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Minutes for To: Members of the Board From: Office of the Secretary October 9, 1957. Attached is a copy of the minutes of the Board of Governors of the Federal Reserve System on the above date. It is not proposed to include a statement with respect to any of the entries in this set of minutes in the record of policy actions required to be maintained pursuant to section 10 of the Federal Reserve Act. Should you have any question with regard to the minutes, it will be appreciated if you will advise the Secretary's Office. Otherwise, if you were present at the meeting, please initial in column A, below to indicate that you approve the minutes. If you were not present, please initial in column B below to indicate that you have seen the minutes. Chm. Martin Gov. Szymczak Gov. Vardaman 1/ Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson 1/ In accordance with Governor Shepardson's memorandum of March 8, 1957, these minutes are not being sent to Governor Vardaman for initial. Minutes of actions taken by the Board of Governors of the Federal Reserve System on Wednesday, October 9, 1957. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Mills Robertson Shepardson Mr. Carpenter, Secretary Mr. Kenyon, Assistant Secretary Mr. Thomas, Economic Adviser to the Board Mr. Young, Director, Division of Research and Statistics Mr. Marget, Director, Division of International Finance Mr. Johnson, Controller, and Director, Division of Personnel Administration Mr. Hackley, General Counsel Mr. Masters, Director, Division of Examinations Mr. Sprecher, Assistant Director, Division of Personnel Administration Mr. Solomon, Assistant General Counsel Mr. Hexter, Assistant General Counsel Mr. Hostrup, Assistant Director, Division of Examinations Mr. Furth, Chief, International Financial Operations Section, Division of International Finance Mr. Sammons, Chief, Latin American Section, Division of International Finance Mr. Davis, Assistant Counsel Mr. Thompson, Supervisory Review Examiner, Division of Examinations Items circulated to the Board. The following items, which had been circulated to the members of the Board and copies of which are attached to these minutes under the respective item numbers indicated, ' Igere aD-KaTI unanimously: -2- 10/9/57 Item No. Letter to Girard Trust Corn Exchange Bank, Philadslphia, Pennsylvania, approving the establishment (pf six out-of-town branches incident to the proposed merger of Ambler National Bank, Ambler, Pennsylvania, and The National Bank of Narberth, Narberth, Pennvania, into the applicant bank. (For transmittal urough the Federal Reserve Bank of Philadelphia) 1 Letter to the Federal Reserve Bank of Richmond extending the time within which County Trust Company of Maryland, Cambridge, Maryland, may establish a branch in Annapolis, Maryland. 2 Letter to The Selma National Bank, Selma, Alabama, aPProving the bank's application for permission to exercise fiduciary powers. (For transmittal through the Federal Reserve Bank of Atlanta) 3 Letter to The First National Bank, Palestine, Texas, 1:sg5rding a possible offer to pay interest on demand °-el?osits in accordance with a proposed contract. (W1th a copy to the Federal Reserve Bank of Dallas) 4 T Application of Wisconsin Bankshares Corporation (Item No. 5). At the meeting on May 24, 1957, the Board considered the application of Wisconsin Bankshares Corporation, Milwaukee, Wisconsin, to acquire control °f the proposed Southgate National Bank of Milwaukee and decided to request the applicant, through the Federal Reserve Bank of Chicago, to submit additional and pertinent information that it might have, or be able t° 6btain, relative to whether the need for this banking facility was such "to offset the question of further expansion by the holding company. There had now been distributed to the members of the Board copies °r : 1957, a memorandum from the Division of Examinations dated October 2 14 which the Division again recommended approval of the application. 283 10/9/57 The memorandum summArized the additional data submitted by the applicant, including detailed information with respect to the local area to be served by the proposed bank, and the view was expressed that this added to the previous information relating to convenience, needs, and welfare in such a way as to strengthen the application substantially. There had also been distributed copies of a memorandum from the Legal Division, dated October 4, 1957, which brought out that although the supplemental information submitted by the applicant presented a Strong case with respect to the need for the new bank, it must be borne in mind that the Board did not have the benefit of any contrary evidence that might be presented by parties opposed to the proposed transaction. However, while a public hearing in Milwaukee would provide the best way Of developing any such evidence, it was thought questionable whether a hearing would result in presentation of any significant factual inforIllation not already before the Board. Accordingly, it continued to be the opinion of the Legal Division that the issue turned upon whether the oard, in its judgment, felt that the showing of need was sufficient to outweigh the resulting increase in the size and extent of the applicant's h°1ding company system and the possible deterrent effect on the establishflient of independent banks in the particular area. It was felt that approval the application would probably be sustained by the courts in the event of judicial review but that, on the other hand, denial of the application /r°1-11d probably also be sustained. 10/9/57 At the request of the Board, Mr. Masters made a statement in which he said that, as brought out in the memoranda from the Division Of Examinations and the Legal Division, the decision appeared to turn on whether consideration5relating to the convenience, needs, and welfare of the comumnity to be served were sufficiently strong to offset adverse considerations growing out of the dominant position of the applicant in the Milwaukee area. He went on to say that the addi- ti°11al information which had now been obtained from the applicant seemed to add considerable strength to the position which formed the basis of the earlier favorable recommendation from the Division of Examinations. Re noted that the Southgate area has a population of about 60,000; that it is separated from other outlying areas by certain natural and manIllade barriers; that the area has no banking facilities at the present tinle; that there has been a very substantial growth in population and ilidustrY; and that prospects for further growth are favorable. The growth of the area since 1950 was demonstrated rather convincingly, he thought, by comparative aerial photographs submitted by the applicant. 