The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
A meeting of the Board of Governors of the Federal Reserve SYsternwith the Federal Advisory Council was held in the offices of the Board of Governors in Washington on Tuesday, November 181 1947, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Szymczak Draper Evans Vardaman Clayton Mr. Carpenter, Secretary Messrs. Spencer, Burgess, Williams, McCoy, Fleming, J. T. Brown, E. E. Brown, Penick, Atwood, Kemper, and Odlia, members of the Federal Advisory Council from the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, and Twelfth Federal Reserve Districts, respectively. Mr. Prochnow, Acting Secretary of the Federal Advisory Council At its separate meeting before this joint meeting the FedAdvisory Council approved statements with respect to the mat'Lel% Were to be discussed with the Board of Governors and Ye8terdRY copies of these statements were furnished to the members t the Board for consideration in accordance with the procedure Ilgx*eed upon by the Council and the Board on December 3, 1946. At thts meeting the discussions with respect to the topics were subBtEirltiallY as follows: 1. 'What position does the Council wish to take now on Bill S. 408? I 11/18/47 -2- The Council is cognizant of the investigation of the activities and powers of the Reconstruction Finance Corporation now being made by a Congressional Committee. Until ,ongress has determined whether the Reconstruction Finance ' L crPoration should be continued, and, if continued, what wers to make or guarantee loans should be given it, the ouncil feels that no action by Congress should be taken cn Senate Bill 408. The Council feels that Senate Bill .12-08 should be considered only as an alternative to legislation continuing the present loan and guarantee powers of the Reconstruction Finance Corporation. If the Congress should decide to continue the Reconstruction Finance t ecrporation without greatly curtailing its loan and guarang powers, the Council would be opposed to the passage !!' Senate Bill 408. The majority of the Council would preSenate Bill 408 to the continuation of the Reconstrucicn Finance Corporation powers, but it should also be noted that a minority of the Council is against giving , 1, 114Y guarantee or commitment powers to the Federal Reserve soanks under any circumstances, as proposed in Senate Bill 408. 2 r President Brown stated that in accordance with the underetkad. Ing at the last meeting, the Council had given further con- 8i1era4Lor i t to what its position should be with respect to the in--- loan bill and that the above statement was the result of that con sideration. Chairman Eccles said that the new statement which indicated pref erence for the industrial loan bill rather than an extension °r the lending talleh powers of the Reconstruction Finance Corporation was 111°11° satisfactory to the Board than a statement which would op- P0a a 0 enactment of the industrial loan bill. 2. The Board is very much concerned about the rapid expansion of bank credit. The Board, therefore, 1568 11/18/47 -3desires to have the views of the Council as to the further steps that might be taken to correct this serious situation through monetary or fiscal means. The Council has reviewed the question of the volume of bank credit both in the aggregate and as shown in the banks with which they are familiar. We do not know what "serious situation" in bank ?redit the Board has in mind. For the past year the tcrtal volume of bank credit (i.e. the available amount 2f bank money) as measured by adjusted demand deposits uas been practically level. As bank loans have increased, the ,, mnics have decreased their investments. We find nothing in bank loans themselves to suggest that v." growth of loans has been an active inflationary fac' 41% It rather appears to have been a reflection of the very high level of business activity and high prices. To a large extent growth of loans is a direct result 71 government policies. For example, an increase of nearly llion dollars in the real estate loans by insured banks ce the end of the war reflects directly the purchase of 'ettA and GI mortgages in the housing program. Is_ The Reconstruction Finance Corporation is encouraging 'LI* lending by guaranteeing risky loans. a . Commercial loans are influenced by high prices and ent of agricultural and manufactured products 07;:i 4117 gn aid program. th„ High wages and high costs of materials have meant business needed more money to take care of its cusomere. There is nothing in the figures or our experience to ggest that there exists any substantial lending for speculati t, on or for unnecessary uses. Loans for carrying securi-Les are much reduced. Su c In this period the government, through the E.F.C., the I 4-, the P.C.A., and other agencies, has been making loans I 11/18/47 -4- that the banks refrained from making because of their speculative nature. The Reserve System itself is askg for more power to guarantee loans on the presumption waat bank lending is too cautious. The causes of our present inflation are not in current h -anking policies but are found in the great warexpansion of buying power together with unusual events and public policies since that time. Among recent inflationary causes may be listed the following: The foreign aid program A cycle of wage increases in