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Minutes of actions taken by the Board of Governors of the Federal. Reserve System on Monday, May 21, 1951. PRESENT: Mx. Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Evans Vardaman Powell Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Minutes of actions taken by the Board of Governors of the ?ecleral Reserve System on May 182 1951, were approved unanimously. Minutes of the meeting of the Board of Governors of the Federal Reser "Srstem with the Presidents of the Federal Reserve Banks held on 144182 1951, were approved unanimously. Memorandum dated May 182 19512 from Mr. Sloan, Assistant Director "he Division of Examinations,recommendin that the Board approve an g 4(ilrance of funds in the amount of $1,000 to Glenn M. Goodman, Federal Re8erve Examiner in that Division, in connection with his forthcoming 11Pli°/reci trip to Europe. The memorandum stated that Mr. Goodman had eient accrued annual leave to provide security for the advance. Approved unanimously. Letter to the Honorable A. Willis Robertson, United States 41Late '"da hington, D. Co, reading as follows: whieb"This letter is in response to yours of May 1 in i; You, ask for any suggestions with respect to amend— might be made to the Federal Reserve Act which that, etaa- permit the Federal Reserve System to provide finan— %1 to small business in normal times. elle00,"e Use of the private banking system should be whettlaged in the financing of small business enterprises 6r the need is for current working capital or for 5/21/51 -2- "longer term funds. The Reserve Banks are qualified to assist local banks in making credit available to borrowers, who, though otherwise meritorious, may present credit risks of a character which banks will not ordinarily accept; and, by such aid, the Reserve Banks could help to restore and maintain normal credit relationships between such borrowers and the banks. However, the Reserve Banks have been handicapped in carrying out such a function by the restrictive provisions of section 13b Of the Federal Reserve Act. Under present law they may make commitments and loans only for working capital purPoses, only to 'established' businesses, and only with Maturities not exceeding 5 years. These limitations ake it difficult to render effective assistance in ! eeting the requirements of smaller businesses. ' "One method of utilizing the services of the Federal Reserve System more effectively in the extension of fiancial assistance to small business in normal times would be to authorize the Reserve Banks to enter into ,rticipations and commitments with financing institu_1°Ils with respect to loans made to business enterprises, !II a basis under which a Reserve Bank might assume not ,**e than 90 per cent of the risk involved and under ) : "10/1 loans would not be limited solely to working capital Poses or restricted to 'established' businesses. The .1„4inIUM maturity on any such loan should be fixed at ten tead of five years. The local bankers, of course, ° n!!uld assume as much of the risk as possible. If your mittee should so desire, the Board will be glad to _draft amendments to carry into effect changes of thililit s Kind. "Another method of dealing with the problem is inZPorated in a bill (S. 1329) introduced in the present Federal Rese,li°n of the Congress which would amend the lle Act to provide for the creation of investment corapa; es to aid in meeting the financing needs of small blisib, th• Hearings were held on similar legislation in -444 last year. Some changes in the law such as those mentioned : above norna ould be appropriate for consideration in more ente,... times as means to aid in the financing of business itinalrises. As you know, however, because of the great rY pressures resulting from the defense emer, gene y, a variety of measures are being taken, especially V Z ,r ttt ir) d'f 5/21/51 —3— by the Federal Reserve System, to discourage any extensions of credit that are not essential for defense. In the circumstances, we feel that there is serious question as to the advisability of changes in the law at this time that would provide additional authority for the expansion of the use of credit, even by small businesses, for any Purposes that are not closely related to defense needs. "Recently the Senate Banking and Currency Committee requested the views of the Board on S. 515, a bin to amend the Reconstruction Finance Corporation Act. In response to that request, the Board expressed the view at any credit necessary for the national defense and "for other purposes should be made available to the fullest extent possible through private credit channels and that in the exceptional cases in which Government assistance Tay be required guarantees of loans by private institu141 )ns are more desirable than direct Government loans. „„e reply also stated that if the powers of the Recon7.'ruotion Finance Corporation to make direct loans were ID? be continued they should be in such form as to require 111,at.loans be made only in the exceptional cases in which Reedlt is not available from other sources and that the inerstruction Finance Corporation, which was organized be 932 as an emergency organization, should continue to essentially so regarded." Approved, Mr. Vardaman not voting. /less Letter to the Honorable Lyndon B. Johnson, Chairman, Prepared- beommittee, Co 'ttee on Armed Services, United States Senate, k"ingt D. C., reading as follows: riecti"In