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Minutes for September 12, 1958 To: Members of the Board From: Office of the Secretary 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. A Chm. Martin Gov. Szymczak Gov. Vardaman Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson r•-47 Minutes of the Board of Governors of the Federal Reserve System on Friday, September 12, 1958. The Board met in the Special Library at 9:45 a.m. PRESENT: Mr. Balderston, Vice Chairman Mr. Szymczak Mr. Vardaman Mr. Mills Mr. Robertson Mr. Shepardson Mr. Kenyon, Assistant Secretary Mr. Fauver, Assistant Secretary Mr. Riefler, Assistant to the Chairman Mr. Thomas, Economic Adviser to the Board Mr. Young., Director, Division of Research and Statistics Mr. Boothe, Administrator, Office of Defense Loans Miss Burr, Associate Adviser, Division of Research and Statistics Mr. Benner, Assistant Director, Division of Examinations Report on mobilization activities (Item No. 1). On August 14, 1958, the Board received a request from Senator Robertson as Chairman Of the Joint Committee on Defense Production for a factual summary of 111°bilization activities of the Board during the past year for inclusion 111 the Eighth Animal Report of the Joint Committee to the Congress. The equest was somewhat more broad than those in previous years, which related on1,y to programs carried out under the Defense Production Act. Ac cordinglY the report proposed for submission to the Committee covered th0 preparedness program of commercial banks as well as activities under /Entered at point indicated in minutes. I,•-•,‘ _ ..00cgr) 9/12/58 the V-loan program. Copies of the proposed report had been distributed to members of the Board prior to the meeting, together with a memorandum from Mr. Leonard dated September 10, 1958. The report was unanimously approved for transmittal to the Joint Committee in the form attached to these minutes under Item No. 1. At this point Governor Szymczak and Messrs. Hackley, General Counsel, and Molony, Special Assistant to the Board, joined the meeting and Mr. Boothe withdrew. Library of Congress report on monetary policy. As reported to the Board at its meeting on August 27, there had been received from Senator Flabright a letter dated August 26, 1958, which requested staff comments on the revised draft of a study entitled "Federal Reserve Policy and Economic Stability 1951-57" prepared for the Senate Banking and Currency Committee by the Legislative Reference Service of the Library Of Congress. Prior to this meeting there had been circulated to the members of the Board a proposed reply for the signature of the Chairman Which would be accompanied by a memorandum incorporating the staff comMents on this study. There followed a general discussion of the proposed letter and attached comments, relating both to the substance and to the form of the reply. It was the consensus that the transmittal letter should contain a request for its publication, along with the staff comments, in the printed report, but that the letter should be prepared in somewhat 2593 9/12/58 briefer form and that certain specific comments on the Library of Congress study now enumerated in the letter should be incorporated instead in the memorandum of staff comments. The memorandum, it was suggested, should be edited in such a way as to present more forcefully and clearly to the average reader the import of the major points discussed therein* Because of the nature of the study, which reflected the personal analysis of its author, Dr. Achinstein, concern was expressed lest the impression be created upon publication that it reflected the views of the Senate Banking and Currency Committee, much in the manner of a Committee report released foLlowing hearings. It was noted that discussion by the Board's Legislative Counsel with the staff of the Committee had resulted in an indication that the title page of the printed study would contain language more nearly representative of the actual circumstances. Nevertheless, the element of possible confusion served to reinforce the view of the Board that the staff comments to be published with the document should be presented as effectively as possible and that the transmittal letter over the Chairman's signature also should be included with the published study. At the conclusion of the discussion it was understood that the staff would prepare a revised draft of the transmittal letter and the staff comments to be attached, taking into account the views expressed at the meeting, with a view to further consideration by the Board at its meeting on September 15. 