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A meeting of the Board of Governors of the Federal Reserve System was held in Washington on Monday, February 4, 1946, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymczak McKee Draper Evans Mr. Carpenter, Secretary Mr. Connell, General Assistant, Office of the Secretary Mr. Morrill, Special Adviser Mr. Thurston, Assistant to the Chairman The action stated with respect to each of the matters hereinafter referred to was taken by the Board: The minutes of the meeting of the Board of Governors of the " (1. Reserve System held on February 1, 1946, were approved unani111.01.1a13,.. Letter to the Presidents of all the Federal Reserve Banks readtrig "follows: vil, "In view of the return of service men and women to ci' ,;.- 4.an life With their need for employment, and as one step rrards the return to normal personnel policies, the Board er,1- that the Federal Resee ry Banks and the Board itself er-1 , 4d return as promptly as reasonably possible to the gene4-1- Policy of making retirements of officers and employees ce !?tive upon attainment of age 65, in the absence of exseNlonal circumstances which would justify retention in rIfics beyond that age. 8_5 "A ccordingly, the Board's letter of December 3, 1942, can97, which was issued because of the war emergency, is celled and superseded by this letter. proyid At e "The Rules and Regulations of the Retirement System that any member in active service who has attained age ') shall be retired on a date not more than 90 days next 1_60 2/4/46 "following the date on which such age is attained, except that during the five years next following attainment of age 65 any member, on the request of the Employing Bank, may be retained in service for a period of one year as the result of each such request during the five year period. In case, therefore, a Bank wishes to retain an officer o7 t1,1ylan the President or First Vice President who serve (s= terms and to whom this letter does not apply) or ,mployee in service for more than 90 days after he attains age 1°5, the Board should be furnished with a full statement of the exceptional circumstances which, in the judgment of the board 2f directors of the Bank, justify such retention, and the : °ard's advance approval should be obtained for the payment of alarY for any service rendered after the expiration of such 90 day period. by m:p1 order to facilitate the administration of the policy adva-lang it effective in stages, a statement and request for for ne? approval of payment of salary as referred to in the going paragraph will not be required: 1. With respect to the continuation in service until July 1, 1946, of an officer or employee who attained age 65 prior to January 1, 1946; or 2. With respect to the continuation in service until January 1, 1947, or for not more than 90 days after attainment of age 65, whichever is the later, of an officer or employee who attains age 65 during the calendar year 1946." Approved unanimously. Letter trig a to the Presidents of all the Federal Reserve Banks read- 8 f011OWS: .„"Consideration has recently been given to a question ani( 21'ne; out of sections 3(a) and 3(h) of Regulation T, as 14nded respectively effective January 21, 1946, and July `), 1945 Per "Under section 3(a), during the present period of 100 ri, Cent margin requirements, an ordinary Purchase of a secuee'T other than an exempted security cannot be effected in a : ral account and must be effected in the special cash a prohibitor other appropriate special accounts. Section 3(b) the a.-1,8 certain Withdrawals from a general account while Justed debit balance exceeds the maximum loan value. of 1,„'In this case, the customer wishes to purchase ,1_,000 'IZ stock, a registered non-exempted security. He wishes 161 2/4/46 —3— "to do this by depositing with the broker certain exempted ?ecurities on which the broker would in good faith be will— ing to lend $1,000. "The broker recognizes that section 3(a) prevents the Purchase from being effected in the general account. He however, whether the transaction may be carried out by °Y withdrawing $1,000 in cash from the general account against the deposit of the exempted securities, and then malung the purchase in the cash account. "The answer to this question depends on whether the Withdrawal may be made from the general account, which in turn depends on the status of the general account after the completion of the deposit and withdrawal. If there 'ruld then be no excess of the adjusted debit balance of he accounT, over the maximum loan value of the securities, the withdrawal would be permissible. However, if there would be such an excess, the withdrawal of the $1,000 gainst the deposit of the exempted securities would not ts.permissible. In other words, while the credit main— call-led on registered securities exceeds the amount that 4TIld be extended on them (which is now zero), transac— ' -L°ns such as the $1,000 withdrawal are forbidden." Z Approved unanimously. Letter prepared for the signature of Chairman Eccles to Senator /1°bertp . Wagner, Chairman of the Senate Banking and Currency Committee, readi, ---"g as follows: "On behalf of the Board I am enclosing two statemen+ -s with regard to S. 1592 now pending before your Com-. msttee. Because of the Federal Reserve System's respon— ilities in the broad field of credit, we desired to forth the reasons why we feel it would be desirable reconsider certain provisions, particularly the "pro— contained in the legislation to provide easier wrs!.calit terms on new housing in the lowest price ranges. 