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609 Minutes for To; Members of the Board From: Office of the Secretary December 10, 1965 Attached is a copy of the minutes of the Board of Governors of the Federal Reserve System on the above date. It is not proposed to include a statement with respect to any of the entries in this set of Tinutes in the record of policy actions required to ue maintained pursuant to section 10 of the Federal Reserve Act. Should you have any question with regard to the • minutes, it will be appreciated if you will advise he Secretary's Office. Otherwise, please initial 4 el°14. If you were present at the meeting, your initials will indicate approval of the minutes. If You were not present, your initials will indicate °nly that you have seen the minutes. Chm. Martin Gov. Robertson Gov. Balderston Gov. Shepardson Gov. Mitchell Gov. Daane Gov. Maisel Ii Minutes of the Board of Governors of the Federal Reserve SYstem on Friday, December 10, 1965. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Balderston, Vice Chairman 1/ Robertson Shepardson Mitchell Daane Maisel Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Mr. Young, Senior Adviser to the Board and Director, Division of International Finance Mr. Holland, Adviser to the Board Mr. Solomon, Adviser to the Board Mr. Molony, Assistant to the Board Mx. Fauver, Assistant to the Board Mr. Hackley, General Counsel Mr. Brill, Director, Division of Research and Statistics Mr. Hexter, Associate General Counsel Mr. Hooff, Assistant General Counsel Mr. Partee, Associate Director, Division of Research and Statistics Mr. Axilrod, Associate Adviser, Division of Research and Statistics Miss Eaton, General Assistant, Office of the Secretary Mr. Forrestal, Senior Attorney, Legal Division Mr. Furth, Consultant Messrs. Bernard, Eckert, Ettin, and Keir of the Division of Research and Statistics Messrs. Baker and Gemmill of the Division of International Finance MOrle market review. Mr. Bernard commented on the Government secur. . ltles market, Mr. Eckert reviewed bank credit developments, and 1/ Withdrew at point indicated in minutes. 41 12/10/65 -2- Mr. Baker summarized foreign exchange market developments. Distributed materials included tables affording perspective on the money and capital markets and on bank reserve utilization, along with a table on recent interest rate developments. Messrs. Axilrod, Bernard, Ettin, Baker, and Gemmill then withdre w, as did Miss Eaton. Time and savings deposits. Attention was directed to the follow- jag di stributed memoranda: Memorandum from Messrs. Brill and Eckert dated December 9, , 1_965, presenting data concerning the competitive position of °anks vis-a-vis other savings institutions. The memorandum Pr esented several arguments for and against limiting the issuance by banks of savings "bonds" and "certificates." Memorandum from the Legal Division (Mr. Hackley) dated 1°ecember 9, 1965, presenting possible alternative measures the Board might take to prevent avoidance of the 4 per cent ximum rate on savings deposits by a shift into instruments hat met the regulatory definition of a time deposit. The r alternatives discussed were (1) to establish different ceiling .ates for certificates of deposit according to amounts; (2) ato define time deposits to exclude deposits below a specified Zunt; (3) to establish different ceiling rates according to (4 ther a deposit had a single maturity or multiple maturities; , to redefine time deposits to exclude deposits with multiple matues. The Legal Division believed that the fourth alter! t tive would be the most understandable, and it would avoid " a need for any change in the Board's recent rate ceiling oc fti°n. However, it might not provide a complete solution d the problem because it would be possible for a bank and a ,ePositor to set up a routine arrangement under which the :atter would request the bank at the time of each maturity of dePosit to renew the deposit for another similar period. r In summarizing the data developed in the Brill-Eckert memorandum, Mr. Br. 111 said there did not seem to be any economic need for giving 41< 12/10/65 banks the -3- greater latitude to compete for the savings of individuals. On other hand, there seemed to be no economic reason to hamper banks from obtaining more savings through use of the savings "bond" or It ce t ificate." Much could be said for giving the banks freedom to Pay the same rates to small savers as to corporations and wealthy individuals. There was latitude on the part of competitors, to the nt that it seemed to them prudent, to meet bank competition. Governor Balderston called particular attention to the final Paragraph of the Brill-Eckert memorandum, in which it was pointed out that flexibility existed among banks' competitors to meet the situation if theY found it desirable and prudent to do so. Rates on U.S. Savings 130nds had been raised in the past; a new bond with a "catchy" title and a higher rate might be successful in attracting additional funds. And the "e savings and loan regulatory agency apparently had authority to Permit savings and loan associations to issue instruments with terms e°mPetitive to those available on savings instruments offered by banks. If the inflationary threat was real, all instruments of Government POlic Y should be marshalled to encourage saving rather than to preserve orrip etltive positions. Governor Balderston then turned to Mr. Hackley and inquired the, of the possible alternative measures presented by the Legal bivis. 