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A meeting of the Board of Governors of the Federal Re"I
've System with the Federal Advisory Council was held in the
ces of the Board of Governors in Washington on Tuesday,
14311eniter 15, 1949, at 10:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
McCabe, Chairman
Szymczak
Draper
Evans
Vardaman
Clayton
Mr. Carpenter, Secretary
Messrs. Spencer, Burgess, Potts, Congdon,
Fleming, J. T. Brown, E. E. Brown,
Hemingway, Atwood, Kemper, Woods, and
Odlin, members of the Federal Advisory
Council from the First, Second, Third,
Fourth, Fifth, Sixth, Seventh, Eighth,
Ninth, Tenth, Eleventh, and Twelfth
Federal Reserve Districts, respectively.
Mr. Prochnow, Secretary of the Federal
Advisory Council.
President Brown stated that at its meeting on November
13
'1949
the
-, 4.
re Dect to
Federal Advisory Council approved the report with
the insurance of bank deposits submitted to the Board
date of October
5, 1949, by the special committee appointed
bY the Council pursuant to the suggestion made at the meeting of
he
toard of Governors and the Council on September 20, 1949.
efore this meeting the Council submitted to the Board
tet
clIndum setting forth the Council's views on the topics to
be cll.
8cUssed at this meeting. The statement of the Council and
t4
giscUssion with respect to each of the topics was substantially
1777
W15/49
-2-
"follows:
1. Coinage of gold.
What is the Board's opinion on the proposal
now being urged to make currency redeemable
in gold coin, and, specifically, what is
the Board's opinion of the Reed Bill now
before Congress which is designed to accomplish that purpose?
While the Council does not consider it feasible or
desirable at the present
time to make currency convertible
into gold coin, it believes convertibility is a desirable
?bjective of our monetary policy. The Council also believes it would be advisable to have a thorough study
!lade to
determine what preliminary steps should be taken
toward this objective. In view of continuing public uncertainty
regarding the power of the Secretary of the
easury, one of the preliminary steps should be the re:'-sion of the Gold Reserve Act of 1934 to make it clear
that the
power to change the price of gold resides only
i
ln the
Congress. Facing as we are the danger of a creep04g inflation, the right to redeem currency in gold coin
Umand would act as some check on a possible further
deterioration
in the purchasing power of the dollar.
j
President Brown stated that the Council
was unanimously
C)r
he
°Pinion that it was not feasible at the present time to
l'es1141e the
free coinage and circulation of gold, but that as
1°4 as the provisions of the Gold Reserve Act authorizing the
2eQl'ettrldr of the Treasury to vary the price at which the Treasury
k44c1 131kY and sell gold remained in the law business men would be
(11%'bed
about the possibility of a change in the price.
In
tlIce circumstances, he said, notwithstanding
the recent statements
the Secretary of
the Treasury and the President that there was
A
11/15/49
^- ',W
.
*) .'
(
-3-
4° intention
to change the price of gold, it was believed to be
important that the law be amended to make it clear that any change
14 the price of gold would require action by the Congress.
During a discussion of the authority of the Secretary with
es
Peet to the
purchase and sale of gold as determined by the Gold
Rese,,
Act of 1434 and the Bretton Woods legislation, Chairman
loiccab
e expressed the opinion that if the amendments as proposed
bY the
Council were suggested at this time it would open the whole
IclicY question with respect to gold and that it would be preferable
riot
-e-Lse that question at the present time. He also referred to
the
cillsvers which had been made to the questions asked by the
'40.p4
-8 subcommittee of the Joint Committee on the Economic Report
lth
aspect to increasing the price of gold and the free coinage
or
and stated that the members of the Board who were present
at this
Meeting concurred in these answers.
Mr. Burgess stated that there was no difference of opinion
t%eei. +1.
Council and the Board as to the action that should be
talte
at the
present time but that there was a fundamental difference
c41 th
etre
question of the desirability of the domestic coinage and
4lati°11 of gold, the Council feeling that such a step at the
Drop,
tine would be a valuable adjunct to an effective monetary
system.
