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Minutes of actions taken by the Board of Governors of the Federal Reserve System on Friday, November 21, 1947. in the Board Room at 2:30 P.m. PRESENT: Mr. Mr. Mr. Mr. The Board met Szymczak, Chairman pro tern Draper Evans Clayton Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Smead, Director of the Division of Bank Operations Mr. Vest, General Counsel Mr. Leonard, Director of the Division of Examinations Mr. Horbett, Assistant Director of the Division of Bank Operations Mr. Mr. Mr. Mr. Chairman Eccles' office advised that he was working on the tat tent to be presented when he appeared before the Joint Committee °11 the Economic Report on Tuesday, November 25, 1947, and therefore ecild not attend this meeting. Mr. Vardaman's office advised that he would be unable to attend a meeting this afternoon. There were presented telegrams to the Federal Reserve Banks 130st°11, New York, Philadelphia, Chicago, St. Louis, and San FranCtsco 'stating that the Board approves the establishment without ' e DY the Federal Reserve Bank of San Francisco on November 18, br the p -ederal Reserve Banks of New York, Philadelphia, .and Chicago 0/1 Nov elilber 20, 1947, and the Federal Reserve Banks of Boston and 8t. to 418 today of the rates of discount and purchase in their ex- 1844g schedules. Approved unanimously. 4/21/47 -2- There was presented a telegram to Mr. Clark, First Vice President of the Federal Reserve Bank of Atlanta, reading as follows: "Board of Governors has approved for your Bank efsctive November 24, 1947, range of rates of one per cent -60 five per cent on advances to financing institutions IfInder Section 13b applicable both to portion for which illaneing institution is obligated and to remaining Portion. Otherwise the Board of Governors of the Federal Reserve System approves establishment by your Bank, ithout change, of rates of discount and purchase in , 4 108 existing schedule advice of which was contained J-n. Your telegram dated November 20." Z Approved unanimously. Szymczak stated that Chairman Eccles had requested mem,bers °I the staff to prepare a draft of reply to the statement subby the Federal Advisory Council on the expansion of bank credit 4rld that the draft would be submitted to the Board for approval 'cm as it was finished. In that connection, Mr. Clayton stated that this morning he r4et with the executive committee of the National Association of Super- Visor 3 of 1)ePosit. State Banks, Comptroller of the Currency Delano, and Federal T -Lnsurance Corporation Director Cook to discuss a draft of the 8tatameni. on bank credit policy during the inflation proposed to be wordtt bei4xla bY the supervisory agencies and on which agreement as to the g Previously had been reached with Comptroller of the Currency "reported at the meeting on November 17. At this morning's rtlestim„ -" he said, tentative agreement was reached on the statement Ete roliove 11/21/47 —3— "BANK CREDIT POLICY DURING INFLATION "Our country is experiencing a boom of dangerous Proportions. The volume of bank credit has been greatly inflated in response to the needs for financing the war !!*fort. The demands for goods and services, both domesand foreign, are exerting a strong upward pressure (311 prices in spite of the high volume of physical production. These demands would be inflationary without nY further increase in the use of bank credit, but the demand is being steadily increased through continued. rapid expansion in bank loans, in addition to °tiler factors outside the control of the banking system. "A further increase in production is desirable but this can only take place slowly and to a limited degree with the available supply of raw materials, Plant capacity and labor. Therefore a further growth of outstanding bank credit tends to add to the already excessive demand and to make for still higher prices. The Board of Governors of the Federal Reserve S3rs tem, the Comptroller of the Currency, the Federal 1:1?Pcsit Insurance Corporation, and the Executive Com,.1ttee of the National Association of Supervisors of .t,ate Banks are unanimously of the view that present e_Onditions require the bankers of the country to exextreme caution in their lending policies. It at times such as these that bad loans are made and uture losses become inevitable. "It is recognized that a continued flow of bank is necessary for the production and distribution aia goods and services. The banks of the country have penluatelY met this important need in the reconversion 81," - '°d. Under existing conditions, however, the banks 11:uld curtail all loans either to individuals or busis2ses for speculation in real estate, commodities or sZeurities. They should guard against the over-extenof°1 , 1 of consumer credit and should not relax the terms fistallment financing. As far as possible extension Of f4 'ank credit under existing conditions should be con' 4e, 1. 1ed to financing that will help production rather than -elY increase consumer demand. ,._ "The bank supervisory authorities strongly urge diors to see that their banks follow these policies and lntain adequate capital in relation to risk assets." 1606 11/21/47 -4Clayton also said that the executive committee of the Aseo ciation would clear the statement with a representative group or th e supervisors, and,if they approved it, it would be in form t°14 filial consideration by the Board. In response to a question, Cl -Layton said that the representatives who went over the draft ( lids (7° with the understanding that their group approved the issu- ance Of a statement on the subject, but that final acceptance of the f °rm of statement was a matter for decision by the governing bodt_ of the respective agencies. During a discussion, he also said there was no chance of chetai,, -,4g agreement by the other participants on a change in wording IA,. lch would give greater emphasis to the overall expansion of ballk C edit, since they do not consider it part of their function 'egulate the total volume of credit extended, and that the Board e°11aider the possibility of issuing an additional statement '411ch would make it clear that the joint statement was not intended to m ' - seuas the problem of bank credit in the light of the Board's 6115"1/11 res ponsibilities in that field. In accordance with a suggestion by Mr. Szymczak, it was agreed unanimously that a copy of the statement would be sent to each member of the Board for consideration while it was being reviewed by the representative group of Supervisors of State Banks. 