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1487 A meeting of the Board of Governors of the Federal Reserve System was held in Washington on Monday, July 27, 1942, at 12:00 noon. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chailman Ransom, Vice Chairman Szymczak McKee Draper Evans Ir. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chairman Mr. Parry, Chief of the Division of Security Loans Mr. Dreibelbis, Assistant General Counsel Mr. Bonnar Brown, Special Assistant in the Division of Security Loans Mr. Ransom presented a memorandum prepared by him and Mr. Parry illkder date of July 24, 1942, submitting and recommending the adoption, effective immediately, of t;o amendments to Regulation W Which would liberalize the regulation with respect to credits relating to (1) the c°47ersion of existinP, residential heating eouipment and the purchase or irlsulating materials, and (2) the repair or replacement of property clerriag-p4,1 Or lost as the result of a disaster. The memorandum read in 13e1I as follows: "'Fuel Conservation Credits'. - The purpose of this Emendment is to remove a credit barrier, the 12-month limitation, that Regulation W places in the way of a GovernmentsPonsored campaign to conserve fuel, mainly for transportation reasons, by inducing people (1) to convert furnaces from one Duel to another, principally from oil to coal, and (2) to insulate their homes -- and to do so forthwith. A number of "her agencies are interested in this campaign, including 8Jr1°/le others the Tar Production Board and the Office of Defense Transportation. We have been in communication with 1488 7/27/42 -2- "these agencies as well as with the National Housing Agency, Office of Price Administration, Office of Bituminous Coal Consumers' Counsel, Office of Petroleum Coordinator for War, Secretary of the Treasury, and Secretary of Commerce. A copy of our letter to them is attached, together with the replies that have been received. We have been impressed by the extent to which they favor both the campaign in question and the proposed relaxation of Regulation W as a part of that campaign. "'Disaster Credits'. - The purpose of this amendment is to remove barriers placed by Regulation W in the way of extensions of credit to sufferers from such community disasters as the 'flash floods' that have recently afflicted Kentucky, Pennsylvania, and New York. To prevent the instalment sale Of furniture, for example, to these sufferers without a down Payment of 20 per cent, seems unreasonable. So does the limitation to 12 months of loans to repair houses, etc., or to buy furniture, etc. Attached is a letter from Mr. R. B. Hays, Federal Reserve Bank of Cleveland, which presents the problem a8 it has recently appeared in Kentucky and a memorandum of a telephone call from Mr. Loren B. Allen, Federal Reserve Bank of New York, presenting the problem as it has recently apPeared in New York. "This amendment has been discussed informally with Mr. Bonner of OPA, who saw no objection, but has not been formally submitted to the Consultative Committee." In the discussion of the proposed amendments, inquiry was made tla to whether they might be used as a means of evading other provisions Op the regulation, and Mr. Ransom stated that, while that possibility /18.8 always present, he felt it was not a serious one, that the amount or edit of the kinds contemplated by the amendmentsprobably would not be large, and that he was of the opinion that the liberalization of the regulation in these respects was entirely justified, particularly beof the fact that, if under the conditions to which the amendments relate there were undue hardship because of lack of fuel or because of eclIrtainity disaster, the public reaction against Regulation W would 1489 7/27/42 -3- be Out of all proportion to anything that might be accomplished by riot adopting the amendments. Mr. Ransom also stated that the amend- Ment relating to fuel conservation credits did not include such items 48 lUmber siding, that it had been urged that these items should be inclUded, but that it was felt that the amendment went about as far as W" justified at this time. He also read from some of the letters re- ceiVed from interested agencies of Government in which they concurred 14 the desirability of this amendment. , At the conclusion of the discussion, upon motion by Mr. Ransom and by unanimous vote, the following amendments to Regulation W were adopted, effective immediately, with the understanding that the Federal Reserve Banks would be advised by wire with a request that they print the amendments and distribute them to interested persons. It was also understood that press statements in the form read during the discussion would be given to the press this afternoon for immediate release. "Amendment No. 6 to Regulation W , "Regulation W is hereby amended effective July 27, 1942, cSr adding the following new subsection at the end of section 8: "(m) Fuel Conservation Credits. -- Any extension of credit to finance (1) the conversion of heating equipment to the use of sny