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263 A meeting of the Board of Governors of the Federal Reserve a em with the Federal Advisory Council was held in the offices of the of Governors in Washington on Tuesday, February 15, 1949, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. McCabe, Chairman Eccles Szymczak Draper Vardaman Clayton MT. Carpenter, Secretary Messrs. Potts, Congdon, Fleming, J. T. Brown, Edward E. Brown, Hemingway, Atwood, and Odlin, members of the Federal Advisory Council from the Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, and Twelfth Federal Reserve Districts, respectively Messrs. Thomas P. Beal, John C. Traphagen, and Joseph C. Williams, who were attending the meeting as alternates for Messrs. Spencer, Burgess, and Kemper, members of the Federal Advisory Council from the First, Second, and Tenth Federal Reserve Districts, respectively (Mr. Woods, member of the Council from the Eleventh Federal Reserve District, did not attend the meeting and no alternate to attend in his absence was appointed) Mr. Prochnow, Secretary of the Federal Advisory Council At its separate meeting before this joint meeting, the Federal Acivis Ile7 Council selected Mr. Edward E. Brown as President of the Cola i pj-) Mr. Spencer as First Vice President, Mr. Fleming as Second kt.;ts resident, and Messrs. Edward E. Brown, Spencer, Fleming, Burgess, and Congdon as members of the Executive Committee of the Council, 2/15/49 -2- for the current calendar year. Mr. Prochnow was reelected as Secretary 01 the Council for the year 1949. In accordance with the procedure established on December 3, 1946) the Federal Advisory Council submitted to the Board of Governors betore this meeting a memorandum of topics to be discussed with the The statement of the Council and the discussion of each of the tc/131-08 at this meeting were as follows: 1. Authority of the Board of Governors to increase reserve requirements of banks. Discussion on bank reserves. The President, in his Economic Report, recommended that Congress provide continuing authority to the Board of Governors to require banks to hold supplemental reserves up to a maximum of 10 per cent of demand deposits and 4 per cent of time deposits and that this authority be made applicable to all insured banks. For consideration in connection with the proposed legislation, the Board would like to know the views of the Council as to the desirability of making provision for authority to allow some return to the banks upon the supplemental reserves required. The Council wishes to preface its comments on this discus • elon with the following statement on bank reserves as )cPressed in the Council's Memorandum to the Board of Gov! x'nors on November 22, 1948: "The Council further believes that increasing bank reserves is not the proper method of dealing with the problem of inflation. One of the results of an increase in bank reserves under current conditions is the transfer of government securities from banks to the Federal Reserve System, thereby largely nullifying any possible benefits from increasing the reserves and making the problem of debt mnnagement by the Treasury more difficult. An increase 2/15/49 -3"in member bank reserves not only makes membership in the System less desirable, but it also affects the earnings of some banks adversely. The over-all earnings of banks may be satisfactory, but the arbitrary character of an increase in reserves in all banks affects the earnings of individual banks unfairly." Since the Memorandum of the Council to the Board on November 22, 1948, there has been a slackening in industrial e-ctivity in various phases of our economy, increasing unemployment, and the general price structure has turned downward, Particularly in agricultural products. There is no way of lcowing now how far this downward trend may proceed or when it will turn. In these circumstances and at this time introducof legislation, sponsored by the Board, giving authority 4or higher bank reserves as proposed by the President in his Economic Report, might further unsettle the economy. In the light of the above, the Council believes that the Proposal for legislation giving authority to the Board to require banks to hold supplemental reserves up to a maximum of 10 Per cent of demand deposits and 4 per cent of time deposits, !PPlicable to all insured banks, should be reconsidered. If ,111a Board should determine to press for this legislation, the incil would under existing conditions oppose the legislation s against the best interests of the economy, and would request , Mission from the Committees of Congress to appear and estify. r The Council is opposed to the payment of interest on all or— Re aiv part of the balances carried by agy bank in a Federal serve bank. The Council does not believe it would be advisable to 1 1ave the Federal Reserve System authority over the reserve rev irements of nonmember banks, believing such authority would drken the dual banking system, and might ultimately lead to its atruction. The council believes in the maintenance of the , d ' e-1 banking system. 