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: Members of the Board Prom: Office of the Secretary Attached is a copy of the minutes of the meeting of the 1!?ara of Governors of the Federal Reserve System with the Federal Aavisory Council held on February 19, 1957. It is not proposed to include a statement with respect to !nY 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. i , Should you have any question with regard to the minutes, AZ 14111 be appreciated if you will advise the Secretary's Office. ' c'hervise, if you were present at the meeting, please initial in 2114m1 A below to indicate that you approve the minutes. If you ;!!e not present, please initial in column B below to indicate "at You have seen the minutes. Chm Martin Gov. Szymczak Gov. Vardaman Gov. Mills %v. Robertson GI3v. Balderston Shepardson (2/14 A meeting of the Board of Governors of the Federal Reserve 8Ystem with the Federal Advisory Council was held in the offices of the Board of Governors in Washington on Tuesday, February 19, 1957, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Vardaman Mills Robertson Shepardson Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Messrs. Brace, Massie, Mitchell, Fleming, Kimball, Livingston, Miller, Baird, Kemper, Jacobs, and King, Members of the Federal Advisory Council from the First, Second, Third, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively Mr. James N. Land, Senior Vice President, Mellon National Bank and Trust Company, Pittsburgh, Pennsylvania Mr. Prochnow and Mr. Korsvik, Secretary and Assistant Secretary of the Federal Advisory Council, respectively President Fleming reported that at its earlier separate meeting, the Federal Advisory Council elected Mr. Fleming as President of the C°141c11, Mr. Denton as Vice President, and Mr. Prochnow and Mr. Korsvik e s Secretary and Assistant Secretary, respectively. ' Messrs. Massie, 111tchell, and Livingston were elected directors to serve with Messrs. ?lenling and Denton, ex officio, as members of the executive committee 01 the Council. 383 -2- 2/19/57 President Fleming stated that the Federal Advisory Council at its current meeting reaffirmed an earlier action to support the status of the Board of Governors of the Federal Reserve System as an independent agency of the Congress in the event any effort should develop along the lines of a suggestion made by Mr. Elliott Bell in the fall of 1956. The Chairman of the executive committee was author- ized by the Council to use this action in whatever manner seemed apProPriate. Before this meeting the Council submitted to the Board of Governors a memorandum setting forth the Council's views on the subto be discussed with the Board at this joint meeting. The statement of the topics, the Council's views, and the discussion with respect to each of the subjects were as follows: 1. What are the views of the Council with respect to the business situation during the period from now until mid-1957? Among specific industries, the Board would like to have the Council's judgment as to the prospective demand for new model automobiles during this perood, as well as for used automobiles. Are further increases in prices of finished products expected? Is there any indication of a change in the supply-demand relationships that would call for a relaxation of credit restraints? All members of the Council expect a high level of business from now until mid-1957. Although economic conditions may varY from district to district, it is anticipated that business generally will be good. However, the members of the Council !re concerned with the continued narrowing of the profit margin, as this tends to make business investment progressively less attractive. '384 2/19/57 -3- The Council believes it is somewhat early to make a definite prediction as to the demand for new model automobiles. Most districts expect that the number of new cars sold will be slightly higher in the first half of 1957 than in the corresponding period of 1956, but not as high as in 1955. The demand for used cars is good and should continue satisfactory for the first half of the year. The prices of most finished products will probably increase, with certain exceptions such as appliances, textiles, and some chemical products. The Council does not believe there are sufficient changes In. the supply-demand relationships to call for a relaxation of credit restraints. Chairman Martin stated that he would appreciate having the members of the Council comment on what he called the current "blitz of 13essimime regarding the economic situation, furnishing some assessment Of the bases of such feelings and their significance. Mr. Brace stated that the general feeling he had observed in Ne/I ngland was one of some disappointment in the outlook for the first 1141f Of 1957. He emphasized more strongly than was indicated by the C°1111cilt s answer to this question the shrinking profit margins of busilless. New automobile sales had been disappointing and the outlook was 8°41eldlat gloomy. While this reflected weather conditions to some ex- tellt, there was also evidence that high prices were a factor in the reIllet44ce of persons now having good automobiles to turn them in on new Mr. Brace said the textile industry was not in good position 644 11 number of mills had closed down recently, some of them permanently. °4 'e other hand, shipbuilding was active and conditions in the machine 2/19/57 tool industry were good, with profit margins being maintained. The imPortant electronics industry was experiencing pressur e, partly because it was difficult to know what profit margins would be on Government orders when deliveries were completed. One could find what- ever condition he looked for among the large variety of small in(14stries in New England, but the over-all view would not be one of ' Illessimiam yet, but of concern as to the outlook, with current busiIless fairly active. Mr. Massie said that business in the Second District for the 1.°1-11"th quarter of 1956 recorded quite a few all-time record highs, but within that framework there were some weak spots. The service cilastries were taking up any unemployment that developed in other 4(3.43. Personal income was at a new record level. The weak spots /lex'e the ones that had been weak in the past: employment in the textile industry was 20 percent below 1948 levels; and residential buildvas sharply below last year's level. Nonresidential private build, 14(Particularly commercial) was quite high, and public constru ction vas 4.0 percent above a year ago. Automobile sales were reasonably 13'3(4 'iith the best records being shown by certain of the lower priced 41401/Lailes. Used automobiles were moving well. Over-all business e°1111 be characterized as being about as good as could be hoped for, '148sie said, recognizing that at any given time some phases of kleth ' ess 'would be less good than others. 