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1241 Minutes of actions taken by the Board of Governors of the Federal Reserve System on Tuesday, June 5, 1951. The Board met in the Board Room at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Vardaman Norton Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Thurston, Assistant to the Board Riefler, Assistant to the Chairman Thomas, Economic Adviser to the Board Vest, General Counsel Sloan, Director, Division of Bank Operations Solomon, Assistant General Counsel Hooff, Assistant Counsel Youngdahl, Chiefs Government Finance Section, Division of Research and Statistics Leach, Economist, Division of Research and Statistics Mr. Thomas reported on recent developments in the Government -es market, commenting particularly on the reaction of the 4111tet the recent Treasury announcement for refunding of securities 1°4114 4_ g 4-11 June and July. Following Mr. Thomas' remarks, Messrs. 1°1111gdala and Leach withdrew from the meeting. tood Before this meeting there had been sent to each member of the ' memorandum from Messrs. Sloan and Vest dated June 4, 1951, with Peet to a proposed consolidation involving Mercantile-Commerce Bank 4111irrust n was attached a memorandum Prepared C-111ParlY, St. Louis, Missouri, to which by- Mr. Robert Neill, Jr., Attorney, representing MercantileCotkeree Balik and Trust Company, regarding the details of the consolidation 210 6/5/51 -2- to take place between that bank and Mississippi Valley Trust Compagy„ St. Louis, Missouri, both of which are State member banks of the Federal ila"rve System. The memorandum from Messrs. Sloan and Vest stated that lichile Mercantile-Commerce Bank and Trust Company was not asking the 13°1rd for approval or permission, it presumably would like to know on illformal basis whether the Board would object or take any administrative action if the consolidation was carried through as planned. The Ilielc/randum pointed out several matters for consideration, the principal 11/esti0n being that under the consolidation plan the trust company would Plirchase the stock of the Mercantile-Commerce National Bank, which for 11Pvirarda of twenty years had been trusteed for the benefit of those who sha reholders of the Mercantile-Commerce Bank and Trust Company when the trust was established; that the stock of the national bank would then be)i— ' " 4 effect, donated by the trust company to the Mercantile-Commerce e411pAn.,,. a wholly owned subsidiary of the trust company acquired prior to the t* e When purchases of stock by member banks were made unlawful; and th4t thi -s would be a technical violation of the statute and would result ClePletiOn PrODOR ti4114:744- that in the assets of the trust company of some $1,600,000. would result in the continuation of an arrangement substan e that which has existed over some twenty years past, except the 144tic_nolders of beneficial interest in the existing trust are not in all respects with the present shareholders of the Mercantileerce B flk and Trust Company, which would donate the stock of the 6/5/51 -3national bank to its wholly owned subsidiary. In commenting on the memorandum, Mr. Vest stated that the banks were consolidating under a State statute which provided that two banks Nr consolidate into one bank, and that the consolidated bank would be 4 continuation of the corporate existence of both of the banks and that, therefore, there would be no need for the Mercantile-Commerce Bank and '411st Company to apply for membership in the Federal Reserve System if the consolidation was consummated. Thus, he stated, the Board did not aPPear to be called upon to take affirmative action approving the con'dation, and it would be a question whether, if the consolidation " vrelie consummated, the Board would take action against the bank because Otthe technical violation of the statute. Such action, Mr. Vest stated, 4)111c1 be to expel the bank from membership in the System. Mr, Young, Director of the Division of Research and Statistics, 1°111ed the meeting at this point. In response to a question from Chairman Martin, Mr. Sloan stated that th4„ -4e was no apprehension on the part of the Division of Examinations e°11ce,—, -11g the proposed consolidation from the standpoint of the bank or the setlioe it would render to the community, that both State member banks )(ere 14 good condition and under capable management, and that the only — was that of the technical violation of Section 5136, Revised 41kIt ees Previously discussed. Consideration of this