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Minutes for March 20, 1959 To: 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, if you were present at the meeting, please initial in column A below to indicate that you approve the minutes. If you were not present, please initial in column B below to indicate that you have seen the minutes. A Chin. Martin Gov. Szymczak Gov. Mills Gov, Robertson Gov. Balderston Gov. Shepardson 11,4 01. I Minutes of the Board of Governors of the Federal Reserve System on Friday, March 20, 1959. PRESENT: Mr. Mr. Mr. Mr. Mr. The Board met in the Board Room at 10:00 a.m. Balderston, Vice Chairman Szymczak Mills Robertson Shepardson Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Mr. Young, Director, Division of Research and Statistics Mr. Hackley, General Counsel Mr. Farrell, Director, Division of Bank Operations Mr. Molony, Special Assistant to the Board Mr. Noyes, Adviser, Division of Research and Statistics Mr. Solomon, Assistant General Counsel Mr. Hexter, Assistant General Counsel Mr. Hostrup, Assistant Director, Division of Examinations Mr. Benner, Assistant Director, Division of Examinations Mr. Daniels, Assistant Director, Division of Bank Operations Mr. Hooff, Assistant Counsel Discount rates. The establishment without change by the Federal Re8erve Banks of New York, Philadelphia, and Chicago on March 19, 1959, or the rates on discounts and advances in their existing schedules was ! I1 :2171!! unanimously, with the understanding that appropriate advice 1401-11d be sent to the respective Banks. Application of Marine_ Trust Company. Pursuant to the under- Btandi -ng at yesterday's meeting, further consideration was given to the application of The Marine Trust Company of Western New York, Buffalo, n11 3/20/59 -2- Neu York, to establish a branch at 2340 Niagara Falls Boulevard, in an unincorporated area of the Town of Tonawanda. In supplementation of the information contained in the file that had been circulated to the Board, Mr. Nelson reviewed the site Of the proposed branch, the relationship of that site to other offices Of Marine Trust Company and offices of competing institutions, the Proportions of Marine's offices and deposits to total bank offices and deposits in an area within a radius of about six miles from the site °f the proposed branch, and the characteristics of the area that would be served by the branch. Since Marine already had a large part of the business in the area to be served, it did not appear to the Division Or Examinations that the establishment of the branch would have any sUbstantial effect on the competing banks. Mr. Hackley stated that to the Legal Division this seemed to be another case in which the benefits that would be derived by the c"munity from establishment of the branch must be weighed against any Potential adverse effect on competition resulting from establishment Of an additional office by a bank already having a clear majority of the deposits and offices in the area. As in a number of recent bank 41ding company cases, it was felt that a decision on the part of the kard to approve the branch probably would not be questioned, or teversed by the courts. 3/20/59 -3Mr. Hexter expressed the opinion that from a purely legal Point of view the Board would have grounds for a decision either to approve or to deny. A decision to approve would in all probability not be subject to any judicial review, but the likelihood of such review 'would be somewhat greater in the event of denial. to The Board would have rely, if it decided to turn down the application, on the ground that establishment of the branch would adversely affect potential competition in the area, and this might be regarded by the courts as unduly tenuous. Thus far, there had been little in the way of court decisions to afford an indication in that regard. In response to a question by Governor Balderston, Mr. Hexter Commented that the convenience of a community was always enhanced by having a banking office in the immediate area. •r banking However, with a number facilities available within a radius of three or four miles, the residents of this particular area would not be disaccommodated 8rsetlY by the absence of additional facilities. On the other side of the Picture, a person wanting to deal with a bank other than Marine 14)111d have to travel only a relatively short distance. In the Old Kent 'decided by the Board yesterday, the factor of community need case seemed to be greater because of the longer distance to available banking faeilitiee, but the effect of Old Kent's establishing a branch in that c°mmunitY might be potentially worse from the standpoint of competition. 3/20/59 In response to a further question Mr. Hexter expressed the view that the Marine application might be regarded more favorably if Marine were seeking to compete in an area not previously served by it) for that would tend in the direction of increasing competition. BY the same token, if a competitor of Marine desired to establish a branch in this particular area, where Marine already had a majority Of the facilities, that would clearly increase competition. However, if Marine established the proposed branch, that might have the effect °I* diminishing the possibility of more competition in the area. Mr. Hackley expressed agreement, particularly with regard to :the effect on potential competition. In terms of immediate effect he noted that there were already other branches of Marine in the local area and that some of their deposits probably would be transferred to the neNT branch. In these circumstances, it appeared that there would be little immediate effect on competition. On the other hand, establishment of the Marine branch might have the effect of precluding the establishment CI other banks or branches. Governor Mills stated that he concurred in the favorable recom nendation of the Division of Examinations. In his own thinking, e not regard the competitive factor as of great importance in this vartioular case, which involved the establishment of another b11141eh in an area that vas essentially a suburb forming a part of the IlletrolNro 4— ,04.4.T.an Buffalo area. The applicant bank wished to extend its 3/20/59 -5- services in one enclave of the area and to provide facilities not now available to a particular community, and that seemed to him to be in order. to As he saw it, to deny the application would in a sense amount reversing the reasoning behind some of the decisions the Board had arrived at in approving the establishment of branches by subsidiaries of Marine