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ALle:it) A meeting of the Board of Governors of the Federal Reserve Stetenl. was held in Washington on Wednesday, June 17, 1942, at 11:00 PRESENT: Mr. Mr. Mr. Mr. Eccles, Chairman Szymczak Draper Evans Mr. Mr. Mr. Mr. Morrill, Secretary Betheal Assistant Secretary Carpenter, Assistant Secretary Clayton, Assistant to the Chairman The action stated with respect to each of the matters hereinreferred to was taken by the Board: The minutes of the meeting of the Board of Governors of the ?ed. ,re3 Reserve System held on June 16, 1942, were approved unani- 4441-64. Memorandum dated June 16, 1942, from Mr. Goldenweiser, Diof the Division of Research and Statistics, submitting the to atlon of Raymond Van Brakle as a library aid in that Division, bee', 'cute effective as of the close of business on June 28, 1942, 41d rd, -'commending that the resignation be accepted as of that date. The resignation was accepted. Letter to Mr. Walden, First Vice President of the Federal e B of Richmond, reading as follows: m Ihe Board of Governors approves the changes h perso in t-e nne1classification plan of the Baltimore I -2"Branch as requested in your letter of June 12, 1942." Approved unanimously. Letter to the board of directors of the "State Bank of East 14441, "e East Moline, Illinois, stating that, subject to conditions fl 141110ership numbered 1 to 3 contained in the Board's Regulation ah,4 the follov;ing special condition, the Board approves the balto 8 application for membership in the Federal Reserve System and 0_ 4.or the appropriate amount of stock in the Federal Reserve Bank o1 C'".-., "4. Prior to admission to membership, such bank, if it has not already done so, shall charge off or Otherwise eliminate estimated losses of $3,269 as shown in the report of examination of such bank as of May 4, 1942, made by an examiner for the Federal Reserve Bank of Chicago." Approved unanimously, for transmission through the Federal Reserve Bank of Chicago. Letter to Mr. McRae, Chief Examiner of the Federal Reserve ktlk of Boston, reading as follows: mi, "The Merrill Trust Company, Bangor, Maine, subit'ted Schedule 0 as of April 4, 1942, indicating that had two affiliates, Maine Real Estate Title Comliaf panf and The Merrill Mortgage Company, both of Bangor, 220fle- Attached to Schedule 0 was a copy of form F.R. T„ c'n which the following statement appeared: 'Thi7i. t Company has no affiliate or holding company af 11am e within the terms of the Banking Act of 1933, as Both forms were signed by George D. Everett, TrZ,Ided.' ...surer of the trust company. "The report of examination of the Merrill Mortgage j 6/17/42 "Company as of February 24, 1942, indicated that the mortgage company had become an affiliate of the trust Company and that it was indebted to the trust company 111 the amount of approximately 375,OOO, in which case the report of the affiliate should have been submitted and published at the last call date. The publication !t this time of the affiliate reports as of past call sates will apparently serve no useful purpose and the oard will not insist upon their publication. If, however, the affiliation exists at the time of the next call for condition reports, the report of the affiliate sh?uld be submitted and published unless waived by the waiver provisions printed on form F.R. 220b. The files ow that the Maine Real Estate Title Company is in .„?I'ITal liquidation and accordingly a report of this af-Illiate is not required." p Approved unanimously. Letter to Mr. Woolley, Vice President and Secretary of the ' 1 41 Reserve Bank of Kansas City, reading as follows: lir "This refers to your letter of April 22, 1942, to Paulger, and prior correspondence, with respect to .g'_1:ge holdings of special tax bills of the City of Kansas Kansas, by The Riverview State Bank, Kansas City, Kansas. th "It is understood that you and Mr. Leedy are of i_e oon that the tax bills are not 'securities' with' 042 the meaning of section 5136 of the Revised Statutes United States, and that, accordingly, purchases or t the the tax bills by a State member bank are subject to restrictions by the Federal law. However, while we ste°gnize the arguments in support of your position, ifr?Ilg arguments to the contrary may be presented; and, se 6fsle tax bills are 'securities' within the meaning of inetl°n 5136, a State member bank cannot purchase them ivi„anY amount unless they are 'investment securities' ti e-eh comply with the requirements of section 54.36 and pl. Comptroller's Investment Securities Regulation. Com lance with these requirements may be questioned on the g -4n grounds that the tax bills are not 'obligations evidencing indebtedness *** in the form of bonds, notes, and/or debentures', that they do not comply with the requirements °f the Comptroller's Regulation with respect to marketability, and that their investment characteristics are distinctly or predominately speculative. Finally, even thoirst