September 11–12, 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 Wash ington on Saturday, September 11, 1937, at 10:20 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. Wyatt, General Counsel Mr. Goldenweiser, Economist Mr. Williams, Associate Economist Mr. Dreibelbis, Assistant General Counsel Mr. Burgess, Manager of the System Open Market Account Mr. Carpenter, Assistant Secretary of the Board of Governors of the Federal Reserve System Mr. Thurston, Special Assistant to the Chairman of the Board of Governors of the Federal Reserve System Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on June 9, 1937, were approved. Upon motion duly made and seconded, and by unanimous vote, the actions of the executive committee as set forth in the minutes of the meetings of the executive committee on June 9, June 15, July 6, August 18 and September 4, 1937, were approved, ratified and confirmed. a report prepared by the Federal Reserve Mr. Burgess submitted market operations conducted by the New York Bank of New York of open
bank for the System open market account since the meeting of the Fed eral Open Market Committee on June 9 and up to and including September 10, 1937. Upon motion duly made and seconded, and by unanimous vote, the transactions covered by the report were approved, ratified and confirmed. Chairman Eccles then called on Messrs. Goldenweiser and Williams for a review of business and credit conditions. Mr. Goldenweiser stated that, while the impetus of recovery had slackened temporarily, there was as yet no evidence of a general decline or recession. In the capital market, Mr. Goldenweiser said, there had been a very definite slackening of activity with less refunding than last year and a scarcity cf new issues, and the stock market had gone through a pretty severe reaction recently. In the banking situation, the aggre gate amount of investments had gone down and the volume of deposits had decreased but not substantially. He was of the opinion that the situa tion was one where, in terms of short-term developments, there was no danger of the speculative excesses or inflationary developments that were where on the contrary there was in evidence six months ago, but, somewhat situation, partly as an immediate result a possibility that the uncertain might lead to a decline in busi the hesitation in the capital market, of magnitude. He said that the ness and to a recession of indeterminable industries, the textile industry situation was different in different and the steel down, while the automobile showing a definite slowing largely on orders high rate, the latter continuing at a industries were
received previously rather than on current orders, which had fallen off. The past year, he said, had been disappointing in the construction field which had not yet recovered to anything like the extent hoped for or to the extent necessary to provide a volume of activity which would result in little unemployment and a more lasting basis of prosperity. He stated further that prices have had a mixed movement but that the situation in this respect was not unusual at this time of the year. In general, he felt that the industrial production index was not likely to go much be low the 115 that had been anticipated but that it might fall below that figure for a month or two. He interpreted the industrial outlook over a somewhat longer period as being very good because of the present larger annual income than has been the case for several years and the existence of substantial shortages in many important industries such as construc tion, railroads, and public utilities, the expenditures of which when a large amount of buying power in the hands of those who made will place work for these concerns. he said, for modifying the policy of There was no reason, by the System in 1932 and continu monetary ease that was adopted there was less reason since that time. He believed ously maintained there was last autumn or general policy now than to deviate from that there was evidence of up very rapidly and when prices were going winter in some lines of market and in the securities speculative developments should contem that the System to him, therefore, business. It appeared a policy of counteracting such seasonal tightening plate at this time
influences as are likely to develop between now and the end of the year as a result of a prospective increase in the demand for currency of ap proximately $400,000,000 and possibly some increase in reserve require ments owing to the growth of deposits in connection with autumn trade, which would reduce excess reserves of member banks at the peak of the currency demand to between $300,000,000 and $400,000,000, while in the New York market excess reserves might be wiped out completely. He felt that, if it were still the System's policy to maintain a condition of monetary ease for the furtherance and completion of re covery, the System should be prepared to take action to make that policy effective, and if that point were made clear it would be easier to con sider the possible courses of action that might be pursued in carrying out that policy. These alternatives in his opinion were (1) A reduction in reserve requirements, (2) Action by the System in the open market, by the Treasury to desterilize gold or to modify (3) Action its policy of gold sterilization, or the System and the Treasury. of action by (4) A combination a reduction in reserve of the opinion that He was strongly virtues of any other vices and none of the had all of the requirements a reversal of the posi that it would be that could be adopted, policy not be utilized except requirements should that changes in reserve tion an inflexible in the use of it would involve and that infrequently, a seasonal situation. one, to meet of a flexible strument instead
