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Minutes of actions taken by the Board of Governors of the
Federal Reserve System on Friday, February 6, 1953.
The Board met in
the Board Room at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Szymczak
Evans
Verdaman
Mills
Robertson
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Carpenter, Secretary
Sherman, Assistant Secretary
Kenyon, Assistant Secretary
Thurston, Assistant to the Board
Riefler, Assistant to the Chairman
Leonard, Director, Division of
Bank Operations
Vest, General Counsel
Young, Director, Division of
Research and Statistics
Boothe, Administrator, Office of
Defense Loans
Solomon, Assistant General Counsel
Hackley, Assistant General Counsel
Noyes, Assistant Director, Division of
Research and Statistics
Connell, Technical Assistant, Office of
Defense Loans
Prior to this meeting there had been sent to each member of the
toard a
memorandum dated February 5, 1953, from the Secretary of the
toard
.e13rozt
transmitting a memorandum of the meeting held on February 3 with
eentatives of the guaranteeing agencies under the V-loan program
t(Ir the purpose of obtaining the views of those agencies on the proposal
th4t the maximum permissible interest rate on guaranteed loans be ineteaeed from 5 to 5-1/2 per cent.
The meeting was called by the Board
2/6/53
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on January 28, 1953, following consideration of a letter dated January 21,
1953/ from Mr. Kenton R. Cravens, Chairman of the Subcommittee on Financi4g of Defense Contracts of the American Bankers Association, making a
formal appeal for an increase in the maximum rate.
Mr. Cravens appeared
at the
meeting on February 3) along with other representatives of the
Plillericam Bankers Association, to present the case for the increase.
Governor Vardaman summarized the February 3 meeting, at which
Messrs. Szymczak, Mills, and Robertson also were present, saying that he
•"insd the Impression that Mr. Cravens and his associates were quite sincel*e tn their efforts to serve the banking fraternity by getting the maxiMlInl rate more in line with what they considered to be prevailing interest
l'8.te levels, but that in his opinion they did not make a strong presentati0
4 since they offered no evidence to show that the V-loan program was
being hampered in any way by the prevailing rate..
He said that of the
l'ellresentatives of the guaranteeing agencies who spoke at the meeting
the
the
'LLLY one who definitely favored an increase was a representative of
Department of the Army, who did not elaborate upon his position or
84Port it with any evidence that his Department was experiencing diffiellitY with the present rate.
Governor Vardaman noted that Mr. Cravens made the statement at
the meeting that Mr. Craig R. Sheaffer, Assistant Secretary of Commerceclesignate, who vas unable to be present, had expressed himself to the
2('
2/6/53
effect that an increase to 5-1/2 per cent would conform with present
interest rate trends and the Department of Commerce would have no obiection to such an increase.
He said that he would inquire of Mr.
Sheaffer whether he wished to have that statement stand in the record
"the meeting.
Governor Var
mnfl also noted that in his letter to the
Board of January 21/ 19531 Mr. Cravens stated that representatives of
the DePartments of Defense, Army, Navy, and Air Force with wham he conte
rred informally early last December expressed the opinion that the
Inatirclum rate should be increased to 5-1/2 per cent.
However, Governor
VEt
r"c.wan said, in a letter to Chairman Martin dated February
2,
which
"
V read at the February 3 meeting after the representatives of the
ilniel'icala Bankers Association had withdrawn from the room, Assistant
8E101444_
-- u4rY of Defense W. J. McNeil stated that none of the persons with
114311 Mr. Cravens conferred expressed or agreed to the opinion that the
kutt
Um interest rate should be increased, it being their recollection
that they
stated to Mr. Cravens only that they knew of no reason to object to
such a proposal, when made and reasonably justified, and that the
—.Ion would be one for decision by the Board of Governors.
There ensued a full discussion of the reasons for and against the
NXmed increase, with all of the members of the Board and the interested
4erabers of the staff participating.
