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1814 A meeting of the Board of Governors of the Federal Reserve SYst., e,awith the Federal Advisory Council was held in the offices of B oard of Governors in Washington on Tuesday., November 21, 19500, atin:35 a.n. PRESENT: Mr. Mr. Mr. Mr. Yr. McCabe, Chairman Eccles Szymczak Evans Powell Mr. Carpenter, Secretary Messrs. Bucklin, Potts, Congdon, Fleming, J. T. Brown, Edward E. Brown, Hemingway, Ringland, Beals, and Lochead, members of the Federal Advisory Council. from the First, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, and Twelfth Federal Reserve Districts, respectively. Mr. DeWitt Ray, President, National City Bank of Dallas, Texas, who attended the meeting in the absence of Mr. -;ioods, a member of the Council from the Eleventh Federal Reserve District. Mx. Prochnow, Secretary of the Federal Advisory Council Before this meeting the Council submitted to the Board a setting forth the Council's viers on the subjects to be vrith the Board. and the 4"olion: 1, The statement of the topics, the Council's discussion with respect to each of the subjects were c, 0 'active credit controls: (a) 1/that information do the members of the Council have with respect to the effects of Regulations Wand X? 1-1/21/50 -2(b) are the views of the Council as to what, if any, action should be taken by the Board to change the existing Regulations and X or to broaden their scope? surf (a) Regulations A and X have not been in operation iclently long to determine their full effect on the economy. Nell cent in some car s91 es have been reduced 10 to 15 per report a decline areas, sections other although s high as 50 per cent. The Pacific Coast and the South ialave more aPParently felt the impact of Regulation verely than the rest of the country. ne Because of the large volume of outstanding commit4' It , no reduction in real estate credit has yet 0c1.r tred. Contractors report that when their presenti comst ments are completed construction will decline suon lallY in volume. The decline in the price of lumber ti.14 00 partly due to Regulation X. A simplification of reLr!PortinL, forms for Regulation X, with a resulting -"i°n in the paper work required, would be highly de- 4 that (b) The Council is unanimously of the opinion in Regulations W or X is desirable at th' n° change is time . wi.ui Llembers of the Council have previously discussed in the Board some of the difficult problems involved fing out a regulation covering industrial and commerir' ' a-L construction loans. The Council would appreciate theof ipresent views of the Board relative to the regulation ' °ans of these types. 1 . n Connection with the suggestion of the Council that a simcation cf the reporting forms for hegulation X would be highly cloair : i biel President Brown stated that the suggestion referred to the eent that a bank maintain records which demonstrate on their Whether a credit was or was not real estate construction credit, 1 SI_E) 11h1/50 tit this -3requirement resulted in a considerable burden, and that S h0111d. not be required to make such a record unless it had scie r".sen to believe that the loan :;as an extension or real estate el3listructl on. credit. Durinr' a discussion of this matter :Ir. Riefler, Assistant to Chairrrian tiocabe, Jas called into the meetin7 and he outlined the con- sideration ziv _ n e to, and the reasons for, the requirement in Section 4(c) or Regulation X ahich had been desiL,nod to make compliance by Registrants as simple and easy as possible and still meet the need, tc)r erlforcenient Purposes, for some evidence as to ahether a Particular loa.n..4as er Was not real estate construction credit. In this 1-3stzedreference connection, aas made to the interpretation the Board on October 1 1950, .4hich stated that if the istra.nt sias satisfied that the credit aas not real estate construetiell credit, the requirement of the first sentence in Section 14.(c) o Reliliation X i:;ould be met by a aritten endorsement or rubber stamp 1Cend, placed upon the credit instrument or other papers in connection With the credit and sinned by the Registrant or a responsible (3-licer of the Reoistrant, stating that he was satisfied that the in question Jaz not real estate construction credit. Some of the members of the Council indicated that under that Ptation the requireLlent aould not be a burdensome one. The stion was asked of President Brown whether he had in A r 1 1V21/50 1*Id that in certain cases no record :rould be required and ho his Problem -40uld be solved by his suestion that a Registrant have in the re cord of the loan a statement that he had no reason to believe that the loan as real estate construction credit. He responded that he felt that the requirement should be something less than a flat statement on the part of the Registrant that the