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Minutes for September 15, 1964. 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, please initial below. If you were present at the meeting, your initials will indicate approval of the minutes. If you were not present, your initials will indicate only that you have seen the minutes. Chm. Martin Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. Mitchell Gov. Daane Minutes of the Board of Governors of the Federal Reserve System on Tuesday, September 15, 1964. The Board met in the Board Roam at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman 1/ Robertson Shepardson Mitchell Sherman, Secretary Molony, Assistant to the Board Cardon, Legislative Counsel Fauver, Assistant to the Board Solomon, Director, Division of Examinations Mr. Hexter, Assistant General Counsel Mr. Shay, Assistant General Counsel Mr. Sammons, Adviser, Division of International Finance Mr. Daniels, Assistant Director, Division of Bank Operations Mr. Goodman, Assistant Director, Division of Examinations Mr. Leavitt, Assistant Director, Division of Examinations Mrs. Semia, Technical Assistant, Office of the Secretary Mr. Poundstone, Review Examiner, Division of Examinations Mr. Mr. Mr. Mr. Mr. Discount rates. The establishment without change by the Federal Reserve Bank of Boston on September 14, 1964, of the rates on discounts 44d advances in its existing schedule was approved unanimously, with the Understanding that appropriate advice would be sent to that Bank. Distributed items. The following items, copies of which are ttaohed to these minutes under the respective item numbers indicated, PProved unanimously: uoined meeting at point indicated in minutes. ) 9/15/64 -2Item No. Letter to International Banking Corporation, New York, New York, granting consent to purchase additional shares or First National City Trust Company of Canada, Montreal, Canada. 1 Letter to Continental International Finance Corporation, Chicago, Illinois, granting consent to purchase shares °Is ADELA Investment Company, S. A., Luxembourg. 2 Application of Mellon Bank International. There had been dis- tributed a memorandum dated September 11, 1964, from the Division of ExaMinations regarding the application of Mellon Bank International, Pittsburgh, Pennsylvania (a corporation organized under section 25(a) of the Federal Reserve Act), for permission to purchase 1,200,000 shares "common stock of HI-Koppers Cement Corporation, Makati, Rizal, PhilipPities, at a cost of approximately $300,000. Among other facts, the 43eMorandum brought out that HI-Koppers was a joint undertaking between IC°P,Pers International C. A. (a wholly-owned subsidiary of Koppers Company, Inc') and House of Investments, Inc. (a Philippine corporation). Originally, each of these participants planned to take 50 per cent of HI-Koppers equity. Re'vever, it was found that Philippine law limited holdings by single Parties in basic mining enterprises to 15 per cent of the voting stock. 4cc°rdingly, it was decided that Koppers International would take 15 per cent of the voting stock and all of the non-voting stock, and that House c)f Investments also would take 15 per cent of the voting stock, and Mellon Bank International was invited also to take 15 per cent of the , 31141 i#Q1 9/15/64 -3- 7°ting stock. It was expected that with the Edge corporation's support, KoPpers International and House of Investments would be able to elect at least six of the nine HI-Koppers directors. Both Koppers International and- Koppers Company were long-time and valued customers of Mellon National Bank and Trust Company, the parent organization of Mellon Bank International. During discussion questions were raised as to the consistency °f the proposed investment with the spirit of Philippine law and the aPpropriateness of the investment from the point of view of the broad Parpose of section 25(a) of the Federal Reserve Act to further the foreign commerce of the United States. Question was raised also regarding the ProPriety of an Edge corporation entering into what appeared to be purely an equity transaction, whereas the operative field of Edge corporations Was ostensibly finance and commerce. Comments were made that financing by Mellon Bank International might enter the picture if the entire capital tor HI-Koppers was not forthcoming from the presently-contemplated sources. It was suggested that the intent of the statute might be considered to "'brace the export of American expertise as well as capital. Governor Robertson expressed the view that the export of services 111c1 not qualify the transaction as a move in furtherance of the foreign commerce of the United States. Governor Mitchell commented that the transaction appeared to him t° involve selling operating capacity abroad to the detriment of the 11/41'Itst for a United States product. Moreover, he questioned whether 31Z8 9/15/64 Edge corporations Corporations should engage in business unconnected with banking and This appeared to be the first application for consent to such finance. a transaction since the September 1963 revision of Regulation K, Corporations Engaged in Foreign Banking and Financing under the Federal Reserve Ant. At the conclusion of the discussion it was agreed to defer action Pending the Obtaining of additional information bearing on the questions that had been raised. Messrs. Shay and Poundstone then withdrew and Mr. Young, Adviser to the Board and Director, Division of International Finance, entered the room. Gold loan to Costa Rica (Item No. 3). a inealOrandUM There had been distributed dated September 11, 1964, from Mr. Young regarding a request addressed to the Federal Reserve Bank of New York by Banco Central de 'ata Rica for a loan on gold of $2 million for a period of three months. Cc Me request indicated that every year during September, October, and 40vember there was a heavy outflow of foreign exchange because of heavy irtrun,,4. bank at a time when exports were seasonally low. The Costa Rican expected to repay the loan with the proceeds from exports of products, incipally coffee, that would start to move this month but ordinarily ' 131 'not reach maximum volume until later in the year. clic The New York leserve Bank's officers recommended approval, and its directors, by a telePhone poll, had authorized granting the loan, subject to the Board's 9/15/64 -5- aPProval, which Mr. Young recommended be given. Attached to the memorandum was a draft of telegram to the Federal Reserve Bank of New York that would indicate affirmative action by the Board. During discussion, Governor Shepardson asked if there was reasonable likelihood that within the term of the