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291 Minutes of actions taken by the Board of Governors of the al Reserve System on Tuesday, March 2, 1948. PRESENT: Mr. Mr. Mr. Mr. Mr. Mt. Eccles, Chairman pro tem. Szymczak Draper Evans 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 Pecleral Reserve System on March 1, 1948, were approved unanimously. Letter to Mr. Latham, Vice President of the Federal Reserve ta. ) ak 0 r Boston, reading as follows: lao "Reference is made to your letter of February 18, submitting the request of The Brooks Bank and orlist Company, Torrington, Connecticut, for approval is an additional investment of $165,000 in bank premIlree in lieu of the additional investment of $110,000 oreviously proposed which was approved by the Board Gove rnors on February 14, 1946. "It is understood that the investment as presently Z° 013°sed has been approved by the appropriate State auy01,1,1t1es subject to certain conditions and, in view of recommendation, the Board approves the proposed adta'Ional investment in banking premises by The Brooks 1,11 k and Trust Company provided the aggregate carrying r, lle of the bank's investment in land, buildings, sz;titure and fixtures does not exceed $240,000 and the tie8 conditions imposed by the State banking authoriee are met." Approved unanimously. application had been received under date of January 13, 1948, *°m The Chase National Bank of the City of New York", New 292 3/2/48 -2- New York, requesting approval of the Board to establish and taelnte'ill in Heidelberg, Germany, a branch of "The Chase National 1111.12 of the City of New York', and a letter had been received under clate of January 14, 1948, from Mr. Wiltse, Vice President of the Pecier 41 Reserve Bank of New York, recommending that the application be 4r) 41 '°1Ted. The Board had also been advised by the Office of the °1314Pt r011er of the Currency on January 23, 1948, and by the Departttet or the Army on February 25, 1948, that those departments had 40 0.k. 'action to the establishment of the proposed branch. The following order was adopted by unanimous vote: "ORDER The Chase National Bank of the City of New rov. 4 application to the Board of Governors of made the4 the 0 ..- x ederal Reserve System, pursuant to the provisions section 25 of the Federal Reserve Act, for permission 'u establish a branch at Heidelberg, Germany; and it appears that the said bank may properly be a "1111911 establish a branch at Heidelberg, Gerto th0 2 Za "NOW THEREFORE, The Chase National Bank of the Citv - of New York is authorized to establish a branch Reidelberg, Germany, and to operate and maintain e , .t.thject to the provisions of section 25 of the Fed1.; 11-1- Reserve Act, upon condition that unless the branch be.pactually established and opened for business on or e March 1, 1949, all rights hereby granted as to tbell branch shall be deemed to have been abandoned and 111';.! authority hereby granted shall automatically ter4,48•te on such date. ated. March 2, 1948" In connection with the above matter, the following letter to Mt. Wiltse, Vice President of the Federal Reserve Bank of New York, was approved unanimously: 293 3/2/48 -3- "Enclosed is a certified copy of an order of the Board of Governors authorizing The Chase National Bank f the City of New York to establish a branch at Heidelberg, Germany, which you will please deliver to the bank. 1 Copy of the order is enclosed for your files. ' "Please ask the bank to note that the authority to establish the branch will automatically terminate on March 1, 1949, if the branch is not actually established alld opened for business on or before that date, and reuest the bank to advise the Board in writing through 1-e Federal Reserve Bank of New York when the branch is '0 established and opened for business." 2 Letter to Mr. Wiltse, Vice President of the Federal Reserve °t New York, reading as follows: 1948 "Reference is made to your letter of February 20, ) submitting the request of the Lincoln Rochester Tust Company, Rochester, New York, for approval of he establishment of a branch in Canandaigua, New ..rk, in connection with the proposed absorption of +1° 'Lle Ontario County Trust Company. In view of your recommendation, the Board of GO vernors approves the establishment and operation iclif a branch in Canandaigua, New York, by the Lincoln 2chester Trust Company, Rochester, New York, prothe merger with the Ontario County Trust Com'114Y is effected substantially in accordance with pre Plan submitted; the prior approval of the aptls°Priate State authorities is obtained, and with Understanding that Counsel for the Reserve Bank ,f1-1 review and satisfy himself as to the legality Of all steps taken to effect the proposed absorption 'Id establish the branch." 