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A meeting of the Board of Governors of the Federal Reserve 83rstem with the Federal Advisory Council was held in the offices of the Board of Governors in Washington on Tuesday, May 15, 1951, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mt. Mr. Martin, Chairman hccles Szymczpk Evans Vardaman Norton Powell Mr. Carpenter, Secretary Messrs. Jackson, Congdon, Fleming, Davis, Brown, Hemingway, Ringland, and Beals, Members of the Federal Advisory Council from the Second, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, and Tenth Federal Reserve Districts, respectively. Messrs. David E. Williams and Reno Odl.in, who had been designated to attend the meeting of the Federal Advisory Council in the absence of Messrs. Potts and Lochead, Members of the Council from the Third and Twelfth Federal Reserve Districts, respectively. Mr. Prochnow, Secretary of the Federal Advisory Council. Before this meeting the Council submitted to the Board a iller".8./Idurri setting forth the Council's views on the subjects to be cliscussed with the Board at this joint meeting. The statement of the t°111c) the Council's views, and the discussion with respect to each °t the subJects were as follows: ro- -21. The Board would like to have the views of the Council on the prospective business and economic situation during the next six months and on the policies that should be followed by the System in the field of general credit controls. The Council believes, based on current economic trends, that business will continue active in the next six months. The total volume of loans in the next sixty or ninety days Will .0ro1)ably move sidewise, and may even decline slightly, because of the liquidation of inventories. However, the banking system will shortly be confronted with large demands for credit to finance new crops, defense plant expansion and the manufacture of defense products. The Council believes that bY the Fall of 1951 the total loans required to maintain the defense effort and essential civilian production will exceed the volume of loans in the Fall of 1950. In this period of national emergency involving heavy defense oxpenditures, it iS desirable for essential production and gross national Product to rise. A larger volume of bank loans necessarily results. In addition, for the present at least, higher prices aril wages have been frozen into the economy, and they require a larger volume of loans. In view of the economic outlook for the balance of the 2.alendar year, the huge refunding program confronting the ,reasury and the large amount of new money which the Trea°UrY will require in that period, stability in the financial 4nd credit field is highly desirable, and drastic or rapid e hanges in general credit controls should be avoided. Unless t°1,ltions s radically change, the Council believes therefore no upward change in reserve requirements is desirable -01 the next six months. Indeed it is quite probable that a. d ecrease in reserve requirements way be necessary by the sl, IL°f 1951. In view of Treasury requirements and the preUnsettlement and nervousness in the Government bond 1:f.ket, the Council also now believes that the rediscount aT:e should not be raised during the period immediately M. Open market operations should be conducted on a e7-Ls that will supply the minimum reserves needed for tos"tial business credit and for Treasury financing, and Ilittintain a reasonably stable market for Government obgattous at or around present levels. 5/15/51 -3President Brown commented that the statement of the Council repthe views of each of the representatives present at this nieeting of the Council as to the probable demand for loans and loan IcPaxleion in his district, and that, while in the agricultural districts 4134s might decline prior to the movement of this year's crops, they 11(511a4 increase substantially again in the fall so that the total at that ti vould be in excess of last year. He also said that if it were not the Treasury financing situation, a number of the members of the C°411cil would feel that the rediscount rate of the Federal Reserve Banks til°111d be increased but that this would have an adverse effect on Governsecurity prices and might encourage the liquidation of savings bonds. It W ac the feeling of the Council, he said, that the Government securities ke t Should be permitted to adjust to the recent open market policies or the SYstem. He added that the Council was not in favor of completely Deem. , 46 the market for Government securities but rather that since there had.be, -el/violent kEtrite changes in open market policy in the recent period the required a period in which it could settle down. Mr, Fleming made the additional comment that it was clear from the Pia I's that had been announced by the Director of Defense Mobilization 111clothp,„ ' - s for the expansion of defense production that the continuation oese lel civilian production would require a further expansion in ECtost tional product which in turn would require a further expansion or I:, oredit and that while the banks were trying to restrict speculative 3/15/51 -4- 8411110a-essential credit it would not be possible to reduce the volume °I' civilian credit sufficiently to offset the growth of credit for deIltIse Purposes, particularly in view of the fact that the latter would he l'equired in large amounts at one time. Reference was made by Chairman Martin to a statement released bYthe Board of Governors to the press yesterday with respect to member balakloans as of April 9, 1951, which indicated an increase of $1,653 killiOfl in loans since December 30, 1950. Copies of the statement and t a more complete statement on the same subject were distributed during them eeting. There was general