was complicated, 8441 by the fact that in the case of a national bank in Dallas, Texas, 6/5/51 -1- the C omptroller of the Currency had permitted a situation to exist rex' rtlany years which was no different from that which would exist if the St. Louis State member banks carried out the proposed plan of c°11801idation. Also, a similar situation had existed in the case of aState member bank in Atlanta, Georgia, for many years, Mr. Sloan said. Mr. Vardaman stated that he had been familiar with the proposed e°11solidat1on for some time and with the situation that had long existed " 1111 ):Y the Mercantile-Commerce Bank and Trust Company in fact controlled theMercantile-Commerce National Bank. He stated that while he would like ' 0 see the consolidation of the Mercantile-Commerce Bank and Trust %zp all'Y and Mississippi Valley Trust Company consummated, he felt the should not permit the continuation of a situation where there was teel— '"ical violation of the statute even though, in effect, it would be —11g a situation that had existed for a great many years and would 1)e bri 4ing about a situation in St. Louis substantially like that which he,d 101 1g been permitted in Dallas and Atlanta. Mr. Vardaman went on to thai. to he felt the Board should take the position that it was not going rove the proposed purchase of stock of the national bank. Mr. Vardaman tte.te4 1-111"ther that because he had opposed the control of the national the Trust Company when he was President of a neighborhood bank in ' 1,0111s 'Ind active in the neighborhood bankers association, he felt that Moto, refrain from voting on this question or participating in any rI tther discussion of it. 0-7.- 6/5/51 In response to a question from Chairman Martin as to what steps he Board might take in this connection, Mr. Vest stated that the Board hscl authority to remove officers and directors of banks for continued 71018.tion8 of law, but he questioned whether this authority could be ellecttirely exercised in this instance and said that, in his opinion, the (414 Practicab1e action that might be taken would be to expel the bank rt0 41Zembership. Mr. Vest also stated that if the bank chose to do so, it could withdraw from membership in the System for a brief period and %las, uulaate the transaction as a nonmember bank, and the consolidated bank, lle.viht, thus completely corrected any legal difficulties, could then apply rcit Illembership in the System and it would be a question for the Board to eteilline whether the bark should be admitted as a member bank. DUring an extensive further discussion of the matter, consideratioliv as given to various suggestions in the course of which Chairman )4rtit IcPressed the view that under all the circumstances the Board kith e. lther Indicate informally to representatives of the MercantileXU and Trust Company that it would not expect to object to the ot 111414tiort of the merger along the lines presented by representatives that b„ , 1141 informally to the Legal Division, or that it could take the : 1 1°11 that it had no comment to make concerning the proposal. The t4 4111131a Procedure, he felt, would be for Mr. Vest to Indicate informally kr' Neill, Attorney for the bank, that he had brought the matter to the ) 6N51 -6- wttention of the Board and that on the basis of an informal discussion of the matter the Board would not expect to interpose any objection to the 1:11rChase of the stock of Mercantile-Commerce National Bank by MercantileBank and Trust Company as contemplated in the proposal submitted bY Mr. Neill. Following a discussion, upon motion by Mr. Norton, the latter suggestion was approved. Mr. Vardaman did not vote on the question because of his previous official connection with St. Louis banks, and for reasons given previously during this meeting. In taking this action it was understood that Mr. Vest would transmit the comments informally to representatives of the Mercantile-Commerce Bank and Trust Company. Mr, Norton then presented two memoranda dated June 4, 1951, tec 011111 ending that the Board concur in the designation by the Housing 144 ° Finance Administrator of the Bremerton, Washington, and San kr. ,08) Texas, areas as areas for the application of special credit term. -Qutder section 6(y) Nes _ of Regulation X, Real Estate Credit, for pur- °I defense construction. The memoranda stated that the Housing 441/014e Finance Agency had made a comprehensive survey of the need . hotlei ) h ng to serve the Bremerton, Washington, area and had concluded ther e was an urgent