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1413 A meeting of the Board of Governors of the Federal Reserve Syswas held in Washington on Tuesday, October 8, 1946, at 10:35 a•rn• PPESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Draper Evans Vardaman Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Chairman Parry, Director of the Division of Security Loans Vest, General Counsel Thomas, Director of the Division of Research and Statistics Leonard, Director of the Division of Examinations Nelson, Director of the Division of Personnel Administration Tolmsend, Assistant General Counsel Chairman Eccles stated that following the meeting of the Board On Allguet 20, 1946, at which there was a discussion of the question Mether the National Labor Relations Act applied to the Federal Reserve Banks: he had a further telephone conversation with Mr. Herzog, Chairman f the National Labor Relations Board, as a result of which the latter agreed that further consideration of the question should be held until rte./. he (Chairman Eccles) returned from the West. He also said that l'eeentl,Y he had received a request from Mr. Herzog for a further contoren, 'e on the matter, that he had replied that he would try to meet this reek on the matter, and that in the meantime there had been a c°171ience attended by Mr. hansom and attorneys for the Board of 1414 10/8/46 -2- Governors and the National Labor Relations Board, the substance of Which would be reported by Mr. Vest. Ur. Vest stated that Mr. Ransom, Mr. Townsend and he met with Mr* VanArkel, General Counsel, and another attorney from the National Labor Relations Board on September 30, at which time it was stated that the Labor Board had not reached a decision as to the application of the National Labor Relations Act to the Federal Reserve Banks, and the impression was gained by the representatives of the Board at that eMference that there was at least some chance that the decision of the Labor Board would be that the Act did not apply. The attorneys for the Labor Board, Mr. Vest said, were interested in discussing what the Procedure would be in the event the decision of the Labor Board was that the Act did apply, and had stated that the Labor Board was faced not °44 with the legal question, but also whether it should decline to take jurisdiction in the matter because of considerations of policy. vest also said that it appeared from the discussion that there were three possible courses available to the Labor Board, (1) a ruling that the Act did or did not apply, (2) a decision by the Labor Board that it would not take jurisdiction in the matter, and (3) to let the cas_ take its usual course, in which event there mould be an election at the Federal Reserve Bank of Dallas to determine whether the labor Unto , - represented the majority of the employees, and in the event it did) the Federal Reserve Bank would decline to bargain with repre- 1415 10/8/46 -3- set-tives of the union, which would constitute an unfair labor practice an would form a basis on which the question of the applicability of the National Labor Relations Act to the Federal Reserve Banks could be taken to court, either by the Federal Reserve Bank or the labor union. Mr. Vest went on to say that the representatives of the Labor Board sug— gested the possibility of a stipulation of the facts by the labor union ahd the Federal Reserve Bank of Dallas on the basis on which the matter Could be considered by the Labor Board, but that it was felt that a forma record of that kind would not produce any additional information that not available in the briefs already filed. Mr. Vest added that the specific question for consideration by the Board of Governors was whether it wished to suggest any procedure Other than that the case follow the normal course in the event the Labor Board should decide that the Act was applicable, and that it was the NA 4vv of himself and Mr. Townsend that one or more of the members r the Board of Governors should meet with members of the National Labor Relations Board for the purpose of attempting to persuade the latter that nothing would be gained by placing the question in the eciurts for the reason that the employees of the Federal Reserve Banks were relatively very few in number, the docket of the cases of the Lab° r Board was already very far behind, and nothing would be gained br the labor union in the event it was held by the courts that the Act WaS aPPlicable to the Reserve banks. 