The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
723 A meeting of the Board of Governors of the Federal Reserve SMemirms held in Washington on Thursday, May 3, 1945, at 3:00 p.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymczak McKee Draper Evans Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Thurston, Assistant to the Chairman Mr. Goldenweiser, Economic Adviser, Division of Research and Statistics Mr. Parry, Director of the Division of Security Loans Mr. Thomas, Director of the Division of Research and Statistics Mr. Vest, General Attorney Mr. Brown, Assistant Director of the Division of Security Loans Chairman Eccles stated that since the Board of Governors last ec)nsidered the question of increasing the margin requirements prescribed in Regulation T, Extension and Maintenance of Credit by Brokers, Dealers, and Ilelnbers of National Securities Exchanges, and Regulation U, Loans 13,ayo_ " 48 for the Purpose of Purchasing or Carrying Stocks Registered on a N atic)nal Securities Exchange, there had been no meeting of the ECono . mIc Stabilization Board until this morning. At that meeting con— sider,,, ' 6-Lon was given to a memorandum entitled "Speculative Capital Trans— actions Corporate Stocks and in Urban and Farm Real Estate" which had been — 1"l'ePared by a special staff committee upon the request of Mr. Davis, 41'ector of Economic Stabilization, at an earlier meeting of the Economic --4-4ation Board. The summary of the findings and recommendations 724 5/3/45 -2- contained in the memorandum was read by Chairman Eccles as follows, and*. Thomas stated that members of the special committee had previ°1184 discussed various parts of the program suggested in the memorandum vith him and Mr. Parry: . The major finding of this report is that the situation is threatening in all three areas, with the danger Perhaps more acute in farm and urban real estate, less imMediate in the stock market. The common problems, however, argue strongly for a frontal attack across-the-board; in Particular, any tendency to single out one area (e.g., farm real estate) would properly be subject to attack as too nar?w and too discriminatory. Within each area, selective action is advised, in order to secure the maximum positive reTate in curbing inflation with the minimum disturbance to Qle normal functioning of these markets. The specific recommendations conform to the pattern suggested by the Interdepartmental Tax Committee in its report of March 6, with a few additions. The recommendations Include: (1) Strengthening of capital gains taxation, by (a) Extension to three years of the minimum holding period for computing longterm capital gains for the Federal income tax. (b) An increase in the present ceiling rate of 25 per cent on long-term capital gains. (2) Additional controls over terms of direct Government loans, Government-guaranteed loans and unguaranteed loans, through (a) Issuance of an Executive order and appropriate regulations setting minimum down payments and perhaps periods of amortization for urban and farm mortgage loans (b) Further increases in margin requirements on stocks. 725 5/3/45 -3(3) Tightening of controls over evictions by (a) Increasing the period of notice required to six months. (b) Requiring cash down payments of 33-1/3 per cent or more. The recommendation to strengthen the taxation of capital gains is the only one which requires legislation and Which applies uniformly in all three markets. The proposal to lengthen the present six-months holding period used in computing long-term capital gains, as the Interdepartmental Tax Committee states, will "rectify an overdose of leniency Put into the 1942 law as an experiment." The additional suggestion for increasing the present ceiling of 25 per cent on taxation of long-term capital gains is designed to ,:":ing 1 the rate on long-term capital gains more nearly into dane with higher wartime rates on other income, and thus reduce this glaring loophole in the wartime tax structure. In addition, enactment of technical changes, one of which 7as formerly proposed by the Treasury, would be advisable to close certain other loopholes which now stimulate purchase of real estate for the purpose of tax avoidance. Because the proposed changes will require Congressional ac,°fly it is suggested that, if approved, they be submitted the staff of the Joint Committee on Internal Revenue Taxation and the Treasury Department for elaboration of details. t. Judging IV the precedent of consumer credit regula1°u, the imposition of controls over farm and urban mortit.g: credit is within the wartime Executive powers conveyed b- ;!cti°n 5(b) of the Trading-With-The-Enemy Act (as amended the First War Powers Act). It is, therefore, proposed the President issue an Executive order vesting in the of Economic Stabilization (Board of Governors of ect°1. the Federal Reserve System) the power to regulate the terms zr.i: c onditions a to all forms of mortgage credit. .