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Minutes for To: March 10, 1960. Members of the Board From: Office of the Secretary Attached is a copy of the minutes of the Board of Governors of the Federal Reserve System on the above date. It is not proposed to include a statement With respect to any of the entries in this set of minutes in the record of policy actions required to be maintained pursuant to section 10 of the Federal Reserve Act. Should you have any question with regard to the minutes, it will be appreciated if you will advise the Secretary's Office. Otherwise, please initial below. If You were present at the meeting, your initials will indicate approval of the minutes. If you were not present, Your initials will indicate only that you have seen the minutes. Chm. Martin Gov. Szymczak Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King 0-10 96!) Minutes of the Board of Governors of the Federal Reserve System on Thursday, March 10, 1960. PRESENT: Mr. Mr. Mr. Mr. The Board met in the Board Room at 10:00 a.m. Martin Chairman 1/ Balderston, Vice Chairman Szymczak Mills Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Miss Carmichael, Assistant Secretary Mr. Thomas, Adviser to the Board Mr. Young, Adviser to the Board Mr. Hackley, General Counsel Mr. Farrell, Director, Division of Bank Operations Mr. Solomon, Director, Division of Examinations Mr. Chase, Assistant General Counsel Mr. Conkling, Assistant Director, Division of Bank Operations Mr. Collier, Chief, Current Series Section, Division of Bank Operations Collecting branch reports of condition. There had been distributed 13. inenlorandum dated March 7, 1960, from the Division of Bank Operations, Presenting views of members of the Board's staff and of other agencies on 131‘°Posal to expand the regular biennial collection of deposits by e°11nties reports scheduled for the June 1960 call to: (1) require a l'eP°rt of individual branches; (2) ask for detail in addition to the 11811e1 county totals of demand and time deposits of individuals, partnershiPs, and corporations, and total deposits; and (3) require publication °f Inclividual branch data, or in some other way, make it legally EIv4ilable for use in administrative hearings. The memorandum pointed °I.it that reports of condition had not been collected from all branches 1/ 'ntered meeting at point indicated in minutes. 3/lo/6o -2- since June 1949; the results of that survey were published in the July 1950 Federal Reserve Bulletin. It had been suggested that if reports were to be collected again from branches, this should be done soon as a longer lapse would limit the usefulness of comparative statistics. Since 1949 the Board has made biennial collections of total demand and time and total deposits of individuals, partnerships, and corporations deposits for all branches located outside the head office county. County totals for all branches, rather than individual branch figures, have been collected in these surveys. These data have been the basis for the Board's Standard biennial pamphlet, Distribution of Bank Deposits by Counties and MetroPolitan Areas. In the early stages of discussion of this matter, memoranda were Qirculated to interested members of the Board's staff, other bank supervisory of the agencies, the Department of Agriculture, and the Bureau 1311dget. haa Divisions Subsequently, representatives of the interested Board discussed these proposals in an attempt to reach a consensus. Bank After considering varying views and needs, the Division of the June ations recommended that the collection of branch figures at ' °Pel 196o call be limited to the usucl deposits by counties totals that have bee4 collected biennially. that, if the Commenting on the memorandum, Mr. Conkling noted l'eeoMmendation of the Division of Bank Operations were adopted, the Boara, S Legal, Examinations, and Research and Statistics Divisions 3/10/60 -3- vould not have the information in which they had expressed an interest. However, his feeling was that there would be difficulty in collecting all of the various types of figures that these Divisions thought would be helpful. Chairman Martin entered the meeting at this point. Governor Mills said he took a little more friendly view of the Pr°Posal than was indicated in the memorandum from the Division of Bank &Aerations. The collection of branch reports probably would not recur for several years. He felt that it might be desirable to collect the statistics and use them as a benchmark, since otherwise there was a ti8 of having a void in statistics that might be needed at some future altte• He recognized, however, that there might be a problem in at;king 1444 to furnish branch data for public release since many States do not l'eglaire their publication and, if the Board were to make public these tiglIres) it would in a sense be overriding State laws. Also, this 14.