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226 A meeting of the Board of Governors of the Federal Reserve 4Yetem with the Federal Advisory Council was held in the offices of the Board of Governors in Washington on Monday, February 14, 1944, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymczak McKee Draper Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Goldenweiser, Director of the Division of Research and Statistics Mr. Smead, Director of the Division of Bank Operations Mr. Paulger, Director of the Division of Examinations Mr. Parry, Director of the Division of Security Loans Mr. Dreibelbis, General Attorney Mr. Wyatt, General Counsel Mr. Berntson, Clerk in the Secretary's Office Messrs. Charles E. Spencer, Jr., John C. Traphagen, William F. Kurtz, B. G. Huntington, Keehn W. Beery, Edward E. Brown, Ralph C. Gifford, Lyman E. Wakefield, A. E. Bradshaw, Ed. H. Winton, and George M. Wallace, members of the Federal Advisory Council representing the First, Second, Third, Fourth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively Mr. Walter Lichtenstein, Secretary of the Federal Advisory Council Mr. Brown stated that at its separate meeting the Federal Ad- had adopted a resolution with respect to the absorption 227 2/14/44 —2- of exchange charges which it would be glad to have the Board release to the Press or present to the Banking and Currency Committees of the Senate and House if it thought that advisable. The resolution was read by Mr. Lichtenstein, and during the en811ing discussion Mr. Ransom suggested that it would be better if the ' l asolution referred to section 19 of the Federal Reserve Act rather than to Regulation Q inasmuch as the problem of enforcement of the prohibi— tion of exchange and collection charges, contained in section 19 of the Pederal Reserve Act, would be the same if Regulation Q had never been a dopted. The members of the Council were agreeable to this change, and Brown suggested that Mr. Kurtz, who had drafted the original resolu— t40 112 confer with Mr. Ransom on the proposed change. While this was best u. -41g done, Mr. Brown stated that the members of the Council, par— ticl--"arly those representing regions where the practice of absorbing e3tchar, -ge charges was most widespread, felt that the percentage of net Ile earned by nonpar banks from exchange charges was much smaller th waS generally supposed, and that, while the Council realized that bar* slithich charged exchange were nonmember banks, it would be helpful lt an estimate could be obtained as to the amount of such earnings. Mr. Dreibelbis said that on the last day of the hearings be— tore the House Committee the Federal Deposit Insurance Corporation had Prase., LILed some comparisons requested by Congressman Patman relating 228 2/14/44 -3- to the earnings of 2,500 nonpar and 2,500 par banks of approximately the same size. Mr. Ransom stated that the estimate of between 8 and 10 million dollars of earnings from exchange charges was probably too 4401, and that the important point was not the present volume of such Charges but rather the fact that, if the Brown-Maybank bill became law, that volume would increase tenfold or more. At this point Mr. Robert V. Fleming, the member of the Federal AdvisorY Council representing the Fifth Federal Reserve District, hilled the meeting. In response to Mr. Szymczak's inquiry whether the Council had 443r suggestion as to how the Board should proceed in the Senate heartiles in the event it were asked to appear, Mr. Brown stated that the e°141eil had no suggestions other than that the Board should make sure that the members of the Senate Committee understood the fundamental i*cblem involved. Mr. Ransom emphasized the fact that the Board had not suggeeltsd or invited the hearings before the House Committee. He ex- Iltiessed appreciation of Mr. Kurtz' effective testimony at the hearings 11411°1 then said that in his opinion the question was no longer one of dere,,A. 'lug the Board's position but one of defending par clearance. Chairman Eccles said that the American Bankers Association sholinA take a position on the matter, that the Association could not serve 4 useful purpose if it straddled a fundamental issue of this and that the banks should be alert to the possibilities of the 229 2/14/44 -L- 6ituation because it would be unfortunate if they should again get into a position of competing for demand deposits of other banks. During a further discussion, Mr. Clayton, Assistant to the Chairman, Mr. Thurston, Special Assistant to the Chairman, and Mr. /rest, Assistant General Attorney, joined the meeting and Mr. GoldenWeiser withdrew. At the conclusion of the discussion, Mr. Ransom stated that he and Mr. Kurtz had agreed on a change in the resolution to incorporate the suggestion which he (Mr. Ransom) had made at the beginning of the discussion. The revised resolution was approved unanimously by the Council and concurred in by the members of the Board of Governors aa follows, with the understanding that it would be released to the 131'ea8 immediately: "Bg.solutim_m_Ahaaratim ol' Ekoh4neft-GhArgfta "The Federal Advisory Council reaffirms its repeated belief that it is both