(L),.1 r _n detai ls of theExecutive order and the major features succee regulations tions should be worked out jointly 7lYing " c-IT L I the Board of Governors, with the Department of Agril'ure, and the national Housing Agency. Proposed controls over evictions are within the ThePresent Powers of the Price Administrator, since their 726 51/V45 —4— Pimary purpose is to prevent evasion of rent control. Since tightening of such regulations, however, will also help to restrain increases in housing values, a directive from the Director of Economic Stabilization would give ad— ditional support to the Price Administrator. The final collapse of Germany will place new and serious pressures on the hold—the—line program. Even if higher cap— 3:tal values may be reasonably anticipated in the long run in some areas, rapid further appreciation during the war would be undesirable. Adoption and announcement of a pro— gram to curb inflation in the real estate and stock markets provide a good occasion for the new President to reaf— "Iirm his determination to resist inflationary pressures and LI:lus strengthen the backbone of the whole economic stabiliza— tion program. Chairman Eccles made the further statement that no formal ac— tijah 'I was taken by the Economic Stabilization Board on the suggested pro— enlbut that some of the members expressed approval of it, that Under Secretary of the Treasury Bell said that the Treasury would like to have OpportUnity to consider the program from the standpoint of its pos— effects on Treasury financing operations, that Mr. Purcell, Chair— of the q Securities and Exchange Commission, and Mr. tickard, Secretary Agriculture, thought the program was satisfactory but preferred the e4Pital gains tax as the best way to get at the problem, and that he (Chairman Eccles) had reviewed again the reasons why he thought the prob414 should be attacked through a tax on capital gains rather than through the kediun of credit controls. Chairman Eccles also said that he had a luncheon appointment Ifithur. i-dvis tomorrow, at which time he expected to discuss the whole 4latt -r e ..'urther, and that he would like to be in a position at that time 727 5/3/45 to tell -5Ur. Davis what action the Board was prepared to take with re- spect to an increase in margin requirements. Chairman Eccles then read the portion of the memorandum above referred to which related particularly to further increases in margin requirements and which read in part as follows: At present levels the volume of stock market credit is probably not excessive. Any reduction, however, would help to restrain market increases by reducing the effective demand of margin traders. While there is much to be said for complete elimination of margin trading at the present stage in the market it would probably be preferle to increase margin requirements by gradual stages. wben expansion in stock market credit coincides with increases in the level of the market, further increases in margin requirements would be desirable. When future inare ordered, it may also be advisable to expand coverage of the new requirements so that they not only apply to additions to new accounts, as at present, but also requ.1..re proceeds of future sales to be used to bring underrglned accounts up to the new levels. lie stated that some of the members of the Economic Stabilization Board aPParent4 favored action by the Board to put trading in registered seclIrities on a cash basis and that he outlined the reasons why some of the members of the Board of Governors questioned the desirability of that action except as a part of a general program to combat inflation. There was further discussion, he said, of the suggestion that action 1113111c1 be taken by the Board to increase margin requirements as a necesstep which would be within existing statutory powers, before any tOther request was made of Congress for legislation to deal with the trItlationary situation, and that some of the members of the Economic Stabilization Board felt that the taking of such action was highly 728 5/3/45 —6— desirable. °r Chairman Eccles added that he had pointed out the necessity being sure that any action taken by the Board would be in accordance 'With the program of the administration and that Messrs. Davis and Vinson indicated that if the Board should decide to take action they would be willing to clear the matter with the President. There was a general discussion by the members of the Board of the situation in the securities markets and of the basis upon which actell might be taken by the Board to increase margin requirements. During the discussion, Mr. Draper suggested that Chairman Eccles advise Mr. Davis when he met with him tomorrow that the Board of Governors was prepared to increase from 50 per cent to 70 per cent the margin renow prescribed in Regulations T and U upon being advised that such action would be in harmony with the stabilization program of the Gove rnment. Mr. Draper made it clear that his suggestion contem, Plated action which would include a requirement not now in the Regulations that when there was a sale of securities from an undermargined ace°1111t the proceeds of the sale would be used to the extent necessary to Illargin the re ing securities in the account on a 70 per cent