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1945 A meeting of the Board of Governors of the Federal Reserve System was held in Washington on Tuesday, October 27, 1936, at 11:00 a. m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Broderick Szymczak McKee Davis Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chairman Mr. Wyatt, General Counsel Mr. Goldenweiser„ Director of the Division of Research and Statistics Mr. Gardner, Research Assistant in the Division of Research and Statistics Mr. Morse, Junior Research Assistant in the Division of Research and Statistics Consideration was given to a revised memorandum prepared by Messrs. Goldenweiser, Morrill and Wyatt, pursuant to the action taken at the meeting of the Board on October 23, 1936, on the subject of procedure with respect to foreign relationships of Federal reserve banks. Copies of the memorandum had been furnished to the members of the Board prior to this meeting. The memorandum was read and discussed paragraph by paragraph and certain amendments were agreed to. At the conclusion of the discussion, it was understood that the Secretary would send copies of the memorandum as amended to First Vice President Sproul of the Federal Reserve Bank of New York, in 1946 10/27/36 -2the absence of President Harrison, for the consideration of the representatives of the Federal Reserve Bank of New York prior to their conference with the Board on Friday, October 30, 1956. Upon a statement by Mr. McKee that he had made arrangements to leave Washington at noon, or shortly after noon, on October 30, the Secretary was requested to ascertain from Mr. Sproul whether it would be possible for the representatives of the Federal Reserve Bank of New York to meet with the Board on the evening of Thursday, October 29, and, if not, if they could arrange to meet with the Board at 9:50 a. m. on October 30. Later the Secretary reported that he had talked with Mr. Sproul, who said that Mr. Harrison's schedule for return from his western trip called for his arrival in Washington Friday morning and that it would be convenient to arrange to meet with the Board at 9:30 that morning, but that in the circumstances it would not be possible to arrange for the meeting on Thursday evening, as this would not give him an opportunity to go over the memorandum with Mr. Harrison in advance of the meeting. At this point Messrs. Thurston, Wyatt, Goldenweiser, Gardner and Morse left the meeting and consideration was then given to each Of the matters hereinafter referred to and the action stated with resPect thereto was taken by the Board: The minutes of the meeting of the Board of Governors of the Pederal Reserve System held on October 26, 1956, were approved unanimously. Letter to Mr. Walden, First Vice President of the Federal Reserve Bank of Richmond, reading as follows: "Reference is made to your letter of October 19 with reference to the continuance of the temporary assignment 10/27/36 -3- "of Mr. W. H. Blankenship to the position of Senior Clerk in the Custodian Department. "You state in your letter that Mr. Blankenship, who receives an annual salary of $21400, was classified prior to May 1, 1936 as Securities Clerk in the Discount Department, the maximum salary for which position is $2,5801 and that on the above date he was temporarily assigned to the position of Senior Clerk in the Custodian Department, the maximum salary for which position is $11980. You further state that the revised personnel classification plan of your bank now under consideration by the Board provides a maximum salary of $21580 for the position of Securities Teller to which position you contemplate transferring Mr. Blankenship, and ask the Board to approve the temporary assignment of Mr. Blankenship to the position of Senior Clerk in the Custodian Department at his present salary pending action by the Board on the revised personnel classification plan. "In view of the statements contained in your letter and pending action on the revised personnel classification plan, the Board approves the continuance of the temporary assignment of Mr. Blankenship to the above mentioned position without reduction in salary." Approved unanimously. Letter to Mr. McKinney, President of the Federal Reserve of Dallas, reading as follows: "This refers to your letter of October 8 with respect to the views of your board of directors in regard to the advisability of reducing the number of directors of each Federal Reserve branch bank from seven to five. "You will recall that this subject was discussed at the last Presidents' Conference and that the Conference voted Ito recommend to the Board of Governors that the number of directors at the branches, whether five or seven, and the inclusion of or exclusion from the board of the Manager of the branches, be left to the discretion of each individual Federal Reserve bank.' While this matter has received some consideration since the presidents' Conference the Board has taken no formal action thereon. Your letter, however, has been brought to the attention of the Board." Approved unanimously. 1948 10/27/36 -4- Letter to Mr. Walter Lichtenstein, Secretary of the Federal Advisory Council, Chicago, Illinois, reading as follows: "In response to your recent letter making inquiry as to topics which might be suggested by the Board for consideration by the Federal Advisory Council at its next meeting in November, I am sending you herewith thirteen copies of a memorandum of questions relating to the definitions of the terms 'interest' and 'savings deposits' in the Board's Regulation Q. It will be appreciated if you will furnish each member of the Council one copy at your earliest convenience." Approved unanimously. The memorandum inclosed with the above letter was in the following form: "DEFINITION OF 'SAVINGS DEPOSITS', SUBSECTION (E) OF SECTION 1 OF REGULATION Q. "Section 19 of the Federal Reserve Act, as amended, provides that the Board is authorized, for the purposes of Section 19, to define the term 'savings deposits'. Pursuant to this authority, the Board's Regulation Q, as revised effective January 1, 1936, section 1, subsection (e), provides in part: "The term "savings deposit" means a deposit, evidenced by a pass book, consisting of funds (i) deposited to the credit of one or more individuals, or of a corporation, association or other organization operated primarily for religious, philanthropic, charitable, educational, fraternal or other similar purposes and not operated for profit, or (ii) in which the entire beneficial interest is held by one or more individuals or by such a corporation, assoetc. ciation or other organization, "The authority granted to the Board by Congress was to enable the Board to correct certain well recognized and unsound banking practices, which had grown LID in connection with savings deposits. The Board's problem was the formulation of a definition consistent with the term 'Savings deposits', which would prevent or minimize these unsound practices and at the same time conform to the intentions of Congress in enacting the provisions of law which relate to this subject. 