Full text of Open Market Investment Policy : Excerpts : 1923 - 1928

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OPEN MARKET INVESTMENT POLICY

EXCERPTS
1923 - 1928

Copy No.

45

Explanatory Note
The record of discussions and policy decisions relating to
the operations of the Federal Open Market Investment Committee during
the years 1923-1930, and of the Open Market Policy Conference during
1930 and the first half of 1931, has been re-examined recently. In
the belief that this record may have a continuing reference value to
present and future members of the Federal Open Market Committee, the
parts describing actions taken and the reasons for those actions have
been reproduced. The parts omitted consist largely of routine reports
which do not seem essential to an adequate historical review of Committee operations in those years.
Copies of this record are being furnished to each of the
members of the Committee, to the Presidents of the Federal Reserve
Banks not currently serving on the Committee, and to members of the
staff who are working on Committee matters. The first volume of the
record covers the years 1923-1928 and it is expected that two additional volumes will be required for the years 1929 to mid-1931. No
similar review has been made for the period subsequent to July 1931.

Winfield W. Riefler, Secretary,
Federal Open Market Committee,

February 1956




Developments During 1923
Organization of Open Market Investment Committee.
Board resolution. The present Open Market Investment Committee
for the Federal Reserve System, which comprises the Governors of the
Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland and
Chicago, was created in accordance with the terms of resolutions adopted
by the Board on March 22, 1923, as follows:
"Whereas the Federal Reserve Board, under the powers given it
in Sections 13 and 14 of the Federal Reserve Act has authority to limit and
otherwise determine the securities and investments purchased by Federal
reserve banks;
"Whereas the Federal Reserve Board has never prescribed any
limitation upon open market purchases by Federal reserve banks;
"Whereas the amount, time, character, and manner of such
purchases may exercise an important influence upon the money market;
"Whereas an open market investment policy for the twelve
banks composing the Federal reserve system is necessary in the interest
of the maintenance of a good relationship between the discount and
purchase operations of the Federal reserve banks and the general money
market}
"Whereas heavy investments in United States securities, particularly short-dated certificate issues, have occasioned embarrassment
to the Treasury in ascertaining the true condition of the money and
investment markets from time to time,
"THEREFORE, Be It Resolved, That the Federal Reserve Board, in
the exercise of its powers under the Federal Reserve Act, lay down and




adopt the following principles with respect to open market investment
operations of the Federal reserve banks, to wit}
"(l) That the time, manner, character, and volume of open market investments purchased by Federal reserve banks be governed with primary
regard to the accommodation of commerce and business and to the effect of
such purchases or sales on the general credit situation.
"(2) That in making the selection of open market purchases, careful regard be always given to the bearing of purchases of United States
Government securities, especially the short-dated issues, upon the market
for such securities, and that open market purchases be primarily commercial
investments, except that Treasury certificates be dealt in, as at present,
under so-called "Repurchase" agreement.
"Be It Further Resolved, That on and after April 1, 1923, the
present Committee of Governors on Centralized Execution of Purchases and
Sales of Government Securities be discontinued, and be superseded by a new
committee known as the Open Market Investment Committee for the Federal
Reserve System, said Committee to consist of five representatives from
the reserve banks and to be under the general supervision of the Federal
Reserve Board; and that it be the duty of this Committee to devise and
recommend plans for the purchase, sale and distribution of the open market
purchases of the Federal reserve banks in accordance with the above principles and such regulations as may from time to time be laid down by the
Federal Reserve Board."
Organization. The Conference of Governors of the Federal Reserve
banks held in Washington during March, 1923, to which the plan of open market operations as outlined in the Board's resolutions was submitted, expressed itself in favor of the plan and of the establishment of the Open




3
Market Investment Committee for the Federal Reserve System to supersede,
on and after April 1, 1923, the existing Governors' Committee on
Centralised Execution of Purchases and Sales of Government Securities.
At the suggestion of the Governors' Conference, the Federal Reserve Board
appointed the members of the Committee on Centralized Execution of Purchases and Sales of Government Securities (Governor Strong, Chairman,
Governors Harding, Norris, Fancher and McDougal) as members of the new
Committee.
Policy adopted at April 13 meeting. The first meeting of the
Open Market Investment Committee for the Federal Reserve System was held
at the Federal Reserve Bank of Philadelphia on Friday, April 13, 1923,
at which meeting the Committee adopted the following policy governing
open market purchases by Federal Reserve banks and the administration
there of:
"The Committee believes it important that the twelve Federal
reserve banks should be in agreement on the subject of a System policy
and in this connection calls attention to the minutes adopted by the
Governors' Conference in October 1922, to wit:
'That for the present the credit policy of the Federal Reserve System should aim to furnish credit and currency to member banks
for their seasonal and emergency requirements, but such policy, as well
as open market operations, should be administered in each district in
such manner as to assist the system in discharging, as far as it may be
able, its national responsibility to prevent credit expansion from
developing into credit inflation.'
"The view therein expressed is sound and, supplemented by the
policy outlined at the recent Conference (Resolutions of Federal Reserve




-4Board adopted on March 22, 1923), presents a safe and sane program for
Federal reserve banks to follow.
"A policy as drastic as t h a t of the Bank of England, for instance, which always aims to make the market pay a penalty rate upon r e course to the bank, i s not always suited to the American b i l l market,
and if applied might have an adverse effect upon the establishment of
dollar credit and dollar b i l l s in overseas trade and world markets, and
i t seems reasonably certain that the sterling credit would quickly drive
the dollar credit from those markets. I t is probable therefore that we
must continue for some time a somewhat paternalistic attitude toward the
market for dollar b i l l s in t h i s country.
"Therefore, i t may be assumed with respect to rate policy as
applied in open market purchases of bankers' b i l l s and prime trade paper,
bearing suitable banking endorsement, that the rates made effective from
time to time should be established with regard to the general credit situation, the state of the open market, and the r a t e s therein obtaining,
but with a primary regard for the accommodation of commerce and business.
The secondary regard must be for the effect of reserve banks' open market rate on the development of dollar acceptance credit in domestic and
foreign markets and dollar exchange in world markets.
"The Open Market Investment Committee for the Federal Reserve
System i s charged with the duty of devising and recommending plans 'for
the purchase, sale and distribution of the open market purchases of the
Federal reserve banks' in accordance with the principles outlined therein.
The reference to sales i s intended to relate to sales which may be made
from time to time by and between Federal reserve banks, of bankers' and
trade b i l l s , but that with respect t o Government securities i t i s intended




5
to refer also to resale of them to the market or elsewhere upon occasion.
"The reference to purchase is understood to relate to the
collective or individual purchase by reserve banks of both bills and
securities and the distribution referred to is understood as intended
likewise to apply both the bills and securities.
"In respect to the System's attitude toward open market operations in bills, it has been recognized repeatedly at conferences of
Governors that the stabilization and support of the bill market at rates
closely related to the rates established by the market itself is a responsibility of the System and not of individual Federal reserve banks,
and it is to be hoped that the operations carried on under the auspices
of the new Committee will provide for a more uniform practice in that
regard.
"When occasion requires that support be rendered to the bill
market, it may be impracticable for every bank under all circumstances to
be a continuous participator in the purchase of bills, and therefore a
way must be devised that will permit some of the banks to participate
regularly in purchases when their loanable funds are not seasonably
employed in serving the requirements of their member banks, but will relieve them from such participation when their local demands are heavy;
at such times their proportionate participation should be assumed by the
other banks and appropriate adjustments made. It is suggested that to
accomplish this ratios of participation in general purchases in the principal markets be worked out so as to make an equitable distribution among
all twelve banks at times when the reserves of all permit, and that appropriate ratios be worked out that would be applicable to the purchases




6
at such times as there are a smaller number of participants. The base for
these ratios is a matter for consideration and mutual agreement. Inasmuch
as the development of local markets by the regional bank is incumbent
upon each bank, its local purchases should not be discontinued but should
operate to reduce its allotment from the general purchases made elsewhere,
and it is suggested that this might be accomplished by each bank regularly
advising the Committee of its local purchases, as has recently been the
practice in transactions in Government securities.
"With respect to the shorter Government issues which freely circulate in the discount market, the position may be somewhat different
They are in essence short-term investment securities which, in the case of
tax certificates and notes, are equally self-liquidating• Their market
value perhaps fluctuates more in accordance with the price of money and
when their yield, plus tax exemption, is considered, it is found that
their relative yeild[yield]more closely approximates the price of time money
than call money. Therefore the rates at which such issues should be
bought for investment by Federal reserve banks should reflect (l) the
general credit situation, (2) the present and prospective price for money
and (3) their current status in the market. The rate at which temporary
advances should be made to dealers on such securities should be more
closely related to their yield and money rates than would be the case in
advances on bills.
"The effect of collective purchases and sales of securities by
the reserve banks is of great importance in its bearing on the general
credit situation. It should be remembered that the injection of reserve
bank funds into the money market acts as a stimulant to it and the resale
of such securities has the reverse effect.




-7"Advances to dealers under sales contracts, of course, are not
allocated but the volume of such advances held at each regional bank may
well be taken into consideration in effecting the equitable distribution
of a l l b i l l s purchased and reported in the same way as local purchases.
Adjustments in the allotment of general purchases can then be made just
as i f they had been locally purchased outright. I t is believed that
when ratios are once established the adjustments will be neither difficult
nor cumbersome."
Sales of Securities during 1923.
At a meeting of the Committee on May 23, 1923, as a r e s u l t of the
discussion and the general feeling that an ease in money had recently
occurred, occasioned partly by an increase in imports of gold and partly
by lessened demand for credit, i t was felt that the time was opportune to
dispose of a moderate amount of securities held by the System (not in the
Open Market Investment account).

I t was voted to authorize and direct

the Chairman to undertake to arrange with the twelve Federal Reserve banks
for the sale of

$50,000,000 of securities on a pro rata basis at as early

a date as practicable.

During the following month, the System disposed

of not only the $50,000,000 of securities referred t o , but of an additional
$30,000,000 as well.
Covering the period from the date of the organization of the
Open Market Investment Committee (April 1, 1923) to the time of the
Governors' Conference held in Washington on November 12, 1923, transactions in Government securities by the Federal reserve banks affecting
their own investment accounts resulted in a reduction of their holdings
of $l48,000,000 from the t o t a l holdings of $222,000,000 (exclusive of
sales contracts), while holdings of bankers acceptances reflected a




8
reduction during the period of $89,000,000 from a total of something over
$261,000,000.
Creation of Open Market Investment Account, December 1923.
At a meeting of the Committee held on December 3, 1923, the
Committee reported to the Federal Reserve Board that in its opinion it
was expedient at that time to give the Reserve banks permission to assume
a position toward the money market by the purchase of a suitable volume
of Government securities of short time maturities, provided such purchases
could be made without disturbing the conditions of the money market and
of the market for Government securities. The Board declared itself in
favor of the purchase of a limited volume of short term Government
securities, reserving to itself the right to discontinue purchases and
to require the sale of any of the securities purchased at any time it
might deem such action to be expedient. This authority constituted the
first step toward the creation of a System open market portfolio.
The minutes of the meeting of the Committee held on December 3,
1923, show that it was the understanding of the Committee that the
Chairman would ask for the views of the Federal Reserve Board and of the
participating Reserve banks as to further purchases after a total of
$100,000,000 had been acquired. At the beginning of the year 1924, the
Open Market Investment Account stood at approximately $13,000,000, and
at the end of January amounted to something over $51,000,000.
Developments during 1924
Meeting of January 14, 1924.
Another meeting of the Committee was held at the Federal Reserve
Bank of New York on January 14, 1924 At this meeting, two members of




-9the Federal Reserve Board (Governor Crissinger and Mr. Miller) were
present. Data was presented to the meeting with respect to the investment holdings of the System, the status of the Special Investment Account, which then amounted to about $35,000,000, and the state of the
market for short term Government securities.
New York Bank memorandum on credit conditions. There was also
read to the Committee the following memorandum addressed to the Chairman
of the Committee by Mr. Burgess of the New York bank, with reference to
basic conditions in the money markets and suggestions for open market program:
"l. Basic Conditions. While money is now extraordinarily easy
and many of the conditions are present for a period of inflation and speculation, it does not seem to me that such a period is yet upon us. In the
field of business and commodity prices there is no evidence whatever of
inflation or speculation. Commodity prices are hovering at the low
points reached in the past month or two. Business is continuing to recede in volume rather than increase. The employment figures for December
showed a decrease, as did also the production of steel, carloadings and
a number of other indexes. The flood of return of currency and the
reflect reduced business activity and continued caution in operations.
In the stock market alone is there evidence of an expansion and there we
have very far from a runaway market, in spite of the pronounced efforts
of many speculators to create a bull market. While stock prices are comparatively high, the street loan accounts are only moderately so, particularly if allowance is made for a sseasonalincrease at the beginning
of the year. It is my belief, therefore, that while the situation
clearly contains a threat of serious inflation, the time has not yet come




-10to sell securities, particularly in view of the limited amounts now held,
but that we should rather continue to acquire more as far as we can do
so, without making easier a market already very easy.
"

2.

The Program. It seems to me wise to continue buying cer-

tificates and notes carefully as they are offered and as far as it can
be done without affecting the market. The best opportunity for purchasing
would appear to be in the latter part of February and early March, when
spring needs of business begin to be felt and when there is ordinarily
some tightening in money rates, but some small quantities might be purchased before that time.
"3. Purchased Bills. It seems clear that some arrangements
should be made by which the $300,000,000 of bills held by the system
should be subject to somewhat the same control as our holdings of
certificates and notes, and that in general the policy should be followed
of maintaining the bill portfolios at present, but letting them diminish
as they mature at times when certificates were being sold. In order to
accomplish this end it is clearly necessary to secure some understanding
between the reserve banks.
"4. Earning Assets. If the present movement toward reduction
of the earning assets of the system continues, it is clear that many of
the banks will be flat and unable to earn expenses. This makes more
difficult an agreement as to purchased bills and raises the question as to
a common policy in the whole matter of earnings. Of course, if a business
boom should begin this difficulty would hardly arise."
Action of Committee. Following a general discussion as to the
existing temporary ease in money and the importance of gradually moving
forward in acquiring a moderate portfolio of short term Government




-11securities, the Committee's minutes of the meeting state that "all present
were in agreement that in view of existing conditions in the money market
this was a time for extreme caution and that for the moment we should
adopt a waiting policy rather than to change our buying prices (thereby
affecting yields) and follow the market downward." A motion was adopted
that buying prices for the purchase of short term Government securities be
not advanced above those already authorized and that the Committee be
authorized to purchase prior to its next meeting not exceeding $15,000,000
of Treasury notes maturing December l5, 1925.
Meetings in February 1924 Purchases Authorized.
At a meeting of the Committee held in Washington on February 8,
1924, at which the principal subject of discussion was the increased
price of Government securities, one of the actions of the Committee was
that the prices at which the Committee was authorized to purchase
Government securities be revised so as to permit of increased purchases
in moderate volume, say up to the amount of $100,000,000 previously
agreed upon.
At the same meeting, the question was raised as to whether the
program of the Committee should be determined solely "with regard to
credit policy or whether it should be influenced by the desire of some of
the banks to increase their investments in order that their earnings
might at all times be large enough to pay their expenses and dividends
without going into surplus. The Committee recognized that there was a
division of opinion among the banks on this question and it was suggested
that it would be desirable for members of the Committee, together with
representatives of the Federal Reserve Board, to meet periodically with
the boards of directors of the different Federal Reserve banks represented




-12on the Committee in order to create a better understanding by discussing
with the different boards of directors the various transactions of the
Committee.
On February 25, 1924 the Open Market Investment Account stood
at about $85,000,000, and on that date a meeting of the Committee was
held in Washington at which a motion was made and carried that the
Chairman be authorized to submit t o a l l participating banks the Committee' s recommendation that further purchases not exceeding $100,000,000
be made after the first $100,000,000 purchase had been completed.
(Secretary's note: I do not find anything in the
minutes of that meeting of the Open Market Investment Committee nor in the minutes of the Board to
show that the question of authorizing an increase in
the account to $200,000,000 was approved by the Federal Reserve Board, although in a l e t t e r which the
Chairman of the Committee addressed to the Governors
of the other Federal Reserve banks, the following
statement appears: "It was felt that in order to
carry out the purpose of the account, i t would be
necessary t o increase purchases at a somewhat more
rapid rate than was possible under the existing
limitations, and the committee, therefore, took the
action which i s expressed i n . . . .the minutes of
that meeting. All of t h i s was submitted to the
Federal Reserve Board, and we understand was informally
approved.")
Meeting of April 22, 1924.
Action of Committee At a meeting of the Committee held on
April 22, 1924, the Chairman of the Committee stated that in accordance with
the authority given at the meeting on February 25, 1924, purchases for the
Special Investment Account had almost reached the $200,000,000 mark, and
asked the views of the Committee and others present with regard t o further
purchases

The Committee voted that additional purchases in the Special

Investment - Account for the Federal Reserve System be authorized up t o
an amount not exceeding in the aggregate $250,000,000.




-13At this meeting, Mr. Winston, Undersecretary of the Treasury,
brought up for discussion problems raised by Treasury operations on
March l5, 1924, and their effect on the money market. Various means were
discussed for avoiding disturbance of the money market as a result of
Treasury operations at times when discounts at Reserve banks are small and
the suggestion was advanced that Federal Reserve banks might at such times
temporarily sell short Governments to member banks to an amount that
would equalize their excess reserves during the few days pending the collection of tax checks. No definite decision, however, was reached.
Memorandum on credit conditions. The report of the Secretary
of the Open Market Committee submitted at the April 22 meeting, has
attached to it a memorandum entitled "Credit Conditions and the Open
Market Program," which reads as follows:
"The Credit Situation
"Since the meeting of the Open Market Investment Committee in
February price and credit inflation has become much less probable for the
immediate future. Practically all of the available indexes for March
indicated a considerable decrease in the volume of production and business
transactions. There is evidence that production has been running somewhat
ahead of consumption and that there are considerable stocks of manufactured
goods on hand. Commodity prices have been working slightly lower. The
prospect for the future, therefore, appears to be for somewhat less active
industry and great caution in business enterprise. The stock market has
weakened and become inactive. While there has been no marked reduction in
bank loans, money rates have become slightly

easier....

"We have a situation where easier money is likely to help rather
than hinder a normal rate of business activity. There therefore appears




-14to be in the business situation no impediment to carrying through a program
of building up a portfolio by the Federal Reserve Banks.
"Future Money Rates
"The usual seasonal tendency of money rates would lead us to
anticipate moderately stable rates until about the middle of May, followed
by some easing until early in July, when the fall seasonal demand will begin. In addition to the seasonal tendency a continuation of gold imports
at the rate of about one million dollars a day, and quiet business are factors
making for easier rates in May and June.
"The Buying Program
"In view of these conditions it seems probable that buying can be
carried on safely during the next two or three months, but at progressively
lower rates. In order not to drive the market down rapidly it will be
necessary to buy slowly and cautiously. The yields on Government securities
for the coming three weeks are apt to be more favorable than in the latter
half of May and in June.
"Probable Results of Buying Program
"It is well to note that even a gradual program of purchases will
tend to ease rates somewhat further. It also seems probable that with or
without a buying program the credit situation may lead to lower discount
rates at some of the Federal Reserve Banks, This in turn would result in
lower market rates and a necessarily lower schedule of purchasing rates.
It seems probable also that, as buying is carried further, holdings of
United States securities will become large enough to make it apparent in
the published statements that such buying has been taking place. This means
that public discussion of the program and its effect on money rates, etc.,




-15will have to be reckoned with. These do not appear to us as reasons which
should stand in the way of carrying on the buying program, but they are
results which should be taken account of."
(Secretary's notes Two members of the Board were
present at the meeting of the Open Market Investment
Committee held on April 22, 1924, but the minutes of
the Board do not show any discussion of the proposals
of the Committee nor of approval having been given to
increasing the account as the Committee recommended.)
Meeting of May 29, 1924
The next meeting of the Open Market Investment Committee was held
in Washington on May 29, 1924 At this time, the Open Market Investment
Account stood at $258,000,000
New York Bank memorandum on credit conditions. Attached to the
report of the Secretary of the Committee, which was submitted at this meeting, was a memorandum from Doctor Burgess to Governor Strong, reading as
follows:
"The tendencies in business and credit conditions are in the
same general direction as at the time of the last meeting of the Open
Market Committee in April, but more definitely marked than at that time.
There is a decline in production and in wholesale trade, although distribution to the consumer continues in fairly heavy volume. Commodity prices
and stock prices are weak. Reflecting these movements, member bank commercial loans have begun to decline somewhat and their investments to
increase. Gold imports have continued heavy, amounting to 45 million in
April, and money has grown progressively easier.
"As far as the business and credit situation goes there appears
to be no immediate danger of inflation or uncontrolled speculative activity.
Easier money is likely to be a benefit rather than a detriment to sound
business activity. In so far as slightly easier money is likely to result




-16from further purchases of securities by the Reserve Banks, a program of
further purchases would be desirable. Moreover the continued inflow
of gold at a higher rate than last year emphasizes the importance of the
buying program.
"In view of the usual seasonal influences it would seem probable
that purchases can be made more easily in a few weeks, in late June and
early July, when business begins to prepare for the autumn trade, than
at the present. But the experience of the past few months would appear
to indicate that some purchases might be made before that time in a
moderate amount without unwholesome effect on the market for government
securities and the money market generally,
"It is perhaps worthy of note that the purchase of securities
by the Federal Reserve Banks has not evoked any adverse criticism, although the amounts have now become large enough so that the purchases have
been commented upon from time to time in the newspapers."
Action of Committee. At the meeting on May 29, 1924, the Chairman of the Committee stated that in view of present and prospective credit
conditions in New York, the directors of the Federal Reserve Bank of New
York felt strongly the necessity for being in a position, either by the
acquisition of a portfolio consisting of assets under their sole control
or by the use through the Committee of the securities in the Special
Investment Account, to exercise a stabilizing influence on the money
market during periods of heavy Treasury transactions and to counteract by
the sale of securities, if and when such action should be warranted, any
undesirable effects caused by abnormal ease of money, growing out of
Treasury operations, when the market was already under the influence of
heavy gold imports. Discussion was also had at the meeting of the question




-17of increasing the amount of securities in the Special Investment Account
and the question of the use of investments held in the System Special Investment Account to neutralize abnormal money conditions in New York on
quarterly tax periods.
The Committee voted to recommend to the participating banks an
increase in the holdings of Government securities for Special Investment
Account of another $150,000,000 such purchases to be made at the discretion of the Committee at current market prices, and also that the Chairman be authorized to make temporary sales of Government securities from
the Special Investment Account during quarterly tax periods in such
amounts as may be deemed advisable under a suitable plan for their repurchase for the Special Investment Account.
At a meeting of the Board on June 4, 1924, there was submitted
a letter from the Chairman of the Open Market Investment Committee, reporting the Committee's action as taken at its meeting on May 29, and on
motion the Board voted that the Chairman of the Open Market Investment Committee be advised that the action reported in his letter is in accordance
with the understanding of the Board, making it clear that the banks are
authorized to purchase through the Committee up to $400,000,000 of short
term Government obligations, and that the Board should be advised when
the purchases have been completed.
Meeting of July 16, 1924
The next meeting of the Open Market Investment Committee was held
in Boston on July 16, 1924, and was attended by Doctor Miller. At that
meeting, the Chairman submitted a memorandum pertaining to the work of
the Committee with especial reference to a program for the future.




(Secretary's note: A copy of the memorandum referred
to does not appear to be in the Board's files,,)

-18At the July 16 meeting, it was voted to authorize the Chairman
of the Committee to sell and repurchase securities held in the Special
Investment Account on the next quarterly tax period, in September, 1924,
in the same manner as such sales and repurchases were made through the New
York and Chicago banks during the June 1924 tax period.
(Secretary's note: This was apparently the first sale of
securities out of the Special Investment Account to offset
the effect of the quarterly Treasury operations.)
At the July 16 meeting, the Committee also discussed its future
policy with respect to increasing the volume of short term government
securities in the Special Investment Account, and the Chairman's view,
which was concurred in by those present, was that the situation in the
New York money market was then such that it would be more advantageous
to have purchases made as largely as possible in Federal Reserve cities
other than New York for the reason that the New York banks were discounting practically nothing and purchases at that time in New York would have
a tendency to increase the volume of loanable funds in New York, whereas
purchases made in other districts would have a tendency to increase the
volume of loanable funds in other sections of the country.
Following the discussion, it was voted by the Committee that the
limit on purchases of Government securities for the System Account be
raised from $400,000,000 to a maximum of $500,000,000, such purchases to
be made at the discretion of the Chairman as to prices and to be so conducted as to avoid or minimize changes in the credit situation or the market
quotations for the securities. The Chairman was also authorized to carry
out the suggested plan of having purchases made in other districts than
New York. The Committee, by formal vote, also expressed the view that it
would be in favor of increasing still further the limit of $£00,000,000 if




-19conditions remain substantially unchanged and to request that the Federal
Reserve Board give the proposal its consideration and furnish the Committee with an expression of its views.
At a meeting of the Federal Reserve Board held on July 29, 1924,
at which the Chairman of the Open Market Investment Committee was present,
formal consideration was given to the actions taken by the Open Market
Investment Committee at its meeting on July l6. The Board approved of
the Committee increasing the account from $400,000,000 to <$500,000,000,
with the understanding that in carrying through this program of purchases
all effort be made to avoid disturbance to the money market. No action
was taken with regard to the suggestion of the Committee that the account
be increased to $600,000,000,
Meeting of October 24, 1924
The Open Market Committee next met at the Federal Reserve Bank
of Chicago on October 24, 1924. This meeting was attended by the Governor
of the Federal Reserve Board. At that time, the Open Market Investment
Account stood at about $500,000,000, purchases up to that amount having
been completed early in September, and the Committee's operations since
having involved only temporary purchases and sales with no net change in
the amount of Government securities held.
Memorandum on credit conditions. Attached to the report of the
Secretary, which was submitted at the Chicago meeting, was a memorandum on
credit and market conditions which reads as follows:
"When the Open Market Committee began its purchases of government securities in December 1923, the holdings of such securities by the
System had been reduced to a point where the reserve banks were practically
out of the market. At the present time the banks hold a portfolio of such




-20securities sufficient in size to constitute a weapon of considerable power
in dealing with the money market.
"Last December there appeared to be a real possibility of price
inflation and undue speculative activity based upon the continued flow of
gold.

At the present time this threat, while it has not been removed,

appears to be much less dangerous because of the fact that the volume of
gold imports has been greatly reduced, and other influences such as growing business activity and prospective foreign loans appear likely to give
employment to surplus funds. There is clearly no such occasion for open
market purchases of government securities as there was a year ago.
"In the absence of any such major considerations as were present
a year ago other factors must be considered in determining the open market
program for the future.
"The easy money of the past five or six months has been a favorable influence in a number of particulars.

It has occurred at a time when

business depression was becoming pronounced, and was a factor in lessening
the extent of the depression and terminating it early.

It also seems clear

that easy money during these months has been an influence in checking the
gold movement to this country, stimulating the movement of funds from this
country to London and aiding a recovery in sterling.

Easy money has also

created a favorable market for the flotation of important foreign loans.
These are all advantages to be conserved if possible during the coming few
months and it may be that they can only be conserved by some further purchases
of securities by the reserve banks.
"There are a number of factors making for firmer money for the
balance of the calendar year.

The volume of gold imports appears to be

definitely reduced and there is even some prospect of gold exports, A




-21number of foreign loans are in contemplation which may lead to direct gold
exports, or the equivalent in the locking up of funds in New York. It
seems probable, for example, that the proceeds of the recent $90,000,000
Canadian Government loan

will be locked up in gold as a basis for currency

issues in Canada, The proceeds of the $100,000,000 loan to Germany may be
similarly locked up, or may be exported.

We have then the possibility of

the loss of $190,000,000 of gold, equivalent in its effect on the market
to the export of that much gold. More active business is likely to absorb
more funds.
"As against these tendencies toward firmer money we have still
the prospect of some continuing gold imports, although in reduced volume,
but, more important, a prospect of some flow of funds from the interior
as a result of the gradual spread through the country of the effects of
the gold import of the past months, and the liquidation of frozen loans as
a result of higher prices for farm products.
"We are dealing at present with a nicely balanced money market.
This is the natural result when member banks are largely out of debt at
the reserve banks and every change in the money supply is directly reflected
in rates.

In this situation it would appear unwise to carry through any

continuous program of buying.

It would rather seem wise for the Committee

to have leeway to meet situations as they may arise. The changes which
may result from foreign issues, gold imports or transfers of funds to or
from the west, may be so abrupt in character as to require rapid action.
The committee would be in the most favorable position if it were free to
expand or diminish the System's portfolio of securities by approximately
$100,000,000 as occasion might require. This would enable the committee
to meet any emergency situation as it might arise while at the same time




-22the boards of directors of the various Federal reserve banks and the
Federal Reserve Board could be consulted in case any program of purchases
or sales beyond $100,000,000 appeared to be desirable."
Action of Committee. At the Chicago meeting a resolution was
passed recommending that the Chairman of the Committee should be given
authority to buy or s e l l , after conferring with the other members of the
Committee, up to $100,000,000 of Government securities in order to meet
any situation in the money market which might develop. The Board' s f i l e s
show that a copy of the minutes of t h i s meeting was received on October
31, 1924 but there does not appear t o be any reference made thereto in the
minutes of the Board prior to November 10, 1925. At the meeting on that
date Mr. Cunningham called attention to the entry in the minutes of the
meeting of the Committee to the effect that "a resolution was passed
recommending that the Chairman should be given authority to buy or s e l l ,
after conferring with the other members of the Committee, up t o $100,000,000
of government securities in order to meet any situation in the money market
which might develop."

Following the discussion which ensued as to the

intent and purpose of t h i s resolution, the Secretary of the was instructed
to confer with the Chairman of the Open Market Investment Committee and
report the present status of the resolution at the next meeting of the
Board.
Meetings of November 12, 1924
(Secretary's notes The next meeting of the Board
was held on November 12, 1924, at which a l l members
of the Open Market Committee were present and the
question of the purpose and intent of the resolution
referred to was made the subject of discussion.)
Recommendations approved by Board. At the meeting on November 12,
the following recommendations were submitted to and approved by the




-23Federal Reserve Boards
"1. That the committee continue to make such temporary sales
and purchases from the special account as are necessary to stabilize
money conditions at tax periods.
"2. That any purchases of government securities or acceptances
be distributed as recently on the basis of estimates of deficiencies of
earnings of the twelve reserve banks.
"3. That the committee be authorized by the Governors Conference
to commence as soon as practicable to exchange certificates maturing after
December 31, 1925 for shorter term certificates.
"4. That action on the recommendation of the Advisory Council
relative to the purchase of foreign bills be deferred until such time as
we may be in a position to know more about the development of conditions
relating to foreign exchanges; and that the System make no purchases of
such bills until that time.
"5. That the committee be given authority
"(a) to replace the $65,000,000 of December maturities to such
extent as may be advisable in consideration of market conditions at that
time; and
"(b) to offset the export or earmarking of gold for foreign
account to such extent as may be advisable in consideration of market conditions, but not to exceed $100,000,000,
"6. That the committee be authorized to sell investments in
the special account in order to reduce that account to the amount of
$500,000,000, as rapidly as money conditions make it practicable."
Report to Governors' Conference on operations of Committee
since organization




The Chairman of the Open Market Investment Committee

24reported

t o the Governors' Conference t h e effect of the Open Market I n v e s t -

ment Committee's operations since i t s organization and the effect thereof
on money r a t e s , e t c . , the f u l l t e x t of the memorandum containing the
Chairman's report follows:
"TO THE JOINT CONFERENCE NOVEMBER 1924
"A l i t t l e l e s s than a year ago, in December 1923, the reserve
banks undertook t o acquire a p o r t f o l i o of investment s e c u r i t i e s i n order
t h a t they might be prepared t o meet any price i n f l a t i o n or undue
speculative a c t i v i t y based upon the huge imports of gold from abroad, which
at t h a t time were amounting t o about $1,000,000 a day.

The System was

then threatened by a s i t u a t i o n i n which i t would be powerless t o exert
any influence by advance of discount r a t e s were i t s loans t o members
l a r g e l y repaid, as seemed l i k e l y .
"The F i r s t $250,000,000
"When your committee made its report to the Governors' Conference
in May of this year, there had been purchased Government securities to
the amount of nearly $250,000,000. While these purchases had been made
on a progressively easier money market, the evidence seems clear that the
purchases had little influence on the money markets outside of the market
for Government securities. The operation did not result in any net increase
in the earning assets of the reserve banks, which in fact declined approximately $300,000,000 during the period.

Increases in holdings of U. S.

securities were more than offset by decreases in bill holdings and discounts and advances. The operation really resulted in an exchange of one
type of earning asset for another type which would be under the control of
the reserve banks in the event of a credit emergency, rather than subject to
repayment at the will of the borrowing members.




-25-

"The Second $250,000,000
"Since the Governors' Conference in May, there has been purchased a further $250,000,000 of Government securities bringing the portfolio to a round $500,000,000. This amount was reached early in September.
The changes in the money markets accompanying the purchase of this second
$250,000,000

were more marked than during the period of the first purchase,,
"Since early in May, money rates have moved to substantially

lower levels. . . .
"Aside from changes in money rates, evidence of the changes within
the financial structure are found in changes in bank loans and deposits.
Between December 1923 and the end of April 1924, there was only a moderate
increase in bank deposits, but from the end of April to the end of September
deposits of New York City reporting member banks increased $738,000,000
and those of reporting banks outside of New York City increased $829,000,000.
These increases appear t o correspond with similar increases in the middle
of 1922 when the reserve banks were carrying on a somewhat similar buying
program.
"The precise responsibility of the open market program for these
money conditions i s very difficult t o determine.

Until the end of July,

when $450,000,000 of the special accounts had been acquired, purchases of
securities were more than offset in the t o t a l earning assets of the reserve
banks by declines in discounts and advances and b i l l s held.

I t was only

during the purchase of the l a s t $50,000,000, between August 1 and September
24, that there was a net increase in t o t a l earning assets, and t h i s increase,
amounting to $100,000,000 may be ascribed largely to an increase of
$67,000,000 in holdings of acceptances brought to the reserve banks partly
because of conditions within the b i l l market, and partly because of firmer




-26call money from time to time.
"It is important to note that our purchases did not, except perhaps at the very end of the buying program, as stated, add directly to the
volume of credit as many have supposed. But they rather changed the form of
reserve bank credit in the market from discounts to investments. The indirect result of relieving member banks from their indebtedness was to allow
incoming gold and returning currency to affect the market directly. We
simply removed for a time the buffer of rediscounts which the reserve banks
have held between gold imports and the money market. The time was coming
when the buffer of rediscounts would have been eaten away in natural course
by the incoming gold and by a longer period of loan liquidation. We have
simply hastened the natural effect of gold imports. The results have, we
believe, justified the program.

First, we have secured an adequate weapon

against any gold inflation. Second, this has been done without business disturbance or price inflation but rather with considerable benefit to business.
Third, the program has aided the readjustment of world finance. The effects
of the easier money conditions of the summer and fall on American
business and on world finance may well be reviewed with some care.
"Effects of Easy Money
"1. On Business - It is generally agreed by economists that the
swings of the business cycle may be lessened by making credit readily
available when business has begun its downward swing or is in a state of
depression and conversely by making credit less easily available when
business is booming and speculation is becoming rife.

The program of the

Open Market Committee in contributing toward easier money during the past
nine months is directly in keeping with this economic principle. We have
had in these nine months, and particularly in the summer of 1924, a




-27considerable business recession. The decline in factory employment for
example, amounted to more than 15 per cent, production in basic industries
declined 26 per cent and our index of the volume of trade 15 per cent from
the high points of the spring of 1923. A genuine recovery appears, however,
to have begun and. the bottom of the depression appears to have been passed
without serious unemployment, business failures or the like.

It is

entirely logical to believe that easy money has been a factor in shortening the duration of depression and loan liquidation and lightening its
effects. Further, the easy money has made possible a large amount of
domestic financing of which business was much in need,, There has been
no other period since some time before the outbreak of the World War,
when refunding issues could be sold in large volume on advantageous
terms.

The financing of the last few months has straightened out the

financial position of many concerns, furnished capital for improvement
and construction, and in many ways facilitated needed capital financing.
"2. On the International Balance of Payments - Early in the
summer, interest rates for short term money in New York fell to levels
below the current rates in London and this difference has been maintained.
We have knowledge that there has been concurrently a considerable movement of American funds to London and gold imports have gradually diminished
until in September, the excess of imports over exports was negligible.
While this change in the movement of funds between New York and London
may in part be ascribed to gradual financial recovery abroad, and
increased demand from India for gold, it is certainly due in some part,
to the easy money conditions here. To the extent that this is true,
easy money conditions have acted as a kind of inoculation against gold
imports.




Easy money, caused in part by artificial means, has been

-28operating to prevent further gold imports and the dangerously easy money
which they might well induce. Thus, to a certain extent, the open market
program which was designed as a weapon against the inflation which might
result from gold imports has already proved itself an effective instrument. Likewise conditions have been made more favorable to the attempts
of European countries to stabilize their exchanges.
"3. On the flotation of foreign loans - Easy money during the
past summer has undoubtedly been an aid to the flotation of large issues
of foreign securities in this market. In the ten months through October
foreign issues in New York have totaled a billion dollars (including refunding issues) and have far exceeded those of any previous year.
"We need no argument to recognise that these issues have been
an important instrument in world recover. The German loan is the keystone
of the operation of the Dawes Plan. Many of the other loans have given
foreign nations that outside aid which enabled them to start on the
process of financial recovery and others are now pending of important
amounts. Easy money here during the past summer has been a world benefit.
Moreover, these loans always result eventually in an increase in our
export trade.
"4. On Member Bank Earnings - The money conditions of the
past six months have reduced for a time the rates of return to banks on
some of their loans and short term security holdings. This should not
necessarily result in any considerable reduction in bank earnings. The



credit and business situation has been such that there are comparatively

-29American banking is clearly not a factor which should receive consideration in determining Federal reserve credit policy.

Our credit policy

should be determined in the interest of the whole of the country's
business.

It is entirely fitting and proper that at times our policy

should run counter to the immediate interest of some banks. This would
seldom be true if the banks were geared up to modify their interest rates
and their lending and investment policy to meet changing credit conditions.
It is interesting that the Chicago banks have just taken action in this
direction and the Philadelphia banks propose to do so.
"Future Program
"The first results at which the open market program of purchases
aimed have been achieved in that we now possess a considerable portfolio
of Government securities available against any emergency. Moreover, the
danger of inflation now appears to be more remote than it did a year ago,
because of the diminution in gold imports.

It does, however, appear to

be desirable that relatively easy money should maintain for a further
period. While business has begun its recovery it is still below normal
and requires fostering.

It continues to be desirable that our rates should

be under the London market in order to check the flow of gold and to
assist in the recovery of the exchanges. It still appears to be desirable
to encourage conservative foreign borrowing in this market.

In order to

achieve these ends, however, it is not necessary that money should be any
easier than it is now or, in fact, that the present exceedingly low level
of rates should maintain.

It is sufficient that we should avoid any

marked tightness of money.
"There are a number of tendencies towards firmer money which must
be taken account of. As business increases in volume it will require more




-30funds.

It is also probable that certain of the foreign loans being made

in this market will result in the earmarking of gold or other removal of
reserve money, i.e., gold, from the market.

The suggested retirement of

some amount of national bank notes would have a similar tightening influence.
"In the light of this probable development it would seem wise
for the committee to have leeway to meet any emergency situation.

A number

of the possible causes of tight money are such as would produce abrupt
changes in the money markets. The committee would be in the most favorable
position if it were free to expand or diminish the System's portfolio of
securities by approximately §100,000,000 as occasion might arise. This
would enable the committee to meet any changes in the situation, while
at the same time the Federal Reserve Board and the boards of directors of
the various Federal reserve banks could be consulted in case of any program of purchases or sales beyond $100,000,000 appeared to be desirable.
"Public Criticism
"At the meeting of the American Bankers' Association, in
Chicago, the following resolution was adopted:
"'The Federal reserve banks have been driven, in order to earn
their expenses and dividend charges in these more normal times, to compete for business with their own member banks in such fashion that there
is danger that in the future the operations of the reserve banks may tend
to accentuate the swings of the financial pendulum, rather than to keep
the swings from going too far in either direction.
"'We earnestly recommend that a careful investigation be made by
those who are properly qualified to investigate whether it might not be
wise to limit the Federal reserve banks to their primary functions as
banks of issue and rediscount.'




-31"This resolution gives evidence of misunderstanding on the
part of many bankers of the nature and purpose of the open market program.
While the resolution of the Bankers Association is restrained in its
terms and in its form, it seems clear that the open market procedure of the
system may be criticised in the future. It would appear to be the course
of wisdom to meet this criticism before rather than after it has become
acute and widespread.

The conference might well consider whether a care-

ful article in the Federal Reserve Bulletin might not be wise, in the
same general form as the treatment in last year's annual report, but
giving somewhat more definitely the facts and results of the program, and
such as could be reprinted in the Monthly Review of the reserve banks.
"Detailed Procedure of Committee
"In the work of the committee during the past six months a
number of experiments have been tried and precedents established. At
the June 15 tax period the Federal reserve banks of Chicago and New York
made temporary sales of securities from the Special Investment Account
to offset the ease in the market resulting from a temporary excess of
government disbursements over receipts. The experience at the March 15
tax date, when money had been abnormally easy for some days, had given
evidence that at periods when member banks are out of debt at the
reserve banks government operations are likely to unsettle the money
markets unless some special offsetting operations are carried through.
The temporary sale of certificates at the June 15 period appeared to
meet the situation successfully.

At the September 15 tax period the

same type of operation was carried through in Chicago, but not at New
York.

This transaction is similar to what frequently takes place at

the Bank of England at tax periods, and is clearly an operation which
will be found useful in the future. At the Chicago meeting of the open




-32market committee on October 24 it was recommended that appropriate action
of this character be taken on the December 15 tax date.
"0n June 1 the committee began apportioning purchases of
government securities and bankers acceptances among the various reserve
banks on the basis of the estimated deficiencies in their earnings.
This seemed to the committee the best equitable method of distribution,
rather than based upon capital or other relative proportions and it
appears to have met with the favor of the reserve banks.
The committee has discussed, but has not yet taken definite
action, on a number of important problems which must be settled in the
near future.

On December 15, $65,000,000 certificates held in the

special investment account mature, and a decision should be reached as to
whether they should be replaced or the account automatically diminished
by their maturity.

