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392 A meoting of the Federal lieserve Board was held in the office of the Governor on Thursday, May 12, 1927 at 10:45 a.m. PRESENT: PRESENT ALSO: The Chairman Governor Crissinger Mr. Platt Mr. Hamlin Mr. Miller Mr. James Mr. Cunninjiam Mr. McIntosh Mr. Eddy, Secretary Mr. McClelland, Asst. Secretary Governors Strong, Harding, Norris, Fancher and McDougal, Members of the Open Market Investment Committee. Mr. Harrison, Secretary of the Open Market Investment Committee. Mr. Goldenweiser, Director of the Division of Research and Statistics. The Chairman of the Committee submitted, for the information of the °41 ' cl, a memorandum relative to recent oren market policy, covering the general credit situation and recent transactions resulting from large parell4aes Of gold. He also presented the recommendations of the Open Market illveetment Committee, stating that the recommendations had been submitted to Me Governors' Conference now in session and received the unanimous ap131'°val of the Governors of all twelve Federal deserve banks. The recom- ?netliations of the Committee were as follows: "The Open Market Committee, after considering the attached memorandum, and after discussion with the Federal Reserve Board, submits the following recommendations of policy for the period ending August 1 next: (1) That no further sales of system securities be made in order to offset arrivals of gold from abroad now known or anticipated. (2) That it shall be the policy of the committee between now and. August 1 next, gradually to acquire, if possible to do so without undue effect upon the money market, sufficient additional short-time government obligations to bring the total of the committee's investment account up to :,;250,000,000. In interpreting the expression 293 5/3.2/27 -2- "undue effect upon the money market," the committee would expect to keep in mind any changes which mi4it occur in the general level of money rates, as well as the extent to which these purchases might effect a reduction in the amount of borrowings by member banks. While this policy is not directed towards bringing about a reduction in discount rates by any Federal reserve bank, nor is that immediately anticipated, it is recognized that some lowering of market rates for money might nevertheless justify such a reduction later in the year, especially at the principal financial centers. The reoommendation in paragraph two is also made after consideration of the fact that somewhat lower interest rates ordinarily operate to check gold Imports; in fact, that was one of the effects of purchases Of securities made in 1924. The committee further expects to continue studies of those methods set out in the preliminary memorandum by which increases in the System's portfolio might be brought about without increasing the amount of Federal reserve credit in the market. It expects to discuss with the Treasury Department those methods with which the Treasury is concerned, and requests that the Federal Reserve Board give consideration to those particular items, such as reserves on time deposits, which relate to the regulations of the Federal Reserve Board." Governor Criss Inger called attention to the fact that the Board, under the Jaal) ression that the Federal Advisory Council would meet here tomorrow, requested the Council to make a careful review of the open market 'c)licY of the Federal Reserve System since the organization of the Open L54rket Committee and to give the Board the benefit of its views and to sub414 4AY recommendations that may seem desirable with regard to changes in the method or objectives of open market policy. The Governor stated that the Pederal Advisory Council would not meet until next Friday, May 20th, and se cillently would not be able to discuss the matter as contemplated jointly V h It- the Board and the Open Market Investment Committee. Governor Strong, Chairman of the Committee, called attention to the that the preliminary memorandum presented to the Board shows the present (311clitin Of affairs and requested that consideration be given to that mam- 394 5/12/27 -3- " anclum in connection with cons idera.tion of the Committee's recommendations. Thereupon ensued a detailed discussion as to the present Open Market situation and the desirability of increasing the System's portfolio of governinellt securities, as recommended by the Committee, and of methods whereby sach all ircrease could be accomplished without disturbing the money market. Mr. Miller expressed his °Anion that the recommendation of the acmoraittee for an increase in the investznent account up to ,; r 250,000,000 was in the right direction but that the most important question concerned the 13110per time at which to make purchases. Governor Strong stated that the purpose of the Committee was to 4reei with the Board upon the policy which would extend, under existing c°/1clitions, until August 1st, and having done so that it would seem to be the responsibility of the Committee to put the policy into execution, keepthe Board informed daily of all transactions. Mere followed a discussion as to the possibility of future irri13°Ilts of gold and the effect of such imports upon the money market, in conWith a policy of the Federal .:eserve System which itself might re11t in adding to the present supply of money. Governor Strong expressed the opinion that the policy contemplated iii the Committee's recommendations walla not result in any increase in ?tlicieral ,ieservo credit in the money market, but would be offset by reductions rza Inber banks' borrowings from the Federal deserve Bank of New York or in the bill holdings of the System. 