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t?' Minutes of actions taken by the Board of Governors of the Ilecleral Reserve System on Friday, August 5, 1949. The Board met illthe Board Room at 2:45 p.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. Young, Associate Director, Division of Research and Statistics Mr. Mr. Mr. Mr. Mr. Mr. A draft of letter to Senator Maybank, Chairman of the Senate Banking and Currency Committee, revised in accordance with the discussion at the meeting of the Board yesterday, was read and after certain additional changes, was approved in the following form: re "This is in response to your letter of August 2, 1949, t tsting the views of the Board of Governors with respect vo --e bill S. 2344. The principal effects of this bill °111d be to remove all maturity limitations on loans made , ' t). 1 the Reconstruction Finance Corporation and to increase the aggregate amount of such loans that may be outstanding any one time to $5 billion. "The Reconstruction Finance Corporation was established 14 lo„ , 42-3 as an emergency organization. In that capacity, du 4 _& -ing the economic depression of the 1930's and again dur4 g the war 4 period the Corporation performed a very useful The Board :ice to the Government and to the nation. fel u 18 that the Corporation should continue to be regarded ,ne essentially of an emergency character. In ordinary 8ee times the lending functions of the Corporation, if litillued at all, should be held to a minimum and it should 1.342 8/5/49 -2- "not be aggressive in soliciting or accepting loans. Even in such circumstances the Corporation should avoid as far as possible competition with private credit sources. In his recent Economic Report the President suggested legislation to extend the maximum maturities of loans by the Corporation to permit financial assistance to business entures which are economically sound and urgently needed ttan expanding economy but which require long periods of ,444e to develop and produce earnings which will permit oramortization of debt. It is the view of the Board the present 10-year limitation on ordinary business ans by the Corporation is entirely adequate and that in t"e types of cases referred to by the President the limiion could well be fixed at 15 years but should not be moved altogether. The Board concurs with the view exessed by the Secretary of the Treasury that there be gular amortization of loans having maturities in excess Of 10 Years. "The Board is not in accord with the provision of the bli Which would increase the aggregate limitation on ans made by the Corporation. The Board is in sympathy ! II the policy of stimulating employment at this time ri ' - cnigh the encouragement of necessary financing of busi4!ss enterprises, particularly small business. However, believes that such financing of enterprises worthy of usredit should be encouraged to the greatest extent posflble through regular private banking channels and that rinarlcing by the Government should be undertaken only when u 'lancing is not available on a reasonable basis from the 1811a1 credit sources. In the case of ordinary business _Qalls, the Board feels that the use of the private credit tstem can best carry out the objective of the President's taatement in his recent Economic Report that the Governnt's policy should be 'to encourage banks and other ins, ' a i utions to maintain and expand their productive lending Commercial banks have available ample funds tZtivitY l. a Meet the financing requirements of business, and there 8. ! 13 are to be little evidence that sound credit is unable on reasonable terms to an extent that would call rol 'increasing the aggregate dollar amount of authority R?construction Finance Corporation loans. 130 It should also be noted that loans made by the Cor,:!tion involve the use of Government funds and that a NI theher enlargement of the aggregate lending authority of Corporation would thus increase the amount of the proa Pective Government deficit. I j Z j 7 8/D/49 "Since the bill is now the subject of hearings beyour Committee, time has not permitted us to take the matter up with the Bureau of the Budget." Reference was made to the consideration given by the Board at re cent meetings, and particularly at the meeting yesterday, to 6. further reduction in reserve requirements of member banks and to the discussion of the entire Problem of System credit policy at the m eeting of the Federal Open Market Committee this morning. At the latter meeting, action was taken by the Federal Open Market CObNi4. tee looking to