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Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E .6 . U35k '•> Q c Q ttn n m M L A meeting o f the Open Market Investment Com®i t tee was held Washington, D* C. t at 10 a* m«, Monday, August X3t 1928* S /> 3 I J - V A memorandum on credit conditions together with the report o f the secretary covering the operations in the System Account since the last meeting o f the committee were submitted and made the basis of an extended discussion of credit conditions and market rates generally* Reference was made to the report o f the committee submitted at it s la st meeting, in which the committee expressed the opinion that the present amount of member bank borrowings at the Reserve banks end present money rates would not be wholesome i f continued over an extended period and that the committee should^ therefore, be prepared, yrhen conditions warrant, to exercise its in fluence to modify these conditions* It was pointed out that we are now approach ing a period o f seasonal demand for crop movement and other purposes that make i t important, that the committee should be prepared tilth authority, to act, i f necessary, in order to avoid any undue credit stringency* There was a long discussion of various means which might be employed in case of need* generally agreed that It was while i t might become necessary to put funds ia the market through the purchase of Government securities nevertheless it would be preferable not to use that means any sooner than might be r e t i r e d or u n til i t became evi dent that other means were not adequate to avoid an undue or unwholesome s tria gency. In discussing these various factors it was pointed out that the present level o f rates in this country has depressed some of the principal foreign exchanges to very near our gold import point, and that there are three possible courses which might be followed by the banks of issue of those countries in meeting the situation: (a ) to permit gold to move out, (b) to increase the Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . 1235k * 2 discount ra te , ( c ) to use some o f th e ir American balances in order to support th e ir exchange, thus p o ssib ly avoiding the lo s s o f g o ld or the need fo r an increase in rates* I t was stated th at some o f these foreign banks, with th is in view, have already liq u id a te d commercial b i l l s which the Reserve banks have held fo r th e ir account, and that i t has been necessary to take over those b i l l s into the Reserve banks1 p o r t fo lio s , thus putting funds into the market* I t was also in d ica ted that i f the pressure on these exchanges contin ues, we might be requested by some o f the fo re ig n banks o f issue to liq u id a te government secu ri t ie s from th e ir accounts, and that in view o f the e x istin g sta te o f the govern ment se cu rity market i t might be necessary fo r the Reserve banks, at le a st tem p orarily, to take these s e c u r it ie s into th e ir own p o r t fo lio s * The committee also reviewed the con d ition o f the b i l l market, c a llin g a tten tion t o the fa c t that we are now approaching a season when there is a normal increase in the t o t a l volume o f bankers’ acceptances outstanding and in the amount o f o ffe r in g s o f th ose b i l l s to the Reserve banks. Purchase o f such b i l l s by the Reserve System would also put funds in the market* The committee f e l t , however, that in s p ite o f a ll these in flu en ces i t might s t i l l be necessary fo r the Reserve banks t o purchase government s e c u r it ie s in order to prevent any unwholesome re s t r ic t io n o f c r e d it , and with th is in view, in order that the committee might be prepared to act immediately in the event o f a n e c e s s ity , the fo llo w in g report was prepared and adopted as the recommendation o f the committee in regard to the System’ s open market p o lic y : ’’The p o lic y recommended by the committee in most o f it s meetings sin ce January, has been to check or prevent unduly rapid or unnecessary in crease in the volume o f bank cre d it* While the t o t a l volume o f loans and investments o f reporting member banks is now con siderab ly above what i t was at the low point in February, n e v e rth e le ss, i t is approximately 0300,000,000 below the high point o f May, and there is ev i dence that member banks are making continued e f f o r t s to reduce th e ir borrowings at Federal Reserve Banks* "The committee does not b e lie v e that con d ition s n e ce s sita te an immediate purchase o f s e c u r it ie s by the System, I t is o f the Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E .6 . U354, w# 3 op in ion ! however, that as pointed out at i t s la s t meeting, an extended period o f high money ra tes and heavy pressure re su ltin g from la rg e borrowings by member banks would not be wholesome and th a t there are some in d ica tio n s that with the approaching f a l l demands fo r c r e d it i t may soon be p o ssib le or necessary to take steps looking toward the red u ction , or at le a s t the avoidance o f the n e c e s s ity a f any su bstan tial in crea se, in the volume o f member bank d is counts* With these fa cts in view and r e a liz in g that i f and when the time arrives undue delay may be h u rtfu l to the s itu a tio n , the committee recommends that i t should be the p o lic y o f the System to purchase s e c u r it ie s whenever that should become necessary to avoid undue c r e d it stringency* "The Committee would expect to take such steps as may be needed to carry out th is p o lic y , i f approved, b e lie v in g , however, that i t might be advisable to have another meeting o f the Committee to review the e f f e c t o f any steps that may be taken in