discussion of the economic situation and the 4eed for bank credit in the light of a comment by Chairman Martin that becellas of the very fluid situation over the next several' months it would jac't Dossible to say at this time what the credit needs of the economy 11°111d be, He also said that it would not be possible to continue to credit indefinitely and tie the hands of the System with respect tore discount rates, open market operations, and further increases in reser requirements, that it would be necessary to restrain such ex- . % ,i 114181°11, and that in the voluntary credit restraint program an effort VEte made to establish criteria for lending. He also referred to the te "essential production" as used in the Council's statement and 441(1 thal. ., the question was how we were to determine what was essential i4 Ile ha Inanner as to offset increased defense production by decreases r 5/15/51 - 5 CiVilian production and whether there was to be a further inflationary owt in credit by an attempt to finance civilian production along with itcreased defense production. President Brown stated that the term "essential production" as tised in the Council's statement was taken from the voluntary credit resi*Etint program and was used in the same sense that it was used in that Arogram. Mr. Vardaman stated that he had never felt that it would be pose to carry out the defense program without appreciable inflation and that xor that reason he had advocated the strictest kind of controls which nelude rationing, price control, etc. It was his view that the ecola (1/4Y could not carry the dual burden of civilian and defense production Vithoh+ a major degree of inflation, that it should be the policy to cut 154ek th -e standard of living until such time as the country was prepared tor de use from a military standpoint, and that in order to accomplish that 4., -" 'would be necessary to cut civilian production to a minimum. Mr. Eccles questioned whether it would be desirable further to "D8.4a bank credit which would mean a further expansion in the supply of 11104 a Period of full production. He expressed the view that increases aereir, Qe Production should be offset by reductions in civilian product 14 i°11,tha t °n1Y to the extent that additional facilities and manpower could be Provid eu should credit be expanded, and that in order to avoid further 111/latiolm-m47 pressures a tight rein should be held on the volume of credit, 5/15/51 -6- into account the velocity of turnover of existing credit. He eireed with the Council's statement relating to discount rates and the gerieral situation in the Government securities market. He did not want to return to a situation in which support of the Government securities 4544At would be provided at fixed pegs but he felt that the Open Market Ntkittee was under obligation to take cognizance of the present form "he debt structure and that the question of confidence and stability 114the market would depend on the msnAgement of the market by the Open "Committee as the underwriter of that market. He felt that the 144111: COrorai ttee should be prepared to provide stability to the market and he n -13 question about its ability to perform that function. He felt the't the changes that had taken place had had a very wholesome effect 4144ccomp118hed largely the purposes which the Committee sought to 4Ce°r111)118h. He felt that the System should be in a position to sterilize 8441tional reserves that might be created by the System's stabilizing °Petati°11s and that increased authority over bank reserves would be 44"888a7 for that p Ilith ose. He disagreed with the Council's suggestion respect to the desirability of a reduction in reserve requirements f 4 letter time for the reason that any reserves that should be supplied to the market could be provided more flexibly through open market operations -4413Y creating large amounts of excess reserves by a reduction in rerequireMents. 5/15b1 _7_ There was a discussion of the refunding operations to be con- dlleted by the Treasury during the balance of the year, the funds available tOr itvestment in Government securities, and the possible demands for funds 11°1s cl'OP movements and the defense effort. Mr. Jackson referred to the difficulty of controlling the exof bank credit when there was a widespread feeling that at the 8841e time that private credit agencies were being asked through the volunterY credit restraint program and otherwise to limit the volume of their credit extended by Government agencies was expanding. The Problem of further credit demands was discussed on the basis or th e differences between the present period and during the second world Var, 4r. Congdon commented on the difficulty of preventing bank credit l'Illiell/anding in the period immediately ahead because of the difficulty or a ling civilian production in the same places and in direct pro13°I.t1 cla to the expansion of defense production. While he did not believe t414t there would be inflationary increases in loans from this point on llot think it was likely that the switchover from civilian to clench" Production Ch.4 could be made without some further increases in loans. Martin stated that in a situation of undeclared war as we have at the present time it was necessary to work with infinite ktie4 questions that arose °6 voilla ha tovard an integrated pattern and that the Bittlati Ire to be in terms of adjustments rather than absolutes. In that °A 'he said, the various instruments of credit policy could not be 5115/51 -8- seated but the System would have to try to work them into a unified Prograra. 