Full text of Minutes of the Board of Governors of the Federal Reserve System : Meeting Minutes, December 20, 1941, Volume 28, Part 4

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1822
A meeting of the Board of Governors of the Federal Reserve
Sietem was held in Uashin
gton on Saturday, December 20, 1941, at 11:00
4.ra.

PRESENT: Mr.
Mr.
Mr.
Mr.
Mr.

Eccles, Chairman
Ransom, Vice Chairman
Szymczak
McKee
Draper

Mr.
Mr.
Mr.
Mr.

Morrill, Secretary
Bethea, Assistant Secretary
Carpenter, Assistant Secretary
Clayton, Assistant to the Chairman

The action
stated with respect to each of the matters hereinlat'er' r
eferred to was taken by the Board:
The minutes
of the meeting of the Board of Governors of the
4cier l Reserve
System held on December 19, 1941, were approved unani44184.

11r
'Szymczak stated that in accordance with the action taken
atthe
meeting
i
of the Board on December 16, 1941, he had discussed with
Pre.
j. Lelds the question of his continuance as Class C director and
_
" 841d Federal
Reserve Agent at the Federal Reserve Bank of
e4go3 and
that it was the recommendation of the Personnel Committee
that
11r. Lbe
redesignated as Chairman and Federal Reserve Agent
t(/r the
"rning year and that Mr. Leland
be appointed Deputy Chairman
or the
Bank for
the year 1942.
Accordingly, Frank J. Lewis was redesignated as Chairman and Federal Reserve
Agent at the
Federal Reserve Bank of Chicago
for the year
1942, and his compensation as
Chairman and Federal Reserve Agent was fixed




1823
12/20/41

-4-

on the uniform basis fixed for the same position at all Federal Reserve Banks, i.e.,
the same amount as the aggregate of the fees
payable during the same period to any other
director for attendance corresponding to his
at meetings of the board of directors, executive committee, and other committees of the
board of directors, and Simeon E. Leland
was appointed Deputy Chairman of the Chicago
Bank for the same period.
Letter to the board of directors of the "Bankers Trust CornRocky Mount, Virginia, stating that,
subject to conditions of
raerlibershiP numbered 1 to 3 contained in the Board' Regula
s
tion H and
thefollowing special condition, the Board approves the bank's
appli440n for
membership in the Federal Reserve System and for the appro11114.te allaount of stock in
the Federal Reserve Bank of Richmond:

"4. Prior
to admission to membership, such bank, if
it

has not already done so, shall charge off or
otherwise eliminate estimated losses of $7,320.201
as shown in the report of examination of such
bank as
of October 13, 1941, made by an examiner
for the Federal Reserv
e Bank of Richmond."
The letter also contained the following special comment:

ez_ "It appears
that, while the bank is authorized to
a 17cise trust
powers, actually it is doing so only to
as ely limited
extent. At the time of the examination
p1i°-1 October 13,
1941, made in connection with the apad,
t7ation for membership,
only one small account was being
ne—"-ssnistered and it is said that additional trust busiappl.is not being
solicited. In the circumstances, the
trilsteation has been approved on the same basis as if
thai, P°wers were not being exercised. It appears also
ILK possesses certain powers which are not bethe ...ercised and
which are not necessarily required in
'°nduct of a bankin busine
g
ss, such as the power to




1212°/41

11

guarantee the payment of bonds. Attention is invited
to the fact that if the bank should desire in the future
to
exercise trust powers beyond the extent necessary in
connection with
the one account now being administered,
°P to exercise any other powers not actually exercised at
thC time of
admission to membership, it will be necessary
under condition of
membership numbered 1 to obtain the perof the Board before exercising them. in this conthe Board understands that there has been no
,!lange in the scone of the corporate powers exercised by
Lfie bank since the
date of its application for membership."
Approved unanimously, together with
a letter to Mr. Leach, President of the.
Federal Reserve Bank of Richmond, reading
as follows:
"The Board of Governors of the Federal Reserve SysaPproves the application of the 'Bankers Trust Company
Mount, Virginia, for membership in the Federal Re:
erlre System, subject to the conditions prescribed in the
inel°sed letter which you are requested to forward to the
l etterof
oard
Directors of the institution. Two copies of such
-are also enclosed, one of which is for your files
rd the
other of which you are requested to forward to the
f!mmissioner of Banking for the Commonwealth of Virginia
`'r his
information.
will be noted that the condition of membership
ulne the elimination of losses requires that the ent_'e amount of the losses classified be eliminated prior
-11e bankt s
admission to membership. Such a requirement
cc;n1
,
1
,
1
1
„
.
1
.eePind
With the Board's established policy in this
foron
and, there appears to be no compelling reason
rTking an exception in this case.
time
has been noted that the bank has been accepting
of 11.-teposits of
other banks in :'
4 5,000 amounts, the total
deposits on the date of the recent examination
ame,,.°0, or nearly 10 per cent of total deposits. The
at the time
of the previous examination was ::',55,000.
the d 'According
to the examiner, the bank contends that
coltrs:Posits do not
represent borrowed money. That, of
wottid is a question which the F.D.1.C. or the courts
biat i,"ave to determine
should the occasion ever arise,
must be admitted
that in this case the question
tem

