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656
A meeting of
the Board of Governors of the Federal Reserve
System with
the Federal Advisory Council was held in the offices of
thB Boara
or Governors in Washington on Tuesday,
April 27, 1948, at
10:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
McCabe, Chairman
Szymczak
Draper
Evans
Clayton
Mr. Carpenter, Secretary
Messrs. Spencer, Burgess, Williams, McCoy,
Fleming, J. T. Brown, E. E. Brown, Penick,
Atwood, Kemper, Woods, and Odlin, members
of the Federal Advisory Council from the
First, Second, Third, Fourth, Fifth, Sixth,
Seventh, Eighth, Ninth, Tenth, Eleventh, and
Twelfth Federal Reserve Districts, respectively.
Mr. Prochnow, Secretary of the Federal Advisory
Council
At the
separate meeting of the Council on April 25, 1948, the
l'esiglast*lon
of Mr. Lichtenstein as Secretary of the Council was precltkted AnA
accepted, and Mr. Prochnow was elected to succeed him.
Before this joint meeting, the Federal Advisory Council
41Pproll.
ecl statements
with respect to the matters which were to be diseUss„,
with the
Board of Governors and yesterday copies of these statewere f
urnished to the members of the Board for consideration in
aeeord
"ce with the procedure agreed
upon by the Council and the Board
ori tee
the
el*
"3, 1946. At this meeting the discussions with respect to
602114- 8
"
were substantially as follows:
657
4/27/48
—2—
1. It is understood
that the Federal Reserve System
.5 now considering a program of allowing, first,
immediate credit on all sendings to the Federal
Reserve System of transit items, regardless of the
number of days it may take to collect either by
air mail or train, and second, the possible elim—
ination of sorting transit items by reserve dis—
tricts and direct sendings to the Federal Reserve
banks and their branches. These procedures, if
contemplated, involve important changes in the
functioning of the banking system, and it would
be most desirable for the Board of Governors and
the Council to discuss them.
1
In relation to the first part of this question, the Council
:lehes to
restate its position as expressed on page five of its
r:iorandum to
the Board of Governors on November 18, 1947, as
"No
changes in the check collection processes should
r 11(748:
in making items available sooner, on the average, than
the
Period required for their collection. For example, for the
Federal Reserve Banks to make all items immediately available
Iligould be
unsound, as it would make funds available when they
e not actually collected. It would be the equivalent of
_ riting a loan without interest and of paying a cash subsidy
'ur deposits
in the Federal Reserve banks."
Z
tail Also, adding
the amount of float to bank reserves would be
abus:tsi.onary. Such an unrealistic banking practice invites
agenda
President Brown stated that this matter had been placed
on the
again at the request of one of the members of the Council and
t'Council was of the opinion that a policy of giving immediate
elNdit for
all cash items would be subject to certain abuses for the
reason,
that
that banks which were associated in one way or another could
kaizta,
14 a continuous float by what would amount to a kiting of checks.
Rs add
ed that
the Council felt strongly that the practice was entirely
qatio
for the reasons stated above and that the action would be in—
liarY and should not be taken at this time.
With respect to the
658
4/27/48
seectd part of
the topic President Brown said that the problem of
8°rt5 was not a
matter which the Council should take up with the
Boal
'
d as it was a technical problem which affected different banks
differently, and in the interest of efficiency and effective opera—
ti0
41
it would be
well if changes of this kind were discussed with the
8atik Mezagement Commission of the American Bankers Association and also
with b
ank officers who have responsibility for the operation of the
_
anbit de
partments of the larger banks. He also referred to the dis—
c14161°11 of this matter at the meeting of the Council with the Board of
Gwarnors
November of last year and stated that the Council would be
glad to
haivne any
comments that the Board might wish to make.
