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1228 A meeting of the Board of Governors of the Federal Reserve Sys— tern was held in Washington on Thursday, July 19, 1945, at 10:30 a.m. PRESENT: Mr. Ransom, Vice Chairman Mr. Szymczak Mr. Evans Mr. Carpenter, Secretary Mr. Connell, General Assistant, Office of the Secretary Mr. Thurston, Assistant to the Chairman The action stated with respect to each of the matters herein— arter referred to was taken by the Board: Ilemorandum dated July 17, 1945, from Mr. Bethea, Director of the 411.81.011 of Administrative Services, recommending that Mr. Richard J. 141ellel be appointed as a guard in that Division, on a temporary basis for all indefinite period at a salary of $1,770 per annum, plus supplemental ectaPensation for overtime of $265.50, effective as of the date upon which he c°nImences the performance of his duties, after passing the usual phy— eieal examination. The memorandum stated that Mr. Michel will become a 41eluber of the Board's retirement system. Approved unanimously. Letter to the Presidents of all Federal Reserve Banks reading az foliovis: fr The Board has taken up again the question of increasing ta3111 10 per cent to 15 per cent the maximum rate of supplemen— t° compensation which the Federal Reserve Banks are authorized folpaY their employees. You may recall that this was considered 191,3,fwing the meeting of the Conference of Presidents in October we;-,, but in a telegram dated December 16, 1943, the Presidents tai e advised that approval of such an increase could not be ob— 'fled from the National War Labor Board. the "Clearance of such an increase has now been obtained from 0.t, salary stabilization authorities and accordingly the Board tajovernors authorizes the increase subject to the same limi— as to amount of salary as set forth in the Board's let— ter '% March 3, 1942. 1229 7/19/45 —2- "For convenience and to avoid the necessity of cross reference, this letter cancels and supersedes the Board's letter of March 3, 1942. "Specifically, the Board authorizes the Federal Reserve Banks to pay such supplemental compensation or allowances as ../.1.eir respective boards of directors deem necessary from ''1 .-111e to time up to a maximum of 15 per cent per annum on the first $3,000 of annual salary to members of their staffs re— ceiving annual salaries of less than $6,000, provided, how— ever, (1) that such supplemental compensation shall not in— crease the total of basic salary and supplemental compensa— tion in any case beyond the rate of $6,000 per annum, and 2) that supplemental payments covering salary periods end— ing prior to July 1, 1945, shall be limited to the amounts authorized under the Board's letter of March 3, 1942. "Supplemental payments should not be considered as a Part of basic salary nor should they be referred to as bonuses an no contributions to the Retirement System should be made 14 respect thereto. "It should be understood that the Board reserves the right either to cancel or amend at any time the authority granted herein for the payment of supplemental compensation. "The Board is giving no publicity to its action in this l_liatter and, if any changes with respect to supplemental pay— ments are approved by your directors, it is requested that You advise the Board of Governors but that otherwise such pay— "tits be handled as routine salary matters without publicity Of any kind." Approved unanimously, together with letter to the Wage Stabilization Division, National War Labor Board and to the Salary Stabilization Unit of the Bureau of Internal Revenue, with respect to the above changes at the Federal Reserve Banks. Letter to Mr. Laning, Vice President and Cashier of the Federal e Bank of Cleveland, reading as follows: 80 "The Board of Governors approves the changes in the per— ciTlel classification plan of the Federal Reserve Bank of , 914tt !, Branches, as submitted with your two letters of lealac Y 1230 7/19/45 -3Approved unanimously, together with a letter to the Salary Stabilization Unit, Commissioner of Internal Revenue, with respect to the above changes. Approved unanimously. Letter to Mr. Willett, First Vice President of the Federal Re- ere Bank of Boston, reading as follows: "Receipt is acknowledged of your letter of July 10, 1945, With reference to the Board's letter of July 7, 1945, transmittlflg an inquiry received from 'Mr. E. A. Hillbom, Cashier, First "a6ional Bank, Wallingford, Connecticut, regarding the question Whether the form of analysis of accounts used by that bank in1relves a payment of interest on demand deposits. You enclose Copies of correspondence between your Bank and Mr. Hillbom in n early same subject and raise the part of 1944 with respect to the question whether the Board believes it desirable for You to make a reply to Mr. Hillbom's