-




1825

12/20/41

-41!„.
Lould at least be close. Aside from that factor, hall.ever, the Board feels strongly that from the standpoint
of the depositary banks the practice of accepting out-ofdeposits, which would not be tendered if it were not
for the
insurance feature, offers an easy road to trouble
and is wholly unsound. As a result of such a practice,
some banks would drift into a state of over-extension and
t_h
e,situation would be more hazardous than if the extra
runcts had been obtained by means of borrowing through
regular channels. Deposits of that character would naturally be more volatile than local deposits and in the
vent of a reversal in business conditions woule likely
1,1thdrawn, and if the deposits had been accepted in
'
11.7 volume serious consequences could result from the
ank's being called upon for repayment within a short
Period
ment "Following the recent examination the State Departsuggested that the practice be discontinued and it
be expected that the Reserve Bank also will urge
the i
nstitution to discontinue what could be a dangerous
Policy.

';

in 1 "when the bank was first examined for membership,
'
larch of this year, there was evidently no idea of
theexistence of the irregularities which later were to
lead
,
ead to the removal of the president. However, there was
171 admittedly
decided weakness in the management, and the
ta
,
nk's application has been held in abeyance pending steps
a; e°rrect the situation. The then president, inactive
re an officer but a dominant influence in the bank, was
ci
ded as incompetent as a business man, and the prinan
operatin officer, the cashier, was said to be only
lioi°Perating officer with no initiative and having no
f uee on policy matters, conseouently the unwholesome inlence
ono:
the president had little, if any, internal opP°siti
new "The former president has now been replaced and the
the President, who
has been a director of the bank for
F.00dP?st few years, is said to be a successful farmer, with
and Judgment and well informed as to the bank's borrowers
be _ co
nditions in the community. Hovever, he is not to
in }3tee.t ve in the bank and is, of course, not experienced
prle,zeZ4Tamement.
Therefore, even though a definite imunquestionably been made, there is still a
neeeTi:zed weakness in the active management and the busithe s
bank is certainly of sufficient volume to need
- 11--Lces of a capable active officer. The application
'




1826

12/20/41

-5-

"has been approved with the distinct understanding that,
flt1.1 existing questions have been satisfactorily resolved,
lie.Reserve Bank will give the case unusually close supervlslon to see that the affairs of the bank are being sound3y
ad
ministered."
Telegram to the Presidents of all Federal Reserve Banks, reading
f°110ws:
"Reg. 1-118.

The Board has been asked whether, in

ntee 'l of the provisions of sections 8(a), (b) and (c) of
'

gulation W, a Registrant 'taking over an extension of
1-/Istalment credit that has been made by a vendor and that
no connection whatever with the sale of a listed are, must be bound by the terms granted by that vendor'.
b
"The Board has answered that, since the obligation
eing retired in such case is neither 'instalment loan
lelsecliti nor 'instalment sale credit' as defined in the
gUl
:Latination, and therefore was not itself subject to Regu-11
a Registrant makinga loan to retire such an
gation is not bound by the terms granted by the vendor.
mal
ts, of course, does not exempt the loan from the maximum
ge uritY and other provisions of the Regulation applicable
a nerally to instalment loan credit. Moreover, in such
te2se, if a Registrant making the loan wished to grant
14.0
more liberal than those granted by the vendor, it
bei-141 be necessary for him to ascertain that the credit
of ng refinanced was in fact credit arising from the sale
an
unlisted article.
pres "In this connection, the 'Statement of Borrower'
,ribed by the Board provides a means for the Registrant
to ac
certain certain facts, including facts as to whether
'
the
tiojrooeeds are to be used to retire an instalment obligataitcl and it protects the Registrant in relying in good
Istat °n such facts when so ascertained. However, the
.
e111_7nt of Borrower' does not provide any means for ascerta,
ing 6:11'ng facts in addition to those developed in answertaitl ue questions
contained in the prescribed form. Cer0_91
estaber
provisions of the Regulation provide means for
faith lshinE certain pertinent facts by accepting in good
.flet,:a statement
of the obligor with respect to such
'- but neither
the 'Statement of Borrower' nor any