Midland Corporation in other sections of the State of New York. A somewhat different problem, and the one of particular concern to him) was the gradual extension of Marine Midland banks into counties and banking districts of the State not previously served by that °rganization, for such extension could be detrimental to the competitive Pc 'aition of other banks. In those instances to date, it had been fmand that the Marine Midland subsidiary bank would control only a Percentage of the banking offices and bank deposits of the area concerned, and the Board had properly found justification for approving the a Pplication. Nevertheless, this was a trend and a development that ill his Judgment deserved much more critical examination then the aPPlication before the Board today. Governor Robertson stated that he would be opposed to granting the current application. appeared In the Old Kent case decided yesterday, it to him that the need for banking services was sufficiently iseat to offset the factor of reduced competition. In this case, it haa en suggested by the staff that the immediate effect of competition %1°1/1c1 not be great because Marine already had a large proportion of the 3/2059 -6- business in the area concerned. According to that logic, however, it Would be possible for Marine to add one additional branch after another. He felt that this was the wrong approach, and he would consider it a mistake to permit the applicant to increase its percentage of control in this particular area. In his opinion, the adverse effect on potential coMpetition far outweighed the need of the public for additional facilities. Governor Shepardson confirmed by question addressed to Mr. Nelson that there appeared to be no desire at present on the part of competing banks to establish facilities in the area where the proposed branch would be located. He then expressed himself as much concerned e-bout the cumulative effect of approval of the various Marine Midland 4P1ioati0n8. While each one might seem to have justification) over a Period of time Marine Midland was gradually extending its areas of d°minance. It was difficult to find a place where the Board could justify stopping this encroachment but, as Governor Mills had said, The s ituation ought to be examined carefully. In this particular cll'es 'competitors could have entered the area had they desired, and It alight be said that there was less reason for turning down this aPPlieation than the Old Kent application because in that case State Jay 14°111d preclude a competitor from establishing a branch in the same CO'flrfl -"'ty after Old Kent established one there. Therefore, although corice rned about the gradual encroachment of Marine, he was not sure ether the facts of this specific application were such as to support a 3/20/59 -7Governor Szymczak said that he shared Governor Shepardson's feeling of reluctance, particularly because of the apparent inability to work out a yardstick by which to gauge applications such as those Presented by Marine Midland banks from time to time. It was evident that Marine was expanding its operations continuously, and in the Buffalo area competition was substantially between the Marine Trust Company and one competing institution. It must be acknowledged that Marine was serving the convenience of the public through its branches. 11°1lever, with Marine already having so many branches in the area, he 11°111d be inclined on balance to deny the current application on the Principle of limiting further and further expansion by the applicant. 140king at the matter from the standpoint of how any independent bank e°111d be expected to establish itself in the area and operate successfully, °fle could see that the effect of additional Marine branches might be to exert a damaging effect on potential competition. In view of questions raised by Governor Balderston, Mr. Nelson "hibited a map to indicate the site of the proposed branch, the lielfttive locations of existing banking facilities, and the primary 8ervice area of the branch. After examining the map, Governor Shepardson observed that the 1°catim, Of the proposed branch appeared to indicate an extension by Marizle Trust into the periphery of an expanding area. This seemed to 3/20/59 -8- suggest a "leap-frogging" by Marine to move ahead of competition into the expanding area, and in this he found an argument in support of an adverse position on the branch application. As he saw it, this would not constitute an intensification of service in an area where Marine vas already represented as much as an expansion of its territory. Therefore, while the question admittedly was a difficult one, he concluded that there was a basis for denial of the application. Governor Szymczak agreed, stating that the map seemed to show an attempt on the part of Marine to keep one step ahead of competition by rendering service to a community that was only now developing or might develop in the future. In such circumstances, the possibility ot the creation of a new bank in the community would appear to be lessened. Governor Mills cautioned against downgrading the convenience ractor in this kind of situation. It was his observation that banking becoming more and more impersonal and that a branch bank, or even e°mPlete unit bank, was principally a station of convenience for depositors. The public, he felt, had very little feeling about who suPPlied the service as long as the service was convenient and the facilities comprehensive enough to meet local needs. Particularly 'with the development of suburbs, he believed the convenience factor ecl/ild not be pushed as far down the scale of considerations as might have been the case in earlier years. 