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Minutes for To: Members of the Board From: Office of the Secretary February 18, 1965 Attached is a copy of the minutes of the Board of Governors of the Federal Reserve System on the above date. 1/ 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 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, please initial below. If you were present at the meeting, your initials will indicate approval of the minutes. If you were not present) your initials will indicate only that you have seen the minutes. Chm. Martin Gov, Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov, Mitchell Gov. Daane / MeetingPresidents of the Federal Reserve Banks. Minutes of a meeting of the Board of Governors of the Federal Reserve System with the Presidents of the Federal Reserve Banks on Thursday, February 18, 1965. The meeting was held in the Board Room at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Mills Robertson Shepardson Mitchell Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Mr. Young, Adviser to the Board and Director, Division of International Finance Mr. Noyes, Adviser to the Board Mr. Molony, Assistant to the Board Mr. Cardon, Legislative Counsel Mr. Fauver, Assistant to the Board Mr. Hackley, General Counsel Mr. Brill, Director, Division of Research and Statistics Mr. Solomon, Director, Division of Examinations Mr. Shay, Assistant General Counsel Mr. Koch, Associate Director, Division of Research and Statistics Mr. Hersey, Adviser, Division of International Finance Mr. Sammons, Adviser, Division of International Finance Mr. Reynolds, Associate Adviser, Division of International Finance Mr. Goodman, Assistant Director, Division of Examinations Mr. Leavitt,Assistant Director, Division of Examinations Mr. Dahl, Chief, Special Studies and Operations Section, Division of International Finance Mr. Gemmill, Economist, Division of International Finance Mr. Furth, Consultant Messrs. Ellis, Hayes, Bopp, Hickman, Wayne, Bryan, Scanlon, Shuford, Clay, Irons, and Swan, Presidents of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco, respectively 2/18/65 -2Mr. Strothman, First Vice President, Federal Reserve Bank of Minneapolis Messrs. Coombs and Holmes, Vice Presidents, Federal Reserve Bank of New York Voluntary credit restraint effort. This meeting was called for the purpose of discussing further the role of the Federal Reserve System in the voluntary effort to restrain foreign lending and investment, a part of the President's program to improve the balance of Payments position of the United States as spelled out in his message to the Congress on February 10, 1965. A telephone conference had been held between the Board and the Reserve Bank Presidents on February 10, and this meeting supplemented the discussion held at that time. In advance of the meeting the following documents had been distributed to the members of the Board and the Reserve Bank Presidents with a memorandum from Governor Robertson dated February 17, 1965: drafts of statements to be made by Chairman Martin and Governor Robertson at the meeting to be held this afternoon at the Federal Reserve Building with representatives of the financial community; a background paper on the U.S. balance of payments that was to serve as the basis of a chart Show to be presented this afternoon by the Board's staff; and a series of papers setting forth current staff thinking on what might be approPriate guidelines for the Federal Reserve to follow in carrying out its responsibility for the voluntary credit restraint effort by financial institutions. Chairman Martin began the meeting by reviewing the events that were scheduled for today, including the meeting at the White House at 2/ 18/65 -3- 1:30 p.m. at which President Johnson was to talk with some 350 business and financial leaders concerning the objectives of the voluntary program. Chairman Martin noted that he, Governor Robertson, and Presidents Hayes and Scanlon would represent the Federal Reserve at the White House meeting. He noted also that following the White House meeting the industrialists would go to the Department of Commerce for a conference with Secretary Connor. The financial leaders would come to the Federal Reserve Building for a meeting in which the members of the Board and the Reserve Bank Presidents would participate. Chairman Martin repeated at this time his statement during the February 10 telephone conference that Governor Robertson had been designated as the member of the Board in whom responsibility would be centered for administration of the voluntary restraint effort as it applied to banks and also to nonbank financial institutions, it now having been requested that the program for such institutions fall within the purview of the Federal Reserve. At the request of Chairman Martin, Mr. Young commented on the meeting he had attended in Paris earlier this week of Working Party 3 of the Economic Policy Committee of the Organization for Economic Cooperation and Development. He noted that Governor Daane had remained in Paris for the meeting of the Economic Policy Committee currently in progress. Mr. Young's remarks were followed by comments by Mr. Coombs based on his attendance at the most recent monthly meeting of the Bank for International Se ttlements in Basle. .) 