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1i63 A meeting of the Board of Governors of the Federal Reserve SYstem was held in Washington on Friday, August 6, 1943, at 11:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Draper Evans Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman The action stated with respect to each of the matters hereinPer referred to was taken by the Board: The minutes of the meeting of the Board of Governors of the Reserve System held on August 5, 1943, were approved unanimously. Telegrams to Mr. Paddock, President of the Federal Reserve Bank B t°4: Messrs. Treiber and McCreedy, Secretaries of the Federal Reor " ser "Banks of New York and Philadelphia, respectively, Mr. Leach, PresiA " ent of the Federal Reserve Bank of Richmond, Mr. Frazer, Secretap., -4 Pro tern of the Federal Reserve Bank of Atlanta, Mr. Dillard, Vice Pres.;,4 4-"nt of the Federal Reserve Bank of Chicago, Mr. Stewart, Secretary _ ur the Federal Reserve Bank of St. Louis, Messrs. Powell and First Vice Presidents of the Federal Reserve Banks of MinneallcIlis and Dallas, respectively, and W. Hale, Secretary of the Federal eser "e Bank of San Francisco, stating that the Board approves the estabii shent without change by the Federal Reserve Banks of St. Louis allot s °4 Francisco on August 3, by the Federal Reserve Bank of Atlanta 01-1 ' list 4, by the Federal Reserve Banks of New York, Philadelphia, 11141411114, Chicago, Minneapolis, Dallas, and San Francisco on August 5, ' 1164 8/6/43 -2- 143, and by the Federal Reserve Bank of Boston today, of the rates of ctilcount and purchase in their existing schedules. Approved unanimously. Memorandum dated August 3, 1943, from Mr. Goldenweiser, Director of the Division of Research and Statistics, recommending that G'ottfr ieu Haberler be appointed as an Economic Specialist in that Dill:181.°n on a temporary basis for a period of not to exceed one year, with basic salary at the rate of $9,600 per annum, effective as of the 'late upon which he enters upon the performance of his duties after havi4g Passed satisfactorily the usual physical examination, with the lulderstanding that he will not become a member of the Retirement System _ the Federal Reserve Banks during the period of his temporary tlaPlo Yment. The memorandum stated that, if the work in which Mr. Habsrler would participate was not completed within a year, consideration _ might have to be given to an extension of his appointment. Approved unanimously. Memorandum of this date from Mr. Morrill, recommending that 4113h Matthews be appointed as a cafeteria helper in the Secretary's °trice on a temporary basis for a period of not to exceed 60 days, with basic salary at the rate of 41,080 per annum, effective August 6, 1943. Approved unanimously. Letter to Mr. McRae, Chief Examiner of the Federal Reserve °f Boston, reading as follows: 1165 8/6/43 —3-- "This refers to your letter of May 20, 1943, and its enclosures, with regard to the applicability of section 32 of the Banking Act of 1933, as amended, to the service of four members of the Advisory Board of the Massachusetts Investors Trust, Boston, Massachusetts, who are serving at the same time as directors of member banks. "It appears that the Advisory Board was created in order to provide the maximum assurance that changes would not i?e made by the trustees of the Massachusetts Investors Trust ?-ri the then existing policies and purposes of the Trust and, in giving effect to such purpose, the Advisory Board was vested with the following powers: (1) additional securities may not be added to the approved list (to which the trustees are confined for investment) by the trustees, without the approval of a majority of the Advisory Board; (2) a security °f which the trust has no holdings may be removed from the approved list by affirmative vote of a majority of the AdrY Board; (3) no loan shall be contracted by the truste.eson behalf of the trust without the approval of the AdBoard if the aggregate amount of loans outstanding, ?-ncluding the proposed loan, will exceed five per cent of the liquidating value of the trust; (4) no alteration or amendment of the trust indenture shall be effective unless ,ssented to in writing by a majority of the Advisory Board; S5) no merger of the trust with any other organization shall be effected unless first approved in writing by the Advi!