Full text of Minutes of the Board of Governors of the Federal Reserve System : Meeting Minutes, August 31, 1944, Volume 31, Part 3

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1299

A meeting of the Board of Governors of the Federal Reserve
818tera was held in
Washington on Thursday, August 31, 1944, at 10:30

aone

PRESENT:

Mr. Eccles, Chairman
Mr. Ransom, Vice Chairman
Mr. Draper
Mr. Bethea, Assistant Secretary
Mr. Carpenter, Assistant Secretary
Mr. Clayton, Assistant to the Chairman
Mr. Smead, Director, Division of Bank
Operations
Mr. Vest, Assistant General Attorney

Chairman Eccles reviewed the informal discussions which he and
141
'ClaYton

had had with Colonel Mechem of the War Department, Mr.

RilleitleY3 Director
of Contract Settlement, and Colonel McKinney, of Mr.
flineltleYis office,
with respect to the maximum interest rate and guar—
tee
and c
the time of
the isstlariceommitment
by it offees to be prescribed by the Board at
Regulation V as revised in connection with the
INIInfor f
inancing the claims of contractors, subcontractors, and
()thel's allsing out
of the termination of war contracts.
10

He said that

8ervices had
been strongly of the opinion that the maximum rate on
telbrilitiati°11 loans should be 5 per cent, that they should share in com—
kttr4erlt fees,
and that the guarantee fees should be higher than he had
"
Nht, wouict e
reas
:
n appropriate in the circumstances. He added that the
174 to

for the desire of the Services for high guarantee fees

enable them to
accumulate as large a fund as possible from which
t°136:,Y any
losses that might be incurred in connection with their guar—
kteee.




1300
8/31/44
-2Cha.irni

Eccles also reported that yesterday Colonel McKinney

411ed** Clayton to say that, if the Federal Reserve could see its
vlaY clear to agree to a
maximum interest rate of 4-1/2 per cent in°'ee4i°f 4 per cent, Mr. Hinckley would concur in all the other pro143844 insisted upon
by the Chairman, namely, (1) no sharing of the
carktment fee,
(2) the maximum commitment fee to be 1/4 instead of
3/8 "
P cent per
annum, with an alternative maximum of a flat fee of
11qto
exceed $50, and (3) the lower and simpler schedule of guarantee
tees.
itj

'le Colonel McKinney said that the Services would prefer not

t°41ke

these concessions, he would undertake to clear the compromise

1114111Ivith them so
as to assure that there would not be any disagreetcts Ur.
Clayton asked Colonel McKinney to cR31 him back when he had
lee'
'
led the
matter with the Services and Colonel McKinney had reported
14ter ill the day
that it had been so cleared.

Chairman Eccles went

in all the circumstances he felt that the Board should
4cePt this c
ompromise and that that would be his recommendation.
14 the discussion which ensued, reference was made to the fact

th,
Ito

'
4418

made under the Regulation V procedure for war production in-

'ved
-Larger possibility of loss than loans made for the purpose of
Ing the 1
var
'
c -aims of contractors in connection with the termination
carl,y e°11tt
'
acts, so that ordinarily the latter class of loans should
a lower rate, but that, on the other hand, it was important




1301

—3—
that the rate on
termination loans be high enough so that the banks
11°111(1 be interested in making them. It was pointed out that if the
interest rate were 5 per cent with 25 per cent of the interest
earhedbeg

payable to the guarantor as a guarantee fee for a 90

Pel'eeltA guarantee, as had been suggested by the Services, the net rate

to

the

bank would be 3.75 per cent whereas if the rate were 4-1/2 per

411t1d.th 20 per cent of the interest earned payable to the guarantor,
ae
1-1°11. proposed, the net return to the bank would be 3.6 per cent,

that
be

the net difference to the lending bank in the two rates would
per cent.
Reference
was also made by Chairman Eccles to the responsi-

t4t .°f the Board
for the determination of rates and fees in connecop WItIltermination loans, and it was stated that under the provisions
- 8ectin

-n 4 of the proposed revised Regulation V it was contemplated
that the
rates of interest, guarantee and commitment fees, and other
chat,gea
11°1-11d be prescribed by the Board with the concurrence of the
b4eetor
t
°f Contract Settlement. Chairman Eccles said that the Conr4ct
Settlement
Act of 1944 placed the responsibility for policies
411(1 Procfm
-- 11res in connection with the settlement of war contracts in
qe pir'
ector of
Contract Settlement and that the Federal Reserve Banks
411th
-orized to act as fiscal agents of the Services in facilitating
the ttrlet
eing of contractors in connection with claims arising out




1302

-4qtliete

ation of war contracts.