14 addition, the trading area of the proposed bank had been the subject stuaY by a firm of economic analysts, and growth and opinion surveys had been made by independent organizations retained by the applicant. All of this, he felt, combined to present a much stronger picture from the standpoint of convenience, needs, ana welfare, and the Division of illinations was led to feel that favorable action should be taken on the basis of that factor alone. ?ederal Reserve Bank of Chicago. This was also the conclusion of the 2 83 -5- 10/9/57 On the other side, Mr. Masters pointed out, was the dominant position of Wisconsin Bankshares Corporation in the Milwaukee area. After elimination of interbank deposits, the holding company system /ras found to control 46 per cent of the bank deposits in the city and 41 Per cent of such deposits in the county, and the percentages in respect to banking offices were 41 and 31, respectively. However, the Proposed transaction would increase the percentage of controlled deposits (3111Y very nominally. In the 3-1/2 mile area surrounding the site of the Proposed bank, having a population of about 175,000, the applicant controlled only about 20 per cent of the deposits and 17 per cent of the barlkine offices. Furthermore, the other banking offices in this area were beyond the aforementioned natural and man-made barriers. Mr. Masters concluded by bringing out that some objections to the Proposed transaction had been raised. Two or three of the local tanks within the 3-1/2 mile area had protested on the ground that they had Provided, and could continue to provide, adequate banking services. Ther- had also been objections from certain downtown Milwaukee banks and rrom the Wisconsin Bankers Association, but within the Association the clbjection was not unanimous. Mr. Hackley then summarized the memorandum from the Legal Division. Ile said that on the basis of the fifth factor required to be considered in a matter of this kind, it seemed seriously questionable whether approval of the application would be in accordance with the purposes of the Bank Company Act unless there was a showing of need for the bank -6- 10/9/57 sufficient to offset the adverse considerations. As stated in the memorandum, a public hearing would be the best way to determine the actual extent of such need, but such a hearing might not develop anything new in the way of factual information. On the basis of the available facts and the finAlysis by the Division of Examinations, it vas the feeling of the Legal Division that, despite the adverse considerations, approval of the application on the basis of need for the bank would be a reasonable exercise of the Board's discretion and Probably would be upheld by the courts. Governor Sheparison inquired regarding the accuracy of the aPPlicant's statement that its percentage of the banking business in the Milwaukee area had decreased over the past twenty years, and Mr. Thompson responded that this was correct from the standpoint of relative grawth. However, he said, it was the view of the Division of Examinations that under the Bank Holding Company Act applications of this kind must be appraised in the light of the current situation. Governor Shepardson also inquired whether there had been any reae011 why other parties would have been precluded from establishing a bank in the Southgate area, and Mr. Hostrup replied that the applicant had obtained approval from the Comptroller of the Currency in 1952 to establish a bank at that location. Since that time, no steps had been .t4ken by others to organize a bank in the area despite the fact that Wisconsin Bankshares let the matter lapse until late 1955. 2839 10/9/57 In this connection, Governor Robertson suggested that others might have been deterred by the fact that Wisconsin Bankshares, a large organization, had already obtained the right to establish a bank at the Southgate location. Mr. Hackley then pointed out that the failure of Wisconsin Bankshares to establish a bank after it had obtained approval could be regarded, although not conclusively, as an indication of a lack of sufficient need for banking services in the area. In another area in Milwaukee where a somewhat similar situation prevailed, independent interests had, in fact, established a bank. Chairman Martin inquired how this application might be distinglaished from the current application of Baystate Corporation to acquire the Union Trust Company of Springfield, Massachusetts, and Mr. Hackley said that this was a difficult question. However, in the Milwaukee case the elimination of a large existing bank would not be involved. Also, the Percentage of area deposits controlled by Wisconsin Bankshares, while already large, would be increased only slightly through control of the Proposed new bank, according to projected deposits for the new institution. On the other side, the relative position of Baystate in the general Springrield area was not as dominant as that of Wisconsin Bankshares in the Milwaukee area and the establishment of the new bank in Southgate could be regarded as giving the applicant the advantage of prior occupancy and Perhaps deterring independent interests from establishing a bank in the riltUre. On balance, the Baystate application seemed to present a some- hat more serious question under the law because it would result in the 10/9/57 -8- elimination of a large competing independent bank. There appeared to be a relatively strong showing of need in the Milwaukee case, while U1 the Baystate case the principal benefits from the proposed acquisition and subsequent merger would be largely those resulting from any consolidation of banking institutions. Governor Mills expressed the view that when the Board was considering applications involving the expansion of a bank holding c°mPanY, a distinction was necessary as between the establishment of an additional unit which would be equivalent to a branch and expansion tbr°11gh purchase of a bank, or establishment of a new bank, in the overall area within which the holding company had been operating. In his °Pinion, it was the global expansion of a holding company's activities that the Bank Holding Company Act was directed at, rather than the first tYPe of application. Where an application did not go beyond expanding services and facilities within a community already served by a bank holding company, denial of the application would not only limit the °PPortunity of the applicant to provide services but would deprive the community of services beneficial to its development. Through denial in such a ease, he felt that the Board, as an administering authority, 11°1-11d be going beyond determining the need of a community for banking services and would be saying that such services should not be provided because the additional facilities would lessen competition. It seemed to him that in making a determination, the Board should consider the 84vantages that the banking services could bring to the community just aa seriously as the problem of competition within banking. 