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To: Members of the Board From: Office of the Secretary Attached is a copy of the minutes of the meeting of the Board of Governors of the Federal Reserve System with the Federal Advisory Council held on February 17, 1959. It is not proposed to include a statement with respect to 114Y 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 will 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 !ere not present, please initial in column B below to indicate that you have seen the minutes. A Chairman Martin Governor Szymezak Governor Mills Governor Robertson Governor Balderston Governor Shepardson A meeting of the Board of Governors of the Federal Reserve System vith the Federal Advisory Council was held in the offices of the Board of Governors in Washington on Tuesday, February 17, 1959, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Mills Robertson Shepardson Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Messrs. Brace, McCloy, Sienkiewicz, Hays, Alfriend, Sibley, Livingston, Murray, McClintock, Jacobs, and Frankland, Members of the Federal Advisory Council from the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively Mr. Prochnow and Mr. Korsvik, Secretary and Assistant Secretary of the Federal Advisory Council, respectively Before this meeting the Federal Advisory Council had submitted to the Board a memorandum setting forth its views on the subjects to be aieclassed. follovs: The topics, the Council's views, and the discussion were as 1. The Council understands that there will shortly be introduced in this Congress bills substantially identical with H.R. 11781 and S. 3603 which were introduced at the last session of the Congress at the request of the Board of Governors. The bills would provide for amending Section 19 of the Federal Reserve Act governing member bank reserve requirements. Would it be desirable to include in this proposed legislation a provision eliminating the central reserve city classification? , The Council favors the general objectives of the proposed -Legislation but it should include an amendment eliminating the central reserve city classification. 2/17/59 -2- Chairman Martin referred to the long history of the study of reserve requirements by the Federal Reserve System, the contributions illade to the study of that subject by the American Bankers Association, alld the meetings held last year by the Board with representatives of the Association. He noted that the bill finally developed by the Board ' net with the approval of the American Bankers Association and that in My of last year the Federal Advisory Council, as then constituted, tirlanimously endorsed the bill. Thereafter, with the permission of Mr. nenton, then President of the Council, he had informed the Chairmen of the senate and House Banking and Currency Committees of the Council's P°sition. Chairman Martin went on to say that the Board had reviewed the platter toward the end of last year, found its position unchanged, and .s° itulicated to the Banking and Currency Committees in requesting l'eintroduction of the proposed legislation at this session of the con6ress- The Board understood that the American Bankers Association continued to list the proposal among the legislation that it intended to aupport. Chairman Martin then stated that there would be distributed to each member of the Council at the conclusion of this meeting a copy of 1:)4Per prepared by the Board's staff under date of January 29, 1959, vhic , " provided background information on the proposed legislation for l'ellision of reserve requirements. or a . urlef memorandum prepared by There would also be distributed copie Mr. Thomas of the Board's staff under 2/17/59 -3- date of February 3, 1959, commenting on a memorandum from Mr. James J. Saxon which constituted a brief for elimination of any differential in reserve requirements for central reserve and reserve city banks. Asked by Mr. W..'Cloy whether the Board would go along if it developed that the Banking and Currency Committees were willing to amend the bill so as to eliminate the central reserve city classification, Chairman Martin repeated that the Board had reviewed its position at the eacl of last year, found its position to be the same as before, and rethat position in requesting that the bill be reintroduced in this session of the Congress. In the circumstances, the Board would be oPPosed to such a change in the bill. In further discussion, President Livingston remarked that the Fed eral Advisory Council still favored the bill, but with an amendment t° eliminate the central reserve city classification. To this, Chairman Martin replied that, however the matter might be stated, the Council's present position was different from that l'ePorted before, with the permission of the President of the Council, to the Chairmen of the Banking and Currency Committees. While this Cheal, 6e in position would not necessarily cause any embarrassment to the noard, it might complicate the obtaining of legislation. Mr. Hays inquired whether, if an amendment to the bill to eliminate the central reserve city classification were introduced by other parties, the t oard would oppose it, and Chairman Martin replied in the affirmative. hen asked for the reasons, he said that the basic thinking of the Board vas set forth fully in the staff memorandum to be distributed at the end 2/17/59 -4- cf the meeting. In summary, the present bill had been hammered out after long study and consultation, the Board requested its introduction last Year, and the Board had recently reaffirmed its position. 