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Minutes for To: Members of the Board From: Office of the Secretary September 12, 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 Goy. Vardaman Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson X Minutes of actions taken by the Board of Governors of the e(leral Reserve System on Thursday, September 12) 1957. The Board Piet in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman 1/ Szymczak Vardaman Mills Robertson Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Kenyon, Assistant Secretary Riefler, Assistant to the Chairman Leonard, Director, Division of Bank Operations Bethea, Director, Division of Administrative Services Young, Director, Division of Research and Statistics Johnson, Controller) and Director, Division of Personnel Administration Hackley, General Counsel Noyes, Adviser, Division of Research and Statistics Sprecher, Assistant Director, Division of Personnel Administration Hexter, Assistant General Counsel Schwartz, Economist) Division of Research and Statistics Electronic computer (Item No. 1). In a letter dated August 30, 1957) *. Andrew T. Fischer, Director of Marketing for Alwac Corporation, 84\11-sed that delivery of the Alwac 800 Computer System ordered by the toal,A 4"- would be further delayed, possibly into 1959. As an interim Measur el he suggested installation of an Alwac III-E on a rental basis, A ttended morning session only. 9/12/57 -2- '4th 'waiver by the Board of the penalty provisions in the existing cottract. He also stated as soon as reevaluation of the Alvac 800 1)rcgram had been completed, definite schedules would be presented to the Board. The situation was discussed in memoranda from Mt. Young and *cm the Legal Division, dated September 10 and 11, 1957, respectively, O Nihich copies had been distributed to the members of the Board. The ilielnorandum from Mr. Young discussed possible procedural alternatives 1" concurred in the suggestion of the Legal Division that a letter be sent to Alvac Corporation 'which would in effect constitute an - 4uvledgment and preserve the Boardts rights. ' This would permit krther study of the matter in order to reach a decision as to what ecilIrse of action would be most appropriate. The memorandum from the Legal -1* Division discussed the possible alternative actions from a legal etarld Point in the light of the terms of the contract and expenses Y Incurred by the Board in preparation for the installation of - computing system. It was recommended that the Board might treat the contract as being in full force and effect until October 30, 1957, Ett vhi c" time there -would be an "actual" breach of contract because Ill•c te failure to make delivery on or before that date. The Board then seek damages for breach of contract, enter into a modified ll'angernent with Alvac Corporation, enter into an arrangement with alloth er manufacturer, or take no action whatever. -3- 9/12/57 Governor Mills said that, beyond the question of legal rights 411c1 whether the Board wished to assert those rights, it occurred to hinathat the project was in a sense one of an experimental nature, lith the Board having a part in the development of a device tailored tor its particular needs on almost a research basis. Therefore, it 8 Illed to him that the Board might wish to consider the problems " nding delivery of the computer in a somewhat different light sIll *°41 an exclusively commercial transaction. In these circumstances, he felt that the Board should exercise a degree of patience and not ''act its full legal rights, even though it might be entitled to do sc)" the He went on to note that in dealing leniently with Alwac Corporation noard had expected to get a better machine than originally con- te1111314ted, but he now had some doubt about the company from its 8tallciP°Int of its financing and management. It seemed possible that the 13°ard might be dealing with a concern that had moved too high in erea of research and could not produce the equipment or service the ' 1.rhich might be expected from some larger manufacturer. the Governor Vardaman recalled having felt originally that e'rcl was entering into this project too soon and said he went along with t 4'e program on the basis that the special committee of the Board had. g°11e into the matter thoroughly. At this point, he felt that the reco 111111endation of the Legal Division might well be accepted. This 9/12/57 -4- 7'3111d permit deferring a final decision until the end of October, and U1 the meantime it might be possible to obtain further information about the Potentialities of the company, particularly its financial status 44a its ability to give the Board the benefit of further developments in the computer field. If the situation seemed doubtful, the Board c°111d then consider cancelling the contract and dealing with a larger 14all turer, even at increased cost. Governor Vardaman noted that the proposed reply to Alwac Cor- ID°ratiou had been prepared for Mr. Bethea's signature) and Mr. Hexter ec4rIlliented on this point by saying that previous correspondence on the Illatter had been signed by Mr. Bethea in line with his procurement responsibilities. It was considered preferable to continue in this 1118flxierhe said, in order to avoid any complication due to a possible c°4te4tion on the part of the Alwac Corporation that it did not know 111° was speaking for the Board. At the request of the Board, Mr. Young then made a statement 14 ch he said that the developments with respect to delivery of the computer were very disappointing to the staff; it had looked forto obtaining the machine and beginning to handle some of its work i4 this way. At the same time, he did not believe that the picture - entirely black. The company was understood to have been reorganized, h aye brought in leading trouble-shooters, and to have set up an 1141)roved operating organization. From an engineering standpoint, the Q°tIla-nY seemed to be quite satisfactory, and it had been appraised 9/12/57 -5- carefully by the Bureau of Standards in connection with a proposed 1311rohase by that Bureau. Also,the company was obtaining new capital from its principal owner and there would be new funds to permit gc)ing ahead with development work. The Alwac