proposed loan Costa Rica -sgoulia experience a return flow of foreign exchange that would enable rePaYment. Staff responses indicated that there was such expectation and that the proposed loan would be consistent with the Board's policy such loans. Comment was made that in connection with a similar loan laSt year the Costa Rican bank had asked for a term of four months but elthsequently had revised it to three months inasmuch as the Board's 1°11cY on gold loans provided that the initial term usually would be limited to three months, although renewals had been granted for additl°nal periods. The telegram to the Federal Reserve Bank of New York was approved tularlimously. A copy is attached as Item No. 3. Chairman Martin then entered the roam and, having been informed br Governor Robertson of the actions that had been taken, indicated his c°4currence in them. Mr. Harris, Coordinator of Defense Planning, also j°14ed the meeting at this point, and Messrs. Young, Sammons, and Goodwithdrew Changes in control of banks (Item No. 4). Mr. Solomon reported on steps being taken by the Federal Deposit Insurance Corporation to 9/15/64 -6- imPlement the provisions of H. R. 12267 (Public Law 88-593), which had been approved by the President on September 12, 1964. The new law pro- vided that an insured bank must report (1) changes in the outstanding v°ting stock of any insured bank that would result in control or in a Change in the control of the bank, and (2) any instances where an insured bank made a loan or loans, secured, or to be secured, by 25 per cent or More of the outstanding voting stock of an insured bank. to be Reports were made to the Federal supervisory agency having primary jurisdiction ver the bank involved. Since an insured bank thus might have to make l'ePorts to any of the three Federal bank supervisory agencies) coordination of agency notification of insured banks would seem appropriate. Ile Federal Deposit Insurance Corporation planned to mail to all insured banks in the near future a packet containing a copy of the new law, backinformation such as legislative history and certain statements, 44i a request that reports to the Corporation regarding changes in esailtrol or loans on the stock of insured nonmember banks be submitted to the Supervising Examiners of the Corporation's District Offices. The C°rPoration had inquired if the Board would like to have included in the illteket Whatever request the Board might wish to make of insured banks as to the submission of reports involving State member banks. It was linder- atoed that the Corporation also was exploring the possibility of including 14 it8 packet a statement by the Comptroller of the Currency as to submission 01' reports involving national banks. In response to a question from Governor k 9/15/64 Robertson, Mr. Solomon indicated that the Corporation was not devising 4 form for the reports, it being considered that the law itself was sufficiently explicit as to the information to be reported. The ques- tions presented, Mr. Solomon said, were whether the Board wished to have the required reports submitted to the Federal Reserve Banks, and Yhether the Board wished to avail itself of the Corporation's offer to relaY the Board's request to insured banks. During discussion there was unanimous agreement among the members Of the Board that reports involving State member banks should be submitted to the Federal Reserve Banks and that it would be important to share the ill-formation promptly with the State bank supervisors concerned. Several qUestions of procedure for handling the reports were raised, and Mr. 8°1°mon indicated that the staff was studying the matter but had not Yet resolved all administrative details. At the conclusion of the discussion it was understood that the st4fr 'would prepare a statement indicating that reports involving State le*er banks were to be submitted to the Federal Reserve Banks; that the statement would be included in the packet to be mailed to all insured blInke by the Federal Deposit Insurance Corporation; and that an appropriate letter would be sent later to Federal Reserve Banks regarding procedures. Secretary's Note: A copy of the statement by the Board sent to all insured banks by the Federal Deposit Insurance Corporation on September 18, 1964, is attached as Item No. 4. The Presidents of all Federal Reserve Banks were informed of the text of the statement in a telegram dated September 16, 1964. 9/15/64 -8Reserve Bank building procedures. In connection with an informal inquiry from Congressman Reuss as to whether designs for Federal Reserve Bank and branch buildings were selected on the basis of competition among architects, Chairman Martin asked that Mr. Daniels comment on Reserve Bank procedures relating to building projects. Mr. Daniels responded that, generally speaking, the Federal Reserve Banks did not hold design competitions for Bank and branch buildings. The usual procedure was that the Reserve Bank selected an 4rchitect, who prepared preliminary plans and later expanded them if they were approved by the Bank's directors and by the Board of Governors. The -0 Joank was required to report to the Board the terms of the agreement lith the architect, the fees charged, and so on. There was, of course, comPetive bidding for the construction, except for such projects as l'elli°deling, which, under the Board's instructions, might be handled by 121 negotiated bid from a contractor who was already familiar with the blinding. Contracts not based on competitive bids also might arise from 1511c3jects involving equipment, such as elevators, that was of such a 44ture as almost to require that the work be done by the manufacturer its 'ervice outlets. At the conclusion of Mr. Daniels' remarks, Chairman Martin Itsked that a brief memorandum be prepared regarding the status of plans for "ew Federal Reserve Bank and branch building projects now under e°nsideration. 9/15/64 Report on mobilization activities (Item No. 5). There had been distributed a memorandum dated September 14, 1964, from Mr. Harris re€arding a proposed reply to a letter of July 1, 1964, from Chairman Patman of the Joint Committee on Defense Production requesting a summary °I mobilization activities for the past year. The draft report attached to the memoranaum summarized developments in preparedness programs relating to the Federal Reserve System, "banking institutions," and V-loans. In comments at the Board's invitation, Mr. Harris first summarized the nature of Governmental mandates upon the Board and other agencies l'elating to defense planning, and in this connection he suggested that the Board's Annual Report for 1964 include comments on preparedness and rti°b1lization programs. He also described the shifts that had occurred 14 the emphasis of defense planning over the past several years; the 11°41'd's participation in interagency planning; and physical and administlIttive measures that had been developed for survival in the event of EtttEte , such as the provision of shelter facilities and relocation Otrieee, studies of the relative vulnerability of various sites, a 8Ystem of delegations of authority, and emergency currency supplies. 