Chairman McCabe stated that when the Committee on Correspon—
delAB
ank Relations of the Reserve City Bankers Association was in
Vashin
gton last January for an informal conference with members of the
Boardts
Staff, the
Committee was assured that no decision had been
teEtched
to give immediate credit or further to reduce the number of
-", that
before such a decision was reached the whole question would
have
'
0 be canvassed with the Federal Reserve Banks, and that if such
deci .
sl°n were made it would take the Federal Reserve Banks at least
41 Year
(311 two to make the necessary changes in organization and ecuip—
t
Put such a
plan into actual operation. He also said that, as
Nted
at the
meeting with the Council on November 18, 1947, the Council
1°111d b pi
Ve an
6
opportunity to express its views before such a change
rnade.
659
4/27/48
-4President Brown stated that in these circumstances there was
no
need for
further discussion of the matter with the Board at this
time.
2.
In view of the change in the Government's budgetary
Prospect which will considerably reduce further retirement of marketable debt and which may mean a
cash deficit, what should be the System's recommendation as to types of securities (maturities, yields,
eligibility) that should be offered by the Treasury
for refunding or for new money?
b
The Council does not believe it can be assumed that the
,
141dget will show a cash deficit. There is as yet no conclu,tve evidence indicating the direction of the economic trend
J-4 the coming months.
As to new issues, the following comments are made:
The basic principle to follow is that as much as
11),?ssible of the short term debt should be funded into secuwhich will be purchased and retained by non-br-nk in,estors
yltiee .
B. The markets will not now absorb large amounts of
ri
sr
gible securities. However, the Federal Reserve System
"
°111d sell bonds out of its portfolio, at or near present
Pllicee, whenever there is a demand in the market for them.
C. Emphasis should continue to be placed upon the sale
and G bonds, and the amount of F's and G's which an
Nestor may acquire should be increased.
of
j„ '1'2
„
D. Bills and certificates should be sold at slightly
1' rates than now prevail as a means of selling to noninvestors, reducing the incentive for banks to lengthen
-ctAirities and as a means also of keeping some pressure on
hi
credit
President Brown stated that while the Council was in full agreeeflt
With the general policy of the Board during the last five or six
Icqlths with
regard to the types of issues that should be offered, it
1-41 felt that if the limit on the Series F and G bonds could be raised
11 1°111c1 result in a substantial amount of additional trust and other
beiag invested in these issues.
In response to an inquiry from
660
44N48
—5—
McCabe as to how large an increase the Council had in mind,
Pteeident Brown
suggested an increase in the limitation from $1002000
0
to0„
i,--vu,000 or t250,000. He also said that the Council did not under—
"and why pension trusts could not invest in these issues.
On the question of sales from the System portfolio,
President
13rewri said that it was obvious that the System's holdings of bonds
eQuid not
be sold while the market was at or near the support prices,
but
that it was
the view of the Council that as the market moved away
fl'ccm these
prices System holdings should be sold, and that if the rate
°II bills were allowed
to move up slightly there would be increased in—
tere„
"in bill
issues on the part of corporations and other nonbank
holders.
He added that the increase in the rate on bills and
certifi—
Ctee was one
of the important factors in the decision of banks to
811°rten
rather than lengthen their maturities and that the psychological
a small increase in the rate, even if it were as little as
118 Per, cent,
was important.
Chairman McCabe said that he assumed that when the Committee
:
c the Alllerican Bankers Association on Government Borrowing (of which
'e8sts
'E• E. Brown, Spencer, Burgess, and Fleming were members) met
1144 the S
ecretary of the Treasury today at luncheon these points
l'i°41c1 be discussed
and Mr. Fleming stated that that was the purpose
the raeeting.
the F
Chairman McCabe inquired whether an increase in the limit on
and G h
-onds would result in the sale of long—term market issues
PtoviA
"e funds for the purchase of F and G's and it was the view of
661
4127/48
-6-
themembers
of the Council that it would not.
Mr. Burgess stated
that another
reason for increasing the limit on the F and G bonds
1.1•as that
it was going to be difficult to make a success of the cur'rent savings bond drive and that an increase in the limit would be
helpftll in
that direction.
