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To: Members of the Board From: Office of the Secretary Attached is a copy of the minutes of the meeting of the Board of Governors of the Federal Reserve System with the Presidents Of the Federal Reserve Banks held on June 16, 1959. 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 vial be appreciated if you will advise the Secretary's Office. Other!Ise, if you were present at the meeting, please initial in column A velow to indicate that you approve the minutes. If you were not Present, please initial in column B below to indicate that you have seen the minutes. Chm. Martin Gov, Szymczak Gov. Mills Gov. Robertson Cov. Balderston Gov. Shepardson Gov. King A meeting of the Board of Governors of the Federal Reserve System with ROorn JUrie the Presidents of the Federal Reserve Banks was held in the Board of the Federal Reserve Building in Washington, D. C., on Tuesday, 16, 1959, at 11:45 a.m. PRESENT: Mr. Mr. Mr. Mr. Szymczak, Acting Chairman Robertson Shepardson King Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Messrs. Erickson, Hayes, Bopp, Fulton, Leach, Bryan, Allen, Johns, Deming, Leedy, Irons, and Mangels, Presidents of the Federal Reserve Banks of Boston, New York,Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco, respectively Mr. Nye, Secretary of the Conference of Presidents of the Federal Reserve Banks Mr. Lapkin, Secretary-designate of the Conference of Presidents Prior to this meeting there had been distributed to the members Of to the Board a memorandum of the topics that the Presidents would like discuss. The topics, the statement of the Presidents with respect to and the discussion at this meeting were as follows: of reimbursement for handling postal money orders. The Conference voted to approve the recommendation of the Committee on Collections and Accounting that the Federal Reserve Banks adopt a revised reimbursement rate of $2.20 per thousand money orders processed during the period July 1, 1959 through June 3 i 2) 1960, and that when such rate is presented to the Post 4',,fice Department the Federal Reserve Banks reserve the right review and redetermine the rate of reimbursement at any tune during the fiscal year in the event of any substantial in operations or in the factors on which the rate is basedd. 6/16/59 -2- President Mangels commented briefly on the matter and stated that the usual letter would be sent to the Post Office Department with resPect to the proposed rate of reimbursement. 2. Furnishing of wrapped coin by the Federal Reserve Banks. The Conference accepted with appreciation the report of the Ad Hoc Committee on Wrapped Coin Costs dated May 29, 1959. In order to insure consonance of the recommended formula for computing coin-wrapping costs with current System cost accounting practices, the Conference agreed to refer the matter to the Subcommittee on Accounting for review. Pending receipt of a report from that Subcommittee, the Presidents deferred their decision regarding the policy question of placing charges for the service on a more nearly uniform basis and securing reimbursement for substantially the costs involved. After reviewing the reasons why the Presidents' Conference had 'ecided to refer the report of May 29, 1959, to the Subcommittee on Ace°114ting for study of the recommended formula for computing coincosts, President Fulton said that upon receipt of a report rl '°171 the S ubcommittee the Conference would consider the matter further "cl Present its views to the Board. In this connection President Hayes noted that the Board's letter "?ebrliary 1959, indicated a willingness to leave the question '"her to engage "the in in the coin-wrapping function to the determination dividual Reserve Banks but requested the development of a 111114'°1711 aPProach to making charges, if wrapped coin was furnished, %?ith a View to securing reimbursement for substantially the costs trwolved. Mr. Hayes pointed out that the New York Bank had for many 4t1"B 11°11 °1/ed. the practice of furnishing a limited amount of wrapped 6/16/59 -3- eoin to country banks without charge and said that the Board's letter therefore presented a problem. The Bank would like to be able to cc)ntinue its present service to the country banks but was not in a P°Bition to undertake to supply the New York City banks because of the additional facilities that would be required. In response to a question regarding the need to continue the 8srvi- to the country banks, Mr. Hayes said those banks had become acelist°111ed to the practice over a period of years and a bank relations Droblem vould arise from a decision to terminate it. He had no great for 0 the coin -wrapping service as such, but if other Reserve Banks c°ntinued to wrap coin he felt that the New York Bank might be placed in an emb arrassing position by stopping the limited service to country banks° He also felt that it would be difficult to institute a charge at this Point. 