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Minutes of actions taken by the Board of Governors of the l'eaeral Reserve System on WednesdaY/ allY 27, 1951. PRESENT: Mr. Mr. Mr. Mr. Szymczak, Chairman pro tam Evans Vardaman Norton Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Minutes of actions taken by the Board of Governors of the Pour al Reserve System on July 241 1951, were approved unanimously. Memorandum dated July 200 1951, from Mr. Marget„ Director, °4 of International Finance, recommending that the resignation 01, kr. Gail M. Hartmann, Research Assistant in that Division, be "eePted to be effective, in accordance with his request, at the olose of business August 31 1951. Approved unanimously. Letter to Mr. DeMoss, Vice President of the Federal Reserve Of 'N mealas / reading as follows: yo,„ "In accordance with the request contained in cl.'c letter of July 201 19510 the Board approves the e ; algtation of Curtis Leroy Scott as a special assistant iner for the Federal Reserve Bank of Dallas." Approved unanimously. 1114 Letter to the Honorable Maple T. Hari., Chairman, Federal Deposit ccirPoration, Washington, D. C. reading as follows: 7/25/51 -2- "Reference is made to your letter of July 16, 1951, requesting that appropriate members of the Board's staff and proper persons at the Federal Reserve Banks in ,tasart:EL, St. Louis, Minneapolis, Kansas City, and Dallas oe advised of your intention to continue your program of auditing the Certified Statements submitted for " sesament purposes by insured banks and that you are scheduling such audits in a number of the larger banks in the Sixth, Eighth, Ninth, Tenth and Eleventh Federal Reserve Districts. "Copies of your letter and this reply have been Sent .1 , 1t to the Presidents of the Federal Reserve Banks of :C-48.4ta, St. Louis, Minneapolis, Kansas City, and Dallas ,°gether with information as to the provisions of your ;,evl°us letters, to which you refer, with regard to e4 141 Scope of the audits, the personnel engaged therein, Attention of the Presidents of the first three bnks Was invited to the fact that such audits had _en made in banks of one or more States in their respective districts." Approved unanimously. e. Letter to the Presidents of all Federal Reserve Banks, reading t°110vs tio ;As you are no doubt aware, Ceiling Price Regulaprill No. 34, issued on May 111 1951, by the Office of po'ce Stabilization, applies to service charges by banks. a Y°ur information in this connection there is enclosed -,°1/Y of a letter which the Board addressed to the PresipoT °f a Federal Reserve Bank in response to his inquiry regulation vheriting out the difficulties caused by such tla t n°11Par banks are added to the par list or become "'tiers in the Federal Reserve System. be "It was our thought that your Bank should have the art of this information in the event you should have apti e of a nonpar bank being added to the par list or an 01.114-eati0n of a State bank for membership in the System, 'Of which might involve setting up of a new system or ,!1 l visi- flrice charges. When you have such a case you might ‘° send it to the Board after developing fully the 1/25/51 -3 "!nformation necessary for submission to the Office of 'tqco Stabilization as indicated in the third paragraph or the enclosed letter as well as pertinent provisions of Ceiling Price Regulation No. 34." Approved unanimously. Letter to the Honorable Chester B. McMullen, House of Representatives, D. C., reading as follows: "This refers to your letter of July 21 1951, with Thich you enclosed a letter from Mr. T. F. Green, Jr., easurer, General Construction Corporation, St. Petersj ' Florida, concerning difficulties being experienced , 11 Florida in connection with securing bank loans with wwernment guarantees. "Over-all figures on Regulation V loans indicate aLiat through June 30 six guaranteed loans had been Ilthorized through the Federal Reserve Banks by the %a ranteeing agencies to defense contractors in Florida. es loans represented about one-fifth of the total in th: m Atlanta Federal Reserve District, which is approximtet'elY the same proportion that total loans of Florida exIllber banks bear to total loans of member banks in the Atlanta District. In the second paragraph of his letter, Mr. Green Statee that t a bank to which he applied for a loan refused to ' be 'end a V-loan with a Government guarantee partly per" of having to give up part of its interest to the A„,:ral Reserve. A Federal Reserve Bank does not receive r interest on such loans unless as a participant it gilaallee8 Funds. Presumably Mt. Green refers to the EtIltse fee, which is computed as a percentage of the illj lax erest charged the borrower on the loan and varies Theanlount according to the percentage of guarantee. /les gUarantee fee goes to the Government. The Federal Ze Banks collect these fees as fiscal agents of theel earte7:vernment procurement department issuing the guar'• The guarantee fees are then deposited by the -"Ve Bank in the U. S. Treasurer's General Account to the e.