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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FEDERAL R E S E R V E B A N K oF N E w Y O R K Aostitute t h i ; ecruary o 1dolph Bur; Governor ule Gover! i De Reserve Bank, a CONFIDENTIAL MINUTES O F THE MEETING O F GOVTRNORS HELD A T WASHINGTON, D . C., FEBRUARY 2 4 and 25, 1932, February 2 4 , 1922. The m e e t i n g w a s c a l l e d t o order a t 10:20 a . m.; Governor Meyer i n the Ghair, t h e r e being present: From the Federal Reserve Board Secretary Mills, Governor Meyer, Messrs. Hamlin, James, M a g e e a n d Miller, Messrs. F l o y d Harrison, Morrill, Goldenweiser, Wyatt a n d McClelland, the Federal reserve banks Governors Y o u n g , H a r r i s o n , N o r r i s , F a n c h e r , Seay, Black, McDougal, Martin, Geery, Hamilton, McKinney, and Deputy Governor Burgess, (secretary p r o tem). Governor Meyer indicated t h a t w i t h t h e Glass-Steagall b i l l i n conference and likely t o b e acted u p o n i n the immediate future, i t seemed wise t o have a meeting o f the governors b o t h f o r a consideration o f general policy a n d a considera- tion o f the procedure t o be adopted b y the Federal Reserve System under the powers conferred b y this bill. With respect t o t h e provision o f the bill f o r loans t o groups o f banks, Governors McDougal a n d Fancher suggested t h a t t h e l a w would operate effectively i n principal clearing house centers, b u t would prove difficult elsewhere. Governor Norris suggested t h a t this clause w o u l d provide a n additional impetus toward organizing county clearing houses a n d thus towards developing g r o u p responsibility a n d group examinations. There ensued a general discussion o f the provision o f the biil f o r t h e use o f government securities a s collateral f o r Federal reserve notes. Q u e s t i o n was raised whether, to transfer a i f action were t a k e n under this provision, i t would b e better large b l o c k o f government securities a t once f o r use a s collateral or whether i t would b e better t o d o i t zradually a s each b a n k h a d need. With respect t o publicity i t seemed clear t h a t i t would b e necessary because o f the public interest i n the matter t o report separately t h e amount o f government securities being used f r o m time t o time a s collateral f o r Federal reserve notes. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis This Z amount could i n a n y event b e computed f r o m figures n o w published. A possi ble program suggested w a s that enough governments should b e transferred t o bring t h e free g o l d t o $500,000,000, a n d that t h e free g o l d b e kept a t that figure. A differing point o f view w a s that i t might b e well t o s h o w t h e maximum o f free g o l d at once. A n o t h e r possibility suggested w a s t h a t governments b e transferred t o collateral o n l y a s required b y each bank. With reference t o the general question o f loans against collateral other than eligible paper, a number o f t h e governors pointed o u t t h e dangers i n the Federal Reserve System's becoming loaded down with loans o f this sort. F r o m this point o f view i t was recognized that the provisions i n the new Act should b e administered cautiously. It was pointed out b y Dr. Miller that i f loans o n ineligible paper should make i t possible for a bank t o make eligible loans, eligible paper would thus b e provided t o repay t h e first loan. Mr. James, Governor Harrison, a n d others suggested that whatever regulations were adopted should guard against the implication that the bill constituted in a m y sense a guaranty o f deposits o f member banks, a n d should safeguard t h e Reserve banks against becaning unduly loaded with ineligible paper, b u t that t h e regulations adopted should n o t b e t o o rigid, because o f great differences i n banking conditions b e t w e e n different parts o f t h e country a n d t h e lack o f experience with loans of this sort which may make it necessary to modify the procedure from time t o time. Both Governor Meyer and Dr. Miller pointed out that i t m s t b e assumed that t h e tide will t u r n some time; t h a t t h e Reconstruction Finance Corporation was making loans u p o n that assumption; a n d that w a s a necessary assumption f o r Federal reserve operations, With regard t o the relationship between loans b y the Reserve banks a n d loans b y the Reconstruction Finance Corporation Governor Meyer suggested t h a t cases https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 requiring loans f o r relatively short periods s h o u l d b e handled b y the Federal Reserve System, a n d that cases where a longer t i m e use o f money w a s clearly neces- sary should b e handled b y the Reconstruction Finance Corporation. The meeting adjourned a t 1:00 p . m., t o reconvene i n t h e afternoon a s a n Open Market Policy Conference. The meeting o f t h e Open Market Policy Conference w a s called t o order a t 2:40 D y m , t h e r e being present Governors Young, Harrison (chairman), Norris, Seay, Fancher, McDougal, Martin, Geery, Hamilton, McKinney, a n d Deputy Governor Burgess, secretary. There w a s further informal discussion o f the character o f regulations which might b e adopted t o govern operations under Section 10(b)of t h e Glass-Steagall Bill i n order t o avoid having t h e Reserve b a n k s loaded u p with loans o n ineligible paper. S u g g e s t i o n s t o that purpose w e r e t h a t t h e discount rate u p o n these loans should b e a t least 2 % above t h e discount rate, t h a t n o time note f o r a period longer t h a n 9 0 days should b e taken, t h a t t h e collateral w h i c h might b e taken should be defined i n a regulation, t h a t t h e aggregate advances m a d e under t h e provision might well b e limited t o some percentage o f t h e reserve deposits o f the Federal reserve banks o r t o the total surplus. Governor Black suggested t h e r e w a s danger t h a t limitations prescribed i n deregulations a s t o the amount o f these loans might b e construed a s tending t o feat t h e purpose o f t h e Congress, a n d would t e n d t o interfere w i t h t h e good psychological effect produced b y the passage o f the bili. Governor Y o u n g stated that h e believed t h a t t h e group p l a n caomstituting would b e impossible Section 10(a) o f t h e bill would n o t prove effective since i t to organize groups o f this sort. At 3:50 Governor Meyer entered t h e meeting, a n d there w a s continued d i s cussion o f possible regulations a n d particularly o f what r a t e should b e charged o n advances under t h e bill. G o v e r n o r Norris suggested t h a t t h e rates charged o n loans https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 made under Section 10(a) and 10(b) should probably b e the same i n order t o avoid discriminating against country banks which would presumably borrow largely under provisions o f 10(b) Governor Meyer indicated t h a t something was t o b e said f o r a flat 5 1/2% rate which would correspond t o the rate now being charged b y the Reconstruction Finance Corporation. At 4:06 p. m., t h e Secretary o f t h e Treasury a n d Messrs. Magee, Miller, Hemlin, James, Morrill, Wyatt, a n d McClelland entered the meeting. There ensued a general discussion o f t h e regulations which might govern loans under 10(b) o f the Glass-Steagall bill. The meeting t h e n proceeded t o a discussion o f open market policy. Governor Harrison reviewed t h e action o f t h e conference i n January authorizing t h e executive committee, i f the occasion arose, $200,000,000 o f government securities. t o purchase u p t o H e indicated t h a t action h a d n o t been taken under that authorization, p a r t l y because various elements i n the domestic program have developed more slowly than h a d been anticipated, p a r t l y because o f gold w i thdrawals t o Europe, a n d partly because o f t h e limited amount o f free g o l d held b y the System. T h e s e conditions were all being modified i n a favorable direction a t the present time, a n d t h e question might n o w b e raised upon t h e merits whether i t might b e well t o proceed with t h e program a s originally planned. T h e important reason f o r considering action a t this t i m e was t h e continued rapid deflation o f bank credit which was a seriously depressing influence o n the whole business structure a n d the price level, Governor Meyer added that the question o f buying government securities also related itself t o hoarding; t h a t i t seemed unnecessary for the banking position t o b e subjected t o severe strain because o f the funds withdrawn for hoarding, when t h e Reserve System under t h e n e w bill h a s t h e necessary power b y t h e purchase of government securities t o relieve the banks from some of their indebtedness t o the Reserve banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis H e said h e did not believe that buying sovernments alone would 5 control t h e situation, b u t t h e operations o f various favorable factors, including the Reconstruction Finance Corporation, w o u l d b e aided b y a gredual purchase o f government securities which would help the banks t o reduce their bills payable, a n d so lighten the pressure o n the credit situation. The question w a s raised whether t h e purchase o f governments i n the ceaters would relieve t h e country banks which a r e most heavily i n debt. G o v e r n o r Meyer responded t h a t h e believed t h a t t h e money pool w a s s o liquid a n d money circulated so freely t h a t purchases i n the centers would a t least i n part relieve pressure i n the interior. G o v e r n o r Harrison pointeé o u t that a obligations Treasury program o f selling i n the centers, t h e proceeds o f which would b e distributed b y the Treasury throughout t h e country, w o u l d have t h e effect o f relieving t h e situation and making funds rut into the New York market available elsewhere. Governor Harrison further pointed out that the country's gold stock had been reduced b y about $100,000,000 i n