3. Rei mbursement for handling Federal tax depositary receipts. itle Conference T approved the recommendation of the Committee on fiscal Agency Operations, based on a study of actual costs for the current fiscal year to date, to reduce the reimbursement rate from 12.24 cents per receipt to 12 cents per receipt retroactive to July 1, 1958. Mr. Leach pointed out that the reduced rate will result in a saving to the Treasury of approximately $18,000 for fiscal 1959. The Conference also DP I isoved the Committee's recommendation that tentative rates 1, 4-2.17 cents for fiscal 1960 and 12.27 cents for fiscal 1961 he s ubmitted to the Treasury. Z eoke ripresident Leach discussed the procedure followed, in respect to 1,11reerneseal agency operations, of reaching agreement on a rate of reimnt o11 the basis of an estimated unit cost and then making 6/16/59 -4adjustment, if necessary, in the light of experience in order that the Reserve Banks, as a group, might recover approximately their actual costs. He also commented briefly on the principal reason for the favorable experience in handling Federal tax depositary receipts during the fiscal year 1959 and on the reasons for the anticipated higher unit costs in the fiscal years 1960 and 1961. No objection being indicated, it was understood that the matter l'r°11-1(1 be taken up with the Treasury on the basis proposed by the President's Conference. 4. ! eimbursement for verification and destruction of unfit United otates currency. The Committee on Fiscal Agency Operations rec°mmended and theConference approved rates of reimbursement , 137,1 ;_1,000 pieces of money destroyed of 28.9 cents for fiscal 4- 0,0 and 29.4 cents for fiscal 1961. regard to the suggestions set forth in Mr. Heffelfinger s letter With Of June 1, 1959, to Mr. Leach and Mr. Baird's letter of ,T.,1111e ly 1959, to Chairman Martin, the Presidents agreed that the ;ederal Reserve Banks should be represented at a suggested oefderal Reserve-Treasury meeting (to explore certain aspects ,0 the v erification and destruction operations) by the Conference mmittee on Fiscal Agency Operations as presently constituted, arnelY, Mr. Leach, Mr. Fulton, and Mr. Mangels. With r eference to discussion at the joint meeting of the Board the Presidents on March 24, 1959, President Leach noted that the 14311rY had thereafter agreed to an adjusted reimbursement rate of 28.8 cents per thousand pieces of money destroyed retroactive to 1) lo58 He pointed out that the rates of reimbursement approved the Cs3ntererice for the fiscal years 1960 and 1961 likewise were l'Arcled as subject to adjustment in the light of actual operations. 6/16/59 There being no objection, it was understood that the matter ' l7°111d be taken up with the Treasury on the basis of the action taken by the Presidents. There followed a brief discussion of the letters from the Treasury, Ile referred to in the statement of the Presidents' Conference, and of the Proposal that representatives of the Board and the Federal Reserve 13811ks meet jointly with Treasury representatives for consideration of the questions raised in those letters. Reference was made to the survey hej —66 conducted currently by the Board's Division of Bank Operations e°ncerning variations in the verification and destruction procedures r°11°17ed by the respective Reserve Banks and it was stated that in due c°111'8e the Presidents would be advised of the representation designated by the Board for participation in the Treasury-Federal Reserve meeting, 1411ch /43uld take place after the results of the survey by the Division °r OPerations were available. The view was expressed in the course of discussion that it 131)eared d oubtful at this point whether the Treasury would be receptive t° knY plan whereby the Reserve Banks would be divested of the currency X1 an destruction function and that the Treasury-Federal in eeting Probably would have to be directed principally toward et.s.Illishing the need for such safeguards as the System might consider 41313113riate to minimize the dangers inherent in the verification and tl'ileti0 11 operations. In this connection Mr. Hayes commented that 6/ 16/59 -68°rne of the Banks felt more strongly than others regarding the desirability of terminating these operations and that he, for one, did not feel so strongly about the matter. 5. Practices of Federal Reserve Banks relating to the audit function. Pursuant to the Board's letter request of April 10, 1959, the Conference reviewed the practices at each of the Federal Reserve Banks relating to certain aspects of the audit function. It was the sense of the meeting that Chairman Erickson summarize the findings of such review at the joint meeting with the Board of Governors on June 16. Chairman Erickson noted that the Board's letter of April 10, 1959, had requested discussion by the Presidents' Conference of (1) the question of attendance by one or more senior officers at some of the 10 "eserve Banks at meetings of the directors' Audit Committee, and (2) the somewhat related question of salary administration as it 15erta148 to those engaged in the audit function. With respect to the 8ec011c1 of those questions, he said that discussion at the Conference teeting 14 yesterday disclosed that, although there were some variations, general the salary of the General Auditor was reviewed with the Cilalzraan of the Board of Directors and with the top officers of the tank before being considered by the Board of Directors. The estab-merit Of salaries for others on the audit staff was handled in i'luch the same manner as the fixing of salaries for personnel in the Othel% dePartments of the Bank, with consideration given to the general l'el'El°111.1e1 ad ministration policies of the institution. Ett With regard to the first question, Chairman Erickson said that eight °f the Banks it was not the practice for operating officers 6 / 16/59 -7tc