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1.553 A meeting of the Board of Governors of the Federal Reserve SYsteln was held in Washington on Tuesday, November 23, 1937, at 11:00 a. In. PRESENT: Mr. Mr. Mr. Mr. Ransom, lace Chairman Szymczak McKee Davis Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Wyatt, General Counsel Mr. Pauleer, Chief of the Division of Examinations Mr. Smead, Chief of the Division of Bank Operations Mr. Dreibelbis, Assistant General Counsel Mr. Wingfield, Assistant General Counsel Mai. Leonard, Assistant Chief of the Division of Examinations Mr. Blattner, Assistant Director of the Division of Research and Statistics Natdit There was presented a letter dated November 17, 1937, from Mr. ' Chairman of the Federal Reserve Bank of St. Louis, requesting, ror Wood, ett . reasons stated in the letter, that the Board approve for Mr. Vica Presiaent of the bank, salary for the year 1938 at the pres- te Or 415,000 per annum. 1/448 00 A draft of reply to Mr. Nardin's letter lisidered in the light of the position taken by the Board in its letter MaY 11, 1937, to Chairman Nardin with respect to the continllettot 0 r Mr. Wood's services during the coming year. During a discussion, reference was made to the possible difference in amounts that might be payable to Mr. Wood's estate in the event of his death during active service 1,554 11/23/37 -2and if death occurred following his retirement, and it was understood that the draft of reply to Mr. Nardin's letter would be resubmitted to the Board for consideration after being amended to include a statement designed to obtain assurance that these differences had been explained to Mr. Wood. Reference was made to a letter addressed to Mr. Szymczak under Clate °I* November 15, 1937, by President Fleming of the Federal Reserve telak °I Cleveland, referring to the beneficial results of the meeting or the di rectors and officers of the Federal reserve banks with the BOard on the occasion of the formal opening of the Board's new building and suggesting that it would be desirable if such meetings were fl'orl time to time in Washington either of groups of directors C'ffie"S of Federal reserve banks or the boards of directors of 1114vidual reserve banks. The letter also suggested that it might be ell excellent thing for the Board of Governors to visit in a body °Itte Of the eastern Federal reserve banks for the nurpose of estab14'11111g closer contacts with the respective boards of directors. In e°nnection, attention was called to a letter addressed to Chair4f celes under date of November 19, 1937, by President Schaller the pederal Reserve Bank of Chicago, which offered a similar sugti(311* T'e t question of the desirability of meetings of the Board 4f Govez.113rs dIzellaed as With directors and officers of Federal reserve banks was tets that well as the procedure that might be followed and the matniimit be discussed at such meetings. At the conclusion of the discussion it was agreed that Mr. Szymczak would prepare, 1555 11/23/37 -3for the consideration of the Board, drafts of replies to the letters from the Presidents of the Federal Reserve Banks of Cleveland and Chicago. At this point Mr. Goldenweiser, Director of the Division of Re8all'eh and Statistics, entered the room. Consideration was then given to memoranda dated October 28 411c1 November 8, 1937, from Mr. Goldenwiser with respect to the paytent TT1 de p itin to Mrs. Kitzmiller following the death of Mr. Kitzmiller, Clerk in the Division of Research and Statistics, on September 15 '1937- The memorandum of October 28 stated that Mr. Kitzmiller, who b ecalale 65 years of age on May 5, 1937, had requested that he be cotutin -tleci in the employ of the Board until the end of the year, and that s. lrloe he died in active service his estate was entitled under thamo " -- a and Regulations of the Retirement System to 44,791.92 (repre2er itink' One-year's salary plus his contributions to the Retirement wi +1, '-'41 interest), whereas if he had retired upon reaching 65 YeEirs Or age his estate would have received approximately 413,600 ntillg the actuarial reserve which would have been created 143°11 his r etirement plus the $1,800 which would have been contributed t e 63ard to the Retirement System pursuant to the action taken Ett the n8 nieeti1 on March 25, 1937). The memorandum of November 8 stated tilEtt /ten Mr. Kitzmiller decided to remain in the employ of the Board r(*tIle l'eillainder of the year he did not realize that he was jeopard- " h estate to the extent of