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1487 A meeting of the Board of Governors of the Federal Reserve 878tem was held in Washington on Friday, December PRESENT: Mr. Mr. Mr. Mr. Mr. 1, 1939, at 4:30 Ransom, Vice Chairman Szymczak McKee Davis Draper Mr. Betnea, Assistant Secretary Mr. Harrison, President of the Federal Reserve Bank of New York Ur. Harrison said that he wished to advise the Board with 1 1)eiot to some new developments regarding the handling of payments tor 1, ' Illschases of the British and French Governments through the ac°°111its 11,4 4,L.Lch the respective central banks of Great Britain and 6 regularly maintain with the Federal Reserve Bank of New York. lie ret erred alld it litta to the earlier conversations which he had had with the the Treasury during the past two months following which beer decided thaL the Treasury would not request the New York t alik EIS its fiscal agent to open special accounts for those '41rIerits„ He pointed out that when Chairman Eccles and lie had 0(kter l'ed With the Secretary of the Treasury in October they had both ex eesed the opinion that the regular central bank accounts 8110 ld bs Used 1111'ts Ile *)1411114 rather than for the New York Bank to open special fiscal agent of the Treasury for the British and French ellts, but that Secretary Morgenthau had indicated a preference 1488 12/1/39 " I) having -2the particular transactions in which the Treasury was interested segregated from the regular central bank transactions With the thought that in this way the Treasury could more easily keep informed regarding them. At the time, he said, Under Secre- te-rY Hanes and he had expressed the view that the segregated central bank accounts, opened for this purpose, should not be "exclusive" " counts (that is the only such accounts in this country and exclusive of any such accounts which might otherwise be opened by the respective Governments or central banks with commercial banks h"e) but that Chairman Eccles had agreed with the Secretary that it would be desirable to have these accounts exclusive so that Payinehts for all goods bought by the British or French Governments Wcilla be effected through the accounts of the Bank of England and the Bank of France with the Federal Reserve Bank. Mr. Harrison 8eid that he had then expressed the opinion that, if the Treasury 4e8ires to route all these payments through the Federal Reserve knv for the purpose of keeping fully informed, it would be better t° have the purchasing agents of those Governments in this country 44 i5e the Treasury directly regarding their activities. Chairman teel. ' el he said, seemed to feel that such a procedure would be of mvall tage but only as a double check on information which the Treasury Illight obtain from the New York Federal Reserve Bank. Mr. Harrison that he did not know what position the Treasury had since taken 1489 12/1/39 -3- on the question of opening exclusive accounts but indicated that he would not be disposed to take any further action in the matter °f opening special central bank accounts in the absence of approPriate requests from those central banks, inasmuch as it is not the practice of the Federal Reserve Bank to solicit accounts. Mr. Harrison then discussed briefly the inaccurate and misle4d1ng stories which have appeared in the press recently charactellzing the activities of the Federal Reserve Bank of New York Ile a violation of the spirit of the Neutrality Act and criticizing the Federal Reserve Bank for taking desirable business away from Comm ercial banks. Mr. Davis said that, when he was in Minneapolis recently, M.r. P. -Yuon had shown him some similar articles which had appeared 111 th e local press and that subsequently Senator McNary had called 4114 °a the telephone with regard to press reports. He said that O b°th occasions he had endeavored to make it clear that there was 40 1101ation of the letter or spirit of the Neutrality Act. Mr. Harrison stated that the newsmen had not consulted him berc, Or writing the articles and that as a matter of fact the Bank 1148 iin+ -' done anything new and that no new accounts had been opened. The Treasury, he said, was concerned about the delay in the Ett the special accounts with the Federal Reserve Bank, and r, -°11terence there today with Messrs. Cochran and Stewart, at 1_490 12/1/39 -4- Which Mr. Butterworth was also present, the matter was discussed and he (Mr. Harrison) had advised the Treasury that there was nothing he could do until the Bank of England or the Bank of France aPProached the Federal Reserve Bank on the matter. He said that Osborne, representative of the British Treasury working with the British Purchasing Mission, had inquired of him as to the 11'(/ceclurc for setting up special accounts and that he had advised hilt that it would be necessary for a central bank merely to ask that funds be transferred from its regular account to a special acill its name to be designated, say "Account A", and to submit the necessary signing authorities. Mr. Harrison indicated that he would like to get rid of the resent procedure whereby the Federal Reserve Bank makes payments °4 behalf of the Bank of England and the Bank of France to member " In New York in connection with the purchase of airplanes by the british and French Governments from the Lockheed Aircraft CorII°ration, such payments being made only to designated member banks 41/illet certificates signed by the airplane manufacturer and cont*"d by the member bank. In this connection, he said that he 14841 gathered through Mr. Gatterns of the sank of England that 4111ellc8n traots Manufacturers might want the full amount of their con- placed in blocked accounts before expanding their plants takiag new orders, and that Mr. Uatterns had asked whether the 1471.rOlic Federal Reserve Bank would be willing to advise the 1491 12/1/39 -5- Lockheed uombany, for example, that it had on deposit, and segregated for the purpose, a specified amount in dollars with which to make payment for the full amount of its contract with the British Goverament. He said that he had discussed the question with the Treasury and had Messrs. Sproul, Logan, Khoke and Hounds workon the problem. It was Mr. Harrison's offhand impression, 110w- that while there would be no legal or practical difficulties hioh would prevent the Federal Reserve Bank from making such e"tifioates to American manufacturers in accordance with a request rl 'a a foreign central bank, nevertheless he hoped it would not be IleceasarY to do so. Mr. McKee interposed at this point with the remark that it Wellicl Seem to him that the Federal Reserve Bank of New York