2. The Council understands that the Board of Govornors is considering a change in the time schedules published by the local Federal Reserve Banks under Section 4 (1) of Regulation J. Under the proposal, credit for items on so-ca]led "country points" would become available after three days instead of the present two. The Council would like to discuss this proposal with the Board of Governors. If the Board of Governors is considering changes in the time schedules published by the local Federal Reserve Banks under Section 4 (1 of Regulation J, the Council would welcome the opportunity to discuss such changes with the Board of Governors. After making preliminary comments regarding the origin and nature °f the proposal, Chairman Martin turned to Governor Robertson who had served as Chairman of the System Committee to study the problem of float. Governor Robertson explained that the System, being concerned about the substantial increase in the volume of float in recent years and the effects of float fluctuation on the conduct of open market operations, haa instituted a comprehensive study of various methods, including eh elles in Reserve Bank operating procedures, by which the volume of ' Peaer al Reserve credit provided through the existence of float might be In the course of that study, question was raised regarding the tV0... A 4's-Y maximum deferment, the reasons for and against increasing it were ' P1o'ed at the technical level, and the matter was later discussed by the 130n 1.0.3 and the Presidents of the Federal Reserve Banks. Three-day maximum defe,„ lent would be more realistic from the point of view of the time ' 2/17/59 -5- actually. incurred in the collection of certain items and it appeared, alth°11gh one could not tell precisely, that a change to a three-day deferment would result in reducing the volume of float by aPProximately one-third. The question was still under consideration, h°14ever, and no decision had yet been reached. President Livingston stated, in response to a question by Chairman Martin, that the Federal Advisory Council was unanimous in its opposition to the proposal. Mr. McCloy then inquired about the possibility of reducing the ume of float through improvements in mechanical operations at the Pederal Reserve Banks over a period of time, and Governor Robertson l'ePlied that this was part of the whole study of float. Some steps 14 this direction already had been taken, he said, and continuing ttent4 4-on was being given to various possibilities. In this connection, he observed that to the extent that Federal Reserve credit might be l'ecluced through a change in the check collection time schedule, the Syste would have to give consideration to providing in some other way the ount of reserves appropriate to the economic situation. Mr. Hays suggested the possibility of adoption by the Federal ' ve Banks of the practice followed generally by commercial banks of char„1 6-L Jg the accounts of their correspondents on the day that items sent to n -11ch correspondents normally would be received, and Mt. Brace expressed the 'Lew that the Federal Reserve System might not be justified in making the '118'gested change in maximum deferment until it was clear that the best 2/17/59 -6- efforts of all of the Federal Reserve Banks, on a uniform basis, still left the volume of float too high. Following additional comments regarding Federal Reserve Bank check collection operations, during which reference was made to limitations on service posed by the cost factor, Chairman Martin repeated that all aspects of the float problem were being reviewed and that no decision had yet been reached on the suggested change in maximum de ferment. 3. What are the views of the Council regarding the current business situation and the prospects for business activity during approximately the next six months? The Council believes that business has continued to improve moderately since the last meeting with the Board. In recent weeks, the metal industry, especially steel, has reported increased buying, in Part at least in anticipation of a possible strike. Retail salel: are continuing at a high level. Although automobile sales are above totals of a year ago, they are somewhat below earlier expectations. The farm equipment industry has reported an increased volume of .onsiness as a result of the rise in farm income. Construction, a puoyant force in the economy last year, continues an upward trend. crent is lagging behind the improvement in production, re-ng (1) an improvement in productivity, owing largely to the .1se of more efficient plants, and (2) a longer workweek with overtime rather than an increase in the number of workers. Ttt a The members of the Council anticipate that business generally mt,_11"ing the next six months will move to somewhat higher levels. e outlook for farm income in general would appear to be satisactory though in some areas there may be some softening of farm Prices. In supplementation of the summary statement of the Council, the tvicluai members presented detailed reports on business and financial _7_ 2/17/59 developments in their respective districts. In response to a question raised by Chairman Martin, several of the