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Pa 609 ReIT '10/59 Minutes for To: March 14, 1961 Members of the Board Prom: 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 Ilith 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. Szymczak Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King Minutes of the Board of Governors of the Federal Reserve System on -"esuaY, March 14, 1961. PRESENT: Mr. Mr. Mr. Mr. Balderston, Vice Chairman Szymczak Robertson Shepardson Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Discount rates. Reserir- The Board met in the Board Room at 10:00 a.m- Sherman, Secretary Kenyon, Assistant Secretary Hackley, General Counsel Farrell, Director, Division of Bank Operations Solomon, Director, Division of Examinations Johnson, Director, Division of Personnel Administration Daniels, Assistant Director, Division of Bank Operations Kiley, Assistant Director, Division of Bank Operations Landry, Assistant to the Secretary The establishment without change by the Federal Bank of Minneapolis on March 13, 1961, of the rates on discounts 4rla,z ' Lwances in its existing schedule was approved unanimously, with the 4-StS.nd.ing that appropriate advice would be sent to that Bank. ' Items circulated to the Board. The following items, which had beela circulated to the Board and copies of which are attached to these kikt es under the respective item numbers indicated, were approved Item No. tiQtte tO Patterson, Crawford, Arensberg and Pittsburgh, Pennsylvania, interposing O't Nria—niection to the merger of two common trust tt-1,111a1ntained by Pittsburgh National Bank, ' s llrgh, Pennsylvania. 41e 1 3/14/61 -2Item No. Letter to the Federal Reserve Bank of Chicago, 2 4tIPPltqing the payment of salaries to the Bank s Paixiters at specified rates. t tter to Fidelity Savings State Bank, Topeka, 1,4448, granting permission to maintain reduced —serves. 3 Mr. Johnson withdrew from the meeting at this point. Purchase of electronic co Nre uter s stem b I• Cleveland Bank (Item No. 4 . "acl been circulated to the members of the Board a file containing a (11Vt of letter to the Federal Reserve Bank of Cleveland that would note Ifith°Ut Objection the action of its Board of Directors authorizing the 1)111.4chase of an IBM 1401 Model E-4 electronic computer system for delivery 1451almately in March 1962. There was also included in the file a memo- Om the Division of Bank Operations dated March 6, 1961, which 4(tecl that the proposal to purchase for $296,520 the electronic system lerl'ed to was the result of an intensive study by the Bank, the major clbjectIves of which were to determine (a) the immediate and potential -.'ements for a computer system within the Bank, and (b) which computer sYstem -would best fulfill those requirements at the lowest cost. As teDort ed in the memorandum, the Reserve Bank studied ten types of equip- 44t br A 144 --()%kuced by eight different manufacturers and found that the IBM sYstem was the third lowest in cost among the ten considered, but C. 3/14/61 WaS -3- the best overall machine to handle the Bank's data processing pr oblems. Other expenses incident to the installation were expected to be abate- if. p200,000, including site preparation, preparing and testing Pr°grams, and the initial overlapping of present methods with computer 4*tods of operation. In the opinion of the Division of Bank Operations, as expressed in it8 memorandum, the acquisition of the IBM 1401 computer system appeared reasc)nable. The Bank's cost studies indicated that by prorating one-eighth or t he Purchase price each year over the estimated eight-year life of the c°MPuter an immediate saving of $30,000 in comparison with present methods would be realized in 1962 and close to a $50,000 average annual saving ever the eight years ending in 1969. It was noted, however, that this lson excluded the estimated cost of $200,000 incident to establishing da ' the computer system. With respect to the lease alternative, it was brought °4t ill the memorandum that the Bank took into consideration the possibility either leasing the computer system with an option to purchase or entering lalto a Price Cellt straight lease agreement. Under the former arrangement, the purchase would be based on $296,520 less an allowance of approximately 65 per Of the rental payments made up to the purchase date, whereas under a 414'41-8ht lease contract the Bank would pay a monthly rental of about 36,900 154t the e quipment could be purchased at any time upon payment of S296,520 leas an allowance of 32,467 for each month for which rental had been paid. 3/14/61 It as stated in the memorandum that both of these alternative plans were discarded by the Bank because they would cost more over a period of