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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 18, 1958. It is not proposed to include a statement with respect to anY of the entries in this set of minutes in the record of policy actions required to be maintained pursuant to section 10 of the Pederal 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 'hat you have seen the minutes. A Ch4. Martin Gov. Szymczak Gov. Vardaman Gov, Mills GOV. Robertson Gov. Balderston GOV. Shepardson 8 A meeting of the Board of Governors of the Federal Reserve System with the Federal Advisory Council was held in the offices of the Board of G°vernors in Washington on Tuesday, February 18, 1958, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Vardaman Mills Shepardson Mr. Carpenter, Secretary Mr. Kenyon, Assistant Secretary Messrs. Brace, Massie, Sienkiewicz, Denton, Alfriend, Sibley, Livingston, McDonnell, Murray, Kemper, Jacobs, and King, Members of the Federal Advisory Council from the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively Mr. Prochnow and Mr. Korsvik, Secretary and Assistant Secretary of the Federal Advisory Council, respectively. Mr. Denton reported that at its earlier separate meeting the l'ederal Advisory Council elected him as President of the Council, Mr. Livingston as Vice President, and Mr. Prochnow and Mr. Korsvik as Secretary and Assistant Secretary, respectively. Messrs. Brace, Massie, 414 Sienkiewicz were elected as directors to serve with Messrs. Denton 4114 Livingston, ex officio, as members of the executive committee of the Mr. Denton then introduced the new members of the Council, Messrs. Sielakiewicz, Alfriend, Sibley, and McDonnell, and Chairman Martin extended the a welcome on behalf of the Board. In his comments Chairman Martin said th "the Board had appreciated the Council's advice in the past and wanted 585 2/18/58 -2.- to continue to rely on its contributions. He asked that the members express t hemselves frankly on all matters, and in as critical a vein as they cared to, so that the Board might have the full benefit of their views. The Council had submitted to the Board a memorandum setting forth its views on the subjects to be discussed at this meeting. The topics, the C°Uncilis views, and the discussion were as follows: 1. What are the views of the Council regarding the current business situation and the prospects for business activity during the next six months?. The members of the Council believe that the current downward trend of business is likely to continue for the next six months. Construction activity, Federal, State and local spending and the present relatively high level of consumer expenditures are sustaining factors tending to moderate the decline. The eventuni reversal of present inventory liquidation policies and increased Federal expenditures may provide the basis for an improvement in business activity later this year. There are at present no significant factors which indicate a probable quick reversal of the business decline. A substantial reduction in taxes and a sharp acceleration in the rate and magnitude of government expenditures might curtail and soon reverse the continued downtrend in business which the Council anticipates. However, the ultimate cost to the economy of such extreme measures might be significantly greater than the short-run advantages. Mr. Brace reported that in the First District the downward trend or activity was continuing; although it could not be said that the trend accelerating. The shipyards were booming and the electronics field /las sound but the metals trade was running out of backlog business rapidly ' ella there was little sign of pickup. The textile business perhaps was °Iptimistic simply because it could not go any lower, but at any rate there s some anticipation of a pickup in volume if not in profits. ' 1?8 Consumer expe nditures were holding up very well in soft goods lines but were 58f; 2/18/58 -3- diselppointing in hard goods lines. The rate of savings was well maintained s increasing in some areas, which provided an element of strength ror the future but on the other hand detracted from current acttvity. In 8/4112111117 Mr. Brace felt that the drift downward in business activity would c°x1111.1111e and that activity would be at a lower level for several months to come. Mr. Massie said that business activity in the Second District was Tlite 148 ' 8 a vell maintained until near the end of 1957, following which there rather sharp drop which was particularly noticeable in January. A lot of this was due to a slowing down of orders in the capital goods field. 311'4 le7rnent was down quite a bit and a number of industries, such as the industry, which would ordinarily have layoffs at this time had 18.id °ff more workers than expected. Reductions in defense orders were no SeverTo being felt although some of the cancellations took place previously. areas in the District were now rated as surplus labor areas, with tothi, ' - 4,K being done about the situation so far. Average wage rates had to a new peak of $2.13 an hour but the total hours worked were down, ' '41th the result that actual take-home pay was down somewhat. Consumer continued to be a sustaining influence on the economy; even the arY figures showed the same or possibly a little better than the same Year ago. ' DeparLwent store sales looked quite good. Nonresidential °I7Lstrl, -ction figures were holding up well and there would probably be a --,Aation of the construction of office buildings in New York City as a lot of construction in upper New York State in connection with the s t* Lawrence Waterway and power projects, in addition to quite a heavy 2/18/58 -14- rclaa building program all over the State. Residential construction seemed to have stopped moving downward about September or October but it would flat be possible to tell until this spring whether there would be any sUbstemtial change in trend. In summary, Mr. Massie said, the Second District went along at a l'erY high rate until just recently. However, the ensuing drop was rather severe and it appeared that the trend would continue for some time. At resent it was not possible to tell just how bad the situation might become. Governor Vardaman inquired of Mr. Massie concerning the prospect fOl '°ccupancy of the large office buildings constructed in New York City 44a the latter replied that rentals were good, at least up to the present time Y despite the heavy rate of new building. He understood that something like ,) 25 additional buildings were now contemplated. As a general rule, he 8`116.) it is difficult to finance such a structure until evidence can be 11°1'41 of a substantial number of good leases running until at least the term, ' nation of the mortgage and in most cases ground is not broken until the 1 ' eases are all buttoned up and permanent financing is available. In fel*/ eases, the parties had been taking a chance on the basis that the ni°rtgage market might open up further this spring but generally speaking It h ad been possible to fill the buildings with good lessees. One factor haa 'een that large corporations with offices scattered around the city c°nsolidating their offices in the new buildings. Mr. Sienkiewicz reported that activity in the Third District had e°11tIllued downward steadily since the spring of last year through January 2/18/58 -5- of this year. Of This had been marked by production cutbacks, heavy layoffs personnel, and a shorter work week, these developments being most Proaounced in durable goods industries. The curtailments in nondurables haAlbeen less extensive and less severe; in fact, there had been improve• it i• n some nondurable goods lines. Reductions in building activity had bes4 due primarily to bad weather conditions since the demand for multidwellings and small houses continued in good volume and the demand rer other types of buildings was quite strong. Plans for capital expendi- ttlres had been revised downward for pll industries except public utilities sn'ithe rate of spending for plant and equipment was estimated at about 15 15"cent below a year ago. However, the extent of obsolescence in plant Ittidequipment in Philadelphia, particularly in nondurable goods industries, 148 '8 still large and would require more capital. 