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Minutes of actions taken by the Board of Governors of the Federal Reserve System on Tuesday, August 3, 1954. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Vardaman Mills Carpenter, Secretary Sherman, Assistant Secretary Thurston, Assistant to the Board Vest, General Counsel Sprecher, Assistant Director, Division of Personnel Administration Mr. Hexter, Assistant General Counsel Mr. Cherry, Legislative Counsel Mr. Mr. Mr. Mr. Mr. Governor Mills stated that there had been included in the report of the Senate Committee on Finance on H.R. 9366, a bill to amend the Social Security Act, known as the Social Security Amendments of 1954, a provision in Section 114 which provided that service which is covered by old-age and survivors insurance shall not be credited toward benefits (other than a benefit under title II of the Social Security Act or a benefit under the Railroad Retirement Act of 1937, as amended) under any retirement system established by the United States or any instrumentality thereof. This provision would be ap- plicable to any service performed after 1954 by an individual as an officer or employee of the United States or any instrumentality thereof, and Governor Mills stated that if the provision were to become law, it would have the effect of terminating the Retirement System of the Federal Reserve Banks as an operative system, at least as it applied to Reserve Bank employees. 1148 -2- 8/3/54 At Governor Mills' request, Mr. Vest commented on the provision, stating that it had been put in the Senate report on the bill by the Committee on Finance last week. No such provision had been included in the House bill which had been reported sometime ago. Mr. Vest said that the provision would, as Governor Mills indicated, mean that Federal Reserve Bank employees could not receive credit in the Retirement System of the Federal Reserve Banks for any service performed after 1954 since the Federal Reserve Banks have been considered to be instrumentalities of the United States. Mr. Vest added the comment, in response to a question from Governor Mills, that the amendments to the law which brought the Federal Reserve Banks within the scope of the Social Security System in 1951 did not provide for optional participation but rather made such participation on the part of the Federal Reserve Bank employees mandatory. Governor Mills stated that the Civil Service Commission was disturbed about the inclusion of the provision in question and contemplated writing a letter to Chairman Millikin of the Senate Finance Committee requesting that the provision be eliminated. It was Governor Mills' view that the provision as now included went much further than the correction of the situations about which members of the Senate Finance Committee were concerned and that it had been inserted without full study of the problems that it would create. Governor Mills also referred to the report of the Committee on Retirement Policy for Federal Personnel (the Kaplan Committee) which had proposed steps to bring about an integration with 1149 -3- 8/3/54 Social Security of the various retirement systems covering Federal employees. It was Governor Mills' recommendation that the Board send a letter to the Senate Finance Committee explaining the serious problem that would be presented to the Federal Reserve System if the provision In question were enacted and requesting its elimination. Mr. Cherry commented on discussions he had had with members of the staff of the Senate Finance Committee which indicated that they were cognizant of the effects the proposed amendment to the Law would have on the Federal Reserve Retirement System. There followed further discussion of the provision in the Senate report, of discussions with Mr. Wurts„ Chairman of the Retirement Committee of the Retirement System of the Federal Reserve Banks, and of the form of letter that might be written seeking to bring about elimination of the provision. At the conclusion of the discussion, it was agreed unanimously that a letter, to be prepared for Chairman Martin's signature, should be sent to Chairman Millikin of the Senate Finance Committee in the following form, with the understanding that a similar letter should be sent to the Chairman of the Committee on Ways and Means, House of Representatives: Our attention has been called to the proposed new section 114 of H. R. 9366 (the Social Security Amendments of 1954), as reported from the Senate Committee on Finance on July 271 1954. Not being aware of the origin and purpose of the new section, the Board is not certain as to its correct interpretation. Apparently, however, one effect of this provision would be that service which constitutes "employment", as defined 1150 8/3/54 -4- in section 210(a) of the Social Security Act, performed after 1954 by employees of an "instrumentality" of the United States, would have to be disregarded in calculating benefits under a retirement system established by such instrumentality. If enacted in its present form, section 114 might have an unanticipated and very unfortunate effect upon the retirement benefits of employees of the Federal Reserve Banks. Since 1934, these employees have been subject to the Retirement System of the Federal Reserve Banks. They were placed under the Federal Old-Age and Survivors Insurance System by the Social Security Act Amendments of 1950, and thereafter adjustments were