current inquiry. Mr. From the previous correspondence between your Bank and Hillbom, it appears that he has already been adequately ised by Mr. Berge of your Bank as to the substance of the rulings relating to service charges. The position taken those rulings has not been changed. However, as you know, cier the Board's letter of June 22, 1945, to all member banks, the absorption of exchange charges in amounts aggregating not than $2 a month for any one depositor will be considered 'foreas trivial and will be disregarded, provided the bank keeps records as the appropriate supervisory authority may re' eilflre. This principle applies equally where the absorption is ha !eted through the analysis of accounts. If, on the other morl, a bank absorbs exchange charges in amounts aggregating thfe than 32 for any one customer during a month, whether by pr :use of an analysis of accounts or otherwise, it will be -81.1.P .,led that the law has been violated. "Accordingly, in order that the effect of the letter of jUne 222 1945 may be explained to Mr. Hillbom and also in order that, • Ids letter to the Board may receive an acknowledgment, 1.18 suggested that your Bank might reply to his present in17 along the lines indicated above." r Approved unanimously. or Atia Letter to Mr. V. S.McLarin, President of the Federal Reserve Bank nta, reading as follows: 1231 7/19/45 —4— "There is enclosed a copy of a letter which the Board has received from. Mr. A. L. Rettig, Assistant Vice President, .?1tY National Bank of Baton Rouge, Louisiana, dated July 10, 4-945, raising a question with respect to the application of the Board's letter of June 22, 1945, regarding the absorption of exchange charges. "It is understood that the practice of the bank is to charge back to its depositors exchange charges at the rate of /10 of 1 per cent. Mr. Rettig states that they know of no Specific case in which they have paid charges at a rate ex— .!eedIng 1/10 of 1 per cent, and if there are no such cases is, of course, no absorption involved. If, however, the the amount of charges paid by the bank exceeds the rate indi— cated, the question arises whether the amounts absorbed ag— g!'egate more than $2 for any one depositor in any one month, xIce, under the Board's letter of June 22, 1945, lesser amounts absorbed will be considered as trivial and disregarded, provided the bank keeps such records as may be required by the appropriate Supervisory authority. "We are unable to say on the basis of the facts presented Whether the amounts, if any, absorbed by the bank may exceed : 4 Per month for any one depositor and we do not feel that we biT sufficiently familiar with the facts to make any suggestion, fu'' It is possible that some reasonable basis might be found f°r allocating the amounts absorbed among the depositors af— fected,in order to determine this question. The question esNler the practice of the bank constitutes a payment of inter— 18 one which can only be decided when all the pertinent fa ' thet6. in the case are developed as a result of examination of 4bank, Whenever the bank absorbs exchange charges, it should 1„..1 1'n'ain such records as will enable it to provide the examiner . :" - h all the facts necessary to permit of a determination whether ' Payment of interest is involved. va "We recognize the natural desire of the bank to know in ad— whether its practice may constitute a payment of interest, You can understand why it would not be feasible for the IT:.?.rd to attempt to pass on this question in advance of the de— ' .1°Pment of the facts by examination. re,c1 "It will be appreciated if your bank will make appropriate a Y to Mr. Rettig's inquiry in the light of the above. We have f lsed Mr. Rettig that his letter is being referred to your bank °r reply n unanimously. Letter 4. o Mr. G. Harold Klein, Niagara Falls, New York, reading as u follows: 1232 7/19/45 —5— "This is in reply to your letter of July 11, 1945, concerning the recent amendments to the Board's Regulations T and U having to do with margin requirements. "You have suggested that the effect of the new rules Will be to freeze margin accounts, to dry up selling, so that prices instead of being steadier will rise more rapidly. The 4flown facts, when all of them are considered together, do not TIpport this view. If, when there is strong pressure on the :JUYing side, margin traders customarily eased that pressure by reducing their holdings, a case might be made against any action that would discourage any selling by margin traders Under thatl such circumstances. There is evidence to show, however, margin traders do not as a rule reduce their aggregate h "l , (4dings at these times; quite the contrary, they generally erease them and their switches from one stock to another help to stimulate speculative activity. In these circumstances, the aggregate effect of the new rules should be distinctly on the side of greater stability, both in rising markets and in falling markets. "You also make reference to borrowing on stock exchange collateral for purposes other than purchasing or trading in ! ecurities. Neither Regulation T nor Regulation U governs Such credit so that the broker or bank need obtain only so uch collateral as it deems necessary for its own protection. 