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335 A meeting of the Board of Governors of the Federal Reserve SM'el wee held in Washington on Wednesday, February 24, 1937, at 12115 P.m. PRESENT: Mr. Eccles, Chairman Mr. Szymczak Mr. Davis Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Consideration was given to each of the matters hereinafter l'eterred to and the action stated with respect thereto was taken by the Board w Telegram to Mr. Stewart, Secretary of the Federal Reserve Ilk of St. Louis, reading as follows: ect."Your telegram. Board approves for your bank, eflve February 25, following rates on industrial adUnder provisions of section 13(b) of Federal ReAct: 4 per cent to 5 1/2 per cent per annum on l'31rset advances to established industrial or commercial vusineeess; 3 1/2 per cent per annum on industrial advances to financing institutions for the portions of adances for which such institutions are obligated, and 4 Per eent per annum on remaining portions." Approved unanimously. B°nd, in the amount of $50,000, executed under date of Feb16, 1937, by Miss C. Margaret J. Reid as Alternate Assistant deral Reserve Agent at the Federal Reserve Bank of Philadelphia. Approved unanimously. Memorandum dated February 19, 1937, from Mr. Dreibelbis, ABeis .61)4- --v General Counsel, recommending that the salary of Mrs. 336 2/24/37 -2Pcina B. Poiseau, a stenographer in the Legal Division, be increased from '1)620 to 01,740 per annum, to be effective at the beginning of the first 41711 -monthly pay period following the date on which approved by the Board. Approved unanimously. Memorandum dated February 19, 1937, from Mr. Davis submitting a l'ecomnendation, concurred in by Mr. McKee, that Mr. George Chance, 13111, Brazos County, Texas, be appointed a. director of the Houston l ich of the Federal Reserve Bank of Dallas for the unexpired portion Or the teila ending December 31, 1937. The recommendation was approved unanimously, with the understanding that before entering upon his duties Mr. Chance would sever his connection as Vice President of the City National Bank of Bryan, Texas. Telegram to Mr. Peyton, President of the Federal Reserve Bank or mi eaD°118, referring to the application of the "Farmers and Mer14 ' chants a , - -ate Bank of Sacred Heart", Sacred Heart, Minnesota, for pertnissi 4.un to Withdraw innediete1y from membership in the Federal Re%mire 6Yatem, and stating that the Board waives the usual requirement or qx Ibonths notice of intention to withdraw, and that, accordingl y, 111)04 aR.,_ '4Tender of the Federal reserve bank stock issued to the Fara " 0 Merchants State Bank of Sacred Heart, the Federal Reserve ktk r Minneapolis is authorized to cancel such stock and make appro..efund thereon. The telegram also stated that it was assumed thElt, in - accordance with the bank's desire, the termination of its menli be 11 in the System would be deferred until it could simultaneously tlecePted -Y the Federal Deposit Insurance Corporation as a nonmember 337 2/24/37 -5insured bank. Approved unanimously, together with a letter to Mr. Leo T. Crowley, Chairman of the Federal Deposit Insurance Corporation, reading as follows: "The Board has today approved the application of the Farmers and Merchants State Bank of Sacred Heart', Sacred Heart, Minnesota, for permission to withdraw from member51p 3, in the System and waived the usual six months' notice ' 41 intention to withdraw. It is understood, however, that e bank desires to continue, without Interruption, its status as an insured bank, and that it desires the insurance on de2osits as a nonmember to become effective simulaneously with its termination of membership in the System. "It is assumed, therefore, that you may desire to make : 41111 examination of the bank and, in accordance with the proof, subsection (k) (2) of section 12B of the Federal Reserve Act, the Board hereby grants written consent for : xaminers for the Federal Deposit Insurance Corporation to 4xamine the Farmers and iterchants State Bank of Sacred Heart ,4:n connection with its application for continuation of dePosit insurance as a nonmember bank." Letter to Mr. N. C. Lenfesty, Cashier, The National City Bank m ,011,1 York, New York, New York, reading as follows: 19 "Reference is made to your letters of December 29, t436 and February 5, 1937, with respect to the applicat°n for permission for the Cuban branches of The Nat 1°4811 City Bank of New York to exercise fiduciary powers. el "The Board of Governors hereby consents to the exerbr" by The National City Bank of New York, at its anohes located in Cuba, of any of the fiduciary powers 'retofore granted it by the Board pursuant to section 11(k) of the Federal Reserve Act, provided that the exerthse of such powers in Cuba is not in contravention of 1°cal