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9;:plet4 Minutes of actions taken by the Board of Governors of the Fed eral Reserve System on Tuesday, February 12, 1952. PRESENT: Mr. Martin, Chairman Mr. Szymczak Mr. Evans Mr. Carpenter, Secretary Mr. Kenyon, Assistant Secretary Memorandum dated February 8, 1952, from Mr. Leonard, Director, Division of Bank Operations, recommending an increase in the basic Ilary of Caroline M. Clark, Clerk-i-tenographer in that Division, from 3,110 to $3,255 per annum, effective February 17, 1952. Approved unanimously. Letter to Mr. Hill, Vice President, Federal Reserve Bank of PhilaclelPhia reading as follows: In accordance with the request contained in your letter of February ), 1952, the Board approves the tip1 7intment of John Leo Dolphin as an assistant examiner or the Federal Reserve Bank of Philadelphia. If the !?Pointment is not made effective February 15, 19)2, as P-Lanned, please advise us." Approved unanimously. Letter to Mr. Clarke, Secretary, Federal Reserve Bank of New York, 1.44111 as follows: "The Board of Governors approves the reappointments Of Ms_ H. Me: p Arthur G. Nelson, Edward J. Noble and 44i11iam ? ...uch as members of the Industrial Advisory Committee ofrecond Federal Reserve District to serve for tems vi jfle Year each beginning March 1, 1952, in accordance the action taken by the board of directors, as reyour letter of February 7, 1972. "It Is noted from your letter that, in view of the small volume of applications for loans under Section 13b 1)0,14 91,34A 2/12b2 -2- of the Federal Reserve Act, the directors consider it inadvisable at this time to seek additional members of the Committee to fill the two existing vacancies." Approved unanimously. Letter to Mr. Patterson, Secretary, Board of Directors, Federal Ile8er'ie Bank of Atlanta, reading as follows: "The Board of Governors approves the appointments °f Messrs. John E. Fanford, I. C. Milner, George lainship, Luther H. Randall and Fhaxmon H. Gamble as members of the yldustrial Advisory Committee for the Sixth Federal Reserve Delstrict to serve for terms of one year each, beginning ch 1, 1952, in accordance with the action taken by the -°°ard of Directors of the Federal Reserve Benk of Atlanta, lae reported in your telegram of February 8, 1952." Approved unanimously. Letter to Mr. Peyton, President, Federal Reserve Bank of Minnea18) reading as follows: "On November 13, 1951, a group consisting pf two Reserve Dank Presidents and two Vice Presidents in e haree v of Personnel met at the Board's offices to discuss 4.8:Ys and means of implementing an expanded program of execuye development and training in the Federal Reserve System. As a result of the above meeting, several suggestions ere made which, it was hoped, the Conference of Presidents "Id discuss and then make whatever recommendations it "eeMed advisable to the Board of Governors. Accordingly, ; 3 311 111aY wish to arrange for some time on the agenda of the w() Jthcoming meeting so one of the Presidents, perhaps Mr. lliams, can discuss the suggestions which came out of the 07ember meeting." Pe 1 Approved unanimously. Telegram to the Presidents of all Federal Reserve Banks, reading roilowo: 230 2/12/52 -3- "The Board has received suggestions that conditions in the furniture industry (including floor coverings) are such as to call for some relaxation of Regulation U. It has been suggested that the exemption provided in the regulation be raised from *50 to $75 or *100 and, alternatively, that Group C items be delisted. "The Board would appreciate receiving your comments on the condition of the furniture market in your district and Your reaction to the specific suggestions mentioned above by Tuesday, February 19." Approved unanimously. Letter to the Honorable Clyde Doyle, House of Representatives, D. C., reading as follows: "This refers to your letter of February 2, 1952, in which you requested the Board to consider and report on an enclosed statement you have received from John M. Stokes, P .resident, Bellflower (California) Automobile Dealers' Ilssociation, Incorporated, regarding Regulation Irj--ConSumer Credit. "Mr. Stokes' statement presents arguments for a relaxation of the maximum maturity provided under the regulation as It applies to instalment credits for the purchase of . ZI)toMebiles on the West Coast. He expresses the view that West Coast depends more heavily on automobile transporta ' 10n than does the East Coast and that West Coast automobile maturities should be longer, particularly for new and late ira.el cars, than the 18 months maxinum under the regulation ! 