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A joint meeting of the Board of Governors of the Federal Reserve SYstera and the Presidents of the Federal Reserve Banks was held at the Board's offices in Washington, D. C., on Tuesday, December 9, 1952, at ":00 PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Evans Vardaman Robertson Mr. Carpenter, Secretary Mr. Kenyon, Assistant Secretary Messrs. Erickson, Sproul, Williams, Gidney, Leach, Bryan, Young, Johns, Powell, Leedy, Gilbert, and Earhart, Presidents of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco, respectively Mr. Heflin, Secretary of the Conference of Presidents Before this meeting there had been submitted to the Board a Illetn°rati.dtun listing the topics to be discussed at this joint meeting and llg the views of the Conference of Presidents with respect to each t°131e * The topics, the statement of the Conference of Presidents with l'esPect to each, and the discussion concerning them at this meeting /115re as follows: 1. Discussion of recommendations contained in the Patman Subcommittee Report. President Leach amplified the introductory paragraph contained in the la_ -'reeidents' memorandum which read as follows: 20,37 12/9/52 -2The Presidents discussed the specific recommendations for legislation contained in the Patman Subcommittee report as well as the desirability of a Congressional directive concerning responsibilities of the System, the establishment, as recommended by Secretary Snyder, of a consultive and advisory council and the establishment of a commission to study various problems of the financial, monetary, fiscal and debt situation. The discussion was based, in large part, Upon the draft statement of November 12, 1952, prepared for the Presidents by the Conference Subcommittee on Legislation, a copy of which is attached for the information of the Board. The views of the Presidents on the several matters discussed are summarized briefly below. a. Congressional directives or "mandates". Eleven of the twelve presidents were of the opinion that it would be desirable to seek to have incorporated in the Federal Reserve Act a better statement than now exists of the purposes and function of the Federal Reserve System, the exact wording of such a directive and the method of presenting it to the Congress to be the subject of further study and exploration by the Board and the Reserve Banks. President Leach said that the Presidents, with one exception, felt that 4 better directive or mandate incorporated in the Federal Reserve Act °Illd be helpful in providing an improved understanding of the pur%sae and functions of the System but that they recognized the difficulty 140,04 ea tu wording a mandate which would be appropriate in all circumettqln -68 and/ at the same time, not be too rigid. Re then referred to three suggestions offered by the Subcommittee 4,0 121'9/52 _3- f the Committee on Legislation in its memorandum prepared for the Presi86 The first suggestion was to propose an addition of the words "and stebilitY of the value of the dollar" to the Declaration of Policy in the 4PloYment Act of 1946. The second was to insert a "declaration of 1)c/licY" immediately after the preamble to the Federal Reserve Act, pos1114 al°4 the lines of the declaration included in the House version or the Banking Act of 1935. eltIllicit The third was to include a longer but more declaration, a possible wording of which was given in the Sub- eorrazittee s memorandum. With reference to the first suggestion, President Leach pointed out t1 the Subcommittee thought the addition of such language to the 41/lc:Tama Act of 1946 would not be sufficient for the System's needs. " Ile that most of the Presidents would be prepared to accept something 411g the lines of the third suggestion of the Subcommittee. President Leach observed that it was not the feeling of the Cone of Presidents that a mandate was necessary for carrying on the %tat It3na of the system but rather that it would be desirable to have it were phrased satisfactorily. In response to a question by Governor Robertson whether eleven or tUesidents favored a mandate of the type of the Subcommittee's thira euggestion„ President Leach said that this suggestion met with a gOoa recePtion but that the Conference did not adopt any specific suggestion. 2039 12/9/52 President Williams inquired whether the Board felt that it 1"be desirable to go forward with a request for a mandate at this tt4le• Chairman Mertin responded that the Board had not yet gone into ti*t Matter, that he had no opinion at this time, but that he thought the Board might be in a better position to appraise the situation after the Middle of January when the legislative program of the new Congress becaine more clearly indicated. Concluding comments by President Leach were to the effect that 111._ 'unsidering this and other recommendations in the Patman Subcommittee rePort'the Presidents had given primary consideration to what the posi- tion Or the System should be, leaving the question of procedure for subNile Cone ide ration. b. Advisory Council. The Presidents were opposed unanimously to the creation of an interagency consultive and advisory council as suggested by the Secretary of the Treasury. They also felt that there was danger in the creation of a consultive body of creditgranting or guaranteeing agencies in which the Federal Reserve would participate as one meMber. It was felt that such a body would create in another form the hazard of placing the System in a subordinate or minority position. The Conference was of the opinion that while there is much to be gained through efforts to bring the actions of these other agencies into consistency with general monetary and credit policy, there is the question as to whether the System should not proceed further with informal approaches on its own initiative. Closer liaison with various agencies, individually, would not seem to involve the same risks to the System's necessary autonomy and independence. 