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/63 Minutes for March 12, 1 To: Members of the Board From: Office of the Secretary 64 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. Chin. Martin Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. Mitchell Gov. Deane 806 Minutes of the Board of Governors of the Federal Reserve System on Thursday, March 12, 1964. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Mills Robertson Shepardson Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Sherman, Secretary Kenyon, Assistant Secretary Noyes, Adviser to the Board Cardon, Legislative Counsel Fauver, Assistant to the Board Hackley, General Counsel Brill, Director, Division of Research and Statistics Farrell, Director, Division of Bank Operations Solomon, Director, Division of Examinations 01 Conne1l, Assistant General Counsel Spencer, General Assistant, Office of the Secretary Circulated items. The following item, copies of which are attached to these minutes under the respective item numbers indicated, were aPproved unanimously: Item No. 1,etter to Fayette Bank and Trust Company, ()/inersville, Indiana, approving the establishn Of a branch at East 6th Street and Eastern .rwenue. Idetter to United California Bank, Los Angeles, 1).ilifornia, approving the establishment of a 4rich in the vicinity of Freeport Boulevard and : 13; tCrero Way, Sacramento, with the understanding the branch would be opened in temporary L."arters at 4401 Freeport Boulevard, and (2) ations at the temporary location would be tiLlecontinued simultaneously with the opening of e Permanent office. r 1 2 3/12/64 -2Item No. Letter to United California Bank, Los Angeles, California, approving an extension of time to establish a branch at Doolittle Drive and Marina Boulevard, San Leandro. 3 Letter to County Bank of Santa Cruz, Santa Cruz, California, approving an extension of time to establish a branch in the vicinity of Front and Cooper Streets. 14 Letter to Bremen State Bank, Bremen, Indiana, 5 waiving the requirement of six months notice withdrawal from membership in the Federal Reserve System. Letter to Old Capital Bank and Trust Company, 2 e r7don, Indiana, waiving the requirement of months' notice of withdrawal from membership in. the Federal Reserve System. 6 Letter to Englewood State Bank, Englewood, Colorado, waiving the requirement of six 1112flthst notice of withdrawal from membersuiP in the Federal Reserve System. 7 Warren Bank (Items 8 and 9). There haB been distributed a memo- from the Legal Division dated March 11, 1964, with regard to a letter dated February 27, 1964, from Herbert J. Miller, Jr., Assistant Attorney General, Criminal Division, Department of Justice. The letter Ilequested on behalf of Federal Deposit Insurance Corporation Examiner M°Illas E. Lindsey, who was currently serving as an agent of a Federal 'x'atIcl jury in the Eastern District of Michigan, access to certain documents relating to the Warren Bank, Warren, Michigan, that were in the Possession of the Federal Reserve Bank of Chicago; namely, reports 4,; SOS 3/12/64 -3- of examination, open and confidential sections, for the years 1961 to the present; related correspondence; and examiners' loan line cards. The memorandum discussed the request at some length and concluded by expressing the view that the assertion by the Justice Department of possible banking irregularities in the Warren Bank would justify the Board in authorizing Examiner Lindsey to review confidential portions Of the reports of examination. Attached to the memorandum was a draft Of reply to the Department of Justice that would authorize access by Examiner Lindsey to the requested documents at the Federal Reserve Bank °f Chicago under certain conditions. The letter also expressed the assumption that the Department would make prompt disclosure to the Board Of anY evidence indicating banking irregularities. At the Board's request Mr. O'Connell reviewed the facts relating to th e request, his comments being based substantially on the information Presented in the March 11 memorandum. In discussion, Governor Mills remarked that the Board was familiar with his attitude toward disclosure of the kind requested by the Department of Justice. was improper. He thought that release of such information The subpoena procedure should be followed; if the records ' lrere used in evidence, the fact that it had been necessary to resort to the subpoena procedure would afford indication of the Board's opposition to ' 4.ing available information that should be confidential