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MINUTES OF MEETING OF THE OPEN MARKET POLICY CONFERENCE
HELD AT THE OFJICES OF THE FEDERAL RESERVE BOARD
WASHINGTON, D. C., JANUARY 8 1 ^ 1931,

The meeting convened at 10:00 o*clock, there being present the
following:
Governors Youngj Fancher, Seay, Black, McDougal, Martin,
Geery, Talley, Calkins and Harrison, Chaiiman
Deputy Governors Hutt, Worthington and Burgess, secretary#
The preliminary memorandum submitted by the chairman and the report
of the secretary covering System operations in government securities were dis­
tributed and read by those present.

It was moved and. carried that these re­

ports be received and placed on file*
* Governor Harrison then reviewed for the conference his discussions
with European bankers and others and the impressions he gathered on his recent
European trip#

In the course of extended discussion of these matters Governor

Harrison pointed out that the world owes tho United States on balance about
#600,000,000 each year, and that payment has to be made in gold, in imports from
foreign countries to us, or by borrowing from us.

These countries were unable

to send us much more gold, their exports to us were now limited and now finan­
cing curtailed.

Their only alternative was to diminish their purchases of goods

from us, which was now being done to our detriment.
He indicated that the people he met abroad appeared to bulieve that
recovery from the present business depression depends largely on America, part­
ly for psychological reasons and partly because of the importance of exports to
us and borrowing from us.
Generally speaking he felt that tho economic situation of European
countries had grown distinctly worse since his visit last spring, and has
probably grown somewhat worso in tho weuks since his recent return from Europe#




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Aftur general discussion with regard to the foreign situation,
Governor Harrison referred to t i reduction of the discount rate of the
ie
Federal Reserve Bank of New York, effective liecember 24, 1930,

He indicated

that the banking situation was of primary importance in the decision.

He had

been urged from many quarters to make a reassuring statement which might aid
in quieting the banking situation.

Such.a statement was practically impossible

because to be strong enough to do any good it would run the risk of being contra­
dicted by any small bank failure which might thereafter occur#

The rate re­

duction, apart from other reasons, served as a method of stating to the public
that money was freely available.
by the money situation.

It would probably help the foreign situation as well

as the domestic situation.
to reduce her rate*

The rate reduction was justified technically,

Incidentally, it might make it easier for France

The discount rate decision had been made very rapidly,

and there had not been an opportunity to discuss the matter with most of the
other Reserve banks.

In fact* the proposal had only arisen after the meeting

on December 20 of the executive committee of the Open Market Policy Conference*
Governor Harrison referred to the holdings of sterling bills purchased
during the period of greatest weakness of sterling last autumn.

He said it

had been the intention to sell these bills some time after the turn of the year,
when it was hoped that sterling would be strong enough to make that an orderly
operation.

Recent weakness of sterling, however, has made this program seem

undesirable up to this time, and instead of the sale of sterling the directors
of the New York bank had voted at their last meeting to sell a part of the se­
curities which had been added to the portfolio of the New York bank during the
recent banking emergency*
Governor McDougal commented on the recent discount rate change by
the Federal Reserve Bank of Chicago and indicated with regard to the last three
changes in their discount rate that in the case of the first two of these changes




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it had been hoped that the reduction in the rate would have some encouraging
effect upon business, but that the latest change had been made without any such
belief, but was designed to correct to some extent the large differential of
1 1/2$ between the Chicago rate and that of the New York bank*
Governor McDougal expressed the hope that there would be no further re­
duction in the bill rate; that money was too cheap with Federal funds quoted at
1/4 of one per cent; and that it would be better for the market to get the
bills if it wanted them*
Governor Calkins suggested that the position should be one in which we
kept our bill rate low, but tried to correct any over-sloppy condition in the
money market by the sale of government securities*

Several of those present

concurred in this view*
There ensued a discussion as to the statement of facts in the prelim­
inary memorandum submitted by the chairman, and Governor Harrison further re­
viewed the changes in the money market since the last meeting of the Open Market
Policy Conference, pointing out that the seasonal expansion in the requirements
for Federal reserve credit up to the time of financial disturbances nad oeen less
than normal, and bill purchases appeared to be sufficient to take care of seasonal
needs without additional purchases of government securities.

