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248 A meeting of the Board of Governors of the Federal Reserve System as held in Washington on Tuesday, February 9, 1937, at 3:00 p.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Broderick McKee Davis Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chairman Mr. Goldenteiser, Director of the Division of Research and Statistics Mr. Dreibelbis, Assistant General Counsel Mr. Horbett, Assistant Chief of the Division of Bank Operations Mr• Ransom referred to the discussions which had been taking place with members of Congress and Chairman Crowley of the Federal Deposit Inzuranc Corporation regarding the problems which had arisen in connection with the definition of interest in Regulation Q of the Board of Governors by rea _on of the difference between the Board's regulation and Regulation iv of the Federal Deposit Insurance Corporation, with specific ' l eferenoe to the absorption of exchange and collection charges by member banks and insured nonmember banks respectively. Mr. Ransom reported that Crowley had agreed to a suggestion that amendments to the Board's Regulation Q 4ing them and the Corporation's Regulation IV be drafted thich would into uniformity on the basis of a declaration of the law and the elimination from both regulations of the definitions of the term Hi -tteresto contained therein. Mr. Ransom added that Mr. Crowley had 6.gl ' eed to recommend to the board of directors of the Corporation that 249 2/9/37 -2it take such action with respect to its Regulation IV and that it join With the Board of Governors in the issuance of a statement for release to the press regarding the matter. This course of action, Mr. Ransom Pointed out, would remove from the Board's regulation any specific reference to the absorption of exchange and collection charges or any other Particular type of expense, and in the future, under the regulations of both bodies, the question what in a particular case would be considered a paYment of interest or a device to evade the prohibition against the Payment of interest would become a matter of administrative determination under the law and the regulations, in the light of experience and as sPecifio cases involving the necessity for such determination might arise. Mr. ansom referred to the difficulties which members of Congress who had Con Sidered the matter had encountered in endeavoring to determine what, ifan called amendments to the law they would feel justified in proposing and attention to the fact that the problem had many ramifications, 8°Ille of which touched upon questions of fundamental importance to the bttriki ng sYstem of the country. He expressed the view that it was highly in view of other important problems with which Congress is Confr °flted, that care be exercised to avoid the creation of a situation which might result in the apparent necessity for Congress to act upon this Particular aspect of banking legislation before all aspects of the pl....L., Obi had been fully explored and its relation to other more khdam-fltal problems thoroughly considered. For these reasons, he felt that it would be best to adopt the proposed procedure to which Mr. Crowley 250 2/9/37 -3had agreed and to defer indefinitely a specific determination of the question whether the absorption of exchange and collection charges would constitute the payment of interest, at least until some clear necessity therefor should arise in due course through the presentation of a par- t:1(111er case, with all the facts required for a carefully considered decisi°n. The Chai man and other members of the Board indicated their e°11eurrenoe with Mr. Ransom's analysis of the situation and the views exPressed by him, Thereupon, Mr. Ransom moved the adoption of the following resolution: "BE IT RESOLVED, That, effective February 11, 1937, Regulation Q entitled 'Payment of Interest on Deposits', as adopted to become effective January 1, 1936, is amended by striki__ Lig out subsection (f) of section 1 thereof and by inserting after the first sentence of subsection (a) of section 2 thereof the following sentence: Within this regulation, any payment to or for the account of any depositor as compensation for the use of funds constituting a deposit shell be considered interest." Mr. Ransom then submitted 8 draft of an announcement proposed for1 e'ease to the press as a joint statement of the Board of Governors ' and +1, '"e Federal Deposit Insurance Corporation upon receipt of advice from !Ir. Crowley that the board of directors of the Corporation had "Opted the proposed amendments to Regulation IV of the Corporation " ' I had agreed to the proposed announcement. In this connection Mr. R1118°Tri said that Mr. Crowley and he had agreed that, if the proposed 8J11e/1,1,,.. s and press statement were approved, it would be desirable to call 'Pon Senator Glass and Chairman Steagall of the House Banking and 251 2/9/57 Currency Committee for the purpose of advising them fully as to the action taken. The proposed resolution and press release were discussed at length. Mr. Dreibelbis was requested to ascertain whether certain suggested changes in the release