386 _5_ 2/19/57 With respect to Chairman Martin's request, Mr. Massie said that he found some pessimism in the Second District - the largest exaount turning up among persons principally interested in professional Investing of money. These same people were not bearish on business in general but felt that prices of common stocks had risen so much over the past fifteen years that some adjustment was called for. a. PS YCliOlOgiCal effect on individua1s. This had For example, there had been c°11stierdble shifting from good stocks to municipal securities. While he 'would not call this group bearish on the general outlook, Mr. Massie 841d that with present high employment and production levels it was difficult to find a stimulus that would carry activity to still higher levels. Mr. Massie went on to describe a meeting of the Commerce AssocLation of New York in November 1956 and a meeting he had with a small of well-to-do individuals interested in real estate who expressed the view that the "tight money policy" was "killing off" building. They Il4Eled to have their views brought to the attention of the Board of Gov1.13, Mr. Massie said, and he reviewed his discussion with these inclividuals who did not seem to understand how the monetary system worked. At the conclusion of the meeting, he said, they seemed to have a better and the efforts --az-Ling of the monetary policy being followed beih,„ -16 Oade to keep inflation dawn. entire It was Mr. Massie's view that the business community in the Second District was beginning to under- more about these matters. -6- 2/19/57 Mr. Massie concluded his remarks with the statement that he relt business conditions currently were good but that he did not see how they could go forward immediately and, therefore, he anticipated 8°111e leveling off with further shrinking of profit margins. Mr. Mitchell said that business in the Third District rose to a very high level toward the end of 1956 but that in the last month or s° indications of leveling off had developed. This was healthy, he in general, Strong spots included the steel industry and metals felt. spot. letr°leum, and shipbuilding - the latter a new strong The bitumi ous and the ancoal industry was moving along satisfactorily the first time since industry was showing some improvement for the war. The textile industry, which expected some pick-up three or 'months ago, had shrunk back to a very low ebb. l'°111 Residential build- Itig had dropped off in number of starts, but dollar volume approximated erear ago. Industrial and commercial building had held up well and 13111)11c construction had increased. Igere District department store sales about at last year's dollar level, compared with an increase of Out five percent nationally. New automobile sales were running about the sEMe as a year ago and dealers' inventories were rather high pending }lett Was expected to be better spring business. Inventories of goods °L-L-LY were about in line with sales and businessmen ti°118 about increasing them than during 1956. were more cau- Employment and wage pay- 41ents Were of work were slightly higher than a year ago, although hours 101.re,, Money in the Third District continued tight. ‘)(A(Th ) :7) • 2/19/57 -7Mr. Mitchell said that he expected business to stay on the cur- l'smt high plateau during the first half of 1957. Profit margins were 811rinking and business confidence had weakened somewhat, particularly 14 the last month or so. This reflected developments in the stock inarket and the fact that capacity in most industries was adequate or in excess of current needs. Any slack resulting from falling off in Private outlays during the next year would be taken up by increased ?ederal and local governmental expenditures. In sum, Mr. Mitchell be- nehed that business was leveling off with a slight reduction in in- riati°11arY pressures, that this was a healthy development, and that any hesitation shown in the next few months would be a good thing if one locked to longer-run maintenance of better business over an extended 13eriod. Mr. Land said that Fourth District business activity had con144cd at a high level since the Council's meeting last November. The teel industry continued to operate at a high rate although output had tieclizied from 100 percent of capacity to a 97-98 percent rate, a develop- that had come a little sooner than the industry had expected. This rilight reflect the fact that in earlier months 10 to 15 percent of steel °1114°11t had been going to inventory. By the end of March steel inven- tor, es would be back to the unduly high pre-strike level if present ' °Perati-ng rates continued, and some further reduction in output might teate Place to prevent inventories rising further. The automobile industry 9 _3_ 2/19/57 had not been taking as much steel as was expected earlier, but the steel released by that industry had found ready takers in other lines. The glass industry had shown some slackening in activity, particularly in vIndow glass output. The aluminum industry reflected a change in pace, e°mPared with the very tight situation that had existed for some time, 84a aluminum producers were now hunting for buyers. Retail sales con- tinued at a good level except for sales of appliances. Prices were tend- ink to edge up, although certain fabricated aluminum items and window @Ilss prices were tending to ease. Business confidence today was not 4s bullish as a few months ago, but Mr. Land did not feel the situation had w orsened in recent weeks. President Fleming said that developments in the stock market something to do with the feeling of pessimism that Chairman referred to. Press The squeeze on profit margins was another factor. reports had over-emphasized the situation and had misinterpreted stat ements of the Secretary of the Treasury and others as to the busilless outlook. As to the Fifth District, President Fleming said that over-all bils1 ne8s nontinued good. Shipbuilding, coal production, and cigarette 131‘c)cilletion were bright spots, and farm product prices were slightly be t t-er than earlier. Residential construction was down but industrial —ruction continued very strong. The furniture industry had weakened, the textile industry was not in satisfactory condition. Despite these weak spots, President Fleming thought the over-all situation in the Pit th District should be described as good. 390 -9- 2/19/57 Mr. Kimball said that the long-term growth trend in the Atlanta District was continuing but that currently there was some concern about the future business outlook. Actual conditions were somewhat mixed, bIlt among the favorable elements was the fact that personal income was Continuing to grow at a faster rate than for the country as a whole. C°11suiners were spending their income at a higher rate than nationally, 118 indicated by department store sales and early active sales of 1957 4'"ael automobiles to fleet buyers. The automobile market now seemed to be weakening, however. As to unfavorable factors, Mr. Kimball said that easl, had been some receipts of farmers declined during 1956 and there %Tee.kening in the paper and chemical industries. The textile industry, which had been quite disapexpected some improvement in late 1956, had 13°111t1ag, and the lumber industry was still depressed. (leclined more than seasonally. 