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1716 A meeting of the Board of Governors of the Federal Reserve System with the Presidents of the Federal Reserve Banks /fIls held in the offices of the Board of Governors in Washington on Tuesday, December 9, 1947, at 3:40 p.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Szymczak Draper Evans Vardaman Clayton Mr. Carpenter, Secretary Messrs. Sproul, Williams, Gidney, Leach, Young, Peyton, Leedy, Gilbert, and Earhart, Presidents of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco. Messrs. Clark and Hitt, First Vice Presidents of the Federal Reserve Banks of Atlanta and St. Louis Mr. Treiber, Secretary of the Presidents Conference Before this meeting a memorandum had been submitted to the 11°Itra of Governors covering the matters which the Presidents had discussed at their separate session yesterday and which they wished to ecnIsider with the Board at this meeting. The statement of the Presi aents and the discussion at this meeting with respect to each or the matters considered were substantially as follows: 1. Delayed return of unpaid items. The Conference ecflasidered the problem of the delayed return of unpaid 1717 12/9/47 -2- items by drawee banks. The Conference approved the Joint report on this subject, dated November 6, 1947, by the Committee on Collections and the Special Committee of Counsel on Delayed Return of Unpaid Items, copies of which have been furnished the Board's staff. It is expected that the American Bankers Association Will recommend that Regulation J and the Reserve Bank circulars or operating letters governing the collection of checks be amended so as to authorize a procedure for the conditional payment of cash items presented by the Reserve Banks by mail, with the right of the drawee banks to return unpaid items and reclaim payment therefor on the next succeeding business day following the receipt of such items by the respective drawee banks. In the event the A.B.A. makes such recommendation, appropriate committees of the Conference will make recommendations regarding the text of such amendments. Mr. Sproul stated that the above statement was in the 44tilre of a progress report and that no action was called for at this time. 2. Federal Reserve exchange drafts. In June 1947 the Board referred to the Committee on Operations a suggestion received from one of the presidents regarding the desirability of changing the wording on the form of Federal Reserve exchange draft. The Board suggested that the committee also consider the desirability of 411Y other changes in the instructions, as attached to the Board's letter X-7454 of June 13, 1933, which were Prepared in 1917 when the drafts first came into use. The Conference reviewed the recommendations with respect to such drafts set forth on pages 5 - 9 of the report of November 14, 1947, of the Committee on Collections, copies of which have been furnished the Board's staff. The Conference approved such recomZendations, except that the Conference felt ihat it should be optional with each Reserve Bank as to whether it should require a member bank to make application for Permission to issue Federal Reserve exchange drafts. It was the view of the Conference that any Reserve 'which wished to do so might provide in its circular or 1718 12/9/47 -3- operating letter sent to member banks that any member bank in its district wishing to issue Federal Reserve exchange drafts might do so subject to the terms and conditions set forth by the Reserve Bank in its circular or operating letter. Mr. Leach suggested that, after the minutes of the Presidents Conference were received, the Board could advise the Federal Reserve Banks what action it wished to take in connection with this Matter. The Conference to the respect with reviewed the experience to date Form reports on expense Preparation of functional F. R. 634. The Conference recommends that such rePorts be submitted quarterly rather than monthly as at present. The adoption of this recommendation would reduce the work at the Reserve Banks of preParing the reports and the work at the Board of compiling the material therein in comparative form. Monthly operations fluctuate so greatly that comparison of monthly figures at the different Reserve Banks gives a distorted view of operations. 3. Functional expense reports. The members of the Board indicated that they would be willtug tc) approve the above recommendations. •4. Loan value of Treasury bills. The Chairman of the Conference reviewed with the presidents the Board's letter of December 5, 1947, to him as president of the Federal Reserve Bank of New York regarding the amount which the Reserve Banks should loan against Treasury bills. The presidents recognize that inasmuch as Treasury bills are sold at a discount the Reserve Banks would be justified in est ablishing a loan value approximating the price Elt which the bills are sold. Nevertheless, a maic)ritY of the presidents believe that in view of Past practices with respect to loans secured by 1_719 12/9/47 Government securities and the possible inconvenience involved in making an exception with respect to Treasury bills, the Reserve Banks should lend on Treasury bills the maturity value thereof. Chairman Eccles stated that the Board would not have any liee.80/1 to disagree with the views expressed by a majority of the ?I'esidents and that, since that was the view of the majority, the B°ard would be willing to accept it as it felt the procedure followed at all of the Federal Reserve Banks in this connection should be uniform. 