law and that in exercising such powers at its cu!aa branches the bank shall comply in all respects with At the applicable provisions of the Federal Reserve it .and with the regulations of the Board of Governors. trul! understood from the information submitted that the andsL accounts of the Cuban branches will all be carried 4dministered at the Havana Branch, and that such fiauC • ary business as may be transacted at the other Cuban 338 2121 07 "branches will be under the supervision of the trust department of the Havana Branch." Approved unanimously. Letter to Honorable Wright Patman, House of Representatives, 1114Tared for the signature of Chairman Eccles, and reading as follows: "Reference is made to your letter of February 1 reesting information as to the amount of profits realized , the Federal reserve banks during the year 1936 from the sale of United States Government securities and by member banks through the sale of United States Government and other securities. "The operations of the Federal reserve banks are not onducted for the purpose of making profits, and their ..Iansactions in Government securities are subject to the directions and regulations of the Federal Open Market Committee, consisting of all the members of the Board of Govand five representatives of the Federal reserve a ks. The aggregate amount of Government securities held bY the twelve Federal reserve banks was not increased curng the year 1936 and, while prices of Government se_urities income therefrom declined. In order rose during the year, to maintain a proper distribution of maturities 4,11 the portfolio, offsetting sales and purchases were made ;j0m time to time and maturing securities were replaced by ssues. During the course of the year Government selties which were held by some individual Federal reserve 131f, s'"Ics were transferred to the open market account of the , , 8 em as a whole and since then individual Federal reserve j a-c7e have not been permitted to retain separate investment twfints for Government securities. The net profit of the ve Federal reserve banks from the sale of Government ;:cturities during 1936, exclusive of premiums received on sy Ilring securities and on transfers of securities to the be, s,'em Open Market Account by individual Federal reserve sEV' was $3,169,000. Premiums of $3,281,000 realized on we," in the market of such maturing Government obligations me:! °ffset by premiums paid on new issues purchased in the virt in replacement of the maturing securities. Indi04 11111 Federal reserve banks reported profits of e2,453,000 A+ securities transferred to the System Open Market Account rent market values, but this did not represent a r 339 2/2407 -5"Profit to the System as a whole, as these securities were taken into the System Open Market Account at the current market values. "Separate figures of profits on United States Governwent securities sold by member banks are not available, and flgures of earnings, expenses and profits of member banks for the last half of 1936 will not be available for some time. Member banks are not required to publish reports of earnings and expenses and the reports of the individual banks are treated as confidential by the Board. first six months of 1936 national banks rePorted $78,919,000 on securities sold and roFopr.ft'lii:ets !?7,932,000 of recoveries on bonds, stocks and other securities. They also reported losses and depreciation on securles charged off during the six-months' period of 4,979,000. During the same period State bank members of e Federal Reserve system reported profits of $36,610,000 On_ s s ecurities sold and $16,999,000 of recoveries on bonds, ,c'eks and other securities. They also reported losses and ' elx:eciation on securities charged off during the six-months' period of $200336,000." t Approved unanimously. Memorandum dated February 16, 1937, from Mr. Smead, Chief of of Bank Operations, recommending that the text accompanyi tte4viel°11 li the Board's weekly statement of condition of Federal reserve banks be 4Nrised so as to place more emphasis on changes in member bank re411'e balances than on changes in Federal reserve bank credit outas , s 'ding I done in the present form of text statement; that the el4414)11 "Gold stock" be substituted for the caption "Monetary gold "'c'elt" to conform with the present practice of the Treasury DepartIllent; that the item "Treasury cash and deposits with Federal reserve 1141111:8" be divided into the items "Treasury cash" and "Treasury deoStt with Federal reserve banks"; and that the amount of inactive 340 2/24/37 -6.g°1c1 included in the gold stock and in Treasury cash be indicated. Approved unanimously. Letter to Honorable Carl Hayden, United States Senate, readas follows. "At the request of Chairman Eccles, I am replying to