has in dicated that you are in te re ste d in the mechanics and techniques as w e ll as the money market aspects o f F ederal Reserve Bank open market operation s. As you know, the term "open market operation " has re fere n ce to the purchases, s a le s and redemptions o f various c r e d it in s t r u ments by the Federal Reserve Banks under the sta tu to ry au th o rity o f the Fed eral Reserve Act and in accordance w ith re g u la tio n s and d ire c tio n s o f the Fed eral Open Market Committee. Since open market operations are fo r a l l p r a c t ic a l pur poses cu rre n tly concerned almost w holly w ith United States Government s e c u r it ie s , i t has seemed b e st to s t a r t these remarks w ith a short review o f the more s a l i ent fa c ts w ith resp ect to Treasury debt — i t s s iz e , growth and p r in c ip a l fe a tu re s . I s h a ll fo llo w th is w ith comments on the stru ctu re and o p e ratio n al mechanics o f the market in which United States Government s e c u rit ie s are traded. This w i l l g iv e a convenient point o f departure fo r a more d e ta ile d look a t the operations themselves and a c le a r e r p ic tu re o f the techniques and problems involved in t h e ir execution. I. NATURE OF THE PUBLIC DEBT Growth and Importance United States Government debt i s one o f the most s ig n ific a n t fe a tu re s o f American economic l i f e . In the p ast decade the t o t a l United States in t e r e s t - b earin g debt has increased s i x - f o l d . At the end o f 1929 i t amounted to $l8 b i l l i o n or 9 per cent o f outstanding p riv a te d e b t*; by the clo se o f $50 b i l l i o n or 32 per cent o f p riv a te d e b t*. At $256 b i l l i o n # , 1939 i t was the F ederal debt now exceeds the t o t a l p riv a te debt* o f the nation; i t i s about equal to the gross n atio n al product and s e v e ra l times the value o f a l l stocks on the New York * # Includin g s ta te and m unicipal o b lig a t io n s . Includin g matured and n o n -in te re st b earin g debt. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IQ ^ O f 2 Stock Exchange. C le a rly , as a r e s u lt o f i t s phenomenal growth over the past decade, i t has assumed a w holly new place in our n atio n al economy. I t has become the p r in c ip a l r e a d ily s h ift a b le investment medium fo r most fin a n c ia l in s t it u tio n s and in d iv id u a ls and as such exercises a dominant fo rc e in the determination o f monetary and c re d it developments. Fo r m The public debt is the most fr e q u e n t l y cited aspect of the postwar m o n e t a r y problem, because of the size, b r o a d ownership and its acceptance as a liquid or re a d i l y shiftable asset. Of m a j o r importance also b u t less f r e qu e n t l y emphasized as an important p r o b l e m in d etermining debt manag e m e n t and credit policies, is the f o r m a n d structure of the debt. The composition of the debt as of F e b r u a r y 28, 1950 is g i v e n in the a ttached Table No. 1. M a r ketable T r e a s u r y obligations amount to some $154 b i l l i o n or 6 1 per cent of total i n t erest-bearing debt, w i t h Treas u r y bonds ($103 billion) predominating. These are c omposed of b a n k - e ligible taxable and p a r t i a l l y tax-exempt bonds a n d ineligible r e s t r i c t e d bonds, having maturities r u n n i n g fr o m several months to seventeen years and nine months (call date for the 2 l/2's of December 1967-72). Certificates of Indebtedness (maturities of twelve months or less) r a n k second in size at $24 billion, f ollowed b y Treas u r y notes (maturities of one-to five-years) at $15 billion, and T r e a s u r y bills (maturities of ninety-one days or less) at $12 billion. At present rates, the return on m a r k e t a b l e T r e a s u r y obligations ranges fro m 1.15 per cent on ninety-one day T r e a s u r y bills a n d 1.17 per cent on n i n e - m o n t h certificates* to 2.35 per cent on the longest te r m T r e a s u r y bonds (a differential of l.l 8 per cent for seventeen years). * Longest m a t u r i t y outstanding. Rates on these issues rise as the m a t u r i t y Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority jO ^ O j 3 increases thus forming a w e l l - d e f i n e d a n d fairly smooth curve of yields, the level a n d slope of w h i c h is subject to constant change, depending on the p a r ticular influences at w o r k at a n y given time. A l t h o u g h our interest lies m a i n l y in m a r k e t a b l e debt, there should be cited here the Treasury's exposure, as a borrower, to the u n c ertain claims of holders of some $65 b i l l i o n of Savings Bonds and Savings Notes because these obligations are an element of great p o t e ntial significance w i t h a direct b e a r ing on the m a rketable segment of the debt. T h e y are held chiefly b y the n o n p rofes s i o n a l investing public and while they are not negotiable, they are redeemable and, to that extent, constitute a demand o b ligation of the Treasury. The f ixed terms of these issues, w i t h their penalties for premature redemption, are closely r e lated to the going mar k e t rate so that the stability of their o wnership depends, among other things, up o n the p r e v a i l i n g rate structure of the marke t a b l e debt. F i x e d r edem p t i o n provisions are scaled so that r e d e m p tion before m a t u r i t y is p e n a l i z e d b y a smaller interest r e t u r n while a rewa r d for n o n - redemption increases w i t h the p a s sage of time. In this w a y ownership tends to be encouraged a n d a wider area is created for fluctuations in mark e t rates bef o r e the redem p t i o n of non-market securities becomes profitable. Leaving aside the element of p s y c h o l o g y a n d v i ewing the matt e r p u r e l y in terms o f the arithmetic of the redem p t i o n schedule, it w o u l d p r o b a b l y take an a p p r e ciable increase in the going m a r k e t rate on comparable m a t urities to discourage sales a n d invite shifts out of non-market into m a r k e t debt or into cash. Non-market debt has increased m o d e s t l y in the postwar years due to the Treasury's efforts to p r omote ownership in those issues. A n y r e v e r s a l of this trend w o u l d m e a n that the Trea s u r y w o u l d have to draw on its cash balances to m e e t redemptions and, under p r esent b u d g e t a r y conditions, m a r k e t b o r r o w i n g Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority /O^Oj 4 for cash through the banking system would be necessary to meet the public’ s cash claims. It is evident then that while these bonds and notes require no direct market support, continuity of ownership is related in part to the action of intermediate and long maturities of marketable Treasury bonds. They can thus be a limiting influence on basic rate changes on the marketable debt and a factor to be reckoned with by those with a direct or indirect administrative responsibility for market conditions in United States Government securities. Maturity Distribution and Ownership A classification of Treasury marketable debt, according to maturity or first-call date, shown in attached Table No. 2 provides some idea of the term structure of the debt and points up the concentration of maturities in the next five years. In the next year alone the Treasury must refund eight separate issues totaling $32 billion (exclusive of weekly roll-overs of Treasury bills, outstanding in the amount of $12.3 billion). Investment needs of investor groups vary widely and their combined influence on supply and demand shapes the general character of the market and creates a set of sub-markets within the whole. Although investors have come to regard United States Government securities generally as little dif ferent from cash, there still exists a well-defined set of divergent maturity preferences which influence the ownership and trading activity in different areas of the market and conditions the whole debt management problem for which the Treasury and the System have a joint responsibility. The general maturity and rate structure of the debt at any given time have a direct bearing on ownership distribution and hence on volume and the character of market activity. To the extent that rates and types of issues are not kept in conformity with the interests and requirements of investors, ele ments of instability in ownership are created. Of course, the positions of Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ^ A 5 various investor groups are constantly changing and portfolio adjustments are a normal daily occurrence. But shifts in ownership, if carried too far in too short a space of time, may lead to disorderly markets and may thus force the System to undertake open market operations for market stabilization purposes with a limiting influence on their effectiveness as a credit control weapon. The major investor groups which, in the broad sense, constitute the market for United States Government securities, and their general maturity preferences are indicated in the attached Table Wo. 3* These few facts provide a rough idea of the character of the Treasury debt and suggest some of the ramifications of the debt management problem. The existence of a fairly broad and homogeneous body of Government debt pro vides an effective medium through which open market operations can be used in the expression of central banking policy. At the same time, the form of the debt is such that the Treasury, faces a formidable and complicated problem of refunding successfully maturing issues, both marketable and non-marketable, in the next three years; this problem will tend to place limits on the System’ s range of operations in its efforts to carry out appropriate and effective credit policies. The future scope for open market operations will depend to a large extent on the need for the System "to make a market" for Treasury obliga tions at the expense of credit considerations. This need, in turn, will depend on the supply of and demand for investment funds and whether refunding offer ings meet the requirements of the market. It seems appropriate at this point to examine the market in which the vast body of Government debt is traded and the mechanics that exist for effect ing ownership changes. Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority 6 IIo STRUCTURE OF MARKET FOR UNITED STATES GOVERNMENT SECURITIES Over-the-counter-Market The market for United States Government securities is known as an "over-the-counter" market. There is no formally organized central meeting place or exchange in the sense that there is for stocks , bonds and commodities. The market exists and is given substance through the operations of a rela tively small group of security dealers specializing in the purchase and sale of Government securities. While only one element in the market, they perform a unique function in creating and maintaining an active market over an extensive network of telephones and private wire systems thus providing a focal point of activity. It has been suggested that a more apt name would be the "over-the- telephone" market since the bulk of the business is done by telephone calls between security dealers and customers. Trading is centered in the hands of a relatively small number of dealers and dealer-banks. It is the function of these dealers to bring together buyers and sellers and facilitate ownership changes by standing ready to match the demand and supply at a given price. While it is true that a market for Treasury bonds exists on the New York Stock Exchange, it is little more than a pale reflection of the over-the-counter market for trading and even on active days turnover on the Exchange is a micro scopic fraction of the volume of trading in the unlisted market. All the larger dealers have their principal offices in New York City and Chicago but they do business of a national scope partly through the medium of branch offices, representatives or other security firms. Many local invest ment firms throughout the country handle Government security business which they pass on to the large Government security houses for a commission. These Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Erf. 7 dealer and investment house facilities are materially supplemented by the activi ties of many bank institutions throughout the country wjlth trading departments. Many other banks encourage their correspondent banks and other clients to place orders through them. All of the facilities existing outside of New York City for trading in Government securities are operated on the basis of the New York market, both with respect to quotations and breadth. Except for a small amount of orders which are matched off by bank and investment firms in local markets, the trading is done ultimately with or through the offices or branches of the Government security dealers and dealer-banks in New York City and Chicago. The dealers’main activity is to maintain a liquid market for outstand ing securities. In carrying out this function dealers engage in three opera tions - buying, selling and the maintenance of a portfolio. Unlike a broker, the dealer does not restrict his operations to buying and selling on orders of customers although under special circumstances the dealer may confine his activi ties largely to an order business. At any given time, a dealer is generally long certain issues and short certain others and, in this way, obtains some protection against changes in the general average of Government security prices. Usually, however, he is either net long or short depending on his judgment of the future course of the market. A dealer creates a market when he is prepared both to buy and sell at the prices he quotes; he maintains a market when he continues over a period of time to state prices at which he is ready and willing to buy and sell. He maintains a substantial holding (position) in a variety of issues and normally stands ready to buy and sell in size. The size of his market is determined by many factors, including his total position, the condition of the market, the issue in question, his capital and borrowing capacity. The dealer makes his Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 8 regular income by selling at a higher price than he buys although he takes some income from the interest accrual on his portfolio in so far as it exceeds the cost of borrowing to carry his position. He also stands to have substantial capital gains or losses as a reflection of the effect of rises or declines in price on the securities in his position. At times the creation and maintenance of a market is a delicate task and can be done only by constant contact with investors, dealers and other segments of the market and estimates of current and prospective Government and Federal Reserve policy. The market trend is not determined by one dealer but by all dealers, who reflect their appraisal of demand and supply by the markets they make (their bid and offered quotations) and constantly refine through telephone calls from dealer to dealer. Prices of Treasury bonds are quoted in multiples of l/32 or l/64 and usually the spread between bid and asked prices is 2/32 although at times it may widen to l/4 of a point under abnormal conditions. This differential between bid and asked prices is "closed up" or reduced in actual trading when activity is reasonably well balanced. Most short-term issues (bills and certificates) are traded on a yield basis. Generally, transactions are for next day (regular) delivery and payment (although deferred or delayed deliveries are not uncommon), and payment is made in Clearing House funds unless otherwise specified. transactions call for delivery and payment the same day. Cash However, the Federal Reserve Bank always insists on payment in Federal funds* when it is a seller and similarly always makes payment in Federal funds when it buys. Where new issues of Treasury obligations have been offered for subscription but not yet issued, trading in such obligations is on a "when issued" basis. Most contracts are oral with written confirmation at the end of the day. * i.e. Immediately available funds at the Federal Reserve Banks as contrasted with other types of balances such as Clearing House funds which in New York are not available until the day after their receipt in the form of checks or drafts on Clearing House banks. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 9 III. RELATIONSHIP OF FEDERAL RESERVE BANKS TO GOVERNMENT SECURITIES MARKET -- OPERATING STANDPOINT The Federal Reserve System occupies a unique position in relation to the United States Government security market. This stems from its statutory authority but the changing features of the American economy, with the large growth in the public debt, have widened the responsibilities of the System and brought open market operations into a position of new prominence in meeting that responsibility. Under the law the Federal Reserve Banks are authorized to buy and sell in the open market a variety of credit instruments. Actual purchases and sales are confined in practice chiefly to obligations of the United States Government although at times bankers acceptances have played an important role in the System's operations. For present purposes only United States Government securities need to be considered. These transactions, known as "open market operations" are one of the major general instruments of credit control. By the terms of Section 12A of the Federal Reserve Act, as amended, the time, character and volume of all purchases and sales of United States Government securities in the market shall be governed with a view to accommo dating commerce and business and with due regard to their bearing on the general credit situation of the country. With the changes wrought by the war open market operations have increased in significance and are now the most flexible and effective instrument in the Federal Reserve System's equipment for affect ing the supply, the availability and the cost of credit. The active role played by open market operations in recent years is suggested by the fact that war time operations in United States Government securities have brought total hold ings of those issues from $2 billion at the end of 1941 to a peak of $24 billion on December 31> 1945some $17 billion. Subsequently holdings have declined to a current level of Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority {T,0. {<3*70j 10 Money Market Effects of Open Market Operations Purchases of Government securities by the Federal Reserve Bank in crease the supply of reserves available to the commercial banks while sales have an opposite effect.* To the extent that transactions are made in effect, from the portfolios of investors and corporations, deposits as well as reserve balances are affected as the funds involved are deposited in, or withdrawn from, their banks. Open market operations are effective as an influence on the avail ability of credit (as distinct from the supply) by encouraging or discouraging lending activities of the member banks and indirectly other suppliers of credit. Through their effect on the supply of reserves and availability of credit, Federal Reserve Bank transactions in United States Government securities also influence interest rates on both public and private credit, either in limited areas or throughout the whole range of the money and capital markets. The character of this latter influence can also be varied by selling one class of Government securities and' buying another without a change in the total holdings of the Federal Reserve Banks. * Thus, because of their flexibility and the As has been indicated earlier, securities which are bought and sold for the System Open Market Account pass through the hands of Government security dealers. These dealers maintain accounts with one or more local commercial banks which lend them the funds needed to finance their purchases and to carry positions. In some cases, the banks also act as clearing agents on their security transactions. In making and receiving payment on their trans actions with the System Account, dealers arrange with their banks of account to make debits and credits to their respective bank’ s reserve accounts at the Federal Reserve Bank. For example, when a dealer delivers securities to the Federal Reserve Bank against payment, he instructs the Reserve Bank to credit payment to the Reserve Account of the member bank at which he keeps his deposit, and he receives from the Federal Reserve Bank a "certified credit advice" which he presents to that bank. Under certain circumstances, the dealer may prefer to receive payment by check on the Federal Reserve Bank in which case an officer's check is issued. Where a dealer picks up securities at the Federal Reserve Bank he must pay for them with Federal funds. To do this he may arrange with his bank to obtain either a debit to its Reserve Account or a check drawn by it on the Federal Reserve Bank. The debit to the Reserve Account will generally be in the form of a letter of authorization to the Federal Reserve Bank from the member bank to charge its Reserve Account. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fT ff. /Q^Qj 11 tendency for credit effects to reach out into all sections of the financial structure, open market operations have an important role in any cyclical credit policy calling for alternating programs of restraint, neutrality and ease. They also serve a useful purpose in smoothing or neutralizing seasonal or shortrun influences affecting reserve balances, such as ordinary gold movements and changes in currency circulation, as well as float, as distinct from basic changes in the credit base. How Federal Open Market Policies Are Determined and Carried Out Over the years, open market operations have passed through a number of important evolutionary stages. Early in the life of the System they were employed as a means of building up earning assets of the Federal Reserve Banks, and the individual banks bought Government securities On their own initiative without System consultation. It was soon evident that this procedure ignored the requirements of the banking system for reserve funds and resulted in a dis organization of the United States Government securities market. It became obvious that there was need for greater coordination of these operations. This situation lead to the creation in 1922 of an Open Market Committee composed of five Governors of certain Federal Reserve Banks for the purpose of recommending policies and coordinating transactions. By the spring of 1923 this Committee was reorganized to give recognition to the interest of the Federal Reserve Board in open market operations, and some guiding principles for the conduct of open market operations were adopted. At this time, a System Open Market Investment Account was also set up, and policies were formulated by the Committee for review by individual Reserve Banks. In 1933 the name of the Committee was changed to Open Market Policy Conference and its membership was expanded further to in clude a representative from each Reserve Bank. Further changes of a statutory nature made in the Committee under the Banking Acts of 1933 and 1935^ culminated Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority EtQ.jC^Of 12 in the present organizational arrangement. These developments in the control and use of open market operations reflected a growing recognition of their importance as an instrument of central banking policy and a recognition of the need to coordinate their conduct more completely with other policy actions and objectives. The Banking Act of 1935 > as amended, placed open market operations under the direction of the Federal Open Market Committee, composed of seven members of the Board of Governors, the President of the New York bank and the presidents of four other Reserve Banks chosen in rotation annually. The Committee meets at least four times a year and sets the general policy. It, in turn, appoints an executive committee (three members of the Board and two pres idents of Reserve Banks), which meets frequently and acts to implement the broad policy laid down by the full Committee. The decisions of the Committee are final and participation can no longer be rejected by an individual bank as was the case prior to 1935The Federal Reserve Bank of New York as an agent for, and under direc tion of, the Federal Open Market Committee operates the System Open Market Account in which the twelve Federal Reserve Banks participate for the purpose of conducting open market operations in Government securities. The New York bank, subject to approval of the Federal Open Market Committee, appoints a Manager of System Open Market Account, who is responsible for translating Federal Open Market Committee policy into action, through System operations in the market, It is through the Government security dealers* that the Federal Reserve System maintains a constant, close and intimate contact with, and influence over, the money and Government security markets. * The actual purchases and sales of The New York Federal Reserve Bank deals only with a limited group of qualified dealers in U.S. Government securities under terms formalized by the Federal Open Market Committee. See 1944 Annual Report of Board of Governors - pp. 4851. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 13 Government securities for System Open Market Account are executed in the trad ing room of the Securities Department of the Federal Reserve Bank of New York. From this room direct wires connect with leading dealer firms in New York City and it is through those firms that our primary market contact is established and maintained. It should be emphasized at this point that the Bank always deals with "the market"; by that is meant that transactions are confined to dealers and direct transactions with banks and with non-bank investors are avoided. The Bank tries to be the residual or marginal factor in the market dealing only with the gap between supply and demand. The satisfaction of normal selling and buying desires of investors is left to the dealers who match off buyers and sellers or increase or reduce their positions. In this way the volume of System Account transactions is minimized while their effects are magnified. Guides to Day-to-Day Operations The operations of these dealers are reported on a confidential basis to the Federal Reserve Bank of New York each day. Their reports cover long and short positions in the various classes of Government securities, the amount of securities borrowed and the amount of money borrowed to carry their port folios. In addition, the volume of trading is reported by each dealer in terms of the total of purchases and sales for each class of security. At times when the Treasury is undertaking a financing operation in the market these dealers’ reports are expanded to cover data regarding the dealer’ s own subscription to the new issue or issues, subscriptions purchased by him as well as purchase and sale transactions in the issues included in the operation. These data pro vide a continuous knowledge of the principal factors in the dealer market. Another phase of the Federal Reserve Bank of New York's contact with the market consists of daily conferences prior to the opening of the market at Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED ■ Authority 14 10°00 A.M. between representatives of the "qualified" dealers and those officers directly responsible for the conduct of the open market operations. Since time does not permit a daily conference with a representative of all the leading dealers, the Manager of the Account will see two or three of them each day in a rotating schedule. At these conferences the representatives review the more important developments in the market, summarize their transactions, and pass on to us any comments they wish to make, or any suggestions that they have gathered in their conversations and contact with the investing public in general. In addition, during the course of each day various dealers are in touch with us as information comes into the market, or trading tendencies develop which a dealer believes should be brought to our attention. Moreover, the tone and characteristics of the market are continually being described to us through tele phone conversation. Apart from market contacts through the dealers, the officers make a practice of maintaining fairly close contact with the portfolio managers of the large local banks, a number of large out-of-town banks, insurance companies, and savings banks, as well as with smaller security firms. The information so obtained amplifies and checks the information which is constantly being re ceived from dealers. The Federal Reserve Bank of New York also follows closely each day the reserve position of the money market banks in New York City, watches the clearings and wire transfers involving such banks, keeps close contact with all money market developments, including current and prospective inflow and out flow of funds, and confers with the Treasury regarding decisions as to the scheduling of calls on Tax and Loan Accounts. It is thus in a position to measure the extent of the pressure and ease in the money market and adjust operations in accordance with the general credit policy being implemented. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 15 In spite of these varied, sources of information, there are times when extraordinary developments upset the calculations and forecasts. In addition to the usual seasonal factors to be reckoned with on a short-term basis and the general Federal Open Market Committee policy being served, there are always a variety of political, economic and psychological elements affecting all security markets with which those connected with open market operations must deal. The job of handling transactions successfully is in reality a team operation in which all the talent and capacities of the System are needed and have an active, if varied, role to play. Those at the trading desk must be constantly in inti mate touch with the market during the trading hours from 10:00 A.M. to 3°00 P.M. in order to determine first, whether System intervention is needed, and second, what form that intervention should take. They must also be continually pre pared to adapt and re-adapt transactions in accordance with the requirements of a changing situation. There can, under these conditions, be no rigid or fixed technique to follow automatically. seldom the same. In fact, the operational procedures are A high degree of flexibility is required, for prompt action and a versatility of approach can add immeasurably to the effectiveness of policy refinements. Execution of Transactions for System Open Market Account As a general rule open market operations are accommodated to the dif ferent sections of the market and to the actions of investor groups which make up those sections, within the limitations of the general policy which the Bank is trying to express. Measured in terms of volume, open market transactions are predominantly in short-term Treasury obligations (one- to ninety-one day Treasury bills and three-to twelve-month certificates of indebtedness) which are largely held by commercial banks and which are the first issues to reflect a changing credit situation. Normally, activity in the Treasury bill and certificate Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IT,0./&£&/■ 16 markets will follow the ebb and flow of funds between banks and the general course of money market forces; in the short run, operations are conducted so as to moderate extremes in the swings of such forces -- at times anticipating developments, and at times waiting for them to be reflected in price and market pressures, depending on the magnitude and duration of the forces at work and the psychology which the Bank may want to create in terms of its general policy directive. More often than not, dealers take the initiative in extending bids and making offers to the System Account on transactions in short Treasury issues. They are especially active at times when their positions are expanding rapidly or, on the other hand, when their positions have been severely depleted. In these extreme situations, they are unable to meet the demands of their cus tomers and will make offerings or bids to the Account which it, in turn, will accept or refuse in the light of the over-all situation and the general credit policy. Occasionally, one dealer will have only a limited view of the market and may be a seller at a time when another may be an active buyer, possibly on an order which he alone may have. Where the market interest is involved two dealers may be "put together" in a situation of this kind. There may be times when dealers have relatively large positions and projections forecast a con siderable degree of money market stringency ahead. In such circumstances, it may be expedient to take the initiative and solicit offerings from "the market" to lessen the impact of the heavy selling expected later. Handling maturing issues of Treasury bills and, to some extent, other maturing Treasury obligations, is a particularly important phase of open market operations under present conditions. In the case of Treasury bills, the System has a weekly decision to make as to the disposal of its holdings of the maturing issue. The Treasury normally makes a fixed offering of new Treasury bills for Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority frtGOj. 17 cash on a competitive basis on Friday of each week. received up until 2 :00 Ordinarily tenders are P.M. on the following Monday and payment is made on the following Thursday in order to provide the Treasury with funds to meet the issue maturing on that date. The System is a large holder of Treasury bills and, depending on its maturity schedule, may either assume an active role in affecting reserve balances and influencing rates through the weekly bidding or, it may try to follow the judgment of the market. This it does by adjusting its exchange tenders as to price and amount in accordance with its appraisal of the market at the time and the basic decision as to whether its holdings of the maturing issue are to be replaced in full or in part, or redeemed, and the desired rate effect. If the System holdings of Treasury bills are redeemed in part or in whole at maturity, the money market effect is much the same as a market sale of an equivalent amount of Treasury obligations. Thus action of this kind provides a means by which some restraint can be placed on the reserves of member banks. Such a step leaves a larger amount of Treasury bills to be absorbed by the market in its bidding, since under usual conditions the cash offerings of Treasury bills are in the same amounts as the maturing issues.* It makes little difference whether the larger awards are made to the commercial banks at the expense of System holdings or whether dealers successfully bid bills away from the commercial banks and the System. In the latter case, dealers must, in turn, borrow from the banks to pay for their commitments on the payment date but in both cases funds move from the commercial banking system to the Federal Reserve Banks with a restrictive effect on reserves and a tend ency for rates to rise if the shift is substantial and the money market is in anything but an easy condition. * System bids are adjusted to take account of differences, if any, between the amount of the bill maturity and bill offering in a given week. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E d . j0 ^ 0 f 18 One of the problems with which we have had to contend since the war has been the insistence of most large banks on a policy of full investment and their consequent efforts to buy or sell for cash (or same-day delivery) in making necessary reserve adjustments. This occasionally causes rapid swings in the market for short-term Government securities. Despite the willingness of some banks to borrow for short periods, this investment policy places, at times, a considerable burden on the market facilities. Similarly, correspondingly greater demands are made on the System to meet these distortions in reserve posi tions and, in so doing, because of rate considerations to become "the market." The Federal Reserve Bank, within the limits permitted by rate effects, has re sisted this practice and has refused to become a party to cash trading. However, dealers have been willing to do some of this business even on a no-profit basis for competitive reasons. System operations in short-term Government securities must also take account of the inter-relationship between, as well as the level of, money market rates in order to maintain a smoothly functioning security market. Apart from capital funds, dealer positions are financed through loans from commercial banks. Rates on those loans vary with money market conditions. The dealers' willingness to carry positions in short Treasury obligations depends in part upon the relationship between these loan rates and the coupon or rate on the securities carried. Thus a high loan rate in a tight money market will be a deterrent to dealer borrowing and may affect the prices dealers quote to the point of forcing System intervention in a situation which might otherwise be self-correcting in the short run. To meet conditions of this kind arising out of temporary money market stringency where the need for an immediate injection of Federal Reserve Bank credit is indicated the Federal Reserve Bank of New York Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority jO ^ O j 19 sometimes enters into repurchase agreements with qualified dealers rather than make outright purchases. These agreements may he defined as a means for making immediately available to the market, through the brokers and dealers in United States Government securities, Federal Reserve Bank funds at a fixed rate of interest under arrangements which involve the purchase by the Federal Reserve Banks of such securities subject to the seller *s commitment to repurchase them at the same price within a specified period of time. All Federal Reserve Banks are currently authorized to enter into such agreements. They are, however, essentially a money market instrument to be used in close conjunction with open market operations. In the case of Treasury bonds, where trading volume is less active and price movements somewhat larger than in short maturities, our operations must be handled with great delicacy because they are more susceptible of damaging mis interpretation and are instrumental in shaping the psychological climate of the whole securities market. The corporate and municipal bond markets are partic ularly sensitive to open market policies and usually respond readily to develop ments in the Treasury bond market. The level, as well as the direction, of rate movements for long-term Treasury bonds directly affects the volume and the character of private financing -- both new and refunding. In these circumstances the System’ s open market operations assume a particular importance in the day-today activities of the underwriters, general security dealers and the other pro fessional elements in the market. There are many ways in which System Open Market transactions in Treasury bonds may be handled. Those in charge may place an order for the purchase or sale of a block of securities (at the prevailing price or above or below that price) through one dealer or through several; they may buy and sell on an agency Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authonty T.OJO^Oj. 20 basis which means that the dealer acts as an intermediary between the System Account and the investor, receiving a commission for his services; they may buy and sell on a net basis in which case the dealer acts as principal, buying or selling for "his own account at his quoted markets; they may wait upon the market and adjust trading operations to the situation disclosed by the firm bids and offers which dealers make on their own initiative; they sometimes use in market operations orders for Treasury investment accounts where authority per mits, as an adjunct to System Open Market operations for stabilization purposes. As a general rule, they buy or sell on a commission basis,'with the dealer act ing as agent for the System Account as well as for his customer. his position is unaffected. In such a case, The choice between these various techniques depends on many factors, including for example, the level of dealer positions in the issues in which we may be operating, the strength of the investment demand and supply in the market, and market psychology. Finally, there are what have come to be known as "open mouth" operations. This is a term coined by the market to describe a situation in which official and semi-official statements are made with a view to encouraging certain inferences as to future policy or immediate objectives. It may also be applied to the use of moral suasion which can some times be exercised successfully over the market through the dealers for a given effect, in lieu of actual operations which the bank may be unable or unwilling to engage in at the time. IV. WAR AND POSTWAR OPEN MARKET OPERATIONS THE CONFLICT BETWEEN RATE AND CREDIT POLICIES A quick historical look at open market operations over the past decade will emphasize how problems and objectives have varied with changing conditions and how responsibilities for a swollen public debt have come to wield such an Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £ 7 # f&G Oj 21 important influence in the determination of open market policies. This should bring the current status of open market operations into a clearer perspective By the outbreak of the war in 1941 the role of open market operations had passed through three phases of development. Starting initially as a device to obtain earning assets for Reserve Banks, they were soon utilized to influence reserve balances for credit control purposes as a supplement to discount rate action. By 1937 their function was broadened to include preservation of orderly markets in Government securities. This concept was further expanded in 1939 as war in Europe developed. In our war years this function was again extended and open market operations were actively employed in maintaining a pattern of rates as well as in the placement of new Treasury obligations with banks and others. When the United States entered the war in December 1941 the Board of Governors of the Federal Reserve System issued a statement with respect to war finance which in cluded the following paragraphs "The System is prepared to use its powers to assure that an ample supply of funds is available at all times for financing the war effort and to exert its influence toward maintaining conditions in the United States Government security market that are satisfactory from the standpoint of the Government’ s requirements.n Bacause the Treasury was unable to raise, through taxation, all the funds needed to finance the war in amounts and at rates which kept pace with expenditures, extensive reliance was placed on borrowing. A large part of the Treasury borrowing in the years 1941 through 1945 "was done outside the area’ of the banking system but the Treasury was nonetheless forced to lean heavily on the banks for its cash needs. It became the duty of the Federal Reserve System not only to maintain a stable market in which the Treasury could complete its financing operations but also to assure the success of Treasury loans in terms Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IT, 22 of subscription response. Through open market operations the System, therefore, took an active part in maintaining a fixed rate structure in the Government security market which was considered vital to the success of the war effort on the financial front in order that 1) a market would be available for Treasury securities at rates known in advance, 2) Treasury borrowing would be possible at steady rather than at rising rates, and 3) the incentive for investors to defer purchases of Government securities in the hope of rising rates would be elim inated. Large scale purchases of United States Government -securities by the Federal Reserve System to prevent rates from rising (many of which were made at the fixed buying rate of 3/8 of 1 per cent posted on Treasury bills), provided the banks with the reserves needed to enable them to act as residual buyers of market debt, and to meet a rapidly expanding public demand for currency. After the war the System endeavored to reorient its policies to the requirements of the peacetime problems. In the period 1946-48 the primary con cern of the Federal Reserve System was the two-sided problem of combatting strong inflationary pressures and of maintaining an orderly and relatively stable market for United States Government securities. The war-time growth of public debt and its new financial significance as a repository of abnormally large war time savings left the Federal Reserve System at the conclusion of the war with a heightened sense of peace-time responsibility for conditions in the Government security market, especially in view of the fluidity of holdings of much of the debt, post-war economic abnormalities and international commitments. The guiding consideration was credit restraint within the limits imposed by l) the avoidance of action which might have an adverse effect on full production and employment, 2) the maintenance of conditions conducive to the successful refunding of matur ing Treasury obligations. Rate stability required that the System act as a Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D Authority jO^Oj 23 residual buyer of Government securities to maintain market liquidity and stabilize market values at a time when credit policy was directed toward restraint. As a result the successful administration of open market operations as a credit instru ment was greatly complicated. This basic conflict between rate and credit policy continues to dog the System but in less acute ways. The form in which that conflict has mani fested itself and the problem it presented at any given time has varied. Different elements in the problem have received varying degrees of emphasis, depending on the market, the budget and the economic 'situation. In the various discussions of the problem the fundamental, central criticism leveled at the System has been the charge that over-emphasis on debt management responsibilities has made an arbitrary structure of rates the overriding criterion in the determination of open market operations, with a perverse effect on the supply of money. In this way, it was feared, an effective brake on the potential increase in the supply of money would be removed and the Treasury encouraged to handle its debt on the basis of interest costs rather than on monetary considerations. In order to prevent support operations from resulting in net additions to Federal Reserve Bank holdings of United States Government securities and thereby providing a basis for a multiple expansion in commercial bank credit three steps were taken in the period 1946-48 i 1. Utilization of Treasury cash balances and surplus to retire maturing debt with emphasis on the debt held by the Federal Reserve Banks, as inflationary forces grew. 2. Controlled increases in short-term rates on United States Government securities. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 24 3. An increase in discount rates and legal reserve requirements against demand deposits for member banks. As a result the System was able to offset by redemptions and sales of short term Governments not only the effects on bank reserves of its own purchases of Government bonds but also the greater part of the effects of other factors such as an inflow of gold and a gradual reduction in currency circulation. Growth in the money supply first slowed and then reversed itself. In 1949 the character of this open market problem changed and its seriousness temporarily lessened as inflationary pressures abated and deflation ary tendencies assumed, for a while, greater relative importance. In view of the accumulating evidence of economic readjustment, the System first modified and later reversed the earlier policies adopted to combat post-war inflation by relaxing certain qualitative controls imposed over credit under Regulations T, U and W and later by reductions in reserve requirements of member banks. Open market operations also played a critical role in the implementation of this re directed policy through their influence over the supply, the availability and the cost of credit. The Federal Open Market Committee after consultation with the Treasury Department, reformulated policy with respect to open market opera tions along lines intended to increase their flexibility and to coordinate them more closely with other instruments of Federal Reserve policy. Toward this end the Federal Open Market Committee made the following statement on June 28, 1949° nThe Federal Open Market Committee, after consulta tion with the Treasury, announced today that with a view to increasing the supply of funds available in the market to meet the needs of commerce, business, and agriculture it will be the policy of the Committee to direct pur chases, sales, and exchanges of Government securities by the Federal Reserve Banks with primary regard to the Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 6Kj^Oj 25 general business and credit situation. The policy of maintaining orderly conditions in the Government security market, and the confidence of investors in Government bonds will be continued. Under present conditions the maintenance of a relatively fixed pat tern of rates has the undesirable effect of absorbing reserves from the market at a time when the avail ability of credit should be increased.n This statement represented a significant milestone in the development of a peace time credit policy aimed at striking a fairer balance of interest between Reserve System responsibilities in the related areas of debt management and credit con trol. With the cooperation of the Treasury Department, short-term rates have been permitted to move more freely in response to market forces and System credit policies. Short-term rates moved sharply lower in the summer of 1949 in reflec tion of the easy money policy then in effect. Later as recessionary forces spent themselves rates again responded by hardening slightly. The Treasury Department recognized this market situation in the choice of terms used in its refunding operations. The System has been moving as rapidly as circumstances will permit to ward the restoration of a freer market. It has availed itself of every opportunity to relax the rigidities of the rate stabilization practices of the war and early post-war years in favor of a policy of guided flexibility in rates, the full expression of which has not yet been fully developed. The future role of the open market instrument will be determined by the measure of agreement that can be achieved between the System and the Treasury in coordinating actions in the separate areas of administrative responsibility. What is involved in such coordination of action and the results that may reasonably be expected from it have been cogently stated in the following quotations from two speeches made earlier this year by Allan Sprouls Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 26 "The primary role of the Federal Reserve System in promoting economic stability is in the field of monetary and credit policy, with which we must now always asso ciate debt management. We will gain much, I believe, if we can achieve general recognition of the inherent inter relations between the two, and of the need for continually directing both, harmoniously, toward the objective of economic stability.***there cannot be a purposeful monetary policy unless the Federal Reserve System is able to pursue alternating programs of restraint, ’ neutrality,’and ease, as the business and credit situation may require. Such programs must, as they accomplish an increase or contrac tion in the volume of credit and a tightening or loosening in the availability of credit, affect interest rates, not only for private credit, but for Government securities. The terms of Treasury offerings for new money, and for refunding issues, must be affected. Yet those effects will, at times, be inconvenient and burdensome to the Treasury in its management of the enormous public debt, and may con flict with otherwise praiseworthy efforts to minimize expenditures for debt service. This is a conflict which will continue to arise, in one form or another, so long as this public debt, huge in relation to our present national income, is with us. It is not a problem which can be solved by demanding more courage or independence on the part of the Federal Reserve System, nor by attacking indiscriminately the Treasury’ s understandable concern with the cost of servicing the public debt." (Excerpt from remarks of Allan Sproul, President, of Federal Reserve Bank of New York, at the Conference of Chairmen of the Federal Reserve Banks and Directors of the Federal Reserve Banks of New York and Minneapolis and their branches, in Washington, D. C., on January 16-17, 1950*) T,***if a suitable permanent framework for the relations between debt management and monetary policy can be estab lished, the tasks of monetary control and debt management will not be impossible. While the money market is not so sensitive to slight changes or disturbances as it was from 1946 through much of 1948, when large segments of the swollen public debt had not yet settled into firm hands, it is still sensitive to relatively small changes in the interest rate structure, and to any uncertainty concerning the future direction of rates created by such changes, in terms of its readiness to make funds available for expan sion. Through judicious use of discount rates and flexible open market operations, it should be possible to make Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 27 monetary policy reasonably effective without such abrupt and such wide changes in interest rates as used to be considered quite normal and a necessary part of central banking technique. Such a monetary program would be consistent with moderate fluctuations in the cost of servicing the debt (and it is important to remember that ’ fluctuation* does not mean only decreases, or only in creases, but changes which may 'average out* over time); nor would such a program contemplate (or require) large changes in the prices of outstanding Government securities.” (Excerpt from remarks of Allan Sproul, President, of Federal Reserve Bank of New York, at the Midwinter Meeting of the New York State Bankers Association, New York City, January 23, 1950.) APR 4 1950 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Auth°rity J£/ 1 / 0 £ 0 / Table 1, STATEMENT OF UNITED STATES DIRECT AID GUARANTEED _____________ PUBLIC DEBT OUTSTANDING# (in millions of dollars) Outstanding 2/28/50 Direct Debt Market Issues: Treasury Bills Ctfs. of Indebt. Treasury Notes Treasury Bonds Other Bonds 12,336 24,399 14,790 102,796 160 Sub-total Non-Market Issues: U. S. Savings Bonds (#■) Savings Notes Investment .Series Bonds 2$ Depositary. Bonds Armed Forces Leave Bonds Sub-total Special Issues Total Interest Bearing Debt Per Cent 4.9 9-6 5.8 40.5 154,481 60.8 57,217 7,988 954 287 __ 322 22 o5 3.1 .4 ,1 ___ .1 6 6 ,m 26.2 32,871 13.0 254,123 100.0 * Current redemption value # Reflects exchange of certificates due March 1 and. bonds called for payment March 15, for new Treasury notes. