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Minutes of actions taken by the Board of Governors of the Psderal Reserve System on Tuesday, August 7, 1951. The Board met in the Board Roam at 10:35 a.m. PRESENT: Mr. Martin, Chairman Mr. Evans Mr. Vardaman Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Kenyon, Assistant Secretary Thurston, Assistant to the Board Riefler, Assistant to the Chairman Thomas, Economic Adviser to the Board Vest, General Counsel Townsend, Solicitor Young, Director, Division of Research and Statistics Noyes, Director, Division of Selective Credit Regulation Boothe, Assistant Director, Division of Selective Credit Regulation Benner, Assistant Director, Division of Selective Credit Regulation Youngdahl, Chief, Government Finance Section, Division of Research and Statistics Mr. David Eastburn, of the staff of the Federal Reserve Belak of Philaul -Phia, who had been assisting the Board on a temporary basis in c°411ection with real estate credit matters, also attended the meeting. Mr. Thomas presented a report on current developments in the Qoverilm_ securities market. Mr. Vardaman stated that he wished to bring to the attention of thechai r ralan the fact that at the meeting of the Board on July 31 he aised a 8. (IttortIm IllestiM regarding the Board taking formal policy actions without Plsesent. He said that this practice had been followed on occasions 8/7/51 -2- the past over his protest, and that while he did not want to hinder the efficient operation of the Board, he desired that this matter of 841ai1listrative procedure be clarified since he did not feel that any definitive action should be taken at any meeting when a majority of the 41eMbers of the Board were not present unless definite proxies of absent 41ItIbers were in the hands of the Chairman. Mr. Vardaman then presented a memorandum dated August 7, 1951 trot Mt. Boothe reading as follows: "The Petroleum Administration for Defense is engaged a in program to stockpile for use of the Armed Forces, 75 Million pounds of TEL. The plan is roughly as follows: "The large oil refiners will purchase and store for use of the Armed Forces approximately 60 million pounds of TEL. The remaining 15 million pounds will be allocated to the smaller refiners. Most of the larger oil companies have indicated a willingness to arrange any financing necessary for the purchase and storage of the TEL; however, it is contemplated that some of the smaller companies who will purchase and store the 15 million pounds may need some financial assistance from the Government up to a maximum of 10 million dollars. "The Petroleum Administration for Defense is anxious to know that whatever Government financing is necessary will be available. Therefore, in those cases where private financing is not available, it is the desire of the Administration to first, offer financing through the medium of a V-loan; second, through the medium of a Y-loan, a credit in which a Federal Reserve Bank would participate under the provision of Section 13b; and third, a direct 13b loan made by a Federal Reserve Bank either With or without a guarantee. "Attached hereto is a tentative proposal outlined by the Petroleum Administration for Defense." 8/7/51 —3— Mr. Vardaman said that he and Mr. Boothe met with representatives Of the Petroleum Administration for Defense this morning to review the matter referred to in the above memorandum, and that as a result of that discussion he would recommend that in cases where funds are not available from any other source, in the form of a V-loan or otherwise, credit be extended to the refiners concerned under the provisions of section 13b Preferably in the form of a V-loan in which a Federal Reserve Bank would Participate, but if necessary as a direct section 13b loan with or withOut a Government guarantee. If any application for a loan should be reeeived, Mr. Vardaman said, it would be understood that the System would determine whether credit was available from private sources, and if a loan were made by a Federal Reserve Bank it would reserve the right during the life of the loan to undertake to sell it to a'private financing institution. He added that under the proposed program he did not feel that tt ould be necessary to make any loan under section 13b without a G°vernment guarantee. Mr. Vardaman said that if the members of the Board present, and Mr. ,, Q zymczak, who was expected to join the meeting later, approved, he (Mr, V ardaman) would request Mr. Boothe to indicate to Mr. Thorp, of the I'etr°1ellm Administration for Defense, that the System would be willing to Participate in financing the program in the circumstances and under the c onditions which Mr. Vardaman described. 