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1642 Minutes of actions taken by the Board of Governors of the 4deral Reserve System on Wednesday, November 26, 1947. Diet in the Board Room at 2:35 p.m. PRESENT: Mr. Mr. Mr. Mr. Mr. The Board Eccles, Chairman Szymczak Draper Evans Clayton Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Chairman Smead, Director of the Division of Bank Operations Thomas, Director of the Division of Research and Statistics Vest, General Counsel Leonard, Director of the Division of Examinations Nelson, Director of the Division of Personnel Administration Baumann, Assistant Counsel Mr. Clayton referred to the discussion at the meeting on Nov- eraber 21 1 947, at which he was authorized to take up with the Comptroller ot t•ts e Currency the question of possible changes in capital require— Ilette n p -- member banks, with respect to which the Legal Division prepared ;I tem Vere Elndum under date of October 21, 1947, in which certain questions ' °I Pl'esented for the consideration of the Board. There was a further discussion of the questions that had c°neidered at the meeting on November 21, during which it was tevtesd that the Board was interested in legislation which would amend the capital requirements for the admission of State banks to membership 1b43 11)W47 in the -2- System and for the establishment of branches by member banks, because the present requirements result in unfair discrimination Ilgainst State member and national banks and thus close the door to ItilrehiP for many State banks which are otherwise eligible and al8° lead to the withdrawal of State banks from membership and the conIrersion of national banks into State nonmember banks. stated It was also that capital requirements for admission of State banks were 111"esed largely upon those for organization of national banks, and that accordingly, any change in the law with respect to requirements re'r State banks raised the question whether similar changes in the recillirements for national banks were desirable. At the conclusion of the discussion, the staff was requested to prepare for consideration by the Board a draft of letter to the Comptroller of the Currency along the lines suggested during the discussion. tee Yesterday Chairman Eccles appeared before the Joint Committhe Economic Report and, in accordance with a procedure which lrif°rinally concurred in by the members of the Board, made sub-. it a the following statement: IT I am In appearing before you today I wish to make clear that se „ ePeaking for the Board of Governors of the Federal Reem, an agency of Congress, and I am not undertaking peasPeak for the Administration or the Presidents of the 12 eral Reserve Banks. "You have requested me to testify, I take it, as to might be done in the monetary and credit field to deal " inflationary forces, which have already gone so far as 1b44 11/26/47 —3— "to cause very serious maladjustments within the economy. C orrection is overdue. The longer it is postponed, the more severe will be the inevitable reaction. "I am sure this Committee recognizes that a great many factors and forces contributed to the inflationary problem and that there is no easy, simple, or single remedy. We are already in the advanced stages of this disease. It is to longer a question of preventing it, but of moderating so far as possible its ultimate ravaE,es. "At best, monetary and credit policy can have only a supplemental influence in any effective treatment of either inflation or deflation. In considering what can be done s° far as monetary and credit action is concerned, it is necessary to make e correct diagnosis of the multiple causes of the situation with which we are now confronted. "What is inflation? It is the condition which exl.sts 'When effective demand exceeds the overall supply of goods and services. Potential overall demand always exceeds ...,111)PlY. What is lacking in deflation is effective demand. We are witnessing effective demand today when individuals and b usinesses, together with State and local governments, aswell as the Federal Government, generally have money 'Which they are trying to spend, bidding for an insufficient ! IIPPly of goods and services. This effective purchasing Power is composed of past savings, current income, or ture credit. The savings were largely accumulated during rIle war years in the form of currency, bank deposits and mcvernment securities. "At the end of 1946, individuals and businesses held bout 223 billion dollars of such liquid savings, or more ' l1:an 1 three times the prewar total. Similarly, current wtional income is at an all-time high level. It is runat a rate of 200 billions a year, or about two and a th-L1 times the total for 1940, the highest year prior to hiel,%Tar. It is due to a record high agricultural income, aq" wages of organized labor and other workers, but not a , of them, and unprecedented business profits. This is e:graented by a readily available supply of excessively easy eiledit for consumers' goods of all kinds, for housing, for and long-term business loans, for State and municipal , 1, 3snditures, and for foreign credits and grants. The notable re-ePtion is loans to buy listed stocks, which are sharply stricted by the Board's margin requirements. In the face of these large and expanding demands, pro• duetlon is practically at capacity and further growth will Z ic e:ssarily be slow. The physical volume of output of manu'lured goods and minerals in 1947 has averaged 186 per cent j 4 1b45 11/26/47 -4- of the 1935-39 average. Current output is about one-fifth below the wartime level, largely because of the reduction in weekly working hours. Agricultural output in physical terms has continued for the past three years at record levels of about a third above the maximum of any prewar Year. This volume reflects general favorable weather and further growth can hardly be expected. Construction of all kinds, including residential building, is close to any Previous peacetime peak. Expansion in building is now beretarded by shortages of essential labor and materials. Railroad transportation is limited by the shortages of rail.1:0ad cars and other equipment. Employment is at very high levels with acute shortages in many fields and with a minilaIM of unemployment. "The source of the present inflation is war financing and the enormous Federal deficits incurred in preparation '°r and prosecution of global war. During the six-year period, June 30, 1940 through June 30, 1946, the Government !'aised about 398 billion dollars, hut only 176 billion dol,, or 44 per cent came from taxes. The remainder of 222 btu. lOns, or about 56 per cent, was raised by borrowing. of this total which was borrowed, approximately 90 bil;lon dollars, or 23 per cent of total needs, was raised by : s 11ing , Government securities to the commercial banking ' ' 8 ems including those purchased by the Federal Reserve Banks. to As the Reserve Board stated in its 1945 Annual Report Congress it is important to tear in mind that borrowing Otherse banking system, whether by the Government or by su , creates an equivalent addition to the country's money itPPlY. To the extent that the Government did not finance tos, l'ar program by taxation, it was obliged to borrow, and 4, Lthe extent that it did not borrow from nonbank investors, ; ' 10 ' relied upon the banks and thus created new supplies of The Federal Reserve by purchasing Government securia .!8) supplied the conaercial banks with reserves needed as oasis for the increased money supply. bv "As a result, the country's money supply, as measured vately held demand deposits and currency in circulation, thjeaeed more than two and one-half times, rising from less endn 40 billion dollars in June of 1940 to 106 billions at the poe.,°f June 1946. In the same period, time or saVings desi;lte nearly doubled. In addition, the general public, outbanks, insurance companies, and Government agencies, to , 11mulated or increased holdings of Government securities kri-LOO billion dollars, or nearly seven times as much as in pubT.°f 1940. These Government securities in the hands of the co_ lc are the equivalent of money because they are readily Livertible into cash. 11/26/47 _5_ "It should be strongly emphasized that the banking systern was the instrument, and not the instigator, of this swollen money supply. The bankers performed a vital service in the financing of the war and particularly in the sale and distribution of savings bonds and of other Government securities. "If it were possible to finance a great war entirely by taxation there would, of course, be no increase in the public , c_lebt. Or if it were possible to do the financing by a combination of taxation and borrowing outside of the banking system, there would be no increase in the money supply. In retrospect, we can see that we could have and probably should have taxed more and borrowed more from nonbank investors and 'ese from the banking system. We are suffering the consequ?nces today of an excessively swollen money supply which !neither the bankers individually nor Government authorities have adequate means at present of controlling. "In order to enable the banks to purchase Government securities essential to the financing of the war, the Federal Reserve System maintained easy money conditions and made Federal Reserve credit and reserves readily available to the ! li nks. The vast money supply thus created was held in check an elaborate harness of controls consisting, among other m71 , -ngs, of allocations of scarce materials, construction per'''s, price and wage ceilings, rationing, and the excess 12rofit5 tax. When the harness of controls was prematurely removed and no effective substitute was devised to hold back the flood of