March 15, 1937 FOMC Minutes: Full Text
A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington on Monday, March 15, 1937, at 10:40 a.m. PRESENT: Mr. Eccles, Chairman Mr. Harrison, Vice Chairman Mr. Broderick Mr. Szymczak Mr. Ransom Mr. McKinney Mr. Martin Mr. Peyton (alternate for Mr. Day) Mr. Morrill, Secretary Mr. Goldenweiser, Economist Mr. Williams, Associate Economist Mr. Dreibelbis, Assistant General Counsel Mr. Burgess, Manager of the System Open Market Account It was stated that on Saturday, March 13, 1937, all of the members of the Committee were notified of the call for this meeting personally or by wire, that Mr. McKee advised the Chairman by telephone that he would be unable to attend, that Mr. Davis wired that he could not be present, and that President Day advised that he would be unable to attend but would arrange with his al ternate, Mr. Peyton, to be present. Mr. Sinclair was confined to his home by illness and his alternate, Mr. Fleming, was absent on vacation. Attention was directed to the fact that this was the first meeting of the Federal Open Market Committee after March 1, 1937, that certain changes had taken place among the members represent ing Federal reserve banks, and that the by-laws provided that at
this meeting the Committee should elect a Chairman, Vice Chairman, Economist, one or more Associate Economists, General Counsel and Assistant General Counsel, and that it should select the members of its executive committes. The Secretary reported that the following had been elected by the respective Federal reserve banks as members of the Federal Open Market Committee for a period of one year commencing March 1, 1937: Mr. George L. Harrison, President of the Federal Reserve Bank of New York, with Mr. Roy A. Young, President of the Federal Reserve Bank of Boston, as alternate member; Mr. John S. Sinclair, President of the Federal Reserve Bank of Philadelphia, with Mr. M. J. Fleming, President of the Federal Reserve Bank of Cleveland, as alternate mem ber; Mr. B. A. McKinney, President of the Federal Reserve Bank of Dallas, with Mr. Oscar Newton, President of the Federal Reserve Bank of Atlanta, as alternate member; Martin, President of the Federal Reserve Bank Mr. Wm. McC. of St. Louis, with Mr. George J. Schaller, President of the Federal Reserve Bank of Chicago, as alternate member; and Mr. Wm. A. Day, President of the Federal Reserve Bank of San Francisco, with Mr. J. N. Peyton, President of the Fed eral Reserve Bank of Minneapolis, as alternate member. The Secretary reported that records of the election of each member and alternate representing the Federal reserve banks or cer tified copies thereof had been received by the Secretary of the with the exception of Mr. Day, each newly elected Committee; that, member and alternate had filed the required oath of office; and that opinion of the Committee's counsel that the newly elected it was the were qualified to participate in the members and alternates present meeting. duly made and seconded, the Upon motion of the Committee were following officers
reelected by unanimous votes to serve until the election of their successors at the first meeting after March 1, 1938: Marriner S. Eccles, Chairman George L. Harrison, Vice Chairman E. A. Goldenweiser, Economist John H. Williams, Associate Economist Walter Wyatt, General Counsel J. P. Dreibelbis, Assistant General Counsel Upon motion duly made and seconded, and by unanimous vote, the Committee selected the Federal Reserve Bank of New York to execute transactions for the System open market account. Mr. Harrison thereupon stated that he would recommend to the board of directors of the Federal Reserve Bank of New York the re newal of the selection of Mr. W. Randolph Burgess as Manager of the System Open Market Account. Upon motion duly made and seconded, and by unanimous vote, the Committee approved the selec tion of Mr. Burgess as Manager of the System ac count in the event of the renewal of his selection by the Federal Reserve Bank of New York to act in that capacity. Upon motion duly made and seconded, and by unanimous vote, the Committee selected as members of the executive committee, in addition to the Chair man of the Federal Open Market Committee, who under of the by-laws is also Chairman of the the provisions executive committee, Messrs. Broderick, McKee, Harrison and Sinclair; as alternates for the members of the Board of Governors who serve as members of the executive committee, Messrs. Ransom, Davis and Szym czak in the order named; and as alternates for the representative members of the executive committee, Messrs. Martin and McKinney in the order named. The Secretary presented the minutes of the two Open Market Committee held on meetings of the Federal motion duly made and January 26, 1937, and, upon these minutes were approved unanimously. seconded, presented the minutes of the The Secretary then committee of the Federal two meetings of the executive