2841 10/9/57 -9To deny the application of Wisconsin Bankshares Corporation, Governor Mills said, could represent denying a growing community banking services being offered by a responsible banking organization. On the other hand the application, if approved, would not result in any substantial expansion of the general position of Wisconsin Bankshares within the entire area that it now serves. Instead, this would merely add a unit, within such area, in a growing community which appeared to need and desire additional banking services. Governor Robertson said that in the light of the purposes of the 13ank Holding Company Act this seemed to be a case where a holding company having a dominant position in an area should not be permitted to expand Unless the need of the community to be served was sufficiently great to ciutweigh the adverse factors. Looking at the record now available, it seelned to him that in this case the need was sufficiently great. While he had some feeling that the Board had only a one-sided picture of the need and that the only way to get the other side would be through a Public hearing, he doubted whether this particular case warranted a Mlle hearing. On the strength of the available record, therefore, he would favor approving the application. After Governor Shepardson had stated that he concurred in the views expressed by Governor Robertson, Governor Szymczak said that he 14°Uld lean somewhat toward a public hearing because of the interest in this application in the State of Wisconsin. Regardless of the infor- rl4tion that had been developed, it seemed to him that a public hearing 2S1 -10- 10/9/57 i1 Milwaukee would be desirable and consistent with proper procedure from a public relations point of view. However, he would be willing to go along with the position expressed by the members of the Board Who had spoken previously. Governor Balderston said that he did not regard the case as an easy one to decide because of the position of Wisconsin Bankshares in the Milwaukee area. In this connection, he noted that the percentages Of deposits and offices controlled by the applicant in this case were higher than those of the applicant in the Baystate case. He subscribed rullY to the views of Governor Mills up to the point where the latter's line of reasoning touched upon the impairment of competition; in his awn 1111-4d, he found it impossible to determine exactly when the point had been leached beyond which further expansion should not be permitted. If looked at from this standpoint, it might be said that the position of the applieallt was such that the Board clearly should deny the application. However, 8inee it seemed necessary to decide these applications on a case-by-case basis by balancing out the various factors, he felt that he could vote to approve the application. Governor Shepardson added to his previous comments by saying that he was influenced by two factors. First, while the percentage of blIsiness in the area controlled by the applicant was high, it apparently bed not been increasing - in fact had declined over a period of years. Als°, if he understood correctly, other parties had not been estopped 10/9/57 from -11- going services. into the Southgate area and meeting the need for banking In view of the size of the Southgate area, he felt that Other parties probably could have found a satisfactory location had they desired to establish a bank, even if one particular location had been preempted by Wisconsin Bankshares. There followed a further discussion regarding the practice in respect to the holding of public hearings on applications under the Bank Holding Company Act, and it was brought out by Mr. Hackley that, 'while such a procedure might be necessary to develop all of the facts and views on both sides, it seemed questionable whether the Board would want to follow a policy of holding a public hearing on each application. Therefore, it appeared that the question of a hearing probably must be resolved in each individual case. Mr. Hackley also pointed out that the five factors which the 13oara is required by the Act to consider in an application of this kind are vague in nature, so that the Board must, in fact, set standards in each ease. In other words, each decision would tend to establish a Ilrinciple. In this particular case, approval of the application would seelll to mean that it was all right for a large bank holding company to establish a new bank in an area where a definitely proven need for banking l'acillties existed and the services were not otherwise available. With reference to Mr. Hackley's comments, Chairman Martin said he heart of the problem seemed to rest in the fact that the Congress had not been able to develop precise legislation and thus gave the Board a -12- 10/9/57 broad area of discretion. Therefore the Board was faced, in each case, with the question whether it was going to handle the matter on a public relations basis or make a decision according to the available facts. He felt that the Board should follow the first course when any real doubt on its part existed. In the absence of such doubt, it was his thought that the Board should not hold a hearing, much as he sympathized with the point of view stated by Governor Szymczak. On this point, Mr. Hackley referred to the legislative history as seeming to indicate that the Board would hold hearings only when required by the Bank Holding Company Act and that in other cases the Bow-A would decide the matter on a more informal basis. Mr. Hexter then suggested a possible alternative method of developi ng factual information which would involve retaining the services 0f Persons who would investigate the various applications from an objective viewpoint. This led to a discussion of the functions performed by the Federal Reserve Banks in investigating and appraising applications Prior to their submission to the Board. Reference also was made to the fact that the applicants, as in this case, sometimes procured the services °f independent organizations to develop evidence on factors such as the need for additional banking services and the area which would be served bY the proposed banking facility. however, It was the general view of the Board, that a procedure such as suggested by Mr. Hexter was worthy of consideration and study. 245 10/9/57 Thereupon, it was agreed unanimously that an order should be issued approving the application of Wisconsin Bankshares Corporation, With the understanding that the order would be published in the Federal Register and that copies would be sent to the appropriate parties. A Copy of the order issued pursuant to this action is attached hereto as Item No. 5. Messrs. Hexter, Hostrup, Davis, and Thompson then withdrew from the meeting and Mr. Koch, Assistant Director, Division of Research and St atistics, entered the room. Maximum rates of interest payable by member banks on time deposits Item No. 6 . The Federal Reserve Bank of New York had forwarded to the Board letters from The First National City Bank of New York, The Chase Manhattan Bank, and Irving Trust Company, dated August 301 September 31 erld September 131 19571 respectively, in which those banks requested that the Board amend the Supplement to Regulation Q, Payment of Interest on DePosits, to increase the maximum permissible rates of interest payable 04 time deposits other than savings deposits. The principal concern of the New York City banks was that they would continue to lose time deposits held for foreign banks (mostly central banks) and other foreign customers if the present disparity between the maximum rates for time deposits and short-term money market rates were to continue. These letters had been c/istributed to the members of the Board along with a letter from the Ilew York Reserve Bank dated September 271 1957, in which the Reserve Bank 10/9/57 expressed the view that some increase in maximum rates for time deposits 14as justified because of (1) the substantial increase in short-term market rates since the maximum time deposit rates were last considered and adjusted, and (2) the fact that the primary purpose of the limitations respecting the payment of interest in section 19 of the Federal Reserve Act and in Regulation Q was to eliminate competition between banks for deposits through the payment of interest at rates so high as to cause them to make unsound loans and investments to cover the interest cost. The New York Bank did not believe that a modest increase in the rates on time deposits would create such a situation. Specifically, the Reserve Bank recommended establishment of the following maximum rates: 3-l/4 per cent on any time deposit (except postal savings deposits which constitute time deposits) having a maturity date of six months or more -om date of deposit; 3_1/4 per cent on any time deposit having a maturity date less than six months and not less than 90 days; 3 per cent on any se ' vings deposit and on any postal savings deposit which constitutes a time deposit; and 1 per cent on any time deposit having a maturity date les than 90 days. The Reserve Bank also renewed the suggestion made in ts letter of September 24, 1956, for a longer-range study of the princi151es that should govern the establishment of maximum rates of interest Yable on time and savings deposits. 