1779
11/15/49
Mr. Fleming questioned whether the authority of the
Seere
tary of the Treasury was so limited as in all circumstances
to
quire the approval by the Congress of any change in the price
ich gold could be purchased and sold, and this point was die-
President Brown suggested that the Board take steps to
cbtai,
- an opinion of the Attorney General on the matter and Chairn4111 McCabe
responded that the Board would be glad to give considerto that
Suggestion.
2.
Economic and business conditions.
The Board would like to have the current
views of the members of the Council regarding probable economic and business
conditions during the next three to six
months.
The Council believes that production and employment
1 remain at a high level in the months immediately aThere will probably be some decline in farm incomes
el„ decrease in private capital expenditures, but Fed1,:al deficit financing, insurance and bonus payments to
axetleIa.ns, capital expenditures by states and municipalities,
IDe". Increasing industrial costs due to wage increases and
pril,!ion programs (which will make for higher prices)will
ably result in an over-all inflationary pressure in
the economy.
T
President Brown stated that yesterday afternoon the Council
-4Led to a report by Mr. Garfield, Chief, Business Conditions
'
I or
the Board's Division of Research and Statistics, and
t 8.P.Peared that the views of the Board's staff were
178(1
la/15/49
-}bstantially in agreement with the views
of the Council as set
torth
above.
fear that
He also said that there appeared to be a genuine
prices would not decline but might move higher and that
48 a result inventories were being increased substantially.
He
el
'
s° said that the
members of the Council had not ventured a guess
48 t° how long that situation would last.
Chairman McCabe summarized the views of the members of
the subcommittee of the Committee on Research and Statistics of
the b
'residents, Conference as expressed at a meeting in Washington
.e8terclaY and there was a general discussion of prospects over the
IleZt th
zee to six months and the probable effects of strikes in
the Coal
and steel industries.
3, §za-Le
rn credit policy.
What suggestions does the Council have to
make regarding System credit policy during
that period?
With the prospect for active business and with the
bel,ati0
Y forces now evidencing themselves, the Council
f.'eves the policy of the Reserve System should be toward
aljmer money. Through the use of open market operations
130d the re-discount rate, the Reserve System has ample
.
"rs to meet presently foreseeable problems.
President Brown stated that
at the last meeting of the
Ool.nci1
there was considerable discussion of the desirability of
14 the
discount rate at the Federal Reserve Banks, that the
ONctci
1 Igas pleased that such action had not been taken, and that
17i
11/15/49
-6the
Present tendency toward inventory accumulation and higher
Prices made
it more desirable than in September that no action
be
8.-en to
reduce rates as that would only add to existing inl':1"61-011ary forces.
Chairman McCabe stated that up to the present time the
errects of
devaluation of foreign currencies had not been as
rile'rked a, was
anticipated in September.
There was a general discussion of when the full effects
or
-valuation might be felt in this country, the probable level
r caPital
expenditures and expenditures for plant modernization,
44d the need for such modernization and for revision of the tax
sl*lacture to encourage investment. There was also a discussion
or
policies with respect to inventory accumulation and
ti4liover.
4.
.
aa
inanc iTre ng.
Does the Council have any further comments
to make with respect to the December financing?
The viewpoint of the Council is the same as that exre
lo sed in its memorandum to the Board on September 20,
which was as follows:
The Council believes that the Treasury's announcement
that it proposes to issue notes to refund the bonds
coming due in December is a step in the right direction.
As the program develops, it should include refunding
into both intermediate and longer-term issues. Too
1782
11/15/49
-7"large a proportion of the Federal debt is now
in short-term securities, esQecially when considered in connection with the amount of savings
bonds outstanding and with the steadily shortening maturities of the present long-term issues."
President Brown stated that the Council saw no change in
th
situation since last September which would call for a change
illthe C
ouncil's opinion on the December financing except its
”eit that
refunding should Include some longer term issues was
streugthened by
the anticipated Treasury deficit during the current
tIsc41 Year. He
also stated that apparently the Treasury would
like to
issue some longer term securities but because of the high
Prices
at which
outstanding maturities were selling in the market
°1111i be
difficult to issue such securities with any expectation
tllat the
price could be maintained without adverse effects on the
ec:410.
generally. He added that the Council assumed that, in view
°r the
announcement of the Treasury that the bonds maturing in
Decetber
would be refunded into notes, the only questions left to
be Illaed
//c)kilcl be
related to maturity and rate at which the refunding issue
offered and that these questions would be determined on
t4eba81s of
the market when the financing was snnounced.
