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5.7i6 A meeting of the Federal Reserve Board was held in the office of the Federal Reserve Board on Tuesday, June 11, 1929 at 11:00 a.m. PRESENT: Governor Young Mr. Platt Ir. Hamlin Ir. Miller Ir. Cunningham Mr. Pole Mr. McClelland, Asst. Secretary The reading of the minutes of the meeting of the Federal Reserve Board held on June 10th was dispensed with. The Governor presented a memorandum dated June 3rd from Ir. Smead, submitting replies received from all Federal Reserve banks to the Board's circular letter of April 12, 1929 (St. 6148) on the subject of the designation and termination of reserve cities, in which inquiry was made as to whether, Iii the opinion of the banks, some formula could be worked out for use as a guide in designating reserve cities along the line of so classifying all cities in which amounts due to banks by member banks equal 10; or more of their total deposits; the memorandum stating that the replies indicate in most cases such a formula would work a hardship on many banks which have relatively small or no bank deposits, and that more equitable results would be obtained by requiring a higher reserve on bank deposits. In the same connection, the Governor presented another memorandum dated June 3rd from the Chief of the Division of Bank Operations, referring to the discussion of reserve requirements at the last Governors' Conference 4nd submitting several proposed formulas for computing member bank reserves, with tabulations showing required reserves under the formulas as compared with those now required. In the memorandum, it was recommended that a copy 6/11/29 -2- Rethereof with the attached tables be forwarded to each Governor and Federal serve Agent with a request that they advise the Board of their views, particularnet dely as to the discontinuance of a lower reserve on time deposits than on mand deposits and to the advisability of allowing vault cash to be counted as part of legally required reserves, with corresponding adjustments in required reserve percentages, and further that the Governors and Agents advise the Board What, in their opinion, would be the most satisfactory method of calculating reserves, provided none of the formulas outlined meet with their approval. It was also suggested that after replies to the Board's letter have been received, a committee might be appointed, if thought necessary, to consider all of the agreed recommendations and to prepare draft of a bill embodying the principles Upon. After discussion, the Governor was authorized to transmit the above memorandum and attached tables to all Governors and Federal Reserve Agents in accordance with the recommendation contained therein. The Governor then stated that the member banks in Albany, N. Y., which 4ave applied for termination of the designation of Albany as a reserve city, are desirous of having the Board reconsider their application. He stated that although action on the Albany application has been deferred pending determination of the general question of the designation of reserve cities, he has given further consideration to the Albany situation and is about convinced that the Board would be justified in granting the application. Governor Young stated that he would have up to date figures, regarding the Albany banks, furnished to the members of the Board for their consideration. At this point, the Secretary of the Treasury joined the meeting and took the Chair. • t- f--- F1 -3- 6/11/29 andum dated The Governor then presented, and the Board discussed, a memor replies June 10th from the Chief of the Division of Bank Operations, submitting 23, 1929 (St. 6170), from the Federal Reserve banks to the Board's letter of April wing requesting reports for the first quarter of the year of member banks borro continuously from the Federal Reserve banks. He stated that 1091 member banks were in debt to Federal Reserve banks throughout the first quarter, and 1667 daily borrowings amounting were in debt 80,j, or more of the time, their average to 4647,000,000. 261 banks were in debt to the Federal eserve banks, he stated, throughout the year ending March 31, 1929 and 925 were in debt 80i; or more of the tize during the year. Mr. Platt stated "In July 1928 the attention of the Federal Reserve Board was called to the fact that redis was ase incre their counts had greatly increased and that of made necessary not only by gold exports but by the sale ,000,000 ...,225 at ities secur of securities. The System's holdings had s count Redis . years were lower than for any time in five ion was raised increased oy „A00,000,000 in a year. The quest be borrowers to banks whether it was good policy to conipel the tradition the down ing break on so large a scale, at the risk of against borrowing." After a brief discussion, upon motion, the memorandum prepared by the Chief of the lated. Division of Bank Operations was ordered circu present and prospective credit A discussion then ensued with respect to the ed by the Federal Reserve System situation and the policy which should be pursu during the coming months. andum entitled "Points for considMiller submitted the following memor Reserve credit policy in the near eration in connection with basis of Federal : credit