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Minutes of actions taken by the Board of Governors of the Reserve System on Wednesday, February 16, 1949. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. McCabe, Chairman Eccles Szymczak Draper Evans Clayton Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Mr. Thurston, Assistant to the Board Minutes of actions taken by the Board of Governors of the Pecierea Reserve System on February 15, 1949, were approved unani1401181y. Minutes of the meeting of the Board of Governors of the Fecieu al Reserve System with the Federal Advisory Council held on ' ?ebrual7 15, 1949, were approved unanimously. Memorandum dated January 6, 1949, from Mr. Thomas, Director or the .11 —ivision of Research and Statistics, recommending that Bernard 4.4e edatan be appointed as an Economist in that Division, on a tem13°I'l indefinite basis with a basic salary at the rate of $4,605 erEtt11111/4, effective as of the date upon which he enters upon the errcallee of his duties, after having passed the usual physical tEttli nation. Approved unanimously. Memorandum dated February 11, 1949, from Mr. Thomas, Director tivision of Research and Statistics, recommending that the 2/16/49 -2- resignation of Mr. Fronk A. Southard, Jr., Associate Director of that Division, be accepted, to be effective, in accordance with hie request, at the close of business on February 28, 1949, and that appropriate payment be made for annual leave remaining to hie credit as of that date. Approved unanimously. Letter to His Excellency Feridun C. Erkin, Ambassador of 1*1:eY, Washington, D. C., reading as follows: "On January 13 we wrote you to say that the Board vould like to contribute to the success of Mr. Salahaddin Tuklbru's studies in the United States by paying him, in accordance with a practice it has followed with respect to foreign students of other countries, a modest living 1/1loyance. This offer was based on the consideration at in the course of the year he has been with us Tukyu has shown himself to be a man whose excep-J-onal abilities and grounding in economics and public dministration promise well for his country and the Vreum8ta1 ce8 of whose training to that end we should 17 haPPY to improve, having in mind the expense of /ring in the United States. Our letter was acknowl_ 8ed by yours of January 26 informing us that you were communicating the offer to your Government at Ankara. "We are now in receipt of a letter from Mr. Tukyu, a c°PY of which is enclosed, saying that he has been illetructed by the Turkish Ministry of Finance that it 4! c°ntrary to the practice of the Ministry to allow personnel to accept money from the institutions 1,11 'which they are being trained and asking that he beex?luded from the proposed program. We understand, accordingly, unless we hear othervie n_ e, that Mr. Tukyu's letter has conveyed to us your ernment's answer to our offer." 4 Approved unanimously. 2/16/k9 Letter to Mr. Gidney, President of the Federal Reserve Bank clf Cleveland, reading as follows: "The Board of Governors approves the reappointments of Messrs. Sam W. Emerson, C. F. Hood, H. P. Ladds, Herman R. Neff and W. Withington as members Of the Industrial Advisory Committee for the Fourth Federal Reserve District to serve for terms of one Year each, beginning March 1, 1949, in accordance with the action taken by the Board of Directors as reported in your letter of February 11, 1949." Approved unanimously. Letter to Mr. Strathy, Secretary of the Federal Reserve Bank "Richmond, reading as follows: "The Board of Governors approves the reappointments of Messrs. J. G. Holtzclaw, Walker D. Stuart, Overton D. Dennis, William L. Manning and John L. Whitehurst as members of the Industrial Advisory CoMmittee for the Fifth Federal Reserve District to serve for terms of one year each, beginning March 1, ! 949, in accordance with the action taken by the d of Directors of the Federal Reserve Bank of Illchmond as reported in your letter of February 11, 1949.it Approved unanimously. Letter to Mr. Hodge, General Counsel of the Federal Reserve ttrat "Chicago, reading as follows: . 0 Reference is made to our discussion of the case 131 Rodda vs. the Detroit Branch of the Federal Reserve ttlik of Chicago, and the request of the attorney for b'jle Plaintiff for a copy of the authorization for the 4,1"'serve Bank to pay dismissal wages or separation al"Lc3warices. to There is attached hereto a certified copy of the ard's letter of March 15, 1946, containing the aut , uorization referred to above. You are advised that 290 2/16/49 -4- "the Board has approved the furnishing of this material to the plaintiff in the above case." Approved unanimously. Letter to Mr. Leedy, President of the Federal Reserve Bank Or Kan sas City, reading as follows: "This refers to your letters of February 2, 1949, one concerning the decision of your Bank to discontinue use of the electrical generating equipment and to contract with the Kansas City Power and Light Company for all energy requirements, the other requesting the Board's approval of expenditures up to $3751000 in imProving and extending the air conditioning system in Your head office building. "It is noted that the net result of changes in the air conditioning program from the original program outlined