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481 A meeting of the Board of Governors of the Federal Reserve SYstem was held in Washington on Monday, March 27, 1944, at 11:00 PRESENT: Mr. Mr. Mr. Mr. Eccles, Chairman Szymczak Draper Evans Mr. Mr. Mr. Mr. Morrill, Secretary Bethea, Assistant Secretary Carpenter, Assistant Secretary Clayton, Assistant to the Chairman The action stated with respect to each of the matters herein— after referred to was taken by the Board: The minutes of the meeting of the Board of Governors of the ?ederal Reserve System held on March 25, 1944, were approved unani— mously. Memorandum dated March 24, 1944, from Mr. Morrill, submitting the resignation of Miss Gweneth Crawford as a telephone operator in he Secretary's Office and recommending that it be accepted as of the Close of business on March 15, 1944, with the understanding that she 1/111 make an appropriate refund for five days of unearned annual leave. The resignation was accepted as recom— mended. Memorandum dated March 25, 19/1)i, from Mr. Goldenweiser, Di— lieet°r of the Division of Research and Statistics, submitting the res— ignation of Mrs. Alice L. Davis as a clerk—stenographer in that Divi— ' i° 1, to become effective as of the close of business on March 20, 482 3/27/44 -2- 1944, and recommending that the resignation be accepted as of that date. The resignation was accepted. Letter to the "English State Bank", English, Indiana, reading 8.8 follows: "The Board is glad to learn that you have completed all arrangements for the admission of your bank to the Federal Reserve System and takes pleasure in transmitting herewith a formal certificate of your membership. "It will be appreciated if you will acknowledge receipt of this certificate." Approved unanimously. Letter prepared in accordance with the action taken at the meeting of the Board on March 21, 1944, to Mr. Davis, President of the Fecleral Reserve Bank of St. Louis, reading as follows: 'Tie are enclosing herewith certified copies of an order of the Board of Governors for a hearing pursuant to the provisions of section 9 of the Federal Reserve Act to determine whether the membership in the Federal Reserve System of the Pine Lawn Bank and Trust Company, Pine Lawn, Missouri, should be forfeited. We also enclose signed and undated letters, with franked envelopes of the Board, transmitting to the bank and to each director thereof certified copies of this order. In accordance With telephone discussion with Mr. Carstarphen, the order Specifies May 17, 1944, as the date for the hearing in this matter. A copy of the order is also enclosed for the use of your bank. "These documents are sent to you so that you may have them rea47 for use in case the conversations which we understand you are soon to have with representatives Of the bank do not result in a satisfactory settlement of the matter. It is requested that, as soon as it apPears advisable in your discretion to do so, you send the certified copies of the orders with the respective letters of transmittal to the bank and to each director 482 3/27/44 -3- "by registered mail, return receipt requested. The let— ters, of course, should bear the date on which they are mailed by your bank, and it will be appreciated if you will give us wire advice when this occurs. If the let— ters are sent, they should be mailed so that they will in any event reach the bank not later than 30 days prior to the date set for the hearing. "The latest information available here shows only four directors of this bank, Messrs. D. W. Dodds, J. T. Dodds, Jr., Thomas Francis and Lloyd Smith. If your bank has any later information from which it appears that some Other person or persons are now directors and you will wire us, we will forward to you a letter and enclosure to go to each such person." The Order referred to in the above letter read as follows: "In the matter of Pine Lawn Bank and Trust Company, Pine Lawn, Missouri. . 1- -0 _WhAtbar "Order for lie Membership in Federal Reserve System Should be Forfeited "It appearing to the Board of Governors of the Fed— eral Reserve System that there is reason to believe that the Pine Lawn Bank and Trust Company, Pine Lawn, Missouri (hereinafter called the 'member bank'), has failed to corn— Ply with provisions of law to which it is subject, condi— tions of membership under which it became a member of the Federal Reserve System, and regulations of the Board of Governors of the Federal Reserve System in that it is Charged that: 111. The said member bank has failed to make correct Reports of Condition to the Federal Reserve Bank, of which it is a member, as required by the fifth paragraph of Section 9 of the Federal Reserve Act, in that the reports of condition at the close of business June 30, 19/12, and De— cember 31, 1942, which were filed with the Fed— eral Reserve Bank of St. Louis contained statements at variance with the books and records of said member bank; 484 3/27/44 -4- "2. Said member bank has failed to make correct reports of earnings and dividends as required by the Board of Governors of the Federal Reserve System pursuant to Section 11(a) of the Federal Reserve Act