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The attached minutes of the meeting of the Board
of Governors of the Federal Reserve System on March 25,
1963, which you have previously initialed, have been
amended at the request of Governor Shepardson to revise
the last two sentences in the first paragraph on page 14.
If you approve these minutes as amended, please
initial below.
Chairman Martin
Governor Mills
Governor Robertson

16

9/61

Minutes for

To:

Members of the Board

From:

Office Of the Secretary

March 25, 1963

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, please initial
below. If you were present at the meeting, your
initials will indicate approval of the minutes. If
you were not present, your initials will indicate
only that you have seen the minutes.

Chin. Martin
Gov. Mills
Gov. Robertson
Gov. Balderston
Gov. Shepardson
Gov. King
Gov. Mitchell

Minutes of the Board of Governors of the Federal Reserve
System on Monday, March 25, 1963.

The Board met in the Board Room

at 10:00 a.m.
PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Martin, Chairman
Balderston, Vice Chairman
Mills
Robertson
Shepardson
Mitchell
Mr. Sherman, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Young, Adviser to the Board and Director,
Division of International Finance
Mr. Molony, Assistant to the Board
Mr. Fauver, Assistant to the Board
Mr. Spencer, General Assistant, Office of
the Secretary
Messrs. Noyes, Koch, Brill, Garfield, Holland,
Williams, Dembitz, Solomon, Eckert, Fisher,
Gehman, Partee, Weiner, Wernick, and Yager
of the Division of Research and Statistics
Messrs. Furth, Hersey, Sammons, Katz, Gekker,
Irvine, Maroni, and Reynolds of the Division
of International Finance

Economic review.

The Divisions of International Finance and

Research and Statistics presented information relating to recent international and domestic financial and business developments, and made
further comments in response to questions asked by members of the Board.
All members of the staff except Messrs. Sherman and Kenyon

then withdrew And the following entered the room:
Mr. Hackley, General Counsel
Mr. Kelleher, Director, Division
of Administrative Services
Mr. Young, Senior Attorney, Legal Division

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Proposed annex building.

Governor Shepardson presented for

consideration a question that had arisen in connection with the plans
currently being prepared for a possible annex building that would be
located across C Street from the Board's present building.

This

question involved the number of parking spaces that it would be possible
to provide under alternative assumptions.

Alternatives, as described

by Governor Shepardson, included utilization of the area presently
owned by the Board, exploration of the possibility of purchasing
from the National Park Service a piece of land contiguous to the
Board's property, or negotiation for extension of underground garage
facilities below some part of the land owned by the Park Service.
Following a general discussion, agreement was expressed with
the suggestion of Governor Shepardson that the preferable course would
be to negotiate with the National Park Service with a view to extending
the garage facilities of the annex building under a portion of the
land owned by the Park Service.

It was also agreed that the archi-

tectural firm preparing plans for the annex building should be urged
to give consideration to providing access to the garage facilities from
more than one street.
All of the members of the staff except Mr. Sherman then withdrew from the roam.
Supervision and examination of Federal Reserve Banks.
Man

Chair-

Martin referred to the discussions on March 20 and 22 of Governor

Robertson's December 4, 1962, memorandum regarding the procedures followed

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in the examination of Federal Reserve Banks, stating that he felt that
He then called

these discussions had been helpful to all concerned.

Upon Governor Robertson for his comments in the light of these discusand the various memoranda prepared.
Governor Robertson stated that at the outset he would emphasize
that there was no significant difference between the purpose of his
Proposal, as presented in his memorandum of December
of the present examination procedures.

4, and the purpose

He then read the Board's.

directive to the Division of Examinations dated May

3, 1951, respecting

examinations of the Federal Reserve Banks, as well as the standards for
such examinations as set forth on page 10 of the memorandum from the
Division of Examinations dated February
Proposal of December

5, 1963, commenting on his

4. Governor Robertson went on to say that these

standards were identical with the standards that should be applied
under the procedure that he proposed, if the Board were to adopt that
Proposal.

The only question was how to go about revising examination

Procedures in order to produce the most effective results.

In presenting

his suggestion of last December, he had no intention of disparaging
the present examinations staff.

