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Minutes of actions taken by the Board of Governors of the Federal Reserve System on Thursday, June 28, 1951. The Board met in the Board Room at 10:35 a.m. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Vardaman Norton Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Thurston, Assistant to the Board Mr. Thomas, Economic Adviser to the Board Mr. Leonard, Director, Division of Bank Operations Mr. Vest, General Counsel Mr. Townsend, Solicitor Mr. Young, Director, Division of Research and Statistics Mr. Noyes, Director, Division of Selective. Credit Regulation Mr. Hackley, Assistant General Counsel Mr. Boothe, Assistant Director, Division of Selective Credit Regulation Before the meeting there had been distributed to the members of the Board a memorandum dated June 27, 1951, from Messrs. Hackley and Boothe reading as follows: "Attached hereto is a copy of a letter addressed to Governor Vardaman by the Honorable Jess Larson, Administrator of General Services Administration, suggesting a revised schedule of guarantee fees on V-loans made for the Purpose of financing the construction of industrial facilities. Also attached for your information is a schedule of the guarantee fees established by the Board in connect ion With V-loans. "Under the authority of the Defense Production Act of 1950 the Board of Governors has the authority to fix rates and fees on V-loans after consultation with the guaranteeing agencies. In view of the controversial nature of the schedule 6/28/51 -2- "of fees proposed by Mr. Larson, we believe it advisable to ask the Board to consider the matter before it is submitted to the various guaranteeing agencies. "Generally speaking, the proposed schedule of fees would mean that, as to construction loan guarantees, the amount of the guarantee fee would not be based solely upon the percentage of guarantee, but would be based partially upon the relation between the amount of the loan to the value of the collateral at any particular time, so that, as the loan is reduced, the guarantee fee likewise would gradually be reduced. "The basic reason advanced in support of this proposal, as stated in Mr. Larson's letter, is that 'contrary to working capital loans, the safety of loans for capital improvements should increase as they become older.' However, it is difficult to believe that the safety of working capital loans is reduced as they are repaid whereas in many cases the security for a fixed capital loan depreciates more rapidly than the loan itself is liquidated. Ne question the validity of the statement in Mr. Larson's letter that the 'security' of a loan made for 100 per cent of the value of the collateral and guaranteed 90 per cent is identical with a loan of 90 per cent of the value of the collateral and guaranteed 100 per cent. "If a schedule of fees as proposed should be adopted in connection with facility loans, many complications would result therefrom; especially in the many cases where the guarantee fee paid by a financing institution to the Government would be much less on a facility loan than on a short-term working capital loan which may be largely secured by Government accounts receivable. For example, if a facility loan is based on 90 per cent of the value of the property securing a loan and guaranteed by the Government to the extent of 90 per cent, the guarantee fee would be only 20 per cent; whereas, a working capital loan which is guaranteed 90 per cent and which is based on 90 per cent of the value of the security of accounts receivable and inventory would require a guarantee fee of 30 per cent. "It seems obvious that this would result in a different treatment of guarantee fees for construction loans and for working capital loans which would be difficult to justify and which would undoubtedly give rise to demands by financing institutions making guaranteed working capital loans for a similar revision in the presently effective basic schedule of guarantee fees. This would be especially true in the case of revolving credits where the amount of loan outstanding fluctuates from week to week. 6/28/51 -3- "Moreover, it is believed that the administration of the proposed schedule of fees would involve extremely burdensome administrative difficulties. For example, it is not clear how and by whom the depreciated value of a plant would be determined from time to time as would be necessary under the proposed schedule. "Not only would the proposed schedule be inequitable and difficult to administer, but it is believed that there is not sufficient evidence at this time to justify such a modification of the schedule of fees in the case of guarantees of construction loans. None of the guaranteeing agencies has yet guaranteed any loan the proceeds of which are to be used primarily for construction purposes. "For these reasons, it is recommended that the Board advise Mr. Larson that in its opinion the adoption of the recommended schedule of fees for construction loan guarantees is not desirable, but that, before giving such advice to Mr. Larson, the matter be presented to the guaranteeing agencies for their consideration and comment, together with a statement setting forth the Board's views in the matter." Mr. Vardaman stated that he opposed the proposal of General ServAdministration referred to in the above memorandum for the reasons set forth therein and particularly because he felt that the establishment of a revised schedule of guarantee fees on V-loans made for the purpose of financing the construction of industrial facilities would be economically unsound and administratively impracticable. He said that he would recommend, however, that before a reply from the Board was made to Mr. Larson concerning the matter the comments of the other guaranteeing agencies with respect to the proposal be solicited and, if it seemed necessary on the basis of their comments, a meeting