The following points were cited during the discussion as tending
to 8
loPort the increase:
2/6/53
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1. An increase would be in keeping with recent changes
In the pattern of interest rates. It would recognize the
normally greater credit risk involved in V-loan financing
and that V-loans require more servicing than regular bank
loans. The higher rate would be conducive to better servicing of smaller V-loans.
2. Inasmuch as interest rates had advanced generally,
the maximum rate established at the inception of the V-loan
Program in September 1950 should be increased now unless the
rate established in 1950 was too high at that time.
3. According to Mr. Cravens, the smaller V-loans made
at the maximum rate of 5 per cent would command, if made without guarantee, an average rate of 6 per cent; if 80, some
narrowing of the differential might be justified.
4. In the spring of 1952, when the American Bankers Association previously requested an increase in the rate, inquiries of the Federal Reserve Banks by the Board revealed
that a large majority of the Ranks felt that the rate should
be adjusted to 5-1/2 per cent, with several feeling that in
addition the guarantee fees should be reduced; recently, representatives of the New York and Philadelphia Reserve Banks
indicated informally that they thought the rate increase
liould be appropriate to provide a more adequate return to
the financing institutions.
The following points were cited against an increase in the maximum
rate:
1. No convincing evidence had been presented that an increase in the rate was necessary to maintain the V-loan prcgram, or, to put it another way, to show that the present maxiMum had in any way militated against the success of the program
or dissuaded banks from making V-loans.
2. Action by the Board to increase the rate might have
Undesirable psychological effects; for example, it might be
said that it was against the interests of small business.
2/6/53
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3. With indications that the defense procurement program
has passed its peak, which would point toward a lesser volume
of V-loan applications, the principal effect of an increase in
the maximum rate might be that the new rate would be applied to
renewals of outstanding loans, whereas the greatest justification for a higher rate would appear to be to cover costs of
Putting new loans on the lenders' books.
4. The difference in yield to a lender at 5 and 5-1/2
Per cent on a loan carrying a high percentage of guarantee
would be quite small whereas the principles involved in a
change in rate are of some significance.
5. So far as Government programs for the insurance or
guarantee of loans are concerned, the great bulk are insured or
guaranteed by the Veterans' Administration, the Federal Housing
Administration, and the farm credit agencies; therefore, it
would be well for the Board to consider what repercussions any
action on its part to increase the maximum rate on V-loans would
have insofar as those larger programs are concerned. Regardless
of the validity of the argument, an increase in the V-loan rate
almost certainly would be used by proponents of an increase in
rates on Government-insured mortgage loans as a reason for a
change and a measure of what the Board considered an appropriate
adjustment in the maximum rate between 1950 and 1953.
6. Rather than to increase the maximum rate, it might be
better to allow a financing institution making a small V-loan,
On which the total interest income would not be large, some
allowance for putting the loan on the books and servicing it,
thus making it more attractive for lenders to assist smaller
businesses under the V-loan program.
7. It appeared to be clearly the consensus of the guaranteeing agencies that no case had been made for an increase.
8. If the rate were not increased, that might encourage
lenders to increase their yield on V-loans through asking a
lower percentage of guarantee.
During the discussion, Governor Robertson inquired whether it
ir)111(1 be advisable to eliminate the maximum rate entirely, leaving the
2/6/53
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rate to be settled in each case oh a negotiated basis.
It was stated
that the presence of a ceiling serves to prevent a lender from exacting
a higher rate
than justified where an applicant is having difficulty in
1°cating a source of credit; that most applicants, although they might
gO
to a Federal Reserve Bank, probably would accept the decision of their
ecnunercial bank as to rate; and that the maximum rate tended particularly
to Protect the small borrower.
It was also stated that elimination of the
111"imum rate on V-loans might cause confusion in arguing either side of
the case
concerning the proper maximum rate applicable to other Government
Xed or guaranteed loans, where a maximum rate sometimes is provided
by law; that it might be argued that where the Government guarantees
1541"t
or
a loan it is appropriate to set some rate limitation as a reflec-
t1011 of the value of the Government guarantee; that where the Government
Is.