4 caUse of the higher prices in that area resulting from he higher freight costs. Mr. Stokes also argues, on various Isr°unds, t that such a relaxation of the regulation would not uo inflationary. "It is a major concern of the Board, as you will appreciate) to design the consumer credit regulation on the basis cf : ,,rinoiples that ar,3 administratively practicable and equitable _or the various individual businesses that are subject to the ' l egulation. The regulation would lose much of its fairness and effectiveness if its requirements were made so complex or ItTrealistic that those affected could not readily comply with ell') or the Federal Reserve System could not suitably administer " 1, Also, the regulation would be subject to serious criticism `' 18 inequitable and discriminatory if it provided preferential J 231 2/12/:32 "treatment on the basis of a regulatory principle that was of limited application to a relatively small grouo of a large Class of Registrants. In the present case, a relaxation based on the extent to which a geographical area of the country depended on automobile transportation, or the extent to which the selling price was increased by freight costs, would raise very serious questions of administrative Practicability and equity. "It would be difficult indeed to arrive at a practicable and. equitable means for varying required instalment terms on the basis of community or area need for automobile transportation. Even assuming such a need could be measured readily, there would 'be a significant number of persons in areas where automobiles are less widely used whose need for automobiles 14°111d be greater than that of many persons in, say, the Los AnEeles area. In any event, corimunities more heavily dependent 1 11,0n automobile transportation are the places where the demand Or automobiles is greatest, and such a provision would accom121ish little except to weeken appreciably the restrictive efrects of the regulation. It shoulA be remembered that longer Pris:turities add to the final cost because they involve larger 111ance charges; they increase rather than reduce the cost °f automobile transportation. "The Board has carefully considered the question of prov til_41ng longer maturities under Regulation W on the basis of ,it5 higher freight rates on automobiles in the western states. ' lePresentatives of the National Automobile Dealers Association and associated West Coast dealers in a meeting with the Board °11 February 9, 1951, presented data and arguments for an amendMent to the regulation which would provide such longer maximum MatUrities on the basis of freight cost differentials. After careful study the Board decided against adoption of such an tillendment on the grounds that it would not only constitute an relaxation of the regulation but that it also would grant "4 unwarranted preference to a portion of those subject to the ' l egulation and would place an excessive administrative burden °11 the trade and on the Federal Reserve System. "Transportation charges, handling costs, and other similar c°8t5 must be reflected, in one way or another, in the selling lsice of a commodity. As a consequence, the problem which 4°11r constituent mentions with regard to freight costs is, in ,ealitY, a pricinE, problem rather than a credit regulation 6blem. As you know, the primary objective of regulation is curb the expansion of consumer credit, from the standpoint helping to control inflation. Therefore, it has seemed to J fl01(3 0„7-0CM:f -5H us that we must continue to relate the requirements of the regulation directly to the selling price of a commodity regardless of the components which make up that price. "There are other difficulties with this proposal to allow for automobile freight differentials under the regulation. For instance, freight charges as they relate to autoIllobiles are determinable only in connection with new cars. Nonetheless the price differential attributable to such Charges is, of course, reflected to some extent in the used car markets, and a provision that allowed longer maturities only for new cars, according to determinable freight costs, would discriminate against used cars. Also, it should be noted that higher used car values mean higher allowances for trade-ins so that the freight differential would be °ffset, at least in pert, in a great many instances. On the basis of equitable treatment for all, similar differentials in maximum maturities should presumably be provided for BP:glances, but freight rates for these would be diverse and difficult to determine in many cases. A major difficulty would arise in the operations of institutions financing rePaper under such a rule, because of complicated payment schedules for different areas and uncertainty as to whether Purchased paper was in compliance with the regulation. "In support of his view that relaxation of automobile maturities on the West Coast would not be inflationary, Mr. Stokes restates a number of the arguments against the regulatton that