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1325 A meeting of the Board of Governors of the Federal Reserve 6)rsten -- was held in Washington on Saturday, September 11, 1943, at 11:00 PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Szymczak McKee Draper Evans Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman The action stated with respect to each of the matters hereinart" referred to was taken by the Board: The minutes of the meeting of the Board of Governors of the Pederal Reserve System held on September 10, 1943, were approved unani41°1181Y. Memorandum dated September 9, 1943, from Mr. Nelson, Assistklt Secretary, recommending that Orlander L. Ross, Jr., be appointed as a1 aborer in the Secretary's Office on a temporary basis for an "Inite period, with basic salary at the rate of 1,200 per annum, erre . "as of the date upon which he enters upon the performance of etl. d 4 -4'ies after having passed satisfactorily the usual physical exam- trlat• 1441, with the understanding that if anything derogatory should (level °P in the investigation of his references his services may be tor,td. nated immediately. Approved unanimously. 1326 9111/43 -2Letter to the Presidents of all the Federal Reserve Banks, ' s.&Lig as follows: "Following the designation by the War Manpower Cornof the Federal Reserve Banks and Branches as an 488eritial activity, National Headquarters, Selective Serv-tee A .System issued a supplement dated July 24, 1943 to llritY and Occupation Bulletin No. 34-1 which has been srpreted by some as making Federal Reserve Banks and anches subject to the procedure established by Execu4. 7e Order 9309 and Public Law 23 with regard to occupadeferment of Federal employees under the Selective ervies Act. "At the time the Federal Reserve Banks and Branches "el'e classified as an essential activity, it was distinctly Iderstood by the Review Committee established by Execu41.." . Order 9309 and by other representatives of the War nower Commission that such designation would not bring _L.,;e Federal Reserve Banks and Branches within the purview ‘ 0 )4 that Order, although it was recognized that Executive il j ler 9309 is applicable to the Board of Governors and Q employees. "The effect of the misunderstandings arising from the at ! ndillent of July 24 referred to above, was brought to the 0 uention of Mr. Barnett, Chairman of the Review Committee „12 Deferment of Government Employees appointed by the Chair() n of the War Manpower Commission, pursuant to Executive cier 9309. Mr. Barnett advises us that after discussing 8"e matter with National Headquarters, Selective Service triatem, it was the consensus that the best way to handle 0 e matter was for Mr. Barnett, as Chairman of the Review nzlittee, to write a letter to the Board advising the 1?ard that the provisions of Executive Order 9309 and Puba31.; &NT 23 are not applicable to the Federal Reserve Banks oi" branches and that the Board could then furnish copies th 'Ple letter to the various Federal Reserve Banks for faelr information and use. Accordingly, enclosed are 10 19 83-mi1e copies of Mr. Barnett's letter of September 7, 3 te shall be glad to send additional copies if deA4'' r j rnal. Z j e Approved unanimously. Letter to the board of directors of the "Farmers and Merchants Greenwood, Wisconsin, stating that, subject to conditions of 1_327 9111/43 -3- IllernbershiP numbered 1 to 3 contained in the Board's Regulation H, the Board approves the bank's application for membership in the Federal Reserve System and for the appropriate amount of stock in the 44 Reserve Bank of Chicago. Approved unanimously, for transmission through the Federal Reserve Bank of Chicago. Letter to the board of directors of the "Portland Trust and 84'r1 llge Bank", Portland, Oregon, stating that, subject to conditions of tembership numbered 1 to 6 contained in the Board's Regulation H, the Board approves the bank's application for membership in the Federal lerve System and for the appropriate amount of stock in the Federal 11""ife Bank of San Francisco. The letter also contained the following special comment: "It appears that the bank possesses certain powers 111ch are not being exercised and which are not necessarily ; negulred in the conduct of a banking business, such as the to act as surety. Attention is invited to the fact 1 ii° " tl,%' if the bank desires to exercise any powers not ac11 1Y exercised at the time of admission to membership, ' 1 11111 be necessary under condition of membership numbered ?at° obtain the permission of the Board of Governors bedere exercising them. In this connection, the Board unnsta ds that