The "heat" that had been evident in

the discussions of his proposal by some members of the staff
Objectionable but on the contrary was a good sign:

was not

it indicated that each

Member of the staff was intent on doing his best with a view to bringing
about the best possible examination procedure.

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Governor Robertson noted that different divisions at the
Board had responsibilities in connection with the Board's supervision of the Federal Reserve Banks, particularly the Division of
Examinations, the Division of Bank Operations, and the Division
Of Personnel Administration.

In his view the Board should insist

that the functions of the several divisions having to do with supervising the Federal Reserve Banks be coordinated and existing procedures modernized, even though there was a more or less natural
reluctance on the part of the staff to get out of ruts, to change
the status quo.

As to the present field examining force, Governor

Robertson felt that only a few members were sufficiently experienced
and qualified to fit into the kind of program envisioned in his
December memorandum.

Of those few, some had in the past indicated

the desirability of moving in the direction that he suggested, but
they had not found suggestions for changes in the procedures acceptable
to those in charge.

It also was noted that several of the men who

'were nearing retirement were not sufficiently flexible to be included
in a force such as he had proposed.

If, as alleged by representatives

some men
of the Division of Examinations, the field force contained
vho were not adaptable to the new procedures, they should not be continued
or placed in
in an expensive travel status but should be dismissed
could be efficiently utilized.
Other positions where their services
it seemed to him the Division of
Governor Robertson stated that
Examinations was not entirely opposed to the kind of examination procedures

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that he had suggested in his December 4 memorandum.

Actually, the

Division had been moving in this direction during the past few years,
doing more sampling and reviewing, and less verifying in the course of
the examinations.

In his opinion, it had been moving too slowly and the

Board should press for more rapid shifts in emphasis.

Nevertheless, to

him it was encouraging that there had been a movement in this direction
With an increased utilization of internal audit departments of the
Reserve Banks and an increased opportunity for the Board's examining
force to do relatively more in the way of review and analysis.
The statement had been made in the course of discussion that
six men staying in Washington could not know sufficiently well what
was going on in the Reserve Banks to give the Board the kind of examination that was needed.

Governor Robertson felt that this was based on an

erroneous premise, since the examiners would not be in Washington all
the time.

They would actually visit Banks frequently and check on

Procedures, techniques, and activities to facilitate verification of
records and accounts, existence of assets, and adequacy of security
controls.

The proposed procedure would actually enhance the surprise

element of examination.

He felt that a small force of top-flight men

Was more likely to achieve true surprise visits or examinations than
a large force such as that now used.

One of the risks in the present

examination procedure, Governor Robertson said, was that outside verification had come to be thought of as the prime purpose of examination.
That had been true 50 years ago and as recently as 20 years ago.

But the

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general procedure that he had suggested, which admittedly differed from
ago, was now being applied
examination procedures used from 20 to 50 years
by the larger commercial banks, which had developed good internal auditing
Systems on which their managements placed great reliance.

In his opinion,

the Federal Reserve Banks had made a great deal of progress in developing better internal audit systems in the past five years, and this
made possible the efficient use of a sampling technique if the procedures
and guidelines were appropriately devised.
Turning to the functions of the Divisions of Bank Operations
and Personnel, Governor Robertson said that representatives of those
ng force delving into matters
divisions did not wish to have the examini

in their areas of responsibility. In his view, the functions of all of
the divisions of the Board should be coordinated to the end that the
Board would be provided with the information that it needed regarding
management of the Reserve Banks, the efficiency of their operations,
Personnel, and all the rest.

He felt that this coordination would be

higher calibre
facilitated if the examining force were composed of
the three divisions-As he saw it, the need was to utilize
and Personnel--in a more efficient
Examinations, Bank Operations,
Manner.
on expressed the view that 6
As to staff, Governor Roberts
the Board with more in the
men of the type he had indicated could provide
Banks and what was going on in them
.waY of information on the Reserve
of Haskins & Sells on
than the Board was now getting. The report
in his December 4
Page 5 expressed views entirely consistent with those

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memorandum, but that firm questioned whether
His reply would be that if

6 men could do the job

6 was not a sufficient number, then make

it 12 or whatever was needed.

There would have to be experimentation,

but this was not the important point.