*()cedure would be contrary to the feeling of some banks operating bz'stlebes that data for individual branches should not be given public ttelltion. Governor Mills was of the opinion that banks were wrong in , taki LE this attitude, but there was a strong sentiment in that direction. Gclvernor Mills was aware of the burden which would fall on the Division or tn.a. 4444 ' Operations if it was decided to compile the statistics under e°naideration, but he did not believe that their collection would impose elltieal problem for the commercial banks that might be requested to 1'1411411 them. 3/10/6o -4Mr. Conkling noted that most of the requests for branch infor- mation with which he was familiar were for number and types of branches, and the Division of Bank Operations has this information readily available. He felt the most pressing need for the other branch data was in the Legal arid Examinations Divisions. Mr. Farrell was of the opinion that asking banks for branch data Ir°1115. impose a burden on them because of the centralized bookkeeping tread- He observed that banks having centralized bookkeeping systems 11-ght not have figures on deposits of branches readily available; it 170111d be necessary in at least some cases for these data to be specially tabulated or estimated. He also felt the bank relations activities of the Federal Reserve Banks might be hampered if banks were asked to furnish cli data. One suggestion by Mr. Crosse, Vice President at the New 1°rIt Reserve Bank, was that if banks were to be asked for these figures, PerilaPs an announcement to that effect should be made two or three 41°Atils in advance so that banks could make some arrangements for branch cl4ta or estimates. Mr. Farrell added the comment that careful consider- 4' 7ti°4 should be given to requiring bank officers to certify figures 1411c11 they knew were estimated. Mr. Solomon said that his interest in the proposal under conBider . atIon was supplemental to and concurrent with the interest expressed 11* °thers. loah It would be helpful to have information on deposits and of branches in analyzing particular situations such as those arising b holding company cases and applications to establish branches. 10.#11011 • 3/10/60 Governor Balderston inquired whether the Comptroller of the CUrreney and the Federal Deposit Insurance Corporation were interested in obtaining branch figures, and Mr. Conkling replied that the Federal Deposit Insurance Corporation was only mildly interested in individual brim u --eu figures; their chief interest was in the county totals included in the Board's biennial publication on Distribution of Bank Deposits by Counties and Metropolitan Areas. He had the impression the the C°mPtroller of the Currency was not interested in branch figures. Mr. Thomas stated that at its meeting last week the System Research Advisory Committee discussed the proposal being considered. Some ln the group were enthusiastic about securing branch figures, especially the San Francisco Reserve Bank. The Committee voted unanimously favor of securing the branch data on a one-time basis. After these flaUres had been obtained, the Committee favored a review in order to deterzine whether they should be compiled periodically and, if so, how tl*ecluentlY• Mr. Thomas said further that since no figures had been e°11113iled since 1949, it would be desirable to have something available 48 to distribution of banking resources and concentrations. He suggested that t there 4f was to be a loan schedule, it would be important to know /rhett b usiness loans had been made in order to get some idea of the local le1341.4g, activity. Mr. Hackley said it would be helpful to have the branch figures Be in passing on applications under the Bank Holding Company Act 911 3/10/60 -6- on mergers or branch applications. Without them, it was almost impossible to determine the true competitive effect. He noted that deposit figures should be obtained for both national and State member banks and that the three Federal supervisory agencies should follow the serae practice if the figures were to be used in litigation. He thought it 'would be desirable from a legal standpoint if the Board were to require that reports of branch deposits be published perhaps every two or three years. After some further discussion, including the question whether banks sh°4-1d. be required to publish data for individual branches, Chairman Mart Or suggested and it was agreed that further discussion of the collection b ranch statistics be postponed until a later meeting