1416 10/8/46 In the discussion which ensued there was general agreement that nothing would be gained by an undertaking to stipulate the facts in the case. Chairman Eccles stated that he had stated to the Chairman of the Labor Board that, in his opinion, nothing would be gained by litieetion of the Question involved, that the Board would carry the case to the Supreme Court if necessary, and that even if the decision were against the Federal Reserve Bank, the labor union would have gained n°thing for the reason that the Federal Reserve Bank was without au thority to make binding agreements regarding salaries of its emnloyees as all salaries were subject to the approval of the Board, and that if -“Y contmversy with resnect to salaries were carried to a point Where there was a strike at a Federal Reserve Bank it undoubtedly w°uld result in legislation by Congress to make it clear that the Federal Reserve Banks were part of the United States for the purposes the National Labor Relations Act. It was possible, he said, that Congress in order to bring that about might see fit to redeem the stock of the Federal Reserve Banks so as to make it clear that the ownership °f the Reserve banks rested with the United States Government. During the course of a discussion Chairmen Eccles suggested that he advise the Chairman of the National Labor Relations Board that the Board of Governors had considered the matter carefully and was unan- 1111°1181Y of the opinion (1) that the Labor Board should find some way of 1417 10/8/46 -5- aliQiding the necessity of having the question taken into the courts, and should recognize that it would be a service to the labor unions to prevent the litigation of a question which the unions could not mgardless of the court decision, as the ultimate outcome would clilY be an amendment to the law to make it clear that the Federal Reserve Banks were a part of the United States, and (2) that if the Labor Board were not willing to follow that suggestion the only other alternative would be to let the matter take the normal course in which case at the proper time the Federal Reserve Bank of Dallas would refuse to bargain with the labor union. Mr. Vardaman enquired whether, if the question of an election arose, the Federal Reserve Bank of Dallas should not refuse to permit the election in order to avoid any question of submitting to the jurisclicti°n of the National Labor Relations Act. Messrs. Vest and Townsend tated the reasons why, in their opinion, the question of jurisdiction eculd not be tested in the courts until it was determined by an election that the labor union represented a majority of the employees of the Bank arid. the Bank refused to bargain with the union. It was agreed during the discussion that the question whether 841 election should be permitted on the premises of the Dallas Bank was clie that should be left to the Board of Directors of the Bank for decision. 1418 10/8/46 —6— At the conclusion of the discussion it was agreed unanimously that in the forthcoming conference with the Chairman of the National Labor Relations Board the position of the Board should be stated by Chairman Eccles as suggested by him at this meeting. Under date of October 4, 1946, Mr. C. F. 14ente, Senior Vice ?resident of Bank of America National Trust and Savings Association, San Francisco, sent a letter to each of the members of the Board of Governors, enclosing a cony of a letter which the bank sent under date Of October 3 to the Federal Reserve Bank of San Francisco, requesting that the Reserve Bank send to the national bank a nomination certificate similar to that sent to other member banks in group 1 in order that the national bank might enter a nomination in the coming election Of a Class A director of the Federal Reserve Bank. A nomination certificate had not been sent to the national bank for the reason that Tra nsamerica Corporation, a holding company affiliate, had designated the National Bank of Tacoma, Washington, as the affiliated bank in gl ' °1-1P 1 which would participate in the nomination and election of Class A and E directors of the Federal Reserve Bank of San Francisco, therefore, under the provis5ons of section 4 of the Federal Reserve Act the Bank of America National Trust & Savings Association, was not atit horized to participate in the nomination or election. In its letter Of October 3, 1946 the national bank took the position that it was not affiliated with Transamerica Corporation, and, therefore, was author- 1419 1°/8/46 —7— 'zed to parLiciate in the election. A copy of the letter from the national bank was forwarded to the Board by First Vice President Earhart of the Federal Reserve Bank of San Francisco with a letter dated October 5, 1946, in which he said that the Board's wire of October 1, 1946, stating that the Board had not changed its position ia the matter had been received, but in view of the national bank's written request for a nomination blank, further instructions by wire would be appreciated. The matter was considered in the light of the decisions of the Board in November 1943, and May and October 1944, that Transwas a holding company affiliate of the national bank, and having designated another bank to participate in the election of directors by banks in group 1, Bank of America was not authorized to part icipate. It was stated that while it might be true that Transamerica did not own a majority of the stock of the national bank, it was clear that it controlled in one way or another the election of a majority of the directors of the bank, and therefore e°fltinued to be a holding company affiliate of the bank. Mr. Townsend stated that the letter of October 4, 1946, frelll Bank of America, which was addressed to each of the members of the Board by registered mail, return receipt requested, was an