effective demand, it was apparent, or at least , should have been apparent, that a sharp rise in prices "ae inevitable. pr. As a result, the economy was caught in a dangerous wagecrlce-Profit-credit spiral, acutely intensified by short farm oti°13s abroad, and reduced corn and cotton crops at home. conditions abroad, in part resulting from our rising prices, aci se upon us obligations which must be met even though they ' to our inflationary difficulties. would be blindly and foolishly optimistic to believe eurt the spiral of inflation can continue through further genpen's-lace, price and profit increases and further overall exof credit without ultimate serious deflation. The 1011aer the necessary readjustment is delayed, the longer it dill take to reach a stable condition of employment and prothet011. The most serious maladjustments are evidenced by pac i ncreasing numbers of our people whose incomes do not keep 01.14e with the rising cost of living. They are being priced co 'cf the market for housing and many other things, and in exIlilltless l instances their savings and credit have already been ere!usted. The higher prices rise and credit expands, the 'ter the subsequent liquidation and downward pressure on 1647 11/26/47 -6- "Prices is bound to be. As the November letter of the National City Bank of New York correctly states, 'Rapidly accumulating debt is both a cause and a consequence of the inflationary Pressures, for in a wage-price spiral, business constantly needs more and more money to keep going and this leads to the incurrence of more and more debt by business and more and more spending by the individual. To check this kind of spiralling__ Rhich is to the ultimate benefit of no one and to the injury of all--is not simple.' "The problem we all face now is what can be done at this late stage, if necessary, to curb further inflationary developments. Asa practical matter, we cannot now put back the elaborate harness of wartime controls, and it seems that we are left only with the choice of certain curbs or restraints electively applied at some of the more critical points of danger. "In the absence of a comprehensive scheme of controls I'le.must continue to put our main reliance on fiscal policy, which is by far the most effective way to deal with the demand of the equation, while we do everything possible to main6441 and increase production. We should have the largest 1:20ssible budgetary surplus while the inflation danger exists. And this means taking from the public in taxes money that r olh?rwise would continue in the spending stream. It means tlgld Government economy. It means deferment of all expendi_1?.res, Federal, State, or local, to the greatest extent contheent with public obligations at home and abroad. _Using budgetary surplus to pay off bank-held public debt as it beeomes due will reduce the money supply by an equivalent 81,0Unt. This is a reversal of the process by which the money e2PlY was expanded. In an inflationary boom such as we are -4"eriencing the Government should pay off as much of its debt as possible. t, "Public debt cannot be reduced during deflation. Budget:7Y deficits, not surpluses, are an inevitable consequence dec,serious deflation. Tax reduction would be appropriate after _ellation sets in, not during an inflationary period. If a 11;oducti on of taxes at this time would, in fact, call forth hje production, then it would be justified. Today we still ije acute scarcities of labor and materials. Adding to exist81! buYing power either by tax reduction or aggregate expanpr: 44 of credit can only have the effect of bidding up the re ces Paid for both labor and materials. If conditions were pr ,!Irsed and we had idle labor and a surplus of materials and ; ! 14 ctive facilities coupled with a shortage of capital and in tic.:;ficient purchasing power, then reductions in taxes, parany those which would stimulate mass buying power, would be 441 order. Ita4S 11/26/47 —7— "If I were to outline a program to meet the situation with which we are now faced, I would list the following steps to deal with the causes rather than with the effects of inflationary pressures. They are listed in what I consider their order of importance. "1. Increased productivity both at home and abroad. Production is the ultimate solution for inflation. Nothing could be more effective than increased productivity of labor and longer hours of work by everyone. In short, if all who are engaged in producing goods and essential services were to work more, and save more, and spend less, the unbalanced relationship between demand and supply would most effectively be corrected and prices would come down. "2. Suspension of future demands for wage increases, especially those of organized labor where the increases have be nl greatest, is necessary if the present unbalanced retionship is to be corrected without severe deflation. Business profits after taxes are more than double what they uWer_ in any prewar year and almost double the profits in any nr year, and therefore business should hold prices down or Should reduce them, in accordance with what would be reasonable earnings. Bur "3. A fiscal policy to produce the largest possible Pls to be used to pay off bank-held Government debt and thus reduce the money supply. This means the greatest pos2,13le economy in all Government expenditures. It means more ;equate financial support of the tax collection machinery the Government to prevent tax evasion. It means no general decrease in tax rates at this time. It should also mean the elimination of the agricultural price support program price ceilings are reimposed. • Legislation giving the Federal Reserve System such : Uthority as may be necessary to restrict further overall :Insion of bank credit. The need for this authority would 1) ese if Congress authorized other anti-inflationary measures suer& as restoration of consumer instalment credit restrictions and if stricter appraisals and less liberal credit terms Were applied under the Veterans' Administration, the FHA, and ' s some Loan Bank programs of housing finance. Continuation and expansion of the Treasury's Savings campaign, with adequate financial support by Congress. fro ' s so raised have a two-fold effect. It removes these funds , ba. ? 1 he spending stream and makes them available to pay off held debt, thus reducing the money supply. r 1649 4/26/47 "Other actions have been proposed which, however, deal with the effects rather than the causes. Allocations, con— struction permits, price and wage ceilings, commodity margin re quirements, instalment credit regulation, export and rent controls, and similar devices are all in the category of curbs rEther than cures. Where they can be applied as a practical 'flatter and enforced, they can be useful, but they do not go to the sources of the problem. "I should like to summarize what the Federal Reserve Board believes might be done in the monetary and credit field. In its 1945 and 1946 Annual Reports to Congress the Federal Reserve Board described the situation in which those with re— sPonsibility for monetary policy find themselves as a conse— quence of the war. As the Board stated in the 1945 report: tIn common with other nations whose energies were devoted primarily to winning the victory, the United States had no choice, under the exigencies of a global war, except to use monetary powers in further— ance of essential war financing and not as an anti— inflationary weapon. There has been a widespread esaumption that, with the coming of peace, such statutory powers as the Reserve System possesses Should be exerted in the traditional way against the heavy inflationary forces at present confronting the country. The Board believes that such an assumption does not take sufficiently into account either the inherent limitations of the System's existing statu— ory powers, under present—day conditions, or the inevitable repercussions on the economy generally and on the Government's financing operations in particular of an exercise of such existing powers to the degree 12.,soessary to be an effective anti—inflationary in— I luence.1 er.,."Of late the Federal Reserve System has been increasingly ,01u-oized for not adequately using its existing statutory lsl ' rers to restrain bank credit expansion. It is very important, rsfore, that the Congress understand what those powers are 141Y the Board does not believe they can be used to deal with credit problem, and why we suggested in the 1945 and 1946 retort , and suggest now, that Congress consider providing other diA" °ritY that may be necessary to cope with the situation. We 1,ro, 'not then and we do not now seek power, but we feel that we be remiss, as an agency of Congress, if we failed to re— Wel ' llz the situation as we see it and to propose alternative pwils of dealing with it inasmuch as we feel that our existing er! are insufficient. 1.1„ "The Reserve System has always had broad powers to in— n the" supply and cost of bank credit. Through open market t 4 11/26/47 -9- operations, that is, buying and selling of Government securities, the System either gives reserves to the banks or absorbs Reserves are the foundation on which bank credit is built If banks have no reserves they cannot lend. But they can obtain reserves when they borrow from the Federal Reserve Banks or sell Government securities to the Reserve Bunks. And the banking system automatically receives reserves through Cold acquisitions, and also when the Federal Reserve Banks buy Government securities from nonbank investors. The Reserve System can restrain banks from borrowing by raising the discount rate sufficiently high to make the borrowing unprofitable. It could refuse to buy Government securities and shut off that source of reserves. It has no powers to deal with reserves arising from gold acquisitions. "Why, then, doesn't the System simply make the discount !ate prohibitive and at the same time refuse to buy any more .;?vernment securities? 