In response to an inquiry by Mr. Szymczak, members of the
Council
- made it clear that the suggestion contained in paragraph A
above
as not
intended to propose that maturing short-term securities
be re,
lunded into
long-term restricted issues but rather the sale of
tic)nrflarketable issues and the use of the proceeds to retire short-term
411Aetable
securities, and that if the rate on bills and certificates
l'/ere 4_
'creased further, more of these issues could be placed in the
ba4d8 of co
rporations and other holders.
They also said that
4151 the
Council advocated that the Treasury issue a long-term
cent b„,4
""") which was done, that that issue absorbed the funds
able ja
the market for
such investment, and that it would not
Pc'esible to
sell a new long-term issue at this time.
a year
21 per
availbe
President
Brown said that the Council assumed that there was
40 fuze
ualnental difference between the Council and the Board on these
) and the
members of the Board indicated that as they underthe s
ituation there was none.
3.
What should be done in the monetary and credit
field to counteract the inflationary pressures
that may be created by the new defense proposals
and the world aid program?
ro
The balance between deflationary forces and inflationary
del
4s8 is not yet clear. As recently as thirty days ago, the
--aticnary factors were in the ascendancy. It is too early
662
4/27/48
—7-
to
determine whether the new defense proposals and the in—
crease in the program for world aid
will lead to a resump—
tion of inflati
onary forces. Until the trend is clearer,
it would not appear necessa
ry or wise to give the Federal
Reserve System added powers to increase banks/ reserve
re—
quirements. The very granting of such powers might in
itself have injurious deflati
onary effects. If the arma—
ment
program is expanded beyond present estimates, it may
require added amounts of bank credit rather
than less.
In the meantime the powers which the System
and the
Treasury
already possess, without new legislation, are
large. The
Board has the power to raise the discount rate,
:_-"ch is an effective method of calling public attention to
e desirability
of checking credit expansion. The Reserve
ltem has recently demonstrated that through relatively
b ght changes in open market policy it can greatly influence
operations, the security markets, and business. Although
;ae Board has
raised the reserve reauirements of the central
jserve city banks from 20 to 22 per cent,
the Board still has
,
;4 e power to increas
e these particular reserve requirements to
K.o per
cent.
r
X
re
Many foreign nations have given up large amounts of gold
tl,ser7es in the past year or two, so that our gold imports in
b;!, Immediate future are unlikely to be as large
as they have
421514 Moreover, the Open Market Committee may sterilize gold
...Torts by selling United States
securities or letting them
run off
without replacement.
b_i The recent trend
in bank loans has demonstrated that the
1:4K? generally are followi
ng a cautious and conservative
vanlng policy.
President
Brown stated that the above comment of the Council
14
the
result of a discussion lasting the greater part of the first day
°r the
they& C°11neills separate meeting and that the Council was unanimous in
t4like
el
'
r that
additional powers to increase reserve requirements of
811°111d not be granted by the Congress at this time.
In that con—
aectiot
"e referred to
the uncertain conditions existing when the
Ootkeil
met in
November and developments since that time and stated
that 40
1401,34 a °ne could say today with assurance that the armament program
11111Pen the recession or whether it would overcom
e the deflationary
663
4/27/48
-8-
fc3reee and start the inflationary spiral upward again. He also said
that .—
84
` ae members
of the Council felt that the decline in prices and
'Isilless activity could continue in spite of the armament program
ParticIllarlY if that program were limited to expansion in aircraft
Pr°duction,
guided missiles, and atomic research and if it did not
tavolv.
- an expenditure of more than $3
or $4 billion. He added that,
ta these circum
stances, it was felt that to ask Congress to grant
authori
tY to increase
reserve requirements, whether in the form of the
8Peci_,
ti-1- reserve
have ....
plan or an increase in existing primary reserves, would
immediate
injurious deflationary effect at a time when it was
11(4 Yet
aPparent which way the economy would go.
