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Minutes of actions taken by the Board of Governors of the ederal Reserve System on Thursday, August 4, 1949. The Board met ilathe Board Room at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. McCabe, Chairman Eccles Draper Clayton Carpenter, Secretary Hammond, Assistant Secretary Morrill, Special Adviser Riefler, Assistant to the Chairman Vest, General Counsel Thomas, Director, Division of Research and Statistics Mr. Leonard, Director, Division of Bank Operations Director, Division of AdminBethea, Mr. istrative Services Mr. Young, Associate Director, Division of Research and Statistics Mr. Mr. Mr. Mr. Mr. Mr. Before this meeting there had been distributed among the membels8 °I' the Board copies of a draft of a reply, prepared in accord841ce Not th Previous discussions of the Board, to the request received senator McClellan, Chairman of the Senate Committee on Expendi- t134.e8 ill the Executive Departments, for the views of the Board conthe provisions of S. 2073 which affect the Federal Reserve SYstem 2073 being a bill making certain changes in laws applito regulatory agencies of the Government so as to effectuate Isecommendations regarding regulatory agencies made by the Commis°rganization of the Executive Branch of the Government. All r the Illembers present with the exception of Mr. Eccles stated that they 8/4/49 -2had read the draft and that they favored its transmittal. Mr. Eccles, who had just returned from the West, had not had an opportunity to read it, The Secretary stated that word had been received from the absent members of the Board that they had read the draft and 41)roved it. During the ensuing discussion, it was stated that recently Senator McClellan had recognized that the provisions of the bill ih so far as they related to the Board of Governors and the Securiand Exchanee Commission involved matters calling for the atten14°11 or the Senate Banking and Currency Committee and in order to the matter that direction, Senator Maybank, Chairman of that er4zlitt ee, had introduced a similar bill (S.2340) containing the 4izie 131.°1/isions relating to the Board. It was agreed, therefore, thEtt t he Board's reply, which otherwise would have been sent to Senator m cCiellan, be sent to Senator Maybank with a copy to Senator keeielieua. Mr. Clayton moved that the letter be approved, with the understanding that if, after reading the draft, Mr. Eccles had any changes to suggest, they would be presented to the Board, that otherwise the letter would be sent to the Bureau of the Budget in accordance with the usual procedure, and that upon receipt of clearance from the Bureau of the Budget it would be transmitted to Senator Maybank without further action by the Board. 8/4/49 -3This motion was put by the Chair and carried unanimously. Secretary's Note: Mr. Eccles had no changes to suggest in the letter, and it was sent to the Budget Bureau on August 11, 1949, in the form approved by the Board, as follows: "This is in response to your request of July 29, 1949, for the views of the Board concerning the provisions of S. 2340 which affect the Federal Reserve System. The bill 4ould make certain changes to effectuate recommendations of Commission on Organization of the Executive Branch of 'the Government which was primarily concerned with more efficient and economical operation of the Government. The Federal Reserve System would be affected in two respects: 1. Future appointments to fill vacancies on the Board would be made so that as soon as possible not more than four members of the Board would be members of the same political party. 2. Internal management of the Board, its relations with Congress, and execution of its policies would be performed on behalf of the Board by the Chairman who would have exclusive and final authority with respect to these matters. The Commission made no separate report on the Federal Rese System, The System was enumerated among the indef'Agent regulatory commissions which are the subject of one 4 4, 1)°1't which notes, however, with respect to the expenses these agencies, that the costs of the Federal Reserve Sysnot a charge on the taxpayers. This report makes te: ei ! cific recommendations affecting certain regulatory agenR;:s while the only recommendations applicable to the Federal allerve System, as such, were general recommendations as to regulatory agencies covered by the report. The only 4ument dealing specifically with the Reserve System, which made public by the Hoover Commission, is a task force : r aiPsort which comments favorably upon the 'efficiency and takli tch' with which the System performs its functions and .02$ no recommendation that the non-partisan character of ti7 Board be abandoned in favor of a bi-partisan Board, aluugh it suggests other changes. I 8/4/49 -4- "The Board strongly opposes the two provisions applicable to the System in S. 2340 and believes that any Changes made in the structure, responsibilities and functi°ning of the System should derive from a comprehensive monetarY and credit study under the direction of the Congress rather than from the necessarily cursory inquiry of the Hoover Commission in this field which did not lead to an examination into or a report on these special problems hY the Commission itself. "As to the first provision, this would be entirely c ontrary to the spirit and intent of the Federal Reserve Act which was carefully drawn to insure that the Federal Reserve System would be non-partisan. Throughout its historY, the System has been at pains to abstain from partia4shiP of any character and the Board has enforced a rule uhat and officers of the 12 Federal Reserve Banks eIld