there has been no change in the scope of : th or .eorporate powers exercised by the bank since the date Its application for membership." Approved unanimously, together with a letter to Mr. Day, President of the Federal Reserve Bank of San Francisco, reading as follows: "The Board of Governors of the Federal Reserve System 1328 9411/43 -4- .0.Pproves the application of the 'Portland Trust and Savngs Bank', Portland, Oregon, for membership in the Fed;ral Reserve System, subject to the conditions prescribed rl the enclosed letter which you are requested to forward 2, the Board of Directors of the institution. Two copies "4 such letter are also enclosed, one of which is for Your files and the other of which you are requested to orward to the Superintendent of Banks for the State of uregon for his information. s ."You will note that the Board has not prescribed a +rep-al condition of membership regarding the exercise of d2 power possessed by the bank to act as surety, but has applicant en bank. care of the matter in the letter to the l t i ma "It is assumed, of course, that you will follow the t4tter or the bank's reporting as a subordinated obllgai;°n in its reports of condition the full amount, includanY as well as the principal, accrued and unpaid interest due to the heirs of the Pittock Estate on the conmade to the bank in 1933, reference to which "er is made on page 16 of the report of examination or membership." Letter to the "First National Bank of Coshocton", Coshocton, 01Ito rearl4 as follows: 12, 1941,Tis refers to the resolution adopted on August Y the board of directors of your bank, formerly he =t7 uommercial National Bank of Coshocton, signifying due,bank's desire to surrender its right to exercise fielarY powers heretofore granted to it. "The Board, understanding that your bank has been harged or otherwise properly relieved in accordance " 8.14-th the law of all of its duties as fiduciary, has isitec.,I a formal certificate to your bank certifying that no longer authorized to exercise any of the fiduci of4T7 powers covered by the provisions of section 11(k) is the Federal Reserve Act, as amended. This certificate enclosed herewith. the :In this connection, your attention is cal3ed to ct that, under the provisions of section 11(k) of th caZ r ederal Reserve Act, as amended, when such a certifie has been issued by the Board of Governors of the 1329 v11/43 -5- - Reserve System to a national bank, such bank "Federol (1\ 4.) shall no longer be subject to the provisions of sec10,a 11(k) of the Federal Reserve Act or the regulations ' °f the Board of Governors of the Federal Reserve System ade pursuant thereto, (2) shall be entitled to have re°Psned to it any securities which it may have deposited :1...th the State or similar authorities for the protection ar Private or court trusts, and (3) shall not exercise nY of the powers conferred by section 11(k) of the FedReserve Act except with the permission of the Board ui Governors of the Federal Reserve System." T Approved unanimously. Telegram to the Presidents of all the Federal Reserve Banks, rear4._ 'ng as follows: "For your information there are given below answers 11 the War Department, Navy Department, and Maritime Com:1 ; !!1°n' to questions asked by two Federal Reserve Banks ili. '" regard to Regulation V termination 'VT' loans: 1. Q. Is a guarantee agreement in order where war production contractor has ample working capital and only desires commitment because of doubts as to his future cash position in the event of the cancellation of his war production contracts? A. Yes; but at least a portion of the funds to be provided under a 'VT' loan agreement should be available to the contractor for financing war production as well as for financing termination settlements. This avoids any question as to the power to guarantee a loan to be made available solgly after termination. 2. Q. What is maximum maturity of commitments which would be approved by the Services? A. Three to three and one-half years or term of settlement provided in guarantee agreement whichever is shorter. 