May 4–5, 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 Tuesday, May 4, 1937, at 11:00 a. m. PRESENT: Mr. Harrison, Vice Chairman Mr. Broderick Mr. Szymczak Mr. McKee Mr. Ransom Mr. Davis Mr. Sinclair Mr. McKinney Mr. Martin Mr. Day Mr. Morrill, Secretary Mr. Wyatt, General Counsel Mr. Dreibelbis, Assistant General Counsel Mr. Williams, Associate Economist Mr. Carpenter, Assistant Secretary of the Board of Governors Mr. Thurston, Special Assistant to the Chairman of the Board of Governors The Secretary reported that Mr. Day, who was attending a meeting of the Federal Open Market Committee for the first time, had filed the required oath of office as a member of the Federal Open Market Committee and that it was the opinion of the Committee's counsel that Mr. Day had duly qualified to participate in the meeting. Consideration was given to suggestions which had been made with respect to the form of the minutes of the Federal Open Market Committee and particularly to the suggestions that the Committee agree that the minutes be prepared in less detail, that whenever an agreement is reached or a position taken by the Committee the agreement or action be expressed or resolution and voted upon, so that it may be so as a formal motion recorded in the minutes, and that individual statements of opinion or
position be omitted from the record, unless the person making the state ments requests that it be incorporated in the minutes in which case the authorship should be shown. During the discussion the Committee considered the questions (1) whether the present form of minutes should be continued, (2) whether the changes referred to above should be made in the present form, (3) whether the minutes should be prepared in a brief form which would state only the actions taken with the votes thereon followed by the reasons and any explanatory discussion that might be necessary, and (4) whether a full stenographic report should be made of the Committee's proceedings. At the conclusion of the discussion Mr. McKee moved that the vice chairman appoint a committee to consider the entire matter and submit a recom mendation to the Federal Open Market Committee. This motion having been duly seconded was put by the chair and carried by unanimous vote. In accordance with this action Mr. Harrison appointed Messrs. Ransom, Davis and Sinclair as members of the committee. duly made and seconded and by Upon motion unanimous vote, the minutes of the meeting of the Committee held on March 15, Federal Open Market 1937, were approved. and seconded and by Upon motion duly made actions of the executive com unanimous vote the Market Committee as mittee of the Federal Open of the meetings of the set forth in the minutes on March 13, 15, and 22-23, executive committee and confirmed. approved, ratified 1937, were the Federal Reserve prepared by submitted a report Mr. Harrison account since System open market operations in the of New York of Bank operations had 3-4, 1937, which Committee on April the meeting of the made by the bank. the weekly reports in detail in been reported
Upon motion duly made and seconded and by unanimous vote the transactions referred to in the report were approved, ratified and confirmed. The question was raised whether the Committee should take any action at this time with respect to directing a quarterly readjustment, as of July 1, 1937, of the participations of the Federal reserve banks in the System open market account and in that connection reference was made to the report of Mr. Burgess, Manager of the System Open Market Account, at the last meeting of the Federal Open Market Committee, that, in the event of further depreciation in the System account, some of the Federal reserve banks might desire that the entire matter of adjust ment of participations in the account be reconsidered before the next quarterly readjustment date. Upon motion duly made and seconded and by unanimous vote, action on the matter was deferred with the understanding that Mr. Smead, Chief of the Division of Bank Operations of the Board of Governors, and Mr. Burgess or Mr. Sproul, of the Federal Reserve Bank of New York, would be re to study the questions which might arise quested in connection with the next quarterly readjustment and to submit a report which would be sent by the Presidents' Conference for con Secretary to the and a recommendation as to the action sideration to be taken. m. the meeting recessed and reconvened at 2:35 p.m. At 12:10 p. with the same attendance as at the morning session and, in addition, Economist for the Federal Open Chairman Eccles and Mr. Goldenweiser, Market Committee. as to present business a request for a statement In response to that conditions had undergone Mr. Williams said and credit conditions which tie he in March at of the Committee since the meeting a change
