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591 Minutes of actions taken by the Board of Governors of the Federal Reserve System on Friday, April 16, 1948. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. McCabe, Chairman Eccles Szymczak Draper Evans Vardaman Clayton Mt. Mr. Mt. Mr. Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Board Minutes of actions taken by the Board of Governors of the Federal Reserve System on April 15, 1948, were approved unanimously. Telegrams to the Federal Reserve Banks of Boston, New York, Philadelphia, Atlanta, Chicago, and St Louis stating that the Board 84:13r°ves the establishment without change by the Federal Reserve Bank °f St. Louis on April 14, by the Federal Reserve Banks of New York, PhiladelPhia, Chicago, and Atlanta on April 15, and by the Federal Ilserve Bank of Boston on April 23, 1948, of the rates of discount Parchase in their existing schedules. Approved unanimously. .Memorandum dated April 15, 1948, from Mr. Carpenter recom311e/11111g increases in the basic annual salaries of the following emPloy ees in the Secretary's Office effective April 18, 1948: 592 4/16/48 -2- Name M. E lizabeth Jones Lillie B. Brow Adaline R. Beeson Mildred E. Pilger Designation Salary Increase To From $3,021.00 2,770.20 2,394.00 2,394.00 Supervisor File Clerk File Clerk File Clerk $3,146.4o 2,845.44 2,544.48 2,544.48 Approved unanimously. Memorandum dated April 7, 1948, from M±. Thomas, Director the Division of Research and Statistics, recommending increases In the basic annual salaries of the following employees in that Din) effective April 18, 1948: Name Itatharyne P. Reda Philip T. Allen 134111 R. Banner ! elen R. Grunwell A. Lupton marY P. McCormick 1,1arY Florence Miller Ituth D. Stone Designation Economist Economist Economist Chief Draftsman Asst. Chief Draftsman Draftsman Clerk Secretary to Mt. Brown Salary Increase To From $4,651.20 $4,776.6o 4,525.80 4,651.20 4,149.60 4,275.00 4,024.20 3,648.00 2,5414.48 2,318.76 2,895.60 4,149.60 3,773.40 2,619.72 2,394.00 3,021.00 Approved unanimously. Memorandum dated March 23, 1948, from Mr. Thomas, Director Of the Division of Research and Statistics, recommending that the tem,, ''rarY indefinite appointments of the following employees in that 'lvision be made permanent, effective immediately: ri QC? 4/16/48 -3- Name Paul E. Banner Arthur L. Broida Merton H. Miller Ernest C. Olson Charles Stanley H. Schmidt J. Sigel Louis Weiner john B. Churchill Sophia Cooper Rarry A. Gillis, Jr. Otto G. Kiehn, Jr. Caroline Lichtenberg aelen B. Arnold Monica F. Jones Mary Florence Miller M. Elva Morse MarY G. Offut Rita I. Ryhal Lois I. Steidel 3-51e N. Carrick Dorothy J. Kane Patricia Anne Vandoren orothy V. Wright William Edward Hardy Samie Reed Designation Economist Economist Economist Economist Economist Economist Economist Research Assistant Research Assistant Research Assistant Research Assistant Research Assistant Clerk Clerk Clerk Clerk Clerk Clerk Clerk Clerk-Stenographer Clerk-Stenographer Clerk-Stenographer Clerk-Typist Messenger Messenger Approved unanimously. Memorandum dated April 12, 1948, from Mr. Leonard, Director or the Division of Examinations, recommending that the basic salary Of Ge °rge S. Sloan, Assistant Director of that Division, be increased $9,376.50 to $9,750 per annum, effective May 2, 1948. Approved unanimously. Memorandum dated April 12, 1948, from Mr. Leonard, Director of the Division of Examinations, recommending increases in the basic 594 4/16/4.8 -j4.Salaries of the following employees in that Division, effec- tiVe April 18, 1948: Name J. C. Smith L. P. Eager, Jr. 1. :t. R. Wilkes a, 11. Radford Esther Severud Salary Increase To From Designation Federal Reserve Examiner Asst. Federal Reserve Examiner Federal Reserve Examiner Federal Reserve Examiner Secretary to Mr. Sloan $6,144.60 $6,384.00 3,021.00 3,146.40 9,077.25 9,376.50 6,623.40 6,862.80 3,021.00 3,146.40 Approved unanimously. Memorandum dated April 12, 1948, from Mt. Leonard, Director Of the Division of Examinations, recommending increases in the basic annual salaries of the following employees in that Division, effective may 2, 1948: Name John J. Hart Carl A. Smith Geo. Williams O. R. Bartz Thelma Zarin Salary Increase To From Designation Asst. Federal Reserve Examiner Asst. Federal Reserve Examiner Asst. Federal Reserve Examiner Federal Reserve Examiner Stenographer $3,522.60 $3,648.00 3,522.60 3,648.00 3,271.80 3,397.20 4,776.60 2,394.00 4,902.00 2,469.24 Approved unanimously. Memorandum dated March 24, 1948, from Mt. Bethea, Director r the bivision of Administrative Services, recommending that the tezip -°rarY indefinite appointments of the following employees in