The important point was to get

better procedures than had existed, and in his opinion a relatively
small number of men with the right qualifications could produce better
results than had been produced in the past, and the Board would be put
in a better position to exercise its responsibilities for general
supervision of the Federal Reserve Banks as well as to meet any questions
or criticisms that might be raised in the Congress or elsewhere.
The firm of Arthur Andersen was opposed to his proposal, thinking
verification was of almost sole importance.

Governor Robertson said

that verification was needed, but this could be gotten through the
internal audits supplemented by intensive, frequent, and properly
devised sampling techniques.

There was no question but that the firm

Of Price Waterhouse & Co. believed that the procedure he proposed was
feasible.

He himself was confident that it was feasible; similar pro-

were being used successfully in larger commercial banking
institutions by supervisory authorities.

Whether or not a system such

aB he contemplated would work in the Federal Reserve would depend
entirely on the quality of persons responsible for it and their willingness to make it work.

It would be very difficult to put it into effect

Unless the personnel were in wholehearted sympathy with the plans, for
that kind of support for the proposal was important to its success.

If

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such a proposal were adopted by the Board, recruitment of the right
Personnel would be a most important step.

One of the purposes of his

suggestion was to assist in the recruitment of persons of the right
type for the examination force.

At the present time, men of the

calibre needed were not interested in jobs that required that they be
on the road in a continuous travel status.

Under his proposal, where

travel might be reduced to a month or two per person during the year,
the recruitment problem would be greatly assisted.
Governor Robertson concluded his comments with a statement that

he did not doubt but that the staff, if given an instruction from the
Board, would endeavor to bring about a change in procedures moving in

whatever direction was indicated. A great deal had already been accomPlished, and the memoranda and the discussions that had resulted from
his proposal had in his judgment been most helpful in bringing about
thoughtful analysis of the procedures now being followed.

If the

Board could decide what it wanted and tell the staff of the procedures
to be followed, he had no doubt but that a shift in the direction
of the procedures could be made in a manner that would yield better
results than the present examination procedures were giving.
Chairman Martin said that he started by wholeheartedly concurhad made, that is,
reing with the last point that Governor Robertson
that all of the members of the Board had benefited enormously from

the review of examination procedures. He also thought that the staff
had benefited especially from the entire review.

He happened to agree

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with the broad approach suggested in Governor Robertson's memorandum.
His reservations on this broad approach were mainly a matter of timing
and when it might be achieved.

After commenting on reasons why at the

Present time he believed that the Board and the System must continue
to have certain aspects of the examination procedures that included
detailed verification by members of the Board's staff, he stated that he
felt that all of the members of the Board should consider the matter
vith an open mind.

Verification was a part of the present procedure,

he noted, and while this could be scrapped today or tomorrow, for the
reasons he had indicated

he did not believe this was the time to make

anY material change in this area.

He agreed with Governor Robertson's

appraisal of the examination staff.

His feeling was that the Board

should be pressing the Director of the Division of Examinations and
his people to move in the direction indicated by Governor Robertson.
Any major shift should not come at once, although he believed that in
time the Board would wish to come to such an arrangement.
Governor Robertson suggested that one way in which the Board
tight start to move in the direction suggested was to tell the staff
that it would like to move in that general direction and request the
Staff to start recruiting for one or two of the top positions with
Persons who would be competent to do the job that was outlined.

In the

Meantime, they would be working with the staff that they presently had.
Governor Mills stated that this was an immensely important
t°Pic.

Leaving aside the human equation of the personnel problems that

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lay at the heart of it and supporting the idea for improving the staff,
he personally believed that the procedure now being followed was
appropriate to the statutory responsibilities of the Board and to the
established and conventional examination field.

This was brolIght out

in both the Arthur Andersen and Haskins & Sells critiques.

He thought

that the views presented by these two firms were correct.

If anything,

he believed that the Board may have gone too far already in cutting down
on the scope of examination and verification.

A legal opinion had

come out of the staff, but if the Board was required by law to make
an examination of the Reserve Banks, he felt that the Board would be
derelict in its duty if it altered the present procedures more than in
a modest way.
Chairman Martin commented that as he saw it what the Board was
striving for was greater efficiency.
Governor Mills responded that efficiency did not come out of
laxity.

