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123 A. meeting of the Federal Reserve Board with the Open Market Policy Conference was held in the office of the Federal Reserve Board on Tuesday, Allgust 11, 1931, at 5:30 p. m. PRESENT: Governor Meyer Mr. Hamlin Mr. 1'r. Mr. Mr. ALSO PRESENT: Taller Tames Magee McClelland, Assistant Secretary. Governor Young Governor Harrison Governor Fancher Governor Black Deputy Governor McKay Governor Martin Governor Geery Deputy Governor Worthington Deputy Governor Gilbert ) ) ) ) Members, Open ) Llarket Policy ) Conference. ) ) ) Mr. Matteson, Secretary, Open Market Policy Conference Dr. Goldenweiser, Director, Division of Research and Statistics Mr. Snead, Chief, Division of Bank Operations Mr. Wyatt, General Counsel. Governor Harrison, Chairman of the Open Market Policy Conference, 131'esented a preliminary memorandum relative to credit conditions, submitted to tile Conference, a report of operations in the System account since the last meeting of the Conference, and tentative minutes of the meeting of the Executive 0°1(cmittee of the Conference held in New York on August 4th. He stated that the Conference had been in session all day discussing e°11ditions both in this country and abroad and he referred particularly to the cill"tio decline in commodity prices which has been so great as to threaten 1441kruPtcy in certain countries of the world and in certain sections of ixiclividual countries whose chief sources of income are raw materials. In many instances these products at present prices are not adequate to cover fixed 11.41.1"6*es so that either commodity prices must rise or else we must expect de- on many debts, national and private. He stated that at the moment it 8/11/za -2- aPpears that nothins, can be done by the Federal Reserve System to help this situation through the discount rate or through operations in the bill market, the °n1Y possible helpful action being the purchase of Government securities in rather large amounts. In this connection, he referred to the free gold of the Federal Reserve banks now amounting to about .Y750,000,000, which could Probably be increased to .1,000,000,000 through the retirement of excess Feda1 Reserve notes held in the cash of the Federal Reserve banks and branches, 4nd to the distribution of this free gold and the fact that five of the Federal Reserve banks hold only what might be considered very close to their oPerating minimums. He stated that no member of the Conference is in favor of purchasing large amounts of Government securities just at this time, and it is felt that there would be no Point in puttin'_, large amounts into the market until such tilne as it should appear that the effect would not be limited to the mere pilin up of excess reserves in member banks which would not be employed. He t"ed that the natural outlet for such excess reserves is in investments, and action were taken at the right time it might result in pressure being inOn the banks for the use of their surplus funds through the purchase of h°11ds, mortgages, etc. The difficulty at the present time, he said, lies in the fact that prime investments have been bought up until they are on a very 1°4 Yield basis; that secondary bonds consist largely of railroad issues a'greeating approximately ,7,750,000,000, k,500,000,000 of which are likely With.n- a short time to become illegal for investment by savings banks, inoe COI anies and for trust funds due to provisions of law relative to eal'Ilinga of issuing companies; and that in addition there is pressure on the 1Q14ket due to forced liquidation of bond portfolios of closed banks. On the other hand, he stated the existing situation is so critical that - Most of the Conference felt that the System should be prepared to act quickly in the event conditions develop to a point where it appears that an operation 14 Gove rnments might encourage or facilitate recovery. He stated that the following resolution was prepared and presented to the Conference by the Chairman: "It is the sense of the Conference that, subject to the approval of the Federal Reserve Board, the Executive Committee be authorized to purchase, for account of such Federal Reserve banks as desire to participate, up to (0300,000,000) of Government securities, if and when it becomes necessary or advisable to do so. "It is the opinion of the Conference that economic conditions in this country and throughout the world are now such that it is essential that the System be prepared promptly to take whatever further proper steps are in its Power to encourage or facilitate a recovery in conditions as soon as it appears likely that such steps will be effective in accomplishing this purpose." He reported, however, that a motion was made to amend the above l*eselution so as to make it read as follows: "It is the sense of the Conference that, subject to the approval of the Federal Reserve Board, tfte Executive Coicaaittee be authorized to purchase, for account of such Federal Reserve banks as desire to participate, up to .A20,000,000 of Government securities, if and when it becomes necessary or advisable to do SO, or if necessary or advisable to sell up to a similar amount. "It is the opinion of the Conference that economic conditions in this country and throughout the world are now such that it is essential that the System be prepared promptly to take whatever further proper steps are in its power to encourage or facilitate a recovery in conditions as soon as it appears likely that such steps will be effective in accomplishing this purpose." Re stated that this motion to amend was carried with two negative votes, Governor Y°1111 and Governor Harrison, following which the resolution as amended was 84°Ptecl, one me:Aber of the Conference, Governor Toung, voting in the negative. Governor Harrison stated that he voted against the amendment because he Was of the opinion that if purchases were to be effective they should be taaae ta 8. more substantial amount; that in view of the withdrawals of currency ao 8/11/31 -4-- for hoarding plus the retirement of bills and Governments held by one foreign central bank the authority contemplated by the amendment would do no more than •offset present withdrawals from the market. He stated, however, that a majority of the members reported that it was their opinion and the opinion of the directors of their banks that it would be inadvisable to purchase any Governments at this