the first t w o months o f the year, w i t h n o offsetting gains t o t h e market, a n d that further g o l d losses a t the rate o f about #50 ,000,000 a month were t o be anticipated. T h e purchase o f government securities would have t h e effect o f offsetting this g o l d loss a n d preventing i t from causing a n increase i n rediscounts. Governor Meyer pointed out that the Reconstruction Finance Gorporation was making m a n y loans which i t was hoped would have a favorable psychological effect; that a t the present t i m e t h e public s t a t e o f mind w a s a major factor; a n d that n o single sentimental factor w a s s o important i n the minds o f the public a s the purchase of government securities b y the #ederal Reserve System. Various factors i n the situation l o o k hopeful, a n c i t seems a prudent t i m e t o act. Governor Seay said that while h e had opposed purchases a t the last previous Conference h e n o w believed t h e time h a d come t o l a y down a barrage a l l along the line, t h a t there w a s n o w a better justification f o r purchases o f governments https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis than. a t a n y time i n eighteen months. Governor McDougal s a i d that h e was n o t clear what good would come f r o m investing i n government securities now, a n d that, w i t h t h e doors o p e n a s t h e n é w bill provides, t h e Reserve banks a r e liable t o b e called upon f o r additional amounts of funds which would have the same effects o n the System's reserves a s buying government securities. H e would b e opposed t o purchases a t least until after there was opportunity t o see what pressure arises f r o m t h e n e w legislation. O n general principles h e preferred t o see t h e banks borrowing t o secure funds. Dr. Miller stated t h a t h e believed there w a s never a boldly than a t present. safer time t o operate H e indicated t h a t h e would approve purchases o n a n even larger scale t h a n t h e amounts b e i n g discussed. There ensued a general discussion o f t h e desirability o f discount r a t e changes i n addition t o security purchases, a n d t h e general opinion w a s expressed that rate changes i n the interior districts were n o t a s important a s they h a d appeared t o b e i n January, i n view o f the hope a n d anticipation t h a t a large p a r t o f the n e w issues o f government securities would probably b e taken b y eastern centers, with t h e result o f drawing money f r o m t h e money market t o other parts o f t h e country. Governor Martin suggested t h a t o n e effect o f t h e Glass-Steagall b i l l i n his district h a d been t o make m a n y banks more cautious because t h e y felt there w a s something hidden i n the situation which t h e y d i d not know. Governor Norris s a i d that h e would approve t h e purchases i f h e were confident t h a t a l l o f o u r s e r i o u s t r o u b l e s w e r e b e h i n d u s , t h a t h e f e a r e d f u r t h e r possible b a n k failures, f u r t h e r commercial failures a n d possible municipal defaults, and raised t h e question o f what might b e accomplished b y a purchase o f government securities, particularly i n view o f the question whether funds s o placed i n the market would b e distributed through the country. Secretary Mills replied that the pressure o f gold exports came directly upon New York where most o f the purchases would presumably b e made, a n d that, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a furthermore, t h e N e w Y o r k banks would have t o carry t h e major pert o f the l o a d o n government financing, a n d that t h e money s o raised w o u l d t h e n b e distributed b y the g o v e r n m e n t a l l o v e r t h e c o u n t r y . ' In t h i s w a y a very direct m e t h o d o f distribut- ing funds was provided. Governor Norris indicated t h a t h e was satisfied w i t h this renly. Governor Harrison t h e n offered t h e following resolution: "Tt i s moved that i t i s t h e sense o : the conference that, subject t o the approval o f the Federal Reserve Board, the Executive Committee shall b e authorized t o purchase u p to $250,000,000 o f government securities f o r System account at the approximate r a t e o f $25,000,000 p e r week. I t i s under~ stood t h a t nurchases under this program shall b e made after a meeting o f the Executive Committee c a l l e d f o r the purpose o f considering s u c h purchases a n d that t h e program shall b e subject t o review b y t h e Conference a t a n y time o n call o f the Conference o r the Federal Reserve Board.” At 6:04 t h e members o f the Federal Reserve B o a r d withdrew f r o m the mecting. A f t e r s o m e further general discussion t h e resolution w a s adoptcd, Governors Young a n d McDougal voting i n the negative. T h e meeting adjourned a t 6:15 p . m. At 6:15 a meeting o f the executive cormittee o f the O p e n Market Policy Gonfercnce w a s convened a n d received a report t h a t t h e Board h a d aprroved t h e resolution adopted b y the Open Market