1 695 .j. MI51 Following a discussion, during which members of the Board present 114Acated that they would be agreeable to the program as outlined, it /148 understood that if Mt. Szymczak agreed Mr. Boothe would so indicate to the Petroleum Administration for Defense. Secretary's note: At Mr. Vardaman's request the Secretary later discussed the matter with Mr. Szymczak, who stated that he would be agreeable to the procedure outlined by Mr. Vardaman. At this point Mr. Boothe withdrew from the meeting. Before the meeting there were distributed to the members of the 4 " copies of a memorandum dated August 6, 1951 from the staff stating that at the request of the Administrator of the Housing and Home Finance 1€elleY, the staff had studied the terms of Regulation X, Real Estate Credit, 41116 light of experience under the regulation to determine whether some 4414 g-lament of down-payment requirements would be desirable, particularly /lith „ --sPect to lower priced houses. The memorandum set forth reasons tor that against a realignment of terms at this time and recommended the"laber of the Board having the assignment for real estate credit control he allth -orized to negotiate with the Housing and Home Finance Administrator 4 1J1‘0Pr1ate realignment of the down-payment schedule prescribed in ' lifta X and the FHA and VA counterpart regulations. Attached to the ket t, 1111CIIIM were three alternative realignment schedules, one suggested by the u 16pg ---ng and Home Finance Agency and the others by the Board's staff fte )"81ble alternatives. - ehbl Mr. Evans referred to the discussion at the meeting on July 31, 4"lhieh time he reviewed the discussion which he and members of the Board's 81:4111 had with Mr. Foley the previous day regarding the defense housing bill which had passed the Senate and which was under consideration by the 11°11se Banking and Currency Committee, it having been Mr. Foley's opinion that the House might undertake to write certain restrictive down-payment 81ons in the legislation, but that if the Board and the Housing and " 11 zinance Agency were willing to join in some voluntary relaxation of te ' 1 11-payment schedule this might be avoided. (1° Mr. Evans recalled that IlleT returning from the meeting with Mr. Foley and reviewing the matter Ilith the staff, it was his recommendation, in which Chairman Martin and . Xorton concurred in telephone conversations, that no definite reply be made to Mr. Foley pending completion of a study by the staff of tIleeffeetS of the regulation and the desirability of an adjustment of its tattle. He said that the memorandum distributed before this meeting repre44ted the result of that study. At this point Messrs. Szymczak and Wood, Economist, Division q 11 esearch and Statistics, joined the meeting. At the request of Mr. Evans, Mr. Noyes compared the minimum downNrIlaes, 4't schedule suggested by the Housing and Home Finance Agency with 41(, alternative schedules suggested by the Board's staff, and stated Neo 118 why the latter two schedules were deemed preferable. 8/7/51 -6Mr. Young pointed out that when the regulation was instituted tilthe fall of 1950 it was decided that its terms should be relatively 8e/lere, that it was understood with Mr. Foley at that time that the situation would be reviewed after experience with the regulation, at least at the end of one year, and that if the terms were found to be t()c) restrictive in the light of prevailing conditions, an adjustment 11°414 be made. Therefore, he said, although the legislative development haa accelerated the review, it would have been made shortly in any event. 1.°ung said that he felt that Mr. Foley and his staff had made a rathe r strong case for some adjustment of terms on the grounds that the nation of the impact of Regulation X and a tightening of credit in the m °rtgage market are tending to have a rather pronounced effect in the hotlb ''4g field, especially in the lower price brackets. In certain areas, Yo said, there was evidence that builders were increasingly indis- lItIsed to go ahead with land commitments and development projects, while %IAcations for FHA and VA commitments were falling off considerably, ,.Lrcumstances, he said, Mr. Foley felt that by the end of the clktreat Year and in early 1952 the level of housing starts might be well the rate of 800-850 thousand a year which was set as the target '"gulation X and its counterpart FHA and VA restrictions were institixteci. Mr. Young recalled that the Board on August 3 addressed a letter 8/7/51 -7- "Ir. Wilson, Director of the Office of Defense Mobilization, inquiring ilhether availability of manpower and materials would be such as to permit the construction of at least 850,000 residential dwelling units in the ce.1°11clex Year 1952, and said that while no reply had been received, members Wilson's staff had stated informally to members of the Board's staff 14141 4 sufficient supply of materials for such a level of housing activity 11°111d be available. Mr. Young went on to say, however, that a case could be made anY relaxation of Regulation X terms on the grounds that the overcredit situation was still inflationary and might become more so, that b " Ling costs were high and showed no signs of reacting substantially, t4t the