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702 Minutes of actions taken by the Board of Governors of the Federal Reserve System on Monday, May 12, 1947. PRESENT: Mt. Mr. Mr. Mr. Mr. Mk. Eccles, Chairman Szymczak Draper Evans Vardaman Clayton Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Chairman Minutes of actions taken by the Board of Governors of the Federal Reserve System on May 9, 1947, were approved unanimously. Memorandum dated May 9, 1947, from Mk. Leonard, Director of the Division of Examinations, recommending that the resignation of Louis W. Zidek, an Assistant Federal Reserve Examiner in that Division, be accepted to be effective, in accordance with his request, at the close of business May 31, 1947, with the understanding that a lump sum payment would be made for annual leave remaining to his credit as of that date. Approved unanimously. Letter to Mr. Powell, First Vice President of the Federal Reserve Bank of Minneapolis, reading as follows: "The Board of Governors approves the program adopted by your Board of Directors as outlined in your letter of May 1, 1947 whereby the surgical benefits of the Montana Physicians' Service will be made available to officers and employees of the Helena Branch of the Federal Reserve Bank of Minneapolis. 703 5/12/47 -2- "It is understood that the Bank will absorb the same dollar amount of the cost of such Montana Physicians' Service coverage as will be absorbed for Head Office employees with like dependents under the arrangement with the Connecticut General Life Insurance Company." Approved unanimously. Letter to Mr. Leach, President of the Federal Reserve Bank of Richmond, reading as follows: "This refers to Mr. Wayne's letter of May 1, 1947, with regard to the applicability of Section 32 of the Banking Act of 1933 to the service of Mr. William H. Barnhardt as a director of the Commercial National Bank of Charlotte, and as a director of R. S. Dickson & Company, Incorporated. "We note that after investigating the matter your bank has determined that the underwriting business of R. S. Dickson & Company, Incorporated, is a substantial and important part of the business of the company; that it does not appear possible to differentiate the facts in any material respect from the facts involved in the Agnew-Fayerweather case; and that it is your conslusion that Mr. Barnhardt's interlocking service is prohibited. We know of no reason to differ with the conclusion reached by your bank in this matter, and it will be appreciated if you will advise the Commercial National Bank of Charlotte accordingly." Approved unanimously. Letter to Mr. Koppang, First Vice President of the Federal Reserve Bank of Kansas City, reading as follows: "This refers to your letter of May 1 regarding penalties incurred by The Farmers and Merchants State Bank of Rush County, La Crosse, Kansas, as a result of deficiencies in reserves for periods ended March 31 and April 15, 1947. 704 5/12/47 -3- "It is noted that your Bank will waive the first Penalty of $27.47 incurred during the reserve computation period within which the bank became a member under the provisions of paragraph B of the rules (S-902-a) enclosed with the Board's letter of March 5, 1946. "In the circumstances stated in your letter, the Board authorizes your Bank not to make the assessment of $229.38 for the penalty incurred during the period ended April 15." Approved unanimously. Telegram to Mr. Volberg, Vice President of the Federal Reserve Bank of San Francisco, reading as follows: "Relet May 3. In view your recommendation Board approves establishment and operation of branch in Mill Valley, California, by American Trust Company, San Francisco, California, subject to purchase of assets of Mill Valley Bank, Mill Valley, California, as proposed, provided such branch is established within six months from May 1, 1947, as required by State authorities, and with understanding that Counsel for Reserve Bank will review and satisfy himself as to the legality of all steps taken to establish branch." Approved unanimously. Letter to Mr. Diercks, Vice President of the Federal Reserve Bank of Chicago, reading as follows: "This refers to your letter of April 30, 1947, with regard to the application of The State Bank of Milan, Milan, Indiana, for permission to exercise fiduciary powers. "In view of the information submitted, and of your favorable recommendation, the Board of Governors of the Federal Reserve System grants the applicant bank permission, under the provisions of its condition of membership numbered 1, to exercise the fiduciary powers now or hereafter authorized under its articles of incorporation and the laws of the State of Indiana. The Board's approval is given subject to acceptance by the bank of the following standard 7O5 5/12/47 -4- "conditions (numbered 4, 5 and 6 in the Board's Regulation H, but numbered as follows for the purposes of the applicant) prescribed in connection with the admission to membership of State banks exercising fiduciary powers: 5. Such bank shall not invest funds held by it as fiduciary in stock or obligations of, or property acquired from, the bank or its directors, officers, or employees, or other interests, or in stock or obligations of, or property acquired from, affiliates of the bank. 6. Such bank, except as permitted in the case of national banks exercising fiduciary powers, shall not invest collectively funds held by the bank as fiduciary and shall keep the securities and investments of each trust separate from those of all other trusts and separate also from the properties of the bank itself. 