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905 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 201 1952, at 10:30 aom. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Evans Powell Mills Robertson Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Messrs. Bucklin„ Smith, Gund, Fleming, Davis, Brown, Alexander, Ringland, Beals, Ray, and Lochead, Members of the Federal Advisory Council from the First, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively. Mr. Henry C. Alexander, President of J. P. Morgan & Co., New York, New York, who attended the meeting as alternate for Mr. N. Baxter Jackson from the Second Federal Reserve District. Mr. Prochnow, Secretary of the Federal Advisory Council. Before this meeting the Federal Advisory Council submitted to the Board Of G°vernors a memorandum setting forth the Council's views on the e/lbject s to be discussed with the Board at this joint meeting. The statelent of th topic, the Council's views, and the discussion with respect to each: of the subjects were as follows: 1. Wb are the business and economic prospects over the next :Ix months? What suggestions does the Council have mitn .Lespe-L u u to system credit policies during that period? 5/20/52 —2— Although economic conditions at present are reasonably stable, there is distinctly less optimism now among business men and bankers regarding the business outlook for the next six months than prevailed earlier this year. Employment, personal income, and activity in many lines continue at a high level, but there are weak spots in important industries, 111c11 as those engaged in manufacturing household appliances, °use furnishings, textiles, shoes and in meat packing. In— ventories of most commodities and materials are in ample sup— ply, and shortages have been largely eliminated. Assuming no lajportant change in the international situation and no serious . eJ t erruption of steel production, the Council does not expect , lthen a severe decline or a sharp upward trend in business ' Ilring the next few months. The majority of the Council think a slight recession in business activity is more probable than upturn. The volume of bank loans has been declining. Con— the counbry as a whole, it appears at present, that, %Dart from normal seasonal swings, the volume of bank loans 11 decline slightly in the balance of the year. Unless conditions change materially, the Council favors co ntinuance of the current rediscount rate and of open market rations which will make the rediscount rate effective and fills Provide a reasonably firm money market and an orderly and th° 874ible market for government securities. The Council approves cre,rtion taken relative to the suspension of the Voluntary de '114-t Restraint program and of Regulation W, in view of the terVne in loans which had occurred and evidence of deflationary ' t4encies. If inflationary forces again become clearly evi— den a 004,! nd assuming the Defense Production Act is extended by stg ess, the Council recommends that the Voluntary Credit Re effec t program be reactivated. During the period it was in ect it was an important influence in restraining unnecessary r Z credit. President Brown stated that the Federal Advisory Council was .1101-tay. m —"e pessimistic as to the economic outlook for the next six raollths t han 14r. Thomas, Economic Adviser to the Board, appeared to be his r eview of the situation presented to the Council yesterday 5/20/52 afternoon. None of the members of the Council, President Brown said, e:qlected any serious recession, much less anything resembling a depres811)h, but they felt the total volume of business was likely to decline 8(mIEMtilat and that total employment would decrease slightly. The members Of the Council felt that this would be healthy for the country as a thole since it would result in some leveling off of inventories and l'i°111d Permit adjustments which might take some of the pressure out of daMands for wage increases which were resulting in higher costs. s to the actions *doh the Federal Reserve System should take, Presiden: Brown said that the Council would recommend a continuation of the existing credit policies, and felt that open market operations had been extremely effective and had been conducted with great skill in the last six months. He also said that the removal of state and municipal issues from the Voluntary Credit Restraint Program took the heart out °f lt at a time when loans generally were declining and the suspension or the program was Wise. He added that immediately following suspension, however, interest 114 sh"11 bY manY potential borrowers in obtaining credit which previously the ' Y had not applied for because they felt that it would not have been l'arrted while the program was in effect. President Brown went on to say that the council felt that if inflationary tendencies should become 5/20/52 clearly evident again on more than a temporary basis, it would be Preferable to reactivate the program rather than to try other more radical changes such as a