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To: Members of the Board 'Freem: Office of the Secretary Attached is a copy of the minutes of the meeting of the 8°ard of Governors of the Federal Reserve System with the Federal ory Council held on May 14, 1957. It is not proposed to include a statement with respect to c°,41Y of the entries in this set of minutes in the record of policy actions ; e cTi .ired to be maintained pursuant to section 10 of the Federal Reserve Should you have any question with regard to the minutes, it will PPreciated if you will advise the Secretary's Office. Otherwise, if ! 1-21:, 'were present at the meeting, please initial in column A below to 1:111clicate that you approve the minutes. If you were not present, please tial in column B below to indicate that you have seen the minutes. be 1 Chin. Martin Gov. Szymczak coy. Vardaman Go Mills Gov. voertson on -1% Gov. Balderston Shepardson x a-aig 1259 A meeting of the Board of Governors of the Federal Reserve SYstem with the Federal Advisory Council was held in the offices of the Board on Tuesday, May 14, 1957, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Vardaman Mills Robertson Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Messrs. Brace, Massie, Mitchell, Denton, Fleming, Kimball, Livingston, Miller, Baird, Kemper, and King, members of the Federal Advisory Council from the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, and Twelfth Districts, respectively Mr. George G. Matkin, President, The State National Bank of El Paso, El Paso, Texas, alternate member from the Eleventh District Mr. William J. Korsvik, Assistant Secretary of the Federal Advisory Council President Fleming stated that the Council was favorably impressed With the statement made before it yesterday afternoon by Mr. Young, Director of the Board's Division of Research and Statistics. He said that the C°114e1l hoped that the statement, with such editorial changes as seemed could be made available to the members of the Council. 148'8 It believed that the statement would be helpful in disseminating infor- 1114ti°11 as to the policies Of the Board, with which the Council was in 13.€1‘eellielat, to persons in the business community with whom they came in eorltact, 1260 5/14/57 -2Before this meeting there had been sent to the members of the Board a memorsndum prepared by the Federal Advisory Council regarding t°Pios that had been placed on the agenda for the joint meeting. The statement of topics, the comments by the Council, and the discussion of the respective topics are set forth below: 1. What are the views of the members of the Council regarding the economic outlook for the approximate period mid-May to mid-autumn of this year? While all major phases of the economy should be covered in this review, the Board would like particularly to have comments on the programs of operative builders for construction of houses during the next year, and how the aggregate demand for residential mortgage credit will compare with funds available for that purpose. Despite some soft spots, practically all districts anticipate the continuation of a high level of business between now and mid-autumn. Some districts expect that the volume of business may even increase during this period. Residential construction has declined in all but two districts in comparison to a year ago. The decrease is largely attributable to the unrealistic terms of V.A. and, to a lesser extent, F.H.A. loans. In addition, in some areas the existing supply ?f new homes seems adequate to meet present demands. Credit 18 generally available to meet the demand for conventional mortgages. President Fleming said that only one member of the Council believed that business might decline between now and mid-autumn. that It would move sideways or increase. All others believed All members of the Council were 8ati8fied that business sentiment currently was much better than at the time of the Council's meeting in February. 1261 5/14/5T -3Mr. Denton said that he had become somewhat concerned about business continuing to be as good as it is now. Of This concern grew out the disappointing automobile sales, the reduced level of residential building, and the shrinkage of inventories. 411Y great depression. He was not talking about However, there had already been some slackening in the rate of business activity, and his personal view was that business would not continue at its present level during the period from now to mid -autumn. Mr. Brace said that in New England there was some feeling that the al4J°rity of the textile business that that area would lose had aleaoly been lost. The area was benefiting from growth of a diversified l'bcYlal) of activities. He rather felt that the shrinking spell was pretty over and that on the whole business was on a fairly solid basis. ----cLstly speaking, Mr. Brace felt that the trend of business in New tnglanAk4 would be upward between now and mid-autumn. There was a problem but volume of business was expected to be satisfactory. Mr. Mitchell felt that business would be good until autumn of this Year. The soft spots were in automobiles, housing, and the running °Dr Or Inventory. These influences, however, had been more than offset bY industrial construction and governmental spending, including spending by munic ipalities and States. Business sentiment was now much better thA, earlier in the year. Freight carloadings were down considerably bIlt that seemed to be the result of the running off of inventories. 