made under which the benefits to which they were entitled under the Retirement System of the Federal Reserve Banks were reduced, as a step in the integration of that system with the Social Security System. Consequently, for the past several years the employees of Federal Reserve Banks have been subject to the Social Security System and have also been entitled to benefits under the Retirement System of the Federal Reserve Banks, with the adjustments referred to above. In this connection, it should be mentioned that none of the funds supporting the Reserve Banks' Retirement System are derived from appropriated monies. Section 210(a)(7)(B) of the Social Security Act, as amended (42 U.S.C. 410), provides that the term "employment" shall not include "Service performed in the employ of an instrumentality of the United States" with designated exceptions, one of these exceptions relating to "(ii) service performed in the employ of...a Federal Reserve Bank..." In view of this statutory provision, it would appear that a Federal Reserve Bank would be regarded as an "instrumentality" within the meaning of section 114 of the pending bill. If this were so, the result would be that Federal Reserve Bank employees, who have been covered by the Retirement System of the Federal Reserve Banks for twenty years, would cease to be subject to that system with respect to future employment, and with respect to such employment would be entitled only to the more limited benefits of the Social Security System. In brief, the enactment of section 114 would have the effect, after this year, of terminating the Retirement System of the Federal Reserve Banks as an operative system. This result would be grossly unfair to employees who have spent years in the Federal Reserve Banks with the understanding that if they performed satisfactory service their retirement rights would continue to accrue until the time of their retirement. Furthermore, such a cutting-off of the accrual of rights 1151 8/3/54 -5- under the Retirement System of the Federal Reserve Banks would have an adverse effect upon the morale of Reserve Bank employees and might make it more difficult not only to recruit new employees but also to retain skilled and experienced employees who have served the lieserve Banks for many years. In view of these considerations, the Board expresses the hope that, unless section 114 is entirely eliminated from the bill at some stage of the legislative proceedings, its provisions will be amended so as to be inapplicable to officers and employees of Federal Reserve Banks. This objective might be accomplished by adding at the end of section 114 the words "other than a Federal Reserve Bank". Your assistance in this matter is earnestly solicited because of its great importance to the effectiveness of the Federal Reserve System. At this point Messrs. Thurston, Vest, Sprecher, Hexter, and Cherry withdrew from the meeting. Governor Szymczak stated that Mr. Dembitz, Assistant Director, Division of International Finance, had advised him that the Foreign Operations Administration had received a request from the Central Bank of Bolivia that a representative of the Federal Reserve System who was an expert in accounting be made available to that Bank for a period of three to four months for the purpose of making a survey of its accounting system to determine whether (a) there were duplic ations in the present system, and (b) whether present controls were sufficient. It would be expected that most of the time required for the survey would be spent in La Paz, Bolivia, and that the survey would include the making of proposals for simplification of the Bank's system of accounting and controls, if the expert felt that to be necessary. Governor Szymczak said that the matter had been brought to his attent ion informally for the purpose of ascertaining whether the Board would look with favor on 152 8/3/ receiving a letter from the Foreign Operations Administration, inquiring whether a representative of the System might be made available for the purpose indicated. During a discussion of the matter, the members of the Board who were present indicated that it would be difficult to comply with a request along the lines described by Governor Szymczak and that it would therefore be desirable to discourage the making of a formal request by Foreign Operations Administration for such assistance. It was understood that this view would be expressed to representatives of the Foreign Operations Administration. Chairman Martin stated that Mr. Clarence Francis, Chairman of the Board of General Foods Corporation and a Class B Director of the Federal Reserve Bank of New York, had indicated informally that he would like to recammend that an Eisenhower Fellowship be awarded to Mr. Noyes, Assistant Director, Division of Research and Statistics. Chairman Martin stated that Mr. Francis had been favorably impressed by Mr. Noyes as the result of the latter's assistance in connection with the study Mr. Francis had made for the President last spring regarding a program for dealing with agricultural surpluses and other excessive stockpiles, and it was his feeling that Mr. Noyes was the type of person who should be selected for an Eisenhower Fellowship. Chairman Martin noted that this would in- volve from six months to a year of study abroad, including visits to various central banks, and that the Board had agreed at its meeting on July 80 1954, that it would not object to participation of a representative of the Federal Reserve System in the Eisenhower Fellowship program. 