13e ‘ At the request of the Board, Mr. Thomas made a statement in which _ heIr st discussed the arguments that could be made for increasing the 1114X1MU1n rates on time deposits, including the relationship of the current 10/9/57 -15- maximum rates to short-term money market rates. He pointed out, how- ever, that there was a question as to whether banks should necessarily be able to pay rates on time deposits competitive with other types of i nvestments. After observing that the interest of the New York City banks in obtaining higher maximum interest rate authority appeared to be related principally to their foreign time deposits, he said that these deposits consist largely of funds which are in a sense liquid or 14°rking balances. Whether the banks ought to compete for that kind of ni°4eY and pay a higher rate of interest than now permissible seemed seriously questionable. While it might be argued that savings deposits are in practice payable on demand, they are limited to thrift accounts likely to remain on deposit for a substantial period. Mr. Thomas then reviewed certain preliminary statistics from the latest available call report data in order to show the approximate v°11-1:°e of deposits that would be affected by a decision with regard to the maximum rates of interest on time deposits, along with the composition °t* such deposits. In this connection, he noted that most of the foreign° d time deposits appeared to be centered in New York City. Mr. Young said that as long as Regulation Q was in effect, the 11°ard vas going to be confronted with the tyre of problem now presented to it , and that a case could certainly be made that the Regulation as it 4°1 '7 Operates is too inflexible. He also pointed out that the problem was °4e involving the allocation of funds in the market rather than a problem atfect44,446 the total volume of funds. He noted that the New York City 291A 10/9/57 -16- banks have a considerable investment in their foreign correspondent relationships, that they are anxious to preserve these relationships, and that they would like to be in a position to compete with the market for the foreign funds. On balance, it seemed to him that some action with respect to the maximum rates perhaps should be taken. Mr. Young then referred to the New York Reserve Bank's suggestion for a basic study to appraise the considerations that the Board ought to take into account in fixing the level of maximum interest rates under Reglaation Q, and to develop appropriate principles. It was his view that such a study should be mane and that the principles which might evolve from it should be made known to the market as well as the Federal Reserve System Views on the matter were then expressed by the members of the Board and Governor Mills, who was the first to speak, said that he re(e.rded the fixing of maximum rates on savings deposits and on other time dePosits as being so interrelated that any adjustment in either area was b°und to affect both types of deposits and present complications. On the basis of that line of reasoning, he believed that the Board should 11Q4ke no adjustment in the present maximum rates. Governor Robertson stated that although he would like to study the matter more carefully before any final action was taken, at present It Igas his view that no change should be made in the current maximum rates. 10/9/57 -17After Governors Shepardson and Szymczak had expressed concur- rence in this point of view, Governor Balderston said he agreed with Governor Mills that time deposits could not be considered apart from savings deposits. At the same time, he continued to be somewhat concerned that this country's banking regulations might tend to prevent its banks from exercising leadership in international financing for the benefit of other nations as well as this country. Therefore, while he slthscribed in general to the views that had been expressed previously, he had some reservation as to whether "the easy answer here was necessarily the right one." Governor Szymczak said he felt that the views just stated by Governor Balderston were correct, and that a case could be mane from the standpoint of international relationships. However, from the standPoint of the Board's statutory responsibility, he did not think that it could move on time deposits without moving on savings deposits since both are part of the whole package. On this point, Mr. Marget expressed the view that "the tail Should not be n11 owed to wag the dog" and that the Board's decision thel'efore could well be made on the grounds stated by Governor Mills. cl4.n JAI not think that the New York banks had made an important case from the standpoint of the national interest and he asked in what manner the natlonal interest would be injured if the foreigners should decide to 1:41t their money in Treasury bills or in alternative types of investments. -18- 10/9/57 Chairman Martin said he was glad that the discussion had come Out in this way since he felt that this was probably the wisest course to follow. However, he found the whole theory of Regulation Q some- what difficult. It perhaps colored his own thinking, he said, that the disParity between the maximum rates on time deposits and short-term market rates might not last too long. In summary, although he agreed with the other members of the Board regarding the disposition of the immediate issue, he felt that the whole problem deserved much study. There followed a discussion of the suggestion for a study along the lines proposed by the New York Reserve Bank and the manner in which sucha study might be conducted, at the conclusion of which it was agreed that the study should be made and Mr. Young was requested to present to the Board a procedural outline. In this connection, some advantage was seen in utilizing personnel from the Federal Reserve Banks on an advisory basis to assist the Board's staff. Thereupon, it was agreed unanimously to advise the Federal Reserve Bank of New York that the Board had decided, because of the close relationship between savings and other time deposits, to make no change in the current maximum permissible rates of interest applicable to the 14tter, and to ask the New York Bank to advise the interested commercial banks accordingly. It was understood, however, that the letter to the Res.