Furthermore, he said,
Understood that it was planned in a general way to finance the
1111/1alllent
Program through private credit sources--if need be by reviving
the Re
gulation V procedure--and that if that were done it would not be
48irable
- -0 increase reserve reauirements. He made the further cmtellt tha4.
an additional objection was that such an increase would
re-
sluce the
earning power of banks and their ability to attract new
eaPital
and would encourage them to take greater risks in order to obtailrt
h1
gher rates. If the increase resulted, he said, in higher
rates
014
real
estate and veterans' loans and on loans to small
business
there Igo
1%It
uld be increased pressure, which Congress could not resist, to
the
credit extended by Government agencies at a lower rate. He
out
that„
tha
eaY that the Council was in full agreement with the Board
cf the most
inflationary factors in the whole situation was
Pre eri+
Pclicy with respect to real estate financing, most of which
664
412N8
—9—
"regards new loans
was guaranteed by the Government, but that be—
cause
of the low
rate these loans were not attracting bank funds and
there were
proposals before the Congress to establish a secondary
"
iage market,
particularly for veterans' loans.
If/ he added, the inflationary spiral should begin to move
11Nard with any
rapidity some months hence, the Council would be pre—
to reexamine
the auestion with a clean mind.
He also said that
'a8 realized
that this was an election year and Congress might ad—
) but
that it was understood that the present plan of the Con—
Was to
recess for the conventions so that it could reconvene,
It /len
-essarY, before the end of the year, and that, therefore, it was
that the matter could be reconsidered at this session
before
t4new
Congress convened.
11r. Burgess outlined the reasons why he thought the present
Bitliatioa
differed from 1940 when the Council joined with the Presidents
°It the
cederal Reserve Banks and the Board of Governo
rs in recommending
that
alithority to raise reserve require
ments be increased. He also
tate(' that if he felt the System did not have sufficient authority to
:
lth any situation that might arise, he would not take the posi—
that
existing authority should not be increased, but that in his
0141110
tiori
11 the System did have adequate authority because it had been
-4v4etrat
eu that very modest changes
in policy had a tremendous effect
°111 the +1_
'41inking of banks and business men.
Therefore, he believed that
sitllation could be handled under existing powers even if it became
seNrere and that only if it became a "runaway" situation would he
any
change
in the System's authority.
665
4/27/48
-10-
Following a brief discussion of the possible gold inflow during the next
year or two and the action that might be taken to offset
the
effects of the movement on member bank reserves, President Brown
lied on other members of the Council for their comment.
Mr. Woods stated that the December 24 action of the System
in
lowering support prices of Government securities had a very marked
effect in
cooling the enthusiasm of those who had made plans for exPaneion I
particularly those who had invested their funds in Government
securitie
s. He also said that banks of the size of his felt that it
N.rould be
damaging to call for higher reserves unless it was absolutely
necessary to do
so and that the situation was being handled very well
t4
reSPOnSe
to the American Bankers Association's program for curtail-
non
productive loans.
flarther
He added that if authority were given for
increases in reserve requirements it would be equivalent to
them because any careful banker would get his institution in
a.
POSitiOla
to meet the new requirements when they were called for.
qlscussions about a possible increase, he said, had caused the
hanks 4._
up do a lot
of thinking about it and they had shifted long-term
4ellrities into
shorter maturities as his bank had done.
Mr* J. T. Brown expressed the opinion that there were two
°Neotions to
granting additional authority over bank reserves. The
first vas
that if it were applied to nonmember banks it would do
aerio
118 inJUrY
to the relations of the System with these banks at a
telthell everything should be done to sell the System to the banks
thilLt 114d not become members for reasons which, in his opinion, were
t el
justified. He said that to give the System authority to
666
4/27/48
-11-.
about
double reserve reouirements of nonmember banks at this time
would be like "waving a red flag in my territory and would be eauivalent to
starting a revolution". Mr. Brown's second objection was
that
13I1 increase in reserve requirements would result in banks attempt0 DI 4„
-a-,tain earnings by taking greater risks of a character that
e014111er 4
e4-al banks should not take.
