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William McChesney Martin, Jr., Papers
Box 21/Folder 1
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Federal Reserve Bank of St. Louis
Series V, Subseries A
FRB Official Correspondence, 1951-68
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Federal Reserve Bank of St. Louis
ELTING ARNOLD
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Federal Reserve Bank of St. Louis
Fisqal Assistant Secretary
Mr. Bartelt
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Federal Reserve Bank of St. Louis
STANDARD FORM NO. 64
Office
L\\£mOTanClUni
T0
: Mr. Martin
FROM
: Elting Arnold
• UNITED STATES GOVERNMENT
DATE:
^^ 1 9 1951
SUBJECT:
Problem
0
You have asked my opinion as to whether there would be any legal
obstacle to your retaining the position of Executive Director, without
compensation, of the International Bank for Reconstruction and Development after becoming Chairman of the Board of Governors of the Federal
Reserve System.
Conclusions
1. There is no general provision of law or provision of the
Bretton Woods Agreements Act which would preclude your retaining
the position of Executive Director after becoming Chairman of the
Board of Governors; but
2« Members of the Board are required by section 10 of the
Federal Reserve Act to "devote their entire time to the business
of the Board. # # #«; and
3. Section 10 of the Act also provides that no member of the
Board shall be "a director of any bank.11 While it might be argued
that Congress could not have had in mind such a post as a directorship of an international banking institution when this provision was
adopted in 1913* it literally would preclude your holding the
directorship of the International Bank.
Discussion
You will recall that a similar question was considered in my
memorandum to you of October 2£, 1?U9> with respect to the positions
of Assistant Secretary of the Treasury and Executive Director of the
International Bank. That memorandum concluded that if it should be
determined that the duties of U.S. Executive Director on the International Bank were not such as to interfere with the performance of
your duties as Assistant Secretary of the Treasury there would appear
to be no legal prohibition to holding both offices. It was pointed
out that the Bretton Woods Agreements Act itself merely provided that
no compensation should be received from the United States for services
as an executive director*
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Federal Reserve Bank of St. Louis
- 2-
It was also pointed out ±0. that memorandum that, in general,
on the subject of conflicts of interests in two positions, the
Attorney General has stated that public officers should not engage
in activities which are incompatible with the duties
of public
office but in the absence of "legal incompatibility11 the question of
the propriety of appointing the same person to each of two offices
belongs to the appointing power and that it is for him to decide
whether one person can properly perform the duties of both offices*
The question of the compatibility of the two offices is coa^licated
in the case of a member of the Board of Governors by the provision
in section 10 of the Federal Reserve Act (12 U.S.C. 2ljl) that
"The members of the Board shall devote their entire tine to the
business of the Board * * #•"
Another serious question arises, moreover, in connection with
a member of the Board of Governors of the Federal Reserve System
holding the office of U»S« Executive Director of the International
Bank. Section 10 of the Federal Reserve Act (12 U.S.C. 21UO provides
in part:
"No member of the Board of Governors of the Federal
Reserve System shall be an officer or director of any
bank, banking institution, trust company, or Federal
Reserve bank or hold stock in any bank, banking institution, or trust company; and before entering upon his
duties as a member of the Board of Governors of the
Federal Reserve System he shall certify under oath that
he has complied with this requirement, and such certification shall be filed with the secretary of the Board*
This provision has appeared in the Federal Reserve Act without
substantial change since its first enactment in 1913* The House and
Senate Reports on the Federal Reserve Act do not add much to an
understanding of the applicability of this section to the present
situation. House Report No. 69 of the 63rd Congress, 1st Session,
states at page
"For obvious reasons it is considered wise that
every member of the Federal reserve board designated
by the President shall surrender any banking connections he may have had at the time of his nomination
# * #»w
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Federal Reserve Bank of St. Louis
- 3It seems clear that the Congress did not intend to limit this
prohibition to a member bank of the Federal Reserve System since
other provisions of the Act provide that members of the Board shall
be ineligible to hold any office, position, or employment in any
member bank. It must be noted that the language of this provision
does not even limit the prohibition to an office or directorship in
a banking institution in the United States* On the other hand, it
might be argued that the Congress had no reason to consider at the
time that the Federal Reserve Act was adopted a directorship on an
international institution such as the International Bank for Reconstruction and Development and that what they were concerned about
was a possible conflict in interest between a private U.S» banking
interest and the performance of duties as a member of the Board of
Governors. Accordingly, the proper interpretation is not certain,
but literally the Federal Reserve Act would preclude your holding
the directorship of the International Bank*
It is suggested that if you wish to give further consideration
to holding both posts, you should consult the legal staff of the
Federal Reserve Board which could more appropriately give you an
opinion than I can. Conceivably, it might even be desirable to
request an opinion of the Attorney General.
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Federal Reserve Bank of St. Louis
1 9 1951
Mr* Martin
fating Arnold
(SigBftd)
ntlng
Problem
You have asked my opinion as to whether to ere would be any legal
obstacle to your retaining the position of Executive Bireetor, without
compensation, of the International Bank for Heconstraction and Levelopit after becoming Chairman of the Board of Governors of the Federal
Conclusions
1* there is no general provision of Isw or provision of the
Hretton Vooda Agreements Act which would preclude your retaining
the position of Executive Director after becoming Chairman of the
Board of Governors} but
2. Members of the Board are required by section 10 of the
Federal Reserve Act to "devote t^eir entire time to the business
of tee Board. * * **j and
3« Section 10 of the Act also provides that ao jaesiber of the
Board shall be tta director of any bank.® hile it roight be argued
that Congress could not have had in mind such a post as a director*
ship of an international banking institution when this provision was
adopted in ly!3, it literally would preclude your holding the
directorship of the International Bank*
Discussion
You idH recall that a similar question was considered in isy
idum to ;fou of October 2$, \9k9» with respect to the positions
of Assistant Secretary of the Treasury and Executive Director of the
International Bank* That &emorandust concluded that if it should be
determined that the duties of U.S. Executive lireetor on the International Bank were not such as to interfere with the performance of
your duties as Assistant Secretary of the treasury there would appear
to be no legal prohibition to holding both offices. It was pointed
out that the Bretton oods Agreeaeats Act itself merely provided that
no coMpensation should be received froB the United States for services
as an executive director.
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Federal Reserve Bank of St. Louis
- 2It was also pointed oat in that ;ae»oranduia that, in general,
on the subject of conflicts of interests in two positions, the
Attorney General has stated that public officers should not engage
in activities which are incompatible
with the duties of public
office but in the absence of ttlegal incompatibility8 the question of
the propriety of appointing the sate person to each of two offices
belongs to the appointing power and that it is for bin to decide
«hether one parson can properly perform the duties of both offices*
The question of the coopstiblllty of the two offices is complicated
in the case of a seiaber of the Board of Governors lay the provision
la section 10 of th® Federal Jiaserve Act (12 U.S.C* 21*1) that
•The flwabera of the Board shall devote their entire time to
business of the Board * * *."
Another serious qofestioa arises, rsiareover, in connection with
a neaber of tiie Board of Governors of the Federal Beserve System
holding the office of u.S* Executive Director of the International
Bank. Section 10 of tern Federal Heserve Act (12 U.S.C. 2ljJ*} provides
to part:
w
rio member of the Board of Governors of the Federal
Reserve System shall be an officer or director of any
bank, banking institution, trust company, or Federal
Reserve bank or hold stock in any bank, banking institution, or trust coapanyj and before entering upon his
duties as a xaeatoer of the Board of Governors of the
Federal leserve Systea he shall certify isider oatfe that
he has complied «ith this requirement* and such certification shall be filed with the secretary cf the Board.
» * **
this provision has appeared in the Federal Reserve Act without
itantial change since its first enactment in 1913 • liae House and
Reports on the Federal fieserve Act do net add inuch to an
ling of toe applicability of this section to the present
situation* Hotase Report 10* 69 of the 63rd Congress, 1st Session,
states at page
"For obvious reasons it is considered vise tbat
everyffieaberof the Federal reserve board, desiipated
by tfee President shall surrender aii^ banking connections he say have had at toe ti«e of his nomination
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Federal Reserve Bank of St. Louis
- 3It seens clear that the Congress did not intend to limit this
prohibition to a aeaber bank of the Federal Reserve System since
other provision* of the Aot provide that mes&ers of the Board shall
be ineligible to hold any office, position, or enpioynent in any
bank. It aust be noted that the language of this provision
not even limit the prohibition to an office or directorship in
a banking institution in the United States* On the other hand, it
Bdght be argued that the Congress had no reason to consider at the
tiae that the Federal Reserve Act was adopted a directorship on an
international institution such as the International Bank for Reconstruction and Development and that irfiat they were concerned about
was a possible conflict in interest between a private U.S. banking
interest and the perfonaance of duties as a aeaber of the Board of
dovernors* Accordingly, the proper interpretation is not certain,
but literally the Federal Reserve Act would preclude your holding
the directorship of the International Bank*
It is suggested that if you wish to give further consideration
to holding both posts, you should consult the legal staff of the
Federal Reserve Board nhich could more appropriately give you an
opinion than I can. Conceivably, it sight even be desirable to
request an opinion of the Attorney General*
EArnold:CRMcNeill:cr
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Date: March 21, 1951
To:
Executive Committee of the
Federal Open Market Committee
From:
Messrs. Thomas and Youngdahl
Subject: Possible Conversion of
System Holdings of 196772 Bonds
Confidential
Decision will need to be made by the Executive Committee of
the Federal Open Market Committee as to whether the Treasury bonds of
June and December 1967-72 in the System1s open market portfolio should
be converted into the new 2-3/4- per cent bonds. Four different
options are open to the Committee:
1. Retain the 2-1/ 2 per cent restricted marketable
bonds.
2. Convert all of the holdings into 2-3/4- per cent
nonmarketable bonds and immediately exercise
the option to exchange them for 1-1/2 per cent
5-year notes.
3. Convert all into the 2-3/4-fs and exchange them
for the 1-1/2 per cent notes in partial amounts
at intervals over an extended period of time.
4. Retain part of the 2-1/2 per cent restricted
bonds and convert the remainder either for immediate or subsequent exchange into notes.
The reasons for and against each of these options may be
summarized as follows:
1. Retention of 2-1/ 2 per cent bonds
Advantages
(a) This would enable the System to retain bonds that
might be useful for market operations at times in the future
when bond prices might tend to rise too sharply.
(b) It is not appropriate for the System to hold nonmarketable bonds.
Disadvantages
(a) One major objection in principle to this choice is
that it is generally better for a central bank to hold
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Federal Reserve Bank of St. Louis
— 2—
principally short-term securities and operate primarily
through the short-term market.
(b) In practice, moreover, for many years the System
is likely to have enough of other long-term bonds to influence that market if it desires.
(c) One of the purposes of the exchange offering is
to reduce the supply of long-term bonds in the market, for
the System to retain its holdings and later sell them in
the market would defeat this purpose.
(d) Substantial System holdings might serve as a
threat overhanging the market and discourage investors
from buying long-term bonds.
2. Full conversion and immediate exchange into notes
Advantages
(a) The exchange would provide the System with additional medium-term securities, which would be available
for use as may be needed in influencing the medium or shortterm market and bank reserves.
(b) It would swell the aggregate amount of the conversion and give favorable publicity to the conversion
operations.
(c) Conversion would help get the Federal Reserve out
of the long-term market. It might, therefore, strengthen
the market for long-term securities by removing the largest
block of bonds overhanging the market and thus suggesting
that over the next several years the Federal Reserve does
not intend to operate directly to prevent declines in the
long-term interest rate.
(d) The amount paid for interest on the Government
debt would appear to be reduced. Most of these savings,of
course, would be lost through corresponding reductions in
the amount repaid by the Federal Reserve to the Treasury,
although that loss would show up in reduced receipts which
are not specifically earmarked as an off-set to interest
payments under existing procedures.
Disadvantages
(a) The Federal Reserve portfolio already has a large
concentration in the 5-year maturity area with 3.2 billion
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Federal Reserve Bank of St. Louis
- 3dollars of the 1-3/4. per cent notes of December 1955« The
exchange would add 2.4 billion in that range*
(b) The future market for the exchange note of April
1956 would be heavily tied to Federal Reserve operations
because the System would probably own most of the issue.
Even more than with the November 1951 note, this might
present a problem in avoiding domination by the System of
the market for these issues.
(c) The System would give up ammunition for directly
preventing a fall or promoting a rise in the long-term
rate should such action be under consideration during the
period that the 1967-72 issues will be within that maturity
range.
3*
Full conversion with subsequent partial exchanges into notes
Advantages
(a) This procedure would make it possible for the
System to obtain medium-term notes as they may be needed
for market operations.
(b) It would permit a distribution of note holdings
among different dates and avoid undue concentration on a
single date.
(c) It would increase the apparent success of the
conversion offer.
(d) It would reduce the supply of marketable longterm bonds outstanding, as explained under 2(c) above.
Disadvantages
(a) There may be some question as to whether the Federal
Reserve should hold nonmarketable, high-interest securities,
even though on a transition basis.
(b) The Treasury would have to pay out more interest
from appropriated funds, even though the Government would
recover most of the addition from Federal Reserve earnings.
(c) It would reduce the System's ability to influence
the long-term market.
4-
Partial conversion
This procedure would have in varying degrees the various
advantages and disadvantages of the other options.
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Federal Reserve Bank of St. Louis
- 4Postscript
Since preparing this memorandum we have had a discussion
with Treasury representatives who indicated that the Treasury is
likely to convert all of the 67-72 bonds held for trust and agency
accounts. There may still be a little difference of opinion in the
Treasury and a final decision has not yet been made on this matter.
They seem to hold the view that it would be advisable for both the
Treasury and the Federal Reserve to convert all of their holdings
partly for the publicity value in indicating a large conversion of
the bonds.
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Federal Reserve Bank of St. Louis
STANDARD FORM NO. 64
UNITED STATES GOVERNMENT
Office
TO
: Mr. Martin
FROM
: Mi-0 Arnold
SUBJECT:
DATE:
Procedure relative to your becoming Chairman of Board of Governors
It is my understanding that it is prerequisite to your becoming a
member of the Board of Governors both that the President issue you a
commission and also that you take the oath of office* The President
then, either simultaneously or at a later date, would by letter
designate you as Chairman of the Board of Governors, for the President
makes this appointment as a separate matter without the advice and
consent of the Senate. I have been informed by the office in the Department of State handling the procedures for this type of appointment that
your commission as a member of the Board of Governors was sent this
morning to this White House for the President's signature.
With regard to terminating your duties as Assistant Secretary and
as Executive Director of the International Bank it is customary to
submit to the President separate resignations for each of these positions,
Under the practice followed in this Department, these two resignations
should be transmitted by letter to the Secretary, who in turn will send
them to the President. It is, of course, desirable that the resignations
be submitted before you take the oath of office as a Board member,
particularly with reference to the statute concerning affiliation with
any bank which was discussed in my earlier memorandum.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
'
/
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
April 18, 1951.
To
From _
Chairman Martin
Miss Benton
MESSAGE:
Attached is the list of Board
membership which you requested.
On page 3 are listed the present
members of the Board, with term ex
piration dates. On page it, a list
of the Chairmen of the Board since
its organization,
Message delivered by_
F.R. 468
Rev. 1/47
MEMBERSHIP OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
1915-1951
Federal
Reserve
District
Effective
date of
Appointment
Charles S. Hamlin
Boston
Aug. 10, 191U Reappointed 1916 and 1926. Served
until Feb. 3, 1936, on which date
his successor took office.
Paul M. Warburg
New York
Aug. 10, 191U Term expired August 9, 1918.
Frederic A. Delano
Chicago
Aug. 10, 1911; Resigned July 21, 1918.
W. P. G. Harding
Atlanta
Aug. 10, 191U Term expired August 9, 1922.
Adolph C. Miller
San Francisco Aug. 10, 191U Reappointed in 192U. Reappointed
in 193U from the Richmond District.
Served until Feb. 3, 1936, on which
date his successor took office.
Albert Strauss
New York
Oct. 26, 1918 Resigned March l£, 1920.
Henry A. Moehlenpah
Chicago
Nov. 10, 1919 Term expired August 9, 1920.
Edmund Platt
New York
June 8, 1920
David C. Wills
Cleveland
Sept. 29, 1920 Term expired March U, 1921.
John R. Mitchell
Minneapolis
May 12, 1921
Milo D. Campbell
Chicago
Mar. Ih> 1923 Died March 22, 1923-
Daniel R. Crissinger
Cleveland
May 1, 1923
Resigned September l£, 1927.
George R, James
St. Louis
May 1U, 1923
Reappointed in 1931• Served until
Feb. 3) 1936, on which date his
successor took office.
Edward H. Cunningham
Chicago
May lli, 1923
Died November 28, 1930.
Roy A. Young
Minneapolis
Oct. U, 1927
Resigned August 31, 1930.
Eugene Meyer
New York
Sept. 16, 1930 Resigned May 10, 1933.
Wayland W. Magee
Kansas City
May 18, 1931
Term expired January 2U, 1933•
Eugene R, Black
Atlanta
May 19, 1933
Resigned August l£, 193U»
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Federal Reserve Bank of St. Louis
Reappointed in 1928. Resigned
September lU, 1930.
Resigned May 12, 1923.
Federal
Reserve
District
— 2—
Effective
date of
Appointment
J. J. Thomas
Kansas City
June ll;, 1933 Served until February 10, 1936, on
which date his successor took office.
Joseph A. Broderick
New York
Feb. 39 1936
Resigned effective September 30,1937*
John K. McKee
Cleveland
Feb. 3, 1936
Served until April ii, 19l|6, on which
date his successor took office.
Ronald Ransom
Atlanta
Feb. 3, 1936
Reappointed effective February 1,
19ii2. Died December 2, 19U7.
Ralph W. Morrison
Dallas
Feb. 10, 1936 Resigned effective July 9, 1936.
Chester C. Davis
Richmond
June 2£, 1936 Resigned effective March 19 19i*0, to
accept reappointment effective March
8, 19UO, for term of li; years from
February 1, 19UO. Resigned
effective April l£
Ernest G. Draper
New York
Mar. 30, 1938 Served until September 1, 19 £0, on
which date his successor took
office.
Lawrence Clayton
Boston
Feb. 1U, 19U7 Died December U,
Thomas B. McCabe
Philadelphia
Apr. l£, 191*8 Resigned March 31, 19 £U
Note: Under the provisions of the original Federal Reserve Act the Federal Reserve Board
was composed of 7 members, including 5> appointive members, the Secretary of the Treasury,
who was ex-officio chairman of the Board, and the Comptroller of the Currency. The original
term of office was 10 years, and the five original appointive members had terms of 2, U, 6,
8, and 10 years, respectively. In 1922 the number of appointive members was increased to 6,
and in 1933 the term of office was increased to 12 years. The Banking Act of 1935>> approved
August 23, 1935>> changed the name of the Federal Reserve Board to the Board of Governors of
the Federal Reserve System and provided that the Board should be composed of 7 appointive
members; that the Secretary of the Treasury and the Comptroller of the Currency should continue to serve as members until February 1, 193&5 that the appointive members in office on
the date of that Act should continue to serve until February 1, 1936, or until their successors were appointed and had qualified and that thereafter the terms of members should be
ll; years and that the designation of Chairman and Vice Chairman of the Board should be for a
term of four years.
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Federal Reserve Bank of St. Louis
t. S. Szymczak
Federal
Reserve
District
Effective
date of
Appointment
Chicago
June lli, 1933 Reappointed effective February 3,
1936, and February 1, 19i*8. Present
term expires January 31* 1962>
Marriner S. Eccles
San Francisco Nov.
193U Reappointed effective Feb. 3, 1936,
March 8, 19UO (switched terms with
Chester Davis - see above), and
February 1, 19kk* Present term
expires January 31 * 195>8.
Rudolph M. Evans
Richmond
Mar.
19U2 Appointed for unexpired portion of
Chester Davis1 term, which expires
January 31, 19£U*
James K. Vardaman, Jr.
St. Louis
Apr. U, 19U6
Edward L. Norton
Atlanta
Sept. 1, 1950 Appointed to fill vacancy at expiration of Ernest Draper's term.
Present term expires January 31A96U*
Oliver S. Powell
Minneapolis
Sept. 1,
Appointed to fill vacancy caused by
resignation of Ralph Morrison,
which had never been filled. Present
term expires January 31* 195>2.
¥m. McC. Martin, Jr.
New York
Apr. 2,
3L
Appointed to fill vacancy caused by
resignation of Thomas McCabe, who
was appointed for the unexpired
portion of Ronald Ransom's term.
Present term expires January 31>195>6.
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Federal Reserve Bank of St. Louis
ss
Appointed to fill vacancy at expiration of John McKee's term.
Present appointment expires
January 31> I960.
- uCHAIRMEN OF THE BOARD
Charles S. Hamlin
W. P. G. Harding
D. R. Crissinger
Roy A. Young
Eugene Meyer
Eugene R. Black
Marriner S. Eccles
.Thomas B. McCabe
1m. McC. Martin, Jr
August 10, 191i;-August 9, 1916
August 10, 1916-August 9, 1922
May 1, 1923-Septenber 15, 1927
October U, 1927-August 31, 1930
September 16, 1930-May 10, 1933
May 19, 1933-August 15, 193U
• November 15, 193l4-January 31,
April 15, 19li8-March 31, 1951
April 2, 1951-
VICE CHAIRMEN OF THE BOARD
F. A. Delano
Paul M. Warburg
Albert Strauss
Edmund Platt
J. J. Thomas
Ronald Ransom
August 10, 19!l;-August 9, 1916
August 10, 1916-August 9, 1918
October 26, 1918-March 15, 1920
July 23, 1920-September lit, 1930
August 21, 193U-February 10, 1936
August 6, 1936-December 2,
Note; Prior to August 23, 1935, the Chairman and Vice Chairman
of the Board were known as Governor and Vice Governor, respectively.
EX-OFFICIO MEMBERS OF THE BOARD
Secretaries of the Treasury
W. G. McAdoo .............. December 23, 191 3-Dec ember 15, 1918
Carter Glass .............. December 16, 1918-February 1, 1920
David F. Houston
..........