Your letter to him dated January 18, 1957, regarding the ctil.lestion of the desirability of Congress enacting legisla410n to permit the States and their political subdivisions tax Federal instrumentalities in so far as their opera05 are of a proprietary nature. Inclosed with your ; 171tter was a copy of a letter from Mr. Charles Toolf, x, Arizona, submitting certain data regarding a numl ber of Federal agencies which he believes are doing more or wess business of a proprietary nature in Arizona. Mr. 1,°°1f expresses the view that these Federal agencies should ' 4-7_ made subject to State or local taxation, or both, on ejr Proprietary business and states that by proprietary nIslness he means business such as is usually engaged In y,persons and corporations as distinguished from duties activities that are essentially governmental in character, it . "Careful thought has been given to this matter, and R ls the opinion of the Board of Governors that Federal arve banks should not be brought within the scope of f2h legislation, since they do not exercise proprietary ' e44ZZT: 1 : 1 ea .nd do not come into competition with private Z "Among the more important functions of the Federal ReServe banks are the holding of the reserves of member banks, the th Taking of discounts for and advances to member banks, Re- furnishing of an elastic currency in the form of Federal Clear. notes, the providing of a national system for the kei ng and collection of checks, the conduct of open-marhia °Aerations with the view of accommodating commerce and. ti:iness and with reference to their effect on credit comaruhns, and the performance of many important fiscal agency for the Federal Government. It is manifest that the Performance of these functions does not constitute the or lig' °f a proprietary business which should be the subject StTite or local taxation. er In addition to the functions mentioned above, the Fed41 Reserve banks have authority under the provisions of 341 2/24/37 -7"the last paragraph of section 13 and the provisions of section 13b of the Federal Reserve Act to perform certain functions which, upon first impression, might possibly be thought to constitute a proprietary business. However, a thorough study of the qualifications which circumscribe the authority granted in these sections, and, more especially, an examinati "cf the actual functioning of the Federal Reserve banks under these provisions of the law, will demonstrate that the activities of the Federal Reserve banks under these sections are not in competition with private enterprise and do not constitute the carrying on of a proprietary business. "Under the provisions of the last paragraph of section 13 of the Federal Reserve Act, which was added by the EmergeneY Banking Act of March 9, 1935, the Federal Reserve banks may make loans to individuals, partnerships, and corporations 211 the security of direct obligations of the United States. rheee loans may be made for periods not in excess of 90 days and must be made at rates which are subject to the review and let ermination of the Board of Governors of the Federal Reserve The total amount of loans which the Federal Reserve b8Yalocstem. made under the authority of this provision during the t'ears 1935 and 1936 was $5,000 and the amount outstanding on _ Fcember 31, 1936, the last date for which figures are availwas only 4,000. The purpose of this provision of the .4-taw was to enable the Federal Reserve banks to make advances individuals and corporations for pay roll and other necesnrY purposes at a time when the commercial banks of the COuntry were closed. With the passing of this emergency little use was made of this authority. "Under the provisions of section 13b of the Federal Reserve Act, which was added by the Act of June 19, 1934, Federal Reserve banks rimy make loans for periods not exceeding 2 ear8 to established industrial or commercial businesses. ever, the law provides that such loans may be made only e appears that the borrr rowerxceptional circumstances," when it er "is unable to obtain requisite financial assistance on ! doreasonable basis from the usual sources". As you are no !1;13t aware, the authority contained in section 13b of the F Reserve Act was granted for the purpose of enabling the Federal Reserve banks to supply a credit need which it a felt was not being supplied by banks or other private fito cial institutions, and not to enable Federal Reserve banks re compete with such institutions. In accordance with the puluircments of the law, the Federal Reserve banks have scru°1181Y avoided the making of loans which the borrower could r 342 2/24/37 -8"obtain from the usual sources and have made advances under this section to commercial and industrial businesses only in cases where banks and other institutions