in your letter of January 17, 1948, indicates that the revised program can be carried out with no greater expense, and perhaps less, than the original ?Ile. It is also noted that you are informed that if he sYstem is to be operated in the cooling season of , 50 you should proceed at once with the plans and be 14 position to commence the work of installation early next autumn. "The Board has considered the matter and will inter°13e no objection to your making expenditures of not to ! :Zeeed $375,000 in improving and extending the air conlolling system in your head office building." I Approved unanimously. Letter prepared for Chairman McCabe's signature to Honorable Larcade, Jr., House of Representatives, reading as follows: vhic:This refers to your letter of February 1, 1949 in a ,.L1 You request comments with respect to H. R. 494, recently introduced by you, which would amend the or Federal Reserve Act to provide that the absorption eze hange and collection charges shall not be deemed a PaYment of interest on deposits by member banks. 2/16/49 -5- "As you know, in 1933 Congress amended the Federal Reserve Act by adding a provision which prohibits any member banks from paying interest on a demand deposit 'directly or indirectly, by any device whatsoever'. The Board of Governors of the Federal Reserve System is charged with the responsibility of enforcing this provision and is expressly authorized by the law to determine what shall be deemed to be a payment of interest. Following the ordinary meaning given the term by the courts in decided cases, the Board defined 'interest' It. its Regulation Q as 'any payment to or for the account of any depositor as compensation for the use of funds constituting a deposit'. Consequently, the Board has taken the position that where the circumstances of a specific case indicate that exchange charges are being Paid and absorbed by a member bank as a means of comPensating its depositor for the use of funds constitut24g a deposit, the absorption of such charges constitutes a 'payment of interest' in violation of the law. "The effect of the bill H. R. 494 obviously would be to reverse the position which has been taken by the Board in this matter. As indicated in your letter, a similar bill, popularly known as the Brown-MaYbank bill, !as under consideration by the 79th Congress in 1944 but Failed of passage in the Senate. That bill was opposed .0Y the Board, as well as by numerous bankers and busi! nessmen. The reasons for the Board's opposition were est forth in detail in a letter dated January 24, 1944 Etddressed c by the Board to Senator Robert F. Wagner, then hairman of the Senate Committee on Banking and Currency; and a copy of that letter is enclosed for your information. "The prohibition of the Banking Act of 1933 against t e Payment of interest on demand deposits was intended : correct certain evils which had arisen from the pracb ce of bsnks in competing for demand balances of other :inks by the payment of interest on such balances, a ;!_actice which in many cases was followed by an abnormal tncentration of deposit balances in a comparatively rprl large banks in the financial centers of the country. 1 :e Board felt that the absorption of exchange charges ; ;Member banks would tend toward the same undesirable 13 C8 as resulted from the direct payment of inter saet and that, therefore, the enactment of the pro' po thi ed legislation would constitute a backward step. In a connection, it is significant that immediately after 1 292 2116/49 -6- "the enactment of the Banking Act of 1933, banks which had been forced to discontinue the direct payment of interest began soliciting accounts by agreements to absorb exchange charges and that the practice of absorbing such charges by certain correspondent banks l'esnited in the abnormal growth of bank balances in those banks. "It is hoped that the above discussion, together with the enclosed copy of the Board's letter of JanIlarY 24, 1944, will fully explain the Board's position in this matter." Approved unanimously. Letter prepared for Chairman McCabe's signature to Honorable 11".rY D. Larcade, Jr., House of Representatives, reading as follows: "This refers to your letter of February 1, 1949, re garding the absorption by member banks of the costs °I* currency shipments, as well as the absorption of such costs by the Federal Reserve Banks in connection Ilith shipments of currency to and from their member banks "The Federal Reserve Banks, as you know, are agencies created by Congress for public purposes, and the 'oviding of free currency shipments for their member Banks is one of the services performed by the Reserve Banks as public institutions. The Federal Reserve fl1 s are not operated for profit and the absorption tb the costs of shipping currency is not employed by as a means of soliciting deposits. One of the nciPal effects of this free service is to provide :eMber banks not located in Federal Reserve Bank cities rs i4fel. as practicable with the same facilities and boneOf 'the Federal Reserve System in this respect as e enjoyed by member banks which happen to be located : B such cities. Other free services performed by the leserve Banks for their member banks include the colof checks, custody of securities, and wire ..ansfer of funds. eb4 "Your