the tax bills are deemed to be eligible investment securities, a State member bank cannot purchase them if its holdings of such tax bills will exceed 10% of its caPital and surplus, unless, as you argue in your letter, each tax bill must be considered separately in applying this limitation. wile understand that you are satisfied not only that e Riverview State Bank is complying with the law but : ,e180 that its holdings of the tax bills, while criticised y you as a concentration in substandard assets, do not ;lir constitute a particularly serious hazard to the bank. „pli this understanding, and in view of other circumstances 6his case, we believe that, while the eligibility of th tie tax bills for purchase by a State member bank is ques,Z.?nable„ it is preferable for us not to undertake to ir upon the numerous doubtful legal questions at this b Te in connection with this isolated case. However, we e-Lieve that you should discuss this matter with the bank's gement in order that it will be fully cognizant of minae legal questions involved and that, in view of these estions and your repeated criticism of the bank's holdOf such tax bills on other grounds, curtailment of vurchases of the tax bills by the bank is in order. 1 , "As suggested in Mr. Paulger's letter of April 18, c142, in reports of condition the tax bills should be incared in asset item 3, 'Obligations of States and politisb,_eubdivisions'; and in reports of examinations, they ' 41-14 be treated as securities and listed as 'State, .̀°1-111tY and municipal obligations' in the securities sche dules." Z Approved unanimously. Chairman Eccles stated that in accordance with the action taken 4t' the the -‘) meeting of the Board on June 12, 1942, he submitted copies of tlIr°13°eed.1etter to banks and other financing institutions, relating he Use of credit in connection with the accumulation of inventories 6/17/42 -5- q consumer goods, to representatives of the Treasury, the Department Of Co mmerce, the War Production Board, the Office of Price Administratic/n) and the Securities and Exchange Commission, and to Mr. Crawley, Chal, 'man of the Federal Deposit Insurance Corporation; that certain ellage8 in the phraseology of the letter had been suggested; and that theletter had been approved in the following form by all of these ageteies. a, "Recently a meeting was held for the purpose of lseussing the use of credit in connection with the acnrmalation of inventories of consumer goods. Among those Present were the following: Mr. Morgenthau, the SecremarY of the Treasury; Mr. Jones, the Secretary of ComBeree; Mr. Nelson, the Chairman of the War Production 0?,ard; Mr. Henderson, the Administrator of the Office tit Price Administration; Mr. Purcell, the Chairman of he S ecurities and Exchange Cormnission; and myself. "There was complete agreement that in the present 4!.Luation, when all possible production must be diverted military purposes, accumulation of inventories of s,:rilian consumer goods should be discouraged. We are tifs that it is clear to you why this is desirable from vetistandpoint of avoiding inflationary developments as rleed as of endeavoring to assure fair treatment of the 481 of all dealers and all consumers. 'Various ways by which this purpose might be accomshed were canvassed. It was agreed that, whether or e4°ther steps may be necessary under the authority of 1 poltslation or executive orders, it is of the utmost imor'ance to enlist your voluntary cooperation and that To Your customers in helping to achieve this objective. his end, it is hoped that you will use your influence or Your community to discourage all unnecessary purchases evZrilian goods and that you will scrutinize carefully a gi 7 application which might enable a borrower to carry 'eater supply of goods than his minimum requirements. aituanis general credit policy would not apply in special pilrp2:1°ns such as the need for supplying fuel for heating "8 next winter, or accommodating manufacturers and Zt 6/17/42 —6- 7dealers having stocks that must be held because of freezing or rationing orders. "The Board of Governors of the Federal Reserve System is writing this letter to you at the request of the group mentioned at the beginning. You have already rendered and are rendering great service in connection with the financing of the war program, and this additional responsibility is ( .) . 