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O P E N

MARKET

INVESTMENT

POLICY

E X C E R P T S

1929 - Mid-1931

Copy No.

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 Com¬
mittee 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 the second, the years 1929 mid-1931. No similar review has been made for the period subsequent
to July 1931.

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

March 1956




-264Developments during 1929
On January 4, 1929 the Federal Reserve Bank of New York increased
its rates for purchases of bankers' acceptances of longer maturities to the
following: 1 to 30 days-4 1/2%, 31 to 90 days - 4 3/4%, 91 to 120 days 4 7/8%- 121 to 180 days - 5%. The repurchase rate was increased from
4 l/2% to 4 3/4%. This increase was Noted by the Board, after an inquiry
as to the reasons had been addressed to the New York bank, inasmuch as the
Board had understood that the question of buying rates would be considered
at the Open Market Investment Committee meeting on January 7 . The bank
advised that there seemed to be no satisfactory alternative to recogniz¬
ing changed market conditions by an increase in buying rates•
Meeting of January 7, 1929.
Preliminary Memorandum of Chairman. The Open Market Investment
Committee met in Washington on January 7

and the following preliminary

memorandum was presented for consideration.
n

The total volume of business in 1928 as compared with 1927, in¬

cluding manufacturing, trade, crop production, building, etc., showed (as
nearly as can now be estimated) an increase for the year of approximately
3 per cent.
n

A comparable figure for the growth in the amount of credit in

use is less easy to compute because much of the increase in credit did not
take the form of bank loans but rather loans made by individuals and
corporations, and was reflected in the banking figures in the increased
velocity of bank deposits. If, however, the growth in bank loans and
investments from June 1927 to June 1928 (to take the mid-points of each
year) is increased by the increase in recorded loans for individuals and
corporations made on the New York Stock Exchange, there appears to have




-265been a total increase in credit of more than 8 per cent. An equal rate
of growth is shown if the figures are taken from December 1927 to Decem¬
ber 1928, as nearly as can now be estimated.
w

The computation can be made another way by computing the change

in bank deposits multiplied by their velocity (MV of the equation of ex¬
change) which would give an indication of the use of credit. These figures
show an increase of about 25 per cent from the last quarter of 1927 to the
last quarter of 1928. This compares with a 15 per cent increase in 1927.
"Thus, the best estimates that we can make indicate that the in¬
crease in the use of credit has been quite out of relation to the increase
in business. In past years such a lack of relationship has usually been
accompanied by changes in prices of different kinds, and often by specu¬
lation in commodities or securities. During the past year, as we know
from the segregated reports, much of the increase in credit has found its
way into loans to brokers on the Stock Exchange.
w

At a number of times during the year there was some evidence

that the expansion of credit had been checked. This was true in February,
in June, and again early in December. But on each occasion the expansion
was again resumed after a brief pause and while the total loans and invest¬
ments of reporting member banks are only slightly higher than in May of
1928, nevertheless the total of all credit in use has continued to increase.
"While this credit expansion does not as yet constitute any con¬
siderable drain on the country's basic bank reserves since it has not
expanded bank deposits by any large amount, it is a potential drain for
the loans made by corporations and individuals, constantly threatens to
be converted into bank loans, particularly at times of strain, as was
illustrated at the year-end when New York City banks were called upon to




-266put $581,000,000 in the market in the last five days of the year, with the
consequence that the reserve ratio of the New York bank was reduced to
55 per cent on December 31. So that, quite aside from any dangers that
may be incident to the possibility of a deflation in the present level of
stock prices, the continued growth in credit is at least a potential use
of bank reserves at a more rapid rate than could be continued indefinitely
especially in the face of actual and possible future losses of gold,
"The Federal Reserve System thus appears to be facing at the
beginning of the year the same general problem which it has faced during
the entire year of 1928; that is, the problem of checking any unnecessary
expansion of credit without, if possible, seriously penalizing business.
"Year End Movement of Funds, The Christmas and year-end requirements
for funds called into use a slightly larger additional amount of Federal re¬
serve credit than in preceding years. Total bills and securities in the
System were increased from $1,500,000,000 about the middle of November
to nearly $1,900,000,000 in the last week of the year. In recent years
the retirement of Federal reserve credit during January has been a little
over $400,000,000, and the problem this month appears to be to make sure
that the seasonal return flow of currency and credit is applied to a re¬
duction of Federal Reserve credit in use so that it will not be made the
basis of any unnecessary expansion of bank credit.
# # -#
. . .last year the diminution in the bill portfolio during
January was smaller and more gradual than in 1927, thus offsetting some¬
what the effectiveness of large sales of government securities. The
liquidation of bills will be somewhat difficult this year because of the
present relatively low position of bill rates in the market, although




-267recent increases of b i l l rates should aid in securing a normal reduction
of b i l l holdings.
"If we assume a normal reduction of $50,000,000 to $100,000,000
in b i l l holdings during January, and a withdrawal of funds through gold
earmarking of $75,000,000 in the f i r s t two weeks of the year, there might
be expected to be a reduction of about $250,000,000 or $300,000,000 in
bills discounted.

This would mean a reduction of rediscounts for the Sys¬

tem to $850,000,000 or $900,000,000 during January and February, or about
the same amount as was maintained during October and November, a period
during which there was a vigorous increase in bank credit, and during which
money rates tended to ease somewhat. Already borrowings of New York City
banks have been reduced to about $.200,000,000 and further reductions are
likely.
"The two possible methods for maintaining the amount of discounts
would be the sale of government securities or an additional liquidation of
the b i l l portfolio beyond what normally takes place.

The two possible

means of making any given amount of member bank indebtedness more effective
in i t s pressure on the credit situation, if this i s regarded as necessary,
would appear to be increases in discount rates or direct dealing with mem¬
ber banks.
w

In determining w h a t , if any change in policy, should be adopted,

and the methods to be employed to effect i t , the three major points for
consideration should, of course be
"1.

The effectiveness of such action in controlling unnecessary

expansion of credit•




"2.

The effect of any such action upon domestic business.

"3.

The effect of such action upon the world monetary situation

-268and indirectly upon world trade."
Action of Committee. The Committee's minutes of the meeting
set forth the following:
"It was voted to invite Governor Seay and Governor Calkins, who
were in Washington on other matters, to attend the meeting of the committee
and to invite Governor Young to attend after a preliminary discussion.
n

The preliminary memorandum on credit conditions and the report

of the secretary were read, and on motion, accepted.
"Governor Harrison made a statement concerning the position of
the accounts of foreign correspondents and the effects upon these accounts
and upon business generally of a continued period of high money rates in
the United States. He indicated that the principal important banks of
issue abroad, with the exception of Germany, have used large amounts of
their foreign balances in sustaining their exchanges, and that the Bank
of England had lost large amounts of gold also. Moreover, in most of
the countries of Europe the return of production and trade to more normal
volume has created a demand for additional credit and bank reserves.
Under these conditions there has already been some stiffening in money
rates abroad and some increases in the discount rates of banks of issue.
This movement is likely to go further if money rates continue high in
this country. It seems likely, moreover, that Europe may require further
amounts of gold.
"At this point Governor Calkins entered the meeting (11:07 A.M.)
"Governor McDougal raised the question whether it was desirable
for the Federal reserve banks to make the present charge of one eighth
for their guaranty on bills bought for the account of foreign corres¬
pondent banks. Governor Harrison indicated that this was a customary




-269charge by banks in this country for this service and that if for no other
reason i t was desirable for the Federal reserve banks to conform to the
practice in this country so as not to compete unfairly with member banks,
There ensued an informal discussion of the general credit situ¬
ation and the methods which might be employed by the reserve banks to
prevent further excessive increases in the volume of credit, including a
discussion of the year-end situation and the probable return flow of funds
to principal centers during January and February,

The discussion included

also a review of the methods employed by the reserve banks represented in
dealing with member banks who were large or continuous borrowers.

It

appeared to be the general view of those present that interviews with member
bankers, to secure their cooperation in preventing excessive use of
Federal reserve funds, were of great value, particularly at this time, as
a means of making sure that the seasonal return flow of funds i s employed
in the reduction of bills and securities of the Federal Reserve System,
"The committee also discussed the possible desirability of a
sale of securities as a means of preventing the stimulation of further
increases in the volume of credit in the f i r s t two months of the year,
vl

The committee then discussed the position of the present Open

Market Committee in view, (1) of the fact that at the joint conference
the representatives of a l l the banks indicated a desire for the reorgani¬
zation of the committee, and (2) of the form of the Federal Reserve
Board's disapproval of the recommendation adopted by the meeting of the
committee in November.
"At 12:35 Governor Young was invited to join the meeting.
Governor Harrison summarized for Governor Young the discussion which had
taken place. Thereupon the members of the Committee discussed with




-270Governor Young the status of the committee indicating some possiblB embar¬
rassment in acting when not constituted in accordance with the wishes
expressed by the joint conference.
"Governor Young indicated that the Board was still considering
the recommendations of the conference and that he hoped for action in the
near future.
"Concerning the question of the relation of the committee to the
Federal Reserve Board, the question was raised whether as a matter of pro¬
cedure the Board was prepared as in the past to approve in advance a
policy recommended by the committee, which would then be executed by the
committee, or whether, as implied in the Board's letter of November 27, 1928,
the Board would only approve any purchase or sale of Government securities
at the time it was to be made. Governor Young considered various aspects
of this question with the committee •
"There ensued a discussion of policy as to the discount rates,
direct action, or the purchase or sale of Government securities.

"The discussion of general credit policy and possible open mar¬
ket operations was resumed.

In view of the recent continued tendency

toward an increase in the volume of credit, the committee was of the
opinion that the System should be prepared to s e l l up to $50,000,000 of
Government securities during January or February, if the amount of member
bank indebtedness in principal cities should diminish to an amount where
money rates become so easy as t o stimulate further increases in the t o t a l
volume of credit beyond that required for business purposes.

I t was the

sense of the committee,however, that there i s no occasion now to make a
recommendation, either as t o the purchase or sale of Government securities




-271for System account.
"After further consideration of the matters discussed at the
morning session the committee expressed the view that i t would be helpful
and desirable to have some more definite understanding or definition of
i t s functions.

In the past the Committee has f e l t , and has understood

that the Board concurred in the view that i t was a reasonable and proper
division of authority and responsibility that the committee should recom¬
mend policies, that these policies should then be approved or disapproved
by the Federal Reserve Board and the participating Federal reserve banks,
and that if approved by the Board the committee should then have authority,
within specified limits, to take such action as may be appropriate to
carry out the policies so approved for account of a l l banks desiring to
participate.
"l

I t was the opinion of the committee that a continuance of this

procedure would be desirable and would f a c i l i t a t e the committee's serving
i t s most useful purpose, especially if the membership of the committee
is enlarged to twelve as recommended by the joint conference last November•
"At 4:05 the committee met with the Federal Reserve Board,. . .
Copies of the preliminary memorandum on credit conditions were distributed
to those present.
"Governor Harrison then made a statement reviewing the general
credit situation and the position of foreign banks of issue, and summariz¬
ing

the committee's discussion at the morning session.

He read to the

meeting the preliminary draft of the minute which had been prepared to
cover the committee's views with regard to the possible sale of securities
and the scope of the functions of the committee.




"l

There ensued a discussion concerning the general credit situation,

-272and particularly the prospective movement of funds during January and
February,
"There was also an informal discussion concerning the possibil¬
ities of broadening the bill market. Some members of the Board raised
the question whether the sale of bills from reserve bank portfolios would
aid in the distribution of bills. Representatives of the reserve banks
present reported that in their opinion there is an ample supply of bills
available at all times for investors without the necessity of selling
bills from reserve bank portfolios."
Open Market and Discount Rate Developments, January-March, 1929•
By January 16, 1929 the total bills and securities of the Federal
Reserve system had declined to $1,551,000,000, due almost entirely to re¬
payment of rediscounts by member banks. There had been a slight reduction,
since the first of the year, in government securities held ($6,000,000),
but practically no change in bills bought in the open market.
Increase in buying rates on acceptances. On January 19 the
Deputy Governor of the Federal Reserve Bank of New York reported, that
in an effort to secure a better distribution of bills, dealers were in¬
creasing their buying rates to a maximum of 5 1/8% for longer maturities,
with the result that on Monday, January 21, the Federal Reserve Bank would
probably find it necessary to further increase its buying rates. There
was considerable discussion by the Board covering the probable effects
of a further increase in buying rates with the possibility of a later
increase which might be necessary in rediscount rates, upon business
and the money market.
On January 21 the Federal Reserve Bank of New York did in¬
crease its schedule of buying rates to the following: - 1 to 15 days -




-2734 3/4 per cent, 16 to 45 days - 4 7/8 per cent, and 46 to 180 days - 5
per cent. Repurchase increased from 4 3/4 per cent to 5 per cent.
Moral Suasion. The Board thereupon began consideration of a
letter to be addressed to the Federal Reserve banks in accordance with
the resolution adopted by the Board on December 31, pointing out the
firming tendencies of the money market, contrary to the usual trend of
rates at the season, due to the extraordinary absorption of funds in
speculative security loans and the necessity for the Federal Reserve
banks to protect their credit facilities against misuse by member
banks.
At the end of January the total volume of the System's bills
and securities amounted to $1,467,000,000, the reduction showing up in
some distribution of bills and a decrease in security holdings, prin¬
cipally under resale agreement.
At the meeting of the Board on February 2, 1929, the Governor
reported conversations while in New York, with the Governor of the Federal
Reserve Bank of Boston and the Governor and Chairman of the Federal Reserve
Bank of New York, with regard to possible increases in the rediscount rates
of the banks. He also reported that although the Open Market Investment
Committee had been unable to sell any government securities for some time,
the market was somewhat improved, and the Committee might propose some
sales from the System1s portfolio in the near future, although the sales
would, of necessity, be in small amounts. No objection was expressed by
the members of the Board to such sales.
At this meeting the Board approved and ordered transmitted a
letter to all Federal Reserve banks, referred to above, with regard to
the problem of protecting the credit situation from strain because of




-274excessive absorption of credit in speculative security loans, and inquir¬
ing as to the methods employed by the Federal Reserve banks to protect
their credit facilities from abuse. There was discussion at this meeting
with respect to the possibility of publication of this letter as a press
statement, which discussion was resumed at the meetings on February 4 and
5, with the result that at the latter meeting a press statement, quoting
from the letter, was approved by the Board and ordered released for pub¬
lication in the morning papers of February 7.
Consideration of discount rate changes. At the meeting on
February 4, the suggestion of the Governor of the Federal Reserve Bank
of Boston that he would recommend an increase in the discount rate to his
board of directors, was considered and a letter was addressed to him re¬
questing his cooperation in an effort to improve the existing situation
along the lines indicated in the Board's letter of February 2.
At the February 5 meeting, the Governor of the Federal Reserve
Bank of New York was present and advised the Board of consideration given
by his directors to the present credit situation, and the possible neces¬
sity of an increase in the discount rate, should other efforts fail to
half the increasing volume of credit. The majority opinion of the members
of the Board was that further efforts should be made along the line of socalled direct action, and that a rate increase should not be considered
until the System is satisfied that all other reasonable means have been
exhausted.




(Secretary' s note: On February 7 the directors of the
Federal Reserve Bank of Dallas, one of the four banks
maintaining a 4 1/2 per cent rate, voted to increase
the rate to 5 per cent. The matter was laid on the
table by the Board.)

-275Letter from New York Bank concerning gold movements, February 13.
At the meeting on February 13

the Governor reported advice received over

the telephone from New York that it would be necessary for the Reichsbank
to ship some gold to this country and, if while the gold is in transit the
Reichsbank should find it necessary to support its exchange, it might re¬
quest the Federal Reserve Bank to assist it for a few days by making an
advance on the gold in transit. The following letter, under date of
February 13, was addressed to the Board by the Governor of the New York
Bank:
"For your information, I am glad to enclose herewith a copy of
a letter which we have to-day sent to the governors of the Federal reserve
banks not represented on the Open Market Investment Committee, relative
to the sales of government securities to offset current gold imports. You
may remember that I discussed this matter with you on the telephone last
week and that you then informed me that such sales met with the approval
of the Board.
"While it appears now that the flow of gold from London has been
checked, at least temporarily, nevertheless it is very likely that we may
get some gold from Berlin as the Reichsbank has cabled us saying that it
is possible gold must be shipped and inquiring whether there would be some
way of our making an advance against the gold in transit. This rather in¬
dicates some pressure for dollars on their part. While no amounts are
mentioned in the cable, nevertheless since the Reichsbank already has
$3,000,000 of gold earmarked with us, I assume that their needs must be
for an amount in excess of this or there probably would be no occasion
for further shipments. I shall, of course, keep you advised."




The following is the letter to the Governors:

-276"As we telegraphed you on February 7, the Open Market Investment
Committee, with the approval of the Federal Reserve Board, decided to dis¬
pose of some of the System's holdings of government securities, as i t
might have an opportunity to do so, in order to offset current gold

import.

"As you may remember, early in January we earmarked approximate¬
l y $65,000,000 for foreign account.

Much of t h i s , however, was offset by

gold imports from Canada. Since the f i r s t of February, owing to the weak¬
ness in sterling exchange, we have received $22,000,000 of gold from
London• During the past week, or since February 7, the sales from the
System Account, as you have already been advised, have been about
$21,500,000; just a l i t t l e less than the t o t a l amount of gold received
from London. Since the increase in the discount rate of the Bank of
England, sterling has strengthened and there does not appear to be any
immediate likelihood of further gold imports from that point.

In the

circumstances no further sales of securities are contemplated at the
moment although we may soon get gold from Berlin,"
Further developments in buying r a t e s , discount rates, and
moral suasion.

At the close of business February 13, the earning assets

of the Federal Reserve System amounted to $l,48l,000,000, consisting of
$904,000,000 of rediscounts, $391,OOO,OOO of acceptances and $177,000,000
of government securities, of which $54,000,000 were in the System's
account, a reduction of $22,000,000 in that portfolio.
On February 14, the Governor reported to the Board that b i l l
rates were again being advanced by dealers in New York City and i t would
probably be necessary for the New York bank to make some increase in i t s
buying r a t e s .

The directors of the bank, at their meeting on that date,

voted to establish a rediscount rate of 6%, which the Board voted to take




-277under review.

The directors, however, requested that their action be either4

approved or disapproved, and in accordance with this request, definite ac¬
tion disapproving the rate was taken by the Board.
On February 15, the Federal Advisory Council met with the Board
and submitted the following minute, which was adopted at i t s preliminary
meeting the day before:
w

The Federal Advisory Council approves the action of the Federal

Reserve Board in instructing the Federal Reserve Banks to prevent, as far
as possible, the diversion of Federal reserve funds for the purpose of
carrying loans based on securities.

The Federal Advisory Council suggests

that a l l the member banks in each d i s t r i c t be asked directly by the Federal
Reserve Bank of the d i s t r i c t to cooperate in order to attain the end de¬
sires.

The Council believes beneficial results can be attained in this

manner."On February 15, the Federal Reserve Bank of New York again in¬
creased i t s buying rates on acceptances to the following;

1 to 45 days -

5%, 46 to 90 days 5 1/8%, 91 to 180 days - 5 l/4%, Repurchase - 5%, trade
acceptances - 5 l/4%

On February 20, the t o t a l b i l l s and securities of the System
had been reduced to $l,403,000,000, consisting principally of $865,000,000
of rediscounts, $356,OOO,OOO of acceptances and $172,000,000 of securities,
of which $49,000,000 were in the System's account.
Letter from Acting Chairman to Board, February 25. Under date
of February 25, the following l e t t e r was addressed to the Board by the
Deputy Governor of the Federal Reserve Bank of New York:
"I have your l e t t e r of February 22 and am glad to report as to
recent sales from the Open Market Investment Account and as to i t s present




-278status.
"Governor Harrison, in his l e t t e r to you under date of Febru¬
ary 13, reported sales aggregating $21,500,000, which left a balance in
the account of $53,925,800. You will recall that at a meeting of our
Executive Committee a week ago at which you were present i t was agreed
that a moderate amount of further sales was desirable as and when the
market could absorb additional offerings without demoralization.

Since

that time there has been sold from the account a total of $1O,425,8OO,
leaving a net balance in the account of $43,500,000, made up of two
issues onlyj v i z . :
$13,500,000 December 15 - 4 1/4% certificates
$30,000,000 . December 15, 1932 - 3 1/2 Treasury notes.
"In addition to the sales referred t o , from the System Account,
there were $2,000,000 of short-term Governments which we held temporarily
in the investment account of this bank and which have also been disposed of
These sales have been made gradually as bids have been received from the
market, but with call money rising today to 9% and with the probability
that i t will remain high during the balance of this month, the demand
for short-term Government securities has fallen off and i t seems unlikely
that we will have further inquiries from the market during the next few
days.

If, however, any further changes occur in the account, I shall be

glad to write you again, next week..
(Secretary's note: On March 1 the Board approved the re¬
discount rate of 5%9 established by the directors of the
Federal Reserve Bank of Dallas, which i t laid on the table
on February 8, and the rate became effective the following
day, March 2.)
Letter from Acting Chairman to Board, March 5. Under date of
March 5, the following l e t t e r was addressed to the Board by the Deputy




-279Governor of the Federal Reserve Bank of New York:
"Since I wrote you on February 25,1929, the only change in the
Open Market Investment Account consists of the sale of $3,500,000 of
Treasury certificates maturing December 15, 1929.

During the l a t t e r part

of the week there developed a slight demand for certificates maturing this
year, which enabled us to make the sale of the December certificates just
referred t o .
"This transaction brings the t o t a l holdings in the System Account
down to $40,000,000, made up as follows:
$10,000,000 - Dec. 15, 192941/4%certificates of indebtedness
30,000,000 - Dec. 15, 1932 - 31/2Treasury notes.
"As a matter of information, this relatively small portfolio of
Government securities may prove to be a b i t embarrassing to us in our
dealings with foreign correspondents on March 15 of this year. We are hold¬
ing here, for account of such correspondents, a t o t a l of $86,000,000 in
the from of Treasury certificates of indebtedness maturing March 15, 1929,
and if, as usually happens, these correspondents wish to replace a sub¬
stantial part of their current maturities by acquiring other short-term
Governments in their stead, i t appears unlikely that we can, in so short
a period, advantageously acquire the securities in the open market in
sufficiently large blocks to meet the correspondents'

requirements.

During recent years the System's Open Market Account has been the medium
for providing the necessary flexibility to enable us to accommodate our
correspondents; but under existing conditions i t looks as though some of
them at least will have to shift into bankers b i l l s or other investments."
Communications from Mw York Bank, week ending March 12. At
e
the meeting of the Board on March 7, the Governor reported a suggestion
by the Deputy Governor of the Federal Reserve Bank of New York that in




-280connection with the March 15 financing of the Treasury, the Federal Reserve
System should purchase about $25,000,000 of securities maturing on that
date from the market, as offered daring the ensuing week, but no action
was taken by the Board pending submission of the matter to the directors
of the Federal Reserve Bank of New York. However, no definite recommen¬
dation for such purchase was submitted.
Under date of March 8, the Board was advised by the Federal Re¬
serve Bank of New York that an additional $8,500,000 of gold was being
shipped by the Reichsbank, and that i f the strong demand for dollars con¬
tinued in Berlin, the Federal Reserve Bank might be requested to make an
advance against this consignment also.

However, no such request was re¬

ceived, and when the gold in question arrived in New York, i t was earmarked
for the account of the Reichsbank.
Under date of March 12, the following l e t t e r was received from
the Deputy Governor of the Federal Reserve Bank of New York:
"With the continuance of firm money and a very weak Government
security market, no further sales have been made from the Open Market In¬
vestment Account since my l a s t l e t t e r to you under date of March 5, 1929.
"In that l e t t e r I mentioned the possibility of our having t o
acquire for account of foreign correspondents other short-term Government
issues to replace their $86,000,000 certificates maturing March 15. This
replacement has been accomplished partly by acquiring bills and partly
by contracting for June and September certificates in the market, while
a further part i s to be disbursed to the market; a l l to be consummated
as of March 15,

1929"

Communications from New York Bank, week ending March 19. On
March 15, the Governor reported that according to the Deputy Governor of




-281the Federal Reserve Bank of New York, the overdraft of the Treasury Depart¬
ment would probably amount to over $300,000,000, which should r e t i r e
practically a l l rediscounts of New York City member banks, even though
those institutions were taking over $100,000,000 of the overdraft.

As a

matter of fact, the overdraft did amount to $399,000,000.
Under date of March 19,

the following l e t t e r was received from

the Deputy Governor of the Federal Reserve Bank of New York:
"There have been no changes in the holdings of Government secu¬
r i t i e s in the System's Open Market Account since I wrote you under date of
March 12, 1929, though the b i l l holdings continue to show a gradual re¬
duction .
"The various operations connected with the Treasury financing
of March 15 were cleared without difficulty and without any apparent in¬
fluence on the money market, no material ease in money developing during
the week. In fact, the call money rate on the New York Stock Exchange
held steady at around 7%, accompanied by slightly firmer time money.

In

connection with the quarterly financing, on March 15 this bank loaned
to the United States Treasury $290,000,000 on i t s one day certificate of
indebtedness, while $85,000,000 of the certificate was participated in by
our member i n s t i t u t i o n s .

This participation was reduced to $20,000,000

yesterday and will be canceled today.

The New York City banks, which

owed us on the 14th $88,000,000, temporarily reduced their borrowings to
$44,000,000 on the 15th, but with the day to day liquidation of the Govern¬
ment certificate we anticipate that the banks will presently be again
borrowing $200,000,000 or thereabouts,
"As a result of the various operations during the week, parti¬
cularly those having to do with the replacing of the large maturities




-282of the foreign banks, this bank temporarily took over $4,000,000 of certi¬
ficates of indebtedness which will be disposed of in the near future; also,
in order to accommodate the Farm Loan Bureau, we took over in our investment
account on March 15 $2,345,000 of Federal Intermediate Credit Bank deben¬
tures, of which $250,000 has been sold, and the balance i s likely to be
disposed of in the near future."
Further consideration of increase in discount rates. At the close
of business March 20, the b i l l and security holdings of the Federal Reserve
System aggregated $1,372,000,000, made up approximately of $943,000,000
of rediscounts, $237,000,000 of acceptances and $185,000,000 of govern¬
ment securities, of which $40,000,000 were in the System's account.
On March 21, following advances in market rates, the Federal
Reserve Bank of New York made effective the following increases i n the
schedule of rates for purchases of acceptances: - 1 to 45 days - 5 l/4%
46 to 90 days - 5 3/8%, 91 to 120 days - 5 1/2%, 121 to 180 days - 5 5/8%,
Repurchase - 51/4%,trade acceptances - 5 l/2%.
On the same day, the directors of the bank again voted to estab¬
lish a rediscount rate of 6 per cent, and inasmuch as definite action on
that date was requested, the Board disapproved the increase.
A conference on March 22 between the Board and representatives
of the Federal Reserve Bank of New York, developed a fundamental differ¬
ence of opinion as to the advisability of an increase in r a t e , the New York
directors feeling that everything which reasonably could, had been done,
without the supplement of an increase in r a t e , to support the policy of
the System, while the majority of the Board felt that results have been
accomplished during the past several weeks by direct action on the part
of the Federal Reserve System, and that further good could be done to




-283prevent misuse of the credit facilities of the System without an increase
in rate, with the attendant possibility of adverse effects upon the general
business situation.
At the meeting on March 23, the Governor reported that at a meeting
of the directors of the Federal Reserve Bank of Chicago, among whom senti¬
ment for an increase in rate had been crystallizing for some time past,
the directors were in favor of an increase, but took no action because
of the reported unfavorable attitude of the Board. He reported further
that member banks in Chicago had decided to take concerted action looking
toward a liquidation of speculative credit loans. (The steady and increas¬
ing borrowings of certain member banks in the 7th Federal Reserve District
was the subject of a letter which the Board addressed to the Federal Re¬
serve Bank of Chicago, under date of March 18• )
On March 25, following further market advances in bill rates
and substantial offerings to the Federal Reserve Bank of New York at
rates 1/8% above those in effect at the bank, the following schedule of
buying rates was established: 1 to 45 days - 5 3/8%, 46 to 120 days 5 1/2%, 121 to 180 days - 5 3/4% repurchase - 5 l/2% trade acceptances -

5 3/4%.
On March 26, the directors of the Federal Reserve Bank of Phila¬
delphia voted to establish a 6 per cent rate, which was disapproved by
the Board, immediate action being requested. On the following day, a
rate of 6 per cent established by the directors of the Federal Reserve
Bank of Boston, was taken under review.
On March 27, the directors of the Federal Reserve Bank of New York
again voted to establish a rediscount rate of 6 per cent, but their action
was disapproved by the Board. The Chicago directors, at an adjourned




-284meeting, took no action.
At the close of business on March 27, the bills and securities
of the System amounted to $1,410,000,000, including $1,024,000,000 of re¬
discounts, $208,000,000 of acceptances and $170,000,000 of government
securities, no change having taken place in the Open Market Investment
Account, which remained at $40,000,000.




-285Meeting of April 1, 1929.
At a meeting of the Open Market Investment Committee held on
April 1, 1929, during the spring conference of Governors, the follow¬
ing preliminary memorandum was discussed and the minutes of the meeting
disclose that, "After consideration of this memorandum and the develop¬
ment of credit conditions generally, the committee informally agreed
that, as there appears to be no need just now to consider the purchase
of government securities and as the committee already has authority to
sell government securities, there is no occasion for any further recommendation at this time. It was understood by the committee that the
chairman would make a report of this conclusion to the Conference of
Governors and to the Federal Reserve Board."
Preliminary memorandum of Chairman, "Since the last meeting of
the Committee on January 7, the System's holdings of U. S. Government
securities have been reduced approximately 70 million dollars, due in
part to the liquidation of sales contract holdings, and in part to a
reduction in the System Special Investment Account from $75,591,OOO to
$40,000,000, largely made as an offset to gold imports. In addition, the
policy of allowing acceptance holdings to mature without replacement has
been reflected in a reduction in these holdings from $485,000,000 to
$208,000,000.
"Gold Movements
* x *
". • • the reduction in the System Special Investment Account
has about offset the total gain in gold since the first of the year.




"Reduction in Bill Holdings
"This leaves as the principal influence on the money market from

-286open market transactions, the reduction in the Reserve Banks1 bill port¬
folios which has been accomplished by permitting bills to mature and
avoiding new purchases to replace them, by declining to take green
bills. The reduction in bill holdings since the first of the year has
been greater than in any recent year.
"While higher bill rates have resulted, sufficient investment
demand has arisen to absorb the new bills coming into the market and
thus reduce the dependence of the bill market upon the System. A con¬
siderable part of the demand has represented foreign buying, but buying
by domestic institutions has also been stimulated somewhat by the higher
yields now being offered.
"Largely as a consequence of the rapid reduction of the Sys¬
tem bill portfolio the borrowings of member banks declined less in
January than might have been expected and since the end of January have
increased from an average level of 850 million to about 1,000 million
dollars, with resulting increased pressure upon the money market.
"Member Bank Credit
"Since early in February . • . there has been a reduction of
153 million dollars in the amounts loaned by reporting banks outside
of New York to security brokers and dealers in New York, but the loans
of these banks to brokers elsewhere have increased 87 million and security
loans to customers have increased 176 million, giving a net increase of
110 million in their total security loans. In New York City there has
been little net change in security loans either to brokers or to
customers.
"The increase in other loans largely commercial has been in
keeping with the usual seasonal tendencies.




-287"Brokers Loans
"Meanwhile the demand for security loans has shown lulls,
accompanying temporary reactions in the security markets, but in
general has shown a tendency to increase further, rather than to
decline. Total brokers loans after some reduction in February in¬
creased again in March and on March 20 reached a level 124 million
dollars above the previous high point of February 6. There has been
some reduction subsequently. The additional funds have been obtained
from sources other than member banks, but it has been e¥ident that
increasingly high rates have been required to attract a sufficient
supply.
"Money Rates
"These increasingly high rates offered by brokers have
been accompanied by further advances in rates charged on commercial
borrowing. .. .
"Effects On Business
"The higher money rates do not appear to have restricted
short term commercial borrowing, but in a number of other ways the
present high level of money rates is beginning to have a detrimental
effect upon business.
"1. The volume of building operations has been declining
largely because of difficulty in obtaining second mortgage money and
loans for building operations and also difficulty in selling real
estate bonds. Stock financing which has been resorted to in some
cases has only partly met the requirements.
"2. A good many state, municipal, railway and other projects,
ordinarily financed through bonds and notes, have been postponed because




-288of difficulty in securing funds at reasonable prices. There is no
way as yet of measuring the precise effect of these postponements
upon business conditions. The decrease in bond financing has been
partly offset by increases in stock financing. An analysis of new
securities issued during the first two months of this year indicates,
however, that out of a total of about $2,500,000,000 of stocks issued,
less than one-fifth represented actual additions to the working capital
of domestic commercial and industrial corporations. The remainder re¬
presented largely securities of investment trusts and other financial
corporations, securities issued in mergers and consolidations, and
refunding issues,
"3. Reduced foreign financing in the United States, to¬
gether with rising money rates and stringent money conditions in
England, Holland, Germany and Italy, due largely to our high call
loan rates, are diminishing the purchasing power of those countries
for our products, a tendency which is likely to be reflected sooner
or later in reduced exports,
"It thus seems reasonably certain that present money con¬
ditions, if long continued, will have a seriously detrimental effect
upon business conditions, and the longer they are continued the more
serious will be the effect. The volume of business now appears to
be sustained in part by the production of automobiles considerably
in excess of retail purchases with a consequent stimulating effect
upon the steel industry, and by the stimulation arising from paper
profits in the stock market.
"The policies which have been adopted by the system since
the first of the year appear to have slowed down somewhat the rate




-289of increase in the use of funds for speculative operations. They do
not yet appear, however, to have been successful in restoring a con¬
dition in which steps may be taken to ease the money market and re¬
store conditions more "wholesome for business.
Communications on Open Market Operations, Gold Movements, and
Discount,
April - May 1929.
Letter from New York Bank to Board, April 2. Under date
of April 2, the following letter was addressed to the Board by the
Deputy Governor of the New York Bank:
"Since my last letter to you on this subject, under date
of March 19, 1929, there have been no changes in the total of the
System's holdings of Government securities amounting to $40,000,000,
although today a change in ownership takes place due to the situation
in St. Louis. As a result of the heavy demands on that bank by member
banks in their district, they have requested the committee to relieve
them of their participation in Government securities in the Open
Market Investment Account amounting to $2,200,000, and in addition
have asked to be temporarily relieved of $9,500,000 - 3 l/2% Treasury
notes of 1930-32 held by them in their own portfolio. The participa¬
tion referred to and the outright holdings have been taken over at
current market prices and distributed to other participating banks
with the understanding that St. Louis will repurchase the $9,500,000
Treasury notes at a later date and at the same prices, provided the
notes shall not have been otherwise disposed of by the committee.
# * #

Discount Rate Discussions. On April 4 the executive
committee of the Federal Reserve Bank of Boston, the board of




-290directors of the Federal Reserve Bank of New York, and the executive
committee of the Federal Reserve Bank of Chicago, voted to establish
rediscount rates of 6% for their respective banks. The Boston rate
was taken under review by the Board, but the actions of the New York
and Chicago banks were disapproved.
At the joint meeting of the Board with the Governors'
Conference of April 4 there was a discussion of the question of re¬
discount rates, as a basis for which the Governors had informally
agreed upon the following statement as a formula: "That no Federal
Reserve Bank should have a rate below 5% and that the rates of the
Federal Reserve Banks in the principal financial centers should be
raised to at least 6%."
Letter from Harrison to Board on Gold Movements, April 8.
The following letter dated April 8, from the Governor of the New York
Bank, was noted and ordered circulated at the meeting of the Board
on April 9:
"I am writing to bring you up to date since our letters of
March 6 and 8 concerning the gold movement to this country from
Germany, Our previous letters dealt with the $3,000,000 held here
under earmark for some time and released on March 6, the $7,96O,OOO
bought by us on March 19 after the extension of an advance against
this consignment in transit, and the $8,526,000 which arrived on
March 2$ and was bought by us on March 28. Practically all of these
funds were paid out by us to the market upon instructions from the
Reichsbank,
"On March 14 we received instructions from the Bank of
France to release $5,007,000 of their gold and earmark it for the




-291Reichsbank in consideration of a shipment of equal value received by
the Bank of France in Paris from the Reichsbank. A second earmarking
transaction of the same kind involving $7,096,000 was effected through
the Bank of France on March 29, and another of $3,991,000 through the
National Bank of Belgium on March 30. All of this gold earmarked for
the Reichsbank was subsequently released and paid to the Street.
"Further earmarkings were effected as follows;
$12,182,000 on April 5, against gold delivered by the
Reichsbank to the Bank of France,
and
$4,021,000 on April 6, arranged through the National
Bank of Belgium.
"Today the Reichsbank asked us to release $12,182,000 gold
from earmark and pay out an equivalent sum, so that tonight we will
hold under earmark for them gold to the amount of only $4,024,000#
I imagine we shall soon be asked to release this gold as well, and
that further swaps with Continental Central Banks may be arranged
in the near future if the strain on German exchange continues•
"The total of the gold involved in these transactions is
$51,800,000 in round figures. In other words, the Reichsbank has
lost that amount of gold since early March, and we have made a corre¬
sponding gain so far of $47,800,000.
"According to our figures the gold movement since the first
of the year has been as follows taking into account exports, imports,
and earmarking transactions;
"In January there was a net loss of $18,000,000, and in
February and March net gains of $26,000,000 and $29,000,000 respectively,
which makes a net gain for the first three months of the year of about
$37,OOO,OOO. For the first week in April, we gained a further




-292$ll,000,000 to which we must add the $12,000,000 released today. This
makes a total net gain since the first of the year of $60,000,000. If we
add to this total the gold amounting to approximately $6,000,000 now on
the way from Argentina, as well as the $4,000,000 now earmarked for the
Reichsbank, which will probably be released in a few days, we arrive at
a total gain of $70,000,000 since January 1, 1929."
Letter from New York Bank to Board, April 9. Under date of
April 9 the following letter was received from the Deputy Governor of the
Federal Reserve Bank of New York:
"The total holdings of Government securities in the System
Account are the same as they were when I wrote you last, under date of
April 2, 1929, namely $49,5QO,OQO, including the $9,500,000 of Treasury
Notes which were temporarily taken over from the portfolio of the Federal
Reserve Bank of St. Louis.
"The $4,000,000 Government securities held temporarily in our
investment account here have been sold for delivery today. This will
partially offset the effect of the release from earmark of gold, amount¬
ing to $6,000,000 yesterday and $5,700,000 today.
"There has been a still further reduction in the System bill
holdings, the amount of acceptances held by this bank at present being
only about $21,000,000 against $34,000,000 a week ago. Our rediscounts
and advances, however, which had shown a large increase the previous week,
are practically unchanged, being $278,000,000 at close of business April
8, against $276,000,000 on April 1.
"Time money is a bit difficult to obtain with rates nominally
quoted at 9%. 10% is the closing rate today for call money."
On April 11 the directors of the Federal Reserve Bank of New York
again voted to establish a rediscount rate of 6 per cent and the Board



-293disapproved their action.
Letter from Harrison to Board on Gold Movements, April 11. Under
date of April 13, the folio-wing letter was received from the Governor of
the New York bank:
"Referring to my letter of April 8, to Governor Young concerning
Reichsbank gold movements, I wish to advise you that we earmarked on
Thursday for the Reichsbank approximately $16,000,000 gold, of which
$12,000,000 was transferred from the gold deposit of the Bank of Prance
with us and $4,000,000 from that of the National Bank of Belgium. In order
to meet its requirements in the exchange market, the Reichsbank has instructed us to release from earmark all but $3,000,000 of the gold thus
set aside for them. The equivalent has been paid to the 'Street.
"The pressure upon German exchange has been and is apparently still
so strong that it has been necessary for the Reichsbank to supplement its
recent exchanges of gold with the Bank of France and the National Bank of
Belgium with a further direct shipment of gold to this country in order to
obtain dollars. As I advised you over the telephone Thursday, we received
a cable from the Reichsbank on that day that $6,437,O76.74 of gold has
been consigned to us on the S. S. "Stuttgart" which left Germany April 11.
In response to their request we have made an advance against this gold
similar to the advance made on a like shipment last month. This loanr
which is for transit time only and carries a rate of interest of 5 per cent,
is for 95 per cent of the value of the gold. It has been participated
among the other Federal reserve banks in the same manner as was done in
the previous case.
"In my letter of April 8, I mentioned the fact that recent gold
transactions between the Reichsbank and this bank aggregated at that time




-294about $5l,800,000, Owing to the additional transfers and the current
shipment referred to in this letter, the total sales of gold by the
Reichsbank to us on this movement now amount to $71,000,000. It is
difficult to say how much foreign exchange the Reichsbank has lost in
addition to this large sum of gold. Their regular published statement
shows only that part of their exchange holdings which is considered as
legal coverj the balance is included in another account and is unidentifiable.
If, however, we consider only that part of the foreign exchange holdings
which is shown as legal cover, it appears that since the first of the year
that item has declined approximately $30,000,000. Considering this portion
of their foreign exchange holdings alone, their known loss in gold and
exchange since the first of the year has been over $100,000,000 of which,
as previously stated, over $70,000,000 is gold. This gold has all been
lost since March 6.
"This experience of the Reichsbank while attributable in part to
unusual factors peculiar to it, is another evidence of the continued
pressure upon the foreign exchanges caused largely by the strain of high
rates in this country and the closing of our bond market to foreign borrowers.
While this foreign situation should not of itself be controlling upon ours,
nevertheless, it cannot be overlooked. As I shall write you in a separate
letter, it is important not only in its possible serious effect upon the
future of the gold standard, which concerns us all, but also more directly
in its effect upon foreign markets for our agricultural and other export¬
able products. It emphasizes the urgent need for speed in the correction
of conditions which still make it impossible to lend our efforts towards
easier money and the consequent opening of our bond market. It is still
our belief that an increase in our rate will serve to hasten the time when




~295~
this will be possible."
Letter from Harrison to Board on gold movements, April 16. Under
date of April 16, Governor Harrison wrote the Board as follows:
"Referring to my letter of April 13 concerning Reichsbank gold
movements, I am now writing to advise you of transactions which have taken
place in the interim.
"At the time of my previous letter, the total sales of gold by
the Reichsbank to us amounted to $71,776,000. This figure has since been
increased to $84,250,000. In addition, there is a shipment of $6,500,000
gold on the way to New York and we have been advised that the Reichsbank
expects $8,313,000 gold to be transferred to it by the National Bank of
Belgium. When these two transactions have been consummated, the Reichsbank
will have suffered a total loss of $99,063,000 gold. As German exchange
continues to be under pressure and is quoted at 23.711/2cents which is
below the theoretical gold point, I should imagine that the movement of
gold from Germany to this country will continue."
Letter from New York Bank to Board, April 16. Deputy Governor
Case addressed the following letter to the Board under date of April 16:
"Since I wrote to Governor Young last under date of April 9, 1929,
sales of short-term Government securities from the Special Investment
Account have been made in an endeavor to partially offset the effect of
further releases of gold from earmarking. These sales have reached a total
of $10,000,000, of which $4,500,000, representing sales to the market,
have already been delivered, and the balance of $5,500,000 will be de¬
livered to the Treasury on Wednesday, the 17th, payment for which will be
made from moneys withdrawn from depositary banks.




-296"It is hoped that we will be able to make further sales, in
accordance with the previous authorization, in the near future, although
the state of the short-term Government security market is such that we may
experience some difficulty in disposing of the balance of securities held
in the System Account (consisting entirely of $30,000,000 United States
Treasury 3 l/2% notes of 1930-32).
*

*

*

"Our ediscounts and advances, which stood at $278,000,000 a
week ago, totaled about $2,000^000 at the close of business last night.
"Even with the slowing up of the trading on the stock market
there has been scarcely

change in money rates, although there has

probably been a more plentiful supply of funds available."
Letter from Harrison to Board on gold movements, April 1 7 . O n
April 17 Governor Harrison wrote the Board as follows;
"Yesterday I wrote to you concerning German gold movements and
referred to the fact that we had bought from the Reichsbank since March 6
approximately $84,250,000 of gold. Of this amount about $52,700,000 was
transferred to the Reichsbank from the gold deposit of the Bank of France
with us against which the Reichsbank delivered gold to the Bank of France
in Paris.
" W ehave just received a cable from the Bank of France that they
would like to buy back from us the gold which they originally transferred
to the Reichsbank and which was subsequently sold to us. In fact, today
the Bank of France transferred to us from certain private banks $15,000,000
to be earmarked in gold and we shall probably receive the remaining
$37,700,000 from the market within a few days to be set aside in gold for
the Bank of France.




-297"When the foregoing transactions have been completed, the gold
amounting to $84,250,000 which we have gained from the Reichsbank will have
been offset to the extent of $52,7OO,OOO. In other words, the Bank of
France will have sold that latter amount of dollars to the Reichsbank who
will have paid for the dollars by shipping gold to Paris. The Reichsbank
will have used these dollars to support its exchange in exactly the same
manner as they would have done if the gold had been shipped to New York and
converted into dollars.
Further actions on discount rate increase. Action of the directors
of the New York bank on April 18, in voting to establish a 6% rate, was again
disapproved by the Board at a meeting on that day.
The Federal Advisory Council met on April 19 and submitted to the
Board the following resolution which had been unanimously adopted by it:
"On February l5, 1929, the Federal Advisory Council adopted the
following resolution:
'The Council believes that every effort should be made to correct
the present situation in the speculative markets before resorting to an
advance in rates.
"The Council in reviewing present conditions finds that in spite
of the cooperation of member banks the measures so far adopted have not been
effective in correcting the present situation of the money market. The
Council, therefore, recommends that the Federal Reserve Board permit the
Federal reserve banks to raise their rediscount rates immediately and maintain a rate consistent with the cost of commercial credit."
On the same day the Board took under review action of the Executive
Committee of the Federal Reserve Bank of Chicago in voting to establish a
rate of 6 per cent.




-298Letter from New York Bank to Board on gold movements, April 19» "!In
order to supplement Governor Harrison's letter of April 17 concerning German
gold movements, I am writing to advise you that on Wednesday we placed under
earmark for the Reichsbank $8,313,000 gold which was transferred from the
gold deposit with us of the National Bank of Belgium, and on Thursday this
gold was released from earmark by the Reichsbank in order that the proceeds
might be paid to the market. This transaction increases to a total of
$92,563,000 the gold -which we have bought from the Reichsbank since March 6.
As you know, there is a consignment of about $6,500,000 now on the way
against which we have made the Reichsbank an advance and which will be
liquidated early next week when the gold is due to arrive in New York. We
have just been advised by the Reichsbank of an additional shipment of gold
valued at $8,141,83O.O3 which is leaving Germany today on the s.s. Hamburg'
and against which the Reichsbank has asked us to make them an advance of
9S% of the value of the gold. This advance, which amounts to $7,734,738.53,
is being made today,, the terms and conditions being identical with the
advance against the gold on the s.s. 'Stuttgart'.
"One further development in connection with this gold movement
from Germany is the fact that the Reichsbank has cabled us that the National
Bank of Belgium will place at their disposal with us an additional amount
of gold valued at approximately

$4,000,000.

The Reichsbank is delivering

the same amount of gold to the National Bank of Belgium in Brussels. If
we include these two shipments now enroute from Germany and the gold to be
transferred from the National Bank of Belgium, we reach a total of
$111,205,000 which is the total amount of gold which the Reichsbank has
lost in support of its exchange since early March.




"In his letter of April 17, Governor Harrison referred to the

-299repurchase by the Bank of France of the $52,7OO,OOO gold transferred by
that institution to the Reichsbank, In consummation of this transaction
we earmarked for the Bank of France $15,000,000 on Wednesday, $15,000,000
on Thursday, and we expect to earmark next week $7,000,000 on Tuesday,
$7,000,000 on Wednesday, and $8,700,000 on Thursday.
Letter from New York Bank to Board on gold movements, April 22.
"Referring to my letter of April 19, concerning German gold movements, I am
writing to advise you of developments in the interim. You will recall that
on April 11 we made an advance of $6,115,222.90 to the Reichsbank against a
consignment of gold on the S. S. 'Stuttgart.' This consignment arrived in
New York today and was immediately sold to the United States Assay Office,
the proceeds being used to liquidate the advance.
"On Saturday we transferred $3,991,000 earmarked gold from the
National Bank of Belgium to the Reichsbank and today this gold was released
from earmark by the Reichsbank and the proceeds paid to the market. The
Bank of France instructed us today to transfer from its gold deposit to
that of the Reichsbank $25,300*000 gold and of this amount $8,000,000 gold
was released from earmark by the Reichsbank. Furthermore, we have received
a cable from the Reichsbank that they expect to receive $12,153,000 gold
from the National Bank of Belgium. We have received no instructions from
the National Bank of Belgium today but will undoubtedly hear from them
tomorrow.
"We have now purchased from the Reichsbank since March 6 a total
of $110, 994,000 gold. If we add to that sum the shipment no?/ en route, the
$17,300,000 which we shall hold under earmark for the Reichsbank tonight
and the $12,153*000 which the Reichsbank expects to receive from the
National Bank of Belgium* we arrive at a total figure of $l48,547,OOO.




-300"You have probably observed that on Friday following the reported
failure of the Reparations negotiations in Paris, German exchange dropped
to 23.70 and, except for a fractional advance on Saturday, has remained at
that figure today, so that we should expect a continuation of this gold
movement from Germany since the reichsmark is considerably below our gold
import point."
Letter from New York Bank to Board, April 23, On April 23 the
Deputy Governor of the New York Bank wrote the Board as follows:
"Since I wrote you under date of April 16, 1929, further sales,
aggregating $10,000,000, have been made from the System Special Investment
Account, for the purpose of partially offsetting the effect of the recent
imports of gold and releases from earmarkings. The holdings in the Account
are now $20,000,000, exclusive of the $9,500,000 of notes held temporarily
for the Federal Reserve Bank of St. Louis. The market for Government se¬
curities has become a trifle stronger, with some demand for the 3-1/2% notes
of 1930-32 which we hold, so that we may presently be able to make further
sales to advantage.
***"
At a meeting of the Board on April 24, the Chairman of the Federal
Reserve Bank of New York conferred with the Board regarding the desire
of the directors of that bank to establish a rate of 6 per cent. He was
advised of the opinion of a majority of the Board that approval of an
increase in discount rates would be confession of the inability of the
System to deal with a limited numberof member banks who are misusing its
facilities other than by imposing the penalty of increased rates upon the
entire banking and business structure of the country.




Letter from Harrison to Board on gold movements, April 24. On the

-301same day the Governor of the New York Bank wrote the Board as follows:
"Since our letter of April 22 concerning German gold movements
there have been one or two developments which I think will be of interest
to you.
!l

We have received instructions from the National Bank of Belgium

to transfer $12,154,000 from their gold deposit with us to that of the
Reichsbank. This makes a total of $36,530,000 gold which the Reichsbank
has received in New York against a corresponding amount delivered to the
National Bank of Belgium in Brussels while the amount of gold swapped in a
similar manner between the Reichsbank and the Bank of France now aggregates
$78,012,000.
Yesterday we released from earmark for the Reichsbank $8,000,000
and today $5,000,000 in order to make payments for their account to the
market and those transactions increase to a total of $123,993,000 the amount
of gold which we have purchased from the Reichsbank since March 6, The
Reichsbank will have under earmark with us tonight approximately $16, 474,000
gold and as we have been advised of no further direct shipments of gold from
Germany to New York, other than the $8,100,000 now in transit,, the aggregate
figure of all these gold transactions with the Reichsbank since March 6 is
still approximately $l48,000,000.
"I referred in one of my previous letters on this subject to the
desire of the Bank of France to buy back from us the gold which they trans¬
ferred to the Reichsbank and which was subsequently sold by the latter to
us. This procedure is being adhered to and in addition to the earmarking
transactions enumerated in the last paragraph of our letter of April 19 we
expect to set aside in gold for the Bank of France $8,000,000 on April 26
and a like amount on April 30.




-302"You have doubtless been advised that the Austrian National Bank
and the Hungarian National Bank have both increased their discount rates by
1% that of the former institution now being 7-1/2% and that of the latter 8%.
Both of these advances are further evidence of the general tendency toward
high interest rates in Europe and I think are largely attributable to our
own credit situation. Both of these central banks have had to increase
their rates to protect their reserves. • • •
"I have just been confidentially advised by the Reichsbank that
their discount rate will probably be increased from 6-1/2% to 7-1/2%
tomorrow. "
Further actions on discount rate and use of moral suasion. On
April 25 the Board took under review action of the board of directors of the
Federal Reserve Bank of Boston in voting to establish a 6 per cent re¬
discount rate, and disapproved similar action by the directors of the
Federal Reserve Bank of New York. On April 26 action by the directors of
the Federal Reserve Bank of Chicago in establishing a rate of 6 per cent
was disapproved.
At the meeting on April 30 the Board addressed to the Federal
Reserve Bank of Philadelphia a form of letter which had been under consider¬
ation for a week or more, requesting further and fuller cooperation in the
Board's policy of preventing the misuse of the discount facilities of the
Federal Reserve System. During the ensuing few days similar letters were
addressed to other Federal Reserve banks.
Letter from Harrison to Board on gold movements9 April 30»

Under

date of April 30 the following letter was received from the Governor of the
New York Banks




"I would like to confirm what I told you on the telephone yesterday

-303morning to the effect that we received advice from the Reichsbank yesterday
that they were shipping to us $8,994,OOO gold bars on the steamer 'Berlin*
and $16,689,000 on the steamer 'Reliance1 and that we were advancing yester¬
day 95 per cent of the value of these two consignments under the usual terms
and conditions.
"In addition to these two shipments of gold, the Reichsbank yester¬
day received $25,4OO,OOO gold in a swap with the Bank of France and we under¬
stand that there will be a further swap of about $25,000,000 with the Bank
of France, probably today. This will increase to $128,412,000 the total
swaps of gold between the Reichsbank and the Bank of France on this movement#
"As I have previously advised you, the Bank of France has been
repurchasing from us the gold -which they have thus transferred to the
Reichsbank. The total amount repurchased or engaged for repurchase is
$78,0114,000. We have now been advised, however, that they do not care to
repurchase any further amounts sold to the Reichsbank. Consequently, when
gold now held by the Reichsbank is released from earmark and the proceeds
paid to the market it will result in a gain to the market pro tanto and will
not be offset by earmarkings for the Bank of France unless there is some
change in their present plans.
"If we include the two consignments of gold now on the way from
Germany to Mew York, as well as the gold which the Reichsbank has under ear¬
mark and the swap of about $25,000,000 which we anticipate will take place
today, the total gold loss suffered by the Reichsbank since March 6 is
$214,692,000.

