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Minutes for February 13, 1959
To:
Members of the Board
From: Office of the Secretary
Attached is a copy of the minutes of the
Board of Governors of the Federal Reserve System on
the above date.
It is not proposed to include a statement
with respect to any of the entries in this set of
minutes in the record of policy actions required to
be maintained pursuant to section 10 of the Federal
Reserve Act.
Should you have any question with regard
to the minutes, it vill be appreciated if you will
advise the Secretary's Office. Otherwise, if you
were present at the meeting, please initial in column A below to indicate that you approve the minutes.
If you were not present, please initial in column B
below to indicate that you have seen the minutes.
A
Ohm. Martin
Gov. Szymczak
Gov. Mills
Gov. Robertson
Gov. Balderston
Gov. Shepardson
Minutes of the Board of Governors of the Federal Reserve System
on Friday, February 13, 1959.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
The Board met in the Board Room at 10:00 a.m.
Martin, Chairman 1/
Balderston, Vice Chairman
Szymczak
Mills
Robertson
Shepardson
Mr. Sherman, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Thomas, Economic Adviser to the
Board
Mr. Hackley, General Counsel
Mr. Molony, Special Assistant to the
Board
Mr. Noyes, Adviser, Division of Research
and Statistics
Mr. Solomon, Assistant General Counsel
Mr. Hexter, Assistant General Counsel
Mr. Hostrup, Assistant Director, Division
of Examinations
Mr. Nelson, Assistant Director, Division
of Examinations
Mr. Hill, Assistant to the Secretary
Mr. Brill, Chief, Capital Markets Section,
Division of Research and Statistics
Discount rates.
Unanimous approval was given to the establishment
without change by the Federal Reserve Banks of Richmond, St. Louis,
MinneaPolis, Kansas City, and Dallas on February 12, 1959, of the rates
discounts and advances in their existing schedules.
Items circulated to the Board. The following items, which
had been
circulated to the Board and copies of which are attached to
these minutes under the respective item numbers indicated, were approved
Unanimously:
Eflt5red meeting at point indicated in minutes.
(;99
2/13/59
-2Item No.
Letter to the Millburn-Short Hills Bank, Millburn,
New Jersey, granting an extension of time within
*itch to accomplish membership in the Federal Reserve
System.
For transmittal through the Federal Reserve
Bank of New
York)
1
Letter to the Federal Reserve Bank of San Francisco
requesting
additional information with regard to the
aPPlication of First Security Corporation, Salt Lake
City, Utah, for a prior tax certification.
2
Letter to the Senate Committee on Banking and Currency
Concerning S. 131, a
bill to amend section 2(h) of the
Bank Holding
Company Act of 1956. (With a copy to the
Bureau of the Budget)
3
Messrs. Hostrup and Nelson then withdrew from the meeting.
Withdrawal and substitution rules.
Discussion of the withdrawal
"d substitution rules under the Board's margin regulations at the
Meeting on
January 13, 1959, concluded with the understanding that the
matter would be considered again after the December figures on stock
market
credit became available.
In the light of those figures, which
Showed a further increase in credit, there had been distributed to the
Board,
with a covering memorandum from Mr. Young dated February 121 1959,
Bummary of recent developments in the stock market and a listing of
reas°11s that might be given for and against modification of the present
withdrayal and substitution rules.
Following comments by Mr. Brill based on the information contained
in the
memorandum on stock market developments, there was a general
disellsaion of the recent trend of stock market credit and the effect of
*
2/13/59
-3-
the two
increases in margin requirements made by the Board last fall.
There was also discussion of the impact of stricter withdrawal and
sub
stitution rules on brokerage house operatiom, as well as the possible
effect of a tightening of the rules on the course of the market under
various circumstances.
Governor Mills raised the question whether a tightening of the
ith-rawal
and substitution rules might not do more to damage legitimate
trading in the stock market than to prevent an excessive use of credit.
The
effect, he suggested, might be to drive stock market credit underwhere it could not be reached.
Governor Robertson agreed that immediate tightening of the
'withdrawal and substitution rules to a parity with the current margin
requirements would have too harsh an effect. It was his view, however,
that
m start should be made toward closer alignment so that eventually
the
zargin requirements and the withdrawal and substitution rules could
be ,
Pa-aced on a comparable basis. While he was not sure how much tightening
°r the rules would be appropriate at the present time, he was impressed
by the
arguments in favor of some change.