credit was not real ' 9st,ate co nstruction credit. At the end of the discussion of this point Chairman McCabe stated that this sucgestion aeuld be considered by the Board, but tlat he did not see ho,i the requirement could be made much less burde ilsc)cle and still serve the purpose for i;hich it fas intended. In connection .rith the statement that the requirement of for the preservation of records Jas that every Registrant slIal-4- preserve such records as are relevant to establishing whether rlot a credit qualified for exemption or hether it was othe,nriso tri co rif°rraitY ;rith the requirements of the Regulation, President stated that he did not think that any such records were mainuY his bank. President Bro n than stated that it was the feeling of the (k)141m 'J--L that the complaints received by the Board that the terms of lLatior' W were too restrictive were prompted largely by self/lter, st that the objectives of the Regulation could not be achieved 111132 it as in fact restrictive, and that the Council saw nothing the situation at tho present time which ,iould justify relaxation 11/21/50 -5- Of theRegulation. There aas a general discussion of the complaints that had beer' received by the Board gith respect to the effect of Regulation °II the sale of automobiles, and Chairman McCabe referred to the statistius -obtained by the Board of automobile registrations in Novezber of this year as compared with November of last year and statistics collected by six large automobile manufacturers on the sale of new and used cars in some of the leading cities in the United States. President Broan emphasized that the Council did not feel 4113acti0n to liberalize the Regulation should be taken by the Board arid that the °Illized pressures for such action ,ere largely the result of efforts by automobile dealers and other interested parties. Rs also said that the complaints on Regulation X aould come later 'Nherl the Re gulation began to take effect, and 'ghat the effects of the b "egUlatien gould be gas difficult, if not impossible, to state at this time. Chairman McCabe outlined hoa the prospect for residential e°11struction in one- and tao-family residences and in multiple housing c°11atruction over the next few months aas affected by the large 4e1114111a.tion of commitments made before Regulation X was adopted, and Sta 2lieci that the decline in construction aould not be as great as had 134"oped When the Regulation .as first put into effect. President 1 RI9 I:/ 1 21/5D —6— Brown was of the opinion that the decline in construction would not be, in E until the middle of next year. 1•Ir. Bucklin said that he had been informed that there had been soze abuses of the provision of the Regulation relating to oral arldwritten commitments for financing flea- construction and, unless s°111ething aere done to correct this situation, construction starts Ilect Year might go as high as I million. In connection with the last paragraph of the Council's statefeat p ''resident Brodn said that all the members of the Council felt that it w°111d be wi-e for the Board's Regulation to cover multiple411114 4°11sing but that it should not be extended at this time to ecilnel*cial and industrial construction, particularly since limitations on that type of construction could best be applied by the NaProduction Authority. Mr. Riefler said that it was expected that an amendment to itetm_ that atl "X to include multiple unit housing would be issued shortly/ the problem as it was related to industrial construction Jas a c°.MPlicated one, particularly since the Board did not want to essential industrial expansion, and that the question whether rectit re -rictions could be applied effectively to commercial conatrilet. 14)n was a very debatable one. Pr • ssldent Brown stated that the Council :ranted to make it e1e4r that it felt that the extension of the Regulation to multiple I S20 11/21/5o -7- 11°11.9ing should be the next step and that the coverage of commercial arbli„ construction should be deferred. At this point Er. Riefler withdrew from the meeting. 2. The Board has been asked by the President to submit its suLTestions as to subjects to be included in the State of the Union message and the Economic Report and the legislation which the Board desires to have considered at the session of the Congress which convenes in January. The Board is now formulating its vieas on these two matters and would like to have any advice or recommendations that the Council might wish to offer 4ith respect to the. co The Council does not know ahat subjects the Board thntr131ates recommending for inclusion in the State of la:.