100, the fourth alternative was considered preferable. 4.14f 12/10/65 -4- Mr. Hackley replied that he was not sure; the third alternative also had certain advantages. After comparing the third and fourth alternatives in more detail, he observed that either of them could give rise to evasive techniques. fourth Asked whether he felt that the alternative would be enforceable, Mr. Hackley pointed out that the banks could set up arrangements with depositors whereby the latter would be supplied with post cards to be sent in if they wanted deP°sits renewed. He was not sure how well the fourth alternative cculd be enforced. There followed a general review of available evidence on the de greeof aggressiveness with which banks appeared to be offering time certificates in smaller denominations, and the discussion then t°11ched upon the first alternative cited in Mr. Hackley's memorandum, Ighich was to establish different ceiling rates according to amounts of certificates of deposit. This alternative reflected a suggestion by staff of the Home Loan Bank Board that the Board of Governors might Prescribe a maximum rate of less than 5-1/2 per cent for certificates Of le _ s s tha n a specified amount, such as $5,000 or $10,000. Mr. liaQkley said the Legal Division had serious doubt whether it was rates -4 the Board's statutory power to fix different maximum ee°rding to amounts of deposits. Even the second alternative dis- some question from the sed in his memorandum might be subject to tandPoint of statutory authority. 4 12/10/65 An observation was made that while some banks undoubtedly were trYing to attract fairly substantial blocks of money from individuals, ill certain sections of the country the certificate of deposit had been the t raditional method of saving, even in small amounts. A $5,000 or $10,000 minimum therefore might cause some disruption of traditional trade practices. Governor Balderston then suggested that the discussion might be A,v. ided into two parts: first, what could be done, if the Board at 8°rne Point considered it prudent to take action; second, the policy c"sid erations involved in taking any action. Governor Maisel suggested taking up the second question first, and , `30vernor Mitchell commented that he did not think the Board should Ything. Governor Daane said he had reached the same conclusion, based O n study of the two December 9 memoranda. The Brill-Eckert memo- randurn seemed to present a fairly compelling case for a hands-off attitude, and the Hackley memorandum led him to believe that the Board 11°41d be faced with all kinds of administrative problems. Governor Robertson commented that the matter of permitting an Qasy by means of circumventing the rate ceiling on savings deposits merely ealling such deposits something else was an important one. Q(3tisiderable merit in Mr. Hackley's fourth alternative. He saw While he was ri(It 84tisfied that it was necessarily the best solution, an over-all Qeliclusion should not be reached on the basis of short study. The 411 12/10/65 -6- Problem should be explored fully to see what could be done and whether the Board should take action. He was far from reaching a conclusion that the Board should simply do nothing. Governor Shepardson questioned whether the proposals thus far Presented offered a solution that would be workable over time. He recalled having objected on various occasions to taking actions that unenforceable it would be unfortunate to make a move, however It Inetitorious the objective, that could not be enforced effectively. A Major* ltY of the banks probably would follow the Board's ruling at the begi . nnlog, but there were always some banks that would find loopholes, aod this would create inequities. As to the general economic question, he ,.., was not sure there was good evidence that the small banks were going to h.. seriously injured, and this appeared to be one of the arguments Laking action. be effective If the Board could find a type of action that would he would be willing to consider it. Otherwise, it would seem best to do nothing. Governor Maisel said that on economic grounds he would not even bother looking in to the effectiveness of possible alternative actions. If it became necessary to make a move, he would prefer to raise the Q'eiling rate on savings deposits. Governor Balderston inquired about the position of Chairman Randall of the Federal Deposit