2040 12/9/52 -5The members of the Board present indicated that they concurred illthe views of the Presidents. c. National monetary commission. The Presidents were of the opinion that the establishment of a commission to make a broad study of the American financial System would be desirable. President Leach said that the Presidents had in mind that there 494 been IlaanY developments and changes since the study of the National morlet,ry Commission which preceded the creation of the Federal Reserve %rate; and that the studies since that time had been in special fields had not covered the financial organization of the country as a whole. " tlettioned in this connection that there was some thought that it might bedesirable to have a commission, as in Canada, that would make a broad 4t1111 Per iodically, perhaps every ten years. President Sproul commented that the studies in recent years had bee, s tituted at the request of individual Congressmen, usually with kite I3articular purpose in mind, the result being a series of studies re latin€ to certain aspects of the financial mechanism rather than the blechala ism as a whole. He thought that if it were possible to establish 8. %roil of the type envisaged,with provision for periodic review Or the coUntry's financial organization, there would be a better prospect tor 40 401itical assessment of the situation. ee,ici he In response to a question by Governor Robertson, President Sproul vould prefer a commission composed of members of Congress and 2041 12/9/52 —6— °Iltside parties. President Leach said that no vote was taken on that P°14t and that there might be some differences of opinion among the Presidents. Chairman Martin then inquired whether the Presidents considered the est ablishment of such a commission to be a pressing matter, and Presi— dent Sproul expressed the view that it would not necessarily be one of the first things to be proposed but that, if the idea of a broad study werp - suggested, he felt it might be accepted as a part of a legislative Pr gram. Governor Vardaman commented that a proposal for a national mone— tarl, -' commission had been made by Mr. Winthrop lff. Aldrich, Chairman of the 11°ard of the Chase National Bank, several years ago, that Mr. Aldrich's P1ala as outlined to him seemed sound, that if the Board and the Reserve Bank directors sought the appointment of a commission he felt such a COrnrai ssim would be set up within a few months, and that in his opinion the Board and the Presidents should actively consider taking steps toward the est ablishment of such a commission. President Williams then spoke of the need for an educational pro— which would lay the basis for a System request for a broad study °.1 the country's financial structure. He felt that without this prelimi— work there probably would be a misinterpretation of the System's ' '56 or the among the bankers of the country, who would fear a disturbance status quo as a result of the study. 2042 12/9/52 -7Governor Evans agreed that it would be unwise to proceed without gi7illg careful thought to the matter and doing some educational work as Nested by President Williams. d. Nonmember bank reserves. The Presidents endorse in principle the recommendation that nonmbmber banks be required to maintain the same reserves as member banks. However, they do not feel that it is a pressing matter and, therefore, do not think that legislation for the purpose should be initiated by the System at this time. President Leach said the Presidents recognized that extension of the sY8te1'8 authority over required reserves to all banks would increase the 14:1t effectiveness of the System's monetary and credit policy but they would rec ommend initiation of legislation at this time because of the con- trove r's3r that would be aroused such a move. e. Additional powers over reserve requirements. The Conference is of the view that additional powers over reserve requirements are not needed at this time. However, they feel that study of the uniform reserve requirement proposal should continue and that prompt consideration should be given to securing legislation which would permit vault cash to be counted as a part of member banks' required reserves with appropriate adjustments in reserve requirements. President Leach said that a principal reason underlying the a majority of the Presidents that legislation should be sought 2043 12/9/52 -8- 11111°1 would permit vault cash to be counted as a part of member banks' reserves was that a substantial saving of time and money could be achieved by the Reserve Banks through a reduction of the shipments of currency betl4esil the Reserve Banks and the member banks. In addition, such a pro- 7431°11 Might make membership in the System a little more attractive. on the other hand, the Presidents recognized that it would be preferable to take such a step at a time when reserve requirements were being lowered a8 a Part Of the System's credit policy so that the adjustment to the tewrequiroilments could be easily made. President Gilbert expressed the view that the matter of vault cash , vas on Y One phase of the whole problem of member bank reserves and it *)11341 be preferable to have a study of the entire