The decision in this regard should be influenced by

the probable credit developments of the next few weeks. At the present
time there do not appear to be any evidences of inflation or undue
speculation which would make it particularly desirable to withdraw
$65,000,000 from the money market. On the contrary there appear to be
a number of influences making for firmer money., and thus indicating the
desirability of replacing these certificates with other securities of the
new issue or some issue now outstanding.
Another problem which the committee has discussed but upon
which no final decision has been reached concerns the maturity of issues
now held in the Special Account. While more than $300,000,000 of the
account matures within the coming fourteen months the balance is of
considerable later maturity and hence would be affected as to price by




-33amy tightening of money. The banks have a considerable profit on these
longer maturities and it would be wise to consider whether this profit
should not be taken now and the risk of loss avoided by purchasing
shorter term issues in their place. Such a program would make the
portfolio somewhat easier to use.

In case it was desired to withdraw

funds from the market it would only be necessary to let approaching
maturities run off.
"Buying Sterling Bills
"The Open Market Committee has discussed the proposal of the
Advisory Council that the reserve banks should purchase some quantity
of sterling bills.

The committee is not, however, prepared to make any

recommendation on this point.

The subject is one which, because of its

complexity and importance, deserves consideration in a separate report
rather than attempting to deal with it at this time.
"Recommendations
"In conclusion, the committee makes the following recommendations:
"1.

That the committee be given authority to buy or sell up

to $100,000,000 of government securities in order to meet any situation
which may develop in the money market.
"2.

That an article be prepared for the Federal Reserve

Bulletin and the Reviews of the Reserve Banks, giving the facts and
results of open market operation.
"3. That the committee continue to make such temporary sales
and purchases from the special account as are necessary to stabilize
money conditions at tax periods.




-34"4. That any purchases of government securities or acceptances
be distributed as recently on the basis of estimates of deficiencies of
earnings of the twelve reserve banks.
"Matters on which the committee does not yet make a recommendation, but which should be discussed by the conference:
"l. Replacing December, 1924, certificates in the open market
portfolio when they mature.
"2. Replacing longer with shorter maturities in order to be
in a position to affect the market simply by letting maturities run off
and to void risk of loss and take present profits.
"3.

Buying Sterling Bills."

Meeting of December 19, 1924.
On December 19, 1924, the Open Market Investment Committee met
with the Federal Reserve Board in Washington.
Report of Chairman. At this meeting, the Chairman of the Committee presented a written report covering the transactions of the Committee since the last meeting reading as follows;
"The transactions of the committee since the last meeting in
Washington have been comprised mainly of two operations: (l) the sale
of March 15 certificates to facilitate the distribution of the new
Treasury 4 per cent bonds, and (2) the redemption of $65 million of
December 15 maturities.
"l. The offer of the Treasury to accept March 15 certificates
of indebtedness and Treasury notes in exchange for the new issue of
4 per cent bonds immediately resulted in a heavy demand for these issues
and the supply available in the market was soon exhausted. In order to
make available a supply of these issues it seemed desirable to sell in the




-35market the holdings in the Special Investment Account. Between December
4 and 16 sales of this issue were made to the amount of $85,050,000 and
in partial replacement there were purchased $66,746,000 of later
maturities. The difficulty in securing any amount of short-term issues
of other maturities, together with a tendency towards ease in the money
market, made it difficult and undesirable to make further replacements
immediately. As a result of this operation alone there has been a net
sale of about $18 million or a net loss to the market of that amount.
"2. Action in connection with the maturity of December 15
certificates to the amount of $6? million followed the course laid down
at the meeting of the committee on November 11. A total of $30,000,000
of these securities was redeemed by the Treasury at intervals prior to
December 15 and by this means the effect on the money market was
distributed over several weeks rather than being felt at one time.
On December 15 the balance, $35,000,000, was redeemed.
"The net result of these two operations was to reduce the
Special Investment Account from $500,000,000 to $17,000,000 on
December 16, or to take out of the money market $83,000,000. The effect
on the market of this loss has not yet been felt fully because of a very
heavy over redemption of securities in this district as against redemptions
in other districts on the 15th. There was a temporary over supply of
funds in the New York market on the l5th and the morning of the l6th of
December, accompanied by a Treasury overdraft which amounted on the night
of the 15th to $144,000,000. This oversupply of funds in the New York
market was wholly artificial and the operations of December 16 indicate
that as taxes are collected and the funds assembled at New York by transfer
from the interior the temporary gain will be completely offset and the




-36market will show a net loss as a result of the two days' operations, as
these transfers to New York are always effected by heavy drafts upon New
York balances belonging to interior banks.
"The Investment Committee has been in agreement that while
conditions were developing which probably made it desirable to take
surplus funds out of the market from time to time by the sale of small
amounts of securities from the open market account, it was, however,
not desirable to permit transactions in the account to create any sudden
or radical change in money conditions which would be abnormal or
temporary. It seems probable that in the next day or two the effects
on the money market of the reduction of $83,000,000 in the Special
Investment Account will be felt very markedly unless some action is
taken by the committee. To prevent this effect from becoming too marked,
arrangements have already been made for the purchase of $15,000,000 of
securities for delivery on December 17 and $5,000,000 for delivery on
December 18. This will bring the Special Investment Account up to
$438,000,000. It may be wise to purchase further amounts to bring the
account to at least $450,000,000 to prevent an undue tightening of
money at this time.
"In these successive steps all of the members of the Open
Market Investment Committee have been consulted by telephone, and in
additional Governors Harding and Norris and Mr. Miller of the Federal
Reserve Board were in New York on Thursday, December 12, as were also
Mr. Wills and Mr, McKay. It has thus been possible to secure directly
the opinions from all of the banks represented on the committee. Several
telegrams explaining the operations of the committee were also sent to
the governors of all the banks.




-37"As far as future policy of purchases and sales is concerned,
it is believed that the committee should be prepared for transactions
in either direction in the light of future developments in the money
markets.
"For the immediate future it is desirable to give attention
to the usual seasonal movement of funds. The figures for the past four
years indicate that between the high point of December and the low point
of January there is usually a decline of from 200 to 400 millions in
the earning assets of all Federal Reserve Banks and of 50 to l50
millions in the earning assets of the Federal Reserve Bank of New York.
Because of the general upward tendency of credit demands, we may anticipate this year the minimum, rather than the maximum easing of
money conditions between December and January.
"In the light of the present security and commodity market
situation, it would appear undesirable for this tendency toward easier
money to find the member banks largely out of debt at the Federal Reserve Banks, so that easier conditions would be reflected in too sharp
an easing of money rates. It therefore seems desirable that the Federal
Reserve Banks should hold, as we enter the new year, a sufficient buffer
of rediscounts and sales contract bills and securities to take up
automatically any slack in the money markets.
"With the present outflow of gold and large demands for currency together with increasing business activity, it is probable that
before the end of the year the needs for credit will lead to some further
resort to Reserve Bank facilities perfectly normal at this season and
will so create a buffer of rediscount and sales contract bills and
securities. This would be a desirable outcome as it would make the




-38readjustment after the first of the year automatic, without the necessity
for any open market operations through the special account. This line
of reasoning may make it desirable to maintain the open market account
at about $450,000,000 even in the face of slightly firmer money conditions."
Action of Committee. At the December 19 meeting, it was the
feeling of the Committee that from then on the account should probably
not be increased from the present amount ($436,000,000) and that from
time to time holdings should be liquidated. It was also the feeling
of the Committee that if member bank borrowing should be necessary, it
would be best in the form of discounts, and that when the seasonal return of funds takes place after January 1 the discounts would act as a
buffer along with maturing bills and sales of securities to absorb the
return flow of holiday currency, and that if then there was an excess of
funds it might be advisable to market some of the investment account.
The Committee's report at the December 19 meeting was approved
by the Federal Reserve Board, including the Committee's proposed future
action as contained in statements made by the Chairman of the Committee.

Developments during 192$
Meeting of January 9, 1925
Action of Committee. Immediately after the turn of the year
(January 9, 1925), members of the Open Market Committee met at the
Federal Reserve Bank in New York. At this meeting, following the submission by the Secretary of the Committee of his report reviewing operations since the last meeting, and a discussion by the Chairman of the
Committee's activities, as set forth in the Secretary's report, the Committee voted that it should stand ready to make such further sales of




-39securities as seem necessary from time to time in view of changing money
conditions to prevent undue ease in the market.
Report of Secretary on operations, The full text of the report
made by the Secretary of the Committee, above referred to, is on file
with the Federal Reserve Board. For the purpose of this memorandum the
following is quoted therefrom:
"Since the last meeting of the Committee on December 19 the
trend of money rates has been very much as was anticipated. Immediately
following that meeting a considerable return flow of funds took place
to the interior to fill the vacuum created by Treasury transfers to this
district. There continued to be some gold withdrawals and these influences, together with year-end readjustments, resulted in firmer
money conditions.
"Call money renewed at 5 per cent, and new loans were placed
at 5-l/2 per cent, and the earning assets of the Federal Reserve Bank
of New York increased to $410,000,000 on December 2l, largely due to
increases in rediscounts and holdings of bills under sales contract.
This increase in our earning assets created a buffer to take up some
of the slack which might develop after the first of the year.
"During the first week of the new year the return of currency
from circulation, and the return of funds from the interior led to a
rapid easing in money conditions bringing the call loan rate down to
2 per cent

on January 8. This easing took place more rapidly than

could be compensated for entirely by declines in bills discounted or
holdings of acceptances. Earning assets of the New York bank declined
from $410,000,000 on December 24 to $275,000,000 on January 7; bills
discounted being reduced by $80,000,000, while holdings of bills and




-40securities under sales contract were entirely wiped out.
"In view of these conditions the members of the Committee were
communicated with and on January 5 a decision was reached to sell
securities to the amount necessary to prevent undue ease in money conditions so far as t h i s could be done without disorganizing the market.
Accordingly $5,000,000 of securities were sold on January 5, $15,000,000
on January 6, $16,000,000 on January 7, and $5,000,000 on January 8.

In

addition $9,909,500 were sold to the Treasury, account Alien Property
Custodian, in replacement for sales of Treasury bonds of like amount t o
the market. The t o t a l holdings in the System's account were thereby r e duced from $449,035,000 on December 19 to $398,125,500 on January 8, 1925,
effecting a net reduction of $50,909,500 in this account."
* * *
"The ease in money conditions at the beginning of the year
usually continues through January.

At present our earning assets have

decreased to a point where further liquidation is limited except in the
Special Investment Account.

It is believed, therefore, that the Committee

should stand ready to make further sales, as far as it is necessary, to
prevent a period of unusually easy money conditions, during January.
In order to affect the money market most directly any sales should be
made in New York.
"It is customary for money conditions to become firmer in the
latter part of February and in March, and with an increasing volume of
business activity we may anticipate that this firming will be pronounced
this coming spring. There will therefore probably be an opportunity for
the Committee to repurchase without difficulty securities sold during
January if that seems wise. The desirability of this repurchase can be




-41determined at a later date when the trend of money and business conditions becomes clearer. It may be wise to allow the Special Investment
Account to remain diminished for some months to come and to confine transactions for the account to sales."
Meeting of February 25, 1925
The account stood at $270,000,000 on February 25, 1925, on
which date a meeting of the Open Market Committee with the Federal Reserve Board was held in Washington.
Report of Chairman. At this meeting the following written report
was submitted by the Chairman, which reviews credit conditions and changes
in the money market since the meeting of the Committee held on January 9.
In submitting the report, the Chairman stated that all members of the
Committee had approved same.
"Changes in money conditions in the past two months have
followed very much the course which was anticipated in preceding reports
of this committee. After Christmas there was the usual return of
currency to the Reserve Banks amounting in this case to approximately 300
million dollars. There was also the usual flow of funds to New York from
the interior, resulting in an increase of more than 250 million in the
street loans of out-of-town banks, compared with a decrease of about
100 million in the street loans of New York City banks. The result of
these tendencies was a rapid decline in Federal Reserve rediscounts, particularly in New York, to a point where member banks were practically
out of debt at the Reserve Banks. Money rates moved to lower levels and




on one or two days touched 2 per cent.

-42January about 150 million dollars. These sales were promptly followed
by increases in the rediscounts of member banks in New York City of between 100 and 150 million and a comparative stabilization of call loan
rates around 3-1/2 per cent. Gold exports amounting to nearly 100
million dollars during January and February and transfers to the interior
over the first of February, were further factors making for firmer rates.
"Simultaneously with firmer money conditions the buying rates
on bankers acceptances of 30 and 60 day maturities were raised from
2-3/4 and 2-7/8 to 3 per cent, thus placing all maturities up to 90 days
at 3 per cent. The open market rate for 90 day bills has risen to
3-1/8, but other market rates are substantially where they were for the
greater part of December.
"In case the flow of funds continues to New York it is believed that the committee should continue to sell securities from time
to time to prevent undue ease in money conditions, such sales to be
limited for the present to an amount to bring the Special Investment
Account down to 200 million dollars.
"We may anticipate before many weeks that the usual spring
demand for funds will make itself felt in the money market. Indeed, the
spring demand taken together with gold exports, which are still continuing heavy, and the cumulative effect of active business may possibly
lead to a rapid increase in rediscounts and a sharp upturn in money rates,
which would make an early review of the committee program necessary."




(Secretary's note: No action was taken by the Federal
Reserve Board with respect to the program considered at
the meeting of the Open Market Committee on February 25,
1925. The individual members of the Board expressed
their views, none of which, however, were contrary to
the proposed program of the Committee.)

43(Secretary' s notes On February 27, 1925, the Federal
Reserve Bank of New York increased i t s rediscount rate
from 3 to 3-1/2 per cent.)
Meeting of April 6, 1925
Action of Committee,

At a meeting of the Committee held on

April 6, 1925, the Chairman submitted the report which he proposed to
make to the conference of Governors then in session. The Committee
voted to amend and approve the report.

I t was also voted to be the

sense of the Committee that under authority now vested in i t , the
Committee should increase i t s holdings up to approximately $300,000,000,
as and whan market conditions warranty i t being the belief of the Committee that the present and prospective gold movements make t h i s increase
advisable.
Report to Governors' Conference.

The text of the report of

the Chairman to the Governors' Conference above referred to follows:
"Since the last joint conference in November the special investment account of the Federal Reserve System has been reduced from
500 million dollars to approximately 250 million.

During a period of

3-1/2 months, from early December to the middle of March, 250 million
of securities were sold in keeping with the purposes for which the
account was first established at the end of 1923.
"The f i r s t reduction in the size of the account was made in
the early part of December.

Sales at that time were in part directed

to steadying the money market and in part to facilitating the Treasury
offering of December l 5 , by making available t o the market Government
securities maturing in March which might be exchanged for the new 4
per cent issue.

The net result of the operation over December 15 was

to reduce the special account by 50 million.




-44"Early in January i t became apparent that the usual return
flow of funds to New York, simultaneous with the return of currency from
circulation, would create very easy money conditions unless funds were
absorbed from the market.

Further sales from the account were there-

fore made amounting to 150 million dollars and bringing the account
to 300 million.

Further sales of 50 million were made in February and

March, with the same end in view.

All but 31 million of the entire

sale of 250 million were made in the New York market.
"The immediate result of these sales, occurring as they did
simultaneously with gold exports, was to place New York City member
banks in debt at the Federal Reserve Bank.

As a consequence the call

loan rate promptly took and maintained a position above the discount
rate and showed an average of about 3-1/2 per cent, with irregular
movements above and below that rate, and there was no period of undue
ease as had been threatened,

Other money rates worked steadily upward

during the period; from early December t o the end of February commercial paper went from 3-1/2 per cent to 4, time money from 3-1/2 to
4-1/4, 90-day bankers b i l l s from 2-3/4 to 3-l/4.

Bill rates were in-

fluenced by successive increases in Federal Reserve buying rates on
b i l l s from 2-3/4 to 3-1/8 per cent for 90-day b i l l s .

On February 27

the Federal Reserve Bank of New York raised i t s discount rate from 3
to 3-l/2 per cent. . . .
"Following these various changes speculative activity on the
stock market became much less intense with periodic reactions, and
finally after the middle of March price averages showed rapid reductions.
It seems clear that to some extent the open market operations of the
System had a deterrent effect on the continuation of heavy speculative
activity.



-45"OPERATIONS AT TAX PERIODS
"In June of last year the committee inaugurated the policy
of making temporary sales of securities from the special investment
account to take up slack in the money market produced by the excess of
government disbursements over receipts in the early days of the tax
period. In December a review of money conditions indicated that such
sales would not be necessary since the holiday demand for funds and
prospective transfers out of the district might be expected to take up
the slack in the money market, and this proved to be the case.
"At the March tax period there was an exceptionally large
government disbursement in New York and a large Treasury overdraft outstanding for about a week. A reduction in member bank indebtedness took
up much of the resulting slack in funds, but in addition temporary sales
of 20 million from the special account were made in New York City and
4 million in Chicago. Slack funds were not entirely taken up by the
liquidation of member bank borrowings or by these temporary sales,
but the ease in money was not serious.
"The experience in recent tax periods appears to indicate the
desirability of temporary sales to the market at any tax period when
redemptions are large and member banks are not borrowing heavily at the
Reserve Banks. December tax periods may be an exception, when demands
for Christmas currency offset the tendency towards easy money. The results of such operations in the future will probably be more completely
successful as member banks understand the purposes better and as sales
are arranged earlier.




"APPORTIONMENT OF PURCHASES
"During the second half of 192k purchases of Government

-46securities and bills made by the open market investment committee
were distributed to the different Reserve Banks on the basis of
their estimated earning requirements. Purchases up to April 1, 1925
have been distributed on the basis of estimated expenses, including
dividends but excluding chargeoffs. In the light of new figures received as of April 1, 1925 from all twelve Federal Reserve Banks, it is
now proposed to apportion purchases in accordance with the earning requirements of the several banks."
Meeting of April 30, 1925
The Committee met again in New York on April 30, 1925. At
this time the account stood at approximately $250,000,000. No action was
taken with relation to operations in the account toward the market. Considerations were all with respect to readjusting apportionments in the
account.
The minutes of the April 30 meeting were submitted to the
Board on May 21, 1925, and it was voted that the Committee should be
advised that the Board noted that no purchases had been made against
the authority granted on April 6, and on review of existing conditions
feels that before any purchases to increase the aggregate of the
System's Special Investment Account are made, they should be submitted
to the Board for consideration.




(Secretary's note: The Board in referring to an
"authority granted on April 6th" had in mind that
action of the Commitee[Com it e ]taken at its April 6 meeting in voting that under authority then vested in
it, the Committee should increase its holdings up
to approximately $300,000,000, as and when market
conditions warrant, it having been the belief of the
Committee at that time that the present and prospective
gold movements made this increase advisable.
In referring to the authority then vested in it,
the Committee on April 6 referred to the authority

-47granted by the Board on November 12, 1924,
for offsetting the export or earmarking of
gold for foreign account to such extent as
may be advisable in consideration of market
conditions, but not to exceed $100,000,000.
The action taken by the Board at i t s meeting on May 21 was
communicated to the Chairman of the Open Market Investment Committee,
who, in a l e t t e r dated May 25 advised the Board that i t seemed to him
that the redistribution of investments together with the situation in
the money market made i t unnecessary at that time to consider exercising
the authorization, and that he did not feel willing to do so at that
time without further consultation with the Committee and Board.
At the meeting of the Board on May 29, the Governor reported
that $31,000,000 of Government securities held in the special account
would mature on June 15, and i t was voted t o approve a request of the
Open Market Investment Committee for authority to purchase in replacement at that time $15,000,000 of securities, the remaining $16,000,000
to be purchased after June l5.
Meeting of June 24, 1925.
On June 24, 1925, the Open Market Investment Account stood at
about $221,000,000.
Report of Chairman. At a meeting of the Committee held on that
date, the following report was made by the Chairman:
"Following the last meeting of the Open Market Investment Committee, $79,149,500 of the government securities held in the System
Special Account were redistributed to reduce the participations of five
banks and increase the participations of six.

Special allotments were

made of $10,000,000 of bankers acceptances t o Minneapolis and $4,000,000
to Kansas City in lieu of governments which they were unable to take




-48because of shortness of collateral for note issues.

Allotments of

$5,000,000 each of bankers acceptances were also made from the New
York portfolio to Kansas City, Atlanta, and Dallas.

Partly as a r e -

sult of these changes estimated earnings of a l l of the banks, except
Minneapolis, for the f i r s t half year have been slightly in excess of
t h e i r estimated expenses and dividends, but not sufficient to cover
charge-offs....
"It may be noted that thus far earning assets of the System
have averaged about $130,000,000 more than last year, while present i n dications are that expenses will be somewhat l e s s .

In view of the usual

increase in earning assets in the f a l l of the year, i t appears reasonably sure that the earning position of the System t h i s year will be
better than l a s t year.
"Quarterly Tax Day Operations
"With the heavy redemption of about $400,000,000 of maturing
issues and a consequent prospect of very easy money conditions, the
following sales under repurchase agreement of securities from the
Special Investment Account were made on June 13 and 15:
"June 13 to New York banks - - " 15 " Chicago banks

$47,000,000
4,000,000

"The sale in New York on June 13 caused a deficit in the reserves
of New York City banks for two days, Saturday and Sunday, which was effective in offsetting large gains to the market resulting from redemptions
on Monday. By Wednesday the collection of income taxes and wire transfers
to other d i s t r i c t s had withdrawn sufficient funds from the market to bring
bank reserves practically down to the required minimum.

By the end of the

week the securities sold had a l l been repurchased. The net result of tax




-49period operations was remarkably steady interest rates, the call rate
remaining at 3-3/4 per cent throughout the entire period.
"Present Credit Situation
"Our best information indicates that for several months business activity has tended to recede from the high point reached early in
the year. Business men do not generally regard the present situation as
wholly satisfactory, although the current rate of activity is probably
above normal and greater than last year. From the point of view of
business, it seems desirable that money should continue to be easily available at moderate rates.
"Recent activity in the security markets has brought prices to
the highest point of all time, and the amount of funds employed in the
market is larger than ever before. The volume of new issues, both
foreign and domestic, so far this year, has been in excess of the
unusually large volume for the corresponding period of last year. While
higher money rates would perhaps have some restraining influence upon
the security markets the effect on business would probably not be favorable.
"In the light of these conditions no extended program of either
purchases or sales in the Special Investment Account seems desirable.
The member banks in principal cities are already substantially in debt
at the Reserve banks and the pressure of this indebtedness is sufficient
to maintain unusual stability in open market money rates at about present
levels. There have been no excess funds in the market and the call rate
has consistently remained above the Federal Reserve discount rate. At
the same time business funds are readily available at moderate rates.
This is a healthy situation and should be maintained.




"It is customary for the earning assets of the Reserve banks to

-50reach their low point in midsummer—usually August—-when the demand for
funds is at a minimum.

To avoid instability of rates during the summer

the committee should be prepared, if necessary, to make sales from the
special account,

It is also recommended that replacement of the 16-1/2

million dollars of treasury notes, matured on June 15 and not yet replaced, be deferred until later.
"In the fall of the year there will normally be a considerable
increase in the demand for funds and an increase in acceptance holdings
and the amounts borrowed by member banks. At that time it will probably
be possible, if indications suggest the need is to build up the Special
Investment Account to a somewhat higher figure. The desirability of
doing so would appear to depend largely upon the developments in business
and finance before that time©
"There is a still further factor in the situation which should
be considered in formulating open market policy, and that is the possible
use of the British credit. The employment of this credit would have the
same effect as purchases of securities in putting funds into the market.
The Reserve banks should be in a position, if the condition of the money
market made it desirable, to offset the use of the credit by the sale of
securities. The Special Investment Account should therefore
time policy

as a long

be maintained in an amount large enough to meet any such

contingency.
"Possible Special Operations
"In addition to the regular quarterly tax day periods, the
committee might well consider whether special operations in the account
should be undertaken on the following occasions:




July 4 currency demand
Autumn trade requirements
Christmas currency demand
January ease in money
"The July 4 holiday customarily calls for from 100 to 200
million dollars of currency and usually leads to member bank borrowing
of about that amount for a few days. This is a very temporary need and
complete liquidation takes place within a few days. Hence it has little
effect on the general credit situation and it is believed no special
operations should be carried through to take care of it.
"By reason of advance redemptions the government maturity on
September 15 will amount to but $229,000,000. Since tax payments will be
around $300,000,000 the effect of tax day operations in the market will
be quite different from the usual effects. As tax cheques are collected
the market will probably be out of funds and the committee may need to
consider the purchase of securities in order to prevent too rapid tightening in the money market, just at a period of the year when the commercial
demand for funds is expanding. Action cannot be determined definitely
until we know the details of Treasury program at that time.
"As suggested above the autumn trade demand together with the
Christmas currency demand offer opportunity for increasing somewhat the
portfolio of the Special Investment Account, without easing the money
market. The experience of the past year indicates the desirability of
having on hand a portfolio from which sale may be made in January to
prevent the rapid return flow of funds from causing too great ease in
the money markets; and the committee may need to consider purchasing
securities for this purpose during the autumn trade expansion and currency demand in October, November and December.







-52"Allotments
"It is proposed that the committee continue to allot System
open market purchases of Bills on the basis of requirements. As a
basis for computations all banks are being requested to furnish figures
as of June 30, 1925, showing (1) actual net earnings for the first six
months of this year; (2) estimated gross earnings for the second half
of the year; (3) estimated expenses, including dividends, for the
second half of the year; and (4) for the information of the committee,
estimated chargeoffs (in detail) for the entire year. These figures
(exclusive of chargeoffs) will be used as a basis for making allotments
during the month of July and will be revised monthly."
Action of Committee
After consideration of the above report, the Committee voted
to authorize the sale to the Bank of England of $2,000,000 of Treasury
certificates maturing September l5, 1925, and further sales up to the
total holdings of this maturity amounting to $5,000,000. The purpose
of this authorization was to prevent employment in the New York market
of a balance obtained by the Bank of England through the purchase of
ear-marked gold from another foreign bank and the employment of any
further balance which that bank might acquire. The Committee also voted
to sell $10,000,000 of Third Liberty Loans to the Treasury from the
Special Investment Account. The Committee discussed further sales from the
Special Investment Account and was in agreement that further sales might
be necessary under existing authority in an amount sufficient to bring
the account down to $200,000,000, if there appeared to be a large flow of
funds from out of town to the New York district during the dull summer
period. No vote was taken on this.

-53Meeting of September 22, 1925
Action of Committee. At the meeting of the Committee on
September 22, 1925, the Chairman's report was adopted.

There

was also a recommendation made by the secretary of the Committee that
during the balance of the year additional purchases of bills or securities
be distributed among the banks in such manner as, first, to provide for
the expenses and dividends of each bank and, second, to provide thereafter
for estimated chargeoffs as completely as possible. The Chairman's
report, which became the committee's report, was presented to the Federal
Reserve Board, the Chairman calling the Board's attention particularly to
that part of the report in which the suggestion was made that the present
situation appeared to call not for open market operations but for careful consideration of the position of the discount rate which was outside
the province of the Committee.
At the meeting of the Board, there was discussion of a suggestion to the effect that it would be desirable to make sales from
the special investment account and to follow these sales shortly by
an increase in the New York discount rate. It appears that most of
those present at the meeting were not in agreement with this view.

Report of Chairman. The text of the Chairman's report is as
follows:
"Credit Conditions
"Since the last meeting of the committee on June 24, business
has continued in large volume, with a tendency in recent weeks toward
still greater activity.

Business continues free, however, from speculative

tendencies and the price level is only slightly higher than it was at the




-54end of June. Speculation in stocks and in real estate has increased.
"The effect of these changes on the credit situation has been
to increase the borrowings of member banks at the Federal Reserve Banks
and to tighten money rates by l/4 to l/2 of 1 per cent. . . •
"One feature of interest in the banking changes since the end
of June has been that the entire increase in borrowings at the Federal
Reserve Banks has been by banks in principal cities, whereas the banks
outside of these cities have reduced their borrowings. Most of the recent increase in street loans on the New York Stock Exchange to a new
high appears to have come from outside of principal cities.
"The net result of the credit changes since the end of June
has been to increase the indebtedness at the Reserve banks of member banks
in principal centers by nearly 200 million dollars—considerably more
than half of this increase taking place in New York City. This result is
very similar to what would have taken place if the Reserve Banks had sold
200 million dollars of Government securities in the open market while
credit conditions remained otherwise unchanged. Member banks in principal cities are substantially in debt at the Reserve Banks and are under
the influence of the discount rate. In other words, the situation is
such that it will be more largely influenced by the position of the discount rate than by open market transactions.
"September 15 transactions
"A review of the changes likely to occur in the banking
situation in connection with Government operations on and after
September 15 appeared to indicate that sales from the special investment account would not be necessary to insure a reasonable degree of
stability, because it was supposed that member banks in principal cities



-55were sufficiently in debt at the Reserve Banks to utilize any excess
funds in paying off indebtedness at the Reserve Banks. Such repayment
actually did take place and the System's statement for September 16
showed a reduction of discounts and advances of 150 million, as compared
Kith the preceding week. Repayment was not made, however, with sufficient
rapidity to absorb all surplus funds, particularly amounts held by nonborrowing banks, and money was quoted as low as 3-1/2 per cent for parts of
three days. In order to avoid even such temporary ease in money, which
was misinterpreted by many, it may seem desirable in the future either
to make sales to the market or else to enlist the cooperation of some
of the large banks in adjusting the money position more rapidly at these
periods.
"Future Program
"As indicated earlier, the principal question of Federal Reserve policy appears at present to be related to discount rates rather
than to open market operations. Recent changes in money rates raise
the question as to whether present discount rates are now a fair price




for money.

-56opportunity. Experience over the fifteenth of the month and on previous
occasions would indicate that semi-automatic changes in borrowings by
member banks cannot be relied upon completely to make adjustment for
any large or rapid movement of funds."
(Note: The discount rates at all of the banks having
the 3-1/2 rate, except New York, were raised from 3-1/2
to 4 per cent between November 10 and November 23. The
banks at which rate advances took place are Boston, Philadelphia, Cleveland, and San Francisco.)
Meeting of Governors' Conference, November 2, 1925
Report of Chairman of Committee. At the Conference of Governors
of the Federal Reserve Banks held in Washington on November 2, 1925, the
Chairman of the Open Market Investment Committee submitted the following
report, which he stated had been approved by the members of the Open
Market Investment Committee. The report was approved by the Governors'
Conference, and the text of the report is as follows:
"Since the last Governors' Conference the Special Investment Account of the system has been reduced by 35 million dollars, from 245
million to 210 million. This reduction has taken place gradually in
connection with the redemption of maturing issues at quarterly tax days,
occasional sales to the Treasury for their accommodation, and a sale
to the Bank of England amounting to 4 million dollars. The gradual reduction in the portfolio has been in keeping with the policy of maintaining the effectiveness of the discount rates of the Reserve Banks by
insuring a round amount of borrowing by member banks in principal cities.
"Credit Conditions
"The changes in business and credit conditions since last spring
have created a situation which is most unusual and most perplexing for
the determination of Federal Reserve policy.




-57"When we met in April domestic business was experiencing some
slight recession from the great activity of the early spring. This was
more true in certain types of industrial activity than in the general
distribution of goods. The recession did not prove to be serious and
in the past two months there have been indications of an increase in
activity and greater business optimism. Various indexes of the total
volume of business indicate that business has been above what we may
call normal, or average, conditions for the entire year. The construction
industry and the automobile industry have been particularly active.
"Business appears generally to be in healthy condition. While
forward buying has increased somewhat lately it continues to be generally
conservative. Commodity prices are firm but there are as yet no considerable price increases. Looking into the future the features in the
business situation which offer possibility of later disturbance appear
to be:
"1. The automobile industry evidently now has a capacity
and annual rate of production which is greater than the growth in the
population or the increase in the domestic demand for cars can support
for any extended period. We are approaching a saturation point in that
industry, unless exports increase with great rapidity.
"2. The building industry is now operating at a pace which
cannot be continued indefinitely. The war years left us with a shortage
in homes. It is clear that most of that shortage has now been made up
and that sometime, perhaps within the next year or two, there will of
necessity be a diminution in new building construction and in the
activity of the industries which are concerned with new building. This
will naturally be accompanied by a slowing up in real estate speculation,




-58which is now active in many places.
"3. There has been for some years past a steady increase in
installment buying, involving the pledge of future income and the building up of what we may call consumer inventories.

It is clear that

this has created a situation in which any extended period of unemployment or any change in psychology might lead to a considerable diminution of activity in those industries serving the consumer directly,
"In none of these directions is there any evidence of an immediate change in the situation.

The prospect is for sound substan-

tial business at a high level for some months to come, but it is
equally clear that the presence of these uncertain factors makes the
continuance of a conservative temper in business most desirable.
"Stock Market
"The stock market appears to offer a fourth element of possible instability in the business situation, for stock market movements
have a widespread psychological influence.

The most serious element

about the recent stock market movement is the possibility of a later
recession in prices which might add impetus toward business reaction.
There are a number of indications that a part of the recent increase in
stock market prices is due to fundamental changes in values, but it is
also possible that the swing of prices may now have gone beyond a level
which can be maintained permanently,
"Credit Requirements
"The growth in business activity has been accompanied by an
increase of currency circulation of 100 million dollars since the end
of April and by an increase of about 300 million dollars in commercial
loans of banks. This is larger than the usual seasonal increase and has




-59come somewhat earlier in the year than usual. In addition, loans on
stocks and bonds show an increase of 300 million, which represents
largely the placing of additional funds into the stock exchange money
market. The net result is an increase of 600 million dollars in total
bank credit advanced by weekly reporting member banks, outside of an
increase which may have occurred in other banks. This increase has been
made possible by an increase of about 250 million dollars in borrowings
from the Federal Reserve Banks. At the same time the nonreporting banks
in smaller cities have decreased their borrowings slightly.
Accompanying this additional borrowing at the Federal Reserve
Banks there has been an increase since April of about l/2 of 1 per cent
or more in the various open market money rates.
* * *

"Gold Movement
"While money rates have been moving upward l/2 of 1 per cent
or more in this country, they have moved lower in London by about 1
per cent and the Bank of England has reduced its rate one per cent from
5 to 4 per cent. In recent weeks rates in London have become slightly
firmer. The result of higher rates here and lower rates in London has
been that considerable American balances which had been placed in London
have returned to this country, and there has been a gold movement from
London to New York of about 40 million dollars, partially offset by a
movement of 21 million dollars from this country to Canada. The movement
from London is slightly larger in amount than was customary in the fall
in the years before the establishment of the Federal Reserve System.
It is clear that the relative level of interest rates in this
and in foreign countries is an important influence on gold movements.




-60If our interest rates reach higher levels without a corresponding increase
in London, a larger gold movement to this country may be stimulated.
"European Situation
"The general recovery in European business and credit conditions
is under present circumstances, facilitated by low money rates in this
country. With industry abroad below normal activity and struggling
against high taxes and the necessity for many readjustments, the actual
cost of money is an important factor in England and the European countries.
In many of these countries, moreover, the supply of working capital is insufficient.

As long as our extension of credit abroad either in the

form of short-term or long-term credit is for productive purposes a considerable flow will be beneficial to the recovery of Europe and will
react favorably upon our own trade. This flow is encouraged by low
money rates. With the finances of Europe in unstable condition small
changes in credit conditions may have large results one way or another,
and it is clear that this country has a definite responsibility to determine its monetary policy with some regard to the effects of such
policy outside of our own borders.
"Recommendations
"These are the outstanding facts in the broad credit situation.
They do not seem to indicate the need for any change in our open market
policy. With the member banks in principal cities substantially in debt
at the Reserve Banks there is little to be gained in the sale of securities
for the purpose of making discount rates more effective. The influence of
our rates is now felt on a considerable body of borrowing and if it appears
desirable the next step should possibly consist in changes in discount
rates, rather than changes in open market holdings. It also seems




-61desirable to maintain the present account at at least its present size
that we may be prepared to deal with any emergency situation. The committee, therefore, is not prepared to recommend at present any change in
our holdings of securities.
"QUARTERLY TAX DAY OPERATIONS
"The June and September tax days furnished additional opportunity
for studying the need for special operations with the investment account
to prevent any unusual and temporary ease in money. At the June tax date
sales of 5l million dollars were made early in the tax day period, with
the very satisfactory result that money rates remained at a constant level
throughout the entire period. At the September period sales to the market
did not appear to be necessary because of unusually large receipts relative
to disbursements by the government and a considerable volume of rediscounts.
No sales were therefore made and there was some easing in money rates for
a few days.

The experience of these two tax days would appear to indicate

that it is usually desirable to make temporary sales to the market early
in the tax day period.
"Turn of the Year
"Last January it was found desirable to make sales of about 150
million dollars of securities to take up the seasonal slack in credit resulting from the return of Christmas currency and the usual seasonal flow
of funds to money centers. This coming year end it appears likely that
city banks will be so largely in debt at the Reserve Banks that slack will
be mostly taken up by the liquidation of discounts. Such liquidation is
frequently a little slow, however, and if credit conditions remain as at
present it would be undesirable to have the banks out of debt.

It will,

therefore, be well to consider some temporary purchase of securities at the




-62time of the Christmas currency demand to be sold in January. The wisdom
of such a policy cannot be determined far in advance.
"Method of Apportionment
"During the past few months further study has been made of the
methods of apportioning purchases of bankers acceptances in the light of
current earnings and expenses. The principle has been adopted of apportioning acceptances among the banks, first, on the basis of estimated expenses
and dividends of the banks; and second, after these have been provided for,
to apportion the remainder on the basis of required earnings to meet losses
and ordinary chargeoffs as far as possible.

The present estimate appears

to indicate that the earnings of the banks for the year will be sufficient
to cover all expenses and dividends and to cover the major part of the
chargeoffs as well.

Included in exhibits attached are tables reflecting

Government security and bill transactions and distributions by the Committee during the year."
Board action.

The above report was considered by the Federal

Reserve Board at the meeting held on November 23, 1925, particularly the
following portion thereof:
"With the member banks in principal cities substantially in
debt at the Reserve Banks there is little to be gained in the sale of
securities for the purpose of making discount rates more effective. The
influence of our rates is now felt on a considerable body of borrowing
and if it appears desirable the next step should possibly consist in
changes in discount rates, rather than changes in open market holdings.
It also seems desirable to maintain the present account at at least its
present size that we may be prepared to deal with any emergency situation.
The committee, therefore, is not prepared to recommend at present any
change in our holdings of securities."



-63At that meeting the Board approved in general the report of the
Open Market Investment Committee dated November 2, but advised the Committee that it desired an immediate meeting to consider whether changed
conditions did not make a change in the open market policy of the Federal
Reserve System desirable. It was also voted that one of the matters to be
referred to the Committee was the question of allowing December 15 maturities
of government securities to run off without replacement.
Meeting of December 1, 1925
On December 1, 1925, the account stood at $210,000,000, no material
change having been made in the amount thereof since early in July 1925. The
Committee met with the Board in Washington on December 1, the minutes of
said meeting reading in part as follows:
* * *
"After thorough canvass of the System's open market policy, as
well as the subject of rates of discount and bill rates, it was the consensus of opinion that the Treasury certificates held in the System account, amounting to about $38,000,000, maturing on December 15, should
be replaced by other maturities to be purchased by the Committee. . . .
* * *

"The meeting formally approved (this) action . . •
"The balance of the session was devoted to a discussion of conditions bearing upon the discount r a t e s of the System and especially of
the Federal Reserve Bank of New York.

I t was the consensus of opinion

that i t would be better to await the turn of the year before the Federal
Reserve Bank of New York made any rate advance, as at that time there was
likely to be considerable liquidation and a large return flow of currency,
with some easing of the money market, which might prove to be the




~64appropriate time for selling some of the System's holdings of Government
securities and for an increase in the New York discount rate.
"Dr, Miller expressed the view that the rate should be advanced
to 4 per cent at once and Mr. Platt expressed the view that he would prefer to see i t advanced to 4 - l / 2 per cent.
***
On December 2 the minutes of the meeting of the Open Market
Investment Committee of December 1 were presented and were received and
filed and the recommendation contained therein was approved by the Board.
Authorization to Resume Purchases for System Account, December 1925
On December 21, 1925, the Board was advised that the Directors
of the Federal Reserve Bank of New York had authorized the Governor of
that bank to make open market purchases up to $50,000,000, the reason for
this action being that call money had advanced to 6 per cent and the
opinion in New York was that a period of tight money was likely to continue for several days. The Governor of the New York bank stated that
when purchases were mads they should be for the System Open Market Account
in which all banks would participate rather than for the account of an
individual bank. The Governor of the New York bank stated that as
Chairman of the Open Market Committee he had taken the matter up with
other members of the Committee, all of whom were of the same opinion.
Consideration of the matter was given the following day, December 22, when
the Governor of the Board reported a telephone conversation with the Chairman of the Open Market Investment Committee, during which he was advised
that the Federal Reserve Bank of New York had already contracted for
$18,000,000 of purchases, which would be carried in its own portfolio if
the Board disapproved the recommendation of the Committee. After a




-65discussion of the matter the Board approved of the Committee purchasing
for the System Account from $25,000,000 to $50,000,000 of securities and
under this authority the account increased.
(Note: The Board's records show that on December
30, 1925, the account stood at $260,000,000)
Developments during 1926
On January 8, the discount rate of the New York Federal Reserve
Bank was raised from 3-1/2 per cent to 4 per cent, the level prevailing
at a l l of the other Federal Reserve banks.,
Meeting of Committee on January 18, 1926, and Subsequent Board Action
The Committee met on January 18, 1926. At that meeting discussion was had with respect to the disposition of the $50,000,000
short-term Government securities which had been acquired during the
l a t t e r part of December 1925 for resale possibly in January 1926.

It

was agreed, in view of existing conditions in the market and the fact
that there were $65,000,000 of March maturities in the account, that
while i t was not desirable to sell the $50,000,000 of Governments immediately, the situation should be carefully watched, in order that
action might be taken at any time that developments disclosed the desirability of selling.
Governor Crissinger, who attended the meeting of the Open Market
Committee reported the Committee's actions to the Board at a meeting of
the Board held on January 19, 1926.
At the meeting of the Federal Reserve Board on January 25, the
Board authorized the Committee to s e l l , not to exceed $50,000,000 of
securities against definite orders.

This action was taken following

presentation to the Board of a l e t t e r from the Deputy Governor of the




-66Federal Reserve Bank of New York, in which he advised that money conditions
in New York were easing considerably with the result that a moderate demand
for short-term securities had sprung up, and further that officials of the
New York bank were inclined to the view that i t might be well to supply
the market from time to time with a moderate amount of these securities, not
exceeding $50,000,000 from the System's Open Market Investment Account, as
and when definite orders for same were received.
(Note: By February 24, 1926, the Open Market Investment
Account had been reduced from $260,000,000 to $210,000,0000
The Chairman of the Open Market Investment Committee was
present at a meeting of the Federal Reserve Board held on March 8, 1926,
and discussed with the members of the Board prospective business and
credit conditions.

He stated that the System held about $100,000,000 of

Government securities which would mature on March 15, about $34,000,000
of which were held for account of foreign banks and the remainder in
the open market investment account.