Open Market Committee held on January 26, 1937, which had been approved at the meeting of the executive com mittee on March 13, 1937, and, upon motion duly made and seconded, and by unanimous vote, the actions set forth in these minutes were approved, ratified and confirmed. The Chairman then called upon Mr. Burgess for his report, as Manager of the System open market account, of operations since the last meeting of the Federal Open Market Committee. Mr. Burgess referred to the regular weekly reports which he had made (including a report which he had submitted as of March 10, 1937) since the last meeting of the Federal Open Market Committee. He stated that there had been held in the System account about $88,000,000 of the 3% notes maturing on April 15 for which the Treasury had offered 2 1/2% 1949-53 bonds in exchange on March 15, and that, in order that the account might not be in the position of holding the entire amount until March 15, the maturity of the notes was largely anticipated by sales and purchases in the market, to the extent of approximately $55,000,000 in advance of March 15, leaving approximately $33,000,000 for exchange for the 2 1/2% bonds. the trends in the government se Mr. Burgess then reviewed preceding ten days. He reported that the curity market during the offering on March preceding the Treasury had been weak just market was announced. No after the offering this weakness continued 8, and Treasury or System account had been made for purchases of securities days of the three-day the second and third March 9 and 10, until moderate purchases was open, when exchange offering period that the of bonds which take care of blocks account to made for Treasury were were made for market. Purchases in the some congestion were causing
Treasury account on these two days and the following day to aid towards preventing a disorderly market. On Friday, March 12, Mr. Burgess reported, the Secretary of the Treasury had asked if the System would resume the arrangement under which the Treasury and the System participated equally in purchases of bonds which had been in effect prior to an arrangement made about a month ago under which the Treasury would take all bonds purchased and the System would take all Treasury notes purchased. Mr. Burgess reported that, after consulting with the chairman and Mr. Harrison, he had indicated to the Secretary that the System would resume operations under the earlier arrangement, and on this basis approximately $32,000,000 of bonds were purchased on Friday and $7,000,000 on Saturday, to be divided equally between the Treasury and the Reserve System, and op erations were continuing on this basis. He indicated that no op erations had been necessary in the note market for the maintenance of orderly conditions. Mr. Burgess reported that, including the effects of trans arranged, the System's holdings of bonds with ma actions already in excess of five years had been increased to $532,000,000. turities He also called attention to the fact that, as a result of action taken 13, the New York bank had author by the executive committee on March such bond holdings to $600,000,000 provided, however, ity to increase within two years, which at security holdings having maturities that should not be reduced totaled approximately $1,100,000,000, present out that the total amount of se below $1,000,000,000. He pointed been changed except temporarily the System account had not curities in
between statement dates, and that all purchases would be covered by sales or maturities of Treasury bills this week and next. Upon motion duly made and seconded, and by unanimous vote, Mr. Burgess' report was accepted and the transactions covered by the reports sub mitted by Mr. Burgess since the period covered by similar action taken at the meeting of the Federal Open Market Committee on January 26, 1937, were approved, ratified and confirmed. Chairman Eccles expressed the opinion that the recent mar ket situation, as referred to by Mr. Burgess, was a readjustment brought about by a number of factors, that the Government securities market, particularly the longer term securities, had shown weakness in part for the reason that the public had began to feel, even be fore the Board issued its recent announcement of a further increase in reserve requirements, that the market for corporate securities was out of line, that some issues had been overpriced during the recent period of extremely low interest rates, and that this weak ness in the corporate securities had affected the Government secur ities market. He referred to the French financial situation, the British armament program and the demand for war materials from other building of inventories in antic countries, labor troubles and the in this country, which had resulted in un ipation of higher prices in commodity prices, and discussions with respect justified increases and reduction of of increased relief expenditures to the possibility in a continued unbalanced taxes which might result social security together with some feeling on budget. He felt that this situation, was moving to stop price of the public that the Board the part