***
"Of these total amounts, all but $63,204,000 had been paid to the
market up to last night either directly, or indirectly through the Agent




-304General. The Reichsbank this morning has $9,400,000 gold under earmark and
$28,8O4,OOO in current account."
Letter from New York Bank to Board, April 30. On the same day the
Deputy Governor of the New York Bank sent the following letter to the Board:
"Since I wrote you on April 23, a further sale of $2,500,000 has
been made from the holdings of the System Special Investment Account as a
partial offset to recent imports of gold and releases from earmarkings.
This sale reduced the holdings of the System Account on April 24 to
$17,500,000, exclusive of the Treasury notes being held temporarily for the
Federal Reserve Bank of St. Louis. On April 26 the St. Louis bank repurchased
$3,500,000 of the $9,500,000 notes taken over from them recently,, thereby
reducing the amount of notes being held temporarily for them to $6,000,000.
We took over from a foreign correspondent yesterday $1,040,000 of the 4-l/2%
Treasury certificates maturing June 15, 1929, which certificates are being
held temporarily in our own investment account.
"With the tightening of money rates due to the month-end re¬
quirements and accompanying a falling off in the demand for Government
securities, no further sales of securities have been made from the System
Account, so that the holdings of Government securities by the System will
probably show very little change for the statement week ending May 1, 1929.
"The amount of bills held outright by the System at the close of
business last Wednesday, April 24, amounted to approximately $116,500,000
or $6,500,000 less than at the end of the preceding week. It is likely,
however, that our own bill portfolio will show an increase for the week
ending May 1, due to the acquisition of a block of bills which mature within
a week and which, because of their early maturity, it -would be impracticable
to apportion to other reserve banks."




-305Inquiry from Board concerning acquisition of acceptances, May 4.
Consideration of this letter resulted in the following inquiry being made
of the New York Bank, under date of May 4:
"Receipt is acknowledged of your letter of April 30th, advising
of a further sale of $2,500,000 made from the Open Market Investment Account,
which reduced the total of that account to $17,500,000, exclusive of the
Treasury notes held temporarily for the Federal Reserve Bank of St. Louis,
the amount of which has been reduced to $6,000,000 by the repurchase of
$3,500,000 by the St. Louis Bank.
"When your letter was read to the Board, it noted particularly
your advice of the acquisition of a block of acceptances maturing within a
week, which because of their early maturity are being held in your own port¬
folio rather than apportioned among the other reserve banks. This trans¬
action undoubtedly accounts for the substantial increase in the bill holdings
of the System shown in the May 2nd statement, and the Board would be inter¬
ested in learning of the circumstances which surrounded the purchase,
including advice as to from whom the bills were acquired. It would be
appreciated if you would write me fully regarding the matter.11
On May 1 the directors of the Federal Reserve Bank of Philadelphia
again voted and the Board disapproved the establishment of a rediscount
rate of 6 per cent. Similar action was taken the following day regarding
the rate of the New York Bank.
Reply of New York Bank, May 6. The Board's inquiry of the New York
Bank,, above referred to, was answered in the following letter, dated May 6,
from the Deputy Governor of the Bank:
"I have your letter of May 4 requesting information regarding our
recent operations in bills which resulted in the substantial portfolio




-306increase reflected in the statement of May 1.
"The published statement for the System showed an increase during
the week ending May 1 of $29,000,000, of which about $26,000,000 occurred in
New York. Of the $26,000,000, $l6,000,000 was an increase in sales contracts,
$9,000,000 of the balance was an increase in bills bought outright maturing
within fifteen days, and there was an increase of about $1,000,000 in bills
bought running over ninety days. The circumstances which led to these
increases were:
1
1

(1) The sale to the market on April 29 by one of the largest

private banking houses of between $19,000,000 and $20,000,000 of bills
maturing within thirty days which the house had carried for some weeks or
months. The Discount Corporation, which made the purchase, informed us that
the house was selling the bills in preparation for May 1 disbursements.
Under the conditions then existing in the money market, it was necessary for
the Discount Corporation to come to us for the bulk of the money required to
take over that parcel. This we supplied by buying outright about $7,000,000
of the bills, which would mature on or before the 8th of May, and by buying
under sales contract an additional $10,000,000 of them.
"(2) Further increases in sales contracts were made necessary by
the difficult condition of the money market which caused loans to discount
houses against bills to be called over the end of the month, and also by a
considerable increase in the volume of new bills offered to the market with
a coincident slackening of the investment demand.
"The third reason for our considerable increase was the discount
with us by some of our foreign correspondents of about $7,500,000 of bills
during the week, most of which were very short but a million or more of which
ran over ninety days. These were practically all for German account and had




-307to be taken into our portfolio rather than sold in the market or distributed
among the other reserve banks because they were indorsed directly to us by
our correspondent who had bought them abroad and previously had remitted
them to us for collection.
"Since April 24, when dealers1 portfolios were $35,000,000, they
had increased by May 1 to $53,000,000, and today will probably run to
$65,QOO,OOO. During this two weeks period, which followed a lull in the
issuing of new bills, resumption of grain exports has brought a large volume
of new thirty day bills into the market for which there is little investment
demand as compared with the ninety day maturities which are relatively
scarce and for which a good demand exists. This has brought about a con¬
dition new to this market and the dealers advanced the rates on short bills
considerably above the rates at which ninety day bills are bought and sold.
In these conditions we can buy and have bought today for our foreign corre¬
spondents in replacing maturities thirty day bills at51/2%as against51/4%
the best rate at which we could buy nineties. We rather expect that a few
days of our buying short bills for foreign banks will relieve the market of
the over supply of short maturities and permit dealers to accumulate a
moderate amount of ninety day bills; and if the volume of nineties increases
substantially we would expect the rates for them to go us to51/2%where they
were until April 21 when dealers reduced their rates to attract bills for
which there was an insistent investment demand,, principally on account of
foreign banks ' buying through their correspondents in America. It looks to
us as if the volume of new drawings might equal if not exceed expiring
credits as with the advancing costs of other methods of financing there
seems to be a shift from bank loans into acceptance credits, notably against
warehoused cotton and in automobile exports, as well as the grain movement




-308"which is now substantial from the Argentine.
"I trust that the above gives you a clear picture of the discount
market of the past two weeks, during "which time money has been much in de¬
mand at rates which have ranged from 10 to 16% since April 25."
(Secretary's Note: The Federal Reserve Bank of Kansas
City, on May 6, with the approval of the Board, es¬
tablished a rediscount rate of 5 per cent, leaving
only two banks, Minneapolis and San Francisco with a
rate of 4~l/2 per cent,)
Under date of May 3 and 6 the Deputy Governor of the Federal
Reserve Bank of New York reported increases in bill rates by dealers in
New York City, but stated that the Federal Reserve Bank did not expect to
increase its rates at the time.
On May 9 the Board again disapproved action of the directors of
the Federal Reserve Bank of New York in voting to establish a rediscount
rate of 6 percent.
(Secretary's Note: The Federal Reserve Bank of
Minneapolis, on May 14, "with the approval of the
Board, increased its rediscount rate from 4-1/2
per cent to 5 per cent)
Letter from New York Bank to Board, May 14. Under date of May 14,
the following letter was addressed to the Board by the Deputy Governor of
the Federal Reserve Bank of New York:
"There has been no change in the holdings of Government securities
in the System Account since my letter to Mr. Platt dated April 30, 1929,
aside from the repurchase by the Federal Reserve Bank of St. Louis of
$3,000,000 of short-term Governments which were temporarily taken over in
the System Account, the holdings in the latter now being $20,500,000
inclusive of a further balance of $3,000,000 belonging to the St, Louis
bank. .




-309-

On May 15, action of the directors of the Federal Reserve Banks
of Boston and Philadelphia in voting to establish rediscount rates cf 6
per cent was taken under review by the Board.
On May 16, action of the New York directors in establishing a rate
of 6 per cent was disapproved, and the action of the Boston and Philadelphia
directors was continued under review.
The following day the Board took under review similar action by
the Executive Committee of the Federal Reserve Bank of Chicago.
(Secretary's Note: Effective May 20, the Federal
Reserve Bank of San Francisco, the last bank main¬
taining a rate of 4-l/2 per cent, increased its rate
to 5 per cent.)
Letter from New York Bank to Boards May 21. Under date of May 21
the following letter was adressed to the Board by the Deputy Governor of
the New York Bank:
"There has been no change in the holdings of Government securities
in the System Account since I wrote you last on May 14, 1929, the amount
held being $20,500,000, inclusive of the balance of $3,000,000 belonging
to the Federal Reserve Bank of St, Louis. . • • "
Memorandum of Federal Advisory Council on discount rate action.
On May 21 the Federal Advisory Council met and adopted the following memorandum which was submitted to the Board with authority to release to the
press:
"The Federal Advisory Council at a regular meeting with the Federal
Reserve Board on Tuesday, May 21st, delivered the following memorandum of
its views on the credit situation, which it authorized the Federal Reserve
Board to release:




-310nt

The Federal Advisory Council has reviewed carefully the credit

situation. It continues to agree with the view of the Federal Reserve
Board expressed in its statement of February 5, 1929, that "an excessive
amount of the country's credit has been absorbed in speculative security
loans."f The policy pursued by the Federal Reserve Board has had a bene¬
ficial effect due largely to the loyal cooperation of the banks of the
country. The efforts in this direction should be continued. The Council
notes, however, that while the total amount of Federal Reserve credit being
used has been reduced, "the amount of the country's credit absorbed in
speculative security loans" has not been substantially lowered.
"Therefore, the Council recommends to the Federal Reserve Board
that it now grant permission to raise the rediscount rates to six per cent
to those Federal reserve banks requesting it, thus bringing the rediscount
rates into closer relation with generally prevailing commercial money rates.
The Council believes that improvement in financial conditions and a conse¬
quent reduction of the rate structure will thereby be brought about more
quickly, thus best safeguarding commerce, industry, and agriculture.
Further consideration of increase in discount rate. Mr. McGarrah
and Governor Harrison, who were present at the meeting of the Federal
Reserve Board on May 22, discussed with the Board in detail the general
business and credit situation and the question of an advance in the rate
of the New York Bank.
Mr. McGarrah pointed out that an advance in the discount rate to
6 per cent is part of a machinery which the directors of the New York Bank
would like to put in operation for the purpose of gaining control of the
money market with a view to relaxation of the pressure which has been upon
the market in time to meet the demands for credit in connection with the




-311moving of crops and fall business.
In reply to an inquiry as to the program which the New York Bank
might follow, Mr. Harrison pointed out that at the present time member
banks in New York City are very reluctant, due to the policy of direct
action, to borrow from the Federal Reserve Bank for any purpose, preferring
to pay as high as 7 per cent for Federal Reserve funds on the outside;
that with the establishment of a rate of 6 per cent there could be an
understanding between the Federal Reserve Bank and its member banks that
at that rate, which would exercise some restraint, the member banks might
come to the Federal Reserve Bank for assistance in meeting commercial
demands upon them; that after watching developments toward the end of the
summer it might be possible to enter upon an easing program through the
purchase of securities, bills or foreign exchange, whichever might be
considered most advisable,, with the hope ultimately of reducing the rate,
without stimulating speculation as would probably occur should a program
of relaxation be undertaken under the present setup.
On May 23, at the time consideration was being given to action of
the New York directors in again voting to establish a 6 per cent rate,
certain members of the Board expressed the opinion that the policy which
had been pursued by the System had been effective, as evidenced by the
existing credit situation,, but questioned whether the relaxation which
should be brought about to facilitate the meeting of fall demands for
credit would be aided by an increase in rate, particularly outside of
New York City# The suggestion was made that a rate of 6 per cent might
be justified if some plan could be worked out looking toward the establish¬
ment of a rate on acceptances of 5 per cent or even 4-l/2 per cent during
the fall to meet current requirements for business and crop-moving. The




-312action of the New York directors was disapproved, and, at the same time,
the Governor was authorized, until such time as the majority of the Board
changed its position, to take under review or disapprove any rediscount
rate of 6 per cent established by a Federal Reserve bank,, whichever might
be preferred by the individual bank taking the action. Under this authority,
action of the directors of the Chicago Bank on May 24 was taken under review.
Letter from New York Bank to Board, May 28. Under date of May 28
the following letter was addressed to the Board by the Deputy Governor of
the New York Bank:
"I wrote you last on May 21, 1929, since which time there has been
no activity in the Open Market Investment Account, the amount of the Government securities held remaining at $20,500,000o . . "
Further discussion of discount and buying rates. At the meeting
of the Board on May 28 there was discussion with respect to the acceptance
market and the question of bill purchases should it be determined to
pursue a policy of relaxation in dealing with credit conditions• It was
pointed out that if dealers were advised that the Federal Reserve bank was
in the market for bills, offerings might be received at existing rates. It
was suggested that otherwise buying rates might be reduced with the under¬
standing, of course, that restraint through a change in rate or otherwise
would be exercised if a tendency developed to bring too many bills to the
Federal Reserve bank. Some members of the Board favored a policy of
relaxation through bill purchases along with the maintenance of the present
rediscount rate, while others expressed the opinion that if a policy could
be agreed upon, an increase to 6 per cent in the rate of some of the
Federal Reserve banks might be justified.




At the same meeting it was voted to continue under review action

-313of the directors of the Federal Reserve Bank of Boston in voting to es¬
tablish a rate of 6 per cent, reconsideration of the matter having been
requested by the Boston Bank.
The next day, May 29, following a meeting of the directors of the
Federal Reserve Bank of New York, it was reported to the Board that the
directors had decided not to take action regarding the rate of the bank,
feeling that the credit situation was at a point where any action taken
must be by the System as a whole.
On that date the earning assets of the System totaled $1,259,000,000,
including $145,000,000 of securities, $118,000,000 of bills bought in the
open market and $988,000,000 of rediscounts.
Meeting between Board and New York Bank Representatives on Discount Rate
and Administration of Discount Mechanism, June 5.
Letter from New York Bank to Board, May 29. On June 1, 1929 the
Board voted to extend an invitation to the directors of the Federal Reserve
Bank of New York to meet in conference with the Board in Washington at as
early a date as may be convenient to them, or, should it be impracticable
for the New York directors to come to Washington as a board, to appoint a
committee for the purpose. This action was taken after consideration of
the following letter dated May 31, from the Chairman of the New York bank,
prepared as a result of deliberations at the directors meeting held on
May 29:
"It is the belief of the directors of this bank that the Federal
Reserve Board policy of seeking the control of credit Without an increase
in the discount rate and otherwise as generally understood, has created
much uncertainty throughout the country, and that the bringing of the Federal
Reserve Board and this bank into harmony with respect to a program which




-314will remove uncertainty is essential to the restoration of confidence and
the development of a situation where a relaxation of credit in the interest
of the country as a whole may be more quickly permitted. They believe that
at the moment the agreement upon a mutually satisfactory program is far more
important than the discount rate.
"For months the directors of this bank have voted a rate which they
have regarded as one that would be a more effective rate and that would more
quickly make lower rates possible. Their action has been disapproved by the
Federal Reserve Board. In view of recent changes in the business and credit
situation, we believe that a rate change now without a mutually satisfactory
program might only aggravate existing tendencies•
"With this in view, and in the interest of trade, industry, and
agriculture, we believe that it may soon be necessary
"(1) To establish a less restrictive discount policy in order
that member banks may more freely borrow for the proper conduct of their
business.
"(2) To correct the widely understood intimation of the Federal
Reserve Board that collateral loans are not a proper function of legitimate
banking.
"(3) To be prepared to increase the Federal Reserve bank portfolios
if and when any real need of doing so becomes apparent.
"These steps may be necessary in order to restore business confi¬
dence, permit of the reopening of a bond market, and to make funds more
freely available to finance our export trade, especially in agricultural
products at the time of crop movement.
"Whether all this can safely be done without a firm rate control
policy we are prepared to discuss, but a longer discussion as to the discount




-315rate without a real understanding regarding a future program we regard as
futile. Our directors, therefore, refrain from rate action ±n the hope
that a general policy in which both we and the Board can concur may be
quickly determined.!!
On June 3 action of the Executive Committee of the Federal Reserve
Bank of Chicago in voting to establish a 6 per cent rate was taken under
review.
Discussion. At the meeting of the Board on June 5, Messrs.
McGarrah, Mitchell, Reyburn and Treman, directors of the Federal Reserve
Bank of New York, and Governor Harrison were present.
Mr. McGarrah referred to the action of the directors of the Federal
Reserve Bank of New York at their meeting last Wednesday in not making the
recommendation of an increase in rate, which they have made regularly during
the past several months, and in addressing a letter to the Board regarding
the credit situation, containing a suggestion that further discussion as
to the discount rate without an understanding regarding the future program
of the System is futile. He stated that the New York committee has come to
Washington in response to the invitation extended by the Board, with the
idea that the Board may have some suggestion to make as to what the future
policy should be.
The members of the New York committee and the Board then engaged in
a detailed discussion regarding the present and prospective credit situationj
the probable desirability of some relaxation in Federal Reserve credit policy
in the near future and the method by which such relaxation could best be
accomplished. Members of the New York committee pointed out that the action
of the directors at their last meeting in making no recommendation for an
increase in discount rate should not be understood to indicate any change in




-316their attitude as to the policy which should have been followed by the
System during the past several, months, but as an effort to reach a common
ground with the Board on the basis of which to consider future policy.
Members of the Board indicated that should any program decided upon for
the immediate future include some easing in the policy of direct action,
that should not be construed as an abondonment of the policy but merely a
suspension of its strict application in the interests of the general credit
situation.
Mitchell's views. Near the conclusion of the discussion, Mr,
Mitchell outlined his views, as follows, from a pencil memorandum which he
had prepared during the discussion and the Chairman suggested that a copy
of the memorandum be left with the Board:
"1 #

Facts clearly indicate the necessity for

(a) An increase in security borrowing between now and July 10.
(b) An increase in agricultural borrowing in the late summer.
(c) Readjustment, of credits over July 1 by reason of dividend
interest and currency requirements and by reason of the proverbial window
dressing that will create a heavy strain especially in New York.
"2. All this points to the definite necessity of increased redis¬
counting of member banks, and if such rediscounts become so excessively
large as to unduly tighten the banking system, then such relief must come
through some release of Federal Reserve credit, through the purchase of
bills, or government securities, or both.
"3.

If such increase in rediscounts and Federal Reserve portfolios

leads to an undue increase in loans either through giving an incentive to
security speculation, land speculation, trade inventory speculation or
agricultural product speculation, then a rate increase is justified, perhaps
several increases with always a willingness to reduce rates as easier




-317conditions justify.
"

4.

This will involve a change of Reserve policy that should "be

publicly understood but it must be made clear to the country, not through
an announcement indicating that the desired goal of the Reserve Board has
now been reached and the deduction made by the public that 'the lid
is off ! , but an announcement that the Federal Reserve
Board and the Banks are now in accord regarding facts and future program
and indicating that the Reserve System will during coming months, express
itself through the rediscount rate - always working toward the goal of sound
business, sound banking and ultimate ease of credit."
Communication's on Open Market Operations and Discounts and Discount Rate
Policy, June - Early August 1929.
Letter from New York Bank to Board, June 5. On the same date,
June 5, the following letter was addressed to the Board by the Deputy
Governor of the New York Bank:
"The changes in the Open Market Investment Account since May 28,
1929, the date of my last letter to you on this subject, have been as
follows:
"We have taken over temporarily, from the portfolio of the Federal
Reserve Bank of St. Louis, $7,125,000 of Liberty Loan and Treasury bonds,
and from the Federal Reserve Bank of Kansas City $5,000,000 of 4% Trsasuiy
bonds. The Federal Reserve Bank of St. Louis wished to be relieved tempo¬
rarily of its Government security holdings, due to the special demand
which it has at this season of the year. Kansas City, owing to its low
reserve position, wished to sell its individual holdings of Government
securities which amounted to $7,755,700. of this amount, $2,755,700 was
sold in the market, but as the long-term Government security market has




-318been in a rather demoralized condition it has not been feasible to make an
immediate sale of these bonds. In order to provide the Kansas City bank
with the funds desired, this $5,000,000 has temporarily been taken over
into the System Account for sale as and when market conditions will
p e r m i t L e t t e r from New York Bank to Boards June 11. Under date of June 11,
the Board received the following letter from Deputy Governor Case:

"There have been two changes in the Open Market Investment Account
since the date of my last letter to you on this subject, June 5, as follows:
"The sale of $3,000,000 of United States Treasury 4% bonds recently
taken over into the Open Market Investment Account from the Federal Reserve
Bank of Kansas City for sale to the market as opportunity affords; and the
taking back by the Federal Reserve Bank of St. Louis of $2,125,000 of
Government securities which were temporarily held for that bank in the
System Account. These transactions will bring the holdings in the account
down to $27,500,000 as against $32,625,000 a week ago.

"

Letter from Board to New York Bank on discount policy, June 12.
At the meeting on June 11 the Board discussed in detail credit conditions
and the policy which should be pursued by the Federal Reserve System during
the ensuing months. Messrs. Miller and Cunningham submitted memoranda of
their personal views on the subject which were referred to a special
committee, consisting of the Governor and Mr. Cunningham, with the request
that it endeavor to work out an outline of a future policy for submission
to the Board at a meeting within the next few days. This committee reported
at a meeting of the Board on June 12, with the result that the following
letter, addressed to the Chairman of the board of directors of the Federal
Reserve Bank of New York was approved for personal presentation by the




-319Governor and Mr. Cunningham:
"The Federal Reserve Board has given further consideration to the
question of future program. The Board thoroughly realizes that many factors
now unforeseen may enter into the credit situation during the coming months.
However, it believes that at the moment there is a possibility of carrying
out a program for the future months without an immediate raise in the discount
rate or, at this writing, easing the situation either by the purchase of
bills or Government securities.
"Therefore, in an effort to develop a mutually satisfactory program,
the Board suggests the following for your consideration, with the hope that
no unforeseen developments will occur which will prompt anyone to change his
position:
"Since February the policy of the Federal Reserve System has
expressed itself primarily through what is called 'direct action1 and this
position was taken deliberately by the Federal Reserve Board, To this
position it holds fast. It is satisfied with the reasonableness of its
policy and with its necessity, even though the methods and degree of appli¬
cation may be controversial.
"The Board, after a careful review of the credit situation finds
that the increased demand for credit to meet mid-year requirements and also
the credit demands for early autumn will probably require member banks to
increase their rediscounts at the Federal reserve banks. This situation will
be better served by a temporary suspension of a rigid policy of direct
pressure, which, however, should not be abandoned, but rather tempered in
order to permit member banks that have not found it practicable to read¬
just their position in accordance with the Boardls principle, to avail
themselves of the rediscount facilities of the Federal reserve banks for the




-320purpose of avoiding, as far as possible, any undue strain or any unnecessary
increase in the cost of credit in meeting the seasonable needs of agriculture, industry and commerce.
1
1

If such rediscounts become excessively large so as to unduly

tighten the credit situation to a point where it acts as a deterrent to
business and there are no other unsatisfactory factors in the situation,
relief should be given through some release of Federal reserve credit,
preferably through the purchase of bills, but if it should appear at the
time that such relief is not adequate or practicable, then, the Federal
Reserve Board would be glad to give consideration to supplementing the
relief through the purchase of short-time Government securities.
"In suggesting this program for the future months, the Board is not
unmindful that a limited number of member banks may expand undesirable loans
upon Federal reserve credit to a point which would not be justified by
conditions and circumstances surrounding these institutions, and in such
cases the Board would expect the Federal reserve banks to resort to the
usual direct action.
"Again, if such increase in rediscounts and Federal reserve port¬
folios leads to an undue increase in loans having the earmarks of unsound
banking practice in any great number of member banks where direct action
can not be applied simultaneously and quickly enough to protect the general
credit situation, the Board would be glad to consider other corrective
measures.
tf

The Board would be glad to hear the views of your directors after

they have considered this outline."
Letter from New York Bank to Board on discount and discount rate
policy, June 13« At the meeting of the directors of the Federal Reserve




-321Bank of New York on June 13, the Board!s letter was presented by the
committee, "which, upon its return to Washington, presented to the Bcard at its
meeting on June 14 the folio-wing letter signed by the Governor of the bank:
ff

Our directors have considered with interest the report of the dis~

cussion which some of them had with the Federal Reserve Board on June £,
relative to a possible program to handle present and prospective credit
problems.
"In the face of conditions as they now appear, it seems likely
"(a) That there will be an increase in security borrowing through¬
out the country between now and the early part of July.
1
1

(b) That there will be a large readjustment of credit over July 1

by reason of interest, dividend and currency requirements and by reason of
window dressing, that may create a heavy strain upon the banks in financial
centers, especially in New York.
1
1

(c) That there will be an increase in agricultural borrowing as

the summer advances.
"with these facts in mind the directors^ as they now view the
situation, believe in a general way
"(a) That there will be a necessity for an increase in the re¬
discounts by member banks in this district and that member banks must be
permitted to borrow from the Federal Reserve Bank for the proper conduct of
their business, regardless of the fact that they may have substantial amounts
of collateral loans outstanding.
"(b) That it rediscounts required by the conditions above referred
to become so large as to cause an undue credit strain then the Federal
Reserve Bank might well be prepared, if necessary, to give temporary relief
through open market operations in bills,, government securities, or both as




-322the occasion warrants.
"(c) That if for any reason, whether through the release of
additional Federal reserve credit through rediscounts, or through possible
later open market operations, or for any other reason, there should be
renewed evidence of an excessive demand for credit, due to speculation in
securities or to speculation in land, building, trade inventories, or
commodities, then the remedy of increased discount rates should be applied
promptly and vigorously in the interest of sound banking and the ultimate
ease of credit.
"(d) That any such rate increase or increases, if required should
of course be made only with the expectation that rates will be reduced as
promptly as conditions permit.
"Our directors feel that it is difficult, if not impossible, defi¬
nitely to lay out any very specific credit program much in advance inasmuch
as such a program might necessarily have to be changed in accordance with
conditions as they develop. They believe, however, that if the above steps,
designed to take care of mid-year and seasonal needs, are taken without the
protection of a higher discount rate, such as they have felt would have
been desirable in order more quickly and safely to permit of relaxation in
credit conditions, the System must then be prepared to resort to immediate
rate action in the event of the possibilities pointed out above.
"This letter will in substance confirm what I told you on the
telephone on June 10, 1929, concerning the views of our directors."
The Governor reported that during his visit in New York, he learned
the buying rate of the bank on 30 day bills was considered to be somewhat
out of line with the market but that inasmuch as the New York bank was not
getting many bills, and had no objection to accumulating some, no action




-323had been taken to change the rate.
Letter from New York Bank to Board, June 19. Deputy Governor Case
wrote the Board under date of June 19 as follows:
"The total holdings in the Open Market Investment Account have
shown a further reduction since I wrote you on June 11. During the week
a sale was made to the market of the balance of $2,000,000 of the $5,000,000
United States Treasury 4% bonds of 1944-54 which had been taken over
recently into the Open Market Investment Account from the Federal Reserve
Bank of Kansas City, There was also sold back to the Federal Reserve Bank
of St. Louis, from the securities which we were holding, $3,000,000 of the
3-1/2% Treasury notes due March 15, 1930-32. These transactions left the
total holdings in the account at $22,500,000, as compared with $27,500,000
a week ago. Included in the present holdings is the $5,000,000 of Fourth
Liberty Loan bonds9 representing the balance of the securities still being
held temporarily for the Federal Reserve Bank of St. Louis.

..."

Letter from New York Bank to Board on discount policy, June 20. At
the meeting of the Board on June 20, Governor Young suggested the desirability
of acquainting the Federal Reserve banks with the attitude of the Board in
the matter of the credit policy to be followed by the System during ensuing
months, particularly in connection with the fall demands for the movement
of crops, as set out in the letter to the Chairman of the Federal Reserve
Bank of New York, approved at the meeting of the Board on June 12. He
also suggested a conference with the Governors of the Federal Reserve banks,
the advisability of which was questioned by some of the members of the Board,
although all were in agreement that the Federal Reserve banks should be
advised of the attitude of the Board as expressed in the letter to the
Federal Reserve Bank of New York.




-324A letter to all Federal Reserve banks, calling a conference in
Washington on July 10, was approved at the meeting on June 21, at which
consideration was also given to the following letter from the Chairman of
the Federal Reserve Bank of New York, dated June 20:
"I have received your letter of June 14, enclosing your letter of
June 12, which you read to our directors last week for the purpose of giving
them an opportunity to state their views.
"Quite apart from its discussion of an immediate credit policy such
as that outlined in our letter of June 12, your letter raises certain
questions of principle and jurisdiction concerning which our directors
expressed their opinions when you presented your letter orally. For reasons
which they gave you at that time their views on these questions quite
evidently differ from those of the Federal Reserve Board. They feel,
however, that as important as these questions are for the future, it would
seem to be better to leave them for consideration as and when they arise
than to attempt to discuss them further now at the risk of prejudicing an
immediate course -of action which our directors and the Federal Reserve
Board apparently agree should be followed at the present time in the best
interests of agriculture, industry and commerce.
"The Board is already familiar with the views of the officers and
directors of this bank with regard to the relative positions which the dis«count rate and so-called direct action should play in Federal reserve credit
policies. The important fact now, it seems to us, is that the Board's
letter of June 12 and our letter of the same date to the Board, agree in
substance as to the immediate course to be pursued, a course which neces¬
sarily involves some modification of the Board's policy of direct action
of the past few months in order that member banks might rediscount with the




-325Federal reserve bank to meet nid-year requirements and the demands for
credit during the late summer and early fall,11
Letter from Board to Reserve Banks on discount policy , June 24. As
a result of this consideration, it was deemed unnecessary to hold a confer-*
ence at as early a date as July 10 and at the meeting on June 24, the
proposed letter to all Federal Reserve banks was ordered transmitted in the
following form:
"Conditions in the different Federal Reserve districts as they
affect the prospective need of Federal Reserve accommodation in the autumn,
particularly such as is incidental to the handling and marketing of the
crops, appear to the Board to merit some general as well as local consider¬
ation,
t!

It is, of course, realized that any survey of conditions and needs

made at this time must be of a tentative and provisional character. It,
nevertheless, seems to the Board that a preliminary canvass of the situ,
ation, both in its local and general aspects, can soon profitably be under¬
taken.
"These matters have been having the attention of the Board, and
in informal conference and recent correspondence with the Federal Reserve
Bank of New York the Board outlined its attitude as follows:
"tSince February the policy of the Federal Reserve System has
expressed itself primarily through what is called "direct action" and this
position was taken deliberately by the Federal Reserve Board, To this
position it holds fast. It is satisfied with the reasonableness of its
policy and with its necessity, even though the methods and degree of appli¬
cation may be controversial,




" ! The Board, after a careful review of the credit situation, finds

-326that the increased demand for credit to meet mid-year requirements and also
the credit demands for early autumn will probably require member banks to
increase their rediscounts at the Federal reserve banks. This situation
will be better served by a temporary suspension of a rigid policy of direct
pressure, which, however, should not be abandoned, but rather tempered in
order to permit member banks that have not found it practicable to readjust
their position in accordance with the Board's principle, to avail themselves
of the rediscount facilities of the Federal reserve banks for the purpose
of avoiding, as far as possible, any undue strain or any unnecessary in~
crease in the cost of credit in meeting the seasonal needs of agriculture,
industry and commerce.
"If such rediscounts become excessively large so as to unduly
tighten the credit situation to a point where it acts as a deterrent to
business and there are no other unsatisfactory factors in the situation,
relief should be given through some release of Federal reserve credit,
preferably through the purchase of bills, but if it should appear at the
time that such relief is not adequate or practicable, then, the Federal
Reserve Board -would be glad to give consideration to supplementing the
relief through the purchase of short-time Government securities.
"'In suggesting this program for the future months, the Board is not
unmindful that a limited number of member banks may expand undesirable loans
upon Federal reserve credit to a point which would not be justified by
conditions and circumstances surrounding these institutions, and in such
cases the Board would expect the Federal reserve banks to resort to the
usual direct action.
"tAgain, if such increase in rediscounts and Federal reserve port¬
folios leads to an undue increase in loans having the earmarks of unsound




-327banking practice in any great number of member banks where direct action
can not be applied simultaneously and quickly enough to protect the general
credit situation, the Board would be glad to consider other corrective
measures .'
"It probably will be desirable to call a conference in Washington
in the near future and, if so, the Board earnestly hopes that your board of
directors will be represented either by the Governor of your bank or an
alternate.
ff

By direction of the Federal Reserve Board.f!

Letter from New York Bank to Board, June 26. Under date of June 26,
the Deputy Governor of the Federal Reserve Bank of New York addressed the
following letter to the Board:
"Government security holdings in the Open Market Investment Account
have shown a reduction of $5,000,000 since June 19, representing that amount
of Fourth Liberty Loan bonds held temporarily for the Federal Reserve Bank
of St. Louis and taken back by them on June 20. This transaction brings
the total outright holdings in the Account down to $17,500,000, consisting
entirely of 3-1/2% Treasury notes due December 15, 1930-32. . • •"
Letter from New York Bank to Board, July 3. Under date of July 3,
Deputy Governor Case addressed the Board as follows
"There have been no changes in the Government security holdings in
the Open Market Investment Account since my letter of June 26, 1929, the
amount remaining at $17,500,000 and consisting entirely of 3-l/2% Treasury
notes due December l5, 193O-32. However, the individual holdings of one of
the banks were reduced, due to a sale to the Treasury by the Federal Reserve
Bank of St, Louis, of $3,000,000 March 15. 1930-32 - 3~l/2% Treasury notes
for account of Sinking Fund.




..."

-328Letter from New York Bank to Board, July 10. The Board received
the following letter from Deputy Governor Case, under date of July 10.
"Holdings in the Open Market Investment Account remain unchanged
at $17,500,000, consisting of 3-1/2 Treasury notes due December 15,
1930-32, since my letter of July 3, 1929. Moreover, the individual holdings
of this bank and the other Federal reserve banks also remain unchanged. • • ..'
Effective July 12 the Federal Reserve Bank of New York reduced its
open market buying rates to the following:
Bankers Acceptances:
1 to 120 days5-1/4%121 to 180 days
Repurchase
5~l/k%
Trade Acceptances
5~l/2%

5-1/2%

Letter from New York Bank to Board, July 17» On July 17,the
following letter was addressed to the Board by the Deputy Governor of the
New York Bank:
"There has been no change in the holdings of Government securities
in the Open Market Investment Account since my letter of July 10, the
balance remaining unchanged at $17,500,000, consisting of 3-i/2% Treasury
notes due December 15, 1930~32. The only change in the holdings in the
investment account of this bank is a small lot of $780,000 of short-term
certificates 'which we are holding temporarily, for resale to the Treasury.
• •"
Letter from New York Bank to Board, July 24. On July 24, Deputy
Governor Case wrote the Board as follows:
"The System Account shows no change since my letter of July 17,
1929, The amount of Government securities held in the account and con¬
sisting of 3-l/2% Treasury notes due December 15, 1930-32, remains at
$17,500,000. • . •"




-329Letter from New York Bank to Board, July 31. Under date of July 31
the following letter was received from the Deputy Governor of the New York
Bank:
"Since my letter to you dated July 24, 1929, there have been no
changes in the System Account holdings or in Government securities held in
our own investment account, the former remaining at $17,500,000 - 3~l/2%
Treasury notes due December 15, 1930-32, and the latter at $480,000 con¬
sisting of short-term certificates. . . ."
Discussions of discount rate policy, August 2-6. Governor Harrison
of the Federal Reserve Bank of New York was present at the meeting of the
Board on August 2. He discussed with the members of the Board in detail
the present credit situation in this country, as well as conditions abroad
and emphasized the effect of possible adverse foreign developments in this
country. Three courses, he stated, seem to be open to the Federal Reserve
System - (1) to adopt a policy of pressure reflected through sharp and
repeated rate advances; (2) to do nothing but maintain the present position,
or (3) to adopt a policy of relaxation "which would let Federal Reserve
credit out into the market as needed during the fall, if possible to do
so safely.
He expressed the opinion that the time has passed for the adoption
of a policy of higher rates as a part of a program of pressure or deflation
looking toward future easier money, and that the question now seems to be
whether the System can release funds necessary to finance fall requirements
and have a tendency toward a reduction of market rates, without stimulating
a new demand for speculative credit or over stimulating business development,
which now appears to be on a sound basis, but which might easily become
over expanded should our foreign markets be curtailed by a continuance of




-330present rates here and abroad.
He suggested an increase in the discount rate to 6 per cent as a
warning against the excessive use of credit, with a simultaneous reduction
in bill rates to attract acceptances and, possibly, purchases of securities
in the event the bill holdings of the System should not increase or increase
too slowly.
On August 6, at a meeting of the Board attended by Governor
Harrison and Governor Talley* reference was made to the discussion at the
meeting of the Board on August 2, and Governor Harrison reiterated briefly
his statements regarding the credit situation and possible future credit
policy. He stated he was unable to give the Board any expression of the
opinion of his board of directors, but two of those directors considered
the plan suggested by him at the meeting of the Board on August 2 the best
so far suggested for meeting the fall requirements, but the third made
inquiries as to the apparent inconsistency of an increase in rate with a
simultaneous policy of ease through purchases of bills or Governments.
Governor Talley expressed doubt that a special commodity rate
would be much availed of, even without a restriction as to the rate charged
customers on notes securing the preferential rate at the Federal Reserve
Bank. He stated that commodities generally do not rest long enough, except
at terminal points, to be used as collateral, so that the commodity rate
would become practically a special export rate available at terminal points
which already get preferential rates on this class of business.
A general discussion as to System policy during the coming months
then ensued. Various opinions were expressed but no consensus was arrived
at.




Letter from New York Bank to Board, August 7. Under date of

-331August 7, Deputy Governor Kenzel wrote as follows:
"In Mr. Case's absence I am writing to inform you of the happenings
in the Open Market Investment Account since his last letter to you, dated
July 31, 1929.
"While the regular holdings of Government securities remain un¬
changed, the Account will show a temporary increase due to the taking over
from the Federal Reserve Bank of St.Louis of all of the short and longterm Government securities, amounting to $13,625,000, held by them in their
portfolio. The St. Louis bank, due to increased re-discounting on the part
of member banks and their low reserve position which has resulted from such
re-discounting, desired to be relieved of these securities temporarily.
They were, therefore, taken over and distributed among other Federal reserve
banks who desired to participate, such distribution being made at the current
market prices with the understanding that they will be repurchased at the
same prices, unless disposed of in the meantime,

..."

Meeting of Board with Reserve Bank Governors and Increase in New York Bank
Discount-Rate«
Views of Board. On August 7, the Board met in joint conference
with the Governors of all Federal Reserve banks and at a meeting of the
Board on August 8, the discussion which took place at the joint meeting
was reviewed. The question of an increase in the rediscount rate of the
Federal Reserve Bank of New York as part of a plan to safely meet fall
credit requirements was the subject of further discussion, at the conclusion
of which an informal canvass indicated that a majority of the members
present would give favorable consideration to action of the directors of the
Federal Reserve Bank of New York establishing a discount rate of 6 per cent,
if coupled with a policy of acquiring bills to the extent necessary to meet




-332fall credit requirements."
Report of Governors. The Board again went into session with the
Governors of the Federal Reserve banks and received the following report
which had been adopted by them:
"It is the judgment of the Governors that the demand for increased
credit incident to the autumn requirements of crop moving and business
should be met, so far as possible, by an increase of the bill portfolio of
such banks as care to participate in bill purchases.
M

The Governors are also of the opinion that this procedure can

best and most safely be undertaken, and with least risk of abuse in the use
of Federal reserve credit, under the protection of an effective discount
rate in the New York district.
"They are further led to this conclusion by the expressed belief
that an increase in the discount rate of the Federal Reserve Bank of New York
would necessitate increases in few, if any, of the other Federal reserve
banks during the period of seasonal business demandj and the desire of the
directors and officers of all other reserve banks to avoid increases, if
possible. It is, therefore, recommended that the Reserve Board act favorably
on any application that may be made by the Federal Reserve Bank of New York
for an increase in its existing rate."
Changes in New York Bank discount and buying rates. Following
this Joint meeting, advice was received from the Federal Reserve Bank of
New York that the directors of that bank had voted to establish a re¬
discount rate of 6 per cent, subject to the approval of the Board, and to
reduce from 5-1/4 per cent to 5-1/8 per cent the minimum buying rate on
acceptances. The rate of 6 per cent established by the New York directors
was approved after the Board had voted to adopt the report received from the




-333Governors as a basis of Federal Reserve policy during ensuing months.
On August 8 a statement was issued to the press as follows: "The
Federal Reserve Board and Governors of Federal reserve banks have been in
conference during the past two days and have considered how resources of the
Federal Reserve System might best conserved and made available to meet
autumn requirements. The problem has presented difficulties because of
certain peculiar conditions, A mutually satisfactory plan has been developed."
The following day the Board noted with approval the open market
rates established by the New York Bank:
Bankers Acceptances:
1 to 120 days
121 to 180 days
Repurchase
Trade Acceptances

5—1/8%
5-1/2%
5-l/8%
6%

Letter from New York Bank to Board, August 14. On August 14
Deputy Governor Kenzel wrote the Board as follows:
"There has been no change in the holdings of Government securities
in the Open Market Investment Account since I wrote you last on August 7,1929,
the total remaining at $31,125,000, inclusive of the $13*625*000 taken over
temporarily from the Federal Reserve Bank of St, Louis.
"Due to the condition of the Government security market, we are
still carrying a fairly large amount for dealers under sales contract, the
total at the close of business today being $26,985,000 against $29,810,000
on August 7, 1929.
"Coincident with the change in our rediscount rate, the prices of
both long and short-term Government securities took a sharp drop. There
has, however, been a good recovery within the past few days and while




-334Liberty and Treasury bond prices are still somewhat lower than a week ago,
the short-term issues are strengthening daily and at this writing are at
practically the same levels as they were last week. This is due chiefly
to easier money, although there has been some demand for the shorter issues,
principally the 3-l/2% Treasury notes of 193O-32. It looks as if the
greater part of this represents accumulation for payment of foreign debt.
"The bill market this week has received slightly larger amounts of
new bills than a week ago, which is seasonal, represented chiefly by grain
bills which are appearing in moderate volume against grain in storage, as well
as some wheat export bills.
"The figures in the dealers portfolios tonight will show a rather
substantial increase, which is more apparent than real, the explanation
being that we have sold to the market for account of a foreign correspondent
$16,000,000 of short bills which, by arrangement with the dealers, we will
carry under sales contract for the most part until the maturity of the bills.
We were able to sell these at 5 and 5-l/l6%, giving our correspondent
the bills under sales contract. We also bought on Monday from another
foreign correspondent about $5,000,000 of bills -which will all have matured
by next Monday.

"We will also be carrying tonight about

$14,000,000 of bills

bought from the market in excess of our actual requirements to replace
maturities for foreign accounts, so making provision in anticipation of the
very large maturities which we shall have to replace for them within the
next few days. These transactions, which are temporarily in our bill
account, together with about $8,000,000 of bills which we bought for System
account but which are coming in today and will be in our portfolio over




alittle

-335tonight less some reductions on sales contracts here, will, we estimate,
make the System's published figures show an increase in bills purchased
over last week of between $30,000,000 and $35,000,000, approximately
$18,000,000 of which was involuntary, being the balance of bills sold by
our foreign correspondents which we are carrying in one way or another•
"This is as much as I have cared to increase the System account
this week and I have done it in a way which will permit a considerable normal
reduction within the next few days through the application of the bills held
in suspense to foreign requirements instead of making new purchases and in
the run-off of bills held under sales contract that were sold by our foreign
correspondents, if it should seem that we have been liberating funds a little
too quickly. But at the present writing it looks to me as if our easing in
rediscounts has resulted much more from heavy transfers of funds to New York
which, I understand, were occasioned to a considerable extent by stock
market margin requirements at the end of last week.11
Motion of Board on establishment of buying rates, August 15. At a
meeting of the Board on August 15, Governor Harrison and Deputy Governor
Kenzel were present and Governor Harrison discussed with the Board the
question of possible purchases of sterling exchange. The question of es¬
tablishment of bill rates was also discussed and a motion was adopted as
follows:
"That in the absence of a quorum of the Board the Executive
Committee, or in its absence, the Executive Officer of the Board be author¬
ized to approve effective buying rates within the limits of a five per cent
minimum and the five and one-half per cent maximum excepting the Federal
Reserve Banks of Dallas and Atlanta were four and seven-eighths per cent and
four and one-half per cent rates are now in effect on short maturities and




-336the Federal Reserve Bank of Richmond, where a rate of five and five-eighths
per cent has been established on long maturities, such rates applying to
bills originating in the respective districts."
Communications on Open Market Operations and Related Matters, Mid-August Mid-September 1929.
Letter from Harrison to Board on operations in bankers' acceptances,
August 16. Under date of August 16, Governor Harrison forwarded to the
Board a copy of the following letter addressed to the Governors of all
other Federal Reserve banks:
"With the published statement of the System out today, reflecting
the changes after the first week's operations under the increased rediscount
rate at this bank, I thought you might be interested in some explanation
of our market operations during the week.
"It was our thought that during the week our open market purchases
of bills should be about $25,000,000, and that we should observe what
effect that would have upon our rediscounts. In our operations we actually
went somewhat beyond the $25,000,000 to about $35,000,000 increase in the
bill portfolio, largely because of the fact that we were called upon by
two of our foreign correspondent banks to dispose of about $21,000,000 of
short bills. This had the effect of increasing our sales contracts almost
by that amount. These transactions account for this week's reduction of
Contingent Liability in the published statement. Several millions of the
bills sold for foreign account have already run off and most of the balance
will mature during the next two weeks. The balance of the increase was
made through purchases anticipating for a few days the requirements of our
foreign correspondents for reinvestment of their maturities, which are very
heavy during this month.




-3371
1

It was by reason of these transactions that the increase in bill

portfolio for the System was confined largely to this bank and the reduction
in our discounted bills was doubtless larger on that account than it would
otherwise have been. It is interesting that the combined figures of the
System show that the reduction of total bills discounted, i.e., $36,000,000
was nearly equaled by the net increase in bills and Governments of
$35,000,000. The reduction in discounts at this bank of about $99,000,000
exceeds the net reduction in the System's discounts by some $63,000,000.
It would be interesting to learn whether the shift in the location of re¬
discounts represents to any extent a shift of borrowings from New York to
other districts on account of our higher rate or whether in part it may
represent transfers of funds to New York to protect market margins, or
whether it is merely an accentuated seasonal movement. Of course, transfers
in this direction are not unusual for this time of month.
"It is our present purpose to proceed very cautiously in volumtarilj increasing the bill portfolio, if indeed any further net increase
may be made during this week, or until the seasonal increase in volume of
bill credit becomes more important than is now apparent.11
Letter from Harrison to Board on authorization for purchases of
sterling, August 16. On the same date Governor Harrison also addressed
the following letter to the Board:
f?

In further reference to our conversation of this afternoon and

merely to repeat in brief some of the long discussion which I had with the
Federal Reserve Board yesterday regarding our possible purchase of sterling,
I want to confirm that our directors yesterday authorized the officers to
purchase up to $25,000,000 of sterling and that, in my opinion, now is the
appropriate time for us to do so, Sterling exchange is weak. $5,000,000 of




-338gold is now on the way to New York from London and we have been advised by
bankers around the street today that unless sterling strengthens they are
likely to take more gold from the Bank of England on some of the fast
steamers that are leaving next week, the first of which is on Tuesday. As
I explained to you on the telephone, the Bank of England has today sold
some dollars in their effort to bolster sterling and to avoid further unnecessary shipments of gold, but it is probable that unless they sell more
dollars or we buy sterling, or both, early next week, still further ship¬
ments of gold. to this country will be undertaken

This we believe un¬

desirable for various reasons which we discussed at the meeting yesterday.
If by the purchase of sterling bills we can help to minimize or avoid
these shipments, without at the same time going contrary to the policy
which the System has adopted for our own market, there seems to be not only
great advantage but no disadvantage in our purchases of sterling, especially
to the extent that sterling is converted into bills and reflected in our
statement in the open market purchases of bills,
"As I mentioned on the telephone, much of the increase in our bill
portfolio during the past week was in repurchase agreements or in short
maturity bills, some of which will no doubt be withdrawn or liquidated
during the course of the week. This position of the bill portfolio gives
us greater leeway in the purchase of sterling than might otherwise be the
case. In any event the facility of purchasing sterling seems to be not only
an additional instrument in the execution of our own domestic program but
also an affirmative aid in supporting sterling exchange which, unless
strengthened, now threatens large gold imports into New York.
!r

As I mentioned on the telephone, I am leaving very shortly to go

out of town over the weekend and I am dictating this letter hurriedly without




-339adequate opportunity for consideration or review, I hope you will please
accept it in that light and understand that I am sending it thus hurriedly
only because you asked me to dispatch it this afternoon before I leave."
This matter -was considered at the meeting of the Board on August 22,
with the result that the Board expressed itself as seeing no objection to
the action of the New York directors in authorizing the officers to purchase
sterling exchange up to $25,000,000.
Letter from New York Bank to Board, August 21. On August 21 the
Deputy Governor of the New York Bank wrote the Board as follows:
"The holdings of Government securities in the Open Market In¬
vestment Account are $5,000,000 higher than they were when I wrote you last
on August 14, 1929, the total being $36,125,000 par value, including
$13,625,000 taken over temporarily from the Federal Reserve Bank of St. Louis
last week and $5,000,000 from Dallas today under similar terms. • • •"
Letter from New York Bank to Board, August 28. Under date of
August 28* Deputy Governor Kenzel wrote as follows:
"Since my last letter, dated August 21, 1929, there have been
no changes in the holdings of Government securities in the Open Market
Investment Account, the total remaining at $36,125,000 par value, including
the two lots taken over temporarily from the Federal Reserve Banks of
St. Louis and Dallas. • • •"
Letter from New York Bank to Board on sterling purchases, August 28.,
At the meeting of the Board on September 3* the Governor presented the
following letter, dated August 28, from the Chairman of the New York Bank:
"Governor Harrison has discussed with you the question of our
purchasing sterling and in his absence I am writing to advise you what we
have done to date in that connection. Last week we purchased $,500, 000




-340which has been invested in sterling bills and yesterday we bought $7O5,OOO
which we expect will be placed in bills today. whether we shall make any
further purchases this week will depend on developments in the foreign
exchange market. Sterling was stronger this morning probably because of
the reported agreement at the Hague.
"I think we may say that our purchases of sterling together with
the sales of dollars which have been made by the Bank of England have
helped to prevent gold imports. You have probably observed that no gold
left London for New York last week and the only movement so far reported
this week is a small consignment of £100,000 which will leave on the S/S
Ile de France tomorrow morning. Of this amount £30,000 is South African
gold bought in the London market and the balance &?0,000, will be taken
from the Bank of England today."
The Governor also reported that in addition to the sterling
purchased by the Federal Reserve Bank of New York, the Bank of England
had liquidated approximately $11,000,000 of its dollar holdings, so that
over the last ten days it had taken approximately $21,000,000 in purchases
of sterling and sales of dollars to prevent gold imports.
Letter from New York Bank to Board, September 4. On September 4,
the Deputy Governor of the New York bank wrote as follows:
"Upon returning from my vacation I find that Mr. Kenzel wrote
you on August 28, 1929. Since that time there has been no change in the
holdings of Government securities in the Open Market Investment Account,
the total (inclusive of the two lots taken over temporarily from the Federal
Reserve Bank of St. Louis and the Federal Reserve Bank of Dallas) remaining
at $36,125,000. . .




#

-341Letter from New York Bank to Board, September 11. On September 11
the following letter was addressed to the Board by the Deputy Governor Case:
"No change has taken place in the holdings of Government securities
in the Open Market Investment Account since September 4, 1929} the date of
my last report to you on this subject. The total in the account remains at
$36,125,000, including the two lots taken over temporarily from the Federal
Reserve Bank of St. Louis and the Federal Reserve Bank of Dallas. • . ."
Resolution of Federal Advisory Council on discount rate increase.
The Federal Advisory Council met with the Board on September 17 and later
presented the following resolution adopted by it:
"The Advisory Council, after consideration of Governor Young's
explanation of the open market policy adopted following the fixing of the
New York Reserve Bank rate at 6%, believes that the increasing of the
New York Bank rate to 6% and the reduction in the buying rate for bills in
the open market have worked satisfactorily thus far and have the approval
of the Council.
"The Council concurs in the thought that the Federal reserve banks
should buy acceptances to such an amount as may be necessary to avoid any
greater burden on commercial business and suggests that these purchases
should be made only as the need develops."
Letter from New York Bank to Board, September 18. Under date of
September 18, the Deputy Governor of the New York bank wrote the Board as
follows:
"There has been no change in the total holdings of Government
securities in the Open Market Investment Account since I wrote you on this
subject under date of September 11, 1929. The total remains at $36,125,000,
including the $13,625,OQO held temporarily for the Federal Reserve Bank




-342of St. Louis and the Federal Reserve Bank of Dallas. • . •"
At the close of business on September 18, bills and securities
held by the System amounted to $1,368,000,000, consisting of $934,000,000
in discounts, $241,000,000 in acceptances, and $178,000,000 in Government
securities, $36,000,000 of which were held in the Open Market Investment
account.
Meeting of September 24, 1929.
At the meeting on September 19, the Governor advised of a tele¬
phone conversation with the Governor of the Federal Reserve Bank of New York
regarding the advisability of holding a meeting of the Open Market Investment
Committee for the purpose of considering the purchase of a limited amount
of Government securities, Tuesday, September 24, was fixed as the date of
the meeting.
Preliminary memorandum of Chairman. The Committee met in
Washington on September 24 and considered the following preliminary memo¬
randum presented by the chairman:
"At a meeting of the Governors of all Federal reserve banks at
Washington, D. C. on August 7 and 8, the following resolution was adopted:
"'It is the judgment of the Governors that the demand for in¬
creased credit incident to the autumn requirements of crop moving and
business should be met, so far as possible, by an increase of the bill
portfolio of such banks as care to participate in bill purchases.
11

The Governors are also of the opinion that this procedure can

best and most safely be undertaken, and with least risk of abuse in the
use of Federal Reserve credit, under the protection of an effective discount
rate in the New York district.




"They are further led to this conclusion by the expressed belief

-343that an increase in the discount rate of the Federal Reserve Bank of New
York would necessitate increases in few, if any, of the other Federal reserve
banks during the period of seasonal business demand; and the desire of the
directors and officers of all other reserve banks to avoid increases, if
possible. It is, therefore, recommended that the Reserve Board act favorably
on any application that may be made by the Federal Reserve Bank of New York
for an increase in its existing rate.'
"This resolution was approved by the Federal Reserve Board and on
August 8 the Federal Reserve Bank of New York raised its discount rate
from five to six per cent and reduced its buying rate for bills from 5-l/4
to 5-1/8 per cent.
"In the six weeks which have elapsed since the adoption of the
program, seasonal demands for Federal reserve credit have been entirely met
by increases in holdings of bankers. acceptances by the Federal reserve
banks. In fact, from the statement of August 7 to that of September 18, the
total amount of Federal reserve credit) outstanding has increased $57,000,000,
the amount of bankers' acceptances held has increased $162,000,000, discounts
of member banks have decreased $130,000,000, and holdings of Government
securities have increased $20,000,000, due to an increase in holdings of
securities under sales contract. The statement for September 18 shows
total bills discounted of $93,000,000, equivalent to 68.5% of total bills,
and securities, compared with $1,064,000,000 on August 7, equal to 81%
of total bills and securities,
"The accompanying diagram shows that the increase in the total
of federal reserve credit since the last week of July, when the seasonal
expansion normally begins, has been in accordance with the normally to be
expected increase on the basis of previous experience.