He stated that his bank had at that

time received from foreign correspondents requests t o replace about
$31,000,000 of securities held for t h e i r account and that he thought i t
advisable and would recommend that the runoff of $66,000,000 of securities
from the open market account be replaced, i f possible to do so. He
stated, however, that i t might be found impossible to replace the entire
amount.
The Board voted to interpose no objection t o the Open Market
Investment Committee replacing, so far as possible, $66,000,000 of
Government securities held by i t for the System account which matured on
March 15, 1926.




(Note: At t h i s point the authorized maximum amount
of the account was $210,000,000.)

-67-

Meetings of March 22-24, 1926
The Committee held a meeting in Washington on March 22. The
Governors of the Federal Reserve banks were also in conference in Washington at the same time.
Report of Committee t o Governors' Conference. The committee
made a report to the conference having previously discussed same informally
with the Board.
Conference.

The Committee's report was approved by the Governors'

The text of the Committee's report i s as follows:

"Since the last Governors' Conference the changes in the
special investment account have consisted of (a) temporary readjustments
to offset the effects on the money market of government financing at tax
periods, (b) purchases and sales to offset seasonal changes over the turn
of the year, and (c) a reduction in t o t a l caused by the repayment of
March 15 maturities, which have not yet been wholly replaced.
"At the December 15 tax period temporary sales of 30 million
dollars were made to New York City banks, and at the March tax period
temporary sales of $38,000,000 were made, of which $35,000,000 were made
in New York and $3,000,000 in Chicago,

The result of these sales was to

exert a considerable stabilizing influence on the market at these periods.
"During the l a t t e r part of December the Committee purchased 50
million of short-term government securities to decrease the seasonal strain
in the market, and these securities were resold in the l a t t e r part of
January and early in February.
"On March 15 there matured 65 million dollars of securities held
in t h e special account, and i n addition $32,500,000 held for foreign
account.




These amounts have been fully replaced for the foreign accounts

-68but only partially replaced as yet by the purchase of $34,355,600 of securities for the System account. This leaves a balance of $31,411,100 to be
purchased for the special account in order to restore it to 210 million
dollars; the $38,160,000 of Treasury notes which matured December 15, 1925,
were replaced by purchases of other maturities, thus causing no change in
the account,
"In the past few weeks, there has been some change in credit conditions, but more particularly in business and financial psychology. The
stock market boom has lost its impetus and the amount of funds employed by
the market has diminished by about 300 million dollars from the date when
public reports were commenced.
what.

Real estate speculation has calmed down some-

There are also reports of business hesitation, evidence of which may

be found in a weakness in commodity prices, a decline of unfilled orders of
the Steel Corporation, some recession in retail trade and some decrease in
the amount of building permits taken out, although the actual volume of current business transactions continues very large. But some business hesitation
appears to be a not unusual accompaniment of a rather sharp arrest of stock
speculation following a long extended period of activity.
"Thus far it would appear that the diminution of speculative activity is wholesome.

The movements which have taken place have been orderly and

there has been no indication so far of untoward consequences. It is not yet
clear how far liquidation will be continued and it is, of course, still possible that there might be a revival of speculation with the dangers it involves.

It appears more probable, however, that the peak of this speculative

and business expansion has been passed.

It therefore seems appropriate in

view of the above to discuss at this time what our open market policy should
be in the event a business recession calls for a revision of policy before we
meet in another governors' conference.




-69"Experience in the past has indicated that member banks when in
debt at the Federal Reserve Bank of New York, and in less degree at other
money centers, constantly endeavor to free themselves from that indebtedness,
and as a consequence such pressure as arises is in the direction of curtailing loans. This is now accentuated over a year ago as the discount rate at
New York is a full 1% higher, and 1/2% higher at four other banks. . . . the
amount of credit furnished by Reserve Banks on member banks direct borrowing,
just prior to the March 15th operations, was larger this year than on any
corresponding date since 1923.
"The total amount of borrowing undoubtedly exerts some pressure
upon the business community. Should we go into a business recession while
the member banks were continuing to borrow directly 500 or 600 million dollars, (if bills are included nearly 800 million dollars,) we should consider
taking steps to relieve some of the pressure which this borrowing induces by
purchasing government securities and thus enabling member banks to reduce
their indebtedness.
"It is not possible to predict to what extent member banks will
continue their borrowing on the present scale in the event of a business
recession.

The release of funds now employed in the security markets,

a decrease in currency requirements, and some decrease in bank loans for
business undertakings, would likely be partly offset by increased
requirements for funds to carry accumulating inventories. Perhaps the
major determining factor will be the movement of gold.

During the first

half of March we received 30 million dollars of gold from Canada and this
movement resulted in easy money rates in New York in the second week of
the month. It seems possible that this gold movement may be continued
somewhat further, and, if so, it would correspondingly liquidate the




-70borrowings of member banks in New York. The usual movement of gold, however, if seasonal causes operate, would lead us to anticipate gold exports
rather than imports during the summer months, with perhaps further imports
in the fall. With these conflicting tendencies future changes in our
loan account are especially significant as a guide and we should see that
the total does not become or continue too burdensome.
"Future Policy
"As a guide to the timing and extent of any purchases which
might appear desirable, one of our best guides will be the amount of
borrowing by member banks in principal centers, and particularly in
New York and Chicago.

Our experience has shown that when New York City

banks are borrowing in the neighborhood of 100 million dollars or more,
there is then some real pressure for reducing loans, and money rates tend
to be markedly higher than the discount rate. On the other hand, when
borrowings of these banks are negligible, as in 1924, the money situation tends to be less elastic and if gold imports take place, there is
liable to be some credit inflation, with money rates dropping below our
discount rate. When member banks are owing us about $0 million dollars
or less the situation appears to be comfortable, with no marked pressure
for liquidation and with the requisite elasticity.

Under these circum-

stances no single bank tends to be in debt for any extended period and
borrowings are passed around among the different banks. Call and time
money rates tend to be but slightly above our discount rate, With this
situation existing in New York, there is less tendency for funds to be
attracted to New York (particularly since commercial rates at such times
are apt to be higher than stock exchange rates for call money) and the
situation has a considerable degree of stability.




-71" . . . In the event of business liquidation now appearing it
would seem advisable to keep the New York City banks out of debt beyond
something in the neighborhood of 50 million dollars. It would probably be
well if some similar rule could be applied to the Chicago banks, although
the amount would, of course, be smaller and the difficulties greater because of the influence of the New York money market.
"In general it would appear that we should not increase or diminish
the special account immediately beyond gradually replacing the issues which
matured on March 15 as market conditions warrant, but that we should prepare ourselves now for the prompt purchase of some farther amount of
securities if

and when there should be further evidence of a recession

in business activity, especially if there is no further liquidation in
the amount of Federal Reserve credit employed."
Action of Committee and Board. On March 23 the report of the
Committee was submitted to the Federal Reserve Board for formal action
end the Board voted to approve the proposal contained therein to the effect that the System's special investment account should not be changed
in amount except that the March 15 maturities should be replaced as
conditions seemed to warrant.
At a joint meeting of the Governors' Conference and the Federal
Reserve Board on March 24, Governor Crissinger advised the conference that
the Federal Reserve Board had at its meeting on March 23 approved the
report of the Open Market Investment Committee, although it was explained
that the Board's approval related expressly to the repurchase of March 15
maturities. Governor Strong then referred to the advisability of giving
the Committee authority to buy additional securities if and as scon as it




-72may be apparent that conditions justify. He stated that in his opinion
the latter part of the report of the Open Market Investment Committee,
which was drafted almost a week before and which suggested the likelihood
of the need for additional purchases, indicated that if the discounts
of New York City member banks did not decrease after the quarter day movements in the money market had been reduced to normal. it would be advisable
for the committee to make further investments. The Federal Reserve Board
thereupon withdrew from the conference in order to consider this question
Upon the Board's return, the Board's Secretary read to the conference the
following extract from the minutes of the meeting of the Board held on
March 23:
"After full discussion, upon motion it was voted that the
committee be advised that the Board has considered the report and
approves the proposal contained therein to the effect that the System's
special investment account should not be changed in amount except that
the March l5th maturities may be replaced as conditions seem to warrant."
It was pointed out, however, by the conference that the Board
had taken no vote on the latter part of the report concerning the prompt
purchase of further securities since the Board felt that the committee's
report made no specific recommendation on this question. Governor Strong
emphasized the fact that the Open Market Investment Committee's report
had been drafted six days before, that the readjustments of the quarter day
period were over, that New York City banks were still heavily in debt to
the Federal Reserve Bank, that the conditions suggested in the latter
part of the report as a guide for further purchases now appeared to exist and




-73that the Committee's report should therefore be considered as a recommendation that i t should be authorized to make the additional purchases.
Governor Strong then informed the Federal Reserve Board that during
i t s absence from the meeting the conference made the specific suggestion that the committee be authorized to buy up to $90,000,000
more if developments in the money market indicate the need for doing so
before[ A ] p r i ll 5 , 1926.
The Board left the conference and held a meeting t o consider
the matter of authorizing the increase in the account to $300,000,000.
Several motions with respect thereto were voted on and a l l were l o s t .
At a meeting of the Board held on March 25 the question of
authorizing an increase in the account to $300,000,000 no purchases to
be made under such authority after April 15, 1926, was given further consideration and on motion the Board approved the recommendation of the Open
Market Investment Committee and Governors' Conference.




(Note: By April 15 the account had been increased to
$275,000,000. On April 23 the discount rate of the
Federal Reserve Bank of New York was reduced from 4
to 3-1/2 per cent. The account ran up to $295,000,000
on June 9 in anticipation of the June 15 maturities,,
and following the maturity date fell off to $239,000,000.
As the securities were replaced the account was increased to $275,000,000 with the Board's approval. This
transaction in replacing maturities was tkan[taken]with the
approval of the Federal Reserve Board.,)

-74Meeting of June 21, 1926
Action of Committee, The Committee met in Washington on June 21,
1926.

The Undersecretary of the Treasury, who attended the meeting, re-

ported that the Treasury would have surplus funds in the Federal Reserve
banks during the month amounting to about 75 million, a substantial part
of which it was proposed to use in the purchase and redemption of Third
Liberty Loan Bonds, and that he contemplated buying additional bonds for
delivery the first of July, when the Treasury would receive 40 million from
the proceeds of a recent sale of Farm Loan Bonds. The Chairman of the Committee made the following report, and, on motion, the committee and the
Federal Reserve Board voted that it was expedient that the System's holdings of Government securities should be maintained for the present at the
existing amount—approximately 275 million—but with authority to make
temporary purchases or sales within a range of 50 million as may be deemed
advisable by the Committee; any such purchases to be liquidated within a
reasonable time as market conditions warrant.
Report of Chairman.

The report of the Chairman was as follows:

"The report of the secretary gives the details of operations
since the last meeting.

As far as policy is concerned, the two principal

problems center around the changes in the money market due to the tax
period, and the policy of the committee for the corning few months in view
of the general credit situation.
"Tax Period.
". . . the New York banks started the tax period with reserves
substantially under requirements, and as a consequence of this fact and of
rapid income tax collections, the surplus of funds on June 15 and 16 was
only temporary and by Friday, when the banks average up their reserves, the




-75situation was again at equilibrium.
"As this week begins the prospects are that the banks in principal centers will be steadily losing in their reserves through the
accumulation of Treasury balances at the Reserve banks. Just as the
problem last week was to prevent too great ease in funds, so the problem
this week will be to prevent too rapid a tightening; and the same may be
true of next week, when semi-annual settlements will coincide with requirements of currency over the July 4 holiday. Various methods for offsetting
a disturbance to the money market at this time may well be considered.
The situation may be met partly by Treasury investment of part of its surplus.

It may be desirable also for the committee to make temporary

purchases for a few days, and authority should be secured for such operations.
"The General Situation.
"At the time of the governors' conference there was some anticipation of a recession in business. Since that time there has been a reduction in some lines of business activity.
lines has been considerably curtailed.
decreased slightly.

Production in various textile

Production of iron and steel has

Building activity is not quite as intense and reports

for May by the New York State Department of Labor, and by the Philadelphia
Reserve Bank for the Philadelphia district, indicate a decline of about
2 per cent in factory employment.

Wholesale and retail trade have been a

little unsatisfactory, but that may largely be ascribed to the weather.
This about concludes the evidence of recession, for, in general, business
has continued at high speed above what we may call normal activity.

Car

loadings are large; production is large in most lines of industry; automobile output is exceptional; bank debits indicate a very large measure of




-76activity; and taking all the evidence together there has been no such recession as was anticipated earlier in the year.
"As far as credit is concerned, the country has continued to
require about the same volume of credit as in the spring and there has
been no particular seasonal reduction.
"Industrial stock averages now within 6 to 8 points of February high, and 10 points above March low; and rails are practically at the
year's high. The recent rise appears to be stimulated by general belief
that money will be very cheap, and by apparent failure of expected business
recession to materialize.

In the past few days the market has apparently

been influenced by temporary ease of money over tax period and some misunderstanding of effect on money of Treasury's not putting out new issue.
"The rise in stock prices has been accompanied by an increase of
less than 100 million in brokers loans, which are still 700 million below
the peak.

Stocks are being carried much more largely on loans direct to

customers by banks outside New York City.

These banks are lending 400

million less to brokers in New York, but their total loans on stocks and
bonds are as large as at year's high point. Thus the total amount of
credit employed in carrying securities has decreased much less than the
brokers loan reports indicate and is only about 200 million below the high
point.
"The general situation may be summarized by saying that the
picture is not clear as to which direction business and credit are likely
to take. A further expansion in business and in speculation is possible;
on the other hand, a continued recession in business is possible. Under
these conditions it would seem wise for the Open Market Committee to maintain its holdings of securities at $275,000,000, or thereabouts, except




for such temporary changes as may be necessary in the next two weeks."
(Note: On August 13, the discount rate at the Federal
Reserve Bank of Mew York was raised from 3 1/2 to 4 per
cent, bringing it back to the level prevailing at all
other Federal Reserve banks.)

Action of Committee.

At a meeting of the Committee held in New

York on August 17, 1926, attended by three members of the Board, the Chairman presented the report set out below, which contained among other things
reference to a request made by the Treasury to purchase $40,000,000 of
Third Liberty Loan 41/4per cent bonds, $25,000,000 from the Special Investment Account and $15,000,000 from the assets of three Reserve banks. The
Committee voted that the sale of the Third Liberty Loan bonds be made to
the Treasury Department without replacement. The Committee also voted to
approve of a sale without replacement made to a foreign correspondent on
August 16 of $2,337,000 of 41/4Treasury notes, and a sale of $5,000,000
additional notes to a foreign correspondent to be made some time during
the current week; also a sale to a foreign correspondent during the next
few weeks of approximately $15,000,000 of Treasury notes.
Report of Chairman. "Since the last meeting of the Open Market
Committee on June 21 the business and financial situation has been somewhat clarified.

The hesitation in business, and particularly in business

sentiment, which was apparent in the spring, has largely passed away, and
business is being carried forward at a very active pace, with optimistic
sentiment as to the future. The present indications are that the year 1926
will establish new records in production, building, freight car loadings,
and other phases of business activity.

From the point of view of credit

policy, perhaps the most important feature of the present activity of
business is that it comes after a very long extended period of active




business.

In the past such a long period of activity has usually been

followed by over-production and over-speculation and by a subsequent decline in activity.
"There are, however, few evidences of overdoing the present business prosperity.

There is some indication of overbuilding.

The textile

industries have been ailing for some time. But in general it must be said
that business men continue to conduct their affairs in orderly and conservative fashion.

Prices of commodities have been remarkably steady, with

the exception of farm products which have tended to decline. The principal
example of speculative action is the stock market, in which higher prices
and active trading appear to reflect not only heavy professional operations,
but large earnings and an increasing public interest,
"Volume of Credit.
" The reporting member banks are extending about one billion dollars more credit than a year ago, an increase which is not far from the
usual increase of credit from year to year due to the country's growth.
The present volume of business is not requiring any exceptional growth in
credit.

About half of the increase since a year ago has been in bank in-

vestments and loans on securities.
"The country has been using about 100 million dollars more of
Federal Reserve credit than it was a year ago, although thus far in August
the increase has not been this large.

The division between different types

of holdings of bills and securities was as follows on August 11:
Total Bills and Securities

Bills discounted
Bills purchased
U. S. Securities
Other




(in millions)
August 12, 1925
"
538
212
329
12

Total Bills and Securities
* *- *-

1,091

August 11, 1926
549
231
366
3
1,149

-79"Future Policy.
"It would appear that there is nothing alarming in the present
situation, but that in view of the present large volume of business and
financial activity the influence of the Reserve System should be in the
direction of caution and conservatism.
"On August 12 the Federal Reserve Bank of New York raised its
discount rate from 3 1/2 per cent to 4 per cent, and the results of this
change are not yet fully apparent.
"It would seem wise to consider, however, whether sales should
not be made from the special investment account in order that a larger proportion of the Federal Reserve credit outstanding may be converted into
discounts, for which the member banks feel direct responsibility.

This

would have the effect of subjecting future extensions of member bank credit
to still closer scrutiny and would make present discount rates more effective.

There does not now seem to be, however, any reason for drastic or

precipitate action in the sale of securities which might disturb the financing of fall trade and agriculture.
"An opportunity for testing the effect of sales of securities is
provided by the Treasury program of purchases for the sinking fund. The
Treasury is desirous of purchasing 40 million dollars of Third Liberty Loan
bonds now held by the Federal Reserve Banks, A sale of these bonds to the
Treasury would constitute a convenient means of increasing the indebtedness
of member banks at the Reserve Banks, with least disturbance to the money
market.

Transfers to the Treasury could be made at intervals with continu-

ous observation as to the effects of the transaction on money conditions.
It would be well for the committee to have authority to replace the securities sold by purchases in the market, if at any time the money market was




-80seriously disturbed,
"A still further problem which the committee will wish to consider is raised by the maturity on September 15 of 67 million of securities held in the special investment account, although the question as to
whether or not these maturities should be replaced would depend somewhat
upon the results of testing the market by the suggested sale to the Treasury.11
Action of Board.

At a meeting on August 23, 1926, the Board re-

ceived and noted a letter from the Secretary of the Open Market Committee,
advising that approval had been received from all Reserve banks to the sale
to the Treasury from the System's holdings of approximately $40,000,000 of
Third Liberty Loan Bonds without replacement. The minutes of the meeting
of the Committee were presented to the Board on August 24 and were ordered
circulated without any action being taken.
(Note: During the period August 17 to September 10, 1926,
the account fell from $275,000,000 to approximately
$210,000,000, The authorities held by the Committee at
this time permitted purchases to be made up to $325,000,000.)
Meeting of September 10, 1926
Action, of Committee. The Committee met with the Board in Washington on September 10. Following the reading of the Chairman's report,
the text of which is quoted below, the view was expressed that the sale of
Liberty Loan Bonds from the System's account to the Treasury Department had
served a useful purpose in making effective the recent change in the New
York discount rate.

(Secretary's Note: By reference to the entry concern-

ing the previous meeting, you will note it was proposed to sell $40,000,000
of Liberties to the Treasury, $25,000,000 from the account and $15,000,000
from the assets of three of the Reserve banks. It appears that the three




-81banks exchanged Liberties with the account for other securities and that
the entire sale of $40,000,000 was made from the account reducing it by
that amount,)

It was the sense of this meeting that the Open Market

account should be maintained for the present at about its present level,
and it was voted that the Open Market account should be maintained for the
present at $200,000,000 or thereabouts, with the understanding that the
Committee could in its discretion increase or decrease the account by not
more than $50,000,000, It was also understood at this meeting of the Committee and the Board that in the event of further gold imports for the
account of foreign correspondents, the Committee should continue to
furnish the foreign correspondents with securities from the special
account, as it had previously done, thus offsetting the effect of gold
imports.
Report of Chairman. The report of the Chairman of the Committee
was as follows:
"Changes Since Last Meeting
"Open Market Account:
"

In accordance with the decision at the last meeting of the com-

mittee, on August 17, the special investment account has been reduced from
270 million dollars to about 210 million dollars. Of this amount 39
million represents sales to the Treasury and 21 million sales to a foreign
correspondent, exactly offsetting gold imports. The net result of these
operations was, therefore, to take out of the money market the amount of
funds represented by the securities sold to the Treasury, which were paid
for by withdrawals from depositary banks throughout the country,
"Federal Reserve Credit:




"The result of these sales was to increase the direct borrowing

-82by member banks, and bills discounted on September 7 amounted to 611 million compared Kith 535 million dollars on August 18 and 639 million a year
ago.

Total bills and securities of the System on September 7 were 1,187

million, a figure which has been reached or exceeded several times this
year and which is about the same as a year ago, whereas they have as a
rule this year been exceeding last year's figures by about 100 million
dollars, . . .
". . . the result of the open market sales has been to shift
to the member banks the responsibility for a somewhat larger proportion of
the total amount of Federal deserve credit now outstanding, which should
presumably have the effect of subjecting future extensions of member bank
credit to a closer scrutiny and making present discount rates more effective.
"Money Rates:
"The combined result of these recent open market sales, the continued influence of the increase of rate of the New York bank,

and in-

creasing fall demands for credit, are shown in a considerable increase in
money rates, . . .
""We are thus entering the Fall with a rate structure substantially higher than a year ago. Five of the Reserve Banks are also operating
with a higher discount rate than was the case a year ago.
"Member Bank Credit:
"Total loans and investments of reporting member banks on September 1 were higher than at any time since June 30 but maintained about
the same increase over the previous year, as has been the case for some
months past, an increase which is not out of line with the usual year to
year increase in the volume of credit to keep pace with the growth in




-83population and trade.

In the past month there has been an increase in

commercial loans and in loans secured by stocks and bonds, partly offset
by a decrease in investments. Total loans on stocks and bonds are
slightly larger than at any time this year with the exception of January 6 and June 30.
"Business and Financial Situation:
"Business continues to be maintained at a high level, with few
evidences of weakness. There has recently been some decrease in the amount
of contracts and permits arranged for new building construction.

This

reduction will probably influence next year's construction rather than
construction for the balance of this year, which promises to be maintained
at a high level. In the main business continues to be conducted in conservative fashion and there is little evidence of over-production or of
speculative tendencies outside of the security markets. The business
public appears to be critically-minded to observe any unwholesome tendencies in the business situation, as nay be indicated by the recent unwillingness of the public to purchase bonds from the G. L. Miller Company
and their consequent failure.

Further evidence may be found in the critical

attitude toward the extension of terms for installment selling, in the
continuance of hand to mouth buying, and in the stability of prices of
other than agricultural commodities. It is difficult to discover any
grounds for serious business disturbance in the immediate future. Even in
the stock market, where speculative operations are most in evidence, the
tendency is clearly toward a careful selection of stocks on the basis of
earnings and fundamental values and the trading is of much more substantial
character than it was a year ago. An excellent argument can be made in
justification for much of the recent rise in stock prices.




-84"OPEN MARKET POLICY
"While it is clear that we are now at a high level of business
and financial activity, and that we are in a situation where the influence of the Federal Reserve System should be toward caution and conservatism, there does not appear to be any emergency situation

The

present volume of discounts, and the present rate structure now constitute a considerable restraint on further extensions of member bank credit.
As the usual Fall needs for additional credit make themselves felt there
will be a steady increase in the burden of indebtedness upon member banks,
and money rates are likely to continue higher than a year ago.
"A further sale of securities at this time would in all probability be followed by an increase in money rates which would make it
difficult to avoid rate increases at a number of the Federal Reserve Banks.
Before such action was taken there should be careful consideration of its
probable effect upon financing of the crop movement, agricultural prices,
and the international relationship of money rates and gold movements. The
special investment account is now down to about 200 million dollars and a
further dissipation of this portfolio would leave the System with little
control over the market in case of some future emergency.
"In the light of these various considerations it would appear to
be wise to defer further open market action

for the present until there

is a chance to observe the effect on the situation of the causes now
operative and to observe further the tendencies in the volume and quality
of credit as the Fall season advances."
Action of Board.

The Federal Reserve Board at a meeting on

September 10 voted to authorize the Open Market Investment Committee to
maintain the System's Special Investment Account at from $200,000,000 to
$225,000,000.




-85Meeting of November 7, 1926
The account remained around $200,000,000 up to the time of the
next meeting of the Committee on November 7, 1926. This meeting was
attended by Governor Norris, Governor McDougal, and Deputy Governors
Paddock, Case, and Harrison, The Committee met for the purpose of reviewing in advance of the Governors' Conference the report of the Open
Market Investment Committee's activities prepared by the Acting Chairman
of the Committee for submission to the Conference. The report was amended
and approved.
Report to Governors' Conference. The text of the report follows:
"Since the Governors' conference last spring there have been two
important changes in the special investment account, - a purchase of
securities between March 29 and April 15, which increased the amount from
210 million dollars to 275 million, and a sale of securities between
August 7 and September 15, which reduced the account again to 200 million
dollars.
"Purchases in March and April
"The purchase of 65 million dollars of securities in March and
April was made at a time when business psychology was pessimistic, when
commodity prices were falling, and when there had been a considerable
liquidation of credit employed in the security markets, and to a lesser
degree in commercial loans. The result of the purchases was to reduce
approximately to that extent borrowing by member banks at the Federal
Reserve Banks, particularly in larger centers, and to operate together with
other causes toward slightly easier money conditions.
"Sales in August and September




"As the year advanced no business recession such as had been

-86anticipated by many earlier in the year developed.

The volume of trade

continued at a very high level, building activity and automobile production were well maintained, commercial loans increased, and the volume of
credit employed in the security markets again showed an increase. Honey
rates showed an advancing tendency and the Federal Reserve Bank of New
York raised its discount rate from 3-1/2 to 4 per cent on August 12.
"The sale of 75 million of securities from the open market investment account between August 7 and September 15 took two forms; first,
the sale of 35 million to foreign correspondents to employ balances created
by gold imports into this country.

This sale of securities merely offset

the effect of the gold imports. In addition 40 million of securities were
sold to the Treasury Department for account of the sinking fund and the
effect of this sale on the market was distributed throughout the country as
the Treasury withdrew funds from depositary banks in all districts to pay
for the securities.
"The sale of securities was naturally accompanied by a slight
further increase in borrowing by member banks, by increased offerings of
bills to the Reserve Banks, and by slightly firmer money conditions. The
relationship between open market purchases and sales during the year to
changes in bills discounted and holdings of bankers acceptances, is shown
in the attached diagram.
"The Present

Credit Situation

"The present credit situation does not appear to indicate the
desirability of any change in open market policy.

Business continues to

be active and the volume of trade is at a high level. The business atmosphere, however, is conservative and there is some apprehension as to the
future.




There were reports recently of some decline in building and

~87~
production of automobiles.

In recent weeks there has been a considerable

liquidation of brokers loans and some slight reduction in the total volume
of credit outstanding.

The October period of largest demand for

aside from a period of slight ease in the second half of October, moneyconditions have been steady.
"Turn of the Year

"In the past two years it has been found desirable to sell securities in January to take up the usual seasonal slack in credit resulting
from the return of Christmas currency and the usual seasonal flow of funds
to money centers. Last year a purchase of 50 million dollars of securities was made during the period of greatest currency demand in December,
and these securities were sold in January and February.

These transactions

appeared to have a stabilizing influence upon money conditions, although
the amount of purchases and sales was not sufficient to prevent a considerable tightening of money rates at the end of the year and a considerable easing in rates at the beginning of the new year.

The committee

therefore suggests that this year it may be desirable to purchase up to
100 million of securities during the coming six weeks, to be sold again
at such time as credit conditions appear to make that course desirable.
If business and credit conditions continue as at present it would seem
wise to sell these securities shortly after the turn of the year, but in
the event of a decline in business activity, such as some observers think
may occur, it then might be desirable to retain a part of these securities
in the Federal Reserve portfolio.
either course.




In any event we should be prepared for

commerci

"Temporary Sales of Securities
"At the June 15 tax period the usual temporary sales of securities were made from the open market account to stabilize money conditions,
with the result that money rates were steady during the period.

At the

September 15 tax period the New York City banks were so largely in debt at
the Reserve Bank that it was felt that temporary sales would not be necessary and this proved to be the case. The temporary supply of funds in the
market, due to the redemption of maturing issues, was offset by the
liquidation of member bank indebtedness and money rates were steady during
the period. . • •"
Action of Board.

The above report was approved by the Conference

which requested the Committee to submit it to the Board with the approval
of the Conference.,
The Federal Reserve Board considered the report at a meeting held
on November 10, 1926, at which meeting the following letter to the Acting
Chairman of the Open Market Investment Committee was approved:
"The Board has considered the report of the Open Market Investment Committee and notes particularly the Committee's suggestion that 'it
may be desirable to purchase up to 100 million of securities during the
coming six weeks, to be sold again at such time as credit conditions appear
to make that course desirable'.

The Board understands from the Committee's

report that as the Committee views the situation at this time there is no
need for action looking toward a change in the amount of the special investment account, as approved by the Board on September 10, 1926, and in
this view the Board concurs. The Board, therefore, construes the Committee's suggestion as an expression of opinion on the part of the Committee that in the event of a future change in the present situation, it




-89may be desirable to give consideration to increasing the account temporarily.
"The Board assumes that should there be any change in the
present situation or any new developments which would seem to warrant increasing the account temporarily the Committee will confer further with
the Board."
Developments during 1927
Communications Concerning Reduction in Account, Early 1927
Views of Federal Advisory Council. The Federal Advisory Council
at its meeting in February 1927 expressed formally to the Board the view
that it did not believe that there was anything in the business situation
at that time which would warrant any reduction of existing discount rates
or necessitate any change in the open market policy.

The Council also

expressed the view that should interest rates continue to decline the
Reserve banks should reduce their holdings of bills bought in the open
market.
The views of the Council were communicated by the Board to the
New York bank and in its advice to the bank the Board stated that the
Council in referring to "bills bought in the open market" indicated they
had reference rather more to short-term

Government securities bought

through the Open Market Committee than to bills. The Board requested the
views of the directors of the New York bank, and in doing so, requested
that cognizance be taken of the gold imports since the first of the year
which amounted to $65,000,000, and the present state of the acceptance
market, and to consider whether there should be any change in the volume of
investments in the System's Special Investment Account, especially in view
of the March 15 maturities from the account.




~90~
Letter from New York Bank, The following letter was received
from the Federal Reserve Bank of New York and brought to the attention
of the Board, which in acknowledging receipt of same, advised the New
York bank that it (the Board) approved of the Committee allowing the
March 15 maturities to run off:
"We are in receipt of your letter of March 2 transmitting the
resolution of your executive committee, asking us to get the views of
our board concerning recommendation No. 1 of the Federal Advisory Council.
"Your letter arrived while our directors' meeting was in session
on Thursday and was read to the directors. There had not been, however,
any time for us to prepare a review of the question for the directors and
it was not possible to give the question the extended consideration which
it warrants. Since the Open Market Investment Committee meeting has been
postponed there will, we trust, be an opportunity to give it more adequate
consideration.
"As you know, we are facing a very complex situation at the tax
day period. In addition to the 30 million dollars of maturities in the
system account, there are 90 million dollars of maturities in foreign
accounts, all of which must be taken care of in one way or another. Total
maturities of Treasury notes, of well over 600 million, constitute the
largest maturity for some time and the new Treasury issues will probably
be more difficult to handle than for some time past.
"In view of the complexity of the situation, we have not yet
been able to make up a comprehensive balance sheet as to the probable
effects on the money market of the operations on and following the fifteenth
of the month, and before that is done it is difficult to lay out any satisfactory program for our operations.




-91"In discussing the matter, however, in a tentative way, it was
the view of our directors that, if the Open Market Investment Committee
concurred, it would be well to let these securities mature on March 15,
thus having the effect, for the time being at least, of removing the funds
from the market for the period when money tends to be very easy for the
few days following the fifteenth, and that the time and manner of replacing these maturities be determined upon later as it becomes possible to
visualize the situation more clearly.

"We hope to be able to make up a survey of the tax day operations before the end of next week, which we shall be glad to send you as
soon as it is ready.
"With regard to the policy relating to bankers acceptances, our
view here has coincided with the position taken by the Federal Advisory
Council, and it has been the feeling of our officers that our buying rates
at which we stand ready to purchase bills should be maintained at the
present levels, so that if and when market rates declined there would
immediately be some pressure on the market to reduce the amount of its
offerings to the Reserve Bank.

This process will, we believe, tend to

absorb any substantial amount of money in the market available under 4 per
cent, and keep our discount rate effective.

Our directors have concurred

in this general program.
n

As you may have noticed, the New York City banks now owe us

about $80,000,000. There is no danger of sloppy money as long as that is
true."
Meeting, of March 21, 1927
The first meeting of the Open Market Investment Committee in 1927
was held on March 21, and at this meeting the Secretary of the Committee



-92submitted a report of transactions in the account since the meeting held
on November 7, 1926. The Chairman also submitted a report reviewing
briefly the December and March money market situations and the open
market policies related thereto.
Report of Acting Chairman.

"The secretary's report gives the

details of operations in the special investment account since the last
meeting of the committee. Beyond the shifting of securities, in order to
accommodate the Treasury and. foreign correspondents, the principal change
in the account has been a decrease of $25,000,000 in the open market
account and a decrease of $50,000,000 in the volume of Government securities held for foreign correspondents due to maturities of March 15
certificates which has had the effect of withdrawing about $75,000,000
from the market.

It will be desirable at this meeting to determine

whether or not these securities should be replaced.
"Before discussing this question, however, it may be well to
review briefly the December and March money market situations and the
open market policies related thereto.
"End of the Year Situation
"In view of the experience at the end of 1925, careful consideration was given to the avoiding of such a period of stringent money as
appeared at that time, and such large borrowing by a few member banks. The
principal steps taken were to discuss the problem thoroughly with a number
of the large member banks in New York City and to make every effort to invest the Treasury balance after the tax day, so that no large Treasury
balance would be built up. For a time it was feared that it would not be
possible to avoid a large Treasury balance and open market purchases were
contemplated.




It proved, however, possible to reach the end of the year

-93with only a normal Treasury balance, and as a consequence of this and the
cooperation of the member banks in showing willingness to appear in debt
at the Reserve Bank at the end of the year, there was no marked stringency of money.
"March 15, Tax Period
"The March 15 tax period was extraordinary in the very large
amount of maturities to be redeemed in cash. Maturities of approximately
660 million dollars plus interest payments of approximately 95 million
dollars, resulted in a large immediate net gain to the market, which was
only partly offset by a Treasury call of 123 million and income tax check
collections.

The consequence was a larger Treasury overdraft and a

larger gain to the market than has taken place for several years. The
gain to the New York market on March 15 through these transactions was
over $300,000,000.
"The taking up in some way of this large volume of surplus funds
in the market was an acute problem.

A number of the banks in New York City

fortunately anticipated this situation and allowed their reserves bo remain about 23 million in deficit for the Saturday, Sunday, and Monday
preceding March 15. Thus they entered the tax day with an accumulated
deficit in their reserves of 69 million dollars. The following methods
were then used to offset large Treasury payments by the liquidation of
Federal Reserve assets:
"(1) $75,000,000 of United States securities in the System and
foreign accounts were allowed to run off.

(Those held in foreign accounts

were replaced by bills from our portfolio.)




"(2) $25,000,000 of sales contracts were taken out by dealers.
" (3)

$65,000,000 of discounts were taken out by member banks.

" (4)

$10,000,000 of securities were sold temporarily for one

day on March 14th from the special investment account.
"(5)

$63,000,000 of participations in the Treasury one-day

certificates were sold to member banks•
"Total $238,000,000 - This, together with the aforementioned
$69,000,000

deficit, provided an effective offset to the $300,000,000

excess reserves.
"The sale of participations in the one-day certificate was a new
method of withdrawing funds from the market. It avoided taking away
earning assets from the other Federal Reserve Banks, even temporarily, as
sales from the special investment account would have done; it avoided the
complicated bookkeeping which that transaction involves; and constituted
a simple and logical means of offsetting Treasury payments into the market.
"As a consequence of the use of these different methods for
removing surplus funds from the market, money remained reasonably steady
all week and call money only dipped under 4 per cent on the exchange for
a few hours on March 16. By Friday the banks were deficient in their
reserves and found it necessary to increase their borrowing from the
Reserve Bank to §150,000,000. Thus at the close of the week the money
situation was restored to approximately the same position as before the
tax period, but the Treasury still had an overdraft of $70,000,000 which
is still to come out of the market.
"Replacement of March 15 Maturities
"The present outlook is for moderately firm money conditions,
as the market settles down after the tax period.

Business is active. The

security markets are using more credit. Further large gold imports seem
unlikely for the present.




-95"If this anticipation is correct, the country will require currently, as in early March, over one billion dollars of Federal Reserve
credit. But there will be a difference in the makeup of this credit,
because foreign correspondents replaced about 50 million dollars of securities matured on March 15 with bills, and the bill holdings of the system
will probably be reduced to something about that amount and the borrowings
by member banks increased.

The effect of this operation will be the same

as a sale of securities.
"Under these conditions borrowing by member banks throughout the
country will be around 400 to 500 million dollars and by member banks in
New York City upwards of 100 million dollars, and the call rate will be a
firm 4 per cent, or possibly higher, even if the 75 million of securities
in the system and foreign accounts, which matured March 15, are replaced.
If, however,these are not replaced, about 75 million dollars additional of
member bank borrowing will be required and call rates will be nearer41/2
or 5 than 4 per cent.
"The principal argument for reducing our security portfolio, by
not replacing the maturities, is that the security market is very active
and using more credit, and firmer money conditions will tend to keep
speculation within bounds.
"The principal arguments for maintaining our security portfolio
by replacing the maturities are:
"l. A portfolio of securities is a protection against inflation, and its size should not be reduced without good cause.




"2. Higher rates here would tend to attract foreign balances
and gold from countries which need them to us who do not want them.
"3. Higher rates here would force higher rates abroad and

-96continue the pressure on world commodity prices.
"The foregoing was submitted to and unanimously adopted as the
report of the Open Market Investment Committee, Washington, D. C ,
March 21, 1927•"
Action of Committee. The recommendations of the Committee at
the meeting last referred to were presented verbally to the Board at a
meeting of the Board and the Committee held on March 21 and were as
follows:
(1) That the Committee be authorized to replace the $25,000,000
of Government securities which matured from the Special Investment Account
on March 15, and
(2) To purchase an additional $50,000,000 of short-term Government securities if and when a situation develops that would seem to justify
such action.
The Board approved of the Committee replacing the $25,000,000 of
Government securities which had matured on March 15, and advised the Committee that it (the Board) would stand ready to act upon a recommendation
for the purchase of an additional $50,000,000 of short-term Government
securities at any time such a course should appear desirable.
At this time (March 21) the account stood at $176,323,500, and
the Committee had authority to increase it by the amount of the March 15
maturities to $201,000,000, which was done immediately following the meeting. The account remained at $200,000,000 all during the period from
March 21 to a date early in May.
Arrangements for Gold Transaction with Bank of France
At a meeting of the Federal Reserve Board held on May 5, 1927,
Governor Strong reported verbally arrangements being made to purchase




•97$60,000,000 of gold from the Bank of France, to be held by the Bank of
England for the New York bank's account. The following is an excerpt
from the minutes of that meeting:
"At this point, Governor Strong of the Federal Reserve Bank of
New York, entered the room and advised the Board that the Bank of France
had contemplated and made arrangements to ship $90,000,000 of gold to
the American Exchange Irving Trust Company of New York City, that
$12,000,000 of the gold had been received by the member bank and
$18,000,000 is now in transit.

He stated that the Federal Reserve Bank

of New York has about completed an arrangement whereby the balance of the
gold not yet shipped ($60,000,000) would be sold to it by the Bank of
France and held for the Federal Reserve Bank, properly earmarked, by the
Bank of England. He also referred to a telephone conversation this morning with Deputy Governor Harrison of the Federal Reserve Bank of New York,
regarding impending arrangements for stabilization of the Polish currency."
No action was taken by the Federal Reserve Board at this meeting.
Meetings of May 9-11, 1927
Meetings of the Open Market Investment Committee were held in
Washington on May 9, 11, and 12, during which period the Governors' Conference was in session.
Preliminary memorandum to Governors' Conference.

The minutes of

the meeting of the Open Market Investment Committee held on the morning of
May 9 show that the Secretary read to the Committee a preliminary draft of
a memorandum relative to the open market policy which was to be submitted
to the Governors' Conference in connection with the Committee's report.
The minutes of a meeting of the Open Market Committee held on the afternoon
of May 9, 1927, show that the Committee considered a redraft of the




-98preliminary memorandum containing the amendments agreed to at the morning
meeting, and that the Chairman of the Committee was requested to transmit
seven copies of the memorandum as amended to the Governor of the Board
for the members of the Board, with advice that the Committee would be glad
to meet with the Board and discuss the memorandum any time suitable to its
convenience. The amended memorandum reads as follows:
"The principal transactions in the Special Investment Account
since the last Governors Conference were reviewed in the chairman's report
to the committee on March 21, and copies of this report were sent to all
Governors.

In accordance with the action taken at that meeting, purchases

of 25 million dollars of securities were made in the market to replace
March 15 maturities, and the Special Investment Account was thus restored
to 200 million dollars, which is approximately the same amount as has been
maintained for the past two years. Recent transactions resulting from
large purchases of gold, are described hereafter.
"General Credit Situation
"For many months business has been active and has continued to
maintain, and in some directions even to exceed, the rate of production
and consumption of immediately preceding years, although a number of
recent developments have been of a character which might have had a widespread unfavorable effect had the general business and financial situation
not been fundamentally sound.

These developments are, of course, the ex-

tensive floods in the lower Mississippi Valley, some overproduction and
price declines in the oil industry, disturbing financial developments in
Japan, reduced production and consequently reduced working time for labor
in two or three large automobile concerns, and not so recently the collapse
of a number of real estate and building speculations and of one or two




~99~
large installments finance companies.
"The total volume of credit in use, estimated from the reports
of the reporting member banks, is now about a billion and a half dollars
larger than a year ago.

The considerable expansion of the last two

months has been distributed between increases in commercial loans,
security loans and investments. On the other hand, the total amount of
credit extended by the Reserve banks is about one hundred million dollars
less than this time last year.

As the net gold imports (excluding the

movement now under way) within this period were about 105 millions, the
reduction of Reserve bank credit has about offset gold imports.
*- *- -x"While total discounts at the Reserve banks are smaller than a
year ago, the difference is largely due to reduced borrowings by country
banks as reporting banks in principal centers are borrowing nearly as much
as they did a year ago. . . .
"A review of the general credit situation, of rates and business,
brings out the following striking facts:
"(l)

That the general level of interest rates in New York, where

changes of rates generally originate, is about 1/2 of one per cent above
last year, the discount rate of the Federal Reserve bank also being 1/2 of
one per cent higher.
"(2) The amount of bank credit employed for conducting the
country's business, at a volume certainly much above the average of the
last few years, is only $1,500,000,000 above what it was last year.
"(3) While irregularly distributed between the classes of goods,
the general level of commodity prices has experienced a considerable fall,
and over the greater part of the past year the decline in prices has been




-100in both agricultural and non-agricultural commodities. Considering the
reluctance of member tanks to borrow from the Reserve banks, coupled with
the considerable decline in interest rates which is occurring in Europe,
the question is raised as to whether the somewhat greater restraint now
being applied to the extension of credit at the money center (New York),
coupled with the reduction of the total of the open market investment
account over the past 18 months or two years from $500,000,000 to less
than $200,000,000, has not gradually had the effect of exercising some
pressure, imperceptible in any change over a short period, but now becoming apparent when examined as to its effects over a longer period.
"Gold Movements
"Between January 1 and May 1 of this year, gold imports into the
United States have amounted to about $110,000,000, including $8,000,000
from Japan, and exports during the same period were $26,000,000. Met
imports during this period were therefore $84,000,000. Inasmuch as
approximately $14,000,000 of the gold exported was gold which had been
earmarked before the period under discussion, about $98,000,000 was the net
amount added to the monetary gold supply of the country during the first
four months of the year.