11 ' 8180 described problems relating to development of an equitable system t(Ir shariag of war losses, and the extent of adoption of preparedness 111'°/1118,112s by commercial banks in comparison with the banking structure. The report was approved unanimously. letter Copies of the transmittal and report to Chairman Patman are attached as Item No. 5. The meeting then adjourned. "d 9/15/64 -10Secretary's Notes: The requirements contemplated by the Board's action on May 18, 1964, in approving the issuance of a preliminary permit to Pittsburgh International Finance Corporation, Pittsburgh, Pennsylvania, having been completed, a letter was sent today to that corporation transmitting a final permit to commence business. Governor Shepardson today approved on behalf of the Board the following items: , Telegram to the Federal Reserve Bank of Minneapolis (attached Item Ar approving the appointment of Phil Carl Gerber as assistant ' 44.1ner. tk Memorandum. from the Division of Administrative Services recommending b:e.aPpointment of Sanford N. Johnson as Guard in that Division, with :sle annual salary at the rate of $4,005, effective the date of entrance ,(Pala duty. Item No. 1 9/15/64 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD September 15, 1964. International Banking Corporation, 399 Park Avenue, New York 22, New York. Gentlemen: In accordance with the request contained in your letter Of June 26, 1964, transmitted through the Federal Reserve Bank of New York, and on the basis of information furnished, the Board of Governors grants consent for your Corporation to purchase and hold 5,000 additional shares of First National City Trust Company of Canada, Montreal, Canada (formerly Mercantile Trust Company), at an approximate cost of US$696,000, provided such stock is acquired within one year from the date of this letter. The Board's consent to the purchase of the additional Shares is granted subject to the conditions in the Board's letter, August 29, 1963 to First National City Bank granting consent zcir your Corporation to purchase and hold all of the outstanding shares of Mercantile Trust Company. Very truly yours, (Signed) Elizabeth L. Carmichael Elizabeth L. Carmichael, Assistant Secretary. 31 BOARD OF GOVERNORS Item No. 2 9/15/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE SOAR() September 15, 1964. con tinental International Finance Corporation, • South La Salle Street, hlcago 90, Illinois. Gentlemen: In accordance with the request contained in your letter of Augu Res 1964, addressed to Mr. Leland Ross, Vice President, Federal rye Bank of Chicago, and on the basis of information furnished, the and Board of Governors grants consent for your corporation to purchase ' in hold up to 50 ordinary shares, par value US$10,000 each, of ADELA tg!stment Company, S.A., Luxembourg, at a cost of approximately stock is acquired within one year from the dau‘?t4°,000, provided such e of this letter. The Board also approves the purchase and holding of shares Investment Company, S.A. within the terms of the above consent in execss of 10 per cent of your corporation's capital and surplus. 0f Available information concerning ADELA indicates that the head prob u -Ltice of ADELA will be located in Luxembourg, and offices will andia„blY also be maintained elsewhere in Europe, in the United States, give atin America. In the circumstances, the Board's consent is agetIn with the understanding that ADELA will not maintain any branch, IlilicY, office or representative in the United States and that ADELA butt 11°t engage or participate in the underwriting, sale or distri"of securities in the United States. Very truly yours, (Signed) Elizabeth L. Carmichael Elizabeth L. Carmichael, Assistant Secretary. Item No. 3 9/15/64 TELEGRAM 1,-EASIED WIRE SERVICE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON September 15, 1964. SANFORD-NEW YORK Our wire September 10. Board approves granting of loan or loans on gold up to a total of $2 million by the Federal Reserve Bank of New York to the Banco Central de Costa Rica on the following terms and conditions: (a) to be made up to 98 per cent of the value of gold bars set aside in your vaults under pledge to you; (b) to mature in three months with option to repay at any time . before maturity, the advances to be made in multiples of $500,000, and the repayments in multiples of $100,000; (c) to bear interest at the discount rate pf your Bank in effect on the date on which such loan or loans are made; and (d) to be requested and made at any time during a period of 30 days beginning with the date of the Banco's acceptance of your terms and conditions. It is understood that the usual participation will be offered to the other Pedersi Reserve Banks. (Signed) Merritt Sherman SHERMAN Item No. BOARD OF GOVERNORS 4 9/15/64 OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD REPORTS TO BE MADE TO FEDERAL RESERVE BANKS UNDER PUBLIC LAW 88-593 The measure recently passed by Congress requiring notice of changes in the control of management of insured banks ‘748 signed into law by the President on September 12, 1964 'Public Law 88-593). Under this new law, all insured banks are tequired to report promptly (1) changes in the outstanding voting stock of any insured bank which will result in control or in a . change in the control of the bank and (2) any instances where an b lzisured bank makes a loan or loans, secured, or to be secured, .Y 25 per cent or more of the outstanding voting stock of an insured bank. Reports concerning changes in control of a State ttlenTher bank are to be made by the president or other chief e s_xecutive officer of that bank, and shall be submitted to its k'ederal Reserve Bank. Reports concerning loans by any insured bank on the of a State member bank are to be made by the president or °ther chief executive officer of the lending bank, and shall be _ 1413Initted to the Federal Reserve Bank of the State member bank ‘34 the stock of which the loan was made. stoct, Paragraph 3 of the new law, a copy of which is ellel°8ed, specifies the information required in the reports to be etnhade. All reports should be addressed to the Vice President in arge of examinations of the Federal Reserve Bank involved. Attention is invited to other provisions of the new law des igned to implement the major requirements outlined above. SePternber 18, 1964 Item No. 5 9/15/64 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON OFFICE OF THE CHAIRMAN September 15, 1964. The Honorable Wright Patman, Chairman, Joint Committee on Defense Production, Congress of the United States, Washington, D. C. 1)ear Mr. Chairman: In response to your letter of July 1, 1964, attached is a summary of mobilization activities of the Board of Governors for the year ending June 30, 1964. --the The summary covers three major preparedness programs Federal the of functions essential Program for the continuity of the Reserve System in the event of an attack on the United States, the Program for bank preparedness, and the V-loan program. Sincerely yours, Wm. McC. Martin, Jr. Attachment. 