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327,-5 - RELATIONS BETWEEN FRBoard, FRBanks & MEMBER BA NKS (FRDistricta 1 - 6 ) ; 'z Wimill 1: ^ . as ; i Reproduced from the Unclassified / Declassified Holdings of the National Archives FED ER AL RESERVE BOARD 5 J WASHINGTON A D D R E S S O F F IC IA L C O R R E S P O N D E N C E TO T H E FED ERAL RESERVE BO ARD X-9115 February 6 , 1935. During an informal meeting of the Governors of the Fed eral reserve banks with the Federal Reserve Board on February 5, I stated to the Governors that it would be helpful to the Federal Reserve Board if the Federal reserve banks would frankly point out any features of the relations between the Federal Reserve Board and the Federal reserve banks and member banks that in their opinion are unsatisfactory or subject to criticism, with special reference to any regulations or rulings or procedure of the Board. If in any respect the actions of the Board or its staff seem bureaucratic or impractical or unduly rigid, the Board desires to be fully ad vised so that it may take any measures that seem desirable to cor rect and improve the situationIn addition, I suggested a number of subjects which it seemed to me it would be desirable for the directors and officers of the Federal reserve banks to discuss. There are inclosed two copies of a revised list of these subjects, which the Board would like to have considered in the manner suggested, and to be advised Reproduced from the Unclassified / Declassified Holdings of the National Archives V - 2- X-9115 as to the views of your bank within thirty days, treating each subject separately. Upon receipt of the replies from the Federal reserve banks they will be analyzed and studied and an endeavor will be made as promptly as possible to advise you as to any conclusions that the Board may reach regarding them. Very truly yours, Inclosures. TO ALL CHAIRMEN. Reproduced from the Unclassified / Declassified Holdings of the National Archives The following is a list of certain subjects which were brought to the attention of the Governors on February 5 by Governor Eccles with the suggestion that these subjects be discussed by the directors and officers of the Federal reserve banks and that the Board be advised as to their views within thirty days, treating each subject separately: 1. General credit situation (a) (b) 2. Interest rates (a) (b) 3. Are commercial banks doing everything in their power'to improve the situation? If not, what steps can be taken by the Federal reserve banks or otherwise to bring about an improvement? On time and savings deposits of member banks. On loans of member banks and on industrial ad vances and commitments by Federal reserve banks . Matters affecting admission of nonmember banks to Federal reserve system (a) (b) (c) Earnings of nonmember banks from exchange collection charges . Present conditions of membership. Advisability of extension of membership to banks outside the States and the District of Columbia. 4. Feed for continuance of assistance of Reconstruction Finance Corporation in connection with rehabilitation of capital structures of banks. 5. Adequacy of reimbursement of Federal reserve banks by Treasury and. other governmental agencies for various services rendered and for space used in Federal reserve bank buildings. 6. Regulation fixing margin requirements for loans by banks upon equity securities for the purpose of purchasing or carrying securities registered on national securities exchanges. Reproduced from the Unclassified / Declassified Holdings of the National Archives -2 - X-9115-a (a) Circumstances under which regulation should be issued. (b) "Whether regulation should permit borrower to obtain from bank more than he could obtain from broker under Regulation T. 7o Economic and statistical divisions of Federal reserve banks. (a) (b) Usefulness to directors and officers» Value of Federal reserve bank monthly reviews. 8 . Establishment of career system for personnel of Federal reserve banks• 9. Criticisms of existing regulations or rulings or procedure of the Federal Reserve Board, with specific recommenda tions as to changes which would correct any unsatisfactory features of the relations between the Board or its staff and the Federal reserve banks or member banks. Reproduced from the Unclassified / Declassified Holdings of the National Archives Keproduced from the Unclassified / Declassified Holdings of the National Archives V TELEGRAM FED ER AL RESERVE SYSTEM (L E A S E D W I R E S E R V IC E ) RECEIVED A T W A S H IN G T O N , D. C . y8bs Boston 1205P Apl 5 1935 /iPft Board 5 PM 12 21 Washington ! Your telegram. April 4> in the absence of the Chairman I advise that his _ ________________________________ — letter of March 2 3 , and enclosures in response to the BoardTs letter of February 6, (X-9H 5 ) were brought before the directors meeting on April 3* The conclusions set forth in the enclosures were read or summarized and no differences of opinion were expressed Garrick 1 2 1 8p m GOVERNMENT PRINTING OFFICE: |»M 16— 794 Reproduced from the Unclassified / Declassified Holdings of the National Archives Form 118 b T E L E G R A M FEDERAL RESERVE BOARD WASHINGTON April 4, 1955 Curtiss - Boston Please refer to your letter of March 25, arid inclosure, in response to uoard*s lett r of February 6 (X-3115) and confirm by wire our assumption that your directors at meeting yesterday concurred in views expressed therein. Bethea LPB/faf 2— 9454 Reproduced from the Unclassified / Declassified Holdings of the National Archives T ELEGRAM FEDER AL RESERVE SYSTEM (L E A S E D W IR E S E R V IC E ) 3 R E C E I V E D A T W A S H I N G T O N , D. C. 1935 MAR Boston Liar 25 25 PM 2 234 pm Morrill Washn Reply to Board’s letter X - ^ 1 1 5 sent by Air mail this morning. Curtiss 2 5 1 pm D. S GOVERNMENT PRINTING OFFICE. 1933 16— 794 52 Reproduced from the Unclassified / Declassified Holdings of the National Archives F o r m 148 b TELEGRAM FEDERAL RESERVE BO ARD WASHINGTON M^rch 25, 1955. Curtice - Boston Piece© refer Bocrd«e letter of February 6, X-9115, tnd foll o w up letter »icrch 18, and advise b y wire when reply any be expected. aorrill. (3 a a (signed) Chester Morrill * J 2— 9454 Reproduced from the Unclassified / Declassified Holdings of the National Archives mm**. -v.mmwhb ! ‘-m mm--m 2 S J FEDERAL RESERVE OF FREDERIC BANK BOSTON H. C U R T I S S CHAIR MAN March 25, 1955 RECEIVED f e d e r a l r e s e r v e bo ard WASHINGTON Federal Reserve Board Washington D. C. 1955 MAR 25 AM 21 Dear Sirs; You will find enclosed in this letter answers to the certain subjects enclosed in the! Board's letter of February 6 , 1955 (X-9115) representing a list of subjects which were brought to the attention of the Governors of the Federal Reserve Banks on February 5 by Governor Eccles, with the suggestion that these subjects be discussed by the directors and officers of the Federal Reserve Banks and that the Board be advised as to their views within thirty days, treating each subject separately. The Board1s letter was discussed with our board of directors at the first meeting after its receipt, and this reply will be discussed with them at our next meeting, and if there are any differences of opinion the Federal Reserve Board will be advised. The delay in answering this letter has been caused by the absence of Governor Young from the bank owing to ill health, and we have only today been able to get together and agree on the views expressed. I am Yours very truly, FHC/D Enclosures "^3 Chairman if 3 2- 0 t y ; JJ ■■■ r^epiuuucea from the Unclassified / Declassified Holdings of the National Archives ■ 1. General credit situation. (a) (b) Are commercial banks doing everything in their power to improve the situation? If not, what steps can be taken by the Federal reserve banks or otherwise to bring about an improvement? This question would appear to have direct bearing upon the accommodation that was furnished by commercial banks in this district to applicants for commercial credit. The reports from member banks show that from January 2 to March 15, 1955 the member banks in this district increased their commercial loans about $50,000,000. In connection with the Industrial Loan Act, we have urged the banks to scour their localities for possible credit needs, and this has resulted in some $17,000,000 of applications for loans being made to the Federal reserve bank under that Act, of which all but about $6,000,000 have either been approved or are under consideration. Most of the loans made by the Federal Reserve Bank are loans of a character where the credit risk was other than a private bank risk. We have under consideration at the present time two or three large loans where the credit risk would appear to be satisfactory, but where the borrowers wish to be assured they can count on the credit advanced for three or four years, which is a longer period than commercial banks are accustomed to make commitments. Commercial banks have also been heavy purchasers of Government se curities. It would therefore appear that commercial banks are doing every thing in their power to improve the situation} and that' nb suggestions have yet been made where the Federal Reserve Banks can further assist in bringing about improvement." Reproduced from the Unclassified / Declassified Holdings of the National Archives 3 2. Interest Rates. (a) On time and savings deposits of member banks. / u The interest rate of 2-ir% now in force on time and savings deposits of member banks would appear to be satisfactory.1 The prevailing rates on mutual savings bank deposits are from 3 to Many of the non member banks are still paying Z% on savings accounts. In Beston and other large cities Clearing House Associations can control the rates of their member banks, and in some cases these rates are lower than It would be an advantage if all commercial banks, members and non members, especially the non members insured, had similar maximum rates.11 (b) On loans of member banks and on industrial advances and commitments by Federal reserve banks. '' In connection with rates on loans, the tendency of member banks is to reduce rates, and it would appear that the borrowers were getting proper relief. In connection with industrial advances and commitments of Federal reserve banks, it would appear that it is logical to have differential rates on these as between Federal reserve districts and between different borrowers in each district." A modification of our Existing rates was recommended at the meeting of our directors yesterday, which recommendation -bars1 been forwarded to Washington. Reproduced from the Unclassified / Declassified Holdings of the National Archives 3. (a) Matters affecting admission of non member banks to Federal Reserve System. Earnings of nonmember banks from exchange collection charges. **The problem of exchange collection charges is not one that arises in this district, as all banks pay their checks at par J* (b) Present conditions of membership. Every nonmember bank in this district has been called upon during past years, and has been advised regarding the Federal Reserve System and the provisions of conditions of membership/z So far as we have been able to learnthe conditions of membership have never been a deterrent to nonmember banks that have felt it was to the it- advantage to join the Federal Reserve System. 11 There are a few features in the conditions of membership that banks in this district have objected to, as follows: Condition numbered 15. Some banks have been worried about the requirement that they shall maintain their unimpaired capital and surplus at not less than one-tenth of the average amount of their aggregate deposit liabilities. They do not question the soundness of the ruling, but wonder sometimes how they are going to increase their capital in times when their deposit liabilities are increasing. Condition numbered 17. This condition has to do with the investment of trust funds in mortgage participations. At the time of our Trust Conference, the feeling was very strong against this condition of membership which prevents transfers of mortgage participation certificates from one trust to another. The meeting adopted the following resolution: "Resolved, that the majority of the bank officers present is opposed to the general condition of membership for new State member banks which prevents such banks from switching participation mortgage certificates, (of mortgages now in existence) between trust funds even though such mortgages, on a new appraisal basis, meet the requirements of a new investment for trust funds." Condition numbered 18. This condition requires that if trust funds held by such bank are deposited in its banking department or otherwise used in the conduct of its business, it shall deposit with its trust department security in the same manner and to the same extent as is required of national banks exercising fiduciary powers. At the conference of trust examiners in Washington, the conference asked the Federal Reserve Board to define the words "trust funds," in the first line of the condition, and a ruling whether "agency funds" held for individuals and corporate trusts are to be protected by the deposit of securities with the trust department, and whether deposits in the savings department are to be so protected. There is some objection to the deposit of securities with the trust department in Connecticut, particularly in the case of deposits in the savings department,which the banks claim are investments and not deposits. Reproduced from the Unclassified / Declassified Holdings of the National Archives £ 4. & Need for the continuance of the assistance of the Reconstruction Finance Corporation in the rehabilitation of the capital structure of banks* It is our opinion that there is a distinct need for the continuance of the assistance of the Reconstruction Finance Corporation in connection with the rehabilitation of the capital structure of banks although at this particular moment such need of assistance is not in evidence in this district to any material extent so far as member banks are concerned. It will be imperative to continue the assistance of the Reconstruction Finance Corporation in the event that any great number of nonmember banks should attempt to become members of the Federal Reserve System between now and July, 1957. Undoubtedly there are some cases where the stock purchased by the Reconstruction Finance Corpotation in rehabilitation of capital structure has since become inpaired, and unless there is a considerable improvement in the value of the assets of these particular banks, it will be necessary for the Reconstruction Finance Corporation to accept some sound plan of recapitalization and make further investment in order to correct the impairment which exists Reproduced from the Unclassified / Declassified Holdings of the National Archives 5. Adequacy of reimbursement of Federal reserve banks by Treasury and other governmental agencies for various services rendered and for space used in Federal reserve bank buildings. This subject was discussed in detail at a meeting on Accounting of a committee of Federal reserve banks held at Chicago, Illinois, on June 27 and 28, 1954, and it is considered as indicated in the recommendation of the committee that Federal reserve banks should be reimbursed for all "out of pocket” expenses in connection with services rendered governmental agencies and allowed a reasonable amount for floor and vault space occupied by such agencies in Fed eral reserve bank buildings. For the year 1954, the Federal Reserve Bank of Boston received reimburse ment amounting to $107,490.59 from the Treasury Department, Reconstruction Finance Corporation, Farm Credit Administration and other governmental agencies covering expenditures made in their behalf. However, during that year certain other expenses amounting to $99,524.26 were incurred for the same agencies for which reimbursement was not received, although it is thought that this amount might properly be considered reimbursable. Detail figures are given on the accompanying statement based on the report to the Federal Reserve Board of fiscal and depositary expenses for the year 1954 (Form B-941). The principal services rendered by Federal reserve banks for governmental agencies have been those in connection with Treasury Department security operations during and since the World War. The services performed for the Reconstruction Finance Corporation, the Farm Credit Administration, the Public Works Administration and other governmental agencies, of this character, have been of more recent origin and relatively smaller in amount. The Treasury Department reimbursed Federal reserve banks for all Liberty Loan and fiscal agency expenses until July 1, 1921. Since that date reimbursement has been made only for expenses relating to new issues although the redemption, exchange and coupon operations currently carried on and in prospect are much larger in volume than the" °new issue" work. New issues are usually closed out in a week or ten days, while redemptions continue over much longer periods, and exchanges from one issue to another have added greatly to the activities of the coupon organization. During 1955 and 1954 the number of Government checks handled by the Federal Reserve Bank of Boston has increased over 500%, and the expense of the department has more than doubled - reaching $16,461.45, for the year ending December 51,1954, and a reasonable annual allowance for office space would be $5,156. Reimbursement has never been made for this service but owing to the character of work performed and the present volume, it is believed that it should properly be on a reimbursable basis. The Boston Loan Agency of the Reconstruction Finance Corporation occupies 4848 square feet of space in the Federal Reserve Bank building and rental of $2.00 per square foot per annum is charged, which includes heat, light and janitor service. A survey indicates that a charge from $2.50 to $2.75 per square foot per annum is made for similar space and service in other business buildings in this vicinity. Reproduced from the Unclassified / Declassified Holdings of the National Archives - 2 FEDERAL RESERVE BARK OF BOSTON Year ending December 31, 1934. Governmental agency expenses and items for which no reimbursement is received, although it is considered that they should be on a reimbursable basis._______________________ TREASURY DEPARTMENT.FISCAL AGENCY DIVISION $21,452.16 Redemptions & Exchanges Accounting 4,924.17 Custody of Securities 8,560.95 Government Coupons 3,911.34 Auditing 3,859.65 Office Space 9,428.00 Vault Space 5,672.00 Miscellaneous Activities 4.676.02 CUSTODIAN RECONSTRUCTION FINANCE CORPORATION Auditing $ 1,495.59 Office Space 6,552.00 Vault Space 3,127.42 2.017.49 Miscellaneous Activities FARM CREDIT ADMINISTRATION AND OTHER GOVT.AGENCIES $ 1,917.86 Departmental Expense 2,966.00 Office Space 1,546.40 Vault Space TREASURY DEPARTMENT.GOVERNMENT CHECKS Departmental Expense Office Space GRAND TOTAL Amount received in reimbursement for expenses i n c u r r e d . _____ $47,304.01 $60,484.27 44,350.61 13,192.50 15,835.97 6,230.26 0 $16,461.43 5.156.00 19.617.45 $99.524.26 $107.490.59 The detailed figures given above are based on the reports to the Federal Reserve Board on Fiscal and Depositary Expenses (Form B-941) for the year ending December 51,1934 Reproduced from the Unclassified / Declassified Holdings of the National Archives 6 . Regulation fixing margin requirements for "loans by banks upon equity securities for the purpose of purchasing or carrying securities registered on national securities exchanges. ’’’In view of the materially reduced amount of credit now being used for the purpose of purchasing and carrying securities, and in view of the various provisions of the Federal Reserve Act and the Banking Act of 1953, we suggest the issue of regulations fixing margin requirements for loans by banks be delayed until there are indications that there will be active demand for credit of the kind under consideration. " When regulations are issued for the banks, such regulations will have to be extended to cover all sources of credit for the purchase or carrying of registered securities so as to cover nany persons” as used in Section 7(d) of the Securities Exchange Act in order that effective and preventative control may be exercised. It is our opinion that the many ramifications of the securities business and credit extended on collateral security which do not bear directly on the speculative use of credit necessitate that any regulations be confined to credit extended on registered equity ^securities when the purpose is for the purchase and carrying of such securities and is so indicated in some form on the note held by the bank. V. * In order to facilitate the operations of margin requirements we would suggest that banks be permitted to loan up to some percentage of the market value, say 75$ in the case of brokers. A non-broker borrower is not entitled to preferred treatment from a bank when the purpose of the proceeds is for purchasing and carrying equity securities, and some simplified form of Regulation T should be worked out applicable to such bank loans. Only the larger banks would be equipped to handle their collateral loans under regu lations similar to those now in force for members of securities exchanges, and then only at considerable additional expense. Further, such an arrangement would prove unsatisfactory.n While we believe that it is the theory of the Bill that the Federal Reserve Board should concern itself only with the regulation of the total credit in use for the purpose of purchasing and carrying of securities, and that it is not the duty of the Federal Reserve banks to police individual loans, nevertheless, it must be recognized that had a regulation been in force compelling the maintenance of margin, it might have proved beneficial. We recognize that this is a very debatable point, possibly solved through bank examinations, although to rely on such a method is to rely on an ”after-the-fact” situation. If regulations are issued, the following should be exempted: 1. Day loans for purpose of clearings. Z. Shipment of securities draft attached. Both are in the nature of cash transactions. Regulations covering foreign branches of domestic banks should be formulated but not issued until it is evident- that these branches are a medium for extending credit. ' In conclusion,’’we do not believe the issuance of regulations is necessary in the immediate future. We believe that insofar as it can be done within the intent of the law, the regulations should be simple and should apply in the main to the total credit in use, thereby reducing the costs of examina tion and policing.t Reproduced from the Unclassified / Declassified Holdings of the National Archives 7. Economic and statistical divisions of Federal reserve banks. (a) (b) Usefulness to directors and officers. Value of Federal reserve bank monthly review. Inasmuch as the economic and statistical department comes immediately under my jurisdiction I have asked Governor Young to investigate the usefulness and value of this department from an unprejudiced outside viewpoint. He advises me that he is hardly prepared to give a detailed reply because he has not had an opportunity to make sufficient inquiries. He has consulted individually three of our directors,- the only ones with whom he could get in touch, and he advises me that these three men say they use the information $rgpy little. This does not surprise me as our board of directors look to the Governor and myself to keep informed on current conditions, and they are kept currently advised by us at our directors’ meetings. In fact, none of our directors h a s : any contact with rcfctit the economic and statistical division and have always been accustomed to consult Governor Young and myself on any specific information that they need. Furthermore, much of the information appearing in the monthly review is old when the directors get it,such information having been already furnished them at our directors’ meetings. A canvass of our officers brings somewhat the same reply, although our senior officers have charts in their offices, furnished by this divi-. sion. Governor Young tells me that so far as he is concerned he uses the information and the department quite liberally. He states that he has attempted to determine in his own mind whether the information that is furnished is more than reading matter to him, and his conclusion is that if the information is not furnished periodically he would be inquiring for it. Owing to his three years’ experience on the Federal Reserve Board and the fact that he is still a member of the Open Market Investment Committee he attempts to keep posted on financial problems both national and international. When the information or figures that he may want are not readily available, he has asked the statistical department for the information and has received information that has been beneficial. Furthermore, he states that that department has prepared and maintained charts for his office which he has used to advantage in many ways. All of this, he tells me, convinces him that the statistical department should be maintained in the Federal reserve banks for the benefit of certain officers even though all the officers and directors do not use the service continuously. He has had the mailing list of the monthly review, now numbering approximately 7554, checked, and finds of this number 657 are sent to banks, 85 to bankers,and the balance used for general distri bution to trade interests and the public. Very few copies are distributed to schools and students, and about 1500 are sent to residents outside of New England. L& p 3 du> neproaucea rrom me unclassified / Declassified Holdings of the National Archives / d © - 2 - He has inquired of the officers of certain large banks as to how much the monthly review is read by their officers. He is informed that so much reading matter now comes to the larger banks that it is all routed to their statistical and research department and only that part of such reading matter as is unusual or of extreme importance is passed on to the officers. I might add that this practice exists in this bank. The monthly reviews of other banks in the system, and the reviews of private banks, both foreign and national, go direct to our statistical department, items being marked which might be of interest and then sent to the senior officers of the bank. Governor Young advises me that he has been unable to ascertain of how much use the outlying and smaller banks make of the monthly review, nor has he been able to ascertain how much the trade and industry utilize that publication. In this connection, it has been my experience that the statistical departments of our larger banks and the individuals in trade and industry, are frequently directly in contact with the economic and sta tistical department, and especially in connection with trade it has brought close contact between the reserve bank and our local business men. Governor Young finds that the mailing list is checked regularly and in answer to inquiries there still seems to be a demand for the review. He therefore assumes that 7300 odd people would not ask f or the information unless the great majority of them at least were interested. He further states that he has had a feeling for several years >\ that the publication of the 12 monthly reviews by the Federal reserve banks together with the Monthly Bulletin of the Federal Reserve Board, was in the nature of an extravagant procedure.'' Whether this is so or not he believes could not be answered except by taking arbitrary action. Suppose the 12 Federal reserve banks should discontinue their monthly reviews for a few months and the reserve banks received no great protest from those now receiving them, it would seem that this should . be conclusive that the reviews were not serving the purpose that the banks and the system intended. On the other hand, if there was a substantial protest it would appear that the reserve banks would be justified in continuing the publications even though we had a smaller circulation. ixeproaucea tram tne Unclassified / Declassified Holdings of the National Archives 8. Establishment of career system for personnel of Federal Reserve Banks v\ It has been the policy of the officers of this bank to encourage promotion within the bank among its staff. A notable example is furnished of an employee who entered the bank at $1600 a year as a general clerk and book keeper and finally was elected deputy governor. There have also been transfers from the Auditing Department to the Department of Bank Examination. Employees in the Banking Department have been given opportunity to work not only in other departments of the bank but also to go out and assist the examining department in the examination of member banks. Our clerks have for a number of years been given the advantage of taking courses under the A.I.B. Although we have one examiner who came to us from the Chicago Federal Reserve Bank, that examiner was an applicant for the position, the change being desired by him for personal reasons. xV It would not appear to be feasible to exchange employees between the Federal reserve banks, as most of our male employees are not only married but own their own homes and it would be a hardship and inconvenient to make such transfer, and most of our female employees live with their families. Since the bank holiday we have, however, from time to time, released men for limited periods to the Federal Reserve Board Departments in Washington, and the experience that they have had from this work has proved valuable to our organization. ** Reproduced from the Unclassified / Declassified Holdings of the National Archives 9. Criticisms of existing gulations or rulings or proced , of the Federal Reserve Board, with specific recommendations as to changes which would correct any un satisfactory features of the relations between the Board or its staff and the Federal reserve banks or member banks. In commenting upon this topic we do not wish to be considered critical or out of sympathy with the requirements of the Board, most of which are in our opinion reasonable and desirable. Having in mind, however, the Board*s desire to ascer tain whether any features of the relations between the Federal Reserve Board and the member banks are unsatisfactory or subject to criticism or seem bureaucratic or impractical or unduly rigid, there are a few matters which we believe should be mentioned in a general way, inasmuch as we sense some feeling of criticism on the part of member banks though it has not been openly expressed. The matters referred to are conditions of membership, conditions applied in connection with the issuance of voting permits to holding company affiliates, the denial of per mits to directors under Section 52 of the Banking let of 1955 and the policy with respect to Clayton let permits. In several instances conditions have been imposed in connection with the admission of State banks to membership or technical difficulties have been raised which have seemed to the applying banks to go beyond the requirements of law or to deal with matters which have been free from criticism in particular cases or to be unnecessar ily burdensome. It is true that in some instances the conditions have been modi fied or withdrawn, but in some cases they seem to have left an unfavorable impres sion. Our suggestion is, that before unusual conditions, that is conditions not required by law or which may be a serious burden to an applying bank, are imposed we be given an opportunity to review them and if neeessaiy or desirable, to discuss them in an informal way with the applying bank. 11 \ In connection with the issuance of voting permits to some holding company affili ates,*’we have had some indication that conditions imposed have been looked upon as going beyond the requirements of the law or have been considered too burdensome or impractical of fulfillment • We believe that in all cases the requirements of the Board have contemplated the accomplishment of results which are theoretically desirable. At the same time we recognize the difficulty which confronts the staff of the Board, in the absence of direct contact with the applicant and its subsidiaries in imposing conditions which are possible and feasible in all cases, and we believe I1 that it might serve to eliminate causes of criticism if an opportunity were afforded to discuss the conditions with the applicant before they are definitely imposed. ^ According to our records, none of the applications by directors and officers of member banks for interlocking relationships under Section 52 of the Banking Act of 1955 has been granted, but there have been several instances where we believe the Federal Reserve Board*s denial of a permit has been looked upon as working a hardship upon a member bank. We have reference to cases where there have been practically no dealings between the dealer in securities and the member bank, and where the services of a director connected with a dealer in securities have been desired by the member bank because of his special knowledge of the investment business. In all cases where a permit has been denied, we have furnished advice as to the Board* s decision in the matter as requested by the Board. It is our impression that the Board*e reasons for denying the permits have not always been looked upon as convincing^' and in one case a question was raised as to the Board*s policy with respect to issuing permits under Section 52. We ourselves believe that in several instances it would have been helpful to a member bank to have the services of a director who was denied a permit, and that the granting of the permitxxwould not have been incompatible with the public interest. 