indication that the bank probably would carry the case into the courts, and that, therefore, the Board should consider whether in the event 1420 10/8/46 of —8— a law suit it would be possible to prove that Transamerica did in fact control the election of a majority of the directors of the national bank. This question was discussed and Chairman Eccles suggested that if the affiliation did in fact continue, it should be subject to demonstration on the basis of the information that had been collected by the examiners for the Federal Reserve Bank of San Francisco and the Board. At the conclusion of the discussion, it was agreed unanimously that no action would be taken by the Board in the matter until Messrs. Vest and Townsend had had an opportunity to consider the question which Mr. Townsend had raised, it being understood that when that had been done counsel would submit a recommendation to the Board as to the action to be taken. In taking this action it was also understood that Mr. Earhart would be advised by wire that the matter presented in his letter of October 5 was having consideration and he would be advised as soon as practicable. At this point Mr. Townsend left the meeting. Chairman Eccles stated that under date of September 30, 1946, he, -, 'ceived a letter from Mr. Caldwell, Chairman of the Federal Reserve bank of Kansas City, and Chairman of the Chairmen's Conference, stating that the executive committee of the Conference would meet in Washington t1 October 14 to arrange the program for the next meeting of the Chairmen 1421 10/8/46 —gwhich it was contemplated would be held in Washington within approximately two weeks from that date. The letter, Chairman Eccles said, requested that he, or some other member of the Board whom he might designate, meet with the executive committee for the purpose of al'ranging a program. It was the unanimous view of the members of the Board that a meeting of the Chairmen's Conference should be held and, upon motion by Mr. Vardaman, Mr. Ransom was requested to meet with the executive committee of the Chairmen's Conference for the purpose of working out a program. October 28 and 29 were suggested as the dates of the Conference, with the thought that the procedure followed in connection with the more recent conferences of the Chairmen of having the conference consisting of two morning sessions and a dinner at one of the hotels on the evening of the first day would be desirable. The suggestion was also made that the first session might be devoted to matters of particular interest to the Federal Reserve Banks and the second session to matters of more general interest. Mr. Carpenter stated that following the meeting with the Federal Achrie°rY Council yesterday, inquiry was made by the Acting Secretary of the c °uncil whether it would be agreeable to the Board if the executive e°ramittee of the Council met in Washington on November 6, with the Understanding that it would meet with the Board at 12 o'clock noon on that aay. 1422 -10While the members of the Board felt that no objection to the meeting should be raised at this time, the matter of meetings of the executive committee of the Federal Advisory Council between the regular meetings of the full Council should be taken up at the next meeting of the Council and the suggestion made that the interim meetings of the executive committee, which were inaugurated during the war period, were no longer necessary and should be discontinued. In connection with the above matter, Chairman Eccles referred t° the discussion at the meeting of the Board with the Federal Advisory Council yesterday at which a number of questions were asked by the 111‘=Ders of the Council and the members of the Board were more or leee cross-examined with respect to its current policies, particularly eel ective credit controls. Chairman Eccles expressed the opinion that the Present members of the Council were drifting away from the original PUrPose of the Council of making recommendations to the Board and, inStead were using the meetings with the Board to obtain information as tQ the views of the Board in connection with problems currently before it, It was his view that this tendency should be corrected and that, if agreeable to the other members of the Board, he should take the matte? UP with Mr. Brown as President of the Council and say to him that the 80ard felt the Council was drifting away from the purpose for which it " 14 created of making recommendations to the Board, that the Board 1%18 glad to receive the views and recommendations of the Council as l'ePriesentatives of the bankers, that instead of the procedure recently 1423 10/8/46 followed the joint meetings of the Council and the Board should be for the purpose of discussing such recommendations, and that it would be appreciated if in the future the recommendations of the Council were the submitted in writing for consideration at the joint meeting of Council and the Board. Chairman Eccles' suggestion was approved unanimously with the understanding that the changed procedure would not prevent a free discussion with the Council of matters presented by it to the Board. In accordance with the action taken at the meeting of the Board On August 20, 1946, Mr. Draper submitted a memorandum under date of September 301 1946, reading as follows: "In compliance with a request from the Board, this memorandum (prepared on September 30, 1946) reviews developments during recent months which have a bearing on the Board's policy in the field of stock-market credit. It covers in general the 8-month period since the middle of last January when the Board raised its margin requirements to the 100 per cent level. "During that period, the level of stock prices first rose somewhat further, by less than 6 per cent. It then declined sharply--by about 24 per cent. This decline was !