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671 A meeting of the Board of Governors of the Federal Reserve S/rstelnwith members of the executive committee of the Federal Advisory co ei "" was held in the offices of the Board of Governors in Washington Thiir sdaY, April 9, 1942, at 10:40 a.m. PRESENT: Mr. Mr. Mr. Mr. Ransom, Vice Chairman McKee Draper Evans Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Messrs. Edward E. Brown, George L. Harrison, W. F. Kurtz, R. V. Fleming, and S. E. Ragland, members of the executive committee of the Federal Advisory Council Mr. Walter Lichtenstein, Secretary of the Federal Advisory Council tatee 14.1". Brown referred to the recent Treasury offering of certifi- bYthe T ind ebtedness and said that the response to the measures adopted rea8UrY eub of indiscriminate use of telegrams and solicitation to seriPtion to the issue must have been rather disappointing. the Draper stated that it had not been the recommendation of e)teelltivs committee of the Federal Open Market Committee that the 141.1e beeh be handl -„ed in that manner, and that the decision appeared to have r114cle at the Treasury prior to the last meeting of representatives °t the Trea surY with members of the executive committee of the Federal i441'ket Committee at which the terms of the issue were discussed. 4a% br-T, 31uree said that the suggestion of an issue of certificates .L4debted, --eaa was made about six weeks ago at the Treasury as a ( 4 4 672 V9/42 -2substitute for the suggestion of the representatives of the Federal eaerl, ' Ye tth System that more short-term paper be put into the market along Vestment paper to meet the needs of investors. Mr. Brown expressed the opinion that it was a mistake to send talev . "Ins indiscriminately to corporations and through personal solicitation to ask for subscriptions from corporations that did not have tlInds to blisiness invest and in some cases were borrowing money for their own Purposes and, therefore, were not in a position to subscribe. Re added that the total subscriptions from Chicago were very small, and he felt many corporations were not willing to subscribe for the reason that +. "'he return after taxes would have been so small that they were not t"ested in the return as against the advantage of having the money 4411eible for use in the event of necessity. He made the further comkerlt that the issue had demonstrated that with the tax bill pending ::: : °:n:::e::::: amount of short-term corporate money for ina °11 117 thel,e MI's Ransom said that it had been the feeling of the members of 41'41 Open Market Committee that there was a considerable amount lisDrt-te rm funds that might flow into a short-term security, and that, if a test were made and the funds did not come in, it would be e 50 'le demonstration of the fact that they did not exist. He et of -n to beat saY that he did not know whether the recent certificate was method of testing whether these funds were available, but up 41942 —3— that 'was true that to the extent the necessity for resort to the bankei, could be reduced by such issues the better the situation would be, Mr. Harrison suggested that it was not possible to have a satis— tactol.„ -4 Lest as long as corporations did not know what their tax bill be over the next year. Mr. Kurtz stated that, while it might have been true that cor— Porations had surplus funds sometime ago, as was suggested by a study tade at the Federal Reserve Bank of Philadelphia, inquiries that he 114(1 Macle recently indicated that because of the many uncertainties in the picture corporations desired to hold their cash. He also said that Government payments were slowing up, which required more working capital in the hands of corporations with Government contracts. Mr. Ransom said he took it for granted that the Federal Re— %Ire System would do everything in its power that might be necessary t°4esist in financing the war, that of necessity the banks would be uPon for a substantial part of the financing, but that he would itit to be sure that everything possible had been done to bring about ttivestment in Government securities of as many nonbank funds as 114tible before a decision was reached on the question whether the ic4''M of Governors should reduce reserve requirements. tht 11-1* UcKee questioned whether the uncertainty injected into ttlre by the pending tax bill was a factor in the attitude of ) 674 11A/42 -4ecImPorate investors toward the recent issue of certificates for the l'e4son that the certificates would mature before the new taxes became due. Mr. Harrison suggested that the tax question was a factor beeallee cor porations would take into account the net income from the securities after possible taxes and take the position that, if they ell°W.4 have to pay most of the income back in the form of taxes, the lietl'eturn would not be sufficient to justify tying their funds up for 1.'Itilicsnthe in a period of uncertainty when it might be necessary to --Lunds available. He also said that he doubted whether new funds 6.1"allable for investment in long-term governments in the next year ° would go much beyond :7,2,000,000,000 as a maximum, and that it Wae 11°t possible for a company to say in response to a telegram from the Treasury what the company's interest would be in a short-term certit& eate of indebtedness because it would not know the answer until it 1%ew What the opportunities were going to be for long-term investment. Ther efc)re 'he felt that the test of market demand should be made first th ee f°rIll of long-term securities to ascertain how many long-term were available, and that when that