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A meeting of the Board of Governors of the Federal Reserve 8:7,em with the Federal Advisory Council was held in the offices of the Board of Governors in Washington on Tuesday, November 20, 1951, at 10:30 PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Vardaman Powell Ir. Carpenter, Secretary Messrs. Bucklin, Jackson, Potts, Congdon, Fleming, Davis, Brown, Hemingway, Ringland, Beals, Ray, and Lochead, 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. Before this meeting the Federal Advisory Council submitted to the 8 °ard of Governors a memorandum setting forth the Council's com— nielits on the subjects to be discussed with the Board at this joint teet'n 1-g• The statement of the topic, the Council's views, and the ' 810n with respect to each of the subjects were as follows: 1s Pros ective business and economic conditions and S stem ve any views 2112aLuaszt The Board would like to the Council might wish to express on the prospective business and economic situation during the next six months and on the policies that should be followed by the System in the field of general credit controls. Assuming no major change in the economy, such as an war or a substantial curtailment of the defense PNram, the Council believes that business will be good au 11/20/51 -2- in the months immediately ahead. Activity in certain lines, such as textile and shoe manufacturing, has been depressed. Considerable spottiness is likely in the next six months even if the over-all level of business L3 high. Retailers and suppliers have made considerable Progress in liquidating excess inventories. By reducing their forward commitments also they have helped to lessen the inflationary pressures. Employment is high and savings are large, so that consumers have the current income and the backlog for substantial personal purchases. There is a noticeable apprehension on the part of manY customers of banks relative to the future of busi4?ss. This apprehension results in questioning the wisdom of further expansion programs, and has caused considerable postponement and some abandonment of construction and other capital expenditures. The members of the Council representing the highly industrialized districts report a continuing demand for loans, and believe that there will be some increase in the over-all volume of loans in their districts. The members of the Council representing districts in which h?avy manufacturing is not so important expect loans either to remain stationary or to decline. Under present conditions, A. The Council believes that the Open Market Committee has followed the proper policy of maintaining a flexible and orderly market for government securities and a reasonably firm money market. A continuance of this policy is recommended. The Council also believes that no change should now be made in reserve requirements or in the rediscount rate. Conditions may change by the next meeting of the Board and the Council. The Council will be Pleased to review this item of the agenda again at that time. B. The Council believes the Voluntary Credit Restraint program has had, and is continuing to have, a salutary effect in restricting credit to loans essential to the defense effort and the functioning of the economy. The Council strongly urges continued emphasis on the program and dramatization of its objectives. i-drAe< 11/20/51 -3- President Brown amplified the views of the Council as set torth above after which he called on Mr. Jackson who stated that busi%e loans in the New York area had increased by small amounts almost every week during the fall period and that this had occurred in the Lace of heavy loan liquidation in all phases of the textile industry. Re ale° said that a private study which had been made in the area as t"hat might be expected in the way of demand for loans by corporati0118 had provided a considerable amount of information all of which illclicated that banks would be faced with substantially increased de41114e for loans for working capital purposes next year, particularly it the goals for defense production were realized in 1952. In response to Chairman Martin's inquiry, Mr. Jackson stated that th he increase in bank loans in his district was smaller than had ba uxpected. President Brown stated he thought that was the case Federal Reserve Districts, but Mr. Congdon was not in a position t° eay whether it would be true in the Fourth District. At this point Mr. Powell joined the meeting. 14r. Jackson stated that loans of the New York banks that had 4141'0 commodity business had been substantially less than expected 4141that others had anticipated higher demands for loans than had 4elaiallY developed. President Brown stated that one of the reasons for the lower loari demand was that smaller amounts were needed to move the cotton 11/20/51 -4- and other agricultural crops than had been anticipated. Mr. Fleming inquired whether the Board had made any study of the effect on the working capital position of business of the payment °Federal taxes pursuant to the requirements of the N011s Plan. Chairman Martin stated that the Board had not made such a study, but that 4r1 excellent study made by one of Mr. Congdon's associates had l'eeelltlY come to his attention which pointed up the problem very well. In response to an inquiry by Chairman Martin, Mr. Jackson stated that he would be glad to make available to the Board the private st'ux);Y to which he had referred. In response to Chairman Martinis request for his comments on the caltlook for bank loans, Mr. Powell stated that, on the basis of stati8ties collected in connection with the voluntary credit restraint 1)141, the expansion of loans this fall had been about what was to be El— "Pected seasonally, and that since there had been an expansion ill dap ''ense loans in the same period of between $800 and $900 million, ' 8 clear that credit for other purposes had been held in check Pl'ettY well. With respect to security flotations he stated that a Tri,• --Jcrity of the issues were defense supporting, that municipal 'lad largely been held to essential needs such as schools, hospita4 3 