FOMC Minutes
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CONFIDENTIAL
MINUTBS OF THE MEETING OF THE FEDERAL OPEN MARKET COMMITTEE
HELD AT WASHINGTON, D. C., DECEMBER 17-18, 1935_____
The meeting was called to order on December 17 at 10:10 a,‘m.‘, there
being present:
From the Board of Governors of the Federal Reserve System,
Chairman Eccles,
Governors Hamlin, Miller, James, O ’Connor, Thomas and Szytoczak.
From the Federal reserve banks $
Governor Harrison, chairman, Governors Young, Norris, Fleming,
Seay, Newton, Schaller, Martin, Geery, Hamilton, McKinney,
and Calkins *
Deputy Governor Burgess.
Messrs. Williams (New York) and Strater (Cleveland).
From the staff of the Board of Governors,
Messrs. Morrill, Clayton, Goldenweiser, Thurston, Thomas,
Curry, Gardner, Garfield, Bethea, Carpenter, and Thompson,
Governor Harrison stated that it was proposed that this first joint meet
ing with the Board of Governors should be devoted to hearing the reports of
specialists who had been studying the credit and financial situation and the problems
before the System.
He then turned the meeting over to Chairman Eccles, who first
called upon Dr. Goldenweiser for a review of the credit situation*
Dr. Goldenweiser then reviewed fully various aspects of the business and
credit situation and discussed alternative policies which might be adopted by the
Federal Reserve System.
After the completion of Dr. Goldenweiserfs statement, there ensued a
brief general discussion of some of the points in his statement.
Chairman Eccles then called upon Dr. Williams, who reviewed the general
question of excess reserves and the methods which might be adopted for dealing with
them*
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At the conclusion of Dr. Williams1 statement, there was a brief general
discussion and a number of those present asked questions which were answered by
Dr* Goldenweiser and Dr. Williams.
In the course of the discussion Mr. Miller pointed out that the powers
granted by the law to raise reserve requirements were granted "to prevent injurious
credit expansion.”
Mr. Miller raised the question how far action under this law
could be justified at a time when no injurious expansion had yet taken place, and
there was some brief discussion of this question in the course of which Dr.
Goldenweiser suggested that the discussions at the time the legislation was passed
made it clear that the legislation was specifically directed to dealing with the
problem of excess bank reserves.
Others pointed out that the power was one of
prevention rather than correction and this implied action in advance of expansion.
At 11:50 a. m . , the Board of Governors of the Federal Reserve System and
staff members left and the meeting reconvened with only the representatives of the
Federal reserve banks present.
A final form of the preliminary memorandum on credit conditions was
distributed in substitution for the tentative draft which had been circulated by
mail.
It was thereupon unanimously
VOTED that the report on operation be accepted and placed
on file and the operations since the last meeting of the
full committee be ratified.
It was also unanimously
VOTED that the preliminary memorandum in its final form be
accepted and placed on file.
Governor Harrison reviewed the action of the Board of Governors on the
resolution adopted at the last meeting of the committee as to shifts between
maturities of government securities in System account.
He reported that at first
the Board had limited its approval to the action necessary to replace maturities
between the date of approval and the next meeting of the committee, and that when
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the difficulty of operating under that approval had been pointed out, the Board had
reinterpreted its action to extend its approval to shifts in maturities of Treasury
bills and Treasury notes in an aggregate amount not exceeding $300,000,000.
Governor Harrison reported that he had made this question the occasion for dis
cussing with Chairman Eccles the desirable procedure to be followed with respect to
questions of this sort, and had pointed out that just as the committee gave the
Board an opportunity to make suggestions with respect to its minutes and the form
of its resolutions, it was also desirable that the Board of Governors should give
the committee an opportunity to make suggestions with regard to proposed Board
action before it was finally taken.
Gheririnan Eccles had informally agreed to this
suggestion.
After some informal discussion of the action which the committee should
take with resppct to operating authorities, it was agreed to leave such action un*r
til after a consideration of general credit policy.
Governor Young then raised the question whether the committee did not
have before it the resolution adopted by the Federal Advisory Council, which had
asked that its action be referred to the Federal Open Market Committee.