1609 11/4/47 -5- Mr. Szymczak stated that since publication in the Federal Register of the notice of proposed changes in reserve city desigliEtti0n8, which was approved at the meeting on October 21, 1947, -111110er of protests had been received from banks in cities whose designation would be changed if the proposed formula were adopted. 4 al 8° said that President Leedy of the Federal Reserve Bank of Xansaa City had addressed a letter to the Board under date of Novemb"171 1947, to provide (1) that paragraph (B)(2) of the proposal be cu "anged by substituting "one-tenth of one per cent" for "one--13.1.4th of One per cent", in referring to the percentage of the 4ggregate amount of demand interbank deposits of all members of the Federal Reserve System which must be held by member banks in anY city designated a reserve city under that paragraph; and (2) that a new paragraph be added which would provide that, in additi°11 to reserve cities that would be designated under the proposed e, the classification would include every other city now classified as a reserve city in which all member banks now subject to reaerv e e4Y requirements, prior to December 31, 1947, had, in writing ' equeeted the Board to designate such city as a reserve city. ' It va -8 also stated that if the first of these changes were made 448a. s city, Kansas, and St. Joseph, Missouri, would be continued ::el*ve cities, that banks in these cities had requested a hearef°l'e action was taken by the Board to put the published formula IA)1_0 )421/47 -6- illt6 effect, and that if the Board was not prepared to adopt Mr. Leetr,_ 6 suggestions and the banks in these cities and other banks which had protested the proposed action were given an opportunity to Present oral objections, it would not be possible for the action t0heoome effective on January 1, 1 948, as originally contemplated. e4rPenter added that a letter had been received this afternoon ttcg the National Stock Yards National Bank, National Stock Yards, 111111°is, objecting to the designation of that city as a reserve eitir arid " questioning the Board's authority to take such action. All of the members of the Board present agreed that a de- eisio4 on M. Leedy's suggestion should not be made at this time, aild that the banks which desired to make oral objection to the Ntion of the proposed formula should be given an opportunity to do 80. Accordingly, it was voted unanimously to advise the Presidents of the Federal Reserve Banks of the districts in which there were cities the designation of Which would be changed by the formula under consideration by the Board, substantially as follows: Banks in two cities have requested an opportunity to present their views orally before action is taken changing the designation of the cities in which they are located. Representatives of these banks Will be given an opportunity to present oral objections to Board or members thereof on Wednesday, December 10, 1947, at 10 a.m. 11/21/47 -7in the Board's offices in Washington. The Board assumes from letters received that few banks would wish to make oral objection but if there is any bank in your district, in a city the classification of which would be changed by the Board's proposal, which has made objection to the proposal orally or in writing since October 20, 1947, it is requested, if you feel that the bank would be interested in making oral objection, that you notify the bank that it may appear if it wishes at the time and place stated above. If such bank signifies a desire to appear, please advise by wire as promptly as possible who will appear on its behalf. It is requested that not more than one representative appear on behalf of any one bank and in any event representation will be limited to two. This is not intended as an invitation to all banks but is merely to afford the banks which definitely desire to make oral objection an opportunity to do so. It was also voted unanimously that Messrs. Szymczak and Clayton be designated to conduct the proceeding with the understanding (1) that any other members of the Board who might wish would attend, and (2) that a full stenographic record of the proceeding would be made. In a discussion of procedure, question was raised whether the representatives of banks from each district should be heard separatelY from the representatives from other districts or whether the Proceeding should be conducted with all representatives present "I the same time. as the consensus of the members present that question Shouldtbe decided at the time of the opening of the Proceetaillg. 1612 11/21/47 -8- One of the items on the agenda as approved by the Chairmen f the Federal Reserve Banks for their conference to be held in islasillngton on December 1 and 2, 1947, was the topic: "Relations °f the Boards of Directors of the Federal Reserve Banks to the 8°41 ' d of Governors". In preparation for the discussion of this bleet with the Chairmen, the statement of responsibilities of the A 4 'Lreotors of Federal Reserve Banks and their relation to the of Governors, which since 1943 had been sent to each new heed office director of a Federal Reserve Bank, had been revised tcl sent to each member of the Board for consideration at this nieetings with the understanding that the statement as approved by the Board, together with any statement on the subject agreed upon the C hairmen, would be used as the basis for the discussion at the "Id-Meats Conference. The statement was discussed and approved unanimously as follows: r "One of the first things that impresses a new Diaet°r of a Federal Reserve Bank is the special charr of the activities of the Banks and of his re11 bility as a Director. These responsibilities 4Ye little resemblance to the duties of directors of .. 