attend meetings of the Audit Committee. At the Boston Bank it was the Practice for the President or First Vice President to attend, but they took no active part in the meeting except to answer questions on operational matters with which they were particularly familiar. Neither t the Boston Bank nor at any other Bank following a similar procedure vas there any intent to impede the General Auditor in the performance °this duties, and the latter had the privilege at any time of requesting a in —411g with the Audit Committee from which the operating officers youlA , ' 4 be excluded. In summary, Mr. Erickson said, it was the view of the c oaference that the matter should be left to the discretion of each Reserve Bank, with the understanding that such procedure as was worked °Lit should have the approval of the Chairman of the Board, the Chairman the Audit Committee, and the General Auditor. Governor Shepardson commented that the Board's concern had to cl° with assuring the freedom and independence of the General Auditor, recogni zing at the same time that the General Auditor and his staff 111118t be regarded as a part of the personnel organization of the Reserve tam, T° Put the matter another way, the Board was concerned about 1511°1114114g such safeguards as would assure the freedom of the General ktzlitor and his staff to perform their assigned functions for the toaba Of Directors. eraor Szymczak commented regarding the situation that preen the Chai and Federal Reserve Agent was a full-time 6/16/59 -8- c)fricer at the Reserve Bank and the audit staff was responsible directlY to that officer, and through him to the Board of Directors. 14 view of the changed organizational setup, he said, and in the light Of certain questions that had arisen in the course of reviewing the 131'cicedures followed by the Board's examining staff in making examinatt°118 of the Federal Reserve Banks, the Board decided that it would ltle to have a discussion with the Presidents, and later with the Chairrren of the Reserve Banks, for the purpose of making sure that the General Auditor had full latitude to report to the directors his rindi ngs concerning the operations of the Bank. Along these lines, the B c)ara also was interested in having a report from the Presidents c°4cerning the matter of salary administration as it pertained to the 84:lit function because of the relationship of that matter to the problem llticler d iscussion. In essence, and having in mind practical considerations itwolv ea in the Reserve Bank organizational setup, the question was %Iheth r „ eGeneral Auditor continued to have the relationship with the di rectors that he enjoyed when his staff was directly responsible to the rull-time Chairman and Federal Reserve Agent. Governor Robertson commented on the necessity for having the atEttils or he t General Auditor clearly defined as a safeguard against ittel lflS that might develop from scrutiny of the System's audit a4'1:13/1-ti- by outside parties and also on the necessity for being ilre that the relationships indicated on paper were actually observed 14 1)r4ctioe. 6/16/59 -9- President Hayes agreed that it was highly important for the Genera" Auditor to be assured of free access to the Chairman of the 13°ara and the Board of Directors, and he added that this was the case at :present. President Johns stated that the St. Louis Bank was one of those l'here it was the practice for either the President or the First Vice 1)x'es1dent to attend meetings of the Audit Committee, which were held it Prior to the meetings of the Board of Directors. Although this vas felt to provide a convenient arrangement and in his judgment did riot 14 anY way impair the freedom of the General Auditor to levy iticiems, nevertheless he did not attach great weight to formal 8"I'rangements. Of more concern to him were what he referred to as the realities of the situation, and the key to the problem was to Obtain a General Auditor who could not be intimidated. If the Gerieral Auditor was a person who could be intimidated, he doubted Ilbethar the proper selection had been made, and if the President /1°1-tic' attempt intimidation, there was a question whether the right 11144 vas holding that office. In further comments, made in reply to a question, Mr. Johns discussed briefly measures that might assure the se lection and retention of a person properly qualified for 15exTormance of the General Auditor's functions. The discussion concluded with comments by President Leach reciara. 4.4g the importance of following procedures at a Reserve Bank 6/16/59 -10With giving recognition to the status of the General Auditor 141:thin the organization. He went on to illustrate his point by relating that when lie the selection of a new General Auditor was required at his Bank recently, the Audit Committee of directors gave consideration to certain individuals and thereafter made a recommendation to the Board ipirectors with regard to the individual selected and his salary. These procedures were duly recorded in the minutes. 