5. Matters which the Board wished to discuss with the Chairman Eccles stated that there were two matters hich the Board would like to discuss with the Presidents while theY were in Washington: (a) Changes in the Federal Reserve Re- tireMent System, and (b) Changes in check collection procedures at the Federal Reserve Banks. (a) Changes in the Retirement System of the Federal Re—al_lcs. Mr. Szymczak read the following memorandum and sel-.13 stat ed that the changes in the Retirement System referred to then -fl were discussed informally at the meeting of the executive Om "&mittee of the Retirement System yesterday which had been called to , '°Iasider the problem of earnings on investments of the Retire-Ystem and what provisions should be made for deficiencies 111 earnings: 1740 12/9/47 -5- The Board of Governors has been reviewing the operations of the Retirement System of the Federal Reserve Banks and is considering making the following suggestions to the Board of Trustees. These suggestions are being submitted to the Presidents for consideration in order that the Board may have your views. (1) That the investments of the Retirement System be confined to United States Government securities and obligations guaranteed by the Government, (including F.H.A. Mortgages and securities of the International Bank for Reconstruction and Development), (2) That the Federal Reserve Bank of New York be designated as Agent for the Retirement System for the purpose of handling the investments under the direction of the Investment Committee, (3) That the Board and the Banks undertake to guarantee the retirement benefits provided by the Retirement System. Reasons for Suggestions: The Retirement System was originally on a 4% interest base which was changed to a 3% base in 1943. At that time the Banks made a substantial lump sum contribution to the Retirement System. For the past several years the return on investments has been approximately 2% or under and, therefore, it appears that additional contributions will have to be made to keep the retirement fund on a 3% base. The Board feels that contributions to make up deficits in reserves could be defended more readily if the Retirement System followed the same general policy with resPect to its investments as is followed in the investMet of trust funds of the Government. The funds of the Civil Service Retirement System are invested in Government securities and Congress appropriates funds to meet the liabilities of that System. 1721 12/9/47 -6- At the present time approximately 75 per cent of the funds of the Retirement System are invested in Government securities and the balance in corporate bonds, preferred and common stocks. The return on investments for several years is not greater than could have been obtained had all investments been in long-term Government securities. In connection with the present investments in stocks the Board feels that the System should not acquire, with its own funds or trust funds, ownership in private corporations through investment in stocks. The Northern Trust Company of Chicago has been retained as manager of investments fer the Retirement System under a contract providing for a fee of 3/4 of 1 per cent of income from investments. It is the Board's feeling that the Federal Reserve Bank Of New York is in a better position to give advice on investments in Government securities than any outside manager and that it could handle such investments more economically than under the present arrangement. It ls believed that a suitable arrangement could be worked out whereby the Reserve Bank would act. as Agent for the Retirement System for the purpose of handling investMents under the direction of the Investment Committee. The Retirement System provides certain benefits for employees and there is an implied obligation on the part of the Board and Banks to make the necessary provision for these liabilities. The Board feels that if the Retirement System follows the same general policy with respect to its investments as is followed in the investment of Government trust funds the Board and the Banks would be justified in undertaking to guarantee the retirement benefits provided by the Retirement System. The only alternative is to put the System on a self-supporting basis, with the understanding that the Banks and the Board would make fixed contributions to the Retirement System and that no additional Payments would be made. If no additional payments are Made it would be necessary to reduce the interest base from the 3% to such amount as would be justified by earnings on investments. 