sewers, and major highways, and that veterans' bonus issues had bee4 held, up since the screening of municipal issues was undertaken. " iewed briefly the present status of the proposed West Virginia 11/20/si veterans bonus issue and stated that he did not know what the out- come of that issue would finally be. He made the further statement that the American Bankers Association was collecting information on the loans which banks had actually turned down pursuant to the voluntay„ credit restraint program but that the resulting statistics would nct be an adequate measure of the effectiveness of the program for the reaeon that, because of the program, many applications for loans were Ilbt being made and banks were declining loans without formal applicatic)rm being submitted. Mr. Lochead commented on the freedom with which funds were being made available for so-called defense housing in his district and the difficulty faced by his bank in that situation in meeting comPetition and at the same time trying to comply with the voluntary credit l'eetraint program. Mr. Powell pointed out that the voluntary credit restraint 151'c aln could do very little in this field for the reason that these 14i°ject8 were being carried out under legislation passed by the Congress. Ilitho discussion of this program, he also referred to an issue to be 1)11t clIt shortly in the State of Texas to finance the purchase of farm 1411,4ft by veterans and stated that it was not possible for the voluntary restraint program to prevent issues of that kind. President Brown stated that the Council would appreciate any 227N 11/20/51 -6- °"ments that the members of the Board might wish to make with respect t° the future business and credit situation. Mr. Szymczak stated that he was in general agreement with theviews that the Council had expressed but that it was not possible to tlake a definite statement at this time as to what would happen in thefuture, particularly because of the uncertainty as to developments illoonnection with the defense program. Chairman Martin stated that, as indicated earlier during the Mecting, the growth in bank loans this fall had been in considerably 1411aller volume than he had anticipated, that the agricultural situation had 4ot required as much credit as had been anticipated, that some 'aee in cotton loans might occurj but that he would expect only a gettle increase in loans up to around the end of March. Beyond that, he said, he was not able to make a forecast. He made the further stateht if the expansion of bank loans had been considerably larger he ' 414 not have been satisfied to put funds into the market through the Medtilm of open market operations on the scale that had occurred in coke etion with the October and November refunding, but that it had been 11°4ible subsequently to take practically all of these funds out of the 11141'ket3 and that if bank loans continued in the period prior to March 301 1!)52 140.111_, 4 the general trend indicated at the present time the situation not be an unhealthy one. 11/20/51 _7_ Mr. Vardaman commented that he did not see much possibility Of 8117 cessation in the demand for bank credit or any change in the 'Willingness of the public to invest in Government securities. He wae concerned about the extent to which credit was extended for so- called defense activities and felt that there should be a much more cal'erul analysis of what should be regarded as loans for defense purPoses• He stressed the view that there would be a tremendous demand tc)r bank credit next year and expressed complete agreement with what 41 been said as to the futility of trying to curb private housing Cot ruction if the Government was to continue to encourage large ecale defense housing* Mr. Powell referred to the factors entering into the expansion Of tank credit and said that he had been trying to develop information 48 to how far along the country was in the construction of plant and equiPMent for defense, that is, whether it was felt that the peak of 471.„ '"°, for this purpose was now being experienced and would taper off 1952. He felt that inventories were now beginning to decline and that ' 41e demand for loans from these sources would taper off with the l'esult that the total volume of outstanding bank credit would either tlatte-n out or decline somewhat. He made the further comment that at the, ' equest of the Office of Price Stabilization a study had been made th e cattle situation from which it appeared that a sharp increase eati-A --e marketings was now taking place which would effect a reduction 280 11/20/51 -8- 1 the high level of live stock credit outstanding. While the situation could be changed by developments in the international situation 4 Such resumption of scare buying, he did not see in the absence of developments any major pressures of the kind which caused the Sharp increase in bank credit last year. He expected to see the total Ir°1141ne of credit remain relatively constant until February and then ci"line substantially during the spring months. 2, Patman Subcommittee Questionnaire. The Board would like to have a further discussion of the answers to be prepared in response to the questionnaire addressed to the Chairman of the Board by the Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report. Copies of the answers to the questions submitted to the Board win be sent to the members of the Council as they are prepared for sending to the Patman Committee. The Council will be pleased to discuss the answers to be RrePared in response to the questionnaire addressed to the 'halrman of the Board by the Subcommittee on General Credit Control and Debt Management of the Joint Committee on the conomic Report. President Brown stated that the members of the Council had the answers which had been prepared to 11 of the questions in the "Ilboammittee questionnaire addressed to the Chairman of the Board ' s llernors, and that while they represented an excellent staff job the were answers to questions relating to historical, factual, and 1( a Matters and did not include questions touching on the structure th e SYstem and other questions which would be much more