3140 SUMMARY OF THE MOBILIZATION ACTIVITIES OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FOR THE YEAR ENDING JUNE 30, 1964 Introduction the This report summarizes the mobilization activities of ending year the Board of Governors of the Federal Reserve System for June 30, 1964. It has been prepared at the request of the Joint Committee on Defense Production, Congress of the United States, and fol1°ws the outline suggested by the Committee. The report is divided into three Parts, each of which deals with a major preparedness program. the Part I describes the preparations of the Board and perform to and ns Reserve Banks to continue their operatio d their essential functions, including certain Presidentially-assigne States. United the upon emergency functions, in the event of an attack Fe deral under Part II describes the preparations of commercial banks, the guidance of the Board and Federal Reserve Banks, to continue their essential banking operations in accordance with the Government's emerTreasury, !!ncY financial policies, and the emergency regulations of the upon attack an of event the 'fle Board, and the Federal Reserve Banks in the United States. plans Part III describes Regulation V-loan activities and a war in basis expanded an on es for the continuation of such activiti emergency. Part I Preparations of the Board of Governors of The Federal Reserve System and the Federal Reserve Banks For a War Emergency preparations undertaken by the !* ItuaT. This program consists of ard and Federal Reserve Banks pursuant to assignments from the Presithe bent and the Director, Office of Emergency Planning, requiring uOard to: r a. Participate in the development of the Government's y emergency policies and plans, including (1) emergenc National The financial and stabilization policies, (2) nPlan for Emergency Preparedness (for all continge war limited a (for cies), (3) Federal Emergency Plan C us D-Min Plan y situation), and (4) Federal Emergenc (for an attack situation); •," -2b. Develop emergency plans and a state of readiness for the continued or resumed operation of the Board and Federal Reserve Banks, including provisions for (1) the protection of personnel and records, (2) the temporary filling of warcaused vacancies, and (3) delegation of authority, and C. Develop plans and a state of readiness for the maintenance of the money, credit, and banking system in accordance with national emergency financial policies, including provisions for (1) the supply and control of currency, (2) the extension and control of credit, (3) the collection of cash items and noncash items, and (4) the conduct of fiscal and foreign financial operations. 2, A sec 4111V/aELLy. The authority for this program is derived from the National : 4 ritY Act of 1947, as amended, the Federal Civil Defense Act of 1950, as Na;141ded, Reorganization Plan No. 1 of 1958, Executive Order 1109411, The the°nal Plan for Emergency Preparedness, promulgated by the President, and of Defense Mobilization Orders, and Circulars issued by the Director, ice of Emergency Planning, pursuant to Executive Orders 10952 and 11051. 3. A hiiv 'etivities. Activities during the past year in support of this program ! th involved all three of its principal elements. While participation in :rewriting of The National Plan was extensive, primary attention was foon : d on improving the state of readiness of the Board and Federal Reserve gen 8 to continue their operations and to perform their emergency functions R assigned by the President in the event of an attack upon the United -tates. a, Interagency participation. Last year, it was reported that The National Plan was being rewritten. The task, now nearing completion, has resulted in a major reorganization of the Plan and a substantial reduction in its volume--from 719 pages to less than 300 pages. The interagency participation required in making this revision has been extensive. On November 20, 1963, the Board and other agencies having emergency responsbilities were directed by the Director, Office of Emergency Planning, to advise and assist him in Preparing and maintaining a Digest of Federal Executive Branch Nonmilitary Emergency Measures. The purpose of the 1/Exe tive Order 11094 provides that the Board of Governors of the Feder4eestel a System shall: (1) participaLe in the formulation of emergency 4881! , 1eisl policies; (2) prepare national emergency plans covering functions tionsned by this order; and (3) develop a state of readiness for all conditilers of national emergency including attack upon the United States. It furof thnvides that the assignments shall be undertaken as an integral part th - Board's activities on the basis that it will have responsibility for em n an emergency, and that it shall be prepared to implement its plans. -3Digest is to facilitate (when time is of the essence)the identification and selection of courses of action for all emergency situations. To assist the Office of Emergency Planning, the Board prepared an index of the objectives and measures for which it would be responsible in an attack situation, together with descriptions of such measures,-their probable effects, alternatives, requirements, and readiness to put such measures into effect. Plans for the continued operation of the Board and Federal Reserve Banks. These plans are set forth in the Board's Emergency Plan and in the emergency manuals of Federal Reserve Banks. A review of these plans and the actions taken to make them effective has been Made to determine the System's readiness to survive ah attack. ation Provision has been made for the receipt and dissemin s). ns (DEFCON of warnings of Defense Readiness Conditio DEFCONs represent various degrees of Military readiness. They are declared by the Joint Chiefs of Staff or higher authority on the basis of the seriousness of any war threat. They are designed to afford an opportunity to expedite final preparations to survive an attack. For example, duting the Cutan Crisis of 1962, DEFCON No. 3 rate was declared and preparations moved at a pace commensu maintain Banks with the threat. The Board and Reserve lists of actions to be taken on receipt of DEFCON warnings. offices These actions include steps to activate alternate regular of use the event for postattack opetations in the ations communic special A offices should become Untenable. expedite to hed establis been system, known as DEFCORD, has the transmission of DEFCON warnings. The DEFCORD receiving device at the Board is located in the Guard's Headsystem quarters where it has coverage at all times. The hours. 