14 the District. Bank loans had Steel was becoming more readily available an effect in Developments in the stock market had had the Sixth District. Nevertheless, Mr. Kimball said that he believed _ s although at a 441e 8 in the Sixth District would continue to grow son,— , With reference to Chairwn -at slower rate than in the past few years. 141S 41e.11 14, in the Sixth District request, he would describe the feeling lag more in the nature of "uneasiness" than of "pessimism." ' much pessimism among Mr. Livingston said that he did not find Seventh had an District businessmen. The level of the stock market inevitably affect on business confidence since many persons felt that it l ePre ' -seated a composite of judgment as to the outlook. Currently, however 'the Chicago District had a very high and satisfactory level of 2/19/57 -10- b usiness. The farm implement business, which had been at a low level for several years, was now more hopeful than for some time. cultural income was up because of higher hog prices. Agri- On the other hand, the rise in hog Prices had affected unfavorably the profits of meat Pa'ckers. Retail sales were excellent at Christmas and still continued to be very satisfactory. ing' Automobile sales had been somewhat encourag- Mr. Livingston referred to the practice of discounting from list 'Ices, stating that the discounts being allowed were not particularly 1)1 Qlcant indicators of the automobile market; they reflected the fact that dealers did not wish to accumulate too much inventory until they haja a better feel of the market for this year's cars, and even more l IaIlificantly, they reflected the fact that "fair-trade pricing" was ' 'Pearing as a merchandising element in the United States. e'les were excellent in the Seventh District. Used car In summing up, Mr. Living- St°4 said that business in the Seventh District was very good and would eel'tainlY" continue to be good through mid-year. Dess;_. 4.1fi1sm on the business front. There was no general Mr. Miller said that the Eighth District was not unlike the rest c t the ' Year country: business would be good during the first half of this Eighth District industry was fairly well diversified and not likely to b, greatly affected by conditions in a single industry. He saw no nee of capital expansion programs being abandoned, but plans for -nal expansion were slowing somewhat. 392 -11- 2/19/57 On Chairman Martin's question, Mr. Miller said that in the Eighth District the business public was generally "cautiously optiMistie. No undue accumulations of inventories had taken place ex- cept of appliances. Even there, General Electric Corporation was going ahead with plans for another production unit. Commercial construction 78-s continuing at a high level and, while the number of housing starts le '8 dawn, the dollar volume was holding up fairly well. The supply of s113-11 houses seemed to be reaching a saturation point and the demand for somewhat larger houses. /lith drouth conditions. bt The Eighth District was not troubled Automobile sales were not as good as desired Were better than last year. Difficulties in marketing issues of bonds for public construction within the interest rate limitations set by States or local governments would delay some construction projects. All in all, Mr. miller anticipated good business during the first half Of this year. Mr. Baird described conditions in the Ninth District as generally qtlite the District. satisfactory, especially in the eastern part of Plo Yment in January was higher than a year ago. Em- The farm machinery in- - Y was showing some pick-up from the depressed conditions of a year eaasi4 ' el% last Retail sales in January were about 2 percent higher than —ex. Prospects for the iron ore industry for 1957 were very good, cle313.1.te predictions of somewhat lower steel production later this year. COp Production had. been reduced somewhat and paper manufacturing 8 were experiencing a slight decline in sales. 2/19/57 -12As industrialization of the Ninth District progressed, agricul- ture carried less weight in the total, Mr. Baird said, but it was still the predominant activity. There was some indication of the drouth area being extended into western parts of the Ninth District and subsoil and surface moisture were not now sufficient to assure favorable growing ccmditions this spring. On the other hand, livestock producers had been favored by weather conditions to the extent that they had not had to feed hay heavily. Faint product prices were somewhat better than a year ago. Baird commented on a symposium he attended a month ago at 11 he was surprised at the optimism shown by businessmen. itznibe men were not too pessimistic. Even the He pointed out, however, that 1:1-1d1es showed that changes in Ninth District business lagged perhaps 81: month5 behind changes in the over-all national picture. Mr. Baird e°11elladed his remarks with the statement that bank deposits had declined tn.ore than seasonally since the first of this year but were now picking lz) somewhat. Despite the loss of deposits, banks were not borrowing as 4111ell as a year ago. Mr. Kemper said that the Tenth District was mildly optimistic the period up to mid-1957. tho He had Observed no pessimism, al- there was uncertainty as to developments in the latter part of the ,Jar- The increased Federal budget and narrowed profit margins were tactol., -- causing uncertainty. In most industries output of goods was t° demand, the cement industry being a possible exception. The stock market was a factor that hoLl made people feel a little poorer. 