9/12/58 —4— Fiscal tgencj activity of the Federal Reserve Bank of New York (Item No. 2). In a letter dated September 10, 199, the Federal Reserve Bank of New York had requested approval by the Board for its acting as fiscal agent in respect to a proposed issue of two-year bonds by the International Bank for Reconstruction and Development. Prior to the meeting there had been circulated to the members of the Board a proposed letter which would indicate the Board's approval. It was unanimously agreed to approve the letter, a copy of which is attached to these minutes as Item No. 2. Thereupon the meeting adjourned. Assistant Secretary,' BOARD OF GOVERNORS OF THE Item No. 1 9/12/58 FEDERAL RESERVE SYSTEM WASHINGTON OFFICE OF THE VICE CHAIRMAN September 12, 1958 The Honorable A. Wil1ia Robertson, Chairman, Joint Committee on Defense Production, Congress of the United States, Washington 25, D. C. Attention: Mr. Harold J. Warren, Clerk and Counsel, Room 927, H.O.L.C. Building, 101 Indiana Avenue; Northwest, Washington 25, D. C. Dear Senator Robertson: In response to your letter of August 14, 1958, attached is a factual summary covering mobilization activities of the Board of Governors for the past year. The summary covers two programs—the V—Loan Program, which is the only program carried out by the Board under authority of the Defense Production Act, and a program related to the preparedness of commercial banks being carried out under the provisions of Defense Mobilization Order 1-20. During the year, the Board of Governors and the Federal Reserve Banks have continued their preparedness programs, and have continued the study of measures to be taken in the monetary and credit field in the event of an emergency. Sincerely yours, C. Canby Balderston, Vice Chairman. Attachment. GUARANTEED LOAN PROGRAM 1. Mobilization programs conducted by your office, including the "V-loan Program" conducted under the authority of the Defense Production Act as amended and the implementing Executive Orders. The Federal Reserve Banks, under regulations of the Board of .ernors, act as fiscal agents of the United States in connection th the V-loan program for Government guarantees of defense produc6ion loans, and the Board of Governors, after consultation with the guaranteeing agencies, prescribes fees, rates and procedures to be Utilized in connection with such guarantees. n 2. The authority from which your office derives its powers for such programs. The present "V-loan Program" of Government guarantees of lo41ns to finance defense production was inaugurated under authority ,If the provisions of section 301 of the Defense Production Act of ( 950, approved September 8, 1950, and the President's Executive jder 10161, dated September 9, 1950, subsequently superseded by 4scutive Order 10480, dated August 14, 1953. Under the law, as ' "ended by the Defense Production Act Amendments of 1958, authority '°x' the program, unless further extended, will terminate on June 30, 496P. 8 3. A sumirory of each program. Pursuant to the law and Executive Orders of the President, eertain designated procurement agencies of the Government are authorized to guarantee loans made by private financing institutions to finance rntractors, subcontractors and others engaged in the performance of rvernment defense contracts for the purpose of expediting production ld deliveries or services for the national defense. By an amendment b cle by the Defense Production Act Amendments of 1953 guarantees may also be issued with respect to loans made to finance contractors, subcontractors 2: other persons in connection with or in contemplation of the termination 'z their defense contracts. Z At the outset of the program the designated guaranteeing • It:tides were the Departments of the Army, Navy, Air Force, Commerce, Iri erior and Agriculture, and the General Services Administration. Ifie 1951 the Atomic Energy Comaission and Defense Materials Procureagencies. By P-nt Agency were also designated as guaranteeing - eoutive Order 10480 of August 14, 1953, the Defense Materials Proy e cu— 4 um nt Agency was abolished and its functions transferred to the eral Services Administration. 