The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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
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■
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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
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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
'
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I D eclassified H oldings o f the N ational Archives
A u th o rity
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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
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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
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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
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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
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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
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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
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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
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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
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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
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.
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.
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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.
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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
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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)
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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.
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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
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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.
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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
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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.
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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 *
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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.
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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.
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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.
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-
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;
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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
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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
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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*
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-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
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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*
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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 .
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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,
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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.”
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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.
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DECLASSIFIED
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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
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DECLASSIFIED
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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
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D E C L A S S IF IE D
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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
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Authority
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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.
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D E C L A S S IF IE D
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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
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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
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DECLASSIFIED
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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
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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
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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
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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
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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
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DECLASSIFIED
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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
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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
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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
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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
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Authority £ 7 #
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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
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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
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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.
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DECLASSIFIED
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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
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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*. « •
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Reproduced from the Unclassified I Declassified Holdings of the National Archives
D E C L A S S IF IE D
Authority
■%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
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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
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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
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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 .
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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.
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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
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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
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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
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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
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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
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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 .
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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
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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
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.
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
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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 ,
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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
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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
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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
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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.
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.
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
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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
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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»
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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.
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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
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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” —
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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.
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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
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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
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.
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
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.
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).
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.
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
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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.
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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.
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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
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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
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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/
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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
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DECLASSIFIED
Authority E g . / o z o )
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"[\
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
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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
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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, $5,000,000, or even more. Another reason for this technical
/ | superiority, however, which is inherent in the essential difference be1 tween a counter market and a floor market, is that transactions in large
\ blocks, especially when they involve "swaps” as many large transactions
\ in Government securities do, require negotiation, which Is not possible
\ on the floor. For example, a dealer operating over the counter, before as
\ sembling a block of some particular issue of securities bid for by a rcusn.-;
\ tomer, may work out (over the telephone or otherwise) a large number bf '
Mjitermediate transactions involving other dealers ana other customers'^ F.
Reproduced from the Unclassified I Declassified Holdings of the National Archives
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Eaja^of
ii*.
Concluding comments. - A few disconnected observations are ap
pended here which seem to belong generally to the discussion but without
belonging to any particular part of it.
In describing the different proposals, the intention has been
to include only enough detail to make each proposal sufficiently concrete
to be debated, not enough to serve as a basis for official action or to
>
exhibit all the possible alternatives.
The proposals discussed relate for the most part to different
aspects of the problem and even those that relate to the same aspect are
not in all cases to be considered mutually exclusive.
For example, the
proposal that the System trade continuously and tha one that it trade
at every Reserve bank might be viewed as supplementary.
Careful efforts have been made in writing this memorandum,
whether or not they have been successful, to avoid bias, including any
bias that might arise from prepossessions in favor of the Government in
general and the Board in particular.
http://fraser.stlouisfed.org/
Federal
Reserve Bank of St. Louis
I
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
Authority /~ A
/(*>$&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
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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
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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
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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*
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Digitized
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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
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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
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]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.
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- 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.
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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
’ '""" ■ " "
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- 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
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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*
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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.
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8
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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*
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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*
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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 :
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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.
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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
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- 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
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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.
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1".....1
1 n' ......1
1
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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*
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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
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- 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.
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- 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 $60,000
a year#
Since they are likely to miss tho bid on some weeks, however, the
actual saving would be considerably less#
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- 19 One advantage of bidding for now issuos of bills would be that the Re
serve System could establish what was in effect a buying rate on Treasury
bills try taking whatever bills wore allotod to them at that rate*
Question
may be raised as to the desirability of having the §ystom Account onter
bids with the Treasury for new bill issuos, sinco there is always the possi
bility of being accused of opening other bids before making their own bid*
Even before this law m s passed, tho Reserve banks did not bid for now issues
of Treasury bills but purchased the issues oach week from dealers and banks •
Tho weight of this objection would bo reduced by advanco publication of the
System*s buying rate*
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KiC’DIN RL^SECTlON
WAY 1 2 |953
R*dnetloa la i r o l w af OfO*»
Hr* isrrta
MTket M M T
Hr. I*ag*tr*at
Dwris* t h* ptit t m t y yoara tha i € m of tr—
atasdlac is tfca opaa sarkat ha* W m
ralal papar out-
as* tor abomt 80 g a m ast.
Batwaa*
1919, tha aarllaat yaar for whlah fl«*raa art »rallabia, apt tha alddla
of 1£9S tha t o I o m o*tataadin« daalisad fraa about |X,000*000,000 to l M f
t|MU *100,000,000,
Owl a* to l»ara«aod borrowls* 'Iff f ia*»o« oospasiaa;
ariilig from tlw c^owth. is fittalt spirt hsiflsi^ the volts* of asafc papar
W i tlaaa t&*r*$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* ۥ 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?'/
\
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(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’
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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 —
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b:
Mr. Smead.
FROM:
J. M. Daiger
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.*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
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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.
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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
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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
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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
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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
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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
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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
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make $1,500,000,000
9
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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
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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
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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
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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
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-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
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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
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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
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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
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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
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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
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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
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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
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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
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-
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
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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.
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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
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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
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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."
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/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."
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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
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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
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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 /
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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
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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
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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
@FedFRASER