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Minutes for To: Members of the Board From: Office of the Secretary Attached is a copy of the minutes of the Governors of the Federal Reserve System on Board of 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, if you were present at the meeting, please initial in column A below to indicate that you approve the minutes. If you were not present, please initial in column B below to indicate that you have seen the minutes. Chin. Martin Gov. Szymczak Gov. VardBmn Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson C 1.379 Minutes of actions taken by the Board of Governors of the Federal Reserve System on Thursday, July 12, 1956. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Vardaman Shepardson 2.1 Carpenter, Secretary Sherman, Assistant Secretary Kenyon, Assistant Secretary Riefler, Assistant to the Chairman Thomas, Economic Adviser to the Board Vest, General Counsel Young, Director, Division of Research and Statistics Mr. Leonard, Director, Division of Bank Operations Mr. Solomon, Assistant General Counsel Mr. Mr. Mr. Mr. Mr. Mr. Mr. Under date of June 28, 1956, Mr. E. Sherman Adams, Deputy Manager of the American Bankers Association, wrote to Chairman Martin to inquire whether the Board was planning to give the Association's Economic Policy Commission the benefit of its reactions to the study of member bank reserve requirements which the Board discussed informally with the Commission at a meeting on May 1, 1956. The letter apparently was written in view of a stateme nt that the meeting on May 1 would be looked upon as an informal exchange of ideas and that the Board would be in touch with the Commiss ion after it had had an opportunity to 1/ Entered meeting at point indicat ed in minutes. 1 380 7/12/56 -2- discuss the matter further. Mr. Adams.' letter indicated that it was the intention of the Commission to present a propos al for consideration at the convention of the American Banker Associ ation to be held in s Los Angeles, California, in Octobe r of this year. Prior to this meeting there had been sent to the members of the Board a memorandum from Mx. Thomas dated July 9 suggesting various positions which the Board might take in replying to Mr. Adams. In a discussion of the matter the view was expressed by members of the Board that it would be inadvisable to make any comments to the Commission which might be interpreted as indicating that the plan had the endorsement of the Board. In the circumstances, it was suggested that a reply be made to Mr. Adamn along the lines that the Board was not Prepared at this time to offer views other than those contained in the staff memorandum which was given to the Commission at the time of the informal meeting. It was further suggested that the reply be phrased in such a way as to indicate that the Board appreciated the interest of the Economic Policy Commis sion in the subject and that the Board was coto n t im n ubank study i n the proble reserv of member requirI eg ementst . was felt that a decision on the question of distributing the study made by the Economic Policy Commission should be left to the American Bankers Association. 1381 7/12/56 -3There was agreement with these views regarding the type of reply which should be sent and it was understood that Mr. Thomas would draft such a letter for the Board's consideration. Chairman Martin in- dicated that in addition to the letter he might get in touch by telephone with the Chairman of the Economic Policy Commission, Mr. Evans Woollen, Jr., and explain the Board's position. With further reference to the subject of reserve requirements, Chairman Martin said he felt strongly that the Board should start working actively on a legislative proposal on member bank reserves which it could present at the beginning of the next session of the Congress. He reported having discussed with the Chairmen of both Banking and Currency Committees the proposal which would make vault cash eligible as part of a member bank's legal reserves, and said that both Chairmen were exPecting the Board to come forward with a plan for modification of the sYstem of reserve requirements. Therefore, it seemed to him that within the next few months the Board should reach a position. It appeared to the Chairman that probably it would never be possible to devise a plan which would be entirely satisfactory to all interested parties and that the most feasible approach would be for the Board to develop a proposal which it would then try to "sell" to the Presidents of the Reserve Banks and others. If necessary, he said, the original proposal could be modi- fied, but the Board should get in the "driver's seat". 1382 7/12/56 Chairman Martin also said that he had received from Mr. Riefler a memorandum relating to this problem. He suggested, as a means of Proceeding in the matter, that copies of Mr. Riefler's memorandum be distributed to the members of the Board, that Mr. Thomas be requested to draw up a tentative reserve requirement proposal representing his best thinking, and that the tentative proposal be distributed to the members of the Board as soon as possible together with papers relating to the study of the Economic Policy Commission and any other papers which would be helpful in enabling the Board members to begin crystallizing their views. In response to a comment by Mr. Thomas that a substantial amount of work had been done on the subject by a special System committee without agreement having been reached on any mutually acceptable plan, Chairman Martin said that it would seem advisable for the Board to go forward with a formulation of its own plan and that Mr. Thomas should work within that framework, although this would not mean that he could not seek the assistance of individuals who had been active in the work of the System committee. It was the unanimous view of the Board that work on the subject should go forward as promptly as possible along the lines suggested by Chairman Martin. At this point Governor Balderston joined the meeting. 