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2439 A meeting of the Board of Governors of the Federal Reserve System 'with the Federal Advisory Council was held in Washington on Thursday, November 21, 1955, at 10:10 a. m. PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Thomas, Vice Chairman Hamlin Miller Szymczak Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Wyatt, General Counsel Mr. Goldenweiser, Director of the Division of Research and Statistics Mr. Parry, Chief of the Division of Security Loans Mr. Currie, Assistant Director of the Division of Research and Statistics (first part of meeting) ALSO PRESENT: Messrs. Steele, Perkins, Loeb, Braun, Gohen, Young, Smith, Wold, Kemper, Frost and Arnold, Members of the Federal Advisory Council from the First, Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, Tenth, Eleventh and Twelfth Federal Reserve Districts. Mr. Edward E. Brown, President of The First National Bank of Chicago, Chicago, Illinois, representing the Seventh Federal Reserve District. Mr. Walter Lichtenstein, Secretary of the Fed— eral Advisory Council. The Secretary of the Council read the following statement which he reported had been adopted by the Council at its meeting yesterday: "The Federal Advisory Council acknowledges receipt of he letter of the Secretary of the Board of Governors of the lrederal Reserve System dated November 12, 1955 in which the Ild?ard asks the advice of the Council in reference to 'the de2 1 1rabi1ity of asking a small group of the larger member banks 'c) fill out a schedule showing in each cuse the deposits of 2440 11/21/35 "'the bank's fifty or one hundred largest depositors on four dates in each year for the past six years, classified by a broad classification', etc. "The members of the Council as individuals see no objection to banks giving the information, but the Council as such does not desire to express an opinion on this subject." The president of the Council stated that it was the feeling of the Council in considering the Board's request that the amount of a corporation's deposits standing alone might mean very little; that a corporation might have been losing money for four or five years, but with stRaller accounts receivable, inventories, etc., might be in a better cash Position than at the beginning of the period during which losses were inHe said that, however, all of the members of the Council had incliceted that they would be glad to have their banks prepare the inform4tion desired should the Board decide to make the request. Chairman Eccles stated that the Board desired information with regard to deposits, not because of its bearing on the financial position °f the depositors, but for the purpose of determining the type of owner811113 and velocity of deposits concerning which no accurate current data la available. He added that it was felt that the concentration of the clwriershiP of deposits was an important factor in the development of the debr eesion and is of importance today in connection with the recovery m°7e4ent and that it was desirable that the Board have information on the biect available to it in connection with the consideration of credit Policies. 2441 11/21/35 At the request of Mr. Eccles, Mr. Currie outlined briefly the reasons which proiapted the suggestion that information with regard to large deposits be obtained. Mr. Young inquired what use would be made of the information, if and when obtained by the Board, and Mr. Eccles replied that it would be helpful in the determination of System credit policies in connection with Ithich it was believed all the information that could be made available should be obtained. He pointed out that if there was a tendency towards a large concentration of deposits in the hands of a few corporations and individuals, the use of which might have a considerable bearing upon the effectiveness of a monetary and credit policy, it was important that the Board have that information. Mr. Frost inquired whether any plan has been suggested to prevent he concentration of deposits and Ar. Eccles replied that he knew of none. 111'• Frost stated that in approving the statement quoted above the members Of the Council desired to express their willingness to cooperate in the tu4Y so far as their min banks were concerned, but that they did not reel that they should suggest to other banks that they furnish informatiO 4 with regard to deposits in such banks. At this point Mr. Currie left the meeting. Mr. Lichtenstein then read the following recommendation adopted t5r the Federal Advisory Council at its meeting yesterday: "The Federal Advisory Council understands that the Board of Governors of the Federal Reserve System is contemplating issuing regulations to deal with the control of 2442 11/21/35 -4- "collateral loans to be made by banks. The Council, therefore, reaffirms herewith its recommendation of May 15, 1954, reading as follows: 'The members of the Federal Advisory Council are of the opinion that the Federal Reserve Board before issuing regulations under this bill, provided it is enacted into law, should make a careful study as regerds the needs of the situation. It should be pointed out that the power conferred on the Board is to be permissive and not mandatory. Consequently, there is no need for the Board to issue any regulations until there is evidence that there is necessity for them. In general the members of the Council feel that if the Board conscientiously can refrain from adding unnecessarily to the innumerable regulations, orders, and laws of all kinds under which banks are at present compelled to operate it will be doing a distinct service. 