1 Reproduced from the Unclassified / Declassified Holdings of the National Archives 9. (Continued) — 2 \'xWith respect to Clayton Act applications and permits, while no specific criticism has been received by us, we surmise that application forms have been considered unnecessarily broad in the scope of the personal information requested." There is no definite comment which we can report and this is merely an impression. It has been intimated to us occasionally that desirable directors have found it too much trouble to apply for a permit and have preferred to relinquish their bank connections. In granting some of the permits, the Board has occasionally com mented upon a director*s attendance at meetings of the board of directors of a nonmember bank or upon his indebtedness to a nonmember bank or to another insti tution and has requested us to bring such comments to the attention of the director and to endeavor to bring about an improvement in attendance or a reduc tion of the indebtedness. Here again we have had no definite reaction that can be quoted, but we have the impression that the reaction has sometimes been un favorable and that the matter of attendance at directors* meetings of other institutions and of indebtedness to nonmember banks may have been looked upon as / "beyond the concern of the Boards Of course we realize that the indebtedness of a director to another institution is of indirect importance to the member bank and we understand the purpose of the Board*s comment. Whether such comments are correctly interpreted, especially in cases where the indebtedness has not been the subject of criticism in reports of examination, is open to question. ,f It is rather difficult to comment to the Board on these matters because there is a natural reticence on the part of applicants for permits about expressing any criticism. We are of the opinion though, that the matter of permits whether to holding company affiliates or under Section 52 or under the Clayton Act 'is potentially the most prolific single cause of criticism on the part of member banks and others, of the Federal Reserve Board. If the actions of the Board and its staff seem bureaucratic or impractical or unduly rigid, we believe it is more apt to be with respect to these matters than with respect to other regula tions or requirements that relate to member banks* In order to qualify under Section 8 (a) of the Securities Exchange Act, a non member bank must sign agreement form T-l, the second paragraph of which is objected to ty many nonmember banks, including savings banks, in this district because of its scope. Reproduced from the Unclassified / Declassified Holdings of the National Archives $«3 7 , * 3 March 18, 1955• Mr. F. H* Curtiss, Chairman, Federal Reserve Bank of Boston, Boston, Massachusetts, Dear Mr* Curtiss* Reference is made to governor Eccles* let ter of February 6, 1955 (X-9115), to the Chairmen of all Federal reserve banks, requesting that the Board be advised within thirty days as to the views of each bank in regard to certain subjects, a list of which was attached thereto. It is understood that the*matter is receiving your attention, and it will be appreciated if you will indicate when you expect that a reply will be submitted. Very truly yours, (Signed) L, P» BEitiSA L, P* Bethea, Assistant Secretary. LPB-CM-jcb Reproduced from the Unclassified / Declassified Holdings of the National Archives >,"’F March 11, 1955. Mr. F. H, Curtiss, Chairman, Federal feeeerve Bank of Boston, Boston, Massachusetts• Dear Mr. Curtiss: Reference is made to Governor Eccles1 letter of February 6, 1955 (I-9115), to the Chairmen of all Federal reserve banks, requesting that the Board be advised within thirty days as to the views of each bank in regard to certain subjects, a list of which J?A- Awl „ ■fettee it oppei has ^fcn-# e U i v e a 'frum'y o m attached thereto. such lot tec. will be appreciated if you will adviswr when Very truly yours. L. P. Bethea, Assistant Secretary^ X LPB-jcb p ) FI L E Reproduced from the Unclassified / Declassified Holdings of the National Archives ,F ^ r m N o .l3 I Office Correspondence Tn ar. Morrill______________________ From. FEDERAL RESERVE BOARD Date March 11, 1955. Subject:. 3 ^ 1,-3 / Mr. Bethea ero 16— 852 To date replies have been received to the Board*s letter of February 6 (X-9115) from only four Federal reserve banks. Inasmuch as Governor Eccles requested that the banks respond within thirty days, which period expired March 8 , it seems desirable at this time to send out follow-up letters to those reserve banks which have not responded. I have, therefore, attached a draft of a follow-up letter which I propose, with your approval, to send to the eight remaining reserve banks. Reproduced from the Unclassified / Declassified Holdings of the National Archives March 18. Replies or acknowledgments now received from all but four FRBanks. ., jcb Reproduced from the Unclassified / Declassified Holdings of the National Archives Keproauced from the Unclassified / Declassified Holdings of the National Archives 3J7,-_3 Fe d e r a l Re s e r v e o f N e w Y Ba n k o r k March 25, 1935. My dear Mr. Bethea: This morning your secretary telephoned this office, asking for two additional copies of the statement of the views of this bank in respect of the questions raised in the Board’s letter (X-9115) of February 6 , 1955, which Mr. Case forwarded to the Board under date of March 15, 1935. The two copies are enclosed for your use, and, in the event that you should need additional ones, we shall be glad to supply them. Very truly yours, Secretary to Mr. Case Mr. L. Bethea, Assistant Secretary, Federal Reserve Board, Washington, D. C. Enclosures (2) Reproduced from the Unclassified / Declassified Holdings of the National Archives c « 7 , - 3 U ;> Fe d e r a l Re s e r v e B a n k o f - f N e w Y o r k March 15, 1955. Dear Governor Eccless The list of subjects which accompanied!your letter (X-9115) of February 6 , 1955, has been considered by our directors and officers in the manner suggested by you, and a statement of the views of this bank with respect to these questions is attached hereto. We have appreciated the opportunity to present our views on these matters, particularly with regard to certain aspects of the relations between the Federal Reserve Board, the Federal reserve banks, the member banks and the public, and we shall look forward to receiving the results of the Board's study and analysis of the replies of the several Federal reserve banks. Hon. Marriner S. Eccles, Governor, Federal Reserve Board, Washington, D. C. Encs. Reproduced from the Unclassified / Declassified Holdings of the National Archives 1. (a) GENERAL CREDIT SITUATION Are commercial banks doing everything in their power to improve the situation? We have assumed that the purpose of this question is to ascertain our views as to whether or not the commercial banks of this district are doing everything possible to make credit available for productive use in agricul ture, commerce and industry, and that it does not refer to those aspects of the credit situation over which individual commercial banks exercise little influence* To answer the question, as we have interpreted it, is largely a matter of opinion, since the extension of credit must be viewed in the light of the risks assumed in each individual case. The experiences of the banks during the past five years have emphasized the difficulty of expressing whole sale judgments on this question. The banks have been subject to criticism, on the one hand, for not being more liberal in the extension of credit and subject to censure, on the other hand, by bank examiners and other supervisory authorities, for the quality of loans and investments previously made. It is our opinion that the commercial banks in this district are ready, willing and even anxious to make credit available to their customers wherever there is a reasonably sound basis for borrowing. This is the business of the banks, the reason for their existence and a source of their profits, and they are under tremendous pressure, at the present time, to employ funds, which are in large supply, so as to meet their operating expenses and other charges. Most of the questions recently raised with respect to lending opera tions of commercial banks have had to do with intermediate term credits, not prime in quality, which usually have been more in the nature of working capital loans than strictly conmercial credits. operating Our own experience in this field, under the provisions of Section 13b of the Federal Reserve Act, has Reproduced from the Unclassified / Declassified Holdings of the National Archives 2 demonstrated to us that there is not a very widespread demand, even for credit of this character, which the commercial banks can or should supply. After approximately eight months of operation, we have approved some 231 applications for industrial loans, the aggregate amount of the prospective credit accommoda tion in these cases being approximately $24,000,000. The commercial banks throughout the district have cooperated effectively with the Federal Reserve Bank of New York in making credit of this sort available, but it is our view that by far the greater part of this lending has been of a character not suitable for commercial banks operating solely on their own account. Demands for credit which do not meet the liberal requirements, both as to soundness and maturity which have been set up in connection with loans made under Section 13b of the Federal Reserve Act, clearly would seem to be beyond the scope of the proper activities of commercial banks. The investment policies of the banks of the district have been cir cumscribed by the same conditions which have affected all those who have funds to invest at this period. To the usual uncertainties regarding the future prospects of the security market in general, and the affairs of individual issuers of securities in particular, have been added doubts as to the future of the currency unit and as to governmental policies with respect to the con duct and profits of business, and to the issuing of and dealing in securities. In such circumstances, improvement of the situation does not seem to be within the powers of the commercial banks. (b) If not, what steps can be taken by the Federal reserve banks or otherwise to bring about an improvement? P Steps which, in the general terms of your question, might be taken to bring about improvement in the credit situation, involve consideration of a whole range of problems, including the ultimate character of our commercial banking system, the disposition of our savings bank business, the provision of Reproduced from the Unclassified / Declassified Holdings of the National Archives 3 intermediate term credit and working capital for commercial and industrial enterprises, and the functioning of the long term private capital market, in cluding the market for mortgage money. Permanent measures for improvement of the general credit situation, we believe, should be directed toward those weaknesses in our present banking system which contributed so heavily to the banking difficulties of the past 15 years, and more, and which have been alleviated, perhaps, but not cured by recent or proposed banking legislation. Until such problems as unification of the banking system, the restriction or separation of commercial and savings banking in the same financial units, the establishment of institutions designed and equipped to provide intermediate term credits for industry and sound mort gage financing for construction, and tho appropriate uses of branch banking, have been solved, whatever steps are taken for the improvement of the general credit situation must be considered as partial or temporary steps. Such an intermediate or temporary step might be the enactment of that section of Title II of the proposed Banking Act of 1935 which would authorize the Federal Reserve Board, by regulation, to make any definition of paper eligible for discount by Federal reserve banks subject only to the limitation that such paper should be commercial, agricultural or industrial paper, and which would extend the authority for the Federal reserve banks to make advances to member banks sound asset. on their promissory notes secured by any To provide a means of discount of all sound assets of commer cial banks (at the discretion of and at a price fixed by the Federal reserve banks) would make it possible to substitute real standards of soundness for partly fictitious standards of liquidity in our banking operations, as now conducted, and should encourage the use of credit wherever such use is justified. The enactment of this provision of the proposed bill, however, would make it all the more necessary to proceed with the fundamental reorgani zation of the commercial banking system and the appropriate treatment of Reproduced from the Unclassified / Declassified Holdings of the National Archives 4 savings bank business. The existing pressure of large excess reserves and the need of the banks for earning assets, combined with enlarged, opportunities for long term investment, creates a situation which introduces certain elements of danger into the banking system, unless the presently proposed legislation actually is viewed as an emergency measure, and a more permanent corrective is promptly sought. In connection with the private capital market there also appears to be an immediate opportunity for a contribution toward the improvement of the general credit situation. Delay in reopening the private capital market re mains a critical obstacle to such improvement, and to the whole progress of recovery. A resumption of private long term financing, with all that it implies in the way of replacement of worn out or obsolescent plant, equipment, and housing, and the promotion of new enterprises and new building, still appears to be a necessary prerequisite to that reduction in governmental ex penses and/or increase in governmental income which will eliminate the re curring large Federal deficits, and thus make the most important of contribu tions to the improvement of the general credit situation. A revision of the Securities Act of 1933 and of the Banking Act of 1933, with a view to the elimination or modification of those sections of these acts which may unnecessarily interfere with the functioning of the private capital market, affords an important means of direct attack upon this problem. Allied to it, however, are all of the questions involved in the future of our currency unit, of the regulation of business profits, of the attitude of the government toward the railroads and the public utilities, and the questions raised by those rigidities in the economic system, such as the costs of certain materials and the wages of certain labor groups, which hinder the resumption of productivity in such fields as building construction. Reproduced from the Unclassified / Declassified Holdings of the National Archives 5 These are questions which, obviously, cannot be developed within the limits of this memorandum. As a minor and temporary contribution to the further improvement of the general credit situation, the continuance of the present liberal policies of the Federal reserve banks with respect to their operations under Section 13b of the Federal Reserve Act is warranted. This has some importance from the standpoint of meeting the demands of borrowers whose command of credit is of questionable validity under present emergency conditions, and in the absence of the proper financial machinery for this sort of lending. Reproduced from the Unclassified / Declassified Holdings of the National Archives 2. (a ) INTEREST RATES On time and savings deposits of* member banks. In so far as this district is concerned, the present maximum rate of interest permitted on time and savings deposits of member banks by regu lation of the State banking departments and/or the Federal Reserve Board appears to bear a proper relation to the average yield on invested funds. On the one hand, it is not so high as to be a deterrent to direct long term in vestment by individual investors. On the other hand, it is not so low as to precipitate a substantial and rapid withdrawal of such deposits from the banks, which would again place the banks in a strained position. Finally, it is a rate which the banks can afford to pay without having to reach for high yields upon their investments in order to meet their operating expenses. h In general and on principle, we are not in favor of the detailed regulation of such rates by national action. It seems to us that the goal of administration should be relatively infrequent adjustments of the maximum rate of interest to be paid on time and savings deposits by member banks, in accordance with shifts in the trend of long term rates of interest, leaving the detailed adjustment of rates, beneath this maximum, to the individual banks. Frequent adjustment of the maximum rate, by the Federal Reserve Board, tends to fix upon the Board the responsibility for continuous control over such rates and to take from the member banks their initiative in such matters. Such a nationally fixed rate obviously cannot take account of different cir cumstances of various banks and different conditions in various parts of the country. '' (b ) On loans of member banks and on industrial advances and commitments by Federal reserve banks. http://fraser.stlouisfed.org/dinarily Federal Reserve Bank of St. Louis Interest rates charged on loans by member banks in this district or vary little from year to year, except with respect to loans granted Reproduced from the Unclassified / Declassified Holdings of the National Archives 2 to prime credit risks in the financial centers. Rates on the latter class of loans fluctuate to a considerable extent with the current value of funds in the market. The rate charged by the average bank in smaller cities and in the country, however, seldom varies from the usual six per cent per annum. 'If we should have a long period of cheap money which would justify some downward revision of this established rate, the natural pressure for the employment of funds, which would characterize such a period, probably would compel such a revision. Already, there are indications that competi tion to place funds advantageously is bringing about a reduction of rates where the credits involved are of a character to warrant such reduction. It has been our observation in the past, however, that attempts to hasten this natural action are quite likely to make more difficult the problem of borrowers v/hose credit is not of the highest standard. ‘ ,1 The rate structure of this bank with respect to industrial advances and commitments appears to us to be satisfactory, both from the standpoint of the level of rates charged and of the relationship existing between the rates for the various kinds of loans and commitments.^ Furthermore, we think it would be quite undesirable to reduce these rates below the going rates charged by banks of the district to their better customers, a step which would establish a wholly illogical rate position. (This question is the subject of a separate letter to the Federal Reserve Board, which is being written in response to the BoardTs letter (X-91B2) dated February 11, 1935.) Reproduced from the Unclassified / Declassified Holdings of the National Archives 3. MATTERS AFFECTING ADMISSION OF NONMEMBER BANKS TO FEDERAL RESERVE SYSTEM (a) Earnings of nomnember banks from exchange collection charges. ^ The nomnember banks of this district are not deriving income from ex change collection charges on checks, and in this respect there is no obstacle to their becoming members. V; (b) Present conditions of membership. The present revision (June 30, 1933) of the Conditions of Membership comprises a list of 18 standard conditions. Many of these conditions appear to be of a desirable character, and banks entering the System have accepted them without serious hesitation. Nevertheless, we think that it would be well to review the conditions at this time in the light of their history and pur pose, and the statutory changes made since the adoption of each. Furthermore, State member banks have been admitted to the System over the course of a number of years, and the conditions to which such banks are severally subject differ widely. In considering a revision of the condi tions, therefore, we think it would be desirable to endeavor, in so far as may be possible, to make them uniform, both as to present State bank members and as to State institutions joining the System in the future. The conditions, in their present form, are, as we conceive them, of three general kinds: (1) those that serve to subject State member institutions to certain provisions of law affecting national banks, to which such State in stitutions might or would not otherwise be subject and to which it is desir able that they should be subject; (2) those that are designed to keep the Federal reserve banks and the Board informed as to certain matters affecting their relations with the State member banks; and (3) those that serve as Reproduced from the Unclassified / Declassified Holdings of the National Archives 2 reminders to such institutions of certain features of good banking practice and of certain provisions of the statutes which might otherwise be overlooked. Conditions of the first kind, generally speaking, may be said to be those numbered 7, 8 t § and 18; those of the second kind, numbers 1, 9, 12 and 14; and those of the third kind, numbers 2, 3, 4, 5, 6, 7, 8, 10, 11, 13, 15, 16 and 17. As will be noted, the purposes of the several conditions overlap to some extent. Generally speaking, we think conditions numbered 1, 9, 10, 14, 16 and 18 should be retained in their present form, and that conditions numbered 2, 3, 5, 6 and 15, which seem unnecessary, and conditions numbered 4, 11 and 13, which are adequately covered by statute, should be eliminated. Condition numbered 7, we believe, should be omitted or at least re vised, in view of recent amendments to Section 9 of the Federal Reserve Act and Section 5136 of the Revised Statutes. It would also seem that Section 24A of the Federal Reserve Act, which relates to national banks only, establishes the standard by which the Board should be guided in respect of condition numbered 8, and that this condition might be revised accordingly. We think that consideration should be given to a revision of con dition numbered 17, which should be considered in connection with condition numbered 12. We construe condition numbered 12 to relate solely to the is suance and sale as a business of notes, bonds, and mortgages, and certificates of participation therein, although some time ago, in an informal discussion with one of our member trust companies, its officers felt that the terms of the condition overlapped those of condition numbered 17. Condition numbered 17 relates to the investment of trust funds ”in participations in pools of ft mortgage bonds or other securities." We think that some ambiguity results Reproduced from the Unclassified / Declassified Holdings of the National Archives 3 from the phrase ”in participations in pools.” The idea of a pool would seem to relate to a case such as that in which securities are issued under a col lateral trust indenture where the collateral consists of mortgage bonds and other securities, but it is doubted whether the condition was intended to be so limited. If it is desired to prohibit the investment of trust funds both in mortgage participation certificates and in collateral trust instruments secured by mortgages, we think the condition should so state. The condition, to the extent that it prohibits the investment of trust funds in mortgage participation certificates, and to the extent that it limits a member bank ”to the collective investment of small amounts of trust funds where the cash balances to the credit of certain trust estates are too small to be invested separately to advantage if the bank owns no participation in the securities in which such collective investments are made and has no interest in them ex cept as trustee or other fiduciary,” ignores the desirability of a trust company being able to participate mortgages among the several trusts for which it is acting as trustee, the method in which such participation is effected, and, in so far as the law of the State of New York is concerned, the fact that subdivision 7 of Section 188 of the Banking Law expressly permits trust com panies organized under the laws of the State to invest trust funds in partici pations in bonds and mortgages, including those in which the trust company owns a participation. It is our understanding that this phase of the business of a large trust company is conducted substantially as follows: The trust company, know ing that it will have, over a period of three to six months, trust moneys to invest, will, in anticipation of the requirements of its several trusts, make a commitment to purchase a large mortgage, expecting delivery thereof to be made in thirty, sixty or ninety days. When the mortgage is delivered, title Reproduced from the Unclassified / Declassified Holdings of the National Archives is taken in the name of the trust company, appropriate entries being made on its books to indicate that the- mortgage was purchased for the investment therein of trust funds, and participations therein are issued to the extent of the trust funds then awaiting investment. The balance of the mortgage (to the extent that participations therein have not been issued) is held by the trust company, although carried in an account indicating that such balance is held for the future investment in parts thereof of trust funds for which the trust company is acting as trustee. It should not be overlooked, however, that until participation certificates have been issued for the entire amount of the mortgage, the trust company itself has an interest therein. If the large trust companies are not permitted to operate in this manner, it as ap parent that the small trusts are penalized. We think, however, that this is a matter which requires further detailed consideration before any attempt is made to redraft the condition. While the present condition may be suitable in the case of smaller institutions, we think that even as to them, it works an undue hardship on small trust estates. ^ We think that attempting to include in the conditions, matters which are substantially covered by statute, serves unnecessarily to magnify the requirements for membership; that, at most, a reference to the applicable statutes is all that is desirable as a reminder to applicant banks of certain specific provisions of the laws which will govern their operations as members of the System. For some time it has been the policy to admit, as State bank members of the Federal Reserve System, nate from their balance sheets ciation in market only banks which can and will elimi all estimated value of securities held, losses, and all depre other than those of the first Reproduced from the Unclassified / Declassified Holdings of the National Archives 5 four grades. These requirements for elimination of losses and depreciation have been much more severe than any requirements which it has been possible to apply to banks which are already members of the Federal Reserve System". There is reason to believe that this has had the effect of preventing the entrance of a number of banks into the System, whose condition and management compare favorably with the condition and management of many banks already members of the System. In view of the desirability of promoting unification of the bank ing system, which is recognized in existing and contemplated provisions of Section 12b of the Federal Reserve Act, it would seem desirable that this phase of System policy, as to the admission of non-membr-r State banks, should be liberalized. Such relaxation of requirements as would permit the entrance into the System of banks in distinctly unsatisfactory or dangerous conditions, of course, is not suggested.* (c ) Advisability of extension of membership to banks outside the States and the District of Columbia. Our position on this question was set forth in our two letters to the Board, dated October 20, 1933, and November 29, 1933, from which we quote the following: "October 20, 1933. S/"It is our view that, particularly in the light of recent banking legislation, we should first study the whole question of membership of banks in dependencies, insular possessions, or parts of the United States outside the continental United States, and de termine what our general policy is to be with reference to such banks /- It may well be that the banking laws governing these areas, and the banking supervision which is extended to them, do not wabrant consideration of applications for membership, with its possible cor ollary of participation in the Federal deposit insurance fund. // "Beyond this question of policy is the question of method and approach* Here it is our view that before individual banks can be examined intelligently for membership in the System, a general survey of economic and banking conditions in the areas affected must be made. The appropriate agencies for making such surveys, it seems to us, would Reproduced from the Unclassified / Declassified Holdings of the National Archives 6 be the Governmental units charged with the administration of the de pendencies or insular possessions concerned, with the possible assist ance of representatives of the banking supervisory authorities and of the Federal Reserve Board and the Federal reserve banks.” '* "November 29, 1933. *** "We are not able to relinquish the opinion expressed in my pre vious letters that matters of national and System policy are here in volved and that an investigation of the whole problem, preferably by or in cooperation with the appropriate Governmental agencies, is a necessary prerequisite to action upon applications for membership sub mitted by individual banks in these areas. "If, then, we are to be called upon for such recommendations in the case of the three banks in Puerto Rico which have discussed the matter with us, we should want to make not only an examination of the applying banks, but also a study of the whole banking situation in that terri tory and of those allied matters, knowledge of which is necessary for an understanding of the banking position. '%uch a survey, it seems to us, would have to take account of the following: (1) The government of the territory, including the nature and extent of the control exercised by American officials. (2) The economic organization of the territory and its trade and financial relationships with the continental United States, (3) The banking system of the territory, the laws which govern its operation, the supervision which it receives, and the character of business which it transacts. (4) The relation of the factors mentioned in the preceding paragraph (3) to successful membership in the Federal Reserve System (and presumably in the Federal Deposit Insurance Corporation), and the general requirements for membership which should be established. (5) The possibility of maintaining proper contact with such banks and an adequate knowledge of their affairs, if and when they are admitted to membership, and the possibility of providing them with the services which are supposed to be the corollary of membership, includ ing such questions as the necessity for establishing a branch or agency or currency depot of this bank in the territory. Reproduced from the Unclassified / Declassified Holdings of the National Archives 7 (6) The general benefits and advantages of membership, from the standpoint of the individual banks and the people of the territory on the one hand, and from the standpoint of the Federal reserve banks and the United States on the other. "It is obvious that a proper investigation of these matters would have to be carried on both here and in Puerto Rico, and that it must trespass upon many fields which ordinarily are within the provinces of the State Department, the Treasury Department, the War Department, and other departments and bureaus concerned with territorial affairs. Furthermore, in any consideration which is given to the problem as it affects the banks in Puerto Rico, cognizance should be taken of the situation which exists in Alaska and in other dependencies, insular possessions, and parts of the United States outside of the continental United States, such as the Philippine Islands, Hawaii, Canal Zone, the Virgin Islands, American Samoa, and Guam. "It is in the light of these facts that we have urged that the question be considered as one for Governmental study, presumably with the assistance of the Federal Reserve Board and the Federal reserve banks, and that failing such a solution, we now suggest that it be considered a System matter for study by the Federal Reserve Board with the cooperation of the Federal reserve banks. Frankly, this bank is not now in a position to divorce from their other duties the personnel which would be required to make a thorough and competent study of this problem. At the some time we recognize the unfairness, to the banks and people concerned, of postpon ing action on this matter until our convenience is suited. In these circumstances would it not be appropriate to appoint a system committee, similar to the committee which investigated the question of branch banking for us, and to require of it a prompt report upon the whole question of membership of banks in our territories, dependencies, and insular possessions?" Reproduced from the Unclassified / Declassified Holdings of the National Archives 4, NEED FOR CONTINUANCE OF ASSISTANCE OF RECONSTRUCTION FINANCE CORPORA TION IN CONNECTION WITH REHABILITA TION OF CAPITAL STRUCTURES