394 2/19/57 -13- People felt that we had a "give away Government." While he personally was not pessimistic, Mr. Kemper said there '4414 some reason for the feeling of uncertainty he had described. Within the Tenth District the situation was surprisingly good, considering that the worst of the drouth area was located in that District and there had been almost no relief thus far. Retail sales had held up fairly well although new automobiles could be bought at discounts as elsewhere and aealers were not making much money. Residential building was sharply below last year and this was being reflected in other businesses such "furniture and appliances. Public and corporate construction were up. Ran.. --c.e conditions were poor, but soil bank payments were helping to in- el ' eese farm income. The soil bank program in turn might affect the reltilizer business unfavorably. Business loans of Tenth District banks had declined since the 44.1ng of the year, Mr. Kemper said, and while an increase on the tax -' Yn1ent date could be expected, they would be a little lower by mid-year. 1:)ell°81ts were dawn about 10 percent since January 1, mostly in corres1)°40-ent bank balances reflecting a move by those banks to purchase Treasr bills. Mr. Kemper said he would sum up the Tenth District situation Ilith the statement that the area was getting along very well, considerthe adverse conditions of nature. Mr. Jacobs described business in the Eleventh District as flattening Ott at a high level. Department store sales were showing minor in- from the previous year. Non-farm employment had declined less 395 2/19/57 than seasonally and recent rains, the best in two years, had helped 11Pidly in the drouth areas, although more moisture was still needed. : The oil industry continued at a very high level. Sales of new model eArktiobiles in four larger cities of the District were about 4 percent better than a year ago but were 5 percent below December sales, and 13rice resistance was evident with substantial discounts generally available on new cars. Residential building was running below last 51.1117, but public and industrial building was expanding. Sufficient alc)rtgage money appeared to be available to take care of projected constIlletion and, even with the decline in residential starts, Mr. Jacobs felt that total construction this year should equal or exceed that of 1956. Bank loans were higher than a year ago, but borrowings for tax 1311rP0ses in. March of this year would be lower than a year ago. In gen- el'EL1Y Mr. Jacobs felt that business for the first half of 1957 should be -4 good as in 1956 and perhaps better. Mr. King referred to Chairman Martin's question by stating that the Twelfth District optimism was on the high side relative to pessi 144a134 The stock market seemed to cause less concern than in some other districts, although it was a factor. Mr. King suggested that at the Present time the financial community and the press were inclined to 4°.le et for news value the pessimistic segments of industry, rather than the items of a more optimistic type that had been evident for so long. In the Twelfth District, employment continued at a very high leltel) Mr. King said, with three of the four principal cities in Cali1'01%44 44- listed as having "excess job opportunities." Residential building 396 2/19/57 -15- as running about 12 percent below a year ago, but other construction would bring the total up at least to 1956 levels. Sales of new houses Slowed down last year but there had been considerable improvement in january and February of this year. The V.A. loans were practically Out of business" today and FHA mortgages were being sold at discounts. Mrs King expressed the belief that bank loans in the Twelfth District wmad increase from January to June this year by about 25 percent of the increase shown in the comparable period of 1956. Dealers in new sUtomobiles were complaining that they were not getting deliveries of nelr oars rapidly enough. Some plans for plant expansion had been c44oe11ed, but Mr. King said that he could select as many other plans that had been increased or expanded. Excess capacity at present seemed t° he centered in the lumber, aluminum, and copper industries. As a matter of interest) Mr. King noted that interest rates to bs Paid on savings deposits at Twelfth District banks had generally °11.e to 3 percent and that three-fourths of such accounts would now this interest rate, while an additional 17 percent would draw 2-1/2 lelseent. The increase in rate was probably reflected in a rise of $165 rail-lion in time deposits at District banks from January 1 to January 20 this Year, compared with a decline of $24 million during the correspond14 Period a year ago. Chairman Martin noted that this was the first meeting of the C°Uricil during 1957. He expressed appreciation for himself and on 397 V19/57 -16- behalf of the other members of the Board for the careful, thoughtful eonsideration that the Council had given to the topics placed on the agencla and for the comments that had been presented. He emphasized the inTortance of these discussions in the work of the System, stating that one of the problems the Board faced constantly was the assessment t lic attitudes. If the System was to be effective, it was necessary that it have the kind of back-stopping that had been given by Mr. Massie Ilel)re the meeting of the New York Commerce Association; one of the 4148/ber,e of that group had commented later that his entire attitude toward tile Mork of the System and the function of monetary policy had been changed 484 result of the meeting with Mr. Massie. There was a tendency for the public to fear that the System operated Liall - rorY tower, Chairman Martin said, citing a recent discussion with " „. —vresentative of a national magazine who said that he had been convinced the,, 'rederal Reserve operated in an ivory tower but that, after having one of the magazine's representatives to observe the System, the ttttitoiA "e of the editors had been completely changed when they found that soTht Parts of the System participated in the reaching of decisions. 416411man Martin said that he was not suggesting that the operating structure SYstem could not be improved, but he was suggesting that to preserve the things that were worth while in our country and economic and social r8te111, it was essential to bring to bear the kind of thinking that was -sented by the comments at this meeting with the Advisory Council. 398 2/19/57 -17The process used in presenting the comments of the members of the Council resembled the procedure followed at meetings of the Federal °Pen Market Committee, Chairman Martin said. He had become convinced that such a procedure was in no way a waste of time but that it gave Perspective and balance and was of great help to the Board in trying to assess current tendencies. There were persons who questioned haw effective a structure such as the System could be with seven Board Members, the directors of the twelve Federal Reserve Banks and their anches, and the members of the Federal Advisory Council. ' ill There would alwaYs be honest differences of opinion and there might be better ways °It conducting these meetings, but he had been encouraged by the way this 14"ocedure had developed. The Board depended on the Council and on the cill'ectors of the Federal Reserve Banks and their branches. He hoped that each member of the Council would put his shoulder to the wheel to see to it that the problem of a depreciated currency and the explanation c/f what was involved was presented to the public in a proper light. He elltioned a newspaper acquaintance who last spring felt that everything the System was doing was wrong but who, after having completed an extended t°111" of the country, now believed that the Federal Reserve was the wark of the currency, and he was considering writing a book about it. This change was not due to the Board but was because of the collective 111111ing together of different parts of the System. The Board welcomed 114/1111g the members of the Council consider themselves as being on the 11g line. ' It would be most helpful if, through their President or 399 -18- 2/19/57 collectively or individually, they would bring to the attention of the /3°ard any problems they felt should be discussed, including unpleasant problems. President Fleming responded that he felt an improved atmosphere had developed between the Board and the Council over the years and that the Council had high regard for its working arrangements with the Board. 