6. rebate of unearned interest on prepaid borrowings from a I.2pserve Bank after a rate change. The Conference had before It the Board-E s letter of May 187 1959, relating to this topic. The Presidents, after some discussion, voted unanimously to reaffirm the position stated at the special session of January 6) 1959, that there was no need for uniformity and that each Reserve Bank should determine its own rebate policy. It was agreed that Mr. Leedy would present to the joint meeting the Conference views regarding the Board's suggested policy of !harging interest at the discount rate or rates prevailing Ilring the period of the borrowing. ' President Leedy, at whose request the question of the rebate of Interest on prepaid borrowings originally came before the Presidents' Cotterence for review, stated that in essence the problem might be c°48idered then a relatively minor matter of an administrative nature. He recalled that for many years the Reserve Banks, with one exception, 114dbeen adhering to a ruling of the Governors' Conference which provided 14 effect that if a member bank prepaid a borrowing after a reduction in the cliscount rate, a rebate would be made on the basis of the new rate. 110'v/ever, in the event of an increase in the discount rate the rebate Ve411111a4e at the old rate. This procedure, he said, did not appear to 6/16/59 -11- have g• iven rise to any great amount of difficulty, although occasionally 411410ber bank would complain. Primarily because the outstanding ruling 1184 not been reviewed in many years, the Kansas City Bank requested discussion of the matter, and it developed to be the majority view of the Presidents' Conference that the long-established rule was appropriate 441 should be continued. It was thought that the matter was essentially 614 administrative one to be handled in the discretion of each Reserve /341 .k and that uniformity was not necessary. This would enable the l'illineaPais Bank, and any others that so desired, to follow the Minne41Pcais Practice of rebating at the original rate despite a change in the discount rate. President Leedy then turned to the Board's letter of May 18, 1959, which, while it would not require immediate uniformity of practice, stlgeftted that the problem be resolved in the future by instituting an allt°1114tic change in the rate of interest on outstanding loans whenever the discount rate was raised or lowered. The Conference, Mr. Leedy 4114) Ve4 Uni0us in looking with disfavor upon this plan. First, the P• residents had in mind the long-established principle that the terms of the contract between a lender and borrower fix both the N4tAtr1ty of the loan and the cost of the loan for the period to 1°14turity. Violation of that principle, it was felt, would create l'e41111• °re Problems in the area of bank relations than were likely to through adherence to the current procedures. Second, adoption 6 / 1 6/59 -12the plan suggested by the Board would result in additional work for Reserve Banks by requiring them to recompute interest for the untheAre Nd portion of sll loans outstanding on the date of change in the cliscount rate. Under the present procedures, it was not felt that 141(111e advantage of the situation was being taken by the member banks. While there might be some instances of borrowing in anticipation of a l'ate change, this could be dealt with through discount window administratiOn and keeping borrowings on a short-term basis. In summary, it %las the view of the Presidents that adoption of the suggested plan 111°11.14 be decidedly to the disadvantage of the Reserve Banks and that the Problems arising occasionally under the current procedures would be ,.... uunor in comparison with those likely to come up under the Board's Droposal. In reply to a question, President Leedy said that adoption of the mi 44eapolis practice would eliminate the occasional complaints to VhichL ne had referred. However, it was contended by those Presidents looki th disfavor on the Minneapolis plan that it would encourage eillber bank --s) following a discount rate reduction, to repay their 1 °448 b r, ' °--ow again, and thus obtain the benefit of the rate reduction. Pl'esident Allen commented that at Banks where the general practice 1.re.8 rola °wed of limiting borrowings to a 15-day or shorter basis the Tlestio4 ' 40111it tended to be academic. If a problem should ever arise, the 1".°1ved would be so small that a serious complaint was unlikely. k 6/16/69 -13- In reply to an inquiry, he stated that country banks, like city banks in the Seventh District, generally borrowed on a 15-day basis except 1411e4 agricultural paper was discounted. He recognized that longer- tenn borrowing might be more common in the Ninth and Tenth Districts. President Deming agreed that the question tended to be academic In character, but he added that occasionally a prepayment was made and the Purpose was not to take advantage of a rate change. If that were the Purpose, the matter could be policed by the Reserve Bank, and in the circumstances he saw no reason to follow a rebate policy that give rise to occasional questions on the part of member banks. Therefore, he would like to continue the long-standing Minneapolis 1)1lactice. President Leedy indicated that the Kansas City Bank also contemplated instituting the Minneapolis plan, if that were permitted 484 illatter of general System policy. Messrs. Hayes and Allen then summarized the position favored by the zajority of the Presidents, stating that the rebate policy followed by mo st of the Reserve Banks tended to make arlministration of Regulatio, A easier, created no public relations problem, and made it a 14 the mOre difficult for member banks to takP advantage of a change discount rate. 7. Aa tional items of information arising out of current °nference meeting. In