in that the reports of earnings and dividends for the six months ended June 30, 1942, for the calendar year 1942, and for the six months ended June 30, 1943, which were filed with the Federal Reserve Bank of St. Louis contained statements at variance with the books and records of said member bank; "3. Said member bank has failed to subject itself to examination as required by the sixth paragraph of Section 9 of the Federal Reserve Act in that, as shown by reports of examination as of January 10, 1942, September 15, 1942, and April 20, 1943, and the correspondence and conference memoranda pertaining thereto, the books and records of said bank are so inadequate and so poorly kept that an appraisal of and ascertainment of the facts concerning the affairs of the bank cannot be made with satisfactory certainty in a reasonable time, if at all, and letters and inquiries directed to the bank's management as to its affairs receive in many instances such inadequate, evasive, or untrustworthy answers as to be wholly unsatisfactory; 4. Said member bank has failed to comply with Condition of Membershin No. 2 imposed by the Board of Governors of the Federal Reserve System and accepted by said bank at the time it became a member of the Federal Reserve System, which requires in part that 'the net capital and surplus funds of such bank shall be adequate in relation to the character and condition of its assets and to its deposit liabilities and other corporate responsibilities,' in that the net capital and surplus funds of said bank are inadequate to fulfill said Condition of Membership, and said bank has failed to make proper additions thereto (a) by diverting income otherwise available for such purpose to the payment of excessive salaries and bonuses to its officers for the calendar year 1942 and for the first four and one-half months of 1943, and 485 3/27/44 —5— "(b) by failure to obtain additional capital from outside sources; and n 5. Said member bank has failed to comply with Condition of Membership No. I imposed by the Board of Governors of the Federal Reserve System and accepted by said bank at the time it became a member of the Federal Reserve System, which requires in part that 'such bank at all times shall conduct its business and exercise its powers with due regard to the safety of its depositors', in that during the period or periods, as the case may be, covered by the examinations as of January 10, 1942, September 15, 1942, and April 20, 1943, (a) it has violated the Statutes of the State of Missouri under which said bank was incorporated by making loans in excess of limitations established by said Statutes, (b) it has made loans in such amounts and to borrowers of such limited financial responsibility as to jeopardize the best interests of the depositors of said bank, it (c) has paid excessive salaries and bonuses to its officers, (d) if: has failed to maintain adequate capital and surplus funds in relation to the character and condition of its assets and to its deposit liabilities and other corporate responsibilities, it has failed to maintain adequate and properly. kept books and records, it has failed to provide itself with trustworthy management, it has acquired a volume of business which is beyond the capacity of the bank's personnel to handle adequately and properly, and (h) it has, through its officers, made misrepresentations of fact to the Federal Housing Administration and to purchasers of loans insured by the Federal Housing Administration, with a resulting hazard to a part of the assets of said bank and a possibility of contingent liabilities to third parties; 486 3/27/44 -6- "And it appearing further to the Board that there should be issued an Order for Hearing to determine whether the membership of such member bank in the Federal Reserve System should be forfeited: "Accordingly, it is ordered that the said member bank be notified to appear before the Board on the 17th day of May, 1944, at ten o'clock a.m. at the offices of the Board on the premises of the Federal Reserve Bank of St. Louis to show cause why, for the reasons above set out, such member bank should not surrender its stock in the Federal Reserve Bank of St. Louis and forfeit its rights and privileges of membership; and it is further ordered that notice Of such hearing be given to the said member bank and the several directors thereof by delivering to them a true copy of this Order by registered mail. "It is further ordered that Walter Wyatt, of Washington, D. C. (hereinafter called the 'hearing officer'), be and he is hereby commissioned as an officer of the Board to receive all of the testimony taken in such hearing and to report the same completely to the Board, including therewith any statement, motions, exceptions, argument or brief which may be made or filed in accordance with this Order. In such capacity the hearing officer shall preside at such hearing and he shall, with all convenient speed, receive the evidence and report the same to the Board. "If the said member bank shall fail to appear in resPonse to this Order, the hearing officer shall report such fact to the Board which, after such further hearing