Full text of Minutes of the Board of Governors of the Federal Reserve System : Meeting Minutes, January 2, 1962, Volume 49, Part 1

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Minutes for

To:

Members of the Board

From:

January 2, 1962

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 Tuesday, January 2, 1962.
PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.

The Board met in the Board Room at 10:00 a.m.

Balderston, Vice Chairman
Mills
Robertson
Shepardson
Mitchell
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Discount rates.

Sherman, Secretary
Kenyon, Assistant Secretary
Fauver, Assistant to the Board
Hackley, General Counsel
Farrell, Director, Division of Bank Operations
Solomon, Director, Division of Examinations
Johnson, Director, Division of Personnel
Administration
Hexter, Assistant General Counsel
O'Connell, Assistant General Counsel
Hooff, Assistant General Counsel
Smith, Assistant Director, Division of
Examinations
Thompson, Assistant Director, Division of
Examinations
Sprecher, Assistant Director, Division of
Personnel Administration

The establishment without change by the Federal

Reserve Bank of Kansas City on December 29, 1961, of the rates on discounts
and advances in its existing schedule was approved unanimously, with the
understanding that appropriate advice would be sent to that Bank.
First Virginia Corporation.

There had been distributed to the

Board memoranda from the Division of Examinations dated December 28,
1961, and January 2, 1962, regarding an apparent change in the financial
reporting procedure of First Virginia Corporation, Arlington, Virginia.
It was noted that on its books First Virginia reflected its investment
in subsidiaries at cost.

In annual reports to shareholders, such

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investments had in the past been reflected at the Corporation's proportionate interest in net asset value, with the excess of such value
over cost reflected in "surplus from equity in affiliates".

However,

in a balance sheet as of August 31 19610 submitted as part of an
)
application to acquire a majority of the shares of a bank in Winchester,
Virginia, there was shown, in addition to the investment in subsidiary
banks at net asset value, an amount of $7360800 representing the "excess
of cost of capital stock of subsidiary banks over the Corporation's
equity in their net assets at date of acquisition."

Evidence that

First Virginia intended to follow a reporting procedure such as reflected
in the aforementioned balance sheet was afforded by a Preliminary Prospectus
filed with the Securities and Exchange Commission, on which comments had
recently been requested by the Commission.

The Prospectus indicated

that First Virginia intended to amortize the item of $736,800 over an
18-year period.
The memoranda expressed the view that the changed reporting
Procedure would not be in line with conservative practice and that it
would not conform with a long-standing policy of the Board, first
indicated in the Board's 1935 Standard Voting Permit Agreement.

This

agreement provided that within not more than two years from the date
such a voting permit was granted, the holding company affiliate would
charge off or otherwise eliminate from its assets the part of the
carrying value on its books of its investments in stocks of subsidiary

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and/or affiliated organizations that was in excess of the adjusted value
of such stocks.

Through the ensuing years, holding company affiliates

had not shown their investments in subsidiary banks at amounts greater
than their interest in the net assets of the subsidiary banks.

Since

the matter might come up in considering a general voting permit application from First Virginia at some future date, it was believed that the
Corporation should be advised of the Board's policy.

Accordingly, it

was suggested that a letter of advice be sent to First Virginia Corporation, the substance of which would also be sent to the Securities
and Exchange Commission in response to its request for comments on the
recently-filed Preliminary Prospectus.
Following explanatory comments by Messrs. Solomon and Thompson,
there ensued a rather extended discussion during which questions were
raised by members of the Board for the purpose of eliciting information
on the history and rationale of the Board's long-standing policy, as
described in the memoranda, the history and growth of First Virginia
Corporation, and the effect of the revised method of reporting.

Con-

sideration also was given to the steps that would be available to the
Board if it should question the change in reporting procedure, but First
Virginia nevertheless continued to follow such a procedure.

Differences

between the "holding company affiliate" statute and the Bank Holding
Company Act of 1956 likewise were mentioned.
The discussion reflected general agreement that an accounting
Procedure under which a holding company's affiliate's investment in

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Subsidiary banks was reflected at an amount equal to its proportionate
interest in their net assets would be appropriate and conservative.
However, at least two members of the Board expressed doubt whether the
Board should interpose objection if First Virginia reflected its investment in subsidiaries either at its proportionate interest in the net
asset value of such subsidiaries or at cost, provided the Corporation
followed a consistent practice.

