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A meeting of the Board of Governors of the Federal Reserve System was held in Washington on Tuesday, September 15, 1942, at 9:30 PRESENT: Mr. Mr. Mr. Mr. Ransom, Vice Chairman Szymczak McKee Draper Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary 141±. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chairman Mr. Dreibelbis, General Attorney Mr. Vest, Assistant General Attorney Mr. Wyatt, General Counsel Reference was made to a memorandum addressed to the Board uader date of September 2, 1942, by Li.. Vest, to which was attached 8111111ar7 of the replies received from the Presidents of the Federal "Banks to the Board's letter of August 7, 1942, asking for the Reser rid suggestions of the Banks regarding the problem of the ab(31.ePtion of exchange and collection charges by member banks. The file he'd been circulated aic.ong the members of the Board before this meeting, 8114 the Latter was considered in the light of the recent discussions of What, any, action the Board should take. By unanimous vote, the Legal Division was requested to prepare a memorandum setting forth the steps which it would recommend for consideration by the Board to meet the problem. 181 9/15/42 -2There was then presented a letter addressed to Chairman Eccles under date of September 14, 1942, by Under Secretary of the Trea surY Bell, referring to the change since April 1 of this year in the volume of excess reserves of member banks in central reserve cities and other member banks and to the agreement that a wider use of excess reserves of member banks outside of central reserve cities would be desirable. The letter also expressed doubt that there was sufficient in- f°rmatien available to enable formulation of effective policies directed toward that end and stated that it would be helpful if the Beard would hate a study made of the distribution of excess reserves outside of central reserve cities, with Particular reference to the location, size, 414 Other characteristics (such as capital ratios) of the banks holding them . It was understood that Li'. Thurston would call Mr. Bell on the telephone and ascertain in what form the information referred to in the letter was desired and obtain more definite advice as to the use to which it was expected to be put. Mr. Ransom stated that, if, over the period of the next sevel'a1 months, substantial amounts of Government securities were purchased tor the System open market account, the earnings of the System would be 14creased to 8 point which would raise the question whether Congress shoulA u restore in some form the provision previously in the law that excess earnings of the Federal Reserve Banks should be paid to the lwverraiLent as a franchise tax. He said that in these circumstances he 1 9/15/42 -3- felt the Board should consider :- -hat its position would be on the matter and What, if any, action it should take. At this point Mr. Paulger, Chief of the Division of Examinations, v, "kr. Leonard, Director of the Division of Personnel I-Ldministratiaa, and Mr 'Cagle the Assistant Chief of the Division of Examinations, joined meetino. Mr. Szymczak made substantially the following statement: Yesterday Mr. Cagle and I attended the special meeting Of the board of directors of the Federal Reserve Bank of Cleveland which had been called in connection with the ind ebtedness and check and other transactions of Mr. Wagner, 110 had resigned as Vice President of the Bank. At the beginning of the meeting, at which, in addition to Er. Cagle and myself, all of the directors except Chairman Brainard were present, I reviewed the history of the development of Information with respect to Mr. Wagner's involved financial condition, after which the directors inquired what the Board ilould like to have them do in the matter. I said that it Was not ITIY purpose to tell the directors what they should do but it was assumed that, inasmuch as they did not have full !-_nformation with respect to the matter, they would wish to uake steps to develop complete information as a basis for lich action on Mr. Wagner's resignation as might appear to be necessary. I also said that they undoubtedly would want to find out whether anything Mr. Vagner had done had resulted n a shortage at the Federal Reserve Bank or whether, by virgield :.pfhis position as an officer of the Bank, he had obtained from other sources, and that to this end the directors might discuss the matter, first with President Fleming as the Chief executive officer of the Bank, and thereafter with the Other officers, including the Auditor and the Vice President rn l charge of examinations, who had had some contact with the etter, after which a decision could be reached as to what further action mi-"ht be necessary. It was made clear that there was no disposition on the part of the Board of Gover,ro.to criticize anyone and that the only interest the Board had in the matter was to be sure that the responsibility of "e directors and the Board was properly discharged. l 181_3 9/15/42 -4- At this Point, the directors called President Fleming into the meeting and Mr. Cagle withdrew, and there was a discussion of the relationship of the Auditor to the board Of directors. It was stated that this matter was on the a6enda for consideration at the forthcoming Chairmen's Conference and that the directors might wish to have the benefit.of the discussions at that conference before reaching a final decision on that matter. I repeated again, in the Presence of 11r. Fleming, that the Board of Governors was not undertaking to criticize anyone in connection with the Lagner laatter and that the only interest the Board had in it was to be sure that the responsibility of the Board and the directors had been adequately met and that all of the facts necessary for a considered decision on Yir. Wagner's resignation had been developed. At the conclusion of the meeting, the directors in?tructed the auditing committee to institute the necessary investigation of the entire matter, conferring first with President Fleming as the chief executive officer and such Of the other officers as might