„ Government procurement o,g4cy.credit of the appropriate Z 7/25/51 -4- "In general, banks have shown a willingness to make defense loans, and a substantial part of the increase in l'(_ 3alle which has occurred during the past nine months has ueen related to the defense effort. It is true that for 4 t11-1:e some banks were reluctant to make loans secured by 488ignment of proceeds of defense contracts. This was be?ause of opinions of the Comptroller General that financIng institutions might be liable to return to the GovernM'It ounts received by them on assigned contracts to ti !!sfy claims by the Government against the contractors, thou such claims were totally unrelated to the loan. 11118 situation as corrected, however, when the Congress )!Iended the Assignment of Claims Act of 1940, effective rt7 15/ 1951, so as to relieve assignee financing institncins of any liability to repay amounts received by : ,4 14 after July 1, 1950, under any assignment. It must pi re membered, also, that banks as private fteancing s st itutions have an obligation to their depositors rind holders, tIna Ulitv can not be expected to take undue risk in c_sk8 making loans even for defense production purposes. ocrtain loans may carry substantial risk or be wiluly Pensive to service even when covered by a guarantee. ! Of 1118 connectioa, it may be noted that it is the policy ' he guaranteeing agencies to authortAe guarantees of 95 per cent -- on which the guarantee fee would :ge 1 from 4o per cent to 50 per cent of the interest on ea,1°8111 -- only in unusual cases in which the product be obtained from other sources and is considered to be age" to the defense effort by the procurement IleY, and %filen no other suitable financing is available. co At the end of Mr. Green's letter it is stated that ullgress Passed Section 13b to take care of such situations pecie're referred to in the letter. Section 13b of the e' l al Reserve Act, which authorizes the Federal Reserve ga„„ eiZs to make loans, and commitments to discount or purto !se 10ane, for the purpose of providing working capital tizus 5 tablished businesses, was enacted in 1934 during the jart. of depression. One of the purposes which Congress etaz7nded to serve by this legislation was to maintain Rel :'-°Y.Ment or provide additional employment. The Federal Banks may and do make loans to defense contractors Section 13b, but under the law such loans must be made 4 4 7/25/51 -5- °a a reasonable and sound basis and direct loans to borrowers may be made by the Reserve Banks only in _Iceptional circumstances when credit is not availa°le from the usual sources. "We are not in a position to comment on prices by procurement agencies, but we hope that this _otter will be of some help to you in answering Mr. Green's letter, which is returned herewith. Our : 8 . 11swer has been delayed so that we might make certain laquiries relating to Mr. Green's allegations." Approved unanimously. Letter to Mr. James H. McCarthy, Secretary, The McCarthy Company, 438 -'" Broadway, Los Angeles, California, reading as follows: 4_ _ "This will acknowledge your letter of July 9, 1951, 'u Chairman Martin, with which you enclosed copies of an eh "c-Llge of correspondence with the Los Angeles Branch 7:,,tthe Federal Reserve Bank of San Francisco. In your er you ask various questions about Regulation X, Real -8.ate Credit. We have carefully read the correspondence you sent us to and confirm the correctness of the reply you received tl,,Y°11r various questions from the Los Angeles Branch of Federal Reserve Bank, Regulation X was issued under the by ,authority of the Defense Production Act of 1950, passed seconigress, and Executive Order No. 10161 of the President. On 60 2(d)(1) of the Act provides as follows: "Real estate construction credit" means anY credit which (i) is wholly or partly secured 1?Y, (ii) is for the purpose of purchasing or carryfinerIcing, or (iv) j' (iii) is for the purpose of new construction use, or acquire to a right nvaves on real property or reel property on which there is new construction. As used in this paragraph the term new construction" means any structure, or any major addition or major improvement to a structure, which has not been begun before 12 o'clock meridian, August ) 1950, As used in this paragraph the term "real .I.ncludes leasehold and other interests Z 1 4 1 : 2 7/25/51 -6- "Part V of the Executive Order provides in part: functions conferred upon the President by Section 2 of the Defense Production Act of 195o are hereby delegated to the Board of Governors of the Federal Reserve SYsteme I , "Regulation X, therefore, which in section 2(f) defines oasw construction' as any structure, or any major addition vti" Inaior improvement to a structure, which is or has been Ilgun after 12 o'clock meridian, August 3, 1950, follows :42.s legislative intent of Congress and we do not believe 4 1.8 within the province of the Board to alter the effect this legislation by administrative action. "If we can furnish you with any additional information 1,74 J-11 be glad to do so." Approved unanimously, with a copy to Mr. Millard, Vice President of the Federal Reserve Bank of San Francisco. Secretary.
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