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19O; A meeting of the Board of Governors of the Federal Reserve la the Federal Advisory Council was held in the offices of the to_ "11Of G overnors in Washington on Tuesday, November 161 1948, atichm PREskliT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. McCabe, C Eccles Szymczak Draper Evans Vardaman Clayton man Mr. Carpenter, Secretary Messrs. Spencer, Burgess, Williams, McCoy, Fleming, J. T. Brown, E. E. Brawn, Penick, 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, respectivel,y. Mr. Prochnow, Secretary of the Federal Adstvisory Council c41.11m EltNi 11131ktt thet Brawn °11 the ted that about a week ago Chairman McCabe telephone and suggested that at this meeting, in- tollawing the usual procedure under which the Council would Zeraoratidwn of matters which it would wish to consider with ") there be an of the legislative matters informal dis htieleco bn atain nk se ud inis perv th Hoover Commission with repor the rt of ion oe rire agencies. He said that he discussed With other members of the Council and they were glad 11116/48 -2- t° Proceed at this meeting in that manner: Before undertaking such a discussion, President Brown mnde 811b3taatially the following statement on behalf of the Council: cal, The unexpected outcome of the national elections Use Th d,a verY profound change in business sentiment. ()IL "48 no clear-cut pattern or grounds for decision ut::ther a recession is in prospect at an earlier tioi ; uhan we had previously thought or whether infla'LrY , c1,11estionpressures will continue. However, there is no a large number of expansion plans have ollact64e1ved at least temporarily. If Congress should tsze .an excess profits tax or heavier corporation giall ; ,a tremendous amount of expansion that had been Ige141 : d would be an abdoned. Business people with whom om u,Icive talked are more worried about the prospect of l'art..inasee than they are about the repeal of the cortrj r'leY law. They are also worried about price areas-43 and allocation of commodities. If when Conto move°uvenes there is an indication that itrestricted is going ion, expansion will be a ;:r1;11l:1/1•11g: to theart of theti;le.et the pr.G°vernmentchange in the situation with respect bond market was due to a belief that the -sent ad ministration is more likely to continue kot 13°1icY of s thka uPporting the Government securities mar;$ EQS0 tZ new administration would have been. There beattaszit feeling, which is more important, that inecause2:1)13 °Itunities will be less than anticipated ttop, bo „ ioriviathe A ueferment or cancellation of plans for 1,1111d is nd that perhaps a per cent Government tae a good thing for insurance companies to hold. 1?-q.db feels that under these circumstances it it ? Unvise, at least until the situation settles "rook Possible to see where we are going, to dia b—i. r by changes in short-term rates or in of the Federal Reserve Banks. Shor should be raised as opportunity offers but, ' 4.141 (4 .1.. the present delicate situation, the Council z41, 311 :1.; 1 %pt14.1.! timing shuld be left to the combined is Ldrle Treasury and the Board of Governors. ttVqloh -es„P°seibility of a recession getting under. her than was b anticipated and the Council 4-tt: to that until the trend becomes clear the ' 411 Would be to take no important action. -3A ong bankers throughout the country the recent in ; Ittli7se31 in reserve requirements of member banks is almost 10ement5disliked. They feel the changes in reserve are not a proper method of dealing with the inTe.sent problem of inflation, and that they have resulted to ;fallsferring Goverament securities from the member banks ""e Federal Reserve Banks and have not been effective ieri,arielleclusceiairvgethe volume of bank loans. As long as the Fedreee ! tl i that Banks buy securities in the market it is not increases in reserve requirements will be eft1.8 vte in r estricting loans. Telhile earnings of banks clivid/47'°1e have not decreased, the earnings of some inthat , 1 1 banks have declined and bank earnings are so low Pa/1k stocks are selling below their liquidation value C4Pia tZ1nstances, making it difficult to get additional exatairi Th !Pedera.1 Advisory Council is not opposed to a resti* is.:4ical of the whole problem of bank reserves or a the ,vy some group, perhaps a monetary commission, of thertiz°13°sal that reserves be computed on the basis of bIlt it of deposit rather than the location of the bank, request'eels that it would be its duty to object to a ?rity tc,b_i l tibe Federal Reserve System for further auth'hat -L-Qcrease bank reserves, and the Council is sure A3.78 gen.erally would feel the same way. els ha -L. members of the Council feel that too much emphati_rols hell placed on the effectiveness of monetary con- Part monetary expansion has played in the 177"arY situation that has existed up to the present s eadit ' I s feel that • is due primarily to large a inflation ag1(,! 