1 12s which it is believed you will be glad to undertake in 'I's general public interest. We feel sure that we can rely uPon your cooperation." The letter was approved unanimously, With the understanding that it would be sent promptly, that it would be given to the press for publication in tomorrow morning's newspapers, and that a copy thereof would be wired to all of the Federal Reserve Banks and their Branches. or Bos Letter to Mr. Hult, Vice President of the Federal Reserve Bank ton, reading as follows: refer to the letter dated May 12, 1942, from the L,..e r " hull Insulation Co., Inc., which you enclosed Woodhull with letter of June 8, 1942. This letter asks that ' or mamim Xir maturity under Regulation W for instalment tt edit financing of the application of rock wool insula,ILon be set at some period longer than the 12 months now 4.'n effect. pu "Requests for special treatment of credit for this ti.;Pose have been brought to our attention from time to th: ever since the regulation went into effect. One of ' thatarguments presented has always been the fuel saving can be achieved by insulation. This argument has merat but it has always been considered that the arguourtl,te against relaxation for this particular activity weighed those in its favor. "Differential treatment of some kind has been reat least for all articles in the Group C category, or or some of them other than insulation, and while there to le seems to be little prospect of any immediate action that effect the point which your correspondent makes be kept in mind in connection with the more general 14estion.ft Approved unanimously. I 236 6/17/42 -7Letter to Mr. Dillard, Vice President of the Federal Reserve 1)4at of Chicago, reading as follows: "In your letter of June 6, 1942, you asked whether ?. credit union, to which a member, who has been inducted 1:1t0 the armed forces, owes a $200 balance on an automo'lle loan made prior to his induction, may sell the automobile for such member for $600 and finance the entire purchase price for the new purchaser without regard to the requirements of Regulation V. not"It is the Board's view that section 10(a)(1) would permit the unregulated financing of the automobile ;_Lor the new purchaser, since this clearly would be action 0Y the Registrant 'with respect to' the obligation of the 4g4 purchaser, rather than the obligation of the credit , 11111°n member. On several occasions the Board has stated :hat an original extension of credit in similar circum4,tances to a subsequent purchaser would not be exempted 'rom.the regulation by section 10(a)(2). Under either eetlens 10(a)(1) or 10(a)(2), the fact that the resale ! a new purchaser follows what you refer to as a bona 18?de collection effort, rather than an ordinary 'reposses11°11' of the automobile would not, in the usual case, ead to a different result. In addition, it should be noted that the opposite result would lead to an anomalous !Zripetitive situation between dealers, finance companies, d other financing institutions. la "In this connection, it should be noted that the tis'' Paragraph of W-72 is merely intended to call attena,„°1 , 1 to sections 10(a)(1) and 10(a)(2) rather than to ly them to the transactions described in the first "ree paragraphs of that interpretation." e Approved unanimously. recortra Memorandum dated June 12, 1942, from Mr. Foulk, Fiscal Agent, ending that an assessment of two hundred forty-five thousandths one Per cent (.00245) of the total paid-in capital and surplus (Sectitt 7 ot and Section 13b) of the Federal Reserve Banks as of the close of einees j tine 30, 1942, be levied to cover the general expenses of the .4 ii)e gTr,i 6117/42 -8- beard for the six months' period beginning July 1, 1942, and that he Federal Reserve Banks be instructed to pay in the assessment in equal instalments on July 1, 1942, and September 1, 1942. The following resolution levying an assessment in accordance with the Fiscal Agent's recommendation was adopted by unanimous vote: "WHEREAS, Section 10 of the Federal Reserve Act, as "ended, provides, among other things, that the Board of rvernors of the Federal Reserve System shall have power 10 levy semiannually upon the Federal Reserve Banks, in Proportion to their capital stock and surplus, an assessit sufficient to pay its estimated expenses and the salaries Ucceedingr : of its members and employees for the half year the levying of such assessment, together with d'1,7 deficit carried forward from the preceding half year, and t. "WHEREAS it appears from a consideration of the es11.7-- sd expenses of the Board of Governors of the Federal J17Prve System that for the six months' period beginning hZY 1, 1942, it is necessary that a fund equal to two 2fIdred and forty-five thousandths of one per cent (.00245) the total paid-in capital stock and surplus (Section nd Section 13b) of the Federal Reserve Banks be created SUCh purposes, exclusive of the cost of printing, isrig and redeeming Federal Reserve notes; "NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF GOV-""ORS OF THE FEDERAL RESERVE SYSTEM, THAT: "(1) There is hereby levied upon the several Federal h,,,:e/ive Banks an assessment in an amount equal to two , 0;"dred and forty-five thousandths of one per cent (.00445) tlie totca.u. paid-in capital and surplus (Section 7 and j„estlon 13b) of each such Bank at the close of business -ue 30, 1942. ." (2) Such assessment shall be paid by each Federal Res se--rve Bank in two equal instalments on July 1, 1942, and Ptember 1, 1942, respectively. Res 1(3) Every Federal Reserve Bank except the