1722 12/9/47 During the ensuing discussion Chairman Eccles amplified --e reasons which prompted the Board to suggest the proposals conin the memorandum and there was a preliminary discussion or the suggestions, of the steps that might be taken to make them effective, and of the alternative courses of action that might be av ailable. Mr. Leedy, Chairman of the Executive Committee of the ReSystem, pointed out that, although the rate of earnings f the retirement system over the years has not been as great as the interest base on which required reserves are computed, the "tUarial experience has been more favorable than that indicated bv " "ile actuarial tables used. In fact, he said the gain from the 1111Proved actuarial experience has offset the deficiency in earn1n gs so that neither in the past nor at the present time has there bA "a deficiency in reserves. One of the Presidents indicated a favorable reaction to the Board's suggestion as assuring full payments to retired em131433reee. Some of the other Presidents, however, questioned the cleeirability of following the Government pattern as suggested in the, '°0ard's memorandum. Mr. Sproul expressed the - view that even thou (41 the Board's suggested plan might appear to assure complete 138.Y.rilent of benefits to retired employees, this did not mean that 1_723 12/9/47 -8- the Plan was the best one. The Government pattern was not nec- essarily the best, he said, and other alternatives should be exellined fully. He questioned the desirability of setting up a DllIn which appeared to assure a deficit in perpetuity and tied tlie SYstem into a Government pattern which sometime in the tlItIlre might be viewed as a reason for further subjecting the SYstem to Government patterns in its operations. At the conclusion of the discussion Chairman Eccles stated that no action would be taken by the Board of Governors the proposed changes had been considered by the Board of Tria stees of the Retirement System and that they would be disellssed at a subsequent meeting of the Presidents and the Board or Governors. (b) Changes in the check collection procedures of the Reserve Banks. Chairman Eccles referred to the con- ration which had been given by the Board during the recent Deriod to changes in the check collection procedures at the FedReserve Banks and stated that there should be a full disilssion by the Presidents and the Board, when time could be °114d therefor, of the advantages and the disadvantages of the Pe(1,„ ' ral Reserve Banks giving immediate credit for all cash items 4Dosited with them by member and nonmember clearing banks. He 1_724 12/9/47 -9- recognized that the present was not the time to make such a change b ecause of the large amount of additional reserves that would be Provided to member banks by the increased float that would be carried by the Federal Reserve Banks under such an arrangement. }IQ/lever, he stated that it was the view of the Board that plans Should be laid to make the change when it would be in harmony the general economic and credit situation of the country to He also said that many banks were prevented from becoming luenlbers of the Federal Reserve System because they could obtain better check collection services from their correspondent banks the. from the Federal Reserve Banks and that the System should 114131%)Ve and expand the check collection system as was contemplated hell the Federal Reserve Act was originally passed in order to 1124/rave the services of the Federal Reserve Banks to member banks 44d Make membership in the System more attractive. He went on to say that the Board was not proposing any "t10/1 on the matter and that no change was contemplated at this time with the exception that the Board felt that something should be d_ Ile in connection with the 50 or 60 member banks each of which ' dePositing with its own Federal Reserve Bank Or branch without a°rt 4 daily average of 300 or more items payable in another Fed- et41 Reserve Bank or branch territory. He said that the Board 1725 12/9/47 reit -10- that these banks should be required to send these items direct to sort and list them separately or that all banks should be given the Privilege of depositing such items with their own Federal Reserve B4Ilks in the same manner as the 50 or 60 banks were doing. He re- ferred to the views expressed by the Presidents on this matter in reply to th,, Board's letter of October 22, 1947, and stated that, 111 view of the comments of the Presidents and of the indicated //Qesibility that the Federal Reserve Banks could remedy the situEtti°11 by individual approaches to the member banks concerned, the 13"I'd contemplated sending a letter to the Federal Reserve Banks 14 /fhich it would be stated that the Board had decided to post1)°11e until June 1, 1948, further consideration of action to rethe 50 or 60 banks referred to above to sort or list sep4r4telY the items payable in other Bank or branch territories. Mr. Leach stated that the individual approach method °Illd be a desirable one as it would enable the Federal Reserve to work the matter out with their member banks without the tec essity of laying down a specific requirement. At the conclusion of the discussion it was understood that the letter as sent to the Federal Reserve Banks by the 13°.111.6. would state that the Board would postpone action on the 'e.tter until July 1, 1948, and would request that the Federal 12/9/47 -11- eserve Banks advise the Board as and when definite arrangements were made with the member banks concerned for remedying the situOn a voluntary basis. It was agreed that if thought de- sire:hie the progress made by the Federal Reserve Banks in bringing about a correction of the existing situation could be discussed at the next meeting of the Presidents and the Board. Thereupon the meeting adjourned. 4'11Droved:
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