2 On July 31, 1958, guarantee agreements outstandinL totaled '5°°,436)000. Of this amount) approximately 75 per cent on the average was t;uaranteed by the Government. Under these guarantee agreements in ()r , ce on July 31) loans outstanding amounted to 6306,136,000 and there "as available to borrowers an additional $194,300,000. For th,. past several years the amount of outstanding guaranagreements has remained rather constant indicating that the new Prklarantees authorized about equaled in amount those terminated each ,!Lr. The guarantee agreements outstanding by the various agencies " rticipating in the program follows: tee Department of the Arnw Department of the Navy Department of the Air Force General Services Administration Atomic Energy Commission $29,146)000 186,443,000 231)1621000 48,264,000 5,422,000 The net guarantee fees and interest on purchased loans collee by . the guaranteeing agencies after deducting established losses) tecl athili ri nistrative costs and the expenses of the Federal Reserve Banks as scal agents as of July 31, 1958, follows: Department of the Army Department of the Navy Department of the Air Force General Services Administration Atomic Energy Commission $51185,000 8,767,000 110380,000 4,500,000 450)000 No loans have been purchased by the Atomic Energy Commission. 11111 2epartment of the Army has purchased 30 loans aggregating 4V31,000. Liquidation on these loans has amounted to $12,831,000. 4v:es charged off have amounted to $176,000. The Department of the as purchased 18 loans aggregating $26)957,000. Liquidation on these ara_se loans has amounted to $26)746)000 and losses charged off have .unted to $3,000. The Department of the Air Force has purchased 1" 3' Earto°8-ne aggregating $4,330,000. The liquidation on these loans has erllinted to $1,846,000 and no losses have been established. The Gen4z7; Services Administration has purchased 1 loan in the amount of bee 3°00. There has been no liquidation on this loan and no loss has n established. There has existed since the inauguration of the "V-loan Program" c)q,lete the cooperation and understanding between the guaranteeing agencies, div.staff of the Board of Governors and the Federal. Reserve Banks. Any 1111‘..erence that have arisen have been promptly settled and the primary .8 in the minds of all connected with the program has been to facilitaj°43 the-T,'Ile financing of defense contractors as provided in section 301 of zxe "efense Production Act of 1950 as amended, and the implementing cutive Orders. -34. A statement on the effectiveness of each program. 5. A statilnt on the current need for the programs. 6. A summary of the programs as related to small business. The guaranteed loan program was successful and fulfilled a 44 purpose during World War II and has been effective during the , ' c ent rearmament period. It provides a mechanism whereby defense carltractor3 and subcontractors, particularly small business concerns, arrange to borrower the funds necessary to finance their defense lletion through their local banks by means of Government guaranteed ' 10° s rather than through the advance of Government funds or direct "wernment loans. Usef From the beginning of the program in September 1950 through J41„ the.' A, 1958, 1,523 loans totaling $3,033,000,000 were authorized by re,„ Procurement agencies which may guarantee such loans under the De"se Production Act of 1950) as amended. There was disbursed during the last 12 months since July 310 1957 aPproximately $707,200,000 on outstanding V-loans, most of which 4re r evolving credits. The large amount of defense work financed through the medium can be realized when you consider that the average ratio of loansthe, boLuollar value of contracts held by borrowers to the amount of money ab''°wed under the V-loan program to finance such contracts has been out 6 to 1. The following tabulation shows the number and amount of eed loans authorized at the end of each month in the period 'gust 1957 through July 1958. Guaranteed loans authorized to date Amount Number (In thousands of dollars) 122 August 31 September 30 October 31 November 30 DeceMber 31 1,497 1,498 1,498 1,500 1,503 2,879,682 2,881,972 2,887,958 2,906,458 2,911,583 259:') - 4Guaranteed loans authorized to date Amount Number (In thousands of dollars) 1958 January 31 February 28 March 31 April 30 May 31 June 30 July 31 1,506 1,511 1,512 1,514 1,516 1,522 1,523 42,922,933 2,934,880 2,936,430 2,936,900 2,952,250 3,029,459 3,033,009 Eighteen per cent of the number and approximately one per cent Of the amount of loans authorized consisted of loans under $100,000 while 56 Per cent of the number and 6 per cent of the amount were under $500,000. Eleven per cent of the number and one per cent of the amount of 4:4148 were to borrowers having assets of under $100,000; approxi42 tatel authorized per cent of the number and 8 per cent of the amounts were to borroY 12 wells having assets of under $500,000; 57 per cent of the number and Per cent of the amount were to borrowers having assets of under $10000,000. Approximately 73 per cent of the number and 19 per cent of the °11nt of loans authorized were to borrowers having less than 500 employees, tillclu troisdirlg employees of affiliated concerns under common ownership or conamount 0/. 