'If and when the Federal Reserve Board deems it necessary and advisable to issue regulations under this provision of the proposed law then it is to be hoped that the Board will bear in mind the need for maintaining adequate markets not merely for securities listed on the more important exchanges of the country but also for securities which have merely a restricted local market and those which are sold over the counter and not listed. Stringent regulations may result in destroying the market for the securities of small worthy industries and thereby possibly destroy these industries themselves by making it impossible for them to obtain needed capital." At the request of Cheirman Eccles, Mr. Parry fantlined briefly the scope of the authority of the Board to prescribe a regulation covertrig the extension and maintenance of credit by banks for the purpose of Pul'ehe 8-ng and carrying securities; pointed out that there was some diffe renee of opinion as to whether the issuance of such regulation by the Board was permissive or mandatory under the law; and stated that the P°8tP°nement of the issuance of the regulation had met the practically °118 approval of all parties interested. He stated, however, that 2443 11/21/35 -5- m°re recently reasons had appeared which suggested the advisability of the issuance of such a regulation by the Board; that there were problems which were difficult of solution in connection with the regulation of the use of bank credit; that the matter had been under consideration by the Board for some time; and that it was contemplated that whenever the ' l egulation is issued it will be as simple, clear and liberal as it is P°Beible to make it in view of the purposes sought to be accomplished by the regulation. Mr. Brown stated that collateral loans by banks in his district had steadily decreased and that there was a movement of collateral loans fl'om banks to brokers because of a lower interest rate, and he expressed the °Pinion that, because of the additional work which would be involved 444 the objections which would be raised by customers of banks to furnishing the information necessary to enable the banks to comply with the l'equirements of the regulation, it was desirable that the Board defer issuing the regulation until there was evidence of an increase of some Ir°14111e in the amount of collateral loans by banks. Chairman Eccles inquired whether, if such a position were taken, °- similar position logieraly could not be taken in connection with the Tlestio n of reducing excess reserves of member banks, on the ground that tier L':3 no evidence at the present time of the speculative use of bank Mr. Frost stated that he could not agree to this; that in his °Pinion the imminence of the dangers resulting from the existence of ex- 2444 11/21/35 -6- "es reserves justified doing something now to reduce them. Mr. Brown stated that, in his opinion, a situation might not arise for several years that would require the issuance by the Board of a regulation covering the extension and maintenance of credit by banks for the purchasing or carrying of securities, whereas there was a possibilitY that excess reserves, if not reduced in some manner, might result in difficulties within the next six months or a year through the undue extension of credit by banks on the basis of such excess reserves. Mr. Szymczak inquired of Mr. Brown what harm might result from ieBuing the regulation at the Present time and Mr. Brown replied that c°mPliance with the regulation would involve the obtaining by banks from their customers of statements of the purposes for which the proceeds of 1°114s were to be used; that the public would not like the applicatio n of 4414itional rules and inquiries into their business or what might appear t0 be regimentation of their affairs, particularly, at a time when busi4682 i8 going ahead, and that he felt that it would be a mistake to put that additional responsibility on the banks. He pointed out also that a Illeetion might arise as to the collcctibility of a loan where the retillil'enlents of the regulation were unintentionally not complied with in InalrIne the loan. He added that it might be necessary, if evidence should apPoar that bank credit was being used for the purchasing or carrying of eeeurities, or to prevent injury or injustice to brokers in favor of banks, to lasue a regulation which would put banks and brokers on an equal 1D4eis but that he was convinced that there would be no need for such a 2445 11/21/35 -7- regulation for a couple of years, whereas he felt that there would be difficulty in the future unless the problem of excess reserves were dealt with now. He also stated that he felt the pressure for the issuance of a riegl-llation covering loans by banks for the purpose of purchasing and calrYing securities had come from the authors of the Securities Exchange Act of 1934 and from brokers who desire to develop antagonism