2. Do you know of revisions in business plans for plant and equipment expenditures in 1957? Are there evidences of excess productive capacity? The members of the Council have been infolwed of downward revisions in plans for plant and equipment expenditures in some industries and of upward revisions in others. There is not at present sufficient evidence of downward revisions in business plans for plant and equipment in 1957 to change significantly total expenditures for these purposes. . There is evidence of excess plant capacity in certain lines. A large part of the expenditures for additional plant and equipment undoubtedly is an effort to increase operating efficiency and reduce costs in order to keep abreast in an increasingly competitive market. There was no discussion of this topic. 3. What is the outlook for construction (residential, industrial and commercial, public) during the period from now until mid-1957? Do construction costs appear likely to be stable, to increase, or to decrease in the near future? Is mortgage money available in sufficient volume to support projected residential, commercial, and private construction during this period? The council believes housing starts in the first half of 957 will be slightly lower than in the same period of 1956, out the dollar volume will be approximately the same because °f larger housing units and higher labor costs. Industrial 'lld commercial construction in the same period are expected .at (1) equal or moderately exceed their 1956 dollar volume, but PlIblic construction should be considerably above last year. 400 2/19/57 -19- The total dollar volume of all construction from now until mid-1957 should be higher than in the corresponding period of 1956. Rising labor costs will be a major factor in increasing construction costs. In reply to a similar question on the volume of mortgage money at the meeting in November, the Council stated: " . . . that mortgage loan demand was outrunning the supply of savings, that the rates of mortgages had risen, and that lenders had become more selective. . . . Less money is now available for mortgages, interest rates are higher and lenders are exercising greater selectivity. "Rates on VA and FHA mortgages are now so unrealistic that this type of investment is becoming increasingly unattractive to lenders. Because of attractive rates, an increasing proportion of savings are being invested in corporate, state and municipal obligations rather than in mortgages." Since the Council's statement, higher mortgage interest rates and the decline in housing starts have tended to bring about a better balance in the supply of funds available for conventional mortgages. Except for the VA mortgages whose present fixed rates are unattractive, sufficient mortgage funds are expected t° be available to finance the anticipated volume of construction from now until mid-1957. There was no discussion of this topic. 4. What are the probable changes in volume of bank loans during the first half of this year? Is the volume of borrowing for tax purposes in March likely to equal or exceed that of a year ago? What is the outlook for consumer credit? The members of the Council expect the volume of bank loans to increase moderately between now and the end of Some districts experience little or no borrowing for tax purposes, but most districts in which there is a concentration of large corporation accounts expect 401 2/19/57 -20 that the volume of borrowing for tax purposes in March may exceed that of a year ago. This will result in an increase in such loans for the System as a whole. The volume of consumer credit may be expected to increase moderately in the first half of the year. President Fleming said that in preparing the Council's statetent on this topic, it had been assumed that the Board was interested In views as to the outlook for bank loans from mid-February until the nliciale of the year. He also referred to the presentation made to the e°1140i1 by Mr. Thomas, Economic Adviser to the Board, yesterday afteradding that on the basis of that presentation he felt more certain that the expectations indicated in the Council's statement would be borne out. 5. What, if any, changes would the members of the Council suggest in the System's current credit policies between now ana mid-year? The Council believes, as stated in its Memorandum to the Board in November, . that the System's credit policies have been appropriate and well executed, especially in view of the difficulties which are always Assuming present in evaluating economic trends. conditions, a continuance of present economic the Council suggests that current credit policies be maintained with the same degree of restraint . . " for the period between now and mid-1957. President Fleming noted the absence in the above statement of 840,Y R -uggestion that the discount window at the Federal Reserve Banks be ket °Den. This was partly because the tendencies that had developed 148t APril for some bankers to feel that the discount facilities might 110' b t e adequately available had disappeared and everybody now anticipated that the discount window would be kept open for legitimate purposes. Vr) -21- 2/19/57 President Fleming went on to say that the Council felt that credit policy had been well executed, that it realized the difficult daY-to-day problems that were presented in this field, and that it had no suggestions for change at this time in the general policy now being followed. 6. Do the members of the Federal Advisory Council have observations as to any features of the Bank Holding Company Act or its operation to date which they feel would be of assistance to the Board in administering its responsibilities under the law? The members of the Council who have had experience . wlth holding companies will present their views orally to the Board on this item of the agenda. President Fleming said that all members of the Federal Advisory C°Uncil were interested in the over-all operation of the holding company legislation but that only a few had been directly concerned with the techniques of its anministration. Messrs. Baird, King, and Kimball 11°41d comment at this meeting on certain aspects of the law, and the Co/Inca would be glad to have the topic on the agenda for the meeting to be held in May with the thought that between now and then the members -41a st-u— the matter and come prepared to discuss it more fully. He then called upon Mr. Baird who presented four matters relating to the hOlA s'411g company legislation as described below. 