2/18/65 -4Chairman Martin then turned to Governor Robertson, who commented on the need for a uniform System approach in dealing with financial institutions participating in the voluntary restraint effort. Since the program was voluntary, guidance to such institutions should not be in terms of orders; on the other hand, it was necessary to have guidelines, if only for internal purposes. Perhaps all of the institutions involved in the program Should have the guidelines so as to know what was expected of them, but consideration of this step could be deferred for the time being. In the meantime, however, there should be a general understanding of the line that the Federal Reserve Bank Presidents would take in their discussions with i.ividual banks and other financial institutions. It was not necessary to discuss the draft guidelines in detail at this meeting, but all concerned should be giving thought to them and provide the benefit of their views. Governor Robertson observed that representatives of the Other Federal bank supervisory agencies had been invited to attend the meeting at the Federal Reserve Building this afterno on. However, it had not yet been determined how bank examiners might be used appropriately in connection with the voluntary restraint effort. Certainly there would be no objection to using bank examiners to pass along information with regard to the program, but the task of discussing the program with the financial institutions engaged significantly in foreign lending would be one for the Resarve 3ank Presidents to undertake. Gat 2/18/65 -5Governor Robertson then turned more specifically to the draft guidelines and reviewed them in sequence. He suggested that the Reserve Bank Presidents discuss the guidelines with their staff members and provide comments and suggestions, with the thought that a revised draft of guidelines might be gotten into the hands of the Reserve Banks within about a week. He also commented that it would not be advisable to take the position definitely at this time that a technical advisory committee or committees would be appointed in connection with the voluntary program. Question was raised whether the Reserve Bank Presidents Should defer meeting with representatives of individual banks until the guidelines were available, and President Hayes commented that conversations with the individual banks could turn up ideas regarding appropriate guidelines. He suggested that the meetings therefore be scheduled without undue delay. Governor Robertson indicated that he saw no objection provided the Reserve Banks re frained from taking firm positions at this time and avoided making statements that had the appearance of orders. He added that no matter what guidelines were established, there would have to be some room for administrative flexibility; excep:ions no doubt would have to be made to take care of unusual situations. He also observed that follow-up meetings could be held by the Reserve Bank Presidents with representatives of banks and other financial institutions as necessary after the guidelines were available. 6iJ2 2/18/65 -6Governor Mitchell indicated that he would feel more comfortable about promulgating guidelines if advice were available from commercial bank experts in foreign operations who could describe the kinds of problems that the voluntary effort ww.:Ild be likely to create. He wondered, therefore, whether the advice of technicians should not be obtained promptly. Governor Robertson responded that his thinking had been to develop a tentative set of guidelines that the technicians could have before them as a basis for discussion and expression of views. If the meetings of the Reserve Bank Presidents proceeded Promptly, any ideas that were developed from such meetings could be incorporated in the tentative guidelines on which the advice Of the technicians would be sought. He also suggested that the Reserve Bank Presidents supply the names of persons who would Seem particularly well qualified to provide technical advice. President Hickman inquired how it was proposed to deal With lines of credit that had not actually been drawn upon, Pointing out that this would have a bearing on the ability of banks to extend export credit and still not expand their loans more than 5 per cent beyond the credits outstanding at the end °f 1964. Governor Robertson replied that under no circumstances should banks be discouraged from extending export credit, but they would be expected to cut back other credits. Whilc, banks would have to honor binding commitments, in some cases there 2/18/65 -7- were simply understandings. Refusals to extend nonexport credits would have to be related to the national interest. President Ellis suggested that if export credits were held out as sacred, banks no doubt would be presented with many applications for financing under the guise of export credit. He suggested that the Reserve Bank Presidents, in discussing the voluntary Program with bankers, be cautious to avoid the possibility of "export credits" being carried to the point of abuse. A Reserve Bank President noted that there was nothing in the draft guidelines with respect to insurance companies, and Governor Robertson replied that guidelines for such companies and other nonbank financial institutions would be formulated as soon as possible. In the meantime, there was nothing to prevent the Reserve Bank Presidents from discussing the program with individual nonbank financial institutions and asking them for a good faith effort. Another President inquired about loans to underdeveloped countries, noting that