basis. crease There was a discussion of the possible significance of an in_ in margin requirements to 70 per cent, and Mr. Parry stated that 111 ' °M the —andpoint of the public the 70 per cent figure would be significant for three reasons: (1) it would raise margin requirements to 4 ,, Polnt than at any time in the past; (2) it would be the largest 729 5/3/45 -7- increase ever made by the Board; and (3) the fact that the last increase Ilas 10 per cent and the proposed increase would be 20 per cent would be 4 Possible indication that the next increase would be to 100 per cent. Mr. McKee inquired whether better control of the market could be o btained by increasing margin requirements by 10 per cent, accompanied bY action by the New (Al all Stock Exchange to require a 100 per cent margin securities selling at t20 or less. Chairman Eccles stated that this suggestion was discussed at the meeting of f the Economic Stabilization Board this morning and that 11r. Purcell Stock t0 had expressed the opinion that such action by the New York zxchange would not have any lasting effect and would only serve lire trading into securities selling at prices higher than t20 per Share• During a discussion of this point Mr. Thurston suggested that, "Illal‘gin requirements were raised the necessity for legislation to tax 8Pecu1ativs profits increased, so as to prevent the accusation that the P°11oY of Government was merely closing the market to anyone who was un4b1e to bUY and sell for cash. 14r. McKee stated that he would not favor any increase in margin requirements at this time because he thought that theof program the G".ertlinent for combating inflation was not complete, that the amount of credit being used at the present time for the purpose of purchasing cl'ea'1*171-11g s ecurities was not large enough to justify action by the 730 5/3/45 -8- Board, and that, therefore, action to increase requirements as part of such a program would not be in harmony with the statute from which the Board's authority was derived. Mr. Evans stated that he favored Mr. Draper's suggestion. Mr. Eccles said that he had preferred for some time an increase tninargin requirements to 100 per cent, for the reason that he did not think that there should be any use of credit during the war period for the Purpose of purchasing or carrying securities, but that he would be 111-114- to approve an increase to 70 per cent if that were the wish of the other members of the Board. Mr- Szymczak expressed the thought that an increase in margin requirements to 70 per cent might be interpreted in the market as a for greatly increased market activity, that therefore it might be better to increase requirements to 100 per cent in a single step, but that, if it were the wish of the other members to approve an inTease to 70 per cent, he would concur in that action. 14r. Ransom said he would favor an increase first to 70 per cent 44d then -LI necessary to 100 per cent, for the reason that such action 13r°bablY would be more effective than an increase to 100 per cent in 011e step. There was a discussion of the question whether it would be better tr°14 the st anupoint of the clerical work involved in calculating margins the increase were to 66-2/3 per cent instead of 70 per cent, and -,. parry stated that 65 or 70 per cent would be easier to calculate 731 5/3/45 tharl 66-2/3 per cent. At the conclusion of the discussion Chairman Eccles stated that it appeared that a majority of the Board would favor Mr. Draper's suggeeticlly and that when he met with Mr. Davis tomorrow he would advise him that the Board was prepared to increase from 50 per cent to 70 per cent the Margin requirements now prescribed in Regulations T and U upon being 84vieed that such action would be in harmony with the stabilization progl'eJa of the Government, and that the Board's action would include a requirement not now in the Regulations that when there was a sale of securities from an undermargined account the proceeds of the sale would be eed to the extent necessary to margin the remaining securities in the -ccount on a 70 per cent basis. At this point Mr. McKee left the meeting. Mr. Ransom suggested that the members of the Board present exheir views on the recommendation contained in the memorandum referreCI to above with respect to strengthening the capital gains tax bY (a) an extension to three years of the minimum holding period for compixting long-term capital gains, and (b) an increase in the present rate of 25 per cent on long-term capital gains. All of the present expressed agreement that the enactment of additional legislation for this purpose would be highly desirable and that Chaires might so advise Mr. Davis when he met with him tomorrow. In connection with the suggestion that the President issue an 732 5/3/45 executive order vesting in the Director of Economic Stabilization or the Board of Governors of the Federal Reserve System power to regulate the terms and conditions applying to a.31 forms of real estate mortgage credit, Chairman Eccles stated that at the meeting of the Economic Sta— bilization Board he had expressed vigorously the