February 2, 1920-March 3, 1921
Andrew ¥• Mellon .......... March U, 1921-February 12, 1932
Ogden L. mils ............ February 12, 1932-March h, 1933
William H. Woodin .... ..... March U, 1933-December 31, 1933
Henry Mo rgenthau, Jr ..... . January 1, 193U-February 1, 1936
Comptrollers of the Currency
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Federal Reserve Bank of St. Louis
John Skelton Williams .....
D. R. Crissinger ..........
Henry M. Dawes ............
Joseph W. Mclntosh ...... . .
J. W. Pole ................
J. F. T. O'Connor ........ .
J
February 2, 191it-March 2, 1921
March 17, 1921-April 30, 1923
May 1, 1923-December 17, 192U
December 20, 192ii-November 20, 1928
November 21, 1928-September 20, 1932
May 11, 1933-February 1, 1936
FEDERAL RESERVE BANK
OF NEW YORK
NEW YORK 45, N.Y.
May 28, 1951
Personal
Hon. William McC. Martin, J r . ,
Board of Governors of the
Federal Reserve System,
Washington 25, D. C.
Chairman,
Dear Bill:
Enclosed is a list of those who have accepted Bob Stevens' and
my invitation to the dinner in your honor, Wednesday evening, June 6th.
There may be one or two late additions or changes, but this is most of the
group you will be meeting.
It will all be pretty informal. Bob Stevens will welcome the
guests, and then will call on me to introduce you. After that, the floor
will be yours to say whatever you want to say to this group of System
associates, and old friends and acquaintances. You can either close it
out with your remarks, or expose yourself to questions.
We are looking forward to the dinner, and also to having you
with us at the luncheon and meeting of our Board of Directors on Thursday,
June 7th.
Yours sincerely,
Allan Sproul
Enclosure
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Federal Reserve Bank of St. Louis
List of Those Who Have Accepted Invitation
to Dinner for
Hon. William McC. Martin, Jr.
Wednesday, June 6, 1951,
at the Links Club, New York City
Members of the Board of Directors of the
Federal Reserve Bank of New York
B u r r P. Cleveland
President,
First National Bank of Cortland, New York
Jay E« Crane
Vice President,
Standard Oil Company (New Jersey)
Marion B. Folsom
Treasurer and Director,
Eastman Kodak Company
William I. Myers
Deputy Chairman
Dean, New York State College of
A g r i c u l t u r e , Cornell University
Robert P. Patterson
Patterson, Belknap & Webb
Roger B. Prescott
President,
The KeeSeville National Bank
Robert T. Stevens
Chairman
Chairman,
J. P. Stevens &: C o . , Inc»
John C. Traphagen
Chairman,
Bank of New York and Fifth Avenue Bank
Members of the Board of Directors
of the Buffalo Branch of the
Federal Reserve Bank of New York
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Federal Reserve Bank of St. Louis
George F. Bates
President,
Power City Trust C o . , N i a g a r a Falls, N.Y.
Bernard E.
President,
Security Trust Co. , Rochester, N.Y.
Finucane
George G. Kleindinst
President,
Liberty Bank of Buffalo, Buffalo, N.Y,
C. Elmer Olson
President,
The First Natl Bank of Falconer, N. Y.
Edgar F. Wendt
President,
Buffalo Forge Company
-2-
Heads of Principal New York City Banks
Wmthrrop Wo Aldrich
I / P e r c y J. Ebbott
or
William Gage Brady,
Jr.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Chairman and President, respectively,
Chase National Bank
Chairman,
National City Bank
W. Randolph Burgess
Chairman, Executive Committee,
National City Bank
J. Luther Cleveland
Chairman,
Guaranty Trust Company
So Sloan Colt
President,
Bankers Trust Company
William S. Gray
Chairman,
Central Hanover Bank and Trust Co.
J. Stewart Baker
Chairman,
Bank of the Manhattan Company
Dunham B. Sherer
Chairman,
Corn Exchange Bank Trust Company
Alexander C» Nagle
President,
First National Bank of City of New York
Charles J. Stewart
President,
New York Trust Company
Henry C. Alexander
President,
J. P. Morgan & C o . , Inc.
Chester Gersten
President,
Public National Bank and Trust Co.
James G. Blaine
President,
The Marine Midland Trust Co. of N. Y.
Benjamin Strong
President,
United States Trust Company
Harold H. Helm
President,
Chemical Bank and Trust Company
-3-
Others
William A » Lyon \y
Superintendent of Banks,
State of New York Banking Department
Federal Reserve Bank of New York
Allan Sproul
President
L 0 R. Rounds
First Vice President
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Federal Reserve Bank of St. Louis
x
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
A substantial part of the information requested by this Questionnaire
will have to be estimates since 1951 is not yet closed and 1952 has not even begun0
It is understood that any estimated figures reported (which are expected to be in
round figures) are only for the purpose of this compilation and are not binding
on you for any purposec Particularly in connection with 1952 > y°u m&y want to
show a maximum and minimum rather than a speci-'ic figure«. In all cases your best
estimate after a reasonable amount of consideration and research is all that is
expected - in no case is elaborate extra work .Just for this purpose desired. It is
hoped you will answer all, but in any case^ where .you can not tiArrive at a reasonable
approximation on this basis just mark that item"noa>M vhich will be understood as
"not available*' or "not answeredo"
In the case of 1952 figures it will be understood that they will generally
be on the basis of 1951 adjusted for known or foreseeable probable changes in capital,
rates of tax, bond portfolio etc, but will not be adjusted for any estimate of
possible changes in general conditions such as in business activity, employment, war
etc.
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Federal Reserve Bank of St. Louis
Form
November 1951
Budget Bureau No,
Schedule
- Tax Questionnaire
(See accompanying instructions)
NAME OF BANK
CITY AND STATE
According to latest Call Report
Total Capital Funds
Total Resources
Number of Shareholders
(common stock)
Number of common
shares outstanding
1. (a) Were you subject to Excess Profits Tax on 1950 earnings Yes
(b) Do you estimate that you will be subject to Excess Profits
Tax
—
1951
Yes
1952
Yes
(c) If the answer is no, check circumstances relating
to that years
1950
Excess profits net income (line 23 of Schedule EP 1>
form 1120) less than ^25,000
Non-recurring losses or expenses
Credit sufficient to offset income subject to tax
Other
(d) Under the law you may use the most advantageous of either™"
the invested capital or base period income methods for
computing the excess profits credit. Which is your
option?
1950
Invested Capital
No
No
No "
1951
Est.
1952
Est«
1951
1952
Base Period Income
NOTE: If all answers under (a) and (b) above are "No", you may disregard the
following qiestions, although completion of the questionnaire as far as possible
would be helpful to a successful completion of the survey.
2. Inadmissible Assets
Total
Total
Inadmissible Assets
Assets
(In thousands of dollars)
At opening of business (use call
report close of previous period)
- July . 1, 1916
- Jan. 1, 19^7
- Jan. 1, 1950
- Jan. 1, 1951
- Jan. 1, 1952 (estimated)
NOTE: Inadmissible assets are obligations on which the interest is fully or
partially exempt from Federal income tax, and stocks of corporations including
Federal Reserve Bank stock.
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Federal Reserve Bank of St. Louis
Questionnaire - Page 2
3. Capital stock
(a) Has new capital stock been issued since Dec. 31» 3-9U9
(do not include stock dividends)
Year issued
(b) If so, please indicate price at which issued $
(Yes or No)
per share.
(c) If readily available, latest market or bid price $
per shar'
(d) "What has been, or possibly will be, the effect of the excess
profits tax in obtaining new capital, particularly in relation
to your bank?
Only banks on Average Earnings Basis should answer this question,
83$ of AVERAGE BASE PERIOD NET INCOME
(This is 83$ of the amount shown on line 26 of
Schedule EP2 of the Excess Profits Tax Return m
in thousands of dollars).
1950
1951 Estimated
1952 Estimated
NET EARNINGS AND INCOME TAXES
1930
1931
1952
Estimated
Estimated
(In thousands qf dollars)
(a) Net income from inadmissible assets
(b) Net earnings from current operations
before income taxes (item 3> Report
of Earnings & Dividends)
(c) Profits before income taxes (item 6,
Report of Earnings & Dividends)
(d) Normal tax net income (item 3^5
Form 1120)
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Federal Reserve Bank of St. Louis
Questionnaire
- Page 3-
1950
1951
1952
Estimated
Estimated
(in thousands of dollars)
(e) Surtax net income (item 5, Tax
Computation, Form 1120)
(f) Adjusted excess profits net income
(Item 2? of Schedule EP-1,
Form 1120)
(g) Taxes on Net Income (item 7>
Report of Earnings & Dividends)
Subdivided as to;
(1) State
(2)
Federal - Normal tax & surtax
(3)
(U)
Excess profits tax
Total
(h) What is your approximate average rate
of return on excess profits tax invested capital (corresponding to
Schedule 2, Item (c) herein) for
the three highest years during
the base period I9h6 It will be understood that the answer under (g) is not a determination of
the liability for any purpose whatsoever and will only be used, in conjunction with figures for other banks, in statistical compilations. It
may be estimated in round figures.
CAPITAL FUNDS & EQUITY INVESTED CAPITAL
(a) Total capital accounts (item 29 of
Report of Condition)
(b) Total adjustments for such items as
reserves for bad debts and other
valuation reserves, excess expense,
tax and other reserves for which no
deduction has been taken for tax
purposes, adjustment of assets from
book to tax basis, and borrowed
capital.
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Federal Reserve Bank of St. Louis
<In thousands of dollars)
Questionnaire
- Page k*
1950
1952
Estimated
Estimated
(In thousands of dollars)
(c) Equity capital for excess profits
tax purposes (a) minus (b)
(This will be the amount shown,
or expected to be shown, as
equity capital in the excess
profits tax return for each
year)
(d) Equity capital per common share
(e) Cash dividends per share of common
stock
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Federal Reserve Bank of St. Louis
(All references to excess profits and income tax
forms are based on the 1950 blanks.)
•
BOARD DP GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
January 21, 19f?2
&y dear Mr. President!
In accord with our recent conversation, I would like to suggest,
for any consideration you say care to give them, tiie following tuo
names as appointees to the Board of Oorernors of the Federal Reserve
System j
For unexpired term of Marriner S. Eccles •*- Expiry January 31, 1958
Abbot L. Mills, Jr., San FrancAco District
tarn of Sdn«rd
For
Louis Robert
A brief biography of ea
Expiry January 31, 1961*
City District.
hase men is attached,
lours respectfully,
L. HcC. Martin, Jr.
The President
The Whdte House
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Federal Reserve Bank of St. Louis
October 27,
IT* H&leol® Bryan, President,
Federal Bsserva Bank of Atlanta,
Atlanta, Georgia*
Dear Maleolmt
Inclosed ars three docusmits that wiH cone up for discussioa at the 44 Hoc MNMMft&tffi acting oa Friday,
First, there is a naabered draft copy of the Subc&artittee**
report as it has just eom® off the adia©0£ r&ph* Is hav® b®«in putting
lat& of night i^rk in on it, I thought w@ h«4 a\mrytliing clenaed
^j, but in gaing si?®r the first f«v pages j\ist ncur I ®«© sos® rough
spots, particularly in the ?r©£ac«. Pl«a8« excuse them. The »©etion on housek@@ping has boen drafted in light of the vi&iris oxpressed
at the last ttMtiAg of th® SuibcoaBHitt*** It ia not nearly so
don® as your draft. I f«al it is good eneogjh* how-en^r, to
Subao^aitt«0 to choose how they *aat to handle this d«lio«t©
Second, there is & nuaft>ex«d draft msfaoraucfcus prepared from
the material in the minutes aad. files of the Op^ss Harket
dealing *ith relations with dealers*
third, there is a ni^bersd draft aoaorandusi of the aaterial
the ®iaut@s, files of the 3pm lau^cet Coomitteet ai«i ths dealer
discussions of the Ad BM Hubcon«aitt«e, relating to J. B. Roll and
Aubrey Lanstau
It is s^- sugtestlon that the Subeossidttee decide cm Friday
or not to distribute ijoaodiately t^ase latter
to the Board and presidents. They give necessary background oaterial
for consideration of the final report*
Wiaficsld 1. Hieflar, Secretary,
Markot Cosaiaittee.
ccj Governor Mills
Chairman Martin
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Federal Reserve Bank of St. Louis
April 8*
STRICTLY C.IIF--PSMTIAL
Dear Randgrt
Herewith a draft of change* along the lines I dismissed from
tints tc time with George Hmphrey, you and the Pr@si<tot» 1 thoagbt
you night like to tore this before tie hava our next disctission.
1 seriously qnasticn the use of th® Reorganisation Act, although,
technically, a good cum eould be nade, perhaps, for Baking it applicable.
I am confidant it is tte wrong way tofcumdl®such a situation a@ this one«
I on also enclosing a tabialatioa of the Mstberaldp of tfc» Board of
Qoyernors sine© February 3> 19^ vhich indicates that during the period
of February 3* 193& through February 28, 19^3f the Board has consisted of
seiren sm?3ibers for only three years and eight months, and consisted of six
aethers for eleven ysars mad ten ninths, and five Meiers for one
five months.
Incidentally, if we coiild find a rstlly good man, it night be wise
to consider filling the present vacancy preparatory to moving along these
lines.
Sincerely yotirs,
u MoC. Martin,
W, R* Burgess
Special Deputy to the Secretary
Treasury Departnent
B.C.
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Federal Reserve Bank of St. Louis
February 17, 1953.
Chairman Martin
Change la membership of Board
Mr. feet
an^
O e a Market Committee.
Following our recent convf rsetion, I have given eoae thought
to postiblfi change in the composition of the Bo*ird OR the basis of
five wembern vith ten-year term* and is th« Open 'ncrket Coanittae to
asefce appropriate a no corresponding changes. I attach drafts of possible SL«tenoir,*uts to u;e I&v vnicu v ,yul_. :,;&k& changes 01' ihia kirad*
Hov«v«r> Ui^re are « number of iaportant questions that ari^e in connection vith any sueh change*, aiiu th«*« irtiauici hfeViJ treful consideration bsfont nay definitive legislative urfeft i*
Hov Should Cfaaa^g in Board _ ^»»ber> Be .Kffgct»d. that the a»ab«r^ip of the feoard ^3 to b* cfj*n&«\i uj rive m«£b&r« vith
ten-year t@r»«, tr<@re are tvo po« *ibl« vayg in whirh the Eg* set-up
isi^ht ba bjoag.ht about. ?i**»t, i^ could be <!oaa by hevia^: the i&v
completely reorgasd.se ana reooaetitute the Boi&rd. In oth«»r vord»,
all present ter^a voulci b« ended on a .ivefc aslu*, iifty Februax-y i, I91>A,
and tsev appointwents l^r tji« President, confirmed bj- 1r*« 3enat«)y vould
be nect&smry for iae®ber»hip oa the nev Board. liii« vould, of course,
cot preolude the President from reappoisting any present sesfc^rs of
the Board that he wished* this stethod nomld bs similar to the sethod
vhich vas followed vhen the Board v*a reorganised in February 1936 BS
•fca« result of the Backing Act of 1935. The only other vay that occurs
to «ae ty vhich a reduction ia membership to five could be brought about
vould be by dropping off of the Board two out of the seven member* nov
provided for. ^ines there ia sov on#? vi*csncy, this m» a practical s»tter
vould m§«n Uia eilssingtioa of *sy oae of the praaent six meabera. The
remaining five «e»b«r9 of the Board vould contiisute sad serve out their
present teraa. Upoa the expiration of Uitir present terms, the President could either reapj-oint thes for term* of tea years or could appoint
is#ffib»rs ia their gtesd for » like term.
Trie attached legislative dreft vould provide for »
of the Board similar to th& settiod used under
Ac' of 1935 « I f you should wish & draft vhich vouB use
of dropping off tvo of the seven s»emb*rs nov provided for by
I vill be glad to furnish It.
complete
the Bankthe method
the statute,
ti-.e r.t of ''.gqabers Vho hc-vg- :" erygQ Full T^r-^g. - Present
l&v coea not permit the reeppointmmt of a new member vho haa served e
full terru of fourteen years. In your reply to the Pataan Questionnaire,
you saggeeted terms of six yeera, vith the prohibition against reappoint
ellffilnst«d. The P^tissc Subcommittee Keport r«eor?se®aded n t^rm of
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Federal Reserve Bank of St. Louis
Ch&iraaa Martin
-2-
six ytsrs wife the prohibition ©geiast reappoiatasnt elininetsd, last
Senator Flanders suggested ft t«a-ye«r term also permitting eligibility
for reappointaent, The attached draft providing for five Bembers vith
tftrais dost not include &r*y ben against reappointatent of «estDifiry%rtlQK_ of Board Mqaberg* » The attached
dm ft nuke* fio change in the preae&t requirements of tb* lav that aot
than on* Hoard &«s)ber may be appointed fro® any one F@d^ra
nd t2mt tb$ President shsil h*ve rta® reg&rd to a fair
of the fiuRmei«l, agriewittiral, industrial and
iRt«.r@«t»
gsogrsphical divisions of the chantry. If csstir^d, of
tb« prorlaiofi regarding ona msmbtr fro«t one district could b*
f *• vft* iadi©«t«d in yomr rtply to ttee
in ths
of Chslrm&n> - The ftttfecbed l*i«l*ttv« draft
in the term* of office of the Cbftinura end Vice Chairsam of the
ttee provision for four-year t^raa in prevent l«v being retained*
of yed.es- si 0:g«a Hsrktt Committee, - In
ing v&o should coa&titute the Federal Open Market CoKaitteev &n® of
th* first questions ^bi^ miggeat* Itself end o»^ i4iich im* been often
dismissed i$ Pettier tfte Federal Reserve Bourd ehould not hfeT© veat@d
is it th* fuaetiofts and. responsibilities of 145® Open, Market Cocalttee*
The Com<tee performs gorerstisantal Aiaetioiui, and is one Tiew of the
«»tt«r it vould »ee« that It abomld be aMuSe up of officials appointed
Isgr the Pre^ideBt with the advice ai^d oonsent of the Senate and that it
not include may ottotr p©r*onji, notvit^staaaii^ thuir official
vith important institutioam lilt© the Fftdoral Keserre Banka,
the placing of the*e function a in tm gourd or say similar
in Washing ton vould awtan s sacrifice of deairmbla decentralisathat there t« to be such cec«ntra!i»at4«S)| the <jue-»to the extent of a©e^«tr®Ii»*tiQi5 arises mud ftlso whether mernon the Ccweittee should include represe«it«tl¥ts from all Fedezsi
Banks or frost sofiie lesser mimb«r of F«^*-r«l Ke*erre Banks. Froa
1935, the Open Hurket Consittee c<5nsi»t»d exclusively of r«spr«*of th- twslT« Federal B®is«rv« %nks* This did not vork satisfactorily riotvitti®t«Biiii^ that tiie Board had the yovmr of regulation over
open market tr«n»aGtioaB» It voulc! obviously be too unvieldy to
repr«gtiitstiv«8 of nil of the ifeserve torws plue all of t,fc«* Hoard
on the n«e«b#rsj2ip of the Comsitt*®, % process yf tlimiaatios, therefore,
it seems & a»ce«,*»«fry conclusion that if ve %r^ to have decestrailzetlon
is this natter, the present
of cosibining the »s*bertMp of the
tion as
't^rs^ip
Reserve
to
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Federal Reserve Bank of St. Louis
eh*ir*&f* Martin
-3~
Board with representation from ecae tat not «U of the Federal
Banks is the pl£& treat Has the leaat abjection to it. la your reply to
the P&t.;:sn ^u^stioanairs, you at* ted, «ft$r consitiarohit* ciscu
;>f
the r»tt~r, that It van desirable tlmt th*» Rssarvf Bams should participate to the greatest extent practicable in the consideration and
fonsulatloti of open sarkat ^olieles, and that there appears to b^ no
compelling r$*aon in the publio Imtereat for disturbing the present
arrangement,
t trie awftberahip of the Board Is to be* reduced
to fire, il; is logicel te» redmc^.
"-^deral Beaerirt B«nk representatives oii the Op^sa Market CoMadtt.ee to either Tour or three, Ar-guiMnta
could p^rhapa be isa-d® either "way vith respect to •»
i such repreaeatation aho*olfi. be; four or three, but isince tiie 3o&rd ssesbera vould
predomlimt© in nambssr in either c&aa, there is so«@thijig to be said
for fesur deserve Batik repressat^tives In order to have wore Federal
tattrve !laafe» directly concerned with tht* f.etivitie« of the Committee
et &nj os* ti»e and to h&ve a broeder b^s« of ^^esiatr&lisiitiom. thia
Cassis a total mf^bferehip of nim os the Op@n Haricot Costsitt^e.
the constant rapresaat&tiaa of the Federal Keaerrd Bask of
lork woul4 b« coot listed; provision to thia effect vaa placed in the
lav by special
attached draft af legislation provides for so Op-an ?4arkat
of .nine B©»fe0rpf ©ff^ctive March 1, 195A» consisting of the
five awmbnrs of the Bo&rd and four reprsaesitetiva^
al Btaerve Bank a ^ o«^- of vhieh voul'i be the Federal peserve Bam of Mew York.
0&« it^a»ajientmtiv€ vould be ^l«ct*ci by tha dlreetc-| a) i-eserve Baaka of Boston, Philadelphia ^ Pich- I "d Atlentr.^ one by the
cllr«»etori of th| - srv* Pcaj^s of Clsv«lau4» Cbicsgo and |t« Louis.
one %
ir^ctors of th© J'er.
. ^ serve Banks of HittDaapelia,
Kanaaa City, taila^
lajaj Francisco. Tais- ^roupiag c*3uld» of course,
ha oi^ftfiged in ei$r -vmy ths.t ail^ht s«ea pref erabla*
^
of Fed-rsl Oaen Har^gt Cossilttge, - Consideration isight b» ^i7»s (e providing in any nov Legialatioa Authority for the
Federal Opuft Harkf *
*.o employ ita ovm utaff anc to obtiitt funda
' 3 pay its «£p®a8«8 I
-ifrrles of its emvloy^es. ?h@ fettached drpift does not presently include such proviaiona.
L« '
'•
-thority for ";.-.rpose might fee d«$ si ruble if
a eBag&fttely atpmrmte »ta,ff a
Opes '"
" Cossmitt*© ver« to fea set
up. However j
H0ika4 out without i I.- Cation if
were- aa ar.