level of starts thus far in 1951 had been substantially in excess ot the 8°0-8j0 thousand annual rate, and that the Federal Reserve System have to get back into a position of supporting the Government se-8 market under a program of Treasury deficit financing, thus %re,4 ye '-L:Ngmore reliance on selective credit controls. He said it could 11 be argued that with a mounting defense program ahead and a " be talc. heavy demand for credit in the mortgage field, no action should en at this time due to the risk of inflationary dangers. However, he rec °81lized that the impact of the present terms of the regulation were e Severe in the lower price brackets, and a modest readjustment might 4r°Priate, Such action, Mr. Young felt, would not conflict with the 8/7/51 -8- ba81° Position of the Board set forth in Chairman Martin's letter of '111Y. 9 to the Chairmen of the Senate and House Banking and Currency Nnnittees concerning consumer credit. In answer to a question by Mr. Vardaman, Mr. Noyes said that the llutter had been discussed with Mr. Norton by telephone following the Illeeting with Mr. Foley on July 30, and Mr. Norton said that he 11°11-141 not be averse to a realignment of the down-payment schedule if that " should be the decision of the Board. There followed a general discussion of the reasons which might 1)e ELA '`7€tneed for and against a relaxation of Regulation X terms at this timed Which it was agreed that the Board must be guided in its decis4 on this matter by the economic justification for a change in thQ,-`gtilation rather than by the possibility that,if no action were tpo, 'Congress might act to limit the author'ity to regulate real estate credit. At the conclusion of the discussion Mr. Evans was authorized by unanimous vote to say to Mr. Foley that the Board did not feel that the terms of Regulation X should be relaxed at this time but that it would be willing to continue to review the situation with him. At this or mess Point all of the members of the staff with the exception Carpenter and Kenyon withdrew, and the action stated with l'e8Pect to , ach of the matters hereinafter referred to was taken by the toard. 817/51 -9Minutes of actions taken by the Board of Governors of the Neral Reserve System on August 1, 19j1, were approved unanimously. Minutes of actions taken by the Board of Governors of the N.er al,Reserve System on August 2, 3, and 6, 1951, were approved and thee recorded therein were ratified unanimously. Memorandum dated August 6, 19,1, from Mr. Bethea, Director, 'Lc)fl of Administrative Services, recommending the appointment of qeor , L ' Spencer, Jr., as a Clerk-Stenographer in that Division, on a te " I'arY indefinite basis, with basic salary at the rate of $2,810 per 41)1111111/ effective as of the date upon which he enters upon the performance or /14 duties after having passed the usual physical examination and subJet to „ wie completion of a satisfactory employment investigation. Approved unanimously. Letter to Mr. Roger W. Jones, Assistant Director, Legislative Refer elln Bureau or the Budget, Washington, D. C., reading as follows: or th"This is in response to your request for the views e Board regarding the enrolled joint resolution (S. • Ret‘ r7ot.‘ , 1 ) 'To make the restrictions of the Federal Re„ s tre o-:e Act on holding office in a member bank inapplicable Ti61; S• Szymczak when he ceases to be a member of the Of Governors of the Federal Reserve System.' 0 The Board feels that the enactment of the joint res: on behalf of Governor Szymczak is apl2ropriate , fur,nopes that the President will approve it. For your ormation in connection with the joint resolulere is enclosed a copy of a letter dated June 21, Y31, Ighich Chairman Martin addressed to Senator Maybank. Approved, Messrs. Szymczak and Vardaman not voting. 8/7/51 Letter to Mr. Hill, Vice President of the Federal Reserve Bank Qr Philadelphia, reading as follows: "In view of the recommendation contained in your letter of July 31, 1951, the Board of Governors extends tc February 15, 1952, the time within which the Wilmington Trust Company, Wilmington, Delaware, may establish a branch in Greenville, Delaware, under the authority granted in the Board's letter of August 15, 1949." Approved unanimously. Letter to Mr. DeMoss, Vice President of the Federal Reserve Bank (4 Dal, 'as, reading as follows: "This refers to your letter of July 25, 1951, subne, 11-tting., with your favorable recommendation, the request '14 the MiMbres Valley Bank, Deming,New Mexico, for perraission to continue to act as Trustee under Agreement tf; c) an issue of t17,000 par value Farm Revenue Bonds of e Deming Municipal Board of Education. It is understood the member bank is the only available corporate fiduciary in Deming and that the trusteeship , 1--.