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'n
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 of Governors in Washington on Tuesday, May 17, 1949, at
10:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
McCabe, Chairman
Eccles
Szymczak
Draper
Vardaman
Clayton
Mr. Carpenter, Secretary
Messrs. Spencer, Burgess, Congdon, Fleming, J. T.
Brown, E. E. Brown, Hemingway, Atwood, Kemper
Woods, and Odlin, members of the Federal Advisory Council from the First, Second, Fourth,
Fifth, Sixth, Seventh, Eighth, Ninth, Tenth,
Eleventh, and Twelfth Federal Reserve Districts,
respectively
Mr. Prochnow, Secretary of the Federal Advisory
Council
1.
Reorganization legislation.
President Brown stated that
following the last meeting of the Council, in response to the instructi°ns of the Council, he addressed a letter under date of February
18
'1949, to Senator McClellan, Chairman of the Senate Committee on
tclpenditures, strongly urging that the Board of Governors be exempted
tl'°Inl the reorganization bill (H.R. 2361) and that subsequently, durthe,
-E his absence in Brazil, Mr. Fleming conferred with Senator McClellan
bout the matter and on March 23, 1949, sent a letter to him (Preside
tit Brown) summarizing what occurred during that conference.
He
said that copies of the two letters would be delivered to the
.8°.ard for its records.
881
5/17/49
-2Following President Brown's statement, there was a brief dis-
etission of the status of the reorganization bills now pending in the
Congress.
Copies of the two letters referred to by Mr. Brown were
handed to the Secretary after this meeting and have been placed in
the files of the Board.
2. -Council's statement on legislation relating to supplemen---_
talEeserve requirements and consumer credit control.
then
Reference was
made to the statement by President Brown on behalf of the Fed-
eral Advisory Council before the Subcommittee of the Senate Banking
arld Currency Committee in connection with proposed legislation with
respect to supplemental reserve requirements and consumer instalment
credit.
President Brown stated that at the last meeting of the
eQuncil its executive committee was authorized, in the event this
legislation was introduced before another meeting of the Council was
held) to issue a statement and testify at any hearings on the bill.
lie also said that the executive committee met on Tuesday and Wednesday
of
last week and approved the statement which he presented at the
'Lags before the Subcommittee and that subsequently the members
Of the Council approved and ratified the statement.
Chairman McCabe stated that he had been accused of bad faith
14 that he had arranged to have the hearings called and concluded betor,
the scheduled meeting of the Federal Advisory Council could be
heir;
and that that was not true. He outlined the circumstances under
Q.Qt,
5/17/49
Which the hearing was called and stated that he began more than a
xcnth ago to get the bills on the calendar since the existing authority would expire on June 301 1949, that when the matter was first discussed with the Chairman of the Banking and Currency Committee it was
Un derstood that the hearings would be held about the first of May,
that Chairman Maybank later changed the date to about the fifteenth
°f May, and that when the bills were introduced Senator Robertson
decided to start the hearings on May 11 and to hold the testimony for
three
days only because of the limitation on the time during which
the matter could be considered-
Chairman McCabe added that this had
all occurred without regard to the scheduled meeting of the Council
because he
did not have the time of that meeting in mind and that,
Y event, he knew the views of the Council on the legislation
arid stated at the hearings what he thought those views would be.
President Brawn said that no member of the Council had accused Chairman McCabe of bad faith in the matter, and Mr. Fleming
stated that Senator Robertson had made it very clear in the hearings
that he had set the hearings and took full responsibility for their
tiXPLi
'
4t. Mr. Fleming also said that the American Bankers Association
had been notified of the hearings but that the Council had not been.
Chairman McCabe responded that the notices had been sent out
the
office of the Senate Banking and Currency Committee and he had
883
5/17/49
-4-
assumed that a notice had gone to the Federal Advisory Council as
well as to other interested parties.