^adij^ that
the
Board vould eoploy feixi p®y ar^r
d-*d ly tht» Co--; I
•••ttlarle* speeifled by the
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Federal Reserve Bank of St. Louis
Chairman Martin
-4-
Cosu&ittee* Hovever, if statutory authority should be sought, It vould
be scat ij&portaat that Coonittee e*ploy9*s and Coawittee funds b»
eitespted fro® the various Federal statutory provisions relating to
OoveraiBS&t esYplayftes &nd Govuramest funds, *uch as the Civil Service
laws, the Classification Act, th* General Accounting Office, Budgeting,
etc. For this purpose, provision® could be inserted im the proposed
illation to give the Committee th* Mae exemptions 1» this regard
«» bus the Board, but it vould be aseesimiy to spell out then* proviaioms in a jmrtgr&pb for this purpose. Tfeis vould invite tii© posaibilitj of Cos^reas eofisitJc-ring sisc, possibly *a«adi0g the existing
i*v givlag th«ae lexearptiona to the lioftrd. The reaulta could not be
of
recently b*en extended for two i^ore v^^ra. It appliea in very broad
leaf wage ~to all ageaeiea is the exetmtive breach of the G
Vhil« aot couple t«ly cle*xf t!i« legislative history indieatea
it vm« intended to apply to tt*ch »geii0i«8 «a tbe Board, It is believed, t&erufore, that a r«org«Rit»tion of the Board r^daeiug the
»aigb«r of it» avambera could b® carried out uix3.er th* procedure of the
Heorgani nation Act, In such ea»@ coiapenjation of Roarti members would
b® fixed at * rate found by ttia Pi-cdldect to prevail for
officera is the executiv© breach of the GovarnMeat* However, if
change vere oade la the length of the tern of the meKbara, it
that the teraa woaid h&v« to be fi^ed ; t not acre th&a four
there is MMUtoVftftfci doubt as to vh ether the Federal Op-en
Mark«t Cowoittee C:..-uld b« i&cluded in maeh a raorg«ai*stioa* tfea chief
r««aa.n for tills i» the f«<5t that the raorganltstion plaa vould yod.«rtake to reduce t&* lainife^r of r<?pr^«0ntotiv©a fro® the Fcd«r«l Rt^®rv@
thia ^ould iae«n tlmt the** would have to be * chmi^.;® in the
of election of r®pr*aet:itativ«s. Changes ©f thii kind
not »f?*eifle«iiy provided for In the Haorg&fiiEfttion Act. moreover,
nithotigh the Act ns.kea ^-roviaion for the appointment and oomp«fi§atioR of
»g@ney tteabera, it srovide® that in «u€?h ca«e the appointee nt, if r«ot
under cla.3»lfi$d Civil Service, shall be fcy the Pr®fi^«rit vith the A<l*
consent of th« 3enat«. To have such t*ppo latent » to tfce Qp®R
Commit tee mad* by tee ?resid«at would, of eourae, completely
the set-up of the f^dersl Op«a Market Co®nitt@e. Vhilt it is
Bible that a r0organlf«t-ion plan merely changing tlse nuab«»r of Fed*
«rfel K©s$rv« f«nk represent* lives a. aril th* grouping ^ the B«atrv@ EariKi
for the purpose of electing them (aad not providing for appoiatateots l^
the President) vould go through Congress without aueeessful challenge,
it would b© opem to l^v;ai "ioubt, and objections in Congr®a« on this
-t v«?ry well pr*v«mt the plan frow baeoaii^ effective.
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Federal Reserve Bank of St. Louis
-. • - . ; . . JUSE or
TH* Ffl'-^L OPEN K*f;,rT C>:
1
J I j-l
fo aajetic stttiom 10 and 12A of tb*
as- sjMKeiteA, and fer othar purposes,
it ...eractftd .by.. the geaftt-e and Fouge of
of Ui«j. jJniigCt ':i . •>r ^ . . / . i - - la C',--uv.rH?>: ;-;».--.* t;-,-b.y^di Thftt '• '
tvo parfcfr&pfea of section 10 of t:^ Federal Reserve Act,
• , »•.'«, T..:,i«-t l«f sees, ^41-*)» *•**« h^r^by a&er»o#d *o r*ft.r* as follo^st
(hereinafter referred to &s the f ?oard') shell be eoi
t
with tfe$ advice &«4 soaseat of th® Sanate, after the date
«»fle€?t"u^'it G '
- -^'nt, for t^r?nw of t-*n y^^r* ^xcept *n hereinafter provided, but «<&©h sember of the Board
in o-fl.c
fuch datvs si-i-rill con* L?itt«9- to s^rvt- ^a -r member
Board until F^brsiary 1, 1954, at vhicii ti®« e«er« such
ahail 'be d@«iA«d %• Ittfi
--v
"
^ 1 t*r» ffef "hich
^s d@signfi.tgd ^ the Fr»»idtnt fit the tisje of noain*tlont
but tr, such liiannei:' *-^
>j- tn^ nicpirr-ticr. of I)
of Rot nora than am® ^^iiter is
ah&ll hold o^^ic*? r^»r ft t«rm of t^n
:tio.'.-. of th* term of hie
far £»•>
•••;*«id.eat, i?i K?ol&e*
sR«aoers df the Board, not sort than cn« af vho» shall b© s»1
<
!
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:
'
i
'
-Tit
rtgar-si to 4 feir reprtsestAtiosi of the- ficancial,
.ii«iM4trial, #nd eoiK?I iaifr»s1-s, anc? ^«*ogriR:>hic^l dlvlftiass of tlb* cc
i Bo«r«i shall be laeligibla duri^ th«
tiase th«y «r* IB offic** ^rid for tvo y-t^rp th*r«fi,ft*y to hold
*.ny offle« 4 potitloiti, or t^UfWMi in nr^y ae»b«r b»&k| ©
that ti*i# r«striction ulirll not zpi:ly to «. ^«»b*T vi*j h^«
tfc« full t«ns for vhicb he vat s,ppoint©c!» Of the parsons
•:atft»d itis iccmbfj-5* of the Pof^rd^ cn«» ^hmii >». ^^;; ".
-d
of tha Board v to
-ueh for « t®rr of fctir y^urs. the chrircrf:t* o^ the
I ;- ct to its miperirisloa, slifell be its active
cfeRimaa of thf Board s:^ll. i-ceeir-- s
of 122,500 aso each of ihs otfa^r ie»tsb«r?i of the Board
Ah«ll recalT« an mm»i*l salary of $20*000, Such nalariea shall
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Federal Reserve Bank of St. Louis
*v_
be payable monthly, together vitfe actual aeeeaiiftry trarel Ing
aspen**!*. the fcttsbara of the Bo^rd siiail d&vot# their antire
ti»e to the buain*83 of the Board. Each aeetbar of the Board
shell vlthio fifteen1 eus>~s lifter r.otic® of appointment make end
•ubeerlba to th* oa ^ of office. Upon iAi© *xpir*tion of their
tf;rma* of offic« f *e«b«r9 of the Boerd shall co&tiHu* to
until tfeeir «nce*aeorB «r« appointed and h&ve
See* A. Effaetiva March 1, 1954, the first tvo eentattcat of
(a) of teetion liA of the Federal Reserve let, mn 6Men4e<l
.€«C«, Title li, sec. 263), ara 'hereof ft^emiled to r««4 a a follo*et
is hereby created & Federal Open
Market Corasdttee
referred to &e the 'Cooaittea 1 )» *bieh eha.ll consist of the memb^ra of the Board of Governors of the federal
P.aaerve System asa four repxeftentativea of the Federal fce»srre
B*nka to be selected »« hareiaafter provided» Such repretsntetive» sfcfeli be pr©8id&&tt or First Vice ?rsstci«fitt of F'ecei'^l
Eaaarre Banks and, beginning with tb« ®l«ctiors for
the ters co»aanoir^ March 1, 195i» it.ftll be elected nmimall|( aa follows: One
by the bour^ of director* of the Federml Bee^rve Bank of H«v fork,
one tey- the boards of airectora of the Federal He starve Bftakf of
Boetos, Philadelphim, Ilichssoi^ «M Atlanta, on* % the boards ©f
directors of the federal Bas^rvt
flunks of Cleveiftnd, Cfeicftgo ftfid
f<
it, Louis, one l?f the board* o * diraetora of the Ftdersl Reserve
Baaka of !toss«*j,olls, £sriS« City, I;ail&£ and Saa franclnco**
-'17/53
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Federal Reserve Bank of St. Louis
Changes in membership of Board during period Feb. 3. 1936. through Feb. 28, 1953
No. of
Members
Board composed of Governors Eccles, Ransom, Szymczak,
McKee, and Broderick
February 10, 1936 Governor Morrison took oath of office
June 25, 1936
Governor Davis took oath
Governor Morrison resigned
July 9, 1936
September 30, 1937 Governor Broderick resigned
Governor Draper took oath
March 30, 1938
Governor Davis resigned
April 15, 19U1
March Hi, 19^2
Governor Evans took oath
April U, 19U6
Governor McKee»s service terminated: Governor Vardaman
took oath
February Hi, 19U7 Governor Clayton took oath
Governor Ransom died
December 2, 19U7
Chairman McCabe took oath
April 15, 19U8
Governor
Clayton died
December U, 19h9
September 1, 1950 Governor Draper's service terminated: Governors Norton and
Powell took oath
Chairman McCabe resigned
March 31, 1951
Chairman Martin took oath
April 2, 1951
Governor Eccles resigned
July lh, 1951
Governor Norton resigned
February 1, 1952
February 18, 1952 Governors Mills and Robertson took oath
Governor Powell resigned
June 30, 1952
Elapsed period
before change
W. 5o7 Da.
February 3, 1936
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Federal Reserve Bank of St. Louis
5
6
7
6
5
6
5
6
6
7
6
7
6
7
6
7
6
5
7
6
u
1
2
6
3
10
k
1
7
15
Hi
21
10
9
k
1
8
15
29
20
10
18
13
19
27
7
3
6
k
7
1
12
17
17
12
28
February 28, 1953
Board consisted of the following number of
Members during the periods indicated below;
Elapsed Period
Yrs« Mos, Days
Dates
FIVE MEMBERS
February 3-10, 1936
September 30, 1937 - March 30, 1938
April 15, 191*1 - March lH, 19U2
February 1-18, 1952
7
6
10
29
17
T T #
SIX MEMBERS
February 10 - June 25, 1936
July 9, 1936 - September 30, 1937
March 30, 1938 - April 15, 19U1
March 1U, 19U2 - February lU, 19U7
December 2, 19U7 - April 15, 19U8
December 1*, 19b9 - September 1, 1950
March 31, 1951 - April 2*, 1951
July 1U, 1951 - February 1, 1952
June 30, 1952 - February 28, 1953
1
3
U
11
U
2
11
k
8
6
7
10
15
21
15
13
27
1
17
28
17
SEVEN MEMBERS
June 25 - July 9, 1936
February 1U - December 2, 19U7
April 15, 19U8 - December h, 19U9
September 1, 1950 - March 31, 1951
April 2 - July lU, 1951
February 18 - June 30, 1952
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Federal Reserve Bank of St. Louis
1
"7
9
7
7
3
k
~ff
Ik
18
19
12
I?
MEMBERSHIP OF BOARD OF GOVERNORS
(SINCE FEBRUARY 3, 1936)
Iw
1936
1937
1936
1939
191*0
191*1
191*2
191*3
191*1*
1915
191J
191*6
191*9
1950
1951
1952
1953
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Federal Reserve Bank of St. Louis
Eccles
11-15-3U
. Morrison
1 2-10-36 to 7-9-36
to
7-11-51
Ransom
2-3-36
to
12-2-1*7
Davis
6-25-36 to
U-15-1*!
McKee
2-3-36
to
1
IBroderick
2-3-36
Draper
3-30-33
•
to 9-1-50
•
Evans
3-11-1*2
Vardaman
i»-U-li6
1 2-11-1*7
to 12-U-U9
McCabe
1*-15-1*8 to
1
Powell
* 9.1.50
to
6-30-52
1
Mills
2-16-52
Martin
U-2-51
\
3-31-51
Norton
' 9-1-50
to
S
Robertson
2-16-52
2A 1-52
47
<t
Mr. Allan Sjiroul,
President,
Federal Reserve Bank of
Hew York 4$, Hew Tork.
From your letter of July 1&, 1953, 1 gather that you are
under the impression that "political pressures-" were in tome seaae
responsible for the recommendations on Housekeeping advanced by
the Ad Hoc Subcommittee on the Government Securities Market. Let
me reassure you completely on that point. "We in the System have no
need to take account of such pressures* provided only that we are
right, tf our existing organisation cam be defended, we can, as you
say, 'rely on the ordinarily quiet majority in the Congress to support
us if the matter comes to an issue* '
This brings us back to the basic question, "What about our
present organisation? ts it right? Can it be defended on an impartial,
informed and objective basis?0 t have gone over again your comments
on the Ad Hoe Subcommittee Report, both those you made in February
as well as those in your letter of July 16. They have much merit and
i find much in them with which S agree* it seems to me that In most
cases the considerations you advance have been stated either explicitly
or implicitly in the Report of the Subcommittee.
However, I still feel that the organisation of the Federal
Open Market Committee deserves consideration especially with respect
to the position of Manager of the Account, and his relationship to the
eleven members of the Federal Open Market Committee outside New
fork. These eleven members, in your words, share full measure of
responsibility with you for the open market policies of the Federal
Reserve System. At the same time, as you take pains to point out in
your February comments on the Ad Hoc Subcommittee Report, the
management of the Account* if it chooses, may be able to make a
of policy or. its own.
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Federal Reserve Bank of St. Louis
Mr. Allan Sproui
I Am most sympathetic to your strong conviction that there
doc* mot seem to us to be a practicable way, consistent with his duties
either as Reserve Bank President and his location in Hew York, or as
Vice Chairman of the System Open Market Committee and its executive
committee* to lessen the real and special responsibility of the Blew York
President for System operations affecting the Government securities
market. The :;ue*tion, however, is whether it is possible to achieve
a practical organisation of the Federal Open Market Committee that is
also consistent with the duties and responsibilities of the other eleven
members of the Committee. You yourself hold that the Federal Open
Market Committee has no real option to delegate the management of
the Account to any Reserve Bank other than the Federal Reserve Bank
of Hew York. You base this on grounds of "geographical necessity
and practical administration. In view of this situation, does not your
own reasoning, as revealed in your comments and communications,
lead you to the conclusion that the other eleven members of the
Committee are now placed in a position where they share full
responsibility while the President of the Federal Reserve Bank of
Hew York can, if he chooses, be a tree planet" making quite a little
policy on his own?
This is an objective statement of the situation taken from
your own comments without any implications whatever that this has
happened. We are discussing organization,not personalities. 1 do
not think it is fair to you, to the Ad Hoc Subcommittee, or to the
other members of the 0|ien Market Committee, to take the position
that* "giving credit for good faith % we lace no problem in the way
we have organised the Federal Open Market Committee so long as
the institution and the men involved in the present arrangements for
executing open market policy are directly and wholly responsive to
the directions of the Federal Open Market Committee."
The fact is that the present arrangement by which the
management of the Open Market Account is delegated to the Federal
Reserve Bank of New York might, under certain circumstances,
seriously impair public confidence to the Federal Open Market
Committee, particularly if the impression were generated that
members of the Committee were not really in control of operations
or were uninformed with respect to important aspects of them.
That this haaard exists was brought home forcefully to me
in the course of the discussion with the dealer organisations. in
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Federal Reserve Bank of St. Louis
most cases* the discussions were warm and friendly, though cautious
in tone, and, in most case*, the dealers had the friendliest attitude
toward the Federal Open Market Committee, the Subcommittee, the
Federal Reserve Bank of Hew York, and the day-to-day operations
of the Committee* There was an undertone, however, that was
distinctly critical of many of the technical aspects of oar operations.
In most cases, those who were critical felt that these techniques
were not always wisely conceived and that they failed to give sufficient
consideration* to the realities of the marketplace*
How, these critics did not usually blame the management of
the Account. They seemed to feel that the management was working
reluctantly under restrictions imposed by the Federal Open Market
Committee. One reason the dealers gave for welcoming the discussions
was that it afforded them a chance to explain directly to j»eersbers of the
Federal Open Market Committee why they felt that some of its practices
were not well conceived. This caught ail of us on the Subcommittee by
surprise, in some cases* we were not even familiar with the criticised
techniques.
The fact is that our present form of organisation inevitably
leaves individual members of the Federal Open Market Committee in
positions that might be difficult, if not impossible, to defend. For
example, if the discussions before the Subcommittee had been before
a committee of the Congress, as they might well have been, and if a
Congressman, prompted by a hostile dealer, had called up each member
of the Federal Open Market Committee to account for and justify certain
directives for which he shared responsibility, the result would scarcely
have contributed to confidence irn the technical competence of the
Committee,
The problem before us is an organisational problem, it
relates to the discharge of shared responsibilities, It is not the sort
of problem that can be disposed of merely by giving credit to good
faith.
1 agree with you that the problem is created by the 'twilight
cone of operations where the discretion that is necessary to effective
conduct of operations leaves a risk that decisions reached at the policy
level may be modified in execution. Many organisations face this type
of problem. It is not unique to the Federal Open Market Committee.
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Federal Reserve Bank of St. Louis
. Allan Sproul
I am under the impression that the most generally recommended
solution is the one which the Ad Hoc Subcommittee recommended for
consideration by the full Open Market Committee, namelyv (1) that
the policy making body choose an executive in which it has confidence,
(2) that it hold that executive strictly responsible for the objective
exercise of such discretion as is essential to effective operations,
and (3) that it change the executive if it is dissatisfied with his
operations. Delegated discretionary powers, such as we have, in a
situation where the responsible body cannot in practice change the
management is, I think, an anomaly.
After reading your communications, I feel very certain
that the Open Market Committee does face a problem which deserves
the most candid examination.
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Federal Reserve Bank of St. Louis
*.
A...
5*
to* VHHam HcOiesm-y Kartln, Jr.
Promt HBvtborae Arey
Reference Is imde to TOUT meaoranduH for the Satiorml Advisory
Cornell on the subject<twlmding Policies of Export-Import Bank.* The
last paragraph of the TT«ocanniiind Action* provide as follows
*!n order that the volime of new Ifcport~Iapprt Bai& lending,
in the period iaaediately ahead, shall not constitute an undue
financial burden, the Council proposes that each loan application
in the future be subjected to more severe scnitiay, vith the
requiroaent of a aere positive showing that the proposed financing
would be Is the national interest of the United States and that
the funds cannot be raised on reasonable terms from private sources* *
use of the terms *i»re severe scrutiny* and "sore positive
do not establish very accurate tests* The Act under which the Export-»I«port
Bs^c operates requires ftndin|-s along the lines indicated and it is assuwad
that this stat*ient implies either that the Baric win establish tests aore
severe than have been established in the past operations of the Bank or
wore severe than the lair require. I believe it may be asasaed that past
AMMs&rations have been in fall compliance with the lav*
It occurs to mt however, that this paragraph lacks clarity in a
sere important aspect*tt The <iae of the words *in toe period teaediately
ahead* mad the words gliall not constitute an undue financial burdmf
would imH,cate that the purpose of the severe acratlagr of the Bank's
operationa is 1 to miadadjie net drsMags upon the Tr^wBiiy* To1 t^e
that the Bank !* loans do not sxc-eed repayment st the Trcjaamry ^ position
is not adverse^ affected, To the extent that the Bank utilises its power
to guarantee so that only a contingent liability falls upon41the Treasury,
its operations do not "constitute an undue financial burden any raorc than
do tho^ of the I^emational Bank, Accordingly, it would seen that words
should be inserted to indicate that the s»re severe tests are to be applicable in the consideration of those - application*! for loans ¥hlch vould
rot&dre a withdrawal of funds from the Treasury. If the tests are to be
applied on any other ground then it would appear to be illogical for the
Council to take such a position with respect to the Kxport^Isport Bank and
not take an identical position with respect to its Instructions to
United States representatives en the Board of the International
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Federal Reserve Bank of St. Louis
If it is concluded that it is necessary to include a atatment
aiailar to that in your memorandaa, it is suggested that consideration
be giiren to language substantial^ as foUowai
For the period iduediatety ahead, the Council is of the
opinion also that, in the consideration of each application for
a loan lagr the Bank *Meh would require a withdrawal of funds fr«aa
th« treasury, special attention ahcrald be given to (a) the sx.t<mt
to which the nations! interest of the United States is inmlv©df
and (b) the tasa-v^ilabilit^r of funds on reasonable tarns
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Federal Reserve Bank of St. Louis
30UTCC3 »
FEDERAL RESERVE BANK
OF NEW YORK
NEW YORK 45, N. Y.
February 15, 1954
Hon. Wm. McC* Martin, Jr. , Chairman,
Board of Governors of the
Federal Reserve System,
Washington 25, D«, C,
Dear Bill:
In your letter of February 9 you inquire whether I might
have some questions or suggestions concerningthe enclosed galley
proofs of the Board's Annual Report for 1953, I have some views
concerning galley number 4, which I give you frankly, while remaining
acutely aware that this is the Board's Annual Report, and that my views
on the matters discussed, as a member of the Federal Open Market
Committee, have so far been distinctly minority views.
In the first place it seems to me that most of the section
on "Steps toward f r e e r , more self reliant financial markets" takes over
and substitutes for the policy record of the Federal Open Market Committee. While the Federal Open Market Committee rejected the idea of
publishing "rules of the game", this is another step beyond previous
statements, intimations, and interpretations, and beyond the record of
the Federal Open Market Committee itself, which does just that. It
also omits reference to the possibility of change by the Federal Open
Market Committee, which gives the whole thing an air of timelessness
or permanence which could be misleading, and which the Federal Open
Market Committee has renounced. The howl from one or two vocalists
in the market, that we had broken our pledged word when we made some
piddling swaps recently, is perhaps significant.
The transition from a definition of a free market to the
purpose of Federal Reserve purchases and sales of Government securities
in such a market, I find less than clear. I think we must start from the
premise that we haven't a free market as defined, but a market in which
borrowers and lenders have to and do take account of possible action by
the Federal Reserve System to increase or reduce the supply (and cost
and availability) of funds. Then, I think it is sliding over a difficulty
to say that "in such a market Federal Reserve purchases and sales would be
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Federal Reserve Bank of St. Louis
June ?, 1956
To:
Chairman Martin
From: Mr. Riefler
Subject: Letter from Arthur Condon to
Arthur Burns citing effects of credit
restrictions on the trucking industry.
