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A meeting of the Board of Governors of the Federal Reserve sYstem with the Presidents of the Federal Reserve Banks was held in the °Ifices of the Board of Governors in Washington on Friday, May 18, 1951, at 10 :35 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Eccles Szymczak Evans Norton Powell Mr. Carpenter, Secretary Messrs. Erickson, Sproul, Williams, Gidney, Leach, Bryan, Young, Johns, Peyton, Leedy, Gilbert, and Earhart, Presidents of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco, respectively. Mr. Clement Van Nice, Secretary of the Conference of Presidents Laused legislation with regard to capit2L_Eaaalzements 42,r_Zadera1 Reserve membership. The Conference considered the draft of a proposed bill with respect to capital requirements ,nd other matters which was sent by the Board of Governors to each of the Reserve Banks on April 24, 1951, along with explanatory statement, a covering letter, and other material. Without attempting to pass on the merits of the other sections Of the proposed bill, the Conference agreed that the sections vering capital requirements for Federal Reserve membership anç capital requirements for the establishment of branches Td:ght have greaber chance of favorable Congressional action they were divorced from the other parts of the bill. It ;as felt by the Conference that the proposal for changes in :serve requirements for member banks in reserve cities and central reserve cities and the proposal for permitting the 0:,?irculation without penalty of Federal Reserve notes of aner Reserve Banks were to a certain extent controversial 4,r that, since these proposals might invite opposition to '"e entire bill they might better be eliminated from this r 5/18/53. -2bill and perhaps made the subject of separate legislation. A question was also raised by some of the Presidents concerning that provision of the proposed bill which would require that in no event could a bank be admitted to Federal Reserve membership unless it had first received approval for deposit insurance by the Federal Deposit Insurance Corporation. It was suggested that a discussion of the reasons for including this provision in the proposed bill would be appreciated. It was decided to list this topic for discussion at the Joint meeting of the Board of Governors and the Presidents in order that there might be an exchange of views concerning both these suggestions. In commenting on the Presidents' statement, Mr. Powell said that Informal advice had been received from the Legal Division of the Office of the Comptroller of the Currency that that Office would support the 134 1, ' 4-1--L in its present form. He also said that the Comptroller himwas not greatly concerned about the provisions of the bill reto reserve requirements of member banks and the issuance of Nierkl Reserve notes but that he was very much in favor of the proposed keildlnent which would liberalize the capital requirements for the estab41/41ent of branches by national banks and would support the bill as Nsently written. Mr. Powell also said that no opinion had been ex- on the proposed legislation by the Chairman of the Federal DeIkeit In surance Corporation and he did not know whether that organi44°11 wollid support the bill, but that the National Association of Sill)erills°rs of State Banks had passed a resolution endorsing the principle liberalizing the capital requirements for the establishment of : : .11(41" bY State member banks and that he had received a letter from Lyon. 1.3 'resident of the Association, stating that it favored the 5/18/51 -3- legislation proposed by the Board but suggested the addition of a provision which would make it clear that the requirements for the establishnlont of branches by national and State member banks would not be 1C4er than established by State law for State nonmember banks. Mr. 44'1°11 also outlined the reasons for the inclusion in the bill of the Pr°visions relating to reserve requirements and the issuance of Federal Reserve notes and stated that these provisions were of secondary 141Porf -ance and could be dropped from the bill if it was felt that they were °I' such a controversial character as to endanger favorable con'atIon of that part of the bill relating to capital requirements. Mr. Peyton stated that, while the Presidents were entirely triervi, v4:Y. to the bill in its present form, it was felt by some, but not kla 04..k the Presidents, that because of the opposition that might be to the provisions relating to reserve requirements and Federal e notes it would be preferable if they were included in a separate Mr. Leedy suggested that before the provision with respect to ede ral Reserve notes became effective a plan should be worked out tor t, al location of Federal Reserve notes issued by the Federal Reel*Ire Banks. 