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49% Minutes of actions taken by the Board of Governors of the Reserve System on Wednesday, March 16, 1949. PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman pro tem. Szymczak Draper Vardaman Clayton Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Board Minutes of actions taken by the Board of Governors of the ?tcleriti Reserve System on March 15, 1949, were approved unanimously. Memoranda from the heads of the divisions indicated below teem "Intending increases in the basic annual salaries of the follow1.4 eqloyees in those divisions, effective March 20, 1949: Ette Salary Increases From Title To Name 3 1081(41 OF EXAMINATIONS $3,601.80 $3,727.20 Supervisor, Recording Mrs. Nancy R. Porter 9 Stenographic Section & V10 Stenographer 2,284.00 2,423.04 Miss Myrtle P. Brown ; 9 14/ 8 SERVICES ADMINISTRATIVE 3 11 4.ON OP 9 2,949.72 3,024.96 General Mechanic Karl J. Steger Approved unanimously. ot Memorandum dated March 15, 1949, from Mr. Bethea, Director te kvision of Administrative Services, recommending the appoint- 44/At Ot Mi88 Dolores Ann Ferris as a stenographer in that Division, , with b asic salary at the rate of $2,498.28 per annum, to be effectt aa of the date upon which she enters upon the performance of get 4. Uties after having passed the usual physical examination. Approved unanimously. 499 3/16/49 -2Draft of letter to Bank of America National Trust & Savings Association, San Francisco, California, prepared in accordance with the Understanding at the meeting of the Board on March 7, 1949, and Ncling as follows: "This refers to the applications filed by your bank with the Board of Governors for permission to establish branches in Bremen, Hamburg, and FrankfurtaMqviain, Germany. These applications have involved numerous questions requiring careful consideration by the Board. "The Board does not believe that it would be Justified in approving these applications on the basis of such information as it now has. However, there are certain important questions which have arisen in connection with our consideration of the applications and, before taking final action in the Matter, the Board feels that it would be desirable to have a discussion of these questions at a meeting 14 Washington between representatives of the Board nd a senior officer or officers of your bank. If ,111-8 is agreeable to you, we suggest that you get in "olach with the Federal Reserve BPnk of San Francisco 14 order that a mutually convenient time for such a raeeting may be arranged." The letter was approved, Messrs. Vardaman and Clayton voting "aye", and Messrs. Eccles, Szymczak, and Draper not voting. Messrs. McCabe and Evans had stated that if they were present they would vote to approve. Letter to Mr. Trimble, Assistant General Counsel at the FedIlessrve Bank of New York, reading as follows: "This refers to your letter of February 23, 1949, kr Mr. Vest, enclosing copies of correspondence with Thomas F. Maude, Vice President, The First Na11,0na1 Iron BEtrik of Morristown, Morristown, New Jersey, Ifhich Mr. Maude requested that you submit to the to 500 3/16/49 "Board the question whether a national bank in New Jersey Which establishes a 'security fund' in accordance with State law must also deposit securities in its trust dePartment to secure trust funds used by it in the conof its business. "Mt. Maude contends that a national bank should tot be required to deposit securities in its trust dePartment in addition to establishing a 'security fund' because this is not required of State banks under a recently enacted New Jersey statute. He urges that, in order to avoid penalizing national banks, Regulation F should be amended to provide that the establishment of a 'security fund' pursuant to State law shall constitute compliance with the requirement that a national bank dePosit securities in its trust department to secure trust funds used by it in the conduct of its business, Provided that the 'security fund' shall at least equal the amount of trust funds so used by the bank. , "The provisions of the New Jersey Banking Act of ,1948 relating to 'security funds' provide, in brief, : that a bank exercising fiduciary powers may create !Uch a fund by depositing securities with a Federal 4leserve Bank or other approved depositary to be held ;Ubiect to the order of the Superior Court as security 4°1 the performance of the bank's obligations in fi11ciarY capacities for which security shall be required . -1d other security is not given. Recourse to the 'se' fund' may be had only after the entry of a judg;Int against the bank 'for a breach of any fiduciary ;:!ligation or obligations to one or more persons for "clae benefit the fund was deposited.' "The protection of trust funds which a State bank Be8 in the conduct of its business is covered by other 4-"laions of the New Jersey Banking Act of 1948(see ; „T°n 35). While a State bank is no longer required te t "Posit securities in its trust department to secure : raeust funds which it deposits in its own banking depart' the New Jersey law now provides that, in the event t he th, insolvency of a State bank, such deposits of trust oi:mds shall constitute preferred claims. In the event ,the insolvency of a national bank, there is no similar 8 Ettutory preference under Federal law. "The fourth paragraph of section 11(k) of the FedReserve Act, relating to the exercise of fiduciary Qlfers bY nationR1. banks, provides