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0 FEDERAL RESERVE BOARD WASE1NGTON 2b, 19Z6 Dear Mr. Case: Ihe Federal Reserve Board has considered the report and r eCOAIIIE endations submitted by the Open market investment Committee today, a copy of which, in the form finally adopted by the Committee is attached hereto. The Board approved the k;o1 i cy outlined in the authorizes the sale of further securities from the report Open Market investment Account, if such sales are deemed necessary by the Committee. Very truly yours, (Si6ned) R. A. YOUNG Governor B. Cbse, Actin6 Chairman, Open hi arket investment Committee, c/o Federal Reserve Bank, iAew lork, N. Y. JUme 1, 1928. -Governor Youngs Supplementing our daily letter to the Federal Reserve Board gains and losses to the money market, I am summarizing herein a few of important changes which have taken place in Now York and throughout concerning the the System 1ring the past week. Except for a temporary rise in ,o 5 1/2% cal money to 6 1/2% on Monday, and doable Tuesday afternoon the money market has been steady and moderately firm past qring the week, due largely to further sales of securities from the System. .,:ount, reduction in Reserve Bank bill holdings, gold exports and a holiday and al-end currency demand. There has been a fairly steady flow of funds tO New York which, except the reduction in Reserve Bank bill and security holdings, would have enabled vue iam-York banks to reduce their indebtedness considerably and, consequently, would have eased the money market. links As it was, the borrowings of the New York City totaled $246,000,000 yesterday, an amount slightly larger than a week ago, while borrowings by banks outside of New York increased about $90,000,000 during week. On Monday, a sale of nearly $260000,000 of securities to the market wall made and was immediately reflected in an increase in the borrowings of New Ork City banks. On Tuesday, there was-a temporary increase of slightly lesn hau $7,000,000 in the System Account, which was due to the temporary purchase ,f securities from a foreign aocount. Sales contract holdings of securities also ncreased #7,000,000 during the week; so that the net reduction in total security oldings was but $11,0000000. At the close of business tonight, the open market. ortfolio will stand at #750000,000, 3overnor Ibung. or:oat, 8/1/28. resent level of our buying rates on bills, which, with the cost of , ices them above the open market offering rates on tee the shorter maturities, has resulted in small offerings of bills to us and a consequent reduction of $27,000,000 in the total bill holdings of the System during the past week. Yesterday, maturities here exceeded purchases by an additional 010,0000000 A factor in the comparatively low open market rates on short bills has been the strong demand for bills account for foreign The new law exempting income received by foreign central banks from bills (effective as of January 1 1928) is likely further to stimulate the bills in this market. foreign demand for The gold movement continuea to be an influence toward firm money. The principal item during the past week was an export of $15,000000 to London by a New York bank. This shipment and the 0,000,000 shipment to London last week are reported to have been special transactions - they were not warranted by the position of sterling, figuring the usual coats involved in the calculation of the gold export point. Sterling exchange has advanced to the highest lewel of the year, notwithstanding the relatively high level of money rates here. We understand that a factor in its strength has been the 00,000,000 Australian loan recently floated here, the proceeds of Which have been Amde available to the British Government. Holiday and month-end currency requirements have created a. further, though temporary, demand for funds this weak. A considerable part of this currency will probably return from circulation nikt week, but the influence of this on the money market is likely to be offset by the withdrawal of funds from Now York, which usually ocours in the first week of each month. Recapitulating, the principal developments of the week have been the following: Increase in borrowing from Reserve Banks: By New York City banks 0611Q0000s.00400.o OOOOOOO 0004 8,000,000 By all others(aocompanying transfers to New York. and some increase in currency requirements)...... 86.000,000 Total 08,000,000 - Principal causes of increased demand for reserve funds: Net reduction in security Reduction in bill holdings° sold exports....00000000 Temporary 00000000000000 00000000 increase in currency 26,000,000 1700009000 circulation0.00000000. 