This gold movement, together with the imports of

1926, account largely for the fact that the System's earning assets show
a decline during the past year, in spite of an increase of some billion
and a half dollars in bank credit.
"Entirely apart from the movement of gold referred to above, there
have been some significant developments since May 1, not included in the
above figures. During the last part of April, the Bank of France recovered
approximately $90,000,000 of gold from the Bank of England by the repayment
of its credit to the Bank of England.




Of this $90,000,000, $12,000,000

-101arrived in New York last week, $18,000,000 is still on the water, and
$60,000,000 was purchased by the Federal Reserve Bank of New York on May 6
and is now held by the Bank of England under earmark for account of the
New York bank.

In addition to this Bank of France gold, $2,500,000 has

recently been imported from Australia, and another $2,500,000 more is now
on the water from Australia and expected to arrive in this country this
week.
"A somewhat disturbing factor arose in the probability of the
importation and sale to the Federal Reserve Bank of New York of the
$90,000,000 of gold, negotiations for the purchase of which had been concluded by one of the New York member banks from the Bank of France. It
was learned that space had been reserved on the steamers and arrangements
had been made for shipping the entire amount of gold; in fact, one shipment was about to arrive in New York, and others were being loaded. In
view of this situation, after consulting with all the members of the Open
Market Investment Committee and with the Federal Reserve Board by telephone, it was arranged to purchase from the Bank of France all of the
gold—nearly $60,000,000—which had not been shipped, and to sell the
Bank of France a like amount of the September maturity of certificates of
indebtedness held in the Open Market Investment account. By this arrangement, the money market status remained unchanged, except as to the gold
which had already been shipped, leaving the committee in position to determine later at its meeting whether these securities should be replaced
or not. Securities were sold to offset $9,000,000 of the $12,000,000
already arrived, but no arrangements have been made for sales to offset the
balance of the gold which will arrive from London and from Australia, amounting in all to about $20,000,000. With the sale already made and further




-102sales, if made to offset further gold arrivals, the securities remaining
in the System's portfolio account will be a little over $100,000,000, too
small an amount to afford security against possible future developments.
This will be appreciated, for example, if the $90,000,000 now purchased
had arrived at a time when we had no portfolio of government securities
available.

It is clear, therefore, that the committee must from now on

give careful attention to meeting this gold problem, either by increasing
its portfolio in anticipation of future developments, or by adopting other
measures.

The method of doing so should be determined with regard to

whether the time has or has not arrived when the Federal Reserve System
can afford to put new funds in the market, the effect of which would be to
reduce the borrowings of member banks, principally in New York, and possibly to reduce the System's holdings of bills. There are various
possibilities for dealing with the gold problem as a whole which have
never heretofore been discussed in the committee's report and which are
now submitted simply for discussion.

None of them are recommended at this

time, but are intended simply as a summary of all possibilities.
"(l)

They are:

The committee could replace the securities sold to the

Bank of France. The immediate effect would be to reduce the amount of
member bank borrowings in New York, which are now running on the average
at from $100,000,000 to $150,000,000.
"(2) Those Federal Reserve banks which have considerable holdings of long time bonds could dispose of those bonds, realize their profit
and repurchase through the committee as a part of the committee's account,
an equivalent amount of short time securities. These, with other short
term government securities owned by individual Reserve banks, could be
added to the System holdings without reducing the total earning assets




-103of the individual Reserve banks, and thus increase the committee' s account
to over $200,000,000,
"(3) Arrangements might be made with the Secretary of the Treasury for somewhat increasing balances carried with the Federal Reserve banks,
and reducing the amount carried with special depository banks.
"(4)

Some or all of the $75,000,000 of 2 per cent Panama Canal

bonds could be called and the national bank notes issued against them
retired.

Further purchases of the 2 per cent Consols of 1930 could be

made in anticipation of their possible retirement in 1930, as contemplated
by the Secretary of the Treasury in his report of 1924.
"(5) By gradual stages, or all at once, the time schedule of
the Par Collection System could be adjusted so as to increase the volume of
uncollected checks and correspondingly reduce the reserve of members.
"(6)

Plans could be undertaken for retiring the greenbacks,

which however would require legislation.
"(7)

Further amounts of the capital of the Federal Reserve banks

could be called.
"(8) The reclassification of reserve cities could be gradually
undertaken so as to increase reserve requirements.
"(9) A readjustment of the relations of the Reserve banks to
the market for gold could be effected if the Secretary of the Treasury saw
fit as authorised by law, to discontinue paying cash up to 98 per cent

of

the value of imported gold, thus throwing the market for gold entirely
upon the Federal Reserve banks and enabling them to reduce the gold point
for imported gold by the equivalent of a loss of interest for the period
during which payment would be delayed. By reason of our Treasury practice,
the United States is today paying the highest price of any world market for
gold.



"(l0) The Federal Reserve Board, of course, after adequate study,
could revise the definition of what constitutes a time deposit, thus raising the reserve requirements. This is probably justified by the fact that
something like 60 per cent of the increase in bank deposits in the United
States over the past ten years consists of that class of deposits which
require only 3 per cent reserve.
"(11) A revision of the regulations of the Federal Reserve Board
in relation to the maintenance of reserves, by averaging reserves for a
period of a week in Federal Reserve bank cities, and two weeks in the rest
of the country, could have the practical effect of somewhat increasing the
amount which member banks must borrow.
"(12)

The Federal Reserve Board could revise its ruling relative

to currency in transit, which in effect reduces reserve requirements in
those districts where the ruling is now applied.
"The above comprehend most, if not all, of the possible measures
available for dealing with the problem of gold imports in view of our reduced portfolio.

They are submitted for consideration and study.

"The possibility of gold imports must not be overlooked, and may
indeed be imminent.
"(l)

The underlying causes of such a movement would be:

The continued maintenance of our present level of interest

rates, somewhat higher than a year ago, in the face of declining interest
rates and reducing bank rates in Europe.
"(2) The fact that our technical practice in dealing with gold
makes this the best market in which to sell it and one of the most difficult from which to export it.
"(3) The possibility, regarded by some as the probability, that
within the next two years Germany will be forced to ship us large amounts




of gold in order to meet reparation payments in the standard year.
"(4) Heavy foreign payments to meet the service on all foreign
loans.
"Nor must the possibility be overlooked that conditions may
change rapidly and instead of experiencing a large addition to our gold
reserve, there is indeed a possibility, although more remote, that within
the next few years we may sustain a large loss of gold.
"Gold exports from this country can arise from two causes:
" (l) The first is the perfectly normal movement resulting from
exchange rates reaching a level at which it is cheaper to make payments
abroad by shipping gold than by buying exchange.
"(2) The other, however, can occur irrespective of the gold shipping point, because of large balances held in this country for account of
foreign governments and foreign banks of issue, which, as in the case of
Germany, may decide to take gold for reserve purposes, irrespective of the
gold point.
"No danger need be apprehended as to a normal export of gold, but
we might sustain a large loss of gold under the second category at any
time, and that we are now prepared to deal with successfully because of
the large proportion of such balances held by the Federal Reserve bank, the
export of which could easily be provided for by our purchasing the securities
now held for account of our foreign correspondents. The only embarrassment
likely to occur as a result of such a demand will be due to the lack of an
adequate supply of American gold coin, concerning which discussion has been
had from time to time with the Treasury.
"Looking, therefore, to the future, that is, say for the next
three years, the committee is of the opinion that the policy of the Federal




-106Reserve System should be to prepare itself to deal with either a large
import movement of gold or a large export movement of gold.

Any other

position would expose the System to the charge of lack of foresight.
"In view of the many alternatives to be considered, and
especially in view of the fact that whatever may be the policy of the
System it will involve taking a definite position as to the money market,
the committee prefers to defer any recommendation until after discussion
with the Federal Reserve Board and a definite expression of their views."
Action of Committee. A second meeting of the Open Market Committee was held on the afternoon of May 9, 1927, attended by six members
of the Federal Reserve Board.

The minutes of that meeting show that

there was a long discussion by various members of the committee and the
Federal Reserve Board of the preliminary memorandum previously distributed
among the members of the committee and the Federal Reserve Board, and that
Governor Strong explained that this preliminary memorandum did not embody
any recommendations but merely raised points for discussion with the Federal Reserve Board which would enable the committee later to file a report
with definite recommendations.

The meeting adjourned with the understand-

ing that the Committee would submit its final report to the Federal Reserve
Board later on in the week.
A

report of the Open Market Committee dated May 11, 1927, was

submitted to the Board at a meeting held on May 12, 1927. In this report,
the Open Market Committee made the following recommendations of policy for
the period ending August 1, 1927:
" (l) That no further sales of system securities be made in order
to offset arrivals of gold from abroad now known or anticipated.




" (2) That it shall be the policy of the committee between now




-107and August 1 next, gradually to acquire, if possible to do so without
undue effect upon the money market, sufficient additional short-time
government obligations to bring the total of the committee's investment
account up to $250,000,000.

In interpreting the expression 'undue effect

upon the money market,' the committee would expect to keep in mind any
changes which might occur in the general level of money rates, as well
as the extent to which these purchases might effect a reduction in the
amount of borrowings by member banks.
"While this policy is not directed towards bringing about a
reduction in discount rates by any Federal reserve bank, nor is that immediately anticipated, it is recognized that some lowering of market rates
for money might nevertheless justify such a reduction later in the year,
especially at the principal financial centers. The recommendation in
paragraph two is also made after consideration of the fact that somewhat
lower interest rates ordinarily operate to check gold imports; in fact,
that was one of the effects of purchases of securities made in 1924.
"The committee further expects to continue studies of those
methods set out in the preliminary memorandum by which increases in the
System's portfolio might be brought about without increasing the amount
of Federal reserve credit in the market.

It expects to discuss with the

Treasury Department those methods with which the Treasury is concerned,
and requests that the Federal Reserve Board give consideration to those
particular items, such as reserves on time deposits, which relate to
the regulations of the Federal Reserve Board."
Action by Board. At the May 12 meeting of the Board, following submission of the above recommendations, the Governor of the Board
called attention to the fact that the Board, under the impression that

-108
the Federal Advisory Council would meet here tomorrow recently requested
the Council to make a careful review of the open market policy of the
Federal Reserve System since the organization of the Open Market Committee
and to give the Board the benefit of its views and to submit any
objectives of open market policy. The Governor stated that the Federal
Advisory Council would not meet until next Friday, May 20, and consequently would not be able to discuss the matter as contemplated jointly
with the Board and the Open Market Committee, Governor Strong, Chairman
of the Committee, called attention to the fact that the preliminary
memorandum presented to the Board shows the present condition of affairs
and requested that consideration be given to that memorandum in connection with consideration of the Committee's recommendations. Thereupon
ensued a detailed discussion as to the present Open Market situation and
the desirability of increasing the System's portfolio of Government
securities, as recommended by the Committee, and of methods whereby such
an increase could be accomplished without disturbing the money market.
Governor Strong stated that the purpose of the Committee was to agree
with the Board upon the policy which would extend, under existing conditions, until August 1, and having done so that it would seem to be the
responsibility of the Committee to put the policy into execution, keeping
the Board informed daily of all transactions.

There followed a discussion as to the possibility of future imports of gold and the effect of such imports upon the money market, in
conjunction with a policy of the Federal Reserve System which itself
might result in adding to the present supply of money. Governor Strong
expressed the opinion that the policy contemplated in the Committee's




recomm




-109recommendations would not result in any increase in Federal Reserve
credit in the money market, but would be offset by reductions in member
banks' borrowings from the Federal Reserve Bank of New York or in the
bill holdings of the System. Upon motion, the recommendations of the
Open Market Investment Committee were received by the Board and made
special order of business for a date to be fixed by the Governor after
conference with the Chairman of the Board.
The Board reconvened during the afternoon of May 12, and during
that session the Governor referred to the statement made by Governor
Strong at the meeting of the Board on May 5 to the effect that the
Federal Reserve Bank of New York was endeavoring to purchase from the
Bank of France certain gold which the Bank of France was withdrawing
from the Bank of England and had sold to and intended to ship to the
American Exchange Irving Trust Company of New York City, which, if purchased, the Federal Reserve Bank of New York intended to have earmarked
and held for it by the Bank of England. The Governor stated that he had
been advised by Governor Strong that the gold in question totaling
$59,548,000 had been purchased by the New York bank, had been earmarked
and was being held by the Bank of England, and that at the Conference of
Governors of the Federal Reserve banks now in session in Washington it
had been voted unanimously that all Federal Reserve banks participate in
the purchase and that said gold be not counted as part of the banks' gold
reserves. The Governor stated that he had also been advised that the
participation was to be made effective as of May 11, and recommended that
in the Board's published statement showing the condition of the twelve
Federal Reserve banks, the gold in question be reported against the
caption, "Gold Held Abroad," immediately preceding the item "Due from

-110Foreign Banks," and that the published analysis thereof accompanying the
statement contain the following brief comment in regard thereto: "During the week the Federal Reserve Bank of New York purchased abroad
$59,548,000 of gold, the purchase being participated in by all Federal
reserve banks. This gold is now held earmarked by one of the foreign
correspondents of the New York bank and is shown in the statement against
a new item 'Gold held abroad.'"
The only action taken by the Board at this meeting was with regard to how the gold should be reported, and to reaffirm a previous
position taken that Federal Reserve banks should not regard as part of
their reserves gold earmarked in foreign countries. Up to this point, no
formal action had been taken, according to the minutes, approving of the
purchase of the gold.
At a meeting of the Board held on May 13, 1927, consideration
was given to the recommendations of the Open Market Investment Committee
which had been submitted at the meeting held on the previous day. The
action of the Board at this meeting was to adopt a resolution as follows:
"Resolved, that the Federal Reserve Board approve the report
and Recommendations of the Open Market Investment Committee, with the
feeling that the securities proposed to be purchased should be accumulated
slowly and with a view to the possibility that it may not be advisable to
purchase the full amount authorized withint[within]the time limit mentioned,"
The Board also approved the following draft of letter to the
Chairman of the Open Market Investment Committee, advising of the action
taken by the Board with respect to the Committee's recommendations:
"At the meeting of the Federal Reserve Board this morning,
consideration was given to the report of the Open Market Investment




-111Committee, dated May 11, 1927, in which the Committee recommended:
'(l) That no further sales of System securities be made in order to
offset arrivals of gold from abroad now known or anticipated' and
'(2) That it shall be the policy of the committee between now and
August 1 next, gradually to acquire, if possible to do so without
undue effect upon the money market sufficient additional short-time
government obligations to bring the total of the committee's investment
account up to $250,000,000. In interpreting the expression 'undue effect
upon the money market,' the committee would expect to keep in mind any
changes which might occur in the general level of money rates, as well
as the extent to which these purchases might effect a reduction in the
amount of borrowings by member banks.'
"The Board voted to approve the report and recommendations contained therein, with the feeling that the securities proposed to be purchased should be accumulated slowly and with a view to the possibility
that it may not be advisable to purchase the full amount authorized within the period of time mentioned."
Communications on Open Market Operations and Gold Movements9 mid-May July 1927
At this point (May 13) the account stood at approximately
$136,000,000, having been reduced during the previous week about
$65,000,000 by reason of sales of approximately $60,000,000 of securities
to the Bank of France and $5,000,000 for reasons not stated. The Committee, under the action of the Board above mentioned, had authority to
increase the account up to <$250,000,000.
On June 8, the account stood at $316,050,300.
Letter from Strong to Crissinger, June 9.

On June 9, Governor

Strong addressed a communication to Governor Crissinger, reading as




-112follows:
"It will interest you to have a resume of the transactions in
the open market which have been necessarily quite active because of the
large amount of securities which we are called upon to buy.
"As you have been advised we have made purchases of a total of
$100,000,000, offsetting exactly that amount of gold earmarked for account of one of our foreign correspondents, and that part of the
transaction is concluded.
"We have also concluded purchases aggregating a total of
$115,000,000 for delivery on or before June 15, to replace all of the
maturities held in the System account and for the account of foreign correspondents maturing on that date. In addition to that we have purchased in round figures $l6,000,000 for the System's open market investment account, this purchase having been made in connection with




the adjustment of purchases currently being made for account of the
Treasury Department, and so far that is all that has been done pursuant
to the recommendations of the Open Market Investment Committee recently
approved by the Federal Reserve Board.
"Preparations for the June 1 financing, occurring simultaneously
with the holiday at the end of May, necessitated somewhat heavier borrowing here than would ordinarily be the case, and the rates in the money market showed a tendency to stiffen somewhat, but we believe that the effect
was only temporary and that the return flow of funds from the interior and
of currency, coupled with the purchases which we have made, will leave
rate conditions not greatly above where they were during the latter part
of May.
"The present situation is that the member banks in New York

-113City owe us about $50,000,000 and that the dealers owe us an additional
$50,000,000 under sales contract agreement. Between now and June 15
this indebtedness of the banks and market to us may be somewhat further
reduced. For a few days after the l5th as usual money will be easy, as
Treasury maturities are in excess of tax payments, but after three or
four days large tax payments will come out of the markets. The amount
of funds available to the market will be reduced from the present situation by approximately $65,000,000 as a net result of June 15 maturities.
That means that the New York banks and market will have to be borrowing
from us at least $150,000,000, and, on top of this, will come the usual
extra demand for credit in connection with the end of the half year.
This will give us a situation that we will have to think about and watch
carefully. Further purchases will then be desirable."
Board discussions. Governor Strong's communication of June 9 was
brought to the attention of the Board at a meeting held on June 10. No
action was taken by the Board. In presenting the letter, the Governor
of the Board stated that Governor Strong advised him yesterday (Jane 9)
over the telephone that the Federal Reserve Bank of New York had purchased from the Reichsbank and earmarked abroad $2,600,000 additional
of gold, making a total of gold earmarked abroad of between $62,000,000
and $63,000,000. The Governor further stated that Governor Strong advised
him on the morning of June 10 that conditions were so shaping themselves
as to probably make it necessary for the Federal Reserve System to convert
this earmarked gold into earning assets through the purchase of bills
abroad.
At a meeting of the Federal Reserve Board held on June 14, there
was presented a letter dated June 11 from the Deputy Governor of the







Federal Reserve Bank of New York, with reference to the purchase of
$2,600,000 of gold by the Federal Reserve bank from the Reichsbank,
which was earmarked at the Bank of England, the Deputy Governor transmitting copies of communications addressed to other Federal Reserve
banks regarding the transaction and their participation therein. At
this meeting, the Governor also "reported a telephone conversation with
Governor Strong during which he was advised of the sale to the Bank of
France of approximately $60,000,000 of gold which the Federal Reserve
Banks have held earmarked at the Bank of England. The Governor reported
that the sale was made at a price approximately $85,000 above that paid
for the gold which is to be taken down by the Bank of France at the rate
of $15,000,000 a week, with an option to the Bank of France to take
$30,000,000 the first week. The Federal Reserve Banks in payment will
receive a deposit credit at the Bank of England, at interest, which is
to be invested in sterling bills as and when such bills are available.
The matter, he stated, was submitted to the directors of the Federal Reserve Bank of New York and unanimously approved by them and will be made
the subject of a formal communication to the Board in the course of the
next day or so." Following the Governor's report, a general discussion
ensued as to the position of the United States in the world gold market and the policy involved in the purchase of foreign bills reported
by the Governor.
At the meeting of the Board held on June 15, the Governor presented a letter dated June 14 from the Deputy Governor of the Federal
Reserve Bank of New York, transmitting for the information of the Board
copies of telegram and letter addressed to the Governors of all other
Federal Reserve banks, concerning the sale to the Bank of France of

-115approximately $60,000,000 of gold held under earmark in the Bank of
England for account of the Federal Reserve banks, as reported informally
by the Governor at the meeting of the Board on June 14. Thereupon ensued
a discussion as to the authority of the Federal Reserve Board in connection with transactions of this kind entered into under the provisions
of Section 14 of the Federal Reserve Act. The relations between the
Federal Reserve Bank of New York and the Bank of England were also discussed, and by direction of the Board the Secretary opened and read to
the Board the formal agreement between the New York bank and the Bank of
England which has been carried in the files under seal. He also read
the action of the Board at its meeting on December 19, 1916 in voting
"That the Federal Reserve Bank of New York be authorized to appoint as
its correspondent and agent The Bank of England of London, England, and
that it be further authorized to open and maintain banking accounts with
and for said correspondent and agent for the purpose of purchasing,
selling and collecting bills of exchange, in accordance with the provisions of Section 14 and other provisions of the Federal Reserve Act,
as amended; and for such other purposes as may be permitted under said
Federal Reserve Act, as amended." Following the discussion, it was
voted to request the Law Committee to report to the Board with respect to
what limitations and restrictions the Board is authorized to impose on
operations conducted by the Federal Reserve banks under Section 14 and
as to the Board's general authority in such transactions.
Letter from Strong to Crissinger, June 16. On June 15, the
account stood at $244,256,300, having been reduced during the week from
about $316,050,300, the point at which it stood on June 8. Operations
over this period are referred to in the following letter, dated June 16,




-116addressed by Governor Strong to the Governor of the Board, and presented
at a meeting of the Board held on June 17:
"Referring to my l e t t e r of June 9 in regard to transactions in
the open market there has been some change in the position due to the
unexpectedly large overdraft of the Treasury in connection with June 15
transactions which leads me to write you further as to the position of
the money market and as t o prospective purchases by the Open Market
Investment Committee,
"

Wehad calculated, with such information as we usually have,

that the amount of the overdraft would be, in round figures, $180,000,000.
It turned out to be $240,000,000, the disbursements for the Treasury's
account being larger than the preliminary estimates.

Against this large

disbursement pending tax collections we distributed $104,000,000 of
participations to various member banks, leaving the net amount of funds
put into the market as a result of Treasury transactions $136,000,000,
This means, of course, that there must be withdrawn from the money
market between now and early next week not only the $136,000,000 which
will repay the government's temporary certificate of indebtedness (net)
but also possibly $30,000,000 more t o restore the government's working
balance in the Reserve banks.

In other words, on top of borrowings

from us aggregating between &25,000,000 and $50,000,000 at the present
time, the market will lose, say $165,000,000, and we anticipate that the
borrowing in a l l forms at t h i s bank next week for a time may exceed
$200,000,000, and t h i s , of course, w i l l be in the week prior to the
double holiday when we have to meet quite a heavy demand for currency,
a demand on the part of those who practice window dressing at semi-annual
periods, as well as a demand arising from the very heavy July 1 interest




-117and dividend disbursements.
"One hundred million dollars of the securities now held in
the open market account were purchased to offset the loss of that amount
of gold earmarked for foreign account as described in my letter of
June 9, so we have only realized about $15,000,000 of the increase in
the account which was contemplated when the committee and the Board
aims we had in mind at that time, we might still purchase an additional
$100,000,000 between now and August 1.

"Having in mind, however, the size of the Stock Exchange Loan
account and the expressions of views contained in your letter of May 13,
our directors today, after a full discussion, took the view which is
held by the officers of the bank that it might be well to defer further
purchases until possibly after the first of July, even though in the
meantime money rates might advance somewhat in the general money market.
"This was the recommendation of the officers of the bank after
full discussion of the situation, and we thought we should bring it
immediately to the attention of the Board. We are, however, prepared
to act promptly in making further purchases in case money market conditions indicate the need for it.
"I hope you will be good enough to bring this letter to the
attention of the Board as it somewhat elaborates the report contained
in my letter of June 9."
Board reply questioning purchase authority. At the meeting
of the Board on June 17, following presentation of the last quoted
letter from Governor Strong, discussion ensued as to the action of the
Board at its meeting on May 13 in approving a recommendation of the




-118Open Market Investment Committee "That it shall be the policy of the
Committee between now and August 1st next, gradually to acquire, if
possible to do so without undue effect upon the money market, sufficient
additional short-time government obligations to bring the total of the
Committee's investment account up to $250,000,000." Attention was called
to the fact that the System account then (June 17) amounted to approximately
$235,000,000 and that regardless of the manner in which the account was
built up the authority granted by the Board had been exercised and the
aims which the Board had in mind had been realized. After discussion,
it was understood that there would be prepared and submitted to the Board
at its next meeting draft of a letter to Governor Strong along the lines
of the discussion at this meeting.
At a meeting of the Board held on June 20, the Governor of the
Board, in accordance with the action of the Board at its meeting on June
17 submitted draft of letter replying to Governor Strong's letter of
June 16, reading as follows:
"Receipt is acknowledged of your letter of June 16th, supplementing your letter to me of June 9th, and commenting upon the changed
position of the money market due to the unexpectedly large overdraft
of the Treasury in connection with June 15 transactions. I note your views
regarding the possibility of further purchases by the Open Market Investment Committee and note the opinion of the officers of your Bank concurred
in, by the members of your Board of Directors that it might be well to
defer any further purchases until after the first of July, even though
in the meantime money rates might have advanced somewhat in the general
money market.




-119"Your letter was brought to the attention of the Board at its
meeting this morning, and there was a discussion of several of the matters
mentioned.

Particular reference was made to your statement that the Open

Market Investment Committee has realized only about $15,000,000 of the
increase in the System's account which was contemplated when the Committee
and the Board discussed the matter at the time of the Governors' Conference, and the further statement that 'to realize fully the aims we had in
mind at that time, we might still purchase an additional $100,000,000
between now and August lst.'
"Such purchase of an additional $100,000,000 would result in an
enlargement of the System's investment account beyond the limit approved by
the Board at its May 13th meeting.

Action of the Board at that time was to

approve the Committee's recommendation to purchase sufficient additional
short term government obligations to bring the total of the investment
account up to $250,000,000.
"The System's special investment account amounts at this time to
approximately $235,000,000, leaving a leeway for future purchases of
$15,000,000 to reach the limit previously approved.
"In view of the contingencies pointed out in your letter and such
other information as the Board has regarding money market conditions, it may
later on be advisable to make additional purchases of securities on System
account. The enlargement of the System's account in the near future, however, raises a new question, and the matter should, therefore, be submitted
to the Board in the usual course.11
In presenting the draft of letter just quoted, the Governor stated
that he understood from a telephone conversation with Governor Strong that a
further letter on this subject is being forwarded to the Board, and action




-120on the letter quoted above was therefore deferred.
Reply of Strong on authority to offset gold movements. At a
meeting of the Board held on June 21, Governor Crissinger presented the
following letter from Governor Strong, dated June 20, which he had stated
at the meeting on June 20 was being forwarded to the Board:
"In our telephone conversation on Friday you mentioned that some
members of the Board felt that the purchases already concluded by the Open
Market Investment Committee had completed the amount which was recommended
by the committee to the Federal Reserve Board in its last report, and that
the position should now be reviewed again to determine whether any further
purchases were justified.
"We have proceeded in making these purchases in accordance with
my understanding of the policy agreed upon by the Board with the Open
Market Investment Committee in the past, that large movements of gold such
as we have recently experienced are, as a matter of course, to be offset
by purchases or sales of Open Market Investment Committee holdings. I think
you will find this general view of the committee's policy referred to in
previous reports of the committee, three of which I have before me, that is,
November 8, 1926, September 10, 1926, and the last meeting held in May, The
records of the earlier meetings of the committee, are, as I recall, even
more specific on this point, but they are not before me as I dictate this
letter,
"To review the present situation, when the Bank of France secured
the return of $90,000,000 of gold in London we negotiated for its purchase,
as you know, on very short notice in order to avoid its getting into the
country when, having once crossed the exchange barrier, it would form a
permanent part of our gold reserves, $30,000,000 we were unable to arrest




-121in London, but we partly offset the effect of its addition to bank reserves
by sales, as I recall, of about $15,000,000 of the System's securities.
The purchase of $60,000,000 in London was effected by our selling a like
amount of the System's securities to the Bank of France and so avoiding the
expansion of bank reserves which would have resulted from our paying for
the gold without reducing our investment account. While the effect of
this was to give the Bank of France dollar balances for $90,000,000 in
New York, about $75,000,000 or thereabouts of this gold was actually offset by sales of securities.
"Now exactly the reverse operation has taken place as to
$100,000,000, because the Bank of France has withdrawn $100,000,000 of their
deposits with New York banks, transferred them to us, and purchased that
amount of gold, thus effecting a reduction of bank reserves in this city of
$100,000,000. As explained to you by telephone, this made it necessary to
offset the loss of reserves by purchases of securities as rapidly as they
could be made.

Had we failed to do so we would have had a sharp advance

in interest rates at a time when it would have caused inconvenience to the
Treasury financing then under way and would have increased the likelihood
of even higher rates which we also expected after the June financing was
concluded.
"As in previous similar cases we did not feel that these purchases
formed a part of the $115,000,000 authorized by the Board following the
submission of the committee's report of Kay 9.

In fact we felt that under

that authority only $15,000,000 of purchases had been effected and that the
general scheme of the report to continue purchases up to $250,000,000 before
August 1, if money market conditions made that possible, clearly contemplates that regard for money market conditions and for the volume of




-122borrowing in New York would be the guiding principle. Were this not the
case the effect of this loss of $100,000,000 of gold would be to entirely
nullify the action of the Open Market Investment Committee and the Federal
Reserve Board.
"As explained by telephone and in my last two letters on this
subject, we are anticipating heavy borrowing this week, although the amount
cannot accurately be forecast. It will furnish the opportunity to enlarge
the committee's holdings of securities which the committee believes, and
which we felt the Board believed, was a desirable thing to accomplish if it
could be done without creating an undue ease of money, but the continued
enlargement of the security loan account seemed to justify our delaying
these purchases for a short time so as to see what effect a brief period of
somewhat higher rates would have.
"We realize, as the Board doubtless does, that there has been
a considerable speculation in stocks, although far less active and menacing
in its proportions than that which had developed in either Berlin or Paris.
Just as is stated in the committee's report and in my previous letters this
situation will require careful scrutiny from day to day until the true
position of the money market discloses itself. But I am sure the Board has
in mind that if a period of definitely higher rates now develops and no
purchases are made practically all the bills in the market will come to the
Federal Reserve Bank which might make it necessary for us to advance our
bill buying rate, and that, in turn, make it necessary to advance our discount rate. Such action at this time we do not believe is justified, and
our directors feel would be distinctly harmful.
"So, summarizing the position as it appears to be today, I should
say that we are quite willing to watch the effect of somewhat higher rates




-123for a short period, but we believe it would be hazardous at this time to
allow a general revision of the level of interest rates to occur, for the
reasons "(l)

That it might force an increase in our bill rate and

ultimately our discount rate,

"(2) That such a n increase would b e detrimental to the business
of the country,
"(3)

That it would have a tendency to depress the value o f

sterling and ultimately the continental exchanges, and possibly embarrass
us b y starting another gold import movement, and
"(4)

That with the heavy refunding operations n o w under w a y and

in prospect for the Treasury we believe that any general advance i n t h e
level of interest rates, unless necessitated b y other impelling reasons,
might have a detrimental effect u p o n the Treasury ' s plans which would b e
quite unnecessary.
"I have endeavored, by telephone and letter, t o keep you and the
members of the Board fully informed o f these developments from day to day
in the hope that what w e are doing was fully understood and would meet with
the B o a r d ' s entire approval.

I f that i s not t h e case may I ask you to let

me k n o w at once, a s the situation is certainly one o f sufficient importance
to make it necessary that there should b e n o misunderstanding of the B o a r d ' s
action and the committee's policy."
Action o f Board. During a discussion which ensued following the
reading of the above letter, the Governor was called from t h e meeting and
upon his return stated that he had received a telephone call from Governor
Strong who suggested that i f members of the Board desired more detailed i n formation regarding present conditions than i s contained i n his letters, h e




-124would be glad to come to Washington tomorrow (June 22) for an interview.
At the request of the members of the Board, the Governor of the Board expressed to Governor Strong the desire of the members that he come to
Washington.

Action by the Board on Governor Strong's letter of June 20 was

thereupon deferred.
Accordingly, Governor Strong came to Washington and attended a
meeting of the Board held on June 22. The following is quoted from the
minutes of that meeting:
"Governor Crissinger stated that the meeting had been called for
the purpose of discussing with Governor Strong in further detail the matters
referred to in his letters to the Board of June 9th, 16th and 20th. The
Board, with Governor Strong, then made an extended review of present and
prospective conditions. Governor Strong reported upon the money markets, at
home and abroad, and on the gold and exchange situation. During the discussion, it was brought out that if money rates should firm or rise it
would be desirable to give relief to the situation through purchase of
securities in the open market. The opinion was expressed by some members
of the Board that authority to the Open Market Investment Committee to make
such purchases up to $l00,000,000 already exists under the action taken by
the Board on May 13th, as the $100,000,000 of securities purchased since
that time to offset gold exported to the Bank of France should not be considered as having been purchased under the Board's authority referred to.
This opinion was not concurred in by all members of the Board.11
The action of the Board at the meeting on June 22 was to adopt the following resolution:
"After hearing a report upon the money markets, at home and
abroad, and of the gold and exchange situation, the Board authorize the




-125Governor of the Board to advise the Open Market Investment Committee that
it does not consider the $100,000,000 of securities purchased by the Committee since May 13, 1927, as forming part of the authority granted to the
Committee by the Board on that date."
During the period from June 22 to the date of the next meeting
of the Open Market Investment Committee held in Washington on July 27,
purchases were made for the account which increased the total from
$250,448,300 to $265,998,300.
Meeting of July 27, 1927
Preliminary memorandum of Chairman. At the July 27 meeting of
the Committee, consideration was given to a preliminary memorandum relative
to open market policy, as follows:
"The gold movements of the past two months have illustrated the
need for preparedness on the part of the Federal Reserve System to deal
with either gold exports or imports, which was emphasized in the Chairman's
memorandum discussed at the last Governors1 Conference.

This year's gold

movements have included the import of 130 million dollars of gold from
abroad, the purchase of 62 million dollars abroad, the sale of 100 million
dollars for earmarking here, and the resale of 60 million abroad.

There

has thus been an import movement, or its equivalent, of 190 million dollars
and an export movement, or its equivalent, of 160 million dollars. Fortunately these two movements have largely offset each other in their influence on the domestic credit situation.
embarrassment.

Otherwise they might have occasioned

These movements were largely unforeseen and unforeseeable,

although at any time possible under present conditions.
"Recent transactions in the special investment account have been
largely for the purpose of dealing with these changes in gold.




At one time,

-126in May, the account was as low as 136 million dollars, and it has now been
restored to 265 million dollars. The increase represents largely purchases to offset the earmarking of 100 million dollars of gold here, but
includes in addition the purchase of about 30 million dollars of securities under the authority arranged at the time of the Governors' Conference.
. . . It would appear that this portfolio should be increased from time to
time when favorable opportunity offers, if the System is to be in a position to meet future extraordinary gold movements. . . .
"A temporal increase in the account in ordinary course may be
involved in replacing 56 million of maturities in September which includes
30 million taken over from a foreign account in exchange for larch certificates. It may be necessary to take over further amounts of securities from
foreign correspondents.
"The Credit Situation
"A number of important changes have taken place in the domestic
and foreign credit situation since the Governors' Conference. These may be
summarized as follows:
"l. Money rates abroad have risen vigorously; open market money
rates in London, Berlin, Zurich, and a number of other centers are markedly
higher than they were three months ago. The Reichsbank and the Bank of
Austria have raised their discount rates. Open market money rates are close
to or above the bank rate in London, Berlin, Zurich, Amsterdam, and Milan,
as shown in the attached table. These firmer money conditions are undoubtedly exerting continuing pressure upon world trade and world prices,
which is liable to react unfavorably upon our own trade and prices.
"2.

There has been some reduction in business activity in this

country, not serious, but indicating a spirit of great caution in business.




-127"3. There has been some congestion of the bond market, due
largely to undigested new issues. This situation has been partially corrected.
"4. Due largely to reduced industrial payrolls there has been
a slight reduction in the past few weeks in the credit and currency demand,
and total bills and securities of the Reserve System have dipped below one
billion dollars. The New York Reserve Bank gained 50 million last week
in transfers from the interior and New York City member bank borrowing was
correspondingly reduced.
"5. There is growing ease in money conditions, although some
rates are still slightly higher than a year ago, due probably to a higher
discount rate at the New York Reserve Bank. . . .
"The Prospect for Autumn
"Normally the approaching seasonal demand for funds might be expected to tighten money conditions somewhat.

If this takes place it would

have the result (l) of increasing the pressure on world money markets and
perhaps forcing up the Bank of England discount rate, and certain of the
Continental discount rates, with consequent unfavorable reaction upon world
trade and prices; (2) of accentuating the existing tendency towards some
reduction in business activity.
"If on the other hand steps should be taken which would prevent
any seasonal increase in money rates, and tend rather towards somewhat
easier money conditions, the following results might be anticipated.
"l. An easing of the pressure upon world money markets, which
would react favorably upon world trade.

The results would be felt partly

through the tendency for balances to move in the direction of the highest
rate, and partly as lower bill rates here would attract financing to our




-128bill market which might otherwise go to London and require funds there.
"2. Coming at the crop moving season easier money conditions
would tend to facilitate the marketing of the crops at favorable prices.
"3. It would tend to remove any credit pressure which may now
be exerted upon business, and would encourage business enterprise.
"4.

There would on the other hand be danger that easier money

might encourage speculation. The spirit of business is so cautious that
it seems doubtful whether speculative tendencies in business would easily
arise, but it is probable that easier money would stimulate speculation in
securities.
" If under these circumstances it should seem wise to follow a
policy favoring easier money conditions, the immediate problems would be
(l) to localise the effects of easier money conditions, where they would
be most beneficial; and (2) to prevent excessive speculation or excessive
growth in the volume of credit.
"In this connection the attached table shows the total bills discounted at Federal Reserve Banks in the 12 districts. The total is nearly
100 million smaller than it was a year ago and the decreases in bills discounted exceed 25 per cent in the New York, Richmond, Minneapolis, Kansas
City, and Dallas districts."
Action, of Committee. The Minutes of the meeting of the Board and
the Open Market Investment Committee held on July 27 read as follows:
"The meeting was called as a meeting of the Open Market Investment Committee with the Federal Reserve Board and representatives of two
of the mid-western banks were present.

The Chairman presented his report

reviewing open market operations and credit conditions. The credit policy
of the System was thereupon fully discussed.




-129"Consideration was given to the continued fall in commodity prices,
to the fact that there was a diminution of borrowing from the reserve banks
due apparently to some slackening in business, and especially to the relation of money rates in the United States to money rates in Europe. It was
reported that because of heavy foreign payments which are likely to increase with the fall movement of commodities to Europe, there was a continued drain on European central bank gold reserves, which made it more
than likely that central bank rates in Europe would need to be further
advanced this fall.

The German and Austrian rates have already been once

advanced and there is some probability of a one per cent advance in the
rate of the Bank of England.
"All present at the meeting recognized that these developments
would necessarily have a depressing effect upon business abroad and might
tend to restrict the freedom of purchases of goods in this country at the
usual season.

It was also brought out that it is the duty of the central

banks to keep money rates at as low a level as may be attained with safety,
and that at this time rates could be reduced not only without harm but with
reasonable expectations of beneficial results. It was felt that the only
possible adverse development resulting from a general lowering of discount
rates would be in the speculative security markets, but that this possibility
should not stand in the way of the execution of an otherwise desirable
policy,
"There was no exception to the view that the time had arrived, or
was approaching, when the discount rate in New York should be reduced, and
with one or two exceptions there was no dissent from the view that a System
policy of lower discount rates should in general prevail. It was pointed
out, however, that local conditions in some of the interior reserve districts




-130did not indicate any demand for rate reductions in those districts and that
the small borrowings from the reserve banks indicate an adequate supply of
credit for all needs at the present rates.

Officers of some of the larger

member banks were quoted as opposed to rate reductions.

On the other hand,

it was pointed out that reductions now, which would result in no harm and
considerable possible benefit, would place the reserve banks in position to
make increases later which might serve as warnings without penalizing
business with high rates.
"It was also suggested that in order to make a three and onehalf per cent discount rate effective some further purchases of securities
might be desirable up to say $50,000,000.
"The most important consideration at the meeting was undoubtedly
the fact that the differential between the rates in New York and the rates
in London was not today sufficient to enable London, and therefore the
rest of Europe, to avoid general advances in rates this autumn unless rates
here were lowered, and that the consequence of such high rates as would
result in Europe would be unfavorable to the marketing of our export produce
abroad and would have an adverse effect generally on world trade.11
The minutes were approved by the meeting, following which it was
moved and carried that the authority of the Open Market Investment Committee
be extended for the purchase, as and when conditions warrant, of not to exceed an additional $50,000,000 of investments.
At this point, July 27, when the account stood at $265,998,300,
the Committee had authority to increase the holdings in the account up to
$315,000,000.




(Secretary's note: On July 29, 1927, the rediscount rate
of the Federal Reserve Bank of Kansas City was reduced
from 4 per cent to 3-l/2 per cent and between that date

-131and September 13, 1927, similar reductions were made at
all of the Federal Reserve banks. The rate of 3-1/2 per
cent was established at the Federal Reserve Bank of New
York on August 5, 1927, at which time the Open Market
Investment account amounted to approximately $290,000,000.)
Communications on Open Market Operations and Gold Movements, August October, 1927
During the period from August 15 to 19, the following letters
were exchanged between the Governor of the Board and Governor Strong:
Letter from Strong to Crissinger, August 15. "I am sending you
a letter today as Chairman of the Open Market Investment Committee which
I think explains itself, but wish to add something to it personally so that
you may understand the atmosphere.
"There has been a considerable movement of funds away from New
York. It resulted as you have observed in the money market remaining somewhat firmer than we had anticipated and it not only resulted in our purchasing somewhat more for open market account than I had expected, but in
our doing so much more rapidly than had been anticipated. The transactions reported in my separate letter are simply routine and arose in connection with adjustments made in the various accounts as explained.
"We are about facing the need for a very considerable preparation
for the September 15 financing. We hold for account of the Open Market Investment Committee and for account of our foreign correspondents something
over $200,000,000 of the certificates maturing September 15. If repayment
of these were received from the Treasury without any offsetting purchases
it would of course result in a very severe stiffening of money rates and a
large shortage of reserves in New York, much the largest in fact that we
have experienced in some years. In view of this fact we are now proceeding
vigorously to purchase several longer maturities against offsetting sales
of the September 15 maturities as rapidly as these can be effected. The




-132account will be up and down from day to day, but I want you to understand
just what is taking place, and hope you will explain it to your colleagues in the Board.
"From this time on I anticipate there may be a fairly steady
growth in demands upon us by the money market and we would not wish to
have the money situation complicated by failure to anticipate these maturities."
Reply of Crissinger, August, 16,

"I have received this morning

your private and confidential letter of August 15th concerning the market
situation as it is now developing.

