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A meeting of the executive committee of the Federal Open Mar
ket Committee was held in the offices of the Board of Governors of the
Federal Reserve System in Washington on Monday, March 22, 1937, at

10:35 a.m.
PRESENT:

Mr.
Mr.
Mr.
Mr.

Broderick
McKee
Ransom (alternate for Chairman Eccles)
Harrison

Mr. Sinclair
Messrs. Szymczak and Davis, Members of
the Federal Open Market Committee.
Mr. Morrill, Secretary
Mr. Goldenweiser, Economist

Mr. Williams, Associate Economist
Mr. Dreibelbis, Assistant General Counsel
Mr. Carpenter, Assistant Secretary of the
Board of Governors
Mr. Thurston, Special Assistant to the

Chairman of the Board of Governors
Mr. Piser, Senior Economist in the Divi
sion of Research and Statistics of the
Board of Governors
Upon motion by Mr. Ransom, which was duly sec
onded, Mr. Harrison was elected to serve as chairman
of the meeting in the absence of Chairman Eccles.
For the information of the members of the Federal Open Market
Committee who were not present at the meeting of the executive commit
tee on March 13 or the meeting of the full Committee on March 15,
Messrs. Harrison and Ransom reviewed the circumstances which had at
tended the calling of the two meetings,

as well as telephone conver

sations with Secretary Morgenthau in Georgia and Chairman Eccles in
Florida and discussions by members of the executive committee since
the meeting on March 15.

Mr. Harrison also reported informally on the

transactions of the New York bank for the Treasury and the System open
market account since March 9 which resulted in the purchase of a total
of $121,000,000 of Goverment bonds for the account of trust funds ad
ministered by the Treasury and of $68,000,000 for the System open mar
ket account in replacement of shorter term securities held in the
account.
It

had been felt, Mr. Harrison said, because of the continued

weakness of the Government securities market, that it

would be desirable

to hold a meeting of the executive committee today in order to review
the entire situation and to consider any suggestions with respect to
the steps to be taken by the committee with a view to preventing a dis
orderly market.

He also said that it

appeared from a telephone conver

sation which Mr. Burgess had on Saturday with the Secretary of the
Treasury that he was entirely satisfied with the manner in which the
Federal Reserve System was handling the situation.
Mr. Ransom stated that on March 17 the Secretary of the Treas
ury advised over the telephone that the Treasury Department had only
approximately $14,000,000 additional funds available for investment
and inquired whether the System would be willing to take over the en
tire amount of bonds that it
a disorderly market.

was found necessary to purchase to prevent

Mr. Ransom said that, after consulting with

Messrs. Harrison and Sinclair by telephone and personally with the mem
bers of the executive committee in Washington,

he called the Secretary

on the morning of March 18 and advised him that the committee was ready
to direct the purchase for the System open market account,

in replacement

3/22/37

-3

of shorter term securities held in the account,

of all Government bonds

acquired in accordance with the policy of preventing a disorderly mar
ket, whenever the Treasury felt that it

had no further funds to invest.

Mr. Pansom inquired during the conversation on the 17th whether some
of the Secretary's remarks indicated that he felt that the System
should purchase securities for the purpose of increasing the System
portfolio as distinguished from purchases of bonds in replacement of
shorter term securities held in the account and the Secretary replied
that he felt that the decision on that matter was one for the System
to make.

Mr. Ransom added that the Secretary conveyed the impression

that he was interested only in keeping the market orderly and had stated
that he wanted to inform the System that, since he had only $14,000,000
available at that time for investment,

if

the Treasury were called upon

to make additional purchases in order to prevent a disorderly market such
purchases would have to be accomplished with funds derived from the
transfer of gold certificates to the Federal reserve banks or in

some

other manner.
Mr. Harrison expressed the opinion that the present condition
of the Government bond market reflected an understandable adjustment,
after a prolonged rise, to various conditions which bear directly upon
the value of long-time fixed income investments.

It

might well be felt,

he stated, that the bond market was undergoing a somewhat belated read
justment after almost two years of steady rise; that this readjustment
was probably made more drastic by recent rises in

commodity prices and

consequent talk of inflation which tended to keep other investors out
of the market at a time when banks were selling; and that it

was likely

3/22/37

-4

that the readjustment was more severe than it

would have been if

action

to check the long and steady downward trend in interest rates had been
taken sooner.

