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Federal Reserve Bank of St. Louis

Federal Reserve Bank of St. Louis


July 1956
Federal Reserve Bank of St. Louis


is the fourth of a series of publications by the
Federal Reserve Bank of New York designed to furnish
the student of banking with information, not readily available
elsewhere, concerning various aspects of the national money
market and factors affecting it. For some years, the men charged
with carrying out the directions of the Federal Open Market
Committee, through action taken at the Trading Desk of the
Federal Reserve Bank of New York, have faced an insistent
series of requests to describe what is done: not the policy, nor
its effects; simply a review of the manner in which operations
are conducted. It has not been physically possible to meet more
than a small fraction of those inquiries through occasional
speeches, nor have the strains of a Trading Desk assignment
(for reasons that may become clearer to those who read what
follows) permitted any of the men active in this work to take
time out for preparation of the comprehensive manuscript that
is undoubtedly needed. However, over the past two years, the
author of this booklet has carried the main load of the speaking assignments that could be fulfilled. A number of those who
have heard his oral presentation have suggested that he write
down the main outline that has emerged from his various extemporaneous efforts, filling in some of the more significant
details. This booklet is the result of an effort to respond to
those requests.
We shall be glad to make additional copies available for
classroom use and for similar purposes.



First Vice President
New York City
July 1956
Federal Reserve Bank of St. Louis


Ninth Printing
January 1964-

Federal Reserve Bank of St. Louis



I. Introduction: The System's
"Defensive" and "Dynamic"
Responsibilities .......................... ... ...... ....

VII. The Use of "Projections"
and the "Feel" of the Market ... ......... ... 64

11. The Role of the National
Money Market ..... ..... ..... .... ... .. ...... .. .... .. ... . 1O
What is the money market? ...... ......... .......
The specia l place of the banks.. .. ..............
Point of entry for the central bank ............
Comparisons and contrasts with the
London "money market" ..........................
The Government securities dealer as a
"buffer" for the commercial banks............


111. Instruments and Institutions
of the Money Market ........... ...... ........ ..... 18
What is the "stock in trade"?........ ....... .. ..... 18
The major institutions that make up
the money market.. ........ ...... .. .. ............... .. . 26
The money market rates of interest.. ........ 30

IV. Trading Procedures in the
Government Securities Market .. ... .. .. .. 3 3
Why are dealers necessary? ........................
How dealers "make markets" ........ ... ........ .
Differences among types of Government
securities .. ......... ...... .. ... ...... .. .. ......... ...........
The physical side of completing
transactions .......................... .......... .... ........


V. Interrelations Between the
Government Securities Market and
Other Markets .... ... .. .. ...... .. .. .... ......... .... .. .. 43
Built-in link s to other markets ...... ......... ... 43
The dealer loan mechanism and the
money market .............. ...... ............ ............ 46

VI. What the "Trading Desk"
Does -- A General Survey ...... .. .... .... .... ... 52
The organization of the Securities
Department within the Bank .... ...... ........ .. 54
A "day's work" at the Trading Desk.. ..... 57
Federal Reserve Bank of St. Louis

The preparation and use of "project ions" 65
The "feel" of the market.. .... ...... .......... .... 76

VIII. Trading Methods and
Objectives; Coordination with
Transactions for Other Official
Accounts .... ...... ....... ..... .... ......... .... ...... ....... 80
The execution of outright transactions
for the System Open Market Account.. .. .
Entering into repurchase agreements
with nonbank dealers ...... .... .. .. ............. ....
Operations in bankers' acceptances .. ........
Coordination with transactions for other
official accounts and for some member
banks .........................................................


IX. Operating Liaison with the
Federal Open Market Committee ....... 94
Transmitting Committee instructions to
the Account Management.. ........ ...... .. ...... 96
Transmission of reports from the
Trading Desk to the System Open
Market Committee and other senior
Federal Reserve System officials .. ...... .. .. .. 98

X. Conclusion: The Fusing of
"Defensive" and "Dynamic"
Responsibilities in Open Market
Operations .. ...... ........... ..... .... .... ... ... .......... 100
Chart I: Weekly Changes in Selected
Operating Factors Affecting Level of
Excess Reserves ..................................... .... 67
Chart 2: Daily Changes in Selected
Operating Factors Affecting Level of
Excess Reserves for Four-Week
Interval in 1955 .. ... ........... ......... ... .............. 68
Chart 3: Changes in Federal R eserve
Holdings of Govemment Securities and
Other Market Factors Affecting Level
of Reserves ................................................ 102
Federal Reserve Bank of St. Louis

Federal Reserve Operations in the Money
and Government Securities Markets

I. Introduction: The System's "Defensive"
and "Dynamic" Responsibilities
When the Federal Reserve System was established at the outset of World
War I, there was a wide belief in the United States that the monetary system
was a primary cause of periodic depressions, which appeared invariably to be
set off by financial stringency and crisis. It seemed then, as the economy produced more and more goods, of greater variety, in more places, that there were
increasingly frequent and severe mechanical failures in the functioning of the
system which was supposed to provide the money to keep all of this in motion.
There was something wrong with a monetary system which relied upon a rather
inelastic supply of metallic and paper money to serve the dual purpose of basic
reserves for the banking system and circulating currency. Sometimes the failure
seemed to be a general shortage of currency; sometimes it took the form of
lags or defaults in the collection of checks; and sometimes there were sharp
regional shifts of currency or deposits ( and notably such international shifts
as paralleled financing of the annual movement of cotton from the South,
through New York, to London and beyond) that put unbearable added pressures
upon the money centers where the thousands of independent unit banks kept
their reserves. These were, of course, only a few of the many manifestations seasonal, regional, or general - of the inflexibility or perversity in the money
and credit apparatus which were thought to be root causes of economic instability. To provide correctives for the varied forms of these mechanical failures,
N o te : The author's debt to his associates is so large that any attempted list of acknowledgments would
almost certainly be incomplete. Messrs. Tilford C. Gaines and Paul A. Yolcker must be singled out, however,
bec a use of their valia nt help in steering the original draft of this booklet through the final sta ges of editing,
checking, and printing.
Federal Reserve Bank of St. Louis


or abuses, of the nation's monetary system, the Federal Reserve System was
To a surprising degree, _the System has in fact fulfilled all of the specific
objectives originally set ou't for it; but that fulfillment has not by any means
assured economic stability. As each kind of mechanical disturbance was checked
- and such operations have taken continuous effort under changing conditions
by an unsung nine tenths of all Federal Reserve employees over the past fortytwo years - the supposed significance of that particular kind of disturbance
receded. There was always so much more coming into visibility, to account for
economic fluctuations, that little notice could be given to the removal of even
some of the more serious mechanical obstructions which had once been listed
among the strategic factors in business cycles. Actually, the greatest part of the
System's daily effort even now is still consumed in tasks that have come to be
taken for granted, and which very few observers would ever mention, without
prompting, as significant aids to a stable, growing economy. The public eye
has shifted from the early conception of a Federal Reserve System that should
determinedly "keep money out of the way" by making the monetary machinery
work smoothly, and has passed over to one that demands aggressive use of the
central bank's influence upon money and credit to help promote economic
growth and to help limit or counteract the inflationary or deflationary disturbances that are generated from time to time by an ever-changing constellation
of widely varying economic forces.
Perhaps the earlier conception, and the wide range of operating functions
that came with it, might be called the defensive side of the Federal Reserve
System's duties - defending against those seasonal, regional, or perhaps accidental causes of sudden stringency that arise in the process of issuing currency,
or clearing checks, or meeting net flows of funds among regions ( or vis-a-vis
other countries), for example, and which might by unhappy coincidence aggravate, or even ignite, a financial and economic crisis. But before many years
had elapsed, it became apparent that the new Federal Reserve System could
not adequately perform the functions of a central bank only by providing an
elastic currency, assuring prompt negotiability of checks at par, pooling and
settling the reserve flows among banks of all regions, and rediscounting selfliquidating commercial paper at various rates of interest. A more sensitive
monetary control mechanism was wanted, to make greater use of the latent
potential of a fractional reserve banking system in resisting inflation and deflation and facilitating economic growth. That shift-over from a purely defensive
Federal Reserve Bank of St. Louis

to what might be called a dynamic conception of Federal Reserve responsibility
was evident all through the twenties and found full legislative expression in the
Banking Act of 1935.1 The emergence of open market operations as a major
instrument of monetary policy was the symptom, and in many ways represented
the substance, of this change.
But it would be misleading indeed to identify open market operations in
any exclusive way with the dynamic side of Federal Reserve System operations.
In practice, the defensive and the dynamic responsibilities of the System are
carried out side by side, day by day, and most operating arms of the System are
involved to some degree in each. The provision of currency, the processing
and crediting of checks for collection, the expediting of wire transfers of deposit balances among banks and of Government securities among investors, the
calling and disbursement of funds for the United States Treasury, the settlement
of the United States balance of payments with other countries, and a variety of
other receipts and disbursements of funds for foreign governments and central
banks - all of these and other operations, though primarily defensive in character, nonetheless frequently are of real importance in the implementation
of dynamic policy. And from the other side, the three main instruments of
positive policy - reserve requirements, discounting, and open market operations - very frequently play a part in meeting the Federal Reserve's defensive
These can be no more than tantalizing introductory suggestions, however,
until there has been an extended digression through the money market, and
the Government securities market, to observe the way in which they now function
and the economic services which they perform. From that background, it will
be less confusing to return to the details of Federal Reserve System open market
operations. Even then, no attempt will be made in this pamphlet to describe
other operations - currency or check collection, changes in reserve requirements, the use of the "discount window", or any others - except as they
relate to the conduct of open market operations. Nor will there be any space
for policy formation as such - the real essence of the Federal Reserve System's
dynamic responsibilities. Guides used in policy formation, or measures that
might be used in appraising the effects achieved in implementing that policy,
are not going to be discussed. This is intended only as a picture of the setting in
which open market operations are carried out and the methods used in those
1 The terms d efensive and dy 11a111ic as used in this pamphlet are of the author's coinage and are not
used in discussions within the Federal Reserve System. They do, however, have expository usefulness in
this booklet.
Federal Reserve Bank of St. Louis


operations. This picture will necessarily include some view of the relevant
markets and at least a glimpse of the interrelations with other Federal Reserve
operations, but it will center on the Trading Desk at the Federal Reserve Bank
of New York, where since 1936 all outright market transactions in Government
securities for the entire Federal Reserve System have been negotiated under the
continuous direction of the Federal Open Market Committee ( and where a
major part of such transactions was carried out for at least a dozen years
before that) .2

II. The Role of the National Money Market
It is much easier to describe the money market than to define it. Even a
description will necessarily have ragged edges. Some institutions or some types
of credit instruments are by nature borderline cases, part in and part out of the
money market. Moreover, practices change rapidly in a vigorous money market
that is keeping pace with the needs of a growing, ever more diversified economy.
Nor is there any single trading floor or exchange where the money market does
its work, although the ultimate balancing-out of the supplies of and demands
for funds from various parts of the country does take place through transactions
among a variety of financial institutions located in the downtown financial
district of New York City. However, efforts of both kinds - the definition or
analysis, and the descriptive list or catalogue - are necessary in preparing to
understand the techniques used by the Federal Reserve System to influence the
money market through its operations in Government securities.
The general purposes and functions of a money market, and some of the
more notable distinguishing features that have developed out of our indigenous
2The F eder al Open Market Committee, in essentially its present form and with its present powers, was
established by the Banking Act of 1935 . The relevant provisions of that act brought to culmination a gradual
development, during the twenties and early thirties, toward formalizing and centralizing control over open
market operations as their national significance became more widely app reciated . Originally, open market
operations were designed largely to acq uire earning asse ts for the Federal Reserve Banks or to meet local
conditions, and each Reserve Bank consequentl y conducted operations individually a nd upon its own
initiative. As early as 1922, however, an informal committee of Governors of seve ral of the Reserve Banks
was established to promote greater coordin a tion in the open market operations of the individual Banks. Soon
the better organized securit y operations became recognized as a useful instrument of m-0netary policy to
supplement the use of the discount mech ani sm. Beginning in 1923, this Committee was brought more directly
under the supervision of the Federal Reserve Board, which specifically directed that -Operations be carried
out with primary regard to the state of business a nd the general credit situation, thereby effectively launching
the Committee on the broad course it has si nce followed. The Banking Act of 1933 for the first time gave
statutory recognition to the Committee {i ncident ally. giving it the present title). and helped to strengthen
its control oH:r the operations of the individu a l Banks. Until 1935 . howe ver , individual Reserve Banks were
not compelled to act upon policy decisions reached by the Federal Open Market Committee.

Federal Reserve Bank of St. Louis

financial arrangements in the United States (particularly in contrast to those
of the United Kingdom), are outlined here. Section III lists the various institutions which now make up the national money market in this country and the
various forms of money or short-term credit which are its stock in trade.3


Broadly defined, the money market could include all forms of short-term
credit, as contrasted with the capital market which deals in long-term debt
obligations and equities. (Even more broadly, the term has sometimes been used
to include the capital market as well.) Most narrowly defined, the term could
include only the market for the most immediately available form of money itself
- currency, and deposit balances at Federal Reserve Banks (that is, "Federal
funds"). No doubt there are uses for which each of these definitions might be
suitable, but the consensus would fall somewhere between the extremes. It is
probably not far from the consensus, and from the usage that is most meaningful
in terms of Federal Reserve operations, to define the money market as the active
market for money and close money substitutes which financial institutions and
others rely upon to provide the liquidity needed in the usual course of their
operations. This would not include the bank checking accounts of most individuals or of most business firms; nor would it take in most savings deposits or
savings bonds. These, to be sure, represent liquidity to their owners and are so
used; but it is in turn the issuers of these liabilities - and the transactions in
money and near money by the banks themselves, for example, or the Treasury's
cash balances and its short-term market offerings or operations - that come
within the rather specialized precincts of the money market.
The market's stock of goods consists of the active margins of bank reserves,
and that part of all outstanding credit instruments which the holders believe
they can readily liquidate to meet their needs for money and which others
would ordinarily be willing to acquire and hold as liquid investments until such
time as they too needed "absolute liquidity", that is, money itself. A galaxy
of interest rates reflects at all times the net balance of preferences of holders
among the different degrees of liquidity provided by the different kinds of instruments generally in use in the money market, on the basis of the supply of
each that is currently available.
3 For a fuller description of the money ma rket as a whole, a nd o f the va rious instruments mentioned in
Section III , see M on ey Mark et Essars, by H a rold V . Roel se and others, published by the Federal Reserve
Bank of New York, M arch 1952 (fourth printing, No vember 1954 ) .
Federal Reserve Bank of St. Louis


The very looseness of these elements of a definition should make it obvious
that pitfalls abound in any attempt to measure the money market with neat statistical precision. That is partly because there is a variable fringe of money market
instruments, determined by the changing attitudes of holders; partly because the
double counting of credit claims an? underlying "liquid' collateral may be difficult to untangle; and also because the freedom of entry to the money market
is, in any practical sense so far as the United States is concerned, quite unlimited.
Large business corporations, foreign holders of dollar reserves, States, municipalities, and public authorities, trusts, and pension funds - all these and more
have rapidly increased their direct participation in the money market ( that is,
in the active trading of negotiable or "market" instruments of liquidity) since
the end of World War II. These developments have had a very real impact upon
the operations of the banking system as well as upon the state of liquidity in
the economy. They must be kept in view as daily action is taken to fulfill Federal
Reserve policy.


Despite these qualifications, the heart of the money market in any country
is in its banks and the apparatus that exists among and around them for maintaining the individual liquidity of each. Maintaining liquidity is not merely a
matter for each bank of keeping its primary reserves at all times in line with
statutory reserve requirements (or, in some countries, in line with rather rigidly
observed conventional "requirements"). To do that in itself is no simple mechanical chore, particularly in a country served by thousands of separate banks,
where the accidents of trade, or the incidence of large financial transactions, may
result even overnight in a convergence of deposit withdrawals upon any one
individual bank so large as to consume a major part (in some cases the larger
part) of the balances then being held as required reserves. No bank without a
good margin of "secondary liquidity", as well as borrowing privileges at its
Federal Reserve Bank or other commercial banks, could survive very long in
the face of the wide deposit swings, which often are not predictable, that strike
individual banks from day to day or month to month: some due to seasonal
factors ( crops, holidays, tourists, or tax dates); some representing net shifts of
funds among localities or regions; some the result of a divergence even within
the same city between the bank-by-bank pattern of the Treasury's tax or borrow12
Federal Reserve Bank of St. Louis

ing receipts and the pattern of its disbursements; some due to the analogous
effects of the receipt and expenditure patterns of giant corporations; and of
course many other causes.
But there is more to the typical bank's need for liquidity than the purely
operational liquidity needs related to its deposit banking business. In addition,
the bank normally husbands some liquid assets that can readily be converted
into lendable funds when there are urgent customer needs to be met, in excess
of the usual rolling-over of maturing loans or investments into new ones. This
margin may be trimmed rather narrow at times, and it will widen at others,
for a variety of reasons related to the circumstances of the individual bank
and the judgment of its management concerning local or national business conditions. However, most banks will usually have some margin of assets that the
management regards as "liquid", which can be drawn upon when the volume
of demands or opportunities for new loans or investments becomes irresistible
and the bank has no excess reserves to use. For that kind of liquidity, too, the
banks depend upon the functioning of the money market, just as do other investors. Thus the money market, in addition to its important task in passing
around the residual excesses or deficiencies of reserves related to net shifts of
deposits among banks, in order to find a balance, also makes it possible for
banks and others to "use" their secondary reserves of liquid assets when they
wish to do so. They can use them, of course, only when there are others who
will give up cash in order to take them on, and the various money market
rates of interest reflect the balancing of these selling and buying influences, too,
as they work themselves out in the competitive conditions of the money market.


It is but a short step from recognition of the money market's role in
balancing-out the distribution of bank reserves, and in providing the liquidity
needed in the portfolio management of banks and others, to observe that it is also
a natural meeting ground for the central bank to come into contact with the
financial sectors of the economy as a whole. That is why the money market
is the principal zone for the exercise both of the Federal Reserve System's
defensive and its dynamic responsibilities. Defensively, the System's job might
be seen, when stripped of complicating details, as that of keeping a given volume of reserves in being and helping with the economical distribution of that
Federal Reserve Bank of St. Louis


given total. Dynamically, the job is to vary the quantity of reserves ( after allowing for seasonal variations) by such amounts, and through such methods, as to
make the banking system, and the money market as well, an active force in
the economy - promoting growth, resisting depression, and limiting inflation.
That means inescapably that the Federal Reserve System, as it varies the volume
of bank reserves for policy purposes, will also have some influence of its own
upon the cost and availability of credit. Moreover, the Federal Reserve and the
Treasury are necessarily market influences because of the large part they must
play in determining the supply of secondary reserve assets. Consequently their
actions, and expectations concerning them, become a part of the matrix of
supply and demand forces that the money market continually is resolving into
"going" rates of interest for the various kinds of money market instruments
that are soon to be described.


London has long been regarded as the classic money market for domestic
needs, for international requirements, and for furnishing the central bank with
a suitable milieu in which to exert its influence with reasonable assurance of a
prompt, sensitive, and general response. There, the term "money market" is
definitely and consciously used in two different senses. One is broad and changing, like the general definition just suggested for use here, and need not be
explored in detail. But the other is a narrow and specific meaning, referring
to the operations of a group of twelve discount houses which comprise the
Discount Market Association, and this deserves some elaboration.
Aside from a few customers carried over as the vestigial remnants of an
earlier era, these discount houses, and they alone, borrow at the Bank of England. The rate at which they borrow is known round the world as the "Bank
Rate". Subject to the lodgment of acceptable collateral security, each house
may borrow at its own initiative, although it must then retain the borrowing
for a minimum of seven days, paying a "Bank Rate" that is normally a "penalty
rate". In thereby bringing about the creation of bank reserves, the discount houses
serve as an adjunct to the Clearing Banks, the large branch banking institutions
which serve the entire ountry. Most of these banks maintain head offices in
London where the liqui _ity standards for each bank are determined and then
maintained through the ,peration of each bank's "money position". The residuals
Federal Reserve Bank of St. Louis

in each bank's daily money pos1t1on are settled, for the most pa,rt, through
direct transactions with the discount houses, which become the buffers for
bringing the excesses of some banks to the use of banks which are short,
or for absorbing the net impact when the banks as a whole are short of funds,
or for employing the surplus when the banks on balance have short-term funds
to spare. While the effectiveness of Bank of England policy is immediately
dependent upon the degree of pressure maintained upon the banking system as
a whole, through funding and open market operations, the discount houses
provide the medium through which a considerable part of the initial impact of
the Bank's action is exerted. It is because these are the main sinews of the
London market, and because they can, in relative terms, be so readily identified
and observed, that the term " money market" has taken on this very speci al
significance in London.
There is no close working counterpart for the "money market" in this sense
in the United States, although some of the arrangements here have been edging
toward the London pattern, over the past decade or two, more than is generally
recognized ( while the London pattern has also been acquiring some of the detailed characteristics of New York ) . Here, though, borrowing from the
central bank is necessary, first of all, as part of a mechanism of defensive
arrangements that can give each of the thousands of independent unit banks
a supplemental source of temporary reserves to help meet the sudden and often
unexpected reserve drains that may at any time strike any of them. That is
one reason, and a sufficient reason, for giving all member banks in this country
direct access to the "discount window" ( even though it is an access to be used
as a privilege and not a right). The flows between banking offices that create
many of the individual bank reserve problems here are, in England, either balanced out within each of the branch systems or settled as net residuals through
the mo,ney position adjustments made by their principal offices in London. The
mechanical side of the problem, when it gets beyond the London City clearings,
is relatively small. With the apparatus somewhat less encumbered by problems of
mechanics, it is somewhat more sharply exposed to the direct influences of the
action taken by the Bank of England in fulfilling its own dynamic responsibilities,
although there is still a defensive job to be done in smoothing out seasonal or
other swings in the volume of bank reserves. But it is the channeling of funds
released through the "discount window" of the Bank of England to the small
group of discount houses, and the Bank's direct transactions with these houses
in Treasury bills or other short-term Government securities, along with the
Federal Reserve Bank of St. Louis


great panoply of related operating arrangements in the market that are dependent upon these relationships, which give rise to the special and narrower
meaning of the term "money market" in London. Although the nonbank dealers
in Government securities are the closest counterpart in the United States to the
London discount houses, and although as we shall see the Federal Reserve
System has at times advanced funds to these dealers in the form of repurchase
agreements, at the System's initiative - and executes a large part of its Government securities transactions with them - the comparison is still too limited to
have given rise to any use in this country of the term "money market" to describe these dealers as a group.