1383 7/12/56 -5The following matters, which had been circulated to the mem- bers of the Board, were present ed for consideration and the action taken in each instance was as stated: Letter to Mr. Smith, Federal Reserve Agent, Federal Reserve Bank Of Dallas, reading as follows : In accordance with the request contained in your letter of June 28, 1956, the Board of Governors approves the appointment of Mr. Marvin D. Cline, Jr., as Federal Reserve Agent's Representative at the El Paso Branch to succeed Mr. George A. Garrison. This approval is given with the understanding that Cline will be placed upon the Federal Reserve Agent's payroll and will be solely responsible to him or, during a vacancy in the office of the Federal Reserve Agent, to the Assistant Federal Reserve Agent, and to the Board of Governors, for the proper performance of his duties. When not engaged in the performance of his duties as Federal Reserve Agent's Representative he may, with the approval of the Federal Reserve Agent or, in his absence, of the Assistant Federal Reserve Agent, and the Vice President in charge of the El Paso Branch, perform such work for the Branch as will not be inconsistent with his duties as Federal Reserve Agent's Representative. It is noted from your letter that with the approval of Mr. Cline's appointment by the Board of Governors he will execute the usual Oath of Office which will be forwarded to the Board of Governors together with advice as to the effective date of his appointment. Approved unanimously. Letter to the Board of Directors, Fidelity-Philadelphia Trust Company, Philadelphia, Pennsylvania, reading as follows: Pursuant to your request submitted through the Federal Reserve Bank of Philadelphia, the Board of Governors approves the establishment of a branch in the Oak Park Shoppin g 1384 7/12/56 -6- Center, situated between Oak Road and Bishop Road, West Baltimore Pike, Upper Darby Township, Pennsylvania, by the Fidelity-Philadelphia Trust Company, Philadelphia, Pennsylvania, provided the existing branch at 242 West Baltimore Pike, Clifton Heights, Pennsylvania, is simultaneously discontinued and the new branch is established within six months from the date of this letter. The Board of Governors also approves the additional investment of $75,000 in banking premises as required under Section 24A of the Federal Reserve Act arising from the contemplated expenditure for leasehold improvements at the new location of the branch. Approved unanimously, for transmittal through the Federal Reserve Bank of Philadelphia. Telegram to Mr. Gentry, First Vice President, Federal Reserve Bank of Dallas, readin g as follows,: Betel July 3. Since notes of Houston Bank for Cooperatives are not eligible for purchase by Reserve Banks, they could qualify as security for advances under section 2(h) of Regulation A only if eligible for discount under section 3(a) thereof. However, it is understood that a large part of the proceeds of such notes ordinarily is used for permanent or fixed investments such as buildings and machin ery, in which event the notes would not be eligible for discount because of the provisions of section 3(a)(2). If this is not the case with respect to the proceeds of the partic ular note involved, it would seem necessary to consider the question of eligibility in the light of information regarding the actual use of such proceeds. Approved unanimously. Pursuant to the understanding at the meeting on June 27, 1956, there had been sent to the members of the Board copies of letters proposed to be sent to the Chairm an of the Presidents' Conference and the i385 7/12/56 -7- Acting Secretary of the Federal Advisory Council requesting that at the next meetings of those organizations there be discuss ion of a Proposal that Regulation Q, Payment of Interest on Deposits, be amended to increase from 1 to 1-1/2 per cent the maximum rate of interest payable on time deposits having a maturity of less than 90 days and to increase from 2 to 2-1/2 per cent the maximum rate payable on time deposits having a maturity of less than six months and not less than 90 days. There had also been sent to the members of the Board copies of a proposed letter to the Federal Reserve Bank of New York suggesting the nature of a reply which might be made to The Amalgamated Bank of New York regarding a request from that institution for an increase in the maximum interest rates payable on time certificates of deposit, including an increase to 2-3/4 per cent for time deposits having a maturity of ninety days or more. In a discussion of the proposed letters, it was suggested that they be changed so as (a) to eliminate reference in the first two letters to the fact that the proposal under consideration originated with a member bank, and (b) not to foreclose the possibility of a change in the maximum rate of interest payable on savings deposits or on time deposits having a maturity of six months or more. With these changes, the letters were approved unanimously in the following form: 1386 7/12/56 -8- Letter to