change in reserve requirements or a higher d1sc°11nt rate. In response to a question from Chairman Martin as to the judg— Illent of the Council concerning the possible reinstitution of Regulation Consumer Credit, if there were a renewal of inflationary pressures, President Brown said that he would put the Voluntary Credit Restraint Pr°gram into active operation first. With respect to Regulation W., he stated that it was obvious that virtually every listed article was or 8hertly - would be in surplus supply excepting possibly certain of the tore PoPular makes of automobiles. Mr. Fleming agreed with the views expressed by President Brown 141t4 as to the Voluntary Credit Restraint Program and as to the supply s&tu "1°n for articles which had been listed under Regulation W. He aLso ' 11q11-1-red as to the possibility of continuing the collection of loan figure -8 from selected banks which had been assembled under the Voluntary Credit Restraint Program, and Governor Powell replied that this matter waa OW being studied and that if the banks were willing to report the rigures he felt they would be collected. Mr. Fleming stated that he felt the continuatio n of the loan figures was important to the banks alld he hoped the Federal Reserve would continue to assemble the data 9f9 5/20/52 —5— which he was sure most banks would be willing to report. Mr. Bucklin entered the meeting at this point. Governor Powell stated that one of the problems under the Volun— taniCredit Restraint Program had been the handling of loans by banks to CO companies and that the Committee had taken the stand that the Pregram need not be applied to such loans on the ground that they were l'estlaicted at the stage of consumer use of the credit under Regulation W. He c"°Ked for the views of Council members as to whether, if inflationary 1)1'688111'es were renewed, it might be practicable to bring finance company loans wlthin the scope of the Voluntary Credit Restraint Program in the absence of Regulatio n W. Thi8 question was discussed but no strong opinion was expressed as to h,„, -" effective the Voluntary Credit Restraint Program might be if applied tO loans to finance companies. Mr. Davis said that the finance e(44Pan. les might regulate the ultimate terms of credit themselves reason— ably. we 112 and Mr. Ringland felt that the problem lay with the retailers Ilk° extended the credit and then turned to the finance companies to dis— e°11rit their receivables. Mr. Ringland expressed the view, however, that 4Tlati4mPt might be made to restrict such credit under the Voluntary Credit 11c4tradlit Program if it were reactivated. exterisioin response to a question from Mr. Fleming as to the probable n of the Defense Production Act, Chairman Martin stated that he 910 5,4W52 —6— hadbeen asked to appear before the House Banking and Currency Committee tomorrow morning to testify and that while the Senate had passed a bill x'tencling the Act, he was unable, at this stage, to guess what action the 11°11se might take. He stated that it would be helpful to have the views qthe members of the Council as to the need for extending the Defense Pr°cluction Act, particularly the question of continuing authority for the I/qua arY Credit Restraint Program and the consumer credit and real estate regul ti a -°ns, all of which would expire on June 30, 1952 unless extended. Sevral individual members of the Council expressed their views, all 0P 4. 'chose who spoke indicating that they felt authority for the Volun— n_ -4 '-'redit Restraint Program and the consumer credit regulation should be Some of them felt that authority for the real estate credit he a -°11 also should be continued although President Brown stated that 111-8 less tore certain that such authority was needed and that he was even u°11btful that continuation of authority for price or wage controls was teeded. Chairman Martin then asked for a further discussion of the business cjIltlook and at President Brown's suggestion several of the members of the e°1111°i1 commented on conditions in their districts, most of them indica— that bankers and businessmen generally felt some recession in business Iltder Y. However, none of them felt that a sharp decline was to be elcIlected. 1 5/20/52 -72. 'What effect is Regulation X having in the economy at the Present time and what, if any, action should the Board take with respect to liberalization or suspension of the Regulation? Under present conditions, Regulation X no longer serves any useful purpose as regards non government guaranteed real estate credit. The regulation has not had a marked effect on the financing of lower-priced houses. It does result in hampering the construction and sale of higher-priced houses, and causes much lr Iedless irritation and injustice. The Council is unanimous in °commending that the regulation now be suspended. President Brown stated that he was surprised at the unanimous view °I' the members of the Council that Regulation X, Real Estate Credit, should be susPended. He said that after discussing the