to the act. Mr. Frost stated that he objected to the statement that the Problem of reducing excess reserves of member banks and the question of the issuance of a regulation covering loans by banks for the purpose of PlIzichasing or carrying securities were analogous, and that he felt that they were two separate and independent problems. Mr. Perkins stated that he felt it should be made clear that in Maki th ng loans to commercial customers under the proposed regulation, on s ecurity of a portfolio which might include a registered stock, the would not he under the necessity of cross-examining the customer 48 to the purpose for which the proceeds of the loan would be used. He 418° said that he understood that the problem was being considered by Mr. parry. In this connection, Mr. Parry stated that the matter of 8ceetP1i8hing the purpose of the regulation without interfering with the 1184a1 re lations of banks and their regular customers has been the prineiPal point in the minds of those working on the regulation and that he relt the Board would do everything within its power, consistent with the Purpos,, 8 SOUght to be accomplished by the regulation, to avoid restrictions 2446 W21/35 -8- °I1 commercial borrowing or impairment of the rights of banks against borrowers from the banks. Mr. Thomas inquired as to whether the members of the Council saw anY objection to the drafting of a regulation which could be considered alld placed in final form preparatory to its issuance by the Board, and it Iras stated that, with the understanding that the Council felt that there was no reason for making the regulation effective at the present time/ it was agreed that the preparation of the regulation was desirable. Chairman Eccles pointed out that because of the relatively small alli°untof colleteral loans being made by banks at the present time the Present might be an opportune time to test the regulation in the new field that it would cover, whereas if it were issued during a period of iner'eased activity difficulty might result. Mr. Miller inquired whether the members of the Council saw anytiiirlg in the present situation in the stock market which should give the Board concern. Mr. Perkins stated that, in his opinion, the activity in the stock market was due (1) to the low bond yields resulting in a shift by illvestors from bonds to corporate stocks of corporations rhich for the first tin, during the depression had substantial earning prospects, and (2) a large investment in stocks by foreign investors. Mr. Brown ex- Pressed agreement with Mr. Perkins' statement, and said that corporations 111 the n1,-4..4 - cago district are beginning to show substantial earnings for the '4.rst time in four or five years and the business and investing 2447 11/21/35 -9- community are fairly well convinced that business is on the upturn. He added that the amount of stock buying caused by inflation fears was e°nsiderably less than a year ago. Mr. Miller inquired whether the other members of the Council were in agreement with the opinions expressed by Messrs. Perkins and Brom and MI'. Frost stated that inquiries are coristantly being made of him as to the advisability of converting investments into common stocks in order to protect against inflation. Mr. Smith stated that his experience in St. Louj5 was similar to that of Mr. Frost. Messrs. Steele and Loeb were of the opinion that the fear of inflation was less than it was six months or a year ago. Chairman Eccles expressed the opinion that so long as money rates continue low and ample funds are available for the capital and mc)rtgege markets, there need be little concern over the question whether atocka are purchased because of fear or because of confidence in the 1311814"s situation, but that if it should appear that funds were being absorbed in equities and real estate to such en extent as to make funds unavailable in the capital and mortgage markets except at undesirably high rates there would be real cause for concern. Szymczak inquired of Mr. Braun what his opinion was in connect::rith the tatter under discussion and Mr. Braun stated that he telt the imPressien still existed to some extent that there was something tending toward inflation, although he knew from his own experience that investments made in common stocks by organizations which formerly confined 2448 11/4/35 -10- their investments to bonds were because of the decreased yield on high grade bonds and the prospect of more profitable operation of the corporations the stock of which was being bought. Mr. Lichtenstein then read a recommendation adopted by the Federal Advisory Council at its separate meeting, as follows: "The Federal Advisory Council, in view of the fact that it has been advised by the Chairman of the Board of Governors of the Federal Reserve System that the Board does not have the authority to initiate open market operations, requests the Board to submit the following recommendation to the Open Market Committee and to call for that Purpose a special meeting of said Committee at an early date. "The Federal Advisory Council of the Federal Reserve System has received the communication of the Board of Governors of the System, wherein reference is made to the statement of the Council made to the Board at its meeting of