3/20/59 -9Governor Balderston commented that, like other members of the Board who had spoken, he found this case perplexing. If it had envisaged an extension of Marine's competitive power into an area already supplied bY banking facilities, he felt that he would favor denial of the appliIf it were an effort by Marine to serve an area in which the cation. bank had not been represented and which would have no banking facilities unless provided by Marine, he felt that he would favor approval of the application. In this instance, Marine already had several banking "'flees in the general area and the new branch would be in a location Where it would obviously add to the convenience of the public without elearl— J precluding competition in the future. The Board, he felt, must not Place too much reliance upon any single ratio or any single statistical Illeasure. Therefore, despite the percentage of control already achieved by Marine Trust Company in the area concerned, he considered the convenience factor more important than the possibility of damage to Potential competition. Hence, he would be inclined to approve the aP plication. From this discussion, it developed that Governors Balderston and Mille would favor approving the application while Governors Szymczak, Robe tson, and Shepardson would not. Accordingly, it was agreed, 13141173uant to the usual practice in cases where the action proposed to be tak en by the Board was different from the recommendation of the eser, " Bank concerned, that informal advice should be given to the 3/20/59 -10- Federal Reserve Bank of New York concerning the likelihood of denial of the application in order that the Reserve Bank might have an oPportunity to submit further information or views if it so desired before the Board took final action. In this connection, it was indicated that there would be no objection on the part of the Board if, upon being so advised, the New York Reserve Bank wished to discuss the matter with the New York State Banking Department, particularly in view of the understanding reached last fall between the Board and the then Superintendent of Banks of the State of New York. During the foregoing discussion Mr. Young withdrew from the illeeting, and at its conclusion Mr. Hooff withdrew. Handling of unissued Federal Reserve notes. At the meeting on March 10, 1959, the suggestion was made that the President's Conference be asked to institute a study of the handling of unissued Federal Reserve notes from the time of their shipment from Washington until their issuance to the respective Reserve Banks. A draft of a letter to the Chairman of the Conference intended to implement this suggestion had been distributed prior to this meeting. A copy of such letter, if aPProved by the Board, would be sent to each Federal Reserve Agent. Mr. Farrell stated that the Division of Examinations had made certain s uggestions regarding the language of the proposed letter designed Reserve principally to recognize the responsibilities of the Federal Agents and the General Auditors in the area concerned. These ii 3/20/59 -11- suggesti0n6, in which he said that the Division of Bank Operations concurred, were embodied in a revised draft of letter, copies of which were distributed at this time. Mr. Farrell then raised the broader question as to whether a " 114' such as proposed would be procedurally appropriate in view of the desirability of maintaining a separation between the functions of the Agent, the General Auditor, and the operating side of the Reserve Bank. A possible alternative, he said, would be for the Board's staff to Prepare.a questionnaire which would be sent to the Reserve Bank ?residents, the Federal Reserve Agents, and the General Auditors, and then to prepare for the Board's consideration a proposed standardized Procedure for the handling of unissued notes Which could be sent to all of the respondents to the questionnaire for comment. At this point Governor Robertson suggested several changes in the orig inal draft of letter with a view to shifting the tone and earilhasis of the request toward providing a definition of adequate and aPPropriate safeguards for the consideration of each Reserve Bank in Perfecting its own procedures. After further discussion, during which agreement was expressed '41th revisions along the lines suggested by Governor Robertson and by the D ivision of Examinations, it was understood that a draft of letter l'erleeting the those suggestions would be prepared and distributed for Board's consideration. 4 3/20/59 -12Messrs. Noyes and Daniels then withdrew from the meeting and Mr. Brill, Chief, Capital Markets Section, Division of Research and S tatistics, entered the room. Regulation of employee-benefit funds of national banks. The Bureau of the Budget had requested the Board's views on a draft bill, submitted by the Treasury Department on behalf of the Comptroller of the Currency, to provide for regulation of the administration of pension, Profit-sharing, and employee welfare or benefit funds of employees Of national banks. In a memorandum dated March 12, 1959, which had been distributed t° the Board, Mr. Hexter recalled that the Comptroller made a recommen4tion along these same general lines when the proposed Financial Inst itutions Act was being drafted in 1956, but that no provisions on this subject were included in the Act, presumably because of a general atuay of the regulation of employee-benefit plans then being conducted bY the Senate Labor and Public Welfare Committee. Legislation resulting fls°41 that study had now become effective. Submitted with the file on this matter was a memorandum prepared by m-. Hexter analyzing the Treasury's proposed bill and enumerating 11'°/31s402 that might require consideration. Because of these unresolved cillesti°", the suggestion was made that the Board might wish to refrain tr°111 ta king a position regarding the proposal at this time, and a possible 3/20/59 -13- reply to the Budget Bureau drafted along such lines was submitted. Copies of the memorandum of analysis would be transmitted with the letter in order to indicate the nature and scope of the problems that might require further study. Following comments by Messrs. Hexter and Brill on the backof the proposal and certain of the major problems seen in the bill as drafted, including the question whether special legislation in the area of national banks only was called for, Governor Robertson suggested that, before a formal reply was made to the Budget Bureau, IvIr• Rexter be requested to get in touch with the Office of the eftPtroller of the Currency informally with a view to discussing the Pc:tints he had raised in his analytical memorandum and determining whether the Treasu th°se questions. would like to recast the bill to meet some of It was further suggested that Mr. Hexter communicate vith the Budget Bureau by telephone and indicate that certain substantial ilr°bleme involved in the proposed legislation were under study by the 11Qa d. Following comments by Mr. Benner to the effect that the subject --e proposed legislation had been of concern to the Division of and that inter-agency study with a view to possible 4-0PMent of legislation applicable to all insured banks might be clesirab e, agreement vas expressed with the approach suggested by 3/20/59 -14- Governor Robertson, it being understood that Mr. Hexter would advise the Office of the Comptroller of the Currency