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Minutes of actions taken by the Board of Governors of the Federal Reserve System on Tuesday, October 162 1951. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Norton Powell Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Minutes of actions taken by the Board of Governors of the Federal Reserve System on October 15, 1951, were approved unanimousl y. Memorandum dated October 15, 19512 from Mr. Sherman, Assistant Se cretary of the Board, recommending an increase in the basic salary of Miss Doreen Dippre, Secretary to Mr. Kenyon in the Office of the Secretary, from • $3,475 to $3,600 per annum, effective October 28, 1951. Approved unanimously. Memorandum dated October 11, 1951, from Mr. Young, Director, 1)1-vision of Research and Statistics, recommending that the temporary ap pointment of Mrs. Katherine G. Black, Clerk in that Division, be ctended for an additional period of not to exceed twelve months from (let°ter 16, 1951, with an increase in her basic salary from $22875 to 42 Iqr" Per annum, effective October 16, 1951. Approved unanimously. Letter to Mr. Meyer, Assistant Vice President of the Federal 4"erve Bank of Chicago, reading as follows: "In view of the circumstances described in your letter of October 112 1951, the Board of Governors 10/16/51 -2- "approves the payment of salaries to the following employees at the rates indicated on the basis of a 48-hour week (40 hours at straight time and 8 hours at one and one-half times the hourly rate). Name Equivalent ---Annual Salary Hartnett, Wm. J. $ 3,244.$0 Komes, George S. 3,244.80 Crowe, John 3,036.80 Hicks, Eldon E. 3,036.80 Mossman„ Frank D. 3,036.80 Novak, Frank A. 3,036.80 Petersen, Louis 31036.80 Sheerin„ Joseph 3,036.80 Stewart, Frank J. 3,036.80 Stuart, Clifford 0. 3,036.80 Wimberley, Shelby L. 3,036.80" Approved unanimously. Telegram to Mr. Paul T. Taylor, Taylor Warehouses, Winston3 North Carolina, prepared in accordance with the action at the meeting on October 15, 1951, reading as follows: "Board of Governors of the Federal Reserve System has appointed you director of the Charlotte Branch of the Federal Reserve Bank of Richmond for three-year term beginning January 1, 1952, and will be pleased to have Your acceptance by collect telegram. "It is understood that you are not a director of a Bank and do not hold public or political office. Should Your situation in these respects change during the tenure Of your appointment, it will be appreciated if you will advise the Chairman of the Board of Directors of the Federal Reserve Bank of Richmond." Approved unanimously. Letter to Mr. Crosse, Assistant Vice President of the Federal Resere Bank of New York, reading as follows: "Reference is made to your letter of October 10, 1951, submitting the request of the Endicott Trust ; 10/16/51 -3- "Company, Endicott, New York, for permission to establish a de novo branch in the unincorporated Village of Endwell, New York. "In view of your recommendation the Board of Governors approves the establishment and operation of a branch in Endwell, New York, by the Endicott Trust Company, Endicott, New York, provided the branch is established within six months from the date of this letter. "It is understood counsel for the Federal Reserve Bank will review and satisfy himself as to the legality of all steps taken to establish the branch." Approved unanimously. Letter to Mr. Symms, Vice President and Cashier of the Federal Reserve Bank of San Francisco, reading as follows: "This will acknowledge receipt of your letter of October 2 inquiring whether any of the guaranteeing agencies would consider an application for a guarantee cn behalf of the Central Intelligence Agency. "Since the activities of the Central Intelligence Agency are directly related to the national defense effort, a contract awarded by that Agency could be regarded in a sense as a defense contract. However, after discussing the matter informally with certain members of the staff in the Defense Department and General Services Administration, we feel that it is verY unlikely that any of the guaranteeing agencies ' (culd consider an application for a guarantee of a loan : 10 finance such a contract, since generally, of course, it would have no relation to the performance of defense Procurement contracts awarded by the guaranteeing agencies." Approved unanimously. Letter to Mr. Cornelius P. Cotter, Counselor at Law, 551 Fifth Avenu6, New York, New York, reading as follows: "This refers to your letter of September 28, 1951, concerning the meeting on September 25 in Washington which was attended by you and your client, Mr. Frank J. 10/16/51 -4- "Rothschmitt, and certain members of the Board's staff. The discussion related to RegulationW and the automobile instalment leasing arrangements of Mr. Rothschmitt's business, Contract Vehicles, Inc. This matter also has been the subject of earlier correspondence. 'At the September 25 meeting you and Mr. Rothschmitt Proposed that the regulation be amended in certain respects as outlined in your letter of September 28. As we understand it, you propose that there be exempted from the regulation any automobile instalment leasing arrangement of no more than 12 months' duration, provided the purpose of the lease is to supply the lessee with an automobile for business use. "Various proposals advocating a use test for listed articles in determining the application of the regulation have been urged from time to time since the regulation was first instituted in 1941. However, the Board has felt it would be undesirable to depart from the general test, now long established, based on the design of the article. Serious difficulties are inherent in a use test under a regulation covering so broad and complex a field as that covered by Regulation W. Not only would such a test be a less workable approach from the regulatory standpoint, but it also would place upon Registrants an additional responsibility of vague and indefinite proportions. Furthermore, uniformity of