--/`', °1-1t of a desire of local businessmen, farmers and 1' ,- 4chers to facilitate the financing of an experimental .1i. 1'11 for the benefit of students in the agricultural area. Is also noted that the appointment involves only a b.e.T!Aed amount of time and responsibility and that you 'eve the bank is in a position to properly handle the "count ”In jecti the circumstances, the Board will interpose no ohon to the Mimbres Valley Bank acting as Trustee in the mat 144,_ ter above described with the understanding that it clql not acquire any other fiduciary business without first ba.2_111ing the permission of the Board. Please advise the ac cordingly." Approved unanimously. Or chic Letter to Mr. Diercks, Vice President of the Federal Reserve Bank ego, reading as follows: ?12 8/7/51 -11- "Reference is made to your letter of July 27, 1951, slibmitting the application of Union Bank and Trust Company, Strawberry:Point, Iowa, for permission to exercise fiduciary Powers. "In view of the Reserve Bank's recommendation and the information submitted, the Board of Governors of the Federal Reserve System grants the applicant permission, under the provisions of its condition of membership tumbered 1, to exercise the fiduciary powers now or hereafter authorized under the terms of its charter and the laws of the State of Iowa. "You are requested to advise the Union Bank and Trust vallY, Strawberry Point, Iowa, of the Board's action." Approved unanimously. Letter to Mr. Clark, First Vice President o2 the Federal Reserve 131/11k ()f Atlanta, reading as follows: "Reference is made to your letter of July 20, 19)1, , 141lich you advised that it appears expenses for certain ' eudects at your head office will exceed the 1951 budget stilliates as follows: Amount Object Retirement and Social $48,000 Security Contributions Postage and Expressage: Original shipments of 45,000 F. R. currency O 30,000 Other Printing, stationery- and 52,000 supplies Assessment for expenses of 22,800 Board of Governors Federal Reserve currency: 150,000 Original cost ana "The Board accepts the revised figures as submitted re,,,TProPriate notations are being made in the Board's 01,--A's. It is noted that you expect to furnish an estimate lcic_esses in Salaries - Employees at the head office and : brA —4e4ea after third-quarter figures are available." Approved unanimously. 8/7/51 -12Letter to Mr. Olson, Vice President of the Federal Reserve Bank "Chicago, reading as follows: "We acknowledge receipt of your letter of July 31, 1951, containing enclosures from Kilbane Brothers, Inc., and Abbott Laboratories. According to the correspondence, Kilbane Brothers, Inc., plan to construct a warehouse for Abbott Laboratories Which they state will function es an integral part of their Inanufacturing and processing operations. "We do not doubt that Abbott Laboratories regards a warehouse for the storage of raw materials and packaging supplies as essential to the manufacturing process as such. However, we do not think that the description of the use of this property coincides with our telegram X-32 and letter of explanftti°n X-39 regarding the processing of materials, goods, or ricles into finished or partly finished manufactured proucts. Many semifinished articles are products which later ;;e atcobined to make the finished product and it is obvious Storage must be furnished to accommodate such partly nished products; for example, various parts of a motor asY be made In different departments of a plant and later 1,11,1!erdbled in other departments. Storage for these parts, __"-ich are in an inbetween stage of the productive process, ust be supplied. We do not think, however, that this in-Ldes warehouse facilities for either the storage of raw materials or the storage of fully finished products awaitt this tr d18 1but1on. It is our opinion that warehouses of Regulaof provisions er type are fully subject to the tion X. Z 111 Approved unanimously. Letter to Mr. Roger W. Jones, Assistant Director, Legislative Bureau of the Budget, Washington, D. C., reading as follows: "This is in response to your letter of July 31, 1951, reo,. the views of the Board on a proposed bill submitted b Aueueu bY the Treasury Department 'To clarify the act of national St 17, 1950, providing for the conversion of b 1,8414 Int0 and their merger and consolidation with State 8/7/51 -13- 'The need for this legislation, as explained by the Secretary of the Treasury in his letter, a copy of which was enclosed with your request, arises from the fact that section 4 of the Act of August 17, 1950 (Public Law 706) Provides in part that no conversion of a national bank into a State bank shall take place under such act unless under the law of the State in which such national bank is located State banks may convert into national banks 'as Provided by Federal law'. The Federal law to which this efers provides that a State bank may convert into a national bank upon a vote of the holders of only )1 per cent of the stock of such bank and contains no provision for the payment of cash to dissenting shareholders. Section 2 of the act of August 171 1950 provides that a national bank may convert into a State bank upon a vote of the holders