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Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority M2NDT3S OF MEETING OF THE OPSt MARKET POLICY C0NEER2HC3 wmrasMY, 4, 1933, wismNaF«, d. c. jmsmt The meeting was called to order at 10:20 a* m., there being present the following! Governor Harrison, chairman, and Governors Young, Horris, 5*nchar, Seay, Black, McDougal, Martin, Geery, Haailton, McKinney, and Calkins, and Deputy Governor Burgess, secretary. The secretaryfs report of operations was received, and placed on file. The preliminary memorandum on credit conditions was distributed* Governor Harrison pointed out that the present organization of the con ference called for rotation in the membership of the executive committee, and it was moved and carried that the present executive comaittee be continued for another year* Governor Young reported that the committee on banking legislation had been in session the previous day and had reached a general agreement. He indicated that the preliminary report of the committee would be mailed to the governors in a few days* At 10:35 the members of the Federal Reserve Board entered the meeting, there being present: Governor Meyer, Messrs. Hamlin, James, Hiller, Magee, and from the Board Staff Messrs, Floyd Harrison, Morrill, Goldenweiser, Wyatt, Smead, McClelland, and Carpenter* Dr. Goldenweiser reviewed the recent developments in the credit situa tion, and presented a memorandum on the subject prepared in the Board’s Division of Research and Statistics. During Dr. Goldenweiser»s statement the Chairman of the Board joined the meeting* Governor Meyer stated that probably at no time since the war has the relation between the open market policy of the Federal Reserve System and the general economic situation been so important and that for this reason it is y / r / 3 3 3 3 .- C - J . Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 2 p a r t ic u la r ly necessary that the d e c is io n o f the Open Market P o lic y Conference be o f such a character as to be capable o f expression in d e f in it e terras which w i l l be understandable t o th e p u b lic and j u s t i f y confidence in th e soundness and s t a b i l i t y o f the System’ s p o lic y . He r e fe r r e d t o th e a g ita tio n , e s p e c ia lly in Congress, f o r the adoption o f in fla t io n a r y measures and p oin ted out th at under conditions l i k e th ese the System must o f n e c e s s ity g iv e due con sid eration to such fa c to r s in reaching a determ ination as t o fu tu re p o lic y . He also stated that during h is recent v i s i t s to seven o f th e Federal re s e rv e banks, when he discussed the open market p o lic y w ith th e d ir e c to r s o f those banks, he found what appeared t o be gen era l approval, and he expressed th e opinion that the p o lic ie s o f th e System, in th e lig h t o f conditions which have e x isted during th e la s t two years, have been remarkably fr e e from p u b lic c r itic is m * The S e c re ta ry o f the Conference then read th e p relim in a ry memorandum on c re d it con dition s p r e v io u s ly d is trib u te d * S e c re ta ry M a lls on request review ed the budgetary s itu a tio n o f th e gov ernment* He also reviewed the proposals fo r in fla t io n which were being made to th e Congress and suggested that any slackening in Federal re s e rv e open market p o lic y might p ro vid e an excuse f o r an unsound in f la t io n b i l l * . . % S e creta ry M ills poin ted out, however, that the Treasu ry i t s e l f was not d i r e c t l y or in d ir e c t ly in te r e s te d in th e d ecisio n th e open market p o lic y conference might rea ch . The Treasury should pay th e market p r ic e fo r i t s money and should not exp ect, fo r example, to take advantage o f any abnormal s itu a tio n f o r a la rg e refu nding opera tio n * P o lic y should be determined independently o f the Treasury p o s it io n j As a basis fo r discu ssion by th e Conference, Governor H arrison then out lin e d the various arguments both fo r and against somo redu ction in tho s e c u r ity h oldings o f Federal re s e rv e banks* o f some red u ction . He suggested the fo llo w in g arguments in fa vo r Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ^ j o (1 ) The System open market p o lic y had not been one t o accumulate any d e fin it e amount o f s e c u r itie s but rath er to check d e fla tio n through the redu ction o f bank debt and the c re a tio n o f su b stan tial excess re s e rv e s , which had been accomplished* I t had been g e n e r a lly agreed that a ft o r a su b stan tial e f f e c t iv e pressure had been secured th e System would reduce i t s s e c u rity holdings as soon as p o s s ib le without r e lie v in g that p ressu re, Tlie turn o f th e year appeared