Governor Shepardson directed a number of technical questions
to the staff regarding the withdrawal and substitution rules and related
414tters, following which he stated that he found it difficult to determine
%that Should
be done in this area.
While he was concerned about the
1)1"/ he did not at this time have a solution.
2/13/59
-4At this point Chairman Martin joined the meeting and Governor
Balderston summarized for him the discussion thus far.
At the Boardts request, Mr. Solomon reviewed the nature of
Changes that
might be made in the withdrawal and substitution rules to
implement the
suggestion of Governor Robertson.
There followed further comments by the staff with respect to
the o
peration of the withdrawal and substitution rules, after which
cons
ideration was given to the problem of unregulated lenders and the
reas01111 why the Board thus far had concluded not to extend the margin
re
gUlations to cover them.
Governor Balderston observed that the volume of reported stock
niarket credit had increased less rapidly in recent months, which might
l'ericct the
margin requirement
te all "negative carry".
increases along with a factor he referred
It was understandable, he said, that a certain
11111°11nt of credit was needed simply to lubricate the market.
However,
the existence of underground sources of credit left an implication that
the Board was not
pursuing its regulatory job properly. He felt that
Reg
ulation U offered a possibility for diminishing the flow of credit
to the _8e
sources and that it would be appropriate to consider tightening
the
Pr°visions of that regulation, even if the success achieved thereby
vas ,
0-11-1-3, moderate.
V -;•
2/13/59
-5At Governor Balderstonts request, Mr. Solomon then reviewed
steps
that might be taken to tighten the provisions of Regulation U,
as outlined in a memorandum from him to the Board dated November 4, 1958.
Chairman Martin expressed the opinion that all of the possibilities
tentioned at this meeting should be studied carefully in order to see
what they would involve.
If the point had been reached where the Board
considered various actions necessary, he felt that those steps should
be taken
without regard to the effect on relationships between the Board
and the stock market community.
He doubted, however, that the Board
should try to change the character of the stock market under the guise
Of r
egulating credit.
As he saw it, the crux of the problem was that
PeoPle currently
had an aversion to fixed-income securities and preferred
t° Place their
savings in common stocks, and he questioned how much
ccalld be done by regulation.
Furthermore, he would be reluctant to
inake operations more difficult for those endeavoring to abide by the
1/1'escribed regulations because that might simply encourage the fringe
eleillents that try to evade the regulations.
Nothing in the history
f the pertinent legislation indicated any intent to eliminate credit
rr(341 the stock
market entirely, he pointed out, and the amount of stock
tarket credit
was modest compared with that used in other segments of
the economy.
The volume had not increased substantially since the margin
IseclUirements were increased to 90 per cent and some ammunition should be
held in
reserve for use in the event of a further bulge in stock market
Retivit
2/13/59
-6In a concluding comment, the Chairman indicated that he would
favor a fixed pattern of withdrawa
l and substitution rules.
Governor Robertson agreed and said that he would have the same
feeling with respect to margin requirements.
He suggested, however,
that any move
in the direction of aligning the withdrawal and substitution
rules with the
margin requirements would be more feasible in a period
of UPsving than at another time.
Governor Szymczak referred to the difficulties involved in
administering
selective credit controls, especially where the applicable
statutes were vague.
As to moves that might be made currently, he
suggested the possibility of working in the direction of tightening the
nlargin regulations from the standpoint of their applicability to bank
lenders and expressed
the view that a moderate tightening of the withcire148.1 and substitution rules would permit the Board to gain some
exPerience.
The real problem, he said, was to try to work out something
that "would be both workable and understandable.
The discussion concluded with the request that Mr. Solomon prepare
for
the Boardts
consideration a memorandum describing steps that might
be taken
to carry into effect actions along the lines that had been
sUggested at this
meeting.
All of the members of the staff except Messrs. Sherman
Ti then
withdrew from the meeting.
and
2/13/59
-7Subpoena served on Agent's representative. Reference was made
to a telephone call received today by Mr. Solomon from Mr. Victor
Pregeant
of the Federal Reserve Bank of Richmond regarding a subpoena
1.11a2s.
tecura served upon Mr. T. W. Bagby, Federal Reserve Agent's
Representative at the Charlotte Branch, to appear on February 161 1959,
in the United States District Court for the Western District of South
Car°1ina, at Greenville, South Carolina, in the case of the United States
vs.
