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1473 A meeting of the Board of Governors of the Federal Reserve Syswas held in Washington on Tuesday, August 4, 1936, at 10:30 a. in. PRESENT: Mr. Mr. Mr. Mr. Eccles, Chairman Szymczak Ransom Davis Mr. Morrill Secretary Mr. Carpenter, Assistant Secretary Mr. Thurston, Special Assistant to the Chairman Mr. Goldenweiser, Director of the Division of Research and Statistics Mr. Wyatt, General Counsel There was presented a memorandum dated July 17, 1936, from Mr. 827n1 zpl, c in which it was stated that Mr. Strater, Secretary of the Pre 4 d ents, Conference, had raised informally the question whether the tatIllation of monthly reports of activities of the bank relations de _ Plartm e'iLs of the twelve Federal reserve banks which have been prepared by him as Secretary of the Presidents' Conference should be continued tote Prepared at Cleveland and distributed to the banks and the Board °I' whether the banks should send their reports directly to the Board it the first instance. The memorandum advanced the thought that the ) C Elr " might suggest to the Federal reserve banks the desirability of ilallging the present procedure to the extent that instead of sending thei reports to Cleveland for consolidation, such reports be sent to the tb, ' °ard direct and be accompanied by narrative reports setting forth cohe. 18elY the information gained by the officers of the banks from thet r discussions with bankers and others referred to in the reports, With -Pecial reference to such matters as criticism and comments, 1474 8/4/36 -2_ fa7orable or unfavorable, with respect to the Federal reserve banks "he Board of Governors, the attitude of nonmember and member banks tow lird membership in the System, and suggestions that may be received which would tend to improve the System and its relations with banks a41 the public. The memorandum had been circulated among the other nietabers of the Board prior to this meeting with the request that they give some thought to the matter with a view to its discussion at a Tneetillg of the Board. Chairman Eccles suggested that Mr. Szymczak be requested to Pi'ePere for consideration a draft of form of report calling for such illf°rmation in connection with the public relations of the Federal resellre banks as it is believed would be helpful to the Board and to the banks, together with a draft of a letter to the banks requesting that they forward such reports to the Board in accordance with a proto be set forth in the letter. Mr. Ransom moved that Chairman EcciesT suggestion be approved. Carried unanimously. Mr. Ransom ca31ed attention to the report of the Special Corntamedittee on Administrative Law of the American Bar Association as con- in the advance program for the Fifty-Ninth Annual Meeting of the A ' tseociation to be held at Boston, Massachusetts, on August 24 - 28, 19z6. The Committee report recommended the adoption of a resolution l'e4clitig in part as follows: 14'75 8/4/36 -3- "RESOLVED, That the Association approves, in principle, the establishment of a federal administrative court, without aPproving or disapproving the provisions of any pending bills dealing with the subject, and expresses its opinion that such court should have the following features: (a) Its essential purpose should be to provide a means for the gradual segregation of judicial functions now exercised by federal administrative agencies (or hereafter proposed to be lodged in such agencies) and to establish an independent forum for the exercise of those judicial functions on issues both of law and of fact, either originally or on review of the decisions of such agencies. (b) Its members should be lawyers, should be appointed by the President and confirmed by the Senate, and should hold their offices during good behavior. At the outset the members of the administrative court should, so far as practicable, include the members of those federal tribunals which would be superseded by the court. (c) While at the outset its jurisdiction should be confined to a limited number of classes of administrative controversies, its organization should be such as to serve as a nucleus in which jurisdiction over Other classes of administrative controversies could, from time to time, be reposed by Congress. (d) Its organization should include a trial division and an appellate division and, within the range Of practicability, each division should be susceptible of subdivision into branches for the hearing of particular classes of cases, to the end that the benefit Of expert and experienced judges over particular subject-matters may be achieved and that at the same time a satisfactory flexibility may be preserved. (e) It should, to the full extent permitted by Its size and its jurisdiction, be ambulatory so that, so far as possible, its cases would be heard in the district or region where they arise and excessive concentration of power in Washington would be avoided, and, to this end and to assist it in the expeditious handling of its work, it should be assisted by commissioners or examiners. (f) It should have broad power to govern its internal organization and its practice and procedure by rules and regulations. 