24 is tested at least once every Provision has been made for the protection of personnel. The National Shelter Policy has been applied to all Federal Reserve buildings. At present, 36 of the System's 37 buildings contain areas having adequate shielding to be the Utilized as fallout shelters. Facilities to improve 22 in d complete been have areas habitability of shelter buildings buildings and are planned for the remainder of the one in located l Personne ng. shieldi having adequate purposes building not having a suitable area for shelter the event in shelter nearby a use to ed instruct have been of an emergency. Provision has been made for an orderly transfer of 3143 -4nate offices in operations from regular offices to alter wing an attack follo le possib the event it should not be ction, duplicates conne this In to use the regular offices. and communications opera me warti of all records needed for nate offices. alter the at tion facilities are maintained view to a with ed select been The alternate offices have offices ar regul the to ible their being reasonably access from nt dista ly cient suffi to facilitate relocation, yet ts effec l therma and blast all target areas to avoid the ples princi These . areas of weapons detonated in such their locafor selecting alternate offices require that nuclear of light the in tions be periodically reviewed Departthe by ed prepar attack hazard studies "NAHICUS" to sary neces been ment of Defense. Heretofore, it has infive in es offic change the location of alternate bases, and stances due to the nearby location of SAC the accessie ICBM sites, or due to the need to improv ar office. regul bility of the alternate office to the in the locamade At the present time, changes are being tion of two alternate offices. filling of Provision has been made for the temporary d emergency lishe war-caused vacancies according to estab in this filled lines of succession. Vacancies would be the norin d fille manner until such time as they can be temporary a for ts mal manner. A review of these arrangemen there that tes indica "care-taker" type of administration and ion solut this are no satisfactory alternatives to gements. that there is no need to modify present arran the In order to further assure that the functions of med -perfor be to nue conti Board and Reserve Banks would fail -should above bed descri even if all of the measures rity autho its of tions delega ngent the Board has made conti , to surviving members of the Board, the interim Board beand the Federal Reserve Banks when communications disBanks are tween the Board and the Federal Reserve made contingent have Banks ve Reser al rupted. The Feder for certain purdelegations to other Reserve Banks and, Agents. poses, to emergency Cash Agents and Check • of the money, Plans for the maintenance and control are set forth credit, and banking system. These plans Treasin the Government's emergency financial policies, plans ency emerg ury's Emergency Banking Regulation No. 1, plans ency emerg and regulations of the Board, and in the They have and circulars of the Federal Reserve Banks. for makness readi been reviewed to determine the state of ing them effective. es that emergency Executive Order 11094, section 2, provid -5financial plans shall be developed in consonance with national emergency financial policies. The national emergency financial policies require that provision be made for the following: (1) The maintenance of the money, credit, and financial system. (2) The continuance of banking operations including provision for liquidity and credit. (3) The equitable sharing of war losses. (4) The decentralization of adequate supplies of currency. (5) The availability of bank deposits according to postattack needs. (6) The clearance of checks including those drawn on destroyed banks. (7) The availability of new bank credit for essential purposes. (8) Government guarantee of private financing for essential purposes, if not otherwise available on reasonable terms. As a partial implementation of these policies, the Secretary c) the Treasury has issued Emergency Regulation No. 11/ requiring the continuance of banking operations, authorizing loans between banking institutions without regard to normal restrictions (to provide liquidity), and limiting withdrawals of cash, transfers of bank balances, and extensions of credit (to adjust availability of currency, bank balances, and new credit to postattack needs). To further implement the emergency financial policies, the Board has issued to Reserve Banks its Emergency Regulations Nos. 1 and 2 and has provided them with additional guidance on emergency monetary policy. The Secretary of the Treasury has delegated to the Board ". . . s / "lty and power to take such action consistent with regulation ,th 41, 11 to necessary be 14111ed by the Secretary of the Treasury . . . as may ; 141 g functionin and of4nta1 n, regulate, limit, or suspend the operation anY banking institution." -6The Federal Open Market Committee has provided the Federal Reserve Banks with guidance on the purchase and sale of Government securities. l During the past year, progress has been made by Federa Reserve Banks in preparation and distribution of emergency instructions to all banking institutions. They have now completed this task. The emergency instructions are designed to keep the whole banking system operating in the immediate postattack period. They include Emergency Circulars on (1) the distribution of currency and of the use of emergency Cash Agents, (2) the collection the checks and the use of emergency Check Agents, (3) cy credit collection of noncash items, and (4) the emergen and discount policies. An emergency supply of currency has been accumulated. At the close of the reporting period, 81 per cent of unto issued Federal Reserve notes had been