to o ffe r th e best chance to de crease th e amount o f s e c u r itie s without reducing member bank reserves and so not changing p o lic y * I f t h is opportu n ity were not used during January i t might not be fe a s ib le to liq u id a te fo r a year without decreasing bank re s e rv e s and thus g iv in g the ap pearance o f a change in p o lic y * (2 ) Any fu rth e r su b sta n tia l in crease in excess reserves might not in fa c t increase e f f e c t iv o pressure and would thus serve o n ly to minimize c o n tro l when necessary. / (3 ) Though i t was not th e m otive th e fa c t that th e Reserve banks have bought so la rg e amounts o f government s e c u r itie s has in fa c t enabled th e Treasu ry to borrow cheaply and so in some measure has encouraged th e continuance o f an unbalanced budget . y Governor H arrison suggested the fo llo w in g arguments in fa v o r o f h oldin g the government p o r t f o lio in t a c t . I ,/ ' ( 1 ) There is danger that a red u ction in s e c u r ity holdings might be construed as a r e v e r s a l o f p o lic y which might in turn in crea se the danger o f the adoption o f some r a d ic a l in fla t io n a r y polic37 by Congress since th e most e f f e c t i v e argument against such in fla t io n is that an o rd e rly p o lic y o f r e f l a t i o n is now at work.. Any move so in te rp re te d a lso might be discou ragin g to business or to bankers h o ld in g a la r g e volume o f government s e c u r itie s , who might s ta rt to liq u id a t e , (2 ) A red u ction in the t o t a l holdings might operate as a check to the bond market thus re ta rd in g business re c o v e r y and fu rth er in ju rin g bond p o r t f o lio s o f banks. (3 ) One question was the e ffe c tiv e n e s s o f varyin g amounts o f excess re s e rv e s . There are in d ica tio n s that in te re s t on d ep osits in p r in c ip a l centers might be elim in ated . I t is d i f f i c u l t to tr a c e the e f fe c t s o f such a move but i f lim ite d to bank d ep osits i t would probably d is tr ib u te the pressure fo r p u ttin g money to work more v/idely and would thus j u s t i f y a la r g e r t o t a l o f excess res e rv e s . Governor H arrison fu rth er suggested that any redu ction in s e c u r ity h o ld ings should in any event not exceed the return flo w o f currency, and that the System should not attempt to o ffs e t g o ld imports sin ce that might be in terp reted as c o n s titu tin g a p o lic y o f s t e r i l i z a t i o n o f go ld . T5BT Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 4 Governor Meyer suggested that what is most requ ired i s assurance as to th e continuance o f th e pressure o f excess re s e rv e s . Mr, M ille r suggested that the p re c is e amount o f excess re s erves main tain ed was an in c id e n ta l d e t a il, but that th e important, question was one o f p o lic y and d ir e c tio n o f movement, and that th ere might be harm in stopping excess reserves from accumulating. There ensued a gen eral discu ssion during which the question was ra ised whether country banks could and would make use o f excess re s erves i f d riven back from the cen ters. Governor M artin poin ted Out that fe a r o f bank fa ilu r e s was p reven tin g banks from using t h e ir excess re s e rv e s and i f that s itu a tio n were cor rected th e excess re s e rv e s would be put to u se. Governor Calkins emphasized th e same d i f f i c u l t y , p a r t ic u la r ly in r e l a t io n to a g r ic u ltu r a l banks. Governor Meyer pointed out that one e f f e c t o f the p o lic y had been to r e l i e v e g r e a t ly th e finances o f c i t i e s and s ta te s , so that th e y could secure money in th e market fo r r e l i e f and other necessary a c t i v i t i e s . This was h e lp fu l in keeping the s o c ia l o rga n iza tio n goin g. Governor N o rris ra is e d th e question o f th e probable renewal, o f th e p ro v is io n s o f S ection s 2 and 3 o f the Glass S te a g a ll b i l l ? and in general discu ssion i t was suggested that th ere would probably be l i t t l e d i f f i c u l t y in the renewal o f the p ro v is io n s r e fe r r e d t o , and that in any event the s itu a tio n o f the banks with resp ect to c o lla t e r a l fo r Federal re s e rv e notes could not be r e lie v e d by the sa le o f any reasonable amount o f government s e c u r it ie s . There ensued some fu rth er discu ssion o f th e use o f excess reserves and the probable e ffe c t s o f a discontinuance o f in te re s t on d ep osits in New York should that occur. There was some d iffe r e n c e o f opinion as to the extent to which an excess o f reserves would be put to use by banks i f i t were d is trib u te d more w id e ly throu^iout the country, some expressing the b e l i e f that th e funds