III-E computer was now iii Production and organizations which had installed this machine were finding it quite satisfactory. With regard to the charting machine ordered by the Board from the same concern, Mr. Young said that delivery likewise was being delaYed. While the machine was actlially in existence, its functioning did not yet meet the desired standards and consultants had been brought 14 for further study. It now appeared that progress was being made, but that it would be at least four months before the necessary corrections we accomplished. Returning to the computer situation, Mr. Young appraised the 11411°Ils alternatives and said it was the feeling of the staff at the nicallent that probably the best procedure was to play along with the c°14PalaY, but to re-examine the whole matter intensively before making 4 tinal recommendation. In response to questions by Governor Balderston, Mr. Young classed the potential use of a computer installation in the near tilt and said that although it would be desirable to have the Alvac alrellable promptly, there were no urgent projects which could not be 800 9/12/57 Ilandied -6on a different basis. With regard to the prospective business lt/ao- survey, he said that collection and tabulation of the information /1°111d be done on mechanical tabulating equipment at the Federal Reserve 844ks rather then attempting to do the work in Washington and that this d avoid some of the problems encountered in connection with the 1955 survey. He also commented that it had been found, in the case of 44 electronic computers, that approximately 12 months after delivery 1748 required in order to "get the bugs out of the machine". After Mr. Schwartz had reviewed possible advantages and disadvantages of accepting a III-E computer on a rental basis, Mr. Bethea Pointed out the difficulty that would be involved in changing to a different coding system when the Alwac 800 machine eventually was de livered. At the conclusion of the discussion, the proposed letter to 41141e Corporation was approved unanimously, with the understanding that Further study would be given to alternative courses which the lk)Etrd might follow. Item **-------11c --1*-1.• During A copy of the letter is attached hereto as the foregoing discussion Mr. Molony, Special Assistant to the Board, entered the room. At its conclusion Messrs. Hexter 444 Schwartz withdrew and Messrs. Solomon and Shay, Assistant General e°114ael, joined the meeting. 61 ifft,t1k 9/12/57 -7Board and Federal Reserve Bank budgets for 1958. There had been distributed to the members of the Board a draft of the instructions to be issued for preparing the 1958 budget of the Board. At the request of the Board, Mr. Johnson discussed the differellees from the procedures provided by the 1957 budget instructions. lie also pointed out that each Division of the Board would deliver a ecPY of its tentative budget to Governor Shepardson on or before October 11, 1957. After review, the completed budget would be delivered to Governor Shepardson not later than the 8th of November. Governor Mills inquired concerning the presentation in the bud get of tentative expenditures on which a final decision had not been reached, and in response Mr. Johnson described how special projects 1/°4111 be segregated from the operating budget. on Governor Mills then referred to the need for careful preparati 44a* consideration of the budget at a time when the Board had declared Itself so firmly in favor of economy in Federal expenditures. He ex- the view that in order to afford the Board a complete picture, "should be included in the budget whenever there was any possibility itel that e-xpense would be incurred during the budget year, rather than to have Special projects presented to the Board during the course of the Year. Agreement was expressed with the views stated by Governor Mills 411d Mr. Johnson assured the Board that every effort would be made to 2533 9/12/57 -8- have the budget take into account expenses that might be incurred the year 1958. Thereupon, the instructions for preparing the Board's budget for locA were approved unanimously. There had also been distributed to the members of the Board e°131ea of a memorandum from Mr. Leonard dated September 9, 1957, sUbMitting an outline of the procedures recommended for snAlyzing 4111 considering the budgets of the Federal Reserve Banks for 1958. The recommended procedures were unchanged from last year, except that the distribution of budget summaries to the Board was scheduled or the third week in November instead of the first week, because of the Board's action in extending the deadline for receipt of the budgets 1'1'0M October 1 to October 15. Following a statement by Mr. Leonard, the recommended procedures 1 unanimously. .1 Iltel* P4kE21r2. In this connection, Governor Balderston suggested the appoint• of a coomittee of the Board to consider the proposed Bank budgets salary recommendations for officers before these matters were • 441 811hmitted to the full Board. Agreement was expressed with this suggestion 441 i• t was understood that a committee of the Board would be appointed et pi, —4 aPpropriate time. Mr. Noyes then withdrew from the meeting. 25, 9/12/57 -9Retirement cases at Federal Reserve Banks. In a letter dated jUlY 15, 1957, sent pursuant to the Board's request, each of the Federal Reserve Banks was asked to give the circumstances under which ertiPloyees had retired since January 18, 19570 the date on which the S.Pecial Joint Committee submitted its report concerning proposed changes in the Bank Plan of the Retirement System of the Federal Reserve 1144ke. The responses were summarized in a memorandum from the Division °t Personnel Administration dated August 28, 1957, which had been circulated to the members of the Board. It was recommended that the I/csara consider authorizing adjustment of the retirement allowances of 11 regular service retirees who had retired on or after April 1, 1957) in order to give such persons the benefit of the amendments to the Retirement System which became effective September 1, 1957. If, h°14ever, such adjustments were to be made through the Retirement System, it appeared that it would be necessary to amend the Rules and Regulations, 8441 it was suggested