other fuel, (2) the installation of looserill, blanket, or batt-type insulation, or insulating board, Within existing structures, (3) the installation of storm doors, storm windows, or weather stripping, or (4) the purchase of materials for any of the above purposes." "Amendment No. 7 to Regulation W "RegulationW is hereby amended effective July 27, 1942, bY striking out subsection (h) of section 8 and substituting the following: "(h) Disaster Credits. -- Any extension of credit (1) niade by the Disaster Loan Corporation, or (2) to finance the l'eloair or replacement of real or personal property damaged 1490 7/27/42 -4- "or lost as a result of a Which the Federal Reserve disaster occurs finds has substantial number of the flood or other similar disaster Bank of the district in which the created an emergency affecting a inhabitants of the stricken area." At this point, Messrs. Thurston, Parry, Dreibelbis, and Bonnar 13r°1110. left the meeting, and 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 IPcderal Reserve System held on July 25, 1942, were approved unanimously. Memorandum dated July 21, 1942, from MT. Goldenweiser, Director or the Division of Research and Statistics, submitting the resignation Of Haskell Wald as a junior economist in that Division, to become ef- fective as of the close of business on July 19, 1942, and recommending that the resignation be accepted as of that date. The resignation was accepted. Telegram to Mr. Gilbert, President of the Federal Reserve Bank "Dallas, reading as follows: "Retel July 24. Board is sorry to learn of Mr. Crump's ondition and will interpose no objection to the payment to ainl of the proposed cash allowance in an amount equal to six months' salary to supplement retirement benefits if he is retired under the disability provisions of the Retirement System." Approved unanimously. Letter to Mr. Evans, Vice President and Secretary of the Federal "serve Bank of Dallas, reading as follows: , "This refers to your letter of July 3, 1942, and Mr. k3troud's memorandum enclosed therewith, expressing the inion that there is no legal objection to the retirement Washington County State Bank, Brenham, Texas, of the re11/aining $5,000 of its capital debentures held by the 2 1.491 7/27/42 -5- "Reconstruction Finance Corporation, and recommending that the Board approve the retirement of the debentures and other Proposed readjustments in the bank's capital accounts. "The Board has consistently taken the position in numerous cases involving this question, including sol:,e in your District (e.g., First State Bank, Kerrville, Texas), that capital deb ,ntures of State member banks which are owned by tne Reconstruction Finance Corporation constitute capital stock within the meaning of the Federal statutes governing the withdraml of capital stock of such banks and that, accordingly, a retirement of such debentures by a State member bank which reduces the aggregate outstanding stock and debentures to an amount below that required for the organization of a national bank in the same place constitutes a violation of the technical requirements of the Federal Reserve Act. "In reaching a contrary conclusion, you have given very limited effect to the following provision of section 9 of the Federal Reserve Act: 'For the purposes of membership of any such bank the terms "capital" and "capital stock" shall include the amount of outstanding capital notes and debentures legally issued by the applying bank and purchased by the Reconstruction Finance Corporation.' "Considering this provision together with the previously enacted statutory provisions relating to the purchase of capital debentures of State banks by the Reconstruction Finance Corporation, it is believed that one is clearly warranted in adopting a construction generally to the effect that, in so fall as State member banks are concerned, the terms 'capital' elid 'capital stock' wherever used in Federal statutes aplaicable to such banks by reason of membership shall be reMsd to include such capital debentures. Such a construe' ,J-071 is in accord with the apparent intent that where State -!anks could not issue preferred stock eligible for purchase 0Y the Reconstruction Finance Corporation, the issuance and sale of capital debentures to that corporation should serve 8 a substitute which would accomplish the same purposes. ' LlIeldentally, this would appear to give the above-quoted P sTovision no broader meaning than that it applies 'to admis1°11 to membership and to retention of membership', as sug, eeted by Mr. Stroud, since the right of a bank to retain ' eMbership depends upon, among other things, compliance with rhe Federal laws a-plicable to it as a member bank and, there°Ise, the meaning of the terms 'capital' and 'capital stock' 7,11erever used in the applicable statutes (including those reto withdrawalof capital) is pertinent to the retention °D xembership. T 1492 7/27/42 -6- "Further, when applied to other situations, a narrow construction which would justify the conclusion which you have reached in this case would produce