2. What, if any, action should be taken by the Board with respect to changes in the terms of Regulation WI Consumer Credit, and Regulation X, Real Estate Credit? Regulation W has and is cutting into instalment credit Regulation X is just ueginning to show its effects due to the many starts and 843Provals made before its adoption, in which cases it does Ot apply. The Council after full discussion does not zavor any change at present in the terms of Regulation W and Regulation X. nd is accomplishing its intention. There was no discussion of this topic at this point. 3. The program for voluntary credit restraint is now getting into operation and the Board would be pleased to have ally comments that the members of the Council might wish to make as to the progress of the program in their respective districts and what results are being obtained. t , The program for voluntary credit restraint has met with 44 general approval not only of banks but of insurance com, ; anies and investment bankers. This general approval is _yen greater than was anticipated. Although the regional 'ollamittees have only recently been organized and are just Ili.°1g getting in operation, the program has already resulted 1101 much critical screening by banks of applications for , ans as to their purpose. Many loans, particularly those f ,1",r large amounts, have been turned down because they would it contribute to the defense effort or the carrying on of eme,essential civilian economy. Many borrowers have not b;PlIed for loans because of the knowledge that they would de test of the program clined because they could not meet the Z 114d The Council believes that as the program is better it ,7).1*,”ood and is further implemented and gets under way aao r"-L1 be increasingly effective in restraining unnecessary ' Undesirable credit expansion. The Council recommends thV aci reParation and distribution at frequent intervals of °nal literature and publicity materials on the subjen 0 keep the program constantly before lenders and were and In the press. 5/15/51 -9- The Council wishes to express its appreciation to the Board of Governors and the officials of the Federal Reserve Banks for their leadership and cooperation in getting the program under way. In particular, the former Chairman of the Board, Mr. McCabe; the present Chairman; Mx. Martin; and Governor Powell, who has direct charge cf the program, are to be commended for their active and unremitting efforts to promote the program both with Congress, other departments of the Government, and with the banks and other lending institutions. The voluntary credit restraint program does not cover 1°ans guaranteed by the Government or its agencies. The Present program would be more effective if it involved not ".1Y private credit, but also loans so guaranteed. In this ! onnection, the Council wishes to call attention to the rollowing statement in its memorandum to the Board of Governors on February 201 1951: "Government loans and guaranties of loans in all fields; including real estate, should be terminated; except where such loans are necessary for the defense effort." Even if the demand for loans is restricted to those Ireeseary for the defense effort and carrying on the eslititti civilian economy; the requests for credit for ' onstruction are and will be so heavy that the Council loomes the action which the NPA has taken to require aPProval of certain kinds of construction projects. (3 e need of obtaining approval before materials can be j stained for construction should greatly help not only conservation of scarce materials and labor but also °-clould restrain credit expansion. r Mr. Powell discussed the basis on which the term "essential prolias used in the voluntary credit restraint program and stated tlia it /148 not known when the program was adopted what the defense lloms 11°111d be, that those needs had not yet been defined; and that thtrer la the term might mean one thing today and something else six klathe trom now when the defense program was more fully under way. 1 UfR2 5/15/51 -10- Itold.ed that the voluntary credit restraint committees were working on the Program and were evolving a definition of what was essential which v°41(1 become more and more restrictive as the defense program progressed. 11tlined the reasons for the periodic bulletins issued by the Voluntary Creglit Restraint Committee and the procedures followed by the subcommittee 4411the national committee in the handling of inquiries as to whether kliticillar loans complied with the program. It was anticipated, he said, th4t at the meeting of the Committee on May 21 consideration would be €11/ell to a bulletin on credit on existing housing which is not within the ac°1)e or Regulation X. He also said that the Committee would study the 131'()b1eill of the sale in this country of foreign municipal ,issues. He made the turther Comment that the national committee was setting up a liaison Etzl'e/ageraent With the defense agencies so that, in answering the problems c(IIA.g before it, the committee would be familiar with what the defense 4e4cies 'were thinking in terms of the use of materials and labor in the detelise eff ort. Re expressed the opinion that there should not be too rigid a viev 8.8 the 1,1x t° the volume of credit that should be outstanding in a given °A) that the problem involved not only the amount of credit but Pi4itY of its turnover as well, and that the success of a credit cy ust be measured in terms of its effect on the price level and riot 14 teMs of the volume of credit outstanding. He also suggested that ne, ki'00 5/15/51 -11- C 1114-cut ideas with respect to the productive capacity of existing manand facilities should not be too rigid, that notwithstanding the t ftteMe."ILL last fall that our manpower and facilities were fully employed 1)1MAletion last winter was tremendous, and that therefore we should not "11 industry short" as to what it can do under forced draft. he In addition, aaid, there