1 del b Iler11 :12 for capital goods and consumers' durable 14-4eili"lbrnerateeilIZ-Lsthfoerc:upacity of the country to supply labor goods. We are not unmindful that qtt s °f the hi , °11 befo, Board have very courageously taken the po' °11 had e Congress that expenditures for housing encouraged by Government guarantees were 111°N El..41 for tthe other hand, the Government has promised eg Drr,A arld °1 / 8 i n g• It might be that the fear of higher wqbe. ". ..1rAn tOlbrn : Uera I eeTt Co ntrols will reduce expenditures for e re2ital goods. We feel that the recent In;' ence with representatives of the insurance has been be " Gov-4 tilese instieffective in reducing sales of securiitzei‘%erriors tutions. We, also feel that the Board b,should ' emphasize that monetarypolicy by l —ye verY little effect as long as other things al L 1909 —4— Z cei °jug on and if price supports are going to be cont .in— to bi.agrieultural production and other prices are going be kept high. In oank credit or that situation it is inevitable that Gove ent funds are going to be used theOne l'raY or another to carry commodities than would be CL se if prices were allowed to seek a more normal level. Burgess has some figures which show that expensli— lor consumer durable goods have increased about ince 1938 or 1939. Whether the level of these 31 Perideis+L ex— the F`u:e8 Will be checked we do not know but we think the fo " e of what might happen because of the outcome of Pehdil`eetion may very seriously reduce the rate of ex— ti for producers' capital goods. Mr* rgess 131 Mr• Brolra distributed copies of the tabulation referred to which showed that expenditures for consumer durable °c3cI8 1111c1 increased since 1938 from an annual rate of $7.4 billion t30.4 billion, that producers' goods had inexpenditures 0e;s4t8e:Itestilli!5.4 billion to $22 billion, and that the expenditures :: ici /3.4 :: palities for public works had increased from b111 th be is ll eion in the same period. were ticIde;4tO2 ot%t or %Itl°48 4nC1 He said that if expenditures substantial expenditures for fc)reigla aid, etc., the total would be beyond the capa— to 8eieettn'itshecto:nt: to produce and some way would have to be found s that should be produced. th ttoti fie ohe elleuing discussion, Mr. Eccles stated that the situa— which lie were trying to do too much too fast, which 4Z1 to 1/1 e country using up the surplus that would be 4,11d : 434°4 a r ecession and that production of these desirable -"'ees should be spread out over a period of years. 11/16/48 —5— Mr. Burgess stated that there should be some group which e°441 /14 take a study to determine what the situation was and allegest the principles upon which decisions could be made as to the Neots that should be postponed and those that should be cerlled out. There ensued a discussion of the reasons for the decline sales Of Government securities by insurance companies and whether of allocating basic materials would be effective. Chairman McCabe inquired whether the Board was to understand tr°t1 the Council's statement that it felt that deflationary forces tr°41 no%r zight be greater than the forces of inflation. President Brown riot responded that the members of the Council did '31,r but felt that or ea -there was a possibility that the restriction th.t th expeaditures might be so great as to cause a recession and top of the inflation might be past. Some members of the tel t) he ktijer said, that a large number of people were cancelling evoa 8. Or fret eCtS eht (including the railroads which feared a contraction eY had 1°adings and were not ordering the freight cars that eXPected to buy), but that such a readjustment might be a rable thi„• —g taking the economY as a whole. The ei44 I's vas further discussion of the change in the situation 14Itional el ections, and President Brown stated that the or the l'i°14141. depend to a very considerable extent on the pro— and the attitude of Congress toward the 11116/44 —678al°11s Proposals that might be advanced. At least, he said, there O1 be a breathing spell of three or four months before expansion Plazs of business would be resumed at anything like the rate that 44teelacontemplated before the election. That did not mean, he said; that utilities would not continue to supply services by ex— khcling their f acilities but that such projects as the construction c)fdePertanent stores, freight cars, etc., would slow down. During the discussion there appeared to be agreement that ttlinstraent such as outlined by President Brown would be a desir— 4111e 'Lim, --Le if it did not go too far. 