that twC1 ,1 3,30 4/16/48 -5- Division be made permanent, effective immediately: Name Designation Relen Louise Sweeney Peg. Lee Wall Robert B. Carter airamH. Florea Preston E. Fowler William M. Myers Ruth I. Buck Parallel,. Mock Anna IL 'Utz Cecile C. Wiesner Mabel E. Wike Benjamin L. Dinkins aazel M. Glover Co/astance H. Richardson Louise A. Wrightson Clerk Clerk-Stenographer Laborer Guard Laborer Cafeteria Helper Page Elevator Operator Charwoman Page Page Laborer Elevator Operator Charwoman Charwoman Approved unanimously. Memorandum dated April 13, 1948, from Mt. Nelson, Director the Division of Personnel Administration, recommending that the tern 13°rarY indefinite appointments of the following employees in that 'ulvision be made permanent, effective immediately: Name Designation ! , 111aa J. Markevich Quarforth Clerk-Stenographer Leave Clerk Approved unanimously. Telegram to Mr. Joseph W. Seacrest, Carlton Hotel, Washington, C *) reading as follows: "Board of Governors of Federal Reserve System has aPPointed you Director of Omaha Branch of Federal Reserve Bank of Kansas City for unexpired portion of term 4/16/48 -6- "ending December 31, 1949, and will be pleased to have Your acceptance by collect telegram." Approved unanimously. Letter to The National City Bank of New York, New York 15, New York, reading as follows: "This refers to the letter of April 1, 1948, from Vice President W. G. Speer of your bank requesting an extension of time within which you may establish and °Pen for business the additional branch at Manila, RePublic of the Philippines, for which authorization as given by the Board on May 9, 1947. Permission for the establishment of such branch was granted Provided the branch were actually established and °Pened for business on or before June 1, 1948. "The Board of Governors of the Federal Reserve SYstem extends to June 1, 1949, the time within which The National City Bank of New York may establish and 2pen for business the additional branch at Manila, IlePUblic of the Philippines, in accordance with the Provisions of its order of May 9, 1947." Approved unanimously. Letter to Mr. Elmer B. Staats, Assistant Director, LegislaReference Division, Bureau of the Budget, reading as follows: "This is in response to your letter of March 29, 1948, asking for our comments regarding H.R. 2799, a 14T-1 'To amend the Federal Home Loan Bank Act, Title Of the National Housing Act, and for other purP"ee' and an amendment to it proposed by the Housing and Home Finance Agency. The amendment would strike °Ut all the language of the bill after the enacting c 11use and insert new provisions. Consequently, our 2 43mments will be directed entirely to the proposed ' to "The important question raised by the amendment R.R. 2799 here proposed is to what extent share 597 4/16/48 -7- accounts in savings and loan associations are to be Clothed with the attributes of money. "This legislation would encourage associations to anticipate that they would always be able to repurchase Share accounts in cash, on demand. They would be able to call on the Federal Savings and Loan Insurance Corporation 'to make loans to, purchase the assets of, or make a contribution to,' an insured institution which Was having difficulty in repurchasing shares, in the knowledge that the Corporation could borrow substantially from the Treasury (section 6). They would be able to anticipate that the Treasury would make cash available to them for the repurchase of share accounts through loans to the Federal Home Loan Banks (section 3). They would be encouraged to anticipate and to represent that, should they nevertheless go into default, the Insurance Corporation would pay the claims of shareholders in cash (section 7). "The Board is of the opinion that the Government should not encourage savings and loan associations to anticipate such a degree of liquidity unless, at the same time, it requires them to follow policies which can reasonably be expected to produce liquidity. A Government guarantee of liquidity, in other words, should supplement, not substitute for, policies appropriate to liquidity. "Furthermore, by the very act of assuring, or seeming to assure, the convertibility into cash of assets which by their nature are not liquid, the Government would restrict the range within which it is free to adopt the fiscal and credit policies appropriate under various conditions. At a time when the management of fiscal and credit policy has been made as difficult as it has by events of the past few years, it seems to us unwise for the Government to restrict its freedom further. "It is principally for these reasons that the Board has, in the past, opposed certain changes in the operations of the Home Loan Bank System, and now oPposes the major provisions of the proposed amendment to H.R. 2799. Our specific objections to these provisions, which must be considered within the framework Qf the broad effects of the amendment are set forth in the following paragraphs. 