1 APproximately 75 per cent of the number and 23 per cent of the 500 than 418 authorized were to borrowers individually having less -v-40Yees. The following tabulation shows a breakdown of guaranteed loans allthorized as of July 31, 1958, by size of loan: PERCENTAGE DISTRIBUTION OF V-LOANS AUTHORIZED THROUGH JULY 31, 1958, BY SIZE OF LOAN Size of Loan tinder 450,000 - $99,999 - $249,999 $499,999 '25°3°W 7 s:600,000 - $999,999 44,999,999 1,52o00l000 m1/3 $9,999,999 4000 and over Percentage of guaranteed loans authorized __ Amount Number 7.3 10.4 19.6 18.6 15.6 .1 .5 1.9 3.8 6.1 22.2 28.0 3.1 3.2 12.3 47.3 Cumulative percentage distributions Amount Number 7.3 17.7 37.3 55.9 71.5 93.7 96.8 100.0 .1 .6 2.5 6.3 12.4 40.4 52.7 100.0 26r -5Percentage distribution of the guaranteed loans authorized m the beginning of the program to the end of July 1958, is shown b low, classified by number of employees of the borrower. PERCENTAGE DISTRIBUTION OF V-LOANS AUTHORIZED THROUGH ....2jall."1.2511_131 NUMBER ?El2LOYETIS OF BORROWER NIter tc,A219;ozta Percentage of guaranteed loans authorized Amount Number Cumulative percentage distributions Amount Number Number of employees of borrower, including affiliated concerns under common ownership or control thlder 25 -49 ,5? -74 (7) 99 1 ,°° - 149 ;5° '„ 5° 499 AJ0 - 999 1)000 - 2,499 2)500 and over liot available 8.1 10.7 9.0 6.8 9.5 13.1 15.3 11.0 7.2 5.6 3.7 .6 .8 1.2 1.2 1.9 4.3 8.9 10.8 14-4 53-5 2.4 8.1 18.8 27.8 34.6 44.1 57.2 72.5 83.5 90.7 96.3 100.0 .6 1.4 2.6 3.8 5.7 10.0 18.9 29.7 44-1 97.6 100.0 Number of employees of borrower only (not including affiliated concerns under common ownership or control) thicter 5 50 75 25 -49 - 74 _ 99 - 149 .L50 -249 5() 500 - 499 11° 0 0 - 999 2,499 23500 and over Not available 9.0 11.3 9.8 7.0 9.1 13.5 15.3 10.7 6.1 4.4 3.8 .9 1.2 1.3 1.2 1.9 6.1 9.9 11.6 13.9 42.6 9.4 9.0 20.3 30.1 37.1 46.2 59.7 75.0 85.7 91.8 96.2 100.0 office 7. Major problems which now confront your including programs, in carrying out mobilization the "V-loan Program". None. .9 2.1 3.4 4.6 6.5 12.6 22.5 34.1 48.0 90.6 100.0 2601 6 8. Changes in mobilization planning and readiness measures to meet future emergencies, including the "V-loan Program." The Federal Reserve Banks have plans to conduct the essenoperations of the banks from relocation offices in the event of emergency. The Reserve Banks plan to continue to perform such soal agency functions under the V-loan program as the situation "en prevailing permits. tii4. p j 9. Summary of any standby programs for any future emergency. The only Federal Reserve program authorized under the Defense Plans contemplate that the n Act is the V-loan program. eci cb"wIctio eral Reserve Banks and the Board will be prepared to participate in exPanded V-loan program suitable to any future emergency needs. 10. Changes in organization during the past year. None. 11. Future objectives. As stated in section 301 of the Defense Production Act, the ob • "to expedite h"cLive of the guaranteed loan program continues to be • ero dllotlon and deliveries or services under Government contracts." 12. Availability of funds for defense needs, including the "V-loan Program." monies The guaranteeing agencies are authorized to use any expenses and 141":uPrlated to them for defense purposes to meet any costs connection with the V-loan program. 13. A statement of action taken as a result of any recommendations of the Joint Committee on Defense Production. None. t 14. Such other information as may appear pertinen the for es activiti in summarizing your mobilization " Program. an past year, including the "V-lo of 1950 as Under the provisions of the Defense Production Act the President to reports make to ot i.ru, the Attorney General is directed of results the on Congress .Lle United States and to both Houses of 2602 -7-. surg, .1. —Vs.made for the purpose of determining any factors which may tend ellminate competition, create or strengthen monopolies, injure small siness, or otherwise promote undue concentration of economic power in he course of the administration of the Defense Production Act. 1958, After an extensive survey, the Attorney General on August 8, the by d reache ndered such a report. The