need for approximately 750 units, to be located l 17:eeOnable : 44t41 commuting distance of naval installations in Bremerton, -4 the case of San Marcos the Agency had concluded on the 6/5/51 -7- basis of a survey that there was an urgent need for approximately 50 441ts in ' connection with the air force base. Thereupon, upon motion by Mr. Norton, unanimous approval was given to letters to Mr. Foley, Housing and Home Finance Administrator, as follows: Letter regarding Bremerton, Washington 4 "In response to your letter of June 1, 1951, this 48 to advise you that the Board of Governors concurs in Y(34r designation of the Bremerton, Washington, area as 44 area for the application of special credit terms under secon ti 6(p) of Regulation X, Real Estate Credit, for pur, : 1 1 8 of defense construction. Your letter states that :Jere is a need for 750 housing units to be located within 'reasonable commuting distance of Bremerton, 450 to be rental n ranging from $60 to $90 per month, and 300 to be sale ez:!e at $9500 and $10,500 each. Under the terms of the a the entire 750 units will be controlled by your gelleY through the issuance of specific certificates. accordance with your suggestion, the relaxation thaZerrns prescribed by Regulation X will be identical to Previously announced for other designated defense areas.,, r Letter regarding San Marcos, Texas acivi "In response to your letter of June 1, 1951, this is to ilkI6'8e You that the Board of Governors concurs in your desigpit pllof the San Marcos, Texas, area as an area for the aplat.T4tion of special credit terms under section 6(p) of Regu°4.11 X) Real Estate Credit, for purposes of defense : con 10 s Your letter states that there is a need for 50 —lite.) . units to be located within reasonable commuting dist (440e of San Marcos, to rent for $65 and $75 per month vii321, Under the terms of the exemption, the entire 50 units spemue controlled by your agency through the issuance of —tic certificates. 6/5/51 -8"In accordance with your suggestion, the relaxation of terms prescribed by Regulation X will be identical to that Previously announced for other designated defense areas." The members of the staff then withdrew and the Board went into eltenuttve session. Following the executive session, Chairman Martin reported to the eta,17 that the Board had considered the memorandum dated May 29, 3_9,1, Seel ' tt°14 Mr. Allen, Director of the Division of Personnel Administration, re°°111111encling that Mr. Hilkert, who had been serving as Acting Director "Ille Division, be appointed a consultant to the Board and that the birev— ' 4ur of the Division of Personnel Administration be authorized to 41.1038i Hilkert's services as consultant whenever it was felt they vere 13.ecessarY. The recommendation contemplated that during the next 411rer 41.°11.ths Mr. Hilkert might be asked to visit the Board's offices 4 411 "'rage of two or three days a month and that the current arrange4114 11444 "respect to the reimbursement of the Federal Reserve Bank of 1111 incurred by 441114 for Mr. Hilkert's salary and actual expenses 11°111c1 be continued. Chairman Martin also advised the Secretary that Mr. Allen's recommendation had been approved unanimously by the four members of the Board attending the executive session, with the understanding, however, that any request by Mr. Allen for the services of Mr. Hilkert would have the prior approval of the Personnel Committee. 6/5/51 -9While the Board was in executive session, a telegram dated June 4, lo„ dd.-) was received from the Federal Reserve Bank of St. Louis which 41896- certain questions as to whether a new corporation would be formed result of the proposed consolidation of Mercantile-Commerce Bank 48 414T1'ust Company anA Mississippi Valley Trust Company, and whether in 8/leh event a new application for membership in the Federal Reserve System t1117°1ving formal approval of such application by the Board would be rein connection with the consolidation. Messrs. Carpenter, Vest, 814311) and Solomon then returned to the meeting and indicated that this le8rItra Placed the matter in a new light since, if a new application g 4444. be necessary, the Board would be called upon to approve the 4ai cation in the light of the entire transaction. There ensued a further discussion of the matter during which it was agreed unanimously that the understanding reached earlier in this meeting was rescinded and that the matter would be brought up for consideration again after the point raised in the telegram from the Federal Reserve Bank of St. Louis was clarified. tIkt to At this point Messrs. Vest, Sloan, and Solomon withdrew, and 1 stated with respect to each of the matters hereinafter referred 44 taken. by the Board: knutes of actions taken by the Board of Governors of the Federal 878tem on June 4, 1951, were approved unanimously. 