President Brown stated that Mr. Potts, the member of the
Council from the Third Federal Reserve District, had attended the
separate meetings of the Council on May 15 and 16 but had found it
Ileeessary to return to Philadelphia yesterday for a meeting of the
b°ard of directors of his bank.
In accordance with the procedure established on December 3,
1946) the Federal Advisory Council submitted to the Board of Gover11°1's before this meeting a memorandum of the topics to be discussed
Illth the Board.
The statement of the Council with respect to each
°.f the topics was read by President Brown and the discussion at this
ic/int meeting was as follows:
3. Holding company legislation.
Does the Board of Governors propose to
secure introduction of bank holding company legislation in this session and attempt to obtain enactment; and if that
is not intended in this session, what
are the plans for bank holding company
legislation?
Bank holding company legislation has been the subject of joint discussions by the Board and the Council
on numerous occasions, but no legislation has been
enacted. The Council mould appreciate knowing what action the Board may be contemplating on such legislation.
President Brown stated that at least one member of the Counqi Was
being pressed for current information as to the status of
884
-5-
5/17/49
this legislation and that the Council would appreciate any information that the Board could give.
Chairman McCabe reviewed developments in connection with the
Proposed legislation during the past year and stated that some time
ago he had presented copies of a revised draft of the bill, in which
a number of substantial changes had been made, to the Secretary of
the Treasury, the Comptroller of the Currency, and the Chairman of
the Federal Deposit Insurance Corporation but had not yet received
their reactions.
He also said that the position of the Board, which
had been
the same from the beginning, was to push the bill along,
that he had talked with the Chairman of the Senate Banking and CurCommittee about getting the bill on the calendar, and that
eetercia,,Y Senator Robertson told him that consideration was being
to the question whether the bill could be taken up by the present session of Congress before it adjourned, and if the Board would
4114 the bill up, Senator Maybank or he would introduce it and his
Sub
committee would hold hearings on it which would give the legisla'4 Priority in the next session of Congress if it could not be
cltlieidered during the current session.
Mr. Odlin inquired whether the Board would offer the bill
stated reasons why he thought it desirable that the legislation
110
be expedited.
—6—
5/17/49
Chairman McCabe responded that it was the intention of the
Board to offer the legislation, that he proposed to tell the Treasury,
the Comptroller of the Currency, and the Chairman of the Federal DePosit Insurance Corporation of his conversation with Senator Robert8°11 and give them an opportunity to comment on the legislation, and
that the bill would be submitted to the Bureau of the Budget for
Comment in accordance with the established procedure after which it
/1 11.1d be presented to the Senate Banking and Currency Committee.
He
tade the further statement that he would like to have an expression
(4 the views of the Treasury, the Comptroller of the Currency, and
the Federal Deposit Insurance Corporation before the bill was sent
t0 the Congress but that if they did not comment on it promptly, it
Wolad
be sent to the Budget Bureau Inhere it was not expected there
1401
.
11d.
be any delay in its consideration.
4.
Deposit insurance coverage and assessment.
Recently there has been renewed discussion of the suggestion that the
Federal Deposit Insurance Corporation
assessment be reduced and insurance
coverage on deposits increased. In
a recent reply to a request from the
Senate Banking and Currency Committee
for a report on a bill to increase the
insurance coverage from $5,000 to *15,000,
the Board stated that this change should
not be considered without due regard
to the reduction or elimination of assessments and a revision of the basis
for such assessments, and that the
Board had instituted a careful study
S/17/)49
-7with a view to placing itself in a position to respond to further inquiries
that the Committee might -wish to make.
The Board would appreciate having the
views of the Council on the matters
that should be taken into account in
making such a study and the conclusions
that might be reached.
The Council is familiar with the discussions on
this matter which the Federal Deposit Insurance Corporation has had with a committee of the American Bankers
Association. Without being committed to any particular
formula, the Council favors in general an approach to
this subject on the basis of these discussions.
Specifically, the Council believes any legislation
should include the following points:
A.
No increase should be made in the
present insurance coverage of $5,000;
B.