--4-ve Bank would indicate concurrence in the suggestion for a study of the Principles that should govern the establishment of maximum rates 10/9/57 -19- Payable on time and savings deposits. A copy of the letter sent to the Federal Reserve Bank of New York pursuant to this action is attached hereto as Item No. 6. Messrs. Young, Marget, Koch, Furth, and Sammons then withdrew from the meeting. Major medical insurance (Item No. 7). On April 18, 1957, the Board authorized the Division of Personnel Administration to invite a number of insurance companies to submit competitive bids for major medical insurance covering the Board's staff. Invitations to submit bids were subsequently distributed, sealed bids received from all Participating companies were opened on June 20, 1957, and the Division Personnel Administration then made a detailed analysis and evaluation °I' the proposals submitted by the various companies. In three memoranda submitted to Governor Shepardson in August 1957, the Personnel Division discussed the recommended disposition of requested alternatives to basic sPecifications, additional alternatives suggested by the various companies, " cl Points to be reviewed in selecting the carrier. On the basis of this 441/1Ysis, the Division made the following recommendations: (a) that a contract for major medical insurance for the Board's employees be entered with the Prudential Insurance Company of America, the low bidder, e't the rate of $1004 per month for an individual employee and $2.37 for 4 familY (including the employee), this rate being subject to adjustment based on the exact characteristics of the population finally enrolled ' r° major medical insurance; (b) that the contract include basic 2S52 10/9/57 specifications previously approved by the Board, with a three-year 'aximum period for each illness at no additional cost as against the two-year period in the basic specifications; (c) that the following changes in the basic specifications be adopted, with no additional cost in the case of the low bidder: (1) coverage from birth rather than 14 days, (2) coverage to age 23 if the dependent is in school or is economically dependent upon the insured, rather than the 19 Years of age originOly provided, and (3) expansion from 3 to 12 ra°11th8 of the period for establishment of a deductible amount for Ita illness; (d) that the following additional specifications be proat no additional cost: (1) coverage of preexisting illness conditions, (2) coverage from date of employment, (3) furl coverage /rhile overseas on Board business, and (4) overseas coverage for at le"t 30 days following departure while on leave. With regard to the cost of the health insurance program, ineltiding the hospital-surgical plan currently in effect and major medical lasurance, four alternatives for financing the program were discussed ana the estimated cost to the Board of each alternative was presented. Ace°rding to the recommended alternative, the Board would pay one-third the cost of major medical insurance and one-third of basic hospitaliallti°11, at a cost estimated at $20,436 per year. This would be applicable -uLn employees and dependents. 10/9/57 -21The memoranda from the Personnel Division were accompanied by a oemorandum from the Legal Division dated August 12, 1957, discussing the Board's authority to make payments toward the health insurance program, to contract for group insurance, enri to make employee payroll deductions. At the suggestion of Governor Shepardson, copies of these memo- randa had been distributed to the members of the Board, and a detailed evaluation of the bids received for major medical insurance was circulated to the Board. Following an introductory statement by Governor Shepardson„ Mr. J°1u1son. discussed, with the aid of a group of charts which he distributed, the 'work which had been done by the Division of Personnel Administration Ofl this matter, the costs and alternatives involved, and the reasons u nderlying the Division's recommendations. With respect to financing the health insurance program, he discussed also a fifth possible alternative Under which the Board would pay the full cost of the program for employees bIlt 'would make no contribution for the coverage of dependents. Governor Shepardson then commented further on the proposals. Re Ah.. r -,, whasized that in his own view it was fundamental that the employee Illake Some contribution to the cost of the insurance. On such a basis, he felt that a strong program could be built up mder which a large 1°el'eentage of the Board's staff would participate in the basic plan as veil as the major medical plan. With regard to the question of pay- 14 a Part of the cost of the insurance for dependents, he referred 10/9/57 -22- to the Board's interest in the families of its employees and suggested that it would be good personnel policy to include some Board contribution °11 a family basis. Accordingly, he favored the alternative recommended by the Personnel Division. In this connection, he brought out that 811ch an arrangement would not be unreasonably out of line with the Provisions of S.2339, introduced at the last session of the Congress, even if there should be some cutback in what was contemplated by that bill. His recommendation contemplated, of course, that the Board's contribution would be made only when employees and their dependents were covered by the Board's program of health insurance. Governor Mills said that, as he understood the plan and the l'ecommendations, he would concur in them, recognizing that this might well lead to major medical insurance plans at the Federal Reserve Banks /thich would have an effect from the standpoint of the Banks' budgets. In the light of Governor Mills' comments, there was a discussion or the situation at the Reserve Banks from which it developed that they llOw Pay two-thirds of the cost of basic hospitalization programs for employees and their dependents, but that only two Banks now have major Medical plans, in each case on a noncontributory basis. With no con- uutions by the two Banks, it had been found necessary to limit particiIle ' tion to the higher salary brackets from which a sufficient number of e1441310Yees could be enrolled. It was considered likely, however, that 1114,1°r medical insurance plans would be initiated or expanded throughout the SYstem. fe.1Q 10/9/57 -23Governor Robertson expressed himself as very much in favor of the general program, although he felt there was something to be said, in the interest of equitable treatment, for a larger contribution by l'he Board toward the cost of the plan for employees and reduction or elimination of contributions to meet the cost of insurance for members Of the family. Governon3Szymczak and Balderston indicated that they Pgreed with the recommendations of Governor Shepardson, and accordingly the remainder Of the discussion dealt with the point raised by Governor Robertson. Mr. Johnson said it had been found that the trend among private business organizations was toward a larger percentage of contributions by the employer. He also brought out that the basic plan now in effect at the Board provides a substantially higher rate for employees with dePeadents than for individual employees. The family being fundamental to the social structure of the country, he thought that it votad be desirable to contribute a portion of the cost to cover dependents. Chairman Martin agreed, stating that the family structure was an institution that he thought must be recognized. At the conclusion of the discussion, the recommendations of G. ve nor Shepardson and the Division of Personnel Administration were ov d unanimously, with the understanding that the major medical , 1481)) --ance program