He also said that action by the Treasury to desterilize a stated amount of gold would be better than the discontinuance of further sterilization, for the reason that in the event the latter course were pursued the extent of the action could not be determined, whereas the desterilization of a given amount of gold would increase reserves of member banks by a definite amount. The objections to desterilization, he said, were that the increase in reserves could not be counteracted except by sales out of the System portfolio, and that action by the Treasury at this time also might be interpreted as violating the principle that the Federal Reserve System has primary responsibility for credit condi tions and has adequate instruments for handling it. He then expressed the opinion that the most satisfactory action would be for the System to take such independent action through the medium of open market operations as, in its judgment, was necessary to meet the situation. He pointed out that for four or five years there had been such that there was a tendency now to a large volume of excess reserves in reserves as being of more importance than is regard fluctuations action to ease a situation more justified, and that the System regards He suggested that the System might seriously than used to be the case. of a rule of thumb as to advisability of the adoption take counsel on the desirable conditions would be likely to produce volume of reserves that the and that, if such of business activity, at different stages in the market would increase its port be determined upon, the System an amount could run off and let securities below that amount reserves fell folio when was undertaking an feeling that it exceeded it, without when reserves
operation involving a matter of major policy. He called attention to the view that at one time prevailed that the New York banks should be in debt by approximately $50,000,000, that when they were in debt more than that a condition of tightness developed and that when they were in debt less than that credit conditions were considered to be unduly easy. He felt that a much more liberal rule would have to be adopted today in furtherance of the existing easy money policy, which would contemplate not only that the banks would be out of debt but also would have a volume of reserves sufficient to make them willing to undertake legitimate financing without disposing of other earning assets, and that the System could adopt a policy of maintaining approximately $250,000,000 of excess reserves for central reserve city banks and $700,000,000 or $800,000,000 for the country as a concluded by expressing the opinion that if the System would whole. He policy it would be in a position to meet the seasonal adopt such a that he would recommend that the policy problem without difficulty and be made effective. the question, which was a difficult Mr. Williams stated that present time with a was confronted at the one, was whether the country something more serious or whether it was seasonal variation short-term would be a side-wise felt that there probably that; that he had than disappointing to which would be during this period movement for a while while, on the whole, hesitancy; and that, and would cause some some confident about was growing less that view, he inclined to he was still might be some recession. it and that there
It appeared to him that there were two influences on the situation, one of minor significance and one of greater significance. Inventories were built up last winter and early spring because of fear of rising prices, labor troubles, etc., and since that time production has been in larger volume than new orders. It had been thought, he said, that the present would be about the time when there would be some indication of when the period of hesitancy would end but that such indications were not yet in evidence. That, he added, was the kind of situation in which people become nervous and it might be that the present reaction in the stock market was a reflection of that situation. He felt that the break in the market, coming at this time, was apt to have a rather significant effect on business and might cause business men to delay activity longer than they otherwise would, resulting in a negative movement lasting longer than ordinarily would be the case. The other question, he said, had to do with the more fundamental fact that recovery could not go forward without assistance from the heavy utilities, and railroad equipment, such as building, public industries industrial income might result high agricultural and and that although than a decline, there was a possibility in a side-wise movement rather would recede before going forward. that business factors bearing on the that among the He was of the opinion that if the Administration It seemed clear were the following: matter reduction in this would be a basis there forward on the present went Government of of the expenditures year in the income-creating fiscal