when all members or the Board were present. Messrs. Molony and Fauver, Assistants to the Board, Noyes, Director, ) Koch, Adviser, and Dembitz, Associate Adviser, Division of Res. -exch and Statistics, entered the room during the foregoing discussion. Tax remittances to Federal Reserve Banks. There had been dis- trib, ''acl to the Board a memorandum dated March 7, 1960, from Mr. Farrell Conce rfling a proposal made in June 1959 by the Treasury Department that the ,ederal Reserve Banks extend their depositary activities as fiscal Eterits of the Treasury to include receipt of payments made by individuals ()4e8timated income taxes. (4111 : 3/10/60 -7The memorandum pointed out that for the last ten years the Pecieral Reserve Banks have been acting as fiscal agents for the Treasury Ln the receipt of deposits from employers representing withheld income taxes, Social Security taxes, Railroad Retirement taxes, and also certain excise tax remittances. The remittances received by the Federal Reserve Bank are credited to the Treasurer's General Account, and for each remittarice two copies of a punch card receipt form are prepared. One c°PY of this receipt is "validated" by a special stamp and returned to the employer who made the deposit, for submission to the Director of Internal Revenue with the depositor's report. The other copy of the reeeilot form is retained by the Federal Reserve Bank. the depositor's account number. Both copies bear When the Director of Internal Revenue receives the report and the validated receipt forms, he forwards the 14tter to the Federal Reserve Bank, where they are matched with the copy retained by the Reserve Bank in order to make sure that the amounts clai„ "Led on the report have actually been deposited in the Reserve Bank. Under the Treasury Department proposal, the procedure would be the s ame as outlined in the above paragraph except that (a) remittances wou1,4 be made by the taxpayers themselves, either directly or through a . erejal bank, rather than by employers who have withheld part of the twcp 4Yer's salary, and (b) Directors of Internal Revenue would deposit rec Pts on separate certificates for matching on an annual basis. The Treas urY Department originally expected no opposition by the Federal 3/10/60 -8- Reserve Banks to the proposed procedure because of a belief that the Proposal was merely a logical extension of the work that the Federal Reserve Banks were already performing. This position was based in part on the fact that the Federal Reserve Banks are now receiving deposits Of Payments for Social Security taxes, which are payments from the taxPaYers. At a joint meeting of the Board of Governors and the Federal Reserve Bank Presidents on July 7, 1959, it was reported that the Presidents were unanimous in their view that the Treasury proposal was not In the best interests of the System and not in the public interest, and Chairman Martin said it was understood that Federal Reserve representatives should be firm that the Federal Reserve System was a central banking °Nallization and not a tax-collecting agency. The Joint meeting authorized G°vernor Mills and Presidents Leach, Fulton, and Mangels to present the 6-'3 views to Mr. Heffelfinger, Fiscal Assistant Secretary of the ' 11°41 TIse"IlrY Department. A copy of Governor Mills' report of the conference, 4ted July 7, 1959, was attached to the March 7, 1960, memorandum of Mr. Faxreaa In his report, Governor Mills indicated that Mr. Leach had ej out that the Federal Reserve Banks were bankers' banks and were n°t intended to deal with the public at large and that the request of Treac. and Internal Revenue Service would shift administrative income tkx "4ccounting functions to the Federal Reserve Banks where they did not bel °rig. However, Mr. Heffelfinger was adamant in his position that 3/1o/6o -9- the Treasury could legally and properly demand that the Federal Reserve Banks comply with the Treasury's request in line with their fiscal agency relationship to the Treasury. He acknowledged that the Federal Reserve Banks would have to carry an additional workload, especially where estimated income tax payments as low as $12.50 each would be involved. He said, however, that the Internal Revenue Service planned to ask Congress or legislation that would not require the verification of individual Ine°me tax returns for amounts due on estimated income tax payments below $40 per year. In the July 7 conference, Mr. Heffelfinger reported that the Treasury Department was under insistent pressure from the Internal Revenue Ser., vice to have the Federal Reserve Banks function in the manner requested, c4 the basis that the work could be more efficiently handled in that 11141111er and