FOMC Minutes

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 Monday, May 25, 1936, at 2:50 p.m.

PRESENT:

Mr. Eccles, Chairman

Mr. Harrison, Vice Chairman

Mr. Broderiok

Mr. Szymczak

Mr. McKee

Mr.

Mr.

Mr.

Mr.

Fleming

McKinney

Schaller

Hamilton

Mr.

Mr.

Mr.

Mr.

Mr.

Morrill, Secretary

Wyatt, General Counsel

Goldenweiser, Economist

Williams, Associate Economist

Burgess, Manager of the System Open

Market Account

Mr. Thurston, Special Assistant to the

Chairman

The Committee was informed that certificates of the unanimous

election by the directors of the Federal Reserve Banks of Chicago and

St. Louis of President George J. Schaller as a member of the Federal

Open Market Committee and of President Wm. McC. Martin as alternate

for President Schaller for the period ending February 28, 1957, had

been received by the Board of Governors of the Federal Reserve System,

The Secretary submitted the minutes of the

meetings of the Federal Open Market Committee on

March 18 and 19, 1936, and, upon motion duly

made and seconded, and by unanimous vote, the

minutes were approved as submitted.

The Secretary also submitted the minutes of

the meeting of the executive committee of the Fed

eral Open Market Committee held on March 19, 1936,

and, upon motion duly made and seconded, and by

unanimous vote, the actions set forth therein were

approved, ratified and confirmed,

5/25/36

-2

It

was then stated that during the interval between the meeting

of the executive committee on March 19, 1956, and the present date the

individual members of the executive committee had approved the follow

ing matters and that at the meeting of the executive committee held

this morning the actions referred to were approved,

ratified and con

firmed:

(1)

A reduction by the Federal Reserve Bank of New York of

approximately $2,000,000 in the account carried with

the Bank for International Settlements, by the gradual

withdrawal of the proceeds of approximately $1,600,000

of bills held in the account and $400,000 in the sight

deposit with the Bank for International Settlements.

(2)

A shift by the Federal Reserve Bank of Dallas of

$1,205,000 of 3 3/4% 1946-56 bonds held in the bank's

own investment account into a like amount of 2 7/8%

1955-60 Treasury bonds.

(5)

An increase of $10,000,000 in the authority granted

to the Federal Reserve Bank of New York by the

executive committee of the Federal Open Market Com

mittee on March 19, 1936, to make shifts of securi

ties in the System account into other securities

having maturities within a range of one year from

those of the securities sold.

(4)

Transfers of participations in the System Account, as

follows

$5,000,000 to Dallas from New York.

$5,000,000 to Dallas from Chicago.

Upon motion duly made and seconded, and by

unanimous vote, the actions of the executive

committee above described were approved, ratified

and confirmed.

President Harrison expressed the view that there were certain

respects in which there was a possible over-lapping of the jurisdiction

of the Federal Open Market Committee and the Board of Governors of the

Federal Reserve System which he felt should be studied carefully with a

-3

5/25/36

view to clearing up and removing unnecessary duplication in these matters,

There was a brief discussion as a result of which it

was understood that

President Harrison would prepare a review of the matters which he had in

mind and take them up with the Secretary of the Board of Governors of the

Federal Reserve System.

Mr. Burgess submitted the report of open market operations pre

pared by the Federal Reserve Bank of New York as agent for the Federal

Open Market Committee covering the period since March 16, 1936, and up

to and including May 20, 1936.

Mr. Burgess discussed the principal

features of the report and called particular attention to the fact

that there had been no change in

market account.

the total holdings in

the system open

He discussed the shifts between maturities and trans

fers of participations in

the account and referred briefly to each of

the exhibits attached to the report.

Upon motion duly made and seconded, and by

unanimous vote, the report as submitted was approved

and the transactions set forth therein were approved,

ratified and confirmed.

Mr. Burgess also submitted for the information of the Committee

memoranda entitled:

"Summary of Methods of Allotment used in Distributing Sys

tem Purchases of Bankers Acceptances and Government Securi

ties."

"Government Security Holdings by Individual Reserve Banks

for their Own Account"

The Committee then took up for consideration the recommendations

which had been agreed upon at the meeting of the executive committee of

5/25/36

-4

the Federal Open Market Committee that morning, which are embodied in the

minutes of that meeting.

The first

of these recommended that the Federal

Open Market Committee approve and continue in

effect the existing formula

for allotment among the Federal reserve banks of their respective partici

pations in the aggregate amount of United States Government securities

held in the System open market account.

It

was pointed out that this

formula provided for such allotments on the basis

ofthe ratio of each

bank's expenses, dividends and charge-offs to the total of such expenses,

dividends and charge-offs for the twelve Federal reserve banks.

It

was

agreed that the formula included the important factors that should be con

sidered and that the current application of its

provisions should result

in a reasonable and equitable distribution of the participations in the

account.