11118 'would make for a healthier situation later in the year. Mr. Mitchell 126 5/14/57 81C1 that his feeling was that the corrections that had taken place earlier this year would make for better business in the balance of the year. Mr. Livingston said that he was one of those who shared the °Ptimistic feeling. In the Seventh District, business was good except in the automotive industry and in the South Bend area where there was 4 labor surplus. On the average, business was good, employment was g°°d, and workers had a feeling of job security. They were making good 111°11eY and were willing to spend it. This was manifested by the fine tone of retail sales. In the Midwest there was, of course, the farm iniPlement situation, which was not good. The suggestion had been made that the Soil Bank payments might have caused poorer sales of farm im13Iellielltsy although others would argue that such payments would increase 1314rchase8 of farm implements. Whatever the reason, farm implements Ilere not selling well. Personally, Mr. Livingston said that he looked 8 ' continuation o thi8 of the high level of business from now until autumn Year and perhaps some improvement. Mr. Kemper said that he, too, was one of those who was very °I3t4 laistie about the next six months. The Tenth District had full el11110.3mient, retail sales were up, and there had been rains over the elitire area which had helped growing crops, filled water storage facili'and improved grazing conditions for livestock. The outlook for ties both f411ming and cattle raising had improved. The Tenth District was 263 5/14/57 -5- One of the few districts that in the first three months of this year 1184 a larger amount of residential construction than in the correspondperiod of last year. On the other hand, public construction declined 14 Per cent during the first quarter of this year. As a whole, Mr. Kemper believed that economic conditions in the Tenth District for the next six zonths should be very good. Mr. Massie said that the weakest spot in the Second District 1148 in residential building which was off about a third from last year, "pared with a decline of about 18 per cent for the country as a whole* This as offset by large nonresidential construction, which had shown 4 Year-period increase of 25 per cent in recent months. This included 4 great deal of activity in connection with plant expansion in different ilarts of the district. The employment situation had been mixed, with sq le bad labor difficulties in the automotive and electrical industries, bt/t this situation had now been corrected. The service industries were aetive but not quite as strong as they had been a few months ago. They 441 absorbed labor released from the textile and cutting-up trades, and t°t6111 emPloyment was high. For the period from now until autumn, Mr. 14481-e felt that business should be sustained at quite a high level. pern.„ ta for money was terrific. This demand was not so large during the PaYment period, but shortly afterwards the demand had increased very 81149-1131Y and had been particularly strong since April 1. There was no letlIP at the present time. I 26 5/14/57 -6In response to a question from Governor Vardaman, Mr. Massie said that finance companies, which had had substantial amounts of Paper outstanding that was due between March 10 and 15, had been among the heavy users of credit. He estimated that today such companies were usillg a higher percentage of their lines of credit than ever before: about 74 per cent, compared with a historical high of about 50 per cent tulless the situation was unusual. These companies were growing and tendez u to need more money. A number of the large well-known companies, Ilhich did not ordinarily borrow substantial amounts from New York banks /41th which they had lines of credit, had come in recently to obtain funds. Mr. Matkin commented on the recent rains in the Dallas District, Stating that they had largely broken the drought that had persisted for a nozther of years. He assessed the rains as doing a great deal more gc)(3d than. harm. Farmers and cattlemen are in much better position and 1°°k1ng forward to much better times as a result of the rains. Mr. lletkin expressed the personal view that business would continue on a hinq, level during the next six months, with possibly some increase. There l'/Ets still some complaint from parts of the building industry as to a lack of mortgage funds. However, Mr. Matkin felt that legitimate 'demands for such credit were being taken care of. Mr.-King said that economic activities in California and the Tvelfth District for the first time in several years seemed to be level- orf with the rest of the nation. For a number of years, growth in 1265 5/14/57 _7- the Twelfth District had exceeded that of the rest of the country. In commenting on the housing situation, Mr. King said that unsold houses Igers not a distressing problem. Some of the weaker builders had gone °Ilt of business, and the stronger ones were still building houses. The Present VA rate had caused some building to be deferred, buttbere had been renewed activity in FHA-financed building since the rate had been increased. There was enough money available for those who wished to and who should be building, Mr. King commented. Employment was ' 1411 in the Twelfth District, but there was some concern about the elimi- naticn or overtime in connection with defense contracts because of the effect ..... it might have in the important aircraft industry. This in turn nlight affect department store sales. Automobile registrations in 41i1'ornia during March were higher than at any time since January 1956, el.th01401 in Oregon and Washington they declined. The steel industry was °Perating at 100 per cent capacity and some of the West Coast facilities were being expanded. Mr. King said that loans of banks in the Twelfth "rict had increased recently, the increase coming largely from public 4 Retail sales continued moderately strong. In general, Mr. Xino. b elieved that business would continue strong until the autumn and, it change occurred, he would think that an increase would be more ely than a decline. Mr. Kimball said that in the Sixth District the outlook eomflewh more buoyant than in the rest of the country. was He felt it 1266 5/14/57 -8- significant that in the last three months there had been a noticeable uPsurge in construction, with both residential and nonresidential contracts running at a higher rate than a year ago. alla consumer incomes were increasing. Employment was high Consumers were spending these inc°131es, Mr. Kimball said, although recently sales of furniture and household appliances had fnllen off somewhat. Sixth District were Automobile sales in the 8 per cent above those of a year ago. Bank deposits were uP and deposit activity in March was the highest in the District's hist°rY. The agricultural outlook had been improved by firming of prices both for vegetables and livestock. There