that this might raise questions concerning the ta.)c status of the Retirement System similar to those raised by the Late rnal Revenue Service several years ago. The legal aspects of the matter were developed further in illenl°1'anda from Messrs. Solomon and Hackley, dated July 24 and August '1957, respectively, particularly in the light of the requirement 26 14 the Internal Revenue Code which states that a pension fund, in °1lder to be exempt from taxes on its income, must among other things tot discriminate in favor of officers, shareholders, supervisors, or -10- 9/12/57 b1ghlY compensated employees. These memoranda also had been circulated to the members of the Board. At the request of the Board, Mr. Sprecher summarized the inforMation contained in the letters from the Federal Reserve Banks. In general, it was his conclusion that the Bank; had acted in good faith in an effort to do the best possible job under circumstances where it " 17 not known until recently what action would be taken with respect to revising the Retirement System benefits. He stated reasons for feeling that retroactive adjustments, if any, could well be restricted to regular service retirements and pointed out that if this course were t°11oved only a relatively small number of cases would be involved. On the matter of a cut-off date, he said that if a recommendation must be Made) the Division of Personnel Administration would be inclined to silgeet April 1, 1957, because that was the date when arrangements became effective in the case of a high-level employee looking toward alving him the benefit of the amendments to the Retirement System. There followed a discussion of the matter from the standpoint °t (1)the most appropriate cut-off date for adjusting retirement allow414"8, if it should be decided in favor of such an arrangement, (2) tile number of cases involved, and (3) the question whether any such aciilletitents should be made through the Retirement System or by payments °Uteide of the Retirement System. During this discussion, question 1148 raised whether the action by the Board effective April 1, 1957, 25!"(3 9/12/57 in -11- approving arrangements whereby a retiring Reserve Bank President Might be eligible for adjusted retirement benefits under the Retirenient System contemplated similar arrangements for other Reserve Bank ell1PloYees scheduled to retire on and after that date. On this point, it was stated that according to the record the Board's action related (7)111Y to the one particular case. Later, in approving requests for ectension of the retirement dates of certain employees, the question had. come up as to whether the same opportunity was being given to all ell1Ployees, and the Board therefore had requested complete information fl'QuI the Federal Reserve Banks. Accordingly, the problem of what e°11rse should be followed was before the Board for determination at this time. Discussion then turned to the legal aspects of the situation Mrs Hackley said that as a legal matter the Retirement System's exempt status appeared to depend on lack of discrimination in f4vOr of highly compensated employees. While he felt that no definitive 448%/er could be given in the absence of discussion with the Internal Reve, "Ile Service, he considered it doubtful whether the Internal Revenue ice would hold that a failure to go back and make adjustments would je0Pardize the Retirement System's tax status. As a policy matter, he reit that if any adjustments were made they should perhaps go back at least as far as April 1, 1957. However, in his opinion any charge - serimination would be unjustified if the retirement occurred prior ' 94(12/57 -12- to a time when there was some reasonable certainty of changes in the Retirement System; as of April 1, 1957, there was some possibility of stich changes, but they were not yet definite, and the first action that provided any degree of certainty was the approval given by the 13°all on June 28, 1957. Therefore, it would appear that the Retire- ment -P.vstemts position would be safe from the standpoint of its tax atatue if adjustments vent back only to that date. If there were any charges of discrimination, he felt that they would be likely only in the ease of regular service retirements and the case of the retiring Rese„ -"e Bank President which had been mentioned earlier was not a reglalar service retirement. Mr. Solomon supplemented these comments by saying that the illrormation which had been developed did not appear to reflect di ation in favor of highly compensated employees and that there vere ''LLY a relatively few cases about which there appeared to be any ackbt. °I' While one might speculate at some length on how to resolve all those doubts, he pointed out that any decision might raise certain clifficulties. Among other things, it would not seem feasible t° deal with the situation through the Retirement System itself except thl'°Ugh an amendment to the Rules and Regulations. In all the circum% cee, it seemed to him that the System was confronted with a rather 4fficult practical problem. From the available information, it appeared t th -e Federal Reserve Banks had done a reasonably good job of acting %,• 9/12/57 -13- la good faith, and any further actions might only raise about as manY problems as they would solve. Mr. Hackley said that the Legal Division wished to emphasize the distinction between legal and moral aspects of the matter. From the standpoint of equity, he felt that much could be said for going back to April 1, 1957. After further discussion, Governor Robertson said that, as he recalled the consideration given to the case of President Powell, tt had been in the minds of the members of the Board that everyone in the SYstem subject to the Bank Plan was entitled to be treated in exaetlY the same manner. He did not feel that the Board should be call.4 Upon to make a determination in each individual case as to '41ether there had been compliance with this precept, and in his opinion 411 the Board should do was to say that everyone was entitled to be treated equally. He would, therefore, ask the staff to consider Whether there was any case that seemed questionable and, if so, to lake 4 specific recommendation on which the Board could act. He said he vas , Impressed by the statement of good faith on the part of the , ResA '_ "fe Banks and went on to say that he would favor asking the Reserve ZiEtrat Presidents to review the pertinent retirement cases. If it appeared that there had been compliance with the concept of equill treatment, he lic31.11d be ' inclined to drop the matter at that point. 