excess of increases in either the cost of living or productivity A shorter working week A short corn crop Veterans bonuses and relief payments Agricultural price subsidies U. S. Government spending of 36 billion dollars a year Housing subsidies In the face of these developments a substantial inShe in bank loans was inevitable and the banks have wn restraint. The dangers in the present situation fe understood by bankers and there is hardly a bank in the :.count ry which has not been warning its customers :gaInst overexpansion. The loans being made are mostly lor direct production. The first thing to do is to reconsider government rilioies which are inflationary and especially excessive government spending and subsidies. We recognize that even though the causes of inflation are se largelY outside the sphere of monetary policy, the ReSystem has a special responsibility for bank credit ' as In this situation should take all reasonable care to 8ure conservative credit policies. this special area we suggest that the System and the Trin -easury ,4 14 already have large powers, without new legis' 011, to place credit under broad restraints. i9 15TO 11/13/47 -5- One of these powers is the discount rate which is a eeognized instrument for serving notice on the public of the need for restraint in the use of credit. Similarly by open market operations the System can control the reserves of the member banks and limit their lending power. _ The Board also still has the power to raise reserve requirements in Central Reserve Cities and so tighten money. h The Treasury by the pricing of new issues and the _ndling of its balances has great influence on the rate ..tuu volume of money. In the past year the System and the Treasury have used these powers effectively. The money markets and the policies of business men are today so sensitive to action of these sorts which the Rese System and the Treasury take that present powers are rve ample to place all restraints on credit expansion "leh the System and the Treasury may consider necessary. The Council wishes it clearly understood that it Shares the apprehens ion of the Board of Governors with respect to inflation dangers. It does, however, most i6renuously object to the singling out of the increase bank loans as a principal contributing factor; and has attempted to point out above, the vastly more _'-inPortant elements of inflation - of which bank loans ure a barometer. baak This is not to say that there have not been unwise of,-Leans in some cases. After all, banking is a form be 'unlan endeavor, operated by human beings. It would Butanlazing if there were not some errors in judgment.. of we submit that, on the record, there is no evidence pe 14?ank credit expansion beyond that which could be exunder all the circumstances. There is every eviet:!e that loans are today doing a wholesome and conwork in their intended place in the economy. 11/18/47 —6— The Council has studied the increase in consumer cr?dit in relation to the termination of Regulation W. While consumer credit has increased substantially, much Of this reflects the availability of automobiles and household appliances. There is so far too little ex— perience on which to judge the effect of the termination of = on W. The American Bankers Association is with considerable success to ensure mainte— nance V banks of sound lending standards. This effort towards voluntary cooperation seems to the Council the i:Mt: and the democratic method of dealing with this both with respect to the banks and other lend— ers. The Council is opposed to legislation giving the Doard new regulatory powers in this matter. President Brown said that the above statement was prepared hY the n ,,ouncil before the delivery of the President's message at the oPenin g of the special session of Congress, and that since then the Council had given further consideration to the matter and wished to ttdd th e following paragraphs to the statement: w., „1:6n Z" 'Ilat Suggestions in the President's message to Congress respect to credit control indicate the possibility he Federal Reserve Board may present to Congress the b.se in its 1945 Annual Report for a required '6-.01.1* reserve of short term government securities. The uncil therefore wishes to state its views on this PII°Posal. sh The proposal as we understand it is that banks °111 be required by law to maintain, in addition to Cash reserves, reserves of short term government se— c Se— in a deposits, to relationship to percentage bu.rities be from time to time by the Federal Reserve Board. r The Council is unanimously opposed to this scheme -L0 the following reasons: 1. It ls • impractical. The operations of banks are so Ierent, reflecting as they do adaptation to the varying 1522 11/18/47 -7- needs of their communities and customers, that no percentage of short term government security holdings can be appied fairly or practically to all banks. Any percentage high enough to offer any measure of restraint on a substantial number of banks will have disastrous effects on ma4Y other banks, compelling them to liquidate sound and necessary loans and thus actually check production. The ver7 banks which have served the business in their communities most aggressively and helpfully would be hardest Such a plan would substitute the edicts of a board in washington for the judgments of the boards of directors °f 15,000 banks throughout the country as to the employof a substantial part of the funds of their banks. ls is ElEtep towards socialization of banking. 