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED A u th o r ity 'Table 2. SUMMARY OF UNITED STATES DIRECT INTEREST-BEARING MARKET ISSUES OUTSTANDING FEBRUARY 28, 1950 # CLASSIFIED BY YEAR IN WHICH ISSUES BECOME DUE OR CALLABLE (in millions of dollars) Year Bills 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 i960 1961 1962 1963 1964 1965 1966 1967 Various 12,336 Treasury Bonds Taxable Part. Restrict TaxUnre exempt stricted ed Ctfs. of indeb ted. Treasury Notes 19,026 5 >373 3,596 4,659 1,186 3,500 4,675 1,860 725 681 2,611 982 7,574 8,496 17,013 5,272 919 8,754 1,485 50* 110* 12J .36 14,790 12,249 2,716 2,118 2,831 7,599 5,197 3,481 19,656 41,071 49*636 Total 43,718 22,028 17,013 725 5,356 4,471 6,254 99,565 919 8,754 1,485 50 2,118 2,831 7,599 5,197 3,481 22,372 110 154,481 * Wholly Tax-Exempt # Reflects exchange of certificates due March 1 and bonds called for payment March 15, for new Treasury notes. Cumu lative Total 43,718 65,746 82,759 83,484 88,840 93,311 99,565 100,484 109,238 110,723 110,773 112,891 115,722 123,321 128,518 131,999 154,371 154,481 Table 3 • TREASURY SURVEY OF OWNERSHIP, NOVEMBER 30 , 1949 SUMMARY OF INTEREST BEARING PUBLIC MARKETABLE SECURITIES HOLDINGS BY CALL CLASSES AS A PER CENT OF TOTAL HOLDINGS Due or first becoming callable HOLDINGS AS A # OF MARKET DEBT OUTSTANDING Total 3 8 o5 100 .0 43 =8 38d 11 =3 2.5 4.3 Mutual Savings Banks 6,9 100,0 4,2 10.1 18.3 27.2 40.2 Life Insurance Companies 9.4 100.0 1.3 5*6 6.5 25.8 60^8 Fire, Casualty & Marine Insurance Companies 2.5 100.0 25.3 19 =5 19 =5 16.5 19 o2 U. S. Government Investment A/CS and Federal Reserve Banks 14.8 100.0 48.5 8„o 4.8 7o0 31=7 All Other Investors 27.9 100.0 45=3 13.4 8.1 7=6 25=6 100.0 100.0 37 =7 21.3 9 =7 8.8 22.5 CLASS OF HOLDER Commercial Banks TOTAL In 1 yr. :L-5 yrs, 5-10 yrs a 10-15 yrs 0 Over .15 yrs mzr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority d.jO^Oj ,KEC'D IN FILES SECTION I AUG 2 4 1349 ^ W u r t 'a * . ly w — Meea&y isarket prospects Tho attached copy o f * re g u la r sswfcly ta b le showing p o ssib le fu ture changes i a bank reserves i a Federal iieaerr© mrfcet ep aratian * in d ic a te s the s o rt o f s it u a t io n that ssighi be e x a c t e d i a t h is wewlc sad nest* the iap o rtsn t asjmct o f t h is s itu a tio n a t present Is that ssutber banks hold a su b s ta n tia l nmmmb o f exees* r e « e r ^ s ^ « * l3 % a i l 11on on la s t '& • < ! « • * day, A u g u s t 1 7 * D u r in g the m a s k s fro ® that a * t e , ikm ss 500 m illio n d o lla r * m ill be ad4ed to a v a ila b le reserves by the reductions i a reserv e r ^ u i r e » e a t s # but these id 11 fee more thaa o ffs e t by retirem ents o f fOO m illio n d o lla r s o f Treasury b i l l s 'trm the System aeoouat aad fu rth e r in creases in Treasury balaaee a t the itoserv* Banks re s u lt in g from a d d itio n a l o ffe r in g s o f b i l l s * 4s a r e s u lt , taeaber hanks w i l l need to draw d®*» t h e ir excess reserves by a su b s ta n tia l amount. Km Isa& er banka could wm% the e n t ir e sUmia by drawiag upan excess reseanre# aad s t i l l Imre am excess o f a m r BOO M illio n d o lla r s . &i&ce# hownrer, » M t o f the excess reserves arc h eld by eouatry banka# m cannot be c e r ta in how ra p id ly those ftstads *1 1 ! be |»u& to mse* &s o f 8<mday o f th is m&k country bar*ks had o w r 800 m illio n o f « « m reserves# ithieh i s $mm 300 m illio n mate thaa they Imm o u s t o m r ily held* H aters* c i t y banks lm4 oil th at dilute 2&6 a i l l i o a o f excess re se rv e s , ^hleh i s a p p r a s ir n t e ly 100- s & llla ti more tfeam tbsay a r d in a r ily carry# v e n tra l reserve c i t y banks a ls o had scw w bat more excess reserves <m Ita d e y than i s tmt&mry* It a^fears 113©®ly, tharaffcr*, that tha ssaaey mrkat » y be relatively easy during the »«xt wsak^-d the System my be called to buy sems securities m fhurs*I«y or Fri<lay, but on sfehar #»ys iher# sssy be sales by the Systeis* Is have allcws4 for set purchases la the comli^ weak ozi the sumngrtloit that hanks s ill be sim in drawing down excess reserves. A t t a o h a s a t ,.^.. ><rc." * ^ tfir j ' &•« S ***rs *« r Szymctak " x .. , ,7 y / w Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority j T O J r t G n j . REC’ JJ IN FILES SECTION1 AUG 18 !949’ >*V aw-'.- • —» i/tt:> Ohairaisi ^ooOab© Mmtxl ♦.‘ Oo&liof Thmmn. Uamy aartatt daroldgpagat* In th® f i r*t *»®k afior th© araouao®** of th® d®«roa«® la r®«®rv® roquiraaont® have boos in nmm ®«rj>ri*inc;* The first Boreas# me. liw&t®& to oountyy bank®, ®a<£ it «a® not m ill ^5nar8d&y# th® llth # that oity 'bank i^quirosssOiitB r»4uQtd* Th® t*o most striking doTolopwfctsfcs haw bo&n th® h®avy dett®&4 for ®®rtl* flo a t® * rather than bill® *m4 th® prmgt doollts® l& ®x®®®9 ro u o rrs* a t camtry bank®* A* & result of the atron# mr k o t & m m & for oertifioafc®$# about sallliou dollar* of oortifioatos w»i* gold firm th® 3y®t®» aooownt in tli® m o k ®&<ling Augtftt IP* ftwunoy M i l # t» th® account, on th® other hoivd* vbeRMSNf ®xt for th# w*®k, r®fl®0tl&& purotauHMi b®f®r® th* ianotinooat&t o f a r#duatioa in re*®ry® r®<|uir«?wntfi m £ oatly »&&®rat® s&lo® (59 aillim dallar®) or ?&»&4y *»<! Tuoi^a&^of thi* n*®k. Q& :3vda9®6ajr m4 Thursday, ilp irw for tfcloh w i l l appo&r in mxt m*k** ®tat«£s®nt# 116 MillloKi of oortlfioat®® aa& 58 million of bill* ®®r® *®1<|# oad 2&9 ailllasi of til It m r & r®i2®*sa®d* la supplyi&g o o r l i f i o a t * * *&<t M i l * , fch® ?i®w York Bank p a ra itio d o aly a ftsaall d®*llsj® la rato® f o r bill# aa<5 p ra-ottoally a«sa® la rat®# for o o r t i float®** Th® margin b i t w th® rat® m bill® tad ICMaenth o o rtlfio a to ® 1 » <**iy € h a * i« E x i# t i n% saarsait pr® *«ur®* wmM %mi to put th® rat© on ® * r t lflo a t ® t lowor If i t w r ® iw»t f o r Syst®n aoiism in •oiling at tho falgtior rat®* fm oxplanatioos my be o ffo ro d fo r th® hoavlor 4mmi& f o r © ® rtift® & t«« th®n f o r b i l l s , (1 } Th® rv d u e tio * i a mmrm r®qutr®«a®at® to dmte h*a ap p lie d only to country \mik$ 0 wlilah «-n «rfelly p ro f^ r o o r t i float®® to b ill® * ( 2 ) Cit^ lmnk®# <l»al®r®# a»d pk®rbap» o th ir iwll*4*ifarai®d bi^®r* ®-3tp«ot th at ® hort-t® m i a t « r ® « t rato® i d l l «J®oll»® a® a r*®«lt o f Board a d t i m ®n^ ar© asoxlou® to ® « r t lfio a t ® « a t jir©#«;it m tm 9 m ««1 1 a® to hold m to the®® th at thoy h a w * TIs© baak ®tat®aeat f o r &u?.;u»t 10 indioat®® th at both factor® mm o p a r a t iw * Htw York City bmku in^ro-med ti^ir holding® of certificate in tbjj w®®k by ^20 M X X i m iSollar® «aa4 Ohioa^o baiils® sksm^d im inor®a®® of 20 sdllioa* Both ^roup® of bank® m&\%m<l thoir 'holding® of bill®* but this w prdh&bly tho r®ralt of ®al»® 'bofofr® th® r®duotl<«i la ro^ulm^ist® w m aatftotwood* FDLE C O P Y FOBFILBS WoodifefThoams — ................. . Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Efi. Tho aaakly nt&bmmvfc also ahoaa that mwfesy baalm wro f uiok to tmte» utso o f th o ir a d d itio n a l w g t r r o t , L’.s ilm t e d ©:2£ o a » raaonro# o f o o m try bank# f o r lad&aaday, August 10, ahowad m m i&araa#a o f o&ly i±0 Kdlliaaa aboma tha attiaata o f tho £raoodla$ r^djaasday b a fo r * mJclxtfc allowable© f a r th# ro tro a o tlv a ro d u o tlm in r # * s m *a$uiraHMftat#» Xjs othar word#* tha ©cmttiry bank# u t i l l s a d about 200 s i l i i o e * o f tho 214; m i l l lm # ra l«a# a d * I t 1# aot p o##ibla to know abathar th ia va^vaaaat# a a h lf t o f funds that isirht haW ooourrad in assy w e n t or afeathar i t r# flo o t # quick a o t l m by tfoa ooaatry bank# in in r s r t ia c arailahla fuad#* Baoauaa o f t b s featroaotlva fa a tu ra o f tha raductlfiai i a j^uiraaaat#* eo*mtry banlai aould radaa# t h a ir r a a a r w a fu r th ia «paak dowa. to tha la v a l th at w i l l prevail aftxt aoak* It la poaatbl© that nam ootaitry ba&fc# haira alroady takan admataga of thia opportunity* Tha policy o f bsapini: up tha ra ta m eartlfioata# fcaa probably aaaottrasad tha saarieei to b*$r o o r t lflo a t o a r a t bar thaa toay M i l s o r hold ajsoaaa raaarvaa* If tho ra ta osi oertlfioato# iwi baaa parslttad to daoliaa l a raa-somra to a*sfe#t tla&aad#* tha s a rg in ba%#aan b i l l and cartifloat* rat## -ii« i hava a&rmsad to a paimt a&arta M i l a tsrould k i e boan, isaora popular* I t rm j ba #aid# on t**o ottanr h*md# that tha polioy falloaad l a aarriag to a f f a o t a quLok abaorpilaa o f availabl* axoaaa raaarva# a&d saay ps«vaat a sharp timlim in latera#t rata* Ja#t p r io r to tha armweaoa-* a a a t o f l*w u m ry fla a a o ia g a&d thaa a suhaacfuani lanraa#* l a rata#* B s t a b lia t a m t of oaugMaa rata# on maw- fiaaiiolag -would ha made jaora d l f f 1~ ouli by aiask fluctuation*^ Aaafchar eoooluvlaa that la aaggaatod by th*aa dovalopsassta i# to cast sow® doubt upoa th® p’ * wallia^ vlav that tha nmlrml «t?read hatwaaa tis» l-y®6r aartifiaata rata a&ti! Ui® h ill mta should ba ty% par oamt* If basic# aad othar ixsrestar# prafar oartifloataa ta bill# aiid i&dicata i&mi? pmt&rmsm in tha aastaat* thaa pm&iMtp* tha Syeteaa should not aadaavor to pzww* as adjustment ia the ralati<mahip of thaaa rata#. A# f o r fa&ur© d aw lo p aaB tat tha #ltuatl<m in thm eurrant aezit aa«ic isary ba c w t e t d lffa r a iit * About IfjO m illio n o f addltiorml raaarvaa wara imtit a v a ila b l# to c i t y baaka m Thursday and a»o th # r IjO□ m l l l l m w ill baooaa aval la b ia to cowatry baak# m Tiaaaday, although tlia lattar nay ba- i a part antioipatad, X& asay w sm t, tl«ara ahould b# abmdsunt f»ad# ia the mr&at* Offaattiag thaaa fm d # a ra th « m t u r i t l a # o f b i l l # l a tha Sy#t®zs aaoo^at yaetorday (fh u rad ay ) to £iy a l l l i m dollar#, tagather w ith the la o ra a a a i a b i l l # aold and: a © a ll m aar loan aaaowta o f 100 m illion d ollar® * taalara obtaitied aboaet J50 a l l l i a a d o lla r# o f b i l l # <m Thuraday and a i l l *m&t to diapaaa o f thaaa b i l l # or borrow m thaw in ard o r t o hold out f o r tho h l^h ar p ric a (losaor r a t a ) that i^v#y a^spaot i d l l oooar* balaaaa* hmmimT, thm Hd# a l i i < w r t #oraa ^tim ia oa tha aarket# ahowld ba r e la t i w ly aa#y thia wmte* rT m %h& falloHlas: itataewnt tha Treasury ha# aljma% aomaad «a additional offaria^; of 200 «lll£oa# of Mil# for fbxaem &ky, tha 13th# ttoafh. i t doa# not ^ a d th#' a s t r a mmtoy* _ Tha®# ara a ls o Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority **** 3 Tha dteffwaa* in nzmrm y^qtdrmckite baeoadag etfm tim at aiiy hmk* m tba mm data mmmtm to 2^0 adllioft dollara* It la not mlikmly itmt ttofe so#- to mm ptvmmsx* m tha oarteat in that »aak i f ibe Systma** toldlaga of bill# or* para&tfcad to im off* T Th» aasa* Ins trm in tba naxt tm -waafcs (muling, Avgmt 51 md $9ptftst&v* TJ# ito*® the Systaafe b ill mtarl^laa to about feo jstllicm aaafe. m&k $m& fEha dmrmmm Sm m t m raquir&mnts to 2^0 miXlim * wak* Tmrts id II alao to' & h&XI4fcy atxrgttnoy <3*»s»»& la tkia parlod* If tlit Traoausy ibnmid offer additional b ill* In thoaa tw wa«k*# tto prfcaatahi would bo !&»**<•£ aonaaahat* It ia aot mllkaX^ tbat tha SjstaM my- to 4&ll#d upoei to' puatthao* a a e u ritle a 1& tfe* m r k i t during tha latter part of Ay$*iat «*$ tto first wmk of $e?tas*ber, sbaMthatandisg tha m<ki&tlom la r « i# w «w$ttiroaa*tt* bmm£m»% effooti*** In tb*t parlod* (Forth** retail# of praapaeta for ftottira -«*aks ara iaolttdad in & m iiid •tataattitt with. tables mm toixk£ praparad«) Mother dawlapMBtt «*f laiaroat ft&ow* .In tba aaekly ata&asaasit lit am i a $oQasaroiaX sit 'An* Torfe Sity baxtk* of 38 isilllm dollara mai at Ohioan® baaka o f 6 a llU o n dollars* iV^WutflL iTX?fWpJpuy(^^ «h.AMlk VtLlikHkJkA ^®WwBk^>0^ \|| ^ MM -■*-■- ‘- ■*''•-*■ ^ ^ v3 4fl^ U^’0- — i Jfc 4m. Aufl ^8^S00^(SNM fc of prtnrioua aa^##tatiooa« fb* total* axoiwtlac gold, aaa &*5 billion m Auguat ID. Xmvi@w of thla it la a ll the mm a^rpriaiit^ that tha b ill laaua la tolag f.nomtnad. ajgpli^ naxt waak* Tfe# Treaaury ha* 3aosMrf«r# tbat It mill m 1m*®pr g*& la ^ ra «t for tha alapaad period of tl*a mmxUk far Sarla# t> aatac pvrn^mmi after tto first « f tto laontb* ?hla mgr ^avo a s d ld m o ^ ra tln g a f f a e t <m m rn rn t a a la a a f thoaa aot#a btst ab«ml4 %ha dl.aty ibu tlao o f a&laa witMm tha math ra th e r than tb»- t o t a l ’rolus^a* Tto attaeto^l a l ^ t a c l w o«SM@nta mg&rdin$ m r io «» other inmcn^sIo d a ^ X ^ M a ^ * aonaarolsm; ieifaanrntlan* Ati»oyB3SBjlt« ifiaFj 1 * . m h&m mmntly obt& in#d R eproduced from the U nclassified I D eclassified H oldings o f the N ational A rchives DECLASSIFIED A u th o r ity E & / Q 9 o j it* Mr* i * 4 * j i i S l * r i*ii*t«m t VI*# ?re» ideal Federal fte»«rt« 9*ak #1* $§» T«r&. tom* %*■ Att*eh*d |* * roirtJ% o f $«$«# .i**4 «£ your a i i l S t » * w « S # t « a fte r lin e I*. « • 1± * the?* are m« eh*age« on £*€•• 1 *&# *• Oft $**$♦ 3 oheaglag, the issOiNS. to re*d *• folleeet * It le pM>pm *&4 therefore, the ported boyi*ig r&to# «uid r epurahfcse 0jA1m -for tr#**vir7 b « ell*lnftte4« Th* poinU th*t ae*d dUeueeion iaeludee” Beet r*fA r4», A.* BlQW.j^i^WWB #i*i*f * Swr8«iwS rim&ee M m f r & m - .fltf nti—ifl ?.*• Hr* ?ho»e* h*e net y*t eeen oar ofeerjee %x*d I t u n til IfKi^ey ^ bat I thouffct yoo sight life* to h if f *a »e oorwMmte In the *«*tttl»e » I t h t ll <5*11 /ou ftftttr fit t in g 3s5jft # Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority trmmsmtf k ill* & m Ir m m * *r+ %bwm f t * *$M%m bmtamm mmfciiwififi v t h m m * t t r m m m y kill* m% m % m * * & & * * p l **S»£ 'ttWMS I(jjjf ##F%S-^l<<lillNISe (&# fsflWB'SlrSliSliir ptrtlMu** iMI tWf 16SW' t# #4*<fcd®e:tSl8it# ft/%# #*l# #£ b U l » *$ t i » |/% p # i « i * *t # «$ * *»fe# &$*» m«%*% k ill m%m %m r im ■%9mr4 tfc# %$**+ m M m m rt& tlm tm r*tm , wfcii* 4m*ia&Am$ m m tm A m%v*ftfe$ M il* Ini# mm M ii# *% %Im» fci£h«r Or %&# M l* f * t * «©*ii4 fe« fftfiP* h f nfet m*%*% r*t «* #% m m tmmr &m&9 $**% m tb* im rtttlm tom m%m I* mm #«$gpl# iiMt-jt *m& i&Mi a^aFltiriL ttii Slk* ctMHkfidt egev Vm «*|Mr %• He *m4mm nr ■mm*mam% *£ %m*% feiU* m%*%wm4im$, m * l»m\ «f alNMgt J Mlli#*# i « «I «* r t M 1% #* lnei; ** %)m «*rtifie-**# i* *tjr$«r1M «% * flx#d %mm4 m%*# tfe* b lU wt&& nefc !«**• * «**»ffe In. r#t## »£ a *«ri;i£ l«*t* ##* tfe* t«a * mtw&ilqf* it mm m «rpM »i# t&mrmiwwt i i m *tair» it HfcfcS* * r tt*fefc$R$ t# Ini |p£««i In im*tst& m%*%*m4$&% tot wup&iMg itk0%x^mm%§ »«r*!ftg tna% %Imi I41i «n4 *■? ph*m» *&& %tm&. mtt &m iki# ^r«iwatUjr» tin* ^ -^ N l 1m liHHrMMMNU Hw i « <Nf% *• 4mm wUk m#%Utm%mm f# ^ # i« i t m m m % 0 £ - im !•««*#» #f hlllm vm M l» r«4iMNNl «i$i 3* MIJU w«alil %>* <NtfM bi m Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority jT,6K jftGO] (*%•) ffef* § Q) ®mmrm o f go**rw m & 9*mrtttm» m lm *' pr4&l*as *f ♦*###* *f ' Th* m “"i illi iiTTi i >«nr1it-r lioilfllsjis I s . £tat 'ajpm#fcl<9#l *»d#fli£li#iy frmmm. fb* mt %'&*** ***% J%*»11&# js#r ##$ mm? »#% #*!*# of £r#*#*«•? «&X%ssii«»# ' lb# mm4* h? $$*%m pm4$®& $*ti&# #r » r#%Mr» f3Uswr *f r**#ry«« i m m *m tafftMi *>f fitlft ia eirmi^fct<3t»# *r 'I^b * #tst la r*#«n* fryHump1h> wliJUsllg. 41%S.ltSs t\Ww fJMi iHMffwi.titfIt # tJ# #** %$ £«r M ilt* mmm m f*4f*#& l $# $ n «at # w * ltM if# pm *m% mtm. m ml^ fifty# WS: StwysitiNNl &i#iPiiflMNVf> i f th* b in ntt* *m# r*i##* mt wil% %* MUft*fg* tm «*•!» is *&* *N*ft¥*isft tart 1»#*pai$* bill* b**lm, tis * * * n l4 It# mm M U te#&ft|a.$«# mMtm&rn t ls * $/b %li# *pm *a&rk#% ml# fc# ri#» m *&#!£$**$# « f fwmmay ^HX# %f- #ttfc#r** ffci# *lsaf!# *wr% fey %m*li m *xo«»«iv« «ftvfci»?ji * & & # & m i * % * m m a it wmM m#i #•$** *1** frf&l#* #f m * fcfc# | r # ##nt fctil. rats*. ’pm*$fok%$&y I# tawtt # m % *t tit# \*j timlterm *t m*j$IKm mm V P i f l p p * W Ifc IMiiillHttW $*rt« .##3r« it M l l « lt#M 'lif tip# Iw ri*** MBWi rnt* *t i»^#r##i (##f m*mr$M%: Trmmatf' ^iii# mmM h* # ff# # M it£W&$1S&F* &t M i l * It# ll# in uQ "ttblb idj£lj^Sul n frw^rapf (Wiltl>M # tt ft Jt## r®1S4k f ^ ^ d s i ii l* twtmmX % m * # m *TvWTOFy |«** m t nr %# *3£ tm 4kll#666<l* A»iy -dft WW' wHP -^ m*m ” mp IM |1W | | W » F 0 E f i l e s ! E. Musgrave Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority ^ Q.IfiZoj- m f .It tfoilwr tat# ©f b ills bjr ih# tint •*rfcifi«ftt»* « f rm4km%lv* ft !**§* of 2$ n il Hon * yfe jxr is »e*3J f'r«*#«ry i»fc«r*t% ll* r « « *n4 I f th* » f*eiftl r*fc# th* * « r « to slurry mmM b* %tm% amount* tbm *$mmlnl e*rfcifts»%# m%m *&&h& tmm to b# mm* p tli* m $ M m £r«un $&a* t# %tm of ill* ?*4*w»l m *f h m m t w immI* m B m b ill *«& ftr tb# ririiril#g« of l m * prmUiim m m M tt* w§t»»fci*b|# b ills «r 1&%# *«> r«<pir#»* wiMm «$*& *#trk«% in %# if* feel£An£« «*»14 bt rwteiiMi i » «MMrtwtAbl# fsrn **A b# ##*«»«► * £rm£ki*m imm **4%b »U «I %m *%m&rh th# %®mmm M mmirn.®* #»• %« hal&im& mi b ill* *t * r*tm •r t# «s«1msi£« :x4tl* ft$ft£*u»% oftrtifi «**«•• lit&seufc m frmuukim t«*# e«NGwr«l?ii « f #11 b ill* l**t* 7/ per ***** «*riifi4ft**» or m ©«rr*#j>«»4l»g. i* fcb# b i l l rmie* *w»*l awrryimf r e s u lt In mmmmm*l imwmm# In *n %b* ft & ll« #*bi In lb * tb s « f 6% M illion <*©t l* ; r * « * S$ n illiia e 4 * i l * r * «a#«t * f wb.i*fe# tm im t *g i*% in £ w m M tim * 0 w * m M * * * * * * t# Us* &*t*rv» % & % » * fbi* I m r m . m m In «**t* *ot Mtermi ’£«n*nii «Mr*ti»£* «*i*16 b* *££**% w «scr# tlm«i % % h l l m » £r*«i«bl** %ns «n « tftH w^3ul iwi it mml4 prw%4* m WmU *n on th# jNNwifi in Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority ■%r Q . f i s . 01 ? It would appear to be desirable for tha System to be ourrently ap praised of the investment policy of banks and of the reasons for past and prospective changes in such policy* Such information would be particularly helpful to me in studying current developments in the Government security market, and I should think it would also be helpful to the offioers and direotors of the Federal Reserve Banks. In the recent past, commercial banks were generally lengthening their portfolios, and this policy had an important influence in strengthening the market for 2 per cent bonds and in resulting in a substantial supply of bills and short-term certificates. There is some evidence now that banks are either in a transition phase or are beginning to shorten their port folios . Developments of this nature have an important bearing in the planning of open market operations and of Treasury financing. In this respect, it is useful to know not only past trends as refleoted in reported figures but to have some indication of future trends. In connection with open market operations, it is helpful to know what securities the System is likely to purchase or to sell in the near future. Suoh information would be particularly useful in the post war period in the event that the System should find it desirable to modify or gradually to abandon the maintenance of a pattern of rates. In connection with Treasury finaneing, it is useful to know not only reoent trends involving shifting from one group of securities to another but also what trends may be expected in the future. If, for example, there is con siderable evidence that banks are anxious to decrease their holdings of 2 per cent bonds, this fact should be an important consideration in the determination by the Treasury regarding offerings of suoh securities. Specifically, I should like to suggest that the System oontemplate a study of these questions somewhat along the following lines* 1. A tabulation by each Reserve Bank for each weekly reporting member bank in its distriot of suoh significant figures as holdings of each of the five classes of Government securities, deposits, loans, other investments, and reserve balances. 2. A tabulation of a sample of other banks obtained from the oall reports. It would not be necessary to tabulate all of the smaller banks, but a carefully chosen sample of suoh banks in each distriot should indioate current trends. 5. A study of trends at each of the banks for whioh figures are tabulated. This study would indioate banks that are reoeiving an inflow of funds and the disposition made of those funds into reserve balanoes, loans, or invest ments in Government securities by classes. It would indioate for banks that are losing funds the type of asset that is b eing reduced. Finally, it would indicate for banks having little or no change in total funds available any shifts that they might be making among their assets. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 2- 4* After studying the trends of individual banks, it would be help fu l for an offioer of the Reserve Bank to interview the investment officers of these banks, particularly the banks whose figures indioate some change in policy* In these interviews, the Reserve Bank o ffio er would discuss the recent changes and attempt to obtain information as to the reason back of the changes and as to future investment policy. It would also be helpful to ascertain what type of securities each bank would prefer to purchase in a future Treasury offerin g. 5. Each Reserve Bank would make suoh use of this information as might be desired by the officers and directors of the Bank. In addition, it would be of value to the Board i f the Reserve Banks would send a periodic report of the results of their studies and interviews. I t is contemplated that suoh reports would not be in great detail but might cover general trends in the reoent past and any changes in trend that banks may contemplate fo r the future, together with suoh suggestions regarding future Treasury financing as the banks may have to o ffe r. 6. It would probably be desirable for the committee to outline a general program and method of approach, in order to bring about uniformity among the twelve Banks in developing this study and the interviews. 7. I f this program proves to be successful, it might be helpful to ex pand i t to include insuranoe companies, mutual savings banks, and other important groups of investors in eaoh d is tric t. Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority f / 4 I I FILES SECTIO* JUH-8 1943 - ^ ^ Jm» 7. 19U. ■r* Albert C* k & v m t OoMral Ceantoi, f«4 «rtl » » m lank a f 3** 'ranoiaao, l t a Fpaaaiaao* C a lif am i a* Doar Mr* Ig n a t Floaoo M M pt my thanka fo r your ▼< anoloalnc tmr wty information a oopy of a 1attar whiafe j M i i i n a M i bo tha Aoalatant Attornoy Oo&orml of California undor 4ato of Hay 27* 19^5. tha quaatio* whothor aurplua fund a of tho £tabo of ^ i f o m i a m y bo inroatod in Treasury h ills lasued by the Treaaury of tha Tfcitet State*. 1 hare read your opinion on thia with vrnafa interest and fool that there eon bo no doubt about tha oorreet&eas of tho eonelusion whiofe yo* here reaehed. Iran i f Treasury b ll la wer« not toehntoally bonds thay would at least ba inoluded in tha brood tom "obli* Cations • • • for vhloh %h« faith u d of tfco Unitod «ro in tho seetioa of tha California low quoted on pa^a 1 of *~c You rofor to tho opinion whioh I addressed an Oetobor 27# ic^fgf /fin hr# iooloa in hia oapaeity aa inaan of tha Federal Open Kartot Coendttoe, relating to tho lim itation on tha amount of o b li gations o f tha Unitad ^tatea wt.iah nay bo acquired diraotly fro® tha ftettod ttateei bwt you did not aay whether or not you agreed with say Bi— t^alorn, t t ^pat oare to express any views on that subjeet 1 would bo interested in rooeivin* thaau / \ H th a l l boot wiahoa and kindoat paraonal regarda, 1 am youra. falter * y * t t # Ooaoral Counaal. »u ^ as?i ||. 3 S ?i i . F r. iE 'iv M Reproduced from the Unclassified I Declassified Holdings of the National Archives F \ RD DECLASSIFIED Authority OFG O V E R N O R S I wec*D in maS f w sicipiob 1 MAR 26 1943 FEDERAL RESERVE SYSTEM Office Correspondence To_ Board of Governors From. Ronald Hansom Subject; Treasury financing. CONFIDENTIAL Carrfek Sometime ago I asked for a chart showing the extension through 1944 of the^pattern of securities then being issued by the Treasury, Of course this could be nothing more than a forecast, but I thought it might be helpful to see where we would come out by that time i f we continued to follow the then existing program. Copies were sent to a ll Board Members, I asked Mr. Goldenweiser to have Miss Burr take one copy of this chart and insert actual results for the four months November 1942-February 1943* On the attached chart the changes indicated in red are the actual results rather than the forecasted results. Also attached is a memorandum from Miss Burr, dated March 13./commenting on thes'e"cfianges. fhijTmay be interesting to members of the Board and is being circulated with the request that it be returned to me. FORC?nELATION Attachments 2 yI DECLASSIFIED Authority E o j Q G o f ^ \RD O F G O V E R N O R S ' ' I--~IW or THE FEDERAL RESERVE SYSTEM y 1 x 3 3 -*5 Office Correspondence T a _________Mr. Goldenweiser___________ 2 C 1843'* ^ Date M«reh lg j 1948 Subject:____________________ ___________ _ From_____ Ml«g Barr l ,7 9 ’ t.sL - [J / ,)4 Oa the attached schedalol of nonthly issues and redemptions ,j of public marketable securities through December 1944 prepared last ^ 'f \ r October, there have been inserted the actual r e m i t s for the four scathe November 1942-Febraary 1945. Comparison of actual resalts with the sehedale brings oat the following points; 1 * the monthly distribution of offering8 «&s greatly changed as a resalt of^l^illlMBber Victory Drive, the idea of which was at a very preliminary stage when the schedule was prepared. Three-quarters of the net change in securities took place in Decem ber. 2 . She net increase in marketable securities oat standing was aboat #S| billion less for these foar months than shown by the sehedale*- Nevertheless the net increase in del3mi» bills and in cer tificates outstanding has been somewhat larger than shown by the sehedale and the net increase in oatstsnding long-term bonds sold to investors has been smaller than shown by the sehedale* let increase in pablic marketable securities November 1942-Febraary 1945 (in billions of dollars) BUIS Certificates Notes Boods~short-tera long-term TOTAL As shown by October Schedule Actual 2*0 4*4 5*1 4*9 5*5 H 0 .2 4*0 3*5 17.2 5*1 2.8 15*7 Considering the fact that this sehedale showed by the end of 1944 a very substantial increase in bills and certificates, yen might well be concerned that offerings have ran ahead of tfee sehedale. S. The volame of savings bonds and tax notes appears to have changed daring the four months aboat as estimated, althoagh $ I Ql / „-» I t ----- — ftfr HI"""...... , 'HB» Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority r* the savin gs bonds appear to have run a l i t t l e behind the expecta tio n s o f September and the ta x notes a l i t t l e ahead* R evision o f th is schedule to December 1944, to take ac count o f the p e rio d ic V ic to ry D rives and the issuance o f s h o rt dated bonds, might g iv e some in t e r e s t in g r e s u lt s , e s p e c ia lly i f the r e v is io n were made a f t e r the r e s u lt s o f the A p r il d riv e are known. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority f. f '■ Governor FILES SECTION lARD OF G O V E R N O R S Office Correspondence To. Board of Governors From. Gov. Szymczak ^ SEP 3 0 1342 o r THt FEDERAL RESERVE SYSTEM Dfltft September <ik4l4±I am sure you will find the attached memorandum of interest. It relates to the subject '.ve discussed yesterday with the Pres idents at the Open Market Committee meeting. I am quite aware of the fact that there will not be much borrowing and we should not encourage Banks to go into debt over a lcng period cf time. However, having so realistic a presenta tion of the long range program by Drs. Golaenweiser and Williams," Y/e must be aware of the fact that we shall be compelled to rely more and more upon Open Market operations and less and less on reduction of reserve requirements. The job ahead of us is tremendous. It is only common sense, therefore, that urges us to provide rediscount facilities for member Banks at a rate which m i l make it possible for them to borrow, if and when reserve conditions in individual member Banks are such as to make this advisable and part of our long range program on the subject of reserves and Government deficit financing. I don’ t think, 'T11 Hi T nm fcriTfi1rl, that rediscounting can be expected, nor should be expected, to provide any major share of the new reserves needed. However, lowering the general rediscount rate is highly advantageous for member Banks, which may find themselves in a tight reserve position, to avail them selves of the rediscount facilities for which the Federal Reserve Banks were created. The attached memo concentrates on the subject discussed yesterday, namely, general versus preferential rediscounting. Attachment http://fraser.stlouisfed.org/ ;\ Federal Reserve Bank of St. Louis A & Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Form V.R. 131 REC'D IN FILES SECTION BOARD OF GOVERNORS o r THE FEDERAL RESERVE SYSTEM Office Correspondence To. Files From. Mr. Morrill AUG 16 1940 J Da1 ate..Attgmst 13 » JL9AQ.. Subjects During a meeting of the Board on August 9 , 194-0, Mr. Draper distributed copies of the attached memorandum relating to steps which might be taken to improve the relations of the f e d eral Reserve System to thegovernment security market and it was agreed that the matter should be considered at a conference to be held on Monday, August 12, 194-0. Messrs. Eccles, Ransom, McKee, Davis, Draper, Morrill, Carpenter, Thurston, Iftratt, Goldenweiser, and Piser met in the Board Room on Monday, August 12, for that purpose, at which time Mr. Draper stated that his reason for requesting that considera tion be given to the advisability of making the changes suggested was that he felt the present arrangement was not working satis factorily and that some program should be worked out which could be discussed and adopted ty the^Federal Open Market Committee. The draft of program was considered in the light of its possible effects on the Government security market, the inability of the System to control the causes of the present money market situation, and the suggestion that possibly the most important element in the solution of the problem was the selection of a manager of the System open market account who would report di rectly to the executive committee of the Open Market Committee rather than to a Federal Reserve Bank. With reference to the large amount of Treasury financ ing that would be necessitated ty the defense program, Mr. Gold enweiser stated that Messrs. Parry and Piser were working on a memorandum covering that matter which would be submitted to the members of the Board for consideration prior to the next Treasury financing operation, and Chairman Eccles said that between now and December of this year the Board might well make a complete study of the Government fiscal policy as it relates to monetary and credit conditions and thereafter express its views with re spect to the effect of that policy on the credit situation. Mr. Draper suggested that a committee be appointed to consider and report to the Board on the advisability of selecting * r Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority - 2- a well-qualified expert to make a study of the functioning of the Government bond market and submit a report containing recommenda tions as to the methods, if any, by which the present organization and functioning of that market could be improved. This suggestion was discussed and it was decided that between now and the first meeting of the Federal Open Market Com mittee after March 1, 1941> Mr. Draper would consult with members of the staff for the purpose of formulating a program which he would be prepared to recommend with a view to the consideration by the members of the Federal Open Market Committee in Washington of the desirability of placing it upon the docket of the first meeting of the Committee after March 1, 1941. SRC:sbm FOR A P P R O fllg Board toirnt Ife SifegMsM- FOB. FILES Sarah. Murphy Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority E 0 . / O 9 O I REC'D IN PILES ACTION AUG 1 6 1940 STRICTLY CONFIDENTIAL “------------Foreword The scope of this suggested program is not broad* In fact, it is so restricted that it is a fair question as to whether the changes suggested herein are worth making at all. However, this is the problem that faces us:- If in a meet ing of the Open Market Committee we are to discuss a definite plan for better control of government bond dealers, it seems essential that we present a united front at that meeting* With this aim in mind, we might as well be realistic and admit now that it is probably impos sible for all of us to agree upon a program which to some of us might seem too far-reaching* On the other hand, & modest program which we could all support might be considerably more effective than no program at all* Also, such a program would have 3 distinct advantages: First* It would give some of us a clearer insight into the problem as a whole. Second. It would educate our staff into a better familiarity with actual working technique. Third. It would serve as evidence to all concerned that while we believed present conditions could be improved, we had decided to proceed in a cautious and reasonable way, to which no fair-minded person could take exception. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED^ Authority - 2- Suggesfred Program With these facts in mind the following program is suggested:1 - The System should control within limits the portfolio of dealers. We know that this is taking place to some extent at present but there is evidence to show that the methods used are neither very definite nor very strict. We also receive no regular reports on just what is being done. 2 - Individual Reserve banks should provide to member banks and small investors a service of buying and selling government secu rities at existing New York quotations. Transactions under this plan should be limited to those in volving not more than $ 200,000.00 of government bonds in any one trans action. All transactions of this character should be carried on by each individual Reserve bank keeping in touch with us here in Washing ton and having its orders executed through us rather than directly with the New York bank. Our staff here in Washington, in turn, would keep in touch with the New York market by receiving hourly quotations in ordinaiy times or 30 minute quotations in times of crisis. From our point o f view, the advantages of having all this small business clear through our staff here in Washington are obvious. 3 - The System should engage in more frequent swap transactipns in order to keep the market as non-rigid as possible. U - Over-the-counter quotations should be made public at reg ular and frequent intervals during the day. This could be accomplished ^ ^ ^ " ■ '''a s a a i l M K a i i y M A i i 'y v . Reproduced from the Unclassified I Declassified Holdings of the National Archives 111 D E C L A S S IF IE D Authority -3by providing the Dow Jones Ticker Service with quotations on a selected list of the most active bonds every hour in ordinary times and every 30 minutes in time of crisis. 5 - The New York Stock Exchange should be used more freely than at present. This could be done by putting in bids and offers at more frequent intervals. It might be worth the effort to try and build up a larger amount of business on the Stock Exchange. 6 - A dealer's confirmation should indicate whether the transaction was executed on a dealer or a broker basis. 7 - Bank supervisors should be instructed to be more critical of those banks which are continually trading in and out of the market. 8 - The dealers, both recognized and unrecognized, should be encouraged to form an association for the purpose of improving trading practices in the market. If such an association were brought into being, and proper regulations adopted, it would give added strength to reputable dealers and to us in thwarting the efforts of those who at tempt to raid the market or act in other ways prejudicial to decent public and private standards. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £ t0.j090j ////?, STRICTLY CONFIDENTIAL - // ' N i t e c V i ^ F i i i k S ec tio n AUG 1 6 1940 « Some Thoughts On The Suggested Program Relating To The Government Bond Market B .G .D . 1. So far as small orders are concerned, the present pro cedure is an artificial one. all types of money. New York is not the money market for It is the money market for big money. The money markets for small money are west of the Hudson River. 2. From a management standpoint the present method of handling orders is inefficient in that, regardless of the location of the buyer, these orders are executed in New York whereas many of these orders could have been executed in the districts in which they originate. 3. Under this proposed plan New York would still execute all orders, both large and small, originating in its own district. Only those orders originating in other districts would be serviced direct. 4* The present arrangement of subservience by other banks to New York is an unhealthy one, particularly in a regional central banking system such as ours. If we were a purely central bank, such as some of the foreign central banks, the situation would be different. But we are not. 5. In these days when the System itself is so relatively free from burdensome problems, any move of this nature should help to re vitalize the System’ s regional activities without in any sense injuring the basic functions of the Open Market Committee setup in New York. FO R f il e s Sarah M u r p h y ir Reproduced from the Unclassified I Declassified Holdings of the National Archives miiiiiiiniiiOT^ D E C L A S S IF IE D Authority - 6. 2- As to the freedom of action of the dealers under the present setup, this state of affairs is fraught with danger, par ticularly under future potentialities in the world situation. If, in the future, our record shows that we have not even made a modest effort to strengthen this setup, we are certainly laying ourselves open to criticism that could have been easily avoided by a little extra foresight now. Even if this suggested program, or a similar one, is rejected by the Open Market Committee, at least the record will show that we are aware of the dangers involved and that we tried to do our best to meet them. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority K f y / O Z O j REC'D IN FILES SECTION AUG 1 6 1940 STRICTLY CONFIDENTIAL Foreword The scope of this suggested program is not broad. In fact, it is so restricted that it is a fair question as to whether the changes suggested herein are worth making at all. However, this is the problem that faces us:- If in a meet ing of the Open Market Committee we are to discuss a definite plan for better control of government bond dealers, it seems essential that we present a united front at that meeting. With this aim in mind, we might as well be realistic and admit now that it is probably impos sible for all of us to agree upon a program which to some of us might seem too far-reaching. On the other hand, a modest program which we could all support might be considerably more effective than no program at all. Also, such a program would have 3 distinct advantages: First. It would give some of us a clearer insight into the problem as a whole. Second. It would educate our staff into a better familiarity with actual working technique. Third. It would serve as evidence to all concerned that while we believed present conditions could be improved, we had decided to proceed in a cautious and reasonable way, to which no fair-minded person could take exception. mm Reproduced from the Unclassified I Declassified Holdings of the National Archives declassified Authority - £,GJQ9oj 2- Suggested Program With these facts in mind the following program is suggested:1 - The System should control within limits the portfolio of dealers. We know that this is taking place to some extent at present but there is evidence to show that the methods used are neither very definite nor very strict. We also receive no regular reports on just what is being done. 2 - Individual Reserve banks should provide to member banks and small investors a service of buying and selling government secu rities at existing New York quotations. Transactions under this plan should be limited to those in volving not more than $2 00,000.00 of government bonds in any one trans action. All transactions of this character should be carried on by each individual Reserve bank keeping in touch with us here in Washing ton and having its orders executed through us rather than directly with the New York bank. Our staff here in Washington, in turn, would keep in touch with the New York market by receiving hourly quotations in ordinary times or 30 minute quotations in times of crisis. From our point of view, the advantages of having all this small business clear through our staff here in Washington are obvious. 3 - The System should engage in more frequent swap transac tions in order to keep the market as non-rigid as possible. 4 - Over-the-counter quotations should be made public at reg ular and frequent intervals during the day. This could be accomplished Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Jp, by providing the Dow Jones Ticker Service with quotations on a selected list of the most active bonds every hour in ordinary times and every 30 minutes in time of crisis. 5 - The New York Stock Exchange should be used more freely than at present. This could be done by putting in bids and offers at more frequent intervals. It might be worth the effort to try and build up a larger amount of business on the Stock Exchange. 6 — A dealer's confirmation should indicate whether the transaction was executed on a dealer or a broker basis. 7 - Bank supervisors should be instructed to be more critical of those banks which are continually trading in and out of the market. 8 - The dealers, both recognized and unrecognized, should be encouraged to form an association for the purpose of improving trading practices in the market. If such an association were brought into being, and proper regulations adopted, it would give added strength to reputable dealers and to us in thwarting the efforts of those who at tempt to raid the market or act in other ways prejudicial to decent public and private standards. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority REC’ D IN FILES SECTION AUG i_G 1940 STRICTLY CONFIDENTIAL Some Thoughts On The Suggested Program Relating To The Government Bond. Market E.G.D. 1. So far as small orders are concerned, the present pro cedure is an artificial one. all types of money. New York is not the money market for It is the money market for big money. The money markets for small money a re west of the Hudson River. 2. From a management standpoint the present method of handling orders is inefficient in that, regardless of the location of the buyer, these orders are executed in New York whereas many of these orders could have been executed in the districts in which they originate. 3. Under this proposed plan New York would still execute all orders, both large and small, originating in its own district. Only those orders originating in other districts would be serviced direct. 4* The present arrangement of subservience by other banks to New York is an unhealthy one, particularly in a regional central banking system such as ours. If we were a purely central bank, such as some of the foreign central banks, the situation would be different. But we are not. 5. In these days when the System itself is so relatively free from burdensome problems, any move of this nature should help to re vitalize the System’ s regional activities without in any sense injuring the basic functions of the Open Market Committee set-up in New York. 6. As to the freedom of action of the dealers under the Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority -2 - present set-up, this state of affairs is fraught with danger, particularly under future potentialities in the world situation. If, in the future, our record shows that we have not even made a modest effort to strengthen this set-up, we are certainly lay ing ourselves open to criticism that could have been easily avoided by a little extra foresight now. Even if this suggested program, or a similar one, is rejected by the Open Market Committee, at least the record will show that we are aware of the dangers in volved and that we tried to do our best to meet them. DECLASSIFIED Authority E c >, 10 9 0 4 . REC'D IN FILES SECTION / MAY 101940, t> C- O ft lUy 9, 1940. Mr. George L , H arriso n , ?re#icL®nt, F ed eral Jaeserve tom* o f le v Xoric, M m lark,, Mew loric. It®*? Mr. liarriaous I wian to tbaak you for s ^ 7/rel&tiYe J o tae outcome of the experiment of & regular »portii*£ service from & representa tive group of' laveatweut mmJLug £irm. .i L 19 copy o f l e t t e r sent to e&cn firm in the ! SLr group* r e fe r r e d to i& /our l e t t e r as being enclosed t&erewita, * * s eviden tly os&tted in ^ a v e rte n ti^ . *kea i t i * re c e iv e d , I m ill c ir c u la t e jo u r l e t t e r to toe other members o f %'m » o tre fo r t k e ir u*for~ laation. b iiice rel^ >oura, (Signed) Chester F 1L C. Davis FOR FILES a Me; Carol Piper */> / Reproduced from the Unclassified Declassified Holdings of the National Archives DECLASSIFIED Authority )090j 1£ 'FILES SECTION T T 3^ DEC 2 7 1949 ^ I yx^1. 22, 19U9. 16% Jo)»i £• langua, Vic# Fr#sld#nt, 9 »d «rtl B###r»* Busk o f Chisago# Chicago 90, I llin o is . D#ar John: rfiW In accordfi&o# with your r»qu— t o f Dsowa b r 2 0 i w ar# #od o sin g thr## oopist o f t ^ ^ K i w e t l w t i t l e i # *A Proposal for a K#nr Typ# of Long-fsra Qo r r a w n t .JScb&Jj Th# proposaX shar## / a u d # l y . A# 1 r#w#rnbor i t Wic E is fls r was th* parla# mormr o rig in a lly , bat th# thing has b##n vorind «*r#r by # # w * I . oth#r# h#r# #t th# Board including Ralph, Woody, AX Koch, fa s Smith and sty##lf» 41 was largely r#s pooslbl# for th# ld#a o f th# pr##f#ot»# for presentation, although again this responsibility is shar#d by othars. Z as sorry that X forgot to wi rm you rog#rding th# tab!# 1b th# B#e#»b#r Ballot Id. At any rat# # yowr stod#ats at th# WisoeBsSa School w i l l hav# soa#thlng to work m t r m th# D##ssib#r loading a r t le ls . H*rry Chrlst*as. Slxsc#r#ly yours, (Siflned) RichardYoungdaM Hiohard Yoongdahl, Chlsf, OovsroxNmt Flzia&o# Saotioc, Division of R###aroh and Statistics* Sholo#ur#s 3* ll$8Mf Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority ^REC’ D i n FILES SECTION F e d e r a l Re s e r v e B a n k of C h icag o CHICAGO 90 December 20, 1949 Mr. C. Richard Youngdahl, Chief Banking Section Division of Research and Statistics Board of Governors of the Federal Reserve System Washington 25, D. C. Dear Dick; 1 C / Thank you for the documentjentitled WA Proposal For a New Type of Long-Term Government Bond”. I would appreciate receiving two or three additional copies of this proposal if they are available. By the way, who prepared the proposal? Sincerely yours, John K. Langum Yice President R e ^ j ^ W r o r n W U n c m 's if r e ^ /T O S r s 'if ie d 'H o ld in g s 'o f t h e National Archives DECLASSIFIED Authority Ed./aZa/ lX 'L IN FILES SECTION •x A jAN 5 1950 «2? •, ^ STRICTLY CONFIDENTIAL /.*>// f / V % ROPQSAL FOR A NEW TYPE m LONG-TERM GOVERNMENT Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority THE PROPOSAL To offer a new type of Government ‘ b ond that would be; Long-term Repaid, with interest, in equal instalments N onmarketable Redeemable at owner’ s option Available on tap WHY THE PROPOSAL? During the next three years the Government faces the problem of refunding or refinancing a major portion of its debt:— 45 billion dollars of bills, certificates, and notes are now outstanding. 45 billion dollars of bonds will become callable. Basic considerations regarding the maturity distribution and form of the Government debt:-** Too large a floating debt creates refinancing problems for the Treasury and greatly restricts the flexibility and scope of monetary action. Too large a volume of long-term, marketable securities presents problems of maintaining orderliness in the market for such securities. It would be in the public interest if a significant proportion of the refinancing required in the next few years would come from an offer of long-term, nonmarketable bonds that would appeal strongly to institutional investors. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E.0. FEATURES OF PROPOSED BOND 1. Denominations; $1,000 2. $5,000 $10,000 Price: 100 per cent 3* Semi-annual interest and instalment repayments of principal: $25 per $ 1,000 First semi-annual payment would be approximately l /2 interest and l /2 repayment of principal; thereafter a decreasing proportion of each semi annual payment would be interest and an increas ing proportion, repayment of principal, for the outstanding principal would gradually be declining. Period of repayment: 28 years 5* Redemption privilege: At owner’ s option 6 . Yield: When held to final maturity--2.52 per cent When redeemed prior to maturity— approximately equal to the yield that might be obtained by investing for a corresponding maturity in the present G-overnment securities market. 7• Amount which may be held: Available for subscription at any time in unlimited amounts. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority PAYMENTS AND YIELD OF BOND Ssmi-annual payments made on a $ 1,000 bond of the proposed type at the end of the years noted would be as follows: Repayment of principal End of* Total payment Interest First year $ 25.00 $ 12 . kk $ 12.56 Fifth year 25.00 11.12 13.88 Tenth year 25.00 9.2? 15.73 20th year 25 .00 4,79 20.21 28th year (maturity) 25.00 .31 24.69 The bond would yield the following percentage return if held for the period indicated: Redemption value at end of period indicated: y . ,, , * redemption $ 960.55 1 .10# 2 .65# Five years 814.70 1.41 3.14 Ten years 654.81 1 .8h 3-67 20 years 324.68 2.33 5.14 2.52 mb am Period held: One year To maturity (28 years) Additional yield if he from end of period inc cated to ;aturlty: Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority WHO MAY OWN? Nonbank investors only, except that savings deposits of banlcs may be invested on a formula basis, The bond should appeal particularly to: Life insurance cohp'a:\i6S Fire, marine, casualty, and surety insurance companies Fraternal benefit iaeurance companies ar.d organizations Banks with savings deposits Savings and loan associations Trust funds Pension funds Endowment funds College and univd~£i i,7 funds Foundations Religious organizations Trade unions Credit unions It would also be available to individual investors, but would be most attractive to those with large accumulated savings. No limitation on amounts that could be purchased or held. General Comment:— Ineligible for commercial bank investment, except for a specified proportion of savings deposits. The bond would be an attractive form in which to hold some of the commercial bank funds now invested, for liquidity reasons, in bills and certificates. In such investments, however, heavy redemptions and new purchases would be a burden on the Treasury and a source of confusion in the money market. Once seasoned, the bond should command a growing market with portfolio investors, institutional and indi viduals . "H T Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ADVANTAGES TO INVESTORS The bond would be particularly attractive to institu tional investors because: (1) It would be safe (2) It would yield a comparatively high return (3) It would be liquid (*f) It would provide a staggered series of principal repayments and offer good opportunity to carry out a flexible investment policy in accordance with changing market conditions. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority /D ^ O j ADVANTAGES TO THE TREASURY The bond would assist th© Treasury ins (l) Obtal-.lng long-term money at low cost. (2) Moving toward a more balanced debt structure, particularly as to maturity. (3) Placing an additional and significant portion of the long-term debt in permanent hands because of the high additional yield investors have to forego if they redeem the bond prior to maturity. (*0 Mitigating debt management problems of the type that have prevailed thus far in the postwar period. Our monetary and debt management authorities have recognized the need for main taining an orderly market for long-term market able Government securities during this peribd, but this tended to offset the effects of other measures taken by them to promote economic and monetary stability. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ADVANTAGES TO m Kfy/o£oi FEDERAL BESERVE (1) Reduce possibility of need for support operations (2) Increase the flexibility of credit policy. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £ .0 ,1 0 5 0 ) ADVANTAGES TO THE PUBLIC Issuance of this "bond ir a significant amount helps to assure the public that: (1) Monets.? and credit policies appropriate for :u.,intaining stable economic progress will be more flexibly and promptly adopted. (2) The Treasury is prepared to put some part of its debt on a regular retirement basis. Funds for debt retirement might be considered a part of the Federal budget, and a semi automatic method of debt reduction be adopted. (3) A freer, yet orderly, Government securities market will continue to be an objective of national financial policy. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority SUPPORTING MATERIAL Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IT ,& /d ^ O j IMPORTANCE OF FEDERAL DEBT IN THE ECONOMY The Federal debt now is: Approximately equal to the gross national product In 1939, it wag less than 1/2 In 1929, it was less than l/5 About 1 1/2 times the size of the money supply In 1939, it was 5/6 In 1929, it was 1/3 About 60 per cent of all public and private debt In 1939, it was 1/4 In 1929, it was l/lO The Federal debt backs: 3/5 of 1/3 of our total deposit and currency supply. our life insurance reserves. All of our postal savings. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IT .& . / <3£ O j- THE CURRENT STRICTURE OF THE GOVERI-MENT DEBT As of August 31, 19^9, the total Federal debt was: 256 151111011 dollars This total was made up of 25k Mllion dollars of interesthearing, and 2 billion of matured or non-interest bearing, securities. The interest-bearing debt was made up of the following types of securities: $156 billion Marketable securities Bills, certificates and notes 45 Bonds 111 6l Eligible for banks to own Partially or wholly tax exempt Fully taxable Restricted as to bank owner ship 15 46 50 65 Nonmarketable securities Series E savings bonds Series F and G savings bonds Savings notes Investment bonds Other bonds Special issues Total 33 21 7 1 3 33 25^ Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority PATTERN OF DEBT INSTRUMENTS USED IN WAR FINANCE During th© five year period ending December 31, 19^5 the Treasury obtained 377 billion dollars to finance the war. This total included 1^9 billion from taxes and 228 from borrowing. Type of Security Amount issued (In billions of dollars) Marketable debt Purchased mainly by;- 157 Bills, certificates, and notes 69 Bonds 89 Banks, other institutional investors, and large corporations for liquidity Eligible for banks to own 36 Banks and other institu tional investors for income Restricted as to bank ownership 52 Institutional investors and individuals for income Nonmarketable debt 56 E bonds 31 Individuals with low or medium incomes for high return and price stability F and G bonds Ik Individuals with high incomes and institutional investors for high return and price stability Savings notes 8 Corporations for liquidity and price stability Other 3 Special issues 15 T o ta l 158 Government agencies and trust funds for income and price stability Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority WAR EXPERIENCE WITH THE PRINCIPAL TYPES OF G O V E M M T SECURITIES Marketable debt Bills, certificates, and notes Purchased in large volume at low yields during the war period, principally "by banks, other institutional investors, and large corporations. Investor needs for liquidity were glutted by an over supply of these securities and many holders tended to shift from these securities to marketable Government bonds in large volume in the early postwar period, thereby necessitating large-scale open-market operations in Government securities by the Federal Reserve System and the Treasury’ s trust funds to maintain orderly markets. Bonds Purchased in large volume by investors during the war period, but with large-scale, short-run purchases to obtain capital gains. Much shifting of existing eligible bonds to banks. In the postwar period, large-scale shifting by investors, particularly institutions like life insurance companies, out of long-term marketable Government bonds into higher* yielding private obligations, mainly corporate bonds and mortgages, thereby augmenting the inflationary pressures of the time. Nonmarketable debt Savings bonds Purchased in large volume by investors, mainly individuals, during both the war and postwar periods. Total holdings of savings bonds were maintained and expanded during the postwar period. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED A u th o rity THE CURRENT OWNERSHIP OF THE GOVERNMENT DEBT As of August 31, 19^9, th© debt is estimated to have been held as follows: Held by: Amount (in billions of dollars) Banks Composition of holdings:" 84 Commercial banks 67 Federal Reserve Banks 18 Nonbank investors About 45 billion, or 3/4, of all bank eligible bonds; and 19 billion, or over 40 per cent, of all bills, certificates, and notes out standing About 8 billion of bonds, 5 billion ineligible for com mercial bank ownership; and nearly 10 billion of bills, certificates, and notes 133 About 49 billion, or 7/8, of all savings bonds out standing; and about 17 billion of other bonds, mostly marketable. Individuals 69 Insurance companies and mutual savings banks 32 About 31 billion of bonds, 24 billion ineligible for commercial bank ownership 32 About 11 billion of bonds, and 21 billion of bills, certificates, and notes, including 6 billion of savings notes Business corporations, associations, and State and local governments U. S. Government agencies and trust funds T o ta l 39 About 33 billion of special issues of bonds, and 6 billion of other securities, mostly bonds ineligible for commercial bank ownership Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fftG O j MATURITY DISTRIBUTION OF THE U. S. GOVERNMENT DEBT As of August 31, 19^9, th© total Federal debt comprised the following maturi ties or first call dates: Type of debt and maturity:- Amount L'. billions of dollars) Marketable debt 156 1949 - 1950 Includes 16 billion of bonds 6l 29 1951 - 1952 1953 - 1955 1956 - 1958 1959 - 1962 1963 - 196? 4 7 12 k2 Nonmarke table debt 67 All redeemable at option of investor. Shown as if held to maturity Savings bonds, savings notes, and investment bonds 1949 . 1950 2 1951 » 1952 1953 - 1955 15 25 17 19 5 6 - 19 5 8 k 1 1959 - 1962 196 3 - 19 6 7 Matured and other debt redeemable at option of holder Other Special issues General Comment: - 33 Total Government trust funds by law must invest excess receipts in Federal securities. Net redemp tions are unlikely for many years, barring a depression Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority “>-_T *F "MISC. ■ r"'t136 lBSM i - , r 1.0-38 FE D E R A L * R E S E R V E B A N K CMf N E W Y O R K 1N TER O FFK ROUTE SLk 5/10/40 to Secretary t o ____ Bton. Chester C. Davis DEPARTMENT DIVISIO N REMARKS Thte attached is copy of letter which should have been enclosed in letter of 5/7/40 to Gov. Davis from Mr. George L. Harrison FROM NQrman P. Davis - Manager Security Loans Department. D d epartm en t iv is io n N . B . USE THtS FORM INSTEAD OF OFFICE ENVELOPE WHEN POSSIBLE. TO INSURE PROMPT AND ACCURATE DELIVERY A L L COMMUNICATIONS SHOULD BE D ISTINCTLY LABBLKD. ".""wr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASS1F1£1) Authority REC’ O m F IL E S SECTION MAY101940 F e d e r a l R e se rv e B ank of Ne w Yo r k May 7, 1940. Dear Mr* Davis: Under date of April 6, 1933, I wrote to you concerning our plans to inaugurate a regu lar Reporting service from a representative group of ^investment banking firms. For the information of yourself and the other members of the Board, I enclose herewith copy of a letter which I am send ing today to each firm in the group giving notice of the discontinuance of the weekly reports with c irc u la tio n respect to underwriting commitments and inventory positions* As you will note from the letter, we have not found these reports to be of sufficient value to justify the trouble and expense of their compilation by the reporting firm or of their analysis by ourselves. Faithfully yoi*£s, arrison, ‘ ge President. Hon* Chester C* Davis, Board of Governors of the Federal Reserve System, Washington, D* C* Enc. FiistteMr.Jhokm. *r. Ransom Mr. Szymczak. M McKee Mr. Davis .. r. Draper. Mr. Clayton Mr. Morrill Mr. Bethea. **** Mr. Carpenter Mr. Noell . Mr. heast n*te turn t» Mrs, r FOS FILES a E. IL Mc2»*w | - ' j " 11".......... Reproduced from the Unclassified / Declassified Holdings of the National Archives ........ - DECLASSIFIED Authority (0 9 0 j \ c 0 May 7, 1940 Y Mr. Harold Stanley, Morgan Stanley & Co., Inc., 2 Wall Street, New York, N. Y. Dear Mr. Stanley: You will recall that I wrote to you under date of April 6, 1938, and subsequently discussed the partici pation of your firm, and other investment banking firms, in a confidential reporting service which would help to keep us informed concerning the functioning of the new issues market, and which might also prove helpful to the market. Through the cooperation of a representative group of firms, the reporting service was established about two years ago. It has been of distinct value to us, not only because it has improved our knowledge of the methods and processes by which new issues are underwritten and distributed, but more particularly because of the in tangible, but nevertheless very real, benefits which my associates and I have obtained from personal contact with you and your associates. At the present time, however, the use which we can make of the weekly reports submitted to us by your firm, and the other firms, does not seem to us to .justify the effort of their preparation by you, and of their compilation and analysis by us. We, therefore, propose to discontinue this part of the service after this week. As I am anxious that the discontinuance of the weekly reports at this time be not construed as an abate ment of our interest in the functioning of the new issues market, and as I anticipate that there will be numerous occasions when we shall desire to obtain specific informa tion with respect to particular issues or general conditions in the market, I hope that I and the officers of this bank, who have been heretofore functioning in a liaison capacity with your firm, may feel free to call upon you for such information. I should also be grateful if your firm would continue to furnish us, as heretofore, with periodic state ments of financial condition. I renew my expression of sincere gratitude for the cooperation which you have given in this undertaking. Faithfully yours, NPD:AS:am George L. Harrison, President. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority REC’ D IN FILES SECTION 7onaF.IL 131 BOARD O F G OVERNORS I.. AUG 3 1 1949 □ F TH E FEDERAL RESERVE SYSTEM Office Correspondence Date April 2,91 1940 To. Dr, Goldenweiser Subject: The principles of open- From. Emile Despres market policy reconsidered________ The principles governing open-market operations were developed at a time when the short-term money market occupied a strategic place in our banking framework. Federal Reserre policies operated in the first instance upon the short-term money market, and the broader effects of these policies upon the economy were communicated through that channel. In other words, that market was the principal point of contact between the Federal Reserve System, on the one hand, and the banks and the whole economy, on the other. Through its operations in short-term Treasury securities, the System was able to increase or decrease the volume of member bank rediscounts, and the banks responded to the variations in their indebtedness by altering the terms upon which they placed funds in the money market. Now, however, member banks, instead of having to borrow from time to time in order to keep their reserves at the required level, have excess reserves in an amount which is more than double the System*s security portfolio; meanwhile, the supply of most kinds of short-term paper has been reduced to a mere fraction of its volume in the Twenties. There is little likelihood that it will be possible to restore the mechanism of the Twenties, even if such a development were desirable. It is clear that open-market operations no longer possess the sort of significance which they had in the past. Since the principles which were developed under the conditions of the Twenties do not furnish satisfactory guidance today, there is need for a new appraisal of the functions of openmarket operations in the light of today’ s conditions. It is generally acknowledged that the final objective of central bank policy in its relation to economic activity is to influence the volume of expenditure in the markets for goods and services. The influence of the central bank upon expend iture is only indirect, however, and operates through the market for loanable funds. By influencing the cost and avail- 1 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority D r . Goldenweiser - 2- A p r i l 29, 1940 a b i l i t y o f funds to those ■who w ish to borrow and spend, the c e n tra l bank can exert a re ta rd in g o r s tim u la tin g e ffe c t on the volume o f such expe n d itu re . The c e n tra l bank’ s in flu e n c e is confined to the supply side o f the lo an m arket, and the a c tu a l amount o f borrowing is dependent, o f course, on a v a r ie t y o f o th e r fa c to rs as w e ll. N e ve rth e le ss, the volume o f expenditure is never w h o lly independent o f the cost and a v a i l a b i l i t y o f loan able funds, and the c e n tra l bank*s in flue nce over the flo w o f expenditure and income d e rive s from t h is f a c t . The fo c a l p o in t o f Reserve System c o n tro l du rin g the Tw enties was, as noted e a r l i e r , the s h o rt-te rm money m arket. T h is c o n tro l could be exercised because the Reserve System was able to in flu e n c e the volume o f member bank indebted ness through open-market o peratio ns and to determine the cost o f t h is borrow ing through re d isco u n t ra te s . W ith these in struments a t i t s d isp o sa l the System had power to produce ra p id and s u b s ta n tia l changes i n the le v e l o f open-market s h o rt-te rm r a te s , and these ra te movements le d to much sm aller movements i n the y ie ld s o f lo n g -te rm s e c u ritie s and in money ra te s o utside the p r in c ip a l f in a n c ia l c e n te rs . The System sometimes regarded i t s fu n c tio n as one o f in flu e n c in g the money and c a p ita l m arkets, and sometimes as one o f in flu e n c in g the volume of bank d e p o s its . Under the circum stances then p r e v a ilin g , i t made l i t t l e d iffe re n c e , in p r a c tic e , which in te rp re ta t io n was adopted. To da y, however, the d is t in c t io n is an im portant one, and i t i s th e re fo re w orth p o in tin g out th a t i t is through the money and c a p ita l markets th a t c e n tra l bank p o lic ie s , and changes in the money supp ly, exert an in flu e n c e on economic a c t i v i t y . A part from i t s e ffe c ts on t h e i n t e re st ra te s tr u c tu re , a change in money supply has & ^ aJ r * ' T "“T i t t l e e c o n S M T 'F i^ IT Ic a S c e T ^ I n p r in c ip le any volume o f expenditure in the markets f o r goods and s e rvic e s can be H 'T financed from any q u a n tity o f money. A l l th a t is necessary is th a t the volume o f tu rn o ve r be s u f f ic ie n t ly ra p id o r slow . Of course, t h is p r in c ip le can be pushed to absurd le n g th s , b u t, w ith in the l i m i t s o f p r a c t i c a l i t y , a l l degrees o f prosper i t y o r depression can e x is t whatever the q u a n tity o f money may be. Open-market operations d u rin g the Tw enties operated through t h e i r e ffe c ts on the le n d in g o r investment p o lic ie s o f banks. F o r example, by s e llin g s e c u ritie s in s u f f ic ie n t Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority D r . G-oldenweiser -3- EtfJoZoj A p r i l 29, 1940 volume, the System was able to check an expansion of bank loans and investments, and bank deposits, or could even produce a contraction in bank assets and deposits.1/ The rise in money rates tended to draw domestic nonbanking funds, as well as foreign funds, into the money market. Thus, as banks with drew from the loan market, bank depositors exchanged their deposits for the short-term assets previously held by banks. The decline in deposits was accompanied by a transfer of earn ing assets from banks to their depositors. Clearly, a shift in asset holdings from cash to nearby substitutes for cash need not have any' effect on the volume of expenditures for goods and services. The statement frequently made that the Reserve System can influence the volume of deposits but not their rate of turnover is, therefore, not quite accurate. Any central bank action which tends to expand or contract the volume of deposits leat£~an opposite ~effec¥~03a~their rate of turnover. It is only in so far as thr effontt rm thn vnlnmn dopoaitti outweighs--jrfrs offgg'trLHi& cffuoO on Ike ralu ’ (If'turn- j;<flp®3P-that central bank policy can influence the flow of expend iture and income. >r*V. I n p r a c t ic e , o f course, c e n tra l bank p o lic ie s in flu e n c e not o n ly the volume o f d e po sits but a ls o , to a much sm a lle r extent the flo w of expenditure and income. I n o th e r words, t h e ir effeG on the volume o f de p o sits is not com pletely n u l l i f i e d by t h e ir e ffe c t on the ra te o f tu rn o v e r. But i t i s because money and in te r e s t ra te s are ra is e d by r e s t r i c t i v e p o lic ie s , and lowered by expansive p o lic ie s , th a t the volume o f spending f o r goods and se rvic e s i s in flu e n ce d by c e n tra l bank a c tio n . \\ L e t us assume, f o r example, th a t as the r e s u lt o f openmarket sales by the Reserve System, commercial banks b id somewhat le s s a c t iv e ly f o r s h o rt-te rm paper. Tre a s u ry b i l l ra te s r is e from 3 to 4 per c e n t, c a l l money advances from 4 to 6 pe r c e n t, and s im ila r , though g e n e ra lly s m a lle r, movements occur elsewhere in the in te re s t ra te s tr u c t u r e . As a r e s u lt o f the r i s e in ra te s co rp o ra tio n s and i n s t i t u t i o n a l in v e s to rs decide to exchange a p a rt o f th e ir, bank depo sits f o r earning assets p re v io u s ly held by banks. Thus, a p a r t ic u la r in d u s t r ia l c o rp o ra tio n which fo rm e rly held #10,000,000 in bank depo sits may now hold o n ly $3,000,000 on d e p o s it, w ith , say, $ 4 ,OCX),000 i n c a l l loans and #3,000,000 in Tre a s u ry b i l l s . The f a c t th a t the c o rp o ra tio n is Ol****. tujt y The re la tio n s h ip o f Fe d e ra l Reserve p o lic ie s to movements o f fo re ig n funds, and the r e s u lt in g lim it a t io n s on Sys tem a c tio n , w i l l be l e f t out o f account in t h is a n a ly s is . is' ,. h Reproduced from the Unclassified / Declassified Holdings of the National Archives D r . Goldenweiser DECLASSIFIED Authority -4 - A p r i l 29, 1940 now earning a h ig h e r ra te o f re tu rn on i t s f in a n c ia l assets may lead i t to postpone c e rta in types o f o p tio n a l expe nditure, such as f o r in v e n to ry o r p la n t and equipment. More im po rta nt, the increased c o s tlin e s s o f borrow ing may lead to some reduc t io n in the amount c u r r e n t ly borrowed and, th e re fo re , in the stream o f expenditure f o r goods and s e rv ic e s . Th u s, the in flu e n ce which c e n tra l bank p o lic ie s exert on the volume of expenditure f o r goods and se rvic e s i s exerted through t h e ir e ffe c t on money and in te re s t r a te s ; changes in the volume of bank depo sits a f fe c t spending and economic a c t i v i t y o n ly i n d i r e c t l y , through the market f o r loanable funds. T h is p o in t has been so f u l l y developed because i t i s not g e n e ra lly understood and because i t i s o f p a r t ic u la r s ig n ific a n c e under present c o n d itio n s . The present la rg e supply o f cash is accompanied by an extrem ely sm all supply o f s h o rt-te rm assets w hich re present nearby s u b s titu te s f o r cash. The change in the com position o f assets o th e r than cash has operated to in crease g re a tly the demand f o r cash. P r io r to 1933, banks were c u sto m a rily "loaned up” to the l i m i t o f t h e ir a v a ila b le re serve s and the y fre q u e n tly went in to debt to the Reserve banks f o r s h o rte r o r lo n g e r p e rio d s . They h e ld , however, la rg e secondary reserves in the form o f open-market paper, and o f t h e ir rem aining assets a considerable p o rtio n consisted o f customers’ lo a n s, secured o r unsecured, which were a t le a s t n o m in a lly sh o rt term . Today the secondary re se rve o f open-market s h o rt-te rm assets has d e c lin e d , customers1 loans are g r e a t ly dim in ish e d , and ho ldings o f lo n g e r-te rm a s se ts, la r g e ly Government s e c u r it ie s , have in crease d. Excess reserves are t r u l y "excess” o n ly i n the le g a l sense. I n an economic sense, they meet the banking sys tem’ s demand f o r l i q u i d i t y w hich was fo rm e rly met by i t s hold in g s o f s h o rt-te rm a sse ts. The w illin g n e s s o f banks to hold t h e ir present p o r t f o lio s o f Government s e c u ritie s a t e x is tin g y ie ld s i s dependent on the present supp ly o f excess re se rve s. F o r bank de p o sito rs t h e ,s to r y i s v i r t u a l l y the same. The b u lk o f the grow th in d e po sits r e la t iv e to predepression le v e ls has been in the d e po sits o f f in a n c ia l in s t i t u t i o n s , t r u s t funds, and w e ll-t o -d o in d iv id u a ls . F o r them cash has taken the place o f earning assets and the demand f o r cash has been heightened by the de arth o f nearby a lte rn a tiv e s i n the form o f s h o rt-te rm paper. The p o p u la rity o f savings bonds * ^ ^Rgpf^fQ^CJ^fremniTg^mtSSSgif^rE^f^rfi'^tl ^OldrrTgs^of the National'Archives* DECLASSIFIED Authority D r . Gol&enweiser -5 - E.0.IO5OI A p r i l 29, 1940 among i n s t i t u t i o n a l in v e s to rs and w ealthy in d iv id u a ls i s i l lu s t r a t i v e i n t h i s connection. The demand f o r cash, besides being l a r g e r , i s much more v o l a t i l e than in the Tw e n tie s . Large in v e s to rs , in ste ad o f being o ffe re d a wide range of assets o f v a ry in g degrees o f l i q u i d i t y , are v i r t u a l l y confronted w ith the choice o f h o ld in g cash o r lo n g -te rm s e c u r it ie s . U n c e rta in ty re g a rd in g the fu tu re p r ic e o f such s e c u r it ie s , i . e . , the fu tu re le v e l o f in te re s t ra te s , pro vid e s the p r in c ip a l m otive f o r h o ld in g cash. Anyone would much ra th e r hold an asset y i e l d in g , say, 2 1/4 pe r cent than hold cash,provid ed he were c e rta in th a t the asset m ight be exchanged f o r cash a t any time in the fu tu re f o r a t le a s t i t s o r ig in a l c o s t. But t h i s c e r ta in ty does not e x is t and sp e cu la tive a n tic ip a tio n s have fre e p la y in t h e ir in flu e n c e on in te r e s t ra te s . S e ve ra l p o in ts emerge from t h is a n a ly s is . I n the f i r s t p la c e , open-market opera tio n s have s ig n ific a n c e no t o n ly hAeanse rvf* t h a jr rm a lso beeamge o f _ b e a r t B l r of hiffh -g rade secu r i t i es. I f ih e market b e lie v e s th a t the System i s prepared to fu rn is h vlg o ro u s support to the Government s e c u rity m arket, h o ld e rs o f h ig h -g ra d e s e c u ritie s w i l l be le s s disposed to press t h e ir h o ld in g s on the m arket. Second, i t i s ju s t as t r u l y de;Oj3dLiJ3fiar^ .jt o -x e f ra in from buying Government to seme ?oreseen~evenf7 th e re is sudde n ly increased demand.£s>r.s&s£u th e * ^ B ^ M "l;o press i t s h o ld in g s on a p r evio u s ly Since f l l H i u p p ly o f funds is s ig n if ic a n t o n ly because o f i t s r e la t io n to the in te r e s t ra te s tr u c tu re , the System is r e tr e a tin g from i t s e s s e n tia l task i f i t regards i t s job as th a t o f d e te r m ining the supply and a llo w in g the le v e l o f ra te s to respond to the market*s changing a n t ic ip a t io n s . T&eJReserve System should no t t r v to avoid wta k in g a v ie w” re g a r d i^ ^ n f e r e g T ~ ^ r tg B ." " ~— ’ ghird, since thaJEoaar^mJSzatgm was created to provide elasticity to~~t^Tanking system^ it never had much power to check inflatronT^Tfcs” power today is greater than in the fggfr, tiyeMugg-^ mo-re control over , ” IOTeW§ f'"fiTt^sT^It can influence not only'lSe^suppiy money B u F also iEe'i^eSgn^ for--gash lirTBlafrion \% long-term Merely by indicating that it regards intearest rates L Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £ , 0 . l Q 9 o j D r. Goldenweiser - 6- A p r i l 29, 1940 as too low and is prepared to press i t s s e c u ritie s on the m arket, the System could produce a sharp marking up o f bond y i e ld s . C o n ve rse ly, by in d ic a tin g th a t i t is prepared to keep in te re s t ra te s from r i s in g otherw ise than w ith extreme gradualness, the System could g r e a t ly increase the demand f o r s e c u ritie s a t present y ie ld s . F i n a l l y , a coordinated in te r e s t ra te p o lic y among Government agencies is g r e a tly needed to day. System open-market o p e ra tio n s, Tre a s u ry debt o p e ra tio n s , and the a c t i v i t i e s o f Government le n d in g agencies should a l l be brought w ith in the scope o f a u n if ie d p o lic y . T he Government as a whole has fa ru m©j2Q_power to in f l ;uCTLce^the_^co^tllwjs^d.„.SS8kiI^^i^i^^yOT^l^'fttJ^ds~'Jt?^,' borrowers than i n the pas t . T h is gower^ahoulfl frQ. e f f e c t iv ely-^ Qo^rM«atBd""To promote expansion now and s t a b i l i t y l a t e r . mr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority j6ib » piles wmm 8“*194Q ' March 11, 1940. STRICTLY CONFIDENTIAL QUESTIONS FOR THE FEDERAL OPEN MARKET COMMITTEE The System’ s open market operations, usually intended in the past to add to or to subtract from the reserves of the member banks, have been intended in recent years to influence the course of the mar ket for Government securities with a view to preventing panic, mini mizing disorder, or "exercising an influence toward maintaining orderly market conditions”. The problems of the Federal Open Market Committee have accordingly become more numerous and more difficult. The purpose of this paper is to state some of these problems, to describe some of the proposed solutions, and to summarize with respect to each proposal the principal arguments both pro and con. One of the difficult problems is that of formulating the objectives of contemplated operations with sufficient precision to make possible a real meeting of minds among the several members of the Com mittee. In the absence of such formulation, discussion is difficult to focus and decision is impeded. In addition there is tho difficulty of transmitting proper instructions to the manager of the System Open Market Account and determining, both during and after the event, whether the purposes of the Committee are being effectuated. On the purely technical side, moreover, market operations designed to promote sta bility in the market must be broader in scope and more speedy and flexible in execution than market operations designed to influence the volume of member bank reserve balances. Twr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority K a /O ^ O J Three of the proposals for meeting the situation that have been made from time to time arc discussed, in this paper, each of which could be adopted either with or without the others: (1) changing the System agent selected by the Committee from an institution to an in dividual; (2) conducting open market operations at all Federal Reserve banks instead of at only one Reserve bank; and (3) having the System operate continuously instead of occasionally. At the end of this dis cussion, some proposals of a quite different order are enumerated and cornrnented upon. Proposal for changing the System agent selected by the Com mit toe. - The first proposal is that the Federal Open Market Commit tee, instead of selecting as the System’s agent either the Federal Reserve Bank of New York or any other Reserve bank, should select some individual, who 'would execute transactions in and manage the Sys tem Open Market Account, acting for all of tho Federal Reserve banks collectively as the Federal Reserve Bank of .New York does at present. He would not be on the payroll of a particular Reserve bank, however, and would not be on the payroll of the Board. He would be answerable to the Committee, but would have no more responsibility to any one member of tho Committee then to any other member. A manager so ap pointed could be located in New York, or he could (if the Committee should so desire) be located in Washington, or the Committee could choose both a manager and an associate manager, with tho idea that, taking turns, one of them might always bo in Washington. It may be argued in favor of the proposal that it would ef fect a clean-cut separation between policy-making personnel ond operating »■;'... ....... Reproduced from the Unclassified / Declassified Holdings of the National Archives 'j ......-......... . 1" ' r m 1........... DECLASSIFIED Authority )0 9 0 j personnel, tlius eliminating one important source of misunderstanding, and that the agent-manager’s contacts with the several members of the executive committee and of the full Committee would be much, closer than they are now. This should facilitate both the formulation of open market policy and its execution, especially as the closer con tacts should lead in due time to assimilation from the manager by all the members of the Committee of the technical lessons of market ex perience. Possible arguments against the proposal are that for oper ations of such magnitude an'*!festitutional rather than an individual agent may be preferable as being more responsible, and that a manager of the account who had less independence of the Committee than the Committee’ s present agent and manager might fail to stand out suffi ciently in the counsels of the Committee against any tendency in the Committee to undertake operations technically unsound. The arrange ment would naturally be viewed with hostility in at least some parts of the financial community and might consequently be handicapped in maintaining the cooperation of dealers and dealor-banks which has al ways been cultivated by the officers of tho Nov- York Reserve bank and which has been found to be very valuable in connection with the acqui sition of market information and helpful in connection with the floating of new issues of Government securities. Proposal to provide for System dealings in Govorument securities at every Federal Reserve bank. - The second proposal is that, in stead of confining System dealings in Government securities to the Fed eral Reserve Bank of New York, provision be made for dealings at every i mr Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 4. Fe deral Reserve bank. The mechanics o f the proposed arrangement would not in v o lv e d e c e n tra liz a tio n o f c o n tro l. The general manager o f tra d in g f o r the e n tire System would probably continue to be the System’ s sole " t r a d e r ” in New Y o rk , but he would in any case have under h is s u p e rvis io n a d i s t r i c t manager at every Fe d e ra l Reserve bank. Under h is su p e rvisio n each d i s t r i c t manager would be empowered to deal in Government s e c u ri t ie s f o r System account in h is own d i s t r i c t , on the ba3is o f lim ite d bids and o ff e rs decided upon by the general manager o f System tra d in g and communicated by him c u rre n tly and con tin u o u sly to a l l the d i s t r i c t managers by te le ty p e o r o the rw ise. The tra n s a c tio n s a t o u tly in g Re serve banks would be d ire c te d by tho general manager according to a Sys tem p la n , worked out along lin e s approved by the Fe deral Open Market Committee, th a t would cover such d e ta ils as the amount o f i n i t i a t i v e th a t e ith e r the general manager o r the d i s t r i c t manager m ight be a l lowed to take, how fre q u e n tly (as weeklir o r d a ily ) any s e c u ritie s taken te m p o ra rily in to the account o f an in d iv id u a l Reserve bank should be c a rrie d to System account, and the 3ize o f the maximum in d iv id u a l tro n s a c tio n th a t m ight be handled by the d i s t r i c t manager w itho ut having to consult the general manager. In fa v o r o f the proposed arrangements i t may be argued th a t they should enable the System to be more e f f e c tiv e by d e a lin g w ith d is tu rb in g liq u id a t io n "a t i t s so urce", e s p e c ia lly th a t a r is in g f a r away from New Y o rk . Widespread d e a lin g s should add to the e ffe c tive n e s s o f tho o u tly in g Fe d e ra l Reserve banks in the counsels o f the System by g iv in g these Reserve banks increased o p p o rtu n ity f o r a c q u irin g an in tim a te Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority E ,t> .( 6 G o j . knowledge o f the market. The s e rv ic e rendered to member banks might be much a p p re cia te d , e s p e c ia lly by the sm a lle r banks which are unable to h ir e t h e ir own " tra d e r" in Governments to p ro te c t them in de a lin g in the open m arket. In past y e a rs , before the open market o peratio ns o f the Reserve banks were com pletely c e n tra liz e d , the re was some buying and s e llin g by in d iv id u a l Fe d e ra l Reserve banks, and even now the Re serve banks do in a sm all way something s im ila r to t h is when they serve upon request as brokers (w ith o u t commission) f o r member banks. There are in a d d itio n two f u rth e r p o in ts , i l l u s t r a t e d by in c id e n ts in Sep tember o f l a s t y e a r, both o f which re la te to the emergency occasions when the market is u n u su a lly weak and the System is almost the only buyer: Large member bonks o u tsid e New York C it y which have some s e l l i n g to do f o r correspondents at such times f e e l u n f a ir ly treatcti. be cause (1 ) in ste a d o f being able to s e l l d i r e c t ly to the System at i t s buying p ric e they must s e ll to some middleman a t a l i t t l e low er p ric e and (2 ) havin g to g iv e up names o f customers to d e a le rs , as they had to do f o r a few days in September in o rd e r to make sales through the dealers to the System, meant g iv in g up the names to com petitors instead o f to a Fe d e ra l Reserve bank which i s a se ra i-p u b lic in s t i t u t i o n . In o p p o s itio n to the proposal th a t System d e alin g s be conduc ted at a l l Fe d e ra l Reserve banks, i t may be argued th a t the advantages m ight not be s u b s ta n tia l enough to o ffs e t the added com plexity and ex pense o f management. In c o n sid e rin g the contentio n in fa v o r o f having a ready market at each Fe d e ra l Reserve bank f o r tha member banks of the d i s t r i c t , i t may be affirm e d th a t except in times ol emergency, when the System i s almost the o n ly buyer, the market is a lre a d y so w e ll organized throughout the co u n try as to b rin g a f a i r l y ready market q u ite Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 6. near to almost every member bank. I t could be conceded th a t the pro posed arrangement m ight h elp a t times to h a lt ,fat the source" some l i q u i da tio n by o u tly in g member bonks o r o th e r s e lle r s , but i t could s t i l l be contended th a t a market having the de sire d degree o f s t a b i l i t y can be achieved o n ly by the System1s operatio ns in the la r g e r tra n s a c tio n s , most o f which w i l l continue to be in the c e n tra l market at New Y o rk C it y . P ro po sal f o r making System operatio ns continuous. - The t h i r d proposal would mako System operations in the Government s e c u ri t ie s market continuous in ste ad o f in te rm itte n t and would enlarge t h e ir scope in o th e r ways. tio n s : T h is proposal comprises three re la te d sugges (1 ) th a t the System, in ste ad o f d e a lin g a c t iv e ly o n ly in periods when the market threatens to become d is o r d e r ly , and then d e a lin g o nly on one s id e , adopt the p r a c tic e o f d e a lin g a c t iv e ly on both sides at a l l times o r almost a l l tim es; (2 ) th a t the volume o f the System*s de al ings be so enlarged, and t h e ir ch a ra cte r so a lte re d , as to make them at a l l times an im portant f a c t o r in the m arket; and (3 ) th a t the Sys tem, in ste ad o f co n fin in g i t s o v e r-th e -c o u n te r tra n s a ctio n s to la rg o dealers and la rg e dealer-bonks (member ba n k s), extend i t s d u e lin g s to o th e r de alers anu o th e r member banks, and p o s s ib ly to o th e r banks, to insurance companies, o r even to the gen eral p u b lic . I n fa v o r of t h is proposal i t may be argued th a t continuous and d iv e r s if ie d d e a lin g on a la rg e scale would enable the System to have at a l l tim es, by d ir e c t o bse rva tio n and d e a lin g experience and not (as a t present) la r g e ly at sccond-hcnd, f u l l in fo rm a tio n as to the sta te o f the market and the s iz e :ind run o f tra n s a c tio n s . T h is should s im p lif y the problem of determ ining .it any g iven time what tho c u rre n t trend o f Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Ejt.lOGOj. 7. the market a c tu a lly i s and whether, in the l i g h t o f e sta b lish e d System p o lic y , the trend is one th a t should be "bucked” and i f so to what ex te n t and by what type and magnitude o f o p e ra tio n s. The o p eratio ns o f the System " t r a d e r ” should a lso be more e f f e c t iv e , because p ro fe s s io n a l dealers and o th e r persons would become accustomed to seeing him tra d in g e x te n s iv e ly at a l l times on both sides o f the m arket, now more and now le s s , sometimes f o r the System p o r t f o lio but o fte n m erely as middleman. They would consequently no lo n g e r be in so good a p o s itio n to d iv in e System p o lic y by observing System o p e ra tio n s, and in a d d itio n a v a r ia tio n in the amount o f h is a c t i v i t y in e ith e r d ir e c tio n would not be "news" as h is entrance o r w ithdraw al now i s . One o f the o b je c tio n s to the proposal is th a t in v e s to rs and tra d e rs , f o r some considerable time at le a s t , would probably be ve ry suspicio us o f a market in which the System would be known to be in p o s itio n at any moment and w ith o u t n o tic e to exercise o f f i c i a l i n f l u ence. T h is m ight s e rio u s ly im p a ir the q u a lity o f the market. The a r rangement would be at a l l times open to the accusation th a t the market is being manipulated in the in te re s ts o f the Tre a su ry and against the in te re s ts o f the in v e s tin g p u b lic . The proposed arrangement would be p u ttin g the Fe d e ra l Reserve System in to d ir e c t and form idable competi tio n w ith dealers and could be viewed as l i k e l y in duo time to put them com pletely out o f business. I f t h is view were to be w id e ly h e ld , and e s p e c ia lly i f i t were to be shared by the T re a s u ry , o p p o sitio n to the proposed arrangement would be vigoro us and prolonged. Another o b je c tio n i s th a t extensive operations to promote s t a b i l i t y in the market cannot be combined w ith o perations to in flu e n c e bank reserves so th a t when the l a t t e r become p r a c tic a b le once more the form er would have to be d is continued. -s r Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 8. Other p ro p o sa ls . - The proposals discussed have a l l re la te d in one way o r another to the management o f System open market opera t io n s . In a d d itio n to these, mention should be made f o r the record o f two proposals o f a q u ite d if f e r e n t o rd e r: (1 ) I t has been suggested th a t the New York Stock Exchange be encouraged and a s s is te d to b rin g more o f the tra d in g in Government s e c u ritie s to the f l o o r of the Exchange. The purpose would bo to mako to make the f lo o r m arket, which i s now v e ry s m a ll, more re p re s e n ta tiv e , and in a d d itio n to b r in g a la r g e r p ro p o rtio n o f the t o t a l tra d in g under the general s u p e rvisio n o f the Exchange and under the Exchange’ s ru le s governing tra d in g p r a c tic e s . The p r in c ip a l arguments against t h is proposal are th a t the o bstacles in tho way are v e ry fo rm id able . Tho tra d in g in a l l kinds o f bonds, not m erely in Governments, i s done m ainly over the c o u n te r, and a l l e f f o r t s o f the Exchange to b rin g much bond tra d in g to the f lo o r have h e re to fo re f a ile d to get anywhere at a ll. So f a r a t le a s t as tra d in g in Government s e c u ritie s is con cerned, an o v e r-th e -c o u n te r market has groat te c h n ic a l advantages, la r g e ly because so many of the tra n s a c tio n s are i n la rg e b lo c k s , both o u tr ig h t and on swaps, and such tra n s a c tio n s re q u ire n e g o tia tio n and b a rg a in in g which are not p o ssib le on the f lo o r . (2 ) The suggestion has a lso been made th a t tra d in g in Govern ment s e c u ritie s should be brought under fu rth e r re g u la tio n , e ith e r by extension of the present in fo rm a l in flu e n c e exercised over the t r r d in g p o s itio n s of the s ix le a d in g d e a le rs b y the manager o f the Account o r by b rin g in g tra d in g in Governments under "a n ti-m e n ip u lfitio n ” ru in s o f the S e c u ritie s and Exchange Commission th a t hrve born issued pursuant DECLASSIFIED Authority {~.Q.IO$0) a. to the S e c u ritie s Exchange A c t o f 19,54. The powers o f the S e c u r itie s and Exchange Commission urn e x te n sive and tho Commission coulu bo r e quested to s t r ik e out o f c e rta in o f i t s present 11a n ti-m a n ip u la tio n r u le s ’* the presen t exemption — in d ic a te d by tho S e c u ritie s Exchange A ct o f 1934 b u t n o t made mandatory by the s ta tu te — s e c u r it ie s . f o r Government The ru le s in q uestio n re la te to the disso m in ?tio n o f i n form ation (w hether tru e o r f a ls e ) to the e ffe c t th a t p ric e s are l i k e l y to r i s e o r f a l l because o f tho operatio ns o f some verson — Fe d e ra l Reserve System — e . g . , tho and to the e ffe c tin g o f tra n s a c tio n s in s e rie s f o r the purpose o f causing the market to be a c tiv e o r causing quo tatio ns to move end thus in d u c in g o th e r persons to buy o r s e l l . In fa v o r o f proposals f o r more re g u la tio n i t may be argued th a t i t m ight reduce the amount o f u n s t r b i l i z i n g sp e cu la tio n th a t now re s u lt s both from the tr a d in g o f detalers and from th a t o f o th e r persons. A ga in st the extension o f the manager’ s in fo rm a l in flu e n c e , i t may be argued th a t such re g u la tio n cou ld n o t be c a rrie d v e i^ f a r w ith o u t u p s e ttin g the v e ry b a sis o f th e present arrangement. As to e n lis t in g the S e c u ritie s and Exchange Commission, i t i s probable th a t the Com m ission would be w i l l i n g to remove the exemption o n ly on the b a s is o f an a f firm a tiv e shewing, which m ight be d i f f i c u l t , th a t such a c tio n i s necessary Mi n the p u b lic in t e r e s t o r f o r the p ro te c tio n o f in v e s to rs ” . I t may be said in general th a t i n organized markets which have been under re g u la tio n f o r some time attem pts to have done ve ry l i t t l e regulate tra d in g seem to to make these markets s te a d ie r, e s p e c ia lly on those occasions when mass p ^c h o lo g y i s a f a c t o r . Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority VonaP. R. 131 BOARD OF GOVERNORS or TH E FEDERAL RESERVE SYSTEM Office Correspondence To_ From. Members o f thfc Board Subject l 14*4 M r. P a r r y and M r. P is e r ... t *— '— ■-------- A ttached i s a d ra ft o f the memorandum which we have prepared by request fo r submission to the mem bers o f the Fe deral Open Market Committee. Before p u ttin g i t in to f i n a l form f o r mimeographing, we should ap p re cia te c r it ic is m s and suggestions. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority gPRICTLY CONFIDENTIAL February 28, 1940 C1P-LMP (Second d r a f t ) M A M G iim T O f OPEN MARKET OPERATIONS The S y s te m ^ open-market operatio ns du rin g the la s t few years hare been d ire c te d i n la rg e p a rt at new o b je c tiv e s and have ne cessitated th e u b 4 by the Fe d e ra l Open Market Committee o f a technique of o p e ra tio n th a t i s s u b s t a n tia lly d if f e r e n t from th a t used i n e a r l ie r y e a rs . These developmenta have made th© Committee’ s problems o f management more d i f f ic u lt , The purpose o f t h is paper i s to sta te b r i e f l y some o f these problem s, to describe se ve ra l o f the p r in c ip a l suggestions th a t have been made f o r s o lv in g them, and to summarize f o r the c o n sid e ra tio n of the Committee w ith re ference to each proposal the p r in c ip a l arguments both pro and con. U n t i l a few years ago, open-market o peratio ns were u s u a lly in tended to add to o r to s u b tra c t from the reserves o f the member banks, e ith e r by some d e f in it e amount o r to the extent necessary to b rin g about measurable r e s u lts on member bank bo rro w in g , s h o rt-te rm money r a te s , e tc * , but i n recent ye ars t h is purpose has given way to another and in consequence these d e f in it e c r i t e r i a have ceased to be a p p lic a b le . The more recent purpose has been v a r io u s ly s ta te d , upon o ccasio n, in such g eneral terras as p re ve n tin g p a n ic , minimizing d is o rd e r, o r "e x e rc is in g an in flu e n c e toward m a in ta in in g o rd e rly market conditions**. One o f the most d i f f i c u l t o f the new problems by which the Com m itte e has been confronted is th a t o f fo rm u la tin g the purpose o r purposes o f g iven operations w ith s u f f ic ie n t p re c is io n to make p o ssible a re a l ":"us ir Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E fA / O ^ O j 2 meeting o f minds among the se ve ra l members o f the Committee. . In the ab sence o f such fo rm u la tio n , both debate and d e c is io n on m atters o f p o lic y are impeded# In a d d itio n there i s the d i f f i c u l t y o f in s u rin g th a t the f u l l Committee end i t s executive committee w i l l have th© same under standing o f a p o lic y th a t has been agreed upon and the f u r th e r d i f f i c u l t y o f tra n s m ittin g to the manager o f the System Open Market Account in s tru c tio n s in such for® th a t when c a rrie d out a l l p a rtie s concerned can determ ine, both d u rin g and a f t e r the event, whether the purposes o f the Committee are being e ffe c tu a te d . Once a p o lic y d e cisio n has been made, moreover, w ith a view to promoting s t a b i l i t y in the market, the ensuing market o perations must, on the p u re ly te c h n ic a l s id e , be broader in scope and BRich more speedy and f le x ib le in t h e ir d e ta ils o f execution than the operatio ns th a t went w ith the o ld e r and le s s am bitious open-market p o lic ie s . Among the p r in c ip a l proposals th a t have been made from time to time f o r meeting the new s it u a t io n , three th a t are among the most ambi tio u s , each o f which could be adopted e it h e r w ith o r w ith o u t the o th e rs , are discussed in t h is paperi (1 ) changing the agent a c tin g f o r the Reserve banks from an i n s t i t u t i o n to an in d iv id u a l | (2 ) making the System* s operatio ns continuous in ste a d o f o cc a sio n a l! and {$ ) a rra n g in g to have these operations take place a t a l l Federal Reserve banks in ste ad o f a t o n ly one Reserve bank. A t the end o f t h is d is c u s s io n , some le s s s i g n i f i cant proposals are b r i e f l y touched upon. Proposal f o r changing the agent selecte d by the Committee. The f i r s t proposal has to do w ith the arrangements by which the p o lic y DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority 3. de cisio n s o f the fe d e ra l Open Market Committee are tra n s la te d in to a c tu a l purchases and s a le s , at the Government particular p ric e s and l a p a r t ic u la r amounts, in securities market* A ccording to present arrangements, the general p o lic ie s determined by th e Fe deral Open Market Committee are tra n s la te d in to act io n by th e executive committee through the agency o f a Fe deral Reserve bank, the fe d e ra l Reserve Bank o f Hew Y o rk , o f which the P residen t i s a member o f both th a m itte e and a Account* Committee and. i t s executive com Vloe*Presidexrt i s the manager o f the System Open Market T h is arrangement , however c o n s c ie n tio u s ly c a rrie d out by a l l p a r t ic ip a n t s t has in h e re n t disadvantages, p a r t i c u l a r l y at times whan a l l the members o f the executive committee are not in complete agreement w ith respect both to m atters o f general p o lic y and to p o lic y * matters of tra d in g Unless th e re is complete agreement on these m atters between the executive committee and the Committee's agent, rooted in the f u lle s t undQrsta.nd.ing,. both o f these fu n c tio n a rie s are l i k e l y upon occasion to f in d the re la tio n s h ip u n s a tis fa c to ry — as some members o f the executive committee m y f e e l th a t the Committee*s p o lic ie s and p o s s ib ly even i t s in s tru c tio n s have not been c a rrie d out e x a c tly , whereas there may be grounds from the p o in t o f view o f the agent f o r charging the executive committee w ith h avin g given f a u lt y in s tru c tio n s * A proposal, th a t has been advanced f o r d e a lin g c o n s tru c tiv e ly w ith t h i s s it u a tio n is th a t the .Federal Open Market Committee, instead o f s e le c tin g as the System*s agent e ith e r the Federal Reserve Bank o f Hew York o r any o th e r Reserve bank, should se le ct some in d iv id u a l, who Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority ^ O ^ O ^ O j 4. f! I | would execute tra n s a c tio n s i n and manage tho System Open Market Account* | The agent selected would act f o r a l l o f the Federal Reserve banks c o l - ! ! \ l e e t i v e l y , as the Federal Reserve Bank o f New Yo rk does at p re s e n t, but i bank and would be | would not be on the p a y r o ll o f a p a r t ic u la r Reserve [ answerable, in p r a c tic e as w e ll as i n th e o ry , d i r e c t l y to the doim itte© re p re se n tin g h ie p r in c ip a ls . A manager ao appointed and supervised could be p h y s ic a lly lo ca te d in lew Y o rk o r he could { i f the Committee should ao d e s ire ) he lo ca te d in Washington; a. refinem ent o f t h is singes t i o n would be to have the Committee choose both a manager and an asso c ia te manager, w ith the idea t h a t , ta k in g tu rn s but keeping i n close to u c h , one o r the o th e r of them m ight always be i n Washington* I t may be argued, in fa v o r o f an agent, th a t in managing the System arrangement f o r an in d iv id u a l account he would have no so re re s p o n s ib ilit y to any one member o f the Fe deral Open Market Committee t iu n to any o th e r member, and th a t in consequence the contacts o f the manager o f the account w ith the se ve ra l members of the f u l l Committee i I I they are now. of the executive committee and would tend i n a l l respects to be much c lo s e r than In course of tim e , h is educating them w ith respect to market m atters and being educated by them w ith respect to p o lic y n a tte rs ! should reduce s u b s ta n tia lly the p o s s i b il i t y o f m isunderstanding and co rresp on ding ly increase the e f f ic ie n c y o f the System’ s operations# One p o ssib le argument against the proposal is th a t f o r o peratio ns o f such m g n ltu d e an in s t i t u t i o n a l ra th e r than a personal agent though not le g a lly necessary may be d e s ira b le . Another is th a t the proposed arrangement m ight not In sure a s u f f ic ie n t ly h ig h degree o f te c h n ic a l competence on the p a rt o f the manager unless the Committee were w i l l i n g Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 5* both to s tre s s te c h n ic s ! competence i n M s s e le c tio n , instead o f ad* herence to i t s own economic philosophy* and to pay him acco rding to New Y o rk standards in ste ad o f Washington standards. There is also the con te n tio n th a t the manager o f the account, having le s s th© Committee than the Coasmit te e ’ s independence o f present agent and manager, m ight f a l l to stand up s u f f ic ie n t ly a g ainst the Committee i n case the l a t t e r should be disposed at any tim e to undertake o peratio ns th a t were te c h n ic a lly unsound* There is also the question whether the re could be re ta in e d under the proposed arrangement — since i t would n a t u r a lly be viewed askance in at le a s t some p a rts o f the f in a n c ia l community — th a t co o p e ra tio n o f dealers and dea.ler-b 0.nks which has always been c u ltiv a te d by the o f f ic e r s o f the Hew York Reserve bank and which has been found to be most va lu a b le in connection w ith th e a c q u is itio n o f market in f o r m ation and i n connection w ith the f lo a t in g o f new issues o f Government s e c u ritie s # Proposal f o r making System operations continuous* - Th© second p ro p o sa l, which i s in some respects the most am bitious o f a l l , would change the nature o f System o peratio ns in th® Government s e c u ritie s mar ket by making those operatio ns continuous instead o f in te rm itte n t and e n la rg in g t h e ir scope in o th e r ways. T h is proposal comprises th ree re la te d suggestions? ( l ) That th© System, in ste ad o f d e a lin g a c t iv e ly o n ly in p e rio d s when the market threatens to become d is o r d e r ly , and then deal in g Only on one s id e , at a l l times o r adopt the p ra c tic e o f d e a lin g a c t iv e ly on both sides almost a l l tim e s ; (2 ) th a t the volume of the System*s Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority de a lin g s be so E~,0r /<Q G 0/. e n larg ed , and t h e ir ch a ra cte r bo a lte re d ,, as to make the System operatio ns at a l l tin e s an Im portant f a c to r In the m arket; and (3 ) th a t the System, in ste ad o f c o n fin in g i t s o v e r-th e -c o u n te r tra n s a c tio n s to la rg e dealers and. la rg e dealer-banka (member h a n k s ), extend i t s d e alin g s to o th e r dealers and