The suggestion then was made that before

sending any letter to First Virginia it might be desirable to ask
on a
representatives of the Corporation to come to the Board's offices
the
mutually convenient date for a conference with representatives of
Legal and Examining Divisions, in order that there might be a clear
an
understanding of facts and in order that First Virginia might have
Opportunity to present arguments in favor of the reporting procedure
that it evidently intended to follow before the Board's views were
reduced to writing in a letter to the Corporation.

This suggestion

contemplated that representatives of the Securities and Exchange
and
Commission would be invited to participate in such a conference
that the matter would be brought back to the Board for further consideration after the conference had been held.
understood
Agreement being expressed with this suggestion, it was
that such a procedure would be followed.
Messrs. Hexter, O'Connell, and Thompson then withdrew from the
meeting.

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-5Philadelphia salary structure

(Item No. 1).

There had been

circulated to the Board a memorandum from the Division of Personnel
Administration dated December 15, 1961, with respect to a request from
the Federal Reserve Bank of Philadelphia for Board approval of a 5
per cent increase in the salary structure applicable to employees of
that Bank, effective January 15, 1962.

The Bank also requested approval

of payments to four part-time employees whose salaries, when converted
to a full-time basis, would exceed the maximum of their respective
grades.

The Personnel Division recommended that these requests be

approved.

It further recommended that the Bank be informed that it

would be unnecessary to request specific approval of salaries for the
part-time positions in question each time the salary structure was
adjusted.

Submitted with the memorandum was a letter to the Reserve

Bank reflecting these recommendations.
The memorandum noted, with respect to the request, that the
directors of the Reserve Bank had approved a general salary increase
of

3 per cent for all nonofficial personnel concurrent with the anjust-

ment in salary structure.

Adjustments of slightly more than

3 per cent

would be made in the relatively few cases in which employees' salaries
would otherwise be below the minimum of their respective job grades.
It was further noted that the general adjustment of

3 per cent was not

provided for specifically in the Bank's 1962 budget, although President
Bopp had mentioned it to the Board's Budget Committee as a distinct

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probability.

The Bank's budget letter had indicated that provision was

being made for merit increases amounting to 2.5 per cent of 1961 salaries.
When the memorandum was in circulation to the Board, Governor
Mitchell indicated that he had a question with respect to the part of
the proposal that contemplated a general 3 per cent salary increase.
In presenting the matter, Mr. Johnson brought out that after
the proposed 3 per cent general increase had been effected, the remaining
latitude within the grades of the revised salary structure would be used
for merit salary increases.

This represented a change in the approach

of the Philadelphia Bank, which previously had followed the procedure
of making full upward salary adjustments coincident with a salary
structure adjustment.

However, the general practice of the other Reserve

Banks was to bring employees up to the minimums of their new grades and,
except for that, to follow a merit salary increase program.

Accordingly,

the proposed program of the Philadelphia Bank represented a partial step

In the direction of the procedure followed generally by the other Reserve
Banks.
Governor Mitchell indicated that he questioned whether the
Proposed

3 per cent blanket salary increase would be consistent with

good salary administration.

He recalled that the Federal Reserve had

spoken repeatedly against the use of an automatic escalator in labor
contracts.

He did not understand why the Philadelphia Bank would want

to follow a practice of this kind; in his judgment it would be better
to provide increases on a merit basis.

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2

-7In reply, Mr. Johnson pointed out that it could be said, in

favor of such a procedure, that it was easier to administer.

Certainly,

general salary increases meant that less deserving employees would
receive increases along with those who were more deserving.

However,

the Philadelphia Bank had adhered to the philosophy that the rank
of employees within grade reflected proper alignment; if an employee
was not producing satisfactorily, he would be low in his grade.

Under

this theory, if the market should move up, salaries should be moved up
generally so that the existing alignment of salaries within particular
grades would be maintained.

The Philadelphia Bank had been questioned

on this philosophy from time to time, but had felt that it was appropriate.
According to the present plan, the Bank would be moving away from a full
across-the-board increase to only a partial increase, and the management
reportedly anticipated some difficulty in selling even this modified
approach to the employees.
In further discussion, Governor Mitchell inquired whether the
Philadelphia Bank should not be advised that it was out of step with
the practice of other Federal Reserve Banks.

If such advice was given,

he would be inclined to let the matter go at that point, for in general
principle he felt that the Reserve Banks should be permitted to operate
according to their own judgment and discretion.

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-8Mr. Johnson responded that the Philadelphia Bank was aware that
The subject had been discussed

its approach was unique within the System.
frequently at System personnel conferences.