For the Board to place its hopes in the Reserve Bank auditors

exclusively did not seem to him to meet the statutory responsibilities
Of the Board.

The Board should go beyond an observation of the procedures

followed at the Reserve Banks, if it was to make fully effective examinations of the type that Congress had a right to expect.
Governor Shepardson said that it seemed to him there had been
significant developments in sampling procedures over the years that
"ere widely accepted not only in the research field but also in
inspection.

This was true in quality inspections, in law enforcement,

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and in other areas.

It was his impression that probably the weakness

in the steps taken so far in the examination process arose from the
fact that there had not been enough professional guidance in developing
the sampling approach.

He had thought that the Board was going to get

some of this type of guidance from Price Waterhouse & Co. in its
assignment to that firm in connection with observing examination procedures
during the past year, but the fact is they did not contribute in this
respect.

The Board had already made in connection with those surveys

a tentative decision to move in the direction of greater use of sampling
Procedures, Governor Shepardson commented, but it seemed to him there
had been some dragging of feet in putting these procedures into use.
When price Waterhouse & Co. did not come up with the help that had been
anticipated, that caused a further delay in putting some of the improved
Procedures into effect.

Governor Shepardson went on to say that he

thought the Board could combine sampling processes with the independent
examination procedures.

He agreed with Governor Mills that the Board

Should have an independent examination procedure.

He did not think the

Board could or should depend to a high degree on the audit staff of the
Reserve Banks for its examinations.

After all, the auditors under the

existing setup live with the people in the Reserve Banks from day to
examinations by independent
day, and there was much to be said for
outside personnel.

There had to be some verification, but he was

convinced that a proper sampling approach could be worked out that could
do away with a good deal of waste motion that he felt now took place.

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From the standpoint of personnel, he thought it true that the Board
did not now have the quality of persons on the field force that it
Should have.

There was no resistance to upgrading of persons if they

had the potential, but the field force simply had not had a sufficient
number of the type of persons needed.

In his opinion, the Division

Of Examinations must be pressed to obtain more persons of that type.
His own feeling was that the Board should indicate a decision that it
wished to move aggressively and with more than gradual speed into
modernization of the examination approach.

He did not think there

Should be a sudden turnover, but at the same time there should be a
definite move toward more modernization.
Governor Mitchell said that he felt that the last point made
by Governor Shepardson was very important.

He did not think anything

dramatic was going to happen, but personally he believed that something
Should develop.

During the relatively short period he had been a

member of the Board, he had criticized the examination reports and felt
that some changes should be made.

As nearly as he had been able to

20
determine from the information furnished, it appeared that from
to 25 per cent of the time on an examination went into verification of
the holdings of cash and securities.

Even with the use of all modern

could be slimmed down very much.
techniques, he did not think that this

Re felt that the examination ought to have some of the direct verification in it.

In fact, he was afraid that they may have gone too far in the

direction of reducing verification rather than not far enough.

On the

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other hand, he doubted that the cutting down of verification had been
as competently handled as could have been the case if the best sampling
techniques had been used.

There should be an appropriate verification

Of various records at the Banks, such as expense account records, but
to him the problem was one of balancing verification work with what
vas really needed in different areas.

Governor Mitchell also noted that

two Board divisions were largely concerned with operations at the
Reserve Banks, the Division of Bank Operations and the Personnel Division.

He felt that personnel in those divisions were better equipped

to deal with problems in their respective areas than were the members of
the examination force.

He could see no need for inclusion in the examina-

tion reports of detailed summaries of matters in these areas.

The

Board should be doing what it could to help improve Bank management
Procedures.

His conclusion was that time was of some importance in

cutting back on the work done by the examination force in the areas
Of bank management and personnel. He would not move as slowly as some
Of the comments indicated.

In addition, he would look carefully into

the verification techniques to determine whether the examination procedures had already gone too far in slimming down verification in certain
areas.

The Board should see to it that it was using its examination force

in the most modern and effective way.

If it attacked the problem in

this manner, he believed that it would be moving toward the objective
that Governor Robertson had suggested.

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Governor Shepardson referred to Governor Mitchell's comments

on the content of examination reports, stating that he had had the
feeling that the inclusion in the memoranda or some of the material
circulated with examination reports relating to personnel was superfluous.

