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82 Minutes of actions taken by the Board of Governors of the Federal Reserve System on Friday, March 25, 1955. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mt. Mr. Mt. Mr. Mt. Martin, Chairman Balderston, Vice Chairman Szymczak Vardaman Mills Robertson Carpenter, Secretary Sherman, Assistant Secretary Kenyon, Assistant Secretary Thurston, Assistant to the Board Riefler, Assistant to the Chairman Vest, General Counsel Hostrup, Assistant Director, Division of Examinations Mr. Solomon, Assistant General Counsel Mr. Cherry, Legislative Counsel Mr. Mr. Mr. Mr. Mr. Mr. Mr. The following members of the staff of the Division of Research and Statistics also were present: Mr. Young, Director Mr. Garfield, Adviser on Economic Research Miss Burr, Assistant Director Mr. Koch, Assistant Director Mr. Gehman, Chief, Business Conditions Section Mr. Jones, Chief, Consumer Credit and Finances Section Mr. Miller, Chief, Government Finance Section Mr. Weiner, Chief, National Income, Moneyflows, and Labor Section Mr. Simpson, Acting Chief, Business Finance and Capital Markets Section Mr. Allen, Economist Miss Dingle, Economist Mr. Trueblood, Economist Mr. Wernick, Economist Mr. Wood, Economist 483 3/25/55 -2The representatives of the Division of Research and Statistics Presented a review of business and economic developments, at the conclusion of which they withdrew from the meeting . The following matters, which had been circulated to the members of the Board, were presented for consideration and the action taken in each instance was as indicated: Memorandum dated March 16, 1955, from Mr. Bethea, Director, Divin of Administrative Services, recommending the appointment of William Smith as Cafeteria Laborer in that Division, on a temporary basis for __p_eriod of two months, with basic salary at the rate of 432,552 per annum, '.1.-rective as of the date upon which he enters upon the performance of his duties. Approved unanimously. sion rs ,Memorandum dated March 15, 1955, from Mr. Bethea, Director, DiviAdministrative Services, recommending that the basic salary of irald B. Fitzhugh, Operator (Tabulating Equipment) in that Division, be eTeased from 414,170 to 414,330 per annum, effective March 27, 1955, inent to his promotion to the position of Tabulation Planner. Approved unanimously. Der, Letter to Mr. K. L. Scott, Director, Agricultural Credit Services, 4-41-ument of Agriculture, Washington, D. C., reading as follows: This is in response to your letter of March 7 suggesting that representatives of the Board of Governors attend the conference which has been arranged in your office on April 4 with the Legislative Committee of the American National Cattlemen's Association at which they will discuss the two resolutions relative to agricultural credit adopted by the Association at its annual convention in January of this year. It is understood that it would be expected that the representatives of the Board would be prepared, should the need arise, to make a general statement with respect to the relationship of the Federal Reserve System to the overall agricultural credit picture and the basis used in the ‘41 3/25/55 -3- appraisal of cattle loans during the examinations of member banks and that, should any questions of policy arise involving the Federal Reserve System, they would be submitted to the Board of Governors subsequently for consideration. Arrangements have been made for Mr. Philip T. Allen, Economist in the Board's Division of Research and Statistics, and Mr. Fred A. Nelson or Mr. Henry Benner, Assistant Directors of the Division of Examinations, to be present at the conference. Approved unanimously. Telegram to Mr. Woolley, Vice President, Federal Reserve Bank of Kalisas City, reading as follows: Reurtel March 22, 1955, Board approves designation of Stanley Andrews as special assistant examiner for the Federal Reserve Bank of Kansas City to lend clerical assistance in examinations of Commerce Trust Company, Kansas City, and The International Trust C°mPany, Denver. Approved unanimously. Letter to Mr. Denmark, Vice President, Federal Reserve Bank of Atlanta , reading as follows: Reference is made to your letters of March 10 and 16, 1955, regarding the proposed change in the .location of the Broadmoor Branch of the Progressive liank and Trust Company, New Orleans, Louisiana, from 3401 South Broad Street to the corner of Broad and Erato Streets, New Orleans, Louisiana, which has been approved by the State Bank Commissioner. Based on the map submitted it appears both locations are in the same immediate neighborhood, and you state the branch will continue to serve the same general trade area it is now serving and that the competitive situation will not be affected because there are no other banking offices in the immediate vicinity at the present time. In the circumstances, it is the Board's view that the proposed change constitutes the mere relocation of an existing branch within the exceptive language of paragraph 7 of Section 8(b) of 48 3/25/55 -4- Regulation H rather than the establishment of a new branch subject to its approval. Please advise the trust company accordingly. Approved unanimously. Letter to the Board of Directors, Southern Arizona Bank and Trust Comr llanY, Tucson, Arizona, reading as follows: The Board of Governors approves the establishment of a branch by Southern Arizona Bank and Trust Company in the vicinity of Swan Road and Broadway, in an unincorporated area east of Tucson as a successor to the existing Alvernon-Broadway office, Provided the change in location is accomplished Within one year from the date of this letter. Approved unanimously-, for transmittal through the Federal Reserve Bank of Dallas. Letter to Mr. Millard, Vice President, Federal Reserve Bank of San F rancisco, reading as follows: Reference is made to your letter of March 14, 1955, submitting a request from the Security Trust & Savings Bank of San Diego, San Diego, California, that the Board waive a condition concerning the carrying value of fixed assets imposed when it approved the absorption of The Border Bank, San Ysidro, California, and authorized the establishment of a branch in San Ysidro. . The Board has given careful consideration to this request and has concluded it should be denied. You are aware, it has been a policy of the Board z? require that fixed assets acquired in the absorptlon of banks must not be carried on the books of the purchasing bank at values in excess of their dePreciated value for tax purposes. This policy is ?ased upon principle and has no relationship to the Intrinsic or utility value to the bank. In this connection, the selling bank, as a going concern, would not be permitted to write up the value of such assets, ai:1d it is believed it would not be reasonable to permit the purchasing bank to effect such a write-up on itS books or those of a subsidiary. Please advise the bank of the Board's decision. Approved unanimously. 4 3/25/55 C4V, -5At the meeting on February 25, 1955, consideration was given to a draft of reply to a letter dated January 25, 1955, from Mr. Floyd M. Call, Executive Manager of the Florida Bankers Association, inquiring as to the Board's views with respect to the legality or the propriety of the practice whereby "so-called banking groups operating here in Fl oridata have seen fit to bring together the asset, liability, and capitea structure figures from each of their individuP1 banks into one conSolidated balance sheet for the purpose of newspaper publication". At that time it was agreed that before any reply was sent the views of the Com ptroller of the Currency and the Federal Deposit Insurance Corporation sh°111d be obtained and Counsel should consider whether there might be any reason to bring the practice referred to by Mr. Call to the attention of the Federal Trade Commission. The requested inquiries were made and Priort0 this meeting memo-Panda from Mr. Sloan, Director, Division of nations, and Mr. Hackley, Assistant General Counsel, dated March 11 arld m, rch 21) 1955, respectively, had been circulated to the members of -c ' the .00ard. On the basis of the information now available, it was suggested that t Would still be appropriate to send to Mr. Call the reply which pre1 ' Y. was submitted for the Board's consideration. Governor Robertson commented on the situation, stating that the 8411,E!) , 1- was somewhat misleading because it indicated that the resources the banks in the group were behind each bank, but that on the other the practice appeared to involve no evasion or violation of legal 3/25/55 requirements. -6He further stated that all of the banks in the group to 'which Mr. Call probably had reference (the Florida National Group) were either national or nonmember State institutions so that, despite informal advice to the Board that the Office of the Comptroller of the CurrenoY had received, and replied to, a similar letter from Mr. Call, it seemed appropriate to suggest to Mr. Call that the matter be pursued 'with the agency or agencies having primary supervision over the banks in. question. In the circumstances, he proposed that the reply to Mr. Call be revised to read as follows: This refers to your letter of January 25, 1955, addressed to Mr. William McC. Martin, Jr., Chairman of the Board of Governors of the Federal Reserve System, in which YOU state that for a period of years a number of so-called aaking groups operating in Florida have seen fit to bring together the asset, liability, and capital structure figures from each of their individual banks into one con.?lidated balance sheet for the purpose of newspaper pub1?.cation. You inquire whether the practice is in conflict 'with any law, rule, or regulation of the Board and, if what our reaction is as to the propriety of the procedure The Board has asked me to inform you that while it e?nsiders such a practice to be undesirable and possibly e.sleading to the public, it is not technically a violaIon of any statute administered by the Board. If the ileoard is correct in its assumption as to the group you ad in mind when writing the letter, it wishes to point that all of the banks in that group are either national banks or state nonmember banks, and therefore your inquiry Perhaps should be directed to the agency or agencies havlag primary supervision over such banks. l l Following a discussion, the letter proposed by Governor Robertson was approved unanimously, with the understanding that a copy would be sent to the Federal Reserve Bank of Atlanta. 41, 3/25/55 -7There were presented telegrams to the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and Dallas approving the establishment without change by the Federal Reserve Bank of St. Louis on March 21, by the Federal Reserve Bank of Kansas City on March 23, and by the Federal Reserve Ilanks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, an Dallas on March 24, 1955, of the rates of discount and DlI'Chase in their existing schedules. Approved unanimously. Following the discussion at the meeting on March 23, 1955, there had been sent to the members of the Board alternative drafts of a letter to Senator Homer Capehart replying to the Senator's letter of March 18, 1955, in regard to possible violations of the Board's Regulation U, Loans bY 8anks for the Purpose of Purchasing or Carrying Stocks Registered on a National Securities Exchange, in connection with the purchase of stock of M°4tg0mery Ward & Company in a proxy contest. Following a discussion, unanimous approval was given to a letter for the signature of Chairman Martin to Senator Capehart in the following form, with the understanding that in addition to sending the