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Minutes of actions taken by the Board of Governors of the Federal Reserve System on Thursday, August 31, 1950. The Board rnet in the Board Room at 10:40 a.m. PRESENT: Mr. Mr. Mr. Mr. McCabe, Chairman Eccles Szymczak Evans Carpenter, Secretary Sherman, Assistant Secretary Kenyon, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Board Riefler, Assistant to the Chairman Leonard, Director, Division of Bank Operations Mr. Vest, General Counsel Mr. Millard, Director, Division of Examinations Mr. Young, Director, Division of Research and Statistics Mr. Solomon, Assistant General Counsel Mr. Shay, Assistant Counsel Mr. Jones, Chief, Consumer Credit and Finances Section, Division of Research and Statistics Mr. Pawley, Economist, Division of Research and Statistics Mr. Mr. Mr. Mr. Mr. Mr. Mr. Messrs. Norton and Powell, members-designate of the Board of Governors Mr. Lewis, Assistant Vice President of the Federal Reserve 8a4k of St. Louis, and Mr. Heath, Assistant Cashier and Assistant Secretary Of the Federal Reserve Bank of Chicago, who were assisting the Board's staff temporarily in connection with consumer credit activities, were also present. Ecorlorai Chairman McCabe referred to the release of the Committee for c DeveloPment issued under date of August 28, 1950, with realleot to a Program for restraining inflationary forces, and suggested 8/31/50 —2— that it would be desirable to have the report sent to all commercial banks. It was understood that Mr. Young would ascertain whether the Committee for Economic Development would have the funds available to distribute this report as proposed and that if not the Board would pay the cost of mailing the report to all commercial banks. Reference was then made to the revised draft of letter 131'ePared in response to the letter from the Bureau of the Budget dated August 28, 1950, requesting the Board's views on a proposed Qlraft °f Executive Order delegating certain functions of the President under the Defense Production Act of 1950. The draft had been cha , "gecl in the light of the discussion at the meeting yesterday. The revised draft of letter was read and approved unanimously in the following form: "This refers to your letter of August 28, 1950, in Which h you requested our views on a proposed draft .j (3, Executive Order delegating certain functions of President under the Defense Production Act of 195 Upon° There are several provisions in this draft which we would like to comment. pr "We note that the functions conferred upon the cr:(311-deht with respect to real estate construction vrould be delegated by Part VIII of the Execto the Housing and Home Finance Admin,:"r. sx, I The Housing and Home Finance Agency already es functions in the real estate field and the ha-Isu sees no objection to this proposal. The Board to%if ,!lt that it is most important that the agency auti ch this authority is delegated should have full °11tY both to prescribe and administer regula' to 3 regarding real estate construction credit and suj iake the policies and set the terms relating to :edit controls. It would in the Board's opinion .1 be en? ' rely impracticable to vest in one agency the i65 813a/50 -3- 0re sponsibility for making policy decisions and in another agency the responsibility for carrying out such decisions and administering the controls. The agency having the responsibility should also have iull and complete authority. "The Board earnestly prefers not to be involved in the administration of the real estate construction credit program. We feel that the Board could be most nelPful in this matter in offering our technical skills .;arld in giving our advice and counsel on policy probrme that arise. In this connection, we would be glad to make available to the agency which is to have this ..linction the tentative results of the work which we have done on this subject up to this time. "Since we received your letter enclosing a copy ?! I the draft of Executive Order, however, Mr. Riefler has presented to the Board the informal revision of l eita the tovisions of the Executive Order relating to real construction credit, which was proposed and cellscussed by representatives of various agencies contried at a meeting on August 30. understand that (la e nguage of this revision has not yet been finally ,°r4ed out and also that it has not been definitely 7greed to by the other agencies. Subject to this er standing, however, the Board has considered the pr matter and feels that this informal proposal would es°v] i-de a method by which the purposes of the real ti'aLe credit control authority might be more effecwovelY carried out. In view of this fact, the Board with some reluctance, be prepared to accept un, sk of theta real estate construction credit control sh!!!' the conditions of the informal proposal, if it A 'lid be the decision of the President that the Board so. orde "ae also note that Part VIII of the Executive r delegates to the Board of Governors of the FedJ - ai Reserve System the functions with respect to concredit. In the event that the bill as enacted ces these functions in the Board of Governors, sublil at, S a l-Y e as provided in the form of bill passed