approximately 48,800 in the event he 1556 11/23/37 -4- sn0111c1 die before retirement, and that, inasmuch as the payment to e• Ic itzmiller of the 41,800 authorized by the Board to be paid to 'Glreanent System on behalf of Mr. Kitzmiller would not establish d"er(31.1S it precedent because of the unusual circumstances involved, .'kz recommended that such a payment be made. Mr. Davis moved that the Board authorize the payment of 41,800 to Mrs. Kitzmiller in accordance with Mr. Goldenweiser's recommendation. The matter was discussed in the light of a memorandum dated Ott6ber 29 from Mr. Van Fossen, Assistant Chief of the Division of 136111 °Perations. During the discussion Mr. McKee suggested that steps be taken to establish a procedure under which members of the Rettrelaent system of the Federal Reserve Banks would be given full 141'°ril1at1on regarding the benefits to which their estates would be entitled in the event of death while in active service as compared 171III PaYments that would be made in the event of death following l'otirement. At the conclusion of the discussion, Mr. Davis' motion was approved, Mr. Szymczak voting "no". Reference was made to an application for membership in the ?sdertu. Reserve System which had been filed by the 'Metropolitan Trust °c)1t113."Y", Chicago, Illinois, and which had been submitted with the l're.ble r ecommendation of the Federal Reserve Bank of Chicago and tileoard's Division of Examinations. The trust company was chartered 1.557 11/23/37 -5the General Corporation Act of Illinois rather than under the batiking laws of the State and was not authorized to conduct a banking bUsines_. The application had been considered by Counsel's office and irtielalorandura had been submitted under date of November 19, 1937, by Mr. 1Vingrie1d in which it was stated that it was entirely clear that the t1'116t b°mPany was eligible for membership in the System and that the qqestio n whether it should be admitted to membership, notwithstanding the fact that it had no authority to conduct a banking business, was a lat , te- e4 Policy to be determined by the Board. The application was considered in the light of the policy which had been adopted by the 8c)e`I'd in the past of admitting trust companies to membership which do al1 11138tIllti Y no commercial banking business and it was agreed that tIleP°1ioY was applicable to institutions such as the Metropolitan TI'Llet Company. Thereupon, upon motion by Mr. McKee, unanimous approval was given to a letter to the board of directors of the Metropolitan Trust Company stating that, subject to the conditions of membership set forth below, the Board approves the trust company's application for membership in the Federal Reserve System and for the aPpropriate amount of stock in the Federal Reserve Bank of Chicago: Such trust company at all times shall conduct its business and exercise its powers with due regard to the safety of its depositors and interests of the trusts under its administration, and, except with the permission of the Board of Governors of the Fedoral Reserve System, such trust company shall not 11/23/37 -6cause or permit any change to be made in the general character of its business or in the scope of the corporate powers exercised by it at the time of admission to membership. "2. The net capital and surplus funds of such trust comPenY shall be adequate in relation to the character and condition of its assets and to its deposit liabilities and other corporate responsibilities, and its capital shall not be reduced except with the permission of the Board of Governors of the Federal Reserve System. ”3. Such trust company shall not engage as a business in issuing or selling either directly or indirectly (through affiliated corporations or otherwise) notes, bonds, mortgages, certificates, or other evidences of indebtedness representing real estate loans or participations therein, either with or without a guarantee, indorsement, or other obligation of such trust company or an affiliated corporation. "4. Such trust company shall not invest funds held by it as fiduciary in obligatio ns of or property acquired from the trust company or its directors, officers, emPloyees, members of their families, or their interests, or in obligations of or property acquired from affiliates of the trust company. ttb. Such trust company shall not invest funds held by it as fiduciary in Participations in pools of mortgage bonds or other securities, and the securities and investments of each trust shall be kept separate from those of all other trusts and separate also from the properties of the trust company itself; provided, however, that the Board of Governors of the Federal Reserve System will not object to the collective investment of trust funds where the cash balances to the credit of certain trust estates are too small t° be invested separately to advantage, if the trust c°mPany owns no participation in the securities in ghich such collective investments are made and has no interest in them except as trustee or other fiduciary, and if such collectiv investmen t is not proe nibited by state law or the instrument creating the trust. 