The contrast with London does not end with the relations of the central
bank to the market. Relations between the commercial banks and the Government securities dealers are also much different here; they vary considerably
from bank to bank and from dealer to dealer; and there is no single, cohesive
view as to what they should be. But by and large in actual practice, and now
apparently much more than in London, one important aspect of the dealer's
role in the United States money market is to serve as "buffer of last resort" for
the principal banks. Here, the banks' use of the Government securities dealers
has the effect, most of the time, of reducing the extent to which the money
market banks turn to the "lender of last resort" ( that is, the Federal Reserve)
for help in meeting the net residual effects which converge upon them from
reserve shifts among the banks of the country and from any decided swing in
liquidity preference for the country as a whole. One part of the dealer's "buffer"
role is his standing readiness to take short-term Government securities in some
volume at a reasonable price whenever banks or others are trying to obtain funds
on balance by selling them. At the same time, banks that have been lending to
the dealer to help carry his previous holdings may find they need funds, and so
the "buffer" absorbs pressure from the other side as these lending banks either
raise their rate or perhaps call back their loans.
The dealer, in turn, if he is to repay some of his loans and to carry the
added portfolio just acquired, must then turn to his own network of contacts
with other local banks, out-of-town banks, large corporations, State treasurers,
Federal Reserve Bank of St. Louis

and the like in a determined effort to draw in temporarily idle funds from all over
the country. In this way, he supplements what the money market banks presumably have been doing all along to gather and employ the surplus balances of the
rest of the country. If the dealer cannot borrow enough , perhaps this will turn out
to be a day when the Federal Reserve System sees a temporary need for putting funds in the market, so that it -will provide some funds to him through
a repurchase agreement; or perhaps the Federal Reserve will buy securities
outright for reserve purposes, and the dealer may, if his prices are equal to
the best, be able to move off some of his portfolio that way. If the dealer still
needs additional financing to pay for his purchases and carry his position, however, he will just have to work himself into balance either by arranging to borrow
at the higher New York bank rates or by stepping-up his selling drive and
lowering prices further ( thus n.i~ing the interest rate quoted on his offerings)
until he pries loose some buyers somewhere, meanwhile lowering his bid prices
still further in order to dissuade anyone else from selling to him. At a price,
some New York bank will usually find a way to lend him the last bit that
he needs.
In a very meaningful sense, however, the buying and selling of shorter-term
Government securities through a specialized dealer market, and the lending
apparatus that has evolved to make it possible for these dealers to carry their
portfolios, provide the kind of continuous communication between all parts of
the national money market that was once made possible in part by the call
money market. The elimination of the payment of interest on demand deposits
by the Banking Acts of I 933 and I 935 , the prohibition of member banks' acting
as a medium for the placement of security loans for nonbank lenders by the
Banking Act of I 933, the establishment of margin requirements for loans to purchase or carry listed securities under the terms of the Securities Exchange Act of
1934, and the easy money conditions of the later thirties, along with other
changes, brought the call money market virtually to an end long before the desk
was formally and officially closed at the Stock Exchange in 1946. The new
arrangements grew as the old deteriorated, for the economic need continued to
keep the centripetal forces of the nation's money machinery directed toward a
common center, and reliance upon interbank connections alone (under the
statutes and regulations that emerged out of the Great Depression) could not,
apparently, fully satisfy the need. Also, the very large body of short-term
Government debt created during World War II provided a nearly ideal instrument for the development of a new mechanism.
Federal Reserve Bank of St. Louis


Ill. Instruments and Institutions of the Money Market
This is to be a small scale, and somewhat stylized, picture of the principal
elements of the money market in the United States at mid-1956. It did not
look quite this way a year earlier; it will look still different a year ahead. Recognition of that fact - the inevitability of change in the kinds of paper used, in
the arrangements for issuing, trading, and holding these money market instruments, and in the institutions which participate - is more important than any
single description of the money market itself. These changes come in response
to competitive pressures as the participants seek more efficient and more economical ways of doing their part in that over-all job of the money market
which has just been described.
The central bank, to retain its own maximum effectiveness, has to adapt its
own procedures to the emerging changes. That is why very few categorical
statements can be made about, or any long-run standardization attempted for,
the detailed techniques that the central bank should be expected to use. The
System's defensive aim is to help keep the machinery of the money market
working smoothly in distributing and allocating the market's stock in trade
within any given period; its dynamic aim is to exert through the money market
whatever degree of pressure upon bank reserves, liquidity, and the general
availability of credit is required for stability without inhibiting sustainable economic growth. The details presented in this pamphlet are important only as
they help to show how the particular Federal Reserve market techniques in
use at mid-1956 have become necessary in relation to the particular structure and organization of the money market existing today. In this present
section there is, first, an introduction to the principal types of instruments
in use; second, a description of the major institutions which make up the
money market; and, third, a discussion of the key money market rates of


Several of the money market instruments in the list below would scarcely
have been considered for such a list ten, or even five, years before 1956; others
have long since passed their heyday and are still included mainly because of
their in-and-out marginal significance. Those of most recent prominence are
Federal Reserve Bank of St. Louis

capitalized; those of less significance now than they have been at times in the
past are italicized. Each is subsequently described further.
1. Money- Clearing House and FEDERAL FUNDS.
2. Short-term United States Government securities (including Treasury
3. Dealer loans and other dealer financing arrangements - extended by
banks and by NoNBANKS.
4. Interbank loans and balances.
5. Commercial paper and bankers' acceptances.
6. Issues of UNITED STATES GOVERNMENT AGENCIES (Federal Intermediate Credit Banks, Federal Land Banks, Federal Home Loan
Banks, and others); TEMPORARY HOUSING NOTES; Others.
7. Funds obtained directly from the Federal Reserve:
a. Bank borrowing at the "discount window".
b. Repurchase agreements with nonbank Government securities
1. MONEY. The conventional method of payment used in the country at
large ( and in the money market as well until a few years ago) is a check drawn
on a commercial bank account. Such checks, when drawn on New York banks,
are known in the money market as clearing house funds because they do not
become "good money" - that is, available funds against which the recipient
can in turn draw checks - until they pass on the following business day through
the New York Clearing House for collection. In effect, collection takes the form
of a credit to the balance held by the recipient's bank of deposit in the Federal
Reserve Bank. For checks collected about the country through the Federal
Reserve System, the receiving commercial bank is given credit in its reserve
account in conformity with a time schedule based mainly on expected collection
time ( subject to reversal in the event the check proves to be noncollectable).
The Federal Reserve's aim, of course, is to reduce the time needed to collect
checks so that checks drawn in any part of the country on any other part will be
as nearly equal as possible in value ( that is, to minimize the loss of the use of
funds because they are tied up "in transit"). More efficient processing and more
rapid transportation over the life of the Federal Reserve System have greatly
shortened the time required for the collection of checks, but the time schedules
have been cut even more - from an original maximum collection period of nine
calendar days down to a present maximum of two business days, and the number
Federal Reserve Bank of St. Louis


of two-day collection points is still being studied for possible further reduction. A
counterpart of this arrangement is that the schedules for giving automatic credit
have not only kept up with, but in some cases have gone ahead of, the best standards of performance, with the result that more money is credited to bankers' balances for checks in process of collection than has been collected through presentation of checks due against the banks on which they were drawn. The difference, known as "float", represents a variable supply of Federal Reserve credit,
placed directly into the reserve balances of the banks, and has in recent years
become a factor of considerable importance in influencing the day-by-day condition of the money market. We will see more of it again in Section VII below.
There also is some settlement of payments among banks themselves through
the use of checks drawn on their reserve accounts or by other authorization to
debit or credit the accounts. This is automatic whenever banks in different localities take advantage of the Federal Reserve's wire transfer facilities, because any
funds for wire transmission through a Federal Reserve Bank ( or Branch) have
to come from the sending bank's own reserve account, and the proceeds at
the other end automatically flow into the receiving bank's reserve account at
the Reserve Bank of destination. By use of the wire transfer facilities and the
other means of transferring reserve balances, it is possible for some banks to
obtain "Federal Reserve funds " immediately from other banks in order to build
up their own reserve balances when it appears that their daily averages for the
reserve computation period will fall below requirements ( calculated as the average of daily requirements against each day's deposit balances - on a weekly
basis for central reserve city and reserve city banks, and semimonthly for
country banks). Even before World War II, this had become the principal
method of making interbank loans between the large banks on a day-to-day
basis, and the rate paid by the borrowing bank to the lending bank for these
loans became known as the "Federal funds rate".
Not until the banks, and others closely linked to the money market, had
gone through several waves of tightening conditions after World War II did
recognition begin to grow of the uses to which Federal funds might be put
by others in the money market as well. After all, everyone in that market was
engaged in economizing in the use of money. Any delay while awaiting the
passage of regular checks through the clearing house meant the possible loss
of a day's interest. As short-term rates rose, this "opportunity cost" became
even greater. The outcome, by mid-1956, is that the greater part of all transactions of any size in Government securities maturing within a year, and many
Federal Reserve Bank of St. Louis

involving longer securities, are being settled for payment in Federal funds. Moreover, negotiation over the form of settlement, clearing house or Federal funds,
has become a factor in most financial transactions, including payment by underwriters for new long-term capital issues. Of course, all Treasury checks drawn
on balances held in Federal Reserve Banks can be presented for immediate payment during banking hours, and so these may be treated by their recipients as
Federal funds. As a combined result of these and similar developments, the
money market has largely shifted over to a Federal funds basis for settlement of
a substantial part of its important transactions. In effect, the money market is
dealing in two kinds of money- New York Clearing House funds and Federal
funds. The Federal funds rate, determined in continuous trading among dealers,
banks, and brokers - centered in New York but spreading over networks of
contacts maintained by many leading banks in various regions of the country has become the most nearly reliable of all short-run indicators of the prevailing
state of the money market.
2. SHORT-TERM GOVERNMENT SECURITIES. Among the close money substitutes which serve the money market, Government securities of shorter term
had already become much the most important by the end of World War II. But
because a large part of them have since become, by mid-1956, virtually impounded in the precautionary reserves of large business corporations, foreign
central banks, and others, the proportion of them marginally available for the
traditional needs of the money market - settling interbank reserve differences
and reconciling shifts in the liquidity preferences of investors - has become
smaller and less assured. The commercial banks included in the Treasury
survey of debt ownership, for example, hold only about one tenth of the outstanding volume of Treasury bills; Federal Reserve holdings at this writing are
less than one twentieth of the supply. By contrast, in the immediate postwar
years, 1946-50 inclusive, combined Federal Reserve-commercial bank holdings
averaged four fifths of the total supply.
3. DEALER LOANS - EXTENDED BY BANKS AND NON BANKS. In current parlance, so far as relevance to Federal Reserve operations is concerned, the term
"dealer" refers to those firms which, regardless of any other activities they may
pursue, regularly "make markets" in United States Government securities. That
is, the dealer stands ready to buy from or sell to bona fide investors ( "retail customers"), on either side of his posted "bid" and "offer" quotations, reasonable
amounts of outstanding marketable issues. He ordinarily buys as a principal
for his own position, and sells from it, thereby taking directly the risks involved
Federal Reserve Bank of St. Louis


in appraising "the market" (the price resulting from the consensus of all
current market activity). By far the preponderance of market activity is in the
short-term issues, and much of this is in the nature of money market transactions. But, as we have already seen, the dealer is in the money market from
two sides: his trading, and the financing of his own portfolio, or "position".
Before World War II, dealer borrowing was primarily from the money market
banks in New York. Since 1945, and given impetus each time money began
to tighten, the dealers have brought into the market as investors (mainly in
Treasury bills and certificates) a variety of large business corporations, State
treasuries, widely scattered banks, and others; once "educated", many of these
investors have also become lenders. They realize that they can employ funds
with reasonable safety on a short-term basis by making loans ( through a repurchase agreement or "buy-back") for a stipulated period at a stated rate
of interest determined by money conditions at the time the loan is made. Risks
of market price fluctuation are avoided, and precise scheduling of maturity
to coincide with the date of a money need is possible. Typically the rate will
be reasonably close to the market rate on Treasury bills. Even if the rate should
be no better, or possibly a bit less, than that on a Treasury bill, the other
conditions frequently offer more than compensating advantages to the supplier
of money.
To the dealer, who has seen a steady rise in bank lending rates in New York
- as the banks have moved with market conditions and higher rates on commercial loans to keep their "dealer loan" rates well above the Treasury bill rate,
and usually above the average interest yield on the dealer's entire portfolio it often appears worth while to lose a possible trading transaction in favor of
arranging a loan with one of these new postwar customers. At mid-1956, the
dealers seem generally to be relying upon the New York and Chicago banks
for less than a quarter of their usual borrowing needs, although this is undoubtedly a highly variable proportion from day to day. Out-of-town banks apparently
account much of the time for . more than the central reserve city banks themselves. And the remainder is apparently obtained from a heterogeneous assortment of corporations, eleemosynary funds, local and State authorities, and even
at times from the fiscal agents acting for some of the quasi-Governmental agencies mentioned below. To all, banks and nonbanks alike, the dealer loan and
related financing arrangements have become real money-market instruments.
4. INTERBANK LOANS AND BALANCES. Except for the new importance
achieved over the past two or three years by the market for Federal funds,
Federal Reserve Bank of St. Louis

which has emerged out of the traditional interbank lending process, there have
been no changes of major significance to the money market with respect to the
use and importance of these instruments over the past decade.
types of paper have increased considerably from their low volume of the 1930's,
neither is more than of occasional marginal significance in the market as of
mid-1956. A relatively new form of co~mercial paper, the directly placed
short-term note of major finance companies, accounts for m'uch more than the
combined outstanding amount of traditional commercial paper and bankers'
acceptances. One dealer accounts for the great bulk of trading in commercial
paper, and only four would be considered reasonably active in the market in any
size; similarly there are only four active dealers in bankers' acceptances, as of this
writing. Both types of paper ( apart from that of the leading finance companies)
are bought and sold through the dealer market, for the most part, and the
dealers in each have demonstrated a greater degree of flexibility in varying
their rates with changing money market conditions over the past few years
than had been apparent since the thirties. Thus, although relatively small in
volume, these two types of paper may be regaining something of their old
significance, as their rate variations ( changes have been made every few months)
come to be viewed as periodic signals of informed market judgment concerning
the direction and degree of change in money market rates, which may then be
confirmed by the actual trading in these fringe sectors of the market.
Recognizing that the bankers' acceptance was still not obsolete, and might
have a greater potential for use in the future, the Federal Reserve System resumed the maintenance of a small position in them from March 31, 1955
onward, having been virtually out of the market for its own account since 1933,
except for a short interlude in 1946. At the same time, the System resumed
the extension of repurchase agreements in bankers' acceptances.
6. OTHER INSTRUMENTS. Although many of the quasi-Governmental agencies, such as the Federal Land Banks, the Federal Home Loan Banks, and the
Federal Intermediate Credit Banks, have long been borrowers in the short-term
or intermediate public market, the volume of their borrowings has increased
considerably over the past three or four years. Moreover, several new types of
borrowers have been added, including the Banks for Cooperatives (since 1950)
and two subdivisions of the Federal National Mortgage Association (beginning
in 1955). In addition, the periodic issuance of Temporary Housing Notes, in
anticipation of later borrowing by the various groups of local housing authori-
Federal Reserve Bank of St. Louis


ties brought together for borrowing purposes under the public housing program, has also absorbed funds that were part of the floating supply in the
money market. Moreover, within the past two years the various so-called
"agencies" have moved out of what was largely a bank market and have been
viewed as more and more attractive by business corporations and others. As a
result, some of the better known "agency" names, particularly issues with an
original maturity of one year or less, have begun to enjoy a fairly active and
broad trading market.
"discount window" by member banks is, of course, a privilege that is not to be
abused or overused, since no bank should expect to exist on permanently borrowed capital beyond the equity supplied by its own shareholders. Moreover,
through some alchemy that defies precise analysis, the combination of the Board
of Governors' Regulation A ( most recently revised in February 1955), of periodic consultations by the discount · officers of the various Federal Reserve Banks
with persistent borrowers, and of a genuine reluctance on the part of most
banks toward being in debt more than temporarily to the Federal Reserve,
the "discount window" is not a loophole in the Federal Reserve System's credit
control apparatus. It is instead a safety valve, enabling individual banks to
restore their reserves to the required levels when unforeseen losses of funds
have created reserve deficiencies, and helping to even out among a succession
of borrowing banks the incidence of a general policy that cannot strike all
alike when there are so many payments going through each day to alter the
distribution of reserves and deposits among the thousands of separate unit
banks. When Federal Reserve policy is markedly restrictive, the chance incidence of the impact of the restrictive policies will strike more banks, and the
need for borrowing from the Reserve Banks will be for a larger aggregate
volume, than when policy is mild and funds may be freely obtainable through
the Federal funds market, or otherwise. In effect, borrowing gives the affected
bank time both to determine whether or not fundamental changes will have
to be made in its own portfolio and to carry out in a reasonably orderly manner
any such changes that prove to be necessary. In fact, the larger the total of
bank borrowing and the more numerous the borrowing banks, the greater is
the presumption, as a rule, that a restrictive credit policy is being widely felt by
the banks. Thus the possibility of borrowing by deficient banks is an essential aid
to the smooth working of the money mechanism; and the ability to vary the
aggregate need for borrowing by member banks is a part of the credit control
Federal Reserve Bank of St. Louis

apparatus through which the central bank maintains a desired general degree of
pressure upon the banking system.
Supplementing the borrowing of the banks, which is always at the initiative
of the banks themselves, and which is always granted initially (perhaps with
rare exceptions, in circumstances that would have been already discussed with
an offending bank), there is an entirely different method of providing funds
which the Federal Reserve also may use in smoothing the gyrations of the
money market - that is, the repurchase agreement with nonbank Government
securities dealers. Under a repurchase agreement, the Federal Reserve acquires
securities from a dealer against payment, under a contract which binds the
dealer to repurchase the same securities at the same price on or before a
stipulated final date, and to pay the Federal Reserve a specified rate of interest
over the period that it holds the securities. The repurchase mechanism was
used extensively in the 1920's in connection with bankers' acceptances; it has
again, as just noted, been revived for occasional use of that type since March
19 5 5. It was also used, though less frequently, for Government securities in
earlier years, and has been used in that form with increasing frequency during
the recurring periods of relatively tight money since World War II, and particularly when short-lived seasonal swings of large magnitude are caused by some
of the other factors affecting the volume of bank reserves.
The negotiations with dealers concerning their possible needs for repurchase
agreements have become an important means of measuring the degree of
pressure present in the money market - that is, the net effect on the dealers
of whatever sales by others they have had to absorb, what they have to borrow,
and ( often a further separate consideration) how much they need in Federal
funds. Repurchases are then made only at the Federal Reserve's initiative,
after dealers have shown a genuine residual need, and only if the satisfaction
of all or part of this need will help in fulfilling Federal Reserve policy. They are
made for maturities of no longer than fifteen days. The securities, valued in each
case to provide a nominal margin of protection to the Federal Reserve, can
have a remaining term to maturity of no more than fifteen months under current directives of the Federal Open Market Committee. The rate of interest
is usually the same as the discount rate of the Federal Reserve Bank of New
York. It may be set higher or lower than the discount rate, at the discretion of
the Manager of the Federal Open Market Account, under conditions established
and periodically reviewed by the Federal Open Market Committee, but it may
not be set below the lower of the latest average issuing rate for Treasury bills
Federal Reserve Bank of St. Louis


or the discount rate. Any given repurchase agreement may be terminated virtually without notice at the option of either the Federal Reserve or the dealer,
although the Federal Reserve has not found need to use its option, instead
generally retaining flexibility by setting a maximum maturity of less than fifteen
days. Section VI below will add further to the description of the use of repurchase agreements by the Federal Reserve.


1. THE NEW YORK FINANCIAL CENTER. The center of the money market
is in downtown New York City, clustered irregularly around Wall Street, from
Church Street and Trinity Place at one end to Pearl Street at the other, extending northward about three or four blocks from Wall and southward perhaps two
blocks below Wall. This area bounds the location of the head offices of the ten or
fifteen banks which, with their money position officers, their securities trading
departments, their networks of telephone connections, and their custody and
messenger services, provide the major part of the facilities needed to effect the
transfers of money, advices in confirmation of agreements, and the securities
themselves, which flow largely on the basis of word-of-mouth agreements over
the telephone between men who are known to each other and whose integrity
cannot be questioned.
Within this same bounded area is the New York Clearing House, through
which the accumulated checks drawn by depositors of any one of these ( and
a few other smaller member) banks are presented for collection before 10 a. m.
each morning. Here, too, are the principal trading offices of practically all of
the Government securities dealers, several of whom have other offices scattered
across the country, and a few of whom have home offices in Chicago. Here,
also, are the brokers in Government securities who run small lot orders ( usually
by telephone) from dealer to dealer, and the others who maintain desks devoted
to locating and placing Federal funds in New York or across the country.
Close by are the offices of many of the major insurance companies, other
large financial and nonfinancial corporations which have large sums to manage,
and a host of other activities dependent in some degree, much of the time, upon
the efficient continued performance of the money market. And within this same
bounded area are the New York Stock Exchange and the American Stock
Exchange. Here are the main offices of the leading stock brokerage firms.
Federal Reserve Bank of St. Louis

And as an integral part of this same financing center, here are major offices of
the principal underwriting firms and "over-the-counter" dealers which handle
debt instruments or equities, and play the leading role in scheduling and placing
the flow of new capital issues for the country as a whole. Only blocks away
are many of the major commodity trading markets in the United States markets which often also depend upon tapping the funds of the money market
in significant volume.
Of course, none of these institutions is entirely engaged in the affairs of
the money market, as we have loosely defined it for our use, but all move
within its zone of activities; the banks, the Government securities dealers,
those who trade in Federal funds or merchandise other forms of short-term
credit, and the FederaJ Reserve Bank of New York as the System's arm inside
the bounded zone are at its center. The Treasury is in effect here, too, as
principal issuer of short-term money market instruments, but it acts ordinarily
from day to day through its own fiscal agent, which ( as in most Treasury fiscal
matters arising elsewhere in the country) is the Federal Reserve Bank located
on the scene.
2. THE BANKS OUTSIDE NEW YORK. The institutions located in New York,
of course, among them carry through not only the great volume of financial
transactions originating in the City, but also the residual reckonings of the great
mass of money payments, on trade and on financial account, which take place
throughout the country; but there are many other banks outside New York
which often reconcile themselves without ever reaching through to the facilities
of the final clearing center in New York. Other leading banks actually comprising a part of the national money market, closely linked not only to New
York but to other banks across the country - and particularly to the banks,
large or small, in their own region - include perhaps five or six in Chicago; and
along the Eastern Seaboard, from Boston down through Philadelphia and the
South, there are eight or ten more. These numbers vary, too, with the extent
of prevailing pressures; more banks become money market conscious, in a
large and meaningful sense, when pressures have been fairly strong and persistent for some time, and the numbers mentioned here are only illustrative.
As of mid-1956, by the same general standards, there are probably five or
six real money-market banks on the Western Seaboard; perhaps six or seven
outside Chicago in the broadly defined Midwest, from the Appalachians to
the Rockies; and five or six in the South and Southwest. By and large these
are the same banks, practically all located in reserve or central reserve cities,
Federal Reserve Bank of St. Louis


which were classified by the Treasury as "Class C" .depositaries when , on
August 1, 1955, it instituted arrangements for making same-day calls on, or
redeposits in, a selected group of larger banks, as a means of evening out
those wide and often capricious swings in the Treasury's cash balances at the
Federal Reserve Banks that had long been a major source of money market
disturbance. (See further, Sections VI and VII, below.) 4
addition to these banks, and serving in some respects as adjuncts to them so
far as the operations of the money market are concerned, there are the Government securities dealers. Much of what these dealers do, in making markets for
Government securities, is to be described in Section IV below; their relations
with other markets, and some of the special aspects of their borrowing problems
in the money market, are discussed in Section V. At this stage, in taking inventory of the principal institutions in the money market, it is important only to
distinguish between the "bank" and the "nonbank" dealers. There is no economic
reason, of course, why any commercial bank could not set up within its organization a dealer department, assuming it has the necessary skilled trading personnel
and could allocate some part of its resources to carrying the position of its dealer
function. But only five of the major banks have done so, on a continuing basis
- three in New York and two in Chicago (although the latter also maintain
New York offices which their dealer departments use in their operations). There
is also another bank in Chicago which usually functions as a dealer, and there
are a few other banks located around the country which endeavor to make markets in some Government securities for customers or other banks in their own
region. Currently, only the five principal dealer banks are regularly in touch with
the Trading Desk at the Federal Reserve Bank of New York on a continuous
basis .
These bank dealers generally stand ready to "make markets" in all maturities of Government securities to any bona fide investor, regardless of whether
or not he may be a depositor of the bank. By contrast, many other large banks
do a substantial "customer business", but that is not done on the basis of
quotations continuously maintained by the bank itself. Though these other
banks may buy from , or sell directly to, their own customers, they ordinarily
rely, both for determining the current quotations and for taking or providing
the securities involved, upon the dealer market. The dealer department of the
4For a more comprehensive detailed analysis, see Th e Treasury and th e Money Market , by H . C. Carr
and others, published by the Federal Reser ve Bank of New York, May 1954 (third printing, M ay 1956).