1476 8/4/36 -4- "(g) It should have no executive, inquisitorial or prosecuting power, and should have no legislative poner. (h) Its decisions should be subject to review, in specified cases, either directly by the Supreme Court or by the Several circuit courts of appeals. Its establishment should not impair or detract from the Jurisdiction now exercised by constitutional courts." Mr. Ransom stated that it appeared that if the administrative e°14t contemplated in the committee resolution were established, it would "IfY to a considerable extent, the powers of the Board to effect com"Ltlice by member banks with provisions of the Federal Reserve Act and lated legislation and the Board's regulations, and the observance by Inerliber banks of sound banking practices, and would affect materially the Power of the Board in the field of credit control. At Mr. Ransom's 811"eation, Mr. Wyatt pointed out that, under the procedure contemplated by the report, should the Board decide to cite a member bank to show cause why its membership should not be forfeited for non-observance of 44 0the Board's regulations or for any other reason, or an officer clirector of a member bank to show cause why he should not be removed 111 °ffice for having continued unsafe or unsound practices in concIlleting the business of the member bank, it would be necessary for the e4ee to be heard before a trial division of the administrative court rl'c'm which an appeal could be taken to the appellate division and, if the member bank or officer or director wished to do so, he might apply r r rehearing and then might apply to the Supreme Court of the United Ntes for a writ of certiorari. The members of the Board indicated 4 % 8/4/36 _5- agreement with the opinion that such a procedure would result in such delaYs that it would be impossible for the Board to force compliance Withthe provisions of the Federal Reserve Act and related legislation arldthe regulations of the Board, that at the proper time the Board 811°111d take a position on the matter, and that in the meantime Counsel's ce should study the proposal carefully and be prepared to advise the Board regarding it. After a discussion of various aspects of the matter, Mr. Ransom moved that Mr. Wyatt be authorized to attend as an observer the Annual Meeting of the American Bar Association to be held in Boston on August 24-28, 1936, and that Mr. Wyatt be requested to prepare, following his return from the annual meeting, a memorandum setting forth the status of the matter and the probable effects of the establishment of the proposed court on the discharge by the Board of its responsibilities under the law. Carried unanimously. There followed a discussion of the present practice of the 1/4„1„ 1 it answering inquiries received from the Federal reserve banks, 'nenibe tiot 8 banks, and others for interpretations of the law and the regulaof the Board and it was pointed out that while efforts had been 1ktle 4. 0 have banks and other interested persons forward their requests t° th e Federal reserve banks for handling, a number of requests for in- ter, vl 'etations are still received by the Board direct from banks and in, %Iduais. 8/4/36 -6After a discussion, it was agreed that in the future all such requests should be sent by the Board to the Federal reserve banks when it appears that they will be in a position to handle the questions involved. Chairman Eccles villed attention to a letter received by him utder date of July 31, 1936, from President Peyton of the Federal Re8I'Ve Bank of Minneapolis stating that he had received an invitation to sPeak before the convention of the National Association of Super'418°1 ' 8 of State Banks to be held at Detroit on September 14 - 16, inclusive; that it had occurred to him that the request might afford an °131)°Itlin44.y to put before the State Supervisors some ideas in which the Board. of Governors is interested; but that if the Board should adthat such was not the case he would refuse the invitation. Mr. Peyton's letter was referred to Mr. Szymczak for further attention with the understanding that it was the consensus of the Board that it would be desirable for Mr. Peyton to accept the invitation and to discuss in his address the benefits of membership in the Federal reserve system. Chairman Eccles presented a memorandum addressed to him by Mr. IlYatt, -11-(er date of July 310 1936, with further regard to the clpim as4rte-, u against the Federal Reserve Bank of Chicago by the Liquidating I i1-11step --s of the Fletcher-American National Bank of Indianapolis. The Prqe_tt status of this matter was discussed and Mr. Wyatt stated that the ttorneys for the Federal Reserve Bank of Chicago and the Liquidat' 8M6 -7- Trustees of the Fletcher-American National Bank had reached a deadlock on the matter; that his conferences with the attorneys had been °14 as an interested party and not as a representative of the Board Or reserve