addition to the foregoing matters, he following items of possible interest to the Board were considered by the Conference. They are reported herein 's a matter of information. Z 6/16/59 a, The Conference approved the report of the Subcommittee on Collections dated May 19, 1959, with respect to the following: (1) Language revisions in operating letters and circulars of the Federal Reserve Banks, effective July 1, 1959, to reflect the substitution of the immediate credit routing symbol in place of the symbol "000" on officers' checks and expense checks, and the elimination of Federal Reserve exchange drafts; (2) (3) Recommendation that the Subcommittee on Collections be granted permission to make a comprehensive review of noncash operating practices and procedures of the Federal Reserve Banks and branches to determine whether changes in the uniform language of the noncash operating circulars seem desirable; and Recommendation that the Subcommittee on Collections be authorized to develop a program, consistent with any Program pursued by the ABA, aimed at the elimination of so-called "headache" checks, i.e., items not readily adaptable to processing by electronic equipment. b. The Conference: (1) Accepted the report of the Subcommittee on Machine and Tabulating Equipment dated April 30, 1959, on Utilization of Synchro-Monroe Card Punch Verifier for Certain Tabulating Operations; (2) Accepted the report of the Subcommittee on Machine and Tabulating Equipment dated June 2, 1959, on Meeting of Planning and Punched Card Personnel of the Federal Reserve Banks held at the Federal Reserve Bank of Kansas City, May 4-6, 1959; and (3) Concurred in the recommendation of the Committee on Miscellaneous Operations to change the name of the Subcommittee on Machine and Tabulating Equipment to the Subcommittee on Systems and Procedures. c. The Presidents considered letter report of the Subcommittee on z_c-Lectronics dated May 13, 1959, and accepted the following items tls presented therein: (1) • Promotion of use of common machine language by commercial banks; 6/16/59 -15- (2) Installation of encoding devices at Federal Reserve Banks not having pilot installations; and (3) Status of contract negotiations with equipment manufacturers. The Conference deferred consideration of the Subcommittee's proposals relating to the preprinting plans of Federal Reserve Banks until the next special session of the Conference. The Conference concurred in the conclusion set forth in letter report of the Subcommittee on Fiscal Agency Operations, dated May 22, 1959, that the practice with regard to signature reand. signature verification on Fiscal Agency documents received from member and nonmember banks should be left to the discretion of each Reserve Bank. e, The Chairman of the Committee on Research and Statistics reported that the program for collection of certain statistics as an additional phase of the Federal Funds study was scheduled to commence September 1, 1959. Mr. Hayes expressed the hope that the September 1 date could be deferred in the event that the forthcoming Treasury-Federal Reserve study of the Government securities market suggested changes in the dealer report forms. r. g. The Committee on Research and Statistics reported that it had again discussed the retail trade statistics program. The Committee believed, and the Conference concurred, that the Committee should confer with the technical staffs of the Reserve Banks and he Board with a view to (1) incorporating technical improvements la the retail trade statistics now being collected, and (2) eliminating unneeded items from the department store series. The Presidents unanimously authorized the Chairman of the Committee on Research and Statistics, from time to time, to appoint ad hoc committees to assist the Committee in matters falling hin the purview of the Committee. h, The Conference took the following action with respect to items on mm 1 for its consideration by the Special Committee 7 17 1:::: Operations: (1) Accepted letter report of the Chairman of the Subcommittee on Emergency Cash Operations dated June 5, 1959, on the question of pre-attack storage of currency with Cash Agent banks, and referred the report to the Board of Governors for its information and guidance; 6/16/59 —16— (2) Deferred until the next special session of the Conference final consideration of joint report of the Insurance Committee and the Subcommittee of Counsel on Emergency Operations dated May 19, 1959, concerning extent and method of indemnification of Cash Agent banks; and (3) Concurred in Mr. Hayes' suggestion that, as proposed by Governor Robertson, a member of the Board's staff bring the Presidents up to date regarding plans for Reserve Bank participation in Operation Alert 1959, following the July 7 meeting of the Open Market Committee. is The Presidents accepted the report of the Nominating Committee and unanimously. elected Mr. johns as Chairman and Mr. Bryan as Vice Chairman of the Conference, with terms of office to become effective following the close of the Conference meeting of June 15, 1959. The Conference then approved the appointment Of David Lapkin, Federal Reserve Bank of St. Louis, as Secretary, effective as of the aforementioned date. These items were reviewed by Chairman Erickson, but there was no -qssion with respect to them. The meeting then adjourned. ./\ Secretary
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