It is a little surprising that a person of the standing of
Mr. Condon would send a letter of this character to an economist of the
standing of Arthur Burns. It appears obvious that the writer is unfamiliar
with the "facts of life" of a competitive economy. There may very well be
undesirable, as well as desirable, effects of credit restraint on the
economy as a whole, and on the trucking industry. We are watching the
situation with the most painstaking care to obtain straws on what is
happening. We welcome information that bears on the point.
Unfortunately, the type of information conveyed in this letter
tells nothing. It is the sort of information that could be gathered and
verified in a competitive economy at any time—in a period of credit ease
as well as credit restraint. It is axiomatic, in a competitive economy,
that some businessmen who would like to expand further their borrowing find
lenders unwilling to go along. This letter does nothing but cite a number
of such individual instances. It implies dire aggregative effects on the
economy, but gives not one scintilla of information that bears on this point.
There are a few facts that one would think would have given the
writer some pause. For example, the output of heavy trucks is running at
record levels. When this is happening, it is a little stiff to have a
supposedly knowledgeable person drag in prophecies of impending collapse
of our national defense due to a failure to replace, modernize and expand
our trucking equipment.
It is also surprising to have a presumably informed person accept,
as a valid explanation, a statement by a bank in Houston that it was refusing to extend a certain line of credit because its consumer credit portfolio was close to the limits it wished to maintain. Anyone remotely
familiar with consumer instalment credit knows that it is written on a
monthly repayment basis, and that a portfolio of this paper will run off
very rapidly unless it is constantly renewed. The statement of the Houston
bank, while couched in kindly language, clearly implied that the bank preferred to confine its new acquisitions to the paper of borrowers other than
the applicant.
Something of the same sort of explanation must apply to all the
other cases of credit turndown cited. The writer of the letter probably
did not realize that the commercial banks in this country now hold business
loans in record volume. As those loans have a fairly rapid turnover, it
follows that the number of new loans being made currently must also be in
record volume. It further follows, axiomatically, that any individual
businessman who fails to secure the loan he desires does not because the
lender is making fewer loans but because he has preferred to loan to
another businessman instead.
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Federal Reserve Bank of St. Louis
-2-
All this is implicit in a competitive enterprise economy, and
therefore tells us nothing of value concerning the general economic situation or of the availability of credit to the trucking industry as a whole.
If Mr. Condon wishes to be constructive and helpful in illuminating the
implication of the current business situation, any aggregative information
he would furnish on the course of total borrowings by the trucking industry
and on total unfilled orders for heavy trucks and trailers would be
illuminating.
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Federal Reserve Bank of St. Louis
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
May 24, 1956.
Dear Arthur:
Thank you for forwarding
the letter In connection with the
trucking industry. I am glad to have
till*.
Sincerely yours t
Wm. McC. Martin, Jr
The Honorable Arthur F. Burns,
Chairman,
Council of Economic
Washiagtoa 25, £>.€.
THE C H A I R M A N OF THE
COUNCIL OF ECONOMIC A D V I S E R S
WASHINGTON
May 23, 1956
Mr. William McChesney Martin, Jr.
Board of Governors of the
Federal Reserve System
Washington, D. C.
Dear Bill:
I think the enclosed letter will be of
interest to you.
Sincerely yours,
Arthur F. Burns
Enclosure
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Federal Reserve Bank of St. Louis
TELEPHONE NATIONAL 8-4O56
J O S E P H E. DAVIES
F R A N K L I N D . J O N E S (1929)
DONALD R.RICHBERG
MILLARD E-TYDI NGS
A L F O N S B. L A N D A
JAMES T.WELCH
RAYMOND C.CUSHWA
C. R O B E R T MATHIS
DELMAR W . H O L L O M A N
ARTHUR D.CONDON
FRIEDA B.HENNOCK
A R T H U R J. C E R R A
CABLE ADDRESS"DAVJON"
LAW O F F I C E S
DAVIES, R I C H B E R G , T Y P I N G S & L A N D A
A D R I E N F. B U S I C K
OF COUNSEL
IOOO VERMONT AVENUE, NORTHWEST
W A S H I N G T O N 5, D. C.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
-- -
J^KlwS|^^Bw
A «&^p&«r
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PAUL H. DOUGLAS. ILL., CHAIRMAN
JOHN SPARKM AN. ALA.
J. W. FUUBRIOHT, ARK.
JOSEPH C. 0-MAHONEY. WYO.
JOHN F. KENNEDY, MASS.
PRESCOTT BUSH, CONN.
JOHN MARSHALL BUTLER. MO.
JACOB K. JAVITS, N.Y.
JOHN W. LEHMAN. CLERK AND
ACTING EXECUTIVE DIRECTOR
Congress of tfjc Untteb
WRIGHT PATMAN. TEX.. VICE CHAIRMAN
RICHARD DOLLING, MO.
HALE BOGGS. LA.
HENRY S. REUSS, WIS.
FRANK M. COFFIN. MAINE
THOMAS B. CURTIS. MO.
CLARENCE E. KILBURN, N.Y.
WILLIAM B. WIDNALL. N.J.
JOINT ECONOMIC COMMITTEE
(CREATED PURSUANT TO SEC. 3(«) Of PUBLIC LAW J0«. »TH CONORESB)
March 12, 19bO
The Honorable William McChesney Martin, Chairman
Federal Reserve Board.
Washington 25, E). C.
My dear Chairman Martin:
We are addressing this letter to you in the hope that the Federal Reserve
Board may adopt certain very definite reforms which, if•accompanied by parallel
action on the part of the Treasury, may remove or greatly lessen the very real
dangers to the people of the United States which we believe would "be created by
the lifting or removal of the interest ceiling on long-time government bonds.
Combined with needed Treasury reforms, these would have the effect of increasing
the price and lowering the yield and hence the interest rate on government oonds
without resorting either to "pegging" the market or inflationary devices. Somewhat similar proposals for reforms were made to you during 1959 anci in January
of this year by certain majority members of the Joint Economic Committee. At
those times you were firm in your refusal to accept these reforms.
We wish to help the country and reduce the tension which is developing
between the Board and a large section of Congress, and we hope that further
reflection upon these matters may have induced a greater willingness on your
part and that of the Board to reconsider basic issues of policy.
We now appeal to you to signify your intent and that of the Board to make
at least four basic reforms or improvements in the conduct of the Board's affairs:
1. To recommend the establishment of margins on the purchase of government
securities by customers of security dealers, and to regulate the activities of
the security dealers themselves.
As the debacle of the summer of 1956 clearly showed, it is intolerable that
there should be such widespread speculation in government securities on infinitesimal
or non-existent margins. This can be damaging to the credit of the united States
of America, we have waited for you to give us a lead on this matter on the basis
of your long study of the incident and have been disappointed by your silence and
your failure to act.
This offers the possibility of fruitful cooperation between your Board arid
Congress, and if you will assign some of your experts to work with us, we shall be
glad to draft legislation which will deal with the great abuses which have been
revealed and yet be fair to all parties.
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Federal Reserve Bank of St. Louis
- 2Honorable William McChesney Martin
2. A second reform which we believe the Reserve Board should adopt is to
abandon its "bills only" policy. We have scarcely been able to find a single
competent economist who endorses this policy to which, with rare exceptions,
you have held for so many years. The abandonment of this mistaken policy would
be desirable in itself and would clear the way for further reforms.
3. In our judgment, it is imperative that you should, over a period of
time, permit an increase in the money supply (currency plus demand deposits) at
approximately the same rate as that at which the real gross national product is
growing. This would not be inflationary. Rather it would be a stabilizing force,
We regret that,during the years from 1953 to 1959 when the economy was
growing at the excessively slow rate of 2.3 percent a year, your Board would only
permit the money supply to grow at the still slower rate of 1.8 percent a year.
The increase in population cut the growth of the money supply on a per capita
basis to . l percent per annum.
In our judgment, this slow rate of growth was
one of the causes which artificially increased the interest rate and hence
retarded home building, expansion by small business, and state and local investment. It was therefore one of the causes for the increasing unemployment during
this period and for slowing down the rate of growth itself.
We must honestly state that your failure to expand the supply of money at an
adequate rate has been in large part responsible for this.
Let us, 'however, emphasize two things: First, we want relative stability in
the price level, with the long-time growth in the money supply only matching the
long-time growth in the real gross national product.
Second, we are not opposed to some cyclical variations in the growth of the
money supply. The availability of credit could, for example, be relatively
increased in periods of recession or depression, or slightly dampened down in an
undue upswing. But -these variations should not be used to alter the long-run
policy of expanding the money supply in line with the increase in the production
of goods and services so as to avoid both inflation and deflation, but also with
a view to maximum employment and adequate growth.
4. The Federal Reserve should use open market purchases to provide the
increase in member bank reserves for the needed long-time or secular expansion
of the money supply. Taking normal velocity into account, this would be at the
rate of about 3 to k percent per year.
As you know, such expansion could be achieved by one of two ways: a) the
reserve requirements of the member banks could be lowered; or b) the same end
could be accomplished by open market purchases.
You hav.e stated publicly that you felt that the reserve ratios should be
lowered still further and the banking system appears to be aiming for an
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 3Honorable William I'IcChcsney l^irtin
ultimate average level of about ten per cent as preferable to the present
level of approximately 16 per cent. A reduction in reserve requirements
from 16 to 10 per cent vould support , with present member bank reserve balances, ^ an expansion in demand deposits from the present $110 billion to
about Ol90 billion, or an increase of $80 billion.
If the creation of this $80 billion is accomplished by lowering reserve requirements, it vould be done without any increase in the capital
assets and earnings of the Federal Reserve System. The interest on these
additional sums and the profits fxom this great expansion of credit vould
accrue entirely to the private commercial banks, without the Reserve System
or the government sharing in the profits then made through having delegated
the governmentfs power to create monetary purchasing power or money to the
banks. In other words, private banks will get all the interest and profits
on this money, with little or no cost to themselves. In these circumstances,
one can understand why the banks are so anxious to use this method and why1
those who support the banks find it possible to justify this method. Hugo
sums are at stake.
According to Federal Reserve System figures, the average rate of earnings of member banks on their combined capital, surplus and undistributed
profits in 1958, the last full year for which figures are available, was
17.3 per cent before taxes and 9-7 per cent after taxes.
In view of the fact that the risks of bank stockholders have "been decreased in the last decade* by the guarantee of bank deposits and the abolition of double liability, this rate of earnings on capital arid surplus (accumulated from prior earnings) would seem to be amply adequate.
Now, if you feel that the private banking systen of the country, whose
major source of profit is the loans and deposits created by the fractional
reserve system at little cost to the banks ther.ise3.ves, deceives higher rates
of earnings than these, then you should frankly say so for the record and
justify your reasons. You should do this for that would "be the effect of
creating the long-run, needed expansion of the money supply by the method
of reducing reserve requirements which you advocate.
If instead, the creation of these amounts is done "cy open market purchases, the government will get £O per cent of the interest and profits on
one- sixth of the $30 billion, or on about 013-1/3 "billion. The banks will
still receive the interest and profits on $66-2/3 "billion. Certainly the
banks should not be unhappy to see the government and the people get this
small profit for the delegation to them of the Constitutional power of the
Congress to "coin money and regulate the value thereof."
As you understand, if the ex-pans ion were accomplished by open market
purchases, then the Federal Reserve System vould acquire added earning assets
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Honorable William liceiiesney I&rtin
of approximately $13-1/3 billion in Government bonds over the years at an
initial rate of about $570 million a year and an average rate of about
million per year.
At k per cent interest, this would mean initial earnings of approximately $23 million a year and rising by slightly more than this amount each
year to over i&6 million in the second year, '$69 million the third year,
etc., until at the end of the period, the annual added earnings would be
approximately $9^0 million a year and would continue from then on. The cumulative amounts of these earnings which would accrue to the Federal Reserve
system in the period would be over $4.5 billion. Under prevailing practices,
at least 90 per cent of these sums, or over «)4 billion, would: "be turned over
to the Treasury.
These nay seem to be small and inconsequential amounts to you, ilr.
Chairman, but to the hard-pressed taxpayers of this country and the members
of Congress charged with the duty'of fiscal responsibility, they are of great
importance. They would help to balance the budget and provide needed services.
Moreover, the large volume of annual purchases of government bonds would raise
their prices and lower their yields and hence lover the "basic interest rates
on governments about which you and the Treasury have been complaining.
This' action, along with 'a more appropriate fiscal policy, would res-alt
in long-term interest rates well below the V£ per cent ceiling and would
make the question of whether the ceiling should be removed largely an academic
one.
Instead of focusing on the question of the symptoms of our problem, namely
the Jfrj- per cent ceiling, we urge you and the Treasury to get at the "basic
causes of the problem, namely excessively high interest rates in a period
characterized not by full employment, forced draft growth, and inflation but
one characterized by excessive unemployment, a slow rate of grotrbh, and stable
prices.
Ue should emphasize that we are not proposing that present reserve requirements be raised but that they be kept at existing levels. Thus, we are
not advocating that the government's share in the creation of additional purchasing power be increased, but merely that it not be reduced, as you would
have it done.
When we have questioned you on this issue, you have objected on the
grounds that in tines of recession, lowering reserve requirements may be, a
faster and quicker way of expanding credit than through achieving these effects by open market purchases.
However, this answer has to do .with the short-run and does not affect
the question of the secular or long-run expansion about which we are concerned.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 5The Honorable Uilliam McChesney JMarfcin
It nay "bo proper to lover and raise reserve requirements for cyclical
or short-run purposes. Yet during the years 1951 to I960, a period dominated
by the tight money policy of the Federal Reserve System, the Federal Reserve
has lowered, reserve requirements during recessions but has not subsequently
raised then during periods of expansion. The effects, therefore, have been
to lower reserve ratios permanently.
In other -words, since 1951 you have not raised reserve requirements and
hence have not used them as a counter cyclical weapon in periods of expansion.
This fact seriously diminishes the force of the single argument you have used
in opposition to our view that open market operations are to be preferred, to
the method of lowering reserve requirements for secular expansion. In the
first place, you have been using a short-run argument in reply to our point
that the long-run expansion should occur by open market purchases. In the
second place, even in the short run you. have not used reserve requirements
fully as a counter cyclical weapon for they have been changed only downward
and have not been raised.
With respect to the long run, the \xltimate effects of the two methods
would, as you have admitted, be the same. Even the immediate effects would
be stibstantially -similar. The public interest calls for using the open market purchase method for the long run or secular expansion of the money sxroply
and ve call upon you and the Federal Reserve Board to issue a clear statement
of policy to that effect.
In short, we believe that a proper sense of fiscal responsibility should
lead you (l) to work cooperatively with Congress for requiring margins on
the purchases of government bonds and for proper regulation of that market,
(2) to abandon the discredited "bills only" policy, (3) to effect the longtime increase in the money supply at approximately the same rate as the
growth in the real national product, and 00 to do this by open market operations rather than by lowering reserve ratios.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Ive will welcome your cooperation for these worthy ends.
With best wishes,
Sincerely yours,
Dear
:
Thanks for your letter of
0
I can understand
your bewilderment at the scope and variety of published speculation
concerning relationships between the incoming administration and me,
of the
for I am bewildered by it myself, including many/ideas, opinions,ra
conclusions and attitudes I have seen attributed in print to me*
You are very thoughtful to express
concern to me, but please
do not be troubled on my behalf. Let me try to explain how I do feel
about these mat ers&
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Possible material for use in
letter re position
12/20/60
CM
On February 7, 195>lj more than a month before the Treasury
-Federal Reserve "Accord" and nearly two months before I entered upon
7
C^
!f£±^£^;ev'
service with the Federal Reserve System, the Washln^toWEvening Starj
*b—
**
/te+v
published an editorial entitled "Our Threatened Dollar" that began
A
this way:
"It is unfortunate — exceedingly unfortunate —
that the really important facts of the difference of opinion
concerning our Federal monetary policy are in danger of being
submerged and lost in a clash of personalities0
»*The personality aspect is not very important,. The
economic future of this country does not depend upon what James
K» Vardaman thinks of Marriner Eccles, what Mr. Eccles may think
of Secretary of the Treasury Snyder, or upon what any or all of
them think about the President*, A great deal does depend, however,
on whether Mr. Eccles or Mr* Snyder is right in the matter, and
whether the correct view prevails*
I* The one thing that is clearly at stake, and which is of
much greater importance to the country than the status of any of
the individuals involved, is the future value of the American
dollar. No one has to be told that the purchasing power of the
dollar — its real measure of value — is shrinking. If this
shrinkage continues it is only a question of time until public
confidence in the dollar disappears aid the public cfedit will
be destroyed* If that time mini inifwr comes, our capitalist
society is done for, and we will move, whether we like it or
not, into some form of tightly regimented, socialistic economy <,«,«**
^
Although the particulars set forth have changed' alto-
fl
^terreningdecade,
gether in the Q^H'i'jMrfiFiT~r T'l u Mmtohit <rt1 1i nn1 ijl TTTI B LTnr1fctrrnf| the general
philosophy or principle s th&n stated seem to me to be as true now
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
as when that editorial vras written*
!$r own interest, accordingly, is focussed upon just two
things: 1) that a genuine effort be made, by those in authority, to
preserve the purchasing power of the dollar that is so vital to our
economy and the preservation of our society; and 2) that the Federal
4sH^£C*sjt &*-<-* *~ *-*~
Reserve be allowed the freedom from political/p9=e&s«p«rnecessary for
^
it to contribute its part to that eff ort<>
— not
It is these things that matterjaarthiPi thnn-what happens
A
to me0 If these values are preserved, then what happens to me or what
I do in the future certainly can be classified as a matter of indifference
to all, and most particularly so to me0
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
OP THE
FEDERAL R E S E R V E SYSTEM
Office Correspondence
Date
January n, 1961.
To
Chairman Martin
Subject:
Reply to James Tobin's article
Prom
James L. Knipe
in "Challenge." issue of January, 1961.
These comments, drafted in letter form, may be useful if
attached to the reprint of the article in your file. I had not
fully realized, on first skimming, just how unfairly Tobin's article
was written.
In view of his new post, I suggest that you give consideration to sending him some sort of a letter, or inviting him over for
lunch, or taking some other action. Perhaps such bias as he now
seems to have is sufficiently important to justify action of some
kind rather than to let the matter drop?
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
January 11, 1961,
Dear Mr. Tobin:
Tour article which appeared in the magazine "Challenge11 (January, 1961, issue) deals with matters which are of great concern to us
in the Federal Reserve System. I am sure you want to know how we view
the facts with which you deal, and I am also confident that you
welcome the expression of our opinions on the various issues under
discussion.
We are, of course, in full agreement with your conclusion,
that it would be most unfortunate if the Congress, the Administration,
and the Federal Reserve System (a creation of the Congress) were
unable to reach general agreement on broad financial and economic
policies for the nation. Such agreement always has been reached,
despite occasional differences of opinion on specific problems, throughout the forty-eight years of the System's existence. Over those years
the System has appeared to hold views on specific matters a bit closer
to those of the Congressional leadership at some times and to the
Administration at other times. In every case, at least during the ten
years about which I can speak with direct knowledge, I am certain that
System policies have been formulated with the independent and nonpartisan regard for the national welfare which is expected of us by
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Draft
Mr. James Tobin
-2-
January 11, 1961
Congress and the Administration. Whatever inadequacies there may be in
the record—and we are proud of the record—arise out of human
fallibility in carrying out the difficult task of devising and implementing central bank policies which will be most conducive to the
nation's economic health.
Along this line, permit me to point out, simply as an example,
that significant differences of opinion have occasionally arisen in
recent years, notably in 1956 and 1958, between the System and the
Administration.
It is not accurate for you to say, "Since 1953 the
Board of Governors of the Federal Reserve and the Administration have
been in uncoerced and enthusiastic agreement on the broad lines of
policy.11
The differences which were reported in the press during the
years mentioned were not the only ones which existed.
Others were
ironed out in the series of conferences which have been held steadily
and frequently throughout the years. These conferences with
Congressional leaders and Administration officials have made possible
the constant airing of all problems and have resulted in what we regard
as a fine atmosphere of understanding and cooperation.
The problems with which the Federal Reserve is concerned are,
of course, precisely the same ones with which Congress and the Administration are dealing. Everyone with any share of the responsibility
for a viable, growing American economy is eternally beset with the
dilemma of how best to attain a satisfactorily high level of employment,
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-3-
January 11, 1961.
a sufficiently rapid rate of national growth, and a reasonably stable
purchasing power of the dollar.
In one sense, our share of the responsibility is more onerous
simply because it is so restricted, as compared with the all-embracing
power of Congress and the wide scope of Administration responsibility*
Congress, for instance, can change the institutional structure in the
wage-price area, if necessary, and can alter fiscal and tax policies,
just as it can make statutory changes in the structure and functioning
of the Federal Reserve System, if it wishes.
Looked at from another angle, our share of the responsibility
is less burdensome in that we have relatively little to do with such
great national issues as the foreign aid programs, and the accompanying
balance-of-payments troubles.
These troubles eventually plague us in
our work, but all we can do is to recognize that they exist and deal
with them as best we can. We do not feel that you convey a fair
impression of the nation's international problems when you write, "But
the dollar has come to its present pass under those very policies,
administered by a conservative Administration and an independent central
bank, both dedicated above all to sound finance."
Surely it is not your
feeling that a "liberal" Administration, and a "dependent" central bank,
both dedicated to unsound finance, would have avoided the present balanceof-payments problem? You are just as fully aware as we are that the gold
outflow is largely an outgrowth of the international necessities forced
upon the United States if it is to play its proper role in a deeply
disturbed world.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Draft
Mr. James Tobin
-4-
January 11, 1961.
Each of us has a perfect right to hold an opinion with respect
to the attitudes, motives, and philosophies of any agency or individual.
You will understand, I am sure, when I differ strongly with several
of the opinions which you express about the Federal Reserve.
First,
we do not feel that there is a M. . . single correct policy—namely
the course which, within the limits of human error, the Fed pursues."
I do not know of any group of men more willing to spend long hours in
study and discussion attempting to mold an institution's policies to the
needs of the times.