24:Le the Board is in entire sympathy with the stated tJectives of the bill and is in accord with many of Provisions, it is our judgment that its enactment hout revision would add to already serious infla— °narY pressures. r T 162 2/4/46 -4- "One of the enclosed statements deals with the easy credit proposals. The other statement deals with various provisions of the measure to which we have previously expressed objection. We would appreciate having these state!Dents made a part of the official record of the hearings before your Committee." Approved unanimously. The two statements referred to in the above letter to Senator Wagner read as follows: "INFLATIONARY DANGERS IN TITLE IV OF S 1592 "Section 402 of S. 1592 would amend Section 203 of the National Housing Act so as to permit the Federal Housing Administration to insure loans for as much as 95 per ) .e,,nt of the value of the property, the loans to run for -)4 years, at 4 per cent interest. Such insured mortgages Would be available only on houses built under FHA inspection, and would not exceed $5,000. "This hl l :ection is proposed as part of a long-range Federal policy, but its enactment now or in the near .uture would strengthe the serious inflationary pressures n the housing market. It would not contribute to meeting 2, immediate need for both an increased supply of houses -"u better housing for families of low income. "The housing crisis is typical of the inflation problem r erlerallY. It is due to the fact that the demand vastly ex,eds the supply. There is a large accumulated shortage of Llous. s jng units. At the same time, incomes have never been as in the past few-years, and never before has the ca! - ral public had available such tremendous amounts of gill" and readily convertible assets. When credit is ree,red, borrowers have been able to obtain increasingly a.Y mortgage terms from banks and other lenders who, havseLallPle funds, are eager to supplement their government !'ltY holdings with higher yield investments. A ready air,: lar jt1kJ, ability of cash resources has thus combined with the t 8413reoede nted need for houses to bring about the inflationary uaion in the housing field. strip, To add to this dangerous pressure at this time by a tiZI-L further easing of credit terms would make the inflasup ?I :1Y danger all the greater without providing any new lie s'les whatever of houses on the market. The difficulty stant1?-ot in credit terms, which have been reduced sublallY in the past decade but in the immediate and 163 2/4/46 —5— prospective shortages of building materials of various kinds and of manpower. Any realistic attack on the prob— lem must look to remedies for these shortages as well as to solutions of the special difficulties created by anti— quated building codes, by monopolistic practices affecting building materials as well as the building trades, by juris— dictional conflicts, and by similar restrictions which make for inadequate construction at excessive cost. "Availability of credit is thus not the factor which t.amits additions to the supply of housing, and may not be :me years to come. While materials and manpower are further liberalization of credit terms mould merely add to inflationary pressures. Whether further easing ,c1 . credit terms would be desirable at some future time o wlen the demand for housing is not in excess of the supply mLmanpower and materials is another question, and one 471ch should be considered in the light of conditions 'Ten. Certainly at this time it would be illusory and : 1 1v1 1-, 1eading to the general public to enact legislation ,"4-ell in effect would serve only to intensify the demand 3ideJctor without adding anything whatsoever to the supply of the equation. If it is desired to increase the . P acT?ortion of houses built in the lowest price ranges, 4:10n along lines of material allocation would appear "hold more promise." IsZ4, "COMMENTS REGARDING TITLE III OF S. 1592 Sections 301 and 302 Section 301 would authorize Federal savings and 10an a ssociations to lend or invest their funds in any ;Mgage or obligation which is insured under Title I or „,;;e 11 of the National Housing Act, as amended. This w-(4.44 change existing law in two important respects. It lould permit such an association to make loans on homes „cated more than fifty miles from its home office, and ermit it to participate in the financing of large—scale nol,:I,tal housing, without regard to the limitation which .restricts the aggregate of such loans to 15 per cent th? assets of the association. 'These provisions should not be enacted. Savings and home a sociations have traditionally been local thrift and &flat flnancing institutions, gathering investment funds of to jiduals from the local community and lending them out ' 111e owners and prospective home owners within the local 4 7 164 2/4/46 -6- community. This is clearly the basic function which intended Federal savings and loan associations to 60 perform, although it permitted them, as a matter of perating flexibility and to meet unusual situations, to engage in other lending activities within well-defined limits. "This element of flexibility is proper and useful, but if operations now permitted as exceptions to the rule should become the general rule, the basic function described above would be fundamentally altered. Therefore, the ...oans made on properties outside the association's T°calitY (i.e., beyond 50 miles) should remain within the -0-percent-of-assets limitation. h "Furthermore the financing of large-scale rental ,,C,,113ing should continue to be subject to the 15-per-cent,.,,, -assets limitation. Such financing is essentially different from the financing of homes for owners and