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9/61 Minutes for To: Members of the Board From: Office of the Secretary December 145 1961 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 minutes in the record of policy actions required to be 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 the Secretary's Office. Otherwise, please initial below. If you were present at the meeting, your initials will indicate approval of the minutes. If You were not present, your initials will indicate °n1Y that you have seen the minutes. Chm. Martin Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King Gov. Mitchell 42 ' Minutes of the Board of Governors of the Federal Reserve System on Thursday, December 14, 1961. PRESENT: Mr. Mr. Mr. Mr. Mr. The Board met in the Board Room at 10:00 a.m. Balderston, Vice Chairman Mills Robertson King Mitchell Mr. Sherman, Secretary Miss Carmichael, Assistant Secretary Mr. Molony, Assistant to the Board Mr. Fauver, Assistant to the Board Mr. Hackley, General Counsel Mr. Farrell, Director, Division of Bank Operations Mr. Solomon, Director, Division of Examinations Mr. Kiley, Assistant Director, Division of Bank Operations Mr. Young, Senior Attorney Mr. Veenstra, Technical Assistant, Call Report Section, Division of Bank Operations Items circulated to the Board. been The following items, which had circulated to the Board and copies of which are attached to these ttlizilltes under the respective item numbers indicated, were approved 1.14artimously : Item No. tetter to The Manistee County Savings Bank, 0 steel Michigan, approving the declaration . a dividend payable on December 15, 1961. 1 Letter 4 .0 the Presidents of all Federal b:el've Banks regarding form FR 107 for use ;State member banks in submitting Reports 0 yome and Dividends for the calendar ended December 31, 1961, and form FR 107a, or '..11Actions for the Preparation of Reports la e°me and Dividends. 2 Equipment at New York Reserve Bank (Item No. 3). There had bee, "' distributed a memorandum from Mr. Kiley dated December 11, 1961, 12/14/61 -2- Ilegarding the proposed purchase by the Federal Reserve Bank of New York of additional equipment to supplement its high-speed check processing SYStern. this Provision for an expenditure of $244,000 to purchase ecilliPment had been included in the Bank's 1962 budget. rather According to the memorandum, the decision to purchase 'Ulan rent the additional equipment stemmed from the original equipment agz'eement which provided that upon the successful completion of the Nlot test the Bank would purchase the Stored Reference Computer or it for a total period of five years. Economically it was determined period that the net purchase price at the conclusion of the pilot test %14s the equivalent of approximately 32 months' rental as compared with 614 6b1igati0n to rent for an additional 54 months. ' Therefore, the was also clecIsion was reached to purchase the original equipment and it now under condeernecl appropriate to purchase the additional equipment The Reserve Bank had indicated that the new equipment would 13erftit increased utilization of the check processing computer and checks daily. ellelltually permit the processing of upwards of 500,000 Reserve Attached to the memorandum was a telegram to the Federal ing the 14111k of New York that would interpose no objection to purchas equipment. Bank After Messrs. Kiley and Farrell commented on the Reserve electronic 111'°11°Sal, there ensued a general discussion relating to 12/14/61 -3- equipment, including reference to the various kinds now available, the relative merits of renting as against purchasing, and accounting procedures followed in connection with such equipment. In the course of the discussion Governor Mitchell reiterated the view that he had expressed at the Board meeting on November 16, 1961, to the effect that Reserve Banks should be permitted to make their own decisions as to the purchase or rental of computer equipment. time, At that however, a majority of the Board agreed that Federal Reserve Banks be asked to submit hereafter to the Board, separate and apart from their blIdsets, any plans contemplating large expenditures for furniture and egUiPment. Governor Mitchell noted that, in this case, the New York Reserve Bank proposed to buy the new equipment, whereas a staff proposal 8 now before the Board recommending rental of a computer for use at ' 116 the Board on the ground that within a short period of time the equipment cAlld become obsolescent. Governor Mitchell suggested that, if it was con sidered preferable to rent rather than purchase computer equipment e't the Board, and if the Board was to review proposals by the Reserve 444 for obtaining such equipment, it would seem consistent for the staff to r'ecommend that the Board follow the same procedure as to rental or IIIIrchase that it recommended for the Reserve Banks. Various comments were then made regarding the points raised bY Governor Mitchell. It was observed that, although the Reserve Banks heAre Primary responsibility for decisions relating to their own electronic 12/14/61 -4- eq41Prilent, the November 16 action was designed as a means of keeping the Board informed of proposed large expenditures and affording an °Plaortunity for the Board to offer any appropriate suggestions or objections. Also, it was noted that decisions as to the specific type (4* equipment needed and whether it should be purchased or rented would sePetld on the individual circumstances involved in each case. At the conclusion of this discussion, the telegram to the Federal Reserve Bank of New York interposing no objection to the purchase of the equipment, as outlined in that Bank's letter of December 5, 1961, 1148 .9.1kk1 anpl unanimously. A copy of the telegram is attached as Item No. 3. During the foregoing discussion Mr. Thomas, Adviser to the Board, elltered the room. Request from the Bureau of the Budget (Item No. 4). A memo- 1%. 