Insurance Corporation, and Governor Daane sato he appeared to be concerned that the large banks would begin to 4 12/10/65 -7- weed out their poorer credits, with the result that these credits would trickle down to the smaller banks, thus increasing their risk exposure. In further discussion of this point, the thought was expressed that essentially a problem of bank supervision appeared to be involved. Mr. Brill noted that his memorandum had been addressed primarily to the matter of banks competing with other savings institutions. He aieed the question whether a hazard would not exist if money was allowed to flow freely into the savings and loans to finance an industry where the demand had not been particularly strong. Governor Maisel commented that the argument of the savings and 1°a4 industry was premised on interest paid being a cost of doing busihess. When there was a lesser supply of funds, the savings and loans had to go out and reach a different type of demand, thus creating cohcerh about a deterioration of their assets in order to offset the hiso— cost of doing business. Governor Balderston said Chairman Horne of the Home Loan Bank 11°ard Pressed the point that his Board had been trying to encourage estraint by fixing price limits, and that unless the Board of Governors charlaed what it had done the banks would sell so many small-denomination 4rtificates as to evade the 4 per cent limit on passbook savings and the l'ebY put the savings and loans in jeopardy. The Home Loan Bank Board the would have to reverse what it had thought was sound policy; and tt w°111d have to raise money in the market to bolster the savings and 14118 if they got into trouble. *Jk._ 12/10/65 -8- Following further discussion along these lines, Governor 4bert5on said he saw little, if anything, to justify the position that a mere switching of the form of instruments warranted a differ- ential in rates paid to savers by banks. He felt that the fourth 41ternative mentioned in Mr. Hackley's memorandum was legal and that it might be a good step to take, but he was not entirely satisfied that the Board had come up with the best solution on such short consideration. After additional discussion of the fourth alternative, Gov- erj Daane and Maisel reiterated that they would not want to take " 437 action at this juncture. Governor Mitchell commented that the Ultima te goal presumably was to remove the interest rate ceilings entirely. Still, he felt that the Board probably should ask the staff te c oasider the possibilities further. Accordingly, it was understood that the staff would give further ec'nsideration to the matter. Governor Balderston withdrew from the meeting at this point g with Messrs. Young and Furth. Mr. Farrell, Director, Division °f 11°flk Operations, entered the room, along with Messrs. Daniels, ASSist ant Director of that Division; Smith, Assistant Director, Division of Examinations; and Sprecher, Assistant Director, Division of "nel Administration. , 12/10/65 -9- Distributed items. The following items were approved unanimously: Liretter to the Presidents of all Federal Reserve Banks \cciPy attached as Item No. 1) regarding plans for , ia utomatin g the L.5.3 and L.5.4 reports, relating to ucTrowings from Reserve Banks. Request of the Federal Reserve Bank of Boston for , 1 1°Pr°va1 of payment of salary to Assistant Vice jresident Tangney at the rate of $17,500 effective i anuarY 1, 1966. (Indication of approval contained cri 4- letter to Boston Bank dated December 10, 1965; 0PY attached to minutes of December 9.) Communications and Records Center (Item No. 2). Pursuant to the understanding at yesterday's meeting, there had been distributed under today's date a revised draft of letter to the Federal Reserve jank of Richmond relating to plans and specifications for a structure Po Posed to be erected at Culpeper, Virginia. This installation,which 143uld be shared by personnel of the Board and the Richmond Bank as an eraer geneY facility, also would be operated on a continuing basis as a n ioations and records center. The revised draft letter indicated that before authorizing the Richmond Bank to proceed with final plans and specifications the Board 1(341c1 like to have further consideration given to the desirability of eliminating or modifying the window areas to provide added security Pro tection, the desirability of extending the mezzanine floor, and the desirability of providing structural supports and additional ceiling 4-ght that would permit covering over the open spaces on the mezzanine 1°° 'in the future. 