9/12/57 After additional discussion of alternative possibilities and legal considerations bearing upon the possible courms of action, agreemerit was expressed by the members of the Board with the suggestion that the most appropriate date to consider in making any adjustments t retirement allowances that may be deemed necessary or appropriate probably be April 1, 1957. The view was also expressed that all ea•ses of regular service retirements effective on and after that date hould be approached with a view to equality of treatment. Accordingly, it was suggested that a letter to the Reserve tank Presidents reflecting the views expressed at this meeting be aratted for the Board's consideration. This suggestion contemplated that the Board would consult with the Presidents at the next meeting °11 the Presidents' Conference in an effort to work out on a cooperative bast., anY aspects of the matter on which there may be questions. In a further comment in explanation of his position, Governor 11°Ilertson said he did not agree that everyone who retired on and after 415111 1/ 1957, should automatically be given additional retirement 41-lowances, for this would represent in effect moving the effective 44te of the changes in Retirenent System benefits back to that date. 11°11e/rex', he felt that each case involving a retirement between April 1 Juae 28, 1 the individual 957/ should be examined to be sure that Q04c— was given options comparable to the arrangements made for Mr. 111^e". - ell. He also felt that the final decision should be made by the Feder.a1 Reserve Bank concerned and that the Board should not reverse 9/12/57 -15- the decision of the Reserve Bank if it appeared to have been about right. Ensuing discussion indicated it to be the view of the Board that 8./1Y adjustments could be handled most feasibly through payments °Utetle the Retirement System. Since the Board would have to approve alV such Payments, this was felt to make it all the more advisable that there be discussion with the Reserve Bank Presidents. At the conclusion of the discussion, it was agreed that a letter to the Presidents along the lines suggested would be prepared t°r the Board's consideration. During the foregoing discussion, Messrs. Riefler and Young Vithdrew from the meeting and at its conclusion Mr. Leonard also vitharev. Mr. Kelleher, Assistant Director, Division of Administrative Ser _, viceu Joined the meeting at this point. Ellgibility of funds of Indian tribes as savings deposits Item At its meeting on May 15, 1957, the Board considered the question, presented by the Bureau of Indian Affairs, of the eligili+ bi ----Y of an Indian tribe to have a savings deposit at a member bank. To clarify certain questions raised by the Board, the staff Vas 'quested to discuss the subject further with the Bureau of Indian Atrai , -8 and to check with the Federal Reserve Bank of San Francisco, earlier had informed an interested member bank in that District 9/12/57 -16- that in its opinion Indian tribes were not eligible to have savings clePosits. The results of the further staff inquiry were contained ia a memorandum from Mr. Shay dated June 21, 1957, which, with its att achments, had been circulated to the members of the Board. With hie memorandum, Mr. Shay submitted alternative drafts of a letter to the Bureau of Indian Affairs, one of which would continue to express the view that deposits of tribal funds by Indian tribes are not eligible for classification as savings deposits under the Board's RegUlation Q. Representatives of the Federal Deposit Insurance C°rPoration had informally expressed agreement with this view from the standpoint of the corporation's regulation. The other draft of rePlY "would take the opposite position; that is, that Indian tribes ' e e eligible under Regulation Q to have savings deposits in member 11844. This position would be based on the philosophy that notwithStanding the formal aspects of their organization as governmental e4c1 business units, Indian tribes may be regarded as resembling in tilliclaznental objective organizations of the kind specified in Regu14ti°11 as being eligible to have savings deposits. Mr. Shay's liae4:10rariclum„ however, indicated the belief that such a position, if 'Preferred by the Board, might more appropriately be the subject of 814ellarnent of the Regulation than an interpretation of the Regulation 14 its present form. At the request of the Board, Mr. Shay reviewed the positions take, an in the alternative drafts of letter, pointing out that the first alter riative draft now contained language to the effect that the question 9/12/57 -17- Would be kept in mind in any study looking toward possible revisions Of Regulation Q. Such a staff study, he noted, was requested by the Dc/ani sUbsequent to previous discussion of the Indian tribe question anci as now in progress. Mr. Shay stated that the Legal Division Preferred the first alternative draft and that personally his prererence for that draft was quite strong, since he felt that any different answer, if given, should be through amendment of Regulation Q. With regard to the further inquiry which the Board had requested, Mr. Shay recalled that the principal questions were whether savings deposits would be of any great benefit to the Indian tribes 44i whether the matter had arisen primarily through the interest of eftnercial banks in obtaining these deposits. He said that he could 4°t answer those questions specifically, but that in checking into he matter three converging desires became clear; namely, the desire Of commercial banks, particularly a national bank in Arizona, for the deposits; the desire of the Bureau of Indian Affairs to make the 14dian tribes less dependent on the Government so far as the commercial lives of the Indians are concerned; and the apparent interest of the Indian tribes, in acceding to the desire of the Bureau, to put themselves in the best possible