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Minutes for February 4, 1963 To: Members of the Board From: Office Of the Secretary Attached is a copy of the minutes of the Board of Governors of the Federal Reserve System on the above date. It is not proposed to include a statement with respect to any of the entries in this set of minutes in the record of policy actions required to be maintained pursuant to section 10 of the Federal Reserve Act. Should you have any question with regard to the minutes, it will be appreciated if you will advise the Secretary's Office. Otherwise, please initial below. If you were present at the meeting, your initials will indicate approval of the minutes. If you were not present, your initials will indicate only that you have seen the minutes. Chin. Martin Gov. Mills Gov, Robertson Gov. Balderston Gov. Shepardson Gov. King Gov. Mitchell Minutes of the Board of Governors of the Federal Reserve System on Monday, February ).4. 1963. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Balderston, Vice Chairman Mr. Mills Mr. Robertson Mr. Shepardson Mr. Mitchell Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Mr. Young, Adviser to the Board and Director, Division of International Finance Mr. Molony, Assistant to the Board Mr. Fauver, Assistant to the Board Mr. Noyes, Director, Division of Research and Statistics Mr. Farrell, Director, Division of Bank Operations Mr. Solomon, Director, Division of Examinations Mr. Hexter, Assistant General Counsel Mr. Dembitz, Associate Adviser, Division of Research and Statistics Mr. Conkling, Assistant Director, Division of Bank Operations Mr. Daniels, Assistant Director, Division of Bank Operations Mr. Leavitt, Assistant Director, Division of Examinations Mr. Spencer, General Assistant, Office of the Secretary Mr. Young, Senior Attorney, Legal Division Mr. Collier, Chief, Current Series Section, Division of Bank Operations Application to maintain reduced reserves (Item No. 1). There had been circulated a memorandum dated January 16, 1963, from the Division of Bank Operations recommending that Sterling National Bank and Trust Company, New York, New York, be granted permission to maintain the same reserves against deposits as are required to be maintained by 2/4/63 -2- nonreserve city banks. Attached to the memorandum was a draft of letter to Sterling National Bank in which such permission would be granted. The memorandum indicated that Sterling National Bank's total demand deposits averaged about $122 million, with time deposits around $17 million and demand deposits due to other banks less than $2 million. While no existing reserve city bank with demand deposits of over $100 million had been granted permission to maintain reduced reserves, the recommendation that this bank be permitted to do so was based on the following points: 1. Sterling National Bank ranked 13th in demand deposit size out of the 22 member banks in the Borough of Manhattan; its demand deposits represented less than 1/2 of 1 per cent of total demand deposits of all reserve city banks in New York City; and its commercial and industrial loans outstanding were about 1/2 of 1 per cent of the total for all reserve city banks in the City of New York. 2. The demand deposits of Sterling National Bank due to other banks, as well as the activity of As demand deposits, were nominal compared with the large money market banks in New York City. 3. The character of Sterling National Bank's business, which was primarily local, was significantly different from that of the large downtown money market banks dealing with nationally or internationally known concerns. 4. Sterling National Bank was one of several New York City banks that were authorized to maintain reserve city requirements in 1949 when the central reserve city classification was in effect. 5. The character of the bank's business had not changed in the past 12 years. During discussion, Mr. Noyes noted that Mr. Dembitz, after reviewing the case, had raised a question regarding the problems that 2/4/63 -3- might arise in other cities where banks smaller than Sterling National had not been granted permission to carry reduced reserves. Commenting upon this matter, Mr. Dembitz pointed out that there were a number of reserve city banks in various cities that were considerably smaller in volume of deposits than Sterling National. It seemed to him that if the Board wanted to classify Sterling National as a country bank, it should consider whether a valid distinction could be made between this particular bank and various smaller banks that continued in reserve city status. To draw such a distinction--based on character of business-- might be rather difficult, he thought. Perhaps Sterling National could be notified that consideration of its application was being deferred Pending further study of the general problem. Mr. Farrell then reviewed in some detail the reasons in support of the favorable recommendation of the Division of Bank Operations, his comments representing an amplification of the information contained in the memorandum from the Division. In reply to questions, he cited two other New York City member banks of about the same size as Sterling National that it seemed to him probably should be regarded as eligible for permission to maintain reduced reserves if they should make