4 President Brown stated that the members of the Council were defiktteiv v °f the opinion that the country was in a recession, that they did CY4 how deep it was going to go, but that the business decline was into new areas accompanied by a material change for the worse 266 2/15/49 -4- Lusiness sentiment. It was the Council's view, he said, that the Psychology on the part of businessmen and their customers and banks was 4 IritallY important factor and that anything that would lead to further Illleettlement or hesitation in the granting of bank loans would be unHe referred to Chairman McCabe's testimony before the fl:)14.1nate. j°141t Committee on the Economic Report yesterday and stated that the 041, 'Luen neglected to mention that, if the increased authority were Uvell to the System to raise reserve requirements, bankers would 1141 8:tel,Y set about putting their banks in a position to meet the ' " 11"laximum requirements, that that did not mean that they would keep le cash but rather that they would shift into short-term Governments 411c1 ot her forms of very liquid short-term paper and would be unwilling to e )ctend credit at a time when the economy was turning down which Iroqd be unsettling to the confidence of the business community. He Ettwea that the Council was of the opinion last summer that authority to trlere, 'se reserve requirements by ten percentage points on demand de8 elid four percentage points on time deposits was larger than it be, and that with the greater decline in business activity at the PreLent time the Council felt even more strongly that the authority not be granted to that extent. He made the further statement the Council would be opposed unanimously to the payment of interest 811 1)1plemental reserve requirements, because such an arrangement, in "tect Y would be the same as the special reserve plan with the funds of t4 barik 8 invested in special securities on which the interest rate _5_ 2115/49 Ig°11-14 be adjusted from time to time. Mr. Fleming expressed the view that whenever authority was given tO the System in the past it had been used, that at the joint meeting r the board of directors of the Federal Reserve Bank of Richmond last week the directors reported a very much sharper decline in business than had been reported at the year end, that the Board of Governors was 1.11 a. Position where it could endanger the econonly in a situation that -"be a readjustment and not a deep depression, and that in the situation, in which mass psychology could very well play a ver,, ' maJor role, very great caution should be used. Chairman McCabe referred to his recent trip to the Federal ReElerv' banks and branches at Seattle, Portland, San Francisco, Los 41agel es) El Paso, Dallas, and Houston and stated that the views eR--e„ /144 bY the Council were not shared by a majority of the bankers Irith 14101a he talked, that in spite of the decline in business activi- everl t here was more optimism than had been expressed by the Council 111 areas where there had been a considerable decline, and that in sections the bankers felt that the action taken by the Board of qoverri Ors had been in the interest of the banking system. He also said that stated in his testimony before the Joint Committee on the -0110mi e Report yesterday, he felt that the bankers were in a stronger 13°sttin, Nlith the public and Congress today than they had been at any tixtle n the past, that on his recent trip he had not heard any criticism 1' the b "Ice nor had he heard any such criticism in Washington, and that 268 2115/49 -6- t t could not be said of some other financial groups. Mr. Fleming stated that Chairman McCabe had not referred in his teEt4' -1- 40/W yesterday to the voluntary anti-inflationary program instituteA by the bankers last year and Chairman McCabe responded that he had expressed his approval of that program on other occasions. He also 444 that the Board was interested in establishing the banking system 1-11 th e confidence of the public and Congress and putting it in a positioh tO meet any test that may be placed upon it, and that he hoped that 44. - would be possible for the Board and the banks to work together " (41 the --Jaags that would enable the banking system to render the l'ea.test possible service. He made the further statement that notwithstanA, ' ' -11g the recommendation of the President and the Board that increased authority be given over reserve requirements of banks the banks still selling short-term Government securities and purchasing longthat issues which would indicate that they did not have any great fear re8erve requirements would be increased other than to meet an kergency situation. He also pointed out that, at the time emergency 4"h°rity over reserve requirements was granted by the Congress last 411Z1Ist, the Board had not exhausted its authority to increase reserve ernents of central reserve city banks, and that the emergency 'Illthr3r1ty had not been wholly used, so that it was not correct to say tht the had Board to always used whatever authority had been given to it. Che irman McCabe also reviewed the suggestions that had come the 130a rd that interest be paid on supplemental reserves 2/15/49 -.7— made it clear that the Board was not asking for such authority. With respect to the