inflation which would result in firmer money conditions, would natur ally result in the prices of long term securities seeking somewhat lower levels. He also said that it should be pointed out that the action of the Board in increasing reserve requirements did not consti tute a reversal of its easy money policy, that the present trend toward price inflation should be met in another way and that, as suggested in a statement which he was issuing to the press today, the time for adop tion of a restrictive money policy does not arise until there is full production and employment. It should also be made clear, Chairman Eccles said, that the market situation is not due to the action of the Board in increasing reserve requirements, that after the full increase in requirements takes effect there will be about $500,000,000 of ex cess reserves and there will still be ample funds available for legit imate business use, and that bank deposits are approximately $2,000,000,000 in excess of the total in 1929. He then referred to the continued easy money policy of the System and the huge excess reserves which had been allowed to accumu late. He pointed out that after the Board was given authority in 1935 to increase reserve requirements and, in spite of the fact that it was immediately urged to exercise the power, it did not take such action excess reserves had reached a total of approximately $3,500,000,000 until an increase in reserve requirements, it absorbed only when, by $1,500,000,000, and that later, after $600,000,000 of additional gold in further increases of excess reserves, had been imported, resulting limit of its authority but reserve requirements to the it had increased
in the belief that after the increase would become fully effective mem ber banks would have sufficient excess reserves to insure the continu ation of the System's easy money policy. He said that if the Board were subject to criticism for the course it had pursued it would be because it had not taken action sooner to stop the decline of interest rates to the extremely low level that they had been allowed to reach. He stated that every important step taken by the Board in 1936 with respect to an increase in reserve requirements was discussed fully with the Secretary of the Treasury before action was taken and that the recent action effecting a further increase was reviewed with the Secretary of the Treasury and the President was advised of the pro posed action before it was taken, that they interposed no objection at any time, and that the Secretary had expressed to the President his feeling of satisfaction with the Board's close cooperation with the Treasury, and had said only two days ago that he did not feel that any increase in interest rates that had taken place thus far had had any It was pointed out in this connection that bad effects on business. the Treasury of sterilizing gold imports to pre the present program of excess reserves of member banks was inaugurated vent their increasing respect to a further in action of the Board with prior to the recent crease in reserve requirements. point Mr. Thurston joined the meeting. At this selling orders the source of as to to an inquiry In response Mr. Burgess said the past week, the market during had come into which reducing their holdings the result of dealers they had been partly that
of bonds acquired in connection with the March 15 financing and re flected partly the sale of bonds from all parts of the country, some coming from corporations which held April 15 note maturities which they did not wish to exchange for the bonds offered by the Treasury. President Harrison expressed agreement with the general posi tion taken by Chairman Eccles and stated that he did not agree with statements that action by the Board of Governors in increasing reserve requirements was principally responsible for the weakness in the Govern ment bond market; that, while the increase might have had some psycho logical effect, there would have been anyway a gradual readjustment of the market, partly because of fear of price inflation. He expressed the opinion that the increase in reserve requirements was fully justi fied in order to put the System in position to exercise credit control through open market operations whenever such action appeared to be He also agreed that, while there was no need for the exer necessary. cise of a policy of credit restraint at this time, he could not agree the Federal Reserve System should increase the with the suggestion that the Government bond market and of portfolio as a means of supporting that the System proposed to follow a restrictive dispelling the rumor he said, that it would be construed policy. Apart from the fact, money excess reserves in order with the policy of decreasing as inconsistent it might well add unwise System control when necessary, to give the be checked rather than of prices which should stimulus to the inflation encouraged. for a statement upon Mr. Goldenweiser then called The Chairman
as Economist of the Federal Open Market Committee. Mr. Goldenweiser said that the basic economic situation was good, that recovery was definitely under way with a very rapid rise in business activity in December, a slight recession in January and February due chiefly to labor troubles and floods, and a resumption of the upward trend in the latter part of February and early part of March. He pointed out that recovery was not confined to the United States but that conditions were fairly good in most of the large countries and that France, in spite of her financial difficulties, was experiencing a decided economic up turn. The fact still remained, Mr. Goldenweiser said, that recovery in the United States was still quite incomplete and below the level reached in other countries, that there was still