unreasonable results which surely were not contemplated and should be avoided if possible. For example, it would follow that, Upon admission of a bank to membership with stock and debentures in the minimum amount required for admission, the law would not prohibit the bank from immediately reducing its capital below the required amount by retiring debentures. On the other side of the picture, it would follow that capital debentures owned by the Reconstruction Finance Corporation could not be treated as capital or capital stock for the purposes of various statutory restrictions Upon State member banks relating to loans, investments, establishment of branches, and other matters. This would definitely discriminate against State banks which had issued capital debentures and in favor of national banks and those State banks which had issued preferred stock; and, Where a bank's capital consisted largely of debentures, its operations might be so restricted as to make membership inadvisable. "Pointing out that the statutory restrictions upon withdrawal of capital stock deal directly with national banks and are made applicable to State member banks only by reference, Mr. Stroud argues that they do not govern the retirement of debentures by State member banks because the statutory definition of 'capital' in the case of national banks does not include debentures. Identical reasoning Ilso would be applicable in construing a number of other statutory provisions (e.g., those relating to purchase of investment securities) where it would be advantageous to State member banks to treat debentures as capital or capital stock and, in connection with the ruling published in the Federal Reserve Bulletin for November 1934 at page 749 which construed some of these provisions, this argument was dismissed as highly technical and contrary to the apparent intent and purposes of the law. Obviously, 0 e is not justified in construing the law narrowly in those few cases in which it is advantageous to the banks ?lid broadly in other instances where the narrow construelon is disadvantageous. "In your letter you suggest that the Board's construetion of the law results in discrimination against State memrr banks because it restricts their right to retire capital Qebentures, whereas there is no restriction upon the retirement of debentures by national banks. The answer is that .1r tienal banks obtain capital funds from the Reconstruction 'inance Corporation through the issuance and sale of preferred 1493 7/27/42 -7- stock, instead of debentures, and the retirement of such stock is subject to the same restrictions which the Board deems to be applicable to retirement of debentures by State member banks. As a matter of fact, a narrow construction, not a broad one, would result in discrimination, since State banks which had issued debentures would be in a more favorable position with respect to retirements than banks which had issued preferred stock and in a less favorable position in other respects, as noted above. "As indicated above, the Board is of the opinion that the position heretofore taken by it is correct and that, accordingly, the proposed retirement by Washington County State Bank of its outstanding debentures would constitute a violation of the technical requirements of the Federal Reserve Act and the previous retirements made after the 1940 census fitzures for Brenham became available constituted like violations. "However, the penalty for such violations by a State member bank is expulsion of the bank from membership and the law vests in the Board discretion with respect to whether such action should be taken. In view of this fact, the Board has interposed no objection to retirements Of debentures in violation of the statutory requirements in some instances. In the two instances most comparable to the present case, member banks located in towns whose Populations had increased subsequent to the banks' admission to membership had cooperated with the program of supervisory authorities for the rehabilitation of banks by selling debentures to the Reconstruction Finance Corporation in order to meet emergency situations arising at the time of the banking holiday and, after the emergency had Passed, the banks found themselves penalized for their cooperation by the legal requirement requiring them to Maintain capital stock in such amounts that their capital funds were obviously excessive. "In the present case, it appears that the bank undoubtedly would have been admitted to membership with 01117 $50,000 capital stock and, as a practical matter, that amount can not now be considered inadequate; that it may have been admitted to membership and proceeded with the retirement of its debentures in ignorance, or th a misunderstanding, of the statutory requirements; 6hat retirements have been made in violation of such requirements with the approval of your bank and without ob jection by the Board, the increase in the population Of Brenham and the legal question involved having been overlooked; that now only a relatively insignificant n 494 