was fearful that the recovery movement was proceeding too rapidly and that it might turn into a disorderly upward movement which might result in price spirals and dislocations which would be distinctly harmful. He stated that, during the interim since the last meeting of the Committee, the movement had leveled out with some reduction in prices both at home and abroad and a more orderly condition had appeared, so that there seemed to be much less likelihood of a runaway movement than was the case a month or two ago. He referred to statements made by some economists that the present uninterrupted recovery movement was the longest on record and that, therefore, a recession could be expected, and stated that while the records of past recoveries and reactions might indicate that a decline in business activity could be expected he did not feel that such a conclusion should be drawn from the present situation. He because of the many uncertain factors in the situation it stated that to forecast what the future would was difficult, if not impossible, to be a strong under felt, because of what appeared bring, but that he goods, that the continuation particularly durable lying demand for goods, might reasonably be expected. of recovery draw from this situation, conclusion that he would The general present time for was no need at the said, was that there Mr. Williams by the Fed policy by the adoption the present easy money a change in nor for any action restrictive measures System of any eral Reserve of business activity. in further stimulation which would result had been a that there the fact that, notwithstanding He stated had been little there business improvement, period of sustained long
progress made in reducing expenditures and that, if the budget were not balanced under the existing favorable conditions and a reaction should set in which would increase the relief burden and reduce revenue, a serious situation might result, and that therefore he welcomed the present movement toward reduction in Government expenditures. He added that, inasmuch as the period of adjustment to the May 1 increase in reserve requirements was past, or nearly so, he did not see any necessity for continuing purchases of Government securities, that such action would result in further easing the situation which he did not feel was justified at this time, and that the question before the Committee was whether it would take the position that further stimulation, which might prove to be dangerous to the progress of orderly recovery, would be justified in order to prevent disorderly securities market should such conditions conditions in the Government follow a middle course which He felt that the System should develop. movement nor add further no restriction to the present would result in stimulation to it. he was in general agreement with Mr. Goldenweiser stated that opinion that, as the business and expressed the Mr. Williams' position and responded more quickly world was much more sensitive and financial the case in the past, the conditions than had been to changing control were much at hand for credit which the System had instruments situation at the business and credit in influencing the more effective ago. As an the case some years would have been present time than recent rumor concerning he referred to a of this fact, illustration resulted in of gold which in the price of a reduction the possibility
a substantial decline in the prices of commodities traded in on the international markets and a recession in world business activity. In these circumstances, he said, he felt more hopeful that the instruments available to the System would be effective in the field of credit control and that in view of this situation he felt the System should not give too much attention to records of past movements but should analyze existing conditions carefully and reach a decision on that basis as to what should be done. In connection with the question of Government expenditures, he agreed with Mr. Williams that it was desirable to balance the budget, but he felt that the entire matter of Government expenditures should be reviewed for the purpose of determining in what fields money should be spent. He said that the emphasis should be shifted from the total volume of expenditures, which may have been justified in the period of "pump-priming", to the nature of expenditures. He thought, on the other hand, that if it were found that a large volume of funds were needed to meet the relief problem adequately, this could be accomplished without inflation if such expenditures were met by increased taxation. any great possibility at this time of a new period of He did not see debt at a high level, and he setting in with the Government depression that the budget situation, with the possi expressed a further opinion relatively small deficit for the fiscal year 1938, was a bility of a was not in any real danger of a definite indication that the country of general inflation. period inasmuch as it has been by emphasizing that, He concluded an influence on been used to exert which had that the powers shown
credit conditions had worked more effectively than some had anticipated, he felt that the responsibility of the System to use its powers wisely was greatly increased. After a statement by Mr. Williams with respect to the present position of gold in the world monetary picture there was a general dis cussion of the effect of the continued inflow of gold into the United States on the monetary and credit situation, the reasons for the con tinued inflow, and steps that might be taken to meet the problem. There was also a discussion of the questions which would arise if the Treasury should consider it necessary or desirable to discontinue the present policy of sterilizing gold. At the conclusion of the discussion the meeting recessed to convene again on May 5, 1937. Secretary. Approved: Chairman,