Federal Reserve Bank of St. Louis

dealer bank customarily depends upon the bank's own resources for the full
amount of the financing needed to carry its position, although some arrangements for repurchase agreements or " buy-backs" with customers do exist. Only
two of the banks which have dealer departments also have a regular facility for
making loans to nonbank dealers, although the others may occasionally come
in to make dealer loans under special circumstances. But most of the other
money market banks in New York, and some elsewhere, are lenders of funds
to dealers and establish lending rates each day ( for renewals and for new money).
Practices vary among banks as to their readiness to lend securities to dealers,
whether bank or nonbank, either in connection with short sales or to help
effect deliveries when purchased securities are delayed in transit. In general,
few banks will lend securities. More banks lend funds than will lend securities,
and the aggregate amounts of funds loaned are ordinarily larger. Although there
are some exceptions, the banks in New York that lend money to dealers will
normally only provide Clearing House funds; but banks outside automatically
provide Federal funds when they use the Federal Reserve wire service in
transmitting them.
In contrast to the dealer banks, the nonbank dealers depend upon a variety
of sources for their borrowed fund s; thus, so far as the analogy with London
is concerned, it is the nonbank dealer which corresponds more closely with the
discount house in that respect. On the buying and selling side, however, it is
not considered proper, though perhaps not unknown, for a British discount
house to deal in securities longer than five years (jobbers on the stock exchange
ordinarily handle anything that is longer) , and from that angle the bank dealers
in this country may be closer analogues. For, although bank dealers will handle
longer maturities, conventionally they prefer to specialize in the under-five-year
securities, thus keeping their dealer positions in the same maturity area as their
investment portfolios. Of course, some of the nonbank dealers also, for all
practical purposes, operate only in the short area, but they are the exception.
By coincidence, though, there are, as of mid-1956, just about the same number
of active nonbank dealers in Government securities ( who, among their other
Government securities business, seem prepared to make markets on a regular
basis in Treasury bills, the type of security in which Federal Reserve operations
currently occur) as there are discount houses in the British market. Although
any others are welcome to establish regular contact with the Trading Desk, there
are twelve which have actually done business with the Desk ( on the basis of
competitive bids or offerings) during the first six months of 1956. All have
Federal Reserve Bank of St. Louis


New York offices, and the distribution of their thirty-two other offices ( excluding
representatives not considered full branches) is as follows:
Number of offices
Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Cincinnati . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Los Angeles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Pittsburgh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
San Francisco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Washington, D. C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
West Palm Beach, Florida . . . . . . . . . . . . . . . . . . . . . . . 1


1. FEDERAL FUNDS. In determining the immediate state of the money
market at a given hour on a given day, the interest rate to which one would
have to look as of mid-1956 is the "Federal funds rate". If "available" money
is generally all in use, that rate will normally be equal to the discount rate of
the Federal Reserve Bank of New York which, at the time of writing, is 2¾
per cent. In a tight market, all trading will occur at that rate. With the splitdiscount rate situation prevailing at mid-19 5 6 ( the Minneapolis and San Francisco Federal Reserve Banks have 3 per cent discount rates), there have been
times when some trading has occurred at rates above 2¾ per cent, but those
have not been frequent. For brief periods at the close of a statement week,
when the principal banks may discover that they have made more-than-ample
provision for their requirements and will average out with some excess, the
Federal funds rate may dip quickly to as low as 2 per cent, or possibly even
lower, only to be back up to 2¾ per cent at the opening the next morning
with the start of a new statement week. There is no one place where this rate
is "made", that is, where all supply and demand come together. Instead, the
process is dispersed among one or more brokers who actively bring buyers and
sellers of funds together, some of the banks (both in New York and outside)
Federal Reserve Bank of St. Louis

who either act as brokers or take outright trading positions in Federal funds,
and some of the Government securities dealers who obtain or release funds
as a by-product of their own trading transactions. While there is rarely any
doubt as to the rate at which funds are trading at any given time, there is no
fully reliable statistical indicator based upon the volume of transactions occurring at various rates. That paradox - of a rate recently thrust into key importance which cannot be found among the usually published money market indicators - is under special study within the Federal Reserve System at mid-1956.
2. DEALER LOAN RATES. Perhaps next in significance, as an indicator of
the degree of strain or ease felt by the various leading money market banks, is
the dealer loan rate which each of them ( except for some dealer banks) posts
each morning, around 11: 00 a. m., after appraising the effects of transactions
at the Clearing House and all other developments likely to affect the money
position on the given day. Referred to, for example, as "3 ¼ - 3¼", or
"3 ¼ across", a bank's rate means that it will charge 3¼ per cent for renewals of
existing loans secured by Government securities and 3¼ per cent for new loans.
If posted as "3 - 3¼", the rate means 3 per cent for renewals and 3¼ per cent
for new money. Or in some cases, it may appear as "3 ¼ - O", which means
3 ¾ per cent for renewals, but no new money available at any rate. There is not,
in the case of any bank, an assurance that large sums will be available at the
new money rate; and, of course, the amount a dealer might obtain will depend
as well upon his own credit standing and general relationship with each bank.
Nor is there any commitment to keep the posted rate unchanged (although
some special lending arrangements carry beyond the usual one-day term, or
call feature, ordinarily stipulated in dealer loans). A bank which starts with
a relatively low posted rate on new money, for example, is quite at liberty to
raise that rate during the day, to negotiate some variant of it with a particular
dealer, or to cut it off entirely and make no more money available after having
kept the rate posted for only a few minutes. One bank in New York, moreover,
often posts a "preferential rate" for limited amounts of loans where the collateral
is entirely Treasury bills. Thus, it is virtually impossible to compute a single
rate to describe the effective lending rate, either for renewals or for new money,
at the New York City banks. That difficulty does not alter the fact, however,
that in keeping closely aware of the actual rates that are in effect the dealers,
and the Federal Reserve as well, can tell a great deal about the way in which
the residual money pressures from the rest of the country are coming to rest
in New York - whether the City as a whole is losing or gaining funds, and
Federal Reserve Bank of St. Louis


something about the distribution of ease or pressure among the leading banks.
As we shall see in Section VII, regul ar telephone liaison with the money position officers of the principal banks makes possible a much fuller evaluation of
all the forces at work.
In addition to the Federal funds rate and the various dealer loan rates
of key New York banks, interest also attaches to the rates at which dealer
financing can be obtained out of town: first from banks in Chicago and elsewhere, and then from nonbank sources. This is the sort of information that
can only be obtained anecdotally, at the moment of its significance. But aggressive Govern_ment securities dealers are always alert to seek out money
available in other parts of the country at rates lower than those posted by the
New York banks; and, by closely watching their progress, the Trading Desk
at the Federal Reserve Bank of New York is usually able to improve its
appraisal of the general availability of funds and the extent to which they are
being tapped -'- that is, being brought into the common pool and made an
active part of the national money market. For these developments, as well,
there is no kind of statistical indicator, but the fact that no data are compiled
for the use of students of the money market does not alter the importance of
these rates in energizing the functioning of the money market on a truly national
scale. Virtually all parts of the monetary machine are presently being kept in
sensitive contact with all others through the combined efforts of the banks and
others engaged in trading Federal funds, and of the dealers engaged in locating
borrowed money at rates below those prevailing in New York.
3. THE OTHER MONEY MARKET RATES. There is no need, presumably, to
do more than recapitulate the other money market rates. The keystone of the
entire structure is the discount rate of the Federal Reserve Banks. Fluctuating
around, though more often below, the dominant discount rate, is the weekly
auction rate for Treasury bills. Loosely related to both are the dealer bid and
offering rates on bankers' acceptances and on commercial paper, the latter somewhat higher, partly because such paper is usually several months longer in term
and does not carry a bank name. Then comes the "one-year" rate on Government
securities - that applicable to a new certificate if one were to be offered - and
along with that is the whole family of prevailing rates on currently outstanding
Governments in the under-five-year area. Rates on the various Government
agency issues, bank lending rates on stock exchange collateral ( to dealers and to
customers), and the somewhat slower moving rate of great significance to quality
business borrowers the country over, the "prime rate" of the leading money
Federal Reserve Bank of St. Louis

market banks - all these are a part of the money market, and a snapshot of
a representative group of them, as they looked on June 29, 1956, is given in
the following table:

June 29, 1956
Per cent
Federal Reserve discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2¾ *
Treasury bills - average issuing rate, • .... • • . . . . . . . . . . . . . . . . . . . . . . . . . 2.535 t
Bankers' acceptances - dealers' offered rate for 1 to 90-day paper ... ... .. 2:Ys
Commercial paper - dealers' offered rate for 4 to 6-month paper ......... 3¾
United States Government security maturing closest to one year ......... 2.56
Federal Intermediate Credit Bank debentures maturing 4/ 1/57, bid . . . .... 3.40
Call loans against stock exchange collateral .......................... 4
Commercial bank prime loan rate . ................................. 3¾
•In two districts (San Francisco and Minneapolis) the rate is 3,per cent.
tissue dated June 28, 1956.

IV. Trading Procedures in the Government
Securities Market
Both the problems and the methods of central banking in the United States
change with the shifting practices of the banks, dealers, and others who make
up the money market. The purchases of bankers' acceptances and the rediscounts of commercial paper which formed the main connection between the
money market and the central bank in the World War I era gave way, as more
and more Government debt of various maturities was created, to increasing
use of United States Government securities. By World War II, it had become
a rarity for any bank in the United States to rediscount commercial paper.
Direct advances on the collateral of Government securities were much simpler
all round, and all banks had some Government securities in their portfolios
which could be used as collateral for borrowing. Moreover, as Government
securities seemed to fill much of the need for negotiable secondary reserves
and bank lending rates were at extremely low levels, the interests of borrowers
and of banks in using negotiable commercial paper or bankers' acceptances
diminished; the business formerly financed in those forms was more and more
Federal Reserve Bank of St. Louis


handled through commercial loans; and a central bank desiring to absorb or
release funds on its own initiative found that purchases and sales of Government
securities were simpler and more effective than market purchases and runoffs
of bankers' acceptances. As a result, for more than half of its forty-two years,
the Federal Reserve System has centered its open market operations in the
Government securities market.
Even though Federal Reserve operations on an outright basis are normally
confined to Treasury bills ( discount obligations of three months or less maturity), it is important to have an introductory view of the Government securities
market as a whole at mid-1956, before turning in Sections VI through VIII
below to the detailed aspects of the Federal Reserve System's own operating
procedures. Much has already been said about the dealers and their present
relation to the money market. That will be drawn together and amplified here
in briefly answering four questions: Why are dealers necessary? How do they
"make markets"? What are the differences among types of securities? What
physical arrangements are needed for the prompt fulfillment of transactions?
In Section V, more will be said about the dealers' relations with other markets
and about the special problems of dealer financing.


The dealer type of market that has emerged for Government securities in
the United States reflects the answer of competitive enterprise, under the conditions of mid-1956, to the need for a mechanism that will bring together all
potential buyers and sellers, at any given time, and emerge with prices that
come closest to satisfying the interests of all of them. For a long time an effort
was made to shift the center of trading in Government securities to the floor
of the New York Stock Exchange, and a few bonds are still occasionally traded
there, but the facilities provided by the combination of brokers and specialists
in a stock exchange never proved adequate to service the large volume and
particular interests represented by the greater part of the trading in Government securities.
All of the Government securities dealers are, in a sense, specialists; all buy
for and sell from ·their own positions at prices which they continuously make and
revise. But the total trading volume is so great that no one specialist could
ever handle it all. Nor would it be practicable to have an array of specialists
for each two or three p airings of Government securities - the interrelations
Federal Reserve Bank of St. Louis

among the various prices are too often too close. Consequently, in the Government securities market as contrasted with the Stock Exchange, there is a
division of the specialist's labor, and an alteration in form (to include the
broker's services as well). With fifteen or twenty quasi-specialists, competitively
seeking out all potential buyers and sellers and competitively quoting prices
on any of the outstanding Government securities all through the trading day,
each potential buyer or seller can be assured of quotations as refined, and
"spreads" (between the market bid and offer) as narrow, as the full magnitude
of the large volume of trading should be expected to make possible.
There is little doubt, given the consensus on price that develops continuously
out of the activity of the dealer market, that a particular holder could, at times,
sell directly to an investor with whom he happened to be in contact and, by
making use of the prevailing market price, come to a settlement that would
satisfy both sides. That does happen. Investors sometimes do short-cut the
dealer market, but not regularly and rarely in size. Actually no seller of size,
nor any buyer, alert to the vast scale of the potential buying and selling interest
customary in Government securities, could feel sure that he was discharging
his own obligations properly if he made it a practice to negotiate his· own
trades with his own circle of contacts whenever possible. He would want to be
sure that he was getting as good a price as could be had at that time anywhere
in the country. And in order to be sure, he would have to turn to the dealers,
whose job it is to keep in contact with actual or potential buyers or sellers
across the country, and who inject the added assurance to the customer that
they are willing to risk their own capital in trading at these quoted prices.
No single buyer or seller could ever know, until he tried, whether the price for
the particular amount he had in mind would in fact prove to be the same, or
better, or worse, th an the currently reported " dealer quote" .
The essence of the dealer method of operation is negotiation, to work out
a price for a seller that will satisfy him and yet reflect what the dealer knows
about the current demand for the particular issue, in amounts of the given
size. And anyone experienced in the market will appreciate that, even though
quotations are always being given, they only reflect the consensus of judgments
among dealers as to the visible supply and demand and current expectations;
one order of substantial size (to illustrate, as of mid-1956, perhaps 25 million
dollars in bills or 5 million dollars in bonds) could at times change those
quotations markedly. Thu s, there has come to be nearly universal recognition
of the need to rely upon, and function through, the dealers - the firms which
Federal Reserve Bank of St. Louis


make it their business to keep bringing supply and demand together, from all
over the country, and which can neither overcharge a customer (because of
competition) nor undercharge him (because the risk of loss falls directly upon
the dealer's own capital).
There are thus three distinguishing elements in the dealers' unique role:
first, the specialization in detailed knowledge of the Government securities
market, the factors affecting the market, and the holdings and interests of
various customers across the country; second, the stake of each dealer, trading
for his own position; and third, the competition among dealers, seeking customers and quick to take advantage of any mistake in judgment revealed by
another dealer.
The results of dealer performance through the years have been to provide
a market of considerable scope and diversity for Government securities. It is
to the interest of the Treasury as issuer of these securities, and of the Federal
Reserve as a major buyer and seller of these securities in carrying out credit
policy, that such performance continue and improve. For that reason, as well
as for the reasons already mentioned in referring to the private buyer or seller
of Government securities, both the Treasury and the Federal Reserve confine
all of their market transactions for the purchase and sale of outstanding Government securities to the dealer firms which continue, day in and day out, at
risk to themselves, to "make markets" in these securities to everyone.


The dealers conduct their business in an "over-the-counter" telephone
market. While "salesmen" of the various firms have assigned areas (by investortype or by region or both) which they develop through personal visits in an
effort to explain the services offered and to learn more about the needs and the
preferences of every potential customer, practically all of the actual transactions
are executed "on the wire". Substantial amounts change hands on the basis of
oral commitments, often between men who have never seen each other, to be
confirmed later through the delivery of purchase or sale advices by the dealer,
through the mail or by messenger. That readiness of contact and promptness
of execution, made possible by the well-organized use of communication facilities among parties known to each other as established concerns of good credit
standing, has equipped the Government securities market to carry out a major
part of the job expected of an efficient money market.
Federal Reserve Bank of St. Louis

There are differences, of course, among dealers in their readiness to enter
into transactions on the basis of their routine quotations, depending not only
upon the size of the dealer and his current appraisal of market conditions,
but also upon those characteristic differences among individuals which are as
much a part of "knowing" the Government securities market as they would be
in knowing a nation or a city. Any dealer reserves the right to "negotiate" over
the price and amount that he will be "good for" for any given issue. Most of
the larger dealers publish quotation sheets, giving their bid and offer prices for
all Government securities as of the close of business each day. Through continuous minute-to-minute appraisal of market developments, principally as these
are reflected through customer inquiries and through the exchange of quotations
( called "runs") among dealers, these prices will subsequently be varied up or
down throughout the course of the next trading day ( 10 a.m. to 3: 30 p.m.
New York time).
Dealer performance will usually be characteristically different for securities
of shorter term from that for securities of longer term. Probably because the
issues of shorter term are considered more liquid, the magnitude of daily transactions in shorter-term securities ordinarily appears to be many times greater
than that in the longer terms, and their prices tend to fluctuate less sharply.
In turn, many of the dealers concentrate their efforts at the short end of the list,
and almost without exception any of the dealers would be prepared to do business on the wire in much larger magnitudes for the shorter-maturity issues than
for intermediate or long-term securities. The amounts vary, generally, in inverse
relation to the risks. In Treasury bills, for example, trading is normally conducted in the millions of dollars, and the larger dealers frequently have several
transactions in blocks of 5 or 10 million dollars ( or even larger) during the
course of a single day. By contrast, the customary trading unit in long bonds
usually does not exceed one million dollars, and is often less than that in


Treasury bills are generally issued with a three-month maturity and are
issued on a discount basis. At present there are at all times thirteen regular
issues of Treasury bills outstanding, one issue maturing on Thursday of each
week ( except for adjustments in the event of a holiday) . Bills are sold at sealedbid auctions, and the time for bidding for each renewal of Treasury bills expires
Federal Reserve Bank of St. Louis


at 1: 30 p.m. New York time each Monday. (In the event of a holiday on Monday, the closing time for the auction is customarily brought forward to the next
earlier business day, usually the preceding Friday.) Actually, most competitive
tenders in New York are not submitted at the Federal Reserve Bank until the
last half hour before the bidding closes; many arrive within the last minutes. The
close physical proximity of the money market institutions to the Federal Reserve
Bank permits the special transmittal of tenders by messenger. Others located
some distance away ordinarily submit tenders by mail, telegraph, or through the
money market banks (who tender large amounts each week "for customers").
Most of the bidders for small amounts, and many others up to the limit of
$200,000 per subscriber, submit noncompetitive tenders which are allotted in
full at the average price determined by the accepted competitive tenders ( about
one sixth to one eighth of the total bill issue each week is currently accounted
for by the tenders).
Dealers ordinarily bid for a sizable amount of Treasury bills each week,
and subsequently perform the role of distributing the securities to others as
demand appears ( the combined dealer allotments often run as high as one
quarter of the total issue). Because of their key role, dealers of recognized
standing are permitted to bid for amounts related to their net worth without
making the 2 per cent deposit which the Treasury requires from all others,
except commercial banks. In practice, nearly all of the competitive tenders which
are not for the account of dealers or money market banks themselves are submitted through the commercial banks, with the banks, in effect, assuming the
obligation of the subscriber to pay for any bills allotted on the delivery date.
Each dealer knows at the opening of business on Tuesday morning
how many Treasury bills he has been awarded in the latest auction. Since
those bills will not have to be picked up and paid for at the Federal Reserve
Banks until Thursday, the dealer has two full trading days and part of another
in which to sell his "new bills" or to "swap" them against other outstanding
bills, for Thursday delivery and payment, before he has to put up any money
at all. This additional leverage, as well as the short maturity of Treasury bills,
helps to account for the market view that trading in Treasury bills represents
as much as one half or more of the dollar volume of all trading in Government
securities most of the time.
Certificates of indebtedness are fixed-interest obligations, issued at par, with
an original maturity of no more than one year. There is very little differ38
Federal Reserve Bank of St. Louis

ence for all practical purposes between certificates and notes, except that
notes have an original maturity of not more than five years or less than one
year. Treasury bonds are the long-term debt instrument. There is no specified
statutory outer limit on the maturities for which the bonds may be issued, but
customarily they are not issued for maturities any shorter than five years, since
these maturities are ordinarily reserved for the three other categories of issues
already mentioned. Only notes and bonds are eligible under present statutes for
direct purchase by the Treasury for sinking fund purposes.
In terms of detailed trading procedures, Treasury bills are quoted in the
dealer market on a discount basis, and the quotations, given in terms of percentage yield, are refined to %oo of 1 per cent ( or 1 "basis-point"). Thus, the
Treasury bill of thirteen-week maturity at the time this is being written is
generally quoted in the dealer market at 2.49 per cent bid and 2.46 per cent
offered. The spread between the bid and offer quotations represents the
dealer's profit margin, in the event that he is fortunate enough to turn over
at 2.46 per cent any bills he acquires at 2.49 per cent ( on a thirteen-week
bill, this 3 basis-point spread would be equal to $75 per million dollars par
value of bills traded). Obviously, at times of greater uncertainty concerning
the direction of market pressures, the dealer will widen this "spread" in order
to protect himself against either acquiring securities at too low a rate of yield
( too high a price) or selling them at too high a yield ( too low a price) in
relation to the prices that may develop shortly as the market reaches a new
consensus. The yield spread also widens as Treasury bills near maturity, in
order to keep a satisfactory margin in terms of the actual dollars and cents of
principal amount being bought or sold.
The same kind of spread is maintained, and the same general principles
govern the width of the spread for certificates, notes, and bonds. However, all
of these securities are currently quoted on a price basis ( although it never
needs specifying, it is understood that the prices will in addition include the
interest accrued from the last interest-payment date to the date of delivery).
For example, the outstanding certificates due in February 1957, bearing a
2¾ per cent rate of interest, are being generally quoted by dealers as this is
written at 99 .31 bid and 100.1 offered. The price actually is straddling "par".
The figure after the decimal point does not represent hundredths of a percentage
point; it represents thirty-seconds. It is only for convenience in notation that
the form shown here is used in the market; it would actually be read as 99 3 ½2
Federal Reserve Bank of St. Louis


bid and 100 %2 offered. 5 Similar quotations (although not necessarily with the
same spread) would be available from all leading dealers for all other outstanding certificates, Treasury notes, and Treasury bonds. Currently, most
dealers would be prepared to do business with investors in these types of
securities, at quotations given on the wire, in units of one million dollars
( or more in the case of shorter maturities) but that varies with conditions and
the issues involved, and at times a particular dealer may reach unflinchingly
for amounts of several million dollars, while at other times he would prefer to
make no "firm" quotation at all, asking the customer instead to leave the block
with him "on an order basis" .
As a means of cross-checking the refinement of prices, and thereby enabling
dealers to maintain a spread as narrow as the majority would judge to be practicable under the conditions prevailing at any given time, there is a considerable amount of trading among dealers . At times, this interdealer trading has
been formalized in so-called "trading agreements" , which each dealer would
negotiate on a bilateral basis with as many other individual dealers as chose to
make such arrangements with him. Under such agreements, each dealer would
undertake to do business immediately on the wire, for either the bid or offered
side of any security quoted in his run, in " 100 bond lots" (that is, 100 bonds of
$1,000 par value each, or $100,000) with the other dealer - the initiative to rest
with either dealer. These transactions usually arise in the course of the customary
telephone calls to each other for "runs", giving the list of all current quotations,
and either dealer might immediately "snap" any offer or "hit" any bid that
appeared to him to be out of line with his judgment of "the current market".
Frequently, however, transactions between dealers are negotiated for larger
From time to time through the years, some dealers have found these formalized arrangements troublesome, believing that they give rise to a large number
of relatively small transactions without real significance, particularly at times
when one dealer or another may set out to attempt to generate price movements in order to test the strength of the convictions of various dealers concerning prevailing quotations, and possibly to activate investor interest during
relatively dull periods. Some of the dealers, who regard this use of trading
:;Thus, a ~urch ase r of a $1,000 certificate .of th is issue. o n June 12, 1956, when tha t quota tion prevailed,
for regula r delivery o n June 13 wo uld have pa id the fo llowm g :
Principal (100 1/ 32, t he offered price ) .......................................... $1 ,000. 31
A ccrued interest to June 13 .... ...... ......................... ... ......................... .
T o tal cost .......... ...... .................................. ................................~

Federal Reserve Bank of St. Louis

agreements as an unnecessary abuse, have actually as of mid-1956 suspended
all of their trading agreements with other dealers, although they continue to do
business with each other on a negotiated trading basis. A few other dealers are
still maintaining trading agreements _with each other, however, and all of the
dealers are still normally prepared to do business with their "retail customers"
in reasonable amounts on the wire at their current quotations.


To facilitate the execution of transactions in Government securities, all
of the leading dealers maintain head offices, or active trading offices, in New
York City. As a corollary to this concentration of dealer trading facilities in
New York, the bulk of all securities owned by the dealers is physically held
in New York, and arrangements are made for their use as collateral in borrowing funds from sources located anywhere in the country.
At mid-1956, after several years of development spurred by somewhat
higher short-term rates of interest, a considerable proportion of the business in
shorter Government securities is being done for "cash", i. e., for immediate
(same-day) delivery and payment - a development which has been made possible only by the physical proximity of the securities to the actual trading offices
of the dealer firms, the nearness of each firm to the others, and the efficiency
of the wire transfer facilities.
Of course, the dealers in Government securities hold in their own positions
only a relatively small fraction of that part of the outstanding marketable Government debt that actually moves through the market in any week, month, or
year. A major part of the active portfolios of Government securities held by
other investors is also kept physically in New York, under custody arrangements, in order to facilit ate prompt delivery in the event that speedy consummation of purchases or sales should at any time be essential. There is still a
considerable part of the marketable debt that is actually traded, however,
which is held physically at other locations around the country. The facility that
makes these securities, as well, virtually a part of the "New York supply" is
the "Commissioner of the Public Debt" wire transfer system that is maintained
by the Federal Reserve Banks. Through this facility, any seller of Government
securities in any part of the country may, by presenting the securities physically
at the nearest Federal Reserve Bank or Branch, have the securities transmitted
by wire to a buyer who is prepared to receive them at virtually any other Federal
Federal Reserve Bank of St. Louis


Reserve Bank or Branch. 6 Over 90 per cent of the heavy traffic in secuntles
over the "CPD" wire is between other centers and New York; there is very
little switching of securities between other Federal Reserve Banks or Branches.
With the same exceptions mentioned in the footnote , Federal Reserve Banks
or Branches also make the denominational exchanges ( supplying securities in
units of $1 ,000, $ I 0,000, $ I 00,000, or 1 million dollars) which are necessary
for the prompt fulfillment of orders of differing size.
The actual handling and transferring of securities, by means of messengers,
is largely concentrated in one New York City bank, which serves as "clearing
agent" for most of the securities transferred by most of the nonbank dealers.
The bank dealers, as a by-product of the large customer business ordinarily
done by the other departments of each bank, generally rely upon their own
messengers and their own clearance facilities. But the "cages" of the various
nonbank dealers - where all accounting records are maintained, purchase and
sale confirmations are issued , loans are executed, and instructions for the custody
and transfer of securities are prepared - depend heavily upon a close and
understanding relationship with this clearing agent. Although some other banks
( which are not dealer banks) do a nominal amount of the clearing business
for some categories of securities for some dealers, the bulk of the volume, and
the impact of a considerable part of any remaining shortage of funds among
the dealers near the end of the day, falls upon this one bank. In turn, because
it can effect some economies of scale from doing so large a part of the total
clearing business, this bank charges reasonable fees which are related to the
dollar volume of total transactions.
These physical facilities are important underpinnings for a trading market
in Government securities in the United States that can promptly reflect those
basic forces of supply, demand, and expectations which affect all credit and
capital markets. The unique characteristic of the Government securities market,
provided it is competitive and efficient, is its freedom from credit risk; and the
reflection of the basic forces through such a market should be somewhat less
ambiguous, somewhat less subject to varied interpretations, than the varying
prices and rates placed by the market upon different classes (Aaa, Aa, A, for

6The Helena Branch of the Federal Reserve Bank of Minneapolis is the only Branch or Bank not
participating in this system, and no securities may be transferred to the Buffalo Branch of the Federal Reserve
Bank of New York. No fees are charged for transferring Treasury bills, certificates, or notes or bonds
maturing or called for redemption within one year. The charge for other transfers is $5 for amounts up to
$50,000 face amount, and $10 for face amounts of $50,000 and over; in each case, the transfer must be of a
single issue to a single recipient.

