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Minutes of actions taken by the Board of Governors of the Fed— eral Reserve System on Wednesday, April 20, 1955. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr, Martin, Chairman Balderston, Vice Chairman Szymczak Mills Robertson Shepardson Mr. Mr. Mr. Mr. Mr. Mr, Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Kenyon, Assistant Secretary Thurston, Assistant to the Board Riefler, Assistant to the Chairman Leonard, Director, Division of Bank Operations Vest, General Counsel Sloan, Director, Division of Examinations Johnson, Controller, and Director, Division of Personnel Administration Solomon, Assistant General Counsel Cherry, Legislative Counsel The following matters, which had been circulated to the members of the Board, were presented for consideration and the action taken in each instance was as indicated: Letter to Mr. Young, President, Federal Reserve Bank of Chicago, reading as follows: The members of the Board of Governors sincerely regret to learn from your letter of April 11, 1955, of the death of Mr. G. Barret Moxley, President, Kiefer—Stewart Company, Indianapolis, Indiana, who had been serving as a member of the Industrial Advisory Committee. In accordance with the action taken by the Board of Directors as indicated in your letter, the Board of Governors approves the appointment of Mr. G. Harvey Bradley, Chairman, W. J. Holliday & Company, Indianapolis, Indiana, as a member 4/2o/55 -2- of the Industrial Advisory Committee for the Seventh Federal Reserve District to serve for the remaining portion of the term ending February 29/ 19561 to succeed Mr. Moxley. Approved unanimously. Letter to the Board of Directors, Hadley Falls Trust Company, Holyoke, Massachusetts, reading as follows: Pursuant to your request submitted through the Federal Reserve Bank of Boston, the Board of Governors approves the establishment of a branch by Hadley Falls Trust Company at, or in the vicinity of, the junction of High and Maple Streets, Holyoke, Massachusetts, provided the branch is established within six months from the date of this letter. While the present capital structure of the trust company is not satisfactory, the establishment of this branch is being approved in view of the minimum of expansion involved and the apparent need for the facility to serve present customers. The Board wishes to impress upon you the need for strengthening the capital structure of the trust company as rapidly as possible, and the approval of this branch should not be interpreted as the approval of the plan for capital revision, which was submitted in connection with the application. That plan is believed to be inadequate and to contain some questionable features. Approved unanimously, for transmittal through the Federal Reserve Bank of Boston. ton, D. Letter to The Honorable, The Comptroller of the Currency, Washingreading as follows: Ce, This is in response to a letter dated March 29, 1955, with enclosures, from Mr. L. A. Jennings, Deputy Comptroller of the Currency, relating to a possible violation of Regulation 0 by an executive officer of a national bank and requesting the views of the Board with respect thereto. The important facts set out in the enclosures are as follows: Two loans totaling $18,000, each secured by an FHA Title II mortgage, were made by a national bank. Subsequently the mortgagor's equity was purchased by an executive officer of the bank. The deed to the property is recorded in the name of the executive officer, who has been making payments on the note. The executive officer acquired the mortgagor's 4/20/55 -3- equity subject to the existing mortgage but he did not assume the mortgage by a separate assumption agreement, endorsement of the note, or joining as maker. The balance outstanding on the two loans is $14,939.68. The Board Is Regulation 0 defines the term "extension of credit" as including any transaction as a result of which an executive officer becomes obligated to a bank "directly or indirectly by any means whatsoever, by reason of an endorsement on an obligation or otherwise"; and the term "become indebted" is defined as meaning any transaction by which an executive officer "directly or indirectly by any means whatsoever" receives such an extension of credit. All of the pertinent facts and circumstances of the present case are not known, particularly the terms of any contractual arrangement which was entered into between the mortgagor and the executive officer. However, if upon default and the obtaining of a deficiency judgment by the bank against the mortgagor, the latter would have any right of recourse in law or equity against the executive officer, it is the view of the Board that the executive officer would be "indirectly" obligated to the bank within the meaning of Regulation 0. Approved unanimously. Letter to Mr. Frank N. Belgrano, Jr., President and Chairman of the Board, Transamerica Corporation, San Francisco, California, reading as follows: Messrs. Covington & Burling have asked the Board of Governors for a statement as to whether the agreement made by Transamerica Corporation in connection with its voting permit that "it will declare dividends only out of actual net earnings" would limit it to declaring dividends out of net earnings for the current year, or whether it may use net earnings of prior years which were not distributed in the year they were earned and which have been transferred to an otherwise unrestricted surplus account. You are advised that under the agreement Transamerica may declare dividends out of actual net earnings of prior years which were undistributed and which have been transferred to an otherwise unrestricted surplus account* Approved unanimously, with a copy to the Federal Reserve Bank of San Francisco. 