a low level of pro duction and a large amount of unemployment, that activity in the con struction and railroad equipment industries was at a relatively low electrical plants, which were producing a record amount point and that yet engaged to any extent in plant expansion. He of power, had not amount of funds available for business referred to the large aggregate there had been some increase in the expansion and to the fact that by a decrease in Govern of commercial borrowings, accompanied amount as a healthy condi of banks, which he regarded ment security holdings purposes increases as lending for commercial on the theory that tion in order to avoid should decline of Government securities bank holdings available for business the amount of deposits further increase in a supply of money is the fact that the present expansion. He said that the hands of centers and in in the financial and is concentrated large
people holding it for investment gives strength to the investment market, that reactions in the securities market were the result of psychological factors rather than fundamental economic changes, and that, while they were to be expected under existing conditions, they should not cause the System particular concern. He felt, however, that the System was confronted with the important problem of what its position would be if the present market situation continues or another readjustment takes place at a later date resulting in a de cline in security prices, when a difference of opinion may develop with respect to the action that should be taken by the System to meet the situation. When that time comes, he said, the System should consider buying Government securities rather than refusing to take such action and run the risk of action being taken in another form which would complicate the machinery of credit control and result in di vided responsibility for such control. He also referred to the fact issued to the press at the time the Board of Gov that the statement increase reserve requirements pointed ernors took action to further out that the increase would place the Federal Reserve System in a to exercise monetary control through open market operations, position an increase of $100,000,000 or and expressed the opinion that at a time of market weakness in the System account $200,000,000 and that an equal amount of securities would do no serious harm at an appropriate later allowed to run off be disposed of or could justification for there was no economic He added that, while time. he felt, for the at this time, in the System portfolio an increase Federal Open Market Committee forth above, that the reasons set
should give the executive committee authority to increase the Sys tem portfolio, such action being based on the uncertainty in the Government bond market and the fact that it might be found to be desirable to increase the System portfolio in order to prevent a disorderly market. At 1:16 p. m. the meeting adjourned and reconvened at 2:50 p. m. with the same attendance as at the morning session, including Mr. Thurston. Mr. Williams said that the feeling had been growing with him that the present is one of the most difficult periods the Fed oral Reserve System has been called upon to face. He referred to the recovery of business activity to around the previous peak and said that the movement promises to go somewhat beyond that level, that in terms of real income and employment the volume of activity should go to substantially higher levels than the country has ever seen before, and that when business activity has reached approximately the present level and there is a disturbing element present, such as an unwarranted increase in prices, that element exerts a restrict ing influence which might halt the recovery before it reaches any a desirable level. He said that the disturbances which thing like the present time are nonmonetary in character and if they exist at or later the System will be forced to are not corrected sooner action to prevent dislocations. take restrictive monetary with the fact said, is faced Mr. Williams The Government, which it has taken most of the actions to the present time that up
have been generally popular acttons, that from now on the emphasis will have to be placed on restrictive action, that the feeling is growing that restrictive action is necessary in order to prevent inflation, and that, if, in the face of such a feeling, action is taken which is regarded as inflationary, such as an increase in ex cess reserves through open market purchases of securities, the dis continuance of the sterilization of imported gold, or the use of the stabilization fund, such action would be very difficult to justify and was, in his opinion, not to be expected unless a crisis develops. He added that the specific question before the System at the present time was whether it should only attempt to prevent a disorderly market or go beyond that to a point which might necessitate action which would increase excess reserves. He said he would not favor at the present time any action which would go beyond the present policy of shifting maturities of securities in the System account in the effort to maintain an orderly market. In response to an inquiry, Mr. Williams said that he felt of securities in the System account be that increasing the amount 1, when the last increase in reserve requirements tween now and May be interpreted as a reversal of the will be come effective, might excess reserves of member by the Board in reducing policy followed for action was in the he felt that the real field banks, and that in which the Federal Reserve and not in any field field of prices In response to a authorized to act. or the Treasury was System wise to give the said it might be question, Mr. Williams further