were unable or unwilling to make the requisite advances. The volume of advances being made under this section is comparatively smBil at the present time and is rapidly declining. The law also Provides that the Federal Reserve banks shall have power to extend credit to any bank or other financing institution for Periods not exceeding 5 years on the security of obligations of such institutions issued for the purpose of providing working capital to established industrial or commercial businesses, but it is believed to be clear that this authority `toes not involve a proprietary function. "It is essential to keep in mind that the Reserve banks ! re not operated for the purpose of making profits, either for the Reserve banks themselves or for the member banks who OWn the stock of the Reserve banks. They are the agencies lhrough which national credit policies are effectuated. The ,,aw requires that discount rates of Federal Reserve banks be fixed with a view to accommodating commerce and business, arid that open-market operations of the Federal Reserve banks be governed with a view to the same considerations and with ':egard also to the bearing of such operations upon the gene i:fa]. credit situation of the country. The Federal Reserve anks are, therefore, conducted for public rather than private purposes. "Even when they are not called upon to extend credit to their member banks, the Federal Reserve banks render countless daily services to the public and to the Government. For F2tance, during the calendar year ending June 30, 1936, the ' 4- sral Reserve banks collected free of charge checks amount; 1:g to 218 billion dollars and, as fiscal agents of the GovernTh nt, handled the issue, redemption, and exchange of Government obli gations amounting to more than 27 billion dollars. ei "Moreover, Federal Reserve banks act as depositaries and foscal agents of the United States and in this capacity per341111 many services which are of great value to the Government. sf,lce 1920 they have carried on the functions of the former d''Areasuries which were abolished by law in that year. As ositaries and fiscal agents of the United States they mainchln accounts for the Treasurer of the United States, collect °pecks deposited for the credit of the Treasurer, cash checks hGover1ment disbursing officers, act for the Treasury and er Governmental agencies in the flotation of new issues of jj 4 343 2/24/37 -9fl e -ecnrities, redeem bonds and coupons of the Government, and Perform many other similar services. The fiscal agency functions of the Federal Reserve banks include also the handling of securities and the disbursement of funds for such institutions as the Reconstruction Finance Corporation, the Federal ,It),?posit Insurance Corporation, the Home Owners' Loan Corpora2-on, the Federal Home Loan banks, the Farm Credit Administration, the Federal Land banks, the Federal Farm Mortgage CorPoration, the Federal Intermediate Credit banks and other Gov7nmental agencies. Those agencies could not have been placed Into operation so quickly nor could they have functioned so economically and efficiently had it not been for the fiscal laellinery of the Federal Reserve banks already in existence. "Since its enactment in 1913 the Federal Reserve Act has Provided that Federal Reserve banks, including the capital stock and surplus therein and the income derived therefrom, !hell be exempt from Federal, State, or local taxation, except 'axes upon real estate. This exemption from taxation was enacted by Congress in recognition of the fact that the funcc3ne of the Federal Reserve banks are Governmental rather than „ proprietary in nature and it is respectfully submitted .!nat there has been no change in the situation which would w.cs advisable the removal of this protection from these banks, e -ch at present constitute one of the most effective and i!°nomical agencies serving the United States Government and ;"j8 lnstrumentalities in the handling of fiscal operations and In ef fectuating national credit policies. "As you requested, a carbon copy of this letter is inel a4-0?ed. It is hoped that the above discussion will be of tsosistance to you in this matter and that you will feel free , call upon us at any time when you think we may be of assist,anee V Approved unanimously. Letter to the Presidents of all Federal reserve banks reading as roll ows, It_ "You are hereby advised that the Board's Form 61c, 'alYsis of report of examination', heretofore used In. sinnection with applications of national banks for permsyo(3n to exercise trust powers, is being discontinued, and miltIrs authorized, therefore, to omit that form when sub' 111g such applications to the Board." 4 Approved unanimously. Thereupon the meeting adjourned.
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