°rY Board; (6) certain distributions may be made to sharel'olders in the discretion of the trustees at rates of insrest and other terms as the trustees may determine with T:he aPproval of the Advisory Board; (7) under certain lim.3 :tations a new class of shares may be created and their tarms and conditions specified by resolution of the trus?esaPproved by the Advisory Board; and (8) the trustees, yith.the approval of the Advisory Board, may provide for the issue of scrip for fractions of shares. . "It will be observed that these powers are not merely 13";'vlsory, as that term is generally understood, but are Alndlng on the trustees. Moreover, it is noted that the ,greement and Declaration of Trust does not provide that l'he Advisory Board consult with and advise the trustees regarding investments and investment policies and matters enerally. In these circumstances, it is the view of the ifoard tnat the functions of the Advisory Board of the 4aseachusett5 Investors Trust are not merely advisory, and services to. member banks by members of such a board are Prohibited by section 32 of the Banking Act of 1933, as amended. t 1166 8/6/43 -4- "While it is recognized that it can be argued that members of the Advisory Board are not technically either officers, directors, or employees of the organization with which they are connected, it seems clear that Congress intended that persons as intimately and importantly connected with an organization engaged in the activities described in the statute as are the members of this Advisory Board be included within the provie?-ons of section 32 notwithstanding they do not have the offlcial title of officer, director, or employee." Approved unanimously. Letter to Mr. Young, President of the Federal Reserve Bank of ago, reading as follows: "This refers to your letter of July 27, 1943, relating to compliance by State member banks in Wisconsin with the condition of membership requiring a bank subject thereto to fdeposit securities with its trust department if it deposits trust funds in its commercial or savings department or otherUses them in the conduct of its business. "The Board agrees with the opinion of your counsel that Under the law recently enacted in Wisconsin, copy of which !las enclosed with your letter, any trust funds so deposited by a State bank would be protected by a preference over claims by general creditors in the distribution of the bank's assets in the event of insolvency or liquidation. Accordthe Board waives compliance by State member banks in Wisconsin with the condition of membership in question, but expressly reserves the right to require full compliance with such condition if at any time as a result of statutory Changes or otherwise it feels that trust funds so deposited are not otherwise adequately protected. Please so advise in ,Writing each member bank in Wisconsin in your District which , 37 subject to such condition of membership and forward to the Board for its records a copy of the advice you furnish each of such banks. "A similar letter is being sent to the Federal Reserve Ban', - of Minneapolis with respect to Wisconsin banks in the Ninth Federal Reserve District." Approved unanimously. 1167 8/6/43 -5Mr. Ransom referred to informal discussions of members of the Pc) Board with respect to the procedure to be followed in the dis°/1 of the question whether the absorption by member banks of e:kellsrlge and collection charges constituted the payment of interest within the meaning of the Board's Regulation Q, Payment of Interest °4 Deposits, and stated that in accordance with the informal conclu8iQa reached following these discussions he had sent today, over his signature, the following letter (with appropriate changes in refflees to individuals named in the letters) to Senator Wagner and C(41alsaman Steagall as Chairmen of the Senate and House Banking and Curre neY Committees, respectively, and to Congressman Doughton. He also said that before sending the letters he had advised Mr. Crowley, Chaim a4 of the Federal Deposit Insurance Corporation, and Mr. Delano, C°411Pltr(3-ler of the Currency, regarding the procedure which he was followi g and subsequently had sent to them copies of the letter and its eliel°811re: "You may recall that early in 1937 I talked with you and :lth several other Members of Congress about the question ether the absorption by banks of exchange and collection crha ,,rges should be regarded as a payment of interest on demand iPosits within the prohibition of the law and the Board's ,,egulation Q. As a result of these discussions, it was un"xr,00d that I would advise you in advance of any future ntIon which might be taken by the Board affecting the status e v4 this matter. That time seems to have arrived, as the neessltY for action has increasingly impressed itself upon us. 8 ."As you may also recall, the Banking Act of 1933 amended „ectIon 19 of the Federal Reserve Act so as to provide that member bank 'shall, directly or indirectly, by any device Whatsoever, pay any