Party to a loan transaction it should set some rate limitation to
keeP the
borrower from being overcharged; that it was quite clearly the
It
-' of the Congress in setting up the current V-loan program that some
1118-)ciraulll rate should be fixed, as was done in the previous V-loan program;
alici that elimination of the maximum rate might result in each guaranteeagency setting up its own maximum rate.
There was also a discussion of the probable effect of a reduction
r the
maximum interest rate to 4-l/2 per cent.
It was suggested that on
the io
Si
of V-loans made to date under the current program, this might
266
2/6/53
-7-
have eliminated approximately one-half of the number of borrowers, it
being evident that the smaller borrowers had been financed predominantly
Ett 5 Per cent.
It was also brought out that the Board, in approaching
it8 functions under the V-loan program, had assumed a need for the pro-
8rkm and it would not seem appropriate, therefore, for the Board to
EtttetaPt to influence the degree of activity of the program through exel'el81ng its authority to fix rates and fees but rather for it to look
to the guaranteeing agencies to scale down their contracts and guarantees
ir they felt that the program was larger than it cught to be.
It was
11130 stated that a decrease to 4-1/2 per cent in the maximum rate probabl,
-NY would encounter opposition from the Armed Services as bringing
that
rate too close to the 4 per cent rate on advance payments.
It was the consensus of the Board
that no change in the maximum rate of
interest should be made at this time
and that a letter should be sent to Mr.
Cravens advising him to that effect.
Secretary's Note: Pursuant to the above
action, a letter reading as follows was
sent by Chairman Martin to Mr. Cravens
on February 9, 1953:
"Reference is made to your letter of January 21, 1953,
requesting the Board to consider increasing the maximum perIlliesible rate of interest on V-loans from 5 per cent to 5-1/2
Per cent. After consultation with the guaranteeing agencies
and consideration of the facts brought out in the conference
held in the Board's building Tuesday, February 3, it is the
"Quiensus of the Board that no change he made in the maximum
V-loun interest rate at this time.
2G/
2/6/53
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"The Board appreciates the interest of your committee
and I can assure you that the committee should feel free to
bring to the Board's attention at any time problems arising
in connection with the V-loan program."
At this point Messrs. Boothe, Hackley, Noyes, and Connell withdrew
prom the meeting while Messrs. Thomas, Economic Adviser to the Board;
Seh.
Chief/ Business Finance and Capital Markets Section, Division
Of
Research and Statistics; and Shay, Assistant Counsel, entered the
Prior to this meeting there had been sent to the members of the
13°11rd coPies of the following staff papers having to do with Regulations
It
txtension and Maintenance of Credit by Brokers, Dealers, and Members
or
mational Securities Exchanges, and U, Loans by Banks for the Purpose
"Purchasing or Carrying Stocks Registered on a National Securities ExehallEe:
Regulation of Stock Market Credit, dated January 8, 1953.
Bank Financing of Investment Trust Shares, dated January 9, 1953.
Requests to Broaden "Subscription Rights" Provisions of Regulations T and U, dated January 9, 1953.
Board Actions on Margin Requirements - A Review of Considerations,
dated January 30, 1953.
There had also been sent to the members of the Board copies of a
14enlorandum from Mr. Shay dated February 4, 1953, summarizing the replies
or the Federal Reserve Banks to the Board's letter of January 14, 1953,
their views on proposals contained in the second and third
Or
the
above mentioned staff memoranda.
4,#
2/6/53
-9Governor Szymczak commented briefly on the several memoranda and
041 suggestions received by the Board from bankers, brokers
am
and dealers,
the general pane for various technical changes in Regulations T
U. He suggested, in view of the limited time available, that the
discussion at this meeting be confined to the question whether Regulation
should be amended so as to apply specifically to credit for purchasing
shkres of
open-end investment companies, and he reviewed the facts set
t°.rth in the staff memorandum covering the matter.