in part as follows: 501 3/16/49 -4- "'Funds deposited or held in trust by the bank awaiting investment shall be carried in a separate account and shall not be used by the bank in the conduct of its business unless it shall first set aside in the trust department United States bonds or other securities approved by the Board of Governors of the Federal Reserve System.' "The sixth paragraph of section 11(k) provides as follows: 'Whenever the laws of a State require corporations acting in a fiduciary capacity, to deposit securities With the State authorities for the protection of private or court trusts, national banks so acting shall be required to make similar deposits and securities so deposited shall be held for the protection of private or court trusts, as provided by the State law.' "As you pointed out in your correspondence with Mr. Maude, the Board has ruled that the foregoing requireMents of section 11(k) are separate and independent reboth of which must be complied with; and that the deposit of securities with State authorities for the Protection of private or court trusts is not a compliance nth the requirement that securities be deposited by a national bank in its trust department to secure trust funfis Used by the bank in the conduct of its business (1920 Federal Reserve Bulletin 699; 1921 Federal Reserve Bulletin 309). "The Board believes that the creation of a 'security ruhrli „--by a national bank pursuant to the New Jersey statee to secure the faithful performance of fiduciary obIgations of the bank clearly cannot be regarded as com' -iance with the requirement that securities be deposited Y the bank in its trust department to secure repayment !f trust funds deposited by the bank in its own banking ;411 ePartment or otherwise used in the conduct of its busie88. The 'security fund' does not serve the same pur, se or provide the same protection for trust benefiNAaries as the deposit of securities in the trust dertment. This distinction is recognized by the provi, 13 8 °118 of section 11(k) of the Federal Reserve Act quoted 0°1is and also by the New Jersey statutes which, in addi. °4 to providing for 'security funds', create a prefer4 Ce to protect trust funds which a State bank deposits 11 its banking department. The provisions of Regulation F relating to the ae„ Posit of securities by a national bank in its trust r 4 3/16/49 -5- "department merely restate the statutory requirement and list the kinds of securities which may be deposited; and, since the requirement is prescribed by law, it cannot be modified or waived by an amendment to Regulation F. "It will be appreciated if you will advise Mr. Maude In accordance with the foregoing. You may wish also to call his attention to the fact that the situation in New Jersey does not appear to differ materially from that which has existed for years in a number of other States where State banks are not required to deposit securities in their trust departments." Approved unanimously. Letter to Mr. Wayne, Vice President of the Federal Reserve 44k of ichmond, reading as follows: "This refers to your letter of March 4, 1949, with itS enclosures, regarding the question whether the absorption by a member bank of transportation charges on 111°11eY shipped by it to certain customers constitutes a 'PtaYMent of interest on demand deposits within the meantrig of section 19 of the Federal Reserve Act and of the °ard's Regulation Q. to 1, "The Board appreciates the desire of a member bank , vs informed in advance whether a particular practice ;hollowed by it Is consistent with the law. As you know, : ° ever, it has been the Board's policy for a number of not to express an opinion as to whether a particr practice involves a payment of interest on demand e.!Posits in violation of Regulation Q, except after eonof all the facts and circumstances of a ecific case as developed in the course of examinations the member bank involved. The policy which the Board .7 4 1s followed in this respect since 1937 has proved to be 0.0e most satisfactory basis for dealing with questions this kind. Prior to that date the Board had attempted i Pass on numerous questions as to whether certain prac8hees involved a payment of interest, but experience ee°%?ed that it was impracticable to attempt to issue abtleral rulings or to pass on these questions in the ch, s_elice of full information, because the facts and cir'stances differ widely with individual cases. r j j 3/16/49 -6- "In accordance with this policy, the Board in several instances has declined to express an opinion except on the basis of facts developed in examinations as to whether the absorption of the expense of shipping currency involves a PaYment of interest in violation of the law and the regulation. Moreover, in view of the difficulty of showing that the absorption of such an expense in a particular case involves a payment of compensation for the use of funds constituting deposits, it seems questionable whether Practices of this kind would be held to involve a violation of law if in any case the matter should reach the Point of litigation. It seems apparent that it would be difficult to establish a clear line of demarkation between the absorption of shipping costs and the absorption of the expenses incurred by member banks in furnishing ma4Y other services to their customers. "Some time ago, the Federal Reserve Bank of St. Louis Presented the Board with a similar question regarding the