following conclusions were Att°rneY General regarding the V-loan program. Our broad survey of the Defense Production Act V-loan Program indicates that, on the whole, it operated satisfactorily. The program appears to have yielded material benefits to the three parties involved--the lenders, the borrowers and the Government. The program resulted in considerable benefits to the more Government. The $2.9 billion in V-loan credits and the ins, credit those under s sement than $11.6 billion in disbur funds. ment, Govern not e, volved the expenditure of privat That the Government guaranteed the private lenders against most of the loss was sufficient to set in motion this large ry to volume of defense production financing. Finally, contra program loan Vthe many other Government financing programs, has been self-sustaining. The Government has thus far netted a profit in excess of $27 million, more than its profit under a World War II V-loan program involving a threefold greater volume of loans. The lenders, who in almost all cases were commercial credits banks, were enabled to extend close to 0 billion in ring conside , profit of at a minimum of risk and at a fair rate Govthe with st intere the lessened risk and the sharing of loss of ernment. The lending institutions did not face any it was since ing, business through direct Government financ own their sed disbur they who made and serviced the loans, y guarant ment Govern a funds, and decided whether to apply for -loans V of s portion against loss. Moreover, the guaranteed ions were not counted in computing the legal lending limitat the that extent Zoverning the banks. Accordingly, to the legal loans were guaranteed, the banks did not commit their loans nteed -guara lending authority and were able to make non to others. -loan proIn general, the borraaers benefited from the V of credits volume gram since they were enabled to obtain a large and terms ble to finance their defense production on reasona in which s credit for rather extended maturities. These were h other throug them many cases would not have been available to borrowers did not have channels. In most cases, however, the 260:3 -8to mortgage their fixed assets to obtain these credits; it was suffcient merely to assign as security the monies payable on the defense contracts which were being financed. The small and medium size groups of contractors by far predominated among the borrowers. While their share of the that dollar volume of the program was substantially less than of tion propor their of larger firms, it closely paralleled ions defense contracts. Moreover, since their scale of operat ng anythi t reques or need was smaller, smaller business did not ss. busine large by ed like the dollar volume of V-loans obtain rejected, Indeed, if none of their V-loan applications had been addislight very small business would have received only a tlonal share of the entire program. Small business received some particular benefits under the program. Since 1953 their applications, unlike those of goods large business, could not be denied merely because the were , and services for which V-loan financing was sought readily available from other sources. Moreover, the Govern most mentls ceiling on interest rates and its assumption of of the risk of loss resulted in small business paying a lower ' interest rate on V-loan credits than it would have had to p457 credit cial commer ary custom r, Furthe on nonguaranteed loans. Standards may have been somewhat relaxed in small business conloans, since many small business firms received V-loans siderably in excess of their total assets. small Apart from these benefits, the program enabled many tracts subcon business firms to undertake defense contracts and suffiobtain could they that With the reasonable expectation that then, , anpear would It d. cient working capital to procee undertaking the program broadened the base of firms seeking and defense contracts and subcontracts. effects It is difficult to measure further the competitive available of the V-loan program because of the unsuitability of be must it l, data for detailed analysis. However, in genera e prodefens aid to recognized that the V-loan program, designed such of n patter curement, followed, rather than determined, the which of ts, elemen procurement. That pattern involves a host of his e financ the ability of the would-be defense contractor to increasing the availaProduction is only one. Nevertheless by the potential of bility of such financing, this program widened tracts, and subcon firms to compete for defense