Mr. Vest expressed agreement with the opinion given in the memothat the Board had authority, if it wished to exercise it, to apply
ile8'illat1on IT to credit for purchasing open-end investment trust shares on
the theory that a loan for purchasing such shares, which are rarely registered on a securities exchange, is actually'a loan for the purpose of purchasing or carrying the underlying registered stocks in the company's
Portfol4
---0 and that the Board might look to the substance, rather than the
1.0114, of the transaction. He pointed out, however, that in the October
1952 ,„
.rederal Reserve Bulletin there was published an interpretation that
the p
r
ohtbitions against a broker subject to Regulation T "arranging" for
4NY e
xtension or maintenance of credit on unregistered securities applied
credit on the collateral of unregistered shares of an open-end invest-
111e3at c°InPanY, and said that there might be some charges of inconsistency
-0111,1
the Board amend Regulation U as suggested since it might be said
'
2C
2/6/53
-10-
that in the one case the Board looked at the form of the transaction and
in the other case at the substance.
Mr. Vest did not consider this a
serious matter because the prohibition in Regulation T against brokers
arranging" certain credit:- is based Pssentially on the collateral while
Regulation U is chiefly in terms of loans for the purpose of purchasing
or carrying registered stocks.
Mr. Solomon concurred in the view of Mr. Vest that no serious
embarrassment would be caused by the October 1952 interpretation.
Following a discussion, Governor Szymczak suggested that a draft
of amendment to Regulation U along the lines mentioned be published in
the Federal Register with a view to obtaining comments from interested
Parties.
Governor Mills expressed the opinion that it would be preferable
to defer such publication until such time as the Board had considered
the other matters relating to Regulations T and U covered in the above
Mentioned
staff memoranda.
It was Governor Robertson's view that the amendment to Regulation
U should be approved by the Board and that, pending its publication and
final adoption, the Board should construe Regulation U as being applicable
to the financing of open-end investment trust shares.
No conclusions were reached, and it was understood that the matter
140Uld be discussed
further at another meeting of the Board.
2/6/53
-11There were presented telegrams to the Federal Reserve Banks of
13°E3t°n, New York, Philadelphia, Cleveland, Richmond, St. Louis, Minnea110118, Dallas, and San Francisco stating that the Board approves the
establishment
without change by the Federal Reserve Banks of Boston and
St. Louis on February 2, by the Federal Reserve Bank of San Francisco on
PebruarY 3, and by the Federal Reserve Banks of New York, Philadelphia,
Cleveland, Richmond, Minneapolis, and Dallas on February 5, 1953, of the
rates of discount and purchase in their existing schedules.
Approved unanimously.
The meeting then adjourned.
During the day the following addi-
t104al actions were taken by the Board, with all of the members present:
Minutes of actions taken by the Board of Governors of the Federal
Reserve System on February 5, 1953, were approved unanimously.
Letter to Mr. Powell, President, Federal Reserve Bank of MinneaiDolls, reading as follows:
"Reference is made to your letter of January 22, 1953,
advising of the various actions taken by the Board of Directors with respect to the appointments of the officers of the
Federal Reserve Bank of Minneapolis and the Helena Branch
for the year 1953, and the fixing of their salaries.
"As requested, the Board of Governors approves the payment of salaries to the following officers for the period
January 22, 1953, through May 31, 1953, at the rates indicated, which are the rates fixed by the Board of Directors
as reported in your letter.
271
2/6/53
-12-
Salary
"Name and Title
J. Marvin Peterson, Vice President and
$13,000
Director of Research
9,000
A. W. Johnson, Assistant Vice President
8,x)0
Christian Ries, Assistant Vice President
John Gillette, Assistant Cashier
7,500
M. B. Holmgren, Assistant Cashier
7,500
"Approval by the Board of Governors of the salaries fired by the Board of Directors for the remaining
Officers has been deferred pending formulation of an
officer salary plan referred to in our letter of February 2, 1953."
Approved unanimously.