that his request for consideration by that Office of the points raised in his memorandum 1418 being made at the instruction of the Board. During the foregoing discussion Messrs. Johnson, Director, Division of Personnel Administration, O'Connell, Assistant General Counse,, and Young, Assistant Counsel, entered the room; at its con- Messrs. Hexter and Brill withdrew and Mr. Noyes rejoined the 'meeting. Conflict of interest bills (Items 1, 2, and 3). The House Ccmamittee on the Judiciary had requested the Board's views on H.R. 2156, ht° strengthen the criminal law relating to bribery, graft, and conflicts of interest," and H.R. 2157, "to implement the criminal laws l'elating to bribery, graft, and conflict of interest in Government " PloYment and to promote ethics in Government". These requests were the subJect of comments in memoranda from Mr. Walter Young dated l'ebrIlary 25 and March 10, 1959, respectively, both of which had been distributed to the Board. Submitted with the memoranda were drafts of 111°P°8ed letters to the Committee on the Judiciary. In comments based on the memoranda, Mr. Hackley stated that °111,Y t140 provisions of the proposed legislation would appear to be of ll'cat concern to the Board. The first would preclude any Government 3/20/59 -15- employee, after leaving Governmental service, from ever representing a client in matters concerning which he had responsibility while employed by the Government. While this language conceivably could be construed in a very severe way, Mr. Hackley's view vas that in all probability it vould not be so construed. The second item of concern would forbid an ex-Government employee for a period of two years after termination Of service from assisting anyone in connection with any matter directly Or indirectly involving the Government agency where he was formerly This, Mr. Hackley noted, would be similar to provisions employed. in the proposed Financial Institutions Act to which the Board had objected. In the letters reporting on the two bills, opposition would be expressed to the second of the provisions mentioned and attention 140111d be called to the possibility of unduly severe construction of the first. Mr. Young noted that the proposed letter reporting on H.R. 2157 11°1111 question the desirability of a provision declaring it to be roper conduct for an employee of the Government to discuss or c°118ider future employment with any person outside the Government with 141°14 he transacted business on behalf of the United States or whose interp04. might be substantially affected by his performance of official chltien Mr. Young also pointed out that Congressman Bennett of Florida hari _ vritten the Board expressing an interest in obtaining assurance I 3/20/59 that the effect of certain bills, including H.R. 2157, would not be to supersede the joint resolution passed by the 85th Congress which established a code of ethics to be adhered to by all Government employees. The proposed letter on H.R. 2157 would take cognizance of Congressman Bennett's interest in the matter. In discussion, Governor Mills inquired whether the proposed legislation, if enacted, might be construed to prohibit an ex-Government etPloyee from criticizing actions or positions taken by his former agerlY and Governor Shepardson suggested that the question might become even more complex if the pertinent provisions were considered applicable t° ELII ex-employee who had subsequently become associated with an organization or client seeking to transact business with his former agency. Responses by Messrs. Hackley and Young were in terms that the ellralnal statutes are construed strictly and that it seemed doubtful 'Whether the implications suggested by Governors Mills and Shepardson c°111d be read into the proposed legislation. After referring to the 15e1"tillent provisions, they again stated that they could not envisage those Provisions being construed so broadly. Thereupon, the proposed letters to the Committee on the Judiciary vere -PProved unanimously together with the proposed reply to Congressman e4nett. Copies of the approved letters are attached as Items 1, 2 and 3, I'esPectively. V20/59 -17Messrs. Nelson and Young then withdrew from the meeting. Letter to Senator Johnson (Item No. 4). In accordance with the understanding at the meeting on March 17, 1959, there had been distributed to the members of the Board a revised draft of letter, vith enclosure, to be sent to Senator Lyndon Johnson of Texas with resPect to questions raised in correspondence by a constituent, Mr. E. Cutcher of Lockhart, Texas. Following a brief discussion, the proposed letter was approved Unanimously along with the accompanying memorandum. Copies of the letter and memorandum are attached under Item No. 4. Continental Bank and Trust Company (Item No. 5). In connection 'with the section 9 proceeding involving The Continental Bank and Trust CoMPanY, Salt Lake City, Utah, on which the Hearing Examiner's Report arid R ecommended Decision was filed under date of March 16, 1959, 4eeia1 Counsel to the Board had requested an extension of time of 30 dais to and including April 30, 1959, for filing exceptions and 811131)°rting briefs to the Hearing Examiner's Report. from With a memorandum ''• Solomon dated March 19, 1959, there had been distributed to the Board a draft of letter which would forward a copy of the motion to Counsel for Respondent and allow until March 25, 1959, to enter 41V ob jections to its being granted. The proposed letter to Counsel for Respondent, a copy of which 18 attached as Item No. 5, was approved unanimously, with the 3/20/59 -18- understanding that if no objection to the motion were interposed by March 25, 1959, the request of Special Counsel to the Board would be granted. Suit filed by Continental against the San Francisco Reserve 1. 