decentralized cent per 19 while s, branche and Banks Federal Reserve total of remained in Washington, D. C. In addition, a of $239.8 million had been prepositioned in the vaults program selected emergency Cash Agents as a part of a disof hazards the e overcom to ss of maximum readine amount, this Of . rtation transpo and rupted communications Cash $94.8 million was prepositioned with emergency year. last the Agents during The Federal Reserve Banks have designated 261 emergency Cash Agents and 423 emergency Check Agents. Banks The Treasury Department has provided the Reserve ions, operat agency with emergency instructions on fiscal No. ion and has prepared Fiscal Service Emergency Regulat for terms 1, a stand-by document, which provides the inaccessible granting relief to owners of destroyed or United States bearer securities. in an Guidance for the conduct of foreign operations Bank Reserve emergency has been prepared by the Federal operaof New York. Duplicate records of its foreign Internations as well,s the duplicate records of the and the pment, tional Bankra Reconstruction and Develo at the ned International Finance Corporation are maintai Board's alternate office. 4% t, been tested fectiveness. The effectiveness of the program has ' agai indicate St a variety of possible attack patterns. The results that sent the measures being taken give reasonable assurance that the es141 wartime functions of the Federal Reserve System in support ' -7of the money, credit, and financial system can be maintained in a postattack emergency. urrent Need. The program will be needed as long as any potential has the capability of launching a massive nuclear attack upon the United States. The program contributes to the over-all defense Posture of the nation, to the effectiveness of the family of deterrents to attack, and to the nation's preparedness to maintain the money and credit system if attacked. 54eZ 6. Small Business. The program for the continuity of the essential wartime functions of the Federal Reserve System relates directly to ue Board and Federal Reserve Banks, and indirectly to banking insti!utions and other businesses large and small capable of making a con! ribution to the war effort and reconstruction. Since it is assumed 'Pat the large cities, the industrial-population concentrations, and qnancial centers might be the natural objects of attack with weapons °I mass destruction, emphasis has been placed on the utilization and PreParation of small banking institutions outside of the more vulner! ble target areas to serve the smaller business enterprises upon which eliance must be placed to support military, civil defense, and reconst ruction operations. 7 ' IlAjor Problems. The lack of a plan for the equitable sharing of 14441. losses, One of the emergency financial policies, was mentioned : 311 our report to the Joint Committee dated September 15, 1963, as the nnlY major problem. During the past year, the interagency Committee t141 War Loss Sharing agreed that, pending the development of a defini, ille operational plan for the sharing of war losses, the following uocuments should be prepositioned at appropriate relocation sites: (a) The proposed "War Disaster Act of 1951." (b) Board staff paper, "Preattack Planning for Postattack Financial and Economic Rehabilitation," revised April 16, 1959. (c) Treasury staff paper, 'War Loss Sharing," January 19, 1963. (d) A statement of existing interagency agreement on war loss sharing. Treasury staff is now working on ways and means for financing stafcthe postattack operation of loss sharing, while the Board's coof4- is working on ways and means for establishing preattack values, tionirmation of loss or damage claimed, and the form of claim applica• 8 ' tIaasIlastanspi. No change in the program is contemplated. 1 kJ? , -8Changes in ways and means for furthering the program will be made as needed, particularly as needed to meet changes in enemy capabilities. 9. Standby Programs. There are two programs which might properly come under this heading. One pertains to the equitable sharing of war losses, mentioned above; the other pertains to the postattack u tilization of bank examiners. The three Federal supervisory agencies, together with the Federal Reserve Banks, have agreed to look to their examination personnel as the primary source of reserve manPower. They have further agreed that this manpower should be utilized iU a cooperative manner to meet the most urgent needs, including staffing requirements of Federal Reserve Banks, emergency Check Agents and Cash Agents, and banking institutions which may have difficulties in C ontinuing or re-establishing operations. (3. 1Lnr Organizational Changes. There have been no organizational changes administering this program during the past year. 11. Future Objectives. Future objectives are to keep our preparedness ensures current and to constantly improve our readiness. On the ' Isis of foreseeable needs to cope with increasing missile capabilities and decreasing warning time, emphasis will be placed on: (1) Defense Readiness Conditions (DFFCONs) procedures, (2) improving fallout ell' otection, (3) modifying relocation arrangements as necessary to meet JUInging estimates of vulnerability, (4) developing standby plans for tne equitable sharing of war losses, and (5) continuing the decentralizainn of currency to Federal Reserve Banks and Cash Agent Banks. Z l e2. Availability of Funds. Funds are made available as needed to earrY on the preparedness responsibilities of the Board and the Fedai Reserve Banks. Since the operating funds for the Board and the henks are not derived from Congressional appropriations, the Board : 0 8 Sought to limit expenditures to those kinds of needs which Cone88 has approved in making appropriations to other Government agencies. J -9- 3148 Part II Preparedness of Commercial Banks For a War Emergency TI2Z1. 111. The Board is responsible for the development of plans, 1* in cooperation with the Department of the Treasury and the Federal DePosit Insurance Corporation, to encourage preparedness by "banking talstitutions" in order to assure the continuity of their operations in the event of enemy attack. The authority for the conduct of this program is derived 1 2' ...1.11.1112Eltx. fr°m Executive Order 11094, February 26, 1963. 