41ent i• n the district was running about r force. In mid-January, unemploy- 7 or 8 per cent of the total civilian The demand for all classes of workers, including professional niet1 and those with technical skills, had slackened considerably and many • now on relief. Unemployment compensation claims had been increasing istantially since last fall and it was estimated that at the turn of the 2• 65,000 workers in Pennsylvania were receiving unemployment insurance bertecs, The broad effect had been to cut personal income and reduce si)ehcling, and the degree of caution in consumer spending was becoming more 111'174sive. This was being aggravated by statements from various sources hieh tended to undermine general confidence. 589 2/18/58 -6Mr. Sienkiewicz said that the present business letdown seemed to be inevitable consequence of a period of boom activity during which excesses developed and that the current slump showed all of the earmarks of aa inventory readjustment. Stocks of goods, including automobiles, 434been growing almost steadily since 1956 and production cutbacks t°1-lowed, along with inventory liquidation. The most rapid reduction of illventories at present seemed to be in raw materials and unfinished goods htle stocks of finished goods were larger than last year. ID°121:t might be approaching when buying would be resumed. However, the In addition to the Usual seasonal pickup in production and employment during the spring se4s0a, there seemed to be a good chance for graduR1 recovery in the se(ad half of the year. ttitude of consumers. This, he felt, would depend primarily on the Current incomes continued large and could be --vanded by consumer credit if confidence was maintained. Increasing Nftditures by Federal and local governments and for private residential 'commercial construction were among the strong factors. 6143 He expected little change in prices due to the rigidities which had been built into the -Price structure. Automatic wage increases this summer might stimulate °IllebuYi,g. and it seemed doubtful whether additional demands for wage illel'eases and fringe benefits would be resisted strongly by employers. The .4 nflationary implications of such a situation were obvious. An ' ."-alaate aspect of the matter, he said, was political interference with Ilatur 1 a-1- processes of adjustment. If certain things were done in an effort to restore the business boom regardless of the consequences, the result illight be renewed inflation with a vengeance. 590 2/18/58 -7Mr. Denton said that business in the Fourth District was bad in relation to what it had been previously, although good in relation to the b°ttonl of a depression. c1.111.te substantial. The amount of unemployment was growing and was In order to appraise the current situation and the 0k in diverse fields of activity, he had checked groups of companies ill various lines of business. In alloy steel the three companies that he ellted showed a similar pattern, with business having started to decline last sPring and a little upturn in incoming orders in November. January e*PPeared to be a bit ahead of November, and February was continuing about g°0d as January, although minor variations appeared to be on the down 814s, One company said that it did not feel the bottom had yet been l'hecl as far as its awn business was concerned. the Steel industry Companies supplying found incoming orders down about 50 per cent and the e°11struction business, including road building equipment, saw no signs of 14rturn- As to the aluminum industry, incoming orders showed no improve- Itierit but neither were they worse. The downward trend started for them el)°1-It last July and continued quite sharply into November, following which thi/m. --6s had been quite even, with no signs of an upturn. The price structure °Ilthe production side had broken materially. Companies in the carbon steel 11411strY reported that their business had flattened out at about the 11(Te 110er-December level. As yet there was no pickup but the trend of in had, increased recently and they believed that there might be a - upturn through the spring months. The oil business was poor with clertarld. off, inventories high, and product prices softening. In the chemical 59 2A8/58 -8- field the companies were all pessimistic and there was surplus capacity tor the ingredients used in making up plastiCs. The coal business had 1'td. Of sharply, with even the demand on the part of utilities down 8°1*fhat, and no upturn was seen. The railroads saw no prospect for Pz'ovement and their business was down sharply from a year ago. In _ laAct rical goods, orders were off, while incoming orders for heavy equip. 10erit vere declining. .10 The latter development might have an effect continuing and 1960 due to the lead time involved in this business. In. general, Mr. Denton said) practically no upturn of any signifi- elstmen. - was foreseen in the Fourth District for the next six months. Perhaps alter Labor Day, with the normal fall pickup in business, there might be EL t11111. He concluded by saying that the forecast did not take into account the Possibility of extreme Governmental action such as a drastic tax Mr. Alfriend reported that the situation in the Fifth District was "tie bit different because agriculture was such a large influence in Ukt district. Industrially, bad times in Eastern Carolina and Eastern 114"ginr --la had definitely affected sales of new and used automobiles and lanzes with the percentage of repossessions up sharply in those Att._ The improvement which had been hoped for in the textile field Aid riot materialize and cautious buying was the order of the day. In ktuminous coal there had been a sharp decline in November and December) As v as in shipbuilding at Baltimore and Hampton Roads. There was, Weyer, a good backlog of shipbuilding orders in Newport News. 592 2/18/58 To date, Mr. Alfriend said, there had not been too much laying off f vorkers in the district but rather a reduction in manhours, and this Ilas somewhat in contrast with the more highly industrialized areas. However, talking with various people in the district he found the same feeling I' u ncertainty and unhappiness which had been expressed by others at this *eting. In his bank's annual report and in his report to the bank's share"ere, be had gone as far as predicting no upturn until the last quarter ( 6t the year. Now he was not too certain of his own forecast, but he felt that certainly there would not be any substantial pickup before that time. The stdble points in the district were largely those places where military 143tallittions are located. In general, the downward trend in the district AMS continuing. Mr. Sibley said he could go along with the general statement that IMs inees had turned down. As to employment, however, the