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-w Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . OPEN MAP.KET INVESTMENT m?lvlTTTm Chairman* s Report Joint Conference - November ^923 *1316 S e cre ta ry 1s report o f the operations o f the Open Market In vest ment Committee has been d istrib u te d to tfofe members o f the Federal Reserve Board and o f the Conference, I t give s'/a. d eta iled account o f the proceed ings o f the Committee and th.3 usual /ch ed u les o f tra n sa ctio n s, and w ill be submitted f o r comment and a ctio n b / the Governors at th e ir separate meeting* As the Committee and i t s predecessor i$ the agency through which transactions in furtherance p f ifoe System’ s open market cre d it p o lic y axe executed, in p a rt, a b r i e f t m e w o f wha.t has been done should cover the period from January 1, 1022, to the present time, a.s a. r a d ica l change took p la ce in the p o lic y o f n ea rly a l l of the Reserve Banks, commencing at about the f i r s t named da.te- I t was then that, fo llo w in g a. grea.tly reduced volume o f d isco u n ts, many o f the banks made la rge purchases o f Government s e c u r itie s * These were on such a scale as to arouse o b je c tio n by the Secretary o f the Treasury on the grounds that an a r t i f i c i a l market was being created - that Reserve Bank purchases and sa les at times mig^it con f l i c t with the execution o f Treasury Department orders - and with new issues being made - and that investments merely f o r earnings were not j u s t i f i e d , e s p e c ia lly i f lia b le to cause any in fla t io n o f bank c r e d it . The appointment o f the Committee, o f which the present one is su cce ssor, promptly resu lted in u n iform ity o f op eration s by Reserve Banks, in a l l the markets; elim inated c o n f l ic t s o f orders between the Treasury and the banks and between the banks themselves; - and by cen terin g the d is t r ib u t io n o f orders in the hands o f the Committee, enabled i t to d is tr ib u te purchases and sa les between Reserve D is t r ic t s so as tc promote an a.ctive market in many c i t i e s , ,ra.ther than con centrate the market p r in c ip a lly in New York C ity . 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 Since the summer o f 1922 there has been gradual and continuous liqu.ida.tion o f Government s e c u r it ie s owned by the System, the t o t a l held on October 31* 1923 > being but $92,000,000 against a maximum o f $6l S , 000,000 on June 7> 1922. The important re su lts o f th is most s ig n ific a n t development in the c r e d it p o lic y o f the System, other than those already mentioned , can now p o ssib ly be summarized a.s fo llo w s : At the end o f the yea.r 1921, fo llo w in g a period o f extreme nervousness as to the solvency o f many la rg e in d u stria l and commercial concerns, and even o f la rg e banking in s tit u t io n s which had made them heavy advances, there s t i l l continued to be pressure by banks to liq u id a te lo a n s, and get out o f debt to the Reserve System in sp ite o f the con siderable reductions in Reserve Bank discount rates which had already been made in a l l D is t r i c t s . This pressure was widespread but e s p e c ia lly n o tice a b le in New York and with the type o f bank loan described as "fro z e n 11 * Reserve Banks s te a d ily supplied new c r e d it t o The purchases made by the market and the surplus was at once applied to reducing discounts a t the Reserve Banks, e s p e c ia lly the la rg er Eastern ones. As the large member banks got out o f d ebt, sur plus funds were a v a ila b le f o r new loa n s, pressure upon borrowers ceased, money ra tes eased a p p re cia b ly , nervousness s h o r tly disappeared, and a general s p i r i t o f e n te rp rise and hopefulness succeeded the depression o f . 