1.112,1vatelY managed banks. They spring from the nature the Federal Reserve Banks and can be understood only r,:, he light of the purposes of central banking and the F7,1onal structure of the Federal Reserve System. Every Ile'eral Reserve Bank serves its own district, yet its seti°ns are interlaced with those of other Federal ReBanks in carrying out the purposes of the System 1613 11/21/47 -9- "which are principally (1) to accommodate commerce, inand agriculture through the exercise of the Systeml s influence upon the general credit situation of the c°untrY; (2) to meet the currency needs of the country; (3) to operate an efficient system for the clearing and collection of checks; (4) to provide a more effective supervision of banks; and (5) to act as fiscal agent of the United States. "It has been the custom of important nations in the Past to have central banking functions of the respective countries performed by a single institution. However, 14 ,11en the Federal Reserve Act was passed in 1913 Congress 2ecided that the wide diversification of interests in the United States called for a regional system and that the °Perations of the regional banks should be supervised by a Government agency in Washington. Advantages of both centralization and decentralization were sought. Therefore, provision was made for the Board of Governors and e 12 Federal Reserve Banks. "The supervisory and other powers of the Board of GO vernors are very broad, in fact so broad that, if they were exercised to the extent the language of the various Pirovi sions of law would seem to permit, they would center 21 the Board all important decisions of policy (except 'Ten 13 market policy which is determined by the Federal Pen Market Committee) and would leave the Federal Reserve Banks largely as instruments in the field to carry ' or these policies. A statement of the broad character a,the Board's responsibilities as defined in the law is titached. On the other hand, it is clear that Congress 84 0's° Placed very substantial responsibilities on the neafds of Directors of the Federal Reserve Banks in contic'ion with the operations of the Banks in their respecAj e districts. Under the terms of the Federal Reserve su ,everY Federal Reserve Bank is conducted under the Pervison and control of the Board of Directors who shall 1-1- perform the duties usually appertaining to the of directors of banking associations and all such ce 1 1 ; 4 c1th'les as are prescribed by law' and who 'shall administer dte s,,affairs of said bank fairly and impartially without b mination in favor of or against any member bank or anks.t authonnce the passage of the Banking Act of 1935 when -luY to direct the purchase and sale of Government 11/21/47 -10- securities by the Federal Reserve Banks was taken from the Boards of Directors of the Federal Reserve Banks and Placed in the Federal Open Market Committee, question has frequently arisen concerning what appeared to be an inconsistency in the provisions of law referred to in the preParagraph and the authority given the Board of Governors and the Federal Open Market Committee. Directors have asked what is left for them to do and how can they Perform the duties usually performed by directors of banking associations when they have no authority over the investments of the Reserve Banks, when the rules under which rid the rates at which discounts and advances made to mem,er banks are determined by the Board of Governors, when he Directors do not have final authority for the selection of senior executive officers of the Bank and the salaries to be paid officers and employees, and when other P°1icY decisions or the kind referred to in the attached statement are made by the Board of Governors. It is only natural that this question should arise. Usually the Directors of the Federal Reserve Banks are men are used to making top policy decisions without their being subject to review by a coordinating agency such as the nle.Board of Governors. However, a study of the respon'lbllity of the System and its place in our economy will ke it clear why Congress has made certain acts of the Boards of Directors of the Federal Reserve Banks subject toapproval by the Board of Governors and in some instances a.m"43 to the direction of the Board of Governors. For exr Pie) the Board, as the agency established by Congress and ve iquired to make reports to it, must exercise certain superPowers with respect to appointment of official perwOnel, salaries and expenses, and certain other matters eri?h in the absence of the Board probably would be exGeeleed by the Treasury, the Bureau of the Budget, the Tbneral Accounting Office, or the Civil Service Commission. refore, while the responsibility for the control of the : cost of operating the Federal Reserve Banks is shared by Dae Boards of Directors and officers of the Federal Reserve tanks and the Board of Governors, the Board should be able to demonstrate whenever necessary that it is in a position er, ; f nd does adequately supervise expenditures of the Fedp_'1 Reserve Banks for salaries and for other purposes. , 7 1. this reason the Board recently reestablished the argement (discontinued during the war) under which annual t 1 -1615 11/21/47 -11- "budgets are submitted by the Federal Reserve Banks and the Directors have responsibility for the adoption by the Banks of effective budget procedures. "Each Federal Reserve Bank is both regional in scope d an integral part of a national monetary and credit system. That system should operate in a smooth working system that serves both the district and the nation. Therefore, while authority with respect to matters which are I nal in their scope rests with the Directors, on questionsof policy having nation-wide application (other than ° 1,Pen market policy which is determined by the Federal Open larket Committee) and in matters which involve coordination °f the System's activities and operations, the final decision must rest with the Board of Governors. "In these System policy decisions Directors of the Federal Reserve Banks can play a very important advisory part. Selected as they are as the representatives of bankcommerce, industry, and agriculture and for their outStanding accomplishment in their chosen fields, they are able to make available to the formulation of System pollf!ies their seasoned experience in business and public affairs and their broad knowledge of regional conditions. Therefore they are in a position effectively to advise the Board as to actions that it might take with respect b° such policies. Furthermore, when the decisions have ,es made, the Directors are able to explain and thereby ) n. bring about an understanding and an acceptance of them 4_ their various communities. There is a widespread feelthat fiscal and monetary programs and procedures are ''ufficult if not impossible for the average individual to itderstand. However, actions taken by the Government and 8 to central bank in this field are of the utmost importance