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2212 A meeting of the Board of Governors of the Federal Reserve System was held in Washington on Wednesday, October 50, 1955, at 11:10 a. in. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Thomas, Vice Chairman Hamlin Miller James Szymczak 0/Connor Mr. Mr. Mr. Mr. Mr. Morrill, Secretary Bethea, Assistant Secretary Carpenter, Assistant Secretary Clayton, Assistant to the Chairman Wyatt, General Counsel (last part of meeting) Mr. Szymczak referred to the letter dated June 12, 1955, from Mr. Curtiss, Federal Reserve Agent at the Federal Reserve Bank of Boston, on which action was deferred at the meeting of the Board on October 25, 1935, with regard to the question whether certain agency accounts in the foreign clePtIrtment of the Industrial Trust Company, Providence, Rhode Island, are dePoEits rithin the meaning of section 19 of the Federal Reserve Act. He stated that he had discussed the matter with Mr. Wyatt, General Counsel, krid suggested that Mr. Wyatt be called into the meeting to outline the °(Insiderations on which the opinion of his office was based that such kccoUnts should be treated as deposits. During a discussion of the P°Bsible effects of a ruling by the Board that funds in such accounts are 11°t deposits, Mr. Szymczak stated that Mr. Wyatt felt that such a ruling lint result in attempts by banks by the adoption of similar devices, to de the provisions of section 19 vith regard to reserves and the payment °t interest on deposits. Mr. Hamlin stated that his discussions tith the qtleers at the Federal Reserve Bank of Boston indicated that they felt 1*Y strongly that the funds in the accounts were not deposits and that to 22:13 10/30/35 -2- rule that they were deposits would have a serious effect on the foreign exchange business of banks. Mr. Wyatt was called into the meeting and, after outlining briefly the procedure followed by the Industrial Trust Company in handling such "counts, stated that Mr. DuBois, Assistant Counsel, had gone into the tatter thoroughly in order to determine whether such accounts are deposits, truct funds or agency accounts and that, while he (Mr. Wyatt) did not have fresh in his mind all of the technical questions involved, he felt that the Board had the authority under the law to define deposits and to prescribe . such rules and regulations as it may determine necessary to effectuate the PlIrPoses of section 19 and to prevent evasions thereof; that, as a practical instter, if the Board should rule that such accounts are not deposits it would establish a precedent under which other banks might attempt to diegUise deposits as trust accounts in order to evade the restrictions on the 131Ytent of interest on deposits; and that this might become a very imP13rtant consideration rhen active competition for deposits again develops. Ile added that he doubted that it was a particularly vital matter, however, the reason that if abuses of the kind referred to developed, the Board If°141c1 have the necessary authority to issue regulations to enforce the provisions of section 19, but that the reason for his position was that it ll'olad be more difficult to stop the abuse than to prevent its development. turi -rig the course of the discussion, Mr. Miller inquired whether there was evidence of bad faith so far as the classification of the accounts Was e°11leerned, and it was pointed out that there was a large Italian population 14 Providence which apparently desired to hold funds in lira and that the 2214 10/30/35 accounts evidently represent bona fide foreign exchange transactions. Mr. Thomas stated that he did not concur in the proposed letter pre— Pared by Counsel nor the opinion of Counsel in support thereof, for the reason that the transactions provided for in the contract submitted with the inquiry do not result in a debtor—creditor relationship between the benk and the customer, but on the contrary, the contract provides that the fund in which the client's money is invested continues to belong to the Client; that the bank acts only as agent, makes the investment at the sole risk of the client, and is discharged from liability when it makes delivery to client of draft on its foreign correspondent. At the conclusion of the discussion, Mr. Hamlin moved that counsel be requested to pre— pare a letter to Mr. Curtiss, Federal Reserve Agent at the Federal Reserve Bank of Boston, ad— vising that, on the basis of the information be— fore it, the Board does not consider the accounts in question as being deposits within the meaning of section 19 of the Federal Reserve Act and re— questing, for the reason that deposit relations might be created by mingling the funds in the accounts with the general assets of the bank, that the Federal Reserve Agent keep in close touch with the manner in which the bank handles the accounts. Carried unanimously. The Chairman stated that the Committee on District No. 10 (Messrs. 