position. It was interesting to note, he that the member bank principally concerned had now indicated to the San Francisco Bank in rather vague fashion that the matter was not (14Ite as urgent as earlier and that the interest of the Indian tribes 2543 9/12/57 I/44 -18- abated somewhat, thereby giving the impression that the member baak would be satisfied to let the question lie dormant for the time being. However, the Bureau of Indian Affairs had taken the position that it would like to have the question considered on the basis on which it was originally presented. In response to a question by Governor Robertson concerning the forms of investment available for tribal funds at the present time Mr. Shay said that such funds can be divided into two general e4tegories - current earnings of the tribes and tribal funds accumulated °ver the years. Funds in the second category are held by the Govern- 'neat and carry four per cent interest, but current earnings cannot be invested in this way except in certain rare instances. The current 'linings therefore are usually held on deposit in commercial banks " Or other financial institutions, although in some instances local disbursing officers of the Bureau of Indian Affairs have authority to invest these funds in specified Government bonds. Most of the flInds at commercial banks are in the form of demand deposits, Mr. Shay Said, with a smaller amount in time deposits. Governor Robertson then expressed the opinion that, although the approach taken in the second alternative draft of letter seemed at tiliat to be quite plausible, the difficulties involved in making an ecelltion in a case of this kind would be great. tore, He suggested, there- that the Board go along with the letter recommended by the Legal bivision. 25449/12/57 Agreement being expressed with the point of view stated bY Governor Robertson, unanimous approval was given to the letter to the Bureau of Indian Affairs of which a copy is attached hereto with the understanding that the substance of the reply would be sent to the Federal Reserve Banks for their information. Messrs. Sherman, Solomon, and Shay then withdrew from the Ineeting. Operation of barber shop. The arrangement with Mr. Willis B°1ing under which he operated the barber shop in the Federal Reserve 331,111ding having been terminated through his letter of September 10, 1957) there had been distributed to the members of the Board prior to this meeting copies of a memorandum from Mr. Kelleher dated September 11, 1957, suggesting alternative methods for operating the 84°P in the future. It was recommended that the Board enter into a co4tract, if possible, with the management of a large existing barber 11 to operate and manage the shop in the building, or, failing that, enter into a contract with an individual, the terms and conditions ot the contract in either case to be in general the same as those UsUmed by Mr. Boling. The matter was discussed and preference was expressed by Illealbers of the Board for an arrangement with the management of a 14rge shop to also operate the shop in the building under contract Illth the Board. This preference having been expressed, the recommend.ati°n in Mr. Kelleher's memorandum was approved unanimously. 9/12/57 The meeting then recessed and reconvened at 3:15 p.m. with the same attendance as at the conclusion of the morning session except that Governor Balderston and Messrs. Bethea and Kelleher were flat present, while Messrs. Riefler and Solomon were present, along th Messrs. Masters, Director, Division of Examinations, Goodman, Assistant Director of that Division, and Furth, Chief, International Financial Operations Section, Division of International Finance. Purchase of stock of Banca d'America e d'Italia by Bank of Ameri •New York "-------,S_tL (Item No. 3). As previously discussed by the Board On several occasions, most recently on September 3, 1957, Bank of Ame 'New York, New York, had requested the consent of the Board rico, to the Purchase of 11,674,456 shares of Banca d'America e d'Italia, Milan „ ) irualy, representing all shares owned by Transamerica Corporation, San Francisco, California, for $11 million plus a sum equal to 40 lire Per' share, prorated on an annusl basis for the period from January 1, 1957 / to the closing date and computed at a rate of 625 lire to the Urlited States dollar, payable to the extent of the earnings of the Italian bank for such period, all in accordance with the provisions an agreement of purchase and sale entered into between Bank of Ailiel'ica and Transamerica Corporation under date of March 20, 1957. This agreement was to automatically terminate in 180 days (September 16 , 1 '4-J)7), and it appeared that the total amount payable for the stock thr ugh September 30, 1957, would be approximately $11,560,000. 2546 9/12/57 On September 3, 1957, the Board requested the Division of Cxarninations to obtain such additional information as appeared necessary for consideration of the proposed transaction, in order that final action might be taken. Accordingly, there had been distributed to the members of the Board before this meeting copies a memorandum from Mr. Goodman dated September 11, 1957, discussing the Proposed purchase in the light of all available information. As 11°teci in the memorandum, the Department of State previously had indicated that it would have no objection to the purchase, and the C°111Ptroller of the Currency, in a letter dated September 11, 1957, stated that he knew of no reason why the request should not be aPproved. The recommendation of the Federal Reserve Bank of New York vas favorable and the recommendation of the Division of Exam!so was favorable, subject to several conditions proposed tc) be set forth in a letter to Bank of America, a draft of which was attbmitted with the memorandum. One of the suggested conditions would provide that Bank of Arrterica would agree to maintain a net capital structure which, in the ildgment of the Board of Governors, would be adequate in relation to the character and condition of its assets and to its deposit lla:bilities and other corporate responsibilities, after giving c°48ideration to Bank of America, New York, and Banca d'America e al Italia on a consolidated basis. 