This appeared to be

true 1 until the banking emergency when the New York bank had found it necessary
to take over securities from two member banks and at the end of tho year when pur**
chases were necessary in order to avoid too great tightening of credit due to an
unusual amount of ’
’
window dressing*” Purchases made for the open market account
had since been liquidated as had also $20,000,000 of the emergency purchases made
by the New York bank.

Since the turn of the year the return flow of funds ap­

peared to have greatly aided the bond market.
cess

deal*

There had been a considerable ex­

of reserves of the New York City banks, though this had fluctuated a good
It was the general plan of the New York bank to liquidate the balance of




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the temporary purchases of ^45,000,000 of securities, as the surplus of reserves
offered opportunity without interfering with the bond and money market.
It was moved by Governor McDougal that it was xhe sense of the confer­
ence that the present was an opportune time to let government securities go from
the open market portfolio as and when it could be done without undue disturbance,
with the understanding that sales should not be made rapidly and should be made
in orderly fashion.

Governor McDougal explained this motion by saying that some

time ago System open market operations had followed a general principle which he
believed to be sound, and should be reverted to, that whenever the market is
ready to take bills and government securities the Reserve System should sell them,
and conversely, the System should acquire them when the market cannot take them
readily*

On this principle he would like to hold bill rates where they were to

push bills out of the System,
Governor Harrison coumented that if we sell governments' we should have
the bill rate at a point nearer to the market so that we might be ready to take
in bills without such a big penalty to the seller.

He would not favor any sales

of governments unless the bill window were opened to provide in this way any money
the market required.
There ensued a general discussion as to how a general policy might be
t
r

stated in which Governors Harrison, Black, Young, and Seay participated, all of
them agreeing that a statement of policy as well as proposed action was important.
Governor Young stated that a sale of $50,000,000 or $60,000,000 of
governments might perhaps injure the bond market; that a eomercial banker who saw
a reduction in government holdings of the Reserve System would be inclined to sell
bonds.

In any event it was important to decide the general policy whether the

conference favored firmer or easier money, or the status quo.
Governor Black presented a substitute resolution to that of Governor
McDougal, the provisions of which were then discussed.




The morning meeting adjourned at 1:10,

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The meeting reconvened at 2:37, and after further discussion the follow­
ing resolution was adopted by unanimous vote:
❖

The Conference has considered the preliminary
memorandum submitted by the Chairman and has reviewed
business and credit conditions as they now appear. It
is the sense of the Conference that in view of these con­
ditions it should be the policy of the System to continue
an easy money policy in the best interest of trade and
commerce. It is the belief of the Conference, however,
that the seasonal return flow of currency and credit and
other factors have tended during recent weeks to make for
an undue excess of funds in the principal money centers.
It is therefore the opinion of the Conference that in these
circumstances it would be desirable to dispose of some of
the System holdings of government securities as and when
opportunity affords itself to do this without disturbance
or any (undue *) tightening of the money position. It is
understood that there shall be a new meeting of the Con­
ference as soon as or whenever conditions in the opinion
of the Conference or the Federal Reserve Board justify a
reconsideration of this policy."
'
this word later omitted
While this resolution was being typed, Governor Harrison reported brief­
ly his appearance before the Senate sub-committee investigating monetary problems#
At 4:30 Governor Meyer and Messrs. Hamlin, James, Miller, and
Goldenweiser, McClelland, and Smead joined the meeting.
Governor Harrison reviewed the discussions of the Conference, read the
preliminary memorandum of the chairman, and the resolution stating the findings
of the conference.

He also reported the action of the directors of the Federal

Reserve Bank of New York in voting to sell $35,000,000 of government securities
out of the emergency purchase made during December, of which amount $20,000,000
had already been sold.
Mr. Miller inquired whether the banks of other districts than New York
had surplus reserves.

Governors Young and McDougal replied that the banks in

the Boston and Chicago districts did not have surpluses*

Mr. Miller inquired

how surplus reserves were to be interpreted, and Governor Harrison replied that
; they appeared to indicate first, little demand for funds by borrowers, and second,
\ \ reluctance to employ funds.




lie stated that the New York banks were in a very

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liquid position, their per cent of liquid assets being as high as perhaps ever
before.

