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Minutes for April 2, To: Members of the Board From: Office of the Secretary 1959 Attached is a copy of the minutes of the Board of Governors of the Federal Reserve System on the above date. It is not proposed to include a statement with respect to any of the entries in this set of minutes in the record of policy actions required to be maintained pursuant to section 10 of the Federal Reserve Act. Should you have any question with regard to the minutes, it will be appreciated if you will advise the Secretary's Office. Otherwise, if you were present at the meeting, please initial in column A below to indicate that you approve the minutes. If you were not present, please initial In column B below to indicate that you have seen the minutes. A Chin. Martin Gov. Szymczak Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King lark- II 1 21 Minutes of the Board of Governors of the Federal Reserve System Oil Thursday, April 2, PRESENT: Mr. Mr. Mr. Mr. Mr. 1959. The Board met in the Board Room at 10:00 a.m. Balderston, Vice Chairman Szymczak Mills Robertson 1/ Shepardson Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Sherman, Secretary Kenyon, Assistant Secretary Thomas, Economic Adviser to the Board Young, Director, Division of Research and Statistics Hackley, General Counsel Farrell, Director, Division of Bank Operations Molony, Special Assistant to the Board Shay, Legislative Counsel Noyes, Adviser, Division of Research and Statistics Solomon, Assistant General Counsel Goodman, Assistant Director, Division of Examinations Hill, Assistant to the Secretary Collier, Chief, Current Series Section, Division of Bank Operations Item circulated to the Board. been The following item, which had circulated to the Board and a copy of which is attached to these minutes as Item No. 1, was approved unanimously, for transmittal through the Federal Reserve Bank of New York: Letter to Bankers Trust Company, New York, New York, approving the establishment of an additional branch in London, England. Mr. Goodman then withdrew from the meeting. Retail trade statistics. Board There had been distributed to the a memorandum from Mr. Young, Director, Division of Research and 1/ Withdrew from meeting at point indicated in minutes. 1,-,(1 .1 4/2/59 -2- Statistics, dated April 1, 1959, with regard to the collection of retail trade statistics. In reviewing the background of the matter, Mr. Young recalled that the System Research Advisory Committee some time ago appointed a subcommittee to examine the department store series in light of changes in distributive channels that had taken place over the years and to determine the System's responsibility for the collection of such statistics. In a report and summary recommendation, the subcommittee took the position that the System, over the long run, should try to divest itself of these statistics on the grounds that it would be difficult to justify the role of the central bank in collecting such data. In the meantime, however, it was suggested that the System continue to collect the data and a number of detailed suggestions were made for their improvement. After extended discussion within the System Research Advisory Committee, it was decided that it would be desirable to try to interest the Bureau of the Census in assuming a program of retail trade statistics, with the period of transition financed by the System. This proposal was taken up with the Presidents and the Board, and the Su bcommittee then entered into negotiations with the Census Bureau which eventuated in a suggested program at the national and regional level estimated to cost 4'590,000 a year. However, the majority view of the Presidents' Conference was that it would be unwise to underwrite, even 4/2/59 -3- to 1960, any Census Bureau expenditures to institute such a program, including one confined to statistics at the national level. The Conference also adopted a resolution to the effect that until such time as the Census Bureau received appropriations for a program of retail trade statistics, the System should continue to collect and Perhaps improve the data on department store trade and expand the scope of the program to cover other retail outlets that compete with department stores without incurring major additional expense. On the question of obtaining assurance from the Bureau of the Budget that the cost of the program would ultimately be financed out of appropriations, the only commitment possible at this time would be a "best effort" on their part; in no event did it appear that appropriations could be arranged until fiscal 1961, and possibly not even then. In light of the Conference action, Mr. Young wrote to Mr. Bryan, Chairman of the Committee on Research and Statistics, on January 19, 1959, expressing doubt regarding the feasibility of the Conference proposal, citing the Shortcomings of the current program, and raising the question of alternatives. Later, Mr. Bryan, in a discussion with Mr. Young, stated that he thought any meeting of research personnel to consider modifications in the System program would be fruitless without guidance from the Board as to whether it had reservations regarding arrangements 'ith the Census Bureau involving a commitment of *250,000 to *275,000 Per year for a data collection program. If the Board had no substantial reservations, the matter might again be put before the Presidents. V2/59 In response to questions from members of the Board, Messrs. Young and Noyes made comments on various aspects of the problem. Among other things, they commented that savings achieved by transferring the collection of data to the Census Bureau would probably not be equal to the cost of the services of the Bureau, at least during a transition period, since the rather large force of