application, except where clearly impracticable, has always been viewed as an essential attribute of fairness in the application of this regulation as of other regulatory measures. An exception such as you suggest would be certain to result in proposals for its extension in favor of other articles and transactions for various reasons, including an understandable desire for what mould be regarded as equal treatment° "In the light of the foregoing, it would seem unnecessarY to discuss the related part of your proposal, i.e., the extension of the 3-month period to 12 months. Unrestricted extension of time for so long a period, alone, would seem to be neither appropriate nor justified at this time. "In arriving at these views, all aspects of the matter as presented by you and Mr. Rothschmitt on September 25 and ?,Y your letter of September 28 have been carefully studied. qe regret that you apparently misunderstood certain statements made during the discussion on September 25. Your 10/16/51 -5- "references to the need for automotive transportation, the credit and inflationary aspects of sales and leases, and the features of the particular leases involved raised Points which, in addition, have been previously studied at length both in connection with the application of the regulation generally, and in connection with specific situations. "If the Congressional purpose in authorizing the regulation is to be effectuated, the acquisition of the use of funds or property through instalment transactions within the scope of the statute and regulation cannot be expected to continue free of restraint. Otherwise, the inflationary pressures which the regulation was designed to help curb would proceed unabated. Assuming that some apparent or technical disparities may exist between some of the aspects ?r consequences of a conditional sale as compared with an instalment lease, their initial impacts on the economy, as well as other major substantive features, are essentially indistinguishable. Both involve credit, and both add to the inflationary effects that occur in the bidding for goods and services, especially during a time of vast defense expenditures. "The fact that leasing arrangements may not at present be as widespread as other forms of credit in the automobile field, for example, should not be regarded of itself as a ground for exemption or preferential treatment. To be effective and equitable in its application, the regulation cannot properly disregard competitive forms of credit which are of a character to add to the over-all problem which the statute and regulation were designed to meet. However, as You know, the regulation does not prohibit instalment leasIng. As is true also with ordinary instalment loans and Conditional sales, the regulation merely requires that the transactions subject to the regulation meet certain requirements. "The opportunity to discuss the matter in question with cu and Mr. Rothschmitt on September 25 was appreciated. „L owever, if additional points in this connection have occurred t'c either of you since that discussion or since your letter 2f September 28, we would be glad to hear from you further. LI:I any event, it is hoped that the foregoing will be of assistance to you in connection with the matters discussed and covered in your letter." fi Approved unanimously, with a copy to Mr. Scheffer„ Manager, Real Estate & Consumer Credit Department, Federal Reserve Bank of New York. 10/16/51 -6- Telegram to Mr. Swan, Assistant Vice President of the Federal Reserve Bank of San Francisco, reading as follows: "Reurtel October 9 about status under Regulation (X) of detached garages located on residential property. We concur in your view that a detached garage on residential Property, costing more than $2500 and constructed after February 150 1951, is a nonresidential structure, and credit extended to finance its construction would be subject to nonresidential provisions of regulation. Any subsequent sale of the real property would be a sale of residential property and the residential provisions of the regulation would apply if the residence is subject to the regulation." Approved unanimously. Letter to the Honorable Brien McMahon, United States Senate, Was hington, D. C., reading as tonal's: "This refers to your letter of September 19, 1951, addressed to Mr. Woodlief Thomas, which was accompanied by a letter from Mr. Earle Goodenow, of Goodenow and Shaw, Inc., dated September 150 1951, concerning Regulation X, Real Estate Credit. "As you know, Regulation X was issued under the at.ithority of the Defense Production Act of 1950 and Executive Order No. 10161 of the President which delegates the function of regulating real estate credit to the Board of Governors subject to the concurrence of the Housing and Home Finance Administrator. The companion regulations cf the Federal Housing Administration and of the Veterans Administration were issued at the same time. "The primary purpose of real estate credit restrictions, J-11c0 other credit controls, is to restrain the expansion ?f, credit when inflationary pressures threaten the stability of the national economy. One result of the period , 311 expanded building activity that began in 1949, only to ve accentuated by the beginning of the Korean War, was the Pneration of an unprecedented volume of mortgage credit. The demand for such long-term credit far exceeded the supply °f savings being made available for this type of investment. 