1921 But i t must be re ca lle d that as a general r u le , the market w ill always borrow the minimum o f c r e d it from the bank o f issue vshich is required to finance a given volume o f business a.t the e x is t in g p r ic e le v e l* o f t o t a l reserve c r e d it was, however, No surplus created by the purchases o f the t Reserve Banks and no in f la t io n o f bank c r e d it re su lte d 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 _ 3 b ecau.se the discounts by members were reduced as the investment account in cre a se d » Banks m longer had to pa.y as heavy a. ta x, by way o f d isco u n t, to the System and the d e sire to get out o f debt was la x g e ly s a t is fie d * As a. r e s u lt , whatever may have inspired the purchases by some Reserve Banks ** whether f o r earnings (a.s in most cases) or otherw ise - neverth eless the r e s u lt wa.s fu rth er to moderate the course o f liq u id a t io n , reduce in te r e s t rates and firm ly e s ta b lis h the foundation f o r economic re co v e ry . Throughout the la t t e r pa.rt o f 1922 and e a t ly in 1 9 2 3 , the impetus o f the r e v iv a l, spreading into a ll b u sin ess, ex cep tin g some departments o f a.gricu ltu re, and a ffe c t in g in marked degree b u ild in g op era tion s, wages o f a l l the b u ild in g trades, the automobile in d u stry , and stock sp e cu la tio n , th rea t ened to develop in to an unhealty expansion, unwarranted p r ic e advances, and in th e ir tra in bank loan i n f la t io n . The loans on the New York Stock Exchange reached the la rg e st t o t a l ever recorded. A moderation o f th is movement was in part suggested to the p u b lic by the advance in discoun t rates by three Reserve Banks from Ufo to i t was. undoubtedly fu rth e r assisted by the sa le o f Reserve Bank investm ents, which had been continuous throughout the period o f advancing p r ic e s , and which drove our members to increase th e ir borrowings; but probably was more than anything e ls e due to the s e n s itiv e state o f mind o f the p u b lic g e n e ra lly , and to the freq u en tly discussed d e sire among business men to avoid the events o f 1919» 1920 and 1921. But l i t t l e was needed to re sto re conservatism . The System has s t i l l a lso been confronted with a. problem o f major importance, sin ce January, 1 9 22 , in the la^ge net imports o f g o ld , the t o t a l fo r the period down to the la t e s t rep orts a v a ila b le bein g $^3 2 , 9 3 8 ,8 2 2 Had the ea.rning assets o f the Reserve Banks remained unchanged at the January, 1922 fig u re $1,1+71 m illio n s th is a d d itio n t o our gold stock Reproduced from the Unclassified / Declassified Holdings of the National Archives declassified Authority E .6 .1 2 3 5 k - Ij. - in e v ita b ly woulo have caused a. grea.ter expansion o f bank loans and currency than has taken pla.ce - with a l l the d isord ers in p r ic e s a r is in g therefrom* The redu ction o f ea.rning a.ssets by the Reserve Banks, p a x tly through reduced d iscou n ts, at tim es, and la.rgely by the sa le o f investm ents, has probably aided to hold in check any such development. Down to about August, 1923 th is reduction in earning a ssets had more than o f f s e t net gold imports and net domestic production o f the mines, and i t is only since the usual seasonal demands o f the la te summer and f a l l have caused an in crease in members1 borrow ings, togeth er with a d d itio n a l gold im ports, that th is net reduction has not been ma.inta.ined* Since the new Committee was appointed