Mr.
tbs t
Fleming concurred in President Brown's statement with
111-ther comment that the Secretary of the Treasury was of the
v1141011
thtl 441e that there was no need for a meeting of the Committee of
l'ican Bankers Association on Government borrowing prior to
11/25/49
-8-
the T)
-ecember financing but that he had called a meeting of the
ecinMittee on December 15 and 16 when the problems of Treasury
financing would be discussed.
Z. Burgess stated that as long as longer term Treasury
bolla
s were selling at present high prices, the Treasury was
Ittran„.„
and could not do what it was understood it would like
to do.
j
that is, refund some of the maturing issues with longer
te
se curities, and that the question was whether some decline
ill 10
rig
term security prices would not be wholesome as a check
°xi niunielloal and business borrowing and to clear the way for
10
la,ger term
refunding.
In response to an inquiry from Chairman McCabe as to
ther the
Council felt that long term Government bonds should
be
from the System account, President Brown said that in disSSion
yesterday and the day before the members of the Council
sed the view that it would be helpful if restricted bonds
he sold from the System account more freely than was being
(104e
"the present time, that the market would take the bonds,
te
knat the
action would tend to check the decline in the long
rate.
5.
The Board has been asked to submit to the
President the legislative program affecting
1_784
11/15/49
-9the Federal Reserve System which the
Board desires to have considered at the
forthcoming session of Congress. The
formulation of the Board's views on that
matter is now in process and it would be
glad to have any advice or recommendations
that the Council might wish to make in
that connection.
The Council is not advised as to what legislative
P.I'ogram the Board may desire to have considered at the
prthcoming session of Congress. However, the Council
ilas discussed with the Board various legislative prooh different occasions.
The Council has previously approved the following
1egi
slative proposals:
(a) Bank holding company legislation--The Council
has on many occasions urged the passage of
bank holding company legislation, and is now
in favor of the passage of such legislation.
(b) 2spital requirements for admission of state
banks to membership in the Federal Reserve
aqp.ELJII2LE2r authority over the establish,
ment of out-of-town branches of state member
banks--In its memorandum to the Board on
September 20, 1949, the Council favored H.R.
5749. The Council is still of the same
Opinion.
c)
ER1'212. ap.a_liy_LIE.122.12/21.112serve
Banks of
from the
directly
obligations
government
Board on
the
to
memorandum
its
.22211a--In
11
March 11, 1947, the Council made the following statement:
"The Council recommends that authority be given for
a period of three years to make direct purchases up
to 5 billion dollars from the Treasury. The Council
believes that it would be advisable to review the
Matter again at the end of three years to determine
11/15/49
-10"if there had been any abuse of the power and
also to determine whether the power should be
further continued or be permitted to lapse.
The Council cannot but be mindful of the fact
that historically and in various countries direct borrowing by a government from the central
bank has been a common vehicle of inflation."
The Council now recommends a renewal of this authority for a period of three years.
(d) Modification of limitation on the cost of
Federal Reserve Branch buildings--The Council
in the past favored, and now favors, repeal
of paragraph 9, section 101 of the Federal
Reserve Act.
The Council has expressed opinions on other legis8.tiya matters, as follows:
(1)
Section 13b--In connection with Section 13b of
the Federal Reserve Act, the Council stated in
its memorandum to the Board on September 20,
1949:
"The Council is opposed to two government agencies
having lending or guarantee powers in the same field
and therefore would not favor giving additional
guaranteeing powers to the Federal Reserve Banks in
the industrial field."
The Council is still of the same opinion.
(2) Consumer credit--The Council has in the past
stated that it does not believe the Board
should in time of peace have powers over
.consumer credit. The Council remains opposed
to the granting of such powers to the Board.
(3) Possible changes in the law with reuect to
bank reserves-(a)
The Council, as stated in its memorandum
to the Board on September 20, 1949, is
178b
11/15/49
-11"unanimously of the opinion that
neither the Board of Governors nor
any Federal agency should have authority to fix the reserve requirements of non-member banks."