1,,,t me say that if the Congress disagrees , ith us and feels, as do some bankers and insurance company 74ecutives, that we should more fully use existing powers, we would welcome such an expression from the Congress. In that , asey there would be no need to consider any alternative powers. -1/1 the other hand, if Congress agrees that our existing powers n'e not appropriate under present circumstances, full consideration should be given to any proposal that would help to meet the situation. the 7First, let us consider what the effect would be of raising discount rate by itself. Actually, the effect would be 1:segligible, except for possible psychological reaction, because 4. 1°ng as the System stands ready to buy Government securities 441 the open market, banks can obtain reserves at will by selling ltIch securities out of their portfolios. Suppose, then, that „e SYstem refused to buy the securities--and that is the heart of the matter--what would the consequences be? Bear in mind that the total interest-bearing debt of the Government is 256 Llion dollars, more than five times what it was before the The public debt at the beginning of 1940 was about one'a of the total public and private debt of the country, at the present time it is nearly two-thirds of the whereasr indebtedness of the country. About one-third of the total al Government debt is short-term marketable debt and would to be refunded into higher-rate securities. This would raise the cost to the Government, and therefore to the taxpa 14r82 of carrying the public debt. Already the nation's tax ,for interest cost is approximately 5 billion doll_rs or any one -seventh of the total Federal budget. Just how high would interest rates have to rise to deter bus• mess and individuals from borrowing from banks? Higher Z Z 11/26/47 _lo_ interest rates do not deter the lender. Rising interest rates are like rising prices. At some point they do deter the borrower or the buyer. They do not deter the lender or the seller. I doubt if anybody knows how high interest rates, especially short-term rates, would have to rise to discourage b°rrolTers. Certainly the rates would have to be substantially above the -present relatively low levels. Bank customers, particularly business, with seemingly insatiable markets awaiting their products, are hardly to be deterred by one or two Points of increase in bank interest rates. "The additional costs to the Government in carrying the Public debt would be difficult to estimate, but they would azount to billions a year over a period of time. If that were the only consequence, it might be argued that the extra cost to the Government would be justified because inflationexY borrowings would cease. "However) this is only one aspect of the matter. In the Process of leaving Government securities to the free play of 'variable forces in the market, the Treasury would be confronted with a continuing puzzle in all of its constantly recurrent refunding operations. It could not tell from day to day at what Price it could sell its securities. It would be entirely at the mercy of uncontrolled factors in the market, if, indeed, °11ditions did not become so confused and chaotic as to demoralize completely any refunding operations. "I recently saw a prediction by a very keen bond market analYst that failure of the Reserve System to support the 2-1/2 " ) cent rate on marketable Government bonds would lead to a :_lnolesale liquidation of all Government bonds, including the .ft rimarketable E, F and G bonds. He declared that it would be ,f_1? most dramatically inflationary move that could be made at ; 1_113 time, the repercussions of which weuld be) as he put it/ ci; catastrophic as to make present fears appear as one raineel ) . in a storm. That is strong language. Nobody can say with r',ainty that it is too exaggerated. "In any case, I think it is fairly clear that withdrawing 81, t:PPort from the Government securities market and letting inrest rates rise on Government securities would not increase tilePower of the Federal Reserve System to offset increases in -, of" reserves from gold acqeisitions. Sales of System holdings vitiGlovernment securities for this purpose would have to compete private credit demands. Private borrowers might outbid us or these ty reserves. There would be no certain level of securiGo,v?rices or interest rates at which we could dispose of enough ernment securities to offset gold imports. If "On the other hand, we have to recognize what would happen thel'e follow the present course of policy in order to maintain nee Public's confidence in Government credit and avoid any uness rY increase in the interest cost tp the Government for 1 165'4 11/26/47 -11- carrying the public debt. Commercial banks currently hold about 70 billion dollars of Government securities. This sum ie about 50 per cent of their total deposits. If they should sell half of these securities and the Federal Reserve System, in providing an ultimate market, should buy them, the banks would acquire an equivalent volume of new reserves. On the basis of these reserves, the banks could expand credit by about six times, or by more than 200 billion dollars. This is nearly double the present amount of demand deposits and currency. While it is unlikely that the banks would dispose of so large a proportion of their holdings, it nevertheless 's a measure of the potential bank credit expansion that can ?cour if the banks are left with complete freedom to convert their Government security holdings into reserves at will. "This bank credit expansion potential is apart from Other sources of bank reserves. Gold is now flowing into banking system in large quantities from foreign holdings. 9ur A a result, deposits are increased and on the asset side nnks gain an equal amount of reserves. Over the next year, 'T 14,1 gold inflow is estimated at from 2 to 3 billion dollars. '2'ltiPlied by six, this would permit an expansion of bank credit of from 12 to 18 billions. incl. "There are two other important potential sources of eased bank res.-rves. Nonbank investors, mainly business ?r ,orporations, hold about 13 billion dollars of short-term Government 0 securities. Businesses face increasing needs for Capital under prevailing inflationary conditions. To Some extent, Gor these needs will be met by sales of short-term bilys.rnment securities, which the Reserve System may have to to, "The second possible source of bank reserves is the 59 cu -L;I:ions of marketable, medium- and long-term Government seties held by nonbank investors. With widening opportuni:78 for the placement of funds in private investment at in,7 singly attractive yields, there is a small amount of !alfti117 by investors of their holdings of marketable longr, shiT,,rvernment securities. If inflation continues, this Fed ing will likely increase. Such sales have to be met by ra2ral Reserve support of the prices of marketable GovernteZ bonds so as to protect the 2-1/2 per cent rate on longtno issues. The result of these support operations is to bank reserves and thus to support further inflation. deal "Under present and prospective conditions, it is not only of Jable but essential, in the opinion of the Treasury and rate"e Reserve System, that the established 2-1/2 per cent ta. °4 long-term marketable Government securities be mainIned. 4 b53 11/26/47 -12- "The Federal Reserve Board has one other power that it has been criticized by some for not using. That is the power to raise the reserve requirements of the banks in New York and Chicago from 20 to 26 per cent of their net demand deposits. This is a relatively minor matter and does not in anY way go to the heart of the problem. Any action taken would have an effect on banking conditions only in two cities in which the credit expansion, as well as deposit growth, has been relatively less than for the rest of the country. "We have given a great deal of study to this admittedly difficult and complex problem. We are convinced that the f?rnedY of letting interest rates on Government debt go up on ,2, . r(1e theory that this would bring an end to inflationary rr°14-ing is dubious at best, as has been demonstrated in vast monetary history, notably in the 20's when high rates were unsuccessful in restraining speculation in the stock markets, real estate, or otherwise. "As was made clear in the Annual Report for 1946, we are ! ( ./t oPposed in principle to higher interest rates if some desirable ends and the public interest can be served by such a ) °11c.Y. In fact, in recent months we have cooperated with .c.ne Treasury in permitting some moderate, corrective rise trom wartime levels of interest rates on short-term Government securities. This adjustment was made to reduce the wide differential prevailing between short-term and long-term e J-rflterest rates. Such a large differential was having the fect of encouraging banks to sell short-term securities, Which . the Federal Reserve bought, and to buy long-term secuexties in the process, thereby encouraging multiple credit sttansion. The differential in rates was also exerting a " )ng downward pressure on yields of long-term securities. lire •Were aware that this decline was artificially induced by tiveetment policies of the banking system known as monetiza/42n of the public debt, and resulted in bank credit expansion. 