It

was observed that the principal reason that the existing

formula had not worked out in

the past as intended had been the fact

that no bank was obliged under the law to accept or retain the particular

amount allotted to it

in accordance with the formula and that the actual

participations were determined through informal negotiations on the basis

of the amounts which individual banks desired or were willing to hold

from time to time.

This difficulty having been specifically provided

against in the Banking Act of 1935 it

was felt that, with the cooperation

of the Board of Governors of the Federal Reserve System in requiring and

obtaining periodical reports at reasonably frequent intervals showing

anticipated charge-offs of unusual amounts by reason of possible losses

in addition to the customary information as to current earnings and

expenses,

including the usual allowances for depreciation and other items,

-5

5/25/36

together with the development of a uniform policy with respect to unusual

charge-offs,

the formula would be practical in its

operation.

In connection with the question what treatment should be given

to the profits that might accrue to individual banks from the transfer

to the System account of Government securities held in their individual

portfolios it

was agreed that, since they had assumed and carried the

risk of fluctuations in

market values and possible losses in

the ultimate

disposition of these securities, they were entitled to such profits as

a matter of equity and that, since such profits were of a non-recurring

nature, they should not be taken into account in

of the securities held in the System account.

the future allocation

The view was expressed by

some of the members that such non-recurring profits might well be added

to the reserves of these banks.

It

was pointed out that the proposed provision for readjustments

in the allocations if

at any time the reserve ratio of a particular bank

should fall below 50% should afford an ample margin of protection to

such a bank and a reasonable opportunity for considering the possibili

ties of action which would enable the System to meet the situation thus

presented.

After detailed discussion of the various aspects

of the questions involved, upon motion duly made and

seconded and by unanimous vote, the Committee (a) ap

proved and continued in effect the formula adopted by

the Federal Open Market Committee as constituted prior

to March 1, 1936, and the practice followed under its

authority, with respect to allotments to the various

Federal Reserve banks of Government securities held in

the system open market account; (b) authorized and di

rected the executive committee to make such adjustments

as of June 15, 1936, as may be necessary to bring the

-8

5/25/36

allotment to each Federal reserve bank of Govern

ment securities held in the system open market ac

count into conformity with such formula; and (c)

authorized and directed the executive committee to

make thereafter from time to time such readjustments

as may be necessary to maintain the distribution of

Government securities among the Federal reserve banks

in accordance with such formula: provided, however,

that if at any time the reserve ratio of any Federal

reserve bank should fall below 50% or would be reduced

below 50% by reason of the operation of such formula

the executive committee shall make such readjustments

in the allotments as shall be necessary to raise the

reserve ratio of such bank to 50% by allocating the

necessary amount of securities to the other Federal

reserve banks in accordance with the formula. In this

connection it was agreed that any profit received by

any individual Federal reserve bank as a result of the

transfer as of June 15, 1936, to the system open mar

ket account of United States Government securities held

in the individual investment account of such Federal re

serve bank should be treated as a non-recurrent item

which should not be taken into account in the applica

It was also agreed that there

tion of such formula.

should be obtained from each Federal reserve bank at

quarterly intervals reports showing the nature and

amount of any unusual charge-offs which such bank anti

cipates will be made during or at the end of each cal

endar year and that the Board of Governors of the Fed

eral Reserve System should be requested to endeavor to

bring about the observance of a uniform policy among

the Federal reserve banks with reference to such

charge-offs.

In connection with the recommendation of the executive committee

that the Federal reserve banks be directed to transfer on June 15, 1936,

to the System open market account all of the United States Government

securities held in

the individual investment accounts of such banks, a

question was raised as to the application of this requirement to Govern

ment securities in which the self-insurance funds of certain Federal re

serve banks had been invested.

It

was stated that, while the executive

5/25/56

-7

committee had not discussed the effect of the recommendation upon such

investments,

such recommendation was broad enough in

its

terms to re

quire such investments to be transferred to the System open market

account.

After some discussion it

ments were in

was the consensus that such invest

reality a matter of individual bank bookkeeping and that

there was no sufficient reason why such securities should not be included

in those required to be transferred to the System open market account,

In view of the fact that the Banking Act of 1955 transferred to

and lodged in

the Federal Open Market Committee the final authority over

as well as the responsibility for the determination of policy with re

spect to the conduct of open market operations, and provided that no

Federal reserve bank should engage or decline to engage in such opera

tions except in accordance with the direction or regulations of the

Committee, it

was the opinion of the Committee that the separate invest

ments in Government securities now held by individual Federal reserve

banks should be transferred to the System account.

Accordingly, upon motion duly made and

seconded and by unanimous vote, the Committee

directed that the Federal reserve banks trans

fer on June 15, 1936, to the System open market

account, at the market prices prevailing on

that date, all the United States Government

securities held in the individual investment

accounts of such Federal reserve banks, in

cluding Government securities held as invest

ments of self-insurance funds.