between the stillervisory agency and the bank under examination. not accede to the present request. Therefore, he would 809 3/12/64 Governor Robertson stated that he would accede to the request, subject to the conditions recommended by the Legal Division. It seemed to him that there was more to be lost by failing to make the records available, especially where there was a specific allegation of criminal irregularities. He was not aware of any information in the confidential sections that could be helpful, but if the material were subpoenaed, the confidential sections might be subjected to publicity. After further discussion, during which Chairman Martin and Governors Balderston and Shepardson indicated that they also favored 'king the requested material available, the letter to the Department of Justice was approved, Governor Mills dissenting. letter is attached as Item No. A copy of the 8, and a copy of the letter sent to the Federal Reserve Bank of Chicago is attached as Item No. Deferment schedules (Item No. 10). 9. There had been distributed Under date of March 11, 1964, a draft of reply to a letter of February 20, 1964, from Chairman Fascell of the Legal and Monetary Affairs Subcommittee ty °I* the House Committee on Government Operations regarding the possibili Of reducing float in the Federal Reserve System by raising the maximum deferment time for check credits. The proposed reply would indicate that there had been few developments that would add to the information 1/1 eviously furnished with the Board's letters of August 15, 1963, and ' APrll 14, 1961. Discussion reflected general agreement as to the appropriateness °I' the proposed reply under present circumstances. Governor Balderston 3/12/64 -5- Pointed out, however, that the Subcommittee had inquired about the deferment schedules from time to time, and presumably could be expected It was of some concern to him that to continue to check on the matter. each time the Subcommittee inquired it was told, in somewhat defensive fashion, that the question was continuing under consideration. These remarks led to a rather extended discussion of Federal Reserve check collection procedures and reasons why it would seem inopportune, at the present stage, to move toward a change in maximum deferment. The discussion also touched upon commercial banking practices and the bearing upon them of the float factor, including competitive benefits accruing to banks of various size categories. It was generally agreed that the subject deserved continuing attention by the Board in the light of developments. At the conclusion of the discussion, the letter to Chairman Pascell was approved unanimously. A copy is attached as Item No. 10. The meeting then adjourned. Secretary's Note: Pursuant to recommendations contained in memoranda from appropriate individuals concerned, Governor Shepardson today approved on behalf of the Board the following actions relating to the Board's staff: APPointment Aa_ Joyce J. Wood as Clerk-Stenographer, Division of Personnel t7inistration, with basic annual salary at the rate of $3,880, effec-4ve the date of entrance upon duty. 3/12/64 salary -6- increase Helen M. Dunn, Statistical Assistant, Division of Research and Statistics, from $4,850 to $5,235 per annum, effective March 15, 1964. r'N tary ) C&,/ 8-12 BOARD OF GOVERNORS Item No. 1 3/12/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD March 12, 1964 Board of Directors, Payette Bank and Trust Company, Connersville, Indiana. Gentlemen: The Board of Governors of the Federal Reserve ' System approves the establishment by Fayette Bank and Trust Company, Connersville, Indiana, of an in-town branch (facility) at the northwest corner of the intersection of East 6th Street and Eastern Avenue, provided the branch is established within one Year from the date of this letter. Very truly yours, (Signed) Karl E. Bakke Karl E. Bakke, Assistant Secretary. (The letter to the Reserve Bank stated that the Board also had approved a six-month extension of the period allowed to establish the branch; and that if an extension should be requested, the procedure prescribed in the Board's letter °f November 9, 1962 (S-1846), should be followed.) Item No. 2 3/12/64 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD March 12, 1964 Board of Directors, United California Bank, Los Angeles, California. G entlemen: The Board of Governors of the Federal Reserve System ,.1)Proves the establishment of a branch by United California Bank the vicinity of the intersection of Freeport