Federal : : I ve Bank of Richmond shall pay such assessment by transter the amount thereof on the dates as above provided -'°Iagh the Interdistrict Settlement Fund to the Federal 6/17/42 -9- "Reserve Bank of Richmond for credit to the account of the Board of Governors of the Federal Reserve System on the books of that Bank, with telegraphic advice to Richmond Of the purpose and amount of the credit, and the Federal Reserve Bank of Richmond shall pay its assessment by crediting the amount thereof on its books to the Board of Governors of the Federal Reserve System on the dates as above Provided." Letter to Mr. E. B. Stroud, First Vice President and General Ool "n,„ -'el of the Federal Reserve Bank of Dallas, reading as follows: "This refers to your letter of June 9, 1942, raising ' a question as to the legal authority of your bank to open D1 , 1 account for the local loan agency of the Reconstruction 'tnance Corporation. The letter addressed to your bank : 81()In Mr. D. B. Griffin, Assistant Treasurer of the Recone.!,ruction Finance Corporation, a copy of which you ened, asks whether there is any objection to opening up ;ccounts at your bank and branches for Reconstruction Fi' s ll?e Corporation Agency Managers. It is assumed that a RInu-lar letter has been sent to all of the other Federal eserve Banks. 4 "Section 7 of the Reconstruction Finance Corporation 4ce,N(page 198 of the Board's edition of the Federal Reserve n i Provides in part that 'All moneys of the corporation 6 otherwise employed may be deposited with the Treasurer 00 the United States subject to check by authority of the p2:130ration or in any Federal reserve banks, *** . The a7cteral reserve banks are authorized and directed to act depositaries, custodians, and fiscal agents for the Reorn?truction Finance Corporation in the general performance th lte powers conferred by this Act.' It is assumed that pi: funds of the local loan agencies of the Reconstruction the?e Corporation are funds of the corporation and, in erlelrcumstances, we know of no legal reason why the FedReserve Banks may not open the accounts described in "Ur letter and its enclosure." 4 4 Approved unanimously, with the understanding that copies of the letter would be sent to the Presidents of a31 of the Federal Reserve Banks. 6117/42 -10Letter to the Comptroller of the Currency requesting that he Place an order with the Bureau of Engraving and Printing for printing 2830 04,100 sheets of Federal Reserve notes of the 1934 Series during the f. lscal year ending June 301 19431 in the amounts and denominations for the respective Federal Reserve Banks as set forth in the letter. Approved unanimously. Letter prepared for the signature of Chairman Eccles to Senator tob "11* Wagner, Chairman of the Senate Committee on Banking and Curreading as follows: f, "This refers to your letter of June 131 1942, in which ;1-11, request a report on S. 2565, a Bill 'to amend sections -n arid 19 of the Federal Reserve Act, as amended', which You. introduced on June 4, 1942. , "For the reasons stated below, the Board of Governors n:e-Ls that it is important that this Bill be enacted by vngress as soon as possible. fe "The principal change in the law which would be efp2ted by section 1 of the Bill would be to regroup the f7deral Reserve Banks for the purpose of electing their 2.1re representatives on the Federal Open Market Committee ;:athat it would be required that a representative of the mi,al Reserve Bank of New York be a member of the Cornat all times. th "The Federal Reserve Bank of New York is located at see m?neY market and at the principal market for Government inellrities. As a result it occupies a unique and outstandt4 Position with respect to the Federal Reserve System, Treasury and the banking system of the country. Its res, of 1 total approximately 40 per cent of the aggregate fiethe wle twelve Federal Reserve Banks. Its operations as for!,1411 agent of the United States and its transactions with 17-e35'gn governments, foreign central banks and bankers, as ' ere as its operations in foreign exchange, are in far ater volume than those of any other Federal Reserve Bank. 1 6/17/42 -11"In all of these fields it is most desirable that the advice and counsel of the New York Reserve Bank should be available to the Federal Open Market Committee. "At present, one representative of the Committee is elected by the Boston and New York Reserve Banks but, as t Isllis has worked out in practice, the Boston Reserve Bank s never had a representative serve as a member of the (InImittee but only as an alternate to the President of the ;1%1 York Reserve Bank, who has served continuously. As J:ndacated above, it is desirable in the public interest . '11at a representative of the Federal Reserve Bank of New illork be on the Committee at all times, but the Federal reserve Bank of Boston should also have the opportunity 02r its President to serve from time to time as a member I the Committee as do the Presidents of the