at less cost than is now the case. He had no question but that costs of this type incurred by the Federal Reserve Banks would be laeltriblirsable in character and that initially they would be defrayed out Or the Internal Revenue Service appropriations but subsequently by a 11-1'eet appropriation. Since the Federal Reserve Banks were already tax depositary receipts for other types of Federal income tax 614d. ev —else tax payments, he was unwilling to recognize the distinctions ' (11'111 41 bY Mr. Leach. In his July 7 memorandum, Governor Mills stated that it was his -10a that if the matter was not dropped, technical experts from 3/10/60 the -10- Federal Reserve Banks, the Board, and the Internal Revenue Service should completely analyze the mechanics of the procedure requested, with the thought that such an analysis would either suggest ways by which the /4°1'k involved could be simplified or would clearly reveal that it was of a character that was inappropriate to shift to the Federal Reserve Banks. The memorandum from Mr. Farrell referred to a conversation that Chairman Martin and Governor Balderston had on March 2, 1960, with Under Secretary of the Treasury Baird and Fiscal Assistant Secretary lieffelfinger, in which they repeated the proposal. COXve Following that rsation, Mr. Farrell talked with Mr. Heffelfinger who stated that, after being informed last summer of the Federal Reserve opposition to the Treasury proposal, his staff had attempted, without success, to develop some arrangement under which the regional offices of the Treasury °111d handle the work involved under the proposed plan. 114d given ation to Up He said they the idea because it would mean (a) requesting an appropri- cover at least 150 additional employees, (b) confusion resulting freal the necessity to cross Federal Reserve district lines, and (c) with- the present depositary receipt operation from the Federal Reserve Mr. Hackley said that the Treasury Department proposal had been Niaid ered to some extent by the Legal Division, which was of the opinion that Under section 15 of the Federal Reserve Act the Treasury Department I'l41c1 have authority to direct the Federal Reserve Banks to carry out 3/10/60 -11- tIlY fiscal agent functions, and it would appear that the receipt of taxes Was of a fiscal character. He spoke also of section 6302(c) of the Internal Revenue Code of 1954, which provided that the Secretary of the Treasury may authorize Federal Reserve Banks, and incorporated banks or trust companies which are depositaries or financial agents of the United States) to receive any tax imposed under the internal revenue laws, in such manner, at such times, and under such conditions as he may prescribe; 44(1 he shall prescribe the manner, times, and conditions under which the receipt of such tax by such banks and trust companies is to be treated as payment of such tax to the Secretary or his delegate. Mr. Ii4ckleY noted that this provision involved authority; the Treasury Delpartment had pointed to it as the intent of Congress. the Treasury Department was not entirely clear, however. The proposal of If only receipt °f quarterly payments of tax payers, validation of receipt forms, and 11"ifYing reports were involved, Mr. Hackley felt that this would not be considered collection of taxes. If, on the other hand, the proposal e°\rared verification of tax returns or collection of taxes, Mr. Hackley reit a different question might be presented. The Board would be in a Intlell better position to oppose the propcsal if it went beyond the mere l'e°eiPt of taxes. 4 In summary, Mr. Hackley felt that the proposal involved icy matter rather than a legal question if it related only to receipt or tax Payments and periodic verifications of amounts received. 3/10/60 -12Mr. Farrell stated that the procedure proposed by the Treasury Department was about what Mr. Hackley had outlined. He explained the various steps involved and noted that there would be an auditing problem unless validating stamps were controlled. At the present time the Federal Reserve Banks were dealing with employers who were familiar with the procedures; under the proposed plan, the Banks would be dealing dillectlY with taxpayers. He added that about 80 per cent of the estimated te Payments were now being made through commercial banks. However, urlder the proposed plan since many tax payments would be in small amounts cozinercial banks would not want to handle them. Payers With individual tax- sending payments directly to Federal Reserve Banks, it was to be ePected that the Banks would be bothered with numerous questions. Mr. Falirell noted that in considering the proposal Mr. Leach and Mr. Heflin, General Counsel of the Richmond