September 24, 1935, concerning the amount of Government securities held by the System, which has not varied for a long time, and calling the attention of the Board to the basic theory of open market operations: that there should at all times prevail sufficient flexibility to prevent undue expansion and contraction in the credit structure of the country. The Council enquired whether the Board agreed witIi the princip le enunciated. "The present communicetion of the Board recognizes 'the l?'ecessity for the consideration of the factors referred to ln the statement as elements in the determination of open Tarket policy' and closes with the statement that 'if the (31Incil has any proposals to make with respect to the 2Peration of the open market account of the Federal Reserve °:fstem, which it believes to be pertinent in the existing sltuation, all factors considered, the Board will, as in the Past, be glad to receive them and consider them'. "The Council is fully cognizant of and thoroughly :PPreciates the importance and significance of the obligalon imposed upon it by law 'to confer directly with the f_ederal Reserve Board' and 'to make recommendations in re'..O discount rates, redisco unt business, note issues, '23,erve conditions in the various districts, the purchase marksale of gold or securit ies by reserve banks, open o erations la said banks, and the general affairs of 2449 11/21/35 -11-- "'the reserve banking System', and it has given its most careful and earnest considerEtion to the suggestion by the Board that it will be glad to receive from the Council such proposals as it may make with respect to the open market account of the System. "As a result of this consideration the Council desires to call the attention of the Board to the fact that, since the discontinuance, more than two years ego, of open market Purchases by the System, excess reserves of member banks held by the System have now reached the unprecedented total of more than three billion dollars, which may well be considered as a base upon which additional bank credit can be extended to the extent of at least thirty billion dollars With a corresponding increase of bank deposit liabilities. wrhe Council believes that there have now been some considerable evidences of recovery in business, of an increase in prices generally, and particularly in the security markets of the country, with the possibility, at least, that a too rapid advance of security prices could easily develop into a new wave of speculation such as preceded the market collapse of 1929. The constant pressure of the very large excess reserves of the member banks creating a plethora . of the available supply of bank credit has a very distinct tendency to foster and encourage speculative activity, increase prices, and raise the living cost of the population. The Council believes that, even with the practically complete elimination of excess reserves, the banking system of the country would still be prepared and ardently desirous of meeting any and all legitimate and proper demands for bank credit, and it is strongly of the opinion that, in order to Obviate the probability of an undue and dangerous credit Inflation, it is desirable from every point of view to eliminate or at least greatly reduce the excess reserves now being carried in the System. "Since the enactment of the Banking Act of 1955, there exist two methods by which this can be accomplished. 1. The selling or 'permitting to run off' of a portion or all of the System holdings of Government securities. 2. Raising of reserve requirements. "The Council has most earnestly considered the question as to which of these two methods might be the more desirable 'UXlder the present circumstances and has determined to recommend as strongly as possible the first method. "The controlling reason for this is the indisputable fact that so long as Government bonds are held under the Ownership of the System, either the currency of the country 2450 11A1/35 -12- "or the reserves of member banks, to a corresponding extent, are dependent entirely upon a Government obligation. The rorld history of currency and banking has demonstrated the dangers inherent in such a system or policy too many times to make it necessary for them to be elaborated upon in this communication. "There is, however, another reason for preferring the first method, namely, the ease and flexibility with which it may be administered. Under that method, Government security holdings may bb permitted to run off or may be sold, rapidly or gradually, as in the judgment of the Open Market Committee, may seem to be feasible or advisable. If at any time, the effects seem to be too severe, it is possible to suspend or even temporarily to reverse the Policy. "Under the second method, namely, increase of reserve requirements, rigidity is substituted for flexibility, since it must be entirely apparent to any one that frequent Changes in reserve requirements would create a chaotic condition in planning for the future by member bank management. "Finally, the Council wishes to make perfectly clear to the Board that, after Government security holdings of the System have been eliminated or greatly reduced, and if, then, further curbs upon speculation should seem to be desirable, here would