3. n Is it intended there should be a breakdown between amount committed for 'borrowed working capital' and amount committed for freeing borrower's 'own working capital upon cancellations of 1330 9/11/43 -6- A. 4. Q. A. 5. Q. A. "'his war production contracts' or is it intended there should be over-all credit and that the maximum amounts which may be borrowed for the two purposes should be limited by a loan formula? It is intended that there should be an over-all credit, and the maximum amounts which may be borrowed may be borrowed for both purposes or divided between the two purposes, depending on agreement between the borrower and the bank as to the loan formula. The War Department will in general permit the full credit to be used for war production as well as on termination, but the Navy and Maritime Commission may in approving the terms of the loan require a limitation on the amounts to be drawn down before cancellation to amounts needed for financing war production. As indicated in question (1) a portion of the credit must he so made available at the borrower's election even though he may not choose to avail himself of the right to borrow until after termination. Is credit available upon cancellations of war production contracts to be limited by amount of inventories, work in process, and accounts receivable, etc., which are allocable to cancelled contracts? No. The credit may be predicated on total war production inventories and work-inprocess, and accounts receivable attributable to both cancelled and uncancelled contracts. In addition the credit may be predicated upon moneys which have been used or are to be used concurrently to pay sub-contractors' claims on cancelled contracts without overlap, of course, with inventory or receivables. In determining borrower's 'own working capital' are bank loans, accounts payable, and other current liabilities to be deducted from current assets? Yes. 1331 9/11/43 —7-- "6. Q. Is amount of credit to be available upon A. 7. Q. A. 8 Q. A. 9. Q. 10. A. Q. cancellation of war production contracts to be limited by amount of borrower's 'own working capital'? No, since the formula might include payments to subcontractors in excess of then working capital or receivables representing a claim for facilities or expenditures expressly made reimbursable by the Procurement Agency or the borrower may have a net minus working capital or just a heavily extended position. Is amount of credit to be available upon cancellation of war production contracts to be limited by the proportion of borrower's 'own working capital' which the borrower's investment in inventories, work in process, and accounts receivable which are allocable to cancelled contracts bears to his aggregate investment in inventories, work in process, and accounts receivable? No, the credit to be available is to be a percentage of the investment in war production inventories and work in process and war production receivables and payments made or concurrently to be made to subcontractors. Is credit available on cancellation of war production contracts to be made available to subcontractors as well as prime contractors? Yes. If borrower is prime contractor, may cancellation of war production contract upon which he is subcontractor be made a basis for credit? Yes. Is it desired that guarantee agreements should be so drawn that financing institutions must assume burden of verifying inventories, goods in process and accounts receivable where loans are made based on cancellation of war production contracts or is it sufficient if loan agreement 1332 -8"provides for certificates of borrower and provides that financing institution acting in good faith may rely thereon? A. There is no change in policy in this respect from ordinary Regulation V loans. The Financing Institution may provide in the loan agreement for certification by borrower. Inasmuch as the Financing Institution in this type of loan will always have at least a 10% interest, it is believed that it will have sufficient incentive to exercise reasonable care to obtain additional verification in those cases where that appears to be necessary. 11. Q. Where borrower is presently being financed by Regulation V loan, can financing institution make commitment separate and apart from outstanding loan and guarantee and receive an independent guarantee therefor which does not require the financing institution to waive any protection afforded by Section 5 of outstanding guarantee agreement? A. In general it is believed that the existing V loan should be converted into a larger VT loan where the latter type of loan appears desirable. This will avoid serious problems of loans competing for collateral. 