was ascertained short-term e 14, itie8 could be offered which could be taken by the banks. the Ilrie tiht In c onnection with a further reference to the question whether eltainties in the tax situation had any effect on the attitude the certificate issue, Mr. Brown stated that he had talked to 675 V9/42 -5the tr. easurers of certain large corporations and that they felt they needed to hold their cash to meet possible demands that might be made Ilpon 11 in connection with war production, that the loss of the small " ellic4Int of net income that they might get from a 1/2 per cent security 11°1111 be a cheap price to pay for having the cash available, and that itthr were going to invest in anything it should be higher interest rete sec urities. Mr. Ransom inquired what the members of the Council thought 11°111d be the effect of lowering reserve requirements in a situation iee the threat of inflation was already strong, and Mr. Brown re1)()Iiciedvirith the statement that in his opinion inflation of bank denot result in an inflation of prices and that a greater clatigerfr°41 inflated bank deposits lay in the tendency of banks to over— et in lcmg-term securities in relation to their capital assets, Itillehnlight result in insolvency for the banks if the Government should be 141able to maintain prices of long-term securities. He agreed with t4etatement made by Mr. Ransom that large increases in excess reserves : 11LIcil'e8111t in a decline in interest rates to a point where it might cb341ger the whole economic structure, but expressed disagreement with 410:41LeteMent which he said had recently been made at a meeting of the b 0r directors of the Federal Reserve Bank of Chicago by a repre- %tatille °f the Treasury that, if the bill rate went up to 3/8 per 411t' it night affect the price of intermediate bonds and perhaps long- 676 4/9/42 -6- terra securities so that it would not be possible for the Treasury to rina-rice at 2-1/2 per cent. SOMR of the members of the Council indiCated that they did not agree that an increase in the short-term rate '1°111d have that effect, and Mr. Harrison stated that it was not out °I* Proportion to have a long-term rate five times as large as the shortterra rate and that in England, where the banks were recognized as being rlecessary to the war effort, it had been made possible for them to 11/re 153r the issuance of short-term securities carrying a rate of 1 or 4/8 per cent. He did not think such an arrangement would be politi- -1/4LY possible in this country but that it was not reasonable to say that a 1/2 per cent short-term rate would make it impossible to maintain per cent rate on long-term securities. 11r. Fleming commented that in the long run it was going to be tleeeesarY to rely on the banks for a substantial part of the war financ14ezid that, while the banks should of course pay taxes on earnings trkl°8418) there should be a recognition in the tax program of the Ne services that the banks are called upon to render in the sale of cl"ellee bonds, the handling of blocked accounts of foreigners, and in ther con nections. He also said that he felt it was important that the bikat c)/ternitient, after having done a very constructive job in building e4Pital in the depression, do not at this time adopt a taxation Drograt 441._ 441e Which would work in the opposite direction and result in banks . -uch a position at the end of the war that they could not stand 677 4/9/42 -7the _, 8 sh0CK that might come during the post-war period. In response to a suggestion from Mr. Ransom that the banks q conserve their capital by curtailing dividends, Mr. Fleming said that he did not think dividend payments were heavy. Mr. Ransom inquired haw a preferential treatment of banks inthe should t'ax program could be justified, and Mr. Fleming said that it be considered in view of the circumstances to which he had 4terr ed and that it had been discussed with the Treasury in connectict . with the pending tax bill. 141r. McKee suggested that the problem should be met by the 11'relle n —14 1, reimbursing the banks for out-of-pocket expenses incurred 'Ither„ -Ln connection with the services which they were now rendering ' tt)tthe 'wernment without charge. Mr. Brown inquired what the situation was with respect to the 44e-teI'M the bet,a of Program of Treasury financing that had been suggested to '4r7 by the Federal Reserve System, and stated that the memthe Council had the impression that not much headway had been the direction of a long-term program and that the Treasury 1148 cant n i-u-ng to operate on a day-to-day basis. 4 thepe Mr. Ransom stated that he felt that, since the members of deral Open Market Committee first began studying the matter, eeNider thatab .,le progress had been made toward the adoption of a program -Lt had not been as rapid as he would have liked, and that 678 41V42 -8the cro l'fieulty had been a tendency to argue over details instead of lagreeing on a set of general principles and leaving to the technicians the details of rates and maturities in harmony with the agreed prineiPlee. He felt that the necessities of the situation would force the 14`eastiry toadopt some kind of a program which the Federal Reserve Systeni alld the banks would have to support, and that when a program was ' e cloPted the results would be much more satisfactory. Mr. McKee stated that it was felt that the Treasury was well 444g the way toward the adoption of a program recently when a banker etitreci the picture and urged on the Treasury the continuation of openrnalltet issues rather than the issuance of nonmarket tap securities suggested in ,, e Ln program proposed