certainly be no possible objection to an in1--ease in reserve requirements. On the contrary, it would become the clear and plain duty of the Board fearlessly and Promptly to take such action." Upon inquiry from Chairman Eccles, Mr. Smith stated that the recoMmendation expressed the unanimous opinion of the Council. Mr. Miller inquired rhether the Council proposed that the System Should sell securities to curb speculation and Mr. Smith replied that it 1148 rather for the purpose of removing the temptation to speculate. Pr°8t at Mr. that the recommendation was not made as being a corrective illie484re, but because it was felt that the System was faced with the P"sibility of speculative expansion. Mr. Miller said that, in his opinion, the country was still faced with the problem of economic re- 2451 11/21/35 —13-- c"ery rather than speculative expansion. Mr. Frost stated that Government obligations were the basis of approximately $2,500,000,000 of the excess reserves of member banks which could be used as a base for the extension of credit of ten to fifteen times that amount, and that the existence of large amounts of excess funds had put pressure on the banks to keep their funds profitably employed, in order to permit the Payment of dividends to shareholders, to a point where the banks were willing to make loans which they formerly did not feel were safe to make. Mr. Miller inquired whether other members of the Council sub— scribed to that position, and some of the members indicated that they were not entirely in agreement with Mr. Frost's statement. Mr. Perkins Ilererred to the increase in excess reserves of member banks and inquired whether it was felt that if excess reserves mounted to four or five billion dollars it would aid recovery. Mr. Miller replied in the negat lye, hut stated that a movement to counteract an increase in re— serves at this time might have a chilling effect carrying with it a P°8sibilitY of danger; that, while the Federal Reserve System would have to take action in that direction at the proper time, he felt the im— P°rtant question at this time was whether the recovery movement had /iellched that point; but that it had been suggested as a reason for 111141ediate action that if the System did not act now it might not act when the time arrived when action should be taken. 4r, Frost stated that his reason for sutgesting that action be taken at this time was that it would enable the reduction or elimination 2452 11A1/35 -14- Of the Government security holdings, upon which a Portion of the excess reserves were based, without resulting in pressure on any member bank to rediscount at the Federal reserve bank, whereas if action were not taken until the excess reserves were used as a basis for bank credit the 8a-le of Government bonds would be made possible only by a corresponding atilaullt of rediscounts by member banks or curtailment of loans of member banks and that, in his opinion, the time to take action was while the large eXcess reserves were not being used. Mr. Miller raised a question as to the effect of a reduction of rive hundred million or a billion dollars in the System account within 4 Period up to four months and Mr. Frost inquired if the results would n°t be more unsatisfactory if action were not taken until a time when ik credit had been built up on existing excess reserves. This point Was discussed and Mr. Loeb stated that in the past, when Government aectlrities were purchased by the System to offset the outflow of gold, it had been stated that when the gold movement was reversed securities W°1141 be disposed of as a matter of normal procedure, but that such action had not occurred. Mr. Miller answered that the conditions under which the s Mem is operating must be taken into account and that the policy 111.01,ved must be governed by the existing situation. He stated that he telt -ere would be a considerable hazard at the present time in the -ation of a portion of the holdings in the System account and that the n ' lilestion would naturally arise as to the purpose of the System in aPParen+, -yJ-Y reversing its policy at this time. Mr. Loeb stated that the 2453 11/21/85 -15- a1swer in such a situation would be that a reduction in the holdings of seoarities was a normal operation. Mr. Miller expressed the opinion that the country was still faced with the problem of recovery; and that the sale of between five hundred million and one billion dollars of securities within a period of four and five months would be extremely unwise. Mr. Perkins stated that he would not have voted for the recominendation had he felt that there was any danger of stopping the trend of recovery; that he had discussed the matter with banks in New York who felt that cautious action could be taken; and that he had voted for the recommendation for the reason that he felt that if the System account Vve1'e gradually reduced it would not upset the recovery psychology, here "if the situation were allowed to reach a point where the excess i*eeerves began to be used as a basis for bank credit it might be difficult to reverse the movement. Chairman Eccles, after referring to the difference in viewpoint the in A VI -""".4 Council and the Board by reason of the fact that the former acts advisory capacity, while the Board