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741 A meeting of the Board of Governors of the Federal Reserve Sys— tem wi,, T41 the Federal Advisory Council was held in the offices of the BOayyi Of Governors in Washington, on Monday, May 20, 1946, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Eccles, Chairman Szymczak Draper Evans Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Hammond, Assistant Secretary Thurston, Assistant to the Chairman Paulger, Director of the Division of Examinations Thomas, Director of the Division of Research and Statistics Vest, General Counsel Parry, Director of the Division of Security Loans Bethea, Director of the Division of Administrative Services Horbett, Assistant Director of the Division of Bank Operations Townsend, Assistant General Counsel Young, Assistant Director of the Division of Research and Statistics Messrs. Traphagen, McCoy, Wiggins, Brown, Penick, Baird, Bradshaw, Winton, and Odlin, members of the Federal Advisory Council, from the Second, Fourth, Fifth, Seventh, Eighth, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively, Messrs. Bucklin, Loeb, and Robinson, alternates for Messrs. Spencer, Williams, and Strickland, from the First, Third, and Sixth Federal Reserve Districts, respectively. A8 Parciatia + Stated in the minutes of the meeting on May 8, 1946, Mr. 4 Na8 absent on official business. 141'i Drown stated that in response to the request contained 742 5/20/46 -2- the Board,s letter of May 71 19461 the Federal Advisory Council at its separate meeting yesterday gave considerable time to 4 Clia CUSSiOn of a possible formula or set of principles that might be used in the designation of central reserve and reserve cities and that the Council came to the same conclusion as was expressed at the meeting of the executive committee with the Board of Gov- "lore in April that, while there might not be much logic in the Pl'eserit designations, the proposal to designate as reserve cities °44 those cities in which a Federal Reserve Bank or branch was 1°Cated was even more illogical; and that the test whether a city eholad be a reserve city was the character of business done by the b that is, whether they held a substantial amount of c°1'reePondent bank deposits and commercial deposits from outside the trade area in which the banks were located. He added that in the opinion of the Council the proper course for the Board to pur811e Was to perm't the existing situation to continue and to terktnate the designation of a reserve city only at the request of the banks in that city. If in a few cases such as Grand Rapids, 4411iftl, the banks were divided in their opinion as to what should be done, the Board Should analyze the character of the deposits °t the banks and decide the action that should be taken in the lightof that Mr. B ro w n went o n to say that at analysis. 743 5/20/46/ -3- separate meeting the Council had attempted to write a formula or set of principles that might be used by the Board but had come to the conclusion that, because of varying conditions in different parts of the United States, it was difficult if not impossible to find a solution that could be apPlied satisfactorily in all sections of the country, that there were several cities in the United States which were morain,-.-wportant as trade centers than some of the cities in lihich branches of the Federal Reserve Banks were located, and that the proposal to limit reserve city designations to 4deral Reserve Bank and branch cities "made no sense at all." Re felt that the only explanation that had been given for such Pl'qlosal was that several years ago the advantage which a had by being able to discount paper and obtain currency arld oiui more quickly when it was located in a Federal Reserve ilarlk or branch city than was otherwise the case justified the l'ecl4irement that such banks maintain higher reserves, but that the A; -4-rPlane service now available and the ability of a bank tO borrow on Government securities held in safekeeping at a 4deral Reserve Bank had practically eliminated that advantage. Re made the further comment that the Board now realized how etl\)11g4 the banks that would be affected by the Board's profelt about the matter, and that, since it was not a cllie8tion of great importance, the Council could not understand 44 5/20/46 -4- whY the Board believed it necessary or desirable to disturb the e: "dhg situation at this time. Chairman Eccles responded that the Board did not feel that it was a satisfactory solution to leave to the decision of nielliber banks in a particular city whether that city would or w°111d not be designated as a reserve city, and that as an agency the Government charged with responsibility in the matter the 13(lard should have some basis upon which reserve city designations 1401.11d be determined. He also repeated the statement previously laads that the argwnent that banks with large amounts of bank and eemmercial deposits should be required to carry higher reserves wae not sound because the necessary protection for such deposits was. 'rnIshed by access to the discount or open market facilities °t the Federal Reserve Banks and not by higher reserve requirements which °n1Y served to immobilize a larger part of the bank's funds. Mr. Traphagen said that the termination of reserve city des ignation of cities which had been reserve cities for a number Of ye al's would work hardship on the banks in such cities as they W°41d le'se accounts which they had acquired because of their reserve City status. Chairman Eccles questioned whether this would be the and stated that there were a number of cities in the United hatn -8 which were not reserve cities in which correspondent bank 745 5/20/46 -5- snd commercial deposits from outside the cities' trade areas were much larger than in banks in reserve cities, and that the determining factor was not whether the city was a reserve city but the nature of the business done in the area. He made the further observation that in the past member banks had felt that there Iva _ a 3 decided advantage in being located in a