their 24 branches must not be identified with partisan °r political activities. "As the principal proponent of the Federal Reserve Act/ Senator Glass insisted that members of the Board should ',j'e appointed without regard for political affiliations and he r ecounted in his book, 'An Adventure in Constructive Fie', that President Wilson, in whose first administration 4.1_ e Act became law, 'purposely refrained from contact with ;rele Federal Reserve Board because he wanted the Board to Perfectly free to pursue its course within the law with . particle of constraint or restraint from the Exe .t-171 4,a ! r "BY its nature the Federal Reserve System, and indeed Ilit7 central banking organization, should bring to bear on , 8 4etarY and credit problems for which it is primarily rernsib ple independent judgment and action free, so far as ible, from extraneous influence. It is explicit in the sts ! e'ements of the authors of the Federal Reserve Act and nlicit in the Act itself as a basic principle that the ;;Icteral Reserve System as an agency of Congress should be : th . non-partisan, non-political basis. The law provides in selecting the members of the Board who are apth,21ted by the President with the advice and consent of tc ( ; -. Senate, not more than one of them shall be selected any one Federal Reserve district and that the Presiri-6 shall have due regard to a fair representation of the esancial, agricultural, industrial and commercial interte , s _ and geographical divisions of the country. Their 13i;w.s are fixed in such manner as to provide for the exOn of the term of not more than one member in any 1332 8/4/49 -)- "two-year period. They are required to devote their entire time to the business of the Board and to make annual reports to the Congress. "The responsibilities of the Board as the governing 1, .3c1c17 of the Federal Reserve System are carried out in the light of economic considerations, as evidenced by various Provisions of the Federal Reserve Act which require that actions of the System shall be taken with a view to accom!odating commerce and business and with regard to their bearingupon the general credit situation of the country, or with a view to preventing injurious credit expansion or contraction, or for the maintenance of sound credit conditions. "S. 2340, however, would make the political history and affiliations of each future appointee to membership on the Board an essential factor in the consideration of his qualifications and might prevent the appointment of a per8°11 Well qualified by training and experience to serve as e. member. By this means there could be injected into the Federal Reserve System, at the top, political points of tiel4 which might take precedence over economic considerac;'1°ns. This provision, coupled with the provision that the thairman of the Board shall have exclusive and final au°11-tY with respect to its internal management, its relations c with Congress, and the execution of its policies, °111d result in a single political appointee controlling the Policies of the Federal Reserve System. Under the exPlan the organization of the Board's staff and the of the Board's policies have developed over the sears pr , r8 on a strictly non-political basis, as a fundamental to'Lliciple. Every important appointment and change in the fliard l e staff is approved by the Board; this is not the "cti°11 of any single member. Specific rules of the Board re _quire that every member of the Board's staff be appointed or Promotedon the basis solely of his merits and qualifi10, 1°fle and over the years the Board has built up a staff elah intellectual integrity and backgrounds of experience '.raining in the subjects to which employees are respecvelY assigned. )30, This bill, however, would place in the hands of one ch ; l'cl member -- the one designated by the President as re,i.1,111an -- exclusive authority over the staff with the same as if he were a single administrator. Thus the staff of the if the Board would be responsible only to the Chairman, and a Politically-minded Chairman were to be appointed the 1333 8/4/49 -6- It staff could be reorganized on a purely political basis and such considerations would no doubt enter into staff reports and recommendations. "The provisions of S. 2340 go beyond the recommendation as to administrative responsibility contained in the Hoover Commission Report which states in this connection that 'This recommendation does not derogate from the statut°rY responsibilities placed upon the other members of the Co mmission. They remain exactly as they are'. However, under the bill the other six members of the Board would be deprived of the essential meRns for their independent apPraisal of facts and policies without which their voting rtvileges would be rendered futile. The Chairman would !in a position to effectuate his will through the medium his control of the staff organization. This would be 11111 ' 41r, not only to the other members of the Board, but to Lhe staff as well, who now feel and are so instructed that their responsibility is to the Board as a whole and not 8°1elY to any individual member. the"Furthermore, there is a fundamental inconsistency in suggestion that increased responsibility for administ ration be placed on the Chairman. He more than any other meMber has to carry the load of initiating and determining 8°ard policy. Therefore, rather than placing greater rePonsibility on him for administrative detail, he and the ,ler V members should be relieved of that responsibility tflich should be carried by the staff. As a practical mat'should it be necessary or desirable for the purposes ' ' ' 14 More effective internal operation to assign to the