598 4/16/48 -8- "Conditions for liquidity. The Government has undertaken to guarantee the liquidity of bank deposits principally because deposits in commercial banks are the most Important part of the money system of the country, as is illustrated by the fact that the bulk of all payments is made by check, and experience has shown that a breakdown in this part of the financial system paralyzes economic life. This guarantee of liquidity by the Government is Provided partly through the insurance of deposits by the Federal Deposit Insurance Corporation, but more largely through the ability of the Federal Reserve System to supPly cash to members, and through members to nonmembers, in time of need. Just as important as these Government Provisions, however, is the fact that by law, by the requirements of supervisory authorities, and by a tradition arising out of business necessity, banks must pursue manpolicies designed to achieve a degree of liquidity appropriate to the circumstances. Thus, the immediate oprating responsibility for maintaining the liquidity of ! u-ePosits falls on the banks themselves; the Government's guarantee of liquidity involves only supplementary and residual responsibilities. "Moreover, the ability of banks to obtain liquidity bY borrowing from, or selling assets to, the Federal Reserve Banks is subject to such restraints or such encouragement as the Federal Reserve authorities may imthrough discount rates and open market operations. Tiese .i Policies of the Federal Reserve are determined With reference to the needs of the economy for money and with the aim of maintaining a desirable degree of economic stability. To provide savings and loan associations with similar privileges, operating through the.Treasury, but without the same restraints, would be ec.lulvalent to setting up another Federal Reserve System Without the same objectives and responsibilities for the economy as a whole. "Savings and loan associations are neither required nor expected to maintain more than a nominal degree of liqu1djShare accounts in savings and loan associations are not, and should not be, a part of the money system. The insurance of these accounts is not the insurance of deposits but the insurance of stock equities in mutual thrift and home financing institutions. The essential purpose of the insurance is to protect the Pose 599 4/16/48 -9- Tt owner of the shares in his long-term plan of thrift or home and not to provide him with liquidity. BY foregoing liquidity, the owner of shares receives a comparatively high rate of return on his savings, and because liquidity is not required, savings and loan institutions are able to invest most of their assets in long-term, relatively non-marketable obligations and thus to pay comparatively high rates of dividend. If savings and loan associations wish to be liquid, they must be prepared to accept the restraints which liquidity requires, and which the proposed legislation does not impose. "If the Government is to guarantee the liquidity of shares in savings and loan associations, not only must the associations be required to pursue policies designed to achieve an appropriate degree of liquidity, but the reserve and discount system for these associations--the Federal Home Loan Bank System--must follow Policies which reinforce rather than diminish the iiof its members. In time, such policies would change the character of savings and loan association oPerations and also the character of the Federal Home L°an Bank System. The former would become more like commercial banks while the latter would tend to function more in a typical central banking role. The deirability of an evolutionary addition to the economy's anking organization of this type, which would further c°mPlicate our banking structure and make more difficult a unified national policy with regard to bank credit exPansion, is highly doubtful. "Section 3 of the amendment. The problem of the aPProPriate role of the Federal Home Loan Bank System, ecnisistent with our present financial organization, is raised quite clearly by section 3 of the proposed amendlent. Under existing law, the Federal Home Loan Banks, or the Home Loan Bank Board, on behalf of the Banks, may uorrow from the money market, but there is no provision for borrowing from the Treasury. Section 3 would authorize the Secretary of the Treasury to purchase obligations .c2f the Federal Home Loan Banks in