4th respect to the requirement in the draft of bill that 4° State 1. , ) 1, 'dank could become a member of the System until it was approved the?e, ueral Deposit Insurance Corporation for deposit insurance, °'14111 explained that it was felt this provision should remove at S/18/51 -)4- least some of the objection of the Federal Deposit Insurance Corporation to the bill because it would give the Corporation authority to Pass on all State banks admitted to deposit insurance, which is a right t4t it should have both with respect to new banks and banks which halm been in existence for SOMB time but the deposits of which had ibt Previously been insured. There should be no objection on the Part of the Federal Deposit Insurance Corporation, Mr. Powell said, to thp - admission to membership in the System of State banks which have Illalified for insurance* In response to Mr. Powellts request for the views of the ents on this provision of the bill, Mr. Earhart referred to the 4et, th "at at the present time a nonmember noninsured bank may make -,vlon for admission to membership in the System and if it is ad114-tteri lLs deposits are automatically insured but that, under the proce(kr e Proposed in the bill, the bank would first have to make appliati°11 to the Federal Deposit Insurance Corporation for insurance and wheri approved would have to file another application for membership in the 3r8tem3 and that this arrangement might result in the Federal DeP4it Insurance Corporation prescribing conditions of insurance which the Fed '4eral Reserve System had attempted to get away from in connection '"lth w achnission of State banks to membership. He made it clear that he 40t alacialici-uggesting that the Federal Reserve System would have lower r 8 for admission than the Federal Deposit Insurance Corporation atiler that some arrangement should be worked out so that it would R2 5/18/51 -5- rlot be necessary for the applying bank to file two separate applica- tions„. Some of the Presidents concurred in Mr. Earhart's statement /1111e others felt that the provision in the draft of bill was a proper °Ile and that the proposed arrangement did not differ greatly in eft"t from the procedure now being followed by the Federal Reserve Banks in diecussing with representatives of the Federal Deposit Insurance 53q0ration applications for membership in the System before action ietaken by the Federal Reserve Banks. 2. Hearings by the Patman Subcommittee of the Joint ComElittee on the Economic Report. It is understoo777707-Conference that the Board of Governors has been asked to submit a large amount of historical and factual material to the Patman Subcommittee of the Joint Committee on the Economic Report for its information and that, although no date has as yet been set for the Subcommittee's hearings, there is a possibility that they may commence in June. In recognition of the possibility that the Subcommittee may also wish to obtain information on short notice from the various Reserve Banks in connection with its hearings, the Presidents would like to be informed of the Board's °Pinion concerning the course and direction of the Sub! °mmittee's activities and of the possible character of the information which the Banks may be called upon to f urnish. C hairman Martin stated that while there had been some dis4311 Of the plans of the subcommittee for its study and of the ile411-11gs to be held in connection with the study, no definite plans 4(1 beell announced and the Board had no information as to when the 11:41'illes would be held or what additional information might be requested. 41441d that the Board's staff had had the assistance of the staff of tftc) the Federal Reserve Banks in preparing the information being -6submitted by the staff to the staff of the subcommittee and that if it Should be desirable to do so the staffs of other Reserve Banks would be called on for assistance. 3. Al2guacy of reserves for contingencies. The Conference considered the suggestion made by one of the Reserve Banks to the Board of Governors and placed on the Conference agenda by the Board that reserves for contingencies of the Reserve Banks be further increased in view of the recent change in open market policy and subsequent market developments. A memorandum, dated April 26, 1951, prepared by the Board's staff and covering background material on this question was noted. It was the general consensus of the Conference that, although the Banks would favor increasing the amount of the present deduction in their payments to the Treasury Department, such withheld funds should be transferred to the Banks' surplus accounts to become a fundamental part of the Banks' permanent capital reserves rather than being allocated to the reserves for contingencies account. The Presidents would appreciate an expression of opinion from the Board concerning this proposal. Mr. Peyton stated that this suggestion was not prompted by "eeling that additional Federal Reserve Bank capital was essential bit l'ather by a consensus on the part of the Presidents' Conference that the public associated the amount of a bank's capital with its 114bilities and that the ratio of capital to liabilities had significance. Ileref°re, he said, the Presidents felt it would be desirable to build 14) the capital of the banks as a means of building confidence in the tl'"gth of the banking system and that the increase should be a permanent ' ' 141-tion to surplus rather than to reserves for contingencies. Chairman Martin stated that the Board had discussed the mat- 414 questioned whether any action should be taken at this time to t he existing arrangement under which 90 per cent of the earnings 5/18/51 -7- of the Federal Reserve Banks are paid to the Treasury and that this was particularly true at the present time when the decline in the C*vernment securities market and the depreciation in the System's headings of Government securities were the result of the System's cl'edit policies. Mr. Peyton inquired whether the $80 million of reserves for ec4Itiligencies which had already been established could be transferred toe urPlus. It was suggested that such action could not be taken fi'tillout departing from the existing arrangement but that losses could be charged against the reserves if that should be found desirable. Ilete rence was also made to the fact that it was unlikely that losses °no year would be so large that they could not be covered by tarti4 4.11gs and it was suggested that the problem would be entirely difterient If • the earnings of the System were at a substantially lower 111.01.