0 6/5/51 -10Memorandum dated May 28, 1951, from Mr. Young, Director of t4 Division of Research and Statistics, recommending that the resig"4/14 of Miss June A. Truitt, Clerk-Stenographer in that Division, be Pted to be effective, in accordance with her request, at the close or b usiness June 8, 1951. Approved unanimously. Memorandum dated June 4, 1951, from Mr. Bethea, Director of 141)11/18ton of Administrative Services, recommending that the resig144)110f Mrs. Gertrude E. Booth, Stenographer in that Division, be koce,n4 v'ed to be effective, in accordance with her request, at the close °I' business June 15, 1951' Approved unanimously. Memorandum dated June 4, 1951, from Mr. Young, Director of the t -4181011 of Research and Statistics, recommending increases in 111"4814 flflUal salaries of the following employees in that Divieffective June 10, 1951: Pre chtling svi rdlehurat ;11t1ArEt Morse luEt C. Driver Title Economist Clerk Clerk Clerk Salary Increase To From $417/T5 05 0$44,200 4,075 3,195 2,730 Approved unanimously. 4413 MeMorandum dated June 1, 1951, from Mr. Bethea, Director oC of Administrative Services, recommending a leave of q(kce 1-thout pay for Miss Elizabeth J. McGuire, Stenographer in 3,275 21810 W51 that -11- Division, upon the expiration of her annual leave of 7 hours, 8 days and beginning June 7, 1951, until September 15, 1951. Approved unanimously. Letter for the signature of the Chairman to the Honorable SPessard L. Holland, United States Senate, Washington, D. C., reading "f°11ows: "Thank you for referring to the Board of Governors coPY of the telegram dated May 16, 1951, from Mr. C. A. iamson, Vice President of the Builders Mcrtgage Corpo,ation, St. Petersburg, Florida, concerning the supply of ' 411‘tgage funds. Identical telegrams from Mr. Williamson 'were also received through the offices of Senator Smathers ,atricl. Representative McMullen. We are glad of the opportunity o exPlain the Board's position on the matter. We are particularly gratified to learn that Mr. williamson feeln that VIE) goal of 850,000 units is sound, ;Ild that Regulation X is working well. The regulation, as ill.,know, was authorized by Congress in the Defense ProAct of 1950, and is designed to combat inflationary Theeures aid conserve materials for the defense effort. Il regulation is intended to influence the amount and maT/ of credit by specifying certain terms -- down payment, mu,1111tY, and amortization requirements -- which borrowers Meet to obtain the crealt. In effect, it is intended 0 reduce demand. In so doing, it mut necssarily prevent 8‘' he.111 ,,,e People from buying new homes who otherwise might ve been able to. 1011 "The tightening in the sLpply of mortgage funds to pecich Mr. Williamson refers is partly the result of the 0.1! 4 1"411 Reserve System's open market policy. Since the be,:reak In Korea the demand for long-term credit has otIttLezcePtionally great and in total has considerably 7 1 iPped the supply of savings becoming available for 611, Go;" 1, vestment. Some holders of outstanding marketable ballietrtialent bonds, such as insurance companies and savings 8, were selling from their portfolios in order to raise f j 6/5/51 -12- funds to meet this surplus demand for long-term credit, and the volume of such sales was greatly in excess of the buying by other investors. Until recently, the Federal Reserve System had been buying up the excess of bonds offered for sale, thus preventing price declines. These purchases, however, were very inflationary. They both increased the money supply and swelled the reserves ?I' banks, thus becoming the basis for an expansion of bank ' jending activities. "In order to keep down such monetization of the GovernMent debt, the Federal Reserve policy of rigid support of Government bond prices was discontinued. Prices of bonds declined in response to the excess of selling over buying in the securities market. Lenders are now more reluctant to !ell their Government securities to make mortgage loans. .°116 has tended to reduce the supply of mortgage funds to ale extent, and by diminishing the flow of funds from a inflationary source, has restored a more normal roaltuation in which the demand for mortgage loans is met 2 .113 completely from the natural flow of savings into le 4Cling institutions. 