The arrangement, he said, un-

der which the
Board prescribed the rates of interest and fees on terloans was possible only because the Director of Contract
Settlement was
Willing to give the responsibility to the Board, and
he (Chairman Eccles) now felt that the Board should not be in a po8ition of
ha
g its actions subject to veto by another agency in
eirelukstances of this kind. He thought that it would have been
better if
the procedure had required that the rates of interest
44(1 tee8 be fixed
by the Director of Contract Settlement after consilltation Ivith the
was his suggestion that, after
the prograza now in Board, and it
contemplation had been approved and was in oper4t1c41) the
Board propose to Mr. Hinckley that the procedure be
eh4hged to
provide that the rates of interest and fees be prescribed
b5r the Di
rector of Contract Settlement after consultation with the
°r by the
Board after consultation with the Director of Contket
Settlement,.
After

extended discussion it was agreed that the proposed
8e4citilea of
fees and maximum ate of interest were a satisfactory
8eliltion,
During the course of the discussion Chairman Eccles
111‘"erlted
itilleitiel; and
there was read the following draft of letter to Mr.




1303
8/31/44
—5—
„„ "Under the provisions of section 4 of Regulation V
lu3-L the Board
of Governors, as amended in the form approved
4 r YOU on August 8, 1944, the Board of Governors proposes
Z? establish, subject to your concurrence, effective at the
-me the
amended Regulation itself goes into effect, the folan ine, schedule of guarantee fees (charged by the guarantor)
commitment fees (charged by the financing institution)
rath
respect to T loans:
GUARANTEE FEES
ON TERMINATION LOANS GUARANTEED PURSUANT
TO THE CONTRACT SETTLRMENT ACT OF 1944
Per cent of
Guarantee Fee
'oan us&_1•a„._nteed
(Per
cent of interest
.
payable by borrower
on guaranteed portion
of loan)
80 or less
10
85
15
90
20

V

95
Over 95

30
50

MAXIMUM COMMITMENT FRE
THAT MAY BE
CHARGED BORROWER BY FINANCING INSTITUTION
1/4 of 1 per cent per annum]or
A flat fee of not to exceed *50.002
ca "It is the intention of the Board to provide, as is the
se
se.with
respect to V and VT loans, that no termination fee,
chl
'
ITIce fee, or other fee of a similar character, except
ro
:
rges covering out-of-pocket expenses may be charged a borer.bY a financing institution.
a
"The Board also proposes, with your concurrence, to fix
of four and one-half per cent per annum as the maximum
erest aeon T loans.

V

°
T7
e-based on average daily unused balance of the maximum principal amount of the loan.
"1-LhouLzard to the amount or maturity of the commitIr.,




1304
8/31/44
—6"As you know, these schedules of fees and the maximum
rate of
interest have been discussed at great length with
141e Armed Services
and the Maritime Commission and with your
staff. There has been substantial divergence of thought
!
0 that the
foregoing proposals represent some concessions
c1hthe part of
all. In general, as compared with the
,
1sedules relating to V and VT loans, the fees have been
8
;
1 ustantially
lowered, the schedules simplified, the shar—
th Of the guarantor in the commitment fee eliminated, and
,Illaximum rate of interest lowered by one—half of one per
ii;;" All of this should help to popularize the program
'
re reflects the spirit of the Contract Settlement Act which
prrenizes the obligation of the Government to provide
111)t and equitable interim financing to contractors pend—
,"nal settlement of their claims.
that In order to achieve greater uniformity, it is proposed
the the new schedules of guarantee and commitment fees and
tetinlaximum interest rate of four and one—half per cent be
thee applicable to guarantees of V and VT loans executed on
the new forms which have been prepared by the Services and
tad Board of Governors and which it is contemplated will be
tio171.effective at the time the T program is put in opera—

7

pro "In the
opinion of the Board of Governors, the foregoing
Cont"als are calculated to further the objectives of the
we ract Settlement
Act and are both practical and equitable.
Would appreciate
advice as to whether you concur in them."
Ther
e was some question whether the application of the new
gedttie
oil the of fees and maximum interest rate to V and VT loans executed

t4 se new forms had been specifically cleared with representatives of

ktt, w.

and it was understood that Mr. Clayton would discuss this

lth them before
the letter was sent.
to

the

Chainilan Eccles suggested that if the letter were satisfactory

11 a illerribers of the Board present the views of Messrs. McKee and Evans
sceri.
'
elned by telephone and, if a majority of the members
'
of the