1,:r. Hamlin then moved that the Board approve the recommendations of the Open Market Investment Committee, as above quoted. 5/12/27 Mr. Miller moved, as a substitute for .Mr. Hamlin's motion, that the recornendations of the Open Market Investment Committee be received by the 7oard and made special order of business for a date to be fixed by the Governor after conference with the Chairman of the Board. 4 general discussion then ensued as to the present method of executing °Pen market policy, touching upon the relative responsibility of the Board 414 the Committee. Following thiA discussion, Mr. Miller's substitute motion was pat by the Chair and carried, the members voting as follows: Governor Crissinger, uaye" Mr. Platt, "aye" Mr. Hamlin, "aye" Mr. Cunninjiam, "aye" Er. McIntosh, "eve" The Chnirman, "no" Mr. Hamlin, "no" Mr. James, "no" I rae Chairman of the Board and the Members of the Open Market Investment Cc44ittee then left the meeting and Governor Crissinger took the Chair. G{3vernor Calkins of the Federal Reserve Bank of San Francisco was then itivited into the meetin,7 and he discussedwith the members of the Board in clet4ils on the basis of developments befo/e he left San Francisco and advices l'eeeived by him from the Federal Reserve Bank of San Francisco since he has been in 1/It k Ashington, the condition of the Pacific Southwest Trust and Savings Of Los Anp;eles in the light of certain transactions disclosed by a re- 2e4t examination of the bank, which were the subject of a letter addressed t° thG Board by the Federal Reserve Agent at San Francisco under date of Ai)"1 27th. He reviewed the recent transactions so far as he was acquainted Witla theM and expressed the ooinion that exclusive of any losses which mi.ght 396 5/12/27 accrue to the bank through these transactions, its entire undivided profits and surplus accounts would be wiped out and its capital slightly impaired 48 the result of worthless and doubtful assets taken in the regular course °f business. He stated that no ore could at this time foretell the results °I the recent transactions, and expressed the opinion that it would be most aeeirable to subject the bank promptly to another thorough examination. Governor Calkins than left the room and the Board recessed at 1:00 The Board reconvened at 2:30 p.m., all members being present who attended the morning session with the exception of the Chairman and Ur. 14eIntosh, The Governor referred to the statement made by Governor Strong at the 'eating of the Board on ',lay 5th to the effect that the Federal Reserve Ballk 4/f New York was endeavoring to purchase from the Bank of France certain °10ivA11ch the Bank of France was withdrawing from the Bank of England and "a sold to and intended to ship to the American Exchange Irving Trust CcIllaPa4y of New York City, which, if purchased, the Federal Reserve Bank of Ilew York intended to have earmarked and held for it by the Bank of England. e Governor stated that he had been advised by Governor Strong that the aola ala question, totaling :4;59,548,000 had been puxchased by the New York had been earmark.ed and was being held by the Bank of England, and that at the 'Jonference of Govrnors of the Federal reserve banks now in Sees °11 in Washington it had been voted unanimously that all Federal reserve batjts Participate in the purchase and that said gold be not counted as part (3 the banks' , old reserves. 9(T‘I ) 0a.f -6 The Governor stated that he had also been advised that the participation was to be made effective as of May 11th, azxi recommended that in the Board's PUblished statement showing the condition of the twelve Federal reserve banks, the gold in question be reported ar:ainst the caption, "Gold Held. Abroad", itttediately preceding the item "Due from Foreign Banks", and that the published 411a1Yeis accompanying the statement contain the following brief cw.ment in regard thereto: "During the week the Federal lieserve Bank of New York purchased, abroad 459,548,000 of gold, the purchase being participated in by all Federal reserve banks. This gold is now held earmarked by ore of the foreim corresrondents of the New York bank and is shmrn in the statement against a new item 'Gold held abroad." After a detailed discussion, M. Miller moved that the Board reaffirm the position taken at the meeting on January 28, 1921 that Federal deserve banks should not regard as part of their reserves gold earmarked in foreign countries. Mr. Miller's motion beinF put by the Ohair carried. VAS Mr. James then moved that the Board approve the recommendations of the Governor as to the method of reporting In the Board's weekly statement the gold now held earmarked oy the Bank of England, and as to the comment concer,ing the purchase of the gold to be made in the publishefanalysis accompanying the weekly statement. Mr. James' motion being put by the Chair carried. 0, ..1 .7. The meeting adjourned at 3:00 4 4Rait%„ 4/ Approlrect: Id ° 11 at At mil/ Cove . gr Secretary.