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Minutes of actions taken by the Board of Governors of the Federal Reserve System on Thursday, August 9, 1951. The Board met in the Board Room at 10:35 a.m. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Evans Powel3 Carpenter, Secretary Kenyon, Assistant Secretary Thurston, Assistant to the Board Thomas, Economic Adviser to the Board Vest, General Counsel Townsend, Solicitor Young, Director, Division of Research and Statistics Mr. Noyes, Director, Division of Selective Credit Regulation Mr. Solomon, Assistant General Counsel Mr. Mr. Mr. Mr. Mr. Mr. Mr. Messrs. Raymond M. Foley and Neil J. Hardy, Administrator and 4s81stant Administrator, respectively, of the Housing and Home Finance 4gericY also were present. Chairman Martin stated that in a conference which Mr. Evans had with Mr. Foley following the meeting of the Board on August 7, 1951, the 4t.ter requested an opportunity to present to the Board his views with lie3PeCt to the desirability of some relaxation in the terms of Regulation X3 Real Estate Credit. Mr. Foley made substantially the following statement: , In discussions as to which Government agency should be chosen 0 administer the real estate regulations I opposed giving full ithority over residential construction credit to the Housing and 0e Finance Agency on the grounds that much of the construction 4Lalled conventional financing and that there was involved a T 8/9/51 -2- broad question of the inflationary influences of such credit Which would affect the whole economy. I pointed out at the time that the Housing and Home Finance Agency had been given responsibility by Congress for attempting to carry out various housing projects, but that the problem of the regulation of credit seemed objectively to be a field in which the Board of Governors had far greater interest and responsibility and could exert greater effectiveness. In the circumstances, I proposed that there be a joint undertaking in administering the controls, and despite the prophesies of many persons that such a joint undertaking could not prove successful, the record has revealed that a good job has been done in carrying out a difficult task, which should set a pattern for the future. When the terms of Regulation X and its companion VA and FHA restrictions were formulated, it was realized that there were no exact guides and that the Board and the Housing and Home Fi. rlance Agency were proceeding on the basis of their best judgment In the light of existing conditions and conditions envisaged for the future. It was also understood at that time that the agencies could not hope to control or restrict commitments already made and that this unrestricted backlog would have to be taken into consideration. Therefore, in setting the goal of 800-850 thousand housing starts for the year 1951 and preparing regulatory terms, it was understood that the terms would have to be made more severe achieve the goal than if the backlog of commitments had not been involved. The joint announcement issued when the regulations were Instituted recognized that fact by stating that the goal of housing starts and the terms of the regulations would be re-examined at a later date, and that the goal and the terms would be modified tr the situation justified. Now, the overhang of pre-regulation ?cmmitments is largely out of the picture and evidence available 1-ndlcates that the rate of housing starts is falling and probably Val continue to fall. Mr. Nilson, Director of the Office of 'efense Mobilization, has stated recently that the same number lousing starts for 1952 would appear at this time to be comPatlble with the defense program. Therefore, serious consideration should be given to a modi-cation of the terms of Regulation X. The Housing and Home 4.Illance Agency deems it necessary to maintain as large a produc::4.011 of housing as is consistent with announced policies of the nrernment, provided such reduction is well-balanced. The need t°r housing still exists) particularly in certain price, size, 4nd rental brackets) and the backlog of demand will continue to and it is important that we avoid if possible a situation Parallel to that following World War II when a severe housing p 8/9/51 -3- shortage necessitated emergency actions. With respect to the trend in housing starts, a judgment cannot be formed solely on the basis of the effect of Regulation X and its counterpart FHA and VA regulations, since the current tightness in the mortgage market is also an element. The latter factor is present in various degrees ln different sections of the country and particularly affects the lower-priced housing field. We cannot forecast how long this situation will prevail but there are some signs of an easing in the market. It is highly important to take modifying action at this . time in such a fashion that the announcement of the action Will not convey to the public the impression that the danger Of inflation has passed. Such an impression can be avoided by making it clear that the modification is an attempt to Obtain the kind of results which were sought when the regulations were instituted. I do not know whether an adjustment of the down-payment schedules under the regulations will forestall the writing of restrictions into the defense housing bill Which has passed the Senate and is pending before the House. The retention in the legislation of the proposed limitations on housing terms of loans to veterans would make the regulations extremely difficult, if not