proper and necessary to prevent the evasion of section 19 of the Federal Reserve Act by the device of absorbing exchange charges, and that the Board of Governors of the Federal Reserve System be urged firmly to °PPose the passage of the so-called Maybank Bill (S. 1642) and the Brown Bill (H.R. 3956) now before the Senate and the House, respectively. The practice of exchange absorption has become a serious competitive abuse, and is tending to draw deposits away from their natural trade areas and normal trade streams. This dislocation of funds may well cause embarrassment at the time of any future banking stress. "The Council believes that the practice violates the intent of the Banking Acts of 1933 and 1935 respecting the Prohibition against the payment of interest on demand dePosits. The proposed bills legalizing exchange absorption rlIn counter to all recent Federal legislation in that they Create a preference in favor of the large depositor." 230 2/14/44 -5Mr. Brown then stated that, although the Council was still concerned over the increased tendency toward Government lending, and while it might wish later to publish the statement adopted by the executive committee of the Council at its meeting on December 7, 1943, vith respect to the plans of the Smaller War Plants Corporation to make fully guaranteed loans of up to $25,000, the Council had decided that it would be inopportune to release the statement at this time. He then referred to the new bill prepared by Senator Mead on loans to ellaall business and asked if the Board had taken a position with reePect to it. Mr. Draper replied that, while it was understood the bill had been Printed, it had not yet been introduced and that the Board had te.kerl no position on it and had had no part in its drafting. In this connection, Mr. Brown referred to the practice of the 13°41'd until about a year ago of sending to each member of the Council (1/Ice a month a list of Pending bills affecting banks, including a brief l'e1301.1t with respect to the status of the bills. He said that the Collp, • ,cii members had found this service extremely valuable and wondered Whether it could be resumed. Mr. Ransom responded that the list had been discontinued be4418e of lack of personnel and the feeling that it might not be possible to ie ' eeP it entirely up to date with the result that someone might rely °n it when it was not as accurate as it should be. 231 2/14/44 -6At this point Mr. Thurston withdrew from the meeting. Chairman Eccles discussed the possibilities of further legis- lation to aid small business and stated that he had suggested to Mr. Bernard M. Baruch, of the Advisory Unit for War and Postwar Adjustment Paicies, and to Mr. John Hancock, Chairman of the Joint Contract Termination Board, that the 139 million dollars available to the Federal Reserve Banks under section 19b of the Federal Reserve Act, representing the amount taken from the Federal Reserve System for the capital f the Federal Deposit Insurance Corporation, be made available to the Board under an amendment to section 13b for use through the Federal Res Banks to guarantee loans made by private financing institutions. He said that Messrs. Baruch and Hancock favored the proposal and were g to include it in their recommendation for meeting the conversion Preblets of small concerns. This arrangement, he said, would be sup- Plamental to the lending authority of the Reconstruction Finance CorP°rati°11, which it was felt did not go far enough. Mr. McKee inquired whether any members of the Council had seen 44Y evidence of strong subcontractors being unwilling to continue to 8UPP1Y weak prime contractors to enable them to carry out war contracts. 141' 'Brown stated that in his district two large corporations had been 8UPP1 Ying parts to weak prime contractors only on condition that the latter deposit with them advance payments sufficient to cover any Possible loss, and that this practice was spreading and, according to the contractinp officers, was interfering with the ability of the 232 2/14/44 -7- services to place contracts. Mr. Brown also said that the Council understood that as the result of meetings held in Washington with representative bankers on January 17 and 18, 1944, the Joint Contract Termination Board had distributed a number of its tentative conclusions with respect to termin ation financing. Chairman Eccles said that a report of the subcommittee on termination financing of the Joint Contract Termination Board had been sent to the bankers in attendance at the meetings on January 17 and 18, that it was also being sent to the Presidents of the FedReserve Banks, and that while it had not been released it was exlected it would be made public shortly. Mr. Brown stated that one of the matters -which the Council telt was not covered was the guarantee of a contractor against the inso lvencY of the contractor immediately above him, and that this Pliessnted a very serious ouestion which hed also been raised by some °t the procurement agencies. Mr. McKee indicated agreement with this Ili"' and felt that in such cases the services should contract directly With the subcontractors, especially in cases where the