application of supplemental reserve requires to all insured banks, Chairman McCabe stated that he was sure that ann; --J°ritY of the member banks would favor such action, that on his ent trip a number of the banks commented that they would not favor the granting of additional authority over bank reserves unless it was 8151)lisd to all insured banks, and that it was only fair that insured bank s be required to share the burden of action by the central banking " L°rities in the interest of sound credit conditions. He did not thtnt, 811oh action had any relationship to the dual banking system. Mr. Fleming stated that as long as the System continued its Dolt, of supporting the Government securities market (which he thought - correct policy and a wonderful demonstration of effective action t ,..scteral Open Market Committee) interest rates were going to be at 1OITevel, If, he said, the System began to pay interest on supplenietto ' 4 reserves, there would be a revival of the demand for payment of ttte„ st on demand deposits, and if that were done on top of the Fed- elta t ePosit Insurance Corporation assessment the banks would be in a lIcliti°n in which their earnings would completely disappear in a period cit -(34 interest rates and they could not survive. He also said the I rcbleta vas not so much one of interfering with correspondent bank re11%)11811iPs and that in his opinion the Federal Reserve System, fine a It w48, could not supplant the correspondent banking system because 4cleral Reserve Bank officers did not have the intimate contacts 2/15/49 that —8— the commercial banks had with their individual customers which the banks could call upon in connection with the services that the c°1Tespondent banks perform. Mr. Odlin expressed the opinion that the bankers favoring the PaThent of interest on supplemental reserves had not thought the k'Qtlem through and that the application of supplemental reserve re0,11ttie ments to insured banks would open the door to control of non, rasiaber banks by the Federal Reserve System without the banks knowing how real tbat control would go. He favored the retention of a situntion in - a bank could escape Federal control by conversion into a State bara. . lf the Federal controls should go too far. In a general discussion of the application of supplemental teserv e requirements to insured member banks, Mr. Eccles outlined the re46°11efor the action of the Board on September 16 and 24, 1948, insing reserve reouirements of member banks by 2 per cent of demand depo . slts and 1-1/2 per cent of time deposits and stated that this n did not increase required reserves as much as the total rereceived by the banks from System purchases last fall of long0M b°lids to support the market. In other words, he said, the ihcre ase did nothing more than immobilize reserves received by the fore 11 67stem as a result of the System's support policy and, therel'as entirely justified for that reason. raerte r Mr, Fleming stated that the authority over reserve require- equested by the Board would amount to approximately a 50 per 2 / 15/49 cent increase over existing requirements and that the banks all over thc country felt that if that authority were granted by the Congress ould be used immediately by the Board. There was a discussion of the effect on the market of the Inc rease in reserve requirements approved by the Board of Governors on September 16 and 24, 1948, and of the possible situation in the money enci Government security markets in the event of a continued business decline. Mr. Eccles stated that in such a situation the money market (3124 undoubted1;y be very easy and the banks would be under pressure to sell short-term securities and btly long-terms which would force t4iees issues to a high premium and a lo17er yield. If the authority l*egranted to apply supplemental reserve requirements, he said, the 134114 l uld be more likely to increase their holdings of short-term 4eill'ities the rather than long-teras which would result in less "playing Pattern of rates" and in a more stable market. Mr. Traphagen stated that banks did not like to buy long-term Q°1%.1111ent securities in which there had been as much as a six-point illIctuation in recent years, but that they made such investments as a rtiellns est getting necessary earnings. He also said that it was correct thAt, if the 4 -mposition of supplemental reserve requirements were 41411c)ried, the banks would invest in short-terms rather than long, but that the situation would have a very adverse effect on the cone of the country because in such a situation the banks would not /15/49 -10- be to make the loans that they otherwise might make.. Mr. Atwood inquired wk, if it was felt that the short-term securities should be held by the banks, the System was supporting the Present short-t.rm rate. Chairman McCabe responded that the System had recommended an flc4.ea -se in the short rate and Mr. Fleming said that the Committee on Gave— “lraent Borrowing of the American Bankers Association had recomriertded to the Treasury that the short-term rate be increased for the sazie reasons advanced by the System. In response to an inquiry, he stated +1, 1/ith Committee