-344"A second diagram shows the changes in System holdings of bankers'
acceptances for the past three years, and shows that during August System
holdings increased more rapidly than last year, but since then have about
kept pace with the figures for the past two years. During current week,
however, there appears to have been a noticeable decline in the rate of
increase in bill holdings.
"It is still early to pass judgment fully on the effects of the
policies adopted. The immediate psychological effect of the rate change
passed quickly. Since then there has been some evidence that the economic
consequences of these policies may be of considerably greater importance.
"Effects on Money Rates. The following table compares open
market money rates on September 23 with corresponding rates in the first
week of August and indicates that except for a slightly firmer tendency in
commercial paper and in time money there has been no appreciable change in
interest rates.
Money Rates at New York
First Week
August 1929 Sept.20, 1929
8 128
8-3/4-9
9
6
6-l/4
5-1/8
5-1/8
*6.00
6.07

Stock Exchange call loans
Stock Exchange 90-day loans
Prime commercial paper
Bills - 90-day unindorsed
Customers' rates on commercial loans
Treasury certificates and notes
Maturing December 15
4.79
4.54
Maturing March 15
4.56
4.5l
Fed. Res. Bk. of New York rediscount rate
5
6
Fed. Res. Bk. of New York buying rate for
90-day bills
5-l/4
5-1/8
*Average rate of leading banks at middle of August; July rate 5.8O

"An analysis of the rates actually charged by commercial banks to
their commercial customers in the second district indicates practically no
change in the rates charged by banks outside of New York City which are



-345generally uniform at 6 per cent. In the cities 6% is the commonest rate.
A slight movement upward is shown in the fact that fewer loans are made at
5-1/2 and 5-3/4 per cent, and possibly a few more are made at rates above
6 per cent. Thus the average of rates is fractionally higher on that
account, continuing an upward tendency which has been reflected in an
increase month by month from 5.50 per cent in February to 6.07 in September,
as indicated by reports of ten New York City banks.
"Effect in Member Bank Position. Since the rate increase there
has been little net change in the total loans and investments of reporting
member banks, in spite of an increase of $230,000,000 in commercial loans.
This increase has been about offset by a decline of $140,000,000 in col¬
lateral loans and $110,000,000 in investments. Brokers' loans have con¬
tinued to expand and are now $549,000,000 higher than they were early in
August when the discount rate was increased. But this increase has been
largely in loans for account of others and in face of a decline in the total
loans on collateral by reporting member banks,
"In a number of ways the statistics appear to reveal an attitude
on the part of member banks generally. The following points are interesting,
". Bank loans on collateral have declined during a period when
brokers'loans were rising steadily.
"2.

Funds made available to member banks by Federal reserve

acceptance purchases in excess of seasonal needs were used entirely to
reduce indebtedness at the Reserve Banks, There was no increase in bank
credit.
"3. Decreases in rediscounts have not yet been reflected in any
easing in money rates, although,as illustrated by the attached chart, we
might expect that a continued reduction in total volume of discounts




-346
will ultimately tend to decrease interest rates.
"All these appear to show an unwillingness of the banks to con¬
tinue in debt and a vigorous and general attempt to liquidate this debt.
"Effect on Movement of Funds. Following the increase of discount
rate at New York a considerable flow of funds from other districts was a
possible danger which might have forced other Reserve banks to protect
their reserves. In the week immediately following the rate change there was
some movement to New York, but this was of short duration and was followed
by a loss of funds following much the usual seasonal course.
"This result is probably ascribable to the fact that the discount
rate was already so far below market rates that the increase had little
effect on market rates.
"On the other hand funds made available by the purchase of ac¬
ceptances have largely gone to liquidate discounts at the New York Reserve
Bank and discounts at other Reserve banks have followed much the usual
seasonal course. The rate change has apparently had little effect on the
movement of funds between the United States and Europe. Confidential
reports to the New York bank indicate a slight increase in foreign balances
between the end of July and the end of August, but this increase cannot be
attributed to higher rates in this market, for it took altogether the form
of an increase in holdings of bankers' acceptances and Treasury certificates
the yields on which have not increased. There was, moreover, a decrease of
$24,000,000 in the amount of foreign funds employed on time or call in this
market, the first decrease that has occurred in this account for some time.
It is perhaps significant that it accompanied a level of call money rates
slightly lower than had prevailed for some months previous.




"The European Situation. The flow of gold from Europe has

-347continued at about the same rate as before the policies of August 8 were
adopted. Since that time the Bank of England has lost an additional
$22,000,000 (mostly to France and Germany) of gold and its reserves have
been reduced from 141,400,000 to 136,900,000. While there have been
no marked changes in European money rates, the indications are that the
pressure upon Europe due to high money rates, is becoming constantly more
intense and is tending to retard industrial and business development.
August figures show an unseasonal decline in United States exports, though
a single month's figures are not sufficient to indicate a trend. There is
evidence of abacking up of "wheat in shipping centers which is probably
attributable in part at least to a restraint on the part of foreign buyers.
"The Domestic Business Situation. Business is still operating
at a high level, above any of the computed !normal! lines based on previous
years experience and allowing for growth. In recent weeks, however, there
has been a declining tendency in a number of basic industries. Building
activity has been reduced still further automobile production has been
receding, and steel production has reflected these tendencies. These
recessions have not, however, progressed far enough to warrant definite
conclusions as to the trend.
"Agricultural Conditions. The size of the year's crops is
expected to be generally smaller than a year ago. With higher prices the
total return to the farmer may be not short of a year ago, but certain
sections of the country have suffered severely through the drought. The
continued pressure on the credit situation has also been reflected by in¬
creasing reports from some localities of difficulties of agriculture in
securing an adequate supply of credit."




At a joint meeting of the Committee with the Federal Reserve Board

-348on the afternoon of the 24th, the following report was submitted by the
Committee:
"The Committee has reviewed a preliminary memorandum and current
credit conditions.
"During the past eighteen months interest rates in this country
have gradually risen and money, especially for new undertakings, has become
more difficult to obtain. While business continues at a high level, there
are some indications of a possible impending recession.
"Rates in many foreign centers have risen even more markedly and
the loss of reserves of central banks threatens further increases in rates
and probable curtailment of Europe!s capacity to buy this country's products,
"In accordance with the System policy adopted on August 8th
seasonal requirements for Federal reserve credit have been met by bill
purchases, and in fact such purchases have been sufficient to reduce re¬
discounts to some extent.
"For the purpose of avoiding any increase and, if possible,
facilitating some further reduction in the total volume of member bank
discounts during the fall season, if this can be done without stimulating
unnecessary or abnormal expansion of member bank credit, the Committee
favors a further increase of the open market holdings of the Federal reserve
banks. It favors an increase of these holdings by the continued purchase
of bills if they can be obtained in sufficient amounts to accomplish this
purpose. If bills cannot be obtained in sufficient amounts without inter¬
fering with the present desirable distribution, it favors the purchase of
Government certificates of the short maturities.
"The Committee therefore recommends that it be authorized to
purchase not to exceed $25,000,000 a week of such certificates for account




-349of such banks as care to participate, with the understanding that such
purchases be made only under the conditions above stated, and "with the
further understanding that there be careful current review of the conse¬
quences of such purchases, in order that there may be another meeting with
the Board at any time that that may seem advisable either to the Board or to
the Committee. In any event, the Committee feels that there should be
another such meeting not later than November lst."
In presenting the report the Chairman stated that the Committee
prefers to carry out the program previously agreed upon through the purchase
of acceptances, but pointed out that whereas three weeks ago the bill port¬
folio of the System increased $40,000,000, last week it increased only
$20,000,000 and so far this week only $6,000,000. The Committee, he stated,
feels that rather than force member banks to get necessary credit during the
fall through rediscounts and undo what has already been accomplished in the
reduction of rediscounts, the System should buy bills, if they can be
gotten rapidly enough, and should be prepared, in the event bills can not
be secured, to purchase short term governments.
"The members of the Open Market Investment Committee then with¬
drew from the meeting and, after some further discussion, at the suggestion
of the Governor it was voted to take the report of the Committee under
review pending the return of some of the absent members of the Board.!!
Current letter from New York Bank to Board. Deputy Governor Case
wrote the Board under date of September 25 as follows:
"Since I wrote you, under date of September 18, there have been
several transactions in the Open Market Investment Account. These trans¬
actions consisted of sales to the Treasury, for account of the Sinking Fund,
of $10,795,000 aggregate amount of Government securities, which were




-350replaced in the account by purchase in the market of $10,795,000 Treasurycertificates maturing in December of this year and in June, 193O; also,
the Federal Reserve Bank of Dallas repurchased the $5,000,000 of Fourth
Liberty Loan bonds which had been held temporarily in the System Account.
None of these transactions, however, will reflect any change in the holdings
of Government securities by the system for the week.

..."

Letter from Harrison to Board on Committee action. The following
letter was received from Governor Harrison under date of September 30:
"While I was not present last Thursday at the meeting of our
directors, I understand that the report of the Open Market Investment
Committee, now pending before the Federal Reserve Board, was considered and
approved by the directors who authorized the officers to participate in any
purchases made in accordance with the terms of the report, subject to its
approval by the Federal Reserve Board.
!l

At the meeting of our executive committee this afternoon, when

it was reported that the Board had not yet acted upon the report, the
directors reviewed further the considerations which to them make it seem
important that the Open Market Committee be given the authority recommended
in the report in order that the committee may be prepared as and when it
may seem advisable to supplement the purchase of bills by the purchase of
government securities.
"The directors realize, of course, that limited purchases of
government securities at this time will not of themeselves result in any
immediate reversal in the general trend of interest rates. They believe
that if we buy government securities in this market the proceeds would in
all probability be applied first to the reduction of discounts at the Federal
Reserve Bank of New York, just as proceeds of the purchases of bills have




-351made it possible for our member banks to reduce their borrowings, and that
as long as we have an effective discount rate the proceeds 6t such purchases
would not be made the basis of an expansion of unnecessary credit. The
experience of the past six or eight weeks, in which all collateral loans as
well as loans to brokers have been reduced by our member banks, demonstrates
that they are seeking to reduce their discounts rather than to use any new
Federal reserve credit as the basis of a further expansion of speculative
credit. If this process is continued, as we think it probably would be,
by our open market operations in bills or government securities, and if as
a result rates tended to decline in this market funds would probably then
be withdrawn from New York by banks and others, rates would tend to stiffen
again and our member banks would find it necessary to step in to relieve
the pressure and again to increase their borrowings from us. Further open
market operations would then be necessary, if it seemed advisable at the
time, to repeat the process, thus indicating that only by this sort of
slo?r see-saw procedure is it likely that we shall eventually approach a
condition of easier rates.
"With all this in mind and realizing that at best it will be a
slow process, our directors are of the opinion that the Open Market In~
vestment Committee should now be given authority, in order that it might
be prepared as soon as circumstances referred to in its report warrant, to
supplement the purchase of bills with purchases of government securities.
This they think is advisable in order that we may, as speedily as may be
consistent with safety, facilitate the reduction in the total volume of
discounts throughout the Federal Reserve System which they believe to be a
necessary forerunner of an ultimate ease in the present credit situation.




"In this connection it was pointed out that there is now evidence

-352that, while larger corporations seem to be in a position to obtain funds
which they need by new capital issues, it is becoming increasingly difficult
for smaller business men and farmers to obtain necessary credit. They also
referred to the fact that it now appears that high rates of interest are
having a serious effect upon new building projects} have substantially
closed our bond markets to European borrowers, and have contributed largely
to the need for continued and repeated increases in discount rates abroad.
All of this they feel will ultimately react against foreign purchasing
power for our goods with the possibility of serious ill effects upon
American business and agriculture.
"1

In conclusion, they believe that both the domestic and inter¬

national situation make it seem advisable for the System to continue open
market operations in bills, and, if necessary, in governments, at a rate
which will permit of a continued reduction in member bank discounts, and
thus gradually to pave the way for an ultimate ease in interest rates
which is now becoming more and more important to the world at large.ff
Letter from Board approving Committee program At the meeting of
the Board on October 1 the following letter to the Chairman of the Open
Market Investment Committee, approving the program recommended by the
Committee in its report to the Board on September 21, was approved:
"The Federal Reserve Board has reviewed the report and recom¬
mendation of the Open Market Investment Committee as of September 24, 1929.
"The Board approves of your program to continue the purchasing of
bills, and if necessary supplement the program by purchasing short-term
Government securities for those reserve banks that desire to participate
for the purposes mentioned in your recommendation, (to wit: — For the




-353purpose of avoiding any increase and, if possible, facilitating some
further reduction in the total volume of member bank discounts during the
fall season, if this can be done without stimulating unnecessary or abnormal
expansion of member bank credit.' The Board, to this end, grants the
authorization requested to purchase short-time Government securities at not
to exceed $25,000,000 a week.)
"In authorizing such purchases, the Board is approving mainly for
seasonal reasons and such approval should not be interpreted as a reversal
of former policies.
"The Board welcomes and adopts the suggestion contained in the
recommendation of the Committee that there be careful current review of the
consequences of such purchases, and you will be advised promptly by the
Board if at any time it believes that purchases should be discontinued or
the procedure changed.
"It is also agreeable to the Board that the Committee meet with
it again at some date, later to be determined, but not later than November 1."1
Communications on Open Market Operations and Discount and Buying
Letter from Hew York Bank to Board, October 2. Under date of
October 2, Mr. Case advised the Board as follows:
"There have been no transactions in the Open Market Investment
Account since I wrote to you under date of September 25, 1929. The total
amount of holdings in the account remains at $31,125,000, including the
$8,625,000 which is being held temporarily for the Federal Reserve Bank of
St. Louis.

• •
Letter from New York Bank to Board, October 9. The following

letter was received from the Deputy Governor of the New York bank under




Rates,"

-354~
date of October 9:
"The only transaction in the Open Market Investment Account since
I "wrote you under date of October 2, has been the sale, today, to the
Federal Reserve Bank of St. Louis of the $8,625,000 par value of Government
securities which have been held temporarily in the System Account since
August 6 last. This sale reduces the total holdings of the Open Market
Account to $22,500,000. However, this transaction will not reflect any
decrease in the System1 s holdings of Governments for the week

• • "

Letter from New York Bank to Board, October 16+ On October 16,
Mr. Case wrote as follows:
"The holdings in the Open Market Investment Account, namely,
$22,500,000 par value of Government securities, are the same as when I
wrote you on October 9, 1929. This bank!s holdings of Government securities,
representing securities held for dealers under sales contracts, show a
decrease of $3,820,000 over last week's figures, the total at the close of
business today being $9,380,000. . . ."
Letter from New York Bank to Board, October 23. The following
letter was received from Mr. Case under date of October 23, 1929:
"Since try letter of October 16, 1929, there have been no changes
in the holdings of Government securities in the Open Market Investment
Account, totaling $22,500,000. Our holdings of Governments under sales
contract, however, have shown a farther reduction, the amount being
$6,830,000 at the close of business tonight as compared with $9,380,000
of Governments at the close of business October 16. . . ."
Consideration of New York Bank discount and buying rates,
October 24,-28. At the meeting of the Board on October 24, Governor Young
reported advice received from the New York bank to the effect that dealers1




-355rates on acceptances had been reduced one-eighth per cent and consideration
was being given by the Federal Reserve Bank of New York to a reduction in
its buying rate. He stated that some of the directors of the New York bank
were in favor of a reduction in the discount rate of the bank. Some con¬
sideration would also be given at their meeting to the purchase of a
limited amount of Government securities since the holdings of the System
were expected to show a reduction for the week due to a decrease in
repurchase agreements.
At the reconvened meeting on the afternoon of the 24th, the Board
disapproved the action of the New York directors in voting to establish a
rediscount rate of 5-1/2 per cent and determined the rate of the bank to
be six per cent.
At the same meeting the following schedule of buying rates on
acceptances, at the New York bank, effective October 24, was approved by the
Board:
Bankers acceptances:
1 to 90 days
5%
91 to 120 days
5-l/8%
121 to 180 days 5-1/2%
Repurchase
5%
Trade bills
5%
On October 28, Governor Young reported a telephone conversation
with Deputy Governor Kenzel of the Federal Reserve Bank of New York, who
advised him that with a buying rate of 5 per cent in effect the Federal
Reserve bank is not getting any bills, the rate on which in the market this
morning is 4—5/8 per cent. He stated that there has been a large reduction
in brokers loans and that corporations and bankers in the interior are
calling such loans and investing in bills, Governments and commercial paper.
As a result, he stated, New York City banks have increased their borrowings




-356at the Federal Reserve bank to $155,000,000 and it is possible their loans
may run up to $250,000,000 or $300,000,000 in the next few days. The
Executive Committee at the New York bank meets today and, he stated, will
probably give some consideration to the advisability of purchasing Government
securities. It is also possible, he stated, that the New York bank may
further reduce its effective buying rate on bills.
Members of the Board expressed the opinion that no further re¬
duction in the bill rate should be made at this time as the easing program
of the System seems to be progressing satisfactorily.
(Secretary's Note: At this time conditions in the
money market were threatened by reason of drastic
liquidation in the securities markets.)
Consideration of Mew York Bank security purchases for its own
account. At the meeting on October 29, the Governor reported a telephone
conversation on the 28th with Governor Harrison, who informed him that he
had been given authority by his board of directors to purchase in the open
market, at his discretion, for account of that bank, United States Govern¬
ment securities, without any stated limit. The Governor stated that he
advised Governor Harrison that he would bring the matter before the Board
this morning and that subsequent information received from Governor Harrison
indicated that he was in position to make arrangements for the purchase of
approximately $50,000,000 of securities under the authority granted by his
directors, and that it was his opinion and that of some of his directors
that the purchases should be made before the opening of the market and
announcement of the call rate.
The report of the Governor was noted by the Board and after dis¬
cussion it was the opinion of the Board that inasmuch as purchases of
securities have already been made, there was nothing before the Board at




-357the time requiring immediate action. It was therefore voted that questions
arising out of the assumption of responsibility by the New York Federal
Reserve Bank, in undertaking this operation on its own account without
having first obtained the approval of the Open Market Investment Committee
and the Federal Reserve Board, be left for future discussion.
However, the procedure which had been in effect in the matter of
System open market operations since establishment of the Open Market In¬
vestment Committee in 1923 was reviewed and motions were introduced in¬
structing the Board1s counsel to draw up and submit to the Board a regulation
covering open market operations, but no action was taken.
During the afternoon the Governor again talked over the telephone
with Governor Harrison who advised him that the directors of his bank, who
had been in special session to consider the advisability of a reduction in
the discount rate, had adjourned without action. The Governor stated he had
inquired whether it would be of any benefit if the New York directors had
an expression from the Board and Governor Harrison stated he thought it
would be most helpful. As an expression of the opinion of the Board as to
the action which might be taken, the following statement was adopted:
1
1

That the most helpful thing at the present time would be a re¬

duction in the discount rate of the New York bank to 5%, coupled, however,
with an understanding that the System will suspend, for the time being, any
purchases of Government securities, pending future developments in the
credit situation as a result of the rate reduction, and further consider¬
ation and approval by the Federal Reserve Board."
On October 30 and 31 the Board was in almost continuous session
and received reports from the Governor of telephone conversations with the
Federal Reserve Bank of New York. At the request of the Board, the Governor




-358also communicated with the heads of several of the other Federal Reserve
banks and reported their advices generally of no severe pressure upon their
Federal Reserve banks.
Letter from New York Bank to Board, October 31. At the meeting
of the Board on October 31 the following letter, dated October 30, from
Deputy Governor Case was presented:
"At the close of business October 23, 1929, the date of my last
letter to you, the holdings of Government securities in the Open Market
Investment Account aggregated $22,5OO,OOO, Since then, purchases of shortterm Government securities totaling $25,000,000 have been made, bringing
the account, at the close of business tonight, up to $47,500,000. The ad¬
ditional purchases which have been made to relieve the situation in this
market, and regarding which you have been kept informed, have reached a
total of $108,152,000. There will be transferred tomorrow to the Open
Market Investment Account and distributed among participating Federal
reserve banks a further $25,000,000 of the securities purchased. . .."
Reduction of New York Bank discount rate. During the afternoon
of that day the Governor reported telephone advice from the Governor of the
Federal Reserve Bank of New York that the directors of that bank had voted
to establish a rediscount rate of 5 per cent and also to establish a minimum
buying rate for purchases of acceptances of 4—l/2 per cent, with the under¬
standing that if this minimum rate were approved by the Board, an effective
buying rate of 4-3/4 Per cent would be established. With regard to Govern¬
ment securities he advised the Board that the officers had reported to the
directors of the New York bank that no purchases were made either on October
30 or 31, and that they could see no occasion for additional purchases at
this time although it might become necessary to take on additional amounts




-359later, depending upon developments.
The rediscount rate of 5 per cent, established by the New York
directors, was approved by the Board effective November 1, but their action
in voting to establish a minimum buying rate of 4-l/2 per cent was reviewed
and the Board determined the minimum buying rate of the bank to be 4-3/4
per cent.
Preceding this action, there was discussion of the question of
regulating further purchases of Government securities and after action had
been taken, consideration of a proposed regulation on the subject of open
market operations was made special order of business for November 5.
At the suggestion of the Governor, he was authorized to approve
effective buying rates, not less than the minimum rate of 4-3/4 per cent
approved by the Board, established at the Federal Reserve Bank of New York
or at any other Federal Reserve bank. On November 2, the Board ratified
his action in approving the following schedule established at the New York
bank on November 1, 1929:
Bankers Acceptances:
1 to 120 days
4-3/4%
121 to 180 days
5%
Repurchase
4-3/4%
Trade Acceptances 5%
Board consideration of regulation of open market operations,
November 5. At the meeting on November 5, following a discussion of a
regulation governing open market operations, the Board adopted the following
resolution:
"Except with the approval of the Federal Reserve Board, no Federal
Reserve Bank shall (a) buy any bonds, notes, certificates of indebtedness
or Treasury bills of the United States, having a maturity in excess of
fifteen days, or (b) sell any bonds, notes, certificates of indebtedness,




-360or Treasury bills of the United States."
The effective date of this regulation was left for subsequent
determination by the Board, and at the meeting on November 7 the Governor
advised the Board that in consulting the Board's Counsel regarding the
preparation of a letter to all Federal Reserve banks regarding the regu¬
lation, he was informed that there was considerable doubt of its legality
in the form adopted• It was understood that the Governor would endeavor
to work out another form along the lines discussed and submit it to the
Board later.
Letter from New York Bank to Board, November 7. Under date of
November 7, the following letter was addressed to the Board by the Deputy
Governor of the New York bank:
"Since my last letter to you on this subject, under date of
October 30, 1929, there have been some farther changes in the holdings of
Government securities* as follows:
"Additional purchases made to relieve the situation in this market
and which, on October 30, amounted to $108,152,000, reached a total of
$132,652,000 at the close of business November 6. Of this, $25,000,000 of
securities were transferred on October 31 to the Open Market Investment
Account for distribution among participating Federal reserve banks, as
previously advised. A further $25,000,000 will be transferred to the System
Account today for distribution.
"On the other hand, however, our sales contracts, which a week
ago reached a total of $32,660,000, have shown a large reduction and stood
at the close of business yesterday at $8,750,000.
"You have, no doubt, noted the sharp rise in prices of both short
and long-term Government securities, especially the latter. The quotations




-361at the beginning of business today as compared with a week ago show an
increase of from l/32 to 10/32 on short-term certificates and notes, and
from 18/32 to l.ll/32 on Liberty Loan and Treasury bonds• Government
securities have been in active demand on the part of banks and other corpo¬
rations in an endeavor to keep employed funds "which were formerly used in
the call loan market.

..."

Resolution of New York Bank on open market operations, November 7.
At a meeting of the board of directors of the New York bank on November 7,
the following resolution was adopted:
"It is the unanimous opinion of this board that, in the interest
of maintaining business and employment, the policy of the Federal Reserve
System and this bank for the coming weeks should be to keep a plentiful
supply of money in the market through the purchase of bills, if available,
and if not, then through the purchase of governments, in order that discounts
of the Federal Reserve System may be reduced and at the proper time a
further reduction of the discount rate effected, with the objective of
securing lower interest rates for business throughout the country."
This resolution was transmitted to the Board on the same date in a letter
from the Governor of the New York bank reading as follows:
"At the meeting of our board of directors this afternoon, after
discussing current conditions here, as well as the proposed meeting of the
Open Market Committee next week, our directors unanimously adopted the
enclosed resolution as an expression of their views as to what should be
the policy of the System and this bank during the coming weeks.
"The resolution speaks for itself, but it was the general senti¬
ment of the directors that in the present circumstances we should proceed
with the purchase of government securities, if, as now seems to be the case,




-362bills are not available in adequate supplies, at a rate which will not
only provide ample funds for the usual seasonal demands throughout the rest
of the year but also permit of a reduction in the total volume of discounts
in the System to a point where interest rates for commerce and business
may become generally lower, It was their belief that unless this is done,
after the events of the past weeks, there may be greater danger of a
recession in business with consequent depression and unemployment, which
we should do all in our power to prevent.
"In the meantime and in order to maintain an orderly money market
at suitable rates during this extraordinary period, we bought $17,000,000
of certificates of indebtedness today, as I discussed with you over the
telephone this morning, $5,000,000 for delivery today and $12,000,000 for
delivery tomorrow. In view of all the unusual conditions "which have pre¬
vailed here during the past several days and the need, even now, of avoiding
any evidence of a money shortage or a rise in rates during this period of
of uncertainty, I think we should continue to make such purchases of govern¬
ments in reasonable amounts as and when opportunity offers. I shall of
course continue to keep you posted currently of any such transactions.
"1 hope, however, that it will be convenient to the Board to have
an early meeting with the Open Market Investment Committee to discuss the
future program of the committee and its operations for System account."
Governor Harrison consulted informally with the members of the
Board on November 9 with the result that a meeting of the Open Market In¬
vestment Committee was called for November 12, and he again met with the
Board for a general discussion of banking and credit conditions on November 11.
At the close of business on November 6, the bill and security
holdings of the Federal Reserve System aggregated $1,638,000,000, made up




-363approximately of $991,OOO,OOQ of rediscounts, $330,000,000 of acceptances
and $293,000,000 of Government securities, of which $73,000,000 were in
the System1 s account.
Meeting of November 12, 1929
Preliminary memorandum of Chairman. At the meeting of the Open
Market Investment Committee on November 12, the following preliminary memo¬
randum was considered:
"At the last meeting of the committee on September 24 the following
resolution was adopted and approved by the Federal Reserve Board:
The Committee has reviewed a preliminary memorandum and current
credit conditions.
During the past eighteen months interest rates in this country
have gradually risen and money, especially for new undertakings, has become
more difficult to obtain. While business continues at a high level, there
are some indications of a possible impending recession.
Rates in many foreign centers have risen even more markedly and
the loss of reserves of central banks threatens farther increases in rates
and probable curtailment ofEurope's capacity to buy this country's products.
In accordance with the System policy adopted on August 8th
seasonal requirements for Federal reserve credit have been met by bill
purchases, and in fact such purchases have been sufficient to reduce re¬
discounts to some extent.
'For the purpose of avoiding any increase and, if possible, facili¬
tating some further reduction in the total volume of member bank discounts
during the fall season, if this can be done without stimulating unnecessary
or abnormal expansion of member bank credit, the Committee favors a further




-364increase of the open market holdings of the Federal reserve banks. It
favors an increase of these holdings by the continued purchase of bills if
they can be obtained in sufficient amounts to accomplish this purpose. If
bills cannot be obtained in sufficient amounts without interfering with the
present desirable distribution, it favors the purchase of Government cer¬
tificates of the short maturities.
The Committee therefore recommends that it be authorized to
purchase not to exceed $25,000,000 a week of such certificates for account
of such banks as care to participate, with the understanding that such
purchases be made only under the conditions above stated, and with the
further understanding that there be careful current review of the conse-*
quences of such purchases, in order that there may be another meeting with
the Board at any time that that may seem advisable either to the Board or to
the Committee. In any event, the Committee feels that there should be
another such meeting not later than November 1st. !

"Up until mid-October acceptances were offered in sufficient
volumes to meet System requirements, but from then on offerings were small
due to demand from other buyers, and it was necessary to increase holdings
of government securities to achieve the end in view.
until the latter part of October purchases of bills and
governments were more than sufficient to meet seasonal needs for Federal
reserve funds and bills discounted declined somewhat.
"In the period up to the middle of October the policies pursued
were as successful as could have been anticipated. The decline in discounts
was followed by easier money rates in New York. The bond market strengthened
and, influenced as well by higher money rates abroad, foreign exchange rates




recovered to a point where gold exports began.
n

In the past three weeks the whole credit situation has been

changed by a violent decline of stock prices. The result has been a re¬
versal of the credit trends which had continued for two years, - and the
Federal Reserve System now faces a very difficult credit situation from
that which prevailed a few weeks ago. The major changes in the situation
may be summarized as follows:
1
1

(1) The demand for credit for speculative use which for two

years made necessary a system policy of protecting its credit, has subsided.
"(2) The conversion of over a billion dollars of brokers loans
from other account to bank loans has placed a considerable strain upon
member banks and increased their borrowing at the Reserve bank to a total
of over $900,000,000.
"3) Business activity has continued to show some recession and
there is a threat of further recession due in part to some destruction of
purchasing power and a disturbed psychology due to stock market liquidation.
"These changes have taken place with great rapidity. For some
days, in fact, the credit situation in New York appeared to be at a criti¬
cal stage due to the huge burden thrown upon the New York City banks when
other lenders in the Stock Exchange money market suddenly withdrew their
funds and borrowers resorted to the New York City banks. This occurred
at a time when the security market was going through a panic which might
easily have spread more generally to the banking situation. It was in these
circumstances that the Federal Reserve Bank of New York on October 29
purchased about $100,000,000 of securities in order to make funds freely
available to the money market thus to minimize the possibility of an ad¬
vance in rates which would have added materially to the difficulties of




-366the situation. •

«

"In the following two weeks portions of these security purchases
were turned over to the special investment account to make up the $25,00,000
a week of security purchases agreed upon at the last meeting of the com¬
mittee and by the Federal Reserve Board in the event that bills could not
be purchased in sufficient amount.
"Seasonal Expectation. The seasonal expectation in the demand
for Federal reserve credit is that this demand will remain relatively
constant until the last week in November, and between that time and the
end of the year it will increase nearly $300,000,000 due largely to
Christmas currency requirements. In the absence of open market operations
it might be anticipated that this demand would lead to an increase in
$1,200,000,000. Such a change would ordinarily be accompanied by somewhat
more stringent money conditions. After the end of the year it might be
expected that the requirement for Federal reserve credit would decrease
between $400,000,000,and $500,000,000. A part of the decrease after the
first of the year would be absorbed by partial liquidation of the System's
portfolio of bankers acceptances, and the remainder would be taken up by
reductions in rediscounts or in holdings of Government securities.

"Condition of the Bill Market. The shift of funds from call loans
to other employment has been accompanied by a largely increased demand for
bankers acceptances as a consequence of which few bills have recently been
offered to the reserve banks and total bill holdings have declined during
a period when an increase is usual. The present prospect appears to be
that this investment demand for bills will continue for some weeks and the
Reserve System is likely to receive less than the usual offerings, so that




-367little increase in the open market portfolio is to be anticipated from this
source."
Action of Committee. At a meeting of the Open Market Investment
Committee with the Board that afternoon (November 12) the following report
was submitted:
"Since the meeting of the Committee on September 24, the credit
situation has changed abruptly. There has been a severe liquidation of
credit against securities under circumstances which constitute a serious
threat to business stability at a time when there were already indications
of a business recession. this seems clearly to indicate the need of having
the Federal Reserve System do all within its power toward assuring the
ready availability of money for businessr at reasonable rates,
"In view of these circumstances and for the purpose of avoiding
any increase, and if possible facilitating some reduction, in the total
volume of member bank discounts, the Committee believes that the System
should be prepared to increase the open market holdings of the Federal
reserve banks through the purchase of bills if they can be acquired in
sufficient amounts without interfering with their present desirable distri¬
bution, and if not, through the purchase of Government securities.
"It is believed by the Committee that this may be done with safety
in the interest of business without the risk that funds so put out by the
Federal reserve banks would be used to stimulate any abnormal or unnecessary
expansion of member bank credit.
"The Committee also has in mind the fact that present conditions
may possibly develop to the point where, as an emergency measure, in the
interest of maintaining banking and business stability, it may be necessary
quickly to purchase large amounts of Government securities in order to




-368avoid any undue stringency in credit.
"The Committee therefore recommends that the present limit of
$25,000,000 per week on the purchase of Government securities be removed
and that the Committee be authorized in lieu therefor to purchase not to
exceed $200,000,000 of Government securities for account of such banks as
care to participate, in order that it might be empowered and prepared to
make purchases of Government securities as and when it may seem to be
necessary for the purposes, or in the contingencies outlined above, but
only with the understanding that there be a careful current review by the
Federal Reserve Board and the Committee of the consequences of any such
purchases that may be made, and that another meeting with the Board be held
at any time it may seem desirable to the Board or the Committee, and that
in any event there be another such meeting not later than the first week
in January."
During the detailed discussion of banking and credit conditions
which ensued, the attention of the members of the Open Market Investment
Committee was called to the fact that the Federal Advisory Council will
hold its next meeting in Washington on Tuesday, November 19, and they were
advised that the Board believed the views of the Council should be obtained
before any System policy is definitely decided upon.
A canvass of the members of the Open Market Investment Committee
disclosed that in requesting authority to purchase not to exceed $200,000,000
of Government securities for account of such banks as care to participate,
the members did not have in mind that such purchases should be made under
any circumstances but rather that the Committee should be in position, in
the exercise of its judgment, to make such purchases should conditions
warrant.




-369Governor Harrison pointed out that the authority granted following
the meeting of the Committee on September 24, to purchase not to exceed
$25,000,000 of securities a week would permit the purchase of approximately
$200,000,000 between now and the first of the year but that it was believed
desirable that the Conmittee should not be limited to the purchase of
$25,000,000 at any one time.
There was some discussion as to the advisability of a further
reduction in rates by the Federal Reserve banks in lieu of purchases of
Government securities and Governor Harding advised the Board that the
directors of his bank, at their last meeting, considered reducing the rate
of that bank to 4-l/2 per cent. He discussed the matter with members of
the Board, some of whom pointed out the undesirability of a reduction in
the discount rate without a corresponding reduction in the bill rate.
Letter from Board to Chairman. The Board in executive session
following the meeting with the Committee considered the Committee 's report
but no action was taken until the next day, November 13, "when a letter to
the Chairman of the Committee, reading as follows, was adopted and ordered
transmitted:
"The Federal Reserve Board has had under consideration the report
of the Open Market Investment Committee, dated November 12, and notes that
the Committee's recommendations relate, (1) to the more permanent features
of open market policy and, (2) to a possible emergency operation,
ff

The Board feels that the general situation is not sufficiently

clarified for the System to formulate and adopt a permanent open market
policy at this time. The Board has that under continuous consideration
and will be glad to confer further with the Committee as we approach more
nearly steadied credit conditions.




-370"The Board fully appreciates the possibility that a situation may
arise speedily that will call for an open market operation on the part of
Federal reserve banks by the purchase of Government securities. To this
end the Board has arranged to act promptly on the application of the Com¬
mittee or any Federal reserve bank to purchase securities in a sudden
contingency. It has authorized the Governor, should the Board not be im¬
mediately available, to act on its behalf in giving approval in an emergency
to purchases. In the event that an emergency should arise with such
suddenness and be so acute that it is not practicable to confer with the
Governor, the Board will interpose no objection to a purchase operation
being undertaken, with the understanding, however, that prompt advice of
such purchase be furnished the Board.
"This action of the Board supersedes the authority which was
granted to the Open Market Investment Committee on September 24, 1929, to
purchase not to exceed $25,000,000 per week of Government securities."
Communications on Open Market Operations and Discount and Buying Rates,
Mid-November-December 1929.
Letter from New York Bank to Board, November 14. Under date of
November 14. the following letter was addressed to the Board by Deputy
Governor Case:
"The Government security transactions effected since my letter of
November 7, 1929, may be summarized as follows:




Balance on November 6, 1929, held by
Federal Reserve Bank of New York . « . . • • $ 107,652,000
Purchases in market •
•....•
•.
39,150,000
$ l46,8O2,OOO
Less transfer to System Account,
Nov. 7, 1929 •...»...«..»..+••.••••••••

25,000,000
$ 121,802,000

-371Plus purchase from Federal Reserve Bank
of Cleveland (which was a transfer .....
from their portfolio) ..•«•••.»•••«••.•«•

l5,lS7$9$O

$ 136,959,950
Less transfer to System Account,
Nov.14, 1929
25,000,000
Balance at close of business Nov. 14, 1929.$ 111,959,950
"The transfers to System Account referred to above bring the
total in the System Investment Account at the close of business today, to
$122,500,000.
"Our sales contracts, which a week ago stood at $8,750,000, were
practically wiped out at the close of business yesterday, a reduction
during the week of approximately $8,000,000.
"While the volume of trading in the Government security market
during the past week has not been in so large an amount as in the preceding
week, the demand has continued good, with the buying orders coming princi¬
pally from the banks. Prices of practically all issues show fractional
gains over last week, and several of the issues are selling at - or close
to - the high prices for the year

1929.

• •"

Reduction of New York Bank discount a and buying rates.

At

a special meeting of the Executive Committee on November 14,
Mr. Cunningham reported that Governor Young, who was in New York, had called
him on the telephone and asked for the reaction of members of the Board in
Washington on a recommendation which Governor Harrison contemplated making
to his Board of Directors that the discount rate of the New York bank be
reduced to 4-l/2 per cent and that a bill rate of 4-1/2 per cent also be
established. After discussion it was decided to advise Governor Young as
follows:




"The Board is of the opinion that any action with regard to the

-372discount rate at this time is primarily a matter for the judgment of the
directors of the New York bank. The Board will support them in any action
they take, "whether that be to leave the rate "where it is or to reduce it to
4-1/2%. In the event that the discount rate should be reduced, the Board
would expect that the acceptance rate would be similarly reduced.tf
At a meeting in the afternoon the Vice Governor reported that the
directors of the Federal Reserve Bank of New York had voted to establish a
rediscount rate of 4-1/2 per cent and also to establish a minimum bill rate
of 4 per cent with the expectation that a buying rate of 4-1/4 per cent
would be made effective. Both the discount rate of 4—1/2 per cent and the
minimum bill rate of 4 per cent were approved by the Board, the discount
rate to become effective November 15. At the meeting of the Board on
November 16 the following schedule of buying rates, made effective at the
New York bank on November l5, was noted with approval:
Bankers acceptances:
1 to 120 days
4-1/4%
121 to 180 days
4-1/2%
Repurchase
4-1/4%
Trade acceptances
—
4-1/2%
Governments repurchase 4-1/2%
(Secretary's Note: On November 21 the Federal Reserve
Bank of Boston, with the approval of the Board, reduced
its discount rate from 5 per cent to 4-1/2 per cent.)
Letter from New York Bank to Board, November 21. Under date of
November 21 the following letter was received from Deputy Governor Case:
"Since my last letter to you under date of November 14, 1929,
there have been no further additions to the total amount of this bank's
holdings of Government securities, the amount of such holdings remaining
at $111,969,950 par value. Moreover, no transfers to the Open Market In¬
vestment Account have been made since November 14, the amount of securities




-373in the System Account standing at $122,500,000. • • ."
At the meeting of the Board on November 22, the following schedule
of buying rates on acceptances at the Federal Reserve Bank of New York,
effective November 21, was noted with approval:
1 to 120 days
121 to 180 days
Repurchase

-

4%
4-1/2%
4%

(Secretary's note: At a special meeting of the Board
on November 22 approval was given to a rediscount rate
of 4-l/2 per cent, established by the board of directors
of the Federal Reserve Bank of Chicago, effective
November 23.)
At the special meeting on November 22, the Governor, or in his
absence, the active executive officer of the Board, was authorized to approve
a discount rate of 4-l/2 per cent established by the directors of any Federal
Reserve bank.
Letter from Harrison to Board on liquidation of sterling bills,
November 22. The following letter was received from Governor Harrison under
date of November 22:
"You will be interested to learn that negotiations have just
been completed with the Bank of England for the liquidation of our special
sterling bill account amounting to approximately £3,300,000 which we have
been maintaining in London for the past few months. We received a cable
from the Bank of England the other day offering to repurchase these sterling
bills from us at the current rate of exchange, payment to be made to us in
New York from the holdings of dollars of the Bank of England.
"You will recall that we purchased these bills at a time when
sterling exchange was in the neighborhood of the gold import point from
London, slightly under $4.85, and the present improved position of sterling




appears to afford a satisfactory opportunity to liquidate them. The average
cost of the sterling to us was about $4.8480 and we are now being paid by
the Bank of England at $4.87 l/2. This makes a profit on the exchange
transaction of about $89,000 in addition to which there has been the discount
earned since the bills were purchased. This will be augmented by some
profit derived from the discounting of the bills with the Bank of England
at rates lower than those at which they were purchased."
Board action on procedure for approving open market operations.
At the meeting of the Board on November 25, the Governor referred to the
resolution adopted by the board of directors of the Federal Reserve Bank
of New York on November 7, which was presented to the Board on November 8,
and the report submitted to the Board by the Open Market Investment Com¬
mittee on November 12 regarding System open market policy and reviewed the
action of the Board on November 13 in addressing a letter to the Chairman
of the Open Market Investment Committee, setting forth arrangements made
for prompt consideration by the Board of any emergency open market oper¬
ation that may be necessary but expressing the Board's feeling that the
general situation was not sufficiently clarified for the System to formu¬
late and adopt a permanent open market policy at that time. He advised
the Board that the directors of the Federal Reserve Bank of New York subse¬
quently authorized the officers to purchase $50,000,000 of Government se¬
curities at their discretion for account of that bank. He stated that he
discussed last week with Directors Young, Woolley and Reyburn of the
New York bank, who were in TJashington attending the President's conference,
the matter of procedure in open market operations, advising them of the
position of the Board that it has the duty and responsibility under the
Federal Reserve Act of passing upon open market operations by the Federal




-375Reserve banks. These directors, he stated, expressed the opinion that it
was entirely within the rights of the Board for it to concern itself about
purchases in the open market and that all such major operations should
have the approval of the Board, although it seemed to them that the Board
would not care to have ordinary transactions in snail amounts submitted
to it. They expressed the opinion that the New York bank or the Open
Market Investment Committee should submit to the Board recommendations as
to policy and if approved by the Board should request and receive authority
to make purchases to carry out such policy. The Governor stated that this
appears to him to be the solution of the difficulty which has existed
between the New York bank and the Board regarding jurisdiction in open
market operations. He also stated that Governor Harrison of the New York
bank was in Washington on Saturday and advised that he is prepared to
recommend to his directors that the New York bank refrain from major credit
operations in the open market on its own account, except with the approval
of the Board.
After discussion, it was voted to approve the general principles
as to System policy laid down by the New York directors in their resolution
of November 7 and the Open Market Investment Committee in its report of
November 12, and to give authority to the Committee in accordance with the
following letter transmitted to the Chairman under date of November 25:
"Under date of November 13th, following consideration by the
Board of the report submitted by the Open Market Investment Committee on
November 12th, you were advised that, in the opinion of the Board, the
general situation was not sufficiently clarified for the System to formu¬
late and adopt a permanent open market policy at that time.




"The Board has reconsidered this action and has voted to approve

-376the general principles as to future policy laid down in the report of the
Open Market Investment Committee and the resolution adopted by the Board
of Directors of the Federal Reserve Bank of New York at its meeting on
November 7th, which you transmitted to the Board with your letter of the
same date. Accordingly, the Board authorizes the Open Market Investment
Committee to purchase, from time to time, not to exceed in the aggregate
$200,000,000 of Government securities, with the understanding that if at
any time the Board feels that purchases are being made too rapidly, it will
so express itself to the Committee and reconsider the whole situation.tf
Letter from New York Bank to Board, November 27. The following
letter was sent to the Board by Deputy Governor Case under date of
November 27:
"Since my last letter to you dated November 21, 1929, there have
been no changes in the total holdings of government securities in the
Open Market Investment Account, the amount remaining at $122,500,000©

Of

this amount $100,000,000 are short maturities, $50,000,000 maturing
December 15, 1929 and $50,000,000 in March and June of next year. The
balance, $22,500,000, is made up of 3-l/2$ Treasury notes of 1930-32• The
holdings of this bank have likewise remained unchanged at $lll,969,95O.
• . •"
Letter from Harrison explaining open market actions, November 27.
Under date of December 3 the Chairman of the Open Market Investment Com¬
mittee, in a letter transmitting copy of one written by him to all Gover¬
nors under date of November 27, advised the Board as follows:
"I am glad to enclose herewith for your information a copy of a
letter which I sent to each of the other Governors on November 27, when
transmitting a copy of the Board's letter of November 25 relative to the




-377report of the Open Market Investment Committee.
"As I explained to you over the telephone yesterday, several of
the reserve banks have made inquiries about the development of conditions
in this market during the past several weeks, with special reference to
our large purchases of government securities the end of October. Because
of these inquiries I thought it just as well to send some sort of a review
to each of the Governors, especially as it has such a direct bearing upon
any purchases of securities that may be made in accordance with the report
of the Open Market Investment Committee. At the present time, seven banks
are participating in these purchases. Of the remaining five, Cleveland
and Richmond have written to us that they would take up with their di¬
rectors the question of participation just as soon as it is possible to
do so."
The letter to all Governors, referred to above, is as follows:
"On November 19 we forwarded to you and to the Governor of each
of the other Federal reserve banks a copy of the report of the Open Market
Investment Committee adopted at its meeting in Washington on November 12,
and a copy of the Federal Reserve Board's letter dated November 13.
"We have just received a further communication from the Federal
Reserve Board, dated November 25, in which Governor Young states that the
Board has reconsidered the action taken on November 13 and has voted to
approve the general principles as to future policy laid down in the report
of the Open Market Investment Committee and the resolution adopted by the
Board of Directors of the Federal Reserve Bank of New York at its meeting
on November 7. For your information, and the information of your directors,
I am enclosing a copy of Governor Young!s letter of November 25 together
with a copy of the resolution of our directors to which it refers.




-378"While it is difficult at this time, in the scope of a letter, to
give any very satisfactory review of the developments in this market during
the past five or six weeks, nevertheless I hope you will let me comment
more or less informally and in a general way regarding the situation as it
related to this bank and credit policies which we felt it necessary to adopt.
"Some of the Federal reserve banks have already written to me
making certain inquiries, especially in relation to our purchases of govern¬
ment securities. It has occurred to me, therefore, that you, too, may be
interested in a brief picture as we now see it.
"r

The very sudden and drastic liquidation in the stock market,

accompanied by the calling of loans for out-of-toi/vn banks and others,
naturally resulted in a tremendous shift in loans to our own member banks
just at a time when the stock market itself was weakest and the mechanical
apparatus of the exchange was taxed to its utmost. Our particular problem
was to endeavor to maintain an easy money position throughout the whole
period lest any evidence of a shortage of funds or an increase in money
rates might lead to some sort of a money panic. If we should have added
to the panicky state of mind relating to security values any fear of a
money shortage, we might indeed have faced the most serious calamity. With
this in mind, we kept our discount window wide open and let it be known
that member banks might borrow freely to establish the reserves required
against the large increase in deposits resulting from the taking over of
loans called by others. In addition to this we went into the market, as
you know, and bought large blocks of government securities, partly for
psychological reasons but largely because we felt it so important that
there should be no tightening of money during the period of such large
transfers of loansto our own member banks. As we look back now, it is not




-379~
at all unlikely that had we not bought governments so freely, thus supple¬
menting the reserves built up by large additional discounts, the stock
exchange might have had to yield to the tremendous pressure brought to bear
upon it to close on some one of those very bad days the last part of October.
"For the moment, the stock market seems to have quieted down.
There has been a vast liquidation of security loans, and funds transferred
to New York from all over the country, to replenish margins or to pay for
investments, have made for great ease in this market. While this surplus
of funds is now lessening, we have not yet any money shortage. It is
possible, however, that with the outflow of money now in progress and the
increase in currency demand now beginning, money rates may very quickly
tighten,
"For a year or two the Federal Reserve System has directed most
of its policies towards pressure upon the credit situation in order that
it might minimize the amount of funds being employed for unnecessary or
speculative purposes. We sold well over $400,000,000 of government securi¬
ties and liquidated an equally large bill portfolio. Both of these oper¬
ations tended to force member banks into our debt, so that we had a total
volume of discounts in the System averaging over a billion dollars. Even
now, after the liquidation of the stock market and consequent reduction in
call loans, the total volume of discounts in the System approximates
$900,000,000. And we do not have to go very far back in our history to
realize that when the total volume of discounts is anything like the
present level, we do not have the basis for easy money rates. Indeed, com¬
mercial paper rates and over-the-counter rates to customers fluctuate almost
precisely as the total volume of discounts fluctuates, and it is question¬
able whether we can anticipate generally easier rates or easier money




-380conditions until the volume of discounts as a whole is substantially
reduced.
"With the stock market out of the way at the moment and with
little or no reason to fear that funds which we might put out will be
employed for speculative purposes, the question immediately presents
itself as to how we can most safely and quickly effect a reduction in the
volume of discounts as a whole. Certainly we do not want to liquidate the
total volume of reserve credit by forcing a deflation of two or three
hundred million dollars in discounts at a time when business is obviously
hesitating, commodity prices are declining, and when there are more
evidences of a recession than of an over-expansion in any line. That being
so, it seems to us that if we hope to accomplish a reduction in discounts
to a point which will make money readily available, we must do so by a
substantial increase in the System' s open market portfolio. This will
enable member banks to use the funds which we put out to pay off discounts
and thus pave the way for a greater availability of funds for business at
reasonable rates, open the bond and mortgage market, and establish for the
first time in two or three years a more normal money position.
"As we look ahead, it is not likely that the total volume of
Federal reserve credit will average much less than, say, eleven or twelve
hundred million dollars, perhaps thirteen or fourteen hundred million
dollars. The growth of the country during the past year or so would seem
clearly to justify this level of Federal reserve credit except as it might
be altered by substantial gold movements. If that is true, it seems to
us that we might expect the need of having, say, half of our total earning
assets in open market portfolio, bills or governments.




"The tremendous investment demand for bills has made it impossible

-381and unwise for us to seek to acquire that form of investment any faster
than we have. To do so would only dislodge what is now appearing to be
a fairly satisfactory open market distribution of bills. That leaves us
governments as the only effectively substantial means of operating in the
open market at this time; and now that the Federal Reserve Board has
approved of a program that will permit of such an operation, I hope that
you will let us know, after you have had an opportunity to discuss it with
your directors, whether you care to participate in any purchases that may
be made in execution of the policy recommended by the committee and approved
by the Federal Reserve Board.
1
1

It may well be that future developments will make it unnecessary

or unwise to pursue any very substantial program of purchases. If so, we
could of course proceed accordingly, but at the moment, with gold going
out and facing a period of increased demand for currency, perhaps amounting
to 250 or 300 millions, it seems that we have every reason to buy govern¬
ments rather than to remain quiescent and force banks to increase their
discounts to obtain necessary reserves. If we do that, instead of having
nine or ten hundred millions of discounts, we may have twelve or thirteen
hundred millions and postpone more or less indefinitely a return to a
volume of discounts which will make easier money rates throughout the
country possible.
"At the moment New York City banks are borrowing practically
nothing from the Federal reserve banks. They are not only out of debt to
us but have had large sums of money over, so that Federal reserve funds in
New York have been selling at a substantial discounts On the other hand,
member banks in other districts are heavily in debt, some reserve banks
showing discounts as of November 20 in excess of one hundred million dollars.




-382With this picture in mind, it would seem logical and desirable that anyopen market purchases made in System account in execution of the policyabove referred to might better be made in those districts where discounts
are heaviest. To the extent that this can be done it seems to us that it
would be wise. It is probable, however, that most of the purchases in the
execution of the program would have to be made in New York owing to the
unavailability of securities in other markets. That would keep our member
banks out of debt, leave them with funds over and lead them to reduce rates.
That in turn would tend to force funds back into the interior as has been
the case in the past two or three days, when very substantial transfers
of funds have been made from New York to the interior. If and when that
proceeds far enough, rates will again tighten up in New York. Our banks
may be forced back into debt and then by the purchase of additional govern,ments, they would be let out of debt, would find themselves with funds over
and would repeat the process. Thus, by a gradual see-siaw operation, we
would be able to provide funds to the rest of the country with which discounts
in other districts might be reduced. It is important, however, that we
should not proceed so fast as to make funds in this or any market unneces¬
arily sloppy, but equally important that we proceed fast enough to avoid
any tightening of rates that would unnecessarily check the seepage of funds
to other districts.
"I hope you will forgive the length and informality of this letter.
There are so many variable factors in the situation that it is difficult
definitely to prognosticate. At the moment, however, it seems to us that
this is about the way a program of purchases would operate. In any event
I should be very glad to have your views and reactions."




-383Letters from New York Bank to Board during December. On
December 4, Deputy Governor Case of the Federal Reserve Bank of New York
reported to the Board as follows:
"The holdings of government securities in the Open Market In¬
vestment Account have been increased by $30,000,000 since my letter af
November 27, and now total $152,500,000. Additional purchases were made
and apportioned to participating Federal Reserve banks yesterday, amounting
to $15,990,000, and today, $l4,010,000. . • .
(Secretary's note: On December 5* the Board approved
a rediscount rate of 4-1/2 per cent, effective December 6,
for the Federal Reserve Bank of San Francisco, and on
December 10, with the approval of the Board, the Board
of Directors of the Federal Reserve Bank of Atlanta
established a 4--l/2 per cent rediscount rate at that
bank,)
Under date of December 11, Deputy Governor Case wrote as follows:
"The holdings of government securities in the Open Market In¬
vestment Account have shown an increase of about $25,000,000 since my letter
to you under date of December 4, 1929, the total tonight being $177,675,000
as against $152,500,000 a week ago. These additional purchases have been
apportioned among the nine participating Federal reserve banks•

• •"

At the meetings of the Board on December 11 and 12, the question
of the reorganization of the Open Market Investment Committee was discussed
but no action taken.
The following letter was received from Deputy Governor Case under
date of December 18:
"There has been an increase of $45,000,000 in the holdings of
government securities in the Open Market Investment Account since I wrote
you on December 11, our holdings at the close of business tonight being
$222,675,000, as against $177*675*000 on December 11.