17 also recognized the importance of checking the decline in ang-term interest rates to protect educational, charitable, br Pension funds, as well as insurance institutions, savings nks, and individuals depending upon interest for income. "The action permitting a moderate rise in short-term 1:(;erest rates coincided, however) with strong demands for ro g-term funds, which put considerable strain on the market u corporate and municipal securities. As a consequence, T4se issues have been made more attractive as investments. e,f are thus somewhat more competitive with long-term Gov'"Inents than before. We have to face this fact of the market 1 tb54 Ww47 -13-- Place and be prepared to offset any shifts in investor holdings from Government bonds to other securities. The undesirable aspect of the situation, from the standpoint of inflationary credit conditions, is that support of Government bonds adds to bank reserves. These developments indicate that a policy of permitting interest rates on short-term Government securities to rise has gone about as far as can be Justified under present circumstances. "We have, therefore, been compelled to seek some better alternative than higher interest rates to restrain further bank credit expansion. We believe that one is available which will 130t make the Government and the taxpayer bear the added cost of the restraint, that will impose very little, if any, hardship fl the banks, that will) in fact, have a compensating aspect in that restraint imposed would increase interest rates on Private borrowings without additional cost to the Government. A_ "I refer to the second alternative proposed in the 1945 tral Report. We recoirimend for consideration, as the best b :ternative we have been able to devise, that all commercial gnks be required as a temporary measure to hold some percentr e of their demand and time deposits, in addition to present : serves, in a special reserve in the form of Treasury bills, oertlficates and notes or cash, cash items, interbank balances, r balances with Federal Reserve Banks. ,_."Such a requirement would be far less onerous for the , -Ibcing system than any other effective method that has been 1.1ggested in the long period in which this problem has been dis4liss f by bankers, by economists, and public officials. Manied8.1' 4, such a requirement would have to be imposed gradually, b at all, as an offset, for example, to bank reserves created acquisitions and by the purchase of Government securitie° es from nonbank investors, and also to limit the too ready ;Tilability of reserves, now enabling banks to obtain them at re-Ll. A multiple expansion of credit can be built on these dorrves at a ratio of fully six dollars of lending for every of reserves. We would propose that the special reserve re " 1 dequirement be limited by law to a maximum of 25 per cent on a 111:d and 10 per cent on time deposits. It should be made 13-11cable to all commercial banks. It would not be effective azdaPPlied only to member banks of the Federal Reserve System, wQuid be an unjustifiable discrimination. We recognize that this proposal is no panacea, but it "p eullicl . be an important, available restraint, now lacking, to be 13Xlsd equally to all commercial banks so that the individual ' 0. 11,- er would be in the same competitive situation he is in today. th:r the next four months there is likely to be little need for suggested special reserve because of the large amount of ? r 4 11/26/47 —14— "Treasury surplus funds, taken from the market through taxes, Which will be available to retire bank—held public debt. This would temporarily exert pressure against bank credit ex— Pansion. "The proposed special reserve requirement has a number °f important advantages over other methods of dealing with the Problem of restricting the banks' expansion of credit: nl. The plan would have about the same effect in limit— ing credit expansion as an increase in primary reserve require— ments, which was proposed as the third alternative in the 1945 Annual Report. It would enable the banks to retain the same volume of earning assets that they now hold, whereas an in— ?lease in basic reserve requirements would make it necessary tr them to reduce earning assets, with adverse effects upon e earnings position of banks. 2. The ratio of potential credit expansion on a given increase in reserves would be narrowed to the extent that the special reserve was required. At the maximum requirement pro— Posed, it would be lowered from six to one to nearly two and one—half to one. 73. It would brine about an increase in interest rates O , Private debt and would increase earnings of the banks from source where rates on loans are comparatively low. It 4.:7,uld accomplish this purpose, moreover, without increasing 17 interest cost on the public debt or permitting unstable fees in Vie Government securities market. The plan, in ef— _c, would divorce the market for private debt from the , d market for Government securities. re!', "4. The plan would not rely on higher interest rates to rain private borrowing, but to the extent higher interest t:"'es restrain such borrowing, the proposal would make use of the interest rate mechanism. Hence, the cost of restraining °Lit would be borne by private borrowers who are incurring 84dit . 4, 'anal debt, and not by the Government which is reducing debt. av„,"5. The main effect of the plan would be to reduce the 11111-Lability of bank credit. This would be accomplished by the restraint on the lenders, that is, the banks. They 011 would be less willing to sell Government securities in as'7r to expand credit because the amount of such liquid assets b, l'heY held as secondary reserves could be greatly reduced l'el.6he requirement. Such an authority, even withOut action resZg taken by the Reserve authorities, would have a very raining influence. 1656 11/26/47 -15- "6. The plan would restore use of the customary instruments of Reserve influence on bank credit expansion, namely, discount rates and open mPrket operations. Support of these instruments by the special reserve requirement would enable the Federal Reserve to make it more difficult and costly for banks to borrow Federal Reserve funds. "7. No alterations in the banking structure, in the authority of the supervisors, in customary methods of bank ?perations, or in established interbank relationships would be introduced as a result of imposing the requirement. "8. The banks would be left by the plan with sufficient latitude to meet essential needs of the economy for credit, and the public would be assured of a high degree of liquidity and safety for the banking system. "Many bankers argue that this proposed requirement is unnecessary because the banks themselves have a vital interest tfl the conservative extension of credit, and will prevent excessive credit expansion as a matter of ordinary banking 13rudsnce. The banks, however, are confronted by a situation 411 which they can readily meet unlimited private credit de! lands and in which such demands are vigorously sustained by 1L.nlation while, at the same time, these demands are conf',Flbuting to inflation. They are both a cause and effect. s banks are not in a position to refuse legitimate, sound edlt demands of individual customers, and current loans, taken separately, which in the light of the customer's satisnact0rY credit risk, do appear to represent legitimate credit ! .h ede. But in accommodating these credit demands freely, the 'rks as a system are expanding bank deposits and adding to e money supply. th "Prom the beginning of 1946 through October of this year, 1,...Lbanking system as a whole has increased its loans and inS--other than Treasury obligations--by an estimated 12 billion dollars. This has added a like amount to the money 1,,PPlY, which, together with gold acquisitions, is largely vs7eP?nsible for an increase in privately held deposits of 14 '11110n dollars. a, "Reconversion of the economy from war to peace required ' ilIglieseive bank financing of agriculture, commerce, and industry pe °rder to facilitate the earliest possible attainment of f f 3 etime activity on a much higher level than prevailed beu 0Ze the war. Some of this bank credit expansion for private ael j °?es, therefore, was justified. High levels of peacetime er2;YItY have long since been attained, however; yet, bank expansion is continuing and in recent months has gained ctipld momentum. r j i lb52' 11/26/47 -16- "None of us likes restraints. I am sympathetic with the bankers who resent seeming to be singled out for a special restraint on their wares, which are loans and investments. T0 the uninformed, it might appear that the banking system has been or is now to blame for the oversupply of money. This is not the case. "Instinctively and naturally, bankers do not relish restrictions on their activities any more than labor likes wage etontrols, or agriculture likes price ceilings. We realize that tl?e special reserve proposal which we consider the best alternalys, after considering all of the circumstances, will be very strongly resisted by those bankers who fear that it points !!ccusingly at them, or that it is more regimentation, more saucr8tic reaching for power, or an encroachment on State Tr,lghts, or an opening wedge to force nonmember banks into the Aeserve System. All these things have been said to us pritelY or publicly--and we can only say that if a better al' ernative can be devised, we would welcome it. "The Board recommends that the administration of the scial reserve plan be placed in the Federal Open Market rmmittee, whose members, in addition to the Reserve Board, rte five presidents of the Federal Reserve Banks. This should "elP to remove some of the misgivings of bankers. The new Power opposition of some very prominent bankers to any for the Federal Reserve is expressed in a statement ; .1ich 1 they have asked me to submit for the record. It is a 12:atement of the Federal Advisory Council, composed of twelve nkers, one from each