has the responsibility for acti°11, Pointed out that a reduction of from five hundred million to a billion dollars in the System account might substantially stiffen interest rates, and that, if such action were taken when attempts are made to stimulate recovery, the Board would have great difficulty t4 formulating satisfactory reasons for such action. He stated that he did 11°t wish to convey the impression that the Board should defer action 2454 11/21/35 in order to keep interest rates do-An but thct its policy should be one of encouraging the use of credit for a furtherance of recovery. Mr. Perkins stated that he had not voted for the recommendation for the puroose of increasing money rates and that he felt that such was 11°t the purpose of the Council in submitting the recommendation. Chair— nlaq Eccles stated that he had discussed this matter riith a number of bankers, includin; some of the members of the Federal Advisory Council, Who felt that interest rates should be increased and that the banks could not continue to operate on the basis of present rates. It was illdicated by a number of the members of the Federal Advisory Council thct 84ell a concideration hfd not entered into their action on the recommenda— tion. Chairman Eccles stated that, if the System should take action tthich would affect adversely the Government bond market, it would react 4()t °nly against the Federal Reserve System but the whole banking tructure. He pointed out the additional fact that the Federal reserve b4nka - are dependent at the present time -for earnings upon their holdings cr Gov - ernment securities, and stated that if the securities were disposed °t the banks might reach the Point where it rould be necessary to sus— Ile44 dends to stockholders and to ask Congress for appropriations to riect °Aerating expenses, and that if this should occur it would affect the ; 4-ndePendence of the Federal Reserve System. )1 Mr. Wold stated that the Federal reserve banks previously had °I4er'ated a period of approximately two years without profits, and 2455 14121A5 -17- 0hairman Eccles replied that there was very little prospect in the near fllture of any material increase of rediscounts for member banks or in Paderal reserve banks' holdings of acceptances, so that undoubtedly there "tad be a long period of time before the banks could depend on earnings being sufficiPnt from any source other than their holdings of Government se curities. Mr. Frost inquired whether the earning position of the Federal ' l eeerve banks should be permitted to enter into the determination of open larket policy, and Chairman Eccles stated that, while it should not be a determining factor in open market policy, it would be proper to consider it in reaching a conclusion as to whether a policy of reducing excess l'eeerves should be made effective by a change in reserve requirements or by a change in the System's holdings of Government securities. Mr. Miller pointed out that the recommendation of the Federal Advi eory Council showed a very distinct preference for meeting the altuation by a reduction in the System's holdings of Government securities ) and stated that he had reached the conclusion that the method to be 118ed at the proper time was an increase in reserve requirements, and that ln this connection, consideration should be given by the Board to teguesting such further authority from Congress as would enable the toe. rd to deal effectively with any situation that might arise. Mr. Arnold stated that excess reserves were largely the result Of g°1d imports and were held largely by banks in New York and Chicago 411d that 3 if reserve requirements were increased, it would work to the 2456 11121/Z,5 -18- disadvantage of thousands of small banks that have no excess reserves. Chairman Eccles stated that the study made by the Board of the reserve Position of member banks showed just the opposite, viz., that excess reserves were proportionately higher in the country banks than in the reserve city and central reserve city banks. Mr. Frost suggested that if reserve requirements were increased 40 change would be made in the amount of existing reserves, but that if a reduction were made in the securities held in the System account reserves of member banks would be reduced end the elimination of governmeat bonds would add to the purity of the System's reserves. Mr. Miller atated that, apart from the method to be used, the alternative was not °Ile of acting now or waiting until the situation is entirely out of hand; that the real question was when should action be taken; that the System %could be tested by the accuracy of its judgment on this point; and that the Board's record must shov. that it was not afraid to wait when v,aiting 4(1 no harm but might be a constructive factor; and that it was not id to act vhen it appeared that action was the proper course. Chairman Eccles stated that he had met with the Council yesterday 411c1 had Pointed out that any recommendation of a reduction in the 83T8tW 5 holdings of Government securities would be one primarily for the e°118iderEti0n of the Federal Open Market Committee, that the Federal Open kark..4. Committee had given very careful consideration to the problem, elid it had come to the conclusion that the System portfolio