Governor Mitchell also noted that the Philadelphia Bank had not
made provision in its 1962 budget for the full impact of the general
pay increase, to which Mr. Johnson replied that other Reserve Banks
had from time to time also followed the practice of not making provision
in their budgets for increased salary expenditures incident to possible
salary structure adjustments, apparently feeling that the justification
for and approval of such adjustments should not be presumed.
Members of the Board, other than Governor Mitchell, then indicated
that they would be inclined to go along with approval of the proposed
salary structure adjustment, even recognizing that the Bank intended
to effect a general 3 per cent pay increase.

Despite such reservations

as they might have personally as to the philosophy embodied in the
general pay increase procedure, they would be inclined to rely on the

judgment and discretion of the Bank management. Governor Mitchell
stated that he also would be willing to approve the salary structure
adjustment, on which he had no question.

He observed that the Board

was not being called upon to approve the 3 per cent general pay increase.
Accordingly, the proposed letter to the Federal Reserve Bank of
Philadelphia was approved unanimously.

A copy is attached as Item No. 1.

Mr. Sprecher then withdrew from the meeting.

1 2
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-9Examination of Kansas City Reserve Bank.

There had been circulated

to the Board the report of the examination of the Federal Reserve Bank of
Kansas City made by the Board's examining staff as of July 31, 1961, along
with the usual accompanying memoranda.
At the request of the Board, Mr. Smith commented on matters
disclosed by the examination, and the discussion that ensued related
principally to the administration of the Reserve Bank's discount window.
It was noted that the report of examination listed six country banks
whose borrowings had been frequent or protracted; the previous year's
report of examination had cited 32 such banks.

Of the six banks

mentioned in the 1961 examination report, two had continued to borrow
steadily since the date of examination.

The comments made during the

discussion brought out that in connection with the 1960 examination
report a letter had been sent by the Board to the Kansas City Reserve
Bank, to which a reply had been received and noted.

This subject had

also been touched upon by the Chairman of the Reserve Bank in a letter
written following receipt of the 1961 examination report.
After a number of questions had been discussed relating to the
extent to and manner in which cases of protracted borrowing appeared to
be followed by the Reserve Bank and the general philosophy of discount
window administration in the Tenth District, it was the consensus that
the current circumstances, including the improvement noted between the
1960 and 1961 examination dates, appeared to make unnecessary any action

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on the part of the Board at this time.

However, it was understood,

pursuant to a suggestion made during the discussion, that on some
mutually convenient occasion Governor Mitchell would discuss informally
with President Clay the administration of the discount function at the
Kansas City Bank.
There were no other matters disclosed by the examination of the
Reserve Bank that appeared to require action on the part of the Board.

The meeting then aajourned.

Secretary's Note: Governor Shepardson today
approved on behalf of the Board the following
items:
Memorandum from the Division of International Finance recommending an increase in the basic annual salary of Marcia G. Patz,
Secretary in that Division, from *5,335 to *5,655, effective January 7,
1962,
Letters to the Federal Reserve Banks of Boston, New York, and
Philadelphia (attached Items 2, 3, and 4) in connection with a call for
reports of condition as of December 31, 1961, from foreign banking and
foreign financing corporations.

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Item No. 1
1/2/62

WASHINGTON 25. D. C.
ADDRESS

OFFICIAL

CORRESPONDENCE

TO THE BOARD

January 2, 1962

EaEIREEILLIEL
T
Mr. Robert N. Hilkert,
First Vice President,
Federal Reserve Bank of Philadelphia,
Philadelphia 1, Pennsylvania.
Dear Mr. Hilkert:
As requested in your letter of December 7, 1961, the
Board of Governors approves the following minimum and maximum salaries
for the respective grades of the employees' salary structure,
effective January 15, 1962:
Grade

Minimum Salary

Maximum Salary

1
2

$ 2,520

3

2,560

4
5

2,950

3,980

3,385
3,835
4,335
4,845

4,570
5,175
5,850
6,540
7,250
7,950

6
7
8

95
10
51
A
11
6,490
12
13
14
15
16

7,175
7,875
8,605
9,450
10
,345

$ 2,940

3,395

8,760
9,685
10,630
11,615
12,760
13,965

Salaries should be paid to employees, other than officers,
Within the limits specified for the grades in which the positions of
the respective employees are classified. It is assumed that all
employees whose salaries are below the minimums of their grades as a