letter Chairman Martin would discuss the matter with Senator Capehart at an appropriate time: t. The Board of Governors has given careful considera2°4 to your letter of March 18 in regard to possible vlolation of Regulation U in connection with the purchase 89 3/25/55 -8- of stock of Montgomery Ward 8: Company in a proxy contest. For many years it has been the regular practice for bank examiners in the course of examinations to investigate whether loans have been granted in violation of Regulation U. This procedure is designed to assure general compliance with the regulation. Over the years few violations have been found and of these only a very small percentage involved loans supported by falsified statements as to the purpose of the loans. The Board believes that the procedure as outlined has been adequate in enforcing compliance with the regulation. It is the Board's view, and no doubt your own, that a departure from this procedure would not be justified in the absence of specific information as to the identity of banks that might have violated the regulation. 110 specific information has so far come to the attention of the Board that would enable examiners to ascertain 'where suspected violations may have occurred and therefore we are not in a position to comply with your requests. The Board wishes to be alert to any violations of law or regulations and, therefore, if you will furnish the Board with facts that would serve as a basis for a reasonable belief that a violation of Regulation U has 17curred at a particular bank or banks under its superthe Board will institute appropriate investigation of the matter. The problem you refer to is a complex one and raises qUestions as to what is the best means of serving the Ps9blio interest; that is, whether stricter requirements ,hould be applied to the lending operations of banks. On ance, however, it is the Board's conclusion that the Present procedure is adequate and we have no recommenda1°Ils for additional legislation to offer at this time. If you would care to go into this matter further, I would 4, 0-L course be very glad to discuss it with you at Your convenience. Messrs. Thurston, Solomon, and Cherry then withdrew from the nieetinfr bb and Messrs. Horbett, Assistant Director, Division of Bank Operations, ' a46- Hack].eY, Assistant General Counsel, entered the room. 490 3/25/55 -9In accordance with the understanding at the meeting on February 8) 1955, Governor Robertson had sent to Mr. H. E. Cook, Chairma n of the Federal Deposit Insuran ce Corporation, a letter dated February 9, 1955, asking the Corporation's views with respect to the possibility of bringinto conformity the regulations of that Corporation and of the Board 1./1-th respect to the absorption of exchange charges by banks. Cook Chairman replied under date of March 10, 1955, to the effect while the Fed- eral Deposit Insurance Corporation as anxious to cooperate in such matters of mutual concern within the limits of its authority, it had conlUcled, after exhaustive consideration of the legal elements in the situation, that it had "no alternative but to abide by our historic positn, i -" on this controv ersial issue". In the circumstances, there had been sent to the members of the Board, with a memorandum from Mr. Hackley d'ateci March 23, 1955, a draft of letter to the Federal Reserve Banks disellssilig various aspects of the problem and raising for consideration the P0881bilitY of having representatives of the Reserve Banks and the Office Or the Comptro ller of the Currency approach member banks whose practices create a problem in this respect and frankly explain why such practices tend- to encourage the imposition of exchange charges and to work against the banks be -v,,- themselves and the public, with the hope that the banks might rsuaded to discontinue the practices in question. The letter would State that before taking up the proposal with the Comptroller of the Curt Board would like to have the Reserve Banks' views as to whether an approach would be feasible and would serve a useful purpose. 3/25/55 -10In discussing the problem and the proposed communication to the Pederal Reserve Banks, Governor Robertson said that if any legislation were to be sought it would be desirable to have the support of the ballking industry. wLS He also said that the Comptroller of the Currency understood to be anxious to join with the Federal Reserve in seeking a solution to the problem but that for certain unrelated reasons the Comptroller did not know whether he would be in a position to participate actively in any legislative program at the present time. Governor Robert- s°11 vent on to say that yesterday he received a telephone call from Mr. jchns, President of the Federal Reserve Bank of St. Louis, who said that member banks in Memphis, Tennessee, had complained that they were losing accoUnts because of the absorption of exchange by St. Louis banks, and that there appeared to be other evidences of violation of the so-called "tw0 dollar rule -" which was set forth in the Board's circular letter of j4ne 22 19, He said that President Johns was informed of the approach 84ggested in the proposed letter to the Federal Reserve Banks and that he favored it. Governor Robertson further stated that in North Carolina a eroul, 4- was reported to have raised funds with a view to putting par clear ance on the statutes of that State within two years. With regard to the f °rm of communication to the Federal Reserve Banks, Governor Robertson silEgested that the proposed letter be put into the form of a memorandum fr°111 the Board to the Reserve Banks and that the memorandum be transmitted Vith a covering letter from the Secretary of the Board indicating that the 3/25/55 -11- Board had requested transmission of the memorandum for prompt consideration and reply. Following a