Second, I think it grossly unjust for you to suggest, "This
conviction may lead the Board of Governors to resist and to frustrate
any effort ... to gear the federal budget and other instruments of
economic policy to higher levels of employment and production."
I am
confident that, as you think over such a suggestion, you will recognize
that it should never have been made. Third, in similar vein, you
comment, "In the era of Eisenhower, Martin, Humphrey, and Anderson,
the operative belief has been, or often seemed to be, that monetary
control and debt management cannot be effective unless they are
expensive, and the more costly the more effective." I cannot believe
that you, as an economist, think that the rise in interest rates which
always accompanies a business cycle peak was deliberately brought about
by the President of the United States and some of the country's
financial officials.
Fourth, in discussing the Treasury's debt-management policies,
you write, "The Treasury, seconded by the Federal Reserve, has favored
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-5-
January 11, 1961.
contracyclical variation of the maturity structure, issuing long-term
obligations in place of more liquid short-term ones to fight inflation,
and also issuing shorts in place of longs to combat recession." This
statement is not correct. The Federal Reserve has refrained at all
times, rightly or wrongly, from trying to advise the Treasury on the
broad aspects of its debt-management policies.
The Federal Reserve System needs and, we believe, deserves
the sympathetic aid and criticism of the Government officials who are
concerned with these economic and financial matters. As a completely nonpartisan organization, we are not consciously swayed in our judgments
by either Party's programs or philosophies.
In Committee Hearings, in
conferences, and through written reports, we are constantly exposing
our reasoning, so that the Congress and the Administration are always
fully informed and thus in position to give advice or take any other
action which seems proper to them.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
January 11, 1961.
Chairman Martin
James L. Knipe
Reply to James Tobin's article
in "Challenge,1* issue of January, 1961.
These comments, drafted in letter form, may be useful if
attached to the reprint of the article in your file. I had not
fully realized, on first skimming, just how unfairly Tobin's article
was written.
In view of his new post, I suggest that you give consideration to sending him some sort of a letter, or inviting him over for
lunch, or taking some other action. Perhaps such bias aft he now
seems to have is sufficiently important to justify action of some
kind rather than to let the matter drop?
Attachment
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
FIRST DRAFT
Letter to James Tobin
January 11, 1961.
Dear Kr. Tobin i
Tour article which appeared in the magazine "Challenge" (January, 1961, issue) deals with matters which are of great concern to us
in the Federal Reserve System. I am sure you want to know how we view
the facts with which you deal, and I am also confident that you
welcome the expression of our opinions on the various issues under
discussion.
We are, of course, in full agreement with your conclusion,
that it would be most unfortunate if the Congress, the Administration,
and the Federal Reserve System (a creation of the Congress) were
unable to reach general agreeinent on broad financial and economic
policies for the nation. Such agreement always has been reached,
despite occasional differences of opinion on specific problems, throughout the forty-eight years of the System's existence. Over those years
the System has appeared to hold views on specific matters a bit closer
to those of the Congressional leadership at some tisies and to the
Administration at other times. In every case, at least during the ten
years about which I can speak with direct knowledge, I am certain that
System policies have been formulated with the Independent and nonpartisan regard for the national welfare which is expected of us by
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Draft
Mr. James Tobin
~2-
January 11, 1961
Congress and the Administration. Whatever inadequacies there may be in
the record—-and we are proud of the record—arise out of human
fallibility in carrying out the difficult task of devising and implementing central bank policies which will be most conducive to the
nation*s eeonosdc health.
Along this line, persdt ne to point out, simply as an example,
that significant differences of opinion have occasionally arisen in
recent years, notably in 1956 and 195&, between the System and the
Administration. It is not accurate for you to say, "Since 1953 the
Board of Governors of the Federal Reserve and the Administration have
been in uncoerced and enthusiastic agreement on the broad lines of
policy." The differences which were reported in the press during the
years mentioned were not the only ones which existed. Others were
ironed out in the series of conferences which have been held steadily
and frequently throughout the years. These conferences with
Congressional leaders and Administration officials have laade possible
the constant airing of all problems and have resulted in what we regard
as a fine atmosphere of understanding and cooperation.
The problems with which the Federal Reserve is concerned are,
of course, precisely the same ones with which Congress and the Administration are dealing. Everyone with any share of the responsibility
for a viable, growing American econou^- is eternally beset with the
dilessna of how best to attain a satisfactorily high level of employment,
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
a sufficiently rapid rate of national growth, and a reasonably stable
purchasing power of the dollar.
In one sense, our share of the responsibility is asore onerous
simply because it is so restricted, as compared with the all-embracing
power of Congress and the wide scope of Administration responsibility.
Congress, for instance, can change the institutional structure in the
wage-price area, if necessary, and can alter fiscal and tax policies,
just as it can make statutory changes in the structure and functioning
of the Federal Reserve System, if it wishes.
Looked at fro© another angle, our share of the responsibility
is less burdensome in that we have relatively little to do with such
great national issues as the foreign aid programs, and the accompanying
balanee~of~paym@nts troubles. These troubles eventually plague us in
our work, but all we can do is to recognize that they exist and deal
with them as best we can. We do not feel that you convey a fair
impression of the nation's international problems when you write, "But
the dollar has come to its present pass under those very policies,
adadnistered by a conservative Administration and an independent central
bank, both dedicated above all to sound finance." Surely it is not your
feeling that a "liberal" Administration, and a "dependent" central bank,
both dedicated to unsound finance, would have avoided the present balanceof-paysents problem? tou are just as fully aware as we are that the gold
outflow is largely an outgrowth of the international necessities forced
upon the United States if it is to play its proper role in a deeplydisturbed world.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Draft
Mr. James Tobin
~4-
January 11, 1961.
Each of us has a perfect right to hold an opinion with respect
to the attitudes, motives, and philosophies of any agency or individual.
Tou will understand, I am sure, when I differ strongly with several
of the opinions which you express about the Federal Reserve. First,
we do not feel that there is a w. . . single correct policy—namely
the course which, within the lislts of human error, the Fed pursues."
I do not know of any group of men more willing to spend long hours in
study and discussion attempting to raold an institution's policies to the
needs of the times.
Second, I think it grossly unjust for you to suggest, "This
conviction nay lead the Board of Governors to resist and to frustrate
any effort ... to gear the federal budget and other instruments of
economic policy to higher levels of es^loyment and production." I am
confident that, as you think over such a suggestion, you will recognize
that it should never have been made. Third, in similar vein, you
eoxmnent, "In the era of Elsenhower, Martin, Humphrey, and Anderson,
the operative belief has been, or often seeaed to be, that monetary
control and debt isanageroent cannot be effective unless they are
expensive, and the more costly the more effective.*1 I cannot believe
that you, as an economist, think that the rise in Interest rates which
always accompanies a business cycle peak was deliberately brought about
by the President of the United States and some of the country's
financial officials.
Fourth, in discussing the Treasury's debt-management policies,
you write, t!The Treasury, seconded by the Federal Reserve, has favored
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Draft
Kr. James fobin
-5*
January 11, 1961.
contracyelieal variation of the maturity structure, issuing long-term
obligations in place of more liquid short-term ones to fight inflation,
and also issuing shorts in place of longs to combat recession." This
statement is not correct. The Federal Reserve has refrained at all
times, rightly or wrongly, from trying to advise the Treasury on the
broad aspects of its debt-management policies.
The Federal Reserve System needs and, we believe, deserves
the sympathetic aid and criticism of the Government officials who are
concerned with these economic and financial matters. As a completely nonpartisan organisation, we are not consciously swayed in our judgments
by either Party*s programs or philosophies. In Committee Hearings, in
conferences, and through written reports, we are constantly exposing
our reasoning, so that the Congress and the Administration are always
fully informed and thus in position to give advice or take any other
action which seems proper to them.
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Federal Reserve Bank of St. Louis
February 16, 1961.
Chairman Martin:
As you will note, the attached has nothing to do
with the work of the Division of Examinations.
It relates instead to a possible new security
that mi$it help to solve some of the current problems of the
relationships between long-term and short-term interest rates.
The memorandum attempts to summarize the idea,
which is based on a thesis I prepared in 19l]l for the Graduate
School of Banking* (The British Treasury briefly used a similar
security in the 1920!s.)
If the general idea seemed to you to have merit,
it could, of course, be developed further as you might think
appropriat e,
Frederic Solomon
Attachment
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Federal Reserve Bank of St. Louis
2A6/61
A NEW SECURITT TO HELP HOLD LONG-TERM INTEREST
RATES DOWN AND SHORT-TERM R&TES UP
PH3POSAL; The Treasury would issue a long-term or medium-tern? security
that would pay interest for each interest-payment period at a rate equal to the
average of the rates at which short-term Treasury bills had been auctioned
during the period.
A floor of say 1% per annum, and a ceiling of say, 1% per annum,
might be provided.
MECHANICS AND UNDERLYING PRINCIPLES; These are explained in a thesis entitled "How Variable Interest Bonds Can Help to Solve the Problems of Liquidity,
Depression, and Defense1*. As shown there, the tying of the security's interest
payments to short-term rates could be expected to maintain its market price
approximately at par (just as Treasury bills show only slight market fluctuations).
The thesis was prepared for the Stonier Graduate School of Banking operated by
the American Bankers Association at Rutgers University, and is on file at the
Graduate School Library, 12 East 36th Street, New York City.
ADVANTAGES; The new security would have the market characteristics of a
short-term security. Hence, its issuance would have the effect of shifting the
given volume of securities from the long-term to the short-term market, with a
resulting shift of downward pressures on interest rates from the short-term to
the long-term areas.
At the same time, the security would have the refinancing characteristics of a longer-term security. Since it would not have to be frequently
refinanced, it would ease the problems of the Treasury and lessen interference
with Federal Reserve operations.
Since the security probably would maintain a relatively stable
market price approximately at par, it probably could be placed on continuous
("tap") offer, or made available on frequent auctions (like Treasury bills),
with a minimum of market disturbance*
TO FACILITATE THE NEW SECURITY'S INTRODUCTION;
1. There should be thorough advance explanation of the security's
features and advantages.
2. The new security probably should be made available as an
alternative open to purchasers on some offering.
3« The first issues of the new security probably should have
a relatively early maturity, say, 3 to 5 years. After the principle proved
itself in the market, it could be applied to longer maturities.
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Federal Reserve Bank of St. Louis
/
September 19, 1961,
Mr. Allan B. Kline,
4209 Grove Avenue,
Western Springs, Illinois,
n
tat
tr«j
Dear
Mr.
Klines
Chairman Martin asked me to writ« to you about the relative
merits of the administrative, cash and national income account approaches
to analysis of the fiscal position of the Federal Government.
As is pointed out in the August Monthly Review of the Federal
Reserve Bank of Kansas City, which I understand you have seen, each approach has a distinct usefulness in helping to provide the answers to
certain questions. It cannot be said that one is superior to another
for all purposes. The uses of the administrative budget are, of course,
as the name implies, administrative rather than economic. It is obviously indisputable for the purpose for which it is intended; i. e.,
the consideration of implementing legislation, appropriations and revenue measures by the Congress.
•
The cash budget, as you understand I am sure, is most significant in focusing on the net new borrowing or repayment of debt which
result from the Government's operations in a given period. In assessing the effect of fiscal policy on the money market and evaluating the
Treasury's financing problems, it is clearly the most useful formulatioa,
The surplus or deficit in terms of the national income accounts
differs from the cash accounts primarily in that it treats the accounts
on an accrual basis, rather than a cash basis, and in focusing on Government outlays for goods and services* It does not include Government
outlays under lending or other financial programs. It tends to focus
attention on the effect of the Governments fiscal policies on the rest
of the economy, rather than on the financial problems of the Government
itself. Perhaps this can be made clear most easily in terms of an
example. In the cash budget one includes in any given period the tax
payments actually made by individuals and corporations during the period.
In the national income accounts approach, the tax liabilities accruing
in the period are substituted for the payments made. From the point of
view of the effect of taxes on business-men's decisions, this latter
approach might be more meaningful, since, for example, in a year of high
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Federal Reserve Bank of St. Louis
M E R C A N T I L E TRUST
COMPANY
SAINT L O U I S 66, MO.
S I D N E Y MAESTRE
CHAIRMAN OF THE EXECUTIVE COMMITTEE
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Federal Reserve Bank of St. Louis
December 16, 1963
Mr. Win. McC. Martin, Jr.
Chairman
Board of Governors
Federal Reserve System
Washington, D. C.
Dear Bill:
I had planned to write you before receiving
your letter of December 13. It was very thoughtful of you to write me, and I do greatly appreciate the statements you have made.
I can only say that I enjoyed my association
with you, the members of the Federal Reserve Board,
and my fellow bankers, and I do hope I contributed
something.
My final report to the Directors of the
Federal Reserve Bank of St. Louis was made last
Thursday, and my concluding remarks were that I
hoped they would do everything within their power
to keep you as Chairman in Washington.
With every good wish, I am
Sincerely,
tre
FIRST NATIONAL BANK
IN WICHITA
WICHITA, K A N S A S
CHARLES J. CHANDLER
December 30, 1963
Dear Bill:
Just a line to commend you and the
other members of the Board for the issuance
of the statement on December 26th. It
means a great deal to those of us who are
interested in sound banking to have the
Board take the stand that it has on this
and other occasions in opposition to the
unwise and, if I may say so, ill-considered
actions of the Comptroller.
{Please do not trouble to respond.
My warmest regards.
Sincerely,
Mr. Wn. McC. Martin,Jr.
Board of Governors of
the Federal Reserve System
Washington, D. C.
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Federal Reserve Bank of St. Louis
OF MEMPHIS
ALLEN M O R G A N
CABLE " F I R B A N K "
December 26, 1963
"Our 100th Year"
PRESIDENT
PHONE
5Z7-668I
The Honorable William McC. Martin, Jr.
Chairman of the Board of Governors
Federal Reserve System
Washington, D. C.
Dear Bill:
Thank you for writing me about my appointment as a director of the
Memphis Branch of the Federal Reserve Bank of St. Louis. I will
be attending my first official meeting in January and am looking forward to seeing you when I am in Washington.
Bill, you are doing a grand job for your government, as well as the
banking system. It is wonderful to see a man so dedicated and able
serving as Chairman of the Board of Governors of the Federal Reserve
System.
I remember the wonderful speech you made when you were president of
the Export-Import Bank and I would certainly welcome having you back
down here for a speech, as well as have you as my doubles partner for
some tennis.
Best wishes for a happy and prosperous New Year.
Sincerely,
AMrln
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Federal Reserve Bank of St. Louis
Memorandum for the President
-2*
4. What the Fed can and does 40 is 10 control the volume 01
reserve* available to the basking system. I his, in turn, influences
the volume of bank credit and money that the banking system can
create, which is one important factor, along with the flow of savings
and the investment decisions of business, that goes into the determima
tion ©f Interest rates. Within limits, the marginal influence of the
Federal Reserve Is very important, but it is not determinative In any
absolute sense.
§. Monetary policy should not, and la fact cannot, b* focused
solely on interest rate objectives --any more than It can ignore them
completely as some economists argue that It should.
4. The immediate goal of monetary policy should be to pro*
vide the reserves needed to support a rate of growth la bank credit
and money which will foster stable economic growth.
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Federal Reserve Bank of St. Louis
(a) It must take into account the international position of
the dollar* -for a collapse of the dollar as a reserve
currency would certainly make havoc of our efforts
to achieve stable growth. This continues to be a
national danger.
(b) It must be constantly concerned for the full employment of both hum »n and physical resources.
(c) It must take laid account price developments and the
possibility of inflation, or the widespread expec t* tion
of inflation, which woulcl do great damage to heatthy
growth.
.
(d) It must surely also take into account interest rates
and credit availability, te be certain thai, without
doing violence to the other essential components of
stable growth, it Is providing the maximum possible
stimulus to the investment expenditures which are
the basis of future growth.
It cannot ignore, as much as It might like to do so*
the soundness of the Individual obligations that go to
make up the growing total of public and private debt,
for even a sisabie minority of unsound loans could
bring the whole structure down on our heads.
i
(t)
It irmst also be concerned with current output and
sales. Credit must be readily available to move
goods to market and from the market to the hands
of the consumer on term* and at rate* that arc as
reasonable as possible.
7. All these things, and many others, mast b« constantly
weighed and balanced by the Open Market Committee at it* iri-weekly
meetings. We cannot produce, through monetary policy alone, high
or low interest rates, balance of payment* surpluses or "Deficits*
rising or failing prices, more or less employment, or a sound or
mnsound financial structure. We do exert some influence on all
these thing*, hopefully to the right direeti0a-~that of sound and
sustainable expansion.
i. I believe that the record el the Administration and of the
Federal Eeserve in this period of expansion is aa excellent erne* The
fact Is that ample credit has been available to finance aa expansion
in GNF which was substantially larger than most private and Government observers anticipated a year ago. Credit remains readily
available. Mortgage interest rates» probably the most important
rates from the point el view of the general pabiie and in their
impact on over-ail economic activity, are below a year ago, and
corporate and municipal rates are still below the levels they reached
in 1961, the first year of recovery.
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Federal Reserve Bank of St. Louis
WM.
Win, McC. Martin, Jr.
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Federal Reserve Bank of St. Louis
.'ME CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVlSCR*
WASHINGTON
Confidential
January 5, 1964
MEMORANDUM FOR THE PRESIDENT
Subject: Tighter Money in 1964?
1. Financial observers are increasingly predicting that interest rates
will rise in 1964.
2. This prediction rests on (a) expectations of expanding business that
will boost the demand for credit and (b) statements by Federal Reserve officials. Sylvia Porter's bond letter of December 20 says:
"The market reacted very strongly to remarks by Federal Reserve
Chairman William McChesney Martin, Jr. , about the likelihood of
higher interest rates when the economy expands . . , . M
3. During 1963, interest rates rose substantially:
- - o n 3-month Treasury bills, from 2. 89% to 3. 52%.
-- on long-term U. S. Government securities, from 3.85%
to 4.16%.
- - o n high-grade municipal bonds, from 3. 11% to 3. 32%.
- - o n corporate Aaa bonds, from 4. 23% to 4. 37%.
4. The average yield on long-term U. S. Government securities is now
only l/4th of a percentage point below its weekly postwar peak in
I960. This level has been exceeded in only about 6 months since
the War.
5.
The case for higher interest rates to date has been -- quite rightly
-- that they were needed to help reduce our balance-of-payments
deficit.
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Federal Reserve Bank of St. Louis
-2-
6. Now, bankers are beginning to suggest that we need higher interest
rates for domestic reasons - - t o meet a threat of inflation or to protect the "quality of credit.11
7. Some people think that it's somehow "natural11 or "healthy11 for interest rates to rise when demand for credit increases -- that it
would be wrong for the money managers to increase the supply of
credit enough to stop it. The answer is that we decided 50 years
ago, when we set up the Federal Reserve System, that we couldn't
and shouldn't let "money manage itself. " In fact, it is the Fed that
manages money and,together with the Treasury, can determine interest
rates,
8. They should let interest rates rise, or push them up, only when this
is good for the economy. The rise of rates in 1963 was not "natural,"
and it won't be "natural" if they go up in 1964.
9» Prices may rise a bit in 1964. We hope they won't, but we may not
be able to prevent some price-wage creep. But if such a creep occurs,
it won't be "inflation, " and particularly not the kind that tight money
can stop -- unless, of course, we have an unexpected boom that expands demand too fast in relation to capacity. In the face of such a
boom, rising interest rates would be a healthy restraint.
10. In the absence of such a boom, rising interest rates could put a real
crimp in our expansion as they did in 1959, when they occurred sideby-side' with a big restrictive swing in our budget position.
11. Some people would tighten money to try to stop "deterioration in the
quality of credit. " Undoubtedly, some institutions are not as careful
as they should be in lending money. But the best way to deal with
this is to stop unsound practices by vigilant regulation -- the Federal
Home Loan Bank Board's new regulations to curb unwise lending by
savings and loan associations is a case in point. This pinpoints the
target. To deal with this problem by restricting total credit would
be a buckshot approach, and may even boomerang -- it could slow down
output and income and thus weaken the base of existing credit.
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Federal Reserve Bank of St. Louis
---
-3-
12.
Up to now, long-term interest rate increases have lagged behind shortterm increases, and home mortgage rates haven't risen at all. But if
we tighten any more, long-term rates would surely rise. Mortgage
rates, on which continued strength in housing and other construction
depends, would go up.
13.
The Bureau of the Budget stresses the 3-way boost in budget costs from
higher interest rates:
a.
Interest on the public debt would rise by $400 million a year
on the marketable debt falling due in 1964 if interest rates rise
by 1/2% -- and this cost would grow as the impact spreads to
other portions of the debt.
b. Direct Federal loans and mortgage purchases would rise because
private funds would cost more and be. less available. This could
add several hundred millions to budget outlays.
c.
Sales of financial assets -- now counted on to pull the budget totals
down by $2. 2 billion -- would drop sharply as private rates of
return rose, making the returns on Federal assets less attractive.
In summary, tight money and higher interest rates (in the range of
1/2%) could raise budget expenditures by well over $1 billion a year.
If we have to raise interest rates to stop balance-of-payments outflows -- and there's no evidence of such a need right now -- we'll
swallow hard and take it. The tax cut would help us take it, economically. But before we use higher interest rates to try to head off price
increases or credit deterioration, we should carefully count the high
costs to the budget and the economy.
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Federal Reserve Bank of St. Louis
Walter W. Heller
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Federal Reserve Bank of St. Louis
NORMAN S.STERRY
M E N R Y F. P R I N C E
HOMER D.CROTTY
HERBERT F.STURDY
FREDERIC H.STURDY
VAN COTT N I V E N
BERT A . L E W I S
SHERMAN WELPTON.JR
W I L L I A M F R E N C H SMITIJULIAN O.VON KALINOV
F. D A N I E L FROST
MAX E D D Y UTT
R O B E R T F. S C H W A R Z
R I C H A R D E. DAVIS
SHARP WHITMORE
GEORGE H.WHITNEY
FRANK L.MALLORY
SAMUEL O.PRUITT.JR.
ILJ_IAM F . S P A L D I N G
""HARD H . W O L . F O R D
-I C I S M. WH EAT
T. PI GOTT, J R.
1ES R. HUTTER
ARTHUR W . S C H M U T Z
JEROME C.BYRNE
J O H N L.ENDICOTT
N O R M A N B. B A R K E R
J. R O B E R T POST, JR.
R O B E R T D. B U R C H
JAS.