question before determin- 14"hs legislation that the System should propose. f. Franchise tax. The Presidents agreed that if legislation to reimpose a franchise tax on Federal Reserve Banks should be proposed, the System should not oppose it provided adequate provision is made for the surplus accounts of individual Reserve Banks. Some of the Presidents feel that the System should initiate legislation to secure reimposition of the tax. hairman Martin said that the Board had given consideration to 41ethe ' 1 the System should initiate legislation and whether, if legislation ' ere illtrmA , -,uced by others, the Board should oppose its enactment. The 2044 12A)/52 -913clardis discussion, he said, took into account the various arguments for and against its taking either of the courses. g. Taxation of Federal Reserve Bank dent stock. The Conference, with one Presi elimn latio legis if dissenting, agreed that Fedon ends divid inating tax exemption of eral Reserve Bank stock issued prior to the March 28, 1942, should be proposed, the er, Howev it. System should not oppose not d shoul m Syste Presidents felt that the initiate such legislation. President Leach said the Presidents felt the System had no resPonsibility to propose legislation to eliminate the tax exemption with l'"Pect to dividends on stock issued prior to March 28, 1942. However, the zajority believed that if such legislation should be proposed by (111(11re, the System should not oppose its enactment. ssion of Chairman Martin commented that the Board, after discu this matter, felt that the question was one for decision by Congress and the m ember banks. the h. Budgets and audits. For prement state reasons set forth in the on ee mmitt Subco pared by the Conference of ments Legislation, and in the state the Chairman of the Board of Governors Committee and the Presidents in the Patman gly opstron hearings, the Presidents are posed to Reserve (1) the submission of Board or ; ttees commi Bank budgets to Congressional nts accou ts Board (2) the audit of the by the General Accounting Office; the Reserve (3) any compulsory audit of al Gener the Banks by outside auditors or Accounting Office. 2045 12/9/52 -10In response to an inquiry by Governor Vardaman whether the Presi- cleats would be as strongly opposed to a regulation issued by the Board of q(Arern providing for outside audits of the Reserve Banks as they would bet() a - legal requirement, President Leach said it was felt that a needless expe„ "se would be involved because there would be a duplication of the exanilaations conducted by the Board's staff. Chairman Martin stated that the Board was undertaking to have Arthur Andersen and Co. audit the Board's accounts for the last nine months t 1952 and the year 1953. At the request of Chairman Martin Governor Robertson discussed the d ecisiot of the Board to have representatives of Arthur Andersen and Co. ac e°mPany the Board's examiners on one examination each year for the P/1171bee Of reviewing the adequacy of the examination procedures and determinIfhether the procedures were being carried out properly. In this way, he said 'the Board would have an impartial opinion as to the adequacy of 1143 exarai nation procedures and would be prepared to defend them if necessary. "4611I out that no audit of the Reserve Bank's accounts by the audit actual participation by the firm in the examination would be involveA, `L and that whether the arrangement would need to be continued for t4ltre tha t two or three years was a matter on which a decision would have to be slade later. 2046 12/9/52 -11During a discussion of the contemplated arrangement, one of the Presidents stated that his Bank would like to have the benefit of any c'hervations which might be made by the audit firm concerning the Bank's aildliting procedures, and it was suggested that any such observations raight 111°13t appropriately be passed on to the Bank through the Board's Staff. i. Federal Reserve orpnization. The Conference Subcommittee on Legislation did not consider proposals affecting the size of the Board of Governors, salaries and terms of office of Board members and other matters directly relating to the Board, and no position was taken on these questions by the Presidents. If the Board wishes the views of the Presidents they would be glad to consider these matters and discuss them at a later meeting. There was no discussion of this topic. 2. member banks from Federal Reserve ranks for the puryose of lessening or avoiding excess profits taxes. The Conference discussed at length the problem of member bank loan administration, including the tax considerations 20, mentioned in the Board's letter of November traadminis 1952. The Presidents reviewed their and loans tive responsibility in the field of discounts to member banks and discussed loan it Procedure in their districts, illustrating t discoun to in some instances by reference in applications of specific banks. They keep ed mention a criteri mind, among other things, the do but 20, r in the Board's letter of Novembe not believe that any specific test or formula 12.11nItla:ty 2047 12/9/52 -12would be satisfactory in all cases. In this connection the Presidents would be interested in any information the Board may have which reflects the experience or views of the Department of Internal Revenue with respect to allowing or disallowing such borrowings in determining excess profits tax liability. President Leach reviewed the discussion by the Conference of the were Problem of loan administration, stating that the Presidents aWare of the possibility that some members were borrowing for the ID141°°8e of lessening or avoiding excess profits taxes, that they officers agreed this was not a proper purpose of borrowing, that the ()f a number of the Reserve Banks had conferred with member banks Where there was reason to believe that such a practice was being followed, but that banks borrowed for combinations of purposes and it 11811allY was not possible to prove conclusively that a bank was bor.