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4 I) 1C4 )t )r) Minutes of actions taken by the Board of Governors of the lietleral Reserve System on Friday, July 29, 1949. The Board met in theBoard Room at 10:30 a.m. PRESENT: Mr. McCabe, Chairman Mr. Szymczak Mr. Clayton Carpenter, Secretary Hammond, Assistant Secretary Morrill, Special Adviser Riefler, Assistant to the Chairman Vest, General Counsel Thomas, Director, Division of Research and Statistics Mr. Leonard, Director, Division of Bank Operations Mr. Mr. Mr. Mr. Mr. Mr. There were presented telegrams to the Federal Reserve Banks "110 "°n, New York, Cleveland, Richmond, Chicago, St. Louis, Min4144)c:ills: Kansas City, Dallas, and San Francisco stating that the 441 ' cl aPproves the establishment without change by the Federal Re6i4e 8a.nk of San Francisco on July 26, by the Federal Reserve Bank or St* Louis on July 27, by the Federal Reserve Banks of New York, level 4414, Richmond, Chicago, Minneapolis, Kansas City, and Dallas 04 Jul 28/ 1949, and by the Federal Reserve Bank of Boston today °It the rates of discount and purchase in their existing schedules. Approved ImAnimously. Chairman McCabe suggested that inasmuch as Mr. Szymczak be On vacation next week and might not be present when further totteia there ertttion would be given to System credit policy at which time would be a discussion of action by the Board on a further 7/29/49 -2- Niuction in reserve requirements of member banks, he should have 4110PPortunity to express his views at this meeting of the Board. Mr. Szymczak said that while he was not prepared to say at this time what his position would be next week on the extent to 141110h member bank reserve requirements should be reduced as that l()W-cl depend on developments in the interim and on discussions next 'tleek, he did feel that the Board should discuss the matter on ThurscirsJoid should indicate at the meeting of the Federal Open Market ittee on Friday the action that the Board was prepared to take. Present thinking was that reserve requirements should be reby two percentage points on demand deposits of all member banks, I I 1 1 114110-'ulced to become effective in two steps, but that the amount of the „ ' -eduction should be related to the reduction to be made in the Di Shte-'s portfolio of Treasury bills. He felt that a change in the clisc °114t rate should be included in the discussions next week and Rhola d be considered by the directors of the Federal Reserve Banks. Mr. Riefler reviewed the points covered in a staff discus"rith Mr. Rouse, Manager of the System Open Market Account, on 27 of System open market policy in relation to the overall oreitt. -"'icY of the System, and in that connection Chairman McCabe re- rrefl to a letter received from Mr. Rounds, First Vice President ' th e ederal Reserve Bank of New York, under date of July 25, 1949, to the market for bank stocks. It was understood that the 7/29/49 letter Would would be circulated among the other members of the Board for their information. There was a general discussion, in the light of the decisions that m ght be made with respect to Treasury bills in the System Open Mket Account, of the desirability of a further reduction in re- rve requirements. Messrs. McCabe and Szymczak felt that action %18.8 called for at the present time and that communication with the tthellt inembers of the Board and with the five President members of the Rederal Open Market Committee with a view to immediate action bY thp4 coard would be justified. Mr. Clayton did not feel that the was sufficiently compelling to require action until the rae.tter - could be discussed next week when a quorum of the Board would be Preseut. At the conclusion of the discussion it was agreed that a meet' J1 the Board should be called for 10:30 a.m. on Thursday, August 4 to c tilne °Ileider action on member bank reserve requirements, at which CleCiSion should be reached, and that the absent members of the 14 -°Etrd should be informed of the discussion today and of the meet111. oil Thursday so that they could be present if they so desired. or Various suggestions were considered as to the effective dates e. %.e s /..11.ther reduction in reserve requirements. kr :"estion • ye In connection with that the effective date for country banks be August 1, sk. stated that there was no legal objection to taking action 7/29/49 -4- tIle latter part of next week and making it effective retroactively to4algust 1 but that such action had never been taken and it might be interpreted by the general public as indicating a more urgent Ileed, for the reduction than was actually the case. It was the general consensus following the discussion that ItnLeMber bank reserve requirements were reduced by two percentage P°14t8, one half c°Untry banks of the reduction could be made effective for as of August 1 and for reserve and central reserve 414 banks on August 4, and that the second half