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Minutes of actions taken by the Board of Governors of the Pederel Reserve System on Monday, August 2, 1948. 14 the Board Room at 9:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. The Board met McCabe, Chairman Eccles Szymczak Draper Evans Vardaman Clayton Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Board Riefler, Assistant to the Chairman Smead, Director of the Division of Bank Operations Mr. Thomas, Director of the Division of Research and Statistics Mr. Vest, General Counsel Mr. Mr. Mr. Mr. Mr. Mr. Chairman McCabe stated that this meeting had been called the request of Mr. Eccles who was concerned whether the three 1311118'graPh statement approved by the members of the Board on July 28) Eind recorded in the minutes of July 29, 1948, for presentation to theBanking and Currency Committees of Congress correctly repreBezfted the Board's position with respect to the inclusion of nonblezber banks in legislation authorizing the Board to increase reserve requirements. The Chairman said he had discussed the matter pith mr. Eccles and that following that conversation the state- illerlt to be presented before the House Banking and Currency Committee today had been changed and copies of the revised statement had 1189 8/2/48 -2- teell sent to each member of the Board for his information before coilsideration at this meeting. °r He also said that after the copies the revised statement had been distributed the first two and a half 1,„ -6es, which undertook to speak for the Board, had been changed ' to "ad as set forth below. The purpose of the entire revision, he 'was to avoid changing the three paragraph statement approved said bY thQ - members of the Board on July 28, 1948, and at the same time to st ate the reasons for making the authority of the Board to in9"be reserve requirements applicable to nonmember banks. "I deeply appreciate the consideration your ChairIlan has extended to me in making the time of my appear' el°g.ce here as convenient as possible. Although Con1%essman Wolcott had asked me to come before you earlier, kindly consented in deference to my request to wait this morning. I therefore acceded to the urgent equest of Senator Tdbey to appear before the Senate snking and Currency Committee last Thursday morning. t'nee your Committee has been fully occupied with the estimonY of Mr. Porter, I trust that the postponement natil this morning has not caused you inconvenience. On the evening before going to the Senate Committee I canvassed the members of the Board by telephone '4) ascertain their views on the two titles of the pro.''(peed anti-inflation bill which relate to consumer credit and bank reserves. The members of the Board agreed unanimously to the following statement: Anti-Inflation Act of 1948 "The proposed 'Anti-Inflation Act of 1948' Includes two titles relating to credit controls. Both are, in substance, part of the comprehensive anti-inflationary program which the Board of Governors has previously recommended to Congress. Title One relates to regulation of consumer credit and Title Two relates to bank reserves. As you gentlemen know, the proposed regulation of consumer ; 1190 8/2/48 -3- "credit is identical, except for the date, with the bill passed by the Senate, and acceptable to the Board of Governors as one part of an overall program. "The proposal with respect to bank reserves is similar to that advanced by the Board in April, except that the increased requirements would be applicable only to member banks, whereas the Board had recommended that they be made applicable to all commercial banks. This is a significant difference. We feel deeply that it is not fair to member banks in their competitive relations to non-member banks to require that they be singled out to carry the additional reserves that may be necessary to combat this inflationary situation. As an emergency measure, however, the bill would be adequate to meet the immediate need for additional authority to deal with reserves. "In thus stating the views of the Board on these two titles of direct concern to the System, I do not want to create the impression that action in the credit field alone will solve our inflationary problems. Other areas, particularly a budgetary Surplus, are more important. "Since I presented that statement to the Senate ComXit tee/ we have been in touch with the Presidents of sevetal of the Federal Reserve Banks, and others. There is j ver°ng concurrence with the statement that it would be (1412Y Unfair to single out member banks to carry the adreserves to combat this inflationary situation. is particularly true of the Presidents from those ITtricts where there are large numbers of non-member a nks, which would be given a competitive advantage as _Tlinst member banks. It might result in a serious loss c7 membership in the System and weaken the effectiveness ts policies. As you know, the effective reserve rerements in most states are substantially below those _!rrisd by member banks, and thus non-member banks have esrsater latitude and earning power. The question of the inclusion of non-member banks is ne_rY important and