In fact, he said, if

there were any criticism to be made

of the System in the matter of increasing reserve requirements,
be, he thought,

that it

had waited too long.

it

would

He added that he felt that

one of the lessons that might be learned from recent experience was that
open market operations to avoid a disorderly market should not follow
the market too closely, and that it

probably was a mistake to attempt

to offset minor day-to-day adjustments in

the market.

In response to an inquiry from Mr. McKee as to where the sell
ing was coming from, Mr. Harrison said that it
to ascertain who the sellers were although it

was difficult definitely
was likely that some of

it was due to liquidation by dealers of their position following the
March 15 financing and more generally due to sales by banks and others
throughout the country.

He pointed out that the present weakness in the

market was not so much caused by heavy offerings as by the fact that
corporations, trusts, and other investors were keeping out of the market
because of talk of the possibility of price inflation, supplemented
by labor troubles and world-wide armament programs, which resulted in
a lack of bidders for the securities being offered.
Mr. Harrison said that the Treasury had not yet entirely ex
hausted the funds available to it

for investment and that, therefore,

all bonds acquired since March 12 had been equally divided between the
Treasury and the System open market account.
Mr. Harrison referred to the fact that the action taken by the

-5

3/22/37

Federal Open Market Committee at the meeting on March 15 in authoriz
ing the executive committee to increase or decrease the total amount
of securities held in the System open market account was with the dis
tinct understanding that the account would not be increased unless an
emergency arose which,

in the judgment of the executive committee,

would justify such an increase.

He expressed the opinion that exist

ing conditions did not constitute such an emergency as the Committee
had in mind.
There followed a discussion of the effect of the recent decline
of prices of Government securities on the yield of such securities, the
question when buyers might be expected to come into the market,

reasons

for the tendency of some banks to sell securities rather than to reduce
their balances with correspondent banks to meet the increase in reserve
requirements,

and changes in the Government security holdings of report

ing member banks.
Mr. Goldenweiser referred to the failure of income tax receipts
to reach Treasury estimates as a further unsettling factor in the mone
tary situation.

He also expressed the opinion that there was consider

able room for expansion of commercial loans of member banks, that, gen
erally speaking, there was no necessity for the liquidation by member
banks of their Government security holdings in
reserve requirements or customers'

order to meet increased

borrowings for business purposes, and

that, while there had been some stiffening of rates since last November,
a substantial strengthening of long term rates was not to be expected
for some time to come, although short term rates, which had been very

-6

3/22/37

much lower than the long term rates, might go up considerably in compar
ison to the rates recently in effect.
Mr. Williams referred to the elements in the present situation
which point toward the development of inflationary trends before a full
recovery has been attained and raised the question whether, if
flationary situation develops,

an in

will not be necessary to permit rates

it

to increase in order to meet that situation and whether in
excess reserves or even easy money would be justified.

such a case

In this connec

tion he referred to certain phases of the economic situation which have
inflationary tendencies notwithstanding the fact that full recovery has
not been achieved and he suggested that in this situation the System
should resist all suggestions that action be taken which would increase
excess reserves and that it

should look in the direction of restrictive

measures in order to check the inflationary trends.
There was also a discussion, in the light of the situation ex
isting since the latter part of 1935, of the relative merits of an in
crease in reserve requirements and the absorption of excess reserves
through open market operations.

Mr. Sinclair suggested a discussion

of the question whether the Board of Governors would be justified in
any circumstances in rescinding its

action with respect to the increase

in reserve requirements which will take effect on May 1.
When this question was raised Mr. Harrison was absent from the
room discussing the existing market situation with Mr. Burgess, Manager
of the System open market account,
and after reviewing Mr.

who was in New York.

Upon his return

Burgess' report, Mr. Harrison said that he was

3/22/37

-7

still of the opinion that there was no reason why the System should
change its

present policy of preventing a disorderly market through

shifts in the System open market account and that there was no justifi
cation for taking action at this time to increase the System portfolio.
The other members of the Federal Open Market Committee present indicated
agreement with Mr. Harrison's position.
In connection with the question raised by Mr. Sinclair, the
question was raised whether the Board of Governors might obtain up to
date information with respect to the distribution of excess reserves
of member banks.