the handling of crop-movinr, future, and particularly in connection with requirements in the autumn": -4- 6/11/29 ve System for "1. The firm money policy pursued by the Reser l improvement in the more than a year has resulted in a substantia of credit in use in the general credit situation; the total volume 4 per cent as compared with country has expanded at a rate of about about 7 per cent. the previous annual average rate of increase of on credit conditions This has been accomplished without undue strain affecting trade and industry. of the Federal Re2. Since early February the noney policy through what is called serve System has expressed itself primarily r banks making misuse of 'direct pressure', exerted against membe been effective in reduchas y polic Federal Reserve credit. This ve banks by some meming the volume of borrowings from Federal reser their borrowings. ber banks and in the case of others of checking t experience may 3. 'Direct pressure', on the basis of recen in Federal Reserve bankbe concluded to be a practicable technique of misuse of Federal Retypes in certa ing practice in dealing with has not, however, been serve credit facilities by member banks. It r that it can be fully fully effective in all cases, nor does it appea whose condition is, to speak effective, in the case of member banks dation of the accommodation liqui practically, so unliquid as to make necessarily a slow they have received from Federal reserve banks process. demonstrated again that 4. This whole recent experience has dependent to a large the liquidity of the Federal reserve banks is ; when member banks banks r degree upon the liquidity of their membe d their security expan to banks use the resources of Federal reserve dity of the liqui the ve invol loans on a considerable scale, they loans can not such for it, n weake Federal Reserve System and thereby period of time brief a in and banks be liquidated on a large scale by without producing Serious unsettlemont. er' uses and soThe distinction between so-called 'prop gets its meaning t credi ve Reser called 'improper' uses of Federal in Reserve bankved obser be to and its justification as a principle d and certain liqui are t credi of ing from the fact that certain types mic liquidity. econo ne genui of sense other types are not liquid in the Federal Rethe of tion opera the y To safeguard permanentl 5. departure from the principles serve System it is necessary that no with regard to the use of Fedannounced by the Board February last . On the contrary, the eral Reserve credit be unnecessarily taken be a necessary element will rs, method of 'direct pressure', it appea ds certain types regar as e futur in Federal Reserve practice in the of misuse of credit. method of correcting unEmployed in the recent past as a ices, 'direct pressure' will find sound banking conditions and pract preventing the development its status in the future as a means of al Reserve is related to them. of such conditions so far as the Feder instead of deflation. It will become a method of sanitation the Federal Reserve Board The position publicly taken by To this position it holds fast. February last was taken deliberately. 6/11/29 fI -5"It is satisfied at once of the reasonableness, in the interest of good Federal Reserve banking, of its position rind of its necessity. 6. It may be that rigid application of the Board's policy will have to be suspended during the period of the autumn credit requirements, in order that the trade and industry of the country shall not suffer. To this end it may be necessary for Federal reserve banks to permit member banks that have not found it practicable to readjust their position in accordance with the Board's principle, to avail themselves of the rediscount facilities of the Federal Reserve banks for such purposes and for such periods of time as the Federal reserve bank may deem to be essential. 7. Any general easing of credit conditions is likely to require an increase in the total volume of Federal Reserve credit in use. The best and safest method of accomplishing this during the late summer and autumn period will be by the purchase of bills. All things considered, the attitude of the Federal Reserve toward money conditions will best be expressed by the bill rate during coming months. Skilful adaptation of a bill purchase policy to the trend Of conditions will enable the Federal Reserve to bring ease to the credit situation where easing is necessary and with a minimum of interference with the Board's policy of discrimination against uses of Federal Reserve credit for speculative loans6 8. The Federal Reserve System will probably be in the best position after the autumn crop movements are over to readjust its that attitude toward the money market in accordance with conditions two past the are more nearly normal than any that have existed for years. *Alatever change in discount rate seemsunwarranted or justified by underlying economic and business conditions, if any, can then intelligently be made. The whole matter of the credit rate structure will be one for primary consideration at the autumn Conference of Chairmen and moving Governors of the Reserve banks following the peak of cropdemands. Reserve proAt the same time the whole question of Federal have its cedure with regard to credit technique and control should future status definitely determined by the Board." 