-bout as much as the market had risen since August of 4.8-st year, or about one-third as much as it had risen i snce the middle of 1942. The volume of stock-market ?redit has declined continuously and substantially, but ls still about half as large as it was at the prewar peak of stock prices in the spring of 1937. For the year to date, the volume of trading on the New York Stock Exchange has been the largest in about 8 years. Interest rates, hough showing firmer tendencies, continue at record low levels. Corporate profits for the half-year have been down from a year ago. The volume of new corporate security issues has been the largest in many years. Some 1424 10/8/46 -12- "of these developments, particularly the decline in stock Prices, have given rise to the suggestion that the Board's margin recuirements should now be reduced. "During this same period, the volume of industrial production has increased, practically full employment has prevailed, the national income has expanded, consumer expenditures have risen sharply to ne:, high levels, the Public's holdings of liquid assets (already unprecedented) have increased further, and the general level of commodity Prices has risen more rapidly than at any other time in recent years. The rise in commodity prices has reflected in Part, but only in part, the weakening of direct price controls. Inflationary pressures have continued to be strong and are at least as strong at present as at any time since the beginning of the war. None of these dev?lopments suggest that there should be, at the present time, any relaxaticn in the Government's anti-inflation Policies, or in the Board's general credit policy. "Viewing the situation as a whole, it is difficult to be persuaded by the arguments that have been brought forward by proponents of lowering margin requirements. These arguments, which come mainly from brokers and from some, but relatively few, bankers, seem to be open to question. The 'thin-market' argument in particular can be discounted because it is a matter of common knowledge ".11at the market is always thin, on the buying side, when it is declining after a long-continued bull movement, and for some time thereafter. In the autumn of 1929, for example, the market was certainly thin on the buying side even though margin requirements were not subject to 0vernment regulation and were comparatively low. It is Important to note in this connection that in every substantial decline for which we have statistics on margin trading) margin traders have aggravated the decline by selling more than they bought. "Speaking, of course, as only one member of the ! °ard, I believe that to lower margin requirements at uhis time would not be a constructive move. I question also whether it would be in compliance with the letter spirit of the law, which says 'the Board....may, from time to time, .... prescribe such lower margin re‘tuirements as it deems necessary or apr,ropriate for the accommodation of commerce and industry having due regard to the general credit situation of the country (undersupplied).' I am nryself unable to see, as of 'Ile present time, how a reduction in the Board's margin requirements could be justified under this legislative fcrmula. 9 1425 10/8/46 -13- "For all these reasons, my own recommendation would be to take no action by way of lowering the margin requirements at this time but to make plans for reviewing the situation from time to time, as conditions change. I.would also recommend that the Board review the uhole situation again at some specified time -- for example, as Soon as the volume of credit extended by brokers, which at the end of August was at the $725 million level, shall have declined to a new low level. That would be a decline to a figure below the 000 million level, at which it stood at the low point in the summer of 1942, and seems likely to be reached within a few more months." In connection with Mr. Draper's recommendations, reference was fliade to the suggestions made at the meeting of the Board with the Presidente of the Federal Reserve Banks on October 4, 1946, and at the meeting with the Federal Advisory Council yesterday that there be some relaxation of the prohibition in the regulations of the substitution of securities in under-margined accounts and the extension of credit to enable the holders of securities to exercise rights issued to them, and Mrs Draper stated that he had not made a recommendation on these