reference to the absorption of the costs of Pments of currency by member banks presumably re, 4e to the question whether the absorption of such 'osts by a member bank would constitute a payment of r 4 2/16/49 -7- "interest upon demand deposits within the meaning of the prohibition of the law and of the Board's Regulation Q, This question would depend upon whether, under all the circumstances of a particular case, a member bank is absorbing such costs as a means of compensating its depositor for the use of funds constituting a deposit. However, no case has come before the Board in which a decision has been made as to whether the absorption by a. member benk of the expense of shipping currency was a violation of the law and the Board's Regulation Q. "We appreciate your writing us regarding this matter Vld we are glad to have the opportunity to advise you. -Lf you should have any further questions in this connection, we hope that you will feel free to call upon us." Approved nnAnimously. Letter to Mr. Milton S. Koblitz, Attorney and Counsellor-at141.16, e 3 ing as Estrellita Way, Bel-Air, Los Angeles 24, California, readfollows: i "This refers to your letter of February 5, 1949, n which you express the opinion that margin requirexents should be reduced. tu The Board is constantly studying the many factors in'iat must be taken into account in setting such requireAlthough the level of stock prices and the acin the market are factors to be considered, they • eie bY no means the only ones. The general economic b 'dilation of the country is important and must constantly e borne in mind. e "It is a source of strength in the economy that, in bl ' eite of the serious inflation elsewhere, there has not in the stock markee t4 a dangerous expansion of credit That fact has helped to prevent the general infrom being even worse, and it will inevitably aeseen the shock of Any readjustment, not only so far the stock mArket is concerned, but also in other '4-ts of the economy. You may be sure that your point of view will be etua:: careful consideration in the Board's continuing of the matter with a view to making such changes 14 as may be appropriate from time to time ,, Approved unanimously. 4:34. 2/16/49 -8Letter to Mr. Warner, Acting Manager, Credit Department of the Federal Reserve Bank of New York, reading as follows: "This is in reference to your letter of February 8 on the subject of Regulation W, with which you enclosed copies of an exchtinge of correspondence with the Passaic National Bank and Trust Complay, Passaic, New Jersey. "That bank proposes an amendment that would exempt from the provisions of the regulation any loan for the Purpose of purchasing articles not listed in Part 1 of the Supplement to Regulation W. The suggestion is Prompted by the fact that a bank can purchase instalment contracts arising from such purchases from dealers, Without regard to Regulation WI while loans for the same purpose would be subject to section 4(b) as unclassified instalment loans. "The application of the regulation, in its present scope, to instalment Obligations arising from sales of Unlisted articles is necessarily dependent on the way the financing is arranged. This cannot be avoided Itithout a drastic change in the scope of the regulaion, either to eliminate regulation of unclassified .11sta1ment loans or to bring instalment sales of un-Listed articles under the regulation. "Unclassified instalment loans represent, in our °Pillion, an important segment of consumer instalment credit which must be regulated if Regulation W is to !?coMplish its purposes. Of course, it would be pos:Ible to enlarge the scope of the regulation to in„ude many articles not presently listed, but such enlargement of the regulation would place a heavy Einn on many registrants. Since the volume of inSales credit extended for unlisted articles . relatively small and stable, compared with the eriume and variability of the regulated segments of bhnit, it appears to us that such an additional 7"n on registrants would not be justified at this 4tme Approved unanimously. Letter to Honorable Hamilton C. Jones, House of Representatives, tqa4i 4g as follows: 2R5 2/16/49 -9- "As requested in your letter of January 28, addressed to Mr. Lewis, we have written to Mr. W. E. KiMbrell of Kimbrell's, Incorporated, Charlotte, North Carolina. Mr. Kimbrell's letter is enclosed, together with a copy of our letter. "We can appreciate your constituent's concern over the particular situation he described. It seems to us, however, that when a young family has incurred substantial indebtedness in purchasing a home and has an $8.00 per week excess income over other living expenses, they would hardly be desirous of incurring additional debt to the extent that the entire $8.00 'would be needed each week for repayment. The benefits resulting from such credit may be of doubtful value in the long run. "As mentioned in our letter to Mr. Kimbrell, Regulation W does not apply in any way to the instalment sale of articles of furniture with a cash price of less than $50.00. "Thank you for pinking this letter available to us." Approved unanimously. Letter to Mr. Dom Glasgow, President, Glasgow Supply Company, Char, 4-otte 1, North Carolina, reading as follows: a "This will acknowledge with thanks your letter of 4.alluarY 31 in regard to Regulation W and its relation 40 business conditions in your area. , "You recommend the repeal of the regulation, feelthat such a step would act to check the current beeline in durable goods sales in your locality since, .