The meeting of the Federal Open Market Committee was recon vened in the offices of the Board of Governors of the Federal Reserve System in Washington on Wednesday, May 5, 1957, at 10:50 a.m. PRESENT: Mr. Eccles, Chairman Mr. Harrison, Vice Chairman Mr. Broderick Mr. Szymczak Mr. McKee Mr. Ransom Mr. Davis Mr. Sinclair Mr. McKinney Mr. Martin Mr. Day Mr. Morrill, Secretary Mr. Goldenweiser, Economist Mr. Williams, Associate Economist Mr. Wyatt, General Counsel Mr. Carpenter, Assistant Secretary of the Board of Governors Mr. Thurston, Special Assistant to the Chairman of the Board of Governors There ensued a general discussion of open market policy and the directions to be given to the executive committee to effect trans actions in the System open market account. Upon motion duly made and seconded, and by unani mous vote, the Committee instructed the executive com mittee to direct the replacement of maturing securi ties in the System open market account with other Govern ment securities and to make such shifts between maturi account as may be necessary in the proper ad ties in the of the account, provided that the amount of ministration within two years be maintained at not securities maturing and that the amount of bonds less than $1,000,000,000 maturities in excess of five years be not over having $850,000,000 nor less than $500,000,000. to which author of the extent During a discussion committee to increase be given to the executive ity should
or decrease the total amount of securities held in the System account, Mr. Davis moved that the Committee di rect the executive committee to make purchases and sales (including authority to allow maturities to run off) of United States Government securities for the System open market account to such extent as may be necessary before the adjournment of the next meeting of the Federal Open Market Committee, for the purpose of preventing disorderly market conditions, provided that the aggregate amount of securities held in the account shall not be increased to an amount exceeding $2,680,000,000 nor decreased to an amount less than $2,180,000,000; the kinds and maturities of the secur ities acquired or sold to be determined in the light of current market developments. Mr. Harrison referred to the resolution of similar nature adopted by the Federal Open Market Committee on April 4 and to the actions taken by the executive committee under that authority, and he inquired whether, if the motion offered by Mr. Davis were carried it would be the intention of the full Committee that the executive com mittee would have authority to decrease as well as increase the ac be any restriction on the executive com count, whether there would in the account within the limitations mittee with respect to reductions whether it would be expected that provided in the new authority, or would be called before the account another meeting of the Committee could be decreased. that each member of the Committee should state It was agreed views on the questions raised by Mr. Harrison. his feel it would be advis stated that he did not Chairman Eccles able to reduce the portfolio by more than a small amount, although he merely for the purpose of accustoming did not object to slight reductions
the public to changes in the account, but that he was of the opinion that it would be unwise to make any substantial reduction in the ac count until the budget was more nearly balanced and the gold problem was nearer a solution than was the case at the present time. He fa vored the process of shifting maturities of securities in the System account to the fullest extent possible in order to prevent disorderly market conditions. He stated that he would if necessary increase the portfolio by purchases in the market of Treasury bills at the time of a new offering of bills, with the understanding that securities equal to the amount of bills acquired would be disposed of as soon as pos. sible thereafter, and that he would also favor temporary increases in the System account with a view to preventing disorderly conditions over a quarterly income tax payment period or Treasury financing per iod, with the understanding that securities in an amount substantially equal to the amounts purchased would be disposed of as soon as the mar ket had adjusted itself to the shifts of funds during such period. Mr. Martin stated that it had been his understanding that the procedure under which the executive committee had operated was that the full Committee determined the policy that should be followed in the that under the instructions of the full light of existing conditions, comittee carried out operations in accordance Committee the executive should become necessary to reconsider with that policy, and that if it full Committee would be called another meeting of the policy matters
5/5/37 -4, and the executive committee given further instructions. He expressed the opinion that under existing conditions the executive committee should be authorized to increase or decrease the account in such man ner as would be in accordance with the policy of preventing disorderly market conditions. Mr. Harrison stated that he would vote for Mr. Davis' motion on the ground that he believed it always advisable for the executive com mittee to be prepared to act promptly in exercising its influence toward preventing, as far as possible, disorderly money market conditions. He also stated that in voting for the resolution it was his understanding that the motion was intended to enable the executive committee to act equally freely and flexibly either by making purchases or sales of secur ities, in carrying out this purpose. He added that if, in the course of routine operations by the System designed to prevent a disorderly market, money rates should change substantially or become too high or too low economy, whether because of budgetary pol for the good of the country's for any other reason, then, he felt, there should icy or gold policy or Federal Open Market Committee to consider major be another meeting of the credit policy. proposed motion was the language of the McKinney said that Mr. should be taken into con none of the factors that clear; that it set out in the ac except that transactions the executive committee sideration by market con of preventing disorderly be for the purpose count should committee to was on the executive the burden ditions; that, therefore,