10/16/51 -7- "Much of this expanded demand for mortgage funds was supplied by the liquidation of Government bonds by banks, insurance companies, and other investment institutions. To a large extent, these bonds were purchased by the Federal Reserve Banks because the amount Offered exceeded demand from other investors and threatened substantial price declines. The purchase of securities by the Federal Reserve results in an increase in the amount of reserves of commercial banks, which can then be used to expand greatly their loans and investments. "If this highly inflationary process of monetizing the Government debt had been allowed to continue unrestrained, inflationary pressures in our economy today would be much greater than they are. The building industry would be afflicted with higher costs and higher selling prices while, at the same time, prospective buyers would find it extremely difficult to accumulate necessary down payments. "Apart from the problems of credit, it would have been necessary, from the point of view of the availability of materials in a defense economy and the obvious inflationary impact of material shortages in the housing field itself, to place some restraint on the record volume of building that developed in 1950. While it is not possible ..t;0 estimate such magnitudes exactly, it is the combined Pdgment of the Government agencies concerned that it will ue Possible during the defense period to proceed with residential construction at a rate of about 850,000 per Year. The goal of 850,000 units is approximately 40 per cent less than the record of 1,395,000 units produced in 1950, but it compares favorably with other high-level postwar years. It may be said also that a volume of building of the magnitude produced in 1950 is far in :xcess of the average long-term need for new housing. fome curtailment was or would soon be necessary in order assure maintenance of a reasonable degree of stability in the building industry. "The credit controls which were imposed were designed t° Permit the construction of about 850,000 units and it 36em5 clear from data now available that they are not too re strictive for this purpose. In the first eight months , ., c)f 1951, 758,500 new housing units were started and it ;4)1 seems likely that the total number of units which will ce started in 1951 will exceed 1,000,000 units. 10/16/51 -8- "Real estate credit terms were relaxed by the Board and other agencies on September 1, 1951, in accordance With the Defense Housing and Community Facilities and Services Act of 1951. Because of the present high-rate of building and mortgage lending activity and the continuing need to restrain inflationary forces, the Board considers any further relaxation inadvisable at this time. The Board continuously studies the effects of the regulation for the purpose of making adjustments in the regulation whenever such adjustments are appropriate to the needs of the economy. 11Ne hope that this explanation is a satisfactory answer to the questions raised by Mr. Goodenow. If he Should desire specific information or assistance concerning Regulation X, he may find it convenient to call upon or write to the Federal Reserve Bank of New York." Approved unanimously. Letter to Mr. Pondrom, Vice President and Cashier of the Federal Reserve Bank of Dallas, reading as follows: "de acknowledge your letter of September 171, 1951, together with copies of correspondence regarding comments about the Supplement to Regulation X made by Mr. Philip Lieber, President of the First Federal Savings and Loan Association of Shreveport. The response made to Mr. Lieber in Mr. Gilbertls letter of September 15, 1951, would seem to answer fully the objections he raises. "The objection to a schedule which follows two different methods of computation is understandable and we are certain that many other Registrants will make the same objection. When the Defense Housing and Community Facilities and Services Act of 1951 was passed by Congress, We Particularly asked for information in respect to the t°rm in which the revised terms were to be presented. We would have preferred the type of schedule previously used, which permitted the use of a graduated schedule of maximum loan values. We were given to understand, howver, that the percentage down payments set forth in the ?fense Housing Act for houses valued at $12,000 or less sn°uld be adopted as a flat percentage for each of the specified price classes. t - 10/16/51 -9- "With respect to the computation of maximum mortgage amounts for loans guaranteed by the Veterans Administration in price classes above $12,0001 Mr. Lieber quite understandably feels at first glance that the schedule is confusing and possibly inconsistent. The Board and other agencies concerned with real estate credit regulation did not feel that it would be advisable to relax real estate credit terms more than the relaxation specified in the Defense Housing Act and it was not possible to make the transition from the $12,000 price to the 0_5,000 price and at the same time resume the pre-September I schedule at or near $15,000 without decreasing the maximum loan value in this price class at a faster rate than the rate Prevailing in succeeding classes. However, if Mr. Lieber bears in mind that both the dollar base and the percentage of excess price that may be added to that base to obtain the total permissible mortgage vary with different price classes between $12,000 and $24,5001 we believe it will become evident, when viewed as a whole, that the ratio of mortgage permitted to price of property decreases continuously throughout the entire schedule beyond $12,000. This can be observed on the attached schedule of dollar amounts of permissible mortgages and the schedule of maximum mortgage as a per cent of the price by $1,000 intervals. We believe that after examining these sched1:1,les Mr. Lieber will agree that purchasers in the 0,000 to *24,500 price class are not being penalized relative to those in the preceding price class. "We hope that this information will prove helpful." Approved unanimously. Memorandum dated October 15, 1951, from the Division of Personnel Adm inistration, recommending for the reasons stated therein that the Division of Administrative Services be authorized to honor petty cash tickets turned in by Miss Ayers, Administrative Assistant in the ' 10n of Personnel Administration, covering certain costs involved • ln the e ntertainment of Miss Joan Knight, of the Bank of England, a 10/16/51 -10- visitor to the Board's offices. Approved unanimously.
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