other Reserve Banks. "Section 2 of the Bill would amend section 19 of the Pederal Reserve Act so as to authorize the Board of Gover°118 of the Federal Reserve System to change the reserve :?quirements of member banks in central reserve cities, thin the limitations of the present law, without necesi_rilY making a change in the reserve requirements of memkmr banks in reserve cities. Fe, "Under the present law the Board of Governors of the ' leral Reserve System, in order to prevent injurious cr , lit expansion or contraction, may change the requiremeec ' e as to the maintenance of reserves by banks located tril 1 _ reserve and central reserve cities or by member banks 4fated elsewhere, but it may not change the reserve rerements of member banks in central reserve cities withat the same time changing those of member banks in ZZerv cities.ule No change in reserve requirements may be me if the rest is to decrease the requirements of a to ,er bank below the amount specified in the statute or e,,,:ncrease them to more than twice that amount. At pres"6. reserve requirements of all member banks are at the to which they can be raised under the law. ped„ Because of the recent increases in the amounts of ba,,ral taxes, there are heavy withdrawals of deposits from it4s throughout the country in order to meet tax liabiltAx 8 at or around the quarterly dates on which Federal man PaYments are due. In order to meet these withdrawals withbanks find it necessary to draw upon their balances the, their correspondent banks, and these in turn upon tiZ balances with banks in central reserve cities, parany New York City. At such times banks in New York 2 Z Z I 6/17/42 -12"City- may find it necessary to sell United States obliga0118 in considerable amounts. Such action might have a depressing effect upon the Government security market at a time when this would be contrary to the public interest. "In order to avoid such contingency it might be de811-able for the Board of Governors to reduce reserve recliarements of member banks in central reserve cities at a tIme when it would not be advisable to reduce reserve of member banks in reserve cities. In order to t? Provide provide the necessary flexibility to meet this situait is felt that the Board of Governors should be Powered to change the reserve requirements of member crs.in central reserve cities without at the same time angIng the reserve requirements of other member banks. „ "Section 3 of the Bill would amend section 19 of 'ne Federal Reserve Act by repealing the provision which lma 3r°h-lbit8 member banks of the Federal Reserve System from king new loans or paying dividends while their reserves are f deficient, retaining in the law, however, the power t the Board of Governors of the Federal Reserve System prescribe penalties for deficiencies in reserves. it m"The Federal Reserve Act contains a provisionper, Aiting reserves of member banks to be checked against and ;drawn for the purpose of meeting existing liabilities, Jeot to regulations and penalties to be prescribed by he Reserve Board. The purpose of this provision, hower, was in large effect nullified by the addition of a Pro11150 prohibiting the making of new loans and the paye of dividends while reserves are deficient. Due to 1.0,," of personal liability on the part of bank directors ee '-Losses which may be sustained on loans made while rethrves are deficient, banks may be prevented from availing ther. 118elves of the privilege of utilizing any portion of da;ir required reserves even for a day or fraction ofa th unless they refrain from making any new loans during r 4.0 at period. "If the proviso is repealed, the power of the Reserve 11.1111'd to prescribe penalties for deficiencies in reserves, renth would remain unaffected, would be a sufficient detert- The Board's present regulations prescribe a penalty riloret_form of an interest charge amounting to 2 per cent it, 'nan the Federal Reserve Bank discount rate, so that 4-8 cheaper for a member bank to borrow from the Reserve 110 2zi 6/17/42 —13— Bank in order to maintain its reserves than it is to Decome deficient in its reserves and pay the penalty. "Owing to the fact that large tax collections and the.flotation of large amounts of Government securities ,111Inalg the present emergency may cause wide fluctuations -!-11 available reserves, especially in the money centers, lt 13 particularly important during the emergency period r avoid any stringency in the money market resulting the rigid and unnecessary prohibition upon making 4.oans While reserves are deficient. "As indicated above, in the opinion of the Board °f Governors it is important in the public interest that ?ach amendment proposed in this Bill be enacted into law 6-8 soon as possible, and the Board hopes, therefore, that Y°ur Committee will give the Bill its early and favorable co nsideration." Approved unanimously. Thereupon the meeting adjourned. Chairman.
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