111°mas and James) had submitted a renort dated October 25, 1935, in 174tch it was stated that, after reviewing the files with regard to the kssible removal of Mr. Frank W. Sponable as a Class A Director of the Picleral Reserve Bank of Kansas City, the committee found no just cause tcl* removal, and recommended that the Board take no action. Mr. Thomas stated that he had discussed -the matter with Governor 2215 1 10/30/35 _A_ Hamilton of the Federal Reserve Bank of Kansas City when he was in Washington recently, and that the files contained a very complete report from Mr. McAdams, Assistant Federal Reserve Agent at Kansas City, on the matter, which was the principal basis for the committee's recommendation. It was pointed out that the matter was brought to the Board's attention in a telephone conversation between the Chief Examiner of the Office of the Comptroller of the Currency and the Board's Division of Examinations in which the Chief ExAminer stated that serious consideration was being given to taking action, under the provisions of Section 30 of the Banking Act of 1933, for the removal of Mr. Spoilable as a director of the Miami County NationAl Bank of Paola, Kansas; that following the telephone conversation the criticisms set forth in the reports of examination of the national bank were summarized by the Board's Division of Examinations in a memorandum addressed to Chairman Eccles under date of August 1, 1935, and that a report was received from the Assistant Federal Reserve Agent at Kansas City under date of August 27, 1935. The last two paragraphs of the report from the Assistant Federal Reserve Agent, which were read at the meeting, were as follows: "I have discussed this whole matter with Mr. I. D. Wright, Chief National Bank Examiner, and we concur in the belief that Mr. Sponable and his directors are sincere in their assurances that there will be no further legal violations and that every effort will be made to place the bank in good condition. "We concur also in the belief that the examiner's criticisms were somewhat over-emphasized, due to the attitude 2216 10/30/35 -5- "of Mr. Sponable's son, who has not been on good terms with his father for the past year or so, and whose resignation as vice president of the bank was requested shortly before the date of examination. In the report of examination the exPriner stated that the reemployment of the son was of vital importance to the bank, but after subsequent conferences with the directors and after further investigation the examiner and the Chief National Bank Examiner became convinced that such reemployment would be harmful to the bank unless a complete reconciliation of the differences between father and son can be accomplished." The question was raised as to whether, if the report of the Committee were adopted, the Board should take action reprimanding Mr. Sponable. It was stated, during the discussion, that there were two questions involved in the case; first, whether the Board should take action to remove Mr. Sponable as a director of the Federal Reserve Bank of Kansas City, and, second, whether the Comptroller of the Currency should proceed under the provisions of Section 30 of the Banking Act of 1933 to effect the removal of Mr. Sponable as a director of the national bank. In this connection it was pointed out that the Office of the Comptroller of the Currency had not certified the facts in the case to the Board under Section 30 and that, therefore, the question of Mr. Sponable's removal as a director of the national bank was not before the Board for consideration. Mr. O'Connor moved that it be the sense of the Board that: 1. In view of the fact that the Comptroller of the Currency had not made a recommendation to the Board with regard to the removal of Mr. Sponable as a director of the national bank, the Board did not feel that that matter was before it for consideration, and 2. The Board, having had its attention called to the criticised actions 10/30/65 -6of Mr. Sponable and having considered the matter largely on the basis of the report from the Assistant Federal Reserve Agent did not find, on the basis of the information available, sufficient justification for removal of Mr. Sponable as a director of the Federal Reserve Bank. Carried unnnimously. Mr. Miller referred to the statement contained in the Federal Reserve Agent's letter that Mr. Sponable and his directors had given assurance that there would be no further violations of law and that every effort would be made to place the bank in good condition and he suggested that, in replying to Mr. McAdams' letter, the Board state that it was willing to accept these assurances and, on the strength thereof, would take no further action in the matter at this time. The Secretary was requested to prepare a letter to the Assistant Federal Reserve Agent at Kansas City in accordance with Mr. Miller's suggestion. The Chairman then called attention