It is very interesting.

I think it was

reasonable to expect it in view of the differential between the rates of
New York and London.
"I quite agree that you should take vigorous steps to prepare for
off-setting the September maturities.
"It appears to me that we have some problem on, but I feel confident that you will be able to work it out. I would be very glad to take
this matter up with the Board if there was any Board here, but there is
nobody here but Mr. James. . . ."
Letter from Strong to Crissinger, August 15. "At the opening of
business this morning, the Open Market Investment Account stood at about
$301,000,000, with additional purchases made last week, for delivery today,
of $4,000,000, which will make the total $305,000,000. This brings us up
to a total of $40,000,000 of purchases against the $50,000,000 recently
authorized.
"This morning one of our foreign correspondents requested us to
sell $10,000,000 of September 15, 1927 certificates, which we are taking
for the System Account.




This will complete our purchases for the present.

-133In addition to t h i s $10,000,000 purchase we have been offered a block of
$20,000,000 of the September 15 certificates, and as we hold in the System account $20,000,000 of the Treasury 3 3/8% bonds (for which we turned
in Second Liberty Loan 4 l/4% bonds on June 15) which can now be sold t o
an advantage, i t has seemed to us an opportune time to make the switch.
We are, therefore, taking in the $20,000,000 of September 15 certificates,
against which we will s e l l the long-term 3 3/8% bonds, and have today sold
$10,000,000 of the l a t t e r at 100 22/32, for delivery tomorrow.

The remain-

ing $10,000,000 will undoubtedly be sold within the course of the next few
days."
-X- -X" -X-

Letter from Strong to Crissinger, August 16, "Since writing you
yesterday we have still another development which has a bearing upon the
money market. Sterling exchange since our rate reduction has been consistently strong and yesterday we were able to liquidate L1,000,000 of our
London account at a satisfactory rate. And the arrangement with the Bank
of England to continue this policy will possibly result in further sales
of sterling from time to time so long as the market justifies it.
"These sales of course have the effect of taking funds out of
the money market in New York and consequently of impairing banking reserves.
If sterling is strong enough to justify considerable sales it will possibly
be necessary for us to extend our purchases of Government securities. This,
of course, is one of the offsetting transactions which will be current from
time to time, and it simply means that as the London portfolio decreases
the New York portfolio will correspondingly increase, and vice versa. On
the other hand, it may be that we can buy gold in London at satisfactory
prices and hold it earmarked so as to be in position to sell it at a




-134favorable opportunity."

-x- -x- -xLetter from Strong to Crissinger, August 19. "Matters are
developing from day to day in money market affairs and once more I should
advise you just what is transpiring.
"In the first place you will observe from the gold settlement
fund figures that we have lost over $120,000,000 of our reserves in the
last few weeks to the rest of the country.

While this is not unusual at

the season, I have a feeling, which is shared by some of my associates
here, that the movement has been accentuated by the failure of Chicago and
Philadelphia to reduce their discount rates. But after all that is a
matter for them to decide and we must make our arrangements accordingly.
"Until the last day or two the trend of the money market disclosed an underlying strength which disturbed me somewhat, but within the
last forty-eight hours it has shown evidence of ease, stock exchange
rates today were reduced to 3-1/2%, there is a somewhat lessened demand
for Federal Reserve funds, and signs that the commercial paper market has
eased a bit as well as the rate on collateral time loans.
"One of the results of this ease, of course, is to strengthen
the sterling rate somewhat and we have been successful in disposing so far
of about L-3,750,000 of our sterling balances - in round figures about
$18,000,000 - This, of course, takes money out of the money market and
considering that it involves no change in policy and simply a shift in
portfolio from London to Mew York, we have felt obliged to buy a moderate
amount of governments in order to offset these withdrawals.
"Taking the situation as a whole, it has worked out most satisfactorily.




If we find after the turn of January that our portfolio is

-135larger than necessary we can readily liquidate a part of it. And as matters
stand today I think it may be better later in the year to let the needs of
the market be supplied by the member banks borrowing from us. The
liquidation immediately following the first of January will enable us to
judge of the extent, if at all, we should sell Government securities.
"I hope the whole program has worked out to your satisfaction.
I know it has to ours, and our directors expressed satisfaction when the
subject was reviewed at yesterday's meeting."
Letter from Strong, August 25. All of the above communications
were presented at an Executive Committee meeting held on August 24. No
action was taken by the Committee except to note the contents thereof.
At the meeting of the Executive Committee held on September 2,
the Committee noted the following communication from Governor Strong dated
August 25:
"Since my letter of August 16 in reference to changes in the
Open Market Investment Account, the strength in sterling has enabled us
to make further sales from our London account.

Such sales have reached a

total of L7,180,000through the close of business tonight, involving the
withdrawal from this market of approximately $35,000,000, and up to the
close of business last night we had purchased for the System Account, as
an offset, a total of $17,004,500 par value of Government securities.
"Today one of our foreign correspondents requests us to sell
from its holdings §25,000,000 of Treasury certificates maturing September
15 next; of this amount we have purchased for the System account
$15,000,000, making total purchases to offset sales of sterling $32,000,000
and increasing the holdings in the System Account to $347,000,000. The
remaining $10,000,000 of these September certificates we have purchased




-136for our own investment account, to be held there temporarily for sale to
the Treasury early in September.
"With the continued strength in sterling, we will, no doubt, be
able to make further substantial sales, in which event we shall continue
making offsetting transactions."
(Secretary's note: On September 13, 1927, the Federal Reserve Bank of Minneapolis reduced its rate to 3 1/2%, being
the last Reserve bank to reduce its rate during the period
running from July 1927.)
Letter from Strong to Platt, September 28. "Referring to our
recent telephone conversation about a possible meeting of the Open Market
Committee, I recently wrote the members of the committee, as per enclosed
copy of my letter, and I now have replies, the substance of which are as
follows:
"All the members of the committee agree as to the wisdom of making purchases to offset shipments of gold to Argentina and, of course, they
have already expressed a similar view as to making purchases of securities
against sales of sterling. We should like to liquidate the balance of
the sterling account very shortly, and this involves the purchase of
$10,000,000 or $12,000,000 additional, so that these two accounts together
at the present moment will involve the addition of about $25,000,000 to
our Open Market Committee holdings, bringing it close to $400,000,000. You
have in mind, of course, that the additions to the account so far made
roughly comprise $100,000,000 to offset the loss of gold to the Bank of France
47,000,000 to offset sales of sterling
30,000,000 under the authorization arranged at the meeting last
May
50,000,000 under the authorization arranged at the meeting of
July 27
a total of $227,000,000, which with the committee's original holdings in




-137round figures accounts for the present total.
"As to the suggestion of making additional purchases to meet the
seasonal demand for funds, the replies are as follows:
"McDougal:

Believes as the account is now $360,000,000, addi-

tion should only be made if demonstrated to be clearly desirable and,
therefore, a meeting at a convenient date is important. Expresses some
apprehension about status of Stock Exchange speculation.
"Harding: Believes we should increase our purchases in addition
to those mentioned above so as to meet the fall demands without any considerable change in the open market rates.
"Fancher: Thinks we should have a meeting, and if we decide to
increase our portfolio it should be done in the expectation of making
liberal sales around the turn of the year.
"Norris:

Is opposed to further purchases unless the demands upon

us in New York become excessive. Expresses some doubt as to the speculative situation in the Stock Exchange. Would like to have meeting held in
Philadelphia.
Personally, I should like to see a meeting held in New York if
it could be arranged on the day that our directors meet, as an exchange of
views with these gentlemen, who are in close contact with affairs here, I
believe would be helpful to everybody,
"After considering this letter, could you not have your secretary
call me on the telephone so that we can talk it over?"
Letter from Strong to other members of Committee, September 20.
"The accompanying letter which is being sent to the Governors of ail Reserve banks explains itself.

What with the transactions for account of the

Treasury, for our foreign correspondents and for the Open Market Committee




-138account, Mr. Case has been submerged with a mass of transactions, the net
result of which could hardly be reported until now. They were forecast
in our letter of August 26, and the details, of course, appear in the
regular weekly reports.
"There are two questions about which we must give consideration
at an early date. One is in regard to further purchases to offset the
effect of exports of gold.

We have been making these regularly to offset

the withdrawal of funds from the market resulting from sales of sterling
balances, but have not completed purchases to offset gold exports such as
those under way to Argentina.

That movement may run up to between

$20,000,000 and $25,000,000. Our own view is that we should buy government securities for an equivalent amount as at this season of the year when
there is a pretty heavy draft on New York reserves, the influence of the
loss of that amount will be quite marked.

We would appreciate an ex-

pression of your views.
"The second question is generally as to the outlook for the fall
and whether it indicates the need for further open market purchases beyond
those above referred to. The Federal Reserve System from some date in
August, which varies, according to conditions, to the first of the following January each year, is called upon to supply an expansion of bank reserves aggregating around $400,000,000 as shown by past experience.
Roughly, nearly half of that has already been taken. We anticipate there
may be some little slackening of this demand after the first of October,
but for only a short period, and thereafter the holiday demand will arise
and we must be prepared to meet it. Our decision of course relates to the
discount rate. Having reduced rates to 3 1/2 per cent, it seems to us
that it would be rather unfortunate to have too much of this demand met




-139by discount at the Federal Reserve Bank of New York, where most of it
occurs, and we would prefer to moderate its influence upon open market
rates by buying a round amount of governments with the understanding of
course that immediately after the first of January, or even anticipating
the large return of currency which then occurs, we should begin to liquidate a part of the Open Market account. If the entire requirements of the
season were met by borrowing, it would automatically liquidate as it did
last year and the year before, but if we furnish the entire amount by buying securities, we must of course be prepared to sell them promptly, otherwise money would be unduly cheap and we shall not experience the seasonal
liquidation which is wholesome and to be promoted.
"In view of the possibility of its being misunderstood during
the pendency of all of this discussion of rate changes in Washington, I
have hesitated to suggest a meeting of the Open Market Committee there
and believe it was wise to defer it. If, however, the committee will be
willing to meet in the near future, I think it is important that they
should do so, and if circumstances make it unwise to meet in Washington,
I shall take the liberty of asking Mr, Platt to arrange for some of the
members of the Board to meet with us in New York. Won't you please write
me very frankly just how this impresses you."
Letter from Strong to Banks not represented on Committee, September 20. "Since I wrote you last on August 26, the principal change in the
amount of Government securities held in the System Open Market Investment
Account has been due to the continued purchase of securities to offset
sales of sterling which would otherwise have had the effect of tightening the money market and possibly jeopardizing the object of recent System
rate action. Because of the strength in sterling, it has been possible
to make somewhat larger sales than had been anticipated with corresponding



-140reduction in our sterling balance.

Such sales now amount to $47,000,000,

consequently our purchases for the Open Market Investment Account now
t o t a l $$47,000,000, increasing the account to $362,000,000 at the present
time.
"In addition to this change in the t o t a l , there have been a
number of changes in the composition of the account, as we advised you
would be necessary.

These changes consisted largely of the replacement

of the September 1$ maturities with other issues and the exchange of our
Second Liberty Loan bonds for the new issue of 3-1/2 per cent notes.
"The weekly reports will show the details of transactions made
in replacement of the September 1$ maturities in the Open Market Account.
Besides these we have purchased in the market approximately $80,000,000
of Government securities to replace the September 15 maturities held for
foreign accounts. With a l l of these transactions our turnover of Government issues around the l5th of the month was about $320,000,000.
"As you will have noted, the tax period passed without any
serious disturbance to the market.

The Treasury overdraft here was

$200,000,000, out of which we sold temporary participations of $50,000,000
to member banks to take up the temporary over-supply of funds.

The over-

draft has now been retired, which has caused the banks to enter t h i s week
deficient in reserves. With the Treasury balance in the reserve banks
piling up, as income taxes continue to be received, there may be an appearance of somewhat tighter money for the balance of t h i s month and possibly early next, but we are hoping that i t will be only temporary.
"Since September 1 there have been losses to the money market
due to net gold exports, largely due to shipments of $13,500,000 (and




-141more in prospect) to Argentina, against which no purchases of Government
securities have as yet been mads.

Further purchases to offset this gold

loss will be made in due course, after consulting the Committee, if they
agree with our own view, that we should endeavor to offset any undue influence upon the money market due to considerable gold movements.
"I am writing you again at this time in order to keep you fully
advised.

It is sometimes difficult to do this as frequently as we would

like when in the midst of so active a period as the present.

You no doubt

will be interested, however, to learn that the various operations about
which I wrote you previously, have gone through satisfactorily, all of
which I trust meets with your approval."
Excerpt from letter from Strong to Platt, September 29. "I am
attaching a statement from which you will observe that the difference between the amount of credit now being furnished by the Federal Reserve System this year and last year very nearly offsets the addition to our gold
due to imports during the first seven or eight months of this year; also
that the seasonal increase in the amount of Federal Reserve credit being
employed since the first week in August is $130,000,000 for 1927 as against
$120,000,000 for 1926. Roughly speaking, imports of gold this year are to
some extent offset by reductions in our earning assets, and the seasonal
increase is almost exactly what it was last year for the same period.
"In view of the replies received from the other members of the
committee, and considering the fact that our money rates are still comfortable and that the exchange rates have held pretty firm., we are now
disposed to suggest that the meeting of the Open Market Investment Committee be deferred for a fortnight or thereabouts and shall then be held




-142in Washington after Mr. Young is there. We can then review the whole situation.

And this meeting, coming but a few weeks before the Governors Con-

ference, will enable us to discuss the results of the meeting at the time
of the conference with all present.
"I hope this is satisfactory to you and your colleagues."
Letter from Strong to Board, October 25. Under date of October 25,
1927, the Chairman of the Open Market Investment Committee wrote to the
Board with respect to the desire of the Bank of France to purchase
$50,000,000 of additional gold to be earmarked at the Federal Reserve Bank
of New York, $30,000,000 to be purchased with the proceeds of maturing
bills held for the Bank of France, and $20,000,000 to be purchased with
the proceeds of payments to the Federal Reserve Bank by member banks.
The Chairman advised that the Executive Committee of the bank had suggested that bill maturities, as well as the member bank payments, be offset by purchases of securities. The letter from the Chairman of the Committee was read at a meeting of the Board and no action taken relative
thereto. The letter follows:
"It was not possible until today to send you the particulars of
the transaction in gold of the Bank of France, as the details of the arrangement had not been worked out until today's cables had been exchanged.
"They advised us by mail and cable that they now desired to purchase ,v50,000,C00 of additional gold which they wished us to earmark for
them, and suggested a method by which payment could be effected which,
however, would have unnecessarily delayed the conclusion of the transaction because of their desire to avoid any interference with our money
market.




-143"We explained to them that we could conclude the earmarking more
promptly than they had suggested, and it has now been arranged by exchange of cables that we should earmark $10,000,000 this week and
$10,000,000 next week, against the proceeds of maturing bills held for the
Bank of France and, in addition, that we should earmark $2,000,000 each
business day except Saturdays against payments to us from member banks
until a total of $20,000,000 is earmarked in that way, and a further
$10,000,000 should be earmarked of the proceeds of bills maturing the
second week in November,,
"As the bill maturities, if not replaced in the market, will
impose by that amount heavier borrowings by the member banks at this
season, our executive committee, at the meeting yesterday, suggested that
we should offset these funds by purchases of securities which we are
gradually doing.

The same applies to the funds withdrawn from the member

banks•
"As is customary in these transactions, we are conferring with
the members of the Open Market Committee by telephone so that they may be
fully informed and the transaction approved in behalf of the committee.
"This transaction will be made the subject of a supplementary
statement at the meeting of the Open Market Committee to be held in
Washington on November 1.
"You will be interested to know quite confidentially that this
gold is purchased from us rather than taken in London, pursuant to the
general desire to protect the London market against undue demands, and the
Bank of France is able to do this because of the transactions conducted
earlier this year which enabled them to convert a considerable amount of
their sterling into dollars."




-144(Secretary's note: On October 26, 1927, the Open Market
Investment Account stood at $387,000,000, and on November 2, 1927, it had increased to $403,000,000.)
Meeting of November 2, 1927
Preliminary memorandum of Chairman. At the meeting of the Board
on November 1, 1927, the Governor stated that the Chairman of the Open
Market Investment Committee had furnished him with a number of copies of a
preliminary memorandum being considered by the Open Market Investment
Committee which was meeting on that date, and he handed a copy to each
member of the Board for consideration prior to the meeting which the Board
was to hold with the Committee on the following day.

The preliminary

memorandum is as follows:
"In accordance with the general policy forecast by discussions
at the governors' conference in May and at the meeting of the Open Market
Investment Committee on July 27, all of the Federal Reserve Banks have
since that meeting reduced their discount rates from 4 per cent to 3 1/2
per cent. . . .
"In order to make the change of discount rate effective in New
York it was found necessary to purchase 50 million dollars of Government
securities for account of the System, as previously authorized.

The re-

duction of the rate in New York was followed by large transfers of funds
to other districts, principally to the west. Between August 3 and September 7 (when the Chicago bank reduced its rate) the gold reserve of the New
York bank declined 109 million dollars, most of the loss going to the Reserve
Banks which still maintained a 4 per cent rate. Over the whole period from
July 20 to October 12 the New York Bank lost 181 millions of gold, including
transfers to other districts as well as gold exports and withdrawals of gold
currency for circulation. As a consequence the borrowing of New York City




-145member banks increased about 75 million dollars and, with prospects of even
larger borrowings, it was necessary to purchase in August the 50 million of
securities.

Otherwise money rates would have experienced a sharp advance

which would have defeated the purposes of the policies adopted.
"In this same period it has been possible to liquidate all of
the special sterling account with the Bank of England at a profit [of]
$163,000.

In order to offset the loss of funds to the New York money

market resulting from these sales a corresponding amount of securities has
been purchased, a reversal of the operation which took place in the Spring
when purchases of gold abroad were offset by sales of securities. . . .
". . , as a net result of the year's operations to date the
Special Investment Account has been increased $174,000,000. Of this
$95,000,000 represents offsets to market losses through earmarkings, etc.,
and $79,000,000 represents purchases made in keeping with policy aims.
"A further result of the movement of funds from New York to other
districts has been that member banks in districts other than New York have
been able to meet the seasonal increase in credit requirements without any
increase in their borrowings at their Reserve banks, whereas banks in New
York have increased their borrowings. , . .
"The decrease in total member bank borrowings as compared with a
year ago arises partly from a lessened demand for Federal Reserve credit
due to smaller currency requirements and gold imports and partly from the
increase in the System's holdings of securities. . . .
"Under these conditions money rates have become relatively stable
at levels about 1/4 to 1/2 of 1 per cent lower than at the middle of July
and substantially lower than a year ago. . . .




-146"Consequences of Lower Rates
"Aside from the domestic movement of funds from New York to other
districts, the following changes, related in some measure to the lower rate
level, have taken place in the money market situation.
"l. Higher Sterling Exchange, Whereas a year ago sterling exchange moved steadily downward from early July until the end of October,
and such a movement had begun early in July this year, the lower level of
interest rates prevailing has been an influence toward stronger sterling
exchange, and the demand rate has moved from a little above $4.85 the
middle of July to nearly $4.86 3/4 recently, and the cable rate from $4.85 1/2
to $4.87 l/8, - this notwithstanding sales of over 12 million pounds of
sterling by the Reserve Banks. This strength in the exchange reflects the
tendency for funds to move from New York to London, and some tendency for
short and long term financing to be shifted from London to New York. The
rates London banks are now paying for deposits are about 4 1/4 to 4 1/2 per
cent, and are higher rates than those at which funds can be employed at
short notice in the New York money market. Acceptance credits are now
cheaper to obtain in New York than they were and the dollar volume of bills
outstanding in this market is as large as at any time since 1920. Sterling
long bills are also bought here by our banks and "carried" in London after
acceptance instead of being discounted.
"2. Net Gold Exports in September. In every month this year up
to September there had been a net import of gold (if we exclude earmarkings).

But in September there has at last been a net export movement of

gold and gold imports for the moment are arrested.

A net outgo of about

13 million dollars was largely the result of a shipment of 23 million to the
Argentine, more than offsetting imports of about 10 million from Australia,




-147While the Argentine shipment was in the nature of a special transaction,
the relation of exchange rates made it cheaper to purchase this gold in
New York than in London.
"So far this year all movements of gold (exports, imports, and
earmarking operations) have resulted in a net gain to this country of
about 49 million dollars. This is contrary to general views, which are
based on reports that omit earmarked gold held by us. In this connection
it is interesting to note that in the past three years, 1925, 1926, and
1927, during which there has been considerable discussion of our sterilizing gold, this country has gained as a net result of gold operations only
about 18 million dollars of gold, which is less than seasonal movements
of single years at times prior to the war.
"3. Growth in Speculation.

A further and less favorable result

of easier money, and one which was anticipated, has been some stimulation
of stock exchange speculation. There has been a growth of 336 million
dollars since the middle of July in loans to brokers and dealers in New
York, accompanying an irregular advance in stock prices.
"There is no means of knowing beyond question how far this recent
rise in stock prices represents excessive speculation and how far it represents a gradual readjustment of values to increased industrial efficiency,
larger profits, higher commodity prices, and a lower basic interest rate
level than for some years past.

It is clear from a study of such rela-

tionships as those of stock yields with bond yields and with money rates,
that the current level of stock market prices is less abnormal than a
casual inspection of prices alone would suggest. The investment trust and
the growing popularity of common stocks as investments are factors which
may also be changing somewhat the old price and yield relationships.




-148"4. Growth in Volume of Credit, There has been a considerable
growth in the volume of bank credit, more rapid in fact than took place
in either 1925 or 1926. • , ,
"5. Greater Firmness in Commodity Prices. An index of prices
of basic commodities, computed by the New York Reserve Bank, has been
tending generally upward since early in the spring, due almost wholly to
increases in agricultural prices, which may be ascribed largely to
particular crop conditions but partly to success in marketing surplus production abroad.

The upward movement has been accelerated, however, in the

past two months and the larger index of the Department of Labor, made up
from quotations for over 500 different commodities, also moved upward in
July and August. This index is still, however, a number of points lower
than it was a year ago.
"General Condition of Business
"There has been no marked change in the general business outlook.
The general volume of manufacturing production is somewhat lower than a
year ago and lower than it was early this year, a change which is reflected
in a smaller currency demand than last year. The agricultural situation,
however, has improved and there are prospects for larger crops than had
been anticipated early in the spring, and an increase in the purchasing
power of the farm population.

The general business outlook is, however,

for a continued fairly good volume of business activity during the balance
of the year, without either a recession or a boom.

Many authorities agree

that increasing domestic competition is affecting profits adversely,
"Developments Abroad
"The outstanding new developments in European money markets are
the increases of the discount rates by the Reichsbank from 6 to 7 per cent,




-149and its Lombard rate from 7 to 8 per cent and but recently of Holland from
3 1/2 to 4 1/2.

Aside from these changes the rates of central banks

abroad have been at the same level as in July.

The explanation of the

change of rate by the Reichsbank is its reduced reserve assets, and in
general it illustrates the narrowness of margin within which the banks of
issue of Europe are operating and probably reflects some strain in meeting
payments due to the U. S. The reserves of most European banks of issue are
not adequate generally to undergo any considerable or continued strain
without the necessity for increases in rates. The latest moves emphasize
the importance of this country's maintaining, if possible, a rate relationship with Europe, such that at least the world's new gold output available for monetary purposes may not be diverted to this country but may
flow to those centers where the reserves are most in need of reinforcement.
"The Sterling Position
"While our rate reductions, together with a recent increase in
foreign loans placed in this market, a movement by American banks to
accumulate balances in London, and probably some covering of short positions in sterling have led to the sharp advance in sterling rates commented
upon earlier, there remains some question as to the position of sterling
for the balance of this year. The movement of cotton, while smaller than
last year, is at much higher prices and the delayed movement has probably
not reduced total dollar requirements. The larger amount of bills being
drawn in dollars than last year, simply defers the demand abroad for dollars.
"Some of these developments simply defer but do not finally effect
dollars payments. It is hoped that the ultimate demand for dollars may go
over until the period of liquidation and ease of rates immediately after
January 1st. In the meantime, however, the committee should be prepared to




-150intervene, if necessary, and again accumulate a London portfolio at the
London gold export point, or buy gold in London when offered for export
to New York.

In case of such purchases the committee should consider

whether offsetting sales of securities should not be made in New York just
as they were in the spring when gold was acquired abroad.
"The Guilder Position
"The holiday delayed cable exchanges which might have enabled us
otherwise to agree with the Nederlandsche Bank upon a plan to avoid their
rate increase or limit it to 1/2 per cent, instead of 1 per cent. This
situation may recur and should be considered by the committee.
" As to Offsetting Gold Movements or the Equivalent
"The experiences of this year have provided a demonstration of
the effectiveness of the policy of offsetting gains and losses of gold
through import, export, or earmarking by purchases or sales of securities.
Purchases or sales of gold abroad or of exchange, which have just the same
effect on the market as gold movements, have been similarly offset . . .
whereas the open market account increased from 136 million in May to 375
million in October, only 79 million of the purchases were of a nature to
affect the credit situation; the balance represented offsets.
"The effect of such offsetting purchases or sales has been to
prevent disturbance to the credit situation from artificial causes. If
purchases or sales of this sort are not made promptly, not only will
money rates be affected, sometimes quite sharply, but the borrowings from
the reserve banks will become readjusted automatically at times when not
desirable. In the case of imports of gold, unless repayments of loans are
at once made to the reserve banks, loan expansion occurs at once in the
market•




-151"Failure to 'offset' a gold import or export (or equivalent earmark transaction) has the same result as a purchase or a sale of securities when no gold movement occurs. The same situation arises whenever
large transactions for foreign banks alter the reserve position, and
occasionally when changes occur in Treasury balances with the Reserve Banks.
"It should be understood that these necessary adjustments will
be made from time to time, within reasonable limits and for a round amount,
the members of the committee being consulted by telephone. At times
action must be taken at once, - for example when a foreign bank desires to
sell securities and earmark gold, or when our own foreign balances are
being liquidated as recently.
"Sales of Securities in January
"In addition to any sales of securities which may be necessary
to offset any purchases of foreign exchange, or gold abroad, it will be
necessary to consider whether sales should be made in January.

In case

borrowings at the New York Reserve Bank, and possibly other Reserve Banks,
are not sufficient to absorb the January return flow of currency and
Reserve Bank credit, the committee should consider sales of securities.
"Future Program
"As to specific cases
"The committee should consider the following "1.

The Reserve Banks being prepared to repeat the operation of

buying gold or balances abroad, if necessary, to prevent gold movement from
London or some other foreign center.
"2.

A continuance of the general understanding that the committee

will undertake to offset by purchases and sales of securities any such major
gold, or equivalent, operations as have been offset this year.




This would

-152include the offsetting of purchases or sales of sterling or other foreign
currencies.
"3. The desirability- of sales of securities in January, if it
appears necessary, to take up slack in the money market,
"As to general policy.
"A review of the events of the past two months makes it clear
that the policies agreed upon in July have so far been successful, more
so perhaps than could have been anticipated.

Concerning the future, the

principal questions are "1.

How long will the firmness of sterling and other European

exchanges be maintained, even with present rate relationships, when the
full seasonal strain for making American purchases appears?
"2. Will money rates in this country rise later in the year
with Christmas demands for funds, so as to disturb the international rate
relationships?
"3.

Is there likely to be increasing difficulty for Europe in

meeting payments due in the United States?
"4. Is there likelihood of speculation in stocks or commodities,
using so large an amount of credit as to constitute a danger?
"5. In view of these possibilities what flexibility in operations should be given the Open Market Committee?
"Supplementary Note on Gold Earmarking
"Since the preceding pages were written we have received instructions from a foreign correspondent to earmark 50 million dollars of gold
for their account.

This earmarking operation has precisely the same effect

in withdrawing funds from the money market as the export of 50 million
dollars of gold, or the sale of 50 million dollars of securities by the




-153Reserve System.

In order that this operation may not disturb the money

market and defeat the policy we have been pursuing, the committee is
undertaking to offset these earmarkings by a purchase of 50 million
dollars of securities, so that the net result of the operation will be to
leave the money market unaffected.
"This transaction illustrates precisely what occurs when gold
is earmarked. Under the instructions which have been received, 30 million
dollars of the earmarked gold will be paid for by applying the proceeds of
bankers acceptances now held for the account of this correspondent, which
mature between now and November 11. The remaining 20 million will be paid
for by funds to be deposited with the New York Reserve Bank by a number of
the New York City banks, which hold balances for the account of this
correspondent.
*

-

*

•

#

"It will be seen that, as the bills held for this correspondent
mature, the market pays to the Federal Reserve Bank the amounts due, and
that as these sums are applied to the purchase of gold and are not reinvested in the market they will constitute a loss to the market, reduce the
reserves of the New York City banks, and (in the absence of offsetting
operations) force those banks to increase their borrowings at the Federal
Reserve Banks. Payments to the Reserve Bank by New York City banks have a
precisely similar result.

In order to maintain the present status quo it

is necessary, therefore, to put 50 million dollars into the market to replace the 50 million dollars withdrawn by this earmarking operation.
Securities are being purchased a little more slowly than gold is being earmarked and thus a daily test is made of market conditions.




"At present the New York City banks owe the Federal Reserve Bank

-154of New York about 90 million dollars, and this amount of borrowing will
normally be increased somewhat as Christmas approaches. Any large extended increase in this borrowing would be followed inevitably by firmer
money rates, and would imperil the policy which the Reserve System has
been following.
"One other phase of this earmarking operation is worthy of consideration. Exports and imports of gold from and into this country since
the beginning of this year resulted in a net import of about 125 million
dollars.

If, however, earmarking operations are taken into account the

net gain to the market through imports will, after the completion of this
transaction, have been entirely offset by losses through the earmarking of
gold.

Thus the actual facts as to gold movements are quite contrary to

the general belief based upon the published figures for gold exports and
imports.
"The same thing is true if we go back a few years.

Since the

autumn of 1924 the figures for gold imports and exports indicate a net
movement to this country of about 100 million dollars, and it is the common
impression that in the past three years we have been absorbing and sterilizing the world's gold. When earmarkings are taken into consideration,
however, the past three years (including this current transaction) show a
net loss of $50,000,000 of gold rather than a net gain.
"In view of the important influence of gold movements upon money
conditions, and the somewhat misleading character of statements which are
now made public, it is believed that we should consider some weekly statement as to gold held under earmark.

It is true that figures given out once

a month by the Department of Commerce for the stock of gold in the United
States do make allowance for earmarking, but these figures are published




-155only once a month and some time after the event. The publishing of the
weekly figures for gold earmarkings would correct possible erroneous
impressions and aid in a general public understanding of Federal Reserve
policies."
Action of Committee. On November 2, at a meeting of the Board
at which the members of the Open Market Investment Committee were present,
Governor Young presented the following report containing the recommendations of the Open Market Investment Committee, which the Chairman of the
Committee stated had as its basis the preliminary memorandum quoted above:
"The committee has considered the confidential preliminary
memoranda submitted by the Chairman, and upon the basis of the memoranda
proposes that the open market policy of the System until March 1st next,
unless developments not now anticipated require a further review, shall
be:

to maintain stable rates for money at about present levels and pre-

vent further imports of gold.
" In order to carry out the above policy, the committee would
adopt the following program and procedure:
"(l) The Plan of offsetting gold movements by purchases and
sales of securities would be continued as heretofore.
"(2) Any considerable advance in rates for money towards the
end of the year would be dealt with only if necessary by temporary purchases of securities.
"(3) During the return flow of currency which usually occurs
in January, sales of securities would be made in amounts sufficient to
insure retirement of the seasonal issue and prevent its being added to
member banks reserves.




"(4) In event of the renewal of a gold movement to the United

-156States, gold may be purchased abroad in London, and possibly in Holland
and Switzerland, if necessary, at approximately their gold export points,
or exchange on those countries may be purchased, so as to arrest, if
possible, a further importation of gold. The limit upon such purchases
to be $100,000,000. Such purchases would also be offset the same as the
gold movement. Gold or exchange purchased may be invested in bills or
employed at interest, as in the case of the Bank of England account.
"(5) The considerations which will guide the committee as to
when and for what amounts such transactions shall be made, are:
"(a)

The amount of borrowings by member banks from the Reserve

banks;
"(b) The general level of interest rates;
"(c) The movement of foreign exchange rates as an indication of
possible gold imports,
"The committee would expect to be charged with the execution of
the program for account of those Reserve banks which approve and participate."
Following the meeting with the members of the Open Market Investment Committee, a motion was adopted by the Board that approval be given to
the policy governing open market operations as recommended by the Committee
in its report,




(Secretary's note: It will be noted that as a result of
the action taken by the Board on November 2, 1927, the Open
Market Investment Committee was authorized to make purchases and sales for the Account to offset gold movements
without limitation. The Committee was also authorized to
sell securities in order to offset the seasonal return of
currency during January and to purchase gold or exchange
abroad, if necessary, up to $100,000,000 and to sell
securities to offset such purchases.)

-157Communications on Open Market Operations and Gold, Movements, NovemberDecember 1927
Letter from Strong, November 10, Under date of November 10, the
following advice was received from the Chairman of the Open Market Investment Committee:
"In accordance with our conversation, I am writing you something
of open market matters and will do so at frequent intervals, if you desire.
Details of the activities of the Open Market Investment Committee and the
changes in the holdings of Government securities are, as usual contained
in the weekly report of the secretary of the committee, which is regularly
sent you.
"You will observe that there has been a gradual increase in the
Government security holdings during the past few weeks. As you know,
these increases have been due to purchases to partially offset the current
earmarking of gold, amounting in all to $50,000,000, for a foreign correspondent. . . .
"• . .so far, offsetting purchases of $36,500,000 have been
made against $45,000,000 of gold already earmarked.

Further purchases of

Government securities will gradually be made to offset the total of
$50,000,000.
"In addition to the earmarked gold for French account, shipments
to Brazil, amounting to $36,500,000, and to Poland, amounting to $15,000,000,
a total of $51,500,000, are to be made this month. About $11,000,000 has
already gone forward to Brazil, and it is expected that the total going to
both Brazil and Poland will be shipped between now and November 30. No
purchases have as yet been arranged as an offset to these latter prospective shipments, and we are inclined to await developments before doing so.




-158At the moment, therefore, we have deferred offsets to $8,500,000 on account
of the French and $11,000,000 on account of the Brazilian transactions.
The shipment of $31,500,000 to Argentina was not entirely offset, either.
"In our view, the continued steady rates for money and the
strength of sterling, which closed yesterday at 4.871/4,justifies this delay
in further buying of Governments."
(The above letter, after being circulated, was presented at the
meeting of the Board on November 17 and noted.)
Under date of November 15, the following letter was received from
the Chairman of the Open Market Investment Committee:
"I have received your letter of November 12 and am glad that you
found the information contained in mine of the 10th, with regard to open
market transactions, of interest.
"Since that time there has been but a small increase in the holdings of Government securities in the System Account.

Including the trans-

actions completed today, the par value of the securities held on November 15
will be approximately $415,000,000, against $375,000,000 at the middle of
last month, the increase of $40,000,000 representing purchases to offset
the $50,000,000 of gold earmarked for one of our foreign correspondents.
****

"It is also expected that further earmarkings or shipments will
be made this month:
To Brazill
To Poland

[Brazil]
. . . . . .
Total

$ 14,500,000
6,000,000
$102,500,000

No further offsetting purchases have as yet been made to cover these transactions, as the satisfactory price of sterling (4.87 7/16 for cables today)




-159and the favorable state of the money market have not seemed to justify
such action.
"In other words, taking into consideration gold already earmarked or shipped, we are now upwards of $42,000,000 short of making
offsetting purchases, with $20,000,000 outstanding commitments yet to
be executed.

The recent activity in the open market account has, there-

fore, been confined, in the main, to changes in maturities. The present
state of the Government security market afforded a good opportunity to
dispose of the longer maturities, and, with the approval of the Open
Market Investment Committee, we have sold (at a profit) all of the31/2%
3-5 year Treasury notes and Fourth Liberty Loan41/4%bonds, aggregating
some $79,000,000, replacing these with shorter maturities, mostly the
new 3 1/8% Treasury certificates. This will result in the total holdings in the account being in short-time paper maturing within the next
ten months • • .

"As to our future program, a good deal depends upon how the
operation of redeeming the Second Liberty Loan bonds works out. It
looks now as though the Treasury might run something of an overdraft
for a number of days, which would tend to keep money moderately easy,
but it also seems possible that toward the latter part of this month
money conditions might tend to be considerably firmer and it might be
desirable to offset more fully the amounts of gold exported or earmarked.
We shall continue to watch carefully the condition of the money market,
and will keep you informed as to the situation."
(The above letter, after being circulated, was presented at the meeting
of the Board on November 21, 1927 and was noted, as a matter of record,
inasmuch as the procedure being followed was in accordance with the
by the Board.)




recomm

-160Letter from Strong, November 17. "Referring to the last paragraph of your letter of November 16, the Treasury overdraft together with
the November 15 financing undoubtedly has had a tendency to rather sharply
ease the money market. Our large member banks today were about ninety
millions over in actual reserves although only about six millions over in
average. This situation should correct itself in a few days as
Second Liberty bonds subject the large amount of deposits to the usual
reserve requirements when no longer held by the Government. We are making no further purchases of securities and probably will not do so until
the true position of the money market is clearer."

(The above letter, after being circulated, was noted by the Board at its
meeting on November 25th.)
The Federal Reserve Board received the following communication,
dated November 23, from the Chairman of the Open Market Investment Committee:
"There have been no changes in the holdings of Government securities in the Special Investment Account since I wrote you on November 15 • • •

"Additional earmarkings and some further shipments of gold during
the past week brings the total movement to date up to $101,500,000
i

While it is considered likely that further earmarkings or shipments will
be made this month, we know definitely as to the following:
To Brazil .
" Poland . . •

$3,500,000
. 3,000,000

6,500,000

No offsetting purchases beyond the $40,000,000 of which you have already
been advised have as yet been made to cover these transactions. The large




withd

-161Treasury transactions in connection with the redemption of the Second
Liberty Loan bonds have resulted in some ease in money, the Treasury
having a temporary overdraft at the Federal reserve banks estimated to
amount to about $72,000,000 as at the close of business to-night. The
Treasury has made a call upon depositary banks for payment of this amount
on Friday, November 25. Call money has remained easy all week at 3 1/2%,
while sterling has remained steady, the cable rate being 4.87 5/8 to-day.
With the covering of the Government overdraft, however, we may expect
some firming up of money. It may therefore be desirable to make further
purchases of Governments in the near future as a partial offset to the
large amounts of gold exported or earmarked. We shall continue to keep
a careful lookout in order to act promptly if conditions seem to warrant
further action".
(The above letter was presented at the meeting of the Board on November 25,
was noted and ordered circulated.)

Letter from Strong, December 2. "Since writing you on November 23,
the anticipated firming of call money rates has taken place. As I explained
to you yesterday, this is due partly to the heavy calls made upon depositary
banks by the Treasury, and partly to the continued outflow of gold. Total
shipments and earmarking of gold on this movement now amount to $128,500,000,
while the total of Government securities purchased as an offset amounts to
$44,000,000, leaving a net balance of $84,500,000 against which no purchases
have been made.
"As you know, in our talk yesterday we pretty generally agreed
that, under existing conditions, there is at the moment no occasion for
making further offsetting purchases of Government securities. The




-162$4,000,000 purchased during the past week represents a single block of
Treasury paper due December 15, which we took over from a foreign correspondent.
"There will, of course, be some necessary shifting about incident to the December 15 Treasury operation. For instance, at the request
of the Treasury Department we are proposing presently to sell, from our
Open Market Investment Account and from holdings for account of foreign
correspondents, as nearly as may be $92,000,000 of the41/2%notes maturing
December 15, 1927, to the fiscal agents of the British Government for its
payment to our Treasury on December 15. We shall, at the same time, acquire
in their stead a like amount of other maturities©

This program will enable

the Treasury to reduce its current borrowing requirements by the amount of
December 15 paper turned in on account of the British debt payments.
"I am inclined to think that it may be desirable to have a meeting of the Open Market Investment Committee within the next two or three
weeks, and I am asking Mr. Case to arrange this with you during my absence
from the bank."
(The above letter was presented to the Board on December 5 and noted.)

Letter from Acting Chairman to Board, December 13. "Additional
shipments and earmarking of gold on the recent movement have now reached
an aggregate of $l48,000,000, with further anticipated shipments this week
of $14,000,000, No additional offsetting purchases of Government securities have been made, however, beyond the $45,000,000 previously reported.
"The recent ease in call money has in part been due to the
rather unexpectedly large redemptions of Second Liberty Loan bonds called
for payment November 15, with a resultant overdraft of $57,000,000 now




-163being carried by this bank. This overdraft will be further augmented,
on Thursday, December 15, when the maturing41/2%Treasury notes will be
presented here for redemption, at which time the overdraft, we estimate,
may run as high as $150,000,000 or thereabouts. "With the receipt and
presentation of the income tax checks, this overdraft should be materially reduced from day to day until about Tuesday, December 20, when, by
reason of a call from depositary banks, it is anticipated that the overdraft will be wiped out and the Treasury again have a normal balance.
During the last ten days in December, we anticipate that the usual holiday currency withdrawals and the usual year-end "window-dressing" on the
part of banks throughout the country, will cause money to be in good demand and that, temporarily at least, call money rates may range from, say
41/2%to

5%.
"As you know, this situation was discussed with our directors

when you were here in the bank two weeks ago, and the prevailing opinion
was and is that it might be well to let our banks borrow any additional
funds that may be needed (which we estimate may run as high as from
$100,000,000 to $150,000,000) rather than to undertake to ease the situation by making further purchases of Government securities.
"There will be an unusually large volume of transactions in
connection with the Treasury's turnover for December 15, perhaps the
principal one having to do with our furnishing the fiscal agents of the
British Government, from our open market portfolio, with $92,575,000 of
the41/2%U.S. Treasury notes due December 15, 1927, which, in turn, are
to be used immediately by the fiscal agents in making payment to the
U. S. Treasury. "We have agreed to take over from the fiscal agents, in
replacement, a like amount of other short-term Government paper. This




-164transaction is being made in order to simplify the Treasury's borrowing
program as of December 15, 1927.
"The foreign exchanges continue strong: sterling has maintained its position at high levels, today's cable quotations being 4.88
5/16."

