A primary dealer is a government securities dealer designated, by the Federal Reserve Bank of New York, as eligible to participate in open market operations undertaken by the Bank at the direction of the Federal Open Market Committee. The primary dealer system is the nexus of designation criteria and performance requirements that stem from the decision to execute open market operations through primary dealers.
This paper presents a history of the primary dealer system from the late 1930s to the early 1950s. The paper focuses on two formal programs: the "recognized" dealer program adopted by the Federal Reserve Bank of New York in 1939 and the "qualified" dealer program adopted by the Federal Open Market Committee in 1944 and abandoned in 1953, but addresses as well the more informal predecessor and successor systems. Section 1 reviews the emergence of open market operations as a principal instrument of monetary policy in the 1920s. Section 2 describes how Robert Rouse formalized the New York Bank's informal system of "recognized" dealer counterparties following his selection as Manager of the System Open Market Account in 1939. Although the Bank typically dealt with recognized dealers, it also did business from time to time with other dealers; neither the original informal system nor the successor formal system made a sharp distinction between the two.
The focus of monetary policy changed from managing reserves to keeping interest rates low following U.S. entry into World War II. To support the new focus, the FOMC replaced the New York Bank's recognized dealer program with its own program of "qualified" dealers. As discussed in sections 3 and 4, the new format limited transactions for the Open Market Account to qualified dealers and imposed a variety of restrictions on those dealers.
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