111'• Cunningham also presented the following memorandum of his personal views rea— Ning the situation and future System policy: y 2nd, "The policy outlined in the Board's letter of Februar executive ofwhich was generally approved by the directors and the ted in the efficers of the Federal Reserve banks, who have coopera therewith, fort to have member banks adopt a procedure in harmony correcting a situhas, in the main, made substantial progress toward use of Federal ation which had come to be regarded as an improper 561 6/11/29 -6- "reserve credit. The results of a necessity have been slow in fruition. Obviously, they have varied, being largely dependent upon the cooperative spirit manifested in each district, but withal, so satisfactory to justify the belief that in due course there will come to be established a policy predicated and, supported on the common understanding of what is economically sound and proper in the use of Federal reserve bank credit. Personally, I have strongly supported the policy outlined in the Board's letter of February 2nd, and also the effort that has been made to bring about the correction in the situation by direct pressure against offending banks, rather than to pursue the policy of increasing the discount rate and thereby penalizing all member banks of the System, in order to correct a situation in which the majority of the member banks are not offenders. And the language of this memorandum, in which my views advocate a policy of credit ease to meet the increasing needs of credit for industry and commerce in the near future, should not be interpreted as an abandonment by me of the policy of direct action at any time it seems necessary to control the use of Federal reserve credit for purposes not contemplated by the Federal Reserve Act. In my opinion, there should be no abandonment of the policy of direct action, but it is entirely practical that direct pressure should be so tempered in its application by the Federal reserve banks during the period when the policy of the Board is to give an easing effect to the money market and a consequent decrease in the cost of needed credit by agriculture, industry and commerce to meet seasonal requirements. It is becoming quite evident that the credit situation throughout the country with respect to the needs of industry and commerce will be the problem of the near future. It involves the credit requirements of mid-year financing which will press heavily upon the banks of the country. This will be followed in due course by the increasing credit needs for the purpose of harvesting and marketing the year's crop and the additional demands for credit to cover the seasonal requirements of industry and commerce in the autumn. In order that the above service may be adequately as well as economically rendered to the country, the Federal reserve policy, in my opinion, should be one tending toward an easing. of money rates thereby avoiding, so far as possible, embarrassment to agriculture ana business at a time when its requirements for credit are at a peak and the necessity for borrowing unavoidable. In my opinion, under existing conditions in the money market, this could be accomplished in the following manner: 1. By retaining the discount rate at 5 per cent and undertaking at an early date to bring some ease in the credit situation by reducing the bill rates at the Federal reserve banks by 1/4 per cent, and continuing to make additional reductions at short intervals 2 C) -7- 6/11/29 "with the objective in mind to reduce the bill rate by August 1st, at least to the level, or possibly below the level, of the aiscount rate. 2. If the credit situation at such time (August 1st), and especially if the use of credit for so-called speculative purposes, is satisfactory, consideration should be given to a reduction in the rediscount rate and thereby contribute further ease in the cost of credit for seasonal requirements. In order that the policy outlined would be effective, Federal reserve banks should be encouraged in each district to purchase bills and acceptances (green bills) liberally from member banks and recognized bill dealers. Personally, I am not unmindful of the possibility that there might be a renewal or a continuance of the practice at some of the borrowing banks to use Federal reserve funds for making or supporting loans to stock brokers or others engaged in such pursuit, (as the Federal Aeserve Board has as yet not adopted any methods to prevent the practice.) In the event that this practice continued throughout the System, I would be in favor of giving consideration to any policy that would effectively correct the situation." At the conclusion of the discussion, it was voted that the several memoranda as to future policy, which have been submitted to the Board, should be referred to a special committee consisting of the Cunningham with the request that Governor and they endeavor to work out an outline of future policy for submission to the Board at a meeting within the next day or so. 11 The meeting adjourned at 12:45 p.m. todatzi Assistant Secretary. APproved:
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