$2,500,000,000 to $3,000,000,000, which is a substantial proportion of the national income, and which it had been expected would be replaced by private spending. While he had felt last spring that the time for such replacement had come, there was now a question in his mind whether that situation would materialize fully. The building situation, he said, was disappointing in that it now appeared that it not only had not gone forward during the recent period, but it seemed probable that it would recede owing chiefly to advances in construction costs. Not withstanding the fact that there was evidence of rising rents and a reduction in the number of vacancies, there was a considerable statis tical record behind the view that a sharp advance in construction costs was followed by a recession in building or a cessation of building ex pansion for a considerable period. In view of this there was a major question in his mind whether the country could count on a recovery of building to take the place of a decrease of Government income-creating expenditures. whether an increase in public Another question, he said, was on, and that although there was an utility expenditures could be relied and some evidence of pressure on facilities, increase in power consumption of all the uncertainties of the public it might develop that, because in that field would be slow in making utility situation, new expansion industry, he felt, was made appearance. The railroad equipment its the next few months. labor outlook for uncertain by the not know what conclusions stated that he did Mr. Williams then
to draw from all of these circumstances but that they indicated a distinct possibility of a recession before further recovery. He was firmly of the opinion that sooner or later recovery would be resumed but he felt unable to say whether a recession would first occur as a means of correcting some of the existing obstacles to further recovery. The major question, he said, was whether private investment in the heavy industries during this fiscal year would take the place of a substantial contraction of public spending. The Committee entered into a discussion of the business and credit situation as outlined by Messrs. Goldenweiser and Williams. Mr. Harrison suggested that the problem before the Federal Open Market Committee at this time was quite different from that under con sideration at the April and May meetings of the Committee and was related to the question whether the leveling off of the volume of business activity was the result of monetary or nonmonetary causes, whether the System appropriately could take any action which would tend to check a recession and to facilitate the continuation of recovery, and, if so, take. He was of the opinion that the causes of the what form it should in the monetary field and that there had been present situation were not in reserve requirements of member thus far that the increases no evidence had resulted in any actual restriction of credit. banks the present trend causes of of the possible During a discussion the existing situation opinion that, while expressed the Mr. Goldenweiser that action be taken causes, it was desirable was not due to monetary to economic recovery. a monetary climate favorable to maintain
In this connection consideration was given to forecasts of prob able demands for credit and currency between now and the end of the year which it was anticipated would result in substantial reductions in excess reserves of member banks and the possible elimination of excess reserves in the New York market with resulting increases in short-term money rates. Mr. Ransom said that action in the open market to counteract such a stiffening of rates would be consistent with the policy announced by the Federal Open Market Committee in the statement released to the press on April 5, 1937. There was also a discussion of the relation of the current de cline in security prices to the problem under consideration, and the probable effects of a continuation of that movement on the general busi ness situation. Mr. Ransom expressed the opinion that the anticipated year-end reduction in excess reserves was a money market problem and one in con nection with which responsibility rested on the Federal Reserve System and particularly the Federal Open Market Committee to initiate whatever action was necessary to meet the situation and to continue in effect the System policy of easy money conditions. He also felt that, for this purpose, the Committee should regard the powers existing in the Federal Reserve System and the Treasury to influence credit conditions as though they resided in one place and were available for use in determining the that, while there was no apparent action that should be taken. He stated the expectation by banks that of credit at the present time, restriction the year-end might result in conditions would exist over less easy money at a time when the part of the banks policies on the restrictive credit more
recovery movement had practically halted and there was some evidence that there might be a recession in business activity, and that the question before the Committee was whether action should be taken to assure the banks that there would be no shortage of reserves over the period of crop movements and increased currency requirements. Mr. Ransom then presented, as a basis for discussion, a draft of a resolution which would instruct the executive committee of the Federal Open Market Committee to direct the purchase in the open market from time to time of sufficient amounts of Treasury bills to offset the seasonal withdrawals of currency and other seasonal influences between now and the end of the year so that the aggregate volume of excess reserves of member banks would be continuously adequate to maintain the System's policy of furthering economic recovery through monetary ease. 1:00 p.m. the meeting recessed for luncheon and reconvened At at 2:30 p.m. with the same attendance as at the morning session. a further discussion of the possible reserve position There was the year and of the prospective between now and the end of of member banks with the movement of crops and for demands for credit in connection presented indicated that during the holiday season. Information currency be reduced to below member banks would probably excess reserves of all excess re the end of November and that by before Christmas, $400,000,000 some member banks in New York and probably have disappeared serves would earning assets. to borrow or to liquidate market might be forced in that in view of the the question whether, was given to Consideration for further progress and the necessity business picture present uncertain