Federal Reserve district. Often we ,Fee• In this case they unitedly oppose the remedy we adThey contend that banks are not indulging in in81,ati°nary expansion of credit; that, therefore, the problem (3111d be attacked on other fronts, and that no legislation 1. ; in required on the banking front. They differ with us also r unanimously opposing reinstatement of instalment credit n r er "I am sure the Council's views reflect the opinion of a ti„nt many bankers, who are entirely sincere in the belief 114L the loans they are extending are safe, deserving risks h;ifelssarY to sustain full production. That conviction, honestly or , t3 is unhappily characteristic of boom psychology. In 19200 theln the latter part of that decade, bankers would have made th same replies that they give today if asked whether they ti,, (3,11ight the loans they were making should not be made. A short ti711!'e later they were trying desperately to liquidate some of ap7e loans. The individual banker is judging by standards 14Ying to the individual borrower and risk. 11/26/47 -17- "The Reserve Board, the Congress, and all responsible tor public policy must necessarily approach the whole problem from a different standpoint. The question we must ask is vhether any further expansion in the aggregate amount of credit iS desirable or dangerous. If it, in fact, calls forth more Production it will be desirable. If it only permits one borrower to bid against another would-be buyer for scarce goods and thus adds to upward pressures on prices, it is dangerous. It le our best judgment that overall expansion of the money supPly at this time is inflationary and dangerous. "It is unfortunate, I think, that banking leaders oppose Protective measures against inflationary forces arising in the credit field. They seem to forget that in order to assist in War financing, the Government provided the banking system with additional reserves w'lich enabled the banks to buy Government ! eeurities; that this created new deposits in the banks; and that banks have also had the benefit of interest received on ,he Government securities they have held and will continue to ??ld for an indefinite period. They object even to a temporary ;L1mitati0n on the further use of these funds as a basis for ;Laoans to private borrowers, which wc)uld in turn create more and c e deposits. The Government has an obligation and a duty to in at this time of national danger to say to the banks, Stepw e are not proposing to deprive you of benefits you have already derivedb and will continue to derive from the vast increase in dePosits resulting from your purchases of Government securir_ees but we do say that you should be willing to accept a _reonable limitation on using a war-created situation to multiprivate loans in peacetime when they serve to intensify inationary pressures.' on, "To sum up, the proposed special reserve requirement is in7 a part, though a necessary part, of any effective antifr lationary program. As I have indicated, action on other is°11te, by far the most important of which is fiscal policy, ac2:lecess'ary to the s-iccess of that program. And the need for 610t1 on the monetary and credit front would be reduced to the extent that needed action is taken on other fronts." Upon motion by Mr. Szymczak, the statement was approved unanimously, with the understanding that a copy would be sent by the Board to all ' banks in the United States and to the supervisors of banks in each of the 48 states with a transmittal letter reading as follows: 1659 11/26/47 —18— "The Board of Governors of the Federal Reserve System encloses for your information a copy of my statement before the Joint Committee of the Congress on the Economic Report dealing with the current problem of inflationary bank credit "Pansion. The Board is sending tlis statement to you di— feet-4 because of the importance of the subject matter to Tale banking comilunity as well as to the public generally." There was then submitted a draft of reply IT the Board to the statement submitted by the Federal Advisory Council on November 17 in rssPonse to the Board's inquiry with respect to the expansion of bark el7edits The Council's statement and the substance of the Board's repi,„ were presented by Chairman Eccles when he appeared before the Joint (.1 -ommittee on the Economic Report yesterday morning. The draft or reply read as follows: "The Federal Advisory Council, composed of one banker fro _, , 111 each of the twelve Federal Reserve Districts designated '..er u statutory authority to advise the Board of Governors the Federal Reserve System, was recently asked by the °ard for an expression of the Council's views as to the Present credit situation. The Board stated that it 'is very 14eh concerned about the rapid expansion of bank credit. The Board, therefore, desires to have the views of the Council to the further steps that might be taken to correct this serious situation through monetary or fiscal means.' cat4 "The Council's reply, which has been released for publiof -L'n by the Board and presented te Congress by the Chairman 1_ the Board, states that the Council finds 'nothing in bank a5c17s themselves to sugest that growth of loans has leen an a inflationary factor. It rather appears to have been reflection of the very high level of business activity and hi'! th"Prices.' While the Council shares the apprehension of 1.0.7 -00ard Board with respect to inflation dangers, it believes that 1110"e causes of inflation are largely outside the sphere of sZtarY. policy'. Nevertheless it recognizes that 'the Re— SYstem has a special responsibility for bank credit and co 'his situation should take all reasonable care to assure thie.1:v8tive credit policies.' The Council expresses the view new ' ln this special area present powers are ample, without va, legislation, to place all restraints on credit expansion _Leh the System and the Treasury may consider necessary. • ik160 11126/47 -19- t expansiop "The rapid expansion of bank credit, about which the Board is concerned, is indicated by the growth of bank deposits held by businesses and individuals at all commercial banks in the United States, which increased by 14 billion dollars from the end of 1945 t) the end of October this year. The growth exceeded 3 billion dollars in the last four months and is continuing. This growth was on top of a nearly threefold wartime expansion in deposits and currency which was greatly in excess of needs and has been an important basis of postwar inflationary pressures. "The basis of this continued expansion in bank deposits has been primarily the growth in bank loans, which has been at a more rapid rate than at any time in American banking rustory, amounting in the agLregate to 10 billion dollars !ince the end of 1945. Other factors in the deposit increr:se have been an addition of nearly 2 billion dollars to bank holdings of securities other than those of the Federal Government 8nd gold acouisitions amounting to about 3 billions. "These increased loans have been made to businesses, to holders of real estate, and to consumers. Only loans on sec o, lFities have declined. This decrease is due to liquidation '108-ns made to purchase Government securities in war loan drives, but loans on other securities have also failed to adThis is an exceptional situation for a period of inr ationary develoument and is in large part due to the Board's egulation of margin requirements. "It is true, as the Council points out, that banks have educed have • their holdings of Government obligations as loans increased. This decline, however, followed a temporary Peak w , ak reached during the Victory Loan Drive and resulted almost tue°11Y from Treasury use of its excessive balances at banks noTPorarily built up to a high level during the drive. It has had any effect in reducing private deposits. HT 4P-442Iisaunr impact of bank loan expansion tv, The Board agrees with the Federal Advisory Council that or basic causes of inflation lie primarily outside of the area current monetary and banking developments. However, the eal'd believes that all possible measures and policies should adopted by Government, business, farmers, and workers to r ea;* 0 ciC111e e more, consume less, and save more, and tO avoid costth,,,Price-raising actions. Further.aore, the Board considers of-;" the most effective means of diminishing the basic causes I the nflation is maintenance of the largest possible surplus in th., G°vernment's budget. This important means of dealing with ' Problem is entirely ignored by the Council. C 166'1 11/26/47 -20- "The Board also recognizes that individual banks in making loans are no doubt being guided by the aim of .neeting the necessary and constructive needs of borrafers, and that many banks are aware of the dangers in the present situation and are exercising some restraint on borrowers. Expansion in lending has to a large extent been necessary to supply working capital needed by business to maintain or increase production at rising prices. As accumulated cash balances are drawn 411314n funds must be borrowed. Consumers also borrow to supplement incomes and purchasers of homes borrow more than sellers repay because of advancing real estate prices. "In the Board's opinion it is not correct to contend that because inflation calls forth an increased demand for bank " - pane, these loans do not contribute to inflation. The economy 111, °14 is caught in a partly self-generating spiral of rising ages, costs, prices, and profits supported by active use of Previously accumulated liquid assets and by expanding bank 29418. Credit is contributing to the continuation of inAs was well stated, in a recent Monthly pressures. Letter of the National City Bank of New York: 'Rapidly accumulating debt is both a cause and a consequence of the inflationary pressures, for in a l'Iage-price spiral, business constantly needs more and more money to keep going and this leads to the incurrence of more and more debt by business and more and more spending by the individual. To check this kind of spiralling--which is to the ultimate benefit of no one and to the injury of all--is not simple.' au "Although each loan, taken separately, may aid in the prosuction and movement of goods, yet in view of the limited viPlies of goods available, a loan to one business or inditl,"val to finance the purchase or holding of goods permits tO borrower to bid against someone else who has or is able c funds. Credit expansion thus is called for by price pfl rj eases and provides the basis for further increases. This is ableess, unless checked by positive limitations on the availSupply of crdit, could easily lead to catastrophic col"Bankers, businessmen, farmers, wage earners, who in their °Perat • tio lons unwittingly contribute to the rising spiral of inflaThar4.1, cannot individually be held responsible for its course. co_u course is the result of reliance on the free-enterprise, 014Petitive price system in a situation where demand, supply, be Price are not in equilibrium and where a rise in prices can b, Prevented only through the maintenance of a harness of controls alovernment. 