-nioh message and the Economic Report, or what legisof"lon the Board contemplates proposing at the session Goncress which convenes in January. The Council tifo -""u be interested in what the Board has in mind on these m Boa atters, and would be glad to discuss them with the unt. Until the economic situation has become clearer and the effect of Regulations and X (which the Council il°11slY believes will materially reduce bank credit in thpaillr ev"i lhstallment and real estate fields) can be more fully a4:11ted, , the Council believes that it would not be delaw:''e to introduce any legislation to change existing ' governing bank reserves. ::a : b ts tated that the Board gas disappointed at : 4:: 1 1s 0014 1 the : hquestion, that the Board had a respon31bill:t'Y to offer suggest tii o:s in response to the President's request, tlit the PurPose of the Council was to advise the Board in matters this 1Q.rvi --) and that the reason for the question was that the Board " kted t 0 be sure that it had the benefit of the Council's views. 1R21. 11/21/50 Arri°11F, the specific questions, he said, gas ghether the Board should Sugg st an extension of the authority with respect to consumer and real estate construction credit and what the recommendation of the 80ard should be aith respect to reserve requirements when bank credit was increasing at an alarming rate. In that connection, he referred to the appeals that had been made to the banks by the bank sliPervisory agencies and the American Bankers Association to curtail ereclitl and the discussions which members of the Board had had with representatives of the American Bankers Association with respect to Ir°11111-tarY agreements by financing institutions under the Defense Proof 1950. Act r-r. Fleming expressed the opinion that the authority for , trhe re ation of real estate and consumer credit should be continued u"hat action to obtain voluntary agreements on the part of financing inst itutions had been almost if not entirely blocked by the attitlicie of the Department of Justice as outliped in the letter reeeilied by the Board from the Attorney General under date of October 1950. Chairman McCabe stated that the question of voluntary agree41erit8 had, 13_ n 'e discussed with the Attorney General on Friday of last Ileek) that 1,:r. the d, P Peyton Ford, Deputy Attorney General, participated in that 1-cuseion at which time it was stated to the Attorney General the P°son set forth in his letter of October 19 was such as 11/21/50 -9t° influence the counsel of any bank to advise against the bank's Participation in any such agreements that voluntary agreements in the financing field were different from the problems presented in Other fields covered by the Defense Production Act, that it was dif— tiotat to see non in the highly competitive field of finance banks aria inSilrance companies could get together in an effort to create a raorloPoly, and that there as a possibility of effective action in this field to achieve the objectives of the Act to curtail the use or credit. The representatives of the Department of Justice, Chairman 11°Cabe said, agreed 'frith this approach and the Attorney General stated that the Bo ard might go ahead immediately in New York or some other Prihcipal city to get group together for the purpose of drafting a a watement of objectives, that such a meeting -would have "the blessing" or the Department of Justice, and that, if desired, the Department 'tta.d have One of its best qualified men attend the meeting for the PlIrPose of assuring those present that the meeting was held with the coricurrence of the Department of Justice so that no counsel for a Participating financial institution would have any objection to what '44e worked out. Chairman McCabe added that the Attorney General sug— teci that he send the Board a letter approving this suggested pro— ces, that it was understood that the Board's General Counsel would IrePare a draft of such a letter be cleared by the Justice ;(hich el3artnient) and that as soon as the letter .gas received a meeting along 1823 11/21/50 -10the lines suvested would be proposed. Members of the Council indicated concurrence in the procecklre o utlined by Chairman McCabe stating that the question whether i"°111(ibe tillstice the desirable to have a representative of the Department of attend the meeting to be held in New York would depend upon person selected. Chairman McCabe stated that he would try to set *.Pord to go to the meeting. President Brown stated that, while the Council gould be op- . Iteed to authority, over consumer and real estate construction credit pe acetime, it felt that until the international situation was clarified the authority should be continued. On the question of a Ilarige in the authority of the Board Jith respect to reserve require- he said the Council felt that the situation was different today. er°111 that o btained in 19)18 and that higher reserve requirements at tilie time gould tend to defeat the rearmament program. Chairman McCabe inquired hol the Council would