time, and that they could not foresee the likelihood of any occasion to buy Governments in the near future. He had voted for the amended resolution, he said, because he thought it was important that the Executive Committee should not be without some authority to act. Governor Harrison also stated that it was not contemplated that the 450,000,000 of Governments purchased by the Federal Reserve Bank of New York within the last two or three days would be absorbed into the System account under the authority given in the amended resolution of the Conference, and that unless some of the other individual Federal Reserve banks desired to Participate in those purchases they would be carried in the portfolio of the New York bank. Governor Young reported that he had voted against both the motion to a:lend the original resolution and the adoption of the resolution as amended because he felt that any emergency could be taken care of by the System through Purchases of bills, which will come to the System at a one per cent rate, and that he would rather see an increase in the bill portfolio or even in rediscounts than in ineligible Government securities. He said he would regret t° see the important functions of the Federal Reserve System in redisco unting and bill operations further nullified by purchases of Government 3acurities. He expressed the opinion that neither the commodity price situation nor the bond market would be helped by an operation in Government S/11/31 _5- securities. lie stated that even if there were anything in the idea that excess lieserves Could be put in the market and create activity, he did not feel that the Present was the time to do it. He stated that when the time did come he th°11eht there would be opportunity for a thoroughgoing discussion of it by the Conference before action was taken. Governor Meyer, who had attended a part of the preliminary meeting of hO Open Market Policy Conference, stated that the authorization was given because the Conference felt the Executive Committee should have authority to take 8(3nle action, either to buy or to sell Government securities, if circumstances l'equired, pending another meeting of the conference. The Governor then made inquiry of Doctor Goldenweiser regarding the cillestion of free Gold in the System and the idea apparently held by some of (1 the Governors that a danger exists of employing too large a portion of the 2YEtem's free gold in purchases of Government securities which are not eligible 48 c°11ateral for Federal Reserve notes, in the face of the possibility of eUrrencY demands arising from local situations. Doctor Goldenweiser replied that he did not see any real danger in the 1rmaizA4 situation for the System as a whole, since any sustained demand for 111 '1110Y would necessitate borrowing by member banks which would of itself 1'111111311 the collateral necessary for the issuance of the notes. Doctor Miller then stated that he did not feel that a policy of main1 nc the status quo in a money market at depression levels for fear that it " 1 .t cause some disturbance had an adequate basis. A He stated rather that he felt) a keptical as he might be toward Open Market policy as an instrument of the 2 ecieral Reserve System, that if there ever had been a justification for itg bolA experimental use, even though it might only serve to demonstrate the 11111its 0.p the availability of such a policy, that situation exists at the 128 8/11/31 -6- Present time, He stated that while not over optimistic as to what might be "cmplished, he felt sure that if ever the experiment could be undertaken with the rainimum of hazard it was at the present time, or in the near future, and that 8illee the Federal Reserve System is the one agency which a large part of the Public thinks has the power to do something, he felt that either no action shcUld be taken or else such action should be taken as might result in some tacivelnent in the moribund condition which now exists. Governor Meyer then referred to the initiation of the present meeting °t the Conference by the Federal Reserve Board, through the suggestion made to the Chairman of the Conference of the Board's willingness to sympathetically consider a program of positive open market action, which decision had been ached by the Board after a careful consideration of all related conditions. rie stated that at the recent meeting of the Executive Committee of the Confer,ell "an interesting discussion had ensued, but that it was recognized that in 411Y such a major program a meeting of the full Conference was necessary. He et4ted that a majority of the Governors apparently cane to this meeting carryilkg /mandates to a certain extent from their boards of directors and that the 8°411 had not had an opportunity to participate in the discussions until after "tion had been taken by the Conference. Be stated that he did not feel that the B°ard was fully informed of the views of the Conference and suggested that i)e1114P8 further study and consideration should be given to the situation with the exPectation of having another meeting of the Conference in the not distant Alta . sp at which a full and free discussion can be had. He stated that he has l'elt for some time that it would make for a more satisfactory procedure if the toco.A were brought into the preliminary discussiont and that he believed in the ttIttire the meetings of the Open Market Policy Conference should begin with a 441°48810n of the whole situation with the Board, following which a separate .L2,9 8/11/31 -7- "melon could be held by the Conference, and a further joint meeting with the Menibers of the Board, if desired. Governor Harrison expressed his in objections to the present organi- Z4t1°A of the Open Market Policy Conference, but stated that the procedure at th18 meeting was what had been followed since the Conference was organized atd that there had been no intent to exclude the members of the Board from a 1'411 participation in the discussions. Governor Meyer also referred to the fact that several of the Governors 114d left the Conference before its completion and expressed the opinion that 14 the tuture when attending meetings of the Open Market Policy Conference, —.6mments should be made by the various Governors to afford themselves 441151e time to participate in the entire proceeding* The meeting adjourned at 6:50 p. m. Assistant Secretary. 44110yed:
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