11/26/47 —21— "For these conditions, the bankers are not responsible either individually or as a group. Their job is to meet the credit needs of their communities constructively, competi— tively, and profitably; they are not individuaLy in a position to refuse use the legitimate, sound credit demands of their cus— They find themselves in a situation in which they can readily meet unlimited credit demands from the public and in which the public's credit demands are vigorously sustained. That situation was created by war, by the necessities of war finance, and by premature abandonment of controls, thereby releasing inflationary pressures. Responsibility of the indi— vidual banker for developments can go no further than ob— s ervance of prudent policy in the extension of credit and the Illaintenance of propsr soundness of loans and liquidity and safety of individual banks. t7/17 _ for credit exoansion scrnsil ---k-A-tofG.overnment "The Federal Advisory Council states that Government a gencies have been making loans that banks refrained from ; IT i,king. Except in the field of foreign lendinb, the volume ,' loans by Government credit agencies is very small relative ;.? the volum of bank loans and the total has not increased. J3 true that some of the activities of Government agencies, furthering objectives set forth by Congress, have encouraged linhealthy credit expansion in the field of housing, primarily o aid veterans. Foreign lending by the Government has ex16;anded because of the urgency of restoring production abroad 1 d the difficulties and inadvisability of obtaining private credits for these essential purposes. to "The Council refers to the Board's request for authority • guarantee loans in cases where credit is needed but cannot L obtained from banks. The Board wishes it clearly under— Stood that it is requesting merely an amendment of an existing th°vision of law, for the gurliose of rescinding a power which ✓ e Reserve Banks already have to make loans and revising some— het their power to guarantee loans. Under existing conditions b,,,ese powers are not likely to be used but some such power will ,' needed at times in the future to provide for small business :alource of cauitall which large cori)orations can obtain through hases of securities in the market. Amendment of existing law to , been recommended to enable the System to return certain funds mat.'he Treasury and this provides an appropriate opportunity to ▪ other long—needed revisions. With reference to this bill Federal Advisory Council expressed its views on November 18, 747, as follows: 'The Council is cognizant of the investigation of the activities and Dowers of the Reconstruction Finance Corporation now being made by a Congressional Committee. ntil Congress has determined whether the Reconstruction 11163 11/26/47 -22- "Finance Corporation should be continued, and, if continued, what powers to make or guarantee loans should be given it, the Council feels that no action by Congress should be taken on Senate Bill 408. The Council feels that Senate Bill 408 should be considered only as an alternative to legislation continuing the present loan and guarantee powers of the Reconstruction Finance Corporation. If the Congress should decide to continue the Reconstruction Finance Corporation without greatly curtailing its loan and guaranteeing powers: the Council would be opposed to the passage of Senate Bill 408. The majority of the Council would prefer Senate Bill 408 to the continuation of the Reconstruction Finance Corporation powers, but it should also be noted that a minority of the Council is against giving any guarantee or commitment powers to the Federal Reserve Banks under any circumstances, as proposed in Senate Bill 408.1 nee of restricting inflation The Board cannot agree with the Council's view that the Res rile System and the Treasury have ample powers to place all ! -'eLraints on credit expansion that the System may consider eessary. As the Board has pointed out in its Annual Reports t°r 1945 and 1946 and in other statements: banks are in a posito provide any additional credit demanded by borrowers and c v"e System cannot prevent such expansion. This is the case belase commercial banks of the country now hold 70 billion dolcf United States Government securities, any part of which eY can readily sell in order to obtain funds to make loans. When banks sell Government securities, the Federal Reserve, ,L1ch provides the ultimate market for Government securities, :1'48t purchase them in the absence of other buyers in order to 7 p leyent a breakdown of the securities market. Federal Reserve inrcheses create bank reserves which can be expanded by the bankg eYstem into more than six times as much in loans and investnients• ria ."The Council suggests that the System can restrain incil cuarY credit expansion through use of existing powers, int authority to increase the discount rate, to sell securicoes in the open market, and to raise reserve requirements at erlfltral reserve city banks. None of these powers can be used ectively if banks continue to sell Government securities es to the R System and thus create additional bank reserves.toserv or In fact attempt to use these powers would increase sales the vernment securities in the market by banks and others. If 140,,SYstem refused to purchase any 7ore securities, bond prices '14 decline sharply. The threat of such a policy would induce r 1b64 11/26/47 -23- a wave of selling of marketable bonds, and if prices on these bonds declined there might be widespread redemption of savings bonds, which are redeemable on demand. The Reserve System would have to purchase securities in order to Ineet the drains on the Treasury, and new reserves would thereby be created. "Recent measures by the System and the Treasury to raise interest rates on short-term Government securities have diminished somewhat the inducement to banks to sell short-term securities and to purchase longer-term higher-rate issues. Higher rates on short-term securities) however, have but little, if any, in discouraging banks from selling them to make loans. Mo oreover, ''' reover, a recent increase in capital demands has gut some Pressures on the long-term securities market, and has resulted 111 a decline in bond prices. This places a limit on the extent to which short-term rates may be -ermitted to rise without causj-ng an undue drop in Government bond prices. "The Board has proposed a means of curbing the ability of . tinks to create additional reserves by selling Government securiles to the System and of reducing the amount of credit expansion maY be possible on the basis of reserves thus created or m ' rising from a continued gold inflow. This proposal calls for anting to the System a temporary authority to require all banks special reserve in Treasury bills, certificates and ns3th°1d r°"or in certain cash assets, in addition to present basic z j r equired reserves. measure would enable the System to impose some restrict ea . ion on undue credit expansion without depriving banks of „filing assets. It would permit a rise in lending rates to new Private borrowers without raising the interest cost on the outstanding debt of the Government, which is not now increasing. It Would not prevent banks from meeting essential credit needs er the econopy but would discourage unrestrained .expansion of edit for any purpose. .0, "Use of an instrument such as the one proposed would enable aSYstem to curb credit ,expansion with much less burden on f;!Ke and less threat to Government credit than would result attempt to use effectively any of the existing powers mentioned flea by the Federal Advisory Council." Upon motion by Mr. Szymczak, the draft of reply was approved unanimously, with the understanding that a copy would be sent promptly to the Joint Committee on the Economic Report, the Presidents of the Federal Reserve Banks, and members of the Federal Advisory Council. 1666 U,'26147 -24Chairman Eccles stated that Chairman Tobey of the Senate Banking and Currency Committee had advised that he would like to have a drat+ Of a bill if any had been prepared by the Board in connection with the Special reserve plan, that the legal division had been working on " 1. a bill, and that he (Chairman Eccles) would recommend that the 13°ard approve sending the bill to the Chairmen of the Banking and Cur- I'LeY Committees of the Senate and the House of Representatives. The ILS(3/1 for Chairman Tobey's request, Chairman Eccles said, was that he %1Ettitecl to have a print of - bill when the matter was taken up by his Colmvi+ ' tee- The draft of bill was in the following form: "A BILL "Toogozide for special reserves to be held by banks, and for purposes. of "Be it enacted by the Senate_And_Emgp_s_f_aapagggnIatives p ---lettnited .