were agreeable to the Federal Deposit Insurance Corporation and he withdrew from the meeting for that purpose. The motion offered by Mr. Ransom was put by the chair and carried by unanimous vote. At the request of Mr. Ransom there was brought up for considerati°n a draft of a letter to Mr. Charles L. Heiss, Statistician for the Research Committee of the Wisconsin State Bankers Association, reading as follows: "Reference is made to your letter of January 22, requesting certain earnings and expense figures for State bank members in Wisconsin covering the calendar year 1935 and certain condition figures of the same banks as of December 31, 1935. It is noted that you have obtained similar data from the Comptroller of the Currency covering national banks and from the l70. Deposit Insurance Corporation covering insured nonmem'edeer -anks, that you desire to include figures for State bank members in a composite for all banks in the State of Wisconsin, and that any information given you covering State bank members will not be used in any manner which might make possible the identification of the figures for any bank. "In response to your request there is inclosed, for use under the conditions indicated, a table showing earnings, exItts;easrd dividends of State bank members in Wisconsin for 1935, arranged by size of banks, using total deposits Rs the measure of size, also a copy of the Board's 1935 Anitplual Report, on pages 261 and 264 of which are shown the State .1!. nk members in Wisconsin on December 31, 1935, together with '"e amounts of their loans, investments, deposits, capital and surplus. It is assumed that the data shown in the An,11.1a1 Report will give you all the information you need rela'lye to the assets and liabilities of the banks in aub- t 252 2/9/37 -5"stantially the same form as furnished by the Comptroller of the Currency covering national banks." Mr, Ransom stated that he had asked that the proposed letter be brOL.tht to the attention of the Board at this meeting for conside ttion view of the discussion which had taken place on January 1E, 1937, in cellnection with a request of the Indiana Bankers' Association for certain inform 4--a'ion. It was pointed out that in that case the request had been for access to reports of condition and earnings and dividends of State ulember banks Whereas which were on file at the Federal Reserve Bank of Chicago, the present request did not involve access to any reports or records of either the Federal Reserve Bank or the Board, but was confined to a request for statistical information which had been compiled in the Division of Bank Operations on the basis of the reports submitted and that the Board in the past had complied with requests from other organizetio for similar information. In that connection, Mr. McKee suggested the 'estion whether it might not be preferable to make such information respect to State member banks available only through the State banking authorities. The matter was discussed and at the conclusion of the discussion Mr. Ransom moved that the letter be approved. Carried unanimously. Mr. Horbett left the meeting at this point. Reference was then made to the following resolution adopted by the Sent.te on February 5, 1937, and transmitted to the Board by the Seere tarY of the Senate under that date: 2/9/37 -6"RESOLVED, That the Board of Governors of the Federal Reserve System is requested to transmit to the Senate, as s?on as practicable, a report setting forth the reasons for tae isauance of the recent order of the Board increasing the reserve requirements of member banks after May 1, 1937, the actual and probable effect of such order with respect to interest rates upon public and private obligations, and its Probable effect upon the banking system of the country." Messrs. Thurston and Goldenweiser were requested to prepare and submit to the Board as promptly as possible a draft of reply to the resolution in accordance with suggestions made during the discussion of the matter. Mr. Dreibelbis, who had returned to the room during the consideration of the Senate resolution above referred to, stated that he had diseu8sed the changes suggested by the Board in the press release with resPect to the amendment of Regulation Q with Mr. L. E. Birdzell, General C°11/1se1 for the Federal Deposit Insurance Corporation, and that Mr. Birdzell had stated that the changes were acceptable to him and that the Chairman of the Federal Deposit Insurance Corporation would present the "tire matter at a meeting of the board of directors of the Corporation tor a°rrow for action. Thereupon the press release was approved unanimously in the following form and it was understood that it would not be given out until after advice had been received of its approval by the Federal Deposit Insurance Corporation: "In view of widespread differences of opinion in the lawmak* and administrative branches of the Government as to the :ntent of the law and as a result of further consultations bethe Federal Deposit Insurance Corporation and the Board °I Governors of the Federal Reserve System, their respective 254 2M7 -7- regulations relating to the payment of interest on