- g for excess profits tax purposes. He also said that the Presihad in mind the various considerations which should guide their 10a the exercise Pro cedures, that the situation appeared to call for or iuct gment more than the establishment of any tests or formulas which cl be apparently applied in all cases, and that each application be considered on its own merit. President Leach pointed out that there was some danger in ces the g stringent lending standards because in some circumstan 12/9/52 SY8tem -13- Would rather have member banks borrow than sell securities. He l'erliarked that even if the excess profits tax should expire on June 30, 1953 banks would be able to derive a benefit from borrowing throughout the vhole of that calendar year. 1)151 In the circumstances, he felt that /1111g for excess profits tax purposes might come to light late in 1953. Governor Robertson said it was his understanding, although he had /lot —41.en the matter up formally, that the Bureau of Internal Revenue had look ed into some cases where it appeared that the purpose of borrowing latiot have been to avoid or lessen excess profits taxes but that the Bureau 119414ot disallowed the borrowing in any case and that it did not intend to make a Policy of investigating the purpose of the borrowing. In the ensuing discussion, Chairman Martin alluded to the increased 14111 by member banks from the Federal Reserve Banks and stated that the Re serve Bank directors have a real responsibility in passing on such 104118. Several of the Presidents commented on the loan procedures followed by thei r respective Banks, on the extent of borrowing by certain groups of barov, bvithin their districts, and on the steps taken where it appeared that hatks were borrowing too freely. President Young said that certain member banks in the Seventh )19 12/9/52 District had been obtaining renewals of 90-day advances made under the authcritY of the last paragraph of section 13 of the Federal Reserve Act "he security of United States Government obligations, that this practice hsd been discussed with two or three of the member banks, and that the ileserve Bank directors last week decided to follow a policy of making no krther advances to member banks under this paragraph of the Act, thus lic)rcihig member banks to secure advances for periods not exceeding 15 %rs under the authority of paragraph 8 of section 13. There followed a discussion of the effect of an increase in the „ 4.1.scount rate upon borrowing by member banks and, although it was hot felt that such an increase would discourage banks from borrowing tor excess Profits tax purposes, some of the Presidents suggested that 8. cont inuation of member bank borrowing at the recent level would make 1u4Perative that serious consideration be given to discount rate President Leach remarked that it might be possible to obtain a bett Be general picture of the situation in January following the period sonal borrowing and that if at that time the larger banks were celltilluing to borrow heavily/ it might be well to give thought to a 4tter to the member banks regarding the appropriate purposes of bor141141g from the Federal Reserve, Chairman Martin referred to the discussion of discount rate policy W9/52 -15- atthe meeting of the Federal Open Market Committee yesterday and stated the Problem was one which merited continuous study by the members of the Board and the Presidents. 3. Payment by Federal Reserve Banks of notes of other Federal Reserve Banks. The Conference discussed the Board's letter of November 19, 1952, concerning the desirability of securing legislation to permit a Federal Reserve Bank to pay out notes of other Federal Reserve Banks. The Presidents wish to point out that this question was not considered on its merits at the September meeting of the Conference and that after full discussion of the matter at this meeting of the Conference they would favor repeal of the third and fourth sentences of paragraph 3 of Section 16 of the Federal Reserve Act to make it permissive for a Federal Reserve Bank to pay out notes of other Federal Reserve Banks. President Leach indicated that, based on earlier estimates, the 15rOp °Bed change in the law might result in a saving to the System as a vhoie Of as much as $750,000 annually. President Bryan said it was important to keep in mind that a 1 of technical problems would be involved if the law made it ' -°rY for a Federal Reserve Bank to pay out notes of other ReBerve /2anks and for this reason he would not want to see the System Be allY legislation until a statement had been prepared for the Cori:tr eB8 discussing these points. He thought it would be a grave kititak e/ eePecially in view of the long-established tradition, to %Ige the law except on a permissive basis under which the notes would 2051 12/9/52 remain the liability of the issuing Reserve Bank. President Bryan fore- "31 the possibility of a situation where a Reserve Bank might run short c3treserves 110;e8 and would choose to restore its position by sending back of another Reserve Bank. This concluded the discussion of the topics listed for considera- ti()rLat this joint meeting. Governor Robertson referred to his