by it will be unnecessary to provide such a frJo-egation in the Executive Order, and we understand evelli,Y°ur letter that this provision would in that be deleted. "Under section 302 of the Executive Order the W CT) 8/31/5o "Armed Services and the Department of Commerce would be authorized to guarantee loans for the national defense, using the Federal Reserve System as the instrumentality to administer this program as was done in connection with the V-loan program in World War II. Section 303 of the Order, however, would authorize and also would direct the Reconstruction Finance CorPoration, upon the issuance of a certificate of necessitY by an appropriate Government agency, not only to make but to guarantee loans to private business enterPrises for the expansion of capacity, development of technological processes, and the production of essenyt,dal materials. This authority for guarantees by the neconstruction Finance Corporation would seem to proe, to some extent at least, for a duplication of 'he authority granted to the Armed Services and other aranteeing agencies by section 302, and the Board els that there is no necessity for such a duplica1°n of authority. We suggest, therefore, that ap.roPriate provisions be inserted in the Executive Order ( 13.1 limit it the authority which would be conferred upon e Finance Corporation in such a way tO avoid a duplication of the guaranteed loan prowould be set up under section 302 of the p j P Z "Section 701 of the Executive Order would delegate to the Secretaries of Interior, Agriculture and Com- merce and to a Commissioner of the Interstate Commerce A-111mi3310n the authority of the President under the neet to consult with representatives of industry, busit4e, financing, agriculture, labor, and other inun4ests, with a view to encouraging the making of vol01::arY agreements and programs in furtherance of the m'e'Jetctives of the Act, to approve such voluntary agree3 and programs, and to request actions pursuant latreto. It will be observed that this authority reas! 8 to voluntary agreements by financing interests whi4 ! 11 as other interests but that the agencies to pri." the authority is delegated do not have functions thsliarilY in the financing field. The extension of terevoluntary agreements provision to financing inand 3te was provided by action of the Senate Banking BoarTIrrency Committee following a suggestion by the ista , o'l of Governors. The Federal Reserve System has 17.44 rtant functions not only in the field of supercrefn of banks but also in the field of monetary and be controls, and we feel, therefore, that it would 'PPropriate and desirable that the functions con- 81R/5o -5- "ferred by section 708 (a) and (b) should be delegated to the Board in so far as they relate to financing. "We appreciate very much this opportunity to subOur comments on the Executive Order." Mr. Evans then called upon Mr. Leonard to discuss the proPosed PPCIViSiOn to be included in the consumer credit regulation with 91121ect to home improvement credits. Mr. Leonard stated that the Federal Housing Administration was exceedingly desirous that any regulation issued by the Board e"ering consumer credit contain a provision which would support the Federal Housing Administration rule issued as of August 1, 1950 INiring a 10 per cent down payment on home improvement credits and lirnit of be 36 months on the maturity of such credits if they were to eligible for insurance under Title I of the Federal Housing Act. Leona„ “I also said that he and the staff had studied such a proexhaustively, that it would be possible to include a similar Pr"fisi°11 in a regulation issued by the Board, but that the effect of allch a provision in the Board's regulation would be different from the rul_ e of the Federal Housing Administration in that the latter simPly made n°flconforming loans ineligible for insurance whereas a pro'41-31.orl in the Board's regulation would make such credits illegal. He added that if such a provision were included the Board should realize illadvance that it would be experimental in nature, exceedingly difll1 t'i4 ' _t to administer, and subject to a great deal of evasion intentional or oth erwise. 8iderable Mr. Leonard went on to say that he had con- doubt as to the practicability or the necessity of the down N/Ment pr ovision in connection with home improvement credits, that 7414 8/31/50 -6- avtlence was not available to indicate that it would have much additional restrictive effect, but that the Federal Housing Administration staff felt strongly that the requirement would be effectit" suPPort of the action the Administration had taken. Mr. Leonard vferit °11 t° say that if such a provision were to be adopted it would be hic, ' recommendation that it require a down payment of 10 per cent °f the estimated cost of the home improvement work with a maximum latill'itY of 30 months, provided the Federal Housing Administration If°1114 reduce its terms from 36 months to 30 months, with the underst4114ing that the prescribed dawn payment should be made not later than the c ommencement of work. Mr. Wood, Economist, Division of Research and Statistics, billed the meeting at this point. There ensued a general discussion of the desirability of l'estricticms on home improvement credits and it was the consensus that the r egulation which the Board expected to issue should include 811chreetrictions, both as to down payment and maturity, recognizing that such re strictions would be experimental in character. The discussion then turned to the terms that should be Prescribed for Group B and C articles, appliances and furniture. 