demand deposits have been brought into uniformity by amendments adopted by the Board and by the Corporation. "The definition of 'interest' has been eliminated from Regulation Q of the Board and from Regulation IV of the Federal Deposit Insurance Corporation and paragraph (a) of section 2 of each regulation has been amended by inserting after the first sentence the following: 'Within this regulation, any I28.3nment to or for the account of any depositor as compensation for the use of funds constituting a deposit shall be considered i nterest.' "The effect of these amendments is to declare existing law than to interpret and apply the law to particular Practices. riel' This will permit the general application .by each agency of a uniform law and a determination of specific cases upon the facts involved. It will also permit each agency to d etermine, with respect to cases coming before it, whether or not any practice involved in any such cases is a 'device' the meaning of the statute employed by the banks to evade the prohibition of the law. "The Board of Governors, in its original definition of the term interest (section l(f)), specified that such term should igelude the payment or absorption of exchange or collection .,!11ges which involve out-of-pocket expenses. The present :,1?tlon of the Board of Governors removes this finding or specification from its regulation. ffio Henceforth under both regulations the question of what particular case is a payment of interest upon a demand deposit or a device to evade the prohibition against the payment Ofuoh interest, becomes, for both agencies, a matter of adt u. istrative determination under the general law in the light Of experience and as specific cases may develop." Mr. Ransom was authorized to call Upon Senator Glass and Representative Steagall, in company with the Chairman of the Federal Deposit Insurance Corporafor the purpose of advising them as to the action of the Board and the Corporation in this matter and the reasons therefor. eral It was stated that inquiries had been made by Presidents of Fedreserve the Treas banks as to the status of the undertaking of the Secretary ' 1117 to obtain an appropriation to replace the existing stocks 255 2/9/37 -8- of unissued Federal reserve notes of the 1928 series held by the Federal reserve banks. the Chairman Eccles said that he had addressed a letter to Secretary of the Treasury regarding the matter under date of December 29) 1936, and that he would ascertain its present status and advise the oard. Consideration was given to a memorandum dated February 1, 1937, tr°111 Mr. Dreibelbis, Assistant General Counsel, requesting advice as to the wishes of the Board with respect to the practice to be followed during the Present session of Congress in answering requests from Congressional e°nInlittees for reports on proposed legislation. In connection with this tter reference was made to the position taken by the Board when the same question was presented on February 27, 1955, and the procedure subfollowed. It was agreed that such requests should be held Without action unless it appeared that there was something in the situati°n surrounding a particular bill which made it advisable to submit a Prot report and it appeared that the Board had a definite position 17hich it desired to state; it being understood that counsel's office Would keep in close touch with all banking legislation and would submit to the Board for consideration a report on any bill when it appeared that, because of its nature or any special consideration that was being gliren to it by either House of Congress, such a report should be made upon request by a committee of Congress. It was decided that the procedure set forth above should be followed during the present session of Congress. 256 2/9/37 -9Attention was directed to a memorandum addressed to Mr. Broderick under date of January 25, 1937, by Mr. Carpenter with respect to the service of Mr. Sinclair, President of the Federal Reserve Bank of PhiladelPhia, as a director of the James G. Biddle Company, a corporation recently organized to carry on the business of dealing in electrical and scientific instruments formerly conducted by his father-in-law. The mem°randum had been circulated among the members of the Board at the request of Mr. Broderick for their information prior to consideration at a nleeting Of the Board of the question whether, in accordance with the P°3itiOn Previously taken by the Board that officers of Federal reserve banks should not be identified with any outside business interests, Mr. S111--LaIr should sever his connection with the company. After consideration of the question in the light of the circumstances set forth in the memorandum, Mr. Broderick moved that the matter be laid on the table, with the understanding that any other case of this kind coming to the attention of the Board will be considered on the basis of the circumstances existing in each instance. Carried unanimously. At this point Mr. Goldenweiser left the room. There followed a discussion of a memorandum dated February 3, 1937_ 'from Mr. Vest, Assistant General Counsel, calling attention to three alternative