1
1

In addition to the special certificates of indebtedness which we

have been carrying for the last day or two to cover the Treasury overdraft
(which will in all probability be wiped out tonight), our own holdings of
government securities show a temporary increase of $9,000,000 incidental
to the Treasury's financing during the week,
"Our holdings of government securities under sales contract
agreements have also shown an increase, #23,375,000, for the week, the total
amount held tonight being $23,925,000 as compared with $550,000 at the close
of business December 11. • • •"
(Secretary's Note: On December 19 the Board approved
a rediscount rate of 4-l/2 per cent on all classes of
paper of all maturities, effective December 20, for
the Federal Reserve Bank of Kansas City.)
The following letter was addressed to the Board by the Deputy
Governor of the New York Bank under date of December 26:
"There has been an increase of $39,700,000 in the holdings of
government securities in the Open Market Investment Account since I wrote
you on December 18, the total holdings in the Account at the close of the
statement week ending December 2k being $262,375,000, as against $222,675,000
on December 18.
"Meanwhile, our holdings of government securities under sales
contract agreement have shown a decrease of $14,750,000 for the week, the
total amount held at the close of business December 2k being $9,175,000, as
compared with $23,925,000 at the close of the previous week. • • •"
At the meeting of the Board on December 31 there was a discussion
regarding the credit situation and System open market policy over the turn
of the year, attention being called to the fact that the Open Market In¬
vestment Committee retained at that time some leeway under the authority




-385granted to i t to purchase not to exceed $200,000,000 of Government securi¬
t i e s although i t was suggested that the Committee be authorized to sell
Government securities after the turn of the year, no action was taken.




-386Developments during 1930
Communications on Open Market Operations, Early January 1930
At the meeting of the Board on January 2, the Governor reported
a conversation on Tuesday with the Governor of the Federal Reserve Bank
of New York during which he was advised that the Open Market Investment
Committee is no longer buying Government securities and does not desire
at this time to sell any securities until developments over the turn of
the year can be tested out. Governor Harrison advised him, he stated, that
it is believed the initial reduction in Federal Reserve credit outstanding
will come about from a decline in bills and securities held under repurchase
agreements and that it is believed that it would be a mistake to have a
meeting of the Open Market Investment Committee before next week. The
Governor stated he is inclined to agree that it would be better to postpone
any meeting with the Open Market Investment Committee until after January 7.
Letters from New York Bank to Board, January 2 and 8. Mr, Case
wrote the Board on January 2, as follows:
"Since I wrote you on December 26, 1929, there has been an increase
of $15,125,000 in the holdings of government securities in the Open Market
Investment Account, the total heldings at the close of business December 31
being $277,500,000, as against $262,375,000 the week before.
"Our holdings of government securities under sales contract
during the same period have increased $12,675,000, or from $9,175,000 to
$21,850,000 during the week. This increase, however, we believe will be
temporary, as the dealers anticipate being able presently to obtain their
accommodations in the outside market. • • "




Under date of January 8, Deputy Governor Case wrote as follows:
"There has been no change in the holdings of government securities

-387in the Open Market Investment Account since I wrote you on January 2, 1930,
the total remaining at $277,500,000,
"Our holdings of Governments under sales contract, however,
during the same period have decreased $13,585,000 (from $21,850,000 to
$8,265,000) and we understand this balance will be taken up today. As you
were advised on Monday, this bank's holdings of government securities were
reduced on that day by approximately $10,000,000. • • •"
Letter from Harrison to Banks not members of the Committee,
January 11. At the meeting of the Board on January 11, Governor Harrison
of the New York Bank discussed informally with the Board the matter of
System policy and presented copy of the following letter addressed by him
under date of January 10 to the Governors of those Federal Reserve banks
not represented on the Open Market Investment Committee*
"While you have been receiving formal reports of the Open Market
Committee currently, it has occurred to me, now that we have turned the
end of the year, that it may be helpful to review conditions and prospects
as we now see them, especially as they relate to the System policy recom¬
mended by the Open Market Committee and approved by the Federal Reserve
Board in November.
"As you will remember, that policy was, in substance, that the
Federal Reserve System should do all within its power toward assuring the
ready availability of money for business at reasonable rates. with this
in view, the committee recommended a program of open market operations
that would avoid any increase and, if possible, facilitate some reduction
in the total volume of member bank discounts, since a large volume of
discounts has always been an inevitable obstacle to easy money conditions
generally.




-388" It seems to us, as we now see the problem, that while we have
made excellent progress towards our objectives, there is no occasion at
the present time to change our policies or objectives, although it must
be recognized that there is now a real difference in the machinery or means
to be employed in accomplishing them now that we have turned the end of
the year.
During the fall, and especially during the month of December,
the seasonal demand for currency and Federal reserve credit will usually
average about $300,000,000. During the past two months, the demand for
currency was slightly less than usual, but this difference in currency
payments was far more than offset by an outward flow of gold aggregating
about $110,000,000.
""While Federal reserve figures were much distorted as a result
of the crisis in the stock market and the consequent shifting of loans by
'others1 back to our member banks, nevertheless total Federal reserve
assets expanded during this fall period, that is, from the end of August to
December 2k$ by a little over $300,000,000f or about the usual seasonal
amount. Between November 27, immediately after the approval of the Open
Market Committee's report, and December 24, total Federal reserve credit
expanded about $100,000,000, or just about the amount of gold exports.
The seasonal requirements for currency which were slightly less than usual
this year were almost fully offset by the reduction in member bank credit
and reserve requirements following the sharp upturn the first of November.
"During this period of four weeks, November 27 - December 24,
open market operations of the System comprised the purchase of $155,000,000
of government securities and an increase of about $100,000,000 in bills,
including repurchase agreements - an increase of $255,000,000 in the total




-389open market holdings of the System, or a net increase in such holdings of
about $150,000,000 beyond the amount of gold exports. As a result of all
these operations there was a reduction in System discounts of almost pre¬
cisely $150,000,000 during the same period.
"Thus up until Christmas we were successful not only in avoiding
any increase but in actually accomplishing some reduction in member bank
discounts and thus in securing some relief in the general credit situation
despite the seasonal demand for credit and an additional demand due to gold
exports.
"Since Christmas the usual return flow of holiday currency and
the reduction in credit requirements have by the natural process carried
further the easing operation which before Christmas we facilitated by the
purchase of government securities. The latest report shows that member
bank discounts are now down, to a little under $600,000,000, or about what
they were in the spring of 1928. In this way the first technical step has
been taken toward removing one of the obstacles to an easier credit position.
It cannot be said, however, that the country has yet the full benefit of
freely available credit at reasonable rates. The bond market is somewhat
improved but is still restricted. Mortgage money is difficult to obtain,
and while over the counter rates and commercial paper rates have both de¬
clined at the principal centers they are still considerably higher than
they were before the period of huge speculative demand for credit. It will
evidently take some time before these conditions are corrected, but at
least some of the obstacles to a restoration of more normal credit con¬
ditions have been removed,
"In the meantime the evidences of business recession have become
constantly clearer. Car loadings, bank debits, and commodity prices show a




-390continuous decline and employment reports which we have just received for
New York State show a reduction in factory employment of 4 per cent in
December.
"In view of all the facts we do not see any occasion at the present
time for a change in the general objectives of System policy formulated in
November.
"It seems to us, however, and to the other members of the com¬
mittee that in view of the progress we have already made and in view of the
uncertainties in the credit situation pending an unwinding of the year-end
movements, there is no need at this time for any further purchases of govern¬
ment securities. On the other hand, there are a number of factors in the
situation which make us believe that there is no need just now for any
sales from the System Account. As we see it, continued large holdings of
bankers acceptances under repurchase agreement, substantial maturities
during January of bills held outright for the System, member bank discounts,
and possible gold exports, are all factors which will tend to mop up the
return flow of currency and credit in amounts sufficient to avoid any
sloppiness in the money market.
"In all the circumstances we feel that there is probably no need
to have a meeting of the Open Market Committee before the last week in
January, when we will have a still better picture of the effect of the usual
seasonal credit operations during the month. In the meantime, we recognize
that it will be necessary to watch the situation carefully and that, as
always must be the case, we should be prepared, in the event of any sudden
change in conditions or the development of any need, promptly to reconsider
and, if necessary amend our present program and policies.




"I should very much appreciate any comments which you may care to

-391give us regarding these open market policies or any suggestions which you
may care to have the committee consider at its meeting the latter part of
this month."
(Secretary' s note: On January 15 the Board approved
a discount rate of 4-l/2 per cent on all classes of
paper of all maturities, effective January 16, at the
Federal Reserve Bank of Philadelphia,)
Letter from New York Bank to Board, January 15. Under date of
January 15, Deputy Governor Case wrote the Board as follows:
"The total holdings of government securities in the Open Market
Investment Account remain the same as they were on January 8, 1930, the date
of my last letter to you; namely, $277,500,000. There was, however, some
change in the amount of holdings by the individual banks in the Account by
virtue of the sale by the Federal Reserve Bank of St. Louis, during the
week, to the other participating banks of $10,000,000 of its participation
in government securities in the System Account.
"There has been no change in the outright holdings of this bank
during the week. However, our holdings of government securities under
sales contract have decreased by $5,885,OOO, being $2,380,000 at the close of
business today as against $8,265,000 a week ago.




..."

-392Establishment of Open Market Policy Conference, January 1930
Letter from Board to Reserve Banks. At the meeting on January
16, Dr. Miller submitted a suggested revision of open market investment
procedure which was adopted by the Board,and he was instructed to prepare
and submit a letter to all Federal Reserve banks advising of the Boards
action. This letter was submitted by Dr. Miller at the meeting on Jan¬
uary 21 and while no action was taken at that time, the Governor was
authorized to advise the banks by telegraph that the Open Market Investment Committee had been enlarged to include all banks, that a letter out¬
lining the new procedure would follow shortly, and that a meeting of the
committee would be held in Washington on January 28, At the meeting on
January 23 the following letter submitted by Dr. Miller at the meeting on
the 21st. was approved and ordered transmitted:
"This letter invites the attention of your bank to changes which
the Federal Reserve Board, after prolonged consideration of the matter,
has concluded should be made in the existing procedure governing open
market operations.
"It may be recalled that it was in April 1923, that the present
procedure with regard to open market operations was adopted. In the pre¬
ceding year many of the Reserve banks, in order to maintain portfolios of
earning assets, entered the market on their own separate accounts to pur¬
chase United States Government securities, without much regard to the ef¬
fects of their operations on the market for Government securities or on
credit conditions. It was found necessary, in consequence, to give to
open market operations a status which recognized their credit effects
and economic consequences and also their effects on the position of each
Federal Reserve bank.




-393A copy of the Board's resolution containing an outline of
the procedure adopted in 1923 is herewith enclosed. Under this pro¬
cedure the principle governing open market operations was defined and
its application and practice left to a Committee consisting of five
Reserve banks acting under the general supervision of the Federal Re¬
serve Board.
"The principle was stated as follows:
'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.!
"The five banks constituting the Open Market Investment Com¬
mittee were the following:
Federal
Federal
Federal
Federal
Federal

Reserve
Reserve
Reserve
Reserve
Reserve

Bank
Bank
Bank
Bank
Bank

of
of
of
of
of

Boston
New York
Philadelphia
Cleveland
Chicago

"Although the necessity of giving to open market operations a
System status was recognized in 1923, it was not then foreseen how* much
use would be made of the open market operation as an instrument of
Federal reserve credit policy. As a matter of fact, frequent resort has
been taken to open market operations—either by purchase or sale of United
States Government securities—-as a mode of policy in the five years
following the 1923 arrangements.
"The experience of this period shows that the open market opera¬
tion, when involving other than trifling amounts, may be of first-rate
importance in altering credit conditions even when viewed on a national
scale.




-394"It is not surprising, therefore, that suggestions should have
been made that the System character of open market operations should be
fully recognized by having all twelve Federal Reserve banks, instead of
five as at present, represented in the shaping of open market policy.
Views to this effect have been expressed informally by Reserve banks not
included in the existing setup, and formally by the Federal Advisory Council
in the following recommendation adopted in September 1928:
'The Federal Advisory Council without any intention of criticis¬
ing the present arrangements but in order that all governors of the Federal
Reserve banks may participate in the discussions leading up to actions of
the Open Market Committee suggests to the Federal Reserve Board to consider
the advisability of having the membership of the Open Market Committee con¬
sist of all the governors of the Federal Reserve banks with an executive
committee composed of five members with full power to act.'
"For the reasons briefly set forth above, the Board has drawn
up a revision of the 1923 open market procedure, which embodies a fuller
recognition of the joint interest and responsibility of the Federal Re¬
serve banks and the Federal Reserve Board in the matter of open market
policy. The elements of this procedure are contained in a memorandum
adopted by the Federal Reserve Board reading as follows:
'(1) The Open Market Investment Committee, as at present con¬
stituted, to be discontinued and a new committee, to be known as the Open
Market Policy Conference, to be set up in its place.
!

(2) Each Federal Reserve bank to be represented on the Open

Market Policy Conference.
'(3) The Conference to meet with the Federal Reserve Board
at such times as may be arranged by or with the Board.




-395' (4) The function of the Open Market Policy Conference to be
to consider, develop and recommend plans with regard to the purchase or
sale of securities in the open market•
'{5) The time, character and volume of such purchases and sales
to be governed with the view of accommodating commerce and business and
with regard to their bearing upon the credit situation.
'(6) The conclusions and/or recommendations of the Open Market
Policy Conference to be submitted to each of the Federal Reserve banks and
to the Federal Reserve Board for consideration and/or action.
!

(7) A committee to be known as the Open Market Executive Com¬

mittee to be constituted for the purpose of executing such purchases and
sales of securities as have been approved by Federal Reserve banks and
the Federal Reserve Board.'
"Such further working arrangements as may be found necessary to
make the above outlined plan operative will, in the opinion of the Board,
best be determined by the Conference itself when it is organized.
"The Board believes that the above procedure contains the essen¬
tials of a workable plan designed to give expression to the common interest
of the Federal Reserve banks in matters of open market policy and to pro¬
vide a reasonable and practicable method for joint action. After your bank
has had time to consider the plan, the Board will welcome an expression
of your views."
Current letter from New York Bank to Board, January 22. On January
23 the following letter, dated January 22, was received from Deputy Governor
Case:
"There has been no change in the holdings of government securities
in the Open Market Investment Account since my letter to you under date of




-396January l5, 1930, the amount remaining at

$277,500,000

The outright hold¬

ings of this bank have likewise remained at the same figure as reported
last week, while our sales contracts in government securities have all been
paid off.
# # #"
Under date of January 23 the Board was advised that the Board of
Directors of the Federal Reserve Bank of New York at its meeting on that
day voted to request the Federal Reserve Board to reduce to 3-1/2 per cent
the minimum buying rate approved by it for the purchase of bankers' ac¬
ceptances, and subject to such action by the Board, to establish a minimum
rate of 3-1/2 per cent at or above which currently effective rates may be
fixed. This matter was considered at the meeting on January 24, during
which the Governor advised it was his understanding that if the minimum
rate of 3-1/2 per cent were approved by the Board, the bank planned to
reduce its effective rates slowly, at first by one-eighth per cent only to
3-7/8 per cent on short maturities, but action was deferred pending a dis¬
cussion of business and credit conditions at the meeting of the Open Mar¬
ket Investment Committee on January 28.
Discussion at January 28 meeting of Conference, At the meeting of
the Open Market Policy Conference held in Washington on January 28, at which
all Federal Reserve Banks except Kansas City were represented, Governor
Young explained "that this is the first meeting of the Open Market Policy
Conference attended by representatives of all of the Federal Reserve banks
and that no formal procedure has as yet been set up. He referred to the
policy adopted by the System in November and comments which had been re¬
ceived from various sources as to its continuance or change. He stated
that the directors of the Federal Reserve Bank of New York have requested




-397the Board to approve a reduction to 3-1/2 per cent in the bank's minimum
rate for purchases of bankers acceptances with the idea of reducing the
effective buying rate perhaps 1/8 per cent to 3-7/8 per cent. He stated
that the matter has been permitted to go over pending discussion at this
meeting, as has the question of a further reduction in discount rate which
has been also under consideration at the New York Bank,"
The Governor requested the individual members of the Conference
to express themselves on the advisability of a cautious program of ease
through the bill rate and also on the question of a possible further re¬
duction in the discount rate.
"Governor McDougal, after expressing the attitude of the Chicago
board, which has had under consideration the lowering of the discount rate,
said he believed this action might be taken in the near future if the
directors could agree that it would be a stimulus to legitimate business.
In regard to the proposed reduction in the bill rate, he stated he could
not quite see the propriety of such action at the moment but that he
certainly would not favor any action which would tighten the situation.
"Governor Norris expressed the opinion that the program adopted
in November has been accomplished and that no further easing should be
effected. He stated he would not favor a reduction in the discount rate
at this time, although he would approve a snail reduction in the bill rate
to keep the System in the bill market and prevent liquidation of the entire
System portfolio and not for the purpose of increasing holdings.
"Mr. Burgess pointed out that the directors of the New York Bank
would not expect to ease the credit situation through the bill rate but
rather prevent its hardening with the approach of spring. He stated he
did not believe a 3 7/8% bill rate would impede the distribution of bills




-393although it would take over some of the dealers' portfolios and prevent a
too rapid decline in the System' s holdings. He stated that in the opinion
of the New York directors with the present volume of rediscounts a reduction
in the discount rate would be logical.
"Governor Harrison reviewed briefly the policy adopted in November.
The policy was made effective in December, he stated, through purchases of
Government securities and in January through the seasonal return flow of
currency. He expressed the opinion that before discussing future mechanics
it should be determined whether the policy is to be continued.
"Deputy Governor Paddock stated that the situation in the First
District has cleaned up better and more rapidly than was expected but there
are still some collateral loans which should be liquidated. He stated his
bank would like to see a policy of marking time for the present until some¬
thing more definite develops, and then probably begin with a reduction in
the bill rate.
"Governor Fancher stated that he thought the System policy should
be to keep money fairly comfortable and that he would favor a reduction in
the bill rate. With regard to a reduction in the discount rate, he stated
his bank is still at 5% the directors feeling that some pressure should be
continued a while longer to assist liquidation and though it may later-toward
the end of February—reduce to 4 l/2% he thought it would stay at that rate
for some time.
"Governor Talley stated that up to this time his bank has been in
favor of the execution of the System policy, but he would not now approve a
reduction in the bill or discount rates. He expressed the opinion that the
System can err more readily at the present time by easing than by doing




-399nothing and stated he would be opposed to any specific movement to ease.
"Governor Martin expressed the opinion that the results sought in
the November policy have been obtained. He stated he thought a reduction
in the discount rate right now would be a movement in the wrong direction
as he does not believe business is suffering because it cannot get money
at reasonable rates and a reduction might retard further liquidation. He
also stated that if a reduction in the bill rate would result in a fairly
immediate lowering of the discount rate, he would not favor that at the
present time.
"Governor Black expressed the opinion that a policy of ease
should be continued. He stated that his bank would favor a reduction in
the bill rate, and, if it had an opportunity, would probably reduce its
own discount rate of 4 1/2%, in an effort to obtain reasonable rates for
business.
"Governor Geery stated that his bank maintains a 5% discount
rate, which is below the commercial rate in the district. If a reduction
in the bill rate were to be made to a point where it would interfere with
the normal distribution of acceptances, he stated he would be opposed to
it, but he thought it would be a wise move if it were simply a step to con¬
form to the market and take on as outright holdings such bills as are now
carried under repurchase agreements.
"Governor Seay expressed the opinion that the System should main¬
tain the present situation rather than ease further. He said he thought
the System should proceed cautiously in order to see that hardening of
rates does not result from the spring demands and to prevent any hardening
it might be well to act through the acceptance rate or possibly by small




-400purchases of Government securities, although he would dislike very much
to see the latter done.
"Governor Calkins expressed the opinion that the objective of
the System's policy, as he understood it, seems to have been achieved and
there is no occasion to go farther at the present time. He stated that if
it should later appear desirable to bring about a condition of greater
ease it should be done through some slight variation in the bill rate, as
the System can then reverse itself without embarrassment, which it cannot
do as regards the discount rate."
Preliminary memorandum from Harrison. During his statement
Governor Harrison presented the following preliminary memorandum for the
consideration of the Committees
"At the last meeting of the Open Market Investment Committee on
November 12 the resolutions adopted included the following statement of
policy:
'Since the meeting of the Committee on September 24, the
credit situation has changed abruptly. There has been a severe liquida¬
tion of credit against securities under circumstances which constitute
a serious threat to business stability at a time when there were already
indications of a business recession. This seems clearly to indicate the
need of having the Federal Reserve System do all within its power towards
assuring the ready availability of money for business, at reasonable rates.
"

In

view of these circumstances and for the purpose of avoiding

any increase, and if possible facilitating some reduction, in the total
volume of member bank discounts, the Committee believes that the System
should be prepared to increase the open market holdings of the Federal
Reserve banks through the purchase of bills if they can be acquired in




-401sufficient amounts without interfering with their present desirable dis¬
tribution, and if not, through the purchase of Government

securities'

"The committee recommended that to accomplish these purposes it
be granted authority to purchase not to exceed $200,000,000 of Government
securities.
"The Federal Reserve Board approved this program on November 2J>,
and it was also approved by a majority vote of the Governors' Conference
on December 11. Since November 27 purchases have been made under this
authority totaling $15,000,000, bringing the holdings in the open market
account up to $277,000,000 and the total security holdings of the System
up to $477,000,000. The purchases were all made prior to the first of the
year.
"Results Accomplished
"The purchase of securities appears to have accomplished a con¬
siderable part of the results which the committee hoped for. During
December, when there is ordinarily a considerable increase in rediscounts, no
increase took place, but on the contrary there was some decrease, facilitated
by the retirement of credit called into use in connection with the stock
market break. After the first of the year the seasonal retirement of cur¬
rency and credit, together with a continued liquidation of security loans
enabled the member banks to decrease their indebtedness still further, and
the System's total discounts for the past two weeks have been just under
$450,000,000. This is an amount of discounts conducive to a comfortable
money position. The accompanying chart indicates that with this level of
discounts, commercial paper rates might be expected to range from 4 to
4 l/2 per cent, other things being equal. The relationship between discounts




-402and commercial paper rates has been remarkably close in the past, though
rates are frequently a little sluggish in responding to a decrease in dis¬
counts. The second chart indicates also that with something like the
present amount of discounts the volume of bank credit usually tends to in¬
crease at a rate consistent with the usual rate of growth of the country's
business.
"While discounts have been reduced, it cannot yet be said that
money is readily available for business at such reasonable rates as would
encourage business enterprise. Commercial paper rates in the open market
are still 4 3/4 to 5 per cent, and the rate which the banks are charging
customers on prime commercial paper in New York City is still 5 l/4 and
5 l/2 per cent. These relatively high interest rates reflect in part the
slowness of rates to adjust themselves to a changed monetary condition,
in part great caution and conservatism of the banks, and in part the dis¬
count rates of the Federal Reserve System which are higher than has
usually been the case with the present volume of rediscounts. Mortgage
money in particular is not yet freely available and the bond market still
has limited absorptive power.
"Volume of Credit
"The total volume of bank credit has declined by nearly 2 billion
dollars since the first of November, and the loans and investments of the
reporting member banks are now less than one per cent higher than at
this time in 1929, a year to year increase which is less than the usual
growth of credit required by the country's business.
"Condition of Business
"The recession in business activity which began in the late
summer became more precipitate in the last two months of the year,




-403and the December figures showed a decline greater than had occurred in any
year since 1924. The meager figures so far available for January show a
seasonal recovery from the low point in December in the automobile, steel,
and a number of other lines of business, but it is too early to judge
whether the recovery has been more than the usual seasonal gain. Commodity
prices have continued to be weak and in the United States show a decline
of 2.6 per cent from a year ago. World prices as judged by the British
index, show a decline of 4 per cent.
"The Seasonal Expectation
"Ordinarily the spring increase in business gives rise to an
increase in the demand for Federal reserve credit of something in the
neighborhood of $90,000,000 from the lowest point at the end of January
to the highest point early in April. The bill holdings of the System
usually decline in this period because of a seasonal decline in the vol¬
ume of bills outstanding, and as a consequence there is usually some in¬
crease in the discounts of the System and some firming in money conditions.
"Condition of the Bill Market
"The volume of bills outstanding increased to a new high figure
of $1,700,000,000 at the end of December. The bill holdings of the Federal
Reserve System, however, amounting to $392,000,000, constituted a much
smaller proportion of the total bills outstanding than usual. This was due
primarily to an extraordinary demand for liquid short term investments for
the employment of funds withdrawn from the security markets in November.
This demand was so considerable that during November and December the bill
holdings of the Reserve System showed nothing like the usual seasonal
increase, nor would it have been possible to acquire any considerable




-404volume of bills during the period without driving rates to very low
levels.
"Near the end of the year, however, funds began to be distributed
more normally, and a considerable volume of bills was thrown into the
market, with the consequence that dealers portfolios became congested and
bill rates were increased by l/8 of one per cent. This situation is grad¬
ually being corrected as the volume of bills outstanding is slightly re¬
duced and distribution is gradually taking place. Under these circumstances
it seems possible, however, that the spring liquidation of the System's
portfolio may be somewhat slower than usual, dependent somewhat upon the
System's buying rate for bills.
"Foreign Exchanges and Gold Movement
"During November and December when considerable amounts of foreign
funds were being withdrawn from New York the foreign exchanges were very
strong and more than 100 million dollars of gold was exported. In January
this situation has become adjusted, interest rates have declined in Europe,
foreign exchanges have weakened, and gold exports have ceased. Most of
the exchanges are so far below the export points that considerable recovery
would be necessary before gold moved. In the next two weeks more than
$15,000,000 of gold is expected to arrive from Japan and South America.11
Governor Harrison also stated that "the present minimum bill rate
of the New York bank is 4% and that the directors feel they should have
some leeway to adjust their effective rate downward as well as upward. He
stated that the immediate effect of a reduction of l/8 of 1% in the buying
rate would be to convert some of the bills held under repurchase agreement
into outright holdings and avoid pressure on the money market incident to




-405a transfer of Federal Reserve credit from bills into rediscounts. He
pointed out that unless the seasonal reduction in bills is minimized the
System1s discounts may advance in an amount totaling the bill reduction
and the spring demands for additional credit."
Recommendation of Conference and discussion with Board. After
considerable discussion regarding the present procedure in the establish¬
ment of bill rates, the members of the Board withdrew and the Conference
drew up the following recommendation which was presented at the joint
meeting of the Conference with the Board on January 29:
"The Open Market Committee, including informally the Governors or
Deputy Governors from eleven of the Federal Reserve banks, has considered
the report of the secretary of the Open Market Committee, the preliminary
memorandum, and the data submitted by the Federal Reserve Board and by
representatives of the several reserve banks, and has reached the following
conclusions upon the matters therein referred to and upon the specific
questions asked by the Federal Reserve Board,




"The facts appear to be:
1. The panicky feeling has subsided.
2. A business recession has taken place, the extent
or duration of which is not yet possible to
determine.
3. Money has been made available to commerce and industry
at more reasonable rates.
4. Liquidation is progressing in an orderly fashion.
5. Rediscounts have been reduced to under $450,000,000.
6. However, there is a large volume of security loans
in member banks which they are anxious to get reduced.
7. Liquidation has been slower in country banks than in the
city banks.

~406~
"Under these circumstances it is the judgment of the Committee
that no open market operations in Government securities are necessary at
this time either to halt or to expedite the present trend of credit.
"The Committee believes, however, that it would have an unfor¬
tunate effect upon business if the demand for additional credit for spring
business, concurrently with the running off of the present bill portfolio
of the System should result in a hardening of rates.
"It therefore recommends that the minimum buying rate for bills,
fixed by the Federal Reserve Board, be reduced so that the Federal Reserve
banks may have such flexibility in their bill operations that the present
portfolio may be not only maintained but may if necessary be increased to
such extent as to avoid the hardening of rates which might result from a
a seasonal demand for additional reserve credit."
In presenting the recommendation, Governor Norris made the
following statement:
"There were differences of opinion regarding the matter before
the conference, the representatives of two of the banks feeling it is de¬
sirable to have a distinct easing of rates and that it would be advisable
for the System to do anything likely to have that effect. The majority
opinion was that what has already been done has set in motion a trend
which should result in lower rates. Between a reduction of discounts and
large purchases of securities, and a reduction of rates to business there
is always a lag and that lag is likely to be greater at this time because
the appetite of the bankers has been whetted during recent months and they
are slower about coming down. There is every reason to anticipate that
the reduction will occur so that it is believed the current is set in the




-407direction of easier rates.
"We (speaking here for the majority opinion) feel we should not
interfere in that movement either in the direction of halting it or
attempting to expedite it, unless the situation clearly calls for some
action and we cannot see that it does. On the contrary, we feel it is
better that the situation should clear up further, that the extent and
duration of this recession should be more ascertainable than at the present
moment, and that it is inexpedient for us to exhaust at the present time any
part of our ammunition in an attempt to stimulate business when it is per¬
haps on a downward curve and we had better wait until we feel that we have
reached a stable basis where the administration of some stimulant may have
a distinct and good effect rather than to exhaust our ammunition now in
what may be perhaps a vain attempt to stem an inevitable recession. There¬
fore, the recommendation is made that we see no necessity for open market
operations in Government securities at this time either to halt or to
expedite the present trend of credit. The majority of the Committee is
not in favor of any radical reduction in the bill rate or radical buying of
bills which would create an artificial ease or necessitate a reduction in
the discount rate. If that reduction comes about naturally from further
liquidation or reduced demand, all well and good, but we do not feel that
we should make any active effort to bring that about. Therefore, we have
limited this recommendation to the maintenance of the present portfolio
and such increase as may be necessary, not to avoid some increase in dis¬
counts, but if any conditions likely to bring about a hardening of rates
arise, then we believe that hardening should be prevented by increasing
the bill portfolio.




-408"We do not believe that in the present temper of the public there
is any danger of a revival of active speculation in the market.
"We do not favor any such operations in bills as will necessitate
a reduction in the discount rate, but if it should come as the result of
the general trend of events, that is a matter between the bank and the
Board. The seasonal demand during the spring may not be as large as usual
and may not reach more than $75,OOO,OOO and that probably could be taken
care of by an increase in rediscounts without hardening of rates. A greater
demand might have a hardening effect which should be prevented by the pur¬
chase of bills, but we distinctly feel that no operation in bills should
be undertaken for the purpose of either forcing or facilitating a re¬
duction in discount rates by any bank."
During the discussion which followed regarding the advisability
of a reduction in the effective buying rates of bills and the probable
results of such a reduction, the following statements were made:
"Governor Harrison in further explanation, stated that the Con¬
ference felt the System should let the present downward trend of rates
run along and do nothing which would artificially either stop the decline
or force it down more rapidly. We feel, he stated, it would be desirable
if possible, without any artificial action, to permit continuance of the
present trend. The Committee hopes the New York Bank will not go out and
buy so many bills that it will force a reduction in the discount rate, but
the Committee does not express any opinion on a reduction in the rate, which
may be brought about by the normal trend.
"Governor Norris stated the feeling was that any temporary peak
in the downward trend should be levelled off through the bill market.




-409"Governor Martin stated that he cast the only vote against the
report because he was fearful of results which might come from any artificial
action which, in his opinion, would be justified only in an emergency. He
stated he would regret to artificially accentuate easy money at this par¬
ticular time as he does not believe it is necessary, and feels that if the
recommendation of the Committee should be followed out and a reduction
made in the bill rate it would mean as a matter of course, based on ex¬
perience, a later reduction in the rediscount rate."
Communications on Open Market Operations and Discount Rates, late January —
late March 1930 "
Letter from New York Bank to Board, January 29. The following
letter was received from Deputy Governor Case under date of January 29:
"The total holdings of government securities in the Open Market
Investment Account remain unchanged at $277,500,000, the amount reported
in my letter of January 22, 193O. The outright holdings of this bank are
also unchanged with no sales contracts against government securities. .

Board disapproval of reduction of New York Bank discount and
buying rates. At the meeting of the Board on January 30 the Governor
stated "that the directors of the Federal Reserve Bank of New York meet
today and he, therefore, requested that the Board consider, in the light
of the report submitted yesterday by the Open Market Policy Conference,
the request of the New York Bank that the Board reduce to 3-1/2 per cent
the minimum buying rate established for the purchase of bankers acceptances
by the bank. He stated that if the minimum rate is reduced the bank will
undoubtedly establish an effective rate of 3-7/8 per cent today which, in
his opinion, will result in easing the credit situation, to which he




-410personally is not opposed. He stated, however, that his impression from
the discussions yesterday is that the recommendation of the Open Market
Conference was approved by the Governors on different premises-~two definitely
being in favor of an easing program and the others in favor of preventing
any hardening due to a run off in the System bill portfolio or the increased
spring demands for credit.
"The Chairman stated that he thought the System's position should
be to keep credit from hardening and that it would be a good thing to take
care of the spring demand by some easing policy."
After some discussion it was voted that the Federal Reserve Bank
of New York be advised that the Board had taken under review its request for
the establishment of a minimum buying rate of 3-1/2 per cent for purchases
of acceptances and had determined the minimum buying rate to be 3-3A per
cent.
At a special meeting of the Board on the afternoon of January 30,
Governor Young reported that he had been advised that the directors of the
Federal Reserve Bank of New York had voted to establish a discount rate
of 4 per cent and had approved the establishment of an effective buying
rate of 3-7/8 per cent on bills up to 45 days, which action, he stated, was
unanimous,based on the belief of the New York directors that a rate reduc¬
tion would be an aid to the business situation, and was taken by them
following a report by Dr. Burgess of the deliberations of the Open Market
Policy Conference. A motion to approve the discount rate established by
the New York directors was lost, some of the members of the Board express¬
ing the opinion that a reduction would be a little premature.
Letter from New York Bank to Board, February 5, Under date of
February 5 Mr, Case wrote the Board as follows:




-411"Since my last letter to you, under date of January 29, 1930,
there have been no transactions in the Open Market Investment Account, the
holdings of government securities remaining unchanged at

$277,500,000

The holdings of this bank have also remained at the same figure as re¬
ported last week, with sales contracts showing a small increase of
$l,l40,000

At the meeting on February 6, following receipt of advice from
the Federal Reserve Bank of New York that its Board of Directors had again
voted to establish a discount rate of 4 per cent, and report by the Governor
that there was quite a decided feeling on the part of the directors for an
adjustment in the rate at the Boston and Chicago banks, there was further
discussion as to the advisability of a reduction in the discount rate, some
of the members still feeling that conditions were not opportune at the
moment for a reduction. It was voted, however, to approve a discount rate
of 4 per cent for the New York Bank, effective February 7.
(Secretary' s notes At the meeting on February 6 the
Board also approved a rediscount rate of 4-l/2% on all
classes of paper of all maturities for the Federal Re¬
serve Bank of Richmond, effective February 7.)
On February 7 the Board considered a second request from the
Federal Reserve Bank of New York, for a reduction to 3-1/2 per cent in the
minimum buying rate for the purchase of bankers1 acceptances at that bank,
but action on the matter was deferred.




(Secretary's note: On February 7 the Board approved a
discount rate of 4% on all classes of paper of all
maturities, for the Federal Reserve Bank of Chicago,
and a rate of 4-l/2% for the Federal Reserve Banks of
Cleveland, Minneapolis, and Dallas, effective February
8; and on February 10th a rate of 4-l/2% on all
classes of paper was approved for the Federal Reserve
Bank of St. Louis, effective February 11.)

-412On February 11 the Federal Reserve Bank of New York established
the following schedule of effective buying rates on acceptances:
1 to \& days
46 to 120 days
121 to 180 days
Repurchase

3-3/4%
3-7/8%
4-l/4%
3-7/8%

At the meeting of the Board on February 12 it was voted to re¬
duce to 3-l/2$ the minimum buying rate for purchase of bankers* acceptances
at the New York Bank.
(Secretary's note: On February 12 the Board ap¬
proved a rediscount rate of 4% on all classes of
paper of all maturities for the Federal Reserve
Bank of Boston, effective February 13.)
Letters from New York Bank to Board, February 13-26. The Deputy
Governor of the Federal Reserve Bank of New York wrote the Board under
date of February 13 as follows:
"There have been no changes in the total holdings of Government
securities in the Open Market Investment Account since my letter of
February 6 to you, the amount remaining at $277,500,000. Our individual
holdings of Governments also remained the same, and advances under sales
contracts, which are still at a low level, total $1,550,000, as against
$1,140,000 last week.

(Secretary's note: On February 14 the Board ap¬
proved a rediscount rate of 4% on all classes of
paper of all maturities for the Federal Reserve
Bank of Kansas City, effective February 15.)
Under date of February 19 the following letter was received from
Deputy Governor Case::
"The only change that has taken place in the Open Market Invest¬
ment Account since my letter to you under date of February 13, 1930, is the




-413taking over temporarily from the Federal Reserve Bank of Dallas of
$5,000,000 of i t s participation in government securities and distributing
i t among those other Federal Reserve banks which oared to participate.
All of the banks, with the exception of Atlanta, St. Louis and Kansas
City, participated.

This transaction has, of course, no effect on the

t o t a l holdings in the account, the amount remaining at $277,5OO,OOO» Our
individual holdings of government securities are the same as a week ago,
with sales contracts also remaining at a low level, namely $2,900,000.

On February 2k the Federal Reserve Bank of New York established the
following schedule of effective buying rates on acceptances:
1 to 90 days
91 t o 120 days
121 to 180 days
Repurchase

3-3/4%
3-7/8%
4-1/4%
3-7/8%

Mr. Case wrote the Board as follows on February 26:
"The t o t a l par value of government securities in the Open Market
Investment Account remains precisely the same as when I wrote you on
February 19, 1930. There has, however, been some change in maturities.
Our individual holdings of government securities remain the same, with
sales contracts at $4,750,000 - an increase of $1,850,000. . • •"
Board consideration of desirability of open market purchases,
March 5. At the meeting of the Board on March 5 discussion was had regard¬
ing the various factors entering into the business and credit situation
and the extent and possible duration of the business recession.

The desir¬

ability of the Board's taking some action t o ease the situation either
through the Government securities market or a reduction in the discount
rate, and the possible effects of such action, were thoroughly reviewed and




-414the Governor was instructed to advise the Chairman of the New York Bank that
the Board had given very careful consideration t o the business and credit
situation generally; that i t realized that conditions were not good and
believed i t was an opportune time for the System to take some actionj that
i t would, perhaps, be advisable to have a meeting for the consideration of
open market policy, possibly on Monday, March 24, after the tax payment
period; that the Board f e l t , however, that during the interim no harm could
be done and some good could be accomplished by an increase in the Government
security portfolio of the Federal Reserve Bank of New York, purchases being
made gradually to not to exceed $50,000,000 during the two weeks or so be¬
tween March 5 and the date of the meeting.
Letter from New York Bank to Board, March 5. Mr, Case wrote as
follows under date of March 5:
"While there have been some changes in the maturities of the
issues held, the t o t a l par value of government securities in the Open
Market Investment Account remains the same as i t was when I wrote you on
February 26, 1930, namely $277,500,000

The investment account of t h i s

bank will show an increase of $8,000,000 over a week ago, occasioned by
the temporary purchase of some short-term governments which will be off¬
set within a few days by the taking over by the Treasury of a like .
amount. • • # "
On March 5 the Federal Reserve Bank of New York made a further
reduction in i t s buying rates on b i l l s and on March 6 established the
following schedule:




1 to 120 days
121 to 180 days
Repurchase

3-1/2%
3~3/4%
3-1/2%

-415Purchases of securities in mid-March. At the meeting on March
10, during a discussion of a request from the Federal Reserve Bank of New
York for a reduction in the minimum buying rate at that bank to 3%, the
Governor presented a l e t t e r from the Chairman of the bank dated March 7,
advising that "at the meeting on March 6th consideration was given to the
Board's l e t t e r of March 5th, suggesting the purchase of not to exceed
$50,000,000 of Government securities pending a meeting of the Open Market
Committee suggested for March 24,th; the l e t t e r advising that the
directors present at the meeting and the officers of the bank were unani¬
mously i n favor of making such purchases and the directors authorized the
officers to proceed, in accordance with which action purchases of
$25,000,000 have been made from private sources and further purchases will
probably be made for delivery during the statement period beginning
March 13th."

At the conclusion of the discussion i t was voted to establish

a minimum buying rate of 3 per cent for the purchase of acceptances at
the New York Bank.
On March 11 the New York Bank made a further reduction in i t s
schedule of effective buying rates of 1/4% on maturities up to 1$ days and
on repurchase agreements and 1/8% on other maturities.
Under date of March 12 the Chairman of the New York Bank advised
the Board as follows:
"The increase of $26,750,000 in the holdings of government
securities in the Open Market Investment Account since my last l e t t e r dated
March 5, 1930, i s in line with the decision arrived at last week to make
additional purchases up to not exceeding $50,000,000, for the time being.
The foregoing indicates that practically one-half of the $50,000,000 has




-416already been purchased, and the balance contracted for, for delivery later
this week. The securities already purchased have been placed in the Open
Market Investment Account and allotted to such of the banks as desired to
participate. . . .t!
Reduction of New York Bank discount rate to 3-1/2 per cent. At
the meeting of the Board on March 13 the Governor reported advice that the
New York directors had unanimously voted to establish a rediscount rate of
3-1/2%, which rate was approved effective March 14.
(Secretary1s notes On March 14 the Board approved
a rediscount rate of 4% on all classes of paper for
the Federal Reserve Bank of Cleveland, effective
March 15.)
This reduction was followed on March 14, 17 and 19 by further
reductions in the effective buying rates on bills at the New York Bank,
and on March 20 the following schedule was established:
1 to 120 days
121 to 180 days
Repurchase

3%
3-1/4%
3%

Under date of March 17 Mr. Case wrote the Board as follows:
w

In connection with our discussions last week relative to the

change in our discount rate one point was made both by our officers and
our directors which I should like to pass on to you.
"

We all realize that in reducing our rate to 3 l/2 per cent and

accompanying this rate reduction by making funds so freely available
through open market operations in the interest of business, we are embark¬
ing on a course which involves certain dangers. In the past reductions
below four per cent and large open market purchases have at times been
followed by outbursts of excessive speculation and too rapid increases in
the volume of credit. We here believe that the present business and credit




-417situation justifies running some risk in the hope that business may be
benefited, and there appears just now to be less risk than usual from
excessive speculation.
"We have the belief, however, that even now as we take this step
we should be considering the policy to be pursued if too rapid expansion
of credit results. One method which has been discussed is the general
practice of the European central banks of raising their rates by a full
per cent rather than by one-half per cent steps. We may find that this
practice based upon long experience in many countries, would be effective
here. It at least appears to warrant careful consideration.
"On one view we are quite unanimous: that if necessary the System
should be as prompt to take vigorous and definite measures to prevent
excessive expansion of credit as it has been during the past five months to
take steps designed to facilitate the movement toward easy credit con¬
ditions in the interest of business. The experience of the past few months
should insure wide public support for the System in acting to prevent as far
as its powers go the recurrence of the events daring this period.
"1 am passing on to you these views, not with the thought that any
of us can in any way make advance commitments since every situation is in
some sense unique, but simply to keep you informed as to our discussions.
The suggestion is perhaps one that you would like to discuss with your
associates."
Board discussion of buying rate on acceptances. At the meeting
of the Board on March 19 a general discussion of the credit situation
developed during which it was the consensus of opinion that there is danger
that the present policy of the Federal Reserve System will result in too




-418much ease in the money market • The members generally expressed the opinion
that no further reduction should be approved in the minimum buying rate on
bankers1 acceptances, which is now at 3% and down to which effective rates
have been reduced
At the meeting on March 20 the Governor reported a telephone
conversation with Chairman Case of the Federal Reserve Bank of New York,
who expressed "the opinion that the present very easy money situation is
only temporary as New York City banks are $60,000,000 short in their
actual reserves and, in addition, the Government overdraft of $44,000,000
is to be taken care of in the next two days. He stated that the New York
bank is not attempting to follow the bill rate in further reductions and
is losing some bills, Mr. Case expressed the opinion that no action
should be taken during the next few days and Governor Young stated that
upon inquiry he advised Mr. Case that, in his opinion, it is proper to do
nothing under the circumstances. He stated, however, that dealers' rates are
now below the Federal Reserve bank rate for purchases of acceptances and
that directors may possibly request a lower minimum buying rate."
(Secretary's note: Effective March 20, the Federal
Reserve Board approved a rediscount rate of 4% on all
classes of paper for the Federal Reserve Bank of
Philadelphia, and on that date a similar rate was
approved for the Federal Reserve Bank of San Francisco,
effective March 21.)
On March 19 total bills and securities held by the System
amounted to $961,000,000 consisting principally of Government securities
in the amount of $561,000,000, acceptances in the amount of $185,000,000
and discounted bills in the amount of $206,000,000,
Letter from New York Bank to Board, March 20. The following
letter was received from Mr. Case under date of March 20:




-419"There has been no change in the holdings of government securities
in the Open Market Investment Account since my letter of March 12, 1930
aside from the completion of the delivery and apportionment to other par¬
ticipating Federal Reserve banks of the balance of the recent purchases.
These purchases reached a total of $49,750,000. • • .t!
Meeting of Governors on March 24, and Adoption of Procedure for Open
Market Policy Conference.
Preliminary memorandum of Secretary. The meeting of represents.
tives of all Federal Reserve banks, called by the Governor of the Board on
March 12, to consider open market policies, was held in Washington with
the Federal Reserve Board on March 24, at which the following preliminary
memorandum, prepared by the Secretary of the Open Market Investment Com¬
mittee, was considered:
"The most important development in the credit situation since
the last meeting of the Open Market Investment Committee on January 28
and 29, is that business conditions have not improved as rapidly as had
been hoped at that time. The January figures for business and trade were
slightly better than those for December, and February in turn was very
slightly better than January, But the improvement in both months was so
small as to leave the total volume of production and trade below the cor¬
responding period in any recent year. The recession appears to have been
more severe than in either 1924. or 1927. Accompanying the business reces¬
sion unemployment has become serious, probably more so than in any year
since 1921. In both 1924 and 1927 business was supported in recession by
a continued substantial volume of building construction, but in the past
few months building has continued at a low ebb without any indication yet
of substantial recovery.




-420"MONEY RATES
"The trend toward easier money conditions which was observed
at the time of the last meeting has continued even more rapidly than was
then anticipated, partly due to a reduced demand for credit and currency
for business, but more largely to a heavy flow of gold imports, mostly
from Japan and Brazil, which has totaled about $100,000,000 in the period.
In the past two weeks Treasury operations in connection with the March 15
tax period have been an additional important factor toward ease. For ten
days before the tax period the Treasury balance at the Reserve banks was
drawn down to exceptionally low figures, thus putting funds into the mar¬
ket, and at the time of the tax period the excess of funds in the market
as a result of large Treasury disbursements covered by an overdraft could
not be absorbed in the usual way by a reduction in member bank indebtedness.
And as a consequence there was a considerable volume of free funds avail¬
able in the market which tended to depress money rates rapidly. On March
19 total bills discounted for the Federal Reserve System were $206,000,000
as compared with $407,000,000 on January 29. The decline in money rates
in this period is indicated in the accompanying table:
January 29, 1930
Rates for Commercial paper

4

4

3/4-5
4

90 day bills (offered)
4

Call money (renewal)
Time money

March 21, 1930

Jan.
5.4l

l/2

3

l/2 (nominal)

4

Bank rates to customers in
New York

2 1/2

3 3/4

1$

Feb.

15.
5.09

Mar.15
4.93

"On March 18 the New York Clearing House reduced deposit rates
by l/2 of one per cent except for the rate on bank deposits which remained
unchanged.




-421"In the early part of this period rates tended to move rather
sluggishly and to reflect rather slowly the fundamental changes in the
credit position, but during the latter part of the period the decline be¬
came precipitous and during the tax period even more rapid than the funda¬
mental credit situation appeared to justify.
"BOND AND STOCK MARKETS
"The effects of easy money and freely available credit have been
in the first place to stimulate a vigorous recovery in the bond market.
Bond prices have risen to the highest points in more than a year, and the
bond market has been opened to new issues; so that bond financing is now
in substantial volume and well absorbed. This is of particular importance
with relation to the business situation because it makes possible the
carrying forward of many business undertakings which had been postponed
because of the condition of the bond market.
"The stock market remained irregular until the past week when it
made a considerable recovery with more active trading than for some time.
Brokers loans as reported to the Federal Reserve banks have risen $500,000,000
since the last meeting of the committee. This probably represents in part
an increase in loans by banks to replace loans withdrawn because of low
rates by lenders whose operations do not appear in the Federal reserve
reports, but it reflected in part also the recent recovery in stock prices.
"BANK CREDIT
"The total volume of bank credit continued to decline until the
end of February but since that time has risen about $300,000,000 and is
now about as large as at the middle of January. The increase has been mostly
in security loans, as so-called commercial loans have remained close to the




-422lowest point of the year. In the week ended March 19 bank investments
showed their first sizable increase, part of which resulted from subscrip¬
tion to the new Treasury issue.
"FEDERAL RESERVE POSITION
n

In the face of continued business depression and a rapid down¬

ward movement of money rates changes in Federal Reserve bank discount
rates have taken place more rapidly than was anticipated at the time of
the last meeting. Since that time two changes have been made in the
rates of the New York and Cleveland banks and one change in the cases of
Boston, Philadelphia, Richmond, Chicago, St. Louis, Minneapolis, Kansas
City and Dallas.
"During the early part of the period the Reserve banks were
successful in pursuing the policy adopted at the January meeting of holding
their bill portfolio at a level close to the level of the latter part of
January, which was between $275,000,000 and $300,000,000. Early in March,
however, it became clear that, with a decline in the total volume of bills
in the market, and an increasing demand for bills from banks and others
seeking short term investments, it would be impossible to maintain the bill
portfolio. In these circumstances and in view of the unfavorable business
situation the New York reserve bank, after consultation with the Federal
Reserve Board, undertook to purchase $50,000,000 of Government securities.
All reserve banks were advised of this operation and offered participations
in the purchase, and eight of the reserve banks took participations•
"The following table compares system figures for March 19 with
those for January 22. March 19 figures are distorted somewhat by the
Treasury overdraft. More normal figures for this week will show an in¬
crease in bills and discounts, replacing the overdraft.




-423(In millions
January 22
Bills discounted
433
Bills bought
298
U. S. securities
477
Other securities
15
Total bills and securities
1,223
"Includes $29,000,000 of the $44,000,000 special one-day
ficate of indebtedness to cover overdraft on that date;
participation in the certificate was held by a New York

of dollars)
March 19
206
185
561
9
96l
Treasury certi¬
a $15,000,000
member bank."

Discussion of Governors. At the outset of the general discussion
Governor Young referred "to the purchase of $50,000,000 of Government secu¬
rities made by the New York Bank, with the approval of the Board, during the
past two weeks as an offset to a rapid runoff in the System's bill portfolio
which it was not thought wise to deal with by a reduction in the bill rate
at the time the purchase was authorized.
"Governor Norris questioned the advisability of the purchase of
Government securities in a money market already easy as a result of the
normal trend.
"Governor Young then referred to the reductions in discount and
bill rates which have been made since the last open market meeting, in
which he stated the Federal Reserve System preceded the market. He advised
the Conference that the Board has before it a request for a further reduc¬
tion in the minimum buying rate from 3% to 2 l/2% and that the question
before the Conference would seem to be whether the System should continue
efforts toward further ease, whether the policy of the System should be to
keep the existing situation unchanged or whether it is advisable to reverse
the present policy by allowing the market to take bills as they mature and
possibly some Government securities.
"Mr, Case pointed out that of the $185,000,000 bill portfolio of
the System, $100,000,000 mature within the next thirty days.




The discussion

-424brought out that in the absence of action by the System, these bill maturities
would exert a tightening influence only in the event they were not offset
by gold imports, a reduction of currency circulation, security liquidation
or a further recession in business with lessened credit demand.
!l

Mr. Miller pointed out that the present very easy money is

largely due to the fact that while the System has been operating in the
open market, its operations have been augmented by gold imports and re¬
duced currency requirements incident to a slowing down of the business de¬
mand for credit,
"A general discussion then ensued during which it appeared to be
the consensus of opinion that for the present, at least, the Federal Reserve
System has proceeded far enough in the direction of easy credit as a stimulus
to business and that for the time being, unless some unforeseen development
occurs, there should be no increase in the Government security or bill
portfolios."1
During the afternoon the representatives of the Federal Reserve
banks in conference adopted the following memorandum, which was presented
at a meeting with the Board later in the afternoon:
"The Open Market Committee, including informally representatives
of all the reserve banks, has considered the information submitted in the
Chairman1s preliminary memorandum, by the Federal Reserve Board, and by
representatives of the several banks©
"While Treasury tax period operations have distorted the near-time
view of the money situation, it is clear that since the meeting of the Com¬
mittee on January 28 and 29 money conditions have eased substantially and
money has become more freely available and the ease has been extended from




-425the short time to the long time money market .
t!

The Committee believes the steps already taken by the Federal

Reserve System in easing the money market through open market operations
have gone as far in providing the stimulus of easy money for business use
as seems desirable at this time. The Committee believes that at present
there is no occasion for further purchases of Government securities,
"In the interest of flexibility and preparedness for the unexpected,
the Committee favors a reduction in the minimum buying rate on bills, fixed
by the Reserve Board, to 2-1/2%. It is the sense of the meeting, however,
that in the absence of some developments that cannot now be anticipated,
bills should not be bought below 3%."
Revision of proposed provisions for Open Market Policy Conference.
Following a brief discussion of the memorandum, the question of open market
procedure was taken up and a committee, consisting of all representatives
of the Federal Reserve banks present and the Governor of the Board was ap¬
pointed for the purpose of preparing, in the light of replies received from
the banks to the Board's letter of January 23, a revision of the proposed
open market procedure to be submitted to the Conference and later to the
Federal Reserve banks.
This committee submitted the following report at the joint meet¬
ing of the representatives of the Federal Reserve banks with the Board on
March 25:
"The Committee appointed at the meeting of the Federal Reserve
Board with the representatives of the twelve Federal reserve banks yesterday,
met at the Carlton Hotel last evening and adopted the attached revised draft
of a proposed open market procedure.