The maximum assessment in any one
year should not exceed one-twelfth
of one per cent;
C.
Provision should be made for maintaining the integrity of the fund
by establishing a statutory formula
for an automatic scale of assessments, based on the previous years'
losses and expenses, to range from
no assessment, or an assessment of
a nominal amount, under present conditions, to a maximum of one-twelfth
of one per cent per annum.
In any study for tne purpose of determining the
adequacy of Federal Deposit Insurance Corporation funds
and the rate of assessments, the Council suggests the
importance of considering not only the possible losses
of the Federal Deposit Insurance Corporation but also
the effect on bank earnings, capital and dividends of
the steady drain of assessments. These assessments reduce the power of the individual bank to make its awn
provision for losses.
5/17/49
-8President Brown stated that the formula that had been dis-
cussed by the committee of the American Bankers Association and representatives of the Federal Deposit Insurance Corporation would
provide for a flexible assessment rate with a minimum of 1/96 of
°ne percent and a maximum of 1/12 of one percent and that the board
cf directors of the Federal Deposit Insurance Corporation would determine each year the amount of the assessment that would be needed
tcgether with other income to cover the Corporation's current losses
and expenses and provide a statutory addition to surplus of 25 mil1io“
_Lor the year.
He said that the Council would be glad to have
the conclusions that the Board's study might have led to and that
the members of the Council did not favor the so-called "Pittsburgh
Plare' under which the earnings of the Federal Reserve Banks would be
Paid to the Federal Deposit Insurance Corporation and assessments
17°111d be discontinued for banks that had paid such assessments for
15 *years.
In response to a comment by Chairman McCabe that the Board
It°111c1 be interested in knowing whether the members of the Council
wow,
-La favor a change in the assessment base which would take into
4cecunt the distinction between risk and nonrisk assets, President
8
°1411 ssid that it was felt that such a formula would not be accepta:)1e- regardless of its merits because it would give the greatest re"t the larger banks.
He added that with the Federal Deposit
49Lq
5/17/49
-9.-
Insurance Corporation funds at the level they will reach by the end
of this year, it was the feeling of the Council that the assessment
should be reduced by a statutory formula and not be left to the discretion of the Federal Deposit Insurance Corporation.
He made the
further statement that he understood that Chairman Hanl was opposed to
the formula which would differentiate between risk and nonrisk assets,
but it was believed he favored a formula along the lines outlined
above.
There was a discussion of the likelihood of legislation on
this
subject being introduced during the present session of the Congress
cillring which Chairman McCabe stated that the Board's study of the matter
was Progressing and that the Board would be prepared to express an
°Pinion after it had had an opportunity to consider the results of the
stAlqy.
In response to an inquiry from Mr. Fleming as to whether the
Oa
th
favored a reduction in the assessment, Chairman McCabe stated
the Board had taken the position that the question of an in-
ere
ase in deposit coverage should not be considered without due regard
to a.
reduction or elimination of the assessment and revision of the
4asessment base. Mr. Fleming commented that consideration on that
bttai
was not necessary for the reason that the policy of the Federal
bePc`ait, Insurance Corporation of coming to the assistance of insured
bkrlk
8 'which were in trouble amounted to a 100 per cent insurance of
5/17/49
-10-
depo5it3.
He also said that anything that the Board might do to
further consideration of the assessment problem would be very helpful.
In a further discussion, Mr. Fleming stated that while he had
taken the position in the past that the assessment should not be reduced, he now felt that the reserves of the Corporation were adequate
and that the continuation of the present assessment would be an unjustifiably heavy drain which, in the case of his own institution,
azounted to about $6 for each share of the banks stock.
The prob-
lem was important, he said, because, although the banks had had good
e 'lld-rigs in the past, that might not be the case in the future.
He
Inade the further statement that if the Board would like to have a
c()AY of the formula that was discussed by the committee of the Amen Bankers Association with the Federal Deposit Insurance Corpora, he would be glad to leave a copy with the Secretary of the
130.4r44
but that, for reasons -which he outlined, the memorandum should
be held in complete confidence for the information of the Board only.