4/2o/55 In accordance with the understanding when he met with the Board on April 18, 1955, the Comptroller General of the United States, Mr. Joseph Campbell, sent the following letter to Chairman Martin on the same date: Pursuant to our meeting of today, I am forwarding a copy of letter dated April 13, 1955, from the Chairman, Committee on Government Operations, House of Representatives, directing the General Accounting Office to make an audit, on behalf of the Committee on Government Operations, of the Board of Governors of the Federal Reserve System, the Fed— eral Open Market Committee, and the Federal Reserve Banks and their branches for the period January 1, 19532 to Decem— ber 31, 195h. There are a number of problems to be -worked out in connection with this assignment. We are prepared to dis— cuss with your Board, your staff and yourself the procedural matters -which must necessarily be agreed upon in advance of the beginning of the audit. We shall appreciate a reply to this letter at your early convenience. A suggested reply to the Comptroller General had been drafted and Copies of the draft had been sent to the members of the Board prior to this meeting. In discussing the proposed reply, Governor Szymczak said that it did not go into the merits of the request made by the Chairman of the Com— mittee on Government Operations, but was designed merely to "hold the Place." In this connection, he said that in a few days it was hoped to have available two memoranda from the Board's staff, one of which would deal with Congressional consideration of proposals during the past ten years to audit the Board of Governors and the Federal Reserve Banks and the other Of which would discuss, on the basis of principle and the intent of Congress, 11hY the audits should not be made. 4/2o/55 A discussion followed concerning the content of the reply that might be made to the Comptroller General's letter, and several suggestions were made for changes in the draft that had been submitted. AL the conclusion of the discussion, it was agreed unanimously that the reply would be sent in a form satisfactory to Chairman Martin in the light of the discussion at this meeting. Secretary's Note: The letter sent today in accordance with this action read as follows: This is to acknowledge your letter of April 18 enclosing a copy of a letter dated April 13, 1955, from the Chairman, Committee on Government Operations, House of Representatives, requesting the General Accounting Office to make an audit on behalf of the Committee on Government Operations of the Board of Governors of the Federal Reserve System, the Federal Open Market Committee, and the Federal Reserve Banks and their branches for the period January 1, 1953 to December 31, 1954. As I believe the Board made clear at the meeting with you Monday afternoon, the Federal Reserve System is a creature of Congress and its powers, responsibilities and administrative procedures are determined by the Congress. Since it is the country's monetary and credit authority, the Congress has placed on the Federal Reserve Board the responsibility for administering proper disciplines with respect to budgetary, auditing, and related matters affecting System expenditures. The proposal that the Comptroller General of the United States undertake a separate audit represents an important departure from long-established practice and precedent with far-reaching implications affecting not only the Board of Governors, but the Federal Open Market Committee, and the 12 Federal Reserve Banks with their 24 branches. The Board will consult with the Open Market Committee, which is a statutory entity, and with the Chairmen, directors, and Presidents of the Federal Reserve Banks and will advise further with you as promptly as possible. There was also some discussion of what other steps, if any, the Board should take at this time, including the question of notifying the _6_ 4/2o/55 Chairmen and Presidents of the Federal Reserve Banks, but no conclusions were reached, it being understood that there would be a further discussion of the matter. Messrs. Leonard, Sloan, and Johnson then withdrew from the meeting and Mr. Young Director, Division of Research and Statistics, entered the room. Pursuant to the understanding at the meeting of the Board yesterday, a revised draft of letter to the Chairman of the House Committee on Government Operations concerning the Hoover Commission Report on Lending Agencies had been Prepared, and copies of the revised draft were distributed to the members of the Board at this time. The draft of letter was discussed and certain suggestions were made for further changes. At the conclusion of the discussion, unanimous approval was given to a letter for the signature of Chairman Martin to the Honorable William L. Dawson, Chairman, House Committee on Government Operations, in the following form: This is in reply to your request of March 18, 1955 for information as to the effects on functions of the Federal Reserve System of recommendations concerning lending, guaranteeing, and insurance activities in the report of