Mr* Szymczak commented that the problem of the nonmember
1:1141i:s
1"rculdhave to be faced whenever the question of further increases
in reserve
reauirements was raised, and Mr. Brown stated that
44Y auch
Proposal would meet strong resistance from nonmember banks
a4d he
questioned whether the present was the time for the Federal
Reeerv
e SYstem to waste its efforts in useless arguments on this
Pqrit.
In
connection with Mr. Brown's comments there was a question
'44ether Chai
n Eccles in his recent testimony before the Joint Corn-
kittee on
the Economic Report had advocated the granting of authority
tor the
a
pplication of the special reserve plan as well as an increase
LI existing
reserve requirements or whether the proposal was that one
Ors the
other be authorized. The members of the Council had interPreted his
testimony as advocating the special reserve plan on top of
the
recommendation with respect to an increase in existing requirekelits.
Mr. Fleming read from Mr. Eccles' testimony on this point, in11.111.1ag his
statPment that the increase in existing reauirements might
be to 25
per cent for country banks, 30 per cent for reserve city banks,
"
k 35
per cent
for central reserve city banks.
hs
Members of the Board made it clear that the Board's proposal
.
Increase of 10 per cent on demand deposits and 4 per cent on
667
4/27/48
time
-12-
deposits with the special reserve plan as a supplemental authority
in the
event banks should persistently follow the practice of selling
Q°7ernment securities to the Federal Reserve Banks in order to expand
1211711te loans.
Mr. McCoy made the point that the banks outside of New York
aild Chicago had to maintain large balances with their correspondent
banks
In order to be in a position to provide the services expected
111,Y their
customers; that reouired reserves, balances with correspondent banks,
and cash in vault amounted to between 40 and 45 per cent
(31* the ban
,
ls
deposits; and that if existing reserve requirements
raised
lu percentage points it would mean that 50 per cent or
the funds of banks outside of New York and Chicago would be
Chairman McCabe inquired whether a straight increase in existing l'eserves or the special reserve plan would be more onerous, and
MeCCIY replied that there were banks which did not have sufficient
8"14'ities to meet the special reserve plan and would have to liquidate
1°a118 in order to purchase the securities that would be required.
Mr. Odlin suggested that the System should stop looking so
cl°411Y at
charts and try to see bank loans for what they were.
He
ate:tied that if the banks were put in a strait-jacket in search for
4 the°retical
cure of a disease, it would be damaging to the country.
Rea's° said that the question whether the special reserve plan or an
i'llce48e in existing reserve recuirements was preferable was like ask148
' 6.1.1 whether he would prefer to have his right or his left leg
668
4/27/48
—13amputated, and that in his opinion there was no
justification for
increasing the System's
authority to raise reserve requirements.
Re '
lras of the opinion that the
banks were not overloaned, that
sPeculative loans were not being made, that there was
no time in
his
experience when the banks had been more careful in their credit
P°1icies than
they were at the present time, and that if that were
the
case he
would like to know why we should strait—jacket the banks
an academic
theory.
when
Mr. Kemper stated
that he was agreeably surprised yesterday
Mr.
Young, Associate Director of the Board's Division of Research
44sa
Statistics, told the Council that the indications were that the
illflationary pressures would
be moderate for the next 12 months.
Ir
these
circumstances Mr. Kemper felt it would be desirable to
111:4413ene a
uthority to increase reserve requirements until such time
riet rear es the
trends could be determined.
1.148 °f the
With that in mind, he
°Pinion that the current discussions were germane to a
Perl°d /then it would be
timely to consider such an increase, which
Israallot
now. He Would
defer the discussions until next year and felt
t4t 'srhen the
discussions were had they should refer to an increase
Alri
reserve requirements and not to the special reserve plan
q11
ee the
latter was subject to too much misunderstanding.
14r. Williams stated that he did not know the history
back of
e:q.st4,2.
11.w with respect to member bank reserve requirements and
1,ro
that
4lat4.04
be very helpful if that information could be
developed and
P°stPoned until a study could be made of the problem in the
4/2N8
-14-
669
light of
that information.