be arranged between representatives of the Board and the guaranteeing agencies. Thereupon, upon motion by Mr. Vardaman, unanimous approval was given to the following 6/28/51 -4letter to Lieutenant General R. S. McLain, Comptroller, Department of the Army, Pentagon Building, Washington 25, D. Co, (Attention Mr. C. H. Knapp, Deputy Comptroller), together with identical letters to the Departments of the Navy, Air Force, Commerce, Interior, Agriculture, and the Atomic Energy Commission, with the understanding that a copy of the letter to the Department of the Army would be sent to Mr. Larson for his information: "There is enclosed a copy of a letter received by Governor Vardaman of the Board from the Honorable Jess Larson, Administrator of General Services Administration, suggesting a revised schedule of guarantee fees on V-loans made for the purpose of financing the construction of industrial facilities. Generally speaking, under the proposed schedule, guarantee fees on construction loan guarantees would be based, not only upon the percentage of guarantee, but also upon the relation of the amount of the loan to the value of the collateral, so that, as the loan is reduced, the guarantee fee would also gradually be reduced° "In our preliminary consideration of the suggestion certain questions occur to us regarding the desirability of the proposed schedule. For example, the statement that the safety of loans for capital improvements, unlike working capital loans, increases as the loans become older may be questioned, since it is difficult to believe that the safety of working capital loans is reduced as they are repaid and since in some cases the security for a fixed capital loan may depreciate more rapidly than the loan itself is liquidated. It may also be questioned whether the 'security' of a loan made for 100 per cent of the value of the collateral and guaranteed 90 per cent is identical with the 'security' of a loan made for 90 per cent of the value of the collateral and guaranteed 100 per cent. "Under the proposed schedule of fees, the fee paid by a financing institution would be much less on a facility loan than on a short-term working capital loan which may be largely secured by Government accounts receivable. Thus, in the case of a facility loan based on 90 per cent of the value of the property securing the loan and guaranteed by tthe Government to the extent of 90 per cent, the guarantee tee would be only 20 per cent, whereas a working capital "30 6/28/51 -5- "loan guaranteed 90 per cent and based on 90 per cent of the value of the security of accounts receivable and inventory would require a guarantee fee of 30 per cent. Such a different treatment of guarantee fees for construction loans and working capital loans might be difficult to justify and might well give rise to demands by financing institutions making guaranteed working capital loans for a similar revision in the presently effective general schedule of guarantee fees; and this would be especially true in the case of revolving credits where the amount of the loan outstanding fluctuates from time to time. "In the light of these questions, before expressing any views with respect to the proposal made in Mr. Larson's letter, we would appreciate receiving as promptly as practicable your comments regarding this proposal. In this connection, we would also appreciate having your opinion as to whether the present schedule of guarantee fees has prevented the consummation of any construction loans which your agency would have desired to handle as guaranteed loans or whether such cases are likely to arise in the near future." At this point Mr. Eccles and Mr. Solomon, Assistant General Counsel, joined the meeting and Messrs. Hackley and Boothe withdrew. There was presented a memorandum dated June 27) 1951, from Mr. Leonard, Director of the Division of Bank Operations, stating that in response to the Board's letter of June 13, 1951 to the Presidents of all Federal Reserve Banks requesting their views on the suggestion that the unamortized premium on the nonmarketable 2-3/4 per cent bonds, Investment Series B-1975-801 held in the System open market account be eliminated, ten of the Reserve Banks indicated they would favor the charge chargeioff while two (New York and Philadelphia) did not favor the off but preferred that it be amortized in the regular course. The memorandum recommended that the Reserve Banks be advised that the 6/28/51 -6- Board approved the charge-off of the unamortized premium ( 9,720,758 on June 6, 1951) at the end of June 1951, such charge to be made as a deduction from current net earnings, leaving open for later discussion with the Reserve Banks the question whether at the end of the year 1951 the proposed deduction from current net earnings should be offset by an equivalent withdrawal from reserves for contingencies. At Chairman Martin's request, Mr. Leonard reviewed the contents of the memorandum and stated that, while in his opinion it would be in order to continue to carry the premium in the account and amortize it on a regular basis if the bonds were to be held as an investment, the portfolio of the open market account did not have the aspects of an investment account and on this basis he would recommend that the unamortized premium be charged off. Mr. Leonard also stated that Mr. Powell had expressed himself as in favor of the charge-off. Mr. Leonard then recalled the views expressed by some of the Reserve Bank Presidents in the past with respect to depreciation in the °Pen market account which had led them to feel that Reserve System payments to the Treasury should be reduced in order to build up the Banks' capital accounts and which culminated in discussion at the joint meeting Of the Board and the Presidents on May 18, 1951, at which time the Board questioned the necessity for such action. There ensued a discussion of the proposed charge-off, during