A . G I B S O N , I 8 5 2 - I 922
W. E . D U N N , I 8 6 I - I 9 2 5
ALBERT CRUTCHER, I86O-I93I
G I B S O N , D U N N & CRUTCHER
LAWYERS
RAYMOND L.CURRAN
GEORGE W. BERMANT
J O H N J. H A N S O N
G.EDWARD FITZGERALI
DEAN C.DUNLAVEY
634 SOUTH S P R I N G STREET
BEVERLY HILLS OFFICE
LOS A N G E L E S , CALIFORNIA 9 O O I 4
96OI WILSHIRE
ROY D. M I L L E R
HERBERT KRAUS
GUY K.CLAIRE
F. LEE COULTER, JR.
GEORGE G.GREGORY
RUSSELL L.JOHNSON
ARTHUR O.ARMSTRONG, JR.
R O B E R T S. W A R R E N
CHARLES R.COLLINS
ZOLTAN M.MIHALY
JAMES L.SOBIESKI
RONALD E.GOTHER
J E R O M E F. P R E W O Z N I K
I R W I N F. W O O D L A N D
J O H N H. S H A R E R
LOUIS R.ROBINSON
BERNARD E.JACOB
J A M E S M. M U R P H Y
SHARI L.DENNIS
JUSTIN E.DOYLE
JAN VETTER
CHARLES S.BATTLES,JR.
T H O M A S J. K L I T G A A R D
KENNETH W.GRAHAM,JR.
J O H N J. C O S T
R I C H A R D H. R O B I N S O N , JR
H U G H J. SCALLON
CHESTER A. S K I N N E R
C A R L D. LAWSON
PAUL G . B O W E R
DEAN STERN
BOULEVARD
MADISON O-93OO
B E V E R L Y H I L L S , CA LI F. 9 O a i O
CABLE ADDRESS: GIBTRASK
February 10, 1964
OUR FILE N U M B E R
C 498-63
Mr. William McChesney Martin, Jr.
Chairman, Federal Reserve Board
Federal Reserve Building
Washington 25, D. C.
Dear Bill:
I telephoned to you in the middle of last week
and, finding that you -would be absent for some time,
transferred my call to Mr. Hackley, Chief Counsel of the
Federal Reserve Board.
We had a helpful talk on a narrow point about
whether those capital notes and capital debentures which
are "frozen-in", in the sense that they cannot be paid
unless and until they are replaced by capital stock or
earnings, or replaced by other similarly restricted capital debentures, should not be treated as capital at least
for some purposes.
Mr. Hackley called my attention to the report
in the January 1964 issue of the Federal Reserve Bulletin
on the action of the Board of Governors concluding that
capital notes and capital debentures, generally speaking,
are not capital for the various purposes specified in the
Federal Reserve Act. However, I outlined to him reasons
why certain capital debentures with strict conditions on
repayment of principal might well be exceptions from this
general ruling and he suggested that this point be submitted to the Board of Governors for decision.
I am enclosing a copy of my letter to the Federal
Reserve Bank in San Francisco asking that this question be
submitted to the Board. I thought you might want to be
acquainted with the problem in advance of its coming up at
a Board meeting.
With best personal regards,
Sincerely
HFS:mms
Enclosure
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Federal Reserve Bank of St. Louis
rbert F. Sturdy
CABLE ADDRESS: G1BTRASK
GIBSON. DUNN 8c CRUTCHER
LAWYERS
634 SOUTH SPRING STREET
LOS ANGELES 14. CALIFORNIA
February 13, 1964
C 498-63
Federal Reserve Bank
of San Francisco
San Francisco, California
I have read the statement in the January 1964 issue
of the Federal Reserve Bulletin setting forth the conclusion
of the Board of Governors that capital notes and capital
debentures issued by member banks, even though subordinated
to deposit liabilities, do not constitute "capital stock,"
"capital" or "surplus" for purposes of various provisions of
the Federal Reserve Act that imposed requirements or limita*
tions upon member banks*
X agree with the decision as a general proposition.
However, there is a limited class of capital notes and capital
debentures which we believe should be axcepted from the general
proposition. In those instances where the capital notes or
capital debentures are precluded by their express terms from
being paid unless or until they are replaced with the proceeds
of the sale of stock, with subsequent retained earnings, or in
effect refunded by the issuance of similarly limited capital
notes or debentures, they serve every purpose which is served
by capital and surplus and should be classified as such* The
proceeds of such capital notes or capital debentures (hereinafter for convenience both referred to as capital debentures)
become a permanent addition to the equity in the bank* To date
there have been very few capital debentures which are so re*
strieted and I feel confident that the Board of Governors did
not have this limited class in mind when it made its decision.
Attached as Exhibit "A" is an example of a capital debenture
clause so limiting payment of principal. We would like to have
this point reviewed by the Board with the request that it sake
an exception to the general proposition*
During our research in connection with recent issues
of capital notes and capital debentures by state and national
banks in California, certain facts were developed which the
Board might find helpful in reaching a conclusion on our particular point.
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Federal Reserve Bank of St. Louis
Federal Reserve Bank
Page 2
February 13, 1964
1. Capital debentures appear to have arisen in the mid19301 8 because of the depression-born need to restore the
impaired capital of many of the banks, both state and national.
The Reconstruction Finance Corporation stood ready to furnish
capital funds to such banks for preferred stock in order to
restore their impaired capital, but was hampered by the fact
that it could not buy such preferred shares in some states
because of double liability imposed on shareholders of banks
by the state law. Furthermore, some of the states either
prohibited the issuance of preferred stock by banks or imposed
the impractical requirement that a preferred stock issue be
consented to by 100% of its existing shareholders. Nevertheless if Reconstruction Finance Corporation merely loaned funds
to the banks on the usual form of note or debenture, the resulting fixed obligations could hardly be regarded as a
restoration of impaired capital. Consequently a new security
known as a capital debenture was conceived. As I view it,
these were intended to be debt to the extent that they would
come ahead of all payments to stockholders in the event of a
liquidation; but would be equity capital so far as the protection of depositors and general creditors of the issuing bank
were concerned. The distinguishing feature which would give
capital debentures the character of equity capital so far as
depositors and creditors are concerned (as distinguished from
ordinary debentures even if subordinated) is an express provision restricting repayment of the principal of the capital
debentures in ways which usually apply only to capital. As
will be noted later, many states provide that capital debentures cannot be repaid while there remains any impairment of
capital* Even beyond this, California seems to require that
before capital debentures can be repaid they must be replaced
by other forms of equity capital. This gives a permanence to
the addition of the new capital funds through the issuance of
capital debentures.
2. By the Bank Conservation Act of 1933, 48 Stat. 1, 6,
Congress authorized the Reconstruction Finance Corporation to
purchase the preferred stock of any bank or trust company in
need of capital. Within a matter of weeks, Congress found it
necessary to amend this Act to provide that the Reconstruction
Finance Corporation could purchase the capital notes or debentures of the bank in order to avoid the double liability on
Reconstruction Finance Corporation as a shareholder and to
avoid the requirement of unanimous consent to preferred stock
by the existing shareholders of the bank. As originally introduced the amending legislation provided that such capital
notes or debentures had to have voting rights similar to those
accorded preferred stock. However, this provision was
eliminated as a result of a discussion on the floor of the
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Federal Reserve Bank of St. Louis
Federal Reserve Bank
Page 3
February 13, 1964
Senate to the effect that there was a danger of the courts
holding that capital debentures with voting rights were in
fact preferred stock creating double liability on the holder,
and requiring unanimous consent of stockholders. 77 Cong.
Rec. 789, 813. The amendment as finally enacted provided
in its pertinent part as follows:
"Nothing in this section shall be construed to
authorize the Reconstruction Finance Corporation
to subscribe for preferred stock in any State bank
or trust company if under the laws of the State in
which said State bank or trust company is located
the holders of such preferred stock are not exempt
from double liability. In any case in which under
the laws of the State in which it is located a
State bank or trust company is not permitted to
issue preferred stock exempt from double liability,
or if such laws permit such issue of preferred
stock only by unanimous consent of stockholders,
the Reconstruction Finance Corporation is authorized,
for the purposes of this section, to purchase the
legally issued capital notesrt or debentures of such
State bank or trust company.
48 Stat. 20, 21 (1933)
As a result, a substantial number of states passed legislation permitting state banks to issue capital debentures
with the consent of the state banking authority.
It should be noted here that Congress never specifically
authorized any bank to issue capital debentures. The above
legislation only authorised Reconstruction Finance Corpora*
tion to purchase such securities. Since Congress was concerned with the purchase and not with the issuance of capital
debentures, it made no specific provision for allocating
these securities to the capital 0r debt structure of the
national banks*
:
.
.
_
•
.
3. Though Congress has never authorized the issuance
of capital notes or debentures, the Comptroller of the
Currency, pursuant to the authority delegated to him, has
authorized the issuance of capital notes or debentures by
national banks.
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Federal Reserve Bank of St. Louis
Federal Reserve Bank
Page 4
February 13, 1964
"Sec. 14«5L Capital debentures .
"(a) It is the policy of the Comptroller of
the Currency to permit the issuance of convertible
or Mftconvertible capital debentures by national
banking associations in accordance with normal
business considerations.
11
(b) Subject to the provisions of 12 U.S.C.
82, the bank may, with the approval of stockholders
owning two~thirds of the stock of the bank, entitled
to vote, issue convertible or nonconvertible capital
debentures in such amounts and under such terms and
conditions as shall be approved by the Comptroller,
provided, however, that the principal amount of
capital debentures outstanding at any time, when
added to all other outstanding indebtedness of the
bank, except those forms of indebtedness exempt
from the provisions of 12 U.S.C. 82, shall not
exceed an amount equal to 100 percent of the bank's
unimpaired paid-in capital stock plus 50 percent
of the amount of its unimpaired surplus fund."
Code of Fed. Eeg. , T. 12, Sec. 14.5
This is merely a formula for limiting the amount of capital
debentures which may be issued, but it is couched in
language which would seem to classify capital debentures
as part of the outstanding indebtedness rather than as a
part of the capital stock. As we have mentioned above,
the capital debentures are indebtedness so far as the
stockholders are concerned although they serve the same
purpose as capital so far as the depositors and creditors
of the bank are concerned provided appropriate restrictions
on their repayment are imposed.
the taxing authorities of the Federal Government
have consistently taken the position that capital debentures
are debt. In 1935 the Internal Revenue Service issued a
ruling specifically
on these securities, though it is limited
to "income*1 debentures.
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Federal Reserve Bank of St. Louis
Federal Reserve Bank
Page 5
February 13, 1964
"SECTIOK 23 (b) — DEDUCTIONS FRCH GROSS
INCOME: INTEREST,
Article 23(b)--lz Interest.
(Also /Section 115, Article
XIV--14— 7409
I. T. 2878
Revenue Act of 1934.
"The interest paid upon the income debentures issued by a bank to evidence indebtedness
to the Reconstruction Finance Corporation is
deductible for Federal income tax purposes.
"Distributions on preferred stock issued
by a bank to that corporation constitute
dividends and are not
deductible for Federal
11
income tax purposes,
•,
-, .-..,-•..•
Cum. •*!.. Sec. 23(b)t Art. 23<b)~l, 57
The internal Revenue Service took the same position, i.e.
that capital notes or debentures are creditor interest?,
with regard to the excess profits tax. However, in the
only judicial construction of the federal legislation,
it was 11held that capital notes or debentures constitute
"equity interest. In Mercantile Bank & Trust Co. v.
United States, (Ct. Cl. 1^57) 147 Wsapp.' $5^, 958*959,
the court held in regard to income bonds:
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Federal Reserve Bank of St. Louis
"The plaintiff says that the RFC was
originally authorized to purchase preferred
stock | that the transaction quite certainly
would have taken that form but for the impediment
of the Constitution of Missouri; that the impediment was surmounted by legislation enacted by
Congress and the State of Missouri ; but that , in
the end, the RFC wrote a document which, in most
essential respects, put it in the position of a
holder of preferred stock. The plaintiff offered,
for comparison, and we have received in evidence,
a certificate of preferred stock issued to the RFC
by another bank in Kansas City which, because it
was a national bank, was not restricted by the
Missouri Constitution in its power to issue preferred stock.
"Comparison of the two documents does show
that the RFC was in both cases making investments
in the banks to restore their capital, putting its
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Federal Reserve Bank of St. Louis
investments at the risk of the earning power of the
banks, subordinating its rights to those of depositors and creditors having normal business dealings
with the banks. Interest, in one case, and dividends, in the other, were payable only out of
earnings accruing alter the date of the capital
note and of the issuance of the preferred stock*
Both documents provide for the retirement or redemption of the obligations, by call, upon substantially identical terms. Both documents provide for
the establishment by the banks of retirement funds
or sinking funds for the liquidation of the respective
obligations. Both documents provide that in case of
liquidation of the banks, the rights of the holders
shall be subordinate to the rights of depositors and
all other creditors of the banks, except, in the
case of the capital notes, other creditors, if any,
who agreed, in extending credit, that their rights
should be subordinate to those of the holders of the
capital notes. Both documents provide that if the
banks should be in default in the payment of dividends
or interest on the obligations, or in payments into
the retirement fund or sinking fund, the holders should
have the right to remove directors or officers.
"The Government says that the capital note created
a definite obligation to pay a fixed sum. It did
name a fixed sum, but the obligation to pay it, hedged
about as it was with conditions and grants of priorities
to other creditor®, was by no means definite. It had a
definite maturity date* which is evidence of a debt,
but that date, read in connection with the numerous
subordinating conditions in the note, was the date on
which the holder would be paid if the prescribed conditions did not prevent payment. It had a fixed rate
of interest, but that rate was no more fixed than, and
was identical with, the rate of dividends provided in
the comparable certificate of preferred stock. Both
were cumulative, were not currently payable except out
of earnings, and were ultimately payable on the same
conditions, fhe holder of the capital note had no voting
rights, but it did have, as we have seen, the power under
certain conditions to control the management of the bank.
Voting rights are not a necessary attribute of preferred
stock.
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"Our conclusion is that the predominant
qualities of the capital note in question were
those of preferred stock, and that it should be
placed in that classification for legal purposes,
including the application to it of the excess
profits taK law. * * * '
Mercantile Bank & Trust Co. v.
United States, 147 W, Supp. 956, 958-959
5* While Congress has never specifically authorised
the issuance of capital debentures by national banks, it
has recognized them by two statutes which specifically do
not treat capital debentures as part of the bank's indebtedness .
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Federal Reserve Bank of St. Louis
(a) The first of these Congressional Acts
treats the capital debentures as capital for the
purpose of determining whether the capital is
unimpaired* This Act reads as follows:
"If any part of the capital of a national
bank. State member bank, or bank applying for
membership in the Federal Reserve System consists
of preferred stock, the determination of whether
or not the capital of such bank is impaired and
the amount of such impairment shall be based upon
the par value of its stock even though the amount
which the holders of such preferred stock shall
be entitled to receive in the event of retirement
or liquidation shall be in excess of the par value
of such preferred stock. If any such bank or
trust company shall have outstanding any capital
notes or debentures ofthe type which the Reconstraction Finance Corporation'is authorized ,to
**urcnase^ pursuant to^ the provisions of section
Td of this title, the capital bjE such bank may
bedeemedto be unimpaired if the gound value of its
assets is not less than itstotal liabilitiest including ^capital stock, but excluding such capital notes
1gations o£ the bank expressly
subordinated thereto7"
(Emphasis added.)
§
49 Stat. 722 (1935), 12 U.S.C.A. Sec. 51b-l
There are several noteworthy aspects to this particular
statute.
irst, for determining impairment of capital the
f
UTty of capital debentures is ignored and to this
extent the debentures are treated, not as debt, but as
capital.
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Second, it should be noted that the exclusion of
capital debentures from debt is not limited to
capital debentures purchased by the Reconstruction
Finance Corporation, but extends to all debentures
"of the type" which the Reconstruction Finance Corpo*
ration could buy, regardless of wh© actually owns
them*
Third, this section starts out with the term
"capital11. While not usually synonymous with
"capital stock", the context indicates that Congress
considered the two terms as the same for the purposes
of this statute.
(b) In another Congressional Act dealing with
state bank membership in the Federal Reserve System,
Congress has specified that capital debentures are
"capital stock" for the specific purpose of qualifying
a state bank for such membership and determining the
amount it must invest in stock of a Federal Reserve
bank, 12 U»S*C.A* Sec. 329. It reads as follows:
"Any bank incorporated by special law of any
State, or organised under the general laws of any
State or of the United States, including Morris
Flan banks and other incorporated banking institutions engaged in similar business, desiring to
become a member of the Federal reserve system, may
make application to the Federal Reserve Board
(Board of Governors of the Federal Reserve System),
under such rules and regulations as it may prescribe, for the right to subscribe to the stock of
the Federal reserve bank organized within the
district in which the applying bank is located.
Such application shall be for the same amount of
stock that the applying bank would be required to
subscribe to a national bank, for the purposes of
meiabership of any
such bank the terms capital and
tal stockj shal include" bhe amount of" outstandcapital notes and debentures legally issued by
ne applying oank and purchased by the Reconstruction
inanee CoirppratipQ, *
(Emphasis Added.)
12 U.S.C.A, Sec.
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February 13, 1964
6* It is true that the Federal Reserve Board has
taken the position, based on the last mentioned statute,
that capital notes and debentures (other than those
purchased by the Reconstruction Finance Corporation) may
not be considered as capital or capital stock for the
purpose of determining the loan limits of state member
banks.
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Federal Reserve Bank of St. Louis
"In a ruling issued under date of November 8,
1933, the board expressed the belief that it was
the purpose of the Congress in authorizing the
purchase by the Reconstruction Finance Corporation
of debentures and capital notes from State banks
te provide capital funds for such banks, and stated
that it would consider the proceeds of such capital
notes or debentures as capital funds of State banks
and as part of the unimpaired capital required of
such banks for admission of such banks to membership
in the Federal Reserve System. By the act of June
16, 1934, section 9 of the Federal Reserve Act was
amended to provide that, for the purposes of membership of any State bank, the terms capital and capital
stock shall include the amount of outstanding capital
notes and debentures legally issued by the applying
bank and purchased by the Reconstruction Finance
Corporation. In view of its previous ruling and of
the subsequent amendment to said Section 9, the
Board is of the opinion that capital notes and
debentures legally issued by State member banks and
purchased by the Reconstruction Finance Corporation
should be considered as capital or capital stock in
determining limitations under the aforesaid sections
of the Federal Reserve Act and under section 210 of
the Agricultural Credits Act of 1923. However,
since the above-mentioned amendment to section 9 of
the Federal Reserve Act does not refer to capital
notes and debentures sold to other than the Reconstruction Finance Corporation, it is the view of the
Board that any notes or debentures not sold to the
Reconstruction Finance Corporation may not be included
in determining the limitations under said provisions
of law.
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February 13, 1964
"The foregoing ruling of the Board is applicable
only to State member banks and is not intended to
refer to limitations fixed by State statutes, as the
construction of such statutes is within the jurisdiction of the appropriate State supervisory
authorities rather than the jurisdiction of the
Federal Reserve Board."
1934 Fed. Stes. Bull.
The Federal Reserve Board, of course, based its ruling on
the enplicit language of the above statute that only
capital debentures purchased by the Reconstruction Finance
Corporation are to be considered as capital stock for determining whether a state bank meets the capital requirements
for membership in the Federal Reserve System. There is no
such limitation in regard to national banks. Of course, it
can be argued that by limiting the circumstances under which
capital debentures are "capital stock11 for state banks
Congress intended to limit the character of capital debentures for both state and national banks, nevertheless there
could be a good reason why Congress should specify and limit
the treatment of capital debentures issued by state banks
without extending a similar restriction to those issued by
national banks. Congress has no other control over the
capital structure of state banks, while it does have control
over national banks,
7. The state treatment of capital debentures varies
&**•*•}'•
(a) Banks are generally required to maintain a
minimum capital structure. If a bank's net assets
are insufficient to equal this required structure,
its capital is to that extent impaired. In many
States such impairment may be overcome by the issue
of capital debentures. In the following 9 states
it is provided that if the capital debentures are
sufficient to make up the deficit, capital shall
not be deemed to be impaired. Typically, such provision is coupled with a provision that the capital
notes may not be retired until the impairment is
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Del. Code Anno. (1953) T. 5 Sec. 764 (b) ;
Md. Code Anno. (1957) Art. 11, See. 70;
Mo. Stat. Anno. (1952) Sec. 362.120
(See the sentence following this list) ;
N. Bak. Century Code (1959) Sec. 6*03-42;
S. C, Code (1962) Sec. 8-152:
fex. Civ, Stat. (1959)Art. 342-607;
Wash. Rev. Code (1961) Sec. 30.36.030;
W. Va. Code (1961) Sec. 3128(2);
Wis. Stat. Anno. (1957) Sec. 221.046.
The Missouri statute permits only those capital notes
sold to the Reconstruction Finance Corporation to be
used in offsetting any impairment of capital.
(b) Six states expressly provide by statute
that capital notes and debentures
are generally to
be considered as "capital*1.
del. Code Anno. (1953) T. Sec. 764(b);
Ind. Stat. Anno. (1951) Sec. 18-103(p);
Md. Code Anno. (1957) Art. 11, Sec. 70;
Texas Civ. Stat. (1959) Art. 342-607;
Wash. Rev. Code Anno. (1961) Sec. 30.36.010.
In spite of these statutes, it was held, in Federal
Pep, ins. Cort>. v. Department of Financial Inst.
(Ind. App. 1942) 44 N.E. 2d 992, W-996 and
truction finance Corporation v. Cossett (Tex.
Ill S.W. 2d 1066, 1074*1075, tnat capital debentures in the hands of the Reconstruction Finance
Corporation were debt, rather than equity, interests.
These cases, however, were concerned only with the
status of capital debentures in liquidation, and
treated them precisely according to their standard
terms, i.e. subordinate to debts and deposits, but
senior to the stockholders.
r
(c) Four states expressly provide that capital
debentures issued to the Reconstruction Finance Cor*
poration shall be considered as capital.