points 4a it was desired to give them further consideration before that was done. The reasons for the present limitations in the regulations with l'eaPect to the substitution of securities in under-margined accounts and the eXtension of credit in connection with the exercise of rights by the °11-gina1 holder were discussed and it was the consensus of the members of the Board that if it were practicable to amend the regulations to cover the latter point that should be done, but that the other amendment proP°8ed by the Presidents should not be made at this time. Upon motion by Mr. Vardaman, Messrs. Draper and Parry uere requested to investigate this matter and to present a recommendation at the next meeting of the Board as to the desirability of such an amendment and if 1426 10/8/46 -14it was felt that some relaxation should be provided by an amendment, what the intent of the relaxation should be. Mr. Vardaman stated that he felt that consideration should he gtby the Board to what its position would be in the event the Charge was made before Congress that the Board had exceeded its authority under the law in eliminating margin trading. It was his thought that the Board should give consideration to the question whether its position would not be stronger if the margin requirewere fixed at some point below 100 per cent. He also suggested that it might be desirable for the Board to point out to the collgress through the proper channels that the Board had no authority over the extension of credit in connection with the purchase of real estate or other commodities, that if it had had such authority it wculd have exercised it to substantially the same extent as its allth°ritY to regulate the use of credit for the purpose of purchasing 44d carrying securities, and that as long as the present situation e°11tinued it was operating to the detriment of listed securities in relation to other forms of investment. A third question raised by 41 '4 Vardaman related to the conditions under which the Board would act to reduce margin requirements. Chairman Eccles stated that in hearings and otherwise the Congress hail been put on notice that the Board had no authority over credit used trl the Purchase of real estate or other commodities and that the Board titer Treted the law as giving it authority to eliminate margin trading, 6° that he did not think the Board could be criticized as having exceeded 1427 10/8/46 —15— its the authority. There was a discussion of the legislative history of provisions of the Securities Exchange Act relating to the questions raised by Mr. Vardaman but no action with respect to them was taken by the Board• At this point Mr. Vardaman left the meeting. Mr. Evans stated that with the approval of the Board, Messrs. Triffin and Grove went to Guatemala in 1945 for the purpose of assisting he Guatemalan Government in a proposed reorganization of the monetary ell(1 banking system of that country and had been instrumental in the draft— ing of a Monetary Law and a Central Bank Law. A draft of a proposed General Banking Law was later submitted to the Guatemalans by Mr. Grove, When he returned to Guatemala in July of this year for a period of six weeks. Following the departure of Mr. Grove, Mr. Evms said, Mr. Prebisch, f"PaerlY of the Central Bank of Argentina, visited Guatemala and after l'elriewing the proposed legislation made a number of suggestions for changes which did not appear to Messrs. Grove and Knapp, of the Board's Divi . elon of Research and Statistics, as being practicable or desirable, 4nd that there was a question whether Mr. Grove should return to Guatemala for the Purpose of assisting in finding a satisfactory solution. Mr. Thomas expressed a view that the changes proposed by Mr. 131'ehisch were in some respects unworkable, that it was widely known that IsePresentatives from the United States had worked on the formulation of the . -glslation, and that if it were adopted with the changes proposed by 4r. p re°3-SCh it might result in a misunderstanding that the representative 8 from the United States had proposed impracticable legislation. 1428 10/8/46 -16Mr. Evans stated that it would be his suggestion that Mr. Grove, in his personal capacity, write a letter to the proper authorities of Guatemala pointing out the proposed changes which it was felt were unworkable and what might be done to correct the situation. It would be understood, Mr. Evans said, that copies of the letter would be sent to he State Department and to the American Embassy in Guatemala. The members of the Board present agreed unanimously that the matter should be handled in this way. At this point Messrs. Parry, Vest, Thomas, Leonard and Nelson withdrew from the meeting and the action stated with respect to each °t the matters hereinafter set forth was then taken by the Board: The minutes of the meeting of the Board of Governors of the Federal Reserve System held on October 4, 1946, were approved unanimously. The minutes of the meeting of the Board of Governors of the Fed' 1 41 Reserve System with the Presidents of the Federal Reserve Banks held on October 4, 1946, were approved unanimously. The minutes of the meeting of the Board of Governors of the Pede ral Reserve System with the Federal Advisory Council held on Octob er 7, 1946, were approved unanimously. Memorandum dated October 3, 1946, from Mr. Bethea, Director of the pg ' 4-vl8ion of Administrative Services, submitting the resignation of George Re Kay, reservation clerk in that Division, and recommending that it be accepted to become effective, in accordance with his request, at the Close of business October 11, 1946, with the understanding that a Ilamn 811111 payment would be made for annual leave remaining to his credit 4 of that date. Approved unanimously. 