2 1 .L.,1I5em No. 6). As the Board had previously been advised, there vas pending in the United States District Court, District of Utah, an action by The Continental Bank and Trust Company, Salt Lake City, Utah, againSt the Federal Reserve Bank of San Francisco involving a trust Under which the member bank was the beneficiary and under which officers or the bank held as trustees stock of the Paramount Life Insurance CcIlliPany of Texas. This action was being defended by the Federal Reserve Ballk of San Francisco, and its Vice President and General Counsel had 11eeted permission to disclose certain previously unpublished inforati°n relative to the above trust in connection with such defense. Certain of the documents that Mr. O'Kane wished to file were attached in reproduced form to a memorandum from Mr. O'Connell dated March 19, 1959 ,'which had been distributed to the Board, and the remainder of the nultarial was described in Mr. O'Connell's memorandum. Briefly, certain "davits prepared in support of the Reserve Bank's Motion to Dismiss or, it the alternative, for Summary Judgment contained references to --"c"tion relative to the insurance company issue obtained through exami,„ ' - ation of the member bank. Also involved were a transcript of a 3/20/59 certain agency account maintained in the trust department of Continental and copies of certain correspondence between Counsel for the Reserve Bank and Counsel for Continental. In his memorandum, Mr. O'Connell expressed no judgment as to the validity of the legal positions asserted by the Reserve Bank. However, assuming the validity of those positions, he expressed the judgment that the material for which permission to disclose had been requested was relevant and necessary to the defenses asserted. It was recommended, therefore, that the Board authorize 1411'°IKane to disclose the material in question in connection with defense of the suit. Following comments by Mr. O'Connell on the nature of the 1111Published information proposed for disclosure and comments by Mr. Rack' eY in support of the recommendation made in Mr. O'Connell's Illemorandum, Governor Mills indicated that he was somewhat apprehensive b°Ut the disclosure of unpublished information abstracted from a l'ePort of examination. He felt that the Board should be very certain it 'las not breaching the principle of confidentiality, especially becaUse in this case the suit had to do with a trust account and trust ad ministration has unusual considerations of confidentiality aPPlied to it. After reviewing the essentials of the case, he observed that a matter of principle appeared to be involved in the suit rather thall d etails of administration. If the Court should indicate that the 3/20/59 -20- information filed by the Reserve Bank did not adequately explain the matter and the Bank were then required by the Court to produce additional information, it seemed to him that the circumstances would be more favorable for disclosure of the unpublished information. Mr. O'Connell responded that a large portion of the material had in fact already been disclosed, in other language, in the complaint filed in this matter. The member bank had clearly asserted the nature °f the trust in question, which in effect was all that the attachments tO the affidavits would do. After drawing certain comparisons with the 315:teriel that the Board had authorized for possible disclosure in connection with the suit filed against it by Old Kent Bank and Trust C°mPaalY, Mr. O'Connell said it appeared proper that legal defenses Ithieh were legitimate should be raised at this juncture. If they were nclt, the Court might grant a cross-motion by the plaintiff for summary JUdgment and there would never be an opportunity to present the 1111Published information. Governor Mills then stated that, having been reassured by the advice of Counsel, he would be willing to authorize disclosure of the unAublished information in question, and other members of the Board expr essed themselves in like terms. Accordingly, unanimous approval 14" given to the telegram to Mr. (Mane of which a copy is attached as 3/20/59 -21Messrs. Hostrup, Benner, O'Connell, and Holahan then withdrew from the meeting. Letter to Senator Robertson (Item No. 7). In a letter dated March 18, 1959, Senator Robertson inquired about the accuracy of a recent statement by Senator Gore of Tennessee to the effect that at the end of 1958 the money supply was lover in relation to gross national Product than in 1952. The percentages cited by Senator Gore were 32.8 "cl 37.2, respectively. As understood at yesterday's meeting, a draft °r ProPosed reply had been distributed to the members of the Board. Discussion of the proposed reply resulted in suggestions that l'efsrence be made (1) to the need for considering the rate of turnover in discussing the adequacy of the money supply and (2) to the need r" Viewing the relationship of the money supply to gross national PrQduct Over a longer period of time than that referred to by Senator Gore. At the conclusion of the discussion, unanimous approval was given to a reply to Senator Robertson in the form attached as Item No.7 . 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 affecting the Board's staff: 3/20/59 -22- Salary increa Eleanor S. Frase, Economist, Division of Research and Statistics, from $10,850 to $11,355 per annum, effective March 22, 1959. t, Thomas V. Kopfman, Assistant Supervisor, Duplicating, Mail, 'essenger, and Supply Section, Division of Administrative Services, from $6,718 to $6,947 per annum, effective March 22, 1959. . 11S.22,1ce of resignation Gladys D. Bosben, Draftsman-Illustrator, Division of Research and Btatisti cs, effective March 18, 1959. 41111.•,Sec BOARD OF GOVERNORS OF THE Item No. 1 3/20/59 FEDERAL RESERVE SYSTEM WASHINC3TON OFFICE OF THE VICE CHAIRMAN March 20, 1959. The Honorable Emanuel Celler, Chairman, Committee on the Judiciary, House of Representatives, Washington 25, D. C. -Dear Mr. Chairman: This is in response to your letter of February 4, 1959, requesting an expression of the Board's views on H.R. 2156 "To strengthen the criminal laws relating to bribery, graft, and conflicts of interest, and for other purposes." The Board has followed with much interest the study which your Committee has made of this general subject and is in full accord with the objectives of the bill. The bill would rearrange provisions of existing laW in a more orderly manner, make certain technical changes, ?lad attempt to clarify and expand certain provisions of existing law which, in practice, have been difficult to interpret. The Board considers that the provisions in section 1 of the bill relating to bribery, compensation to Government officials otherwise than as provided for by law, the Prosecution by Government officials of claims against the United States, and interested persons acting as Government agents are desirable. No comments are offered with respect r,,o the proposed new sections 204 and 206 of the Criminal t `4Ode since they in no way affect the Board of Governors. The new section 207 embodies an amendment of the resent exit pGO section 984, relating to disqualification of former officers and employees in matters connected with /heir former duties. The first paragraph of the new section Prohibits an ex-Government