in the recovery movement, the System should take any action to create additional excess reserves in conformity with its policy of maintaining easy money conditions, and whether it should make any public statement at this time. The discussion disclosed the view on the part of a majority of the members of the Committee that the situation called for affirmative action by the Federal Open Market Committee at the present time and that some public announcement of the action taken should be made. There ensued a discussion of the extent to which, and the form in which, action should be taken. The four alternatives presented by Mr. Goldenweiser during the morning session were analyzed, and suggestions were made that the System request the Treasury to desterilize a given amount of gold, which it was stated would have the effect of increasing member bank reserves relatively promptly and largely in the money centers where additional reserves would probably be needed, and that the executive committee be authorized to direct the purchase of a sufficient amount of short-term Government securities to provide such additional funds as might be needed to meet the expected reduction of reserves between now and the of the year. It was the consensus of the members of the Committee end act alone through the open market, the most that, while the System could would be the suggested joint action by the System and desirable action the Treasury. it was agreed that the Chair At the conclusion of the discussion of the Treasury whether he would man should ascertain from the Secretary $300,000,000 of inactive gold desterilize $200,000,000 or be willing to the lines of the might be adopted along part of a program which as a above suggestions.
Thereupon the meeting recessed with the understanding that it would reconvene again on September 12, 1937, at 11:00 a. m. Secretary. Approved: Chairman.
The meeting of the Federal Open Market Committee was reconvened in the offices of the Board of Governors of the Federal Reserve System in Washington on September 12, 1937, at 11:00 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. Wyatt, General Counsel Mr. Goldenweiser, Economist Mr. Williams, Associate Economist Mr. Dreibelbis, Assistant General Counsel Mr. Burgess, Manager of the System Open Market Account Mr. Carpenter, Assistant Secretary of the Board of Governors of the Federal Reserve System Mr. Thurston, Special Assistant to the Chairman of the Board of Governors of the Federal Reserve System Eccles stated that he had talked over the telephone Chairman Secretary of the Treasury, and Secretary with Mr. Wayne Taylor, Assistant suggested at the meet to the program of action Morgenthau with respect afternoon and had Committee yesterday the Federal Open Market ing of were of the opinion and the Board of Governors stated that the Committee by acting alone through could meet the situation that, while the System action would the most desirable also felt that market, it was the open Treasury. Chairman System and the action by the proposed joint be the
Eccles said that Secretary Morgenthau stated that the Treasury would be glad to cooperate in a program along the lines suggested and that he would take the necessary steps to release gold from the inactive account to the extent of $300,000,000 upon being advised of the adoption of the proposed program. During the discussion of the proposed program there were presented the following resolutions: RESOLVED, That, until the adjournment of the next meeting of the Committee, the executive com mittee is authorized to direct the purchase in the open market from time to time of sufficient amounts of Treasury bills or other short-term Treasury obligations to provide funds to meet seasonal withdrawals of currency from the banks and other seasonal requirements, for the purpose of maintaining at member banks an aggregate volume of excess reserves adequate for the con tinuation of the System's policy of furthering economic recovery through monetary ease; and the executive committee is authorized from time to time to direct a reduction of the holdings of such obligations when the seasonal influences are reversed or if other influences make their retention unnecessary for the purposes of this It is understood that the executive resolution. committee, in the exercise of this authority, will or decrease by more than $300,000,000 not increase now in the System open the amount of securities without another meeting of the Fed market account eral Open Market Committee. with a view to cooperation RESOLVED, That, in the above the policy declared in effectuating recommend to the Board resolution the Committee Reserve System that Governors of the Federal of of the Treasury favor it request the Secretary of approxi consider the desterilization ably to of gold out of the Treasury mately $300,000,000