Sixth District 441I0t been hit as hard as the nation generally. Employment hit a peak 004t --A in. June and since that time there had been a gradual slackening 11'4 1111111ing about one per cent as compared with 1.8 per cent for the c°1111trY as a whole. This appeared to be due to the composition of the (1113trietts economy, since 54 per cent of the employment is in about 36 .L-1" cent of the industries that make up total employment and only 14 1)el 'cent is in those industries 'where unemployment throughout the country is 11 greatest. Tennessee and some parts of Alabama had been hit quite he‘rd by unemployment, but the Sixth District, taken as a whole, was in better shape than other parts of the United States. There had been some " 59C.) 2/18/58 -10- slackening off in construction; in 1957 residential construction dropped °IT somewhat but it naw had picked up a little. This had an effect on the lumber industry, which is one of the district's basic industries. TeXtiles had been down for a number of years, they hit a low point in the latter part of 1957, and if there had been any improvement since then it /14s aot noticeable yet. The lumber business was showing some improvement /4hils the paper and pulp industry, which was among the last to be hit, had 811°1411 some slackening off over the last few months. In general, sales held 143WeU through the end of 1957 but there was a little more difficulty in raa'king collections in the latter part of the year. Agriculture appeared to be off considerably. Mr. Sibley went on to say that Florida was one of the States holcling the district up and that business had been hard hit by the recent 11".tther. be, He could not say at this time just how severe the results would Ii summary, he felt it could be said that the Sixth District was 131'(31DablY in better shape than the nation as a whole. At the same time it 1148 reeling the downtrend of activity which other members of the Council heja described at this meeting. Mr. Livingston pointed out that the picture in the Seventh District eeoll (31,Y can be divided between agriculture on the one hand and manufacturing 844 t r—,0Portation on the other hand. The agricultural situation could be tertr, satisfactory, if that statement can ever be made about agriculture, bItt "4121ufacturing and transportation presented a different picture, con(11ellab1Y worse than last November. While retail sales had held up 594 2/3.8/58 -11- "lalsingly well except in durable goods, car loadings were down, dealer nocksOf automobiles were high, and sales of cars were very disappointing. 14Pulaoyment in the district was increasing generally and in Detroit the 6^.tion was somewhat critical., with upward of 120,000 people, or about " ' 11. 1er cent of the total labor force, now unemployed. In Chicago there 1Nrabout 100,000 unemployed. The construction business was fairly good, Itth Pore office buildings built and being built in Chicago than in the lirecoo4,— years. The oil business was not good and there was a large lIrellsuPPly of gas due to the fact that last year was a good one for burning 144 And the refineries wanted to be sure that they had enough this year. Mr. McDonnell said that the Eighth District seemed to represent 44r cross section of the country. Manufacturing activity, rail freight ., and coal mining had contracted at levels well below last year: tilsz" ILIPloYment was increasing and St. Louis and Louisville now had substantial 44):!Or surpluses. Construction activity continued at a relatively high level 6145lie.'44i1 trade was holding up quite well. Also, the two industries for 1144414 St. Louis is best known (beer and shoes) were holding up quite well. an...4 Qb-,-Lculture the most serious problem derived fram the damage to the 1957 i'cotton crop, which is the most important cash crop in the area and t44- 4101ts for about 75 per cent of cash farm income. Last year this dropped t .Pez. cent of the previous year and well below the ten-year average, Southeastern Mississippi particularly hard hit. However, farmers "4'qqttle back quickly man one good crop could correct the situation. PVIOP - respects, In conditions were just about average, with business still 595 2/18/58 -12.- being done at high levels. These levels, he pointed out, only looked bad vhen compared with the earlier boom situation, and he considered the current Movement as more in the nature of an adjustment than a serious recession. Mr. Murray reported that the situation in the Ninth District may have started to level off in February. In Montana, the current decline had been felt quite seriously as long ago as early last year. Now it was the feeling in that area that activity was probably at the bottom, but no slibstantial upturn was foreseen in the near future. Ments were probably down further from last year. In Michigan, ore ship- Unemployment was moderate throughout the district and weekly earnings in December were higher than in 13ecember 1956. Construction was down somewhat but the volume of building 1/errai'ts filed in December was up. There was some indication that residential c°48tructi0n would perform a little better in 1958 than 1957, with more 141°11eY available for home financing and some reduction in interest rates. Reth sales were holding up well, not only in the cities but also in the areas, and were running a little bit better than the national average. 111(1ther strong point was the agricultural picture, with estimated farm income last Year up one percentage point more than the nation as a whole. tiad There --en a good moisture situation and quite an open winter so that range c°11clition8 were good. The feed situation also was good and agricultural klees had held up well. Over-all the decline in the Ninth District seemed less severe than ManY of the highly industrialized sections of the country and a number Or PeoPle seemed to think that the decline had reached bottom. On the other 596 2/18/58 -13- hkall 0 few businessmen were found to be very optimistic and there was fitua some inventory reduction to take place. for Imich pickup until fall. Mr. Murray did not look However, if there should be a good crop this Year the district should have good fall business. Mr. Kemper said that in the Tenth District agricultural conditions 1004141 better tbsn in several years. There had been good moisture all laVoUgh the district and a good crop in 1957. Acreage was 26 per cent 144her for winter wheat than in 1957, and estimates at this time were to tbe effect that there would be almost a 50 per cent better wheat crop than laztvft 0-ar. 4104_ In general, prices had been very good, although there was some ia corn and oats since the first of the year, and in price terms 'the. re was a very good livestock*.feed ratio. Cattle numbers as of the 1**st of the year were 2 per cent higher than a year earlier although cattle 1111Dabers throughout the nation were down. In summary, it looked as though both the farmers and cattlemen would be very prosperous over the next year. Mr. Kemper then said that employment was off sUbstantially throughout the uastrict, although the rate of unemploymment was lower than for the tolti -04 as a whole. In particular, there was unemployment in Wichita due to Iti--wOrf3 in the aircraft industry, there ha.k3 been quite a few layoffs '1. 