consider the desirability of sales as well as the desirability of pur chases for the purpose stated; and that the motion would leave to the executive committee the determination of what constituted disorderly market conditions. He also said that, if a question with respect to influencing interest rates or some other matter of general policy should arise, a meeting of the full Committee should be held to ex plore the problem. Mr. Szymczak said that, when the Board of Governors adopted the policy of increasing reserve requirements, that action was taken because of the amount of excess reserves which provided a base for credit expansion beyond the needs of commerce, industry and agriculture. The action, he said, placed the System in a position to take action in the open market, and he had felt that action in the open market would be taken only when further excess reserves were to be absorbed, or when a reversal of the anti-inflationary policy was to be adopted for the purpose of making possible further expansion of credit in accordance with the needs of industry, commerce and agriculture. Since then, how presented that would show the need of ever, there has been no evidence Board, when the increase in re of the policy adopted by the reversal He did not feel that the System serve requirements was announced. of the Government secur responsibility for the condition could assume in view of the fact that other factors, in ities market, particularly beyond the control of budget problems, which were cluding the gold and
the Federal Reserve System but which must be taken into consideration in determining System policies, had a direct effect on the condition of the market. Since the System's Open Market Committee has recently adopted a policy of increasing its open market portfolio, not with the purpose of reversing its anti-inflationary policy, but to ease the condition of the market over the period of adjustment to the May first increase in reserve requirements, and since May first has passed, there remained only the question of continuing the policy of preventing disorderly market conditions. He felt, therefore, that the Committee should now sell or allow to run off, as well as purchase, Government securities in accordance with that policy. He also stated that he felt discretionary power should be given to the executive committee to pur chase, sell or allow to run off, securities within the limitations fixed by the full committee. did not think that at this particular time the Mr. Sinclair measures. He also expressed the System should apply any restrictive to open market operations as a that when reference was made opinion should mean just that and that of control the term flexible instrument ways according to con to use the instrument both the System intended his view that the day to day. It was money market from ditions in the not, without a proposed motion should committee under the executive endeavor to stem by the full Committee, declaration of policy further limit itself primarily interest rates, but should changes in trends of
to offsetting sudden and drastic changes in rates either way, which was his understanding as to what was meant by "preventing disorderly market conditions". He said that the causes of such conditions may be manifold, such as those arising out of the gold or budget problems or the exigencies of government financing; that the executive committee should, by purchases and sales, meet opportunities to steady the market in these respects, but should not attempt to support the market the trends in which may be affected by underlying causes over which the committee can have no con trol or but little influence, He added that with this brief statement of his view as to what he considered to be the function of the executive committee under the motion, he would vote in favor of its adoption. Mr. Ransom stated that he would support Mr. Davis' motion but that he thought it could be worded somewhat differently to state more nearly the thoughts which had been expressed and certainly his own views. He did not think the general question of interest rates could be disassociated from order or disorder in the Government securities expressed agreement with the opinion that there were other market and he question and the budget situ including the gold very important factors, beyond control of the System except as ation in particular, which were He said that, now that the was able to influence them indirectly. it become effective, he did not in reserve requirements had 'ay 1 increase Federal Open Makket Committee be the policy of the anticipate it would of increasing reserves, and the portfolio for the purpose to increase be able to function committee might he felt the executive that, while
