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FEDER L RESERVE BO RD

WASHINGTON

ADDRESS OFFICIAL. CORRESPONDE NCE  T O

T H E

  FEDERAL RESERVE BOARD

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January

  23 , 19 30 .

SUBJ3CT: Open Market Pro ced ur e .

Dear

  S i r :

T hi s l e t t e r i n v i t e s

  t h e

  a t t e n t i o n

  of

  your bank

  t o

changes which  t h e  Fede ral Reserve Board, a f t e r prol ong ed  c o n -

s i d e r a t i o n  o f t h e  mat ter ,  h a s  concluded should  be  made  i n t h e

ex is t i ng procedure governing open market oper at i on s .

I t may he

  r e c a l l e d t h a t

  i t w as i n

  A p r i l ,

  1 9 2 3 ,

  that

t h e

  present procedure wi th regard

  t o

  open market op er at io ns

  was

adopted .

  I n t h e

  preceding year many

  o f t h e

  reserve hanks,

  i n

order

  t o

  m a i n t a i n p o r t f o l i o s

  of

  ea r n i ng as s e t s , en t e r ed

  t h e m a r -

k e t o n  t h e i r  ow n  separate accounts  t o  purchase Uni ted States

Government se c u r i t i e s , witho ut much reg ard  t o t h e  e f f e c t s  o f

t he i r ope r a t i ons  o n t h e  market  f o r  Government securi t ies  or on

c r ed i t cond i t i ons .

  I t w a s

  found necessary,

  i n

  consequence,

  t o

give

  t o

  open market op er at ion s

  a

  s tatus which recognized thei r

c r e d i t e f f e c t s

  a n d

  economic consequences

  a n d

  a l s o t h e i r e f f e c t s

o n t h e

  p o s i t i o n

  o f

  each Federal reserve hank.

A  copy  o f t h e  Board ' s r esolu t ion conta in ing  a n  out l ine

o f t h e  procedure adopted  i n 1 9 2 3 i s  here with enc los ed. Under

th i s procedure

  t h e

  pr in c ip l e governing open market op er ati on s

w as

  d e f i n e d

  a n d i t s

  a p p l i c a t i o n

  a n d

  p r a c t i c e l e f t

  t o a

  Committee

c o n s i s t i n g

  of

  f ive reserve banks act ing under

  t h e

  general super-

v i s i o n  o f t h e  Federal Reserve Board.

The  p r i n c i p l e  w as  s t a t e d  a s  fol lows;

That

  t h e

  t ime, manner, character

  a n d

  volume

  o f

open market investments purchased

  h y

  Federal reserve

banks

  b e

  governed with primary regard

  t o t h e

  accommo-

da t i on

  of

  commerce

  a n d

  bus iness ,

  a n d t o t h e

  e f f e c t

  of

such purchases

  o r

  s a l e s

  o n t h e

  gener a l c r ed i t s i t ua -

t i o n .

The  f i ve banks cons t i t u t i ng  t h e  Open Market I nv es tmen t Committee

were  t h e  fo l lowing:

Federal Reserve Bank

  of

  Boston

Federal Reserve Bank

  of New

  York

Federal Reserve Bank

  of

  Ph i l ade l ph i a

Federal Reserve Bank

  o f

  Cleveland

Federal Reserve Bank

  o f

  Chicago.

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Although  t h e  n e c e s s i t y  of  g iv ing  t o  open market ope ra-

t i o n s  a  System sta tus  w as  recognized  i n 1 9 2 3 , i t w a s n o t  then

fo re se e n  how  much  u s e  would  he  made  of t he  open market operation

a s a n  ins t rument  of  Federa l rese rve c red i t po l icy .  As a  matter

of  f a c t , f r e q u e n t r e s o r t  h a s  been take n  t o  open market op er at io ns  -

e i t h e r  b y  purchase  o r  sa l e  o f  United St at es Government s e c ur i t i e s  -

a s a

  mode

  o f

  p o l i c y

  i n t h e

  f iv e years fo l lowing

  t h e 1 9 2 3

  a r r a n g e -

ment s .

The

  experience

  of

  this period shows that

  t h e

  open market

operat ion, when involving other than t r i f l ing amounts ,  may be of

f i r s t - r a t e i m p o r t a n c e

  i n

  al te r in g cre di t cond it i ons even when

viewed  o n a  na t iona l sca le .