Federal Reserve Bank or branch city because it gave them the privilege of immediate access to the currency and coin collection, and discount facilities of the Federal Reserve Banks and that the Board felt there was more justification for limiting reserve cities to the cities in which Federal Reserve Banks and branches were located than in any other proposal that had been advanced, Particularly since it would reduce the required reserves of hallk3 in cities where the designation was discontinued and would work no hardship on them. Mr. Brown stated that, although the establishment of a ederal Reserve branch might have been an indication of the urnPertance of the city when the branch was established, conditions 44 c hanged to such an extent that there were several cities in the United States that were much more important as trade centers than some Federal Reserve branch cities and that to limit desigriations to Federal Reserve Bank and branch cities was not a Pl'oPer recognition of the importance of other cities. 746 5/20/46 —6— Mr. Bradshaw expressed the opinion that when a city had been a reserve city for a number of years and the business fits banks had been built on that basis, the discontinuance °f the reserve city status, particularly at the present time *eri it was expected that there would be a substantial shift of clePosits because of readjustments following the war, would (144 serve to accentuate that shift and banks in those cities mfolad suffer as a result. Chairman Eccles stated that in his opinion the law 811°1-11e1 be changed at the first opportunity to provide for a 111114rm reserve requirement for all banks. Mr. Brown agreed that +, ' 41e present law was unsatisfactory but felt that it would be 8°Ille time before satisfactory legislation could be enacted, arldthat inasmuch as changes in present reserve city designa— ti°48 was not an important matter action to change the existing qtalation should not be taken. During the course of a discussion, members of the 3-1- referred again to their feeling that the discontinuance re serve city status would place banks affected at a competi— tive „ ulsadvantage which would result in the loss of deposits and, regarrn Gss of the fact that higher reserves were not a protection Of to "4q:10sitor s, the argument that they were would be used to at— tract deposits from banks in the cities where the reserve city 7 7 5/20/46 City -7- designation was terminated. Mr. Winton said that the situation would be different if a citY like Fort Worth or Tulsa had never been designated as a reserve city, but having had the designation and the banks aV:ix—.6 built their business on the strength of the designation, there Was no question but that they would suffer a loss of deP°sit8 if the designation were taken away. He also asked why the 11°&rd felt that the matter was important at this time and Chairman Eccles responded that time for action with respect to matters of this kind never seemed to be appropriate. Mr. Winton said he cad lict went to leave the impression that he felt the time would " 4 'be appropriate to discontinue the designation of Fort Worth as a reserve city but he would like to know why the Board proPosed action just at this time. Mr. Szymczak said that the matter had been under consideration for a long time and that it was not a new proposal. Mr. Winton suggested that, inasmuch as it was Agreed that 4„, '4e Present designations were illogical but that the probleta -nvolved broader questions which should be handled by legOiland since action to change the designations was not 1111Po rtant at the present time, the situation might be left 1114cmt Change. There was some further discussion of the matter 1kt no flew points were presented. 5/20/'46. —8— Mr. Brown referred to the draft of bank holding company bill which had been sent by the Board to members of the Council urlder date of May 1, 1946, and stated that the Council was gen— eralaY in agreement with the proposed bill realizing that some legislative action was necessary to enable the Board to correct the uns atisfactory expansion policies followed by the large bank holm--4"g company on the west coast, and that, while the draft had (144e defects, they could be ironed out in conferences between attorneys for the Board and responsible bank holding companies With°11t altering the fundamental purposes for which the draft wa8 drawn- The Council did not know, he said, what the legisla— tive situation was with respect to the bill or whether the other Federz, bank supervisory agencies favored it or whether they still Plieferred a bill containing a death sentence. He added that most °t the members of the Council considered a death sentence bill as liritcrtunate sirce a nwnber of bank holding companies could not be 'lLt-Lciated at the present time without adversely affecting large eeetions of the United States. During Ur. Brown's statement, Mr. Draper left the meeting. Chairman Eccles reviewed the reasons for the preparation Of the }A li in the form now proposed by the Board and the situa— tions Which the bill was designed to meet and stated that he did 40t think that the question of a death sentence was any longer an tealle at the Treasury but that as he understood it the Federal De— 749 5/20/46 —9— P°8it Insurance Corporation still favored a death sentence bill. During the ensuing discussion it was stated that the IndePendent Bankers Association had formally endorsed the bill in Principle and were undertaking to rally the support of inbanks for the legislation. Chairman Eccles stated that, because of other pressing legislation he did not think there was any likelihood that the 411 would be taken up by Congress this year, and it was his vien that hearings should not be held until just before the legislation could be considered by Congress for the reason that, if hearings were held and the bill were reported out by the Con- gressi°1181 committees and no action were taken, the situation uld be more unsatisfactory than if no hearings were held. In response to an inquiry from Mr. Bucklin whether the r„ -""Pendent Bankers Association