more happily with more definite authority than that contained in the mandate incorporated in Mr. Davis' motion, he did not have at the time any specific suggestions to offer, Mr. Davis expressed the opinion that the Committee's action should be treated as nearly as possible as a routine matter and in a way that would attract as little attention as possible. He said he would not be disturbed if the total amount of securities in the ac count dropped below the existing level; that he did not believe the proposed motion would authorize the executive committee to use the authority to bring about a progressive increase in interest rates; and that he favored continuing authority in the executive committee to change the total amount of securities in the account should conditions warrant and to prevent the total from again becoming fixed. He said preferred having the executive committee maintain the status that he he would not want the total of the quo as far as possible and that by an amount that could be regarded as a change in account decreased in a hardening in rates. The account, he policy or that might result disorderly rise as well as a should be operated to prevent a said, in the Government securities market. disorderly fall vote for the resolution in order Mr. Day stated that he would the opportunity, in its discretion, to to give the executive committee the day as such demands to meet the demands of fluctuate the account disorderly market with the policy of preventing arise in connection
conditions. He felt that, should a substantial change in the situation occur which would require a reconsideration of policy, a meeting of the full Committee should be held. He interpreted the resolution not as an authority to influence money rates or security prices but as authority to effect transactions in the System open market account with a view to maintaining orderly conditions in the Government security market which might require sales as well as purchases of Government securities for the account. Mr. McKee said he was ready to vote in favor of the motion pro posed by Mr. Davis, believing it to be a continuation of the authority given to the executive committee by the full Committee at the meeting on April 4, 1957. He expressed the hope, however, that it would not be necessary to further increase the portfolio if the authority were re newed, and that an opportunity would be presented for some decrease in the account through sales or allowing maturities to run off. He ex that in the past the open market portfolio had been pressed the opinion allowed to remain in a static condition for an undesirable length of a condition in the future should be time, that the recurrence of such Committee should take advantage of opportunities avoided, and that the in the portfolio as might be made to make such reasonable reductions He also stated that one of creating disorder in the market. without the portfolio at the time for voting in favor of increasing his reasons was predicated on Federal Open Market Committee action was taken by the would continue its present gold the understanding that the Treasury
sterilization policy, and that, if and when the Treasury saw fit to change such policy, he believed it advisable for the full Committee to meet immediately after notice of such change for the purpose of considering the advisability of decreasing its portfolio so as to counteract any adverse effect on the volume of reserves caused by a reversal of the policy referred to. Mr. Broderick favored Mr. Davis' motion. He said that gen eral open market policy was determined by the Open Market Committee, that the executive Committee, as the operating body, must be given discretionary power to operate within the limits of the general au thority in order to be able to meet changing market and business con ditions, and that this procedure was necessary because of daily uncer tainties as well as psychological reactions. He also said that in this connection he was looking forward with great interest to the re action on Wednesday of this week to the weekly statement of condition of Federal reserve banks which will show no increase in the portfolio over the previous week. He did not think the System could peg the market nor exercise control, but could only influence the trend and check the pace. It was his impression that, in the future, attention would not be focused on the aggregate amount of securities in the port folio but rather on the amount of long term bonds, and that changes in maturities would not be of as great importance as the changes in holdings of long term bonds. As to the Treasury bill market, he ex pressed the opinion that there should be a wider market, of interest
to banks in sections of the country other than New York where the mar ket is now largely concentrated; that it may be that the 9 months maturities are too long to be attractive; that it might be well to try 3 and 6 months maturities; that the banks need short term bills to balance their position; that the System should always be interested in the success of Treasury bill offerings, but should not give, nor be requested to give, a guaranty that it would stand prepared to make such offerings successful; and that a better way of arriving at the desired result would be to increase interest in the bill market through a wider participation by banks and investors throughout the country. Mr. Goldenweiser stated that he felt that the proposed motion was not adequate, that there was clearly a policy issue before the Committee whether the authority to be granted should be used merely to see that no violent fluctuations were permitted to occur or whether the Committee wished to use its influence to maintain easy money con low money rates, and that the full Committee should take ditions and a position on this issue. At this point Mr. Dreibelbis, Assistant General Counsel, joined the meeting. At the conclusion of the ensuing discussion, Mr. Davis' motion, having been duly seconded, was put by the chair and carried unanimously. Thereupon the meeting adjourned. Approved: Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, April 6, 1937·Minutes of the Executive Committee, April 20, 1937·Minutes of the Executive Committee, April 26, 1937·Minutes of the Executive Committee, May 5, 1937