(b)
The Council believes that changes in
reserve requirements should be used
rarely and only for adjustment to
basic changes in the monetary situation. In dealing with the question
of bank reserves, it has often been
forgotten that to build and preserve
a sound banking system banks must
have earnings sufficient to enable
them to accumulate capital and pay
adequate dividends. There should,
therefore, be an upper limit on reserve requirements. The Council believes that the limits now in the
law are as high as are tolerable,
and give the Board sufficient power,
with their other present instruments
of policy, to deal with any foreseeable situation.
The discussion with respect to the Council's comments on
le('islation was substantially as follows:
(a) Bank holding company legislation.
Chairman McCabe in-
Whether the bill (S.2118) now pending before the Congress
rtls e'ecePtable to the Federal Advisory Council or whether it would
4631e sortie
further changes to suggest.
In the discussion which ensued the members of the Council
.'3tatecl th4t if the bill made it clear that there would be no tax
t 4bIlitY in connection with the distribution or exchange of property
e°1111)11 ance with the provisions of the bill and that a bank would
1787
11/15/49
-12-
11°-t become a
holding company if it held the stock of a trust
e°14401Y which did no commercial banking business, the Council
'401114 support
the bill.
(b) 22.pital requirements for admission to membership and
theestablishment of branches b
State member banks.
There was no
discussion of this topic.
(c)Purchase of Government securities directly from the
Treas
Mr. Fleming stated that when this legislation was being
c°461clered by the Congress in the past, it had been made clear that
the
tArthority had been used only occasionally during emergencies or
t1411
—
n:tient periods and that it would be desirable if, when the
niktter
- "Imes before the Congress again, the limited extent to which
the
tqlthority had been used could be pointed out.
(d) Limitation on the cost of Federal Reserve Branch buildings.
etbers of the Board outlined the extent to which commitments
had. be_la
ped
made against the $10 million authority for erection of
t'al Reserve Branch buildings and the need for the repeal of the
°4 in the existing law or an extension of the $10 million au-
(e) Industrial loans.
Chairman McCabe asked if the members
the Council had read his answer in the Douglas questionnaire on
:
44118trlal loans by the Federal Reserve Banks.
11A5/49
-13-
President Brown responded that they had but were of the
°14111.0/1 that the limitation proposed in the answer on the authority
or the Reconstruction Finance Corporation to make industrial loans
11°111c1 not be effective in reducing the volume of business done by
thec°rPoration and might result in political pressure being brought
on the
Federal Reserve Banks to adopt more liberal lending policies.
Chairman McCabe stated that his suggestion would channel
8 of the kind under discussion through the banking system rather
t4la
to the
Reconstruction Finance Corporation and that he doubted
th4
t it would
be possible to curb the present lending activities of
the corporat
ion unless some satisfactory counter proposal could be
°frered.
There was a discussion of the effectiveness of the limitation
°11 Rec
°Ilstruction Finance Corporation lending proposed in the ChairZtIA t, I
s
allswer to the Douglas questionnaire and the members of the
Cottlacil
reiterated the opinion that it would not be an effective curb.
There was a discussion of the operations and policies of the
149.
Reserve Banks under their existing authority to make industrial
4 441-4d Mr. Congdon stated that there had been occasions in the
-,vel
and district when the Federal Reserve Bank of Cleveland took
e.
134rtin4
-,Pation in a loan which was in excess of the legal limit of
the
EIrticiPating commercial bank when a correspondent bank would
bee4 willing to take the portion of the loan that the originating
`;-'89
t.
11/15/49
1/&14t could not legally make, and that it appeared to him to be
c)kg for the Federal Reserve Banks thus to compete with corPoladent banks.
Other members of the Council stated that the
41a situation had arisen in their districts and in a discussion
or the question why a commercial bank would prefer to go to a
4(161
'
8.1 Reserve Bank rather than a correspondent bank it was
stated that
in some cases the small bank hesitated to go to its
el5rre'sPondent because of the fear that the latter would take the
heitess away from the smaller bank.
President Brown stated that the lending policies of the
Rec°48truction Finance Corporation were very different today from
1146:t theY were a number of years ago, that the present management
or the C
orporation was more responsive to political pressure, and
t44t if the Federal Reserve Banks were to undertake to make loans
°r the type
which the Reconstruction Finance Corporation was now
4'11:1.4 they
would have to be much more liberal in their lending
°. 11cies or the present situation would not be changed since the
Ilee°4struct10n Finance Corporation was making loans which the comkercial baliks and
the Federal Reserve Banks would not be willing to
tl rtake.