Mr. Leedy, Chairman, Conference of Presidents of the FedReserve Banks You will recall that at the last meeting of the Presidents consideration was given to the desirability of increasing the maximum permissible rates of interest on time and savings deposits under Regulation Q. At that time the Presidents were evenly divided regarding the advisability of increasing such rates on time deposits. Since that meeting, one of the Reserve Banks has submitted a proposal that Regulation Q be amended to increase from 1 to 1-1/2 per cent the maximum rate of interest payable on time deposits having a maturity of less than 90 days and to increase from 2 to 2-1/2 per cent the maximum rate payable on time deposits having a maturity of less than six months and not less than 90 days. The proposal as made does not contemplate a change in the maximum rate on savings deposits or on time deposits having a maturity date of six months or more. In a discussion of this proposal by the Board, the suggestion was made that before any conclusions were reached the views of the Presidents of the Federal Reserve Banks and of the Federal Advisory Council be obtained. Accordingly, it will be appreciated if you will put this subject on the agenda for the next meeting of the Presidents' Conference and the joint meeting of the Presidents with the Board of Governors. A separate letter is being sent to the Federal Advisory Council requesting that the topic be placed on the agenda for its next meeting. Letter to Mr. William J. Korsvik, Acting Secretary, Federal Advisor y Council The Board is considering a proposal submitted by a Federal Reserve Bank that Regulation Q be amended to increase from 1 to 1-1/2 per cent the maximum rate of interest payable on time deposits having a maturity of less than 90 days and to increase from 2 to 2-1/2 per cent the 1387 7/12/56 maximum rate payable on time deposits having a maturity Of less than six months and not less than 90 days. The proposal as made does not contemplate a change in the maximum rate on savings deposits or on time deposits having a maturity of six months or more. In a discussion of this proposal, the Board suggested that before any conclusions were reached the views of the Presidents of the Federal Reserve Banks and of the Federal Advisory Council be obtained. Accordingly, it will be appreciated if you will put this subject on the agenda for the next meeting of the Council and the joint meeting of the Council with the Board of Governors. A separate letter is being sent to the Chairman of the Conference of Presidents of the Federal Reserv Banks e requesting that the topic be placed on the agenda for the next meeting of the Conference. Letter to 11r. Wiltse Vice President Federal Reserve Bank of New York With your letter of June 29, 1956, you transmitted a letter from The Amalgamated Bank of New York dated June 13, 1956 in which that bank requested an increase in the interest rates that may be paid on time certificates of deposit under Regulation Q. Specifically, the bank asks that the existing 1 per cent maximum permissible rate on time deposits having a maturity of less than 90 days be increased to 1-1/2 per cent, that the existing rate of 2 per cent on time deposits having a maximum maturity of not less than 90 days but less than six months be increased to 2-3/4 per cent, and that the maximu permissible rate m on time deposits having a maturity of six months and over be increased from 2-1/2 per cent to 2-3/4 per cent. You will note from the enclosed copy of a letter being sent today to the Chairm an of the Conference of Presidents that the Board has asked that the Conference consider at its next meeting whethe r the permissible rates on deposits having maturities of less than six months should be increased. Also, the Board is asking the Federal Advisory Council to consider this question and to discuss it at its meeting in 1388 7/12/56 -10- September. These requests are, as you will recognize, based upon the proposal of The First National City Bank of New York, supported by The Chase Manhattan Bank, as transmitted to the Board by your Bank on May 21 1956. Accordingly, you may wish to inform The Amalgamated Bank that the Board is studying this question and that the bank will be informed in due course of the decision resulting from the study. Mr. Horbett then withdrew from the meeting. Reference was made to a memorandum dated June 261 19561 from the Legal Division and the Division of Research and Statistics, which had been circulated to the members of the Board, recommending for reasons stated that the Board continu e its present practice of publishing Periodically a list of securities subject to Regulation U1 Loans by Banks for the Purpose of Purchasing or Carrying Stocks Registered on a National Securities Exchange, pursuant to section 3(c) of that regulation. The memorandum was prepared in the light of a question raised at the meeting on February 27, 1956, regarding the advisability of continuing the current practice. Governor Vardaman stated that he had raised the question because it appeared that the Board, indistributing the list, was assuming a certain liability by indicating that only the securities included therein were subject to Regulation U1 whereas there might be other securities of which the Board was not aware. He suggested that the prac- tice was a rather unusual one for a regulatory body to follow. 