,V




12/20/4l

—6—

provon of the Regulation provides any means for ascertaining whether instalment credit being retired, instead
Of being 'instalment loan credit' or 'instalment sale
credit', is some different type of instalment credit.
."..ceordingly, if the Registrant wishes to disregard the
terms of the instalment obligation being retired, he
must
ascertain the
necessary facts independently of the 'Statement of Borrower', and
the treatment which he may accord
to the instalment
obligation being retired will be controlled by the facts themselves.
"It may be noted that a similar problem arises in the
case of a
loan to retire an extension of 'instalment sale
credit, or
'instalment loan credit' which was originally
granted with a shorter maturity than that required by the
Itegulation and on which, therefore, the Regulation would
P?rmit the rate of payment to be
reduced to that permis!?-ble in the
first instance. The question whether a partcular outstanding obligation is one on which the rate
Of
ti PaYment could be reduced in this manner is another quesn which is not answered in the
'Statement of Borrower'
and on which the Registrant is not authorized to rely on
,nY.other statement of the obligor. Therefore, if the
.171gistrant making the loan to retire the obligation
shes to reduce the rate of
payment, he must act inden!fldently of the
'Statement of Borrower', and the treat1:It which he
may accord to the instalment obligation
lng retired will depend upon the
facts themselves."

r

4

Approved unanimously.
Telegram

to Mr. Swanson, Vice President of the Federal Reserve

eapolis, reading as follows:
to „ur wire December 5. A borrower who has contracted
4 Pay 18 monthly instalments of 25 each and who becomes

rov;Ths past due in the middle of
the contract may boror t.100
from another lender on an 18-month basis in view
tiot '
14 e fact that
section 8(c) refers only to 'retire' and
lendt!reduce'. However, the original lender could not
"44a q00 with which to pay the past-due instalments
or th that would be in effect a lengthening of the
maturity
°riginal loan without a statement of necessity.
c()rtt„if the 4 payments were at the end of an 18-month
et the loan by
the new lender would be to 'retire'




828
12/20/41

-7-

"and therefore could not be made without a statement of
necessity.
"If the past due payments were in the middle of the
18-month contract, the new lender could not take over the
entire contract without a statement of necessity. The
new loan could not be made under section 8(b) because the
Past due instalments and the instalments not yet due are
not two
separate obligations. The new loan could not be
made with the entire outstanding balance divided into
equal
monthly instalments over the remainder of the original 18 months' maturity because that would have the efect of
revising the contract so as to make the last intalments substantially greater than the earlier instalments.n

l

Approved unanimously, with the understanding that a similar telegram would
be sent to the Presidents of all Federal
Reserve Banks except Minneapolis.
Of

Letter to Mr. Lassiter, Chairman of the Federal Reserve Bank
"IT14)nd, reading as follows:
11
"At the completion
of the examination of the Federal
!serve
Bank of Richmond made as of September 30, 1941,
z_the Board's
examiners, a copy of the report of the ex;
c 111rlation was left for your information and the inform?,
°I1 of the
dent Leach. directors. A copy was also furnished Presibe "t,
F is
understood that the auditing
ilna°1e to complete the desired schedule
departmny of audits this
zaear because
of the fact that during the year the departotitili,
t was called upon to loan some of its employees to
iar'r departments. The Board recognizes that this was due
thegelY to emergency demands upon the bank; nevertheless,
of the auditing department is so important that
age"°'Ild seem that
every effort should be made by the manyriAnt to
meet the demands upon the operating departments
401;°11t handicapping the auditing department in its work.
a 4-7er, the Board believes that, as a general policy,
Of j
1r13 distinction should be maintained between the work
a/1d t),
e ?Perating departments and the auditing department
Bilorclf'3 in particular, members of the auditing department
---&L not be
called upon to participate in the work of