OF BANKS. The operations of the Reconstruction Finance Corporation, in con nection with the rehabilitation of the capital structures of banks in this district have been of tremendous value during the recent emergency. During the period of these operations, up to mid-February, 270 national banks have received $144,788,000 of capital assistance, and 77 state member banks have re ceived $110,184,000, while retirements of preferred stock or capital notes thus purchased have only totaled approximately $54,659,000. The original program of the Reconstruction Finance Corporation to subscribe to preferred stock or capi tal notes of banks in amounts sufficient to give them net sound capital equal to approximately ten per cent of deposits is not yet completed. In this district there are approximately 14 state member banks and 68 national banks whose applications are still pending. We feel that the activities of the Reconstruction Finance Corporation in this field should continue until these pending applications have been disposed of, or until the problems of these banks have been settled in some other way. There also appears to be a temporary need for the continuance of this type of activity by the Reconstruction Finance Corporation to bring further as sistance to certain banks which have already received capital aid. These are banks with respect to which the original estimates of capital needs now appear to have been too low and which, upon the basis of current examination reports, still appear to be below the standard which has been considered desirable. Our data concerning this type of situation are not complete, but a survey of reports of examinations made since October 1, 1934 indicates that of 410 banks examined, approximately 7 state member banks and 48 national banks may be said to need additional capital assistance, ranging from moderate amounts' up to very sub http://fraser.stlouisfed.org/ stantial Federal Reserve Bank of St. Louis amounts, if the banks are to be placed in a thoroughly sound capital Reproduced from the Unclassified / Declassified Holdings of the National Archives 2 position. The capital rehabilitation program of the Reconstruction Finance Corporation properly could be continued until there has been a final disposition of situations of this kind, which really would involve no extension of the orig inal program. When the present program of capital rehabilitation has been com■l * pleted, however, we believe that the Reconstruction Finance Corporation should definitely terminate its activities in this field. Looking to the future, and so long as the Federal Deposit Insurance Corporation is in existence, it might be advisable for that corporation to have the option of making temporary capital advances to banks with weakened capital structures, if it appears likely that such advances would permit the banks so assisted to be restored to sound condition and to be put in a position to operate profitably in the future, a procedure which, it Is to be hoped, would result in a smaller contribution by the Federal Deposit Insurance Corpora tion to the banks.involved, than if they were permitted to fail. (A suggestion along these lines was contained in the report of the Federal Reserve System Committee on legislative Program submitted to the Federal Reserve Board under date of December 17, 1934,) The expansion of the functions of the Federal Deposit Insurance Corporation to meet this need would seem to be appropriate, so long as underlying defects in our banking system make possible numerous bank failures, inasmuch as the prevention of bank failures is much more im portant and constructive, than the payment of depositors after a bank has been closed x\ Reproduced from the Unclassified / Declassified Holdings of the National Archives 5. ADEQUACY OF REIMBURSEMENT OF FEDERAL RESERVE BANKS BY TREASURY AND FOR OTHER GOVERNMENTAL AGENCIES FOR VARIOUS SERVICES RENDERED AND FOR SPACE USED IN FEDERAL RESERVE BANK BUILDINGS There is attached a summary of the expenses of this bank as fiscal agent and depositary of the United States for the period January 1, 1934 to December 31, 1934, exclusive of expenses for banking house space utilized in these operations, and exclusive of expenses incurred in connection with services rendered to governmental agencies such as the Public Works Administration and the Federal Farm Mortgage Corporation, with which we have contracts calling for reim bursement of salary and out-of-pocket expenses. A substantial part of the expenses set forth in this summary are at tributable to services which we perform as depositary, such as the payment of Government coupons, interest checks, disbursing officers* checks, and Treasury warrants. It has never been the policy of this bank to seek reimbursement for expenses incurred in rendering these services, which appear to be the same sort of services which a commercial bank would render its depositors in return for balances maintained with it. The general question of obtaining additional reimbursement for non depositary services which we render to the Treasury Department has been the subject of discussion at frequent intervals practically since the establishment of the System. Under date of August 3, 1922, the Treasury Department pointed out in a letter addressed to this bank by the then Undersecretary of the Treasury, that the Treasury had no funds from which it could reimburse Federal reserve banks for their services other than those relating to new issues of Government securities, and that there was a strong feeling in Congress that the operations of the Federal reserve banks were sufficiently profitable to enable the banks to absorb any other expenses connected with their fiscal agency operations. It is our understanding, therefore, that the Treasury Department would have to obtain from Congress an ad ditional appropriation with which to pay all fiscal agency expenses of the Federal reserve banks, other than those relating to new issues, and we do not recommend Reproduced from the Unclassified / Declassified Holdings of the National Archives 2 attempting to secure such complete reimbursement at this time. i Nevertheless there are certain services which we perform, apart from those relating to new issues, where the Treasury already appears to have adequate authority in law to pay for expenses and services rendered, such as purchases of gold and silver abroad. In these cases wo feel that the Federal reserve banks should seek immediate reimburse ment . ^ As a matter of principle, it is our belief that, under existing conditions, the Federal reserve banks should be reimbursed by the Treasury Department for var ious non-depositary services which they now render for that department without receiving adequate reimbursement.' Referring to the Board’s memorandum B-941 (for the six months ended June 1934) these services may be listed as follows: Exhibit "C" »D" »E” "Kn " 0" "S" "T" "V?" United States Government Issues - Redemptions and Exchanges. United States Government Issues - Accounting. United States Government Issues - Custody of Securities. Safekeeping of Securities for various Government Officials and Agencies. Certification of Foreign Exchange Rates. Miscellaneous Activities - Reconstruction Finance Corporation, Farm Credit Administration, etc. Farm Credit Administration. Gold purchased abroad, Silver purchased abroad, etc. v' While we do not obtain reimbursement from the Treasury Department on account of rent, light, heat, power and similar items of overhead expenses in con nection with the use of space in the bank building, we do obtain a nominal payment for space in the bank building which we rent to agencies of the Government other than the Treasury Department. It is our opinion that the proximity of these agencies to our offices is a convenience which warrants the establishment of smaller than market rentals for the space which they occupy. Tho ultimate solution of this whole problem seems to us to lie in the restoration of some form of franchise tax, such as was formerly paid to the Govern ment by the Federal reserve banks, which would justify the establishment of an appropriate schedule of charges, on a business basis, for all services rendered by the Federal reserve banks to the Treasury and other governmental agencies-, and for space in Federal reserve buildings used by such agencies. v Reproduced from the Unclassified / Declassified Holdings of the National Archives FISCAL AGENCY AND DEPOSITARY EXPENSES FOR YEAR ENDED DECEMBER 31,, 1934. EXHIBIT B New Issues C Redemptions and Exchanges D Accounting (Government Bond) E Custody of Securities Government Issues TOTAL EXPENSE REIMBURSABLE $107,756 $ 99,443 81,081 | 8,313 81,081 - 5,878 - 5,878 NOT REIMBURSABLE ) ) 13,252 F Auditing - Government Issues 4,364 - 4,364 G Government Checks 49,295 - 49,295 H Government Coupons 25,666 - 25,666 I Treasurer’s General Account 6,646 - 6,646 J Transfer of Funds by Telegraph 473 - 473 K Safekeeping - Government ) Accounts - other than New ) Issues, Reconstruction ) Finance Corp. and Farm Credit) 58,797 52,060 6,737 L Purchase and Sale of Securities 4,968 - 4,968 M Supplying Government agencies ) with Currency and Coin ) 9,179 8,670 509 Foreign Exchange (President’s ) order of March 10, 1933) ) 33,580 29,637 3,943 Foreign Department - exclusive) of "N*» ) 41,909 12 41,897 Miscellaneous Activities Treasury Department 11,666 N 3,151 10,101 0-Pv- w Q R Reconstruction Finance Corp. s Miscellaneous Activities Government Agencies T Farm Credit Administration TOTAL ---------- Ac cou nt ing Dep art me nt, March 4, 1935. ) ) 197,547 ) ) 11,124 - 175,240 - 11,666 22,307 11,124 19,227 9,463 9,764 - $682,408 $377,676 $304,732 Reproduced from the Unclassified / Declassified Holdings of the National Archives AMOUNTS COLLECTED FROM GOVERNMENT AGENCIES AS FISCAL AGENT AND DEPOSITARY FOR YEAR ENDED 1934 EXHIBIT B & E Treasury Department - New Issues - - - - - - - - - - - - - - K Comptroller of the Currency Insolvent Bank Division - - Public Works Administration M - - - - - - - - - - - - - - - - - - -$20,422 5,748 Federal Farm Mortgage Corporation - - - - - - - - 6,731 Home Owners* Loan Corporation - - - - - - - - - - 18,198 Alien Property Custodian - - - - -- -- - -- $102,594 961 52,060 Postage - Shipments of Currency and Coin to San /uan, West Indies, Coast Guard Stations and Circulated Coins to Federals - - - - - - - - - - - - 8,670 N Foreign Exchange Control - - - - - - - - - - - - - - - - - - 29,637 R Reconstruction Finance Corporation - - - - - - - - - - - - - 175,240 O-P- V-W Foreign Department - Miscellaneous -- - - - - - - - - - - T Farm Credit Administration - - - - - - - - - - - - $7,868 Postage and Insurance - Shipments of Farm Loan Bonds and Coupons - - - - - - - - - 1,575 12 9,465 T O T A L -------------------- $377,676 Account ing Department, March 4, 1935. Reproduced from the Unclassified / Declassified Holdings of the National Archives 6. (a) REGULATION FIXING HJtGIN REQUIREMENT FOR LOANS BY BANKS UPON EQUITY SECURI TIES FOR THE PURPOSE OF PURCHASING OR CARRYING SECURITIES REGISTERED ON NATIONAL SECURITIES EXCHziNGES Circumstances under which regulations should be issued. v In our opinion, inasmuch as the statute does not require the is suance of such regulations, the Federal Reserve Board should not, at the present time, issue regulations with respect to bank loans on securities, for the following reasons: 1. Regulation T has not been thoroughly digested by the brokers and others subject to its provisions. In general the brokerage community has only a limited knowledge of the regulation and a considerable amount of explanation and education is necessary before we can even tell how the regulation will operate. The present technical dif ficulties already apparent are sufficient to demand the Board’s concentration. An active security market will undoubtedly aggravate the present problems and uncover further unforeseen difficulties. A new set of bank loan regulations for securities even if couched in general terms would cause increased confusion and re tard the present healthy application of Regulation T. 2. The Banking Act of 1933 gives the Reserve System large powers of control for the whole field of banking, in so far as speculative credit, or the uses of credit for ’’any other purpose inconsistent with the main tenance of sound credit conditions” are concerned. Regulations covering bank collateral loans under the Securities Exchange Act, therefore, are unnecessary at this time for control purposes. 3. The general recovery program of the country has involved encouragement of banks to adopt a liberal lending policy. Placing further restrictions upon bank lend ing, at this time would tend to be deflationary and to counteract this general program. 4. A further study of collateral brink loans from a super visory standpoint also would seem to be desirable before additional regulations are promulgated. The experience gained from evasion and circumvention under Regulation T should supplement our present limited knowledge of control in this field of banking. Reproduced from the Unclassified / Declassified Holdings of the National Archives 2 (b) Whether regulation should permit borrowers to obtain from the bank more than could be obtained from the broker under Regulation T._____________________ _ ^ In our opinion, a new bank regulation, if it should be decided to issue one, would require a different approach to the problem than that of Regulation T. The bank collateral loan is, essentially, a different type of loan from the brokerfs loan. ( The broker looks wholly to the collateral for protection and promotes the making of collateral loans partly for the sake of commissions on trades; whereas, the banker should use credit judgment in regard to the character and worth of the borrower and the col lateral becomes in many cases incidental to the loan. Whether prescribed margin requirements are needed on bank loans is debatable, when the broker1s or dealerTs customers are subject to regulation in the extension of credit. \V Such restrictions might find the bank customer claiming his right to the maximum loan value of the securities presented to the bank and so in fact in some cases decrease rather than increase the actual margins. For such reasons, a quite different approach to this question seems de sirable. Just what this approach would indicate it is difficult to suggest without considerable further study.'1 The approach while different from that of Regulation T should profit from a further accumulation of experiences with that regulation.1 reproduced irom the Unclassified / Declassified Holdings of the National Archives 7. (a) ECONOMIC AND STATISTICAL DIVISIONS OF FEDERAL RESERVE BANKS Usefulness to directors and officers. The work of this Department, as now organized, represents the outgrowth of fifteen years experience in supplying the needs of the directors and officers of the Federal Reserve Bank of New York for statistical information and research concerning matters related to the credit policy of the bank. One of the primary functions of the Depart ment , from the outset, has been to maintain and analyze for the directors and officers of the bank the various data on banking and business conditions, and to obtain and report to the Federal Reserve Board data on the banking and money situation, and to some extent on business in this district. Quite early in the life of the department it became apparent that the especial need at this bank was for research concerning factors affecting the money market. Fluctuations occurred in the supply of funds in the mar ket and in money rates, the causes of which were more or less obscure, and it became apparent that surmise concerning causes frequently was incorrect. For at least the past ten years, therefore, one of the most important func tions of the Reports Department has been to analyze and make available in formation concerning all of the important factors bearing on the money market, including not only the local supply of and demand for credit, but inter-district movements of funds, the foreign exchanges and gold movements and related factors, the security markets, etc. A method was worked out a number of years ago, whereby the department follows constantly the move ments of funds in and out of the New York money market, so that causes of changes in money market conditions are no longer a matter of conjecture. In order correctly to interpret changes in business and banking data, the Reproduced from the Unclassified / Declassified Holdings of the National Archives 2 department has also carried forward analytical work applied to business and financial data,and research into the relations between business, banking, and price data. In order that the results of the regular work of the department may be available in usable form, a regular system of reporting has been evolved. The reports prepared by the department include the following: Daily reports Internal reports Several reports to officers are made each day concerning move ments of funds in and out of the New York money market, and conditions in the security, commodity, and foreign exchange markets. Telegraphic reports to Federal Reserve Board Three reports are made each day, along s ernewhat the same lines as the reports to officers. "Board Letter” At the close of each day a mimeographed report is prepared in letter form, a number of copies of which are sent to the Federal Re serve Board, and other copies are distributed the next morning in the bank for the information of the officers. This report includes in formation concerning factors affecting the supply of funds in the money market, open market transactions in Government securities and bills for this and other Federal Reserve Banks, changes in the earning; assets of this bank, and developments in the commodity, security, and foreign exchange markets. Weekly reports to Directors Business and Financial Summary http://fraser.stlouisfed.org/ on Federal Reserve Bank of St. Louis A weekly report on banking and business developments is prepared Tuesday of each week and is sent to the directors and officers for Reproduced from the Unclassified / Declassified Holdings of the National Archives 3 their perusal in advance of the Directors Meeting on Thursday. Just before the meeting the information is brought up to date by the preparation of a sheet containing the latest available data. Report by Assistant Federal Reserve Agent An oral report to the directors is made at each meeting by the Assistant Federal Reserve Agent in charge of the Reports Department, concerning developments in the banking and business situation, and this report is considered before action is taken with respect to the discount rates of the Bank, and, at times, before action is taken on other matters. Charts In order that the data contained in these reports may be readily visualized, a considerable number of wall charts are hung in the Directors Room and are brought up to date before each meeting. These charts frequently are used in discussions of credit policy. It has been found in this bank that close contact between the statistical organization and the directors and officers is essential if the department is to function successfully. Attendance by the officer in charge of the statistical department at meetings of the directors and officers enables the department to keep in close touch with the problems that are before the directors and officers, and it can therefore direct its efforts in such a way that they will be definitely useful. Without such contacts, a statistical department is likely to be working more or less in the dark i and is likely to fall far short of its greatest usefulness to the bank. One of the principal functions of the Reports Department in addi tion to supplying regular reports on business and financial conditions is to conduct special studies concerning problems that come before the directors and senibr officers. Some of these studies involve ascertaining the facts Reproduced from the Unclassified / Declassified Holdings of the National Archives 4 concerning matters that need clarification; some relate to the various theories that are advanced concerning the relations between the money supply, business, and prices; others involve analyzing and estimating the potential effects of proposed legislation; others require an effort to forecast the credit problems to be faced by the Reserve Bank and to indicate possible ways of meeting such problems. Needs for such studies are almost constantly arising, and this bank has attempted to maintain, without unduly large ex penditure, a staff competent to study the problems and report the findings in concise and intelligible form. A few of the studies which the Reports Department was called upon to make at the request of the directors or officers of the bank during the past year are listed below: Estimate of effects of the Gold Reserve Act of 1934 on member bank excess reserves. Estimate of effects of devaluation of the dollar on balance of payments of the United States and on gold movements. Outlook for member bank excess reserves and possible ways of dealing with the situation. Survey of available facilities in the capital market for the dis tribution of new securities, in view of liquidation of bank affiliates, and failures or withdrawals from the field of other houses. Study of method of handling social insurance reserves that would best conform to desirable credit policy. Review of the extent of business recovery in connucti on with con sideration of bank policy. Study of comparative participation by member banks and by British banks in financing the respective national governments. Preliminary memoranda were also prepared at intervals for the Federal Open Market Committee and for the Open Market Executive Committee. (b) Value of Federal reserve bank monthly reviews / l While the primary function of the Statistical Department of a Reserve Bank is to supply information for the use of the Bank and the Reproduced from the Unclassified / Declassified Holdings of the National Archives Federal Reserve Board, the department can also serve a useful function in matters relating to public relations, including the preparation of reports for publication, the answering of outside inquiries concerning Reserve Bank and member bank data, etc. The most important phase of this work is the \[ preparation of the Monthly Review. The Monthly Review of the Federal Reserve Bank of New York in its early years was devoted largely to reports in some detail on changes in bus iness conditions, prices, etc., but for a number of years past has been devoted largely to the subjects on which this bank is peculiarly fitted to report, especially the money market and related factors, such as the security markets, foreign exchanges, and gold movements. Business data are now pre sented in more condensed form for the benefit of our member banks and general readers. W As this publication is devoted more largely than perhaps any other to money market conditions, it is believed to occupy a rather unique position among publications of this general character, and, while it has not a voluminous circulation as compared with less technical business and financial publications, it is widely distributed and apparently is well regarded among those who are interested in the subject matter with which it deals.xX A brief summary of the distribution of the Monthly Review in December 1934 follows: Number of copies Banks in Second Federal Reserve District - - - - - - - - - - - Quantity shipments (largely to member banks) - - - - - - - - - Newspapers and magazines - - - - - -- - - - - - -- - - - - - Federal Reserve Board, F. R. Banks, branches, etc. - - - - - - Bank examining agencies and examiners - - - - - - - - - - - - Private bankers, brokers, etc. - - - - - - - - - - - - - - - - Foreign bank representatives in New York - - - - - - — - - - Foreign commercial banks - - - - - - - - - — - - - - - - - - Foreign central banks - - - - - - - - - - - - - - - - - - - - Foreign individuals - - - - - - - - - - - - - - - - - - - - - Reporting retail and wholesale concerns - - - - - - - - - - - Individuals, libraries, etc. (domestic) - - - - - - - - - - - Miscellaneous financial institutions and others - - - - - - - Total distributed - - - - - -- _ _ _ _ _ _ _ _ _ _ _ _ _ _ Surplus copies - - - - - - - - - - - - - - - - - - - - - Total printed - - - - - - - - - - - - - - - - - - - - - - 1,264 7,956 235 96 41 249 61 310 137 845 178 9,044 422 20,838 862 21,700 Reproduced from the Unclassified / Declassified Holdings of the National Archives 6 The Review goes to every State in the country with the exception of Nevada, and, as the table indicates, a number of copies are sent abroad. The great bulk, of course, are distributed in the Second District, including nearly 8,000 copies which are sent in quantity shipments to member banks for dis tribution among their customers. Of the bulk shipments to member banks, about 3,000 copies are sent out in small quantities without charge, while about 5,000 copies are paid for by the member banks. In order that the mailing list for our Monthly Review may be limited as far as possible to those who are really interested in receiving it a revision of the list is made from time to time, the procedure being to notify those receiving the Review that unless they advise us promptly that they wish to continue to receive it, their names will be dropped from the mail ing list. At the time of the last revision, in July 1933, at least 70 per cent of the individuals who get the Review by direct mailing requested that their names be retained on our mailing list. In addition to the considerable number of people who receive the Monthly Review of this bank, many others undoubtedly read the excerpts from the Review that are printed in the newspapers. ^ For institutions that have so few direct contacts with the public as the Reserve Banks, we believe that the expense of preparing and distributing the Monthly Review is quite justified, provided the publications are in such form that they are well regarded. All of the material used in the preparation of the Monthly Review of the New York Reserve Bank is prepared primarily for internal use, so that the additional cost of preparing the Review is not very great.* It is questionable how a similar amount could better be expended from the viewpoint of public relations.'' * The total cost of the Monthly Review of the Federal Reserve Bank of New York, in its preparation, as well as printing, sales, is not over $12,000 a year,V' including salary expense involved http://fraser.stlouisfed.org/ postage, etc., less receipts from Federal Reserve Bank of St. Louis Reproduced from the Unclassified / Declassified Holdings of the National Archives 8. ESTABLISHMENT OF CAREER SYSTEM FOR PERSONNEL OF FEDERAL RESERVE BANKS We are firmly of the opinion that if central banking is to succeed in this country all possible steps must be taken to build up a central banking rl tradition and to increase the attractions of a central banking career. ^The art of central banking is not one which can be mastered readily and quickly by reason of adaptability for and experience in ordinary commercial pur suits. It involves an attitude of mind which subordinates the profit motive, and involves knowledge of a technique of credit control for which general business training, or even commercial banking experience, offers inadequate preparation.^ \v We believe it would be desirable, therefore, to try to establish some form of career system for the personnel of Federal reserve banks. The aims of such a system should be, it seems to us, to provide the stimulus of interesting work, adequate compensation, and possible non-monetary rewards for the ablest men who can be associated with the System personnelT \N While there is interesting work to be done at all of the Federal reserve banks, it is inevitable that in general, the most interesting work of the System, as far as credit policy is concerned, must be done at Washington, D. C., by the Federal Reserve Board and its staff, and at New York by this bank. This situation suggests that consideration be given to the possibility of devising a system of temporary or permanent transfer (or exchange) of individuals who have shown special aptitude for work upon the broad problems of credit policy to (or between) these foci of action with respect to these problems. A start already has been made in this direction by the calling of men from the Federal reserve banks to Washington, from time to time, to work with the staff of the Federal Reserve Board, and by the exchange of men which has taken place between this bank and the Board. The con tinuance or renewal of conferences of those engaged in various phases of the work of the Federal reserve banks, such as the conferences formerly held at Washington by the Division of Research and Statistics of the Federal Reserve Board, also is Reproduced from the Unclassified / Declassified Holdings of the National Archives 2 a possible means of widening the interest in employment in the Federal Reserve M System. v\ The question of adequate compensation involves the formulation of a general salary policy which will permit the System to attract the most capable available men by providing the possibilities of income and security which will compare favorably with similar possibilities in other lines of endeavour, talcing into account the satisfactions to be derived from the opportunity for public ij service which employment in the System affords. VFinally, the question of non-monetary rewards, which is perhaps but an elaboration of the idea of a satisfying public service, suggests that the number of important posts within the System which a career man may aspire to fill be in creased. This may well be facilitated by greater freedom in the transfer of men in the System, either temporarily or permanently, from one bank to another or even between the Federal Reserve Board and the several banks.11 Reproduced from the Unclassified / Declassified Holdings of the National Archives 9. CRITICISMS OF EXISTING REGULATIONS OR RULINGS OR PROCEDURE OF THE FEDERAL RESERVE BOARD, WITH SPECIFIC RECOMMENDATIONS AS TO CHANGES WHICH WOULD CORRECT ANY UNSATISFACTORY FEATURES OF THE. RELATIONS BETWEEN THE BOARD OR ITS STAFF AND THE FEDERAL RESERVE BANKS OR MEMBER BANKS. It has seemed to us that the Federal Reserve Board’s policy, of recent years, has called for the making of an enormous number of decisions, involving the assembly in its offices at Washington of a vast amount of de tailed data with respect to matters of relatively minor importance, the ad ministration of which could better be delegated to the individual Federal reserve banks,within the limits of broad general policies established by the Federal Reserve Board. The existing procedure has caused a multiplication of work, delays in taking action, Increased expenses of administration, and a separation between those (member banks and others) subject to administrative control and those exercising the details of that control which rncourages the growth of bureaucratic methods. It is possible that in some periods of the System’s operations, policy may have lent itself to inadequate treatment of such matters, but in recent years the tendency sepms to have been to go much • too far in the opposite direction. Our views on certain specific matters in this field and in the related field of relations between the Federal Reserve Board and the Federal Reserve Banks, are presented below, '* Bank Membership. In the admission of State banks to membership in the Federal Reserve System, there have developed most exacting requirements as to material to be furnished in connection with the application and as to conditions to be met by banks prior to admission. This has reached the point where it constitutes a distinct obstacle to bringing many State banks of average or better than averW-) age quality into the Federal Reserve System. We have made suggestions concern ing the improvement of this situation in our discussion of Topic 3. Reproduced from the Unclassified / Declassified Holdings of the National Archives 2 Interpretation and administration of Section 8 and Section 8A of the Clayton Act. ^\We concur in the feeling of the members of the Federal Beserve Board as expressed in the letter of the Board dated January 9, 1935, (X-9082), that the procedure during the past year in connection with Clayton Act appli cations has not only been cumbersome but has not produced entirely satisfac tory results. It has been our experience that this procedure has operated, in many instances, to deprive member banks in the Second Federal Reserve District of the services of valuable directors, even where it has been shown that the institutions covered by the application of a given individual were not so situated as to be in substantial competition; that even in instances where permission has been granted to continue interlocking relationships, the voluminous amount of information required of an applicant in support of his application and the delay incident to the disposition thereof has occasioned much irritation among bank directors and officers and the feeling that they have been subjected to regulation unnecessarily oppressive inusharacter. Re peated instances have come to our attention in which directors of national banks in this district who were serving at the same time as officers and directors of other banking institutions have elected to discontinue their services to one or more of such institutions rather than undertake to obtain the permission of the Federal Reserve Board to continue such interlocking relationships. Our view of Sections 8 and 8A of the Clayton Act is that they were intended to supplement other anti-trust legislation, particularly the Sherman Anti-Trust Act of 1890, and that it was not the intention of the Congress in enacting these sections to place upon the Board the responsibility of passing upon the general qualifications of applicants for service as bank directors. 