s the public generally, and it is desirable that an underending of them be as widespread as possible. This will Particularly true in future years which will be characterized e by a large national debt, 8 large Federal budget, increased importance of fiscal and monetary policies the economic life of the country. Although the SysProblemno direct responsibility for fiscal policy-, that is so closely related to the System and its res , 4cIleibilitie5 that the Directors, through the information itve10Ped by the System, should keep in touch with it as be affects the System and the Federal Reserve Banks and , Prepared to express opinions regarding the policies th' might be followed. n r 11/21/47 -12"Much has been said in recent years about the Federal Reserve Banks as centers of information and leadershiP and it is believed that the Directors can play a most effective part in bringing this about. In this connection the following is a summary of a statement Tade by the Chairmen at their conference in April 1941: ,There should be no limit to the work of the Federal neserve Banks in the field of cooperation, education, and leadership. The good that the Banks can do is limited only by the intelligence, courage, and leaderip of their directors and officers. On the other and, we must not underestimate the routine or opertIng functions and responsibilities of central bank'rig as they form a vital part of the System. On the assumption that there will be further centralization with respect to fiscal and monetary policy and that the objectives of that policy will be different and 7e1 involving measures which will take on an ineasing explicit regional differentiation, it seems "eirable that the Reserve Banks be firmly established as centers of information, enlightenment, and leaderThey must be able to submit comprehensive in_ormation wisely interpreted on economic problems and :egional trends. They must be able to act as centers t°r interpretation in their districts of national pol:LeY and methods in the fiscal and monetary area. They a.lust be able to assume leadership in times of emergency arid to exert proper influence on national policy esfrom the point of view of regional considerat10 0ns., This assignment is one to challenge the abili, : 2 es of the best qualified men we can find to serve as 'lrectors of Federal Reserve Banks. "In addition to this service, the Directors of the FederalReserve Banks have some specific and important ;: 1 sPonsibilities. Perhaps the most important of these e l- to see to it that the Federal Reserve Banks have t2171Petent and efficient management. The President is e chief executive officer of the Bank and all other reeutive officers and employees of the Bank are diY responsible to him. In his absence the First _4,,-ce President acts in this capacity. The importance .1t.1 the selection of competent management, and particurlY the President and First Vice President, is clearly j 4 1617 11/21/47 -13- "demonstrated by a consideration of the responsibilities of the President whose work can be classified into four major areas: (1) the operation of the Federal Reserve Bank, (2) analysis of information for and consultation With the Board of Directors, the Board of Governors, and the Federal Open Market Committee in connection with policy decisions, (3) leadership in his district in interpreting System policies and in the formulation and adoption of sound commercial banking policies, and (4) membership on the Federal Open Market Committee. "The operating functions of the Federal Reserve enks have been organized to a point where they are t!t times referred to as routine functions, but they °Lc' not run automatically. They require continuous s_uPervision by men who are well qualified to keep them runctioning economically and efficiently and who are able to adapt the procedures to changes as they come along so that the Banks' operations will be kept abreast of the times. The responsibility for a well balanced nd qualified staff rests in the first instance with President and he is expected to anticipate as much as Possible the demands that may be made on the Bank end to make recommendations to the Board of Directors s to how these demands may best be met. The imporB4nce of the regular operations of the Federal Reserve anks should be kept constantly in mind because they constitute the daily contact of the public with the stsrla and the principal basis for public judgment of us quality of System administration. cu In the formulation of policy the President oc,Pies a unique position and plays a most important ; al‘t. The policies of the System and his Bank find 0;Pression in the operations of the Bank. Because ct, ,his close relationship with the member banks and h usrs in the district he is able to see firsthand fo4 these policies are applied in the field. Thereore, he is able to appraise their effectiveness and thaformulate valuable recommendations as to actions m t should be taken. Through the research departZts of the Bank he is able to develop information Golch is necessary to the Directors, the Board of revernors, and the Federal Open Market Committee in Ilehing their decisions. Through the medium of the Z j 11/21/47 -14- "Presidents' Conference and its committees, the Presidents are able to compare notes on, and make studies of, conditions and problems in their respective districts and thereby to place themselves in a position to make recomndations on matters of System and district policy and eserve Bank operations. "Fran the standpoint of public service, perhaps the ln°st important function of the President is the leader1P which he is able to give in his district. This falls under two major headings. First, upon the President rests the primary responsibility to interpret and °14sin acceptance of the policies adopted by his Bank !'14 by the System. Actions on monetary and credit matters have a vital effect on commerce, industry, and !griculture and if they are to succeed as they should bIle:Y must be understood. The President is in a better Position than anyone else to bring this understanding ”out. He is a part of the community and as the fulltlime executive head of the Bank is expected to be the :pokesman for the System in the district and to explain meaning of Federal Reserve actions and why they are In the public interest. Second, it is believed that the F!deral Reserve Banks, because of their special relationto the commercial