4 Approved unanimously. Letter to Mr. McConnell, Vice President of the Federal ReOf Minneapolis, reading as follows: "Enclosed are copies of a letter dated February. n, cU Y 1948, and a resolution passed February 19, 294 3/2/48 -4- "1948, received from the Bank of Sheridan, Sheridan, Moutana. The wording of the resolution appears to defeat its purpose but Board's Counsel is of the .?Pirlion that the intent seems evident, particularly "°1 View of the accompanying letter and the fact that anY other action would have been meaningless. "A proposed reply to the member bank, with a COPY for your files, is also enclosed, which you are requested to forward unless you feel that the Matter should be handled in some other manner, in Which case we would like to have your recommendation. 1947 The copy of the bank's letter of December 30, ., received with your letter of January 2, 1948, itdicates that the resignation of Mr. Paris W. Robert as a director was accepted and, therefore, it would Pear that the bank now has only four directors. If she bank is to continue as a member of the Federal Rebellve System, please advise us as to what action has een or will be taken to comply with the requirement that it shall have not less than five directors." ? Approved unanimously. Letter to the Honorable Maple T. Harl, Chairman, Federal Insurance Corporation, reading as follows: aril. :With further reference to your letter of Febru" 1948, and the Board's reply dated February 12, 1948, there are enclosed two copies each of a memorandum elluZitted by George R. Wilkinson, Examiner for the FedReserve Bank of Kansas City, and a letter dated .arY 9, 1948, from the President of the Merchants gn.l 0;'' of Kansas City to President Steffins of the Bank 114,e. Odessa, Odessa, Missouri, both pertaining to the 1dling of a certain loan by the Merchants Bank se, , c131 -ed bY capital notes of the Bank of Odessa. ve The Board is advised that the enclosed documents !inspected in Kansas City by the examiner for the 1.1) or.4- Who conducted the recent examination of the Bank th °dessa and who feels that the information contained Ilaer.ein is satisfactory for your purposes. In particit appears that payment of the note of President rens secured by capital notes of the Bank of Odessa ' 296 31W48 -5- which matured January 1, 1948, was effected January 9, 911.8, through a debit item originating in Odessa against Ole account of the Bank of Odessa with the Merchants Bank of Kansas City. "The Board and the Reserve Bank are glad to have had the oPPortunity to be of service." Approved unanimously. Letter to Mr. Milton N. Mound, Attorney at Law, 295 Madison 414tale, New York 17, New York, reading as follows: "This is in reply to your letter of February 19, rerding the provisions of the Board's security loan regu-!ti°ns that restrict substitution of securities in, and wit hdrawals from, undermargined accounts. You are correct in your understanding that these Prov • • lsions would prohibit either of the two sets of lsansactions proposed in your letter, assuming, of ' r°11rse, that in neither case would the transactions iesult in a debit balance smaller than the maximum 1 1 value of the securities in the account. The 7 1, 111.4.?e in question are provided in the Board's Regu+L'I.on T, and we are glad to outline the reasons for vuera. r "The essential reason for the restrictions on substit 4. Utaons and withdrawals is that they help to restrain the . rin, inflationary use of credit in the securities markets. i'e Board is authorized and directed by the Securities ellange Act of 1934 to prevent the excessive use of ise'it for the purchase or carrying of securities. It th rue, of course, that the sale of one security and cr- Purchase of another with the proceeds do not inthe amount of the customer's debit balance -e 15, the amount of credit in use -- but they do i'ilect the amount of use made of outstanding credit. the rule against substitutions were not in effect, tinlators could and would purchase and sell securiealscie over and over again using the same borrowed money, ilieL the same would be true of cash withdrawn from underlied accounts. Also, these provisions, together 1 the margin requirement, work in the direction of 1 4 liging about a gradual increase of the margin in 4 296 3/2/48 -6- undermargini-d accounts toward the standard prescribed by the regulation. "Moreover, these rules serve to strengthen the 75 Per cent margin requirements. In fact, they are in substance a part of that requirement. When one comment is closed out, the rules assure that a new coMnitment cannot be undertaken unless the account c'r the new commitment is on a 75 per cent basis, ,?1.1st as would be required for a