the Commission on Organization of the Executive Branch of the Government, and for any other relevant comments on the report. Although the report makes no specific recommendation regarding the Federal Reserve System, recommendation No. )47 reads as follows: "That a representative of the Secretary of the Treasury sit ex officio on all boards or commissions having the power to affect the fiscal policy of the United States. His major functions when serving in this capacity 4/2o/55 -7- would be to convey to such agencies the credit policy of the Federal Government." We assume that the wording "to affect the fiscal policy of the United States and to convey ... the credit policy of the Federal Government" was not intended as a recommendation that a representative of the Secretary of the Treasury be made an ex officio member of the Board of Governors. The Board feels that such an arrangement mould be undesirable for the reasons indicated in the Board's reply to Question I1.6(b) of the Questionnaire of Subcommittee of the Joint Congressional Committee on the Economic Report, November 1949. A copy of this reply is attached. Comment seems desirable on a few other portions of the report text. The table on page 93 under "Miscellaneous Loans" contains a reference to "certain Treasury advances to the Federal Reserve Banks for industrial 1oans--27.5 million dollars". These funds were advances as provided by section 13b of the Federal Reserve Act enacted on June 19, 1934; they are carried on the balance sheet of the Federal Reserve Banks as surplus; and the Federal Reserve on several occasions has asked the Congress to authorize their repayment to the Treasury. In Table VI "Agencies Primarily to Finance Business" (page 78), the report shows Federal Reserve Bank loans on June 30, '954 totaling 37.9 million dollars. Of this total, some 21.7 million dollars represented discounts and advances for member banks and 15 million dollars represented loans on gold to foreign monetary authorities. Only 1.2 million dollars of these loans were advances to industrial and commercial businesses and properly considered as business financing directly. The 1.2 million dollars of Federal Reserve Bank loans to industrial and commercial enterprises outstanding on June 30, 1954 were extended under the authority of section 13b of the Federal Reserve Act previously referred to. That legislation authorized the Federal Reserve Banks, within Prescribed limitations, to make credit available to meet the working capital needs of established industrial and commercial enterprises when such credit was unavailable from usual sources on a reasonable basis. The authority was actively used in the depression and recovery years of the middle and late 'thirties, but has had only intermittent use since then. The amount of such loans outstanding has declined since the 'thirties and on April 13, 1955 amounted to only 653 thousand dollars. 14/20/55 —8— This report at various points refers to the Federal Reserve Banks as one of several types of Federal lending agencies. The Federal Reserve System, including the Board of Governors in Washington and the twelve Federal Reserve Banks, comprise the central banking organization of the United States. The System's primary functions are: (1) to provide the economy with a flow of credit and money geared to high levels of employment, orderly growth, and a stable value for the dollar; (2) to serve as a lender of last resort for the banking system in times of emergency; and (3) to participate with other Federal and State supervisory authorities in providing an effective supervision of banking. Its assets consist chiefly of gold certificates and other currency, eligible securities purchased in the open market, and discounts of member banks. Its investing and lending power is not to be used for profit, but for the purpose of influencing credit and monetary conditions in the general public interest. The Federal Reserve Banks are not subject to the Government Corporation Control Act, as might be interpreted from the report, because the benefits of such coverage are otherwise achieved through provisions of the Federal Reserve Act. Needless to say, the Board is pleased with the following statement in the Commission's report: "This Commission has no recommendations as to the Federal Reserve System. It is mentioned here because as a mutualized institution it is a bridge between private enterprise and Government, it has amply proved the value of that form of organization where intervention of Government is necessary. During the 42 years since its foundation in 1913 it has functioned efficiently without a taint of mismanagement or corruption." The foregoing action was taken with the understanding that a letter substantially the same as the letter sent to Chairman Dawson would be sent to the Honorable Rowland R. Hughes, Director, Bureau of the Budget, in response to the Bureau's request of March 4, 1955, for comments on the Hoover Commission reports, the letter to Mr. Hughes to include a paragraph stating that a letter had been sent to the House Committee on Government Operations in response to a request for the Board's comments on the Report on Lending Agencies not later than April 15, 1955. —9— 4/20/55 Minutes of actions taken by Board of Governors of the Fed eral Reserve System on April 19, 1955, were approved unanimously* The meeting then adjourned.
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