0J01 from the Legal Division dated December 13, 1961, had been distributed " with reference to a legislative referral memorandum from the Bureau of Budget requesting a report on a Treasury Department recommendation taxation of mutual savings banks and savings and loan associations. It 4140eared that the same request had been sent to the Federal Home Loan Board, Council of Economic Advisers, Veterans Administration, and }ICAO4 -4-ng and Home Finance Agency. The Bureau of the Budget memorandum stated that there would be 4 rap 4. -e'ing this afternoon to discuss the Treasury proposal and that it If°14a be appreciated if the Board would have available a statement setting r°'"th its views on the subject. 12/14/61 -5- The Legal Division memorandum pointed out that under existing law mutual thrift institutions were permitted to make tax deductible transfers of retained earnings to a bad debt reserve until the total of reserves, surplus, and undivided profits equaled 12 per cent of deposits 01 shares. the The Treasury recommendation was to permit the taxing of institutions in a man er generally comparable to other business e°rPorations, and commercial banks in particular, after a two-year tra nsitional period. Except for the provision relating to the transitional period, the Treasury recommendation was substantially the same as was provided tI70 identical bills, H.R. 2899 and H.R. 2900, on which the Board ' l ePorted by a letter dated March 30, 19610 to the House Ways and Means C°mMittee. In that report the Board stated in part that there was a 8erl°118 question as to whether the existing arrangements with respect to taxation were wholly equitable as among various financial institutions 446, that the size of tax-free bad debt allowance should be determined ill the same way for other institutions as for commercial banks. The determination 13(Irli concluded that, once such an allowance was permitted, administratively by ()1' the maximum amount would seem to be best decided the Secretary of the Treasury. In a letter dated August 3, 1961, the 13 had replied along the same line in response to a request from the licluse Ways and Means Committee for comments on a report by the eas 4rY Department on the taxation of mutual savings banks and savings °an associations. -6- 12/14/61 In view of the position taken by the Board in its earlier reports to the House Ways and Means Committee, the Legal Division memorandum of 1)ecember 13 suggested that the Board might wish to send a representative to the Bureau of the Budget meeting this afternoon with instructions either to endorse or to offer no Objection to the Treasury proposal. Governor Mills stated that he thought the Board should be rePresented at the meeting. The proposal was controversial, and taxation "Perts in the previous and present administrations were united in the 1)(118tti,an that the savings institutions should be brought under an 4PProPriate tax formula. As a key element in the Government supervisory field-) he believed the Board should be informed on this subject. ke°rdingly, a member of the Board's staff should attend the meeting as an observer if for no other reason than to pick up the atmosphere °t the discussion so that the Board could become better informed regarding the proposal. Governor Robertson said he would prefer not to have a Board Presentative at the meeting. He would merely send a short letter to the Bureau of the Budget indicating that the proposal appeared to be silnilar to that contained in two bills introduced in the 87th Congress the Board had reported to the House Committee on Ways and Means 141cler dates of March 30 and August 3, 1961, taking the position that tEcliltiorl, of various financial institutions should be as comparable and ecitlitable if possible. He would enclose copies of the two earlier rePorts outlining the Board's views on H.R. 2899 and H.R. 2900. " 12/14/61 -7- In the discussion that followed it was brought out that as yet the Treasury Department had not drafted a bill covering its proposal 47341, accordingly, there was no occasion at this time for the Board to take a definite position. At the conclusion of the discussion it was understood that a °ard representative with a background in the area of taxation would be asked to attend the meeting this afternoon as an observer, and that he //c)111d deliver to the Bureau of the Budget a letter along the lines su ggested by Governor Robertson. Item A copy of the letter is attached as , Secretary's Note: Pursuant to this action Mr. Bangs, Senior