o th e r member banks, and p o s s ib ly to o th e r hanks, to insurance companies, o r even to tha general p u b lic . I n fa v o r o f t h is proposal i t m y ba argued th a t continuous and d iv e r s if ie d d e a lin g on a la rg e seal© would enable the System to have at a l l tim e s , by d ir e c t o b se rva tio n and d e a lin g experience and not (as at p re s e n t) la r g e ly at second-hand, f u l l in fo rm a tio n as to the s ta te o f the market and the s iz e and run o f tra n s a c tio n s . I t should consequently be le s s d i f f i c u l t than i t i s now to determine at any g iven tim e what the c u rre n t tre n d o f the market a c t u a lly is and w hether, i n the l i g h t o f esta b lish e d System p o lic y , the tre n d i s one th a t should 'bo "bucked” and i f so to what extent and by what type and magnitude o f o p e ra tio n s . The operations o f the System " t r a d e r ” should also be more e f f e c t iv e , be cause p ro fe s s io n a l dealers and o th e r persons, being accustomed to seeing him. tra d in g extensively at a l l tim es on both sides o f the m arket, now more and now le s s , sometimes f o r the System p o r t f o lio but o fte n sc* m e r e l y as middleman, would no lo n g e r be in bo good a p o s itio n to d iv in e System p o lic y by o bse rving System o p e ra tio n s , and in a d d itio n a v a r ia t io n in the amount o f h is a c t i v i t y in e ith e r d ir e c t io n would not be "news" as h is entrance o r w ithdraw al now i s . One o f the o b je c tio n s to the proposal is th a t the time s ig h t come, sooner o r l a t e r , when the System and i t s "tra d e r* would be con fro nte d by a dilemma* T h is might be at a time when — * p o s s ib ly a f t e r Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 7 . th© c re d it s it u a tio n had been brought under c o n tro l again by some such means as aa increase in re se rve requirem ents — the System would d e sire | to tig h te n the c re d it s it u a t io n b y s e l l in g a s u b s ta n tia l volume o f G overn- | meat s e c u ritie s fro® i t s p o rtfo lio * I to become known q u ite soon to the market and m ight occasion vig o ro u s s e llin g I Such an o p e ra tio n would be c e rta in w hich, unless counteracted by a re v e rs a l o f System o p e ra tio n s, m ight cause th e market to become d is o r d e r ly . Another o b je c tio n is th a t in ve sto rs and t r a d e r s , f o r seme considerable tim e at le a st* would probably be v e r y sus p ic io u s o f a market i n which the System would "be known to be in p o s itio n a t any moment and w ithout n o tic e to exe rcise o f f i c i a l in flu e n c e . The a r rangement would be at a l l tim es open, m oreover, to the accusation th a t the market is being manipulated in the in te re s ta o f th e T re a s u ry and against the in te re s ts o f the in v e s tin g p u b lic . The proposed arrangement, f u rth e r more, by p u ttin g the Fe deral Reserve System in to d ir e c t com petition w ith d e a le rs , m ight arouse fe a r among them th a t th e y would b e put com pletely out o f business and n ig h t a c c o rd in g ly provoke vigoro us c r it ic is m not o n ly from them but a lso from o th e r quarters* By way o f in d ic a tin g p o ssib le answers to the o b je c tio n s th a t have been enumerated, a number o f p o in ts may be b r i e f l y m entioned. The dilemma I mentioned, im ro lv in g a p o ssib le c o n f lic t at some time between operations | designed to steady the market aad o pera tio n s designed to reduce bank r e - i | serve s, is probably not imminent, since the use o f open-market o peratio ns as I [ an instrum ent o f c re d it p o lic y has been im p ra c tic a l f o r se ve ra l years and ■ may continue to be im p ra c tic a l f o r m n y years to come. [ asked, m oreover, why System o peratio ns f o r reasons o f c re d it c o n tro l should V I t m ight f a i r l y be be more u n s e ttlin g under the proposed p la n than under the present o r any o th e r p la n . The contentio n concerning antagonism to the proposed Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority K a /O ^ O ) 0. p la n would lo se socie o f its fore© i f the System were to go o ve r to the proposed new procedure o n ly g ra d u a lly , and t h is antagonism migfat f a i r l y be expected to die away in du© tim e i f and when the d a y -to -d a y o perations o f the System i n the market were found and s e n s ib le . by experience to be reasonable The most e f fe c tiv e answer to o b je c tio n s ! however, i f i t can be su b sta n tia te d , i s th a t the newer o b je c tiv e s o f the System*& p o l i c ie s i n the Government s e c u ritie s ssarket are o f such Importance to the p u b lic w elfare as to j u s t i f y s u b s ta n tia l extension o f System e n te rp ris e in to t h i s fie ld .. Proposal to p ro vid e f o r System d e a lin g s in Government s e c u ritie s at every fe d e ra l Reserve bank. - The t h i r d proposal is t h a t , in ste ad o f c o n fin in g System dealin gs to the fe d e ra l Reserve Bank o f New Y o rk , pro v is io n be made f o r System d e a lin g s in Government s e c u ritie s at every Federal Reserve bank, o r at every Reserve bank d e s irin g to p a rtic ip a te * In w orking out the mechanics o f the proposed arrangement, i t would be necessary to reco gnize th a t any step toward d e c e n tra liz a tio n o f operations must not be accompanied by d e c e n tra lis a tio n o f c o n tro l* The general manager o f trading f o r the e n tire System would pro b a b ly con tin u e to be the S yste m s sole ’•trader** in Mew Y o rk , but he would in any case have under h is s u p e rv is io n a d i s t r i c t manager a t ©very Federal ..Re serve bank except p o s s ib ly th a t he would h im s e lf serve i n th a t c a p a c ity a t the Fe deral Reserve Bank o f Hew York# Under h is s u p e rv is io n , each d i s t r i c t manager would be empowered to deal in Government s e c u ritie s f o r System account in h is own d i s t r i c t , on the b a sis o f lim it e d b id s and o ffe rs decided upon by the general manager o f System tr a d in g and communicated # Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 9. by him c u rre n tly and co n tin u o u sly to a l l the d i s t r i c t managers by t e le type o r o th e rw ise . The tra n s a c tio n s a t o u tly in g Reserve banks would be d ire c te d by the general manager according to a System p la n , worked out along lin e s approved by the Fe deral Open Market Committee, th a t would cover such d e t a ils as the amount o f i n i t i a t i v e th a t e ith e r the general manager o r the d i s t r i c t manager might be allotted to take, how fre q u e n tly (as weekly o r d a ily ) any s e c u ritie s taken te m p o ra rily in to the account o f an in d iv id u a l Reserve bank should be c a rrie d to System account, and the s ize o f the maximum in d iv id u a l tra n s a c tio n th a t might be handled by the d i s t r i c t manager w ith o u t having to c o n s u lt the general manager. Any such arrangement as th a t proposed would present d i f f i c u l t i e s to the general manager o f tra d in g f o r the e n tire System, but these could be surmounted, since a s im ila r arrangement has been worked o ut by d e a le rs . I t can be argued th a t the proposed arrangements might enable the System to be more e f fe c tiv e by d e a lin g w ith d is tu rb in g liq u id a t io n Ba t i t s so urce". I t m ight add to the p re s tig e o f the o u tly in g Federal Re serve banks in t h e ir own Fe deral Reserve d i s t r i c t s and in a d d itio n in crease t h e ir e ffe c tive n e s s in the counsels o f the System because o f t h e ir increased o p p o rtu n ity f o r a c q u irin g an in tim a te knowledge o f the market. The s e rv ic e rendered to member banks m ight be much ap p re cia te d , e s p e c ia lly by the sm all banks which are unable to h ire t h e ir own "tra d e r* in Govern ments to p ro te c t them in d e a lin g in the open market. I t may be noted th a t in past y e a rs , before the open-market operatio ns o f the Reserve banks were com pletely c e n tra lis e d , the re was some buying and s e llin g by in d iv id u a l DECLASSIFIED from the Unclassified I Declassified Holdings of the National Archives Authority F , o . i o $ o f 10. Fe deral Reserve banks, and th a t even now the Reserve banks do i n a small way something s im ila r to t h i s when th e y serve upon request as brokers (w ithout coasmission) f o r member banks* There are f i n a l l y two f u rth e r p o in ts , iJ lu s t ra te d by in c id e n ts i n September o f la s t y e a r, both o f which re la te to the emergency occasions when the market is u n u su a lly weak and the System i s almost the o n ly b u ye r. Large member banks o utside New York C it y which have some s e llin g to do f o r correspondents at such tim es fe e l u n f a i r ly tre a te d because (1 ) in ste ad o f being able to s e l l d i r e c t l y to the System a t i t s b u yin g p r ic e th e y Must s e l l to some middleman at a l i t t l e low er p ric e and (2 ) h avin g to g iv e up names o f customers to d e a le rs , as th e y had to do f o r a few days i n September in o rd e r to make sales through the dealers to the System, meant g iv in g up th e names to com petitors instead o f to a Fe deral Reserve bank which is a se m i-p u b lic in s titu tio n * In o p p o s itio n to the proposal th a t System de a lin g s at a l l Fe deral Reserve banks be a u th o riz e d , i t may be argued th a t the advantages th a t m ight s u b s ta n tia l flo w fro® th e proposed arrangement might not be/enough to o ffs e t the added com plexity and expense o f management• The con te ntio n th a t th e re should be provided b y the System a t each in d iv id u a l Fe deral Reserve bank a ready mar ket f o r the member banks o f the d i s t r i c t has some fo rc e , but except in tim es o f emergency, vjhen the System is almost the o n ly b u ye r, the market is a lre a d y so w e ll organized throughout the country as to b r in g a f a i r l y ready market q u ite near to almost every member bank. I t may be conceded th a t the proposed arrangement might perhaps h e lp at times to h a lt "a t the source" some lit|uida~ t i o n by o u tly in g member banks o r o th e r s e l l e r s , but i t may s t i l l be argued th a t i t is p r im a r ily by th e System’ s operatio ns in the la r g e r tra n s a c tio n s , most o f which w i l l continue to be in the c e n tra l market at New York C i t y , Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority E # , / O ^ O j 11 that a market having the desired, degree of . s ta b ility Mist be achieved. O ther pro p o sa ls. - The proposals discussed have a l l re la te d Management o f System open-market o p e ra tio n s. to the In a d d itio n to these, there are a number o f proposals f o r im proving the ch a ra cte r o f the market f o r Government s e c u ritie s in one re spect o r another by o th e r means, o f which the p r in c ip a l ones are as follows* (1 ) I t has been suggested th a t the New York Stock Exchange be encouraged and assiste d to b rin g more o f the tra d in g in Government s e c u ri t ie s to the f lo o r o f the Exchange, w ith a view to making the f lo o r mar k e t, which is now v e iy sm a ll, more re p re s e n ta tiv e , and also to b rin g in g a la r g e r p ro p o rtio n o f the t o t a l tra d in g under the Exchanged tra d in g r u le s . (2 ) The suggestion has also been made th a t the SEC be requested to s tr ik e out o f c e rta in o f i t s “a n ti-m a n ip u la tio n r u le s * the present exemption — in d ic a te d by the S e c u ritie s Exchange made mandatory by the s ta tu te — Act o f 1954 b u t no t f o r Government s e c u r it ie s . The ru le s in question re la te to the dissem ination o f in fo rm a tio n (whether tru e o r fa ls e ) to the e f fe c t th a t p ric e s are l i k e l y to r is e o r f a l l because o f the operations o f some person — e . g . , the Fe deral Reserve System — and to the e f fe c tin g o f tra n s a ctio n s in s e rie s f o r the purpose o f causing the market to be a c tiv e o r causing q uo tatio ns to move and thus in d u cin g o the r persons to buy o r s e l l . I t i s probable th a t the Commission, i f w i l l i n g to remove the exemption, would be w i l l i n g to do so o nly on the ba sis o f an a ffirm a tiv e showing th a t such a c tio n i s necessary " in the p u b lic in t e r e s t o r f o r the p ro te c tio n o f in v e s to rs 1*. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED /O^Oj Authority I** ^XUSS ' FIECT*fvlAH ~ 2 1B40 .......... fa b ru a ry S9, 194© lia&bara o f tha Board Mr# P a rry and Mr* F la a r Attacbad I® a draft of tha m*»or*mdtt« n&tob m have prepared by request for aubed salon to tha ®e«~ bar# of the Federal Open Market Camlttee. Before putting i t Into fin a l fora for utlfteograp&ng, wa should appreciate oritioiaaa and suggestiona. QjX.tL4$*>^A«£f <rllS t .J *0 H tkl ^ A ,. ^^ & o Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Eq.io^of M rs. 0*Hare: A f t e r t a lk in g t h is over w ith M r. P a rry , M r. M o r r i l l had me change the cover in g memo to read as i t does in the attached copy. yd MMBM Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority f j . f r / 0 ^ 0 f tr* Pmaetf t$,Mm \ sttthe&mi \ i* « m m h m m ^mmm S ^ t m p m w i m f \\ lot«t4i 4m$% ty ' tm- m m m M m *&&«& i m m&mlmlm* « f ili# % «$ Hitt*#* %» mm amfa^mmUvg « f Urn Zvtmlttmm* m k m M mppvmmimlm CEP/cls \ top M tor* Reproduced from the Unclassified I Declassified Holdings of the National Archives To: From: DECLASSIFIED Authority M r. C a rp e n te r. M r. Hammond. February 8 , 1940< %3$ ~ ~z I n a l e t t e r o f J u ly 1 8 , 1924^ from Governor S tro rg to Governor TT rls s in g e r the re ■was a p p a re n tly an enclosure of a copy o f a l e t t e r then being addressed t o a l l o f t h e Fe d e ra l Reserve banks i n o rd e r to g iv e e f f e c t to th e a c tio n taken b y the committee a t i t s meeting i n Boston on J u ly 16* T h is l e t t e r to the banks i s the sub ject o f a memorandum b y M r. Stew art dated J u ly 21T 1924/ and a ls o *33 has o th e r mention* T he l e t t e r i t s e l f , however, i s n o t i n o ur f i l e s . I t seems to me d e s ira b le th a t we have i t ,a n d I suggest t h a t we ask New York f o r a cop y. Attached i s a copy o f Governor S tro n g 1s l e t t e r i n w hich th e l e t t e r to the banks i s mentioned* Attachm ent. » Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority REC’ D IN F IL E S M A R 2 3 1940 V* M r. M o r r i l l : Attached. are 15 copies o f M r. Parry*s memorandum on the Government s e c u ritie s m arket: one each f o r the Board members, one each f o r M essrs. C la yto n , Th u rs to n , M o r r i l l , Bethea, and f iv e e x tra co p ie s. From th is o f f ic e we have made the fo llo w in g d i s t r ib u t io n : M r. M r. M r. M r. M r. M r. M r. Goldenweiser P is e r Smead D re ib e lb is P a rry B ra d le y Brown F . C. O'Hare d^£*j&vuCa. // / (Z&Li z r , Ot,, . V Q\Aa S DECLASSIFIED Authority f r . o j a s o j November /<!/*■ / / w7 r- / 4 The fo llo w in g d is t r ib u t io n has been made of the attached memorandumf 15 copies to M r. M o r r i l l to be d is t r ib u t e d : M r. E ccle s M r. C la yto n M r. Ransom M r. Th u rsto n M r. McKee M r. Davis M r. Draper M r. Szymczak M r. M o r r i l l M r. Bethea 5 extras D is t r ib u t io n from t h i s o f f ic e : M r. Goldenweiser M r. P is e r M r. Smead M r. D re ib e lb is M r. P a rry M r. B rad le y M r. Brown F ile s M r. Thomas (N ov. 3 , 1939) FOB. t e a Pi Gi O'Here Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IT,#.i J C 'O COHFIPW TIAL 333 • TO: Board o f Governors FROM: See note 1/ S u b je ct: Im proving the,government S e c u ritie s M arket. d. T h is memorandum, prepared at the recent request of the Board f o r an im p a rtia l d iscu ssio n of c e rta in proposals r e la t in g to the Gov ernment s e c u r itie s market, is intended f o r the a tte n tio n of the Board alone and is on th a t understanding more outspoken in some places than i t could otherw ise have been. D e fin in g the problem* - The problem to be considered re la te s to the fu n c tio n in g o f the market f o r Government s e c u r it ie s . I t has grown c h ie f ly out o f the c o n d itio n s tha t have made th a t market i n c re a s in g ly sp e cu la tive of la te ye a rs and out o f the experience of the System in attem pting upon occasion, through o peratio ns guided by the Fe deral Open Market Committee, to make c e rta in p o lic ie s e f fe c tiv e in th a t market f o r the purpose o f m in im izin g d is o rd e r, o f f i c i a l l y | expressed as ’’the purpose of e x e rc is in g an in flu e n c e toward m aintain-\ • in g o rd e rly market c o n d itio n s ” . The market f o r Government s e c u ritie s has been more o r le s s d is o rd e rly on se ve ra l d if f e re n t occasions d u rin g recent ye a rs , in f r e q uen tly on the up side but q u ite often on the down side — as in the s p rin g o f 1937, the autumn of 1937, the sp rin g o f 1938, the autumn o f 1938 (M u n ich ), and the autumn of 1939 (European w a r). The evidence o f d is o rd e r th a t was present on many o f these occasions was q u ite apparent. 331 , I It in clu ded the absence of b id s , except as provided by the 1/ T h is memorandum has been w rit te n by % .^ P a r r y (who takes f u l l r e s p o n s ib ilit y f o r i t s language) in close c o lla b o ra tio n w ith Mr. P is e r . They both take r e s p o n s ib ilit y f o r a l l views expressed. Others who have been consulted in c lu d e M r. G oldenw eiser, Mr. M o r r i l l , Mr. Smead, and M r. D re ib e lb is . ■wr Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority E ^ / O ^ O j System, o r at le a s t the absence o f bids at le v e ls close to the going market p r ic e ; spreads w id e r than usual between the best bids in the market and the best o f f e r s ; s u b s ta n tia l p ric e change?* between a g ive n tra n s a c tio n and the tra n s a c tio n im m ediately fo llo w in g ; uncommonly wide p r ic e changes w ith in the l i m i t s o f a s in g le day o r a short p e rio d o f consecutive days; and f i n a l l y , the presence in the market o f a good deal o f excitem ent, evidenced f o r example by the ebb and flo w o f w ild run:or, p re d ic tio n s th a t p r ic e s of Government s e c u ritie s would d e clin e to s p e c i f ie d low le v e ls , and s p ir it e d discussio n of these developments in f i n a n c ia l c ir c le s and in the f in a n c ia l pre ss. evidence as t h i s , th e re could be l i t t l e In the face o f such d i f f i c u l t y in c h a ra c te riz in g the market as d is o r d e r ly ; the h e a rt o f the a d m in is tra tiv e problem was to determine and appraise the degree o f the d is o rd e r. The e f f o rt s of the System to m inim ize d is o rd e r in d e c lin in g m arkets, although they have unquestionably had s u b s ta n tia l e f fe c t, have not in evexy instance prevented the d is o rd e r from becoming i t s e l f a m a te ria l cause of weakness in the market and consequently c o n trib u tin g to the establishm ent in the market of a le v e l o f p ric e s f o r Government s e c u r it ie s , f o r a lo n g e r o r s h o rte r p e rio d , th a t was lo w e r, at le a s t in the o p in io n o f some o f the members of the Board, than was ju s t if ie d by a w e ll balanced view o f the u n d e rly in g fa c to rs in the s it u a tio n . In t h is in t e r p r e t a t io n , the e s s e n tia l p o in t about the o b je c t iv e -o f the Sys tem’ s operations is not described m erely in te rns o f an " o r d e r ly market” , because th a t p a r t ic u la r expression has too many d if f e r e n t meanings, both as used in System discussio ns and as used in discussio ns "on the S t r e e t " . A cco rding to the fo rego ing a n a ly s is o f the s it u a t io n , the cru c ia l questions in each instance of market i n s t a b i l i t y are whose judgment Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority S. o f the degree o f d is o rd e r i s the one th a t s h a ll be d e c is iv e in the de te rm in a tio n o f System tra d in g p o lic y and by what p r in c ip le s and methods, in s o fa r as a sound judgment does not depend on such intangib3.es as "mar ket sense” , s h a ll a sound judgment be a rriv e d at and tra n s la te d in to terms o f market technique. I t i s w ith technique th a t t h is memorandum d e a ls, but since a discussio n o f technique, in o rd e r to have re a l s ig n if ic a n c e , must be concerned w ith means in t h e i r r e la t io n to selected ends, i t w i l l be worth w h ile to id e n t if y some of the le a d in g purposes f o r which market o perations may be employed. 'fwo o f these are (1 ) emergency s t a b iliz a t io n and (2 ) emergency s t a b iliz a t io n p lu s o rd in a ry s ta b iliz a tio n .* ^ / O perations d ire c te d at the f i r s t o f these, sometimes described when used in a f a l l i n g market as "p re ve n tin g p a n ic " , would not o n ly be lim it e d to occasions upon which d is o rd e r th reatene d, e ith e r on the up side o r on the down s id e , but would also be lim ite d in t h e ir purpose by absence o f concern on the p a rt of the System w ith the a c tu a l le v e l at which market p ric e s would e v e n tu a lly be e sta b lish e d a f t o r d istu rb a n ce , provided o nly that t h is le v e l were reached as the re s u lt o f a market process not i t s e l f accentuated by unduly shaaj; and abrupt changes. O perations d ire c te d at the second o f the enumerated market o b je c tiv e s would be conducted at any tim e , perhaps even at a l l tim es, and would aim not o n ly at the dampen in g down o f such flu c tu a tio n s as occur in emergencies but also a t the lim it a t io n in some degree of the m inor flu c tu a tio n s th a t occur at q u ite 2/ A t h ir d p o ssib le purpose, which needs mention in t h is memorandum main l y because i t has been mentioned elsewhere, would be to e x e rc is e , w ith in te n t and not m erely in c id e n t a lly , z, measure o f in flu e n c e o r c o n tro l over the le v e l o f the p ric e s o f Government s e c u r itie s . Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 4. sh o rt in t e r v a ls even in a market th a t is reasonably normal — but s t i l l w itho ut s p e c ia l System concern as to the le v e l o f the m arket. By way o f emphasizing the p o in t th a t any program o f s t a b iliz a t io n must be judged in the l i g h t o f i t s purposes, i t may be noted th a t p o s s ib le purposes o f a program of emea^gency s t a b iliz a t io n p lu s o rd in a ry s t a b iliz a t io n might be (1 ) to c u r t a i l sp e cu la tio n in Government s e c u ritie s by making the market so steady th a t i t would not be o f much in te re s t to speculators and so would lo s e some o f i t s tendency to i n s t a b i l i t y , o r (2 ) to put the System in a p o s itio n by v ir t u e o f the scope and na ture o f i t s o r d in a ry operatio ns ancl i t s experience in normal times to be more e ffe c t i v e in emergencies than i t is now. F iv e proposals are discussed, la r g e ly in the o rd e r o f conven ience in e x p o s itio n , but the f i r s t two proposals are more ambitioua than the la s t two. The proposals r e la te to (1 ) management o f the Sys tem’ s o peratio ns in the Government s e c u ritie s m arket; (2 ) making those operations continuous, e tc ; (3 ) having them take place in every Federal Reserve d i s t r i c t ; (4 ) re g u la tio n ; and (5 ) b rin g in g more of the tra d in g to the f lo o r o f the Exchange, e tc . P roposal f o r changing the management o f System o p e ra tio n s . The f i r s t proposal to be discussed has to do w ith the arrangements by which the p o lic y de cisio n s of the Fe deral Open Market Committee, what ever these may be, are tra n s la te d in to a c tu a l purchases and sa le s , a t p a r t ic u la r p ric e s and in p a r t ic u la r amounts, in the Government s e c u ri t ie s m arket. A ccording to the arrangements th a t have been in e ffe c t f o r some y e a rs , the genoral p o lic ie s determined by the Fe deral Open Mar ket Committee are tra n s la te d in to a c tio n by tho executive committee through the agency of the Fe d e ra l Reserve Bank, o f itfew Y o rk , a c tin g .» . . . ii. i Reproduced from the Unclassified I Declassified Holdings of the National Archives ~~ iim n i - m i i n . ..............I.........• n m i i i i i u g j} i i DECLASSIFIED Authority /QGOj 5. p r im a r ily through the P re sid e n t o f th a t bank and the V ic e -P re s id e n t who is the manager of the System Open Market A ccount. The P re s id e n t o f the Fe deral Reserve Bank o f New York i s a member and vice -ch a irm a n o f the Fe deral Open Market Committee and also a member and vice -ch a irm a n ox* the executive committee; he i s a t the same time the c h ie f executive o f f ic e r o f the Fe deral Reserve Bank o f New Y o rk , the agent o f the Reserve banks se lecte d by the Committee, and in t h is c a p a c ity the V ic e -P re s id e n t who i s the Manager o f the System Account is p r im a r ily re sp o n sib le to him. T h is arrangement, however c o n s c ie n tio u s ly c a rrie d out by a l l p a r t ic ip a n t s , has im portant disadvantages, p a r t i c u l a r l y at times when the executive committee as a whole and i t s New Yo rk member are not in complete agreement w ith re spect both to m atters of general p o lic y and to m atters o f tra d in g p o lic y . U nless th e re is complete agreement on these m a tte rs, and in a d d itio n mutual understanding and mutual c o n fi dence between the executive committee and the Committee’ s agent, both o f these fu n c tio n a rie s are l i k e l y upon occasion to f in d the r e la t io n ship u n s a tis fa c to ry : the executive committee may f e e l th a t i t s p o lic ie s and even i t s in s tru c tio n s have not been c a rrie d out e x a c tly o r w ith s u f f ic ie n t v ig o r , whereas the men in New Y o rk may not o n ly have the opposite o p in io n and be able to support i t w ith te c h n ic a l d e ta ils but they may in a d d itio n be able to advance reasons f o r charging the execu t iv e committee w itb v a c i l la t io n , de lay in making d e c is io n s , o r a la c k of p re c is io n in fo rm u la tin g and tra n s m ittin g in s tr u c tio n s . There are those who consider such an arrangement as t h is to be in h e re n tly and in c u ra b ly unsound. In any event, a proposal has been ■«r Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E f' r lO G O j 6 . advanced f o r co n sid era tio n th a t the Fe deral Open Market Committee, in stead o f s e le c tin g the Fe d e ra l Reserve Bank o f New Y o rk , s e le c t some o th e r agent to execute tra n s a ctio n s in and manage the System Open Mar ket Account. The agent se le cte d would act f o r a l l of the Fe d e ra l Re serve banks c o l l e c t i v e l y , as does the Fe d e ra l Reserve Bank o f New York now, but would not be on the p a y r o ll o f a p a r t ic u la r Reserve bank and would be answerable, in p ra c tic e as w e ll as in th e o ry , d i r e c t l y to the Committee. Under such an arrangement, the agent and manager o f the Sys tem account would have no more r e s p o n s ib ilit y to the Fe d e ra l Reserve Bank o f New Y o rk o r to the New York member o f the Fe deral Open Market Committee than to any o th e r ie d e ra l Reserve bank o r member o f the Com m itte e . A manager so appointed and supervised might be p h y s ic a lly l o cated in New Y o rk , as would seem to bo d e s ira b le a t le a s t u n t i l some experience had been had un der the new scheme, but he could ( i f the Com m itte e d e sire d ) be lo ca te d in Washington, a refinem ent o f t h is sugges tio n would be to have the Committee choose both a manager and an asso c ia te manager, w ith tho idea th a t, ta k in g tu rn s , one o r the o th e r of them might always be in Washington, where he could be educated by the executive committee and could educate the executive committee and the Board. An im portant argument f o r the proposal th a t the Fe d e ra l Open Market Committee s e le c t an agent o th e r than the Fe deral Reserve Bank o f New York to conduct the tra d in g o peratio ns f o r a l l o f the Fe deral Re serve banks would be th a t the contacts w ith the Board and i t s s t a f f of a manager so chosen and so supervised would be so much c lo s e r than they are now, both in s p i r i t and in f a c t , th a t the p o s s i b il i t y o f m isunderstanding Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 7 in v o lv in g members o f the Board would be s u b s t a n tia lly reduced. O b je c tio n s . - The proposal would be a c t iv e ly re s is te d by the Fe deral Reserve Bank o f New Yo rk and b y -th e New Yo rk f in a n c ia l commun it y . One p o ssib le argument against i t is th a t f o r o p eratio ns o f such magnitude an in s t i t u t i o n a l ra th e r than a personal agent (though not le g a lly necessary) may be d e s ira b le . M o th e r is th a t the proposed a r rangement might not in su re a s u f f ic ie n t ly h ig h degree o f te c h n ic a l oompe tence on the p a rt o f the manager unless the Committee were w i l l i n g both to s tre ss te c h n ic a l competence in h is s e le c tio n , in ste ad o f agreement w ith i t s e l f , and to pay him according to New York standards in ste ad o f Washington standards. There i s a lso the contention th a t the manager of the account, havin g le s s independence o f the Committee than the present manager, might f a i l to stand up s u f f ic ie n t ly against the Com m ittee in case the l a t t e r should be disposed at any time to advise operations th a t were te c h n ic a lly unsound, f i n a l l y , the re i s the ques tio n whether there could be re ta in e d under the proposed arrangement, since i t would be viewed askance in New York by reason o f i t s not being id e n t if ie d w ith th a t community, the cooperation o f de alers and d e a le rbanks which has always been c u ltiv a te d by the o f f ic e r s o f the New York Reserve bank and which has been tovsxA to be h e lp f u l in connection w ith the a c q u is itio n of market in fo rm a tio n by the New Yo rk bank and w ith the f lo a t in g o f new issues of Government s e c u r it ie s . I f judged from any p o in t o f view except the s p e c ia l p o in t of view of New Y o rk C it y , none of these o b je c tio n s except p o s s ib ly the la s t seems to have much fo rc e . C e rt a in ly few o f them can be taken ve ry s e rio u s ly by those who b e lie v e th a t one o f the purposes o f Congress in c re a tin g the fe d e ra l Open Market Committee as a t present c o n s titu te d , Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority o. and endowing i t w ith p le n a ry powers, was to lessen s u b s t a n tia lly the in flu e n c e in open-market m atters o f the fe d e ra l Reserve Bank o f New York and to increase th a t o f the re p re s e n ta tive s o f the Government and the o th e r Fe deral Reserve banks. Some of the cooperation now re ceived from de alers would c e r t a in ly be l o s t , but not th a t s u b s ta n tia l p a rt o f t h is cooperation which has a f a i r l y s o lid basis in the s e lf -in t e r e s t / o f the d e alers and the de a le r-b a n ks. P roposal f o r making System o peratio ns continuo us, e tc . - The second proposal to be discussed, which bears d i r e c t l y on the s t a b i l i za tio n problem and is probably the most am bitious o f them a l l , would change the n a tu re o f System operations in the Government s e c u ritie s market by making those o peratio ns continuous in ste ad o f in te rm itte n t and a lt e r in g them, in o th e r ways. Ifcls proposal* according to one care f u l l y considered view , would comprise three re la te d suggestions: (1 ) That the System, in ste ad of d e a lin g a c t iv e ly o n ly in perio d s when the market threatens to become d is o r d e r ly , and then d e a lin g o n ly on one s id e , . Copt the p r a c tic e o f de alin g a c t iv e ly on both sides at a l l times ( o r almost a l l tim e s ); (2 ) th a t the volume o f the System 's dealin gs be so enlarged, end t h e ir c h a ra cte r so a lte re d , as to make the System o peratio ns at a l l times an im portant f a c t o r in the m arket; and (3 ) th a t the System, in stead of c o n fin in g i t s o v e r-th e -c o u n te r tra n s a c tio n s to l:irg e avow York dealers and la rg e New Y o rk dealer-banks (member ba i-k s), adopt the prac t ic e of d e a lin g in a d d itio n w ith o th e r d e a le rs , o th e r member ba^ks, o th e r banks, insurance companies, anO. the general p u b lic . The p r in c ip a l co n sid era tio n s in fa v o r o f t h is proposal may be b r i e f l y stated as fe llo w s : (l) Continuous and d iv e r s if ie d d e a lin g on a la rg e scale DECLASSIFIED — Reproduced from the Unclassified / Declassified Holdings of the National Archives Authority E ,£ > ,lQ $ Q ) 9. would enable the System to have at a l l tim es, by d ir e c t observa tio n and de alin g experience end not (a s at present) la r g e ly at second-hand, f u l l in fo rm a tio n as to the s ta te of the m arket, the s iz e and run o f tra n s a c tio n s , e t c ., from which i t vrould be le s s d i f f i c u l t than i t i s now to determine at any g ive n time what the cu rre n t tre n d o f the market a c t u a lly is and whether, in the l i g h t o f esta b lish e d System p o lic y , i t i s one of those trends th a t should be "bucked” and i f so, to what extent and by what type and magni tude o f o p e ra tio n s; (2 ) The o p eratio ns o f the System would tend to b e n e fit a l l banks and o th e r in v e s to rs by causing the market g e n e ra lly to be a " c lo s e r" market than i t would otherw ise be; and (3 ) r£he operatio ns o f the System " tr a d e r ” would be more e f f e c t iv e , because p ro fe s s io n a l d e alers and o th e r persons, being accustomed to seeing him tra d in g e x te n s iv e ly at a l l times on both sides o f the m arket, now more .and now le s s , would no lo n g e r be in so good a p o s itio n to d iv in e System p o lic y by o bserving Sys tem o p e ra tio n s, arid in a d d itio n a v a r ia t io n in the amount o f h is a c t i v i t y in e ith e r d ire c tio n would not be "news" (a s h is entrance o r w ithdraw al now i s ) . O b je c tio n s . - Among the o b je c tio n s to the proposal th a t have been advanced, probably the most im portant i s th a t the time would be l i k e l y to come, sooner o r l a t e r , when the System and i t s " tra d e r" would be confronted by a serious dilemma. I h i s might be at a time when — p o s s ib ly a f t e r the c r e d it s itu a tio n has been brought under c o n tro l again by some such means as an increase in re serve requirem ents — the System would d e s ire to tig h te n the c re d it s itu a tio n by s e llin g Government < *af Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 10. s e c u ritie s from i t s p o r t f o l io . Such an o p e ra tio n , though conducted by the " t r a d e r ” evor so c a u tio u s ly , would be l i k e l y to cause the market to get the wind up and thus occasion some vigoro us s e llin g th a t m igh t, un le s s counteracted by System b u yin g, defeat the System’ s s t a b iliz a t io n o b je c tiv e by causing the market to become d is o r d e r ly . T h is o b je c tio n , i f i t s premises be accepted, seems to be a v e ry t e l l i n g one. Upon c a re fu l c o n s id e ra tio n , however, reasons appear f o r doubting th a t ix. i s so co n clu sive as i t m ight seem to be at f i r s t s ig h t . The contingency o u tlin e d might not a ris e f o r many y e a rs , pos s ib ly not so lo ng as the country continues to have such an enormous volume o f excess re se rve s. By the time th a t the in d ic a te d contingency d id a r is e , c o n d itio n s w ith respect to the volume of excess re se rve s, the s iz e o f the p u b lic d e bt, the gen eral c h a ra cte r o f the m arket, e t c ., might w e ll be so d if f e re n t from what they are now as to make the use of open-market operations as an instrum ent of c r c d it p o lic y e n t ir e ly im p r a c t ic a l. I t has, in f a c t , been im p ra c tic a l f o r se ve ra l y e a rs . At w o rs t, moreover, i t i s h a rd to see why System operations f o r reasons o f c re d it c o n tro l should be any more d i f f i c u l t o r u n s e ttlin g under the pro posed plan than they have been in the p a s t, and there may ever, be some reason to b e lie v e tha t any d is o rd e r created by s e llin g f o r purposes o f c re d it c o n tro l might prove to be lessened unuer the proposed scheme because o f the market’ s being more accustomed to System d e a lin g and be cause o f the increased s k i l l in tho p ra c tic e of h is a r t acquired by the System " tr a d e r ” through h is more extended and a c tiv e tra d in g experience A nother o b je c tio n that has been advanced i s th a t in v e s to rs , ........!~ i j j i" .1iw" 1'mu1 • • • in •« ytni i Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 11. f o r some considerable time at le a s t , would probably be v e ry suspicious o f a market b e lie ve d to be co n sta n tly under o f f i c i a l c o n tr o l, never a lto g e th e r "n a tu ra l and fre e ” , and consequently u n p re d ic ta b le . The arrangement would be at a l l times open, moreover, i t i s s a id , to the accusation th a t the market is being manipulated in the in te re s ts of the Tre a su ry and against the in te re s ts o f the in v e s tin g p u b lic . The pro posed arrangement, fu rth e rm o re , by p u ttin g the i'e d e ra l Reserve System in to d ir e c t com petition w ith bro ke rs, d e a le rs , and d e a le r-b a n k s, cer t a in ly in lNiew Yo rk C it y and p o s s ib ly elsewhere, might arouse fe a r among dealers th a t they would be put com pletely out o f business ana provoke vig o ro us c r it ic is m from many q u a rte rs. Among the p o ssib le answers to such o b je c tio n s as these, the most e f f e c t iv e , i f i t can be s u b sta n tia te d , i s th a t the s t a b iliz a t io n o b je c tiv e s of the S y s te m ^ p o lic ie s in the Government s e c u ritie s market are of such importance to the p u b lic w e lfa re as to j u s t i f y s u b s ta n tia l extension o f System e n te rp ris e in to t h is f i e l d . The i n i t i a l antagonism, fu rthe rm o re, m ight f a i r l y be expected to d ie away in due time i f and when the d a y -to -d a y operatio ns of the System in the market were found by experience to be reasonable and s e n s ib le . In re c o g n itio n o f the fo rce of these and o th e r o b je c tio n s , however, i t has been suggested th a t i f the System shoula decide to adopt the proposec. new procedure i t should s t a r t in a sm all way and expand g ra d u a lly , p o s s ib ly by ta k in g upon i t s e lf at the outset o n ly a r e la t i v e l y sm all p ro p o rtio n of the t o t a l b u si ness o r by c o n fin in g i t s d e a lin g s to member banks u r to some o th e r selected 3egmont of the m arket. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority r 12 . P roposal to provid e f o r System d e alin g s in Government s e c u ri t ie s at every Fe d e ra l Reserve bank* - A l l de a lin g s in Government s e c u ri t ie s are now e ffe cte d fo r the System Open Market Account by the Fe deral Reserve Bank o f New Y o rk , a c tin g as agent o f the Committee and in be h a lf o f a l l the Fe d e ra l Reserve banks. They are effe cte d almost a l to g e th e r in the New York m arket, though small purchases o r sales are at times made elsewhere, e s p e c ia lly in Chicago. The proposal next to be discussed i s th a t p ro v is io n be made f o r System d e alin g s in Gov ernment s e c u ritie s at each of the o th e r ie u e r& l Reserve banks. Before d e s c rib in g c o n c re te ly ju s t how the necessary arrange ments might be made, the reasons th a t have been advancea f o r th is , p ro posal may be b r i e f l y sta te d . I t i s said th a t such arrangements might enable the System to be more e f fe c tiv e by d e a lin g w ith d is tu rb in g l i q u i da tio n tfat i t s source” . I t i s said th a t as lo ng as the Fe d e ra l Reserve Bank o f New York i s the o n ly one of the Reserve banks th a t is empowered to deal in Government s e c u r it ie s , w h ile no o th e r Fe d e ra l Reserve bank may buy o r s e l l such s e c u ritie s even in i t s own Fe d e ra l Reserve d i s t r i c t , these o th e r Fe d e ra l Reserve banks are deprived o f some o f the p re s tig e th a t the y deserve in t h e ir own d i s t r i c t s and perhaps also o f e f f e c tiv e ness in the counsels of the System because o f t h e i r la c k o f knowledge o f the m arket. I t is also said th a t i f a Fe deral Reserve bank p rovid es a market l o c a ll y f o r the buying and s e llin g o f Government s e c u r it ie s , the s e rv ic e w i l l be appreciated by many o f i t s member bunks, e s p e c ia lly Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 13. tho small banks which are unable to h ir e t h e ir own " tra d e r" in Govern ments to p ro te c t them in d e a lin g w ith o rd in a ry dealers in the open mar k e t. There is the c o n sid e ra tio n th a t in past y e a rs , before the open- market o p eratio ns of the Reserve banks were com pletely c e n tra liz e d , there was some buying and s e llin g by i& d iv id u a l Fe deral Reserve banks, and th a t even now the Reserve banks do in a sm all way something s im ila r to th is when they serve upon request as brokers (w ith o u t commission) f o r member banks. There are f i n a l l y two f u rth e r p o in ts , ill u s t r a t e d by in c id e n ts in September o f t h is y e a r, both of which r e la te to the occasions when the market i s weak and the System is the o n ly buyer. Large member b^nks o utsid e ftew York C it y which have some s e llin g to do a t such times f e e l u n f a ir ly tre a te d because (1 ) in ste a d o f being able to s e l l d i r e c t l y to the System at i t s buying p r ic e they must s e l l to some middleman at a l i t t l e low er p r ic e and (2 ) h a vin g to g iv e up names o f customers to d e a le rs , as they had to do in September in o rd e r to make sales through the dealers to the System, meant g iv in g up the names to com petitors in ste ad of to a F e d e ra l Reserve bank which i s a semi p u b lic in s t i t u t i o n . ■*r Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 14. In c o n sid e rin g the mechanics o f the proposed arrangement, i t i s im portant to re co g n ize th a t d e c e n tra liz a tio n o f operations must not bo accompanied by d e c e n tra lis a tio n o f c o n tr o l. A ccording to one c a r e f u lly considered scheme, the general manager o f tra d in g f o r the e n tire System, whether o r not the Fe deral Reserve Bank o f New York continues to be the agent o f the Fe deral ODen Market Committee, would continue ( l i k e the p re sent Manager o f the Open Market Account) to be the System 's sole " tr a d e r ” in New Y o rk , but he would have under h is s u p e rvisio n a d i s t r i c t manager a t every Fe deral Reserve bank except the Federal Reserve Bank of New York. Under h is s u p e rv is io n , each d i s t r i c t manager would be empowered to deal in Government s e c u ritie s f o r System account, in h is own d i s t r i c t , e ith e r w ith member banks o n ly o r w ith them and also w ith o th e r in v e s to rs . A ll tra d in g everywhere would be on the b a sis o f l im i t i n g b id s and o ffe rs de cided upon (o r approxim ately decided upon) by the general manager o f Sys tem tra d in g and communicated by him c u rre n tly and co n tin u o u sly to a l l the d i s t r i c t managers b y d ir e c t w ire (u s in g te le g ra p h , telephone, o r t e le t y p e ). In plan ning the System’ s tra d in g operations and in e s ta b lis h in g the l im i t i n g bids and o ffe rs to be used throughout the System, the general manager would have a t h is d is p o s a l, i n a d d itio n to the b id and asked quo ta tio n s obtained c u r r e n tly by telephone from the New York Stock Exchange and corresponding data fro n le a d in g de a le rs in New Y o rk , ( l ) the inform a t io n acquired by him from h is own System tra d in g in the New York market, and (2 ) the in fo rm a tio n f r o i a l l p a rts o f tho c o u n try w ith regard to b id s , o f f e r s , and tra n s a c tio n s tra n sm itte d to him c u rre n tly by the d i s t r i c t managers in a l l o f th e o u tly in g Fe d e ra l Reserve banks. The tra n s a c tio n s a t in d iv id u a l Reserve banks would be d ire c te d 111 11» Reproduced from the Unclassified I Declassified Holdings of the National Archives m 1 DECLASSIFIED Authority 15. by the general manager according to a System plan, worked out presumably by the Federal Open Market Connittee, that would cover such details as the a.aount of initiative that either the general manager or the district manager might be allowed to take, how frequently (as weekly or daily) se curities, if any, taken temporarily into the account of an individual Re serve bank should be carried to System account, and the sizo of tho maxi mum individual transaction that might be handled by the district manager without having to consult the general manager. A concrete example may help to show how such a scheme might serve to reconcile decontraliaction of operations with centralization of control. If the district manager at tho Chicago Reserve Bank, for ex ample, should recoive from a customer an offer to 3ell $20,000 of 1960-65 bonds, the district muiager at th<- Chicago bank would presumably buy the bonds immediately at a price not higher thf<n the current bid price that had been already authorized by the general manager of System trading. If the offer wore to sell as much as §5,000,000 of these bonds, howover, the district manager at the Chicago Reserve Bank would take the transaction under advisement and discuss it with the general manager of System trading.!/ The general manager would then d e c id o whether the offer should be accepted by the Chicago district manager, and if so whether at a price as high as, or only at a price lower than, the bid already authorized. In making this decision, the general manager would consider any offsetting orders he might have from other districts to buy the same issue, eny offsetting buying orders in other bonds of similar maturity, any buying orders in other 5/ The figures £20,000 and $5,000,000 are raeroly illustrative* The exact point at which the line between a ,ffirr.i bid*' and a "conditional bid11 would be drawn, which would be likely in any giv^n case to be somewhere between these two figures, cannot be deterained in advance of experience. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 16. Government securities, the composition of the System inventory and all I other factors bearing on the question. Once the decision had been made, it would be communicated to the customer by the Chicago district manager. Objections. - Tho objections to the proposal that System deal ings in Government securities at all Federal Reserve banks be authorized by some? appropriate arrangement do not seem to be very substantial. Any such arrangement would present difficulties to the general manager of trading for the entire System, but these could be surmounted. It may well be doubted, however, whether the advantages that flight flow from the pro posed arrangement would be very substantial. The contention that there should be provided by the Systeui at each individual Federal Reserve bank a "ready market” for the member banks of the district has some force, but except in times of emergency, when the System is almost th? only buyer, the narket is already so well organized throughout the country as to bring a fairly ready market quite near to aloost every member bank. The proposed arrangement might perhaps help at times to halt "at the source” some liquidation by outlying member banks or other sellers, but it is primarily by the System’ s operfitions in the larger transactions, most of which will continue to be in tho central market at New Yor.V. City, that a close market (as well as a market having the desired stability) must be achieved. Proposal for regulation of the trading in Government securi ties by professional dealers. - The next proposal to be considered belongs in a quite different category from the ones that have been already dis cussed. It relates not to trading operations by the System in the market for Government securities but to trading in that market by others, par ticularly by professional dealers, and to the regulation of that trading. m Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Eti./OGOj 17. The aerket for Government securities is very broad, but the price-making market centers at New York City and in that city not on the Exchange but in dealings over the counter, in which large dealers who specialize in such dealings play a leading part. There is a little trad ing in small lots on the Exchange every day, and all the transactions there:* are publicized by being reported on the ticker, but this trading is not by any means continuous and ordinarily amounts to little more than an inexact reflection of the trading over the counter. In being' a counter market, the market for Government securities does not differ essentially from the market for the bonds of important municipalities and large corporations, or fron the market for British Government securities in London. same fundamental reasons — All have counter markets, and for the that such securities belong in the main to large institutions which can afford to have professional "traders'1 of their own and which do most of their trading in large blocks. Such trading naturally goes to the counter because the counter, in contrast to the ’ ’ floor", affords opportunities for the necessary privacy of negotiation, for bargaining, and for various economies that go with dealing on c large scale. In other essentials, the market for Government securities is like other highly organized markets. The outsiders, the institutional and other holders of Government securities who buy and sell them from time to time, are the real "makers”of the market, their trades the ones for whom professionals compete. Given their interest and participation as buyers and sellers, the professional dealers, as in other organized markets, ordinarily make the market ’ ’ close”and make the market ’ ’ continuous” — Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority O.l0^0! in. close in the sense of making the spread at any given tine between tho highest bid and the lowest offer a narrow one, find continuous in the sense of making it possible for investors to buy or sell at any viomrnt during any business day. To make a market "close" and "continuous” is a useful economic function, and this becomes evident to all when those who ordinarily perform this function quit doing so as all professionals in all highly organised markets commonly do in times of serious disturbance. At such tines they "run away", usually to save their profits or their capital, whether they are jobbers on the London Stock Exchange or floor traders on the Nov; York Stock Exchange or professional dealers in Govern ment or other bonds over the counter. This contributes at tin^s to in stability, but as a general proposition the prevailing opinion among economist who have specialized in tho study of highly organised markets is that the volatility of such markets arises far more from the multi farious influences that operate on and through mo33 psychology, including in particular the flow of market information, than it does from the de fects of market mechanism or from the behavior of professional dealers of any kind. If it is true, as the foregoing analysis affirms, that the market in Government securities is essentially like other highly organized morkets that have been more thoroughly studied, then the possibilities of making it raore stable through regulation and closer supervision of pro fessional dealers must be quite limited. '•That is called for primarily is stabilizing operations along lines discussed elsewhere. It is never theless in order to inquire whether such unstabilising influence it3 d:>rs arise from the activities of dealers could not be reduced by measures of regulation properly designed for the purpose. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £~,0. tO^Of 19. According to suggestions that have been made for fchis pur pose, steps should be taken (1) to tighten the informal supervision of the trading by the large dealers that is at present exercised by the Federal Reserve Bank of New York and possibly (2) to bring all dealers, whether large or small, under certain regulatory provisions of the Se curities Exchange Act of 1934. The only direct control of any consequence that is now exerted over the professional dealers in Government securities is that which is exercised informally over the eight or ten leading dealers, on a so-called cooperative basis, by th© Federal Reserve Bank of New York. This coopera tion includes at the present time tho making of highly confidential daily reports to the Reserve Bank which show, among other things, the size at the close of the day of the dealer1s own "position" in each type of Govern ment securities. On the basis of these reports — and largely by reason of the fact that the Bank if so disposed could withhold valuable busi ness from a non-cooperative dealer or, with Treasury approval, limit his subscriptions to new issues of Treasury securities — the Bank has at times informed one dealer or another that his position was becoming so large as to make the market vulnerable cud has advised him to reduce his portfolio to a more reasonable figure. There is evidence to show that the "moral suasion" thus exercised by the? Bank has had a salutary influence and to indicate that it would be well for the Bank to make more frequent requests to dealers for reducing long positions or cover ing short positions when such action would appear desirable to give greater stability to the market. In the interests of efficiency ana good understanding among all the members of the executive committee, reports of all such requests, which have not heretofore been made to the committee or to the Board, should be made to tho committeo currently and Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £,QJOGOj 20. in detail. The principal consideration in favor of the proposal is that the instrument of "moral suasion", if firmly and skillfully employed by the Federal Reserve Bank of New York, might contribute to the prevention of excessive and unstabilizing speculation on the part of the pro fessional dealers and even have a little indirect effect on the specu lation induced by them on the part of their customers. It probably could not be carried very far, however, without the likelihood of alien ating the dealers and so upsetting the very basis of the present arrange ment . If further regulation of dealers in Government Sfcuriti. s were dosired, the trading in the Government securities market ■light be brough under certain of the "anti-manipulation" provisions of the Se curities Exchange Act of 1934. Among these provisions, the principal ones which would seem relevant are those which prohibit (l) the dissemi nation of information (whether true or false) to the effect that prices are likely to rise or fall because of the operations of some person (e.£., dissemination of information to the effect that prices are likely to rise or fall because of operations >f the Federal Open Market Com mittee), (2) the making of false or misleading statements as to any iaaterial fact, and (5) tho effecting of transactions in series for the immediate purpose of causing the market to be active or causing quota tions to move and the ultimate purpose *>f thus inducing other persons to buy or sell. The trading in the Government securities market might be brought under these provisions, without new leg.il sat ion, by action of the Securities and Exchange Commission, which is the agency now authorized .........................................i 111 1 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority !T,0./O$0j 21 . to make the necessary rules and regulations and to enforce the same. The Commission has issued rules relating to the provisions specified, but these contain, largely in consequence of statutory provisions that are not mandatory but are indicative, a specific exemption for Govern-noni securities (along with municipal securities). There is soue reason to be lieve that the practices in question are employed to some extent by the professional dealers in the Government securities market, and if the Federal Reserve System were persuaded that these practices constitute ’ ’ manipulation” the System could recommend to the Commission that it rescind the present exemption, so far as Government securities are con cerned. The evidence to this effect that i3 at present in the Board's files, however, is rather scanty and probably not sufficient to convince the Commission. If so, an appeal either to the Commission or to Congress would have to be preceded by a special investigation of 30:ue kind. On the whole, the proposal for attaeking the problem of dis orderly markets in Government securities by the iiethod of regulation is not promising. Markets already regulated are far fron stable — includin the grain futures markets regulated since 1922 and the stock market regu lated since 19.54. Proposals for bringing more trading to the Exchange, provid ing the public with better information, etc. - The purpose of the pro posals finally to be considered would be to bring to the supnort of Federal Reserve operations so-ie changes in the organization of the Mar ket for Government securities. According to suggestions that have been made along those linos, steps should be taken (l) to induce and assist the New York 8t >ck Exchange to bring more of the trading in Government securities to the floor of the Exchange and (£) to provide more and bettor mcrket information for the public. The principal reason for trying to bring more of the trading Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 22 . in Government securities to the floor of the New York Stock Exchange is in order to make that market in these securities, now little more than a small and intermittent (but widely publicized) echo of the over-thecounter market, more representative and consequently more efficient. A secondary reason is to bring a larger proportion of the total trading under the Exchange’ s trading rules. Doubtless measures for bringing more of the trading to the floor could be devised by the New York Stock Exchange and would be so devised by thorn if the Exchange were duly pressed or encouraged from Washington.^/ The System could also help the cause along by having the Manager of the System Open Market Account make more U3e of the floor market then he does at present. It has been further suggested that the Federal Reserve Bank of New York, partly in order to provide information that would be helpful in guiding System open-market operations, should request the more impor tant dealers to include in their daily reports to the Reserve Bank, in addition to the aggregate amount of their purchases and sales of each type of Government securities (already being reported) certain additional information, to wit: the amount of each of the four principal types, long-term rnd short-term, bought frou find sold to each of the principal classes of customers — such os dealers, insurance companies, savings banks, and commercial banks, with separate figures for New York City and eab-oftown banks. Theac- reports would serve to inform the System more fully 4/ Some measures that h«ve been suggested include increasing the size of the trading unit in Goverauents on the Exchange from one bond to ten bonds, establishing n Governuent bond /nemborship on the Exchange at p much lower price, and allowing transactions fit closer differences such as l/64th or (still better) l/lOQth of a point (instead of l/52nd ns at present). Reproduced from the Unclassified I Declassified Holdings ofthe National Archives DECLASSIFIED Authority 28 . with respect to just what is going on in the market, as indicated by the class of customers that is buying or selling on balance at any given time, either the long or the short maturities, and put the System in posi tion to conduct its own stabilization (and other) operations more effec tively. It should be noted in this connection that information similar to th*.t described above has for aany years been confidentially reported by dealers in the raarket for bankers' acceptances. The proposed reports, in addition to being of use to the Systou, would provide figures for release to the ratblic shoving for each day, for the reporting group of dealers as a whole, the total volume of trading in each of the four principal typos of Govern* lent securities. Those data, if published daily, would give the public far better informa tion as to the volume of trading in Government securities than the pub lic now obtains through the reported (but substantially misleading) fig ure of the volume on the Stock Exchange. By another proposal designed to give the public essential market inforietion, the Reserve Bank .night put on the news ticker every hour, or even every half-hour, the consoli dated average bid prices and offering pricos that the Bank now computes at intervals for its own purposes on the basis of the dealers' quotations obtained by telephone. The principal considerations in favor of such s urogram as hf s been outlined ore; (l) to the extent that business should move to the floor of the Exchange, not only tho Exchange market but c-lso the mar ket as a whole would become technically better; (&) to provide the trad ing public with More and better information would tend zo have a similar effect; and (3) the System, having better information itself, could handle it3 own trading more efficiently. DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings ofthe National Archives Authority EgJOGOj i/i. Objections. - The principal argument against the nronosal is that the over-the-counter market for Government securities, techni cally considered, is so much better at prosent than the corresponding market on the floor of the Exchange that even extraordinary efforts by the Exchange night not succeed in loving much of that trading to the floor. This technical superiority of the over-the-countor aarket arisen largely though not entirely fro 1 tho niuch larger volu.io of the trading on that market. This r.takes it especially advantageous for trading in Goveraaent securities, because much of this trading is in largo blocks, such as $1,000,000, $5,000,000, or even more. Another reason for this technical superiority, however, vfoich is inherent in the essential dif ference between a counter market and a floor market, is that transactions in large blocks, especially when they involve "swaps”as many large trans actions in Goveraaent securities do* rntuire negotiation, which is not possible on the floor. For exa iple, a dealer operating over the counter, before assembling a block of soue particular issue of securities bid for by a customer, may work out (over the telephone 'T otherwise) a large number of intermediate transactions involving other dealers and other customers• Concluding couments. - A few disconnected observations arc ap pended here which seem to belong generally to the discussion but without belonging to any particular part of it. In describing the different proposals, the intention has been to include only enough detail to nake each proposal sufficiently con crete to be debated, not enough to serve as a basis for official action or to exhibit all the possible alternatives. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority F.Q./oGoj 25. The proposals'discussed relate for the most part to differ ent aspects of the problem and even those that relate to the same aspect are not in all cases to be considered mutually exclusive. For example, the proposal that the System trade continuously and the one that it trade at every Reserve bank might be viewed as supplementary. Careful efforts have been made in writing this memorandum, whether or not they have been successful, to avoid bias, including any bias that might arise from prepossessions in favor of the Government in general and the Board in particular. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Si October 3^» 1939 U D ra ft to be po lish ed f o r mimeographing)! I_—" To : Board o f Governors From: See note S u b je c t: Im proving the Government S e c u ritie s M arket. 1/ T h is memorandum, prepared at the recent request o f the Board f o r an im p a rtia l d isc u ssio n of c e rta in proposals r e la t in g to the Govern ment s e c u ritie s m arket, is intended f o r the a tte n tio n of the Board alone and is on th a t understanding more outspoken in some places than i t could otherw ise have been. D e fin in g the problem . - The problem to be considered re la te s to the fu n c tio n in g of the market f o r Government s e c u r it ie s . I t has grown c h ie f ly out o f the c o n d itio n s th a t have.made th a t market in c re a s in g ly s p e cu la tive o f la t e years and out of the experience o f the System in attem pting upon occasion, through operations guided by the Federal Open Market Committee, to make c e rta in p o lic ie s e f fe c tiv e in th a t market fo r the purpose o f m in im izin g d is o rd e r, o f f i c i a l l y expressed as "th e purpose o f e x e rc is in g an in flu e n c e toward m a in ta in in g o rd e rly market c o n d itio n s ” . The market f o r Government s e c u ritie s has been more o r le s s d is o rd e rly on several d if f e re n t occasions d u rin g recent y e a rs , in fre q u e n tly on the up side but q u ite o fte n on the down side — • as in the s p rin g of 1937 t the autumn of 1937 > the sp rin g of 1938 > the autumn o f 193$ (M u n ich ), l / T h is memorandum has been w r it te n by M r. P a rry (who takes f u l l re s p o n s ib i l i t y f o r i t s language) in close c o lla b o ra tio n w ith M r. P is e r , They both take r e s p o n s ib ilit y f o r a l l views expressed. Others who have been consulted in clu d e M r. G oldenw eiser, M r. M o r r i l l , M r. Smead, jM r. ThurstonTJ and M r. D re ib e lb is . FO ; ;7.,£S F. C. O 'H a ro Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £,0,-1090/ 2. and the autumn of 1939 (European war). The evidence of disorder that was present on many of these occasions was quite apparent. It included the absence of bids, except as provided by the System, or at least the ab sence of bids at levels close to the going market price; spreads wider than usual between the best bids in the market and the best offers; sub stantial price changes between a given transaction and the transaction immediately following; uncommonly wide price changes within the limits of a single day or a short period of consecutive days; and finally, the presence in the market of a good deal of excitement, evidenced for ex ample by the ebb and flow of jrumor, sometimes]wild rumor, predictions that prices of Government securities would decline to specified low levels, and spirited discussion of these developments in financial cir cles and in the financial press. In the face of such evidence as this, there could be little difficulty in characterizing the market as disord erly; the heart of the administrative problem was to determine and appraise the degree of the disorder. The efforts of the System to minimize disorder in declining markets, although they have unquestionably had substantial effect, have not in every instance prevented the disorder from becoming itself a material cause of weakness in the market and consequently contributing to the establishment in the market of a level of prices for Government securities, for a longer or shorter period, that was lower, at least in the opinion of some of the members of the Board, than was justified by a well balanced view of the underlying factors in the situation. In this interpretation, the essential point about the objective of the System’ s operations is not described^jentirel;£] in terms of an "orderly market^ jMHKgM Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority E ojo So} because that particular expression has too many different meanings, both 6A tUkaJL. as used in System discussions andA in discussions "on the Street11• ccording to the foregoing analysis of the situation, the cru cial questions in each instance of market instability are whose judg ment of the degree of disorder is the one that shall be decisive in the determination of System trading policy^ J#) by what principles and methods, insofar as a sound judgment does not depend on such intangibles as "mar ket sense”, shall a sound judgment be arrived at and translated into terms of market technique* {and (3) through what channels and by what means shall a judgment, once arrived at, be carried into effect?| It is with technique that this memorandum deals, but since a discussion of technique, in order to have real significance, must be concerned with means in their relation t<^jcertain\ ends, it will be worth while to identify some of the leading purposes for which market operations may be employed. Two of these are (l) emergency stabilization and (2) emer gency stabilization plus ordinary stabilization. 2/ Operations directed at the first of these, sometimes described when used in a falling market as "preventing panic”, would not only be limited to occasions upon which disorder threatened, either on the up side or on the down side, but ??ould also be limited in their purpose by absence of concern on the part of the System with the actual level at which market prices would eventually be established after disturbance, provided only that this level were reached as the result of a market process not itself accentuated by unduly sharp and abrupt changes. Operations directed at the second of 2/ A third possible purpose, which needs mention in this memorandum main-___ ly because it has been mentioned elsewhere, would be to exercise, wilth intent and not merely incidentally, a measure of influence or controp. fo' over the level of the prices of Government securities. j F- c yiicir® Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 4* the enumerated market objectives would be conducted at any time, perhaps even at all times, and would aim not only at the dampening down of such fluctuations as occur in emergencies but also at the limitation in some degree of the minor fluctuations that occur at quite short intervals even in a market that is reasonably normal — A concern as to the level of the market. but still without special By way of emphasizing the point that any program of stabilization must be judged in the light of its pur poses, it may be noted that possible purposes of a program of emergency stabilization plus ordinary stabilization might be (l) to curtail specu- Insert (A) for page 4. Five Proposals are discusseu,.V rgely in the order of convenience „ ~ two. — *“ 1“ * The ,-oposals relate to (l) management of the System's operations in the Government securities market; (2) making those operations continuous, etc.; (3) having them take place in every Federal Reserve district; ^ lationfts) bringing more of the trading to the floor of the Ex ch an gl « * * ^ K \ \ ....... -. mittee are translated into action by the executive committee through the agency of the Federal Reserve Bank of New York, acting primarily through the President of that bank and the Vice-President who is the manager of the System Open Market Account. The President of the Federal Reservie ~ rori f ii .es I Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 5. Bank of New York is a member and vice-chairman of the Federal Open Market Committee and also a member and vice-chairman of the executive committee; he is at the same time the chief executive officer of the Federal Reserve Bank of New York, the agent of^the Committee, and in this capacity the Vice-President who is the Manager of the System Account is primarily responsible to him. This arrangement, however conscientiously carried out by all participants, has important disadvantages, particularly at times when the executive committee as a whole and its New York member are not in com plete agreement with respect both to matters of general policy and to matters of trading policy. Unless there is complete agreement on these matters, and in addition mutual understanding and mutual confidence be tween the executive committee and the Committee’ s agent, both of these functionaries are likely^to find the relationship unsatisfactoryjwhen things go wrong^ The^committee jin Washington} may feel that its policies and even its instructions have not been carried out exactly or with suf ficient vigor, whereas the men in New York may not only have the opposite opinion and be able to support it with technical details but they may in twUUMM r— addition be able to advance reasons for charging the^committee \in Washington^with vacillation, -j^aofrioA os^ or a lack of precision in formu lating and transmitting instructions. There are those who consider such an arrangement as this to be inherently and incurably unsound. In any event, a proposal has been advanced for consideration that the Federal Open Market Committee, in stead of selecting the Federal Reserve Bank of New York, select some other agent to execute transactions in and manage the System Open Market Account. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority f T . f f J O Z O j 6 . The agent selected would act for all of the Federal Reserve banks col lectively, as does the Federal Reserve Bank of New York now, but would not be on the payroll of a particular Reserve bank and would be answerable, in practice as well as in theory, directly to the Committee. Under such an arrangement, the agent and manager of the System account would have no more responsibility to the Federal Reserve Bank of New York or to the New York member of the Federal Open Market Com mittee than to any other Federal Reserve bank or member of the Committee. .A manager so appointed and supervised might be physically loeated in Ne?* York, as would seem to be desirable at least until some experience Jisj^ had under the new scheme, but he could (if the Committee desired) be located in Washington. A refinement of this suggestion would be to have the Committee choose both a manager and an associate manager, with the idea that, taking turns, one or the other of them might always be in Washingtoiy liere he could be educated by the executive committee and could educate the executive committee and the Board. [One of thejj^argument/ for the proposal that the Federal Open Market Committee select an agent other than the Federal Reserve Bank of New York to conduct the trading operations for all of the Federal Reserve banks would be that the contacts with the Board and its staff of a man ager so chosen and so supervised would be so much closer than they are , now, both in spirit and in fact, that the possibility of misunderstanding ^ w o u l d be substantially reduced. Objections. - The proposal would be actively resisted by the Federal Reserve Bank of New York and b y the New York financial community#" One (of t h e i^ possible argument^ against it is that for operations of jsuqh Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E . o . i o S o ! 7- magnitude an institutional rather than a personal agent (though not legal ly necessary) may be desirable. Another is that the proposed arrangement might not insureA ««> high *. degree of technical competence on the part of the manager |as the present arrangement^ unless the Committee were^ willing both to stress technical competence in his selection^and to pay him ac cording to New York standards instead of Washington standards. There is also the contention that the manager of the account, having less inde pendence of the Committee than the present manager, might fail to stand up sufficiently against the Committee in case the latter should be dis posed at any time to advise operations that were technically unsound• Finally, there is the question whether there could be retained under the proposed arrangement, since it would be viewed askance in New York by reason of its not being identified with that community, the cooperation of dealers and dealer-banks which has always been cultivated b y the^ officers of the New York Reserve bank and which has been helpful in con- \ (|a dU«^u.4«i»-an* Ik* f neetion wfEEj^the floating of new issues of Government securities^11 : in some other connections’ ^ ^ ^(one of these objections except possibly the l a s t ^ J f judged from any point of view except the special point of vie?/ of New York City, sueLio U ■ •;.rt j i:-.ucL fore'2 . Certainly Jmost] of them cai^otj be taken very seriously by those who believe that one of the purposes of Congress in creating the Federal Open Market Committee as at present constituted, and endowing it with plenary powers, was to lessen the influence in open-mar- C kot matters of the Federal Reserve Bank of New York and^increase that of A _ ........... ... . the representatives of the Government and the other Federal Reserve banks*., a r jjTha1^*^ome of the cooperation^menti»n^d^would^be.Tos-tT ia piractieftlly^certainf^ ^ DECLASSIFIED ReprodaiSdlrom ffrrUnelsfesM t Declassified Holdings of the National Archives Authority \ r.ajaZo/ . \ 8* but not that substantiaixjpart of irfeA which has a fairly solid basis in the .ai\ self-interest of the dealersland the dealer-banks. Proposal for makingVsvstem operations continuou s, etc, - The uHw»U-u\i* i»TC+JU+) Z U *wurvt second proposal to be discussed^ould change the nature of System opera ■i. <m >m -i ■ii.fflV ^ ■ ■ .-.■ ■ in * ■i i ii ii—" —• m i m mmt m m i i m m im ■■ - tions in the Government securities market by making those operations continuous instead of intermittent and altering them in other ways. This tym> i (tiw ^ proposal, according to one view, would comprise three related suggestions: A (1) That the System, instead of dealing actively only in periods when the market threatens to become disorderly, and then dealing only on one side, adopt the practice of dealing actively on both sides at all times (or almost all times); (2) that the volume of the System,s dealings be so enlarged, and their character so altered, as to make the System opera tions at all times an important factor in “ Zfiakitig. the market"t^and (3) that the System, instead of confining its over-the-counter transactions to large New York dealers and large New York dealer-banks (member banks) , adopt the practice of dealing in addition with other dealers, other mem ber banks, other banks, insurance companies, and the general public. The principal considerations in favor of this proposal may be briefly stated as follows: (1) Continuous and diversified dealing on a large scale would enable the System to have at all times, by direct observa tion and dealing experience and not (as at present) largely at second-hand, full information as to the state of the market, the size and run of transactions, etc., from which it would be less difficult than it is now to determine at any given time what the current trend of the market actually is and whether, in the light r O B FILES F, C. C'E -?» mm Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority (i) J U J fO / E.O./i5$Of I*fli y /£*, u w u M . 6*1 a '» ilAnjL* Sit ^ of established System policy, it is one of those trends that should be ’ ’ bucked" and if so, to what extent and by what type and magnitude of operations: ■ --------- * 3 -TE) The operations of the System "trader" would be more effective, because professional dealers and other persons^ould hej A accustomed to seeing him trading extensively at all times on both »vuvi M w r LlA A J ^ sides of the market^ »nd oonewqnontly a variation in the amount of £xa * his activity in either direction would not be "news1^. ^ cryu*Jkd*«4Bpa4 j(3) Since any bank or other person could obtain from the System at any time the System’ s buying and selling prices and many such persons would actually deal with the System directly, t h e ^ ^ u l d * ( ' no longer be in^^i unfavorable] position Jin comparison with the large i dealers and dealer-banksjto divine System policy [from direct contact with t h e , , ^ ^ ^ ^ _ j 4 Objections. - Among the objections to the proposal that have been advanced, probably the most important is that the time would be likely to come, sooner or later, when the System and its ” trader” jf"because of their continuous concern with either ordinary or emergency stabilization, [would be confronted by a^dilemma. when — This might be at a time possibly after the credit situation has been brought under con trol again by some such means as an increase in reserve requirements — the System would desire to tighten the credit situation by selling Govern ment securities from its portfolio. by the "trader" ever so cautiow i , Such an operation, though conducted u I TO £ o : ^ ^ u u s e the market to get the wind up and thus occasion some vigorous selling that might, unless counteracted "by System buying, defeat the System’ s stabilization objective / Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Eo.ioSoi h, * 10. by causing the market to\become disorderly. This ob jection^jseems jat first sight] to be a very telling one. Upon careful consideration, however, reasons appear for doubting that it is so conclusive as it might seem to be at first sight. ft cl> The contingency outlined might not arise for many years^ j^robab^^£t wouldjnot jarisejso long as the country continues to have such an enormous volume of excess reserves. By the time that the indicated contingency did arise, con ditions with respect to the volume of excess reserves, the size of the public debt, the general character of the market, etc., might well be so different from what they are now as to make the use of open-market operations as an instrument of credit policy entirely impractical. It has, in fact, been impractical for several years. ^Then, too, the time at which sales for purposes of credit control would become necessary a, would be v@ry likely to be one in which general business was booming, Treasury- receipts from taxation expanding, and the Government debt de creasing. In such circumstances, the market for Government securities might be sufficiently strong to absorb System sales with ccstfparative ease — but there are those who argue that at such a tjdie the market might be weak because the banks, having to meet s^kfstantial demands for business loans, might be selling their Goverjatfenfc securitiesQ At worst, ^it is hard to see why System operations for reasons of credit control should be any more difficult or unsettling under the proposed plan than they have been in the past, and there may even be some reason to believe that any disorder created by selling for purposes of credit control might ~ , ^ ^ j pell! prove to be lessened under the prop&£¥d‘ ~scheme because of) the inI 1; creased skill in the practice of his art acquired by the System "trader”I through his more extended and active trading experience. j F C H FiLES f' ! F. C. Oliar# j Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 11. Another objection that has been advanced is that investors, for some considerable time at least, would probably be very suspicious of a market believed to be constantly under official control, never altogether ’ ’ natural and free’ ’ , and consequently unpredictable. The arrangement would be at all times open, moreover, it is said, to the accusation that the market is being manipulated in the interests of the Treasury and against the interests of the investing public. The proposed arrangement, fur thermore, by putting the Federal Reserve System into direct competition with brokers, dealers, and dealer-banks, certainly in New York City and possibly elsewhere, might crous^vigorous jand widespread^criticism J rom persons in other occupations who object on principle to such competition. Among the possible answers to such objections as these, the most effective, if it can be substantiated, is that the objectives of the System’ s policies in the Government securities market are of such p/uJnA importance to the public welfare as to justify Afeer extension of System \ A lui« enterprise this field. The initial antagonism, furthermore, might fairly be expected to die away in due time if and hen the day-to-day operations of the System in the market were found by experience to be reasonable and sensible. In recognition of the force of these and other objections, however, it has been suggested that if the System should decide to adopt the proposed new procedure it should start in a small way and expand gradually, possibly by taking upon itself at the outset only a relatively small proportion of the total business or by confining its dealings to member banks or to some other selected segment of the market• a 4*** ' R g ^^G ^^ro n i^th ^ld 'n 'cig^'^^^r^f^rftg a » H © ld (n g ssof the NationaLArchives* DECLASSIFIED Authority E q . f o z o ! 12 . Proposal to provide for System dealings in Government securities at every Federal Reserve bank:. - All dealings in Government securities are now effected for the System Open Market Account by the Federal Re serve Bank of New York, acting as agent of the Committee and in behalf of all the Federal Reserve banks. f They are effected almost altogether in the New York market, though small purchases or sales are at times / made elsewhere, especially in Chicago. The proposal next to be discus sed is that provision be made for System dealings in Government securi ties at each of the other Federal Reserve banks. Before describing concretely just how the necessary arrange ments might be made, the reasons that have been advanced for this pro posal may be briefly stated. H mTM . It is said that such arrangements might V .............. enable the System toJjdeaiQwith disturbing liquidation ” at its source”. It is said that as long as the Federal Reserve Bank of New York is the only one of the Reserve banks that is empowered to deal in Government securities, 4- hile no other Federal Reserve bank may buy or sell such securities even in its own Federal Reserve district,^either for its own account or for System account7j thr- •. other Federal Reserve banks are de prived of somejpf the prestige that they/deserve in their own districts / If* A-ft &-fr ^ J and tfoff effectiveness in the counsels of the System. ^ A A It is also said that if a Federal Reserve bank provides a market locally for tlie buying and selling of Ck)vernment securities, the service y/ill be appreciated by many of its member banks, especially the small banks which are unable to hire their own "trader” in Governments to protect O’ jfctw them in dealing with ordinary dealersj|against having to pay somewhat more \ \ than the going market price when buying and having to take somewhat ’OH h ie s F. C. O'Har. B55 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E g . / o z o ) i / I \ \ \ "[\ 13. \\MJLf&o fjgtC when s e l l in g . ;\Th e re are t&s f u rth e r p o in ts , ^ il l u s t r a t e d by in c id e n ts in September of t h is ye- L -■ n weak and the System is the o n ly buyer^ i4> A A 4 occasions when the market is A ■ iber banks outside New York C it y which have some s e llin g to d o ^ la e l u n f a ir ly treated]w hen they cannot deal d i r e c t l y w ith the Federal Reserve System ]because ( l ) in stead of being able to s e l l d ir e c t ly to the System at i t s buying p ric e they must s e l l to some middleman at a l i t t l e low er p ric e and (2 ) having t to g iv e up names of custom ers^nN.order to make s a fS i^ to the System, as they had to do in September/ t hoy- ■faavo T a g i v s the names (to dealers^who h A * V — ....... ' ? a*er com petitors instead of to a Fe deral Reserve bank which is a sem ip u b lic i n s t i t u t i o n jand not a com petito^. /There is the ginoA co n sid e ra tio n th a t in past ye a rs, before the open-market o perations o f the Reserve banks were com pletely c e n tra liz e d , th e re was some buying and s e llin g by in d iv id u a l Fe deral Reserve banks, and th a t even now the Reserve banks do in a sm all way something s im ila r to t h is when th e y serve upon request as brokers (w itho ut commission) f o r member banks. FO B ?H E S F. C. O'Hara ‘R’^ d ^ ' f r W t t i e ^ l rtC IIBSlfi?J?'0raa§lifl® fW I'dW |^0f the NationabArchives* DECLASSIFIED Authority j0 9 0 j ! H. In considering the mechanics of the proposed arrangement, it is I / ’ ’* g j j ■iP^l important to recognize that decentralization of operations must be accomiJiAaa i1^^^ (i/vAZ'*U*'I,, iu t panied by ^.centralization of control. According to one me poooffer poooi'bibs scheme, > / f-wMpL \u u W -W tft tJL F 6 ^ 4, the general manager of t ra f f i c Tor "the" entire System^ wlin rnii^t fry might : ^ .Tint k 1 11 T *rl flhir ^ r l r , would continue (like the present Manager of the Open Market Account) to be the/sole jt>± prlTLLipttl] "trader’ X but he / would have under his supervision a district manager at every Federal v .. Reserve bank 1(inolu&iB.'gl the Federal Reserve Bank of New Yorls/. Under v * ^ A y his supervision, ttws^district manager would be empowered to deal in !\'v Government securities for System account, in his own district, either with V t 0> " member banks only or with them and also with other [Institutions, etcj All trading everywhere would be on the basis of limiting bids and offers decided upon (or approximately decided upon) by the general manager of System trading and communicated by him currently and continuously to all the district managers by direct wire (using telegraph, telephone, or teletype) .j^Phe transactions at individual Reserve banks^jthoughjjdirect- / / ed by the general manager^(would be) according to a System plan, worked I out presumably by the Federal Open Market Committee, that would cover \Jf ) such details as^the size of the maximum individual transaction that might \ ^ | be handled by the district manager without |Ms^ having to consult the general manager.i In planning the System’ s trading operations and in estab- lishing the limiting bids and offers to be used throughout the System, the general manager would have at his disposal, in addition to the bid p tv i and asked quotations obtained currently by telephone from the New York Stock Exchange and corresponding data from leading dealers in New York, (l) the information acquired by him from fbhe\ System trading [conducted in A U A >v J j y'D^c'lSStffifdffoTdftp'of the National-Archives* DECLASSIFIED Authority Eo.lQ9of 15. the New York market, and (2) the information from all parts of the coun try with regard to bids, offers, and transactions transmitted to him currently by the district managers in all of the outlying Federal Reserve aiiks. jlf securities we>s^found to be coming in or going out in too large volume at any given timdv taking transactions everywhere into ac count, this would be a reason f o r \ h e general manager to alter his quo tations, or to take some other appropriate step for bringing the trading at one or more Reserve banks within bounds^ . work. A concrete^ example may help to show how such a scheme might / If the district manager at the Chicago Reserve Bank, for example, receive^ from a customer an offer to sell $20,000 of 1960-65 bonds, the A* district manager at the Chicago bank would presumably buy the bonds immediately ;->t a price not higher than the current bid price that had been already authorized by the general manager of System trading. If the offer were to sell as much as $5,000,000 of these bonds, however, the district manager at the Chicago Reserve Bank would take the trans action under advisement and discuss it with the general manager of System trading. The general manager would then decide whether the offer should be accepted by the Chicago district manager, and if so whether at a price as high as, or only at a price lower than, the bid already authorized. In making this decision, the general manager would consider any offset ting orders he might have from other districts to buy the same issue, any offsetting buying orders in other bonds of similar maturity, any , buying orders in other Government securities, and all other factors bearing on the question. Once the decision had been made, it Y/ould be commu nicated to the customer by the Chicago district manager. r:I.ES Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority Footnote fo r page 15* e exact 3/ The fig u re s $20,000 and $ 5 ,000,000 are m erely i l l u s t r a t i v e . The exact p o in t at which the lin e between a " firm b id ” and a ’’c o n d itio n a l b id ” would be drawn, which would be lik e l y ^ t o be somewhere between these two fig u re s , cannot be determined in advance o f experience. FOB FILES i-. C, O'Har* National Archives DECLASSIFIED Authority 16 . O b je c tio n s . - The o b je c tio n s to the proposal th a t System d e a lings in Government s e c u ritie s at a l l Fe deral Reserve banks be a u th o rize d by some a p p ro p ria te arrangement do not seem to be v e ry s u b s ta n tia l. Any such arrangement would present d i f f i c u l t i e s to the general manager o f tra d in g fo r the e n tire System, but these could be surmounted. I t may w e ll be doubted, however, whether the advantages th a t might flo w from the p ro posed arrangement would be v e ry s u b s ta n tia l. The con te ntio n th a t the re should be provided by the System at each in d iv id u a l Fe deral Reserve bank a ’’ready m arket” f o r the member banks of the d i s t r i c t has some fo rc e , but except i n times o f emergency, when the System is almost the o n ly bu yer, the market is a lre a d y so w e ll organized throughout the country as to b rin g a f a i r l y ready market .rm irljr ■H; ore to tho doop 'Off almost every member bank. The proposed arrangement might perhaps h elp at times to h a lt *’at the source” some liq u id a t io n by o u tly in g member banks o r o th e r s e lle r s , but i t is p r im a r ily by the System’ s o peratio ns in the l a r ger tra n s a c tio n s , most of which w i l l continue to be in the c e n tra l market at New York C i t y , th a t a close market (as w e ll as a market having the de sire d s t a b i l i t y ) must be achieved. / I FOB FILES F. C. O'Hara Rg^maissrd- from^tn^C) ^S id ^gs-Qf the NationakAishivesi DECLASSIFIED Authority Eg./ozo/ l6a. P roposal f o r re g u la tio n of the tra d in g in Government s e c u ritie s by p ro fe s s io n a l d e a le rs . - The next proposal to be considered belongs in a q u ite d iff e re n t category from the ones th a t have been alre a d y discussed. I t re la te s not to tra d in g operations by the System in the market f o r Government s e c u ritie s but to tra d in g in th a t market by o th e rs , p a r tic u l a r l y by p ro fe s s io n a l d e a le rs , and to the re g u la tio n of th a t tr a d in g . The market f o r Government s e c u ritie s is v e ry broad, but the p rice-m ak in g market centers at New York C it y and in th a t c i t y not on the ! Exchange but in dealingqover the co u n te r, in which la rg e dealers who s p e c ia liz e in such dealin gs p la y a le a d in g p a r t . There is a l i t t l e tr a d in g in sm all lo t s on the Exchange every day, and a l l the tra n s a c tio n s th e re are p u b lic iz e d by be in g reported on the t i c k e r , but t h is tra d in g is not by any means continuous and o r d in a r ily amounts to l i t t l e more than an inexact r e f le c t io n of the tra d in g over the cou nte r. In being a counter m arket, the market fo r Government s e c u ritie s does not d i f f e r e s s e n tia lly from the market f o r the bonds o f im portant rr ^rvvw’tL* tv. A m u n ic ip a litie s and la rg e c o r p o r a t io n s ^ A l l have counter m arkets, and f o r the same fundamental reasons — th a t such s e c u ritie s belong in the main to la rg e in s t it u t io n s which can a ffo rd to have p ro fe s s io n a l " tra d e rs ” of t h e ir own and which do most of t h e i r tra d in g in la rg e b lo ck s. Such tra d in g n a t u r a lly goes to the counter because the co u n te r, in con t r a s t to the ’’f l o o r ” , a ffo rd s o p p o rtu n itie s f o r the necessary p riv a c y of n e g o tia tio n , fo r b a rg a in in g , and f o r v a rio u s economies th a t go w ith d e a lin g on a la rg e s c a le . f R ^ r§ 8i3S§a>fr5rrT'ttT®*Uff6ta§§i /“BO T^ifiecffioldings of the National Archives DECLASSIFIED Authority l 6b In other essentials, the market for Government securities is like other highly organized markets. The outsiders, the institutional and other holders of Government securities who buy and sell them from time to time, are the real "makers” of the market, their trades the ones for whom professionals. compete. Given their interest and participation as buyers and sellers, the professional dealers, as in other organized markets, ordinarily make the market "close" and make the market "continuous” — close in the sense of making the spread at any given time between the highest bid and the lowest offer a narrow one, and continuous in the sense of making it possible for investors to buy or sell at any moment during any business day. To make a market "close”and "con- tinuous" is a useful economic function, a» becomes evident to all when those who ordinarily perform this function quit doing so as all professionals in a U QJr ance. They highly organized markets commonly do in times of serious disturbance. A "run away", usually to save their profits or their capital, whether they are jobbers on the London Stock Exchange or floor traders on the New York Stock Exchange or professional dealers in Government or other bonds over the counter. This contributes at times to instability economists who have specialized in the study of highly organized markets is that theijt volatility^arises far more from the multifarious influences that operate on and through mass psychology, including in particular the flow of market in formation, than it does from the defects of market mechanism or from the be havior of professional dealers of any kind. i-o- 'o— ■ >- t A t h e influence .exercised by the profes sional dealers in the direction of causing instability in the Government securities market, it is nevertheless order to inquire whether that influence could not be reduced by measures of^regulation properly designed for the n u m ser-- M P Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ISC If it is true, as the foregoing analysis affirms, that the market in Government securities is essentially like other highly organized markets that have been more thoroughly studied, then the possibilities of making it more stable through regulation and closer supervision of professional dealers must be quite limited* What is called for primarily is stabilizing operations along lines discussed elsevvhere. It is nevertheless in order to inquire whether such unstabilizing influence as does arise from the activities of dealers could not be reduced by measures of regulation properly designed for the purpose. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority i? •18 . According to suggestions that have been made for this pur pose, steps should be taken (l) to tighten the informal supervision of the trading by the large dealers that is at present exercised by the Fed eral Reserve Bank of New York and possibly (2) to bring all dealers, whether large or small, under certain regulatory provisions of the Securities Exchange Act of 1934* The only direct control of any consequence that is now exerted over the professional dealers in Government securities is that which is exercised informally over the eight or ten leading dealers, on a socalled cooperative basis, by the Federal Reserve Bank of New-York. This cooperation includes at the present time the making of highly confiden tial daily reports to the Reserve Bank which shov/, among other things, the size at the close of the day of the dealer1s own "position” in each type of Government securities. On the basis of these reports — and largely by reason of the fact that the Bank if so disposed could with hold valuable business from a non-cooperative dealer or, with Treasury approval, limit his subscriptions to new issues of Treasury securities — the Bank has at times informed one dealer or another that his position was becoming so large as to make the market vulnerable and has advised him to reduce his portfolio to a more reasonable figure. There is evi dence to show that the "moral suasion”thus exercised by the Bank has (jtfcVI*-**'-' had a salutary influence and capi aan to b r i eve that it would be well for the Bank to make more frequent requests to dealers for reducing long positions or covering short positions when such action would appear desir able to give greater stability to/the market^ r. UUL < OT! r. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 18a. The principal consideration in favor of such action is that the instrument of ’ ’ moral suasion”, if firmly and skillfully employed by the Federal Reserve Bank of New York, might contribute to the prevention of excessive and unstabilizing speculation on the part of the professional dealers and even have a little indirect effect on the speculation induced Y* k’ -y by them on the part of their customers. It coula not be carried very far, A however, without the likelihood of alienating the dealers and so upsetting the very basis of the present arrangement. If f-ypther regulation of dealers in Government securities viere desired, the trading in the Government securities market might be brought under certain of the ’ ’ anti-manipulation”provisions of the Securities Exchange Act of 1934 • Among these 'provisions, the ones which would seem A relevant are those which prohibit (l) the dissemination of infor mation (whether true or false) to the effect that prices are likely to rise or fall because of the operations of some person (e.g., dissemination ■*-*—M tm of information to the effect that prices are likely to rise or fall be cause of operations of the Federal Open Market Committee), (2) the making of false or misleading statements as to any material fact, and (3 ) the effecting of transactions in series for the immediate purpose of causing the market to be active or causing quotations to move and the ultimate purpose of thus inducing other persons to buy or sell. The trading in the Government securities market might be brought under these provisions, without new legislation, by action of the Securi ties and Exchange Commission, which is the agency now authorized to make the necessary rules and regulations and to enforce the same. The Com mission has issued rules relating to the provisions specified, but thes'p lC Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 18b. contain a specific exemption for Government securities (along with muni^ (UdAjA th# ^ ^ 4" cipal securities). UThe federal Reserve i-wo '■ ■ **-«**' recommend to the Commission that it rescind thh« exemption, so far as Government securities are concerned^ [ana if the Commission should do so the effect would be to bring under the Commission’ s rules all dealings in Government securities including those of the professional dealersj, There is some reason to believe that the practices [that might be thus forbiddenj are engaged in to some extent by the professional dealers in the Government securities m a r k e t t e ^ ' ^ h e evidence to this effect that is at present in the Board’ s ... j ketvOJU^t files/is rather scanty and probably not sufficient to convince the Oommi sgion^^ ] " r i " nnrl n — mn +oVq +Viq 4-W ub*s A» If so, u u U i e app^^i awiiiTii +.Q 4s M u L*j L * £ | On the whole, the proposal W I..j_ n 1 if"I II1" I * to Cpngress J # f11 i i fj. t for attacking the problem of dis orderly markets in Government securities by the method of regulation is not * * promising. Markets already regulated are far from stablej — OuJfL ( J M - >ES *!»!■ Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 20 . bring to the support of Federal Reserve operations some changes in the organization of the market for Government securities. According to sug gestions that have been made along these lines, steps should be taken Proposals for bringing more trading to the Exchange, providing with better information, etc. - The purpose of the proposals finally to be considered j(most of which were put forward in more detail in Mr. Piser's memorandum to the Board of December 9, 1 9 3 8 ) j would be to a small and intermittent (but widely publicized) echo of the over-thecounter market, more representative and consequently more efficient. A secondary reason is to bring a larger proportion of the total trading under the Exchange’ s trading rules. Doubtless measures for bringing more of the trading to the floor could be devised by the New York Stock Exchange and would be so devised by them if the Exchange were duly pres3/ sed or encouraged from Washington.*^ The System could also help the cause along by having the Manager of the System Open Market Account make more use of the floor market than he does at present. It has been further suggested that the Federal Reserve Bank of New York, partly in order to provide information that would be helpful in guiding System open-market operations, should request the more impor tant dealers to include in their daily reports to the Reserve Bank, in addition to the aggregate amount of their purchases and sales of each type 2/ Some measures that have been stagested include increasing the size of the trading unit in Governments on the Exchange from one bond to ten bonds, establishing a Government bond membership on the Exchange at a much lower price, and allowing transactions at closer differences aucfcr as l/64th or (still better) l/l00th of a point (instead of l/32nd e^a air:— present ) . j ?. c. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority F . 0 .j O ^ O f 21. of Government securities (already being reported) certain additional in y' ~ formation, to wits the amount of each of the four principal types, long-A't***. .£*** and short, bought from and sold to each of the principal classes of customers — such as dealers, insurance companies, savings banks, and com mercial banks, with separate figures for New York City and out-of-town r i banks. These reports would serve to inform the System more fully with respect to just what is going on in the market, as indicated by the class of customers that is buying or selling on balance at any given time, either the long or the short maturities, and put the System in position to conduct its own stabilization (and other) operations more effective ly. It should be noted in this connection that information similar to that described above has for many years been confidentially reported by dealers in the market for bankers* acceptances. The proposed reports, in addition to being of use to the Sys tem, would provide figures for release to the public showing for each day, for the reporting group of dealers as a whole, the total volume of trading in each of the four principal types of Government securities. These data, if published daily, would give the public far better infor mation as to the volume of trading in Government securities than the pub lic now obtains through the reported (but substantially misleading) fig ure of the'volume on the Stock Exchange. By another proposal designed to give the public essential market information, the Reserve Bank might put on the news ticker every hour, or even every half-hour, the consoli dated average bid prices and offering prices that the Bank now computes at intervals for its own purposes on the basis of the dealers' quotations obtained by telephone. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority 22 . The principal considerations in favor of such a program, as has been outlined are: (l) to the extent that business should move to the floor of the Exchange, not only the Exchange market but also the market as a whole would become technically better; (2 ) to provide the trading public with more and better information would tend to have a similar effect; and (3 ) the System, having better information itself, could handle its own trading more efficiently. Objections. - The p r i n c i p a l argument against the proposal is that the over-the-counter market for Government securities, technically considered, is so much better at present than the corresponding market on the floor of the Exchange, that even extraordinary efforts by the Ex change might not succeed in moving much of that trading to the floor.