Reserve Bank, had spoken of the disti netion between the words "receipt" and "collection" with reference to ta)ces. Mr. Hackley stated that this distinction was not clear to him, since he understood under the proposed plan that the Reserve Banks would rael'elY receive quarterly payments, provide evidence of receipt of the le.Yillerits) and periodically verify the total amounts received. After further discussion, Mr. Hackley noted that the Treasury 11) 13 ment proposal involved a problem similar to that which had come up eve, al Years ago when the Reserve Banks were asked to perform certain ' 3/10/60 -13- funct1on3 in the destruction of currency. At that time, after a study or the problem, Mr. Vest prepared a memorandum in which he indicated that if the functions were clearly fiscal agency functions the Board had no legal reason to intervene, except that under the Board's powers Of general supervision over Reserve Banks the Board would be in a position to contest the act of the Treasury if it could be shown that the perof such duties would impair the other functions of the Reserve BankR Mr. Hackley felt it was difficult to see where the other functions of the Reserve Banks would be impaired by extension of their depositary activities to include receipts of payments by individuals on estimated ilacome taxes. At Chairman Martin's suggestion, it was agreed that further disc4881°4 of the proposal would be deferred until a later meeting when all -4.-u members were present. Mr. Chase then withdrew from the meeting. Classification of cities and banks for reserve purposes. Pursuant to cu.__ 'eussion at the Board meeting on February 11, 1960, a memorandum Mr. Thomas covering a report on classification of cities and banks for reserve purposes was distributed on March 4, 1960. The report 14c1,,A ed a brief review of underlying considerations and an appraisal or the- various standards that might be used as a basis for classification ""u'llvidual banks within a city and for classification of reserve eities. 3/10/60 Pending completion of further study, the report suggested tentative criteria that could be followed. Chairman Martin asked for views on the report, and Governor 84Ymezak replied that he felt it was a good paper that represented a good approach to a solution of a difficult and complex problem. Two classifi- cati "steps were involved: (1) classification or reserve cities and (2) exemption from reserve city reserve requirements of certain banks whic h, under the new legislation, could be permitted to carry reduced " rel .es, depending upon the nature of their business. Governor Szymczak th011ght that the approach suggested in Mr. Thomas' memorandum and in the three annexes, especially annex C, was reasonable. The suggestions in 44neX C sounded technical and difficult for the average person to de stand because they were based on wholesale and retail business, but the sence of the papers was that the Board needed further statistical itire'rmation to help it reach a final solution. In the interim, Governor Szrrticza-k suggested that the Board continue the approach that it had been resli.Wing up to this time, that is permitting banks having less than 413°14 $40 million of demand deposits to carry reduced reserves. This had s eemed to him to be a reasonable thing to do, and any other approach that . might be tried now would get the Board into an entirely different 3 of questions. ' r If the Board should decide to pursue the study "" along the lines suggested in the memorandum and, in the interim, Naoll hat it has been doing, it would seem desirable to bring the 3/10/6o -15- Reserve Banks into the picture promptly; they would administer these reserve requirements and the sooner they entered the discussions the better. Governor Szymczak concluded his comments with a statement that he wished to congratulate the staff on the papers that had been prepared. They represented a reasoned attempt to give information on reserve requirements that could be applied in terms of monetary needs, and this was something that the Board had not had up to this point. Governor Mills stated that the report left him with the same e011cern he had had from the beginning, that an attempt was being made to refine the distinguishing marks of a reserve city or a "country" bellk so far that in the process of refinement a decision important to the banking fraternity was being delayed. Secondarily, this refinement l'r°41c1 involve collecting additional data on deposits and turnover and 4 4481,7 distinction between wholesale and retail business. This, he 444/ would take a great deal of time and would involve banks with 4c1clitional reporting, a process which they would find difficult to 