41.17A, ---Lsas City, and New Mexico was the only part of the district showing 11,11 4 44trea e in factory employment. Retail trade had held up fairly well, the volume being down only about one per cent, but this relatively good let was due largely to sales of soft goods as sales had been slaw for good-. Automobiles had been stacking up stibstantially and contractors' 2/18/58 equipment was not moving. Retail stocks were up generally and merchan- disers had not been able to correct the situation. The level of construction Wards in the district had been excellent, with a gain in December of about 10 per cent over the previous year, largely in public works and Utilities and to a lesser extent in residential construction. Veather had affected retail trade to some extent. Poor The milling business 484 not been particularly good; some large mills were considering closing awn and confining their business to storage only. Mr. Kemper concluded by saying that, as compared with the national eirtl°01t, the outlook in the Tenth District was excellent even though some developments, such as the decision of a large manufacturer to defer a plant exNlalsion program, did not make the district too happy. Mr. Jacobs suitunarized a survey that he had made of bankers and bUsinessinen in the Eleventh District by saying that as a whole they expected in 1958 to be as good as or better than in 1957. He went on to say e " " that it is impossible for those who have not seen drought areas to know what e°11tinued good rains mean. With the better rainfall the ranchers and farmera 14 the western part of the district felt that 1958 would be a much better Iree-r than 1957, and even so the last part of 1957 was not too bad. The °IllY bad part of the agricultural picture was in the eastern part of the 6.j-strict, which experienced one of the earliest freezes on record and eelltinuous rains thereafter, with the result that a great deal of the t°11 crop was lost. It now appeared that there would be about the same ' e°t ctilict of land put into the reserve program in 1958 as in 1957. Business ) f: 2/18/58 -15- illvemAories were fairly stable and, while some felt that inventories were a little large in comparison to sales, they did not appear to be overly —, % ensome. In construction the reports were mixed. Industrial building seemed likely to show a decrease but the residential construction outlook was erY good. There was an overhang of excess residential construction blemmtwo areas, Fort Worth and Houston. In the area of credit, the delastd for loans continued strong and for the first time in many months its Ilrance companies were taking warehoused loans as fast as the banks get them together. The oil situation showed little change since the laat ,meeting of the Council, although it might be a little worse. 14 ' 14 A-4.pelines were not taking even the proration but the situation had tot let created a great deal of unemployment. As a whole, Mr. Jacobs said, the sentiment of the people appeared t45 :be better than last September. It was the general feeling that the 464-1.Reserve had done a good job but that a little more monetary ease *telt be in order. Without exception, the bankers felt that now VIEW the tim .or the Federal Reserve to go to Congress for legislation on reserve reTai rements. Mr. King stated that the Twelfth District to a large extent was lo11°Nring the national pattern. The aircraft industry, which accounts tclt 23 per cent of the wage and salary payments of the district against "ati°nal figure of about 7 per cent, started dawn in volume and (14314/uent late last year and the downward trend in employment was °11:/1111.ing. The industry did not think that any action on the part of 599 2/18/58 the Government would reverse that trend before the latter part of the year. linter industry, which in combination with the aircraft industry represents about 1/3 of the value of manufactured products in the district, had been depressed for a longer period of time than the aircraft industry. 14/144Ver, more optimism was noted in that area, some people feeling that the 8 ituation had hit bottom and was starting up. Wbrcm- Construction continued even through January, and many anticipated that more housing -would be -.1.1t in the district this year than last year. Mr. King said that he was surprised how little unemployment there -L4 an area like Los Angeles, the estimate in January being only about 5 -ap Iftt cent. TVo areas, Portland and Spokane, reported substantial unemploy- DePartment store sales were following the national pattern. A 11'15°d deal of pessimism was found in the oil industry and there was also 1141 spot in the metals area, including aluminum, copper, and some of "important metals. Partly because of the predominance of the the le ail'el*art industry, it did not seem likely that the economy in the Twelfth ket r-et would turn around before late in the year. Mr. Carpenter withdrew from the meeting at this point. 2. Haw does the demand for credit at the present time compare with demands at this season a year ago? If an increase in demand is anticipated during the next three months, in what fields of activity is this most likely to arise? What is the credit demand outlook for the last half of the year? All members of the Council report that the present demand for credit is considerably less than the demand at this season a year ago. 6, 8 -17- Although there may be some borrowing for tax purposes, there appears to be little likelihood of any important increase in the demand for bank loans in the next three months. The credit demand for the last half of the year is likely to dhow some increase, reflecting the usual fall borrowing, inventory restocking following the present liquidation, and greater business activity resulting from larger Federal expenditures. Mr. Mills referred to the concern which had been expressed selreatl months ago about the impact on the aircraft industry of cutbacks 14111 -"--gress payments by the Defense Department and the burden that this 1/0111d Put on banking facilities. Mr. King commented that most of the borrowing in the aircraft 115°111 ' 4"ry was in the East. He was aware of the concern expressed when the eUtba 1— eA.0 in progress payments were inaugurated but he did not know of any eoZieern at the present time about inability to obtain sufficient money tor 41,uue financing of operations. Mr. Massie said that at first everyone was greatly concerned, for estiftates indicated that the cash needed to finance contracts might not --.4-Lable. After about three weeks, however, the rules were changed e4d. .1044. --uLL04gh in some cases arrangements had to be made for somewhat higher l'e°11t lines, there were means of getting necessary financing. Unless soroe4..„ unforeseen should develop, it appeared that the situation had traigh tened itself out satisfactorily. Mr. Shepardson then inquired about the agricultural situation in thS 584— .44-um District in the light of recent weather conditions, and Mr. 111 % said he was quite sure that a great deal of the peanut crop had 2/18/58 -18- been lost. Likewise, the citrus and vegetable crop losses in Florida 'were buuoar' to have created distress, especially where people were not entitled on their credit rating to bank credit. Mr. Jacobs reported that there was only one serious incident of 644/tress in the Louisiana area and that was in a section 'where five large Plantations experienced two floods which ruined the crop. Financial aesistance had been extended through Government sources working with the eormercial banks. Mr. Vardaman inquired about reports on the cattle situation In Plorida in view of the cold weather and asked whether this would have 4 8eriou8 effect on the over-all economy of the Sixth District. Mr. Sibley responded that in Florida people had always depended On earrYing cattle through the winter on pasture, so that the present BitQation was quite a hardship for them. There was some question, he 'alas about conditions under which aid could be given, and in certain seetiQns there was unquestionably a good deal of distress. 