4r.Leonard stated that it was proposed to put furniture in a sekrate category and, for reasons which he stated, to apply the a4me maturity as for appliances but a lower down payment. He then deacribed the suggested alternative sets of terms that might be .P1)liecl to d ifferent categories of articles as shown in his memo- G9 8i/311150 -7- ranclum to Mr. Evans dated August 30, 1950 in order to provide a baaa Aced set of terms in the regulation. He stated that if auto1014.1e credits were permitted a maximum maturity of 21 months, it was felt that a balanced program would call for maximum maturities (3f 18 months for appliances and furniture and minimum down payments Of 15 Per cent on appliances and 10 per cent on furniture. He also eail that the maximum maturity for unclassified loans should be the "ame as the shortest of the maturities prescribed otherwise the ' r egulation, which would be 18 months under the proposed -Letts There followed a discussion of terms prescribed when the gAlat i°A was in effect prior to June 30, 1_949, of the relation Of the Proposed terms to those currently prevailing in the trade, arid Of recommendations from the trade as to the effect of alternaLve 8et5 of terms. During the discussion Mr. Szymczak said that he felt even 111°I ' e strorv.,_ G-L.Y than he had yesterday that the terms adopted should be stricter than those recommended by Mr. Evans, that he had no eling as to the terms for appliances and furniture as such but '4a.8 c°11-cerned with the over-all effects of the Regulation, and that merit terms for automobiles should not be more th down (on which there was no disagreement) and a 111.4111Um ma turity of 18 months. Mrs Fauver, Administrative Assistant to Chairman McCabe, .70 8/31/5o -8- joined the meeting at this point. Mr. Eccles said that nothing in the discussion had caused him to change the views he expressed yesterday, that with almost $20 b,-1, 1--4-Lon of consumer credit outstanding under conditions existing today, and with inflationary forces more acute than in 1948, the Dro wth of such credit should not only be slowed down but the 111111e o utstanding should be reduced, that for reasons stated pre714)11elY he would support terms for automobiles of 1/3 down and 18 1401'44 m -aximum maturity, and that he felt it would be wrong to reor to anY less than 20% down on appliances and 15% down on furniture Permit maximum maturities of more than 18 months for either. Chairman McCabe said that he felt exactly as he did yester- dal) that*. Evans and the staff had made an exhaustive study of the luestim, that they were convinced their recommendation would l'e8ult in a definite restriction on credit, and that he would like t° s• ee the r ecommended terms given a trial for 30 or 60 days and th• ey were not restrictive enough to tighten them promptly. This, he sai• d, would be a better way to put the regulation into operation tha*Il to make it too drastic at the beginning. Mr. Powell said he had not changed his views from those ex- 131‘°ssed Yesterday on automobiles but that, for reasons which he 141.ted 'the Proposed terms on other articles seemed to him to be 00 t liberal. This was a small part of the total, however, and he del VR/50 -9- °12-14 go along with Mr. Evans' recommendation with the expectation that terms would be reviewed within 60 days or less. Mr. Norton said that he had felt that much of the present intlatiOn was caused by building activity, that he thought credit automobiles should be restricted, and that the terms suggested f°raPPliances and furniture seemed about right at this time. For these reasons he would be inclined to go along with Mr. Evans' reccrItiero., . -..ttion with the thought that if necessary the regulation could be +4 "4-Ettened within a short time. Chairman McCabe said that Mr. Draper told him that if he vfere called upon to vote he would favor the terms recommended by Uz. an8 and that Mr. Vardaman expressed the view at the meeting On A.11 gil8t4) 1950 that, while he would prefer more restrictive te11118,ha -would vote to approve the maturity and down payment prore commended by Mr. Evans as a result of the study he and the s tatf were making. Chairman McCabe then suggested that, although no formal Ibte c°111d be taken until the Defense Production Act of 1950 became laws it tizai he understood that the staff should proceed to prepare a . : d art of the regulation on the basis of the terms recommended andt vans, including restrictions on home improvement credits : el : Ili-ea-1 changes which he felt were necessary in the regulaIlIth the understanding that the regulation would be submitted 8/31/5o -10- fc)r final consideration and action by the Board when the law was "acted, in the expectation that the members of the Board would then vote Meetings cedure substantially as indicated