Mr. Penick suggested that in the absence of the program
°f the American
Bankers Association to restrain speculative loans
there
would have been a substantial increase in bank loans during
the
recent period. He emphasized that for Congress to grant authoritY to
increase reserve requirements would be the same as putting
the increase into effect because the banks would immediately undertake to place
themselves in a position to meet any increases that
I4iLatt be
made under the authority.
Mr. Atwood expressed the view that the present requirement
°t the law
which based reserve requirements on central reserve, reser7e, and
nonreserve cities was no longer realistic and that it was
4(It 1°gieal to add an additional 10 per cent to these outmoded require-
1
In response to Mr. Szymczak's inquiry, Mr. Atwood stated that
418 suggestion was that the whole basis of bank reserves be revised
411(/ bl'OUght
Up to date.
recomal
President Brown inquired as to the reasons for the Board's
endation that authority be granted to increase reserve re-1168 on time deposits from 6 to 10 per cent. Mr. Szymczak
re
8Pcl.nd
ed that it was
for the purpose of maintaining substantially
the
existing
relationship between reserves on time and demand deposits.
ba.,
84_0hairman
McCabe stated that recently an officer of a large
that it was his opinion that the bank supervisory authorities
%*6 not
as strong as they should be in their comments on the character
670
4/27/48
-15--
of loans
banks were making.
In response to Chairman McCabe's inquiry
as to whether the
Council was in agreement with that statement, Mr.
IlsIning commented tiv,it in the area surrounding Washington there had
been' s' Very marked change, beginning about a year ago, in the attitude
of
examiners with respect to the classification of bank loans and
that in his
opinion the present policy of the Comptroller of the Curregard was "pretty stiff".
Chairman
McCabe said that he was concerned because of the
wide
difference between the views of the Board and the Council on the
need for authority
to increase reserve requirements. He also stated
that
'
49 Board had made a recommendation to the Congress which the
Couricti
-‘ felt was wrong,
that he had very great respect for the views
A, groups,
and that he expected to be called before the committees
Orth
the
-°4gress shortly and would like to have the views of the members
th
e -°1111cil as to what they would do if, not as a banker or as a
Member
of the Federal
Advisory Council but as Chairman of the Board of
Govern
-°11s1 they were called to testify before a congressional corn-.
41.ttee
14 a period when the inflationary spiral had started up again.
President Brown questioned the assumption that the inflationary
would continue
upward.
in Mr. Brell'rn ts
Other members of the Council concurred
comment and there was SOMB discussion of this point.
tiorlary. Reference was made again in that connection to the inflaharscter of real estate financing, and Mr. Szymczak suggested
tIlat it
1.43uld be helpful if the Council would adopt a statement which
671
4/27/48
-16-
the Board could
send to the committees of Congress which were considering further
housing legislation.
President Brown stated that he had presented the position of
the c,
'
1111eil on his appearances before congressional committees.
Mr. Fleming stated that, without intending to be critical of
the Board
of Governors or questioning its motives, he did not think
the r
ecommendation with
respect to authority to increase reserve reSubmitted by the Board of Governors to the Joint Committee
On the
142Cabel
Economic Report, should have been presented on the eve of Mr.
8 confirmation as a member of the Board.
Mr. Szymczak stated that the recommendation did not change
—7 fundamental way
the position which the Board took in November,
that
Chairman Eccles had been asked by the Joint Committee to appear,
that
hiB a
ppearance had been postponed for a week, and that the Board
:
4 1110 choice other than to appear. He also stated that the matter
i d been discussed
with Mr. McCabe to ascertain whether he wished to
ta the
41
discussion and that he had felt that he should not do so
after his confi
tion as a member of the Board.
Mr. Odin stated that, in his opinion, one of the greatest
4111ces the
System could render would be to get away from the thought
that
the Only thing that could be talked about was bank reserves. In
te8P0Aae to
11r1 Odliti
Chairman McCabe's inquiry as to what the System should do,
said there was nothing the System could do because the origin
theinf
lationary situation was outside the sphere of the System's
41411°11'V. He added that representatives of the System spent all their
4/27/48
-17tilne talking about bank reserves which in his opinion was not the
allswer) and that we could not counteract inflation by drying up
that would be useful in the country.