3. As indicated earlier, the Federal Reserve System and the Treasury already possess large powers of credit control not now being fully used. Such new powers as those Proposed are not necessary. the President Brown added that the Council would like to have elite statement made public by the Board and sent to the Chair- Zen of the Senate and House Banking and Currency Committees. Chai ,.rman Eccles stated that yesterday afternoon Senator Taft elIlled on the telephone and after referring to the statement contained th8 Presidentts message with respect to restraining the creation of 11111.411ti°nerY bank credit, stated that he was calling a joint meeting : r the Baaking and Currency Committees and the Joint Committee on the Report for consideration of this phase of the program preeted bY the President, that the Committees wanted to reach a con- el114 0n the matter as promptly as possible, and that they would 11/18/47 —8— like to have him (Chairman Eccles) appear before the three Commit— tees on Thursday of this week. Chairman Eccles also said that he suggested to the Senator that he be given until Monday to prepare for the hearing, and that he did not know at this time whether he 1./culd appear before the Committees on Thursday of this week or early aext week. In connection with the comment in the Council's statement that the discount rate was one of the powers available to the Board, President Brown stated that an increase in the rate of 1/4 or 1/2 Per cent would have a very grea psychological effect on the money t'larket, that bankers and business men were "jittery" at the present time, and that any increase in the rate would have a much greater effect than a very substantial increase would have had before the /ler• He also said that open market operations could be used greatly to tighten the money market without driving the price of Government %Urities (other than possibly Treasury certificates) below par. Re added that the Committee felt that the war loan accounts were than necessary and that calls on war loan accounts resulted vithdrawals from large correspondent banks in amounts larger than he needed to be, and that, while an increase in the reserve require— 1nel:its of banks in central reserve cities would result in the loss of lerge amount of earning assets to the banks in New York and Chicago, 5?4 11/18/47 was felt that the reserve requirements of banks in those cities shcalld be increased before a request was made for additional powers to control the credit situation. In response to the Council's statement Chairman Eccles comzelited su bstantially as follows: a . Aside from direct controls such as were in effect .uring the war, two accepted methods of dealing with an inflationary situation are fiscal and monetary measures. voth of these methods were largely suspended while the r was on and resort was had to direct controls. The 1118-11cilag by the banks of the Government deficit during t1, var was highly inflationary—more inflationary than " , - nore of the debt had been financed outside of the as it should have been. The monetary policy during 4. the war period was also inflationary as it had be adjusted to carry out the Treasury fiscal policy. Although the System was opposed to the program of mainfling a pattern of rates and the sale of Government ecurities on a basis which enabled banks to play the of rates and sell securities at a premium as :ntern 13 _usileY neared maturity, there was nothing the System '°111 .4 do about the matter. Inflation during the war PeriGd was prevented by direct controls, end when these controls were removed following the war there 6as little done, or that could be done, in the fiscal tr monetary fields to prevent inflation. It is true steps were taken to retire Government debt, but t reduction was effected largely through a reducb r of Treasury balances, and not through a substantial bil PtarY surplus which is the means by which an antinary fiscal policy is made effective. J At the present time we are confronted with a very da thrigr.°us inflationary situation. The reimposition of of direct controls, which were in effect ''g 11q2 .-ag the war and which should not have been removed im 11 We were "out of the woods", is impractical if not i7P0ssib1e. In the absence of such controls and parleulerlY if the Marshall Plan is put into effect it 1575 11/18/47 -10is necessary to have a fiscal policy which will produce a substantial budget surplus. Such a policy would be much more effective in dealing with the inflationary Problem than anything that can be done in the monetary field, and it should be pointed out that no monetary Policy can deal with the problem of inflation adequately In the absence of an effective fiscal policy. During the last session Congress tried to reduce exPenditures but was unsuccessful in making very sub.tantial reductions. In view of the character of the large items making up the budget such as veterans' benefits, interest on the public debt, military expenditures, ?rid the foreign relief program, it is not to be expected that there will be a very substantial reduction in exPenditures in the immediate future. In addition there are various items of public