new customer. If lt were not for the restrictions on undermargined ,: 3cc0unts, the same degree of restraint on stock mar' -et credit would require either higher margin requirethan 75 per cent or that the Board exercise its : t atutory authority to require liquidation. The presnt rules seem to us to be preferable to equivalent alternatives. They do not force the liquidation of eviously-held commitments that are undermargined, but on the other hand they do not give undue advanage to old accounts. "The Board believes that the present terms of the re gulation are in the public interest at this ?, le and that they carry out the intent of Congress ;Ter the statutory mandate. Relaxation of the pronow would only add to the supply of credit 1...chout increasing the production of goods, which : p limited by shortages of key materials and man/ler. That is to say, it would be of distinctly ' nflationary tendency." r Approved unanimously. Letter prepared for Chairman Eccles' signature to the 44)rabl-e Edith Nourse Rogers, House of Representatives, reading 4 tc ' llows: "This refers to your letter of February 20, 1948/ asking for the Board's comments and recom3Idations regarding H. R. 5120, a bill to amend Servicemen's Readjustment Act of 1944, as -14elided. "In general, the bill would provide certain ,1S, grants, Government guaranties, and tax TZ 297 3/2/48 -7- ft exemptions in connection with veterans' housing. As .ndicated below, these would be made available chiefly 'through State agencies or subdivisions. "To finance veterans' housing State agencies or subdivisions would be authorized to issue bonds which woui,a be fully guaranteed as to principal and interest by the United States, and the interest on such guaraneed bonds would be exempt from all Federal taxation. °Uch guaranteed bonds could be issued in an aggregate 4111°141t of $2,000,000,000. The Administrator of Veterans Affairs would be Et1,1:1thorized to advance working capital and 'interim llaancing' to State agencies and subdivisions in connecti-on with veterans' housing at an interest rate of °Ille-half of 1 per cent per annum, and $100,000,000 °Uld be authorized to be appropriated for this purPose. "The Federal Works Administrator would be authored. to make grants to State agencies and subdivisions ng one-half the cost of public facilities in con,:cV-on with housing under the bill. An appropriation "4 200,000,000 would be authorized for this purpose. The interest and principal paid by any veteran who acquired a home under the bill could be deducted the veteran for the purpose of computing Federal Inc cmie tax if the total cost of the home did not exceed $15,000. , "Whatever merit some such bill might have in other l_cUmstances, the Board believes that this bill should 1210 be enacted in the present situation. One of the east inflationary factors at this time is excessively t1,8Y mortgage credit for housing. More than half of b"e current unprecedented mortgage lending is sponsored the Federal Government under legislation enacted by gee Congress and this bill would add to the already ,"°us provisions for mortgage credit. The Governter must therefore assume much of the responsibility anY adverse effects of this type of lending under rilai"tch sellers and builders of houses are enabled to 10 e exorbitant profits, and families of moderate and yow,iacome are encouraged to assume mortgage debt betheir ability to pay when the present inflationary is over. In this connection, your attention is wilted to my statement on home financing before the ' 1. Z 4 298 3/2/48 8- n, 'Joint Committee on the Economic Report on November 25, 19471 of which a copy is attached. "While it seems unnecessary to enter extensively 11P°n a discussion of other aspects of the bill, the Board feels that, aside from the substantial additional aPpropriation of Government funds proposed for housing 'Poses without reimbursement, it provides for a loan 111te for working capital and 'interim financing' which , 's substantially below the cost of money to the Governexit/ for a highly questionable tax exemption on pay: ents on home mortgages, and for a tax exemption on uonds which is not in harmony with Government policy, Particularly as expressed in the Act of February 19, 191, of withdrawing tax exemption form all obligations , -tssued after March 28, 1942 by the United States or any ; egencY or instrumentality thereof. Moreover, it is not iinsistent with the heavy responsibilities of the Treasfor the management of the existing large public debt 11,° Place elsewhere the issuance and sale of Government g uaranteed bonds which would be authorized by this bill." Approved unanimously. 4provea: Chairman pro tem.
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