The
members of the Board present stated that they would like to have
a ,
14Y of the formula and would keep it in confidence. Thereupon
'Fleming handed a copy to the Secretary of the Board with that
141'
Ilkler
standing.
Mr. Eccles stated that the assessment problem was a matter of
c)tlksiderable interest to the Board as well as the Federal Deposit InsurCorporation for the reason that by far the greatest part of the
890
5/17/49
-11-
annual assessment of more than $100,000,000 was paid by member banks
and had a substantial effect on their earnings, and that, therefore,
the whole question was related to the problem of rates on Government
s
ecurities and System open market policy.
S.
Legislation to permit conversion of national banks.
In a recent letter to the Chairman of the
Banking and Currency Committee of the House,
the Board took the position that action on
Bill H. R. 1161, a bill to provide for the
conversion or absorption of national banks
into state banks, should be deferred until
consideration had been given to the problem
of reserve requirements. Subsequently, Mr.
Brooks, past president of the State Bank
Division of the American Bankers Association,
wired the Board criticising that position.
Copies of his wire and the Board's reply are
attached. The Board would like to have the
comments of the Council on the Board's position.
The members of the Council are in unanimous agreement that national banks should have a right to convert
to state charters as easily as state banks can convert
to national charters. The fact that state nonmember
banks may have different reserve requirements than
national banks should not be ccnsidered in connection
With legislation authorizing such conversion. The
Council, therefore, feels that Congressional action on
Bill H. R. 1161 should be considered without reference
to reserve requirements.
Chairman McCabe stated that the Board was glad to have the
of the Council and would take them into consideration in any deeiaiclh that it might make in connection with the legislation. He also
sat,
'
that recently Messrs. Brumbaugh, Bell, Hospelhorn, and Rapport
5/17/49
-12-
of the National Association of State Bank Supervisors discussed the
matter with him and urged that the Board support the legislation.
President Brown stated that the information that had come to
him was to the effect that there was no active support of the bill in
Congress and that there was no chance of its passing during the
Present session.
6. Credit Controls.
Since the Council met on February 13-15, 1949,
the Board has relaxed the provisions of Regulation W on two occasions and has reduced margin
requirements from 75 per cent to 50 per cent.
The Board would welcome the comments of the
members of the Council on these actions and
their views as to what, if any, further steps
the Board or the Federal Open Market Committee
might take at this time to meet their responsibilities in the monetary and credit fields.
The Council is in agreement with the general direction
of the action which the Board has taken in relaxing the
provisions of Regulation W, but calls attention to the fact
that the Board's action has not yet gone as far in some
respects as the Council recommended in February. At that
time the Council stated in its written memorandum to the
Board,
"In connection with household furnishings and
appliances, the Council favors eliminating
these articles from control inasmuch as they
are now, with minor exceptions, in ample
supply."
In view of the current economic trend, the Council feels even
more strongly than it did in February regarding the elimination of articles from control, and it now recommends that all
controls under Regulation 7; be dropped. As stated to the
Senate Committee on Banking and Currency, the Council favors
892
5/17/49
-13the termination of the Board's power over consumer credit.
The Council agrees with and approves the various
steps the Board has taken in reducing margin requirements.
The Council believes that under present conditions
bank reserves now required are unnecessarily high, and
it recommends that the Board make further substantial
reductions in required reserves. Decreases in bank reserve requirements increase bank lending power and encourage banks to proceed with more confidence in their
lending and investing policies. They also enable banks
to maintain their earnings, strengthen their ability to
absorb losses, and strengthen their capital funds. The
Council has noted with approval the action of the Open
Market Committee in supplying securities to the market,
and thus maintaining orderly conditions, when reserve
requirements were recently reduced.
The Council continues to feel that changes in reserve requirements are not a suitable method of current
credit control, but should be used only rarely for adjustment to basic changes in the monetary situation. Changes
in reserve requirements make difficult the planning of
banking operations.