had been a decline in borrow- Of agriculture, primarily because of a decline in cotton acreage that'was going on under the Soil Bank program. This program was pro- ceeaing very rapidly, Mr. Kimball said, and the taking of acreage out Of Production would release additional workers which would help to attl'4et more industries into the District. On the whole, Mr. Kimball felt that the trend in the Sixth District was strong and he could see nothing t° change that situation over the next six months. Mr. Baird said that he was one of those who believed that busi4ess 'would continue at a high level and perhaps show a moderate increase °Ireli the next six months. He based this on the belief that the rolling l'e4diti8tment would continue for another six months. Full employment and high incomes were being reflected in widespread spending on a variety of a°ft goods and services. There was a much more optimistic feeling in 5/l4/57 the Ninth District than in February of this year. Mr. Baird recalled that at the preceding meeting he had indicated that some of the Midvest drought was reaching into the Ninth District. This had now been changed with good rainfall during April over most of the area, even th°1-Igh subsoil moisture was still lacking in some sections. The outlook for crop production this year was good, and psychology in general vas good . Mr. Miller said that in the Eighth District business could be "Pected to continue at a satisfactory level from now until mid-autumn* Re could see nothing to change that outlook. Psychologically, the situa- ti°fl was better than in February. This might be because there had been flO raore statements from high officials in Washington about "hair curling" R i delore--ons. The soft spots were not affecting the Eighth District Parti ciA-Larly. Department store sales were up and soft goods generally selling well. The coal situation was good. a sat isfactory level. Of Unemployment was at All in all, Mr. Miller looked for a continuation Prn,sa business during the next six months. President Fleming said that in the Fifth District the over-all ee°4°113'Y was good. The soft spots were automobile sales, residential biLtlaing, and textiles. With Industrialization of the District was continuing, new plants being constructed. Shipbuilding was active. Palle cl industrial construction increases were more than offsetting the IU housing. Farm prices were better than they had been earlier* Pl'esident Fleming said that he expected the present level of business 1268 5/14/57 to Continue until mid-autumn. Bank loans were dawn somewhat. Demand continue deposits also were down, but savings deposits were showing an increase. President Fleming said that be believed that the specific question that the Board had asked about plans of operative builders had been fairly well covered in the above comments. He noted that some months ago, the Federal Reserve Bank of Richmond had brought to his attention an estimate that housing starts this year would total one million units; it was now 410Po-rent, he said, that the year's total would be considerably under that figure. 2. The Board would like to have the members of the Council comment on the attitude of the business community toward the level of prices and the cost of living. That is, how do businessmen really feel about a rising price level such as has been experienced in recent years? Do they believe that in the years to come a rising price level is necessary as an alternative to unemployment? Do they understand and favor the vigorous use of credit and fiscal measures to maintain a dollar of relatively stable purchasing power? There is no one attitude toward the level of prices and the cost of living which may be said to characterize all businessmen. However, from discussions with a number of businessmen, the members of the Council are of the opinion that the business community views with concern the rising price level and the increase in the cost of living. Nevertheless, in a period of strong and sustained demand for goods and services, there is a tendency to consider (141Y the immediate future and to grant wage increases, especially if they can be absorbed largely or entirely by higher prices. Moreover, under these conditions, there is also a reluctance to rlsk idling plant and equipment as a result of strikes growing out of the resistance to wage demands. The Council is of the opinion that most businessmen do not believe a rising price level is necessary as an alternative to unemployment. On the other hand, if confronted with a choice, they 5/14/57 Probably would choose a moderately rising price level to Widespread, prolonged unemployment. Most businessmen would prefer stable prices and a high level of employment. To the extent that businessmen understand the vigorous use of credit and fiscal measures to maintain a dollar of relatively stable purchasing power, they favor such measures. However, a broad educational program directed toward the business community would be greatly helpful in providing the needed understanding and support of these measures over the business community generally. President Fleming said that the Council believed that the top level personnel in the banking world were conversant with and understood th°r°ughlY the policies of the Federal Reserve System and what the System Was e ndeavoring to accomplish. The Council believed that in some of the lat'ger business corporations that also was true. It did not believe th4t the average businessman on the lower level really understood the PcIlicies of the Board. This was why the Council felt that Mr. Young's tatement yesterday on creeping inflation would be educational when the men came to talk with members of the Council. President Fleming referred to these as the second and third level of smaller businessmen 14h° complained about tight money and who did not understand the System's er'edit Policies that, in the Council's opinion, had been well executed .644c1 had contributed to holding down inflation* He felt that this was the v''ea where education was necessary. For members of the Council and the. associates, a statement such as that by Mr. Young would be more helP1‘111 than some of the pronouncements coming from the Board itself