subcontractors Nere working on late 1945 deliveries. Mr. Brown went on to say that another important problem was DreR a., --"6ed by the fact that, while the large contractors could obtain VT 1°5ns at the present time and later would be able to get T loans, 233 2/14/44 the Small contractor who needed assistance most did not know the procedure and was not making arrangements to meet his needs, and that the Procurement offices in the Chicago district thought the proposed procedure, which would authori7e a 90 per cent payment of the contractor's estimated claim provided the amount of the claim was certified to be reasonable by one of the procurement services, was entirely inadequate to take care of the situation since the delay in securing these estites would be almost as great as the delays in obtaining final set tlements. He said that the Council felt that some method should be Provided for paying the small subcontractor without the necessity °Ie en estimate of his claim being made by the procurement agency. Mr. Kurtz expressed the oninion that the amount that would be lost by fraud would be negligible in relation to the benefits derived tl'°m that procedure. Mr. McKee made the statement that, while he was no longer a ember of the Board's War Loans Committee, he felt that the bankers eli0uld do something to allay the fear of subcontractors for the solof prime contractors by making some provision for payments to the subcontractors or for breaking down war contracts so that contracts 13reiriously made by prim contractors with subcontractors could be made bY the the service directly, and that if something like that were not done resulting situation might react against the banks. After some further discussion, Mr. Vest said that all of the 234 2/14/44 -9- Points raised by the members of the Council had been considered not only by the subcommittee on interim financing of the Joint Contract Termination Board but also by the main committee. Mr. Brown then referred to the discussion at the meeting of the executive committee of the Council with the Board on January 5, 1944, with respect to a tentative draft of a bill relating to the auPervision of bank holding companies which it was reported had been Prepared by the Board in collaboration with the Federal Deposit Insurance Corporation and possibly other Governmental agencies, and to the l'equest made at that time that the members of the Advisory Council be allowed to see a copy of the draft of bill, and stated that the Council Would like to repeat that request at this time as it had to do with a matter that was of nrimary interest to the banks of the country. Chairman Eccles stated that the Board of Governors had a re- 8P°n8ibility quite different from that of the Federal Advisory Council that it was charged under the law with certain regulatory and super3118°r7 powers, that if, in order to perform its duties, the Board felt e"tain legislation was necessary it did not follow that the Board Iles under obligation to discuss it with the Council, the members of Whjch might have a personal interest therein, and that a discussion Illth the members of the Council of proposed legislation after it was tntrod uced in Congress would afford them ample opportunity to present thei ,. views. He pointed out also that there was a question of procedure irorol 'Ired in the Board's relations with any member of Congress who might 235 2A14/44. -10- introduce such a bill. He went on to say that it was not certain that the bill would be introduced, that before it was introduced it *)111d have to be cleared with the Bureau of the Budget, and that in this instance there was a question whether that would be possible. He added that sometime ago Congressman Patman introduced a holding c°111/mAY bill on which he might have held hearings last year had not the Board felt it was premature and that some delay was desirable. ChairMan Eccles felt that the matter had now reached the point where the Board could not expect Mr. Patman to defer hearings any longer, that if hearings were held on the bill the Board would be called upon to make a definite report and would state at that time what it felt 184111d be covered by the bill, but that to give to the members of the C°114cil what the Board might propose in such a report would be preniatul'e and inadvisable. He also indicated that it would be very dif- ficult to furnish the Council members with copies of the draft of bill WithoUt it becoming public. Mr. Gifford said that he had seen a newspaper story to the effect that the Board was sponsoring legislation to regulate interbank deposits. lienthere of the Board said that there was no basis for such a report and that 4, might have resulted from the recent hearings before the House 44Icing and Currency Committee. Mr. Brown said that there was a great distinction between the hold.; COmpany bill introduced by Mr. Patman, or any other member of 236 2/14/44 —11- the House, and a bill agreed upon by the Board and submitted to other G°vernmental agencies and approved by several of them and which was virtually final as to its form except for clearance by the Budget Bureau. He felt that after the bill's introduction it