banks, the Government, and the pubshould furnish constructive leadership in everything ,rt vill contribute to sound commercial banking and cred? policies. The interest of the System in this connec„1°11 is much greater than that of agencies which are conned primarily with deposit insurance and bank supertlsion since the System is interested in the whole monemarY and credit picture as it affects not only the comiroial banks but all phases of community and national gi!e• This affords to the System a basis for leaderv"11) that looks not only to the maintenance of the soleneY of the commercial banking system but also to its EgiTheatest possible public service. The System can well cof!rd to furnish leadership in the principles of sound bank lending, investment, and other policies, tile r :r elationship of the banks to the public, and the j,taoe that the banks should occupy in connection with 'seal and other policies of the Government. Five of the Presidents serve with the members of the Board of Governors as members of the Federal Open r 7 1 I 19 1-,14a/47 -15- "Market Committee and by rotation each President serves from time to time as a member of the Committee. As such he has direct responsibility for policy formation in a tremendously important field which calls for a broad knowledge of the background of all credit control actions °f the System whether taken by the Board, the Federal Reserve Banks, or the Open Market Committee, ability to analYze the possible reactions of the banks and the public to the different forms of System action, and sound judg! ent as to the extent to which and the form in which ac"ion should be taken. "For these reasons exceptional care should be taken in the selection of the President and the First Vice Presient to see that they are men who can command respect in ,he community and who can furnish leadership of the kind cribed above. While their responsibilities are greatly d'?s lfferent from those of officers of private banks, if they are able to render this kind of service their work will be more important from the standpoint of the maintenance of !?und economic and finpncial conditions than that of ofIlcers of large private commercial banks. As suggested in the Board's letter of March 28, 1947, however, they ' 111 not expect to command the salaries that are paid to head of large commercial institutions and must derive !Part of their compensation from the performance of a enable public service. The fact that the law makes a aPpointment of the President and First Vice Presitent and salaries fixed for them by the Board of Direc(1f,8 aS well as the salaries fixed for other officers n, employees subject to approval by the Board of Govdoes not lessen the responsibilities of the Diors for their selection or for constant study of the illeat_ageraent for the purpose of assuring that the Bank will °Iltinue to be properly and efficiently managed. Several years ago, as a means of enabling the Board and sal the Banks to provide more effective administration of va aries of employees (as distinguished from officers), the Banks adopted personnel classification plans. RentlY these plans were completely revised and brought Up ) date. Within the limitations of the minimum and ' ae. 3 um salaries provided by the plans the Federal Rea , 1.11e Banks are free to fix salaries without specific vProval of the Board. V )4111' 11/2a/47 -16- "As previously stated, the Board of Directors is responsible for the conduct of the affairs of the Federal Reserve Bank and is required to administer the affairs fairly and impartially without discrimination. In regard to credit accommodations each Bank may extend to each member bank such discounts, advancements, and accommodations as may be safely and reasonably made with due regard to the claims and demands of other member 2 t Inks, the maintenance of sound credit conditions, and 'ne accommodation of commerce, industry, and agriculture. Each Federal Reserve Bank is required to keep its fingers on the economic pulse of the district and Ito keep itself . informed of the general character and amount of loans and ?flvestments of its member banks with a view to ascertaining whether undue use is being made of bank credit for Paculative carrying or trading in securities, real esate, or commodities or for any other purpose inconsistrp t with the maintenance of sound credit conditions'. lua law contemplates that the rates at which discounts !Ind advances will be made by the Federal Reserve Banks !riall be established by the Boards of Directors subject Lo review and determination by the Board. The fact that the Board of Governors has authority, if it feels it is ,1 1?cessary to do so, to determine that the rates shall be ';Lfferent from those fixed by the Directors does not alter fl-e responsibility of the Directors to initiate these rates. f "In their operations the Federal Reserve Banks perfunctions which are essential to the effective workOf the banking system and the economy generally. In a,tion to administering the regulations of the Board they responsible r functions of the esponsible for seeing that the currency SYstem operate effectively. They have an important ija, ra in bank supervision and examination. Through the iintenance of an efficient system for the collection of a eeks, the Banks serve business and banking by promoting aj n100th flow of money transfers. The fiscal agency oper: s (3ns conducted for the United States provide essential j el jices for the Government and the public in the trans4_ i°fls involved in the sale of Government obliga- ions, ; 1-1 the collection of Federal taxes, and in the disburseof Federal funds. The relationship of the Reserve thliks to the Government is demonstrated most forcibly in e issue of Federal Reserve notes which make up the bulk Z j 1621 11/21/47 -17- sin,° . ; 14atycountry's currency, in their services to the and other Governmental agencies, in the field cf international relationships, and in their administrati°n of regulations relating to margin requirements for loans on securities (Regulations T and U). Moreover, the event of the liquidation of a Federal Reserve t5ank, any surplus remaining after payment of all claims elongs to the United States, and, under a policy adopted .Y the Board, approximately ninety per cent of the earnof the Banks after expenses and dividends are paid 0 the Government as an interest charge on Federal Reserve notes. "Each Federal Reserve Bank