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621 A meeting of the Board of Governors of the Federal Reserve 8Yetem Was held in Washington on Tuesday, Tune 7, 1938, at 3:00 p.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymczak McKee Draper Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chairman Mr. Wyatt, General Counsel Mr. Goldenweiser, Director of the Division of Research and Statistics Mr. Dreibelbis, Assistant General Counsel Mr. Ransom referred to recent newspaper articles relating to " tion by the Treasury in placing imported gold in the Treasury general "count, thereby in effect sterilizing the gold, and inquired whether "a action was being taken by the Department as a matter of policy. ChElirman Eccles stated that the procedure was merely a continuation ' c t a practice followed in the past and that, in view of the large work14 balances held by the Treasury at the present time, it made little °II to difference whether gold imports were handled in this manner, 814 "if gold certificates were issued to the Federal reserve banks 1ii the amount of the imported gold it would only add to the Treasury EL/el, -(les at the Federal reserve banks and would not affect member bank ' leeerves. If, however, Chairman Eccles said, the working balances of tile Treasury fell so low that it would be necessary for the Treasury -) ) C2f 6/7/38 t° borrow funds to pay for the incoming gold it would appear that such action would be a matter of policy concerning which he would expect that the Treasury would consult with the Board. It was also pointed cut that the Treasury had stated that the gold held in the general acas free gold could be used to meet gold exports without affecting tta damestic monetary situation. There was presented a letter addressed to the Board under date "Tune 6, 1938, by Mr. Sinclair, President of the Federal Reserve l*Ilk of Philadelphia, in which he stated that the National Bureau of Economic Research had requested that a portion of the time of Mr. C. ' A Sienkiewiez, Assistant Vice President of the bank in charge of the bejakt 8 Department of Statistics and Research, be made available during the next year and a half to supervise that part of the general study Which has been undertaken by the Bureau on consumer financing which Will cover the consumer financing activities of commercial banks. The letter inclosed a copy of an outline of the proposed study, including the Part of the study which would be supervised by Mr. Sienkiewicz, 414 stated that President Sinclair had reviewed the matter with the 11°41*(1 of directors of the bank, with the special committee of the board °t clirectors which gave consideration to the request, and with repreaa ntatives of the National Bureau of Economic Research; that he was "Inced that the proposed study would be of value to the Federal l'seervs banks and the member banks; that if not more than one-half C23 6/7/38 -3- °t Mr. Sienkiewicz' time were made available for the purpose adjustment could be made without inconvenience or risk to the continuity kad value of the research and statistical work now carried on by the beak: and that the board of directors of the bark had authorized President Sinclair to approve the proposed arrangement, if no objection were interposed by the Board of Governors, on the basis of the payment Of salary to Mr. Sienkiewicz by the Federal reserve bank during the Period that the arrangement would be in effect at the rate of $5,000 13" annum, the balance of ta,500 of his annual salary to be paid by the National Bureau of Economic Research. The letter added that the ELIll'angement would have to be somewhat flexible as to time and subject t° control by President Sinclair and that the study would be carried on in dependently of the work of the bank. The question of Mr. Sienkiewicz' participation in the proposed 8t/14 was considered in the light of the enlarged program of the Board "°btaining through the Federal reserve banks and otherwise additional (bIrrent business information and the development of the Department t Statistics and Research to carry on its share of this activity. 141'. Goldenweiser stated that, notwithstanding the fact that the De- 13"nent of Statistics and Research at the Philadelphia bank was one Of the best in the Federal Reserve System, he felt that the bank was 14 need of the full time services of Mr. Sienkiewicz and that it would riot be desirable for him to undertake the supervision of the proposed 6/7/38 etudY. -4In response to an inquiry as to why the National Bureau of E'en -1101ilic Research had approached Mr. Sienkiowicz, Mr. Goldenweiser stated that he understood that the representatives of the Bureau were ecqueinted with Mr. Sienkiewicz and his work and felt that he would be a desirable person to undertake the work but that if he could not undertake the task the Bureau would undoubtedly be able to find someone else wh° would be qualified. It was suggested that if the Board's approval were given in this case it might be called upon to approve similar reNests involving other officers of the Federal reserve banks and that since it did not appear that the services of Mr. Sienkiewicz were indispensable to the study it would not be desirable for him to serve. In connection with the discussion, there was also presented 4 second letter written by President Sinclair under date of Tune 6, 1938) requesting approval by the Board of the appointment of Robert 14sse1l Williams, sr., as statistician in the bank's Department of Ststistics and Research, with salary at the rate of 2,52.0 per annum. 