254_ 9/12/57 -22In response to a question by Governor Mills on this point, ** Goodman set forth certain statistics from which he drew the e°4c1usion that the capital position of Bank of America l'e4sonably satisfactory. would be In reply to other questions by Governor VErtlarnan bearing upon the same point, he reiterated the opinion that the capital of Bank of America at the present time could be e°48idered generally adequate when looked at in the light of the e°11eePt expressed in the condition contained in the proposed letter to Bank of America. Governor Vardaman then touched on the question whether the 1104rd would knowingly permit Bank of America to bleed its capital 4Qc°1-Ints and jeopardize its corporate soundness in order to protect the Italian institution, and Mr. Goodman replied in terms that this 6.1Pleared to raise a very difficult question of policy. He expressed the view that if anything were to happen to the Italian bank, Bank CT An, —"erica could not let it fail, for it appeared that the offices (If the Italian bank probably would be regarded publicly as being Ve1.1, -4 much like branches of the American bank. When asked by Governor Vard. eIllan for a further explanation of this reasoning in the light of the '-act that Bank of America and Banca d'America e d'Italia are el3ar + a,,e corporations, he said that if, for example, a condition of s"°111d prevail and Italy should be taken over by a foreign power, ther e might be reason for standing on the corporate structure. If, 0I- A! I , ( ' 9/12/57 -23- however, difficulties were to arise in the normal course of oPerations, he felt that there would be at least a moral obligation °4 the part of the American bank to support the deposits of the Italian institution. After further discussion, Governor Vardaman stated that these were just interesting questions that he had wished to raise 44a that he was prepared to vote in favor of permitting Bank of America to purchase the stock of the Italian bank awned by Transamerica Corporation. Governor Robertson said that in his opinion the Board had 14 effect already passed on the proposed transaction in principle 44a that the main question before the Board at this time therefore /14s whether justification could be found for permitting Bank of Arnellica to invest in the stock of the Italian bank in an amount in ecess of 15 per cent of its capital and surplus, the figure beyond l?hich special approval is required by section 25(a) of the Federal Reserve Act. As he read the statute, the purpose of this provision s to prevent unnecessary hazards - not necessarily a geographical ' Ire diversification of risks, because there could be a number of investments i4 0 "e country - but through undue concentration in one enterprise. The Board, he noted, was authorized to permit a larger investment in ek4Y case if it saw fit. He went on to express the view that the files 9/12/57 -24- tailed to show justification for going above the statutory limitation in this instance, but on the other hand he felt that there were reasons 1411Y the Board would be warranted in granting its permission. If one /fere to look at the whole picture, he said, one could not stand on legal technicalities, and in this case he considered it necessary to look at the whole organization. When that was done, the proposed Investment was seen to be very small in relationship to the assets 441- capital funds of Bank of America's parent institution, Bank of Araellca National Trust and Savings Association. In substance, he felt that the Italian bank might be regarded as a branch of the parent institution, the only distinction being that legally the transaction 1.148 being carried out through an intermediate corporation. Looking 4"t the matter from this standpoint, he felt that the risks were not sUtticiently great to prevent the Board from being justified in 1)el'Illitting an investment larger than 15 per cent of the capital and of Bank of America, New York. In view of the limited amount t risk, the quality of the management of the parent institution, 441 the kind of management that it could be expected to put into 6.11"Y banking corporation which it owned or controlled, he would feel 14411"r321ted in sanctioning an investment above the statutory maximum, l'ecc%nizing that the proposed investment of approximately 01.5 million ' 4°11.1a. represent a figure considerably in excess of the 15 per cent of e4Dit3.1 and surplus mentioned in section 25(a). 9/.2/57 -25After Governor Szymczak stated that he agreed with the 1--Itmt of view expressed by Governor Robertson, the Secretary reported that Governor Balderston, before leaving Washington earlier today, haa advised that if he were present he would vote to approve the request of Bank of America. Thereupon, the proposed letter to Bank of America, New York, "which a copy is attached hereto as Item No. 3, was approved 4-wously, with the understanding that it would be transmitted 114944 hrough the Federal Reserve Bank of New York and that copies would he sent to the Federal Reserve Bank of San Francisco and the Comptroller (:1 'the Currency. The meeting then adjourned. BOARD OF GOVERNORS OF THE Item No. 1 9/12/57 FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. ADONESS OFf ICIAL COWRESPLINOENCE TO THE OCIAFID September 12, 1957 . Andrew T. Fischer, Director of Marketing, ALIIAC Corporation, 10 Columbus Circle, New York 19, New York. Dear Mr. Fischer: This will acknowledge receipt of your letter of Aup „-)4st 30, 1957, in which you state that delivery of the "1-WAC800 Computer System ordered by the Board will be delayed submitted " c siblY into 1959. As an interim measure, you have P ertain proposals relating to the installation and use of an ALWAC III-E. Your letter has been brought to the attention of the , Board. However, a decision regarding your proposals probIlulY will not be made until the Board receives the ”definite ehedules" regarding the ALWAC 800 program, referred to in the received aast Paragraph of your letter. When such schedules are will you e4 a decision is made with respect to your proposals, Promptly advised. l 0 anding, In order to avoid any possible misunderst the of its any Board hereby informs you that it has not waived riO4,4 4->“us under the existing contract with your company. Very truly yours, L. P. Bethea, Director, Division of Administrative Services. r- r BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. Item No. 2 9/12/57 ADDRESS OFFICIAL CORIIESPONDENCE TO THE BOARD September 12, 1957 Fred H. Massey, ”eistant Commissioner, 'eau of Indian Affairs, asted States Department of the Interior, hiagton 25, D. C. he ar Mr. Massey: r V This is in further reference to your letter to Chairman of April 12, 1957 (Ref: Budget and Finance--Finance), concern18Phether an Indian tribe is eligible under section 1(e) of the inard t a Regulation Q (12 CFR 217.1(e)] to maintain savings deposits member banks of the Federal Reserve System. 