by the Federal Reserve System, with the N8111t that uP to the present time the Treasury had been unwilling to aticiPt a program. Ma'. Ransom emphasized that the failure of the System and the 4a11-1‘Y to agree on a program was not because of bad relations, be4114 he thought they were really very good, but because of differences °t °Pillion as to what should be done. to Mr. Harrison inquired whether the members of the Council were assiline from what had been said that the plan suggested by the System 1144heerl d iscarded, and Mr. Ransom replied that such was not the case, 4" that the representatives of the System felt that some plan along the litle suggested should be adopted for the purpose of ascertaining 679 V9/42 -9- What funds could be obtained through the use of nonmarket issues. The Members of the Board present concurred in Mr. Ransom's statement that V— "' suggested plan had not been discarded by the Treasury. Mr. Harrison stated that the reason for his inquiry was that, irlIon-negotiable tap issues were to be offered, someone should look illt6 the question whether they would be legal investments for corporate illVestors, that there was a real question whether his company could buy t11141, that so far as his company was concerned it did not make much dif ference Whether the securities were negotiable or not for the reason that it purchased them to hold to maturity, but that he did not want tohave to look forward to a time when there would be no long-term lasUes av ailable which would be legal investments for insurance cm, Pkies. He also said that, SO far as his own company was concerned, he /74 w illing not only to spend all its available funds but to borrow 4543r for the purchase of Government securities, but in order to do that it would be necessary to know what the program was to be, and that the longer a program delayed the more difficult the problem was become because of the investment of available funds. In a 4114 the further discussion, it was stated that it was whether the tap issues contemplated by the program suggested to 1)7easury would be legal investments for trust funds. In that con- ttetic>r1) Mr. Kurtz stated that the Series G bonds were a good instru144t f°1 'trust investment, and he suggested that the limit on these be 680 V9/42 -10- increased to $100,000. Mr. Harrison expressed the opinion that it would be a mistake tar -nee the war on a basis which would result at the end of the 75 per cent of the Government debt being payable on de/m4d ) that if rates increased after the war the demand obligations wonid be offered for redemption at a time when it would be difficult the G overnment to refund, and that a situation might be created Which. woUld force the Government to resort to greenbacks as a means Ot rth g off the debt. W41714 tran 50 to Mr. Ransom suggested that the most important job before the contx7 was to win the war, that if the job could be done along orthodolt 14._ 4-4-nee and inflation could be avoided that, of course, was desir''IA that we should be most concerned about winning the war. In that sit -uation, he said, we should decide what the alternatives were khd at would be the effects if the Board of Governors should lower zrve requirements. Mr. Harrison stated that he would not lower requirements at time Tthat he mould try first to get as many long-term nonbank th. No[s as Possible invested in Government securities, and that only it b ecame necessary to rely on the banks for a preponderant part t the 1,4_ 'nealcing would he give consideration to the necessity for a qge in reserve requirements. Mr. Ransom concurred in this statement 411c1 aaid that, if reserve requirements were lowered it probably would 681 4/9/42 -11be riecessary to resort to selective methods of control which would raise d ifficult problems. Ur. Harrison said that he did not agree with a statement made Nime. Eccles at an earlier meeting that, if the Federal Reserve sYsten,Were to support the market, long-term Government securities b• e ln fact demand obligations. It was his opinion, Mr. Harrison aaid 'that if the Government did not want the banks to purchase longterm 'eellrities it had sufficient influence over the banks that they Would not buy them. Messrs. Brown and Fleming did not agree with this etatemen4 --u, but Mr. Ransom said he was in agreement with it and felt that ) lf the Government had a comprehensive financing program, the bariket suPsrvisory authorities could say that short-term securities 17°tIld be Made available for bank investment and they should not purchase 1111 securities, and that if that were done the banks would re- In a further discussion of the pending tax bill, members of the C°141e1i reiterated the opinion that the Treasury tax proposals were ciarigerous to the maintenance of bank capital. In response to an '4111% from u_. Dew Ransom whether that view was being presented to the ritl'e411173 it was stated that it had been and that it would also be preeerrted to bez,a Congress. In answer to a question from Mr. McKee as to whether the memc)f the Council had any comments to make with respect to the Series 682 419/42 -12war b°11cle, Mr. Brown stated that the cost of issuing and redeeming these securities in the small denominations in which they were issued 1418.8 ()lit Of all proportion to the amount of funds raised, and that 95 Percent of the expense of issue and redemption would be eliminated it Pr°1ri8i011 were made only to inscribe the bonds with the name of the 15111'cl/48er, taking whatever chances of oversubscription or loss that kight be 4_ azivolved in the elimination of the elaborate records required the present procedure. In connection with a comment by Mr. Ransom that the financing relliireltents of the Government could not be met by reliance on voluntary Pti0n5 i 11)eel ' , Mr. Brown stated that, if the limit on the Series F and 13(1411cis were raised to g100,000 and an organized effort made to encourage 4'bse11.13ti°11e, the funds raised by these issues could be increased very klterial4r. Ur. Kurtz pointed out that there appeared to be no unanimity 4441e the members of the executive committee of the Federal Advisory C°14"11 as to the financing program which should be adopted, and he Nee8ted that they were under obligation to develop a program which ()1411 be submitted for consideration. aten Ur* Harrison said that the members of the Council had never the Program suggested to the Treasury by the Federal Reserve Yaterti. 