Mr. Atwood inquired whether, if the Congress was willing to
'
silth°rity to the Federal Reserve Banks along the lines sugNted
in Chairman McCabe's answer to the Douglas questionnaire
exce
1)t tor the proposed limitation on the activity of the Reconstruc104
illaince Corporation, the Board would be willing to accept such
p
1 790
11/15/49
411thority.
Chairman McCabe said that this point had not been considered
bY the
Board.
Mr. Kemper stated that there was no assurance that the
tisfactory experience of the Federal Reserve Banks under the pro1814
Of section 13b of the Federal Reserve Act would be repeated
14141
'the amended authority proposed by the Board for the reason that
Yould not be made for as long as 10 years for any purpose and
that
*ALIA be an entirely different business from that done by the
be2lh under
section 13b. Furthermore, he said, there would be incompetition with correspondent banks because the smaller
would find it to their advantage to go to the Federal Reserve
118
'
44 for
participations in loans that were larger than the bank -
Make. He
Nieral
added that the proposed authority would subject the
Reserve Banks to political pressure to make industrial loans
4Iad
would not be
effective in curbing the lending activities of the
,
st
ruction Finance Corporation with the result that the legis141'1°4 would
establish another competitive lending agency and would
:
13
t 44°ther step in the direction of socializing the banking system.
-1111g
"
thavt
the discussion similar statements were made by other members
Council.
Several of the members of the Council expressed the opinion
tether
than liberalize the authority of the Federal Reserve Banks
14.1/r01-1"
'
sea in the Chairman's answer to the Douglas questionnaire,
1791
11/15/49
it
-16-
vould be preferable to leave the law in its present form until
the pe
rformance of the Reconstruction Finance Corporation under
it8
existing
authority made it clear that the authority of the
Corporation should be curbed.
Mr. Kemper added the further observation that if the auth°ritv
- of the Federal Reserve Banks was changed as proposed there
Iraetothing to prevent a different Board adopting a different
11(41-cY which would be in the direction of socialized credit.
Mr. Evans questioned whether there was much danger of
DclitiCal
pressure being brought in connection with industrial
4418 bY the
Federal Reserve Banks because of the regional character
°r the
Federal
Reserve Banks and the fact that the loans which a
've Bank would make would be subject to approval by the Board
Of
rectors of the bank.
The members of the Council were of the
°A141
cn, however, that that would not be an adequate protection.
14
response to a question by Mr. Draper whether the Council
alt the.,
section 13b should be repealed, President Brown stated
that t
he Council felt that as long as the Reconstruction Finance
C°1"Porafi
---on had authority to make industrial loans and there was
11° Drcl,
--auility of curtailing the Corporation's activities, the
Pecier
al Reserve Banks should not have authority in the same field.
hit 44
Chairman McCabe referred to the statement contained in
"to the Douglas questionnaire to the effect that unless
811
1.792
11/15/49
-17Changes were made in the law to place the authority
°t the Federal Reserve Banks on a more effective basis, it would
be Pr
eferable to repeal the present limited authority of the
4.
44-L Reserve Banks in its entirety.
He added that it was his
171e'f̀ th at before that was done, however, an effort should be made
to sui
authority from the Reconstruction Finance Corporation to
the,
zederal Reserve Banks, that the trend to the "left" would not
bestopped
by mere opposition, and that the only way to meet that
by the proposal of a sound alternative program.
The members of the Council indicated that while they would
Prerer
to have the authority in the industrial loan field placed
13°41Y in the
Federal Reserve Banks, they did not believe it would
be Pelesible to
effect that change, and that in the circumstances
It
be Preferable for the Federal Reserve Banks not to have
4111.4ritY to make industrial loans.
There was some further discussion of the matter but no
rent conclusions were expressed.
(f) Consumer credit.
Chairman McCabe read his answer to
the
°U@Ets questionnaire on this subject and in the ensuing discilseity.4
Volved
1thethe
°I* the matter President Brown stated that the question inthe differing opinions of the Council and the Board was
authority over
consumer instalment credit was a proper
1793
14115/49
-18-
lAstrument of credit policy.