- -t States of America in Con ress assembled, That the ,,,I4';?ral Reserve Act is hereby amended by inserting therein imrcIlately following section 19 thereof a new section reading as follows: t. 'Sec. 19A. (a) Effective Date and Time Limit. - This seee Shall become effective on the first day of the third caltnr month following the month in which it is enacted (except er!t6 percentages and other regulations hereunder may be presaf bed in advance of the effective date to take effect on or ter such date) and shall expire at the end of three years '''sr its effective date. the : 1 03) Purposes. - As a result of necessary war financing, - 'Jenks of the country own large amounts of short-term Govhalliment securities. Substantial amounts of such securities ailr? already been converted into bank reserves and large adellit l°11'al amounts can be converted into such reserves with reeer,ing multiple increases in bank credit and in deposits that -'e as money. Such monetary and credit expansion, at a time lbi)t) 11/26/47 —25— "when total effective demand for goods and services is in excess of the supply which can be produced by the nation's Productive capacity and labor force, would further aggra— vate inflationary pressures on prices and thus produce bur— ensd upon and dislocations in interstate and foreign Co rce and the nation's monetary, banking and credit structure. Efforts to avoid such consequences through the use of methods 5)f credit control available under existing law are seriously ha ndicapped because, with the present large volume of the Public debt, they would tend to produce such declines in the Prices of Government securities (and securities in general) as to cause disturbances to the Government credit, inter— ate and foreign commerce, and the nation's monetary, bank— and credit structure. 'The purposes of this section, in the light of which it8 provisions sh?ll be construed and applied, are to re— quire banks to hold short—term Government securities or other specified liquid assets in such amounts as may be 1.fTeessary to protect interstate and foreign commerce and nation's monetary, banking and credit structure from the a bove—mentioned burdens, disturbances and dislocations. /(c) Holding of "Special Reserve Assets". — (1) Every baluc shall own "special reserve assets", as described in subsection (d) hereof, in an amount equal to the sum of such Pjrcsntage of its demand deposits and such percentage of its 12ims deposits as the Federal Open Market Committee (created section 12A of this Act and hereinafter called the "Com— eu) may by regulation prescribe from time to time as 11--essary to accomplish the purposes of this section, but in ° event shall the percentage so prescribed with respect to den iand deposits exceed 25 per centum or the percentage so vrescribed with respect to time deposits exceed 10 per centum. t(2) The Committee shall not initially prescribe a per— no'lLage in excess of 10 per centum with respect to demand de— or in excess of 4 per centum with respect to time de— ,21-t 3 and shall not thereafter at any one time increase such eentages by more than 5 percentage points in the case of ecinletd deposits or by more than 2 percentage points in the of time deposits. No initial percentage or subsequent ;1;ersase thereof shall become effective until the expiration 8- period of at least 60 days after notice thereof shall e been published in the Federal Register; but nocther prie"ice or procedure shall be required in connection with the sta , s2ribing of any percentage under this subsection notwith— '111g any other provision of law. secti (3) In prescribing any percentages under this sub— O3 the Committee shall consider among other factors W Z 11/26/47 -26- "(A) the volume and ownership of securities and other assets eligible for holding as special reserve assets or readily convertible into such special reserve assets, (B) gold movements, currency fluctuations, and other factors affecting the available supply of bank reserves, (C) conditions in the Government securities market, and (D) the general credit situation cf the country. 1(d) Description of "Special Reserve Assets". - "Special reserve assets" shall consist of any one or more of the following assets: '(1) Obligations of the United States in the form of Treasury bills, certificates of indebtedness, and notes having a maturity not exceeding two years at the time of issue. bank '(2) The aggregate amount of the following assets which a owns in excess of the sum of 20 per centum of its demand deposits and 6 per centum of its time deposits: (A) Coin and c frenoY in its vault or on hand, (B) demand deposits due from er banks to the extent that they exceed demand deposits due ottheher banks, (C) deposits with a Federal Reserve Bank (and Reserve Banks are authorized to receive such deposits from fYbank), and (D) cash items received in the ordinary course ,r business which are in process of collection and are payable Immediately upon presentation in the United States. '(e) Computations. - For the purpose of determining the nts and percentages specified in subsections (c) and (d) of this section, each bank shall compute all such amounts on coull, average daily basis covering monthly computation periods 1),4 ?uoll other computation periods, not shorter than weekly ; It r1cds, as the Committee may )rescribe; and the Committee Y ci prescribe different computation periods for different ora3ses of banks, classified according to size or location d„?ther reasonable basis. The amount by which the average n--"-Y amount of special reserve assets owned by a bank in any ,somputation period falls below the amount required by this al %t on or regulations pursuant thereto shall be considered deficiency" for such computation period. l(f) Penalty for Deficiencies. - Any bank having in any co (4Putation period a "deficiency" as defined in subsection a, of this section shall pay to the United Status a penalty a; rk the rate of one-half of one per centum per month upon the is°411t of such deficiency for such period. If such penalty 111°_t Paid to the Treasurer of the United States by the end or , '"e month succeeding that in which such computation period 1668 111W47 -27- "'ended, such penalty, together with interest thereon at the rate of six per centum per annum from the end of such succeeding month until paid, may be sued for and recovered IDY the United States in a suit to be brought by the United States District Attorney in the District Court of the United States of the judicial district in which the principal place of business of such bank in the United States is located, and the District Courts of the United States shall have jurisdiction of such suits. If and when the Committee naJa so request, it shall be thE duty of the several -11strict Attorneys in their respective districts, under the supervision of the Attorney General, to institute proceedings to collect such penalties including interest. In Ipusual cases, when a bank has a deficiency which results :1"0n1 excusable error made in good faith, a certificate may e issued in the discretion of the Committee excusing such panic from payment of a penalty on account of such deficiency. '(g) Reports. - The Committee may require banks to furnish from time to time such reports and other information 1438 it may prescribe, but no such reports or information shall , e required except such as the Committee may find to be neces-ary to obtain Information as to compliance with this section ..°therwise to enable it to carry out its functions under 21s section. Any person who shall knowingly make any false Statement or report or give any false information or wilfully tail to furnish any report or information required under this v Subsection shall be guilty of a misdemeanor, and upon connlctlon shall be fined not more than $5,000, or imprisoned riot m orethan one year or both; and the expiration of the provisions of this section shall not prevent prosecution for any such offense committed prior to such expiration. 1(h) Reysulations and Administration. - The Committee may fr ef° , 111 time to time prescribe, amend or revoke regulations to or4ectuate the provisions of this section or to prevent evasion of circumvention of its purposes either by abnormal accumulations ,cle, sits due to or from other banks or by other devices; and then regulations may, among other things, include definitions of terms used in this section not inconsistent with the deftContained herein or with the purposes of this section. function of the Committee under this section Other than the Beribing of regulations and the determination of matters of re-eral policy may be performed by such member, officer, or presentative of the Committee as it may designate for the Pose; and in the administration of this section, the Committee g 16it 11/26/47 -28- tt maY utilize the services of the Federal Reserve Banks and anY other agencies, Federal or State, which are available and a ppropriate. I(i) Plefinitions. - When used in this section, unless Otherwise required by the context -1(1) "Person" means any individual, partnership, corporation, bu sineu trust, association, or other similar organization. 