would be Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 5 put to use in investments or somewhat fr e e r len d in g, and oth ers expressing the opp osite o p in io n . The m eeting adjourned at 1:10 p# m* The m eeting reconvened at 2:25 p . m ., th e re being present th e fo llo w in g : Governor H arrison, chairman, and Governors Young, N o r r is , Fancher, Seay, Black, McDougal, M artin, Geery, Hamilton, McKinney, and Calkins, and Deputy Governor Burgess, s ecreta ry * A fte r some fu rth e r gen eral discu ssion each o f th e governors stated h is views which may be summarized b r i e f l y as fo llo w s : Governor Black said that w h ile he saw no economic reasons fo r not le t t i n g m a tu rities run o f f he was g r e a t ly impressed by th e dangers o f unsound in fla t io n a r y vj proposals and b e lie v e ? that th ey could o n ly be combated bjf th e continuance o f th e present p o lic y o f th e Federal Reserve System, Governor Geery favored le t t i n g January m atu rities run o f f a ft e r making a statement that th e p o lic y o f m aintaining excess reserves would be continued. Future p o lic y could be governed by th e e f f e c t s o f th is o p eration . Governor Seay b e lie v e d that th e dangers o f a fu rth er accumulation o f re s e rv e s were g re a te r than those o f disposin g o f some s e c u r it ie s . He b elie v e d a statement th at th e re was no change in p o lic y would be adequate t o d ea l w ith p o l i t i c a l problems which have a way o f not m a te r ia liz in g . He would le t not le s s than $200,000,000 o f s e c u r itie s go. Governor Young emphasized th e op p ortu n ity in January f o r l e t t i n g govern ments go without in t e r fe r in g w ith excess re s e rv e s . i He would le t January m aturi- t i e s run o f f and perhaps those o f February and would t r y to speed up th e renewal o f the Glass S te a g a ll b i l l . Governor Calkins stated that he was not impressed by th e p o l i t i c a l argument and p a r t ic u la r ly with th e System*s power t o deal with in f l a t i o n i s t s . He was not a supporter o f the th eo ry that excess res e rv e s were e f f e c t i v e in expanding c r e d it . He would, however, l e t a sm aller amount o f governments than the January Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 6 m a tu rities run o f f and not decide yet about February, Governor M artin thought the elim in a tio n o f in te r e s t on d ep osits would re s u lt in hoarding and other d i f f i c u l t i e s . He b e lie v e d the banking s itu a tio n must be straigh ten ed out b e fo re excess reserves would have t h e ir f u l l e f f e c t . He would fa vo r l e t t i n g some s e c u r itie s run o f f , w ith the execu tive committee keeping in c lo s e touch with th e r e s u lt s . / Governor Hamilton b e lie v e d th e System should not base i t s a ctio n on the p o l i t i c a l s itu a tio n . He would fa v o r l e t t i n g January m a tu rities run o f f and having another meeting to decide on February m a tu ritie s . He considered i t important to exp la in the a ctio n t o th e p u b lic .^ sl Governor Fancher thought an elim in a tio n o f in te re s t charges due to in creasing res e rv e s would be u ndesirable* He b e lie v e d some o f the m a tu rities in January should not be rep la ced , r e la t in g any changes to the retu rn flo w o f curren cy. Governor N o rris suggested that fu rth e r increases in excess reserves would a d versely a ffe c t bank earnings and incur the r is k o f disturbance which might a r is e from e lim in a tin g in te r e s t on d e p o s its . was the encouragement to an unbalanced budget. As to p o l i t i c a l e ff e c t s one danger The other r e la te d to in fla t io n a r y p rop osa ls. He b e lie v e d t h is la t t e r d i f f i c u l t y could be met by a c a re fu l statement o f p o lic y . He would fa vo r le t t i n g January m a tu rities run o f f t o the extent o f the currency retu rn but would on ly fa v o r doing th is i f an explanation were made* If no explanation were made he would fa v o r m aintaining the p o r t f o l i o . « ; U / Governor McDougal b e lie v e d that fu rth e r increase in excess reserves woulc / j : be unwise and that reductions in the p o r t f o l i o might make open market money r a te s firm er and strengthen the p o s itio n o f the R eserve System. He favored l e t t i n g at le a s t January m a tu rities run o f f ; and would p r e fe r to include the February m atu ri- Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority lT ,A / (0 £ S ? / 7 Governor McKinney did not fa vo r g iv in g to o much con sid eration t o the p o l i t i c a l a sp ects. t i e s t o run o f f , He said he would permit th e g re a te r p o rtio n o f January m aturi adding