interest on any deposit which is payable clemandl, and the Banking Act of 1935 authorized the Board ,.?determine what shall be deemed to be a payment of interest :t1411fl the meaning of this section. In view of this provision he law, the Board adopted a definition of interest under wilioh the absorption of exchange and collection charges by a ' 8/6/43 -6- "member bank as compensation for the maintenance of a demand ueposit would be construed as a payment of interest on such deposit. "On January 30, 1937, however, at the request of Senator „, wagner and yourself, the Board deferred the effective date of 4 t tu:nnition. Following a discussion with Mr. Crowley, f the fact that the problem involved an interpretation of the law under which the Federal Deposit Insurance Corporation operates with respect to nonmember insured banks, the Board amended its Regulation Q by striking out the def: .1 ration in question ana providing that, for the purposes of the Regulation, 'interest' should mean 'any payment to or for ,e account of any depositor as compensation for the use of lunds constituting a deposit', and the Federal Deposit Insurance Corporation amended its Regulation so as to define interest in identical language. The Regulations of both Agencies therefore became uniform in this respect. At the same time, the Board and the Federal Deposit Insurance Corporation la?ued a joint statement for the press in which it was P03 : nted out that the effect of the amendments was to declare existing law rather than to interpret and apply the law-to Particular cases. It was stated that this would permit the Teral application by each agency of a uniform law and a Q termination, based upon the facts involved, in specific eases. "Since then the Board's Regulation has remained un4e.Ilanged in this respect and no ruling has been issued by "e LQ Board regarding the question whether the absorption of :xchange charges constitutes a payment of interest. It was and there was some reason to believe, that the pract?Ped' klee would gradually diminish, particularly since many pankers regarded it as unsound, and that the problem would eventually solve itself without more specific action. Rehowever, it has appeared that the practice, instead Of d iminishing, has increased. The Board has been informed that same banks have taken advantage of the situation to en!age in a competition for bank deposits on the basis of ab2rgtion of exchange and collection charges which other banks .a.ve believed to be unlawful. As a result, the Board of fernors has been urged on a number of occasions to take acFir. Requests of this kind have come from members of the ' e eral Advisory Council as well as from other bankers. "Last year the Board received a letter from the office `J:91e Comptroller of the Currency under date of July 31, 1942 41-Ling attention to the continued absorption of exchange charn. 5es in considerable amounts by a particular national bank urging upon the Board the desirability of a prompt ruling "4-1,h respect to the question as applied to this specific case. j 1169 8/6/43 -7- "A copy of this letter is enclosed for your information. The Board has reconsidered the entire matter carefully in the light of this case; and there is also enclosed a copy of the reply which has been prepared with a view to its transmission to the Comptroller on August 23, 1943. In this letter the Position is taken that the absorption of exchange charges by thebank is a payment of interest on demand deposits in vioation of the law and the Board's Regulation Q. Since a ruling in conformity with this letter is one that would be apPlicable to all member banks, we contemplate publishing the ruling in the September issue of the Federal Reserve Bulletin, !Hich will go to the press about the date of the letter to the Comptroller of the Currency. I am therefore writing you in a ccordance with the understanding mentioned in the first paragraph of this letter so that you may be advised of the proposed action before it takes effect, and I am writing letters to Messrs. Wagner and Doughton to the same effect. If in the meantime any of you should desire to discuss the matter with me, I will be at your service." The letter to Comptroller Delano, referred to in the foregoing letter, read as follows: "This refers to previous correspondence between your uffice and the Board, regarding the question whether the absorption of exchange charges by National Bank of Commerce of incoln, Lincoln, Nebraska, constitutes a payment of interest 2n demand deposits in violation of section 19 of the Federal neserve Act and of the Board's Regulation Q. . "Your Office has submitted detailed reports of your ex4/1..T.