of not less than 2/3 of the stock, and dissenting shareholders shall be entitled to the value of their stock in cash. Since the enactment of Public Law 706, several State legislatures have enacted laws imposing conditions 011 conNersions of State banks into national banks similar to those contained in section 2 of the act of August 17, 1950. Such statutes, in effect, prohibit the conversion °f a national bank into a State bank because the conditions Proscribed by the State statute for the conversion of a tate bank into a national bank are not the same as those 'Provided by Federal law' although they are identical with the conditions prescribed by Federal law for the conversion Of a national bank into a State bank. "The proposed bill would permit the conversion of a hational bank into a State bank if the limitations or conditions of the State law are no more restrictive than those contained in section 2 of the act of August 17, 1950, with !:eePect to the conversion of a national bank into a State an under Under state charter. "You are advised that the Board has no objection to re, verable consideration of this proposed legislation." Approved unanimously. Memorandum dated August 71 1951, from Mr. Townsend, Solicitor, 441'1111g to the Order for investigation issued by the Board on May 24, 1951) ih the matter of Miller Motor Sales, Inc., St. Louis, Missouri, a t 6/7/51 -14- 1%.eastrant under Regulation W, Consumer Credit, and recommending that the i rd's file in the case be closed, inasmuch as Miller Motor Sales, Inc., 11( ceased to do business and was in the process of liquidating its assets. Approved unanimously. Letter to Mr. Lewis, Vice President of the Federal Reserve Bank q Louis, reading as follows: "This refers to your letter of July 25, 1951, concerning !_t./1 application for a certificate of exemption under section (g) of Regulation X in connection with the constrmtion of ) 8. proposed retail center located on approximately 34 acres Of land in St. Louis County, at an estimated cost of around $15 million. As we understand the facts, the applicant made his first surveys in 1945, has devoted considerable time and expense toward the planning of the proposed retail ?enter, and has considered several proposed methods of financlne, Including the formation of a corporation to construct arld operate the center. "Our view is that the fact that a corporation is to be ?reanized to construct and operate the center does not mean hat your Bank cannot properly issue a certificate of exemption, should all the other requirements of section 5(g) be satisfied. I°14ever, based solely upon the facts as outlined in your ! letter, we question whether there was a financing plan con'Plated by the applicant and by a Registrant prior to _ebruary 15, 1951, within the meaning of section 5(g), and suggest that this question be carefully explored in consider14g whether a certificate of exemption should be issued." Approved unanimously. Letter to Mr. Strothman, Vice President of the Federal Reserve 4,4 k-.4 Minneapolis, reading as follows: "This refers to your letter of July 19, 1951 concerning the , applicability of Regulation X to the financing of the _?°mpletion' of so-called 'basement homes'. As we underand the facts, in a typical case a homebuilder prior to 8/7/51 -15- "August 3, 1950 planned a 1-1/2 story house with a full basement and, after completion of the basement and flooring of the first floor covered the construction with roofing material and used it as a dwelling temporarily and indefinitely until such time as his plans could be completed. The question raised is whether 'completion' at the present time should be regarded as the completion Of a residence begun before August 3, 1950 or as a major addition to an existing structure. "You stated that heretofore it has been your view that in the absence of a fairly consistent process of construction following the occupancy of the basement, Regulation X requires that such construction be considered as a major addition rather than as completion of a residence begun before August 3, 1950. You also had stated in Your letter of February 13, 1951 that this was the general rule followed in answering such inquiries, and the Board concurred in your previously expressed opinion Iii its reply of February 261 1951. "The problem as you have outlined it apparently is °ne peculiar to Minneapolis, and we agree that there may be compelling reasons for a reconsideration and reversal of the position previously taken. It undoubtedly is true that the owners and local financing institutions. regard eo-called 'basement homes' as incompleted residences and, !ince it is our understanding that the FHA so regards l'hom, the Board will have no objection if your bank follows he general rule of considering such construction as the °°MPletion of residences begun before August 3, 1950, rather than as a major addition to an existing residence." Approved unanimously.
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