0 Reproduced from the Unclassified / Declassified Holdings of the National Archives 3 For the foregoing reasons we recommend that the Board give consider ation to the advisability of adopting permanently the policy expressed in its letter of January 9, 1935, (X-9082), i. e., that C.layton Act permits will be granted in all cases except as to banks which are engaged in the same class or classes of business in the same community and are so located as to be in a position to compete substantially. We feel that it would be advisable for the Board to adopt this policy whether the law remains as it is at the present time, or whether an amendment is enacted such as that proposed by Section 328 of H. R. 5357 (the proposed Banking Act of 1935), now pending before Congress, and that the Board then delegate to the Federal reserve banks the execution of this policy, in so far as is possible, Interpretation and administration of Section 32 of the Banking Act of 1933, \\ In taking action with respect to applications of officers and directors of member banks, submitted under Section 32 of the Banking Act of 1933 and the Board’s Regulation R, to serve at the same time as officers, directors and employees of organizations engaged in the business of purchasing, selling, or negotiating securities, and in rendering decisions in response to requests for rulings concerning the necessity for making applications for permits under Section 32, the Board has taken the position that it was the in tent of Congress, in enacting Section 32, to terminate the usual relationships of the types referred to in the section between member banks and dealers in and underwriters of securities, and the Board has accordingly declined to grant permits authorizing relationships of the kind referred to in that section and has exercised its authority to issue permits only in exceptional cases which, though coming within the letter of the section, are not typical of the relationships commonly existing prior to the enactment of the Banking Act of 1933 between banks and dealers in or underwriters of securities. Reproduced from the Unclassified / Declassified Holdings of the National Archives 4 \\ The practical result of this interpretation of Section 32, in so far as this Federal Reserve District is concerned, has been that a. number of its member banks have been deprived of the services of valuable directors and officers who were at the same time serving other organizations, such as in vestment trusts and brokerage firms, even though no information was disclosed in connection with the applications of such individuals which would reflect in any degree upon their desirability as directors or officers of the member banks in question, except that the relationships covered by their applications came within the Board’s interpretation of the prohibitions of Section 32.* ^ This has given rise, we believe, to a feeling that the Board’s policy with respect to the administration of Section 32 of the Banking Act of 1933 has been unnecessarily strict and inelastic. We appreciate, however, that serious administrative difficulties would have been involved if the Board had undertaken to pass upon the question of whether the granting of a permit was or was not in its judgment incompatible with the public interest in the light of the particular facts and circumstances in each case, ft Section 306 of H. R. 5357, the proposed Banking Act of 1935, as in troduced in the House of Representatives on February 5, 1935, would amend Section 32 of the Banking Act of 1933 so as to permit the Board to deal with the subject-matter of that section by general regulation rather than by the issuance of individual permits. In view of this pending amendment we will not undertake at this time to discuss the advisability of a review and possible modification of the Board’s policy with respect to the administration of this section as now effective. If, however, the proposed amendment should not be enacted we would like to give further consideration to this question and to have the privilege of submitting a supplemental letter if we have any suggestions Reproduced from the Unclassified / Declassified Holdings of the National Archives 5 Voting permits. On the subject of voting permits, Section 5144 of the Revised Statutes as amended by Section 19 of the Banking Act of 1933 provides, in part, as follows I "The Federal Reserve Board may, in its discretion, grant or withhold such permit as the public interest may require. In acting upon such application, the Board shall consider the financial condition of the applicant, the general character of its management, and the probable effect of the granting of such permit upon the affairs of such bank." The statute then proceeds to prescribe certain specific conditions on which such permits shall be granted* ^ It would seem that with respect to the granting or withholding of voting permits a broader view might have been taken of the statute and a more liberal policy pursued. The statute itself would seem to indicate that it was intended that voting permits be granted or withheld on broad grounds, i. e ., "as the public interest may require," and that the considerations entering into the determination of the granting or withholding of a permit should be (1) the financial condition of the applicant, (Si the general character of the applicant’s management, and (3) the probable effect of the granting of the permit on the affairs of the subsidiary member banks, and Section VI of the Board’s Regulation P so stated.. Instead of in general merely determining on the basis of these considerations whether it is in the public interest to grant or withhold particular permits, the Board has, as we interpret its policy, made each application for a voting permit a means of bringing pressure to bear not only on subsidiary member banks but subsidiary non-member banks as w e ll, to make immediate charge-offs or eliminations of estimated losses and depreciation and to strengthen their capital structures to a degree that could hardly be said to be required to give effect to the policy of the statute. \\ Reproduced from the Unclassified / Declassified Holdings of the National Archives 6 nX In many cases a holding company affiliate has been asked to agree to do things as a condition to the issuance of a permit to which its directors and officers have conscientiously felt that the company could not agree, resulting in con siderable embarrassment and irritation on the part of the officials of the holding company affiliate and of the subsidiary banks, and difficult and time consuming negotiations on the part of the officers of this bank to obtain compliance with the Board’s requirements. V\ It would also seem that in some instances the dual policy of the statute has been lost sight of, to wit, to strengthen holding company affili ates or to terminate the holding company affiliate relationship, the Board having been apparently reluctant to permit the distribution to its stockholders by a holding company affiliate of the stocks of less than all of its several subsidiary member banks notwithstanding that such distribution was a step to ward the ultimate liquidation of the holding company affiliate. In this con nection it might be noted that some of the provisions of the form of applica tion for a voting permit (F. R. B. Form P-1) are somewhat broader than the corresponding provisions of the statute.' jV While the Board's policy with respect to passing upon applications for voting permits has no doubt had beneficial results in hastening desirable action by banks in the matter of charge-offs, etc., we question whether it is within the fair intent of the statutes or whether it is necessary or desirable to take the occasion of such applications to force such action. In this con nection we think it is true that subsidiary banks of holding company affiliates have, by reason of the desirability or necessity of obtaining voting permits, been subjected to more severe treatment than have other member banks, both state and national, which are not subsidiaries of holding company affiliates. Reproduced from the Unclassified / Declassified Holdings of the National Archives 7 ^ Notwithstanding the compliance of many holding company affiliates with the Board1s requirements, up to the present time, only two general >X permits have been issued to holding company affiliates in this district. We recommend that the Board consider the advisability of adopting the general policy of issuing general voting permits to holding company af filiates in all cases except those in which it appears that the issuance of such permits would not be in the public interest, and that the question of public interest be determined primarily on the basis of the factors enumerated in the statute, i. e., the financial condition of the applicant, the general character of its management, and the probable effect of the granting of such permit upon the affairs of the subsidiary bank. This would not of course prevent the Board from imposing conditions in regard to charge-offs, etc., in exceptional cases. We suggest also that the Board’s policy with r.espect to "limited" permits be modified so that such permits will be issued only in ex ceptional cases rather than as a general practice.v Finally, we question whether this is not another duty with respect to which, under existing legislation or by amendment to the law, the Federal reserve banks could be given greater freedom of action within the limits of a general policy adopted by the Federal Reserve Board* Granting permission to State member banks to open branches* V We have had two cases in this district where State member banks have applied for permission to open branches in accordance with the law of the State, The Federal Reserve Board and the Comptroller of the Currency have, in these cases, made requirements as to certain charge-offs and eliminations. This has occasioned resentment as the banks felt that it was unjust that a request for authority to establish branches of small importance relative to the total of the bank’s business should be made the occasion of such requirements Reproduced from the Unclassified / Declassified Holdings of the National Archives 8 V This feeling has been intensified by the fact that national banks which have opened branches in the State during the same period have not been made the subject of similar requirements. n) It is believed that a more liberal policy might be pursued in this a ix matter without detriment to the public interest.11 Salaries of officers and employees of this bank. \V In recent years the exercise by the Board of its responsibilities with respect to salaries provided by the Board of Directors for the officers and employees of this bank has involved anvxunwarranted encroachment upon the time of both the Board and the directors of the bank, and has interfered with x N the maintenance of a salary schedule at this bank' which would give proper recognition to the duties and responsibilities of the individual members of the bank staff as well as to an appropriate relationship between the salaries \V X of different members of the staff. x It is our view that in this field of Federal Reserve System opera tion the Board should confine itself to broad questions of policy and not attempt to control details of intra-bank administration. While the total salary expenditures of a Federal Reserve Bank properly may be a matter of con cern to the Board, the division of that total within the bank would seem to involve questions which, by their nature, must be reserved to the Board of Directors and officers of the individual banks who are in close touch with the work of the hank and the participations of various individuals in that work. This is the policy which lias been in successful operation for some years with respect to employees ©f the banks in the lower salary ranges, and it would seem desirable to extend the idea underlying this established practice, al though not its form, to the officers of the banks and the employees in the higher salary ranges Reproduced from the Unclassified / Declassified Holdings of the National Archives 9 ^ We would suggest that the Board formulate a general policy for its guidance, and the guidance of the Federal reserve banks, with respect to the compensation of officers and employees of Federal reserve banks, and that such policy should contemplate leaving the utmost discretion as to individual salaries, as contrasted with total salary expense, to the Board of Directors of the Reserve banks. It is difficult to see how, without such a policy, we can maintain a proper relationship between responsibility and salaries of members of our staff, or expect to encourage the continuance in the service of this bank of employees who have shown a capacity to develop and assume in creased duties and responsibilities. The establishment of a career system for personnel of Federal reserve banks which will attract and hold the ablest available men is, in large part, dependent upon the adoption of such a policy. General relations between Federal Reserve Board and Federal reserve banks. It is our view that nothing would contribute more to the establish ment of satisfactory relations between the Federal Reserve Board and the Federal reserve banks than the adoption by the Federal Reserve Board of a broad general policy which would accord to the actions of the boards of direc tors of Federal reserve banks, with respect to matters of bank administration, district problems, or other matters concerning which the law gives the directors initial responsibility, the presumption that such actions are right and proper unless obviously in conflict with general System policies estab\» lished by the Board, or with the statutes. In any case where the Federal Reserve Board feels that it must disapprove of the action taken by a board of directors of a Federal reserve bank, or where it has reasons which it feels justify its overruling the presumption in favor of the correctness or wisdom of the action taken by the directors, it would seem to be clearly a matter of good organization that the reasons for the Board’s disapproval should be Reproduced from the Unclassified / Declassified Holdings of the National Archives 10 transmitted to the directors. Otherwise,- it is difficult to see hew it will be possible to develop and to maintain a wise and harmonious accord be tween the Federal Reserve Board and the several boards of directors in the w conduct of the System's affairs» Reproduced from the Unclassified / Declassified Holdings of the National Archives ■F E D E R A L R E S E R V E B O A R D F IL E 4 e Fe d e r a l R e s e r v e B a n k o f N e w Y 7 _ 3 o r k y ?//^ February 8, 1935* Dear Governor Eccles: Mr. Mr. f.-lorr;!!. Mr. Bcihea z .. tz |Your letter of February 8, 1955 (X-9115) on the general Mr. Carpenter. Mr. Nocll. • • •subject of relations between the Federal Reserve Board and the Mr. Mr. •Federal reserve banks and member banks, has been received. We Mr. Mr. Please note — welcome the suggestion, made in your letter, that it would be check helpful if the Federal reserve banks would point out any features and return to JArTCarpfitef . of these relations which they deem may be unsatisfactory or subject to criticism, and we shall be happy to cooperate in a survey of this situation. The list of subjects (X-9115-a) which accompanied your let ter and which was suggested for discussion by our directors and officers, also will have our careful consideration, and advice as to our views thereon will be submitted to the Federal Reserve Board within thirty days, as requested. Faithfully yours, J. H. CASE, Chairman. Honorable Marriner S. Eccles, Governor, Federal Reserve Board, Washington, D. C. A c ) Reproduced from the Unclassified / Declassified Holdings of the National Archives F e d e r a l Re s e r v e Ba n k o f P h i l a d e l T h ir d D is tr ic t Ri c h a r d L . A u s t i n C hairm an of t h e B oard and February 6, 1937 F e d e r a l Re s e r ve Agent R E C E IV E D L. P. Bethea, Esq., AssTt Secy., Board of Governors of the Federal Reserve System, Washington, D. C. / Dear Mr. Bethea ' &37 FEB 10 BCArU. S 36 GOVERNORS OF THF •EDERAL RESERVE SYSTEM 'our letter of January 29th, enclos ing a copyOf the memorandum forwarded by this bank under date of March 20, 1935 in response to Mr. Eccles1 letter of February 6, 1936, was duly received, and I want to thank you for your kindness in having a copy of this memorandum made for me. AM Very truly yours, Chairman Reproduced from the Unclassified / Declassified Holdings of the National Archives Mr. R. L* Austin, Chairman, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania, Dear Mr. Austin! Pursuant to the telephonic request made of Mr. Leonard b y Mr, Hill, there is sent you here with a copy of your letter of March £0, 1955, and its lnclosure, which was written to Mr. Eccles in response to his letter of February 6, 1955 (X-9115). Very truly yours, iSigned) L® P» BETHEA L# P , Bethea, Assistant Secretary. Inclosure. ect Mr. E. C. H ill A2a ^ ^ Reproduced from the Unclassified / Declassified Holdings of the National Archives / F e d e r a l Re s e r v e Ba n k o f P h i l a d e l p h i a T hird 3 ^ 7 D is tr ic t Ri c h a r d L . A u s t i n Chairm an o f the Board and F ed e r a l Re s e r ve Agent March 20, 1955 Honorable Marriner S. Eccles, Governor, Federal Reserve Board, Washington, D. C. Dear Governor Eccles In reply to your letter of February 6th, 1935, X-9115, in which you submitted nine subjects to be discussed by the directors and officers of this bank, we enclose herewith an expression of their views resulting from a discussion of those subjects, which I was authorized at a meeting of the board, held this morning, to submit to you. Very truly yours, Chairman Enclosure Reproduced from the Unclassified / Declassified Holdings of the National Archives FEDERAL RESERVE BANKZ OF PHILADELPHIA 1. General credit situation (a) Are commercial banks doing everything in their power to improve the situation? The commercial banks in the Third Federal Reserve District, with few exceptions, have been and are doing everything in reason in meeting the general credit situation, consistent with the duties and responsibil ities owing to their depositors and stockholders. Few justifiable complaints have reached us concerning the inability on the part of business concerns with proper credit standing to obtain needed commercial credit. Most com plaints are those of prejudiced persons or disappointed applicants undeserv ing of credit. In a few communities such as the shore resorts in Southern New Jersey, and at Reading and Johnstown in Pennsylvania, credit has been difficult to obtain due to restricted banking facilities following the clos ing of banks. Where banks have been reorganized in these communities, it is natural to expect highly cautious lending attitudes, especially where, for the most part, the would-be borrowers are of a class without adequate credit standing, to whom credit was formerly extended when it should not have been. A relatively few commercial banks have indicated their unwillingness to consider applications for industrial loans under Section 13b, with or without our participation, not to be uncooperative, but primarily due to an ultra-conservative lending policy of long duration, and to the length of time such loans would have to remain outstanding. Where deserving applicants have been denied commercial credit for any of these enumerated reasons, we have been able to relieve the situation somewhat through our operations under Section 15b. Banks in this district and, we believe, elsewhere, are generally alert to the need for lending, if for no other reason than to increase earnings uucu l,um unuiassmea / Declassified Holdings of the National Archives Z federal reserve bank OF PHILADELPHIA to a point where expenses may be met and a reasonable profit obtained. This is also indicated by a tendency toward lower interest rates for good short-time commercial loans, and the large amounts of excess funds avail able for lending and investment.^The problem is not one of unwillingness on the part of banks to lend, but an unwillingness or inability on the part of business concerns to borrow in the face of prevailing business and credit conditions. 1 It is not unreasonable to expect that the volume of commercial loans in this district will increase as the prospect for profit able business grows brighter. (b) If not, what steps can be taken by the Federal Reserve Banks or otherwise to bring about an improvement? r It is our belief that in this district the greater part of unsatis fied credit demand is represented by the type of credit which would normally be obtained from private investors or through the securities market. In most instances, the industrial loans made by this bank cannot be considered as strictly commercial loans, no matter how sound they may be from a credit or risk point of view. Commercial banks should not be expected to make loans of this character which, in effect, would make them partners in or partowners of business enterprises. Keproaucea irom the Unclassified / Declassified Holdings of the National Archives FEDERAL RESERVE BANK** OF PHILADELPHIA 2. Interest Rates (a) On time and savings deposits of member banks The question of the amount of interest that should be paid on time and savings deposits of member banks is one of vital importance to American bankers and especially to the country banks. !| The executives of the smaller institutions appear to be reluc tant to calculate the value of the deposit accounts in their institutions and are prone to pay, either in interest or in services, more than the account is worth, in the belief that increased deposits are an evidence of growth and success.1 The payment of interest on deposits should be strictly confined to time and savings accounts. V The member banks of the Federal Reserve System in this district have been greatly benefitted by the reduction in the amount of interest payable on time accounts. Some of them, however, would be very willing to return to the old rates, feeling that it would result in an increase in deposits.' The member banks of the Federal Reserve System, of course, complain bitterly where non-members are paying higher rates than the System limit, and it is unfortunate that they must have that type of competition. On the other hand, in some neighborhoods the member banks are paying lower rates of interest than the regulation requirements. There should, if possible, be a more exact definition of time and savings deposits. There is a great difference between the ordinary so- called time deposit and the true savings account such as we see in the Reproduced from the Unclassified / Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF PHILADELPHIA mutual savings banks where people are saving for their old age without expectation of withdrawing the money for expenditure or investment. In the matter of savings accounts there should be a strict re straint upon withdrawals without notice. Some of the evils of the pre sent situation might be cured if a maximum limit of say $50 a month would be imposed, and that withdrawal without notice should be coupled with some positive declaration of necessity. (b) On loans of member banks and on industrial advances and commitments by Federal Reserve Banks. This paragraph refers to three distinct types of accommodation: (1) (2) (3) Interest charged by member banks on their loans to customers; Interest charged on direct loans to industry by Federal Re serve Banks; Commitments by Federal Reserve Banks. (1) Interest charged on loans to customers by member banks depends upon a variety of conditions. In the larger sense commercial banks charge a rate to their customers that is based on the price of money in the real money markets, and it is to a great extent a matter of supply and demand. 'In these days when funds are plentiful, larger banks will loan money to their good customers at very low rates.. If the risk is increased or the account of a customer is not attractive, they, of course, do not give him the benefit of the lowest rate. Good customers today have no trouble getI* ting liberal accommodation from their banks at very low interest. It must be remembered that customers are given accommodation at low rates provided they maintain satisfactory balances. (2) The loans of funds of this Reserve Bank direct to industrial institutions have been at 5% and 6% rates, and there have been no loans that Keproduced from the Unclassified / Declassified Holdings of the National Archives -j the Street would call 11prime loans". If there had been, the applicants would not have had need to apply to us. tor. FEDERAL RESERVE BANK OF PHILADELPHIA The term of the loan is also a fac Although the borrowers may have good prospects today and good accounts on their books, the fact that the Reserve Bank's accommodation is a long time contract, increases the chance of unsatisfactory conditions developing which cannot be discovered until they have done some damage. Even where a mortgage was given, in many instances it was on a type of property that was developed for a highly specialized purpose, and in the event of failure to pay the debt a buyer for the highly specialized plant might not be found for some time. When the loan is made against "receivables", there is con siderable labor in handling the changing paper and checking the credits. '' We know of no instance in which these loans have been made where a sound \ \ commercial bank would have considered a lower rate. (3) It is our intention to make a further study of commitment rates. Generally, the matter of making a commitment today to loan money a year hence, and then carry the loan for a considerable period of time, is a hazard for which the compensation should be carefully measured. nupruuucea irom tne unclassified / Declassified Holdings of the National Archives ■■■■ * fed era l RESERVE BANK OF pHiLADEV-PHlA 5. Matters affecting admission of nonmember banks to Federal Reserve System. (a) Earnings of nonmember banks from exchange collection charges Warnings of non-member banks from exchange and collection charges are a negligible factor in this district. All non-member banks are on the par list, and hence exchange charges arise only from transactions with cor respondent banks .^ (b) Present conditions of membership From a strictly System point of view, present conditions of member ship are not considered too severe, although the requirements with respect to charge-offs have made it impossible for the majority of the non-member banks in this district to qualify. Many non-member institutions have sub stantial investments in stocks on which the depreciation is heavy. The state laws still permit banks and trust companies to invest in stocks, subject to certain limitations.v Present banking laws of Pennsylvania, which only recognize common stock as capital for state institutions, have prevented them from eliminating losses and depreciation through the usual method of reducing common capital, and then rehabilitating the capital structure by the sale of preferred stock. The new Secretary of Banking of Pennsylvania recently announced that legis lation now is being drafted which will overcome this handicap by giving pre ferred stock the same status as common stock. u ’ Non-member state banks generally are aware of the closer supervision and more stringent requirements imposed upon member state banks than those to which they are subjected by the state supervisory authorities. In most Reproduced from the Unclassified / Declassified Holdings of the National Archives 7 feder al reserve bank OF PHILADELPHIA cases the bankers are willing to admit the desirability of the more rigid regulation, but they believe that by postponing applying for mem bership until it is required of them to retain the benefits of deposit insurance, concessions will be made which will not demand such drastic action in the matter of charge-offs and other corrective measures.v ^Uniform condition numbered 17 which prohibits the pooling of trust investments, we believe, has deterred a number of Pennsylvania banks from applying for membership. The State Banking Code of 1955 prohibits the pooling of investments and the sale of participations to the public with or without the bank’s guarantee, although pools still are permitted for the collective investment of trust funds, by which means these funds may be invested almost up to the last dollar, thereby producing a maximum of income for the beneficiaries. In more prosperous times the pooling practice involved a minimum of risk. The dangers and difficulties now, however, are apparent to the managements of most of the trust companies. The provision in condition numbered 17 which prohibits a bank from owning an interest in a trust pool created for the investment of small balances deprives the pool of the flexibility which is necessary for its successful operation. If some modification of condition numbered 17 were possible to permit the bank’s participation in pools created for the collective invest ment of small balances which cannot be invested separately to advantage, it would have the effect of making membership more attractive to the smaller trust companies/' "'/The power to issue title insurance is the birthright of practically all trust companies in Pennsylvania. The majority of the non-member banks are trust companies, but apparently only approximately 16 per cent of them have Reproduced from the Unclassified / Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF PHILADELPHIA exercised their title powers. Under the provisions of a late Act, it is believed that some of the companies which heretofore engaged in the issuance of title policies have since lost the right to do so. It is recognized that title business is not a proper function for a commercial bank to engage in, but in certain instances it would impose a real hard ship upon banks for them to be forced to abandon their title business. It is recommended that in such cases some modification of the Board's usual policy be permitted, in order that these banks may qualify for mem«/ bership, provided their conditions are otherwise satisfactory. r Because of the dual supervision by State and Federal authorities to which state member banks are subject, a number of the non-member banks have expressed a preference to convert into national banks, rather than to seek membership under their present charters. It is believed that if the Comptroller is given the discretionary authority provided for in the new banking bill to permit converting state banks to carry over sound but nonconforming assets into national banks, a large number of state banks will seek national charters in preference to membership under their present state charters. * (c) Advisability of extension of membership to banks outside the States and the District of Columbia. !