0 "Federal Reserve policy, however, has not been the elllY force at work. Many lending institutions have beifte fully loaned-up for the time being and are not mak1.4 8.1,11ey commitments at the unusually high volume of last e."".. This situation should improve in the near future r; institutions digest the backlog of commitments and ',4,!eilie an increased flow of new savings and pay-offs. 404-mitation of new housing starts to 850,000 a year will nalch to bring about such an adjustment in the mortege market. uev:We hope this will explain the Board's views on the tiar ion which M. Williamson raises. If we can be of iler assistance, please do not hesitate to call upon r Approved unanimously, with the understanding that similar letters would be sent in response to other inquiries where appropriate. Letter Ita 'L01101031 to the Honorable I. W. Duggan, Governor, Farm Credit Department of Agriculture, Washington, D. C., reading 6/5/31 -13.- "By your letter of May 18, 1951, and its enclosures, YOU wrote to the Board concerning the status, under Regulation W, of certain loans by production credit associations to member-farmers. As you indicated, this matter has been the subject of discussions between members of your Staff and members of the Board's staff. Briefly, the question is whether an association loan is an instalment loan under Regulation W where the loan, although evidenced by a single payment note, is accompanied by a plan or arrangement Ursuant to which the parties expect that certain payments n Partial liquidation of the indebtedness will be made Prior to maturity date of the note. "Regulation W, in its present form, applies to 'instalCredit' which is defined to mean 'a credit which the °bligor undertakes to repay in two or more scheduled payments or as to which the obligor undertakes to make two or ore scheduled payments or deposits usable to liquidate the eclit, or which has a similar purpose or effect'. By sec°1 ' R ?. 80)(6), this basic definition is incorporated in the v.efinition of 'instalment loan'. r , "This broad definition concerns itself with substance, nnner than form. Concepts which might apply elsewhere are Consequently, th7 Ilece8s‘trily controlling under the regulation. re,e fact that an obligation Is in the form of a single-payment ivate vill not, of itself, prevent the application of the regu10,4 1°11 where there are other features of the transaction bring it within the definition. In the Board's view, ilatxr angement or plan for the orderly repayment or retireehe debt as described by you would constitute such a reZt r j Z the "The views just expressed would, of course, apply in vhirftse of any institution engaged in the lending business is might make loans of a similar nature. Regulation W to Or broad application and the Board has always endeavored the greatest possible equality of treatment among those use subject to the regulation. or th 4.vu referred to the fact that so-called 'dairy loans' Cons e associations are considered subject to the regulation. latteluetItlY, the extension of the application of the regutio l in accordance with the above views to other associabt -1°ans should not be too difficult. Of course, it will ece"arY in connection with the borrower's application te ol) In information from him meeting the requirements of 6N51 -14- ti section 4(d) and revealing the purposes of the loan. Unless the loan is to purchase an article listed in the Supplement to the regulation or to make a down payment on any such article, most of the association loans would seem to be exempt under section 7(b) relating to agricultural loans. °D14elrer, in those cases where the association loan is to 1:4)urchase a listed article, such as an automobile, then, as the case of a bank or other lender, the amount of the fan may not exceed the maximum loan value prescribed for wie article by the regulation. "At the present time the maximum maturities for transactions subject to the regulation are for periods in excess (.:4* one year. This should not prove burdensome, since you 41Idicate that the association loans normally are limited to !Year. In addition, section 6(a)(1) of the regulation es special provisions affording great flexibility in the : 1 alpaYment of instalment obligations by obligors with seasonal 4ncomes, such as farmers. 'In the discussions with members of your staff, it vas inted out to us that a very small number of association T° 1,84 4 8 are for the purpose of purchasing listed articles. 