contracts and ition. compet thus aided rather than adversely affected 2604 In reinstituting the V-loan program in 1950, Congress professed its satisfaction with the way it had operated during 4orld War II. Our survey indicates that the present program closely paralleled the earlier experience. Al ' '60 COMERCIAL BANK PREPAREDNESS PROGRAM 1. Mobilization programs conducted by your office. Development of plans, in cooperation with the Department of the Tx• the Comptroller of the Currency, and the Federal beeasurY, including c Posit Insurance Corporation, to encourage preparedness measures by the aniercial banking system designed to assure continuity of operations of *r banking system in the event of enemy attack, including the preserva_. of essential records. j 2. The authority from which your office derives its powers for such programs. Defense Mobilization Order I...20. 3. A summary of each program. This program seeks to accomplish its purpose (1) by acquainting corm. -,ercial banks with the importance of making plans for preservation of .sential records and continuation of operations in the event of attack, 4(2) by providing guidance as to how this might be done. g Two committees of bankers are working on the program--an Advisory "er Uilltitee on Commercial Bank Preparedness and a Banking Committee on gency operations, the latter a committee composed of senior operating Jeers. During the first part of this year, the committees have issued rd de distributed to all banks in the country copies of five booklets preattack preparedness measures. The committees are now work0 a, a a series of booklets concerning measures and operations following ' 4eetructive attack. 4. A statement on the effectiveness of each program. So far, emphasis has been on the preparation and distribution of the 1, a41 °0klets referred to in No. 3 above. The next step is to encourage b: /t r8 to undertake the precautionary measures for their own institutions. therefore, too early to comment on the effectiveness of the program. 5. A statement on the current need for the programs. It is believed that an effectively functioning banking system 14°11.1c1 be essential to the nation in time of war as well as in peace, and 13116 adequate preparedness measures are essential for such a continuing g system. 260 -2.. . A summary of the programs as related to small business. 6 0.3 The program relates to the entire economy, to small business well as large. 7. Major problems which now confront your office in carrying out mobilization programs. General lack of realization of the necessity for such a program. 8. Changes in mobilization planning and readiness measures to meet future emergencies. None. 9. Summary of any standby programs for any future emergency. None. 10. Changes in organization during the past year. None. 11. Future objectives. Implementation of the program. 12. Availability of funds for defense needs. Not applicable. 13, A statement of action taken as a result of any recommendations of the Joint Committee on Defense Production. None. 1144 Such other information as may appear pertinent in summarizing your mobilization activities for the past year. AeCompallying this to in Item 3. summary report are copies of the five booklets 2607 I 4 0;044*, egi ki0 Ot -- 4 11 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. 4 01, 4, 04.f . t Item No. 2 9/12/58 ADDRESS OFFICIAL CORRESP ONDENCE. TO THE BOARD September 12) 1958 Mr. H. A. Bilby, Vice President, Federal Reserve Bank of New York, New York 45, New York. Dear Mr. Bilb5r: This refers to your letter of September 10, 1958, and its enclosures, concerning the propos ed issue by the International Bank or Recons truction and Development of its Two Year Bonds of 1958, ! 14c October 1, 1960. In that letter you state that it is proposed 0 amend Schedule A of the Fiscal Agency Agreement dated as of ,ebruarY 6, 1950, between the International Bank and your Bank to include the bonds in question. ; The Board of Governors approves of your Bank acting as Agent in respect of the proposed issue by the Internationa l -auk of Two Year Bonds of 1958, due October 1, 1960, and approv es the , ( 3 ccution and delive ry by your Bank of an Agreement with the InternaN.Lonal Bank in the form or substantially in the form of Supplement o 15 to the Fiscal Agency Agreement dated as of February 6, 1950, etween your Bank and the International Bank, enclosed with your letter. 1118ccu. Z Very truly yours, (Signed) Kenneth A. Kenjon Kenneth A. Kenyon, Assistant Secretary.
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