However, it

was felt that, as the inquiry which would

have to be made of the Federal reserve banks in order to obtain such
information might create the impression that the Board would take ac
tion to rescind the May 1 increase in reserve requirements, such an in
quiry should not be made.

In this connection Mr. Goldenweiser said

that he thought that Mr. Smead and he might be able to develop some
information that would be useful without sending out an inquiry.
It

was stated that as the authority granted to the New York

bank at the meeting of the executive committee on March 15 to effect
transactions in

the System open market account continued only until the

next meeting of the committee,

it

was necessary that such authority be

renewed at this meeting.
Upon motion duly made and seconded, and by unani
mous vote, the executive committee directed the Fed
eral Reserve Bank of New York, until the next meeting
of the executive committee, supe seding all previous
authorizations, (1) to replace maturing securities in
the System open market account by purchases of like
amounts of bills or of notes maturing within two

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3/22/37

years, (2) to make such shifts of securities in the
account as may be necessary in the proper adminis

tration of the account, up to an aggregate of
$50,000,000,

into other Government securities hav

ing maturities within a range of one year from those
of the securities sold, (3) to make such other shifts
(which may be accomplished when desirable through
replacement of maturing securities) of securities
in the account as may be necessary in the proper ad
ministration of the account, up to an aggregate of
$100,000,000, into other Government securities hav
ing maturities which are not within a range of one
year from those of the securities sold, (4) upon ap
proval by a majority of the members of the executive
committee, which might be obtained by telephone,
telegraph or mail, to make such other shifts as
might be found to be desirable and advisable within
the limits of the authority granted to the executive
committee by the Federal Open Market Committee, and
(5) to permit such fluctuations, up to a limit at
any one time of $25,000,000, in the amount of hold
ings of Government securities in the System open
market account between weekly statement dates as
may be desirable for the practical administration
of the account in making shifts between and replace
ment of securities pursuant to the authority granted
by the executive committee.
The meeting recessed at 1:15 p.m. and reconvened at 3:10 p.m.
with the same attendance as at the morning session, with the exception
of Mr. Piser.
There was a general discussion of the question whether, in the
case of an emergency, the Board of Governors would be justified in re
scinding the increase in reserve requirements which will become effec
tive on May 1 and it was the opinion of a majority of the members of the
Federal Open Market Committee present that such action would be unde
sirable for the reason that it

would amount to a reversal of the policy

which formed the basis for the increase and would be an action taken
because of weakness in the Government bond market rather than because

3/22/37

-.9

of a fundamental condition in the business or credit situation calling
for such action.

It

was pointed out that many banks throughout the

country had already adjusted their reserve position to meet the increase
and to rescind the action now unless absolutely necessary, would result
in discrimination against such banks.
At the conclusion of this discussion it

was also expressed as the

opinion of a majority of the members present that the action of the Board
in increasing reserve requirements was entirely proper both in the light
of the circumstances which existed at the time action was taken and in
the light of existing conditions, that in the present situation there was
no justification for a reversal of the policy of the Board with respect
to reserve requirements of member banks, that the System portfolio should
not be increased in the absence of an emergency which was not now fore
seen, and that the present policy of operation through shifts in the Sys
tem open market account for the purpose of preventing a disorderly market
should be continued.
Mr. Harrison referred to the action taken by the Federal Open

Market Committee at its meeting on January 28, 1937, in authorizing the
executive committee to direct the readjustment of participations of the
Federal reserve banks in the System open market account as of April 1,
1937, and called attention to the possibility that some Federal reserve
bank might object to a transfer of securities at book value, rather than
the present lower market values.

This matter was discussed briefly.

The suggestion was made and agreed to that it

would be desirable

for the executive committee to meet again tomorrow for discussion of

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3/22/37

developments in the market for Government securities.

Accordingly, the

meeting recessed at 4:50 p.m. with the understanding that it

would con

vene again at 10:30 a.m. tomorrow.

Secretary.

Approved:
Chairman pro tem.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102