time thall an outright purchase. Another factor in the Bank's rejection of a traight lease commitment was that it would not protect the Bank against Pric • e increases in the event of a later decision to purchase. Governor Shepardson expressed the view that the proposed purchase epemred. to be reasonable. Reserve Bank He noted that the study undertaken by the had been exhaustive. Also, Mr. Schwartz of the Board's staff bad r eviewed the proposal and felt that the IBM 1401 computer was reasonably adapted to the Reserve Bank's needs. Mr. Farrell commented that the principal question of Mr. Schwartz Item v.A Wnether it was wise for the Reserve Bank to elect outright purchase illstenA -- of a lease-purchase option arrangement for its first computer. 41fts the view of Mr. Schwartz, Mr. Farrell said, that the latter plan 1.1°111d Provide flexibility and protect the Reserve Bank during a transition 15erioA. uIn this connection, Mr. Farrell referred to discussion of this 13°14t in the memorandum, which noted that the Cleveland Reserve Bank dis'''.rded the purchase option plan because it would entail greater exPen 8e than outright purchase--approximately $22,000 if the option to 1)1Ircha se was not exercised until one year after rental. Should a se oPtion be exercised after six months, the additional expense be aPproximately $11,000. Moreover, the Cleveland Bank doubted 944 3/14/61 -5- ether it would be in a substantially better position to reach a decision after six months, or even after a year. Based on an estimated eight-year lire of the equipment, the Bank calculated that it could purchase the e°mPuter and switch to another system after about four years, if so desired, without incurring more expense than under a lease arrangement. The letter to the Federal Reserve Bank of Cleveland stating that the Board interposed no objection to the purchase of the computer system 1148 then a roved unanimously. A copy of the letter is attached as Item No. 4. Reserve Bank accounting for cost of purchased computers. There had been circulated a memorandum from the Division of Bank Operations dated 1441*ch 6, 1961, regarding the question of accounting procedure raised by the .,,,4-"--cchase by Federal Reserve Banks of electronic computer systems. The Bo ard's accounting instructions for many years had provided that 1)Urehe. 8es of furniture and office equipment should be charged to current ell8e, but the proposed purchase of a computer by the Cleveland Reserve Bank noy raised again the question whether there should be any deviation *°41 this Procedure, particularly in the light of the System's sizable ctive outlays for computer purchases. The cost of such an item 1114(11fttionably would be greater than the cost of any single unit of ecw4,vment heretofore charged to current expense. It was noted, however, that certain furniture and equipment purchases, particularly when new 3/14/61 -6- buildings Cost Of were being furnished, had been in the same magnitude as the computers. Reference was also made in the memorandum to informal discussion of this matter with Mr. Herz of Price Waterhouse & Co., who exPressed the view that it would be illogical and undesirable to caPItalize amounts spent for computers without capitalizing lesser allic)unts spent for other equipment and furniture. Mr. Herz did not a.cllate the latter, and he saw no reason to change the present procdLlIre simply because larger amounts were involved. The Division of tank n ‘43erations concurred in the view expressed by Mr. Herz. Therefore, Unless the Board saw some objection, the Division proposed to make 4PPI'ePriate changes in the Accounting Manual to include provision for elpare„. .3-11g the purchase cost of computers to current expense. Mr. Farrell commented that at the meeting of the Presidents' '-7rence on Monday, March 6, 1961, the Conference requested the Co ttee on Collections and Accounting to broaden its current study the effect on comparative cost data of the purchase of computers by sett*. Reserve Banks and their rental by others to include all accounting 4s13eets Of computer installations not covered in the Accounting Manual. Re 8 . aa-a that upon consultation with President Deming, Chairman of the 004titti ttee on Collections and Accounting, the latter stated that he saw no, "n Why the Accounting Manual should not be changed in the manner vuserl by the Division of Bank Operations. Mr. Deming said the principal 3/14/61 -7- )rIce1.11 of the Presidents was with the effect of computer installations 04unit costs; in other words, that a Reserve Bank that had purchased a c°11Tuter should not show a lower unit cost for work produced than another Bank operating a computer on a rental basis. Following a discussion, unanimous approval was given to the 1)r013°83-1- of the Division of Bank Operations to make appropriate changes in the Accounting Manual to include provision for charging the cost of IptIrchased computers to current expense. Al]. members of the staff except Messrs. Sherman, Hackley, and S°1(31110n then withdrew. 