1305

-7II°41
'
(1 4PProved the letter, that it be sent to Mr. Hinckley.
Messrs. Ransom and Draper stated
that the letter was satisfactory to them.
Thereupon, Chairman Eccles' suggestion
was approved unanimously.
Secretary's Note: On September 2, 1944/
Mr. Carpenter called Messrs. McKee and
Evans on the telephone to ascertain their
views with respect to the schedule of fees
and the maximum interest rate referred to
in the proposed letter to Mr. Hinckley.
After listening to a review of the develop—
ments which resulted in the compromise set
forth in the letter, Mr. McKee stated that
he was in favor of the proposed schedule
of fees but that he thought it would be a
mistake to reduce the maximum interest rate
below 5 per cent for the reasons that (1)
it was not certain that the possibilities
of loss were not as great in connection
With T loans as with V or VT loans, (2)
While it was not expected that many loans
would be made at the 5 per cent rate, there
might be cases in which the investigation
and supervision work done by a lending bank
in connection with a loan would justify a
5 per cent rate, and (3) it was unwise at
this time to raise the questions that might
attend a reduction in the maximum rate. He
added, however, that if the compromise rate
of 4-1/2 per cent were the only thing pos—
sible in all the circumstances he would
not object.
Mr. Evans stated that he was in favor
of all of the proposals set forth in the
letter to Mr. Hinckley.
A majority of the Board having approved
these proposals, the letter was sent to Mr.
Hinckley by messenger on the morning of
September
2, 1944.




130G
8/31/44
—8—
At this
point, Messrs. Smead and Vest withdrew from the meet—
itlel and the action stated with respect to each of the matters herein—
referred to was
then taken by the Board.
siollor

il
emorandum of this date from Mr. Paulger, Director of the Divi—
1)cartlinations, submitting the resignation of Miss Giovanna M.

4attare

as a
stenographer in that Division, to become effective as of
he Close
of business on September 5, 1944, and recommending that the
resignation be
accepted as of that date.
The resignation was accepted as rec—
ommended.

Letter to Mr. McLarin, President of the Federal
Reserve Bank
st At'
anta, reading as follows:
23, :
1 Receipt is acknowledged of your letter of August
1.1,0114, regarding an inquiry which you have received
E. H. Sherry of the Home Improvement Company of
W. 21 gnanl, Alabama regarding section 8(m) of Regulation
-;',1'e question is whether insulating board which is
1\1 81 nailed on the
outside of a dwelling, following
11.e"
the
4 an imitation brick roll type siding is nailed over
whici',nsulating board, is exempt under section 8(m)(2)
illEt i.rcemPts any extension of credit to finance 'the
tion -Lation of loose fill, blanket, or bat—type insula'
1; insulating board, within existing structures'.
rot,
the same question was asked by Counsel
the
the t
e Federal Reserve Bank of Richmond, and a copy of
zro°ard's reply, dated August 12, 1942, is enclosed.
see, the Board gave the same answer as was
the .2Y representatives of
your bank, that is, that
"
Iei/IPtion was not applicable.
tioard:15/1 collateral interest in this connection is the
cl ,
8 letter of
June 9, 1944, a copy of which is en—
oee' for your convenience."




Approved unanimously.

1307
8/31/44

—9—
Letter to Mr. Mangels, Vice President of the Federal Reserve
kik of
uan Francisco, reading as follows:
1944 "This will acknowledge your letter of August 15,
le3.11.closing copies of correspondence with the Uintah
state
Vernal, Utah, relative to your report of examination
of that bank as of June 5, 1944.
note also the comments of Mr. Siddoway, President
e effect that the usefulness of Regulathe bank,
c2n
W has alt
ro
eadlyi. passed. We have received a number of
11ment3 of
like nature particularly from bankers and
wo,.?rs in the lending field, some of which say that it
v14-14 be a good
idea to abandon Regulation W quite promptly
al!er the end
of the European phase of the war. We have
rioZ° received comment
s to the opposite effect and have
:
hal 18°111e in the current writings of economists who
be
I.been writing
about the problems with which we may
eco,aced during the time we are changing over from a war
-°r1Y to a peace economy. J. K. Clark, for example,
oerva.n article
entitled, 'How Not to Reconvert', has re61Y made the following comment about this subject:
'There are similar chances to go wrong
in the
matter of credit controls. Restrictions on consumer credit, under Regulation W,
are not very active at present; and this could
easily lead to the conclusion that they are
not needed
any more. So it would be very
easy to make the mistake of abandoning them,
after which it might be next to impossible to
restore them when
the need arose -- as it inevitably would. Whether or not a general overall inflation occurs after the war, there is
8ure to be a market for consumer durables in
which monetary demand is far in excess of the
IPPly, for a considerable period.'
Regis47Ie are always glad to be informed of opinions of
avrants and want to get as complete an understand8 P°ssible of the reasons behind them."

4

r




Approved unanimously.




Thereupon the meeting adjourned.

Assistant Secretary.