/ The question of extension of membership to banks outside the States and the District of Columbia is a matter about which we do not feel compe tent to advise, because we are not familiar with the requirements of such banks t' Our contacts ad those of our member institutions with banks outside the States for the most part are limited to the handling of checks and collection items. We understand at the present time all checks must be Reproduced from the Unclassified / Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF PHILADELPHIA // handled as collection items. We believe that membership would make possible uniformly lower exchange charges and also facilitate the col lection of checks and drafts, thus encouraging business between the United States and its possessions. We presume that facilities for obtaining cash and rediscounting would be of material benefit to such banks. Unless branches of the Federal Reserve Banks were established in each of the possessions, however, there would appear to be presented many problems in connection with the maintenance of reserve, etc., which V would make their administration and supervision difficult. R e n rn rin n p rf fro m th e I In r la s s ifip rl / D p r.laa a ifip H H n lrlin n s n f th p N a tio n a l A rc h iv e s 4. Need for continuance of assistance of Reconstruction Finance Corporation in connection with rehabilitation of capital structures of banks. In Pennsylvania there are approximately thirty-one banks now in need of strengthened capital structures, according to a recent survey made by the Federal Deposit Insurance Corporation and the Pennsylvania State Banking Department. Of this number, four are member banks and twenty-seven are non-members. The estimated total amount of additional capital needed is $8,065,000. Six of this group are banks in which the Reconstruction Finance Corporation already has an investment, but with respect to which it is estimated that additional capital is needed. The Philadelphia Agency of the Reconstruction Finance Corporation reports as of March 1st, 1955, that it had outstanding undisbursed commitments to nineteen non-member state banks and twelve member banks in this district in the total amount of $2,960,000. It is reported that the Federal Deposit Insurance Corporation has completed its work in Southern New Jersey. As a matter of fact, the prev ious Commissioner of Banking was not disposed to cooperate fully with the Federal agencies in connection with non-member banks with weakened capital structures. It is hoped that the new Commissioner of Banking, when appointed, will be more cooperative with the Federal agencies, inasmuch as it is our belief that there are a number of non-member banks in Southern New Jersey in need of additional capital. No need has been indicated for additional capital in the state of Delaware. Reproduced from the Unclassified / Declassified Holdings of the National Archives 5. Adequacy of reimbursement of Federal Reserve Banks by Treasury and other governmental agencies for various ser vices rendered and for space used in Federal Reserve Bank buildings. The statement below giving the cost, during 1954, of such activ ities and the amount received in reimbursement shows a net cost to this bank of $80,946.42. The only compensation that might be argued that should be applied against the net cost is the problematical value of the Government's balance during that year, which averaged $5,700,000. This balance was not usable, and involved the special handling of an enormous number of checks. It must be remembered that many of these activities are more costly than the ordinary relations between a bank and its customers, because of the Government's requirement of detailed reports and schedules and methods of handling that are very different from what a bank ordinarily does for its depositors. FISCAL AGENCY AND DEPOSITORY EXPENSES Total Expense $54,252.05 $52,665.67 24,175.67 5,657.20 — 1,558.97 8,281.88 11,521.99 5,575.52 4,565.10 5,256.46 458.02 127,565.28 114,863.45 357.60 557.60 639.24 ' 659.24 360.55 560.55 1,391.73 1,391.73 4.947.46 $251,662.48 $150,716.06 150.716.06 Net cost to,this b a n k ---------------- $ 80,946.42 U. S. Government Issues -- New Issues t! Redemption & Exchanges M Accounting 11 Custody of Securities It Auditing Government Checks Government Coupons Treasurer's General Account Supplying Government Agencies with Currency & Coin Fiscal Agent & Custodian for R. F. C. Farm Credit Administration Federal Emergency Administration of Public Works Federal Farm Mortgage Corporation Home Owners' Loan Corporation Miscellaneous Other Costs Reimbursable Reproduced from the Unclassified / Declassified Holdings of the National Archives A FEDERAL RESERVE BffrlK OF PHILADELPHIA No charge is included in the above tabulation for use of vault, \\lt is our opinion that the cost of the above expenses should be reimbursable, and that no credit should be allowed for the Government deposit because, in the nature of things, reserve banks are not expected to invest as closely as member banks, and therefore do not have the same opportunities for using balances to create earnings. Reproduced from the Unclassified / Declassified Holdings of the National Archives 6. Regulation fixing margin requirements for loans by banks upon equity securities for the purpose of pur chasing or carrying securities registered on national securities exchanges. (a) Circumstances under which regulation should be issued. Under the Securities Exchange Act the Federal Reserve Board ap pears to be directed to prescribe marginal requirements for loans, for the purpose of preventing excessive use of credit in the purchase and carrying of registered securities. This requirement seems to be intended to apply to loans made by banks as well as brokers. If this is the proper interpretation of the Act, it would seem that the Board should issue the regulation as soon as possible. ''Under existing circumstances, the present appears a desirable time to issue such a regulation, as dealings in secur ities now are of so small a volume that any adverse effect of such a regula tion would produce a minimum of disturbance. Also, if the regulation were issued now, all parties would know the conditions under which loaning oper ations in connection with registered securities should be conducted and a future disturbance be avoided.''1 (b) Whether regulation should permit borrower to obtain from bank more than he could obtain from broker under Regulation T . v We feel that restrictions in the Act which apply to brokers should not apply to a bank in dealing with its own customers other than brokers. Banks1 relations with their customers are such that they should be at liberty to require such margin^as they think are necessary. The Federal Reserve Act gives the Board power at any time to fix the percentage of bank capital and surplus which may be represented by loans secured by stocks and bond collat eral, should it appear that too much bank credit is being used for the purpose of carrying securities.^ Reproduced from the Unclassified / Declassified Holdings of the National Archives f e d e r a l r e s e r v e ban OF PHILADELPHIA 7. Economic and Statistical Division (a) Usefulness to directors and officers The Economic and Statistical Division of this bank, in addition to the monthly bulletin issued by it, prepares for the directors and officers, a weekly statement containing the latest current changes and developments in business and banking. Much of this information is ob tained directly through confidential and friendly relations established by the Division, and is not obtainable through any other source. \\ The directors and officers, in reply to this inquiry, stated that they find the information contained in these statements useful and de pendable, and very helpful to them in the discharge of their duties. With the confusion and uncertainty which surrounds business at the present time they feel the necessity for having all such information, and that this \\ Division performs a valuable service. J Reproduced irom the Unclassified / Declassified Holdings of the National Archives 7. Economic and statistical divisions of Federal Reserve Banks. (b) Value of Federal Reserve Bank monthly reviews. The value of our monthly bulletin, The Business Review, is prob ably best indicated by the extent and character of monthly demand for it. Our active mailing list at present is as follows: Industrial and trade concerns Banks in this district Colleges and universities Trade organizations Individuals Foreign (mostly banks) Total 5,098 962 100 75 690 280 7,205 In order to keep this mailing list active, it has been our pract ice to make a periodical check by asking the recipients of the bulletin if they find it useful, and wish us to continue sending it to them. When we stopped sending the Review to those who failed to respond, complaints and requests to be continued on the mailing list in many instances followed immediately. As a result, the number of undelivered copies has been reduced to the minimum, and at present it seldom exceeds five copies in any one month. New requests for the bulletin in the past two years have averaged about 30 a month, most of them coming from industrial and commercial concerns. Industrial and trade concerns have shown us most generous cooperation in making our monthly review of business conditions possible. They have re peatedly expressed their confidence in our statistical work, and have made use of our current data on production, employment and distribution of goods. ^ The demand for our survey of current business activity in this dis trict has been especially heavy since 1929, during which period reliable <1 3 - 2 - o . y (3 ) information on business conditions has been eagerly sought for in place of rumors and press accounts usually based on inadequate facts, biased views, or doubtful interpretations. been growing persistently. The demand for accurate data has Our monthly review is undoubtedly regarded as a unique and dependable source of information.^ Valuable as are the composite data for the country, they natur ally do not meet the manifold business problems which require specific information and knowledge of economic conditions by industrial areas. Our industrial advisory committees have used our Division of Statistics and Research to the fullest extent. During the past dozen years we have endeav ored to build up our economic and statistical information so as to measure currently the rate at which goods are being produced and marketed, the volume of employment and changes in income from wages in this district. No reliable local information of this kind was available by months before this bank undertook to collect it. At present nearly 4,000 business establishments are reporting to us voluntarily their confidential data every month. These statistical data have enabled us to provide industry and commerce with a comprehensive and accurate summary of business and agricultural conditions every month. The organization and presentation of current reports are made in an effort to show not only the prevailing rate of activity by important lines of busi ness and by industrial areas within this district, but also the existing conditions in the reserve district as a whole. We have endeavored to con fine our surveys to the presentation of ascertained facts, avoiding the interpretations and conclusions which might reflect forecasting. In consequRnce, through the medium of our monthly bulletin as well as advance releases on industrial employment and trade, it has been possible for us to furnish our business and banking establishments with reliable information on the current performance of industry and commerce, which certainly bears a direct relation to banking and credit. ^We are convinced that there is a definite need and demand for such local economic and statistical information, and that there is at present no other agency in our district that could provide this service for our own benefit and for the use of business generally. ./ ^ Reproduced from the Unclassified / Declassified Holdings of the National Archives 8. Establishment of career system for personnel of Federal Reserve Banks. xX The possibility of doing this, of course, depends upon how at tractive the opportunities are for young men and young women of intelligence in the System. vX If Federal Reserve Banks are to operate as banks, with the same opportunities of promotion and development of employees and the same monetary return as may be found in other banking institutions, there is no reason why young people interested in banking as a career should not be interested in service in the Federal Reserve Banks. At the present time, however, there cannot be the same sense of security they would have if they were employed in a strong, reputable bank or trust company. There is the possibility of the Federal Reserve Banks being made Government depart ments, or that they may meet the same fate as the First and Second Banks of the United States. The political threat is serious and gives the offi cers and employees grave concern. vx As to obtaining officers for Federal Reserve Banks, unless they can receive salaries comparable to the compensation paid by other banking institutions, there is little inducement for a young man to enter the service of the Reserve Banks as a career, because if he has intelligence and initia tive, his prospects are better elsewhere.' On the other hand, Federal Reserve Banks may find a few people to serve as Governors and in the higher posi tions, if they have some independent means, provided the fear of political domination or destruction is removed. x>^ Reserve Bank employees know that in the event of their incapacity from illness, injury or old age, they will not be adequately provided for. Reproduced from the Unclassified / Declassified Holdings of the National Archives ') The retiring allowance for an average faithful employee who has served twenty years would scarcely be enough to give him or her the barest ne cessities of life. The larger banks and other substantial business corporations of this neighborhood provide much better for superannuated or incapacitated employees. yV| The best thing for the Federal Reserve System would be for it to provide the same compensation and demand the same intelligence and energy as are required of employees of other banking institutions. banks, this energy is devoted largely to getting business. V In commercial In Reserve Banks, it should be devoted to the supervision of member banks, the educa tion of their officers, and the cultivation of good-will. There is another matter that might be mentioned that has affected prospective officers’ or employees’ attitudes towards connection with the Federal Reserve Banks.^ The Board’s objection to officers or employees having outside connections or interests is another deterrent. Persons with active minds and high-minded desires cannot be confined to the daily tasks in their offices without dulling their mental and spiritual development. To insist upon their confining their efforts to their business without out side interests or contacts may develop a satisfactory bureau clerk, but will not produce a competent bank officer. A bank officer is not effective simply because he knows the mechanics of banking. and have a real knowledge of people and their ways. He must be broad-minded He needs breadth as well as acuteness)V In the commercial banks they require more than detailed knowledge of bank work, and they are generally very glad to see their employees con nected with outside interests, provided, of course, such connections do not Reproduced from the Unclassified / Declassified Holdings of the National Archives interfere with their work in the banks. It gives them breadth of view and marks them as personalities with possibility of development. ^The man who knows nothing but the job in which he earns his living is apt to be a very narrow person, and it is reasonable to believe that where a man's life is made up of a variety of activities, which bring him into contact with various groups and interests, the experience should make him more valuable to the bank V Reproduced from the Unclassified / Declassified Holdings of the National Archives rfi, fed er a l reserve bank OF PHILADELPHIA 9. Criticisms of existing regulations or rulings or procedure of the Federal Reserve Board, with specific recommendations as to changes which would correct any unsatisfactory features of the relations between the Board or its staff and the Federal Reserve Banks or member banks. vV v As to your ninth question we would say that the regulations of the Board seem to us to have been carefully drawn, and we are, for the most part, in accord with these regulations and the various rulings of the Board. Wp feel some hesitation in replying to the latter part of this question - the relations between the Board or its staff and the Federal Reserve Banks or member banks - but assume that you invite and wish a frank statement of our feeling. It might be summarized in the if statement that in the earlier years of the System we felt that the Board realized that the banks were conducting the operations of the System, and their disposition was to be cooperative and helpful. Having this feeling, we consulted freely with the Board, or with individual members, and never failed to get a sympathetic hearing and helpful advice or suggestions. We regret to have to say that in later years we have noticed a changed attitude on the part of the Board. A disposition to distrust and criticise seems to have succeeded to the former disposition to help.^ As a result we have refrained from making inquiries or submitting doubtful questions, except when necessary.^ ^ We have never made any list or memorandum of illustrations of this changed attitude, and there are probably a number that have passed from our recollection. The following are a few that now occur to us; ^ l.x\ In June, 1932, at the request of President Hoover, we got Reproduced from the Unclassified / Declassified Holdings of the National Archives twelve men of local prominence to serve as a "Banking and Industrial Committee". These gentlemen contributed their own valuable time, their Chairman contributed his Secretary to act as Secretary of the Committee, a local bank gave them quarters in its building rent-free, and they col lected a very considerable sum of money from trades benefitted by a "Renovize" campaign, which they waged with great success. As we were unable to contribute to their work either space or personnel, we agreed to bear, for a limited number of months, the very moderate salaries of two or three high-grade men they had to employ. Our total expenditures on account of this Committee were about $5,800. Although the times were critical and we were all overworked, we were harassed by constant inquiries, from your Secretary as to these men, their duties, their compensation, and the date of expiration of their employment. Even after the employment of the last man had ceased, on the date previously named to him, he inquired whether it had ceased.^ \' 2. The position taken by the Board in construing the Clayton Act and Section 52 of the Banking Act of 1955, in considering applications for permits to serve on two or more boards of directors, has disturbed our banks very much; has weakened their boards of directors by depriving them of the services of able men; and has excited a feeling of resentment on the part of these men. The Board*s negative decisions are generally regarded as wrong because they are not supported by the data submitted to the Board with the applications. y ^ 5. We recognize the duties and responsibilities imposed upon the v .Board, but we cannot avoid the feeling that the close and constant attention paid by the Board to matters of employment, promotion, and compensation comes very close to operation rather than supervision, and indicates a lack of confidence in the interest and ability of our Director6.^ We have been in the habit of reporting absences of employees over thirty days, on account of sickness, to our Executive Committee, which approved exten sions. The minutes of the Executive Committee, including these details, have always been read to and approved by the Board at its next meeting. We cannot see the reason for requiring that the attention of the Board, which has more important matters to consider, should be taken up with the details of each individual case - character of illness, age, prognosis, Ifv etc. We have, however, been instructed that this must be done. \x 4. l| In two cases - that of the Berks County Trust Company of Reading, and the "Main Line Trust Company" of Ardmore - the Board took po sitions which indicated a total lack of confidence in the Directors and officers of this bank, and a contempt for their judgment. Indeed, in the latter case, their comments to the Chairman and Governor cannot be charack\ \V terized otherwise than as offensive. ' N' 5. h We deplore the Board1s insistence that all officers and em ployees of Reserve Banks must divorce themselves from all civic and com munity interests. Mr* Austin *s enforced resignation from the Treasurership of the Chamber of Commerce has cut off a valuable contact with the business interests of the city. The same is true of Mr. Norris* severance from the Beneficial Saving Fund Society. Perhaps the most striking illustration is the insistence that a clerk in our Currency Department may not oblige his neighbors by serving them on the School Board of a small country township". Reproduced from the Unclassified / Declassified Holdings of the National Archives * We feel that it is to the interest of the System, as well as to the interest of the communities in which the Banks are located, that offi cers and employees should maintain useful business contacts, and do their duty as citizens, where such contacts and duties create no embar„ 11 rassment, and in no wise interfere with the performance of their work/1 Reproduced from the Unclassified / Declassified Holdings of the National Archives 3 21.-3 March 18, 1955. Mr. R. L. Austin, Chairmen, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania. Dear Mr. Austin: Reference is made to Governor Eccles1 let ter of February 6, 1955 (X-9115), to the Chairmen of ell Federal reserve banks, requesting that the Board be ad vised within thirty days as to the views of each bank in regard to certain subjects, a list of which was attached thereto. It is understood that the matter is receiving your attention, and it will be appreciated if you will in dicate when you expect that a reply will be submitted. Very truly yours, L. P. Bethea, Assistant Secretary. LPB-jcb Reproduced from the Unclassified / Declassified Holdings of the National Archives F e d e r a l R e s e r v e o k C l e v e l a n d B a n k M a r c h 11, H o n . M . S. Eccles, . 1955 Governor, Federal Reserve Board, Washington, D . C. Dear Governor Eccles: Our Board of D i r e c t o r s at its m e e t i n g on M a r c h 8 gave particular consideration X - 9 1 1 5 , and I have been to y o u r l e t t e r of F e b ruary instructed to transmit 6, to y o u the general views of the m e m bers of the B o ard of D i r e c t o r s and the officers of the bank wit h r e s p e c t the list t r a n s mitted with y o u r letter 1. General credit and numbered X-9115-a. Are c o m m ercial banks d o ing eve r y t h i n g in their power to improve the s i t u a tion? (b) If not, what steps can be taken by Fe d e r a l reserve banks or otherwise to b r i n g about an improvement? We have found in our contacts with m e m b e r banks as that there is a genuine desire good industrial of our field r e p r e s e n t a t i v e s on the part of the banks and commercial loans, the l i m i t a t i o n s supervisory Generally make and that to make they are doing imposed by law and the r e s t r i c t i o n s authorities. speaking, however, they are not inclined to these loans for a l o n g -time p e r i o d , nor do they deem it prudent to lower their credit they do m a k e , especially in situation: well as through the regular visits of the subjects (a) (a) so with i n to the apparently standards on loans which in view of their past experience and uuuvcu llum unciassmea / Declassified Holdings of the National Archives / W F e d e r a l o i R < C i:h i ;h v i -2- the further fact that they are almost supervisory authorities examiners who r e p r e s e n t visions especially as inte r p r e t e d by the constantly u r g i n g our banks of Section 15b of the Federal R e s erve Act, a v a i lable in or comm i t m e n t s with re s p e c t per 2. to loans, c e n t . guarantee under the p r o fit pointing through participations w i t h as much as an the p r o v i s i o n s of the lav/. Interest r a t e s : (a) On time and banks. savings de p o s i t s of m e mber (b) On loans of member banks and on i n d u s trial a d v a n c e s and comm i t m e n t s by Federal r e s erve banks. (a) H In c o n s i d e r i n g the rate of in t e r e s t time or savings deposits, account the average rate every bank must, to be paid on of c o u r s e , take into on its i n v ested assets. of earning assets of banks vary, and The port f o l i o s consequently the average rate of r e t u r n v a r i e s ; and in e s t a b l i s h i n g a ma x i m u m rate paid on time and to the average allowing, to the trans a c t i o n s pe r m i t t e d u n der out to them the a d v a n t a g e s eighty strictly those a u t h o r i t i e s . We have u r g e d and are consider certain to be criticized if they do not adhere to sound commercial b a n k i n g pr a c t i c e (b ) a n k l e v e l a n d H o n . M . S . Eccles - by the : B savings deposits, earnings from consideration to be should be given this source for the average bank, of c o u r s e , a suf f i c i e n t spread to cover o v e rhead and a rea s o n a b l e p r o f i t . (fe) While in this district there d u c t i o n in the rate paid on deposits, has been a m a t e r i a l r e generally s p e aking there Reproduced from the Unclassified / Declassified Holdings of the National Archives Fe d e r a l R e s e r v e o k H o n . M. C S . Eccles - B axil l e v e l a n d -5- has been no m a t e r i a l red u c t i o n in the rate who is an ordinary credit r i s k . This charged the b o r rower situation throughout the life of the F e d eral Reserve words, has p r e v a i l e d System; in other have been p a y i n g a 6% r a t e , r e g a rdless such b o r r o w e r s the r e d i scount rate in effect at the Federal reserve b a n k . With the present r e s t r i c t e d e a r ning power of b a n k s , a r e d u ction the rate charged the b o r rower who is an ordinary mig ht mat e r i a l l y affect a bank's that its very earning power existence m i ght be t h r e a t e n e d . of c o u r s e , have always r e c e i v e d the benefit of in credit risk to such an extent Prime credit risks, of favorable interest , U rates. In c o n s i d e r i n g our rates for i n d u strial loans and/or ments under Se c t i o n 1 3 b , it is felt that we must count the rate ing ordinary esta b l i s h e d by our m e m b e r banks commit take into a c for loans r e p r e s e n t credit r i s k s , and it is not felt that our rate be r e d u c e d below the p r e v a i l i n g rate*, fact that in large m e a sure the loans especially in v iew of the offered to us are in that they are of long m a t u r i t y , in many instances by rece i v a b l e s or other pensive, thus etc., the further w a r r a n t i n g fect are in the nature under more favorable c ollateral of lon g - t e r m conditions, s u b - s tandard are secured servicing of w h ich is ex the rate for what in ef i n v e stment loans which, would should even carry a m a x i m u m r a t e . A red u c t i o n in our 13b rates might bring p r e s s u r e upon m e m b e r banks to reduce ber banks their loans rates and, can ill a f ford to take this if m e m b e r banks did not reduce as stated b e f o r e , some m e m step. On the other hand, their rates f o l l o w i n g r e d u ction of Reproduced from the Unclassified / Declassified Holdings of the National Archives M ^ 4 V W 1 Fe d e r a l R e s e r v e OF Hon. B axil CLEViM^VNl) M . S. Eccles - -4- ^ our 13b r a t e s , the result m i ght be an infl u x of borrowers the Federal by reserve bank who should p r o perly to be a c c o m m o d a t e d their own banks. n The commitment rate, w h i c h in effect is a fee for the \ w e a r m arking of f u n d s , we feel is not u n r e a sonable, all c i r c u m stances considered, especially in view of the expense w h ich the Federal reserve bank incurs in its i n v e s t i g a t i o n of the business of an a p p l i c a n t and the fact that when an a p p l i c a t i o n is a p p r o v e d on a com m i t m e n t b a s i s , it is quite p r o bable c o m m itment fee is the only get for its services. return w h i c h the reserve bank will It must be r e m e m b e r e d too that approval of a loan on a com m i t m e n t basis creates on the part of the r e s e r v e bank, the loan must be exe r c i s e d 3. a contingent liability and continued t hroughout s u p e r v i s i o n of the life of the commitment. Matters a f f e c t i n g a d m i s s i o n of n o n - member banks to F e d e r a l reserve system: (a) Earnings of n o n - m e m b e r banks from exchange collection c h a r g e s . (b) P r e sent (c) A d v i s a b i l i t y of e x t e n s i o n of m e m b e r ship to banks outside the States and the D i s t r i c t of C o l u m b i a . (a) ,z Earnings from conditions exchange of m e m b e r s h i p . collection factor in this d i s t r i c t , especially exchange that the charges have p e rhaps been inau g u r a t e d by the b a n k s . d e p o sitors and it would These charges are not a since in a great many s u p e rseded by service seem should service instances charges charges are paid by the compensate the banks for the Reproduced from the Unclassified / Declassified Holdings of the National Archives // f 'm # zr*} < y w Fe d e r a l R e s e r v e of H o n . M . S . Eccles - Conditions for m e m b e r s h i p drastic Cl e v e i a x d -5- r e l i n q u i s h m e n t of exchange (b ) R a n k charges .* of m e m b e r s h i p since imposed on banks a p p l y i n g the ba n k i n g holiday appear to be more than those i m p osed on banks w h i c h entered prior to the h o l i d a y . membership the System It is our f e e l i n g that conditions of should now be of u n i f o r m a p p l i c a t i o n to all member banks in so far as p r a c t i c a b l e . (c ) Pres u m a b l y to banks in Alaska this refers or in a dep e n d e n c y any part of the U n i t e d States States, to the or insular p o s s e s s i o n or outside fi and it seems to us that this extension of mem b e r s h i p the continental United q u e stion could better be an s w e r e d by the F e d e r a l reserve banks in the coast is our view that the be n e f i t s of m e m b e r s h i p cities. to banks It in these remote l o c a t i o n s would depend upon the facility w ith w h i c h they could transact their busin e s s w i t h the reserve banks wit h w h i c h they were a f f i l i a t e d . ^ 4. Need for c ontinuance of ass i s t a n c e of R e c o n struction Finance Corp o r a t i o n in connection with r e h a b i l i t a t i o n of capital structures of banks. n There are still banks tures need bolstering, in this district whose and we b e l ieve the need c o n t i n u a t i o n of R e c o n s t r u c t i o n F i n ance capital still exists for C o r p o r a t i o n assistance this r e s p e c t . 5. struc Adequacy of r e i m b u r s e m e n t of Federal reserve banks by Treasury and other g o v e r nmental a g e ncies for various services r e n d e r e d and for space used in F e d eral reserve bank b u i l d i n g s . in from the Unclassified / Declassified Holdings of the National Archives F k i >k i $a i . R e s e r v e o f Hon. M. C l e v e l a n d S. Eccles - Xv A study rendered -6- of our own the Treasury indicates situation w ith respect to services and other G o v e r n m e n t a l a g e ncies the i n a d equacy subject is under 1Va x h clearly of the r e i m b u r s e m e n t received. c o n s i d e r a t i o n by a committee This of Governors of Fe d e r a l reserve banks.' 6. (a) R e g u l a t i o n fixing m a r g i n r e q u i r e m e n t s for loans by banks upon equity securities for the pu r p o s e of p u r c h a s i n g or carrying s e cur ities r e g i s t e r e d on n a t ional securities ex changes. (a) C i r c u m s t a n c e s u n der w h i c h r e g u l a t i o n should be issued. (b) W h ether r e g u l a t i o n should permit bo r r o w e r to o b tain from bank more than he could obtain from broker u n d e r R e g u l a t i o n T. and ( b ) . ^ It is the opinion n d that Section 7(b) Sec u r i t i e s Exchange Act of 1934 is impracticable, time as the law is s i m p lified the issuance of the and until such of the r e g u l a t i o n should x\ \ \ be deferred. * In the last analysis, the m a king of securities loans itself into a qu e s t i o n of credits. Aside r e s olves from the collateral, there are other factors w h i c h must be c o n s i d e r e d in such cases, such as the p u rpose of the loan, rep u t a t i o n of the borrower, 7. ability, and and his f i n a n c i a l worth. E c o nomic and s t a t i s t i c a l di v i s i o n of Federal r e s erve banks: (a) Usefulness to directors and officers. (b) Value of F e d e r a l reserve bank monthly reviews. (a) ^The B o a r d of Dir e c t o r s the character, and officers of this bank have Reproduced from the Unclassified / Declassified Holdings of the National Archives Fe d e r a l R e s e r v e OF Hon. M. (jJtVHI^VXI) S . Eccles - found the -7- statistical data, Statistical Department meeting, Ba n k c h a r t s , etc., p r e pared by to be very valuable. the At each Board the head of the S t a t i s t i c a l D e p a r t m e n t p r e s e n t s the Board his o b s e r v a t i o n s from the to statistics a c c u m u l a t e d V during the month. (b) >\ It is the v iew of our B o a r d and officers MONTHLY B U S INESS R E V I E W should be continued in view of the w i d e - s p r e a d interest w h ich it has e v o k e d .^ evidenced by the fact that from a small 1,000 copies m o nthly to member banks, and to the companies to 10,000 of 9,000 b e ing the direct r e sult and receive c i r c u l a t i o n of about of this b a n k , su p p l y i n g us with data, copies monthly, the increase of requests by individuals, c orporations to be p l a c e d on the ma i l i n g list to the REVIEW. 8. E s t a b l i s h m e n t of career system for p e r s onnel of F e d eral reserve banks. \\ A career system w i t h i n each Federal reserve bank would d e s i r a b l e , but it is not felt that a career involve This i n t erest is to of f i c e r s and d i r ectors c irculation has increased firms, that our seem system w h ich would the m o v e m e n t of o f f icers and employees from d i s trict to district would be desirable.'V A W i t h the vast territory served by the F e d e r a l Reserve and the great d i v e r s i t y in industrial, p u r suits exi s t i n g b e t ween districts, customs and p r a c t i c e s p r a c tices of all, commercial, and the p r o b l e m s and a g r i c u l t u r a l it follows na t u r a l l y of one district are not System that the the customs and of one district are not the Reproduced from the Unclassified / Declassified Holdings of the National Archives /f c c Fe d e r a l R e s e r v e o f Hon. C l e v e l a n d M . S . Eccles - p r o blems of all. district can only trict; -8- Thorough knowledge come th r o u g h y e a r s and a man cannot ability the the nomadic a career standpoint existence for system which of the pr o b l e m s of a of res i d e n c e in the d i s serve a di s t r i c t to the best of his if he is not thoroughly From ]>a x i v f a m i l i a r with its p r o b l e m s . u of the individual, it is felt that employees w h ich might resu l t from c o n t e mplates the transfer of p e r sonnel from d i s trict to d i s trict might prove u n a t t r a c t i v e w o men who would oth e r w i s e constitute to men and a very des i r a b l e type of x\ e m p l o y e e , especially 9. if they were owners of their homes. Criticisms of existing r e g u l a t i o n s or rulings or pro c e d u r e of the Federal Reserve Board, wit h specific r e c o m men d a t i o n s as to changes w h i c h would correct any u n s a t i s f a c t o r y features of the r e l a t i o n s b e t w e e n the Board or its staff and the Federal r e serve banks or memb e r banks. > t*In this connection, we believe that it might be helpful the Fe d e r a l Reserve B o ard and to the F e d e r a l reserve banks con s u l t i n g committee were of the r e serve banks, sired, especially which involve set up, co m p o s e d of o p e r a t i n g officials w h i c h the B o ard could consult if it so d e comp l i c a t e d o p e r a t i n g pr o b l e m s for m e m b e r banks and A similar a r r a n g e m e n t might be helpful in conn e c t i o n wit h the i s s uance by the B o a r d of i n s t r u c t i o n s to re- setting up a c c o u n t i n g procedures. May I assure y o u that we have been if a in c o n n e c t i o n vrith the drafting of r e g u lations Federal reserve banks. serve b a nks to glad to give the Board's Reproduced from the Unclassified / Declassified Holdings of the National Archives Fe i m m e x e R e s e r v e FLv n i l OF ClJEVELAND H o n . M . S . Eccles - que s t i o n s our serious fully -9- thought, and I have ende a v o r e d to c are set down the opinions of our B o a r d and o f f icers on the v a rious topics. Very F-B truly yours, Governor Reproduced from the Unclassified / Declassified Holdings of the National Archives Reproduced from the Unclassified / Declassified Holdings of the National Archives x f K o tin N o . 