which reference was made to the agreement in 1938 concerning bank examination policies, announced after discussions between representa- 6/28/51 -7- tives of the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Board, which recognized the principle that commercial bank investments should be considered in light of their inherent soundness rather than on the basis of day-to-day market fluctuations and provided, therefore, that daily fluctuations in investment quality securities need not be taken into account in examination reports provided there was a proper amortization of securities purchased at a premium. Messrs. Eccles and Vardaman expressed apprehension that the proposed charge-off on the part of the System would be interpreted by the other bank supervisory agencies and the commercial banks in such a manner as to weaken the effectiveness of that agreement. Mr. Eccles also stated that reserves for contingencies had been set up on the books of the Reserve Banks which should be adequate to take care of losses in the open market account and that there was no important reason for the proposed write-off. Chairman Martin suggested that inasmuch as Mr. Powell had strong views on the matter, action be deferred for further discussion at a meeting at which he could be present. This suggestion was approved unanimously with the understanding that the Presidents of all Federal Reserve Banks would be advised by telegram that the Board had deferred action and no charge-off of unamortized premium on the 2-3/4 per cent bonds would be made in the second quarter of this year. 6/28/51 -8Chairman Martin and Mr. Thomas withdrew from the meeting at this point. .There was presented a memorandum prepared in the Legal Division under date of June 18, 1951 stating that at present the Board's Rules of Procedure provide only for the issuance of subpoenas by the Board itself, and that, following the practice prevailing in other agencies, orders issued recently by the Board in connection with the enforcement of Regulations g, Consumer Credit, and X, Real Estate Credit, have provided for the issuance of subpoenas by an officer designated for that Purpose when such procedure is authorized by law. The memorandum recommended that the Board's Rules of Procedure be conformed to this practice by an amendment to Rule III (j) of the Rules of Practice for Formal Hearings to provide that subpoenas "will be issued only by the Board, or such person as the Board may designate for this purpose, and as authorized by law." The memorandum stated further that the proposed amendment also would change the wording of Rule III (k), (which provides that witnesses "will be paid the same fees and mileage that are paid to witnesses in the courts of the United States, unless the Board otherwise d irects,") to delete the words "unless the Board otherwise directs", in "der that the provision would conform to a Federal statute providing that such fees in administrative hearings shall be the same as those "provided by law for witnesses attending United States courts." The memorandum had been in circulation and Mr. Vardaman requested that the matter be 1454 6/28/51 placed on the docket for consideration at a meeting of the Board. In answer to a question by Mr. Vardaman, Mr. Vest said that a review of the practices of the Board failed to disclose any violation of law in its procedures for the issuance of subpoenas, and that the Proposed amendment would merely provide for the designation of an officer of the Board to issue subpoenas in specific cases . He also stated that by virtue of authority contained in the Defense Production Act of 1950, the Board in cases pertaining to the enforcement of Regulation W, Consumer Credit, and Regulation X, Real Estate Credit, had entered Specific orders designating specific officers of the Board for the purPose of issuing subpoenas in each case, and that the proposed amendment was a matter of bringing the Rules of Procedure into conformity with this Practice, Regarding the portion of the proposed amendment relating to the payment of witness fees, Mr. Vest said that its effect would be merely to strike out a clause providing that the Board might direct the PaYment of fees other than on the basis paid to witnesses in the courts of the United States, thus leaving the Rule in a form to provide for uniform application of the Federal Statute relating to witness fees in administrative hearings. In response to a further question by Mr. Vardaman, Mr. Vest said that the Board had been compensating witnesses on the basis called for by the statute, namely the same as witnesses attending United States courts. 1 I55 6/28/51 -10- He added, however, that there might have been cases where a person was employed as a consultant and compensated as such, who also had acted as a witness. Referring to the services of Dr. E. A. Goldenweiser as consultant in connection with the Clayton Act proceeding against Transamerica Corporation, Mr. Vardaman said that it was his recollection that in this case Dr. Goldenweiser was desired first as a witness, whereupon the Board set fixed fees and expenses including travel to San Francisco, California, and that when the Board was informed thereafter by the Solicitor that Dr. Goldenweiser was needed in a consultant capacity, he was employed and continued on that basiso Mr. Townsend said it was his recollection that Dr. Goldenweiser, who had been on the Board's list of approved consultants since his retirement on January 1, 1946, was employed at his (Mr. Townsend's) re- quest on a consultant basis and that he was not paid any witness fees in view of the statutory provision that Government employees are not entitled to such fees, this provision being applicable to Dr. Goldenweiser because of his employment by the Board. He pointed out, however, that Dr. Goldenweiser was allowed travel expenses in substantially the same manner as other employees of the Board