Federal Reserve Bank of St. Louis

example) of private credit risks. It probably would have been impossible for
the present market facilities to have been energized and refined to the level of
efficient performance prevailing at mid-1956 without the driving stimulus provided by the dealers specializing in Government securities.

V. Interrelations Between the Government Securities
Market and Other Markets
The various paths of influence running between the action of the central
bank and the Government securities market, or in turn the transmission of
influences between the Government market and other parts of the capital market,
have been the subject of study by able economists for many years. No doubt,
changing institutional practices will keep the specific interrelationships at any
particular time some distance away from the current classroom "model", just
as any observations here on institutional arrangements at mid-1956 may be
out of date within a few months or years. But there are two kinds of interrelations that may always be expected to have some significance, and which
have not received their share of attention in the past. Without attempting to
add in any way to what has already been thought and said on the theory of
the rate structure, or of shifting investor preferences as influences upon the
differentials between "Governments" and "corporates", or the differentials
among "corporates" of differing quality, this section focuses on those two relatively neglected kinds of interconnection with other markets that have a continuing significance in the execution ( and to some extent in the formulation)
of credit policy. These are: the built-in links, within particular dealer firms,
between their activity in the Government securities market and their participation as underwriters or dealers in other markets; and those direct links between
the dealers, as borrowers, and the money market, which comprise the dealer
loan mechanism.


Although no single dealer is large enough to dominate the Government
securities market, and although none of the Government securities dealers is a
Federal Reserve Bank of St. Louis


large enough factor in any other market to dominate it, the fact that most Government dealers have important interests in other markets does help to assure
a close interrelationship between actual developments in those other markets
and the factors that determine dealers' judgments of the Government market.
The bank dealers, of course, might be expected to provide a close link with
the various segments of the bank-credit sector. They do, but the operations of
the dealer department do not necessarily have to fluctuate in line with the money
position of the bank. That would mean alternating between feast and famine,
so far as the position of the dealer department is concerned, and would not
be conducive to maintaining regular markets. As a rule, though responsive to
the major shifts in the money position of the parent bank, and perhaps expected
at times to make heroic efforts for investors who are important depositors, the
bank dealers come as close to being purely and simply dealers in Government
secµrities as the nonbank dealers. In terms of capital resources and borrowing
potential, however, although internal arrangements presumably vary from bank
to bank, the bank dealers are a group apart, as may become clearer in a few
Among the nonbank dealers, there presently are three who are also active
dealers in bankers' acceptances, making continuous markets within the limits
permitted by the available supply of acceptances. Although none of the non-

bank dealers specializes in commercial paper, at least one has acted from
time to time as a dealer in such paper on an agency basis. Two are members
of the New York Stock Exchange. Three are members of the American
Stock Exchange. Several are leading dealers in the "over-the-counter" market
in unlisted stocks. Seven are dealers in the bonds of States, municipalities,
and public authorities, and regularly participate in the syndicates formed to
market offerings of such securities as well as making markets in some of them
for "over-the-counter" trading. At least ten participate in the dealer selling
groups formed by the fiscal agents of the various quasi-Governmental agencies
(FICs, FHLBs, etc.) to market original offerings; and most of these, perhaps
more actively than most other members of the distributing groups, continue
to make good markets in the agency issues in reasonable amounts as long
as they remain outstanding. The dealer banks also participate actively in the
municipal and agency markets.
Another important area in which some of the Government securities dealer
firms also play a significant part is the underwriting of corporate security issues,
both fixed-interest-bearing and various classes of equities. Among the four
Federal Reserve Bank of St. Louis

active in this area, at least one is ordinarily among the members of the winning
syndicate for nearly every major market offering. These same dealers also maintain "over-the-counter" markets in the bonds which they helped to underwrite,
and some of them extend more widely to include most of the outstanding bonds
for which there is any frequency of trading. There are also some specialties
which one or another has developed. One of the Government dealer firms , for
example, is also one of the two most prominent firms interested in underwriting
railroad equipment trust issues - taking the lead in forming syndicates to bid
and in forming selling groups. Several also specialize in the kind of financial
counseling which is such an important by-product of the skills and facilities
brought together in firms primarily devoted to the underwriting and marketing
of securities - advising potential borrowers on types of offerings, possible
amounts, timing, and probable rates, though such managerial service, performed
often on a fee basis, would then ordinarily exclude them from participating in
the actual underwriting and selling of whatever issue was finally decided upon
by the borrower.
Nor is this all. At least six of the Government dealer firms also quote
markets in some of the obligations of the International Bank for Reconstruction
and Development (mainly those denominated in United States dollars), and
several underwrite and trade in the United States dollar bonds of foreign governments. Some also have connections through which they may assist American
investors who wish to trade in equities and bonds on foreign markets. And three
others, the dealer banks, are among the leading institutions in New York that
make good markets in foreign exchange.
There are still other links to other markets; but enough has been said to
indicate that, despite the peculiar skills and knowledge that are essential to
successful trading in Government securities through the years, these firms have
not become so narrowed in their specialization as to lose contact with the
significant developments in all other financial markets - as such developments
can only be known, intimately and promptly, by direct participants in these
other markets. The senior managements which set the broad policy outlines for
the various Government dealer firms, bank and nonbank, do so on the basis
of tested experience in the rough and tumble of the whole range of financial
markets. And whether or not they participate directly in the other markets,
all are necessarily in any event obliged to take developments in those markets
into account in dealing with customers who may move from one to the other.
Federal Reserve Bank of St. Louis



The outlines of the financing arrangements that have been developed by the
nonbank dealers were sketched first in Section II above, and then filled in further in Section III. So far as their general significance at mid-1956 is concerned, in providing a framework designed to activate the dealers as supplemental agents in the task of mobilizing available funds for the money market,
enough has already been said. So far as all of this helps to create the kind of
national market that will be keenly sensitive to the effects of open market
operations carried out by the Federal Reserve System in the dealer market in
New York, more of the consequences will be discussed in Sections VI, VII,
and VIII to follow. Here attention is focused on some potentially conflicting
principles that are imbedded in the present relations between the dealers and
their various sources of funds.
The pace of innovation and change in the operating relations between the
nonbank dealers and the money market as a whole has been so rapid over the
few years before mid-1956 that analysis and appraisal have not been able to
keep up with practice. For that reason, rather than attempt any further listing
of the details of prevailing procedures - details which might be considerably
altered within a year - it may be wiser to try to sort out the main lines
that the development seems to be taking. It would appear certain, for the years
ahead, that short-term Government securities will continue to be the most
important money market instrument, apart from the two forms of money itself,
clearing house funds and Federal funds. With that certainty would also go the
very great probability that nonbank dealers can be expected to continue, alongside the bank dealers, to play the leading role in assuring ready marketability
at competitive prices for these "liquid" Government securities. As a counterpart, the arrangements for financing the nonbank dealers will also, no doubt,
continue to be of crucial importance to the functioning of the money market,
and "dealer loans" may themselves be expected to continue to be a money
market instrument of double-edged significance - a liquid lodgment for shortterm funds, and a necessary basis for the effective maintenance of competitive
markets in Government securities.
At mid-1956, there appear to be two conflicting paths of development along
which the dealer loan mechanism has been evolving with changing money
market conditions. Either path is surrounded by implications for the longer-run
structure of the money market and for the nature of the job and the responsibility that would devolve upon the large banks that have traditionally been
Federal Reserve Bank of St. Louis

regarded as the "money market banks". One path, the one which has seemed
to be the more heavily traveled during recent months, implies a growing reliance upon the nonbank dealers to find the marginal money somewhere in the
country that will, in effect, meet much of the net residuals of reserve needs that
have been passed along to New York for final settlement as a result of deposit
shifts or of a general shortage of reserves. The other path implies a continuance
of traditional banking responsibility for locating the marginal funds to balance
out the residual reserve needs that are shifted to New York for ultimate settlement. Either path might eventually become the main road; or the market
might evolve some lasting way of using and expanding both. It is not with any
intention to indicate a preference for one, or the other, or a compromise, but
only as a needed final stage in mapping out the terrain in which Federal Reserve
operations have to be conducted that these two approaches are described
further here.



money market apparatus will always have to function in such a way that dealers
are under some compulsion to seek out available funds, wherever they may be.
In years gone by, that compulsion mainly took the form of seeking out buyers
(and of course sellers, as part of a two-way market facility) who could be interested in outright transactions in Government securities. More recently, as mentioned in Sections II and III, there has been a growing tendency to convert some
part of that investor market into a source of funds to finance positions, using
established direct trading contacts with out-of-town banks, and with business
corporations, States and municipalities, and others, to arrange financing through
the form of repurchase agreements.
Having taken the initiative in "educating" their investor customers to the
alternative of repurchase agreements, the nonbank dealers now find a genuine
and continuing, though fluctuating, demand for this kind of accommodation.
For a few days, or a few weeks, the "lender" can employ short-term funds at
a contractual rate of interest. This provides much more return than could be
imputed to the goodwill derived from keeping a noninterest-bearing demand
deposit at his bank. The agreed rate might even at times be higher than that
on a Treasury bill with a comparable number of days left to run. Moreover,
in ordinary circumstances the supplier of funds is relieved of the risks of fluctuation in market prices; at the conclusion of the contract he simply returns the
securities taken on repurchase agreement and receives in r~turn the amount he
Federal Reserve Bank of St. Louis


originally advanced, plus the agreed interest. And he can usually pick his
day of maturity, so that he need not be tied to a Thursday, the day that
Treasury bills mature, or to the maturity date of other Treasury securities.
The dealer, on his side, though perhaps troubled at times over the thought
that he is doing less outright trading business with these customers ( the type of
business upon which his special skills had all been focused in the past), is
nonetheless able as a rule to obtain a major part of his needed financing in this
way, and usually at rates of interest considerably below those charged by the
money market banks that make dealer loans. He is often able to arrange for
ready substitution of collateral - taking out of the repurchase agreement collateral any securities he has been able to sell, and putting back something he
has just purchased, or has had out on some other loan. While the dealer may
have to give the supplier of funds an option to call all or part at any time, and
may not be able to get quite the same flexibility for himself to vary the amount
to suit his own situation, he often finds that the other party to the repurchase
agreement is rather indifferent to any provision of margin ( i.e., market value of
collateral higher than the amount of the repurchase agreement) so that very
little of the dealer's own capital has to be tied up in such arrangements and his
borrowing "leverage" becomes quite high. Thus, on balance, while he might
still have preferred to do his borrowing at the money market banks and to
concentrate his market contacts on the actual trading of securities for outright
purchase and sale, the dealer finds the inducement of competitive costs sending
him out to scour the country for funds.
The inducement to dealers for finding "outside" funds has been fairly strong
over most of the past two years; but at times of peak money market tightness,
when the economic need has been for a maximum effort to mobilize existing
funds, the characteristic reaction of the money market banks has been for each
to raise its dealer loan rate promptly and at times considerably, thereby giving
the dealers an added spur to find funds, wherever they might be. When those
funds come in, to provide the needed balance for each dealer's own position,
they also ordinarily result in an availability of reserves at some New York bank,
which is thereby, in turn, relieved of some of the pressure that the money
market is being called upon to meet. (This is an abbreviated version of a host
of complex, interrelated money flows, some in, some out, and some merely
transfers among deposits held in New York all along.) Thus, although each
bank might at the same time be engaged in many other kinds of effort to locate
funds and restore its own reserve position, and even though in the end some
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part of the dealers' needs might be met by the New York banks at their higher
rates, the functioning of the apparatus has been such that the dealers have
pushed their varied ingenuities to the limit in an effort to borrow funds all over
the country. That has had the effect, too, of broadening out noticeably the
distribution of the pressure on bank reserves to many parts of the country that
might not otherwise have been as directly exposed to it.
The deeper question, of course, which can probably be answered only by
the market itself as it develops over the years ahead, is whether this kind of
structure is best suited, not only to the day-by-day fulfillment of the money market's job and to maintaining a nation-wide diffusion of money market influences
that will assure a fairly sensitive response to Federal Reserve action affecting
the volume of funds, but also to providing the kind of shock-resistant financial
arrangements that are needed in periods of crisis.

The recent market developments more nearly in line with past
patterns of money market adjustment have been the spreading networks of bank
contacts in the Federal funds market. One Wall Street brokerage firm has for
years maintained a sort of clearing desk, bringing "buyers" and "sellers" of
Federal funds together and keeping the bid and offer quotations in line with the
shifting availabilities and demands, but it appears at mid-1956 that the gross
volume of transactions may have grown beyond the capacity of any one existing
facility. While that brokerage firm continues to have an important place in the
market, bank after bank, over the preceding few years, has become active as
a broker ( or in a limited sense as a dealer) in Federal funds. Although all are
parts of the same broad market, with a fair uniformity in quotations among
them all at any given time, these various newer elements in the Federal funds
market are clearly still finding themselves, in the midst of a stage of rapid
adjustment and growth, as this booklet is being written.
Several of the banks, not only in New York but also in other key cities,
have taken on an aggressive program, contacting banks (and reportedly at
times other sources or users as well) within their own regions, or across the
country, to canvass the extent of the supply or the intensity of the demand during the course of every day. For the most part, these banks then buy up the
funds they find available, taking them into their own reserve positions. In turn,
within the limits permitted by their own reserve situations, they will also sell
funds to those contacts that have indicated a need, perhaps including sales of
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funds to Government securities dealers or other financial institutions in need of
Federal funds to make payments on that day. Banks operating on a regional
basis will then dispose of any excess, or make good any deficiency, through
transactions effected directly in the New York market in Federal funds.
Thus, in a new environment in which trading for "today's" money against
"tomorrow's" money has become a large-scale operation, all of the major money
market banks in New York City have become active to some degree in buying
and selling Federal funds. The crisscrossing network of relations thus maintained
through the correspondent banking connections of these banks, and between the
New York banks and other financial institutions acquiring or using Federal funds
for payment purposes in New York, has also done a great deal by mid-1956
toward binding all parts of the financial mechanism of the country together and
keeping it marginally sensitive to those changes brought about in the availability of Federal funds by the action of the Federal Reserve System.
There are two aspects of the growing importance of Federal funds that have
special significance for the Government securities dealers. One is that some
part of the money that dealers might themselves be seeking, as they search
over the country for funds, is being funneled instead directly into the bank segment of the Federal funds market. That would apply particularly to funds which
the holder expects to retain only for a few days, and at periods when the
Federal funds rate is remaining consistently close to or at the discount rate. The
other aspect of significance is that at least one of the New York money market
banks, whenever it finds itself able to keep its position somewhat ahead, on
balance ( and this may be wholly or partly the result of Federal funds transactions), shows some readiness to lend at relatively more favorable terms,
though not often in large amounts, to the nonbank dealers. Usually, this takes
the form of a preferential lending rate to dealers on the collateral of Treasury
bills. This special type of loan is ordinarily made in Federal funds rather than
in clearing house funds. At times other New York banks make call loans to the
dealers in Federal funds. When money is tight, and particularly where week
ends are involved, this is of more value to a dealer than a preferential rate on
a loan in clearing house funds. That is true because so large a part of the
settlements for Government securities have come to be made as a matter of
course in Federal funds, and, if a dealer receiving a delivery against payment
in Federal funds can borrow only in clearing house funds, he will then face the
additional expense of buying the Federal funds with which to make payment.
(Whether or not he may later be able to reverse that, by repaying his bank
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loan in clearing house funds and selling the Federal funds for the one day interval, thereby offsetting all or p art of the double expense, there is usually little
question that a loan initially made in Federal funds is to be preferred, and will
probably prove in the end to be cheaper all around.)
There has not yet, by mid-1956, been any evidence, however, of a disposition on the part of the New York banks to extend preferential arrangements
on any sort of systematic basis, comparable to the British arrangement where
the banks supply a part of dealers' continuing needs at a preferential rate and
may apply variable daily rates (related to swings in the money position) to
dealer borrowings above the more-or-less assured part of "the line". Nor is
there any reason why one should necessarily expect such an outcome. But it
does appear that one of the factors that has played a large part in impelling
the dealers to do as much as possible of their borrowing away from the New
York banks - that is, the continuance of long-standing "normal" arrangements
for lending to dealers in clearing house funds - may be in process of change.
Perhaps, with the growing participation of the banks in the Federal funds market - a type of operation for which their established facilities and skills are
well adapted - the emphasis is shifting. Perhaps there may at some stage ahead
be a growing dependence of a continuous kind by the nonbank dealers upon
the money market banks. Perhaps those banks, in turn, have found, through
the payment of a rate for the "purchase" of Federal funds, a partial substitute
for the drawing power of interest payments on demand deposits which, until
they were prohibited, were an important means of attracting funds to the banks
at the money centers. Perhaps the banks themselves will be taking over a
greater part of the initiative for locating the funds needed to keep the money
market as a whole in balance, within the general framework of tightness or ease
that may be intended at any particular time by Federal Reserve policy. However,
whether the banks can, or should, effectively compete with the dealers in attracting Federal funds from nonbank sources is indeed a question.
There are at least some parts of this second path, or approach, visible and
in use at mid-1956. Whether it will broaden out, paralleling the first, with a
minimum of conflict or confusion in market procedures, or whether one or
the other will become the dominant pattern for the money market as a whole,
will have to depend on the preferences emerging from the mass of independent
actions taking place in the market itself. But both paths have become sufficiently
important for the Federal Reserve to devote real effort to learning all it can
Federal Reserve Bank of St. Louis


from observing the traffic over both, in attempting to fit its operating techniques
as closely as possible to the important forces actually at work in the continuously
changing markets for money and for Government securities in the United States.

VI. What the "Trading Desk" Does- A General Survey
The "Trading Desk" is the operating arm of the Federal Open Market
Committee. All transactions consciously undertaken by the System in the
money market or the Government securities market, at its own initiative, to
carry out its responsibilities, are executed by the Trading Desk. Known formally
as the Securities Department of the Federal Reserve Bank of New York, the
Desk has no direct part in policy formation; it simply carries out the instructions
of the Federal Open Market Committee. Consequently, as stressed at the beginning of this booklet, there will be no consideration of policy formation here.
Given the policy ( and more will be said on the communication of that policy
in Section IX), what does the Trading Desk do?

As the prerequisite to everything else, the Desk must bring together every
kind of available information on the current state of bank reserves and the
money market. The effectiveness of Federal Reserve policy, and the steps that
must be decided upon each day to reinforce or maintain that effectiveness,
depend upon an accurate determination and appraisal of what is currently going
on. Most immediately, then, the Trading Desk has to serve as an observation
post, gathering and coordinating the evidence that should make it possible to
decide whether action is needed to carry out the instructions of the Federal
Open Market Committee, either for the defensive job of keeping the mechanics
of the money market working smoothly, or for the dynamic job of creating the
intended degree of pressure in the money market as a whole.
The duties of the Desk as an observation post do not stop there. They also
include continuous reporting and appraisal of conditions in the money and
capital markets for the Federal Open Market Committee, providing a part of the
great range of data and analyses that form the raw materials used by the Committee in those frequent evaluations of the general money and credit situation which
underlie its equally frequent considerations of appropriate current policy. In
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addition, because the United States Treasury customarily utilizes the facilities
of established Federal Reserve Banks or Branches to conduct as much as
practicable of any fiscal agency business - for reasons of economy as well as
coordination - the Trading Desk has customarily served as the eyes and ears
of the Treasury in the Government securities market and related markets.
Challenging as it is, the observation post assignment is only the first of
four broad categories of the Trading Desk's work; all are, however, so closely
interrelated that any officer of the function might find it difficult to explain, if
asked at any particular moment, which one was currently occupying his attention. The second is the actual trading itself, including maintaining high standards
of business performance in relationships with the dealer market in Government
securities as well as with the dealer market in bankers' acceptances, and executing
occasional transactions in other markets for other accounts. This also includes
maintenance of all accounting records for the System Open Market Account,
and "participating" the Account among the twelve Federal Reserve Banks,
as directed by the Committee. The third is a wide variety of ancillary duties:
some ( such as investments for foreign central banks) are carried out by the
Trading Desk to assure coordination with the steps being taken to implement
Federal Reserve policy; some ( such as the actual processing of subscriptions
for Treasury cash issues) are carried out by the Department in order to make
further use of facilities or skills already necessarily developed at the Desk; and
some (like this booklet) to help provide a basis for public information on
operations and procedures. Fourth is the keystone, the actual decision-making
inherent in the execution of policy on the operating level, which includes constant communication with members of the Federal Open Market Committee
and the staff of the Board of Governors in Washington, preparation of voluminous written reports on all aspects of actions actually taken, and, as a corollary,
the rendering of advice when requested concerning possible market developments ahead ( or, in the case of the Treasury, serving as technical consultants
in the determination of the detailed terms of market offerings).
More substantive detail on all of these parts of the Trading Desk's work
is given in Sections VII, VIII, and IX. As an aid in perspective here, it may
be helpful to take a look first at the organization of the Securities Department
and its interconnections with the other departments of the Federal Reserve
Bank of New York. After that, to illustrate the way in which observation,
action, and reporting are combined, there will be a quick view of a day's work
at the Trading Desk.
Federal Reserve Bank of St. Louis



Like the changing markets with which it deals, the organization of the
Trading Desk and its related functions does not stand still. As of mid-1956,
however, the Securities Department is divided into two divisions, one (the Bill
Division) devoted entirely to all aspects of buying and accounting for bankers'
acceptances, and the other ( the Securities Division) containing everything
else, including a "Purchase and Sale" Section, located physically in an enclosed
Trading Room, and consisting of all members of the staff who execute market
transactions in Government securities.
This Trading Room, and its U-shaped Trading Desk equipped with telephone turrets for each of the traders and each of the officers, is the nerve
center of all activity. A large quotation board, across the wall at the open end
of the U, is kept continuously filled with the current quotations of a representative group of leading dealers for all Government securities, along with a composite quotation for each issue representing the consensus among these quotations, on the basis of the individual dealer "runs" ( and of the Trading Desk's
practically continuous conversations with the traders on the desks at the other
active dealer firms as to the going bid and offer prices). The same board is
kept currently posted with a variety of other information to give at a glance,
as nearly as possible, a picture of the existing state of the money market, the
Government securities market, and other financial markets.
In charge of the full range of activities in the Department is a Vice President
of the Federal Reserve Bank of New York, who has also, customarily, been
selected by the directors of the Bank and approved by the Federal Open
Market Committee as Manager of the System Open Market Account. The
Manager of the Account reports directly to the Committee and its Washington
staff concerning market developments and actual operations, as well as to the
President of the New York Bank, who also has always been one of the twelve
members of the Federal Open Market Committee (the Federal Reserve Act
was amended July 7, 1942, to make the President or the First Vice President
of the New York Bank a statutory member of the Committee. To assure continuous exercise of the decision-making responsibility by an experienced officer of
senior standing, within the operating scope marked out for the Manager by the
Federal Open Market Committee, the First Vice President has for some years
acted as the Manager's alternate in his absence; in the absence of both, the
President would ordinarily be immediately responsible.
Federal Reserve Bank of St. Louis