„!eause of curtailed payrolls in the textile mills, roPle apparently cannot meet the down payment and utaturity requirements of the regulation. "Although the Board has received a number of reqUes -s for relaxation of the regulation from people Z production and mArketing of consumers' 10 0 11 (13-1:1 t= 13 there is also evidence of a different l t of view in those quarters. The attached sheets , co ! ceT'ain excerpts from unsolicited letters we have rebe ved expressing views that the regulation should not re1 zu at this time. 2/16/14.9 -10- "Regulation W is a flexible measure and the Board is particularly concerned that it be properly adapted to current economic and credit conditions. With this in mind, the Board is constantly studying conditions in the economy generally as well as conditions in those businesses which are affected directly by the provisions of the regulation, including trends in the production and marketing of appliances and other consumers' durable goods. "On several occasions since the end of the war it has appeared that inflationary pressures were waning and that there was a prospect of general price weakness and rising unemployment. Each of these occasions was ended, however, by a renewal of the inflationary spiral While currently there are some renewed signs of weakness in the business situation, other factors continue to exert inflationsry pressures. "It is clear that factors other than Regulation W are also influencing sales of consumers' durable goods as appliances, radios, furniture, etc. A sales : cline is normal at this time of the year for some of 1T'ese products on a purely seasonal basis. In view of ire current high cost of living, many people have less uYing power available for such purchases. "Relaxation of Regulation W is being suggested by :?me people in the businesses affected, in order to °Limulate sales. The amounts involved in down payments nd instalments reflect, in addition to the provisions °r the regulation, the prices of the articles involved. IT_Ich relaxation, if it resulted in increased demand, 111d tend to support the current prices for appliances, 08, Phonographs, furniture, etc. In this connecJ-uu the following statement which appears in the rePort of the Senate Committee on Banking and Currency reco mmending enactment of this legislation is of in- 4 'Only harm could result from inducing muof American families to go heavily into debt on too easy terms for goods at the present high level of prices. The excessive credit built up in that way would not only increase Present inflationary pressures; it would have to be liquidated later out of current income Should a down swing occur, thus necessarily diverting that income from the channels of consumer expenditures in the ensuing period . . . 297 2/16/49 -11- . . . excesses in the field . . . (of consumer credit) can be harmful not only to the people directly involved, but also to millions of others who are penalized by the inflationary effects of such excesses. The person of small income is the one hit hardest when inflation pushes prices beyond his reach and the one who suffers most when the resulting deflation throws him out of a job. The legislation should tend to result in directing competition along the line of decreasing prices rather than extending excessive credit terms. By making some contribution toward preventing further inflation at this time, and thus toward moderating any ensuing deflation, consumer instalment credit controls can especially serve the interests of the person of low income in addition to serving the interests of all other consumers affected by our national economy.' "There is some scattered evidence of increasing supPlies, price cuts, ana other sales concessions in connecon with certain articles, such as appliances and radios. Irese developments are being watched closely, and the 4?e-ra is prepared to take prompt action to relax Regulalcm W when conditions call for such action. We are sending a copy of this letter to the Honor'kue Hamilton C. Jones from whom we received your letter °f January 31 addressed to him on the same subject. "Thank you for sending in your views." Approved unanimously. Tel-egram to Mr. Knoke, Vice President of the Federal Reserve * or t43 New York, reading as follows: Your wire of February 10 re gold loans to Bank ( 6111. Board approves three months renewals of 18 loan due March 9; (2) ,750,000 of the $10,000,000 750 000 of the $1,500,000 loan due March 23; 414d (N %...)) +875,000 of the $1,750,000 loan due April 4, ;Iztthe same terms and conditions as apply to the loans and on the understanding that any f11.141 1 Z€ renewal of these loans which might be reed would, if granted, be contingent upon p 298 2/16/49 -12- compliance with the modified program of repayment outlined in your wire looking toward full repayment by March 19,0. "It is understood that the usual participation vill be offered to the other Federal Reserve Banks." Approved unanimously. Arproyea: c Chairman.
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