be found to be desirable, after which it would be determined by the directors what further steps should be taken. It was understood that I would inform Chairman Brainard of the discussions at the meeting, that he would keep in close touch with the progress of the investigation, which should be made expeditiously, that the .c! c Ildltins committee would report to the board of directors at 'requent intervals, and that whenever anything was developed Which it was believed should be brought to the attention of the Board of Governors a representative of the board of directors would communicate with the Board of Governors or I would go to Cleveland again. In accordance with this under?tanding, I have talked to Mr. Brainard, and a letter is being prepared for my signature to him confirming the understanding alving him information with respect to the indebtedness of 7* .Wagner at Cleveland banks, the nature and extent of his check tine, operations, and the large deposits made by him in his c hecking account. 1 During the discussion of the relationship of the Auditor tO 4 the board of directors, an opportunity was presented for me (iiscuss in some detail the System program of executive devaloPment and the consideration which was being given to the :XPansion of the functions and services of the branches of " - 3aeral Reserve Banks, and the directors expressed themselves as being in full agreement with what was being proposed. -11 9/15/42 -5- Toward the end of the meeting of the directors, Mr. Klages stated that, as a means of protecting the rights of First Vice President 2,urlinden (who had recently reached the age of 65) under the retirement system and in order to provide an opportunity for the Proper training of an offiIc?r of the Bank to succeed Mr. Fleming as President upon us retirement in 1946, the directors recently had informed Mr. Zurlinden that they proposed to retire him as of February 23, 1943. I took the position that the Board of Governors had approved the appointment of 1,:r. Zurlinden as First Vice President for a term of five years from March 1, 1942, that if the board of directors of the Bank had any plans with respect to his retirement they should have been taken up with the Board of Governors before they were discussed with Mr. Zurlinien, and that before any further action was taken a conzittee of the directors should meet with the 1, ;1: . 13 12=ngton at a time when all of the members of present for the purpose of reviewing the Ira°1e Problem of official Personnel at the Cleveland Bank. he directors agreed that they would proceed in accordance Nita this suggestion. During the afternoon, I had an opportunity to talk with 4r. Fleming and Mr. Hays about expanding the functions and services of the Pittsburgh and Cincinnati Branches. . As the result of recent discussions, the directors have „rcided to continue the present arrangement with Squire, kdancters & Dempsey as Counsel for the Bank and to appoint one employees of the Bank, who is a member of the bar and 0 has Practiced law, as assistant counsel. A letter askluS for the Board's approval of a salary for the new appointee will be submitted to the Board in due course. Of tile Following Mr. Szymczak's statement, 'Messrs. Thurston, Paulger, bretbelbis, Leonard, Vest, Wyatt, and Cagle left the meeting, and the acti -on stated with respect to each of the matters hereinafter referred to Was then taken by the Board: The minutes of the meeting of the Board of Governors of the Fe e1 Reserve System held on September 12, 1942, were approved unanitiously. 8 9/15/42 k -6The minutes of the meeting of the Board of Governors of the Federal Reserve System held on September 14, 1942, were approved and the ectio 8 n recorded therein were ratified unanimously. The minutes of the meeting of the Board of Governors of the Federal Reserve System with the Federal Advisory Council held on Sep- tember 14, 1942, were approved unanimously. Memorandum dated September 9, 1942, from Mr. Paulger, Chief Of the Division of Examinations, recommending that the following in- cl ' eases in salaries of employees in that Division be approved, effective as of September 16, 1942: Name Designation Louis W. Zidek Edward S. Myers Herbert H. Hagler Carroll R. Eighfield Robert X. Schoenhoff X. Fred English Assistant Assistant Assistant Assistant Assistant Assistant Examiner Examiner Examiner Examiner Examiner Examiner Salary Increase To From •••••••••• $1,900 2,300 2,900 2,300 2,500 2,900 $2,100 2,500 3,100 2,500 2,700 3,100 Approved unanimously. Lemorandum dated September 15, 1942, from Mr. Carpenter, Submitting the resignation of Rexford Kirkland as a senior operator (cluillicating devices) in the Secretary's Office, to become effective "Of the close of business on September 27, 1942, and recommending that the resignation be accepted as of that date. The resignation was accepted. Letter to Mr. Meyer, Assistant Cashier of the Federal Reserve of Chicago, reading as follows: 181. 9/15/42 -7- "In accordance with the request contained in your letter of Septeaber 1, 1942, the Board of Governors approves the payment of salaries to Minor B. Smith, General Clerk, Discount Department, at the rate of e3,720 per annum) and W. W. Tongue, Statistician and Analyst, Research and Statistics Department, at the rate of 0,800 per annum, WhjCh IS 0220 and : 4 200, respectively, in excess of the maxim-um annual salaries provided in the personnel classification Plan for these positions." Approved unanimously. Letter to the Presidents of all of the Federal Reserve Banks, read.ing as follows: "The Board has received from the War Department a memorandum dated September 10, 1942, signed by Lieutenant Colonel Paul Cleveland, regarding the cancellation of terminated guarantee agreements previously executed by the Federal Reserve Banks on behalf of the War Department under Executive Order No. 9112. For your information and guidance the statement regarding this matter contained in the War Department's memorandum is set forth below: '1. In a number of cases, guarantee agreements executed by the Federal Reserve banks, as fiscal agents of the United States, have been terminated, either