as it may require, may treat such failure as an admission of the truth of the allegations contained in this Order and will Proceed with its consideration and disposition of the matter in the light thereof. Otherwise he shall proceed with the hearing, but he is authorized, at any time prior to the taking of the testimony, to initiate, conduct, or partacipate in pre-hearing proceedings with representatives or counsel of the member bank and the Federal Reserve Bank looking toward (a) the simplification of the issues; (b) the possibility of obtaining stipulations of fact and of documents which will avoid unnecessary proof; and (c) such Other matters as may aid in the disposition of the cont-rboversy; and if, in connection with such proceedings, a satisfactory disposition of the matter appears probable to hlm, he is authorized to adjourn the hearing for such period 48 may be necessary to submit the proposed disposition to the Board for its consideration. He shall preside at the 487 3/27/44 -7- "taking of the testimony and he is authorized to adjourn the hearing during the course thereof from time to time as may be necessary for the orderly and convenient taking of the testimony. He shall fix the time and places where he will take the testimony at any adjournments of the hearing. "The hearings shall be private and, except as the hearing officer may otherwise permit at the request of the member bank, shall be attended only by representatives of the member bank, witnesses, and other persons having an official interest in the proceedings. The hearing of— ficer shall receive all reliable, probative and relevant evidence, and the rules of evidence prevailing in courts . He shall re— of law or equity shall not be controllinc, ject all evidence which is clearly inadmissible under the foregoing test and injurious or confusing to the or— derly progress of the hearing, but if any evidence prof— fered by the said member bank is rejected on such grounds, the said member bank may, not later than the end of the business day following such rejection or within such further time as the hearing officer may allow, file a written ex— ception setting out the nature of the evidence which was rejected, the facts it expected to prove thereby, and ground upon which it claims it should have been received. Such exception shall be filed with the hearing officer and included in the Transcript of the Record, nrovision for which is hereinafter made in this Order, and if, upon consideration, the Board deems the exception to be well taken, it will either regard the facts as having been established or reopen the hearing for evidence on that issue. "The hearing officer shall at the expense of the Board employ stenographers to take the testimony and tran— scribe the same and otherwise to assist in taking the evi— dence and reporting the same. Upon the completion of the taking of testimony, the hearing, for that purpose, shall be closed, and, except as may be otherwise expressly di— rected by the Board, no further proceedings shall be had Other than the making or filing of arguments, briefs, exceptions, motions, or statements. "Promptly after the hearing is closed for the pur— pose of taking testimony, the hearing officer, from the transcribed evidence shall prepare Tentative Findings of Fact which shall set out clearly and succinctly the per— tinent facts which he deems have been established by the 488 3/27/44 -8- evidence. A copy of the transcribed evidence and a copy of the Tentative Findings of Fact shall be forwarded promptly by regular mail to the said member bank, and it shall have 30 calendar days from the date of their deposit in the post office in which to file with the hearing officer any exceptions to any of the Tentative Findings of Fact, any motion for additional findings of fact, and any arguments, briefs, or other statements for the consideration of the Board. "For the Board's use in making its findings of fact, entering its final order, or otherwise disposing of the matter, the hearing officer, at the expiration of the 30 calendar days provided for in the preceding paragraph, shall make such revisions and additions to this Tentative Findings of Fact as he may deem appropriate and, at the ipt of the expense of the Board, promptly prepare a Transcr shall conwhich of l Record in quadruplicate, the origina (2) e; evidenc ibed transcr tain the originals of (1) the his Recommended Findings of Fact; and (3) the originals of all exceptions, motions, arguments, briefs, or statements filed with the hearing officer; and the copies of which shall contain copies of all such papers. The hearing officer shall promptly file the original and one copy of the Transcrint of the Record with the Board, and shall furnish one cony to the member bank and one copy to the Federal Reserve Bank. "By order of the Board of Governors of the Federal A. D. 1944. Reserve System made this 25th day of March, " (SE) _(§ignad) Chester_Marrill_ Secretary Board of Governors of the Reserve System" Federal Approved unanimously. Letter prepared for the signature of Chairman Eccles to Honorble C. Douglass Buck, United States Senate, reading as follows: I