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A meeting of the Federal Open Market Committee was held in


offices of the Board of Governors of the Federal Reserve System in Wash
ington on Saturday, September 11, 1937,


at 10:20 a. m.

Eccles, Chairman
Harrison, Vice Chairman


Morrill, Secretary
Wyatt, General Counsel
Goldenweiser, Economist
Williams, Associate Economist
Dreibelbis, Assistant General Counsel
Burgess, Manager of the System Open
Market Account
Mr. Carpenter, Assistant Secretary of the
Board of Governors of the Federal Reserve
Mr. Thurston, Special Assistant to the
Chairman of the Board of Governors of
the Federal Reserve System
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
June 9, 1937, were approved.
Upon motion duly made and seconded, and
by unanimous vote, the actions of the executive
committee as set forth in the minutes of the
meetings of the executive committee on June 9,
June 15, July 6, August 18 and September 4,
1937, were approved, ratified and confirmed.
Mr. Burgess submitted a report prepared by the Federal Reserve
Bank of New York of open market operations conducted by the New York



bank for the System open market account since the meeting of the Fed
eral Open Market Committee on June 9 and up to and including September

10, 1937.
Upon motion duly made and seconded, and by

unanimous vote, the transactions covered by the
report were approved, ratified and confirmed.
Chairman Eccles then called on Messrs. Goldenweiser and Williams
for a review of business and credit conditions.
Mr. Goldenweiser stated that, while the impetus of recovery had
slackened temporarily,
or recession.

there was as yet no evidence of a general decline

In the capital market, Mr. Goldenweiser said, there had

been a very definite slackening of activity with less refunding than last
year and a scarcity cf new issues, and the stock market had gone through
a pretty severe reaction recently.

In the banking situation,

the aggre

gate amount of investments had gone down and the volume of deposits had
decreased but not substantially.

He was of the opinion that the situa

tion was one where, in terms of short-term developments, there was no
danger of the speculative excesses or inflationary developments that were
somewhat in evidence six months ago,

but, where on the contrary there was

a possibility that the uncertain situation, partly as an immediate result
of the hesitation in the capital market, might lead to a decline in
ness and to a recession of indeterminable magnitude.
situation was different in different industries,
showing a definite slowing down,


He said that the

the textile industry

while the automobile and the steel

industries were continuing at a high rate, the latter largely on orders



received previously rather than on current orders, which had fallen off.
The past year, he said, had been disappointing in the construction field
which had not yet recovered to anything like the extent hoped for or to
the extent necessary to provide a volume of activity which would result
in little

unemployment and a more lasting basis of prosperity.

He stated

further that prices have had a mixed movement but that the situation in
this respect was not unusual at this time of the year.

In general,


felt that the industrial production index was not likely to go much be
low the 115 that had been anticipated but that it
figure for a month or two.

might fall below that

He interpreted the industrial outlook over a

somewhat longer period as being very good because of the present larger
annual income than has been the case for several years and the existence
of substantial shortages in many important industries such as construc
tion, railroads, and public utilities, the expenditures of which when
made will place a large amount of buying power in the hands of those who
work for these concerns.

There was no reason, he said, for modifying the policy of
monetary ease that was adopted by the System in 1932 and continu
ously maintained since that time.

He believed there was less reason

to deviate from that general policy now than there was last autumn or
winter when prices were going up very rapidly and there was evidence of
speculative developments in the securities market and in


some lines of

appeared to him, therefore, that the System should contem

plate at this time a policy of counteracting such seasonal tightening



influences as are likely to develop between now and the end of the year
as a result of a prospective increase in the demand for currency of ap
proximately $400,000,000 and possibly some increase in reserve require
ments owing to the growth of deposits in

connection with autumn trade,

which would reduce excess reserves of member banks at the peak of the
currency demand to between $300,000,000 and $400,000,000, while in the
New York market excess reserves might be wiped out completely.
He felt that, if


were still

the System's policy to maintain

a condition of monetary ease for the furtherance and completion of re
covery, the System should be prepared to take action to make that policy

and if that point were made clear it

would be easier to con

sider the possible courses of action that might be pursued in carrying
out that policy.

These alternatives in his opinion were


A reduction in reserve requirements,


Action by the System in the open market,


Action by the Treasury to desterilize gold or to modify

its policy of gold sterilization, or

A combination of action by the System and the Treasury.

He was strongly of the opinion that a reduction in reserve
requirements had all of the vices and none of the virtues of any other
policy that could be adopted,

that it

would be a reversal of the posi

tion that changes in reserve requirements should not be utilized except
infrequently, and that it

would involve the use of an inflexible in

strument instead of a flexible one, to meet a seasonal situation.