System personnel currently engaged in this work no doubt would be reduced Principally through the process of attrition and transfer. In connection with obtaining assurances from the Bureau of the Budget that funds would be appropriated by the Congress for the collection of retail trade statistics by the Census Bureau, it would be necessary for that Bureau to negotiate with the Ways and Means Committee, budget re Vests made thereafter might be eliminated, and requests would then have to be included in subsequent budgets until such time as approval might be finslly granted. Therefore, the Bureau of the Budget could do no more than give assurance of a "best effort" in this regard. In a recent instance, however, the Commerce Department advised it was no longer necessary for the Board to pay for certain services because appropriations had been obtained for the purpose. The Budget Bureau had been working toward a restructuring of statistical responsibilities within the Government, with designated agencies assigned focal responsibilitY for major statistical areas, and for the collection of trade s tatistics the Bureau of the Census was the focal agency. Banking, I 4/2/59 -5- monetary, and other financial statistics had been designated as the System's responsibility. Thus, the general proposal to transfer the retail trade statistics to the Bureau of the Census was consistent With the Budget Bureau program. A program such as suggested by the Presidents' Conference did not seem feasible since it would hardly be possible to effect any substantial improvements in the department store series without incurring considerable additional cost. The Present program was not based on a scientific sample and any significant revisions would involve a major outlay, both in money and in intellectual resources. The members of the Board then expressed their tentative views, beginning with Governor Mills, who said that he had reservations about contracting with the Census Bureau, for he had difficulty in thinking the problem through to a logical conclusion at this stage. Without doubt there was a real need for reform in the handling of the retail trade statistics. However, if there was to be a shift in the collection of data to the Census Bureau, he thought it essential to know what work units could be released within the System and what savings could be achieved. It occurred to him that in contracting with the Census Bureau the System would be stepping out of its usual role by farming out work for which it had assumed a primary responsibility. A sUb- stalltial amount of money would be involved and there seemed no reason to believe that the Budget Bureau or the Commerce Department, even with 4/2/59 -6- the best intentions, could make a commitment that by a certain date the Federal Reserve System would be relieved of the expense involved. If the program were engaged in as an experiment, that might provide more reason for the Budget Bureau or the Commerce Department to say that the System had a responsibility and raise a question whether appropriations should be sought. Even if a request were made, there vas no reason to believe that the Congress necessarily would provide appropriations. Governor Robertson expressed sympathy with the view that the System should obtain the best possible figures even if it had to buy them. While he had a general antipathy toward Government agencies selling their services instead of operating on appropriated funds, there might be justifiable exceptions. His general feeling was that the Whole question presented by Mr. Young was fraught with emotion and that it vould be unwise for the Board to take a position until it met with the Reserve Bank Presidents again and tried to reach a mutually acceptable conclusion. Governor Shepardson said that there were numerous instances Where agencies of the Government paid for services performed by other agencies; for example, the Treasury's reimbursement to the Federal Reserve System for fiscal agency services. If the figures to be collected by the Census Bureau would constitute an improvement, he felt the System could be criticized for not using them. Moreover, he I 25fl 4/2/59 -7- See no real objection to entering into a contract with the Census Bureau even without a commitment that appropriations would be forthcoming. With respect to the regional statistics, he felt that if the program proposed by the Census Bureau was not satisfactory, that phase Of the problem should be settled at the Reserve Bank level. On the matter of the cost of the System and Census Bureau programs, he was of the opinion that reasonable approximations could be made by the Reserve Banks and a target date set by which System personnel engaged in the type of work assumed by the Census Bureau would be expected to be released. He would be agreeable to meeting with the Presidents and also to advising them that the Board would raise no objection concerning a decision to contract with the Census Bureau for a program found to be desirable. Governor Szymczak said that he would go even a little further than Governor Robertson and would be willing to take the position that the Board looked with favor on obtaining the best figures obtainable for the formulation of monetary policy. His position would contemplate getting the national figures from the Census Bureau and turning the Problem of regional statistics back to the Reserve Banks. This would mean that questions of haw to accomplish an appropriate regional program, cut expenses, and keep public relations problems to a minimum would be left to the Banks to work out. Governor Balderston expressed agreement with the idea of meeting with the Presidents to discuss the problem. Like Governor Mills, he 1 25 -8- 4/2/59 had some reluctance with regard to entering into any arrangement with the Census