bank; and that he would like to continue his negotiawith the attorneys for the liquidating trustees in the hope that a definite proposal for a settlement of the case could be obtained Which could be recommended to the board of directors of the Federal Reserve Bank of Chicago for acceptance. Mr. Ransom moved that Mr. Wyatt be authorized to continue his negotiations with a view to ascertaining the basis upon which the attorneys for the liquidating trustees would be willing to settle the claim. Carried unanimously, with the understanding that, following the conclusion of Mr. Wyatt's conferences with the attorneys, Mr. Ransom will confer with Mr. Wyatt and submit a recommendation to the Board as to what, if any, action should be taken. Chairman Eccles then read the following memorandum which had bee, "Prepared by Mr. Goldenweiser following discussions by him and Chat— man Eccles with respect to a desirable enlargement of the activities (4 the research and statistical work of the Federal Reserve Sysena "The purpose of the economic services of the Federal System is to make available to the System the statis'cal and economic material required for the formulation °f monetary policies. "This work has for many years been carried on at the Federal Reserve Board and at the Federal Reserve banks under B. 1480 8/4/36 -8- "the general supervision of the Board's staff. With the changes in the economic situation and in the law which greatly increased the responsibilities of the Board, the distribution of duties between the banks and the Board in economic work needs to be more clearly defined. "Bcardt s Division "In principle responsibility for the economic material made available to the System for its interpretation should be on the Board's Division of Research and Statistics. "The work of this Division should be divided into current work and longer-time projects. In recent years there has been little time for such projects because of the increasing pressure of current work. "The major current work of the Division consists of assembling and preparing the basic material on business and credit conditions; of interpreting it for the use of the Board and the System, and of preparing the material for the Federal Reserve Bulletin and the Board's Annual Report. Continuous work absorbing most of the time of the existing Personnel is necessary for the purpose of constantly imPl'oving the basic statistical data on business and banking and revising indexes compiled by the Division in order to maintain their accuracy and representativeness under changing conditions. The most important single index, that °f industrial production, is now undergoing a thorough revision. "In order to present to the Board more regularly than heretofore the results of the Division's analyses of the current business and credit situation, it is proposed that the Division prepare every month a brief statement of the 0latstanding developments of the month that are of interest tO the Board. This statement should be frank and informal and should be for the confidential use of the Board and Possibly of the Reserve banks. Some time in the future it may become feasible to send it also to member banks. This onthly statement on current developments may be accompanied 'Y special articles signed by members of the Division and Presenting different phases of the work in which they are engaged and which would be of interest to the Board though Possibly not ready for publication. "In recent months the Board's Division has considerably exPanded, chiefly by the addition of junior economic assistants. The addition to the staff of more mature persons is n°1v required to work in fields that have not been adequately covered. It is necessary to find a person to help in the work on taxation with special reference to the bearing of 1481 8/4/36 -9- "fiscal policy on monetary problems and on the business situation. The person for this work should not be primarily a technical tax expert, but one with broad understanding of the relationship between tax policy and monetary policy. It ls believed that Miss Burr is qualified to do this work, but in that case she needs to be relieved of some of her current duties. Another person needed is in the general field of agricultural economics who would bring to the Board understanding of the credit problems of agriculture and who would he in close touch with Governmental and other agencies dealWith agricultural credit. Still another person is needed to work in the broad field of the relationship between various Government activities such, for example, as Social Security provisions, and the problems of monetary management. t is also important to have one or two persons of training and ability who would not be burdened with work on current developments but would be able to give their entire time to studies of business and financial trends with the view to developing better methods of anticipating economic events. A careful search for qualified persons to undertake such studies should be begun at once. Existing members of the Division may be