(g) Bank reserve requirements.
thDA
Chairman McCabe stated
Jzi his answer to the Douglas questionnaire as to whether
the _
zrfectiveness of Federal Reserve policy was reduced by the
Pl'eSellee of nonmember banks, he had submitted as an alternative
88.1 the suggestion made by Mr. J. T. Brown at the previous
tleetinn,
-kb of the Council that all commercial banks be required to
Illaittain the same percentage of reserves against deposits but that
11°Illis1aber banks be permitted to count their balances with corNilotdent banks as reserves.
Mr. J. T. Brown stated that he noted that the suggestion
e°11Pled in Chairman McCabe's answer with the further comment that
ltt114
—44
'
8
improvement were all that could be achieved at the present
title
'would not be safe to give direct access to the credit
441.14
ties of the Federal Reserve Banks to all nonmember banks
(4 the .swer proposed in the event reserve requirements were
1444
Vid.e
Ullitorm for all banks) but that it would be feasible to pro-
such access to all nonmember banks that chose of their own
v°11tio
„
to carry the required reserves with the Federal Reserve
114114,
J-Ls also expressed the opinion such an arrangement would
*)ritable and said that it would be acceptable to him.
Mr. Congdon suggested that when the Board undertook to
1114te its views with respect to changes in the law relating to
1794
11/15/49
-19-
144/erve requirements the Council be afforded an opportunity for
a full discussion of the matter with the Board.
Mr. Burgess commented that such a discussion should in" consideration of the earnings and capital position of
batko
') and that the principle reason for the opposition of banks
t°111creased authority in the Board over bank reserves was the
"feet of
increased requirements on bank earnings.
The members of the Board indicated agreement with Mr.
C°4gdoni S
suggestion and Mr. Evans proposed that the Board's staff
—quested to prepare a draft of statement which could be sUb1111:tted to the
Council in anticipation of such a discussion.
the in
All
of the Council stated that such an arrangement
163111c1 be very
helpful.
6. Palglas questionnaire.
Are there any matters in connection with
the questionnaires sent out by the Douglas
subcommittee of the Joint Committee on the
Economic Report that the Council would like
to discuss with the Board?
Two members of the Council have been asked to testify
the Douglas subcommittee of the Joint Committee on the
ran"nic Report. It is not possible in this written memofor the Council to express an opinion on all of the
qUestions in the questionnaire
of the Douglas subcommittee.
of the Council will be pleased to comment on any of
the
le questions should the members of the Board desire their
'oints
be
PI'esident Brown inquired if anyone knew what objectives were
17(1r-
11/15/49
-20-
bei
Sought by the Douglas subcommittee in sending out its
TLIesti-konnaires and holdings hearings on monetary, credit, and
"4-1- Policies and no one had the answer to that question.
Mr. Burgess inquired whether the Board favored the crea"
tic
a National Monetary Commission and Chairman McCabe responded
ill the a
ffirmative. Mr. Burgess said that the important point in
ttb
creation of such a commission would be the selection of quailtie,4
"Personnel
to serve as its members.
Members of the Council commented that Chairman McCabe's ansiieTs
to the Douglas questionnaire were a very useful piece of work
elldhe
expressed appreciation of the assistance that some of the
illerQbe
r8
t
of the Council and others had given in submitting comments
his consideration in placing the answers in final form. He
Et180
stated that he appreciated the opportunity to work with the
Colatle
11 and while there had been differences of opinion at times
d always been on a friendly basis.
Some members of the Council stated that probably this
0111413
a their last meeting as members of the Council and that
h.
P
preciated the opportunity which they had had to serve in
tb t
eaPacity,
oktia
t110
President Brown stated that the next meeting of the Council
rItInarily be held on February 19-21, 1950, but that since
4tes were just prior to Washington's birthday, the time for
-1796
11/15/49
-21-
the
meeting could be changed to February 12-14, if the Board of
Gov
ertors should prefer. The members of the Board and the Council
tested that either time would be satisfactory to them whereupon
Pre8
.Ldelit Brown stated that the next meeting would be held on Febru
84"4' 19.21.
Thereupon the meeting adjourned.
Chairman.
@FedFRASER