explain why I/°ard had applied restrictions to consumer and real estate contriletion credit and had failed to take more vigorous action directly t° ellrb the unusually large expansion of bank credit that had taken 1:41ee' Aile he hoped it would be possible to work out something in Illerield of voluntarY agreements, he recognized that that would be Ltficult task. C4 aaed The problems inherent in working out such agreements were dis- all( 'Mr. Fleming stated that Trx. Cravens, Vice President of the )04.0 11/21/50 '‘ercantile Commerce Bank and Trust Company, St. Louis, and a member °Irthe Credit Policy Commission of the American Bankers Association, '''ae Prepared to go to work on the development of such an agreement assoon as the Board had cleared the matter with the Department of thistice and that it was felt that the sooner the task was undertaken the better it would be. In discussing the large growth in credit in recent months the members of the Council outlined the reasons why it would be difficult to get a quick reversal of that trend. In that connection Mr. ecaes expressed the opinion that an expanded defense program would %rtinue for an indefinite period, that increased defense production ahould be offset by a reduction in civilian production, and that the aeceZPanying reduction in the use of civilian credit should offset the Increased use of credit for defense production so that there would. be 4° Ileed for an increase in the over-all volume of credit outstanding. Chairman McCabe expressed the opinion that if considerable 111111e elapsed before indirect controls could be made effective the Pl'easuore for the application of direct controls would be greatly inreased. that Several of the members of the Council were of the opinion there ere would be a drastic decline in the volume of bank loans 41'ter the f .,Ixrin of the year. Chai,"an McCabe asked how that could occur in the face of an 411cIst -versal expectation of further price increases and he ex- 1 925 11/21/50 r) 158ed the view that it would be necessary for Congress to enact 411 adequate tax bill and for other action to be taken so that the Plthlie would realize that the movement of prices could not continue .e in one direction only. Returning to the question of ahat legislation the Board rec°mmend, President Brown said that it would be unwise to increase reserve requirements in a war economy. Chairman McCabe inquired whether the Council would continue t()have that view if bank credit continued to expand, and in that 1,e(3rilleeti°1-1 he referred to the difficulty of convincing a particular that its loans were too high. Ilr• Beals stated that he had discussed that matter with seven 134114 in livestock centers, that unusually favorable weather condi15 tl° in the Mississippi valley area had resulted in large feed crops 411(1741eat Pastures which had induced farmers to increase livestock m._ 1.0ari bY about 50 per cent, and that the banks in question felt that fOr this purpose were too high. 3. One of the questions that has had a very important bearing on the credit policies ef the System is the impact of the prospective defense program on the economy. The Beard would be glad to have the comments Of the Council on the economic and business situation over the next six months, particularly in the light of the probable impact of prospective expenditures for defense and the current inflationary situation. the next six months, according to the Council's the cash budget of the Federal Government is 11/21/50 -13expected to be in balance, or shoa a surplus. The credit impact of the defense program during this period will be chiefly due to requirements of man__urers for . uranf money for -plant changes and expansion : 10 take care of government orders received or anticdapated. The main impact for financing defense pro,n°4 is not likely to take place until after the —`-tu-Le of 1951. It is the opinion of the members of the Council in-" ok an loans due to seasonal demands Jill probably ci7 ease from now until January, but they expect a doline in loans in their respective districts in January r!fl b:ebruary. should cut new installment Regulation Yedlt sharply by January or February. Regulation ciuld begin to reduce new construction credit by the 9sidle of next year. It may be that the calendar year , eraewl3Ilacr:=.no increase in bank loans or only a moa- Z i ste The Council would be interested in knowing what forP!Lhave been taken to encourage voluntary. agreements att."ae restriction of credit, and what the present. mt 1st ude of the Deartment -o of Justice is regarding the ---ltY or prooriety of such agreements. President Brown outlined reasons ally the members of the e°11ricil felt that the over-all decline in loans after the first of the Year w°111d be very sharp and stated that Whether the decline w°113-d be sharp or moderate in a particular area would depend upon c°11(litic)" in that area. Pollogi rkf a discussion of the factors that might affect the te the bank credit after the first of the year, Mr. Fleming exthe ooinion that the System had accomplished more through iricrease in the short-term rate than would be accomplished by an in reserve requirements. 