matter fully the Council elt f the u it would be desirable for the Board to suspend the regulation elrqrely at this time rather than to relax it insofar as non-government 1.1111red or guaranteed credits were concerned. This feeling was based upon the _. e fa t that the regulation was not needed under present conditions insOfar as n°n-government guaranteed real estate credit was concerned and that the regulation was difficult to administer and caused unnecessary IlalicishiP in a good many cases. Chairman Martin asked whether the members of the Council would 44°13e un Practical ous in recommending suspension of Regulation X if, as a matter, such action would result in re-emergence of no-down- 1°ans guaranteed by the Veterans Administration and more extensive Ilse °I' the very liberal provisions of the Federal Housing Act. 5/2W52 -8President Brown said he could not guess what the Housing and lic3tis Finance Administrator would do in the absence of the restrictions ageinst non -government guaranteed credit but that if he understood the ittlation correctly, it would be possible to continue restrictions in cc3rmection with extensions of Veterans Administration and Federal Housing Administration guaranteed or insured credits. He added that he still feltRegulation X should be suspended and that if the Veterans Administratio 4 WaS going to run the risk of guaranteeing mortgages with no down PaYMent, that was their concern. Mr. Lochead stated that there was considerable complaint in the Neif4 'e Coast area against the practice of permitting contractors to sell Veteran .. ltdministration guaranteed mortgages at discounts of as much as 2 or 3 Per cent in order to place the loans which were not acceptable to Prilrate lenders at the existing 4 per cent rate. Governor Evans stated he had not heard of such complaints on a SCale although it was recognized that there was difficulty in Placint, man7 of the Veterans Administration guaranteed mortgages at the Present 4 per cent rate. Several members of the Council then commented upon the real estate °n in their respective districts, some of them indicating that a 11114er of unsold completed houses were being carried by builders in both 5/20/52 -9and higher-price brackets while others stated that shortages of hot ",Particularly in lower- and medium-price brackets, continued in their areas' 3. The Board would apprecate any comments that the Council might wish to make relating to the Bank Holding Company legislation discussed in Chairman Martin's recent letter to Congressman Spence, Chairman of the House Banking and Currency Committee. (Letter dated April 11, 1952.) h The Council, as constituted from time to time in the past, l as rePeatedly expressed itself in favor of bank holding company .slation. In a letter to the Board of Governors on February 20, t, 9 ,50, the Council approved bank holding company bill, S. 2318, 4AT1 before the Committee on Banking and Currency of the Senate, Zh certain amendments which the Council understood were acceptto the then Board. This bill had met the general approval °I the bank holding companies with one important exception. No eticn was taken on S. 2318 by the Committee on Banking and Cur2ncY of the Senate, to which it had been referred, and the bill With the 81st Congress. hol In view of the widespread operations of the various bank c,ding companies in different parts of the United States, the ti'ncil believes that a bank holding company bill should be inithallY drafted by the Board of Governors and the provisions of coe draft fully discussed by the Board with the principal holding ofmPanies and others affected, before the Board urges the passage anY bank holding company legislation. st The Council believes that the proposed bases for legislation sl,a4ed in Chairman Martin's recent letter tl Congressman Spence im!,T_Ild be discussed with the various bank holding companies and -•Ln bankers' associations. Pending their oeing embodied in the bill so discussed, and opportunity given to condraft81. tomt does not feel it can express an ouC alhoe t otelligent opinion 1101.04,,_ President Brown stated that it was impossible to discuss bank pies, co raPany legislation intelligently on the basis of general princind that he and several other members of the Advisory Council had 914 5/20/52 -10- given a great deal of time in the past few years to the study of such legislation and had discovered many new problems whenever any specific ProPosal for legislation was made. He noted that the Council had taken a Position in favor of S. 2318, as indicated in its letter to the Board "ehrua- 203 1950, with certain amendments, but the bill had died with .0.Y the 81st Congress. As to the general principles stated in Chairman --4's letter of April 11, 1952 to Congressman Spence, President Brown felt that while they might be generally acceptable it was not possible to -"cm just how specifjc oA.turtion3 would be affected until specific legislation was drafted. He stated that he did not feel that the test of "11°1 ' 844 proposed in