0 Enclosed with your letter were copies of the constitutions alla 1,, the ,Y-Laws and corporate charters of the San Carlos Apache Tribe of com,,f1-11 Carlos Reservation, Arizona, and of the Yavapai—Apache Indian jn ity of the Camp Verde Reservation, Arizona, by which each of the (h"n bribes was organized as provided by the Act of June 18, 1934 n Stat. 984). The purposes of this Act, among others, were to grant inaia rights of home rule to Indians and to extend to them the right -Lorm business ana other organizations. Under their constitutions and bylaws, it appears that each °t the 14_ tribes is a self—governing organization, subject to certain e'41tations Each constitution established a representativo tribal cuerning body, known as a council, with broad powers, including among pth,"8 the power to levy taxes; to appropriate tribal funds for public NWoees; to promulgate ordinances establishing law enforcement domacies and regulating the conduct of members of the tribe, including 1)1, "tic relations; to license Dr regulate activities on tribal lands Of t"sons not members of the tribe; to prevent sales or encumbrances ptibit.lbal funds or assets; to regulate assignments of tribal land for 1 ? nae; to charter subordinate organizations; and to manage all tri1,: ot Val economic affairs and enterprises in accordance with the terms ' 410 tribe's corporate charter. Under their corporate charters, the entire membership of each or Thethe tribes is a body politic and corporate of the United States. `ribal councils established by the tribes, constitutions and bylaws UUARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 54..5.3 Mr. Fred H. Massey -2 by the charters to exercise all of the broad charter n designated which include among others the power to borrow money and to rajfers till'es operate, and dispose of property, subject to certain limitsto make contracts, including contracts for the rendition of ElerViCeS to the tribe; and to engage in any business that will izther the economic well-being of the tribe. Without their consent, en1111,,D,! 8 of the tribe are not liable for corporate debts; and corporate 8171Tags or profits may be used for the public purposes of the tribe, as the construction of public works, expenses of the tribal governt ,the needs of charity, and the making of loans to members of the ti In your letter, you stated that "An Indian tribe is primarily Lfrci',, 11-tical and governing body over its members. To engage in profitle-Vg business enterprises for the economic well being of its members Ain one of its many functions." Under the definition in section 1(e) of the Board's Regulation r., (i) ;!, member banks may classify as a "savings deposit" only oi. "funds to,rPosited to the credit of one or more individuals, or a reirration, association or other organization operated primarily for simifi°1183 philanthropic, charitable, educational, fraternal or other berie,," Purposes and not operated for profit, or (ii) in which the entire -A. interest is held by one or more individuals or by such a corp„ o wise -auion, association or other organization", if the deposit othercomplies with the definition. the /3, This part of the definition of "savings deposit" has been in takena'arcl ts regulation for over 20 years, and the Board uniformly has Cual,the position that deposits of States and municipalities are not irite2 e for classification as savings deposits. Enclosed are copies of 247 'vretations of the Board published at 1936 Federal Reserve Bulletin the r at 1937 Federal Reserve Bulletin 1073, which are indicative of tott...."dis views concerning the application of the regulation. Funds of tion-'qal corporations, of courael also are ineligible for classifica"savings deposits under the regulation. In view of the governmental character of the San Carlos Apache corpo„arK1 ,_ of the Yavapai-Apache Indian Community and also their broad the 04U6 authority to engage in business activities, the Board is of torlep.t irlion that such tribes, so far as deposits of tribal funds are dtp0;:ird, are not organizations of the kind that may have "savings ot t s" as defined in section 1(e) of Regulation Q, and that a deposit s'ual funds may not be regarded as one in which "the entire beneficial UOARD OF UOVERNORS OF THE FEDERAL RESERVE SYSTEM Mt. Fred H. Massey -3 tinhterest is held by one or more individuals" within the meaning of section of the regulation. Accordingly, deposits of tribal funds `' e4c, the San Carlos Apache Tribe or of the Yavapai-Apache Indian 0.1141nTnity, and of any other tribe similarly organized, would not be :-Lble for classification by a member bank as "savings deposits" for th Purposes of the Board's regulation. On the other hand, there is nothing in the regulation which votad itai .prevent member banks from maintaining savings deposits for :vidual Indians, or for Indian organizations operated primarily for el".