Your letter of April 4 you stated that in cona c,"-T1 with the performance of its duties, which include ope'lninuous study of all policies, programs, activities, Depl facilities, requirements and practices of the cie : -:ment of Defense, the Armed Services and other agenrat•-xeroising t functions relating to them, and the adminisco„,1,.on thereof in all respects, the Preparedness Subttee -Ls engaging upon a study of the particular tasks fle,-1 to each entity in the mobilization structure and -4"the methods and procedures employed in carrying out the assigned tasks. In this connection, you requested certain information regarding functions of a defense character being performed by the Board of Governors. "In answer to your request there is set forth in the attached statements and enclosures information ./,th m respect to the guaranteed loan program (RegulaT V), the regulation of consumer credit (Regulation "), the regulation of real estate credit (Regulation x), Tld the voluntary credit restraint program. In addition, the Subcommittee has been placed on our mailing list to receive all publications and releases distributed by the Board relative to these functions. "Ae trust that the information given herewith will serve the purposes of your Subcommittee and we will be glad to furnish additional information as requested." Approved unanimously. Letter for the signature of the Chairman to Mr. A. E. Barit, Presifi ' ent and General Manager, Hudson Motor Car Company, Detroit, 14chi Can, reading as follows: the "Plank you for your informative letter of May 8 on of- supject of Regulation VI and particularly the effect 34:present instalment credit restrictions on your terms are "The Board has felt that relatively strict regulathe aPProPriate for instalment credit under pron at this inflationary time in view of the strong 1, 3811res now present in the economy. Nhile we are very : ki c°ncerned that the regulation not be excessively 4_ '!uri• in the case of individual businesses or the Board feels, nevertheless, that the cglaation must provide a definite curb on instalment tioclit if it is to be effective in this period of rlatio l.emergency. Although supply and demand condiIn markets for the specific regulated articles 3eti. as automobiles are one factor to be considered in eons̀l-tig the terms of Regulation ff, the Board must also 44er the economic and credit conditions in the eco, "°111Y as a whole. shysi are glad to have your observations on the effect Of Regulationiff on current new and used car sales. As You point out, published statistics on the industry generally appear weeks after the developments they reflect. However, the Board's staff watches developments in the automobile markets closely and, as you know, certain sales, Production, and inventory data are available to us somewhat earlier than are the usual published figures. It appears to us, and I believe you will agree, that a number Of factors other than the credit regulations have also been influencing the current volume of automobile sales. "You refer to the claim made by some dealers that the sale of used cars does not involve the use of critical Materials or manpower. This is of course true. The ex1?ansi0n of instalment credit for the purchase of used cars, f this credit were not regulated, would, however, contribute ,° an inflationary increase in demand for articles that do "oe critical materials. Any increase in demand for used Cars would tend to spread to the demand for new cars either or via the trade-in. Moreover, any expansion of credit buying encouraged ,J-edit by easier credit terms would tend r circulate throughout the economy in the form of larger for all consumer goods. appreciate your interest in writing to us. You 'tl?e assured that your viewswill be considered in our ifluing study of the effect of the regulation. Regupr„.1°11'4 is a flexible instrument and the Board will be Pared to modify its terms promptly when such action (IPPeare to be in the interests of the national defense Pr°grame li t V Approved unanimously. Letter to the Honorable Olin D. Johnston, United States Senate, 4111./Igtori$D. C03 reading as follows: Rom "Mt. Raymond M. Foley, Administrator, Housing and :Flnanoe Agency, has referred to us a letter addre atSsed to you by the Honorable R. Aubrey Harley, Attorneymr ",i'VJ Newberry, South Carolina, concerning Regulation h. so ;narleyto letter has reference to the difficulties of Re 6 h°me owners in Newberry in meeting the terms of applicable to home improvement credit. 5/21/51 -6- "In drafting the present regulation, a considerable amount of research and study preceded the setting of terms in the home improvement area. The required terms in other regulated areas provide for minimum down payments of 33 1/3 Per cent in the case of automobiles, 25 per cent for major household appliances, and 15 per cent for furniture, with maximum maturities of 15 months in all three classes of The down payment requirement of 10 per cent and the 30 months maturity permitted in the case of home improveInents, of course, reflect a wide differential. ta "These relatively lenient requirements were adopted 1, recognition of the possibility that such terms might needed for necessitous home repairs. The fact that a earge majority of home repairs and improvements do not it;ceed $5oo to $800 (monthly payments of approximately z.) to $25) led the Board to believe that the more lenient rM would not render compliance unduly burdensome in