qualified to cover some of these subjects, but in such cases new persons will be needed to cover their Present fields. Work at Reserve banks "The research and statistical work of the banks should be primarily two fold: (1) to collect information about the districts for local use and for the purpose of transmission to the Board to be consolidated with material from other districts into a national picture, and (2) to receive from the Board's Division the statistical and graphic information there consolidated and to interpret it for the benefit of local officers and directors, including the member of the OPen Market Committee if there be one from that district. The staff of the Reserve banks, therefore, needs to consist of: (a) such persons as are required for the collection of information, and (b) at least one person with sufficient training to keep himself abreast of all the available information and to interpret it to the local officials. "The statistical and economic services of the Reserve banks have been under the supervision of the Federal Reserve Agent, but are now being transferred to the banks. In ap?roving such transfers the Board of Governors should retain the authority to pass upon the budgets of the divisions and to approve the principal personnel. The Board's Division Should assist the banks in finding appropriate persons for their economic and statistical work." T 1482 8/4A6 -10There followed a discussion of the relationship of the Board's 131:91aion of Research and Statistics with the research and statistical activities of the Federal reserve banks and of the results that might be expected to be accomplished through the proposed enlargement of the actdvities of the Division of Research and Statistics in Washington. At the conclusion of the discussion, Mr. Szymczak moved that the proposals set forth in the above memorandum be approved in principle with the understanding that any new appointments in the Board's Division of Research and Statistics and proposed changes in the research ana statistical activities of particular Federal reserve banks will be submitted to the Board for consideration. Carried unanimously, with the understanding that a copy of Mr. Goldenweiser's memorandum will be submitted to Messrs. Broderick and McKee and an opportunity afforded to them to record their position with respect thereto. Chairman Eccles referred to the vacancies in the Board appointMellte to the directorates of branches of Federal reserve banks and 811ggested that each member of the Board be furnished with a list of " tisti-ng vacancies with the understanding that they will submit from tize to time to the Personnel Committee the names of individuals whom th eir opinion it would be desirable to consider for appointment as bran 1. c" directors and that, following receipt of the suggestions of the "-aual members of the Board, the Personnel Committee will make eileh ther investigations as appear to be necessary in the circum- 1483 8/4/36 -11- stances and submit recommendations to the Board for the appointment of °1ireotors at the branches to fill the existing vacancies. Chairman Eccles' suggestion was approved unanimously. At this point Messrs. Thurston, Goldenweiser and Wyatt left the meeting and consideration was then given to each of the matters hereinreferred to and the action stated with respect thereto was taken by the Board: The minutes of the meeting of the Board of Governors of the Fed- eral Reserve System held on July 31, 1936, were approved unanimously. The minutes of the meeting of the Board of Governors of the Fed- el'&1 Reserve System held on August 1, 1936, were approved and the acti°118 recorded therein were ratified unanimously. Memorandum dated August 3, 1936, from Mr. Goldenweiser, Director °I' the Division of Research and Statistics, stating that, for personal l'es°11s it would be necessary for Mrs. Susan Burr Litchfield, a research "sistant in the Division of Research and Statistics, to be away from 17°1‘k at the office for several weeks. The memorandum also stated that 11'84 Litchfield's annual leave allowance would expire on August 6 and ee()Ialliended that she be granted leave without pay beginning August 7 to -"en date as her physician advises, a period which probably would not eeeed two months. Approved unanimously, with the understanding that the total period of absence without pay would not exceed two months. Memorandum dated July 31, 1936, from Mr. Smead, Chief of the 1484 8/4/36 -12- Division of Bank Operations, recommending that Mr. Edgar B. Barton, a temporary file clerk in the Division of Bank Operations, be given a further temporary appointment to December 31, 1936, at his present salary of t1,440 per annn. Approved unanimously. Letter to the Presidents of all Federal reserve banks, reading 48 follows. "In order that the Board of Governors of the Federal 1.eserve System may have current information as to rates of Interest being paid by member banks on savings and time dePosits and rates of interest or discount being charged by member banks on various classes of loans, please request each member bank in your district to send you a report as f October 1, 1936, on Form 2 a copy of which is attached and additional copies of which have been sent to you under separate cover. For this purpose, Please send two c°Ples of the form of report to each member bank with an aPpropriate letter requesting that the report be submitted Promptly after October 1. "It is also requested that tabulations be made of the .rates reported by member banks, in accordance with the forms °f the two summary tables also attached hereto, for each of the following groups of banks (if any) in your district: 1. Central Reserve city member banks. 