preferred a death sentence, Chairraan Eccles said that they realized they could not get a cleath eentence and preferred the bill proposed by the Board as aX1 alternatiVe, and that a bill which would freeze the existing aituation was a possible compromise. had beea Pederal He also said that the bill discussed with representatives of the Treasury, the Deposit Insurance Corporation and Department of Justice, that the Department of Justice favored the bill, that the staff t'ePresentatives of the Treasury and the Federal Deposit Insurance 750 5/20/46/ Corlration were not in favor of giving the Board any additional discretion under the law, but that the Treasury would favor the bill if the administration of the statute were placed in that DePartment and the Federal Deposit Insurance Corporation would feel the same way if it were given authority to administer the el ' d law. SC1Sclision Chairman Eccles added that after a long period of with representatives of the Treasury and the Federal Deposit Insurance Corporation without agreement on a bill, the Board decided to present the bill to Congress but that before doing so he talked with Secretary of the Treasury Vinson who haci no objection to the introduction of the bill but reserved the right to support or oppose it in any hearings that might be held. Mr. Odlin expressed the opinion that many independent barlicers on the west coast would favor a death sentence or freezing bill, but general, and that he did not think that attitude was that the bill proposed by the Board would be generally satisfactory in that district. After a discussion of certain provisions of the bill Ch"aan Eccles stated that the Board would be glad to have its 4tt0 111eY8 discuss with attorneys for banks or bank holding companies 44Y changes in the bill which it was felt would be desirable to ---'ulate objectionable features. e 5/20/46/ -11Turning to Government financing policy and System credit Policies, Mr. Brown said that the Council felt that the Board had done an excellent job in getting the Treasury to use lts excess balances to retire maturing issues of Government securities. He said that this step, together with the elimin- ation of the preferential discount rate, was very helpful and that it would be desirable to go further in the same direction. Re made the additional statement that there had been considerable ccmfusion in connection with the Treasury's announcement that it had authorized commercial banks to hold, for trading purposes, restr. icted issues in an amount not to exceed 1 per cent of dellaxid dePosits or 4500,000 whichever was less. He said that a be number of banks in the Chicago district were seeking to PlIrohase the highest rate restricted issues that they could get 1113 to the limit of the authorization and that the Treasury had sent out a second wire to the effect that the authority granted 17" °IllY for the purpose of facilitating trading for customers' ace°114t and not for the purpose of enabling the banks to acquire a4 cliti°11a1 long-term securities for their own account. He went t° aaY that it was apparent that the authority would be subject to a ' onsiderable amount of abuse. Chairman Eccles stated that the matter had been disCue aed at considerable length with the Treasury, that the sug- 5/20/46 -12- gesticn had been made by Messrs. Sproul and Rouse of the Federal Reserve Bank of New York who had felt for some time that the authority should be granted in order that banks would be in a Position promptly to execute small orders for their customers which they could not do under the arrangement previously in effect, and that if experience showed that the banks were abusing the Privilege the Treasury would have to consider the desirability °Is discontinuing it. Mr. Brown suggested that as a means of counteracting anY tend ency toward abuse it might be made clear that such securities could not be used as collateral for borrowing by -a-L Reserve Banks and would not be accepted for safekeeping 13-; the Federal Reserve Banks. Chairman Eccles stated that the l'srusal to accept such securities for safekeeping might be helpful but that generally the banks would not be interested in using them as collateral for borrowing. Mr. Brown said that the effect of the Treasury announcekent w as to increase market prices on the restricted issues and that "had been suggested that the Treasury was uneasy because Of the decline that had taken place in the prices on long-term 8 alad had made the announcellent to stop the decline. Chairman Eeele s replied that that was not the case, that the Treasury had been celleidering the matter for several months, and that it just 753 5/2W46 -13- haPPened to be announced in a period when there had been a decline in market prices. Mr. Brown then inquired whether any action had been taken or was contemplated with respect to speculative loans by hanks on Government securities. Chairman Eccles stated that a aft of letter to the Federal Reserve Banks on the subject had been Prepared but that it had not been sent. He also outlined 418 views as to what such a letter should contain and the Coninvolved in timing the sending of the letter. Mr. Brown also asked whether there had been any further cle7e1°Pments in connection with the reorganization of the Federal bark Supervisory agencies under the Reorganization Act and ChairMat 'Eccles responded in the negative stating that he did not think " 1144 would be done this year in that field. Ur. Brown then stated that Rednesday, June 26, at 12 °clock - noon had been suggested as the date for the next meeting of the executive committee of the Council with the Board of Governors and he inquired whether that would be a satisfactory time. The m.„ eQme -"iuers of the Board who were present indicated that, although members of the Board would be away from Washington on that clate '1G limuld be as satisfactory as any other that might be chosen as it was not likely that all of the members would be 4Nlabie at any one time during the summer months. Thereupon the meeting adjourne
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