prospec.1vs owners. The borrower, in the case of rental housing, : i38 not a home owner. He is an in in a business ennrPrise just as is the hotel owner. Thus, the financing .11. j large-scale rental housing is essentially business fi! neing, which it was never contemplated savings and loan associations would undertake. The Federal Home Loan Bank ard has, we think quite properly, recognized this fact se aeauss, although the present law would permit Federal vings and loan associations to make any non-home loan within the 15-per-cent-of-assets limitation, the Board, by re ho .gulation, has imposed severe restrictions on the rental loinT,ln loans which they may make. It has limited such 1 '0 50 per cent of appraised value, except in the 1,-e °f small apartments (5 to 12 families) for which the trt is 60 per cent, even though they are insured under e National Housing Act. ere ""For these reasons, the blanket authorization of FedWheresavings and loan associations to lend any amount anytiofl on in mortgages, which is contemplated by sec(and the corresponding provisions in section 302), lad not be enacted. 10_3 or "The purpose of "Section section 303 is to increase the amount the'rleY which the Federal Home Loan Banks may borrow in the irrne7 market by widening the range of Bank assets on it asis of which debentures may be issued. The law as llow stands restricts the amount of debentures which O 165 2/4/46 tt -7- the System may issue to the amount of advances to members secured by loans of the types prescribed by Congress in section 10(a) of the Federal Home Loan Bank Act. Thus, the power of the Home Loan Banks to obtain funds in the money market is geared to the volume of the advances to the member institutions secured by loans of the best type, namely, loans which qualify under section 10(a). It seems obvious that the present provision furnishes the HOMB Loan sank System with borrowing capacity more than adequate to enable member institutions to meet the demand for such loans in commun ities where share accounts are insufficient. WithIfin the limitation which relates debentures to capital, the orn? Loan Banks can now issue debentures on a one-for-one .basis r for the entire amount of 10(a) loans rediscounted. what way could a demand arise which could not be met Under the present provisi on? Only if member institutions Should wish to rediscount other types of paper (or obtain unsecured advances) in considerable volume. Such other 12 ‘4Per would include mortgage loans on business properties, !Partment houses, and other non-home properties, as well d8 loans made on the security of share accounts. It seems apparent that Congress did not intend that such paper tu°111d form the basis for obtaining additional funds in 84.: market. With the possible exception of loans on the 41,eurity of share accounts, this is a type of financing at should be held within the 15-per-cent-of-assets limie112:?n, as already pointed out herein, and therefore that co't14d not be encouraged by giving such paper, when dis furlted at a Home Loan Bank, the same access to market t IloaviLndi es enjoyed by 10(a) paper. In fact, the power such other paper in the debenture base would de ? the inevitable effect of eliminating the relative th :lrability of loans under section 10(a) which are clearly hom..111°st appropriate type of loan for mutual thrift and cing institutions. ba, „ Ine proposed amendme nt would also include in the dece re 'ure base of the System all Governm ent obligations owned voul,?,tlY by the Federal Home Loan Banks. This provision 48 ' Permit Government obligations, including those held bentafrte Bank's reserves, to be counted in the dee base. "The present law in our opinion is over-generous in Proiridi ng that required reserves may be invested in earnassets (the reserves of commercial banks and those of 16 2/14/44 -8- "the Federal Reserve Banks may not be in earning assets) and the proposed amendment would go even further by allowing the reserves to be again multiplied by forming a base for the issuance of debentures. "There is nothing in the present law which restricts the power of the System to raise money to perform the functions it was established to perform, namely, to provide a reservoir of funds on which member institutions can draw When the demand for sound home mortgage loans in their cornexceeds the amount of share investment. Without : 1 3suing debentures, the Banks can make advances out of their own capital, as well as from deposits they may have , r L om member institutions which have more share capital na-n mortgage loans. When demands on the Banks exceed :these resources, the System may borrow from the money marthe entire amount of section 10(a) advances from the banks to their members. c. "Bearing in mind that Federal savings and loan asso,ations are forbidden by law to accept deposits and that :he holder of a share in such an institution should not cicPsct the same liquidiLy as the owner of a deposit in a °mmercial bank, it seems obvious that the Federal Home Loan Banks should not need to raise funds on the basis assets other than loans of the types described in sec11 .. 