* A Concluding comment. - -Lt is not the purpose of this memorandum, / in view of the terms of reference to which ,3ft is subject, to make any recommendations to the Board as toN^iethpr the proposals discussed here/ in, or any of them, should be adoptedy^Attention may be called, however, / to the fact that the different prop6sals alfee so related that none of them / ! y \ either depends upon or conflict {/with any of \^e^others. Consequently j( 1 \ \ \ \ \ any one of them — such as t&fe most urgent or the'^east controversial — (either without the other^ or before or after anyNqf them) could be adopted separately, any desired continuation\jould be developed, ' \ / \ or allj^fL^them could be combined into a single program. 7 \ Tbel technical superiority of the over-the-counter market arises largely 7 though not entirely from the much larger volume of the trading on that / market. This makes it especially advantageous for trading in Government / securitiesAbecause much of this trading is in large blocks, such as Af #1,000.000, $5,000,000, or even more. Another reason for this technical / | superiority, however, which is inherent in the essential difference be1 tween a counter market and a floor market, is that transactions in large \ blocks, especially when they involve "swaps” as many large transactions \ in Government securities do, require negotiation, which Is not possible \ on the floor. For example, a dealer operating over the counter, before as \ sembling a block of some particular issue of securities bid for by a rcusn.-; \ tomer, may work out (over the telephone or otherwise) a large number bf ' Mjitermediate transactions involving other dealers ana other customers'^ F. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Eaja^of ii*. Concluding comments. - A few disconnected observations are ap pended here which seem to belong generally to the discussion but without belonging to any particular part of it. In describing the different proposals, the intention has been to include only enough detail to make each proposal sufficiently concrete to be debated, not enough to serve as a basis for official action or to > exhibit all the possible alternatives. The proposals discussed relate for the most part to different aspects of the problem and even those that relate to the same aspect are not in all cases to be considered mutually exclusive. For example, the proposal that the System trade continuously and tha one that it trade at every Reserve bank might be viewed as supplementary. Careful efforts have been made in writing this memorandum, whether or not they have been successful, to avoid bias, including any bias that might arise from prepossessions in favor of the Government in general and the Board in particular. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis I Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority /~ A /(*>$&j i x- r:rm ' *' J ! ’ 4 1939 u Index of 0* S. Government Hr. Parry and Mr. Bradley Bond Prices, etc. Mr, Grinioff The Treasury for some time has compiled and published two in dexes dealing with long-term Government bonds which also appear in the Federal heserve Bulletin and In the daily letter of the Federal Reserve Bank of Mew fork. One index deals with yields, tha other with prices. Both of these indexes were revised in Hoveaber 1938 (see •Bulletin" for December 1958, pm 1345)* The revision changed the composition of both indexes by d e l u d i n g only the bonds which were not due or callable for twelve years or sore. Previously, the index Included bonds not due or callable for eight years or aore. The reason for this revision is that in 1956 a significant difference in yield developed between m d l u M and long-term bonds, whereas previously the difference had been relatively small. The published yield figures cover the period 1919 to th© pre sent on a monthly basis (average of daily figures). From 1951 to the present, figures are available weekly (on Wednesdays)* In addition, current daily figures appear in the letter of the Federal Reserve Bank of Saw Xork and presumably back figures on a daily basis could be ob tained frosi the Treasury If needed. The index of bond prices consists of a simple arithmetic average of the prices of the same bonds used in. calculating yields. Published figures, on a revised basis, cover the period 19SI to 1957 monthly (average of dally figures), and the period 1957 to date weekly (leanesday figures). Daily figures appear in the letter of the federal Reserve Bank, of New lork. This price index has performed in a scanner Quite different from the yield index, ihereas the yield index has shown a long-term downward trend and yields in the s u n e r of 1929 were the lowest on record* the index of bond prices has failed completely to reflect the long-term downward trend* The reason is that new issues replacing the callable issues bore coupon rates near to the current market yield and consequently the prices of the new Issues Here near par. The result is that the price index has a large downward bias and should not be used for long-tera comparison. A warning to this end appeared in the release covering the issue of the new index ("Bulletin* for December 19 S3, p. 1045): *In using the price averages it should be noted that the comparability of the figures may be affected by changes in the issues included. For example, the price average was the sasse in Septeaber 1358 as in March 19B4 although average yields had de clined by 5/8 of 1 percent in the inter!©. Since 1931, there tanges 4i*-t&e iss havB-beeB F F “ | Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority To: E.O.)6$Of Mr. Parry and Hr* Bradley The largest change occurred in October 19S5, when the 4-1/4 *s of X947-52, which were then selling at 114-1/2, were removed from the average? this elimination reduced the average by 5.2 points* The aggregate effect of the 1$ changes has been to lower the aver age by 10*7 points* The price series is more useful for compar ing market fluctuations over short periods which do not involve differences in the Issues included than for comparisons over a long period of time*8 At this point, one night ask — given an adequate long-term yield index — is there use for a grice index since both essentially express the saae thing? The answer is that it is largely a question of personal choice, although there are situations when one might be prefer able to the other. It must be borne in aind that a given change in yield does not produce percentagewise the same change in the price of a bond. For instance, the change in yield from k per cent to 4 per cent of a 5 per cent 16-year bond (a change of 100 per cent) changes the price from 115.6 (at a yield of 2 per cent to maturity) to S$*5 (at a yield of 4 per cent to ma turity) — a change of about ZZ per cent* Consequently, if it is desired to compare, say the movements of bonds and stocks on a single grid* a bond price index might be preferable to the yield index* If a yield index is used, as sometimes has been done, the construction of a chart showing bond yields and stock prices creates the problem of relative scales. Ordinarily the bond yield scale is so adjusted that yields fluctuate about as much as prices of the bonds would if t&ey were plotted instead of yields. Since such yields are usually plotted on an inverted scale, it shows that the real purpose of such charts is to ©alte yield movements simulate price movements* I'ita this difficulty in sdnd, a new price index was constructed for the period 1951 to date!/ in the following manner; The average yields as published were converted into corresponding prices of a hypothetical bond having a coupon rat® of 2 per cent and 16 years to maturity. The resulting series was then converted into relatives with 1 926*1-50* The resulting series shows, as a per cent of the 19E8 level, approximately the most probable price at which the Treasury at a given moment could sell a 5 per cent 16-year bond — “ all other things being equal”. The 5 per cent coupon rate and 16 years to maturity represent approximately m average of coupon rates and of time to call — or to ma turity of all of the outstanding Treasury bonds — ...-.not . due or callable for twelve years, for the period 1951-1959. The time to call was used because during this period bonds were called ana not allowed to mature, 1/ For selected weeks only* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority To* Mr. Parry and Mr. Bradley -3~ hence It was the time to call and &ot to maturity which bad the greater inflaence on the price of the bonds, the average yields as -published in the index were also computed to call date and not to maturity date (when the bonds sold over par)* The process of averaging coupon rates and years to a&turity leads to soaae complications and loss of reality* It can be proved ®athe matically that of two bonds of equal coupon rate, but of unequal saturity (or tiase to call date), the price of the one having the longer time to run will fluctuate aiore percentagewise per unit change in yield than the on® having the shorter tine to run, "all other thing® being equal1’ . Secondly, of two bonds of equal term, but of unequal coupon rate, the price of the one having the lower coupon rate will fluctuate sore percentagewise than the price of the one having the higher coupon rate, "all other tilings being equal*.. Consequently, it is iaportant to select the proper coupon rate and the ter® of the bond to be used as the new index as the shape of the curve depends on these two factors once the yield is given. The new index (in fact a hypothetic bond) represents the actual fluctuations of existing bonds most accurately daring the periods when the actual, and average, coupon rates and years to call date were the closest* In statistical language, when the dispersion of the universe about the mean (Standard de viation) was small. I a tindividual issue©, the highest coupon rate mas 4j per cent, the lowest Ef per cent* the longest tera was tl years and the shortest 15 years, this universe is represented by a bond of 5 per cent coupon rate and 16 years term to call date. Given below are the average yields and years to call date, for the period for all outstanding issues, by years:. All Treasury bonds not due or callable for Ik years of sore Date June m , * » * B * » * * « * « * » * * » Average Average coupon rat© 1351 19§£ 1955 1954 im b 1956 1357 19S8 1929 Sept. SO, 1959 5.78 5.6$ S. 5$ S. 65 Average aumber of years to call date fc. 85 S. £6 16 lb 14 IS 17 IS 15 16 17 15.6 fc.78 18 £.94 2 .8S k:.8S ,E COPY Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority To: Mr* Parry arid Mr* Bradley Eg./o^o/ -4- This means that the index will understate by a very assail amount the fluctuations in the actual bonds for the recent period, since •the coupon rates of actual bonds are smaller and term is longer. Since the actual average coupon rate for the period 1321-1959 is about 3*& per cent, the coupon rate of 5 per cent represents a compromise between understating by a trifle the price fluctuations in the f e * rp^ent years, and overstating somewhat the fluctuations in the pest years .^ On Chart So. 1, the old and the ne* indexes of Government 'bond prices are plotted. Both indexes are on a comparable base, 19k6-iv>. It is seen that the old index completely fails to reflect the steady de crease in yields and the consequent increase in price mhereas the new in dex increases in price steadily. The old index (when not on a 1926=100 basis but on a dollar basis) la of some value to show the actual dollar price of long-term Government bonds. As a long-tersa retrospective index, it is absolutely incorrect. The new index gives proper weight to tha in crease in yields, but does not reflect actual dollar prices of the bonds* The principal us© to which this index can be put — the „j.r o«?e for which it was designed — is its use in connection with the Lttwi i&rd Statistics Company indexes of stock prices, which are on a 1926=1')' basis* This is shown on Chart 'Ho. 2. On this chart, the following in dexes are plotted, all on a 1928*130 'bases stock prices, n m index of ........................ i shorn the Influence of change in coupon rate and term th© following ®xoffered, then the yield of Government bond was £.10 the price (as per .cent of 19&6) of a: '& per cant 16 yr. bond is 5 per cent 18 yr. bond is 5|- per cent 16 yr. bond is £|- per cent 18 yr. bond ie l£iu4 (the bond used in the index) 1£4*8 1^1.8 1*4.1 In the Cleveland Trust Bulletin for June 1939, there appeared an attempt to derive a price index from the published yield figures for the period 1919-1933. The method used was simply to capitalize the yield -at 5 per cent (by dividing the yield into '£) without any allowance for maturity dates or call dates. In other words, the result is the derived price of a perpetual bond — not of a bond with a definite maturity. Consequently, the method used in the Bulletin is not a correct one for the purpose on hand because the Treasury bonds have a definite maturity, is has been mentioned in the text, bonds of longer term fluctuate more than bonds of shorter term and perpetual bonds will have the widest possible swings — *all other things being equal**. F I Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority To: Mr. Parry and Mr. Bradley /O^Oj -o- tJ. S. Government bond prices, preferred stock prices, and corporate bond prices. The purpose of tuis chart is to show conveniently in one place, the relative movements and levels of various kinds of securities. It shows that on September £0, 1959 stock p r i c e s were slight!/ below their 19L6 level, while corporate bond prices^ were slightly below stock prices. U, S. Goverausent bond prices and preferred stock prices were about 1& oar cent above their 19£6 level# The chart is useful to show graphically how disturbances are some times localized in one type of security only, and sometioes spread to the entire security market* Chart So* 3 was constructed for the purpose of showing conveniently in one place bond yields and stock prices, to avoid confusion, fc*.a-panels are used — bond yields In the upper panel, stock prices in the lower. This, however, does not solve the problems of relative scales. I have used the ratio of one per cent change In yield to equal ten per cent change in price* After using it, I learned that Miss Burr, Hr. Piser,. and Mr. Dirks, working indepe&dsnfcfo have algo decided to use the same ratio. Charts as described above are used by Dr. Goldenwelser and liss Burr. This chart is useful in showing changes In yield in the different grades of bonds. In 1937-1958, for instance, Baa bonds and stocks declined drastically, but Government bonds and high-grade corporate bonds declined by a very small amount. In addition to showing bond yields, I have also plotted yields on high-grade industrial preferred stocks. The yield index of preferred stocks is useful in measuring fluctuations in these stocks. It should be used with care, however, if a direct comparison as to levels is attempted between bond yields and preferred stock yields. Ihe yield on bonds is a yield to maturity whereas the yield on preferred stocks is a current yield, the preferred stocks in this index (Standard Statistics Company) are mixed, son® not being of sufficiently high grade to eliminate the element of risk. The call factor 5/ The index of corporate bonds plotted on the chart is the index of 45 cor porate bonds compiled by the Standard Statistics Company. It contains ap proximately an equal amount of bonds of each rating ranging from w&aaB to *Baa* (Moody’ s ratings). The prices of laa bonds have behaved differently fross prices of 3&a bonds and pooling the two together makes the index diffi cult to Interpret — unless a general cross-section of the bond market is required. It might be better to use an index of high-grade corporate bonds of etedlufe-gr&de bonds — separately, not combined* The combined index mas used simply because it had been used before. If a wall chart is to be con structed, it would be desirable to use an index which embodied bonds of one grade only. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ■ i ! To; Mr. Parry and l!r. Bradley -6- (4) is also present In some of these stocks. Consequently* the yield in dex of preferred stocks should not be used except in a general manner in comparing actual rate of yield on bonds aad preferred stocks. The pecu liarities of the preferred stock index were aore fully discussed in a memorandum of November 7, 1956, entitled "Preferred Stock Price Index in Bulletin* by Messrs.. Bro*n, Deaibits, and Grlnioff. In the panel showing stock prices, the new index of Governsent bond prices wms also plotted. This index, as mentioned before is derived fro® yields. It is on a 13k6=100 base and as such is directly comparable with stock prices, as to relative levels and amplitude of fluctuations., whereas the yield index in the upper panel is not directly comparable. 'It w m for this additional convenience that the price index was added to the chart* In view of the above discussion, Chart :\!o> 5 appears to be the logical candidate.to replace the existing wall chart entitled. “ Prices of Bonds and Stocks* because it gives uraable information ®ore directly. Secondly, it night be recommended that consideration be given to the deletion of the published price index of treasury bonds from the Bulletin. 4/ Another complicating factor is that the yield index of preferred stocks is obtained by a aethod which amounts to taking a harmonic m a n of the yields instead of an arithmetic mean, and a harsonie mean is always smaller than the arithmetic mean. In this case, however, as the range of the data is small, the harmonic mean and the arithmetic are very close together. tBQ/cU F WcJictlngs^ of the NationalArchives* DECLASSIFIED Authority E G.IOGO} REC'D IN FUSS SECTION Form FjJL 131 BOARD DF B D V E R N D R S OF THE FEDERAL RESERVE SYSTEM Office Correspondence To_ Mr. Soymsgafc From_ Henry Edmiston — X /V a * A APR22 1941/t. 5 3 3 ® te September 26, 1939 ^ Subject: This is in answer to your question of this morning as to the proportion of trading in securities,other than Governments, which is transacted by dealers at net prices* The large majority of sales of corporate and municipal bonds are executed at net prices through dealers in the over-the-counter market. This is because the transactions of banks and other institu tional investors, ifhich bulk large in the total, are handled through dealers. Even where a commission house obtains an order from a cus tomer, it is likely to be executed through a dealer on a net basis and the customer is eharged a commission by the broker'* In such cases, however, there is often ah agreement to put the sale through on the Exchange so that the customer m i l be able to see a recoitd of the trans action* This method means adding slightly to the net price previously agreed upon in order to cover the seller’ s commission (the seller in this example is, of course, the dealer)* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority RFmo in m m \ BBtmm OCT241939 ¥l h A m I- Hr* Seyswtsk Hear? Bdsdstoa This 1* In mmrnr t# your question of this morning as to the proportion of tradinf; in seouritie* , other than GoTerrararats , which i * transacted by dealer* at net' price*. the large najority of * * !• * of oorporate and minieipel bonds are executed market# net prioe* through dealers in the orer^the-oounter Thi* is beoause the transaction* of hank* and ether instittt- ■tioaaal investors, whioh bulk large in the to ta l, am handled through dealer#. Even where a. coaaitslon hmm obtain* an order froa a ona** tower* it .la lik ely to be executed through a dealer'm % net basis and the oustoaosr is aharjed a. ooattisslon by the broker* In such oaaes* however* there i* often -aa agreement to put the sale through the Sxehaage *o that the euttoair will be able to see a r©oond of the trans action* Thia aethod nsans adding s ligh tly prioe previously agreed upon in erder to oarer the seller*a oowai**ion (the *eller in this exa*pl* i * # of ecurse, the dealer}* HE/ jh — --— f o b files Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Form F. S. 131 ]T,fr/0£0/ BOARD OF G O VER NO R S o r THE FEDERAL RESERVE SYSTEM Office Correspondence To _____ Mr. Goldenweiser____________ From. Mr* Thomas Date September 2, 1959 Subjects STRICTLY CONFIDENTIAL The Board members have been in the habit of meeting at 8s30 every morning to consider open market policy at the time of the opening of the market* At the meeting this morning (Saturday, September 2), Mr. Harrison and Mr. Leach attended, making it a full meeting of the Open Market Executive Committee. Board members present were Eccles* Szymczak, Draper of Executive Committee, and Davis. The situation was that the market had declined by exactly one point yesterday, the quoted prices being the bid prices of the System Account, there being no other bids in the market. Declines had been gradual, being about l/8th of a point at each step and the System had purchased about $54,000,000 of bonds in the market and had taken over early in the morning about $62,000,000 of all sorts of Government securities from the dealers* portfolios. Another development of interest yesterday was that the cor porate bond market had declinedpuch more sharply than the Government security market. The System bid at this m o r n i n g ^ opening was l/8th below last night*s close. There were offerings in the market. At about 10s30 it was reported that the New York Bank had purchased about $3,700,000 of bonds for System Account and had lowered its bid by another l/4th of a point, making a total decline since yesterday’ s close of 3/8th2 Board members present immediately raised the question about lowering the bid by a full l/4th of a point with such a small amount of purchases* Mr. Sproul explained over the telephone that the reason for this action was the tendency for arbitrage between corporate bonds and Government bonds because of the sharper decline in the former; and feeling among responsible bankers and dealers with whom he had con sulted was that the Government bond market should be permitted to fall somewhat further before outside buying support could be reached. Some of the Board members took the position that the action followed was not consistent with the instructions of the Committee. Mr. Davis indicated that he had no particular objection to the action but felt that the reasoning was not consistent. Mr. Draper objected to the action. The Chairman stated that there was a question as to whether the Government bond market should decline to the level of the corporate market or the corporate market should rise* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Mr* Goldenweiser - 2 - £^OJO^Of Strictly confidential It was implied, although not expressed in any such definite terms, that one of the purposes of support to the Government bond market was support for the entire securities market, wharoifj since it was not possible for the System to buy corporate bonds, its only way of supporting that market was through the Government security market• Mr. Sproul had also indicated that he thought it might be desirable to lower the price by another l/4th before the end of the day. Instructions were given not to lower the price unless he received a flood of offers and then to consult the Committee before taking that action. In the meantime the Account had purchased about $10,000,000 of securities and by 11:30 another $5,000,000 had been purchased. At that time it was reported that the Federal Reserve bids were topped on the Exchange by jiboul 1/sa on three bonds. It is difficult to know now what brought about this change since there had been a slight shift in market psychology on the basis of efforts at -reconciliation abroad^resulting in some selling of the war stocks that had been in considerable demand. The issue that arose was vigorously discussed with Mr. Harrison saying that those in the market could not be criticized in view of the fact that the total decline had been only 3/8th^ the others indicating that they were satisfied with the decline of as little as 3/8ths, but felt that buying should be more vigorous be fore any further decline was permitted. There was also some dis cussion as to whether anyone not close to the market could determine policies under such conditions. Mr. Leach supported the views of the members of the Board that there should be more vigorous buying before any further decline was permitted. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IN R E tSS S TSECTION -T"’ " " '| JUL 5 t9^q 3 496 STATEMENT BY THE FEDERAL OPEN MARKET COMMITTEE For release in morning newspapers of Friday, June 30, 1959. .Time 29, 1929 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 fl3,378,000 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 ipurchased 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. 323 , 0 6 ? IT'S- 3 4 R-JUEU F o m o i A I Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority JT .tP ./ o Z o / Form F. R. 131 BOARD OF G OV E R N O R S "A A SltT DP THE I ' §*2 % FEDERAL RESERVE SYSTEM Office Correspondence fete " ^ 41 1 May' To_________ Board of Governors_________ Subject:______ ^Qpen market operations____ From_______Mr. Wyattf General Counsel _______________ by the Treasury___________ It is reported in the Wall Street Journal for May 20, 1939 that, under an amendment to the Social Security Act agreed to by the Committee on Ways and Means of the House of Represen tatives on Friday, May 19, the Treasury will be authorized to use the Old Age Pension Reserve Fund to purchase obligations of the Federal Government in the open market* For the Board*s information in this connection there is quoted below a statement regarding open market purchases of Govern ment bonds by the Treasury which was made by Professor Harley L* Lutz, of Princeton University, in an address before the New Jersey Bankers Association on May 19, 1939. This was published in the American Banker for Saturday, May 20, 1939* f,In fact, I am prepared to go so far as to say that I regard the authorization to the Treasury to engage in open market operations as dangerous and undesirable under all circumstances* It presents too great an opportunity, and often too strong a temptation, to manipulate the market for the Government paper. The same sort of prac tice, when engaged in by individuals, is called *wash selling’. The English language has hardly been powerful enough in invective to satisfy those who have condemned wash sales; yet substantially similar operations are entirely lawful, when re sorted to by the Treasury for the purpose of sup porting the public debt.” Respectfully, /falter Wyatt, General Counsel Av Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E^/o9oj FEDER AL HOM E LO AN BANK BOARD " WASHINGTON \ ^ OFFICE OF T. D . W E B B VICE CHAIRMAN February 23, 1959 Mr. Lawrence Clayton, Assistant to Chairman, Federal Reserve Board, Washington, D. c. Dear Larry: Your letter of the JL8t_h^n answer to my in quiry of January 27th/received. Thank you very much for this information. I am sure it will be helpful to the Vice Chairman to whom I am handing your letter. If I can he of personal service to you at any time, kindly advise me. JMRrKSP 2*OB F3DL-US F. a. Ritter 1 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E$,I o5o ) mm REC'D IH FILES SECTION W F E B 2 7 1939 1 February 18] 1939. iffr* n» to Tiea r # a * r d Hoaa Loan Baa* Bo*rd, vmmm&im* c. DHT ^UU I baara fem o f ip iH M tle a * ra^ard to tba oontrol iNNMKef# Si^sS##* _ o p a ra tio a s la tb # % tba fa d # **! Baaarra ©p<iw#a*te#*t ara #&»** duot«d In a###l?f*### with piooadara ptaaw f bad fey tlia Tadaral Btanfr* aa man dad by lb# Aet ft# i f f l * tba p?wi#i«m# ■o f ib&# A*t, *# datamima '«p#ttH*#si£#* policy i# -¥**!•& in ’ tfe#Opaa Itarkrat ablob &# oo«po#«d of tba 9fr«n aaobara o f !&#■ Board o f «*d fV r« aa*b#*« aalaatad by tk# eonblaad dlr#tf%or«t** # £ -ft*a *youp* Of $#&ii*& Baaorra baaka, fb # 3t**r .«Hls|« tba tHR% ob*r«et«r, and Tolwaa o f att purskaaaa *&d #*!## o f '& & M I 8 t «t «« Oonr*r*M « t a##n*iti## b f tba M n « l b * » t * -aUali ba attb * iri#i w w iF C w m iw t * V v im VAO D u f l i f t v l v W lu w i» - t t .^pP* vfMP&JT ■ apo# tba gaecral Mto&Mkm of -tb# «©^tiP3 r* ?aft$%§^b#l## is ta**» p«m nai^at op«rat1o&« a# ta mamdatory apo# a ll Ta4aral I m « 7T« banka. At tba praaaat tiwa, tb#r*for*, *b# board* o f ffa. ;$#iff#i, 'I#*#|»# ban*a bar* ae |# W(Wrw=^P.M Mm ^w-w* «*#'.•* i#wBP’^P 'Wr W r u&lmmm I# l&i&tiii t r **»■ o f tb* Fadaral O^Mt Markat ■flp- a^ap #f V '«t tfe#- Iwtto* s i t o i ' ;1 15crn nay btt tataraated tm a b r la f rariaw of tb* davaloiMxit of a 9 * if«i opan-«ark*t #|^^»i|«l|i«W I util, «* | t ' tba 'f * « l « l « f fb# Vfe*i& War, »ad l*aadltttaly tbai^aftar, wii«a tba # | ^ it i^ ii’ o f tfaa Syat«a wara aaoaaaajrlly aloaaly gaarad to ^ » . TrMaary* • gaaaral flaaaclng pro«ra«, jp*#iriM'QBi#. ;«f- tb# ,f # i # » ^ 'Wmmmm Aat i t o i t aa* a© aantral eoatiol <y»aT oj>m-«arkat oparatioa*. Lata la 19*0 n 4 la thm fi^ i# # ## gaaaral mmfom b«^b# # ■ M^batantlal volaaa o f at th# Saaarra baaba at le t Had baa# b a ilt «p darla^ tba p i|p »#iir a * p »a lo a . A# a -#i8###i|»##aa#|| aasititiNii aaa^i^# & & £for. FRASER Digitized %‘ f Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority Mr* J. M, Rountree - 2 ~ of the federal Reserve banks declined and a number of the Reserve banks, early in 1922, began to purchase Government securities mainly for the pur pose of restoring their earnings* These purchases resulted at times In disturbance in the Government security market* Purchases by interior Re** serve banks,;moreover, placed funds in the H ew York market, which were used to pay off indebtedness of Hew York City banks to the local Reserve bank. In this way purchase of Government securities by one group of Reserve banks resulted in reducing the disdounts of another group of Reserve banks, leaving the earning assets of the System as a w&ole unchanged* It became apparent, therefore, that operations of the several Federal Reserve banks in United States Government securities should be coordinated* In the spring of 1922 an informal C o m i t t e e of four Governors of the Reserve banks was appointed for this purpose. This Committee, which was later en larged to five Governors, functioned for about one year. During that time it became more clearly understood that at times when there is a considerable Tolaae of indebtedness to the Federal Reserve banks purchases of Government securities by the Reserve banks, by placing funds at the disposal of me«ber banks, result in a reduction of this indebtedness, while sales of Government securities b y the Federal Reserve banks, by withdrawing funds frcxa the mar ket, result in a corresponding increase in member bank indebtedness. In directly these purchases or sales also tend to ease or ti&hten credit conditions by making banks feel inclined or disinclined to lend or invest money, the greater the banks* indebtedness the less willing they are to extend credit. Recognizing the importance of open-market operations as an instru ment of monetary policy, the Federal Reserve Board in 1923 suggested that the i n f o m a l Costalttee be reorganised and given official status. The new Committee was called "The Open Market Investment Committee for the Federal Reserve System*, and its duty was to make reeossaendations in regard to open-market policies* The Board stated that o p w - s n x & e t policy should be based on the same principle as the discount rate policy, namely, to aeeonsaodate conaeree and business, with due regard to the general credit situation.. In the years that followed, openmarket operations by the Systea were on a substantial scale. In 1930 the Com mittee was enlarged to include all twelve Governors of the Federal Reserve banks and in 1953 this Committee was recognised in the lew under the name "Federal Open Market Committee*. As mentioned above, the present CaHtmittee was created by the Banking Act of 1935. Prior to 1935, as you can see, authority over and responsibility for open-market operations was diffused. A QORKittee of Governors initiated the policy; these recommendations were submitted for approval or disapproval to the Federal Reserve Board, and if approved, the boards of directors of the in dividual Reserve banks had ultimate power to decide whether or not to partici pate la the operations* As Chairman Iccles pointed out in his testimony on the Banking Bill of 1935, this machinery was better adapted to obstruct ion end delay than to the efficient formulation and execution of policy* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED jO^Of Authority Mr. J, M. Bountree M t h refarsnce to your specific problem it appears that neither of tiie tm major reasons which led to tue coordination of the Governmaat security operations of the Federal Reserro banks apply to the Home Loan Beaks. The magnitude of *our parchaises and sales would probably aot be sufficient, ‘ rscerivt under extraordinary circumstances, to create undue disturbeaee in the Govexsuaaat security sarkat. -And th«j? would not affect the total volume of reserve -funds available to commercial binks and, therefore, would not ba related to national credit policy* Although the Federal Beserve experience may not be particularly helpful to you as a precedent, you may find it desirable on other grounds to follow a Systtxci policy requiring, approval by the Home Loan Bank Board of purchases and sales of Govensaeat securities by the individual Home b o m Banks* As I understand th© Bain purpose of the Federal i;orse Loan Bank Act, the Federal Home Loan Banka were established primarily to serve as reseTToirs of funds for messber institutions engaged in hone saortg&g© financing* the operations of these banks as a system rather than as individual banks would seem to be of major importance. The coordination of their operations under the Federal Home Loan Bank Board provides a means of equalizing the distribu tion of mortgage credit th rou #o ut the country by an if ting funds to those localities wtiere they are most needed, Provision was made for this In the law by penaltting or repairing individual Home Loan Banks to rediscount the notes held by other Horae Loan Banks or to make deposits with other banks* Since the Home Loan Bank Board has power to require tae individual banks to place their idle funds at the disposal of other banks In the interest of the efficient operation of the Hora« Loan- System as a whole, it 'would se«& to follow that the investment of such idle funds in Government securities should elso be a matter of System policy* to be coordinated and approved by the Board so that the banks will not work at q t q as-purposes with each other* In addition, the Home Loan Bank Board may find it desirable to have control over th© distribution b y maturities and otherwise of the fund* of the Horae Loan Bank System taken as a whole* The total asaount invested in Governsent securities by the Home Loan Banks and the maturity distribution of these securities has a bearing on the amount of funds that is available for immediate use as well as on the extant of losses tnrough price declines at times when It becase necessary to obtain funds through the sale of securities. Very truly yours, ® N ) Im m m Cfftjtw Lawrence Clayton, Assistant to Chairman* ^ SSB:W:EAG:1 : wr: mu: iw------ 1 n 5 FDLE n ----------- s E D Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority . .« Font-7* Mr131 IREC’ D IN FILES SECTION B ~ BOARD O F GO VERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence |K r r n l , , , 0, n I f t_ L i 1 .] ^ x ■?q Date^saiii^__ T a M r . E d m is t o n __________________________ Subject:_____________________________ Vm m M is s A n d e r s o n _________________________ ________________________________________________________ Could something similar to the following paragraphsbe used in your letter? "In contrast to the various functions of the Federal Reserve banks, the Federal Home Loan banks were established for one primary purpose which is to serve as reservoirs of funds for member insti tutions engaged in home mortgage financing# The operations of these banks, as a system rather than as individual banks, are of iqgjor importance in carrying out the,purposes of the Federal Home Loan Bank Act. The coordination of their operations under the Federal Home Loan Bank Board provides a means of equalizing the distribution of mortgage credit throughout the country by shifting funds to those localities where they are most needed. \ This is done by permitting or requiring the Home Loan banks to rediscount the discounted notes held by other banks^ to purchase bonds issued by other banks, or to make deposits with other banks. "In view of this, it appears to me that certain operations of individual Home Loan banks, such as the purchase or sale of U. S. Government securities, which would affect the supply of available credit for the Home Loan 4^rstem as a whole, should be coordinated and approved by the Federal Home Loan Bank Board." Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E f r / O Z O j \ \ 6> for TTLES Q. Ritter Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E.O, REC’ D IN FILES SECTION B O A R D OF G O V E R N O R S OF FEDERAL FEB 2 7 193° THE RESERVE SYSTEM Office Correspondence Tn Mr. M o r r i l l ___ Dflfp January 50 f 1959 Subject:. jrrom_______Mr. Clayton Mr. Rountree is a friend of mine and called me on the telephone to say that the at tached letter was written at the instance of Mr. Webb, Vice Chairman, with the thought that some of the reasons underlying the policy of the Federal Reserve Open Market operations would as sist the Federal Home Loan Bank Board in taking a position with their regional banks. What they want, in other words, is ammunition for a system policy. This might involve reference to the legis lative history of our own Federal Open Market Com mittee. Will you please suggest who should draft the reply. Y Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E g . / o z o / R E C'D IN FILES SECTION K F E B 2 7 193P ,F E D E R A L H O M E L O A N B A N K B O A R D WASHINGTON \ January 27, 1939* O F F IC E A* or T. D. WEBB VIC E C HAIRM AN Mr. Lawrence Clayton, Assistant to Chairman, Federal Reserve Board, Washington, D. C. Dear Larry: Will you please let me know tlie policy of the Federal Reserve Board as to authority of directors of a Federal Reserve Bank in buy ing or selling Government securities? The question arises in this way: As you know, we have twelve banks, and they now have in their portfolios $45,000,000. of Government securities. Some of the direct ors feel they should have the right to sell these securities on the market as they desire and buy on the market when it becomes neces sary. What I wish to knew is the policy of the Federal Reserve Board toward the directors of the Federal Reserve Banks in such matters. Regards. F o b P IL E S S'- <*■Ritter K •w r Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ■ REC’ D IN FILES SECTION JAN 3 193P R- >77 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 weeks 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. .*ef the NationabArchives- DECLASSIFIED Authority £ .0 ,1 0 9 0 1 15 \ - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Division of Research and Statistics ^ G O V E R N M M T SECURITY MARKET AND THE ^ SYSTEM OPEN MARKET ACCOUNT Leroy M» ^iser J o h t w e s Olf JAN 10 19 3 1 KENtFT® r f B 2 r* 1 STRICTLY CONFIDENTIAL ......... V:.P;r~r-,R O N JUN 30 1939 December 9, 1938 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E^IO^Oj CONTENTS Page Summary •.. ..................... ....... 1 Present organization of the market.#. 2 Methods of improving the market•••*•• 5 System Open Market Account..........• 15 ACKNOWLEDGMENT In preparing this memorandum the writer has discussed the questions considered vdth Mr. Goldenvvreiser, Mr. Parry, Mr* Thomas, and Mr. Edmiston and is indebted to them for many suggestions• L. M* Piser Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E. 0. ( I■ SUMMARY The following suggestions are advanced for improving the Government s curity market: 1. More definite and continuous supervision of dealers* portfolio positions by informal contacts through the N e w York Reserve Bank • 2. Removal of the exemption of Government security dealers fr o m the "anti-manipulation" provisions of the Securities Exchange Act. 3. Daily reports fro m the principal dealers, to be made public in total, showing the amount of their transactions and the high and low price in each issue. 4. W e e k l y confidential reports from dealers showing purchases and sales b y types of issue and classes of holders* 5. Certain changes in Stock Exchange procedure designed to bring more trading to the floor. The following suggestions are advanced for improving Federal Reserve security o p e r a t i o n s : 1. A doption of regulation empowering each Reserve ban k to deal in Government securities. 2. Revision of published statement to exclude bre a k d o w n of the comr p osition of the Government security account by bonds, notes, and bills, and to sh o w fewer m a t u r i t y groups* 3. Legislative authority to buy Government securities directly f r o m the Treasury* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ]T,fr/0£O/ - 2 - PRESENT ORGANIZATION OF THE MARKET History of the Government security market At the present time trading in Government securities is carried on prin cipally over the counter* The only Government securities listed on the Stock Exchange are Treasury bonds* Trading in notes and bills is entirely over the counter, and transactions in bonds on the floor are a negligible proportion of total Government bond transactions# This has not always been the case* During and shortly after the World War the amount of trading in Government bonds on the floor was considerably larger than at present and was a much larger proportion of total transactions in Government bonds* At that time a large part of tho outstanding amount of Government bonds was held by individuals* Each transaction was for a rela tively small amount, and few transactions involved a swap from one issue to another. During the 1920* s the ownership of important amounts of Government bonds shifted from individuals to institutions, such as banks and insurance companies. Transactions of these institutions are large, and frequently involve swaps out of one issue into another* These institutions have employed skilled and ex perienced traders to handle their trading and have found that their transac tions can usually bo executed to better advantage over the counter than on the floor.1/ There are several reasons why this is true* First, on swaps, if bi^ying and selling orders aro placed simultaneously on the floor, the broker may com plete one sido of the transaction and fail to complete the other. Second, on l/ It is understood that similar developments have occurrod also in London with respect to securities of the British Government. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority [T, - 3 a single order for perhaps 200 bonds it may be possible to effect a transac tion for only one bond. Third, trading over the counter can be carried on in l/o4,s as against l / 3 2 ’ s on the floor. Fourth, large transactions can be kept more confidential over the counter, whereas a large bid or offering on the floor would alter the price against the institution. Finally, large in stitutional transactions frequently have to be worked out over a period of time through negotiation, and such negotiation would be hampered if bids or offers were given on the floor, even though the broker took his time. Functions of the dealers The primary functions of Government security dealers are (l) to provide a mechanism for the distribution of n e w Treasury issues and (2) to provide a ready market for outstanding Treasury issues. At the present time dealers play a more important role in distributing Treasury bills than in distributing new issues of other Government securities. Dealers bid for a substantial por tion of each n e w bill issue and sell tfro bills (a) to investors who do not bid because of unfamiliarity with tho bill market and (b) to the Federal Reserve banks, who are not allowed by law to bid. Dealers also aid in the conversion of maturing issues by purchasing them from holders who might otherwise present thorn for redemption in cash. In normal times dealers provide a ready market for outstanding Treasury issues by themselves buying and selling moderate amounts of Government secur ities at current quotations and by working out larger orders for customers. It is in this respect that dealers perform thoir most important function. In tho Government security market trading activity is small in relation to the total amount of debt outstanding. It vrould bo difficult, therefore, to find ready buyers and sellers for large blocks of securities without working through dealers. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 4 - On large orders and swaps dealers through their contacts with important investors are able to effect at prevailing market prices exchanges which it would be difficult or impossible to make on the Stock Exchange* Before assem bling or selling a block of securities a dealer may work out a number of in termediate transactions involving other dealers and customers* If a dealer docs not have a ready buyer or seller, ho may take an offering into his port folio temporarily or may provide issues in demand by borrowing the securities. Dealers thereby aid in maintaining a market that is orderly and liquid in n o r mal times* This is obviously advantageous both to the Treasury and to investors in Government securities* Dcfects in the market mechanism There are times when the Government security market, which ordinarily is an unusually orderly and liquid market, loses those characteristics* situation is inherent in all markets. This It has been accentuated in the Govern ment security market by the growth in the importance of dealers, who contribute at times to disorderly conditions by themselves speculating in the market. This is to be expected. No dealer, bank, or other investor whose actions are m o t i vated by profit considerations can be expected to engage in transactions to preserve an orderly market when he feels certain that such transactions will result in a loss. Such conditions can be remedied only by adequate transac tions by the Federal Reserve System and the Treasury* There are five principal defects in the Government security market. changes in d e a l e r s ’portfolios at times accentuate price movements. First, Second, at times of heavy liquidation dealers do not make firm bids to customers. Third, in periods of inactive trading dealers vary their quotations 011 Government se curities for the purpose of attracting buying or selling in the market and ’ '""" ■ " " Reproduced from the Unclassified I Declassified Holdings of the National Archives 1 1"" ""t"....T T 1 DECLASSIFIED Authority E f y / Q G O j - 5 thus inducing activity# Fourth, through market letters and direct contacts dealers attempt to increase activity by trying to persuade customers to buy or sell# Fifth, the public is informed as to the amount, price, and sequence of current transactions only for the relatively insignificant amount of trad ing on the floor# It is believed that an attempt should be made to eradicate these defects as far as possible# It is further believed that such an attempt should seek at the same time to preserve as far as possible the existing mechanism of the market# In the following paragraphs there are discussed two general procedures for solving the problem: (1) by increased regulation of dealers* activities and additional reports from dealers and (2) by attempting to increase trading on the Stock Exchange# METHODS OF IMPROVING THE MA.HKET Portfolio fluctuations Changes in dealers1 portfolios frequently accentuate rather than lessen price movements, since dealers are likely to incroaso thoir portfolios at times of sharply rising prices and to decrease their portfolios at times of sharply falling prices# During the decline in the market in March 1937, for example, dealers roduced their portfolios of Treasury bonds by $50,000,000, until at the bottom of tho market around the first of April they had a small short position# They also acquired a short position in Treasury bonds during the brief periods of unsettloment in early September 1937 and again in March and early April 1938# On tho other hand, they added $>60,000,000 to their bond portfolio in tho second half of April 1938 in a rising market# It is to bo noted, however, that during tho decline in September 1938 dealers gen erally maintained their position and did not contribute to the weakness in the market# "wr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E t f J O G O j - 6 - In most of these instances, dealers were doing in a small way what in vestors were doing in a large way. Fluctuations in dealers1 portfolios are small in comparison with fluctuations in bank portfolios* In March 1937, for example, while dealers reduced their total position by $60,000,000, reporting member banks sold $500,000,000* At the New York Reserve Bank the position of each Government security dealer is carefully watched* Whenever any individual dealer acquires a long position which is believed to be of such substantial proportions as to make the market vulnerable, the New York Reserve Bank advises the dealer to reduce his portfolio to a more reasonable figure* This is handled informally and is done without specific authority, except that the Now York Reserve Bank could refuse to do business with any dealer who failed to cooperate* Dealers* sub scriptions to now bond and note issues have also beon limited* Dealers have generally cooporated in these efforts* As a result fluctuations in dealers1 portfolios have boon to some extent reduced* More definite and continuous supervision of dealers’portfolio positions, however, might bo advisable* This supervision could continue to be oxercised informally by direct contact with dealers through the Now York Reserve Bank, but with more frequent requests to doalors for reducing long positions or cov ering short positions when such action would appear to give greater stability to the market* Such matters require trained market judgment and cannot be re duced to a formula* Portfolios should bo sufficiently largo and flexible for each dealer to meet tho normal requirements of his customers, but no dealer should be permitted to accumulate so large a speculative position that its accumulation would be an important factor in a rising market or its liquida tion an important factor in a weak market* Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority £ , Q J 0 9 0 f - 7 - Regulation of this type might first be extended by soliciting inform ally the voluntary cooperation of the dealers, since this would arouse less antagonism# In case this was not forthcoming, legislative authority to en force adherence might be sought* In any event the New York Reserve Bank, in addition to being given general instructions, should be asked to report to the Board all instances in which they request changes in dealer positions* At times of heavy liquidation dealers do not make firm bids to customers* At these times dealers take all selling orders subject to their finding a buyer. The same situation exists at all times with regard to large orders* It also exists at times in all markets* Although Government security dealers often do not make a market at times when it is especially important that they do so, such a procedure is necessary for the dealers* own protection, since their capital would be quickly wiped out during a period of rapid decline in the market* can be lessened by regulating portfolios* nating dealers* This defect in the market It would not be affected by elimi Ultimate responsibility for maintaining an orderly market dur ing periods of liquidation rests with the Federal Reserve System and the Trea sury, and no other holder of Government securities can be expected to buy when prices are declining and look as though they will decline further* Removal of. exemption from Securities Exchange Act In periods of inactive trading dealers vary their quotations on Government securities for the purpose of attracting buying or selling in the market and thus inducing activity* This is a relatively minor abuse, however, and it is difficult to see how it could be eradicated without entirely eliminating dealers* For reasons to be given later this would create major new problems ' in the process of attempting to solve a minor one. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £7^9, - 8 - Through letters and direct contacts dealers attempt to persuade customers to buy or sell in order to stimulate activity in the market* The same thing is done by investment services, but in the latter case is more likely to re flect their best forecast of the market, since they have no interest in stimu lating activity• It is to the long-run interest of dealers also to give cor- rcct advice, since repeated attempts on the part of any individual dealer to induce activity by making a poor forecast would lose customors* This is prob ably not a serious situation, however, since most customers either use their own judgment before birring or soiling or chock with other investors, such as correspondent banks* Moreover, legislation to prevent the soliciting of busi ness in this manner would be quite likely to prove impossible of enforcement. Some improvement in these respects might result from removing from tho law the exemption of Government security dealers from the "anti-manipulation” pro visions of tho Securities Exchange Act* Similar problems are being handled in other markets by the Securities Exchange Commission* There seems to bo no reason why Government security dealers should not be subject to the same regu lations as other dealers* Reports on trading The public is informed as to the amount, price, and sequence of current transactions only for the relatively insignificant amount of transactions on tho floor* The published figures of volume of trading on the Exchango givo a decidedly erroneous impression of tho amount of transactions, and the published priccs do not always indicate the prices at which transactions are occurring over tho counter. Bid and asked quotations are furnished by dealers daily in circulars to their customers and more frequently by phone or wire upon request, and some nowspapors publish the closing quotations of a selected dealer* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 9 - At any given time quotations vary slightly from dealer to dealer. In addition, the customer is never sure that he receives the best price at the time of the transaction, since a dealer could make different quotations to different customers* This danger is considerably reduced, however, by com petition among dealers, as is shovm. by the fact that the most successful dealer is the one who has the reputation for the fairest relations with his customers. It is to be noted also that there is relatively little complaint on this point from investors. This situation could be improved by requesting the more important dealers each day to report to the N e w York Reserve Bank or the Stock Exchange the amount of their purchases and sales of each issue and the high and low price at which transactions in each issue were effected* would be published daily. The total figures for each issue This would give a much more accurate picture of the Government security market than is now obtained through the reported figures of dealings on the Stock Exchange and would also give customers a chance to check on the fairness of the prices at vfhich their own transactions were exe cuted • At the present time the only information received currently from Govern ment security dealers is a daily report on their position by types of secur ities, their borrowings, and tho amount of their transactions in each type* It contains no information on prices* There has been suggested above a n e w daily report on the amount and prices of transactions in individual issues in tho over-the-counter market, and it is further suggested that dealers be re quested to report weekly by types of issue tho amount of Government securities bought from and sold to each of the principal classes of holders. Similar in formation is n o w being confidentially reported by dealers in the b a n k e r s 1 a c ceptance market* Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority - 10 - Such reports would indicate the investment policy of each of the indicated classes of institutions# They xvould provide more exactly the information that is h o w obtained informally through personal contacts. They would be of consid erable aid consequently in interpreting market movements. A proposed form for such reports has been prepared and carefully studied. It is a form on which cach important dealer might be requested to report weekly and is shown in the accompanying t a b l e : Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E.Q.frtGOj. - 11 - TRANSACTIONS IN UNITED STATES GOVERNMENT SECURITIES OF (Name of dealer) during the week ending (Par amount in thousands of dollars) Purchases from or sales to Purchases Sale* Trea Trea Trea Guar Trea Trea Trea Guar sury sury sury anteed sury sury sury anteed bills notes bonds issues bills notes bonds issues Treasury - ne w issues, exchanges, and maturltics.».*».......»... Federal Reserve banks.. Commercial banks, trust companies, and pri vate banks : New York C i t y ...... Out of to w n......... Savings banks Foreign banks ........ .. Insurance companies.... Other deal e r s .......... Others.... Total Note: Figures should include transactions arranged during the week regard less of the date of delivery. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority - 12 - Increased trading on the Stock Exchange To summarize, the above suggestions are to reduce changes in dealersf portfolios by closer supervision, to remove the exemption of Government secur ity dealers from the ’ ’ anti-manipulation” provisions of the Securities Exchange Act, and to obtain additional reports from the largest dealers# These sugges tions would not completely eliminate the defects of the market# They would, however, improve the market to a considerable extent# It might be thoughtthat the defects could be further reduced by requiring by law that all transactions in Government securities be handled on the New York Stock Exchange# If this could be done, there would be complete public reporting of the amount, price, and sequence of current transactions, and trading would be subjected to published rules# Defects that would not be eliminated would be the presence of fluctuating portfolios of speculators and the absence of buyers in periods of liquidation and of sellers in periods of acc\HP.ulation# These defects can be remedied only by adequate Federal Reserve and Treasury transactions# A short step in this direction might bo desirable# It might be possible to increase the proportion of trading in Government securities on tho Stock Exchange by increasing tho trading unit from 1 bond to 10 bonds, by establish ing a bond membership on the Exchange at a much lower price, by allowing trans actions in l/64*s or preferably in 1/1001s, and by larger use of the floor by the System Account# in stocks# Tho specialist system might develop in Treasury bonds as A specialist both trades for his own account and accepts for a small commission orders from other membors# He may not trade for his own ac count when ho holds an unexecuted order for a customor at the same or a better price, but he is required to trade for his own account when tho lack of ■*r Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Q ^ Q ^ O f - 13 reasonable bids or offers threatens to create a disorderly market- With deal ers acting as specialists on the floor and under strict rules, it should not be possible to manipulate prices, and the dealers would be under some compul sion to maintain an orderly market* A complete elimination of the over-the-counter market, if this could be accomplished, would probably, however, reduce the liquidity of the market in normal times and result in more erratic fluctuations in prices* Three types of transaction, which between them make up the bulk of trading, would be dif ficult to handle on the floor* These types are swaps, trading in bills and possibly cl so in notes, and large transactions, which require negotiation* It is quite certain that investors as well as dealers would strongly prefer that these transactions be handled on an ovor-the-counter basis, and it seems desirable that they should bo so handled* Moreover, tho elimination of non-bank dealers, while removing those deal ers who are largely responsible for the abuses, would be unfair to those who are conducting their business in a satisfactory manner. If non-bank dealers alone were eliminated or placed on a commission basis, an important share of their business would probably go to dealer banks* This would reduce competition in the market and would retain all of the defects of the dealer mechanism. The elimination of large city correspondents as dealers might arouse the antagonism of small banks, who have found it generally satisfactory to trade with their largo city correspondents* If such a complete elimination of the over-the-counter market were at tempted it would probably be necessary for the Federal Reserve to take over the dealer function altogether, since the market probably could not operate satisfactorily without over-the-counter trading* It is suggested in a later Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority K & . / O Z O j - 14 - section that each Reserve bank should be allowed to act as dealer for its member banks* It is not suggested, however, that the Reserve banks should attempt to handle all of the over-the-counter business* There are a number of reasons why this would be undesirable* Complete handling of the over-the-counter business by the Federal Reserve would mul tiply the accusations that the market is being manipulated by the Government* It would place the Federal Reserve System in a large and complicated business in -which its experience is limited* There would bo frequent and difficult choicos between transactions to influence the credit situation and transac tions to perform smoothly tho function of dealer* Finally, tho Reserve banks would need to bid directly for new Treasury bills and would need to make largo purchases of rights before each new financing, which would further multiply the accusations that tho market was being ’ ’ rigged”by tho Government. It appears, thoroforo, that an attempt to bring all trading to tho Ex change or to the Exchange and tho Reserve banks would bo difficult of accom plishment. If successful, it would raise new problems, which might be more difficult than the present problems. It might be desirable to make tho sug gested changes in Stock Exchange procedure, but the regulation of dealers for tho present probably should not go beyond the suggestions made in a preceding scction of this memorandum. ............1 1".....1 1 n' ......1 1 1 1 1 1 :*<H w r DECLASSIFIED Authority E , d . l 0 $ 0 ) - 15 - SYSTEM OPEN MARKET ACCOUNT Dealings in Governments Each Reserve bank should bo empowered to do some dealing in Government securities* The larger city banks act as dealers for their correspondents, and smaller banks have commented favorably upon this practice. At the pres ent time when Reserve banks receive orders from their member banks they place those orders with brokers or with Government security dealers. As a result comparatively few transactions are handled through the Reserve banks • It would bo especially helpful in disorderly markets for the Reserve banks to take care of panicky liquidation closer to the source rather than to force all liquidation to como to one or two dealors in New York. Member banks have remarked that it is obvious when the only buyer is the Federal, because at such a time the only bids in the market are by one or two dealers in New York* If, on tho other hand, each Reserve bank bought Government se curities at such a time and perhaps gave some of the largor correspondent banks authority to purchase limited amounts of Government securities, there would bo an appearance of wider buying interest in tho market and some of the panicl^y liquidation might bo forestalled* One objection to this procedure, of course, would be the difficulty of managing tho Account with twelve widoly scattered oporators in Government se curities* Each Reserve bank might bo given a trading account, however, and be authorized to buy and sell Government securities at current prices as long as this trading account wore kopt within limited amounts. The System*s hold ings of Government securities would fluctuate each wool:, since it would be difficult to strike an oven balance in all transactions at tho twelve Reserve banks, but if each Reserve bank were given definite limits within which to operate, these fluctuations would be small* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 16 - Certain dangers might result from going too far in this direction and attempting to handle all Federal Reserve transactions with investors rather than with dealers* First, the elimination of all transactions with dealers would remove the System’ s influence over dealers. Second, it would remove the aid which the System gives to dealers and the market in working out large transactions* Third, the making of desirable shifts in the Account would bo loss flexible if they could not be carried out directly through dealers* Publication of gystom holdings Tho System is now required to publish weekly both tho total of its Gov ernment security account and the maturities of this total* The total of the Account should bo published weekly, since this reflects System policy with regard to member bank reserves* The composition of the Account, however, represents policy with regard to the technical situation in the Government security market* Shifts within the Account are generally made to maintain an orderly market and have no bearing upon the general credit policy of the System* Consequently, shifts within the Account arc frequently misinterpreted by those who are following System policy* At times, also, exchanges with tho Treasury are misintorpretod as changes in market policy* The publication of those composition figures is at times a deterrent rather than an aid to the maintenance of orderly conditions in the market* Frequently before making shifts it is necessary to considor the psychological effect of the publication of the figures as well as to consider the technical condition of tho market* It is impossible to determine in advance the psycho logical effect of a shift in the Account* At timos of market weakness, for example, large purchases of Treasury bonds might either reassure investors by Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 17 showing that tho System Account was taking a firm attitude with regard to the market, or else it might precipitate further liquidation by showing that liquidation during tho preceding week had been large* Another result of the publication of holdings of Government securities by small maturity cla^sifications is that dealers and banks are able to vary tlioir bids for now bill issues in accordance with the needs of the System Account for replacing maturing bills* When tho System Account has largo maturities dealers and bankers know that it may be necessary to clean up the market in bills fairly completely in order to make replacements, and conse quently the rate on Treasury bills may decline. When tho System Account has small maturities it means that dealers may be forced to carry bills for a period, and consequently the rate may advance somewhat. This problem could be solved by keeping an even amount of Treasury bills maturing each week, but this is difficult to do in view of special demands for particular bill issues. It would also result in less flexibility in supporting the market for other issues through offsetting such purchases by allowing part of the current week ’ s bill maturity to run off without replacement. Legislation would be necessary in order to relieve the System completely of the requirement of publishing the maturity distribution of Government se curity holdings. Th© essential difficulties that arise from publication of the detailed maturity distribution could be removed without legislation by publishing only total holdings maturing within 2 years, 2 to 5 years, and over 5 years. These are the maturity periods that the Federal Open Market Committee has considered of sufficient importance to include in their resolutions. This change would involve revision of tho published statement to exclude tho break down of the composition of the Government security account by bonds, notes, and bills and to eliminate all maturity groups of less than 2 years. «wr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority K f r / O G O j - 18 Direct purchases from Treasury The Federal Reserve banks should not be prohibited by law from buying Government securities directly from the Treasury# The present restrictions prohibit tho Reserve banks from covering a Treasury overdraft by purchasing spocial certificates of indebtedness# There has been no occasion for the use of this mechanism in the recent past, but it is helpful in a period when tho Treasury is retiring debt# Treasury expenditures for the redemption of maturing securities are made generally on the 15th of the tax collection months, while income tax receipts are not available until the 16th and later# As a result the Treasury has a large excess of payments for a few days and in the past has covered this excess by selling to tho Roserve banks a special certificate of indebtedness# With this mothod of handling temporary over drafts prohibited the Treasury might find it necessary to ask for bids on a spocial Treasury bill issue, which would be a somewhat less floxiblc procedure than handling the overdraft directly with the Reserve banks# The presont law also forcos tho Reserve banks to buy their weekly re placements of Treasury bills above the issue price# D6alers and bonks bid for the new Treasury bill issues and sell them to the Sjystem Account at a discount which is generally 0#015 percent loss than the average rate at which tho now bill issue was sold# With presont extremely low rates, tho difforonce has been reduced to 0*010 percent# If the System were permitted to bid for new bills and were always able to guess the average rate exactly, the System would be saved about $60,000 a year# Since they are likely to miss tho bid on some weeks, however, the actual saving would be considerably less# Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority K ^ / O ^ O j - 19 One advantage of bidding for now issuos of bills would be that the Re serve System could establish what was in effect a buying rate on Treasury bills try taking whatever bills wore allotod to them at that rate* Question may be raised as to the desirability of having the §ystom Account onter bids with the Treasury for new bill issuos, sinco there is always the possi bility of being accused of opening other bids before making their own bid* Even before this law m s passed, tho Reserve banks did not bid for now issues of Treasury bills but purchased the issues oach week from dealers and banks • Tho weight of this objection would bo reduced by advanco publication of the System*s buying rate* Reproduced'from' th e 'U n d a s s lfie d / D eclassified' H oldings of the N ational A rchives DECLASSIFIED Authority KiC’DIN RL^SECTlON WAY 1 2 |953 R*dnetloa la i r o l w af OfO*» Hr* isrrta MTket M M T Hr. I*ag*tr*at Dwris* t h* ptit t m t y yoara tha i € m of tr— atasdlac is tfca opaa sarkat ha* W m ralal papar out- as* tor abomt 80 g a m ast. Batwaa* 1919, tha aarllaat yaar for whlah fl«*raa art »rallabia, apt tha alddla of 1£9S tha t o I o m o*tataadin« daalisad fraa about |X,000*000,000 to l M f t|MU *100,000,000, Owl a* to l»ara«aod borrowls* 'Iff f ia*»o« oospasiaa; ariilig from tlw c^owth. is fittalt spirt hsiflsi^ the volts* of asafc papar W i tlaaa t&*r*$o*d to ahoat $**5,000,000. Thaaa .fl#*f*a ara praaaatad la tha followlac tabla alosc wit* tha othar laforsatlos you reqsaata* m tka — awit o f n — rnlal l«a*a of i i t i r banka of tha TOdaral Bawarra 8yata», opaa aarkot rwtaa for aaMaralal papar, and rataa.cbarjad a«a- t o w m by tasks U lo*d|ag eltiao. TO.OEK OF C « * H t C X A L BQBttOWIJC AHD H T S K E S T HATES (Dallara la millloaa} 1919 i m 19«S i*£f» OR# 8®5 19t9 1955 1938 294 ?23 W iA S i m m f threagh 19*B« lat arc liable As of Maroh t* 1*,584 XX,061 l£t400 ».60* 5/ ?*44B loaaa os $•*9 6*90 S#0® S*46 6*48 ft.Bl 5*98 7.01 5.64 6*00 5,95 4*10 2-54 6.08 5.«4 urn . 75 aatata asA o* iaeicrltlaa partly aattaatad ' T'w wr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority £ , 0 ^ 0 9 0 ) «■» 2 «• It appears that the decline 1b the importance of tha commercial p#per market has not been due to any change in practice on th© part of * borrowers to borrow directly from banks instead of through tha open mar ket. Instead It la attributable to alterations In business management that have plaoed large business e o a c e n u of the type that borrow la the open market on a sore self-supporting basis* During the *20’ * such concerns im- proved their cash positions by issuing stocks In the bull security market, and In general large concerns have been operating in recant years with greater short-term liquid assets than during the 9£Q9s* At the same time the need for eash by such concerns has been decreased by new forms of mer chandising* including producer to consular sales as exemplified In chain stores, and by Increasing the turnover of merchandise and reducing Inventories, which have been aided by improved transportation* The decline in the volume of open-market commercial paper has been actn*~ companled by a sharp reduction in the rates a f such paper* the present rate of 3/4 of 1 percent is well below the average of rates charged customers by banks, which is about % 1/3 percent in Hew York City and about S 3/4 per cent in 35 other leading cities* Some of the better credit risks, however, ere having to pay less than 1 1 f t percent on loans in Sew York City. This is not much above the commercial paper rate if allowance is made for the note broker* s commission* VI»ieh REC'D I# PXU5S SECTION % OCT 2 51938 U April 7, 1958 Mr. George Harrison, President, Federal Reserve Bank, Mew York, fcew York. Dear Mr. Harrisons I wish to acknowledge receipt of y o u r letter of April 6jfwith the enclosed copy of the letter and ques tionnaire which went to the thirty investment banking firms • X aa arranging to hare this circulated so that the Board members and staff heads aay have an opportun ity to read it. Thanking you for sanding It to ae, I am, Sincerely yours, sum i ’Moldings'ofthe National Archives DECLASSIFIED Authority ir.0./o£oi / .F e d e r a l F N o f J * Cardad! Dear Mr. Davis% Our plans, which I discussed with you recently, for obtaining regular reports from a representative group of investment banking firms, which we hope will improve our knowledge of the capital position and the inventory position of the new issue market, have progressed to the point where we are approaching about thirty firms asking th»ir cooperation. Enclosed is a copy of the letter and the questionnaire which we have sent to these firms, and which I thought you might like to see and to bring to the attention of the other Members of the Board. Faithfully yo George L. Harrison President. Hon. Chester C. Davis, Board of Governors of the Federal Reserve System, Washington, D.C. Encs. (2) FOB FILES Carol Piper ■r Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority MI SC . 140 A ^,0, ISM F E D E R A L RESERVE B A N K OF N E W Y O R K A p r i l 6, 1938 Baar lip It la ona of tha dutlaa and raaponaibllitlaa of tha Federal Reserve Bank of How fork, a* tha bank of laaua In tha principal aaonay market of tha country, to kaap Itaalf informed ooncerning tha functioning of that aarkat, both with raapaot to ahort t a » oradit faotora and long tana capital tranaaatlona. ilia experience® of tha paat faw yaara hava aaphaalaad our naad for aora eoaaprahanalva information oonoarning tha latter of thaaa two phaaaa of tha aonay n r t e t , ainoe tha affaot of oradit polioy upon new financing and tha repCTcuaalons of tha functioning of tha oa* laauaa aarkat upon oradit policy, £k^ira'baa& a n iaportant aapaot of tha whole racorary problem. At other tlaaa, ...tha^oparatIona of thfc new laauaa aarkat have had a aubatantial influence upon (|ha international movement of funda, which la \ , alao a matter of general oo of oradit policy and tharafora of particular Intaraat to thia I hava recently d tha ii tha poaalblllty of improving our knowladga of aw iaauaa market with aeveral of thoaa who ara faotora in it, and they have expreaaed a willlngnaaa to cooperate with ua by furnlahlng ua with weekly reporta, along tha linaa of tha enoloaed quaatlonnaira. I an, tharafora, approaching a rapreaantative groap of tha loading investment hanking houaea, having offices In thia city, ineluding two or thraa whoaa aain office* ara in othar cant ara, aaking than to Join in thia voluntary undertaking. In addltlon,*Q thaaa waakly raporta, it la contemplated that aaoh f l m will aupply ua with quarterly statemente of condition beginning with tha atataaent aa of March 31, 1938 (or naaraat data) and with an audltad statement of condition, at laaat onca a yaar, bag inning with a atataaant aa of Deeeabar 31, 1937 (or naaraat data). If auoh statements ara now Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority M IS C . 14 0 - B - 1 5 M - 2 - 3 8 _ « April 6, 1938. being furnlehed to other agenclee or If, 1b the future tbey ere required by other agenoies, oopiee could of course be furnished to tie, ee it ie not our desire to oeuee eny unnecessary duplication of work on your part* AS you will see, our principal purpoee is to obtain information concern ing the capital and inventory position of the ihole new Issues market, and we went to request only such Inf onset ion as is essential to our purpoee and as can be readily supplied, without the preparation of figuree rtiich reporting firns would not ordinar ily compile for their own use. The confidential character ef the figures submitted by individual firms will, of couree, be preserved* Ho one hut those officers of the beak, VL<U "*” "who are _____ j-___.)UJWliU.vwntTWr.,^rTTriT)..,rfrnv.l|V_.ni,Y- i'- J’*'*''"'' directly concerned, and the few saployeee, who will be engaged la the tabulation and combination of ths reports, would have aceese to the«. Until we have had a o m exper ience with the reporte, I m not even able to say that we shall give beck to the reporting fines, or sake public, the ugragateNfigtiree which we ccsKplle. X..., X _ « , „». f..I t U v X A u , body in a position to know , „ « n to Heverthe . D.UtrBl o . ^ status o f \ h e whole Market* u v j - - « - *• - > * * . « — weekly reporte of its operations jm d with periodic stetsoente of condition. - - « . I shall then notify you of the date of eooaenosswnt of the reporting service, which we should like to eet within the next two weeks, and shall supply you with a set of blank forms and instructions for use In reporting to us. as we proceed with this undertaking and gain experience in the analysle of the figures, it say be that we shall want to modify It in sons respects, and I ahould always, of course, welcome eny suggestions which you say wish to sake concerning It. http://fraser.stlouisfed.org/ Enc.of St. Louis Federal Reserve Bank Faithfully yours, George L. Harrison, President* j FOR 1II-HS I Carol Piper Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority CONFIDENTIAL WEEKLY REPORT FROM SECURITY UNDERWRITERS TO THE FEDERAL RESERVE BANK OF NEW YORK Report as of close of business Friday Finn Name 1938. (Except as otherwise indicated amounts should be reported in teiras of face value or number of shares, as the case may b e . ) 1. Ctommitments under underwriting agreements to purchase securities not yet publicly offered for sale. Approximate Purchase Date of Name of Issue Total Issue Commitment Brice Public Offering 2. Met position in securities with respect to which firm participated in an underwriting agreement which has not been terminated. Name of Issue Original Underwriting Commitment Amount Retained For Sale By Us Net Additional Purchases Net Position (L-long) (S-short) Ledger Value Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority K ^ / O ^ O j 2. 3. Securities purchased under underwriting agreements which were terminated within the last six months. Name of Issue 4. Net Position (L-long) (S-short) Ledger Value Estimated Market Value Money Borrowed A) From Banks in the United States B) From Others FOR f il e s Ca.ro1 F'ver Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority {fiGOI 3 5. (To be answered only by representatives of other underwriters of an issue involving a public offering.) d) B) Please attach a list showing the names and commitments of the several underwriters in each underwriting entered into during the past week. NET position of the account maintained for the several under writers or participants with respect to any securities referred to in Item 2 and for which settlement has not been effected with such underwriters or participants. Fame of Issue 6. Total Issue Amount Reserved for Sale for the Accounts of the Several Participants Net Additional Purchases Met Posit ion (L-long) (S-short) Ledger Value Brief description of prospective issues with respect to which firm has no definite commitment but expects to act as manager or representative of other underwriters, including name and amount of issue, and the approximate date of public offering. filhis Carol Piper Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority INSTRUCTIONS Item ,#1. Report only actual, not prospective commitments, under this item, A joint account formed to hid for and to offer publicly municipal issues should be classed as an underwriting. Joint accounts for purposes of trading need not be reported in this item. In the case of commitments to purchase the Unsubscribed portion of securities offered or to be offered to existing security holders, the commitment should be reported under Item #1 until the amount the underwriter will be required to purchase has been definitely determined. Thereafter the position of the firm with respect to such commitment should be reported under Item #2 or Item #3, as the case may be. In the last column enter date of expiration of existing security holders’subscription rights. Item $2* An underwriting agreement should be considered as having bsen "terminated" on the day as of which the final accounting is made. Purchases and sales made by underwriter’ s representative for your account and for which settlement has not been made should not be reflected under "Net Additional Purchases" or in "Net Position." Such data will be reported in total by such representative in Item 5(B). The "Amount Retained for Sale Tby Us" should represent the portion of the original underwriting commitment reserved by you for direct distribution or released by the underwriter’ s represen tative for direct distribution by you and should be adjusted by reason of additional securities released by or to the underwriter’ s a representative. Securities confirmed by the underwriter’ s repre sentative on so-called selling group terms should be included under "Net Additional Purchases" rather than as adjustments in the "Amount . Retained for Sale by Us." Item #3. Only securities the ledger values of which are #100,000 or more need be separately recorded; all other securities may be combined and entered as "other issues.” Item $4. Customers’free credit balances should not be included. Item #5. See instructions for Item #2. It is expected that the report of the manager or representative of other underwriters will reflect all positions which are not indicated by the reports of other underwriters or participants under Item #2. Item #6. Include only issues the offering of which appears likely within a few weeks, and not those simply in the discussion stage, Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority /O^Oj / April Zt> 1957 Board of Governor* Kr.^ureibelbis, Assistant General Counsel* Amendments to section 14(b) of ^Federal leservs Act and 4(n) of floras ' O m e r s Lean Aot proposed by Federal H Loan Bank Board* At Mr* Clayton*a request 1 h a w reviewed Mr. Daiger’ s meocorandum of April 17th addressed to C h a t m a n leclcs upon the subject Y*€'pen Market Operations proposed by the Federal Hone Loan Bank Board"* this review, however, has been confined solely to an analysis of the existing applicable statutes and the legal affeet of suggested amend ments to sectlen 14(b) of the Federal Heserve Aot and section 4(n) of the Hens O m e r s Loan Aot, which snendments, I understand have been proposed by the Federal Home Loan Bank Board, for the convenience of the Board the various Acts involved are separately analysed under descriptive headings, as followss FE&&8AL FA M MQBT&J&M ACT i f The federal Farm Mortgage Corporation Aot creating the Fed eral Farm Mortgage Corporation was approved January 31, 19S4* This Aot authorised the Corporation to issue f-2,000,000,000 of bonds fully guaranteed by the United States both as to interest and principal, which bonds, among other things, may be exchanged for con solidated Farm Loan bends of equal face value Issued under the Federal Farm Loan Act. The Act amended section IS of the Federal Beserve Act by making the bonds of the Corporation eligible for pledge as security to a member bank's fifteen day collateral note. At the same time, section 14(b) of the Federal Reserve Aot was emended to make bonds of the Corporation having maturities frost d&te of purchase of not exceeding six months.ell&IVic" for purchase 'and 'sale in the' o p c n m a r k e t . KOMI (MMMS LOAM ACT The Mom Owners Loan Act creating the Home Owners Loan Cor poration was approved June 15, 1§35* The Act originally authorised the issuance of $2,000,000,000 of bonds guaranteed as to interest only by the Government. By process of asiendaent the Aot finally authorised the issuance of #4,760,000,000 of bends guaranteed both as to Interest and principal by the United States. Approximately #1,800,000,000 of this mm regains unissued. ! 3 1 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority IT.a/oZo/ Board of Governor* * 2 Section 4(n) of tho Act authorises the Corporation to (1) puroha.se Federal Home Loan Bank bonds* debentures* or notes* or eonsolidated Federal Hone Loan Bank bonds or debenturesi (2) to pur chase full paid income shares of federal Savings and Loan Assoclations after funds made available to the Secretary of the Treasury for the purohase of suoh shares have been exhausted, suoh purchases to be cm the same terms and conditions as apply to the purohase of suoh shares by the Secretary of the Treasury. *300,000,000 of the authorised bond Issue is set aside for the purpose of this subsection. It is now proposed to amend the subsection by allocating the | 300,000,000 to the purohase of shares of Federal Savings and Loan Associations and providing that the total amount of unused bond authorisation of the Corporation (v:1,500,000,000) shall be available for the other purposes of the subsection| to wit, the purchase of Federal Roue Loan Bank bonds* debentures* or notes* or consolidated Federal Base Loan Bank bonds or debentures* In an amendment of the Act (April 27* I S M ) providing for the guarantee by the United States* both as to principal and interest* of bonds Issued by the Corporation, sections 13 and 14 of the Federal aeserve Aot were amended in the same manner as already amended with respect to bonds of the Federal Farm Mortgage Corporation* Section 13 of the Federal Reserve Act was amended by making the bonds of the Corporation eligible for pledge as security to a manber bank’ s 15 day collateral note* Section 14(b) of the federal Reserve Aot was amended to make bonds of the Corporation having maturities froaa date of pur* ohase of not exceeding 6 months ef £gjble"for purolmso and sale in the open market* lAL HGHS U m BASK ACT The Federal Home Loan Bank Act* authorising the establishment of Federal Hone Loan Banks* was approved July 22* 1982* Any building and loan association* saviags and loan associa tion* cooperative bank* homestead association* insurance company* or savings bank* is eligible to become a member or a nonmember borrower of a Federal Home Loan Bank and a Federal Hosse Loan Bank under certain conditions and against certain security may make advances to its mem* bers* as well as* to nozmMnber borrowers* Each Federal Hone Loan Bank is authorised to issue debentures* bonds* or other obligations upon suoh terms and conditions as the Board may approve* The Act also provides for the Issuance of consolidated Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority Eo./o^oj Board of Governors » $ federal H a m . L a m Bank debentures reprwmtttlag the joint and eeveral obligation* of all Federal Home Loan Banks* T h e m debentures cannot bo iseued if any of tho assets of any Federal Home Loan Bask are pledged to secure any debts and are limited in amount to five times the total paid-in capital of all of the Federal Hcase Loan Basks* If no debentures are outstanding* consolidated Federal Heme Lomu Bank bonds constituting the joist and several obligations of all of the Federal Home Loan Banks mmy be issued upon such terms end condition* as the *eard stay prescribe* The Act provides that all obligations of Federal Horn Loan Basks shall plainly state that sueh obligations are not obligations of the limited States and are not guaranteed by the Y n l t e d States ♦ It le b o w proposed to emend section 14(b) of the Federal laser** Act to make bonds, debentures or other obligations issued Haaa LoBa ^ * * « *»■ amended, eligible" for.purchase aiid _saie.in the.open market* ... ............. M 1 L O O Y B*TWfeJSH FIBK CtBi.IT AittlUSTHAJIOl M S w m m * L hc h U J M BAiiE * Y 3 f a * y*mi TO AfA IL lB IUf T OF F A I S A L MSBJOT1 UftJUi. fcXXSTIHG LAW* Bonis of the Federal Farm Mortgage Corporation pursuant to the provisions of section 14(b) of the Federal Reserve Act say be bought and sold by Federal Reserve banka* Correspondingly* bonds of the Hearn Owners Loan Corporation pursuant to the provisions of section 14(b) of the Federal Reserve Act m y be bought and sold by Federal B e s o m * banka* Bonds of the Federal Farm Mortgage Corporation isay be ex~ changed for consolidated Farm Loon bonds leaned under the- Federal Farm Loan Act* Correspondingly* bonds of the H a m Owners Loan Corporation may be used by the Hoste Owners Loan Corporation to acquire Federal Home Loan Bank bonds* debentures or notes of consolidated Federal Emm Loan Bank bonds or debentures* at present within the limit of the 1500*000*000 allocated for that and other purposes and* if the pro posed amendment to section 4(n) of the Hone Owners 'Loan Act is enacted* within the limit of the unused bond authorisation of that Corporation ($1,600*000*000)* Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority Beard of Governor* - 4 Bonds of both tho Fodoral Fara Mortgage Corporation and tho Hono Owners Loan Corporation are fully guaranteed at to principal and interest and pursuant to the proviso added to section 14(b) of the federal Heserve Act by amendment at the tine of the enactment of the Banking Act of 1935 these bonds nay now be bought and sold without regard to maturities* Section 945 of Title 12 I'* S* €• A* provides as followsi "Any Federal Reserve bask may buy and sell farm loan bonds issued under this chapter to the same extent and subject to the same limitations placed upon the lurehase and sale by said banks of State, county, district and municipal bonds under section 14(b) of the Federal Reserve Act of Deessnber 23, 1913 (maturities from date of urchase of not exceeding six months)** Paragraph 3 of section 13(a) of the Federal Reserve Act pro vides as followsc "Any Federal reserve bank stay also buy end sell debentures sad other such obligations issued by a Federal Interned* late Credit Bank or by a National Agricultural Credit Corpora tion, but only to the sane extent as end subject to the sane limitations as those upemrtihieh it aay buy and sell bonds issued under Title I of the federal Farm Loan Aet«* Drawing an analogy the Federal Home Loan Bank Board asserts that inasmteh as Farm Loan bonds sad Intermediate Credit Bank obliga tions may be bought and sold, obligations of the Federal Borne Loan Banks should likewise be Bade eligible for purchase and sale by Federal Reserve banks under section 14(b) of the Federal Reserve Act* The sug gested amendment to aeccnplish this purpose would nske "bonds, deben tures or other obligations Issued under the provisions o:f the Federal H o b o Loan.Act, as s h a d e d , * eligible for purohae* without reference to maturity* It may be pointed out, however, that since the proposed amend ment would permit the purchase of Federal Hone Loan Bank obligations without reference to the maturity thereof, whereas, the purchase of Farm Loan bonds and Intermediate Credit Bank obligations is limited to obligations with maturities not exceeding six months frcei the date of purchase, the eligibility of Federal Moste Loan Bank obligations for pur chase by Federal Reserve banks would be broader than that of Farm Loan bonds and Intermediate Credit Bank obligations* Hespeetfully submitted, ( j J e n f ' J* P* Drelhelbis, Assistant General Counsel* Jriyebb Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority £ , o . l o $ o f / ■/ Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D ■ Authority Form F. R. 181 BOARD OF GOVERNORS OF THE FEDERAL. RESERVE S Y S T E M 7, Office Correspondence ms el, To From Mr* Haokley. Law Clerk* Subject:. __ Date _ April._2Q^JL9J3Z*__ M eaning of term "open market" ero 16—852 An exhaustive search of the authorities has been made for the purpose of determining what meaning, if any, the courts have given to the term "open market"• No case has been found which expressly defines that term; but the following cases clearly indicate by associated words of description, certain definite characteristics of an open markets (i) An open market is a market in which the price of an article, generally"deal¥Tn7~~is fixed by lawful trade and competition* Thus, in Love joy v* Michels, 88 Mich. 15, 49 N. W* 901 (1891), the plaintiff agreed to sell knives to the defend ant without fixing a definite price. Upon breach of the con tract on the part of the defendant, plaintiff brought suit and recovered damages determined by the price which had been fixed by the Knife Makers* Association, of which the plaintiff was a member. Upon appeal by the defendant, it was held that the Knife Makers* Association was a combination in restraint of trade; that the price fixed by such Association could not be regarded as "fair market value"; and that therefore other evidence should have been considered in determining the amount of damages* Ac cordingly, the judgment was reversed. In this connection the court saids u* * $/The market price of an article manu factured by a number of different persons is a price fixed by buyer and seller in an open market, in the usual and ordinary course of lawful trade and competition*,/* * * Associations of this char acter (combinatlons in restraint of trade) give the buyer no voice, and close the market against competition# * * *" (49 N. W* at 903) In Wallingford v* Yfestern Union Tel* Co*, 53 S. C. 410, 31 S* E. 274, 276 (1898), plaintiff sued the defendant for fail ure to deliver a telegram containing an offer for a carload of mules alleging that as the result of such failure, he was forced to keep them for considerable time and to sell them for a sum which was less than the offer. It was held that the plaintiff’ s loss was the direct result of the defendants negligence and that the complaint therefore stated a cause of action* In this Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 2- connection, the court declared that the measure of damages should be the difference between the market value of the mules on the seme terms at the time the message should have been de livered and the price offered in case such market value was less than the price offered# With respect to "market value”, the court said: »•* * * By fmarket value1 is meant the price that could have been obtained in open market, on fair competition, on similar terras, * * *#" In Carey Lithograph Co# v# Magazine and Book Co#, 70 Misc. 541, 127 N. Y. Supp. 300, 302 (I91l),~ the'plaintiff“ had agreed to submit sketches for advertising lithographs to the defendant and upon breach of the contract by the defendant, plaintiff brought suit alleging that defendant had given the contract to another person notwithstanding the fact that defend ant had promised plaintiff to accept his lithographs at the ’ ’ market price”* Defendant contended that the sketches had been submitted on a ”competitive bid”basis and that plaintiff*s bid was higher than that of the person to whom the contract had been given. It was held that the parties contemplated a price fixed by open competition and accordingly, judgment was rendered for the defendant# In this connection, the court quoted from the Lovejoy case, supra,.and then went on to say: "■Where the subject of the price is an j article commonly dealt in, this price will be fixed in a more or less definite sum by the con- ; sensus of all the buyers and sellers dealing in the article. The term ’ market* assumes the ex istence of trade, and the price is fixed in trade by the highest bidder and the lowest offerer.” In Peoria Gas Light & Coke Co# v. Peoria Terminal Railway Co., 146 111# 37£ N # 1. 550 (1693), the piarntiff l*aTlroad brought eminent domain proceedings to condemn for its right of way a portion of defendants property# Over the defendants ob jection, the plaintiff was permitted to prove the price paid to other owners along the same right of way in determining the amount of compensation. Upon appeal by the defendant, the case was re versed for other reasons; but with respect to the manner of com puting compensation it was held that the evidence in question had been properly admitted on the theory that such evidence tended to show the ’ ’ fair market value”of the property. In this connec tion, the court said: Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority -3- .A » * * ♦/It cannot be doubted that such sales* -when made in the free and open market, where a fair oppor tunity for competition has existed, become material and often very important factors in determing the value of the particular property in question#/* * *n 2 (2) Except for the influence of such competition, an "open market” is otherwise free; and buyers and sellers are subject to no compulsion# In Huskie v# Griffin, 75 H. H# 345, 74 Atl. 595, 597 (1909), the plaintiff alleged that the defendant had maliciously caused him to be discharged from his employment# The trial court nonsuited the plaintiff and he appealed. It was held that the nonsuit was Improper and that the trial court had erred in not submitting to the jury evidence of fraud, malicious injury and unreasonable interference with the plaintiff’ s right to an open market in the procurement of employment. In the latter connection, the court stated* «* * * Prima facie a man can demand an open market; and, since this is so, one who interferes with this free market must justify his acts or re spond in demages.H In Me Garry v. Superior Portland Cement Co», 163 Pac. 928 (Wash# 1917), the plaintiff had bought cement from the de fendant with an agreement that the plaintiff would receive a re bate in the event of a drop in the market prioe. Subsequently, the defendant sold cement to a third person at a lower price; and in a suit brought by the plaintiff, it was held that he was entitled to the rebate provided for in the contract. In discuss ing the question whether there had been a drop in the market price, the court said: «* * * *niarket price* implies prioe or value in an open market, and that buying and selling have some influence upon the price# If the market is not open but subject to control by $ X L oomfixing' a price either by ex press ‘ agreemeni, or by a common, though unexpressed, understanding, how can it be said that there is a pri09?'/ \ Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E^/O^Oj —4— (3) Where the article sold is corporate stock, certain cases ind icat e~~th at to const it ute~~an "open market^ the stock must be listed on an exchange* Spiegel, 202 N. Y* S* 650 (1923), the plain tiff* s assignors and the defendant had entered into a copartner ship agreement to form and promote a corporation. Defendant vi olated the terns of the contract in the methods followed by him in organizing the corporation. Subsequently, he became bankrupt and the plaintiff sought an accounting to recover his proportion ate value of the stock issued by the corporation. The referee in bankruptcy rendered a report fixing the value of such stock and his report was ratified by the court. In his report the ref eree explained that he had determined the value from a considera tion of the business of the corporation and the value of its as sets rather than from the price at which the stock sold* In this connection, the referee stated the value of the stock could not be ascertained from market quotations since the stock was very closely held and since n* * * It has never been listed on any exchange* There has been apparently no *open market* for the purchase and sale of the same*" j I In Joseph v. Sulzberger, 136 App. Div. 499, 121 N.Y. Supp. 73 (1910),"the defendant had agreed to buy certain corpor ate stock for the joint account of the plaintiff, the defendant, and others. Upon breach of the contract, plaintiff brought suit and recovered substantial damages which were determined from a consideration of the "book value" of the stock in question* Upon appeal by the defendant, it was held that the plaintiff had failed to prove the contract alleged in his complaint and accordingly, the judgment was reversed. However, the court felt that since a retrial would be necessary, it was proper for it to consider the measure of damages* In this connection, therefore, the court ex pressed the opinion that the method by which the value of the stock had been determined in the trial court was improper; that ordinarily damages for breach of contract to sell stock is the difference between the contract price and the market price; but that where there was no market price, the value of the stock should be determined by the price for which the stock could have been bought from a third person. In this connection, the court pointed out: "There was no open market for the stock of the company in this case, in the sense that it was dealt in or quoted upon any stock exchange; * i^mmww9^am«BWpieir’ Reproduced from the Unclassified I Declassified Holdings of the National Archives D E C L A S S IF IE D Authority •5» but that the plaintiff could have bought this stock from a member of the Schwarzchild family and that that price fixed and limited the damages suffered by reason of the defend a n t s refusal to deliver. Respectfully, Howard H. Hackley, Law Clerk# ‘"."'JBWB B W IW M W — Reproduced from the Unclassified I Declassified Holdings of the National Archives P i D E C L A S S IF IE D Authority E & . i o $ o } b: Mr. Smead. FROM: J. M. Daiger Reproduced from the Unclassified / Declassified Holdings of the National Archives D E C L A S S IF IE D A u th o rity £ , C , l 0 5 0 f . .*7 ••• April 17, 1937 Mr. Eccles ^Open~Market Operations Proposed J. M. Daiger by Federal Home Loan Bank Board Mr. Preston Delano, Governor of the Federal Home Loan Bank System, wishes to obtain an expression of your views re garding two provisions of a bill which the Federal Home Loan Bank Board has submitted to the Acting Director of the Budget "for consideration and for presentation to the President and for advice as to the position of the President in reference to the same." As both the provisions to which Mr. Delano refers involve matters of open-market operation, and as both seem to me to carry implications that are questionable from the point of view of credit and fiscal policy, I am giving to you herewith the substance of the two provisions, a summary of the arguments made in support of them, and my own comments and suggestions in regard to them. The provisions take the form of an amendment to paragraph (b) of section 14 of the Federal Reserve Act and an amendment to subsection (n) of section 4 of the Home Owners* Loan Act. Tho present and proposed forms of these measures are appended to this memorandum. i (Appendix A) Proposed Amendment to Federal Reserve Act \ 4 i | Paragraph (b) of section 14 of the Federal Reserve Act would be amended to include bonds, debentures, and other obligations of the Federal Home Loan banks among tho securities which Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E o j Q ^ O j the Federal Reserve banks are authorized to buy and sell. The au thorisation would be permissive only and would apply only to openmarket transactions, but there would be no limitation as to matur ities. Proposed Amendment to Home Owners1 Loan Act Subsection (n) of section 4 of the Home Owners1 Loan Act would be amended to the following effect: 1. The $300,000,000 previously made available to tho Home Owners1 Loan Corporation for (a) the purchase of Fed eral Home Loan Bank bonds, debentures, or notes, (b) the purchase of shares, certificates of deposit, or investment certificates of member or insured savings-and-loan institu tions, and (c) the making of deposits in such institutions, would henceforth be available exclusively for the purchase of shares, certificates of deposit, or investment certificates. 2. The unused bond authorization of the Home Owners1 Loan Corporation (approximately $1,500,000,000) would be made available to the Corporation for the purchase of Federal Home Loan Bank obligations. Tho sale of HOLC bonds for this pur pose would be subject to the approval of the Secretary of the Treasury, but the funds subsequently realized by the HOLC from the sale or payment of Federal Home Loan Bank obligations would be available for reinvestment in similar support of the Federal Home Loan Bank System. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority £ , Q r( 0 9 0 j -3- Relevant Provisions of the Reilly Bill In connection with the foregoing proposals of the Federal Home Loan Bank Board, relevant provisions of the Reilly Bill (H.R. 3420) should also be noted. This bill was introduced by Congressman Reilly of Wisconsin at the request of the United States Building and Loan League. Mr. Morton Bodfish, executive vice-pres- ident of the League, informed me that he drafted the bill after consultation with officials of the IIOLC and indicated that they regarded its provisions favorably. The provisions of the Reilly Bill relating to Federal Reserve matters are, briefly, 1. as follows: Section 13 of the Federal Reserve Act would be amended to authorize the Federal Reserve brinks (a) to buy debentures or bonds issued by the Federal Home Loan banks; (b) to make loons to Federal Homo Loan banks "upon the security of notes or notes secured by mortgage or other real-estate lien;11 and (c) to authorize the Federal Reserve banks to ’ ’ rediscount such notes and notes secured by mort gage or other lien on real estate with the endorsement of such Federal home loan banks.” The Board of Governors would be authorized to prescribe rules and regulations "not incon sistent herewith.” 