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609 9/61 Minutes for To: Members of the Board From: Office Of the Secretary July 171, 1963 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 Wednesday, July 17, 1963. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Robertson Shepardson Mr. Sherman, Secretary Miss Carmichael, Assistant Secretary Mr. Young, Adviser to the Board and Director, Division of International Finance Mr. Molony, Assistant to the Board Mr. Cardon, Legislative Counsel Mr. Fauver, Assistant to the Board Mr. Noyes, Director, Division of Research and Statistics Mr. Farrell, Director, Division of Bank Operations Mr. Solomon, Director, Division of Examinations Mr. Connell, Controller Mr. O'Connell, Assistant General Counsel Mr. Furth, Adviser, Division of International Finance Mr. Daniels, Assistant Director, Division of Bank Operations Mr. Young, Senior Attorney, Legal Division Custody and safekeeping of securities (Item No. 1). Pursuant to the understanding at the meeting of the Board on June 28, 1963, there had been distributed a draft of letter to the Presidents of all Federal Reserve Banks regarding procedures followed in the custody and safekeeping of securities at the Reserve Banks. The letter would refer to the apparent inadvertent destruction of certain certificates of indebtedness at the San Francisco and Richmond Reserve Banks, as well as to the information developed in the course of the several investigations or these occurrences, including the report of the House Banking and Currency Committee and its special Subcommittee (House Report #354). ACt)0GCl,r)(111 ( 1 -2- 7/17/63 The letter would list certain procedures that should be followed at the Reserve Banks in the custody and safekeeping of securities and would ask each Reserve Bank to make a review of its practices with respect to (a) adequacy of supervision of employees engaged in custody or handling of securities or other valuables, and (b) retention, inspection, and disposal of all refuse from securities vaults and other vulnerable working areas throughout the Bank. In the final paragraph the letter would state that the Conference of Presidents of the Reserve Banks was being requested, through an appropriate committee or committees, to prepare suitable recommendations for a more complete set of general standards for the custody and safekeeping of securities. Chairman Martin noted that the letter as drafted amounted to an instruction for all Reserve Banks to follow the procedures listed. In his view it would be preferable at this time to ask the Reserve Bank Presidents for their views on those procedures. Mr. Solomon noted that the letter had been prepared at the instruction of the Board following a discussion of the report of examination of the Federal Reserve Bank of San Francisco. As Chairman Martin had suggested, the proposed letter was almost in the form of an order or instruction to all Reserve Banks. It could of course be modified so that, instead of advising the Reserve Banks that certain Practices should be followed, their comments on those practices would be requested. If desired, the matter could be taken up informally vith the Reserve Bank Presidents. A-.111. Asitt)014Cet• 7/17/63 .3... Governor Shepardson said he thought that a letter was called for, but he believed it should be in the form of an inquiry asking the Reserve Banks for information relating to certain practices. During the discussion that followed, Governor Robertson suggested that the draft of letter be revised and that in the first paragraph responsibility be placed on the Conference of Presidents for reviewing the safekeeping practices now being followed at the Reserve Banks and for making recommendations regarding general standards for the safekeeping of securities from the time of their receipt until their release from custody. There being general agreement, it was understood that the letter would be revised along the lines suggested by Governor Robertson. A copy of the letter sent to the Reserve Banks pursuant to this action is attached as Item No. 1. During the foregoing discussion Mr. Koch, Associate Director, bivision of Research and Statistics, entered the room. Nomination of Class A and Class B directors (Item No. 2). There had been distributed a memorandum from the Legal Division dated July 16, 1963, regarding procedures for nominating Class A and Class B directors of the Federal Reserve Banks. As pointed out in the memorandum, the Board had been requested by the staff of the House Banking and Currency Committee to furnish information on these procedures and in that connection the Reserve Banks had been asked to supply the Board With sample copies of the various election circulars, ballots, and other 4 44% t -4- 7/17/63 related forms. The memorandum had been prepared to bring to the Board!s attention certain procedures that were being followed in several of the Reserve Bank districts, particularly in the selection of candidates. The information supplied by the Reserve Banks revealed that In five districts (Boston, New York, Philadelphia, Richmond, and Atlanta) member banks through their various banking associations had adopted a procedure for appointing nominating advisory committees, which in turn selected candidates to be recommended to all member banks Participating in the particular election. Although no such nominating Procedure was provided for in section 4 of the Federal Reserve Act, there was nothing in the statute that would prohibit this practice so long as each member bank was free to nominate any candidate desired regardless of the recommendations or suggestions of the nominating committee. In four of the five districts having nominating advisory committees, this right was specifically preserved and was so stated in the circular or memorandum informing member banks of the