I t i s n o t

  surpris ing, therefore , that suggest ions should

have been made that  th e  System character  of  open market oper at io ns

should  b e  fu l ly r e c o g n iz e d  by  having  a l l  twelve Fed era l re se rv e

banks, ins tead  of  f i v e  a s a t  p re se n t , r e p re se n te d  i n t h e  shaping

of  open market p o l i c y . Views  t o  t h i s ef f e c t have been expressed

in fo rma l ly  by  reserve banks  n o t  included  i n t h e  e x i s t i n g s e t -u p ,

a n d  fo rma l ly  by the  Federal Advisory Council  i n t h e  fo ll ow in g recom-

mendation adopted

  i n

  September,

  1 9 2 8 :

The

  Federal Advisory Council without

a n y  i n t e n t i o n  of  c r i t i c i s i n g  t h e  presen t

arrangements

  b u t i n

  order that

  a l l

  governors

of the  Federal reserve banks  may  p a r t i c i p a t e

i n t h e

  d iscuss ions lead ing

  up to

  a c t i o n s

  o f

t h e  Open Market Committee su gg es ts  t o t h e

Federal Reserve Board

  t o

  cons ider

  t h e

  a d v i s -

a b i l i t y  of  having  t h e  membership  of th e  Open

Market Committee consist

  of a l l t h e

  governors

o f t h e  Fede ral res erv e banks wit h  a n  executive

committee composed

  o f

  f i v e members wi th f u l l

power  t o a c t .

F o r t h e  r e a so n s b r i e f ly  s e t  for th above,  t h e  Board  h a s

drawn  u p a  r e v i s i o n  of the 1923  open market proc edu re, which  em -

bodies  a  f u l l e r r e c o g n i t i o n  o f t h e  j o i n t i n t e r e s t  a n d  r e s p o n s i -

b i l i t y  o f t h e  Federal reserve banks  a n d t h e  Federal Reserve Board

i n t h e  ma t t e r  of  open market po li cy .  The  elements  of  t h i s  p r o -

cedure

  a r e

  con ta ined

  i n a

  memorandum adopted

  b y t h e

  Federal Reserve

Board reading  a s  fo l lows:

( l ) T h e  Open Market Investment Committee,  a s a t  presen t

c o n s t i t u t e d ,

  to be

  d iscon t inued

  and a new

  committee,

  t o b e

  known

a s t h e  Open Market Po l i c y Confer ence ,  t o b e s e t u p i n i t s  p lace .

( 2 )  Bach Fed era l re se rv e bank  t o b e  r e p re se n te d  on the

Open Market Policy Conference.

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— 3 r»

(3 ) The  Conference  t o  meet with  t h e  Federal Reserve Board,

a t

  such times

  a s n ay be

  arranged

  by o r

  wi th

  t h e

  Board.

(4 ) The

  f u n c t i o n

  of the

  Open Market Policy Conference

  to be

t o  consider, develop  a n d  recommend pl an s wi th re ga rd  t o t h e p u r -

chase

  o r

  s a l e

  o f

  s e c u r i t i e s

  i n t h e

  open market.

(5 ) The

  t ime, cha rac ter

  a n d

  volume

  of

  such pur cha ses

  a n d

s a l e s

  to he

  governed with

  t h e

  view

  of

  accommodating commerce

  a n d

business

  a n d

  with regard

  t o

  t h e i r bearing upon

  t h e

  c r e d i t s i t u a -

t i on .

(6) The

  conclusions and/or recommendations

  of th e

  Open

Market Policy Conference

  to be

  submit ted

  t o

  each

  o f t h e

  Federal

reserve banks

  a n d t o t h e

  Federal Reserve Board

  f o r

  cons i de r a t i on

and/or ac t ion .

( 7 ) A

  committee

  to be

  known

  a s t h e

  Open Market Exe cu ti ve

Committee  to be  c o n s t i t u t e d  f o r t h e  purpose  of  executing such

purchases  a n d  s a l e s  o f  s e c u r i t i e s  a s  have been approved  b y F e d -

eral reserve banks  a n d t h e  Federal Reserve Board.

Such further working arrangements  as may be  found neces-

sary  t o  make  t h e  above out l in ed p l an opera t ive wi l l ,  i n t h e  opinion

o f t h e  Board, best  b e  determined  b y t h e  Conference i tself when  i t

i s  organized.

The

  Board bel ieves that

  t h e

  above proc edur e cont ai ns

  t h e

e s s e n t i a l s  of a  workable plan designed  t o  give express ion  to the

common interest  o f t h e  Federal reserve banks  i n  mat t e r s  of  open

market pol icy  a n d t o  provide  a  reasonable  a n d  pract icable method

f o r  jo in t ac t i on . Af te r your bank  h a s h a d  time  t o  cons ider  the

p l an ,  t h e  Board will welcome  a h  express ion  o f  your views.

By  order  o f t h e  Federal Reserve Board.