He also said that action by the Treasury to desterilize a
stated amount of gold would be better than the discontinuance of further
sterilization, for the reason that in

the event the latter course were

pursued the extent of the action could not be determined, whereas the
desterilization of a given amount of gold would increase reserves of
member banks by a definite amount.
said, were that the increase in

The objections to desterilization, he

reserves could not be counteracted except

by sales out of the System portfolio, and that action by the Treasury
at this time also might be interpreted as violating the principle that
the Federal Reserve System has primary responsibility for credit condi
tions and has adequate instruments for handling it.

He then expressed

the opinion that the most satisfactory action would be for the System
to take such independent action through the medium of open market
operations as, in



was necessary to meet the situation.

He pointed out that for four or five years there had been such
a large volume of excess reserves that there was a tendency now to
regard fluctuations in reserves as being of more importance than is
justified, and that the System regards action to ease a situation more
seriously than used to be the case.

He suggested that the System might

take counsel on the advisability of the adoption of a rule of thumb as to
the volume of reserves that would be likely to produce desirable conditions
in the market at different stages of business activity, and that, if
an amount could be determined upon, the System would increase its


folio when reserves fell below that amount and let securities run off
when reserves exceeded it,

without feeling that it


was undertaking an



operation involving a matter of major policy.

He called attention to the

view that at one time prevailed that the New York banks should be in debt
by approximately $50,000,000, that when they were in debt more than that
a condition of tightness developed and that when they were in debt less
than that credit conditions were considered to be unduly easy.

He felt

that a much more liberal rule would have to be adopted today in furtherance
of the existing easy money policy, which would contemplate not only that
the banks would be out of debt but also would have a volume of reserves
sufficient to make them willing to undertake legitimate financing without
disposing of other earning assets,

and that the System could adopt a policy

of maintaining approximately $250,000,000 of excess reserves for central
reserve city banks and $700,000,000 or $800,000,000 for the country as a

He concluded by expressing the opinion that if

adopt such a policy it

would be in

the System would

a position to meet the seasonal

problem without difficulty and that he would recommend that the policy
be made effective.
Mr. Williams stated that the question, which was a difficult
one, was whether the country was confronted at the present time with a
short-term seasonal variation or whether it

was something more serious

than that; that he had felt that there probably would be a side-wise
movement for a while during this period which would be disappointing to
some and would cause some hesitancy; and that, while, on the whole,
he was still

inclined to that view, he was growing less confident about

and that there might be some recession.



appeared to him that there were two influences on the situation,

one of minor significance and one of greater significance.


were built up last winter and early spring because of fear of rising
prices, labor troubles, etc.,

and since that time production has been

in larger volume than new orders.


had been thought, he said, that

the present would be about the time when there would be some indication
of when the period of hesitancy would end but that such indications were
not yet in evidence.

That, he added, was the kind of situation in which

people become nervous and it

might be that the present reaction in

stock market was a reflection of that situation.
in the market,


He felt that the break

coming at this time, was apt to have a rather significant

effect on business and might cause business men to delay activity longer
than they otherwise would, resulting in a negative movement lasting
longer than ordinarily would be the case.
The other question, he said, had to do with the more fundamental
fact that recovery could not go forward without assistance from the heavy

industries such as building, public utilities, and railroad equipment,
and that although high agricultural and industrial income might result
in a side-wise movement rather than a decline, there was a possibility
that business would recede before going forward.
He was of the opinion that among the factors bearing on the
matter were the following:


seemed clear that if

the Administration

went forward on the present basis there would be a reduction in this
fiscal year in

the income-creating expenditures of the Government of



$2,500,000,000 to $3,000,000,000,

which is a substantial proportion of

the national income, and which it

had been expected would be replaced

by private spending.

While he had felt last spring that the time for

such replacement had come, there was now a question in his mind whether
that situation would materialize fully.
said, was disappointing in that it

The building situation, he

now appeared that it

not gone forward during the recent period, but it

not only had

seemed probable that

would recede owing chiefly to advances in construction costs.


withstanding the fact that there was evidence of rising rents and a
reduction in the number of vacancies, there was a considerable statis
tical record behind the view that a sharp advance in
was followed by a recession in

construction costs

building or a cessation of building ex

pansion for a considerable period.

In view of this there was a major

question in his mind whether the country could count on a recovery of
building to take the place of a decrease of Government income-creating
Another question, he said, was whether an increase in public
utility expenditures could be relied on, and that although there was an
increase in power consumption and some evidence of pressure on facilities,
it might develop that, because of all the uncertainties of the public
utility situation, new expansion in that field would be slow in making
its appearance.

The railroad equipment industry, he felt, was made

uncertain by the labor outlook for the next few months.
Mr. Williams then stated that he did not know what conclusions



to draw from all of these circumstances but that they indicated a
distinct possibility of a recession before further recovery.