7/27/42 -8- "amount of debentures, ,;5,000, remains to be retired; that the bank is in satisfactory condition and its aggregate capital funds are adequate without the debentures; and that, in proposing to retire the remainder of its debentures and to transfer its reserve for dividends payable in common stock to surplus and undivided profits instead of declaring such a d ividend, the bank is following the recommendation of the State banking authorities. "On the other hand, the declaration of a stock dividend in an amount sufficient to satisfy the legal requirements would not result in excessive capital stock or an unsatisfactory distribution of the bank's capital accounts, and the fact that the bank has created a reserve for dividends payable in common stock which now exceeds the amount of the debentures which were outstanding when the bank was admitted to membership indicates that, over a Period of years, the bank's manawement has contemplated that such action eventually would be taken. Also, while your bank's approval of the retirements previously made was not conditioned upon the creation of a reserve for dividends payable in common stock, the fact that the bank was voluntarily creating such a reserve was expressly noted and, although your bank and the Board are hardly in a position to complain about the preVious retirements, they might properly insist upon the use Of the reserve for the purposes for which it was created. There is no showing that the declaration of a stock dividend would work any hardship upon the bank and no reason is given for the change in the bank's program other than that it was recommended by the State authorities. There is no indication as to the basis for the State authorities' recommendatl°n or how strongly they feel about the matter and it seems entirely possible that neither they nor the bank would have any serious objection to an increase in the outstanding stock Of the bank if it were pointed out that this is necessary in Order to comply with the technical requirements of the Federal Reserve Act. "The reasons for disregarding the technical requirements ?f the law seem somewhat less impressive in this case than those in which such action heretofore has been taken by °le Board. However, you are, of course, much more familiar .11cin the Board with the local situation and any understandjngs or commitments which may have been made and, in view ' ?f the circumstances recited above and your recommendation, °le Board authorizes you to interpose no objection to the retirement of the bank's remaining debentures and to the °ther proposed chanfzes in the bank's capital accounts if, after consideration of this letter and discussion of the 1495 7/27/42 -9- "matter with the State authorities, you feel that the circumstances warrant the disregard of the technical requirements in this instance. Similar cases arising in the future Of course should be presented to the Board for action on the basis of the facts and circumstances of each case." Approved unanimously. Letter to Mr. Fry, Vice President of the Federal Reserve Bank °D Richmond, reading as follows: "This refers to your letter of Tilly 15, 1942, regarding the special condition suggested in our letters of July 7, 9 and 10, 1942, for insertion in guarantee agreements where the agreement between the borrower and the financing institution provides that a rate of interest higher than the rate Payable before maturity of the loan shall be paid by the borrower after maturity or as interest on overdue interest or otherwise. In view of the fact that you are rarely in a position to know whether there is to be a higher rate of interest charged after maturity, you suggest that, as indi?ated in the memorandum from Mr. Wallace which you enclosed, lt would be a good idea to include the conaitioh suggested in every guarantee agreement. "We have taken this matter up informally with the War 1?epartment, Navy Department and Maritime Commission, and it ls their feeling that it is preferable not to modify or add to the provisions of the standard form of agreement except ''here necessary or desirable because of the circumstances or Particular cases and, accordingly, that it is not desirable to include uniformly in all guarantee agreements an adprovision on this subject at this time if it can be avoided. There will be no objection, however, to your including a special condition on this subject in any particular ease where you think it is advisable to do so either because °f absence of information with respect to the matter or ot herwise." Approved unanimously, together with a similar letter to Mr. Olson, Assistant Vice President of the Federal Reserve Bank of Chicago, and letters transmitting copies of the letter from Mr. Fry and the above reply to Colonel John C. Mechem, Chief of the Miscellaneous Branch, Fiscal Division of the 1496 7/27/42 -10Tar Department; Lr. Sidney A. Mitchell, Chief of Finance Section, Office of Procurement and Material, Navy Department; and MT. B. B. Griffith, Assistant to Director of Finance, United States ilaritime Commission. Letter to Mr. Olson, Assistant Vice President and Assistant Secretary of the Federal Reserve Bank of Chicago, reading as follows: "This refers to your telegram of July 22, 1942, in Which you inquire hether it is agreeable to incorporate in section 13 of the standard form of guarantee agreement a uniform paragraph intended to give protection to financing institutions against invalidity of assignments. The question of changes in or additions to the standard form Of guarantee agreement has been the subject of informal discussion with representatives of the Tar Department, NevY Department and Maritime Commission, and it is felt that it is not desirable to make any such changes or adif it can be avoided. It is suggested, therefore, . 