remarks at the joint meeting Of the Board and the Presidents on September 26, 1952, concerning the 11171'em being formulated by an interagency committee consisting of l'ePresentatives of the three Federal bank supervisory agencies to keep the b anking system in operation in the event of an emergency. that a He said draft of the plans had been completed and that at a meeting last Ileek or representatives of the three Federal bank supervisory agencies 1°4(1 the m - National Association of Supervisors of State Banks it was agreed that before submitting the draft to the National Security Resource3Board it °Ilia- be desirable to have the benefit of the views of the Reserve Bank l'reet clellta, the members of the Federal Advisory Council, and representatives Of t he State blnk ,,upervisors and the American Bankers Association. After Otj -.15 chat the committee wished to have these comments by the end of the Nrre lit month, Governor Robertson stated that at the conclusion of this 14 -co each President would be handed two copies of the statement of the 2052 12/9/52 -17Program, one for his own use and the other for transmission to the member Or the Council from his district with a request for his comments. Question was raised whether the material should be handed to the ... (1116going or incoming member of the Council, in those districts where 8. C ouncilman had been appointed for 1953, and Governor Robertson sug- gested that the matter be taken up with the individual now in office since his Vie%le were desired before the end of the year. Governor Robertson also stated that although he had discussed the, ' 1"°Posed program in very general terms with the Reserve Bank representattle, 88 who attended the recent meeting on emergency operations, it seemed 481-liable that the matter be kept confidential and that there be no disellsei .t0:4 with other Reserve Bank personnel at this time, and that after the yo_ 1118 were submitted by the interagency committee a decision would be " .,lether the program should be given broader distribution. etlIted He further -AL0.‘ the plan was to be submitted to a few of the State bank super- visors for comment but that he did not yet know the identity of that group. Governor Robertson said that at the meeting of the interagency 1*111 Ittee consideration was given to ways and means of getting the larger rcial banks to take proper precautionary steps to protect their assets, Nor 4, and personnel in the event of war emergency, it having been as411,411. 1/3 'ed through a survey that relatively few of these banks appeared to 12/9/52 -18- set up adequate programs. It was suggested, he said, that letters be Bent to the larger banks requesting certain information but it was his oIi that, in lieu of such letters, it would be preferable as a first stel)for the Presidents or other senior officers of the respective Reserve Beaks to discuss the matter personally with the commercial banks concerned. G°1161'llor Robertson stated that, if agreeable to the Presidents, the Board 11°1z1,4 ' send each President a letter indicating the commercial banks in his + -ev which should be contacted and the information which the Board votild like to have furnished to it regarding the programs of these banks. Following a discussion, it was understood that the procedure sugted loY Gove r Robertson would be followed. In response to an inquiry by President Williams whether there liere alq. Matters discussed at the Conference of Reserve Dank Chairmen in Nee. €4) Ilhich might be commented upon at this time, Chairman Martin said ere had been consideration of the objectives, scope, and content or the Public relations program of the System and that, while no formal 8 taken, he felt that the exploration of the nature of the problem %141 qtrt.t4 1-- helpful and that progress was being made, with an understanding that 6110, " a program would have to be carried out at the "grass roots". C leCI, however, that precise definitions of the concept of the problem t still be formulated. 12/9/52 -19Chairman Martin stated that the problems involved in Reserve klakbuel,, -6st procedures also were discussed with the Chairmen, that their l'e813°48ibilities for expenses in the light of the semi-public character or Federal Reserve Banks were stressed, and that the Chairmen were recitleated to convey to the other directors of their Banks that they 8141241 aPProach the budgets on the basis that they might be called upon to ju8tifY them before a Congressional committee. Chairman Martin then summarized the discussion with the Chairmen c't the Bc3ard'5 desire to establish beginning with 1954 a policy of rotation or Cl._ C directors under a plan whereby no director would be reappointed 41ter serving two full terms of three years each unless he was then designated 48°1141 and Federal Reserve Agent, in which event he might serve one r41)1's term for a total of not more than three full terms. Chairman Martin 1341 that the Board was are that the transition to this policy would inN.Ite certain problems and that it hoped these could be worked out satisractorily. Pr esident Bryan commented on the problems created by the policy iletlIg followed by the Federal Reserve Bank of Atlanta of limiting the 4t''g1ee of directors appointed to its branch IDoriiti Lo one full term. Pl'esident Gidney said that the Cleveland Bank followed the policy 41:01 *, It. 7 12/9/52 -20- (4141°rmtag all branch directors when appointed by the directors of the eiellatuld Bank that their service would be limited to one term. Thereupon the meeting adjourned.
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