Governor McBougal stated that the three largest banks in Chicago showed

a very liquid statement, probably never exceeded in liquidity.
Governor Harrison said that the recent test in New York of the ability
of certain banks to stand losses of 30$ to 50f of their deposits raised the
o
question of the desirability of the Federal Reserve System having power to dis­
count notes secured by listed bbnds under proper safeguards.

He believed such

a provision might make it much easier to deal with cases of banks facing runs.
Mr. Miller suggested that the banking situation might be suffering just
now from excessive caution and excessive desire for liquidity.

Governor Harrison

replied that that was one reason why our easy money policy had not proved more
effective.

Governor Meyer suggested that money was not really easy until last

summer, and that the expected good results from easy money had been interrupted
by bank failures and other difficulties,
Mr. Miller referred to a memorandum which he had received relating to
the possible use of Clearing House certificates and discussing the liquidity of
the city banks, which was then read by the assistant secretary of the Federal
eserve Board,
Governor Meyer stated that the banking situation was at present the
primary thing to consider, and that whatever policy was adopted should be adopted
with that in view.

He suggested that bill maturities would respond to changes

in the money market, and would act as a buffer in taking up surplus funds.

Any

proposal for the liquidation of governments should consider the present extra­
ordinary reluctance of banks to show bills payable.

The present banking situa­

tion was so delicate that it could be easily disturbed.
Governor Harrison pointed out that the resolutions of the conference
represented a compromise since some of those present were in favor of considerable
sales of securities, while others were only in favor of such moderate sales as




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might be necessary to take up some of the slack.

Governor Meyer suggested that

any move which the Federal Reserve System made in its automatic assets immediate­
ly put the acts of the System on the skyline where they were subject to observa­
tion and criticism.
—

Governor Harrison indicated that he would not be content with even

the proposed moderate program of sales of governments unless the buying rates for
bills were nearer to the market rate, as bills coming back to the System would
act as a safety valve in case too much funds were withdrawn from the market.
!J

Mr. Miller stated that the banking situation was now more important
than the credit situation, and asked what the governors wure planning to do in
different districts if further banking trouble started.

The Federal reserve

bank is the normal place of leadership, and plans should be developed to keep
any bank with good resources from suffering.
Governor Harrison outlined a method which had been devised in New York
to deal with any banks which might hereafter be in trouble.
At this point Governor Harrison left the meeting.
Governor Meyer stated that a reduction of bills and discounts of the
System did not involve tho launching of any major policy, whereas the sale of
governments is commonly interpreted as a major move in Federal reserve policy.
The Reserve System has been accused in a number of quarters of pursuing a de­
flationary policy in the past year, and a sale of government securities at this
time is likely to draw fire.

In this situation it would appear most desirable

to avoid a move which appears to represent a major change in policy when there
is no necessity for doing it.
Governor Young said that those present would certainly not favor any
program which they believed would affect bank confidence, or that was a new and
major change in policy.

Government bonds had first been bought under an emergency,

and their purchase had proved helpful, but there was a limit to what the System
could do in buying bonds.




Some sales would put the System into a position to go

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back into the market and buy again if it is necessary.
Governor McDougal pointed out that no one present was desirous of dump­
ing securities in the market, but they favored a program that would be worked out
gradually,

Governor Calkins stated that he believed the word "undue" should be

omitted in the phrase "any undue tightening of the money position."

There seemed

to be general sentiment in favor of this suggestion.
Governor Meyer stated that in this position the Board has an apparent
responsibility to the country; that the world was now in the worst economic con­
dition that he had ever seen.

There had been the worst breakdown in credit

conditions which he had witnessed.

The present situation in Germany and

Australia in which a nation’s credit was at question being cases in point.
employment, unrest, and discontent were severe.

Un­

Under these circumstances every­

thing which the Federal Reserve System does which is or may be interpreted as a
move in major policy is on the skyline.
Governor Calkins stated that the proposal was not considered as a major
change in policy, that his idea was that a beginning of sales might be made by
letting February 16 maturities of Treasury bills run off.

It could not be con­

sidered a major change in policy because it provides specifically for the "con­
tinuance of an easy money policy."




The meeting adjourned at 6:15*

W. Randolph Burgess,
Secretary,


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102