has a full-time auditor Whoreports directly to the Board of Directors through "e Chairman and the Audit Committee. The auditor and examiners for the Board of Governors maintain close relations with each other evidencing the common interest of the Board of Directors and the Board of Governors in seeing that the practices and procedures of the Bank are ,°und and in conformity with the law and applicable regulations. t "The Directors also have responsibility for the branc ,Les of the Federal Reserve Bank. They appoint a u2ejority of the branch directors, the remainder being !PPointed by the Board of Governors. As is done in the election of directors of Federal Reserve Banks, care le taken to appoint men as directors of branches who are orders and who will bring to the branches the benefit a-rg°0d judgment and tested experience. The matters which within the province of the branch directors vary in the e different districts but in recent years the activities the branches have been increased. This has tended to r,lcrease the responsibilities of the branch board, subject, , course, to the supervision of the Directors of the FedReserve Bank who are responsible for the operations Of the or Bank as a whole. The Board has repeatedly said that the strength of the ill, regional organization of the System is in the existence Le Principal cities of the United States of 12 Banks prd 24 branches which are close to and familiar with the 11,°blems of the respective territories which they serve which have the organization and 'know howl to render service in the banking and credit fields and as fis1- agents for the various branches of the Government. It Z 16:eZ 11/21/47 -18- would not be expected that either strength or ability for leadership would characterize the Federal Reserve Banks if all of the important decisions of policy were made in Washington and the Banks were merely service ?tations through which these decisions were carried into effect. On the other hand, it could not be said that the Board was discharging adequately the responsibaitY placed on it by the law if, in a rubber stamp fashion, it approved all of the actions taken by the Board of Directors of each Bank with respect to salaries, credit policies, foreign relations, service to member banks, and other important matters of that kind. F'ven when the Directors of the Federal Reserve Bank have carefully considered a matter on the basis of all the .4t-information available to them, there are occasions when 1,11e Board, because of broader questions of System policy sed on national and at times international considerations, is obliged to disapprove the action or suggest that it be modified. This is not a pleasant task for eB ss o:14.and it is not undertaken any oftener than j Z ,, "There is no question that the Board of Governors, e directors, and the executive officers of the Fed-ral Reserve Banks have a place in the System in which 7.,, 11ch individual can find problems which will test his m Iilities and afford ample opportunity for public service of the highest order. The central banking function .8 one of utmost importance and will continue to be so tl! the years of reconstruction that lie ahead. All of men who are in positions of responsibility in the can look forward to the future with the assurance that c at °n1Y if their job is well done will that function artinue to be entrusted to the System. In order that of its parts may be forceful and forward looking, e tleh,group should concentrate its energies on its par : „cular task, keeping in mind as a general guiding prinle that the Board has primary responsibility for genthel supervision and for System policies and that, within s.e limitations established by such policies, the decipl°118 on local matters that can be made by the individual r?deral Reserve Banks and all operations that can be carblet? on effectively in their respective districts should e in the hands of the Banks. r Vj 11/21/47 -19- "Inasmuch as the Chairman of the Federal Reserve Bank in his capacity of Federal Reserve Agent is the official representative of the Board at the Federal Reserve Bank, there are certain matters in the policy field which should 10? discussed by the Board directly with him and through 113 .-m with the Board of Directors of the Bank. In connect on with certain other matters, the Board communicates with both the Chairman and the President and on other matters which are handled by the President or should be presented to the directors through him, the Board communi!ates only with the President. It is believed that this arrangement is a most satisfactory one and should be continued "The Conference of Chairmen which meets periodically affords an excellent opportunity for a discussion of broad questions of System and national policy and other matters relating directly to the System's work. The Board wel?omes these discussions as it believes that they clarify respective areas in which the Board of Governors and e Federal Reserve Banks have responsibility and make Possible a greater degree of cooperation. "SUPERVISORY AND OTHER RESPONSIBILITIES OF THE BOARD OF GOVERNORS "In addition to the activities of the Federal Reserve Ban . ks (including fiscal agency operations) being under the neral supervision of the Board, the Banks are subject to txa°rlination by the Board, which may also require from the IZaks such reports and statements as it may deem necessary. is required to appoint three of the nine directors of s Federal Reserve Banks, to designate the Chairman and trutY Chairman of the board of directors, and to approve aPPointments of Presidents and First Vice Presidents d the salaries of all Reserve Bank officers and employca.s. It can remove any director, officer, or employee for ()fuse and may suspend the operation, and take possession, of anY Federal Reserve Bank which violates the provisions the Federal Reserve Act. ot The authority of the Board over the credit functions the Federal Reserve Banks is very broad inasmuch as the Rescounts, advancements, and accommodations extended by the de ! erve Banks to their member banks are subject to the orby's and regulations of the Board. Discount rates charged he Reserve Banks are subject to approval and determiri j lOn by the Board, and it can suspend for cause any member r C Z 1.624 11/21/47 -20- "bank from the use of the credit facilities of the Federal Reserve Banks. The Board also may require a Federal Reserve Bank