12/10/65 -10- Mr. Farrell commented that the situation involved pitting the judgment of the Division of Bank Operations and the Board's Consulting Arch. tect against that of the architectural firm engaged by the Reserve sank in respect to certain aspects of the preliminary plans and specifications. If a letter simply requesting further study was sent to the Richmond Bank, the results might be inconclusive, so it seemed that there was need for additional guidance from the Board. Governor Shepardson pointed out that at the meeting at which the eliminary plans were presented to the Board, four questions had bee ti raised. These related to (1) provision for a continuous row of glass windows in the general office area and the computer room space; (2) Pr ovision for cast stone and granite facing on the exterior underand between the windows; (3) provision for a solid masonry wall seirating the office areas tentatively allocated to the Board of C°\iernors and to the Richmond Bank; and (4) extension of the mezzanine Based on the discussion yesterday, it appeared that the Board ‘gas ih elined to accept the proposal for the exterior facing, and this could be etld the stated in the letter. Two of the other matters (the windows mezzanine floor) were touched upon in the draft letter, but 1/ithout recommendation, and the matter of the masonry wall was not 4*Iltinned. As to the extension of the mezzanine floor, if the Board d that done the architect should also be asked to consider what 1. nal service facilities would be necessary incident to increased 12/10/65 -11- dormitory capacity. In essence, it seemed best for the Board to take a rather clear-cut stand at this stage since the proposal had been under study for months. Governor Mitchell said he was satisfied with the recommendation for the facing of the exterior, but he felt that the architect should be a are sked to restudy two features; namely, the treatment of the window a and the question of emergency housing for dependents. Finally, he thought it was generally agreed that the allocation of space for the 44rd's staff was unsatisfactory. Governor Daane said that he would be willing to go along with the ar chitect's treatment of the window area if additional security could be worked out at reasonable cost. As to the mezzanine, he was rather attracted to the idea of providing structural supports to permit cover. lug over open spaces on the mezzanine floor in the future. Governor Maisel indicated that he agreed generally with the --s that had been stated, including the alternative of providing str'uctural supports for the mezzanine floor. After further discussion of the problems involved in blending the rie eds envisaged for emergency facilities and alternatively for rlulng operations, Governor Robertson outlined the type of letter that would seem appropriate for transmittal to the Richmond Bank in liTht of the views expressed at today's meeting, and it was understood tha t such a letter would be sent. Attached as Item No. 2 is a copy of th e letter sent to the Richmond Bank pursuant to this understanding. 12/10/65 -12- Appointment of Deputy Chairman at Dallas. The Board appointed Max Levine, Chairman of the Board of Foley's, Houston, Texas, as Deputy Chairman of the Federal Reserve Bank of Dallas for the year 1966. The meeting then adjourned. Secretary's Notes: Governor Shepardson today approved on behalf of the Board the following items: 1965 Memorandum from the Office of the Controller dated December 9, a, , recommending approval of specified overexpenditures in various counts of the 1965 budgets for certain divisions and offices of the 19s staff, these representing overexpenditures incurred during ap°5 that had not had prior approval by the Board; and requesting Phr°11a1 of any other overexpenditures in the "Salaries" account that g t be occasioned because of the general pay increase. 4 .Memorandum from the Division of Administrative Services recomding rescission of the resignation of James H. Lowden, Messenger effthat Division, whose resignation had previously been accepted ective the close of business December 10, 1965. Governor Shepardson today noted on behalf of the Board memoranda advising that applications for retirement had been filed by the following persons on the Board's staff, effective the dates indicated: Division of Research and Statistics Effective date Alvern H. Sutherland, Chief Librarian December 31, 1965 -.DI-vision of Administrative Services Nelson Dyson, Photographer (Offset) Catherine L. Schmidt, Secretary 1(ar1 J. Steger, Steamfitter-Operating Engineer December 31, 1965 December 21, 1965 December 31, 1965 ..... ' () Cot:• t • BOARD OF GOVERNORS Item No. 1 12/10/65 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 Ii ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD December 10, 1965. illear Sir: As you know, System personnel are now intensively gaged " -n a fundamental reappraisal of the Federal Reserve dis detc°unt mechanism. The Board is also undertaking a more tioailad and continuing review of on-going discount operaitliae as indicated in the Board's letter of June 29, 1965, tiating new quarterly reports in this area. As a part of both these programs and the current l PfZrem for automating as many regular statistical series as the .1ple, plans have now been completed for the automating of Thi ''.5.3.and L.5.4 reports, "Borrowings from Reserve Banks." 