"It was also voted to be the sense of the representatives of the

-426Federal reserve banks present at the meeting that the representative of the
Federal Reserve Bank of New York be elected Chairman of the Conference for
one year; that the Executive Committee provided for in the proposed pro¬
cedure should consist of the Chairman and the representatives of the Federal
Reserve Banks of Boston, Cleveland, Philadelphia and Chicago for one year;
also, that the Conference adopt the principle of reasonable rotation in the
membershop of the Executive Committee after the first year.
"(l) The Open Market Investment Committee, as at present constituted,
to be discontinued and a new committee, to be known as the Open Market Policy
Conference, to be set up in its place.
"(2) The Open Market Policy Conference to consist of a representative
tive from each Federal Reserve Bank, designated by the Board of Directors of
the bank..
"(3) The Conference to meet with the Federal Reserve Board upon
the call of the Governor of the Federal Reserve Board or the Chairman of
the Executive Committee, after consultation with the Governor of the Federal
Reserve Board.
"(4) The function of the Open Market Policy Conference to be to
consider, develop and recommend policies and plans with regard to open
market operations.
"(5) The time, character and volume of purchases and sales to be
governed with the view of accommodating commerce and business and with re¬
gard to their bearing upon the credit situation.
" (6) The conclusions and/or recommendations of the Open Market
Policy Conference, when approved by the Federal Reserve Board, to be sub¬
mitted to each Federal reserve bank for determination as to whether it will
participate in any purchases or sales if recommended: any Federal reserve




-427bank dissenting from the proposed policy to be expected to acquaint the
Federal Reserve Board and the Chairman of the Executive Committee with
the reasons for its dissent.
(7) A Committee of five to be selected from and by the members
of the Conference for a term of one year, with full power to act in the
execution of the policies adopted by the Open Market Policy Conference and
approved by the Federal Reserve Board, and to hold meetings with the Board
as frequently as may be desirable.
"(8) Each Federal reserve bank to have the right, at its option,
to retire as a member of the Open Market Policy Conference; no member of
the Conference to be considered as waiving any of its lights under the
Federal Reserve Act with respect to the purchase and sale of securities, but
each member of the Conference will respect its Conference obligations.fl
The following memorandum, left with the Board by Governor Young,
who was appearing at the time before the House Banking and Currency Com¬
mittee, was also read:
u

The Committee that was suggested yesterday afternoon to draft an

open market procedure for the System met last evening at the Carlton Hotel
and after much discussion and many compromises, the attached draft was
finally approved unanimously by the committee. I believe that it meets
many of the criticisms that were made by the various boards of directors,
but not all. Nevertheless, I do believe that after the directors of the
various reserve banks learn that their representatives have agreed to it
unanimously that they will no doubt adopt it.
u

The eighth section was included on my suggestion for certain

specific reasons, which are as follows:




n

l.

No board of directors would care to treat its responsibilities

-423and duties under law in such a light manner as to assign those duties
and responsibilities under all occasions and conditions, and I believe
it advisable under the arrangement to specifically mention the rights
that they have under the law.
"2. From a practical standpoint, however, I do not believe that
any Federal Reserve bank would withdraw from representation in the Open
Market Policy Conference except with great reluctance, even though their
board of directors may frequently dissent from the policy.
"3. If one or several of the smaller banks should elect to with¬
draw, I still believe that the committee would be in a position to function.
If, however, one or several of the larger Federal reserve banks should elect
to withdraw, the probabilities are that the committee plan would have to
be abandoned, and open market operations would have to be handled by
regulation. Regardless of what has happened in the past, however, I
believe this to be a very remote possibility,11
The revised procedure submitted by the Committee was thoroughly
discussed and finally amended to read as follows:
1
1

(l) The Open Market Investment Committee, as at present con¬

stituted, is hereby discontinued and a new committee, voluntary in character,
to be known as the Open Market Policy Conference, is set up in its place.
"(2) The Open Market Policy Conference shall consist of a repre¬
sentative from each Federal Reserve Bank, designated by the Board of Di¬
rectors of the bank.
"(3) The Conference shall meet with the Federal Reserve Board
upon the call of the Governor of the Federal Reserve Board or the Chairman
of the Executive Committee, after consultation with the Governor of the
Federal Reserve Board.




-429"(4) The function of the Open Market Policy Conference shall be
to consider, develop and recommend policies and plans with regard to open
market operations.
"(5) The time, character and volume of purchases and sales shall
be governed with the view of accommodating commerce and business and with
regard to their bearing upon the credit situation.
"(6) The conclusions and/or recommendations of the Open Market
Policy Conference, when approved by the Federal Reserve Board, shall be
submitted to each Federal reserve bank for determination as to whether
it will participate in any purchases or sales recommended; any Federal
reserve bank dissenting from the proposed policy shall be expected to
acquaint the Federal Reserve Board and the Chairman of the Executive Com¬
mittee with the reasons for its dissent.
" (7) An Executive Committee of five shall be selected from and
by the members of the Conference for a term of one year, with full power
to act in the execution of the policies adopted by the Open Market Policy
Conference and approved by the Federal Reserve Board, and to hold meetings
with the Board as frequently as may be desirable.
"(8) Each Federal Reserve bank participating in the Open Market
Policy Conference shall be considered as waiving none of its rights under
the Federal Reserve Act; each Federal Reserve Bank shall have the right
at its option to retire as a member of the Open Market Policy Conference,
but each bank while a member of the Conference shall respect its Conference
obligations."
Adoption of procedure by Board. At the meeting on March 26 the
Governor stated that he had talked over the telephone with Deputy Governor
Case of the New York bank "who advised him that the directors at their




-430~
meeting tomorrow will probably take no action with regard to the rates in
effect at that bank. It was, therefore, agreed to again defer action on
the reconanendations of the Open Market Policy Conference and the requests
of the New York bank for reduction in its minimum buying rate."
Discussion was also had regarding the proposed open market pro¬
cedure as revised at the meeting on the 24th and following a vote to re¬
consider the action of the Board on January 16 in adopting the procedure
submitted to the banks with the Board' s letter of January 23, it was voted
to adopt the revised procedure, same to become effective when ratified by
the Board of Directors of the twelve Federal Reserve banks.
Current letter from New York Bank to Board, March 26. On March 26
Mr. Case wrote the Board as follows;
"There has been no change in the total amount of holdings of
government securities in the Open Market Investment Account since my letter
dated March 20, 1930, the amount remaining unchanged at $327,300,000.
"As to our own investment account: with the exception of the re¬
duction of $29,000,000 from last week's figures, the amount of the special
one-day certificate of indebtedness to cover the government overdraft, the
total remains unchanged at $112,000,000«

Sales contracts are still at a

low figure, being $2,46O,OOO at the close of business tonight. . . • "
Letter from Board to Reserve Banks on organization of Open Market
Policy Conference• At the meeting on March 31 the following letter, sub¬
mitting to the Federal Reserve banks the proposed open market procedure
was ordered transmitted:
"Under date of January 23, 1930, a letter was addressed to each
Federal Reserve bank advising of adoption by the Board of a revision of the
open market procedure made effective in April 1923. This letter expressed




-431the belief of the Board that the procedure adopted contained the essentials
of a workable plan designed to give expression to the common interests of
the Federal Reserve banks in matters of open market policy and to provide a
reasonable and practicable method for joint action. It requested that after
each bank had had time to consider the plan its views thereon be forwarded
to the Board.
"On March 24th and 25th, a meeting was held for the consideration
of open market policy attended by representatives of the twelve Federal Re¬
serve banks. At the conclusion of the regular business, a thorough dis~
cussion was had regarding open market procedure in the light of letters which
had been received by the Board from the directors of eleven of the Federal
Reserve banks. Following this discussion the representatives of the Federal
Reserve banks, with the Governor of the Federal Reserve Board, were ap¬
pointed a committee to prepare a further revision of the plan acceptable to
them. This revision was then thoroughly discussed by the Board and the
representatives of the Federal Reserve banks, with the result that some
further changes were made.
"The revised procedure in its final form, copy of which is at¬
tached, was unanimously agreed to by the representatives of the Federal Re¬
serve banks. It has since been considered by the Federal Reserve Board and
was adopted by the Board without change, to become effective when ratified
by the boards of directors of the twelve Federal Reserve banks. Please,
therefore, submit the matter to the Board of Directors of your bank at its
next meeting and advise the Board whether your directors accept participa¬
tion in the Open Market Policy Conference under the plan as revised.
"In the Board1s letter of January 23, 1930, it was pointed out
that certain working arrangements which might be necessary would best be




-432determined by the conference itself when organized. In this connection,
the representatives of the Federal Reserve banks at the meeting on March
24th and 25th voted it to be the sense of those present at the meeting that
the representative of the Federal Reserve Bank of New York on the Open Mar¬
ket Policy Conference should be elected chairman for one year; that the
Executive Committee, provided for in the procedure, should consist of the
chairman and the representatives of the Federal Reserve Banks of Boston,
Cleveland, Philadelphia and Chicago for one year: and that the conference
adopt a principle of reasonable rotation in the membership of the Executive
Committee after the first year."
Communications on Open Market Operations and Discount and Buying Rates,
April ~ mid-May 1930 "
Developments during early April. Under date of April 2 the Chairman

of the New York Bank wrote the Board asfollows:"Therehas been no change in the
securities in the Open Market Investment Account since my letter dated
March 26, 1930, the total remaining at $327,3OO,000. There has, however,
been a small change in the composition of the portfolio, and the participa¬
tions by Federal reserve banks in the Account by virtue of an exchange in
the market of $l,500,000 Fourth Liberty Loan bonds for a like amount of
Treasury notes, and the sale to the Federal Reserve Bank of Boston, at
their request, of $10,000,000 of government securities from our participa¬
tion in the System Account. • . ."

At the meeting on April 7 the report submitted by the Open Market
Policy Conference on March 2k was considered. The Governor reported ffon
his visit to New York last Thursday, commenting particularly on the spread
between existing bill rates in this country and in England. He stated




-433that the New York bank is not disposed to reduce its effective buying rates
under present conditions but that he did not see any particular objection
to reducing the minimum buying rate of the bank from 3% to 2 l/2% as recom¬
mended in the report. During the discussion, all of the members of the
Board expressed themselves as in agreement with the views of the Committee
that at present there is no occasion for further purchases of Government
securities and that in the absence of some development that can not now be
anticipated, bills should be bought below 3%. Some of the members of the
Board, however, questioned the advisability of reducing the minimum buying
rate to 2 l/2%."
At the conclusion of the discussion, it was voted to approve the
report with the exception of the suggestion that the minimum buying rate be
reduced, which was held underreview.
On April 10 Mr. Case wrote the Board as follows:
"Referring to my letter dated April 2, 1930, the Treasury' s
operations in the government security market during the past week have
brought about no change in the total of either the Open Market Investment
Account or our own portfolio. • • . ft
(Secretary's note: Effective April 8, 11, 12, 12, and
15, the Federal Reserve Board approved for the Federal
Reserve Banks of Dallas, Richmond, Atlanta, St. Louis,
and Minneapolis, respectively, a rediscount rate of
4 per cent on all classes of paper of all maturities.)
At the meeting on April 15 Governor Harrison was present and
"acquainted the Board in detail with business and financial conditions in
various European countries as observed by him during a recent trip abroad.
He reported discussions had with officers of various European central banks
regarding conditions in their respective countries and internationally. The




-434general impression, he stated, seems to be that there is no world short¬
age of capital but a very bad geographical distribution which is an
important factor in the present business and commodity price depression,
and that banks of issue should do all they can toward rehabilitating the
long term money market and effecting a redistribution of capital, although
their efforts must necessarily be directed to the short term money market
on the hope that the maintenance of reasonable rates for short time money
will gradually affect the long time investment market."
Under date of April 16, Mr. Case wrote as follows:
"Although there have been some changes in maturities of the
government securities held in the Open Market Investment Account, there
has been no change in the total since my letter of April 10, 1930, the
par value of governments held still being $327,300,000. ..."
Letter from Board to Reserve Banks requesting meeting of Con¬
ference , April 19• The following motion was submitted by Mr. James at the
meeting of the Board on April 18, but no action was taken:
"In view of the conditions shown in the Federal Reserve Board
press release for April 17th, 1930, showing condition of weekly reporting
member banks, which discloses the fact that loans on securities to brokers
and dealers by member banks is higher now than in any period excepting
October 30th and November 6th, 1929, I wish to offer a motion that the
Board give consideration to calling a meeting of the Open Market Policy
Conference at an early date, with a view of arranging for the disposal of
not less than fifty million Government securities."
Following a discussion of Mr. James1 motion at the meeting on
April 19, the Governor was authorized to transmit the following letter to
the Governors of all Federal Reserve Banks and to change the date of the




proposed meeting if necessary or advisable:
"Money market and related developments since the last meeting
of the Open Market Policy Conference March 24-25 have been such as to
lead some thought here, as elsewhere, that the relation of the Federal
Reserve System to current trends should be reviewed with a view of
determining whether the System's position should be readjusted;- and,
more particularly, whether the System portfolio of Governments should be
maintained at its existing level.
"With these considerations in mind, I am writing to ask whether
you think a meeting in the near future is desirable, and whether it would
be convenient for you to attend, if the meeting were called for Monday,
Kay 5th. It is realized that not all members of the Conference may find
it convenient to attend, especially those living at a distance; and the
fact that two meetings of the Conference have already been held this year
is not overlooked by the Board.
"A written statement of views would be appreciated by the Board
from any bank not participating in the meeting of the Conference, should
it be called.11




-436Letter from Mew York Bank to Board, April 23. Under date of
April 23 Mr. Case wrote the Board as follows:
"There have been no changes in the status of the Open Market
Account since my letter to you dated April 16, 1930, the total par
value remaining at $327,300,000 and the maturities practically the same
as a week a g o . • • "
Board disapproval of 3 per cent New York Bank discount rate,
late April. At the meeting of the Board on April 24, the Governor re¬
ported 1fa telephone conversation this morning with Governor Harrison,
during which he was advised that the directors of the New York bank on
Monday discussed and at their meeting today will probably act to reduce
the discount rate of the bank to 3$ and to request approval of a reduc¬
tion in their minimum buying rate to 2 l/2%. Governor Harrison stated
that as he was not present at the meeting on Monday he had not had much
opportunity to consider the matter, but was passing it on for information
of the Board."
Following a discussion of the probable action of the New
York directors, Governor Young again talked over the telephone with
Governor Harrison and advised him that there is some feeling on the
part of the Board that the matter might well go over for a while, par¬
ticularly in view of the recommendation of the recent meeting of the
Open Market Policy Conference and the fact that another meeting of the
Conference is in contemplation early in May.
At the afternoon session of the meeting of the Board on the
24th, the Governor reported "advice received from Governor Harrison
that the directors of the Federal Reserve Bank of New York present at
the meeting today unanimously voted to establish a rediscount rate of




-4373% on all classes of paper of all maturities, with understanding, however,
that their action is predicated upon approval or disapproval by the
Federal Reserve Board today, and also voted to request approval by the
Board of a minimum buying rate of 2 l/2% with the idea of putting into
effect a rate of 2 3/4% if the discount rate is reduced to 3%."
The Governor reported the substance of a statement made to
him by Governor Harrison over the telephone of the reasons which had
led the Board of Directors of the New York bank to vote a reduction
of its discount rate. The reasons had mainly to do with national and
international conditions, such as the trend of business, commodity
prices both in America and in Europe, money rates, and foreign exchanges
and gold movements.
"Further discussion of the national economic and credit situa¬
tion ensued, which developed a considerable variance of opinion between
the New York Bank and the Federal Reserve Board with regard to Federal
Reserve policy.

It appeared that some of the members of the Board were

still of the same opinion with regard to factors and conditions affecting
Federal Reserve policy as they were at the time the Board began to con¬
sider a meeting of the Open Market Policy Conference early in May - to
the effect that the immediate objective in credit policy should be the
maintenance of stability rather than further easing through Federal
Reserve action." Following this discussion it was voted to disapprove
the action of the New York directors as to the discount rate and to
determine that rate to be 3-1/2 per cent. Action on a motion to approve
a minimum buying rate of 2-1/2 per cent was deferred for a later meeting
of the Board.

The motion was again considered at the meeting on April

30 at which time the Governor stated that the only bills coming to the




-438Federal Reserve bank were very short maturities offered by member banks,
that dealers' rates had been reduced, that the English buying rate had
been lowered to 2-3/8 per cent, and that, in his opinion, the New York
buying rate should be lowered, even though it may be a forerunner of a
reduction in the discount rate of the bank. He also presented the
following letter, dated April 28, from Governor Harrison setting forth
the principal factors considered by the directors of the New York Bank
when they took action at their meeting on April 24:
"At the meeting of our directors last Thursday, recent devel¬
opments in credit and business conditions were reviewed at some length
in their relation to the rate and credit policies of this bank. It
may interest you to have the following brief summary of the principal
factors in the situation which were considered:
"(a) Wholesale commodity prices continue to decline so that
the last available weekly index indicates a level lower than at any
time since the United States entered the war in 1917•
"(b) March figures for trade and production show considerable
declines from February and on the whole were lower than at any time
during the current movement.
"(c) Such figures as are available for April show that
building contract awards continue to run substantially below last
year. On the other hand, car loadings of merchandise show some increase
in the first two weeks of April, though this may possibly be due to
the late Easter trade. Car loadings of heavy freight show about the
usual seasonal decline.
" (d) Current quarterly reports of many industrial corpora¬
tions show large declines in volume and profits from a year ago.




-439"(e) Our export trade for the first three months of 1930
shows a decline of about $280,000,000 from the same period of 1929 a net decline of slightly over 20 per cent.

Imports have declined

about the same percentage.
(f)

The bond market has shown some weakness the past two

weeks with a slight decline in prices and some backing up of new issues.
We have felt that the financing of new enterprises and the restoration
of purchasing power for commodities whose prices are still declining,
depends in part at least upon the strength and activity of the bond
market and that the revival of foreign purchasing power for our export¬
able surplus is largely dependent upon new capital acquired through
the bond markets of the world, including the American bond market.
"(g) Gold continues to move to America - net imports
amounting to almost $200,000,000 so far this calendar year.
"(h) Some of the foreign exchanges, especially the South
American exchanges, are weak relative to the dollar.
(i) Member bank credit has on the whole shown little expan¬
sion in recent weeks and Federal reserve credit continues to decline.
On last Thursday total borrowings by all banks in this district were
at a low record of recent years - approximately $35, 000,000.
"(j) Our reserve

percentage is approximately 82 per cent.

"(k) The stock market has been irregular and on the whole
weaker during the past few weeks and in all the above circumstances there
appears to be less risk of a too rapid expansion of bank credit collateraled by securities.
"It is, of course, difficult in the scope of a letter to
review in any great detail the various matters discussed by the




-440directors or to give the views of individual directors with respect
to them. The above summary, however, refers to some of the main facts
which were before the directors when they took action with respect to
the discount rate at their meeting last Thursday."
During the discussion which ensued, some members of the
Board "expressed their objection to a reduction in the minimum buy¬
ing rate to 2-1/2 per cent, for the reason that it will probably force
an early reduction in the discount rate, which they are unwilling to
approve under present conditions and while the System maintains its
present heavy portfolio of Government securities. They indicated that
with a withdrawal of Federal Reserve funds from the market, through
the sale of Government securities, a reduction in the discount rate
might be justified." It was finally voted to approve a minimum buying
rate of 2-3/4% for the New York Bank,
Under date of April 30 Deputy Governor Kenzel wrote the
Board as follows:
"There have been no changes in the Open Market Investment
Account since Mr. Case's letter to you dated April 23, 1930, the total
remaining at $327,300,000 and the maturities the same as last week.
Board approval of 3 per cent discount rate, May 1. At the
meeting of the Board on May 1 the Governor stated that the Bank of
England had reduced its rate from 3-1/2 per cent to 3 per cent and the
Bank of France from 3 per cent to 2-1/2 per cent, and reported that
the directors of the Federal Reserve Bank of New York had unanimously
voted to establish a rediscount rate of 3 per cent on all classes of
pape;r also, to renew their request that the Board approve for the
bank a minimum buying rate of 2-1/2 per cent for purchases of bankers




•"

-441acceptances. Following consideration of the action of the New York
directors it was voted to approve the rediscount rate of 3 per cent
established by them and to approve a

minimum buying rate of 2-1/2

per cent for the purchase of bankers1 acceptances. Governor Young
stated that it was his intention to advise the other Federal Reserve
banks that because of the action taken on the New York rates it was
not believed that a meeting of the Open Market Policy Conference would
be necessary and that the contemplated meeting was cancelled.
Under date of May 1 the Board received a telegram from
Deputy Governor Kenzel of New York advising that further reductions had
been made in dealers1 rates on bills and that the Federal Reserve Bank
of New York would have bought bills at 2-7/8 per cent (up to 120 days)
but had had no offerings. On May 2 the following schedule was estab¬
lished by the New York Bank:
1 to 120 days
121 to 180 days
Repurchase
Trade acceptances

2-3/4

Per c e n t
3 per cent
2-3/U per cent
3 per cent

(Secretary's Note: On May 7 the Federal Reserve Board
approved a rediscount rate of 3-1/2 per cent on all
classes of paper of all maturities, for the Federal
Reserve Bank of Boston, effective May 8i)
On May 7 Mr. Case wrote the Board as follows:
"There have been no changes in the total of the holdings of
Government securities in the Open Market Investment Account since
Mr. Kenzel's letter to you, dated May 1, 1930, the total remaining at
$327,300,000. The maturities have also remained at practically their
previous figure

• . •"

On May 8 the New York Bank established the following
schedule of buying rates:




-4421 to 60 days
61 to 120 days
121 to 180 days
Repurchase

2-1/2
2-5/8
3 per
2-5/8

per cent
per cent
cent
per cent

On the same date the New York directors voted to request the
Board to reduce to 2 per cent the minimum buying rate for the purchase
of bankers acceptances at the bank. Action on this request was deferred
at the meeting on May 9 for a full meeting of the Board.
Decision to call meeting of Conference to discuss advisability
of purchases Governor Harrison was present at the meeting of the
Board on May 14 and discussed with the Board the depressed business
situation in this country and the world generally.

He stated that "the

directors of the Federal Reserve Bank of New York have discussed the
matter of possible future System policy but do not recommend any action
at the present time. He stated that probably the only action which
could be considered by the Federal Reserve System, if anything were
done, and if conditions at the time justified it would be to embark
upon an open market operation in Government securities. He suggested
the advisability of a review of existing conditions through a meeting,
in the near future, of the Open Market Policy Conference or the
executive committee of the Conference, but no definite commitment on
this suggestion was made by any member of the Board."
The following letter was received from Deputy Governor
Burgess under date of May 14:
"Since Mr. Case's letter to you dated May 7, 1930 there
has been no change in the total holdings of government securities in
the Open Market Investment Account.

The amount still remains at $327,300,000,

with the maturities practically unchanged.
also remain the same at about $112,000,000.




Our own holdings
. • "T'

-443At the meeting on May 15 the Governor referred to the suggestion made
at the meeting yesterday by Governor Harrison "of a meeting soon of
the Open Market Policy Conference or the Executive Committee of the
Conference. He also referred to the apparent intention of the New York
bank to initiate in the near future a policy looking toward further
ease of the credit situation through purchases of Government securities.
He expressed the opinion that a meeting of the Open Market Policy
Conference would probably be advisable in order that all Federal Reserve
banks may be informed of the program which the New York bank seems to
have in mind and stated that if the members of the Board have no bbjection he will call a meeting for Wednesday, May 21st. Discussion ensued
during which some members of the Board expressed doubt as to whether
any benefits will accrue from an open market meeting at this time
unless some definite recommendations are to be submitted and that they
personally would be opposed to any program of Government purchases."
Other members, however, agreed with the Governor that all Federal
Reserve banks should be kept informed of possible future developments,
and it was voted to call a meeting of the Open Market Policy Conference
on May 21•
On May 19, the New York Bank established the following sched¬
ule of buying rates:
1 to 90 days
91 to 120 days
121 to 180 days
Repurchase

2-1/2
2-5/8
3 per
2-1/2

per cent
per cent
cent
per cent

On May 21 the System's total holdings of bills and securities
amounted to $932,000,000, of which amount $528,000,000 was in the form
of Government securities, $187,000,000 in bills, and $210,000,000 in
bills discounted.




-444Meeting of May 21-22, 1930
The Federal Reserve Board met with the members of the Open
Market Policy Conference in Washington on May 21. At this meeting the
Governor reported "that participation in the Open Market Policy Con—
ference

under the revised plan recently approved by the Board has

been accepted by all Federal Reserve banks and that this, accordingly,
is the first formal meeting of the Conference. He stated that in its
acceptance the New York bank set forth its interpretation of the plan
as not affecting in any way the present procedure with respect to bill
operations."
He also reported that at the meeting of the Federal Advisory
Council with the Board on May 20 the Council had no recommendation to
make with regard to discount rates or open market policy, apparently
being of the opinion that no action by the System is necessary just
at this time. He also reported that on the question of the advisability
of increasing Federal reserve bank rates 1 per cent at a time instead of
l/2 per cent, as had been customary, the Council did not care to make
a definite recommendation, feeling that while such a policy might
be advisable under certain conditions, a raise of one-half per cent
would

be preferable.
Preliminary memorandum. At a separate meeting of the Open

Market Policy Conference on the 21st, the following preliminary
memorandum was considered:
"Reports on business activity during the two months since
the last meeting of the Open Market Investment Committee have, in
general, shown no material evidence of recoveryt

After allowance for

the usual seasonal increase, final figures for March showed some




-445reduction from February in general production and trade, and April
figures apparently will show a slight increase, but, in general, there
seems to have been little advance from the lowest levels reached during
the recession which began last autumn.
"In some directions conditions appear to have become somewhat
worse, rather than better. Factory employment, for example, failed to
show the customary spring increases, and the Federal Reserve Board's
seasonally adjusted index has declined each month to a new low point
for recent years. The bond market, which at the time of the March
meeting had been showing a

strong advance, has since had a setback

and, although there has been some improvement accompanying the easy
money conditions of the past three or four weeks, the recent condi¬
tion

of the bond market cannot be called better than fair. Com¬

modity prices, after some indication of a slightly firmer tendency in
the latter part of March, have subsequently turned downward again
and the weekly index of 285 commodities computed by the Federal
Reserve Board has declined gradually, but steadily, to new low levels
since 1916.
"COMMODITY PRICES:
" . • . there has been a decline of about 2 per cent
in

the Board's commodity price index/since March 28, and approximately

10 per cent since last July.
"This decline has not been confined to any one group of
commodities.

. • . while some of the most severe declines since last

July have been in agricultural products, there have been substantial
declines also in metals and other industrial raw materials.
"SECURITY MARKETS




"Just preceding the last meeting of the Committee on March

-44624 and 25, the bond market showed a rapid increase in the volume of
trading, and a rapid rise in prices. Apparently this represented, in
part, a response to the unusually easy money conditions which developed
for a short time during the March tax period because of the temporary
excess of Treasury disbursements over collections. With the firmer
money conditions that developed in the latter part of March and the
early part of April, there was a reaction in the bond market; the
volume of bond trading on the New York Stock Exchange declined from
around $20,000,000 a
March

day to around $10,000,000j a large part of the

rise in bond prices was canceled; and there were reports of a

considerable accumulation of undigested bonds in the hands of security
dealers.
"Accompanying the easier money conditions of the past
few weeks, however, bond market conditions have shown some slight
improvement•

There has been no sustained increase in the volume

of bond trading on the Exchange, but it is reported that the accumu¬
lation of bonds has been to some extent distributed, and that there
has been a little better distribution of new offerings, which have
been in large volume. Bond prices, however, have not reached the
levels of the third week in March, and the market is not strong.
" • . • there has been a larger volume of domestic corporate
bond issues

during the first four months of 1930/ than in either of

the two previous years, an increase also in foreign corporate issues,
and a considerable revival in issues of domestic municipalities and
states, and also in foreign governmental borrowing through the bond
market. The increased issues reflect in part the carrying out of
financing postponed by reason of adverse market conditions last
year, and also represent the partial fulfillment of pledges made to the



-447President by corporation and public officials• An analysis of the issues
indicates a large part of the proceeds are being used directly in under¬
takings involving construction or other undertakings involving the
employment of labor and the purchase of materials.

...

Although re¬

cent money rates have made bond yieldsmore attractive than for two
years past there still appears to be reluctance on the part of commercial
banks to increase their bond holdings materially.
"Notwithstanding the somewhat firmer money conditions during
the latter part of March and the early part of April, stock prices con¬
tinued to rise during that period, and at the highest point reached early
in April, a general index of stock prices showed a recovery equal to
nearly 60 per cent of the decline from the highest level reached in 1929
to the lowest point of last November•

Subsequently, although money condi¬

tions have eased, there has been a substantial decline in stock prices,
and recently the volume of trading has diminished considerably.
"MONEY RATES
"/There was/a~ distinct firming between March 21 and April 16
in a majority of rates, including call money, time money, and bankers
acceptance rates, and yields on short-dated Treasury certificates.
During that period there was no evidence of any considerable surplus
of funds seeking short-term investment in the New York money market.
In fact, the advance in rates reflected some slight difficulty in
meeting the demand for funds, a difficulty which was further

evidenced

by a considerable increase in sales of bills to the New York Reserve
Bank under repurchase agreement•

During the latter part of April money

conditions eased slightly, reflecting chiefly a substantial inflow of
gold, and this movement toward easier conditions was accelerated early




-448in May by reductions in the rediscount rate. of the Federal Reserve Banks
of New York and Boston, and by a further decline in the amount of currency
in circulation.

Even during this later period, however, there were only

a few days on which the New York banks were completely out of debt, and
surplus funds in the market were rather promptly absorbed by reductions
in the system bill portfolio.
"FEDERAL RESERVE CREDIT
ff

Funds made available through gold imports or currency reduction

were used to reduce the amount of Federal Reserve credit in use, rather
than for any expansion in credit, • . .
"Discounts for member banks show little change

from March 2k

to May 17/- Between March 24 and April 16 the bill holdings of the System
increased $61,000,000, largely in sales contracts, accompanying firmer
money conditions. Subsequently, gold imports and the continued reduc¬
tion in the amount of currency in circulation made available funds which
were used to reduce bill holdings over $100,000,000.
"MEMBER BANK CREDIT
"Since the statement date just preceding the last meeting
there has been a comparatively small increase in the total loans and
investments of weekly reporting member banks, as follows:
(In millions of dollars)

Loans on securities
All other loans
Investments
Totals

Amount on
March 19
May
14
8,O54
8,
246
8,793
8,560
5,667
5,811
22,5l4

22,616

Change
192
- 233
+ 144
+ 103

"One factor in the recent trend of bank loans, no doubt, is
the fact that municipalities and, to some extent, corporations, which
last year were unable to obtain long-term loans under favorable




-449conditions through the bond market, and consequently relied upon shortterm bank loans, this year have sold long-term bonds and have used
part at least of the proceeds to repay bank loans. To the extent that
the increase in security loans has been due to borrowing by security
dealers to carry such securities pending distribution, the loans which
would now be included in

loans on securities" may be serving the same

purpose as last year, when they would have been included among the "all
other loans•!<
# # #
1
1

« • . although the security loans of weekly reporting banks

are now higher than on October 2 of last year, there has been a net
liquidation of nearly 4 billion dollars of loans on securities during
the intervening period.

The analysis indicates further that, although

the loans of weekly reporting banks to brokers for their own account
have incresed nearly $1,100,000,000 since December 24, practically
:$400,0Q0,000 of this amount has served simply to replace loans to
brokers withdrawn by lenders otherthandomesticbanks, and the remainder
has replaced loans made by reporting banks directly to their customers,
so that there has been no net increase in total security loans since
December 24, notwithstanding the fact that the weekly reports of
brokers loans have indicated a net increase of about $750,000,000.
Even since February 26 a substantial part of the increase in the loans
of reporting banks to brokers has simply offset continued withdrawals
of funds from brokers loans by "other" lenders, and continued reduc¬
tions in security loans made by the reporting banks directly to their
customers.
"The total reduction in loans for 'others' indicated by this
analysis is nearly $3,400,0Q0,Q0G since last October, not including the




-450reduction of unknown amount in loans to New York brokers by customers
of out-of-town banks. The reduction did not all take place last autumn,
but has continued during the past few months, and it seems quite pos¬
sible that it may have some bearing on the continued decline in the
1

commercial1 loans of reporting banks. That is to say, the steady

withdrawal of funds from the call loan market by corporations and other
lenders may well have provided current funds for business transactions,
which otherwise might have been borrowed at banks.ff
Action of Conference,

The Board met with the Open Market

Policy Conference again on May 22 at which meeting Governor Harrison
stated "that during the separate session of the Open Market Policy
Conference its formal organization was considered with the result that
he, as representative of the Federal Reserve Bank of New York, was
chosen as Chairman, and Deputy Governor Burgess of the New York Bank
as Secretary. He stated that the Executive Committee will be composed
of the representatives of the Boston, New York, Philadelphia, Cleveland
and Chicago banks for a period of one year, and that a policy of rotation
among the Federal Reserve banks will be followed thereafter in the selec¬
tion of the Committee.
fl

He stated it was also the sense of the Governors present

that the minimum buying rate for purchases of bankers acceptances
approved by the Federal Reserve Board should always be at a point which
will give flexibility in the bill operations of the Federal Reserve
banks.
"The Conference also voted, he stated, to go on record that
recommendations as to the discount rate of any Federal Reserve bank

or

Federal Reserve banks are not within its proper province and the direc¬
tors of any Federal Reserve bank must be free at any time to change



-451the discount rate of their bank, subject only to the review and determi¬
nation of the Federal Reserve Board.
"With regard to the suggestion of one of the Federal Reserve
banks, reported yesterday by Governor Young, that it be permitted to
purchase Government securities for the purpose of supplementing its
earnings, Governor Harrison reported that it was the sense of the
Conference that the supplementing of income of a Federal Reserve bank is
not a proper reason for the purchase of Government securities.
!f

With regard to the policy to be pursued to meet full credit

requirements, Governor Harrison reported that it was the sense of the
Conference that in view of the uncertainties as to credit conditions it
is too early at this time to formulate definite plans as to the means
to be used to provide Federal Reserve credit to meet autumn seasonal
requirements.
1
1

He stated that the Conference heard a report by him with

regard to the foreign situation, based upon his recent trip abroad, and
after reviewing the domestic situation both with respect to business and
credit conditions, adopted the following:
?l

The Conference has considered a preliminary memorandum

reviewing domestic business and credit conditions and has discussed
at length the present trends in world trade, commerce and commodity
prices. Particular consideration was given to the rapidly declining
volume of our export trade and its probable relation to the decline in
commodity prices in this country•
!f

It appears to the Conference that conditions in business,

agriculture and trade are still seriously depressed, not only in
this country but evidently throughout the rest of the world as well.
It is the sense of the Conference that these conditions merit continuous



-452careful observation by the Federal Reserve System in order that the
System will be prepared to act promptly in the event that conditions
further develop in such a way as to make action seem advisable •
"In the present circumstances, however, it does not appear
to the Conference that any affirmative recommendation as to Open
Market operations is advisable just now. But it is the sense of the
Conference that if the situation so develops as to require an Open
Market operation by the System the members of the Conference will be
prepared to reconvene or else, if a meeting cf the whole Conference is
not practicable, to act promptly on recommendation of its Executive
Committee.tf
Governor Young "referred to communications which have been
received recently from certain of the Federal Reserve banks regarding
open market policy and requested that the Governors of the banks in
advising the Board of their views in the future state whether or not
they believe that a meeting of the Open Market Policy Conference
should be held for the purpose of considering their suggestions or
views."
"Governor Harrison stated that if any Governor having such
a recommendation to make would send a copy of his letter to the Board
to each other Governor, either directly or through him as Chairman of
the Conference, the entire Conference would be acquainted with the
views of the individual members.
"Mr. Miller called attention to the considerable decline in
the volume of Federal Reserve credit. During recent weeks it has been
running well below $1,000,000,000, Taking the monetary gold stock of
the country and the outstanding volume of Federal Reserve credit togeth¬
er,




the aggregate of these is less than at any time since 192k. He

-453raised the questionWhetherthis did not involve a contraction of the
basis of fundamental credit, whose effects would be felt not only in
the United States but throughout the Western World.
"Keeping in mind all factors in the present situation, he
expressed the opinion that the volume of Federal Reserve credit out¬
standing should be maintained at a thousand millions of dollars, and
that when it showed a tendency to run below this, the volume should be
built up by open market purchases. The policy of maintaining such a
volume of credit, irrespective of demands for Federal Reserve credit,,
would prevent liquidation in credit and business from becoming too
drastic and thus working an unnecessary and undesirable

contraction

"Governor Harrison stated that he knew the directors of the
New York Bank would look with favor upon an early purchase of Govern¬
ment securities in the event there was not some immediate change in
the present outlook about which they have much concern.
"Conditions in the bond market were discused in this connec¬
tion and the question of whether or not the market would be revived by
security purchases on the part of the Federal Reserve banks.
"Some members of the Conference expressed the view that
there is no shortage of investment money but the reluctance of
investors to purchase bonds is due to lack of confidence because of
the character of issues which have been brought out during the past
few years."
Consideration of Open Market Operations and Discount Rates, Late-May~Mld-June 1930
Developments May 22-28. On May 22 Mr. Burgess wrote the Board
as follows:




-454"There has been no change in the holdings of Government securi¬
ties in the Open Market Investment Account since my letter to you dated
May 14, 1930, the total remaining at $327,300,000, with the maturities
practically unchanged. Our own holdings are also about the same as a
week ago, namely $112,000,000, the few changes in maturities that there
were consisting mainly in the replacement of the Treasury Bills which
matured on May 19, 1930, with the new bills maturing August 18, 193O.
. . ."
At the meeting of the Board on May 27, Governor Young called
up for consideration the request made by the directors of the Federal
Reserve Bank of New York at their meeting on May 8 that the Board
approve for that bank a minimum buying rate of 2% but it was felt by
the members of the board present that under existing conditions action
by the Board at the time was not necessary.
On May 28 Deputy Governor Burgess wrote as follows:
"The total holdings of government securities in the open market
account have not changed since my last letter to you dated May 22, 1930,
the total remaining at $327,300,000. The individual holdings of this
bank have likewise remained practically unchanged as to the total.
There have, however, been some changes in the maturities in both accounts,
the greater part of such changes being for the purpose of providing
the Treasury with 3 1/2% notes of Series A, maturing March 1, 1932.
Treasury purchases of these notes totaled $10,000,000 on last Tuesday,
$10,000,000 today, and $5,000,000 next Tuesday.

#

• •"

Decision to resume purchases. At the meeting of the Board
on May 29 the Governor reported "a telephone conversation with
Governor Harrison of the Federal Reserve Bank of New York, who




-455advised him that at the meeting of his Executive Committee on Monday
there was a feeling on the part of the Directors of the Bank that
some action should be taken by the Federal Reserve System to further
ease the credit situation and that in all probability a recommendation
will come from them in the next week or so for the purchase of Govern¬
ment securities. He also reported that the bill holdings of the
System are running off with the outside rate in New York slightly below
the Federal reserve bank rate and that Governor Harrison advised him
that had his bank any leeway below its minimum authorized rate of 2 l/2%,
he would recommend to his Directors a reduction of l/8%, not in an
attempt to accumulate bills but to follow the market and maintain
present holdings." Some members of the Board stated they would not
care to vote a reduction in the minimum buying rate of the New York
bank pending further consideration by the Board of the possible program
of purchases of Government securities, and it was voted to make the ques¬
tion of the minimum buying rate special order of business at the meet¬
ing on June 2.
At that meeting the Governor referred to the report made by
the Open Market Policy Conference on May

22

that it did not appear

to the Conference that any affirmative recommendation as to open
market operations was advisable at the time. He stated, that the
directors of the Federal Reserve Bank of New York, however, felt that
there should be some further easing without delay, and at their meeting
on May 29 had made a recommendation that the System proceed to purchase
Government securities at the rate of $25,000,000 a week. He stated
that Governor Harrison had taken the matter up with the Executive Com¬
mittee of the Open Market Policy Conference and the Governors of the




-456other Federal Reserve Banks, but not having heard from all of them was
not prepared to advise the Board formally.

Governor Harrison advised

informally, however, Governor Young stated, that of the nine banks heard
from six were favorable to the New York recommendation and three were
opposed. There was considerable discussion regarding the probable
effects of a program of security purchases, coupled with a reduction in
the buying rate on bills and a majority of the members present indicated
that they were prepared to vote a reduction in the minimum buying rate
of the New York bank, and, upon a formal vote being taken, a minimum
buying rate of 2 per cent was approved for the New York bank.
As the special order of business at the meeting of the Federal
Reserve Board on June 3, the following telegram, dated June 3, from
Governor Harrison with further regard to additional purchases of
Government securities was considered:
"This telegram is to confirm telephone conversations of
Thursday, yesterday and today. Our directors, while approving unanimously
the report of the Open Market Policy Conference of its meeting of May
21 and 22 after a thorough discussion voted on May 29 that in their
opinion it now seems desirable for the system to undertake the purchase
of Government securities in moderate amounts. In reaching this conclusion
our directors had before them evidence that the current business depres¬
sion was continuing without any important indication of improvement.
It was their belief that the hope of greater business activity and
increased purchasing power for our surplus products depends at least
to some extent upon the financing of new undertakings both at home and
abroad through the bond market. while the directors appreciate that
it is impossible to forecast accurately the extent of the effect of




-457the proposed purchases, nevertheless they feel that the money position is
so delicately balanced that even a slight addition to the available
reserve funds might prove helpful both from the point of view of its
direct influence on the bond market and in the psychological benefit
which might also arise. In any event it seems clear that small pur¬
chases of Government securities at this time could do no harm and a
test with the hope that they might be of some benefit seems desirable.
Since the meeting of our directors on Thursday we have discussed the
question of purchases of Government securities with the members of the
Executive Committee of the Open Market Policy Conference and with the
Governors of all other Federal Reserve banks. A majority of the Execu¬
tive Committee and a majority

of the Governors of all Reserve banks

are now in favor of purchasing not to exceed $25,000,000 a week of
Government securities for the next two weeks with the understanding that
at the end of that time the situation would again be reviewed We
should appreciate the action of the Board upon this proposal of a
majority of the Conference."
The Governor stated that "Governor Harrison advised him that
of the Executive Committee of the Open Market Policy Conference the
representatives of the Federal Reserve Banks of Boston, New York and
Cleveland approve the recommendation contained in the above telegram,
while Philadelphia and Chicago disapprove. Of the twelve banks, he
stated* the representatives of Boston, New York, Cleveland* Richmond*
Atlanta* Minneapolis and Kansas City approve* Philadelphia* Chicago*
Dallas and San Francisco disapprove, and the representative of the
Federal Reserve Bank of St. Louis interposes no objection.,




In the discussion which followed* some doubt was expressed

-458as to the advisability of Government purchases by the System before the
June 1$ tax payment period.

It was suggested that the Board reply to

the recommendation of the majority of the Open Market Policy Confer¬
ence that the Board will approve the purchase of Government securities
whenever and to the extent that the earning assets of the Federal
Reserve banks fall below $1,000,000,000. It was finally voted to
approve the purchase of not to exceed $25,000,000 a week of
Government securities for the next two weeks with the understanding
that at the end of that time the situation would again be reviewed.
Developments June 3-13•

On June 3 the Federal Reserve Bank

of New York established the following schedule of effective rates for
purchases of bankers1 acceptances:
1 to 45 days
46 to 120 days
121 to 180 days
Repurchase

2-3/8
2-1/2
3 per
2-1/2

per cent
per cent
cent
per cent

Deputy Governor Burgess, of the Federal Reserve Bank of
New York, wrote the Board under date of June 4, as follows.
"Holdings of government securities in the Open Market
Account will show an increase of $15,000,000,000 over a week ago, the
total now being $342,3QO,OOO against $327,300,000 when I wrote you
last on May 28, 1930. This increase of $15,000,000 represents pur¬
chases of Treasury 3 l/2 per cent notes made today in pursuance of the
plan which has been agreed upon to make purchases for System Account
not to exceed $25,000,000 a week for the next two weeks, referred to
in Governor Harrison's telegram of June 3 and your letter of that
date. Aside from this increase there have been no changes in the
maturities of the securities held in the account. We have arranged




-459for additional deliveries tomorrow of $5,000,000 and have also arranged
for deliveries at our option next week. • . •

n

On June 5 the Federal Reserve Bank of New York established
the following schedule of effective buying rates on banker's acceptances:
1 to 90 days
91 to 120 days
121 to 180 days
Repurchase

2-l/4

per cent
2-3/8 per cent
2-3/4
Per c e n t
2-3/8 per cent

(Secretary1s note: With the approval of the Federal
Reserve Board, the Federal Reserve Bank of Cleveland,
on June 7, established a rediscount rate of 3-1/2 per
cent on all classes of paper of all maturities.)
Under date of June 13, Deputy Governor Burgess of the Federal
Reserve Bank of New York advised the Board as follows:
"Since my last letter to Governor Young dated June 4, 1930,
the holdings of government securities in the Open Market Account have
increased $35,000,000, from $342,300,000 to $377,300,000 at the close
of business June 11. This increase represents further purchases of
government securities made in pursuance of the plan agreed upon to pur~
chase a total of $50,000,000 of governments for System Account last week
and this. Aside from these purchases, the Federal Reserve Bank of
Atlanta, due to conditions in Florida, asked to be relieved temporarily
of $8,000,000 of its participation in government securities in the
System Account,

These securities were taken over temporarily into

our participation in the System Account yesterday and have been appor¬
tioned today to other Federal reserve banks which, in response to a
telegram, expressed a willingness to participate. . • . ft
Reduction of New York Bank discount rate to 2-1/2 per cent.
Governor Harrison was present at the meeting of the Board on June 16
and stated "that at his directors' meeting two weeks ago, they reviewed




-460business conditions in their relation to credit conditions, and while
they felt there was not much they could do directly to create more
activity in business, nevertheless, they felt that with the world depres¬
sion in business, commodity prices and export trade, and with no definite
evidence that conditions are better, the System should do whatever it
can to remove any possible obstacles to recovery, and, more directly
through the short-time money market, to influence and build up a bond
market through which the directors think recovery must ultimately be
expected. It was the feeling, he stated, that the New York bank rate
should soon go to 2 l/2%.
"He stated that his directors again raised the question last
Thursday and would have voted unanimously for a reduction had he recom¬
mended it, but that he urged them to put it off a week as it would be
better to wait until the effect of the purchase of fifty million of
Government securities could be observed and the Treasury quarterly
financing is over and the reparations loan out of the way.
"While he was unable to commit his directors in advance,
Governor Harrison stated that in view of the discussion at the meeting
last Thursday, unless there is some substantial change in the meantime,,
he is of the opinion they will vote unanimously at their next meeting
for a reduction in the rate to 2 l/2%. In Governor Harrison's opinion,
his directors have no undue expectations as to what a reduction in
the rate will do. Their policy has not been predicated on the thought
that anything the System could do would of itself stop the decline or
that it could in any direct may make prices better or insure greater
business activity, but they have desired to do what is within the power
of the bank to remove any possible obstacles or to facilitate the




-461recovery when the time comes for business to pick up.
"Some of the directors pointed out, he stated, that while
business figures as a whole do not show any improvement, the fact must
be taken into account that they would show an even greater decline if
it were not for activity in public utilities, railroads and municipal¬
ities, which have proceeded fairly actively as a result of the Adminis¬
tration program of last winter. Mr. Owen D. Young has pointed out,
however, that if prices continue to decline and if other lines of
business and industry do not give their support, the utilities, rail¬
roads and municipalities cannot be expected to continue their construe-*
tion and equipment programs and the time will come when they, themselves,
must slow up.
"Governor Harrison further stated that he believes on the
whole, the feeling of the directors of the Federal Reserve Bank of
New York is that there isn!t much hope of real improvement for several,
months, and some of them feel improvement may not be marked before
next year. They are particularly concerned about the export trade which
has such a direct effect upon commodity prices and feel that a revival
of our foreign markets depends largely upon the bond market, and that
hopes of getting a strong bond market rest upon a continued ease in
the short-time money market more than anything else.
"In response to the Chairman1s questions as to what effect
the proposed reduction would have on the Bank of England, Governor
Harrison said he had not yet communicated with the bank, but his feel¬
ing is that if the Federal Reserve Bank of New York should reduce its
rate on Thursday, the Bank of England would probably go down the
next week.




-462n

Mr. Hamlin explained to Governor Harrison that their will

probably not be a quorum of the Board present on Thursday and inquired
whether any action that the Board might take now authorizing approval
of a reduction in the New York rate, if voted by the directors on
Thursday, might be construed as initiation by the Board of the reduction
in rate. Governor Harrison replied that he thought not, since he had
come to Washington to advise the Board that as he sees if now, he will
recommend the reduction next Thursday, and, on the basis of the discussion
last week, he has every reason to believe that his directors will unani¬
mously approve of it. Any action by the Board now, he stated, would
therefore be simply in expectation of the bank!s possible action next
Thursday.
"Governor Harrison also Stated that, in his opinion, when the
demand for credit does come, the System will have to be prepared to
consider when and how rapidly it will increase rates, because in his
judgment, a 2 1/2% rate is a recognition of a serious depression and
in his present judgment should not be long maintained in the face of any
really substantial demand for bank credit whether from increased business
activity or other causes."
At this meeting, in view of the possibility of a quorum of
the Board not being present during the next several days, the Vice
Governor was authorised and directed to approve a rate of 2-1/2 per cent
if established by the directors of the Federal Reserve dank of New York
on Thursday, and to approve a reduction of not exceeding l/2 per cent
in the rate of any other Federal reserve bank, if and when voted.
On June 16 the Federal Reserve Bank of New York established
the following schedule of effective buying rates on bankers1 acceptances:




-4631 to45 days
46 to 120 days
121 to 180 days
Repurchase

2-1/8
2-1/3
2-1/4
2-l/4

per
per
per
per

cent
cent
cent
cent

At the meeting of the Executive Committee on June 18, Vice
Governor Platt stated that after consultation with him, the Chairman of
the Open Market Policy Conference
Committee of the

had called a meeting of the Executive

Conference for Monday, June 23.

Deputy Governor Burgess wrote the Board as follows, under date
of June 19:
"The Treasury tax period has passed as anticipated with very
little disturbance to the market due largely to the payment by foreign
governments of their interest in cash.
"There has been no change in the total holdings of government
securities in the Open Market investment Account since my last letter
to you dated June 13, 1930• • • • "
At the meeting of the Executive Committee on June 20, Vice
Governor Platt reported that in accordance with the directions of the
Board at the meeting on the l6th, he had approved a discount rate of 2-1/2
per cent for the Federal Reserve Bank of New York on all classes of
paper of all maturities, effective June 20. A request of the New York
directors for a minimum buying rate for the purchase of bankers1 accept¬
ances of 1-3/4 per centwas also considered at this meeting, but action
was deferred•
On June 20 the Federal Reserve Bank of New York established
the following schedule of effective buying rates on acceptances:




1 to 90 days
91 to 120 days
121 to 180 days
Repurchase
Trade acceptances

2 per
2-1/8
2-3/8
2-1/8
2-1/2

cent
per cent
per cent
per cent
per cent

-464(Secretary's note: With the approval of the Federal Re¬
serve Board, the Federal Reserve Bank of Chicago estab¬
lished a rediscount rate of 3-1/2 per cent on all
classes of paper of all maturities, effective June 21.)
Meeting of Executive Committee, June 23, 1930
Preliminary memorandum of Chairman, The Executive Committee of
the Open Market Policy Conference met in Washington on June 23, at which
meeting the following preliminary memorandum submitted by the Chairman of
the Conference was considered:
"During the past two weeks the purchase of $50,000,000 of U. S.
Government securities for the System account, approved by a majority of
the members of the Open Market Investment Committee, has been completed.
As in the case of previous security purchases, the principal effect has
been to accelerate the tendency toward easier money conditions, by
facilitating the retirement of indebtedness of member banks and reducing
the dependence of the acceptance market on the System.

# #*
". • • since June 3 the purchase of $50,000,000 of U. S. Securi¬
ties, together with the liquidation of Reserve Bank credit called into use
temporarily over the May month-end, has resulted in a reduction in member
bank indebtedness to an amount slightly smaller even than around the middle
of May, notwithstanding the reduction of over $50,000,000 in the bill
holdings of the System, The reduction in System bill portfolio reflects
larger holding of bills by member banks, which gives them a cushion against
recurring periods of firm money,
"Accompanying these changes in the form of Federal Reserve credit
in us, there has been a definite, but orderly, decline in money rates.
Treasury tax period operations did not result in any large surplus of funds
in the New York money market, even temporarily, such as caused the rapid




-465fluctuation in money rates during the March tax period.

The following

table shows the change in rates both before and after the change in the
discount rate of the Federal Reserve Bank of New York effective June 20.
May 21
Call money
Time money, 90 days
Bills, 90 days, unendorsed
Commercial paper
U.S. Certificates
Sept. 1930 - yield
Dec. 1930 - yield

June 3

June 19

3
3 1/4-1/2

3
3 1/4

2 3/8
3 3/4

2 3/8
2 1/8
3 1/2-3/4 3 1/2-3/4

2.21
2.63

1.98
2.41

2 1/2
2 3/4

1.65
1.95

June 20
2 1/2
2 1/2-3/4
2
3 1/4-3/4
1.60
1.92

"Business Conditions
"During the month since the last meeting of the Open Market
Policy Conference in May, business conditions have shown no material
change - if anything, the tendency has been toward a further decline,
rather than toward definite improvement.

In the largest industries, such

as the steel, automobile, and building industries, the recent changes
have apparently been chiefly of a seasonal nature, and factory employment
also has shown a decline of about the usual proportions for the time of
the year, but substantial curtailment has occurred in the cotton goods
industry. . . .
"It is now apparent that the current recession in business bears
greater similarity to that of 1921 than to the recessions of 1924 and 1927.
As in 1921, the decline in this country has been accompanied by a world¬
wide business depression, and a world-wide decline in commodity prices.
The last weekly commodity index of the Federal Reserve Board,for June 13,
showed the largest decline for any week this year.

During the past week

wheat and cotton have declined substantially, as shown in the accompanying
diagrams, wheat reaching a new low point since before the War, and cotton




-466the lowest since 1926-1927, when the price was depressed by an unusually
large crop.
"Business Demand for Funds
n

The commercial loans of weekly reporting banks have continued

the unseasonable decline noted at the last meeting of the Committee, so
that the total reduction in these loans since last autumn is now by far
the largest that has occurred since 1921, This does not mean, however,
that there is no business demand for funds; the demand is for capital
rather than short-term credit, and the demand has been so great as to
exceed at times the gradually increasing supply of funds seeking employ¬
ment in investment securities, and the bond market is not yet really
strong and easily becomes congested.