had not recommended the increase in connection .e refunding of the March 1 certificates for the reason that it f e-LT, that the Treasury was convinced that the increase should not 'de at that time, but that the Committee had recommended the itlerea se be made as soon as possible, possibly in connection with the 41)1,ii - refunding and in any event prior to the June financing in order t he bonds maturing on June 15 might be refunded into an issue or tstQues , at rates which would not "turn sour”. He also expressed the ()Pinto 11 that the Treasury refunding exclusively into one-year Treasury %tif• leates should not be continued but that issues should be put out tc) 111'3.1 e in the open dates in the '501 3. He also said that the Corntee had stated that at the appropriate time it would like to disC'11" with the Treasury the issuance of a long-term bond that would be i4el1gib1e for purchase by the banks. President Brown referred to the reconmendation contained in • 2 / 15/49 -11Che'irrqan McCabels testimony yesterday that the Board be given authorto increase supplemental reserve requirements by 10 per cent of de/1 -and deposits and 4 per cent of time deposits and inquired whether the Board was bound by that testimony and the President's recommendatic)h in his economic report, or whether the Board would be willing to consider the renewal of the existing emergency authority of 4 per cent ort ' Iannd deposits of member banks and 1-1/2 per cent on time deposits °f such banks. Mr. Eccles stated that the Board's position was that the "*Iltr should be granted to the extent of 10 per cent of '114 deposits and 4 per cent of time deposits of all insured banks, 441 tligl ' t if the existing authority was not renewed the Board would be in a raLich 'Less satisfactory position to deal with an inflationary situation, thrit - If the authority lapsed the banks' required reserves would be reduced by approximately $2 billion which would result in an extremely slop 1°11eY market. Chairman McCabe inquired what the Council would propose as an ter rlativ ,..)tore to the proposal of the Board as contained in his testimony the Joint Committee on the Economic Report yesterday. 111 a discussion of this point it was pointed out again by berS Poseci ter of the Board that the Federal Open Markot Committee had proan increase in the short-term rate and flexibility in the short- 5b, and that it would have been better if the short-term rate 414 bee,; - -Lncreased last year. 2A5/49 In response to Chairman McCabe's incuiry, President Brown sU'ted that the Council felt it was highly unwise and dangerous to ask for a uthority to increase reserve requirements beyond the existing al114)ritY, that in the next two or three months the trend of the cur— rent business movement would be much clearer, and that if around MeNY 1 4. it appeared that the recession was over and inflationary forces ln the ascendancy or that the economy was in balance it would be Prope, for Congress to continue the authority granted last August, but that, _ n 0 the other hand, if the recession was still going deeper the ' 46 emergency authority should be allowed to lapse. In no event, J-u should Congress be asked to go beyond the renewal of that eUthortty. Reference was made to the predictions made last year and the berore that the inantionary period was over and members of the teral Advisory Council expressed the view that there was no question 1)14 that the country was in a period of declining business activity at thipresent time. Chairman McCabe pointed out that most price declines 114d beel). from a very high level, that the prices that had declined most still Very high in comparison with prewar levels, and that it was oy,4 that 1949 would still be a year of high levels of business 4ett\ritY. Mr. Fleming agreed except for the possibility of adverse eft, ects of unfavorable mass psychology. He did not think the situa— shcoo "-IA develop into a depression as long as defense and foreign 275 2/15/49 aid -13- Programs continued. Chairman McCabe stated that the Council and the Board were a vel7 responsible group of leadership in this country and that they shcro "A be prepared to take bold and courageous action rather than to cloPt an attitude which might signal a depression. He said that the edS4. States was still fighting a cold war with Russia, that it was liecessarY to keep the economy strong, and that the leadership of the Co1111-47 had a tremendous responsibility to do everything possible to that end, Mr. Fleming expressed the view that the voluntary anti-inflation Program adopted by the American Bankers Association last year was 811ch a . etlon on the part of the bankers. Chairman McCabe concurred and stat ed that for the bankers and the Board to sit by and take no action %tould 11°t accomplish what was needed to meet the existing situation. co ngdon suggested that there would be no need for further authority to I'lease reserve reauirements unless there were danger of a further 141114ti°narY movement, and that, if no such danger existed, the thing the SYstem to do was to it still until it was possible to see Ithich 174Y the economy was going to move and if it continued to move cic47111 ' r41"d the System should retrace the steps it had taken during the cil°Pment of the inflationary situation. 