7148 reasons riven for the appointment were that one of the key en151°Yees in the office had suffered a serious eyesight impairment that result in permanent disability and that there was need in the (lePertment for a competent individual who could develop to succeed to l 'esPonsible position and assist in meeting the current demands on the department. At the conclusion of the discussion moved that the Board take the McKee Mr. 6/7/38 -5position that the entire time of Mr. Sienkiewicz was needed at the Federal reserve bank and that it would not be desirable for him to undertake the proposed study. Carried unanimously. Ransom moved that the Secretary be requested to advise President Sinclair that the Board approves the appointment of Mr. Robert Russell Williams, Jr. as statistician in the Department of Statistics and Research of the Federal Reserve Bank of Philadelphia, with salary at the rate of 12,520 per annum. Carried unanimously. Reference was made to the existinFr arrangement under which the 1/°°k5 of the Board's Fiscal Agent are audited twice each year by the allditors of the Federal Reserve Bank of Cleveland and to discussions 1/11.1011 had taken place with respect to the question of the desirability °r having the audits made by an outside auditing firm. It was stated that the audits under the present arrangement were very thorough and entirely satisfactory, but that it was possible that such an audit Illight not be regarded as being entirely independent and that the positi°4 might be taken that the audits should be made by auditors who are I/c/t connected in any way with the Federal Reserve System. It was also atated that when the present arrangement was made originally it was the intention to rotate the work among the auditors of the nearby Fedreserve banks and it was explained why this plan had not been tqlowed. It was agreed that the present Plan for audits should be G2$ 6/7/38 -6- °°ntinued in effect with the understanding that the work will be rotated 4nd that arrangements will be made for having the audits during the period ending June 30, 1939, made by the auditors of a different Federal reserve bank. At the conclusion of the discussion the matter was referred to the Personnel Committee for recommendation to the Board. Mr. Ransom stated that yesterday afternoon Representative GoldsActing Chairman of the Banking and Currency Committee of the 1411803 of Representatives, called Mr. Wyatt on the telephone and requested tlmt he and Mr. Ransom attend a hearing to be held by the Committee this morning on Bill H.R. 10845, introduced by Representative Steagall, to limit the liability of foreign branches of national banks. Repre- seatatives of the banks principally interested, Mr. Ransom said, were Pl'sse.at at the hearing and after they had presented their views the C°Onlittee asked for the opinion of the Board, in response to which loft.. IlY"t presented for the record the letters addressed by the Board to Selultor Wagner under date of May 13 and June 6, 1938, in connection W4.4 a similar bill, S. 4046, introduced in the Senate. Mr. Ransom "dad that the principal question before the Committee was whether the bill should provide for reasonable notice being given to the present dePcIsitors and creditors of foreign branches of the changes which the le islation would make in their rights and that the attorney for The C1148° National Bank of the City of New York, who was present at the 11"tg, stated to Mr. Ransom, and had previously stated to Mr. Wyatt th" his bank would oppose any legislation on this matter if it contained 627 6/7/38 4 _7- Provision requiring notice, since notice was not required by the laws of the State of New York to be given by State banks operating foreign branches. In response to a request, Mr. Ransom said, he had advised the e°zunittee that the Board would be glad to consider the question of notice 44d inform the Committee of its decision. Mr. Ransom further stated that, since leaving the hearing, information had been received by Mr. Wyatt that the bill had been opposed by certain members of the House Committee and therefore, would not be reported out at this session of the Congress, elld that it was understood that Senator Wagner had called an executive ee8sion of the Banking and Currency Committee of the Senate for tomorrow 4131ining for the purpose of giving further consideration to the Senate bill. Mr. Ransom then recommended that, in view of the statements made the proponents of the bill at the hearing and after careful considerati°11 of the question of notice, the Board take the position that the legislation should provide that if the banks wish to take advantage of the 131"isions of the law they would be required to give reasonable notice to those who were depositors and other creditors of their foreign branches at the time of the enactment of the legislation of the changes made thereby. Mr. Ransom's recommendation was concurred in by the other members of the Board present and, upon motion by Mr. Szymczak, the Secretary was requested by unanimous, vote to advise Messrs. Wagner and Goldsborough by letters to be approved by Mr. Ransom that the Board is of the opinion that the bill should provide that it would not affect the rights of existing depositors and other creditors of a branch or agency of a national bank in a foreign country until after reasonable notice thereof had been given to them. 6/7/38 -8Mr. McKee reported for the record that it had been decided that the application of The People's Bank of Potsdam, N. Y., Potsdam, 1\l'ew York, for membership in the Federal Reserve System, which was disegeeed at the meeting of the Board on December 10, 1937, should be held in abeyance pending receipt of another report of examination of the bank. At this point Messrs. Thurston, Viyatt, Goldenweiser and treibelbis left the meeting and consideration was then given to each Of the matters hereinafter referred to and the action stated with re8Pect thereto was taken by the Board: The minutes of the meeting of the Board of Governors of the ecicral Reserve System held on June 6, 1938, were approved unanimously. Letter to Mr. Hale, Vice President of the Federal Reserve Ilank of San Francisco, reading as follows: "This refers to your letter of May 10, 1938, in which You request advice on the question whether, in connection With the limitations on the discount of the paper of one borrower, which are contained in section 1(1) of Regulation A, it is proper to consider reserves for dividends Payable in common