or tl'oM G overnment. These second and third level businessmen just did not tulderstand the mechanics of what the System was trying to do, President 1270 5/14/57 -12- Pleming said, and many of them would say that money was too tight. Chairman Martin said that this was the heart of the problem e°11fl'o11ting the System. As long as tight money was being discussed "much as it was, not only by the public but also in Congress, the Problem of how to educate the public was very much with the System. If the System embarked upon an active program of education, it might be accused of being in the political area. Mr. Mitchell said that he had found that after a little explana,. ti°11 businessmen were pretty unanimously of the view that they wanted a st444 dollar and stable prices. They also were unanimously of the view that the Federal Reserve had done an excellent job in the last four or five Yea6 and that it was essential that the System retain its independence. They thought that it would be difficult to hold prices, Mr. Mitchel, elth said, but they did not want the Goveloaent to meddle with wages, 140 or down. This was almost unanimously the view after the busi- lleasmaa understood the problem, Mr. Mitchell said, but it was quite true that at the start he had very little knowledge of monetary policy. Chairman Martin inquired whether the public was growing increas- 14 cynical about the possibility of resisting inflation, and to this 10111esti on Messrs. Mitchell, Livingston, Fleming, and others indicated that 8 uch a tendency was developing. Chairman Martin went on to say that this compounded the difficulties confronting those who would resist illaatione 5/14/57 -13President Fleming stated that this was partly because none of the b usinessmen wished to be faced with a situation like the Westinghouse strike. With full employment and with earnings high, there was a tendency to accept the demands of labor for higher wages rather than to risk a strike. Mr. Kemper said that it seemed to him that some of the cynicism t°1rard the ability of the Federal authorities to control inflation stA, —.Jilted from the fact that most people think that labor unions enter 1140 the problem to a very large degree. This was a political situation, he said, and as long as mazy of those running for public office wanted thc labor vote, not much control would be put on labor. Mr. Kemper also thc/ught that as long as there was a rising wage scale, which everyone 44tle1Pated, it was going to be very difficult to control inflation. Governor Vardamsn stated that during the past six months he had Observed that the below-the-top level businessmen did not understand the l'edellal Reserve System and were not sympathetic with what they called the4 `'lght money policy. Neither did they wish to give to the Board 811rficient power to control inflation It was Governor Vardaman's view that if the System was going to get at the problem, it would have to go belov the level of the top businessmen or the Reserve City Bankers group alld start a real educational program with such groups as Rotary Clubs 414d 8° forth. President Fleming said that Mr. Matkin had had an interesting ence along this line, and at his request Mr. Matkin commented on 1_272 5/14/57 his -14- experience in being requested to talk before the Rotary Club in Eil'aso, and to describe the functions and operations of the Federal Reserve System. Mr. Matkin said that with the assistance of the Federal Reserve Bank of Dallas he prepared a statement which was presented before the Rot_ dx.Y Club and, later on, before the Associated General Contractors °I' that city, and in both eases he found a great deal of interest in the /"ederal Reserve and its policies. Governor Mills said that the problem the discussion had been exPloring wa8 the wage-price spiral. 111 ",more level* growth He noted that if the spiral moved credit obviously would be needed to support a higher price The antidote was a monetary and credit policy that would restrain in the money supply. Governor Mills inquired what problem might °me out of an economica3ly proper monetary and credit policy that might, however, bear inequitably as between various business and social groups. President Fleming responded that he did not see how this question e°11-1-d be solved.. It was necessary for the System in limiting the volume Of credit to deal across the board. Governor Mills commented further that if there was such control the v°1ume of credit when a demand for credit was exerting pressure urinp. Prices up, and if the supply of credit did not then expand to meet ""at pressure, the available supply of credit would have to be spread staon, 0, greater number of claimants0 He wondered what the effect of such to sitilation Would be. 5/14/57 -15President Fleming stated that the effect of this development haa been that banks had been a little more selective in their granting Of Credits Mr. Kemper raised the question whether it might be possible to l'elate wage increases to the cost of living index. Governor Vardaman did not think the problem should be approached t cmgh labor. Labor had not been the sole cause of the increase in demand for money, he said, and he felt there had been a tendency to overemPhasize the part wages played in the increased costs of production. lie felt that more talks like those by Mr. Matkin would be most helpful. Mr. Kimbn11 reported that he had been asked to speak before the Miami 1, lanufacturers Association on the subject of tight money and that, t°11°I.ring this talk, he had also received a request to speak on the slIhject before the Kiwanis Club. He felt that an effective job of edueati lig larger groups of businessmen could be done by accepting invitations 0f this type, In response to a suggestion by Mr. Kemper that some of this should be done by the businessmen rather than by bankers, Mr. Kimball stated that in his view the business people expected the bankers to make alleh talks and welcomed having them do so. Mr, Mitchell said that businessmen would have to be sold on the 141101„, Idea before they could be expected to make speeches along these He felt that a great deal of progress had been made in educating (Iriker'sy not only at the top level but at other levels. If the same thing Q01. u.d. e done with businessmen over the next year or two, it would 5/14/57 represent real progress. A great deal of effort on the part of every member of the Federal Advisory Council would be required to get busilleSsmen to go out and really explain this problem, Mr. Mitchell said, 4dcling that the Reserve Banks could be expected to help in such a 13r°gran4 Mr. Mitchell also expressed the opinion that a great many businessmen were reconciled to a creeping inflation. Chairman Martin commented that the problem was obvious, but the solution was still obscure. 