"The total amount of new bond issues so far this year has
been approximately 50 per cent larger than in the first five months of
last year, and considerably larger also than in the similar period in
1928. This large increase in new issues apparently is in response to an
unsatisfied demand for capital which accumulated during the high interest
rate period of the past year and a half. During that period foreign
borrowing in this market was largely suspended; municipal borrowing through
the bond market was held back; and the amount of new capital obtained by
domestic producing and distributing corporations, notwithstanding the
extraordinarily large volume of corporation securities which were sold,
was not unusually large. A large proportion of the stock issues in 1929
represented funds obtained by investment trusts and financial trading
corporations, new securities issued in exchange for old securities in cases
of mergers, and stock issues sold for the purpose of retiring bonds or




-467bank loans. Consequently, this year there has been no evidence that
domestic corporations are over supplied for capital, but rather there has
been an increase in the demand for capital, especially from railroad and
public utility corporations, and the bond market has not been strong
enough to furnish all the funds which could be used.
"• . . in 1921-1922 there was a similar tendency for an en¬
larged demand for capital through the bond market to precede business
recovery, whereas the demand for short loans tended to follow, rather
than to precede, business recovery. In the less severe recessions of
1924 and 1927, also, a large volume of new capital issues preceded busi¬
ness recovery, while expansion of commercial loans awaited increased
business activity.
"Member Bank Credit
1
1

In view of this tendency for a demand for capital funds to

precede a business demand for short-term credit after periods of business
recession, it is not surprising to find that there appears to be a
corresponding tendency for expansion in member bank credit to occur first
in the forms of credit related to the capital market, rather than in
short-term commercial credit, • • , bank investments and loans on securi¬
ties have increased before commercial loans. Tendencies in bank credit
during recent months, • • , appear to have been somewhat similar to those
of corresponding periods in previous years.
"An analysis of security loans indicates that, notwithstanding
the high level of security loans in reporting banks, the total of cur¬
rently reported security loans, including loans of corporations and others
to brokers, has shown a reduction of nearly $4,000,000,000 since last
autumn, . , ,




-468"From the high point of last September to June 11, the Standard
Statistics Company index of the prices of 405 stocks showed a net decline
of 28 per cent. The figures above show a decline of 27 per cent in the
total ofcurrently-reported security loans during the corresponding
period.

In view of the fact that bank loans on securities undoubtedly

include a certain proportion of business loans and do not represent
exclusively loans for the purpose of carrying securities on margin, and
include also loans on bonds, it is clear that the amount of loans used
purely for security trading purposes has declined more than security
prices, and that a larger proportion of stocks at the present time are
held outright than was the case last autumn. Another factor in the vol¬
ume of security loans has been the large amount of new securities which
have been offered for public subscription during recent months, some part
of which, no doubt, have been carried on borrowed funds, pending dis¬
tribution.
u

The increase in security loans of reporting banks since last

October has been entirely in loans to brokers - presumably the most
liquid type of security loans - and has represented simply a partial re¬
placement of the large volume of loans called by corporations and other
non-banking lenders.
"Member Bank Investments and Federal Reserve Security Purchases.
"The increase in bank investment holdings during recent months
has proceeded rather slowly. No doubt this has been due to some extent to
the decline in bond prices last year, which has made banks reluctant to
increase their investment portfolios. Investments of weekly reporting
member banks now constitute a smaller proportion of their total loans and
investments than was the case three years ago.




Compared with the growth

-469in the proportion of time deposits to total time and demand deposits in
these banks, the increase in the proportion of investments has lagged
decidedly, . . .
". . . purchases of Government securities by the Reserve Banks
at several times during recent years have expedited the purchase of in¬
vestment securities by commercial banks. As in earlier periods, the
increase in the System1 s holdings of Government securities since last
autumn has been followed by an increase in the investment holdings of
reporting member banks. Up to the present time, however, this increase in
bank investments has been considerably smaller than that of 1922 or 1924,
although to produce an equal effect, a much larger increase would be re¬
quired at the present time; that is to say, the growth in the business of
the country since 1921 has probably amounted to around 45 per cent, so
that the capital requirements of business have been greatly enlarged.

The

increase in investment holdings, moreover, has not yet been sufficient to
replace the decrease last year.
"The effect of Reserve Bank purchases of Government securities
on the position of member banks, with respect to their ability to in¬
crease their investments, was supplemented in 1921-1922 and in 1924 by
heavy imports of gold.

This year also there has been an inflow of gold,

but it has been small in comparison with the movements in the earlier
periods."
Action of Committee.

Following its separate meeting, the Execu¬

tive Committee of the Open Market Policy Conference met with the Federal
Reserve Board, and in response to Vice Governor Platt's inquiry as to
whether or not the Committee had any recommendations to make, Governor
Harrison stated that "when the advisability of an open market operation




-470was considered some two weeks or so ago it was recommended that the Sys¬
tem buy Government securities not to exceed $25,OOO,OOO a week for two
weeks, with the understanding that the situation would then be reviewed,
and this meeting had been called with a view of carrying out that con¬
templated review.

He stated that the Committee had gone over credit

conditions as they now see them and had considered a preliminary memo¬
randum submitted by the Chairman, and a majority of the Committee - four
out of five - had voted that the Committee should not recommend any open
market operation at this time.
"He also stated that as he understands the procedure approved by
the Board there is no recommendation to be made by the Committee to the
Board, but that the Committee meets for the purpose of making recommenda¬
tions to the whole Conference, which recommendations would then be sub¬
mitted to the Board•

The Committee is making, he stated, a report to the

Board that the Committee as a whole voted to make no recommendation as to
an open market operation now. Mr. Platt pointed out that "the System's
holdings of Government securities at the present time are within
$50,000,000 of the peak on June 14, 1922 when they were $630,000,000 but
that at that time the discounts of member banks amounted to $414,000,000,
while on June 18 they were only $207,000,000." He also distributed copies
of the following letter from Governor Calkins, dated June 16, setting
forth reasons why the Federal Reserve Bank of San Francisco did not
participate in the $50,000,000 of Government securities recently purchased:
"Recalling somewhat late a remark you made to the effect that
when a bank disapproves of the recommendations of the Open Market Policy
Conference it might properly advise the Board as to the reasons for its
disapproval, I think I may briefly summarize our reasons for not




-471participating in the $50,000,000 Governments recently purchased as fol¬
lows:
"a,. With credit cheap and redundant we do not believe that
business recovery will be accelerated by making credit cheaper and more
redundant•
"b.

We find no reason to believe that excessively cheap money

will promote or create a bond market, seeing evidence in the recent past
to the contrary, and, further, do not consider the promotion or creation
of a bond market one of the functions of the Federal Reserve System.
"C. We believe that there may come an opportune moment to put
money into the market when that action will have a beneficial effect and
feel that if, at such a time, our open market portfolio of Governments is
excessive there may be hesitation to increase it.
"There is much more that might be argued, but I have endeavored
to summarize briefly."
Mr. Platt then inquired as to whether or not the individual mem¬
bers of the Committee had any comments to make.

"Governor Harrison stated

that he represented the minority in the Committeefs vote that no recom¬
mendation be made at the present time, that he represented unanimous views
of the New York directors as well as his own and the officers of the New
York bank that it would be preferable to continue purchases of Government
securities up to, say, $25,OOO,OOO a week for another two weeks, largely
on the theory that business and commodity prices have not improved and
that a good part of the difficulty at the present time is lack of pur¬
chasing power in various parts of the world which are not in a position
to purchase or take up surplus commodities off the markets of the world.
Because of this deficiency in buying power, prices have declined and this




-472is reflected through decreased export trade in the principal countries
which have products to export, such as England and America. With this
in mind, everything possible should be done to revive buying power for
our surplus products through the export of long time capital to those
parts of the world where purchasing power has been curtailed.

Purchases

of Government securities, he said would do no harm and might do some
good in reviving the bond market.

There is no danger at the moment of

speculative revival and past experience has always shown that whenever
the System is buying Government securities the bond market becomes more
active and stronger and, therefore, not being aware of any danger or
disadvantages in the purchase of Governments at this time and having
many precedents that the purchase of Governments is helpful to the bond
market, the New York banks feels the System should make such purchases
in the hope that they will facilitate through the bond market a better
distribution of capital to points where buying power is now seriously
curtailed.
fl

He stated that for these reasons the New York directors last

Thursday expressed the view that the System should buy Government securi¬
ties not to exceed $25,000,000 per week for the next few weeks, but since
the majority of the Executive Committee of the Conference does not favor
purchases at this time no recommendation is being made by the Committee,
"Governor Fancher stated that he favored the purchase of the
$50,000,000 of Government securities purchased several weeks ago follow¬
ing the meeting here at that time and felt that the Federal Reserve credit
then in the market perhaps should not be withdrawn.

The opinion seemed

to be, he stated, that bills were running off and perhaps the amount in
which the System's holdings of bills were declining should be put back




-473through the purchase of Government securities. On that basis, he said,
he favored the purchase of securities and the amount purchased had about
offset the decreased holdings of bills. He stated that member bank
borrowings have fluctuated up and down. Rates have been further reduced
at New York and some of the other banks, and it seems to him that the
System could not do much more to help a bond market. Money is extremely
easy and banks are finding a problem in how to place the surplus money
which they have on hand.

He expressed the opinion that they will first

place it in short time securities and will finally go to bonds for the
sake of earnings, which is going to revive the bond market.
"Governor Norris stated that the majority of the Executive Com¬
mittee of the Open Market Policy Conference are substantially in agreement
with the letter from Governor Calkins. The feeling of the Committee is,
he said, that the principal characteristic of the present period of
depression is falling commodity prices, and that an analysis will reveal
the fact that in the case of most of the commodities in which price re¬
ductions have been most marked there is a specific reason having nothing
to do with credit conditions or interest rates. He called attention to
the fact that there is no evidence of any great accumulation of goods in
this country, but that on the contrary inventories on the whole are lower
than they were last year. The trouble, he said, is not so much over¬
production of goods, as over-development of productive capacity.

He

stated that he can not see any evidence that any responsible concern in
this country has any difficulty in getting capital for any legitimate
purpose and that there is a very serious question whether it is one of
the functions of the Federal Reserve System to develop or foster the bond
market, but granted that it is, the bond market which it is desired to




-474~
foster at this time is a market for foreign rather than domestic bonds
and he believes the reason there has been such a falling off in the
volume of foreign issues in this country has not been due to credit con¬
ditions but to the doubt that has been aroused by public statements on the
subject.
"Governor Norris further stated that at the meeting of his board
of directors last week they had a long discussion on this subject. He
said he had called the attention of his Board to the fact that the dis¬
count rate of the Federal Reserve Bank of Philadelphia was out of line
with that of the Federal Reserve Bank of New York and out of line with
the two guides which have always been accepted in the past - the accep¬
tance rates and the open market rate for money.

He stated that of the

seven members present, five felt that no action which they could take
either as regards open market operations or a reduction in the discount
rate would have any effect whatever on the situation which is one for
which the Philadelphia Bank is not responsible and can not help, and the
only effect of a reduction in the discount rate would be to increase the
margin of profit for those banks which are chronic borrowers at the
Federal Reserve bank and would make it more difficult for the well
managed banks to show any earnings at all. For these reasons, he stated,
it was voted to make no change in the discount rate of the Philadelphia
bank.
"Deputy Governor Paddock stated that at his directors1 meeting
last Wednesday the whole situation was gone over and on the question as
to whether or not the Boston bank would follow the Federal Reserve Bank
of New York by a reduction in the discount rate, the directors voted
against a reduction.




In the purchase of Government securities, he stated,

-475he thought the feeling was just about the same and the majority of his
directors would rather see things go along about as they are for a short
time as there is no pressure for borrowing in the Boston District and
money is available at reasonable rates.
"Governor Harrison stated that he did not want to leave the
thought that there is any feeling in New York different from that expressed
by the other members of the Committee that there is an adequate supply of
short time credit available for business. That is not the difficulty
today, he stated, and it has not been for months, the difficulty being a
bad distribution of short and long time money. What his directors have
had in mind, he said, has not been not so much to create more short time
money but to facilitate a market through which long time capital could be
distributed to those points where there is an admitted shortage of buying
power.

A plentiful supply of short time money at low rates is merely a

means of facilitating this.
"Governor Norris then stated that the other members of the Execu¬
tive Committee of the Open Market Policy Conference can not bring them¬
selves to believe that a further purchase of Government securities would
help, but feel that such purchase would be an interference with the
natural effect at this time and would not be productive of any good, and
might be embarrassing at the time when business starts to pick up, at
which time the System would find itself with a large amount of Government
securities and low discount rates.

If it then began to mark up rates and

sell securities, or both, it might check an incipient revival and if not
would be accused no doubt of doing so or operating in that direction. He
stated that as the majority of the members of the Executive Committee could
not see any benefit to be derived from affirmative action, it was felt that
no action is the safest course,"




-476Developments Relating to Open Market Operations and Discount Policy,
late June-late September 1930
At the meeting of the Board on June 25, it was voted to approve
a minimum buying rate of 1-3/4 per cent for the purchase of bankers1
acceptances for the Federal Reserve Bank of New York and on June 30 the
New York bank established the following schedule of effective buying
rates on bankers1 acceptances:
1 to 45 days
46 to 90 days
91 to 120 days
121 to 180 days
Repurchase

1-7/8 per cent
2
" "
2-1/8 " "l
2-3/8 " "
l
1
2
"

Letters from New York Bank to Board, June 27 and July 3. Under
date of June 27, Deputy Governor Burgess wrote the Board as follows:
"There has been no increase in the holdings of government
securities, either in the System Account or in the Investment Account of
this bank, since my last letter to you on this subject dated June 19,
1930, the aggregate of these accounts being $337,300,000 and $111,428,200
respectively. • . •
Under date of July 3, the following letter was received from
Deputy Governor Burgess of the Federal Reserve Bank of New York:
n

Since I wrote you last on June 27 the dominating influence on

the open markets for both Government securities and acceptances has been
the increased demand for reserve credit arising from June 30 window
dressing and holiday currency demands. There have been very large trans¬
fers of funds from this district to other districts, and also a large
withdrawal of currency, all of which have reduced the reserves of the
member banks and compelled them to look about for funds to replenish these
reserves. While borrowing was increased for a few days by about $50,000,000




-477the banks have been unusually sensitive as to borrowing on the statement
date and, as far as they could, have sought other means of obtaining
Federal reserve credit. They fortunately had on hand a larger volume of
bills than usual, many of which they sold to us or to the market, and
they also unloaded some Government securities in addition to calling loans
in the call loan market, which had the effect of raising the call rate to
3 per cent on Monday and Tuesday,
n

The effect of these events on our operations in Government

securities was mainly to bring us on July 1 $20,000,000 of Government
securities under sales contract for dealers who were not able to secure
funds outside at advantageous rates. This total has since been reduced to
5)13,700,000, and the chances are that it will be wiped out within a few
days.

Outright holdings of securities by this bank showed a temporary

increase of approximately §6,000,000 for the week pending sales of securi¬
ties to the Treasury for sinking fund account.

The Treasury plans to

purchase next week $25,000,000 Series A Treasury notes of 1930-32, all of
which we now have on hand or under contract.

The System special invest¬

ment account showed no change for the week. . . ."
(Secretary1s note: On July 3 with approval of the Fed¬
eral Reserve Board, the Federal Reserve Bank of Boston
established a rediscount rate of 3 per cent and the
Federal Reserve Bank of Philadelphia a rediscount rate
of 3-1/2 per cent on all classes of paper of all
maturities,)
Letter from Harrison on desirability of resuming purchases. At
the meeting on July 8, Vice Governor Platt referred to the following letter
dated July 3, which Governor Harrison had sent to the Governors of all
Federal Reserve banks and stated that while he has no definite information
from anyone, there is some slight evidence of a change in mind in favor of




-478the purchase of additional Government securities:
1
1

We have already forwarded to you a preliminary draft of the

minutes of the meeting of the executive committee of the Open Market
Policy Conference held in Washington on June 23. As you will have
observed from those minutes, a majority of the members of the committee
voted that in their opinion it was not desirable at that time for the
Federal Reserve System to undertake any further open market purchases of
government securities. As a result of this action by the committee no
recommendation was submitted to the conference as a whole, and while the
views of the committee were reported to the Federal Reserve Board, no
recommendation was put before them for consideration.
ft

As I reported at the meeting of the committee in Washington,

our directors voted on June 19, after the completion of the purchase of
the $50,000,000 previously authorized by the conference, that, in their
opinion, further purchases in an amount of about $25,000,000 a week should
be continued.

I personally favored such purchases during the discussions

in Washington, and our directors, at their meeting on June 26, reiterated
their views with respect to the importance of a continuance of that pro¬
gram.

In fact, they felt so earnestly the need of continuing these

purchases of government securities that they have suggested that I write
to you outlining some of the reasons why the Federal Reserve Bank of New
York has for so many months favored having the Federal Reserve System do
everything possible and within its power to facilitate a recovery of
business.
"They do not feel that low discount rates or further purchases
of government securities will of themselves fix commodity prices or re¬
store business activity.




There are too many other factors involved in the

-479situation to expect that any such credit operations would, or could, alone
accomplish these objectives.

They do feel, however, that further pur¬

chases of government securities in circumstances such as the present, can
do no possible harm and will likely accomplish some good.
!r

As they view the situation it is about this:

The United States

and most other countries of the world are in the midst of a severe busi¬
ness depression.

The decline in business activity has been great as

judged by almost every available index. Unemployment is serious. Com¬
modity prices have suffered the most severe and rapid decline since the
post-war deflation of 1921, and are now about 12 per cent less than a
year ago. The decline has been most pronounced in the last few weeks.
Profit margins are seriously cut, purchasing power has been reduced, and
many people are facing unemployment and distress.
"While it is no doubt true that this depression is, in part at
least, the result of causes quite unrelated to monetary conditions and
clearly outside the control of the Reserve System, there are nevertheless
some aspects of the situation with respect to which the Reserve System
has a direct responsibility.

Overproduction of certain basic commodities,

both actual and potential, has no doubt played a large part in developing
present conditions. On the other hand, it is also true that under¬
consumption, due to credit restrictions and high rates during 1928 and
1929, a stoppage of the flow of capital, and an interruption of economic
activity in many sections of the world, has also been an important factor
in the present depression. But whether the present depression is due more
to overproduction or more to underconsumption, it must be agreed that there
is a surplus of many basic commodities awaiting distribution, commodities
which are wanted and needed in many sections of the world which have not




-430the power to purchase them.

This surplus of unsold goods may not, in

many cases, be great, but unfortunately the mere existence of an unsold
surplus hanging over the market is a dominant factor in the course of
the price of any commodity.

Anything, therefore, that can be done to

stimulate economic activity and thus provide a market for that surplus,
however great or however small, will be a steadying influence and a
vital factor in the recovery of prices and business.
"Our directors have believed, therefore, that whatever steps
the Reserve System may take, whether through discount rates or open
market operations, to facilitate a more active and stronger bond market
through which capital funds may be made available for new enterprise or
distributed to those parts of the world where purchasing power is now
seriously curtailed, should be taken promptly and courageously.

This is

especially true, they feel, if in the conditions as they now exist there
can be said to be no substantial risk incident to such a course• Stimu¬
lating an active and strong bond market will run very little danger of
encouraging unnecessary borrowings by those concerns which already have
surplus products or ample capacity to produce.

On the other hand, such

a course will make available necessary capital funds to those who now
lack capital and will thus do much to revive normal economic conditions,
restore purchasing power and tend to distribute our surplus goods into
fields where they are so urgently needed.
"During 1928 and 1929 the diversion of world credit into the
speculative markets very severely restricted certain types of new
financing through the bond market. Money became difficult to obtain for
building operations and other new enterprises in many markets. New
foreign borrowings in this market were greatly reduced and foreign buying




-481from us is in consequence now reduced.

Indeed, current figures relating

to our foreign trade indicate a drop in the past four or five months of
over 20 per cent as compared with last year. Even if we take into account
the decline in commodity prices, the amount of goods being exported from
the United States to world markets is now substantially less than last
year.

All the evidence indicates that we have surplus goods to sell and

that there are other parts of the world that are in need of those goods.
To stimulate their distribution to the points where needed becomes a
matter of the most vital importance if the decline in commodity prices is
to be checked and business is to be restored to normal activity.
M

In previous business depressions recovery has never taken place

until there has been a strong bond market through which new enterprise
requiring long time capital may be financed.

So while there is no con¬

siderable demand from business for short time money at the present time,
and short time money may be said generally to be plentiful and cheap in
many sections of the country and other parts of the world, there is never¬
theless a large demand for long time capital for new undertakings.

The

bond market has in the past several months been able to absorb a very con¬
siderable volume of these new issues but it is not yet vigorous nor is it
able to supply all of the funds which legitimate business, both at home
and abroad, so much demands.
"This appears to our directors to be a situation in which the
Reserve System has some responsibility.

. . . whenever the Federal Re¬

serve System embarks upon a program of purchasing government securities,
the bond market has become more active and stronger. When the System buys
securities, short time money becomes more plentiful and cheaper.

It also

becomes less profitable in comparison with long time money, and it has been




-482demonstrated in the past that in such circumstances, through a further in¬
crease in the reserves of member banks money will be made available for
the bond market or shifted to the bond market from the short time market
or from other investments less profitable than bonds.
"Purchases of securities which have been made thus far have
aided in relieving the member banks from the pressure of indebtedness at
the Reserve Banks and in a measure have provided the market with surplus
funds available for use in the bond and mortgage market. But to a large
extent these purchases which have been made thus far have been offset by
declines in rediscounts and in the bill portfolios of the Federal Reserve
banks so that the total of Federal Reserve credit has shown a net decline
even making allowance for gold imports. It has been our belief, therefore,
that purchases of government securities should be continued to the extent
necessary to keep some supply of surplus funds in the money market as a
stimulus to the bond market, at least until such time as there may be some
evidence of a recovery in business. This may not involve any very large
amount of further purchases, but our directors feel that additional pur¬
chases at the present time are not only desirable but necessary if the
System is to do its utmost for the accommodation of business and trade.
"Even since the meeting of the committee on June 23 there has
been a further seasonal tendency for the bill holdings of the System to
diminish and some tendency for discounts to increase, though this movement
was interrupted by the unusual demand for funds incident to the end of the
month and holiday currency requirements which led to increases of both bills
and discounts and brought the total of reserve bank credit outstanding to
$1,060,000,000.

The events of this period have illustrated the extreme

sensitiveness of the banks at present to any indebtedness at the Reserve




-483banks. Even the relatively small amount of additional borrowings which
New York City Banks found necessary was accompanied by an increase of one
per cent in the call loan rate. It is thus evident that an even smaller
amount of borrowing under present conditions is as effective a restraint
as substantially a greater amount was a year ago. This is normally a
season when the bill holdings of the System diminish and when the extra
demand for funds for crop moving begins to be felt. It is, therefore,
a time when there is need for us to be particularly alert to avoid in¬
creases of rediscounts, even apart from a more general policy of operating
positively in supplying the market with surplus funds.
"So while there may be no definite assurance that open market
operations in government securities will of themselves promote any
immediate recovery, we cannot foresee any appreciable harm that can re¬
sult from such a policy and believe that the seriousness of the present
depression is so great as to justify taking every possible step to
facilitate improvement.
"This letter is being written largely because our directors feel
that it is fair to them and to the policies which they have pursued so
earnestly in the past several months, to give you some idea of the reasons
which have prompted not only our rate reductions but our advocacy of
further purchases of government securities,

I hope you will please accept

it in that spirit, and with the understanding that our directors feel
keenly the need for a continued and frank exchange of views among the Fed¬
eral reserve banks and the Board, especially at such a critical time as
the present.

I hope you will please feel free to show this letter to your

officers or to your directors and to write us equally frankly what may be
your own views in the hope that we may thus facilitate a common approach




-484to our present problem.

I am taking the liberty of sending a similar let¬

ter to the governor of each other Federal reserve bank and a copy to the
Federal Reserve Board."
Letters from New York Bank to Board, July 11~31. Deputy Gov¬
ernor Burgess of the Federal Reserve Bank of New York advised the Board as
follows under date of July 11:
"The status of the holdings of Government securities, both in
the System Account and in the Investment Account of this bank, is practi¬
cally the same as when I wrote you last on July 3, 1930; in fact, the only
change has been a reduction of $5,000,000 in the Government security hold¬
ings of this bank, due to sales to the Treasury for the sinking fund of
securities held temporarily in our account, . • • "
(Secretary's note: With the approval of the Boards
on July 12 the Federal Reserve Bank of Atlanta
established a rediscount rate of 3-1/2 per cent on
all classes of paper of all maturities.)
On July 17, Deputy Governor Burgess wrote the Board as follows:
"Total holdings of Government securities, both in the System
Account and in the Investment Account of this bank, are unchanged from last
week.

Sales contracts against Government securities have now been entirely

paid off, accounting for the decrease of 13 million dollars shown for total
government securities in the System statement. . . . "
(Secretary1s note: On July 18, with the approval of
the Federal Reserve Board the Federal Reserve Bank
of Richmond established a rediscount rate of 3-1/2
per cent on all classes of paper of all maturities.)
On July 21 the Federal Reserve Bank of New York established the
following schedule of effective buying rates on bankers1 acceptances:




1 to 75 days
76 to 90 days
91 to 120 days

1-7/8 per cent
2
» "
2-1/8 " lf

121 to 180 days
Repurchase

2-3/8 per cent
f
f
n
2

On July 24, Deputy Governor Burgess advised the Board as fol¬
lows:
"Since my last letter on this subject to Mr. Platt, dated July
17, 1930, the total holdings of Government securities in the System
Account, also in the Investment Account of this bank, are unchanged as to
total, and we have held no Government securities under sales contract for
some time, • , ,"
The following letter was received from Deputy Governor Burgess
under date of July 31:
"There is very little to report with regard to Government secu¬
rities as there have been no changes in the total holdings either in the
System Account or in the Investment Account of this bank since I wrote you
on July 24, and there have been no purchases under sales contract agree¬
ment. . • •"
Action during August, At the meeting of the Executive Committee
on August 6 the Governor reported "that he has been advised by the Chair¬
man of the Federal Reserve Bank of New York, which advice will be con¬
firmed by wire, that he had, on behalf of the Open Market Policy Confer¬
ence discussed with the Governor, Chairman, or Deputy Governor of the
various Federal reserve banks the question of the advisability of further
purchases of Government securities and that the banks, in order to
partially offset recent exportation of gold, favor the purchase of addi¬
tional securities. The Open Market Policy Conference requests, Governor
Young stated, approval by the Board of the immediate purchase of $25,000,000
of Government securities for System Account, with the understanding that




-486the situation will again be reviewed during the early part of next week."
Governor Young also explained that he had communicated with absent mem¬
bers of the Board, with the exception of Mr. Miller, and that they
favored the proposed purchase. Following Governor Young's statement it
was voted to authorize the purchase of $25,000,000 of Government securi¬
ties during the current week, it being the understanding that the situa¬
tion would be reviewed the following week as to the desirability of making
further purchases.
Under date of August 7, Deputy Governor Rounds wrote the Board
as follows:
"In the absence of Mr, Burgess I am writing you regarding open
market operations, There have been no changes in the total holdings
either in the System Account or in the Investment Account of this bank
since Mr. Burgess

letter to you dated July 31, 1930, and there have been

no sales contracts made against Government securities.

"As you already know, arrangements were made yesterday for t h e
purchase of a n additional $25,000,000. o f Government securities for
System Account for delivery today.

This increase w i l l o f course not b e

reflected in this week's statement."
(Secretary 1 s note: With t h e approval of t h e Board the
Federal Reserve Bank of S t , Louis established a redis¬
count rate o f 3-1/2 per cent o n all classes o f paper o f
all maturities effective August 7 and the Federal R e ¬
serve Bank o f S a n Francisco established the same rate
effective August 8.)
At the meeting of the Board o n August 8, t h e Governor was author¬
ized in the absence of a quorum of the Board to approve discount rates
down to 3 per cent if and when voted b y any Federal Reserve Bank, and down




-487to 2 1/2 per cent if and when voted by the Federal Reserve Bank of Boston.
He was also authorized in the event of further recommendations by the Open
Market Policy Conference for approval by the Board of additional purchases
of government securities, to confer by telephone with absent members of
the Board, and if a majority of the Board was in favor of the proposed
open market operation, to approve additional purchases of securities as
recommended by the Conference•
Under date of August 14, the following letter was received from
the Deputy Governor of the Federal Reserve Bank of New York:
"During the statement week ended last night, the holdings of
government securities in the System Account have been increased $25,000,000,
this being the purchase referred to in my letter of August 7, 1930. . • •"
(Secretary's note: With the approval of the Federal
Reserve Board, the Federal Reserve Bank of Kansas
City reduced its rediscount rate on all classes of
paper of all maturities, effective August 1$, from
4 per cent to 3 1/2 per cent.)
On August 21, Deputy Governor Rounds of the Federal Reserve Bank
of New York wrote the Board as follows:
"The holdings of government securities in the System Account have
shown no change since my last letter dated August 14, 1930. . . .ff
Under date of August 26, the following letter was received from
Deputy Governor Rounds:
fl

The total holdings of government securities in the System

Account remain the same as when I wrote you last on August 21st, 1930,
namely, $402,300,000. During this period some changes were made in the
issues with a view to shortening the maturities. The holdings of this bank
likewise remain unchanged, with no sales contracts against government
securities. . . .!!




Authorization for further purchases, September 1930

At the

meeting of the Federal Reserve Board on September 3, the following tele¬
gram from the Secretar3r of the Open Market Policy Conference was con¬
sidered:
H

In view of the desirability of maintaining the present easy

money position and the possibility that seasonal requirements and gold
exports may bring about a change in the situation if no action is taken
a majority of the members of the Open Market Policy Conference recommends
the authorization of a purchase of Government securities up to $50,000,000
with the understanding that this authority is to be exercised only if
necessary as a supplement to bill purchases in offsetting seasonal demands
for credit, gold exports, or other influences towards firmer money which
might interfere with the continuance of present money conditions. We
should appreciate your advising us of the action of the Board on this
recommendation.ft
Consideration was also given in this connection to the following
letter, dated August 29, from Governor Calkins, regarding the procedure
followed by the Open Market Policy Conference in determining upon the
recommendation contained in the telegram quoted above:
!l

Mr. Case (apparently in the absence of Governor Harrison) called

this morning and explained that they wished to have approval of their pro¬
posal to buy Governments when and if they deemed it expedient to do so in
the near future.
n

He told me that eight of the governors had assented, three were

absent, and, therefore, I presume that mine will be the only negative ex¬
pression.




ft

0n the last occasion when money was put into the market Mr. Case

-489also called on the telephone and discussed the matter, and I said that I
would assent in that instance but felt that before further operations there
should be a conference.

I do not believe that it is possible to reach a

reasoned conclusion without discussion, and it is obviously impossible to
have adequate discussion over long distance telephone, discussion that in¬
volves twelve or more individuals.
"My own impression at this moment is that there is no reason to
expect the injection of additional credit into an already redundant situa¬
tion to bring about the effects desired, and while I think most of us
would feel that considerable gold exports should be at least partly offset
by additional investments, I am not yet convinced that it will be expedient
for us to put money into the market on every occasion on which gold is ex¬
ported or to put money into the market to the extent to which gold is
exported.
"However, I am writing this letter not to argue the entire field
over, but to express again my view that the present procedure which, as I
see it, is exactly contrary to the procedure contemplated when the Open
Market Policy Conference was set up, is not the right procedure, and that
the Open Market Policy Conference should adopt an affirmative or a negative
policy effective until cancelled or reversed after adequate discussion and
consideration."
Members of the Board expressed agreement with Governor Calkin's
opinion regarding the procedure followed by the Open Market Policy Confer¬
ence but it was the consensus of opinion that in this case, due to the fact
it would soon be necessary to call the Governors of the Federal Reserve
Banks to Washington for their regular Fall Conference, it would not be de¬
sirable to call a special meeting of the Open Market Policy Conference at




-490that time. It was finally voted to grant the authority requested and the
following letter was accordingly transmitted to the Secretary of the Con¬
ference:
"At a meeting of the Federal Reserve Board today consideration
was given to your telegram of September 2nd, requesting, on behalf of the
Open Market Policy Conference, authority for the purchase of Government
securities up to $50,000,000, it being stated in your telegram that this
authority would be exercised only if necessary as a supplement to bill
purchases in offsetting seasonal demands for credit, gold exports or other
influences toward firmer money, which might interfere with the continuance
of present money conditions.
ft

The Board voted to grant the authority requested even though in

this instance the procedure followed by the Open Market Policy Conference
was not in harmony with the resolutions establishing it, under which a
meeting of the conference should have been held for free and full dis¬
cussion of the proposed action among the members of the Conference and
with the Board. However, the Board today determined to call the fall
conference of governors beginning Monday, October 6th, and in view of this
fact and the further fact that open market matters have been so fully can¬
vassed during recent months, it did not seem desirable to ask the governors
to come to a special meeting of the Open Market Policy Conference at this
time, although the Board would not wish a precedent to be established. It
is understood, however, that the whole question of open market policy will
be reconsidered at an open market meeting to be held at the time of the
governors1 conference."




(Secretary's note: With the approval of the Federal
Reserve Board, the Federal Reserve Bank of Dallas, on
September 8, reduced its rediscount rate, effective

-491September 9> from 4 per cent to 3 1/2 per cent, and on
September 11, the Federal Reserve Bank of Minneapolis
made a like reduction in its rediscount rate, effec¬
tive September 12.)
Statement on availability of credit for marketing of crops,
September 24• On September 23, a special meeting of the Federal Reserve
Board with the Chairmen and Governors of the Federal Reserve Banks of
Richmond, Atlanta, St. Louis, Kansas City, and Dallas, was called for the
purpose of discussing with those representatives crop conditions, par¬
ticularly as regards cotton, and the question of credit facilities for the
marketing of crops. It was the sense of the meeting that the Federal Re¬
serve Banks appeared to be operating satisfactorily, showing a willingness
to lend money and having the resources to do it, but that a public state¬
ment should be issued emphasizing to member banks the readiness of the
Federal Reserve Banks to assist them in handling the movement of crops
and to reassure the producers of the country's staple commodities that the
reserves of the Federal Reserve System were available to meet their
legitimate needs.
Discussion was also had at this meeting regarding the question
of the discounting of commodity paper bearing the endorsement of non-member
banks, but the consensus of opinion was that no special action should be
taken in that direction; also, that a special discount rate on commodity
paper, in view of the existing low level of discount rates, would not be
effective, although if discount rates should tend to rise the establish¬
ment of special rates on commodity paper should be considered.
The matter of issuing a public statement as suggested at the
meeting on September 23 was pursued further at the meeting of the Board
with the Governors and Federal Reserve Agents on September 24, with the




-492result that the following statement was released to the press:
" At a preliminary conference held by the Federal Reserve Board
in connection with the regular fall meeting of the governors and chair¬
men of the twelve Federal reserve banks, a comprehensive review was made
of the agricultural, general economic and credit situation throughout
the country. Being the season of usual marketing of the country's crops,
reports were made with particular reference to the status of agricultural
staples in each of the Federal reserve districts and there was special
discussion of the conditions affecting their marketing and financing•
"The Board was assured and satisfied that in each of the twelve
Federal reserve districts ample credit facilities are available for
financing the marketing of the crops, and that such facilities are being
provided by the banks and other agencies concerned in the orderly market¬
ing of agricultural commodities. The twelve Federal reserve banks through
rediscounts for their member banks, loans to Federal Intermediate Credit
Banks on agricultural paper of cooperative associations and purchases of
bankers1 acceptances covering agricultural commodities, are making their
resources available for the marketing of the country's crops at the lowest
rates in the history of the System.
!!

It was the view of the conference that the extension of credit

to support the orderly marketing of crops - at all times an important
function of the Federal reserve banks - is of special importance at the
present time. To that end, the Federal Reserve Board was assured that the
Federal reserve banks will continue their efforts to acquaint their com¬
munities with the facilities of the System and the disposition of the
management of those banks to meet the problems connected with the marketing
of the crops.11




-493Meeting of September 25, 1930
Consideration of procedure. At the meeting of the Open Market
Policy Conference held in Washington on September 25, Governor Harrison
referred "to the discussion which had taken place the day before at the
conference of governors with respect to the procedure followed by the
open market policy conference since the last meeting of the conference in
June, and suggested, as had been the sense of the governors conference,
that the procedure to be followed by the open market policy conference
should be one which contemplates the formation of a general System policy
by the whole conference with a mandate to the executive committee to
execute the policy so as to attain the objectives agreed upon by the con¬
ference. Such a procedure would avoid the necessity of calling a new
meeting of the whole conference except at such times as consideration of
a change of general policy appeared to be necessary either to the Board
or to the members of the conference. At the same time it 'would empower
the executive committee to take such steps as might be deemed necessary by
it to execute the policy without the need for calling a meeting of the
whole conference whenever it might be necessary to buy or sell securities
in order to carry out the policy agreed upon. While no formal vote was
taken it appeared to be the sense of the conference that this would be the
most practicable procedure to be followed in the formation and execution
of open market policies of the System,
"Governor Harrison reviewed the status of foreign accounts with
the Federal reserve banks, and pointed out the changes which had taken
place since the last meeting of the conference. He also discussed the gen¬
eral position of the various central banks of issue abroad, calling atten¬
tion to the fact that the gold reserves of most of those banks have not only




-494increased in percentage but in actual amount during the past year. The
increase in the reserve percentage of most of these foreign institutions
is due not only to an increase in the actual gold supplies of the
respective banks but also to a very substantial decrease in note and
deposit liabilities, the decline ranging in most cases from 25% to 50%
from a year ago. He pointed out that this, of course, reflected the de¬
pression in business and trade which exists in those countries and
throughout the world. This depression was further evidenced by the
figures which were presented to indicate the substantial decline in both
the export and import trade of most every one of the principal countries
in Europe, South America, and the Far 3ast.fl
Following Governor Harrison1s statement the following prelim¬
inary memorandum, submitted by the Chairman, was considered:
Preliminary memorandum of Chairman. "For the past year this
country has been in a business recession. At first it was hoped that the
recession would be relatively brief reflecting the temporary disturbance
of a stock market inflation and decline. But in recent months the re¬
cession has extended until, even if the bottom has now been reached, it
will rank as one of the country1s major business recessions both in ex¬
tent and duration. The duration of the recession has already been as long
as that of any recession since the 1880's. The causes of the recession
are deep-seated and broad in their scope and involve, in part at least,
a serious shortage of working capital and curtailment of purchasing power
in a number of countries, and some overproduction in basic world industries
accompanying under consumption. The recession has been accentuated by the
failure of a number of attempts at arbitrary price control. As usual in
recessions, the effects of the basic difficulties have been heightened by




-495a psychology of depression and pessimism. The end of the recession does
not yet appear by any concrete evidence to be definitely in sight though
there have been of late some indications of a check in the downward move¬
ment •
"A major disturbing factor in this business recession has been
a decline in commodity prices much more severe than has usually accompanied recessions in the past. Not a little of the severity of the
depression all over the world is to be ascribed to this factor, • • .
"Federal Reserve Open Market Policy
"As soon as the turn in business had been definitely signalized
by the break in the stock market last November the Reserve System promptly
reversed its policy from one of pressure to one of relaxation, • . • In¬
creases in System holdings of Government securities were accompanied
by a reduction in discounts of member banks at the Reserve banks, . . •
Thus member banks were relieved from the pressure of large Reserve bank
debt and put in a position to lend more freely to their customers. At the
same time the bond market was relieved from the pressure of sales by banks
which had been resorting to sales of bonds to meet their obligations. By
the spring and summer of 1930 banks found themselves with surplus funds
with which to buy amounts of bonds sufficient to compensate for 3ales in
1928 and 1929. Both money rates and the bond market felt the effect of
these changes. Commercial paper rates reached the lowest levels since
1915. Bond prices rose to the highest points since 1928.
"New Security Issues
"New issues of bonds for the first eight months of 1930 compare
favorably with those for previous years, • #




-496tr

The types of issues which account for the increase of 1,448

million dollars in new bond issues over the first eight months of 1929
are shown in the following table:
Change from 1929
in millions of dollars
Public utility
Railroad
Other corporate
Total corporate
Municipal
Foreign
Grand Total

.......

.....

.

+825
+346
- 255
+ 916
+ 144
+ 388
+1,448

!!

The increase in new bond issues has been reflected in a large

increase in construction awards for public utility, railroad, and govern¬
ment work which has partly offset the severe decline in residential con¬
struction.
1
1

Gold Movement

"A further effect of the change in money conditions in the
United States was a reversal of the gold movement from net imports to
net exports. As foreign balances were withdrawn in November and December
1929 considerable exports took place. There ensued, however, a series of
unusual imports from Japan and South America so that there was a consider¬
able net import movement until July 1930, when exports were again resumed.
"Bank Credit
"The immediate effect of the stock market crash was to throw
upon the banks in principal centers the burden of supplying loans on
securities formerly supplied by 'other1 lenders. This movement in fact
continued for a number of months. The reporting member banks in prin¬
cipal centers on this account showed an increase not representing any new
extension of credit to business and not shared by banks outside the




-497principal centers. Other loans, largely commercial, have declined con¬
siderably and bank investments have increased in 1930. The net result
has been that banks in principal centers, which were forced to increase
their security loans show an increase as compared with last year in their
total loans and investments. Banks outside principal centers show no
increase but rather a decrease. Generally speaking the banks have pursued
an extremely cautious lending and investment policy seeking to keep them¬
selves in the most liquid position.

This tendency is illustrated by the

position of the New York City banks with regard to surplus reserves.
Ordinarily these banks never allow a surplus of reserves to continue from
week to week. But during this past summer the New York banks have had
surplus reserves in a number of weeks . . . The surplus, however, has not
been consistently maintained.
"Mechanics of System Security Operations
"Only a part of the security purchases shown in chart 3 repre¬
sented System operations as shown by the following list of open market
decisions.




Sept. 24, 1929

-

Open market committee recommended pur¬
chases of $$25,000,000 a week if neces¬
sary to prevent increase in discounts.
Board approved October 1. No purchases
made at that time.

Oct. 25 - Nov. 14

-

$186,000,000 of securities purchased by
Federal Reserve Bank of New York of
which $75,000,000 were transferred to
System account. $25,000,000 purchased
directly for System account.

Nov. 12

-

Open market committee recommended pur¬
chases up to $200,000,000 if necessary
to reduce discounts. Board approved.

Nov. 27 - Jan. 1, 1930

-

5155,000,000 purchased under November 12
authority.

-498Jan. 8 and 9

- Open Market Committee decided 'no open
market operations in government securi¬
ties necessary at that time either to
halt or expedite the trend of credit.1

March 5 - 1 4

- $50,000,000 purchased by New York Re¬
serve Bank with approval of Reserve
Board, transferred to open market
account and apportioned to banks desir¬
ing participations.

March 24

- All governors meeting informally as
open market conference decided there
was no need for further purchases at
that time.

May 21

- Open Market Conference decided to make
no recommendation but indicated it
would be prepared to act on recommenda¬
tion of executive committee, if
occasion arose.

June 3

- Executive Committee and conference agreed
by telephone to purchases of $25,OOO,OOO
a week for two weeks. Board approved.

June 4 to 11

- $50,000,000 purchased for System account.

June 23

- Executive committee decided against
further purchases at that time,

August 7

- Executive committee and conference agreed
by telephone to purchase of $25,000,000
to offset partially gold exports. Board
approved. $25,000,000 purchased on
August 7.

August 28 to Sept. 3

- Executive committee and conference agreed
by telephone to purchases of $50,000,000
if necessary to maintain easy money con¬
ditions and avoid any firming due to
seasonal or other causes. Board approved.
Authority not exercised.
"Seasonal Prospects

1
1

Aside from gold movements and other causes which cannot now be

foreseen the principal influence upon Federal Reserve credit in the next
few months will be the seasonal requirements for additional currency and
bank credit. . . , The actual increase so far this year has lagged behind




-499the customary requirements because of a smaller currency demand accompany¬
ing reduced payrolls.
n

ments

0 n the average, about half of the September increase in require¬

in the period 1922-29

has been met through bill purchases and half

through other Reserve Bank credit, chiefly discounts for member banks.
This moderate increase in member bank discounting in September has ordin¬
arily been accompanied by slightly firmer money conditions, which con¬
tinued into the first half of October.

During the months of October and

November as a whole, however, the average increase in bill holdings
has been approximately sufficient t o meet the increase in total Reserve
Bank credit required in those months. In December the demand for Reserve
Bank credit, caused chiefly by the holiday currency requirements, has
tended to exceed materially the increase in bill holdings, and has there¬
fore resulted in increased member bank indebtedness.

This December in¬

crease in indebtedness, however, is regarded as a normal development and
does not ordinarily have much effect on money rates, except, perhaps, for
somewhat higher call loan rates,
"It was to avoid the restraining influence of even a moderate
increase in bank indebtedness and accompanying firmness in money condi¬
tions, whether due to seasonal changes, gold exports, or other causes,
that preparations were made to supplement bill purchases with the purchase
of Government's in the early part of September, if such action appeared
necessary to maintain the status quo. Because of the smaller demand for
Federal credit this year no purchases of Government securities have as yet
been required to maintain the credit situation in about its present posi¬
tion. Seasonal needs have thus far been provided for by increase in the




-500bill holdings of the Reserve Banks. Whether bills will continue to come
to the Reserve Banks in sufficient volume to meet additional needs for
Federal Reserve credit depends both on the total amount of bills drawn
and the conditions governing the proportion offered to the Reserve Banks.
1
1

At present the amount of bills outstanding is considerably

larger than it was a year ago, but, • . • the increase over last year has
been lessening due partly to lower commodity prices and smaller foreign
trade.

The volume of export and import bills has been showing an un~

seasonal decline.
"Two conditions favor the Reserve System1s getting a fair pro¬
portion of seasonal drawings of bills. First, the yield is now so low
that there has been some tendency for foreign banks to shift to other
means of employing their funds in this market, and second, large banks
are now holding a considerable volume of bills and when there is any
tendency towards firmer money conditions some of these bills come into
the market or are offered to the Reserve Banks. Even so, however, it is
not now possible to predict whether sufficient bills will come to the
Reserve Banks to meet seasonal or other needs and maintain present money
conditions.11
Action of Conference. Governor Harrison then stated that it was
in order, on the basis of the facts submitted in the preliminary memorandum,
as well as in the discussion of all of the governors, to consider the
formation of an open market policy for the System, it being pointed out
that at the present time the conference has authority to purchase not to
exceed $50,000,000 in order to maintain the present easy money position.
The question before the conference was whether there should be a change
in this policy and if so what that change should be.




-501l!

Governor McDougal stated that he believes it to be important

that the executive committee should have power to operate, that is,
authority both to buy and sell government securities, when necessary.
He added, however, that in his opinion money conditions in the principal
centers are now too easy and that this was probably largely due to the
operations of the Federal reserve banks in the open market, but that he
would not at the moment favor the sale of any government securities. He
felt nevertheless that it might be advisable to allow some of the System's
holdings of bills to fall off. Governor Young stated that this could
probably be done only by increasing the acceptance rate. Both Governors
McDougal and Norris felt that there might be some advantage in a slight
increase in the bill rate. Governor Harrison mentioned, however, that
any such action would necessarily have a tightening influence and that
such action should be made dependent entirely upon whether or not the Sys¬
tem was to agree upon a general firming money policy. Governor Norris,
after a brief discussion of his views with regard to open market policy,
read to the conference the following memorandum which he had prepared and
which he stated had been approved by his directors:
111

The Directors and officers of the Federal Reserve Bank of

Philadelphia find themselves so much out of accord with what appears to
be the sentiment of the other Banks and of the Board as to the policy
which the System should pursue at the present time, that they deem it
proper to state their own view of the situation.
111

We have always believed that the proper function of the System

was well expressed in the phrase used in the Tenth Annual Report of the
Federal Reserve Board - "The Federal Reserve supplies the needed additions
to credit in times of business expansion and takes up the slack in times




-502of business recession.ff We have therefore necessarily found ourselves
out of harmony with the policy recently followed of supplying unneeded
additions to credit in a time of business recession, which is the exact
antithesis of the rule above stated,
" We realize that there are emergencies and exceptional com¬
binations of circumstances when it is the part of wisdom to abandon even
the best of rules, but we cannot see that this is one of those cases, or
that a continuation of the present policy can be productive of anything
but harm.
"'If we understand the reasoning correctly, the policy of buying
government securities is justified by some argument as this - We are in a
period of depression characterised by falling commodity prices and a de¬
plorable volume of unemployment. This condition cannot be corrected with¬
out an increase of building activity. Building activity will be brought
about by low rates for long-time loans. Low rates for long-time loans will
only come with a strong and active bond market. Therefore we should bring
about this condition of the bond market by making short-time credit so
cheap that banks and investors will be driven to the bond market to
utilize their funds.
"|

It is admitted that the conditions we seek to correct are

world-wide. It must be admitted also that the decline in commodity prices
is almost wholly the result of over-production, which is evident not only
in wheat, cotton, coffee, rubber, sugar, copper, cement, coal, and auto¬
mobiles, but in various other commodities, some agricultural and some
industrial. As to most of these commodities, the difficulty cannot be
charged to "under-consumption.n The uses of rubber, cement, and copper
have been continually increasing, and the world's per capita consumption




-503of sugar and coffee Is probably larger than ever before in history.

This

over-production did not manifest itself until a year ago, because, under
the stimulus of instalment selling and an unreasoning belief in longcontinued and unprecedented prosperity, over-buying kept pace with over¬
production. The consequences of such an economic debauch are inevitable,.
We are now suffering them.
" Can they be corrected or removed by cheap money?

We do not

believe that they can. We believe that the correction must come about
through reduced production, reduced inventories, the gradual reduction of
consumer credit, the liquidation of security loans, and the accumulation
of savings through the exercise of thrift. These are slow and simple
remedies, but just as there is "no royal road to knowledge,11 we believe
that there is no short cut or panacea for the rectification of existing
conditions. We do entertain, however, the belief that the declines in
commodity prices and in employment have about run their course, and that
the foundations for business revival have already been laid,
"'

Let us take up, first, the particular argument advanced by

those who advocate cheap money as a cure - that it will stimulate con¬
struction.

Is a stimulation of construction desirable?

of construction?

If so, what kind

The only division of the building industry that shows

any sharp decline is residential construction.

The trend of urban living

is away from the individual house to apartments.

In most, if not all,

of our large cities, one-family houses are very unsalable, and sheriff's
sales are multiplied.

At the same time there is a large percentage of

room vacancy in hotels and apartment houses. It seems to us that a stimu¬
lation of residence construction would be a stimulation of what is already
over-supplied, and would simply be inducing




people to go into what would

-504prove to be disastrous ventures.
"'The railroads and other public utilities are spending money
freely in electrification, removal of grade crossings, new terminals,
and in all directions except equipment.

It is not likely that any large

expenditures for that purpose will be made until car-loadings increase.
It certainly is not wise to encourage any extensive construction of new
industrial plants, or enlargements of existing plants, when production
in most of the major lines is running at from 50% to 80% of present
capacity.
"' Taking the broader view, we are in accord with the opinions
recently expressed by financial writers, one of whom we see quoted as
saying "An abundance of funds for business purposes will stimulate trade
recovery when the time is ripe for such a development; but it cannot, by
itself, go very far toward converting depression into expansion,11 while
another says "Cheap money will not induce manufacturers and merchants to
increase their borrowings, or enlarge their inventories in an unsatis¬
factory business period.

Cheap money is a stimulant, and also an intoxi¬

cant, that may have temporal effect, but a headache will follow if the
dose is large enough, and persisted in. It encourages over-borrowing by
cities, and loans on securities or real estate by individuals."
''At all events, the cheap money policy has now been persisted
in for nearly ten months, during which period the call-loan rate has been
driven down from 6$ and over to 2$; the time-money rate from 6% to 2 1/2%;
the commercial paper rate from 6$ to 3$; and the rate on acceptances from
4 1/2$ to 1 7/8$; and there has been an advance of nearly 6 points in the
average bond price to the highest of the year.

Insofar as this advance

is the result of savings and a reaction from the 1929 theory that equities




-505were better investments than obligations, it is wholesome. To whatever
extent it may be the result of the artificially and abnormally low inter¬
est rates which we have been instrumental in bringing about, we believe
it to be unwholesome and - like all artificial interferences with natural
laws - fraught with potentialities of danger.
"' None of these things has brought about any reversal of condi¬
tions. They have doubtless avoided greater evils that might have occurred,
but it is our judgment that they have been carried too far and too long.
It is significant that a recent increase in brokers1 loans was accepted
as "bullish11 news, being interpreted as evidence that the public was com¬
ing back into the stock market. We believe that the present abnormally
low rates for money are regarded by the public as evidence that no busi¬
ness is being done, and that no one has any use for money; and that some
hardening of rates would be accepted as an indication of a revival of busi¬
ness activity,
"'Our objections to recent Federal Reserve policy, however, are
positive as well as negative.
"'This policy has interfered with the operation of the natural
law of supply and demand in the money market, and has created artificially
low interest rates, and artificially high prices for government securities.
It is open to the same objections which the Treasury urged in 1922 to the
purchases of governments which the Federal Reserve Banks were making at
that time. It is an injustice to our member banks. It has resulted in
making open market operations usurp the discount function, and tends to
foster the regrettable impression that there is some element of impropriety
in borrowing by member banks. It makes our discount rates wholly nominal
and ineffective, and finally, and perhaps most important of all, as the




-506result of injecting a large amount of unasked and unneeded Federal Re¬
serve credit into an already glutted money market, we find ourselves with
over 600 millions of governments on hand, the bulk of which must ulti¬
mately be disposed of. This compares with a previous high of 592 millions
(monthly average) in December, 1927, and a low of 73 millions in November,
1921. This previous high was part of a plan which looked to the stabiliza¬
tion of European currencies, and included provision to check the infla¬
tion which it was feared would follow. We do not undertake to say how
much Federal Reserve credit should be in use today, but we do hold to the
belief that a substantial part of it should be the result of a demand ex¬
pressed in borrowing by member banks, and used in cooperation with those
banks. Less than one-sixth of it is of this character today.
"'The suggestion has been made that we should be prompt to "go
into reverse,11 and dispose of these governments when business picks up.
This is a complete and literal reversal of the policy stated in the Board's
Tenth Annual Report, already quoted. We have been putting out credit in a
period of depression, when it was not wanted and could not be used, and
will have to withdraw credit when it is wanted and can be used. Moreover,
it is not difficult to imagine the caustic comments which will probably be
made when this reverse policy is inaugurated, and credit is withdrawn just
as commerce and industry begin to have use for it.'
"Governor Fancher said that while credit and money rates were
very easy in the larger cities in his district and in his opinion perhaps
a little too easy, he did not think that now is a time to sell government
securities. Governor Calkins in summarizing the situation said that he
would not be in favor of any further easing at this time nor would he be
in favor of any tightening, that while money rates are now very easy,




-507nevertheless it was his judgment that this is not the time to change the
System policy and that he favors maintaining the status quo, Mr, Peple
said that he and Governor Seay, who could not be present at the conference,
were in substance in favor of the views expressed by Governor Calkins,
Governor Geery agreed with Governor Calkins, but said that he would prefer
to see member banks borrow a little more from the Federal reserve banks
before any purchase of securities was undertaken. Governor Young stated
that, in his opinion, credit conditions are very easy but that this is no
time to attempt any change, that he favors maintenance of the status quo,
and that in order to execute such a policy he feels that the System should
be in a position either to buy or sell securities. It was his judgment,
however, that there would be no real opportunity to sell securities until
the turn of the year when the normal return flow of credit and currency
would perhaps afford appropriate opportunity for some sales of securities,
Mr, Worthington stated that Governor Bailey was of the opinion that some
action toward firming would be vase when possible but that the question of
time was the important factor and that the turn of the year would probably
be the right time to take such action. Governor Harrison stated that he
was in agreement with what appeared to be the opinion of the majority of
the members of the conference, that quite regardless of the past, the
present policy of the System should be to maintain the present easy money
position in the principal money centers and that while the System should
be prepared to buy or to sell government securities in order to maintain
that position, nevertheless there appears to be no reason at the present
time either to buy or to sell. He then outlined a report with recommenda¬
tions which he submitted for the consideration of the conference and after
some discussion (during the course of which Governors Talley and Black




-508rejoined the meeting), the open market policy conference voted to approve
the following report:
"'The Open Market Policy Conference has considered the prelim¬
inary memorandum submitted to it by the chairman and has reviewed at
length general business and credit conditions.
"'In view of the continued severe depression in business activity,
trade, and commodity prices in this country, as well as the rest of the
world, it is the sense of the conference that it should be the policy of
the System, so far as possible, to maintain the present easy money rate
position in the principal money centers, it being the opinion of the con¬
ference that under present conditions no further easing of such money rates
would be advisable and that no firming of such rates would be desirable
whether because of seasonal requirements, gold exports, or other causes.
It is, therefore, recommended that the executive committee be authorized,
if necessary, to supplement bill purchases by the purchase of government
securities in the event that the seasonal demand for Federal Reserve credit,
gold exports, or other factors should tend unnecessarily to tighten present
money rates, and that in the event that any conditions should develop which
would require sales of government securities to execute this policy, the
executive committee should be authorized to make such sales. It is under¬
stood, however, that if the committee should have to buy or sell more than
.$100,000,000 of government securities to maintain the status quo, new
authority should be procured in accordance with the prescribed procedure.
"'It is recommended that there should be another meeting of the
Open Market Policy Conference early in January, unless a change in condi¬
tions suggests to the Board or the members of the conference the advisa¬
bility of an earlier meeting.'"