executive committee considerable latitude to meet any situation that might arise before another meeting of the Committee, In the discussion which followed reference was made again to the fact that in both of the statements issued by the Board in connection with increases in reserve requirements it was expressly stated that the Board was using a relatively inflexible method of credit control which would place the System in closer touch with the situation and that it would reserve the more flexible instru ment of open market operations for use in the future as the public interest may require. It was felt by some that if it should be found desirable to increase the System portfolio for the purpose of preventing an unjustified dislocation in the securities market, such should not be regarded as a reversal of System action by the System increases in reserve requirements of member policy upon which the banks were based. some of the members that an increase in the It was felt by account might be interpreted as amount of securities in the System a signal to convert Gov inflationary policy and as evidencing an All of the members agreed holdings into equities, ernment security an increase in not now foreseen the absence of conditions that in this time, that the not be justified at System portfolio would the to make shifts under the authority continue to operate System should market, and to prevent a disorderly in the account, in securities to the be granted should authority purpose additional that for that of securities. make such shifts committee to executive
Upon motion duly made and seconded, and by unanimous vote, the Committee instructed the executive committee to direct the replace ment of maturing securities in the System open market account with other Government securities and to make such shifts between maturities in the account as may be necessary in the proper administration of the account, provided that the amount of securities maturing within two years be maintained at not less than $800,000,000 and that the amount of bonds having maturities in excess of five years be not over $800,000,000 nor less than $500,000,000. Further discussion disclosed a consensus that it would be undesirable for the System to continue indefinitely to In crease the proportion of bonds held in the System account at as great a rate as had taken place during the past week, and that, if it appeared that the prevention of a disorderly market would justify further shifts in large amounts, beyond the limits in the resolution, it might become advisable to increase the aggre gate amount of securities held in the account in order to pre serve a desirable ratio of short to long term securities in the account. committee present were in The members of the executive agreement that, if the Federal Open Market Committee should grant portfolio, such authority would authority to increase the System used unless an emergency arose which called for such action. not be form in which a reso then given to the Consideration was increases or decreases in the System lution authorizing emergency The matter was discussed in some length, account might be adopted. might take were suggested. various forms which the resolution and
The question was raised whether the executive committee would be obliged to exhaust its authority under the resolution just adopted authorizing shifts in the System account before increasing or de creasing the total amount of securities held in the account and the opinion was expressed that, while in the absence of an emer gency the committee should operate under the authority to make shifts, the executive committee should be in a position to exer cise either or both authorities to meet situations which might arise. It was suggested, however, that if the second resolution were adopted it should be made clear to the Secretary of the Treas ury that it was the plan of the executive committee to continue to act under the authority to make shifts in the account, that on the basis of the present situation there was no necessity to resort to the authority to make increases in the System portfolio, and that such action would be resorted to only in the event of the develop ment of new circumstances which, in the judgment of the executive committee, would make necessary an increase in the portfolio. Upon this understanding and in view of the by the Committee and re circumstances discussed ported herein, the Committee, upon motion duly and seconded, and by unanimous vote, author made to arrange for an in ized the executive committee in the present amount of secur crease or decrease account by not more in the System open market ities event of an emergency aris than $250,000,000 in the such action before a meeting of the ing requiring Committee can be held. Federal Open Market left the room to receive a long At this point the Chairman who was in Georgia. of the Treasury call from the Secretary distance Mr. Morgenthau inquired reported that his return the Chairman Upon