opinion that this was 1.1°t the most effective way to handle the problem, that the Board had gillen considerable study to the form of an executive order and the regulations that might be issued under it and that it involved prob— leals that would be difficult to surmount from an administrative stand— Poiat. There was a discussion of the question whether the Board 11°111d be in the position of suggesting that, if such an executive order was to be issued the authority to administer the credit aspects Of the order be placed in another agency, since that would only serve to add to the confusion in the field of credit administration and con— flicting c4* the jurisdictions of Government agencies. It was the consensus members present that, if the order was to be issued, the Board °t Governors should be given the responsibility for its administra— tion. Chairman Eccles raised the question whether the executive or— (1 should " be issued to the Director of Economic Stabilization with Gtylrerrio to delegate the administration of the order to the Board of ' I s or whether it should be issued directly to the Board. The 733 5/3/45 -IIwas made that because of the responsibilities of the Farm Credit Administration and the National Housing Agency and, possibly, other Government agencies in the real estate credit field, it might be Ivell for the order to be issued to the Director of Economic Stabilizati°11 in the first instance, but placing the actual administration of the„ -ruer in the Board of Governors, and authorizing the Director to l'equire the cooperation of the other Government agencies in carrying %It the provisions of the order. This suggestion was acceptable to all of the members of the Boar, ' Present and it was understood that when Chairman Eccles met with i)avis tomorrow he would make substantially the following statement: The Board does not think that an executive order of the kind contemplated is the way to meet the problem; that such an order would deal with effects rather than "uses and, therefore, would not be very effective; that there is a question, which it would be desirable to disTIss with appropriate members of Congress, whether an xecutive order should be issued for a purpose of this kind which might well be the subject of legislation by irFess; but that if it is decided to issue the order 41, ' 4 8 felt that its administration should be placed in ' lIr t Board of Governors as the agency primarily concerned as .h.? credit control and that the order should be so framed Place the authority in the Director of Economic st matalization, should name the Board of Governors as the aistrative agency to carry out the purposes of the biI?r, and should authorize the Director of Economic StaGo'lzation to require cooperation by other interested ve llm tent agencies in making effective the policies deUnder the order. If the decision should be to --ssue the order, the Board, drawing on its exwolaid eri?e in the field of consumer credit administration, orde -Like to have an opportunity to draft an executive isej dand an outline of the regulations that might be -' thereunder so that there would be Some assurance 4r pe4 734 5/3/45 that the order and the regulations would be practicable from an administrative standpoint. Mr. Goldenweiser stated that he had received a request from Senator Millikin of Colorado that he be furnished with the amounts of gold held by the Federal Reserve Bank of New under earmark for varl-ous foreign countries and that he had told the Senator that it had been „ the long—standing policy of central banks not to give out stIch information as it would tend to encourage withdrawal of the gold fO ' 1 shipment abroad or its conversion into dollar balances to be held 41 commercial banks. The Senator was not satisfied with this answer, Goldenweiser said, and asked that his request be submitted to the Board. It was agreed that Mr. Goldenweiser Should advise the Senator that the rela— tionship between the Federal Reserve Banks and their depositors was confidential in the same sense that the relationship be— tween commercial banks and their customers was confidential and that it was not the policy of the Board to give out the infor— mation requested for the reasons that Mr. Goldenweiser had stated. It was also un— derstood that Mr. Goldenweiser would point out that the total amount of earmarked gold held by the Federal Reserve Banks and the total amounts of gold reserves held by the respective foreign countries were published In the Federal Reserve Bulletin. Vest stated that Messrs. Agnew and Fayerweather had chal— lerigea . ln the United States District Court for the District of Columbia the act. loa taken by the Board removing them as directors of the Paterson pft4PZ (1),J 5/3//15 -13Ba,Paterson, New Jersey, and that it was proposed to file raotion tomorrow to dismiss the complaint on the grounds, (1) that the Court was without jurisdiction to entertain a suit against the 8°ard which is an instrumentality of the United States, (2) that the Court is without jurisdiction to issue a writ of certiorari for the Plirlx)se outlined in the bill of complaint, and (3) the complaint fails to at any claim upon which relief can be granted. At this point Messrs. Goldenweiser, Parry, Thomas, Vest, and T3 (NI....