application. As between this group and the larger banks of the city, he felt that a defensible line could be drawn. In Chicago, he noted, the largest bank thus far granted permission to carry reduced reserves had total demand deposits of about $50 million; one bank within that general range had been denied such permission because of the velocity of its deposits. For the City of Chicago, he felt that a natural dividing 2/4/63 point had been found, but at a lower level than in his opinion was appropriate in New York City. He saw no one level that in his judgment would be appropriate in all reserve cities across the country. Reserve city member banks, he suggested, might be classified roughly in three groups: those that almost automatically would be regarded as eligible to maintain reduced reserves; those that almost automatically would be recognized as not eligible for permission to maintain reduced reserves; and a group of borderline banks whose applications for permission to maintain reduced reserves would have to be considered carefully in light of all of the circumstances of the particular case. There ensued a lengthy discussion with respect to standards that might appropriately be applied in granting permission to carry reduced reserves, the kinds of data that would seem helpful in considering such standards, and the degree of difficulty involved in assembling such data. Reference was made in this connection to the understanding that the President's Committee on Financial Institutions might recommend a system of graduated reserve requirements whereby every bank would maintain a low reserve against the first few million dollars of its net demand deposits, a higher reserve against its deposits above this minimum amount and up to a substantial figure, and a still higher reserve against net demand deposits, if any, above the latter amount. It was noted, however, that there was no assurance that such a recommendation, if made by the Committee, would result in legislation within the near future. 2/4/63 -5Governor Balderston suggested as a possible solution that the Board might draw up a basis for differentiating between reserve city banks and country banks and ask the Reserve Bank Presidents for their views as to the application of such guidelines to member banks in their respective districts. It was his thought that if rough guidelines were prepared, based chiefly on size, other information could be filled in by the Federal Reserve Banks, thus affording the Board a better basis for considering the whole group of banks that might be thought of as eligible for permission to maintain reduced reserves. Mr. Hexter commented at this point on the legal aspects of the matter, pointing out that the statute provided that permission to carry reduced reserves was to be determined on the basis of the character of business transacted by a member bank. Thus, if a member bank of the same size or smaller than Sterling National, and doing the same character of business as Sterling National, applied for such permission it would seem difficult under the law for the Board to deny the application. Accordingly, there might be some legal question about the use of different dividing lines in different reserve cities. Also, there might be a question whether the fact that there were very large banks in New York City made the character of business of Sterling National different from that of banks in other reserve cities serving similar types of customers. A dividing of banks in New York City merely on the basis that there was a considerable gap between those having deposits of around $150 million and the next bank, with deposits of around $280 million, might be of questionable defensibility. 2/4/63 -6Governor Balderston then spoke further on the procedural suggestion that he had made previously, stating that it was his thought that the Federal Reserve Banks might be asked to appraise the member banks in the respective districts with reference to the character of their business. The Board could take such figures as it had at its disposal and submit them to the Federal Reserve Banks with a request for their assistance. Where banks in the borderline area were involved, he doubted that the answer could be found merely by reference to a set of statistical tables. In light of Governor Balderston's suggestion, there followed further discussion with respect to the types of information bearing upon the character of a bank's business that might be available through the Federal Reserve Banks in supplementation of statistics presently available to the Board. The discussion then turned more specifically to the request of Sterling National Bank, and Governor Mills indicated that in his opinion the member bank had made a legitimate request that warranted approval on its merits in the light of principles the Board had been following thus far. This view also was expressed by Chairman Martin, who went on to say that this would not prevent the Board from continuing to work on the over-all problem in such manner as seemed most appropriate. Governor Robertson, on the other hand, expressed the view that actions by the Board on a piecemeal basis might tend to encourage additional applications. If the Board were to survey the general problem, 2/4/63 _7_ perhaps along lines such as Governor Balderston had suggested, he