about s ix months a.go, tran saction s in acceptances h~'?e become one o f i t s p r in c ip a l d u tie s, and the importance o f th is a.ccount has increased with the gradual reduction in holdings o f Government s e c u r it ie s . Much the same coimrjents as apply to our Government investment accoun t, apply to th is a.ccount - with the a d d itio n a l fea tu re that the rates f o r purchases o f b i l l s have a. clo se and important bearing upon out* general discount rate* Transactions in b i l l s conducted unde^ the Committee^ super v is io n a.re included in the S ecreta ry’ s report* The Committee is now, or sh o rtly w ill be confronted with some d i f f i c u l t i e s in i t s b i l l purchases, u n less there is easing o f money r a te s , which in f a c t does u su a lly a ris e a ft e r the f i r s t o f th e yeax. The market ra.te fo r prime b i l l s , now about k-l/gfo - should normally be about 1$ o r more below the market ra te fo r prime commercial paper* The d iffe r e n c e in market ra te represents roughly the value o f the bank o b lig a tio n , f o r v\foich the acceptance commission is charged, plus b rok er’ s margins o f p r o f i t . "While that d iffe r e n c e is main tained in the money market a.t the present time and u su a lly w i l l be, the d iffe re n ce between the rates at which we buy b i l l s and our discount ra.te is le s s than l/ z fo * I f money ra tes ease, the spread between Reserve Bank discount ~W 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? - 5 _ ra tes and Reserve Bank buying rates w ill in c re a .se as the ra tes fo r b i l l s are reduced. I f , however, money rates advance, we mast a.dvance our buying ra.tes f o r b i l l s - and an increase o f only 3 /gj& would brin g the b i l l rate to the le v e l o f ,our discount rate - a wholly anomalous and rather unfortuna.te s itu a tio n . I f we did not advance our buying rate with market r a te s , a l l b i l l s would be dumped on the Reserve Banks, causing too large an accumulation, de stroy in g the broad market f o r b i l l s which we have struggled to crea te and p o s s ib ly d efea tin g other purposes o f p o lic y la t e r mentioned, To in crease discount r a te s , and so re sto re the d i f f e r e n t i a l , is ju s t at th is time probably not j u s t i f i e d , and ha.s the p o s s i b i l i t y o f ha.rm when business is h e s ita tin g and seeking an in d ica tio n o f the a ttitu d e o f the Reserve System toward the c r e d it s itu a tio n . On the whole the Committee1 s view is that we can a fford to d ela y any con sid era b le change in buying r a t e s , u n t il the New Y ear's developments d is c lo s e whether we sh a ll experience some reduction im members1 borrowings and lower ma.rket rates* This w i l l , however, leave the gold problem unsolved. I f the System hopes to o f f s e t fu rth er gold imports by reducing investments* i t w ill n eces s it a t e s e llin g some or a l l o f the small balance o f $9^ m illio n o f Government s e c u r itie s s t i l l held by a few o f the Reserve Banks, and then reducing i t s holdings o f b i l l s , p rovided , o f course, fu rth e r large amounts o f gold a r r iv e . The re s u lt to the eaxnings o f some o f the banks would be such as to n e ce s sita te the tra n sfe r to them o f other earning a sse ts by those banks h old in g an excess over ea.ming needs, as f o r example, New Y ork. I t would a lso make i t d i f f i c u l t to avoid an advance in the rate f o r b i l l purchases, in case money rates do not ease. For th is reason a lso a delay in any change o f p o lic y seems d e s ir a b le . 