131 Office Corresponaence To__ Files___________________________ _ From Mr. Bethea _____ _____________ t-E D E R A L R ES E R V E BOARD 3 c )7 .-3 Date, March3i£,, 1£35l.__ Topic 3(c) of Board1s letter X-9115 Subjecttjdated Feb. 6, 1935, "Advisability, of extension of membership to banks _____ outside the States and the District of Columbia”. ... In a telephone conversation with me this afternoon, Assistant Federal Re serve Agent Fry clarified the position taken by the Richmond reserve bank with re spect to the above subject by stating that it was felt that there would be no ob jection to the admission to membership in the System of national banks in Alaska or in a dependency or insular possession of the United States inasmuch as they are under the supervision of the Comptroller of the Currency. He said that he re garded supervision as of first importance and that in any case where a bank located in Alaska or in a dependency or insular possession of the United States could meet the usual membership requirements and was subject to adequate supervision he saw no basis upon which admission to membership could properly be denied. Reproduced from the Unclassified / Declassified Holdings of the National Archives _ _ _ F e d e r a l R e s e r v e Ba n k M U o N of Ric h m o n d j V RECEIVED FEDERAL RESERVE BOARD WASHINGTON 1 9 3 5 MAR 16 AM 9 3 ^ March 15, 1955. Federal Reserve Board, Washington, D. G. Dear Sirs: Reference is made to the Board*s communication X-9115, dated February 6, submitting a list of subjects brought to the attention of the governors on February 5 by Governor Eccles,with the suggestion that these subjects be discussed by the directors and officers of the Federal reserve banks and that the Board be advised as to their views. The list of subjects was read to our Board at its first meeting thereafter, February 15, at which time the Executive Com mittee of the bank was directed to formulate a reply to be sub mitted to the directors for consideration at their following meet ing, which occurred on yesterday, Thursday, March 14. The reply represents the composite opinion of the offi cers of the bank, which was adopted by our Board, and it is now submitted herewith. Very truly yours, GJS-CCP EXECUTIVE COMMITTEE. 06 l3 i^cudabnieu noiaings or the National Archives F e d e r a l R e s e r v e Ba n k of Ric h m o n d REPLY BY TOPICS TO LETTER OF FEDERAL RESERVE BOARD, FEBRUARY 6, 1955. X-9115 1. General Credit Conditions. (a) Are commercial banks doing everything in their power to improve the situation? This question without thorough investigation and supporting data permits only a general answer. As an expression of opinion, however, based upon our experience and observation, it is believed that the question may be answered generally as follows: Vx The principal argument which the banks make in their own defense is that there is a lack of sound customers willing to borrow, brought about by a feeling of uncertainty, which is believed to be widespread, with respect to future developments in the political, monetary, and business fields, which makes both the potential borrower and lender hesitate.'' Formerly, the occa sions were rare when borrowers in good standing in the Fifth Federal Reserve District complained of inability to obtain credit accommodations. It is un deniable that the banks were alarmed — and still are timid — because of the experiences through which they have recently passed. The tremendous decline in the prices of securities, of real estate, and of commodities rendered it impossible, at different periods, for banks to determine the soundness of loans which they had already made. We have heard more than one banker make the statement that a most careful appraisement of his assets at one time was subject to downward revision within a period of a few months. These conditions impelled the banks to make strenuous effort to achieve and maintain a highly liquid position even at the expense of earnings. Beyond question, that is still their attitude. They are entirely willing to make loans which they believe to be good and safe according to their own present standards. A comparison of loans and investments by all member banks in this district as of October 25, 1955, and October 17, 1954, shows an increase of $115,000,000. However, during the same period loans and advances made by banks declined about $15,000,000, but a considerable increase took place in the investment portfolios of member banks, consisting almost entirely of the purchase of United States Government securities. It appears to be true that the demand for accommodation at commer cial banks upon terms generally associated with commercial bank credit has declined perceptibly in recent months. The question most frequently put to us by member banks is: MHow may we employ our idle funds in a manner to yield a maximum return?" It is believed that many commercial banks are of the reproduced from the Unclassified / Declassified Holdings of the National Archives -S Topic 1(a) Continued ' * -Si- opinion that the various governmental and semi-governmental lending agencies afford sufficient credit facilities for agriculturists, home owners, and in dustry unable to borrow on commercial banking terms. Many banks therefore feel that, with the class of customers provided for already mentioned, their own activities should be confined to strictly commercial bank credit or to investment in Government securities, and in other securities of the highest grade to a more limited extent. It is not believed that this general attitude on the part of com mercial banks which we have so briefly sketched is a conscious effort of non cooperation in efforts to improve the general credit situation, but an aroused sense of responsibility leads many banks to believe that their first duty is to their depositors. (b) If not, what steps can be taken by the Federal reserve banks or otherwise to bring about an improvement? P v' " It is not believed that any specific steps should be taken at this time to adjust this situation.*' Something can be accomplished with proprie ty and in good reason through the medium of personal conferences with bank officials, which are continually in process as a part of the regular routine of this bank. |X " U,G uMuaoamcu / ueuidssmea noiaings or me National Archives 4 * • 2. Interest rates. (a) On time and savings deposits of member banks. It has come to our attention that there is in this district a con siderable amount of misunderstanding and wide variations in practice with reference to the payment of interest on savings deposits and the distinction between savings deposits and other kinds of time deposits. The situation in our opinion has been aggravated by the fact that we have in this district such a large number (over six hundred) of nonmembers, which of course are not governed by regulations of the Federal Reserve Board; but, apart from this, there is much difference of interpretation of Regulation Q by member banks, of which there are about four hundred. The amendment to Section 19 of the Federal Reserve Act, known as the Banking Act of 1955, divides deposits into two classes; First, those payable on demand; and second, those with reference to which demand cannot be made in less than thirty days or upon written notice given thirty days in advance of an intention to withdraw. Under the provisions of the Act with reference to demand deposits, no member bank is allowed ’’directly or indirectly, by any device whatsoever” to pay any interest.” With reference to time deposits, no member bank is allowed to pay before maturity or waive any requirement of notice except on a subdivision class known as ’’savings deposits.” \v Yath reference to the payment of' interest on demand deposits by indirect methods, there is in this district a wide difference of opinion and a wide difference in practice. This has taken the form of absorption by the hank of exchange charges incurred in the collection of items handled for deposit. Some banks are refusing to absorb any such charges or indeed any out-of-pocket expenses in connection with a depositor’s account; others are absorbing occasional exchange charges; still others are soliciting business on the basis of absorbing at least ”a reasonable amount” in exchange and other charges. In our opinion it would be most helpful if the Board could lay down definite and specific rules even though it might go to the extent of prohibiting the absorption of any exchange charges or out-of-pocket ex penses in consideration of the size or value of the depositor’s balance. It is probable that in Regulation Q the Board has gone as far in this direction as it can under existing law. If this is the case, we think that the Act should be further amended, and we think that in this respect nonmember banks should be controlled through the F.D.I.C., which should also be given au thority to deal with this situation.^ Time deposits are divided into three classes; 1. 2. 5. Time deposits, open accounts. Time certificates of deposit. Savings accounts. t,,G vMviaoameu / ueuidssmeu noiaings or me National Archives 4 Topic 2(a) Continued 0 -4- 'The Board*s regulations are clear and explicit with reference to time deposits, open accounts, and we are not aware of any abuse or question able practice with respect to them. The Board’s regulations are also clear and explicit with reference to certificates of deposit, except in one respect. xX In Section 5 of Regula tion Q we find the following: t SECTION V. \\ INTEREST ON SAVINGS DEPOSITS . . (a) Definition.— The term "savings deposit” means a deposit which consists of funds accumulated £sem bona fide thrift pur poses and in respect to which — ^ (1) the pass book or other form of receipt evidencing such deposit, must be presented to the bank whenever a withdrawal is made. •t because of the use of the expression "other form of receipt,” some banks have insisted that a certificate of deposit was such other form' of receipt and have consequently continued to pay such certificates before maturity and with out thirty days written notice. We would not be surprised if this practice was fairly widespread among nonmember country banks. M ^ With reference to savings deposits, there are wide differences of opinion, and we have no doubt wide differences in practice. Again we realize the probability that in defining savings deposits as thrift accounts in Regu lation Q the Board has gone as far as it is warranted by the law as it now exists. There is in our opinion great need for further classification and definition under specific amendments to the Federal Reserve Act or under an amendment giving the Board discretion in making distinctions and regulations with respect to the payment of interest on deposits. In this connection we would suggest the following for consideration with relation to this topic:s b The amendment to Section 19 of the Federal Reserve Act forbidding the payment of interest on deposits payable on demand and giving the Board the right to limit the amount of interest which could be paid on time deposits was made for the purpose of saving banks from themselves, or rather from a situa tion into which they had been led by the keen and ruthless competition of re cent years. It was a well known fact that larger and larger percentages of total deposits were shifting from demand to time, partly because the required reserve against time deposits was less and partly because competition was forcing the almost universal payment of interest, a **It is true that with reference to time deposits banks had the right to require written notice of thirty days or more, but it was also true that to make such a requirement was often highly dangerous and raised the question of solvency. «< In the foregoing we have made a number of statements in respect to the practices of banks in this district, both member and nonmember. We be lieve these statements to be true, as they are based upon correspondence with 0111,1Ie unudbbiiiea / ueciassitied holdings of the National Archives 4 Topic 2(a) Continued -5- various member banks, interviews with representatives of banks, and state ments made to us in such interviews from time to time by representatives of member banks. \\ In our opinion, the only practical way in which complete and ac curate information with regard to practices with reference to absorption of exchange charges and with reference to the questionable use of certifi cates of deposit to represent savings accounts and the improper classifi cation of accounts as savings accounts could be ascertained, would be by instructing examiners to investigateethese matters as a part of their routine examination of member banks. (b) On loans of member banks and on industrial advances and commitments by Federal reserve banks. 1 We have been advised by senior officials of a number of the mem ber banks of this district that the tendency is to reduce the rate of inter est to the customer, and that especially is this true in cases where the security offered is considered ample, and in cases where the moral risk is thoroughly satisfactory Investigation of this matter leads us to believe that, generally speaking, member banks are sincere in their statements that they are endeavoring to make good loans whenever the opportunity presents itself, and that they will make the rate of interest in keeping with the risk involved, the length of time, and the general rate of interest pre vailing in this district, as compared with the rate of interest generally charged in other sections of the country. A toith reference to interest rates charged on industrial advances and commitments by Federal reserve banks, as stated in our reply of Febru ary 25 to the Board’s letter X-9122, this matter has been given very care ful consideration by the officers of this bank, and we feel that the rates charged on advances and commitmentsj for the reasons set forth in that let ter (copy attached) are proper under prevailing conditions.1' Topic 2(b) Continued February 25, 1955. Federal Reserve Board, Washington, D. C. Gentlemen: The Board's letter X-9122, subject "Interest Rates Charged on Industrial Advances and Commitments," was read and discussed with our direc tors at their monthly meeting last Thursday, February 14, and the officers of this bank have, as requested, carefully reviewed the rates charged by this bank on industrial advances and commitments. Nearly all industrial advances made by this bank are direct to the applicant, on which advances interest is charged at the rate of 6% per annum, but in a few cases we have made advances through a participating bank, such bank taking 20% or more of the entire loan. In these cases the participating bank charges the borrower interest at the rate of 6% per annum, but we in turn receive through the participating bank interest at the rate of 5% per annum on that portion of the advance which we make. This of course enables the parti cipating bank to make 1% on the transaction and encourages banks to partici pate with us in such loans. The interest charged by this bank on commitments made in connection with industrial advances is at the rate of 1% per annum. We have made no commitments direct to borrowers but all commitments made have been to banks participating in industrial loans. The usual proce dure is for the participating bank to make the entire loan and receive from us a commitment to discount or purchase 80% or less, depending upon the actual amount of the loan that the participating bank desires to become obligated for itself. In a few cases the participating banks have requested that we give them a commitment for 100% of the loan, and they in turn have become responsi ble to us for at least 20% of any loss that may ultimately occur, as provided in the law. Should the participating bank exercise the right given it under our commitment and request that we take over the entire 100% of the loan, we would charge 5% on that part of the loan upon which we would be responsible for any ultimate loss, but would make the participating bank a better rate on the remainder of the loan for which it was responsible for any ultimate loss. We have had no cases of this kind and therefore have not yet fixed a rate. As stated above, the matter of rates charged by this bank on indus trial advances and commitments has been carefully reviev/ed; in fact, the mat ter has been constantly before us since we were authorized to make industrial loans and commitments. We feel that all commitment rates should be on an annual basis, and that has always been our policy. We further feel that a rate of 1% per annum for commitments is reasonable and encourages member banks to make loans covered by commitments. We are also of the opinion that inasmuch as the Fifth Federal Reserve District, except in the larger cities and with Keproduced trom the Unclassified / Declassified Holdings of the National Archives Federal Reserve Board, Ycashingtoru D. C.,Continued -7- valued customers, is normally a 6% district, and taking into consideration the nature of the loans that we have been able to make under Section 13b, the dura tion of the loans, the varied nature of the security offered, the general con ditions surrounding the applicant, the fact that each applicant has been re fused accommodation through regular channels (on the basis of the application made), and furthermore the careful investigation (legal and otherwise) necessa ry to be made prior to passing upon the application, frequently including investigations made ty our men sent into the field, sometimes more than once, the legal work required to be done after the loans are agreed upon, taking nearly the entire time of our Counsel and the part-time work of two legal assistants from the outside, for which no charge is made to the applicant (a charge not being made unless by agreement with the applicant in advance that we undertake to have made special appraisals or special accounting work) — taking into consideration all of these facts, ¥/e believe that 6% is a proper and reasonable charge to be made and so far have not made any loan on which a lesser rate in our judgment would be justifiable. Furthermore, it is to be taken into account that we are committed to pay the Treasury 2% net on that part of its advances to us, being a return of our surplus subscribed to the F.D.I.C. for the purpose of making these loans. line are of the opinion that a 6% rate is nothing more than reasonable. It takes in many cases sixty days or more to complete a loan. Vve have made strenuous endeavors to induce banking institutions to participate with us in making these loans, and even a 6% rate does not appear to be entirely persuasive. If in any case a banking institution finds itself willing to make one of these loans at a rate less than 6%, we will make a rate to such banking institution of 1% less than the rate charged by that bank ing institution to the industrial or commercial borrower but not less than 4% per annum. Vthile these loans are sometimes referred to as secured loans, the fact is that the best security obtainable is taken, but in not many cases can it be considered as absolute or marketable security. At the end of last 3^ear, this account was in the red, in very large part due to the allocation of ex penses over a short period of time and for organization of facilities to handle the loans. Very truly yours, Executive Committee. Reproduced from the Unclassified / Declassified Holdings of the National Archives V / - 5. 8- Matters affecting admission of nonmember banks to Federal Reserve System. (a) Earnings of nonmember banks from exchange collection charges* In the Fifth Federal Reserve District 80% of the nonmember non par banks are in the states of North Carolina and South Carolina. This dis tinction is made by reason of the fact that nonmember banks on the par list are not concerned with exchange collection charges to anything like the ex tent to which nonmember non-par banks are interested in the subject. A brief answer to the question propounded would be that in all states in the Fifth Federal Reserve District, except the two Carolinas, it is not be lieved that earnings from exchange collection charges seriously deter nonmember banks from applying for membership in the System. As evidence of this state ment we quote from the Commissioner of Insurance and Banking in the State of Virginia: ”Giving you my personal opinion, I do not believe that the revenue from exchange bulks very large in the earnings of our nonmember state banks. There may be a few where it is sufficient to pay the salary of an employee or officer of the bank, but I believe more of our banks are remitting at par.” V A very brief survey of the background involved in an answer to the current question may be desirable at this point. Some years ago state banks were permitted to organize and were granted charters with paid-in capital stock for less than the present requirements. It is also true that the restrictions surrounding the organization of a state Dank were not numerous in former years and, as a result of these tendencies, small state banks were chartered, not only in the Fifth Federal Reserve District but elsewhere, under conditions which mature thought and observance of economic necessities would have prevented. In the southern part of our district, which comprises the two states referred to, the above remarks apply with particular force. In aggravated cases there were state banks organized in isolated sections solely for the pur pose of charging exchange, and they established their own rates. There were other state banks organized with small capital for the purpose of financing local business in season but which depended for a steady revenue largely upon exchange charges. There appear to be two reasons, among others, why banks in the sec tion referred to depend upon exchange charges to a marked degree: First, as we have previously said, many of these small state banks were organized with the full intention of charging exchange and with the realization that exchange collection charges as revenue would be necessary to keep them alive; secondly, in the section to which we refer, business generally speaking is highly season al, certainly in the smaller communities in which banks of the type to which we refer would be organized. Therefore, in order to supplement their seasonal Reproduced from the Unclassified / Declassified Holdings of the National Archives Topic 5(a) Continued -St eamings, the banks have depended upon exchange collection charges. "Therefore, we repeat the statement contained in the beginning of this memorandum that, in the two Carolinas-in this district, we believe that earnings of nonmember non-par banks from exchange collection charges restrain many of these institutions, which might otherwise be eligible for membership in the System, from' making application. There are, no doubt, many small banks of the class concerning which we write which would find it extremely difficult to make a living if deprived of exchange collection charges. In fact, there are undoubtedly cases, probably few in number, in which small state banks could not survive without this source of revenue. It is a ques tion whether these small banks are more than a convenience to their locali ties. (b) Present conditions of membership. In our opinion there are only three of the standard conditions of membership now prescribed by the Board which may be regarded as unreasonable and which should be modified. Condition No. 8 reads as follows: "Such banks shall not permit any investment in a bank building or in a site for a bank building to assume such proportions as, in the judgment of the Federal Reserve Board, would endanger the bank*s solvency or liquidity, or would otherwise be unduly large or im proper, and before any investment is made in a bank building or a site for a bank building the bank shall refer the matter to the Federal Reserve Board for consideration." Of course no memberjbank should permit its investment in bank building or site for a bank building to assume such proportions as would endanger its solvency or liquidity,,but we do not think the state mem ber bank should be required to refer this matter to the Federal Reserve Board before making any such investment. The provisions of Section 24(a) of the Act are sufficient. This section reads as follows: "Hereafter no national bank, without the approval of the Comptroller of the Currency, and no State member bank, without the approval of the Federal Reserve Board, shall (1) in vest in bank premises, or in the stock, bonds, debentures, or other such obligations of any corporation holding the premises of such bank or (2) make any loans to or upon the security of the stock of any such corporation, if the aggregate of all such investments and loans will exceed the amount of the capital stock of such bank." We suggest that condition numbered 8 be elimi nated and that Section 24(a) govern this matter. Condition numbered 18 reads as follows: "If trust funds held by such bank are deposited in its banking department or otherwise used in the conduct of its business, it shall deposit with its trust department security in the same manner and to the same extent as is required of national banks exercising fiduciary powers." Each such account is insured by the Federal Deposit In surance Corporation to the extent of $5,000. l*This condition might well be Reproduced from the Unclassified / Declassified Holdings of the National Archives Topic 5(b) Continued -10- amended to provide that such portion of trust funds being used by the bank which are not insured shall be covered by collateral as required of national banks by the Federal Reserve Act^ Section 11(k) of the Act has not been amended so as to take into consideration the insured portion of trust funds on deposit with national banks.VN Condition numbered 19 reads as follows: “Such bank shall make ade quate provision for depreciation in its banking houses and furniture and fixtures, in amounts which in any one year shall be not less than 2 per cent of the present carrying value of its banking houses and 10 per cent of thye present carrying value of its furniture and fixtures.“ This requirement, in many cases, is entirely unreasonable in that it does not take into account the actual value of the property in its relationship to its book value.' Re cently a state member bank bought a banking house fully equipped from the re ceiver of a failed bank for about $15,000. The property purchased was com paratively new and cost about $50,000 just a few years ago. In order to comply with condition numbered 8 this bank had to get permission from the Federal Reserve Board to buy this valuable property at a ridiculously low price. Had the bank bought the property just prior to its becoming a mem ber, it would have been subjected to condition numbered 19 and would be re quired to write the property down each year regardless of its actual value. There are other cases in which banking houses are carried at or below the assessed value for tax purposes. We think" it would be sufficient to require banks to reduce the book value of their banking houses to a fair value and maintain them on this basis at all times.'1 (c) Advisability of extension of membership to banks outside the states and the District of Columbia. Section 19 of the Federal Reserve Act provides that national banks or banks organized under local laws, located in Alaska, or in a dependency or insular possession or any part of the United States outside the continental United States may, with the consent of the Federal Reserve Board, become mem ber banks. Membership might be of some value to some banks so located. We know nothing of the laws governing such state banks and do not know what su pervision they have. In the absence of a better understanding of the condi tions under which state banks are operated we do not think membership in the Federal Reserve System should be extended to state banks outside the conti nental United States. If such banks believe membership in the Federal Re serve System is valuable to them, they should obtain such membership by be coming national banks. Reproduced from the Unclassified / Declassified Holdings of the National Archives - 4. 11- Meed for continuance of assistance of Reconstruction Finance Corporation in connection with rehabilitation of capital structure of banks. From the wording used above, it appears that the question is directed to all banks in the district and is not confined to member banking institutions. We have not maintained a collective record of the member banks in the district which repaired their capital structures through the medium of the facilities of the Reconstruction Finance Corporation. The Richmond Agency of the R. F. C. does not have such a record but the figures could undoubtedly be obtained from the Corporation in Washington. It is true that banks in the Fifth Federal Reserve District, member and nonmember, have availed themselves freely of the assistance offered by the Reconstruction Finance Corporation in repairing depleted capital structures. In some cases this was done at the insistence of the supervisory authorities; in other cases, the banks took the initiative themselves. In nearly all cases involving member banks, while some difference of opinion may have existed prior to the application about the need for additional capital, events after the ar rangements were completed have proved the wisdom of the move. Among member banks there are a few cases pending, and we are informed by the local agency that a few cases are pending involving nonmember banks. It is our belief and the belief of the Richmond Agency of the R. F. C. that the need for further assistance for the purpose and along the lines men tioned has been reduced to a minimum. A few emergency cases have been developed recently in which the facilities of the R. F. C. have been extremely valuable in restoring impaired capital structures, but emergencies of this nature are likely to develop at any time under almost any conditions. Inquiry made of the Supervising Examiner of the Federal Deposit In surance Corporation for this district results in the following expression of opinion: "While the capital rehabilitation program of insured state banks not members of the Federal Reserve System has been fairly well completed, naturally, there are some exceptions. * * * It is believed desirable, however, to continue this aid during the current year. * * * It is very probable that no large amount of funds will be required from the Reconstruction Finance Corporation, but there will be certain cases that do actually need such aid." The above expression of opinion is in line with our experience and belief. The Chief National Bank Examiner of this district advises that there are nine cases involving the sale of preferred stock by national banks to the R. F. C. which are pending. He expresses the opinion that occasionally the need will arise for capital rehabilitation, in which event facilities of the R. F. C. will be very helpful. In general, it is his opinion ttet the program of the Reconstruction Finance Corporation in the rehabilitation of capital Reproduced from the Unclassified / Declassified Holdings of the National Archives Topic 4 Continued -12- structures of national banks in this district is well advanced. .t * ‘1From the information obtained from official sources upon this sub ject, it would appear that the program of.the R. F. C. in,this particular is nearing completion, but that it would be advisable to have the benefit of these facilities for unfinished and emergency cases throughout the balance of this year. l' Reproduced from the Unclassified Declassified Holdings of the National Archives and for space used in Federal reserve bank buildings* At the present time the Treasury Department makes reimbursement only for direct or out-of-pocket expenses incurred by us as Fiscal Agent in connection with new issues of Government securities. It does not make reim bursement for direct expenses incurred as Fiscal Agent in connection with re demptions, exchanges, transfers, and conversions of Government securities, nor does it make provision for the reimbursement of any general expenses, such as personal maintenance, purchasing, telephone (other than tolls), protection, equipment repairs, insurance, planning systems, etc., whether incurred in con nection with new issues or other operations. During the year 1934, expenses incurred by this bank on account of the Treasury Department, including gener al expenses, amounting to'$152,000, of which we received reimbursement for $59,000, leaving $93,000, which we absorbed. Of this $93,000 only $15,000 was represented by general expenses. 