144s „ ti41 Mr. Eccles expressed the view that the business decline that °ccurring was an inevitable result of the unprecedented infla- d1.111. the past two or three years, that the longer the unbalance 276 2/15/49 -144116- distortion in the economy continued the more disastrous the deflati°118-rY adjustments would be, that the situation was an economic I*Ler than a psychological one, and that some adjustment was necess`117 and desirable if the econonly was to return to a period of stability. Mr. Odlin stated that he did not believe that changes in re4,11 , requirements were the proper instrument with which to attempt to cisz0 ' with the inflationary problem. In response to an incjiiry from '' ' 4 411 McCabe as to what would be a constructive approach, Mr. Odlin 811ested that steps should be taken in the field of fiscal policy and rkilIcti°ns in the Federal budget (rather than any increase in taxes Ithich he felt should not have been reduced). Mr. Fleming added on this point that the solution of the over411 problem was one that did not lie within the powers of the Board. he did not think there was much possibility of making subst4lItial reductions in the Federal budget. In a further discussion the members of the Council stated that the," e in favor of an increase in the short-term rate on Government 1.7el ' le8, that they had been consistently in favor of increasing '11°rt-t et ' r4 rates, but that there had been times in the past when they bac' 11(3t urged an increase at a particulnr time. . IA21-a,for relaxation of the terms of Regulation WI Corlsumer Ita ment Credit. The Board would like to know whether the Council believes that the present situation Justifies any relaxation in the terms of Regulation W, Consumer Instalment Credit, and if so, to what extent. 'Al 2/15/49 r -15- Without discussing the necessity or desirability of the legislation on consumer credit, the members of the Council have the following viewpoints regarding relaxation in the terms of Regulation W. All members of the Council are oPposed to any relaxation in the terms of down payments on automobiles. On the cuestion of extending the time for payments on new automobiles, the members of the Council are eve divided.divided. If the time for payments is extended, it Should be to twenty-four months. All members are opposed to extending the time for payments on used automobiles. In connection with household furnishings and appliances, the Council favors eliminating these articles from control inasmuch as they are now, with minor exceptions, in ample supply. President Brown stated that with the exception of sewing machines Possibly television sets, all of the appliances and furniture items d 141te- in Regulation W were now in ample supply, that factories were lling production or were shutting down entirely, and that the N4lei1 the understood that the regulation was adopted originally to reduce demand for articles in short supply and to make funds available dur- the war period for the purchase of Government securities. He added that the cheaper and medium priced automobiles of the three largest Infacturers were still in short supply and prices of used cars cont'LrtIled to be unreasonably high. For that reason, he said, the Council clici not favor any relaxation of the regulation as regards used cars. also said that of the ten representatives of the Council who disc'ttsseci the matter (Messrs. Woods and Odin were not present) five felt tbat it might be desirable to allow longer terms on new automobiles. Following a summary by Chairman McCabe of the views received by the t A rk4 Irom automobile companies with respect to changes in Regula- Oa Mr. Fleming stated that the Council felt that in a case where 47,AniC +.c.0 2/15/49 1:1 —16- 1 articles were in full supply they should be released completely fr°11i the regulation. Chairman McCabe stated that the consensus of the automobile manufacturers was that the Board should retain the maximum 43.tilritY of 18 months until such time as it was felt the maturities Pr escribed by the regulation should be removed altogether. This °Pinien was based on the assumption that if maturities were extended to D, 4 -onths in the regulation there would be pressure to extend terms ' to tk Period, whereas if the maximum terms were eliminated altogether the— w ould be no indication of official approval of maximum terms of in'tiths and it would be easier for dealers to limit them to 18 months. Them embers of the Council concurred in that position and President 1." stated the view of the majority of the Council that it was too 8°°11 to remove automobiles from the regulation and that that should not be d(Ine until they were in greater supply. Mr. Eccles stated that relaxation of the regulation would be 11°tice to the public that the Board thought the present was the time t01)1)Y listed articles, that it was not desirable to encourage the 1°11blic to use up its purchasing power to ktn • Prices and thus sustain the present be better if any relaxation was withheld raorG c-Learl,y determined and until prices tion of purchase goods at