At the time of this writing, there are four junior officers serving under the
Vice President-Manager. One, an Assistant Vice President, is essentially an
intermediary and coordinator, to supervise on the scene, on behalf of the Vice
President-Manager, the execution of detailed duties distributed among the three
other junior officers. These latter, in conformity with customary Bank nomenclature, have each been designated "Manager, Securities Department", a title
easily confused with that of the senior officer in charge, the Vice President and
Manager of the System Account. As a further indication of the approximate
zones of responsibility assigned to each of these three "Managers", informal
designations have been used as follows: (1) Manager, Trading and Markets;
(2) Manager, Market Liaison and Administration; and (3) Manager, Reports
and Analysis. Due to the need for continuous coverage in all zones, however,
each of the three serves as first or second alternate to the others; and all are
expected to keep informed currently concerning all aspects of the Department's
The Vice President of the Securities Department, like all other Vice Presidents of the Bank, is a member of the Officers Council consisting of all senior
officers, meeting periodically with the President of the Bank to take up all
general questions of policy and operations that would have a bearing on the
unified performance of all aspects of the Federal Reserve System's responsibilities that are carried out through the Federal Reserve Bank of New York.
Here, and in other committees within the Bank, such as the Discount Committee, and informal committees on relations with foreign central banks, and
on current credit policy, the Vice President regularly has an opportunity to
review and appraise those day-to-day problems arising from the interrelations
between open market operations and other Federal Reserve operations ( such as
check collections, currency movements, discounts, foreign and international
operations, etc.) that exert effects on bank reserves.
In addition to all of these top-level operating relationships outside the
Department itself, there are also routine arrangements for close coordination
with the fiscal activities of the United States Treasury, not only as regards the
management of the public debt and the purchase or sale of outstanding
Government securities in the market for various Governmental accounts, but also
in connection with the daily management of the Treasury's cash balance. As a
matter of operating practice, the Vice President serves as an adviser to the
Treasury at the time when decisions are being reached with respect to the
precise formulation of the offering terms and all other details related to the issu-
Federal Reserve Bank of St. Louis


ance of Government securities. Insofar a$ the physical aspects of issuance are
concerned, the Securities Department is directly responsible for receiving ( and
where necessary "policing") and processing all subscriptions to issues of marketable Government securities offered for cash ( including the weekly auctions of
Treasury bills). New issues offered on an exchange basis, against presentation of
other maturing securities in payment, are processed in another department of the
Bank, known as the Government Bond Department. In all events, cash or exchange subscriptions received at the Federal Reserve Bank of New York (including those forwarded from its Buffalo Branch) are only those submitted directly in
the Second Federal Reserve District; all other Federal Reserve Banks and their
Branches have their own arrangements for handling cash or exchange subscriptions. The over-all compilation of results and the administrative control
over all details of issuance are handled by the Treasury Department in Washington, subject to the immediate supervision of the Commissioner of the Public
Debt under the general direction of the Fiscal Assistant Secretary.
The Government Bond, Safekeeping, and Security Custody Departments
of the Bank handle all physical aspects of the delivery and custody of securities
bought or sold for the System Account, for Treasury or foreign accounts, or
for member bank or other miscellaneous accounts, by the traders located in the
Trading Room. And the Government Bond Department is responsible for the
actual handling of the calls made by the Treasury against its deposits in commercial bank depositaries, for transfer into its account at the Federal Reserve
Bank, although the determination of the amount of all such calls is worked out
by the Fiscal Assistant Secretary of the Treasury in consultation with the Vice
President or the Assistant Vice President of the Securities Department.
Another department upon which the performance of the Securities Department leans heavily is Research. A major part of the work of the Money Market
Section of the Research Department consists of preparing the detailed projections
of various factors affecting bank reserves, soon to be discussed, and the materials
used by the Securities Department in connection with the daily or twice daily
consultations with the Fiscal Assistant Secretary on Treasury calls against its
depositaries. The Monetary Economics Section of the Research Department
keeps a rotating flow of experienced economists passing through the Trading
Room to improve their understanding of the practical problems of open market
operations, partly in order to take the lead in preparing drafts of some of the
written reports, although these reports must, in the end, bear the imprint of the
operating officers of the Department - who alone can articulate the specific
Federal Reserve Bank of St. Louis

grounds on which operating decisions are made. The variety and extent of
these reports require an over-all expenditure of effort in writing, however, that
is beyond the physical capabilities of the men engaged full time in the actual
operations themselves. Daily data on the reserve positions of banks in New
York and the country as a whole, and on the Federal funds transactions of
New York City banks, are provided by the Financial and Trade Statistics Division of the Research Department. These are some of the ways in which the
Research Department gives needed aid, making possible a joint use of personnel
that materially strengthens the performance of each department in its own
primary role.


Apart from the usual paraphernalia of any office routine - mail, the flow
of written materials to be digested, the customary personnel problems of office
administration, the continuing maintenance of accounting records and processing
of "purchase and sale tickets", and comparable duties, which have to be sandwiched in around the edges of the usual tight-fitting schedule - the day's
developments ordinarily begin for the officers of the Department at 9: 25 a.m.,
with the arrival of the preliminary figure for the Treasury's balance in the
Federal Reserve Banks at the close the previous night. From then until 10: 00,
experts in the Research Department try to ferret out the causes of any deviation

from the previous projection (and at times it might prove to be a deviation of as
much as 100 million dollars or more). Meanwhile, the officers go to a room set
aside for regular conferences each morning with representatives of dealer firms.
Any firm stating that it is functioning as a dealer in Government securities,
maintaining primary markets on a nation-wide basis, and which satisfies ordinary
standards of credit-worthiness and capacity, is welcome to do business with the
Federal Reserve Bank of New York; and, if they wish, representatives may
attend a fifteen minute face-to-face conference with the officers, weekly or biweekly, to discuss the market in general and any aspect of interest related to the
firm's recent operations. The officers understandably, however, limit their remarks to avoid any disclosure to one dealer of information not already generally
available to the market. These conferences run until 10: 00 each morning, and
most of the active dealers in the market participate, generally being represented
by senior members of the firm who wish to have a regular opportunity to express,
Federal Reserve Bank of St. Louis


in the allotted brief time every week or every other week, their views on market
developments or influences. Additional time is available by appointment if a
special situation should require it.
After thus starting the day ( often hearing two firms take, in succeeding
sessions, sharply contradictory views on the causes of current price changes),
some of the officers go directly into the Trading Room to follow the events at
the customary 10 : 00 a.m. opening of the market. Others await a telephone call
scheduled at that hour from the Fiscal Assistant Secretary of the Treasury ( or
his deputy), at the same time absorbing a quick briefing from the Research
staff on the prospects for change in the Treasury's balance that day and several
days ahead. Then in conversation with the Fiscal Assistant Secretary the
analyses of both staffs are compared, the implications discussed, and a decision
is reached by the Treasury as to whether or not to take immediate action to call
or redeposit money in the forty-three large commercial bank depositaries across
the country ( "Class C") upon whom immediate calls or redeposits may be
made through notices which reach the banks by 11: 00 a.m.
By 10: 20 a.m. , data from original records in the Accounting Department,
obtained and processed by the Financial and Trade Statistics Division of the
Research Department, and reproduced by the Stenographic Division, arrive
giving the reserve balances and reserve requirements of each of the central
reserve city banks in New York as of the close of business the preceding day.
This also includes the calculated cumulative reserve positions for the statement
week, and any borrowings outstanding from the Federal Reserve Bank of New
York. Within five or ten minutes this is supplemented by another sheet of data
prepared by the same unit in Research, this one tabulating for each of the
principal money market banks its purchases of Federal funds on the preceding
day (in New York and outside) , its sales (in New York and outside), and its
net position as a buyer or seller ( from New York and outside).
While these data are arriving and being analyzed by the officers, other
things are also going on. Just after 10: 00 a.m., a preliminary decision is reached
on whether to attempt to replace the bankers' acceptances maturing on this
particular day, or perhaps to increase the holdings if a supply is available. That
is made definite as soon as the Bill (Acceptance) Division has completed its
canvass of that market and the officers have analyzed the data just mentioned
and the general state of the market in order to determine the direction in which
to move on the day in order to fit these operations to the credit policy intentions
of the Federal Open Market Committee. At the same time, the staff on the
Federal Reserve Bank of St. Louis

Trading Desk are busily talking to the various dealer firms to learn, first
of all, wh ich way prices are moving in each sector of the Government securities market and for particular issues, which way they are moving in the
corporate and municipal securities markets in general, the action of specific
recent new issues in the market, and changes in prices of stocks on the exchanges. From that, they probe on to learn what they can of the reasons, because
these are the variety of market signals that reflect more sensitively and promptly
than any data or projections, however refined, the forces at work at the moment
in the credit and capital markets. By 10: 45 they begin to obtain reports on the
opening quotations in the Federal funds market. By 11: 00 a.m. they begin
hearing the rates which one New York bank after another has posted for its
loans to Government securities dealers. And by that time they may also begin
to receive the first inquiries from dealers as to whether or not the System would
be willing to consider making some repurchase agreements. Usually at this
same time the summary report arrives, indicating the net debit or credit at the
New York Clearing House of all its participating member banks and the credit
to the Federal Reserve Bank (for the Reserve Bank customarily receives a
The officers may participate in some of the market conversations, but
they must be engaged principally in pulling together the implications of all
these early signals. And about 10: 45 they receive another key item, the projections of all factors expected to be affecting bank reserves, day by day, over
the next four statement weeks. The Research staff, in preparing this, would
have taken into account the effects of any decision reached by the Treasury
with respect to its cash balances at the 10: 00 a.m. conversation. Study of these
projections, against the background of reservations that grow out of the use
of such materials over a long period of time, along with the analysis of the
New York banks' reserve situation, and analysis of the variety of all reports
coming in from the dealers, prepares the officers to begin at 11 : 00 a regular
daily telephone conversation with a representative of the Washington members
of the Federal Open Market Committee (i.e., the seven members of the Board
of Governors) and with one of the Federal Reserve Bank Presidents currently
serving on the Committee. This conversation, usually lasting fifteen to twenty-five
minutes, ordinarily culminates in an outline of the action that the Account
Management then deems appropriate for the day. In most instances, however,
there will still be enough uncertainties in the developing market conditions, as to
whether actual events are confirming or refuting the conditions implied by the
Federal Reserve Bank of St. Louis


projections and data, that alternatives, or various contingencies, would have to
be mentioned at the time as still to be resolved by further observation of the
market over the next hour, or possibly longer.
During the conversation, the Manager, Trading and Markets, along with
all the trading staff, have been continuing the canvass of the market, and
transmitting for use in the conversation all current developments. By that time,
or earlier on days of clear-cut situations, it might be necessary to go into the
market to buy or to sell for System Account. Or by noon the situation might
have reached a stage calling for careful consideration of the use of repurchase
agreements. Physical delivery problems make it difficult to trade for "cash"
delivery after about 12 noon; comparable problems put a virtual closing time
of 1: 30, with some exceptions, on the negotiation of repurchase agreements.
Regular delivery transactions (i.e., next-day delivery and payment) may continue until the agreed market closing hour of 3: 30 p.m. Over these various
intervals, then, the Account Management is evaluating and deciding what ought
to be done. The traders execute the decisions, in the manner and amounts
finally determined by the Vice President-Manager operating within the instructions of the Federal Open Market Committee.
Another vital part of the information needed to round out the picture of
immediate money market developments is provided by the Manager, Market
Liaison and Administration. Beginning shortly after 11: 00 a.m., as the "money
position" men of the leading banks begin to have a view of their individual
reserve situations on the day, this Manager may begin contacting them by
telephone; these conversations may be repeated when necessary during the
day. The discussions range over the factors currently causing changes in each
bank's position, and the courses of action that each expects to follow.
All along, at every stage, there is also an irregular flow of orders arriving
for execution, most requiring consideration as to the best method of handling
to minimize interference with the System policy then being effected in the
market. Such orders come from various Treasury administered trust funds and
investment accounts, from foreign central banks and governments and international organizations, and from "country" member banks. Action for these other
accounts through the day is helpful in insuring the accuracy or integrity of
the various remarks and quotations which the dealers pass along. One level
of insurance protection, as far as the Account Management is concerned,
comes from the wide variety of the contacts, thereby providing ample opportunity to check one dealer's comments against those of others ( without dis60
Federal Reserve Bank of St. Louis

closure, of course). But much more meaningful to any dealer is the prospect
that he may, by keeping the Trading Desk fully informed, uncover an opportunity to do some outright trading business, and that he must be sure of
the quotations he mentions in describing the actual present state of the market,
for at any time the "Fed" might be in a position to "do some business" on
those quotes.
At 12 noon on Mondays and Thursdays, the officers talk a second time to
the Fiscal Assistant Secretary of the Treasury; this time to assist in working
out the regularly scheduled calls that are issued with advance notice to any of
the classes of depositaries (A, B, or C) .7 On Mondays, regular calls are issued
for the following Friday and Monday; on Thursdays, for the following Tuesday,
Wednesday, and Thursday. The aim normally, once differences in estimated receipts and expenditures as between the two staffs are reconciled or clarified, is
to schedule calls that will come as close as possible to maintaining the Treasury's
balance at the Federal Reserve Banks at a constant level. In that way, the
money market effects of swings of money into and out of the Treasury's "Fed
balance" can be most nearly neutralized. The daily possibility of action on the
"Class C" depositaries helps further, of course, by permitting interim adjustments when the projections are not (and often cannot be) accurate with respect
to the particular days on which funds will be "collected" out of the Treasury's
"Fed balance" by those receiving disbursements or when some of the direct
receipts will flow in.
On Mondays, too, the weekly Treasury bill auction occurs. Tenders have to
be submitted by 1: 30 p.m. New York time; upon receipt they are placed inside
locked tin boxes. Tenders are received at all Federal Reserve Banks and at
the Treasury, but the largest part of the dollar volume of tenders is received
at the New York Bank. The crescendo of interest in the bidding mounts during
Monday morning. At the start, dealers usually look toward the market rate on
the longest outstanding Treasury bill as a benchmark, add perhaps 5 basispoints ( depending on the level of rates - about 2½ per cent as this is written)
7These depositaries are classified on the basis of size, and the classifications are periodically reviewed
by the Treasury. The most recent review, m a de as of April 9, 1956, placed into Class A nearly 10,000
of the smaller banks whose Treasury bal ances ( held in what are called Tax and Loan Accounts) were
$ 150,000 or less o n that date. Class 8 includes all bank depositaries whose T ax and Loan Accounts exceeded
$150,000 as of April 9, except for the special group of the largest banks, designated Class C. Any bank with
total deposits of 500 millio n dollars or more as of the latest detailed report on assets and liabilities to the
bank super visory age ncies (which , confusingly enough, is also known as a "call report") is a Class C
depositary. As of mid-1956, the re are roughly 1,400 banks in Class 8 and 43 in Class C. The total Tax and
Loan balances of banks in each of the three classes, as of June 30, 1956, were 600 million dollars for Class A;
1.8 billion dollars for Class B; and 2.2 billion dollars for Class C. Treasury calls for the transfer of
its balances from Class A banks into the Federal Reserve Banks are ordin a ril y made only once a month , in
view of the relatively small size of these balances as distributed among the very large number of banks in
this category.
Federal Reserve Bank of St. Louis


to measure roughly the difference in value of another week to maturity ( and of
three days until payment date ) , and begin talking at that level with respect to
the probable tender. From then on, the circulation of views begins to spin.
Dealers sometimes talk to each other; and they all talk to their banks and
customers; the banks talk to others. "Schools" begin to form for higher or lower
prices (in order to refine quotations more precisely, and, since Treasury regulations require submission of tenders expressed to three decimal places per $100
face value of bills, the auction discussion always reverts from rate to price). By
1: 00 p.m. the pitch usually reaches the fever point; during the next fifteen minutes the bidding either " jells" or " runs" (that is, it either stabilizes, or it becomes
susceptible to minute-by-minute changes in one direction, marking up or marking down, as the case may be). By 1 : 15 p.m., or shortly thereafter, subscribers
have decided what to bid, have sealed their bids, and dispatched messengers
to reach window number 31 on the first floor of the New York Reserve Bank
on time. Rigid formal controls are maintained by the Securities Department
jointly with the Auditing Department, assuring that there can be no opportunity
for the submission of late tenders by the System or any other bidder and that
high standards of accuracy will be maintained.
Through all of that finalizing phase, two key expressions will have been
used: the " to be sure" price, and the " stop out" price. The former is meant
to be the price at which "customers" , who want to be certain of a full allotment,
ought to submit tenders. Below that price, depending on the strength of the
bidding, prices may string out for as much as 10 or 15 "pennies" (per $1,000
bill) or they may all cluster closely under the " to be sure" price. In indicating
his guess on both, the dealer in effect says that he feels that anyone prepared
to take auction risks could bid as low as the "stop out" and probably come out
with some bills ( which would presumably retail later at a price equal to the
average or higher). It is information on both of these guesses, the "to be
sure" and the " stop out", that the Trading Desk obtains from nearly all of the
dealers, minute by minute before the deadline for the tenders is reached, in
order to determine the "consensus of the market" . It is at that consensus that
the Federal Reserve will ordinarily then tender in behalf of foreign and other
accounts, as well as for the System Account itself, in the event the System wishes
to roll over its maturing holdings. The Federal Reserve System never tenders
for bills for cash for its own account; it participates in the bidding only to the
extent of submitting an exchange tender for bills already held and maturing.
Federal Reserve Bank of St. Louis

After the Trading Desk, in its various capacities, has submitted tenders,
to be slipped inside the tin boxes before the 1: 30 closing along with all the
others, an officer of the Department and others - including several representatives of the Auditing Department - withdraw to a designated closed room to
open, sort, and list all tenders. The details are then relayed to the Treasury
in Washington where the results from the entire country are put together, to
determine the lowest price at which a "partial" or "full" allotment will be made,
that is, the actual "stop out" price, and to compute the actual average price
of accepted tenders. Then allotment notices must be prepared and dispatched
for all successful tenders, all tenders are turned over to the auditors for further
checking and retention, and a detailed circular summarizing the nation-wide
results as prepared by the Treasury and transmitted to all Federal Reserve
Banks is cleared through the Publications Division of the Bank for printing and
mailing, as part of the succeeding week's offering and tender form.
This procedure in connection with Treasury bills, repeated each week, is
a simple version of the much more complicated and detailed routine that is
followed by the Department in handling for the Treasury any offering of a
marketable security for cash subscription. Exchange offerings, as already mentioned, are handled in the Bank's Government Bond Department. Before and
during any Treasury offering of a fixed-interest-bearing obligation, however,
the Trading Desk is expected to be alert to advise with respect to the current
market situation - since it is never so simple for the Treasury to set its terms
"on the market" as might appear from the later statistical record. These occasions are not part of every day's routine; but they occur often enough for the
traders to feel it a part of their job to keep checking impressions together, day
by day, of the main forces and the minor disturbances actually at work, so that
a seasoned judgment may emerge from these combined observations when the
Treasury comes in to price an issue.
There has been little mention so far of the variety of reports prepared on
all aspects of operations, during the day, at the end of the day, at the end of
the week, before each meeting of the Federal Open Market Committee, and for
special purposes. These and other aspects of the day's work may properly
be reserved for the next three sections of this booklet.
Federal Reserve Bank of St. Louis


VII. The Use of "Projections" and the
"Feel" of the Market
We come now to what is much of the time the most challenging, and on
occasion the most exasperating, aspect of a Trading Desk assignment - facing
every day, year in and year out, the urgent need to provide, before all the retroactive data of the statistical indicators are in, quick operational answers to
these questions: What is the situation now? Has the day come, has the moment
come, to take some action in further fulfillment of the Federal Open Market
Committee's instructions? In retrospect it may often appear, in glancing back
over a period of Federal Reserve purchases or of sales, that so long as round
amounts of several hundred millions of reserves were provided in one period, or
withdrawn in another, the particular timing on one day as against another, or
even in one week as against another, should have been of no particular consequence. But that would be to forget the perpetual, and unfortunately inescapable,
need to keep all aspects of defensive and dy namic policy working together as one
piece, not merely to harmonize their effects on the dollar magnitudes of bank
reserves, but also to adapt specific action at any time to the prevailing psychology
of the market.
On every day there are actual, or incipient, or threatened problems of
mechanics that must be watched, and where necessary resolved, so that the
pressures emerging, more or less consistently from day to day, will be as close
as possible to those intended by the over-all goals of current credit policy.
Otherwise, such routine factors in the payments process as float, or movements
of currency into circulation, or back again, may bring about changes of several
hundred million dollars in bank reserves within a day or two; and changes in
just such magnitudes, as their effects reach through to the money market, become
the determining marginal influence, capable of swinging the day-by-day availabilities of bank reserves and credit from the conditions characteristic of restraint to those of ease.
To be sure, a certain amount of buffeting of the market from side to side
is unavoidable, regardless of the Federal Reserve's best efforts; and clearly
identifiable distorting influences of a short-run character should not be expected
in any event to launch many false hopes or fears in the market before swinging
back the other way. But to the individual institution, few of these temporary
distortions are promptly identifiable in meaningful magnitudes, so far as its own
situation is concerned. And expectations, even for the market as a whole, often
Federal Reserve Bank of St. Louis

emerge into a dominating over-all influence on the basis of only a very few
days of "feeling easy" or "feeling tight" . There are, of course, some notable
exceptions, such as the days just preceding a Treasury tax date when excesses
of funds may be taken in stride, if the Treasury's Federal Reserve balance has
been allowed to run down, and just following the tax date when a pinch is often
expected as the direct inflow to the Treasury's "Fed balance" zooms faster and
further than can be closely controlled. Much of the time, though, there is something happening mechanically, in ways that no one bank or investor could be
expected to see, either to keep the money market swinging dizzily from side to
side or to keep it for a significant time deceptively easier ( or tighter) than
general credit policy would intend. The fact that some of that gyrating or deviating occurs even after the Federal Reserve System has taken offsetting action
only underlines the need for the Trading Desk to make thorough appraisals
every day of the bank reserve situation, and of the credit conditions and
psychology related to it, in order to limit what it cannot avoid.
These appraisals start first by using a distilled version of all that can be
derived from the experience on comparable days in previous years, both from
data on what happened and from impressions recorded at the time, as modified
by any deviations that have recently appeared between the past record and the
current results. These are the "projections", prepared by the technical_staff of
the Money Market Section of the Research Department, which we wili want to
look at more closely in a moment. Alerted by these projections to the most
probable pattern of developments, the Account Management then devotes itself,
in effect, to putting together everything that can be observed in the market
itself, in order to reach a judgment as to whether today's projection is actually
coming true. There is no better description for this process than "getting the
feel" of the market. It is the combination of both, the projections as modified
or confirmed by the "feel", which provides the basis for deciding what action,
if any, is to be taken in carrying out the instructions of the Federal Open Market


There is a needed place at the policy level for long-range as well as shortrange projections of member bank reserve positions; but in operations, apart
from some of the known seasonal influences that must be taken into consideration
several months ahead, projections for each day in the next four statement weeks
Federal Reserve Bank of St. Louis


generally suffice. These are all put together on a single "spread sheet" ( of which
photostats are then sent to most members of the Board of Governors and
Federal Reserve Bank Presidents) for delivery to the Account Management by
10: 45 each morning. At the same time, because the cross-checking provided by
two staffs working independently and following different methods is indeed indispensable, comparable projections, though not as detailed day by day, are
prepared by the staff of the Board of Governors in Washington. All of the
major factors affecting bank reserves are grouped into a few categories, in order
to bring into focus those changes of major magnitude that might have a pronounced influence on the money market. The variations that actually took place
over the last half of 1955 in some of the major factors for which projections
have to be prepared are shown in Chart 1 on page 67. That chart, however,
smooths out much of the problem on individual days, since it consists of weekly
averages. A further illustration, indicating the range of day-by-day variation in
these factors for an actual but undated four-week interval , is shown in Chart 2
on page 68.
Underlying each of these principal categories, of course, there are many
other details, both as to particular components and as to regional distribution,
which have to be taken into account. To illustrate the nature of the complexities,
however, it should suffice to discuss briefly the five principal categories: float,
currency, Treasury balance, gold and foreign account, and required reserves. s
1. FLOAT. As already explained, float arises as a mechanical by-product
of the check-clearing process. It represents the difference between the two categories shown on regularly published Federal Reserve statements as "uncollected
cash items" and "deferred availability cash items" . There is always a volume
of checks th at have been in the collection process longer than provided for
in the time schedule, and on which the Federal Reserve Banks have credited
the payee bank although collection has not yet been made from the payor
bank. That difference always emerges in favor of the banks, by some amount.
Should the schedules be so arranged that the difference always came out
"against" the commercial banks, some day-by-day variation in the amount of
the difference would still remain. And it is the variability of float that creates
the mechanical problems with which we are concerned here.
In operating practice, it is useful to distinguish three basic reasons for float:
( 1) In the case of some checks it is physically impossible for the Reserve Bank
8For a more detailed description of these factors see Bank Reserves, Some Major Factors Affecting Them ,
by Irving M. Auerbach and oth ers, published br the Federal ~eser ve Bank of New )'.ork_, November 1953
(second printing, August 1954 ) . The Treasury 1s a lso the subJ ect of a separa te pubhcat1on. See footnote
on p. 28.