12. Q. Is the policy of the War Department changed with respect to making regular Regulation V loans to borrowers who can readily obtain needed credit accommodation without a guarantee? A. No. It is the view of the Aar Department that any contractor engaged in war production who needs money for that production, including sufficient to cover his tax liabilities with tax notes, can have a Regulation V loan. If the amount of borrowing sought is however, obviously primarily for post-war protection, he will have to take a new type V loan or a 'VT' loan. For instance, if a borrower needs $7,000,000 for present war production and $20,000,000 to 1333 9/11/43 —9— cover his war production receivables and inventories on termination, to permit him to use his own working capital for re-conversion, if the loan comes in at $20,000,000 it will be classified as a VT loan. If it comes in at g7,000,000 it will be classified as an old form guaranteed loan. Moreover, in the case of a weak contractor, the tendency of the War Department as heretofore will be to approve as a Regulation V loan, a somewhat inflated credit on the theory that the Financing Institution needs additional protection in that type of case. 13, Q. Where a bank makes a loan, after cancellation, under a commitment theretofore given, does borrower pay interest on the loan, or does Service involved pay interest? If a correct interpretation of Section 6, in such a case, is that the guarantor, rather than the borrower, pays interest, does not this Section need revision? This point is raised in view of fact that first part of Section 6 refers to adjustment of interest, which implies that borrower has previously paid it. A. Where a bank makes a loan after cancellation under a commitment theretofore given, interest is waived and guarantor pays interest on a portion of loan proportionate to amount of cancellations, all as provided in Section 6 of guarantee agreement. Borrower must make request for adjustment, and waiver of interest is effective from adjustment notice date, as provided by Section 6. Not considered necessary to revise Section 6, inasmuch as its provisions are applicable in the same way under the broadened program as under the ordinary type of V loan. 'Adjustment' referred to in Section 6 is the waiver of interest and suspension of maturity on the portion of the loan affected." " Approved unanimously, together with the following additional telegram to Mr. 1_334 9111/43 -10Peyton, President of the Federal Reserve Bank of Minneapolis: t_. "Referring your wire of September 3 raising cer1114 questions regarding the expanded Regulation V prorm., answers to all questions except 10 and 11 are being corporated in a wire going to all Federal Reserve Banks. 18wers of guaranteeing agencies to questions 10 and 11 : as follows: 1°- Q. Where credit upon cancellation of war production contracts is provided for, must there be a firm commitment by financing institution or may credit be left optional with it? A. There should be a firm commitment if a commitment fee is charged. If no fee is charged the commitment need not be firm but it is not anticipated that the borrower will normally accept such an agreement. 11. Q. If credit is optional with financing institution should guarantor reserve right to terminate guarantee agreement at any time before credit is actually extended? A. Yes." V Letter to the Presidents of all the Federal Reserve Banks, read- a "There is enclosed for your information a copy of 19Me morandum from the Navy Department, dated September 3, Assistant Chief of43, F4_ signed by Lieutenant Edward B. Smith, oe 4-nance Section, regarding loans guaranteed by the Navy a Partment pursuant to its instructions of August 30, 1943, of tecc)PY which was forwarded to you with the Board's let680 of August 30, 1943." Approved unanimously. Letter to Mr. Allen, Manager of the Credit Department, Federal Bank of New York, reading as follows: 1335 9/11/43 "This refers to your letter of August 24, 1943, en11"ing copies of a draft of loan agreement for 'straight' rrne, with a request that the form be reviewed by the and Navy Departments, the Maritime Commission and ,Joard of Governors. "In this connection there is enclosed a copy of a sme randum from the War Department, dated September 10, 43mo, signed by Mr. Charles H. Willard, Loan Officer, inici? -1,-:-cating that the War Department has not yet studied the e°11a of loan agreement enclosed with your letter, but ;Tressing the view that it would be an unnecessary duPlacation for the Federal Reserve Bank of New York to preare a form of loan agreement for use in connection with voling ' credits, in view of the fact that the form pubin the pamphlet of the American Bankers Association tritled 'War Loans' has been reviewed and approved by e Services. The Navy Department has informally advised qs that it concurs in this view. me , 117e will advise you further upon receipt of the come ribs of the Services regarding the form of loan agreement nelosed with your letter." l Approved unanimously. Thereupon the meeting adjourned. Assistant Secretary. APP/'oved: ,/ Ai4( Ak / Chairman.
@FedFRASER