Letter to Mr. Mangels, First Vice President, Federal Reserve
of San Francisco, reading as follows:
"The Board of Governors approves the reappointments
Of Messrs. E. S. Dulin, Wakefield Baker, Edmund Hayes,
Walter A. Starr, and J. A. Folger as members of the Industrial Advisory Committee for the Twelfth Federal Reserve District to serve for terms of one year each, bel ining Maroh 1, 1953, in accordance with the action
taken by the Board of Directors of the Federal Reserve
Bank of San Francisco, as reported in your letter of
January 28, 1953.
"It is noted from your letter that Mr. Walter A.
S,tarr was dasignated Chairman of the Committee and Mr.
Wakefield Baker, Vice Chairman."
Approved unanimously.
Letter to the Board of Directors, The Fifth Third Union Trust
1°allY, Cincinnati, Ohio, reading as follows:
"Pursuant to your request submitted through the Federal Reserve Bank of Cleveland, the Board of Governors aplJroves the establishment and operation of a branch at 2370
Glendale-Milford Road, Evendale, Hamilton County, Ohio, by
2/6/53
-13-
"The Fifth Third Union !rust Company, provided the branch
is established within five months from January 22, 1953."
Approved unanimously, for
transmittal through the Federal
Reserve Bank of Cleveland.
Letter to the Board of Directors, The Lynchburg Trust and Savings
138-111t) Lynchburg, Virginia, reading as follows:
"Pursuant to your request submitted through the Federal Reserve Bank of Richmond, the Board of Governors apProves the establishment and operation of a branch at 2482
Rivermont Avenue, within the corporate limits of Lynchburg,
Virginia, by The Lynchburg Trust and Savings Bank, Lynchburg, Virginia, provided such branch is established within twelve months from the date of this letter and that
Prior formal approval of the appropriate State authorities
is obtained."
Approved unanimously, for
transmittal through the Federal
Reserve Bank of Richmond.
Letter to the Board of Directors of the West Liberty State
khlr
West Liberty, Iowa, stating that, subject to conditions of mem-
bel
'BhiP numbered 1 and 2 contained in the Board's Regulation HI the
11°8.rcl aPProves the bank's application for membership in the Federal
Rese
"e System and for the appropriate amount of stock in the Federn, -4- geserve Bank of Chicago.
Approved unanimously, for
transmittal through the Federal
Reserve Bank of Chicago, with a
2/6/53
letter to Mr. Young, President of
the Reserve Bank, containing the
following paragraph:
"On the date of the examination the bank was carrying
a balance with the Iowa State Bank and Trust Co., Iowa City,
Iowa, a nonmember bank, which is in excess of the limit prescribed by Section 19 of the Federal Reserve Act, and it is
assumed that such balance will be reduced to a conforming
amount."
Letter to the Comptroller of the Currency, Treasury Department,
W"hington, D. C. (Attention:
the
Mr. G. W. Garwood, Deputy Comptroller of
Currency), reading as follows:
"Reference is made to your letter of May 16, 1952, to
the Federal Reserve Bank of Dallas, Texas, requesting a recomMendation on the application to organize a national bank at
Dallas, Texas, under the title of Industrial National Bank
of Dallas, and to your letter to Mr. Sloan, dated January 28,
?:953, with respect to the views and recommendation of the
Board of Governors on the proposal.
"We have received a report of investigation of the apPlication made by an examiner for the Federal Reserve Bank of
Dallas setting forth information with respect to factors usu8.115r Considered in connection with such applications. While
it appears that the proposed bank might provide more convenient
facilities for a number of people and businesses it is doubtfUl that there exists a definite need for additional banking
facilities in the area since there are a number of banks located within a radius of two and one-half miles of the proposed
l
ocation. The proximity of other banks now serving the area
would also have an unfavorable effect on the future earnings
13
,1*°ePect8 of the institution. In view of these unfavorable
Iactors it is believed that the application should be disap.1?roved at this time. However, if the application is approved
lt would seem desirable to require the applicants to provide
Tanagement acceptable to your office since it appears that
cLefinite arrangements for the services of an executive officer have not been made.