3 Activities. Activities under this program relate to (1) providing guiciZic7 - -tTinking institutions on preparedness measures, (2) encouraging banking institutions to take effective action on the guidance given, and (3) monitoring such action. General guidance on both preattack preparedness measures and P0st banking operations, contained in seven booklets prepared °Y the Banking Committee on Emergency Operations with the approval of !.!deral and State bank supervisory agencies, has been distributed to Ill banks. This general guidance has been supplemented with detailed ! lIs tructions on postattack banking operations contained in emergency el, aronlars or emergency operating letters issued by the Federal Reserve ni nks, more particularly described in Part I. Since heavy reliance is placed upon the willingness of all bank to take the preparedness actions needed for the continuation :! banking operations following a nuclear attack, commercial banks e!Peatedly have been urged to establish suitable preparedness programs a voluntary basis. One of the most important elements of commercial benk preparedness is the maintenance of duplicate records which would du essential for postattack operitions. In order to establish procetes for the initiation of duplicate records programs, and to overcome sePrevailing impression that the cost of such programs is excessive, duveral Federal Reserve Banks and State banking associations have conpiltsd pilot programs in commercial banks of various sizes. These in °t programs have demonstrated that actual costs are not excessive; °tie case they amounted to $200 annually for a $5 million bank. In order to keep abreast with the progress being made by mercial banks in improving their readiness to serve the nation in don event of an attack, bank examiners inquire as to what is being e in the course of regular examinations. The emergency preparedne; 1 !information contained in the examiners' reports (13,582 in 196396') is collated and tabulated by the Board of Governors according to the classification, location, and size of banks. Z -104. Effectiveness. Progress over the past five years is indicated by the following table: Yr. Ending June 30 1960 1961 1962 1963 1964 Banks Reporting 13,464 13,364 13,345 13,466 13,582 Banks with Preparedness Programs % of Deposits Number % of Banks 826 916 1410 2007 2471 06.1 06.9 10.6 14.9. 18.2 58 60 70 74 83.4 Based on the latest tabulation, the number of banks having emergency preparedness programs increased by approximately 23 per cent between June 30, 1963, and June 30, 1964. Banks now participating in the program represent 83.4 per cent of the total deposits of all banks, as compared with 74 per cent on June 30, 1960 For the first time, 411 banks having deposits of $1 billion or more are reported as having . Pre l paredness programs, as are also 93.6 per cent of all banks with 00 million or more deposits, and 48 per cent, or approximately onehalf, of all banks with $10 million or more deposits. While the number Of banks participating is small compared with the total number of banks, these statistics indicate that for the most part large banks in the ll'ainerable metropolitan areas are making preparations for the continnee of banking operations following an attack. The preparedness program has been less effective among the banks. Only 16.5 per cent of the 2,682 banks in the $5-$10 ion category, 8.8 per cent of the 4,368 banks with deposits between $2 $2 and $5 million, and 2.7 per cent of the 3,298 banks with less than taL million in deposits, have taken even the initial steps toward esplishing a preparedness program. small S. r, bel,k, urren t Need. The current need for this program is based on the natlef that a functioning banking system would be essential to the tle i°11 in time of war, and that the achievement of adequate preparedof-I !in time of peace is needed to assure the continued functioning "nk operations in the event of nuclear attack. 6 tin Small Business. The program relates directly to banking institubu-ns, large and small, and indirectly to the entire economy, to small ar : ineas as well as large. Small banks located in less vulnerable ge448 must be prepared to assume a larger role in a postattack emerareeI.as a result of possible damage to large banks in more vulnerable are Ela.or Problems. The major problems in carrying out the program Prep(1) lack of realization on the part of many banks of the need for (2) 4redness measures because of their seemingly secure locations, will4 belief on the part of some that an adequate preparedness program drag coat too much, and (3) a tendency to let preparedness activities during periods of quiescence in international tensions. LAJ() -118. Program Chan. No program changes are contemplated. !. Standby Programs. The entire program is a standby program. d irected toward preparedness for any future emergency. It is Organizational Changes. No organizational changes for the promotion °f the program are contemplated. promoFuture Obiectives. The future objective is to continue the tio forth set problems major ,0 of the program, largely by overcoming the a uove 12. Availability of Funds. ton of this program. There has been no lack of funds for the pro- -12Part III Guaranteed Loan Program 1. Program. The Federal Reserve Banks, under regulations of the Board of Governors, act as fiscal agents of the United States in connection with the V-loan program for Government guarantees of defense production loans. The Board of Governors, after consultation with the guaranteeing agencies, prescribes fees, rates, and procedures to be utilized in connection with such guarantees. 2. Authority. The present V-loan program was inaugurated under authority of the provisions of section 301 of the Defense Production Act of 1950, approved September 8, 1950, and the President's Executive Order 10161, dated September 9, 1950. The original Executive Order was superseded by Executive Order 10480, dated August 14, 1953, and Executive Order 10819, dated May 8, 1959. Under the law, as amended by the Defense Production Act Amendments of 1960, authority for the program, unless further extended, will terminate on June 30, 1966. 