because of payment of the loan, execution of a superseding guarantee agreement, surrender of the guarantee agreement by the financing institution, or for some other reason. '2. In all these cases, all executed copies of the terminated guarantee agreements in the possession of the Federal Reserve banks and the financing institutions should be physically cancelled, either by stamping the word "cancelled" over the signature of the Federal Reserve Bank, or by perforation of the signature of the Federal Reserve Bank. '3. In any case where the guarantee agreement in question has not already been physically cancelled, it is suggested that the best procedure will be for each Federal Reserve Bank to write to the financing institutions, requesting them to physically cancel the guarantee agreements in question, in the manner specified above, and to advise the Iederal Reserve Bank that this has been done. The 181' 9/15/42 -8- "'Federal Reserve Bank should then cancel its copies in the same manner. '4. It is requested that all the Federal Reserve banks be asked to forward to the War Department at their early convenience a list of all guarantee agreements that have been so cancelled, and that thereafter they inform the War Department each time an executed guarantee is so cancelled.' "In accordance with the fourth paragraph of the War DepertMent's memorandum, it will be appreciated if you will forward to ithe Board at your early convenience for transmittal to the War DePartment a list of all guarantee agreements executed by your bank on behalf of the War Department which have been cancelled as the result of their termination. It will also be appreciated if in the future you will advise the Board of each such cancellation of an executed guarantee agreement in order that we maY transmit advice thereof to the War Department." Approved unanimously. Letter to Colonel John C. Yiechem, Chief of the 1:dscellaneous Branch; Fiscal Division, War Department, reading as follows: "Referring to our letter of August 21, 1942, in exPlanation of how charges for various expense items .incurred by the Federal Reserve Banks on behalf of the War Department pursuant to Executive Order 9112 are de'erldined, and to your telephone request with respect thereto, our instructions to the Federal Reserve Banks Provide as follows: 'No portion of the salary of the President or First Vice President should be charged to the "Fiscal Agency, Custodianship, and Depositary" function as a reimbursable expense, and no Portion Of the salary of any other senior officer (including Branch Managing Director) should be charged to a unit of the "Fiscal Agency, Custodianship, and Depositary" function as a reimbursable expense unless he devotes as much as 20 per cent of his time to such unit.' "Pursuant to this instruction, no Federal Reserve Bank will ask for reimbursement for any portion of the salary of 8 „; senior officer of the Bank unless he devotes as much as <"? Per cent of his time to work performed as fiscal agent lopr the United States pursuant to Executive Order 9112 on ehaaf of the War Department, Navy Department and idaritime 9/15/42 -9- "Commission, and no reimbursement will be reouested for any portion of the salary of the President or First Vice President of the Bank. "We are today writing a letter to the Federal Reserve Banks advising thou, . that it is the desire of the War Department that no furniture and eauipment be purchased by the Bank for use in connection with work performed for the War Department pursuant to Executive Order 9112 without first obtaining approval of the War Department. A copy of our letter to the Federal Reserve Banks is enclosed." The letter to the Presidents of the Federal Reserve Banks referred to in the last paragraph of the letter to Colonel Liechem read as follows: . "Colonel Mechem of the War Department recently advised US informally thiA one or two of the Federal Reserve Banks had requested reimbursement for the cost of furniture pur_ chased for use in connection with work performed for the War Department pursuant to Executive Order 9112. he stated that he would prefer not to have to maintain an inventory record Of furniture and equipi,ent purchased by the Reserve Banks as fiscal agents of the War Department, and hoped that such purchases could be avoided. . "If your Bank finds that it does not have furniture and equipment which it can use on a rental basis in handling work for the -vjar Department or finds it impracticable to purchase furniture and eouipment for its own account to be used on a rental basis in connection with work performed for the War DePartment, it will be appreciated if you will write us with respect thereto giving full details. Upon receipt of your letter we will take the matter up with the War Department to see what Procedure can be worked out for acquiring the necessary furniture and equipment." Approved unanimously. Letter to Mr. Sanford, Manager of the Foreign Department of the Pederal Reserve Bank of New York, reading as follows: "Az requested in your letter of September 11, the Boexcl has increased to a total of 6350,000,000 the authorit_ Y given to your bank in the Board's telegram of i83 9/15/42 -10- "December 16, 1941, as amended by its letter of Ley 252 1942, to purchase United States Government securities for the account of foreign central banks and governments." Approved unanimously. Telegram to Lr. Clerk, First Vice President of the Federal Reserve Bank of San Francisco, reading as follows: . "Rotel September 12, Board approves your recommendation that during war emergency any nonmember bank in Hawaii or Alaska be permitted to carry an account with Federal Reserve Bank of San Francisco through which no transactions Will be permitted except those arising from book transfers to and from a member bank for the nonmember bank's own account. Governor IcKee is writing Walsh of American Security Bank, Honolulu, suggesting he get in touch with you. Please advise Board when arrangemen ts have been completed." Approved unanimously. Thereupon the meeting adjourned. P dtilL fic4, Vice Chairman.
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