'W 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 - 6 - F in a lly , quite another view is presented when we con sider ju s t what our p o lic y should be in ca.se the h e s ita tio n and u n certainty which seems to have a risen in some se ctio n s , n ota b ly New England, should threaten a real setback to b u sin ess. While the country is now on the whole prosperous, labor q u ite f u l l y employed, most m ills busy and with a. few exceptions no excess stocks o f goods on hand - there axe a lso some in d ica tio n s o f a growth o f d is tr u s t le s t business is fa.cing a slung?. Steel orders are low er, produ ction o f New England co tto n m ills has re ce n tly been reduced , automobile t ir e business has slowed down, and we have ha.d a long and rather sha.:q3 liq u id a t io n in the sto ck maxket re s u ltin g in a. red u ction o f Stock Exchange lo a n s , estimated at $5 3 2 ,0 0 0 ,0 0 0 . I t is the view o f the Committee that the Reserve System should not h e s ita te to resume open market purchases, thereby again reducing bank borrow ings and ea sin g money r a te s , rather than permit an unwarranted s ta te o f mind alone to d istu rb the even course o f the coun tryTs p rodu ction and consumption* There need T&e l i t t l e fe a r o f in fla t io n from such a p o lic y i f t o t a l earning a ssets are not allowed to increa.se; nor are they l i k e l y to do so in the abs ence o f sp e cu la tio n , in crea sin g p r ic e s and inc.rea.sing stocks o f g o o d s.. The attached schedules o f fig u re s are funished in d e t a il so as to ob via te the need o f quoting them e x te n siv e ly in the body o f th is re p o rt. Beyond the con clu sion s so fa r expressed, a study o f the schedules annexed w i l l d is c lo s e in general the growing importance to the banking open system as a vtfiole, o f the p o l ic ie s adopted in/market tra n sa ctio n s. The record o f the pa.st two years is convin cing evidence o f the need fo r a ha.rmonious program. The Committee has a g reed , at the request o f the New York Bank, and su b ject t o the approval o f the Federal Reserve Board Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . U35fe - 7and of the interested Federal Reserve Banks, to supervise a l l foreign transactions, i f such course seems to thfc conference as lik ely to promote a ’uniform system policy. Respectfully submitted, (Signed) BENJ. STRONG Chairman* Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . :°TAL NET DEMAND AND TIME DEPOSITS NEW YORK CITY CLEARING HOUSE BANKS (in m illio n s ) Date Amount Date Amount 1923 6 4,410 13 January February March A pril May June 2 4,255 4,485 9 4,21? 20 4, 391 16 4,248 27 4,355 23 4, 231 3 4, 361 30 4,296 10 4, 316 7 4,228 17 4, 339 14 4,235 24 4,351 21 4,190 3 4,361 28 4,129 10 4,281 4, 4,138 17 4, 298 11 4, 065 24 4, 220 18 4, 007 31 4,266 25 4, 025 7 4, 218 1 4, 096 14 4, 214 8 4, 073 21 4, 264 15 4,133 28 4, 222 22 4,123 5 4,220 29 4,165 12 4,231 6 4,131 19 4, 224 13 4,119 26 4, 219 20 4,178 27 4,174 3 4,194 July August September October November TP" Reproduced from the Unclassified I Declassified Holdings of the National Archives d e c l a s s if ie d Authority E .6 . I235fe -.OTAL EARNING ASSETS federal reserve bank of new york (In m illio n s ) Date Discounts S e cu ritie s Qv/ned Acceptances 3 ought T otal 1922 January 4 199 98 58 355 F ebruary 1 119 108 37 264 March 90 162 32 285 A pril 88 132 38 258 May 68 211 46 325 June 39 192 38 269 July 108 171 47 326 August 39 158 33 230 September 6 48 161 59 269 October 4 58 163 81 302 November 1 161 67 80 308 December 6 208 65 59 332 January 3 186 121 52 359 F ebruary 7 221 52 27 301 March 200 26 29 256 A pril 211 19 27 257 May 212 4 54 270 June 194 21 74 290 July 260 5 40 305 August 209 12 40 262 