In connection with the foregoing action there was a discussion

of the disposition that should be made of the earnings accruing from the

5/25/36

-8

investments of self-insurance funds in Government securities and the

view was expressed by certain members of the Committee that, as a mat

ter of accounting, the earnings from such securities should be treated

as a part of the current earnings of each Federal reserve bank and that

any additions to the self-insurance fund should be made from current

earnings as in the case of any other special reserve.

Other members of

the Committee expressed the view that earnings from investments of self

insurance funds might well be permitted to accumulate in such funds,

especially if

all reserve banks should invest their self-insurance funds.

It was agreed unanimously that it would be desirable to have a

uniform policy in the twelve Federal reserve banks in regard to the

establishment and maintenance of self-insurance funds and the allocation

of investments thereto, and it was suggested that the matter be given

consideration by the Presidents' Conference which will convene tomorrow.

The Committee then took up for consideration the practice which

it was reported is now followed by only one Federal reserve bank of

holding temporarily in a special investment account Government securities

which it

purchases and sells at the request of individual member and

non-member banks.

It was agreed that, since the principle had been

adopted that the Government securities held by the Federal reserve banks

in their own portfolios should be transferred to and held in the System

account and since it did not appear that it was necessary for the Fed

eral reserve banks to handle as an investment the securities thus pur

chased and sold, the practice should be discontinued but that a reason

able time should be alloed in which to enable the bank to effect the

5/25/36

-9

necessary adjustments.

Upon motion duly made and seconded and

by unanimous vote, the Committee directed

that any Federal reserve bank which purchases

and holds for its own investment account Gov

ernment securities pending their sale for the

account of member or nonmember banks shall not

later than June 15, 1936, discontinue such pur

chases and sell all Government securities so

held,

Attention was then directed to the letter from President Hamilton,

of the Federal Reserve Bank of Kansas City, in regard to temporary pur

chases of Government securities under resale agreements, which was sub

mitted at the meeting of the Federal Open Market Committee on March 19

and to the fact that the consideration of this letter had been deferred

until this meeting.

It

was pointed out that such purchases had been

made from time to time in the past with the approval of the Federal Re

serve Board and that permission to continue the practice would enable

the Federal Reserve Bank to render a service.

It

was agreed that, if

confined to short periods which would be adequate for the accommodations

desired, there was no objection to the practice.

Upon motion duly made and seconded and

by unanimous vote, the Committee granted

authority to each Federal reserve bank to

make temporary purchases of Government securi

ties under resale agreements for periods not

exceeding fifteen days.

Mr. Goldenweiser as the Committee's economist submitted a memo

randum dated May 22, 1936,

containing his report on business and credit

conditions.

Reference was made to the proposal submitted by President

Harrison at the meeting of the Federal Open Market Committee on March

5/25/36

-10

19, 1936,

that authority be granted by the Committee under which, in an

emergency,

any Federal reserve bank might purchase Government securities

when necessary to afford relief in a situation involving specific bank

ing situations in its

district, or, after obtaining the consent of the

Federal Open Market Committee, might purchase or sell Government securi

ties for its

own account, all such purchases and sales to be reported

promptly to the Federal Open Market Committee and its

committee.

executive

Attention was directed to the fact that two members of the

Board of Governors were absent and that Mr. Ransom had expressed a

desire to be present and participate in the discussion when this matter

was taken up for consideration.

In view of the fact that Mr. Ransom's

illness prevented his attendance at this

meeting, Mr. Harrison moved that consideration

of this matter be deferred until the next meet

ing of the Federal Open Market Committee.

Carried unanimously.

The Chairman called attention to the resolutions which were

adopted by the Committee at its

tions.

last meeting covering open market opera

He read the resolution instructing the executive committee to

direct the replacement of maturing securities and to make such shifts

of securities in the System account as may be necessary in the proper

administration of the account, and recommended that the Committee renew

the authority granted in

increase in

that resolution with an amendment to permit an

the maximum amount of bonds in the System account from

$350,000,000 to $500,000,000.

5/25/36

-11

The Chairman stated that the suggestion had been made that it

would be desirable to make some shifts in maturities from short-term

to long-term obligations with a view to improving the earning position

of the Federal reserve banks, and,

in this connection, it

was pointed

out that in March the amount of bonds in the System portfolio had been

increased by $50,000,000.

Reference was also made to the probability

that Treasury financing in June and September would provide for conver

sions of maturing securities into bonds and that it

might be desirable

to take advantage of these opportunities to make further shifts into

bonds.

President Harrison expressed the view that the time to exercise

such authority would be when it

would serve not only the purpose of

increasing earnings but when such purchases would be more appropriate

from the point of view of market conditions and the interests of the

reserve banks.