144 change will need the cooperation of the Reserve Banks as 44cote tad in the enclosed technical memorandum outlining the eve;a8eY procedures. Current reporting of these data should 11 1411Y reduce somewhat the work at the Reserve Banks since a . —"oar of computational and total items have been eliminated. The projects cited at the outset of this letter also t4 e a need for centralized individual bank borrowings data 1.96rehina language form back to the first reserve period in jt i) and the Board is asking your Bank to prepare such data. t4cos recognized that the keypunching of these retrospective 4edtds will constitute a major data processing task that may months ahead t° be fitted in with other demands on resources in the ttirr-, but present planning contemplates that the reporting of Weekent borrowings data in the new format will commence with the might e4ding January 12, 1966. It is hoped that back data be 15, latter the If 31. March by e e ' d4C pared and forwarded to arrive kb4)14.will put your Bank under too much pressure, please let us technical Subsequent correspondence relating to any the to ed direct n questio be may on the enclosed material . 10 tion, connec this In „C" a Division of Data Processing. ease furnish the name of the representative of your Bank to : on 14 future correspondence regarding operating procedures Lila series should be addressed. 7 Very truly yours, 0 /17\AAJLAAA„, Merritt Sherman, Secretary. homeure, TO 144 PRESIDENTS OF ALL FEDERAL RESERVE BANKS. Item No. 2 BOARD OF GOVERNORS 12/10/65 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD December 10, 1965. Edward A. Wayne, President, edera1 Reserve Bank of Richmond, Rxchmond, Virginia. 23213. Dear Mr. Wayne: This refers (a) to Mr. Heflin's letter of October 22, submitting preliminary plans and specifications for the !!°Posed Federal Reserve Communications and Records Center, and ;;questing that your Bank be authorized to proceed with the prepion of detailed plans and specifications; and (b) to the oral ;'„esentation of the plans that was made to members of the Board Governors on November 24 by Messrs. Dickerson and Strange-Boston. 1965 As was indicated at the time of the oral presentation, the , thatuoard favors in general the structure as proposed and believes the its size is adequate for the needs as now known. However, the 80srd believes it would be desirable at this time to consider of P°ssibilities for providing extra space to permit greater use 411°1e building during peace time or under attack conditions. ee this would mean utilization of the building by a greater nb conter of People--ranging from 50 to perhaps 150 more than now addiemPlated--consideration should also be given to the need for the IY.c)nal sanitation and other such facilities. In this light °ard would like to have the written views of the Bank's archi' tect of,s with respect to the advantages and disadvantages and the cost Providing structural supports and additional ceiling height which would permit covering over the open spaces on the mezzanine floor in the future. Extending the mezzanine floor across the open Spaces above the second floor during the original construction so as immediately to provide uniform ceilings and privacy for all office areas and additional floor space for future use as needed. tnay h Please include in these comments any views the architect aye as to the additional number of toilets and other facilities BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM ward A. Wayne -2- that would be needed. In addition it would like to have an estivete of the amount of costs to be saved if the additional space re to be added in the course of construction rather than later. The Board is also concerned about the proposal to achieve aden bio, ua-Le fallout protection by the temporary placement of concrete t js behind the windows, and it would also like to have the archiand 8 written views with respect to the advantages and disadvantages fio,costs of possible alternatives to provide added security and '40ut protection in the window area. During the oral presentation on November 24 questions were also star, raised as to whether (1) the additional cost of the proposed andMacing on the front of the building was a justifiable expense, area k4) the masonry wall running lengthwise through the main working q01.1 might hinder flexible space assignments. Upon further consideration ?f these matters, the Board concluded that the estimated addi44 cost of the stone facing is unobjectionable, and that satisfac; of v°rY space arrangements can be worked out between the management our Bank and a representative of the Board even if the masonry 4. is retained. ren luested atta ntion The Board would like to have the additional information • ln this letter as soon as possible and will give immediate to it. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary.
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