th a t, in h is judgment, such a ctio n would have a heartening e ffe c t on the banks, in h is d i s t r i c t at le a s t , as w e ll as tend to crea te in the p u b lic mind g e n e r a lly th e b e l i e f that because o f improved con dition s i t is no j j lon ger necessary to r i g i d l y m aintain a fix e d amount o f Government s e c u r itie s in th e System . jj Governor H arrison said he had f e l t a l l along that some s e c u r itie s should be allow ed t o run o f f in January but he attached considerable weight to the dangers o f th e in fla t io n a r y movement a l l over th e country. He feared m is in te rp re ta tio n o f sa les by th e banks, th e market, and by Congress, but b e lie v e d th at t h is d i f f i c u l t y might be la r g e ly avoided i f th e p o lic y were c le a r ly understood to be one o f con tin u in g t o maintain su b sta n tia l excess reserves in prosent con d ition s. T h is might in v o lv e purchases as w e ll as sa le s o f s e c u r it ie s . The conference then proceeded to d ra ft a r e s o lu tio n , s ta r tin g with a motion by Governor Calkins that th e ex ecu tive ca a n ittoe be authorized to dispose o f $100,000,000 t o $125,000,000 o f s e c u r itie s in January to o ffs e t currency r e tu rn s. B efore adjournment a p re lim in a ry d ra ft o f the re s o lu tio n was voted upon fa v o ra b ly , Governors McDougal, Seay, and Black, v o tin g in the n eg a tive* I t was decided to hold a fu rth e r m eeting in th e morning, and since Governor Black was unable t o s ta y u n t il morning he desired t o record h is dissent from any proposal f o r reducing th e System p o r t f o l i o , as fo llo w s : *1 am in accord w ith the economic reasons given by th e Conference f o r the proposed redu ction in governments* I , however, have an intense f e e lin g that th e present s itu a tio n as to proposed in fla t io n a r y measures creates a new con d ition that i s most serious and should be persu asive o f a ctio n r e s u ltin g in m aintaining our present h o ld in g s; and I th e r e fo r e v o te ’ no* on th e present m otion .” A fte r fu rth er discu ssion o f th e d ra ft re s o lu tio n th e meeting adjourned at 6:05 p . m. f Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority January 5, 1953. The meeting was c a lle d to order at 10:06 a. m ., th ere being present th e fo llo w in g : Governor H arrison, chairman, and Governors Young, N o r r is , Fancher, Seay, McDougal, M artin, Geery, Hamilton, McKinney, and Calkins, and Deputy Governor Burgess, secreta ry* The discu ssion o f the d ra ft r e s o lu tio n was continued, and a ft e r fu rth er m o d ific a tio n s , i t was passed by unanimous vo te in th e fo llo w in g form: I t i s th e sense o f th e Open Market P o lic y Conference th at th ere should be no change in th e System’ s p o lic y intended to maintain a su b sta n tia l amount o f excess member bank reserves inasmuch as th e continuance o f excess reserves in su b sta n tia l amounts is d e s ira b le in present co n d itio n s. In view o f the retu rn flo w o f currency during January and p ro s p e c tiv e gold move*ments th e amount o f excess reserves may r i s e con siderably above th e present le v e l which is deemed appropriate under present con d it io n s . BE IT RESOLVED, THEREFORE, That, pending another meeting o f the Conference, the Executive Committee be given a u th o rity (a ) to reduce th e S 3rstemTs holdings o f short term Treasury b i l l s in order to o ffs e t such amount o f th e retu rn flo w o f currency as may seem de s ir a b le , provided such a ctio n does not re s u lt in any su b stan tial redu ction in e x is tin g excess re s e rv e s and (b ) i f necessary, t o purchase Government s e c u r itie s in s u ffic ie n t amounts to prevent member bank excess reserves f a l l i n g below th e present gen eral l e v e l , c) Governors Seay and McDougal d esired to be recorded as v o tin g with a re s e rv a tio n . They b elieved that th e proposal represented a step in the r ig h t d i r ectio n but would p r e fe r to see a la r g e r redu ction in th e p o r t f o l i o and did not fa v o r the maintenance o f as la r g e excess res e rv e s as at p resen t. Some re s e rv a tio n as t o th e value o f th e maintenance o f th e present volume o f excess re s e rv e s was expressed by severa l o f th e governors. Governor Young sa id he was v o tin g f o r the re s o lu tio n bocause he b elie v e d i t t o be a step in the rig h t d ir e c tio n and not because he had changed h is views in re fe re n c e t o excess r e s e r v e s . iar Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority ^ ,Q r j O ^ O f 9 I t was understood in fo rm a lly that th e re s o lu tio n should be in terp reted by th e execu tive committee as