have been advanced from time to time by automobile dealers, finance companies, and others who feel that the regulation has unduly interfered with their businesses. Although the Board believes that such a relaxation of the regulation 140Uld be definitely inflationary at this time, in order not to delay our reply or unduly extend its length, we are not 114dertaking in this letter to answer these arguments specificallY. They are directed mainly against the terms of the regUlation in general and are not directly related to the qUestion of providing preferential treatment for automobile credits on the West Coast, which, we assume, is Mr. Ctokes' Primary concern. We should be glad to take them up in a 81113sequent letter, however, if you so desire. "We appreciate having this opportunity to outline our ewn on this question and shall be glad to provide any addiional information that you may require on consumer credit re gulation or other matters for which we have responsibility." n Approved unanimously. -6- 2111452 Letter to Mr. Erickson, President, Federal Reserve Bank of Boston, read-ing as follows: "This refers to your letter of December 7, 1951, and enclosures relating to apparent violations of Reaulation W by Park Motor Co., Auburn, Maine. "Your letter states that in view of the seriousness of the case, the matter was being forwarded directly to the Board Without a disciplinary conference, for such action as the Board may deem advisable under the circumstances. "The report indicates that in the period from December 1, 1950 to September 25, 1951, the registrant made twentyfour sales which were apparently in willful violation of the Regulation, and in twenty-two of these cases the reristrant had accepted side notes as part or all of the down Payment required by the Regulation. "The case would appear to be one in which it would be desirable to complete the investigation in order that the B°Rrd may be in a position to decide what action it should . ake. Accordingly it will be appreciated if you will have he investigators make customer contacts and forward reports thereof to the Board. In making such contacts, It will, of course, be desirable to ask the customers the names of the Persons with whom they dealt and any other circumstances Which would help fix responsibility for the violations and 811P-Plement the evidence already contained in the report." Approved unanimously. Letter to Mr. Gidney, President, Federal Reserve Bank of Cleveland, e".1.11Fr as follows: "Receipt is acknowledged of your letter of February 8, , 952, regarding the case of Pacific gtores, Inc., Cleve.tand, ohlo, which you had referred to the Board with your letter of September 10, 1951. "You state that, after the investigation which rave rise to your letter, a number of customers were interviewed 4.14 a further eycmination of the records of the registrant ' /41.s made, which showed only three violations, which in the °Pinion of your Bank were not willful. 234 2/12/52 -7- "In the circumstances, in view of the principles set forth iiiW-179, you recommend that action against this registrant be held in abeyance pending further investigation. "The Board concurs in this recommendation." Approved unanimously. Memorandum dated February 6, 1952, from Mr. Tcwnsend, colicitor, l'eccillinencling that in accordance with the recommendation of the Federal ReS n ye 1,ank of Now York the matter of Charles A. Monroe, doing business "ellree Motor Sales, Lackawanna, New York, a registrant under Regulation W, co, 'sumer Credit, be referred to the Department of Justice for the 1 stit ' - 10n of such criminal proceedings as that Department might deem 8.1)33`r°13rfate, Approved unanimously. Telegram to Mr. Olson, Vice President, Federal Reserve Lank of Chicaeo) reading as follows: Be"In reference to your telephone conversation with Mr. 411er, on February 1, relative to a Canadian insurance com12anY which is considering making real estate loans with re.1)ect to real property situated in the United States on terms ire liberal than is permitted for a Registrant under Regula,on Y, in our opinion the remllation as issued would not hfbit such transactions. This assumes, of course, that Company would not e), tend such credit by moans of a sub]. 