There now seem to us to have been basic changes in
the situation justifying lower required reserves than the
twenty-six, twenty and fourteen per cent maximums of the
Banking Act of 1935. It would seem wise to lower requirements to a level which can be maintained over a considerable period.
Chairman McCabe reviewed the attitude of the automobile manu-
teturers, finance companies, and others with respect to the continuati0
4 of Regulation 11, Consumer Instalment Credit, and stated unat there
17'48 a wide difference of opinion on the subject.
Mr. Vardaman observed that the registrants who favored con-
ion of the Regulation did so primarily for the reason that they
5/17/49
would like to have it retained as a means of regulating trade prac—
tices rather than as a selective credit control.
He said that the
Act, authorizing the procedure under Regulation IN, stated, in effect,
that it was for the purpose of restraining inflation, and that no
Inention was made of regulating trade practices; and that if the Board
kept the regulation in effect solely as a trade practice control, the
/3°ard would then be usurping the legislative prerogative of the
C°11gres5; and for that reason alone, if for no other, he was opposed
to the continuation of the regulation after its need as a credit con—
trol
had expired.
by
This point was discussed together with a comment
Odlin that the maximum terms prescribed by the Regulation
tended to become minimums and to force more liberal credit terms than
71°111d otherwise be the case.
Chairman McCabe asked for the views of the Council as to the
efeete of future reductions in reserve requirements on interest rates
6114 Oh the Government securities market.
Mr. Burgess expressed the thought that the effect would depend
IIP°4 T reasury policy with respect to Treasury financing and that
barlk
s with excess reserves would be inclined to purchase intermediate
ter,, .
gi Issues which were in short supply in the market. He stated that
the
re were three things that should be done in connection with a re—
chletin
-n in reserve requirements: (1) The System open market account
sholo
'd supply securities to absorb released reserve funds as was very
‘,1
5/17/49
effectively and smoothly done in connection with the recent reduction,
(2) Increase the supply of issues in the areas in which the Federal
Reserve Banks do not have large holdings (this, he said, was the
'
lecommendation of the American Bankers Association Committee on Government Financing in connection with the June refunding), and (3)
In connection with the savings bond drive, make F and G bonds available for investment by banks as was done last year.
There was a discussion of the possible effects on interest
rates of further reductions in reserve requirements in the event the
last two steps suggested by Mr. Burgess were not taken, and Chairman
liceabe inquired whether the members of the Council had noticed any
change in interest rates since the recent reduction in reserve requirements.
The responding comments were to the effect that there
had been some softening in rates.
Mr. Eccles discussed the reasons that might be advanced for
krther reductions in reserve requirements and the likelihood of
beliks
receiving additional reserve funds from the repayment of bank
-", the purchase of investment obligations by other lenders, newly
nlitlecl gold, and a return flow of currency.
He stated that if funds
te
leased by a reduction in reserve requirements were put into shortte)
,„
-"securities, there might be no problem but that many banks would
o into longer term issues in order to maintain earnings which would
rets„
4't in declining yields on these issues and in an extremely seri0114
Problem for the banks.
f:$
-16-
5/17/49
President Brown concurred that bank earnings would decline
and that since the recent reduction in reserves, banks were showing
a
greater willingness to make long-term loans than they were six
Months ago which he said might be a good thing as a means of slowing
down the rate of decline.
Mr. Vardaman inquired what the effects would be of the policy,
which he understood that the Comptroller of the Currency and the Fed641 Deposit Insurance Corporation were following in connection with
bank examinations, of requiring a capital ratio of six to one in re14ti0n to risk assets.
Mr. Congdon said that he had discussed this matter yesterday
/lita Mr. Robertson, Deputy Comptroller of the Currency, who stated
that the office had no such policy and that a letter probably would
be issued to clarify the situation.
Mr. Woods indicated that examinations of two small banks in
*itch he was interested indicated that some such policy was being
1'45110/fed.
