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Minutes of actions taken by the Board of Governors of the Federal. Reserve System on Wednesday, June 7, 1950. 111 the Board Room at 3:30 P•m• PRESENT: Mr. Mr. Mr. Mr. Mr. The Board met McCabe, Chairman Eccles Szymczak Draper Vardaman Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Leonard, Director, Division of Bank Operations Mr. Vest, General Counsel Mr. Nelson, Director, Division of Personnel Administration Mr. Mr. Mr. Mr. Mr• Szymczak referred to the discussion at the meeting of the Board on December 15, 1949, at which it was agreed that the 4ectItive n ‘Jommittee of the Retirement System be advised (1) that the B(lard was Still of the opinion that the arrangement with the Northern 1Nst company should be terninated, and that the Retirement System 811°1111 employ a qualified individual as an investment manager who work under the direction of the Investment Committee, and (2) that the Board would accept temporarily the action taken at the 1"t14g or the Executive Committee on December 14, 1949, but that it 1.0a.s r equested that the committee make a thorough investigation of the --tY and desirability of obtaining the services of a competent eStn1ent manager and submit a report thereon prior to the annual eeti g of the Board of Trustees of the Retirement System in the g of 1950, so that a final decision on the matter could be risy0r) 4..‘ ( "'.50 reached -2at that time. He also referred to the letter to Mr. Gilbert, Chairman of the Executive Committee dated January 13, 1950, concelting this matter and stated that a subcommittee appointed by Mr. Youn, 5.4 Chairman of the Investment Committee of the Retirement System, tt„ u a report under date of April 14, 1950, copies of which had been sent by Mr. Young to members of the Board, recommending in subete that no change be made in the present procedure of retaining the Northern Trust Company to act as investment adviser and manager °I the fund. Mr. Szymczak added that the investment Committee ap- Pr°ved the report of the subcommittee and that at the request of p and Mr. Draper, Messrs. Conkling, Masters, and Pawley of the 80ard I staff had reviewed the subcommittee report after which they ")ItItt A a memorandum dated May 31, 1950, in which they agreed with the , .6sflera1 conclusions or the subcommittee. Mr. Szymczak went on to 84:Y thAf -- '411.3 raised the question of the position the Board should take, 421 its discussion with the Presidents of the Federal Reserve Banks Ilaxt -esk since the Board of Trustees of the Retirement System would hold itS annual meeting on Wednesday afternoon, June 14. During the ensuing discussion, Chairman McCabe said that, for vrls which he had previously stated, he still felt that an individvestment counsel would produce better results for the retirement Yetem - 'an a trust company, and that it would seem desirable to ask the rresidents of the Federal Reserve Banks to continue their study °I the matter. 724 V7/50 —3— There followed a discussion during which reference was made to the u nderstanding at the meeting on April 29, 1949, at which sev— ex‘al officers of the Federal Reserve Banks who were also officers of the Retirement System of the Federal Reserve Banks were present, and ' l'111-Ch it was agreed that the present investment policy should be ec)ritinued with changes in investments designed to increase the average earnings to a 3% level with the understanding that in the event the earai ngs on investments were not brought up to 3% by the end of 1950, ther, would be a determination of the policy which would justify a guarantee of retirement system benefits. Chairman McCabe stated that since the matter of investment 131'"eclure was to be reviewed after the end of 1950, the question for discv, -eei°n at this time was whether the Board should take serious °Ileetion to the report submitted by the subcommittee appointed by Mr, Y°11ng as Chairman of the Investment Committee. ill the He suggested that • circumstances, the Board bring forcibly to the attention of the la ' 1'esidents of the Federal Reserve Banks, all of whom are trustees Of --e retirement system, at a meeting to be held next week before the m eeting of the Board of Trustees of the Retirement System, the that the members of the Board questioned whether the Presidents had ' lven adequate consideration to the employment of an investment colttis elor, and that it would be desirable to continue the study of the katte . r with the view to discussing it again at a later meeting. r'"•1 6/7/50 -4Mr. Vardaman stated that he would be absent on vacation when the Board met with the Presidents of the Federal Reserve Banks next ' l'eek) but that he would like to have the minutes show that he was 0I3P°sed to continuation of the arrangement with the Northern Trust C enY or any other trust company and favored the employment of an investment counselor along the lines sugested by Chairman McCabe. It was agreed unanimously that at a meeting with the Presidents to be held next week prior to the meeting of the Board of Trustees of the Retirement System, Chairman McCabe would state the views of the Board substantially as follows: "While the Board appreciates the thorough study given to this matter by the subcommittee appointed to study investment management procedure, it can not escape the feeling that the benefits that would come from ! 