1°11,1°(a) of the Federal Home Loan Bank Act. The most t;'ellY use for such funds would be to make unsecured advances 81., member institutions to enable them to meet demands for f:are withdrawals - an operation which is clearly inconcilis at% r with the nature of share accounts and the uniform r t provisions of Federal associations governing withdrawal5. foil "Section 303 is therefore open to objection on the bro °wing principal grounds: first, because it would cneaden the base for debentures in such a manner as to lending by member institutions of types which are tnaPpropriate for local mutual thrift and home financg - flnstitutions; second, because, by including paper not tio2rming to section 10(a) as well as Government obligaas "8 owned directly by the Federal HOW Loan Banks, whether 13 rt of their reserves or not, it would make available to ! heis far more funds than they need in order to pertheir functions; and third, because it is desirable 4111.rteathe reserves of the Federal Home Loan Banks, which are invested earning assets, should not be used as in -usis _ for further generation of credit. 167 2/4/46 -9- "The argument which has been advanced that the Federal Home Loan Banks have not participated as fully in the financing of the war as they would if Government obligations could be included in the debenture base) is not convincing. The Treasury has said repeatedly that it does not want institutions to borrow money in order to Purchase Government bonds. "Section 306 "The reserve which Congress has said should some day reach 5 per cent of the Federal Savings and Loan Insurance Corporation's insured risk was, on June 30, 1944, after 10 years of operation, only 0.57 per cent of the insured risk. Section 306 would reduce the insurance „3rell'ilam due from insured institutions by one-third, and "ould consequently slow down the rate at which the reserve is accumulated. In a period when losses were high, the reserve would be sadly deficient. "It might be argued that the right to assess insured ins titutions for losses and operating expenses could be 8ed to meet larger losses, but apart from the fact that l'ue Corporation has never yet used this power of assessaent, it is doubtful that assessments after large losses have; started would be effective in yielding the amount of raeveaue that would be required (since the amount of assesspe en11 for any one year is limited) or could, in such a ij'od of strain, be conveniently paid by the __?t itutions. Indeed, it is contrary to all insurance nnciPles to attempt to assess the insured after the ' ' 1 8k insured against has materialized. pr "One of the arguments advanced in support of this th:" P al in previous years was that the risk insured by Federal Savings and Loan Insurance Corporation is out the same as that insured by the Federal Deposit o silslance Corporation, and that therefore the premiums th„..'441 be similar. However, the risk is far from being - same, of j "In the first place, banks insured by the FDIC as 11,7.7_ 30, 1945, had cash and United States Government sec , ories totaling $112 billion as against total deposits 0,1 4 billion, leaving a balance of $22 billion as the FBg.part of their deposits involving risk of loss to the and resCapital accounts (capital, surplus, undivided profits acco_ erves) totaled $8 billion. The ratio of capital 2ut's to these remaining deposits was therefore 1 to BY comparison, institutions insured by the Federal 1 I Z 168 2/4/46 -10- "Savings and Loan Insurance Corporation, as of December 3 4.1, 1944, had cash and United States Goverment securities totaling $1.5 billion as against total private rePurchasable capital (shares), including deposits and investment certificates of $4 billion, leaving a balance $3 billion. The undivided profits and reserves of insured institutions amounted to approximately $0.36 olllion, a ratio of 1 to 8. On this basis, the cushion Provided by the capital accounts of institutions insured the FDIC is three times as great as that provided in ', 11.e case of accounts insured by the Federal Savings and Loan Insurance Corporation. "In the second place, the comparison of the risks should be on the basis of the insured accounts of the in stitutions and not their total assets. The capital accounts of institutions insured by the FDIC amounted, 21 1943, to 20 per cent of the insured deposits, while the capital accounts of institutions insured by the Fed' 1 9.1 Savings and Loan Insurance Corporation amounted to ITIlY about 9 per cent of its insured accounts. In other ..°1'ds, a comparison on this basis, without taking into account the cash and United States Government securities ch1F11 would tend to reduce the risk, mould show that the a_xel l .lion in the case of the FDIC is over twice as great ,' In the case of the Federal Savings and Loan Insurance or poration. the difference is further accentuated by the e fact that, whereas virtually all of the share accounts ;re deposits of the institutions insured by the Federal 81171ngs and Loan Insurance Corporation are covered by inbile, only about 38 per cent of the total deposit haties of insured banks are insured by the FDIC (its 8-41al Report for 1943 indicates that 36 billion are inered out of a total of 94 billion). This means that the offective premium rate of the FDIC is approximately 1/5 °ne per cent of insured deposits. Consequently, even Other factors were e ual, the rate for the Federal enge and Loan Insurance Corporation should be raised instli " Of theof lowered in order to make it comparable with that FDIC. "The Federal Savings and Loan Insurance Corporation 190 million dollars of Government-furnished money. is, in effect, a subsidy. At the present time, when the ' national debt is so great and such earnest efforts .?.5. : 1 . 7 1_69 2/4/46 -n- !'are being made to increase Government receipts it would b? more prudent to permit the rate to remain where it is with the ultimate view of repaying this 100 million dol— lars to the Treasury when possible, rather than to reduce the rate in the face of all the factors outlined above." Thereupon the meeting adjourned. Chairman.
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