7. If funds held by such bank as fiduciary are deposited in its commercial or savings department or otherwise used in the conduct of its business, it shall deposit with its trust department security in the same manner and to the same extent as is required of national banks exercising fiduciary powers. "Since it is understood that in the State of Indiana, trust funds deposited in the banking department of a bank are preferred claims in event of liquidation of the bank, You are authorized, in accordance with the general authorization previously granted by the Board, to waive compliance with condition of membership numbered 7 herein until further notice, "You are requested to advise The State Bank of Milan, Milan, Indiana, of the Board's action, and to obtain an appropriate resolution of the board of directors of the bank accepting the conditions listed above and forward a certified copy thereof to the Board." Approved unanimously. Letter prepared for Chairman Eccles' signature to the Honorable George T. Washington, Acting Solicitor General, Department of Justice, 706 5/i2/47 reading as follows: "Re: Peoples Bank v. Merriner S. Eccles, et al. "On April 14, 1947, the United States Court of Appeals for the District of Columbia rendered its opinion in the above-entitled case. The Court (Justice Edgerton dissenting) ruled that a certain condition of membership, imposed upon the Peoples Bank at the time of its admission to the Federal Reserve System in 1942, was rendered invalid, according to its literal terms, by an obvious 'purpose' on the part of the Board 'to control the size of Transamerica Corporation', a large bank holding company on the west coast, through the device of the Condition. The opinion also purports to find certain 'concessions' respecting the Condition alleged to have been made by the Board and its counsel since the initiation of the litigation. Treating the Condition as having been modified by these 'concessions' the opinion then goes on to sustain the validity of the Condition but conditions its enforcement by requiring the Board to first find, after hearing, that there has been a 'change for the worse' in the Bank's personnel, in its banking policy, or in the safety of its deposits resulting from the violation of the Condition. "The effect of the majority opinion poses questions of extreme importance to the Board in administering the admission and expulsion provisions of Section 9 of the Federal Reserve Act. These issues are of first impression, having never been before the courts for decision. Over the years the Board has imposed a wide variety of conditions of membership under the specific provisions of Section 9, which authorizes the Board to impose such conditions 'pursuant' to the Federal Reserve Act. These conditions are designed to meet particular situations as they are disclosed by the Board's examination following receipt by it of an application for System membership. The Court in the above-entitled case has seen fit to inquire into an alleged 'purpose' of a condition of membership and has invalidated the condition because of an alleged ulterior 'purpose' which prompted the Board to impose it. By so doing the Court seems clearly to have entered the proscribed area of administrative discretion in a field which patently calls for the application of expert 707 5/12/47 -6- "knowledge and judgment. A judicial inquiry in each instance as to the Board's reasons for imposing conditions of membership would seem to be contrary to the plain Congressional intent to vest in the Board wide discretionary authority to impose such conditions of membership as would, in the Board's judgment, be necessary and appropriate in the public interest. "In holding that the Board might not enforce the condition of membership in this case unless it had first found, after hearing, that the safety of the Bank's deposits had been jeopardized, the Court has also added an additional procedural requirement not contained in the statute. The effect of this holding is to emasculate the Condition in this case and the fact that such would be the result seems plainly intended by the express language of the majority opinion, which points out that the Condition challenged in this litigation 'means no more, and gives the Board no greater authority, than standard Condition No. 1 ...I The effect of this ruling is to deny the Board the authority to impose conditions of membership within the full reach of its delegated power. It is, therefore, of utmost importance to the Board that this point also be finally decided by the Supreme Court. "There are also involved in the case two collateral questions of considerable importance. The first is whether, the Board having neither acted nor threatened to take action pursuant to the Condition, the case at bar presents a justiciable controversy under the Federal Declaratory Judgment Statute. The second is whether, as the District Judge ruled in dismissing the complaint, the Peoples Bank, by agreeing to the Condition and accepting the benefits of System membership resulting therefrom, is not estopped from now asserting the alleged invalidity of the Condition. On this issue there seems to be a possible conflict with a decision of the Circuit Court of Appeals for the First Circuit in White Star Bus Line v. People, of Puerto Rico, 75 F. (2d) 889 (cert. den. 296 U. S. 606). "In view of these considerations and the others pressed Upon you and Mr. Stern by Mr. Townsend, the Board requests that you petition the Supreme Court of the United States to grant a writ of certiorari to review the decision of the Court of Appeals in this case." Approved unanimously. 708 V12/47 Letter to the Honorable Frank L. Sundstrom, United States House of Representatives, reading as follows: "We appreciate the opportunity to comment on the letter and enclosure of April 28, 1947, from Mr. William J. Field, President of the Commercial Trust Company of New Jersey, which you referred to us on May 1. "Mr. Field's letter and enclosure concern the capital requirements which a national bank or State member bank of the Federal Reserve System must meet under Federal law before it can operate an out-of-town branch. They point out the unrealistic and impractical consequences of these capital requirements and suggest that the requirements should be repealed. "As indicated in Mr. Field's enclosure, the Board, in reporting to committees of the last two Congresses, has recommended the enactment of legislation to eliminate the present capital requirements on the subject and to authorize national and State member banks to establish out-of-town branches on terms and conditions comparable to those governing nonmember State banks located in the same States. The Board is still of that opinion. It is convinced that the existing discrimination against national and State member banks should be eliminated and it favors legislation to accomplish this end. "Mr. Field's letter and enclosure are returned herewith pursuant to your request." Approved unanimously. Secretary. Chairman.
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