Federal Reserve Bank of St. Louis


(+)or(-) indicates effect on excess reserves

Millions of dollars







Federal Reserve float




''- ... -1:






- I 500 ~ - - - ~ - - - ~ - - - - ~ - - - ~ - - - - ~ - - - ~ -1500


* Cumulative changes in daily averages for statement weeks July 6 through December 26, 1955.
Federal Reserve Bank of St. Louis


Chart 2


(+)or(-) indicates effect on excess reserves

Millions of dollars








Four statement weeks


Daily changes cumulated from beginning of period.

Federal Reserve Bank of St. Louis

to collect the checks within the period prescribed in the time schedule for
crediting the depositing bank. For example, the time schedule calls for a maximum deferment of two days, yet it is impossible for the Federal Reserve Bank of
New York to collect within that period through the normal collection channels
a check drawn, for instance, on a bank in Winnemucca, Nevada. This kind of
float is sometimes called "time schedule float". ( 2) Even though a check may
ordinarily be collected within the period specified in the time schedule, there
may in some circumstances be transportation delays. For example, foggy weather
may delay airplane schedules. This is "delays-in-transit float". ( 3) The Reserve
Bank may at times be unable within its own Check Department to handle and
dispose of the checks it receives within the normal time allowed for processing.
Illness of employees, holidays, the receipt of an extraordinary amount of checks
on a particular day, all are causes for delay. This is called "holdover float".
The hard core of the float variability is a by-product of the physical fact
that the total amount of checks written is not the same from day to day, and
the transportation and handling facilities for moving these checks around
cannot always perform in an identical manner from day to day. The Federal
Reserve System has over the years, however, taken advantage of every possible
opportunity to expedite transportation and facilitate physical handling, in order
to keep performance as close as possible to the present two-day maximum collection schedules, as a means of minimizing the extent of the day-to-day
swings in float.
The facilities in use at mid-1956, efficient as they are, still leave a range of
variation within any month of somewhere between ½ and 1 billion dollars
in the amount of float outstanding. Apart from holidays or seasonal influences,
the principal reason for that is to be found in the simple fact that more individuals and more businesses customarily write checks in the second week after
the end of each month than at any other time within the month. But the consequence is that, in a framework of over-all policy considerations that may envisage changes of 300 or 400 million dollars in bank reserves within a month
as the signal of a significant change in fundamental policy, it is necessary to
offset through other means a considerable part of the much larger variation in
reserves produced by float alone, if the reserve conditions expressive of general
credit policy are to prevail.
In calculating probable float patterns for each month, the starting point, of
course, is the daily pattern of float for the same month over the past several
years. Ordinarily, five preceding years are studied closely, although others may
Federal Reserve Bank of St. Louis


also be examined. Adjustments must be made for the shift of dates from year
to year from one day of the week to another. Thus, for example, June 1, 1956
fell on a Friday, and the behavior on that day and date would normally be
somewhat different from 1955, when June 1 fell on a Wednesday. Moreover,
there is always a float backwash following a holiday, and in this case the holiday
was only a "partial" one - the Memorial Day holiday on May 30 being
observed only in the northern and western parts of the country. Th ::it holiday
backwash will also vary depending upon the day of the week in which the holiday falls. Detailed aspects such as these have to be studied on the basis of past
experience, and of recent experience over the past few days, before a projection
can be prepared to show whether float may rise on June 1, 1956 by 100 million
dollars or more, or possibly drop off by that amount. As a general rule, on some
date near or just following the middle of the month, float will reach a monthly
peak, ½ billion dollars or more above the low point usually occurring around
the beginning of the month, but the day-by-day incidence of the changes will
also be influenced by such factors as tax dates, falling on the fifteenth of
several months.
In view of the fact that the aggregate of checks passing through the banking system on any day will be in the magnitude of 6 to 10 billion dollars, it
is indeed remarkable that the handling facilities produce float variations measured only in the hundreds of millions. It is even more remarkable that the
daily estimates of float changes, though often in error, are usually within less
than 50 million dollars of the actuals, and in the right direction ( as to increase
or decrease) most of the time. No matter how great the efforts of the Federal
Reserve's operating arms, however, it is never possible to know what these
actuals are for a given day until some time after 3 p.m. on the following day.
Thus there normally is no possibility of taking action on the basis of known
behavior of the float until the second business day following that on which a
given change in float occurs. Since the same is true for all of the other
factors being described here ( except changes in the Treasury's balance, as
explained below), it should be clear that there is no substitute for action based
upon the "feel" of the market ( though always conditioned and alerted by the
projections) if the Federal Reserve System's efforts are to be most nearly
effective in preventing mechanical influences such as these from obscuring the
pattern of bank reserves indicated by general credit policy.
2. CURRENCY IN CIRCULATION. The movements of currency out of the banks
into the hands of the public must almost always produce a roughly corresponding
Federal Reserve Bank of St. Louis

reduction in bank reserves. There is some absorptive capacity in the currency
supplies held by the banks themselves, which are not counted as part of a
bank's legal reserves, but it is generally the case that banks paying out substantial amounts of currency on balance will replenish their stocks ( or anticipate
the outflow) by calling on their own Federal Reserve Bank. When the currency
is shipped from the Federal Reserve Bank, there is a corresponding charge made
for the specific amount involved against the member bank's reserve account.
Conversely, when there is a return flow of currency from circulation into the
banks, the banks customarily forward any holdings in excess of their normal
till requirements directly to their own Federal Reserve Bank. On the arrival
of the currency, there is a corresponding credit to the member bank's reserve
Much of the time, the day-by-day variation in currency outside the Federal
Reserve Banks is in considerably smaller magnitudes than the changes in float.
Except for the days immediately preceding, and occasionally shortly following,
a legal holiday, the actual changes of currency in circulation on a given day
generally run between 25 and 50 million dollars. However, there is a systematic
seasonal pattern of currency outflows, usually aggregating nearly 1 billion dollars, through the late autumn until Christmas. Shortly afterward there is a
roughly equal return flow of currency concentrated in late December, January,
and early February. Underlying this and other seasonal swings there is usually
a steady upward trend in the volume of currency outstanding, basically reflecting the growing volume of business activity and the rising population, and
there are also marked cyclical movements in response to swings in business
activity. Consequently, for this variety of reasons, currency flows during the
course of any year may account for a greater swing in total bank reserves outstanding, and give rise to a larger volume of compensating System action, than
might be required for all of the System's dynamic responsibilities, if there were
no mechanical fluctuations to face.
Projections of currency changes, day by day, are built up from the records
of past experience in roughly the same manner as that already described in discussing float. Much of the time, the precision of the projections is very close.
But there are generally three or four periods in any year when something happens to enlarge or spread out the currency outflow, or its return, and at these
times there is again no substitute for the "feel" of the market in interpreting
the immediate repercussions of such developments upon the existing state of
bank reserves.
Federal Reserve Bank of St. Louis


already seen something of the significance of variations in the Treasury's balance
at the Federal Reserve Banks, and of the arrangements that have been made to
minimize the effect of swings in this balance upon bank reserves. Perhaps it is a
sufficient reminder of the usefulness of, in fact the absolute necessity for, these
arrangements to contemplate what might otherwise happen to the money market
if taxes paid to the Treasury on March 15 were all to be collected immediately
into the Treasury's Federal Reserve balance. Although these actual collections
spread out over several days, depending upon the speed with which the Internal
Revenue Directors can process them, most of them are presented to the banks
on which they have been drawn within ten days. Over this ten-day period in
March of 1956, aggregate collections of nearly 3 .5 billion dollars passed into
the Treasury's depositary balances in commercial banks (in part because of
special arrangements often made in such periods to "redeposit" part of the
large tax checks received directly in the banks upon which these checks are
drawn). Had it not been possible to leave these balances in the commercial
banks for the time being, the actual reserve balances of the entire banking
system in the country would have been cut by almost one fifth. Since disbursements by the Treasury from its accounts with the Federal Reserve Banks pass
into the hands of the public and into the commercial banks, the disbursements
add to bank reserves. If the Treasury could keep its balances in Federal Reserve
Banks constant, the loss in reserves to the banking system through withdrawals
by the Treasury from Tax and Loan Accounts would be exactly offset by the
increase in reserves caused by Treasury disbursements.
Even with present arrangements, however, it rarely proves possible to
estimate disbursements from, and the aggregate of all receipts into, the Treasury's Federal Reserve Bank balances with fine accuracy. Very often, the
difference between actual expenditures or receipts and the projections for them
may be as large as 100 million dollars on a single day, and it has been larger
around the Treasury's tax receipt dates in March and June. Through the use
of the "C" depositary arrangements, as a supplement to the regular procedures
for issuing advance notices of calls, the Treasury is now equipped to take
corrective action at the opening of business on the day following that in which
a significant, unintended increase or decrease in the balance occurs. The use
of "C" depositaries began only on August 1, 1955, but it is already clear
to everyone concerned that this innovation has done much to minimize the
abrupt changes in money market conditions attributable to unforeseen changes
Federal Reserve Bank of St. Louis

in the Treasury's balance at the Federal Reserve Banks. But one condition
for the effective and equitable use of the "C" depositary technique must be that
all possible effort is made to anticipate changes in the Treasury's balance in
scheduling regularly announced calls, so that the cooperating "C" depositaries
do not have to be buffeted too often with surprise changes of some magnitude
affecting their own money positions on the day that the notice is received.
Consequently, the staff of the Treasury, that of the Federal Reserve Board
in Washington, and the Money Market Section in the Research Department at
the Federal Reserve Bank of New York, all continuously prepare estimates of
Treasury receipts and expenditures. Starting with total budget figures, broken
down among approximately fifteen major categories of expenditures and an
equal number of categories of receipts, these staffs work their way down to
the point of preparing calculations of the actual cash flow in each of these
categories for every day over a period several weeks ahead. These detailed
estimates are continually revised for the seven days immediately ahead on the
basis of intensive study of the breakdown of actual receipts and expenditures
as reported to the Treasury by the various Federal Reserve Banks, in their
capacities as fiscal agent for the Treasury, by telegrams dispatched after the close
of business each day.
As far as the use of projections of the Treasury's balance in the Federal
Reserve Banks by the Account Management is concerned, the convenient
assumption is always made, and quite rightly so, that the balance will be constant at the desired level for the period beyond three weeks in the future ( this
assumption is no~ made for the months of March and June, however, when it is
necessary because of the heavy incidence of tax receipts to make detailed daily
projections for the entire month about midway in the month preceding). In
daily operations the Account Management can reasonably assume most of the
time that no major deviation from a normal level of the balance need necessarily
occur - even if projections of receipts and expenditures are revised after the
regularly scheduled calls for the day in question have already been announced since there can always be resort to the "C" depositaries if the deviations are
unduly large.
Thus there is now a very significant difference between the use made of
projections of the Treasury's balance and that made of the projections for
float or currency. As we have seen, the problem in the case of float and currency is to decide whether or not a projected deviation is occurring by judging
Federal Reserve Bank of St. Louis


the immediate evidence visible in the market, and then if necessary to take
offsetting action of an entirely different kind, usually through buying or selling
Government securities to release or absorb additional reserves. In the case
of the Treasury's balance, the means exist for taking direct action immediately
upon the item itself, in order to hold to a minimum its distorting influence upon
the money market, and at times to a limited extent the Treasury may allow its
balances to vary from the constant level when that would be of temporary
assistance to the Federal Reserve in the latter's daily operations. That does not
mean, however, that in the case of the Treasury's balance all possible occasions
for offsetting action by the Federal Reserve have been removed. There is often,
for example, a fairly wide difference between the projections prepared ->° the
Treasury staff and those prepared by either of the two Federal Reserve groups,
and the Account Management must take those differences into account as one of
the many factors it has in view when making a judgment as to whether some market action is immediately necessary. Moreover, even the use of the "C" depositary
mechanism is operative with a one-day lag. It is quite possible for the balance to
run consistently as much as 100 million dollars or even more below the usual
norm, or above it, as deviations between the actuals and the projections persist
for several days running, and the compensating action through the "C" depositaries never catches up. Consequently, although fluctuations in the Treasury's balance no longer play the major role among the disturbing influences in the money
market that they once did, variations in the Treasury's balance still occur in
magnitudes sufficiently large, at times, to require some offsetting action in the
money market by the Account Management.
4. GOLD AND FOREIGN ACCOUNT. With this country's increasing importance
as a world money center, and with the stability of the dollar in terms of gold,
and its free convertibility continually attracting more and more of the world's
monetary reserves into deposit balances and security investments in the United
States, the potential vulnerability of the money market here to net flows of
funds in or out of the country has been materially increased since World War II.
Along with that growth in foreign dollar holdings, a large part of the official
holdings of foreign monetary authorities has been channeled into the Federal
Reserve Banks. Because this has resulted in the concentration of a substantial
part of the investment operations for foreign official accounts in the Federal
Reserve, it has become possible to take into account many of the net flows,
as distinct from mere shifts of ownership of balances already held here ( which
at times aggregate as much as 100 million dollars or more during the course of

Federal Reserve Bank of St. Louis

a single week) , and where necessa ry to take offsetting System action in the
money market.
As of June 27, 1956, the total of foreign offici al deposit balances held in
the Federal Reserve Banks was 293 million doll ars; the total of gold held under
earmark for foreign and internation al accounts in the vaults of the Federal
Reserve Bank of New York was 6.9 billion doll ars; and the total holdings of
Government securities for foreign accounts, held in custody by the Federal
Rese rve System, on the same date aggregated 3.7 billion dollars. Ch anges in
these magnitudes affect bank reserves and mu st be taken into account in
scheduling open market operations. On the bas is of information available from
the foreign monetary authorities on their planned operations, projections can
be prepared to serve as the initial basis for estimating the "gold and foreign "
part of the over-all picture that the Account Management must keep in view
when planning action in the market in the execution of Federal Open Market
Committee instructions. Moreover, any unexpected disbursements of funds from ,
or receipts to, these accounts become immediately known to the operating
officials of the Foreign Department of the New York Reserve Bank, and can
be quickly transmitted to the Trading Desk. If a purchase or sale of Government
securities is involved, the transaction is, in fact, executed by that same Trading
Desk upon receipt of the order. Thus, action not foreseen in the projections can,
nonetheless, be included in the reckonings of the Account Management.
5. R EQUIRED RESERVES. The actual required reserves of each member bank
on a given day, under present regul ations, are computed by applying the existing reserve requirements applicable for each bank to the deposits, less cash
items in the process of collection and demand deposits with other banks, which
that bank holds at the opening of business on the given day. 9 Thus, any development influencing the total volume of outstanding bank deposits, and any shift
in the distribution of demand deposits among banks in the three categories central reserve city (requirement presently 20 per cent), reserve city (requirement presently 18 per cent) , and country (requirement presently 12 per cent) or the distribution between demand and time deposits (requirement presently 5
per cent at all member banks) will affect the actual amount of required reserves
on the next day. Obviously, when an attempt is made to predict the required
!l In turn. each bank averages its requirements for its reserve computation perio d (one week for central
reser ve city banks a nd reserve ci ty b a nk s, and semimo nthl y for country banks) and also averages its reserve
balances, to determine whether o r not it meets the requirement for the period . M odest deficiencies, if they
aggregate 2 per cent or less of average da ily requirements. ma y be carried forward into the next reserve
computation period a nd offset then . H owever. such a deficiency must be fully met in th a t next period.
Pen alties are assessed o n deficient ba nks which do not "make up" withi n the allotted time. Of cou rse. each
bank is expected to attempt to cover its reserve requirements at all times a nd not to take undue adva nta ge of
the carry-over privilege.
Federal Reserve Bank of St. Louis


reserves for all member banks for the country as a whole ( and for each of the
three classes of banks) , there is some reverse effect with the other factors affecting the volume of reserves. For instance, as the public withdraws currency
from the banking system , there is an automatic decrease in deposits, so that in
some measure the reserve drain resulting from the currency outflow is offset
by the reduced requirements against the smaller deposits. The converse applies
when currency in circulation declines.
The principal general influence upon deposits over the longer run is, of
course, the total outstanding amount of credit currently extended by the banking
system ( including all loans and investments held by the banks). Therefore, it
is necessary to embody within the calculations related to the projection of required reserves an explicit estimate of the increase or decrease day by day
in the total credit being extended by the banking system . However, there would
be an element of circularity involved in using such projections, without modifications, as guides for Federal Reserve open market operations. If the forecasts of bank credit were always to be taken as given, and determined independently of all Federal Reserve action, the required reserves data in the projections would reflect what total credit demands are expected to be instead of
being related to the total growth in credit that is to be permitted, on an approximate over-all basis , by Federal Reserve policy.
In these day-by-day projections, considerable use is made of the historical
patterns of the previous years, along lines comparable to those followed in
estimates of float and currency changes, since the daily changes in required
reserves have many aspects of a mechanical nature included in them. But
they are much more markedly influenced by cyclical changes in business
activity and the reflection of these movements in the employment of bank
credit. Therefore, in considering the various factors contributing to a possible
need for funds in the money market at any given time, changes in required
reserves cannot always be considered in the same light as other factors - as
potentially distorting influences in the money market requiring defensive action.
In that sense, the estimates for this factor are different from the others already


Despite steady improvement over the years in the comprehensiveness and
reliability of the projections prepared for the use of the Account Management
Federal Reserve Bank of St. Louis

in its daily operations, it should now be amply clear th at action can never be
based upon the projections alone. It is necessary each day to take advantage of
the great range and variety of signals coming from the current performance of
the market itself in order to develop judgments, not merely as to whether or not
the net effect of the existing projections is actually being borne out in the market,
but also as to whether the current psychology of the market conforms with the
degree of ease or pressure intended by the Federal Open Market Committee.
Even if the Account Management can feel reasonably convinced, on the
basis of its present "feel" of the market as a whole, that the expected developments in terms of changes in the dollar magnitude of bank reserves are occurring, that same "feel" may also persuade the Account Management that the
necessary action should take different forms from one time to another or that
the action can be more, or less, cautious than the dollar magnitudes might imply.
With surprising frequency, the import of the "feel" will be that projections,
which might in themselves have called for some offsetting action to release or
absorb reserves, are not being distinctly borne out. Or the import may be that
developments which the market expects to encounter later are currently immobilizing any momentary enlargement of reserves so that no offsetting action
seems necessary at the moment, particularly if the projections themselves had
suggested to the Account Management that th~ indicated excess might be of
temporary duration (perhaps the result of a sharp peak in the level of float
extending only over two or three days). Or the current geographical distribution
of reserves, particularly when increases have gone mainly to the smaller
country banks, may account for an apparent difference between the figures and
the "feel" . No formula can ever be written to provide a sure guide to the
decision s th at mu st be reached from day to day on the basis of such observation s, conditioned as they must always be by exp erience . But no matter how
extensive the experience of those ass igned to the Trading Desk, the pivotal significance of action taken there, in conveying to the market a relatively consistent
view of the policy of the Federal Open Market Committee through the maze
of wide swinging mechanical disturbances always at work, makes it necessary at
all times to keep continually alert for new methods that may improve the sensitivity of existing arrangements for taking the "feel" or the pulse of the market
at any given time.
As already mentioned in Sections III and V above, the Account Management has over the past few years been taking advantage of current changes in
the structure and procedures of the market to broaden its own knowledge of the
Federal Reserve Bank of St. Louis


day-by-day developments in the New York money market and of the relations
between that center and the national money market as a whole. Without necessarily implying official endorsement or sponsorship of these arrangements, and
understandably reluctant to express such views in any event, the Account
Management has been utilizing its day-by-day contacts with the dealers, in
reviewing their financing requirements as these relate to possible needs for repurchase agreements, to provide an up-to-the-minute indication of the extent
to which funds are becoming available in various parts of the country. Through
contacts with all nonbank dealers, many of whom have quite different contact
networks, the Desk is in a position to use this information in further clarifying
what is already being obtained from many other sources, including the current
data on bank reserve positions in New York and information received from the
Wire Transfer Division of the Bank on sizable transfers of funds between banks
in New York and those in other parts of the country.
In addition, with the growth of the Federal funds market, the Account
Management has been continually broadening and enlarging the daily flow of
information received from the banks concerning their own transactions in
Federal funds. Studies are presently under way to determine whether further
extension of these reports to other banks and to other regions might be practicable in order to improve the ability of the Account Management to gauge accurately the pulse of the national money market at any given time.
Moreover, the steadily broadening facilities for obtaining information during
the course of the day from the money position men of the various banks is
more and more being supplemented by direct contacts, when appropriate, with
other institutions, both financial and nonfinancial, which may at times play a
leading role in current market developments. This has, in the case of nonfinancial corporations, always included some direct information concerning
the dates on which payment will be received for large new security offerings,
and has often included information as to the banks where the funds will be
gathered together as well as information concerning the contemplated plans
for immediate investment of the proceeds ( which usually takes the form of a
substantial short-term investment in money market assets). Some of the major
financial institutions located in or near the downtown financial center also have
sufficient variations in their money flows to thrust them at times into the money
market as a significant short-run influence; the Manager, Market Liaison and
Administration, and the Vice President-Manager in particular cases frequently
receive information about these situations. In volunteering information of this
Federal Reserve Bank of St. Louis

nature, the various cooperating institutions make a valuable contribution to the
analysis of market influences.
From this diffuse complex of varied kinds of information, enough generally
can be assembled to give the Account Management a cross-section view of all,
or nearly all, of the influences at work in the money market on any given day.
Many of them, once known, can be forgotten, in the sense that they help to
resolve otherwise perplexing questions whi~h, once resolved, need have no
further place in influencing the judgment of the Account Management concerning the day's needs for funds or the possible need to absorb funds. All of these
sources of information are, however, an integral part of the over-all view that
the Account Management must have, if it is to be successful in continuing to
express through the money market the primary influence of the credit policy
determined by the Federal Open Market Committee.
One final caution should be noted, before turning to other things. The fact
that the "feel" of each day's situation provides the final cues to action or inaction
should not suggest that all action is determined solely by improvisation from
day to day. For whether or not the projections prove precisely accurate on
each day as it comes along, they do serve as usable rough guides to the shape
of things over the next few days and weeks. And no judgment as to action
today, however much affected by the actual influences visibly at work, can
safely be taken without reference to the probable pattern ( or the principal
alternative patterns) of reserve influences lying just ahead. In a sense, the
projections enable the Account Management to add another dimension - the
immediate future - to the body of information that helps to determine each
day's operations.
Federal Reserve Bank of St. Louis


VIII. Trading Methods and Objectives; Coordination with
Transactions for Other Official Accounts
Once the Account Management has decided, on the basis of all presently
available information, that action should be taken in order to further the current
objectives of the Federal Open Market Committee, the choice as to procedure
lies mainly between outright transactions and repurchase agreements in Government securities. On a very broad basis, of course, outright transactions are
used when there is good reason to believe that the change to be made in the
reserve base may be of some duration; and repurchase agreements are used
when a need for funds is most likely to be quite temporary, soon to be followed
by a need to reverse the effect of the operation through the absorption of
funds. But it would be difficult indeed to catalogue all outright transactions
under the first set of conditions, or to catalogue all repurchase agreements under
the second. Further description of the methods and procedures inherent in each
type of operation may help to suggest some of the peculiar qualities of each that
make the choice of one or the other particularly appropriate in various circumstances. Following the discussion of outright transactions and of repurchase
agreements in Government securities, there is a third part of this present section
devoted to operations in bankers' acceptances; and then a fourth, indicating the
variety of ways in which the Account Management may effect coordination
between the Federal Reserve System's objectives, in its own Government
securities transactions, and iransactions that also come to the Trading Desk
for execution from various Treasury trust funds and investment accounts, from
foreign central banks and governments, and from some of the smaller member
banks in the Second Federal Reserve District, as well as from a few other
miscellaneous accounts.