Governor Harrison re-Qorted that he had requested the Board to send a copy
of the resolution of the Federal Advisory Council to all governors and he read the
letter from Chairman Eccles, with which the Councilrs recommendation had been
transmitted to him as chairman of the Open Market Committee.
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^After further informal discussion of the Council’s action, Governor Norris
presented the following resolution which was seconded by Governor Young,
form includes later changes).
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That the participation of the Federal Reserve System
in the Treasury Bill market no longer serves any useful
purpose; that the System retire from this market by allowing
the present holdings of these Bills to run off as they mature
and that public notice be given to that effect, with such
explanatory statement as may seem advisable.
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PI n discussing the motion, Governor Norris pointed out that while action
was not necessary, it was highly desirable as the excess reserves constituted a
source of danger.
He indicated that even now there was some evidence of inflation
ary results from the excess reserves, especially in the bond market, where a
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Z 3/4fo bond of a rural county seat could be sold at a premium.
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This kind of situa
tion constituted an incentive to communities to spend money unwisely^
Governor Norris stated the belief that a reduction in the Treasury bill
holdings of the Federal reserve banks would have a more desirable effect on the
public, the Treasury, the banks, and the reserve banks than an increase in reserve
requirements, which he believed would make banks more cautious in making loans and
would constitute a hardship on some banks with only moderate amounts of excess
reserves.
He believed that the limitation of any reduction in securities to the
Treasury bill market would avoid most of the possible harmful effects.
With respect
to the earnings of the reserve banks, he pointed out that an addition of
50,000,000 to the five year note holdings of the banks would bring in as much yield
as $500,000,000 of Treasury bills.
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\There ensued a general discussion of Governor Norris’ resolution, during
the course of #iich Governor McKinney pointed out that country banks had available
considerable excess funds outside of their excess reserves on deposit with the re
serve banks, and Governor Calkins raised the objection that the resolution attempted
to lay down a policy for eight months ahead, which went beyond the province of the
present committee.
There was further objection that the Treasury bill was almost
ideal for holding by the Federal Reserve System and it was undesirable that the
System should dispose of all of its Treasury bills.
Governor Calkins also raised
the point that any action, either in reserves or securities, mi^ht be misinterpreted
as a reversal of policy, and that the most that should be considered would be some
very moderate and tentative proposal.
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Governor Martin read a statement, a copy of which is attached to these
minutes, advocating that no action should be taken at the present time because of
danger of discouraging efforts toward recovery.
The meeting adjourned at 1:17 p. m.
The meeting reconvened at 2:37 p. m.
Governor Norris* motion was reread, in slightly revised forir from the
first reading and there ensued a general discussion of this resolution and of the
reasons which might be cited in its support in the record of the committee.
pin the course of discussion Governor Harrison pointed out that in order
to deal fully with the problem of excess reserves, it will probably be necessary,
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sooner or later, to use both methods of control.
He raised the question of what
would be the effect on banks if reserve requirements are increased after the sale
of a large amount of government securities had materially reduced the amount of
excess reserves leaving individual banks less prepared to stand an increase in
requirement
Governors Norris and Calkins took the position that the more flexible
method should be used first and the more rigid method afterwards, whereas Governor
Harrison favored the adjustment of reserve requirements first, leaving later ad
justments to be made by open market operations.
Governor Seay made the point that allowing maturities of bills to run off
would not have any appreciable effect on the amount of excess reserves.
Governor Harrison presented for consideration the question whether there
might be any advantage in adjourning until the middle of January, when some present
uncertainties might be more clear, including,
1.
The effect of the removal from the market of more than
$>600,000,000 by the Treasury through an increase in
its balances with the reserve banks.
2.
The nature of the budget message.
3.
The extent that business might be affected by a slack season.
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After further general discussion, Governor Harrison asked and received
permission to read a memorandum on Excess Reserves and Federal Reserve Policy.
A
copy is attached to the minutes.