under the draft guidelines such loans apparently would be included within the 105 per cent limit, and Governor Robertson replied that this was an area where the Reserve sank Presidents must use discretion in conversations with lending institutions. President Wayne expressed the view that the hope for success lay in the extent to which banks could be persuaded to 2/18/65 -8- roll back the vast amount of credit extended in the fourth quarter of 1964 for nonexport purposes. This would provide funds that could be used to finance exports, and he felt that the Reserve Bank Presidents should express this view. President Hayes said that the banks were looking for guidance on loans to particular geographical areas and on types of credits that were not particularly in the national interest. He suggested focusing attention on the possibility of curtailing credits to Western Europe. He felt that the banks would welcome suggestions by the Federal Reserve that they turn down nonexport credits to developed countries, or fail to renew such credits, without at the same time inviting competitors to take the business away from them. Governor Robertson suggested the alternative approach of emphasizing priority on loans to less developed countries. He went on to say also that if there should be a cut-off of credit to Japan, for example, this would provoke substantial political Problems. Instead, the emphasis should be on not expanding the current volume of credit. The Latin American countries might fall in somewhat the same category. President Ellis inquired as to the thinking about the Probable length of the voluntary program, and Governor Robertson Observed that there would have to be a careful watch to appraise the effectiveness of the program. Chairman Martin commented that if any definite time period was indicated, people would be looking 2/18/65 -9- for results within that particular period. There was a general assumption that if the steps now being taken were not successful, Other steps would have to be taken. This line of reasoning should not be held out as a threat, but the balance of payments message had contained a commitment to hold the price of gold at $35 an ounce. Chairman Martin also noted that the legislation being sought to provide antitrust immunity for certain actions under the voluntary program contained a terminal date at the end of 1967, unless terminated sooner by the President. Chairman Martin also made the comment that some skepticism was bound to be heard about an effort of this kind, but that an oPportunity was provided for the Federal Reserve System to exert strong leadership. In this connection, he noted that all of the members of the Federal Advisory Council would be attending the meetings at the White House and the Federal Reserve Building today. This was a statutory body, and the members should be brought into the program in terms of seeking their advice and support. As many people as possible should be encouraged to lend their efforts to the success of the voluntary program. President Wayne asked for clarification on whether insurance companies were now included in the part of the program for which the Federal Reserve had responsibility, and C hairman Martin replied that the F leral Reserve had been asked to assume responsibility for the program for nonbank financial -10- 2/18/65 institutions, including insurance companies, pension funds, investment companies, and others. He indicated that it would be appropriate for a Reserve Bank President to have discussions with representatives of individual nonbank financial institutions. Members of the Board's staff indicated that information was available at the Treasury that would be useful in compiling a 1_-t of the principal nonbank financial institutions that might be engaged significantly in foreign lending or investment. The work of formulating appropriate guidelines would proceed as rapidly as Possible, and the Federal Reserve Banks would be informed as further steps were taken. Governor Robertson noted in this connection that a check had been made regarding savings and loan associations, that apparently there were few if any such institutions with foreign investments, and that accordingly there appeared to be no need to bring them within the voluntary program. Governor Balderston expressed the hope that Coe '-cderal Reserve System would refrain from conveying an impression that the international payments problem was not likely to be of long d uration. Capital funds might be flowing abroad for a long time. The question was not how long the problem would be before the country, but how fast the balance of payments could be brought under control. It seemed essential to show definite results Within the course of the next year. As to the question of credits to various geographical areas, Governor Balderston pointed out 2/18/65 -11- that if there was restraint on dollars flawing to Europe, it might still be found that credits to underdeveloped countries resulted in dollars eventually piling up in European central banks. Chairman Martin concluded the meeting by reiterating that the Federal Reserve must try to minimize in this initial period the type of skepticism that comes simply from ignorance. The Federal Reserve should exhibit an attitude of wanting to have the right answers and should exert all the leadership it possibly could. The meeting then adjourned. Secretary
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