-15"The Board's Division of Examinations will be glad
to discuss any aspects of this case with representatives
of your office if you so desire."
Approved unanimously, with
a copy to the Federal Reserve
Bank of Dallas.
Letter to the Federal Deposit Insurance Corporation, Washington,
C.) reading as follows:
"Pursuant to the provisions of section 4(b) of the
Federal Deposit Insurance Act, the Board of Governors of
the Federal Reserve System hereby certifies that The Bank
of Tokyo of California, San Francisco, California, became
8.
member of the Federal Reserve System on February 2, 1953,
and is now a member of the System. The Board of Governors
of the Federal Reserve System further hereby certifies that,
in connection with the admission of such bank to membership
the Federal Reserve System, consideration was given to
the following factors enumerated in section 6 of the Federal Deposit Insurance Act:
1. The financial history and condition of the bank,
2. The adequacy of its capital structure,
3. Its future earnings prospects,
4. The general character of its management,
5. The convenience and needs of the community to
be served by the bank, and
6. Whether or not its corporate powers are consistent with the purposes of the Federal Deposit
Insurance Act."
Approved unanimously.
Letter to the Federal Deposit Insurance Corporation, Washington,
reading as follows:
"Pursuant to the provisions of section 4(b) of the
,
eral Deposit Insurance Act, the Board of Governors of
FeA
2/6/53
-16-
"the Federal Reserve System hereby certifies that The Sumitomo
Bank (California), San Francisco, California, became a member
of the Federal Reserve System on February 2, 1953, and is now
a member of the System. The Board of Governors of the Federal
Reserve System further hereby certifies that, in connection
With the admission of such bank to membership in the Federal
Reserve System, consideration was given to the following factors enumerated in section 6 of the Federal Deposit Insurance
Act:
1. The financial history and condition of the bank,
2. The adequacy of its capital structure,
3. Its future earnings prospects,
4. The general character of its management,
5. The convenience and needs of the community to
be served by the bank, and
6. Whether or not its corporate powers are consistent with the purposes of the Federal Deposit
Insurance Act."
Approved unanimously.
Letter to Mr. Young, President, Federal Reserve Bank of Chicago,
reading
as follows:
"Your letter of January 21 regarding the establishment
!
)
,Y. the Federal Reserve Bank of Chicago of an office in Des
wines for the purpose of facilitating the collection of
checks has been read with interest. The Board is in symI,DathY with the general idea of trying such an experiment
further consideration would indicate that the proposal
holds Promise of being an economical and efficient method
of facilitating the collection of checks and reducing the
concentration and resultant bottlenecks at the Head Office.
"In response to your request for any comments we may
have to offer, attached is a list of a number of points
Which would seem to merit consideration before reaching
..
13- decision as to the desirability of establishing an oflice at Des Moines. Undoubtedly, you have these and other
Points in mind.
"The Board would like to hear further from you about
toef,...;42;
2M3
-17-
this matter as plans develop and before any commitments
are made"
Approved unanimously.
Letter to Mr. Leach, Chairman of the Conference of Presidents
of the
Federal Reserve Banks, prepared pursuant to action taken at the
Ineeting of the Board on January 29, 1953, and reading as follows:
"You will recall that the Presidents' Conference of
September 23, 1952 discussed with the Board the advisability of supplementing the retirement allowances payable
to members who retired before qualifying for Social Security benefits.
"The Board approves the payment of a supplemental allowance to those members of the Retirement System who retired before qualifying for Social Security benefits as
originally proposed, except that no allowance be increased
above S3600, and the adjustment for those with less than
ten year
service be $30 for each year of service, rather than a blanket allowance of 5300.
"The Board approves supplemental allowances to members on special service retirement under the same formula
as that used for those on regular retirement with the additional limitations originally proposed.
"The Board approves in principle the approach which
the Retirement Committee has taken to the problem of supPlementing disability allowances, and requests the Presidents' Conference to submit a recommendation as to the
exact formula to be used."
Approved unanimously.
cretary
@FedFRASER