staff A°re of the administrative work of the Board, that can be '1311e without legislation. ut The proposals embraced in this bill become still more t , desirable when considered in the light of the fact that a seven members of the Board of Governors are a majority th 12 members of the Federal Open Market Committee, Wj.tblished by the Federal Reserve Act, which is charged T'll a major responsibility in the field of credit policy. h4 other five members of this Committee are Presidents of eral Reserve Banks who are appointed as Presidents by a directors of their banks with the approval of the Board or Governors on a strictly non-partisan basis. The staff ta the Board as well as the staffs of the Federal Reserve tj lks serve this Committee and customarily the Chairman of : Le Board of Governors is elected as Chairman of the Open )4 'rket Committee while a President of a Federal Reserve t 4 4 A 334 8/4/49 -7"Bank is customarily elected as Vice Chairman of the Committee. The effect on this Committee of the injection of Political considerations into the membership of the Board of Governors and the personnel of its staff would be difficult -4--0 appraise but would undoubtedly be disadvantageous. "The Board of Governors appreciates very much your courtesy in requesting its views and hopes that, if further Con sideration is to be given to this bill in relation to the Federal Reserve System, the Board will be given an opPortunity to be heard." Thereupon, all the members of the staff, with the exception of Messrs. Carpenter and Riefler, withdrew from the meeting. There then ensued an informal discussion of organization illtters a ffecting the Board and of the action that might be taken %1ith respect to them. that 1 During the discussion, a suggestion was made it was believed that the views of the absent members °t the Board with respect to these matters were known, they were "811ch character that action should be deferred until all of the b114413e1.8 of the Board could be present. It was stated that the Clayton Act Proceeding against Transamerica would be recessed during the latt er Part of August and early part of September and that it VEtt ecPected that Mr. Evans would be in Washington during the early kt Of the latter month. It was agreed that since it appeared that all of the members the Board could be present at a meeting of the Board on September a decision should be reached at that time. Accordingly, the Secretary was 8/4/49 -8requested to inform the absent members of the Board of the discussion at this meeting and to advise them that at a meeting of the Board to be held on Tuesday, September 6, 1949, at 10:30 a.m. final action on the matters in question would be taken. The members of the staff who had left the meeting returned at tlus Point, There was read a draft of reply to a letter dated August 2, 1949, from Senator Maybank, Chairman of the Senate Banking and CurIsle3r Committee, requesting the views of the Board on S. 2344, the 1)1111ciPe1 provisions of which would remove the maturity limitations o4 10 ells 'wide by the Reconstruction Finance Corporation and increase to I'D billion the aggregate lending authority of the Corporation. Certain changes were suggested in the letter, and it was agreed that it shou2d be revised and presented for further consideration at the meeting of the Board to be held tomorrow. Chairman McCabe referred to the recent discussions of the Board /lith esPect to action to reduce reserve requirements of member banks ' 4411 toth2 decision at the meeting on July 29, 1949, to give further atlon to the matter at a meeting of the Board today. ' el The problem was discussed in the light of the memorandum preby the staff under date of July 29, 1949, on the framework for edit operations under present conditions and the possible ttect ,p -' a reduction in reserve requirements on interest rates. There 8/4/49 -9 V4 agreement that action by the Board should not be taken unless it le.s accompanied by action by the Federal Open Market Committee to reduce the System's holdings of Treasury securities to absorb the funds N.eased by the reduction in reserve requirements in order that there ad. be ne substantial change in the present level of short-term iliterest rates. During the discussion, the meeting recessed and reconvened at 2:15 P.m. with the same attendance as at the beginning of the morning 8e8sion except that Mr. Bethea was not present. Because of the close relationship between a reduction in re41've requirements and System open market policy, it was agreed 111-ran,, 81-3r by the members present that no formal action should be ' t e the t0 reduce reserve requirements until it was determined whether red er8a Open Market Committee at its meeting tomorrow would take aetio 4 tcelcorb by open market operations the reserves that would be 8ecl by such a reduction, but that in the event such action were by the Committee, the Board should take action following the of the Federal Open Market Committee to reduce reserve re- 1)o.hit the ttlent8 by 2 percentage points on demand deposits of all member to be effective on the following dates, during which period taat r • u-ing Treasury bills in the System open market account would 131'0Zimately equal to the reduction in reserve requirements: 1337 8/4/49 -10Central Reserve and Reserve City Banks 1/2% on August 11 1/2% on August 18 1/2% on August 25 1/2% on September 1 Non-reserve City Banks 1% on August 1 1% on August 16 Following an informal discussion of the range at which the Stelll should buy and sell Treasury bills in the period following the acti°ns of the Board and the Federal Open Market Committee as 14e4tic)11ed above, reference was made to what action, if