felt that the total amount of work involved would be less. Also, the Board would avoid taking a step that it might regret when it had had an opportunity to review the over-all picture. Governor Mitchell suggested that equity would seem to call for treating all banks of similar characteristics on the same basis. There- fore, he felt that the best procedure would be to make a general study and try to decide on those member banks that appeared to deserve permission to carry reduced reserves. Banks that appeared eligible for permission to carry reduced reserves might be informed of the possibility that their applications would be granted if the banks chose to file them. Governor Balderston indicated that he would be inclined to approve the request of Sterling National, taking a chance that such action would not lead immediately to the filing of a number of applications by other banks in the borderline category. Then he would begin to review afresh the banks around the country that seemed to be in the gray area and obtain the views of the Reserve Banks Presidents so that the Board would be better equipped to consider such applications as might be filed. Consideration might also be given, following such a survey, to whether the Federal Reserve should take the initiative, as Governor Mitchell had suggested, in encouraging certain banks to file applications. Governor Shepardson indicated that he would favor the approach outlined by Governor Balderston. 2/4/63 -8Accordingly, the application of Sterling National Bank and Trust Company to maintain reduced reserves was approved Robertson and Mitchell dissenting. Governors It was understood that the staff would give further consideration to types of data that might be accumulated in order to assist the Board in considering the over-all problem involved in the granting of permission to member banks to carry reduced reserves. A copy of the letter sent to Sterling National Bank and Trust Company pursuant to the action taken by the Board is attached as Item No. 1. Messrs. Dembitz and Collier then withdrew from the meeting. Report on competitive factors (Dover-New Philadelphia, Ohio). There had been distributed a draft of report to the Federal Deposit Insurance Corporation regarding the competitive factors involved in the proposed merger of The Citizens National Bank of New Philadelphia, New Philadelphia, Ohio, with The Reeves Banking and Trust Company, Dover, Ohio. Following a discussion in which agreement was expressed With a change in the wording of the conclusion suggested by Governor Balderston, the report was approved unanimously for transmittal to the Corporation with the conclusion reading as follows: The proposed merger of The Citizens National Bank of New Philadelphia, New Philadelphia, Ohio, with The Reeves Banking and Trust Company, Dover, Ohio, would eliminate not only substantial existing competition but even more vigorous potential competition. 2/4/63 -9- Reeves is now dominant in both Dover-New Philadelphia and Tuscarawas County where it holds 40 and 31 per cent of IPC deposits held by banks headquartered in the two areas, respectively. Consummation of this proposal would increase Reeves' dominance in the area as it would then hold 56 and 43 per cent of IPC deposits held by banks headquartered in the Dover-New Philadelphia and Tuscarawas County areas, respectively. Increasing so significantly the volume of banking resources held by this already dominant bank must be viewed as strongly adverse to the preservation of banking competition in Dover-New Philadelphia and Tuscarawas County. Distributed item. The following item, a copy of which is attached to these minutes as Item No. 2, was approved unanimously: Letter to the Bureau of the Budget in reply to its request for a report on a draft bill that would authorize a food stamp program. Procedure for electing Class A and Class B directors. There had been distributed a memorandum from the Legal Division dated January 25, 1963, studying the feasibility of changing the procedure for classifying member banks for the purpose of electing Class A and Class B directors of Federal Reserve Banks. The memorandum noted that this subject had been explored at the instance of Governor Robertson, who had raised certain questions from time to time. The memorandum referred to the provision in the Federal Reserve Act authorizing the Board to classify the member banks of the Federal Reserve districts into three general groups or divisions, designating each group by number, each group to consist as nearly as practicable of banks of similar capitalization. In that connection, in 1934 the Board had adopted a formula for the classification of member banks, seeking 2/4/63 -10- to adhere to the extent possible to the "similar capitalization" provision of the law. The formula that had been adopted, and was still in effect, provided that: "The number of member banks in Group 2 will be approximately one-third of the total number of member banks in the district, with the number of member banks in Group 1 as nearly as may be in the same ratio to the total number of all member banks as the combined capital and surplus of member banks in Group 3 bears to the combined capital and surplus of all member banks." It was pointed out that the present formula, in particular situations, resulted in a