Aft er some further discussion a vote was taken on Governor Norris’
resolution and it failed of adoption by a vote of seven to five, as follows:
Yes
Governors Young
Norris
Schaller
Geery
Hamilton
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No
Governors Harrison
Fleming
Seay
Newton
Martin
McKinney
Calkins
Governor Calkins wished the records to show that he voted no because the
resolution would commit the System too far into the future.^/
Governors McKinney and Harrison wished the record to show that they be
lieved an increase in reserves should precede a reduction in security holdings as
a means of reducing excess reserves.
Governor Martin then presented, tentatively, for consideration, the
following motion:
At this time the danger of discouraging recovery is of
such weight that it is desirable to take no action until the
general factors in the business situation become more settled.
The possibility at this time has not developed into a probability
though it may do so at any time. It is therefore moved that
this meeting adjourn until some day in the middle of January for
a review of the situation.
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After further discussion Governor Schaller read the following motion,
which had been agreed to by the board of directors of the)Chicago/ reserve bank:
After a careful review of the report of the meeting
of the Federal Open Market Committee held in Washington, D. C.,
October 22 to October 24, 1935, inclusive, and presented to us
by our member of that committee, the Board of Directors of the
Federal Reserve Bank of Chicago expresses concurrence in the
conclusions reached at said meeting and especially as set out
in the resolution prepared and delivered to the Board of
Governors.
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This Board fully realizes that the application of any
of the methods of credit control suggested lie within the power
of the Treasury Department and the Board of Governors, to be
used wben, in their judgment, it is necessary. However, in a
spirit of cooperation with both of these agencies we desire to
call their attention to a feeling of growing uneasiness in the
minds of the public as to possible credit inflation, caused by
repeated reference to this danger by our press and public
speakers.
We cannot help but feel that for the moment our great
est potential danger is from our excessively large bank reserves,
caused by a rapid rise in bank deposits, through gold imports
and governmental financing, the control of which might well be
considered our first objective.
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We, therefore, as a Board, desire to respectfully
suggest for earnest consideration by the Board of Governors of
the Federal Reserve System, an increase in reQuired reserves
against bank deposits in Central Reserve and Reserve City banks
to possibly twenty-five per cent of the increase now permitted
by law, thereby not only fortifying our banking structure to
this extent, but giving assurance to business and the public that
the levers of control are operative and in the hands of authori
ties who are reedy to use them. We believe that such action ac
companied by a proper statement of its objectives would be
favorably interpreted by the financial and business interests
rather than otherwise.
We recognize that in addition to the measure referred
to, that of an increase in required reserves, consideration may
properly be given to another effective power in the control of
inflationary tendencies, under which credit may be withdrawn
from the market either by the sale or by the maturity without
replacement of Government securities held in the Federal Reserve
System. However, because it is considered that the application
of such a measure might be reflected in the market for Government
bonds at this particular time, we are disposed to suggest the
primary consideration of an increase in reserve requirements.
There ensued a discussion of these different proposals.
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The discussion of this general question was suspended in order to deal
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with the necessary operating resolutions.
After discussion it was agreed that authority voted to the executive
committee of the Federal Open Market Committee at two previous meetings to make
shifts of maturities in the System open market account, should be continued as nec
essary in the proper administration of the account to enable the executive committee
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to replace maturities from time to time and to make shifts in maturities to meet
changing market conditions.
With respect to the amount of authority which the
committee should have in shifting from shorter maturities to bonds, it was agreed
that some limited authority was advisable in order to deal with any market situation
that might arise.
It was therefore unanimously
VOTED that superseding previous authorizations, the executive
committee be authorized to make shifts between maturities of
government securities up to $300,000,000, 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
be not over $300,000,000.
It was also agreed that authority should be given to the executive com
mittee to buy or sell (which would include authority to allow maturities to run off)
securities for System account within limits as to amount, in order that the com
mittee might be in a position to act promptly if circumstances not now foreseen
should make action appear desirable before a further meeting of the full committee.
It was therefore unanimously
VOTED that the executive committee be authorized to buy
or sell up to $250,000,000 of government securities, sub
ject to telegraphic approval of a majority of the Federal
Open Market Committee and the approval of the Board of
Governors of the Federal Reserve System.