was always the possibility of further increases in im- irts in order to increase the overall supply of goods available for corlsbrIption. During Mr. Powell's statement, Mr. Bucklin, the member of the from the First Federal Reserve District, joined the meeting. In response to a comment by Mr. Fleming as to the desirability or bringing the Voluntary Credit Restraint Program to the attention of potential borrowers, Mr. Powell stated that the American Bankers Associatic)11\l'as sending out a letter to all banks suggesting that they send )1,(is of the voluntary credit restraint program to their borrowing eillst°rIlers. Mr. Fleming suggested that it would be more effective if it Cold be made clear to the borrowers that the letter was being 4r1t at the request of the Voluntary Credit Restraint Committee. At the request of Chairman Martin, Mr. Norton reviewed the hlrorm tttiou available as to housing starts during 1951 compared with the a period in 1950. He commented that the trend of starts was d -Wnward, that the backlog of commitments for residential aXile -12c°nstruction appeared to be in the neighborhood of 550,000 units, and that n otwithstanding tighter credit conditions in the mortgage market itIle.e probable that starts in 1951 would exceed one million. Mr. Evans discussed briefly the effects of Regulation W and Eteps that being taken by the Board for its enforcement. He also suggested the banks could be very helpful if they would urge observance of the regulation as a wartime measure. had INbeen He added that although requests received for relaxation of the regulation because of the decline 'vnaumer demand) the Board at the present time could see no reason for stleh action. It felt, he said, that it should proceed cautiously in the nd stration of the regulation and, if necessary, err on the side of , Itriction rather than to relax the regulation and thereby add to inriatiotary pressures. The members of the Council expressed the view that Regulation W 148 c'irg. an effective job at the present time and President Brown stated that it was the unanimous view of the Council that the regulation should be relaxed. He also said it was surprising how well the regulation Ikte being observed. Ve.retiola Chairman Martin read from a memorandum handed to him by Mr. 11 containing information with respect to applications for loans that ha c/ been received by the guaranteeing agencies under the V-loan 1)to ram /flitch indicated that applications were coming in at the rate of 4Droxi 1114telY 125 per month. 5/15/51 -13Mr. Vardaman stated that the President had just signed the bill ainencling the Assignment of Claims Act which should have the effect of illCreas 4- J-lig the volume of V-loan applications. It has been proposed that additional authority granted to the Board of Governors over bank reserves take the form of a supplementary reserve on any increase in a bank's loans from a base amount. Copies of memoranda relating to this and other suggested reserve requirement plans are attached and the Board would appreciate the views of the Council particularly with respect to the proposed loan expansion reserve plan. In its memorandum to the Board on October 3, 19)0, the Council said that if economic conditions should clearly necessitate any change in the maximum statutory reserve re( ,kirements, the Council was unanimously of the opinion that 'ue Pattern used in 1948 should be followed, extending tem3,°1..s.rY authority for increased maximum cash reserves. The '°Uncil also then stated that it believed any authority i!arlted should be for a period of not more than two and oneif ejears so Congress could review the matter. For reasons Fl have been dtscussed in the answer to Item One of the t rnda, Present economic conditions make it untimely for the t Board now to urge legislation to increase maximum statu.217 bank reserve requirements. The Council does not approve ;ZY Proposal in any form to increase maximum statutory bank tiserve requirements at this time. Under present interna1 ' °11a1 conditions it is obvious that the Congress will be 1,; 11 lecsion almost continuously and could if necessary under callY changed conditions act promptly. The acceptance 17,,,enY such proposal at present would be detrimental to the il`'11-untary credit restraint program, and to Treasury financin the months immediately ahead. Considering the large trne of credit which may be required this Fall for essendefonee and civilian needs, and the magnitude of Treaut., 1, -,Jt refunding and new financing, stability and confidence to 1.116 economy and in the Government bond market are highly ue desired. /15/51 The proposed proposed loan expansion reserve plan is undesirable 14 general for the reasons given, and specifically because it (1) would not meet fluctuating seasonal credit requirements, (2) would work injustices between various banks, (3) would tend to freeze each bank in the same pattern of investtit it happened to have had at the base period, and (4) would fail to provide credit for areas which are growing rapidly in production. President Brown stated that the Council felt that the loan , Nkt "sten reserve plan was the least practicable of the various plans that "ad been proposed for increasing authority over reserve requirements 41X1/ °Illd have less chance of approval by the Congress than other plans thet had been suggested. He expressed the view that the plan would lellalize banks that had been conservative in their lending policies. In response to an inquiry from President Brown, Chairman Martin state u that the Board had not decided on the form of legislation on this 811hje0t that it would recommend to the Congress, that for that reuot the views of the Council were being sought and that this prob1.e/4 "aa been discussed by the four-man committee