Boulevard and rotrero Way, Sacramento, California, provided the branch is establ4 , sued within one year from the date of this letter. It is understood that this branch will be opened in tem— i _vurary quarters at 4401 Freeport Boulevard, Sacramento, and er moved to permanent quarters when they are available. It is ; Iso understood that operations at the temporary location at 4401 eePort Boulevard will be discontinued simultaneously with the Pening of the permanent office. j Very truly yours, (Signed) Karl E. Bakke Karl E. Bakke, Assistant Secretary. (The letter to the Reserve Bank stated that the had approved a six-month extension also 4j2al'd the period allowed to establish the branch; :!lot that if an extension should be requested, '"n'e procedure prescribed in the Board's letter '3f November 9, 1962 (S-1846), should be followed.) BOARD OF GOVERNORS Item No. 3 3/12/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL. CORRESPONOENCE TO THE EIOARD March 121 19611 Board of Directors, United California Bank, Los Angeles, California. Gentlemen: The Board of Governors of the Federal Reserve System extends to September 24, 1964, the time within which United California Bank may establish a branch at the intersection of Doolittle Drive and Marina Boulevard, San Leandro, California. Very truly yours, (Signed) Karl E. Bakke Karl E. Bakke, Assistant Secretary. BOARD OF GOVERNORS Item No. 4 3/12/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25. D. C. ADO EBB OFFICIAL CORRESPONDENCE TO THE BOARD March 12, 1964 Board of Directors, County Bank of Santa Cruz, Santa Cruz, California. Gentlemen: The Board of Governors of the Federal Reserve System extends to September 16, 1964, the time within Which County Bank of Santa Cruz, Santa Cruz, California, maY establish a branch in the vicinity of the intersection of Front and Cooper Streets, Santa Cruz, California. In granting this sixth extension of time, the Board has taken particular note of your expectations of beginning construction of the branch by August 5, 1964. Very truly yours, (s gned) Karl E. Bakke Karl E. Bakke, Assistant Secretary. Li.s7 ( BOARD OF GOVERNORS ti Item No. 5 3/12/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD March 12, 1964 Board of Directors, Bremen State Bank, Bremen, Indiana. Gentlemen: The Federal Reserve Bank of Chicago has forwarded to the Board of Governors your letter dated February 20, 1964, , rgether with the accompanying resolution signifying your -ntention to withdraw from membership in the Federal Reserve . ; Y8teM and requesting waiver of the six-months' notice of such withdrawal. In accordance with your request, the Board of Governors waives the requirement of six-months' notice of withdrawal. Upon rrender to the Federal Reserve Bank of Chicago of the Federal eserve Bank stock issued to your institution, such stock will be 'anceled and appropriate refund will be made thereon. Under the visions of Section 208.10(c) of the Board's Regulation H, your nstitution may accomplish termination of its membership at any time , within eight months from the date the notice of intention to 141 Lhdraw from membership was given. p r It is requested that the certificate of membership be retny. --fled to the Federal Reserve Bank of Chicago. Very truly yours, (Signed) Karl E. Bakke Karl E. Bakke, Assistant Secretary. 817 BOARD OF GOVERNORS Item No. 6 3/12/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD March 12, 1964 Board of Directors, Old Capital Bank and Trust Company, Corydon, Indiana. Gentlemen: The Federal Reserve Bank of St. Louis has forwarded to the Board of Governors President Wiseman's letter dated February 13, 904, together with the accompanying resolution signifying your ntention to withdraw from membership in the Federal Reserve 'System 4nd requesting waiver of the six-months' notice of such withdrawal. 1 The Board of Governors waives the requirement of sixnotice of withdrawal. Under the provisions of Section 208.10(c) the Board's Regulation H, your institution may accomplish terminatf4 of its membership at any time within eight months from the date notice of intention to withdraw from membership was given. Upon Ilurrender to the Federal Reserve Bank of St. Louis of the Federal Lserve stock issued to your institution, such stock will be canceled 'appropriate refund will be made thereon. Z It is requested that the certificate of membership be l'eturned to the Federal Reserve Bank of St. Louis. Very truly yours, (Signed) Karl E. Bakke Karl E. Bakke, Assistant Secretary. i BOARD OF GOVERNORS