Chairman Martin's letter was satisfactory but at the same time the Council would not wish to have the Board feel that it WL3 trYing to evade the question presented by the Board, and that it was singY a matter of being unable to comment specifically on Chairman Martin's letter without having a draft of an actual bill. Lochead discussed the situation on the Pacific Coast and Mr. RI411nd commented briefly on bank holding companies in the Ninth Federal iteserve District. At Chairman Martin's suggestion Governor Robertson made a state- 14a t as ve the background for Chairman nartin's letter of April 11 to eclIgre esman Spence. Governor Robertson said that there were just two 5/20/52 -11- problems with which the supervisory agencies needed to be concerned, °Ile of these being unrestricted bank holding company expansion and the Other being the control of nonbanking activities by bank holding corn0ups These, he felt, would both be dealt with adequately by legislation along the lines suggested in Chairman Martin's letter. Governor Robertson emphasized that the Board had not expressed a view as to the agency which should administer bank holding company legislati°l4 for the reason that it felt the Congress should decide where the l'e3 P°115ibility should be placed. Also, the Board did not feel it would be ar'Yr°Priate to propose legislation until a committee of Congress asked f0 it s suggestions. He reiterated that legislation carrying out the getleral Principles stated in Chairman Martin's letter to Congressman SPence would be a significant step, that it was essential to have supPort, 0 f bi Federal bank supervisory agencies for any legislation that Was to be enacted, and that it appeared that proposals along these lines ght l'ssult in at least an absence of opposition on the part of any of the thr e0 Federal bank supervisory agencies. Mr. Lochead expressed doubt as to the adequacy of legislation d e- to the points Governor Robertson discussed, and there followed gehal,-, --ga-J- discussion at the close of which President Brown expressed the C: 1111eills great interest in holding company legislation and its desire to Stud and comment on any specific proposals for dealing with the problem. ;^".. -12The Board will also be glad to consider with the Council any questions which the members of the Council might have with respect to the study of the check collection system being undertaken under the auspices of the Federal Reserve System with the cooperation of the American and Reserve City Bankers Associations. The members of the Council are pleased that a comprehensive and exhaustive study of the check collection system is being 111dertaken under the auspices of the Federal Reserve System and flth the cooperation of the American and Reserve City Bankers ciations. The Council is also glad to note that the Federal 'rserve , System is not suggesting the study for the purpose of r?roaching upon or weakening the correspondent bank relation1?a of the commercial banks, but solely for the purpose of re`41cIng expenses and increasing efficiency. It is important that :a Proposals growing out of the study be thoroughly analyzed fullY discussed if they are to meet with the general approval t, the banks, without which there is little chance for their adop,A,t?n• As the committee makes preliminary reports, the Council 'welcome the opportunity to discuss them with the Board. President Brown stated that the Council realized that the present cheek c°11ection system resulted in multiple expenses through duplicate listi -ng of items and delays in collection. The Council felt that the eellraittee which had been formed was an excellent one both on the part clf the Federal Reserve and on the part of the American Bankers Associatioh and the Association of Reserve City Bankers. There was nothing more, he aaid, that he could add at this time. At Chairman Martin's suggestion Governor Mills reported on the 11111‘"t status of the work of the committee, noting that the project was 3114ested, 14 the Conference of Presidents of the Federal Reserve Banks 5/20/52 —13— but that it was essentially a joint project of the American Bankers Association, the Association of Reserve City Bankers, and the Federal Rese ' ave System, attempting to reach a common objective of simplifying end exPediting the procedures for collection of checks. A skeleton Pr°granl had been developed at a meeting in New York last week, Governor S aid, and within the next few days it was expected that suggestions Of the interested groups would be received, making it possible to get the vrcirk under way at an early date. Governor /Mils emphasized that the work of the committee had as its objective the improvement of the check collection .Y3tem and in no sense was it interested in attempting to draw more check collection business to the Federal Reserve System away from the correspondent banks. In response to a question from Mr. V. J. Alexander, Governor s tated that it had not yet been finally determined whether the ea a c_ al engineer to be employed by the committee -would serve purely unsultant or whether he would also serve as member of the committee, should have no vote in commit— tee: de iartder felt that such a consultant traternis : ti 13 since he would not be a representative of the banking Mre l'c'ehead withdrew from the meeting during the foregoing Assio_ II and Governor Evans withdrew at this point. 