impossible. I stated to Mr. Evans and members of the Board's staff last week and to Chairman Martin this morning that I feel strongly that action to relax the regulations would not be justified because of the threat of Congressional action, but that I would not be deterred from action by such a threat if I thought a change was called for. There is a substantial body of evidence that a modification of the down-payment schedules is justified at this time, and it 18 on that basis only that I am proposing action. I am not concerned about the rate of production of housing ills Year, but on the basis of a projection of recent trends ; am concerned about the rate of housing starts in 1952. RealZing that in this industry there is necessarily a three to sixmonth lag before any change in terms begins to be effective, I ' - 11e1 that action is desirable now. While it can not be proved 10Y exact statistical reports, the Housing and Home Finance 4 ,gelloY is in close contact with the building industry throughout T,he country and it appears increasingly evident that there is a "ing tendency under the present terms of the regulations oward production of houses in the higher-priced brackets. r Mr. Foley then called upon Mr. Hardy who presented statistics preriarerl 0Y the Housing and Home Finance Agency showing a higher percentage ' 8/9/51 decrease in housing starts in 1951 with each succeeding month below the corresponding month in 1950. He also stated that FHA and VA applications were off greatly percentagewise during the first three weeks of July as compared with the similar period in 1950 and referred to a special study of builders' intentions being conducted for the 11°1181ng and Home Finance Agency by the Bureau of Labor Statistics which °II a Preliminary basis indicated a decline in starts in the third quarter f 1950 of about 20 per cent in certain large Eastern cities below the eeccmd quarter of this year. Mr. Foley referred to the alternative down-payment schedules Which were incorporated in the staff memorandum of August 61 19511 which 1748 discussed at the meeting of the Board on August 7) and said that he w°111d be agreeable to the first of the two schedules (Schedule II), but that the other schedule proposed by the Board' staff (Schedule III) would 11°.t involve sufficient relaxation to justify a change in the present terms. Following a discussion based on Mr. Foley's comments, Chairman /tartin said that the Board would advise him as quickly as possible of 48 decision in the matter. Thereupon, Messrs. Foley and Hardy withdrew. There followed a discussion of the three alternative down-payment flies which had been discussed at the meeting on August 7, and it was the c°nsensus of the members of the Board that Schedule II would be most 819/51 —5— suitable, although some minor modifications would be desirable to avoid salY tightening of terms at the extreme lower end of the schedule. It was then suggested that Mr. Evans be authorized to negotiate with Mr. P°1aY concerning minor adjustments in the proposed down-payment schedule wall the understanding that the Board would agree in principle to a rilcdification of terms of Regulation X along the lines suggested in Schedule II attached to the staff memorandum of August 6, 1951. It was ale() suggested that if there was to be a relaxation of the terms, a joint °8s1 release should be issued and that a joint press conference, similar Pi ' to that held on October 10, 1950, in connection with the original announceof Regulation X and its companion VA and FHA restrictions, should be held, with Mr. Foley present, in order to explain the reasons underlying the relaxation of requirements. These suggestions were approved unanimously. At this point all of the members of the staff with the exception or 14esers. Carpenter and Kenyon withdrew, and the action stated with v'et to each of the matters hereinafter referred to was taken by the Minutes of actions taken by the Board of Governors of the Federal e e System on August 7, 1951, were approved unanimously. Minutes of actions taken by the Board of Governors of the Federal System on August 8, 1951, were approved and the actions recorded -6- 8/9/51 therein were ratified unanimously. Memorandum dated July 311 19510 from Mr. Vest, General Counsel, recommending an increase in the basic salary of Mrs. Eunice M. Boyd, Stenographer in the Legal Division, from $31035 to $31115 per annum, effective August 191 1951. Approved unanimously. Memorandum dated August 7, 19511 from Mr. Allen, Director, nivieion of Personnel Administration, recommending the appointment of *8. Alice Cooper Hook as a Clerk-Typist in that Division, on a tempol'arY indefinite basis, with basic salary at the rate of $21730 per annum, effective as of the date upon which she enters upon the perof her duties after having passed the usual physical exami- n4tion and subject to the completion of a satisfactory employment inv estigation. Approved unanimously. Letter to Commerce Trust Company, Kansas City, Missouri, reading as follows: "In response to your formal application dated July 311 1951, and submitted through the Federal Reserve Bank of Kansas City, the Board of Governors hereby consents, pursuant to the provisions of Section 18(c) of the Federal D?posit Insurance Act, to the purchase of assets and assumption of deposit liabilities of The Stock Yards National Bank of Kansas City, Kansas City, Missouri, by the Commerce Trust Company. "The foregoing is, in effect, confirmation of the informal consent to the proposed absorption