works and payments to farm!l.'s which will be continued, all of which makes it difIicult to follow a fiscal policy which will result in a substantial budget surplus. On the monetary side of the picture we already have volume of credit end deposits in excess of the amount Ileeded to make full utilization of available supply of ab°r and materials. When that condition prevails the expansion, of private credit at a more rapid rate than 1,file debt can be retired from a budget surplus adds to inflationary pressures and that is the prospect at a e Present time. Even loans for productive purposes re inflationary if they increase the demand for labor and material that are already in short supply. Zr Na,.. In this connection the monthly letter from The ' 10nal City Bank of New York states: "Rapidly accumulating debt is both a cause and a consequence of the inflationary pressures, for in a wage-price spirftl, business constantly needs more and more money to keep going and this leads to the incurrence of more and more debt by business and more and more spending by the individual. To check this kind of spiralling--which . 1-5 to the ultimate benefit of no one and to the Iniury of all--is not simple." 1576 11/18/47 -11The point of that statement is that, as increases in nges may be inflationary, increases in the outstanding volume of credit may be inflationary also. When direct controls were taken off, the supply of money- was far in excess of the supply of goods and services that was available and this condition was immediately reflected in increased prices. As prices have gone up oanks have added to the already excessive supply of credit and this has been further reflected in the price strucure. This development has to be stopped somewhere and we cannot say that it should be stopped everywhere except in the field of bank credit. l The statement adopted by the Council contains the comment: "For the past year the total volume of bank credit (i.e. the available amount of bank money) as Teasured by adjusted demand deposits has been practically level. As bank loans have increased, the banks have decreased their investments." According to the information available to the Board that is not true. Total deposits ! -Ild currency held by individuals and businesses (excludU- S. Government and interbank deposits) increased ;"4 05.5 billion in the 12 months ending September 30. the third quarter of 1947 this increase was $2.3 ill°11, an annual rate of over $9 billion. The prinal factors accounting for this growth in bank credit / ere an expansion of bank loans in the twelve-month n : f 'od o $7 billion and an inflow of gold of $2.7 bil17f4 s;"11. Banks, including Federal Reserve Banks and mutual VingS banks, reduced their holdings of government seZrities by nearly $11 billion, but at the same time ()fere was a decrease in United States Government deposits th..11rIrlY $8 billion. During the third quarter of 1947 large loan expansion of $2.3 billion was the princi'-' factor accounting for the further growth in deposits. 0 j ri The Council's statement is apparently based upon es for weekly reporting member banks which have ' shgul iu°s'rn only a moderate increase in demand deposits adLasted during the last 4 or 5 months following a sharp z4fease in the second quarter of the year. In recent no 'Ps, however, deposits at country member banks, and doubt also at nonmember banks, have increased sharply 1577 11/18/47 -12- r eflecting a seasonal flow of funds to agricultural regions which has been particularly great this year because of the high prices of farm products. City banks have contributed to the overall growth in dePosits by the sharp increase of over $2.5 billion in their loans since June. They have been able to increase these loans in part because of the gold inflow and in part because of an increase in interbank bal18',! 3kees, as well as through a decline of about $1 bil; -1011 in their holdings of U. S. Government securities. .° lt is not true even in the case of city banks, as implied in the Council statement, that banks have decreased their investments corresponding to the increase in loans. The Board agrees that credit for housing has been S ° easy and so excessive--and a great portion of it has been made available through the banks--that it has far exceeded the supply of labor and materials with the re.51:11ts that costs have gone up materially. There is very housing credit outside the banks for the reason at a great many individuals and concerns in the mortgage field obtain their funds from banks. We agree that is difficult to restrain the banks if government agenee pedeesuch as the F.H.A. insure housing credit, but it is that without a change in the law there will be a ;lightening of Federal policy in the real estate mortgage G. I. mortgage credit is more difficult because of the t , Pressure brought to bear by the Veterans Adminision but we are hopeful that in that field also there l of4.1 be further restraint. I have discussed the question wi h°using credit with Under Secretary of the Treasury „,g.V-ns and we have also talked to Mr. Foley, of the Fed--a-L Housing Administration, about it. Itae ta the In response to a comment by Mr. Burgess that the Council agreement with the views expressed by Chairman Eccles on reel- estate mortgage situation and that he would suggest that the toe. rd and the