Item No. 7 3/12/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD March 12, 1964 Board of Directors, Englewood State Bank, Englewood, Colorado. Ge ntlemen: The Federal Reserve Bank of Kansas City has forwarded the Board of Governors a letter dated February 25, 1964, ;4gned by President Wendell H. Martin, together with the fce°mPanying resolution, signifying your intention to withdraw membership in the Federal Reserve System and requesting walVer of the six-months' notice of such withdrawal. to The Board of Governors waives the requirement of se months' notice of withdrawal. Under the provisions of Inaction 208.10(c) of the Board's Regulation H, your institution l,acoomplish termination of its membership at any time within ej "t months from the date that notice of intention to withdraw Bark membership was given. Upon surrender to the Federal Reserve of Kansas City of the Federal Reserve stock issued.to your viptution, such stock will be canceled and appropriate refund "L he made thereon. retu It is requested that the certificate of membership be rned to the Federal Reserve Bank of Kansas City. Very truly yours, (Signed) Karl E. Bakke Karl E. Bakke, Assistant Secretary. Si 4 BOARD OF GOVERNORS Item No. OF THE 8 3/12/64 FEDERAL RESERVE SYSTEM WASHINGTON OFFICE OF THE CHAIRMAN March 16, 1964 The Honorable Herb ert J. Miller, Jr., Assistant Attorney General, Crtminal Division, Department of Justice, Washington, D. C. 20530 Dear Mr, Miller: This is in reply to your letter of February 27, 1964 , advising that a Federal grand jury is curre ntly inqui ring into the activities of the Warren Bank, Warren, Michigan. You ask that Mr. fho Inas E. Lindsey, an Examiner on the staff of the Federal Deposit Insurance Corporat ion, currently empowered to act as agent for the .1.and jury, be authorized by the Board to revie w in detail the followI. I1g data related to the Warren Bank: (a) open and confidential sections of reports of examination from January 1, 1961 , to the date of c auY review authorized ; (b) open and confidential sections of related 2rresPondence for the sane dates; and (c) examiners' loan line cards 'elating to the exami nations in question. In making this request, You have given assurance that none of the material to which Mr. Lindsey .,37 be given access will be utilized as evidence in grand jury or cour t Proc eedings but will be used only by Mr. Lindsey for informational Purposes. ' The Board authorizes Mr. Lindsey's access to the cle . following scrlbed data under the conditions herei nafter set forth. The Board to make available for Mr. Lindsey' s study in the offices of the cZeral Reserve Bank of Chicago, under the direction of Reserve Bank officials, the open and confidential porti ons of the reports of examin19„?11 of the Warren Bank prepared as of the close of business February 10, June 4, 1962, and June 17, 1963. The authorization given does not contemplate the preparation s of the whole or any part of the confidential portion of any tirrt of examination. It does contemplate, upon request, the prepa rais 111 of copies of the open secti on of any of the reports to which access erein authorized. The Board further authorizes Mr. Lindsey to stud y, under chieugements agreeable to officials of the Federal Reserve Bank of of ago, the examiners' loan line cards relating to the subject reports "amination of the Warren Bank, it being under stood that the BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 314.4; The Honorable Herbert J. Miller, Jr. -2- originals of such line cards are not to be removed from the Federal Reserve Bank and that the Bank is to make copies, if requested, only Of such cards as may be determined to be reasonably related to the scope of the grand jury's investigation. In response to your request for open and confidential sections of related correspondence, the Board authorizes Mr. Lindsey's access to copies of correspondence exchanged between the Federal Reserve Bank and the Warren Bank in the period January 1, 1961 to date. This authorizatxon covers the preparation by the Reserve Bank, if requested, of copies of any correspondence reviewed by Mr. Lindsey. Your letter contained the stated understanding that the material requested is located at the Detroit Branch of the Federal Reserve Bank of Chicago and could be reviewed by Mr. Lindsey at that Place. Inasmuch as the material has been determined to be located at the head office of the Federal Reserve Bank of Chicago, the authorizatzons herein contemplate review of the material at the head