1429 1O/8/46 -17Telegram to Mr. Gilbert, President of the Federal Reserve Bank cr Dallas, stating that, subject to conditions of membership numbered 1 to 6 contained in the Board's Regulation H, the Board approved the aPPlication of the "Fidelity Bank and Trust Company", Houston, Texas, for membership in the Federal Reserve System and for the appropriate azount of stock in the Federal Reserve Bank of Dallas. The telegram raqueted that the Federal Reserve Bank advise the applicant bank of the 14 -csrd's approval of the application and conditions of membership Prescribed, together with necessary instructions as to the procedure fclr accomplishing membership, and stated that a letter containing detailed advice regarding such approval mould be forwarded to the apal ant bank through the Reserve bank. Approved unanimously. Letter to the "Bank of Syosset, New York", Syosset, New York, arld the "American Bank and Trust Company", Bessemer, Alabama, reading falOWS: "The Board is glad to learn that you have completed all arrangements for the admission of your bank to memberIn the Federal Reserve System and takes pleasure in ' rahsmitting herewith a formal certificate of your membership. . "It will be appreciated if you will acknowledge receipt of this certificate." Approved unanimously. 1430 10/8/46 -LBLetter dated October 7, 1946, to "The National Bank of i.est- field", c/o Westfield Office of the Union Trust Company of Jamestown, 'he stfield, New York, reading as follows: "This refers to the resolution adopted on June 17, 1944, by the board of directors of your bank, signifying the bank's desire to surrender its right to exercise fiduciary powers heretofore granted to it. . "The Board, understanding that your bank has been discharged or otherwise nrooerly relieved in accordance with the law of all of its duties as fiduciary, has isTued a formal certificate to your bank certifying that it is no longer authorized to exercise any of the fiduciary powers covered by the provisions of section 11(k) of the Federal Reserve Act, as amended. This certificate is enclosed herewith. "In this connection, your attention is called to the fact that, under the provisions of section 11(k) of the Federal Reserve Act, as amended, when such a certificate has been issued by the Board of Governors of the Federal Reserve System to a national bank, such bank (1) shall no longer be subject to the provisions of section 11(k) or the regulations of the Board of Governors of the Federal Reserve System made pursuant thereto, ()shall be entitled to have returned to it any securities which it may have deposited with the State authorities for the protection of private or court trusts, and (3) shall not exercise hereafter any of the Powers granted by section 11(k) without first apPlying for and obtaining a new permit to exercise such Powers pursuant to the provisions of section 11(k). "Since it may be necessary for you to file a certified copy of the Board's certificate with the State authorities in connection with the release of the securities which you have deposited with them, such a copy is enclosed herewith." Approved unanimously. 1431 10/8/46 -19Letter to Mr. A. Claflin, Secretary, French American Banking C°rPoration, 31 Nassau Street, New York 5, New York, reading as follows: "Receipt is acknowledged of your letter of September 25, 1946, advising of the resignation of Mr. Daniel A. de Menocal as a director of your corporat4 on and the election of Mr. Charles E. Spencer, Jr. to take his place. Your courtesy in supplying the information is appreciated. "In view of the fact that a list of the directors is submitted with the semi-annual report of condition, it will not be necessary in the future to advise the Board of changes in the directors which do not have any Particular significance on the management of the corporaHowever, the Board will appreciate advice of any changes in your board when they do have a significant bearing on the direction and management of your corporation.” Approved unanimously. Letter dated October 7, 1946, to the Comptroller of the Curreading as follows: "It is respectfully requested that you place an order with the Bureau of Engraving and Printing, supplementing the order of June 13, 1946, for printing of 442,000,000 of Federal Reserve notes of the 1934 Series for the Federal Reserve Bank of Richmond in the 4100 denomination." Approved unanj 'ously. Thereupon the meeting a dr,oi ,/ secretary. Ap ' 0 A 41 Chairman.
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