4Z4I3 fact, together with the matters pointed out above and :Ile Procedures already established by the associations in flnection with 'dairy loans', would appear to make compliace with the regulation in connection with other association tl,a48 a relatively simple matter. Clearly, the problems of associations will be far fewer than those of other regue,n(1 lenders whose business in the regulated areas is more r r this "The Board appreciates your cooperation in submitting 811,,,matter and, of course, is ready at all times to be of assistance as you may consider necessary or desirable." Approved unanimously. 't?4;4 Letter to the Honorable Thomas J. Lane, Rouse of Representatives, 11, D. C., reading as follows: : This refers to your letter of May 23, 19,11 with vhic l Y°11 enclosed a letter regarding Regulation WI Consumer Cree fram Mr. Frank E. Wentworth of the Newburyport Motor 4n4., Newburyport, Massachusetts. The letter pertains 6/5/51 -15- "to the effects of the credit terms of the regulation on the instalment sales of automobiles to average workingmen who require private motor vehicle transportation in order to reach their places of employment. "We recognize that, as Mr. Wentworth points out, the terms of Regulation W may make it difficult or even impossible for some workers who need automobiles for the above Purpose to buy new cars or the higher priced late model used cars. In view of this situation, the Board has given considerdble study to the possible need for special provisions covering cases of this kind. To date, however, our studies have not indicated that the need for such a special exemPtion is great enough to justify the sacrifice that ould be involved in the effectiveness of Regulation W. lhis is especially true, in our opinion, because the reguiati°n/ on balance, is helpful to the low income purchaser n making an automobile available to him at lower prices. "Before Regulation W was reissued last September, automobile prices were substantially higher than they are : New automobiles were generally sold with extra equipw-116 or small trade-in allowances, and used automobiles 1,al'e Priced considerably higher than they are now. While ; egulation W was not the only factor tending to reduce car ices, we feel it has made an important contribution. As a result of these price declines, down-payment requirements rs substantially smaller than they were, and the monthly ,Zents required under the regulation are materially less st, , ti,theY would have been at pre-regulation prices. Our tb-`"-es show that good used cars are available on terms oi "can be met out of factory workers' incomes. The man ca,rerage income typically buys a used car. Good usable continue to be available on terms of 25 to 50 dollars a Month. ty* "The Board has also studied the possibility of making stuVdual exemptions in certain special cases. These sitmies, based Tn part on our experience with such proving World War II, have indicated that any such ner,,r.1°11 would also tend to weaken seriously the effective°f the regulation. Of co The consumer credit regulation must be restrictive, hei„4.11-1 ' sel if it is to accomplish its major purpose of kurig to restrain general inflationary forces by curbing r j 2,5G 6/5/51 "instalment credit. The Board does not wish to be excessively restrictive in the case of individual articles or Industries, but in carrying out its responsibilities under the Defense Production Act it must at the same time consider the necessity of curbing the inflationary effect of instalment credit in the interests of the economy as a whole, in this period of national emergency. "Although the Board recognizes that there has been a eeneral softening in the markets for consumer durable goods falov 1146 the heavy buying wave of last December and JanuarY, nevertheless, in the light of general economic and ?redit conditions, the relaxation of the regulation at this 'time does not appear to be in the interests of the national defense program. "We are returning Mr. Wentworth's letter as requested, a we appreciate this opportunity to outline our views on • prdblem of the average worker who requires private auto• lie transportation in order to hold his job. We received identical letters from Mr. Wentworth • ough the offices of Senator Saltonstall and RepresentaIfe sates, and we replied to both substantially as we • e in this letter." n Approved unanimously, with the understanding that similar letters would be sent in response to other inquiries where appropriate.
@FedFRASER