comparatively small number of banks being classified in Group 1. An argument in favor of changing the formula was that individual banks in Group I exerted a disproportionate influence in the election of the total board of directors of a Federal Reserve Bank. However, Should the number of banks in Group I be increased, the result would be a situation where the relatively small banks in that group would outnumber the larger banks, enabling the former to "freeze out" the larger banks in any election of directors; Group I would contain banks Whose individual interests and problems differed widely, thus violating what seemed to have been the original intent of the law. The memorandum went on to discuss the legislative history relating to the Congressional intent with respect to classification of member banks, noting that Congress apparently intended classification to be based primarily on capitalization in order that large, medium-sized, and small banks would have fair and equal representation in the directorates. 2/4/63 -11In conclusion, the memorandum stated that the question at issue was whether it would be desirable (1) to continue the present formula that required classification in Group 1 of banks of somewhat similar capitalization, or (2) to increase arbitrarily the number of banks in Group 1 in an effort to more nearly equalize the influence of individual banks in the election of Federal Reserve Bank directors. In discussion, Governor Robertson indicated that after having reviewed the memorandum from the Legal Division, and on the basis of that study, he would suggest that no action be taken by the Board to change the present formula. The original Federal Reserve Act, he noted, had required that each group of member banks be composed of approximately one-third of the total number of member banks in the district, but this provision was amended in 1918 at the Board's recommendation to delete the reference to the number of banks in each group. Under the existing statute, nothing significant apparently could be done to augment the number of banks in Group 1; therefore, he would not pursue the matter further, even though he would prefer the provisions of the original Federal Reserve Act if the Board was starting afresh. There was general agreement with the view that no action should be taken by the Board at this time. Messrs. Farrell, Conkling, Daniels, and Young (Legal Division) then withdrew. Request for record of policy actions of Open Market Committee (Item No. 3). When Chairman Martin testified before the Joint Economic 2/4/63 -12- Committee on February 1, 1963, Congressman Reuss had inquired whether the record of policy actions of the Federal Open Market Committee could be furnished in advance of the submission by the Board of its Annual Report, since the Joint Economic Committee wished to make its report on the Economic Report of the President by the first of March. In a discussion of this request, it was noted that a revised draft of the policy record was being distributed today to the members of the Federal Open Market Committee. This suggested that, if the Board so desired, arrangements probably could be made to transmit copies of the policy record to the Joint Economic Committee by Friday, February 15. Governor Mills stated that he had reservations about furnishing the policy record to the Joint Economic Committee in advance. Section 10 of the Federal Reserve Act was specific in requiring the Board to submit its Annual Report to the Speaker of the House of Representatives, and in requiring that the report contain a record of the policy actions Of the Board and of the Federal Open Market Committee. To submit information in advance to a particular Committee of Congress, irrespective of the value of that Committee's work, was a matter of concern to him. It might antagonize other members of Congress, and it seemed to him inconsistent with the Board's statutory responsibility. The Chairman then turned to Mr. Hexter, who said the Legal Division had concluded that even though the Board was required 2/4/63 -13- by statute to furnish certain information to the Congress in its Annual Reports, the Board would not be precluded from furnishing the same information to subdivisions of the Congress before the Annual Report was submitted. There might be a question whether the Board would be subject to criticism for acceding to such a request; such action could open up the possibility of additional similar requests. Also, the Board might feel, if it acceded to such a request, that it then had a duty to furnish parts of its Annual Reports to members of the Congress piecemeal as they became available. However, these appeared to be questions of policy rather than law. Chairman Martin noted that he understood Congressman Reuss to have said that the statute required the Joint Economic Committee to make a report on the Economic Report of the President by the first of March. To avoid a recurrence of requests of the kind that had been made, it would seem desirable if in future years the Board's Annual Report could be submitted to the Congress by about the 20th of February. There followed a discussion relating to the time required, after year end, to obtain certain statistical data for inclusion in the Annual Reports, and it was noted that one possibility might be to issue the Annual Reports in two sections. However, members of the Board expressed the view that it would be preferable to issue each Annual Report as a single volume in the absence of considerations necessitating some different procedure. 