Excerpt from Reply of Board, December l4. "The Board was
interested in your discussion of the probable money market situation
in connection with the December 15th Treasury operations, and I was requested to advise you of the Board's concurrence in the opinion of your
directors that it might be well to let your member banks borrow any additional funds that may be needed rather than to undertake to ease the
situation by making further purchases of securities."
Letter from Acting Chairman, December 21, "Since my last
letter to Governor Young under date of December 13, 1927 there has been
no increase in the par value of the holdings of Government securities
in the Special Account. There have, however, in connection with the
December 15, 1927 operations been some changes in the maturities of the
issues held. These changes were, for the most part, caused by supplying
the fiscal agent of the British Government with the $92,000,000. odd of
Treasury Notes due December 15, 1927 to be used by them in making the
payment to this Government, and at the same time acquiring from these
fiscal agents a like amount of other short-term notes. . . .
"Our loans to member banks on the fifteenth showed a slight
reduction but with the collection of the income tax checks the New York
City institutions have started borrowing again on a rather large scale,
and their loans now stand some $50,000,000. higher than they were a week




-165ago. However, despite the fact that shipments and earmarking of gold
during this movement have continued and now reach a total of about
$175,000,000, accompanied by the usual seasonal demand for currency,
the volume of Federal reserve credit in use thus far has been due to
the increase in our loans without further purchases of Government
securities beyond the $45,000,000 previously reported.
"Call money today is 4 1/2% and while we expect that there
may be a temporary hardening in money rates within the next few days
with call money possibly going to 5% or higher, we anticipate no change
in the program outlined in my letter to Governor Young of last week."
(The above letter was presented to the Board at its
meeting on December 22 and noted.)
(Secretary's note: On December 31, 1927 the total in
the Open Market Investment Account was $423,158,500.)
Developments during 1928
Communications on Open Market Operations and Gold Movements, Early
January 1928
Letter from Acting Chairman, January 5. "Since my letter to
Vice Governor Platt, which was written on December 21, 1927, there have
been some changes in the maturities of the short-term Governments held
in the Account, although there have been no changes in the total par
value held, which remains at $423,l58,500. Such changes in the holdings,
which are contained in the Secretary's detailed weekly reports, have been
the result, for the most part, of purchases and sales to accommodate the
fiscal agent of the British Government and a foreign correspondent. . . .
"No further purchases have been made beyond the $45,000,000 previously reported to offset gold earmarked and shipped, the amount of which
during the last two months has reached a total of $195,000,000. Our loans




-166to member banks, as was to be expected, showed a large increase at the
end of the year; also we have been carrying temporarily for dealers,
under sales contract agreements, good sized amounts of Government securities and bankers bills.
"Call money, which has been firm since the turn of the year,
yesterday dropped from 51/2%to41/2%,and today went to 4%. The indications
are that with the return flow of currency we shall have a liquidation in
loans and securities carried such as is usually experienced at this season
of the year. It would not be surprising, therefore, if conditions in the
near future would warrant consideration of the idea of making some sales
of securities from the Open Market Account."
(The letter quoted above was circulated)
Authorization of New York Bank to sell securities. At the meeting of the Board on January 9, 1928, the Governor reported a telephone
conversation a day or two before with the Deputy Governor of the Federal
Reserve Bank of New York during which he, the Governor, was advised that
in view of the existing situation in the money market it was felt that it
might be expedient to sell from $0,000,000 to $50,000,000 of government
securities from the System account and that the question of such a sale
had been taken up with the members of the Open Market Investment Committee
and approved by them. The Governor stated that being familiar with the
attitude of the members of the Board through informal discussions and feeling that there would be no objection, he advised the Deputy Governor of
the New York Bank accordingly. The Board then formally approved the sale
of not to exceed $50,000,000 of securities from the Special Investment
Account, if and when deemed advisable.




-167Letter from Acting Chairman, January 10. "I have your letter
of yesterday, advising me that the Federal Reserve Board has formally
approved the sale of not to exceed $50,000,000 of Government securities
from the System Special Account, if and when deemed advisable by the
Open Market Investment Committee.
"As you know, the report of the Open Market Investment Committee presented to the Federal Reserve Board at its meeting with the
Committee on November 2, 1927, recommended a certain definite policy
which was approved by the Federal Reserve Board. One of the steps which
the Committee at that time stated it might be necessary to take, in order
to carry out the policy approved by the Federal Reserve Board, was the
sale of Government securities after the turn of the year. That being so,
we had of course, assumed that the Committee had full authority to make
the sales in question; and in my conversation with you on Saturday I
intended merely to report to you, as a matter of information, what the
Committee had in fact agreed to do without any thought that the formal
approval of the Federal Reserve Board was, in the circumstances, necessary. I am writing this merely to explain our understanding in the
matter, and also to give you the reason why we in fact made sales aggregating $25,000,000, on Monday, without expecting or thinking the Board's
approval would be necessary."

Excerpt from letter of Acting Chairman, "Since January 1 the
total losses of gold through payments for export or earmark have amounted
to $33,l50,000. Offsetting these losses, however, total gains through
imports or releases from earmark have amounted to $22,250,000, making a
net loss of 4510,900,000 for the first ten days of the month. In order




-168that you might clearly visualize the movement for this ten day period,
I am enclosing a separate table showing by countries actual shipments
as well as earmark transactions.
"It is a little difficult accurately to forecast gold movements
for the next few weeks. We have, however, been advised that $5,000,000
will be shipped to Brazil on January 14 and $3,000,000 to the Argentine
on the same date. We have also been advised that we will receive
$4,500,000 from Canada tomorrow. Whether or not we will lose more to
South America is problematical, but inasmuch as this is the period of
our heaviest payments to the Argentine it is not unlikely that we may
lose a few million to that country in spite of the fact that total shipments to the Argentine since January 1, 1927 have aggregated $68,000,000,
apart from the shipment of $3,000,000 that is to be made on next Saturday.
"The various exchanges throughout the world were, as you know,
very strong during the latter part of 1927, and while it is true that some
of our shipments of gold were special transactions related to central bank
operations or generally directed towards currency stabilization, nevertheless much of the gold that we lost was the result of the strength of the
foreign exchanges as contrasted with the dollar. Since January 1 there
has been some easing of most of the exchanges. . . .

Meeting of January 12, 1928
Memorandum of Chairman. A meeting of the Open Market Investment
Committee with the Federal Reserve Board was held in Washington, January 12,
1928, at which the following memorandum reviewing operations for the year
1927 was presented by the Chairman of the Open Market Investment Committee.




"The major features of the current credit situation as they relate

-169to Federal Reserve Policy may be summarized as follows:
"VOLUME OF CREDIT
"Over the past 12 months the growth of bank credit in the United
States has been more rapid than in any year since 1924, and more rapid than
is ordinarily required by the year to year growth in the country's trade.
It appears to have been much more rapid than was required by the growth of
trade this year in view of recessions in many branches of business.
"As far as may be judged from the available statistics the
country's bank credit expanded about 8 per cent in 1927 compared with a
normal growth of possibly 6 per cent.
"USE OF CREDIT
"The amount of commercial loans as indicated by 'all other loans'
of reporting member banks, is now no larger than a year ago. The increase
in total loans and investments of these banks was divided almost equally
between loans on stocks and bonds and bank investments. Of the increase
in investments more than half has been in Government securities, reflecting in part the Treasury refunding program which retired three billion
dollars of widely distributed bonds largely by issuing lower yield short
term issues which were carried more largely by banks.
"In interpreting these member bank figures two other considerations should be borne in mind.
"1. 'All other l o a n ' are not a complete measure of business use
of credit. Much of the funds recorded as investments and loans on stocks
and bonds find their way into business use. Through new financing for
example, this year about 6 billion dollars has gone into construction of
building, roads, bridges, plant equipment, etc. Business credit requirements of these sorts continue to grow even in periods of recession and




-170these uses of credit are a factor in business recoveries from recessions.
In the banking figures some of this appears in investments and loans on
stocks and bonds.
"2. 'With our huge time deposits some considerable increments
of bank credit are due to accumulation of interest. The country has perhaps 26 billions of time and savings deposits. Annual 4 per cent interest
on this sum is over one billion dollars.
"But nearly half of the increase in deposits this year has been
in demand rather than time deposits, and much of the increase in bank
credit has been absorbed in increased prices of securities rather than
in business enterprise. The rate of increase in credit has been clearly
more rapid than can be continued without leading to abnormalities of value,
the eventual readjustment of which might involve a severe strain on the
country's business.
***

"CONDITION OF BUSINESS
"...

The principal recessions have been in productive activity

and wholesale (primary) distribution. Retail distribution has been better
sustained and financial activity which includes sales of stocks, new financing, and trading in cotton and grain futures, has been going forward at a
tremendous pace. This very high rate of financial activity has accounted
for the fact that debits to individual accounts have been at such high
levels.
"While the figures show a distinct recession in business they
do not show anything approaching a depression.

In none of the groups are

the figures appreciably below what may be estimated as normal. While
industrial employment has decreased 5 or 6 per cent since a year ago there




-171are no indications of serious unemployment.
***
"It is not easy to explain the recent recessions in business.
There has been no general overproduction nor any credit stringency. New
financing which reflects new enterprise has gone on in ever increasing
amounts. It is likely that it is the effect of the accumulative action
of a number of causes which include the Ford cessation of new car production, the soft coal strike, the floods, the collapse of the Florida boom,
the let-down in new building and plant construction, conservation of railroads in ordering new equipment.
"If these are the causes of recession they are mostly temporary
and the present almost unanimous opinion that business is likely to improve
as the year advances appears to have some justification.
"As to the effect of changes in money conditions upon business
recovery there are two phases of the problem, the real supply of funds,
and the psychological reaction. Under present conditions banks are finding difficulty in employing their funds safely and profitably. This would
still be true even if credit were increasing less rapidly and money were
somewhat firmer; business could still obtain all the credit necessary at
reasonable rates. As to the psychological effect of any action the Reserve System may take in the direction of firmer money there is perhaps
some question since business is now probably very sensitive to changes in
the credit picture. The question for Federal Reserve policy is how the
present credit expansion can best be controlled if possible without
adversely affecting business.
"Foreign EXCHANGES AND GOLD MOVEMENT




"When Federal Reserve discount rates were reduced last August

-172and September, money conditions abroad were an important consideration.
Sterling and other European exchanges were weak and stringent money conditions abroad, with increasing discount rates and consequent pressure on
world commodity markets which might logically be followed by unemployment
and declining purchasing power for our own goods, appeared inevitable unless money were easier in this country.
"Now the situation is quite changed. Much that was hoped to be
accomplished by our rate action has been accomplished.

Most of the European

exchanges are above par and European countries have both taken gold from
us and increased their holdings of dollars. Since the first of the year
the exchanges have declined as bills drawn in dollars have come due and
as short covering has become less of an influence.

Firmer money here

would put more pressure on the exchanges and might possibly lead to some
rate advances abroad, but European money markets are now more firmly entrenched and much more able to take care of themselves.
"The gold outflow appears to be slackening as foreign exchanges
have weakened and firmer money here would perhaps operate as a further
check except for central bank transactions or for other unusual transactions which may be made regardless of the exchange position.

The recent

gold exports, however, have not only improved the monetary position of a
number of countries but have also had good psychological effect. As a
result, consideration of Federal Reserve policy at this time can properly
be much more independent of the European situation than was the case last
summer.
" PRESENT POSITION OF THE Money MARKET
"Between September 1 and January 10 net gold exports and earmarkings have taken approximately 230 million dollars out of the market.




-173"Of this only 45 million has been offset by purchases of securities thus
leaving a net loss to the money market of about 185 million. During this
week we have sold approximately 30 million of Government securities and
anticipate selling an additional 1$ millions within the next few days.
In addition, the required reserves of member banks have increased about
100 million dollars. Thus since early autumn, taking all these changes
into consideration, the requirements for reserve money for which banks
or the market feel responsibility have increased 330 million dollars.
The full weight of this borrowing has only just begun to fall on the
market because of the extended Treasury overdraft from November 15 to
December 20 and the distortion of the picture by year-end transactions.
"At the last report all member banks owed the Reserve Banks
about 500 million dollars and banks in New York City 180 million, and in
addition bill and security dealers have secured funds under sales contracts totaling 76 million. The experience of the past shows that this
amount of burden on the banks and market will ordinarily keep the call
money rate from 1/2 to 1 1/2 per cent above the discount rate with other
rates in correspondence . Thus the conditions are now present for considerably firmer money conditions than in the autumn. The adjustment of
the market to these conditions has been a little slow because of general
expectancy of easy money after the turn of the year, but the adjustment
now appears to be taking place.
* # #
"The foregoing may be summarized as follows:
"1.

In recent months the volume of credit has been increasing

more rapidly than appears to have been required for the needs of business.




"2. The increase seems to have flowed largely into the channels

-174of investment and speculation, though business has probably benefited
indirectly to some extent.
"3.
are temporary.

Business has been receding due probably to causes which
Fundamentals are generally sound,

"4. Even with somewhat firmer money conditions, business is
likely to get all the funds required, but business psychology may be
sensitive to abrupt changes in money conditions.
"5.

European money markets are now in a position largely to

take care of themselves and consideration of Federal Reserve policy may
well be more independent of them than was the case last summer.
"6. Conditions now seem to be present for substantially firmer
money conditions than last autumn, though

the market has been slow in

adjusting to these conditions ."
Action of Committee.

The Chairman of the Open Market Committee

also submitted the following committee report at the meeting on January 12:
"The Committee has considered the memorandum submitted by the
Chairman and has reviewed the program adopted by the committee on November 1, 1927 and approved by the Federal Reserve Board.

Thereupon, the

following conclusions were adopted:
"1.

The object of the policy adopted on November 1 has been

accomplished.
"2. The Committee program should now work towards somewhat
firmer money conditions as far as necessary to check unduly rapid further
increases in the volume of credit.
"3. In order to accomplish this program the committee would expect to sell further amounts of Government securities and if necessary to
deal with gold movements in such manner as necessary to carry out the program.



-175"As outlined in the program of November 1, the committee would
expect to be charged with the execution of this program for the account
of those reserve banks which approve and participate and would hope this
program might guide the committee for the present, unless a change of
conditions makes further review desirable."
The Chairman of the Committee then referred to the action of
the Board on January 9

in approving the sale of not to exceed $50,000,000

of securities from the special investment account if and when deemed advisable by the Committee. He stated that up to the present time $35,000,000
of securities have been sold and delivered, while the remaining $15,000,000
authorized for sale were under contract for delivery within the next day or
t w o . He called attention to the fact that this sale removed from the account all of the securities which were purchased by the Committee as an
offset against gold exports and

earmarkings on the recent movement.

The Board thereupon requested the individual members of the Committee to acquaint it with any discussions and considerations which had
been had at their respective banks with respect to adjusting the rediscount
rate.

Each member of the Committee expressed the views of the officers

and/or directors of his bank as he understood them.

It appeared to be the

general consensus of opinion that no immediate increase in the discount
rate should be made at any Federal reserve bank, but that the general
business and money market situations should be carefully observed during
the course of the succeeding few weeks and that in the interim any correction of money market tendencies should be through operations in the Open
Market Investment Account.
Following the meeting with the members of the Open Market Investment Committee, the Federal Reserve Board voted to authorize the




-176committee during the next two months to make sales of Government securities from time to time, with accompanying authority temporarily to purchase such securities should developments not now in sight require such
action.
(Secretary's Note: On January 12, 1928 the total of
the Open Market Investment Account stood at $376,030,000.)
Communications

on

Open

Market Operations Mid-January-March 1928

Telephone conversations on retardation of sales. At the meeting of the Board on January 16, the Governor reported a telephone conversation with the Acting Chairman of the Open Market Investment Committee,
during which he was advised that the Committee under authority granted
by the Board on January 12 had sold Government securities until a point
had been reached at which further securities would not be absorbed by
the market except at a reduced price. The Governor reported advice given
him by the Acting Chairman of the Open Market Investment Committee that
the reduction in the System's investment account had already caused considerable discussion in New York and that it was now proposed for a day
or two to withhold further offerings of securities.
(Secretary's Note: On the day of this telephone conversation the account stood at $370,330,000.)
The Governor was authorized to advise the Acting Chairman that
the Board was in sympathy with the proposal reported, but did not favor
any prolonged departure from the program recommended by the Committee and
approved by the Board on January 12.
(Secretary's Note: This advice was given to Mr. Case
over the telephone.)
At the meeting on January 18 the Governor reported that the
Acting Chairman of the Open Market Investment Committee had advised him




-177over the telephone that as agreed no securities had been sold to the
market during the past two or three days and that it was not believed
anything should be done for the balance of the week, although $15,000,000
of securities were being sold for the Alien Property Custodian. He further
reported that arrangements had been practically completed for the sale of
$25,000,000 of securities out of the System Account for delivery the following week and that it was expected $50,000,000 would have been sold by
the middle of the next week.

He further stated that in reply to an in-

quiry, the Acting Chairman advised him that there was no disposition on
the part of the Committee to abandon the sale of securities from the System Account, but that the question then concerning the Committee related
merely to the manner and time of selling.
Letter from Acting Chairman to Board January 20. Under date of
January 20, the Acting Chairman of the Open Market Investment Committee
addressed the following letter to the Board reviewing activities in the
Account during the period from January 4 to January 20.
"As agreed upon at the meeting of the Open Market Investment
Committee on January 12, 1928, the idea of reducing the System's holdings
of Government securities has, as you know, been put into practice. Beginning with January 4, 1928:
The total amount held in the System
Special Account was . . •
.. $423,l58,500
Amount held at New York under sales
contract, was .. .

....
Total

..

76,06l,400

$499,219,900

"From the memorandum enclosed you will observe that during the
week ending January 11, 1928:




-178Actual sales made, aggregated

$23,628,500

Liquidation in advances to
dealers, totaled

..

57,561,400

which accounted for the reduction of approximately $81,000,000
as shown by the published statement of the System
as of that date.
"For the week ending January 18, 1928:
Actual sales amounted to ,
31,450,000
Plus a complete liquidation of the remaining amount of our advances to
dealers
18,500,000
which, of course, accounts for the reduction
of about
,.......«..
. • $50,000,000 appearing in this week's published statement.
"we have made further direct sales to the market yesterday
and today, amounting to $25,000,000, which will appear in the weekly
published figures as of January 25, 1928.
"To sum up:
The total reduction by direct sales
from portfolio, from January 4 to
this date, aggregates .
....•. $ 80,000,000
Plus a liquidation (in the form of a
reduction in advances to dealers)
of ...
Making a total reduction of

•

76,000,000
$156,000,000

-x- * #
"The Treasury's current Third Liberty Loan exchange program is
to be closed on Monday, January 23, and this fact should enable us promptly
to make further additional sales to the market. Money has become quite
easy in this market, the call rate being down to31/2%;and our loans to
New York City banks have shown a marked decrease, having gone down to
something less than $50,000,000 as against $110,000,000 a week ago. Bank




-179transfers this way and the return flow of currency have run into large
figures."
(This letter was circulated and noted at the meeting
of the Board on January 25 .)
Authorization for further sales of securities. At the meeting
of the Board held on January 24 the Governor announced a telephone conversation the previous day with the Acting Chairman of the Open Market
Investment Committee during which he was advised that approval had been
received from the Committee for the sale of an additional $50,000,000 of
securities from the Open Market Investment Account.
(No objection was expressed to the proposed sale and
under date of January 26 the following letter was
addressed to the Acting Chairman of the Open Market
Investment Committee:)
"Following our telephone conversation last Monday, January 23rd,
I advised the Board of the desire of the Open Market Investment Committee
to sell an additional $50,000,000 of securities from the System account,
and of the statement I made to you that, as to the attitude of the Board,
I felt the members would be quite willing to give the Committee authority
to sell up to $100,000,000 of securities if it desired to do so.
"None of the members of the Board expressed any objection to
additional sales of securities up to the $50,000,000 limit which you
suggested."
(Secretary's note: At the meeting of the Board on
January 2k approval was given to the rediscount
rate of 4 per cent established by the Executive
Committee of the Federal Reserve Bank of Chicago,
effective January 25.)
Letter from Acting Chairman, January 27. "You will recall that
in my last letter to you, under date of January 20, 1928, I reported a
reduction in the Open Market Investment Account, by direct sales from




-180portfolio, of $80,000,000. Since that time additional sales, aggregating $41,000,000, have been made, which will effect a total reduction in
the account, of .1121,099,500, leaving a balance of about $300,000,000.
"Partly as a result of these sales, the money market is noticeably firmer. . . . This morning the member banks in New York City owe us
130 million dollars, and I see by yesterday's statement that bills discounted for the System as a whole are 20 million larger than they were a
year ago. Just in the past few days there appears to have been some
evidence of a transfer of funds from New York to the interior, and a reduction of borrowing at some of the western Reserve banks, and a corresponding increase in New York.
"These various changes have taken place although we are now at
what is usually the very bottom of the seasonal dip in money rates. The
full effect of our action will be apparent only as the seasonal commercial
demand begins about the middle of February.
"In view of these conditions, our present view would be that we
might defer for the moment further sales of securities and study the situation as it develops."
(The above letter was circulated.)
(Secretary's note: The rediscount rate of the Federal
Reserve Bank of New York was increased from 31/2to 4 per
cent, effective February 3, 1928.)
Telephone conversations on sales, early February. At the meeting on February 2, the Governor reported that the Acting Chairman of
the Open Market Investment Committee had advised him on that day that
there had been some improvement in the demand for Government securities
and that, accordingly, the Committee had sold $10,000,000 of securities
from the Account for delivery the previous day and contracted for the




-181sale of $5,000,000 more for delivery on that day."
(Secretary's note: On "February 2 the account stood at
$287,394,000.
The Governor on February 7 reported a telephone conversation
with the Acting Chairman of the Open Market Investment Committee, who
advised that recent sales from the System account had reduced the portfolio to about $278,000,000. The Governor stated that the member banks
in New York City were then borrowing about $156,000,000 from the Federal
Reserve Bank and that after discussing the matter with the Chairman of
the Board of Directors of the New York Bank, the Acting Chairman of the
Open Market Investment Committee advised him that they were of the opinion
that no further sales of securities should be made for a few days.
Decision to suspend sales. At the meeting of the Federal Reserve
Board on February 10 the following letter which had been circulated was
read:
"Since my last letter to you, under date of January 27, $25,000,000
of additional sales of Government securities have been made from the System
Special Account to the market, reducing the holdings in that account to
$275,000,000 as at the close of business tonight, and representing a reduction of approximately $150,000,000 since the first of the year. These
sales, together with advances in discount rates of this bank and four other
Federal reserve banks during the past week, have resulted in slightly firmer
money.
#

#

"In view of the foregoing, it seems to us here that it may be
wise for the present to continue the Open Market Investment Account at
about the present level and to watch the effect of the sales already made
and the changes in the rediscount rate before taking any further action."




-182The Governor reported a telephone conversation with the Acting
Chairman of the Open Market Investment Committee during which he was advised that the situation had been discussed by the directors of the New
York Bank at their meeting on the previous day, and that the directors
were of the opinion that no further sales of securities should be made
for three or four days.
The Governor was authorized to advise the Acting Chairman of
the Open Market Investment Committee that the Board was in agreement with
the conclusion expressed in his letter of February 7, although there was a
feeling on the part of some members of the Board that further sales should
be indefinitely suspended.
(Secretary's note: This advice to the Acting Chairman
of the Open Market Investment Committee was given
over the telephone.)
On February l4, the following letter, dated February 10, from
the Acting Chairman of the Open Market Investment Committee was read to
the Board and noted:
"Referring to my letter of February 7, 1928, in which I reported
on the sales from the Open Market Investment Account, and to my conversation with you by telephone this morning, I am glad to learn that the Federal Reserve Board is in sympathy with the idea expressed in the last
paragraph of my letter.
"As to our future course, the condition of the money market since
I wrote my letter and the conversations which we have had with our directors and with the members of the committee, confirms me in the belief that
we would do well to continue the account at about the present level. If
there should be any need for a change from this policy we would propose
to confer with you before taking action."




-183(Secretary's note: Since the increase in the Chicago
rate on January 25, the rediscount rate at all of the
other Federal reserve banks, except Cleveland, had
been increased from 31/2to 4 per cent, by February 21,
and the Open Market Investment Account on February 21
stood at $273,000,000.)
(Secretary's note: On March 1, 1928, the rediscount
rate of the Federal Reserve Bank of Cleveland was increased from 3 1/2 to 4%.)

Letter from Acting Chairman on treatment of maturing securi-ties, March l4. "Supplementing our daily informative letter to the
Federal Reserve Board concerning gains and losses to the money market,
I desire to summarize a few of the larger and more important transactions
which are likely to take place tomorrow, particularly those affecting the
Open Market Investment Account.
"In the first place, due to the very heavy redemptions in this
market of U. S. Treasury obligations maturing March 15, 1928, we estimate
that the Treasurer's overdraft with us (which will be covered by a oneday certificate carrying 3 1/4% interest) will approximate $250,000,000,
with a resultant very heavy gain to the money market, which, if not dealt
with in any way by us, would not only enable the city banks to liquidate
their entire indebtedness to us, but would probably furnish them with
something more than $100,000,000 in excess reserves. This would naturally
be followed by considerable competition among the banks to get their money
temporarily invested and would probably result in a reduction in the call
money rate down to 4% or possibly 3 1-/2%.
"In order to stabilize conditions over the tax period, it has,
as you know, been our custom either to make temporary sales of Government
securities from the Open Market Investment Account, or, latterly, to sell




-184to our member banks day-to-day participations in the one-day temporary
certificate of the Government during the four or five days in which the
tax checks are collected.
"During the past year or so our problem on quarterly tax days
has been increased by the very large amount of maturities of Government
obligations held for account of foreign correspondents, agency accounts
of the Treasury, etc. Such maturities tomorrow amount to no less than
$165,000,000! Customarily we are requested to reinvest these maturities
in other U. S. Government obligations, and we necessarily have to be prepared to furnish those accounts, for reinvestment, with the particular
and specific maturities which they desire. This point can best be illustrated by saying that our reinvested orders in the June 15 maturity from
foreign correspondents and the Treasury alone aggregate $110,000,000«

We

are enabled to fill these orders only by reason of the fact that we hold
some $90,000,000 of June 15 maturities in the Open Market Investment Account, the balance being acquired in the outside market for delivery here
tomorrow.
"As we advised you in our letter of February 10, it is planned to
continue the Open Market Investment Account at about the level then agreed
to; viz., $273,000,000. However, under the easy money market conditions
which are likely to exist here tomorrow, we are proposing to have a temporary 'lag' in the delivery of some $83,000,000 of short-term Government
securities purchased to replace the June 15 maturities which we are selling for delivery tomorrow.
"To sum up: the Open Market Investment Account tonight will
stand at about $270,000,000. The securities sold from this account to
foreign correspondents, the Treasury, etc., for delivery tomorrow, will




-185aggregate $130,000,000. The securities purchased for delivery tomorrow
in replacement will aggregate but $50,000,000, leaving the account, at
the close of business tomorrow night, at approximately $190,000,000. The
balance of $83,000,000 of short-term securities which have been purchased
and delivery on which it is proposed to delay, will come in partly on
Friday, Saturday and Monday,

These delayed transactions should synchro-

nise more or less with the payment of tax checks and thus keep a better
semblance of order in our money market.

In accordance with our usual

custom, we are also planning to sell, tomorrow, to such member banks as
are over in their reserves, participations in the one-day Treasury certificate covering its overdraft.

It is estimated that such sales may

amount to $100,000,000 or more.

Meeting of March 26
Memorandum of Chairman. A meeting of the Open Market Investment
Committee was held in Washington on March 26, 1928, at which the following
memorandum was considered:
"At its last meeting on January 12, 1928, the committee recommended a System open market policy which should 'work toward somewhat
firmer money conditions as far as necessary to check unduly rapid further
increases in the volume of credit.'

In accordance with this policy net

gold exports, totaling $68,000,000, (exclusive of exports of earmarked
gold) since that time have not been offset by purchases of securities,
and sales have been made from the open market portfolio amounting to
$150,000,000, and the portfolio has been reduced from $423,000,000 to
$273,000,000. Accompanying these sales of securities the discount rates
of all the Reserve Banks were increased from 3 l/2 to 4 per cent.




-186" Partly as a consequence of these actions, money rates have
risen somewhat, . . .
"The total volume of member bank credit decreased during
January and the first half of February at a somewhat more rapid rate
than the usual seasonal decrease. The decline was largely in loans on
stocks and bonds, and commercial loans increased.

There has not been

sufficient liquidation of credit to release any appreciable amount of
reserve funds and total bills and securities of the Reserve Banks are
currently about 200 million larger than last year.

In the past two

weeks, accompanying a very active stock market, brokers loans have
begun to increase again and with them the total volume of credit.
"The policy adopted in January was thus effective in preventing further increases in the volume of credit, until the past two weeks.
A partial explanation for the diminishing effectiveness of the policies
adopted may be seen by observing the changes in bills discounted of member banks in New York City and member banks in other districts. As sales
of securities were made in January the borrowings of member banks in New
York City were increased, until they reached a point well above 100 million. From early in February, however, borrowings in New York City
showed something of a downward tendency, accompanying transfers of funds
from the interior and increases in the discounts for member banks outside
of New York City. These figures are given in the attached diagram and
table.

They raise the question whether the amount of indebtedness of

member banks in New York City is now sufficient to prevent further increases in the use of credit, particularly for speculation.




"Condition of Business
"In recent weeks the available evidence indicates a continued

-187tendency toward business recovery, and this improvement has gone far
enough

so that Federal Reserve policy may be considered more independently

of the condition of business than for some weeks past."
Action of Committee and Board.

The report made to the Board by

the Committee on March 26 was as follows:
"The committee has considered the memorandum submitted by the
chairman and has reviewed the results of System open market operations
during recent months.
"While it appeared for a time that the purposes set forth in
the Committee's recommendations of January 12 were being accomplished,
there has recently been a renewed tendency towards what seems an unnecessary expansion of credit indicating that the 4% discount rate in
the larger money markets is not as effective as had been contemplated.
"The Committee therefore recommends that the general policy
recommended in January

be continued until another meeting is held at

the time of the Governors' Conference unless or until a change in the
situation makes an earlier reconsideration desirable. The committee
would expect to make such changes in the open market account as are
necessary to carry out the policy."
During the joint meeting of the Board and the Committee on
March 26, at which the recommendations of the Committee were under discussion, the Chairman of the Committee stated that the situation had been
discussed in detail by the Board of Directors of the Federal Reserve Bank
of New York, which felt that the rediscount rate of that bank had not been
effective because of the ability of New York City member banks to liquidate
their borrowings at the Federal Reserve bank to a very low figure. He
said that in the opinion of the directors of the New York bank, which was




-188concurred in by the members of the Open Market Investment Committee, some
further sales of securities should be made from the System portfolio, although there may be further exports of gold which will reduce the amount
of sales that may be necessary.
During the discussion which followed, in reply to an inquiry
by Governor Young, the Chairman of the Committee stated that the operations proposed by the Committee, if its recommendations were approved,
would be conducted with a view to making more effective the prevailing
rediscount rates of the Federal Reserve banks and not with a view to
bringing about an increase in Federal Reserve bank rates.
The Governor of the Board then referred to the security holdings of the individual Federal Reserve banks which are not included in
the System portfolio and which have increased since the establishment of
the Open Market Investment Committee by approximately $50,000,000. He
expressed the opinion that purchases of securities by individual banks
for their own account if made at a time when the System, through the
Open Market Investment Committee, is selling securities have the effect
of offsetting the influence of the System operation.

The matter was dis-

cussed at considerable length and it was agreed that it should be made
a subject for consideration by the Spring Conference of Governors.
Following the joint meeting of the Board and the Committee on
March 26, the Board at a separate session adopted the following resolution:
"Whereas, at a meeting of the Federal Reserve Board and the
Open Market Investment Committee held on January 12, 1928, it appeared
to the members of the Board and the Committee that operations in the Open
Market Investment Account of the Federal Reserve System should be directed
toward bringing about somewhat firmer money conditions, as far as necessary




-189to check unduly rapid further increases in the volume of credit;
"Whereas, the Federal Reserve Board in line with the policyagreed upon on January 12, 1928, voted to authorize the Open Market
Investment Committee to make sales of Government securities from the
System Account from time to time during the following two months, and
also authorised the Committee temporarily to purchase such securities
should developments not then in sight require such action;
"Whereas, in furtherance of the above stated policy approximately $127,000,000 of securities were sold from the Open Market Investment Account, which sales together with an increase in the
other banks, resulted in firmer money conditions and lead to discontinuance early in February of further sales of securities from the Account
until the effect of sales already made and the changes in rediscount
rates could be more closely observed;

"Whereas, the Federal Reserve Board at this meeting has considered the written recommendation made by the Open Market Investment
Committee today and the verbal assurance received from the members of
the Committee that the operations in the Open Market Investment Account
should be conducted with a view to making more effective, and not increasing, prevailing rediscount rates of the Federal Reserve banks;
"Now, Therefore, Be it resolved, That the Federal Reserve
Board approve the policy recommended by the Open Market Investment Committee in its written and verbal reports of this date and authorize
said Committee to make further sales of Government securities from time
to time up to May 1, 1928, at about which time another meeting of the
Committee with the Federal Reserve Board will be held unless a change




rediscou

-190in the situation makes earlier reconsideration desirable."
The above resolution was transmitted to the Chairman of the
Open Market Investment Committee in a letter dated March 26.
Letters on Open Market Operations, April

1928.

Letter from Acting Chairman and resume of current credit situation, April 11. Under date of April 11, 1928, at which time the Open
Market Investment Account stood at $248,000,000, the Deputy Governor of
the Federal Reserve Bank of New York, Acting Chairman of the Open Market
Investment Committee, addressed a letter to the Governor of the Board,
transmitting a resume of the current credit situation with a statement
"It seems quite clear that, for the present, we should continue to make
moderate sales of Government securities from the Open Market Investment
account."
This letter, after having been circulated among all members of
the Board, was presented at the meeting of the Executive Committee on
April 17, and "Noted".
The resume referred to was as follows:
"The principal developments in credit and business during the
past two months have been the following:
Gradual advance in money rates,
Continued outflow of gold,
Moderate recovery in industrial activity,
Substantial increase in commercial loans of reporting banks,
Unusual activity in stocks, prices advancing to new
high levels,
Increase in broker' loans to higher level than ever before,
Substantial increase in the demand for Reserve Bank credit.
"Money Rates
" . . . Money

rates

have

shown

an

upward

trend

since

the end of January, which, however, was quite gradual until within the
past two weeks. The recent advance has carried rates considerably above
the levels that prevailed last autumn, and also moderately above a year




-191-

"Until recently the effects of sales of securities from the
System Account, the advance in rediscount rates, and some further loss
of gold were partly offset by a heavy flow of funds from other districts.
. . .
"A renewed gold export movement in March, the effect of which
did not appear until the Treasury tax period overdraft was eliminated,
together with a small reduction in the System Account, was reflected in
a general, though moderate, advance in money rates near the end of March.
The sharp advance in call money rates since the first of April has accompanied an unusually rapid increase in borrowings of New York City members
from this bank, which in turn appears to have been due to the following
circumstances:
"Month-end and Easter currency requirements in Second District,
Loss of about 100 million dollars in transfers to other districts (probably reflecting currency requirements and collection of April 1 coupons
and dividend checks),
"Increase in member bank reserve requirements, the result of
a large increase in security loans, following a considerable increase in
commercial loans.
"The usual tendency would be for funds to return to New York
during the coming week, and for currency to be retired from circulation,
with a resulting liquidation of member bank indebtedness here and an
easing of call money rates.
"Demand for and Supply of Reserve Funds.




-x- -x- #
"[Over the past year there has been] a net increase in the

-192demand for reserve funds, largely due to gold exports and earmarkings, of
over 300 million dollars, a little less than half of which has been supplied through net increases in Reserve Bank bill and security holdings,
the remainder of which member banks have had to obtain through borrowing
from the Reserve Banks. Nearly 100 million of the increase in borrowing
has occurred within the past week, due partly to a considerable increase
in member bank reserve requirements accompanying credit expansion, and
partly to currency withdrawals .
"Business Recovery and Commercial Loans,
"Industrial activity in general appears to have largely recovered from the decline at the end of 1927, although there is still
considerable irregularity

. . Accompanying this increase in industrial

activity, commercial loans of reporting banks have shown the largest
increase for a similar period in recent years.
"Data on distribution have not shown corresponding gains. . . .
"Commodity Prices.
"Commodity prices in general have shown very little change since
the first of the year. ...
"Renewed Rise in Stock Prices and Security Loans.
"Following a period of moderate recession in January and February, the volume of stock trading during recent weeks has been larger than
ever before, and stock prices have risen with a rapidity that has seldom
been equaled. For a time the rise in prices was not reflected in member
banks security loans to any great extent, apparently due in part to funds
received by the market from sources other than banks, but in the week
ended April 4 member bank security loans increased 275 million dollars
and were larger than at any previous time, with the exception of the




-193temporary high point at the first of the year.
"The Standard Statistics Company index of prices of 228 stocks
is 33 per cent higher than a year ago, when prices were then higher relative to either earnings or dividends than in a number of years. Apparently
the recent advance was based on the feeling that there was an immense
amount of idle funds in the country which were not needed for business
purposes, and an impression that Federal Reserve discount rate changes and
security operations had been largely ineffective and that the moderate
advance in money rates was seasonal and would be followed shortly by a
seasonal decline in rates.

The advance in call money to 5,5 1/2 and 6

per cent appear to have caused some doubts as to the plentifulness of
money and to have resulted in some hesitancy in the stock market.
"Conclusions.
"(l) The effect of Reserve Bank security operations and advances
in rediscount rates on money rates in New York has been partly counteracted until recently by a large movement of funds from other districts,
which was made possible by an unusually large contraction in currency
circulation, and by an increase in borrowings from other Reserve Banks.
"(2) Industry has largely recovered from the recent decline,
but, in general, is not unusually active; distribution appears to have
shown no corresponding increase.
"(3) Stock prices, and consequently brokers loans, have reached
higher levels than ever before; the advance seems to have been based on
the belief that the rise in money rates was largely seasonal and would be
followed soon by a seasonal decline, and that the credit supply was ample
for stock operations as well as general business.




"(4) Indebtedness of New York City member banks amounting to

-194about 150 to 200 million dollars, which is likely to be accompanied by
a call money rate of 5 to 5 l/2 per cent, appears to be necessary to
check the expansion of loans for stock trading purposes.
"(5) Further Reserve Bank sales of securities will probably be
required within the near future to keep indebtedness of New York City
banks and call money rates at these levels, as the recent increase has
been based partly on temporary influences."
Letter from Acting Chairman, April 17. Under date of April 17,
1928, the following letter was addressed by the Acting Chairman of the
Open Market Investment Committee to the Vice-Governor of the Board and was
read at the Board meeting on April 18, 1928:
"IN RE:

Open Market Investment Account

"Last Wednesday and Thursday, before Governor Young left for his
trip south, we had as you know a talk concerning the Open Market Investment Committee's contemplated sales during the ensuing week; and it occurs
to me that you and your associates may be interested in having a complete
resume of what has been done in this regard, as well as of other important
pending transactions that will have an effect on the money market,
"(1) Total sales, between the close of business Wednesday,
April 11, 1928, and the close April 18, 1928, amounted to $47,370,000. ...
"(2) At the request of one of our foreign correspondents, the
Federal Reserve Bank of New York is today supplying them with a total of
020,000,000 banker' bills, which now appear on our statement under the
caption 'Sales Contracts,' and is simultaneously taking over from the
foreign correspondent $20,000,000 of U. S. Government 3 1/8/2 Treasury
certificates due June 15, 1928, for resale to the U. S. Treasury tomorrow,
April 18, 1928. The initial effect of this transaction today will be




-195merely to reduce our portfolio of bill holdings by $20,000,000 and to increase our holdings of Government securities by a like amount; but, as
the Treasury is drawing down balances from depositary banks in order to
pay us for the Treasury certificates tomorrow, this will presently have
the effect also of taking $20,000,000 of funds from the money market.
"

(3) Another item of major importance is the fact that we have

been instructed by the Bank of France to earmark $25,000,000 in fine gold
bars tomorrow, April l8. Payment for these bars will be made out of funds
withdrawn from the market, $3,000,000 today, and $22,000,000 tomorrow.
"When these transactions have been consummated, the money market
will have lost an aggregate of $92,000,000. . . .
"Under these circumstances, probably it will be desirable to
defer any further immediate action.11
(Secretary's note: Effective April 20, 1928,
the discount rates of the Federal Reserve Banks of
Boston and Chicago were increased from 4 to 4 1/2%.)
Letter from Acting Chairman, April 23, 1928. The following
letter dated April 23, 1928 from the Acting Chairman of the Open Market
Investment Committee was circulated among the members of the Board and
"Noted" at the meeting on April 27, 1928.
"In response to your request we have prepared a balance sheet,
which shows the loss of gold since November 10, and the resulting increase
in the use of Reserve Bank credit, together with changes in currency
circulation, member bank reserve requirements, and the effect of security
sales on Reserve Bank discounts, which are needed to complete the picture.
. ..
"Except for the sale of securities, the return of currency from
circulation would have largely offset the loss of gold; the increase in




-196discounts would have been comparatively small, and rates in the New York
money market would have been considerably lower."
Meetings of April 29-30, 1928,
The next meeting of the Open Market Investment Committee was held
on April 29, 1928, at which time the Open Market Investment Account stood
at $152,318,300, and an increase in discount rate from 4 to 4 1/2% had
been made effective at five of the Federal Reserve Banks - Boston, Richmond, Chicago, St. Louis and Minneapolis.
Memorandum of Chairman, At this meeting the following memorandum
was considered:
"Since the last meeting of the Committee on March 26, 1928, there
has been a renewed expansion of bank credit, largely in the form of loans
on stock and bonds. . .
"This increase occurred largely at the end of March and in the
early part of April, but it is not clear that the tendency toward expansion has been checked as yet, notwithstanding a considerable rise in money
rates during the month.
"Since March 26, further sales of approximately $119,000,000 of
securities from the System account have been made, reducing the amount
in the open market portfolio from 0273,000,000 to $154,000,000. In addition there has been a loss to the market of about $57,000,000 through
gold exports and earmarking since the last meeting, and reserve requirements of member banks have been increased approximately $50,000,000 as
the result of credit expansion.

The combined effect has been to increase

member bank indebtedness at the Reserve Banks by over $200,000,000 during
the past five weeks, and money rates in general have advanced...
. ..




-197"Call Money Market
"Call money advanced to 6 per cent early in April partly as the
result of Easter currency requirements and the usual first of the month
flow of funds to the interior, but subsequently declined to 4 l/2 per
cent on several days around the middle of the month, due to a heavy flow
of funds to New York from other districts, which appears to have been
accompanied by renewed borrowing by member banks outside of New York.
"Following the advance in the rediscount rate of several Reserve
Banks from 4. to 4 l/2 per cent in the latter part of April, there was
some withdrawal of funds from New York, indebtedness of New York City
banks was increased, and call money advanced to 5 per cent,
"

Commercial Borrowing and the Condition
of Business.