1. Mr. Baird questioned the need for or desirability Of the prohibition in the Bank Holding Company Act of 1956 against "horizontal loans," i.e., loans made by one holding .20taPan,y bank to another bank in the same system. He noted that "upstreale loans within a holding company system were I03 2/19/57 -22- precluded under previous legislation, and he agreed that they should be. However, he felt that a holding company bank should not have to discriminate against an affiliated correspondent bank, stating that he believed a holding company bank should discharge its obligations to an affiliated correspondent in the same manner that it would to one that was not affiliated. It was Mr. Baird's belief that any abuses could be fully covered by requiring that Government securities be pledged at par or market value against such advances. 2. The second technical point, Mr. Baird said, was the provision in the Bank Holding Company Act of 1956 that prevented banks controlled by a holding company from making loans secured by the stock of the holding company. He had no quarrel with this provision but felt that it was obscure as between prohibitions against new loans and renewals of old loans. He hoped the Board might rule that an existing loan might be renewed but not increased. He noted that in the course of time such loans would disappear. 3. Mr. Baird then referred to Senate Bill 1075 which would extend further the exemption under the Bank Holding Company Act of 1956 for religious, educational, or charitable institutions by making it apply to wholly owned subsidiaries Of such institutions. It was Mr. Baird's opinion that if any action were to be taken on the subject of exemptions, they should be limited rather than increased. He felt that holding companies owned by educational and charitable institutions presented the same problems from the standPoint of the need for regulation as did other holding companies, noting that their methods of operation and the competitive factors were the same regardless of ownership. In principle, he felt that this would apply to religious institutions although he recognized the political difficulty Of eliminating that exemption. However, he felt particularly that exemptions of charitable and educational institutions and their subsidiaries should be restricted rather than extended. Governor Robertson asked the question whether, if the Congress Provided exemption to religious, educational, and charitable 148titutions, there was good reason why the same exemption should 404 -23- 2/19/57 not be extended to wholly owned subsidiaries of the parent institution. To this, Mr. Baird indicated that he felt the same reasoning would al3PlY to the parent and subsidiary institutions. At Mr. Baird's request, Mr. King presented a suggestion made by the Federal Reserve Bank of San Francisco that the Board seek legislative reconsideration of the "other than a bank" clause of section 3(a)(3) of the Bank Holding Company Act of 1956. Mr. King stated that he was presenting this not as a suggestion of his own but as a communication that the Reserve Bank had submitted to him. The Reserve Bank felt that by allowing bank subsidiaries of bank holding companies to merge through the asset acquisition route, an inexplicable distinction between stock and asset acquisition, such as existed under section 7 of the Clayton Act, was perpetuated. The Bank also felt that the exemption given to bank asset acquisition mergers flouted the spirit if not the letter of section 3(d), the so-called Douglas amendment. 4. . Mr. Baird stated that while he had just heard of requirement this Proposal, it apparently would add a authorities State that, in addition to approval by the Currency if the If a State bank or the Comptroller of before a consent national bank, the Board give its bank holding company bank acquired the assets of, or ' raerged with, any other bank. In a State other than the home State of the holding company, the proposal also bank q would prohibit an acquisition or merger by a the unless holding company bank with another bank statutes of that State expressly authorized such action .11th respect to out-of-State bank holding companies. , n Baird stated that such a requirement would be '.,t1scrizinatory against a bank holding company bank and that it would be unjustified. He also pointed out that at the present time mergers involving national banks required the consent of the Comptroller of the Currency, aId those involving only State banks required the approval s the State supervisory authority. After stating in of °Me detail his reasons for opposing legislation such as the ed 4_ San Francisco Bank proposed, Mr. Baird express tive the legisla support :fle hope that the Board would not . ' 611Egestion of the San Francisco Bank. 405 2/19/57 -24Mr. Baird stated that he would have his comments on the third aM fourth points prepared in memorandum form and distributed to the Boaxsa and the Council. Secretary's Note: The memoranda referred to were submitted by Mr. J. H. Colman, President, First Bank Stock Corporation, under date of February 22, 1957, and copies are attached to these minutes as Items 1 and 2. , who stated President Fleming then called upon Mr. Kimball the.t he wished to report tendencies or developments taking place in the Sixth District in connection with the exemption from the definition (e) of a company if at a bank holding company under section 2(a)(3) d of holdings in the least 80 per cent of the total assets were compose tielcl of agriculture. This exemption was being used by so-called 4gr1ou1tural" organizations as a means of acquiring banks at very Prices and was causing apprehension among banks as well as others. The excessively high prices Purchasing organization could afford to pay t°11 such banks because of its ability to offset the excess payments through tax provisions. clePl'eciation on cattle and citrus assets under the ileectUse of the high prices some of these "agricultural" organizations Irsl'e thus able to pay for banks, there was concern as to how far pyraion. 