1829
12/20/41

-8-

"operating departments which is subsequently subject to
audit.
,
"The Board will appreciate advice that the report
nas been consi
dered by the board of directors as well
as any comments you may care to offer regarding discusWith respect to the examination or as to action
taken as a result of the examinatio
n."
Approved unanimously.
Letter to Captain F. W. Hoover, General Manager of the Welfare
41c1 Recreat
ional Association, Washington, D. C., reading as follows:
"I have received your letter of December 10 regarding the
question of losses occurring in connection with
the operation of the Feder
al Reserve cafeteria.
"I think that our disagreeme
nt is more apparent than
and results not from any real difference of opinion
d
as to the
fundamental question, but rather from a misunerstanding of the
terms used. Specifically, I am entirely
'.n,a
greement with you that the Association should not bear
'°88
Part ofresulting from an ordinary miscalculation on the
the Manager as to how many pounds of fish or how
n,
2
1 4r gallons of oyste
rs she should buy. Obviously she can6 Predict
with entire accuracy the amount of each kind
i
l ndo.ml:Ilich will be sold each day, and any loss resultmiscalculation of this kind would seem to me to
Asee
,
l?arlY one which would not violate the Agreement of the
sco-c'ation to operate and manag the cafet
erias in as
e
mical and effic
ient a manner as possible. Likewise,
fr:
o 1:
4 11 agreement with you that the dishes which are broke
n
to time in the ordinary course of the conduct
of
in ,us business should be
paid for by the Board, as has,
4.%t, been
done.
cases T1
,
1,e Agreement, I think, specifically provides for
ciati 04 this kind
when it says, generally, that the Assoerfi ?n Nill operate
the cafeterias 'in as economical and
m.„elent a
manner as possible' and, with respect to equipthat the
Board will bear the expense of certain types
the c1„111-Pment lost or
destroyed 'in the ordinary course of
Row: duct of
the business covered by this Agreement'.
kelit er, it seems to me
that the very fact that the AgreesaYs that the
Board shall bear the cost of certain

4

2r




830
12/20/La

-9"tYPss of equipment lost or destroyed 'in the ordinary
course of the conduct of the busiless' means that the
Board will not bear the cost of such equipment if
lost
or destroyed not in the
ordinary course of the conduct
of the business. In
other words, to use an illustration
which none of us expects will occur, if one of the emPloYees of your Association should maliciously or
intentional
Bly destroy a piece of equipment, or should steal
it,
the
notoard
would look to the Association for reimbursement,
only because of the provisions of the Agreement re-erred to above, but a]so
because the Association, and not
the Board, should be held
responsible for the willful mise°nduct of its
employees since the Association has 'the
t
sxclusive power to appoint, discipline and discharge, and
4.? iix the rates of pay of, employees utilized by it in
I'Due performance of
this Agreement * * *'. The same would
,! true as to losses resulting from negligence, although
negligenceI
have in mind is not the ordinary broken
or burnt pie which occur 'in the ordinary course of
the
r: conduct
of the business' of running a cafeteria, but
'her the obviously inexcusable type of negligence which
,,
1 111(13 for example, make you decide forthwith to discharge
-its
employee.
we "As regards the Coca Cola syrup which 1.a.s spilled,
If are not disposed to argue about the matter any further
TheYou feel that
it is in the same class as the burnt pie.
paentam°unt is too small to warrant our risking any impairhe._ of the pleasant
and satisfactory relationship which
ev?reXisted between the Association and the Board. How, ee› we Were
apprehensive lest the incident be regarded
s
Atab
lishing a precedent at variance with the terms of
the
at tjree:'Ient, and that is the only reason for writing you
length."
Approved unanimously.
Letter to
the Secretary of the Interior, reading as follows:
ter ,.,Chairman Eccles has asked me to reply to your letsolie December 10
requesting information on the use of
fuels. It is noted that the information which you
Gov e relates to
'
fuel requirements of the United States
Iliae
tr
ePent
t
and that the information reported will be tab'glons. show the fuel consumption of the Government by




1831
12/20/41

-10-

"In view of these statements in your letter as to
the purpose of the inquiry, we feel that you should be advised that the requirements of the building occupied by
the Board of Governors at 20th and Constitution Avenue in
this city for purposes for which solid fuels would be required are met through steam furnished by the Central
.14 e,
ting Plant, electricity furnished by the Potomac Elec,',rio Power Company, and gas furnished by the V,ashington
'las Light Company, so that the Board of Governors does
11°t Purchase or carry any stocks of solid fuels.
,,
"The Board of Governors, under the provisions of
Federal Reserve Act, has general supervision over
the
operations of the Federal Reserve Banks, each of which
d its branches,
if any, are located in one of the twelve
tVeral Reserve districts of the United States. Mile
banks are incorporated under the Federal Reserve
7t, the fuel requirements for their buildings are not
Plied by the Government and the properties which they
ecuPY are not Government properties.
In the circumstances, it is assumed that it would
hot Serve
—
in
your purpose to fill out the forms referred to
cerrledY°1-1r letter so far as the Federal Reserve System is conn

r

Approved unanimously.

Thereupon the meeting adjourned.

Secretary.

APPI,Olte,3




Chairman.