2. Reserve city banks in each Reserve city. 3. Banks in each non-Reserve city having a population of 100,000 or more (according to the 1930 census). 4. Other country member banks in each State, or part of State, in the district. "The summary tabulations should be forwarded promptly to the Board. The reports received from member banks maybe retained, at least for the present, in the files of the Federal Reserve bank." Approved unanimously. Letter to Mr. Robert V. Fleming, President of the American Bankers 480ciati0n, reading as follows: "As you know, section 11(b) of the Board's Regulation 1485 8/4/36 "F provides as follows: 'Trust assets shall not be sold or transferred to the national bank, to its directors, officers, or employees, or their interests, or to affiliates of the bank, except that, in cases in which the bank has been advised by its counsel in writing that it has incurred a contingent or potential liability to a trust and desires to relieve itself from such liability, such a sale or transfer may be made with the approval of the board of directors; provided that in all such cases the bank, upon the consummation of the sale or transfer, shall reimburse the trust involved in cash or other acceptable assets.' "rhe Board's attention has been called to a case where he assets of a trust included stock of the fiduciary na61onal bank, and it has been represented that in such case the stock could not be sold for its true value if the bank were precluded from selling the stock to officers or directOrs of the bank. It also appeared that in this case the 4tyllSt instrument expressly authorized the bank, as trustee, 13 make sales of the stock to officers, directors, or em' Ployees of the bank. It appears that from time to time ..11ere may be other cases of a comparable nature, and it has ren suggested that the provision of section 11(b) of Regu' etion F above quoted be amended so as to include an exPtion applicable to cases of this kind. In the light of " such suggestion, the Board is giving consideration to the question whether it should amend the above quoted provision °f section 11(b) so that it would read as follows: 'Trust assets shall not be sold or transferred to the national bank, to its directors, officers, or employees, or their interests, or to affiliates of the bank, except that: (1) In cases in which the bank has been advised by its counsel in writing that it has incurred a contingent or potential liability to a trust and desires to relieve itself from such liability, such a sale or transfer may be made with the approval of the board of directors, Provided that in all such cases the bank, upon the consummation of the sale or transfer, shall reimburse the trust involved in cash or other acceptable assets; and (2) this does not Prohibit sales or transfers of trust assets when such sales or transfers LIIIt_tazessly permitted by court order, by the in.glyument under which the bank is acting as fiduciary, 1486 8/4/36 -14- "'or by valid consent in writing by all the beneficiaries of the trust, and are approved by the board of directors of the bank case rovided that in a in which the bank is acting as fiduciary under apointment b a court the a..raval of such sales or transfers b the court of soil.° riate jurisdiction is obtained (New material underscored.) "However, before the Board takes any action in this Tatter, it would appreciate any suggestions or criticisms 5he American Bankers Association may have with regard to the slygested amendment. It is possible that, among others, you will desire to obtain the views of the same gentlemen who, as representatives of the American Bankers Association, kindly furnished the Board with their suggestions and criticisms at he time the revision of Regulation F was recently under consideration. In connection with the suggested amendment, attention is called to the fact that an exception of a comparable character is now contained in section 11(a) of Regulation F which relates to investments of trust funds in stock of, or property acquired from, the fiduciary bank, or its directors, officers, employees, or their interests, or affiliates of the bank." Approved unanimously. Letter to Mr. Geery, Federal Reserve Agent at the Federal Reserve 1341* ct Minneapolis, reading as follows: "Receipt is acknowledged of your letter of June 18, , 936, requesting advice as to whether section 9(h) of the ' Board's Regulation F requires