Some of the other members of the Council indicated that
the
Y had not heard anything about the matter.
Mr. Eccles discussed how the special reserve plan, which was,
Illlegested by the Board in 1947, would affect the present situation and
Paltioularly the short-term rates on Government securities.
He ex-
the opinion that the problem should be approached on a broader
—44 than merely as a reduction in reserve requirements.
Ur. Burgess expressed the thought that it might be wise at
11011,
'Point to make some issues of restricted Government securities
896
5/17/49
-17-
available for bank investment.
This comment was followed by a gen-
eral discussion of the changed economic situation and the changes
that might be made in Treasury financing policies and the open market
Policies of the System.
There WAS also discussion of the possible
effects of greater flexibility in the short-term rates.
Members of
the Council indicated that they felt the Treasury had made a mistake
in not issuing an intermediate security in connection with the June
rernnding, and they expressed the hope that action would be taken
later to supply that area of the market.
7. Treasury financi.u.
Consideration of the refunding of maturing Government obligations, having in
mind the need of the banking system for
obligations of medium term and the allied
question of removal of restrictions against
purchase by banks which now apply to certain of the outstanding Government obligations.
In connection with the refunding of maturing Government obligations, the Council recommends the following
action:
A.
The issuance of notes or bonds of
intermediate maturities to meet a
shortage of such securities in the
market;
B.
The shifting of a portion of the Federal debt to longer maturities. Even
a '67/1 72 maturity is not now long-term.
The policy of increasing the amount of
the debt payable on demand or in shortterm maturities may create a serious
problem at a later date.
The Council is not prepared to recommend at this
time the removal of restrictions applying to those Government securities which are now ineligible for purchase
by commercial banks.
897
5/17/49
-18Chairman McCabe stated that a meeting of the executive com-
tittee of the Federal Open Market Committee was scheduled for June 3,
1949, at which the views of the Council members on this point could
be considered.
There was a discussion of what the Council meant by the statement that a 67/72 maturity is not now a, long-term and whether the
statement
was correct that increasing the amount of the debt payable
°II demand or in short-term maturities might create a serious problem for the future.
Mr. Eccles questioned whether a 67/72 issue was
nc't still long-term in so far as investment by banks
was
concerned.
Re inquired whether the statement was intended to apply to bank eligible issues and stated reasons why long-term eligible issues should
ri°t be put out at this time.
Mr. Atwood stated that the question of eligibility had not
en discussed by the Council in this connection, and further
om-
rtients indicated that there was no agreement between the members of
the
Council on this point.
Mr. Eccles also stated that increasing the volume of shortwould not present any problems from the standpoint of raisiNth
-e funds necessary to finance the Government but that inasmuch
a8enort—term issues probably would be taken mostly by the banks,
that
form of financing might have inflationary tendencies.
CI{
4.75.4.dk,
5/17/49
-19-
8. Business and credit conditions.
It would be helpful to the Board if
each member of the Council would be
prepared at the joint meeting to give
a brief summary of the current and
prospective business and credit conditions in his Federal Reserve District.
Each member of the Council will be pleased to make
a brief oral statement regarding the current and prospective business and credit conditions in his Federal
Reserve District.
Each member of the Council made a brief statement of current
bil8ineSS conditions in his district which indicated that although
the situation was "spotty" in some areas, business activity throughout the
country continued to decline in almost all lines, that business
Pr°fits were being affected adversely, that crops would be large and
74)111d create price and storage problems, but that there were some
hrlEht spots in the picture, and while it was expected that a gradual
decline would continue, it was thought, at least in some districts,
that it would find a floor before going too far.
9. Date for the next meeting of the Council. President
stated that the next meeting of the Council ordinarily would
beheld on September 18-20, 1949, and that unless the Board had some
c'bjection, it would be set for those dates.
The members of the Board
irldicated that a meeting at that time would be agreeable to them.
Thereupon the meeting adjourned.
@FedFRASER