Council agree on a statement that might be issued this c°rInection, Chairman Eccles replied that if the Council would 1578 11/18/47 —13— Prepare a statement the Board would undoubtedly be glad to consider it. He said that his discussions with Under Secretary of the Treas— ttlr Wiggins grew out of the fact that the three Federal bank super— SOY agencies had discussed a joint statement by the Federal and State b ank supervisory agencies-urging the banks to follow a more • etrictive lending policy, but that it would be difficult to take thet position when the pressure to expand credit was being put on the banks by the Veterans Administration and the Federal Housing A taistration and that he had discussed the matter with Under Secretar/r of the Treasury Wiggins and Mr. Foley in that light. Mr. Burgess said that if the Board would state its posi— tiorl on the real estate situation as outlined by Chairman Eccles he as a member of the Council would be glad to endorse it. There— 11Pori, Chairman Eccles suggested that the Council refer the matter to committee so that if and when something was worked out it e°11-1d be s ubmitted to the committee for endorsement if the members Of the committee agreed with it. Chairmaa Mr. Burgess suggested that when Eccles appeared before the committees of Congress this next he might say that the Council was in agreement with the toara as to the dangers in the real estate mortgage field re— from Pederta pressures from the Veterans Administration and the °using Administration for additional mortgage credit. 4/18/47 -14During a discussion of the statement of the Council with respect to lending activities of the Reconstruction Finance Corpo11114°1) the Commodity Credit Corporation, and the Production Credit Ass°ciations, Chairman Eccles expressed the view that these agen- eies were not increasing credit extensions on balance and that the Coutiol should revise its statement to make clear just what phases °f the activities of these agencies were being objected to. Mr. Fleming stated that he could not help but feel that the pron ouncements that had been made to date with respect to the eq)stsion of bank credit were a step in the direction of making the banks the "whipping boy" again. He thought that was a dis11°Ilest thing to do since the banks had done a good job during and 44cethe war. He asked what the banks were to do when they were hea-v.Y pressure to extend credit for needed housing and to ellable M erchants, who were entirely satisfactory credit risks, to Meet increased pay rolls and higher costs of goods. Chairman Eccles stated that the Board was not blaming the 1)14th:ti t° which Mr. Burgess responded that the implication was that thellawb. --8 were to blame. Chairmen Eccles said that he did not blame the banks at all b th e that they had been following, for the reason that if 1511k could sell a low yield security and make a loan it was to be 1580 114V47 -15- elpected that it would do so, and that it was the job of the banks tO --4.e more profits if they could do so by making sound loans and investments. He also said that the problem was that Federal Reserve 441( credit had been made available to the banks without adequate control 8) that Congress and the Administration had asked what could be done to meet that situation, and that the only thing that the could do was to state the facts and make the suggestions con— its Annual Reports for 1945 and 1946. The Board, he said, 414(4 want the banking system to be the "whipping boy" and for that reason had pointed out the situation that had been created as the result of war financing and the need for additional controls. He added that the Board was not critical of any individual bank or "the banking system, that the banks should not be criticized for Ithat they had done, but that there should be criticism of the situ4t1.°11 14 which the private banking system was given the free access t° l'edera1 Reserve credit that it had at the present time without adequate controls. Chairman Eccles then explained why the Board felt that its exist, Powers were not, as stated by the Council, ample to place EQ1 re ti straints on credit expansion which the System or the Treasury ght consider to be necessary. In that connection he read the foling Patagraphs from the memorandum prepared in the Board's offices 1581 11/18/47 -16°a the proposal for a special reserve requirement against deposits Of banks. The extent to which short-term interest rates may be permitted to rise in order to prevent credit expansion is determined by the behavior of long-term rates and Government bond prices as well as by the effect on -1.1e cost to the Government. It appears that the recent rise in short-term rates may have gone as far as can be lustified in view of current conditions in the bond market. This impossible to bring about increases situation makes it in rates charged on bank loans to private borcowers. Only by divorcing the Government securities maret from the private credit market through some such means as the special reserve proposal can rates on private credits be increased without raising rates on short-term Government securities and thus further upsetting the medium elld long-term Government bond market. c The recent rise of yields on long-term corporate and L:111.1icipal securities has been due to the great increase 1 1?. demands for capital funds rather than to the moderate 8e in interest rates on short-term Government securities. The heavy business demands for capital have been . enerated by the current inflation and the resulting targe dollar volume of business expenditures. The in.7eased supply of corporate securities at higher rates ts a ttracting available investment funds and inducing l'nvestors, primarily institutional, to shift from Government to corporate securities, with consequent down1,1,. 