'Ir. Eccles stated that the volume of expenditures for pro— tilleeret c)it the alit' COrisumers durable goods was in excess of the savings bth: adaciczi: furi azidds thw ee re re fore it did not make much difference whether raised in the form of equity securities or t14) that the t e bee difficulty was that the country was trying to fill klog of demand more rapidly than there were labor and materials tc) 611131)1 4i, l'4 tao '"e cieraancl) that the vole um of money already in existence 4 thttli thq surficient to meet the requirements of this demand, but thile th_...e G, fIllicia kr -vernment had followed a policy of reducing the sup— b'1114 h retirtag Government debt and by other actions, the the 84 ied that to:41411if ea policy by increasing loans and thereby adding N3r1‘, Ct.. excess,ve laity r or 1 money supply. Although a large part of the inflation was outside the credit field and not 11/1648 _7_ /lith the bankers, he said, he.ving followed such a bet free, as it was after credit policies so that it tor they must take part of the responsibility policy. He added that if the System had the first World War, to adopt restrictive would not have been possible for banks insurance companies to provide credit, the inflation would not ha'iPe developed to the extent that it had. 1111 'Fleming stated that that was not the whole story and that it all it would be the necessary to start with the reasons for Policies that had been followed, including the fear of eight 414144 tO ot hi 111112'1°Yed and the demand of labor for increased wages, all h l'esulted in higher prices and the need for additional Nit to do business at the higher price level. Ngeettill the discussion of these points, Mr. Eccles referred to the llot e. °II et the C°1111c1l that increases in reserve requirements were 14 ' 01:ler izstruzent of credit policy in artflationary situation. in ::::ted that vh 11 en the last increase was approved the System was l'tith .1.1,, vg ..1., el1411,,, e"t'srnattve of increasing reserve requirements or h. 541e JAB 061 4 ' 'Llq 4 —4-4eY of tai dOrit ti4)4,.. Y. of the supporting the Government securities market, Council at its last meeting favored continua""Lthe s utoo 4 v.-hotee ---r"P°11cY, and that if that were done the Board had blit to 4), itlerease reserve requirements to sterilize the re— sated "V the Purchase by the Federal Reserve Banks of rc't ricnbank holders. Otherwise, he said, these reserves 4() 4/1648 -811°41c1 have been added to the reserves being created by gold imports 4411°144 have been a further inducement for banks to expand their iNleand inv estments. He made the further statement that anything that °lad be done to reduce prices and bring about some recession thee prevent a fourth round of wage increases would be a de844ble There /las a discussion of how this could be brought about and T. Brovrn raised the question of the inflationary effects of the lerlditlg Policies of the Government through the banks for cooperae aald the Commodity Credit Corporation. arik tliq 111'. C)dlin expressed the view that the increase in reserve rehad not been effect-Lye in restricting the expansion of CNA 4 -s"-t and Mr- Burgessp::::: statedo rect as long as the 4titet -8 get ktici. ealltintled such increases would not have supporting the Government security which enabled banks and insurance companies to 4141441 firide by selling securities to the Federal Reserve NI ' 4 Ile added that the existing large volume of production would 'lltre a certa i n e to amount of credit which the banks were under necests141 811Pp1y because of their customer relationships and that after 4% ktlq 114"e obta ,,ttEt1 eclaPanies had made a loan for a construction project tiled the funds by selling Government securities to the Ileserve 13anks there was not much that could be done to deny the that plight be needed in connection with the project. '4clit 11/1648 —9— 14r. Szymczak asked the question what could be done assuming that the policy of the Government security market was %%tittle& supporting Mt. 'Burgess expressed the view that there was a substantial orpublic works being undertaken by the Government and various Stat." 8.4c1Mun.icipalities and that the Board should urge that such 131‘°Jects be deferred until the backlog of other demands had been more tet. He added that the public the was getting the opinion that .4sre the chief sources of inflationary credit expansion, that thi be u "lade for bad public relations, and that the problem should at -eszi ek ilearer the source of the credit. City)) Mrs 151erning referred to the monthly letter of the National eight alik fQr November in which it was stated that during the first %vertu : : Q 1 °f 1948 insurance companies had sold $1.9 billion of : , e6.41,i t7 8acnritiss and that their loans and investments had 41111ber batktile net amount of $2,535,000,0001 while weekly reporting cr a i4 the Period January 1 to October 20, 1948, had de— a"ecl th tl, litll e - loans and investments by $2,519,000,000 as compared ell illeraass of $575 million in about the same period in 1947. lurth qliallrealee sr discussion, Mr. Eccles expressed the view that thl the e°144104 et)Panies and savings banks were even more responsible for adding to inflationary pressures and that some r°1' tile insurance company problem should be found. 