2arrying value of securities purchased by banks in connection fith Tr -----sury advance refunding_l Governor Balderston reported that the ''IsY was considering offering holders of certain outstanding Treasury securi . ties the opportunity to exchange those securities in advance of laturi+ into new Treasury issues of longer-term securities. Pursuant to Ori+ h -- --Y granted by provisions of the Internal Revenue Code, the ge cretal-, --J of the Treasury would determine that no gain or loss would be reeoen. lzed- for Federal income tax purposes upon the exchange. Governor Balderston went on to say that question had been raised by t he Treasury as to whether the bank supervisory agencies would permit baziks receiving the new securities to place them on their books at an '14°Ijillt not greater than the amount at which the bonds and notes 94te 3/14/61 -8- slir rendered by them were carried on their books, plus the amount of 1)relaium, if any, paid on the new bonds--essentially the position that 11441 been taken by the supervisory agencies in an advance refunding to /41ich reference was made at the meeting of the Board on June 7, 1960, except that at that time no premium was expected to be paid on any of the new securities. Atter discussion, unanimous approval was given to a procedure that /4buld Permit banks under the Board's supervision to place such securities on their books at an amount no greater than that at which the bonds and notes surrendered were carried on their books, plus the amount of ill'em11411, if any, paid on the new bonds. It was also understood that the T reasurY's announcement of the proposed issue would carry such 8144ment to this effect, as well as a statement that the Board would 41)1'4010riately advise its examiners. The meeting then adjourned. Secretary's Note: Pursuant to the recommendations contained in memoranda from appropriate individuals concerned, Governor Shepardson today approved on behalf of the Board the following Items relating to the Board's staff: increase to $4Patrioia D'Ambrosio, Secretary, Division of Examinations, from $4,565 ' 675 per annum, effective March 19, 1961. 948 3/14/61 _9_ outside teachin activit Robert C. Masters, Associate Director, Division of Examinations, to -Liver a lecture in June 1961 to the trust group at the Stonier Graduate School of Banking, Rutgers University, New Brunswick, New Jersey. BOARD OF GOVERNORS 4,4c:ookeq©,;44 * OF THE F 4 * FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. Item NO. 1 3/14/61 4 ADDRESS OFFICIAL CORRESPONDENCE kit MI.S3 •TO THE BOARD 40* March 14, 1961 1),atterson3 Crawford, Arensberg and Dunne, National Dank Building, rlttsburgh 22 Pennsylvania. !s-rct Gentlemen: is made to your letter of February 27, 1961, Itiona ‘elatiReference ve to a proposal to merge two Common Trust Funds for discrepittZY investment maintained by Pittsburgh National Bark, 4.41V11 Pennsylvania, under the provisions of Section 17(c), Recrub,11 F. You state that the purpose of each of those Funds is tio-"eal and that, in order to eliminate the expense and duplicathellnof „effort incident to the separate operation of these Funds, raw-c)nal bank is conterirplating their merr_er into a single Fund unde1:rive-4.a new Plan to be known as "Common Trust Fund—Discretionary Boal entsn of Pittsburgh National Ba:!ki, Y u inquire whether the Governors will interpose any objection to the proposed gel 'of these Corr,Non Trust Funds. to auth it is noted that the present Plans will be duly amended orize the termination of the existing Funds and their raeroer vista a new Plan; that counsel for the Bank will review the pro Of the new Plan and all acti us taken or required in contheir°1 1^lith the pro osed merger, and. will render an opinion as to .Le2taliti; that the bacIl. will give advance notice of the proPcEs -erEer of the two Punds to all persons entitled to the audit Iseport, irk :',°f the respective Fund, and that any participating trust the co-fiduciaries and/or beneficiaries register objections to , rCer will be withdrawn prior to its corn-,ummatiein. It is Ellso e, therved that the valuati. n of the assets and participations colin Funds will be :u.p(rvised and audited by an independent acreec; finn, and that all costs incurred for legal or auditing "nnPction with the contemplated merger transaction will 'ne by the national bank. ). it liot, With regard to the investments of the merged Funds, inthe all that that ascertain a vestmr-d review will be