the light tl of the purpose of the regulation to restrain use of consumer credit. In this regard it may be =,ed that when the regulation became effective, the terms ne.?ntitlement to FHA insurance of credit for home repairs 4-4 Luded a 10 per cent down payment and a maximum maturity q 36 months. t4 th"The practicability of some change in the regulation i8 to be the subJect of connection has been and continues appreciate ,,Study we and staff, by the Board's es the information contained in Mr. Harley's letter. The -Letter is returned herewith for your files." Approved unanimously. Letter to the Presidents of all Federal Reserve Banks, reading aZ .1 011ows y.o "For the confidential information of yourself and lati,n5f in Connection with the administration of Regubet„7 " there is enclosed a copy of correspondence wasiXn the firm of Canfield, Schell, Hannan & Castiello, -' 1 eon, D. C., and the Board. : elosn '"is is being forwarded to you because of its ihtic...slillilarity to certain problems which have arisen May -,San Francisco Federal Reserve District and which arise in other districts. 5/21/51 -7-- "In 1948 and 19490 Kelley Kar Company, Los Angeles, California, attempted to use a number of different devices that conflicted with the spirit and often the letter of Regulation W. One device was to purport to include in the sale of an automobile a contract for greasing and servicing the car, with the alleged charge for such greasing and servicing to be paid in the months ecilowing the maturity permissible under Regulation W. Another device was to include a purported contract for the sale of gasoline, with the cost to be collected in instalments after the permissible maturity. Another ,61,_rice was to attempt to treat insurance on the autofuile in this manner rather than including it in the k4-me balance. "The Registrant attempted to justify such practices 1Tder the mixed-credit provisions of the regulation. The devices were coupled with advertising that, at least first reading, appeared to offer maturities for the 1101 cost of the car beyond those permissible under am regulation. The practices caused great confusion t °4 the industry and for a time threatened to disrupt he o peration of the regulation in the area. v„. "The Board through the Federal Reserve Bank of San t?noisco advised the Kelley Kar Company that the prac„?es were forbidden by the regulation. The company has Presented the same or similar questions to the Federal ?serve Bank of San Francisco under the present regulacitn and has requested references to Federal Register tia:!1°Ils of any interpretations forbidding these prac7 They have been reminded of the previous rulings on .0 da14,_"6 specific points, have been advised that published rtiniTretations, particularly the summary interpretations 195nerr ,ed 9 and 10 at pages 1615 and 1616 of the December l' ederal Reserve Bulletin (15 Fed. Reg. 7827) cover eal7e matters generally, and have been reminded that in 84,nent the Kelley Kar Company is on notice of the ';41.1-C interpretations. carlOhe questions and even phrasing of the inquiry from to tl,elds Schell, Hannan 8c Castiello are closely similar gose from Kelley Kar Company. "It is Unusual. believed that this situation is a relatively di-t °Ile which is not likely to be duplicated in other riots 1 or it se,„ with respect to other listed articles, but rorgiT advisable that you have this background material c°nfidential information." r 4 Approved unanimously, together with a letter to Mr. S. D. Schell, Canfield, Schell, Hannan & Castiello, Suite 637, Vioodward Building, Uashington, D. C., reading as follows: "This refers to your letter of May 10, 1951, and its enclosures„concerning Regulation W. The questions submitted by you are set out in some detail, but it is not clear whether they arise from parti2111ar situations or merely as a matter of general interest. uefinite answers to questions such as those you asked necessarily depend upon all of the relevant circumstances cr a given case. , "Interpretative materials concerning the application 211 he regulation have been published, both in the Federal neserve Bulletin and in the Federal Register. Since the 12Fesent regulation became effective September 18, 1950, 6ne found in those two sou interpretative material will be therces since that date. The questions as outlined in not enclosures with your letter appear to be answered, al only by the language of the regulation itself, but bY the general principles set forth in the summaryat section 222.102 (9) and (10), 15 FedRegister 7827, November 17, 1950, and also at pages T1, 2 and 1616 of the Federal Reserve Bulletin of 1950. sr situations outlined by you strongly resemble the wt!cirie cases with respect to which the principles cited ,04e stated. In those cases the Board said that the la.trices involved were not permissible under the regutr ."The administration of the regulation has beendecenbrallzed among the 12 Federal Reserve Banks and their 641.,1 11es. This decentralization normally expedites the pers—ollig of specific cases as they arise among those gesterdl:who t are subject to the regulation. It is sugFede herefore, that you may wish to take up with the 1 al Reserve Bank of Richmond, or the Federal Reserve Barii,.‘ . the district in which the client is located, any 5pe'.0f to questions or additional problems that may come J°U from your clients under the regulatio " Secretary.
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