.22.IPSILyoadus
J
p
.
Crawley to produce records relating to the issuance,
Shipment,
and serial numbers of certain currency.
It was understood
that the information requested was contained in the records of the office
f the Federal Reserve Agent and was desired by the Court in connection
'with a
prosecution for robbery.
The Secretary was authorized to send a telegram to Mr. Decker,
?ederal Reserve Agent at the Richmond Bank, with a copy to President
Leach/ advising that the Board, pursuant to section 9 of its Rules of
genization, authorized Mr. Bagby to appear and produce the information
r"Nested and testify in connection therewith.
§:_tliEly_pf Government securities market.
Governor Mills said he
had a matter he would like to bring up and that he hoped these comments
l'°111c-i be relayed to Mr. Young.
He referred to the outline that had been
131sePared by the Division of Research with respect to the proposed
TreEte,
'
11/7—Federal Reserve probe of the Government securities market.
Re Su
ggested that thought be given over the week end to that outline
I,-
-8-
2/
13/59
and to the scope of the study that was indicated.
The study program
ss presented would go beyond the original thinking of the Board, which
'was to be a crash program that would produce the facts on the speculative
ings and the collapse in prices of Government securities in the spring
"
and summer of 1958 and on the basis of these facts to provide a better
linderstanding
that would help answer questions that might be directed
to the Chairman and to the System about the Government securities market.
The
study that the Research Division now had in mind would be a fullStudy of the character of the Ad Hoc Subcommittee study in 1952,
vhich 'would go over a period of perhaps six months and would be divided
tvo sections: one factual and the other having to do with a research
,
stud
Y that would delve into the structure of the Government securities
illal‘kst and come up with positive recommendations on improvements that
Might be made which the Board could recommend to the Congress.
Governor Mills said that the problems that occurred to him in
sUch an extensive study were likewise ones that would have to do with
each of these divisions of thinking.
sentiment
To get the facts, there was the
in the Research Division that hearings would be held and that
different financial groups would be invited to attend.
It vas also
e°11temPlated--and this he would think would be proper--that questionnaires
14°111d be
transmitted to financial concerns and others to elicit individual
eisessions concerning the nature of the market.
However, if hearings
(
2/13/59
-9-
were held there might be a different climate than that which existed
at the
time of the Ad Hoc Subcommittee hearings which was a purely
research study on the structure and operation of the Government securities
market.
A hearing held under the conditions that now exist would be
almost equivalent to an adversary proceeding. (Both the Federal Reserve
and the
Treasury had indicated criticism and the Treasury was coupled
*with the
proposed study.)
This would be almost like a Grand Jury
investigation, Governor Mills suggested, which would be the
sort of
thing he felt should be stayed away from.
4
The approach should be on
friendly basis with consultations, if possible, in the offices of
the firms interviewed in order to get what help could be gotten informally
°11 the
basis of the judgments and experiences of individuals closely
Identified with market practices.
Governor Mills said he also had the feeling that a full-blown
l'eseerch study that came up with recommendations for legislation might
be
vl-e-empting the authority of the Congress to hold hearings and to
drav out the same
kind of information that this study would be seeking.
As to the personnel problem, Governor Mills understood that in
"Pending the scope of the proposed study to the one now tentatively
in m4
said there were three study groups contemplated, each having three
Illeinbera including a chairman. Each would develop a report in a particular
rield
°- inquiry. His feeling would be that if a research study of any
20/13/59
-10-
extent were undertaken it might be preferable for one man to go into
each of the
questions and to prepare his paper which would then be
submitted
to others for critical examination.
The other procedure
‘lould involve much greater use of time in making the study.
Governor
14111e concluded his comments by saying that these were his reactions
to the
outline which led him to feel that it would be desirable to
give thought to the subject and to have a discussion of the matter
Promptly.
Chairman Martin suggested that the members of the Board think
bout this
suggestion over the week end.
The meeting then adjourned.