employee from ever representing a l_ ongovernmental interest in matters concerning which he had !Gme responsibility while employed by the Government. As !PPlied to the Board of Governors, this provision, for example, 17113Parently would forbid a former employee from acting on bea member bank in connection with a request for approval Of a branch application if, while employed by the Board, the The Honorable Emanuel Celler -2- individual had some responsibility with respect to that specific application. If this is the correct construction of the Paragraph, the Board would have no objection to its favorable consideration. However, it is assumed that the paragraph would not be construed to forbid an employee of the Board who maY have had some general responsibility in the processing of branch applications from later representing a bank in connection with such an application if while employed by the Board, the individual had no responsibility with respect to the specific branch application. The second paragraph of section 207 would forbid an ex-Government employee, for a period of two years after termination of his Government employment, from assisting anyone in connection with any matter directly or indirectly involving the Government agency where he was formerly employed. This broad prohibition under the language of the paragraph would seem to apply whether his responsibility while employed by the Government involved the specific subject matter or not. The prohibition would apply to all Government employees regardless Of the nature of their duties or the degree of their responsib?lity for actions taken by the Government agency. It is ,,2 view of the Board that, while some expansion of these crimlnal provisions along the lines indicated by the bill may be desiral?le, the language of the proposed provision would be unduly flgld and severe, would give rise to difficult problems of in1,er?retation, and might seriously handicap the Board in recruiting qualified employees. Fina3ly, the Board wishes to comment on the proposed new section 218 under which the President or, under regulations Prescribed by him, the head of a Government agency, might deVoid and rescind any action taken by the agency if in connection with the action, there had been a violation of any of the conflict-of-interest provisions. In actual practice, is believed that this provision could lead to most serious a4ministrative difficulties. For example, if, under the Bank P I lding Company Act, Board takes some action involving a number of corporate entities and years later it is found that int there had been a violation of one of the conflict-oferest provisions, then everything that had been done as a resetc„ of the Board's action might have to be undone. Cona;lvably and very probably, rights of innocent persons such , af stockholders, borrowers, and depositors might be adversely -e.',;ted, not to mention the difficulties which could be The Honorable Emanuel Celler encountered in the process of "unscrambling" complicated corporate relationships. The Board, of course, would favor legislation designed to prevent anyone from profiting as a result of a criminal act. However, if the above interpretation of the proposed new section 218 is correct, then the Board believes that the provision in its present form should not be approved. Sincerely yours, C. Canby Balderston, Vice Chairman. I BOARD OF GOVERNORS OF TI-SE FEDERAL RESERVE SYSTEM WASHINGTON Item No. 2 3/20/59 OFFICE OF THE VICE CHAIRMAN March 20, 1959 The Honorable Emanuel Celler, Chairman, 20mmittee on the Judiciary, (, )Iaee of Representatives, "ashington 25, D. C. De r Mr. Chairman: This is in response to your letter of February /1, 1959, requestcri_.„an expression of the Board's views on H.R. 2157 "To implement the 'ulal laws relating to bribery, graft, and conflict of interest in Gov "hment employment and to promote ethics in Government." The bill would amend the Administrative Procedure Act by setting °lit in cond„a new Title II those actions which would be considered as improper pri,f± on the part of Government employees, ex-Government employees, and "'ue parties. Sanctions are provided for those who engage in such e°11duct. The Board is in accord with the purposes of the bill and has no ePeoific comments to make except with respect to certain provisions, inClUd&rig and 107(a)(5) of the proposed new title, which 4 're in ssections 103, ubstance ce the se am as certain provisions contained in H.R. 2156 Ilith respect to which the Board has already reported to your Committee. sQ4ti Section 103 prohibits an ex-Government employee from ever reproNspollg a nongovernmenLal interest in matters concerning which he had some 18ibility while employed by the Government. If applied to the Board G.2 of t orm euverno rs, this provision, for example, apparently would forbid a a reair, eTPloYee from acting on behalf of a member bank in connection with the i;e8 for approval of a branch bank application if, while employed by %)eci;d1 the individual had some responsibility with respect to that the Bn'e application. If this is the correct construction of the section, it is-al'd would have no objection to its favorable consideration. However, c)r th %slimed that the section would not be construed to forbid an employee °t bre Board Who may have had some general responsibility in the processing !Iloh ane" aPPlications from later representing a bank in connection with go res;aPplication if, while employed by the Board, the individual had ' °118tbility with respect to the specific branch application. BOARD OF GOVERNORS The Honorable Emanuel Celler OF THE FEDERAL RESERVE SYSTEM -2- employee, for a period Section 10/1 would forbid an ex-Government of two years after termination of his Government employment, from assistindirectly involving anyone in connection with any matter directly or This broad prohied. the Government agency where he was formerly employ whether his apply to ition under the language of the section would seem specific subject the ed responsibility while employed by the Government involv employees ent Governm matter or not. The prohibition would apply to all responsitheir of ir?gardless of the nature of their duties or the degree ) of the view the is It 11itY for actions taken by the Government agency. , n sectio this by ted !?ard that, while some provision along the lines indica present its in n sectio 4.v,1I the bill may be desirable, the language of the rm would be unduly rigid and severe, would give rise to difficult s handicap in .1.2131sms of interpretation, and might prove to be a seriou 'cue recruitment of qualified employees. 