'tarY company, loan correspondent, representative agent, / or other person located in the United Ftates who is , ,?er, Ae gistrant." T T! Approved unanimously. Letter to Mr. Guilford Glazer, Oak Ridge Properties, Inc., P. O. 13-23 Oak Ridge, Tennessee, reading as follows: 2/12/52 -8- "Le acknowledge your letter of December 13, 1951, to Which was attached a photostatic copy of a letter, dated December 10, addressed to you by the Federal Reserve Bank of Atlanta regarding the community shopping center which You propose to erect in Oak Ridge, Tennessee. Among a number of matters discussed in your letter, you ask about the procedure to be followed to procure an exemption from Regulation 7 for the proposed project, and you state that it is your belief that Regulation Y was not meant to have the effect of stopping a project so vital to the interest Of national defense as this project. "At various times during the pact several months, we haVC discussed with you the provisions of Regulation T in respect to nonresidential construction, and we have brought 0 your attention the effect of the regulation on the proPosed construction of a shopping center at Oak Ridge. Vie are sure that you are aware that for the purposes of iiegula1°n Y a shopping center is considered to be a nonresidential structure or structures, and therefore either construction °r 1)erm61ient financing in relation thereto would be subject O the nonresidential provisions of the regulation. Several P.rovisions for the exemption of projects such as yours were initially available at the time the nonresidential amendment 14as issued, on February 15, 1951. For example, section Al.) ° J. the regulation provides that credit eytended on nonresiden8-1 construction started prior to February 15 was exempt if j e Permanent financing of the property had been accomplished ;:thin 32 days after completion of construction. Also, sec_lon C(b) provides that any credit is exempt if it is to be t,xtended pursuant to a firm written agreement with a Registrant :11, 84e before February 15, 1951, under the terms of which the lAe gistrant is required without option or discretion on his Iepart to extend credit upon demand by the borrower or upon °111Pliance by the borrower with one or more conditions re, erred to in such agreement. Moreover, section 5(g) of the : egulatton provides that a builder who had made substantial ' commitments with a view to the building of new construction 1, Who asserted that his inability to obtain financing on 14 basis originally contemplated by him and a Registrant cause him a clear and substantial financial hardship, to a Federal Reserve Bank for an exemption if apply CouldE Uch application was properly made prior to April 15, 19,)1. "These various bases for exemptions from the regulation we re Provided for the purpose of establishing an uninterrupted J Z 236 2/12/32 -9- "transition from a period of nonregulation to one of regulation without the creation of hardship or inequity to those persons affected. These exemptive provisions gave full recognition to the fact that most building projects are the culmination of manY months of previous planning, preparation, and arrangement, 811c1 were adopted after extensive consultation with trade organizations representing the real estate finance and building industries. Through the employment of such exemptive provisions, tl?.e. construction industry was protected against disruptive conditions that otherwise could have supervened and brought about aIi unfavorable outcome to the establishment of credit regulations. . "In your own case, it would appear that you had taken no action before February 15, 1951, sufficient to qualify you to aPplY for exemption under the above provisions; however, you re convinced that the shopping center at Oak Ridge is vital 0 the interest of the national defence and on these grounds Y011 have sought exemption under section )(m) of Regulation Y, , 14111ch applies to essential nonresidential defense construction. ' 11 Your letter, you have asked about the applicability of this section of the regulation to your construction project, as well a- the definition of the word 'essential'. . The purpose of this provision of the regulation is to ;,8_lst departments and agencies of the United. Ftates Government ich have a responsfbilty to further construction in connec41011 with legislative or administrative programs essential to le national defense. For example, some Governmental agencies ,: 41 lie a legislative responsibility to encourage the construction n certain types of privately-owned facilities because of their ' cl.ilrect or indirect employment in defense activities. A charteerietic exemple in this connection is the provision of eerr,1 types of storage facilities, especially for liquids of ous, kinds in localities where a critical shortage of such A:call-ties is believed- to obstruct defense activity. The te rmination as to the essentiality of nonresidential con!.