1559 11/23/37 tt6. If funds held by such trust company as fiduciary are deposited in its canmercial or savings department or otherwise used in the conduct of its business, it shall deposit with its trust department security in the same manner and to the same extent as is recuired of national banks exercising fiduciary powers. 117. Prior to admission to membership, such trust comPanY, if it has not already done so, shall charge ,off or otherwise eliminate estimated losses of ii4,025.00 as shown in the report of examination of such trust company as of October 9, 1937, made by an examiner for the Federal Reserve Bank of Chicago." At this point Messrs. Goldenweiser, PaulEer, Leonard and lkingfield left the meeting. Attention was called to a memorandum dated November 11, 1937, tI"r- Morrill submitting a draft of a manuscript entitled "Bank Silellpensi°fls, 1921-1936" which contained a review of bank suspensions (1111111g the Years from 1921 to 1936, inclusive. hEla been circulated The memorandum, which among the members of the Board, stated that the ta""ial contained in the manuscript was of a factual nature and largely c end that, unless there were objections on the part of the b(3" ' it was desired to incorporate the information in the next issue c)r the ped _ eral Reserve Bulletin pursuant to the plan for the publicsor the material as announced in the August issue of the Bulletin. It was agreed that the manuscript should be sent to the printer and that when the galley proof was received the question of publication should be placed on the docket for further consideration by the Board. Mr. wooa Rob Ransom stated that he had received a letter from Mr. Lawrence e") 3-r., requesting that he (Mr. Ransom) discuss with the Board 1560 11/23/37 -8- the idea af placing a bust of former Governor EUgene Black in the Board's tew building. Mr. Ransom stated that, if agreeable to the members of the lard, be would advise Mr. Robert that, because of the urgency of other "ers, a decision had not been reached on the question of portraits and bklets in the new building and that, therefore, it would be necessary to defer a decision on Mr. Robert's request until the question of general Policy had been more thoroughly explored and a decision reached as to whether portraits or busts can be placed in the building. The letter / 1 4)111d also contain, Mr. Ransom said, 8 suggestion that if, after a decision is reached by the Board, the members of Governor Black's family .8hoilld desire to present a portrait or bust, they give consideration to the presentation of a copy of the portrait of Governor Black now hang11°€titthe board room of the Federal Reserve Bank of Atlanta rather than the blIst a picture of which was inclosed with Mr. Robert's letter. The members of the Board expressed agreement with the substance of MT. Ransom's proposed reply. Messrs. Wyatt, amead, Dreibelbis and Blattner then left the rileetite an' a consideration was given to each of the matters hereinafter l'erel ' red to and the action stated with respect thereto was taken by the tOfard: Z"ede The minutes of the meeting of the Board of Governors of the kokl Reserve System held on November 22, 1937, were approved unani- Telegram to Mr. Stewart, Chairman of the Federal Reserve Bank i561 11/23/37 -9_ or S„ zrancisco, stating that the Board approves the establishment Without in its change by the bank today of the rates of discount and purchase existing schedule. Approved unanimously. Letter to Mr. Clerk, First Vice President of the Federal Re- " -0 Bank of San Francisco, reading as follows: "This refers to your telegram of October 1, 1937, and our reply of October 2, 1937, and to our later corre8dpondence with regard to the question whether a note given lrectlY to a member bank, the proceeds of which are used by the maker of the note to purchase goods for use and 11°t for resale, is eligible for discount by a Federal Ree a_erve bank under Regulation A. In this connection it should noted that the regulation permits paper, the proceeds of which are advanced or loaned to some other borrower, to be ,71.scounted provided the proceeds are used by such other pcIrrower for a commercial, agricultural or industrial purse, and provided the paper is of proper maturity and eets the other requirements of the regulation. If, theretoe, the purchase of goods for use and not for resale is .eEarded as a commercial transaction, the note of a finance 4c1mPanY, the proceeds of which have been or are to be used "o finance the purchase of goods by consumers, may be elieible for discount. 