would be put into effect at the beginning of a payperiod as soon after November 1, 1957, as the necessary arrangements 2856 10/9/57 could be completed. The letter sent to the insurance company pursuant to this action is attached as Item No. 7. Messrs. Johnson, Hackley, Masters, Sprecher, and Solomon then vitharew from the meeting and Mr. Young returned to the room. Interagency meeting. Chairman Martin referred to work done by the Council of Economic Advisers in connection with United States budget Projections and said that a member of the Council was planning a meeting tomorrow at which representatives of various interested agencies would gO over these statistics. He thought it desirable that Mr. Young attend on behalf of the Board. In response to a question as to whether this meeting or future illeetings of the same kind would go into policy matters, Chairman Martin stated that although policy decisions might of course ultimately be made on the basis of this statistical information, the meeting tomorrow would be for the purpose of evaluating the accuracy of the available data. Following further discussion, it was agreed unanimously that Mr. Young should attend the meeting on behalf of the Board. There was eas° agreement with a suggestion by Governor Robertson that Mr. Young c'r others attending such meetings keep the members of the Board informed Or ally facts or points of view which were developed that might be helpful to them. At this point Mr. Thomas returned to the meeting and Mr. Miller, Chief, Government Finance Section, Division of Research and Statistics, elltered the room. :t r t -25- 10/9/57 Treasury financing. In the light of an exploratory conversation which Under Secretary of the Treasury Baird had had with Chairman Martin and Vice Chairman Balderston, there was an informal discussion of problems that might be encountered by the Treasury over the remainder of the year and in early 1958 under the existing statutory debt limit. Reference was made to the various alternatives available to the Treasury for financing outside the debt limit, if necessary, including the sale °f securities by the Federal National Mortgage Association, borrowing through the Export-Import Bank, or the sale of gold. The discussion also covered alternative methods for obtaining funds within the debt including the sale of additional Treasury bills, direct borrowing from the Federal Reserve Banks, arrangement of a stand-by credit from a gr°1-11) of commercial banks, and borrowing from the Federal Reserve /3'444 on special certificates which the Reserve Banks would sell to e°111121ercial banks. In addition, the discussion touched upon possible bc)rr°wing needs of defense contractors in view of the proposed curtailInellt of progress payments by the Defense Department. This development was reported to have caused some banks to be concerned about pressure °4 their reserve position, but it was the view of Chairman Martin, with vhich other members of the Board concurred, that it would be inapp roPriate at this time for the Federal Reserve to make any move in the nature of a commitment that the supply of reserves would be increased r°r this purpose. It appeared to be the general view that no single bank 2858 10/9/57 26- Imuld be likely to find itself under particularly great reserve Pressure on this account and that the problem, therefore should not present serious difficulties from the standpoint of reserves wad member bank, borrowing. The meeting then adjourned. Secretary s Note: On October 80 1957, Governor Shepardson approved on behalf of the Board a letter to the Federal Reserve Bank of New York approving the appointment of Marshnll H. Johnson as assistant examiner. A copy of the letter is attached hereto as Item No. 8. 2859 BOARD OF GOVERNORS OF THE Item No. 1 10/9/57 FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. ADDRESS OFFICIAL CORRESPONOENCE TO THE BOARD October 91 1957 Board of Directors, Girard Trust Corn Exchange Bank, Philadelphia, Pennsylvania . Gentlemen: Pursuant to your request submitted through the Federal Reserve Bank of Philadelphia, the Board of Governors of the Federal Reserve System approves the establishment of branches by Girard Trust Corn Exchange Bank, Philadelphia, Pennsylvania, at the following locations: Corner of Essex and Haverford Avenues, Narberth, Pennsylvania, 18 East Wynnewood Road, Wynnewood, Pennsylvania, 1 Bala Avenue, Bala-Cynwyd, Pennsylvania, Butler Avenue and Spring Garden Street, Ambler, Pennsylvania, Wissahickon Avenue and Bethlehem Pike, Flourtown, Springfield Township, Pennsylvania, and Pennsylvania Avenue at Fort Washington entrance to Pennsylvania Turnpike, Fort Washington, Pennsylvania, (1) the merger of The National Bank of Narberth, Narberth, Pennsylvania 148Ylvania, and the Ambler Ndtional Bank, Ambler, Pennsylvania, 'with si. and into Girard Trust Corn Exchange Bank, is effected sub' d Iltially in accordance with the agreement between the parties cated July 9, 1957, (2) daares of dissenting stockholders of the stituent corporations which may be acquired, are disposed of within six months from the date of such acquisition, and (3) the e 4,s_tablishment of the branches is effected within six months from 'ale date of this letter. Very truly yours, (Signed) S. R. Carpenter S. R. Carpenter, Secretary. (30 BOARD OF GOVERNORS OF THE Item No. 2 FEDERAL RESERVE SYSTEM 10/9/57 WASHINGTON 25, D. C. ",:•• ADDRESS OFFICIAL CORRE5PONOENCE TO THE BOARD t}4 October 9, 1957 Mr. N. L. Armistead, Vice President, Federal Reserve Bank of Richmond, Richmond 13, Virginia. Dear Mr. Armistead: In view of the circumstances outlined in your letter of September 26, 1957, and the Reserve Bank's favorable recommendation, the Board of Governors extends until January 22, 1958, the time within which the County Trust Company of Maryland, Cambridge, Maryland, may establish a branch on the south side of West Street between Ritchie Street and Edgewood Avenue, Annapolis, Maryland, under the authorization contained in its letter of October 1956. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Assistant Secretary. 24, BOARD OF GOVERNORS OF THE Item No. 3 FEDERAL RESERVE SYSTEM 10/9/57 WASHINGTON 25. D. C. ADDRESS OFFICIAL CORF/ESPONDE NC( TO THE BOARD October 9, 1957 Board of Directors, The Selma National Bank, Selma, AlAbama. Gentlemen: The Board of Governors of the Federal Reserve System has given consideration to your application for fiduciary powers in connection with the proposed merger Of the Selma Trust & Savings Bank, Selma, Alabama, with Your bank. The Board grants you authority, effective if and when the proposed merger is consummated, to act, when not in contravention of State or local law, as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics, or in any other fiduciary capacity in 'which State banks, trust companies, or other corpora' tions which come into competition with national banks are permitted to act under the laws of the State of Alabama. The exercise of all such rights shall be subject to the provisions of the Federal Reserve Act and the regulations of the Board of Governors of the Federal Reserve System. This letter will serve as authority for The Selma National Bank to exercise the fiduciary powers granted by the Board pending the preparation of a formal certificate covering such authorization, which will be forwarded to You after the merger becomes effective. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Assistant Secretary. 