Minn. Stat. Anno. (194S) Sec. 48.62;
H. D, Century Code (1959) Sec. 6-03-42;
S. C. Code (1962) Sec. 8*152;
W. Va. Code (1961) Sec. 3128(2).
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Federal Reserve Bank of St. Louis
Minnesota provides that all capital debentures other
than those issued to the Reconstruction Finance
Corporation are "liabilities" of the bank. Minn.
Stat. Anno. (1948) Sec. 4S.62.
(d) OTHER STATE PROnSICHS.
Utah provides that capital debentures not maturing within a year shall be added to capital and surplus
in determining the maximum amount which may be loaned.
Utah Coda Anno. (1953) S*c. 7*3-61.
Wisconsin provides that capital debentures "exclusive of Class 'B* capital notes and debentures as
classified by the commissioner of banks" shall be considered "capital". Class B notes are not otherwise
defined. Wis. Stat. Anno. (1957) Sec. 221.045.
Ohio and Oregon have no statutes, but classified*
tiort of capital notes has been the subject of Attorney
general opinions. In Ohio the Attorney General was
asked to express an opinion on whether a bank could
reduce its capital stock and paid in surplus below
statutory levels, substituting capital notes for the
deficit. It was his opinion that capital notes did
not have the characteristics of equity interests, particularly assessability, and therefore could not be
substituted for regular equity interests. 1933 Op, Ohio
Atty. Gen. #1969. The Oregofe Attorney General was
asked to express an opinion whether capital notes
should be shown on bank balance sheets as an equity or
liability account. He opined that the Superintendent
of Banks could direct either classification, depending
on the terms of the securities. 1958*60 Ops. Ore. Atty.
Gen. #116.
The Missouri statutes do not specify how capital
debentures shall be treated in the capital structure.
It is provided that the term of capital debentures
shall not exceed 20 years and that certain assets may
be set aside to fund them. Capital debentures issued
pursuant to its laws have been twice litigated with
inconsistent results. In jogrbrink v. Eugene .State
Bank (Mo. App. 1948) 209 sTw. 2d 265s it was held that
a capital note holder was a "creditor" and required to
file a claim against an insolvent bank. However, in
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February 13, 1964
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Federal Reserve Bank of St. Louis
gantile Bank & Tru.gt Co. _Uhited States . (Ct. Gl.
1957) 147 F. Supp. 956, 958-959, without even a nod
to Missouri law, it was held that capital notes were
equity interests for the purpose of the Federal Excess
Profits Tax. (See page 5 above.)
South Dakota, with no statutory provision for
treatment of capital debentures, held that capital
notes were not capital or surplus for the purpose of
determining the deposit limits of a bank. See
Security State Bank v. Breen (S. Dak. Code) (1960
Supp.) Sec, 6.0409.
Maryland and South Dakota make voting rights
optional, Md. Code Anno. (1957) Art. 11, Sec. 70;
S. Dak. Code (1960 Supp.) Sec. 6.0409.
Jersey prohibits both voting rights and
convertibility features. H. J. Stat. Anno. (1963)
Sec. 17:9A-131.2(c), (d) .
Utah limits the total issue of capital notes to
"33-1/3 per cent" of the amount of capital stock
and surplus at the date of issuance. It also prohibits use of the proceeds to retire outstanding
capital stock or surplus, Utah Code Anno. (1953)
Sec. 7-3*61.
(e) California has a statute authorizing capital
debentures which expressly11states that they shall
not
be deemed "paid up capital or "paid in capital11,
but still makes the® serve the purpose of capital to
a greater or less extent according to how the section
is interpreted. Section 662 of the California
Financial Code provides as follows:
"Sec. 662. Issuance * sale ^ or hypothecation
of capital notes and debentures. A bank with the
prior approval oi the superintendent and after
obtaining the approval of shareholders holding a
majority of the shares of the bank evidenced either
in a writing signed by the shareholders or by vote
at a shareholders' meeting, at any time, may issue,
sell or hypothecate its capital notes or debentures
which may be payable upon such terms and may bear
such rate of interest, if any, as may be provided
therein or which may be convertible into stock with
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Federal Reserve Bank of St. Louis
the approval of the superintendent. Such capital
notes and debentures shall be subordinate to the
claims of creditors and depositors and it shall
be provided in any such capital notes or debentures that in the event of liquidation all
depositors and other creditors of the bank shall
be entitled to be paid in full with such interest
as may be provided by law before any payment shall
be made on account of principal of or interest on
said capital notes or debentures and may provide
that after payment in full of all sums owing to
such depositors and creditors the holders of such
capital notes shall be entitled to be paid from
the remaining assets of the bank the unpaid
principal amount of the capital notes or debentures
plus accrued and unpaid interest thereon before any
payment or other distribution, whether in cash,
property or otherwise, shall be made on account of
any capital stock of the bank. It shall be provided
.n such capital notes or debentures that no payment*'
til at anyy time be made on account of the principal
l
the capital, surplus i undivided profits , and
capital notes or debentures thereafter outstending
Shall be the e<|ual of such aggregate at the date of
the original issue ox such capital, notes or debentures,
or as may be otherwise authorized by the superintendent.
"Such capital notes or debentures shall not be
deemed 'paid up capital' or 'paid in capital1, as
said terms are used in this Banking Law. [Added
by Stats 1953 ch 1438 Sec. 2.J11
Gal. Fin. Code Sec. 662
The underscored language provides that the principal of the
capital debentures may not be paid unless the aggregate of
capital, surplus and capital debentures outstanding after
their retirement is at least equal to the aggregate oF
capital, surplus and capital debentures at the date of the
original issue of the capital debentures being retired.
tou will note that the starting point for the calcu*
lation is the date of the original issue, but it is
ambiguous as to whether this is to be determined immediately before or immediately after the issuance of the
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February 13, 1964
capital debentures. Neither the courts nor the
California Superintendent of Banks has as yet
determined which interpretation should be adopted,
and consequently purchasers of capital debentures
issued In California have to assume for the time
being the most restrictive of these Interpretations,
(Me interpretation for determining the eligibility of capital debentures for retirement would
be to use as a starting point the aggregate of
capital, surplus and capital debentures outstanding
immediately before the issuance of the debentures
to be retired.In that event such retirement would
not be permissible if there had been a drop in the
combined capital, surplus and other capital debentures,
the other and more restrictive interpretation would
be to use as a starting point the aggregate of
capital, surplus and capital debentures outstanding
itamediately after the issuance of the capital debentures being considered for retirement. In that
event the debentures could not be retired unless
they had been replaced subsequent to their issuance
by additional capital, surplus, or other capital
debentures. If the latter interpretation is placed
on the statute, surely there is no economic reason
why the amount of the capital debentures should not
be included as a permanent addition to the equity
of the bank,
8. From the foregoing, it is obvious that the statutory provisions with respect to capital debentures vary
greatly from state to state. It further appears that Call*
fornia has the most stringent statutory restrictions on payment of capital debentures. While these apply only to tfie
state banks of California, they can also be applied to
national banks by contract. Iraether they are applied auto*
matically by statute or are applied voluntarily by contract,
If the capital debentures expressly and unambiguously provide
that they cannot be repaid unless the amount is replaced by
stock, earnings, or similarly restricted debentures, such
capital debentures are the economic equivalent of a preferred
stock. It is submitted that capital debentures so restricted
as to repayment should be treated as capital and surplus for
most, if not all, of the purposes of the Federal Eeserve Act.
fhey constitute a permanent addition to equity.
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February 13, 1964
First, let us consider capital debentures as a part
of the loan base. The loan limits for national banks
are set by 34 Stats* 451, enacted in 1906, which provides,
in pertinent part:
"The total obligations to any national banking
association of any person, copartnership, association „ or corporation shall at no time exceed 10 per
centum of the amount of the capital stock of such
association actually paid in and unimpaired and 10
per centum of its unimpaired surplus fund."
Rev. Stats. 5200 (1875) as amended
12 U.S.C.A. Sec. §4
This statute derives from the National Bank Act of
1864, 13 Stat. 99, 108, which provided, in pertinent part:
"Sec. 29. And be it farther enacted, that
the total liabilities to any association, of any
person, or of any company, corporation, or firm
for money borrowed, including in the liabilities
of a company or firm the liabilities of the
several members thereof, shall at no time exceed
one tenth part of the amount of the capital Jstock
of such association actually paid in, * * *
The terms "capital stock" and "unimpaired surplus
fund" were not and are not further defined. Of. 12 U,S.C«A.
Sec. Sic which defines "capital stock" in a manner not
pertinent here. However, the predecessor to 12 0.S.C.A,
Sec. 52, 13 Stat. 102, was enacted at the same time and
provided, in pertinent part:
"Sec. 12. And be it further enacted, that
th« capital stock ol; any association formed under
this act shall be divided into shares &f ©ft*
hundred dollars each, * * * '
13. Stat. 102 (1864)
Thus, when originally enacted, "capital stock" quite clearly
meant the basic equity security. However, the legislative
history can be analyzed to present quite a strong argument
that capital debentures should be included in the loan limit
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Federal Reserve Bank of St. Louis
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February 13, 1964
base, either as capital stock or as unimpaired surplus.
Originally, loan limits were measured by capital
stock alone. In 1906, in connection with the amendment
to 12 U.S.C.A, Section 84, which increased individual
loan limits by the additional factor of 10% of surplus,
the reason for using capital stock as a measure was
given. At that time, bank stockholders were generally
subject to double liability based on par value. By
tying loan limits to capital stock, banks were discouraged from setting an Initial low par value and large
paid-in surplus, effectively limiting their liability.
See:
H.R. Rep. Ho, 1S35, 59th Cong. 1st sess.
p, 2; 40 Cong. Rec. 5311
Since double liability is no longer a characteristic,
strict limitation to capital stock terminology is not
Since the statutory language setting loan limits
originated long before capital debentures were known,
it is difficult to ascribe to Congress an intent to
include or exclude them. Perhaps more significant is
the intention Indicated by Congress when legislating
concerning capital debentures.
Oa th* two occasions when Congress legislated with
respect to capital debentures they treated them as p«rt
of the capital of the bank, (i) In 12 U.S.C.A. Sec.
51(b)*l quoted under Point 5 above, Congress, for the
purpose of deciding whether the capital of a national
bank or a state bank was impaired when it applied for
membership in the Federal Reserve System, stated that
capital notes or capital debentures of the type which
the Reconstruction Finance Corporation is authorized to
purchase could be used to offset any impairment of
capital which would otherwise exist, (ii) In 12 0.S.C.A.
Sec. 329 quoted under Point 5 above, for the purpose of
determining the amount of capital which a state bank
must have to become a member of the Federal Reserve
System, Congress provided that the terms "capital" and
"capital stock" shall include the amount of outstanding
capital notes and debentures legally issued by the applying bank and purchased by the Reconstruction Finance
Corporation,
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If only those capital debentures which not only are
subordinated to depositors and other creditors but which
are also so restricted as to payment of principal that
they cannot be retired unless replaced with other forms
of "capital" (as would be the case under the subordination
clause submitted herewith) were to be considered for inclusion in the loan base, the Board of Governors of the
Federal Reserve System might very well be in a position to
rule that such limited capital debentures constitute either
"capital stock" or, possibly more appropriately, "unimpaired surplus funds11 for the purpose of establishing the
loan limits of a member bank.
'.
Capital debentures so limited as above suggested
would have all of the protective effect of capital and
surplus insofar as the depositors and other creditors are
involved, the protection of the depositors and creditors
would appear to be the purpose of restricting the amount
of loans to any one person to a stated percentage of the
capital and surplus. Consequently those items which stand
in the same relationship as depositors and creditors as
traditionally recognised forms of capital and surplus
could well be included in the loan base. fhe fact that,
as to shareholders, the capital debentures would have a
preferential position would be just as immaterial as is
the fact that preferred shareholders take precedence over
common shareholders.
Second. let us consider capital debentures as a part
of the base for determining the maximum investment of a
member bank in bank premises and the like. By 12 U.S.C.
See. 37Id banks are restricted to the amount of their
capital stock in determining their maximum investment in
bank premises, or in the securities of any corporation
holding the bank premises, or in loans made to or upon
the stock of such other corporation, unless they obtain
certain approvals. For national banks the approval to
exceed this limit must be obtained from the Comtroller
of the Currency. For state member banks the approval to
exceed this limit must be obtained from the Board of
Governors of the Federal Iteserve System.
For the purpose of determining the maximum permitted
investment in bank premises, capital debentures restricted
against repayment until replaced could be treated in
either one of two ways, fhe Board of Governors and the
Comptroller of the Currency could hold that they consti-
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February 13, 1964
tuted "capital stock" or they could give approval as
permitted in Section 37Td to investments in bank premises
as described in that section up to the amount of the
capital stock plus the amount of capital debentures
frozen into the equity of the bank, the latter would
probably be the more appropriate approach.
Some so* called capital notes and capital debentures
are not truly such. They are often merely
subordinated notes
or subordinated debentures. The word f 'capital11 in connection
with notes or debentures should rightfully be reserved for
those whose principal is restricted against payment until certain conditions are fulfilled with respect to the balance
sheet items of capital and surplus.
Capital debentures were first issued to replace
impaired capital and, as is noted above, in several states
they could not be repaid until the impairment in capital had
otherwise been restored. In the meantime, the capital debentures "stood in" for capital.
In some other instances, as pointed out in the Federal
case cited above (Mercantile Bank & Tgugt £o. v. United States »
(Gt. Ci« If 57) 147 F. iupp. 956, 934*959), the debentures could
only be paid out of earnings, mat would mean, in effect, that
they were frozen in as capital or surplus until replaced by
an increase in surplus through accumulated earnings. The 1935
Internal Revenue Service ruling, cited at the top of page 5
of this letter, declares that the interest paid upon riih "Income
debentures11 issued by a bank to evidence indebtedness to the
Reconstruction Finance Corporation is deductible for federal
income tax purposes although distributions on preferred stock
issued by a bank to the Reconstruction Finance Corporation are
not so deductible.
mentioned at the beginning of this letter, we are
enclosing herewith a proposed provision restricting the repay*
ment of capital debentures until replaced. We are requesting
that, with respect to capital debentures so limited, the Board
of Governors make an exception to its general conclusion about
capital debentures published in the January 1964 issue of the
Federal Reserve Bulletin, We ask that you consider separately
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Federal Reserve Bank of St. Louis
Federal Reserve Bank
Page 20
February 13, 1964
making such an exception (a) for loan base purposes and (b)
for investment in bank premises, The exception should be
limited to that part of the outstanding capital debentures
which meet the following three tests:
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Federal Reserve Bank of St. Louis
1. The payment of the capital debentures must be
expressly subordinated to the claims of depositors and
other creditors, except those other creditors (usually
purchasers of additional capital debentures) who by
contract expressly agree in writing that payment of
principal on the bank's debts to them shall be on an
equal footing with or subordinated to payment of the
capital debentures.
2. Payment of the principal of the capital debentures must be prohibited (except in a liquidation of the
bank after the payment in full to depositors and other
creditors not expressly on an equal footing with or
subordinated to tJte capital debentures) until replaced
by additional capital stock, additional earnings, or
additional capital debentures similarly subordinated and
limited as to payment of principal.
3. Only a portion of the principal amount of such
outstanding capital debentures should be considered as
part of the loan base or as a base for investment in
bank premises, to wit, that part which is prohibited
from being paid because not yet replaced by additional
capital stock, additional surplus or additional capital
debentures similarly limited as to payment. The
reason for this third restriction is that, as capital
is raised through the sale of capital stock, earnings
accumulate in surplus or additional capital debentures
similarly restricted are issued, thereby removing the
restriction on payment of principal for a part 02 the
outstanding capital debentures$ there should not be
included in the base both the proceeds from the addi*
tional capital stock, addit ional surplus and additional
restricted debentures plus the total amount of the outstanding capital debentures. The new capital stock
proceeds^ earned surplus and additional restricted
capital debentures should be included in the base but
not that portion of the outstanding capital debentures
which» by reason thereof, is freed for payment whether
or not actually paid at that time*
Federal Reserve Bank
Page 21
February 13, 1964
We would appreciate your reviewing the requested
exceptions to your general rule at your early convenience.
If there 10 any way in which I might be helpful, either by
letter, telephone or personal appearance, please do not
hesitate to call on a**
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Federal Reserve Bank of St. Louis
Herbert F. Sturdy
of GIBS®*, mm &
EXHIBIT "A"
SUBORDINATION AND CONDITIONS ON
REPAYMENT OF PRINCIPAL
The Capital Debentures shall be subordinate to the
claims of depositors and other creditors of the Bank, except
holders of other capital debentures or capital notes and
those other creditors who by contract expressly agree in
writing that payment of principal on the Bank's debts to
them shall be on an equal footing with or subordinated to
payment of the Capital Debentures, and in the event of
liquidation of the Bank all depositors and other creditors
of the Bank, subject to the same exceptions, shall be entitled
to be paid in full with such interest as may be provided by
law before sny payment shall be made on account of principal
of or interest or premium on the Capital Debentures; and
after payment in full of all sums owing to such depositors and
creditors, the holders of the Capital Debentures shall be
entitled to be paid from the remaining assets of the Bank
the unpaid principal amount of the Capital Debentures and
unpaid interest thereon and premium, if any, before any payment or other distribution, whether in cash, property or
otherwise, shall be insde on account of any capital stock of
the Bank. Except as above provided in the event of liquidation, no payment shall at any time be made on account of the
principal of the Capital Debentures unless following such
payment the aggregate of the capital,surplus, undivided
profits, sinking fund for these Capital Debentures to the
extent If any that the amount remaining in such sinking
fund was debited against surplus or undivided profits, and
the unpaid principal amount of these Capital Debentures and
the unpaid principal amount of other capital debentures and
capital notes thereafter outstanding which are subject to
substantially the same or greater provisions on subordination
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Federal Reserve Bank of St. Louis
i•
and conditions on repayment of principal as are the Capital
Debentures, shall be at least equal to such aggregate at
the date of the original issue of the Capital Debentures,
immediately after such original issue, unless otherwise
authorised by the Comptroller of the Currency of the United
States and by the Board of Governors of the Federal Reserve
System,
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Federal Reserve Bank of St. Louis
The Brookings Institution
1775
M A S S A C H U S E T T S A V E N U E , N. W., W A S H I N G T O N 6, D. C
February 3, 1965
Mr. Martin
This is the memorandum which we
discussed. I hope it fits in with your ideas
Please destroy it when you have read it.
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Federal Reserve Bank of St. Louis
William R. Biggs
tot The Vie* President
Fro&t W« IU &ii£ft
As ?©u know, X have fceen extremely interested in the balance
of Payisants problem for several years and have aada numerous trips
to Europe and interviewed and know rather wall ROW« of th* C«titr*i
bankers ©f Europ«An countri**t «uoh as 5witx*rl4indf a*ni^nyf Holland
and the S«nK of Knglan4* You probably «1§^ know that I have lactur«4 on tha *«bj«ct» both in lf$l and If«*i9 at th« University of
Virginia Bu«in*«» School. I P».*r*ly n«ntion this to Indl0at« that
thii 1« a ^robl«R whicsh holds major, long-t«r» int«r<t*t for m*.
It i« my und«r«tarntiag that thara i« balag pr#i»«r<»d a Balance of
Favmanta Message whl«h the President trill send to Congress*
the serious worsening of the l^alaaoe of Payments situation in
the fourth quarter points up the necessity for specifie measures
of restraint on our $*rt anil it would, in my judi»%«ntt he a great
mistake to have a Balance of ^aymentu Message merely include exhortations and a dincunsion of the problem without (a) specific measures to improve the situation, which would ap|»ly to the private
economy, an4 (b) also definite indication* that the government, ,
itself, intended to cut its otrn untied expenditures abroad.^t^^/ ^
of the weasures^whioh wowl<J be most effective would bet
1* Extension of the interest equalisation tax anil a higher Hate of
tax on foreign &orrowin& of countries include*! under the tax* (The
1$% tax on equity nur«ft*»es is already effective and nould not need
to fee raised*)
2* Immediate action to apply the tax at the present rate to hank
loans and to include then in the extension of the lav at the higher
rates * Also, the new ia«* should include a provision so that the
renewal of bank loans beyond one year would INI subject to tax*
i* "Direct11 investment abroad has keen *eo*t profitable and has and
will in the future yield us substantial returns. However, it cannot
be maintained at the present rate if we are to put our payments in
balance* Furthenaore, the Europeans, notably the French and Dutch,
and now, more and Piore, the Germans, are becoming disturbed about
the eHteftt of U*8* "direct* investment in their industry. In a
£,reat siany instances American industry has not wanted local partner*
or shareholders in their interests abroad because of technical and
financial problems and loss of freedom 4* operating these subsidiaries* This has contributed to dissatisfaction in Europe with the
extent of our investment* While AiMiricaii industry will strongly
resist efforts to lii«it "direct* investment, it is, in my
shortsighted on their part to so resist, since the countries
involved could seriously hurt our inventf&ants by restrictive
sure** if they feel we are ova r~ invest ing. therefore, for reasons
of our1 relationship with these countries, for reasons of protection
to out present "direct* inve»tsstant in these countries , and for the
urgent reason of improving our Balance of Payments, it seems to INI vital
that we take some steps tot
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Federal Reserve Bank of St. Louis
(a) Reduce "direct11 investments abroad, and
(b) Encourage payment of dividends on the investments n«d«.
As far A« the iattar la concerned, this could be accomplished by a
tax incentive program which would encourage the payment of dividends from "direct* investment* in Europe by reiaission of tux*
especially if these payments are ?*4d«i within a certain time limit*
It will be extrersely difficult to draw up the necessary r*&ulations or rettriotion** If «uch legislation or restrictions
should be impossible, perhaps the next best thing would be a Committee to pass on "direct* investments.
** 1 know that an export visa tax on travel to about the same
countries as those covered by the interest oquali*»tion tax is being considered. Such a tax and a further limitation on duty-free
purehases (especially including alcoholic beverages
from these countries would bring Home to our public and the countries
involved our intent to solve the problem. It would also clearly
indicate t© the countries involved that correction of our
could not INI accomplished without so»e cost to the**.