the reduction of the System's holdings of Gover rIllient securities to whatever extent would be necessary to abthe reserves released by the proposed reduction in reserve reand members of the Board stated that action would be tellbY'the Board following the meeting of the Federal Open Mar- ket CcIniMittee to reduce reserve requirements in an amount equal to Ir*cerit of 4e11/1) demand deposits and 1 percent of time deposits of all banks. Messrs. Szymczak and Vardamnn were on vacation, but be- rcire leavinq v Szymczak stated that he would favor a reduction. ; rt rcle''man had informed the Secretary that he would not return to vaca ion until August 8 or 9 and therefore was not prepared 4iY whether he would f favor the reduction. 'rest Mr. Evans was on the t€trisC(3ast in connection with the Clayton Act proceeding against and he had stated to Mr. Morrill Over the telephone /144 8/5/49 -4- While he questioned the desirability of a reduction at this tile and while he was still of the opinion that there should be no retreat from the policy of supporting long-term Government bonds at I'ar, he had not had an opportunity to participate in the recent disc1188ions and would not object to the proposed reduction if the itY of the Board felt that such action should be taken. ' 41411°I Accordingly, at this meeting of the Board the following actions were taken by unanimous vote for the reasons stated at the meeting of the Federal Open Market Committee this morning: The following amended supplement to Regulation D, Reserves of Member Banks, was approved: 4188 "SUPPLEMENT TO REGULATION D the Board of Governors of the Federal Reserve System on August 5, 19 9 "RESERVES REQUIRED TO BE MAINTAINED BY MEMBER BANKS WITH FEDERAL RESERVE BANKS "Pursuant to the provisions of section 19 of the FedReserve Act and section 2(a) of its Regulation D, the d of Governors of the Federal Reserve System hereby 152 31abes the following reserve balances which each mem' bertai bank of the Federal Reserve System is required to mainon deposit with the Federal Reserve Bank of its district: 1. If not in a reserve or central reserve city (a) 6 percent of its time deposits until the opening of business on August 16, 1949, and 5 percent of its time deposits thereafter, plus (b) 13 percent of its net demand deposits from August 1 to August 17, 1949, inclusive, and 12 percent of its net demand deposits thereafter. 2. If in a reserve city (except as to any bank located In an outlying district of a reserve city or in • 8/5/49 -)- 3. "territory added to such city by the extension of the city's corporate limits, which, by the affirmative vote of five members of the Board of Governors of the Federal Reserve System is permitted to maintain the reserves specified in paragraph 1 above) -(a) 6 percent of its time deposits until the opening of business on August 11, 1949, and )percent of its time deposits thereafter, plus (b) 20 percent of its net demand deposits until the opening of business on August 11, 1949, 19-1/2 percent of its net demand deposits from August 11 to August 17, 1949, inclusive, 19 percent of its net demand deposits from August 18 to August 24, 1949, inclusive, 18-1/2 percent of its net demand deposits from August 2) to August 31, 1949, inclusive, and 18 percent of its net demand deposits thereafter. If in a central reserve city (except as to any bank located in an outlying district of a central reserve City or in territory added to such city by the extension of the city's corporate limits, which, by the affirmative vote of five members of the Board of Governors of the Federal Reserve System, is permitted to maintain the reserves specified in paragraph 1 or 2 above) -(a) 6 percent of its time deposits until the opening of business on August 11, 1949, and 1) percent of its time deposits thereafter, plus (b) 24 percent of its net demand deposits until the opening of business on August 11, 1949, 23-1/2 percent of its net demand deposits from August 11 to August 17, 1949, inclusive, 23 percent of its net demand deposits from August 18 to August 24, 1949, inclusive, 22-1/2 percent of its net demand deposits from August 25 to August 31, 1949, inclusive, and 22 percent of its net demand deposits thereafter. The following statement for the A lel f; 81)/49 -6press was approved with the understanding that it would be released immediately and would be sent by telegram to the Presidents of all Federal Reserve Banks with the request that they print and distribute the amended supplement to their member banks: "The Board of Governors has reduced by 2 percent °f net demand deposits and 1 percent of time deposits the amount of reserves required to be maintained by 'ember banks of the Federal Reserve System. The reqUction, which will amount to approximately $1.8 bill o Ilsti 04 n) will become effective as follows: demand deposits Central reserve city banks Effective Reserve city banks --4 to 23— 11, 1949 August From 20 to 19.