fo llo w s : s' (1 ) Treasury b i l l s up t o $125,000,000 would be allowed to run o f f in January to the extent that th ere is a retu rn flo w o f currency, but not to bring excess re s e rv e s below ^500,000,000. (2 ) When th e r e s o lu tio n r e fe r s to th e present l e v e l o f r e serves i t means approxim ately §500,000,000. (5 ) When the r e s o lu tio n r e fe r s t o th e return flo w o f currency i t means the retu rn flow from the December peak ju st b efo re Christmas. (4 ) There would be another meeting o f th e Conference b efo re any in crease in the System holdings o f government s e c u ri t i e s above $1,851,000,000. At 11:00 a. m* o f clo ck tho members o f the Federal Reserve Board entered the m eeting, th ere being p resen t, in ad d ition to the governors o f the Federal res e rv e banks, th e fo llo w in g : Governor Meyer, M essrs. M ille r , Hamlin, James, Magee, M o r r ill, H arrison, Wyatt, M cClelland, and Carpenter. The re s o lu tio n adopted by the Conference was presented to th e Board and unanimously approved by i t . Governor Meyer expressed s a t is fa c t io n with th e form o f re s o lu tio n in that i t provided a more s c i e n t i f i c basis fo r a ctio n than the usual re s o lu tio n which sim ply indicated a d e f in it e amount o f s e c u r itie s t o be bought o r sold. The re s o lu t io n g iv e s assurance t o banks and business men as to the continuation o f easy money and should help make the p o lic y more e f f e c t i v e . it Governor Meyer then stated that is th e opinion o f the Federal Reserve Board that the governors o f the Federal re s e rv e banks can con trib u te a great d ea l to th e success o f the System open market p o lic y by exp lain in g t o member banks in a p o s it iv e way, whenever an opportu n ity i s a ffo rd e d , the purposes sought to be accomplished by th e p o lic y . Governor H arrison rep orted th e in te rp re ta tio n s o f the re s o lu tio n upon which the conference was agreed. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 10 There ensued a gen eral d iscu ssion o f what i f any statement might be g iv e n t o th e p re s s , and Dr, M ille r and Mr. Hamlin, and Governors H arrison and N o r r is vrere con stitu ted a committee to d ra ft a statem ent, and th ey withdrew to prepare a statement. At 12:52 p* m ., the committee returned and the fo llo w in g statement was read and adopted without d issen t: The Open Market P o l i c y Conference o f th e Federal R eserve System, with re p re s e n ta tiv e s from a l l o f the tw e lv e Federal re s e rv e banks in attendance, con cluded i t s meetings with the F ed eral Beserve Board tod ay. The sessions o f th e Conference were devoted to a review o f economic, business, fin a n c ia l and banking con dition s in each o f the tw e lv e F ederal re s e rv e d is t r i c t s and t o the economic and fin a n c ia l s itu a tio n in th e country as a whole. P a r tic u la r re fe re n c e was made in th e discussions t o the workings and e ffe c t s o f th e open market p o lic y thus fa r pursued by the Federal Reserve System during th e course o f the economic depression . Consideration was also given t o th e a ttitu d e o f the System in ad ju stin g i t s opera tio n s to con dition s and needs as th ey may change and develop* % ie f i r s t and immediate o b je c tiv e o f th e open market p o lic y was t o conJ tr ib u te fa c to rs o f s a fe t y and s t a b i l i t y in meeting th e fo rc e s o f d e fla t io n . The la r g e r o b je c tiv e s o f th e System’ s open market p o lic y , t o a s s is t and a c c e le ra te th e fo rc e s o f economic re co very , are now assuming importance*^ With th is purpose in mind, the Conference has decided that th e re should be no change in th e System’ s p o lic y intended to maintain a su b sta n tia l amount o f excess member bank re s e rv e s , th e continuance o f which is deemed d e s ira b le in present con d ition s* Adjustments in the System’ s h oldings in the open market ac count w i l l be in accordance w ith th is p o lic y * Governor Meyer sa id that the Board had approved redu ctions in th e ra te on 10-B loans in th e case o f two re s e rv e banks and would be glad to act upon other a p p lic a tio n s * Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 11 Governor Meyer suggested the importance o f b u ild in g up th e man power o f the Beserve System by b rin gin g in ab le young men. There ensued some discu ssion o f the aid which an adequate pension plan would g iv e to t h is proposal, and i t was in d ica ted that th e Board was studying th e recommendations o f th e governors upon that p o in t . At 1:00 p . m ., the meeting adjourned. W. Randolph Burgess, S ecreta ry .
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