Bureau on the basis of an expectation that funds would be made available later through appropriations. Therefore, if it were decided to enter into a contract with the Census Bureau, he believed the decision should be on the basis that the present figures were not s atisfactory for making decisions with respect to monetary policy. The improvement of present methods of data collection would cost money and he did not feel that the achievement of savings within the System should be the determining factor, although he would favor a close study by the Reserve Banks regarding savings that could be anticipated. Personsliy, he would like to see the System on record with the Budget Bureau as asking relief from this activity at such time as that Bureau could make the necessary arrangements. Since the Bureau had assigned responsibility for various statistical data to various agencies and this particular Program was not within the System's assigned area, he would be pleased to be on record to such effect. At the conclusion of the discussion it was the consensus that a meeting with the Presidents to discuss the whole problem would be desirable, that unalterable opposition to contracting with the Bureau of the Census for a program of retail trade statistics should not be expressed, but that entering into a long-term contract that could lead to future complications was a matter of concern and such a step should not be taken on the basis of expectations that might not be fulfilled. 4/2/59 -9- There was also an opinion that the Board would want to place on the Reserve Banks the responsibility for considering whether to divest themselves of a program that trade associations apparently could handle more appropriately than the central banking system. Mr. Riefler, Assistant to the Chairman, entered the meeting during the foregoing discussion. Letter on bill S. 1120 (Item No. 2). Mr. Shay reported to the Board that the Senate Banking and Currency Committee was preparing an amendment to bill S. 1120 to abolish the central reserve city classification and suggested that it might be desirable to clarify the argument against elimination of this classification, thereby strengthening the position of those who were opposed to such a move. A draft of letter and accompanying statement that might be sent to the Chairman of the Senate Banking and Currency Committee exPressing the Board's views with regard to such a proposal was then d istributed to the Board. During the discussion that followed, certain changes were sUggested in the proposed letter and statement, after which they were approved in the form attached as Item No. 2. Letter to Senator Javits. Governor Szymczak requested that tr aasmittal of the letter to Senator Javits which had been approved at ye sterday's meeting be withheld in order that he might present a 4/2/59 -10- revised draft for consideration, and it was agreed that this would be done. Capital Messrs. Koch, Associate Adviser, and Brill, Chief, Markets Section, Division of Research and Statistics, entered the meeting at this point, and Messrs. Farrell and Collier withdrew. Small business financing project. There had been distributed to the Board shortly before the meeting a memorandum from Mr. Young dated March 30, 1959, reporting on the results of pretests of surveys with regard to small business financing needs and presenting a schedule of the cost of conducting a range of possible surveys. In view of the meetings to be held next week in connection with the Government s ecurities market study, Mr. Young had expressed a desire to make a preliminary statement on the surveys of small business financing at this time. Mr. Young said that pilot operations by the Census Bureau had provided sufficient experience to indicate the problems, possibilities, and approximate costs of conducting such surveys. The pretests had indicated that a broad-scale job would be expensive and difficult to hanale but that the surveys could be broken down by segments of resnn,A „ , ents. A corporate manufacturing mail survey could be undertaken this year and a field interview survey in another area, such as unincorporated retailing, next year. If it seemed appropriate to go ahead with a Program of this kind, it would be desirable to enter into commitments -11- 14'12/59 with the Census Bureau quite soon in order to permit the Bureau to begin preparations. For field interviews, some period was required to develop or update area maps and prepare instructions for field enumerators. The Census Bureau, however, currently was equipped to undertake a mail survey such as suggested for manufacturing corporations. Governor Robertson withdrew from the meeting at this point. response to a question by Governor Balderston, Mr. Young said that in order to undertake a survey of manufacturing corporations this Year, the Board apparently would have to reach a decision within about three weeks. Governor Balderston then asked whether fragmentizing the study so that one survey was made in a period of credit ease and another was made during a period of restraint would produce an undesirable distortion. Mr. Brill replied to the effect that comparisons by industries would 4, beoimportance and such comparisons would not be distorted by changes in monetary and credit conditions. Mr. Young commented that, if a problem of that kind arosq it would be possible to repeat the survey. After further preliminary discussion, it was understood that the members of the Board would give further study to Mr. Young's m emorandum and that the subject would then be taken up at another meeting of the Board. The meeting then adjourned. ')rtZ 4/2/59 -12Secretary's Note: Governor Shepardson today approved on behalf of the Board the nomination of Lloyd M. Schaeffer, Chief Federal Reserve Examiner in the Division of Examinations, to participate in the Conference for Federal Executives sponsored by The Brookings Institution and to be held in Williamsburg, Virginia, from May 10 to 29, 1959. Secret BOARD OF GOVERNORS 00***,„ colt4. 