given July 301 19511 in view of the emergency situation resulting from the recent flood." J-1 8/9/51 -7Approved unanimously, for transmittal through the Federal Reserve Bank of Kansas City. Letter to The National City Bank of New York, New York, New York, reading as follows: "In view of your request submitted through the Federal Reserve Bank of New York and the information contained In your letter dated July 27, 1951, the Board of Governors extends to December 1, 1952, the time within which you may establish an additional branch in the City of Sao Paulo, Brazil, under the authority granted in the Board's letter of November 10, 1950." Approved unanimously, for transmittal through the Federal Reserve Bank of New York. Letter to the Honorable A. W. Hall, Director, Bureau of Enand Printing, Washington, D. C., reading as follows: Ve have received requests from the Federal Reserve Banks of Richmond and Dallas for specimen sets of certain Federal Reserve currency, faces and backs, to be printed on nondistinctive paper. "The request from the Federal Reserve Bank of Richmond supersedes the one which you received some time ago direct from the Bank. The Richmond Bank would like to obtain six sets of all denominations of each of the series of notes issued by the Bank as they may be available, as follows: Old size Federal Reserve notes Series 1914 5's and up Old size Federal Reserve bank notes Series 1918 l's and 2's ew size Federal Reserve notes Series 1928 5's and up New size National Currency Series 1929 10's and 20's New size Federal Reserve notes Series 1934 5's and up New size Federal Reserve notes Series 1950 5's and up "In connection with the above list, we assume or have been advised informally that (1) old-size 1918 Series Federal Reserve notes in the $5001 $1,0001 $5,0001 and $10,000 denominations were intended to be covered by the first item; (2) old-size 1915 "1918 Series Federal Reserve bank notes in the $5, $101 and 8/9/51 -8- 120 denominations are desired in addition to the denominations listed in the second item; and (3) the new-size National in the $100 Currency (Federal Reserve bank notes) Series 1929, nations listed denomination is desired in addition to the denomi In the fourth item. "The Federal Reserve Bank of Dallas states that it has at Its head office in Dallas a set of specimens of the 1934 Series Reserve Federal Reserve notes and the 1929 Series of Federal bank notes. If available, it wishes to obtain three sets of for its specimens of each of these issues, one set apiece o. Antoni San and n2 branch offices at El Paso2 Housto set of the a obtain to like "The Board of Governors would of the notes be could These 1950 Series Federal Reserve notes. to ient conven be would Federal Reserve Bank of Richmond if it the by ted reques notes Prepare them along with the 1950 Series Richmond Bank. these "It will be appreciated if you can arrange to have Banks e Reserv l Federa notes prepared and to have those for the Of Richmond and Dallas mailed direct to the Banks." Approved unanimously. reading as Letter to the Presidents of all Federal Reserve Banks, follows 7. "roll, were advised in a telegram dated June 282 19512 that off Board had deferred action on the question of charging bonds cent "mortized premium on the nonmarketable 2-3/4 per c)t 1975-80 held in the open market account and that no such 044rge-0ff would be made during the second quarter. r "Since then the Board of Governors has given furthe rest it let to prefer 2nsideration to the matter and would _Lthout further action) in view of the differences of opinion that have been expressed and the arguments that might be made suPPort of or against such special charge-offs. However, 47°uld the Presidents wish to renew consideration of the queston, the Board will be glad to discuss it at the meeting of "41 Presidents and the Board in October." the Z Approved unanimously. Letter to the Honorable Walter Horan, House of Representatives, 1f4ehingt°112 D. C., reading as follows: r1-0,77. 8/9/51 -9- "We acknowledge your letter of July 18, 19511 with respect to real estate credit regulations, in which you quote the contents of a telegram received from Mr. Warren L. Williams, President of Murphy Favre Mortgage Company of Spokane, Washington. "As you know, the real estate credit regulations were authorized by Congress in the Defense Production Act of 1950 and by the President in Executive Order No. 10161. In his Executive Order, President Truman, in delegating the functions conferred on him by Section 602 of the Act, provided that the Board should obtain the concurrence of the Housing and Home Finance Administrator ". .. before prescribing, changing, or suspending any real estate construction credit regulation". Furthermore, the Administrator was delegated the authority to issue such regulations and take such other actions as may be necessary to insure that the real estate restrictions would be applicable to the fullest extent Practicable to real estate loans insured or guaranteed by the United States Government. The responsibility for the real estate credit regulations is substantially shared by the Governmental agencies involved and consequential decisions affecting the regulations are given consideration by each. "Before Regulation X, affecting credit on one- and twofamilY homes, WAS issued on October 12, 1950, its terms werE 5-ven prolonged and painstaking consideration, not only by Lhe technical and official staffs of the various agencies involved, but also by representatives of the house-building and finance industries. At that time, with the serious consequences of the Korean War and the excessive price inflation coincident therewith uppermost in everyone's mind, there was a disposition in most quarters to consider the terms of the gulation no more than adequate, in fact, we were criticized some for undue moderation. These last criticisms were sufIlciently persistent that along with our continuing over-all 20nsideration of the effects of the regulation, we have from ime to time reviewed various procedures for tightening the olesrms as initially issued last October, but actually no Isuanges have been made in the terms relative to individual .nme construction except two modifications: (1) computation _.maximum loan values on the basis of the value of family .