could °111Y recognize the foreign central bank and that, if the New York Pederal Reserve Bank gave a letter containing such a certificate, it 11411111d have to block the amount of the funds in such a way that they could be used for no other purpose. It would be similar, Mr. titexee said, to certifying a check. Mx. Harrison indicated agreement and stated that the proposal ec3ttem -41ated that the Federal Reserve Bank would certify tnat it has a certain amount of funds in dollars set aside with which to meet IlaYillents when due—which of course is a regular banking funct104 .11c1 a service which commercial banks would render. He said that h e would prefer that the Federal Reserve Bank not perform 1432 12/1/39 —6— the service, but that he was impressed by the fact that if American Manufacturers insist, then unless the Federal Reserve Bank were Willing to place funds in blocked accounts and issue such certificates, it would be impossible to accomplish what the Treasury had in mind) that is, to keep the account with the Federal Reserve 8elik an exclusive one. He said that the Federal Reserve Bank of ee could, for example, pay the funds over to the Guaranty TIlist Company, and let that institution make the certificates to Aerioan manufacturers. On the other hand, the idea of blocked "coil/its had been proposed to the French, he said, and Mr. Leroy13eaulieu, Financial Attache of the French Embassy, had objected O ll the ground that it would be a reflection on the credit of the Illieneh Government. 11148 Mr. Harrison said that, as the Board knew, it the present practice in handling transactions with the Lockheed U°M1/ 11,Y for the British Government through the Bank of England's ace°1111t at the Federal Reserve Bank to make progress payments--perthree or four on one airplane--but the procedure now being diswould require that the total amount of the contract be 131aeed in a blocked account in advance. Mr. Harrison said that he hald seen Mr. Pinsent, Financial Uounselor of the British EmWhen he was at the Treasury and he had told him of the atLe ()f the French with regard to the blocked account arrangement 411q that Mr. Pinsent had indicated that the British would not be 114114 to go along on such a basis either. Mr. Harrison said 1493 12/1/39 -7- that he had sugges ted to Mr. Pinsent that it would be advisable r°r him through British Treasury representatives at London to get together with officials of the Bank of England and come to some 001111110/1 understanding as to the position to be taken by the Brit184 on this question. He said that he also advised Mr. Pinsent that he was not prepared to say whether the Federal Reserve Bank Of New York could render the service. Mr. Harrison added that, ber°1'e funds placed in a blocked account could be released, it W°111c1 be necessary to know whether the American manufacturer is entitled to the money, and it would not be as though payment was bellig made against a siened draft of the Bank of England. He said that he would not want the Federal Reserve Bank to handle transactions on that basis if it could be avoided, but that Mr. Rounds bad advised him that there would be no mechanical difficulties 44d he (Mr. Harrison) did not want to take the responsibility for bl'88kdown of the whole program. He also said that he had asked Ittr 'SProui to get in touch with Mr. Purvis of the British Purchas14148eion and find out what the British proposed to do. He added tilt it should be borne in mind that the proposal would involve the qu estion of protecting American manufacturers in the event the %4111trY of the foreign buyer were invaded and that commer cial bAnks vtotaa be glad to handle transactions in the manner proposed. Mr. kokee said that while he did not like it very much he thought we 118.nd1e the business as requested rather than be responsible tor 4 b ' l eakdown of the program. 1494 12/1/39 -8- Mx. McKee inquired whether Mr. Harrison knew anything with respect to the proposal reported in the press that the Federal Reserve Bank would lisndle securiti es for a corporation being formed to P , -inance foreign war purchases in this country. Mr. Harrison stated that representatives of the press had buttonholed him "-ler today on this ouestion and that he had told them that he kneW nothing whatever about it. Mr. McKee also inquired whether Mr. Walter Kennedy Whigham, Who the Board had been advised by letter would call at the New O Bank, had discussed with Mr. Harrison anything relating to the a rrangement referred to above or with regard to the tinladling °t Brit'sh funds in connecti on with war purchases in this country. Mt' Harrison stated that Mr. Whighamls visit had been merely a e°11rtesY call, that he had asked him whether he had in mind die- these matters but that he had replied that he had no autilcIritY to negotiate with respect to such matters as they were for lb* PlIrvis and the Bank of England to settle. Mr. Harrison said th" he had raised the question in order that he might ascertain /vhether there might be any need to contact the Board before getting 14t° a discusio n on or the subject. Under the existing, situation, Mr. Harrison said, the Bank °-slid had no place to deposit the proceeds of securities which Were b eing liquidated by British nationals except in its regular "e°11nt With theEederal Reserve Bank, and that the Treasury was not 1495 12/1/39 —9— satisfied with the arrangement as it felt such funds should be segregated in a special account which was what was contemplated Under the arrangement agreed upon between the Secretary of the l'I ' sasu5r and the British Chancellor of the Exchequer. Mr. Harri- 8°4 said that foreign liquidation of securities aggregating about ThilliOn dollars a day is being absorbed in the market without aPParent difriculty and that British nationals had been selling sec urities under licenses issued by the British Government and turn ing the dollar exchange over to it. In conclusion, Mr. Harrison said that he merely wished to l'eport these matters to the Board and to ask for any suggestions eriticigms which it might have. Mr. McKee stated that it seemed to him that it would be ilecessarY for the New York Bank to proceed cautiously with regard to e4Y tr ansactions that might entail liabilities on the part of the Bahk, and Mr. Harrison said that, if it appeared that the operat10 41 °t 114Y of these accounts would involve any such liabilities, he 17°111d feel obliged to take the matter up with his directors in "ec*cialIce with his understanding with them. Thereupon the meeting adjour ed. Assistant Secretary. 4DAr Vice Chairman.
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