members included in their rePorts comments regarding factors that appeared to be contributing to the current level of unemployment, and some of the members responded to a question raised by Governor Balderston regarding the extent to which it aPPeared that American producers might be pricing themselves out of the fc'reign market. During his remarks concerning First District conditions, Mr. Brace rePorted that the general expectation was for a rather gradual improvement in 13118irieS8 during the next six months, with the rate of improvement some- 1411at slower than during the last six months of 1958. The prevailing at titude of caution reflected in part a feeling that some of the illereesing level of activity was being brought about artificially thr°Ugh Government spending. In summary, it might be said that there ' 1748 mild optimism but no expectation of any spectacular increase in activity. In the machine tool industry there was evidence of foreign 811PPl1ers underpricing American items, and this trend was beginning to be noted also in other industries, including optical glass. While this _ Vas ittedly not yet a major consideration in relation to the unemploy11°elat problem, it seemed to be a developing trend. Mr. McCloy reported that activity in the Second District was ill8t about at the preref'ession level. While the pace of recovery f;qf 2/17/59 -8- aPPeared to be a little slower than the pace of recovery from the Previous recession, last year's downturn was not quite as severe. PerhaPs the biggest question that must be faced was whether excess Pr°auctive capacity would be filled out in the course of the current Year/ and the answer was not yet obvious. It seemed quite certain that the year would be a fairly solid one, but whether it was going tO be a boom year or not remained to be seen. As to the employment sittlation, the Second District appeared to be running a little below the rest of the country. While increased productivity appeared to be to improved plant and machinery, it seemed probable that those retained on the payroll during the recession were the better el111/bloYees and that this factor likewise was being reflected in increased productivity. Mr. Sienkiewicz said that conditions in the Third District had l'eecYvered sharply from the low point of the recession and that the Present level of activity was higher than in the corresponding period 1958. The lag in employment appeared to have been the result of eost-s treaming, increased productivity, use of more efficient plant e'r tacilities, and a reluctance to hire people before those already on the Payroll were working full time. The unemployment problem in the Thlra D istrict was quite serious and had been complicated in the larger 1.tiee by an influx of unskilled workers. All in a3), the prospects for the ilext six months seemed quite good except for the unemployment f f7,1, 2/17/59 -9Mr. Hayes reported a general belief in the Fourth District that bUsiness in the first half of 1959 would be at a higher level than in the first half of 1958. In June or July of last year there had begun a 8101,7 but gradual improvement that had continued through the last half of the year, and present indications were that the improvement 14:1111d continue through the first half of 1959. On the matter of foreign c°?1Petition, he had heard of several instances recently where machinery he 'd been purchased abroad although it could have been produced in this c°Untry. In the machine tool industry, this development apparently 1448 being regarded as important enough to cause manufacturers to "tablish relationships in European countries. Of moreinportance th "the effect on the overall employment picture might be the effect NM the standpoint of defense production. Alfriend reported that in the Fifth District, where economic tilIctuations tend to be less pronounced than in other areas, the trends 11" been mixed recently. The District was making a comeback from the recessiOn but not at as fast a pace as the more highly industrialized areas. The general feeling was much better than in September and altIlt the same as in November. All in all, conditions 1,,re much 14Proved over six months ago, and it was felt that improvement would c044.irlue during the next six months. (;11 2/17/59 14±. Sibley said that the Sixth District had been making solid but 81017 progress in the last two months. The business community felt that the recession was over and a great deal of attention was being devoted to the streamlining of operations in order to be able to compete effectively in the future. little 4 — -.-wprovement in Since September there appeared to have been the employment situation although there had been cotsiderable improvement in manufacturing payrolls. This might be attributable to an inclination on the part of employees to appreciate their Jobs more, to cost studies that had been made, and to the money sPent on development of labor-saving machinery. Manufacturers were taakirIg liaison agreements and going into partnership with capital in other c ountries in order to meet the problem of foreign competition, /thich might tendin an indirect way to keep the domestic labor force troM developing. President Livingston commented that the Seventh District had €tn excellent year in 1958 from the standpoint of farm income and that the Prospects were for a somewhat lesser year in 1959, due principally t° increased livestock marketings at substantially lower prices. eller1111,Y speaking, business conditions in the District were good, 4" the unemployment problem, while still serious, appeared to be easit_. K The attitude of businessmen was one of cautious optimism; the:Y exPected the first six months of 1959 to show moderate improvement. 