3. The Board would appreciate comments as to the experience of banks generally regarding (a) whether, as the result of paying higher interest rates, savings and other time deposits have increased since January 1, 1957; (b) if so, whether and to what extent the increase reflects a shift from demand deposits and from funds formerly in savings and loan associations; or whether it reflects entirely new savings; ) whether the cost of the higher interest rates announced on savings and time deposits has had an effect on operating policies of the banks. The Council believes that the experience of banks generally ItlaY be described as follows: (a) Banks which raised their savings interest rates to 3 per cent on January 1, 1957 have experienced a material increase in savings deposits. The increase in rates also has been helpfUl in holding other time deposits. Some banks which increased their savings rates to 2 or 2-1/2 per cent in 1956 report that this action has tended to stabilize their savings deposits. 5/14/57 -17(b) The increase in bank savings deposits thus far seems to reflect primarily a shift from other forms of savings rather than entirely new savings. It appears that the largest proportion of the increase can be accounted for by shifts from savings and loan associations and other institutions and from savings bonds, with only a small transfer from demand deposits. Over the long run, higher savings interest rates should be helpful in increasing new savings. (c) Where interest rates on savings have been raised, there is evidence that banks have endeavored to obtain higher rates on their earning assets which in some instances has resulted in a shift in the types of assets. The payment of higher interest rates to savings depositors also has tended to increase service charges. President Fleming stated that his bank was one that had gone to a 1 Per cent rate on savings and time deposits up to $10,000, and to 2 P" Cent across the board. Passbook savings since the first of the year 41/311earad to have increased 8.6 per cent, he said, and he felt this exPetenea was generally true of other banks. On (b) of the above question, President Fleming said that it was aim e8t impossible to determine whether savings bonds had been cashed and the funds placed in savings deposits. He did know, however, that 4 consi derable amount of funds that had been in savings and loan associations PaYing 3-1/2 per cent had been placed in savings accounts at banks -use ,4 '"-Lth that margin of difference, the owners of the funds preferred to 1, ,Aava „ wiem in banks. As to (c) above, President Fleming said that the increase in "deposits would have to be much greater than it had been thus 5/14/57 far in order to compensate for the increase in the rate paid on such deposits. He noted that there had been a tendency to try to offset the higher interest costs to the banks by adjustments in mortgage rates and to some extent by higher service charges. 4 In response to qUestion from Governor Balderston, President Fleming said that he had not been surprised at the substance of the responses made by the Pede al Advisory Council members to these questions regarding the increase in rates of interest on savings and time deposits in recent 111°4the- One feature that had surprised him, however, had been the fact that there had not been a large proportion of funds transferred fr A ' 4emand deposits to time deposit categories. President Fleming corrunented that when the rate on time deposits was increased from 1 per ceat to 2 per cent some time ago, there had been a greater transfer of 11.4d0 from the demand deposit category. Mr. Kimball suggested that the degree of shift from demand to tijIle deposits depended upon the degree of the increase in the rates 1)8 ' 1'1 on such deposits. He noted that in Miami the rate had been inere.-.bed at the beginning of this year from 1 per cent to 2-1/2 per Cent. mu, J-Lus had been accompanied by an increase in the time and savings --Q-LL category, of which he estimated about 4o1 per cent represented tr4n8fer6 from demand deposits. X. King expressed the view that deposits of business firms 14elle less likely to be shifted from the demand to the time deposit Qat °17 than were deposits of individuAls. He also said that he had L2? 5/14/57 been -19- surprised at the continuing increase in savings deposits that had taken place. Approximately three-fourths of the banks in the Twelfth Pe eral Reserve District were now paying 3 per cent on time and savings deposits, he noted, and increases in such deposits were continuing right up to the present time, which was surprising at this time of year. Mr. Denton stated that his bank had increased the rate payable on time and savings deposits from 1 per cent to 2 per cent last July. There had been a slight drain on savings deposits prior to that time, 13artioularly at the downtown offices where savings and loan associations Ilre located nearby. Since last July, there had not been a week during 'which the savings deposits of his bank had failed to increase. President Fleming suggested that it was too early to determine Ilhether the change in the yield on Series E bonds was sufficient to change the tendency for holders to redeem the bonds. He also noted that funds placed in F and G Series bonds were to be looked upon as invest nent money, rather than as savings deposit money. Mr. Denton stated that while there had been increases in savings its as a result of the higher rates being paid on them, he could cite s everal examples in which the increase in the income derived from 4.11ings deposits had caused the owners to reduce the total amount of their savings where such owners were simply interested in obtaining a sPecip. 