This motion continued in effect a similar authority voted at the meeting
of the committee on October 22-24, 1935.
Governor Young wished to be recorded as voting in favor of both of these
motions on the belief that failure to act on the recommendation of the Advisory
Council might create a situation under which these authorizations might be necessary.
There followed a renewed discussion of the proposals read by Governor
Schaller.
At 4:25 p. m . , by agreement, a recess was taken to attempt to draft a
motion which would embody this proposal.
At 4:37 the meeting reconvened and a vote was taken on the following
resolution:
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E1SOLV1D that it is the sense of this eommittap that for
reasons outlined in the resolution adopted by this committee
at its meeting last October, supplemented by the memoranda
presented to the committee, that the Board of Governors
should now favorably consider some early increase in the
reserve requirements of member banks.
The resolution was lost by a vote of seven to five, as follows.
Yes
No
Governors Harrison
Fleming
Schaller
Geery
McKinney
Governors Young
Norris
Seay
Newton
Mart in
Hamilton
Calkins
Governor Norris asked to be recorded as voting no on the ground that he
favored some action, but preferred action in the open market . )
Governor Seay asked to be recorded as voting no because he prefers to
see action deferred until after the first of the year, when the situation mightJ
be clearer.
Governor Hamilton indicated that he voted no because the resolution
included country banks.
He said that he would vote for a resolution limiting
the increase to reserve city and central reserve city banks.
Governor Martin indicated that his negative vote was on the ground that
the situation was such as to make it undesirable to act at this time.
Governor Harrison left the room for a few minutes to confer with
Chairman Eccles*
At 5:10 Governor Harrison returned and reported that Chairman Eccles
expressed the hope that the open market meeting would not finally adjourn tonight
but would reconvene in the morning.
It was so voted and the meeting adjourned
at 5:12 p. m . , to reconvene as a Governors’ Conference.
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In the course of the Governors* Conference a discussion arose as to the
interpretation of the Banking Act of 1935 with respect to the power of the reserve
banks to exchange government securities directly with the Treasury when an exchange
offering was made.
It was agreed that it would be undesirable at this time to
raise the legal question and that instead it would be better to replace all maturing
issues in the open market.
The meeting reconvened at 10:15 a. m . , on December 18, there being present
the Governors of all the reserve banks, Deputy Governor Burgess, Secretary, and
Mr. Strater of Cleveland.
Governor Harrison indicated that he was concerned about adjourning the
meeting with the record as it was.
It was clear that the majority wanted to take
some action, but were divided as to the method.
They had before tham a unanimous
recommendation of the Federal Advisory Council to take some action.
The committee
would appear to be functioning badly if it favored some action but was unable to
agree upon the method to be employed.
The question might be asked why those who
favored action through the raising of reserve requirements did not support open
market action.
His response would be that the greatest likelihood of agreement on
action on the part of the reserve System lay in the proposal to increase reserve
requirements.
After some further discussion, a draft resolution was read (this form
includes later revisions).
The Committee has considered the preliminary memorandum
and a memorandum on excess reserves and Federal reserve policy
and has discussed various aspects of the credit situation.
The Committee finds that continued improvement has been
made in business and financial conditions since its last meeting
but the country is still short of a full recovery and there does
not appear to be anything in the situation which makes it necessary
for the reserve system now to reverse its policy of easy money.
It is still the unanimous opinion of the Committee that the primary
objective of the reserve system should be to lend its efforts to
ward the furtherance of recovery-
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^ It is the view of the Committee, however, that the
amount of excess reserves of member banks constitutes a source
of danger for the reasons expressed in the reports before the
Committee at its October meeting and those considered at this
meeting. The Committee believes, therefore, that action should
be taken as s^on as possible without undue risk to absorb a
part of these excess reserves as a safeguard against possible
dangers, and not as a policy of credit restraint*^
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Cite this document
Federal Reserve (1935, December 17). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19351218
@misc{wtfs_fomc_minutes_19351218,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1935},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19351218},
note = {Retrieved via When the Fed Speaks corpus}
}