3 11/16/48 —10— Chairmaz. McCabe stated that it was a healthy situation when Board as a regulatory body and the members of the Federal Ad— '74°17 Council, as representatives of the banks which were regulated hY the Board, could sit around the table and have an entirely free the discussion of their problems as was done at meetings of the Board e41d. the Federal AdvieorY Council. He contrasted that situation lqh the 046 existing in the case of the Federal Trade Commission ttki business and the Interstate Commerce Commission and the railroads, '4here a procedure of more formal hearings was followed without the advantage of free informal discussion. While it would not be pos— he said, to reconcile all the differences of opinion, there ekld be e. general support /kid by the banks of the Federal Reserve System 'unity kch 1,Tas 114eve righting to the opportunity for free discussion Preserve provided through the present organization of the Federal Fitera. 11kki, stated that if there was a belief in the chartered sye 1) rez teinith some degree of autonomy in the banks, it should Illbered that only a few years ago the statement was made by men 14113lie life that the banks were not doing their job and that bills irrtr DEttizie (1,,ueed for the establishment of a loaning agency in the De— of cc/amerce. He added that there had also been a ouestion billiks could do the job of reconversion after the war, f1114 met that test, but that if the banking system 19rii 1111648 -11colittaued to be made the target for the charge that they could not et the of their customers there was going to be increased 1318811re f°r the entry of the Government into the credit field, which 11°111draeez the end of the private banking system. Chat .'fl McCabe did not concur with the opinion indicated by 4Zezezbers of the Council that the bankers were "in the dog house". eli the cortrary, he felt that they were in better repute than ever before he sttid that public statements tht P he had made had em-ohaB14dthe part that the banks had played in the war and postwar 1* So fer a9 he knew that was the view of the Board. That did 4tieall' he s8id, that the differences between the Board Frld the C°1111ell e°1134 be r econciled entirely because he did not think ink that 14)11c1 be possible. atthea inquired whether the Board planned to ask Congress 411111, 11et session for further powers over bnnk reserves, and Chair' e 41be stated OtIt that the Board had not reached a decision on that e8idslit Brown then stated that the Federal Advisory Council Parate eet111--L-ng had given a great deal of attention to the chari, ht es in the Federal bank supervisory agencies that berect)' ofthecrinnelldeci by the Hoover Commission, that some of the mem"had seen the study on the Federal Reserve Bperd °Y141,. t "h for the Commission, but that it was expected 11/1648 -12- thet the report submitted would be different from the Bach report. Re 418° said that, while there were differences of opinion among the Zezbers of the Council on some points, there was general agreement O the Points under the following five headings: dtlel I I,' The Coun.cil believes in the maintenance of the this ' Qanking ?lad .3rstein system, that the checks and balances that provides have been constructive in the past, the i?Ist it is is Bach reportdesirable that they be maintained. While indicates that the dual banking system it, °gical, it is politically useless to try to abolish the 1,, 2* The Council realizes the problem of maintaining sarie tirne'clePendence of the Board of Governors and at the 1113-t 813ni t'°viding for cooperation with the r administration, (3f th: siqe independence of action and thought on thepa thth, t °Ilii rel is imperative. The Council realizes ,t the "siapr concept in which the Board would act e of the s\isIlle court of finance" and have the independence • prcIPOL' eTel/le Court has not worked, and that as a long-run ad Board has had to go along with the 4i istltn the B ,71ett. si :,--°r1 in power. '4hat th—pezindePendence The Council believes, however, of thought and action is necessary, ' ic3r1 o Board should not be subservient to the llethe administrar the Tr easury, and that while in the last analysis ,i4c1, 41,c1 Bar , 2 /.1 111d go al ong with the Treasury there shod should 1311reell—"L',erice enough so that it would not be in effect ;11begeelic,,, c)-L the Treasur. 3r The Council thinks that the i' hl ePTo rf e ih̀ts e the Bach report for changes in the memberof 1,.a ,or rdBariling and provision for an Under Secretary as a member of the Board would b.e-r°e:Ile because it would reduce the importance and 4'°41hetcit-h -c e ,°f the Board and its ability to stand out 4reasury. C 3. The eTi s rycil does not favor the Economic Policy it IF31110 reauju in the Bach report for the reason that e the importance of the Board. Furthermore, ssarY• The Administration, through the the LI °I' theez_ "udget or otherwise, should bring about Atl,,°11t h„ coo vl•sc - 71.11g thrdination through informal procedures -the% ' Economic Policy Council. The Federal .4.0s,rd Iavors higher salaries for the members gS well as for cabinet members and others. _A- NJ_Cf.