what action had been taken and that he (Chairman Eccles) advised the Secretary that the Federal Open Market Committee had been in session all day, that it had heard reviews of the present busi ness and economic situation by Messrs. Goldenweiser and Williams, that the entire situation had been discussed thoroughly, and that every effort had been made not to overlook any monetary or eco nomic factor which would influence the judgment of the Committee. He reviewed for the Secretary the transactions which had taken place in the System account today and advised him that the Com mittee had adopted a resolution authorizing the executive com mittee to direct shifts of securities in the System account, that under this authority the amount of bonds in the account with matur ities in excess of five years could be increased by approximately $250,000,000, that if such an increase were made it would reduce the amount of securities in the account having maturities within two years to approximately $800,000,000 with approximately $500,000,000 and that it was felt that it would not falling due within one year, maturities go below these amounts, as be good policy to let these System in a position where, in reduction would place the a further not be able to make a restrictive pol case of necessity, it might System account to run maturities in the icy effective by allowing replacement. The Secretary, Chairman Eccles said, con off without position on this point. curred with the Committee's he advised the Secretary also reported that Chairman Eccles executive committee authorizing the of a resolution of the adoption decrease the System to increase or event of an emergency in the
account by $250,000,000 without a further meeting of the full Com mittee. He reviewed for the information of the Secretary the con siderations which had been discussed as justifying such a resolu tion and expressed the opinion of the Committee that the present situation in the Government bond market was the result of a gen eral trend, that contributing factors were labor difficulties, armament programs and lack of confidence that the budget would be balanced, that England and Canada had gone through an adjustment resulting in increases in the yields on English and Canadian bonds to 1/2%, 3 and that the prices of corporate securities in the United States had been declining since last fall, all of which convinced the Committee that an attempt to maintain the present prices of Government securities would be a mistake, particularly in view of the fact that the trend was in the face of an abundance of funds for business purposes and was not the result of a monetary situation. Mr. Eccles said that he stated that the Committee felt that it should continue to operate through shifts of securities in the System ac count to maintain an orderly market and that the portfolio should as a last resort in an emergency which would jus be increased only and would prevent the action being interpreted as tify such action taken for the purpose of supporting the Government bond having been might have an adverse effect instead market, which interpretation the market. He also referred to the of a favorable effect upon permitted to fall too low interest rates had been possibility that whether any effort should be and stated that it was questionable which had been issued at the price of securities made to maintain
these extremely low rates, except action to prevent a disorderly market during the period of adjustment, that it was his opinion that Government securities continued to be an excellent investment with satisfactory yield and the safest investment that could be made, and that, while the investor could not be insured against the effects of wars and unforeseen conditions, if the Government would balance the budget and deal effectively with labor and arma ment problems which result in abnormal price increases, there was no question in his mind that the price of Government securities would increase instead of decline. The Secretary, Chairman Eccles said, did not disagree with this opinion and appeared to be satis fied with the position which the Committee had taken. Reference was then made to the authority granted to the executive committee at earlier meetings of the full committee to permit fluctuations in the total amount of the securities held in dates and it was agreed that the System account between statement should be renewed for reasons previously stated. this authority Upon motion duly made and seconded, and by vote, the Committee authorized the exec unanimous utive committee to permit such fluctuations, within the amount of holdings of Gov reasonable limits, in in the System open market account ernment securities statement dates as may be desirable between weekly of the account in for the practical administration between and replacements of securi making shifts authority granted by pursuant to the general ties the Federal Open Market Committee.
Thereupon at 7:00 p.m. the meeting adjourned. Approved: Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, March 13, 1937·Minutes of the Executive Committee, March 15, 1937