'led amount of income from the savings. 5/14/57 -20Mr. Kemper stated that the 3 per cent rate seemed to be the nlagic rate and that it had caused a good-sized increase in savings deP"its. He described the situation in his own city where rates had.— .1) zu increased to 2 per cent by the downtown banks, while outbanks had increased their rates to that 3 per cent. The result was the latter group of banks was experiencing an increase in savings dePosits which had totaled almost 15 per cent since January 1, whereas the dovritown banks were having very slight increases. that if the Mr. Kemper felt 3 per cent rate were paid generally, there would be a Illelited increase in savings deposits. President Fleming reported a recent discussion that he had had with members of the Association of Reserve City Bankers who had indicated that aPproxtmately one-third of the banks had made no change in their °r1. savinasdeposits, approximately one-third had made some increase, a'nd apProximately one-third had gone to 4. 3 per cent. In the observation of members of the Council, what effect has reduced liquidity had on the availability of bank loans within their respective districts? Do the banks aim at maintaining any set ratio of liquidity as between loans and holdings of U. S. Government securities, etc.? In regulating their liquidity positions, is there any difference in the policies of banks in (a) central reserve cities (b) reserve cities (c) areas outside (a) and (b). eiThe reduced liquidity of banks has resulted in greater theectivitY in the extension of credit. While most banks watch ratio Of loans to holdings of U. S. Government securities, 1.279 5/14/57 -21- deposits, capital funds, etc., the Council does not know Of any fixed formula widely used by bankers of the country. In regulating their liquidity positions, the Council does not believe there is any real difference in the policies Of banks in (a) central reserve cities, (b) reserve cities or in areas outside (a) and (b). President Fleming said that the deposit structure of a bank had to be examined in order to judge the specific policy to be followed in te17214 of liquidity. One bank might have a greater proportion of time clePosits Which would affect its liquidity needs. The volume of foreign Clell0 13ite would also affect the liquidity needs of the bank. Bankers the ratio of their loans to deposits, President Fleming said, bilt he knew of no fixed formula governing the liquidity position of bahi, and he knew of no member of the Council who knew of any fixed for that purpose. Mr. Denton said that many banks gave some attention to the '4s.110 us formulas established by major depositors. After commenting 1113°4 th e requirements of some of these depositors, he stated that many "the smaller banks in the Furth District used the studies of the Pede-__ Reserve Bank of Cleveland covering member bank operating ratios as a guide in determinin g their liquidity position. 5. What is the Council's view of an appropriate credit policy for the period from the time of this meeting until mid-autumn of 1957? cu The members of the Council approve the credit policies rl ' entlY being pursued by the System. 1230 5/14/57 -22- Assuming, as we do, that the present high level of business continues, the Council believes that the current degree of restraint should be maintained. However, additional reserves will in all probability be required for the June tax needs, Federal fiscal requirements in the early summer months and other seasonal factors. President Fleming said that most of the members of the Council felt that the situation of the Treasury and particularly the heavy atexperienced in the latest refunding might cause the Treasury t0 have to obtain new money earlier than had been expected. He would not expect this before July. Mr. Denton referred to the first topic discussed and to the feeling he had expressed of some skepticism as to the level of business cillring the Period until next autumn. If the situation were to turn out t° be as he felt, it might then be advisable for the System to consider elieclit Policy in the light of those conditions, which might call for less r estraint. In response to a question from Chairman Martin as to ihether more restraint would be called for if the situation did not turn out that 14aY, Mt. Denton responded that in that event he would say there 811°111d. be at least as much restraint as at present; he was not happy With a _ ,:,600 million, riue in net borrowed reserves to a figure as high as , bIlt he thought 4;200 or $300 million would be all right. Mr. Mitchell said that he would hope, when and if business senti4tent d et rioratc.d, that the Board and the System would not be too quick tO inject reserves into the money market. It was very easy to put money he said, and very difficult to bring it back out as was demonstrated the 1953 experience. 281 5/14/57 -23President Fleming said that some of the members of the Council Igere curious as to the situation that had developed in a recent threeweek period in which net borrowed reserves ran in the $600-700 million range• He said that one suggested explanation had to do with the Chicago tax date on April 1. Chairman Martin said that the tax date was one of the elements. Likewise, he recalled that in an earlier period the market had gotten c04siderab1y easier than was called for by the policy the System had been rolloving. He noted that the System used projections of reserves "d that in certain periods these projections were not very good. If the SYstem were to do nothing simply because the projections were not erY good, the situation might get even worse. What the System had to deal • with was such words as color, tone, feel, and behavior of the market. The Chairman vent on to say that there might be a period in which net rrowed reserves were $600-8o0 million and the market did not seem to be tight. A little later with a small shift in reserves, the market kightbecome much tighter. He pointed out that the Manager of the SYstern Account had an extremely difficult job: the Manager must try to BatiarY the individual members of the Federal Open Market Committee, and at the same time he must try to interpret policy in the light of day-todevelopments in the market. 