ap"Responding to your letter of March 23, 1944, to as opinion my preciate the opportunity of giving you by d approve if 1642, Whether or not the Maybank Bill, S. Reserve System. Federal Congress, would injure or weaken the 48) 3/27/44 -9- "I am enclosing a copy of the Board's unanimously CommitCurrency adopted report to the Senate Banking and tee opposing the enactment of the bill as well as a copy of the Majority and Minority Reports of the House Banking and Currency Committee on H. R. 3956, the companion bill Which is also now pending in the Senate. I hope that you Will have an opportunity to read both of these documents as I am sure they will more than confirm to you the fact that the enactment of the legislation would be extremely unwise. "The overwhelming majority of the approximately 14,000 commercial banks in this country are known as par banks because they pay the checks drawn upon them by their customers 100 cents on the dollar. There are, however, about 2,500 banks, located for the most part in the Southeastern States and in the Minnesota area, which discount or make so-called 'exchange' charges against checks drawn by their customers When presented through the mails for payment. These banks are known as nonpar banks. You may not be familiar with this practice because in your section of the country, as in mine, there are no nonpar banks. I hope, therefore, that you will not confuse the practice of a few banks making 'exchange' charges with the accepted practice of banks charging their own customers for services rendered them. "The nonpar or 'exchange' charging banks in the Southeastern States have been able to have most of the 'exchange' Charges they made absorbed by some member banks who were Willing to absorb them for such customers as would maintain a compensating balance. You can see how some member banks could use this, as they have, as a device to pay interest cn demand deposits and thus attract deposits which otherwise they could not obtain. "These are the quarters from which most of the support for the legislation comes. "The legislation, if enacted, will enable some but not all banks, depending upon the amount of business they can do in nonpar areas, progressively to bid for accounts of banks and large depositors with all the attendant evils Which that practice contributed to the 1933 debacle. If the present statute is to be changed at all, the only fair thing to do would seem to be to repeal it in its entirety SO that all banks could honestly and openly pay interest on demand deposits. 490 3/27/44 -10-- "The legislation would authorize member banks to absorb exchange charges made by nonpar banks, and thus to subsidize them, when the member banks themselves must be par banks. I think it would be a great mistake to retreat from a par clearance system which has made such substantial contributions to the economy; but rather than permit the continued discrimination against member banks, I think it would be only fair for Congress, if it enacts this bill, at the same time to make it possible for all banks to charge exchange. "This brings me to a final and extremely important Point, one which cannot afford to be neglected. As I have Pointed out, for a bank really to enjoy the fruits of this legislation, it would have to be a nonpar bank. I should also point out that member banks cannot be nonpar banks. It follows that those member banks of the Federal Reserve SYstem, which decide that they wish to receive the benefits of the legislation - as surely some may decide if Congress gives the practice its blessing - must withdraw from the System. "These are times, of all times, when the Federal Reserve System should be strengthened, not weakened. I know no better way to make the point than to quote from my statement in connection with S. 1764 as follows: 'As members of this Committee are aware, the Federal Reserve, through open market operations, must stabilize the market for Government securities and provide the banks with the reserves necessary to enable them to absorb that part of the debt which is not financed by taxation or borrowing from the general public. The less we raise in taxes and public borrowing, the more the banks have to be relied upon to supply the funds to fight this war. And the more the banks buy, the greater the pressure of dollars on the economy. We know that the banks have bought many Government securities and that they will have to buy more. We must make it possible for them to do so, for nothing must be permitted to clog the flow of money needed to finance the war. But as the tide of money rises, it becomes increasingly important to maintain the restraints that hold it in check.' 491 3/27/a -11- "The agency which Congress has established to perform these tasks is the Federal Reserve System. Certainly, with no substitute being provided, I would not think that Congress would wish to weaken the System at a time when its responsi— bilities are greatest, and the proposed legislation, as I am sure you will agree, could not but have that result." Approved unanimously. Thereupon the meeting adjourned. Chairman.
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