-}ner with respect to the relevant facts in connection with rae matter. The report of examination as of March 22, 1943, Indicates that during the year 1942 the subject bank absorbed exchange charges in the amount of $18,576.22 out of $25,187.15 cchange charges paid, and that during 1943 up to the date of thee examination such charges were absorbed in the amount of ?4,615.80 out of $5,506.81 paid. It appears that the subject bank has absorbed exchange charges in hundreds of instances end for numerous depositors, principally with respect to bal' ancesmaintained by correspondent banks; and that the pracice has existed over a period of years. As of April 20, ;-1938, the report of examination of the bank indicated that 1937 the bank had absorbed exchange charges in the 414,953.68 out of $16,721.85 exchange charges paid; that uat such , Such charges had been absorbed in amounts ranging from cents to *160 for more than 250 correspondent banks; and at, in some instances, the exchange absorbed for particular 1170 q/6/43 -8"bahks amounted to as much as 2 or 3 per cent of their balatiees with the subject bank. "The ent to orBoard's Regulation Q defines interest as 'any payfor the account of any depositor as compensation ?r the use of funds constituting a deposit.' This definiAl "is intended merely as a declaration of the general law. 4ccordingly, the questions to be determined in the present ase are first, whether the absorption of exchange charges by the subject bank, as above described, constitutes a 'payL', and, second, whether such payment is made as compensaon for the use of funds constituting a deposit. "There can be no doubt that the absorption of each exChange charge by the bank results in a 'payment'. In any isirh case, the depositor receives a pecuniary benefit which 4, wcUld not otherwise receive. For example, if a check for ;14-1/00, drawn on a non-par bank which imposes an exchange . j., a!,-e of 1/10 of 1 per cent for paying checks drawn upon at, d;deposited with the subject bank, and is forwarded to the tr ee bank for collection, the non-par bank would remit to subject bank $999 in payment of the check. If the subject bank t , thtl„ lien credits its depositor in the amount of $1,000, the $1 exchange charge, the depositor clearly receive 'payment' in an amount equivalent to the exchange charge a 1 From the facts in the present case it appears that the maZ4Lehts' resulting from absorption of exchange charges are bY the subject bank for the purpose of soliciting and Ijc;!nting its demand deposit accounts; in other words, as No .4:nsationl for the use of funds constituting deposits. er reason for the absorption of such charges is apparent. T t to whi j he bank's correspondent bank deposits, with respect ch e 1:-ese than xchange is regularly absorbed, have increased from .Ln June $7 million at the end of 1941 to nearly $18 million rati 1943. It is significant that during this period the dem ° of this bank's correspondent bank deposits to its total ba:ct deposits has been much higher than at Reserve city a whole, both in its district and throughout the notwithstanding the fact that Lincoln is located on01Li,.it short distance from Omaha, which is a much larger financenter. baxik "hat the absorption of exchange charges for depositing furji8 in consideration for balances maintained by them is the " er indicated by the fact that in at least one instance the 17,',!J2j7ct bank has advised a depositing bank that, since 4Lk s balance in a particular month was negligible, exehw-1 : th e Charges could not be absorbed for such bank because more-uuject bank would 'have no way of making it back'. wri-J:I n it appears that the subject bank, on occasion, has -" its correspondent banks suggesting that they par 8/6/43 -9"items sent to such banks in return for the parring by the subject bank of items received from such banks. "While the practice exists principally with respect to 4ePosits of correspondent banks, it is understood that, in at least one instance, a corporate account formerly carried with competing national bank was obtained by the subject Dank because of its absorption of exchange charges. "In the circumstances, it is the opinion of the Board o trvernors, on the basis of the facts here presented as ' Nujined above, that the absorption of exchange charges by c: ) 1 lonal Bank of Uommerce of Lincoln, Lincoln, Nebraska, tt,nstitutes a 'payment of interest' within the meaning of e general law and is therefore a payment of interest on liand deposits in violation of section 19 of the Federal R2.serve Act and of the provisions of the Board's Regulation Q.si 4 Thereupon the meeting adjourned. A.1)1)1, 0 Chairman.
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