4 a proThe Board also questions the desirability of so sweeping be to it es as that contained in section 102(a) which declar POPer conduct for an employee of the Government to discuss or con: :'14ter his future employment with any person outside the Government with wr he transacts business on behalf of the United States, or whose i al may be substantially affected by his performance of offici dUterests is and 105(a) corollary provision is contained in section employment future er consid or s discus at private persons who on behalf of th Government employee who transacts business with him e UnitedUnitedted States or whose performance of official duties may sub3tantia1ly affect his interests. r agency, under Section 107(a)(5) would authorize the head of an taken by action ons prescribed by the President, to cancel any a G part of the on a evernment agency involving improper conduct whether party. private a inGovernment employee, an ex-Government employee, or to lead could mosZetual- practice it is believed that this provision the under if, e, Banic serious administrative difficulties. For exampl large a ing involv the Board takes some action 411/41:).1-1°16ing Company Act, been had there of corporate entities and later it is found that the of result a as Boa2,1,per conduct, then everything that had been done ly, probab very and the'ts action might have to be undone. Conceivably, and ers, borrow o hts of innocent persons such as stockholders, deprlg mention the difficulties whicZit°re might be adversely affected not to cated could be encountered in the process of nunscramblingn compli cor ation legisl desrrate relationships. The Board, of course, would favor coner improp dkletgnscl to prevent anyone from profiting as a result of proposed section is Corr° ,However, if the above interpretation of the 6 then the Board believes that the provision in its present form ,, sh0 41-u not be 1 / ' approved. with sed The Board understands that Congressman Bennett has discus that You- the te indica advisability of amending H.R. 2157 so as to BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM The Honorable Emanuel Celler the bill is to inplement and supplement the Code of Ethics provided in 11_ Con. Res. 175, 85th Congress, and not to supplant or overrule it. um Board would have no objection to an amendment along these lines. Sincerely yours, C. Canby Balderston, Vice Chsimman. 107 BOARD OF GOVERNORS OF THE Item No. 3 FEDERAL RESERVE SYSTEM 3/20/59 WAS OFFICE OF THE VICE CHAIRMAN March 20, 1959. Honorable Charles E. Bennett, „ T!Rouse of Representatives, rf ashington 25, D. C. Nar Mr. Bennett: This will acknowledge your letter of February 12, 1959, with enclosure, concerning the possible effect of certain bills 1.1 -,eh have been introduced in the present Congress on H. Con. Res. 14 _ 85th Congress, establishing a Code of Ethics to be adhered u3r all Government employees. 0 For your information, there is enclosed a copy of a port cha. which the Board has today submitted to Congressman Celler, a jrman of the House Committee on the Judiciary, on H. R. 2157, 41 "To implement the criminal laws relating to bribery, graft, ar1, l etl .conflict of interest in Government employment, and to promote e8 in Government." Sincerely yours, (Signed) C. Canby Balderston C. Canby Balderston, Vice Chairman. -..110l ure o3 ttl tr,, BOARD OF GOVERNORS ; -430L OF THE Item No. 4 3/20/59 FEDERAL RESERVE SYSTEM WASHINGTON OFFICE OF TN a VICE CHAIRMAN March 20, 1959. The Honorable Lyndon B. Johnson, United States Senate, Washington 25, D. C. Dear Senator Johnson: This is in reply to your request of March 5 for comments on the topic discussed by Mr. H. E. Cutcher of Lockhart, Texas, in his letter to you of March 4, 1959. At the outset, it must be made clear that the Federal Reserve System does not "give" anything to the commercial banks of the country or to anyone else, in the sense that Mr. Cutcher appears to have used that word. Commercial banks by their very nature are in the business of creating money. They do this, for example, every time a loan is to a customer and his account is credited with the proceeds of .: 1114e that loan. The Federal Reserve System was established by Congress to exercise some control over this process of money creation and 3tinguishment by commercial banks. There are various ways in which , : a System makes it possible for banks to expand credit or, con'Je versely forces them to contract credit. The reasons for System i ctions in either direction are, of course, not related to a bank's ndividual interests, but rather to providing credit conditions !I)riducive to growth and prosperity for the country as a whole--in Short,to the public interest. In light of your constituent's interest in the relationahiP of the Federal Reserve System to commercial banks, there is ;nolosed a small pamphlet which he may want to read. This will eas a more adequate explanation than can be provided in a letter. There is also enclosed a brief memorandum explaining the Process by which banks acquire Government securities that you may i nd helpful in responding to the inquiry. request. Mr. Cutcher's letter is returned in accordance with your Sincerely yours, C. Canby Balderston, Vice Chairman. J•1, March 20, 1959. ME I:ORANDUM FOR SENATOR, JOHNEQH Reserve System It is not correct to say or imply that the Federal acquire member banks reserves on the basis of which the banks can 41 Goys interest rnment securities amounting to many times as much and collect securi°Ilth0ee securities. An individual bank can purchase newly issued ties from the U. S. Treasury and credit the Treasury's deposit balance (the purchase. ca led tax and loan account) with the amount of the can n„, -Llu does make loans to its customers on the same basis. A bank obliIn such an operation, however, the bank is subject to two gatione. Federal Reserve First, it must maintain a reserve balance with its anik kor in other required case of a nonmember bank in cash or in some form\ This required reserve, which is a fraction of deposits, may be bta by an individual bank by drawing on its balance with some other bank, , cY borrowing, or by selling some asset. In the final analysis for he me must be ITIber banking system as a whole, the additional reserves cbtai„ be ' -e either by borrowing from the Reserve Bank, or they must 811DPlieri securities. through Federal Reserve purchases of Government The Reserve System, through the Federal Open Market Committee, 4eides Whether or not to purchase securities to supply reserves. The ReSe e banks also decide at what discount rate advances will be made to rrlernber banks. based on broad These decisions, as explained later, are deposits. 