Very truly yours,

E. M.

  McClelland,

As s i s t an t Sec r e t a r y .

20  CHAIRMEN  OF LLL F . R.  BANKS.

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RESOLUTION'S APPROVED

  BY

  FEDERAL RESERVE BOARD

  AT

MEETING-  ON MARCH 2 2 , 1 9 2 3 .

Whereas

  t h e

  Federal Reserve Board, under

  t h e

  powers given

  i t

i n

  Sect ions

  13 and 14 of th e

  Federal Reserve

  A c t , h a s

  a u t h o r i t y

  t o

l i m i t

  an d

  otherwise determine

  t h e

  s e c u r i t i e s

  a n d

  investments purchased

b y

  Federal reserve banks;

Whereas  t h e  Federal Reserve Board  h a s  never prescr ibed  a n y  l i m i t a -

tion upon open market purchases  b y  Federal reserve banks;

Whereas

  t h e

  amount, t ime, character ,

  a n d

  manner

  o f

  such pur cha ses

may

  e x e r c i s e

  an

  importa nt in flu en ce upon

  t h e

  money market;

Whereas

  an

  open market investment policy

  f o r t h e

  twelve banks

composing

  t h e

  Federal reserve sys tem

  i s

  necessary

  i n t h e

  i n t e r e s t

  of

t h e  maintenance  o f a  good relat ionship between  t h e  di scount  a n d p u r -

chase opera t ions  o f t h e  Federal reserve banks  a n d t h e  general money

market;

Whereas heavy investments

  i n

  Unit ed S t a t e s s e cu r i t i e s , pa r t i c u -

lar ly shor t -da ted cer t i f i ca te i s sues , have occas ioned embar rassment

  t o

t h e

  Treasury

  i n

  a s c e r t a i n i n g

  t h e

  t rue condi t ion

  o f t h e

  money

  a n d

  i n v e s t -

ment markets from time

  to

  time,

THEREFORE,  B e I t  Resolved, That  t h e  Federal Reserve Board,  i n t h e

e x e r c i s e  of i t s  powers under  t h e  Federal Reserve  A c t , l a y  down  a n d  adopt

t h e  fo l l owing pr in c i p l es wi th r esp ect  to  open market invest ment ope ra ti on s

o f t h e  Federal reserve banks , to-wi t ;

( 1 )

  That

  t h e

  t ime, manner, character ,

  a n d

  volume

  o f

  open market

inves tments purchased

  b y

  Federal reserve banks

  b e

  governed with primary

r ega r d

  t o t h e

  accommodation

  o f

  commerce

  an d

  bus i nes s

  a n d t o t h e

  e f f e c t

o f

  such purc hase s

  o r

  s a l e s

  o n t h e

  gener a l c r ed i t s i t ua t i on .

( 2 )

  That

  i n

  making

  t h e

  s e l e c t i o n

  o f

  open market pur cha ses , ca re -

f u l

  r ega r d

  b e

  always given

  t o t h e

  bea r i ng

  of

  purchases

  o f

  United States

Government se c ur i t ie s , esp ec ia l l y

  t h e

  sho r t -da ted i s sue s , upon

  t h e m a r -

k e t f o r

  suc h s e c u r i t i e s ,

  a n d

  th at open market pur ch ase s

  b e

  p r i mar i l y

commercial inves t ments , except th at Treasury c e r t i f i c a t e s

  b e

  d e a l t

  i n ,

a s a t  pr es en t , under so -c al le d Repurchase agreement.

B e I t  Further Resolved, That  o n a n d  a f t e r Apr i l  1 , 1 9 2 3 , t h e

present Committee

  of

  Governors

  on

  Central ized Execut ion

  of

  Purchases

a n d

  Sales

  o f

  Government Securi t ies

  b e

  d i s con t i nued ,

  a n d b e

  superseded

by a new

  committee known

  a s t h e

  Open Market I nv es tme nt Committee

  f o r

t h e

  Federal Reserve System, said Committee

  t o

  cons i s t

  o f

  f i v e r e p r e -

sentat ives fnom

  t h e

  reserve banks

  and to be

  under

  t h e

  genera l super -

v i s i on  o f t h e  Federal Reserve Board.;,  a n d  t h a t  i t b e t h e  duty  o f  t h i s

Committee  t o  devi se  a n d  recommend plans  f o r t h e  purchase , sa l e  a n d

d i s t r i b u t i o n  o f t h e  open market purchases  o f t h e  Federa l r eserve

banks  i n  accordance with  t h e  above pr in c i p l es  a n d  such regula t ions

as may

  from time

  t o

  time

  b e

  laid down

  by t h e

  Federal Reserve Board.