"The increase in commercial loans of reporting banks from the
end of January to the middle of April was unusually large this year, and
it now appears that requirements are tending to diminish.

Productive

activity appears to be fairly stable following a rapid recovery in a
number of important industries earlier

in the year, and trade has been

in moderate volume.
"Conclusions,
"1. An excessively rapid increase of bank credit has occurred
during the past month, and it is not clear that the tendency toward expansion has been halted,
"2. Money rates have advanced further as the result of security sales, gold losses, and increased reserve requirements.
"3.

The advance in discount rates of five Reserve Banks appears

to have resulted in some withdrawal of funds from New York, and thus to
have assisted in preventing softness in the New York money market.




-198"4

The highest point of seasonal business credit requirements

has probably passed and there is no indication that the tightening of the
money market has interfered with the extension of all necessary credit to
business,
"5. After the May first interest and dividend requirements have
been met, the normal tendency would be toward easier rates."
Action of Committee and Board, At this meeting (April 29, 1928)
the following report and recommendations were adopted by the Open Market
Investments Committee:
"The Committee has considered the memorandum submitted by the
Chairman, and has carefully reviewed the Open Market operations of the
System since the last meeting of the Committee, in the light of the general
credit situation referred to in the memorandum.
"In view of the fact that it now appears that the expansion in
the total volume of bank credit, referred to in its last report, has continued at what seems to be an unduly rapid rate since that time, notwithstanding the sales of securities made by the Committee and the recent
increase in the discount rates of some of the Reserve Banks, the Committee
now recommends that the general policy adopted at its last meeting be
continued until its next meeting, which it would expect to hold shortly
after the middle of June, unless conditions make an earlier meeting advisable.
"The Committee would expect to make such changes in the Open
Market account as might be necessary to carry out the policy recommended."
This report was presented to the Board at a meeting on May 2,
and the action of the Board was to address the following letter to the
Acting Chairman of the Committee:




-199"The report and recommendations of the Open Market Investment
Committee as of April 29, 1928, have been received and considered by the
Board. We observe that the Committee now recommends that the general
policy adopted at its last meeting be continued until the next meeting.
The previous meeting, to which you refer, was held on March 26, and at
that time your Committee recommended that the general policy established
in January be followed. In January you stated the Committee program
should work toward somewhat firmer money conditions and to accomplish
the program the Committee would expect to sell further amounts of Government securities, the object being to check further unduly rapid increase
in the volume of credit. The Board therefore assumes that your present
policy is a continuation of the program adopted in January.
"

We also observe from your report of April 29 that it is now

expected by your Committee that this policy will be continued until the
next meeting of the Open Market Investment Committee, which you contemplate holding shortly after the middle of June, unless conditions make
an earlier meeting advisable. The Board realizes that it is extremely
difficult for the Committee to outline any definite procedure to be
followed between now and June 15. and in like manner, it is extremely
difficult for the Board to approve any definite policy for any definite
period. It, however, is in agreement with the procedure suggested by
the Committee at the moment and therefore gives approval to its recommendations, but in doing so, reserves the same right that the Committee
reserves of changing its position should conditions develop which would
make a changeadvisable."By order of the Federal Reserve Board."




The Open Market Investment Committee minutes of a joint meeting

-200with the Federal Reserve Board on April 30, read in part as follows:
"A copy of the report of the Open Market Investment Committee
dated April 29, was presented to each member of the Federal Reserve Board,
together with a copy of the formal report of the secretary of the committee
and a preliminary memorandum prepared for the committee on money market
and credit conditions generally. Mr. Case reviewed the conditions referred
to in the preliminary memorandum and the reasons which prompted the committee's report, which he explained had been submitted to and accepted
by the Governors Conference this morning. In discussing the report the
question was raised as to whether the recommendation of the committee was
intended to pave the way for further rate increases. It was explained
that while the action taken by the committee was not designed to cause a
uniform discount rate of 4 1/2 per cent throughout the Federal Reserve
System, nevertheless it might be necessary in any event for some of the
other reserve banks to raise their rates to that figure later on."
Letter on Open Market Operations, May 1928.
Under date of May 8, the Acting Chairman of the Open Market
Investment Committee addressed the following letter to the Governor of
the Board, which was circulated among all members and "Noted" at a
meeting of the Executive Committee of the Board held on May 14:
"Since the week ended Wednesday, May 2, 1928, further sales
from the Open Market Investment Account, approximating $17,000,000,
have been made, reducing the account from ,•157,000,000 to an estimated
total of $140,000,000 as at the close of business Wednesday, May 9, 1928.
"

. . .since the beginning of this year, a total of $283,000,000

of Government securities has been disposed of, which sales in turn have
been reflected in a very substantial increase in bills discounted and




-201direct advances to member banks. The statement of the Federal Reserve
Bank of New York as at the opening of business this morning, compared
with a week ago, reflects a loss in cash reserves of $78,000,000 and an
increase in total bills discounted of almost precisely that figure. A
part of this loss in reserves represents the withdrawal of funds from
New York, but even if these funds are returned, due to prevailing high
rates for call money, it appears to be unlikely that New York banks will
be enabled to reduce their indebtedness much below $200,000,000.
"

You will recall that during the Governors

Conference at

Washington last week, Mr. Harrison reported the likelihood of one of
our foreign correspondents (the Bank of France) withdrawing $67,000,000
of funds from the New York market; the procedure being to have the funds
paid in here for its account and the proceeds thereupon applied to the
earmarking of a like amount of gold. We have now received definite word
from the Bank of France that it plans to withdraw a total of $37,000,000
this week, about as follows:

$17,000,000 on Wednesday, May 9, and

$10,000,000 each on Thursday, May 10, and Friday, May 11 - the remaining
$30,000,000 to be similarly withdrawn on Monday, Tuesday and Wednesday
of next week, May l4, 15 and 16, respectively, in units of '10,000,000
each.
"When the aggregate of this sum comes to be added to our already
expanded volume of bill and security holdings, which today total
$450,000,000, it would appear that our member banks will be indebted
to us (in the form of discounts and advances) in an amount somewhere
between $200,000,000 and $300,000,000 with total holdings of approximately $500,000,000. If member banks' indebtedness to us should hold
somewhere between those two figures, it may presently be necessary to




-202consider carefully the idea of making some slight changes upward in our
rate structure. In any event, it seems reasonably clear that, with this
large withdrawal of funds from the market, it may be unnecessary to make
further sales of securities for the present,"
Meeting of May 25, 1928.
The next meeting of the Open Market Investment Committee was
held on May 25.
(Secretary's Notes On which date the System
Account amounted to approximately $100,000,000.
On the same date a rediscount rate of it 1/2 per
cent was made effective at the Federal Reserve
Bank of Cleveland and only three Federal Reserve
Banks were then maintaining a 4 per cent rate Atlanta, which increased on May 26th; San Francisco,
which increased on June 2nd, and Kansas City.)
Preliminary Memorandum of Acting Chairman. At this meeting
(May 2$) the Open Market Investment Committee considered the following
preliminary memorandum submitted by the Acting Chairman:
"Operations conducted since the meeting at the end of April have
been successful in increasing materially the indebtedness of member banks,
especially New York City members, and in tightening further the New York
money market,
"

. .,

The increase in the indebtedness of all member banks at the

reserve banks increased about 140 million during the three weeks, due
chiefly to the following factors:
"Reduction in the System Account from $154,000,000 on April 27
to $100,000,000 on May 23.
"Gold loss through additional earmarkings of 68 1/2 million
and net exports of 16 million,
"Reduced buying of bills and consequent reduction of about
25 million in Reserve Bank bill holdings.




-203". . . Most of the increase in member bank borrowing has been by
New York City banks. Advances in discount rates of five Reserve Banks
from 4 to 4 l/2 per cent in the latter part of April appear to have
greatly assisted in keeping funds from flowing to New York, and consequently helped to make effective the farther sales of securities in the
New York market. The result is apparent in the course of money rates
previous to the advance in the discount rate of the New York Reserve
Bank on May l8. The advance at New York after New York City members had
been placed heavily in debt at the Reserve Bank has been effective in
tightening the money market further. Present money rates and changes
since the latter part of April and since the latter part of last October
are indicated in the following table:

Call money
Time money, 90-day
Commercial paper

4

Bills, 90-day

4

5

Change
May 23
April 27
1928
1928
6
+1
1/2
+1/2
1/2 - 4 3/4 +
1/8
- 4 1/8 + 1/8 - l/4

Since
October 28
1927
+ 2 1/2
+ 1 l/4
+ 1/2 - 3/4
+ 3/4 - 7/8

"These rates are the highest for the time of year since 1923.
It is evident that rates on security loans have been advanced much more
than rates on commercial borrowing, which is in keeping with the nature
of credit expansion in recent months.
"Loans on Stocks and Bonds.
"Notwithstanding the substantial increase in interest charges on
security loans, such loans have continued to increase rapidly. A further
increase of over 350 million during the past three weeks has carried the
total of loans to brokers placed by New York City banks to 4 1/2 billion
dollars, an amount 800 million higher than in the first week of March,
and nearly 1,600 million or 55 per cent larger than a year ago.




#

•

-204"Most of the increase during [the past three weeks] has been in
loans of New York banks for their own account, and in loans for others
than banks. The heavy indebtedness of New York banks, together with the
recent advance in the discount rate of the New York bank, should give these
banks an incentive to restrict their lendings.
"It is too early to determine the effect of this latest move in
checking credit expansion. The movement of stock prices, which rather
than the volume of trading has caused the expansion of security loans, has
been highly irregular during the past week, - evidence of fairly heavy
liquidation on several days has been followed by a recovery,
"Interdistrict Movement of Funds
"The flow of funds to and from the New York money market is also
an important factor in the extension of credit for stock trading purposes.
It has been apparent in more than one instance since the beginning of
this year that an inflow of funds to New York has largely offset the
effect of open market operations; it has been apparent also that banks in
other parts of the country as a whole have had no surplus funds since the
end of January, but that these transfers were accompanied by increased
borrowing by member banks outside of New York.
"The accompanying chart shows the accumulative movement of funds
to and from New York City banks since April 18, the date that marked the
culmination of a heavy inflow of funds to New York, and that just preceded
the beginning of Reserve Bank advances in discount rates. Call loan renewal rates also are shown.
"The decline in call money renewals to 4 3/4 at the beginning of
the period, together with Reserve Bank discount rate advances in several
districts, appear to have caused some withdrawal of funds from New York




-205until the end of April. The usual month-end inflow and subsequent outflow followed, and recently some movement of funds to New York has
accompanied 5 l/2 to 6 per cent call money. This latest inflow thus far
has been moderate, but the further rise of money rates since the discount
rate of the New York Reserve Bank was advanced may tend to draw funds
more heavily toward New York.
"Conclusions.
"l. Further Reserve Bank security sales, restriction of bill
purchases, and gold loss have substantially increased member bank indebtedness, and have caused a further advance in money rates.
"2. Advances in discount rates of several Reserve Banks other
than New York, most of which occurred in the latter part of April, appear
to have been effective in preventing a further flow of funds to the New
York money market, and in confining the increase in member bank indebtedness largely to New York.
"3. The increase in indebtedness of New York members and the
rise in money rates previous to the advance in the discount rate of the
New York Reserve Bank did not check the expansion of credit used for security trading purposes.
"4. The advance in the discount rate of the New York bank, after
New York member banks had been placed heavily in debt, has resulted in a
further tightening of the New York money market.
"5.

This further advance in money rates may tend to attract

funds from other sections of the country, which would neutralize the
effect of further security operations."
Action of Committee and Board. After consideration of the above
memorandum the Committee adopted the following report.




-206"

The Committee has considered the memorandum submitted by the

Chairman reviewing the credit situation.
"While there has been some pause in the expansion of credit, it
is not yet clear that the expansion is definitely checked.

The Committee

believes that it is difficult to estimate the exact effect of the sales
of securities that have been made to date, and feels that it is possible
that a cumulative effect not yet apparent may make itself manifest in
the near future,
"The Committee believes that sales of securities should be continued at least during the next week,
"To take care of any acute situation which may develop suddenly,
the Committee believes furthermore that it should have authority to make
purchases of securities to an amount not exceeding $100,000,000 as may be
necessary to take care of such a situation if it should arise."
This report was submitted to the Federal Reserve Board at a
joint meeting immediately following, and the Board's minutes of that
joint meeting are as follows:
"The Acting Chairman of the Committee stated that the Open Market
Investment Account has been liquidated to $100,000,000 and that the purpose of the Committee in seeking authority to continue sales of securities,
at least during the next week, is to place the Committee in position to
accept an offer made by the Fiscal Agents of the British Government for
the purchase of $25,000,000 of securities out of a portion of the proceeds of the Australian bond issue recently floated in this country. He
stated that these securities would be held by the agents of the British
Government for probable use in meeting interest and principle payments
due the United States on June l5th. He stated that if these bonds are




-207not purchased from the Federal Reserve System they will be purchased in
the open market, in which event in all probability no loss of credit to
the market will result as the funds for the purchase are assumed to be on
call and the latter transaction would merely exchange a call loan for
government securities. The Acting Chairman stated that the Committee felt
that the offer should be accepted by the Federal Reserve System,
"With regard to the recommendation of the Committee that to take
care of any acute situation which may develop suddenly the Committee
should have authority to make purchases of securities to an amount not
exceeding $100,000,000, the Acting Chairman stated that this should be
considered in the light of the statement contained in the report as to
the possibility that the accumulative effect, not yet apparent, of the
sales of securities that have been made to date may make itself manifest
in the near future, He stated that this recommendation is not based upon
any contingency which any member of the Committee can at this time foresee,
but is made rather out of an abundance of caution in order that the Committee may be prepared to deal with any unforeseen movement which might
dangerously affect the credit situation.
"The Acting Chairman having previously advised the Board that
Governor Harding cast a negative vote on the Committee's report, at the
request of Governor Young, Governor Harding explained his reasons for not
concurring in the Committee's recommendations, principally that he believes
the Committee should no longer operate on a day to day basis but should
formulate its policies to cover wider intervals and because he felt that
the Committee should not seek authority to deal with strictly emergency
situations in the money market as, in his opinion, the Federal Reserve
Bank of New York has ample authority to deal with such a situation of




-208its own accord and, having taken action, could then consult with the Committee and the Board as to any System policy or action believed desirable.
Following a general discussion, it was agreed that the Open Market
Investment Committee should meet again for the purpose of reconsidering
their report in the light of the discussion at this meeting, later joining in another meeting with the Board for discussion of any changes which
the Committee might decide to make in its report."
After recess the Board and the Committee reconvened and the Acting Chairman stated that the Open Market Investment Committee had met
again and reconsidered the report submitted to the Board at the morning
session, in the light of the discussion which took place at that meeting.
He submitted a revised report just adopted by the Committee which was discussed with the Members of the Board and further amended so as to read as
follows:
"At the time of the last meeting of the Open Market Committee on
April 30th, it appeared that the expansion in the total volume of bank
credit was continuing at what appeared to be an unduly rapid rate. Since
then, sales of securities by the reserve banks have continued, several
of the reserve banks have increased their rediscount rates and there have
been further exports and ear marking of gold.
"While there has been some pause in the expansion of bank credit,
it is not yet clear that the expansion is definitely checked.

This meet-

ing of the committee was, therefore, called to review and consider the
present credit situation with the aim of determining whether any different
policy than that adopted at the last meeting should be recommended.
"After considering the memorandum submitted by the Chairman and
reviewing the various factors in the credit situation, the committee sees




-209no reason to change the policy adopted at the last meeting and concurred
in by the Federal Reserve Board. The committee believes that it may
still be necessary to exert further pressure on the credit situation and,
to this end that it may be advisable to make further sales of securities.
"The committee would expect to meet again within the next month."
Following its meeting with the Committee, the Board gave further
consideration to the final report quoted just above and voted - "That the
Acting Chairman of the Open Market Investment Committee be advised that
the Board has considered the report of the Committee, approves the policy
outlined therein and authorizes the sale of further securities from the
Open Market Investment Account if such sales are deemed necessary by the
Committee."
At a meeting of the Executive Committee on May 31> the Governor
reported a telephone advice received from the Acting Chairman of the Open
Market Investment Committee that the $25,000,000 of securities referred
to during a meeting of the Committee with the Board on May 25 had been
sold from the System Account.
The Governor also stated that he was advised that the New York
Bank had taken over temporarily from a foreign correspondent $7,000,000
of securities which were to be disposed of within the next three or four
days.

(Secretary's Note: On May 29, 1928, the Open
Market Investment Account stood at $82,000,000.)
Letters on Open Market Operations and Gold Movements, June 1928.
Letter from Acting Chairman on Open Market Operations, June 1.
"Supplementing our daily letter to the Federal Reserve Board concerning
gains and losses to the money market, I am summarizing herein a few of




-210-

the important changes which have taken place in New York and throughout
the System during the past week,
"Except for a temporary rise in call money to 61/2%on Monday,
and decline to 51/2%Tuesday afternoon, the money market has been steady
and moderately firm during the past week, due largely to further sales
of securities from the System Account, reduction in Reserve Bank bill
holdings, gold exports and a holiday and month-end currency demand.
"There has been a fairly steady flow of funds to New York which,
except for the reduction in Reserve Bank bill and security holdings, would
have enabled the New York banks to reduce their indebtedness considerably and, consequently, would have eased the money market. As it was,
the borrowings of the New York City banks totaled $246,000,000 yesterday,
an amount slightly larger than a week ago, while borrowings by banks
outside of New York increased about $90,000,000 during the week.
On Monday, a sale of nearly $26,000,000 of securities to the
market was made and was immediately reflected in an increase in the
borrowings of New York City banks. On Tuesday, there was a temporary
increase of slightly less than $7,000,000 in the System Account, which
was due to the temporary purchase of securities from a foreign account.
Sales contract holdings of securities also increased $7,000,000 during
the week; so that the net reduction in total security holdings was but
$11,000,000. At the close of business tonight, the open market portfolio will stand at $75,000,000.
The present level of our buying rates on bills, which, with
the cost of indorsement, makes them above the open market offering
rates on the shorter maturities, has resulted in small offerings of
bills to us and a consequent reduction of 27,000,000 in the total bill




-211holdings of the System during the past week.

Yesterday, maturities here

exceeded purchases by an additional $10,000,000. A factor in the comparatively low open market rates on short bills has been the strong demand
for bills for foreign account.

The new law exempting income received by

foreign central banks from bills (effective as of January 1, 1928) is
likely further to stimulate the foreign demand for bills in this market.
"The gold movement continues to be an influence toward firm
money.

The principal item during the past week was an export of

$15,000,000 to London by a New York bank.

This shipment and the

$5,000,000 shipment to London last week are reported to have been special
transactions - they were not warranted by the position of sterling, figuring the usual costs involved in the calculation of the gold export
point.

Sterling exchange has advanced to the highest level of the year,

notwithstanding the relatively high level of money rates here. We understand that a factor in its strength has been the 1/50,000,000 Australian
loan recently floated here, the proceeds of which have been made available to the British Government.
"Holiday and month-end currency requirements have created a
further, though temporary, demand for funds this week. A considerable
part of this currency will probably return from circulation next week,
but the influence of this on the money market is likely to be offset
by the withdrawal of funds from New York, which usually occurs in the
first week of each month.

***

"The immediate prospect, then, appears to be for continued
firmness in the money market during the coming week.

It seems likely

that the total indebtedness of all member banks for the present will
remain above $900,000,000. It is possible that New York banks may




-212continue to gain, through transfers, for a day or two longer, but in view
of the fact that they are now engaged in meeting first-of-the-month dividend and interest disbursements, they are not likely to offer funds freely
in the call loan market. If, however, they do appear to be lending freely,
additional security sales may be necessary to prevent a decline in money
rates. Call money has just gone to 6 1/2%.
Letter from Acting Chairman on Gold Movements, June 1. "I am
enclosing a preliminary statement of the gold movement during May from
which you will observe that the net loss for the month was $109,000,000
including both actual shipments and earmarking transactions. This is the
largest net loss in any one month since the present export movement began
in September 1927. The total exports of gold for the month were
$83,000,000 and although that figure was exceeded by slightly over
$10,000,000 in both March and April, nevertheless there were practically
no imports in May and the amount of gold earmarked was much larger than
any month this year. As you know, the large amount of gold earmarked
for the Bank of France at the beginning of the month was responsible
for this.
*

*

*

"As I have said, the Bank of France was the most important
factor in our earmarking transactions; so also with respect to actual
shipments of gold the largest amount withdrawn during May was for account
of the Bank of France, For the present this movement has stopped as we
have no instructions at the moment to make further shipments to France
and have received no intimation that the amount of gold which they now
hold earmarked with us($93,000,000) is to be taken home in the near future.




-213The second largest withdrawals of gold during Kay were to Great
Britain. Two shipments aggregating $5,000,000 and $15,000,000 were made
to London by the National City Bank of New York and were in part brought
about by the present strength of sterling exchange. Taking into consideration the present shipping costs from New York to London, it is impossible
to see how any profit could be made on these two consignments with sterling at $4.88-5/16 to $4.88-3/8, unless the gold were sold in the London
market at close to the maximum price of 77s. 101/2d.Only a very small
part of the first consignment of $5,000,000 was sold in the London market,
most of the gold having been sold to the Bank of England at its minimum
buying price of 77s. 9d. The second consignment of $15,000,000 has not
yet arrived but there does not appear to be any strong demand for gold
in the London market and we must, therefore, conclude that these transactions are of a special nature and are not being undertaken primarily
for profit.
"Argentina took a fairly substantial amount of gold during the
month as she has been doing now since the latter part of last year and
there was a small amount sent to Italy. Otherwise there is nothing of
importance in the gold movement during May which requires special comment."
Letter from Acting Chairman on Gold Movements, June 6.

"We have

received rather unexpectedly from the Bank of France instructions to ship
to Paris the gold which we now hold earmarked for their account aggregating $93,000,000. There will be eight consignments in the neighborhood
of $12,000,000 each, the first of which will leave New York on Saturday
next and the last on July 8.
"We shall follow the same practice on this movement as we did
in the previous one in regard to publicity, that is, when we hand to the




-214newspaper men each week the statement of gold exports and imports we will
explain to them that the amount shipped to France was released from earmarked gold."
Letter from Acting Chairman on Gold movements, June 8, "Referring to my letter of June 6, there have been some further rather startling
developments in the matter of withdrawals of gold in this market by the
Bank of France. We have just received a confidential cablegram this
morning stating that 'in view of forthcoming stabilization of our currency
we shall need an additional amount of $50,000,000 of fine gold bars which
we hereby ask you to earmark for our account.'
"The Bank of France desires the operation completed by next Thursday, and we are to-day setting aside $15,000,000 of gold for them against
money paid in to us by certain of the New York City banks."
At the meeting of the Board on June 13, at which the last
letter was submitted, the Governor reported telephone advice from the
Federal Reserve Bank of New York that in addition to the $93,000,000 of
earmarked gold that had been moved out of the country for the Bank of
France and the $50,000,000 being earmarked for the account of that
institution, the Bank of France had requested the sale of $50,000,000
of Government securities, of which, $30,000,000 had been sold for
delivery on June 15.
Letter from Acting Chairman on Open Market Operations, June 8.
"Reviewing the events of the past week, the call money market was very
firm at the close of last week, and early this week, but has subsequently
become rather easy, notwithstanding the fact that New York City banks
were borrowing 285 million here this morning.




"During the week a substantial amount of funds was taken from

-215the money market through the further reduction in the bill holdings of
the System, through some further sale of securities and through gold
exports. There was also an increase in member bank reserve balances.
These were partly offset by a reduction in currency circulation and an
increase in the 'float' of the Reserve Banks, but member bank borrowings
increased about 38 million dollars, - almost entirely outside of New York
City, however.
-X- -X' #

"Dealers' offerings to us of bills continue to be considerably
smaller than maturities, partly because of the heavy foreign demand, and
partly because our rates with the cost of indorsement are above the
market rates, especially on short bills. The reduction of 9 million in
securities represents the sale of 7 million securities, which, as we
reported last week, were purchased temporarily from a foreign account,
and also a reduction of 2 million in sales contract holdings. Aside
from this, no further sales of securities from the System Account were
made.
"There may be some further reduction in currency circulation
during the coming week, and also some reduction in member bank reserve
balances, as our records indicate that the balances of New York City
members on June 6 were about 17 million above requirements. At least
partly offsetting these reductions, it is probable that the 'float' of
the Reserve Banks will be reduced during the week and will therefore
take funds from the member banks.
"We discussed yesterday the advisability of conferring with
some of the New York City members who have been borrowing rather
steadily in recent weeks, to see if they could not, by reducing their




-216offerings in the money market, effect a reduction in their indebtedness
here. Dr. Miller, who was here during the discussion, informally expressed himself as doubting the wisdom of any such action at the present
time.
"The appearance of the money market today seems to suggest, however, that such action may yet be necessary. The New York City banks at
the opening of business today had surplus reserves amounting to approximately 20 million. They appear to have offered a corresponding amount
of funds in the market, instead of reducing their indebtedness here, and
consequently we have the unusual situation of a 51/2per cent call rate
with heavy offerings at the same time that the New York City banks are
borrowing 285 million dollars here.
"We have received word that 15 million is being paid in here
today and a total of 50 million within the coming week, the proceeds of
which are to be earmarked for account of the Bank of France. This, of
course, will assist very much in preventing undue ease in the money
market."
(Secretary's note. On June 7, the rediscount rate of
4 1/2% became uniform for all banks, Kansas City increasing from 4% to 4 1/2% on that date. These rates
remained in effect until July 11, when the Federal
Reserve Bank of Chicago increased from 4 1/2% to 5%.
The Chicago action was followed by similar increases
at the Federal Reserve Banks of New York and Richmond
on July 13, Atlanta on July 14, and Boston and St. Louis
on July 19. During this entire period the Open Market
portfolio remained constant at about $85,000,000.)
Meeting of July l8, 1928.
Memorandum of Acting Chairman. "The Open Market Investment
Committee met in Washington on July 18. The following memorandum was
submitted.




-217"MEMORANDUM TO THE OPEN MARKET INVESTMENT COMMITTEE
" Interest Rates.
"Interest rates are higher today than at any time since 1921;
The primary reason for high money rates is that the member banks owe
the Federal Reserve Banks about one billion dollars, compared with an
average borrowing of about 500 million for the preceding six years and
400 million last summer. The heavy borrowing is due primarily to gold
exports of 500 million dollars since last autumn, sales of 300 million
of securities by the Federal Reserve Banks, and some additions to reserve requirements of member banks because of excessive credit expansion.
Partly offsetting these losses of funds, there has been a gain through
the retirement of over 100 million of currency (reflecting some reduction
in factory payrolls and increased use of checks).
"As the autumn demand for funds comes on, larger borrowings
and still higher money rates may be anticipated unless counteracting
steps are taken. Ordinarily autumn trade requires nearly 100 million
additional rediscounts (exclusive of additional Federal Reserve credit
called into use through the seasonal expansion in holdings of bankers'
acceptances).
"Testing the Credit Situation.
"

The present high money rates are testing the credit situation

and it seems reasonable to believe that pressure will be felt most at
the weakest point, whether this is the prices of industrial securities,
the volume of new issues, the amount of new building, or whatever else.
It seems likely that a brief period of rates at present levels is likely
to result in a check to movements which may have gone beyond a sound
economic basis. The fact that such a testing is going on is evidenced




-218by the changes in the total volume of credit, which with the exception of
a temporary rise at the first of July has shown no increase since the early
part of May, The volume of new long time security issues also shows some
sign of pause, and security prices of various types are considerably lower
than they were early in May.
"Effect on Business:
"

If the present high interest rates are continued for several

months it seems probable that business activity may be affected six months
or a year from now. The evidence for this probability may be summarized
briefly.
"l. Charts of business volume and interest rates since 1900
show that continued high rates have almost invariably been followed by
business declines after a lag of six months to a year.
"2. A reasonable explanation is found in the restriction of
new enterprises by high money rates.
(a) High money rates discourage speculative building construction - as indicated by declines in building six months to a year
following high money rates.
(b) High money rates tend to discourage new financing,
which would lead to business activity six months to a year distant.
"3. Present business conditions may be peculiarly susceptible
to restriction of credit,
(a) There was considerable unemployment last winter. Outdoor work, particularly building, has largely absorbed surplus labor, but
factory employment has increased very little. When outdoor work slackens,
further unemployment is at best a danger.




(b) Any considerable unemployment will give installment

-219selling its first considerable test.
"It should be noted, however, that high money rates have not
continued long enough for any noticeable adverse effects. On the contrary,
the figures which would first reflect adverse consequences show that "1. In the first six months of this year the volume of building
contracts has broken all previous records
"2.

. .

.

Similarly, the volume of new financing has broken all

previous records. . . .
"The foregoing figures suggest perhaps an excess rather than
a deficiency of new undertakings. A little slower pace would probably
be wholesome. There is beginning to be some evidence that the pace is
in fact slowing down. Just in recent weeks new issues have diminished.
"Effects on World Finance.
"In recent months European money centers have not been adversely
affected by high rates here, largely because of extraordinary movements
of funds connected with the French reconstruction. A more normal relation
between rates and movements of funds is now beginning. Sterling has declined steadily since the French stabilization. The exchanges are still
generally high, but long continued high rates here would undoubtedly draw
funds from abroad and lead to higher money rates abroad and lower exchange rates, and perhaps eventually gold shipments to this country. It
would probably take some weeks for these developments to occur, and it
may also be said that the speculation which has taken place in this country has been paralleled by similar movements abroad, encouraged by cheap
money; and somewhat firmer money conditions here may not be unwholesome.
"Germany is a particular case with peculiar conditions. She
has had heavy speculation, rising prices and wages, together with high




-220money rates; and as far as temporary money market conditions are concerned
they may perhaps be bettered rather than injured by firm money rates here.
In the long run, however, the payment of German reparations is dependent
upon a steady flow of money from this country.
"The foreign aspects of future policy may be summarized by saying that they appear to offer no pressure toward immediately lower rates
here, but in the long run would be adversely affected by a continuation
of abnormally high rates here.
" Future Program.
"From these various considerations and other aspects of the
current situation, it would appear that some further period of testing
the credit situation by firm money conditions might not be undesirable.
But it would also appear that too extended a period of high money rates
would be detrimental to business and would react unfavorably on the world
financial position.
"Looking into the autumn problem for Federal Reserve policy
appears to be to find a means of bringing about somewhat easier credit
conditions, without at the same time encouraging a renewed expansion of
credit. It seems particularly desirable that money should be somewhat
more easily available for the crop moving season,,
"The two alternatives which naturally present themselves are
a reduction in discount rates or the purchase of government securities.




-221-

"There are a number of objections to considering rate reductions under anything like present conditions "1. Even after recent increases discount rates are low relative to open market rates, and offer encouragement to borrow.
"2 . The present volume of rediscounts is now so large that
banks find it very difficult to keep out of debt at the Reserve Banks
and the tradition against borrowing, which has been the principal source
of effectiveness of Federal Reserve policy, appears to be breaking down.
"The chief danger in open market purchases is that, as they
appear in the statement, they may be regarded as an indication of a
change of Federal Reserve policy and made the occasion for excessive
demands for credit.
"From these considerations it seems desirable "1. That no precipitate change in policy is called for;
"2. That rate reductions should be made only after the
volume of member bank indebtedness has been materially reduced;




"3. That open market purchases should be made at such times

-222and in such quantities that they will be absorbed either (a) In meeting seasonal needs for additional credit; or
(b) In reducing the amount of indebtedness at the Reserve
Banks."
Action of Committee. The report which the Committee made to
the Federal Reserve Board was as follows:
"The committee has considered the preliminary memorandum submitted by the chairman and other features of the current credit situation.
"The committee recommends that no open market action be taken
at present, or until the moderately high level of money rates has continued
long enough to provide a testing of the credit situation, which may have
the effect of checking unsound uses of credit.
"The committee believes, however, that the present amount of
member bank borrowing at the Reserve Banks and present money rates would
not be wholesome if continued over an extended period and believes the
Reserve System should be prepared, if and when conditions warrant, to
exercise its influence to modify these conditions. The committee believes
this situation should have careful, continuous study, and would expect
to meet again for its consideration within a few weeks."
The report submitted by the Committee called for no action but
it was agreed that it would be desirable to have another meeting about
August 13.




(Secretary's note: - On July 26 the Federal Reserve Bank
of Philadelphia established a rediscount rate of 5% and
on August 1st the Federal Reserve Bank of Cleveland did
so putting that rate in effect at eight of the twelve
Federal reserve banks. The41/2%rate was maintained at
Minneapolis, Kansas. City, Dallas and San Francisco.)

-223Meeting of August 13,1928.
Consideration of Preferential Discount and Buying Rates, Just
prior to the next meeting of the Open Market Investment Committee which
was held on August 13 the Board discussed the question of facilitating
seasonal accommodation to commerce and business and two suggestions were
put forward - (1) that the Board define a new class of paper to be known
as "Seasonal crop marketing paper" and advise the Federal Reserve banks
that it stands ready to approve a preferential rediscount rate on such
paper of from l/2 to 1% below the rate on other classes; the other that
the Board advise the Federal Reserve banks that it stands ready to
approve such preferential rates for bankers' acceptances and trade bills.
These suggestions were submitted to the Committee which was then in
session.
At the joint meeting with the Board the Acting Chairman reported that the Committee, with the exception of one member, felt that
preferential rates on special classes of paper would probably not
accomplish what was desired and that the Committee felt that the question whether the season's crops could be moved expeditiously and
reasonably involved the bigger question of the whole credit structure
and would have to be dealt with through open market operations rather
than through preferential rates on commodity paper. He expressed the
opinion of the Committee that to reduce the bill rates would undoubtedly
result in the dumping of a vast volume of acceptances on the Federal
Reserve banks which though it might have the effect of easing the credit
situation would undo the work of many years in the developing of a bill
market.




-224Memorandum of Acting Chairman. At this meeting (August 13,
1928) the Committee considered the following memorandum of credit conditions :
"Since the last meeting of the committee the effects on the
credit situation of gold exports and Federal Reserve action have become
more evident and may be summarized as follows:
"l. Interest rates are generally higher. Time money in particular is firm and difficult to obtain.
"2. The total volume of bank credit is somewhat further reduced,
(300 million dollars since May), though the reduction is still confined
to New York City banks and total loans and investments are still 8 per
cent larger than a year ago. Total deposits are about 2 per cent larger
than a year ago.
"3. The volume of issues of new securities has decreased and
the market is congested.
"4. Bond prices have declined further and average about 4
points under the year's high, and slightly under the 1927 low.
"5. The market for government securities has weakened further
and the July issue is nearly two points under par.
"6. Stock prices have moved irregularly. Average prices
(New York Tribune, 100 stocks) are about 8 points or 5 per cent under
the year's high point. Trading is reduced in volume. Bank stocks
continue weak.
"7. Banks are showing concern about the credit situation and
applying pressure to reduce borrowing at the Reserve Banks. New York
City banks have sold $118,000,000 of government securities since
July 11.




-225"8. European exchanges have weakened further and those of England, France, Italy, and Holland are only slightly above the points at
which gold will move to this country, unless prevented by higher rates
abroad or sale of their balances here to support the exchanges.
"9. There is no evidence of restriction of business, though
profits are reported small in some lines. Building and automobile production are particularly large. There appears to be an ample supply of
credit for business at moderate rates.
"Another development, apparently unrelated to credit conditions,
has been a sharp decline in prices of certain agricultural products,
accompanying estimates of larger crops. As a result it seems probable
that the farm income will be reduced from earlier estimates and possibly
less than last year.
"These various developments raise the question as to whether
and when a change of policy is desirable.
"Earlier Periods for Comparison.
"Bearing upon the question of the timing of any change in policy
a comparison of this year's developments with those of recent previous
periods of credit readjustment is made.. . .The three periods shown for
comparison are 1923 and 1925', when the System sold securities heavily in
the spring simultaneous with rate increases, and 1926 when readjustment
followed rate increases in November 1925 and January 1926. The 1925 readjustment was so temporary as hardly to show in the figures, but in
1923 and 1926 bills discounted amounting to between 500 and 700 million,
and discount rates at 4 l/2 and 4 per cent respectively, appeared to be
sufficient to check the expansion of credit, though in neither case was
there any substantial liquidation of the total volume of credit.




•226~
"What would be a Normal Status?
"The method or methods to be employed toward some relaxation
in credit, when that becomes possible, depend upon the ends to be sought especially what might be considered in the future to be a proper average
of member banks borrowings and a normal level of rates.
"The comparative ineffectiveness of rate increases this spring
at a time when member banks owed the Reserve Banks about 500 million
dollars, raises the question as to the relation between open market rates
and Federal Reserve discount rates, and this raises the further question
whether it is possible to bring about a different relation between Federal
Reserve rates and the market. Experience appears to show that large indebtedness forces market rates high relative to the discount rate, and
that the most feasible method of securing a somewhat more effective adjustment of market and discount rates would be to reduce the amount of
member bank indebtedness while leaving rates unchanged.
"But apart from any attempt to bring about a somewhat different
relation between discount rates and market rates, there are some reasons
for believing that the present amount of member bank borrowing is too
large to be continued over an extended period without some unfortunate
results.
"1. Almost regardless of the discount rate, it keeps severe
pressure on the credit situation.
"2. By keeping open market rates high relative to the discount
rate, it tends to make the cost of financing through acceptances higher
than direct borrowing at banks and tends to dry up the bill market.
"3. By keeping open market rates high relative to the discount
rate, it makes borrowing profitable and creates difficulty in dealing




-227with borrowing banks. 'Good' banks work out of debt taking losses; less
cooperative banks use the Reserve System for profit."
Minutes of Meeting. The complete minutes of the meeting of the Committee,
including its recommendations to the Board as furnished by the Acting
Secretary of the Committee, are as follows:
"A memorandum on credit conditions together with the report of
the secretary covering the operations in the System Account since the last
meeting of 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 of the committee submitted
at its last meeting, in which the committee expressed the opinion that
the present amount of member bank borrowings at the Reserve banks and
present money rates would not be wholesome if continued over an extended
period and that the committee should, therefore, be prepared, when conditions warrant, to exercise its influence to modify these conditions.
It was pointed out that we are now approaching a period of seasonal
demand for crop movement and other purposes that make it important, that
the committee should be prepared with authority, to act, if 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. It
was generally agreed that while it might become necessary to put funds
in the market through the purchase of Government securities nevertheless it would be preferable not to use that means any sooner than might
be required or until it became evident that other means were not adequate to avoid an undue or unwholesome stringency.
"In discussing these various factors it was pointed out that
the present level of rates in this country has depressed some of the




-228principal 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 discount rate, (c) to use some of their
American balances in order to support their exchange, thus possibly avoiding the loss of gold or the need for an increase in rates. It was stated
that some of these foreign banks, with this in view, have already liquidated commercial bills which the Reserve banks have held for their account,
and that it has been necessary to take over those bills into the Reserve
banks' portfolios, thus putting funds into the market.

It was also in-

dicated that if the pressure on these exchanges continues, we might be
requested by some of the foreign banks of issue to liquidate government
securities from their accounts, and that in view of the existing state of
the government security market it might be necessary for the Reserve banks,
at least temporarily, to take these securities into their own portfolios.
"The committee also reviewed the condition of the bill market,
calling attention to the fact that we are now approaching a season when
there is a normal increase in the total volume of bankers' acceptances
outstanding and in the amount of offerings of those bills to the Reserve
banks.

Purchase of such bills by the Reserve System would also put funds

in the market. The Committee felt, however, that in spite of all these
influences it might still be necessary for the Reserve banks to purchase
government securities in order to prevent any unwholesome restriction of
credit, and with this in view, in order that the committee might be prepared to act immediately in the event of a necessity, the following report
was prepared and adopted as the recommendation of the committee in regard
to the System's open market policy:




-229"The policy recommended by the committee in most of its meetings
since January, has been to check or prevent unduly rapid or unnecessary
increase in the volume of bank credit. While the total volume of loans
and investments of reporting member banks is now considerably above what
it was at the low point in February, nevertheless, it is approximately
$300,000,000 below the high point of May, and there is evidence that member banks are making continued efforts to reduce their borrowings at
Federal Reserve Banks.
"The committee does not believe that conditions necessitate an
immediate purchase of securities by the System. It is of the opinion,
however, that as pointed out at its last meeting, an extended period of
high money rates and heavy pressure resulting from large borrowings by
member banks would not be wholesome and that there are some indications
that with the approaching fall demands for credit it may soon be possible
or necessary to take steps looking toward the reduction, or at least the
avoidance of the necessity of any substantial increase, in the volume of
member bank discounts. With these facts in view and realizing that if
and when the time arrives undue delay may be hurtful to the situation,
the committee recommends that it should be the policy of the System to
purchase securities whenever that should become necessary to avoid undue
credit stringency.
"'

The Committee would expect to take such steps as may be need-

ed to carry out this policy, if approved, believing, however, that it
might be advisable to have another meeting of the Committee to review
the effect of any steps that may be taken in pursuance of this policy.!
"Before adjournment, Governor Young joined the meeting and presented to the committee for its consideration and recommendation the
following two proposals;



-230**(A) That the Federal Reserve Board should write a letter to
each Federal Reserve bank indicating its willingness to approve a special
preferential discount rate for agricultural paper drawn for the purpose of
crop marketing; and
"
(B) That it would be desirable for the Federal Reserve System
to make a preferential buying rate for bankers' acceptances to be applicable to new acceptances drawn for the purpose of seasonal crop movement.
"After Governor Young left the meeting, each of these proposals
was considered by the committee and while no formal action was taken in
the short time available for discussion, it was the opinion of the majority of the committee with regard to suggestion (A) that the preferential
rate on agricultural paper drawn for season crop marketing would be undesirable because it was unlikely such a preferential rate would in fact
reduce the cost of credit to the farmer, who would pay to his member bank
the same rate no matter at what rate his bank might be able to rediscount
his particular note, and because it was felt that the whole problem of
crop movement can be dealt with only as a part of the whole credit problem
involving all rates in their application to the total volume of credit.
In the opinion of the committee this was emphasized by the fact that much
of the borrowing for seasonal requirements takes the form of borrowings
from city correspondents on notes collateraled by securities, and that it
is practically impossible to earmark credit once it has left the Federal
Reserve banks. Funds loaned by the Federal Reserve banks, even at preferential rates, find their way into the general credit pool in the same way
as other funds put into the market.
"With regard to suggestion (B), that is, that the System should
make a preferential rate for new bankers' acceptances drawn for the purpose of seasonal crop movement, it was the opinion of the majority of
the committee that any drastic change in the general practice of buying



-231bills, such as a preferential rate on a particular class of agricultural
acceptances, might have unfortunate results in disorganizing the bill market as a whole without at the same time accomplishing the purposes desired.
It is also felt that buying rates for bankers' bills are necessarily related to the entire rate structure and that very deliberate consideration
should be given to the question before adopting a preferential rate out of
line with general market rates. It was felt by a majority of the committee
that advantages that might result from such an action might be more than
offset by the disadvantages.
"The meeting adjourned at 1:15 p. m. to reconvene at 2:30 p.m.