14r. Fleming stated that in the event of a war, suppliers of
l'iar
materials probably would be financed largely by private bank
eNLit
and that reserve requirements should not be increased at such
titae.
Chairman McCabe said that he was sending a letter to the
ell'r4irillen of the twelve Federal Reserve Banks stating that he expected
to be
called before the committees of Congress shortly on the question
or cred-it controls and would like to have the benefits of the views of
the
directors of the Federal Reserve Banks. He also said that he would
ile to have the views of the members of the Council in the same con-
La r
''esponse
to Chairman McCabe"s request, Mt. Burgess stated
th4t tL
Ile Council had been doing a lot of thinking on the matter and
that it
appeared to him that in testifying before the committees
rta/1 u
"IcCabe would have three problems, (1) the economic problem,
(2)
the poi —
ltical problem, and (3) his position as titular head of
the battik'
Chat
rieae or
141 rS b
b,,
,JA.eve
ing system of the United States.
He said that the effective-
the banking system and its wholesomeness depended not only on
8as° on cooperation and leadership, that most of the bankers
been accepted and that
thb (1 that Chairman McCabe's leadership had
a4ks Of the country were ready to work together, and that his
elation b
8"113
to the banks was very important because the job to be
673
4/2748
done could
Could be done only if all parts of the banking system worked
togethe _.
4He felt that the weakness of the Board's position was its
feling that
its powers were inadequate, and that the Board had
"Power
running out of its ears" with which to handle any situation
that m• ight arise.
He said that the Board's position grew out of the
sitl)ation created by
war financing and the feeling that that situation
Should not be
changed. He did not believe, he said, in a natural mar—
ket
for G
overnment securities or that the System should step aside,
lallt he was firmly of the opinion that the Government bond market and
the econom _ c
situation were so closely tied together that the System
44:4 not
be able to do its duty without affecting that market. He
Mded that
the action taken on December 24, 1947, was an example of
the
kind of
actions that the System might find itself being pushed
illt° a• nd that from
the standpoint of economics nothing would be lost
it the
System delayed a decision on the question of additional authority
ti• eserve requirements.
On the political question, he said that
C°11gre8e was
talking about adjourning in June, that the chances of get—
tg
J.egislation on reserve requirements at the present session were
Irer3r13°°1', and that to make a recommendation that legislation be enacted
°111c1 destroy
some of the System's influence in Congress and create
dissension.
On the third point he commented that a recommendation for
even
a Modest
increase in reserve requirements would jeopardize
ell'1111
"
MoCabe's potential leadership of the banking system. In direct
NePorise to
Chairman McCabe's inquiry as to what the members of the
00144e" w°lid do if they were Chairman of the Board, Mr. Burgess said
he
thought it
would he a very desirable thing to support the position
674
4/27(48
—19-.
that the System had taken on rates as that was a sound position,
that it was also very important to support the Board's position
ith respect to mortgage credit, but that on the question of an
increase in reserve reauirements he thought Chairman McCabe was
thoroug„y
n1 entitled to say what was the fact, that is, that that
qtlestion was a
controversial subject, that there was a difference
or
opinion among
economists and between the Council and the Federal
Regalk
-,aftVe
system, and that a decision on the question should be defer—
red.
President
Brown referred briefly to conditions as he had
observed
them in Mexico earlier in the year in connection with the
9 of the Mexican Government to meet its problems by a policy
°I' high
reserve requirements and high interest rates. He stated
that he
was one who felt that the Government securities market had
to be supported,
that a drop in the market to even 99i per cent on
lortg,terta issues
would have a tremendous effect on sentiment, and
that
Government issues could not be permitted to go to 90 or 85
11.th°1't wiping
out the capital of the
that the G
overnment securities market
lt8 %III
level and that if that course
"d of the private
banking system and
banking system.
He believed
should not be allowed to seek
were followed it would be the
result in a panic.
Mr* Evans stated that that was exactly the view of the Board.