we would appreciate it greatly if the v liaraittee would give this problem serious consideration. ,!questionably from the point of view of equity, the pro.7ed legislation should apply to all commercial banks. `' is of course a question for the Congress to decide. r 1 1191 8/2/48 "All of us on the Board are very much concerned about the best way to deal with this problem in this emergency without weakening the power of the Federal Reserve System to adopt and carry out national monetary policies in the broad public interest. Some Members of the Board feel that on balance they would Prefer not to have this emergency legislation unless aPPlies to all commercial banks in the United o ttat es—non-member as well as member. Others feel hat, since the legislation is of an emergency character) lasting for only two years, enactment of the esent bill is preferable to no legislation at all. 1 members recommend that Congress in the interval bye fundamental reconsideration to the problem of nnk reserves in this country. As you know, the Sysrill had had an expert committee working on this probt" .1. Its findings were presented last May to the 'Joint Committee on the Economic Report." r During a discussion of the revised pages, Mr. Eccles stated that his reason for suggesting that the matter be considered was that When he was testifying before the Senate Banking and Currency e°111Mittee on the afternoon of Friday, July 30, Senator McCarthy h" €tsked about the views of the Board with respect to the inclu81°4 °f nonmember banks in the proposed reserve legislation, that he (Ill% Eccles) replied that he did not know what the views of the 11°Eird were at the present time but that he did know that on April 13 '1948, when he testified before the Joint Committee on the Eco- 11°):111e RePort the Board had taken the position that the legislation 1.1°111c1 be made applicable to nonmember banks. At that point, Mr. ecles said, Senator McCarthy referred to the statement presented 14. Chairraan McCabe at the hearing before the Senate Banking and 1192 8/2/48 -5- Olarrency Committee on July 29 which stated that as an emergency Measize a bill which would give authority to increase reserve re1311xement8 of member banks only would be adequate to meet the imraecliate need for additional authority to deal with reserves. Mr. 4cles said that, while he had approved the three paragraph stateover the telephone, he did not realize that it included a statement which implied that legislation covering member banks °44 "cRild be a satisfactory immediate solution to the problem. lie (1.4 'u not think the legislation should be regarded as emergency lA -gisl aLion which would have effect for only a two-year period becatise at the end of that time it would not be practicable to the law to lapse and create excess reserves for member bealk 8 14 the amount by which reserves had been increased under the authority during the interim. It was his view that experi- ence 'with other legislation affecting nonmember banks made it clear that the proposed legislation could not be regarded as ge4CY legislation and that therefore the sentence in the tottrd 8 statement should be explained by a statement to the ef- rect fir that for the first time this morning the members of the 13°ard had an opportunity to discuss the three paragraph statethat it was agreed upon further consideration that the last selatence of the second paragraph did not express the present 1193 8/2/48 -6- of the Board or was somewhat inconsistent with the balance or the statement and therefore should be deleted or (2) that at a nieeting this morning the Board, after further consideration, deto modify the last sentence of the second paragraph of the statement because it was not consistent with the balance of the stItteMent and that the Board's statement of April 13, 1948, preto the Joint Committee on the Economic Report, stated fully the zoard's views on the subject of bank reserves. In the discussion of Mr. Eccles' suggestions, Chairman Meows ue stated that the three paragraph statement had been disA ellssed R, ----, approved by the members of the Board and had been presstited to the Senate Banking and Currency Committee and that he (41i 4 °t think it should be changed, particularly since the revised state 'tent as he had presented it at this meeting stated that unciltl°114:1131Y from the point of view of equity the proposed legis4:tio n should apply to all commercial banks. There was a discussion of the circumstances in which the phone approval of the three paragraph statement was given by the htici Ildtvidual members of the Board. Mr. Vardaman stated that he 'llggested that the statement be considered at a meeting and 114.. 