-4 percent 2 percent " 2,.1 .1 “ 19i t! t1 ---,-- " 23 18, 1949 August " 19 11 It 23, " 221 2), 1949 August " 19 " 18i 2 !, September 1, 1949 22,. - " 22 181 " 18 Non-reserve city banks August 1, 1949 From 14 to 13 percent August 16, 1949 12 " 13 " " °4 tiple de osits Oer,i. -ral reserve and r 4011 eserve city i August 11, 1949 From 6 to 5 percent banks 'reserve city banks August 16, 1949 6 II 5 "The effect of these decreases will be to lower the res. ,rve requirements of banks in central cities by ap°ximately $500 million, of banks in reserve cities by )roximately $677 million, and of banks in non-reserve ties by approximately $625 million. "In announcing this action, Mr. McCabe, Chairman of the, .0oard of Governors of the Federal Reserve System, ed that it was taken after full discussion by the 0-aa'd and the Federal Open Market Committee of the co: 1n di-nation of policies with respect to reserve requireopen market operations, and other System credit a:ruments, with primary regard to the general credit ' co business situation and the maintenance of orderly 4clitions in the Government security market." T Approval was also given to the following statement for publication in the Federal Register: 1 317 8/D/49 -7- "This amendment is issued pursuant to the authority granted to the Board of Governors by section 19 of the Federal Reserve Act with primary regard to the general credit and business situation and the maintenance of orderly conditions in the Government security mPrket. The netice and public procedure described in sections 4(a) and 4(b) of the Administrative Procedure Act, and the prior publication described in section 4(c) of such Act, are impracticable, unnecessary and contrary to the public interest in connection with this amendment for the reans and good cause found as stated in section 262.2(e) the Board's Rules of Procedure (Part 262), and espec11Y because such notice, procedure and prior publica' en would prevent the action from becoming effective as Pr°mPtlY as necessary, and would serve no useful purpose." n J Mr. Young, Associate Director, Division of Research and Stetistics, presented a memorandum dated August ), 1949, in which he l'"iewed the question of extending the stay in Manila of Mr.David L. Grove, an economist in the Division of Research and Statistics, °11 lee. "from the Board to act as adviser at the Central Bank of 11111113Pines. The memorandum referred to the insistent request of the State Department that Mr. Grove's stay be prolonged at least 14Itil after the Philippine elections early in November and to the Doesibility that an adviser be found to succeed him. The Secretary said that Mr. Szymczak, before he left on len, stated that as a compromise the Board might agree to nn /'llgenlerit under which it would endeavor to find someone to go to for the purpose of relieving Mr. Grove and Mr. Grove's stay the be extended for the necessary period after the arrival of riel Man but not to exceed sixty days from August 26, 1949. 1 41 8/5/49 -8The matter was considered in the light of the urgent request made by Mr. Myron M. Cowen, U. S. Ambassador to the Republic of the Philippines, and Mr. W. Walton Butterworth, Director for Far Eastern Affairs,Department of State, during a recent luncheon meeting with members of the Board, that Mr. Grove be permitted to remain until after the Philippine elections early in November, and after discussion, it was voted unanimously to advise the State Department and Mr. Cmdemo, Governor of the Central Bank of the Philippines, that the Board would extend Mr. Grove's stay for a maximum of three months from August 26, 1949, but that in the meantime the Board would endeavor to find someone to succeed Mr. Grove as adviser to the Central Bank for a more extended period, and that if this were done it would be understood that Mr. Grove would remain in Manila only a short time after the arrival of the new man and would not stay until the end of the three-months' period. at There were presented telegrams to the Federal Reserve Banks Y°rk, Philadelphia, Atlanta, Chicago, St. Louis, and San .11c1-800 stating that the Board approves the establishment with- c)lit ebanCe by the Federal Reserve Bank of San Francisco on August '1)r the Federal Reserve Bank of St. Louis on August 3, and by ?ederal Reserve Banks of New York, Philadelphia, Atlanta, and Ciliae° On August 4, 1949, of the rates of discount and purchase in 11' elsting schedules. Approved unanimously. At this point Messrs. Riefler, Vest, Thomas and, Young withdrew 1349 8/5/49 —9- 44:1 the action stated with respect to each of the matters hereinter referred to was taken by the Board: Minutes of actions taken by the Board of Governors of the Peole„ 'al Reserve System on August 4, 1949, were approved unanimously. Letter to Mr. Volberg, Vice President of the Federal Reserve ' 111c Of' Q ,Jan Francisco, reading as follows: "In accordance with the request contained in your letter of August 2, 1949, the Board approves the appointMent of John C. Morris, Jr., at present an assistant es4aminer, as an examiner for the Federal Reserve Bank of Francisco. Please advise us of the date upon which the "e appointment becomes effective." Approved unanimously. Letter prepared for Chairman McCabe's signature to Mr. Peyton, vsiA ' ellt of the Federal Reserve Bank of Minneapolis, reading as fol101/g. "As you know, we have been studying here the suggesti-°n contained in the correspondence from A. J. Kane, 4- re s„---dent of The First National Bank of Brewster, Minnet;'sa, enclosed with your letter of April 13, 1949, that the Federal Reserve System set up a retirement system that might be operated for the benefit of member banks. co "While it is obvious that the Federal Reserve System en11_: 3 d he of some service to some member banks in this er7lecti0n, particularly the smaller banks, and it might tj°11rage membership in the System and enhance the attracli veness of the banking field as a profession, it is be0411,7ed that the following considerations, and perhaps et ers, would make this step an undesirable one notwithancling the advantage that might accrue. There does not appear to be authority under the present law for the Federal Reserve System to set up and : 0 co rate such a retirement system. This obstacle, of course, lad be met by obtaining the necessary legislation from b E 8/V49 1350 -10- "Congress but it is our view that strong objections would be raised to any such legislation as an attempt on the part of the System to embark in a field which waS not originally contemplated when the federal Reserve Act was enacted and which might be interpreted S an effort to obtain greater control over member uanks and their personnel. "Another point to be borne in mind would be that the System would be entering into competition with insurance companies and banks for the business of opere*tinE retirement system trusts. The administration of a retirement system for member banks poses a question s to who should operate the plan and foremost among 4 he problems involved would be the administration and ' nvestment of the plan's funds. "Many of the larger member banks have their own retirement systems and since it is doubtful that they would participate in a retirement system operated by "e Federal Reserve System, there is no assurance that ' llanY banks would join a System plan. Furthermore, several s State banking associations operate retirement illsterns for their members; in fact, the Minnesota 4lIkers Association already has such a plan. If a retirement system were to be established which would be available to banks throughout the country, it Should have the sponsorship of an organization which ,°111(1 be representative of all of the banks and it would ' eeM to us that the American Bankers Association mirht be the logical group to look to for this purpose. wh "While I must confess that the idea attracted me sten it was first presented, and although it may seem w l'ange to Mr. Kane that a Government organization in ta n'shington would appear to be avoiding an opportunity u; exPand its activities, we have come to the conclu13;?/1 that this is a task that it would not be approlate for us to undertake." Z Approved unanimously. i4)1 of Telegram to Mr. Knoke, Vice President of the Federal Reserve New York, reading as follows: Your wire August ). Subject to the usual terms Ettid co nditions upon which you maintain accounts for 51 8/5/49 -11- roreign central banks, Board approves the opening and Maintenance of an account on your books for and in the name of the Union Bank of Burma if formally requested to do so. "It is understood that you will offer participation in this account to the other Federal Reserve Banks." Approved inenimously. 114'''oved: _2 Chairman.
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