recommendation of the committees. In the other district (Richmond) it was Understood that member banks were fully advised of their rights in this regard. The extent to which the Reserve Banks cooperated with the nominating advisory committees varied in the individual districts. For example, in each of the five districts having such committees, except the New York, the meetings of the nominating committee were held at Reserve Bank and secretarial and administrative assistance was furnished jte /1 7/17/63 11) -5- by the Bank. Three of the Reserve Banks (Boston, Philadelphia, and Atlanta) paid transportation and possibly other expenses of members Of the nominating committees. At the Boston Bank the President was invited to participate in the discussions. It was suggested in the memorandum that the Board might wish to give consideration to the extent to which Reserve Banks and their °fficials might appropriately participate in the activities of member hank nominating committees, especially with respect to the payment of transportation and other expenses of the committees and the participation Of Reserve Bank officials in the deliberations of the committees. Following comments by Mr. Sherman and Mr. Young (Legal Division) based on the information contained in the memorandum, Mr. O'Connell expressed the view that there could be criticism of two of the practices being followed by the Reserve Banks in nominating Class A and Class B directors: (1) holding of nominating committee meetings at the Reserve Banks, and (2) payment of expenses by the Reserve Banks incident to the nomination and election of directors. In his view some further inquiries should be made into these practices. Chairman Martin agreed that it would be desirable to make such a review, keeping in mind, however, the importance of the whole matter of locating the best available persons for service with the System. He believed that the matter should be studied thoroughly before considering the possibility of criticizing any expenses designed for such purpose. Aidg )4.0 1 -6- 7/17/63 Governor Balderston commented that the Board and the Reserve Banks were faced with a problem in working out an election process that would lead to the election of suitable directors. If the selection were left to chance, the results might not be satisfactory. It was his view could be done that elections should be prepared for in advance, and this through the work of nominating committees. If a Chairman of a Reserve ors, he Bank had the cooperation of area bankers in nominating direct the Chairman not to be thought it might be somewhat embarrassing for able to offer hospitality to the participating bankers. about the Governor Robertson said that he was not concerned Payment of expenses of nominating committees by Reserve Banks, but he ipating vas bothered by the thought of Reserve Bank officials partic in the nominating process. He considered it appropriate for members Of Reserve Bank boards of directors to take part in the process of that participation by the President selecting new directors, but he felt and the other officers of the Bank might give the wrong impression. nominating Governor Shepardson expressed the view that the itures related to their committees served a useful purpose and expend mate expense for a Reserve activities would seem to represent a legiti Bank. Division review Chairman Martin then suggested that the Legal seem this matter further and make any recommendations that might that it might also be desirable appropriate, and Governor Robertson added questions regarding to take up with the individual Reserve Banks any 7/17/63 -7- practices followed. Along this line, Mr. Young noted that the material that the President furnished by the Boston Reserve Bank had shown of that Bank was invited by nominating committees to participate in directors but discussions regarding recommendations for nominating there was no indication whether he actually participated. At the conclusion of further discussion it was agreed that the t in the matter of participation by the Boston Reserve Bank Presiden when he was in Choice of directors would be discussed with Mr. Ellis Washington. It was also understood that the Legal Division would review the entire nomination and election procedure for electing Class A and Class B directors and make whatever recommendations seemed appropriate for the Board's consideration. Secretary's Note: On July 18, 1963, a letter was sent to Chairman Patman of the House Banking and Currency Committee regarding various documents used in the nomination and election of Class A and Class B directors of the Federal Reserve Banks; a copy of the letter is attached as Item No. 2. Mr. Young (Legal Division) then withdrew from the meeting. Revised edition of System book. There had been distributed a memorandum from Mr. Young (Adviser to the Board) dated June 21, 1963, requesting authorization for publishing a revised edition of the book entitled "The Federal Reserve System--Purposes and Functions." It was noted that the book had last been revised early in 1961 and since that time about 400,000 copies had been distributed. Of this number it was estimated that about one-half had been sent to students of money ? -8- 7/17/63 and banking in colleges and universities. While there was a need for updating the 1961 edition, it seemed especially desirable to publish a special edition in connection with the 50th anniversary of the System. It was contemplated that the book would incorporate additional on policy-making information, especially on the balance of payments and and modificaProcedures, and this would involve a basic reorganization tion of the material in the book. It was pointed out that the proposed edition, as was the case in earlier editions, would be directed to the serious-minded reader seeking a relatively full