1ftith reference to the expenses of other Government agencies, of which the activities of the R. F. C. are by far the largest, the total expenses dur ing 1934 of this bank, including general expenses, amounted to $278,000, of which we received reimbursement for $258,000, leaving $40,000, which we absorbed. It will be seen from the above figures that during the year 1934 fis cal agency, custodianship, and depository expenses of this bank on account of the Treasury Department and other governmental agencies amounted to $410,000, of which we received reimbursement for $277,000, leaving $133,000, absorbed by us, which figure includes only a portion of a reasonable charge for rent of office space and no charge for the rent of vault space. M I t is our opinion that the Federal reserve banks should be reimbursed by the Treasury Department and other governmental agencies for all expenses — general as well as direct — incurred by the banks in connection with fiscal agency, custodianship, and depository operations, including rent for office and vault space used in Federal reserve bank buildings.’f * While we have always thought that complete reimbursement should be made to Federal reserve banks, in years past when the earnings of Federal re serve banks were large, and particularly at the time when a very large portion of such earnings, after providing for expenses, dividends and charge-offs, were being paid to the Government as a franchise tax, there was little or no reason for obtaining reimbursement from the Treasury for all expenses. During recent years, however, conditions have materially changed, and at the present time the earnings of a number of Federal reserve banks are not adequate to meet expenses, dividends and charge-offs, and the situation has caused the banks considerable concern. It has been suggested that in order to provide sufficient revenues Federal reserve banks might be compelled to levy service charges against member banks, and this would seem to be imminent unless the Treasury Department and other governmental agencies will agree to reimburse us tor the cost of services performed for them. xV 4/f <1 Reproduced from the Unclassified / Declassified Holdings of the National Archives -14- 6. Regulation fixing margin requirements for loans by banks upon equity securities for the purpose of purchasing or carrying securities registered on national securities exchanges. (a) Circumstances under which regulations should be issued. Regulation T, which became effective October 1, 1954, has to do ' with the extension of credit by dealers, brokers, and members of national se curities exchanges. The Board may, however, make regulations as to the exten sion of credit by banks for the purpose of purchasing or carrying securities registered on national securities exchanges. v The Federal Reserve Board should, in our opinion, interfere as little as possible with the normal lending by banks by limiting the amount which they may lend on a given security for the purpose just referred to. For this reason we do not think the Board should issue such regulations unless or until it is thoroughly satisfied that banks generally are aiding in speculation to an un reasonable and dangerous extent. Until such condition develops banks should have the right to exercise their own judgment as to how much they will lend on a given security. There are many factors which enter into the lending of money on securities besides the high, low, and present market value of the security. vl (b) Whether regulation should permit borrower to obtain from bank more than he could obtain from broker under Regulation 1. l!Yes, unless, as above stated/ banks generally go too far in contributing to dangerous speculation and diverting credit from commercial and agricultural channels to that of purchasing and carrying securities.'1 7. Economic and statistical divisions of Federal reserve banks, (a) Usefulness to directors and officers. This division includes the work of the head of the department and one woman assistant and a large part of the time of several employees in the accounting and planning department. ^ We do not see how the directors and of ficers of this bank could intelligently operate the bank without having a veiy large amount of statistical data which would have to be gathered and tabulated by employees. So long as the work has to be done,it might as well be handled by a division in the bank. In many instances the information gathered is indispensable for our own good and absolutely necessary in order that we may furnish the Federal Reserve Board from time to time with the in formation which it requiresy (b) Value of Federal reserve bank monthly reviews. We mailed 5549 copies of our January 51, 1955, issue, which is about the same number we have mailed regularly each month for two years. 509 copies went to member and nonmember banks. 2840 copies went to individuals, firms, corporations, and institutions of various kinds scattered throughout the United States and in thirteen foreign countries. On at least two occasions we attempted to revise our list and in closed a notice to the effect that unless specific request was made to be re tained on the list the review would be discontinued. The first time this was attempted comparatively few requested that their names be dropped from the list. On the second occasion our loss was greater, but we observed that later in the year a great many of these people, including some colleges and libraries, wrote us that they had failed to receive certain issues of the revie?/ and requested that we supply them with the missing issues in order that they might complete their files. It appeared that they merely failed to sign the request to be continued on the list. Since that time we have printed on our envelope inclos ing the review a return card, and invariably dropped from the list the name when a review was not delivered. \X The department preparing our monthly review gathers retail trade figures which are greatly in demand by merchants, manufacturers, and industries of various types.x\ x\ Judging from the distribution of our review, we think we are justified in saying that it is regarded by many as having real value, but we are not able to appraise the value of the review in relation to its cost.'1 - 8. 16 - Establishment of career system for personnel of Federal reserve banks. We are doubtful of the practicability and the value of a systemwide career program for officers and employees of Federal reserve banks, but we are convinced of the value of such a system within each Federal reserve bank; in fact, such a system is necessary to the maintenance of a proper morale in each bank, involving as it should orderly promotion by merit and the education of employees to fill all the positions. A system-wide career plan would necessarily involve the uprooting in many cases of lifelong ties and the sacrifice of homes and social connec tions. The ambition of most young men is to establish and own a home, par ticularly after marriage; and while there are perhaps few who would not be willing to sacrifice all of these considerations if the material advantages were sufficient, it is not believed that the arrangement as a plan would be advantageous in its application to this section of the country. A system career for women is not believed to be practicable. Membership on the Fed eral Reserve Board might well be made a career, which would involve security in tenure of office and succession in Governorship. Incidentally, unification in the banking system d' the country would go far toward making banking a profession or career. We submit, however, a special memorandum on this topic. SPECIAL MEMORANDUM The term “career system” is frequently applied to the British Civil Service and to certain members of our diplomatic corps, but its principles are found in our Federal Civil Service, in large business corporations like the Canadian banks with their far-flung branches, the Standard Oil Company with its domestic and foreign organizations, the National City Bank of New York with its branch offices, the Great Atlantic and Pacific Tea Company, etc Though it may be accurately used in connection with business organizations of fair size but of only one local unit, its fuller significance appears in con nection with national and international agencies, private and governmental. Without attempting to define "career system,” because its implica tions suggest themselves, it is desirable in connection with the topic under discussion to ask as to the field the term contemplates. Is this field con sidered in reference to a career system? Or does the field embrace the en tire Federal Reserve System, including all Federal reserve banks and branches and the Federal Reserve Board? Or does it extend to the entire banking sys tem of the nation and contemplate encouraging men to seek training in Federal reserve banks with a view to going later into commercial banks and trust com panies, and thus spread a better understanding of the functions and work of the Federal Reserve System and bring about a closer relationship between the System and the other banking agencies? In addition, it may be asked what is the bottom level at which the career system would begin to operate and the top level to which the personnel embraced could ultimately aspire? from the Unclassified / Declassified Holdings of the National Archives Topic 8 Continued -17- Presumably, the establishment of a career system would be for this Broad general purpose: to develop a personnel of such capacity, training, and loyalty as would insure that the management of Federal reserve banks would be unselfish, free from unworthy political influences, and in the best interests of the entire nation. The establishment of such a system now that the Federal reserve banks have been in operation more than twenty years would involve relating it to those already in the employ of the banks and to the recruiting and training of new employees. Different considerations would seem to apply to these two groups. In the present personnel, especially among the executives, are many who received their basic banking training outside the Federal reserve banks before the System was established. Many of the clerks and department managers have grown up in the Federal reserve banks. Speaking generally, both groups have been encouraged to feel that to the limit of their capacities they would be eligible for such positions above them as might develop, and that these would not be filled with outsiders unless there were no persons within the or ganization qualified to fill them. Permanent stratification has thus been avoided in large measure. The men in the higher positions have felt that they had lifelong jobs with the respective banks in their own communities pro vided they continued to make good. Consequently, a career system set up now, if it is system-wide, should provide that men who have become established in different banks through long years of service should have the privilege of de clining without prejudice to their standing any invitation that might come to them to go elsewhere in the System. A man of this type may have a background of knowledge of his bank, of the people, businesses, conditions, and needs of his district which might be more valuable to his bank than the possibly great er ability of a more active-minded stranger. Preserving the morale of those persons over whom capable men are placed by transfer from other Federal reserve banks should receive careful consideration, especially during the earlier years of any newly established career system. With respect to relating the career system to employees coming in after it is established, considerations touching three groups of persons sug gest themselves. In the British Civil Service there are, we understand, some 450,000 persons. The positions grade all the way from those of menial character to those of very great importance, including some of the higher ambassadorships. These higher positions are filled by persons belonging to the administrative class in the service, some 1,500 in number. It is this group that is prima rily referred to when one speaks of nthe Service” or ”the career system” in Great Britain. The men in the administrative group are recruited year by year as needed, from the most outstanding recent graduates of Oxford, Cambridge, and other great universities but only after passing severe competitive written and oral examinations. Successful candidates go through a long, varied training leading to the higher positions. But applicants who fail to pass these examina tions either drop out entirely or must content themselves with lower positions that have less future, and it is our impression that persons below the adminis trative class very rarely and only with difficulty advance to that class. the Unclassified Declassified Holdings of the National Archives c, c Topic 8 Continued -18- Somewhat similarly, in many of our large industrial establishments young men who have been graduated as engineers are "put through the mill" of practical experience and gradually advanced to higher positions which are not open to men of less education or are attained by them in only exceptional cases. A career system, therefore, may be thought of as primarily referring to those persons who because of special ability and training can be and are rapidly developed into key men and placed in higher and higher executive posi tions — that is, a group from which in time practically all the higher execu tive positions are filled. This, as we understand it, reflects the technical meaning of the term, but it should be of broader significance. Apparently, banking in the future will be more and more a profession. If so, the boy who comes in as a high school graduate only and starts through the mill will find increasing difficulty in reaching the higher executive posi tions under a career system which picks the most promising college and iniversity graduates, routes them more rapidly through a course of practical training with a viewr to placing them in key positions as soon as qualified, and fills practically all the executive positions from these especially trained men. In other words, these young men will arrive at these positions before even the exceptional high school boy can, and generally speaking persons of less than college and university training will be automatically limited to positions of relatively less importance. A consequent stratification with serious conse quences to individuals and morale would seem to be likely, unless carefully guarded against, if the proportion of career men becomes considerable and if practically all the higher executive positions are filled from their ranks. xV For the reasons indicated, it would seem desirable to broaden the term so that the proposed career system would embrace all employees up to a very high level and recognize that they fall into three main groups (l) the "career men" specifically; (2) others of ambition, capacity, and station who prefer — if they can do so without prejudice to their interests — to remain with the "bank in the community in which they have become rooted; (3) others who do the routine work — a very necessary group. So conceived, such a career system, we take it, would include (l) freedom from unworthy political influences, inside and outside, as far as practicable; (2) adequate principles and methods of selection, training, and promotion with the doors to the higher executive positions left open to all who could qualify therefor instead of being limited strictly to the career men; (3) such discretion, within broad limits, as respects salary, discipline, discharge, promotion, and development of morale as would enable each unit to function properly in the light of its peculiar conditions and thus prevent injustices, maladjustments, and dissatis factions likely to develop under a rigid system that is under remote control; (4) a retirement system providing for disability and old age retirement. The assurance of fair, considerate but firm treatment, the sense of financial se curity, and the confidence that promotion will be made on a merit basis as opportunities offer should go a long way toward making less urgent the indi vidual^ feeling of the need of personal wealth for survival and prestige, and consequently should encourage him to devote himself with the least distrac tion, the greatest loyalty, and the most intelligence to serving the nation through doing his best in his job. It would seem desirable, however, to guard the proposed career system against developing an unwortiy class consciousness, an out-of-touch bureaucracy, the unprogressive conservatism of mind and atti tude likely to characterize a strongly entrenched group. Therefore, for the time perhaps, the injection of new blood (other than career men) from the out side now* and then and in certain positions should be provided for. I Reproduced from the Unclassified / Declassified Holdings of the National Archives Criticism of existing regulations or rulings or procedure of the Federal Reserve Board, with specific recommendations as to changes which would correct any unsatisfactory features of the relations between the Board or its staff and the Fed eral reserve banks or member banks. * Z' / Outside of the comments and suggestions contained in our answers to other topics, we have no specific criticisms of existing regulations of ithe Federal Reserve Board which would not involve amendments to the Feder al Reserve Act; and in the present state of flux of the System, we deem it judicious to withhold comments and criticisms of regulations pending changes in the Act proposed by the new banking bill. Topic 9 does not appear to invite suggestions as to changes in the Act itself. vv Under a ruling of the Board, Federal reserve banks are permitted to put up Government securities with the Federal Reserve Agent as collateral to Federal reserve notes, in accordance with the formula outlined in the Board’s letter of May 2, 1952, which imposes such conditions and restrictions as to make it very inconvenient and at times troublesome for this bank to operate under it. The formula was prescribed almost three years ago and the figures in this bank’s balance sheet upon which it was based gave us a margin as specified in the Board’s letter of $15,000,000, which was later increased 50 per cent, as were the margins for all other reserve banks. If the percentages used in the formula were applied to our balance sheet as of March 5, 1955,this bank’s margin would have been in excess of $27,000,000 instead of $15,000,000, and an increase of 50 per cent would have given us a margin of over $40,000,000 instead of the present margin of $22,500,000. ^ I t is our opinion that the limitations upon the amount of Government securities that may be put up as col lateral to Federal reserve notes should either be abolished or each bank’s mar gin should be recalculated upon its present balance sheet. As we have stated previously, our margin in far too small for comfortable operation.'* x ^ The difficulty of obtaining prompt reply from the Board, or from the staff of the Board, upon administrative matters arising out of regulations and rulings is due no doubt to the tremendous pressure of matters upon both the Board and its staff, and we therefore have no particular criticism in this con nection. But nevertheless we are often handicapped, and even embarrassed in some instances, by such delay.1'" s' With respect to the relations between the Board and the Federal re serve banks, or this Federal reserve bank,^ it has for a long time been the feel ing of our directors that the contacts of the Board and Board members with our directors (individually and coliectively) is not as intimate and as close as is believed to be desirable. Our directors have felt — ancf have expressed the feeling — that in matters of broad policy they have not at times been made familiar with the views and policies of the Board or the Board members, and it is believed that the coordination of the Federal reserve banks would be promoted by more informal and intimate contact and exchange of views between the Board members (individually and collectively) and the administration of Federal re serve banks.^ It is of course recognized that the burden both upon the Board and the directors of Federal reserve banks would be increased and that some greater sacrifice of time would be involved by this procedure, but this reply to the Board would not be complete without the expression of this view. 'v M Reproduced from the Unclassified / Declassified Holdings of the National Archives r Reproduced from the Unclassified / Declassified Holdings of the National Archives F e d e r a l R e s e r v e Ba n k o f 3£ 1 - 3 ( Atlanta O F F I C E OF C h a i r m a n o f t h e Bo a r d . Fe d e r a l Re s e r v e A g e n t . J March 26, 1935 Honorable M. S. E c d e s , Governor, Federal Reserve Board, Washington, D. C. Dear Governor Eccles: Reference is made to my letter of March 9, 1935, which was written in reply to your letter of February 6, 1935 (X-9115), addressed to all Chairmen of the Federal reserve banks. The topic relating to interest rates on loans of menber banks and on industrial advances and commitments by Federal reserve banks was not discussed in my letter of March 9th. A review of the reports of examination of ninety-eight selected number of banks in the Sixth Federal Reserve District disclosed the following information regarding interest rates charged on loses: ALABAMA. - (Legal rate 6% - Contract rate 8 %) : The First National Bank of B i m i n g h a m had a high rate of 8$, low of 1%, and average of 5 plus. In Mobile the range is from 8 to 5, and in Montgomery, high 8%, low 3/4%, and average 5.15%. In cities such as Anniston, Huntsville and Selma the range is, high 8%, low 4% and average 7%. In the smaller Alabama towns 8% is generally charged, with a minimum charge of $>1.00, except that CCC loans bear only 3 1/2%. FLORIDA - (Legal rate 8% - Contract fate 10%): In the cities of Jacksonville, Tampa and Miami the range is 8% hi^i, 1% low, and 5% average. In Bradenton the range is 10% high, Reproduced from the Unclassified / Declassified Holdings of the National Archives F e d e r a l R es erv e Bank of A nta Hon. M. S. Eccles - 2. 4% low and 7% average, and in cities such as Ocala, Orlando, Pensa cola and West Palm Beach the range is 8% high, 5% low and 6% average. In the smaller Florida towns the usual rate is 8%, with $1.00 minimum, the average rate charged being 7%. GEORGIA - (Legal rate 7%. Contract rate 8% ) : In Atlanta the range is 8# high, 1$ low and 4$ average, and in Savannah 8% high, 1$ low and 6$ average. In cities such as Athens, Augusta, Columbus, Macon and Rome the range is, high 8%, low 3$ and average 6 1/2%. In the smaller towns the range is 8% high, 3 1/2% low and 7% average. LOUISIANA *- (Southern part of State located in Sixth District) (Legal rate 5% - Contract rate 8%): In New Orleans the range is 8% high, 3 1/2% low and 5 1/2% average. In Baton Rouge and Lake Charles the range is 8% high, 4% low and 7% average, while in the smaller towns of Louisiana the range is 8% high, 4% low and 7 1/2% average. MISSISSIPPI -(Southern part of State located in Sixth District) (Legal rate 6%. Contract rate 8 % ): In Laurel and Meridian the range is 8% high, 6% low and 7% average. In the smaller towns the rate of 8% prevails. TENNESSEE - (Eastern part of State located in Sixth District) (Legal rate 6%. Contract rate 6%) i~“ In Chattanooga and Nashville the range is 8% high, 1% low and 6% average. In cities such as Bristol, Johnson City, McMinnville and Shelbyville the range is 8% high, 6% low and 7% average, with a mini- Reproduced from the Unclassified / Declassified Holdings of the National Archives F e d e r a l R e s e r v e B a n k o f A' nta Hon. M. S. Eccles - 3 mum charge ranging from $1.00 to $1.25. In the smaller t o m s in Tennessee the range is 8% hi^i, 6% low and 7$ average* It will be observed the average interest rate increases vx *** /y as banks are farther removed from financial centers; also that the average rate is more nearly stationary in the rural sections. The question of interest rates on industrial advances and commitments has been given careful consideration by the officers and the Executive Committee of this bank and it is the consensus of opinion that the prevailing rates should not be changed at this time. Applicants for loans under Section 13b offer no objection to the rates and a number of bankers are of the opinion that should the rate on direct loans be lowered the Federal Reserve Banks would be placing themselves in position to com pete substantially with comnercial banks in the making of industrial loans This subject has bear discussed more at length in my letter of March 26th addressed to Mr. Chester Morrill, Secretary, in reply to his letter of February 11, 1935, (X-9122), on the subject of “Interest Rates Charged on Industrial Advances and Commitments." Very truly yours, Hv. nr ne-GTig, Deputy Chairman. Reproduced from the Unclassified / Declassified Holdings of the National Archives ^ 7 - F e d e r a l R e s e r v e Ba n k o f A t l a n t a O F F I C E OF C h a i r m a n o f t h e Bo a r d . Fe d e r a l Re s e r v e Ag e n t . March 9, 1935. Honorable M. S. Ecclea, Governor, Federal Reserve Board, Washington, D. C. Dear Governor Eccles: Your letter of February 6, 1935, X-9115, addressed to all Chairmen of the Federal Reserve Banks, has had the careful consideration of the officers and directors of this bank. The following represents the consensus of opinion as to how the questions submitted in your letter should be answered: 1. General credit situation. (a) Are commercial banks doing everything in their power to improve the situation? We believe that banks in the Sixth Federal Reserve Dis trict are doing everything which they Bight reasonably be expected to do in order to improve the situation. In our opinion the banks are generally desirous of extending credit and making sound loans and are vigorously exerting themselves to do so. The difficulty does not appear to be an unwillingness on the part of the banks to extend credit. On the contrary, there ap pears to be a scarcity of demand among borrowers who are in position to use available funds advantageously and at the same time offer reasonable assurance of repayment • xXA number of banks have repre sentatives in the field actively soliciting loans and are also ex 's tensively advertising for loans. 3 Reproduced from the Unclassified / Declassified Holdings of the National Archives F ede ral R es erv e Bank of A \ n- ' Hon. M. S. Ecclea - 2 (b) > If not, what steps can be taken by the Federal Reserve Banks or otherwise to bring about an improvement? In view of the above and foregoing it does not appear necessary to answer this question. •■ • 2. ) " . ; Inte rest rat es• (a) On time and savings deposits of member banks. We are of the opinion that under conditions such as now obtain the permitted maximum rate of interest should remain at * per cent per annum. 2-1/2 A lower prescribed maximum rate might place member banks at a disadvantage because of competition of postal sav ings bonds, and it is believed that the banks of the country, rural as well as city, are unable at the present time to pay more than 2-1/2 per cent.11 (b) On loans of member banks and on industrial advances and commitments by Federal Reserve Banks. M Ho answer is made to this question at this time. Governor Newton will shortly attend a conference in Dallas, Texas, between the officers and directors of the Dallas bank and the Governors of several of the other reserve banks. Our answer to this question may be molded by the discussions which will be had at that conference. 3. Matters affecting admission of nonmember banks to Federal Reserve System. (a) Earnings of nonmember banks from exchange collection charge. |* This is a question of considerable importance in the Sixth i Reproduced from the Unclassified / Declassified Holdings of the National Archives F e d e r a l R e s e r v e B a n k o f fi \ N" Hon. K. S. Eccles - 3 Federal Reserve District. A number of nonmember banks, in making inquiries concerning membership in the Federal Reserve System, have stated that they feel that they could not forego the exacting of charges for the payment and remission of checks drawn on themselves. II This applies peculiarly to banks located in the smaller conmunities. While member banks may, of course, make charges within the limits prescribed by law for collecting items placed with them on deposit (and city banks customarily make such charges),-member banks located in smaller communities would be unable to receive any considerable amount of revenue frola this source, even if a long established cus tom of not making collection charges did not militate against their doing so. It has been stated by the officers of some of these insti tutions that the revenue from exchange (and by this we mean charges for the payment and remission of checks as distinguished from collec- ..__-............................ . tion charges) will average in a bank with a capital as small as $15,000 from $1500 to $1800 per annum. If deprived of this revenue such banks of necessity would be compelled to liquidate. Revenue from this source, according to reliable information obtained from nonmember banks, in most instances is sufficient to cover the salary of the executive officer in charge of the bank. We believe that a large percentage of nonmember banks in the district would apply for membership if they felt that they might re tain the equivalent of a substantial portion of the exchange charges Reproduced from the Unclassified / Declassified Holdings of the National Archives F ed e r a l R e s e r v e Ba n k of A \ N' Hon. M. S. Eccles - 4 if which are now being made. 3. (b) Present conditions of membership. ii Laying to one side for the moment questions of capital re quirements of nonmember banks, we give it as out opinion that the con ditions of membership presently being prescribed by the Federal Reserve Board should not be materially changed; this for the reason that it is believed that modification of the conditions would have a tendency to lower the standards of membership and give the member banks opportunity to deviate from sound banking principles. Member banks, almost without exception, regard their membership very highly and would not appreciate the lowering of standards in order that membership in the System might be easier of attainment. Assuming that the Federal Reserve Board is to be invested with the right to waive, in whole or in part, the capital requirements of banks applying for membership, we believe that the Board might properly admit to membership any sound bank having the capital required by State law and be rather liberal in fixing the time within which the bank would be compelled to bring its capital requirements up to those set out in Section 9. (c) Advisability of extension of membership to banks outside the States and the District of Columbia. We know of no reason why the privilege of membership should not be extended to national banks located in Alaska and in the insular possessions of the United States. Reproduced from the Unclassified / Declassified Holdings of the National Archives F ede ral R es erv e Bank of A nn 1 Hon* M* S. Eccles - 5 4* V Need for continuance of assistance of Reconstruction Finance Corporation in connection with rehabilita tion of capital structures of banks. It is felt that for several years at least there will be a real need for the continuance of the assistance of the Reconstruction Finance Corporation in connection with the rehabilitation of the cap ital structures of banks. Our conclusions are based upon the belief that a number of banks which sold preferred stock will in all likeli hood be compelled later on to strengthen their capital structures, and it does not appear possible for such banks under present condi tions to secure additional capital from private investors* !< 5. Adequacy of reimbursement of Federal reserve banks by Treasury and other governmental agencies for various services rendered and for space used in Federal reserve bank buildings* Reference to the statistical data prepared by the Federal Reserve Banks incorporated in a report of the fiscal agency and de positary expenses to the Federal Reserve Banks, compiled by the Di vision of Bank Operations for the six months period ending June 30, 1934, reveals that Federal Reserve Banks expended $932,000 in the performance of services, no part of which was reimbursed by the United States Treasury Department. x'lt is our opinion that a con siderable part of these expenditures should be reimbursed, and we therefore suggest that a careful study be made of all these expendi tures with a view to securing for the Federal Reserve Banks adequate reimbursement for items of expenditures made by them in connection with services rendered exclusively in a fiscal agency capacity. Reproduced from the Unclassified / Declassified Holdings of the National Archives F e d e r a l R es e r v e Ba n k of A \ n- Hon. M. S. Eccles - 6 6. Regulations fixing margin requirements for loans by banks upon equity securities for the purpose of purchasing or carrying securities registered on national securities exchanges. (a) Circumstances under which regulation should be issued. vv The regulation should be issued at such time as the Board may deem advisable. We believe, however, that its effective date should be fixed at least fifteen and perhaps thirty days after the date of its release, in order that the banks may have ample time in which to familiarize themselves with its provisions. We think also that as to loans held by banks at the time of the effective date of the regulation reasonable time should be given for the bringing of margin requirements within the prescribed limits; this for the reason that any unusual volume of sales occurring within a comparatively short time and occasioned by the regulation might demoralize the se curities market. (b) Whether regulation should permit borrower to obtain from bank more than he could obtain from broker under Regulation T. 