pursuance o f t h is p o lic y * ” B efore adjournment, Governor Young join ed the meeting and presented to the committee fo r i t s con sideration and recommendation the follow in g two p rop osa ls: (A) That the Federal Reserve Board should w rite a le t t e r to each Federal Reserve bank in d ica tin g i t s w illin g n e ss to approve a s p e cia l preferen t i a l discount ra te for a g ricu ltu ra l paper drawn fo r the purpose o f crop market* in g ; and (B) That i t would be d esira b le fo r the Federal Reserve System to make a p r e fe r e n tia l buying ra te fo r bankers’ acceptances to be ap p lica b le to new acceptances drawn fo r the purpose o f seasonal crop movement* A fter Governor Young l e f t the meeting, each o f these proposals was considered by the committee and w hile no formal action was taken in the short time a v ailab le fo r d iscu ssio n , i t was the opinion o f the m a jority o f the com m ittee with regard to suggestion (A) that the p re fe re n tia l rate on a g ricu ltu ra l paper drawn fo r season crop marketing would be undesirable because i t was u n lik e ly such a p r e fe r e n tia l ra te would in fa c t reduce the co st o f cre d it to the farm er, who would pay to his member bank the same rate no matter at what ra te his bank might be able to rediscount his p a rticu la r n ote, and because i t was f e l t that the whole problem o f crop movement can be dealt with only as a Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . 12354, part o f the whole cre d it problem in volvin g a l l ra te s in th e ir a p p lica tion to the t o t a l volume o f cre d it* In the opinion o f the committee t h is was emphasized by the fa ct that much o f the borrowing fo r seasonal requirements takes the form o f borrowings from c it y correspondents on notes c o lla t e r a le d by s e c u r it ie s , and that i t is p r a c t ic a lly im possible to earmark cre d it once i t has l e f t the Federal Reserve banks. Funds loaned by the Federal Reserve banks, even at p re fe re n tia l ra tes, fin d th e ir way in to the general c r e d it pool in the same way as other funds put in to the market. With regard to suggestion (B ), that i s , that the System should make a p r e fe r e n tia l rate fo r new bankers* acceptances drawn for the purpose o f seasonal crop movement, it was the opinion o f the m ajority o f the committee that any d ra stic change in the general p ra ctice o f buying b i l l s , such as a p re fe re n tia l rate on a p a rticu la r cla s s o f a g ricu ltu ra l acceptances, might have unfortunate resu lts in d isorganizin g the b i l l market as a whole without at the same time accomplishing the purposes desired* It is also f e l t that buying rates for bankers* b i l l s are n e c e s s a r ily re la te d to the e n tire ra te structu re and that very d e lib e ra te con sideration should be given to the question b e fo re adopting a p r e fe r e n tia l ra te out o f lin e with general market rates* I t was f e l t by a m a jority o f the committee that advantages that might re su lt from such an action might be more than o f f s e t by the disadvantages* The meeting adjourned at l s l 5 p* m# to reconvene at 2:30 p , m* The meeting reconvened at 2i3Q p . m*. in jo in t session with the Federal Reserve Board# PRESENT; Governor Young, Messrs* James, McIntosh, M ille r and P latt* Messrs* Goldenweiser, Eddy and McClelland* Governors Fancher, Harding and Norris* Deputy Governors Harrison and McKay* Mr, Burgess, Acting Secretary* Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E.6.1235k The memorandum on cre d it con d ition s and the report to the Open Market Investment Committee were submitted to and read by the Federal Reserve Board# Before d iscu ssion o f the re p o rt, Governor Young asked the committee for it s views on the two questions submitted by him at the morning m eeting. reported o r a lly the conclusion s o f the committee as given above. there ensued a Mr. Harrison A fter th is f u ll d iscu ssion o f the two proposals, e s p e c ia lly that respecting the p r e fe r e n tia l ra te on bankers* b i l l s * The committee reviewed to the Board much o f the d iscu ssion which too.k place at i t s morning meeting, emphasizing e s p e c ia lly the fa ct that while the committee b e lie v e s i t might be necessary to purchase Government s e c u r it ie s in order to avoid any undue strin gen cy during the seasonal f a l l demand, neverth eless i t was f e lt by the committee that th is action should not be taken unless the various other means o f in flu en cin g the s itu a tio n , which were discussed and reviewed, should be inadequate. In response to an inquiry from Governor Young, the members o f the com m ittee expressed the informal op in ion that as they see the situ a tio n at the present time there is not now any occasion fo r a change in the discount rates o f the banks which they represented* B efore adjournment o f the meeting, i t was pointed ou t, as discussed at the morning m eeting, that the e f f o r t o f certa in foreign banks o f issue to s t a b iliz e th e ir exchanges through the sa le o f d o lla rs might p o ssib ly re su lt in t h e ir s a le o f Government s e c u r itie s now held for t h e ir account and that i t might be necessary, because o f the sta te o f the Government s e c u r itie s market, fo r the Reserve banks to take over those s e c u r it ie s , at le a s t tem porarily, pending an opportunity to s e l l them to the market. The meeting adjourned at 5:00 p. m*., with the understanding that the Federal Reserve Board would act upon the recommendation contained in the report o f the committee at the Board meeting the follow in g morning* ^ W# Randolph Burgess, Acting S ecreta ry ,
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