40 pressure on prices of long-term Government issues. '6V-s necessitates Federal Reserve support of long-term „Irernment securities with resulting expansion of bank ;7serves. Only through the use of the special reserve Nuirement would the System be able to neutralize the exy, -1-41sion of reserves that results from supporting the Pl'ies of long-term Government securities. Chairman Eccles stated that the only reason that could be Etire4 f ol* a further increase in the short-term rate would be as a ter to discourage further extension of credit but that an increase 11/1a/47 -17- the rate to 1-1/2 or 1-3/4 per cent would have no anti-inflation817 effect as it would not deter the borrower but, on the contrary, 1.T°111d encourage lenders to make loans because of the high return. Therefore he could see no justification for a further increase in th6 84°rt-term rate unless the situation should change again. He pointed out that the System had no way of offsetting the illease in member bank reserves which resulted from gold imports l'hich were at the rate of about $3 billion a year. He stated that imports could not be sterilized as that would require proIrision for the necessary funds in the budget which was out of the Tlestion at this time. It was necessary also, he said, to support the Government 4'elirity market at the present time, and the purchase of Governlent securities for that purpose together with gold imports might take it possible for banks to expand credit further without selling additional securities, or borrowing from the Federal Reserve Bank, 11/lich event an increase in the discount rate would have no efreet ta coMbating inflation. In that connection he said that Mr. Proi President of the Federal Reserve Bank of New York, thought ' l43111d be a mistake to have a discount rate at a higher level theta the rate on Treasury certificates. He also said that he felt, reasons which he would not take the time to explain, that the i383 11/18/47 -18- discoant rate should be higher than the certificate rate and therefcre a penalty rate. Furthermore, any increase in the rate that cotad be made under present conditions would not be effective in c°1111ating inflation and would be such a minor matter as to be unilnPortant. President Brown again expressed the opinion that an increase 144 the rate would have a marked psychological effect on borrowers. He said that during the past 45 to 60 days there had been a distinct hesitan the part of borrowers, that projects had been deferred beea , "" of higher costs and fears of a recession, and that when inWere in that frame of mind an increase in the discount l'ata of even 1/4 of 1 per cent would have a very marked effect. Chairman Eccles stated that what was having a greater effect Iqls the i ncreased cost of long-term credit, but that if the special 4,ssrve plan were put into effect it would be possible to raise the di8C"nt rate to 1-1/2 or 2 per cent without affecting adversely the short-term Government security market, because the banks would be 4quired to hold a certain portion of their deposits in short-term °"'Ellraents or cash which would separate the short-term Government rE(te from the private credit rate. the pi 1411 'Burgess questioned whether this would be the result of "stating that the two markets did not operate in that way. 1584 11/18/47 —19— Chatrman Eccles explained why he thought the plan would operate to ha-ve that effect. In explanation of why he felt the authority of the Board to increase reserve requirements of banks in central reserve cities was not an effective weapon in dealing with the inflationary situation, Chaituan Eccles stated that the growth of credit outside of these eitias was much larger than in New York and Chicago, that an in— el'ease in reserve requirements would only result in the sale of e"7 " 11zent securities to the Federal Reserve Banks to provide the tional reserves, that this would reduce the earnings of these banks at a time when their earnings had declined more than any other gr°111) of banks, and that they would be under increased pressure to 1714k:e additional l'eaeOns loans to offset the loss of earnings. For these he doubted that an increase in reserve requirements would be helpful in the present situation. At this point Messrs. Vardaman and Fleming left the meeting. P°110wing a discussion of questions asked by members of the e()11111cil with respect to the special reserve plan, Chairman Eccles l'ea-cl the first nine Pages of the memorandum of November 13, 1947, illelticang Pages 2a and pages 5 and 6 of the memorandum as revised ilndler date of November 17, 1947. During the reading Mr. Burgess asked when copies of the 1_585 11/18/47 -20- memorandum would be made available to the members of the Council. Chairman Eccles stated that they would be sent to the Council after he had appeared before the Congressional committees this