1) lisq/er stated that he had approved the statement and would e.saute 1'1111 responsibility for that action on his part but that 1194 8/2/48 -7- he felt the statement in its present form reversed a position pre11S4 taken by the Board and placed the Board in an embarrassing P°sition. Mr. Szymczak did not feel that the Board was placed in alleMbarrassing position as the statement was to the effect that there was a bill now pending before the Congress and that the Board it as being adequate. Mr. Vardaman responded that his ob- iection to the statement was that he did not think the pending bill //as aaequate. Chairman McCabe stated that if, after testifying before the 8e4ate ommittee, he should make a statement along the lines pro1)0secl bY Mr. Eccles it would be taken as a reversal by the Board °tits position. Mr. Eccles expressed the view that it would not be a rever- 8a1c)f the previous position of the Board but an explanation of a te -ce that was not consistent with the rest of the statement. Mr. Morrill suggested that the problem might be met by Btriki 4 out the last sentence of the next to the last paragraph Ett4 the entire last paragraph of the statement as set forth above. Mr. Vardnman responded that the sentence would still be in thesta tement that the proposed bill would be adequate to meet the eiate need for additional authority to deal with reserves. 14r. Evans stated that he would stand by his vote approving the Stat-et although if the statement could be toned down so far 1196 8/2/48 It -8- related to nonmember banks he would prefer that course. Mr. Szymczak stated that in April the Board made a recom- zenclation that Congress grant to the Board additional authority to illc ase reserve requirements of all commercial banks, so that record was clear on that point. bill The pending administration Providing for an increase of reserve requirements by 10 per eellt on demand and 4 per cent on time deposits does not include 11°11illeillber banks because it is considered by those who planned strategy that it 11°13/11e/111)er banks. would stand a better chance of passage without He also said when it was decided that Chairman 14ceEt-be should testify before the Senate Banking and Currency Com11;ttee 441 last week, the three-paragraph statement had been prepared aPProved by all of the members of the Board, that the Chairman Ile.(1 testified before the Committee at which time the three-para.1'41:th st atement was presented by him as the views of the Board, 411c1 that if that statement should now be changed it would prove 141)4rrassing to the Chairman by showing a division in the Board Or slIdden change in position which would be harmful to the sucot the legislation. While Mr. Szymczak preferred to have zlorize *er banks covered by the legislation from the standpoint of es ecNit Y staLt_ to memb-r banks (and this was amply covered in the Chairman's Illent before the Senate Committee and clearly brought out again 14 his 'DroPosed statement before the House Committee), he said it 119* 8/2/48 -9- nill8t be remembered this is not our bill and he felt that legislation apPlYing only to member banks would be adequate from the ecottomics tandpoint of the amount of credit involved and, therefore, 11°111c1 be preferable to no legislation at all. Mr. Clayton suggested that the statement be further revised 4 to -L/101,A Ltue a comment to the effect that the Board only this morning ror th e first time had an opportunity to meet and discuss the stateflient at -- -Length and that all were agreed that the inclusion of nontews_ utr banks was essential to the effectiveness of the proposed In a discussion of Mr. Clayton's suggestion, Mr. McCabe sited that he would not favor such a change, that all of the members of the Board had approved the original statement, and that it qoilld not be changed because a question had arisen with respect to it 1:11ring the hearing before the Senate Banking and Currency Committee. After some further discussion, M. Vardaman moved that the first sentence of the third from the last Paragraph of the statement as set forth above be changed to read as follows, and that the last sentence of the next to the last paragraph and the entire last paragraph be deleted: "Since I presented that statement to the Senate 00m,.Qaittee, the Board has this morning had an oppor"vuro 1. Y to meet and to discuss the proposed legislat4 trn at length. A majority of the Board is agreed tifit the inclusion of the nonmember banks is essentrl to make the proposed legislation fully effec. . I have also been in touch with several of the pr" esidents of the Federal Reserve Banks, and others." 1197 8/2/48 -10Mr. McCabe stated that he would be willing to accept the delt;1-013. of the last sentence of the next to the last paragraph and the e ntire last paragraph of the statement but that he felt the inelltsiOn of the changed sentences proposed by Mr. Vardaman's motion Voblz s'Lu. be a grave mistake. At the conclusion of the discussion, Mr. Vardaman's motion was put by the Chair and carried, Messrs. Eccles, Draper, Vardaman, and Clayton voting "aye" and Messrs. McCabe, Szymczak, and Evans voting "no". The statement as thus approved was as follows: • "I deeply appreciate the consideration your Chairhas extended to me in making the time of my appearealce here as convenient as possible. Although ConFesaman Wolcott had asked me to come before you earlier, e kindly consented in deference to my request to wait until this morning. I therefore acceded to the urgent 13 1lecillest of Senator Tobey to appear before the Senate srking and Currency Committee last Thursday morning. "Your Committee