1.,ecle "Section 13 of the Federal Reserve Act authorizes a ral Reserve bank, under certain conditions, to discount enc/tea, drafts and bills of exchange arising out of actual 0"lercial transactions; that is, notes, drafts, and bills 0: 1_ exchange issued or drawn for agricultural, industrial, cammercial purposes, or the proceeds of which have been or are to be used, for such purposes, the Board of :rernors of the Federal Reserve System to have the right deternine or define the character of the paper thus -Ligible for discount, within the meaning of this Act.' "It is the opinion of the Board that a borrowing for the Purpose of making a purchase of goods is a borrowing a commercial purpose, whether the borrower intends to use , i the goods himself or to resell them. A note of a buyer ' yen to a seller in payment for articles purchased is clearly r 1.562 1a/23/37 -10a note issued or drawn for a commercial purpose. However, the purpose of the note is the same, whether given by the buyer to the seller or given by the buyer directly t° a bank or finance company, for in either case the proceeds are used to finance a sale-- a 'commercial transaction'. While it may be suggested that from a practical viewpoint there is a difference between the discount of Such a note in the hands of the seller and a direct lend.rig by a bank or finance company to the purchaser, there ?Pears to be no justification for any such distinction °rn a legal standpoint. In either case the purpose of giving of the note is to finance the final step in the (Istribution of goods, the sale to the consumer. has h:Accordingly, upon consideration of the question which been Presented, the Board has reached the conclusion ' +-1 a note, the proceeds of which are used by the maker to vurchase Purchase goods for use or consumption rather than for rea note arising out of an actual commercial transaction isZ within the meaning of section 13 of the Federal Rerve Act. Accordingly, such a note given by the maker b reetlY to a member bank will be eligible for discount Federal Reserve bank under Regulation A if it meets ._ e applicable requirements of the regulation as to maturity ; 14: 1 'Yn other respects. For example, a note given to a mber bank by a householder who uses the proceeds to purchase be household equipment such as radios or furniture will .12-igible for discount if it has a maturity at the time Of! discount of not exceeding 90 days. Likewise, the note Of a finance company given to a member bank, the proceeds Of tkiwhich are loaned to other borrowers who use the funds Obtained to purchase goods for use or consumption, 1 be eligible for discount by a Federal Reserve bank 4jhe note meets the applicable requirements of the regu1°11 as to maturity and in other respects." j 4 IT Approved unanimously, together with a letter to the Presidents of all Federal reserve banks, reading as follows: Copy "For Your information there is inclosed herewith a a letter which the Board has addressed to the First IT1P , Y President of the Federal Reserve Bank of San Francisco to .a regard to the question whether a note given directly maka member bank, the proceeds of which are used by the reser of the note to purchase goods for use and not for livele, is eligible for discount by a Federal Reserve bank -er Regulatill A. 1_563 11/23/37 "A ruling incorporating the substance of the inclosed letter will be published in the December number of the Federal Reserve Bulletin, and Federal Reserve banks may advise member banks of the Board's position in this matter immediately if they so desire." In connection with the above matter, the Board also approved unanimously for publication in the December issue of the Federal Reserve Bulletin a ruling, in the form submitted, incorporating the substance of the letter to Mr. Clerk. Thereupon the meeting adjourned. Vice Chairmen.
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