3. The Board would appreciate the views of the Council as to what would be an appropriate credit policy over the next three months. The Council believes that appropriate credit policy over the next three months would provide for moderately easier credit. The implementation of this policy should include some reduction now in required reserves. Mr. Balderston inquired of Mr. Denton what use the banks would take of reserves released through a reduction in reserve requirements, to N,Thi ch the latter replied that although there were excess reserves in 602 Vi8/58 -19- the 1, -anking system as a whole the distribution was not even and there continued to be points of pressure. While a lot of banks in his area, Datticularly smaller banks, bail an easy reserve position at present, the pressure on certain institutions for loans was such that it was not a bit 1411-Ina for those banks to be borrowing money. Li •t This was true, for example, case of his awn bank. Mr. Livingston said that banks could make more loans if reserve NIOzements were reduced, and that this was exactly what would happen in the Case -ase of his awn bank. Temporarily, his bank was in a relatively --- position. easy However, this reflected the fact that the bank had 641.OPted a policy when its reserve position was tight of not ranking certain vhiCh it would ordinsrily make and the restrictions embodied in that *474Y had not been removed. Mr. Massie said that for the last one and a half years many banks struggled with a volume of loans greater than the volume which would have Prevailed if there had been nothing more in the picture than operations 1111cler the established policies of those institutions. During this period, hoiwel,r er, it was necessary to take care of the heavy demanas of customers. The e'- rent reduction of loan demand was not sufficient to permit the bEtok s to get back to the point where there was any freedom of action, for thev1_, l'aa had to unnermine their secondary reserve positions to carry the 1,4trge volume of loans for the last year and a half. At some time these ate-`'4 'clarY reserve positions would have to be rebuilt because the banks gotten down to a point where they had barely enough liquidity to take 603 20 Care of what they were handling and yet were faced with unused commitments Which, if used, would have put them in terrible shape This all meant that these balks must get some additional money or shrink up their loans to rebuild the secondary reserve position,. In response to a further question by Mr. Balderston, Mr. Massie said that additional reserves would be used both to rebuild liquidity and to " " 1 41.e loans. If any kind of upturn in business should start, the banks 'Present would not be in shape to handle the additional loan demand 1141ess they got some more money. In reply to a question from Mr. Vardaman about loan participations t, 4111's Massie said that the large corporations had been borrowing in such *9blume that practically every loan was a syndicate arrangement. When el'edit was very tight, it was necessary to refuse to make brokers' loans ill Iftticipation with correspondents in areas that did not generate their 1oanS. The syndicating of big loans, he said, is really done by the laralm .- corporations themselves. The corporations* have gotten so large that their "demands for credit Are beyond the legal limitations for any one bank. With further reference to Mr. Baiderston's questions, Mr. King said that in the Twelfth District he felt that more interest would be shown by the banks in interim real estate construction loans if more reserves were 4174aable. Mr. sienkiewicz said that the Federal Reserve had contributed to 41.1el'ing the cost of credit through reduction of the discount rate but that 11°tIling as important had been done to contribute to the greater availability 604 2/18/58 -21- of credit. Therefore, it might be a wise move to show that the banking sYstem stood ready to provide all of the credit needed. This might help to stop the drive for tax reduction and other measures now being discussed In some quarters and it might make it easier to stimulate the adjustment or the stonomy. With reference to Mr. Vardaman's question, Mr. Jacobs said that at Present it is hard to find anybody who wants to borrow for 30 days and that instead the demand is for credit for two or three years. He did not think that the banks, in the event of a reduction in reserve requirements, l'rel ' e going to do any bad financing but he felt that it would be helpfUl if they had a little more money with which to operate. Mr. Szymczak noted that this posed a problem. On the one hand tIle banks wanted to get into longer-term loans to help the economy while '.911 the other hand they wished to improve their liquidity. Mr. Livingston stated that in the case of his bank the volume of 1°a118 vas about the same as in February last year. The bank was still heal/11Y loaned and the lending officers were "under wraps," with certain def4„ ,alite limitations having been imposed. Thus in his case, at least, the bank would make more loans if reserve requirements were reduced. Denton stated that in his bank loans were higher than a year a€° and the bank would be in bad shape to take care of any additional cleitazid which might come. The situation had been so tight in the last Orie and a half years that if the economy should require anything more in the form of credit it would be difficult to take care of the situation. 2/18/58 -22- 4. How should monetary policy be adapted to make its maximum contribution to the solution of the longerrange problems of the foreseeable future? Maintaining the value of the currency and providing an expansion of credit required for the continued and orderly growth of the economy are two longer-range problems of the foreseeable future. Monetary policy can make its maximum contribution by a continuous reappraisal of the credit required for the long-run growth of the economy and by the necessary flexibility in policy to meet recurring short-run fluctuations of the economy. An adequate supply of credit over the long-run can be best assured by a gradual reduction of the required reserves of the banking system. The Council believes that the present time is especially opportune for the introduction of legislation designed to overhaul and modernize the present system of reserve requirements. As the Council has heretofore stated, the recent A.B.A. study provides a comprehensive basis for this reform. President Denton recalled that in 1957 the Council on two occasions ised with the Board the question of a basic change in the structure of Illetber bank reserve requirements. On one of those occasions the Council 1314sted that although economic conditions at the time did not appear to be aPProPriste for an actual reduction of reserve requirements, it seemed that it would be desirable to look forward to that kind of an action. Now, "me degree at least, the situation was reversed. If conditions pre- Were not suitable to making a start in that direction, present '311dition6 might make it a good time to go forward. Chairman Martin responded that the Board had been giving a great clee ' l of thought to the longer-range problem and was prepared to present tative conclusions to the Council. Delt He said that personally he some sense of responsibility in this field because he had encouraged the A_ '‘merican Bankers Association to make a study of reserve requirements. 