has been fully occupied with the tell ti onY of Mr. Porter, I trust that the postponement —4611 this morning has not caused you inconvenience. On. the evening before going to the Senate Committee I to ) canvassed the members of the Board by telephone ascertain their views on the two titles of the proe anti-inflation bill which relate to consumer .edit and bank reserves. The members of the Board '‘glleed unanimously to the following statement: Anti-Inflation Act of 1948 "The proposed 'Anti-Inflation Act of 1948' includes two titles relating to credit controls. Both are, in substance, part of the comprehensive anti-inflationary program which the Board of Governors has previously recommended to Congress. Title One relates to regulation of consumer credit and Title Two relates to bank reserves. As you gentlemen know, the proposed regulation of consumer !m r 1198 8/2/48 -11- "credit is identical, except for the date, with the bill passed by the Senate, and acceptable to the Board of Governors as one part of an overall program. The proposal with respect to bank reserves is similar to that advanced by the Board in April, except that the increased requirements would be aPplicable only to member banks, whereas the Board had recommended that they be made applicable to all commercial banks. This is a significant difference. We feel deeply that it is not fair to member banks in their competitive relations to non-member banks to require that they be singled out to carry the additional reserves that may be necessary to combat this inflationary situation. As an emergency measure, however, the bill would be adequate to meet the immediate need for additional authority to deal with reserves. "In thus stating the views of the Board on these two titles of direct concern to the System, I do not want to create the impression that action in the credit field alone will solve our inflationary problems. Other areas, particularly a budgetary surplus, are more important. Since I presented that statement to the Senate Comuilte-Lttee, mitt the Board has this morning had an opportunity to rmet and to discuss the proposed legislation at length. ' 3 e Board is agreed that the inclusion of the non-member _1 .14.ks is essential to make the proposed legislation fully ! ective. I have also been in touch with several of the esidents of the Federal Reserve Banks, and others. There e strong concurrence with the statement that it would be 4,rY Unfair to single out member banks to carry the addi:lonal reserves to combat this inflationary situation. This Particularly true of the Presidents from those districts ere there are large numbers of non-member banks, which as against member uld be given a competitive advantage tnks. It might result in a serious loss of membership in Ar System and weaken the effectiveness of its policies. st You know, the effective reserve requirements in most b ates are substantially below those carried by member ,!Ilks, and thus non-member banks have greater latitude earning power. Ire The question of the inclusion of non-member banks is rY imPortant and we would appreciate it greatly if the , 0 tifIlMittee would give this problem serious consideration. le:restionably from the point of view of effectiveness as as equity the proposed legislation should apply to -4-1- commercial banks." 1 w Z 1199 8/2/48 -12Messrs. McCabe, Evans, Riefler, and Thomas left the meeting t()attemd the hearing before the House Banking and Currency Commit- tee which Chairman McCabe was to testify on the proposed legislatioh with respect to reserve requirements and Mr. Evans was to tes- tifY 011 the proposed restoration of authority to regulate consumer installusrit credit. There was a further discussion of the change made in the statezell+ by the approval of Mr. Vardaman's motion and he sugtha-, if acceptable to Chairman McCabe, a further change be ril4cle to eliminate the reference to "A majority of the Board" kaato s ubstitute therefor the words "The Board" so that the sentence °lad read, "The Board is agreed that the inclusion of the lIctraeltber banks is essential to make the proposed legislation 1'144 eff ective." This suggestion was telephoned to Chairman McCabe wad was acceptable to him and the statement as presented before the House Committee was changed accordingly. There was a discussion of a question by Mr. Vardaman as to ho lotions of the kind which had arisen at this meeting could ," oota ed. in the future. He also raised the question whether the))08. I'di s Position had been made entirely clear to the Congress t44 the 4111ate zoard did not advocate the restoration of authority to consumer credit as a single piece of legislation. During 1_200 8/2/48 -13- cliscussion of the latter point, Mr. Thurston read an excerpt 111‘ct the statement to be presented before the House Banking and ClIrrelicY Committee by Mr. Evans in which it was stated that concredit legislation by itself could not do the job and that to be --adequately effective it must be buttressed by the basic bank erealt c ontrols which the Board had advocated repeatedly. Mr. Vest reported that on Saturday afternoon, July 31, he l'eceilied a telephone call from