3. Activities. Pursuant to the law and Executive Orders of the President, certain designated procurement agencies of the Government are authorized to guarantee loans made by private financing institutions to finance contractors, subcontractors, and others engaged in the performance of Government defense contracts for the purpose of expediting production and deliveries or services for the !ational defense. By an amendment made by the Defense Production J,i_ct Amendments of 1953, guarantees may also be issued with respect c0 loans made to finance contractors and subcontractors or other Persons in connection with or in contemplation of the termination of their defense contracts. At the outset of the program, the designated guaranteeing agencies were the Departments of the Army, Navy, Air Force, eftmerce, Interior, and Agriculture, and the General Services AdIt. liinistration, In 1951, the Atomic Energy Commission and Defense • naterials Procurement Agency were also designated as guaranteeing 14 4!enoies. By Executive Order 10480 of August 14, 1953, the Defense terials Procurement Agency was abolished and its functions transe orred to the General Services Administration. By Executive Order , 819, dated May 8, 1959, the National Aeronautics and Space Admintt3strati n 0 was designated as a guaranteeing agency. By Executive 11062, dated November 19, 1962, and a directive of the Departme _!ot of Defense, dated December 8, 1962, the Defense Supply Agency ur the Department of Defense was designated as a guaranteeing agency. l On June 30, 1964, credit available under guarantee agreents this amount, approximately 78 peroutstanding totaled $92,969,000. Of j" cent on the average was guaranteed by the Government. On :flie 30, loans outstanding amounted to $71,997,000, and there was available to borrowers an additional $20,972,000. Available credit -13under the guarantee agreements outstanding by the various agencies was as follows: Department of the Army Department of the Navy Department of the Air Force $12,517,000 37,386,000 43,066,000 From the beginning of the program to June 30, 1964, net income of the guaranteeing agencies from guarantee and commitment fees and interest on purchased loans, after deducting established losses and expenses of the Federal Reserve Banks as fiscal agents, was as follows: Department of the Army Department of the Navy Department of the Air Force Defense Supply Agency General Services Administration Atomic Energy Commission Department of Commerce Total net income $ 5,343,000 11,866,000 14,693,000 -1,000 6,266,000 509,000 6,000 $38,682,000 The Department of the Army estimates that of the loans it purchased approximately $2,040,000 is uncollectible. The DePsrtment of the Navy estimates that of the loans it has purchased 11PProximately $280,000 is uncollectible. The Department of the Air A( , ) ,ree estimates that of the loans it has purchased approximately 40,000 is uncollectible. Assuming these estimated losses are ' ealized, the net income to the Government at this time on the ! uaranteed loan program is over $36 million. The relatively small incomes of Atomic Energy Commission and Department of Commerce, rs e:lell as the excess of expenses of the Defense Supply Agency, Llect smaller activity in the program rather than unsatisfactory ' IcPsrience. has There has existed since the inauguration of the V-loan Prop t. otam complete cooperation and understanding between the guaranlj eeing agencies, the staff of the Board of Governors, and the Federal seserve Banks. Any differences that have arisen have been promptly th tled and the primary purpose in the minds of all connected with ' to Program has been to facilitate the financing of defense contrac14, ,1 as provided in section 301 of the Defense Production Act of as amended, and the implementing Executive Orders. 4 The guaranteed loan program was successful and f l AttEtilT., , lied a useful purpose during World War II and during the Korean . It has continued to be useful in support of defense produ_ 'Lion, but on a more limited scale. It provides a mechanism whereby 4'. Olk -14ly small business defense contractors and subcontractors, particular to finance their sary concerns, can arrange to borrow the funds neces of Government means by defense production through their local banks nment funds of Gover ce guaranteed loans rather than through the advan or direct Government loans. mber 1950 through From the beginning of the program in Septe authorized were June 30, 1964, 1,624 loans totaling $3,486,340,000 by the procurement agencies which guarantee such loans. there was disDuring the 12 months ending June 30, 1964, most of 00, bursed on outstanding loans approximately $152,216,0 which was revolving credits. 5. Current Need. The current need for this program may be drawn ready to Irom its current activity and the desirability of being d. support an expanded procurement program when neede number and The following tabulation shows the cumulative of the proning begin amount of guaranteed loans authorized from the gh June throu 1963 gram to the end of each month in the period June 1964, 1963 June 30 July 31 August 31 September 30 October 31 November 30 December 31 1964 January 31 February 29 March 31 April 30 May 31 June 30 6. Guaranteed loans authorized to date Amount (In thousands of dollars) Number 3,458,740 1,611 3,463,940 1,613 3,465,340 1,614 3,466,540 1,614 3,467,640 1,614 3,469,215 1,616 3,472,890 1,618 1,619 1,620 1,621 1,623 1,623 1,624 3,475,640 3,476,340 3,476,415 3,477,465 3,483,540 3,486,340 by size of Small Business. Classifications of guaranteed loans ive relat the to ithe borrower were discontinued beginning 1960 due quarlast for t repor (see t activity of the program. At that time, rautho loans of r numbe the ter 1959) approximately three-fourths of ved belie is It yees. emplo 500 ed were to borrowers having less than tly fican signi not has ess busin flat this proportion of loans to small changed. J ) -157. Major Problems. There are no major problems confronting the Board and Federal Reserve Banks in carrying out this program. 8. Program Chang. The Federal Reserve Banks have plans to conduct the essential operations of the Banks from relocation offices in the event of an emergency. The Reserve Banks plan to continue to perform such fiscal agency functions under the V-loan program as the situation then prevailing permits. 9. Standby Programs. Plans contemplate that the Federal Reserve Banks and the Board will be prepared to participate in an expanded Program suitable to any future emergency needs. 10. Organizational Changes. There have been no organizational changes in the conduct of this program during the past year. , in section 301 of the Defense Prostated As Future Objectives. ion Act, the objective of the guaranteed loan program continues tuct .° be "to expedite production and deliveries or services under Gov'rnment contracts." 12. Availability of Funds. The guaranteeing agencies are authorized t a° use any monies appropriated to them for defense purposes to meet .,°Y costs and expenses in connection with the V-loan program. The " ailability of funds is adequate. Se ptember 15, 1964. Item NO. TELEGRAM 6 9/15/64 LEASED WIRE SERVICE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON September 16, 1964. DEMING MINNEAPOLIS Reuriet September 10 1964, the Board approves appointment of Phil Carl Gerber as assistant examiner for the Federal Rese e Bank of Minneapolis, effective today. (Signed) Elizabeth L. Carmichael CARMICHAEL
@FedFRASER