Policy Confrrenee. T h e cxccutive cormittec then voted b y a vote o f 3 t o 2 t o start t h e program a s authorized t h e e n d o f this week o r beginning o f next week. The meeting adjourned a t 6:20 p . m , A meeting o f the Governors Conference w a s convened a t 1:20 o n February there being present Governors N o r r i s , F a n c h e r , M c D o u g a l , G e e r y , M a r t i n , Hamilton, a n d McKinney, D e p u t y Governor Burgess (secretary pro tem). On motion Governor Norris w a s elected chairman p r o tem. The conference proceeded t o a discussion o f the method o f operations be adopted under t h e Glass-Steagall bill. ing r e s o l u t i o n w a s a d o p t e d : https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to a f t e r s o m e general discussion t h e fullow- 8 "The conference believes i t desirable t h a t a s promptly a s possible a regulation o r letter b e issued b y the Federal Reserve Board outlining principles a n d pro- cedure under Section 10(a) a n d 10(b) o f the Glass-Steagall bill, a n d t h e Governors present a r e prepared t o a i d i n t h e preparation o f this material i n any way desired. This motion w a s submitted t o the Federal Reserve Board with t h e suggestion that t h e governors would make available t w o o r three people t o work with somebody i n the Board i n drawing u p t h e forms, etc., i f the Board desired. A f t e r receiving t h i s suggestion t h e Federal Reserve Board notified t h e Conference t h a t t h e Secretary o f the Board, w i t h t h e assistance o f t h e Board's counsel, w o u l d discuss t h e matter with such representatives o f the banks a s might b e selected b y them t o work out the procedure a n d forms, i t being understood t h a t t h e procedure proposed t o b e followed will be reviewed b y all Federal reserve banks and counsel before i t is submitted t o the Board f o r consideration. T h e governors, thereupon, designated Messrs. Rounds (New York), Zurlinden (Cleveland), and Donaldson (Philadelphia), a committee t o deal w i t h this matter w i t h t h e general understanding t h a t t h e y could employ o r requisition a n y help that t h e y required. The question o f organizing groups under Section 10(a) o f the bill was discussed, a n d i t was t h e sense o f the meeting t h a t when material a s t o procedure w a s available i t should b e explained t o key men i n the different districts, l e t t i n g these m e n u s e their judgment a s t o the extent t o which groups should b e organized. It was recognized t h a t there w a s danger i n the Reserve banks undertaking t o stimu- late the definitive organization o f groups because that would lead t o a discussion of the problem b y boardsof directors, t o differences o f opinion, a n d perhaps make it more rather t h a n less difficult t o take care o f a n y situation t h a t might arise, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 It was t h e general opinion t h a t i t should b e made clear t o city banks that t h e purpose o f this p l a n i s not t o relieve correspondert banks. The question o f definition o f collateral t o b e accepted under section 10(b) was discussed. S o m e o f the governors a t first favored some negative definition a s t o collateral which should n o t b e accepted, b u t finally agreed t h a t a definition o f collateral w o u l d probably b e unsatisfactory because a n y definition might include s o m e undesirable paper a n d exclude s o m e desirable paper a n d could not provide adequately f o r differences between districts. The question o f relating t h e total volume o f these loans t o some figure like t h e Reserve b a n k surplus w a s discussed, a n d i t was recognized t h a t there w a s danger o f interfering w i t h t h e good psychological effect o f the passage o f t h e bill b y naming a n y maximum figure. The Conference a l s o discussed Provision 1 0 ( c ) o f the Glass-Steagall B i l l relating t o the use of government securities a s collateral for Federal reserve notes. T h e governors generally expressed t h e belief t h a t t h e o n e year limitation operatincluded i n the final f o r m o f the A c t should n o t interfere w i t h t h e System's ing under this provision. be There w a s informal consideration o f some limitation which might t e pledged against placed upon t h e amount o f government securities w h i c h misht notes. 2 0 p e r cent o f the outstandO n e suggestion w a s t h a t i t should b e limited t o that t h e amount o f free gold ing circulation o f each bank. a n o t h e r suggestion w a s should b e constantly maintained a t $500,000,000,. a agreement t h a t while t h e Board might make T h e r e appeared t o b e general general authorization o f a maximum u s e act within t h a t maximum t o a s great o r of governments t h e banks should b e free t o as small a n extent a s each desired. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Me T h e meeting adjourned a t 12:15 D e W. Randolph Burgess, Secretary p r o tem.
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