discussion, unanimous approval was given to a memorandum from the Board to the Presidents of all Federal Reserve Banks reading as follows, with the understanding that it would be sent to the Federal Reserve Banks with a transmittal letter of the kind suggested by Governor Robertson: On the basis of the survey relating to absorption of exchange charges which was made last year by the Federal Reserve Banks at the request of the Board, this matter was again taken up with the Federal Deposit Insurance Corporation by the Board in an effort to bring the regulations of that agency and the Board into conformity on this point. It was pointed out in a memorandum enclosed with the Board's letter to Chairman Cook of the Federal Deposit Insurance c.)rporation that some member banks suffer a competitive di sadvantage by reason of the different interpretations aced by the two agencies upon substantially similar provisions of law. Chairman Cook's reply of March 10, 1955, a copy of 'Bich is enclosed, indicates that the Corporation has con!luded that it has no alternative but to abide by its his' 4111c position on this issue and that it must pursue its Present course unless and until either Congress or the neral States enact appropriate legislation to deal with ?Ills problem. In this connection, as you know, some States recent years have legislated to prohibit exchange charges bythe banks of such States, largely as the result of ef2,rts of business and trade associations and with cognizance uI the historical background of this matter. It must be the issue relating to absorprecognized that th ti _1 ,2n of exchange charges is closely related to the propriety exchange charges themselves. Prominent in the historical ; 1 aekground, of course, is the fact that the practice of nonof &.nks of deducting exchange charges from the face amounts e"ecks drawn on them when presented through the mails for c 4-lqm?1t has frequently been criticized as unwarranted and as wolTing such checks in the hands of payee-creditors to be h,f'.11 less than their purported value. Generally, the payees L'ie registered no complaint since usually the exchange 493 3/25/55 -12- charge is absorbed by some bank in the chain of collection. However, in order to secure such absorption and avoid passing the charge back to the payee, it often happens that such checks must be circuitously routed with resulting unnecessary delay in collection and payment. Although nonpar banks have contended that exchange charges represent an essential source of revenue, nevertheless, in some instances in which banks have abandoned exchange charges and have instituted a system of service charges appropriately levied against their own depositors, it has been reported that their profits increased rather than diminished as a result. It may be true, as stated by Mr. Cook, that absorption of exchange antedated the Federal Reserve System. On the other hand, when Congress in 1933 prohibited member banks from paying interest on demand deposits "directly or indirectly, by any device whatsoever", certain banks which previously had paid interest on deposits and had not absorbed exchange, began to solicit accounts by offering to absorb exchange charges. In 1944, when Congress had under consideration a bill (subsequently defeated) which would have expressly declared that absorption of exchange Should not be considered a payment of interest, Senator Glass, who had sponsored the 1933 legislation, declared that that bill, if enacted, would "emasculate the statute Prohibiting the payment of interest by banks on demand deposits". With this background in mind, the Board is considering whether it would be desirable for representatives of the Federal Reserve Banks and of the Office of the Comptroller Of the Currency at approximatel y the same time to approach those member banks whose practices create a problem in this 1"espect, either through direct absorption of exchange or through arrangements with nonmember banks for the absorption of exchange on nonpar items, and frankly explain to ?uch member banks how such practices tend to encourage the flIposition of exchange charges and to work against the interests of the banks themselves and of the public, with the 12.?pe that the banks approached may be persuaded to discontinue the practices in question. However, before taking ,;fells proposal up with the Comptroller of the Currency, the ard will appreciate an expression of your views as to Whether such a concerted and simultaneous approach to the m mlper banks involved would be feasible and serve a useful 1)11rPose. 3/25/55 -13In the meantime, due regard should continue to be given to the Board's circular letter of June 22, 1945, in which, as an administrative measure, the Board stated that the absorption of exchange in amounts not exceeding '412 a month for any one customer would be considered trivial and would be disregarded, provided the member bank maintains such records as the appropriate supervisory authority may require for reconcilement purposes. The Board believes that it would not be desirable to mc)dify the provisions of that letter at this time. In addition, if you should at any time learn of any action or expression of views by State bankers associations or business or trade associations regarding this problem, the possibilities of State legislation, or the sponsorship by such groups of any Federal legislation on the subject, it will be appreciated if you will promptly advise the Board. The Board would also, of course, wish to be kept informed of any other significant developments relating to the problem of a kind such as those covered by the recent survey. Minutes of actions taken by the Board of Governors of the Federal Reserve System on March 23, 1955, were approved unanimously. The meeting then adjourned.
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