bills which had been introduced in the House of Repl'esent t,a-lves to amend section 19 of the Federal Reserve Act to extend, to Place in the Board authority to extend, the time during which member banks may pay interest on demand deposits of public funds. The 257 2/9/37 -10memorandum stated that the bills conformed to suggestions that were made by Mr. D. W. Bates, Superintendent of Banks, and other officials from the State of Iowa, at a conference with members of the Board and its Staff on February 2, 1937. Reference was made during the discussion to the l ikelihood of the passage of one of the bills at the present session f Congress and to the :position the Board should take with respect to the bilis. It was understood that Mr. Ransom would discuss the matter with the Comptroller of the Currency and the Chairman of the Federal Deposit Insurance Corporation, with a view to the formulation of a position which might be agreed upon by the Board and the two agencies referred to. Mr. Ransom presented a draft of a reply to a letter addressed to him under date of February 1, 1937, by Representative Wright Patman ill *deb he made certain imluiries concerning matters related to the definition of "interest" as contained in the Board's Regulation Q. The reply had been circulated among the members of the Board prior to consideration at a meeting of the Board. After discussion the letter was approved unanimously in the following form: "This refers further to your letter of January 29, which Mr. Ransom acknowledged on the same date, asking for some information regarding payments of interest by banks. You request the amount of interest paid by 'Federal ReseiZe bal Banks to other banks, including member and nonmember s, for interest on daily balances. The context of your let' 0'7,r indicates, however, that you probably have in mind the amount interest paid by member banks of the Federal Reserve System. "Prior to 1927 the reports of earnings and expenses of member banks did not classify interest payments on deposits, 25E3 2/9/37 :nor I did they distinguish between interest earned on loans and interest and dividends earned on bonds, stocks and other securities. The data that you desire are not available, therefore, for 1925 and 1926, the first two years of the period covered bY your request. The inclosed statement (Table No. 1) shows the requested figures by calendar years for the period 1927-1935, bY semi-annual periods for the year 1933 (when the Banking Act b?came law), and for the first six months of the year 1936. Figures for the last half of 1936 will not be available for some time. The statement also shows the average rates of interest paid and earned by member banks and the average amounts Of deposits. The average rates of interest paid were computed simply by dividing the amount of interest paid by the average amount of deposits. The rates do not, therefore, necessarily reflect the prevailing level of rates of interest, since interest was not necessarily paid on all deposits of a given class. . "You will note from the statement that the average rates of interest paid on deposits by member banks declined steadily after 1930, and that the average rate paid on bankers' bPlances during the first half of 1953 was only 7/10 of 1 percent. You will recall perhaps that banks on their own initiative had been reducing interest rates paid on bankers' balances as well as _?r1 other deposits before the enactment of the Banking Act of -933. For example, the maximum rates of interest on demand deposits payable by member banks of the New York Clearing House Association were changed as follows during the Period 1929-1933: Rates payable to Other banks andT Other sayMutual ings banks trust companies deoositors -a 5/0 2% 2-1/2% March 26, 1950 June 26, 1930 December 27, 1930 May 19, 1931 2-1/2 ,2, 1-1/2 1 1-1/2 1 1/2 2 1-1/2 1 1/2 October 16, 1931 May 13, 1952 January 25, 1953 March 6, 1933 April 13, 1933 June 2, 1933 June 15, 1933 1-1/2 1 1/2 1 1/2 1/4 1/4 1 1 ect JanuarY_11 1929 1/2 1/4 1/2 1/4 1 1 1/2 1/4 1/2 1/4 0 0 259 2/9/37 -12"The above rates applied also to time deposits of the Shorter maturities. "It is, of course, impossible to determine what the average rates of interest paid on deposits would have been in 1933-1936, if the Banking Act of 1933 had not prohibited the payment of interest on demand deposits and had not provided for the regulation of the rates of interest paid on time deposits. In view of the trend in interest rates paid on deposits prior to the enactment of the Banking Act of 1933, however, it seems clear that interest rates would not have been nearly as high in 19331936 as they were in 1927-1930 if such legislation had not been enacted. "The amount of bankers' balances on deposit at city correspondents was very much larger in 1936 than ever before, in spite of the fact that interest could not be paid on demand deposits. In view of the accumulation of surplus bank funds at both city and country banks generally, due largely to heavy imports of g°1, there is no reason to believe that city correspondents would have been willing or able to pay any appreciable amount of interest on bankers' balances even