5/20/52 -14- 5• What legislative or other actions might be taken to improve the capital positions of banks and encourage increases in bank capital including actions that might be by the study of excess profits taxes of commercial banks? For example, what should be the attitude toward the issuance of preferred stock or capital debentures by member banks as a means of raising new capital? , In connection with the Excess Profits Tax, the Council recomthat the Board strongly support favorable legislative acOn the proposal of the special committee on excess profits ax cf the American Bankers Association. In brief, this proposal Provides that a bank be entitled to treat as borrowed capital six fIld two-thirds per cent of its deposits, other than United States ernment and domestic inter-bank deposits. The proposed formuwould lessen the present injustice to banks which are not al,,wed to include any portion of their principal indebtedness, ?flat ]3 is, their deposits, in computing their invested capital base corporations are allowed a high percentage of their indebtedness if they use the invested capital base. Except or the smaller banks, almost all banks find it necessary to use the enebinvested capital method. The proposed change would not only 04 le banks to make highly desirable additions to their capital s'Lof retained earnings, but would make it easier for them to „L-1- additional common stock. Exo_ All members of the Council are agreed that action on the bahrs Profits Tax is the immediate and pressing need, if the fay S are to meet the problem of increasing their capital. If tio?rable action is taken on the Excess Profits Tax, the questenq °f the issuance of preferred stock or capital debentures t° become less important. Particularly if there is no relis, ar_ e.t on taxes, it may be necessary for the banking supervisory orcies to change their attitude on the approval of the issuance Preferred stock or capital debentures by banks. r lg. President Brown referred to the above-mentioned proposal of the Anieric411 Bank -ers Association with respect to a change in the lam regarding the appli cation of the excess profits tax to banks which representatives t) , 5/2W52 —15— f the Association recently discussed with Chairman Martin and other nielabers of the Board. He stated that the proposal had been arrived at after careful study and that it was understood there was a real chance that it might be adopted by the Congress before the end of June. While the amount of excess profits tax incurred by the banks on 1951 earnings 1748 l'elatively small and would not make a very great addition to capital funds , lr used entirely for that purpose, President Brown felt that a great pr oportion of the banks would be in the excess profits bracket in 1952. H.. - said that both as a matter of equity and as assistance to the n adding to their capital funds, the Council hoped the Board would 811PPort th --e proposal of the American Bankers Association committee if the 8c)ard b14Leved there was any real possibility of the legislation being e(3rm1dered at this session of Congress. would b 141% Fleming commented that while he originally had not felt there proposed legislation at this ses— si,on ofecmuch chanc3 of passage of the °ngress he had come to feel that there was a real possibility it w°111d b e considered and that favorable action might be taken. At Governor Powell's request there were distributed to the °f the Ortices Council copies of two memoranda prepared in the Boardts dated may P rcItits tax stucty ) 1952, and May 15, 1952, with respect to the excess conducted by the Board and the probable effects of such tri 5/20/52 —16- taxes on the ability of banks to add to their capital funds. He pointed out that if all of the excess profits tax incurred on 1951 earnings were 84ded to capital funds of the banks of the country they would be increased by only 2/100 of 1 per cent of total assets or by 2/10 of 1 per cent of their capital accounts at the year-end. Governor Powell also said that it did not appear to him that this would do what was primarily 116"ed in the way of increasing bank capital and that while the Board had taken 40 Position on the matter, he personally questioned whether it would be desirable to go "all-out" in favor of a proposal to change the tax laws affecting banks when it might be found later that some other form of action would be necessary. Chairmen Martin said that while, as indicated by Governor Powell, the Board had not taken a position on this matter, he felt it only fair to saiy that in his judgment there was a serious question whether the Board Shod u ndertake a which it might not be prepared to support on ProP°s81 k.11 Nall -out" basis. He added that in his opinion there was little likeli- 11°°c1 of Congress taking any action on the matter at the present session ancithat, r egardless of that point, while he appreciated the comments of th° C°1140i1 with respect to both the need for capital funds and the equity °fa change in the excess profits tax as applied to banks, he was somewhat skePtical whether it would be desirable for the Board to support the l'ee0lUtion proposed by the American Bankers Association. 