1949 10/27/36 -5- "The Board's Regulation Q, in the form which became effective August 29, 1933, contained the following definition: "The term "savings deposit" means a deposit which consists of funds accumulated for bona fide ' etc. thrift purposes and in respect to which of the because ory found unsatisfact This definition was on to numerous questions necessity of giving considerati which banks felt should be submitted for special rulings. Difficulties of interpretation are also arising constantly under the present definition. "A solution of the problem may be found by narrowing the definition or by making it more liberal, and the Board is considering two proposed rewordings of this definition. Mile it appears that the Congressional purpose has been substantially carried out in the statute and the Board's regulation, it is apparent that some further clarification of the definition of the term 'savings deposit' would be of assistance in eliminating such differences in banking practice as may now exist and in preventing evasions whether intentional or unintentional. The Council is asked to consider these revisions and to express to the Board any views it may have concerning them. It is believed that both will require explanatory footnotes, as does the existing definition. The Council is invited to offer other solutions of the problem. The regulation should be as simple and clear as possible and should avoid a definition which will lead to the necessity for numerous requests for special rulings. Copies of the two proposed revisions are attached. "DEFINITION OF 'INTEREST', SUBSECTION (F) OF SECTION 1 OF REGULATION Q "Section 19 of the Federal Reserve Act, as amended, provides that the Board is authorized, for the purposes of section 19, to determine what shall be deemed to be a payment of interest and to prescribe such rules and regulations as it may deem necessary to effectuate the purposes of the section and to prevent evasions thereof. "The section further provides that no member bank shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand. There are certain exceptions provided in the section which are not in point in connection with the questions which are hereinafter addressed to the Council. "Subsection (0 of Section 1 of the Board's revised 10/27/m -6- "Regulation Q which became effective January 1, 1936, provides as follows: "'The term "interest" means a payment, credit, service or other thing of value which is made or furnished by a bank as consideration for the use of the funds constituting a deposit and which involves the payment or absorption by the bank of out-ofpocket eXpenses (i.e., expenses arising out of specific transactions for specific customers and definitely attributable to such transactions as distinguished from overhead and general operating expenses), regardless of whether such payment, credit, service or other thing of value varies with or bears a substantially direct relation to the amount of the depositor's balance. "The term 'interest' includes the payment or absorption of exchange and collection charges which involve out-of-pocket expenses, but does not include the payment or absorption of taxes upon deposits whether levied against the bank or the depositor nor the payment or absorption of premiums on bonds securing deposits where such bonds are required by or under authority of law. "Notwithstanding the foregoing, the payment or absorption of isolated items of out-of-pocket expense in trivial amounts and not of a regularly recurrent nature, where the charging of such items to customers would cause undue friction or misunderstanding, will not be deemed to be a payment of interest, provided that the bank acts in good faith and does not utilize the absorption of such items as a basis for soliciting accounts or obtaining an advantage over competitors and provided further that the bank maintains and makes available to the examiners authorized to examine the bank a record showing the amounts of such items paid or absorbed by it, the dates of such payment or absorption, and the names of the customers for whom such items were paid or absorbed.' "On December 28, 1935, the Board deferred the effective date of this subsection until such date as might be fixed by further action of the Board. This was done because it was learned that the Federal Deposit Insurance Corporation was about to issue its Regulation IV, relating to the payment of interest on deposits by insured nonmember banks, containing a definition of interest which omitted the statement that the absorption of exchange and collection charges constituted a payment of interest. In view of the fact that 1951 10/27/36 "Regulation IV was issued under a statutory provision (section 12B(v)(8) of the Federal Reserve Act) very similar to the provision of section 19 under which Regulation Q was issued, the Board felt that it would be desirable to obtain uniformity in the two regulations and, consequently, made an effort, which has thus far been unsuccessful, to obtain such uniformity. The Board still has before it the question what action it should take regarding the suspended definition of interest in Regulation Q, and would like to obtain the views of the Council on certain questions which have come to its attention in the consideration of this definition. For the ourpose of answering these questions at this particular time, the Council may assume that the two definitions will not be more nearly uniform than they were when originally issued. The Council, therefore, is asked to express its views on the following questions: "1. If made operative, what effect, if any, would the Board's definition of interest have on: (a) Membership in the Federal Reserve System? (b) Correspondent bank relationships? "2. Assuming for the purpose of the question in this paragraph that the prohibition against the payment of interest on demand deposits is in the interest of sound banking practice, does the Council feel that the Board's definition of interest would effectuate the purposes of the statutory provision that such interest shall not be paid, directly or indirectly, by any device whatsoever? o. Two opposing views have been presented to the Board on one question connected with this definition. It has been stated that making the definition effective will cause non-member banks now remitting at par to leave the par list, thus increasing the cost of banking service to the Public. It has also been stated that it will have exactly the opposite effect, and that non-par banks would be forced to remit at par and such banks would be deprived of an important source of revenue. The views of the Council are asked as to which, if either, of these suggested consequences they would anticipate if the definition were made effective. 