explanation of Federal Reserve functions. It would not meet the needs of those desiring a briefer exposition; a special pamphlet would need to be designed for this group. At the Board's request, Mr. Young discussed the proposed edition of the System book, his remarks being based largely on the Information contained in the June 21 memorandum. He concluded by stating that the book would not meet every possible objective, but it would serve a desirable purpose. Accordingly, he recommended that its publication be authorized. During the discussion that followed a number of questions were raised regarding the proposed revision, including the probable size Of the book and the basis on which copies would be distributed. Governor to be Balderston expressed the hope that the additional material Young Included would not substantially increase its size, and Mr. _9_ 7/17/63 t lighter responded that thought was being given to using a somewha e in the size weight paper in order to prevent any substantial increas of the book. the policy of Mr. Young suggested that the Board continue making the book available without charge. He considered it desirable for the System to be in a position to explain its operation and functions to the public. interest Along this line, Governor Balderston expressed his In enlarging rather than diminishing the public understanding of the System. He would, accordingly, favor distributing the book without charge. made Mr. Sherman then referred to the changes that had been in the book since it was first published in 1939, noting that the textbook, Present edition was virtually equivalent to a college level and therefore somewhat over the heads of the general public. There of was real question as to whether the book was meeting the needs all the groups to which it was being sent. Therefore, he wondered if it might not be important to develop some briefer and less technical exposition of the System. for Chairman Martin said that he felt there was a real need d a publication a simplified presentation, and he believe that such Should be prepared. It was also his view that, since the System book had been distributed on a complimentary basis in the past, the revised edition should be made available without charge. -10- 7/17/63 Governor Balderston likewise expressed agreement with the need for preparing a simplified exposition covering the work of the System and suggested that such a publication might be issued in connection with the System's 50th anniversary celebration. He would favor a publication that would in a few hours' reading give a person general information about the System. Governor Shepardson expressed some concern about the matter Of furnishing the System book without charge as a textbook. However, With the history of free distribution of earlier editions, he believed it would be difficult to make a charge at this time. In the discussion that followed it was brought out that it would be necessary to have some outside help in developing a new Publication with a simplified explanation of the System, and it was suggested that Miss Burr, Associate Adviser in the Division of Research and Statistics before her retirement, might be available for this assignment. At the conclusion of the discussion, authorization was given for the publication of the proposed edition of the System book, and it Was understood that copies would be distributed without charge. Also, Governor Shepardson was authorized to explore the possibility of securing Miss Burr or some other person to develop a publication that would present a simplified explanation of the System for distribution to the general public. +4.J4( 11 +4 4 30, 4 e ..fl.. 7/17/63 , Solomon, and All members of the staff except Messrs. Sherman O'Connell then withdrew from the meeting. Report on Justice Department litigation. Mr. Solomon reported on Tuesday, a visit from representatives of the Department of Justice JulY 9. At that time there was a discussion of the pending litigation on the merger of Manufacturers Trust Company and The Hanover Bank, both of New York City, which the Board approved on September 6, 1961, and the possibility of some assistance from the Board or its staff in by means of working out a settlement of the Justice Department suit establishing a new bank that would acquire some of the offices and assets of the present institution. s Mr. Solomon stated that the Justice Department representative had also referred to the possibility of an antitrust action by that involving Department against certain banks in connection with a question interest rates and had indicated that the Department might wish to Obtain the views of the Board as to whether such litigation might adversely affect the public interest. of It was understood that the Board would be kept advised any further developments on these two matters. Report by Mr. Young. Mr. Young reported on the meetings he had attended in Paris of Working Party 3 of the Economic Policy Committee ment June 19-20 "the Organization for Economic Cooperation and Develop aria July 10-11, and on his visit at the Bank of England in London June 21-22. 2334 -12- 7/17/63 Certificates of deposit. Governor Balderston referred to the discussion on July 16, 1963, of Governor Robertson's suggestion as to Placing some limitation on the amounts of negotiable certificates of deposit that banks might issue and raised a question whether Federal Reserve examiners might be alerted to this matter so that they could discuss it with banks. Governor Robertson said that he did not see how the examiners could be expected to discuss the limitation without receiving in advance some guidance or definite statement of policy from the Board. There was no expression of any difference of view by other members of the Board. The meeting then adjourned. 