'V In our opinion there is no logical basis for a discrimina tion by the Federal Reserve Board in favor of a bank and against a \V broker in fixing margin requirements for such advances. 7. Economic and statistical divisions of Federal Reserve Banks. (a) vn The Usefulness to officers and directors. directors and officers of this bank believe that the in- Reproduced from the Unclassified / Declassified Holdings of the National Archives F ede ral R es erv e Bank of A \ nt Hon. M. S. Eccles - 7 formation furnished by the economic and statistical division of the bank is of value to them and they recommend continuance of the service.^ 7. (b) Value of Federal Reserve Bank monthly reviews. ^ The directors and officers also feel that the issuance of the bank’s monthly review is of general value and that this is demonstrated by the constant demand for copies.^ Approximately 3400 of our reviews, including those sent to member banks in the Sixth District, are mailed each month. These reviews go into forty-five of the States and fifteen foreign countries. Hi are constantly adding new names to our list and noting changes of addresses of distributees. An effort is made to as semble in one document all available data in regard to business condi tions and business trends in the district. Such data is accompanied by citations of sources of information and consists of statements of ex isting facts as distinguished from prophecies as to probable business trends or developments. A number of individuals have stated that our review gives more actual information and reliable statistics than they are able to obtain elsewhere. For this reason an effort is made to place in the review info m a t ion concerning as many different lines of business as is reasonably feasible. 8. Establishment of career system for personnel of Federal Reserve Banks. ^ It is the consensus of opinion that there should be est ablished the basis of a career system for the personnel of the Federal Reserve Banks. It has been tentatively suggested that each Federal Reserve Bank might furnish the Federal Reserve Board with the names Reproduced from the Unclassified / Declassified Holdings of the National Archives F ede ral R es erv e Bank of A \ n -t Hon. M. S. Eccles - 8 of junior officers and employees who have demonstrated exceptional ability and whose services might be employed to better advantage by another Federal Reserve Bank because of lack of opportunity for ad vancement with the bank of present connections. 9. Criticisms of existing regulations or rulings or procedure of the Federal Reserve Board, with spe cific recontoendations as to changes which would correct any unsatisfactory features of relations between the Board or its staff and Federal Reserve banks or member banks. vX The examiners stationed at this bank often advise the offi cer in charge of bank examinations that the management of our member banks complain of the number, variety and extent of reports that they are required to prepare. The banks themselves would welcome a revision of report f o m s and the reduction of requests for reports to a minimum. it They would also like consolidations of reports wherever possible. x> The officers and directors of this bank do not reconmend the discontinuance of any reports now required nor the elimination of in formation sought to be elicited thereby. We believe that the Federal Reserve Board and the office of the Comptroller of the Currency have from time to time been advised of the viewpoint of the member banks on this subject and are endeavoring to comply with the wishes of the banks to the full extent consistent with the gathering of necessary or im portant statistical or other data. We do say, however, that any progress in the direction of the lightening of what the member banks regard as a burden would be welcomed and appreciated. ' In connection with our dealings with member banks, and par- Reproduced from the Unclassified / Declassified Holdings of the National Archives F ede ral R es erv e Bank of A \ nt Hon. M. S. Eccles - 9 ticularly in the handling of the woifc of the Federal Reserve Agent, promptness on the part of the Board in giving rulings and in reply- il ing to letters asking for advice would be of great assistance. This is not said by way of criticism, since we realize the unusual pressure which has been put upon the Board in recent years. We might add also that we now receive rulings and replies to inquiries much more promptly than was formerly the case. In this bank we have endeavored to reduce it to a minimum requests for rulings and advice. »Z ' 11 We believe that it would be beneficial to the officers of the reserve banks were the examiners of the Federal Reserve Board at the time of making examinations of reserve banks to offer constructive and helpful suggestions. This would bring about frank discussions which would not only be beneficial,in our opinion, to the officers of the Federal reserve banks but would also eliminate discussions by cor respondence. Through such constructive suggestions the officers of the reserve banks might also learn more clearly the viewpoint of the Board on matters, some of which are of relatively small importance and ' could be disposed of during the period of examination. In your letter you make reference to the possibility that to some of the member banks the actions of the Board or its staff may seem "bureaucratic or impractical or unduly rigid." It is undoubtedly true that a number of the member banks may have regarded some of the rulings, decisions and requirements of the Board as being somewhat harsh and burdensome. We think that we should say, however, that in many instances this point of view was the result of a failure to understand that the Reproduced from the Unclassified / Declassified Holdings of the National Archives F ede ral R es erv e Bank of A \ nt Hon. M. S. Eccles - 10 Board’s actions were required by the Banking Act of 1933 and were not the result of some arbitrary action taken by the Board itself. In all such eases we have endeavored to make plain to the banks that the particular ruling of the Board or some specified requirement was made or imposed because of provisions of law and not as a regulation originating in the Board.v v Some complaint was occasioned by reason of reports made to United States Attorneys of possible violations of Section 22-G of the Federal Reserve Act, in cases where it seemed apparent that no actual violation was intended or was at most technical. This source of possible friction has now been eliminated. v We believe that no harm would result, from the standpoint of the public interest or otherwise, were the Board to modify some what its requirements in the granting of permits under the Clayton Act to serve more than one bank as director. In cases where an officer or director has manifestly abused his office or has been negligent in the discharge of his duties, we believe that the grant of a permit would be incompatible with the public interest, and.that the sole question of inquiry should not center around the question of a curtailment of credit facilities or the lessening of competition. However, technical questions such as the possibility of the lessening of competition and restriction of credit in cases of banks which are not within the pro hibitions of Section 8 might be regarded as of relatively minor im portance Reproduced from the Unclassified / Declassified Holdings of the National Archives F ederal R es erv e Bank of A Hon. M. S. Eccles - 11 Ht As regards the relations between the Board and the Federal reserve bank we desire at all times the utmost of harmony and cooperation. '*It m i ^ t be well, however, for the Board to take under advisement the question of whether the expenditure of rela tively small amounts, in cases where there is no specific authoriza tion by law and the object to be attained is not improper or un lawful, might perhaps be left to the various Federal reserve banks and not call for special authority given by the Board.1 \'The examiners also sometimes criticise unimportant matters H involving questions of local management rather than of general policy. We are not endeavoring to particularize and are'only sug gesting that in so far as minor matters are concerned— matters which involve no question of general policy and are of purely local con cern— more of autonomy might be left to the Federal Reserve Banks and greater latitude be given to its officers and directors for the exercise of their discretion. " As stated, the above are the answers approved by the offi cers and directors of this bank to the questions submitted in ydur letter of February 6, 1935. Upon receipt of your letter the same was sent to the various branches of this bank, with the request that the directors of the branches meet and give their own answers to the same questions. The directors of the branches have held such meetings and have sent me Reproduced from the Unclassified / Declassified Holdings of the National Archives F ede ral R es erv e Bank of A \ nt Hon* M. S. Eccles - 12 copies of the minutes of the meetings at which the answers were formulated. Thinking that these minutes would he of service to you, we are enclosing copies of the same• Yours very truly, Kettig, Deputy Chairman of the Board, Reproduced from the Unclassified / Declassified Holdings of the National Archives F e d e r a l o f R e s e r v e A t l a n t B a n k a O F F I C E OF C h a i r m a n o f t h e Bo a r d . Fe de ral Re s e r v e Ag e n t . Febru ary 26, 1935* Honorable M, S, Eccles, Governor, Federal Reserve Board, Washington, D, C, Dear Governor Eccles; Reference is made to your letter o f February 6, 1935 (X -9 1 15 ): As stated in rpy letter of February 8th, the subjects an A questions suggested by you were carefully considered by the members of our Board of Directors at their meeting on February 8th and the Executive Committee of this bank was directed to communicate with all of our directors and branch directors, with request that the subjects be considered and letters written to the Executive Committee expressing their views# I am advised that our four branches have held special directors1 meetings for the purpose of considering the subjects out lined by you and the reports from three of the branches have been re ceived. It is, of course, anticipated that the information com piled on the various subjects will be presented to our Board of Directors at their meeting on March 8th, Governor Newton has informed me that he has been invited to attend a conference at the Federal Reserve Bank of Dallas on March 12th, at which conference Governors of the Federal Reserve Banks of Saint Louis and Kansas City will be present. It is anticipated that your letter will be considered by the four Governors at the Dallas conference * it is my opinion that it mi^it be desirable to delay making a detailed reply to your letter until after this conference, I trust that the manner in which we are proceeding meets with your approval. Cordially yours, W, H. Kettig, Deputy Chairman of the Board, Reproduced from the Unclassified / Declassified Holdings of the National Archives 3=P7,-3 MINUTES OF MEETING BOARD OF DIRECTORS NASHVILLE BRANCH - FEDERAL RESERVE BANK OF ATLANTA Thursday 11 o ’clock Feb. 21, 1935 Mr. Paul M. Davis, Vice Chairman of the Board of Direc tors of the Nashville Branch, Federal Reserve Bank of Atlanta, called a special meeting of the Board on Thursday, February 21st, to consider questions asked in the Federal Reserve Board1s letter X-9115, as a matter of information in order to get our Board’s general viewpoint on the subject. Our Board covered each specific questionnminutely and gave their respective viewpoints. These answers and opinions are being forwarded in a special letter today to Mr. L. M. Clark, Secretary of the Board, Federal Reserve Bank of Atlanta. Copy is also attached to these minutes. 'uiuniyb ui me national Archives In response to the Federal Reserve Board’s lettefc X-9115, asking that the Board of Directors and officers of the Federal reserve banks discuss certain subjects, at a special meeting of the Board of Directors of the Nashville Branch, Federal Reserve Board of Atlanta, on Thursday, February 21st, our directors expressed themselves as scheduled below: 1. General credit situation: (a) Are commercial banks doing everything in their power to improve the situation? Generally speaking they are. Some are not on account of so much red tape and a lack of understanding regard ing the rules and regulations. (b) If not, what steps can be taken by the Federal Reserve Banks, or otherwise, to bring about an improvement? Examiners’ criticisms have discouraged character loans and in many cases character loans constitute material benefit to the conmunity. Better understanding between the Federal Reserve Banks and their member banks. 2. Interest rates (a) On time and savings deposits of member banks. Present rate of 2 1/2% has met with general approval. (b) On loans of member banks and on industrial advances and commitments by Federal Reserve Banks.y/ Loans of member banks to industries are lower than in normal times. Commitment rate charged by the Federal Reserve Bank on industrial loans is too high, rate is also too high. 3. Matters affecting admission of nonmember banks to the Federal Reserve System. (a) Earnings of nonmember banks from exchange collection charges These earnings are of minor importance at the present time. (b) Present conditions of membership. Membership condition would be greatly improved if all of the member banks had a better conception of the purposes of the Federal Reserve Bank and if a continuity of purpose prevailed rather than changing so rapidly. (c) Advisability of extension of membership to banks outside the States and the District of Columbia. No opinion expressed. ueciassiriea Holdings of the National Archives N Need for continuance of assistance of the Reconstruction Finance Corporation in connection with the rehabilitation of capital structures df banks. Work of the Reconstruction Finance Corporation is generally satisfactory to the banking fraternity and should be con tinued. Adequacy of reimbursement of Federal Reserve Banks by Treasury and other government agencies for various services rendered and for space used in Federal Reserve Bank buildings. It was the opinion of our Board that the Federal Reserve Banks should be reimbursed for the expenses incurred for services rendered and forthe space used. Regulation fixing margin requirements for loans by banks upon equity securities for the purpose of purchasing or carrying securities registered on national securities exchanges. (a) Circumstances under which regulation should be issued. Individual cases should govern the situation. (b) Whether regulation should permit borrower to obtain from bank more than he could obtain from broker under Regula tion T. Should be judged on their respective merits. Economic and statistical divisions of Federal Reserve Banks. (a) Usefulness to officers and directors. Of very little use. (b) Should be dispensed with. Value of Federal Reserve Bank monthly reviews. Practically of no value. \ Establishment of career system for personnel of Federal Reserve Banks. We believe in career system if due consideration is given to ability. Criticisms of existing regulations or rulings or procedure of the Federal Reserve Board, and with specific recommenda tions as to changes which would correct any unsatisfactory feature of relations between the Board ac its staff and the Federal Reserve Banks or member banks. No specific criticisms at the present time. Reproduced from the Unclassified / Declassified Holdings of the National Archives Minutes of Special Meeting Board of Directors New Orleans Branch New Orleans, La., February 21, 1953 3 4 7 , 4 3 (4/ Thursday, 9:50 A. M. The Chairman stated that the purpose of the meeting was to con sider the matters contained in letter from the Governor of the Federal Reserve Board under date of February 6, 1955, X9115-X9115-a, and to ex press thereon the views of this Board to the Board of the Parent Bank. After full and free discussion the following statement was agreed upon: 1• General credit situation (a) Banks generally are apparently anxious to help in improving the situation but are still laying stress on reasonable li quidity and are disinclined to make capital loans that cannot be liquidated within the year. (b) ((Continuation of Federal Reserve Banks' present activity in making industrial loans up to a five-year period is desirable,A and the Federal Reserve Banks should encourage all banks in their respective districts toccooperate as fully as possible in referring such loans to them. 2. Interest rates (a) (b) 5« The present policy of the Federal Reserve Board in fixing a maximum rate of 2-J$ on time and savings deposits for all member banks is considered in line with existing conditions. It cer tainly should not be lowered as long as the Postal Savings rate remains what it is. The present policy of the Federal Reserve Bank of Atlanta in charging a unifora rate of 6$ on industrial loans and 1/2 of 1% on commitments is considered sound. Matters affecting admission of nonmember banks to Federal Reserve System (a) (b) (c) In view of legislation already on the statute books, compelling membership in 1957, and in view of other legislation on this subject now pending, it is difficult to give specific answers to Questions a, b and c. However, if the large number of nonmember banks are to be forced into the System, serious thought needs be given to allow them a reasonable exchange charge for their collection service. 4. There is still need for continuation of the Reconstruction Finance Corporation's authority to rehabilitate capital structure of banks. 5# There is inadequacy of reimbursement of Federal reserve banks by Treasury and other governmental agencies for various services rmdered and for space used in Federal reserve bank buildings. ,vcu " um 1 1 uiiudssniea / ueciassmea Holdings of the National Archives 6. Any regulation which the Federal Reserve Board will make concerning loans by banks upon equity securities should leave discretion to the banks to permit the borrower to obtain more than he could obtain from a broker under Regulation T o 7» The facts furnished by the economic and statistical divisions of Federal reserve banks through their various bulletins and monthly reviews are valuable and should be continued. 8. The members of this Board do not feel sufficiently familiar with a career system for personnel of Federal reserve banks to express a view. 90 There appears to be no reason for criticism concerning existing regulations or rulings or procedure of the Federal Reserve Board. Reproduced from the Unclassified / Declassified Holdings of the National Archives 3 Z I - J 2 Tuesday 10:30 A M MINUTES OF A CALLED MEETING OF THE BOARD OF DIRECTORS OF BIRMINGHAM, ALABAMA., BRANCH February 19, 1935 The meeting was called to order by Mr. Kettig, Chairman of the Board. The object of the meeting is to give consideration to certain subjects submitted for consideration by the Federal Reserve Board in its letter of February 6, 1935, to the Patent Bank in Atlanta and trans mitted to us by it. The questions asked are as follows: 1. 2. General credit situation (a) Are commercial banks doing everything in their power to improve the situation? (b) If not, what steps can be taken by the Federal reserve banks or otherwise to bring about an improvement? Int ere st rat es (a) (b) 3. On time and savings deposits of member banks. On loans of member banks and on industrial advances and commitments by Federal reserve banks. Matters affecting admission of nonmember banks to Federal Re serve System (a) (b) (c) Earnings of nonmember banks from exchange collection charges. Present conditions of membership Advisability of extension of membership to banks outside the States and the District of Columbia. 4. Need for continuance of assistance of Reconstruction Finance Corporation in connection with rehabilitation of capital structures of banks. 5. Adequacy of reimbursement of Federal reserve banks by Treasury and other Government agencies for various services rendered and for space used in Federal reserve bank buildings. 6. Regulation fixing margin requirements for ldans by banks upon equity securities for the purpose of purchasing or carrying securities registered on national securities exchanges. (a) (b) Circumstances under which regulation should be issued. whether regulation should permit borrower to obtain from bank more than he could obtain from broker under Regulation T. reproduced trom the Unclassified / Declassified Holdings of the National Archives 7. Economic and statistical divisions of Federal Reserve Banks. (a) (b) Usefulness to officers and directors. Value of Federal Reserve Bank monthly reviews. 8. Establishment of career system for personnel of Federal Reserve Banks. 9. Criticisms of existing regulations or rulings or procedure Federal Reserve Board, with specific recommendations as to would correct any unsatisfactory features of the relations Board or its staff and the Federal Reserve Banks or member of the changes which between the banks. After careful consideration the statement which follows was formulated as the answer of the Board to the questions submitted, and, on motion duly made and seconded it was adopted. 1. (a) Our Board is made up largely of bankers and therefore it would be expected that its members would hold to the banking point of view, but it is the impression among them that the commercial banks are eager to make loans. The difficulty lies not in the unwillingness of banks to extend credit. There is, however, here as elsewhere, a scarcity of demand among those who can use the surplus funds advantageously and at the same time give adequate assurance of repayment,, 2. (a) (b) From 1% to 2 From 4% to 6$, and by the Federal Reserve Bank 6% . 3. (a) Collection charges undoubtedly play a part in keeping nonmember banks out of the Federal reserve system. (b) We do not believe the conditions are burdensome but we wonder if there is not a lack of conviction as to the advantages of membership to small nonmember banks. (c) See no reason for doing so. 4. Until the task which has been begun has been completed. 5. It is our opinion that the compensation is not adequate considering the amount of vault space required, the guard service, and the services generally by officers and other employees of the bank not specifically reimbursed. 6. We are probably too far removed from the operation of the application of such requirements to justify an expression of opinion. 7. (a) We regard these as being valuable but care should be exercised that they do not become too mechanical in their functions. nupiuuuuea irom tne unciassitied / Declassified Holdings of the National Archives 7. (b) It is always difficult to publish a monthly review in such manner as to hold the attention of those who should be in terested in its contents. Of course that applies to the monthly reviews of the respective Federal reserve banks. They are valuable, however, and a number of people watch them for whatever progress may be reflected in them. 8. So far as branch operations are concerned it would not be practical to undertake the maintenance of a comprehensive course of study for the personnel of the branch. Excellent courses are offered by the American Institute of Banking and these are available to the em ployees and junior officers of the Federal Reserve Banks. 9. There is ample opportunity for examiners to make constructive and helpful suggestions to the officers of the Federal Reserve Banks, as they often do, and a frank discussion of questions is usually beneficial. However, for an examiner to write a criticism in his report, as is sometimes done, without first discussing the matter with the officers of the bank is hardly fair, and it is not productive of the best results. In order to put the matter in concrete f o m , we cite a specific case: Our guard program at this branch has been carefully thought out through a period of two years, it had been personally looked into by the directors and any action of consequence had been approved by them. It is reasonable to suppose that the conclusions arrived at in this way are safer to follow that the conclusions of an examiner, however able, who is here only a few days and who has little opportunity to study the situation. Hear the end of this two-year period an examiner from the Federal Reserve Board came, and while here he did not even mention our guard situation to the officers, but in his report he wrote a very general criticism of it. The fact was that before he came we had plans under way to greatly strengthen the situation; and these plans were carried out before we had seen, or heard of, his report. The presumption is that managements are desirous to improve their program along all lines, therefore for an examiner to discuss measures with them would be more helpful than to criticise a situation without first asking what plans had been made to remedy it. The chief objection to this sort of attitude on the part of examiners is not alone that it is unfair, but that managements mayi agree to unwise proposals rather than to incur criticism. There is a feeling among many bankers that the Federal Reserve Bank has become bureaucratic in dealing with its members. It is probably due to the necessity of departmentalizing the work of these institu tions, but it would seem to us that even that should not prevent the free exercise of sound judgment in discussing and determining credit policies or analyzing credit risks. Our view is that the relations should be as far as possible on the same plane as those which ordi narily exist between a bank and its correspondent. The same discretion and good sense should characterize the classification of notes for nc^uuuieu num me unclassified / Declassified Holdings of the National Archives rediscount at a Federal Reserve Bank as is employed by the officers of a large commercial banking institution. The directing head should be a man of broad banking experience, capable of using wisely and with discretion the latitude vouchsafed to him by a board of directors made up of bankers and business men. As far as is practi cable to do so, he should be given a staff of well equipped and well trained men. The difficulty seems that so often those in subordinated positions are drawn from the lower ranks in the Federal Reserve Bank, or from clerical or accounting jobs in other banks and hence with a limited experience in dealing with the customer, which, of course, is the member bank. They do not always give a practical treatment of the transaction involved. They seem to be rule-bound and hence contribute to the impression that after all the Federal Reserve Bank has become bureaucratic. In making this comment we realize that it is much easier to point out difficulties of this nature than it is to rectify them, but our opinion has been requested and we do believe that much could be done if an effort were made to substitute a more practical handling of many of the transactions which member banks have with the Federal Reserve Banks. Reproduced from the Unclassified / Declassified Holdings of the National Archives 7 CALL MEETING BOARD OF DIRECTORS JACKSONVILLE BRANCH, FEDERAL RESERVE BANK. Tuesday 3:00 P. M. February 19, 1935 As suggested by the Board of Directors of the Federal Reserve Bank of Atlanta at their meeting of February 8, a special meeting of the Board of Directors of the Jacksonville Branch was called for the purpose of a general discussion of the subjects outlined in letter X-9115 written by the Honorable M. S. Eccles, Governor of the Federal Reserve Board, to Mr, W. H. Kettig, Deputy Chairman of the Board of the Federal Reserve Bank of Atlanta. . unuaaanitiu / ueuiassmea noiaings or tne National Archives ■ JACKSONVILLE BRANCH FEDERAL RESERVE BANK OF ATLANTA, Jacksonville, Florida. 1. General credit situation (a) Are comnercial banks doing everything in their power to improve the situation? Yes 2. Interest rates (a) On time and savings deposits of member banks Should be elastic but at this time a maximum rate of 2< jo. (b) On loans of manber banks and on industrial advances and commitments by Federal reserve banks. Should not char ge in excess of 6%. •X 3» 4. Matters affecting admission of nonmember banks to Federal reserve system. (a) We are opposed to nonmember banks being permitted to charge exchange after they become member banks. (b) Nonmember banks becoming members should comply with the present rules, regulations and conditions now applying to member banks; or, in other words, they should not be given any special privileges. (c) Extension of membership to banks located in insular possessions only should be permitted. Banks in foreign countries should not be allowed membership. Need for continuance of assistance of Reconstiuction Finance dorporation in connection with rehabilitation of capital structure of banks. We recommend the continuance of assistance of Reconstruction Finance Corporation in connection with the rehabilitation of capital structure of banks. 5. Adequacy of reimbursement of Federal reserve banks by Treasury and other governmental agencies for various services rendered and for space used in Federal Reserve Bank buildings. A good accounting system should require the various Federal agencies to pay to the Federal reserve banks and their branches a reasonable and fair compensation for services rendered and space used. v " v,aoou,cu' ueuassmea Moldings of the National Archives T Regulation fixing requirements for loans by banks upon equity securities for the purpose of purchasing or carrying securities registered on national securities exchanges. Answering (a) and (b), we think that member banks should be allowed to make loans on listed securities to firms, individuals and cor porations other than brokers, and use their own discretion as to amount of margin. Economic and statistical divisions of Federal reserve banks. We appreciate the value of this service and recommend its con tinuance o Establishment of career system for personnel of Federal reservd banks. We recommend unqualifiedly the establishment of career system for personnel of Federal reserve banks. Criticisms of existing regulations or rulings or procedure of the Federal Reserve Board, with specific recommendations as to changes which would correct any unsatisfactory features of the relations between the Board or its staff and the Federal reserve banks or member banks. We recommend that Federal reserve banks and branches not be per mitted to collect any items, except checks drawn on member and non member banks, without chargefor such service. We recommend that facilities be given member banks for depositing United States securities with any Federal reserve bank in the United States and receive therefor a receipt. We reeomriend a minimum of change in the present banking laws; and we are unqualifiedly opposed to any legislation leading up to a central banking system. 'We recommend that the Federal Reserve Board cause a Dali Loan Depart ment to be established in New York that would permit member baiks to make loans in New York through said agency, and require every member placing call loans in New York to make them through the Federal re serve agency. This in our opinion would give the Federal Reserve Board a better knowledge of and control over the securities market and afford members this service at a minimum risk and expense. We recommend that the Federal Reserve Board construe the law regulat ing the restriction of interest payments on deposits under Section lib of the Banking Act of 1933, and furnish every member a copy of their complete analysis of the law. Reproduced from the Unclassified / Declassified Holdings of the National Archives dear Mr. Eccles: Mr. Hamlin *• Mr, Miller Mr. James ....February 6, 1935, suggesting a number of subjects and questions Mr. Thomas Mr. Szymczak Mr.. Mr. ... « I received your letter No. X-9115, dated . ... Mr. Morrill. . |Z . ....regarding the Federal Reserve Banks in their relations with ... member banks. Mr. Bethea. . ^ I submitted your letter to our Board today and Mr. Carpenter Mr. Noell. Mr. Mr. Mr. Mr. 'tlib members were delighted with the opportunity you have given 'them to submit their views to the Federal Reserve Board on the 'various subjects mentioned. They appreciate the opportunity of Please note — check and return ta making constructive criticisms and answers to the questions Ml C aviar submitted. 1 referred Tie went over the matter very carefully and have your communication to our Executive Committee. They have been directed to communicate with all our branches and all our branch directors, also with some non-member banks. The Committee will gather in all these views and submit them to you in concrete form as soon as they are received. It may require a little mdre than thirty days to compile this infonnation, but the Committee will communicate with you and ask for further time if necessary ,waoa,l,Bu ' ueuiassmea Moldings of the National Archives ederal R eserve Bank of la Mr. M. S. Eccles, Governor - 2 I think your letter is a step in the ri^it direction and will result in much good to the Federal Reserve System. With my regards, I am Yours very truly, W. H. Kettig, Deputy Chairman of the Board•
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