any, should be t e---11 with respect to Federal Reserve Bank discount rates. No decision was reached, but it was the consensus that action nlight Well be deferred until shortly after the first of September when the .6.c-ter would be considered again. Mr, Leonard presented a memorandum dated August 4, 1949, l'hich he stated that the directors of the Federal Reserve Bank Chica.go had voted to accept low bids for the addition to the lltr°1-t Branch building and, subject to approval by the Board of %)vernors, had authorized expenditures of $3,864,856 for that purpose. detail of the bids and additional costs and allowances was set in the memorandum and indicated a cost of approximately 637,000 for the building proper and an overall cost of some 1e85 than the estimates previously submitted. to $235,- Mr. Leonard recommended that the Board interpose no objection the a ccePtance of the bids as proposed and stated, in response to 8/4/49 -11that he unAerstood Mr. Vardaman favored such action. After a brief discussion of the information contained in Mr. Leonard's memorandum and the extent to which commitments had been made against the $10,000,000 limitation on the cost of branch buildings contained in Section 10 of the Federal Reserve Act, the following telegram to Mr. C. S. Young, President of the Federal Reserve Bank of Chicago, was approved unanimously: "Re your July 29 letter, Board will interpose no objectio,, - to awarding contracts for Detroit Branch building on -asis of low adjusted bids amounting to $3,717,148, and in accordance with recommendation of your directors authorizes a total expenditure of $3,864,856 which includes allowance $100,000 for contingencies and allowance of $70,000 for St Partitions and barricades. It is understood that : 40,000 contingency allowance will be used for minor changes ; 414 expenditures without prior submission to Board, but it requested that any major items be submitted for Board's n sideration At this point Messrs. Riefler, Vest, Thomas, Loenard, and Young %lithcilse14) and the action stated with respect to each of the matters tarter referred to was taken by the Board: Minutes of actions taken by the Board of Governors of the Nleral Reserve System on July 19, 1949, were approved unanimously. Minutes of actions taken by the Board of Governors of the Nral Reserve System on July 20, 21, 22, 25, 26, 27, 28, 29, 1949, AllgUst 1, 2, 3, 1949, were approved and the actions recorded therein eu nimously. Memorandum dated August 3, 1949, from Mr. Bethea, Director 8/4/49 -12- ' c r the Division of Administrative Services, recommending that the z'esignation of Edward J. Beaton, a guard in that Division, be ceelpted to be effective, in accordance with his request, at the close ofbusiness August 10, 1949. Approved unanimously. Letter to Mr. Sproul, President of the Federal Reserve Bank t)t Neu York, reading as follows: "Receipt is acknowledged of Mr. Treiber's letter Of July 29, in which it is stated that leaves of ab!?4ce with pay have been granted Mr. Arthur I. Bloomand Mr. John P. Jensen in order that they may !:ender assistance requested by the Korean Minister of finance on monetary and banking problems in Korea. As Ildicated in our letter of July 29 to Mr. Rounds on his same subject, this arrangement meets with the apProval of the Board." Approved unanimously. Letter prepared for Chairman McCabe's signature to Mr. S. Ileadley 613s3use, Versailles Road, Lexington, Kentucky, reading as fol101,18 "We You hay have your letter of July 26, 1949, advising that to e accepted an invitation to become a member of the coe 'rd of Directors of the First National Bank and Trust tiollje-Alr of Lexington, Kentucky, and inquiring whether or the it is mandatory for you to resign as a director of 1 Cincinnati Branch of the Federal Reserve Bank of CleveBoard will be pleased to have you continue your sx,v4 -Lces as a director of the Cincinnati Branch for the 8zes of your term. "The information which you were seeking regarding the % I c) _ intment and service of directors of branches may be ; 10 4d in the Board's regulation on the operation of abnches. This regulation provides that the directors 4'lloitted by the Board of Governors shall be persons who :140 8/4/49 -13- are not prjmnrily engaged in banking and preferably are not directors of banks, although they may be stockholders. While this provision permits some latitude in the selection of directors it follows the general principle established in the Federal Reserve Act that some of the directors of a Federal Reserve Bank should not be associated with commercial banks. The Board feels that it is in the ublic interest to have diversified representation on the ,c)ards of directors of the branches as well as the parent uank, and it has followed the general policy of selecting ! 8 itE appointees individuals who were not serving as uirectors of commercial banks. However, in instances where a branch dIrector subsequently becomes a director of a comn_lercial bank he usually serves out his current term as a airector of a branch. "At the end of this year you will have served as a director of the Cincinnati Branch for five years and, in i a ccordance with the regulation, would have been eligible °I ' an additional term of three years. The Board will rebutlosing your services as a director after this year 0 , we feel sure you will agree with the general principle diversifjed representation on the boards of directors branches of Federal Reserve banks. We hope that your ervice with the commercial bank will permit you to main11 a continued interest in the Federal Reserve System." t Z Approved unanimously. Chairman.
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