The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . tf35(= A I "ft 'I !’ L )J " vf V CONFIDENTIAL July 27, 1927. ^ PRELIMINARY M M R N U RELATIVE TO 0PM M E OA DM ARKET POLICY 1I ' The gold, movements o f the past two months have illu s t r a t e d the need fo r preparedness on the p a rt o f the Federal Reserve System to deal w ith e ith e r gold exports or im ports, which was emphasized in the Chairman’ s memorandum discussed at the la s t Governors1 Conference. This y e a r 's gold movements have included the import o f 130 m illio n d o lla r s o f g old from abroad, the purchase o f 62 m illio n d o l la r s abroad, the sa le o f 100 m illio n d o lla rs fo r earmarking h ero, and the re s a le o f 60 m illio n abroad. There has thus been an import movement, or i t s equivalent, o f 190 m illio n d o lla r s and an export movement, or i t s equivalent, o f 160 m illio n d o lla r s . Fortunately these two movements have la r g e ly o f f s e t each other in th eir in flu en ce on the domestic c r e d it situ a tio n . embarrassment. Otherwise they might have occasioned These movements were la rg e ly unforeseen and u n foreseea b le, a l though at any time p o s s ib le under present co n d itio n s . Recent tran saction s in the sp e cia l investment account have been la rg e ly fo r the purpose o f d ealing with these changes in g old . At one time, in May, the account was as low as 136 m illio n d o lla r s , and i t has now been re sto re d to 265 m illio n d o lla r s . The in crease represents la r g e ly purchases to o f f s e t the ear marking o f 100 m illio n d o lla r s o f gold here, but includes in a d d ition the purchase o f about 30 m illio n d o lla r s o f s e c u r it ie s under the a u th ority arranged at the time o f the Governors’ Conference. The fo llo w in g fig u r e s show the changes from week ' to week in the sp e cia l investment account. I t would appear that th is p o r t fo l io should be increased from time to time when fa v ora b le opportunity o f f e r s , i f the System i s to be in a p o s it io n to meet future extraordinary gold movements. Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . IBSfe 2 A p ril May tt u tt June tt t! tt tt July tt t! ..V - -1 4 - 1 1 -------1 8 --------------2 5 --------------X - . 8 --------------1 5 --------------2 2 --------------2 9 --------------5 - - - - 1 3 --------------2 0 --------------- $2 01 200 13 6 152 188 222 316 246 250 250 250 250 265 A temporary increase in the account in ordinary course may be involved in re p la cin g 56 m illio n o f m a tu rities in September which includes 30 m illio n taken over from a fo re ig n account in exchange fo r March c e r t i f i c a t e s . I t may be necessary to take over fu rth er amounts o f s e c u r it ie s from fo re ig n correspondents, The Credit S ituation A number o f important changes have taken p la ce in the domestic and fo re ig n c r e d it s itu a tio n sin ce the Governors1 Conference. These may be summarized as fo llo w s : 1. Money ra tes abroad have rise n v ig o ro u sly ; open market money ra tes in London, B e rlin , Zurich, and a number o f other centers are markedly higher than they were three months ago. th e ir discount r a te s . The Reichsbank and the Bank o f A ustria have ra ised Open market money ra tes are c lo s e to or above the bank rate in London, B e rlin , Zurich, Amsterdam, and Milan, as shown in an attached ta b le. These firm er money con d ition s are undoubtedly exertin g continuing pressure upon world trade and w orld p r ic e s , which is l i a b l e to rea ct unfavorably upon our own trade and p r ic e s . 2 . There has been some red u ction in business a c t iv it y in th is country, not se rio u s, but in d ica tin g a s p ir it o f great caution in bu sin ess. 3. There has been some congestion o f the bond market, due la r g e ly to undigested new iss u e s. This situ a tio n has been p a r t ia lly co rr e cte d . 4 . Due la r g e ly to reduced in d u stria l p a y r o lls there has been Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority E .6 . IBSfc 3 a s lig h t redu ction in the past few weeks in the c r e d it and currency demand, and t o t a l h i l l s and s e c u r it ie s o f the Reserve System have dipped helow one b i l l i o n d o lla r s . The New York Reserve Bank gained 50 m illio n la s t week in tra n sfe rs from the in t e r io r and New York City member bank borrowing was correspon din gly reduced. 