- large4 ; The Council believes that the maintenance of a 8erv _Degree of independence in the individual Federal Re of the rej Ink8 is desirable as a means of rallying support sen-t'ueral Reserve System. It also believes that the presYstem of electing directors, which is heavily weighted Coi,,a7 „" of the ele—cet-u- tiaras smaller banks, should be maintained. The that the Presidents should continue to be edBbY the boards of — the directors rather than as proposed open zch report. Participation of the Presidents in the tirtue: ' IL et Committee should be continued in order If er toconthe pr's re Presentation of the banks in that body. the B esidents were appointed in the manner suggested in beirt report there would be less likelihood of their tVrilling to speak out against the Board as they do the Present time, which would weaken the support of uYstein. the IL The Council would be opposed to the suggestion in Irisio,'„rePort that the function of examination and superGo7erri-orols a be ll eau i: n su:red banks be placed under the Board of e°11fit , (a) Bank examination should be objecTzha and en kid 1,711 t° the ' °bee ,ther determination of the solvency o their lending policies are sound and they ey: t re 44714 the law. function should not be used °Iltzonetary pTollIscie it , ( 2,), .) The most intelligent criticism of the Board 1,rsiiir,"-Lc1es should come from the banks. That cri 1ort° : tend to be stifled if examination and superhtt .' re given to the body responsible for formulating P°1icies. Banks which were critical of the oaof ril. `411f3A, b06„, -8`r retaliation through the examining department . 44ere 11,7' Iltich "lt' th ire been. would be detrimental to the System. ixistances in the past in which it was 114c1 the.t the office of the Comptroller of the Currency 4tqiatioa. e examita ion procedure as an instrument of wi me Cebe stated that the Bach report had not been sub- titted to bit 8"rd Eisit to as such, although some members of the Board had 8-.41it their individual views regarding it. 11/16/48 -14Pl'esident Brown stated that no member of the Council had been comment on the report. ChairMan McCabe also made it clear that the Board had reached liodecisiorls regarding any of the questions raised in the Bach reor ta the discussion at this meeting. Illsre was an informal discussion of the comments of the Counc:114141Agl,tich it was agreed that the views expressed during the 46%,8810/1 would be regarded as those of the individuals who ktle Dated. ter a Z:30 recess for luncheon, the discussion was resumed at 11411 orP48ident Brown emphasized the view of the Council that the G°vell:1°1's should be the body for the formulation of monetary ‹: that the banks should be free to criticize the System kperviat th Or Qf listaliation through the medium of examination and ,., (411 lie also -8tion 41, the eixtr said that the Council felt there was merit in ""at a member of the Board serve with the Comptroller CO'hu 'Poratio : e alld the Chairman of the Federal Deposit Insurance as a d irector of the Corporation. th President Petiera, Brown stated that ordinarily the next meeting of bt tIlEtt 4 itchris°1"Y Council would be held on February 13-1., 1949, ers was some question whether it might be desirable for Ito rileet sometime in January after the President's budget A.014-4 11/16/48 -15488age and his the congress. message on the State of the Union had been sent to Chttirnan McCabe suggested that the Council plan to meet at theue 1141tizevith the understanding that, if occasion reouired, en earlier raeeting could be held., 111". Burgess stated that if the Board was going to make suggeaticiis to the Congress the Council would like to have an opportkttY to discuss the recomnendations before they were submitted* toe.rChte the ci tirman McCabe stated that he would take that matter up with 144 '1 Eccles suggested that the Council appoint a committee to Nare and subrilit to the Board such recommendations in connection legislation Eis the Council might ree wiso hmm to make. Mt. °dill. 'suggested that President Brown be authorized by the cc1/41"1 t° aPPoint a committee for that purpose, a nd President Brown 4t : teCi that he l'iould ask the executive committee to meet and con"e tletter. ti Chairman McCabe stated that the Board would welcome any Bugthe Council might wish to make. In this connection ttlr : t 11°14tecl out that the President's letter asking for material ,t4 tl State of the Union message and the Economic Report and for ot 4tellttive program reeuested material by the submission of %rith 1 t uPplemental listings for the legislative program '41°11 December 15. that 11 64 —16— It agreed by the members of the Council that the next l'etaar me etIng of the Council would be held on February 13-15, 1949. Thereupon the meeting adjourned.
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