in their comments during the yesterday and today. It was understood that this pro- would be followed. A discussion ensued of the time for announcement of the t" "and e ffective date of the regulation. Mr. Leonard suggested that if it were possible to distribute the regulation sometime Pri°r to Thursday, September 7, the effective date could be September 11) 1950 Ay later date would necessitate postponing the effective date and he reiterated the view previously expressed that the effecti ve date should be a Monday. It was agreed that a decision as to the p effective date would have to be deferred until it was 410.44 "nen the bill would become law. Mr, Evans then stated that it was planned to call a confer- ence of °fficers in charge of administration of the consumer credit I'lati°fl at the Federal Reserve Banks to meet in Washington, probab4 on Monday and Tuesday, September 25 and 26, 1950. At this point all of the members of the staff with the exception of Messrs. Carpenter, Sherman, and Kenyon withdrew, and the ferN A stated with respect to each of the matters hereinafter reto was taken by the Board: s of actions taken by the Board of Governors of the 1173 1 , [! it 8/31/50 Federal Reserve System on August 30, l950, were approved unaninously. Letter to Manufacturers Trust Company, NelY 55 Broad Street, York 15, New York, prepared pursuant to the understanding at the meet,ng l on August 24, 1_950, reading as follows: "Reference is made to your letter of August 23, 950, addressed to the Board of Governors of the tederal Reserve System and to the Federal Reserve 'ank of New York, requesting approval in principle ,().! a merger of your bank and the Brooklyn Trust ComvallY, Brooklyn, New York, in accordance with a proPosed agreement which has been tentatively outlined ln Your letter. "The Federal Reserve Bank of New York has recomm that the Board approve this proposal and the mer Bo of Governors hereby gives consent to the pursuant to the provisions of Section 12B (v) of the Federal Reserve Act, as amended0 f a, regoing is subject to formal approval by the l:°Priate State banking authorities and upon conte?at, after the merger has been effected, capital and surplus of the resulting bank be . " x mately .60,390,000 and $69,440,000, respect.Zoi g Approved, for transmittal through the Federal Reserve Bank of New York, Messrs. Draper and Evans voting "no" for the reasons stated at the meeting on August 24, 1950. Letter Ot at. Louis, to Mr. Davis, President of the Federal Reserve Bank reading as follows: 1950 "This refers to Mr. Klinels letter of August 21, fect 'and its enclosures, regarding the possible eftuel2f Paragraph (5) of section 287.230 of the Kent° AY Revised Statutes upon the power of your Bank rnake advances to State member banks operating corn- 8/31/50 -12- 'fl trust funds. "The statute in question provides that the beneficiaries of any trust or estate shall have a claim Prior to any and all other claims against the bank or .rust company for any money due the trust or estate. we understand that in 1946 the State Attorney General ruled that the statute, while constitutional, applies only to beneficiaries of common trust funds; that the question WAS raised as to whether the claims °V such beneficiaries would have priority over the a1.-111 of a Federal Reserve Bank making an advance to the member bank secured by a pledge of Government rads or other eligible collateral; that the State nurrvisor of Banks at that time adopted a policy of approving the establishment of common trust funds Y State banks; and that the question has now been raised again because the present Supervisor of Banks J.authorizing State banks to establish common trust "Y(211 state that it has been proposed that your Bank ; -Lnuerpose no objection to the operation of apreoved common trust funds by State member banks in se/11°4 and that it continue to make advances under ujulon 13 to banks operating such common trust funds pose!s their financial condition, combined with the wh.sible defect in the collateral, should create doubts ,:leh would cause your Bank to regard such advances nonlonger warranted, dete,jt appears that there has been no authoritative mon tion that claims of beneficiaries of a comwoiadvrilst fund in a State member bank in Kentucky Bank ,have priority over those of a Federal Reserve pie, 60 which assets of the member bank have been not'l'r d as security for an advance. Accordingly, to ti„.;ng bhstandi the existence of some uncertainty as oirou 7 118 question, the Board feels that in all the course proposed in your letter would bethest i 17: one for your Bank to follow in this Matteroo Approved unanimously. 01, Letter to Mr. Leach, President of the Federal Reserve Bank °T1d, reading as follows: "Reference is made to your letter of August 24, 1175 8 1/5o -13- 195o, in which you advised that it appears expenses :?.1" certain functions at the Head Office will exceed '"e 1950 budget estimates as follows: Amount Function $27,000 Provision of Space 25,000 Furniture and Equipment . "The Board accepts the revised figures as suband appropriate notations are being made in the Board's records." Approved unanimously.
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