2862 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Item No. 4 10/9/57 WASHINGTON 25, D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE EIOARO October 9, 1957 Mr. C. L. Hufsmith, Chairman, The First National Bank, Palestine, Texas. Dear Mr. Hufsmith: This refers to your letter of September 20, 1957, with urther reference to the questions raised in your letter of March 7, 1 57, as to whether a possible offer by your bank to pay interest on demand deposits in accordance with a contract set forth in that letter would, violate section 19 of the Federal Reserve Act. Your recent letter in effect requests that the Board provide more direct and definite answ to your yo questions than you feel were provided by the Board's letter of April 8, 1957.s The proposed contract described in your letter of March 7 states that your bank "will pay interest at the rate of 2% per annum °?,demand deposit balances" in accordance with the following terms: Ikl-cL)) settlement for "interest due" would be made monthly; (2) "interest" molrli d be computed at the rate of 2 per cent per annum on the minimum 2 errlitrce- (3) "interest" would be payable in "those forms of baxj 11.1 determined by the bank, such service to be rendered when re tycgened by the depositor", and the "interest payment value" of each (LI of service would be fixed by the bank and posted in its lobby; IT a depositor receiving an amount of bank service with an "interest Payment value" in excess of the amount of "interest" due him would be "arged with the current price of the excess service; (5) the bank WOUld appropriate profit that part of the depositor's each month as b nterest" remaining unpaid under the method above provided; and (6) the 4:would reserve the right to change the rate of interest and the whXrest Payment value" of any service. Your letter further asked it-'"er, if the above terms of the contract would not violate section 19, be a violation of the law for you to add a provision to the contract to the effect that, if a depositor should desire S,ScH Green ab fi-Lng Stamps for that part of his "interest" not paid him under the to 1v3e rules, the bank would give the depositor such stamps in a ratio e fixed by the bank. As you know, section 19 of the Federal Reserve Act, as amen ded in 1933, clearly and explicitly prohibits any member bank from PaYin de , g interest on demand deposits, directly or indirectly, by any 180"-Lee whatsoever. As further amended in 1935, the law authorizes the toal'd to determine what shall be deemed to be a payment of interest and efpescribe such rules and regulations as it may deem necessary to proectuate the purposes of this section and prevent evasions of its visi°ns. Your recent letter suggests that the Board has not BOARD Mr. C. L. Hufsmith OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM -2- discharged its responsibilities under the law for determining what constitutes a payment of interest and that there can be no violation of the law, therefore, until the Board has determined the acts that produce a violation. deterShortly after the Board was authorized by Congress to its revised Board the 1 1-ne what constitutes a payment of interest, ; rpgulation Q to include a detailed definition of the term "interest". (See 1935 Federal Reserve Bulletin, page 863) However, because of differences of opinion between the Board and the Federal Deposit Invsurance Corporation as to whether absorption of exchange charges inry definiived an indirect payment of interest, the proposed regulato tion of agencies both interest was never made effective. In 1937, Triended their regulations on this subject to define a payment of Interest simply as "any payment to or for the account of any depositor compensation for the use of funds constituting a deposit", and the 0sard and the FDIC in a joint statement at that time declared that 4_, e question of what in a particular case is a payment of interest or a device to evade the prohibition against the payment of interest demand deposits would be considered a matter of administrative ermination under the general law in the light of experience and 3 specific cases might develop. (See 1937 Federal Reserve Bulletin, Page 186) j V r r Since 1937, as indicated in the Board's letter of April 8, 1957 13 it has been the general policy of the Board not to attempt to , ermine whether particular practices involve a payment of interest facts t pertinen the all unless h'cePt in flagrant or obvious cases, member "been fully developed in the course of examination of the 134 n of intentio the not was cank involved. It seems apparent that it , deposits 3 demand on interest t°11gr(= 5, in prohibiting the payment of 00 outlaw all banking services rendered by banks to their customers. (1 thk-: other hand, the broad language of the law was clearly designed tr v, Prevent the indirect payment of interest under the guise of serces or other benefits given to depositors. Accordingly, it is as t,ersarY for the Board in each case to have detailed information can it before benefit or service ar e- 'he exact nature of a particul resa any opinion as to whether it would involve an indirect payment -L interest in violation of the law and regulation. V 4 " Your letter of March 7, 1957, did not request an opinion e,I0 whether any particular service or benefit would involve a paylan3 of interest. On the contrary, the proposed deposit contract set make fort ciA h in your letter purported on its face to be an agreement to d in indicate as and, rs deposito demand Payments of interest to the to nt tantamou be would contract a such 4 (1 B°ardis letter of April 8, statement by the bank that it proposes to violate the law. HOARD Mr. C. L. Hufsmith OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 28134 -3- With these considerations in mind, the specific questions asked in your lettar of September 20 are answered as follows: (1) It is impossible to determine whether any particular service offered by your bank under the proposed contract would Involve a payment of interest without knowledge of the exact nature of such service; but, as previously suggested, the flat statement in the contract that the bank will pay interest on demand deposits and references throughout the contract to payment of "interest" appear to be inconsistent with the statutory prohibition against the payment of interest on demand deposits by member banks. (2) Since the particular services have not been described and the Board cannot determine whether they Would violate the law, it is impossible to state the reasons for any such determination. (3) If, as paragraph 7 of the proposed contract seems to indicate, your bank should give demand depositors each month S&H Green Trading Stamps in lieu of a specific dollar amount representing the difference between 2 per cent on the demand deposit and the "interest payment value" of services actually rendered to the depositor, it would seem difficult to distinguish such a practice from a direct monetax7 payment of interest. The reason for the views stated in (3) is that, Whereas paragraphs 1 through 6 of the proposed contract do not describe any particular services or benefits, the Proposed paragraph 7 is more specific. (5) It is believed that the reasons for declining or failing to give answers to your questions have been fully stated above. The Board appreciates your concern with respect to this matter 44d beenthe spirit in