024 5/20/52 -17There was a brief discussion of the desirability of encouraging the issuance of preferred stock or capital debentures by banks needing additional capital, during which Mr. Fleming said those were emergency Measures and their use might cause the public to lose some of its confidence in the soundness of banks. In closing, Mr. Fleming expressed the ,i 1,ope that if the Board found it could not support the proposal of the American Bankers Association at this session of Congress, it would be willing to have a further study made of the effect of the excess Profits tax on banks, particularly with respect to 1952 earnings. 6 Do the members of the Council have any comments cn or suggestions with respect to the Patman hearings? of The members of the Council commend the Chairman and members th the Board and the Presidents of the Federal Reserve Banks for to manner in which they prepared and presented the answers the 'he questions submitted to them by the Patman Subcommittee, on their testimony before it. The Council hopes that these ::!wers and the hearings generally will promote a more intelligent el widespread understanding of the functions, duties, and proto ms of the Federal Reserve System. The Council will be pleased discuss the final report of the Patman Subcommittee if the )q„, v -ard desires to do so after the report is released. iT President Brown stated that Mr. Smith had reported a conversation with mr. Williams, President of the Federal Reserve Bank of Philadelphia, 'who had the res suggested that it might be desirable for the Board to summarize lilts of the Patman hearings and distribute them in advance of the ' 5/20/52 —1814811a-11M° of the report of the subcommittee. President Brown went on to that in the opinion of the Council an excellent job had been done by and on behalf of the Board in answering the questionnaire and in the testirl°11Y Presented by Chairman Martin, Governor Powell, Messrs. Sproul alllBrYarl, Presidents of the Federal Reserve Banks of New York and Atlanta, and othe rs connected with the System. He stated that the Council felt the P"iti°n of the Federal Reserve System was much stronger than before the 111"-ngs even though at the outset of the inquiry the purpose might have been to weaken the System. It seemed clear to the Council, he said, that there was not much to be done in connection with the inquiry until the report was issued and that it could not now be foretold what the nature of that report would be. President Brown added, however, that when the r°Port an W-- released and the Council had an opportunity to study it, it w°1/1c1 e to have a further discussion of the matter with the Board. He , '.j.30 said t, -hat he all of the other members of the Federal Advisory C°141°11J- mere strongly opposed to the formation, by legislative enactment, Of a c_ UDIMittee aChttee on be 044 a composed of the heads of several Government agencies to credit Policies, on the grounds that such a committee would illeans of putting pressure on the Board. chai darlt Man Martin said that the Board concurred heartily in Presi- -u s s uggestion for a continued discussion of the Patman hearings, 9, 147,27 1 i 5/2011/52 that in —19— his Opinion this Was just one of a series of hearings of this s°rt that would be held over the next few years, and that he felt it imPertant to assess the results of this particular hearing so as to have the benefit of all suggestions that might be made as to the course that should be followed by the System. Chairman Martin referred to the sigesti°n by Mr. Smith for a summary of the results of the hearing, c°11Ineriting that the Board had in mind the preparation of a pamphlet or book1A+ —based upon the material collected but that it felt it would not be Pessim ----Le or desirable to issue such a booklet before the committee l'ePcIrt was available. Chairman Martin stated that he and the other members of the Board aPPreci al'ed the fine work that had been done by President Brown and Vice Preside as nt Fleming of the Council in connection with the Patman hearings, well as by Mr. Prochnowl who had served as one of the consultants to " Boar d in the prepar ation of answers to the questionnaire submitted to _ the Board by the Patman Subcommittee. Acivisorylh a discussion of the date for the next meeting of the Federal 5,6 C°1111cil it was agreed that the meeting would be held on October ' 7 1952, rather than at the regularly scheduled time, September ThereuPon the meeting adjour ned.
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