an amount up to three Ltmes the capital stock, reserves, and surplus of the t Banks. "The System now has adequate power as a self-sustaining System to perform its functions as a discount agency 600 4/16/48 -10- for mortgage lending institutions. With these powers, it can, by pursuing proper policies, assure its members of assistance in maintaining the degree of liquidity appropriate to such institutions. "The Treasury support provided for in section 3 is likely, despite the discretion lodged with the Secretary, to be mandatory. It is not difficult to conceive of a situation in which the Secretary of the Treasury, if he refused to exercise his authority to purchase Bank obligations, would be held responsible for the inability of savings and loan associations to repurchase shares on demand. The Home Loan Bank System, therefore, assured ?f cash resources apart from the policies pursued, would 1 , encouraged to invest in illiquid assets, such as long2e advances to members. The burden of providing assistance to savings and loan associations would thus be thrown upon the Treasury, where it does not belong. "This situation could arise in either an inflationary or a deflationary period. If the Treasury were required L° Purchase obligations of the System because private investors could obtain better yields than the System's obligations could bear, and the Treasury in turn had to borrow the funds, the effect might be to expand bank credit, and .__1.1ereby further increase inflationary pressures. In prac-cice it would become necessary for the Reserve Banks, in s upporting the market, to purchase Treasury issues not sorbed by investors, and in the process the Reserve Sysem would create bank reserves. On the basis of these reserves, banks could increase their holdings of Treasury °bligations or other earning assets and concurrently create bank deposits, thus increasing the money supply. "Considering what we regard to be proper Government credit Policy, we believe that the enactment of section 3 is undesirable. We recognize, however, that as things stand, the Government has assumed a responsibility toward the Rome Loan Bank System, and that it would be undesirable in the public interest for Home Loan Banks to be unable to meet maturing obligations due to a temporary emergency. We ;.,ave no objection, therefore, to a provision permitting the °ecretary of the Treasury, if he determines that the market situation warrants such action, to retire from the market sUch maturing obligations as the System cannot redeem withUndue sacrifice and giving him power to negotiate with n CO 4/16/48 -11- "the Federal Home Loan Bank Board such terms and conas he feels to be desirable for the protection of the Treasury in connection with such action. "Sections 6 and 7 of the amendment. In considering the effect of the proposed changes in the powers of the Federal Savings nnd Loan Insurance Corporation, it must be borne in mind that the Corporation, in order to Prevent a default, is authorized 'to make loans to, purchase the assets of, or make a contribution to, an insured institution . . (U.S.C. Title 12, Sec. 1729(f)). The effect of sections 6 and 7 together, and especially in the context of the proposed amendment to H.R. 2799, is to place on the Treasury the burden of providing insured savings and loan associations with a very high degree of a rtificial liquidity. "Section 405(b) of the National Housing Act authorizes the Federal Savings and Loan Insurance Corporation t° make available to each insured member, in the event Of default by an insured institution, either (1) a new insured account in another institution or (2) at the °Ption of the insured member not to exceed 10 per cent 11-3n cash, and the remainder in negotiable non-interest earing debentures of the Corporation. Section 7 of the Proposed amendment would amend this section by adding a authorizing the Corporation, at its option, to sic)n any insured account in cash. "The Board is of the opinion that this provision should not be enacted. Under section 7, the right to Pay cash to the shareholders of an association in default would be exercised at the option and for the con?nience of the Insurance Corporation, and the implica'ion is that it would be exercised only when there is a° general problem of liquidity. However, if the InsUrance Corporation in fact pays claims in cash over a Period of time, insured institutions and shareholders Probably expect cash payment in more critical wtill 11118S, and, having created the expectation, the Corporation will have to satisfy it, possibly to the great emb arassment of Government fiscal programs. "At the present time, the Federal Savings and Loan .urance Corporation