•r-w4 withdrew from the meeting. The action stated with respect to each of the matters hereinreferred to was taken by the Board: The minutes of the meeting of the Board of Governors of the c1e ' a."- Reserve System held on May 2, 1945, were approved unanimously. M emorandum dated April 30, 1945, from Mr. Paulger, Director q the oi . -vision of Examinations, submitting the resignation of L. E. Skees A -8 a Federal Reserve Examiner in that Division, effective as of the elos e of business on April 30, 1945, and recommending that the resignation 1. ue accepted as of that date and that appropriate payment be Made p_ r the accumulated annual leave remaining to his credit at that time. ommenT dh ee d.resignation was accepted as recLetter to Mr. McLarin, President of the Federal Reserve Bank or Atlanta, reading as follows: 736 5/3/45 -14- "The Board of Governors approves the cancellation of pages numbered 1, 2, and 3 of the personnel classification plan of the Savannah Agency as requested in your letter of April 30, 1945." Approved unanimously. Letter to Mr. Meyer, Assistant Cashier of the Federal Reserve 13alak of Chicago, reading as follows: "The Board of Governors approves the change in the Personnel classification plan of the Detroit Branch, in7°1vIng an increase in the maximum annual salary for the position of Officer's Secretary, as submitted with your letter of April 25, 1945." Approved unanimously, together with a letter to the Wage Stabilization Division, National War Labor Board, transmitting a certificate of the Federal Reserve Bank of Chicago with respect to the salary increase at the Detroit Branch. Letter to Mr. Flanders, President of the Federal Reserve Bank of 10 -oston, reading as follows: ta "This refers to your letter of April 13, 1945, written in response to our letter of March 29, regarding the financg of small business enterprises in the reconversion pe- "It is assumed that the questions raised in your letthe position the Federal Reserve System should in considering applications for guaranteed loans under sr Proposed Wagner-Spence bill (S. 511 and H.R. 591), : lad it become law. In this connection, we should like 14°int out that the present Section 13b was enacted in ccei3r to take care of a situation existing during a severe and As legislation designed to combat deflation aid trIg business recovery at a time when banks were seek1308es-1'X-dation of loans, Section 13b served a useful purand t ,The situation now is entirely different, however, "e present Section 13b should be repealed. ter 737 5/3/45 -15- "The next problem we will shortly be faced with is how best to assist a substantial number of our smaller and inadequately financed business enterprises to make the transition from war- to peace-time operations smoothly. It is generally taken for granted that some form of Goverament participation in the extension of credit to business is essential and inevitable in the reconversion and Postwar period. We believe the Wagner-Spence bill would meet the need and at the same time encourage and preserve Private enterprise in the field of banking. During the war the goal of Goverment participation in financing industry was to obtain vast quantities of war materials quickly. In a similar sense the goal during the early Postwar period is to assure prompt reconversion to civilian production. "Commercial banks have made wide use of V loans in providing financing for war production. Well over half of all the war production credit made available by banks wae in guaranteed loans. The banks are now also taking advantage of the T loan. These V and T loans, however, will mature and must be paid when war production is over and the Government has settled with business for materials delivered and for claims resulting from cancelled contracts. This will be the precise time when the program ;-.1u11 employment could easily be jeopardized through a tallure to provide needed credit to all businesses having reasonable prospects of success under peace-time conditions "Today many enterprises engaged in war production die operating with the aid of Government credit supplied c_r?ctly or indirectly through advance payments on war pv on- acts, tax accruals, and V and T loans. considerable r ll'"n of this credit extended for war purposes must be i2-4aced with credit extended for reconversion and civillZel _production. 