43 0_1_0_0,01_91 TOtal0p.00400000**000D00497000,000 continued firmness in The immediate prospect then, appears to be for market during the coming week. It seems likely that the total will remain above $900900090000 7ebtedness of all member banks for the present continue to gain9 through transfers0 for a It is possible that New York banks may they are rerweagaged day or two longer, but in View of the fact that first-of-the-month dividend and interest disbursements, offer funds freely in the call loan market. lending freely, If they are not likely to however, they do appear to be additional security sales may be necessary to prevent a decline in money :etas. Call money has Twet gone to 6 1/44 Very truly yours9 Z. R. CASE, Deputy Governor. :/lorable R. A. Young, c.iovernor, Federal Reserve Board0 Washington, D. C. in meeting rune 1, 1928, enrapat AND CONYIDWFIAL Dear Governor Youngs enoloelta a preliminary statement of the gold movement during Nei :lob you will observe that the net loss for the month was 4109,000,000 in - both satusl shipments and earmarking transactions. This in the largest in any one month since the present export movement began .11,427 in September The total eAports of gold for the month were 483,0009000 and although that figure wao exoeeded by alightly over 410,0009000 in both March and April, nevertheless there were practically no imports in May and the ,mount of gold earmarked was muoh larger than any month this year. As you know, the large amount of gold earmarked for the Bank of France at the beginning of the month was respowsible for this. - . The following table ahowing gains or losses of gold through exports and earmarkinge in millions of dollars will be of interest; Mbnth 1927 September October !- Through Net ,....r.te, 00 0 0 0 0+ 0 0 0 0 0 0 0 OD 0. OD November.0 0 G, , 0 C CO 0 , December- - - - - - - - 1928 0 0 0 0 DO January - 0 OD OD 0 0 0 February a 0 OD 0 ID 0 Wm)) - - z OD AO c_. a April .., - May - DO c.. 2.-, 0, ., OD - - - - - - - Total 9 months OD - .., 11 9 - 53 68 - 14 11 95 - 91 Through Earmarking, Total - 20 - 25 - 40 - 6 9 - 34 - 76 + 6 + 3 .36 +46 83* - 26* =35-1°7 - 93 8 8= 59 - 45 - 109* 773-77T AS I have said, the Bank of France was the most important factor in oUr transactions; so also with respect to actual Shipments of gold the largest amount withdrawn during May was for account of the Bank of France. 4Fre1iminary For ;meson 'Met a s pp as we vs no ns Jae further dhipments to France and have received no intimation that the amount of gold which they now hold earmarked with Us (*93,0009000) Is to be taken home in the near future. The second largest withdrawals of gold during May were to Oreat Britain. Two shipments aggregating $5,0000000 arid #159000A0 were made to London by the National City Bank of New York and were in part brought about by the present strength of sterling exchange. Taking into consideration the present shipping costs from New York to London, it is impossible to see how any profit could be made on these two consignments with sterling at $4.88 5/16 to $4.88 3/8D unless the gold were sold in the London market at close to the maximum price of 7780 10 1/2d. Only a very small part of the first consignment of $5,000,000 was sold in the London market, most of the gold having been sold to the Bank of Englend at its minimum buying price of Mg. id. The second consignment of $16,0009000 has not yet arrived but there does not appear to be any atrong derand for gold in the London market and we must, therefore) ionclude that these transactions are of a special nature and are not being undertaken primarily for profit. Argentina took a fairly substantial amount of gold during the month as he has been doing now since the latter part of last year and there was a small Amount seat to Italy. Otherwise there is nothing of importance in the gold move= t daring May which requires special oomment. Very truly yourso 7. H. CaseD Deputy Governor0 YA. Young, Federal Reserve Board° ;on9 D. C. . GOLD MOVEMENT May 1- 31 iac. 1926: (000's) Imports from Exports Argentina - Belgium Colonbie Country Earmarks Releases 12,700 - - - - 2,500 - .113 1,517 - France - 42,462 679000 Great Britain - 20,026 - - Italy - 4,000 - - Venezuela 44 1,300 All Other 377 600 Totals to ..1 $620605 503 42,468 =1. $69,500 $42,965 152,105 _43,40 106,596 Net Lose for Month Since Last Thursday's Report $14,991,000 exported to England " Italy 2,000,000 " " * Colombia 510,000 " 90,000 * Mexico " 52,000 * Germany 6 15,000 6 India it17.65et000, Federal Reserve Bank of New 'York Foreiga Information Divisioa June 1, 1926 NEM, Still to Go $2,000,000 to Italy and $1,0000000 to Argentina on June 1. $500,000 to Colombia on June 6. Note: Total gold held under earmark by Federal Reserve Bank of New York as of close May 31 was $136,050,294.36. (c) PERSONAL July 5, 1928. Dear Governor Young: I have received the copy of your letter to Governor McDougal under date of June 50, which you were good enough to send me and in which you so clearly set forth your views with regard to the credit situation and further increases in the discount rates. Your resume of what has