With respect to his comments on the function of the Division

Of Bank Operations, Governor Shepardson thought that it would be
inappropriate to tell the examiner that, even though he observed something in a Reserve Bank that was unsatisfactory from the standpoint
Of bank management, he should do nothing about it.

His view was

that the examiner should report his findings through proper channels
to the appropriate division at the Board.
Governor Balderston said that his ideas were similar to some
Of those expressed by Governor Mitchell as far as personnel matters
Were concerned and to those expressed by Governor Shepardson as far
as operations were concerned.

He distinguished between the "inspector

general" and the work of the Division of Bank Operations.
Of the two was quite different.

The approach

There needed to be coordination of

these functions at the top, but he was apprehensive that the man who
served as the "inspector general" not be the one to put into effect

Changes in procedures that were the concern of the operating management.
most of the things that had
GenerallY speaking, he was sympathetic with
been said this morning.
everything it had.

He did not think that the Board should scrap

On that he agreed with Governor Mills.

He would

take the examiner out of the work he was doing that was not necessary.

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As to how to proceed on Reserve Bank operations, his feelings were
much like those of Governor Shepardson.

He would let the examiner

report whatever he Observed, but he did not believe that the examiner
was the man to do the fixing that might be called for in the Reserve
Bank.
Governor Shepardson referred to Governor Mitchell's comment
that the Board may already have gone too far in sampling techniques.
Perhaps this was true.

His point was that he was not convinced that

the sampling techniques that had been used had been devised by persons
With sufficient knowledge of sampling procedures.
Governor Mills said that he sensed from the discussion that
he was much less willing to streamline the Board's examination procedures than were other members of the Board.

If streamlining of the

sort discussed should at any point reach a degree where he felt that
the exemination procedures did not meet the Board's responsibilities,
and also
he would feel bound to bring this to the Board's attention
the
would feel that it was his responsibility to call such views to
attention of the Congress.
anding
Chairman Martin stated that there should be no misunderst
Of this morning's discussion.

The Board had not decided to change

of greater efficiency in
anything other than to move in the direction
its examination operations.
personally wished that the Board
Governor Mitchell said that he
changes, although he had indicated
had made a decision to make some
earlier that he did not think that was the case.

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Governor Shepardson inquired whether something might be done
to straighten out the relationships between the different divisions
of the Board along the lines discussed.
Chairman Martin responded that he did not think that seven
members of the Board could do this.

He felt that this was something

that would have to be worked out with the staff.
Governor Robertson stated that he wished to comment on the
had made as to completely
Points that Governors Shepardson and Mitchell
ions Division from the functions
disassociating the work of the Examinat
of the Division of Bank Operations and the Division of Personnel.

His

concept was that the examiner should get the information just as he
had endeavored to do in the past.

However, having gotten it, he

would not have the examiner discuss matters of this nature with the
the examiner should be in a
management of the Reserve Banks. But
might be gathered to the Divisions
Position to give information that
Of Bank Operations and Personnel, which would then give the Board a report
on the matters observed by the examiners.
was
Governors Shepardson and Mitchell commented that this
Probably a matter of semantics:

that so far as they could see there

that they had expressed from
Ifas no real difference in the views
those just given by Governor Robertson.
Governor Shepardson then inquired whether in moving in the
discussion responsibility fell within his
direction indicated by the
area as the Board member having the responsibility for matters of an

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internal management nature, to which Chairman Martin gave the response
that he thought they did fall in that area.

Governor Shepardson went

on to inquire whether the Board would wish to have him discuss with
the three divisions--Examinations, Bank Operations, and Personnel--an
approach along the lines indicated, and no member of the Board indicated
disagreement with such a procedure.
Governor Shepardson then referred to the letter from Price
Waterhouse & Co. dated February 13, 1963, that had been circulated
to the members of the Board in which Price Waterhouse & Co. had asked
that there be an indication from the Board as to whether the firm had
with the observation of examination
completed its assignment in connection
Procedures and techniques during 1962.

He wondered whether the Board

had any views as to the kind of acknowledgment, if any, that might be
sent to Price Waterhouse & Co.
Governor Mills and Chairman Martin indicated that if anything
was sent it be merely an acknowledgment.
The meeting then adjourned.

Secretary