or of the Federal Reserve Banks Who participated in the case. Mr. Townsend also said that it was his understanding that no witness fees had been paid anyone in the proceeding against Transamerica Corporation other than in accordance with 6/28/51 -11- provisions in the Federal statute relating to such fees in administrative hearings. Speaking as a member of the Personnel Committee at the time of Dr. Goldenweiser's employment on a consultant basis in connection with the Transamerica proceeding, Mr. Szymczak said that the Committee had considered the matter very thoroughly with a view to working out an arrangement which would be satisfactory to Dr. Goldenweiser and in conformity with the Board's established practices. Mr. Vardaman said that he had brought up this matter merely as an illustration of his conviction that the Board from time to time had changed its policy to meet its convenience and that he had no objection to the proposed changes in the Rules of Procedure so long as they conformed with appropriate statutes. Thereupon, unanimous approval was given to the following amendments to the Rules of Organization and Procedure issued by the Board of Governors of the Federal Reserve System, with the understanding that an appropriate letter transmitting the amendments would be sent to the Federal Reserve Banks and to Mr. B. R. Kennedy, Director, Division of the Federal Register, National Archives, Washington, D. C.: "Paragraphs (j) and (k) of Rule III of the Rules of Practice for Formal Hearings, contained in Appendix A to the Rules of Procedure, are amended effective June 28, 1951, to read as follows: (i) Subpoenas requiring the attendance of witnesses from any place in the United States at any designated place of hearing, or requiring the production of documentary evidence, will be issued only by the Board, or such 1452 6/28/51 -12- "person as the Board may designate for this purpose, and as authorized by law. Application may be made either to the Secretary of the Board or to the person so designated by the Board. Such application must be in writing and must state, as definitely as practicable, the reasonable scope of the evidence sought (reasonably identifying any document desired) and the facts to be proved thereby, in sufficient detail to indicate the materiality and relevance thereof. (k) Witnesses summoned by the Board at the request of the respondent or of counsel for the Board will be paid the same fees and mileage that are paid to witnesses in the courts of the United States. Such payments as witnesses may be entitled to receive under this section shall be made by the party at whose instance the witnesses appear." Mr. Townsend referred to remarks made on the floor of the House of Representatives yesterday by Representative Tackett of Arkansas during debate on the extension of the Defense Production Act of 1950, as reported in the Congressional Record of that date, which contained statements indicating that Mr. Tackett had been misinformed with regard to enforcement procedures being followed under Regulation K, Consumer Credit, and questioned whether, inasmuch as Mr. Tackettls remarks had been made a matter of record, the Board would wish to address a letter to Mr. Tackett informing him of the factual errors contained in his speech. There ensued a discussion of the matter during which it was suggested that inasmuch as a formal answer by the Board might tend to attach more importance to the speech than it warranted and since the material apparently had been furnished to Mr. Tackett by sources close to the Federal Reserve System having an objective of getting over a point 6/28/51 -13- of view, it would seem advisable to ignore the statements in the absence of further developments. This suggestion was approved unanimously. At this point all of the members of the staff with the exception of Messrs. Carpenter, Sherman, and Kenyon withdrew, and the action stated with respect to each of the matters hereinafter referred to was taken by the Board: Minutes of actions taken by the Board of Governors of the Federal Reserve System on June 27, 1951, were approved unanimously. Letter to Mr. Diercks, Vice President of the Federal Reserve Bank of Chicago, reading as follows: "In accordance with the request contained in your letter of June 25, 1951, the Board approves the appointment of Edward V. Hanrahan as an assistant examiner for the Federal Reserve Bank of Chicago. Please advise us of the date upon which the appointment becomes effective." Approved unanimously. Letter to Mr. Diercks, Vice President of the Federal Reserve Bank of Chicago, reading as follows: "In accordance with the request contained in your letter of June 25, 1951, the Board approves the appointment of Donald L. Bauer as an assistant examiner for the Federal Reserve Bank of Chicago. Please advise us of the date upon which the appointment becomes effective." Approved unanimously° Letter to Mr. Diercks, Vice President of the Federal Reserve Bank of Chicago, reading as follows: 6/28/51 -14- "In accordance with the request contained in your letter of June 25, 1951, the Board approves the appointment of Robert J. Weber, at present an assistant examiner, as an examiner for the Federal Reserve Bank of Chicago. Please advise us of the date upon which the appointment becomes effective." Approved unanimously. Telegram to Mr. Olson, Vice President of the Federal Reserve Bank of Chicago, reading as follows: "Reurtel June 22 concerning position of purchasers of individual branches of Bennett Rent-A-Car Company as to leasing provisions of Regulation W, it would appear that assignees or purchasers would acquire any rights of the original Registrant. It is suggested that purchasers should indicate on any Registration Statement they may file under the regulation that they are successors to Bennett Rent-A-Car Company." Approved unanimously.
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