12

Mr. Robert N. Hilkert

- 2-

result of the structure increase will be brought within appropriate
ranges as soon as practicable, and not later than April 15, 1962.
The Board also approves total annual payments, as indicated,
to four part-time employees occupying the following positions:
Title

Salary

Medical Director
Waitress (official dining room)

$6,352 per annum
2,068 per annum

In the future, it will not be necessary to request specific approval
of salaries for these positions as long as their adjustments are
related to across-the-board or structure adjustments for full-time
employees.
It is noted that your Board of Directors has authorized,
effective January 15, an across-the-board salary adjustment of
3 per cent which is not fully provided for in the 1962 budget for
employees 1 salaries.
Very truly yours,

(Signed) Merritt Sherman
Merritt Sherman,
Secretary.

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON 25. D. C.

Item No. 2
1/2/62

ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

January 3, 1962

Mr. B. F. Groot, Vice President,
Federal Reserve Bank of Boston,
Boston 6, Massachusetts.
Dear Mr. Groot:
Enclosed is a copy of a letter dated today, addressed
to Boston Overseas Financial Corporation, calling for a report
of condition as of December 31, 1961. You will observe that the
letter requests that the report called for be submitted in
the
duplicate to the Federal Reserve Bank for transmittal to
Board of Governors,
Upon receipt of the report it will be appreciated if
you will have a proof made of the footings and obtain the correction of any obvious errors in the report. Please forward
the original copy of the report to the Board and retain a copy
for your files.
A complete review of the report will be made in the
Board's Division of Examinations, and any correspondence which may
be necessary as a result thereof will be initiated by the Board
With a copy to you for your information.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
Enclosure

BOARD OF GOVERNORS
,,
tioatitr* 4*
.

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Item No. 3

FEDERAL RESERVE SYSTEM

1/2/62

WASHINGTON 25. D. C.

ADDRESS OFFICIAL CORRESPONDENCE

%.

TO THE BOARD

, 4
tit7,7414. WI '
0a044 1.
,

January 3, 1962
Mr. Howard D. Crosse, Vice President,
Federal Reserve Bank of New York,
New York 45, New York.
Dear Mr. Crosse:
Enclosed are copies of letters calling for reports of
condition as of December 31, 1961, from the following foreign banking
and foreign financing corporations in the Second District operating
under the provisions of Section 25 and Section 25(a) of the Federal
Reserve Act:
Bankers Company of New York
Chase Manhattan Overseas Corporation
International Banking Corporation
The Gallatin Company, Inc.
Virgin Islands National Bank
Bank of America
Bankers International Corporation
Bankers International Financing Company, Inc.
Chase International Investment Corporation
Chemical International Banking Corporation
Chemical International Finance, Ltd.
The First Bank of Boston (International)
Morgan Guaranty International Banking Corporation
Morgan Guaranty International Finance Corporation
You will observe that the letters request that the reports
called for be submitted in duplicate to the Federal Reserve Bank for
transmittal to the Board of Governors.
Upon receipt of the reports it will be appreciated if you
Will have a proof made of the footings and obtain the correction of
any obvious errors in the reports. Please forward the original copy
of the reports to the Board and retain a copy for your files.
A complete review of the reports will be made in the Board's
Division of Examinations, and any correspondence which may be necessary as a result thereof will be initiated by the Board with a copy
to you for your information.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
Enclosures

BOARD OF GOVERNORS
0
00tr
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4

OF THE

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Item No. 4

FEDERAL RESERVE SYSTEM
I/17

1/2/62

**

WASHINGTON 25, D. C.
21*
*

ADDRESS OrrICIAL CORRESPONDENCE

4-4,
t

TO THE BOARD

January 3 1962

Mr. Joseph R. Campbell, Vice President,
Federal Reserve Bank of Philadelphia,
Philadelphia 1, Pennsylvania.
Dear Mr. Campbell:
Enclosed is a copy of a letter dated today, addressed
to Philadelphia International Investment Corporation, calling
for a report of condition as of December 31, 1961. You will
observe that the letter requests that the report called for be submitted in duplicate to the Federal Reserve Bank for transmittal to
the Board of Governors,
Upon receipt of the report it will be appreciated if you
will have a proof made of the footings and obtain the correction
of any obvious errors in the report. Please forward the original
copy of the report to the Board and retain a copy for your files.
A complete review of the report will be made in the
Board is Division of Examinations, and any correspondence which may
be necessary as a result thereof will be initiated by the Board
With a copy to you for your information.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
Enclosure