11at in your negotiations with financing institutions you indicate that the standard form of agreement is intended to be uniform and not subject to change, except, of course, special conditions may be necessary because of the circumstances of particular cases." Approved unanimously, together with letters to Mr. Sidney A. Mitchell, Chief of Finance Section, Office of Procurement and Material, Navy Department; Colonel John C. Mechem, Chief of the i:iiscellaneous Branch of the Fiscal Division, War Department; and Mr. B. B. Griffith, Assistant to Director of Finance, United States Maritime Commission, reading as follows: "There are enclosed herewith for your informatior a ?°PY of a telegram received from Mr. A. I. Olson, Assis-uant Vice President and Assistant Secretary of the Federal Reserve Bank of Chicago, and a copy of our reply, with reference to whether it is agreeable to incorporate in section 13 of the standard form of guarantee agreement a uniform !iragraph intended to give protection to financing institubl°11s against invalidity of assignments. We believe that °Ilr' reply is in accord with your views but if not please advise us." l 1497 7/27/42 -11Letter to Mr. Dillard, Vice President and Secretary of the Federal Reserve Bank of Chicago, reading as follows: "'Tour letter of June 19, 1942, enclosing a letter of the same date from Hamilton Ross Industries, Chicago, Illinois, requested our advice as to whether transactions Pnrsuant to the Hamilton Ross Industries' method of selling merchandise conforms to Regulation W and Interpretation W-64. "In a typical case, it appears that Hamilton Ross Industries sells certain featured articles of merchandise to a local merchant and prepares and furnishes for his use mail or newspaper advertising inviting prospective customers to request delivery by the merchant of such articles on approval, trial or inspection for a period of about fifteen days, all without deposit by, or expense or obligation to, such customers. The customer is informed that if, by the end of such Period, be decides to buy the merchandise, a down payment and an instalment contract conforming to Regulation W then must be made. However, the customer has the unconditional right to return the article, if he so chooses, without any expense to himself. "Since it does not appear that the transactions of the tYPe outlined above are entered into for the purpose of evading the Peculation, it is the Board's view that they fall within the terms of Interpretation W-64 and that, for the PlIrPoses of the Regulation, the date of sale may be regarded as the date on which the prospective customer informs the illerchant of his decision to buy the article. "Holcever, in cases of this nature you may find it desirable to advise that Interpretation W-64 contemplates the delivery of an article for an approval, trial or inspection period without obtaining a down payment and an instalment !ontract at the time thereof, only if such delivery is made r_or the purpose, in good faith, of allowing the prospective , rYer to inspect, try out, and approve the article so deIf such purpose is not real, or if such transacOil is merely a device to delay the down payment and -Lnstalment renuirements of the Regulation, then the transWould be considered to be of an evasive nature and 11°t Permitted by Interpretation W-64 or the Regulation. "This interpretation relates, of course, to the Regum?tion as it now stands, but it would be only fair to reany interested Registrant that the Regulation could 0 anY tie be amended to make transactions of the type utlined above unlawful. Study of this case has indicated 1498 7/27/42 -12- "that there may be a real need for such an amendment in order to make the Regulation more effective in accomplishing its purposes, and such an amendment is under active consideration." Approved unanimously. Letter to Mr. Hale, Vice President of the Federal Reserve Bank Of -an Francisco, reading as follows: "Your letter of July 7 describes the various alternatives with which stores operating branches would be faced if section 5(b) of Regulation W is deemed applicable to all the accounts of a customer with the various branches of the store, as stated in the Board's letter to You of Tune 19. You point out that there has been an excellent feeling of cooperation in your district up to the