5. All th* m«**ur«* abov* upply to th* priv*t* »*ctor of the
economy, th* gov*mR*nt «h0«l,4 4i*4 could t«k« tw0 meaningful
*t«B*i
(a) It could indicate its willingness to face currently the penalty
of somewhat higher short ter» interest rates* At this particular
time with a strong economy and the stimuli provided for the maintenance of this strength through 196 S t somewhat higher short terss in
terest rates would be unlikely to have an adverse effect beyond
keeping the economy from over-expansion. There are also some indications that monetary and credit measures night fee a good thing for
the domestic economy at this ti»et having in wind always that
monetary policy emu be reversed when necessary once we obtain
freedom of action from our Balance of Payments
(b) Zs it not high ti»e that the policy of »aintaining such large
numbers of troops in Kuro|>e be reviewed? Me are toin that there is
an atosiic mine MMtlt stretching all along the Iron Curtain in
Europe* If this is the case, the nee4 for pore than token troops
stationed in Europe seems hard to understand* In the event of an
attack one division would involve^!* much as many isore. Since the
Europeans are so disturbed about our Balance of Payments and refer
so often to its inflation effects on then* why not say that we will
maintain our Air force strength anil one divisionf and more divisions
if they will pay for the®, but not otherwise* There certainly must
be other places abroad where we can cut down oisr military expenses
and I notice from the Sitdgat that so far there has been very
little decline in our military expenses abroad*
Conclusion
A combination of the sieasure* noted above would indicate
clearly that we mean business as far as eliminating our Balance of
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Federal Reserve Bank of St. Louis
Payments deficit is concerned. The President's &es»age should
emphasize that our objective 1* not to reduee our deficit but to
eliminate it, even if only temporarily.""" THrETl dollars become
scarcer and we show a will and ability to balance our payment*
we will continue to loaC prestige and leadership in Western
Europef which is the heart of the Western tforld.
I am convinced that if we could eliminate our Balance of
Payments deficit even for one year there would be a great change
in psychology abroadf since, heoause of the dollar *s role as a
reserve currency and the constantly increasing need for reserves
to finance trade, it will lie generally recognised that it would be
unfortunate for us te have a surplus, or even a balance in our
payisents, for very long. Me must, however, show that we can
achieve such a balance.
the great risk i* net taking the necessary steps is that our
freedom of action will be limited in the event that we have to take
monetary steps in a future recession and the pressure on the dollar
may come at Just the wrong t&me* Furthermore, the recent moves of
France indicate the kind of pressure that can ha put on us and we
not be in a position where ««eh pressure ©an ke put on us*
While there will obviously be political handicaps to a
such as this, I am convinced that a program of this kind, if carried
out with determination and success, would strengthen our position
of leadership in the world, rather than weaken it, and would give
us freedom of action in ease we need it at a later date as far as
the domestic economy is concerned. A Balance of Payment* Hessage
that exhorted and emphasised the problems but did not ask for specific Bseasures might well create greater distrust of the dollar
and particularly in our own country. The most serious threat to
the dollar would &e loss ©f confidence by the citizens of our
country In their own currency.
the above ae&oranduis is written en the assumption that as a
Congress will take action to eliminate the gold cover on
the Federal Reserve deposits and thus give us freedom of maneuver
fr0» this technical point of view*
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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
OFFICE OF THE
CHAIRMAN
B O A R D OF G O V E R N O R S
DF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
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Federal Reserve Bank of St. Louis
Chairman Martin
Date October 13. 1955
Subject:
Schweitzer Luncheon
Robert Solomon
You might want to raise the following "tactical" questions
with Mr. Schweitzer and his associates at lunch on Thursday.
Assume that the United States and like-minded countries
in the Group of Ten, together with the Managing Director of the IMF,
would like to see implementation of a scheme such as that outlined
in my paper. What is the best tactical approach to assuring this
outcome?
I can see two possibilities.
One possibility is that the Group of Ten negotiation turns
out to be a stalemate. Suppose also that world monetary reserves
continue to decline, as in the first half of 1965, or remain more or
less unchanged. It is possible to imagine that, without fanfare and
without a monetary conference, the Fund would simply go ahead and
implement the proposal in order to provide for an increase in reserve
assets.
Incidentally, the fact that we have this proposal in our
back pockets ought to stiffen our negotiators in their substantive
bargaining (a subject referred to in my October 4 memorandum to you).
The second possibility is that the Group of Ten itself
would come together on a proposal of this sort. If that is to happen,
the United States would, tactically, have to start from a position
from which it could move in compromise to the desired scheme. In
other words, if this is where we want to end up, what should be our
initial position? Or, alternatively, to what extent would we be
willing to modify this scheme in the direction of European positions?
Two possible answers to this last question occur to me.
One is that the new reserve assets (in the form of claims on the Fund)
would be used by deficit countries and acquired by surplus countries
more or less in proportion to changes in their total reserves of gold
and foreign exchange. Although this would not be a rigid link to
gold as proposed by the French, it would be a gesture in that direction.
We would want to think hard about this possibility before agreeing, but,
it is worth considering.
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Federal Reserve Bank of St. Louis
-2The second compromise would be to narrow participation in
the scheme as indicated on page 8 of my paper. These more restrictive
conditions for participation (the main one is that the country's
currency has been used in Fund drawings in some significant way)
could be applied under the present Articles of Agreement.
Tnr: FIKST NATIONAL, BANK OF CHICAGO
CHICAGO, ILLINOIS
HERBERT V.
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Federal Reserve Bank of St. Louis
Mr„ P r e s i d e n t
The W h i t e House
W a s h i n g t o n , D. C 0
My dear Mr. P r e s i d e n t :
W i t h your very great r e s p o n s i b i l i t i e s ,
it is p e r h a p s wrong e v <=> n t o a s k for the t i m e
r e q u i r e d to read a letter.
However, I b e l i e v e
the m a t t e r I should l i k e to p r e s e n t is of major
s i gn i fi ca nee.
The term of o f f i c e of the C h a i r m a n of the
Board o f Governor s o f t h e F e d e r a l R e s e r v e System
expires April 1«
Having h a d contacts w i t h t h e
v a r i o u s c h a i r m e n and m e m b e r s of that Board over
many y e a r s , I b e l i e v e the present C h a i r m a n is one
of the most d i s t i n g u i s h e d in the histo.ry of the
System. He has served several P r e s i d e n t s f a i t h f u l l y and c o n s c i e n t i o u s l y and is a man d e e p l y
d e d i c a t e d , as you are, Mr. P r e s i d e n t , to the
s e r v i c e of his f e l l o w c o u n t r y m e n .
It has been my p r i v i l e g e to become acq u a i n t e d w i t h many o f t h e l e a d i n g c e n t r a l bankers
and c o m m e r c i a l bankers of the p r i n c i p a l nations
of the W e s t e r n w o r l d .
Mr. M a r t i n not only has
the c o m p l e t e c o n f i d e n c e and r e s p e c t of A m e r i c a n
bankers, but he is also the most h i g h l y e s t e e m e d
and honored c e n t r a l b a n k e r in the w o r l d t o d a y .
He is c o n s i d e r e d as a g r e a t tower of s t r e n g t h on
monetary p o l i c y .
A l t h o u g h as a p r i v a t e c i t i z e n I may not
know all the la t e s t f i g u r e s on the b a l a n c e of p a y ments and r e l a t e d p r o b l e m s , I have s t u d i e d t h i s
p r o b l e m c a r e f u l l y for a Long p e r i o d and know t h a t
it is e x t r e m e l y d i f f i c u l t .
If it is not c r i t i c a l ,
it is at l e a s t s e r i o u s .
An e x p e r i e n c e d p u b l i c
servant h e l d in the h i g h e s t r e g a r d abroad may
prove i n v a l u a b l e in the m a n a g e m e n t of that
problem.
In your recent m e s s a g e to the Congress
r e g a r d i n g taxes, you also referred to the c o o p e r a t i o n you w o u l d l i k e on i n t e r e s t rates.
I believe
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Federal Reserve Bank of St. Louis
February
23, 1967
you spoke w i t h the h i g h e s t p o s s i b l e good i n t e n t
on. these m a t t e r s .
I am also c o m p l e t e l y c o n f i d e n t
that Mr. M a r t i n w o u l d g i v e you the f i n e s t c o o p e r a tion in the a t t a i n m e n t of those g o a l s both of you
so e a r n e s t l y seek.
I trust t h a t you may f i n d it p o s s i b l e to
r e a p p o i n t Mr. M a r t i n as C h a i r m a n so t h a t he may
serve his country and. his P r e s i d e n t w i t h his g r e a t
talents.
W i t h every good w i s h , I am,
R e s p e c t f u l l y yours,
HVP:RML
THE FIRST NATIONAL BANK OF CHICAGO
CHICAGO, ILLINOIS
PROCHNOW
PRKSIDKNT
March
3,
1967
Dear B i l l :
I was w i t h Ben H e i n e m a n , P r e s i d e n t
of the C h i c a g o and N o r t h Western R a i l w a y , t o d a y
at 1 uncheon.
Mr. H e i n e m a n is very c l o s e to the
W h i t e House.
I had p r e v i o u s l y b r o u g h t to his
a t t e n t i o n the matter in which he m i g h t be h e l p f u l .
t o l d h i m a g a i n h o w i m p o r t a n t i t was t h a t t h e
country have the b e n e f i t of your s e r v i c e s as
Chairman.
He s a i d , "I w i l l bet you t h a t Mr.
M a r t i n w i l l be r ea ppo i nt e d s? . He a l s o f e e l s sure
the person w h o m i g h t f i l l t h e other v a c a n c y o n
t h e Board w i l l b e s a t i s f a c t o r y .
In a d d i t i o n , he t o l d me what you und o u b t e d l y know - a group of northern l i b e r a l
Congressmen went to the P r e s i d e n t and urged him
to r e a p p o i n t you. He a d d e d , "knowing how p o l i t i c s
work, I w o u l d not say t h a t it was i m p o s s i b l e t h a t
the P r e s i d e n t may not have asked t h e s e l i b e r a l
m e m b e r s of Congress to come to him w i t h t h i s
r e q u e s t . " He t h o u g h t it m i g h t even be unusual
for a group of l i b e r a l Congressmen all of a s u d d e n
to d e c i d e t h e m s e l v e s t h a t they w o u l d go to the
White Housee
He t h o u g h t t h a t it was just as
l i k e l y t h a t t h e P r e s i d e n t m i g h t have p l a n t e d the
i d e a t h a t they s h o u l d all come to h i m . At any
r a t e , I did not t a k e Ben's bet b e c a u s e I t h o u g h t
he seemed c o n v i n c e d as to what a c t i o n would be
taken.
No a c k n o w l e d g m e n t of t h i s l e t t e r is
expe ct ed.
Very s i n c e r e l y yours,
Mr. W i l l i a m M C C. M a r t i n , Jr.
2861 W o o d l a n d Drive
W a s h i n g t o n , D. C. 20008
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Federal Reserve Bank of St. Louis
•
NATIONAL
OFFICERS: Arthur F. Burns, Chairman; Theodore O. Yntema, Vice Chairman; Donald B. Woodward,
Treasurer; Geoffrey H. Moore, Director of Research; Douglas H. Eldridge, Executive Director; Hal B.
Lary and Victor R. Fuchs, Associate Directors of Research.
BUREAU OF
DIRECTORS AT LARGE: Joseph A. Beirne, Wallace J. Campbell, Erwin D. Canham, Solomon Fabricant,
Frank W. Fetter, Marion B. Folsom, C. H. Greenewalt, Gabriel Hauge, Walter W. Heller, A. J. Hettinger,
Jr., H. W. Laidler, Geoffrey H. Moore, Charles G. Mortimer, J. Wilson Newman, George B. Roberts,
Robert V. Roosa, Boris Shishkin, Gus Tyler, Joseph H. Willits, Donald B. Woodward.
ECONOMIC
RESEARCH
INCORPORATED
DIRECTORS BY UNIVERSITY APPOINTMENT: Francis M. Boddy, Minnesota; Arthur F. Burns, Columbia;
Lester V. Chandler, Princeton; M. G. de Chazeau, Cornell; Walter D. Fisher, Northwestern; R. A. Gordon,
California; H. M. Groves, Wisconsin; Gottfried Haberler, Harvard; Douglas G. Hartle, Toronto; Maurice
W. Lee, North Carolina; Lloyd G. Reynolds, Yale; T. W. Schultz, Chicago; Robert M. Solow,
Massachusetts Institute of Technology; Willis J. Winn, Pennsylvania.
DIRECTORS BY APPOINTMENT OF OTHER ORGANIZATIONS: Thomas D. Flynn, American Institute of
Certified Public Accountants; Nathaniel Goldfinger, American Federation of Labor and Congress of
Industrial Organizations; Harold G. Halcrow, American Farm Economic Association; Walter E. Hoadley,
American Finance Association; Douglass C. North, Economic History Association; Murray Shields,
American Management Association; WHIard L. Thorp, American Economic Association; W. Allen Wallis,
American Statistical Association; T. O. Yntema, Committee for Economic Development.
261 MADISON AVENUE, NEW YORK, N. Y. 10016
December 6, 1967
Mr. William McC. Martin, Jr.
Chairman
Board of Governors of the Federal
Reserve System
Washington, B.C. 20551
Dear Bill:
At the recent meeting at Tom Nichols* place, which you
could not attend because of the British devaluation, Milton
Eisenhower mentioned a paper of mine which attempts to evaluate
the economic and social impact of our defense sector. I am
enclosing a copy on the chance that you may find it of some
interest. Before it is published, I shall want to revise the
present rough draft. If you should feel that I have gone wrong
at one point or another, I should appreciate your advice.
However, I do not want this paper to become in any way a burden
on you.
With kind regards,
Sincerely yours,
Arthur F. Burns
Enclosure
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Federal Reserve Bank of St. Louis
MUrray Hid 2-3190
BOARD OF G O V E R N O R S
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
Chairman Martin
From
$. J. Mais el
Date March is, i968
Subject:
Gold and Swaps Policy
(STRICTLY CONFIDENTIAL FR)
This memorandum explains somewhat more fully the background of my vote
yesterday against expanding the Federal Reserve swap network and against employing
it actively until we reach new agreements with our swap partners. These agreements
should specify how over the intermediate period we are to share possible losses of
gold to speculators as well as how to cover reserve gains by foreign banks as a
result of the current over-valuation of the dollar. They should also cover longer
term agreements looking toward the demonetization of gold and toward ways in which
new methods of exchange and trade adjustments can be activated.
I am not optimistic that such agreements are possible. In effect, then,
I am arguing that the present system cannot be maintained. Our bargaining power
will be greater if we immediately refuse to fund through swaps, or gold sales,
speculative attacks on the dollar. This weekend's negotiations should seek temporary standstill agreements on reserve movements while more basic changes are negotiated. These agreements should include methods of dealing with speculative reserve losses that would not require the United States to give exchange value
guarantees on foreign reserve gains.
I. The United States faces three somewhat separate problems:
1. Gold speculation and the price of gold.
2. Speculation against the dollar in terms of other currencies.
3. The methods of adjustment of the price of the dollar relative to gold and
other currencies.
(a) In the short run (defined as: "end of Vietnam War plus three years").
(b) In the long run.
The United States is in a true state of foreign exchange disequilibrium
which will not be corrected under existing policies. As a result we cannot meet
the immediate problems of speculation or the long-run adjustment problem without
basic policy changes.
The required policies include new international agreements covering each
of the above problems, i.e.,
1. Exchange rate adjustments.
2. Meeting currency speculation.
3. Gold policy.
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Federal Reserve Bank of St. Louis
To:
Chairman Martin
-2-
March 15, 1968
Unless new policies are agreed to and actively implemented by eight or
nine of the Group of Ten countries, the present international monetary system will
not be stabilized. We will only be throwing good money after bad. Until new policies are agreed to, the United States should embargo sales of gold and should give
minimum support (simply enough to avoid extreme day-to-day fluctuations) to existing exchange rates.
II.
There are three basic causes of the current situation:
1.
2.
3.
The relative price of the dollar is too high in terms of our existing
and potential international commitments.
The Bretton Woods international monetary system lacks a real method of
adjustment for key currencies.
The reserve base lacks both a method of normal growth and is inherently
unstable because of potential movements among its components.
The magnitude of the problems would be somewhat smaller if our international commitments were reduced or partially assumed by others. A relative
decrease in the price of the dollar (an increase in the dollar price of foreign
currencies but not necessarily gold) is also necessary. While such a relative
shift could come about as a result of a less inflationary or more deflationary
monetary-fiscal policy in the United States compared to our trading partners, I
feel confident such relative shifts cannot solve the short-run problems and are
extremely unlikely to solve the long-run problem.
III.
To solve the short-run problem at existing exchange rates, we would need
1.
2.
3.
4.
5.
More controls over foreign expenditures, both public and private.
More taxes on foreign expenditures.
A highly deflationary monetary-fiscal policy.
A method of insuring long-run adjustments.
The clear understanding on the part of our foreign partners of what
the real problem is plus a firm commitment to cover almost the entire
expected foreign exchange needs of a violent period of private speculation
plus a considerable share of the needs brought about by our current disequilibrium.
Since I am pessimistic about the possibilities and effectiveness of cutting our short-term exchange needs much if at all by either monetary-fiscal policies
(because short-run elasticities are too small) or by tax and control policies, this
means we must have new adjustment policies. The adjustment policies will have to
include methods of gradually changing the exchange rates among key currencies. In
addition, they probably should include more flexible trade adjustment procedures
than now seem possible under GATT. Finally, a better procedure for handling different types and growth rates of reserves may be necessary.
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Federal Reserve Bank of St. Louis
To: Chairman Martin
-3-
March 15, 1968
In the intermediate period while these are being negotiated and made
effective, we will need firm commitments by others as to the amount of their dollar gains they will fund over an intermediate period. Unless these commitments
cover both their total possible reserve gains due to speculation plus some of the
considerable gains that they will receive due to the fundamental disequilibrium
in the current system, the existing system will collapse.
IV. The problem of gold speculation is separable to some extent from
that of exchange requirements. It could probably be met by a massive infusion
into the private markets from existing monetary gold stocks plus an embargo of
three to five years by the major central banks of gold purchases. This would mean
an immediate partial demonetization of gold with adjustments in reserves made
through certificates, SDR's, or Fund drawings. It would look forward to a total
demonetization when better systems of exchange rate and reserve adjustments come
into effect.
Unless the other major countries agree to a partial demonetization of
gold, we should probably embargo all gold sales. This would look forward to moving
toward a new system of two or a few monetary blocs with special agreements on
settling of accounts among and between them.
Obviously no solution is good. Since all are difficult, on the surface
there may appear to be some major advantages of sticking with current policies
and hoping for the best. This policy, however, has already been tried for too
long. The British experience plus the failure of the Gold Pool operation since
November lead me to believe that we cannot be optimistic. We should retain only
minor hopes that we can reach equilibrium without a major change in the system.
We risk great losses with only a small chance of gain if we continue to put off
basic decisions on how policies should be changed.
cc: Other Members of the Board
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March 28, 1968
Dear Bill:
I didn't want to clutter up the letter with which this note
is enclosed.
In your address in Detroit you said something to the
effect that as long as the ratio of the Federal debt to GNP is
declining you are really not concerned about the size of the debt.
Those aren't the exact words but I think it is generally the idea
and I'm pretty sure I have heard you make this statement on previous
occasions.
It seems to me that the statement needs a qualification:
namely, a great part of the Federal debt was created when the dollar
was worth substantially more than at present; hence, if GNP is
expressed in current dollars and the Federal debt largely in dollars
of greater purchasing power, a declining ratio could be a cause for
alarm, in that the decline in the ratio is materially affected by the
declining purchasing power of the dollar.
I think your statement would have more validity if you said
that you have never become too disturbed about the size of the debt
provided its ratio to GNP in constant dollars is diminishing.
While
this would be a rather involved calculation I think it points up an
important distinction.
One way to approach the problem would be to
restate the Federal debt in current dollars in determining the ratio
of the amount of outstanding Federal debt to GNP in current dollars.
In any event, all of the above is meant to be a constructive
observation on which some joker like me might try to trip you up
someday.
Regards,
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//7>t
N-/MxVi.^-
April 23.
1968
FROM THE DESK OF JOSEPH W. BARR
Tn.
Bill Martin
Bill, I would like to send the attached
letter to Bart Rowen — not so much in your
defense but to express my own conviction that
men of responsibility must speak out when they
think the nation is in danger.
What do you think?
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Federal Reserve Bank of St. Louis
The Under Secretary of the Treasury
Room 3326
Dear Bart:
I have been in public life long enough to know that the
press serves a very useful purpose in its critical efforts,
and I also know that criticism can be lived with by the man
who is being criticized. I am going to comment on your
article of yesterday, not to defend Bill Martin — he is
perfectly capable of taking care of himself. X am commenting
because I think Bill Martin is absolutely correct and I think
he has an obligation to say what he did. He believes it; he
has had many years of experience in the domestic and inter*
national affairs of this nation to back up his opinions; his
opinion is widely shared by men of responsibility, and therefore I believe that he roust speak out to the nation.
Bart, there has been too much talk about what this country
can do if it only has the will. I agree that we are a great
and a powerful nation and that we can meet our international
and domestic responsibilities, within reason, if we are willing
to pay the price. But if we are not willing to reduce or even
to limit the Increase in our standard of living while attempting
to achieve our domestic and International objectives, then I
can only conclude that we are running a grave danger of wrecking the international financial system with which we have lived
for the past 23 years. If we wreck that system; if we are
forced into a disorderly redeployment of our military forces
for financial reasons; if we are forced into protectionist
measures at home; then we can well be setting the stage for
a world in which physical and financial order are in disarray.
In other words, we could be facing a world not too different
from the flow of history that began with 1931. Does a responsible man wait until we are knocked down by the third run on
our reserves before warning his country of the dangers we face?
I would like to share with you one conclusion I have
reached in my ten years of public service. The old term
"political-economist" has fallen into disuse. We now have
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Federal Reserve Bank of St. Louis
- 2politicians, and we have economists. Bill Martin, in my
opinion, qualifies as a political-economist. He is an
uncanny judge of markets and the economic reaction of people
to political decisions* 1 have learned, sometimes the hard
way, that Bill Martin speaks with complete integrity, vast
experience, and great Judgment.
Perhaps all this makes me an "alarmist" also. If it
does, so be it. I would prefer this title to sitting idly by
and taking the chance that my country and the free world may
blow apart without ever expressing my own convictions.
Sincerely,
Joseph W. Barr
Mr. Hobart Rowen
The Washington Post
1515 L Street, N. W.
Washington, D. C. 20005
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