has no authority to borrow from tth11e Treasury. By section 6 of the proposed amendment ha Corporation would receive this authority and the Secretary of the Treasury would be 'authorized and lZvtle 602 4/16/48 -12- "'directed to loan to the Corporation on such terms as may be fixed by the Corporation and the Secretary, such funds as in the judgment of the Home Loan Bank Board are from time to time required for insurance purposes,' up to three times the capital, reserves, and surplus of the Corporation. "The law under which the Federal Savings and Loan Insurance Corporation operates now provides that insured ins titutions shall pay premiums, which shall cease when the reserve of the Corporation reaches 5 per cent of the insured risk, but the Corporation is authorized to assess each insured institution additional premiums equal to the amount of all insurance claims and operating expenses. "These provisions would indicate that the Congress contemplated that the premium would be used to provide the reserves and that the assessment would be used to :Pay losses and expenses, but the Corporation has never exercised its right to assess, with the result that, in effect, insurance losses and operating expenses have come ht of the reserve. This reserve is now much smaller than e 5 Per cent which Congress determined would be appropriate for the insurance of the safety of accounts. While we are not in a position to make an accurate computation as of this date, the indication is that after nearly fourteen years of operation the reserve is still less than one Per cent. "We feel that, if the Treasury is to guarantee the EI :bility of the Corporation to meet its insurance contracts, should be called upon to do so only after the Corporat on has in good faith used the facilities already furnished by Congress for providing adequate reserves. "We should have no objection, therefore, to a measure which authorized the Secretary of the Treasury to purchase °Iaigations of the Corporation provided that the Corpora_I-0/1 has already placed in effect a program of crediting the reserve each year a sum sufficient to build up its reserve to 5 per cent of the insured risk within a period to be set by Congress. "The President has recommended that all Government corporations be required to obtain their funds from the ,r?asury. We are in general agreement with this policy, 1 believe that, if the Insurance Corporation is to bor" ' row directly from the Treasury, it should be required to Meet some test, such as that suggested, of its compliance with the conditions imposed by Congress. r T 603 4/16/48 -13- "Sections 9 and 10 of the amendment. These sections would both serve to weaken the distinction between savings and loan share accounts and demand deposits, and therefore should not be enacted. Section 9 would change the name of the Federal Savings end Loan Insurance Corporation to 'Federal Savings Insurance Corporation.' The purpose of the Proposed change is to remove any possible misapprehension that loans are insured by the Corporation. However, it seems to us that the number of people who are now misled into this belief must be extremely small compared with the number of people who would be deceived by the change ProPosed into thinking that liquidity is insured. Section 10 would make savings and loan shares in insured associations lawful investments for 'all fiduciary, trust, and Public funds the investment or deposit of which shall be under the authority or control of the United States or any officer, officers, agency or agencies thereof.' Share al31737_0erts, which are not payable on demand, are not marketand are not readily transferrable, are obviously not PPropriate investments for such funds, but the fact that heY were approved as such would convey a misleading sense of liquidity to other investors. "To summarize: The provisions of the proposed amendto which we take exception are subject to criticism standing alone. Viewed in the context of the entire prosal, and against the background of previous proposals oZ changes in the organization and operations of the .sravings and loan system, they are even more objectionable. -Lt ls for Congress, of course, to say whether we shall have Yet another banking system, enjoying the liquidity of the commercial banking system and, at the same time, the higher truing capacity, along with the greater risk, of the say" and loan system. In justice to the country's economy, "owever, the issue should be presented this way. If it is, we believe there are important considerations that weigh against the kinds of changes envisaged." Z r Approved unanimous( Secret APProved: Chairman.
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