office of the Reserve Bank. The authorizations are given subject to the understanding that (1) the contents of the documents to which the Department' access is authorized will not be used as evidence either before the 1.s.nd jury or in any court proceedings, but rather, only as background dInformation incident to the pending grand jury investigation; (2) the °cuments to which access is authorized will remain in Mr. Lindsey's 1!stody at all times; and (3) copies of any documents given to Mr. ! lo:ndsey will be returned by him to the Federal Reserve Bank of Chicago Illthin 30 days of the date upon which he takes possession of them unsess upon written request addressed by Mr. Lindsey to President C. J. 2anion of the Federal Reserve Bank, additional time for possession of he documents is authorized. The Board's action in this matter has been taken in accordance 14 14i itlla%:tion 261.2(c) of the Board's Rules Regarding Information, Suband Requests which provides, in part, that "The Board . . . may make available to . . . agencies of the United States • .. reports of examination and other information, for use where necessary in the performance of their official duties . . .". Relative to the activities of the Warren Bank which you advise are the 4, , subject of the grand jury's investigation, in view of the S continuing responsibility as a Federal banking supervisory grth°11-tY, it will be assumed that, to the extent permitted by the ezand jury's function, prompt disclosure will be made to this Board any evidence of banking irregularities within the Warren Bank not 'leoted in the reports of examination to be studied by Mr. Lindsey. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Honorable Herbert J. Miller, OM, 821 410. A copy of this letter is being sent President C. J. Scanlon, Federal Reserve Bank of Chicago. A copy of the Board's letter to President Scanlon is enclosed for your information. It is suggested that Mr. Lindsey contact Vice President Ross in regard to arrangements for access to the documents as herein authorized. Sincerely yours, (Signed) Wm. McC. Martin, Jr. Wm. McC. Martin, Jr. 41.c1 822 BOARD OF GOVERNORS Item No. 9 3/12/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25. D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD March 161 1964 Mr. C. J. Scanlon, President, Federal Reserve Bank of Chicago, P. 0. Box 834, Chicago, Illinois. 60690 Dear Mr. Scanlon: There is enclosed a copy of a letter to Chairman Martin, dated February 27, 1964, from Mr. Herber t J. Miller, Jr., Assistant i ttorney General, Criminal Division, Department of Justice, request* r-ing on behalf of Federal Deposit Insura nce Corporation Examiner 4homas J. Lindsey, who is currently serving as an agent of a Federal _rand jury in the Easter n District of Michigan, access to certain rcuments in the possession of the Detroit Branch of the Federal L eserve Bank of Chicago. Mr. Hiller advise s that the request is made 1-ncident to a curren invest t igation by the grand jury into the !tivities of the Warren Bank, Warren, Michigan. It is understood t:lat this reques t has been the subject of a brief discussion between nee President Ross of your Bank and Mr. Frederic Solomon of the !°ard' s staff, during the course of which it re was determined that the quested materials would be found at the head office of your Bank. As reflected in the Chairman's reply of this date to Mr . ,• Miller, a copy of which is also enclosed, the Board authorizes You to make available to Examiner Lindsey the reports of examination he Warren Bank, in their entire ty, as of the close of business Feb an, ruary 10, 1961, June 4, 1962, and June 17, 1963. The foregoing °rization contemplates Mr. Lindsey's review of confidential porB:fl_s of reports of examinations without removing the same from your sat . . 1 , and under such physical circumstances as are determined to be ' pi lsfactory to you. While the author ization herein does not contemreate the making of copies of any of the confidential portions of av11 21:ts of examination, you are authorized, if requested, to make th!xlable to Examiner Lindsey copies of the open sections of any of reports of examination. Authorization is also given for making available for txiam4 and 'ner Lindsey's review correspondence exchanged between your Bank tt,„ the Warren Bank in the period from January 1, 1961 to the present co:? and, if requested by Examiner Lindsey, for the preparation of vles of such correspondence. Should have read Thomas E. Lindsey. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. C. J. Scanlon -2- In respect to the examiners' loan line cards, item c) in Mr. Miller's letter, following a study of these cards at your Bank by Examine r Lindsey and a person or persons of the Bank's staff designated for this purpose, you are authorized to place in Examiner landsey's possession prepared copies of such of the cards as may be determined to be reasonably related to the scope of the grand jury's xnvestig ation. The foregoing authorization is given with the understanding that copies of any documents placed in Mr. Lindse y's custody will be retained at all times by him; that none of the documents shown or given to Mr. Lindsey, nor their contents, will be used as evidence either before the grand jury or in any court proceeding, but will be 1.1sed only as backgro und information incident to the pending grand jury's .''?vestigation; and that all copies of documents received by Examiner 1.21ndsey pursuant to this authorization will be returned by him within 30 days of the date upon which he takes possession of them, unless uPon written request addressed to you by Mr. Lindsey, you authorize retention of the documents beyond the 30-day period specified. You will note that the Board's letter to Mr. Miller suggests that ,mar. Lindse t y contact Vice President Ross of your Bank in regard 1-11° arranging the details for MI. Lindsey's access to the documents ,!rii'ned. A copy of this letter has been enclosed with the Chairman's --PLY to Mr. Miller. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary. 4telosures f ..... BOARD OF GOVERNORS Item No. 10 3/12/64 OF THE :!Q *0 FEDERAL RESERVE SYSTEM w. WASHINGTON „4,̀/•' .4iALRES'••• OFFICE OF THE CHAIRMAN March 131 1964 The Honorable Dante B. Fascell, Chairman, Legal and Monetary Affairs Subcommittee of the Comulittee on Government Operations, House of Representatives, Washington, D. C. Dear Mr. Chairman: In your letter of February 20, 1964, you refer to previous " rrespondence about the possibility of reducing float in the Federal Reserve System by raising the maximum deferment time for check credits, f aild You ask five specific questions about this matter. You also ask any additional information that might be helpful in considering Lee subject of float in the light of deferment schedules. Generally speaking, there have been no new developments that would add much to the information previously furnished to your Subcommittee with the Board's letter of August 15, 1963, and to its predecessor with i our letter of April 14, 1961. However, reshaping this information n reply to the questions in your recent letter may be helpful. 1. To what extent would the "float" be reduced by changing the deferment schedule from two to three days? It is estimated that a change in the maximum deferment of credit for • lnterdistrict country items from two to three days would result in a id ailY average reduction of something between $700 million and $800 million n time-schedule float. 2. What circumstances make it inappropriate to now change the deferment schedule from two to three days? There are three factors that impel the Board to a belief that suo, men': a change should not be made at this time: namely, (1) the require°v L of additional sorting work by member banks, (2) the effect on holdtie olrIsf .loat, and (3) the possible effect on credit and money market condi- Under present circumstances, a change in the maximum deferment credits fromm two to three days would require an additional sort added expense on the part of many member banks. At such time, however l', as the Federal Reserve Banks are able to process most of their check check The Honorable Dace B. Fascell -2- volume on high-speed equipment, it should be possible to change the d eferment schedule without requiring member banks to make an additional seri, and perhaps to reduce the number of sorts the member banks would have to make even though the deferment schedule were changed. This is because the high-speed equipment has the capability of making the deferment schedule sorts on the basis of the magnetic ink characte rs on the checks, rather than on the basis of a physical separation of the checks. A study last year indicated that daily average "holdover" float /44S in the neighborhood of $500 million, and was rising much more rapidly than "time-schedule" float. The study also showed that holdover float is significantly influenced by problems incident to the transition to highsyeed electronic procedures for handling checks, and that this type of 1.oat can be and