1952 10/27/36 -8- "4. It has come to the attention of the Board that some nonmember banks have withdrawn or are contemplating withdrawal from the par list in order to obtain additional revenue from exchange and collection charges. The Board would appreciate the Council's comments as to the extent to which member banks are bidding competitively for accounts of banks or others on the basis of the absorption of exchange and collection charges and its opinion on the question whether the making effective of the definition of interest contained in Regulation Q would correct this situation or whether the Board should take some additional action. "In submitting the above questions to the Council, the Board does not intend to limit the Council's views to the questions asked, but will appreciate any views which the Council cares to express on any phase of the subjects referred to." Letter to Mr. Clark, Vice President of the Federal Reserve Bank of Atlanta, reading as follows: "Reference is made to your letter of October 8, 19361 transmitting detailed reports of the activities of the Bank and Public Relations Department of the Federal Reserve Bank of Atlanta for the month of September, 1936. It is assumed that the information furnished the Board is in the form which your bank finds most valuable, particularly for reference purposes. Mille such detailed information is helpful in reviewing conditions affecting individual cases, it is not necessary for the Board's purposes. In its letter of August 25, 1936 (X-9680), the Board assumed that, aside from any detailed individual report on each bank visited, the officers and other representatives of your bank would customarily make narrative resumes of the information as a whole gathered during their trips. It was the thought of the Board that it would find copies of such resumes helpful to it. "As stated in the full paragraph in the middle of the second page of its letter of August 251 it was thought that these reports would cover criticisms and comments, favorable or unfavorable, with respect to the Federal Reserve banks or the Board of Governors; the attitude of member and nonmember banks toward membership and the System generally; reasons given by nonmember 1953 10/27/36 "banks for not joining the System; any suggestions which would be of interest to the Board or which would tend to improve the System or its relations with the banks and the public; and suggestions or criticisms made by bankers or others during visits to the Federal Reserve banks. As also stated in the Board's letter, these reports need not follow any set form, but it is felt that the information will be helpful if presented so as to give the Board a general picture of conditions in the different districts and of the attitude of bankers toward the System. "The Board will appreciate it if you can arrange in future to send it one such report covering each month's activities, instead of the individual reports on each bank, such as were inclosed in your letter of October 8." Approved unanimously. Letter to Mr. Powell, Vice President of the Federal Reserve Bank of Minneapolis, reading as follows: "Receipt is acknowledged, with thanks, of your letter of October 19, 1936, inclosing copies of the first three of a series of bi-weekly lectures on Federal reserve operations which your officers and department heads are delivering to the staff of your bank and copies of which are subsequently being furnished to all members of the staff of your head office and Helena Branch. "The Board regards the educational program undertaken by your bank as a distinct contribution in the furtherance of a better understanding of Federal reserve activities and in the creation of good will toward the System, and it will appreciate receiving manuscripts of the succeeding lectures as they are delivered." Approved unanimously. Memorandum dated October 27, 1936, from Mr. Owens, Assistant Counsel, recommending that there be published in the November issue of the Federal Reserve Bulletin, in the form attached to the memorandum, three rulings of the Bureau of Internal Revenue regarding 1954 10/27/36 -10- the question whether national banks, State member banks, and State nonmember banks, are subject to the taxes imposed under certain provisions of the Social Security Act. Approved unanimously. Letter to Mr. Brice A. Eldridge, Secretary, Bergen County Bankers Association, Hackensack, New Jersey, reading as follows: "Receipt is acknowledged of your letter of October 22, addressed to the Federal Reserve Board, and the article inclosed therewith clipped from the Bergen Evening Record of Tuesday, October 20, entitled 'Common Sense Perverted'. "In view of the fact that member banks of the Federal Reserve System are represented in the membership of your Association, it is believed that your Association has available to it all the necessary information to enable it to take whatever steps may be appropriate to combat misinformation contained in an article of this type and that the advisability and method of attempting to correct such misinformation can best be determined on the ground by your own Association. As you no doubt know, the Federal reserve banks and the Board of Governors publish very full and detailed information regarding the structure and operations of the Federal reserve system and it would not be feasible for the Board of Governors to attempt to answer specifically every article or publication containing misstatements of fact particularly when, as a practical matter, it is likely that persons on the ground are the best judges of the local situation and the manner in which it should be dealt with. "Your courtesy in bringing the publication to the attention of the Board is appreciated and if any publication is made in reply thereto the Board will be glad to receive a copy for its information." Approved unanimously. Thereupon the meeting adjourned. 6.3igo Approved: Chairman. r Secretary.
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