1*, investment manager, who would operate under the 1-recti0n of the Investment Committee and who would e access to competent investment counsel, would : 4..1 111g about more effective management of System Retirement funds. However, it is understood that the of the subcommittee study are concurred in by ' 1,7 the Investment Committee of the Retirement System and perhaps by a majority of the Presidents. In these circumstances, the Board will raise no objection to the ?continuation of the existing procedure until the end of the current calendar year when it is expected that, in accordance with the earlier understanding, the whole cp:lestion of retirement system investment policy (as ctstinguished from investment procedure) is to be reviewed. "It is the experience of members of the Board that nvestmentn I counsel are much more alert than corporate trustees to changes in economic conditions and trends Which make changes in security holdings advisable and that they are in a position to increase income with°ut departing from the principles that should govern the investm , .nt of funds of this kind. The Board real- r 726 6/7/5o -5- "izes that such a procedure undoubtedly would require soae additional work on the part of the Investment Committee, but it is believed that the additional benefits which would flow from the arrangement would more than compensate for the additional work involved. "Accordingly, the Board suggests that this question be given further study and that the Retirement System be now and the last meeting of the Presidents Conference in 1950 undertake to study the experience of 12et 1rement, endowment, and similar funds in New York, Ilioago, and other principal cities, for the purpose of developing further information which would make it P?ssible definitely to determine whether the Board's view in this matter is correct." At this point Mr. Myrick, Assistant Director, and Mr. Farrell, linical Assistant, Division of Bank Operations, joined the meeting. Before this meeting there had been sent to each member of the Board a copy of a memorandum from Mr. Farrell dated June 5, 1950 with l'e81) eot to expenses of the Federal Reserve Banks. The memorandum l'eferred to the Board's letter to the Chairmen and Presidents of all ?ecil'al Reserve Banks dated March 16, 19504 and to comments received Na three of the Banks in connection with that letter, and contained a 8tatement which at Chairman s request the Secretary read as McCabe' "It may be of interest to note that, among gencomments regarding our cost accounting procedure, "?he Price, Waterhouse report stated that the Board I°111d stimulate cost consciousness and other means assuring progress in the cost control field.' The rePort also contained the following specific observations: era' T 'Since salaries are the predominant expense In the Federal Reserve System, the control of costs is principally a matter of determining that the banks obtain value in services commensurate with the compensation and other 6/7/50 -6- "employee benefits paid. It involves the evaluation of working methods. The nature and volume of the various service operations of the banks cause the design of these methods to have even more than their normal importance. It is our view that, in most circumstances, the study, design and development of working methods and procedures and other analysis of costs should he handled by an adequate staff Placed at a level sufficiently high in the organization structure of the banks as to be Independent of the various operating departments.' discussing his views informally with the Committee on 'iccounting, Mr. Grady, of Price, Waterhouse and Company, stated that he thought the study of procedures and other nelyses of costs should be a full-time job. He said at he would despair of having this work handled by a committee of officers with other duties." Chairman McCabe referred to the suggestion contained in the (Ialscli s letter of March 16 that, as a part of the topic to be discussed lit the next President's Conference, consideration be given to the adl'isability of appointing a System committee composed of representatives °f the Chairmen'd and Presidents' Conferences and the Board to study 641d submit a report on the problems involved in the budgetary control exPenses, vith the understanding that such a committee might arrange f()T, the service of outside consultants of their own selection. After sttting the reasons why he felt it would be desirable to have such 8 coZmitte e appointed, Chairman McCabe suggested that at its meeting Iqth the Presidents' Conference next week the Board renew the sugges- tic% the for such a committee and that it discuss fully with the Presidents Problem of effective control of expenses in the Federal Reserve Ysteill and how such control might best be attained. 728 6/7/50 -7Following a discussion, Chairman McCabe's suggestion was approved unanimously with the understanding that he would meke a statement substantially as follows: "The Board would like to have a thorough discussion of this problem and to consider with the Presidents the de sirability of appointing the committee suggested in our letter of March 16, 1950, with the thought that the comittee would suggest for approval by the Board and the Federal Peserve Banks a procedure as to how the proPosed study of the problems involved in an effective control of expenses would be conducted; that is, whether ti?,e committee should arrange for the services of out1d e consultants , whether E representative from each Federal Reserve Bank should be on the working group, etc. 141:latever procedure is followed it should be one that 1 have the full support of everyone concerned so that , here can be an effective solution of the problems that nave been confronting the System." Messrs. Myrick and Farrell withdrew from the meeting and Mr. YOun g) Director of the Division of Research and Statistics, joined the Illeeting at this point. There was a brief discussion of the contents of a statement thet "-Olt be presented by Chairman McCabe when he appeared before the Senate Banking and Currency Committee to testify in connection %ith the " that proposed Small Business Act of 1950, S. 3625 and H.R. 8565 8566, but no conclusions were reached and it was understood the matter would be considered at a later meeting of the Board. At this point all of the members of the staff with the exception of Messrs. Carpenter and Sherman withdrew, and the action stated %itt.11 respect to each of the matters hereinafter referred to was taken 729 6/7/50 -8- by the Board: Minutes of actions taken by the Board of Governors of the Fed eral Reserve System on June 61 19501 were approved unanimously. Memorandum dated May 231 19501 from Mr. Young/ Director of the Division of Research and Statistics, recommending the appointtett of Edward Marcus as an Economist in that Division, with basic salaX7 at the rate of $52800 per annum, effective as of the date Po which he enters upon the performance of his duties after having Passed. the usual physical examination. Approved unanimous Secretary.
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