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4 f. 4,;44 A meeting of the Board of Governors of the Federal Reserve System was held in Tashington on Tuesday, January 3, 1939, at 11:30 a. m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymczak McKee Davis Draper Mr. Mr. Mr. Mr. Morrill, Secretary Bethea, Assistant Secretary Carpenter, Assistant Secretary Clayton, Assistant to the Chairman The action stated with respect to each of the matters hereinafter referred to was taken by the Board: The minutes of the meeting of the Board of Governors of the Federal Reserve System held on December 30, 1938, were approved unanimously. Memorandum dated December 27, 1938, from Mr. Paulger, Chief of the Division of Examinations, recommending that, for the reason stated in the memorandum, Edwin Joseph Johnson, an employee of the Baltimore Branch of the Federal Reserve Bank of Richmond, be appointed an Assistant Federal Reserve Examiner, with salary at the rate of 42,00 per annum, with official headquarters at Baltimore, Maryland, effective as of the date upon l&hich he enters upon the performance of his duties. Inasmuch as Mr. Johnson was already a member of the Retirement System of the Federal Reserve Banks it was not necessary for him to take the usual physical examination. -2- 1/3/39 In accordance with the above recommendation Mr. Johnson was appointed an examiner to examine Federal reserve banks, member banks of the Federal Reserve System, and corporations operating under the provisions of Sections 25 and 25(a) of the Federal Reserve Act, for all purposes of the Federal Reserve Act and of all other acts of Congress pertaining to examinations made by, for, or under the direction of the Board of Governors of the Federal Reserve System, and was designated as an Assistant Federal Reserve Examiner, with salary at the rate of2,500 per annum, effective as of the date upon which he enters upon the performance of his duties. Memorandum dated January 3, 1939, from :Mr. Davis recommending, with the concurrence of the other members of the Board, that the salaries of Sidney Washington, Vi11iam H. Lrake and Frederick L. Frost, messengers in the offices of Board members, be increased to the rate of 0.,500 per annum, effective as of January 16, 1939, with the understanding that no further increases will be authorized in these cases inasmuch as ,T,1,500 per annum represents the maximum salary for messengers in the classified civil service. Approved unanimously. Letter dated January 3, 1939, from Charles M. O'Malley tendering his resignation as a guard in the Office of the Secretary, effective at the close of business on January 3, 1939. Accepted. Telegram to Mr. Schaller, President of the Federal Reserve -3- 1/3/39 Bank of Chicago, reading as follows: "In accordance with recommendation contained in your letter of October 28, Board approves a salary at the rate of :;;7,500 per annum, effective January 1, 1939, for Alternate Assistant Federal Reserve Agent and Chief Examiner 1 Ulford R. Diercks." , Approved unanimously. Letter to Mr. Fry, Vice President of the Federal Reserve Bank of Richmond, reading as follows: "Reference is made to your letter of December 5, 1938, concerning securities listed as non-conforming in the report of examination of the Union Trust Company of Maryland, Baltimore, Maryland, as of April 18, 1938, and previous correspondence on this subject. "It is understood that the bonds of the Associated Mortgage Company were purchased with cash by the Royal Realty Corporation, a wholly owned affiliate holding and liquidating other real estate, and were acquired by the member bank in a transaction involving the disposal of real estate held by the bank. Ihhile it is felt that considerable latitude must be allowed with respect to the handling of the assets of the Royal Realty Corporation because of the nature of its activities, it is clear that the investment of its funds in securities having predominantly speculative characteristics is a violation of the spirit and purpose if not the letter of Section 5136 R. S., and the Comptroller's Regulation issued pursuant thereto. Therefore, it is believed that the acquisition of the securities by the affiliate would have been open to question without regard to the fact that they were actually purchased by the bank from its affiliate. It appears, also that the other two issues were acquired by purchase although it is noted that the Interboro Rapid Transit bonds were acquired at approximately the same time that a like amount of Hudson &Manhattan Railroad bonds were sold. In the circumstances, it appears that the sole question involved is whether the securities acquired are 'investment securities' as defined by the law and the Comptroller's Regulation. 