absorption by member banks in St. Louis of the costs of shipping currency to their correspondent banks. After !tilting its general policy and pointing out the consideramentioned above, the Board suggested to the Reserve 'Dank that if it should be pressed by any member bank for an answer to this question, it might, without condoning the practice, advise the member bank that, in the absence ' very unusual circumstances, the Board of Governors (31 would not be disposed at this time to take any action /rith respect to any member bank on the ground that this Practice constitutes a payment of interest. "Recently we were informed that the practice of the St Louis banks of absorbing costs of shipping currency 143 correspondent banks, at first followed by only a few ; 44, had become so prevalent as to be the general rule , aLher than the exception, not only in St. Louis, but in Leighboring cities. Consequently, it developed that the ' !Tte tice, which involved considerable expense to the banks, longer afforded any competitive advantage. As a rethe Federal Reserve Bank of St. Louis has now adus that the member banks which had been absorbing :r costs of currency shipments discontinued this praccice effective March 1, 1949. ceiv "In connection with the inquiry which has been reed by your bank, it is suggested that you advise the mber bank involved of the Board's general policy of ra,:t Passing on questions of this kind until after develop-11t of the facts by examinations, or, if you feel it 3/16/49 "necessary to do so, you may advise the bank along the lines of the advice given by the Board to the Federal Reserve Bank of St. Louis as indicated above. In any event, we think it would be desirable, in your communication with the member bank, to point out the possible effects of any general adoption of this practice in a particular locality as illustrated in the St. Louis situation described above. It is to be hoped that the member bank and other banks in the community will decide that the practice would involve such expense and would be so likely to become general as to outweigh any possible competitive advantages which might result from its a doption." Approved unanimously. Letter to Mr. Wayne, Vice President of the Federal Reserve liktk 0_ I- Richmond, reading as follows: "This refers to your letter of March 4, 1949 regardan inquiry received by you from one of your member i;anks as to whether the practice followed by a national 1 11k in Pittsburgh, Pennsylvania, in operating a group insurance plan involves a violation of section 19 the Federal Reserve Act and of the Board's Regulation It is understood that the insurance plan in question but arers, not only employees of the Pittsburgh bank, The Pittsburgh b,!° employees of its correspondent banks. Pays no part of the premiums payable for insurance ring such employees of correspondent banks, although : itv 0+, 8 attend to the accounting, correspondence, and 1,1:er details connected with the operation of the plan rithout cormaking any charge for this service to its sPondent banks. ee 'since 1937, as you know, it has been the Board's tolleliel policy not to attempt to pass upon questions as :whether particular practices involve a payment of tilt sidel'est in violation of Regulation Q except after conration of all the facts of a specific case as de: veil It i1.3ed bY examinations of the member bank involved. 114,76 been found impracticable to issue any general 1)84,4148 as to whether certain practices constitute a tactellt of interest because of the variation of the s in individual cases, and the policy which the 3/16/49 -8- "Board has followed has proved to be the most satisfactory basis for dealing with questions of this kind. "The Board feels that it would not be desirable for It to depart from its general policy in the instant case, but it will of course be glad to consider the question if It should arise at any time as the result of an examination of any particular bank. Without attempting to pass ulloh the question raised in your letter, it may be said, however, that our Counsel comments that the absorption of the costs of operating such an insurance plan does 11°t appear to be different in principle from the absorp‘ion of other overhead expenses customarily incurred by member banks in providing various services to their cUstomers. "We are, of course, not commenting on the question whether the practice of the Pittsburgh bank contravenes , law of West Virginia. We also make no comment on 411e question whether the bank may be exceeding its powers Ulader the law) as this matter falls within the province et the Comptroller of the Currency and presumably will ° ille to his attention, if it has not already done so, ,,Ils()Itgh reports of examination. In the circumstances e have hesitated to take the matter up with the Comp: of the Currency, but we would be willing to do r° if the Ksenwha Valley Blink has requested it and you eel that it should be done." j Approved unanimously. Z5 Letter to Mr. FrProld A. Rouse, Steiner, Rouse & Company, trotA Street, New York 4, New York, reading as follows: or,"We are replying for Chairman McCabe to your letter 6.rch 1, 1949, in which you suggest that margin re0,7 .t ments be reduced. pc) "Chairman McCabe and this Board are interested, as cull.444rel in the orderly and efficient operation of semarkets and in maintaining conditions through, le economy that are favorable for sustained high "els of business