4a - OF THE Item No. 1 4/2/59 FEDERAL RESERVE SYSTEM * * WASHINGTON 25. D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD **7411. tItt .April 2, 1)59. Bankers Trust Company, 16 Wsll Street, New York 15 : New York. Gentlemen: The Board of Governors of the Federal Reserve System authorizes Bankers Trust Company, New York, New York, pursuant to the provisions of Section 25 of the Federal Reserve Act, to establish an additional branch in London, England, to be located at No. 33-34 Grosvenor Square, and to operate and maintall' such branch subject to the provisions of such Section; upon condition that, unless the branch is actually established and opened for business on or before July 1, 1960, all rights granted hereby shall be deemed to have been abandoned and the authority hereby granted shall automatically terminate on such date. Please advise the Board of Governors in writing, -,hrough the Federal Reserve Bank of New York) when the branch is established and opened for business. It is understood that no change will be made in the location of such branch without tne prior approval of the Board of Governors. Very truly yours, (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Assistant Secretary. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON Item NO. 2 4/2/59 CHAIRMAN OFFICE OF THE VICE April 2, 1959 The Honorable A. Willis Robertson, Chairman, Committee on Banking and Currency, United States Senate, Washington 25, D. C. Dear mi.. Chairman: Following the testimony before your Committee on March 23 on the bill S. 1120, your Committee heard witnesses on March 214 representing certain Chicago banks and the New York Clearing House Association. These witnesses proposed that the bill be amended to eliminate from the law the central reserve city classification. Attached is to such a proposal, may receive careful any action to alter a statement of the Board's views in opposition which is being submitted in the hope that it consideration by your Committee before taking the bill. Sincerely yours, C. Canby B1derston, Vice Chairman Attachment April 2, 1959. STATEYENT OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSEM IN OPPOSITION TO PROPOSAL FOR ABOLITION OF CENTRAL RESERVE CITY CLASSIFICATION OF MEIEER BANKS In connection with Bill S. 1120, to amend the Federal Reserve Act with respect to reserve requirements of member banks, it has been Proposed that the bill be amended to abolish the central reserve city cla ssification. This amendment would provide for only two classes of banks for reserve requirement purposes -- reserve city banks and others. The principal reason advanced for this proposal is that the °riginal basis for the establishment of central reserve cities is no longer applicable. Under the National Bank Act; central reserve cities were required to hold larger reserves because deposits with central reserve city banks could be counted as reserves by other banks; this has nub been permitted since 191 7. It is also stated that, although banks still maintain substantial balances with central reserve city banks for °Perating purposes, the dominance of New York and Chi-.;ago in this respect has greatly diminished. The Board, however, favors the retention of the three classes for a number of fundamental reasons. The proposal to abolish the central reserve city classification is much more sweeping than the provision in the Pending bill to lower the maximum and minimum figures for central reserve city banks to the same range as that permitted for reserve city banks. Practical objections to a mandatory requirement that reserve liscildrements be made identical for all city banks relate to the problem of absorbing the reserves released and the shifts in established relation,, either a reduction -Laps among banks. The Change would necessitate -2in the central reserve city requirements or an increase in those for reserve cities° If reserve requirements at central reserve city banks Were lowered to the level of reserve city banks, the effect would have to be absorbed by raising requirements for country banks, if necessary to maintain an appropriate total level of required reserves. If the total level of required reserves were lowered, the additional reserves would need to be absorbed by other means to avoid undue credit expansion. In any event, there would be a realignment of requirements that would alter long-established relationships among banks; the present central reserve city banks would have lower requirements and country banks would probably have higher requirements relative to the average for all member banks than would be the case if the three-way classification were retained. Retention of the central reserve city classification is essential in order to make it possible to deal with any undue concentration of available reserves in money market centers, such as has happened and might arise again in the future. Absorption of such a pool of reserves through open market operations or through a widespread increase in requirements might be impossible without undue effects on other banks having relatively small amounts of reserves available. Such a situation developed in the 1930's when large amounts of both f°reign and domestic balances were concentrated in New York, and 4eN York City banks he'd very large excess reserves. Authority to maintain three classes of banks provides the Federal Reserve with more powers to deal with such variations in the distribution of reserves. -3More fundamentally, the Board feels that differentials in requirements among banks are desirable for purposes of effectuating monetary Policy. There