2. Section 14 of the Federal Reserve Act would be amended to authorize the Federal Reserve b;mks to buy and sell bonds, debentures, or other obligations of the Federal Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority -4 - Home Loan banks. No limitation is made as to maturities and, unlike the draft prepared by the Federal Home Loan Bank Board, transactions are not limited to the open market. The full text of the foregoing provisions, which appear as sections 11 and 12 of the Reilly Bill, are appended to this memorandum (Appendix B). to me as follows: Apropos of them, Mr. Bodfish has written "I doubt if there will bo any particular objec tion to any of the sections except 11 and 12, and I really believe it would be both fair and wise to give the same privileges to the twelve Federal Home Loan Banks as are now enjoyed by the Federal Intermediate Credit Banks." General Argument for Home Loan Bank Board Proposals Mr. Delano is of the opinion that a concertod effort will be made during the present session of Congress to obtain further legislation to strengthen the Federal Home Loan Bank System. This effort, he says, will have behind it "a pretty damned powerful lobby.” On the one hand, there is the proposal of the United States Building and Loan League to give to the Federal Home Loan banks, and thus indirectly to their 3,800 member institutions, borrowing and rediscount privileges at the Federal Reserve banks that the law denies to Federal Reserve member banks. As you kno?/* some of the high officials of the Federal Home Loan Bank System have themselves been disposed to urge that the Federal Home loon banks be given power of note issue comparable to that of the the Federal Reserve Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E t f J O G O j -5 - banks, or else that the Federal Home Loan banks be admitted to membership in the Federal Reserve System in order that their mem ber institutions might thereby have indirect access to the Federal Reserve banks. These officials have contended, as have the build- ing-and-loan people, that 11some wa^H must be found to assure the Federal Home Loan banks of currency when they need it to meet the demands on their member institutions. The provisions of the Reilly Bill that would open the re serve banks to the building and loan associations reflect, then, something more than the views of Mr. Bodfish and the objectives of the lobby that Mr. Delano speaks of. They reflect what was until comparatively recent months at least, even if it is so no longer, a substantial body of opinion within the organization of the Fed eral Home Loan Bank Board. Mr. Delano apparently regards these various ideas as ex treme and impracticable, but also apparently thinks that they will have a good deal of support in Congress. On the other hand, avail able as an alternative, are the provisions of the bill prepared for the Federal Home Loan Bank Board by its general counsel, Mr. Horace Russell. Mr. Delano holds that the two open-market provisions, as I have called them, in Mr. Russell*s draft, are far more moderate than the Federal Reserve provisions in Mr. Bodfish1s draft; that they avoid tho controversial aspects of the latter; and that their sponsorship by the Administration, with the assent of tho Secretary Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 6- of the Treasury and the Board of Governors of the Federal Reserve System, would effectually preclude the adoption of measures which the Treasury and the Reserve System would find objectionable, but which, in the absence of an Administration bill, Congress would be under great pressure to enact in the interest of the Federal Horae Loan Bank System. Arguments in Behalf of "Psychological Amendments” Speaking quite frankly, Mr. Delano says his Board feels that the Federal Home Loan Bank System "needs dressing up with a few psychological amendments.11 The authority for the Federal Re serve banks to buy Federal Home Loan bank obligations in the open market is sought as a sort of “ window dressing" to help the sale of those obligations. The authorization being purely permissive, it might never be availed ox by the Open Market Committee of the Federal Reserve System; nevertheless its inclusion in the Federal Reserve Act would be "a good talking point" in respect of Federal Home Loan Bank bonds and debentures* So with the proposed authority for the HOLC to sell up to $1,500,000,000 more of bonds. The availability of such a revolv ing fund for use in supporting the market for Federal Home Loan Bank securities would of course be a very strong talking point. The authorization, however, would be permissive only, and the sale of HOLC bonds would in any case be subject to the approval of the Secretary of the Treasury. •arnt Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 10 90 1 -7- Mr. Delano says that his Board wishes to make a special effort to round out the Federal Home Loan Bank System by making it representative of the life insurance companies and mutual sav ings banks as well as of the building and loan associations* In this effort, the Board believes, it needs some such strong induce ment to membership as the potential reserve of $1,500,000,000 would represent. Tho development of "a real home-mortgage system" is seen, therefore, as a very compelling reason why the unused bond authorization of the H0LC should be made available in the manner which the Board has proposed. The further point is made that, if the present unused bond authorization of the H0LC were thus "frozen" for the purpose of sup porting the Federal Home Loan Bank System, there would be an end to various efforts to have tho $1,500,000,000 made available for 6ther purposes, chief among them being a resumption of direct lending to distressed home owners. Arguments Relating to Farm Credit Administration Mr. Delano and Mr. Russell in discussing the proposals of the Federal Home Loan Bank Board, and Mr. Bodfish in discussing the proposals of the United States Building and Loan League, have each drawn certain analogies between privileges already enjoyed by the Farm Credit Administration, or by agencies under itt> supervision, and the privileges now sought in behalf of the Federal Home Loan Bank System. Thus Mr. Delano points out that the Federal Reserve Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 8 - banks have authority to purchase obligations of the Federal Farm Mortgage Corporation, the Federal Land banks, and the Federal Intermediate Credit banks. Noting that this authorization is limited to obligations having maturities of not more than s’ ix months from date of purohase, he suggests that at least a sim ilar authorization with respect to Federal Home Loan Bank secur ities would be unobjectionable, even if the Board of Governors should not look favorably on the proposal to authorize the pur chase of these securities by the reserve banks "without regard to maturities," Of the proposed amendment to make tho present unused bor rowing power of the HOLC available for investment in Federal Home Loan Bank obligations, Mr. Russell stater- in the covering memoran dum to the Acting Director of the Budget: "At present, tho Federal Farm Mortgage Corporation can supply funds to the farm credit cor porations, such as the Federal Land Bonks, by purchase of their bonds, and this amendment is designed to enable the Federal Home Loan Bank Board to employ the remaining resources of the Home Owners* Loan Corporation in the support of the Federal Home Loan Bank System, if necessary." In this same connection Mr. Delano observes that the Fed eral Farm Mortgage Corporation has a bond authorisation of $2,000,000,000 available to support the market for Federal Land Bank bonds, and that under this authorization tho Corporation has purchased some $700,000?000 o* such bonds. He cites this as evidence th.it the proposal to mr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - make $1,500,000,000 9 - available to the Home Owners1 Loan Corporation for a similar purpose has ample precedent and should meet with no valid objection. Objections to the General Argument The first thing to be said of all these arguments is that the reasoning behind them is very nruch oversimplified and that they proceed for the most part upon mistaken assumptions. To begin with, the general argument for the two open-market proposals of the Federal Home Loan Bank Board is an argument for political expediency on the part of the Administration in combatting what is purported to be a formidable building-and-loan lobby. The assumption is that a pressure group exists to which important con cessions must be made; in other words, that the Administration is under the practical necessity of choosing between a radical change in the composition of the Federal Reserve System on the one hand and, on the other, the creation of a huge potential reserve fund, based upon Federal credit, for the Federal Home Loan Bank System. Since you and I have had virtually a parallel experience over the past four years in dealing with the so-called buildingand-loan lobby, I think you will agree that the lobby in question consists in the main of one very resourceful young man, who is not, however, as our experience has shown, altogether invincible. crux of the matter in dealing with the lobby, therefore, is a The matter of will and intention on the part of the Administration and not a i Reproduced from the Unclassified I Declassified Holdings of the National Archives i i ,I,,, ........ DECLASSIFIED^ Authority £ f r f O G O j - 10- political necessity of surrender or compromise. The great difficulty, now as in the past, is to differenti ate between pressure from without and pressure from within; to dif ferentiate, that is, between what the biiilding-and-loan lobby is after and what the governmental agencies directly concerned are after; to differentiate between private maneuvering for advantage or expansion and official maneuvering for advantage or expansion. As you have put it more than once: "The trouble is you never know where you stand with these fellows; you just have to watch them all the time.’ 1 7/hat can be said with certainty is that, regardless of the origin and authorship of a given proposal or set of proposals, the building-and-loan group and the HOLC group are alike habitually building-and-loan minded rather than financial minded. They can usually be found aiming at pretty much the same objectives, urging pretty much the same arguments, and in any event seeking special favors for building and loan associations. 1935, 1954, 1955, and 1956. This was tho case in It is again plainly the case in 1957. The present proposals of the United States Building and Loan League and of the Federal Home Loan Bank Board have a common origin in the natural resentment of the building-and-loan people toward the enlarged real-estate-loan and eligibility provisions of the Banking Act of 1955. Ytihen that measure was pending in Congress, the building-and-loan people were lobbying against it. Their con tention was that real-estate loans had no place at all in demanddeposit institutions, and that the proposals which you had put sar Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 11- forward would simply make a bad situation worse. They argued that to authorize national banks to use a larger proportion of their assets for real-estate loans, and to make long-term amortized loans on real estate, was to encroach on the building-and-loan field and to improve the competitive position of national banks in relation to building and loan associations. They argued further, with forcible logic, that the enlarged eligibility provisions gave to real-estate paper held by Federal Reserve member banks an excep tional status which no other real-estate paper possessed, and that this preference given by the Government to the member banks placed the building and loan associations at an extreme competitive disad vantage. The building-and-loan opposition was not pressed in the open, however, because the personal and political factors ?/ere in your favor right where Mr. Bodfish ordinarily found them in his favor. He was well advised, as I informed you at the time, not to embarrass friends of his who were committed to your support (or at any rate not in a position to oppose you) and not to embarrass himself by a defeat from which they could not then save him. Partly because of these considerations, and partly because he was unable to get the mutual savings bnnks and the life insurance companies to join the building and loan associations in an attack before the Congressional committees, Mr. Bodfish withdrew his request for a hearing of himself and other building-and-loan witnesses against •amr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - your proposals. 12- But the Banking Act of 1935 has been gall and wormwood in the Federal Home Loan Bank System ever since. It has been only a question of time, therefore, when the United States Building and Loan League and the Federal Horae Loan Bank Board would come forward with a plan to "compensate" the building and loan associations for the liquidity presumably givon by the Banking Act of 1935 to real-estate paper held by member banks You and I have been hearing Mr. Fahey, Mr. Delano, Mr. Russell, and Mr. Bodfish talk about this in one form or another for the past eighteen months. At first it appeared that the building~and~loan group and the HOLC group would make a concerted effort to obtain borrowing and discount privileges at the Federal Reserve banks for the Federal Home Loan banks. Tho circumstances under which the Reilly Bill subsequently originated tended to confirm that earlier impression. More recently, however, the HOLC open-market or central reserve plan has been proposed as an alternative. The important point to be noted here is that the essence of the two sets of proposals is the same— namely, that an additional source of borrowing and discount must be provided for the Federal Home Loan banks, so that they in turn may be assured of funds to meet the demands on their institutions. The essential question to be determined, then, is not whether the building-and-loan lobby can be conciliated in a manner unobjectionable to the Treasury and the Federal Reserve System, but whether the home-mortgage institu tional situation calls for the additional borrowing and discount "PSV Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E . O . I O S O j -15facilities that the bill drafted by Mr. Bodfish would obtain through the Federal Reserve banks rjid that the bill drafted by Mr. Russell would obtain through the sale of Government-guaranteed bonds in the open market. In short, I think that Mr. Delano is unduly alarmed over the building-and-loan lobby and quite unnecessarily concerned about the threat of the Reilly Bill to the Federal Reserve System. The Reilly bill was threatening only insofar as it may have em bodied the aims of both the building-and-loan people and the HOLC people, whose combined political strength is obviously very great. Once the alternative plan of the Federal Home Loan Bank Board were devised, however, the Federal Reserve provisions of the Reilly Bill were effectually disposed of. For Mr. Bodfish is sensible enough to have no pride of authorship. He would be the first to concede that the availability in the HOLC of a $1,500,000,000 open-market or central-reserve fund is a far better proposition for the building and loan associations than anything he had pro posed in the Reilly Bill. Hence, if there is to be during the present session of Congress, as Mr. Delano suggests, a concerted effort to "strengthen the Home Loan Bank System,” it will be because a governmental agency is pressing for a larger measure of new assistance to building and loan associations than their own trade body has asked for. "sr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority -14Qb.iectionsto the "Window-Dressing” Arguments From the point of view of Federal Reserve policy, there could scarcely be any objection to a proposal to make Federal Home Loan Bank obligations of short maturity available for open-market operations of the Federal Reserve banks. Such a proposal would be wholly in accord with a variety of provisions in existing law. But this is not the proposal submitted by the Federal Home Loan Bank Board to the Acting Director of the Budget. The proposal as submitted is "without regard to maturities.11 The principal objection to it, therefore, is that it singles out one class of non-governmental paper from all others and puts it into a special category now reserved to direct and guaranteed obligations of the Government. Manifestly, a departure of this kind could not, as a matter of legislative or financial policy, be confined to the bonds of the Federal Home Loan banksj for these bonds possess no peculiar elements that set them above all other corporate issues which, like these, carry no governmental, guarantee. The proposal is not objectionable from the broad point of view of central-banking operation. Theoretically, it might well be argued, tho monetary authorities ought to be free to engage .in what ever open-market operations would in their judgment give effect to the credit policies for which their operations were projected. It might even be argued that they ought to be free to ease the credit position of the Federal Home Loan banks if such an operation appeared ■aar Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E f r / d G O j -15- to be in the public interest and compatible with the general credit conditions existing at the time. Such an argument, however, would be susceptible of indefinite extension to a great variety of spe cial situations in the capital markets for which the Federal Re serve Act makes no provision. The suggestion that the proposed amendment to the Fed eral Reserve Act would confer merely a permissive power, and hence need not be exercised by the Federal Reserve authorities if they were disposed to disregard it, is not one that could be counte nanced with propriety simply to help the sale of Federal Home Loan Bank securities. That would be making a show window of the Federal Reserve Act, besides being altogether at variance with the ethical standards contemplated in the Securities Exchange Act. Furthermore, no exaggerated imagination is required to see that, if the Board of Governors now formally or tacitly assents to the enactment of the amendment as proposed, the Open Market Committee would in all probability at some time in the future be under pressure to act in accordance with it, and would be subjected to questioning and crit icism if it failed to do so. The suggestion that the authority to create a huge revolv ing fund for support of the Home Loan Bank System would likewise be permissive only, and hence would not necessarily be availed of, is what William James, who was the leading American psychologist of his day, would have called ‘ ’ monstrously simplified." It ignores Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority F . f r f O G o j . -16- the plain evidence of experience with the pressure groups that have in recent years obtained such a large measure of governmental assistance for the building and loan associations. There may be arguments which can be advanced to demonstrate that an additional $1,500,000,000 of Federal credit should be made available in sup port of the Federal Home Loan Bank System, but the idea that the present proposal is moderate, or tentative, or more psychological tiian real, is far too simple to be considered seriously. In these circumstances, it is hardly necessary to argue the point that the main body of mutual savings banks and life :in surance companies would not respond to mere psychological treatment. The great majority of these institutions have thus far resisted all efforts to bring them into tho Home Loan Bank System, :ind the rea sons for this are well kno-vn. The System was designed from the outset with building and loan associations primarily in view; it has from the outset been dominated by the building-and-loan group. This is no doubt attributable in large part to the original apathy of the mutual savings banka and life insurance companies— to their superior feeling of self-sufficiency— which left the building-andloan group unopposed in shaping the pattern of the System and the terms of membership in it to their own advantage as against the other groups. The fact nevertheless remains indisputable that these two large groups are for the most part now hostile to the System, first Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority -17- because they regard it as a vested interest of the building and loan associations, and second because they regard many of its ac tivities as competitive rather than cooperative with their own in terests. Moreover— and this is probably the principal reason for their abstention from membership— the mutual savings banks and life insurance companies are not primarily home-mortgage institutions, so that membership could only afford them in any event a relatively small advantage. It may therefore reasonably be asked whether the plan pro posed by the Federal Home Loan Bank Board is not too high a price for the Federal Government to offer as an inducement to these groups to do what not even the experience of the recent depression could in duce them to do. The availability of the proposed revolving fund would unques tionably make it possible for the Home Owners* Loan Corporation to support the market for Federal Rome Loan Bank bonds in a period of general credit stringency. It would thus be able to supply funds to the member institutions of the Federal Home Loan Bank System. In such a period, however, the fiscal and monetary authorities of the Government would necessarily have as a principal concern the market for Treasury securities, and the injection into the market at that time of additional guaranteed obligations of the Government to re lieve pressure on the obligations' of the Home Loan banks would be a complicating rather than on ameliorating factor. The practical problem, then, would be one of emergency lending and not one of Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E . d J O ^ O f -1 8 - open-market operation• At other times no such huge fund as that proposed would be required for the purpose of supporting the Home Loan bond market. The problem would be only a temporary one, such as the maintenance of the market against offerings that might interfere with the sale of a new issue. The current Federal Home Loan Bank Review shows the outstanding advances of the Home Loan banks as #141,205,000 and the total borrowing capacity as $973,000,000. The conditions under which such a sum as $1,500,000,000 would have to be available in order to support the Home Loan bond market are therefore extremely problematical and remote. In fact, since more than half of the $300,000,000 already made available for bond purchases and share subscriptions still reaalas unused, there would seem to be no dif ficulty in giving the Home Loan bond market whatever support it may require for some time to come. On the other hand, the present would seem to be a propitious time to remove the pressure against cancelling the unused portion of the $4,750,000,000 bond authorization of the HOLD. Where considera tions of psychology are involved, the affirmative action of the Pres ident in asking for the cancellation of tho $1,500,000,000, and the affirmative action of Congress in effecting the cancellation, would certainly have a more beneficial effect on the budgetary situation and on the market for Federal securities than a move at this time to ’ ’ freeze" that amount of Federal credit for the future benefit of Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority -1 9 - the Federal Home Loan Bank System. Objections to Arguments from Analogy with FCA There is a fundamental difference between the Federal Land Bank System and the Federal Home Loan Bank System that is almost invariably left out of account when persons speak of thorn as if the latter were to the home-mortgage field what the forraor is to the farm-mortgage field. The difference is inherent in the nature of their respective member agencies. The Federal Land Bank System is a system of borrowers1 cooperatives, designed to get cheap mortgage money for farmers. The Federal Home Loan Bank System is a system of savors1 coopera tives, seeking a relatively high return on small savings. The Federal Land'banks operate as mortgagees, taking the farm-borrower1s mortgage, obtaining funds in tho open market, and basing their lend ing rate on the market rate. The Fodoral Home Loan banks do not operate as mortgagees taking the home-borrower’ s mortgage, but as lenders to mortgagees whose main source of funds is small local savings. Through the Federal Home Loan banks these mortgagees, more than 99 per cent of which arc building and loan associations, have access to the open market as a secondary and indirect source of funds. To the extent that the member associations of the Home Loan banks do supplement their main source of funds by borrowing, they are pyramiding on small savings and creating a class of claims mr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ] £ f y f O G O j - prior to that of the savers. 20- There is nothing parallel or even remotely comparable to this in the Federal Land Bank System. The operations of the building and loan associations are now entering a phase that is entirely new in the brief history of the Federal Home Loan Bank System. for the extension of new credit. It is a phase of borrowing This is an operation apart from and in addition to the purchase of building-and-loan shares by the Federal Government, though these shares, together with those of the small savers, form the base of tho pyramid. The assets of building and loan associations as a whole are apparently still de clining, the ratio of Government capital to private capital in the member associations is apparently still increasing, and the expan sion of building-and-loan lending through borrowing at the Federal Home Loan banks is now apparently a settled policy, to be pursued because of the revival of real-estate and building activity at a * rate faster than the active lending associations can attract local savings. A serious credit problem is present here, involving con flicting theories that were dormant during the deflation and de pression years when the Federal Home Loan Bank System came into being. The problem is this; Is the functional relationship of the Home Loan banks to their member associations (a) that of supplying long-term funds for new credit or (b) that of adjusting temporary fluctuations between savings and loans and meeting the demands of Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority -2 1 - shareholders in periods of emergency? If the relationship is the former, then in the pyramiding on savings the borrowing institu tions can of course increase their earnings beyond the possibil ities of their share capital alone, but in the process of getting more earnings they will diminish and eventually exhaust the borrow ing power that is presumably to serve their shareholders in periods of emergency. No such possible conflict of functional relationships is inherent in the Federal Land Bank System. With respect to the analogies drawn by Mr. Delano, Mr. Bussell, and Mr. Bodfish, there fore, the question most pertinently suggested to one who thinks in banking and financial terms is whether pyramiding on the asse-ts of small savers should now be encouraged, and in practical effect ul timately underwritten, by making the Federal credit available for purchase of $1,500,000,000 of Federal Ilomu Loan Bank bonds. There is no real analogy, as Mr. Delano evidently has boon told there is, between putting the HOLC in a position to support the market for Home Loan Bank bonds and the acquisition by the Fed eral Farm Mortgage Corporation of $700,000,000 of Land Bank bonds. Whoever advised Mr. Delano that these bonds were bought in supporting the market was wholly in error. Tho bonds in question represent dis bursements made in the form of Federal Farm Mortgage Corporation bonds during the period of emergency lending, just as the mortgages held by the Horae Owners1 Loan Corporation represent disbursements Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority - 22 - made In the form of HOLC bonds daring the same period. The analogy with the Federal Farm Mortgage Corporation is stated in tho memorandum to the Acting Director of the Budget as if it were self-explanatory. As a matter of fact, it in no way indicates what the Federal Home Loan Bank Board has in mind with respect to the proposed revolving fund, except that it would be available "in the support of the Federal Home Loan Bank System, if necsssar^.11 Apparently there is a great reluct mice to say in plain words that the Board proposes (a) to make the HOLC permanent,-(h) to make up to &1,500,000,000 av.xilable to it in addition to the unused portion of the $300,000,000 previously made available for bond and share purchases, and (c) to have the fund operate as a super-reserve or central-discount fund Tor the twelve Federal Home Loan banks. Yet the bill submitted in draft form seems clearly open to such in interpretation. Some such course as this might be the practicable way to resolve the credit anomaly presented by the Federal Home Loan Bank System if the long-term expansion function were done away with, or if the twelve banks were to be authorized to buy mortgages without recourse instead of making advances against them. Either of these changes would remedy the conflict of functional relationships in the existing pattern of the System. Sooner or later tho Government will have to face the fact that the System for which the support of additional Federal credit Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority -2 5 - is proposed is a hybrid system. It has no counterpart in the Fed eral Reserve or Federal Land Bank pattern, nor in the buildingsociety pattern of Great Britain, nor in the mortgagc-bank pattern of Continental Europe or South America. It is not a central-banking system with the power of note issue; it is not a system of credit cooperatives formed to effect economies for borrowers; it is not a system limited to the investment of savings funds; it is not a mort gage-banking system making or buying mortgage loans and selling bonds against them. It is apparently designed to be a building-and-loan reserve system for bad times and a building-and-loan expansion system for good times. The trouble with this is that tho expansion in good times is accomplished by a method that is incompatible with the fiduciary function of a savings system and that leaves the reserve function in doubt for periods of credit stringency. It is the same as if mutual savings banks, life insurance companies, commercial banks, and trust companies borrowed against their assets, and thus created a preferred class of creditors, solely for the purpose of enlarging their mort gage portfolios. If it were then proposed that the Federal Govern ment make its credit available for the encouragement and support of such pyramiding operations on the part of any one or all of these other groups of institutions, the proposal would be rejected in short order as plainly contrary to good banking and credit policy. Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority -2 4 - Would you not say that the present proposal ought to be rejected for the same reason in the case of building and loan associations? N.B.— See next page for summary of loans and investments made by Federal Govern ment to assist building and loan associa tions. «®r Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority -25LOANS AND INVESTMENTS BY FEDERAL GOVERNMENT IN BUILDING AND LOAN ACTIVITIES Bonds of Home Owners1 Loan Corporation as of June 12, 1956, given in exchange for mortgages in distress hold by building arid loan associations. $ 875,300,000 Paid subscription from Federal funds as of January 1937 for stock of the Federal Home Loan Banks - 99,7% of whose member institutions are building and loan associations. 119,972,500 Loaned by the Reconstruction Finance Corporation as of November 30, 1936, to building find loan associa tions (including receivers of building and loan associations). 116,559,180 Paid subscription by the United States Treasury and Hone Owners' Loan Corporation as of January 13, 1937, for shares of the Federal Savings and Loan Associations. 177,084,200 Paid subscription by the Home Owners’Loan Corporation as of January 13, 1937, for shares of State build ing and loan associations. 22,094,900 Paid subscription by Home Owners1 Loan Corporation as of November 30, 1936, for shares of the Federal Savings and Loan Insurance Corporation - only building and loan associations are eligible for this insurance protection. Total 100.000.000 $1,411,010,780 Amount repaid as of November 30, 1936, by building and loan associations to Reconstruction Finance Corpora tion. 113.845.175 Net amount of funds loaned or invested by the Federal Government in building and loan associations and in instrumentalities of the United States serving principally building and loan associations. $1,297,165,605 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority APPENDIX A Present Form of Paragraph (b), Section 14, Federal Reserve Act Every Federal reserve bank shall have power: (b) To buy and sell, at home or abroad, bonds and notes of the United States, bonds of the Federal Farm Mortgage Corporation having maturities from date of purchase of not exceeding six months, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners’Loan Act of 1953, as amended, and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System: Provided, That any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market; Proposed Form of Paragraph (b). Section 14. Federal Reserve Act Section 22. Paragraph (b) of Section 14 of the Federal Re serve Act, as amended, is further amended to read as follows: "(b) To buy and sell, at home or abroad, bonds and notes of the United States, bonds of the Federal Farm Mortgage Corporation having maturities from date of purchase of not exceeding six months, bonds, debentures or other obligations issued under the provisions of vthe Federal Home Loan Bank Act, as amended, bonds issued under the provisions of subsection (c) of section 4 of Home Owners’Loan Act of 1933, as amended, having maturities from date of purchase of not ex ceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date -of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, includ ing irrigation, drainage and reclamation districts, such purchases to be made in accordance with rules and regulations prescribed by the Federal Reserve Board. Provided, that any bonds, notes, or other obli gations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest, and obligations issued pursuant to the provisions of the Federal Home Loan Bank Act, as amended, may be bought and sold without regard to maturities but only in the open market." Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority /O ^ O j ~2~ Present Form of Subsection (n), Section 4, Homo Owners* Loan Act (n) The Corporation is authorised to purchase Federal Homo Loan Bank bonds, debentures, or notes, or consolidated Federal Home Loan Bank bonds or debentures. The Corporation is also authorized to purchase full-paid-income shares to Federal Savings and Loan Associations after the funds made available to the Secretary of the Treasury for the purchase of such shares have been exhausted. Such purchases of shares shall be on the same terms and conditions as have been heretofore authorized by law for the purchase of such shares by the Secretary of the Treasury: Provided, That tho total amount of such shares in any one association hold by the Secretary of the Treasury and the Corporation shall not exceed the total amount of such shares heretofore authorized to be held by the Secretary of the Treasury in any one association. Tho Corporation is also authorized to purchase shares in any institution which is (1) a member of a Fed eral Home Loan Bank, or (2) whoso accounts are insured under title IV of the National Housing Act, if the institution is eligible for in surance under such title; and to make deposits and purchase certifi cates of deposit and investment certificates in any such institution. Of the total authorized bond issue of the Corporation $300,000,000 shall be available for the purposes of this subsection, without dis crimination in favor of Federally chartered associations, and bonds of the Corporation not exceeding such amount may be sold for the purposes of this subsection. Proposed Amendment to Subsection (n), Section 4. Home Owners* Loin Act Section 17. The last sentence of subsection (n) of Section 4 of Home Owners* Loan Act of 1955, as amended, is amended to read as follows: n0f the total authorized bond issue of the Corporation, $300,000,000 shall be available for the purchase of shares, certifi cates of deposit or .investment certificates of any member or insured institution as hereinbefore authorized, without discrimination in favor of Federally chartered associations, -..and bonds of the Corpora tion not exceeding such amount may be sold for such purposes; and the total amount of unused bond authorization of the Corporation shall be available for the other purposes of this subsection and bonds of the Corporation not exceedinK such amounts may be sold, subject to the approval of the Secretary of the Treasury, for such purposes; and any funds rea3.ized by the Corporation upon, or from the sale of. invest ments made under the provisions of this subsection in Federal Home Loan Bank bonds, debentures» or notes, or consolidated Federal Home Loan Bank bonds or debentures may be reinvested by tho Corporation at any time in said bonds, notes and debentures." Reproduced from the Unclassified I Declassified Holdings of the National Archives -^ sb- d e c l a s s if ie d Authority F .0 . J r t G r t j APPENDIX B Relevant Provisions of the Reilly Bill SEC. 11. Section 13 of the Federal Reserve Act, as amended, is further amended by adding the following two new sections: "SEC. 13b. Any Federal Reserve bank may, under rules and regulations not inconsistent herewith prescribed by the Board of Governors of the Federal Reserve System, buy debentures or bonds issued pursuant to the provisions of section 11 of the Federal Home Loan Bank Act, as amended. ” SEC. 13c. Any Federal Reserve bank may, subject to regu lations, not inconsistent herewith prescribed by the Board of Governors of the Federal Reserve System, make loans to Federal home loan banks upon the security of notes or notes secured by mortgage or other realestate lien taken by such Federal home loan banks pursuant to the Federal Home Loan Bank Act, as amended, and any Federal Reserve bank is authorized to rediscount such notes and notes secured by mortgage or other lien on real estate with the endorsement of such Federal home loan banks.” SEC. 12. Paragraph (b) of section 14 of the Federal Reserve Act, as amended, is hereby further amended so as to read as follows: ”(b) Every Federal Reserve bank shall have power to buy and sell, at home or abroad, bonds and notes of the United States, bonds of the Federal Farm Mortgage Corporation having maturities from date of purchase of not exceeding six months, bonds, debentures, or other obli gations issued under the provisions of section 11 of the Federal Home Loan Bank Act, as amended, bonds issued under the provisions of subsec tion (c) of section 1463 of this title and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceed ing six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage, and reclamation districts, such purchases to be made in accordance with rules and regulations pre scribed by the Federal Reserve Board: Provided, That any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market.” DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority STATEMENT OF THE OPEN MARKET COMMITTEE OF THE F^Da RAL RESERVE SYSTEM FOR THE PRESS • For release in morning newspapers of Monday, April 5, 1937. With a view (1) to exerting its influence toward orderly con ditions in the money market and (2) to facilitating the orderly adjustment of member banks to the increased reserve requirements effective May 1, 1937, the Open Market Committee of the Federal Re serve System i^ prepared to make open market purchases of United States Government securities for the account of the Federal re serve banks in such amounts and at such times as may be desirable. This purpose is in conformity with the policy announced by the Board of Governors of the Federal Reserve System in its statement on January 30, 1937, which declared, with reference to the increase in reserve requirements, that by this action the System would be placed in a position where^such reduction or expansion of member bank reserves as may be deemed in the public interest may be ef fected through open market operations. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis I Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ^ , £ > J 0 9 0 j i ■ j AprH I. ___ t, d IS m I'lLEt jg :* I COBBSI OF ACTICW SPCOBSTH) a t KRtmrasg *■ ma p H U C B l In v ia * # f ( s ) tfea substantial f a l l l a boa& pricaa tfeat fe&a occarrad aimed tba f l r a t o f tfca year and {¥ } the p o ssib ility tbat cartala banfca w i ll Inn® to wsk» further atjustaents to memt tha p m & l m ln«*«aaa l a raaarta requirementa* %bm qm®t± m arisea whether tfca Systao. akoaM aa$aga in any ofaa m r k m t pnrchaaea ami* I f ao# « f ***** ehmrmtev aad l a wliat degraa. Action m a t necaaaarlly ba feaaaft oa ftlagMMia* objeetivaa* and a aatgfelag o f tli# probable consaqueacau, l a a l l o f which 4iffereacaa o f opinion exist* )Qr own view la as follow *; Dlagnoala While tk» increase la *aa#rra ***tttireaaeiits «sy feava had soraatlilag to do fcltlt taa fall la tioad prleaa tfcara **** varloua coitai^eratloaa ttiat au@gaat tliat other fuetors fcave baaa m m Important* for one tMag, tHe *>ve»at started back la Do««bar. for taaotfea*, It wouM aea» tfcat t&© extent of th» arcvaiiaat* aomtolaad with the faet tfoat It Is k a n n tbat brnks will be left with aona |600 million excess reserves aad t&at otfear fund# available for laveatraeat ara abysmally large, indicate t&at othor consideration# ara f&ranouat* fho&* eoaaftanttlo&a appear to fca a renewed faaap of inflation arising fross rapid prlca and. waga advsaeea, rearmament, tha fall of intaraat rates la Kagland aatl the naraiage of *&rieu» writora. Recently tats has beea af?g*avated fcy a change la the federal feadfat picture, and; a rajeetlon of tka proposal to levy additional taxea* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E a /o O o / - 2— If this is the correct diagnosis of the present situation there would be danger that open market purchase of government obligations would be interpreted es inflationary in Its implica tions and contribute to increased rather than reduced sales of bonds, « view was expressed in financial editorial cogent* in both the Hew York T i m s aad the full Street Journal in rec«nt days, follo^iiv the ru*or that henceforth the Federal Reserve would have to support the bond market* In short# it appears hardly proper to adopt *iafla.tioimry* measures to cope with a situation K'feich arises from infl^tioii&ry fears* by the President that there will be bo An afflwa&tion boom would be more effective than a reaffiraatior. of an easy mor.ey policy on our p *rt, if the above diagnosis is correct* Objectives Thera appear to be tm> objectives thst would be served by o p e n -m a rk e t purchases. One would be to support government bond prices by direct purchases* The other would be to prevent forced sales to meet increased reserve re^uirwaents, by giving banks saore reserves. While related, these two objectives are capable of separate treatment. The first objective of supporting bond prices implies (a) government bond prices, that we feel responsibility for tho level of Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority (b ) that we fee1 thnt the present le v e ls or any further recessions w ill be detrimental to the course of business, (c ) that our action would be effective and (d ) thst we would have ao d iffic u lt y in disposing of our purchases and aspplng *p the additional excess reserves at a la te r date* (a ) I w ill eo&sider these points im or^er* Warn that al*ost a l l the financing requirements of the aovensaent are out o f the m y, i t does not appear that we should fe e l nuch responsibility for the lev el o f government bond prices, except to the extent that a decline nay be attributable to action on our part* In thia ease I t should be one of the considerations that m at be weighed against other considerations, fin an cial c ritic s of the Administration have repeated again aa«i again that the ship of ao&et&ry control would founder on the rocit o f fis c a l poliey that the treasury ?*mld never paw&t I t s interest cost to be raised, Deliberate action to support bond prices sl^ht be interpreted as confirmation o f this view, (b ) f i t appears unlikely that the reeent v m a e n t in bond prices i s detrimental to the course o f business, A substantial portion o f new capital has been raised by nsw stock issues and Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority tik* teal* o f b m s rtmmel** fea» %ooi fa r m t m & l m j«*»o # *o # of rofwMio* «t t&&» #**$» of t*« eyeX* 1* to fbm «lie k #fro «Xro<M!y mawmtim rfcj*l<Uy. r*oo*aloa w|XX mm e *r»lt*l l i « s « « b« long oontiaoo* mm ipfowr I n «tawt*ii«so Tk« ^ IM U Iw n I* 4 tmtpor+rj or aunt 1« m o « n ltfit w » %o feald %© b* aaXmtory mt th* yrt lin t tln o, tfco tM » la prl«o* «houltf bont »t * looor Xovol thoa fc*fo*« tfc* wtttwiiil ft #lffo**»® 0 Of p«r«<i»t w ooo* o » r jw m m 1b Ooiast j l * u « in %kta pfcaa* o f t%* «jr«lo would feo .& no^Hgl'teX* iafiaoaoo In. *b*cklo* oipomaloo* Praooat <K>s*Utio*«, la otfevr «oi*dif d lffo r v id o lj f r « « tfeoo« 1» 1 « 1 # wfe«a tatf t m Aooltatag r«|l<lly» or l f 3 it wfe«» tk« rooor ar? waa otlX I aaoo^tmXti* If, of aoirr**, a «14a O f** tet ofc o*«*rr*4, «ococip*»i #4 %y o f a l l W a U po«mz4Xoo«i Of pi«i«o* tbo *tth r t ft m M m ^ M X f mw$mnm4 atmMI b* 41 f f m n t . w> tHo *o «ltla n o f lawkor ta»tfc#t t® p m * a t basfe fsnx«troo* mm do fitr* I k n i w , roooooioti hmm m l w l f a«aooXl*4 f*9*r profit* <*c ton got t«o*l%#4 la l<ir«* aotw&X loaooa* ^Tfc* a » v « « » t *o il4 HfrfO 4x*att« 'to U m U t tfeo •olv»»cy Of % «**«» to W ■'•-■-■.... Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority £7 «*&•* Aa Twm,Tk*& before, theni I# so g»i«wr«m*ee tfeat (c ) porcheaea w ill fee effective la achieving tfcelr # bjeetlv»« ae tkle depend* aa the uncertain paycfcolegieal veperouaeioHe. I t i s w r th noting tkat tlie Treasury has expeade* ease #800 m illion vtttarat arresting th© decline. A fl*© * awniat of purebases night toe wore® than ineffective. A bold policy of u d ia ite d support sight entail pnrehases o f v*2y larps aagaltade* na&eing wtndh o f tlie laereaae la reserve r e t i r e * ■•at® * {d } F in ally, tfcera i s no gn&rantee tfcmt the Additional exeess ree^rves ereated ttmwgk 0©ver®sest tewd purchaees eaa toe absorbed la t e r wltfeoat affecting bond prices vfeea the se e «rltle s ere sold. tfcls depends O* tfee amount, tfee fatmre eotiree o f the market, eonfldenee, etc* eerleas danger, toot I t 4mm*r**a m m b l* a » ffcie aa| aot be a Additional bead purchases, toy increasing excess reserves rela tiv e to ewr Treasary tolll fe0idln g*» would leave ne i s e lees m v e position te asp «p excess w w r w i and arrest deposit expaa&lon la ttoe f i t n i . ffe* second ebjeetlve ts te pxwmut foreei sales arising H » tlie ai^metfteat* Incident to Meeting tke ae* reqairsnsats* ftois appears to be a sore jastifiatole objaetive sad does aot Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E d . / o ^ o f lead i t s e l f to til# MB4 im fl-t io n r y l ^ l i c tious aa avrald ft policy o f support tag $ ov»w «o»t hernia. It tee m m i •%«*.% wltfc our g»seM I fo lla y o f w r in g toward tfeo Enbaorptioia; of mw t m m .. MM ffftS ft.# a precautionary nttflunkiw*.. afello aot depisrtiag fo r tlia : .tin r M a g f w » aa f M f ooaey policy* * t ©<mL<i adopt tfee pfcsttios tto*t while we do not fo a l tbat tbe f a l l tm bcmd prices attributable to iafl&tion fear* Ju stifies a ©#m»i«rftatiir<* polity mm m r part, we to fe e l t?a«t b&afcs should m t fcafe to di epoee of gevaxisftaat* tkie tiiae la order to nest tfee increase la rocg*i*tneats« f&ore is a real probl«* la »8lcla& tfcls Siatimetiois clear, Hw explajnttios* *o «M m % to accepted, i a ay Hew* If wa lam&frt ^ 0 ^-gggg^^x %om$s am balance* I t emiM be polmteit out t&at i f m wasted to aapply additional reserves m ta fia g lomg-teru govensseat bent**. buying treasury M ila * multi 4o so witticmt tlre o tly fbere la a aiatl&r danger la ffee flat*aei&l eowaialty he# got la ta tba fcabtt o f louplmg together all §»*eraaeiit oblt$»tl«ma k id by all tHa r**erve basks. A*y increase I * the graM to ta l of #1*4 b llllo i* at go’tarssieat obll§©tioas;» # * * » tbo attributable aolaly to laevuasoft treasury b i l l poreltaees, al^kt ba regarded aa ladlaatlve o f a sfeaago i a opeasfcirfcet policy aad, fceaee, l« fl* t io s a r y . ffcaae ob|eetl*mi tag AXfftmlttm* wmld aot apply to increased pwrthasoa of aeeeptaaees* Tariatloma 1m aesoptaaee Holdtag* hare Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority^ ? , boon tk « traditional M t ia o f aakln& temporary aid a n M • d jl i l W B l i sad art* bdI | » » » i t U y ragsrdad « « akan$a la arfcot yoU e|*. it l o f any fkaro woold bo aaottrane* th t tlto » w m * eroat#d fey etidltloaal purehaa*a woul<? ,«o to tha larga aity b&aka that naad additional M M m « . loud ymreiiaMt# on tho othar h*nd, a i h t erM ts raaarvaa fo r country tanka ttet h*;-vo * ! • * * * of rooervoo t l n t t y and an? a m l j to llin g booanta* thay miatxmat tho fntnro trond o f bond | rle M , X would favor at lwaadiat* raduetiOfc 1b tk« M i l bayin* rato front oaa -ha lf paroont to throo-olghtha yoroont* X do io t think thia action would ba ragardad as inflationary and I t would havo tka offoat o f giving additional rooartoa to lav k a k i and foroatoll tho aaooaalty on thair f«jrt o f disyoaint*? of bonda at V rooont yriaaa. X baliava* aoroovor, that tha praoaat r e l« t i* a ly faaorona ylalda ooabinad with tho kno«ladga that axaoaa rooerva* w ill anonnt to aasaa #900 or |VW M illion (topandlng on m r aeeaptanco jorohaooo) and that fnrthor foraod aollin g or borro-in* w ill bo obvlatad, would eo^k l^tto to a oooaotion o f prosonra on tha ■arfcot aad poaaibly to a ro ily * I f , fcowovor, thia dooo not ha^foa, nothia* w i ll kovo boas loot and «a w ill a t l l l ba In a yoaltios to oonnidar vhathar any furthar aetlon on onr part 1* ro^nirad* X^ ia to bo oxpaotad that tha Traaaery w ill oontiana to work fo r an ordarly i&arkat« Xn tko fraoent naaartaln condition* ftradoneo anggaata that rooort to poaaible dan$aro«a axpadlanta ba dalayad ant 11 aftar wo havo givan a f a i r t r i a l to rol& tivaly oafo axpadianta. Reproduced from the Unclassified I Declassified Holdings of the National Archives d eclassified ^ Authority U f t U f i th* vwittttt l i «H «r i f (1} A flfRMW X by th* Fr**i€**t# (S) I M » « 9 i f M««9US4M« by m i m (3) VirolMd i f bead* by th > Tr*«««ry U **1* tl»t ih In o lw th* *r*«tl*n i f arf<littftl * * » « * « (4) f M t s t i f l«a l« by !&• fr***ary tint u » i f tts tvmm 0&A+ (0 ) lU piB ilO B i f §&ld • tv rtltM lm f t * tlm* b i l « f * (0 ) 9 m i f l a M t t i t « » l i t (T) Ftoreht** i f biaAt by th* rmmm bwic»* by th* T r*a «*ry Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority L JAN 21 1937 BOARD OF GOVERNORS □ F THE FEDERAL RESERVE SYSTEM 333 • X -97S7 W A S H IN G T O N A D D R E S S O F F IC IA L C O R R E S P O N D E N C E TO TH E BO ARD January 19, 19 37 Dear S ir : Reference i s made to the Board’ s l e t t e r o f December 23, 1936 (X-9768) supplying c e rta in code words fo r use in telegrams between the fe d e r a l Reserve Bank o f New York and other Federal Reserve banks in connection with tra n sa c tio n s in United States Government s e c u rit ie s in the System Open Market Account. Under the procedure adopted e ffe c t iv e January 1, 1937, the number o f telegrams and the number o f e n trie s in the I n t e r d is t r ic t Settlement Fund in volved in purchase and s a le tran saction s could be reduced con sid era b ly by making settlem ent between the New York bank and each other Federal Reserve bank in a s in g le amount re p resen tin g the net amount due to the Federal Reserve Bank o f New York, or due from the Fed eral Reserve Bank o f New York, as a r e s u lt o f such tran sactio n s on a given day. Ac cord in gly, Mr. W. Randolph Burgess, Manager o f the System Open Market Account, has suggested that two new code words be furnished fo r use in th is manner in lie u o f the code words fu rn ish ed in the Board’ s l e t t e r re fe rr e d to above. Pursuant tc th is suggestion the fo llo w in g code words have been des ignated fo r use in connection with tran sactio n s in United States Govern ment s e c u rit ie s in the System Open Market Account and should be in serted wr Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority X-9797 - £ - on page 134 o f the Federal Reserve Telegraph Code, fo llo w in g the word JUMTOLD: JUMTYNE - We c r e d it you today in the I n t e r d is t r ic t Settlement Fund, (A ) $______________ represen tin g the net amount due you as a r e s u lt o f tran sactio n s today in United States Govern ment s e c u rit ie s in System Open Market Account as fo llo w s : C red its due you, (B ) ________ par valu e, (C) $__________ accrued in t e r e s t , (E ) $___________ premium, (D) discount, (F ) ____ p r o f i t on s a le , le s s c r e d its due u s, (G) | __ premium, (H) $_______________ accrued ___discount, (J ) $_____________ lo s s on in t e r e s t , ( i ) s a le . The c la s s if i c a t i o n o f your pro ra ta share in t o t a l h oldings at the clo se o f business today i s (K) $___________ par value Treasury b i l l s , (L ) $___________ par value Treasury notes, (M) $___________________ par value Treasury bonds. JUMYAK - C red it us today in the I n t e r d is t r ic t Settlement Fund, (A ) $___ represen tin g the net amount due us as a r e s u lt o f tran saction s today in United S tates Government s e c u r it ie s in System Open Market Account as fo llo w s : C red its due u s , (B) §>____________ par valu e, (C) premium, (D) ____ accrued discount, (F ) ____ lo s s on in t e r e s t , (E ) m>_ premium, s a le , le s s c re d its due you, (G) $____ (H) $___________ accrued in te r e s t, ( I ) ___ discount, (J ) $____________ p r o f i t on s a le . The c la s s ifi c a t i o n o f your pro r a t a share in t o t a l holdings a t the clo se o f business today i s (K) $___________ par value Treasury b i l l s , (L ) $________ par value Treasury notes, (M) $s____________ par value Treasury bonds. Very tr u ly yours, L. P. Bethea, A s s is ta n t Secretary, TO PRESIDENTS OF ALL FEDERAL RESERVE BANKS