the collateral specified thereto be pledged with the trust department of a national ank if agency, escrow, receivership and custodianship funds axle in its commercial department. "Section 9(h) of Regulation F requires funds received or held by a national bank in a fiduciary capacity to be Protected by a pledge of collateral to the trust department Y such funds are used by the bank in the conduct of its °usiness; and the question whether particular deposits made by the trust department in the commercial or savings department should be so protected depends upon whether or tot the funds involved are received or held in a fiduciary caPaoity. The Board feels that in any case the question Whether or not the funds are held in a fiduciary capacity 1487 8/4/36 -15- a question which must be determined on the basis of PJ1 the facts and circumstances involved. In this connection, Your attention is invited to the Board's rulings published in the Federal Reserve Bulletins for December 1921 (p.1435), and May 1922 (p.572). Generally speaking, if it is evident that no fiduciary relationship exists, section 9(b) of Regulation F does not require collateral to be pledged with the trust department if funds received or held by such department are used by the bank in the conduct of its business; but where doubt exists as to the status of any such funds and the funds are used in the commercial or savings department ?f the bank, such funds should be protected by collateral in the manner required by the regulation, the presumption being that an account handled through the trust department involves a fiduciary relationship. Hence, if such Protection is not afforded under the circumstances to which You have referred, it should be clearly shown that a fiduciary relationship does not exist. "As indicated above, the Board has not deemed it desirable to attempt to lay down any general rule as to what funds are or are not held in a fiduciary capacity, but if a member bank desires a ruling in any case in connection with funds held by it and full information is furnished as to the facts involved the Board, of course, will be glad to advise as to its views regarding such funds. If any such case is submitted to the Board, it will be appreciated if it is accompanied by a copy of an opinion of the counsel for your bank on the question involved." Approved unanimously. Letter to Mr. Leach, President of the Federal Reserve Bank of 'Richmond, reading as follows: "This refers to your letter of July 6, 1936, and inclosures, requesting the views of the Board upon the queslon whether a Federal Reserve bank may accept deposits made °Y the Federal Deposit Insurance Corporation consisting of funds held by the Corporation in its capacity as receiver of Closed insured State banks. "Section 12B(n)(1) of the Federal Reserve Act provides in part as follows: 'Money of the Corporation not otherwise employed shall be invested in obligations of the 1488 8/4/36 -16- "United States or in obligations guaranteed as to Principal and interest by the United States, except that for temporary periods, in the discretion of the board of directors, funds of the Corporation may be deposited in any Federal Reserve bank or with the Treasurer of the United States.' "The question arises as to whether funds held by the F"ral Deposit Insurance Corporation in its capacity as receiver of closed insured State banks may properly be considered as 'funds of the Corporation' within the above quoted provision of the Federal Reserve Act, which Federal Reserve panks may accept as deposits. "There is, of course, a marked difference between funds lield by the Corporation in its own right and funds held by he Corporation in its capacity as receiver but, under a liberal ,7o118truction of the language of the above statute, which is °elieved to be justified in this case, all of these funds maY be considered as 'funds of the Corporation'. It is believed that the provisions of section 12B(n)(1) were intended to facilitate the operations of the Federal Deposit Insurance .0rporation and, since Congress has provided that one of its zunctions shall be that of acting as receiver of closed insured State banks, it seems reasonable to believe that in the Performance of this function Congress intended the Corporation to have the power to make deposits in Federal Reserve banks under the above quoted provision of the statute. "Accordingly, the Board has reached the conclusion that ' .11nds held by the Federal Deposit Insurance Corporation in its capacity as receiver of closed insured State banks may Properly be considered as 'funds of the Corporation' within the above quoted provision of the Federal Reserve Act, and that Federal Reserve banks may accept deposits of such funds Under the arrangement outlined in the letter dated July 1, 2 1 36, to your bank from Mr. Albert H. Dudley, Chief of the aw and Closed Bank Division of the Federal Deposit Insurance Corporation " 9 Approved unanimously. Thereupon the meeting adjourned. IT0 -ii(, t<007 1 Secretary.
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