"The meeting reconvened at 2:30 p. m. in joint session with the
Federal Reserve Board.

...

"The memorandum on credit conditions and the report to the Open
Market Investment Committee were submitted to and read by the Federal
Reserve Board. Before discussion of the report, Governor Young asked the
committee for its views on the two questions submitted by him at the morning meeting. Mr. Harrison reported orally the conclusions of the committee
as given above. After this there ensued a full discussion of the two proposals, especially that respecting the preferential rate on bankers' bills.
The committee reviewed to the Board much of the discussion which took
place at its morning meeting, emphasizing especially the fact that while
the committee believes it might be necessary to purchase Government securities in order to avoid any undue stringency during the seasonal fall
demand, nevertheless it was felt by the committee that this action should
not be taken unless the various other means of influencing the situation,
which were discussed and reviewed, should be inadequate.




~232~
"In response to an inquiry from Governor Young, the members of
the committee expressed the informal opinion that as they see the situation
at the present time there is not now any occasion for a change in the discount rates of the banks which they represented,
"Before adjournment of the meeting, it was pointed out, as
discussed at the morning meeting, that the effort of certain foreign banks
of issue to stabilize their exchanges through the sale of dollars might
possibly result in their sale of Government securities now held for their
account and that it might be necessary, because of the state of the Govern~
ment securities market, for the Reserve banks to take over those securities,
at least temporarily, pending an opportunity to sell 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 of the committee at the Board meeting the following
morning."
During the discussion which followed presentation of the Committee's report the Acting Chairman stressed the fact, which was confirmed
by other members of the Committee, that the recommendation for the purchase of securities was intended to cover only an emergency situation and
that securities would be purchased only as a last resort if a dangerously
tight money situation should arise despite efforts to prevent such a
situation through purchases of acceptances, exchange operations or otherwise.
Action of Board. The recommendations of the Committee were considered by the Board at its meeting on August 15, 1928, at which consideration was also given to the proposals for the establishment of preferential
rates on paper arising out of the marketing of the current crop or on




-233bankers' acceptances and trade bills, as a method by which the seasonal
credit demands incident to the movement of crops could be met.

The Board

was in agreement that the increased demands for credit for seasonal requirements might put a strain on the whole credit situation which would
react unfavorably to business and industry, and that if such a situation
should develop, some relief should be given by the System.

A motion look-

ing toward the establishment of preferential rates on notes, drafts, and
bills of exchange, the proceeds of which had been or would be used for
the orderly and systematic marketing of current crops was defeated and
a suggestion was made that the recommendation of the Open Market Investment Committee as well as the proposals for preferential rates might be
submitted to all Federal Reserve banks for consideration.

It was the

consensus of opinion however that some affirmative action should be taken
by the Board either to approve the recommendations of the Committee or
to suggest some other definite course of action.
At the meeting of the Board on August 16 consideration of the
matter was resumed and some members of the Board expressed themselves as
being unalterably opposed to the granting of any authority to the Open
Market Investment Committee for the purchase of Government securities
except of course those offered by Foreign banks of issue which it was
agreed should be taken over and absorbed into the system account if they
could not be resold to the market. After a detailed discussion of the
recommendations of the Committee the following communication was addressed
to the Acting Chairman:
"The Board has reviewed carefully the report of the Open Market
Investment Committee and its recommendations of August 13, and has also
considered the verbal discussion which took place during the meeting, and




-234it is in agreement with the Committee that the seasonal requirements of
credit will probably develop a strain upon the future credit situation
which may react unfavorably upon commerce and industry, and that if such
a situation should develop, the System should take some action to relieve
the strain.
"The Board would not care to agree to the purchase of Government
securities, except as a last resort. We understand from the discussion
had with your committee that you favor easing through the bill market, if
possible, and through the Government security market only if unavoidable.
With this understanding, the Board approves the purchase of Government
securities by the committee but limits the amount to $100,000,000. If
a situation should develop which will require reconsideration, the Board
will be glad to meet the committee at any time for that purpose,"
Communications on Open Market Operations, September- Mid-November 1928.
At the meeting of the Board on September 12, 1928 the Governor
reported a telephone advice received from the Deputy Governor of the
Federal Reserve Bank of New York that the bank had taken over from a
foreign correspondent about $23,000,000 of Government securities,
$3,000,000 of which were resold.

He stated that the remaining $20,000,000

would be disposed of as quickly as possible.
(Secretary's note - During this period the Open Market
Investment Account fluctuated temporarily from
$75,000,000 to $92,000,000 due to the fact that the
Committee first took over and then resold the security
holdings of the Federal Reserve Bank of St. Louis.)
Letter of Acting Chairman, September 26. Under date of September 26 the Acting Chairman of the Open Market Investment Committee
forwarded to the Board copy of a letter with enclosure addressed by him
on that date to each member of the Committee as follows:




-235"There seems no real occasion for a meeting of the Open Market
Committee at this time and I am therefore writing this letter to keep the
other members of the Committee currently informed as to the latest developments in the money market.
"The renewal of speculation on a wide scale and the renewed
increase in the volume of credit in recent weeks appear to have made it
undesirable to consider buying securities for the Committee account.
Business appeals to be getting all the funds necessary at reasonable rates
and no emergency situation has developed.
"On September 15, we found it necessary to take over temporarily in our own account $15,000,000 of short-term certificates which a
foreign correspondent was selling but for which we could not find a
market outside. We have not yet been able to dispose of these securities,
nor can we do so in the present condition of the Government securities
market.

There is almost no market for large blocks of Governments. When

the September 12 press statement appeared, we explained to the press that
the increase in Governments represented a temporary talcing over of securities from one of our agency accounts and not a purchase in the market.
This explanation served to avoid a bullish interpretation of the increase.
"We have had a good deal of discussion about the bill market,
particularly at our directors meeting on September 13 when Governor Young
and Mr. Cunningham were present and raised the question whether the bill
rate should not be reduced to attract more bills.

In response we pre-

pared a memorandum for our directors meeting last week, a copy of which I
enclose.

The result was a decision to retain the present rates.
"I am also enclosing a copy of a tabulation we have recently

made showing the increase in Federal reserve credit usually required to




-236finance autumn requirements. The most significant figures seem to be the
following for the average amount of Federal reserve credit required in the
last four months of the past six years:
Increase in F. R.
Amount
Balance
Credit from August
Supplied
met by
after allowance
through Bills Discounts
for gold
Purchased
or
Movements
_ _ Securities
(Millions of Dollars)
August
September
October
November
December

0
+89
+160
+205
+322

September 1928 to date

+

74

0
+ 32
+83
+139
+181

0
+ 57
+ 77
+ 65
+141

+31

+ 43

"These figures appear to show that so far this autumn we are
following closely the precedent of previous years. If we continue to do
so it will only require about 35 million of discounts above the September
average to meet October needs, and that increase need not disturb business.
The December need due to Christmas currency is so largely temporary that
banks are willing to borrow to meet it without increasing the pressure on
the money market. Thus the October peak is the one likely to cause the
maximum of strain and that should not be severe.
"Moreover, it seems likely that this year we shall get the usual
increase in bills. The prospects are for a considerable increase in the
volume of bills created and under present money conditions there will
probably be few buyers of bills outside the reserve banks to absorb the
increase, so that we are likely to get most of the additions to the amount
now outstanding. This being the case, it seems reasonable to believe that
the seasonal requirements of business will be met without any further substantial firming of commercial money rates although it is always necessary




-237to keep in mind that we may have to buy some short governments to carry
out the program indicated above and 1 think we should be ready to do this
on occasion without hesitation or delay.
"I should be glad to hear from you as to the situation in your
district and any thoughts or suggestions you may have."
"PROPOSAL FOR DISCRIMINATORY RATES FOR BILLS
"The suggestion has been made that the Federal Reserve System
should maintain its buying rate for bankers acceptances this autumn at
a lower point than usual relative to other money rates and the discount
rate. The objects of this proposal are: first, to encourage the creation
of bankers acceptances and thus assist in making credit more readily available for the movement or storage of farm products and other goods at
moderate rates; and second, to draw into the Federal Reserve System portfolios a larger than usual amount of acceptances; so that the increased
autumn demands for Federal reserve credit may be met in this way rather
than by additional borrowing, which would tend to tighten money conditions
further. Two possible methods have been suggested of giving effect to
this proposal.
"1. That the buying rate for bills be reduced 1/4 per cent
from the present point so that 90-day bills would be purchased at 4 1/4per cent rather than 4 l/2 per cent.
"2. That the present rate of 4 1/2 per cent on 90-day bills be
maintained without increase during the autumn, when an increase of about
l/4 of one per cent usually occurs, and that the Reserve System stand
ready to buy bills freely. The rate is already lower, relative to other
rates, than usual for this time of year.




"Either one of these methods would serve to encourage the

-238creation of bills and to bring a larger volume of bills into the Reserve
System than normally.
"It is recommended by the officers that the second proposal be
followed, that is, that a 4 1/2 per cent buying rate for 90-day bills be
maintained and the Reserve System stand ready to take bills freely as has
been done the past few weeks. This proposal seems preferable to lowering
the buying rate for bills for the following reasons:
"1. The lowering of the bill rate would attract widespread
comment and probably encourage the increase in credit for speculative
uses which has been resumed.

The psychological effect of such action

might be nearly as great as reducing the discount rate or buying securities,
"2. A 4 l/2 per cent rate is low enough, in relation to other
rates to attract a large volume of financing into the acceptance market
and we understand from dealers and others that with this rate the seasonal
increase in bills is likely to be unusually large.

It is doubtful whether

a lower rate would bring out many additional bills.
"3. It is probable that a 4 l/2 per cent rate will draw into
the reserve banks a sufficient amount of bills so that the autumn requirements for Federal reserve credit will be met almost entirely through that
channel unless unexpected demands arise."
Letter from Acting Chairman, October 8.

Under date of October 8

the following letter was addressed to the Board by the Acting Chairman
of the Open Market Investment Committee:
"As stated to you over the telephone this afternoon, we have
received cable instructions from one of our foreign correspondents to
convert into cash, on Thursday, October 11, 1928, $40,200,000 - 3 1/2%
Treasury notes due December 15, 1930-32, and to pay the proceeds into




-239-

themarket."Inorder to consummate this program we have today arranged
with the Treasury to sell to them, from the Open Market Investment Account,
$30,000,000 3 1/4% certificates due December 15, 1928, delivery to be
made as follows:
$15,000,000 - Thursday, October 11, 1928
15,000,000 - Monday, October 15, 1928.
As to the remaining $10,000,000, we are hopeful of being able to dispose
of this between now and October 17, so as not to show any increase in
the Government security account on our published statement next week.
As a matter of fact, we are today temporarily reducing the portfolio of
this bank by $2,500,000, being the net amount sold to another foreign
correspondent for immediate delivery, which we are planning to replace
on Thursday, October 11, by taking over $2,500,000 Treasury notes from the
$10,000,000 which we have still to market. (You will be interested to
know that the Federal Reserve Bank of St. Louis has today repurchased
from the Open Market Investment Account $5,000,000 - Fourth Liberty Loan
4 1/4% bonds which we have been holding temporarily in the account,)
"If we are successful, as we hope to be, in effecting a sale of
the remaining $7,500,000 Treasury notes, we will have cleaned up this
large order without in any way distorting our picture."
Letter from Acting Chairman, October 10. Under date of October 10
the Acting Chairman addressed the Board as follows:
"We have been keeping current records of the demand for Reserve
Bank credit this autumn, and of the manner in which that demand has been
met. These records seem to indicate that the policy of supplying autumn
credit requirements through bill purchases has so far been entirely




-240successful.
x -x- #
"

. . .the average amount of Reserve Bank credit needed in Sep-

tember was practically identical with the average for the past six years,
but . . ., even without a reduction in our buying rates, the amount of
bills we acquired was 50 per cent larger. Of the remaining increase in
Reserve Bank credit, a considerable part took the form of increased holdings of U. S. securities, largely explained by the Treasury overdrafts
around the 15th so that the average amount of member bank borrowing at
the Reserve Banks for the month of September was practically the same as
in August. This probably was an important factor in preventing a further
rise in commercial borrowing rates during September, and the heavy buying
of bills undoubtedly was mainly responsible for keeping bill rates low
compared with other money rates, and made possible a much larger volume
of financing through the bill market than would have been the case otherwise .
"During the first week of October the increase over August in
Reserve Bank credit outstanding has been somewhat below the six-year
average, and the increase in bill holdings has reached such large proportions as to supply almost the entire amount. The security holdings
of the System are somewhat above the August average, and discounts are
slightly smaller.
"It appears probable that we shall continue to have a large
volume of bills offered to us during October and November and that our
bill holdings may increase faster than the demand for Reserve Bank
credit. If that is the case, discounts for member banks will tend to
decline below the volume of August, and money rates are likely to be




easier than in recent weeks. It would not be surprising if the principal
effect of this situation were to appear in the call money market."
Discussion by Board. At a meeting of the Board on October 17,
1928, the above letter was further discussed, after having been circulated among the members of the Board, and it was voted to address a
letter to the Deputy Governor of the New York Bank advising that members
of the Board are not quite clear as to the meaning of the last paragraph
of his letter and wish that it could be clarified, stating that one or
two members of the Board have so interpreted it as to reach the conclusion that it involved an abandonment of the policy which the System has
been following of keeping certain pressure on the money market. It was
also voted to enquire as to the position of the directors of the New
York Bank in the matter.
At a meeting of the Executive Committee on October 24, 1928,
the Governor reported a telephone conversation with the Acting Chairman
of the Open Market Investment Committee, during which he was advised
that the government bond market is improving and gradual sales have been
made of about $24,000,000 of securities which had been taken over from
foreign correspondents with the result that by the end of the present
week, the system account probably would be back to the figure at which
it stood at the end of August. He also reported that the Acting Chairman stated that if an easy moeny[money]situation continued for any length of
time, requests will probably be received from other foreign correspondents for the liquidation of their security holdings, but that it is
believed the market would absorb them.
Letter from Acting Chairman, October 26. At a meeting of the
Board on October 26, 1928, there was noted a letter from the Deputy




-242Governor of the New York Bank dated October 24, 1928, as follows:
"As I stated to you over the telephone this morning, we are gradually melting down, by direct sales to the market, the remaining $9,000,000
of the total of $23,100,000 of short-term Government securities which we
had acquired from one of our foreign correspondents under date of September 8, 1928. Offers now made us for $5,500,000 of these securities have
been accepted for delivery and payment October 26, 1928; so that there
will remain but $3,500,000 in this account. As you know, it was generally
understood that we would temporarily carry these securities only until
such time as they might be advantageously disposed of in the market.
"You will be interested to know that the Federal Land & Intermediate Credit Bank has taken up from us and resold to the market a total
of #1,550,000 of the $1,750,000 which we had purchased} so that we are
now carrying but $200,000 of these debentures due January 15, 1929.
"The situation in the money market seems to be working out much
in line with our expectations, as indicated in my letter of two weeks ago.
Bill holdings have continued to increase without a corresponding increase
in the total demand for Reserve Bank credit, member bank indebtedness
has been reduced, and the call money market is temporarily easier.
"It now appears that the average demand for Reserve Bank credit
during the month of October will show somewhat less than the usual increase
compared with August. Currency requirements have been running about the
same as in previous years, but commercial borrowings have not shown so
large an increase as usual, possibly due to the relatively high level of
such borrowings during the summer. At the present time the total amount
of Reserve Bank credit outstanding is running somewhat over $100,000,000
higher than the August average, and the peak of seasonal requirements,




until the holidays, appears to have passed,
"Bill holdings, however, are now more than §200,000,000 higher
than the average for August, and the average for the month of October will
show a larger increase than in any previous year. Consequently member
bank borrowings have declined to the lowest average level since May, both
in New York City and for the country as a whole.
"A comparison of the increase in our bill holdings with the increase in bills outstanding indicates that we have acquired all of the
new bills that have been created and more, too. The additional bills we
have purchased have come largely from foreign holdings, and there is at
least a possibility that some of the proceeds have gone into 'the street.'
"While the demand for loans for speculative purposes shows no
sign of abating, it is encouraging to note that member banks in the main
are using the additional funds they are receiving, to repay indebtedness
rather than to increase their loans. The continued increase in brokers
loans placed by New York City banks has not in any degree represented an
increase in the loans for their own account. A part has been for the
account of out-of-town banks, which, of course, is in part for the account
of others, and most of the remainder has been for the account of customers
of New York banks.
"The total volume of member bank credit, which we have been inclined to accept as the criterion for our policy, has shown comparatively
little increase recently, especially after allowance for the effect of
purchases of New Treasury issues in September and October. However, the
prospect seems to be for comfortable conditions in the call money market
until December, except for the usual month-end tightening, and it seems
likely that after the first of the year member bank indebtedness will be




-244considerably below a billion dollars and money conditions will be easier
still. In view of this situation, the figures on member bank credit will
need close watching."
Letter from Acting Chairman, October 26. Under date of October 26, 1928, the Deputy Governor of the Federal Reserve Bank of New York
replied to the Board's inquiry regarding his letter of October 10, as
follows:
"Replying to your letter of yesterday, and confirming our conversation over the 'phone today, your interpretation of the final paragraph
in my letter of October 10 states exactly what I had in mind.
"It seemed probable then that the increase in our bill holdings
would not be accompanied by a corresponding increase in the demand for
Reserve Bank credit, with the result that member bank indebtedness would
be reduced. As the call money market is always first to reflect any such
change, it seemed likely that call money rates would ease somewhat and
that, as you have indicated, this would have a tendency to relieve the
pressure on speculative credit.
"The easier tendency in call money did develop, but there has
been an apparent reversal during the last day or two. There seems to be
no explanation in member bank indebtedness for the 8 per cent money of
yesterday and today. The best explanation we have been able to hit upon
is that there has been an active demand for new loans, and, as there
appears to have been no corresponding increase in the supply from other
sources, the New York City banks have had to provide most of the additional funds and have been willing to do so only at a fairly stiff price.
Under present conditions, however, it hardly seems to us that an 8 per
cent rate can be maintained more than temporarily."




-245(Secretary's note - On October 10th the Open Market Investment
Account was back to the figure of 75,000,000, at which it stood
at the time of the last meeting of the Open Market Investment
Committee, and no change in the account was made up to the time
of the next meeting of the Committee on November 13th. However,
bills bought in the open market had increased from about
190,000,000 to 332,000,000 and continued to further increase
until on November 13th they amounted to about 450,000,000.)
Meeting of November 13-16, 1928.
Preliminary Memorandum of Acting Chairman. On November 13, 1928,
while the Governors' Conference was in session, the Open Market Investment
Committee met and considered the attached preliminary memo.
"In the summer of 1927 the Federal Reserve System adopted a
policy favoring easier money conditions, given effect by the purchase of
a moderate amount of Government securities and a reduction in discount
rates from 4 per cent to 3 1/2 per cent. The primary purposes of this policy were: first, to avoid a continued gold import and a serious stringency
in world money markets, which might have delayed world financial recovery
and reacted adversely upon world trade and the trade of this country; and
second, to cushion, as far as it could be done by easy money, the business
recession which was beginning in this country. When this policy was
adopted, it was recognized that there was danger of stimulating excessive
use of credit in speculation.
''In general, the results desired from this policy came to pass,
Foreign exchanges which in several cases had been close to the levels at
which gold would tend to flow to this country were almost immediately
strengthened, stringency in world money markets was thus avoided, and
our foreign trade was maintained at high levels. In fact the gold and
the dollar exchange which other countries acquired in the summer and
autumn of 1927 placed them in a position of such strength that they have
since that time been less dependent upon conditions in this country.
Although the recession in business activity continued until the end of



-246the year and there was some unemployment during the winter, the recession
was not serious and was followed by a quick recovery which was probably
aided by easy money,
'Gold Outflow.
"The strengthening of the exchanges proceeded to such an extent
that in the autumn of 1927 gold began to move from New York on exchange
transactions. These exports were in addition to a large movement of gold
to France in connection with that country's preparations for the return
to the gold standard, a movement which would probably have taken place
regardless of the exchange position. Altogether net gold exports totaled
over $500,000,000, an unexpectedly large amount,
"During the early part of this gold outflow the policy of buying
Government securities to prevent a tightening of the market was adopted.
Additional securities were purchased also to offset sales in August and
September 6f sterling which had been acquired earlier in the year by a
sale of gold. As the autumn advanced, however, it became evident that
credit was expanding more rapidly than the country's business required.
To meet this situation and in view of the fact that the purposes of the
easy money policy adopted earlier had been largely accomplished, the
purchase of securities was discontinued in November, although the gold
movement continued. In January the Reserve Banks began selling securities, a procedure the necessity of which had been forecast in the Open
Market Committee report to the Governors' Conference in October, The
effect of these sales, together with gold exports, was to lessen the
seasonal liquidation of member bank borrowings and largely to prevent
the usual softening of money rates in January,




"Effects of Security Sales and Discount Rate Advances.
"The sales of securities were followed in February by a general
advance in discount rates, which with later advances are shown in the
accompanying schedule of discount rates of the different Reserve Banks.
For a time speculative activity subsided somewhat, and reporting member
bank loans and investments decreased moderately in January and February.
However, a new outburst of speculation on a larger scale than ever before
occurred in March and April, which led to a renewed and more rapid increase
in bank credit. Within a period of ten weeks the loans and investments
of reporting member banks increased a billion dollars, an increase nearly equal to a full year's growth under ordinary circumstances.
"The sale of securities from the System Special Investment
Account was resumed in the latter part of March and continued more rapidly in April, although the market for governments was so weak that it was
difficult to sell such securities. As securities were sold open market
money rates advanced.

But as a consequence funds were attracted from

other districts, and there was increased discounting at the Reserve Banks
in those districts.

This flow of funds to New York largely offset the

effect of security sales in New York, so that the indebtedness of New York
City banks showed for some time no material increase. Moreover, as money
became tighter, the general distribution of bills was retarded and the
Federal Reserve portfolio declined less than usual at this season.

In

this situation, funds coming into the money market from sources outside
of New York were supplemented by a substantial increase in the loans of
New York City banks for their own account.
"It was not until the second advance in Reserve Bank discount
rates was made effective in the latter part of April and in May that




expansion of credit was halted. Except for a temporary rapid increase
early in July which was followed by a further rise in discount rates in
all but four western districts, the loans and investments of New York
City banks tended to decline from May to August, and in other districts
the expansion was checked.
"Although the activity of the security markets has again increased to new high levels during the past two months, and prices have
advanced higher than ever before, a considerable part of the required
credit has been obtained from sources other than member banks and the
total loans and investments of the weekly reporting banks have remained
below the May levels. The increase in brokers loans for account of
others represents, however, a potential expansion of bank credit because
the banks would be obliged to take over loans called suddenly by the
other lenders,
"Autumn Credit Requirements.
"As the season of autumn currency and credit requirements
approached it was recognized that the steady rise in money rates, which
had followed the gold outflow and Reserve Bank sales of securities and
rate advances, constituted a danger to the business of the country if
it proceeded much further.
~x- -x- -x"While the largest advances had occurred in rates on 'street
loans,' the advances in commercial rates had been substantial and the
tendency was toward still higher rates, It was pointed out at the July
meeting of the committee that high commercial money rates in past years
had been followed frequently by a recession in business activity after
an interval of six months to a year, attributable mainly to the curtailment




-249of building activity and to the partial stoppage of new capital for business enterprises.
"To prevent money conditions from becoming more stringent during
the season of autmn[autumn]trade and crop moving, the purchase of Government
securities was considered but it was felt that such action would be followed immediately by a new outburst of speculative demand for additional
credit which might absorb the credit extended for business uses. It was
finally decided that the policy of maintaining bill rates at their current
levels and purchasing freely bills offered by banks and dealers would
probably put into the market sufficient Federal Reserve funds to meet
autumn credit needs, thus preventing a further rise in commercial money
rates.

"Effects of 1928 Bill Purchases.
"Due to an extraordinarily large volume of bills in the market
and the presence of few other buyers of bills because of the low level of
acceptance rates relative to other open market money rates, the volume of
acceptances offered to the Reserve Banks for purchase has been much larger
than in any previous year and has exceeded the seasonal increase in the
demand for Federal Reserve credit, thus tending to cause a reduction of
about 100 million dollars in member bank indebtedness and some easing in
money rates at a time when the demand for credit for speculative use is
as strong as ever before,
"Unless conditions change it seems probable that money rates
will continue at present levels, with call money between 6 and 7 per cent,
for a few weeks before the holiday currency requirements are encountered.
Further, it seems likely, if present tendencies continue and if the bill
portfolio continues large, that the total indebtedness of member banks




-250after the return of currency from circulation in January will be reduced
temporarily to 750 million or less, and the indebtedness of New York City
banks may be reduced to an extent that would be an incentive to expansion
of loans by these banks,
"Credit Policy.
"Methods which the Reserve Banks may well consider to avoid too
easy money are: an increase in bill buying rates, the sale of securities,
and dealing directly with member banks.
"The question, therefore, to which the open market committee
should, give consideration is whether sales of Government securities should
be made either immediately or after the first of the year, if it seems
wise to continue the policy pursued in recent months.
"The Three Major Factors.
"As bearing upon the question of continuing the present policy
directed toward high money rates, especially for speculative use, the
outcome of the present situation would appear to depend mainly on three
factors and on the timing of these factors:
l. Culmination of expansion of credit for stock speculation.
2. Effect of present money rates on the volume of business.
3. Effect of present money rates on world money rates and
world trade.
"1. As far as stock speculation is concerned, it is, of course,
impossible to set a date when the present movement will culminate. It
is impossible to pass judgment now upon the extent to which the recent
movement is upon a sound economic basis and the extent to which it represents boom psychology. The question can only be settled by time and the
test of high interest rates.




-251"2. Although rates on commercial loans are 1 l/4 to 1 1/2 per
cent higher than a year ago, and higher rates usually react upon business,
there is as yet no evidence that these rates or the condition of the money
market have been found prohibitive to the issuance of all necessary shortterm credit for agricultural and business purposes. Industrial activity
showed a rapid recovery early in the year and has since maintained a high
level, and commodity prices have risen moderately. The higher money rates
have caused a substantial decline in the flotation of long-term bond
issues, but domestic corporations have continued to obtain large amounts
of new capital, as conditions have been favorable to obtaining larger
amounts through stock issues than in any previous year, . . .
"3. Present money rates have plainly had a depressing effect
on foreign exchanges and have retarded the flotations of foreign securities in the market. A relatively small return flow of gold to this
country has occurred during the past two months, and some of the European
exchanges have required support to prevent larger gold shipments. Nearly
all countries are in a much better position than a year ago to protect
their exchanges, but present money rates in this country, if long continued, would probably force higher rate levels in other markets. . . .
"This consideration of major factors affecting policy may be
summarized by saying that there does not appear recently to have been
any change in the situation which would suggest the desirability of discontinuing the policy pursued since the early part of 1928."
Action of Committee, The following is quoted from the Committee's
minutes of that meeting:
"The secretary distributed to each member of the committee
present a copy of the formal report of the secretary of the committee




-252dated November 12, together with a copy of the preliminary memorandum
dated November 14. After reading and discussing these documents and reviewing credit conditions generally, the committee decided informally that
it would be advisable to renew the recommendation contained in the last
report of the committee on August 13, 1928, that it should be authorized
to purchase government securities if and when that might become necessary
in order to avoid an acute credit stringency. It was understood by the
committee, however, that it would defer preparation of a formal report
and recommendation until after another opportunity for a meeting at which
Governor McDougal could be present,
"Before adjournment, the committee discussed the matter of a
possible adjustment of buying rates for bankers acceptances. While it was
realized by the committee that it has no formal jurisdiction over the
matter of bill rates, which are subject to adjustment by individual reserve banks as provided in the law, nevertheless each governor present
expressed the opinion that it might be advisable for the Federal Reserve
Bank of New York to increase its buying rates for bills of all maturities
by l/8 of 1% in the near future."
On November 15, at another meeting of the Committee, the following report was adopted:
"The Committee has reviewed the preliminary memorandum submitted by the Chairman in relation to credit and money market conditions
of the past year. It has given special consideration to the development
of conditions since the last report of the Committee on August 13th and
to the effect of Federal Reserve policies on the volume of credit and the
rates for money during the period of credit movement whose peak has
probably now passed. The Committee feels that the policy of the System




-253has been substantially effective in providing credit for seasonal agricultural and commercial purposes at relatively low rates and without any
abnormal increase in the total volume of member bank loans and investments
for this period of the year.
"The Committee is of the opinion, however, that it should still
be the policy of the System, if possible, to prevent any unduly rapid or
unnecessary further increase in the total volume of bank credit, although
in fact the total loans and investments of all reporting member banks are
now slightly below the high point of May in spite of the usual Fall increase
in the demand for credit for crop movement purposes. But we are approaching the usual seasonal demand for currency for holiday purposes. This
will result in increased borrowings from the Federal Reserve Banks except
to the extent that further gold imports offset the demand for Federal Reserve accommodation. It is not possible to estimate the extent of the
present gold movement or its ultimate effect upon credit conditions and
money rates. Already there is some evidence of easier money rates contributed to partly by the inflow of gold and partly by the large increase in
the bill portfolio of the Federal Reserve Banks, each of which has caused
a reduction of member bank discounts in the New York district. Some of
this increase in the bill portfolio is due to the sale of bills by foreign
banks to support their exchanges, which have felt the pressure of high
rates in this country.
"But while these conditions appear to have an easier tendency
at the moment, nevertheless the uncertainty of the gold movement, the
approaching demand for currency, and the usual demand for Federal Reserve
credit during December suggest to the Committee that the System should
still be prepared in the event of an emergency to prevent any undue




-254stringency of credit during this period.
"With all these facts in mind, the Committee renews the recommendation contained in its report of August 13th that it should be the
policy of the System to purchase Government securities if and when it
might become necessary to avoid an acute credit stringency.
"The Committee would expect to take such steps as may be needed
to carry out this policy, if approved, with the understanding however that
it would be advisable to have another meeting of the Committee in the
event that any substantial change on conditions makes that necessary."
The Committee submitted the report to the Conference of Governors on November 15

and it was accepted as the recommendation of the

Conference to the Board. The following is quoted from the Committee's
minutes of that meeting:
"In connection with the consideration of the report, there was
an informal discussion of the matter of buying rates for bankers' acceptances, and while no formal action was taken, it appeared to be the general
sentiment of the conference that it might be advantageous soon to increase
the buying rates for bills, especially in view of the expansion of the
bill portfolio since September in relation to the net increase in the
total volume of Federal reserve credit outstanding,"
The Board met with the Open Market Investment Committee and the
Governors of the Federal Reserve Banks on November 1 6 ,

at which meeting

the report and recommendations of the Committee were submitted and discussed.

In response to an inquiry by the Governor, the Board was advised

that under conditions as they existed, it was not believed by the Committee
that any change in the Open Market Investment account should be made in
the near future.




-255-

Discussions pf Open Market Operations and RelatedDevelopments,Mid-November-December1928
Communications on Taking over Securities from Bank of England.
At a later meeting of the Board on November 19,

the Governor reported

that he was advised over the telephone from the Federal Reserve Bank of
New York that the question of an increase in the bill rates of the bank
was discussed at considerable length at a meeting of the directors the
day before with the result that any increase was disapproved. He stated
that he was also advised that inquiry was made several days ago by the
Bank of England as to the condition of the government bond market and
that a cablegram had been received requesting the Federal Reserve Bank
to take over about $40,000,000 of securities the first of next week.
Simultaneously, he stated, a cablegram was received from the Bank of
France, advising that it would went earmarked $100,000,000 of gold over
a period of the next three or four months. He stated that the Deputy
Governor of the New York bank advised him that there did not appear to
be anything the bank could do except to take over the securities offered
by the Bank of England, which would put $40,000,000 in the market temporarily. He stated, however, that the bank might negotiate with the Bank
of France with the idea of having that institution take over $40,000,000
of bills prior to its gold earmarking transaction, in which event, the
Federal Reserve Bank could then determine whether or not it wished to
sell the securities taken over from the Bank of England.
A letter dated November 19, from the Deputy Governor of the
Federal Reserve Bank of New York, confirming the telephone conversation
reported by the Governor at a meeting on that date follows:
"Confirming our conversation by telephone this afternoon concerning the block of $38,800,000 of U. S. Treasury 3 1/2% notes due




-256March 15, 1930-32, which amount we are taking over from one of our foreign
correspondents under date of today and tomorrow, I have this afternoon sent
the following two telegrams to the governors of the other Federal reserve
banks, with the exception of Kansas City which is not participating in the
account:

'Purchase has been made from a foreign correspondent of $38,800,000

par value 3 1/2 per cent Treasury notes March 1930-32 at 97 28/32 net and
interest being market price quoted Friday November 16. These notes will be
taken over temporarily in open market investment account $l8,800,000 today
and $20,000,000 tomorrow. Have made sales therefrom to market of $l5,800,000
at 98 net and interest delivery on or before November 21, Any profit that
may accrue from sale of these notes will be held in New York Suspense Account temporarily pending final consummation of the entire transaction. You
will receive advice through regular channels of all details. CASE.'
"' Supplementing my telegram of today have sold to market from
Open Market Account, delivery tomorrow, $5,000,000 par value December 15,
1930-32 Treasury notes at 98 2/32 net and interest regular advices of which
will be sent you.

CASE.'

"The foregoing will, I think, give you a complete picture of the
transaction. We are hoping it may be possible to make further sales from
this account between now and the close of business Wednesday, November 21,
1928. In any event we shall be glad to keep you informed concerning the
matter."
On the following day, November 20, a supplementary letter, as quoted below,
was addressed to the Board by the Deputy Governor of the New York Bank:
"Supplementing my letter of November 19, reporting the purchase
from a foreign correspondent of $38,800,000 U. S. Treasury 3 1/2% notes,




-257for Open Market Investment Account, and the subsequent sales, against this
purchase, of a total of $20,800,000, this i s to inform you that we have
today made a further sale of $10,000,000 of the March 15, 1930-32 notes,
for delivery tomorrow, on precisely the same basis as reported to you yesterday.

This $10,000,000 sale now makes the aggregate of offsetting sales,

$30,800,000.
"Since the close of business l a s t Wednesday our sales contracts
have been reduced by approximately $3,500,000, so that the net of the
week's operations will be to show but a small increase of between
$4,000,000 and $5,000,000 in the System' s holdings of Government securit i e s . We anticipate that during next week we may be able to s e l l to the
market the $8,000,000 overage of these notes remaining in the Open Market
Investment Account .
"'The foregoing seems to us a fairly satisfactory disposition of
the matter."
Letter from New York Bank on Authorization to Purchase Securities.

In connection with the report and recommendations of the Open

Market Investment Committee, there is quoted below a l e t t e r addressed to
the Board under date of November 23 by the Chairman of the Board of
Directors of the Federal Reserve Bank of New York:
"i

As you perhaps know, Mr. Miller attended the meeting of our

board of directors yesterday when the recent report of the Open Market
Investment Committee was presented to the board for their approval.

After

a discussion of the report, in which reference was made to the action
which the board of directors have taken each week since the adoption of
the August report of the Open Market Investment Committee, Mr, Miller
suggested that i t might be interesting to the Federal Reserve Board to




-258have a copy of the weekly resolution passed by our directors authorizing
the officers to participate in the purchase of securities for the account
of the System,
"As you will remember, the report of the committee in August
recommended that i t should be the policy of the System to purchase government securities if i t should become necessary in order to avoid undue
credit stringency. When this report was presented to our directors, they
took one vote approving the policy recommended by the committee, and
approved by the Federal Reserve Board, and then, in order that the officers
might have authority to participate in the purchase of securities taken
for account of the System between meetings of the directors, the following resolution was adopted each week:
""VOTED to authorize the officers to participate in the purchase in the market of government securities up to $25,000,000 for the
Open Market Investment Account if i t were deemed necessary by the
officers to do so prior to the next meeting of the board of directors
in order to carry out the policy recommended at the l a s t meeting of the
Open Market Investment Committee, with the understanding, however, that
before exercising this authority the officers would consult with at
least two of the directors. '
"As the resolution itself implies, our directors felt that as
long as the System policy was to purchase securities, in the event of a
possible emergency, the officers should be free to act instantly in the
event of such an emergency, even between meetings of our board and
executive committee. Appreciating, however, the importance of determining the emergency which should justify the purchase of securities,
as recommended in the report of the committee, our directors felt that,




-259before exercising the authority given to the officers, at least two of
the directors should be consulted. The resolution quoted above is an
exact copy of the one approved at each meeting of our directors between
the August and November meetings of the Open Market Investment Committee.
"You may also be interested to know that at the meeting of our
board, yesterday, Mr. Case presented the report of the Open Market Investment Committee dated November 15, which was read by the secretary, and
which embodied the recommendations of the committee adopted at its meeting in Washington last week. Our board duly voted to approve the report
recommending the System policy, with the understanding, as explained by
the officers, that the report contemplated the purchase of government
securities only in the event of an emergency. After action was taken
upon the report, the directors then passed a resolution similar to the
one quoted above, giving specific authority to the officers to participate in the purchase of government securities up to $25,000,000, if deemed
necessary by the officers to do so, prior to the next meeting of the
board, in order to carry out the policy recommended in the report. It
was understood in this vote, as in the ones which have been passed each
week, that before exercising this authority the officers would consult
with at least two of the directors."
Letter from Board on Committee Report. The report and recommendations of the Open Market Investment Committee were taken up by the
Board at its meeting on November 27, 1928, and the following letter to
the Acting Chairman of the Committee was unanimously approved:
"The Federal Reserve Board has had under review the preliminary
memorandum of the Open Market Investment Committee dated November 14, 1928,
together with the report of the Committee dated November 15, 1928. It




-260is pointed out in both reports that there are many undetermined factors
in the present credit situation and the Board is in agreement with the
conclusions of the Committee that for the present at least the policy
should be one of 'marking time' .
"The Board further observes that the Committee suggests the
System should be prepared, in the event of an emergency, to prevent any
undue stringency of credit, and that it should be the policy of the System
to purchase Government securities if and when it might become necessary
to avoid such credit stringency.
"If the Board approves this recommendation it will give approval
to a policy of buying an indefinite amount of Government securities. It
does not care to give this approval for three reasons:
w

l.

It would not be in harmony with expressions and actions

already taken by certain reserve banks.
"2. It is not prepared at this time to say definitely that an
emergency should be handled by the purchase of Government securities, or
whether other avenues should be resorted to.
"3. It believes that if any real emergency develops in the
country, it might be advisable to have another meeting of the committee.
"During the interim, however, adjustments of temporary credit
situations, which would not be in the nature of serious emergencies,may
be advisable and the Board will hold itself in readiness to act promptly
upon written or telephone request from the Committee in an amount not
to exceed $25,000,000."
On November 28, 1928, the Deputy Governor of the Federal Reserve
Bank of New York reported that sales from the Open Market Investment
Account had been made aggregating a total of $38,800,000, being the




-261e x a c t amount acquired on November 19 and 20th from the Bank of England.
L e t t e r from Acting Chairman t o Board, December 1 8 . Under date
of December

18;

the following l e t t e r was addressed t o t h e Board by t h e

Deputy Governor of t h e New York Bank:
"As t h e r e has been a considerable number of t r a n s a c t i o n s i n t h e
Open Market Investment Account from December 3, 1928, t o and including
December 1 7 , 1928, i t occurs t o us t h a t you may be i n t e r e s t e d i n reviewing the enclosed memorandum (copy of which i s being forwarded today t o
t h e governor of each of t h e other eleven Federal r e s e r v e banks) showing
the replacements which were necessary i n order t o take care of the
$10,000,000 of U. S. Treasury c e r t i f i c a t e s maturing December 1 5 , 1928,
and the s a l e s t o f o r e i g n correspondents of $32,420,000 March l 5 , 1929
U.S. Treasury certificates."
"MEMORANDUM IN RE OPEN MARKET INVESTMENT ACCOUNT
December 3 , 1928, t o and including December 17, 1928.
"On December 3, 1928, t h e t o t a l holdings i n t h e Open Market
Investment Account were $75,488,300, a f i g u r e a t which t h e account had
been maintained for some months but which s t a t i s t i c a l l y was w e l l below
t h e average of r e c e n t y e a r s .
immediately prior to each quarterly tax period we are confronted with the problem of dealing with current maturities and with the
necessity for supplying our foreign correspondents with United States
Government securities of t h e i r own selection to replace their current
maturities.

In this particular instance both of these transactions in-

volved the acquisition of other short-term Government paper.
"0n December 3, 1928, we owned $10,000,000 of the maturing
December 15 certificates and were requested to supply foreign correspondents




-262with about $33,000,000 of March 1929 certificates. . . A classification
of issues held at the close of business December 17, 1928, follows:
3 3/8% C/I
3 7/8% "
4 1/2% "
4 1/4% "
4 1/4% "
3 1/2% T/N
3 l/2% "

due
"
"
"
"
"
"

March 15,
March 15,
June . 15,
Sept. 15,
Dec. 15,
March 15,
Dec. 15,

1929
1929
1929
1929
1929
1932
1932

$8,091,000
6,993,000
6,582,000
2,500,000
16,125,000
5,000,000
30,300,800
* -*

Board Discussion of Interest Rate Developments. As a result of
the usual year end demands, the total b i l l s and securities of the Federal
Reserve System at the beginning of 1929 (January 2), amounted to
$1,890,000,000, consisting of $244,000,000 of government securities,
$76,000,000 of which were in the Open Market Investment Account,
$484,000,000 of acceptances and $1,151,000,000 of rediscounts.
At a meeting of the Board on December 31, 1928, there was discussion with respect to the advisability of an increase in the rates of
the Federal Reserve banks for purchases of acceptances, the market rates
having hardened during the month. I t was pointed out that an increase
in b i l l rates would undoubtedly result in a further stiffening of call
rates which would furnish an added incentive to member banks to carry call
loans rather than to employ the proceeds of the end of the year return
flow of currency to the liquidation of indebtedness at the Federal r e serve banks. The discussion touched upon the procedure followed at some
of the Federal Reserve banks in seeking to restrain member banks from
rediscounting for the purpose of making or maintaining loans on call,
and the desirability of some suitable procedure to accomplish this
purpose being worked out and applied at other Reserve banks. The




-263following resolution was adopted:
"It is the opinion of the Federal Reserve Board that the spread
between the rediscount rates of the Federal reserve banks and rates for
stock exchange loans (both call and time) is such as to offer a temptation
to member banks to use Federal Reserve credit facilities for the purpose
of making or sustaining such loans, and that, therefore, steps should be
taken by the Board to ascertain what the Federal Reserve banks are doing
or propose to do to prevent the improper use of Federal Reserve credit
facilities by their member banks."
At the same meeting it was voted that the next meeting of the
Open Market Investment Committee be held on January 7, 1929, the date
suggested by the Acting Chairman of the Committee.