• Mr. Sproul suggested that because of the fact that losses in e Year probably would be covered by earnings there was little tke).31, 4)0d that the reserves for contingencies would be needed for that ' Dtti,i,mse and that any action taken should be in the form of a permanent kic114)11 to the capital funds of the banks. Some of the members of the Board questioned whether any action thia Ilq0.nd should be taken at this time. 4. Promotion of increased savillp bond sales. It was Pgg7Sted that in view of the fiiendly relationship oetween the Treasury and the Federal Reserve System 5/18/51 —8— proposals suggesting changes in the Treasury's savings bond program might meet with favor at the present time. The Presidents have listed this topic for discussion in order that they may obtain the Board's views concerning the value of further exploration of the subject with the Treasury at this time. Mr. Peyton stated that this suggestion of the Presidents WaS based on the feeling of a majority that the savings bond campaign 17(3uld meet a very considerable amount of resistance unless the bonds CotIld be made more attractive and that perhaps the System could be heipf to the Treasury in formulating plans which would increase sales. During a discussion of ways in which savings bonds could be more attractive, Chairman Martin expressed the view that it was toO late, at least for this year, to reopen the question of the in— terest rate. He also questioned whether the Treasury would be willing to or4 "Lglnate the idea of exemption of earnings from savings bonds from illee'ine taxes. Question was also raised whether, in view of the position of the G°Irernment with respect to tax exemption of income from securities, 414°41d be desirable to suggest an exemption for the income from salt148 bonds. Mr. Norton suggested ways in which, by adopting sales techrliclues used by advertising concerns, the securities could be made t4"e attractive and the appeal of savings bond campaigns could be made 141re effective. Mr° Sproul referred to suggestions that had been made to the TN -4e1117 by the System with respect to steps that might be taken to 5/1.8/51 —9— illerease the sales of savings bonds. He concurred in Chairman Martin's \dew that there was little likelihood that substantial changes could be brought about in the program at this time but suggested that the tem should continue to study the matter, both from the standpoint °f the terms of the securities and the methods and organization used in their sale, so that it would be prepared to make further suggestions at the appropriate time. There was general agreement with this view. 5. 1211222_2roposals concernina reserve re uirements. At the joint meeting of the Board and the Presidents on March 9, 1951, there was a discussion of possible legislatIon to provide increased authority over bank reserve requirements and particularly of the proposed loan expansion reserve plan. The Presidents agreed that they would appreciate being informed of any developments which may have place since the March meeting concerning proposals or changes in reserve requirements. During the course of the meeting there were distributed among the 10 'residents confidential copies of the report of the four-man Wilson ittee appointed by the President of the United States on February 26, 195 1, to stutr waYs and means to provide the necessary restraint on P174ate "edit expansion and at the same time make it possible to stability in the Government securities market. The report rtillmended amonp other things that as an emergency measure legislation be ()Ilght, to empower Federal Reserve authorities for a limited period to 1111Poa e thori akAditional reserve requirements, either by increasing the auzeci Percentages or in some other appropriate way that would have a „1,411111141 adverse effect on the Government securities market. There were '-kso stributed copies of a memorandum dated May 11, 1951, from Mr. „'' 5/18/51 -10- General Counsel, transmitting the latest draft of a bill on the loan expansion reserve plan. Chairman Martin stated that inasmuch as the Board had a com- rf lent to present shortly a draft of proposed legislation on additional authority over bank reserves, it would be very glad to have any comments that the P residentemight wish to make on the matter. *. Bryan expressed the view that any bill which provided tor abase period from which additional required reserves would be calc ulated would meet with such opposition from the banks that it would have „ An chance of approval. In response to Mr. Bryan's inquiry, Chair14411 Marti-n stated that the Board would welcome any written comments th 't the Presidents might wish to make after they had had an opportunity t0studY the draft of bill but that the Board was under obligation to 814it a recommendation promptly and might not be able to wait for itten comments from the Federal Reserve Banks. There was a discussion, in the light of comments made by Mr. SzYMezak, of the possibility of legislation in the present session of eNress and why, in the event of further pressure for expansion of bank e4clit, additional authority over bank reserves might be necessary. For that reason it was felt by the Board that legislation should be recommended IP° the Congress and the decision left to the Congress whether any legis- lat3.