11,33 8/3/54 Chairman Martin vent on to say that if Mr. Noyes were awarded one of the Fellowships it would mean that the Board would continue to pay his salary and the usual retirement system contributions while he was absent, but that the Fellowship would cover his travel and other expenses. It was agreed unanimously that, if Mr. Noyes were awarded an Eisenhower Fellowship, the Board would approve his acceptance of the Fellowship with the understanding that it would continue to pay his salary and the usual retirement system contributions while he was absent from the Board. Chairman Martin referred to the vacancy that existed among appointees to the Board of Directors of the Detroit Branch of the Federal Reserve Bank of Chicago resulting from a resignation on June 30, 1954, by Mr. Hardin, formally Dean of Agriculture, Michigan State College. He suggested that in view of the resignation of Dr. John A. Hannah as Assistant Secretary of Defense, the Board consider whether it would wish to reappoint him as a Director of the Detroit Branch in which capacity he served from January 1, 1951 to March 13, 1953. It was agreed unanimously that Dr. John A. Hannah should be appointed director of the Detroit Branch for the remainder of the term expiring December 31, 1954, if it were ascertained through Mr. Coleman, Chairman of the Federal Reserve Bank of Chicago, that he would accept the appointment. Governor Vardaman inquired as to the status of negotiations for additional real estate adjacent to the head office building of the Federal -8- 8/3/54 Reserve Bank of Chicago and establishment of branches of that Bank at Des Moines and Indianapolis. During a discussion, Chairman Martin sug- gested that Governor Szymczak be asked to talk informally with President Young of the Chicago Benk who was in Washington today with a view to ascertaining the status of proposals for establishment of branches in Des Moines and Indianapolis, as well as acquisition of additional real estate for enlargement of the head office building of that Bank. The meeting then adjourned. During the day the following addi- tional actions were taken by the Board with all of the members except Governors Evans and Robertson present: Minutes of actions taken by the Board of Governors of the Federal Reserve System on August 2, 1954, were approved unanimously. Letter to the Board of Directors, The Peoples-Liberty Bank and Trust Company, Covington, Kentucky, reading as follows: Pursuant to your request submitted through the Federal Reserve Bank of Cleveland, the Board of Governors of the Federal Reserve System approves the establishment of a branch by The Peoples-Liberty Bank and Trust Company, Covington, Kentucky, at the corner of the Dixie Highway and Horse Branch Road, South Fort Mitchell, Kenton County, Kentucky, provided the branch is established by January 17, 1955. Approved unanimously, for transmittal through the Federal Reserve Bank of Cleveland. Letter to the Board of Directors, The Richland Trust Company, Mansfield, Ohio, reading as follows: 8/3/54 -9- Pursuant to your request submitted through the Federal Reserve Bank of Cleveland, the Board of Governors of the Federal Reserve System approves the establishment of a branch by The Richland Trust Company, Mansfield, Ohio, at the corner of Ashland Road and Acker Drive, Cool Ridge Heights, Richland County, Ohio, provided the branch is established within one year from the date of this letter, and the approval given by the State Banking Department is still effective at the time the branch is established. Approved unanimously, for transmittal through the Federal Reserve Bank of Cleveland. Letter to the Comptroller of the Currency, Treasury Department, Washington, D. C., (Attention: Mr. W. M. Taylor, Deputy Comptroller of the Currency), reading as follows: Reference is made to a letter from your office dated December 10, 1953, enclosing photostatic copies of an application to organize a national bank at Warwick, Virginia, and requesting a recommendation as to whether or not the application should be approved. The report of investigation of the application indicates that the proposed capital of the bank, $100,000, would not meet the legal requirements for the organization of a national bank in Warwick which is reported to have a population in excess of 50,000. In this connection, it is reported also that a good portion of the capital of the bank would be furnished by The First National Bank of Newport News through a loan to an affiliated corporation organized to purchase stock of the bank and that the proposed institution would be converted into a branch of The First National Bank of Newport News after a period of five years. Due to the proximity of several banks in the adjacent city of Newport News, there is doubt as to the need for the proposed additional banking facility; and it is indicated that it would place the existing bank and its newly-established branch in an unfavorable competitive position. In view of these unfavorable factors, the Board 1156 8/3/54 -10- of Governors does not feel justified in recommending approval of the application. The Board's Division of Examinations will be glad to discuss any aspects of this case with representatives of your office, if you so desire. Approved unanimously.
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