8110, 'study had now been made and it represented a useful and valuable 60( 2/18/58 -23- con trfbution. Since then the Board had been struggling with the problem 84d-, as always, the element of timing presented a difficult question. In this connection, he emphasized that the remarks which he would make were dire ck,ed toward the longer-run probleml whereas most Uf the comment in the Press recently had been directed toward the short-run aspects of the tter Chairman Martin went on to say that personally he saw a need for a lower level of reserve requirements and that the actions taken by the 4 in 1953 and. 1954 had constituted moves in that direction. He said ' 13°a1 that the Board had analyzed the proposal of the American Bankers Association t° the best of its ability and that this proposal might well represent an iclee'l Plan if the Board "had a clean slate on which to write." However, the Proposal could not be considered without thinking of the world in hich ye are operating and the many uncertainties that are involved. Proceeding to the several basic points in the ABA plan, Chairman 14artia said there was fu31 agreement within the Board regarding permissive which would allow vault cash to be counted as part of a member bariki s required reserves. Here again, however, he was not referring to the question of timing but to the desirability of permissive legislation. ()II the other hand, regardless of the long-run objectives which were sought, the 130ard fcdund unpersuasive the part of the ABA plan which would set up a. target date for completion of the transition to a new level of reserve 4-cements, since progress toward objectives must be fitted in with the Ileecls Of monetary policy and other considerations and it would be unfortunate 60( 2/18/58 -24- to bring about a situation where progress would be measured frequently in terms of the specific target date. At the saw.. time, Chairman Martin continued, it must be recognized that the Board already had considerable latitude for movement under present "utcrY authority. Theref,Dre, while the Board had approached the problem Vith the definite conviction that the present law should be modified, it 'W)ridered haw much additional authority was actunlly needed. It seemed to the Board that the most desirable approach was in terms of presenting as a legislative recommendation as possible consistent with moving in Its discretion toward agreed upon objectives. In this connection, the 1°8-nd. dbserved that the minima of the reserve requirement ranges fixed by thePresent law were such as to permit moving almost all of the distance tow.a.ra the levels that the American Bankers Association had suggested. In substance, Chairman Martin said, the Board had come out in its tentative thinking to the feeling that it vould like to present the 81t1Plest possible type of suggested legtslaticn to the Congress fairly 811c)rtlY. It had nct emmitted itself to any specific kind of legislation 8111 the Council's views would be appreciated. However, it was only fair t0 let the Council know that the Board had devoted a lot of thought to the 811bieet and had n-w come to some fairly firm views. The legislation which the Chairman then described to the Council If°1.1.1,1 4- consist, in addition to provisions relating to vault cash, of pro' vlsi °Ils which would broaden the exemptive power of the Board in such a way 48 to Permit it to reclassify any member bank from the reserve classifi-4 into which it would otherwise fall, on the basis of the character of 608 4l8/58 -25- 1)4813:less transacted. As the Chairman noted, the Board now had authority vo Permit a bank in an outlying section of a central reserve or reserve city to ,k , carry lower reserve balances, and the proposal would broaden that 44W10Z1A74 He then said that the Board had been discussing two alternative t °rum of possible legislation in this respect. p irl) , _ ' 414t Under the first alternative could be permitted to carry reserves applicable to a bank in one of lower reserve classifications now prescribed by statute. Under the :771d alternative the Board would be authorized to establish additional 46,mutations of reserve requirements. For example, instead of moving a bank , the reserve city. direct to the country bank classification, the Board u move the bank to an intermediate level. The Board was aware that g.tald create a certain amount of aaministrative difficulties but it help to eliminate some of the inequities in the existing structure, °I' at least move in that direction. In this connection, the Board did not that any of the plans thus far presented would remove all inequities. Chairman Martin also said that the Board had had some lengthy ' l aellssions about savings and other time deposits, with the thought of 'ecluestiag legislation which would permit distinguishing between such ID°81-ts for reserve purposes, but it had just about come to the conclusion that such legislation should not be sought at this time. The Chairman commented that the Board had scheduled a meeting with special committee on reserve requirements of the American Bankers elation on February 21. While the Board wanted to have the benefit of estions and comments, be was hopeful that publicity could be avoided 60 2/18/58 -26- tot the present and that attention could be focussed on broad aspects of the problem rather than on details. He concluded by saying that he wished t°111ake it entirely clear that the Board retained its right to take any e4tlon which it might deem appropriate under its present statutory authority. In response to a question, Chairman Martin reiterated that his Iselzarks had been directed toward possible legislation and the longer-range 15r6b1em and that he wished to have no misunderstanding on that score. President Denton indicated that he was somewhat concerned about the Possibility of having one or more additional reserve classifications, 4134 Chairman Martin responded that the Board itself was divided in its thinking on that point. Some of the members felt that it would be preferable toO ret get away any more than necessary from the present system while others that the more liberal authority under the alternative form of legis- lati on would permit more progress in moving away from geographical dis- ttla ctions and toward reduced levels of reserve requirements. He added, 1131relmr that when the discussion within the Board came to the question -formity in reserve requirements it was not possible to reach agreement 441that the basis of uniformity would be, some feeling that the basis should size while others thought in terms of velocity of deposits or other elMteria. President Denton then stated that a formula based on velocity of 4ePosits would bother him very much. He said that there had evolved in banking business a concept of dealing with customers which had activity -44 objective and that every effort was now being made to obtain activity 610 2/18/58 -27- ta the accounts. This provided service to the community and tended to make the bank closer to its customers. To put a penalty on deposit activity therefore would fly in the face of stananrd banking practice. Ia other words, it would seem unfortunate to put a penalty on a bank's sUccess in getting active customers as opposed to dormant accounts. Mr. Massie said that as a member of the American Bankers Association's Economic Policy