2/17/59 -11- It would be a mistake to attribute the numbers of unemployed at the Present time in any substantial measure to the inroads of foreign e°mPetition. While that might be one contributing factor, it was by n° means the entire answer. Mr. Murray reported that conditions in the Ninth District were c°4tiauing to improve somewhat. Because of the importance of agriculture to the economy, the District had felt the recession less than other iparts of the country, and purchasing power resulting from last year's Itgrioultural operations should spill over into the first six months of•this year. Looking at the year 1959 as a whole, some reduction in tarM income seemed probable, and the psychology of the farmer as to sPe4cling could change rather quickly if moisture conditions did not a-evelop favorably in the spring. Generally speaking, the atmosphere i4 the Ninth District at present seemed to be one of optimism. law 4.. " employment 4. The appeared to be due to a closer look at expense accounts on•the part of a number of companies during the recession, and increase in t• he efficiency of operations, a better attitude on the part of workers, 414 some lengthening of the workweek. Mr. McClintock reported that the winter wheat crop probably would , be a 'wn from last year. Cattle prices continued good, and probably would 44i." the first half of this year, but herds were being built up and ' there was likely to be a fall in prices when the larger numbers of cattle 2 / 17/59 -12came to market. The oil industry was characterized by "a little bit t°° much of everything." Most producers and refiners were now feeling the effect of imports, Which suggested the possibility of more governIllental control of the oil business. In the Tulsa area, the employment situation appeared to be improving. Mr. Jacobs reported that economic conditions in the Eleventh District had shown marked improvement in the last few months, with the eM131oyment and unemployment trends quite favorable. In the farming Elreas, a great deal of unemployment had no doubt resulted from a VithdraNal of individuals from active farming due to technological irqprovements. These persons had found their way to the cities but 114ellY of them had not yet been able to locate jobs. • District Frankland stated that the economic picture in the Twelfth followed generally the pattern reflected by the reports from the Other districts. It seemed safe to say that business conditions liere g°°d in the District, although within this large area there were reat di fferences as to economic progress and problems. After BlIrir(liarizing significant developments in various parts of the Twelfth 1/18trio. Mr. Prankland concluded with a reference to fiscal and e°11114ereial problems being encountered by the new State of Alaska. How does the demand for credit at the present time compare with demands at this season in previous years of high activity, such as 1957? Is an increase in demand anticipated during the spring months of the year and, if so, in what areas of activity is it likely to be concentrated? 2/17/59 -13Although the volume of loans in some areas is exceptionally high, the demand for credit at the present time is not as great, over the country generally, as it was at this season in previous Years of high business activity. However, the current demand for term loans is very strong. The members of the Council expect some increase in the demand for credit in the spring months of the year. This demand probably will reflect an increase in borrowing by consumers and sales finance companies. In addition, a probable increase in inventories, especially by the metal using industries, may add further to the demand. In reply to a question by Governor Mills as to whether the demand for the term loans appeared to reflect an inability of borrowers to enter caPital market or an unwillingness to go into that market because of the eost of funds, President Livingston said that money was available thro „ , % gn the capital market provided the borrower was willing to pay a rate sufficient to attract investors, as demonstrated by the success Of R. —veral recent issues. on While there might be some feeling of reluctance 41, 'wa theory that interest rates were high at present and might decline later , / uusinessmen generally seemed to think that there would be no 811bstantia1 decline in the foreseeable future. Hence, a principal reason for recourse to term loans appeared to be the desire to use a aingle hawlc.