141clerstand. Governor Mills said he would hope some formula could be cleelcled upon that would not be exactly a rule of thumb decision but 14011.1,1 give better than a rough justification to support a Board decision ' - 1ng classifications without involving extensive further study or 114)0s.14g burdensome requirements on reporting banks. To him, it 413e4red that, by and large, size was the principal denominator for cletermi , ---4J-ng classification of banks for reserve purposes. The Board 3/1o/60 -16- Consistently played down below its importance the liquidity advantages of reserve requirements and the justification for imposing liquidity requirements, he said, and the case had been built too largely on the imPortance of reserve requirements as a tool of monetary policy. He /las groping for some formula that would set size as the basis of classification and would not make narrow distinctions between wholesale and tail deposits. It would be based on demand deposits and would possibly c°11tain some observations as to the locality in which the bank was °13erating• A bank operating in a reserve city or in a neighborhood where Other banks were clearly reserve city banks might have to be called a Ileaervie city bank irrespective of size. re.8 floundering in a morass at present. Governor Mills felt the Board He wondered if it would be best to decide on the communities that would be reserve cities and then, having made that decision, determine which banks in those cities should be "empted from the reserve requirements for such cities. Governor Szymczak said that that would be an easier approach if it /lere practicable, which he doubted. He emphasized the need for having Stabild'axas for classification that could be defended. One bank would hen. that another bank had been exempted from reserve city reserve l'eqtd-rements and naturally would want to know the standards so as to -,..Lne whether it was eligible for such exemption. It was necessary, in hi °Pinion, to have clear reasons for making a city a reserve city bet() granting exemptions to carry reduced reserves. Under the old 3/10/60 -17- law) these exemptions could only be made for banks in outlying sections Of central reserve or reserve cities, but under the new legislation the classification had to be based on character of business. It was neces- sarY, therefore, to determine what was meant by character of business. After some further discussion, it was understood that the question Of standards for classification of reserve cities and banks would be c°nsidered again at a later meeting of the Board. At this point all of the members of the staff excepting Messrs. Sherman) Hackley, Solomon, Farrell, Molony, and Fauver withdrew from the meeting. Appointment of director--Portland Branch. Chairman Martin referred to a memorandum from Mr. Fauver dated March 9, 1960, distributed berore this meeting in which there were listed names of persons whom the 1308.r,1 . might consider for appointment to the existing vacancy on the 1)°all' of Directors of the Portland Branch of the Federal Reserve Bank of 244 Francisco. After discussion and on the basis of Governor Mills' recom mendation, the Board agreed unanimously that the usual steps would be taken to ascertain whether Mr. Paul De Koning, President and General 14elia6er) Jantzen, Inc., Portland, was eligible and would accept appointet if tendered, and if he would, to make the appointment. Secretary's Note: It having been ascertained that Mr. De Koning would accept appointment, if tendered, as a director of the Portland Branch, Federal Reserve Bank of San Francisco, for the unexpired portion of the term ending December 31, 1961, a telegram was sent to him on March 15, 1960, making the appointment. 3/10/60 -18Mr. Fauver withdrew from the meeting at this point and Mr. SIITIth, Assistant Director, Division of Examinations, entered the room. Examination report--Federal Reserve Bank of Minneapolis. The rePort of examination of the Federal Reserve Bank of Minneapolis made 48 of October 30, 1959, had been circulated among the members of the 130ard prior to this meeting. Mr. Smith reviewed the results of the examination, stating that ti° matters appeared to require action by the Board. hie In the course of report, Mr. Smith called attention to the fact that the Board of krectors of the Federal Reserve Bank of Minneapolis, after consideration the question whether an operating officer of the Bank should be present illeetings of the Audit Committee, had reached the conclusion that it Preferable to continue the practice of having an operating officer ettnd such meetings as a rule. Thereupon, the meeting adjourned. \J` (- ) Secret
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