-509Meeting with Board.

The Open Market Policy Conference met with

the Federal Reserve Board during the afternoon of September 25, at which
meeting Governor Harrison stated "that the Conference had discussed for
the better part of the day general credit and business conditions both in
this country and abroad and the System policy most advisable under those
conditions.

Consideration was given, he stated, to a preliminary memo¬

randum prepared in New York as a report of the Chairman, reciting facts
and conditions as they appear, but drawing no conclusions, without a sur¬
vey of which it would be impossible to satisfactorily report the
deliberations of the Conference, There being no objection, he read the
preliminary memorandum to the meeting.
"He reported the Conference, in order to crystallize sentiment,
discussed possible courses of System action (l) Adoption of a policy tend¬
ing to make rate conditions easier, (2) A policy which tends to make them
firmer or (3) A policy the purpose of which would be to maintain them about
where they are. The Conference, he said, was in agreement that the System
should not endeavor to follow an easier money policy and, with possibly
two exceptions, that a policy looking toward the firming of rates should
not be adopted at this time.

He then read the report, which had been

adopted by the Conference with nine affirmative votes, two negative and
one Governor not voting.
"The Governor then asked if the dissenting or non-voting members
of the Conference desired to make a statement or discuss the report.
"Governor Talley, who stated he was the non-voting member, said
that he realized that between now and January 1st is not the time to change
the situation in the direction of firmer money rates and that there would
probably be no occasion for additional purchases of securities by reason




-510of the overages in reserves which exist at the present time, but that he
did not think there was sufficient recognition or appreciation of the lat¬
ter fact on the part of the nine who voted for the report or a willing¬
ness to let these excess reserves be absorbed before further action is
taken by the System.

He also referred to the anxiety as to whether bills

will be offered to the System and asked if the feeling of some that the
System is not getting a sufficient amount of bills is not a sign that the
market does not want additional money, provided there is a sufficient
amount of floating bills so that the market can get money if it wants to
do so.
"Governor McDougal, as one of those voting in the negative, re¬
viewed the developments of the past year in the direction of easier money
conditions to a point where the banks in the cities are possessed of an
enormous amount of surplus funds. He stated that the seasonal demand
which usually comes has not yet developed, that the probability is that
unless something happens to change the outlook the demands through Decem¬
ber will not be so great and that in view of these conditions he thinks
the System has given the present extremely low money market an opportunity
to show what it will do. He stated that he voted against the resolution
for the reason that he does not believe the System should inject any more
of the artificial into the money situation; that things should be allowed
to take their natural course rather than to attempt to formulate a policy
which it is expected will be in force for a period of three months. He
stated that he would not be afraid if rates should firm a little, that if
they went too far the System could take action to stop the trend and that
he did not think it was good policy to maintain the present status of rates
for three months or any definite period of time.




-511" Governor Calkins stated that although he voted in the negative
he was not out of sympathy with the general purport of the report. How¬
ever, he pointed out an inconsistency in that the Open Market Policy Con¬
ference has been authorized since September 3rd, to buy not to exceed
$50,000,000 of Government securities, if necessary to prevent any firming
in existing money rates, and now has reached the conclusion that it does
not wish to ease the market, but recommends in its report that it be
given authority to buy up to $100,000,000. He stated, however, that he
was not in agreement with Governor McDougal as to the expediency of taking
action that might tend to firm money at this moment•

He stated that there

is every reason to anticipate the usual seasonal increase in the demand
for credit and in his opinion the System should go through that period,
the remainder of the year, before taking any action to bring about a less
easy condition.
"Governor Harrison referred to the authority granted the Open
Market Policy Conference on September 3rd and stated that the request at
that time for authority to purchase up to $50,000,000 was indicative of
nothing other than the practical problem of getting authority pending a
meeting of the whole conference.

He stated that in suggesting at the

present time that the limit be fixed at $lOO,000,000 the Conference does
not anticipate using either $50,000,000 or $100,000,000, but felt that
the procedure was at best cumbersome and that as long as the policy had
been agreed upon, if approved by the Board, adequate authority should be
given to the Executive Committee rather than necessitate the reconvening
of the whole conference in the fall if it were determined that purchases
should be made in excess of $50,000,000. The recommendation of the con¬
ference, if approved by the Board, he stated, would define an objective,




-512give the Executive Committee authority to execute the policy and provide
means for anyone interested in checking up to call for a meeting to re¬
view the situation prior to January, when another meeting should be held
in any event.
"Governor Norris expressed his own feeling, and perhaps that of
some of the others voting in favor of the report, that while he would like
to see the recommendation look a little more than it does toward the
firming of rates, he did not care to take the responsibility of saying
that any action in the direction of firming should be taken just at this
time, when we are in the midst of the crop moving season and with the
usual seasonal demand for currency during the few months ahead,
"Mr. Cunningham raised the question, in connection with the sug¬
gestion that the seasonal demand for Federal reserve credit this year will
probably not reach the heights of previous years, of whether the funds in¬
jected into the market by the Federal Farm Board and Intermediate Credit
Banks for the carrying and marketing of commodities should not be given
consideration and, if added to Federal reserve credit, would not bring the
total increase in seasonal credit to its normal proportion.
"Governor Young referred to an investigation made by him last
year which developed that loans by the Farm Loan Board and Intermediate
Credit Banks have the same status as loans by non-member banks so far as
the demand for Federal reserve credit is concerned.
"Mr. Goldenweiser explained that the autumnal increase in the
demand for Federal Reserve credit is brought about entirely by the in¬
creased demand for currency during that period of the year and that indica¬
tions are that the demand for credit during the current year will be less
because the demand for currency has fallen off due to the lower level of




-513wholesale and retail prices, employment and payrolls.
"Dr. Miller then raised the question of the advisability of
further purchases of Government securities by the Federal reserve banks on
the basis that their removal from the general markets would force banks
and others to seek new investments, thereby creating a turnover in the
money market, which at present he described as being in a state of stagna¬
tion.

He stated that such action might eventually lead to the injection

into new enterprise of funds which could not otherwise be employed.
"Governor Harrison stated that this phase of the matter had not
been considered by the Open Market Policy Conference which had, as stated
in its report, voted against any action in the direction of further ease
at the present time.

He expressed the opinion that additional funds put

into the market by the Federal Reserve System under existing conditions
would only add to the burden of excess reserves now carried by member banks
and that while it would probably strengthen the bond and mortgage markets
and encourage borrowers of long time money, it would be fraught with a
great many dangers attendant to a policy of inflation.
"Dr. Miller pointed out that when you have a condition of extreme
idleness in the money market you have an involuntary deflation and stated
that although he was not advocating a program of the sort, he had raised
the question in order to ascertain whether its possibilities had been can¬
vassed by the Open Market Policy Conference.
"The Governor pointed out that if additional credit were forced
into the market through further purchases of Government securities, a
limitation would be put on the tendency toward, further ease by gold exports,
offsetting the extent of such exports the purchases of securities made by
the System.




-514" He then referred to present conditions in the bond market which,
he stated, appears at the present time to be functioning in a normal way,
with no signs of undue inflation but with conditions easy enough to permit
the placing of a good volume of bonds for construction purposes,
"Governor Norris then reported a conversation with a representa¬
tive of a leading financial house who, in reply to an inquiry as to
whether easier money rates would stimulate the bond market, replied that
he would regret to see the Federal Reserve System buy any more securities
or endeavor to put interest rates any lower. Governor Norris stated that
the firm in question was of the opinion that no corporation needing
capital today has any difficulty in getting it and a 1/2 per cent or 1 per
cent reduction in rate would not induce further use of money.1'
Action of Board. Action on the recommendation of the Open Market
Policy Conference was deferred at the meeting of the Board on September 20,
pending receipt of advice of certain changes in verbiage, which the Gov¬
ernor stated Governor Harrison had advised him would be made in the report
submitted to the Board by the Conference, and at the meeting on October 1,
the Governor presented the following telegram from Governor Harrison con¬
taining the revised recommendation:
"The following report and recommendation of Open Market Policy
Conference the substance of which was reported to the Federal Reserve
Board at the joint conference last Thursday, is submitted to the Board
for its consideration and approval:
"'

The Open Market Policy Conference has considered the prelim¬

inary memorandum submitted to it by the Chairman and has reviewed at length
general business and credit conditions.




'' In view of the continued severe depression in business activity,

-515trade, and commodity prices in this country, as well as the rest of the
world, it is the sense of the Conference that it should be the policy of
the System, so far as possible, to maintain the present easy money rate
position in the principal money centers, it being the opinion of the Con¬
ference that under present conditions no further easing of such money rates
would be advisable and that no firming of such rates would be desirable
whether because of seasonal requirements, gold exports, or other causes.
It is, therefore, recommended that the Executive Committee be authorized,
if necessary, to supplement bill purchases by the purchase of Government
securities in the event that the seasonal demand for Federal Reserve
credit, gold exports, or other factors should tend unnecessarily to
tighten present money rates, and that in the event that any conditions
should develop which would require sales of Government securities to
execute this policy, the Executive Committee should be authorized to make
such sales. It is understood, however, that if the Committee should have
to buy or sell more than $100,000,000 of Government securities to maintain
the status quo, new authority should be procured in accordance with the
prescribed procedure.
"' It is recommended that there should be another meeting of the
Open Market Policy Conference early in January, unless a change in condi¬
tions suggests to the Board or the members of the Conference the advisabil¬
ity of an earlier meeting.!
"The minutes of the Open Market Policy Conference which will con¬
tain this report will be transmitted to the Board as soon as drafted and
available for distribution."
The revised report was considered at this meeting and again at the
meeting on October 2, when the following letter was approved and ordered




-516transmitted to Governor Harrison, as Chairman of the Open Market PolicyConference:
"The final Report of the Open Market Policy Conference, trans¬
mitted by you on September 30th, has been fully considered by the Board.
"The Board understands that the Conference is of the opinion
that no change of the existing situation with regard to money rates is
desirable - neither firming of rates nor easing of rates; and that,
therefore, no operations in the open market are contemplated, except as
they may become necessary to counteract factors threatening a disturbance
of the status quo with respect to money rates. It is the understanding
of the Board that the authority asked by the Conference to purchase or
sell Government securities is to protect the existing level of rates, not
to alter it.
"I am writing to advise you that the Board is prepared to approve
the purchase or sale of Government securities within the limits proposed
in the Report of the Conference, for the purpose of maintaining stability
of rates under present conditions, such authority to run until an agree¬
able date next January, unless a change in conditions before that time
should make a review and reconsideration of Open Market policy advisable
at an earlier date.
"It will be understood that such purchases or sales will be made
in consultation with the Governor of the Board or, in his absence, the
Acting Executive Officer of the Board, except purchases or sales made in
small amounts in pursuit of an understood program or in the event of a
sudden emergency,
"It will be understood further that the present action of the
Board in approving the recommendation of the Conference supersedes the




-517action taken on September 3rd."
Communications on Open Market Operations and Foreign Exchange Trans¬
actions, Mid-October-Mid-December 1930
Letter from New York Bank to Board, October 16. The regular
weekly letter regarding conditions and operations in the Government Secu¬
rities and Bill Markets submitted to the Board by the New York Bank was
discontinued with the letter of August 28, but was resumed on October 16,
1930, under which date Deputy Governor Burgess advised as follows:
"In accordance with our telephone conversation I am resuming our
weekly letter summarizing open market operations and giving you in con¬
densed form a weekly statement the details of which we report each day in
our daily letter•
"During the last week, that is, the statement week of October 9
to October 15 inclusive, no change has occurred in the total holdings of
government securities in the System Account which remain at $4O2,3OO,OOO. . .!
'
Communications on purchase of sterling. At the meeting of the
Federal Reserve Board on October 22 consideration was given to letters
dated October 14 and 17 from Governor Harrison of the Federal Reserve Bank
of New York regarding the action taken by the Board of Directors of the
New York Bank on October 9 in authorizing the bank to purchase up to five
million pounds of sterling exchange as and when appropriate opportunity was
afforded and, under which authority the bank had made purchases from time
to time and on October 22 had purchased exchange in the amount of
L2,200,000, ($10,691,000) of which amount LI,900,000 ($9,270,000) had been
converted into sterling bills in which holdings the other Federal Reserve
Banks participated• In a letter to Governor Harrison regarding these trans¬
actions, which letter was approved at this meeting, the Board stated, "so




-518far as the operation affects the open market policy, the Board assumes
that the special operations in foreign exchange Kill be considered as
part of the open market program, subject, of course, to the policy agreed
upon by the Open Market Committee and approved by the Board."
Letters from New York Bank to Board, October 23-November 6. Under
date of October 23, Deputy Governor Burgess wrote the Board as follows:
"Since last week the total amount of government securities in the
System Account has remained unchanged at $402,300,000 and the total in the
investment account of this bank, unchanged at $112,010,700, The only
transactions consisted in exchanges by which holdings of December Treasury
bills were slightly increased and holdings of November bills, December
certificates, and March notes slightly reduced, changes which improved
yields slightly and accommodated the market. • • •"
The following letter was received from Deputy Governor Burgess
under date of October 30, 1930:
"No changes have occurred in the total of the holdings of govern¬
ment securities in either the System Account or the investment account of
this bank since my last letter dated October 23, 1930, such totals remain¬
ing at $402,300,000 and $112,010,700, respectively. Some exchanges were
made, as a good demand for early maturities gave us an opportunity to
replace some early maturing issues with slightly longer maturities having
higher yields, . . ,!t
Under date of November 6, Deputy Governor Burgess wrote as fol¬
lows:
"Since my last letter to you of October 30, 1930, there have been
no changes in the total of the holdings of government securities in the
System Account or the investment account of this bank, the totals remaining




-519at $402,300,000 and $112,010,700, respectively. • . ."
Further communications on sterling purchases.

In his letter of

October 31, Governor Harrison advised that on October 30, his directors
had approved the purchase of an additional five million pounds of sterling
as and when it seemed desirable to do so in order to support sterling
exchange and thus to avoid imports of gold and generally to improve
sentiment regarding the exchange situation.

This letter was presented at

the meeting of the Federal Reserve Board on November 7 on which date a
total of 16,000,000 ($29,277,000) of sterling exchange had been purchased
by the New York bank and converted into bills and prorated among the Fed¬
eral Reserve banks. The Board's reply, dated November 7, to Governor
Harrison1s letter of October 31 contained the following statement, "it is
understood from Governor Harrison's letter of October 23, 1930, that so
far as these purchases have any influence on the money market or money
market rates they will be considered by the Open Market Policy Conference,
along with all other factors influencing the credit position, in the exe¬
cution of the policy agreed upon by the conference and approved by the
Federal Reserve Board.11
Under date of November 13, 1930, the Board was advised by Deputy
Governor Burgess as follows:
"There have been no changes in the total holdings of Government
securities either in the System Account or the investment account of this
bank, since I wrote you last on November 6, 1930

• • •"

Recommendation of Federal Advisory Council, November 18. The
Federal Advisory Council met in Washington on November 18, 1930 and adopted
the following recommendation which was submitted to the Board:




"In the opinion of the Federal Advisory Council the present

-520situation will be best served if the natural flow of credit is unhampered
by open market operations or changes in the rediscount rates. The
seasonal demands during the balance of the year should be met by redis¬
counting on the part of member banks."
Letters from New York Bank to Board, November 22 and 29. On
November 22, Deputy Governor Burgess wrote the following letter to the
Board:
"The total holdings of government securities in the System Account
remain the same as when I wrote you last on November 13, 1930. You will
have observed, however, from our advices, that the holdings of the individ¬
ual banks have changed somewhat, the cause of this change being the taking
over temporarily by the other banks of a portion of the participations of
the Federal Reserve Banks of St. Louis and Atlanta, amounting to
$10,000,000 and $5,000,000, respectively.

The holdings in our own in¬

vestment account have shown a slight reduction, of a temporary nature,
however, as our holdings of United States Treasury bills maturing November
17 have not yet been entirely replaced by other securities. The money
situation has not been such as to call for any haste in making these re¬
placements, and purchases are therefore being made gradually as opportunity
presents.

..."
The following letter was received from Deputy Governor Burgess

under date of November 29, 1930:
"Total holdings in the open market investment account are un¬
changed since my last letter to you dated November 22, 1930. There were
some minor changes in maturities, due to a strong market demand for short
maturities, which has enabled us to exchange at advantageous prices some of
the earlier maturities for later ones.




Further, the Federal Reserve Bank

-521of St, Louis asked to be relieved temporarily of the balance of its
participation in the System Account, These securities, amounting to
$5,526,OOO, were accordingly taken over and apportioned among all other
Federal reserve banks except Atlanta, which had itself been relieved
previously of a large part of its participation.

The total of the secu¬

rities held in our own investment account has shown a slight increase due
to purchases which we are gradually making in replacement of recent matu¬
rities in order to bring the account back to the $112,000,000 figure main¬
tained over the past year, . . •"
Communications from New York Bank, early December.

The New York

bank made further purchases of sterling exchange on November 28, December
1 and 2.

These purchases were converted into sterling bills and on

December 4 the bank held a total of L7,150,000 ($34,882,000) of sterling
bills in which holdings the other Federal Reserve banks participated.
On December 4, Deputy Governor Burgess wrote the Board as follows:
"No changes have occurred in the total of the holdings of govern¬
ment securities in the System Account since my last letter dated November
29, 1930, Changes in maturities were made, however, as the opportunity
afforded, consisting in the main of replacing nearby maturities with later
ones at advantageous rates. , , ,lf
On December 12, Deputy Governor Burgess wrote the following letter
to the Board:
" For the statement week ended December 10 there were no changes
in the total amount of holdings of government securities in the System
Account.

Our own investment holdings likewise remained at the same level.

Sales contracts, however, were increased by $13,000,000, representing
certificates maturing December 15 taken over temporarily from dealers.




-522Yesterday we took these securities into our own account to leave the
dealers free to take any other offerings• The distribution of the secu¬
rities in the System Account underwent a change due to the repurchase by
the Federal Reserve Bank of St. Louis of $5,000,000 of its participation
of government securities in the Account, representing one-half of the
$10,000,000 of governments of which that bark was temporarily relieved on
November 17, 1930.

..."

On December 18, Deputy Governor Burgess wrote the Board as
follows:
"No change has occurred in the total of the holdings of govern¬
ment securities in the System Account, since I wrote you last on December
12, 1930. The changes in maturities are accounted for chiefly by replace¬
ment of maturing certificates of indebtedness and Treasury bills. Such
additional changes in issues consisted almost entirely of exchanges of
Treasury bills maturing February 16, 1931 and 3 1/2% Treasury notes called
for payment in March for other issues of later maturities. These were
made at advantageous rates at the same time satisfying the demand in the
market for these short maturities. 'Were it not for the fact that upwards
of $50,000,000 of replacement purchases made in our own investment account
were made for delayed delivery in order to relieve the effect on the money
market of the Treasury's operations for this quarter, our own investment
account would show an increase of $40,000,000, over the total a week ago.
This $40,000,000 represents the purchase from the Manufacturers Trust Com¬
pany of that amount of longer term government bonds, at a time when that
institution required large amounts of currency and wished to avoid an in¬
crease of loans here to too large a figure.




..."

-523Meeting of Executive Committee December 20, 1930
Preliminary memorandum of Chairman, The Executive Committee of
the Open Market Policy Conference met in Washington on December 20 at
which meeting the following preliminary memorandum was considered:
"At the time of the last meeting of the open market policy con¬
ference near the end of September it was hoped that the bottom of the
business recession had been reached. But since that time business activity
has declined further to about the lowest levels relative to normal ever
reached in this country since adequate records became available. Industrial
production has continued to decline, especially in the iron, steel, and
automobile industries; factory employment has been further reduced; freight
movements and merchandise exports have shown less than the usual autumn
expansion; commodity prices have resumed the decline, agricultural products
in many cases falling to levels even lower than before the drought. Only
the textile industries have shown material signs of improvement
"Banking Situation
"In the midst of a severe industrial depression has come a series
of events which has to an important extent shaken public confidence in the
banking situation. A series of rather spectacular bank failures in various
parts of the country was capped by the failure of the Bank of United States
in New York City, the largest bank ever to fail in this country, with
400,000 depositors largely among the foreign-born population. This failure
was followed by runs on several New York City banks, an increase of over
$150,000,000 in money in circulation, necessitating a like expansion in the
demand for Federal reserve credit. A further result was greatly increased
pressure in the security markets as some banks dumped securities to make
their positions more liquid. Of still greater importance than the definite




-524results is the effect of these events upon public sentiment. These
occurrences may have retarded by some weeks the return of more active
business,
"Bond Market
"Until the past few weeks, prices of the highest grade bonds
held relatively firm, but prices of second grade issues have declined
almost continuously until they are now in many cases the lowest in at
least six years, and on a number of occasions recently it has been re¬
ported that there has been difficulty in obtaining a bid on large blocks
of bonds, . • ,
"One effect of weak bond prices has been a substantial deprecia¬
tion in the investment portfolios of many banks, in some cases causing an
impairment of capital. This situation is particularly acute in country*
banks, although, as the following diagram indicates, these banks in
general have shown little tendency toward rapid expansion of their invest¬
ments either this year, or in previous years of easy money conditions.
The investment difficulties of these banks appear to be due chiefly to a
general tendency to purchase a large proportion of high-yield low quality
bonds, which are particularly vulnerable in periods of reduced business
activity and reduced corporation profits. Increases in investments of
banks in large centers have been particularly in short-term issues.
"Another effect of the weak bond market has been a large shrink¬
age in flotations of securities to provide new capital. . • ,
"Foreign financing and gold movements
"Foreign issues in this market have declined in the past few
months to negligible amounts, due not only to general bond market condi¬
tions here, but more largely to political disturbances abroad. Thus




-525foreign countries have been unable to strengthen their position with funds
obtained in our capital market, and in some cases have had to ship gold
to this country to service their previous debt and to make other payments.
There were net gold imports to the United States of $26,000,000 in October,
$33,OOO,OOO in November, and $17,000,000 in the first 17 days of December,
with additional shipments due to arrive later in the month,
"Reserve position of New York banks
"At the time of the September meeting, the New York banks had a
moderate surplus of reserves and money conditions were easy. Since, at
present rates, there has been a tendency to sell bills to the Reserve banks
only after firmer conditions have appesred$it was not possible to forestall
a slight tightening of the money market in the early part of October and
again at the beginning of November, but in general the New York banks have
had a moderate surplus of funds much of the time until within the past
three or four weeks. In these weeks, Thanksgiving Day and month-end cur¬
rency requirements, the beginning of the heavy currency demand for
Christmas trade, and in the past ten days extraordinary demands for
currency due to disturbed banking situations have absorbed all surplus
funds in the market and caused a rather general increase in rediscounts at
the Reserve Banks. Money rates have changed little, but the money situa¬
tion is distinctly firmer. For a few days past Treasury operations have
eased the market but tax collections to-day are expected to enable the
Treasury to retire its special certificate and absorb any surplus funds,
-- - #
x x
"The present money market situation
"In planning for the last ten days of the year, which are always
a time of some strain on the money market, two phases of the situation




-526stand out. The first is that the recent bank failure in New York, coining
as it did on top of important failures in other parts of the country,
accompanying disastrous declines in the values of securities, has led to
a feeling of great unsettlement, insecurity, and caution. The bond market
is almost completely closed to new issues, and banks and others are most
reluctant to make commitments for more than a very short time ahead, and
in many cases have been dumping securities to make their position more
liquid. The situation is thus peculiarly sensitive to any slight increase
in bank borrowing or any other indication of money strain.
"The bill market in particular has reflected this situation in
the unwillingness of many buyers of bills to buy any but the very finest
bank names. It is not wholly clear yet how this condition may affect our
acquisitions of bills but it seems possible it may impede somewhat the
freedom of access of the money market to this bank through the bill market."
Excerpt from minutes of meeting. At this meeting no formal re¬
port was adopted by the Committee but the minutes contain the following:
"Governor Harrison then summarized the credit position, indicat¬
ing that, owing to some tenseness in the banking situation, the public
state of mind was now more sensitive than when the program of the Open
Market Policy Conference meeting on September 25 had been adopted, which
provided for a possible purchase of up to #100,000,000 Government securi¬
ties if necessary, as a supplement to bill purchases, to prevent any
tightening of the money market due to seasonal or other causes. It was
his view that if there was any difficulty in securing an adequate amount of
bankers acceptances to take care of all seasonal needs for the next ten
days, the committee should be prepared promptly to buy governments rather
than have any increase in nervousness arise from any indication of strain




-527in the money situation.
"This question was then discussed by the members of the com¬
mittee.

In the course of discussion reference was made to the banking

situation at different important centers, the probable currency and
window dressing demands over the first of the year, and problems which
had arisen in connection with some discrimination against certain names
existing in the market for bankers acceptances.
"Those present agreed that if any real need arose they would
be willing to leave it to the judgment of the Federal Reserve Bank of
New York whether some additional amount of government securities should
be purchased within the $100,000,000 authority with the understanding
that the New York bank would keep in close communication with the members
of the committee.
"With reference to the question as to whether any governments
purchased at this time or other governments in the portfolio should be
sold after the turn of the year, while it seemed to be the sense of the
committee that this would prove undesirable or difficult in all the
circumstances, it was agreed that a meeting of the open market policy
conference should be held early in January to consider future policies at
that time. January 12 was suggested as a satisfactory date."
Developments Late December 1930
(Secretary1s note: At the meeting on December 23, the
Federal Reserve Board approved a rediscount rate of
2 per cent on all classes of paper of all maturities
established by the directors of the Federal Reserve
Bank of New York, effective December 24, 1930, and a
minimum authorized buying rate of 1 1/2 per cent for
purchases of bankers1 acceptances by the New York bank.)
On December 24 the Federal Reserve Bank of New York established
the following schedule of effective buying rates on acceptances:




-528Bankersf Acceptances
1 to 120 days
121 to 180 days
Repurchase
Trade acceptances

1 3/4 per cent
2
"
1 3/4 ir rf
2

"

"

Letter from New York Bank to Board, December 26, The following
letter was received from Deputy Governor Burgess under date of December
26:
"The total of the holdings in government securities in the
System Account is the same as when I wrote you last on December 18, 1930.
The changes in the maturities were due to exchanges in the market of
nearby maturities, mostly Treasury bills due February 16, 1931, for other
short-term paper maturing in September and December next year. With re¬
gard to the holdings of this bank, we show a total of $152,464,25O at the
close of business December 24 against $96,264,250 at the close of business
December 17, the increase being entirely due to the replacement purchases
which had previously been made for delayed delivery.
"With the lowering to 2% of the carrying rate on government
securities and some firmness of money conditions sales contract holdings
of government securities to-night show an increase to $8,000,000,
"The government security market has been somewhat easier in tone
during the greater part of the statement week. Offerings were in excess of
the demand, especially for the long-term issues, which were offered in
fairly large volume with a resulting decline in price. However, on the
last day of the statement week, following the announcement of the reduc¬
tion of the rediscount rate by the Federal Reserve Bank of New York, the
government security market showed an improvement and prices of short-term
issues recorded small fractional gains with firming in the long-term issues.
n
•




•

-529(Secretary's note: On December 27 the Federal Reserve
Bank of Cleveland established a rediscount rate of 3
per cent on all classes of paper of all maturities
effective December 29, 1930.)
Year-end purchases. Under date of December 30, Governor Meyer
reported to the Board as follows:
M

In talking with Dr. Burgess this afternoon at four o!clock, he

reported that the total purchases of Governments for delivery today, made
yesterday and today, due to the firmness in the money market in New York
in connection with the year end requirements of the banks, amounted to
$32,000,000. He stated that during the afternoon they felt the situation
had been eased sufficiently to justify refusal to purchase on offerings
from dealers of Government securities.
"In addition, bills were bought in the amount of #7,000,000, of
which $2,000,000 were on repurchase agreements, and $18,000,000 of Gov¬
ernments on repurchase agreements also. These figures are merely rough.
"The Bank's operations in Governments, as I have already re¬
ported to the Board verbally in recent weeks, included a purchase of
$40,000,000 par value, about, amounting to $43,000,000 in cash value, made
on one occasion from the Manufacturers Trust Company which desired to re¬
duce its bills payable with the New York Bank, and $5,000,000 bought on
Saturday afternoon from the Public National Bank which also found itself
borrowing too heavily from the Federal Reserve Bank in connection with
withdrawals of deposits due to runs started in the days following the
closing of the Chelsea Bank and Trust Company. The purchases from the Manu¬
facturers Trust Company and the Public National were reported in off hours
by Governor Harrison, in the case of the Manufacturers, and by Mr. Case




-530on Saturday afternoon in connection with the Public National Bank, and
I stated that I felt the Board would not object to these purchases in
the light of all the circumstances attending them."




(Secretary's note: On December 31 the Federal Reserve
Bank of Boston established a rediscount rate of 2 1/2
per cent on all classes of paper of all maturities
effective January 2, 1931.)

-531Developments, January-July, 1931
Developments in Early January.
Letter from New York Bank to Board, January 2. On January 2nd,
Deputy Governor Burgess wrote the Board as follows.
"Due to an unusual amount of "window dressing" and indications
of some credit strain, purchases were made for System Account (under au¬
thority of the Open Market Policy Conference of September 25, 1930) of
about $32,000,000 which temporarily increased the holdings in the account
by that amount. These purchases, some of which were made on December 30
and others on December 31, had the desired effect. Call money, which had
gone to 4% on December 29, declined to 3 1/2% and then 3% on the last day
of the year, and while Federal funds were firm and in demand on that day
there was no real strain. Of the total amount purchased $10,000,000 have
already been resold to the market for delivery to-day, and the executive
committee is agreed upon a sale of the balance of $22,000,000 as the mar¬
ket will take it.
"This bankfs individual holdings of government securities show
an increase of about $6,000,000, of which $5,000,000 represents govern¬
ment securities taken over from the Public National Bank in order to
enable them to reduce discounts, A sale of $1,000,000 was made to-day.
"Advances were made freely during the last few days of the year
to dealers under sales contract, the amount outstanding at the close of
business December 31 being $34,4O2,8OO against $2,000,000 on December 24.
These also will show a reduction to-day as the banks have large excess
reserves and call money has dropped to 1

1/2%

..."

Board consideration of operations over year-end. At the meet¬
ing of the Federal Reserve Board on January 5




Governor Meyer reported a

-532telephone conversation with Deputy Governor Burgess of the New York bank
in which the latter advised that $17,500,000 of the $32,000,000 of Govern¬
ment securities recently purchased for System Account because of indica¬
tions of some credit strain over the year-end period had been sold; also,
that currency withdrawals in connection with the disturbed banking situation
amounted, in Mr. Burgess1 opinion, to about $300,000,000 and while it was
hoped this may be returned promptly it is possible that it will be very
slow in coming back.
At the meeting of the Federal Reserve Board on January 6, 1931,
reference was made to the report submitted by Governor Meyer under date of
December 30

and it was voted to approve his action in advising the

New York bank that he felt, in the light of all circumstances, the Board
would not object to the purchase of approximately $45,000,000 of Governments
from the Manufacturers Trust Company and the Public National Bank, or to
the purchase of $32,000,000 of Governments recently made by the Open Market
Policy Conference because of banking and credit strain over the year-end
period.
(Secretary's note: On January 7, 1931, the Board approved
the establishment by the Federal Reserve Bank of St. Louis
of a rediscount rate of 3% on all classes of paper of all
maturities effective January 8th.)
Letters from New York Bank to Board, January 8 and l5. Under
date of January 8

the Board was advised by Deputy Governor Burgess as

follows:
"Since I wrote you last on January 2, 1931, a surplus of funds
in the market and a strong market for government securities have justified
further sales of government securities. Of the $32,000,000 of governments
which were purchased at the end of December, a further $16,000,000 have




-533been sold, in addition t o the $10,000,000 last week. . .

"

(Secretary 1 s note: Effective January 9, 1931, the Federal
Reserve Bank of San Francisco established a rediscount
rate of 3 per cent on a l l classes of paper of a l l maturities.
On the same date the Board approved the establishment of a
rediscount rate of 3 per cent on a l l classes of paper by
the Federal Reserve Banks of Chicago and Atlanta, effective
January 10, 1931.)
Under date of January 15, Deputy Governor Burgess wrote the Board
as follows:
"Conditions with respect to the government security market are prac¬
t i c a l l y unchanged from the date of my last l e t t e r t o you, namely, January 8,
1931. The surplus of funds in the market i s even more ample than at that
time, and the government security market i s very strong.

The balance of the

$32,000,000 of governments which were purchased at the end of the year for
the System account, amounting t o about $6,000,000, has been sold at a profit.
This leaves the t o t a l holdings of government securities in the System Account
at $402,300,000 the same figure as for a number of months previous to the
year-end purchases. . . . !
On January 16, 1931, the Federal Reserve Bank of New York estab¬
lished the following schedule of effective buying rates on bankers1 acceptances
1 to 15 days
1 5/3$
16 to 120 days 1 3/4%
121 t o 180 days 2%
Repurchase

1 3/4%

On January 21 the System1s t o t a l holdings of b i l l s and securities
amounted to $1,007,000,000 consisting of $625,000,000 cf Government securities,
$152,000,000 of b i l l s , and $230,000,000 of discounts.
Meeting of January 21, 1931. Tentative plans were made for a meet-*
ing of the Open Market Policy Conference on January 12, 1931, but i t was not
held until January 21, 1931. on which date the Governor or a representative
from each Federal Reserve bank met in Washington.
Preliminary memorandum of Chairman. At the morning session of the



-534meeting the following preliminary memorandum was presented by the Chairman
and discussed by the Conference:
"The volume of business activity has declined since the last meet¬
ing of the Conference in September, and index figures for December reached
as low points relative to normal trends as at any previous time in the
country's history. There is some indication of slight increase in activity
since the first of the year, but it is not yet clear whether the recovery is
more than seasonal. Commodity prices have declined further.
ff

0n top of other difficulties a series of bank failures has shaken

public confidence and brought about a state of apprehension which has im¬
peded business recovery. The number of bank failures in 1930 was 1,326 banks
or over 5 per cent of all the banks in the United States. Deposit liabilities
of failed banks totaled over $900,000,000. In December 328 banks failed with
deposit liabilities of $407,000,000.
"The necessitous liquidation of bonds by banks and others, together
with the disturbance to public confidence, affected the bond market with
peculiar severity. Some of the indexes of bond prices declined in December
to the lowest levels since 1924, while only those composed of the higher
grade issues remained above their 1929 lows. Under these conditions new
financing was practically stopped.
"Since January first easy money conditions in New York, a relaxing
of the pressure on banks, and some indications of lessened public apprehension
have been accompanied by a recovery in bond prices of about half their last
quarter loss, and some resumption of new issues, though the market for new
issues is highly selective and foreign bonds particularly are as yet almost
unsaleable.
"The stoppage of foreign financing in this country at a time when
other Countries are going through a serious depression and are most in need



-535of funds has placed a severe burden on a number of countries. These dif¬
ficulties are accentuated by some reduction in American short term credits
abroad. One consequence has been a weakening of foreign exchanges, and
imports of gold totaling 121 million dollars since September 25.
"THE MONEY MARKET
"On the money market the primary influence was a large additional
demand for currency accompanying bank disturbances. The amount of extra
currency required between the middle of November and the first of January,
in addition to the usual seasonal requirements, was about $350,000,00O.
Part of this extra demand for reserve funds was met by gold imports but most
of it required a corresponding increase in Federal Reserve credit which took
three forms: an increase in member bank rediscounting, an increase in ac¬
ceptance holdings of Reserve Banks, and an increase in government security
holdings. The following table shows the changes in the different categories
of Reserve Bank credit by weeks over this period, which includes the usual
seasonal increase.
Bills and Securities of All Federal Reserve Banks
(In millions of dollars)

u. s.

Discounts
Nov, 19, 1930
Nov. 26
Dec, 3
Deo. 10
Dec. 17
Dec. 21*
Dec, 31
Jan. 2, 1931
Jan. 7

Jan. 14
Jan. 19

Bills
Bought

Securities

205

234

178
176

596
596

257

2l*l*

617
692

260

642

25.1
341.
292
243
243

364

729

328

714

265

659

196
170

61*1*

251
331
448

219

252

602

635

Total Bills
and Securities

985

1,012
1,078
1,118
1,283
1,356
1,352
1,390

1,223
1,089
1,01*8

"The increase between September 25 and January 2 of about
$118,000,000 in Government security holdings consisted of the following:




-536Purchased by Federal Reserve Bank of New York
to provide two member banks with the means
to secure currency (of which $20,000,000 has
been sold by January 21)

$ 45,000,000

Purchased by Federal Reserve Bank of San
Francisco in a similar situation (sold since
January 1)

7,500,000

Temporary year-end purchase for open market
investment account (sold between January 2
and 13)
Held under repurchase agreement (all now
liquidated)

33,000,000

32,400,000
$117,900,000

"The increase in bill holdings in the last quarter of 1930 includ¬
ed purchases of ($35,000,000) of sterling bills by the Federal Reserve Bank
of New York, participated with other Reserve Banks, for the purpose of
supporting sterling exchange during the period of greatest seasonal weakness,
and avoiding gold imports from that source. This holding of sterling will
be liquidated when strength in the exchange permits it. Sterling is now
at the gold import point.
"Since the first of the year the return of currency has been
close to the usual seasonal amount and extremely little of the extra currency
called into circulation has come back, perhaps about $50,000,000, leaving
outstanding an extra amount due to extraordinary causes of about $300,000,000
and calling for that much additional Federal Reserve credit. The rate of
return of this extra currency provides a mathematical measure of the pass¬
ing of a state of apprehension.
"The seasonal return of currency and retirement of year-end
credit has been largely absorbed by a decrease in discounts of$100,000,000,
a reduction of $90,000,000 in Government securities as shown above, and a
decrease of $158,000,000 in bill holdings.




-537Despite this retirement of Federal Reserve credit and the
continued additional demand due to extra currency remaining outstanding,
money rates have been easy in Mew York since the first of the year, and
there has been a tendency towards the accumulation of surplus reserves.
This appears to reflect primarily extreme caution throughout the country
in the use of funds, the result of which is to pile up money in New York,
employed at short term, rather than to make loans or purchase investments
freely.
"The surplus reserves of the New York City banks, have fluctuated
greatly. On several days last week they were as large as 80 million dollars
but, as in previous months, there has not been continuously any considerable
surplus; a few days of plethora of funds has been followed by a drying up
of the surplus.
"Prospects for Coming Weeks
"The seasonal return flow of funds is usually largely completed
by the end of the third week in January; so that the movement due to pure¬
ly seasonal causes should now be near completion.

The System has bill

maturities of $100,000,000 between now and the end of January which should
be sufficient to take up any excessive slack in funds for the balance of
the month. Early in February the spring demand for funds usually begins,
rising to a peak in late March or early April.
"The unknown quantity in the situation is now the extra currency
called into use to meet the December banking emergencies.

If and when this

returns it should make possible a liquidation of discounts to a point where
they were before the unusual needs arose and lead also to some further
reduction in bill holdings. Some return from this source may be available
to meet spring demands for funds."




-538Excerpt from minutes of meetings

The minutes of the morning

meeting of the Conference report the following:
"Governor Harrison then reviewed for the conference his dis¬
cussions with European bankers and others and the impressions he gathered
on his recent European trip. In the course of extended discussion of these
matters Governor Harrison pointed out that the world owes the United States
on balance about $600,000,000 each year, and that payment has to be made
in gold, in imports from foreign countries to us, or by borrowing from us.
These countries were unable to send us much more gold, their exports to
us were now limited and new financing curtailed. Their only alternative
was to diminish their purchases of goods from us, which was now being done
to our detriment.
"He indicated that the people he met abroad appeared to believe
that recovery from the present business depression depends largely on
America, partly for psychological reasons and partly because of the im¬
portance of exports to us and borrowing from us.
"Generally speaking he felt that the economic situation of
European countries had grown distinctly worse since his visit last spring,
and has probably grown somewhat worse in the weeks since his recent return
from Europe,
"After general discussion with regard to the foreign situation,
Governor Harrison referred to the reduction of the discount rate of the
Federal Reserve Bank of New York, effective December 24, 1930• He in¬
dicated that the banking situation was of primary importance in the
decision. He had been urged from many quarters to make a reassuring
statement which might aid in quieting the banking situation. Such a
statement was practically impossible because to be strong enough to do




-539any good it would run the risk of being contradicted by any small bank
failure which might thereafter occur. The rate reduction, apart from
other reasons, served as a method of stating to the public that money was
freely available. The rate reduction was justified technically by the
money situation. It would probably help the foreign situation as well as
the domestic situation. Incidentally, it might make it easier for France
to reduce her rate. The discount rate decision had been made very rapid¬
ly, and there had not been an opportunity to discuss the matter with most
of the other Reserve banks. In fact, the proposal had only arisen after
the meeting on December 20 of the executive committee of the Open Market
Policy Conference.
"Governor Harrison referred to the holdings of sterling bills
purchased during the period of greatest weakness of sterling last autumn.
He said it had been the intention to sell these bills some time after the
turn of the year, when it was hoped that sterling would be strong enough
to make that an orderly operation. Recent weakness of sterling, however,
has made this program seem undesirable up to this time, and instead of
the sale of sterling the directors of the New York bank had voted at their
last meeting to sell a part of the securities which had been added to the
portfolio of the New York bank during the recent banking emergency.
"Governor McDougal commented on the recent discount rate change
by the Federal Reserve Bank of Chicago and indicated with regard to the
last three changes in their discount rate that in the case of the first
two of these changes it had been hoped that the reduction in the rate would
have some encouraging effect upon business, but that the latest change had
been made without any such belief, but was designed to correct to some
extent the large differential of 1 l/2% between the Chicago rate and that




-540of the New York bank.
"Governor McDougal expressed the hope that there would be no
further reduction in the bill ratej that money was too cheap with Federal
funds quoted at l/4 of one per centj and that it would be better for the
market to get the bills if it wanted them.
"Governor Calkins suggested that the position should be one in
which we kept our bill rate low* but tried to correct any over-sloppy
condition in the money market by the sale of government securities.
Several of those present concurred in this view.
"There ensued a discussion as to the statement of facts in the
preliminary memorandum submitted by the chairman, and Governor Harrison
further reviewed the changes in the money market since the last meeting
of the Open Market Policy Conference, pointing out that the seasonal ex¬
pansion in the requirements for Federal reserve credit up to the time of
financial disturbances had been less than normal, and bill purchases
appeared to be sufficient to take care of seasonal needs without additional
purchases of government securities. This appeared to be true, until the
banking emergency when the New York bank had found it necessary to take
over securities from two member banks and at the end of the year when
purchases were necessary in order to avoid too great tightening of credit
due to an unusual amount of "window dressing." Purchases made for the
open market account had since been liquidated as had also $20,000,000 of
the emergency purchases made by the New York bank. Since the turn of
the year the return flow of funds appeared to have greatly aided the bond
market. There had been a considerable excess of reserves of the New York
City banks, though this had fluctuated a good deal. It was the general
plan of the New York bank to liquidate the balance of the temporary




-541purchases of $45,OOO,OOO of securities, as the surplus of reserves offered
opportunity without interfering with the bond and money market.
It was moved by Governor McDougal that it was the sense of the
conference that the present was an opportune time to let government secu¬
rities go from the open market portfolio as and when it could be done without
undue disturbance, with the understanding that sales should not be made
rapidly and should be made in orderly fashion. Governor McDougal explained
this motion by saying that some time ago System open market operations had
followed a general principle which he believed to be sound, and should be
reverted to, that whenever the market is ready to take bills and govern¬
ment securities the Reserve System should sell them, and conversely, the
System should acquire them when the market cannot take them readily. On
this principle he would like to hold bill rates where they were to push
bills out of the System.
"Governor Harrison commented that if we sell governments we should
have the bill rate at a point nearer to the market so that we might be ready
to take in bills without such a big penalty to the seller. He would not
favor any sales of governments unless the bill window were opened to provide
in this way any money the market required.
"There ensued a general discussion as to how a general policy might
be stated, • • ."
Report of Conference, During the afternoon the following report
was adopted by the Conference and submitted at the joint meeting of the
Conference with the Federal Reserve Board:
"The Conference has considered the preliminary memorandum sub¬
mitted by the Chairman and has reviewed business and credit conditions as
they now appear. It is the sense of the Conference that in view of these




-542conditions it should be the policy of the System to continue an easy money
policy in the best interest of trade and commerce. It is the belief of
the Conference, however, that the seasonal return flow of currency and
credit and other factors have tended during recent weeks to make for an
undue excess of funds in the principal money centers. It is therefore the
opinion of the Conference that in these circumstances it would be desirable
to dispose of some of the System holdings of government securities as and
when opportunity affords itself to do this without disturbance or any
(undue -) tightening of the money position.

It is understood that there

shall be a new meeting of the Conference as soon as or whenever conditions
in the opinion of the Conference or the Federal Reserve Board justify a
•consideration of this policy.
"this word later omitted."
In connection with this report the Chairman of the Conference
stated that there was no disagreement among the members of the conference
from the belief that in view of the undue excess of credit prevailing in
most of the important markets of the country an opportunity is presented
to dispose of some of the securities held in the open market account for
the purpose of taking up some of the excess caused by the return flow of
currency and credit, the lack of demand for new credit and some gold imports.
Excerpt from Minutes of meeting with Board.

The Boardfs record

of this joint meeting contains the following:
"Governor Harrison then referred to the fact that the directors
of the Federal Reserve Bank of New York in view of the heavy excess of
reserves in the market, at their meeting last Thursday, thought it well
to avail themselves of the opportunity to dispose of some of the banks
own holdings of Governments acquired over the year-end and during the




-543disturbed banking situation preceding that period. As a result of these
sales he stated that excess reserves were diminished temporarily, although
last night they again amounted to around $57,000,000• The situation, he
stated, is most volatile and affords an opportunity of disposing of secu¬
rities without any undue risk of tightening credit or disturbing the bond
market. The New York bank, be stated, still has $25,000,000 of Governments
to liquidate from its own portfolio•
"There was a discussion of the banking situation, the excess re¬
serves carried by member banks and the efforts of banks generally to place
themselves in the most liquid condition possible. Also as to the steps
which might be taken by Federal reserve banks at this time to prepare to
handle any further bank disturbances in their respective districts.
"Governor Meyer referred to the policy of security sales recom¬
mended by the Committee as being one entirely proper under normal credit
conditions but stressed the fact that at the present time the bank
situation should be a major factor in the determination of policy. He
pointed out that the bill holdings of the System amounting to approximately
$185,000,000 constitute an automatic means of taking up surplus funds,
whereas, should the System embark upon a policy of security sales, the
action will be interpreted by the public generally as a major reversal of
Federal reserve policy. He also referred to the reluctance on the part
of bankers to show bills payable and pointed out that should a further
banking situation arise the Federal Reserve System would undoubtedly find
it necessary to go back into the bond market and make purchases.
"Governor Harrison replied that it was not unlikely that the
maturity of $100,000,000 of bills held in the System account between now
and the end of January might take up the surplus reserves, depending on




-544the rapidity with which the balance of the emergency currency issued during
November and December comes back. He said that the disposition of the
Conference as a whole was not to do anything specific, but to give the Exec¬
utive Committee authority to sell Government securities if an opportunity
affords, to take up any surplus, provided it can be done without any disbe
turbance or undue tightening of the money situation. He stated that he
personally would not be willing to embark on any Government security sales
unless the buying rate of his bank on bills is at the market, thereby en¬
abling bills to come back to the Federal Reserve System if the security
sales should go too far.
"Governor Meyer replied that under ordinary conditions he would
be in favor of a policy leading to conversion of Governments in the System
portfolio into acceptances or bills payable, increasing rediscounts as
the demand for credit increases and raising the discount rate whenever it
should appear desirable. He stated, however, that with the present diffi¬
cult banking situation, he thought it inadvisable to go into an operation
which would be interpreted as in the nature of contraction of credit when
it is not necessary, and when the bill holdings would respond automatic¬
ally to the needs or oversupply of credit for business.
"Other members pf the Conference expressed the opinion that it
would not be harmful to sell Government bonds as contemplated in their
report if and when opportunity is afforded, and pointed out that under
the report, if these sales had any adverse affect they would immediately
be stopped.
"Others pointed out that sales from the open market account at
this time would place the System in better position to take on additional
Government securities later if that should be found necessary to meet a




-545banking situation•"
Developments Relating to Open Market Operations, mid-January - late April 1931
Letter from New York Bank to Board, January 22. Under date of
January 22, Deputy Governor Burgess wrote the following letter to the Board:
"During the past week, with a continuing large surplus of bank
reserves, we sold advantageously $20,000>000 of securities from the invest¬
ment account of this bank. • •"
"The total amount of holdings of Government securities in the
System Account remained unchanged at $402,300,000. There were, however,
some changes as between issues held in the account, due to the sale to the
Federal Farm Loan Bureau noted above, and a small amount of exchanges • • •"
On January 26 the New York bank established the following
schedule of effective buying rates on acceptances:
Bankers' Acceptancest
1 to 45 days
1 l/2%
46 to 120 days 1 5/8%
121 to 180 days 2%
Repurchase
1 5/8%
Trade Acceptances 2%
Board review of conference procedure and report of Conference, At
the meeting of the Federal Reserve Board on January 28, at which Governors
Harrison and Young were in attendance, Governor Meyer referred to the pro¬
cedure at meetings of the Open Market Policy Conference and it was agreed
that it would be an improvement over the present procedure if the initial
meeting at such Conferences were a joint one with the Board, following
which the Open Market Policy Conference could meet separately to formulate
opinions and prepare a report, and then meet again with the Board for a
discussion of its recommendations•




-546On January 29 the Board considered the report submitted by the
Open Market Policy Conference, and voted to advise the Chairman of the
Open Market Policy Conference that in the light of the discussion which
followed its presentation at the joint meeting of the Conference and the
Board on January 21, the Federal Reserve Board had approved the report as
submitted, with the amendment made by the Chairman subsequent to the meet¬
ing of the Conference with the Board.
Letters from New York Bank to Board, January 30-February 13.
Under date of January 30 the Board was advised by Deputy Governor Burgess
as follows:
"Referring to my letter dated January 22, 1931, we were able
during the statement week to sell a further $15,000,000 of government secu¬
rities from the investment account of this bank. These sales, plus the
$20,000,000 of securities sold during the previous week, account for
$35,000,000 of the $45,000,000 of government securities which were taken
over from two New York City banks in December, and reduce our individual
holdings to $122,000,000.
"No changes occurred in the holdings of governments held in the
System Account, other than a few exchanges of maturities. . • • "
The following letter was received from the Deputy Governor of
the New York bank under date of February 5:
"Since I wrote you last on January 30, 1931, no changes have
occurred in the government securities held either for System Account or
our own investment account. The maturities have likewise remained un¬
changed. . • ."
At the meeting of the Board on February 10 the Governor reported
a telephone conversation on that day with Deputy Governor Burgess of the




-547New York bank in which the latter reported that the bank had sold one-half
million pounds of the sterling bills held for System Account and the Gover¬
nor stated he had advised Mr, Burgess it was his understanding that the
System's holding of the sterling bills would be disposed of if possible
during February and March in accordance with the plan previously agreed
upon.
On February 13, 1931, Deputy Governor Burgess wrote the Board as
follows:
"There was no change in the total of government security holdings
in the System Account in the week ended February 11, although there was a
change in the participation of two banks due to the transfer to the Federal
Reserve Bank of Kansas City, at its request, of $5,000,000 of the partici¬
pation of the New York bank.

This transfer appeared justified by the

general earning position of the two banks. The maturities remain unchanged.
No changes occurred in the individual holdings of this bank during the
week ended Wednesday, February 11. We have, however, to-day sold through
the Federal Reserve Bank of Chicago another $10,000,000 of government secu¬
rities representing the remainder of the $45,000,000 of governments purchased
from member banks during December and held temporarily in our own account• . • "
Recommendation of Federal Advisory Council on open market operations
and discount rates. The organization meeting of the Federal Advisory
Council was held in Washington on February 17, 1931, and at that meeting the
following recommendation was adopted and presented to the Board:
"The Federal Advisory Council wishes to reiterate the recommenda¬
tion made at its last meeting that the situation will be best served if
the natural flow of credit is unhampered by open market operations or
changes in the rediscount rates.