appointed by the Presi411t on r .ebruary 26, 1951. There was pressure, he said, for a recommen4t;104 f°r consideration in connection with the legislation extending the efeh -se Production Act, adding that the Board might be called upon to -reserlt something before that legislation was enacted as a part of a °Ilt it O l'amework of credit control. He also said that if war should break beblY would be strongly urged that direct limitations be placed the extension of bank credit under authorities contained in the Trading 5/1)h1 "h the Enemy Act and the Banking Act of 1933, that the Board would l'esist that as long as possible, and that the loan expansion reserve Piwa 'lad been proposed as a means, in a period short of afl-out war, (31' illeeting the problem of the Government securities market and the fulther expansion of credit. He made the further statement that Mr. -4.4. had been careful to make it clear that the voluntary credit l'estl'aint program was not a device to avoid facing up to the problem of nA,. ational authority over bank reserves. During Chairman Martin's statement the members of the Council given copies of a memorandum dated May 11, 19)1, from Mr. Vest, etlel ' al Counsel, to which was attached the latest draft of the loan "Dansio_ u reserve bill. There followed a general discussion of the Problem of credit restraint in the light of the pressure for increases 1111:144k loans for inventories and other purposes and how that problem 811°111cl be met in the light of the need for restraining further increases 1.11 batik credit, 5. The desirability of the Federal Reserve Board undertaking a study of the prospective demands for and supply of credit over the next six to twelve months, the study to include: A. Requirements for new productive plant, inventories and working capital, that cannot be financed from retained earnings and savings (Prospective outlays for new plant in 19)1 are now estimated at $23,910 billion); Amount of bank financing of Federal expenditures that will be required; Estimated extent of net redemptions of savings bonds, and the methods of payment; Amount by which private credit can be contracted in non-essential lines. Ir such a study indicates that the demand for credit is likely to exceed the prospective supply of available funds, a decision should be reached as to whether demand is to be decreased by further restrictions, or whether the supply is to be allowed to increase. The Council believes it would be advisable to maintain a coninuing study of the kind.suggested above. Mr. Fleming stated that this topic was proposed by Mr. Potts, r e- of the Council from the Third Federal Reserve District, that the Droblem had been discussed recently by the. Reserve City Bankers Astoei ation, that it had been suggested that the study referred to be taa e) and that since the Board was the organization best able to C 1141.1 et such a study it would be helpful if the Board would undertake it. Chairman Martin read a memorandum on this topic which had b h - 1)rePared by Mr. Young, Director of the Division of Research and tatieti%=s, as follows: com. "The Board's research staff is already engaged in cr::illuing studies of prospective demands and supply of co'it along the lines suggested by the Federal Advisory ptlettleil. As one phase of this program, the staff is th ileering In developing a special framework for showing 111°IleY and credit flows record -- sources and uses of PAmds of each major sector of the economy. This special 5/15/51 -17- ” undertaking, which has been in process for the past four years, is now at an advanced stage and it is expected that the basic historical tables will be made available to the Public within the next six months. The matter of projecting these figures six to nine or twelve months ahead, presents many difficult technical problems and must at this stage of our empirical knowledge remain a judgment procedure. Gaps in the availability of critical current data, of course, present an handicaps to effective projection work. The fll]ing of such gaps is not alore a matter of the statistical work of the Board, but also of the statistical work of other Government agencies and private organizations, Progress In this work is likely to be hampered lh the Immediate future because appropriations for the statistical programs of a number of Government agencies e.re being seriously cut back. On the basis of existing data, the Board's staff is not hopeful that reasonable ways can be devised of estimating the amount by which private crecnt can be contracted in non-essential lines. The Council may wish to give consideration to suggestions as to how sUch estimate might be developed." Mr. Fleming suggested that it should be the business of some()Ile to y, -old down nonessential construction and other nonessential les so that these would be available when the economy turned -'erd there was need for special activities to provide employment. Mr. Eccles repeated a suggestion made earlier in the meeting th4t he Wilson 4-man committee might urge the Department of Defense to 14e "istine facilities to the fullest extent possible rather than eete Other facilities, and members of the Council stated that that the thoueht behind the statement of the Council on this topic. 5/15/51 -18At the conclusion of the discussion, Chairman Martin stated that the Board had not decided on the form its recommendation with N)ect to reserve requirement legislation would take and that the -veuld like to have any comments that the individual members clfthe Council might wish to make on the subject. President Brown stated that it was planned that the next etille of the Council would be held in Washington on September 16 ' 18) 1951. Thereupon the meeting adjourned.
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