7 BOARD OF GOVERNORS Item No. 1 7/17/63 OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD July 26, 1963. i)ear sir: In the report of the House Banking and Currency Committee (House .t #354) transmitting a report of the Special Subcommittee which held %P aor ce rings inquiring into the apparent inadvertent destruction of certain thrtificates of indebtedness at the Federal Reserve Bank of San Francisco, Committee expressed concern at the apparent diversity in practices the 12 Federal Reserve Banks and their branches pertaining to the r:tekeep ing of securities. In the view of the Board, the Committee's t461(3rt and the information developed in the course of the several investiga"of the occurrence at San Francisco and a similar occurrence at the pea sacaral Reserve Bank of Richmond warrant a comprehensive review of the re'kekeePing function in the respective Banks. Accordingly, the Board is s ting the Chairman of the Conference of Presidents of the Federal Rere Nierve Banks to designate an appropriate Committee or Committees of the safference to make such a study and to recommend general standards for the ralekeePing of securities from the time of their receipt until their ease from custody. The Board recognizes that because of differing circumstances it not h InaY -e practicable for procedures for the safekeeping of securities to b atude completely uniform at all the Reserve Banks, and in requesting the bY the Presidents' Conference, it does not mean to imply that there are how significant deficiencies in the safekeeping procedures at any Bank. .er, it is assumed that the report to be submitted by the study 00,217 tCwattee will gather together in convenient form the best features of by' Practices and procedures currently followed at each Reserve Bank, and of,king this information readily available will facilitate the efforts ollethe Board and the Reserve Banks toward the continued improvement of rating practices. In the view of the Board, the study by the Committee of the ?re-7, limdents, Conference should include, although not be necessarily -tced i to, the following matters: (1) the accounting and operating cortt, " 31s governing the handling of securities from the time of receipt -2to their lodgment in the vault; (2) provisions for the authorized withdrawal of securities from the vault and the control of such securities tO disposition; (3) the physical safeguards provided, including the arrangements for double or multiple custody; (4) provisions to protect against the inadvertent mingling of securities with trash for discard. In addition, it would be desirable for the Committee to conSider the question of the rotation of custodians assigned to vault uutY, on the theory that when two or more custodians are assigned to work together over a period of years, the familiarity thus engendered would tend to vitiate the effectiveness of dual custody. With respect to the more detailed control procedures, the Board b elieves that every effort consistert with reasonable economy should be !xerted to prevent loss, whether due to deliberate malfeasance or through Ina dvertence, but that isolated inadvertencies should not result in unduly omplex or expensive procedures. The investigations of the occurrences at San Francisco and Richmond brought out several precautionary practices followed in certain °! the Reserve Banks that seem to have obvious merit. It is believed '_ uat information concerning these practices or procedures has been made :7ailable to all Reserve Banks, but the Board is not certain how uniformly reY may have been adopted. These are: (a) if envelopes are used to conta securities in the vault, the requirement that such envelopes be th r transparent or have holes punched in them to facilitate visual tilsPection; (b) a provision that when such envelopes are to be discarded, sueY should be slit along the edges, opened flat, and inspected to make fure they are empty; (c) a provision that when such envelopes are removed on' service, they be retained in the vault until after the next audit tlY1. the Reserve Bank's Audit Departmert; (d) appropriate provisions for are inspection and retention of vault trash, or trash removed from any r eas where securities are handled; (e) the provision of a log or other vecord for recording the names of all persons entering or leaving the it, and the times of such entranrPs and departures, 71e J The Board believes that it would be desirable for all Reserve 13rks, if they have not already done so, to give consideration to the a orPtion of these precautions (except that those pertaining to the use c; ) - envelopes may not be applicable in all Banks) without awaiting the i‘mPletion of the broader study to be made by the Presidents' Conference. would be appreciated if you would advise whether or nct such precaution'rY measures currently are included in your Bank's procedures. Very truly yours, T° THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS ( . /x •\ Merritt Sh rman, Secreta- y. c 49,el tr It. BOARD OF GOVERNORS Item No. 2 7/17/63 OF THE FEDERAL RESERVE SYSTEM WASHINGTON OFFICE OF THE CHAIRMAN July 18, 1963. The Honorable Wright Patman, Chairman, Committee on Banking and Currency, House of Representatives, Washington 25, D. C. Dear Mr. Chairman: Mr. Stark of your staff Some weeks ago at his request, ents used Was furnished with a set of the various election docum the nomination and 111 the Second Federal Reserve District in of the Federal Reserve Bank election of Class A and B Directors of New York. Mansfield of your staff reEarlier this month Dr. Harvey similar materials relating to quested that he be supplied with other Fedthe election of Class A and B Directors at the eleven has today ents of these docum eral Reserve Banks. A complete set been delivered to Dr. Mansfield. Sincerely yours, Wm. McC. Martin, Jr. JI
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