Pr
esident Brown also commented that he had felt that until
laEt f.„
'LI the support
of the Government securities market was too rigid,
t4
at the
December 24 action was highly desirable and had very beneficial
lEito75
4/2N8
—20—
effects, and that a- very
mall change in that field could make a very
substantial difference.
He added that he had armed that a very small
increase in the
discount rate could have very large psychological ef—
fects) and
that he agreed fully with Mr. Burgess' suggestion that the
P°81tion of the Board would be stronger if it would state that it
felt there were sufficient powers left in the System to deal with any
"lation that might develop under any moderate degree of inflation
that had
been anticipated. He concurred in the suggestion made by
"
11
'
8 Williams and Atwood that an intensive study be made of hay
'zltisting reserve requirements came into being because in his opinion
the present
basis was haphazard and had no application in the current
sitution.
r. SzYmczak
stated that such a study was being made by mem—
bers 0.0
4
the staffs of the Board and the Federal Reserve Banks.
President
Brown suggested that other ways might be found to
4Pproach the
problem and that the present method of
ect)trol the
amount of bank loans and investments by
serve
rectuireraents was not a satisfactory one, that
4-rlY o
pposed to the special reserve plan, and that
attempting to
changes in re—
he was particu—
Mr. Sproul's
statezent ta
opposition to it was the most effective refutation of
th
e Plell that
he had heard.
Mr. Odlin emphasized his feeling that if a policy were
e4Pted
which would restrict the availability of credit there would
be
44 irresistible demand from the public that the credit be made
676
4/27/48
-21available through
Government agencies and that if that were done the
"would be granted under conditions which would be more unsound
than if the credit
were extended through the banking system.
Other
nierahere of the Council made comments indicating agreement with Mr.
Odlitiss
statement.
Mr. Clayton asked if Mr. Odlin would imply by his statement
that be
cause of the demand for credit it would be futile at any time
t0ad°13t policies desi,gied to restrict the availability of credit.
°cilia responded in the negative stating that, however, if it were
41°1'41 that the authorities had strait-jacketed the extension of bank
there would be a flood of recuests for credit through Governnierit agencies, and that as long as it was possible to say that the
151111g eYstem was able to supply legitimate demands for credit there
If°111c1 be a defense against public insistence for the extension of
credit
thrgugh Government agencies.
Mr. Clayton stated that the Council had suggested that there
"c'ecasion for further authority to control reserves because it
.h8 "t
likely that in the coming months there would be any need for
such
control, and also that if the armament program required additiollea
credit there should be no additional controls because it would
be "cessa17 to expand credit. He questioned whether these two posi1'1°143 l'reire
entirely consistent.
Mr. Fleming stated that if substantial additional amounts of
14.61% needed for the armament program it would not be possible
4/27/48
-22-
to follow a policy of restricting credit.
question
Mr. Spencer asked the
whether the Government could sell enough long-term securi-
ties to
finance a rearmament program and stated that the answer to
that
question was "no". President Brown concurred in that position
and stated
that controls during a war would have to come in the form
f Prohibiting
the use of scarce materials like steel and other
metals for the
manufacture of consumers' goods.
Chairman McCabe stated that the Board was very grateful to
the
Coin for its views, and expressed the hope that the members
of the
ecutive Committee of the Council would keep in touch with
the
Board and give
it the benefit of their views on any developments
that
uught occur
before the next meeting of the Council.
Mr. Brawn stated that the next regular meeting of the Council
'eaeduled for September 19-21 and that in the absence of objection
them
.
eeting would be held at that time.
Mr. Szymezak renewed his suggestion that before the Council
left lin gt,4_
--L11-ngton it adopt a statement or resolution which the Board
c0,04
send
to the committees of Congress with respect to real estate
etianc.
ltig,
and President Brown stated that the Council would meet in
BeParzlt
e -ession at 3 o'clock this afternoon for further consideration
°e that matter.
Thereupon the meeting adjourned.
141Proyed:
Secretary.
Chairman.
@FedFRASER