In recent years virtually all purchases or sales in the market for System
Account on an outright basis have been made in Treasury bills. As already
explained, any dealer who consistently demonstrates his readiness to make
markets is welcome to compete for transactions with the Account, provided
the ,form meets reasonable standards of credit-worthiness and provides the
financial statements needed in reaching a determination to that effect.
Federal Reserve Bank of St. Louis

Once the Account Management decides, for example, to purchase Treasury bills in a magnitude of 50, or 75 , or 100 million dollars, its approach
to the market is governed by two overriding considerations. First, it must trade
with all dealers on a freely competitive basis. This means, when buying, that
it will take bills at the lowest offered prices ( highest yields) , up to the point
that the intended total of purchases is reached. Second, the Account Management must give some weight, if the size and variety of dealers' offerings are great
enough to permit any leeway, to the need for maintaining a maturity distribution of the portfolio that will best contribute to the practical administration of
the Account over the months ahead. This means that when the Account holds
no bills of a particular weekly issue, perhaps because it had let the preceding
issue run off at maturity in order to absorb reserves at that earlier time, some
preference would be given to restoring a moderate holding of that particular
maturity, all other things being equal. There are other similar operating considerations that have to be taken into account.
The usual procedure, once the Vice President-Manager has reached his
decision, is to brief all available members of the trading staff on the language
to be used in contacting dealers, and to assign each person to two, three, or
four dealers as his responsibility. On instructions from the Manager, Trading
and Markets, all traders then begin simultaneously contacting dealers to ask
for bids or offerings, as the case may be, specifying particular maturities where
that is appropriate. Under present arrangements, it is usually possible for the
traders to reach all dealers and note their bids or offers within an elapsed time
of three to five minutes. It is necessary to act quickly so that no dealer can
be placed in a privileged position either by obtaining knowledge of a Federal
Reserve System operation in advance of other dealers or by being able to bid
or offer after the initial impact on prices becomes apparent ( which might be a
particular advantage, in the event of Federal Reserve purchases, for example, if
the purchases had an immedi ate upward influence on Treasury bill prices) .1 o As
each trader completes his contacts with dealers, all of the bids or offers he receives are promptly assembled on a single worksheet, or "blanket", which the
Manager, Trading and Markets, and any other officers currently working with
him, can then use in order to select those bids or offers which, in conformity
with the two principles just mentioned, will fulfill the System's buying or selling
lOSystem action does exert an influence on prices o f bills. and other Government securities as well , but
fortunatel y the m arket is no longer as sensiti ve to this pa rticula r procedure as form erl y.
Federal Reserve Bank of St. Louis


The bids or offers received from the dealers are requested on a "firm" basis
for twenty minutes or thereabouts, as a general rule, and by the elapse of that
time the selections will have been completed and each trader can begin return
calls to the dealers indicating which, if any, of their bids or offers are to be
taken. Generally, this entire operation, known colloquially as a "go-around",
is completed within thirty minutes. The Account Management usually conducts operations in the manner described, unless unsettled conditions are
so pervasive in the market that the broadside effect of a full-scale "goaround" threatens to be unduly disruptive. Under those circumstances, the
Account Management may achieve its objective in terms of absorbing or
releasing reserves, with less pronounced impact on market psychology, by simply
taking advantage of bids or offers that are volunteered by the dealers during the
course of the routine conversations continually in process between the traders
on the Trading Desk and those at various dealer firms. In no event, however,
would purchases or sales be made at prices out of line with those currently prevailing in the market, as checked and cross-checked by all of the traders in
their continuing conversations with the market.
Outright transactions are normally executed either for "cash" ( that is sameday) or for "regular" (next-day) delivery and payment. Due to mechanical
problems of physical delivery, it is ordinarily not practicable to initiate negotiations with respect to cash transactions after 12 o'clock noon, although in special
circumstances, particularly when the Federal Reserve is a seller, transactions
may at times be executed as late as 1 : 00 p.m. One advantage or disadvantage of
cash transactions, depending on the circumstances, which also applies in the
use of repurchase agreements to be described below, is that they provide or
withdraw Federal Reserve funds to or from the market immediately. There are
times when, in the nature of a developing situation, a prompt release or withdrawal of funds is particularly desirable. Transactions for regular delivery may,
of course, be executed at any time until the 3: 30 p.m. closing hour. Thus, it is
broadly correct to generalize, as far as outright transactions are concerned, that
any action intended to influence reserves today must be decided upon, and execution must begin, before or close to noon. Any reserve effect which can suitably
be exerted on the following day may be brought about through regular delivery
transactions at any time during the trading day.
Because of the difficulties of assuring timely physical deliveries, particularly
when dealers may have to withdraw securities already pledged on loans at other
institutions in order to effect delivery, or must await deliveries of the securities
Federal Reserve Bank of St. Louis

from customers, the Account Management often finds on its "go-arounds" that
dealers are not prepared to offer enough securities on a cash basis to meet the
Federal Reserve System's objective. Conversely, when the System is on the
selling side, dealers may also be somewhat reluctant to take as many securities
as the Account Management may have in mind because of the difficulties of
subsequently making arrangements late in the day for additional loan facilities,
both in order to be able to pay for the securities when picking them up ( in
Federal funds) and in order to carry the securities in position after receiving
them. By comparison, when the Federal Reserve policy objective indicates a
need for buying, the repurchase agreement facility usually provides somewhat
greater flexibility. Securities that a dealer may still be in need of financing ordinarily will be more easily accessible, right down to the last minute at which
the dealer closes his own books. Repurchase agreements can physically be
negotiated as late as 1: 30 p.m., and timely deliveries subsequently effected.
Although it is rarely practicable from the Federal Reserve System's own point
of view to operate that late, there are some occasions when the Account Management is glad to take advantage of this avenue for placing funds immediately
in the market at a relatively late hour in the trading day. Of course, the greater
flexibility of operations in repurchase agreements is dependent upon the dealers
having securities in position that they are willing to finance through a repurchase
agreement with the Reserve Bank at the rate of interest the Reserve Bank is
charging on that day.


There has already been frequent occasion to refer to the use that is made of
Trading Desk conversations with the dealers, concerning their needs for funds,
to supplement other sources of information concerning the present immediate
availability of money, both in New York and out of town, and from bank and
nonbank sources. The readiness of the dealers to provide a full picture of their
unfolding situation is heightened, of course, by their knowledge that the Account
Management may on any given day decide that funds can appropriately be
released by the Federal Reserve System itself through the acquisition of securities
under repurchase agreements. The general terms applicable to repurchase contracts have already been described in Section III above (pages 25-6).
One necessary condition for entering into repurchase agreements with the
dealers is that each must file with the Federal Reserve Bank of New York an
Federal Reserve Bank of St. Louis


underlying collateral agreement which provides for the disposition· of the
securities if the dealer should not perform his part of the contract. The dealers
must also provide, as they would to their regular banks of account, periodic
financial statements. On the basis of the net worth shown in the latest statement for each dealer, the Account Management maintains informally a set of
credit lines, placing an upper limit on the total amount of repurchase agreements that will be extended to each dealer. Only on rare occasions would repurchase agreements be entered into in an over-all magnitude so large as to
approach the limits of the "lines" for many of the dealers. There is a related
limitation, though perhaps a relatively minor one, on the amount of repurchase
agreements that may be done by a dealer, arising from the fact that the securities purchased under repurchase agreement are customarily valued by the
Trading Desk at prices slightly below those currently prevailing in the market.
In effect, the dealer ties up a part of his capital in carrying the margin between
the price at which the securities are valued for purposes of the repurchase
agreement and the cost at which he may currently be carrying the securities on
his own books.
Ordinarily, the Account Management does not have sufficient information
to reach a decision on the advisability of entering into repurchase contracts
until 12 o'clock noon; and more often than not, the further study of reports
from the dealers and other sources must continue until 12: 30 p.m. or later
before a clear-cut decision can be reached. By that time, the Vice PresidentManager has an over-all picture of the total remaining financing needs of the
dealers, and of the progress that each has made through his range of contacts
across the country. Summary notes on each conversation by any of the traders
with each dealer, from the opening of the market each day, are kept on a single
worksheet, so that the Vice President-Manager or any of the other officers can
appraise at a glance the current situation with respect to dealer financing at
any time before the final decision is reached. At that stage, the Vice PresidentManager decides, on the basis of all the evidence concerning prevailing pressures then present in the money market, whether or not to make any repurchase
agreements, and, if some are appropriate, he must then decide on the total
amount of funds to be released in this way. He and the other officers participating with him then work out an equitable allocation of this total among the
dealers still reporting some financing needs. Depending upon the extent to
which it seems appropriate to go in relieving the immediate pressures, the Vice
President-Manager may have decided to meet perhaps one third, or possibly
Federal Reserve Bank of St. Louis

two thirds, or in unusual circumstances virtually all, of the remaining dealer
financing needs through the extension of repurchase agreements.
The Vice President-Manager must also decide on the number of days for
which the contracts will be written, and in some circumstances he might set a
rate of interest on the contracts that is above or below the discount rate of the
Federal Reserve Bank of New York, although it is the discount rate which is
almost invariably selected. In deciding on the term, the Manager takes into
account the probable duration of the period for which additional funds ought
to be supplied to the market. Quite often there is no clear-cut timing pattern,
and the Manager may decide to extend the contracts for a full fifteen-day term,
relying upon the dealers themselves to repay in advance of that final date as
additional funds become available in the market at rates below the rate on
Federal Reserve repurchase agreements, or as the particular securities placed
under repurchase agreement may subsequently be sold by the dealers to other
customers, thereby necessitating their withdrawal from the repurchase contract.
There are many occasions, however, when repurchase agreements may be
used as a suitable means of temporizing in a situation where the "feel" of the
market indicates intense tightness, although the projections suggest that money
should be available. In those circumstances, aware of the Federal Reserve
System's interest in smoothing out unusual or severe strains in the money market
and realizing that the projections are not infallible, the Vice President-Manager
may decide to provide temporary relief, while awaiting further developments
over the next day or two that will either confirm the persistence of undue tightness or, conversely, indicate that the projections are being fulfilled and that the
excessive pressure was only the result of a temporary knot in the money market
which could not at the moment be untangled. In this way, with repurchase agreements written for only a few days or perhaps only for one day, the danger of
any serious cumulative development can be forestalled, without supplying
reserves on an outright basis. Moreover, the actual release of funds, usually in
rather limited amounts, will flow directly to those dealers upon whom the converging pressures of the money market, coming from all sides, have been concentrated. Outright purchases of Treasury bills in such circumstances might not
go immediately to the heart of the need if the dealers under most intense pressure should not have significant amounts of Treasury bills available to offer;
moreover, should the strains prove short-lived, the market wouid have been
subjected to the always perplexing spectacle of a quick shift by the Account
Management from purchases on one day to sales a day or two later - a factor
Federal Reserve Bank of St. Louis


of great psychological influence that might cause disturbance or an unsettling misunderstanding in the market. If, after a few days, the persistence of pressures
should be clearly confirmed, however, the Account Management may then with
greater confidence undertake outright purchases and await the termination of
the repurchase agreements at maturity, or before if the dealers should have
reason for doing so.
Another kind of situation in which the extension of repurchase agreements,
as a temporary measure, helps to provide a useful, steadying influence in the
market arises at times of Treasury financing operations, particularly during
periods when commercial bank rates are relatively high. Repurchases may be
more likely to fill a unique need in the event of an exchange offering, rather
than an offering for cash, but there are circumstances in connection with either
type of Treasury offering under which the immediate volume of securities being
carried by the dealers - as "rights" in advance of the delivery date of an
exchange offering, or as new securities on and shortly following the delivery
date for either type of offering - would impose a heavy burden on their financing capabilities, particularly at times when for other reasons the usual sources
of funds might have run dry. The dealers at such times would be serving the
important purpose of assisting in the underwriting and initial distribution of
Treasury offerings, and of helping to make the broad markets in such securities
that are often essential to the successful initial flotation of any large issue, even
including one of the United States Government.
Because of the massive size of virtually all Treasury debt operations, they
are inescapably a temporary distorting influence upon the usual day-by-day
procedures of the Government securities market, and they frequently have
temporary money market repercussions that would, if unchecked, create conditions out of line with the prevailing aims of general credit policy. Thus, not
necessarily as a specific aid to the Treasury, but as a means of helping to
smooth over the impact on the market of a gigantic borrowing operation, there
is a place for some temporary use of repurchase agreements. By helping dealers
to carry some part of their additional holdings at such periods, repurchase agreements may keep the indigestion that is almost chronic with some types of large
issues from becoming a serious disorder. When used in this way, and they are
not by any means always used in connection with Treasury borrowing operations,
repurchase agreements may be able to minimize undue interference with the
steady reflection of credit policy itself in the market.
Federal Reserve Bank of St. Louis

One other incidental detail, of no material consequence but perhaps a
source of some misunderstanding, is that all repurchase agreements are currently
written for the account of the Federal Reserve Bank of New York, rather
than for all the Federal Reserve Banks. The reasons for this are of a procedural nature related to accounting practices. Because the amount of outstanding
repurchase agreements often varies considerably from day to day, and because
there are no repurchases at all outstanding as much as one half of the time,
the awkwardness of attempting to "participate" the ownership in these agreements among the twelve Reserve Banks has, in the past, outweighed any
possible advantage from joint ownership. All repurchase agreements are, in any
event, written in accordance with specific authorizations of the Federal Open
Market Committee, and are reviewed at each meeting of that Committee.
At any time the Committee could, of course, direct that holdings should be
participated among the twelve Reserve Banks if there were a reason for doing so;
also, the New York Bank may, at its discretion, participate its holdings.

Dating back to the early 1920's, when there were no Treasury bills in the
United States and a larger part of the Federal Reserve System's open market
operations were conducted in bankers' acceptances, the Bill (Acceptance) Divisionll of the Securities Department has always made its services available to
the Foreign Department of the Bank, to buy and manage acceptance holdings
for any foreign central banks wishing to acquire acceptances in this market. For
a long interval from the middle of the 1930's until the spring of 1955, it was
the continued maintenance of modest holdings of acceptances for foreign central
banks which, together with the New York Bank's responsibility to publish its
monthly "Acceptance Survey", helped to maintain inside the Federal Reserve
System the skills and facilities essential for the businesslike conduct of transactions in the bankers' acceptance market. As mentioned in Section III, the Federal
Open Market Committee, in recognition of the potentialities for further use of
bankers' acceptances that may be inherent in the expanding role of the United
States in financing world trade, and for other reasons, decided to resume the
acquisition of a portfolio in bankers' acceptances for the System itself. EstabH Operations in b ankers' acce ptances were conducted by a separate depa rtment in the F ecleral Reserve
Bank of N ew York (k nown as the Bill D epartment ) until M arch 4, 1939, when th at department became a
division o f the Securi ties Depa rtment. The Federal Reserve System's responsibili ty to wa rd the bankers'
acce pta nce ma rket implied in the Federal Reserve Act made it im porta nt that a trai ned staff be m a intained
even when the economic disturba nces a nd easy money of the 1930's ca used a prolonged decline of activity
in the bankers' acceptance ma rket.
Federal Reserve Bank of St. Louis


lishing a rather modest limit on total holdings that may be acquired, and expressing a general intention to vary the size of this holding in a manner that
would parallel other Federal Reserve action in the money market (the available
supply of acceptances permitting), the Committee on March 29, 1955 authorized the Manager of the System Open Market Account to begin purchases.
For the same reasons of accounting awkwardness just mentioned in connection with repurchase agreements, the Committee directed that any acceptances acquired should be held for the account of the Federal Reserve Bank of
New York. It also eliminated the former buying rates of the Federal Reserve
Banks and directed that any purchases should be made at the going offered
rate of the dealers for acceptances carrying the dealer's own endorsement, or
another recognized endorsement. The Committee also authorized the Manager
of the System Account to enter into repurchase agreements in bankers' acceptances under the same general conditions, and for the same general purposes, as
those contemplated for repurchase agreements in Government securities.
Over the year and a quarter since the revival of the System's direct activity
in the acceptance market, the portfolio has varied in a nominal range between
roughly 7 and 24 million dollars, and repurchase agreements outstanding have
reached a peak of roughly 11 million dollars although their use has been infrequent. Thus, the scale of operations in the acceptance market has not reached
magnitudes that could be considered significant in supplementing operations
undertaken in the Government securities market to influence the money
market and general credit conditions. However, there has been evidence of
renewed borrower and investor interest in acceptances, perhaps helped in part
by the demonstration of interest on the part of the Federal Reserve, and the
larger flow of acceptances through the Bill Division has permitted the Account
Management a somewhat broader view of the variety and character of acceptances currently being written. The Bill Division has continued, as for many
years in the past, to conduct a monthly survey of the acceptances outstanding
in the United States and, as noted earlier, that too has been of some aid in
stimulating interest in the use of acceptances. There also has been, over this
recent period, somewhat greater flexibility in the bid and offer rates of the
acceptance dealers, and changes in these rates have come to play a somewhat
more significant part in helping to mark out or underline the more lasting
changes, or directions of change, in the money market.
Because there are only four active dealers in bankers' acceptances, and
because the scale of present operations is relatively small, there is no need to
Federal Reserve Bank of St. Louis

maintain Trading Room facilities comparable to those for Government securities.
All of the purchases of bankers' acceptances are handled by the two semor members of the staff of the Bill Division. The Federal Reserve has not, as a matter of
practice, sold acceptances out of its portfolio. Instead, as purchases are made,
the "bill buyers" attempt to distribute maturities fairly evenly, by weeks and
where possible by days. Thus, there are almost always some acceptances maturing every day, and in a relatively short time maturities alone can run the holdings
down as far as might be appropriate in conforming to the direction of other
credit policy action.
The fact that the actual negotiations to purchase acceptances can be handled
without a large staff is also attributable partly to the fact that there is no price
fluctuation within the day ( as there used to be during the twenties), except
on those occasions ( which may be at intervals of several weeks or months)
when a general change in dealers' acceptance rates may occur. Consequently,
the negotiations with each dealer relate to the amount obtainable, the maturity
distribution of that amount ( usu ally running from twenty-one to ninety days),
and the names of the accepting banks involved; but there is ordinarily no
negotiation as to rate.
There is another aspect of acceptance purchases which does require the
use of a larger staff and involves specialized skills. That is the examination of
acceptances, once they arrive from the dealers, to assure their conformity with
Federal Reserve regulations as to the nature of proper acceptance paper, and
to assure that each bill is properly inscribed and endorsed. As arriving bills
are examined, those found unacceptable are immediately returned to the dealers,
who then may, if their own holdings permit, substitute other bills of comparable
amount and maturity.
Although study of the legends on the great variety of acceptances passing
through is a fascinating story in itself, revealing the great variety of goods
moving in the channels of trade ( and particularly international trade), and the
many sources of origin and destination, the job of the acceptance clerks is the
more cold-blooded one of verifying the negotiability of the instruments and
their conformity with established acceptance practices and with the regulations
of the Board of Governors of the Federal Reserve System, as well as inquiring,
under some circumstances, into the credit standing of the business concern drawing the acceptance. Because of the nature of this paper, however, the principal
reliance as to its soundness is placed upon the name of the accepting bank and
the added endorsement which the acceptance carries. Current lists are main-
Federal Reserve Bank of St. Louis


tained of all banks in the United States engaged in extending acceptance credit,
and the condition of each such bank is periodically reviewed. The acceptance
dealers are, of course, well-known to the officers and staff of the Securities
Department, and each periodically provides the customary financial statements
required for review of his credit-worthiness. On the basis of the net worth shown
in each dealer's balance sheet, a credit "line" may, if necessary, be established
applicable to the total amount of his endorsements that can be accepted on
purchases made for the Reserve Bank's account and foreign accounts ( combined), and over-all lines are also established for the amount of repurchase
agreements that might be extended to each, on acceptances and Government
securities taken together.


By far the largest dollar volume of transactions executed for accounts other
than the System Account by the Trading Desk is that done for foreign central
banks and governments. There is also a wide variety and occasionally a substantial volume of transactions executed for the various Governmental trust funds and
investment accounts administered by the Treasury; and within the past few weeks
there have been transactions for the sinking fund account of the Treasury itself.
In terms of number of transactions and diversity among various outstanding marketable securities, the operations conducted for the smaller member banks in the
Second Federal Reserve District also play an important part, although the
dollar volume involved never looms very large. Any other transactions undertaken for some minor miscellaneous accounts are of a service nature and need
not be mentioned here in any further detail. Taken as a group, these transactions
for accounts other than the Federal Reserve have in recent years amounted to
a total volume of roughly the same magnitude as the combined total of purchases
and sales executed for the System Open Market Account itself. In terms of
number of transactions, and frequency of individual contacts with the markets,
this other business over the past two years has involved about five times as
many separate transactions with the various, individual dealers as are involved
in transactions for the System Account. It may be interesting briefly to take a
closer look at the three principal categories into which these other transactions
fall: foreign, Treasury, and member bank.
Federal Reserve Bank of St. Louis


Virtually all direct relations between foreign
monetary authorities and the Federal Reserve System, with respect to the management of deposit balances and the purchase or sale of securities, are maintained in behalf of the Federal Reserve by the Foreign Department of the
Federal Reserve Bank of New York, which has a variety of arrangements for
handling the investment requirements of its correspondents. This Department
keeps the officers of the Securities Department informed concerning actual
orders arriving or orders in contemplation. The actual execution of orders is
carried out on the basis of written instructions from the Foreign Department,
specifying all relevant details in conformity with these arrangements. Thus whenever such transactions reach the stage of becoming an influence in the market,
and exerting an effect on bank reserves, the Vice President-Manager and his
associated officers are in a position to effect suitable coordination with any action
currently under way by the System itself, in connection with either its defensive
or its dynamic responsibilities. Since the flows in and out of the deposit balances
of these foreign central banks and governments are handled by the Foreign
Department, a full picture as to the market effect of any specific security transaction can usually be obtained by piecing together information which would
indicate whether or not funds are actually being absorbed from the market, or
released to the market, on balance.
It is not at all unusual, during the course of any week, for transactions on
foreign account to reach a magnitude of 75 million dollars or 100 million dollars, and they sometimes run much larger, without even taking into account the
weekly Treasury bill tender. For many weeks prior to the time of this writing,
the magnitude of the combined tenders submitted in the Treasury bill auction for
foreign accounts has been larger than the tender submitted by the System
Account itself, and typically these tenders are among the largest of all the bill
tenders submitted. These figures give some indication of the potentialities inherent
in the execution of these transactions for exerting a direct influence on the
behavior of the money market, and upon prices of particular issues, and point
clearly to the need for conducting these operations in a manner consistent with
the Federal Reserve System's own action.
There are times when foreign orders may arrive which can make a helpful
contribution in furthering the reserve effects intended by Federal Reserve
action. For example, if purchase orders should come in on a day when the
System Account is itself contemplating purchases, the release of funds by the
Federal Reserve Bank of St. Louis


foreign accounts might make Federal Reserve action at that moment unnecessary,
although the Account Management would, of course, remain alert to provide
funds through offsetting purchases if there were to be a subsequent absorption
of funds by other foreign accounts. At other times, the sum of foreign account
orders may have the opposite reserve effect to that intended by Federal Reserve
action, and in these instances too the transactions are handled in a manner
calculated to minimize conflict with Federal Reserve policy objectives. In principle it is always considered desirable to execute these transactions through
the dealer market, and to have the specific confirmation of independently
determined prices that is provided when transactions are actually executed with
the dealers on a competitive basis. On occasion, different foreign account
orders may involve purchase and sale of the same issue of securities, and
could be "matched off" internally, but even these transactions are actually
"crossed" through the market.
Because of the frequency of these foreign orders and the great variations
in their size, foreign orders are rarely handled through a full-scale "go-around".
Instead, any given transaction, or pair of transactions, is usually executed by one
trader who contacts four or five dealers in order to obtain the best price under
competitive conditions without going entirely "around the Street". It is often possible to direct these orders to dealers who have already, in conversations during
the day, mentioned to one or another of the traders that they are particularly interested in the specific securities which happen to be involved in this order, or
securities so close as to perhaps make them acceptable to the dealers as substitutes. Records are carefully maintained, however, and frequently reviewed by the
officers of the Securities Department, in order to make certain that the distribution of opportunities to do this business is equitably allocated among all of the
active dealers. But, in the final analysis, it is the performance of the dealers
themselves, on a price basis, which determines how much of the total any one
dealer may actually do.
for Treasury accounts are executed on the basis of telegraphic instructions from
the Fiscal Assistant Secretary. (There are a number of small and miscellaneous
orders, usually executed in behalf of wards of the Government, for which instructions may be transmitted by letter.) At times a range of prices acceptable
to the Treasury account is orally specified, but more often the order is to buy
or sell "at the market". The Trading Desk maintains frequent contact with the
relevant Treasury officials to assure their concurrence in the actual execution of
Federal Reserve Bank of St. Louis

any order at the presently prevailing market price. For the most part, these
various orders for Treasury accounts involve securities other than Treasury bills,
perhaps most frequently the various notes or bonds, but transactions in bills
are not infrequent. Any order received will specify the Government fund or
account for which the purchases or sales are to be made, and will contain
appropriate delivery and accounting instructions to be used by the Safekeeping
and Security Custody Departments of the Bank in maintaining the detailed
records and controls involved.
In executing Treasury orders, there is seldom any conflict with the reserve
effects implied, since the officials at the Treasury and at the Federal Reserve
Bank of New York who are involved in these orders are the same officials who
normally consult each day concerning the management of the Treasury's cash
balance, with a view to minimizing any disturbing effect resulting from the
combination of all receipts or disbursements flowing through the Federal Reserve Banks. The other possible zone of conflict with the general objectives of
credit policy, or the area in which results may perhaps be integrated with the
ends of credit policy, lies in the market impact of the actual execution of outright purchases or sales, if they should be in any significant volume, so far as
price movements and the psychology of the market are concerned. It is necessary, therefore, to handle such orders in a variety of ways, and to rely upon
the skills and experience of the most seasoned traders, in order to accomplish
businesslike execution without disturbing collateral effects. At times some effect
on prices may be of no consequence, but at others it may be almost certain to
have an upsetting influence in market psychology. The Account Management
always feels free, when any consequences are envisaged that might be in conflict
with the Federal Reserve System's current efforts, to request wide discretion
from the Treasury officials with respect to the timing or the pace of fulfillment
of orders.
3. EXECUTING ORDERS FOR MEMBER BANK ACCOUNTS. The Federal Reserve Banks, as a service to their member banks which are too remote from
the facilities of the market and too small to be serviced regularly by dealers,
stand ready to execute orders for them as agent without charge by making
direct contacts with dealers in their behalf. A nominal charge is made if the
transactions are for their customers. Perhaps somewhat less use is made of this
facility at the Federal Reserve Bank of New York, compared with that at other
Federal Reserve Banks, because of the proximity of banks in the Second District to the dealer market in New York City, but a number of the other Reserve
Federal Reserve Bank of St. Louis


Banks do at times have a fairly large volume of such orders: Even here, there
are a number of member banks located some distance from New York who are
permitted to use the Federal Reserve Bank's facilities. The execution of these
small orders by the Trading Desk provides an excellent opportunity for the
traders to maintain a close, and really meaningful, contact with the traders of
the various dealer firms throughout the day. As we have noted earlier, generalizations as to price changes, or looseness in the description of current quotations,
will be quickly refined into an accurate reflection of a dealer's willingness to
perform when he is actually confronted with business to be done. And the
execution of a variety of small-lot orders ( though perhaps such lots are not
always entitled to the finely calculated "inside" market quotations) helps materially in providing that intimacy of working contact which makes possible an
accurate picture of the state of the market at any given time.
As a rule, the officers of the Department prefer that a member bank whose
business is of appreciable volume establish its own direct contacts with various
dealers, or with city correspondents if investment advice is wanted, and genera1ly
this might be expected to occur without prompting, since dealers and large banks
are constantly soliciting potential business which would be sufficiently large to
compensate them for the expenses involved in frequent contacts and in executing
transactions. In the event any such member bank continues to prefer availing itself of the services of the Federal Reserve Bank and the facilities of the Trading
Desk, however, service will be provided. Ordinarily, transactions for member
bank account are executed on a regular delivery basis, so that any aggregate
effect on the flow of bank reserves will not be noticed until the following day. In
any case, the cumulative total has never been large enough to be a factor of
significance in influencing the availability of funds in the money market.