activity. eto "Differences in liquidity between real estate and toa_eke) or between various other kinds of investments, 4 1111J: be important from many viewpoints, particularly en considering the safety of the lender. Such 3/16/49 -9- "differences, however, are less significant in connection with margin requirements, which were authorized by Congress in the Securities Exchange Act of 1934 chiefly for the purpose of protecting the general economy. Any increased protection for the lender was considered to be largely incidental to the broader purposes of the legislation. "The willingness or unwillingness of people to invest in stocks may depend on a number of factors. There is sometimes a tendency, however, to over-estimate the average investor's interest in minute-to-minute stability of quotations and to attach far too little imPortance to his desire for longer term stability for his investment. Heavy trading may tend to result in smaller differences from one trade to the next but, especially if carried to extremes on the basis of ex?essive credit, it may not necessarily contribute to "Lc)nger run stability in securities markets or in business generally. "It is a source of strength in the present situati 4 on that, in spite of the serious inflation elsewhere, in there has not been a dangerous expansion of credit he stock msrket. That fact has helped to prevent the general inflation from being even worse, and it will invitably lessen the shock of any readjustment, not only : far as the stock market is concerned, but also in her parts of the economy. bet "It should perhaps be mentioned that the differences ween the rules applicable to banks and those applicable brokers with respect to loans on unlisted securities :ise from the basic legislation rather than from regula'ons of this Board. "You may be sure that your point of view will be ;Jen careful consideration in the Board's continuing of the matter with a view to making such changes ix " the level of margin requirements as may be appropriate 0114 time to time." r Approved unanimously. ot teza Letter to Mr. Leedy, President of the Federal Reserve Bank as city, reading as follows: Thank you for your letter of March 4 directing our 3/16/49 -10- "attention to an editorial regarding Regulation W which aPpeared in the Kansas City Times of March 4. "The editorial is interesting indeed but it is somewhat unfortunate that it implies that the Board considers inflationary dangers as having disappeared. Potential inflationary forces are still present. The regulation, however, is a flexible measure designed to be tightened or relaxed as circumstances indicate. "The Board feels, sna has so stated from time to time, that consumer credit authority, as well as authority to require additional reserves, should be Permanent •to be used as conditions indicate from time to time. "Again, thank you for the information." Approved unanimously. Letter to the Honorable Abraham J. Multer, House of Repreelltatives, reading as follows: "In the absence of Chairman McCabe, I wish to acv`Ilovledge receipt of your letter of March 9, 1949, recomments on H. R. 1949, a bill to amend section <Id of the Federal Reserve Act. "H. R. 1949 is identical with S. 949, concerning ch the Board has previously expressed its views to t"e Banking and Currency Committee of the Senate. For , 1°ur information there is enclosed a copy of Chairman ; mnbe's letter dated February 25, 1949, to the ChairOf the Senate Banking and Currency Committee report11 on S. 949, together with a copy of a report dated ! J1, and 017,:e 18, 1948, to the Senate Committee on Banking introduced was which 1,7!elloY regarding an identical bill . - the 80th Congress." Approved unanimously. Letter to Mr. Jerry Voorhis, Executive Secretary, The Coope League of the United States of America, 343 South Dearborn t4et, Chicago 4, Illinois, reading as follows: 508 3/16/49 -11- "Chairman McCabe has asked me to respond to your letter of March 1 in which you suggest a meeting of representatives of The Cooperative League with members Of the Board for the purpose of discussing the financial situation of the United States. "The members of the Board who will be in Washington at the time you suggest will be pleased to meet with your group end it is suggested that Thursday, April 14, 1949, at 2:30 p.m., be fixed as the time for the conference. At present it appears that Governor Eccles will be away from Washington on both of the dates you suggest but should his plans be changed he will be glad to join the group, "If the suggested time of the meeting is agreeable to You, it will be appreciated if you will let me know 8414 if you will send to me, when definitely determined, 4 list of the representatives of your organization who 14111 attend the conference together with your suggestions 48 to the points to be covered during the conference." Approved unanimously. Telegram to Mr. Caldwell, Chairman at the Federal Reserve Kansas City, reading as follows: "Reurlet March 91 1949. Board will interpose no uiection to payment by your bank to Mr. J. C. Williams ' _ ee for attending recent meeting of Advisory Council !"3 representative of your bank, as well as reimburse:ent for expenses incurred by him in such attendance, 4 same basis as such fees and expenses are paid by , 41,°11r bank to regularly appointed member of Council °r Your district." Approved unanimously. Chairman pro tem.
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