September 5 210 18 41 269 October 3 204 14 22 240 31 202 11 52 265 1923 October Reproduced from the Unclassified I Declassified Holdings of the National Archives declassified Authority E .6 . U35fe i 'OTAL EARNING ASSETS FEDERAL RESERVE SYSTEM (In m illio n s ) Date Discounts S e cu ritie s Owned* Acceptances Bought Tot al 1922 J anuary 4 1,113 231 127 1,471 F cbruary 1 838 305 90 1,233 March 1 708 413 96 1,216 A p ril 5 625 463 98 1,186 May 3 509 609 107 1,226 June 7 420 618 136 1,174 July 5 499 551 155 1,204 August 2 400 497 150 1,048 September 6 405 508 188 1,102 October 4 434 483 235 1,153 November 1 588 360 261 1,209 December 6 705 312 267 1,284 January 3 628 457 255 F ebruary 7 569 353 185 1,107 March 7 571 345 219 1,135 A pril 4 695 239 260 1,194 May 2 730 185 275 1,191 June 6 183 248 1,166 July 3 95 199 1,223 August 1 806 94 183 1,083 September 5 850 99 175 1,123 October 882 95 173 1,150 884 92 205 1,181 1923 October 3 31 735 1923 High) 930) * Municipal warrants included 1923 High ) 1,339) "W 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 \ STREET LOANS AND BALANCES OF 0UT-0F-T0tyN CORRESPONDENTS (OOO Omitted) Street Loans fo r account o f 1923 Correspondents .3 10 17 24 31 February 7 14 21 28 March 7 14 21 28 A pril 4 11 18 25 2 May 9 16 23 29 June 6 13 20 27 July 3 11 18 25 August 1 8 15 22 29 September 5 12 19 26 October 3 10 17 24 31 January 651, 623 736,791 79 5,426 792,018 750,285 804, 407 801* 228 801r 606 792,532 811^739 843, 564 813,445 810,137 804, 358 841,150 847, 288 837,487 831, 029 821, 490 814, 377 767, 612 756,070 756,165 742, 084 731, 014 681,219 615,146 643, 095 660,136 669,199 6 53, 733 684, 905 664, 984 661,937 639, 759 649, 841 654,246 '667,962 637,821 6 33,671 666,309 653,018 6 32, 380 611,156 * High fo r a l l times* Street Lo fo r own A count Total Street Loans 937, 851 815,280 818,045 763,883 798,917 774,389 807,873 818,457 864, 710 813,182 799,856 837,699 812,901 862, 623 776,453 767,795 805, 785 864, 538 809,624 787, 4-50 784,701 779,419 754, 569 750,120 745,606 758,955 768, 818 710,360 658, 830 636,635 619,371 557,887 560,36 3 534,020 555, 228 552, 438 563, 457 569, 766 557, 856 574,667 531, 951 535, 832 537, 343 552, 506 1, 589, 474 1, 552, 071 1,613,471 1, 555,901 1, 549, 202 1 , 578, 796 1,609,101 1,620,063 1,657,242 1,624,921 1,643,420 1,651,144 1,623,038 1 , 666, 981 1,617,603 1,615,083 1,643,272 *1 ,6 9 5 , 567 1,631,114 1,601,827 1, 552, 313 1,535,489 1,510,734 1,492,204 1,476,620 1, 440,174 1,383*964 1 , 353,455 1, 318,966 1, 305, 834 1, 273,104 1, 242,792 1, 225,347 1,195,957 1,194,987 1,202, 279 1, 217, 703 1,237,728 1,195,677 1,208, 338 1,198, 260 1,188,850 1,169,723 1,163, 662 Total Street Loans fo r account o f Correspondents Balance and balances of fo r account o f Out-of-Town Out-o f-Town Correspondents Correspondent 714,454 760,567 735, 530 673,109 651, 859 667,879 662, 790 659,827 712,477 708,966 707,29 5 682,075 658,173 715, 291 690,167 673,385 640, 486 647,687 611,557 616,932 597,726 583,541 600,156 59 5, 934 587,346 572,858 636,682 617, 004 606,309 573,394 587, 914 586,174 583,535 563,893 559, 831 576, 337 582,419 594,151 57 5,680 621,406 595,759 621,507 581,314 594,783 1, 366,077 1, 497, 358 1, 530,9 56 1,465,127 1,402,144 1, 472,286 1, 464, Cl 8 1 , 461,433 1, 505,009 1,520,705 1, 550,859 1, 495, 520 1, 468, 310 1, 519, 649 1, 531, 317 1,520,673 1, 477,973 1, 478, 716 1,433,047 1, 431,309 1, 365,338 1,339, 611 1 , 356, 321 1 , 338, 018 1, 318, 360 1, 254,077 1,251,828 1,260,099 1,266,445 1,242, 593 1, 241,647 1,271,079 1,248,519 1, 225, 830 1,199,590 1, 226,178 1, 236, 66 5 1,262,113 1, 213, 501 1,255,077 1 , 262,068 1, 274, 525 1, 213, 694 1,205,9 39
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