IX. Operating Liaison with the Federal
Open Market Committee
Liaison with the Federal Open Market Committee is, of course, a two-way
street, and it is probably as heavily traveled as the path between any two parts
of any unit of Government. The inescapable fact that the seat of National Government is in Washington, and that primary responsibility for Federal Reserve
Federal Reserve Bank of St. Louis

policy determination must be in the statutory Federal Open Market Committee
which meets in Washington, is paralleled by the equally inescapable fact
that the center of the money market and the Government securities market is in
New York. The physical trading facilities and the concentration of skilled trading staffs are also there. Consequently, it has been necessary to work out an
unusual variety of arrangements for maintaining continuous contact between
Washington, New York, and the other Reserve Banks to assure by exchange of
information and frequent consultation that the detailed execution of policy in
New York is in conformity with the policy objectives developed in Washington
by the Committee.
But the Federal Reserve System is almost unique among Governmental
agencies in that it also provides within its framework for a considerable measure
of regional representation from across the country, participating in, but never
dominating, the policy-determination processes. Consequently, there is continuous need to keep the Presidents of the other Federal Reserve Banks as
fully informed as possible concerning conditions in the money market and the
Government securities market, as a necessary prerequisite for the participation
each may have in policy determination. At the same time each participating
President - and over the course of any three-year cycle all Presidents serve at
least one one-year term as a full member of the Federal Open Market Committee and at least one more year as an alternate member - must have
continuing opportunity to review the detailed steps being taken by the Account
Management in the daily execution of Committee directives, in order to raise
any questions which he may have over the manner in which the Account
Management is currently fulfilling the Committee's instructions.
The arrangements in existence as of mid-1956, in order to bring all of these
important cogs together, fall into two categories: those concerned with the
transmission of instructions from the Federal Open Market Committee to the
Account Management, and those providing for the transmission of complete
reports to all members and alternate members of the Committee ( and other
Reserve Bank Presidents not currently serving) from the Trading Desk concerning market conditions and operations currently contemplated or under way.
Each of these will be described further here. It is to be understood, of course,
as clearly indicated at the beginning of this pamphlet, that this is not the place
to desciibe the policy-making procedures of the Federal Open Market Committee. We shall be concerned instead only with the manner in which the Committee's instructions are conveyed to the Account Management and the manner in
Federal Reserve Bank of St. Louis


which the Account Management keeps the Committee informed of the steps it
is taking in carrying out those instructions.

All policy is formulated by the Federal Open Market Committee at its
frequent meetings, currently held at three-week intervals at the offices of the
Board of Governors in Washington. Customarily, the Federal Reserve Bank
of New York is represented at those meetings by its President ( or his alternate,
the First Vice President), who serves as a member of the Committee, and also
by the Manager of the System Open Market Account ( or in his rare absences
by the Assistant Vice President serving under him). The presence of the President ( or his alternate) and the Vice President-Manager throughout the entire
discussion makes it possible to acquire an understanding of all of the shades of
meaning that emerge, in elaboration of the formal directives customarily agreed
upon and transmitted to the Federal Reserve Bank of New York after the end
of the meeting. The Manager of the System Account is thus equipped to interpret specific situations as they arise in the light of the full discussion at each
preceding meeting. Official minutes, prepared by the Secretary of the Federal
Open Market Committee and reviewed in detail by all members, serve as the
lasting official record of the full range of instructions given to the Account
Management and are, of course, strictly confidential.
Enough has already been said concerning the day-by-day volatility of
the money market to make it clear that any detailed projections prepared for
the use of the Committee at the time of any particular meeting cannot be
expected to hold good without material deviations over the entire period that
will elapse until the next meeting occurs. Consequently, it is necessary to keep
the members of the Committee continuously informed as to the nature of all
the deviations from the projected pattern that develop day by day, and as to
the judgments being made by the Account Management in taking action for the
Committee against a shifting background in fulfillment of the direction of policy
and the general principles agreed upon at the latest meeting. The principal
method for assuring continuous review by the Committee members, in this
changing situation, of the adaptations being made by the Account Management
as action becomes necessary, consists of a detailed telephone conversation held
at 11 :00 a.m. each business day. Several representatives of the Board of
Governors, and any of the Governors themselves who may be free to participate, always take part in this telephone conversation. In addition, one of the
Federal Reserve Bank of St. Louis

Reserve Bank Presidents currently serving on the Committee also joins the
telephone hookup; and from meeting to meeting there is a rotation among
Presidents, so that each has frequent opportunity to take part in these daily
reviews of the current situation.
Ordinarily these conversations run fifteen to twenty-five minutes and they
bring together everything available by that hour of the day concerning the vast
range of developments described in Section VI where a picture was given of
"A Day's Work at the Trading Desk". As indicated there, these telephone conversations culminate in a formulation of the specific steps, or the presently visible
alternatives and the conditions upon which each may depend, for action to be
taken through the remainder of that day. Immediately following completion
of this telephone conference, senior members of the staff of the Board of
Governors who have participated in the conversation prepare a full summary
which is immediately circulated to all members of the Board of Governors and
at the same time put on the wire to each Federal Reserve Bank President. In
that way, shortly after 12: 00 o'clock noon (Washington time) each Federal
Reserve Bank President across the country will have in written form a digested
summary of the day's opening developments and the probable courses of action.
Thus, on any day, and often before the moment has been reached when specific
action is to be taken, every participating member of the Federal Open Market
Committee has an opportunity to review what is in process and to contact the
Vice President-Manager to raise any questions that he may have concerning the
course of action contemplated. Of course, any members who participate in the
telephone conversation itself may raise questions or seek further clarification
while that conversation is in process.
In areas as complex as those of the swiftly changing money and Government
securities markets, where the execution of transactions must occur at some
distance from the location of most of those who carry the main responsibility
for general policy formulation, this pattern of continuous reporting and review
probably provides the best approach to a workable arrangement for fulfilling
policy objectives promptly, in the light of swift-breaking market developments.
In effect, the telephone arrangements and the subsequent distribution of the
details of the conversation, provide a day-by-day specific reconsideration of
action - as the Vice President-Manager attempts to work out solutions for
each day's shifting problems as near as possible to those which the Committee
as a whole would itself have decided upon if it could physically be present and
in a position to review as a body the specific operating situation arising each day.
Federal Reserve Bank of St. Louis



Although the arrangements for daily review of contemplated action themselves rest upon reports transmitted by the Account Management, those reports
by telephone may properly be considered a part of the continuing liaison through
which the Committee reviews its instructions to the Manager of the Account.
There are a number of other reports, however, which help to fill out the broader
picture of developments, in order to provide senior officials with the full range
of information that they may need. The kinds of information have already been
described, principally in Section VI, where the work of the Trading Desk as an
observation post, as well as a nerve center of action, has been reviewed in some
detail. It is only necessary here to enumerate the various forms in which the
variety of observations, the action taken, and the considerations underlying all
decisions are transmitted in greater detail to the various senior officials.
One means, of spot significance during the course of the day, consists of
two brief telegrams composed at the Trading Desk and sent directly to each
Federal Reserve Bank President and the senior officers at the various Branches,
summarizing the outstanding current developments in the Government securities
market and the money market, one in midmorning, the other at the close.
Another consists in routine telephone reports giving current quotations of outstanding marketable Government securities and mentioning highlights of market
developments, which are made by the various traders on the Desk to staff representatives at the Board of Governors. Comparable reports concerning those
aspects of market developments of interest to the Treasury are also made
directly to a Treasury staff representative who maintains records that the senior
Treasury officials may wish to consult during the course of the day.
Then at the close of the day, a written report is prepared in somewhat
greater detail summarizing all statistical indicators of market developments,
as well as the record of System transactions, and including a brief paragraph
or two describing the principal developments in the money market and the
Government securities market. This report is prepared by the Research Department and transmitted to all members of the Board of Governors and all
Federal Reserve Bank Presidents by overnight mail. Much of the information
included, and the paragraphs summarizing market conditions, are supplied to
the Research Department by traders who have responsibility for information
included in various segments of the report.
Federal Reserve Bank of St. Louis

At the end of each statement week, a rather extensive written report, with
detailed statistical appendices, summarizing developments in all of the markets
and reviewing all action taken by the Account Management, including as
well a step-by-step review of the considerations underlying the decisions taken
on each day, is prepared for transmission to all senior officials in the Federal
Reserve System. Although original drafts of all sections of this report are prepared either by various members of the trading staff, or by economists in the
Research Department, the final version of the report is edited, and often
extensively expanded with respect to the analysis underlying decisions taken,
by any or all of the officers of the Securities Department. The Manager, Reports
and Analysis, has primary responsibility for preparation of the report. It is
never signed by the Manager of the System Open Market Account, however,
without having absorbed several hours of his time as well.
Then, as already mentioned, a further report for the period since the last
meeting, covering the same scope as the weekly reports in more general form,
and also accompanied by projections of factors affecting reserves as well as by
statistical appendices ( which are somewhat less detailed than those which
accompany the weekly reports) is prepared shortly in advance of each meeting
of the Federal Open Market Committee. Since this must be dispatched to each
member in order to reach him before he departs for attendance at the meeting
in Washington, there is also a further brief interval which elapses prior to the
meeting, during which time subsequent developments occur. A supplementary
report covering this brief interval, prepared jointly by the Research staff and
the officers of the Securities function on the evening preceding the meeting of
the Committee, is placed before each member of the Committee as it assembles.
Again, the Manager, Reports and Analysis, has responsibility for these reports,
but the Research Department ordinarily supplies the first drafts.
Four times a year these special reports prepared for each meeting of the
Federal Open Market Committee are stretched out over a full quarterly period,
in order to give the members of the Committee a somewhat longer view of
the pattern of developments and the course of the decisions that have been
taken in executing Committee directives over this interval. Then over and above
all other reports, shortly after the end of each calendar year, a broad general
summary of the major steps taken by the System Account Management during
the year is prepared jointly by the staffs of the Research Department and of
the Securities Department, and edited by the officers. This, too, is delivered to
Federal Reserve Bank of St. Louis


all members of the Federal Open Market Committee and to all other Presidents
not currently serving on the Committee.
These are the regular reports. In addition, special reports are prepared and
sent to the Committee on virtually every change that may be contemplated in
adapting operating procedures to changing market practices. And comprehensive memoranda and records are prepared for the files on a great variety of
actual operations, in order to be able to provide the Committee with a full
review if any question were ever to arise in the future concerning the execution
of any of these transactions.
High in importance, too, are the actual visits of senior Federal Reserve
officials to the Trading Room - not glimpses of a few minutes, but extended
periods spent in close contact with the job being done. Visual awareness, at
least in this complex area, is an important aid to intelligible communication.
It is in all of these varied ways that attempts are currently made to assure
full communication with all senior officials in the Federal Reserve System concerning the many aspects of market events and the steps to be taken in the
day-by-day execution of System transactions. The Trading Desk has a heavy
burden of accountability in its daily attempt to do the best that can be done
toward fulfilling the Committee's instructions.

X. Conclusion: The Fusing of "Defensive" and "Dynamic"
Responsibilities in Open Market Operations
There is always, in the press and in public comment generally, an understandable urge to identify specific changes in System holdings of Government
securities, from week to week, with the more dramatic aspects of general credit
policy. An increase in holdings means that reserves are being supplied; money,
it may be concluded, is going to become easier. A reduction means that reserves
are being absorbed ; Federal Reserve policy, it may be said, appears to have
turned tighter. Such observations are not necessarily wrong, but they frequently
are. And anyone who has come this far in the reading of this pamphlet would
have no difficulty in explaining why.
The key to the riddle, of course, is in the mechanics of the money market
and in the complex of factors always at work affecting bank reserves. The textbook writers were not wrong when they wrote that the way to ease the general
Federal Reserve Bank of St. Louis

credit position is to buy securities and thereby ease reserves, or that tightening
can be accomplished by selling to absorb reserves. They were just simplifying
one integral part of a process that must be learned, and understood, in steps.
What we have added here is a description of some of the complicaticms that
come in when the Federal Reserve System sets out to use this important tool,
open market operations, in the kind of money market that has grown up to
serve the fractional reserve banking system that exists in the United States, and
in most other developed countries, today.
There can scarcely be any question that a fractional reserve system does
provide the flexibility, the prompt response to shifting needs, and the capabilities
for diversified growth that are essential if the monetary system is to be a propelling, rather than a retarding, force in a modern economy. There is also
little if any question that the job of the central bank is both to provide the fuel
that the money machine needs, in terms of primary bank reserves and the
currency supply, and to act as a governor on the over-all rate at which that fuel
is supplied and used, in order to avoid the excesses that might lead the machine
to shake itself to pieces and to avoid the shortages that might cause the machine
to come gasping to a halt. But it is, in fact, a built-in structural feature of the
way today's monetary machine is constructed that some of the central bank's
release or absorption of credit will come, involuntarily, from the swings of
float and circulating currency; some will come, too, from the incidence of fluctuations in the Treasury's balance, or in foreign balances, at the Federal Reserve
Banks. These factors, as well as changes in the amount of required reserves of
member banks, and other lesser factors not mentioned here, are all a part of
the apparatus that is supplying or absorbing reserves every day, on balance,
whether or not the Federal Reserve System takes any action on its own initiative
to influence the outstanding volume of bank reserves.
Chart 3 on page 102 shows the net of all those other factors, with the
greatest swings dampened through use of weekly averages, for the last half of
1955. What stands out most, in comparing that line on the chart with the
line representing cumulative Federal Reserve purchases or sales ( on a weekly
average basis), is that by far the greater part of the System Account's operations through that six-month period apparently consisted in offsetting an irregular, but in the end a substantial, absorption of reserves by these other factors
(in combination). What may also appear, on further study, is that the Federal
Reserve purchases did not quite equal the reserve absorption. Does that have
any significant meaning? It does indeed, for throughout this period the System
Federal Reserve Bank of St. Louis


Chart 3


C-tl or

c-, indicates effect on free reserves
MIiiions of dollars

Millions of dollars

+ 1500












-2000.__ _ __.__ _ ____._ _ _ __.__ _ ___.._ _ _ __.__ _ __, -2000

Cu mu la ti ve changes in daily averages for statement weeks July 6 through December 28, 1955.
Exe I ud es member bank b orr owing fr om the Fed era I Reserve Banks .

Federal Reserve Bank of St. Louis

was pursuing a generally restrictive credit policy, seeing to it that restrictive
pressures on the banking system were maintained, and at times increased. The
action of the other factors by themselves, however, would have produced a net
reduction over this six-month period of almost 1 ½ billion dollars in bank
reserves. If not offset, this reduction would have meant an effective shrinkage
of more than 7 per cent in the reserve base. That would have been restriction
with a vengeance, and scarcely consistent with the balancing role, resisting
inflation while providing sufficient reserves to finance nonspeculative business
needs, which the Federal Reserve was pursuing through this period. What the
Federal ReSierve did, therefore, in getting the degree of restrictive pressure desired, was simply to offset most, but not all, of the pressure originating from the
changes in these other factors.12
There are several important conclusions which this chart and a study of the
period suggest - conclusions that should emerge, too, from the variety of
observations on markets, procedures, and principles in the nine preceding
sections of this booklet.
One is that System Account purchases or sales, while always made with a
view to effecting the general degree of reserve pressure intended by the Committee, can never be taken alone as a signal of the actual credit policy being
pursued. Here is a period consisting almost entirely of purchases, when the
dynamic policy was actually one of restraint, and paradoxically enough the
restraint was in fact achieved. The secret was, as we know, in keeping close
watch on the absorption of reserves by other factors, and then taking action
day by day, to offset only enough of the reserve absorption to prevent the
creation of even tighter conditions in the money market than the policy of the
Federal Open Market Committee intended.
This points to a second conclusion: It is often possible to take advantage
of conditions or changes in reserves, and in market psychology, that are being
produced by other factors, thereby making overt action by the Federal Reserve
unnecessary. Thus, in many weeks when Federal Reserve policy is penetrating
with pervasive effect throughout the money market, no change at all may be
visible in the holdings of the System Account.
Third, as a result of the conditions that underlie the first two conclusions,
the actual course of System Account purchases and sales alone from week to
12Any reader interested in the policy aspects of this period , or in the full range of Federal Reserve
System influence, including the use of the discount rate and the restrictive influence of an increasing volume
of member bank borrowing, is referred to the Annual Report of the Board of Governors of the Federal
Reserve System for 1955, the Annual Reports of the various Federal Reserve Banks for that year, and to the
A1111ual Report and relevant issues of the Monthly Review of the Federal Reserve Bank of New York.
Federal Reserve Bank of St. Louis


week is likely to appear irresolute, if not capricious, unless interpreted in the
broader context suggested here. It is perhaps another paradox that the moving
averages, or the grand aggregates, of statistical data come out as well as they
do after the event only because the Trading Desk and the money market are
operating largely on the basis of something else - the "feel" of each day's
market, which has disappeared by the time comprehensive statistics are prepared. Indeed, the real force of Federal Reserve policy as executed by the
Trading Desk is exerted on the various institutions of the money market, and
their reactions are in turn transmitted to others, on the basis of such a variety
of fast moving signals that many of the immediate signals used in deciding
upon action or inaction during the course of a given day will never be publicly
recorded in available current data published after the event. It is also because
a reasonably smooth and coherent execution of policy, at the actual firing line,
must depend upon close integration of Federal Reserve action or inaction with
the effects of the many changes occurring in other factors that no formula can
be laid down to determine in advance the precise timing, or amount, or form
of Federal Reserve action.
Fourth, the student interested in knowing "what policy is" and prepared
to analyze the complex of all daily and weekly published data can generally
come fairly close to knowing in a short time - close enough to justify the wellimbedded maxim of all central banks that detailed explanations of each policy
step, as taken, are unnecessary, and create rigidities that may handicap the full
flexibility needed for close adaptation of action to quickly changing money
market conditions. The characteristically detailed annual reviews of the record,
published by the Board of Governors and most Federal Reserve Banks,
the monthly Federal Reserve Bulletin, and the New York Reserve Bank's
Monthly Review, provide enough analysis of what was done, and why, soon
enough after the events, to permit the specialist to acquire the body of knowledge
which can equip him to make informed judgments of later data and developments. This does mean, however, that the interpretation of central bank action,
and the evaluation of its influence, has become, like many other things in
this modern day, a zone reserved largely for the specialists. That need not be
harmful so long as those who try to interpret and evaluate can appreciate the
full nature of their task, and so long as there are enough who will make the
effort to give assurance that the mistakes of some will be corrected by others.
All of these conclusions have their origin, of course, in the dual nature of
the Federal Reserve System's responsibilities that was stressed at the beginning
Federal Reserve Bank of St. Louis

of this booklet: the defensive, avoiding mechanical disturbances that could interfere with the smooth functioning of the monetary system, and the dynamic,
using the potentialities of control over the reserve base of a fractional reserve
banking system to help promote economic growth within a pattern of sustained
stability. It should be clear now, at least with respect to open market operations,
that there has in fact been a fusion of both types of responsibility. The uppermost concern at the Trading Desk every day is that the prevailing degree of
pressure intended by the Federal Open Market Committee's policy ( the
dynamic aspect of the System's responsibilities) shall emerge from the day's
confusion as a dominating force. Yet the specific action taken, more often
than not, is directed toward offsetting or cushioning the effect of some mechanical by-product of the physical flow of payments (a defensive operation).
There is no need, of course, to sort out these two sides of specific questions as
they confront the Trading Desk each day; it has long since become second
nature to the operating personnel to handle each problem with its defensive and
its dynamic aspects joined together. The difference, in contrast to much of the
public discussion of System Open Market Operations, however, is that the public
view very often ignores the defensive aspects altogether. This long trip through
the markets and procedures of mid-1956 will have been worth while if it helps
in any way to broaden awareness of the inevitable interrelations of these two
Federal Reserve Bank of St. Louis


The following publications are available free ( except where a charge is
indicated) from any Federal Reserve Bank ( see addresses below for the one
nearest you) or the Board of Governors of the Federal Reserve System,
Washington 25 , D.C.
booklet explaining the structure, objectives, and methods of operations of
the Federal Reserve System.
2. MONEY: MASTER OR SERVANT? A 48-page booklet explaining in nontechnical language the role of money and banking in our economy. The
booklet describes briefly the structure of our money economy and discusses
the power of commercial banks to create money, the function of bank
reserves, and the methods the Federal Reserve System uses to influence the
cost, supply, and availability of credit, as it seeks to encourage balanced
economic growth at high levels of employment.
3. THE MONEY SIDE OF "THE STREET" . A l 03-page account of the workings
of the New York money market including a discussion of the functions and
usefulness of the short-term wholesale money market and of its role in
the operations of the Federal Reserve. 70 cents per copy; 35 cents a copy
on orders from educational institutions.
4. THE QUEST FOR STABILITY. A 54-page booklet of five essays describing
efforts to achieve an efficient monetary system in the United States.
5. OPEN MARKET OPERATIONS. A 43-page booklet describing in layman's
language how open market operations in the U.S. Government Securities
are used to cope with monetary stresses and promote a healthy economy.
6. READINGS ON MONEY. A 58-page booklet discussing the nature of money
and the processes of its creation and circulation. Articles include the rising
money supply, currency and coin, kinds of currency and coin, demand
deposits, bank reserves, money lenders, and the Federal Reserve System.
7. DEPOSIT VELOCITY AND ns SIGNIFICANCE. An 88-page booklet on the
behavior of deposit velocity over the business cycle and over long periods.
60 cents per copy; 30 cents per copy on orders from educational institutions.
analyzing reports of member banks and of the Federal Reserve Banks, including the weekly statement. An appendix contains copies of various
Federal Reserve reports and a glossary of terms.
Federal Reserve Bank of St. Louis



A Workbook on Deposits, Currency, and
Bank Reserves. A 31-page booklet explaining the mechanics of money
creation. The "T" account technique is used to illustrate how bank deposits expand or contract and how miscellaneous factors affect bank rereserves.



A 52-

page booklet of articles dealing with the relationship between the government and the central bank, the decision-making process in implementing
monetary policy, the conduct of open market operations and discount rate
policy, and the role of monetary policy in promoting economic growth.



1914. A 62-page analysis of the performance and policies of central banks
under the pre-1914 gold standard in the light of current monetary and
banking theory. 50 cents per copy; 25 cents per copy on orders from educational institutions.
Each of the Reserve Banks also publishes a monthly review of credit and
business developments which will be sent regularly to those requesting it. The
Board of Governors publishes the Federal Reserve Bulletin monthly; an annual
subscription in the United States costs $6.00.
Federal Reserve · Bank of Atlanta
Atlanta 3, Georgia

Federal Reserve Bank of Minneapolis
Minneapolis 2, Minnesota

Federal Reserve Bank of Boston

Federal Reserve Bank of New York·

Boston 6, Massachusetts

New York 45 , New York

Federal Reserve Bank of Chicago
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