2/4/63 -14There was also some discussion of the amount of time that Should appropriately elapse before policy actions of the Open Market Committee were made public. It was recalled that in certain discussions within the Open Market Committee a view had been expressed that it might be appropriate if policy actions were made public after a lag of a quarter of a year. Early release of the Board's Annual Reports would mean that the entry covering the final Open Market Committee meeting in a given year would be published in the Annual Report within a relatively short period of time. It appeared to be the general view, however, that no substantial problem would be created if the Annual Report was issued each year around February 15 or 20, which would provide a lapse of about two months after the final meeting of the Open Market Committee during the preceding December. This led one member of the Board to make the comment that if no objection was seen in principle to issuing the Annual Report each year about the middle of February, it would seem difficult to decline to comply with the current request of the Joint Economic Committee. Governor Mills reiterated, however, that he was seriously concerned. The Joint Economic Committee had held hearings and had complete authority, at those hearings, to inquire into the thinking of Federal Reserve witnesses on policy matters. If the Committee was now Offered the policy record without an opportunity for representatives of the Federal Reserve to answer questions regarding the decisions 2M/63 -15- recorded in the policy record, he would be apprehensive that the Joint Economic Committee's report on the Economic Report of the President might contain various statements that there would be no opportunity to correct. Chairman Martin noted that this possibility would appear to be present in any event; it would be present if the Board's Annual Report had been issued by the time the Joint Economic Committee prepared its report. In further comment, Governor Mills observed that the Annual Report, in its complete form, analyzed the different phases of domestic and international economic activity that provided the background against Which policy decisions had been made by the Board and by the Federal Open Market Committee. In contrast, the policy record entries were set forth in a form that did not cover the full range of background. In all circumstances, including the fact that he was not completely satisfied With the reasoning of the Legal Division as expressed earlier by Mr. Rexter, he did not feel that he could concur in a decision to accede to the request of the Joint Economic Committee. After further discussion it was agreed, Governor Mills dissenting, that Chairman Martin would write to the Chairman of the Joint Economic Committee indicating that the record of policy actions of the Federal OPen Market Committee would be submitted as soon as possible. A copy of the letter sent pursuant to this understanding is attached as Item No. 3 It was also understood that, at the time the record of 2/4/63 policy actions of the Open Market Committee was transmitted to the Chairman of the Joint Economic Committee, copies would be sent to the Chairmen of the Senate and House Banking and Currency Committees. It was further understood that the decision to comply with the current request of the Joint Economic Committee was not intended to establish a Precedent of general application whereby information from the Board's Annual Reports would be supplied, in response to inquiries, in advance of publication of such reports. Study of market area relating to merger application. At the meeting on January 31, 1963, consideration was given to a request for reconsideration and oral presentation in the matter of a merger application, denied by order dated July 13, 1962, of Dauphin Deposit Trust Company, Harrisburg, Pennsylvania. During that discussion Governor Mitchell had suggested that appropriate members of the Board's staff go to the area involved, perhaps in company with representatives of the Philadelphia Reserve Bank, to make an on-the-spot study looking principally toward definition of the market area. The Board decided, however, against making such a study in this particular instance. Governor Shepardson now called attention to the suggestion made by Governor Mitchell and said he would recommend that representatives Of the Banking Markets Unit, Division of Research and Statistics, and Of the Legal and Examinations Divisions, join with representatives of the New York Reserve Bank in the investigation of the forthcoming 2/4/63 -17- application of Chemical Bank New York Trust Company, New York, New York, to merge with Bank of Rockville Centre Trust Company, Rockville Centre, New York. Agreement was expressed that such an experimental procedure would be appropriate in this instance, and it was understood that the necessary plans would be made. Conference of System Personnel Officers. On the basis of information contained in a memorandum of January 29, 1963, from the Division of Personnel Administration, Governor Shepardson recommended that the Director of the Division be authorized to extend an invitation to the Personnel Officers of the Federal Reserve System to hold their 1964 conference in Washington, D. C. There being no objection, it was understood that an invitation would be extended and that provision would be made in the 1964 budget for the necessary expenses. The meeting then adjourned. Secretary's Note: Governor Shepardson today approved on behalf of the Board the following items: No. Letter to the Federal Reserve Bank of Richmond (attached Item the appointment of John M. Beducian as examiner. 