6. (a) The Board would appreciate receiving any comments the members of the Council may have as to the Bank Holding Company 1 - 282 5/14/57 Act of 1956. (As suggested by Chairman Martin at the meeting on February 19, this topic will be carried on the agenda regularly until the spring of 1958.) (b) What are the views of the members of the Council as to whether all special exemptions from the definition of a bank holding company should be eliminated from the Bank Holding Company Act of 1956? As the Board knows, the Council has consistently supported sound regulation of bank holding companies. The Council believes that while sound in its fundamental approach, the Act of 1956, contains exemptions that may result in possible abuses. The Council believes it desirable that these exemptions be eliminated. Some members of the Council who have special knowledge of hank holding companies, have proposed in writing certain technical amendments to the Act which they believe will contribute to the better administrati on of the Act within its avowed purposes. The Council is of the opinion that the suggestions mentioned above merit the consideration of the Board. President Fleming noted that not all members of the Council were N)eri -enced in the operations of holding companies. The members of the On -Une "Lhad read the proposals for amendments to the Bank Holding Company A" Of 1956 that had been submitted by Mr. Baird, copies of which had bee, " sent to the Board, and the Council approved the consideration of these proposals. Mr. Baird stated that he had been examining another section of the 10 ' ank Holding Company Act very closely and that he expected within the next few days to submit an additional proposal for the consideration r the Board and the members of the Council. 5/14/57 -25Governor Robertson said that he felt that some of the suggestions that members of the Council had made were very good and were backed up bY sound reasoning. He had originally hoped that the Board would come 11P with suggestions for the Congress at an early date but it now appeared that it would not be desirable to submit suggestions until the spring of 1958. In the meantime, he hoped that the members of the Council would reel free to submit additional suggestions and comments regarding the legi slation. President Fleming said that all of the members of the Council v°11341 continue to study the legislation and to submit to the Board any allegestions they might have. He suggested that any such proposals be Seat by the individml members direct to the Board, with copies to the Seer etarY of the Federal Advisory Council for distribution to all of the Council members. 7. The Board would like to have a further discussion of the problem of "window dressing" by banks for purposes of inflating deposits and reducing figures of bank borrowing at times of the regular reports of condition. The Council will be pleased to discuss this item with the Board President Fleming said that he had discussed the question of -ssing" by banks with the Comptroller of the Currency. He found that f or several years the matter had been under active consideration by the CoM Ptroller and that the Comptroller had been working with the Board. also understood that this was not a practice that was widespread but 1284 5/14/57 26- Was one which was used in isolated areas, and that Texas seemed t° be one of the areas in which the practice was engaged in extensively. Mr. Matkin said that while the practice apparently was not wide3.1?read except in Texas, he would predict that it would spread to other areas 4xt 41 something was not done to stop it. He thoroughly approved of 8.et1ve interest on the part of the Council and the Board. ciicl riot Banks which initially wish to engage in window dressing found themselves Under a great deal of pressure to do so, Mr. Matkin said, when competitors ligage(1 • the - In practice, and it was difficult for the first group to e°11tinue to be honest. Mr. Matkin felt that, if necessary, laws should be Paseed to stop window dressing. He had discussed the matter with the acInIPtroller of the Currency as well as with individunl bankers, he said, telt that something could be done to end the practice. President Fleming said that the Comptroller of the Currency had Indic ated the belief that within a year the practice would have been nated in the Southwest, except that the Comptroller was not certain t° one city. The Comptroller had been asked whether he had written letter's to the boards of directors of the offending banks, President Pleillitig said, and had responded that this had not been done but that it 1'4)111413e done if the problem could not be worked out with the managing °:rtleers of the banks. Governor Balderston expressed the hope that this could be worked olt 1.rithollt needless trouble, inconvenience, and expense to all banks. 1285 5114/57 -27- lie wondered whether it would help if, instead of requiring reports of e°11dition as of a single date, averages of deposits were required to be re ported. During the ensuing discussion, the comments of the members of the Colncil made it clear that they were In favor of taking steps to bring an ettd vo what they believed to be a bad practice. Several comments seemed to 1..„ --vor direct action with individual banks as the most effective procedure. They .1 '4-030 indicated that this procedure would avoid burdensome requirements 1)1 banks as a whole. Governor Robertson stated that he hoped this problem would not be 1)811°°ned out of proportion to its importance. ' tS He felt that beneficial would come out of these discussions and that the problem would be The supervisory agencies had wished to avoid tarring all banks of th e e°11fltrY with the sins of just a few banks. When there were a few large 13allks that did not wish to stop the practice, it was not possible to ask the "taller ones to do so. The problem was one that could best be solved bYtl, banks themselves he felt, and he suggested that as soon as some of ''.4e the lalsge banks that were following the objectionable practice could be perto change, the smaller banks would follow their lead. In response tea Westion from President Fleming as to whether discussion of the problek at conventions of State bankers* associations would be helpfUll Governor 114ertson expressed the opinion that such a procedure might have an unfor- t11111' ' 41 te effect on banking generally. Recently there had been a tendency for 11%1131)41:)ex's to become interested in this problem, he said, and if it got into 1)11 ' eas there would be a tendency for all banks to become suspect. 