week or Thereupon the meeting recessed and reconvened at 2:35 p.m. '444 the same attendance as at the beginning of the morning session except that Mr. Fleming was not present. Chairman Eccles suggested that the Council consider revising tts statement with respect to the bank credit situation to make it 14°Ile constructive. He felt that it was in such an antagonistic and t]c-, tone that it would not react to the benefit of the Council. ae said that it gave the impression that the Council felt that every(34 'vas wrong except the bankers, and that if it were to be issued in 1t8 Present form the Board would be under the necessity of answering it arid Pointing out that the Council was wrong in stating that the 8hts111 and the Treasury had adequate powers to deal with the present sitilation and had failed to use existing powers. Chairman Eccles discussed 1:4 the briefly some of the changes which he felt should be made statement and suggested that it was of such importance that cmlncil should consider the appointment of a committee to study tx.°14 every aspect to see that it was in proper form so that it %c)111c1 hs a constructive statement in the light of the present serious 1586 11/18/47 -21ituation and not one which put the bankers in a position where they criticized everyone but themselves. President Brown stated that the Council would consider the Matter and advise the Board of its decision. 3. There is an obligation resting upon the Federal Reserve System constantly to improve and expedite ?heck collection processes for the benefit of industry, agriculture and commerce. A constructive move in this direction is indicated in recent correspondence between the President of the Reserve City Bankers Association and the Chairman of the Board of Governors, copies of which are attached. The Board would appreciate an expression of the views of the Council as to how best to promote and advance the modernization and maximum development of the check collection system. The Council appreciates the efficiency of the check Collection processes of the Federal Reserve System and the desire of the System constantly to improve and exPcedite these processes for the benefit of industry, agriture, and commerce. The Council suggests that when ca, in the collection system are being considered by .)r . the staffs of the Federal Reserve Banks and the Board f Governors, that the Council be advised regarding the rticular operating matters under consideration. The trers of the Council are policy-making officials in t_elr respective banks, and they desire an opportunity ' 1.1 refer these questions of bank operation, as they come cla to bank officials handling such problems. The Counth., as well as the Board of Governors, may also request co- cooperation and advice on these matters of the proper mmittees of the American Bankers Association and the Resee y Bankers Association. No resQt Changes in the check collection processes should than7:1_in making items available sooner, on the average, tam;.; Line period required for their collection. For ex''e, for the Federal Reserve Banks to make all items 1587 11/18/47 -22- immediately available would be unsound, as it would make funds available when they were not actually collected. It would be the equivalent of granting a loan without interest and of paying a cash subsidy for deposits in the Federal Reserve Banks. President Brown stated that the Council understood that the 83arla was stu4ying the possibility of giving immediate credit for all Cash items. He also said that the Federal Reserve Bank of Chicago was giving credit on Saturday for items drawn on New York 1th011gh they could not be collected until the following Monday tilebY absorbing some $20 or $30 million of float and that he thcAlght this practice was unsound. Chairman Eccles stated that the Board had no plan for inlmediate credit for all items, that such a step would add, verY substantial amount to member bank reserves and would °44 increase existing inflationary pressures. He added that the Board did not agree that it would be unsound to give Lameclillte credit for all cash items at a time when such action would be 124 harm°nY with the over-all credit policy of the System. He el-8° said that, as stated in the letter to Mr. Baird, President Qt the Reserve City Bankers Association, if such a step were 4ctively c onsidered the Board would give the Council an opportiArlity to Chaizala express its views. In connection with his statement, Eccles read an excerpt from the 1915 annual report of the 808.rd which expressed the opinion that it was not the interlti°4 °f Congress that member banks should continue to hold 1.588 14/W47 -23- dePosits Of other banks, that the Federal Reserve Banks should perthe work then being performed by correspondent banks, and that the reserve balances carried by the Reserve Banks should serve as the basis for an effective system for collecting checks. Chair Eccles then explained why he felt the giving of illtmadiate credit by the Federal Reserve Banks for cash items would not be unsound but would be in the interests of business, industry, 44d agriculture. He stated that the present practice of requiring banks to sort checks and maintain records of deferred availability deterred banks from joining the Federal Reserve System. He also sata that if the System was to render the service to coiumerce, in— cillstr7, and agriculture and make membership in the System suffietlY attractive to induce members to join the System it would be ne cessary to do something in the direction of giving immediate el ' edit on cash items. He also stated that when the question of e0 111131118°TY membership in the System was under consideration in tbll 19301s, Congressman Steagall expressed the view, which was ec)lieurreci in by others, that banks should not be forced into mem.