are fundamental differences in the character of deposits held by different banks and in their impact on the economy. Since the principal function of reserve requirements is to influence the impact of the use of money on the economic situation, such reqMirements should make allowance not only for the quantity of money outstanding but also for the rate of its use. These differences are recognized in existing Law with respect to requirements against demand and time deposits and to those against demand deposits for the three different classes of banks. They are suf- ficiently distinct and important to justify three classes of banks rather than only two. Just as there are significant differences between the larger city banks and the smaller country banks which make it appropriate vo require different amounts of reserves, there are also differences between large banks concentrated in the leading financial centers and banks in other cities. Differences between large city banks and banks located in small places are numerous and clear. Likewise, New York City and Chicago as banking centers stand out in many respects from other cities. The differences may not be as great as they were in the past but they are still striking, As an illustration of these differences, of the ten largest banks, as measured by total deposits, all but two are in New York and in Chicago, and those two are State-wide branch banks with a substantial volume of deposits at their country branches. Total deposits at all banking offices located within metropolitan areas amount to about $58 billion for New York and nearly l3 billion for Chicago. The next largest are Los Angeles with about 8 billion and San Francisco and Philadelphia with less than W billion each. Interbank demand deposits, which are one indication of the ability of banks in a city to attract funds and put thm to use and which save been used in the past as the principal standard of classi— fication; total over $4 billion at central reserve city banks in New York and $1.2 billion at such banks in Chicago. held in any other city is less than ?'p500 million. The largest total Of the eleven banks holding the largest amount of interbank demand deposits, 10 are central reserve city banks. Still another reason for retaining three classes of banks is that large banks in financial centers, which hold the bulk of the more active balances of businesses and investment institutions and also balances of other banks, are in a better position to put avail— able funds to use actively and promptly in the central money markets than are smaller banks or those located elsewhere. Banks outside the financial centers, on the other hand, find it necessary for operating Purposes to carry a portion of their secondary reserve assets in the form of balances with other banks, on which they receive no earnings and the carrying of which limits their lending capacity. Even reserve City banks maintain substantial amounts of balances with other banks, Particularly in New York and Chicago. New York banks maintain only neglf.gible balances with other banks and Chicago banks have less than Other cities in relation to their balances due to banks. These two cities are central markets for money to an extent that is not true of other large cities. _5Typical depoLitors in large city banks include businesses, individuals, and institutions which have large amounts of funds and use them much more actively than do most of the depositors in the smaller banks. They are in a better position than customers of banks located elsewhere to keep a portion of their liquid funds in short— term marketable assets and to keep small deposit balances relative to the volume of their payments. This is another way of saying that large City banks hold greater amounts of deposits that have high expansionary or inflationary potentials than do the smaller banks. A rough indication of the impact of bank deposits on economic activity is provided by figures of debits to deposit accounts. As measured by the ratio of debits to deposits outstanding, the average rate of turnover of demand deposits, other than interbank and U.S. Government deposits, for all banks in New York City exceeds 50 times a Year* Even when allowance is made for operations of certain financial types of deposits that have extraordinarily high rates of turnover and ars largely concentrated in New York, the average is still over 30. The average for all banks in Chicago is over 30 per cent, and that for Chic ago central reserve city banks alone is higher. Nearly all of the large central reserve city banks show rates of turnover exceeding 30. Of the large reserve city banks, only a few have turnover rates o'"4, than over 30 times a year and more than half have rates of less nr c). For most of the smaller reserve city banks the turnover rates are below 20. At banks in other places, annual rates of turnover of demand deposits are generally less than 20 even for the largest banks, -6deposits the and less than 15 for the bulk of the small banks. For time rate of withdrawals is only about once every two years. nces It is evident that there are sufficiently wide differe in the character of banks and in the impact of their deposits on the economy to provide a basis for differentials in reserve requirements on the existing pattern of three broad classes. Nowhere is there as much concentration of banks that may be characterized as central reserve city banks or the existence of central money markets, as there is in New York and to a lesser extent in Chicago. Since banks under the proposed amend— tents would classification of continue to be classified by cities, the cities is necessarily based upon the extent of such concentration rather than upon a relatively few individual cases.
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