-gious, philanthropic, charitable, educational, fraternal, or other addition, funds held bYTar purposes and not operated for profit. In or n Indian tribe as trustee for the benefit of an individual Indian, of .?fs certain individual Indians, or of a nonprofit Indian organization ,,e kind just described, would be eligible for classification as a —"ings deposit" under the definition of that term in the regulation. It should be pointed out also that funds of an Indian tribe 1t dePoe ed in a member bank would be eligible for classification as a liti„ : uri : 4 _1 e deposit" on which interest could be paid by the bank in accordance the regulation, if the deposit complied with sections 1(c) and 1(d) and "time de„the regulation relating to "time certificates of deposit" v°sits, open account", respectively. definition of A brief review of the background of the Board's are an deposits es,„ 'rigs deposits" may be of assistance. Savings not privileges ally favored class of deposits having special forare banks member to any other class of deposits. Thus, bidd certain in except and, bY law to pay interest on demand deposits elichued circumstances, to pay time deposits before maturity; whereas deposits and also to,banks are permitted to pay interest on savings require 30 days' to right adaralr such deposits on demand, provided the addition, member In nee written notice of withdrawal is reserved. Banks much Reserve .11-s are permitted to carry wial their Federal it ; other deposits any against ier reserves against savings deposits than vh" to savings granted were degh,are payable on demand. These privileges which the purpose a thrift, Boa:Ilts because of the desire to encourage from protect to necessary '3 on the basis of its experience, found 411 dependent deposit savings ! e bY making eligibility for maintenance of a upo "the nature of the depositor. t two letter has been discussed on .As you know, the subject of your and your Bureau. The matter Board occasions by representatives of the BOARD 4. Fred OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 2555 H. Massey the beea carefully considered by the Board, which is not unmindful of eit pecial problems that exist with respect to Indian tribes. The re,,71,1011 presented by you will be borne in mind in connection with any '-tew or revision of the regulation vhich may be undertaken. Very truly yours, (:)( Merritt Sherman, Assistant Secretary. 41°1°8111'es 2 2556 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25. D. C. Item No. 3 9/12/57 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD September 12, 1957 lir. Russell G. Smith, Executive Vice President, sank of America, 40 Wall Street, I40w York, New York. Dear Mr. Smith: In accordance with the request contained in your letter of "gust 21, 1957, transmitted through the Federal Reserve Bank of /ZI'l York, as supplemented by your letter of September 4, 1957, the Il alc_li of Governors grants its consent to your bank to purchase 3 u(4,456 shares of Banca d'America e d'Italia, Milan, Italy, rep; Iting all such shares owned by Transamerica Corporation for , ker .,, ,u00,0001 plus a sum equal to 40 Lire per share, prorated on an Ztla1 basis for the period from January 1, 1957, to the Closing 0 and computed at a rate of 625 Lire to the United States Dollar, „aable to the extent of the earnings of Banca d'America e d'Italia such period, in accordance with the provisions of the Agreement Of P urchase and Sale entered into between Bank of America and TransCorporation under date of March 20, 1957. The Board's approval of the proposed purchase is :iven subject to the following conditions: 1) That as long as Bank of America, New York, maintaini a financial interest in Banca d'America e d'Italia, it will maintain a controlling interest of substantially all of the outstanding stock of Banca d'America e d'Italia; 2) That Bank of America, New York, shall not purchase or hold any stock in Banca d'America e d'Italia if Banca d'America e d'Italia at any time fails to restrict its activities to those permissible to a corporation in Which Bank of America, New York, with the consent of the Board of Governors, may purchase and hold stock under Section 25(a) of the Federal Reserve Act or the regulations thereunder, or if Banca d'America e d'Italia, except with the consent of the Board of Governors, transacts or engages in any business in the United States, establishes any branch or agency, LIDARD OF GOVERNORS lir. Russell G. Smith OF THE FEDERAL. RESERVE SYSTEM - 2 AM. or takes any action or undertakes any operation in Italy or elsewhere which at that time is not permissible to Bank of America, New York; 3) That when required by the Board of Governors, Bank of America, Maw York, will cause Banca d'America e d'Italia to permit examiners appointed by the Board of Governors to examine Banca d'America e d'Italia and its branches and agencies, and to furnish the Board of Governors with such reports as it may request from time to time; 4) That Bank of America, New York, agree to maintain a net capital structure which, in the judgment of the Board of Governors of the Federal Reserve System, shall be adequate in relation to the character and condition of its assets and to its deposit liabilities and other corporate responsibilities, after giving consideration to Bank of America, New York, and Banca d'America e d'Italia on a consolidated basis; 5) That within 90 days after consummation of the proposed acquisition of Banca d'America e d'Italia, steps will be taken to increase the capital of Bank of America, New York, by an amount not less than the cost of the shares of Banca d'America e d'Italia acquired. 6) That Bank of America will be expected to dispose of the stock of Banca d'America e d'Italia as promptly as practicable in the event that operations of Banca d'America e d'Italia should at any time be inconsistent with the provisions of section 25(a) of the Federal Reserve Act or regulations thereunder or the terms of this letter. Upon the completion of the pr osed transaction, it is quested that the Board be furnished (1 a copy of the charter or li les of association or other authorizing instrument and by-laws, l2) a report of condition of Banca d'America e d'Italia as of ,tember 30, 1957, on Form F. R. 314 for the Head Office (submitte ,“C Part A, but excluding sections inapplicable to a foreign and each branch, agency, and office individually (submit-'t?lIntrY) 1.ng Part B), together with a consolidated statement of the bank. re n BI.JARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 2558 lir. Russell G. Smith - 3 In granting consent to your bank to purchase the shares of Barlea dtAmerica e dlItalia, the Board desires to reiterate that it 11111 insist on compliance with the provisions of Regulation K as 'Ildicated in the Board's letter of September 4, 1957, to Chairman Tapp. Very truly yours, (Signed) Merritt Sherman Merritt Sherman, Assistant Secretary.
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