(rilts in one- to four-family residences, and (2) relaxed terms 1-11 critical defense housing areas. You are, of course, fully informed of the initial decisi°n of the Government to allocate to the house-building industry Z 8/9/51 -10- 'a sufficient share of the national resources in a war ye,?r to support the construction of 850,000 housing units. Although this is a cut of 40 per cent below the total produced in 1950, 850,000 housing units compares most favorably with other years since World War II. In order to bring about such a reduction in construction, it was necessary to make the terms of financing moderately restrictive, otherwise no such reduction would have occurred since the industry started approximately 1,400,000 housing units in 1950. The most conscientious effort was made to make the terms equitable to all income groups, but it is aPparent that, if the regulation is to accomplish the objectives of the Defense Production Act to help conserve materials for the defense effort and to aid in restraining inflation, some Persons must feel its restrictive effects. During the first six months of 1951, housing starts totaled 575,000 units (a larger number than in the comparable period of 1949); hence, it seems reasonable to believe that the goal of 850,000 starts will be reached before the year's end, producing a substantial volume of housing in the nation. "Ore agree with you that many loose statements are made about the !average! American family and -what it might or might /2?t do. However, it appears from the sample surveys of peoplets Ilnancial position that considerable amounts of liquid assets :9.re held by people in all walks of life--by wage earners as well as businessmen, by low-income groups as well as high-income g°uPs. Based on sample data, it is estimated that the half of Population (26 million consumer spending units) with incomes °r less than $3,000 owned about $35 billion in bank deposits and is,,vings bonds at the beginning of this year. Approximately $51 '01-11ion was owned by the 21 million spending units with incomes frr.,°m 0,000 to $6,2001 and roughly $49 billion was owned by "e ) 1 million units with incomes of $6,200 or more. 'These amounts of money are very substantial. You are undoubtedl Y correct in saying that inflation has raised the cost of 1 . -,'„,4-flfing in the postwar period somewhat faster than liquid e's have increased. But the $140 billion of liquid assets, :!:rt from currency, in the hands of consumers is so huge and f7 .4,11-dely held that it does constitute a serious further inc„ lonary threat. If all or even a substantial fraction of ers were to attempt to spend their liquid assets in the tt Year, the pressure upon prices would be greatly increased. 04 e are enclosing for your information reprints of reports pur„, e Survey of Consumer Finances and a survey of recent home ,"ases. 8/9/51 -11- 'We assure you that we are giving the most careful consideration to the effect of the terms of the regulation, and if a relaxation seems to be desirable AO All gladly initiate such a change." Approved unanimously. Letter to Mr. Blair, Vice President, Counsel and Secretary of the Federal Reserve Bank of Cleveland, reading as follows: 'This refers to your letter of August 2, 1951, to Nr. Vest, concerning an interpretation of the provisions of section 5(b) of Regulation X. You asked whether a note dated January 3, 1951, which evidences a combination construction and permanent financing loan, and -which provides for the first payments of principal and interest on August 15, 1951, the final instalment to become due July 15, 1971, complies with the maturity requirements of Regulation X. "The question of when credit is extended within the illearling of Regulation X has been most difficult and troublesmile, and the Board's interpretation (s-1274, X-33) was meant to be only a general rule which could be followed for most transactions affected by the regulation, although it Z, 3 expected that there would be exceptions in factual situa, 18 *.ere its application would be inappropriate. However, ti°1, u?ss not seem to be necessary to apply the rule in this !',!ft:loular case. Section 5(b) was intended to permit combi:1Jlon construction and permanent financing loans, and we believe that the note in question complies with the maturity quIrements of the regulation. When the purpose of the loanr taken into consideration, and the terms of the credit inthrunlent itself, we believe a reasonable interpretation of _second sentence in section 5(b) will indicate compliance h that provision inasmuch as it appears that July 15, 1951 the date the Registrant estimated in good faith the conuction would be completed." 4 t Approved unanimously.
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