inactive account, the time and method of such desterilization to be determined by the Secretary of the Treasury in consultation and cooperation with the executive committee of the Federal Open Market Committee. Upon motion duly made and seconded, the foregoing resolutions were adopted by unanimous vote. The meeting then recessed with the understanding that the Board of Governors would convene to consider the request of the Fed eral Open Market Committee that the Board request the Treasury to de sterilize $300,000,000 of gold. Following this recess the Committee reconvened with the same attendance as at the earlier session and the Chairman stated that the Board of Governors had voted unanimously to act in accordance with the request of the Federal Open Market Committee. Thereupon consideration was given to the form of statement to be issued to the press regarding the action taken by the System, and the following statement was approved unani mously for release in the morning papers of September 13, 1937, with the understanding that before such release the Chairman would ascertain that the Secretary of the Treasury approved the portion of the statement regard ing the agreement on his part to release gold from the inactive account: "The Federal Open Market Committee met in Washington reviewed the business and credit on September 11 and 12 and expected seasonal demands on the situation. In view of the during the coming weeks for currency and credit banks the Committee authorized its Executive Committee to pur sufficient amounts time to time open market from chase in the
"of short term U. S. Government obligations to provide funds to meet seasonal withdrawals of currency from the banks and other seasonal requirements. Reduction of the additional holdings in the open market portfolio is con templated when the seasonal influences are reversed or other circumstances make their retention unnecessary. "The purpose of this action is to maintain at member banks an aggregate volume of excess reserves adequate for the continuation of the System's policy of monetary ease for the furtherance of economic recovery. "As a further means of making this policy effective, the Open Market Committee recommended that the Board of Governors of the Federal Reserve System request the Secre tary of the Treasury to release approximately $300,000,000 of gold from the Treasury's inactive account. The Board of Governors acted upon this recommendation and the Secre tary of the Treasury agreed to release at once the desired amount of gold. This will place an equivalent amount of funds at the disposal of the banks and correspondingly in crease their available reserves. "This action is in conformity with the usual policy of the System to facilitate the financing of orderly mar keting of crops and of autumn trade. Together with the recent reductions of discount rates at the several Federal Reserve banks, it will enable the banks to meet readily any increased seasonal demands for credit and currency and of easy credit conditions." contribute to the continuation in the opinion that the of the Committee concurred The members to the executive committee authority previously granted reasons for the of securities in the securities and to make shifts to replace maturing account were still present and that the authority System open market 9, 1937, should be re of the Committee on June granted at the meeting newed. made and seconded, and by Upon motion duly the ex the Committee instructed unanimous vote, the replacement of ecutive committee to direct the System open market acmaturing securities in
count 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 $1,000,000,000 and that the amount of bonds having maturities in excess of five years be not over $850,000,00 nor less than $500,000,000. Reference was made to the question of quarterly readjust ments of participations of the Federal reserve banks in the securi ties held in the System open market account and to the consideration which had been given to the matter by the executive committee since the meeting of the full Committee on June 9, 1937. It was agreed unanimously that further con sideration of the matter by the Federal Open Mar ket Committee should be deferred until the next meeting of the committee. The Chairman withdrew from the meeting at this point to ad vise the Secretary of the Treasury of the action taken by the Fed eral Open Market Committee and the Board of Governors with respect of gold and by the Committee with respect to to the desterilization to offset seasonal influences. purchase of Government securities the had read to the Secre stated that he his return, the Chairman Upon statement and that the Treasury the proposed press tary of the to him and that it was very satisfactory Secretary had stated reserve banks gold at once with the Federal that he would deposit with the expectation in the amount of $300,000,000, certificates banks in the from the Reserve would be withdrawn that the funds used to meet Treasury or three weeks and of the next two course
expenditures. In the circumstances, Chairman Eccles said, the Secretary suggested that it would not be necessary for the executive committee to confer with him regarding the matter. The procedure outlined by the Secre tary of the Treasury was approved unani mously. Thereupon the meeting adjourned. Secretary. Approved: Chairman.
Also: Record of Policy Actions·Minutes of the Executive Committee, June 15, 1937·Minutes of the Executive Committee, July 6, 1937·Minutes of the Executive Committee, August 18, 1937·Minutes of the Executive Committee, September 4, 1937·Minutes of the Executive Committee, September 12, 1937