5
Secretary's Note: Pursuant to the recommendation
contained in a memorandum dated February 12, 1959,
from Mr. Young, Director, Division of Research and
Statistics, Governor Shepardson today approved on
behalf of the Board the appointment of James W. Ford
as Economist in that Division, with basic annual
salary at the rate of $12,0751 effective the date
he assumes his duties.
Sec e
(4
,,
1
f3:7:4
BOARD OF GOVERNORS
OF THE
Item No. 1
FEDERAL RESERVE SYSTEM
2/13/59
WASHINGTON 25. D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE SOAR°
February 13, 1959.
Board of Directors,
Hillburn-Short Hills Bank,
Millburn, New Jersey.
Gentlemen:
d through the
In accordance with a request submitte
Governors exFederal
Bank of New York, the Board of
-Short
tends to May 25, 1959, the time within which Millburn
to
Hills Bank, Millburn, New Jersey, may accomplish admission
the
in
172embership in the Federal Reserve System, as outlined
Idoardis letter of November 25, 1958.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
Item No. 2
2/13/59
ADDRESS OFFICIAL COFRESPONDENCE
TO THE BOARD
February 13, 1959.
tll's E. R. Millard, Vice President,
',ederal Reserve Bank of San Francisco,
oan Francisco
20, California.
°ear Mr.
Millard:
certification .„ This refers to the application for a prior tax
1ied by First Security Corporation ("First"), Salt Lake City,
After further analysis of the application dated September 4,
1958
,1, and the supplemental information furnished with your letter
respect to
uecer
mbe 9, 1958, there remain ceftain questions with
Which
additional
as follows:
desired
are
information
clarification and
4
1. Western Investment Company. The stock of Western is
?wiled
by the proposed new holding company ("corporation"). In
the r,
west-rlginal application, First stated that after the distribution
c,_ ern would be engaged solely in liquidating assets acquired from
JrPoration
and from Corporation's subsidiaries. The Board's letter
O
ctober 9, 1958, included the following sentence:
to be
"As
certain assets of Western have been held for some years and
it would appear from First's annual report for 1957 that the
Inaior portion, if not all, of Western's notes receivables
Probably were not acquired from First or its subsidiary banks,
is deemed necessary to have First substantiate its statement
that Western 'will be engaged solely in the business of liquida,ng assets acquired from the New Holding Corporation, of which
will be a subsidiary and from the subsidiary banks of the
New
Holding Corporation."
Pi
rstts
Bette
letter of OcLober 31, 1958, quoted only that portion of the
lencing with the words "it is deemed necessary," and went
Z4011
:ZaZin "We are of opinion that assets of Western Investment
Corp:?, which consist of property acquired by it from First Security
tor t ation or from subsidiary banks of First Security Corporation
eve,"e Purpose of liquidation, may be retained by it for such purpose
whi;hafter divestiture. All the assets of Western Investment Company
kct wicli° not qualify under the exception of Section 4(c)(1) of the
4 be disposed of by Western Investment Company prior to
qv'
estiture.fl
SOARD
Mr. E. R. Millard
OF GOVERNORS OF T1-4E FEDERAL RESERVE SYSTEM
-2
From First's annual reports to the Board, it is noted that
some of the
securities owned by Western at December 31, 1957, were
la)Pparent4 held
at or prior to December 31, 1948, and others have
_ een acquired since 1948. At the end of 1957, Western also owned
mbership5
in several clubs and held notes, accounts, and real-estate
ntracts receivable, aggregating )107,800.
7
Under the provisions of section 1101(c)(3), First can distri
bute
to
property which, under section 1101(b)(1) it
t'
could distribute directly to its shareholders...., and other property
(except
prohibited property)." The property which could be so distribunder section 1101(b)(1) is stock of controlled banks or bank
hor
tv, ding companies. Therefore, in order for the Board to certify that
e4e exchange and distribution of Western's shares is "appropriate to
w;.114ctuate the policies" of the Act, it is necessary to ascertain
the
the category of "other
her ( stock of Western falls within
ProPerty
ft
except prohibited property)
.
In other words, in order for the Board to certify that the
dietrIN
-1-ution of Western's shares is "appropriate," the Board must be
1
11F
. :tee'. that Western's shares do not constitute prohibited property.
provisions of section 4(c)(1), this means that Western must
co_engaged solely in liquidating assets acquired from First or
(1:oration and
the subsidiary banks. In this connection, it is
liZisable that First be requested to furnish the following inforZ
As to the assets (other than cash) of Western as of
December 31, 1958:
For each security, show the information required by
Schedule A of Form FR-Y6.