Economist in the Government Finance Section of the Division of Research and Statistics, attended the meeting as the Board's representative. In a memorandum dated December 15, 1961, he reported to the Board regarding the meeting. The meeting then adjourned. OM*, BOARD OF GOVERNORS Atool;444, " OF THE FEDERAL RESERVE SYSTEM I 1 ''N t # a* * 4 4 4 Item No. 1 12/14/61 WASHINGTON 25. D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD 4440 ' December 14, 1961 Board of Directors, The Manistee County Savings Bank, Manistee, Michigan. Gentlemen: The Board has received a copy of a letter dated November 28, 1961, sent by Mr. P. W. Groth, President of The Manistee County Savings Bank, to Mr. Hugh J. Helmer, Vice President, Federal Reserve Bank of Chicago, requesting that you be permitted to declare a semiannual dividend of $20,000 payable on December 15, 1961. The Board's permlssion is necessary under the provisions of Section 9 of the Federal Reserve Act and Section 5199(b), United States Revised Statutes. After consideration of the facts, the Board approves the declaration of this dividend, but this approval is limited to the declaration of the abovementioned dividend to be paid December 15, 1961, and does not authorize any other declaration of dividends during 1961 or later. Very truly yours, (Signed) Elizabeth L. Carmichael Elizabeth L. Carmichael, Assistant Secretary. BOARD OF GOVERNORS OF THE Item No. 2 12/14/61 FEDERAL RESERVE SYSTEM WASHINGTON 25. D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD December 15, 1961 TO THE PRESIDENTS OF ALL ishDERAL RESERVE BANKS bear to 7.01.1 Under separate cover, copies of form FR 107 are being sent Irtoolli r Bank for use by State member banks in submitting their Reports of INTith e and Dividends for the Calendar year ended December 31, 1961, together atid Di Copies of Instructions for the Preparation of Reports of Income ( s( f orm FR 107a). °r1 the b Some revisions in the form used at midyear 1961 have been made lIggesti aeis of experience with the midyear reports and the comments and received from the Reserve Banks and member banks; these revi are 4 th., (1) The item of bank premises occupancy expense (2g) and related schedule (Section E), which was used for the first Le In the June report, has been changed to exclude all expenses rXted to furniture, equipment, and machinery; a new item (2h) oe'lects these expenses. The elimination of these amounts from ofel,TancY expense is expected to pro-vide a more realistic measure pe -L andlord" costs; and the new separate item will include exprnses related to the installation and use of automated electronic thr ; , ), e '"eing systems which are more in the nature of labor saving °ooupancy costs. n (2) The combined schedule for the reconciliation of changes shotal accounts has been replaced by separate sections, one ar,74-11g changes in capital accounts and the other Showing the pe; il-tal account items at the beginning and end of the report priTmcl• This is merely a change in format to the style used to °r to June 1961. The items first used in the midyear report oonreflect changes in capital accounts incident to mergers and s°1idations have been retained. Doz.L. The new instructions pamphlet, in addition to covering the revised tlo,̀Aots 04_, ; 4 i ,the report, includes certain clarifications of previous instruc,no -rporating many of the comments and suggestions that were received. Very truly 114 e f9rwarded on receip printer. Merritt Secre 5, 426,3 Item No. TELEGRAM LEASED WIRE SERVICE 12/14/61 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON December 14, 1961. Treiber - New York The Loard interposes no objection to purchase of equipment det forth in your letter December 5, 1961. (Signed) Merritt Sherman 3 BOARD OF GOVERNORS atiltettrro OF THE IR FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. Item No. 4 12/14/61 44:4 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD , "Itt:k rat ott -44404- December 14, 1961 14r, Philip S. Hughes, Assistant Director t_for Legislative Reference, eau of the Budget, washington 25, D. C. bear NI'. Hughes: This refers to your legislative referral memorandum dated December 12, 1961, with respect to a recommendation of the Treasury i)artment for taxation of mutual savings banks and savings and 2an associations, and to the request for the views of the Board uY Thursday afternoon, December 14, 1961. f The proposal of the Treasury Department, as the Board un derstands it, is similar to the proposal contained in two bills, R * 2899 and H. R. 2900, introduced in the 87th Congress, which tci)111(1 amend the Internal Revenue Code of 1954 with respect to taxa: 111 11 of savings and loan associations and mutual savings banks. The n ard submitted reports on those bills to the Chairman of the House Zni/littee on Ways and Means under dates of March 30, 1961 and 0,Plat 3, 1961, in which it took the general position that taxation various financial institutions should be as comparable and as ;4,14Aable as possible. Copies of those reports are enclosed. tredies for existing inequities involve technical questions that e the Boardts judgment can best be determined by Treasury and other xiperts in this field. Very truly your Merritt Sher Secretary.