taken place in the field of credit and the money market since last September, in the way of security sales and loss of gold, very clearly reflects the cause of the present tenseness, and, personally, I find myself in exact agreement with your views. I think that what happened over the mid-year period, when call money went to 8%, and again, the happenings of yesterday, with call money at 10%, is a definite indication that natural forces are at work which, if given a reasonable amount of time, will undoubtedly bring about a corrective of a more satisfactory sort.than would be the case if the System were to again begin moving up its rates, which action of course might have an adverse effect on commerce and industry. Call money went to 10% yesterday about half past one, and shortly thereafter I was called upon by one or two dealers in Government securities, who suggested that they could obtain large amounts of short-term Governments from one or two of the banks for the purpose of making repurchase agreements with us, and thus give the banks in question additional funds to use in the market. My reply was that we were not interested. I had gone over the situation carefully with our Executive Committee at two o'clock, and they agreed with me that the best course for us to pursue was to keep hands off and let nature take its course. 2. 7/3/28. Hon. R. A. Young, 150 Bluff Street, Marquette, Michigan. In reading the press reports this morning I was very glad to observe a leading article in the New York Herald-Tribune, which contained an endorsement of this policy by Mr. C. E. National City Bank. Incidentally, I Mitchell, President of the A copy of the clipping is enclosed for your information. think he put his finger on the sore spot when he pointed out that loans of member banks for account of "all others" had mounted from roughly, $850,000,000 at this time last year to $1,729,00u,000 as of last week - an increase of approximately 000,000,000, and some of the banks at leaet have not heretofore fully with Mr. Mitchell this morning, understood just whet this means. In talking he told me that one large corporation which had dividend payments to make yesterday had sent out its checks on Saturday, and its account with the City Bank was put in funds only yestercay morning by the receipt of a check for more than $20,000,000 deposited by a private banking firm which Mr. Mitchell had reason to believe had been loaning money on the "street" on call for account of the corporation. In other words, the corporation issued its dividend checks on Saturday against its call loan account, depending upon the collection of these funds Monday for this purpose. Apparently this class of operations ran up into big figures, and as our banks already owed us $550,000,000 or thereabouts yesterday morning, they were naturally somewhat reluctant about taking on additionalloans. the inevitable happened! Of course The associated banks are now beginning to realize that, in the last analysis, they are the underwriters of the whole "street" loan account* for others, and they had of course to supply the funds needed at some rate - 10% indicating how reluctant they were to put up additional funds. Today call money renewed at 8%, went to 7% at 12 o'clock and to 6% at one o'clock, closing at 5%. I do not know whether Mr. Platt has referred to you my suggestion up-to-date on the subject, I am enclosing chart of this account. * In order that you may be http://fraser.stlouisfed.org/ showing the current poilition Federal Reserve Bank of St. Louis 7/3/28. Hon. R. A. Young, 5. 150 Bluff Street, Marquette, Michigan. that we have a meeting of the Open Market Investmont Committee at Washington on Wednesday, July 18. As I understood that you would be back that week, and as Dr. Miller was leaving at the end of the week, it seemed to me an appropriate time for the committee to meet and review what had taken place and just what our policy should be for the summer. There was one paragraph of your letter to McDougal that did not appeal to me,and that wae the one containing the suggestion that, in the proposed conference oetreen the directors of the Chipago bank and the Federal Reserve Board (which I think is admirable) representatives of all the other Federal reserve banks should be present. This, I think, would be inadvisable; and as an alternative saggestion, perheps you Open Market Investment Committee, or, indeed, representatives from the other Federal it essential might have the members of the merely pick one or two reeeeve banks, if you really feel that some one from the other reserve banks should be present. Pereonally, I think it would be more diplomatic and complimentary to the Chicago directors to limit the meeting eolely to the and the directors of the bank. Very truly yours, J. H. CASE. Honorable R. A. Young, 150 Bluff Street, Marquette, Michigan. Enclosures. Federal Reserve Board