It

was agreed that an important aspect of the question

was one of timing of the purchases of bonds.

Mr. Williams suggested that in view of the fact that the desir

ability of increasing the System's bond holdings might depend on whether

or not it

was likely that these bonds would have to be sold before matur

ity the question what course should be followed in this matter might de

pend upon the policy of the Board of Governors with reference to changes

in reserve requirements.

A general agreement was indicated that the executive committee

should have such authority as may be necessary in the proper administra

tion of the System account to enable it

to replace maturing securities

and to make shifts in maturities to meet changing market conditions, that

-l2

5/25/36

in that connection it

would be desirable to increase the authority of

the committee to make shifts from short to long term securities, and

that the question of the timing of such shifts should be left to the

judgment of the executive committee.

Messrs. McKee and Hamilton

indicated that they would favor increasing the bond portfolio to the

extent of $50,000,000 or $75,000,000 in connection with the next

Treasury financing.

At the conclusion of the discussion, upon

motion duly made and seconded and by unanimous

vote, the Committee instructed the executive

committee to direct the replacement 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 $1,000,000,000 and that the amount of

bonds be not over $500,000,000.

It

was also agreed that the executive committee should have

authority to buy or sell (which would include authority to allow matur

ities to run off) securities for the System open market account within

reasonable limits in

act promptly if

order that the committee might be in a position to

circumstances not now foreseen should make such action

desirable before another meeting of the full committee.

Accordingly, upon motion duly made and

seconded, and by unanimous vote, the Committee

authorized the executive committee, subject to

telegraphic or written approval by a majority of

the members of the Federal Open Market Committee,

to direct the purchase or sale of Government

securities for the System open

arket account up

to an aggregate amount of $250,000,000

5/25/36

-13It

was pointed out that as a matter of practical operation until

June 15, 1936, when the Government securities held in the individual in

vestment accounts of Federal reserve banks are transferred to the System

open market account, it

would be necessary for the banks to replace

maturing securities in such accounts and to make such shifts of securi

ties held as may be desirable in the proper administration of the

accounts.

Accordingly, upon motion duly made and seconded,

and by unanimous vote, authority was granted, until

June 15, 1936, to each Federal reserve bank holding

Government securities in its individual investment

account to replace maturing securities in such account

and, with the approval of the executive committee, to

make shifts between the maturities in such account,

provided that no change in the total amount of Govern

ment securities held by such Federal reserve bank

shall be effected by such transactions.

Reference was made to the action taken at the last meeting cov

ering the replacement of bills payable in

foreign currencies and it

was

agreed that the authority granted the Federal Reserve Bank of New York

should be continued in order properly to maintain the investments of

balances held with foreign central banks, including the Bank for Inter

national Settlements.

Upon motion duly made and seconded, and by unani

mous vote, the Committee authorized the Federal Reserve

Bank of New York to direct the purchase of bills payable

in foreign currencies in such amount as may be necessary

to replace maturing bills now held for the account of

Federal reserve banks by foreign central banks, includ

ing the Bank for International Settlements. It was

agreed, however, that the Bank might permit the payment

of such maturing bills without replacement thereof to

such extent as it might find advisable in the interest

of the Federal reserve banks.

President Harrison raised a question as to the extent to which

the Presidents of the Federal reserve banks who are members of the Federal

5/25/36

-14-

Open Market Committee might report to the directors of their respective

banks, and to the other Presidents, actions taken by the Federal Open

Market Committee.

After discussion, it was agreed that the Secretary

of the Federal Open Market Committee should prepare ten

tative drafts of excerpts of the minutes of this meeting

setting forth the actions taken by the Committee relating

to the formula for the allotment of securities in the Sys

tem portfolio to the individual Federal reserve banks, the

transfer of individual holdings of Federal reserve banks

to the System account, the authority of individual Federal

reserve banks to replace maturing securities and make shifts

in securities in individual investment accounts until June

15, 1936, the authority granted to each Federal reserve

bank to make temporary purchases of Government securities

under resale agreements for periods not exceeding fifteen

days, and the discontinuance by Federal reserve banks of

purchases for their own investment accounts of Government

securities pending their sale for the account of member or

nonmember banks, so that such excerpts might be made

available to the Presidents of the Federal reserve banks

during their conference tomorrow, with the understanding

that each President would be authorized to report such

actions in confidence to the board of directors of his bank.

Mr. Broderick suggested that the Secretary of the Federal Open

Market Committee be permitted to bring into future meetings of the Com

mittee Mr. S. R, Carpenter, Assistant Secretary of the Board of Governors

of the Federal Reserve System, for the purpose of assisting the Secre

tary in making the record of the proceedings of the Federal Open Market

Committee.

Upon motion duly made and seconded and by unani

mous vote, Mr. Broderick's suggestion was approved.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.