1414111g of control of banks might go outside the regulat In the discussion that followed, Chairman Martin suggested that the toPics relating to the Bank Holding Company Act of 1956 be kept on he e.geada for meetings of the Federal Advisory Council throughout the 401; 2/19/57 -25- two-year period from date of enactment of the law, within which Period the Board was to submit to the Congress recommendations for changes in the legislation, pursuant to section 5(d) of the Act. Governor Robertson stated that he would like to have the Views of the Council as to whether the Board would be justified in recommending that there be eliminated from the Bank Holding Company Act all special exemptions from the definition of a bank holding company. President Fleming responded that the topic would be kept on the agenda and that the members of the Council would study the subject with a view to discussing it at later meetings. Specifically, he sug- gested that all members of the Council examine the exemptions from the definitions of a bank holding company provided in the lawIto hieh Governor Robertson had referred, with a view to discussing them 4't the next meeting of the Council and the Board. He also suggested t in the meantime the Council members send their written comments ' the cliltctlY to the Board. Governor Vardaman stated that he thought another subject that 811°121d be considered was the practice followed by certain chain banking :t*(1u1313 of publishing combined figures of condition for all banks in the eroup. like to have the Governor Robertson then stated that he would C°1111eil give some thought to a problem that had been giving difficulty to the bank a process supervisory agencies for some little time, namely Vhere bY certain banks, relatively few in number, carried on extensive "vilaA 'tow dressing" operations for the purpose of inflating deposits and 407 -26- 2/19/57 reducing figures of bank borrowing at times of the regular reports of condition. He stated that in one district the padding of deposit figUres resulted in overstating deposits by approximately *600 million 14 the report of condition at the end of December 1956. He hoped that the Council would study the problem and at a future meeting discuss 4eY8 in which the practice might be eliminated. ' President Fleming stated that the Council would be glad to discuss this subject at the next meeting. remarks and inGovernor Shepardson referred to Mr. Kemper's Whether requests for advances against soil bank certificates /lere presenting a problem for banks. Mr. Kemper said that this had not yet become a problem in the lellth District. ty if the However, he felt it might present difficul Ilaller banks came to their city correspondents for substantial assistin making such advances, even though the present soil bank contracts precluded a reassignment of the certificates. meeting of the Council President Fleming stated that the next 144 scheduled for May 19-21, 1957, but that if the Board had no objection the Members of the Council would prefer to meet on Sunday, May 12, with the understanding that the joint meeting of the Council with the Board /1014.141 be held on Tuesday, May 14, 1957. satisfactory to the Chairman Martin stated that this would be and it was understood that the meeting would be so scheduled. 2/19/57 Thereupon the meet Item No. 1. 2/19/57 409 Memorandum Re S. 1075 are inA bill has been introduced in the Senate - S. 1075. We g holdin ered bank a regist of e instanc that this was done at the st banks in 30 some intere an e°111Pany domiciled in Minnesota and owning situated in a number of states. The holding company in question is °1'aled by a charitable foundation. Company Act of 1956 by The bill would amend the Bank Holding g company (and therefore holdin -iminating from the definition of a bank owned by a reliwholly 1m all provisions of the Act) any corporation gious, educational or charitable institution. V stands, a religious, educaIt is true that, as the statute now tio owning the stock of several nal or charitable institution directly y. The g a-aks is exempted under the definition of a bank holdin compan of iary owned subsid wholly Pl'oposal would extend this exemption to a such an institution. to be taken on the subject It is suggested that, if any action is of e increased. The present than xemptions, they should be limited rather upon the use to which based ,7,ealptions under Section 2(b) of the Act are ous, educational or religi dends paid by the banks are to be put s of the Act: object real aritable purposes. This leaves untouched the the in ies public compan issfst, to regulate expansion of bank holding ss busine operations. ;;41.erest and second, to divorce banking from other y is owned by holding compan i,ne objects are present whether the bank insZidual investors or by a charitable foundation or other exempt of the less ownerregard same the is .ltion. The method of operation shipl T ed may well be le bank holding companies proposed to be exempt The 14 c__ T. their banks are certumpetition with non-bank holding companies, and need for same other banks. The rialY in direct competition with exists as with respect to ination of such bank holding company Ile 'ior-owned bank holding companies. administrative agencies is Regulation of religious bodies by 1)rob, ous exemption should be religi retalblY undesirable and perhaps the ion is applicab ned. We know of only one instance where such exempt utions with ional instit educat st11,1e. But exemption of charitable and s is inzation organi mpt nonexe sidiaries competing directly with cle; the ion of is exempt able undesir bensible, in our opinion. Equally the are in assets its of fieaak holding company where 80 per cent broad definition of the dd4of agriculture. The Act gives a very .worl , for example, a permit lax agriculture". This exemption would ions with the operation operat combine such Of ae lumber manufacturer to the banks was not more of worth net a gr°uP of banks, so long as the , thn, sts. intere -- One-quarter of the value of the lumber -2This subject of exemptions should not be handled piecemeal but could well be treated in the report which Section 5 of the Act requires the Board to make to Congress within two years from May 9) 1956. We would hope that the Board's recommendations to Congress tad be in the direction of striving to eliminate all exemptions from the Act. It is in the public interest that all bank holding companies °uLa be treated equally with respect to (1) the requirement of obL44i1g approval for additional stock acquisitions, (2) the requirement tl divesting themselves of nonbanking activities, and (3) the require,nt of accumulating statutory reserves of liquid assets under the kavvisions of the Banking Act of 1933.. t Respectfully submitted, First Bank Stock Corporation (signed) J. H. Colman J. H. Colman President Pebruary 22, 1957. 