(tirlaction to the national defense is made by the head or , iste.nt head of an appropriate agency or department of the Government, and if such a certification is made toEtates a Federal Reserve Bank, that Bank will issue a certite of exemption. The determination as to essentiality 011Y discretionary with the departmental or agency off'DraJ- coneerned. It has not been possible for us to prepare ec,ectee standards or definitions as to what factors constitute sentiality to the national defense in respect to nonresidential Z j 237 2/12/52 -10- It construction, since the legislative and administrative programs of Governmental agencies are so dissimilar and unrelated that any attempt to provide a precise statement as to essentiality might favorably assist some but grossly impede others in the discharge of their official responsibilities. Hence, would say that the determination as to the essentiality to the national defense of the community shopping center depends essentially on the decision which is made by the Atomic Energy Commission, which, in company with other departments and agencies cf the united tates Government, is fully empowered to avail itself of the exemption provided by section XIII) of Regulation Y. In the second and third paragraphs of your letter, you state that it was your understanding that officials of the /ederal .aeserve Bank of Atlanta intended to enter into conversations with officials of the Atomic Energy Commission in arl attempt to arrive at some sort of basis for permitting exemption of your project from Regulation :'. You also state that you understood that the proposed project would be presented to the Board of Governors in an attempt to arrive at Some basis for exemption from Regulation Y. The Federal Reserve Bunk of Atlanta has informed us that it made no st:tteraent to the effect that it would undertake to have the proposed construction declared exempt. However, they did advil,e 48 well as Mr. Sapirle, Manager of the Oak Ridge Operations the Atomic Energy Commission, that they were submittinL; 'tie matter to the Board for consideration. During your revisit to Washington, you wore informed by us that the c°rrespondence alluded to above was being carefully reviewed that, if the facts therein disclosed any basis for an s r4eMption from Regulation Y, the Reserve Bank would be int°rMed of our conclusions. After thorough consideration of itie Matter, the Board concluded that the facts presented to Yielded no basis for an exemption of the proposed con°-cruction from Regulation 7. v . "We would like also to call to your attention the prodislons of Amendment No. 8 to Regulation 7, covering nonresilielltial leases, and its effect on extensions of credit for f°nresidential construction on leased land, as set forth In v??tflote 18a, to section 5(o). A copy of Amendment No. 8, t‘lich includes section 5(o) and footnote 18a, is enclosed, 4°gether with a copy of the statement to the press. hope that we have fully answered your letter and will be w g clad -Lad to discuss the matter with you at any time you are in ctthineton." 238 2/12/52 -11Approved unanimously, with a copy to Mr. Denmark, Vice President, Federal Reserve Bank of Atlanta. Letter to Mr. Alva C. Pepper, Pepper Real Estate, e616 Georgia Allen") Silver Spring, Maryland, reading as follows: "This refers to your letter of January 30, 1952, to Mr' Henry Benner, Assistant Director of the Division of F'elective Credit Regulation, which requests information concerning Regulation Y--Real Estate iredit. "As you know, Regulation X was issued under the authorItY of the Defense Production Act of 1950. The need for this Act arose in June 19)0, as a result of the defense preparati°ns that followed the Korean outbreak. At that time the _national economy was enjoying a high level of prosperity. The home building industry was halfway through its greatest Y6ar on record. There were 1,395,000 new housing units tarted in 1950, which brought about an unprecedented con11171Pt10n of materials and expansion of mortgage debt. The ' l r°131em of imposing a defense program on a high-level economy rilecessarily means that some productive power and materials f1st be diverted from civilian to defense uses, and that Ilcreased incomes bidding against a mailer supply of civi4•14n goods would add further to existing inflationary pressures. "One of the fundamental aims of the Defense Production j'e"; of 1950 is to accomplish the required diversion of critinaterials from civilian to defense uses and at the same hlrne restrain inflationary forces. In view of the fact that rTile building and the expansion of mortgage debt were occurat an unprecedented rate, it Was essential that efforts ti made to aplAy restraint in this area. The need for coni ' llued restraint in real estate credit expansion is evident „.?