1/3/39 -4- "It has been noted that President McAdams referred to the Comptroller's ruling to the effect that ratings are not to be taken as conclusive on the question of eligibility and that the responsibility for the proper investment of a bank's funds, which rests primarily with the directors, is not considered fully performed by ascertaining merely that a particular security falls within a particular rating classification. In fact, the Comptroller's Regulation made effective July 1, 1933, which supersedes previous regulations, makes no reference to ratings as a basis for determination of the eligibility of a security. It is provided, however, that 'investment securities' which may be purchased within stated limitations, shall conform to certain requirements with respect to form and marketability and that the purchase of such securities in which the investment characteristics are distinctly or predominantly speculative is prohibited. "Then a bank has purchased securities the eligibility of which is open to question, it is felt that the bank should be in a position to show that the securities do, in fact, conform to the requirements. So far, the Union Trust Company of Maryland does not appear to have presented any facts to establish the conformity of the securities in question nor to have offered any defense of the purchases effected except that of expediency. "When a member bank has acquired illegal assets it is the responsibility of the Board of Directors to dispose of such assets as soon as practicable. There is no Intention to inflict undue hardship upon any member bank and it is not considered necessary to require tmmediate sale of any security acquired in good faith although such security may be found to be non-conforming. It is felt, however, that member banks should be given aid in reaching an understanding of the spirit and purpose of the law and regulation, should be required to exercise good faith in compliance therewith, and should not be permitted to retain indefinitely any securities acquired in violation of the law and regulation; and that it is the duty of the several Federal Reserve Banks to take such action as may be necessary to secure compliance with these principles. Within these bounds and so far as it may be practicable, it is the policy to leave the administrative details, such as fixing definite requirements with respect to particular securities acquired by individual banks, to the -5- 1/3/39 "determination of the several lederal Reserve Banks in the discharge of their supervisory functions." Approved unanimously. Letter to Mr. Henry R. Bowser, Manager, Financial Statistics Division, Federal Reserve Bank of Boston, reading as follows: "Reference is made to your letter of December 2 regarding the reporting in weekly and quarterly call reports of an amount 'United States Treasurer's time deposit, open account' carried on the books of the Union Trust Company, Providence, Rhode Island, under an agreement with the Secretary of the Treasury. "It is understood from the office of the Secretary of the Treasury that this is a dormant account placed with the bank in order that it may be compensated for services rendered in connection with benefit payments authorized under the Social Security Act and that the balance will be on a tike basis and will not be withdrawn prior to the expiration of thirty days written notice from the office of the Secretary of the Treasury. We concur in your view that the amount should be reported as 'time deposits' in the bank's weekly and quarterly condition reports. As no provision is made in the report forms for this item, please request the bank to interline the amount under 'time deposits' against the caption 'United States Treasurer's time deposit, open account'. In the weekly statement of condition of reporting member banks in leading cities the amount of this deposit will be included with 'U. S. Government deposits'." Approved unanimously. Letter to Congressman Campton I. White, Clark Ford, Idaho, reading as follows: "In your letter of December 17, which was received here on December 21, you referred to my letter of November 30, with respect to the Proposal to reestablish a branch of the Federal Reserve Bank of San Francisco in Spokane, and stated that you would like to be heard by the Board before action was taken in the matter. 1/3/39 -6- "After receipt of the transcript of the hearing held in Spokane on October 11 the Board gave the matter careful consideration, and on December 20, the day before the receipt of your letter, decided to concur in the recommendation of the Board of Directors of the Federal Reserve Bank of San Francisco that the Spokane branch be not reopened. The Federal Reserve Bank of San Francisco was notified accordingly. "Should conditions at any time in the future be such as to indicate that the banks in the Inland Empire are not being served adequately by the Portland and Seattle branches, the question of providing any necessary facilities in Spokane will have the prompt and careful consideration of the Board of Governors as well as of the Board of Directors of the Federal Reserve Bank of San Francisco." Approved unanimously. Thereupon the meeting adjourned. Approved: Ch irman.
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