5. There is growing ease in money co n d itio n s, although some ra te s are s t i l l s lig h t ly higher than a year ago, due probably to a higher discount ra te at the New York Reserve Bank. Current quotations fo r money are as fo llo w s compared with la s t year. A Year Ago Call money 9 0 -day time money Commercial paper 90-day b i l l s Treasury Issues Dec.m aturity (n otes) Mar. " (C o f I) Discount Rate N.Y. F.R.B July 23, 1S27 4 4 1/2 4 3 3/8 3 4 4 3 3.03 3.31 3 1/2 2.87 3.19 4 3 /4 3/8 1 /4 1/2 The P rospect fo r Autumn Normally the approaching seasonal demand fo r funds might be expected to tighten money co n d itio n s somewhat. I f th is takes p la ce i t would have the r e s u lt (1) o f in crea sin g the pressure on w orld money markets and perhaps fo r c in g up the Bank o f England discount ra te , and ce rta in o f the Continental discount ra te s, with consequent unfavorable re a ctio n upon world trade and p r ic e s ; (2) o f accentuating the e x is tin g tendency towards some red u ction in business a c t iv i t y . I f on the other hand steps should be taken which would prevent any seasonal in crease in money r a te s , and tend rather towards somewhat e a sie r money co n d itio n s, the fo llo w in g r e s u lts might be a n ticip a te d . 1. An easing o f the pressure upon world money marketd, which would rea ct f a vorably upon w orld trade. The r e s u lt s would be f e l t p a r tly through the tendency f o r balances to move in the d ir e c tio n o f the highest ra te , and p a r tly as lower b i l l ra tes here wpuld a t tr a c t fin a n cin g to our b i l l market which might otherw ise go to Reproduced from the Unclassified / Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . IBSfe 4 London and r e q u i r e fu n ds t h e r e . 2. to f a c i l i t a t e 3. Coming a t th e cro p m oving se a so n e a s ie r money c o n d i t i o n s w ou ld te n d th e m a rk etin g o f th e c r o p s a t f a v o r a b le p r i c e s . I t w ou ld te n d t o rem ove any c r e d i t p r e s s u r e w hich may now b e e x e r t e d u pon "b u sin ess, and w ou ld en cou ra g e b u s in e s s e n t e r p r i s e . 4. T here w ou ld on th e o t h e r hand be danger th a t e a s i e r money m ight en co u r a g e s p e c u l a t io n . The s p i r i t o f b u s in e s s i s so c a u t io u s th a t i t seems d o u b t fu l w hether s p e c u l a t i v e t e n d e n c ie s i n b u s in e s s w ould e a s i l y a r i s e , bu t i t i s p r o b a b le th a t e a s ie r money w ou ld s t im u la t e s p e c u la t io n i n s e c u r i t i e s . I f u n der th e s e cir cu m s ta n c e s i t s h o u ld seem w is e to f o l l o w a p o l i c y fa v o r i n g e a s ie r money c o n d i t i o n s , th e im m ediate p rob lem s w ou ld b e ( l ) to l o c a l i z e th e e f f e c t s o f e a s i e r money c o n d i t i o n s , where th ey w ould b e m ost b e n e f i c i a l ; and ( 2 ) t o p r e v e n t e x c e s s i v e s p e c u l a t i o n o r e x c e s s i v e grow th in th e volume o f c r e d i t . In t h i s c o n n e c t io n th e a t t a c h e d t a b le shows th e t o t a l b i l l s d is c o u n t e d a t F e d e ra l R e s e rv e Banks i n th e 12 d i s t r i c t s . The t o t a l i s n e a r ly 100 m i l l i o n s m a lle r than i t was a y e a r ago and th e d e c r e a s e s i n b i l l s d is c o u n t e d e x c e e d 25 p e r c e n t i n th e New Y ork , Richm ond, M in n e a p o lis , Kansas C it y , and D a lla s d i s t r i c t s . T o ta l B i l l s D is c o u n te d by F e d e ra l R eserv e Banks ( i n m illio n s o f d o lla r s ) Week Ended J u ly 2 0 . J u ly 2 1 , 1926 B oston 24 32 New York 87 126 44 42 P h ila d e lp h ia C le v e la n d 28 35 19 Richm ond 43 44 37 A t la n t a C hicago 55 56 33 S t . L o u is 35 6 M in n e a p o lis 8 11 17 Kansas C it y 8 D a lla s 18 45 San F r a n c is c o 45 T o ta l 495 403 (/ 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 5 Money Rates in World Markets July 1926 May 1927 July 1927 London Market Rate Discount Rate 4.25 5 3.69 4.5 4.31 4.5 Berlin Market Rate Discount Sate 4.5 6 4.83 5 5.: 6 Paris Market Rate Discount Rate 2.25 5 2.13 5 Amsterdam - Market Rate Discount Rate 2.76 3.5 3.5 3.5 3.5 3.5 Brussels Market Rate Discount Rate 6.70 7 4.25 5.5 3.75 5 Zurich Market Rate Discount Rate 2.31 3.5 3.13 3.5 3.81 3.5 Milan Market Rate Discount Rate 8.5 7 9.25 7 Vienna Market Rate Discount Rate 6 7.5 5.38 6 5.75 7 3 3/8 3 1/2 3 5/8 4 3 1/2 4 New York - B ill Rate Discount Rate
@FedFRASER