1(2) "Bank" means any person having a place of business in any state or in the District of Columbia which is (A) a national °ank, or (B) a person engaged in the business of receiving demand ueposits and subject to supervision or examination by the State authority having supervision over banks (or by the Comptroller ?! the Currency in the case of the District of Columbia); but the Committee may by regulation exclude from such term persons ich it deems not to be substantially engaged in the performance of functions customarily performed by banking institutions receiving demand deposits and also not to be within the scope vi the purposes of this section. t , 1(3) The amount of any obligation of the United States in _lie form of a Treasury bill, certificate of indebtedness, or rte means the amount of the book value thereof as determined ' n accordance with regulations of the Committee. ven (4) "Demand deposit" and "time deposit" have the meanings ITsuch terms by regulations prescribed from time to time 3cr) the Board of Governors of the Federal Reserve System pursuant section 19 of this Act. 1(5) "Month" and "monthly" refer to calendar month." Upon motion by Mr. Evans, the draft of bill was approved unanimously, with the understanding that it would be transmitted by Chairman Eccles to the Chairmen of the Banking and Currency Committees with a letter reading as follows: tee "In connection with any consideration which your Commitex maY give to the current problem of inflationary bank credit B4ansicin, I am enclosing herewith a draft of a bill which the rd of Governors suggests for dealing with this problem. You 4 1.11-Sh to have it introduced in the Senate." Mr. Vest inquired whether a copy of the bill should not be sent he ./),. ' esidents of the Federal Reserve Banks and Chairman Eccles stated 11126/47 -29- that further revisions of the memorandum on the special reserve plan had been prepared and were contained in a memorandum dated November 25, 19473 which could be sent to the Presidents but that the draft of bill 8411-141 not be sent to them until after it had been introduced. S ecretary's note: A further revision of the memorandum was made under date of December 5, 1947, and the November 25 draft was not sent to the Presidents. In discussions between Chairman Eccles and Under Secretary Iliggine and between Mr. Evans and Mr. Clark of the Savings Bond Di- ' 11 of the Treasury Department, the suggestion was made by the 11r1s11,17 that it would be helpful to the Treasury savings bond progralill in which the Board has a special Interest, if the cost of print14 a booklet relating to the program could be paid by the Board. The ruatter was discussed and it was the consensus that the Federal Reserve Shtera had a special interest in the wide distribution of savings bonds 44 that) therefore, the Board would be fully justified in paying the ec 'Et of the booklet. Upon motion by Mr. Evans, it was agreed unanimously to authorize the payment of vouchers submitted .by the Savings Bond Division of the Treasury Department covering the cost of printing the booklet in an amount not to exceed $10,000. Reference was made to a letter dated November 6, 1947, from the ellatrmarja, etEli of the Auditing Committee of the board of directors of the FedR Rn e--rve Bank of New York replying to the Board's letter of October lb 1 11/26/47 -30- 21) 1947, nation of concerning two matters discussed during the recent examithat Bank. The reply indicated that the directors felt that the nner of investigation of a defalcation, which investigation had been carried on primarily the operating departments of the Bank by l'e'ther than the Auditing Department, was the one best designed in the ca8e In question to ascertain the facts and protect the interests of the laank. With respect to the question of per diem payments made by the 101, ''tqlk to a former Assistant Vice President while serving as assistkit to the Secretary of the Treasury, the letter from the Auditing C°111mittee stated that it had noted the views expressed by the Board of eTtlirernors and that, should a similar situation arise in the future, allc views would have due consideration. Mr. Vardaman had suggested that this matter be considered at illeetiri -Hg of the Board for the purpose of deciding whether it would be sable to discuss it with the Chairman of the Federal Reserve Bank of y and with the Chairmen of all Federal Reserve Banks at the forthCO:rAirio, Conference of Chairmen with a view to making clear the position c't the Board on the two questions involved. It was agreed that matters of this kind should be discussed on the basis of general policy rather than on the basis of specific instances of the kind referred to, and that therefore the subject should not be taken up at the forthcoming Chairmen's Conference. There was also a discussion of whether there had been a sufficient number of instances of the kind referred to to justify the Board taking them up with the Federal Reserve Banks, and it was concluded that such action would not be necessary at tlis time. 11/26/47 -31In accordance with the understanding at the meeting of the " 13 on September 4, 1946, that there would be brought up at a meetita of the Board the question of publication of postwar pamphlet No. ' 8 4Pederal Reserve Policy," Mt. Evans referred to a memorandum prelIal'ed by Mr. Thomas under date of November 21) 1947, transmitting a c(IP:rof the proof of the pamphlet and recommending that it be published Promptly. The proposed pamphlet contained the following papers: Three Decades of Federal Reserve Policy by Karl R. Bopp IMpact of the War on the Member Banks, 1939-1946, by Robert V. Rosa Selective Instruments of National Credit Policy by Carl E. Parry Problems of Postwar Monetary Policy by Woodlief Thomas and Ralph A. Young By unanimous vote, Mr. Evans was requested to discuss the publication of the pamphlet with Mt. Vardaman and, in the absence of opposition from him, the publication of the pamphlet was authorized. At this point Messrs. Smead, Thomas, Vest, Leonard, Nelson, kl(1 14 1111i38-nn withdrew and the action stated with respect to each of the .atte1.8 hereinafter set forth was taken by the Board: Minutes of actions taken by the Board of Governors of the Fedeta] . serve System on November 25, 1947, were approved unanimously. Memorandum dated November 20, 1947, from Mr. Thomas, Director the D. . 4014en4 71sion of Research and Statistics, recommending that E. A. Or talle Bo elser, a Consultant in that Division, be asked to assist with €tl ' clI s work on the present legislative program for an indet.irminate 11/26/47 -32- Ileriod of time with compensation at the rate of $40 per day worked, th the understanding that traveling expenses, including ver diem in lieU of subsistence at the rates appropriate for a Director of a DiWould be paid by the Board. Approved unanimously. Letter to Mr. Wiltse, Vice President of the Federal Reserve Of New York, reading as follows: "In view of the recommendation contained in your letof November 20, 1947, the Board of Governors extends to c February 16, 1948, the time within which the Cranford Trust ,?mPanY, Cranford, New Jersey, may accomplish termination of -Lts membership pursuant to notice acknowledged by the Board Ity 16, 1947." Approved unanimously. Letter to Mr. Leach, President of the Federal Reserve Bank Or Ri ehmond, reading as follows: "This refers to your letter of September 19, 1947 rethe_ reouest of the Vachovia Bank and Trust Company, ,, u non-Salem, North Carolina, that, for the purpose of determining its average reserve requirements, it be permitted ...„....!ubmit semi-monthly reports of deposits covering all its e `1:lrloes except the one in Charlotte, in lieu of the weekly P°rts now required covering the deposits of all offices. an a "In view of the fact that such a change would require mendment to Regulation 'D', the Board questions whether it should be made. However, we would like to discuss the latter with you the next time you are in Washington, which 91'esumably will be early in December." Approved unanimously. Letter to Mr. Volberg, Vice President of the Federal Reserve 13411k or s -an Francisco, reading as follows: Ibri4 11/26/47 -33- "In view of the recommendation contained in your letter of November 19, 1947, the Board of Governors extends to March 5, 1948, the time within which the Portland Trust and Savings Bank, Portland, Oregon, may establish the proPosed branch in Park Rose, Oregon, as approved by the Board On April 16, 1947." Approved unanimously. Telegram to Mr. Knoke, Vice President of the Federal Reserve Bahk 0f New York, reading as follows: "Your wire November 25. Subject to approval of your of Directors, the Board approves a loan by your Bank the Bank of France of approximately $84,000,000, such 4-°an to be secured by 75,000 kilograms of gold earmarked in Y°ur vaults. It is understood that the loan is to be made on the terms and conditions outlined in your letter of Novembzr 21 as follows: "(a) Interest to be at your rate of discount in effect on the date the loan is made; "(b) The loan to be for three months with the tacit illnd erstanding that you would entertain requests for at 4-,ast three renewals and that in case of a desired renewal atthe end of one year, you would be prepared to review the ..ituation and consider the possibility and advisability of 411/ther extension; of "(c) The amount to be advanced to be up to 98 per cent he value of the gold to be held in your vaults as collateral. /30ard "It is understood that the usual participation will be v4rered to the other Federal Reserve Banks." Approved unanimously. or the n. Memorandum dated November 25, 1947, from Mr. Parry, Director lvision of Security Loans, recommending, for the reasons stated lb' 4/26/47 in the -4— memorandum, that $60 be added to t e item of miscel1aneous ex— Pens "in the 1947 non-personal budget of that Division. Approved animously.
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