if the law had not prohibited the payment of interest on demand deposits. "In the circumstances, we have not made any computations to ,show the amount of interest which would have been paid by member banks either on bankers' balances or on other deposits during the period 1932-1936 if the average rates of interest paid during this period had been the same as the average rates of interes+ u Paid before the enactment of the Banking Act of 1933. Ilch computations may, of course, be made from the data shown ln the inclosed statement. The excess of interest payments, thus computed, over the amount of interest actually paid . uring 1932-1936 would not, however, measure the savings to banks since, as previously pointed out, the rates of interest paid by member banks were declining steadily before the anking Act of 1933 became law. If you decide to have compu, uations made along the lines indicated in your letter, you may wish to have semi-annual figures for 1933, in view of the fact that the Banking Act of 1933 did not become law until J..1.1ne 16, 1933; such figures are shown in Table No. 1, in adto the calendar year totals. ,, "The data in Table No. 1 relate only to member banks of ne Federal Reserve System, both national and State. CorresgnI ng data are not available for nonmember banks. Very few Line State banking departments publish any figures on earnlflg andand expenses of banks under their supervision. However, the Federal Deposit Insurance Corporation obtains reports of earnings and expenses from insured nonmember banks, and there r 260 2/9/37 tr. • is inclosed a statement (Table No. 2) showing the available data covering such banks for the years 1934-1935. "It is hoped that this information will serve your uurPoses.” At this point Messrs. Thurston and Dreibelbis left the meeting and co nsideration was then given to each of the matters hereinafter referred to and the action stated with respect thereto was taken by the Board: The minutes of the meeting of the Board of Governors of the Federal Re_serve System held on February 8, 1937, were approved unanimously. Letter to Mr. Schaller, President of the Federal Reserve Bank Of Chicago, reeding as follows: "This is in answer to your letter of January 4, 1937, relating to the assignment of an officer of the Federal Reserve Bank of Chicago to take charge of the work of the Bank in the administration of the Securities Exchange Act of 1934. "The Board notes from your letter that it is your desire to try 'r. Mr. A. T. Sihler, Assstant Vice President, in this positionbefore considering anyone else, that you have made arrange_ ents (subject to Board approval) for doing so, and that Board uPproval of the proposed arrangement is requested. "The Board is advised, moreover, that since writing your letter you have consulted with Mr. Parry, Chief of the Board's liplivision of Security Loans, have reaffirmed your interest in T71.11C this work handled satisfactorily and in full cooperation With the Board's Division of Security Loans, have explained 1 4t s Z;IcSihler. would be expected to give all of his time to except such as might occasionally be needed in your ,seal Agency Department (as, for instance, when some heavy 1:.?"ece of financing is being negotiated for the Treasury), and nated that in your opinion Mr. Sihler will succeed in the work. file Board is also advised that Ur. Sihler has recently conated with Mr. Parry and other members of the staff in Washand that if his assignment is approved he would plen keep in close touch with the work done in this field by the B: ' ard and by the several Federal Reserve banks. "In view of the information developed in your letter and ,7.1-aborated in these conferences, the Board approves the arrangement proposed." r Approved unanimously. 261 2/9/37 Letter to Mr. Young, Secretary of the Federal Reserve Bank of Chicago, reading as follows: "Reference is made to your letter of February 1 advising that the Executive Committee of your bank, at its meeting on January 29, authorized the payment, subject to the approval of the Board, of an amount not to exceed ; ! 1 350 toward the exPenses of the Secretary's office of the Federal Advisory Council, and of 2O to the member representing your district on the Council for each meeting attended, plus a per diem allowance of 4'10 during the period the member is absent from home as a result of attendance at meetings, in addition to the actual necessary traveling expenses incurred in attending such meetings. "As you noted, the Board's telegram of March 11, 1936, to Mr. Schaller authorized your bank, until further notice, to pay fees and expenses as mentioned above, and accordingly no action by the Board on these matters appears to be necessary at this time." Approved unanimously. Letter to Mr. Young, Vice President of the Federal Reserve Bank Or Chicago, reading as follows: "Receipt is acknowledged of your letter of January 27, -w Q7, regarding the exercise of fiduciary powers by the Holstein State Bank, Holstein, Iowa. "It is not entirely clear from your letter whether the bank permission to exercise all of the fiduciary Porers granted under its charter and the applicable provisions °f the State law, or merely desires permission to act as trusre in the one trust which it is now administering. You state, 1 ever, that you are not in a position to give the specific . 