°11 Would be approved. The view was also expressed by some of the 44r1ber of the Board that unless the need for legislation became clearer 1 the /nonths ahead there was little likelihood that any bill would be 414)1,011 „ . 5/15/51 -11There was a discussion of the form legislation might take and it was made clear that the draft of bill attached to Mr. Vest's 1118111"andum had not been passed on by the Board and that the Board had t reached a decision as to the form that its recommendation would take• This concluded the matters submitted by the Presidents for consi deration at this meeting. Volunta credit restraint program. Mr. Peyton stated that the ?residents would be glad to have any comments that Mr. Powell might e to make with respect to the voluntary credit restraint program andparticularly the present thinking regarding the creation of addittOfl subcommittees. 141% Powell responded that the voluntary credit restraint com4tLttee, which had been expanded to include representatives from savings aild 1°8.11 associations and mutual savings banks, felt that the program 8110111a not be over-organized but that there should be enough subcomMittee 8 8° that the lenders could present their problems without diftlelat a fl Y the committees could meet often enough to give prompt all8were t questions presented to them. He referred to the organization Otbarilo 'flg subcommittees in the five Federal Reserve Bank and branch qties the Twelfth Federal Reserve District, to a request that a balkng el4a subcommittee be organized in Iowa which would not be in a FedRes ktrat el‘ve Bank or branch city and which under the requirements of the ta would not have to have a representative of a Federal Reserve as n member of the subcommittee, and to the probability that a 5/18/5i -12- barking subcommittee would be organized in Detroit to cover at least Part of the State of Michigan. He added that if necessary similar com- rTittees could be organized in other areas. He also referred to the letter recently sent out by the Ameri can Bankers Association over the signature of the President to a-11 banks in the United States suggesting that they ask the Voluntary Credit Restraint Committee for sufficient copies of the program to 8end ,copy to each of their commercial customers. In the first few claY83 he said, the responses to that letter had totaled 120 requests e0r 22)000 copies of the program, most of the requests being from batIk3 in small communities which indicated that the small town banker was behind the program. He made the further statement that the American Bankers A ssociation also had prepared a speech that might be used by ilarikeins when speaking to civic clubs and on other occasions and that 62 recillests for copies of the talk had been received largely from banks i4 small communities. Nhile he did not know how effective these activities would be, he felt they would at least be educational and in that e°1nnlittee way. He called attention to the comments in the four- report referred to above and the support given by that re13°1't to the Program and to the letter sent by Mr. Wilson, Director c't the (3ffice of Defense Mobilization, to governors of States and mayors Pto . kore lnelPal cities suggesting that municipal issues of $1 million or -e ecreened by He also commented that the the local subcommittees re 1)c)rt took the position that Federal Governmentloan and loan guarantee 5/18/51 -13- agencies should follow policies consistent with those of comparable late lending institutions as set forth in the program so that the 1111111tarY credit restraint program would not be undermined. In that c<)1111ection, he stated that all letters that had been received regarding eaSe s where loans had been made by Government agencies after they had been refused by financial institutions as not conforming to the Illciples of the voluntary credit restraint program, were being sent tcthe Council of Economic Advisers for consideration by the special canirtlittee appointed by the President to study and report on the policies qGovernment lending agencies. He also outlined the care with which the voluntary Credit Restraint Committee issued its periodic bulletins and „ 'eferred to the problem confronting the Committee at the present ti/rle 6n respect to the offering of Canadian municipal securities in this country. Mr. Gidney inquired whether the representatives of the Federal 114"ve Banks should be used for the purpose of explaining the program ilitheir respective districts and Mr. Powell replied that there should be 4° objection .0 T, that if it were emphasized that the program was \'°1Untary and was not a Federal Reserve program. Atter some further discussion of the program, the meeting
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