827 11/21/50 -144. A discussion of the Treasury refundings for Jecember and January. as The Board is familiar aith the views of the Council, ressed in previous discussions, regarding the necesi a 2 of shifting a portion of the debt to intermediate ent-origer maturities. The Council believes that the prest , is a desirable time to bring out an intermediate majr-ritY in connection aith the refundings of December and If the of the Board aish to express members tnarYs ell ' views, the Council will be pleased to have them. et!xP President Brown stated that the Council realized the diffiellitY of discussing matters affecting the Government security market 7411.°11 the System had under discussion with the Treasur,7, that the Board was familiar with the recommendations made to the Treasury by the American Bankers Association Committee on Government BorroIing, and that the Council did not know whether the Board aould wish to ex— Press arlY o pinion on this matter or whether it would favor the suggestion that the Treasury offer an intermediate issue in the December e'llciJanuary refunding. The objection to such an issue, he said, \v45 that cor porations hold a substantial percentage of the maturing 1411es and might not want to hold an intermediate security, but it allDeared to the Council that that situation could be met by the Federal OPen llarket Committee folloaing a liberal policy of making the (3(43ber and N ovember 1951 notes available at around 1-1/2 per cent. There as a general discussion of the market effect of an ediate -ssue and Chairman McCabe asked. the Council's view on the acti on of the Open Market Committee in allowing the short-term to tilo lie to a somewhat higher point. Members of the Council in- 11/21/50 -15- ted that the increase was desirable because it put the banks n„„ -ciion where if the Board should raise reserve requirements a bA„ ' 3 could obtain additional reserves through the sale of shortd t"a securities only at a penalty rate which had had a restrictive itlflue es, 4-- °n the extension of bank credit. President Brown stated thea apprehension of the Council had been that the increase in the 8h or rate above 1-1/2 per cent would result in sales of letig-terin -" securities, particularly restricted issues, and that he t4I not see how the rate could go above that level at this time without seri °us unsettling effects on the long-term market. In response to an inquiry by Chairman McCabe as to whether an intermediate refunding issue would tend to put pressure on the shcrt-term rate and to freeze that rate, President Brown said. that he did not want to say that the short-term rates should never be Petinaitted o move higher, that it might be desirable to examine that gliestion at a later date, that he disagreed with the policy of the : Iti e4urY and the Board that the long term 2-1/2 per cent rate should - 111)Ported, and that he felt that the price on long-term securities 11°/1"1.c1 be Permitted to go beloa par. In a discussion of these points, Mr. Eccles stated that the 1:41130e tlot gf the SYstemls actions was to restrict credit, that he did feel that the actions taken tIlat ob. In to this point had accomplished aective, and that the issuance by the Treasury of an interttiat e Security in connectionwith the December and January refunding 11/21/50 —1617°'414 0nlY tend to reduce flexibility in the market because a further increase of the short-term rate would cause the new issue toO beloa par. In these circumstances, he thought the current reflinding should take the form of a one-year certificate and that the sh°rt-terin rate should be permitted to go just as high as possibb, • althout putting continuing pressure on the long-term 2-1/2 Per cent rat„. that At the conclusion of the discussion, Chairman McCabe stated yesterday he had conferred with the Treasury with respect to the December and January refunding and that he did not feel free to tell the council what the recommendations of the Federal Open Market CeM14ittee had been. However, he said, in the discussion that had taken Place at this meeting with the Council, he could not detect alV area of disagreement. President Brown stated that the next meeting of the Federal AchrY Council would be on February 15-20, 191, and that, if it f°11nd to be desirable to have a meeting of the executive comee of the Council aith the Board in the interim, the date for slieh a meeti ng could be fixed later. Thereupon the meeting adjourned.
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