to a memorandum from Mr. Wyatt dated October 19, 1955, in which he stated that a copy of agreement to be entered into by the Federal Reserve Bank of New York With the Banco Central de la Republica Argentina covering the opening and maintenance of an account by the New York bank with the foreign bank, which was inclosed with the letter received by the Board from Mr. Sproul, Assistant to the Governor of the Federal Reserve Bank of New York under date of October 7, 1935, had been checked by counsel's Office and found to be within the terms of the Board's letter of 2218 10/30/35 -7- September 271 1935, authorizing the New York bank to open and maintain an account in the name of the Banco Central de la Republica Argentina. The memorandum also stated that, in view of the responsibilities placed upon the Board of Governors by Section 14(g) of the Federal Reserve Act, it was Mr. Wyattts opinion that the terms of an agreement of the kind referred to should be submitted to the Board's counsel before, rather than after, such terms are forwarded in firP1 form to the foreign bank. Governor Eccles stated that it appeared to him that to adopt a procedure along the lines suggested would be unnecessary and might be irritating to the Federal reserve banks, and that the procedure now being followed in connection with such accounts, which had been in effect for sometime was adequate to enable the Board to discharge its responsibilities under the law. He pointed out that, if at any time an agreement were found not to be in accordance with the authority granted by the Board to the Federal reserve bank, steps could be taken to have the necessary correction made. Mr. Wyatt said that his memorandum had been addressed to the Secretary's office and that he had hot intended it as a matter which should be brought to the attention of the Board. It was stated, in explanation of Mr. Wyatt's statement that when Mr. Sproul's letter was received, Mr. Carpenter, Assistant Secretary, took up with Mr. Wyatt the question whether he desired to aee the letter and inclosure before it was brought to the attention of the members of the Board and that Mr. Wyatt had stated that, as the 22:19 10/50/35 -8- agreement was in final form, his office could take no action in the matter, and that, therefore, the letter should be sent to his office after having been circulated among the members of the Board; that this procedure was followed; and that, when his memorandum was received expressing an opinion on a matter of policy it was brought to the Board's attention for consideration. Mr. O'Connor stated that he felt it was important that the Board's counsel should review an agreements of the kind referred to and call the Board's attention to any matters in connection with which a legal question might be raised. Mr. O'Connor moved that no change be made at this time in the procedure followed by the Board in connection with authorizing the Federal Reserve Bank of New York to open accounts for foreign central banks. Carried unanimously. The Chairman referred to several cases now pending before the Board which involve the question whether, for the purpose of admission of a bank to membership in the Federal Reserve System, a bank's capital would be considered as being impaired where the bank had obtained from depositors a waiver of deposits and had issued certificates in the amount of the waived deposits which required the payment of the certificates before dividends to stockholders of the bank were paid, and gave the certificate holders a priority over the claims of stockholders in case of liquidation, consolidation, etc., and where, if the 61,431)(1, Aroll.r.A. lo/o/35 -9- claims of the certificate holders were considered as liabilities of the bank, the bank's assets, exclusive of its capital, would not be sufficient to meet its liabilities. He stated that the suggested amendment to the law, which would have authorized the Board to waive requirements for membership in the Federal Reserve System, was not adopted except as to nonmember banks which during the calendar year 1941 or any succeeding calendar year shall have average deposits of one million dollars or more, so that the Board was without authority at this time to waive the capital requirements for membership in the System. He stated that the admission of a number of banks to membership was dependent upon a determination by the Board of the question whether or not banks in the circumstances referred to would be considered as having an impaired capital; that a letter had been received recently from the Federal Reserve Agent at Chicago urging a decision by the Board in the matter; and that it was felt that the Board should reach a conclusion on the question involved as soon as possible. It was agreed that the matter should be given consideration at the next meeting of the Board and, at the request of Mr. O'Connor, counsel was requested to prepare a brief memorandum, for