1 1°! , 3:niormation requested by the Board in its letter X-9801, to '1? submitted with applications for permission to exercise Iiduciary powers, but indicate that full information could be obtained at the time of the next examination which undoubtedly will be within the next ninety days. "In the circumstances, the matter will be held in abeyance awaiting the information to be developed at the next exalnination, together with definite advice as to the extent to which the bank desires permission to exercise trust powers, arld Your recommendation as to the advisability of granting 262 2/9/37 -15- "such permission." Approved unanimously. Letter to Mr. Knoke, Vice President of the Federal Reserve 84lik of New York, prepared in accordance with the action taken at the meeting of the Board on January 22, 1957, and reading as follows: "Reference is made to your letter of January 20, 1937 concerning inquiries received from the Bank for International Settlements and the National Bank of Bulgaria regarding the purchase in this market of bankers' acceptances for the account of such banks and also concerning your understanding of the procedure recently established with respect to foreign relationships of Federal Reserve banks as outlined in the Board's statement of procedure (A.-9774). "In the latter connection, you have directed the Board's attention to the use of the words 'otherwise authorized' in the preamble of paragraph 3 of the statement. The Board did not intend that this language should be interpreted as approving or authoriz11?g a transaction otherwise requiring specific permis810n of the Board merely because such transaction is Provided for in an existing agreement with a foreign central bank. "In connection with the instant case, this will confirm the advice given you by this office over the telephone on January 22, 1937, that your bank might Proceed to comply with the request of the National Bank of Bulgaria (the request of the Bank for International Settlements having been withdrawn) and that letter setting forth the Board's action with respect to the general question of procedure would follow. "The Board agrees that, to the extent that bikers' acceptances are purchased for the account of for,, central banks, it is desirable for the Federal Reserve bank to purchase them in order that such transactions may be concentrated as much as possible in the reserve banks and they may be informed currently and , 1111Y as to all such transactions and their effect "Pon the market. At the same time, in view of the 263 2/9/37 -16- "obligation assumed by the Federal Reserve banks in connection with a guarantee of payment at maturity and an agreement to repurchase or sell in this market, and the Possible effects upon the domestic situation, the Board feels that it should be in a position to observe and review the effects of such operations. Therefore, while it is recognized that the Federal Reserve banks should be in a position to act upon the requests of foreign central banks without being under the necessity of referring each specific case to the Board before the transaction is executed, it is felt that some reasonable limit should be fixed upon the aggregate amount of the liability that may be assumed by the Federal Reserve banks and be outstanding at any one time without further authori:6ation from the Board, so that, when the total of such liability aPproaches the limit fixed by the Board, it will be in a Position to review the matter from the standpoint of possible effects upon the domestic credit situation, before additional purchases are made which will increase the aggregate contingent liability to an amount beyond such limit. 'Accordingly, pending approval by the Board of the revisions of the outstanding agreements covering the accounts maintained by the Federal Reserve Bank of New York for foreign central banks, the Board authorizes the Federal Reserve Bank of Now York, in accordance with the terms and conditions of existing agreements, to purchase for the account of such foreign central banks, including the Bank for International Settlements, bankers' acceptances which are eligible for purchase under the regulations of the Board of Governors, with the guarantee of the Federal Reserve bank of payment at maturity and its agreement either to repurchase the acceptances or, at its °Ption, sell them in the market; provided that the aggregaue amount of the liability assumed by the Federal Feserve banks in connection with all such acceptances purchased for all foreign central banks, including the Bank ior International Lsettlements, shall not exceed at any one time the sum of 25,000,000, without further specific authorization which shall be obtained in advance from the /30ard of Governors of the Federal Reserve 6ystem. "A copy of this letter is being sent to the ?residents °f all Federal Reserve banks for their information." Approved unanimously. Thereupon the meeting adjourned.
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