could be made errective for central reserve and reserve cities on August 11 and to. c°1111trY banks on August 16. At this point Messrs. Riefler, Vest, Thomas,and Leonard Ilit4irev and the action stated with respect to each of the matters 414.4 -.L1lafter referred to was taken by the Board: Memorandum dated July 27, 1949, from Mr. Vest, General Courla el, recommending an increase in the basic salary of Howard H. e Assistant Counsel, from $8,808.75 to $9,108.00 per annum, rreetive August 7, 1949. Approved unanimously. Memorandum dated June 3, 1949, from Mr. Young, Associate illt"t()I. of the Division of Research and Statistics, recommending : 4 iller'ease in the basic salary of Orville K. Thompson, an economist 'Ilthat D ivision, from $4,730.40 to $1,857.8O per annum, effective 414(:Ilet 7, 1919. 7/29/49 Approved unanimously. Memorandum dated July 22, 1949, from Mr. Thomas, Director t the Division of Research and Statistics, recommending that Miss lei lle L. Quarforth, leave clerk in the Division of Personnel AdmiAistration, be transferred to the Division of Research and hot istics as a clerk-stenographer, with no change in her present bea c salary of $2,498.28 per annum, effective as of the date upon Ithich she enters upon the performance of her new duties. The memo- also stated that the Division of Personnel Administration 1148 aereeable to this transfer. Approved unanimously. Memorandum dated July 28, 1949, from Mr. Bethea, Director the Division of Administrative Services, recommending the ap- klillttent of Mrs. Geraldine M. Venable as a cafeteria helper in t11" tIvision on a temporary basis for a period of two months, with 1414ic salarY at the rate of $2,020 per annum, effective as of the clItte „ -1441 which she enters upon the performance of her duties after 41,1 4 Passed the usual physical examination. Approved unanimously. Letter to the Presidents of all Federal Reserve Banks, readfollows: lettA"Replies of the Federal Reserve Banks to the Board's -r of February 23, 1949, indicate clearly that they 1-W in favor of liberalizing the rules under which Federal 0,Berve Banks waive penalties for deficiencies in reserves 4 e c, er banks. A summary of the Banks' comments is 1311 7/29/49 -6- "It will be noted that the only proposals about which there appear to be any substantial differences of opinion are those which would authorize Federal Reserve Banks to waive, under certain conditions, penalties for reserve deficiencies which were offset by excess reserves. Two important questions appear to be raised, namely: (1) whether the reserve computation period (for central reserve and reserve city banks only, or for country banks as well) should be doubled, either directly or indirectly; (2) whether the Federal Reserve System should be concerned wlth day-to-day fluctuations in a member bank's reserve balances so long as its average reserve balances over the prescribed reserve computation period are sufficient. "A majority of the Banks apparently would be willing to waive, without any conditions, a penalty for a reserve deficiency in a given period if the deficiency was offset by "cess reserves in the immediately following period. This would amount to practically the same thing as doubling the length of the reserve computation period--at least for banks nich, as a matter of policy, maintain day-to-day reserve loalances close to or below requirements, and at the end of the Period make adjustments to bring average reserve balances uP to average reserve requirements. In this connection, it yill be observed from the comments that the Reserve Banks 4PPear to be equally divided on the question of doubling airectly the weekly reserve computation period of central reIrrve and reserve city banks, also that all but one of the enks are opposed to lengthening the semimonthly reserve cornperiod of country banks. If the period were lengthen : il ed only for central reserve and reserve city banks, however, ' b might raise some question of discrimination against country ellks, even though they already operate under a much longer Ir erioa and do not have as wide fluctuations in deposits and eserves as central reserve and reserve city banks. One Reserve Bank is strongly opposed to a provision for s setting a reserve deficiency in one period by excess re5inn the next period -unless coupled with some condition eeich would discourage wide day-to-day fluctuations in rees. Another Reserve Bank, on the contrary, feels that dayh_claY fluctuations or deficiencies in a bank's reserves should ;n subject a member bank to criticism so long as the necessary jerages are maintained. In the Board's opinion, the law conr ,1Plates that member banks should make reasonable efforts to trla and maintain' the prescribed reserve balances from day day: making allowance, of course, for unforeseen fluctuations 131 7/29/49 'in deposits and reserves, even though penalties are assessed on daily average deficiencies