— bel'alliP but should be free to join the System if they felt that 4erabermir, Was h°"ever, that 1414t to do sufficiently attractive. He emphasized the fact, in field the Board would not taking action in this anything which would interfere with the earnings of 1589 11/18/47 the —24— reserve city banks, that any change of this kind would require 4 1°4 period of preparation, and that it should be remembered that the benefit of immediate credit would accrue largely to the city banks. President Brown stated that the Council agreed that the giv— i4g °f immediate credit on all items would be inflationary which would (iPilear to preclude action for some time to come. ttas He also said that understood that the Board was giving thought to requiring banks %thiell had more than a stated number of items payable in the territory °r aaother Federal Reserve Bank or branch to sort such items separately. 4 added Cheek that such a policy would add about $40 thousand a year to the collection costs of his bank. Chairman Eccles stated that it had been found that about 60 bEtrik5 in different parts of the United States had a large volume of Cheeks Payable in other Federal Reserve Bank or branch territories tileY were dumping on the Federal Reserve Banks without sort, that it was felt that this was taking unfair advantage of the serv— Provided by the Federal Reserve Banks, and that either these ' ellks should be required to sort the items or all banks should be 111-1-tted to deposit items without sort. ellse President Brown stated that, if some way could be found • ^alch the Presidents of the Federal Reserve Banks could dis— Pr°P°sed changes in the check collection system with operating 15M) 11/18/47 -25facers of the banks in their districts without violating the confidence of the System, it would be helpful. Chairman Eccles said the change referred to by President BrWa had not been put into effect and the banks would have a chance t° exPress their views before the change was made. 4. The Council would appreciate any information the Board has regarding developments that may have occurred since the last meeting of the Board and the Council in connection with the Bank Holding Company bill. Chairman Eccles stated that there had been no changes since the last meeting of the Council with respect to the bank holding e°41138-4Y legislation except that the Independent Bankers Association c'f the Twelfth Federal Reserve District and the National Association of Q '41Pervisors of State Banks had taken action strongly favoring bank holdtag company legislation. He also reviewed the present status of the hank holding company bill in Congress and stated that the bill 1.1°111d be given further consideration in its present form with posaiblY one or two minor amendments which would be offered on the floor c)t the Senate or before the House Banking and Currency Committee. Chairman Eccles stated that it now appeared that there was substantial support for the restoration of the auth6rity for the l*egIlletion of consumer installment credit and that installment was expanding at a very rapid rate. He also said that because lbat 11/18/47 -26- of the relaxation of installment credit terms banks were unable to Compete and were losing installment business to other lenders, and that if the authority for regulation were restored and the restrictions of Regulation Wwere again in effect the banks would continue to do a very substantial amount of this kind of business. Thereupon the meeting adjourned. . : Following this joint meeting 12.19 the Federal Advisory Council met in separate session after which Messrs. Spencer and Prochnow advised the Secretary of the Board that the Council had made two changes in the statement submitted by the Council with respect to the exPansion of bank credit: (1) The sentence in the second paragraph which stated that the total of bank credit had been practically level was Changed to read: "For the past year the total volume of bank credit (i.e. the available amount of bank money) as measured by adjusted demand deposits has shown only a moderate increase." (2) The sentence in the ninth paragraph which referred to the R.F.C., C.C.C., and the P.C.A. was changed to read: "In this period the government, through various agencies, has been making loans that the banks refrained from making because of their speculative nature. The Reserve System itself is asking for more power to guarantee loans on the presumption that bank lending is too cautious." Messrs. Spencer and Prochnow also stated that it was the request of the Council that Chairman Eccles present the statement when he appeared at the hearing this week or next before the Joint Committee on the Economic Report and the Banking and Currency Committees but that it was no the request of the Council that the statement b made the subject of a separate press re e. .41 Secre Chairman.
@FedFRASER