existing inflation, and that it would until the present trend was were somewhat lower. In a further discussion Chairman McCabe stated that the posi— the Council on this matter was different from the opinions vressed bY bankers during his recent trip to the Vest Coast that the Z79 2/15/49 -17- regulation should be retained in its present form. Mr. Hemingway stated that the bank officers in charge of small 1°8-11 departments favored the retention of the regulation because it e:131,0_ 'fleted unsound competition. Other members of the Council concurred ill that point, Mr. Congdon adding that the view of the Council was based or theory that when goods were in ample supply there was no need for thei-1-4; being covered by the regulation. Mr. Eccles pointed out that the restoration of Regulation W had lic)t stopped the growth of consumer instalment credit, that the total of 811ell Credit had continued to grow in spite of the existing deflationary aitUat' 1°n, and that when the volume of such credit was leveling off or ecIlltram.4 -"J-ng there would be a better basis for relaxing the regulation. There was a discussion of the rate of growth of instalment eredit d Ilring the period since Regulation W was restored and the posathle ' Ilture trends, after which President Brown stated that, while he 11°t favor legislation giving the Board permanent authority to tegh, --'41qe consumer instalment credit, he had no objection to the extenI°4 c'f the authority for a year or two so far as automobiles were el:Leerned. 111". Vardaman asked for the opinion of the Council as to whether °18"ting authority should be allowed to lapse on June 30, 1949. Presi41A 13-°144 responded that the Council had not taken a vote on that point bilt hp t -t he thought that he could express the views of the Council that not feel that the power to regulate consumer instalment credit 2/154, -18- 811°104 be given to the Board except in time of war, but that the major1.17 Of the Council would have no objection to continuing the authority f a year or two in its present form. " Mr. Eccles suggested that there was not a great deal of diffelienee in the viewpoint of the Council and the Board except as to the tirttlig of the action to relax the provisions of the present regulation. a`ie of the members of the Council indicated agreement with this 8tB"tement. 3. Ilqpre credit policies of the System in the light of Dossible business trends during 1949. What indications hvve the members of the Council observed in their respective districts as to business trends over the next few months and for the year 1949? In the light of these observations, what suggestions does the Council have to make with respect to future credit Policies of the Federal Reserve System? 00 is the consensus of opinion of the members of the --ell who reported regarding business trends in their respective districts that a downward readjustment in the ic°110111Y is taking place. The general feeling is that this tLProbabl,y not the beginning of a severe depression, but it is a recession. However, there is no assurance of y1 far the recession may proceed, and the feeling that , tl: tX's meY be only a relatively minor economic setback is not Prevalent as it was even thirty days ago. in s Sales, production and employment in many lines are down, ume lines very severely. Carloadings have also declined etantially. Even the sale of new houses has declined berflouse of high prices. There is an increasing reluctance by ot industries to engage in capital expansion until the ocs eiell°alic outlook becomes clearer. This does not apply to er ctric and gas utilities, but the railroads due to doeased business are beginning to hesitate in ordering furr equipment at present high prices. The mill demand for st, el is still strong, but declines in the gray market and ' r 2/15/49 -19the falling off of conversion deals indicate that supp1y and demand in steel are tending to come into balance. The psychology of the situation is an important factor, and there is danger of the recession becoming much more severe if increasing numbers of people should come to believe depression was developing. If the Board desires, the individual members of the ,.?lancil will be glad to report briefly on business condi'icns and sentiment in their respective districts. With the economy on balance declining, the Council betieves it would not be desirable for the Board now to Increase reserves, or to raise the rediscount rate, and that ( Jen market operations should be conducted at the present ,'Ine for the purpose of stabilizing the rates on comuercial ucrrowings at present levels. In response to an inouiry by Chairman McCabe as to the significe cf the 1Rst paragraph of the Council's statement, President Brown .t.a-tf4d , - at the Council felt it would be undesirable to let rates go dcn411., 'nd that open market operations should be conducted in such a 44.4rier as to prevent that from occurring. Mr. Eccles discussed the difficulty of carrying out an open 141et Policy as long as both the short-term and long-term rates were suPported. In the ensuing discussion there appeared to be agree- th t it would be necessary for the Treasury to agree to an tlIc48 in the short-tern rate and President Brown stated that it It1A unfortunate if the existing 2 per cent bank rate on prime 1118 should have to be reduced. Mr Eccles also said that it would be difficult to justify a increase in the short-term rate in a period of deflation or 2/15/49 -20- l'ecession, that the rate should have been increased last year to whatPoint it would have gone in relation to the 2-1/2 per cent longte rate, and if that action had been taken it would have been Pc)ssible to let the rate go down somewhat in a period of deflation. Mr. Fleming stated that the justification for an increase in the short rate was a necessity for a rate structure that would permit "14g of the volume of securities coming due over the next three fc".' 