over prescribed periods and there is no longer a prohibition against the making of new loans and the payment of dividends while reserves are deficient "In view of the differences of opinion as to the conditions, if any, under which penalties might be waived on reserve deficiencies in one period which are offset by excess reserves in another period, the Board has deferred action on all of the proposals pending receipt of further views from the Federal Reserve Banks. For convenient reference in commenting on the questions raised, enclosed is a new draft of Proposed revised instructions for waiver of deficient reserve Penalties prepared in the light of the comments of the Federal Reserve Banks. "It is assumed that provisions A, B, D, and E in the new draft would be acceptable to all Federal Reserve Banks, and the Beard is willing to approve them. "Provision C pertains to the waiver of penalties which are offset by excess reserves, and two alternatives for this Provision are presented in the new draft. The Board has not acted upon these alternative provisions, but it is inclined owards No. 2, which would permit Federal Reserve Banks to /4e.ive a penalty when a member bank (central reserve, reserve citY, or country bank) was deficient in reserves during a ven reserve computation period, to the extent that the deficiency was offset by excess reserves during the immediately ?I-lowing reserve computation period, provided that the defire,lencY did not exceed two per cent of the member bank's rereserves. In order to discourage wide day-to-day ' atUctuations in reserve balances, perhaps there should be an duditional proviso, that a penalty could not be waived if a tneiency exceeded 10 per cent of the bank's required re,'rves on any day during the given reserve computation period ;r e the next period. Since, however, wide fluctuations in reb ryes take place for the most part at the big money market ks, the Board would like to have your views as to whether the 10 per cent limitation on daily deficiencies ;71Tuld be made uniformly applicable to all member banks in tol districts, or whether each Federal Reserve Bank, subject sh the 2 per cent limitation contained in alternative No. 2, ij uld deal with such situations in its own district by waivth !or not waiving penalties in its discretion according to circumstances. The Board concurs in the views expressed by some of the p tr 1313 71/29/49 "Federal Reserve Banks that, if the proposed amended instructions for waiver of penalties are adopted, the terms of provision C should be brought to the attention of all member banks. "If you should feel that this matter should be referred to the Presidents' Conference, the Board will, of course, be glad to defer action until the Conference has expressed its Approved unanimously. Letter prepared in accordance with action taken at the meeting °t the Board on June 24, 1949, to Mr. McLarin, President of the Federcti Reserve Bank of Atlanta, reading as follows: "This refers to your letter of May 30, 1949, requesting that the Board approve a maximum of $30,000 for loans to emPloYees. You state that your Bank has for many years been "king loans to employees, using for the purpose funds belongto employees' clubs, aggregating now approximately $22,300. I.140 years ago the Board authorized your Bank to use, in addil°n, $1),000 of its own funds for loans to employees. "Your request raises the fundamental question whether 10ezs by a , Federal Reserve Bank to its employees should be -Limited to necessitous cases of an urgent character or whether !Federal Reserve Bank should go beyond this scope. The Board Ieels that a Federal Reserve Bank should not enter into cornfor loans with other legitimate lenders and that t ormally employees should finance their needs from other repulelle sources. It believes that loans from the employees' 0".4 fund advanced by the Federal Reserve Bank should be made s41-Y in necessitous cases of an urgent character to help an , 41Ployee out of an emergency and where accommodations can not ! ou obtained elsewhere. As you know, the Board in its letter March 12, 1948 expressed the opinion, to which it cons:L.411e8 to subscribe, that employees' loan funds at Federal Reel. "Banks should be kept within reasonably low limits. lut On the basis of experience at the other Federal Reserve pinks) except New York where they have a larger number of emad°Yees, an employees' loan fund of S15,000 or less has been oreqUate to take care of all necessitous loans for the welfare ell1P1oyees. Accordingly, the Board would not look with favor P°4 Your Bank advancing additional funds to increase the 314 employees loan fund beyond the *151000 which it is now authorized to provide. It is assumed that you have given c°481deration to the establishment of a credit union for the Purpose of taking care of the credit needs of employees. Approved unanimously.
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