to rediscount, at rates fixed by the Board, paper acquired by other Federal Reserve Banks, and to write off doubtful or worthless assets. The issuance and retirement of Federal Reserve notes are under the supervision and regulation of the Board. "The Board is required to exercise special supervision over the foreign relationships and transactions ef the Federal Reserve Banks. The responsibility for Policy with respect to the establishment, operation, and discontinuance of branches of the Federal Reserve 8anks rests in the first instance with the Board of Go vernors. The Federal Reserve districts provided by the Federal Reserve Act may be readjusted by the Board. The Board may require each Federal Reserve Bank to ex?reise the functions of a clearing house for its member banks, and the existing check-clearing and collection system has been set up under that authority. he Board may regulate the transfer of funds between the Federal Reserve Banks and their branches. "The conditions under which State banks will be itted to membership in the System are prescribed by the Board, and the disciplinary actions provided by the ta4 with respect to member banks are taken by the Board, tneluding the removal of officers and directors of members banks for violations of the law and unsafe and un24114 practices. Discretion with respect to the exof member banks, the assessment of the cost t uI such examinations, and the reports and statements t(,) be required from member banks is placed in the Board, tileluding approval of appointments of examiners made by 4..e Reserve Banks. The granting of trust powers to nar''aelaal banks is the responsibility of the Board. Persl its authorizing holding company affiliates to vote the s °elt which they own or control in member banks are isby the Board. Maximum rates of interest that may bed lel a_ Paid by member banks on time and savings deposits -L-e determined by the Board. "The most important function of the System, the detninatier th_ ' on of credit policies, rests largely with Boardm1B. While it is true that the Federal Open Committee has responsibility for directing the T n 1626" 1lAa/47 -21- "Open market operations of the Federal Reserve Banks, the Board constitutes a majority of the membership of that Committee and, in addition, has other broad powers over reserves of member banks, the extension of credit to member banks, and the other instruments available to the .ystem for credit regulation. Therefore, as long as the -Law continues in its present form, the responsibility for a consistent System credit policy is one which the Board Zust accept." In taking the above action, it was understood that if, during the meeting with the Chairmen, any changes in the Board's statement were suggested, these changes would be considered by the Board, but that otherwise the statement in the future would be sent to each new head office director with a letter of transmittal reading as follows: "Your telegram of 2 advising of your acceptance of appointment by the Board of Governors as a C 4,1ass C Director of the Federal Reserve Bank of 1-co the three-year term beginning , has been reyou into welcome I wish to On Board, the behalf of thelved. e official family of the Federal Reserve System and to exPress the hope that you will enjoy your new duties and as; ° 1Iciations. If he has not already done so, Mr. 4,rman of the Reserve Bank, will communicate with you in 'Lie near future and advise you of the steps to be taken to lifY as a Director. We trust that whenever you have ocf-sion to come to Washington you will call at our offices a visit and a personal welcome into the System. , The suggestion has been made from time to time in the 1,81 'that it would be helpful if there were made available t2 Directors of Federal Reserve Banks a short statement of h:eir duties and responsibilities. To fill that need there rets ., been prepared a statement outlining in the space of a a Z.Pages the nature of the principal responsibilities of 130"i-rector of a Reserve Bank and his relationship to the 1 of Governors and the System as a whole. This state/11 ,7t41, is enclosed and I would urge that you read it care'.11-Lly. A detailed discussion of the duties and powers r 1_626 11/21/47 -22- "of the Federal Reserve System as a central banking mechanism and the authority of the System with respect to banking and credit matters is beyond the scope and purpose of the statement. These matters are discussed in the booklet entitled 'The Federal Reserve System--Its Purposes and Functions' and the larger volume entitled 'Banking Studies'. oPies of these two publications will be placed in your hands 0Y the Federal Reserve Bank and you will find it to your advantage to read them carefully. As an aid in obtaining an utderstanding of the organization of the System a chart is attached to this letter which shows the principal duties and relationships of the groups comprising the System. "It was not possible in the statement to recognize differences in the organization and operations of individual Federal Reserve Banks, and to meet this situation the Federal Reserve Bank of will furnish You a memorandum which will describe the organization of tLie Bank and the relationship of the Board of Directors, tLie executive and other committees of directors, the directors of the branches, and the President and executive officers to each other and to the functions performed by the Bank." F Mr. Baumann, Assistant Counsel, joined the meeting at this P°14t. Before this meeting there had been circulated among the ttlekbers O f the Board a memorandum prepared in the Legal Division 114der date of October 21, 1947, following the discussion at the leetille of the Presidents and the Board on October 7, 1947, of the clilestic'n whether a recommendation should be made that legislation be. by the Congress to require the approval by the Board for the e stablishment by a State member bank of an intracity branch. The 162'? 