111%* Ransom stated that inquiry would be made to ascertain her t here would be any possible objection to furnishing copies 683 V9/42 °t the —13— P1*()gram to the Council with a view to discussing it at the time Ot the next meeting of the Council on May 18, 1942. 14r. Ragland concurred in the opinion that had been generally Noressed during the discussion that it would be necessary to resort to the batiks in financing the war, and stated that he did not see how that coUld be done if at the same time the banks were "bled white" thr°11gh the maintenance of low interest rates and application of high taxes. He said that the banks would be willing to forego profits if Ileeessary but that the capital of the banks must be kept sound, which Wotild not be possible if short—term rates were kept at the present low km, and the tax burden were greatly increased. Ransom stated that the problem was to keep all costs down, kici that, -e did not believe it would be possible to make out a case for 't the eatment of the banks. In a discussion of this point, members e°uncil stated that they were not asking for special treatment at the problem of keeping the banks sound would have to be recog— ‘4(r. McKee renewed his suggestion that the banks should be reNbliraed by 1,1, - --e Treasury for the services which they are performing for thme Go_ verriment Without charge. Ur, Brown inquired as to the status of the proposal to have the --"" I Res ke/Ita erve Banks act as fiscal agents for the Tar and Navy Depart— arld the Maritime Commission in the making and guaranteeing of 684 4/9/42 -1414e118 for war production purposes. At Mr. Draper's request, a state- it" ' as read which reviewed briefly the attention that had been given t0 this matter by the Board and representatives of the services since 4ecutive Order No. 9112 was signed on March 26. The memorandum also stated that the regulations to be issued by the Board and the instructioris t be ° given by the services to the Federal Reserve Banks were in ti'lea form, subject to minor changes, and would be sent to the Banks llot later than the end of this week when the Federal Reserve Banks would 414 4 Position actively to enlist the support of the private banking eZatem;_ 4.11 the program. The statement made the further comment that, irlastauch as the documents involved had not yet been cleared finally with the armed possible at this time to discuss the details of services, it was not rtext week. aerv the program but that they would be available sometime lb% Ransom pointed out that the operations of the Federal Re- e asistem under the Executive Order would be decentralized and ''erk4ed through the Federal Reserve Banks, and that all information that re8Peet to the program would be issued by them. He also suggested it was extremely important that the Banks participate in the proto the fullest extent possible as it was the intention of the e"vices to get as much of the financing as possible done through 1)111/ate bank_Lag_ system rather than through the use of Government NIcle, and that it was for that reason that the suggestion had been 685 4/9/42 -15de that the Federal Reserve Banks, located throughout the country, act "fiscal agents for the services. Mr. Brown stated that many manufacturers of war materials felt that they should be financed exclusively by advance payments by the Golierh,„ and he inquired whether the proposed program would mean that this type of financing would be discontinued. Mr. McKee said that in the future advance payments would be Illade°41,7 cn the basis of an interest charge, whereupon Mr. Brown stated tha contractors felt that they were in a better bargaining 15(Isiti°11 if they had an advance from the Government than they would bein the ease of a loan with a Government guarantee, and that, theretore, the question was not whether the banks would be willing to make 1314 Vtce rather whether contractors would put pressure on the ser- t° continue to finance by means of advance payments. arltee In connection with a discussion of interest rates and guartees to be charged under the program, Mr. Draper stated that, theie :the case of a 100 per cent guarantee, the amount received by bank would be more, on the average, than the cost of servic- tie th e 1°a, and °Ilrld to be 4ker that if the rates prescribed by the Board should be unsatisfactory they could be changed. Mr. p -leming inquired whether there was any plan to have this Presented at the meeting of the Executive Council of the American Re sociation at French Lick on April 19-22, and Mr. Ransom stated 686 4/9/42 -16- that ix Cravens, who had been employed by the Board on a temporary ba,Tia -In connection with the program, very likely would attend the 4eeting. Thereupon the meeting adjourned. Secretary.
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