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FEDER L RESERVE BO RD
WASHINGTON
ADDRESS OFFICIAL. CORRESPONDE NCE T O
T H E
FEDERAL RESERVE BOARD
X-6484
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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~ 2 —
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.
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