Commission he was one who pleaded strongly against including any target date in the reserve requirement plan, because he felt that it should be within the power of the Board to move in its discretion in the light of open market policy and other considerations. With regard to velocity, he brought out that the situation was somewhat different in New York City than elsewhere. In that city the current demand deposit totals were about the same as in 1948, with only a modest increase 14 time deposits, while for the country as a whole bank deposits were up coasiderably over that period. This meant that the New York City banks had been trying to meet the loan volume incident to a boom period with a 11111ited amount of money, and therefore the available money had been turning Wer rapidly. In such circumstances, he did not think that a pennity on illocity would be justified. Mr. Massie concurred in Mr. Denton's comments bout seeking activity in accounts and pointed out that dormant accounts 141‘e the first to be closed when the money market tightened. With regard to the possibility of establishing additional gradations of reserve requirehe suggested that in thinking of the problem as a whole one must thi of practicalities. The establishment of additional gradations, he Gil -28- 2/18V58 th°11ght) would increase administrative problems quite a bit. In a further comment, he said it was true, as Chairman Martin had pointed out, that 1411tr could be done within the framework of present statutory authority. Mr. Sienkiewicz also expressed the view that additional gradations 17°111d- complicate the problem. He suggested that if the present ranges of Classifications could be narrowed it might be possible to use this 1)(3licY instrument more effectively, offsetting any ill effects of a change ill requirements through open market operations. At present, he said, the instrument was more in the nature of a blunderbuss and the current ranges tended to create too much uncertainty. Mr. Szymczak then made a statement in which he recalled conditions t --ucs in the past and suggested possible situations in the future when ations on open market policy were or could be suah as to necessitate "eased reliance on reserve requirements in the execution of System 13°3-icY. After Mr. Szymczakis comment, Mr. McDonnell raised the question 143etber action on individual applications was a responsibility which the would want to assume, since he envisaged that pressures would be ' 151 ° ght to bear. The Chairman replied that upon reviewing the list of member banks it aPPeared to the Board that there would not be more than about 200 gllestionable or borderline cases. While there would no doubt be pressure IA sr- -41e cases, the Board would be able to break out of its present frozen and start to move in the right direction. Mr. Murray inquired whether classifications of banks would be made 13111311es-to which Chairman Martin replied affirmatively. He went on to say 6 2/18/58 .29. that the vault cash situation deserved consideration in thinking of the Iftblem as a whole, since country banks as a group maintain a higher illftetzttage of vault cash than reserve city banks and the latter a higher Percentage than central reserve city- banks. Mr. Massie said that it had been his view that it would not be deatrable to seek legislative action on vault cash until that situation "uld be studied in relation to other aspects of the whole problem of IT've requirements, since he felt that to get favorable action on any bro,,A Plan would slmost require having vault cash as a part of the plans Mr. Livingston then inquired whether, if a plan of the kind out,. 444e.W. by Chairman Martin were to be agreed upon by the Board, the Council /4)11141 be given an opportunity to look at the proposal in precise form berc e8 bill was introduced. Chairman Martin replied that the Board certainly would try to give tile Council a little time but that the Board was struggling with a time raetor at this point and could not commit itself to meet again with the eo -4441441• If desired, however, arrangements perhaps could be made for a 14eetir14 with the executive committee. With further regard to the time factor, Mr. Vardaman commented tilet 8-11,Y proposal submitted to the Congress after the fifthenth of March have very little chance of passage at this session, particularly It it was the least bit controversial. With reference to the manner in 17111eh the plan -would be intended to operate, he said that the classification °14 benv ---s might not cause a great deal of difficulty because the character 2/18/58 Of .3O.. business of most banks would make their classification a3most obvious 414 changes within individual banks take place grad”ally. However, the 11a would be able to take care of a situation where a small bank is ' 11118 located in the downtown section of a large city and also a situation involving one or a few large banking organizations in a relatively small eitYs Mr. VardRman then went on to suggest why it seemed necessary for the Board and the banking profession to work together as harmoniously as Possible if any legislation was to be obtained. With reference to his previous question, Mr. Livingston said that 48 a member of the Council's executive committee he would not be enthusiastic e:b°'t a study of legislation such as described at this meeting if the time t°11 consideration of it was to be severely limited. If the discussion at this meeting was intended to be the extent of the Council's exposure to the Plan, he felt that it should be understood that the Council would have the, Ight subsequently to disagree with the plan if it so desired. Mr. Balderston said that he was impressed by the fact that the Co4rItrY was now in a period of recession the severity and duration of which e°41a not be foreseen. It was a time, he suggested, which called for the 1:1143t1ratl11I in business statesmanship and one when he, as a member of the Board, felt kove humble in his position because of the difficulty in knowing the right to make at any particular time. in the area of reserve requirement legislation it seemed to him that the Board might be well advised to put 14ard. the simplest kind of proposal consistent with enabling it to move ' tt:11 'a period of time to the fundamental objectives on which there was (Ivel 2/18/58 -31- ralltual agreement. Personally, he did not think that it would be socially Or competitivPly desirable for all banks, large and small, to have exactly the same reserve requirements simply because they happened to be in the seme location geographically, but to him this was more or less of a detail. The general objectives were to make the whole banking system more efficient 414 the to use such funds as were available to foster the economic growth of country without stumbling into inflation or deflation. If there was 8.6reement with these general objectives, it would appear that the simplest P°saible form of legislative proposal consistent with their achievement Wkld stand the greatest chance of success in the Congress. As Chairman Martin had indicated, vault cash legislation would represent a partial 8°Ixtion to the problem, and perhaps the Congress would be willing to ePProve such legislation. However, as Mr. Vardaman had suggested, the 11(31e matter must be approached with delicacy, for misunderstandings could ea3 4Y arise in the Congress regarding the purpose of reserve requirement legislation, as exemplified by certain statements found recently in the Coln-06-cessional Record whir.h had as their basis a