For each note, account, and contract receivable,
show the information required by Schedule B of
Form FR-Y6.
Furnish a description of each other asset.
For each asset under (a), (b), and (c) immediately
above, show:
(1) The date acquired;
From whom acquired;
Whether such asset will be retained by Western
uoArzo
Mr. E. R. Hillard
RESERVE SYSTEM
OF GOVERNORS OF THE FEDERAL
3
or disposed of and, if the asset is to be disposed of, will such asset be held by Corporation
or First Security Company; and
(4)
For each asset to be retained by Western which
has been held more than two years, a statement
as to the reasons for not having liquidated such
asset.
. A statement as to whether Western will engage in any lend2
ing operations whatsoever.
2. First Security Company. From the December 31, 1957,
annual report of First, it is noted that First Security Company had
1 1es and accounts receivable aggregating $101,000. Approximately
2
,%
were from stockholders, directors, or officer3, and $79,000
4 a receivable from others. From the September 30, 1956, report of
Xamination of First, it appears that some of these loans were made in
;oinnection with the acquisition of qualifying shares by directors of
1 st18
be
i'
subsidiary banks. The making of such loans would appear to
the
services for subsidiary banks. However,
it 8 category of performing
the
questionable whether the other loans are in that category, and
those
bas:!f°re, First should be asked whether any loans other than
Security
First
of
assets
as
"on qualifying shares will remain
com
to„PanY at the time that company is acquired by Corporation. If so,
each such loan, furnish the same information as required for
t
desternl
in -LOD)
and 1(d) above.
3. In order to eliminate any possible question as to the
etat"
the *' of the shares of Idaho Investment Company in connection with
tio Prohibitions of section 4, First should furnish definite informato whether Idaho Investment Company will be liquidated prior
to
the distribution of shares of First Security Bank, Rock Springs,
L or
'
poration.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
r,1 "2
BOARD OF GOVERNORS
OF THE
Item No. 3
2/13/59
FEDERAL RESERVE SYSTEM
WASHINGTON
OFFICE OF THE CHAIRMAN
February 13, 1959.
The Honorable A. Willis Robertson, Chairman,
Committee on Banking and Currency,
United States Senate,
Washington 25, D.
C.
Dear Mr. Chairman:
A letter of January 15, 1959, requested a report on
s 131, a
bill to amend section 2(h) of the Bank Holding Company
Act of 1956.
Section 2(h) contains an exemption from the Act for
"any corporation or community chest, fund, or foundation, organZed and operated exclusively for religious, charitable, or
educational purposes, no part of the net earnings of which inures
to the benefit of any private shareholder or individual, and no
substantial
part of the activities of which is carrying on
propaganda, or otherwise attempting to influence legislation."
131 would amend section 2(b) so as to also exempt from the
n
4ct any
corporation all of whose stock is owned by an organizatio
of
all
and
Act
the
of
provision
,_temPt under the above-quoted
)
!
"nose net income is turned over to such an exempt organization.
The Board's views concerning the exemption were stated
Ln R
ecommendation 9 in the Board's report of May 7, 1958, to
pursuant to section 5 of the Bank Holding Company Act.
For convenient reference, there is enclosed a copy of this
;or
ecommendation, which suggested the complete elimination of the
exemption
If Recommendation 9 were not adopted, the Board
believes that in the alternative certain modifications of the
would be desirable, including its possible broadening
along
1-ong the lines contemplated by S. 131.
'
Act
However, instead of piecemeal amendments to the
be
would
it
that
believes
such as proposed by S. 131, the Board
on
whole
a
as
Act
the
Preferable for consideration to be given
'/,1? basis of the Board's report to Congress of May 7, 1958, to
Which was
appended as Exhibit A a draft bill incorporating the
°ard's recommendations for changes in the Act. As indicated
64g
The o orab e A. Millis Robertson
4
.411 IV letter of January 19, 1959, to the Committee the Board hopes
that its report and recommendations will be considered by your Committee during this session of Congress.
Sincerely yours,
4cios
@FedFRASER