should not be redu„ ed. Mr. Loeb inquired vhether the Committee had taken any affirmative ' 2457 11/2v55 -19- action, and Chairman Eccles replied that it had called attention to the large amount of excess reserves, and had expressed the feeling that the Present was not the proper time to decrease the System's holdings of Qoverament securities, but that it might be desirable for the Board to give consideration to an increase in reserve requirements. Mr. Smith stated that, while it was understood that only 46 barlks would not have sufficient available reserves and deposits with Other banks to meet a 25% increase in reserve requirements, he felt that 1418t of the banks whose reserves rere close to the increased requirements 1/°111-d stop making loans and would raise the question whether or not filther increases in reserve requirements were to be expected. Chairman 4cl-es suggested that it might be better for reserve requirements to be iricreased at this time than to wait until a large number of banks had 48ed their excess reserves as a basis for the extension of bank credit, 4" when it might be necessary, in order to apply the necessary curb, to iter ease reserve requirements as much as 50%. At Chairman Eccles' request, Mr. Goldenweiser made a brief state- Referrinq to the alleged "defilement" of the Federal reserve barlIts through the holdings of Government securities, he pointed out that the rederal reserve banks have liabilities of 46,100,000,000 on deposits 44d $3 an 1-,,02000,000 on Federal reserve notes, aggregating $9,700,000,000, 4gain --R-+, which they have $7,500,000,000 of gold certificates and 4)40n -0100,000 of Government securities -- a ratio of reserve to - note 44c1 dePosit liabilities of 77 percent -- indicating that the reserve banks 2458 4/24/3 -20- have an ample metallic reserve back of Federal reserve currency and Zember bank reserve deposits. He also said that it was not unusual for central banks to have n large portfolio of government securities, since, example, the Bank of England has 90 percent of its earning assets in Eovernments. He also said that it was incorrect to speak of the Federal re- 87e banks "investing" reserves of the member banks in Government " 11 11rities, the fact being that these reserves were erected in part by the Federal reserve banks buying Government securities and in part by g°34 imports, the proceeds of which have remained uninvested. He said further that it might be logical to meet the abnormal l'"erve situation arising from the large imports of gold through raising teeerve requirements, and to reserve open-market operations for use at a tinle when the System's policy of easy money might have to be definitely t'elfersed. 10 - 13 percent were established when the banking system had much 04aler be He pointed out that the present reserve requirements of 5, 7, reserves, and that action in raising reserve requirements could te4 v.tered in the light of a readjustment to the System's changed reserve P°81-tion. Mr. Miller pointed out that there was a distinction betTeen intiEvti°118TY currency and credit and redundant currency and credit, and ste'ted that at this point in the recovery movement the former had not tIlleal 'ed es a. condition requiring action by the Board, although the Board all°111(1 be constantly on the alert to determine the time when action should be takea. 2459 11/21/55 -21- Chairman Eccles stated that the Board has considered increasing reserve requirements, not as a means of reversing general open market Policy, but as a means of sterilizing gold imports on the theory that the gold movement was an abnormal situation and, as the movement may be reversed at any time, imported gold should not be used as a portion of the credit structure. Reference vas then made to the action taken by the Federal Open Market Committee at its meeting in Washington on October 22-24, 1955, and Chairman Eccles read the first -rive paragraphs of the draft of a letter to the Chairman of the Federal Open Market Committee which had been Prepared in accordance with the action taken at the meeting of the Board yesterday. Mr. Smith stated that several newspaper men hFd approached him f°r a statement of the matters under consideration b3, the Federal 4dviscr7 Council and that he had advised them that any statement on the 811bject would be given out by the Chairman of the Board of Governors of the ,ederal Reserve System. There was a discussion as to whether the ree°11endati0ns of the Federal Advisory Council should be released to the Pliecs, and Chairman Eccles stated that he felt that, while there TES no °Neetion to informing the press of the topics which were considered by the c °linen, if the recommendations of the Council vere to be released, 114blicat1on should be deferred until the Board had had an opportunity to e°1181der them and determine what action it would take in connection therevIth. Mr. Young suggested that the recommendation with regard to open 2460 11/21/35 market operation —22— should not be released until submitted to the Federal °Pen Market Committee. Mr. Smith stated that the Council would give the matter further consideration and advise the Board today of its wishes in the matter. Thereupon the meeting adjoarned.
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