3R9 7/12/56 -11Mr. Solomon responded that the publication of such a docu- ment was rather unusual and that the justification for the practice was along lines which were in a way similar to the objections. While it was possible, he said, that the Board might inadvertently omit a security that should be included, there was a question whether for that reason the banks through out the country should be left without as reliable a source as the Board's publication for determining which securities were subject to the regulation. It was true, he went on to say, that some bank might refer to the list, fail to find a certain security included, and then make a loan contrary to the provisions of the regulation. However, it appeared that a number of stocks listed on smaller exchanges are not written up in the standard securities manuals. A check was made to ascertain whether there was any reasonably convenient method for a bank to satisfy itself in such cases and it was found that there was no satisfactory way for the smaller bank, or for a bank examiner, to know whether such a security was subject to the regulation. In the circumstances, it seemed desirab le that the list continue to be Published and distributed in a routine manner. In reply to questions, Mr. Solomon confirmed that the list had been published since the adoption of Regulation U and that from a practical standpoint little harm would be done if a security should be inadvertently omitted from the list. aso 7/12/56 -12At the conclusion of the discussion, Governor Vardaman stated that he had raised his question principally on the basis that distribution of the list might be an unnecessary and unwarranted activity on the part of the Board. In the light of the points brought out in the memorandum and at this meeting, he said, he would be agreeable to continuation of the present practice. Thereupon, the recommendation contained in the memorandum dated June 26, 1956, was approved unanimously. At this point Mr. Shay withdrew from the meeting and Mr. Johnson, Controller, and Director, Division of Personnel Administration, entered the room. There had been distributed to the members of the Board copies of a memorandum from Mr. Johnson dated July 11, 1956, discussing certain information desired by Dr. Ira 0. Scott, Jr., Assistant Professor of Economics at the University of Minnesota and holder of a research grant from the Merrill Foundation, in connection with his intention to prepare a monograph entitled "The Government Securities Dealers and Their Role in Monetary Policy". In the light of the provisions of section 5(c) of the Rules on Organization and Information of the Federal Open Market Committee, it was suggested that to supply the information requested it might be necessary to swear in Dr. Scott as an employee of the Board or 1391 7/12/56 -13- as a consultant. The question also was raised whether the matter Should have the consideration of the Open Market Committee. Members of the Board who had talked with Mr. Scott indicated that they were impressed by his earnestness of purpose and his apparent ability to make a contribution to the available literature in the field that his monograph would cover. It was also stated that a check with the Federal Reserve Bank of New York, where Mr. Scott was employed temporarily several years ago, produced the information that he was favorably regarded. At the same time, it was brought out during the dis- cussion that Mr. Scott might inadvertently use confidential material, if permitted access to it, in such a way as to raise questions, that the matter of precedent should be considered, and that employment of Mr. Scott would put him in the position of being able to cite that fact in any paper which was later published. Accordingly, it was suggested that Mr. Scott be advised that members of the Board's staff would be glad to converse with him on matters of interest, that the Board rely on its staff to exercise proper discretion in any such conversations, and that Mr. Scott be permitted access only to published and nonconfidential material. It was further suggested that Mr. Scott be given to understand that after he had completed the phase of his study which he Proposed to undertake in New York, including interviews with securities 4392 7/12/56 dealers, the Board would be glad to receive from him such additional inquiries as he might have. At the conclusion of the discussion, it was agreed unanimously that the suggested procedure should be followed. Messrs. Thomas and Johnson then withdrew from the meeting. Governor Balderston reported that in accordance with the procedure suggested at yesterday's meeting of the Board, he and Mr. Gidney, Comptroller of the Currency, met this morning with Senator Watkins of Utah to explain the position of the Federal bank supervisory agencies regarding pending bank merger legislation and to state why the rendering of assistance by the agencies in drafting compromise legislation was thought to be inadvisable in view of the position already expressed in testimony before Congressional committees at this session of the Congress. He said that the Senator appeared to appreciate the points which were stated and that the conversation was on a friendly plane. The meeting then adjourned. Secretary's Note: Pursuant to the recommendation contained in a memorandum dated July 6, 1956, from Mr. Marget, Director, Division of International Finance, Governor Balderston today approved on behalf of the Board the appointment of Patricia MacDonald Coan as Clerk in that Division, with basic salary at the rate of $3,175 per ef,1 fective the date she assumes he 1 -s.4f .• cretary AL
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