rather carelessly- written 41ti-c1e in the press. Mr. Balderston went on to express concern that at this time, 1)articularly, the whole banking fraternity exhibit the maximum of business 31lete8manship and not present a posture that might seem to critics to clie133-a.Y selfish motives. In the current dilemma of falling employment 4-e the price level was not receding, he considered it very important 'the leadership in r(31 the banking profession to see that the public was 2/18/58 -32- Pr()PerlY informed, that its economic literacy was improved, and that the most careful explanations of the national problem were presented. Returning to the manner in 'which the Board's reserve requirement 11/s°13°8a1 would operate, Mr. Brace asked whether it was envisaged that there light be four or even more classifications for banks in the same city, and Chairman. Martin replied that theoretically this was a possibility. However, he did not know whether it would work out that way in practice. There followed questions relating to the possibility of upward 1488ification, and the responses were in terms that cities might be classitlecl uPward in certain circumstances following which exemptions could be 81"Ilted for applicant banks in those cities if the character of their bilsilless did not warrant the higher classification. The discussion then turiled to the standards of classification which might be established by the Board, and it was explained that the proposal had not yet progressed to the stage where decisions had been made on the weight that should be lVe to various factors, at least in precise terms. In the course of this , uiscussion Mr. Shepardson brought out that whenever there is a change 14 1°Mgestablished practices the ensuing period of transition is bound to ' ve Problems and perhaps temporary inequities. However, the flexibility lalhe ' lent in the Board's plan should make it possible to meet problems as the Y arose more easily than under a program containing rigid requirements. course, giving this much flexibility for action to the Board would call tor ' °Mtidence on the part of the banking profession that the Board was a01.)Ith.A. vp use this flexibility in an equitable manner as the situation 2/18/58 l'equired. This general philosophy would naturally have to be worked into e'formula at some point but for the moment the Board was not prepared to 8PEaa out such a formula. Chairman Martin assured the Council that the plan was not being P4t forvard as a "take it or leave it" operation on the part of the Board. The Board wanted to share with the Council the difficulties it had experienced in working out a plan and it would welcome the Council's reaction 641 comment. The plan, he said, had not been arrived at easily but the 13°8"ra had gradually firmed its thinking in the direction of a program such as outlined. He then emphasized again the distinction between the short- 1.1111 and the longer-range problems. Chairman Martin made the further comment that if the Council should clecide it did not want its executive committee to consider the proposal, th4t was perfectly all right. The Board would like any help but it recog- xliZed the right to disagree with the plan and was not pleading for support of 5. Does the Council have any comments on the Bill, H.R. 10345, introduced by Congressman Patman on January 29) and the cumpanim bill by Senator Athnson„ S. *1191, to create a Small Business Capital Banking System? The members of the Council believe that the creation of a amall Business Capital Banking System as proposed in H.R. 10345 aad S. 3191 would be contrary to the public interest. The Council understands that the Federal Reserve System is making a study to determine whether there is a need for small business capital. If the study indicates that the need exists, consideration should be given to measures which would enable the present banking sYstem to satisfy the need. 617 2/18/58 In a private enterprise economy, capital flaws to enterprises in which the return is commensurate with the risk. If capital fails to flow to certain enterprises, it indicates that the return is inadequate in relation to the risk. It is a serious question whether uneconomic enterprises, which do not attract capital, Should be encouraged by public funds, with the risks assumed by the community, and the losses borne by the public generally. Following comments by President Denton to the effect that the Council did not believe that another banking system ought to be set up and that there were too many at present, Chairman Martin said that some of the pre1 inliaarY results of the Board's current study of small business financing Pl'oblems indicated the possibility that the report would contain material sUch a nature as to lend encouragement to proponents of legislation of the kind in question. He agreed with the statement of the Council that consideration should be given to measures that would enable the present banking system to satisfy the financing needs of small business to the e3ctent that such a need existed, and he recognized that the bills were not satisfactorily drawn in certain respects. Nevertheless, he felt that the Problem ought to be given serious thought and that it would be difficult J4st to say that no system should be established to provide financial assistance to small business because it would compete with private capital. Mr. Brace observed that there appeared to be some confusion due to laCk of proper definitions. In practice, he said, Most cases where small bnsinesses needed financing appeared to involve a need for equity capital l'ather than shorter-term money, and it was not clear whether there was a sUrricient understanding of the problem in the Congress. President Denton then said that the Council was concerned about the fact that over the years there had evolved a number of different types 618 2/18/58 -35- of financial systems, all of which were separate from the commercial ballking system. This perhaps pointed to the need for a thorough study of the nation's financial mechanism. The easy method of setting up a new. office for each kind of financing activity was one that the Council he sitated to see continued. 6. The report required by section 5(b) of the Bank Holding Company Act to be made by the Board will have to be submitted before May 9, 1958, which will be prior to the May meeting of the Council. Accordingly, if the Council has further comments with respect to the Act which it wishes to discuss with the Board prior to the submission of this report, they should be presented at the February meeting. The Council has no comments, other than those previously submitted, on the Bank Holding Company Act. There was no discussion of this topic and it was noted that this 1/48 the last time that the item would appear on the agenda in view of the clesAline for submission of the Board's report to the Congress. Chairman Martin stated that it was of great help to the Board to las•ve the advice of the Council. He urged each member of the Council to kee.P in touch with the Board and to let the Board know whenever it was telt that the policies of the Board were in error. President Denton said that the next meeting of the Council would be scheduled for May 18-20, 1958, if agreeable to the Board, with the joint 11*eting of the Council and the Board on May 20. 61_9 18/58 Chairman Martin indicated that this was satisfactory to the and it was understood that the meeting would be so scheduled. The meeting then adjourned.
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