1341147 -23- metcl°randum stated that the following questions should be decided 111 the Board in connection with the contemplated submission to the 001 of proposed legislation with respect to the capital refor admission of a State bank to membership in the Federal RA e rye System and for the establishment of a branch by a member batik: "1. Should the law contain any minimum capital stock requirement for the admission of State banks to zembership? If so, should the minimum be 825,000 or t50,000? "2. Should the Board recommend that the existing CaPit requirements for the organization of national inks be eliminated and replaced by a provision vestdiscretion in the Comptroller of the Currency similar to that which the Board would have in admitting mt iate banks to membership? If so, should the same 414111m, if any, be prescribed? m "3. Should the requirements for the establishof out-of-town branches by State member banks be vorced from those for the establishment of branches 'by !lational banks and the Board seek legislation only ltn respect to branches of State member banks? the o,_/4,. Should the Board's approval be required for tablishment of intracity branches by State memmLbanks? Should its approval be required for the ng of a branch to a new location?" Durine a discussion of the background of these questions, Mr. ol -aYton's request, Mr. Baumann outlined present capital re(114.re,„ "'eats e -or admission to membership and for the establishment °I* b 1*'Inches by member banks. at Mr- Szymczak suggested that it would be preferable if a Cigion °a the questions could be deferred until Messrs. Eccles (c7r2e3 11/21/47 -24- and Vardaman could be present and Mr. Clayton suggested that inasmuch as some of the questions concerned the Comptroller of the Curthey be discussed with him on the basis that the Board had l'"-ched no decision as to the action to be taken and that the mat- ter Would be considered by the Board in the near future. Mr. Clayton's suggestion was approved unanimously. At this point Messrs. Smead, Vest, Leonard, Horbett, and 861,Th1811.11 Withdrew and the action stated with respect to each of the itatte rs hereinafter set forth was taken by the Board: Minutes of actions taken by the Board of Governors of the Feds,. ' 41 Reserve System on November 20, 1947, were approved unanimously. tne Letter to the Presidents of all Federal Reserve Banks readfollows: "Summaries of Regulation W Enforcement Reports ars enclosed, covering the month of October. Conthat had failed to register were reported at / in addition to the tabulated violators." Approved unanimously. Telegram to Mr. Whittemore, President of the Federal Reserve of Boston, reading as follows: a "Re Willett's letter November 13, 1947. Board Dl . p PI ' clves as the revised budget for Bank Examination rtment for the year 1947 the estimnted expenditures ! Ls the department amounting to $144,785, as submitted connection with the budget for 1948." Approved unanimously. LEV49 11/21/47 -25- Telegram to Mr. McLarin, President of the Federal Reserve Bank of Atlanta, reading as follows: "Board approves revised budget of $43,450 for the Examination Department for last half of 1947 as requested dn Bowman's telegram of November 12, 1947." Approved unanimously. Telegram to Mr. Gilbert, President of the Federal Reserve atitik of Dallas, reading as follows: "Re Gentry's telegram of November 10, 1947. Board 4PProves as the revised budget for Bank Examination Dement for the year 1947 the estimated expenditures •-c)/' the Department amounting to $100,434 as submitted 111 connection with the budget for 1948." Approved unanimously. Letter to the Presidents of all Federal Reserve Banks read- ing as follows: "There have been forwarded to you today under sepairate cover the indicated number of copies of the follow! 1. g forms, a copy of each of which is attached, for use ! sc 1- State member banks and their affiliates in submitting gaPorts as of the next call date: Number of C4.Pj. " e& I'Vn F. °m R. 105 (Call No. 107), Report of condition of Fnotate member banks. 1*. F. R. 105b (Revised August 1939), Loans and adv4ncas to affiliates and investments in and loans Polelfed by obligations of affiliates. R. R. 105e (Revised November 1946), Publisher's of report of condition of State member bank. F, R. 105e-1 (Revised November 1946), Publisher's poe°PY of report of condition of State member bank. ! 11 F. R. 105k (Schedule K), Balances to the credit °' United States Government officers and agencies. 11/21/47 —26— "Form F. R. 220 (Revised August 1946), Report of affiliate or holding company affiliate. Form F. R. 220a (Revised August 1946), Publisher's copy of report of affiliate or holding company affiliate. Fcmra F. R. 220b (Revised August 1946), Instructions for the preparation of reports of affiliates and holding company affiliates. "With the exception of form F. R. 105 and the new Schedule K, all of the forms are the same as those used On October 6, 1947. Schedule K was added at the request of the United States Treasury Department in order to obtain a complete record of official accounts to the credit United States Government officers and agencies. We were informed that similar information was requested subf sequent to the first World War and that it was very help211 ta locating and properly disposing of many accounts enPrised of funds belonging to the United States Governt. Only three copies of form F. R. 105k need be sent to each State member bank (two for the use of the member bank, and one to be completed and returned to the Reserve ,,:1 1 1k). The original copies should be checked for reasonableness and sent directly to the Treasury Department, Diof Deposits, Washington 25, D. C., when they have 7?la received from all State members in your District. ZS information will be collected only on the next call "; similar forms are being requested of banks reportto the Comptroller of the Currency and the Federal u Posit Insurance Corporation. "The following changes have been made in form F. R. 105: (1) Schedules A and B, omitted from the fall call, have been reinserted with a change in the wording of item 4, Schedule B: 'United States savings bonds (series C, D, changed to 'United States non-marketable bonds (savings series C, D, F, G; investment series A-1965; and depositary bonds)'. The new item provides for the classification of the recent issue of Treasury Bonds, investment series A-1965, and combines all United States non-marketable bonds in one item; formerly depositary bonds were classified according to the appropriate maturity against items 5 to 7, inclusive. (2) The heading of Schedule D has been changed to conform to the wording of item 1 on the face of the report." r I Fy G) t y Approved unanimously, with the understanding that the letter would be sent when the forms referred to therein were printed and ready for distribution.
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