consideration of the members of the Board prior to the next meeting, stating the problem presented and the facts involved in each case now before the Board. Messrs. O'Connor and Wyatt left the room at this point and the Board then acted upon the following matters: Memorandum dated October 25, 1935, from Mr. James submitting a letter dated October 17 from Mr. Larson, Assistant Cashier of the Federal 2221 10/50/35 -10- Reserve Bank of Minneapolis, which requested approval of a number of changes in the personnel classification plan of the bank. The memo- randum stated that it appeared from the statements in Mr. Larson's letter and from the Form A pages attached thereto, that the proposed changes were principally due to the discontinuance of the central stenographic section, the elimination of the industrial loan department and the transfer of the work previously handled in that department to the Loans, Rediscounts, and Acceptances Department, and the creation of a new department to handle work relief checks. The memorandum also stated that Mr. James had reviewed the proposed changes and recommended that they be approved. Approved unanimously. Memorandum dated October 22, 1955, from Mr. James submitting a letter dated October 9 from Mr. Walsh, Chairman of the Federal Reserve Bank of Dallas, which requested approval of several changes in the personnel classification plan of the bank and its branches. The memorandum stated that Mr. Walsh's letter advised, in regard to the two Changes involving increases in salary ranges, that the increase in range provided for the position of Chief Guard was the result of a reorganization of the guard force at the head office and the employment of a retired army major as Chief Guard, and that the salary range Provided for the position of Chief of the Collection Division at the Houston Branch was increased in order to put the classification of this position on a parity with other jobs of similar responsibility. 2222 10/30/55 -11- The memorandum also stated that Mr. James had reviewed the proposed changes and recommended that they be approved. Approved unanimously. Letter to the board of directors of "The Reading Trust Company", Reading, Pennsylvania, stating that, subject to the conditions prescribed in the letter, the Board approves the bank's application for membership in the Federal Reserve System and for the appropriate amount Of stock in the Federal Reserve Bank of Philadelphia. Approved unanimously, together with a letter to Mr. Austin, Federal Reserve Agent at the Federal Reserve Bank of Philadelphia, reading as follows: "The Board of Governors of the Federal Reserve System approves the application of 'The Reading Trust Company', Reading, Pennsylvania, for membership in the Federal Reserve System, subject to the conditions prescribed in the inclosed letter which you are requested to forward to the board of directors of the institution. Two copies of such letter are also inclosed, one of which is for your files and the other of which you are requested to forward to the Secretary of Banking for the Commonwealth of Pennsylvania for his information. "Under condition of membership numbered 22, it is expected that the bank will charge off or otherwise eliminate losses incurred in the settlement of the litigation between the beneficiaries of the Lambert A. Rehr estate and the trust company as reported in Mr. Hillis letter of October 19, 1935. "In accordance with the recommendation of the Reserve Bank Committee, the conditions of membership prescribed require, prior to admission to membership, the reduction of the carrying value of the banking house by not less than f;25,000. A condition of membership setting forth the exact amount of depreciation in banking house to be made in future years, however, has not been prescribed, but condition of membership numbered 19 requires that in the future the bank make adequate provision for depreciation in its banking house and furniture and fixtures. In this connection it is understood that your office and the management of The Reading Trust Company have agreed upon a program of reduction in the carry- 2223 10/30/35 -12- "ing value of the banking house and it is assumed that such a program satisfactory to you will be carried out. The revision of the condition of membership pertaining to depreciation on bank premises has been discussed with Mr. Hill, who has indicated that the condition as revised is satisfactory to your office." Telegram to Mr. Case, Federal Reserve Agent at the Federal Reserve Bank of New York, authorizing him to issue a limited voting permit to the "Financial Institutions, Inc.", Warsaw, New York, entitling such organization to vote the stock which it owns or controls of "The Wyoming County National Bank of Warsaw", Warsaw, New York, at any time prior to December 51, 1935, to act upon a proposal or proposals to create and issue common and/or preferred stock and to reduce common