2/19/57 411 Memorandum on Suggestion of Federal Reserve Bank of San Francisco for Amending Bank Holding Company Act of 1956 We understand that this suggestion was made in the following language: "It is suggested that it might be advisable for the Board to seek legislative reconsideration of the 'other than a bank' clause of Section 3(a). It would seem that by thus allowing bank subsidiaries of bank holding coman panies to merge through the asset acquisition route, acquiasset Inexplicable distinction between stock and Act, sition, such as exists under Section 7 of the Clayton acquiasset is perpetuated. The exemption given to bank letter sition mergers seems to flout the spirit if not the Amendment". Of Section 3(d), the so-called Douglas As the law now stands, all subsidiary banks of a bank holding com3 1344Y (whether the subsidiary bank is situated in the home state of the aak holding company or in another state) may acquire the assets of aalOther bank in the same state on precisely the same terms as apply to 411Y other bank in the same state. Statutory merger or consolidation is, °r course, one method of acquiring the assets of another bank and, under Present law, bank holding company banks, wherever situated, may merge Ilrlder the same circumstances as can unit banks. The proposal apparently would change this situation in two respects: , 1- Prior approval of the Federal Reserve Board would be required i the bank holding company bank situated in the home state acquires e 4 Pee assets of, or merges with, another bank in such state. No such Reserve Board prior approval is required of such action by a "ulit bank. ; 1, 2- A bank holding company bank situated in a state other than the ?ale state of its bank holding company would be absolutely prohibited sr°111 acquiring the assets of, or merging with, another bank in such second state unless the statutes of such second state expressly authorize stIch action with respect to out-of-state bank holding companies. No Ilch statute exists in any of the 48 states and the possibility of , 119.ctment of such a law lies in the future. The present effect of the 1'°100sal, therefore, is an absolute prohibition of the right of a bank 2-6-ing company bank in such second state to merge with, or acquire the : :ssets of, another bank in such state, although its unit bank competitor qcross the street is permitted to merge with another bank or acquire its e8sets. ' 1 No reason is advanced for this discrimination against a bank holding a.°111Pany bank. The subject of the Clayton Act and its distinction between equisition of assets and acquisition of stock is wholly beside the point. sq«., -2Under the proposal only bank holding company banks (1) would be required to procure prior approval from the Federal Reserve Board for such action in the bank holding company's home state and (2) would be absolutely prohibited from such action in a second state. All other banks would continue to have the right to merge or acquire another bank's assets without approval of the Federal Reserve Board. If the Clayton Act is to be changed to apply to bank mergers and to the acquisition by one bank of the assets of another, then such 1?gislation should apply to all banks and not merely to the small 1111nority of bank holding company banks. No public policy warrants arlY discrimination in this respect between bank holding company banks and other banks. The policy of the Bank Holding Company Act of 1956 was to regulat e La• nk holding companies, not to regulate banks except to the extent xecessary to prevent upstream loans or loans to affiliates or upon _he security of stock or obligations of affiliates. The contributions acie by bank holding companies to the country's economy were recognized the hearings resulting in the 1956 legislation. The intention of 13:'e Act was to regulate bank holding companies (1) in their expansion vi acquisition of stock of additional banks, and (2) by requiring diof nonbanking assets. The policy of the Act certainly was not • c.liscourage growth on the part of holding company banks nor to penalize ' Ielr activities. T 1711 A merger of two banks always requires the consent of the Comptroller ifen a national bank is involved, or of the state supervisory authority °IllY state banks are involved. The proposal would merely add the ,::Plrement of a second regulatory permission where the banks are 1Ttzated in the home state of the bank holding company. It would comely prohibit such action in other states. ezi Acquisition of the assets of another bank does not by itself add her banking office to the acquiring bank, even where branch banking or Permitted. Such additional office requires regulatory permission he Comptroller or of the state supervisory authority. The proposa l i;;Lls a second set of require regulatory permissions, at least d where a a alloh is to result. It absolutely forbids such asset acquisition in second state. The proposal would deprive a bank holding company of a most important • De' lb possessed by all other banks. It would restrict competition by th-e-j-tting, for example, a large unit bank to merge with, or acquire the assets of, another bank while prohibiting (in a state other than me state) a smaller bank holding company bank from growth by hc) • er with or acquisition of the assets of another bank. _It -3Minority stockholders in a holding company bank - who are innocent bystanders - will suffer, since their bank will not be Permitted to merge with another or buy another bank's assets, while the competing bank may do so. The proposal would prevent, in a state other than the home state the bank holding company, two banks from merging even though a Dank holding company owns the stock of both banks. c Bank holding company legislation should regulate bank holding , °mPanies - it should not regulate banks in matters not pertaining IL'io holding companies. It should not restrict growth on the part of company banks by any restrictions not equally applying to rat banks. No public policy is served by prohibiting a bank holding b()InPanY bank from merging with or from acquiring the assets of another atilz., if such action is in the public interest. Frequently a merger „ ZY Increase competition by creating a bank more competitively equal an existing competitor bank. Frequently also, merger or acquisition 1.4 the assets of another bank is desirable where such other bank is 1.1 141SOUrid financial condition. The proposal would mean that, if a particular merger or bank take" 'were desirable from every point of view, it nevertheless could be consummated if one of the banks was a subsidiary of a bank "lding Company of another state. unnecessary stumbling-block in The the ay proposal would put a wholly national banking system. It of the orderly growth of the prohibit a national bank awned by a bank holding company domiciled c-onianother state from growing by merger or by a bank takeover, whereas Peting banks would be permitted to take such action. Bank mergers and bank takeovers should stand or fall on their own reA, st;:: and be permitted or denied according to the individual circumse ces• They should not be prohibited in advance on a wholesale -'e - they should be regulated in the public interest. ,,ystW ee Would hope that the Board of Governors of the Federal Reserve m Will not lend encouragement to this proposal. Respectfully submitted, First Bank Stock Corporation (signed) J. H. Colman J. H. Colman President February 22/ 1957.
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