'War industries as well as enterprises dIertol have been following their peace-time lines of enr will need to modernize their plant and equipment, and in built _many cases sales organizations will have to be reCivilian markets re-established. The disposal °f surau r-s war inventories, machine tools, etc., no longer neededProblems°r war production purposes will present difficult vetitor; • Mafly plants in which these machines and ines are now located will want to take them over di' recti from the Government upon termination of war conacts. A_ ftrrangements for this should be made now with yZ 738 5/V45 -16- "the proper procurement agencies, not after contracts are cancelled. The availability of adequate credit may be a vital matter in the negotiations. The reconversion Period will be beset with many difficulties, but the availability of adequate credit to all worthy enterprises Should not be one of them. "The Wagner-Spence bill authorizes the Federal Reserve Banks to guarantee loans up to 90 per cent of their face value. If a commercial bank or other private lending institution is not willing to take as much as 10 per cent of the risk in a loan, it is doubtful that the loan should be made. Should the Wagner-Spence bill become law, it would be our thought that the regulations to be issued by the Board should be broad and drawn in such a way as to encourage the Federal Reserve Banks to follow a liberal practice in guaranteeing loans. It should not be necessarY for the Federal Reserve Banks to analyze the credit Position of prospective borrowers to the same extent they have under the present Section 13b, but rather that, in the absence of unusual conditions indicating a different (14,Irse, they should adopt approximately the same practice that has been followed in guaranteeing war loans under Ilegulation V. In other words the Federal Reserve Banks 44.ri general, in the interest of reconversion and lvilian production, be willing to guarantee any small andb medium size loans on which our well-managed commercial .111,!s are willing to assume 10 per cent or more of the provided, of course, that the loans are made in good faith "1th and not for the purpose of bailing out old loans. Under -„; such a program it would be expected that a large Percentage of the loans would carry the maximum 90 per tj .lt guarantee, but the inducement would exist, through areohedule of guarantee fees, for the banks to assume large a percentage of the risk as circumstances would sub In this process we would hope, of course, that Re4cantial losses would not be suffered by the Federal rile Banks, but the success of such a program should not judged by the question of profit and loss alone. 8 1.tecently Chairman Eccles was asked for a memorandum 1 1zing his views with respect to the Wagner-Spence bill : by_ Mr. 0. Max Gardner, Chairman, Advisory Board, 'i'ec. 5 War Mobilization and Reconversion. A copy of is e,lee letter to Mr. Gardner, dated March 14, 1945, -ne-Losed for your information.” 4 I Approved unanimously. 739 5/3/45 -17Letter to Mr. Leach, President of the Federal Reserve Bank of Richmond, reading as follows: "The Board has noted with interest the explanation in your letter of April 23 in regard to the proposal for a park in Charlotte, North Carolina, as a memorial to the residents of that city who have served in the present war. "As you point out, while such a park might be a suitable memorial to men and women who have served their country during the war and might also be of great use and benefit to the people of Charlotte, it is obvious that those who have served in the armed forces will derive no peculiar benefit from the park, and that it is not closely related to the conduct of the affairs of the Bank. Moreover, there maY be numerous other civic projects not only in your district but throughout the United States which might be based upon similar considerations. th "Consequently, the Board feels, as you evidently do, ,.at it would not be warranted in authorizing a contribun from the funds of your Bank for this purpose. In is connection, the Board has asked Me to express its PPreciation of the analysis which you have made of the problem and the expression of your opinion concerning it." r Approved unanimously. Letter to Hr. Lichtenstein, Secretary of the Federal Advisory eftk.41 3 reading as follows: 10), "This letter is in response to yours of April 11, 4.,/_4), asking for a list of subjects which the Board wishes ouncil to discuss at its forthcoming meeting in thshit:Igton on May 13-14, 1945. The Board would appreciate e views of the Council on the following matters: 1. From time to time in the past reference has been made to the practice adopted by certain large depositors of asking the deposi?a, Th.x banks for more detailed information regard?alg.the condition of the banks than is shown in the regularly published reports of condition. To what extent is this practice still being followed and what further action should be taken supervisory agencies in connection 11:ItItihZ4ank 740 5/3/45 -18- "2. Upon recommendation of the American Bankers Association banks in various sections of the country have organized so—clled 'credit pools'. What is the opinion of the Council as to the progress being made by these pools? 3. There has been considerable discussion of the inflationary developments in farm and urban real estate and other capital assets. How should these developments be dealt with? "The usual arrangements are being made for luncheon for the Council on Monday, May 14. If we can be of any as— sistance to you or the members of the Council before the meeting or while the Council is here please let us know." Approved unanimously. Thereupon the meeting adjourned. Chairman.
@FedFRASER