stock, and to make such amendments to the articles of association, charter and/or by-laws of such bank as may be necessary for such purposes, such proposal or proposals to be in accordance with a plan or plans which shall be satisfactory to the Federal Reserve Agent at the Federal Reserve Bank of New York, and which shall have been approved by the appropriate supervisory authorities. The telegram also stated that the Board has accepted the agreement executed by the applicant under date of October 24, 1955, two executed copies of which had been received, and that, accordingly, no conditions had been imposed by the Board. Approved unanimously. Letter to Mr. Walter Lichtenstein, Secretary of the Federal Advisory Council, prepared in accordance with the action taken at the meeting of the Board on October 21, 1935, and reading as follows: 2224 -13- 10/30/35 "At the meeting of members of the Board of Governors of the Federal Reserve System with the Federal Advisory Council on September 24, 1935, the Council submitted to the Board a statement reading as follows: 'The Federal Advisory Council wishes to call the attention of the Board of Governors of the Federal Reserve System to the existence in the system of large amounts of Government bond holdings which have not varied for a long time. The whole theory of open market operations is to have sufficient flexibility to prevent undue expansion and contraction in the credit structure of the country and this may become impossible if the amount of Government bond holdings by the Federal reserve system is allowed to become a constant quantity. The Council would like to know whether the Board agrees with the principle here enunciated.' "The statement has been presented at a meeting of the Board and I have been requested to advise the Council through you that the Board is fully cognizant of the necessity for the consideration of the factors referred to in the statement as elements in the determination of open market policy. "Other factors and considerations besides those mentioned in the Council's memorandum must also be weighed, if a wellconceived and well-adjusted open market policy for the Federal Reserve System is to result. These further factors and considerations have the constant attention of the Board's Division of Research and are the subject of frequent review by the Board and also by the Federal Open Market Committee. "If the Council has any proposals to make with respect to the operation of the open market account of the Federal Reserve System, which it believes to be pertinent in the existing situation, all factors considered, the Board will, as in the past, be glad to receive them and consider them." Approved unanimously. Memorandum dated October 28, 1935, from Mr. Smead, Chief of the Division of Bank Operations, recommending approval of a change from three days to two days, in the inter-district time schedule for cash items between New York and Kansas City. The change had been requested by the Federal Reserve Bank of New York and agreed to by the Federal Reserve Bank of Kansas City. Approved unanimously. 2225 10/30/35 -14- Telegram to Governor Newton of the Federal Reserve Bank of Atlanta, reading as follows: "Your telegram October 28. Board interposes no objection to your bank making arrangements with Second ExportImport Bank of Washington for delivery of and payment for 100000,000 Cuban pesos to be coined for Cuban government at Philadelphia mint. It is assumed that if any portion of payment by Cuban government is in American coin arrangements will be made to reimburse your bank for shipping charges to United States. Please forward to Board statement of details of transaction as finally arranged with Export-Import Bank." Approved unanimously. Letter to the governors of all Federal reserve banks, reading as follows: "As indicated in the minutes of the Personnel Classification Plan Conference held in Chicago on April 17, 1935, pursuant to the Board's letter, B-1071, of April 1, 1935, certain topics on the program of that conference were referred to a sub-committee consisting of Mr. J. S. Walden, Jr., Deputy Governor, Federal Reserve Bank of Richmond (Chairman), Mr. W. W. Paddock, Deputy Governor, Federal Reserve Bank of Boston, and Mr. L. F. Sailer, Deputy Governor, Federal Reserve Bank of New York. "At the request of Mr. O. M. Attebery, Deputy Governor, Federal Reserve Bank of St. Louis, who was chairman of the Chicago conference, the sub-committee has submitted its report, dated October 15, 1935, direct to the Board. Two copies of the report are inclosed. "It will be appreciated if you will furnish the Board at an early date with any comments or suggestions that you may care to make in regard to the report in order that the Board may have your views with respect thereto before it takes formal action on the report." Approved unanimously. Thereupon the meeting adjourned.
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