-, or two or three banks, as the source of funds, with the °seibility of amending the contractual arrangement from time to time. Altholagh the rate for funds might be comparable, this more flexible trIslIngsMent vas considered advantageous. In response to a further question, President Livingston said that „ 8 a general rule a five-year limit on term loans was customary 2/17/59 -14- andlanks were reluctant to go beyond that limit,although some larger banks might occasionally extend the period to as long as seven or even eight years. Governor Balderston asked whether, if inventories should be l'ePlenished at a rapid rate and the loan demand occasioned thereby superimposed on the demand for term loans, this would cause difficulty for the banks. President Livingston replied that there was already a high level °lb 1°ane in the banking system. With a loan demand for inventory 8.ee1111411ation superimposed on that volume, a rising level of business El.ttvit,Y, the needs of the Treasury in the picture, and the Federal Rese— "e System properly concerned about the restraint of credit, it Eippem ' red likely that money would become less available and more costly. Governor Robertson then inquired concerning allegations of a leakn--46e of bank credit into the stock market. In discussion of this question, Mr. McCloy noted indications that 8 avinga were being withdrawn from banks in rather substantial ItieELsUre and were finding their way into the stock market. Mr. Brace l'"els eci to his knowledge of some situations where banks were lending -" linsecured basis to permit the exercise of stock options, subject to all lure d rstanding that the stocks acquired would be held inviolate borrowing was repaid. the possibility President Livingston acknowledged of minor leakages of bank credit into the stock market t'404N , e, 2/17/59 -15- through the medium of unsecured loans but expressed doubt that there 14118 any substantial volume. He commented on the diligence displayed 17 commercial banks generally in endeavoring to satisfy themselves that the nonpurpose statement of the borrower represented no falsificeti°n of the intended use of the loan. 5. Reports reaching the Board from various sources indicate some undercurrent of feeling on the part of business as well as individuals that further inflation is an inevitability. The Board would appreciate the Council's analysis of the extent to which such an attitude may exist; of the effect that it may have with respect to price levels over the next year and over the next several years; and of the steps that bankers and businessmen may be taking toward combating or fostering the factors that are responsible for the attitude described to the extent that it exists. The members of the Council believe that there is an increasingly Widespread feeling that an inflationary trend in the economy is Tlavoidable. This defeatist attitude is one of the most difficult facets of the problem and is aggravated by the belief in certain Tlarters that some inflation is desirable for the growth of the economy. t ,Factors contributing to the foregoing attitude include (1) Zi:Ilj eng(Tieward pressure on wages, (2) the continuing budget steadily increasing demand for Government projects and Services, and (4) the reluctance to reduce Government subsidies or a griculture and stockpiling. There is a strong demand for Government expenditures in many sectors of the economy without a 111mensurate willingness to provide revenue for the expenditures. Should these pressures persist, a rise in prices seems probable uver the next several years. Although there is considerable discussion regarding inflation ' e t7 1 its evils, there is little evidence that any segment of the me°n°mY is willing to take the steps necessary--including some ialasure of austerity such as higher taxes--to combat the thflationary trend. Until members of the community are persuaded et it i5 in their own self-interest that inflation be prevented, 2/17/59 -16- it is not likely that they will moderate their demands on Government. The solution suggested, therefore, is one of education. The attitude of the Board of Governors and the strong public statements by the Chairman are constructive steps in this direction. During the discussion of this topic, question was raised by Chairman Martin as to whether unlimited discussion,for public consumption, the inflationary potential in the economy might have the effect of creating a degree of apprehension such as to motivate decisions that 14°111d only increase the problem. While it was noted that apprehension about the inevitability of irillatic)n on the part of the public might be reflected in decisions rreeting the stock market and the Government securities market, the 14 Ille14 " expressed that only when the public became aroused was there likely to be pressure for constructive steps toward combating inflationary telidelleies, including limitation of Government expenditures. In this Q0111ection, it was noted that the current degree of stability in the collsuraer price index was deceptive since it tended to conceal divergent txsends, i ncluding an upward movement of industrial prices and a decline 14 agri cultural prices. 6. The Board would appreciate the views of the Council as to appropriate credit policy for approximately the next three months. Ina,The Council believes that appropriate credit policy for approxi4.,'elY the next three months would be the maintenance of essentially vue current degree of restraint. Except for a statement by President Livingston confirming endorsement by the 8Yste Council of the policies being pursued by the Federal Reserve MY there was no discussion of this topic. 2/17/59 -17- It vas indicated that the time of the next meeting of the Federal AdvisorY Council would he decided upon after further exploration of lte rnative dates to determine which would he most convenient from the standpoint of the Council and the Board. The meeting then adjourned.
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