11 Years. 4. LiEsessments of the Federal Deposit Insurance CorporaThe Council desires to withdraw this item from conside ration. It was put on the agenda because of different actices in different banks relative to the computation of FDIC assessments, involving chiefly the treatment of .L-Loat and reciprocal balances. The Council believes after 5iEcussion that this question should be taken up by the Da _ nks concerned, or by bankers' associations, with the FDIC pther than by the Council with the Board. However, if the rd or its staff can give any information to the Council tiegarding this matter of computing FDIC assessments, the embers of the Council would welcome such information. r Chairman McCabe stated that the Board understood that the Fedt ePosit Insurance Corporation was acutely conscious of this Proble ra and that the Board would like to look into it further and disetten it ' lrith the Council later, perhaps at the next meeting. ' 5 AllUority of the President to reorganize departments and Nt e-L-91:_lthe Government. Mr. Fleming stated that he did not know c°111mendations would be made by the Hoover Commission with t ethe Federal Reserve System, that at the staff level the sugtOn had been made that the composition of the Board be changed 283 2/15/49 -21- sc)mel'That, and that the Council felt that it would be wrong for a situation to develop in which every time there was a new President it was felt there should be a reorganization of the Board. Be also said that bill had been introduced to give the President power to reorganize the dePartments and agencies of the Government and while he did not ktoivr lihat was happening in that field he felt the independence of the Boa,„; — should be preserved and, if there was any move to put the Board de the Comptroller General or the Bureau of the Budget, the Council Ircruld Jaice to know about it. There was a discussion of the limitations of the bill on the Polrer, of the President with respect to the presentation of reorganiza' tion PI'oPosals affecting the Board of Governors and certain other Net.o. Mr. Eccles stated that under the present bill a reorganizatt°11 Plan proposed by the President would become effective unless 111'4411 60 days after presentation the House and Senate by joint resoluti(51/disaPproved the change, and that perhaps the bill should be '444611ded to provide that either house could disapprove a reorganization Ntsal. He also said that it would be inappropriate for the Board as tkell to take ally action to influence the form of the legislation or to itterfere in anY vay with any decision that Congress might wish to make 141th l'espect to it. „ I.12§...talla&i2n_ar views of Council on pending legislation to re erves and consumer instalment credit. President Brown ted "e-t inasmuch as Mr. Thomas was not able to give his usual re13()rt t0 the Council yesterday afternoon, the members of the Council 2/15149 -22 attended the hearings before the Joint Committee on the Economic Report at which Chairman McCabe testified, that Senator 01 Mahoney, Chairman of the C°mmittee, asked the members of the Council to present their views after Chairman McCabe had finished, and that it had been stated that the C°11fleil would prefer to discuss the matter with the Board before appear1'1111. before the Committee. President Brown also said that the Council did not, 4now the form in which the legislation with respect to reserve -ements and consumer credit regulation would be introduced, that if i t pr000se that the Board be authorized to increase reserve eq 'ements on demand deposits by 10 percentage points and on time deposits by 4 percentage points the Council would oppose the legisla- but that if it proposed an extension of the existing authority the ()linen. Probably would not oppose it. ", In a discussion Chairman McCabe suggested that President Brown e4aa Chairman OrmthoneY and suggest that, if agreeable to the Joint e°11Littee, the Council would prefer to wait until the legislation had beerl introduced and then present its views before the Banking and CurCommittees. It was understood that President Brown would call 2e/lator otmahoney in accordance with this suggestion. Ir. Date of next meetin,g; of the Federal Advisory Council. l'tsiclent Brown stated that it was contemplated that the next meeting of Cegincil would be held in Washington on May 15-17, 1949. Thereupon the meeting Secretary.
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