will be reduced as more and more commercial banks are )1e to deposit with the Reserve Banks checks that are fully coded for . ,1/M-s 1 peed handling. In other words, the hope of reducing holdover float Tends in large measure on the continued cooperation of commercial banks. _als cooperation might not be so readily forthcoming if member banks were " (A./ burdened with the requirement of an additional sort of checks they Presented for payment through the Federal Reserve Banks. ; Credit and money market conditions are now geared in part to ti me-schedule float. While the elimination of this source of reserves ! oul6 be offset in total member bank reserves, the net effect of the I:eduction and the counteraction would undoubtedly be far from equal among ' nIindividual banks. A change from two to three days in the maximum deferbent for check credits would affect the reserve accounts of only those wanks that clear through the Federal Reserve Banks. The most severe effect would be on the banks, generally located in the larger cities, that act as tollection agents for correspondent country banks. It would be difficul t a use open market operations or a change in reserve requirements to channel dI°X°Priate amounts of reserves to those banks that would suffer from the ro'erment schedule change, and only to those banks. The effect that such ; i ulting disequilibrium might have on credit and money market conditions ' d ifficult to predict. 3. Under what circumstances would it be appropriate to make the change, and when could such circumstances be expected to come into being? During the year 1962, Federal Reserve Banks and Branches handled pro_ of about 3 billion country checks, of which 272 million were checessed on high-speed equipment. In 1963 the total volume of country cks was 3.2 billion, of which 872 million were handled on high-speed 4 total The Honorable Dante B. Fascell -3- :quipment. The use of high-speed equipment is expected to increase en more rapidly this year. If these expectations materialize, there s hope that both holdover float and sorting required of member banks Can be substantially reduced in another year or so. J This prospect, however, should not be taken as an implication that..the Board would favor changing maximum check credit deferment from two i....,,L0 three days in a year or two. This decision would still be heavily -uenced by the possible effect of such a change on credit and money 41 rket conditions at that time. 7 4. What would be the estimated effect of such change on fluctuations of reserves, and on the money supply; and could such effects be offset by agency action? 5. What other means does the Federal Reserve Board have at its disposal to offset a change in reserves caused by change in deferment schedule? As previously indicated, it is estimated that changing the rese"'"ul deferment of credit for interdistrict country items would reduce rves bY $700 million or $800 million. The resulting reduction in the trione,, suPPlY would be at least that much, and probably several times more. if me-schedule float on interdistrict country items were removed from fl' oat 44In..b8sed reserves, fluctuations in such reserves would be reduced in be s! °f dollar amounts; however, fluctuations on a percentage basis would "arper and perhaps more troublesome. time_ While a reduction in reserves resulting from the elimination of eith"chedule float on interdistrict country items could be offset in total by a reduction in reserve requirements or by open market purchases Of " c plet°vernment securities, neither of these two alternatives would be comsverelY satisfactory since they would have to be based on country-wide that es, A reduction in reserve requirements would benefit some banks .w°uld not have suffered from the reduction in float-based reserves, havelt might fall short of the objective in the case of banks that would libriauffered. Open market purchases might come closer to restoring equibut they would have the effect of requiring banks to give up earn& eSt, ets to offset the loss of reserves accruing from float. In summary, an extension of the deferment schedule for the purpose l'edu. c lug time-schedule float and the compensating action that would have to be also ,Iaken would undoubtedly disturb money market conditions, and would competitive k/sitsturb--11erhaps to a significant extent in some cases.-the lem that now exists among member banks. Sincerely yours, (Signed) Wm. McC. Martin, Jr. Of Wm. McC. Martin, Jr.
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