'If you have any further questions with reference to these regulat' g, „ lons, you may find it convenient to communicate with the i 4Branch of the Federal Reserve Bank of New York which '-S responsible responsible for the administration of the regulations in Your district. u , "As requested, we are enclosing copies of Regulations T and L,ogether with the recent amendments." Approved unanimously. Letter to Honorable Joseph F. Ryter, House of Representatives, 44ding as follows: Mr h your letter of July 6 you enclosed a petition by to% plomas J. Reardon, of Hartford, Connecticut, with respect calwalch you asked for our reaction. Mr. Reardon's petition !,_ls for legislation by Congress to substitute 'yield' for 07-rket quotation' as a method of valuation for the extension el.fcredit for the purchasing and carrying of securities. The ba,?ct of such proposed legislation would be to change the 111.-8 of margin requirements as now established under the pre8"ns of the Securities Exchange Act of 1934. 1233 WIN45 -6- "Margin requirements at present are percentages of actual Prices at which transactions are effected. Under Mr. Reardon's Proposal there would be substituted a theoretical value of each stock based on past yields. Just how these yields would be dete rmined is not indicated, but it would seem to require a detailed study of the internal operations of each particular corporation. One corporation might have entirely different t?licies from those of others with respect to the determina— tion of earnings and of the amounts available for dividends. Bookkeeping methods might produce varying results. The set— ju:Lement of these questions would no doubt involve much con— troversy and time—consuming processes which might make the ?.PPlication of margin requirements to current transactions , 08sible, or at least very difficult. It would require spe— -al treatment of the stock of each individual corporation and t? carrY out the proposal would create additional administra— :LVe problems on the part of everybody concerned in the trans— as well as on the part of the Government. "Aside from these difficulties, market judgment of values not governed wholly by considerations of past yields. Opin— ;ens in the market as to future prospects and as to general 1.2"mic conditions are much more potent. Therefore, margin quirements based solely upon past performance would not be a ; ! 11. ctical criterion from the point of view of people who buy „'sell stocks currently. We do not believe that the change Proposed by Mr. Reardon would be workable in practice. "Mr. Reardon's petition is returned herewith." 1 V 4 Approved unanimously. Re erve Letter to Mr. Woolley, Vice President and Cashier of the Federal "Dank of Kansas City, reading as follows: " AS indicated in our telegram with reference to your lett er of July 14, 1945, the Board has issued a ruling with i;'srence to the application of Regulation Vi to credits for c0.1:1,,sport planes being sold by the Reconstruction Finance urj,P°ration. A copy of this ruling is attached. You will th'erstand that if similar credits are made by anyone other wo44 the Reconstruction Finance Corporation the same ruling uld apply. i„ "The reason why we have not distributed the enclosed erPretation is that an amendment to the regulation is in rZess of preparation which will obviate the need for the wer'ng. Furthermore, it was our understanding that there e no aircraft of the type described available for sale by ' °Ile ether than the Reconstruction Finance Corporation. W 1234 7119/45 -7- "Answering your specific question with reference to instalment sale credits arising from the sale of listed artIdles, you are correct in your understanding that they are subject to the regulation no matter what their dollar amount." Approved unanimously. Memorandum dated July 18, 1945, from Mr. Hooff, Attorney, recomIrkericling that there be published in the August 1945 issue of the Federal aese I've Bulletin statements in the form attached to the memorandum with respect to the following subjects: Margin Requirements for Purchasing Securities Amendments to Regulations T and U Common Trust Funds Amendments to Regulation F Suit Against Federal Reserve Bank Appeal Dismissed. Approved unanimously. Thereupon the meeting adjourne Secretary. 4PAroveci;_ Vice Chairman.
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