_ the record for 1951, when 1,090,000 new housing units were ;,..arted and mortgage debt increased by an estimated 6.) bile L011 dollars. This need is further accentuated by the proposed 3cPan3ion in the flow of materials to defense uses. "You express particular interest as to whether a'hardsh 1.1) clause was provided in Regulation Y. Although there is f ) Provision in Regulation 7 for administrative determination 0 11( ti e enptions on an individual basis, Section 5(g) of Reguladid provide in certain circumstances for exemptions due t211 financial hardship for persons who had made substantial commitments or undertakings prior to August 3, 1950. To take 239 2/12/52 -12- "advantage of that clause, it was required that the facts of the case be presented to the Federal Reserve Balk of the district in which the applicant conducted his business by March 15, 1951. Thus, builders who had not begun construction but Who had made substantial financial outlays prior to August 3, 1950, were given the opportunity to request an exemption from the terms of the regulation. This exemption provision has exd. Another type of hardship exemption was also provided in Eection C(b) of the regulation fcr credit extended pursuant to firm commitments made prior to the effective date of the reguation, October 12, 1950. As previously indicated, however, 'here is no prevision in the regulation for lifting its provisions whore a builder is finding difficulty in selling houses such as the two you describe in your letter. "The exemption provisions described, as well as the general Provisions of Regulation Y and the companion regulations of the l'ederal Hou.ing Administration and the Veterans Administratfen, "re the result of the most painstaking consideration, and were not adopted until they had been submitted for consideration' representative of the construction and real estate finance industries. In the sections indicated above, every possible llowance was made to avoid the creation of inequitable Eituaii°118 by the establishment of real estate credit terms on an clustry which is typically involved in substantial time lags etween the planning and completion stages. The exemptions l'anted initially were considered to be sufficient in duration ;4) allow members of the industry to incorporate Regulation . 11to their Plans without creating undue hardship. Fubsequent _c? the termination of these exemptions many builders have reIcted their operations or have altered their original plans te icause of Regulation 7. Obviously, the aim of the regula14°11 is not to cause builders or others hardship, but we heYOU will agree that unless its terms are equally restricto all, the regulation cannot have the desired effect of °4d ing down credit expansion with consequent additions to 4 .Lnf laticnary pressures. "We hope that this information will clarify for you tie 11.°Ifisions of Regulation 7, in the light of the efforts being 1346-e to control inflation during the nation's present defense 111°Cram. If you desire any further information or assistance, ;I ease feel free to call upon the Federal Reserve Bank of Richor its Baltimore branch." Z r Approved unanimously, with a copy to the Federal Reserve Bank of Richmond. 240 /12/52 -13Letter to the Presidents of all Federal Reserve Banks, reading 4 r011014Ts "Two questions have teen raised concerning registration under Regulation Y. They may be stated as follows: ]. Must a person who has not filed a registration statement comply with the regulation in making his fourth reel estate credit extension during the year? In making a credit extension which would make the amount extended bY him during the year exceed $50,000, for example, a single loan of $51,000? 2. May a person who is engaged in the business of extending real estate credit, but who has not filed a registration statement within the allotted time, extend nonconforming credit on grounds that he is not a Registrant, and therefore not affected by the prohibitions in the regulation which state 'no Registrant shall .* * *?? . "In answer to the first question, it is the Board's °Pinion that a person becomes 'engaged in the business' in .:king a real estate loan which is either his fourth exten1118 sion of credit during the year or which makes the amount ,3(tended by him during the year exceed $50,000. Therefore, e is 'deemed to be registered' in making that loan and is a Registrant' who must make the loan on terms which comply vith the regulation although he has 30 days thereafter in which to file a registration statement. "In answer to the second question, it is the Board's °Pinion that such a person is no longer 'decmed to be re5steredt if he has not filed a registration statement in allotted time and therefore Is not subject to the proaibi tions of the regulation which state that 'no Registrant shall * * *,. (Underscoring supplied.) However, such a ,rson is prohibited by section 3(a) frcm making any exten1).s sion of real estate construction credit. "These questions and answers are technical in nature, 11.114 we are enclosing for your 4 nformation a copy of a memoof the reasoninf, supporting the Board's conclusions." Approved unanimously. 4(Aivrtill Secretary.
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