would be difficult for the Council either to oppose it or to suggest amendments Without placing itself in the position of opposing the Board. He men- tioned the fact that it had been his understanding that the preamble to the proposed holding company bill contained the statement that banks Were engaged in interstate commerce, which would raise serious Pt°blema for the banks in connection with the labor laws, and that this was the sort of thing which the Council would like to have a Chance to discuss with the Board. Mr. Fleming expressed the opinion that at some point before the bill was introduced it was appropriate for the Council to have an °Ppertunity to discuss the matter with the Board. Later other members Of the Council indicated agreement with this comment. Chairman Eccles Pcnded that in the event legislation were proposed by the Board it would expect to give the Council the views of the Board with respect thet_,0 before the Council was called on to take a position for or against the legislation. Mr. Brown referred again to the statement that the preamble to th e Proposed holding company bill referred to banks as being en- in interstate commerce, and Chairman Eccles stated that the 237 -12- 2/14/44 C°11ncil could be assured that the Board would not want to involve the banking system in any question which might result in difficulties for the banks in connection with labor legislation or other questions. Mr. McKee said that the Federal Advisory Council had not been the first to try to discover what was in the proposed bill, that inhad come from so many sources that the Board had naturally become a little suspicious of why they wanted to see the bill, that the Board had to include a number of things in the draft to protect both the Board and the public, and that he wished the Council would halie confidence that the Board would approach the matter in the same ill/Inner as the Council members would if they were in the same position 48 the members of the Board. He also said that he questioned whether the draft would be cleared by the Budget Bureau. Mr. Brown stated that he did not wish to be persistent but that the Council hoped very much that it would be given an opportunity to cliecuss the language of the proposed bill before it was introduced. Chairman Eccles stated that he did not feel that as a general 1)1111ciPle the Board should discuss proposed legislation before it was intr cduced with the Council whose members represented large banks, that under the statute the Council was expected to represent the banks 'Attie the Board's responsibility was that of an agency of Congress hkvila g responsibility for making recommendations with respect to mat- te ' l s which it felt were in the public interest, but that this did 238 2/14/44 -13- not mean that whenever legislation was introduced either as a result of initiative on the part of the Board or on the part of Congress the e°11neilt s views or objections could not be discussed after the legislation had been introduced, at which time the Board might well accept, and seek acceptance of, the Council's views or an agreeable compromise. Mr. Brown then asked whether merely the preamble to the proP°sed bill could be read to determine whether he was correct in his linclerstanding that it contained the statement that banks were engaged 14 interstate commerce. Chairman Eccles said that if there were any slIch Provision in the bill the Board would not hesitate to take it out, itr. McKee stated that the Council had recorded its position on the " Point and that it was up to the Board to see that such a statement /vas not in the bill. Mr. Brown then said that his question was being "very caret141 4 dodgedu and Chairman Eccles replied, "No, it isn't". Chairman teo 'es also said that the Board would like to avoid the need for legis- lation, that it was being considered for the sole purpose of protecting the b anking system as a whole and holding comrany operations, and that 't 1- was in the thought of protecting the banking system rather thk1 any other reason that the Board felt legislation was necessary. He aA, 'Qad that, in the absence of legislation, conditions might develop "would reflect very seriously on bank holding companies and the bark; 4-ng system, as well as on the Board which had been charged by the 239 2/14/44 —14— Banking Act of 1933 with regulatory responsibility, that the Board did not have adequate authority under the present law to deal with the situation, and that it was the duty of the Board as the agent Qf Congress to call attention to that fact and thereby be relieved of responsibility for whatever miaht develop. Mr. Brown said that it appeared that the Council would not eeoind its request and that the Board would not retreat from its Position with respect to the request. Mr. Brown then stated that in the absence of objection on the Part of the members of the Board the next meeting of the executive c°rftittee of the Federal Advisory Council with the Board, which was aOleduled to be held on Wednesday, March 1, 1944, would be postponed Until. Wednesday, March 8. There was no objection to this postpone— tent. Thereupon the meeting adjourned. APPr Chairman.