difficult 0 He added that the Council would be glad to discuss any "he questions that the Board might wish to consider. Chairman Martin outlined the procedure being followed in the Preparation of the answers to the questionnaire that had been addressed to him and stated that the Board would like to get the benefit of any eo lamerts that the Council might wish to make on any of the questions. Resaid that the 11 answers to which President Brown referred had been 8ert to the Patman Subcommittee on November 15 in order to get some Or the answers in by that deadline date and to demonstrate that every qfcrt was being made to prepare the answers as promptly as possible, 414 lin+ t--u it was understood with the Subcommittee that if it should be ed to make any changes in these answers or in any other answers 1113813q11ently submitted before they were set up in type by the Subcomitlitte el there would be an opportunity to do so. He went on to say that drafts of answers to 60 of the 61 questions would be completed by to r tnoOW many of them were first draft form, that the task of drafting Alta a Herculean one, and that an effort was being made to get the benefit q comments without getting into an editorial job which would not be Pos elble in the available time. He said all of the answers were being ewed by members of the Board, that any differences in the staff IN% b elhg brought before the members of the Board, and that it was hoped that of the answers with the possible exception of three or four 11/20/51 —10-. 'would be transmitted to the Subcommittee before Christmas. He then suggested that perhaps the best procedure would be to send the drafts Of the get their remaining answers to the members of the Council and individual replies by letter rather than to try to get a consensus from the Council as such. In a discussion of how the views of the members °f the Council could best be submitted, Chairman Martin stated that it the Council should wish to undertake to agree on each of the answers he would be glad to have their views but he questioned whether such a Pl'clesdure would be a practical one in the time available. Mr. Fleming suggested that it would not be possible in the that they would have for the members of the Council to read 171:tically the answers to all of the questions and that it would be Plre°411°tive of better results if when the drafts of answers were sent to th "e members of the Council there was some indication of the important point on which the views of the Council were particularly desired. Chairman Martin stated that he would try to follow that procedure. Bucklin inquired whether it was expected that the comments Or the to tt, Ile Council should be in such form that they could be transmitted Subcommittee. In a discussion of this point, Chairman Martin Nt A eq that the views of the members of the Council were desired for 4-geration in connection with the preparation of the final answers le.it would not be the intention to submit such views to the 11/20/51 —13.— SlIbcommittee, their submission would not be precluded if the members O1 the Council should so desire., Mr. Fleming stated that if the views of the members of the C°11neil were requested on only certain important questions the Board w°12-d be at liberty to submit to the Subcommittee any comments that he might make. In response to an inquiry by President Brown, Chairman Martin tlited that he had no information as to the number of witnesses that ' buld be called before the Subcommittee, that Congressman Patman had incLicated that he would start the hearings about January 15, but that " i rae probable that they would not commence before the first of Feb114117 or later. He also said that he had no information as to the besi uPon which economists and others were selected to receive question1fl connection with comment by members of the Council which 448ed the question as to whether the inquiry would be a friendly one, Chairman Martin stated that the Board felt that it should be assumed that the hearing would be a friendly one until it was proved to be °t'llervisise, that there was a disposition in certain quarters to attack tha , hearing unduly, but that the Board continued to regard it as a 4eari ng with a constructive purpose and that it would be helpful to try to keep it on that plane. Chairman Martin then said that he considered of overriding 1lVort, 'nee the answer which would be made to Question B-8, which asked • 4044 4/20/51 —12— Viether the Board of Governors and the Federal Open Market Committee were parts of the executive branch of the Government and if not what the status was. He said that copies of a preliminary draft of the allF.Illrer would be placed in the hands of the members of the Council before they left Washington and that any comments that they might wish to make Ilith respect to it would be particularly helpful. He referred briefly t°°111e of the points raised by the question and there was a discussion ;Dr 1-0, n Ar these points, particularly with respect to the independence of thesystem, should be treated. At the conclusion of the discussion, Chairman Martin said that it *411d be appreciated if the members of the Council would give the clzaft of answer a very critical reading. 3. Discussion of the Public Debt. The Board would like to have an informal round table discussion participated in by all members of the Federal Advisory Council of the Problem of the public debt in so far as it affects the .responsibilities and operations of the Federal Reserve System. Members of the Council will welcome such an informal round table discussion. Chairman Martin stated that Governor Vardaman was particularly 144e eated in the conversion of a greater portion of the public debt 14.to ' 311g—term securities and that Governor Vardaman had suggested that the auovs topic be placed on the agenda for this meeting and would iNee his thinking on the problem. • 11/20/51 -13- Governor Vardaman stated that he, with certain other members Of the Board, for a number of years had urged the abandonment of support of the Government securities market except for purposes of mainorderly market conditions. He said that he had not agreed on the timing of the action taken last March when the market was allowed to below par because he felt that action should have been preceded bY an understanding with the Treasury on how future requirements would be met, but that the action was taken and the market had been well il lect since. He continued to feel that one of the danger points was the continued Treasury financing in the form of short-term securities 411d that he would like to get the views of the members of the Council 8 to what might be done to meet that problem. President Brown stated that Mr. Hemingway had led the dis- e11881.