4) approving Memorandum from the Office of the Controller recommending an increase in the basic annual salary of Eunice M. Boyd, Secretary in that Office, from $6,055 to $6,465, effective February 4, 1963. 14- f. Secretary' BOARD OF GOVERNORS Item NO. 1 2/4/63 OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25. D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD February 4, 1963 Board of Directors, Sterling National Bank and Trust Company, New York, New York. Gentlemen: Pursuant to your request submitted thmugh the Federal Reserve Bank of New York, the Board of Governors, acting under the provisions of Section 19 of the Federal Reserve Act, grants permission to the Sterling National Bank and Trust Company to maintain the same reserves against deposits as are required to be maintained by nonreserve city banks, effective with the first biweekly reserve computation period beginning after the date of this letter. Your attention is called to the fact that such permission is subject to revocation by the Board of Governors. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary. BOARD OF GOVERNORS Item No. 2 2/4/63 OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD February 4, 1963 Mr. Phillip S. Hughes, Assistant Director for Legislative Reference, Bureau of the Budget, Washington 25, D. C. Dear Mr. Hughes: This requesting the of.Agriculture Which would be is in response to your communication of January 14, 1963, Department views of the Board on a bill proposed by the s householder needy for program to authorize a food stamp . participate to available in any State which desires The only provision of the bill that directly concerns the Federal Reserve System is section 9, which provides that the Secretary Of Agriculture, in arranging for the redemption of coupons, shall do so .!Arith the cooperation of the Federal Reserve System and the Treasury Department. As you know, the Federal Reserve Banks, pursuant to action taken by the Secretary of the Treasury under section 15 of the Ebderal Reserve Act, are presently acting as fiscal agents for the Department of Agriculture in connection with the pilot food stamp programs. It is assumed that they would serve in the same capacity should the proposed food stamp program be enacted into law. For this 1 eas0n, it is believed that the specific reference in section 9 of the : draft bill to the cooperation of the Federal Reserve System is unneCessary. The Board offers no comments regarding the substantive Pryvisions of the draft bill, since they do not appear to be related significantly to the Board's responsibilities. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary. Item No. 3 2/4/63 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON OFFICE OF THE CHAIRMAN February 6, 1963 The Honorable Paul H. Douglas, Chairman, Joint Ecoriomic Committee, Washington 25, D. C. Dear Mr. Chairman: At your Committee's hearing last Friday, in response to inquiries by Representative Reuss, I gave assurance that we would review the possibility of expediting the completion of that portion of our Annual Report for 1962 that sets forth the Record of Policy Actions of the Federal Open Market Committee so that we might furnish copies to your Committee in advance of the submission of the complete Annual Report to the Speaker of the House, for the information of the Congress, in compliance with Section 10 of the Federal Reserve Act. This is to advise you that we are bending every effort to speed the completion of that Record of Policy Actions and that we plan to deliver 20 copies to your Committee not later than February 15. I regret that compilation of considerable data essential to providing the Congress with the full report of Federal Reserve System operations contemplated in the Federal Reserve Act makes it impossible to furnish the complete Annual Report equally early to your Committee. We hope to deliver the full report to the Congress before March 15. Sincerely yours, Wm. McC. Martin, Jr. lebL' BOARD OF GOVERNORS Item No. 4 OF THE 2/4/63 FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. ADDRESS orriCIAL CORRESPONDENCE TO THE BOARD February 5, 1963 Mr. John L. Nosker, Vice President, Federal Reserve Bank of Richmond, Richmond 13, Virginia. Dear Mr. Nosker: This will acknowledge Mr. Horigants letter of January 31 enclosing a copy of your letter of January 11, 1963. In accordance With the request contained in your letter, the Board approves the appointment of John M. Beducian, at present an assistant examiner, as an examiner for the Federal Reserve Bank of Richmond, effective today. Please advise the salary rate. Very truly yours, (Signed) Elizabeth L. Carmichael Elizabeth L. Carmichael, Assistant Secretary.
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