which your letter was written. For many years it has peon apParent that administration of the provisions of the law regarding lit of interest on deposits involves practical difficulties. For ti reason, the Board last year, in connection with the proposed ancial Institutions Act, recommended that the law be clarified in BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM • L. Hufsmith -4- ?rder to define more specifically what constitutes a payment of interest on deposits. In its recommendations to the Senate Banking d Currency Committee, the Board suggested that the law be changed 4.? eliminate reference to indirect payments of interest and to define term "interest" as including only cash payments or credits for fle benefit of depositors. (See Committee Print, "Study of Banking ',Jaws, Legislative Recommendations of the Federal Supervisory Agencies", rtober 12, 1956, page 107) This recommendation, however, was not Ocorporated in the bill as it passed the Senate. As you know, that 111 is now pending before the House Banking and Currency Committee. r The Board is glad to have the expression of your views re, uarding this problem; and it is hoped that this letter may serve to exPlain and clarify the Board's position. Very truly yours, (Signed) S. R. Carpenter S. R. Carpenter, Secretary. Item No. 5 BOARD OF GOVERNORS 10/9/57 OF THE FEDERAL RESERVE BOARD In the Matter of the Application of Wisconsin Bankshares Corporation for APProval of Acquisition of Voting Shares Of Southgate National Bank of Milwaukee, Milwaukee, Wisconsin. ORDER The above matter having come before the Board on the application of Wisconsin Bankshares Corporation, Milwaukee, Wisconsin, dated February 27, 1957, filed pursuant to the provisions of sec- ticn 3(a)(2) of the Bank Holding Company Act of 1956, for prior ion of direct approval of acquisition by Wisconsin Bankshares Corporat the of 2,950 shares of a total of 3,000 voting shares of PA/Posed Southgate National Bank of Milwaukee, Milwaukee, Wisconsin, and the It appearing after due consideration thereof in the light of factors enumerated in section 3(c) of the Bank Holding Company Act 1956 that such application should be granted, IT IS HEREBY ORDERED hereby is that the said application be and es granted and the acquisition by 4isconsin Bankshar Corporation of 2,950 voting shares of Southgate National Bank of Mtlwaukee is hereby approved, provided that such acquisition is c°111Pleted within three months from the date hereof. By order of the Board of Governors. 8PAL riated ! b.- R. Oarpermer, Secretary. October 91 1957 BOARD OF GOVERNORS Item No, 6 OF THE FEDERAL RESERVE SYSTEM 10/9/57 WASHINGTON 25, D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD October 11, 1957 Mr. Alfred Hayes, President, Federal Reserve Bank of New York, New York 45, New York. Dear Mr. Hayes: The Board of Governors has given consideration to he questions raised by The First National City Bank of New ! .tork, The Chase Manhattan Bank, and the Irving Trust Company (tn letters transmitted to the Board with your letter of ePtember 4 and Mr. Bilby's letter of September 16, and in hie connection the comments made in your letter of September 27 and its attachment were taken fully into account. Z However, after a discussion of the various aspects matter, the Board concluded that, because of the close relationship between time and savings deposits, it should not low establish a higher maximum rate on time deposits. It will _e appreciated if you will inform the banks which raised the matter with you of the Board's decision. t The Board concurs with the suggestion contained in 01.11' letter of September 27 that a longer-range study of ' 4.1_3 i"u Principles that should govern the establishment of maxima c rates payable on time and savings deposits should be undertil -‘en and is looking into the manner in which such a study eh°uld be -) conducted. , Very truly' yours, enter, S. R. Secretary. 48.6k. BOARD OF GOVERNORS OF THE Item No. 7 FEDERAL RESERVE SYSTEM 10/9/57 WASHINGTON 25. D. C. ADDRESS OFFICIAL CORRESPONDENCE TO ' , He BOARD October 11, 1957 The Prudential Insurance Company Of America, Box 594 Newark 1, New Jersey. G entlemen: It is requested that you issue a contributory policy Group Major Medical Expense Insurance for the employees of t_41c Board of Governors of the Federal Reserve System and their de pendents based on the specifications contained in Plan V of Your proposal dated June 18, 1957. Of Kindly include the following revisions in the proviBimla contained in the previously mentioned plan: 1. Coverage for dependent children from birth rather than from age 14 days as provided in the basic specifications. 2. Coverage to age 23 rather than the 19 years Of age originally provided in the case of dependent children who are full-time students at an accredited institution of higher learning. 3. The establishment of a deductible amount for an illness be extended from the three-month period originally provided to 12 months. 4. That pre-existing illness conditions are to be covered by the contract. 5. Employees out of the country on business are covered with no restrictions. Employees out of the country on leave are to be covered through the balance of the policy month of departure plus the following policy month. \ The Prudential Insurance Company of America - 2 - We desire immediate coverage for present employees and immediate coverage for future employees, i.e., no service waiting period. We desire an effective date of November 17, 1957. A check in the amount of $1,000 is enclosed, which it is understood will be applied against any premium or premiums hereafter becoming due. It is agreed that the final application form will be signed upon delivery to and acceptance by us of the policy contract. The question as to the authority which the Board of Governors has for contracting for Major Medical Insurance has been examined by our Legal Division and an opinion has been rendered to the effect that such authority exists within Section 10 of the Federal Reserve Act as amended by the Banking Act of 1933. Very truly yours, (Signed) S. R. Carpenter S. R. Carpenter, Secretary. Enclosures BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Item No. 8 10/9/57 WASHINGTON 25, D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD October 8, 1957 CO NFIDENTIAL F. R. 14r. H. A. Bilby, Vice President, Federal Reserve Bank of New York, New York 45, New York. Dear Mr. Bilby: In accordance with the request contained in your letter of October 2, 1957/ the Board approves the appoint— tnrnt of Marshall H. Johnson as an assistant examiner for the ederal Reserve Bank of New York. Please advise as to the gate upon which the appointment is made effective. It is noted that Mr. Johnson is indebted to First N4tional Bank in Highland Falls, Highland Falls, New York, on an unsecured loan amounting to $1,705 and a secured loan f jor $500, and that Mr. Johnson will refinance part of this n debtedness with the Metropolitan Life Insurance Company an the balance will be paid by arrangements with his family. Accordingly, the appointment of Mr. Johnson is given with in the understanding that he will not participate Falls, Y Highland fi examinations of First National Bank in - 11 his indebtedness to that bank has been liquidated or " Other, ise eliminated. Very truly yours, (Signed) S. R. Carpenter S. R. Carpenter, Secretary.
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