1)°licIr co nsiderations as to the country's need for additional The second obligation that a bank extending credit to a depositor r%ts be cir Such withPrepared to meet is the withdrawal of the deposit. Occurs within a few weeks in the case of an increase in the Treasury I To Senator Johnson -2- ortions in the case of balance and at varying intervals and in varying prop may additions to other deposits. When deposits are withdrawn, the bank 1Nhi1e its required reserves 1°°e an equivalent dollar amount of reserves, decrease by only a fraction of that amount. The bank must then sell assets or borrow to meet this reserve drain. Thus, no individual bank can es or other assets count on retaining indefinitely Government securiti acquired in return for a deposit balance. em as a whole, funds are In actual practice, for the banking syst bank loses another gains. constantly being shifted among banks. What one The assets for the whole system, l e is no net liquidation for decrease in ' expansion unless unless the total supply of reserve is reduced, or no net the reserve supply is augmented. ly can An addition to the reserve supp ing system, Prcvide the basis so,' an expansion in credit by the whole bank amount of though not by any individual bank, amounting to many times the reserves would the addition to reserves. Correspondingly, a decrease in result in a multiple contraction of credit. reserves, which is the It is this multiple effect of changes in from a small ta.8iS for the statement that banks can expand assets greatly alll°unt of Reserve. reserves supplied by the Federal The additional re- serves, however, as explained, are in no sense a gift. They can be idating other assets, or as aeclUired by a bank only by borrowing or by liqu a from another bank or acquired by result of a deposit of funds shifted the ci sPositor by sale of securities to the Federal Reserve. over, to add to or reduce the Federal Reserve decisions, more iderations as 4vailabi-e supply of reserves, are based upon broad policy cons to th should 0 money that the banking system appropriate amount of credit and e To Senator Johnson _3_ alake available to maintain a growing economy with stable prices. Federal Reserve operations are not made for the purpose of increasing the earnings fbarlics• asset They may enable banks as a group to increase their earning Sy but the effect on bank profits depends on the interest rates re- . eq4Verl and expenses of operating banks. Interest rates in turn are determined by the relation between current demands for credit and the available supply of lendable funds, including the public's savings as well "the reserve position of banks. Additions to bank reserves in the °33enee of demands for credit can result in declining interest rates and a decrease in bank earnings. BOARD OF GOVERNORS OF THE Item No. 5 FEDERAL RESERVE SYSTEM 3/20/59 WASHINGTON 25. D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD March 20, 1959 AIR MAIL - REGISTERED REQUESTED RETURN -------- RECEIPT 4 Peter W. Billinr7s, Esq., Fabian, Clendenin, MaheY, Billings (Sc Stoddard, Continental Bank Building, Salt Lake City, Utah. In the Matter of The Continental Bank and Trust Company, Salt Lake City, Utah. Dear Mr. Billinrrs: Attached for your information is a cony of a 'Motion ( Ir extension of time for Mimi exceptions and motions to !', ' 11-al Examiner's Report and Recommended Decision" filed by the sPecial counsel to the Board of Governors in the above proceeding. If you should have any objections to the granting of motion they should be filed with the Board not later than Ma "arch 25, 1959. this Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Secretary. Enel0Sure 1677 Item No. 6 TELEGRAM 3/20/59 LEASED WIRE SERVICE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON March 20, 1959 011Cane - San Francisco In reference to the motion you propose to file in case of cosgriff, et al. v. Federal Reserve Bank of San Francisco, Board authorizes use of unpublished material in the form and to the extent contained in the affidavits and attachments thereto enclosed in your letter to the Board of March 17. In accordance with telephone request content of this Vire 4 .44 also being sent direct to you in Salt Lake City. (Signed) Merritt Sherman SFERMAN ,fr,Q toottr,,, " BOARD OF GOVERNORS OF THE o FEDERAL RESERVE SYSTEM WASHINGTON Item No. OFFICE OF THE VICE CHAIRMAN s.-1) 1414/1"V\ '4 j`cti-p):34t1 March 20, 1959 The Honorable A. Willis Robertson, !United States Senate, 4ashingt0n 25, D. C. pear Senator Robertson: 1959In response to your letter to Chairman Martin, dated March 18, ) the seasonally adjusted money supply (demand deposits adjusted and i eneY) for the fourth quarter of 1958 was $137.8 billion. The gross ittg Th 4.0nal product in that quarter was at an annual rate of $1453 billion. (111:efore the ratio of the money supply to gross national product was 4 per cent. 4125 . In the comparable quarter of 1952 the respective figures were of 1 billion $359 billion and 34.7 per cent. In the fourth quarter ahd n7, thej comparable figures were $110.5 billion, $245.1 billion, eco, -1 per cent. Throughout the postwar period, in other words, the tin;;anlY has been working off the liquidity bulge occasioned by the leverng of World War II. As you can see from the attached chart, the eoht, nciw is not low by historical standards; it is still several perthat'ge points above that of the 1920,5. Our staff estimates indicate den„the present level is also close to the level prevailing in the first -cLue and a half of this century. those .Wbile the figures used in this letter do not agree precisely with , cited by Senator Gore, this difference is of little import. It ep, grorrs that he has related year-end money supply unadjusted to annual ' riot s national proauct figures. Appropriate s-Latistical refinements do graealter substantially the essential facts. However, in order fully to the import of developments bearing on the ratio of the money supply perr°8s national product, it is necessary to view the trend over a longer d of time than that referred to. Of course, in any discussion of Whaj corls,,constitutes an adequate supply of money, it is necessary to take into 'lueration the rate of turnover or use of that money. Sincerely yours, C. Canby Balderston, Vice Chairman. Att'ehmont 7 3/20/59
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