°11 on this topic in the separate meeting of the Council and would °Il tbe discussion at this joint meeting. Mr. Hemingway said that except in times of emergency such as total "4- war or large gold imports the Government securities market should her,'''I'Inatted to find its own level, that Federal Reserve operations ahotact be directed only toward the maintenance of an orderly market, that it was his opinion that such a policy would be less costly the encl. He felt that the delay in adopting that policy following the war had complicated the problem of carrying it out when it was 4ctoPte d, Ho added that the only way in which interest could be revived 11/20/51 —14— in defense bonds was to get away from a patriotic appeal and allow the rate to go to a point where the securities would again be on an investment basis. Mr. Jackson stated that one important fact was overlooked in the Policy adopted by the Federal Open Market Committee last March, that there was a distinction between the market for defense bonds and the "Professional" market for marketable securities, and that while he areed with the reasons for making defense bonds nonmarketable and redeemable at a fixed price he did not feel that the "professional" market would be disturbed when marketable issues fell below par. Mr. Fleming renewed the suggestion made by him at the last Meeting of the Board and the Council, and at a meeting of the Committ"°n Government Borrowing of the American Bankers Association with the S ecretary of the Treasury, that a program be drawn up which would be el • "lrected toward the conversion of short-term debt into longer-term lta,es so as to avoid the increasingly heavy concentration of the 4bt in the short-term area and so that an opportunity to issue longteNt securities would not be lost as it was in the early part of 1950 ' Viet 4unds were available for investment in such securities. For reaee'tle Which he outlined he was in agreement that it would not be possible to esue long-term Government securities at this time, but he felt that Dry, --gram along the lines which he had suggested should be drawn up so 1;r-01-0,'"*1 41.( 11/20/51 -15- that if the Treasury faced a period of heavy deficits such as now al4wared likely in the latter part of 1952 the problem could be met with the least possible resort to the banking system. On the defense bond program he felt that it was necessary to get away from the concePt that in order to get the public to hold defense bonds there must be a penalty on their redemption. It was his view that there should be a change in the return on such bonds during their earlier years that they would compete with other forms of savings and the public SO ' 4)1:04 buy them because they felt they were a good investment. Comments were ' al ' 1 eement with made by Messrs. Jackson and Congdon indicating Mr. Fleming 1s suggestion and Mr. Congdon expressed theview that the abandonment of the policy of supporting the market "her than orderly market reasons was only part of a necessary 151Nl'am and that the only way to get further amounts of long-term bonds illto the hands of private holders was to offer them at a rate which '401)14 meet the market. President Brown agreed with what had been said in the pre- [3.11g discussion except that he questioned whether it would not be 11°8eible to sell restrict ed 25 or 30-year securities on a 3 per cent 4te ' He felt that there mould be a market for substantial amounts ot 1111 funds in the hands of trust accounts, eleemosynary institut1.048 'etc. He recognized that the System could not permit a Treasury otte flg to fail and that whatever action was taken should be worked out 11/20/51 -16- with the Treasury so that the System would not be called upon to Provide undue market support. Mr. Hemingway inquired whether it would be possible to get ta.4 exemption on the income from defense bonds in some small amount anclMr. Vardaman said he thought it would be and that the matter was l'eeeiving consideration. He also said that he had been interested in a.cij-scnission with the Council of the whole problem of financing the Public debt because he felt the problem was an immediate one and that there should be a program which would meet the situation which would clevel°13 in the fall of 1952 when it appeared that the Treasury deficit l'rolad be large. In the discussion members of the Council expressed the view that the problem of Treasury financing would not be solved until the Trear, ' 1117 adopted a higher rate on long-term issues as had been done 14 P.. -,Lg.Land and Canada. 111r. Potts felt that the longer an increase in the rate was 11"t13°rIed the more difficult the change would be. Mr. Bucklin questioned whether it would be possible to sell 4IV 8 11,4tantial amount of long-term 3 per cent bonds in the present -u but he agreed with Mr. Fleming's suggestion that a program d be worked out. It was also his view that it would be necessary to 1) l'°ceed cautiously with any change in this regard and that it, was 11/20/51 -17- tremendously important not to do anything that would "rock the boat". He also favored the tax exemption feature on defense bonds rather than a higher rate and commented that there was still an element of Patriotism in the appeal of these bonds but that it was important that they have an investment appeal. President Brown stated that the next meeting of the Council would be held on February 17-19, 1952. Thereupon the meeting adjourned. AdA 400PP- /I mifitALietl_4.4.144.1 Secretary.
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