made to 17(c) c)n Secti of 'Jns liliitati 1:LeriP,Lu'i:to confo rm to the and of the applicable provisions of Pennsylvania Pen consununatian of the transaction, it is observed that BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Patterson, Crawford, Arensberg and Dunn -2- t artieiPaas in each of the present Funds will hold interests in •i e new Fund equal in value to the market value of their interests old Funds at that time, and that, incident to the merger tri r the toansaction, there will be no distribution of cash or securities t, 3117 participant in the new Fund, except that the net income of 2,th present Funds will be determined and distributed a, of the 'Izective date of their merger. Although it is not mentioned in your letter, we assume that 4 a,3 -La proposing to establish and maintain the merged Fund under "ew Plan in accordance with the applicable provisions of Regulatio neen P and Pennsylvania law, the national bank will obtain any ssarY approval of the Internal Revenue Service or of State aut ! intuorities or, at least, an indication that such authorities will willrP°3e no objection. It also is assumed that no investment be held in the merged Common Trust Funds in which any of the 'n Participating trusts could not lawfully be invested. Based upon the information ,furnished by you on behalf °f thePittsburgh National Bank relative to actions contemplated for a thtProposed merger of its two Common Trust Funds, and provided vouirl°ur assumptions with respect to it are correct, such merger sec.j'. not appear to any conflict with the provisions of 1 °n 17, Regulation F, and in the circumstances, the Board Ii0 , have no objection to the merger of these two Comi,on Trust ' L s in the manner described. Very truly yours, (Signed) Elizabeth L. Carmichael Elizabeth L. Carmichael, Assistant Secretary. N BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. Item No. 2 3/14/61 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD March 14, 1961 CON FIDENTIAL (FR) H. J. Newman, Vice President, Federal Reserve Bank of Chicago, Chicago 90, Illinois. Dear Mr. Newman: aries 1_by The Board of Governors approves the payment of salthe Federal Reserve Bank of Chicago to the incumbents 11, t/f .91e positions shown below at the rates indicated, effective 1Prli 1, 1961, in accordance with the request contained in your etter of March 2, 1961: Title Head Painter Painter Annual Salary S7,956.00 7,160.4o Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary. 952 BOARD OF GOVERNORS OF THE Item No. FEDERAL RESERVE SYSTEM 3 3/14/61 WASHINGTON 25, D. C. ADDRESS orriciAL CORRESPONDENCE TO THE BOARD March 14, 1961 : 1 4)ard of Directors, 7,,-" IlelitY Savings State Bank, "kqeka, Kansas. Ge ntlemen: Pursuant to your request submitted through the Federal Reservii. the - Dank of Kansas City, the Board of Governors, acting under vrovisions of Section 19 of the Federal Reserve Act, grants wf41.88ion to the Fidelity Savings State Bank to maintain the h;"! reserves against deposits as are required to be maintained efr°411ks located outside of central reserve and reserve cities, be , ctive with the first biweekly reserve computation period ( "fling after the date of this letter. Your attention is called to the fact that such per-3 subject to revocation by the Board of Governors. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary. BOARD OF GOVERNORS otecoti**0 4'4 OF THE • FEDERAL RESERVE SYSTEM ik il a l ' WASHINGTON 25. D. C. \1 Item No. 4 3/14/61 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD *04*** March 14, 1961 Mr. W. D. Fulton, President, Federal Reserve Bank of Cleveland, Cleveland 1, Ohio. Dear Mr. Fulton: Board Referring to your letter of February 10, 1961, the has s Director of Board your of noted without objection the action ut at e purchase to y necessar are as horizing the taking of such steps a IBM 1401 Model E-4 electronic computer system for delivery PPr oximately in March 1962. that It is noted from the enclosures accompanying your letter (1) The computer system will cost 1;296,520 and that an additional $200,000 will have been spent for related items before the system is in full Operation, (2) The computer system will be equipped with 8,000 positions of memory and four magnetic tape drives. (3) The projected work load in 1962, including time for program maintenance, is expected to provide an average daily utilization of the computer System at about 80 per cent of an eight-hour work shift. t ()4) The possibility of obtaining the equipmen with renting g includin under alternative plans, option to purchase, was rejected in favor of the economy of an outright purchase. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary.
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