He was

firmly of the opinion that sooner or later recovery would be resumed


he felt unable to say whether a recession would first occur as a


of correcting some of the existing obstacles to further recovery.


major question, he said, was whether private investment in the heavy
industries during this fiscal year would take the place of a substantial
contraction of public spending.
The Committee entered into a discussion of the business and
credit situation as outlined by Messrs. Goldenweiser and Williams.
Mr. Harrison suggested that the problem before the Federal Open
Market Committee at this time was quite different from that under con
sideration at the April and May meetings of the Committee and was related
to the question whether the leveling off of the volume of business
activity was the result of monetary or nonmonetary causes, whether the
System appropriately could take any action which would tend to check a
recession and to facilitate the continuation of recovery, and, if


what form it should take. He was of the opinion that the causes of the
present situation were not in

the monetary field and that there had been

no evidence thus far that the increases in reserve requirements of member
banks had resulted in

any actual restriction of credit.

During a discussion of the possible causes of the present trend
Mr. Goldenweiser expressed the opinion that, while the existing situation
was not due to monetary causes, it

was desirable that action be taken

to maintain a monetary climate favorable to economic recovery.


In this connection consideration was given to forecasts of prob

able demands for credit and currency between now and the end of the year
which it

was anticipated would result in

reserves of

substantial reductions in excess

member banks and the possible elimination of excess reserves

in the New York market with resulting increases in

Mr. Ransom said that action in

short-term money

the open market to counteract

such a stiffening of rates would be consistent with the policy announced
by the Federal Open Market Committee in

the statement released to the

press on April 5, 1937.
There was also a discussion of the relation of the current de
cline in

security prices to the problem under consideration,

and the

probable effects of a continuation of that movement on the general busi
ness situation.
Mr. Ransom expressed the opinion that the anticipated year-end
reduction in

excess reserves was a money market problem and one in


nection with which responsibility rested on the Federal Reserve System
and particularly the Federal Open Market Committee to initiate whatever
action was necessary to meet the situation and to continue in effect the
System policy of easy money conditions.

He also felt that, for this

the Committee should regard the powers existing in the Federal

Reserve System and the Treasury to influence credit conditions as though
they resided in one place and were available for use in determining the
action that should be taken.

He stated that, while there was no apparent

restriction of credit at the present time, the expectation by banks that
less easy money conditions would exist over the year-end might result in
more restrictive credit policies on the part of the banks at a time when the



recovery movement had practically halted and there was some evidence that
there might be a recession in business activity, and that the question
before the Committee was whether action should be taken to assure the
banks that there would be no shortage of reserves over the period of crop
movements and increased currency requirements.
Mr. Ransom then presented,

as a basis for discussion, a draft of

a resolution which would instruct the executive committee of the Federal
Open Market Committee to direct the purchase in the open market from time
to time of sufficient amounts of Treasury bills to offset the seasonal
withdrawals of currency and other seasonal influences between now and the
end of the year so that the aggregate volume of excess reserves of member
banks would be continuously adequate to maintain the System's policy of
furthering economic recovery through monetary ease.
At 1:00 p.m. the meeting recessed for luncheon and reconvened
at 2:30 p.m. with the same attendance as at the morning session.

There was a further discussion of the possible reserve position
of member banks between now and the end of the year and of the prospective
demands for credit in

connection with the movement of crops and for

currency during the holiday season.

Information presented indicated that

excess reserves of all member banks would probably be reduced to below
$400,000,000 before Christmas,

and that by the end of November excess re

serves would probably have disappeared in New York and some member banks
in that market might be forced to borrow or to liquidate earning assets.
Consideration was given to the question whether, in view of the
present uncertain business picture and the necessity for further progress



in the recovery movement,

the System

additional excess reserves in
easy money conditions,
at this time.

should take any action to create

conformity with its

and whether it

policy of maintaining

should make any public statement

The discussion disclosed the view on the part of a majority

of the members of the Committee that the situation called for affirmative
action by the Federal Open Market Committee at the present time and that
some public announcement of the action taken should be made.
There ensued a discussion of the extent to which, and the form
in which,

action should be taken.

The four alternatives presented by Mr.

Goldenweiser during the morning session were analyzed, and suggestions
were made that the System request the Treasury to desterilize a given
amount of gold, which it

was stated would have the effect of increasing

member bank reserves relatively promptly and largely in the money centers
where additional reserves would probably be needed,

and that the executive

committee be authorized to direct the purchase of a sufficient amount of
short-term Government securities to provide such additional funds as might
be needed to meet the expected reduction of reserves between now and the
end of the year.


was the consensus of the members of the Committee

that, while the System could act alone through the open market, the most
desirable action would be the suggested joint action by the System and
the Treasury.
At the conclusion of the discussion it

was agreed that the Chair

man should ascertain from the Secretary of the Treasury whether he would
be willing to desterilize $200,000,000 or

$300,000,000 of inactive gold

as a part of a program which might be adopted along the lines of the
above suggestions.


Thereupon the meeting recessed with the understanding that it

would reconvene again on September 12, 1937,

at 11:00 a. m.