-548"The Council believes that the manner in which open market opera¬
tions have been conducted since the last meeting of the Council is
satisfactory."
Letters from New York Bank to Board, mid-February to mid-March.
The Board was advised by Deputy Governor Burgess under date of February 19,
as follows:
"There has been no change in the total of the holdings of govern¬
ment securities in the System Account during the week ended February 18.
Maturities were changed somewhat as $25,000,000 of Treasury bills due
February 16 were replaced by other short-term issues. The change in the
holdings of this bank consisted of a reduction of $10,000,000 represent¬
ing a sale through the Federal Reserve Bank of Chicago on Friday, referred
to in my letter of February 13 . • •"
The following letter was received from Deputy Governor Burgess
under date of February 26, 1931:
"There has been no change in the total of the holdings of govern¬
ment securities in the System Account since I wrote you last on
February 19 . . ."
Under date of March 5 Deputy Governor Burgess wrote the Board as
follows:
"Holdings of government securities in the System Account still
remain at $402,3OO,OOO, the only change that has occurred since my last
letter to you dated February 26 being the exchange of $15,000,000 - 3 l/2%
notes for a like amount of short-term governments. The individual holdings
of this bank have likewise remained the same. Arrangements have been made
to replace in both accounts all March 15 maturities • . •
On March 12 Deputy Governor Burgess wrote the following letter
to the Board:
"There has been no change in the total of the holdings of
government securities in the System account since I wrote you last on
March 12, 1931 • . ."



-549Letters from New York Bank to Board on handling of mid-March
Treasury operations. The following letter was received from Deputy Gover¬
nor Burgess under date of March 19, 1931:
"The total of the holdings of government securities in the
Special Account is the same as when I wrote you last on March 12, 1931,
although the maturities have been changed somewhat due to the replacement
of March 15 maturities with other short-term government issues. Individual
participations by the banks underwent a further change due to the repur¬
chase by the Federal Reserve Bank of Atlanta of the balance amounting to
$2,500,000 of its participation in the Special Account, which that bank
relinquished temporarily on November 14 last. This bank's holdings show
a reduction of $13,000,000 as compared with a week ago, due to delayed
delivery of replacement purchases in order to take up some of the excess
funds in the market. Delivery of the $13,000,000 will be made to-morrow.
"As a result of the large Treasury operations the volume of
business at this bank on Monday established a new high record. The
attached sheet shows a tabulation of the Treasury and other operations
indicating that more than $3,000,000,000 of business went through the bank.
Despite this large volume of operations the Treasury special certificate
to cover their excess of disbursements was not as large as at many previous
times. It was concentrated in New York and the totals were,
Monday,
$170,000,000
Tuesday,
103,000,000
Wednesday,
85,000,000
and the figures for to-night will probably be in the neighborhood of
$60,000,000• In order to prevent this operation from flooding the market
with money we followed our usual practice of selling participations in
this certificate to member banks. The following table shows the amounts




-550of these sales and the institutions to which they were sold in the past
four days.

It will be noted that $20,000,000 on Monday and Tuesday, and

$10,000,000 on Wednesday and Thursday, were sold through the Federal
Reserve Bank of Boston. Because of the difficulty in computing exactly
the size of the special certificate, and in order to avoid an oversale the
amounts sold to the Chase Bank on Tuesday, Wednesday and Thursday were
taken from the security portfolio of the Federal Reserve Bank of New York
at the same rate as that carried by the special certificate, namely,
l l / 2 per cent,
Monday
Boston
Chase
Guaranty
National City
First National
Irving
Fifth Avenue
Manhattan

20

Tuesday Wednesday
(millions)

20

30

10

15*

15
15
15

15
15
15

10
1

10
1

8
8

8
5

Thursday

10
10*
5
5
5

1

106
Total
106
From account of Federal Reserve Bank of New York.
This operation is all carried through by an exchange of letters, and the
banks are now sufficiently accustomed to the procedure so that it all goes
through very smoothly. . • "
Under date of March 20 Deputy Governor Crane of the Federal Re¬
serve Bank of New York advised that the liquidation of the special sterling
bill account amounting to approximately $35,000,000 held by the New York
Bank, which was begun on February 10, 1931, had been completed through the
sale of the remainder of the bank's holdings of bills to the Bank of
England.




On March 26 Deputy Governor Burgess wrote the Board as follows:
"Since I wrote you last on March 19, 1931, no changes have been

-551made in the holdings of government securities in the special investment
account affecting the total which still remains at $402,3OO,OOO. Some
changes in maturities were made as the opportunity arose to make exchanges
at advantageous prices.
"The buying back last Friday of the securities sold to member
banks temporarily in connection with the Treasury overdraft, the elimination
of the overdraft itself on Tuesday of this week and the taking in on Friday
of the securities on which delivery was delayed, brought our own investment
account to the same level as formerly, namely, one hundred and twelve
million odd . . •"
Further reductions of New York Bank buying rates on acceptances.
The following letter was received from the Deputy Governor of the
New York Bank under date of April 2:
"No changes have occurred in the status of the system account
since I wrote you last on March 26, either as to the amount of holdings
or the maturities. The investment account of this bank likewise remains
unchanged . • • "
Under date of April 9 Deputy Governor Burgess wrote as follows:
"The total amount of the holdings of government securities in
the system account and the investment account of this bank have not changed
during the pastweek."•••While there has been in recent weeks some discussion of
higher bill rates, this fear has been passing, and a change to-day in our
buying rate for 45 to 90 day bills, bringing them under the 1 l/2 per
cent rate which heretofore has applied only to 1 to 45 day bills, has
acted as a further reassurance against firming rates. Dealers sola us
a fair amount of short bills at intervals during the week which, with




-552our purchases from banks, exceeded system maturities by about $13,000,000
and this, together with the $5,000,000 decrease in our sales contract hold¬
ings effected a net increase in the aggregate amount of bills held for
System account by about $8,000,000•"
On April 9 the Federal Reserve Bank of New York in order to off¬
set apprehension of firmer money rates as the result of Treasury financing,
established the following schedule of effective buying rates on bankers1
acceptances:
1 to 90 days
91 to 120 days
121 to 180 days
Repurchase

1 1/2%
1 5/8%
2
%
1 \/2%

The following letter was received from Deputy Governor Burgess
under date of April 16:
"No changes have occurred in the amount of government security
holdings in the system account or the investment account of this bank
since I wrote you on April 9. with the continued ease in money there has
been no occasion to make advances to dealers on government securities
under sales contract • • ' "
•

At the meeting of the Executive Committee of the Federal Re¬
serve Board on April 18 Governor Harrison of the Federal Reserve Bank of
New York was present and outlined the reasons which prompted his directors
on April 16 to request the Federal Reserve Board to reduce to 1 l/4, per cent
the rate established by it as the minimum authorized buying rate for the
purchase of bankers1 acceptances by the New York Bank. No action was taken
at this meeting, but at the meeting of the Board on April 20 the request
of the New York directors was approved.




-553On April 21 the Federal Reserve Bank of New York established the
following schedule of effective buying rates on bankers1 acceptances:
1 to 45 days
46 to 90 days
91 to 120 days
121 to 180 days
Repurchase

1
1
1
2
1

3/8%
l/2%
5/8%
%
1/2%

The following letter was received from Deputy Governor Burgess
under date of April 24, 1931:
"Total government security holdings have remained unchanged
during the period from April 16, when I wrote you last, to the 22nd inclu¬
sive • • •"
On April 27 the following schedule of effective buying rates on
bankers' acceptances was established by the New York Bank:
1 to 45 days
46 to 120 days
121 to 180 days
Repurchase

1 l/4%
1 3/8%
2
%
1 3/8%

On April 29 the System!s holdings of bills and securities amount¬
ed to $924,OOO,OOO and consisted of $402,000,000 of securities in System
account, $196,000,000 held by the individual Federal reserve banks,
$170,000,000 of acceptances and $155,000,000 of discounts.




-554-

Meeting of April 29-30, 1931.
Following the Governors' Conference which convened in Washington
on April 27, 1931, a meeting of the Open Market Policy Conference was held
on the afternoon of April 29, 1931.
Report of Chairman. At t h i s meeting the following report of the
Chairman of the Conference to the Governors1 Conference was considered:
"Government security holdings of the Federal Reserve System now
t o t a l $602,000,000, which i s about the same figure at which they have been
maintained since the middle of August, 1930, except for a temporary increase
and decrease over the end of the year amounting in the aggregate to about
$100,000,000•

In fact the present t o t a l represents an increase of only

$25,000,000 over the amount held the middle of last June, the $25,000,000
having been bought in August when gold was moving t o France.
"Broadly speaking the open market program of the Federal Reserve
System since the stock market crash in the autumn of 1929 consisted of a
rapid reversal of the policies which had been designed in 1928 and 1929
to place vigorous pressure upon the money market and the member banks.
These policies had involved a decrease of about $450,000,000 in security
holdings between December 1927 and October 1929.

Between October 1929 and

August 1930 the operation was exactly reversed and $450,000,000 of securities
were purchased, bringing the t o t a l back again to around $600,000,000.
"It i s fair to say that the open market operations undertaken dur¬
ing t h i s period were not pursued with the idea that thereby any vigorous
stimulant might be given to business or finance, but rather with the idea
of removing in a period of reaction and depression the pressure which had
been placed upon the market in 1928 and 1929, a period of inflation and




-555-

expansion.

In this way the System undertook simply to remove impediments

which might otherwise unnecessarily delay a restoration of more normal
operations i n the money market.

In particular i t was recognized that the

pressure of high money rates and a restricted supply of funds in 1929 had
shut off a certain amount of the supply of mortgage and long time capital
to various types of borrowers including foreign borrowers whose purchasing
power for our goods was thus seriously curtailed.

Ordinarily there has

been in times past a close relationship between the volume of new financing
and business activity, and financing in this market for foreign countries has
been closely related t o the gold movement and t o the maintenance of trade
equilibrium between the nations especially since the war.

Foreign countries

have in recent years owed the United States currently on balance approxi¬
mately $500,000,000 a year which includes $220,000,000 due on account of
interallied debts.

This amount they have to pay in goods, in gold, or by

an increase in t h e i r indebtedness to us or a
to them.

decrease in our indebtedness

At the present time our market i s pretty effectively closed to

any increase in foreign shipments of goods for one reason or another in¬
cluding reduced consumption of goods and t a r i f f barriers.

Our money market

both short and long term i s closed to foreign borrowers so that they cannot
increase their indebtedness.

Hence the two forms of payment that are open

are a withdrawal of foreign money from the United States or a shipment of
gold to us.

In the present disturbed state of the world foreign individuals

find t h i s the safest market t o employ their funds and hence on that account
there has been l i t t l e movement away from t h i s market.

The net result has

been that we have received considerable amounts of gold as the only means
by which foreigners might meet t h e i r obligations to us.

The most hopeful

method by which some other adjustment may be made appears to be through an




-556-

increase of our loans to foreigners.

I t was a reasonable hope that the

removal of pressure from the money markets might be followed by renewed
financing for enterprises of the sort which had for some months been in¬
adequately supplied with capital, and might lead also t o a resumption of
foreign borrowing here t o restore trade equilibrium already considerably
unbalanced.
"The effect of system purchases of securities i n late 1929 and
during 1930 was somewhat augmented by continued gold imports from abroad
and the retirement of currency from circulation due to business depression.
The net result was to enable the member banks t o reduce their Federal re¬
serve indebtedness to less than $200,000,000 and to bring about easy con¬
ditions i n the principal money markets.
"Under these circumstances there was a considerable recovery in
the bond market in the f i r s t half of 1930 which was, however, soon inter¬
rupted by a series of unfavorable developments wholly unrelated to the
System1s easy money policy.

Increasing p o l i t i c a l disturbances following

economic disorders abroad acted almost immediately to deter investors in
foreign bonds, so that while about $850,000,000 of new money was loaned
abroad in the f i r s t seven months of 1930, the c i v i l war in China, revolu¬
tions in South America, governmental overthrows in Eastern Europe, friction
between France and I t a l y and finally the German elections in September
practically shut our market t o foreign borrowers in the last five months
of the year.

Furthermore the severe drought in t h i s country diminished

the purchasing power of large agricultural areas.

The business depression

became more severe and a series of banking difficulties in the course of
which a number of sizeable banks suspended operations accentuated the
psychology of fear and threw upon the market sizeable blocks of bonds both
domestic and foreign.



-557-

"After the turn of the new year there was some revival of con¬
fidence.

The bond market staged a considerable recovery.

But at t h i s

point a number of b i l l s was introduced into Congress calling at the maximum
for an immediate cash payment to World War veterans of $3,400,000,000. The
payment of this huge sum, or any sum nearly approaching i t would have re¬
quired large new issues of government obligations•

Any such program of

financing could only have been carried forward at interest rates much high¬
er than those currently borne by outstanding government bonds.

Thus the

inevitable consequence of such new issues would have been to revalue out¬
standing bonds, not only government bonds but other prime issues as well, to
a higher yield basis in proportionate relation to the new bonds.

In the

face of t h i s possibility trading in bonds was practically at a s t a n d s t i l l
from the l a t t e r part of January until the bonus question was finally settled
late i n February •
"Since the passage of definite legislation the bond market has in
part recovered lost ground, and new issues of securities have been in some¬
what more satisfactory volume.

However, the recognition of the necessity

for the Treasury's securing considerable amounts of new money to meet the
bonus legislation as passed and t o make up a deficiency in tax receipts
is s t i l l a

deterrent

influence on the bond market, and severe depression

in many lines of business, together with continued political and economic
unsettlament in various parts of the globe have stood in the way of the com¬
plete restoration of a satisfactory security market.

Even now, there i s

practically no market for foreign issues, or for securities of businesses
concerning the credit of which any possible question has been raised.
While bonds of the highest grade are selling at or close to t h e i r highest
prices in recent years practically a l l other categories of bonds continue




-558to be depressed and without a broad market.
n

As far as the business situation i s concerned i t cannot yet be

established that the turn has come. There was for a time considerable
anticipation for a spring revival but that hope passed without apparent ful¬
filment • Comprehensive indexes of the t o t a l volume of trade do show a
slight increase from January to March, but the increase i s not sufficient
to indicate a definite trend and the
offer

current reports from business do not

any certainty of i t s continuance, but rather show a l i t t l e setback.
"An interesting change in the banking s t a t i s t i c s of the past few

weeks has been an increase in the loans and investments of the reporting
member banks resulting directly from new issues of government securities.
On March 15 the Treasury sold $1100,000,000 more securities than i t redeemed,
most of which was taken in the first instance by the weekly reporting banks,
so t h a t

i n a single week due to t h i s and other factors their t o t a l loans

and investments showed an increase of about $500,000,000.

On the l i a b i l i t y

side of the ledger the immediate result was an increase of government de¬
posits in these banks, but as these deposits were drawn down there was a
tendency for them to be replaced by deposits of individuals as the Treasury
funds were paid out to individuals largely in the form of veteran loan
checks.

After some recession the t o t a l volume of credit showed a similar

though smaller increase in connection with the April 1$ issue of Treasury
certificates.

These operations probably tend to result in some increase

i n available purchasing power, and may i n part account for the slight
pick-up in some lines of business but thus far not sufficient time has
elapsed for the business s t a t i s t i c s to reflect any definite r e s u l t s .

There

has been in the past three weeks an unseasonable increase in the t o t a l amount
of money in circulation whichj in the absence of other explanation




appears

-559largely due to the withdrawal of currency by veterans who have received
their bonus money. Already actual payments to veterans have totalled about
$500,000,000, and the increase in currency as a departure from the usual
seasonal tendencies, has been in the neighborhood of $50,000,000.
"Three problems may be suggested as related to future system
open market policy. The first relates to the bond market. Generally speak¬
ing the volume of new domestic issues are now going forward in limited
volume, and these issues are restricted to securities of primest character.
When put out at proper prices they appear to meet with satisfactory dis¬
tribution but bonds which are less than prime can hardly be sold. There
is no material market for foreign issues.
"The unsettlement of the bond market in recent months and the
severe depreciation of many types of issues has focused attention upon
possible errors which issue houses and the market in general may be said
to have made in the past in the issuance of securities. It may be that a
reconsideration of procedures and responsibilities is a necessary preliminary
to the resumption of large scale foreign lending in particular. In any
event these matters have recently been the subject of considerable dis¬
cussion and consideration in the New York market.
"An added complication to the status of the bond market has been
found in the reluctance with which banks have made any increases in their
holdings of long time bonds. It is true that the investments of the re¬
porting member banks show an increase of approximately $2,000,000,000 as
compared with a year ago. About half of this increase, however, has taken
the form of government securities and a considerable part of the rest is
probably in the form of short term obligations of one sort or another.




"The second problem lies in the banking situation itself. As

-560reports are received of recent bank examinations the extent of bank depre¬
ciation on securities and losses on loans has been revealed.

In many in¬

stitutions capital has been seriously impaired by these losses.

One feature

of bank examination procedure which these returns have brought to light has
been the widest variation of practice i n charging off losses on securities.
In the second district at least i t has become clear that no really adequate
method for determining security losses has as yet been devised, and a wide
difference of opinion as to intrinsic values has been revealed especially
with respect t o real estate mortgage bonds. This appears to be a field in
which a considerable amount of careful work may well be carried forward.
From the point of view of Federal reserve policy question may be raised as
to the effect on the position of many banks of any changes in policy which
may be made.

An easier money policy

inevitably would tend to reduce the

interest return of member banks on a part of their earning assets, part i r u l a r l y short term governments and b i l l s which are held most largely by
city banks.

On the other hand any policy which would have an influence

even in small degree toward restoring a better bond market would aid many
banks throughout the country in larger degree.
"The third problem is perhaps the most deep rooted one of the
moment, that i s , the gold movement.

Since the f i r s t of the year about

$120,000,000 of gold has come to the United States with approximately
$33,000,000 on the way.

This follows a movement of $275,000,000 in 1930,

and the present rate of import i s increased by a movement from France which
may reach considerable proportions.

From the point of view of world public

opinion the movement from France i s of importance because during 1930 we
shared with that country the distinction of acting as a magnet to draw gold
from countries which sorely needed i t to money markets where i t was already




-561excessive.

But as we become the single important destination of gold move¬

ments our position becomes even more conspicuous and our responsibilities
even greater.

The causes of t h i s movement may be summarized briefly:

"(l) The rest of the world owes the United States on trade balance
in the neighborhood of $500,000,000 a year, which on the basis of the present
trade balance in merchandise goods can be paid only by further foreign
financing in t h i s market or by shipments of gold,
u

(2) Reductions in prices and money value of exports from many

raw material producing countries i s serving t o accentuate trade deficits
of those countries.
n

(3) A condition of distrust in many money markets encourages

short money to stay here rather than move to higher rate markets.
"As a result of these three causes many countries find themselves
with a balance of trade which can be met only by gold exports.

Foreign

commentators are particularly c r i t i c a l of the monetary policies of the
United States, because t h i s gold which comes to us does not find i t s way
into use.

Imports i n the past fifteen months of nearly $4|00,000,000 of gold

have been accompanied by practically no increase in the t o t a l loans and in¬
vestments of the reporting member banks and by a considerable liquidation of
loans in country banks, whereas the normal r a t i o of expansion of credit on
gold would have indicated an expansion of perhaps $4,000,000,000.

For the

gold as it came into the country has been used by member banks t o repay
Federal reserve credit in one form or another, with the result that in t h i s
period the t o t a l volume of Federal reserve credit has declined by an amount
equal to the gold imports.

Thus i t may be said that the United States has

prevented the usual or normal effect of gold which has come to i t .




"The problem of putting gold imports to work i s a particularly

-562puzzling one because of the obstacles which l i e in the way of almost any
kind of use which i s considered.

An expansion of foreign lending requires

that investors should be willing t o purchase foreign bonds. An expansion
of domestic commercial credit requires that business men should be willing
to borrow.

An expansion of long term bank investments to provide capital

which is in demand here and abroad, requires that banks which have recently
taken huge losses in securities, and upon which the lesson of liquidity
has been enforced by sad experience

should be willing t o purchase bonds.

The e v i l s to the world of continued gold sterilization, however, are so
great as to make desirable a careful scrutiny of Federal reserve open mar¬
ket policy to see whether any action may yet be taken to put more Federal
reserve credit to work or at least to avoid any further reduction in the
volume of earning assets in the System.
"While i t i s commonly stated that money conditions have been
exceedingly easy in recent months, and while indeed money rates have been
at very low levels there has not been over a period of months any consistent
surplus of Federal reserve funds pressing for use upon the market.

During

January there was a substantial surplus in the reserves of New York City
banks but early in February t h i s surplus disappeared and was only present
consistently again for two weeks in March.

Over a period the banks even

in the principal centers have not had any considerable amount of unemployed
funds on their hands as was the case in previous severe business recessions
in t h i s country, as in the 90s and in 1907-08. Question may well be raised
whether methods could be devised for keeping in the hands of these member
banks some surplus of funds pressing for employment.

Even though i t i s

true that the banks in the large centers have had a considerable amount
of their funds employed at very low rates, that does not exert a pressure




-563for credit growth which l i e s i n an actual surplus of reserves f

Furthermore,

apart from the relatively easy position of the banks in the larger c i t i e s ,
credit cannot be said to be very cheap or very plentiful generally through¬
out the country.

For one reason or another i t has become fairly well

bottled up in the larger banks in the larger c i t i e s .
"In a l l these circumstances i t has seemed desirable t o consider
possible means by which gold imports may have their effect on the credit
position rather than being nullified, as they have been, by a reduction
in t o t a l earning assets of the System,

Toward that end the New York bank

has already, with the approval of the Federal Reserve Board, made a reduc¬
tion of 1/8 in i t s buying rate for short bankers b i l l s .

I t remains to be

seen whether this step results in keeping more Federal reserve credit in
employment, or indeed whether i t will even serve to avoid a further re¬
duction in reserve credit as gold continues to come in,
"In any event i t i s clear that the seriousness of the present
world situation and the central position of the United States in the
whole world picture makes i t desirable to tax our ingenuity that the
Federal Reserve System may put forth every possible effort within i t s power
towards maintaining a measure of credit stability throughout the world and
towards eventual business recovery,"
Action of Conference. The minutes of the meeting of the Open Mar¬
ket Policy Conference contain the following:
"There was a long discussion of the report by the various members
of the conference with particular reference to the present gold trends
and the possibility of making the gold standard work more effectively.

It

was pointed out that in view of the present favorable trade balance of the
United States, amounting in recent years t o about $500,000,000 a year, the




-564-

only way in which that trade balance could now be paid for was by the ship¬
ment of gold since the foreign bond market in this country was practically
closed to any new issues.

As indicated in the report of the chairman, t h i s

country has received over $400,000,000 of gold in the last fifteen months.
This gold, however, has not in any way reflected i t s e l f in the expansion
of member bank loans and investments but rather has been utilized to re¬
duce the amount of Federal reserve earning assets.

To that extent i t may

be said that the normal effects of the import of t h i s volume of gold have
been nullified.

The question which was discussed by the conference was

whether there was any appropriate way in which the Federal Reserve System
could take action in order that any further gold imports will have their
normal and natural effect upon the loans and investments of member banks.
"Governor Harrison pointed out that t h i s was one of the reasons
which had prompted the Federal Reserve Bank of New York in recent weeks
to reduce i t s b i l l rates, hoping that by that action i t would be possible
to maintain or even increase the System's b i l l portfolio in spite of the
fact that gold i s s t i l l coming into the country.

He said that to have

done nothing with the b i l l rates would very likely have resulted in a
rapid diminution of the b i l l portfolio of the System as gold came in, not
only thereby nullifying gold imports but liquidating the System1s earning
assets by a substitution of gold, of which we already have a plethora.
Governor Harrison then said that i t was the purpose of the New York bank,
if necessary, to reduce i t s b i l l rate as low as one per cent in the hope of
accomplishing i t s objectives of maintaining or even increasing the b i l l
portfolio in the face of gold imports; that i t was likely that next week or
the following week he would recommend a reduction in the discount rate.
The chief purpose of t h i s program was, he stated, not only to tend to reduce




-565the amount of gold imports or to make those imports that actually take
place more effective, but also, by its effect upon the short time money
market, ultimately to make credit, of which there is now plenty, especially
in the big centers, more active and more widely distributed. It was felt
that this policy sooner or later would necessarily, because of its effect
upon the short time money rates, encourage banks and depositors in banks,
in spite of their present liquidity, to employ their money, which now is
becoming relatively so unprofitable. More specifically, he said that he
hoped that this policy might encourage the New York Clearing House banks
further to reduce interest rates on deposits.
"In this connection, it seemed to be the general sentiment of
the conference that one of the difficulties with the banking situation
today is the consequence of the competition of banks throughout the country
for increasing deposits at unjustifiably high rates of interest, and that
any action which might encourage a more general reduction in those interest
rates could not but be helpful to the banking situation as a whole. Gov¬
ernor Harrison then said that if the policy which the New York bank has
adopted is to become completely effective it requires System cooperation
both in the matter of rates and in the matter of open market purchases of
government securities for with bill rates as low as they are, in the event
that the System's bill portfolio runs off, even after rates may have been
reduced to one per cent, the only effective instrument which the System
has left to aid in maintaining the total volume of its credit outstanding
is the purchase of government securities. He, therefore, recommended that
the conference authorize the executive committee of the conference, if
and when it appears to them necessary or advisable, to purchase up to
$100,000,000 of government securities. In making this recommendation, he




-566pointed out that i t was not the intention to purchase government securities
immediately but rather to attempt to carry out the policy, f i r s t , through
b i l l rates, second, through the reduction in discount rate, and then, if
necessary, to resort to the purchase of government securities.
"Governor Norris was of the opinion that the proposed policy
might not accomplish any great amount of good; that the System was in a
strong position; that there was l i t t l e or no danger of speculation; that
he saw no probability of any bad results from the policy; and that in
those circumstances he was ready t o participate in the policy and to con¬
tribute by recommending a reduction in the Philadelphia bank rate to three
per cent.

His chief misgiving about the adoption of the policy was the

danger of a slowness in the reversal of the policy when that might become
necessary.

This was a danger to which a l l the members of the conference

referred and which Governor Meyer stated he did not believe would be exist¬
ent in the present circumstances, especially in view of the fact that the
country would look upon a reversal of the policy as an evidence that
the turn had come in the business depression.
"Governor Young stated that they are even now following the New
York reductions in b i l l rates and in the past have followed in the reduc¬
tion of discount rates; that he believes i t i s important to have harmony
in the System; and that if New York reduces i t s discount rate to 1 l/2 per
cent, he will recommend the same rate in Boston.

He believes that i t i s

inadvisable t o buy more government securities at the moment but that even
so he would, of course, be willing t o buy government securities at the
present time from any member bank that needed accommodation in that fashion.
He felt that while the program might be right or wrong, the only thing to




-567do, in view of all the circumstances discussed by the conference, is to go
through with it.
"Governor Fancher stated that the economic situation throughout
the world has seriously changed in the past year and is perhaps more serious
than every the gold flow is most important; and he said that he was willing
to go along with any program designed to check it. He also agreed that the
System can lend its efforts to make money so cheap as to put it to work.
He stated that it was probable that Cleveland would not reduce its discount
rate but that the System cannot afford to go along drifting in this extreme
situation, and that he was, therefore, in favor of the recommended program,
"Governor Seay stated that he had no great degree of confidence
that the proposed policy will accomplish anything very definite or that
business recovery is dependent upon any further ease in credit. He in¬
timated that it was possible that a further easing program might be con¬
strued as a move in the wrong direction and as a policy of desperation.
He did feel, however, that any move that would force banks to reduce rates
which they pay on deposits is a most important one, and that if the pro¬
posed program fails in accomplishing that, the program itself would fail.
He stated that if New York reduces its rate to 1 l/2 per cent, he would
recommend a reduction in the Richmond rate to three per cent. He felt,
therefore, that while the program may or may not accomplish good, it would
probably have very little risks attached to it, and that as far as pos¬
sible the Richmond bank would follow the program.
"Governor Black stated that, in his opinion, the present situation
is extreme and that it was important that we do something; that there were
only three courses before the Systems (l) that it should follow a policy
of further pressure by going up in its rates, (2) that we should maintain




-568the status quo, or (3) that we should make further ease. He hopes and be¬
lieves that the program recommended by Governor Harrison will be effective,
at least in part; that it would tend to make the gold which we have more
useful; and that it would tend to drive some short time money to work,
which is what the situation now needs. He questions whether the Clearing
House banks in New York will further reduce their rates, but that even
so that should not deter us in the adoption of the program, which he is
prepared to follow. He said that the Atlanta bank would follow on bill
rate reductions but is not sure what the bank would do about discount rate,
but that he is determined to have the Atlanta bank follow the program as
far as it can.
"Governor McDougal stated that the gold problem, as discussed by
the conference, is an impressive one and should be corrected, if possible;
that that is the big question before us. The banking situation is also
an outstanding problem; and that while he thinks money rates are now cheap
enough and does not see how cheaper rates will stimulate business, never¬
theless it may serve to move gold elsewhere. In his judgment, there is
no danger in the stock market but fears that low or lower rates may lead
banks to take imprudent steps. He was not in favor of buying governments
at the moment but that if lower discount rates were established in the
Eastern districts, Chicago would probably have to follow.
"Governor Martin said that there is no historical precedent for
the present situation, and that it would, therefore, be difficult to predict
the results of the proposed policy. He saw some objections to it but, on
the whole, the majority of reasons were in favor of it. What objections
there are he felt could be overcome if we were prepared to go quickly
enough to reversal. He was in favor of trying the experiment and said that




-569-

St, Louis would follow with reductions in the b i l l rates and probably with
the discount r a t e ,
"Governor Geery was somewhat at a loss t o foresee the precise
results of the proposed policy but was willing to give i t a fair t r i a l at
t h i s time and was willing t o vote for i t .
"Governor Talley stated that he s t i l l has confidence that gold
will finally express i t s e l f .

I t always has in the past sooner or l a t e r ,

and he said we are now a t a practical minimum of discounts and have only
$180,000,000 of b i l l s to be absorbed.

If gold comes beyond that point,

i t will certainly express i t s e l f in the country's credit structure.
proposed program would bring t h i s event nearer.

The

He also agreed that the

policy would tend to shove short time funds outside of New York, though
probably not into remote country d i s t r i c t s .

In his judgment, there was

some question whether i t would be desirable to have the New York banks re¬
duce t h e i r interest rates further! that i t was more desirable, in his mind,
for those banks to send money abroad into short commercial credits.

While

somewhat apprehensive about attempting the policy, he saw l i t t l e ammunition
left, and he was in favor of trying i t ,
"Deputy Governor Worthington said that while the Kansas City bank
has f e l t for some time that money rates have been too low and that there
would be no revival in business u n t i l rates go up, nevertheless he sees
no objection to the program and that i t was necessary, in his judgment,
now t o make some effort to overcome present difficulties.

He sees no

harm and possible good in the program and that Kansas City would always
cooperate with any plan approved by the conference,
"Governor Calkins said that he agreed with the desirability of
harmonious action in the System but questioned how harmonious i t would be




-570unless a program is agreed to without reluctance. He is somewhat skeptical
of the proposed program because of the fact that the present situation was
so lacking in precedents that it is not possible to compare it with the
past. Furthermore, conditions are largely psychological and causes of it
go away back to the war at least• He disagrees with the theory that small
reductions in bill rates and discount rates would stimulate credit or
that it is possible to make the gold standard work in any orthodox fashion
when two nations have most of the gold. He referred to the fact that the
Federal Reserve System has already contributed in a large measure to the
mobility of credit because of the telegraphic transfer system and that
indeed this system contributed largely to the inflation during 1928 and 1929.
The big question, in his mind, is whether we would be prepared to correct
or reverse the policy if it proves to be wrong, but that San Francisco
will be prepared to follow and participate in the program, even though
not with the wholehearted acquiescence which he thinks so advisable.
"Governors Meyer and Harrison then said that they did not have
any fixed certainty of the outcome of the procedure but that it was one
in which we had little, if any, volition since it would be forced upon us
by the present gold movement sooner or later, in any event.
"After further general discussion and upon recommendation of
Governor Harrison, the conference
"VOTED that pending another meeting of the conference, as soon
as that may be deemed necessary by the Federal Reserve Board or the members
of the conference, the executive committee of the conference should be
authorized, if and when it appears to them necessary or advisable, to
purchase up to $100,000,000 of government securities."




A draft of the recommendation of the Open Market Policy Conference

-571was presented to the Board at a meeting of the Conference with the Execu¬
tive Committee of the Federal Reserve Board on April 30, at which meeting
discussion was had with regard to the basis upon which the recommendation
of the Conference was made, including a review of the business and credit
situation, with a detailed analysis of the adverse influences affecting
credit conditions.
Board approval of reductions in discount and buying rates and
proposed open market purchases. At a later meeting of the Executive Com¬
mittee of the Federal Reserve Board held on April 30, Governor Meyer re¬
ferred to a statement made by the Governor of the Federal Reserve Bank of
New York that he expected the directors of his bank at their meeting on
that date to request the Board to reduce to 1 per cent the rate established
by it as the minimum authorized buying rate for the purchase of bankers1
acceptances at that bank, although the bank might not necessarily reduce
its effective buying rate which at that time stood at l-l/4 P e r

C8n

on

the shorter maturities. After some discussion of the possible request
from the New York Bank and because of the contemplated absence of certain
members of the Board, the Assistant Secretary was authorized, upon receipt
of advice of action by the New York directors, to reply that the Board ap¬
proved a minimum authorized buying rate of 1 per cent for the bank. In
accordance with this action of the Executive Committee, the Assistant
Secretary on May 1, upon receipt of a request from the directors of the New
York Bank that the Board reduce the minimum authorized buying rate for the
purchase of bankers ' acceptances at the New York Bank to 1 per cent,
formally advised of approval of the request by the Federal Reserve Board,
The following letter was received from Deputy Governor Burgess
under date of April 30:




-572"There have been no changes in the total amount of holdings of
government securities in either our own investment account of the System
Account since I wrote you last under date of April 24 • •
(Secretary's note: On May 6, 1931, the Federal Reserve
Board approved for the Federal Reserve Banks of Boston
and Philadelphia a rediscount rate of 2% and 3% respect¬
ively on all classes of paper of all maturities, effect¬
ive May 7, 1931.)
On May 5, the New York Bank extended its minimum effective buy¬
ing rate of 1-l/4 per cent on bankers' acceptances to include maturities up
to 90 days, and on May 6 established the following schedule:
1 to 30 days
31 to 90 days

1 1/8%
1 l/4%

91 to 120 days
121 to 180 days

1 3/8%
2%

Repurchase
1 3/8$
(Secretary's notes On May 7th the Board approved for
the Federal Reserve Bank of New York a rediscount rate
of 1 l/2% on all classes of paper of all maturities,
effective May 8, 1931.)
At the meeting of the Board on May 7 consideration was given to
the action of the Open Market Policy Conference on April 29, and it was
voted to approve the request that the Executive Committee be authorized,
if and when it appears to them necessary or advisable to purchase up to
$100,000,000 of Government securities.
Developments Concerning Open Market Operations and Discount and Buying Rates,
Early-May - Mid-June 1931
Further reductions in buying rate and in discount rates of various
Reserve Banks, early-May. Deputy Governor Burgess wrote the Board under
date of May 7th as follows:
"Since I wrote you under date of April 30 a total of $22,543,000
of short-term government securities was transferred in accordance with
proposal discussed at the Governors Conference from the holdings in the




-573investment account of this bank to the participations of several other
Federal reserve banks in the System Special Investment Account.

. ,f

(Secretary's notes On May 7th the Board approved
for the Federal Reserve Bank of Dallas a redis¬
count rate of 3% on all classes of paper of all
maturities, effective May 8th, and on May 8th a
rediscount rate of 2 l/2% was approved for the
Federal Reserve Banks of Cleveland, Chicago and
St. Louis, effective May 9th.)
On May 8 following approval of a reduction to 2-1/2 per cent in
the rediscount rate of the Federal Reserve Bank of Cleveland, and upon re¬
ceipt of advice that the directors of the Federal Reserve Bank of Chicago
would take action on that day reducing the rediscount rate at that bank, the
Board authorized the Executive Committee to approve for any Federal reserve
bank reductions in discount rates of one-half of one per cent at a time
down to, but not below 2 per cent.
On May 8, 1931, the Federal Reserve Bank of New York established
the following schedule of effective buying rates on acceptances:
1 to 30 days
31 to 90 days
91 to 120 days
121 to 180 days
Repurchase
Trade bills

1 l/8%
1 1/4%
1 3/8%
1 l/2%
1 3/8%
1 l/2%

On May 13 the Federal Reserve Bank of New York established the
following schedule of effective buying rates on bankers' acceptances:
1 to 1$ days
1%
16 to 120 days
1 l/8%
121 to 180 days
1 l/4%
Repurchase
1 l/4%
On May 14 the following letter was received from Deputy Governor
Burgess:




"During the week ended May 13, transfers of $5,000,000 and

-574$10,000,000 of government securities were made from the holdings in our
Investment Account to the participations of the Federal Reserve Banks of
Atlanta and San Francisco respectively, in the System Special Investment
Account. •
(Secretary's note: On May 14th the Board approved
for the Federal Reserve Bank of Richmond a re¬
discount rate of 3% on all classes of paper of all
maturities, effective May 15th.)
Between May 15 and July 30, 1931, because of the unsettled
European situation, the Board of Directors of the Federal Reserve Bank
of New York voted to grant, subject to approval of the Federal Reserve
Board, credits to various European central banks.
On May 19, 1931, the Federal Reserve Bank of New York established
the following schedule of effective buying rates on bankerst acceptances:

1 to 90 days
1%
91 to 120 days l-l/8%
121 to 180 days 1 l 4
-/%
Repurchase
1%
(Secretary's note: On May 20th the Board approved
a rediscount rate of 3% on all classes of paper
of all maturities for the Federal Reserve Bank of
Kansas City, effective May 21st.)
Letter from New York Bank to Board, mid-May through mid-June»
Deputy Governor Burgess wrote the following letter to the Board under
date of May 21:

"There was no change in the System total holdings of Government
securities since I wrote you last on May 14 •
(Secretary*s note: On May
for the Federal Reserve Bank of San Francisco a re¬
discount rate of 2-l/2$ on all classes of paper of
all maturities, effective May 22nd.)




-575Under date of May 28 the following letter was received from
Deputy Governor Burgess:
"Since I wrote you on May 21, the total holdings in our own
investment account and the System Special Investment Account have remained
unchanged at $74,776,9OO and $444,468,OOO respectively. .
The following letter was received from Deputy Governor Burgess
under date of June 4, 1931:
"There has been no change in the total holdings in our own invests
ment account or the System Special Investment Account during the past
week.
The following advice was received from Deputy Governor Burgess
under date of June 11:
"The holdings of government securities for the System Special
Investment Account are the same as when I wrote you last on June 4,
1931. • .
The following letter was received from Deputy Governor Burgess of
the New York Bank under date of June 18:
"No changes have occurred in the holdings of government securities
for the System Account since my last letter dated June 11, in so far as the
total par value is concerned. • •

At the meeting on June 19 consider

the directors of the Federal Reserve Bank of New York that the Board reduce
to 3/4 per cent the rate established by it as the minimum authorized buy¬
ing rate for the purchase of bankers1 acceptances by the bank, but after
some discussion of the matter, action was deferred.
Meeting of Executive Committees June 22, 1931




A meeting of the Executive Committee of the Open Market Policy

-576Conference was held at the Federal Reserve Bank of New York on June 22,
1931.
Memorandum of Chairman, The following is from the memorandum
presented at that meeting by the chairman:
"No purchases of government securities have as yet been made
under the authority granted at that conference (Open Market Policy Conference, April 27, 1931), but successive reductions in the bill rate were
made in the early weeks of May and the discount rates of a number of the
Reserve banks were reduced. Reductions in bill rates were an influence
toward maintaining the total volume of bills in the Federal Reserve
System fairly well until the past few days despite the large volume of
gold imports. The figures for bill holdings this year compared with the
average for the years 1926-1930, together with the reserve position of
the New York City banks, are shown in the attached diagrams. In the
past few days bills have been running off as the banks have held large
surplus reserves, and as rates on short governments have declined relative
to bill rates.
"n the weeks since April 27 two important credit movements have
taken place. First, gold imports have been supplemented by large re¬
leases of gold held earmarked for foreign account. During the month of
May the country's gold stock increased $70,000,000 and during the month
of June up to the present, more than $100,000,000, with $26,000,000 addi¬
tional on the way from Germany. This gold has come out of the bank reserves
of foreign central banks principally Germany and the Argentine, at con¬
siderable cost to those countries. From the point of view of world
economics it is important as was agreed at the last meeting of the Con¬
ference that the gold standard should operate normally by this gold being




-577put to work as a basis for credit and not nullified by its sterilization
through continued reduction in Federal Reserve credit outstanding.
"During this period the gold has, however, been largely absorbed,
not so much by a reduction in the total earning assets of the Federal Re¬
serve System as by an increase in the volume of currency in bank tills
or for hoarding. This increase in circulation has occurred in a number
of districts where there have been bank disturbances, and particularly in
the Chicago district. The total such increase amounting to over $100,000,000
has brought the total volume of currency in circulation to a point about
$300,000,000 higher than at this time last year. It has been estimated
that much if not all this increase has been for hoarding.
"The question now arises whether this expansion in currency cir¬
culation is not an abnormal factor for which compensation should be made
in order that incoming gold might have a direct influence upon credit
conditions.
"The question is complicated by the movement of the system bill
portfolio, which is now subject to a number of unusual influences. It
is clear that any purchase of government securities or other means of
placing more funds in the market might be expected to result^ other things
being equal, in a diminution in system holdings of bills. Some adjust-*
ment of bill rates might assist in maintaining the bill portfolio and
preventing it from being reduced quite as rapidly as government security
holdings may be increased. The maintenance of a bill portfolio on the
other hand should be considerably aided by a recent decision of a foreign
correspondent holding more than $300,000,000 of bills in this market to
allow these bills to run off as it may be assumed that the Reserve System
will be called upon to absorb some of these bills.




-578"At the present moment the reserves of the New York City banks are
considerably in excess of requirements. During the next two weeks, however,
midyear demands for funds may be expected to draw upon these reserves and
fairly quickly to exhaust the surplus•
"It is clear that the purposes of the policies adopted at the April
conference have not been fully accomplished though some progress appears to
have been made. The movement of gold imports had slackened up until the time
difficulties arose in Central Europe leading to large releases of gold from
earmark in this country. Rates paid by banks for deposits have been reduced
in most important centers. There has been some recovery in the bond market,
though this is perhaps due as much to direct action on the part of some New
York City banks as it is to any change in the monetary situation•

Despite

the increase in government securities outstanding there has been no net in¬
crease in the total volume of bank credit.

Interest rates are on a definitely

lower basis than they were in April, but this reduction has not yet evidently
led to any considerable shifting of funds from short to long use."
Excerpt from minutes of meeting.

The minutes of the meeting of

the Executive Committee of the Open Market Policy Conference on June 22
contain the following:
"Governor Harrison outlined developments in recent weeks in the
international markets, and particularly in connection with the assistance
required by the Austrian Credit Anstalt, and the further succeeding develop¬
ments in Hungary and in Germany, and indicated that on Friday the Reichsbank
reserve was close to its legal minimum, that altogether the Reichsbank
had sold us over $100,000,000,in gold, and its total losses of gold and
foreign exchange had been approximately $250,000,000. It had begun a
policy of credit rationing at home. As a result largely of the gold




-579from Germany this country had gained $112,000,000 of gold since June 1,
and the total net gain since January 1 amounted to $298,000,000.
"Governor Harrison stated that at the April meeting of the Open
Market Policy Conference all appeared to be in agreement that this country
was receiving gold which it did not desire, and which other countries
could not afford to lose, and that if possible we should find some way to
avoid being in the position of receiving this gold without allowing it to
produce its usual effects in expanding credit. Since the April meeting
incoming gold may be considered to have been partly absorbed by currency
withdrawals in connection with bank difficulties. If the influence of
these currency withdrawals could be eliminated Federal reserve earning assets
would show a substantial reduction. In other words, the gold has been to
a degree sterilized, and the aim of the April meeting of maintaining earning
assets and putting new gold to work has Hot been fully achieved.
"Governor Young objected at this point that he did not agree with
the conclusions of the April conference with respect to the sterilization
of gold.
"Governor Harrison, continuing, pointed out that the other aim
of the April conference was to reduce short money rates and thus encourage
the shifting of funds to employment in longer use. Partly as a consequence
of the action taken there had been large and widespread r eductions of rates
paid by banks on deposits, and in short time money rates generally.
"He further stated that the events of the past two weeks were in
some ways the most critical which the world has passed through since the
war, that there had been a threat of a general moratorium and a possible
breakdown of capitalism in Europe. In the meantime developments in South
America had indicated the danger of a moratorium in certain countries there.




-580In these circumstances it seemed desirable to take every possible measure
available to the Federal Reserve System for improving the situation. He
could see no risk in buying governments at this time, but considerable
advantage. It was a particularly good time, because the improvement of
psychology and the lift in the commodity markets and the security markets
following the announcement of the administrations position as to reparations
provided an impetus toward revival which, with proper encouragement, might
now bring the turning of the tide.
"As far as the bill holdings of the system were concerned Governor
Harrison stated that it would probably be somewhat easier to maintain these
holdings because of the fact that the Bank of France was allowing all its
bills to mature. Since these holdings constituted something like 2$% of
the total bills outstanding in the American market, the release of these
bills would provide a more ample supply, part of which would presumably
come to the Reserve bank. The Bank of France intended, however, to increase
its balances at the Reserve banks as its bills matured, an action which
would be a tightening factor in the money market. It might be desirable in
the near future to make some reduction in bill rates since technically bill
rates were becoming out of line with other short term money rates. In fact
the directors of the New York bank had already requested from the Federal Re¬
serve Board a lower minimum buying rate on bills, though there was no present
intention of reducing the actual buying rate.
"Governor Meyer reported that the statisticians of the Federal Re¬
serve Board computed that from $350,000,000 to $375,000,000 of currency was
now hoarded throughout the country as a result of banking disturbances since
last autumn. This represented an additional demand for Federal reserve
credit which tended to offset the effects of gold imports under the normal
working of the gold standard.



-581"Governor Norris suggested that the two major objectives of the
April program were
(1) to check gold imports, and
(2) to drive down the interest rates paid on deposits by banks.
"There had been great success in pursuing the second objective,
though as to the first we appeared to have gone as far as it was possible
to go, since gold movements now appeared not to be due to interest rates
but rather due to necessity or due to this market being the safest place
for funds.
"Governor Harrison pointed out that the first objective of the
April meeting was perhaps somewhat broader, and included a desire to make
the incoming gold effective and not sterilize it.
"Governor Norris asked whether the real difficulty at present
was not the rates for money but lack of demand for credit from high grade
borrowers while lenders were timid and hesitant with respect to any other
type of borrower.
"Governor Harrison suggested that the pressure of excess reserves
sooner or later tends to overcome timidity. Under the traditional gold
standard the piling up of funds in any country sooner or later operates
toward an expansion of credit which in turn is an influence towards
raising the price level. He hoped that the purchase of governments might
first avoid sterilizing gold, and might second be a stimulus operating with
other favorable recent events towards giving an additional lift toward
business recovery.
"Governor Norris raised the question whether the system would
not be criticized for taking a step to make money still easier when it was
already very easy. Governor Harrison suggested that the proposal simply




-582recognized that incoming gold would inevitably produce credit ease, and the
effect of the action was to bring somewhat earlier rather than later the
normal effects of the gold movement, and thus to avoid in part some of the
serious effects on European countries of the loss of gold,
"Governor Meyer suggested that other critics would Say that by
inaction we were preventing the normal influence of gold.
"Governor Black commented that the action taken at the April 29
meeting at Washington was affirmative, in favor of positive action which was
to continue until it accomplished its results. The methods to be followed
were first the reduction of bill rates and second the purchase of govern¬
ments

The results hoped for were a favorable psychological reaction, lower

interest rates, and the prevention of the sterilization of gold. The first
remedy action through the bill market, appeared to have been exhausted.
Business had not shown any recovery. The European situation was worse. The
remaining remedy was to buy governments which should be done as a logical
continuation of the affirmative policy. The President, by his announcement,
had taken a constructive step which should be backed up to the limit, and
Governor Black believed that the purchase of governments would give this
impression and have this effect.
"Governor Meyer stated that the Federal Reserve Board would be
sympathetic to the purchase of Government securities, would have some
preference for a larger program of purchases than $50,000,000, and that the
Board would regard this program as simply discounting in advance the easing
effect of the return of hoarded currency when the period of apprehension
was over,
"Governor Young discussed the question of gold sterilization and
indicated that he believed that sterilization had been and was natural and




-583inevitable under the operation of the Federal Reserve System that the only
way sterilization could be stopped was to have continuously an excess of
credit, but that any such excess never lasts but is rather quickly absorbed
through a reduction in Federal reserve credit• It is, therefore, impos¬
sible to prevent sterilization without adopting the Macauley policy of
buying an exceedingly large volume of government securities. He agreed
that something should be done to support the action of the President, but
did not believe that the purchase of $50,000,000 of Government securities
would accomplish this purpose. He did think that there was a great op¬
portunity to deal more directly with the problem by some form of advance
to Germany. This might mean announcing the advance on gold in transit,
or announcing that we were prepared to make advances to the Reichsbank.
Such action would put the injection precisely into the place where needed.
"Governor Harrison stated that it would hardly be appropriate to
announce the advance against gold since that was in the nature of temporary
and ordinary banking operation which would pass quickly, and moreover might
suggest weakness on the part of the Reichsbank. He said that there had not
yet been any request from the Reichsbank for a credit though word from
abroad indicated that such a request might come before long.
"Governor McDougal stated that while he was impressed at the last
meeting by the considerations with respect to gold, he considered the
domestic bank situation the most important and pressing element in the
situation, and speaking in general he questioned the desirability of putting
out more credit now that the market is already glutted. Following the
President's announcement, however, we have had an exhibition of the effect
upon the state of mind of some positive action. If purchases of governments
would be received by the public as supporting the Presidents announcement




-584that would appear to him of great importance.
"Governor McDougal asked what the prospective demands for credit
from Europe were likely to be, and Governors Harrison and Meyer reported
recent communications from Europe and indicated that any demands from
Europe would be in sufficiently limited amounts as to constitute no strain
upon the System and leave us free to pursue the policy which seemed best
from other points of view.
"Governor Harrison stated that the directors of the Federal Re¬
serve Bank of New York were unanimous in favoring the purchase of govern¬
ment securities at this time.
"Question was raised as to the general effects of buying govern¬
ment securities, on sentiment and otherwise, and there was also discussed
the form which publicity might take. The general opinion was that probably
no attempt to explain the reason for purchases was desirable. The action
would probably be interpreted as part of the general program.
"Governor Harrison suggested that the attitude of the member
banks toward purchases of government securities had changed considerably
during recent weeks and that two New York City bankers had suggested to him
the desirability of buying governments as a means for aiding the situation,
"Governor Talley said that the purchase of government securities
might have an important effect in helping banks to maintain their liquidity
and so encouraging them to use their funds courageously.
"After some further discussion it was voted to buy up to $50,000,000
of government securities with the understanding that there would be further
conference by telephone or otherwise between members of the committee be¬
fore any purchases were made beyond that amount."




At the meeting of the Board on June 25 further discussion was had

-585with regard to the advisability of a further reduction in the minimum
authorized buying rates on acceptances at the New York Bank, but no action
was taken.
Communications on Open Market Purchases, Late June - July 1931.
Letters from New York Bank to Board, June 25 and July 2. The fol¬
lowing information was received from Deputy Governor Burgess in his letter
of June 25:
"In accordance with the action taken at the meeting of the Execu¬
tive Committee of the Open Market Policy Conference on June 22, a total of
$40,000,000 of government securities has been purchased this week for System
account. • • ."
Under date of July 2 the following letter was received from Deputy
Governor Burgess:
"An additional purchase today of $10,000,000 of government secu¬
rities for System Account completed purchases under the $50,000,000 authori¬
zation. As you know $20,000,000 were purchased in the statement week ending
June 24 • • •"
Letter from Harrison on Executive Committee action authorizing
further purchases. The following letter with regard to action taken by the
Executive Committee of the Open Market Policy Conference was received from
Governor Harrison under date of July 8:
"The purpose of this letter is to confirm the information already
given to you orally that on Monday of this week I consulted with all the
members of the executive committee of the Open Market Policy Conference,
and they all agreed to a further purchase of $50,000,000 of government
securities under the authority arranged at the meeting of the Open Market
Policy Conference on April 29. They felt it was desirable for the statemesnt week ended July 8 to show a small increase in System holdings of




-586gcvernment securities, and approved the suggestion of a purchase of
$20,000,000 this week which,with $10,000,000 bought last Friday, would
slightly more than offset a reduction which would otherwise be shown be¬
cause of a reduction of $25,000,000 of government securities in the hold¬
ings of the San Francisco bank. These, as you know, had been taken over
temporarily to relieve a member bank at the end of the half year,
"In accordance with t h i s authority we have purchased $20,000,000
of governments for delivery yesterday and today, and propose to exercise the
additional $30,000,000 authority gradually over the next three weeks.
"It i s our belief that these purchases of securities will be help¬
ful psychologically in indicating a continuous policy on the part of the
Reserve System t o do whatever i s in i t s power toward making effective con¬
tinued imports of gold. They will also serve in a measure to keep some
surplus reserves in the banks of principal c i t i e s and thus to maintain a
continuous pressure for the free employment of funds,"
Letters from New York Bank to Board, July 9 - 3 0 .

The regular

weekly l e t t e r from Deputy Governor Burgess under date of July 9 advised
as follows:
"As indicated in Governor Harrison 1 s l e t t e r of yesterday, the
holdings of government securities in the System Special Investment Account
have been increased $30,000,000 since Wednesday of last week.. Of t h i s
amount $10,000,000 represents completion of the purchase of $50,000,000
decided upon by the Executive Committee on June 22, and $20,000,000 were
new purchases Tuesday and Wednesday of t h i s week, under the further
$50,000,000 authorization.

The exchanges between issues effected during

the week totaled $17,000,000. • . •"




At the meeting on July 13 the Board considered a l e t t e r dated

-587July 9 from the Governor of the Federal Reserve Bank of New York, setting
forth the reasons which prompted his board of directors to renew its re¬
quest that the Federal Reserve Board reduce to 3/4 per cent the minimum
authorized rate established by it for the purchase of bankers1 acceptances
by the New York Bank. Action on the matter, however, was again deferred.
Under date of July 16 the following letter was received from
Deputy Governor Burgess:
"Since my last letter dated July 9 further purchases of govern¬
ment securities for the System Special Investment Account amounted to
$10,000,000. This makes a total of $30,000,000 of governments purchased
under the second $50,000,000 authorization. Changes between issues, which
were made during the week, only amounted to $3,000,000• . . .
Deputy Governor Burgess advised the Board under date of July 23
as follows:
"The total of the holdings of government securities in the System
Special Investment Account remains the same as when I wrote you last on
July 16, no additional purchases having been made, . • ."
Deputy Governor Burgess wrote the Board as follows under date of
July 30:
"The total of the holdings of Government securities in the System
Special Investment Account still remains the same, no additional purchases
having been made since I wrote you last on July 23 • • • "




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