Mr. McKenna, one of the attorneys r"he Senate Banking and Currency Committee, who said that he 44(1 be commissioned to draft legislation which would bring non- itieraber banks within the proposal for increased authority over reand that he would like Mr. Vest's assistance. Mr.Vest stated that, after some discussion, he agreed to assist Mcitenna .11 1 working out some wording for the legislation, and that he liould like advice as to whether the legislation should 11()vide for a certification by State bank supervisors that nonrneraber banks were maintaining the required reserves and whether t'411.11th°ritY for making changes in reserve requirements should "131 ea c - in the Federal Open Market Committee or with the Board Q°Nrerrlore. The members present indicated that they would favor silch cert ification and placing the authority to change reserve reclizirements in the Board. 1201 8/2/48 -14At this point Messrs. Smead and Vest withdrew and the action stated with respect to each of the matters hereinafter set forth taken by the Board: Minutes of actions taken by the Board of Governors of the Pecier al Reserve System on July 30, 1948, were approved unanimously. Memorandum dated July 26, 1948, from Mr. Boothe, Assistant Director of the Division of Administrative Services, recommending that Carl J. Wickens be appointed as a laborer in that Division, temPorary basis for a period of two months with basic salary at the rate of $2,020 per annum, effective as of the date upon 1411e1:1 he enters upon the performance of his duties after having 14t8seci the usual physical exaraination. The memorandum also stated that 'because of the temporary nature of his appointment Nickens l'i°111c1- not become a member of the Federal Reserve retirement system. Approved unanimously. Letter to Mr. Rounds, First Vice President of the Federal Ilesery e__ of New York, reading as follows: "Reference is Made to your letter of July 26, 0.0"161 submitting the request from Commercial Trust . e13a4Y of New Jersey, Jersey City, New Jersey, for tiall aPproval to the establishment of three branch thelces at Bayonne, New Jersey, in connection with Proposed absorption of the banking business of the Yonne Trust Company, Bayonne, New Jersey. In view of your recommendation, the Board of Gave rnors approves the establishment and operation 1.202 8/2/48 _of the three branches in Bayonne by the Commercial ''rust Company of New Jersey, provided the absorption ls effected substantially in accordance with the plan submitted; the prior approval of the appropriate State thorities is obtained; and with the understanding uhat counsel for the Reserve Bank will review and t satiefY himself as to the legality of the steps taken Q effect the proposed absorption and establishment of the branches." Z Approved unanimously. Letter prepared for Chairman McCabe's signature to Mt. B. C. °ripe ' s President, Investors League, Inc., 175 Fifth Avenue, New York 10 New York, reading as follows: "While the Board of Governors appreciates very " i kch the invitation contained in your letter of July to attend the meeting being sponsored by organization in New York on September 16 to dis11s5 , the advisability of reducing margin requirements, " s?11 can readily appreciate that it would not be posi,ble for the Board to be represented at all meetings ol i this kind that might be called to consider matters the fields in which the Board has responsibility. "As has received from time to +4 mc You know, the Board the views of the New York Stock Exchange, the York Curb Exchange, and individual brokers with ZZipect to margin requirements, and in my letter of le e 22 I discussed the matter in response to your : ti er of June 4, 1948. The Board is glad at any me to receive and consider the views of the Inv4tors League or any other organization or indiclir1.1a1 who is interested in the distribution of se, 1, 1ties and, if the proposed meeting at the Bankers' 01 is held on September 16 and any conclusions are R,nh cl, the Board would be pleased to be advised re„Ling them.” Approved unanimously. 1203 8/2/48 -16Letter to Mr. Sproul, President of the Federal Reserve Bank or New York, reading as follows: 14,0. :This refers to Mr. Wiltse's letter dated June 18, transmitting a protest submitted by Mr. Arnold 7rkel on behalf of himself and Mr. Ralph Dubin in con:?ction with the Board's tentative ruling as to the apP-Licability of section 32 of the Banking Act of 1933 to Mr. Dubin. „. "It will be appreciated if your bank will advise Markel that the Board of Governors has given careConsideration to the protest which he submitted .1,!Ild on the basis of the information and arguments con'ained therein the Board is not inclined to change the P°sition which it took in its letter of March 29, 1948. In these circumstances if Mr. Markel still wishes tO in A, -Lave a conference in Washington for the purpose of '1-scussing this matter in further detail, it is sugfsted that he take the matter up with your bank in an °rt to arrange a time mutually convenient to him representatives of the Board." r Approved unanimously. Secretary. 1Dprov,a: Chairman.
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