stock as a part of capital and surplus. "This question has not heretofore arisen under the Provisions of Regulation A, and, accordingly, the Board has not previously had occasion to express any viewpoint concerning it. "Section 1(1) of Regulation A reads as follows: '(i) Limitations. - The aggregate of notes, drafts, and bills upon which any person, copartnership, association, or corporation is liable as maker, acceptor, indorser, drawer, or guarantor, discounted for any member bank shall at no time exceed the amount for which such person, copartnership, association, or corporation 6r7oCi 6/7/38 -9- "'may lawfully became liable to a national bank under the terms of section 5200 of the Revised Statutes of the United States, as amended. The law forbids a Federal Reserve bank to discount for any State member bank notes, drafts, or bills of exchange of any one borrower who is liable for borrowed money to such State member bank in an amount greater than that which could be borrowed lawfully from such State member bank were it a national bank.' "It will be noted that the limitations contained in both the first and second sentences of the above Provision, which are derived from the provisions of section 13 and section 9 of the Federal Reserve Act, are based upon the maximum amount for which one person may lawfully became liable to a national bank. In determining such maximum amount, it is necessary to consider both the statute and the rulings of the Comptroller of the Currency in administerina the law. Since the Comptroller has taken the position that reserves for dividends payable in common stock may not be considered as capital or surplus under the provisions of section 5200 of the United States Revised Statutes, such reserves should not be considered as a part Of capital or surplus in determining the maximum amount of the borrowings or liabilities of one person to a member bank under section 1(i) of Regulation A. "It may also be pointed out in this connection that, in order to comply with the spirit of the law, a Federal Reserve bank, in making advances to a member bank secured by paper eligible for discount, as well as in discounting Paper for a member bank, should not acquire paper upon which one person is liable in an aggregate amount in excess of the limitations prescribed in section 1(1) of the regulation. On the other hand, however, in view of the fact that section 10(b) of the Federal Reserve Act was enacted subsequently to the provisions of the Federal Reserve Act relating to the amount of paper discountable for one borrower and in view of the purposes sought to be accomplished by the provisions of section 10(b), it is the Board's opinion that the limitations of section 1(1) of Regulation A and the provisions of law upon which they are based are not applicable to advances made under the provisions of section 10(b). It is assumed, of course, that a Federal Reserve bank, in extending credit in any case, will avoid the 6/7/38 -10- "acquisition of an undue amount of paper upon which any one person is liable." Approved unanimously. Letter to Mr. Marshall R. Diggs, Acting Comptroller of the CurIbencY, reading as follows: "Receipt is acknowledged of Mr. Gough's letter of May 26, 1938, with further reference to the applicability of section 32 of the Banking Act of 1933 to Mr. George D. Wray Who is a director of the Commercial National Bank in Shreveport, Louisiana, and president of Motors Securities Company, Inc., Shreveport, Louisiana. Inclosed with Mr. Gough's letter were a copy of a letter from the National Bank Examiner, a statement of the financial condition of the Motors Securities Company as of April 30, 1938, a specimen copy of the collateral trust note issued by the Company, and a copy of the form of trust indenture under which the notes are issued. From these documents it appears that the pertinent facts are as follows: "The Motors Securities Company acquires promissory notes secured by Purchase money liens on motor vehicles and deposits them with the National Bank as trustee under a trust indenture. The Company then issues its collateral trust notes secured by the collateral thus deposited. The notes are the direct obligation of the Company. They are issued serially in denominations of 4500 to $5,000, each series being in the sum of 0.00,000. The specimen note which has been furnished is entitled 'Collateral Trust Note Series Number 55'. It is payable to 'Bearer', but has blanks for the amount, the number of the note, and the date of the Particular trust indenture under which it is issued. Each note bears a 'trustee's certificate' referring to the indenture. The collateral trust notes are sold directly to investors by the Company. "The financial statement of the Company shows (in round figures) total assets of t1,500,000. The largest item of liabilities is .22,000 for outstanding collateral trust notes, end the remainder consists of V300,000 capital, ;.43,000 surplus, 431,000 unearned service charges, 431,000 notes Payable, 4156,000 accounts payable (for insurance), and $62,000 reserves. "On the basis of these facts the case does not appear to be distinguishable in principle from that described in C3I 6/7/38 -11- "the ruling of the Board of Governors published in the Federal Reserve Bulletin for 1934 at page 485, which was referred to in the Board's letter to you of May 6, 1938 regarding this matter, and it therefore appears that the relationships described in the first paragraph of this letter are in violation of section 32 of the Banking Act of 1933. "Copies of this letter and the previous correspondence are being sent to the Federal Reserve Bank of Dallas for its information, and it is suggested that if Mr. Wray desires to submit additional facts or arguments, he should communicate directly with the Federal Reserve Bank so that any additional information may be submitted to the Board With its comments." Approved unanimously. Thereupon the meeting adjourned. Q 5 P 601-1 .A) APProved: Chairman. s
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