present time, and that the trade has responded well to the efforts of the System to secure an understanding of the purposes and the provisions of the regulation, with the result that most Registrants have been desirous of complying not only with its technical provisions, but also with its intent. "In view of the importance of these considerations, and others of a similar nature which you state in your I etter, the relevant portions of the regulation have : , 'earl restudied to determine whether there exists a basis for reversinr, the position taken in the Board's letter (n.Tune 19. This study has not yet revealed any way in which the regulation could be construed so as to reach the result you suggest, and therefore the only course Open that would cet that result would appear to be an a mendment. "Consideration and study will accordingly be given to.the matter of Possible amendment of Regulation W on this subject. In this connection we are interested in obtaining a clearer picture of the nature and degree of the hardship that the present rule will impose if it 811°111d not be changed. "The problem of the store, under the present rule, ?Tpears to be that of determining in particular cases 4nether the customer has an account at one of its branches hich is in default, and it is not easy at this distance °_.80e just what difficulties would be involved in making 4, ills determination. At the beginning it would be neces' e'rY for the branches to con'-pare the lists of their charge ! 'ecount customers to ascertain which of their customers 1499 7/27/42 -13- "have accounts at more than one branch. Thereafter, however, it would not seen to be unduly difficult for a branch Which had an account in default, and which saw on the record Of the account a symbol showing that the customer had an account at another branch, to notify that other branch of the default. As you say, it seems unlikely that there would be anY very large number of instances of a customer's having an account at more than one branch. "There would also be cases, of course, in which a customer opening a new account wants to charge something to it immediately. In such a case, under the present rule, if the customer said that he did not have an account at any other branch of the store and the store permitted the charge in reliance on his statement, there would be a question of fact Whether the Registrant was negligent in extending credit to him if it later developed that he did have an account at one Of the other branches and that account was in default. "In order to give us a fuller understanding of the situation of the stores involved, which will be helpful in determining the exact substance of an appropriate amendment and in determining that the difficulties of these stores do in fact necessitate an amendment, it will be appreciated if You will let us have a further explanation with respect to the Points in the two preceding paragraphs. "In connection with any amendment on this subject, consideration will naturally have to be given to its consequences in the many different classes of cases that it would affect. There will also be the problem of how and where to draw the line as, for example, how to define 'separate credit departzentst in such a manner as to care for legitimate cases without at the same time making possible a device that might permit, ex.tensive avoidance of section 5 of the regulation. Any sugcestions or other assistance that you can give us on such Points will be appreciated. An additional problem on which ie2nY comments will be welcome relates to cases in which a firm 'las two or more stores in the same city. In such a case a Provision permitting the separation of accounts wherever the tores maintain separate accounting departments, without any ! lurther restriction, would seem to create possibilities of voidance of the regulation. "We have discovered one store in the East that has the same problem as the California stores to which your letter r?fers, but if the affected stores in California can indicate ?Etat stores in other parts of the country may prove to be simi4arlY affected, such information would also be appreciated. "Finally, it may be noted that any amendment of the kind in question would necessarily have some effect in further 1500 7/27/42 -14- "Complicating an already complicated regulation. Obviously, 8 regulation applicable to a number of different types of business must, to a certain extent, be a compromise between a short and simple regulation which does not make provision for variations in conditions, and a long and complex regulation which provides for all sorts of cases but which may be difficult to administer because it is difficult for the Registrants to understand. It is largely for this reason that the Board, before passing any amendment on the point in question, wishes to be sure that it is necessary to do so in order to avoid some real hardship that would otherwise occur to the Registrants involved." Approved unanimously. Thereupon the meeting adjourned. 1,4z3vt. ' 0Nred: 4.1131 Chairman. try.
@FedFRASER