1286 5/14/57 Mr. Baird said that he doubted the directors of the banks involved had had the problem brought to their attention in a way that Indicated that window dressing was an unethical practice and something that they would not countenance with borrowers from their banks. He felt that the directors probably had been lulled into accepting the Practice on the grounds that this was a competitive device that had been used for years. He did not see why in aggravated cases a letter clirected to the board of directors criticizing the practice should not be written. Governor Robertson responded that there was a good deal to this suggestion, and the discussion concluded with a statement by Pres 'dent Fleming that the members of the Council were concerned with the Problem and would continue to keep it in mind. 8. The Council would like to know what progress the Board of Governors has made in their study of reserve requirements. In particular the Council would like to know if the Board has come to any conclusion on the reserve requirement proposal advanced by the Economic Policy Commission of the ABA. The Council would welcome any comments the Board wishes to make on this study. President Fleming said that the Council would like to know what Pro as the Board had made in studying the reserve requirements proposals that h ad been submitted by the American Bankers Association. Chairman Martin said that the Board welcomed an opportunity to "48s. the matter and that it wished to keep the Council informed of 128 I 5/14/57 -29- it was doing in this area at all times. The Board had not come to anY conclusion on reserve requirement proposals up to the present time, the Chairman stated. It welcomed the study the ABA had made and thought it an interesting and worth-while addition to knowledge in the rield• The Board was actively endeavoring to work out something on the Problem. Continuing, Chairman Martin said that he reflected the views of the Board in stating that we were dealing with a very difficult and in°Us case of inflation that was already with us: it was not something 4e were only talking about; we now have it. that' He hoped that the Meathers of the Council would bear this major problem in mind. Oil He was 1%ecord and he believed very firmly that reserve requirements were high. In the present atmosphere, however, it was necessary to con- all aspects of the situation. The problem was one which should bee°118idered in terms of assistance to banking generally. The Chairman noted. that various comments were being made along the line that the banke rs would like to have their reserve requirements reduced and that the,, vere already making more money because of higher interest rates. Re fel+ u that it would be difficult to justify a reduction in reserve re4 nts under existing circumstances. he had With respect to the ABA proposals, Chairman Martin said that had a sufficient number of comments from individual bankers to th+ a- not all bankers agreed with the proposals that the ABA committee 1288 5/14/57 -30- e. This was not surprising. He wanted the Council members to knov that the Board takes this problem very seriously and that it was considering all of its aspects. The Board had recently authorized, under the direction of Governor Mills, a review of the various proposals for reserve requirement changes with the purpose of ascertaining the effect Of the various proposals on banks as a group and individually at different times. It would be the Board's intention to discuss this matter the Council as soon as it was able to come to any definite conclusion. President Fleming stated that this was as much as the Council e°11111 hope for, adding that he too thought that it would be unwise to 111'9P°se legislation in this field at the present time. Chairman Martin stated that there had been considerable discussion Of +1, -“e consumer credit study that the Board had made at the request of the sident's Council of Economic Advisers. He wished to inform the Pcder.1 Advisory Council that the Board had not taken any position on the Vestion of authority for regulating consumer credit but that it was h°Ping to arrive at some means of utilizing the study shortly. Governor Mills noted that from time to time the Council had Corn-. tent on the experience of member banks at the discount windows of the Ped"ea Reserve Banks. He noted the absence of comment at this meeting 446- stated that he judged this was an indication that the experience was 8tisfactory. 5/14/57 -31President Fleming noted that this comment had been eliminated at the preceding meeting because the members of the Council were satisfied with the pronouncement that Chairman Martin had made to the effect that the discount window would be kept open for all legitimate purposes. Mr. Livingston said that he had been the member of the Council /rho had raised this question from time to time and that bankers with 1141 he discussed the matter were being well taken care of. Mr. Denton said that he concurred with the remarks of Mt. Livi ngston. Mr. Massie said that banks generally had been borrowing too However, the pressures had come onto them rapidly and they had hot bad an opportunity to mAke the needed adjustments. These were being ttledel but they required time. Mr. Mitchell commented on discussions that the Federal Reserve 44k of Philadelphia had had with certain banks that had borrowed constating that whatever had been done by the Bank on that pro.a been done well. It was agreed that the next meeting of the Council would be held °11 Sunday, September 15, 1957, and that the joint meeting of the Board 44a the Council would be held at 10:30 a.m. on Tuesday, September 17, 1957. Thereupon the meeting adjourned. 4 4 111 I I Arlik tory
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