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1829 A meeting of the Board of Governors of the Federal Reserve Sys— tern was held in Washington on Friday, September 18, 1942, at 10:45 a.m. PRESENT: Mr. Mr. Mr. Mr. Ransom, Vice Chairman Szymczak McKee Draper Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chair— man Mr. Panlger, Chief of the Division of Exam— inations Mr. Dreibelbis, Genera Attorney Mr. Leonard, Director of the Division of Per— sonnel Administration Mr. Vest, Assistant General Attorney Mr. Wyatt, General Counsel There were presented telegrams to Mr. Paddock, President of the Pecte,—, "-I-Reserve Bank of Boston, Messrs. Treiber and McCreedy, Secretaries clf the Federal Reserve Banks of New York and Philadelphia, respectively, kr. T .e4 ' arin, President of the Federal Reserve Bank of Atlanta, and Messrs. Dijaa rd and Hale, Secretaries of the Federal Reserve Banks of Chicago and 841 p respectively, stating that the Board approves the estab— eh4 l1 exit without change by the Federal Reserve Bank of San Francisco on 4Pt b 41-er 15, by the Federal Reserve Bank of Atlanta on September 16, the Federal Reserve Banks of New York, Philadelphial Chicago, and 8a/ip ' l ancisco on September 17, 1942, and by the Federal Reserve Bank of toston today, of the rates of discount and purchase in their existing tiehechlies. Approved unanimously. 9/18/42 -2Reference was made to a letter received under date of Septem- ber 16, 1942, from Mr. Lichtenstein, Secretary of the Federal Advisory C°1111en, reading as follows: . "Acting under instructions of the Federal Advisory Counell) I beg to transmit to you herewith a copy of a resolution adOpted at the recent meeting of the Council on September 14. "This resolution was presented to the Board of Governors at the joint me,yting with the Council on September 14, but it was understood that the Council would reconsider the subject after a committee of the Council had met with a committee of le Board and Lir. Charles 0. Pengra, Counsel, War Department Pflrlee Adjustment Board. I am instructed by the Council to in°Ival You that the Council considered the matter at its after11°°n session after it had listened to a report of the meeting . c)rf its committee with the committee of the Board and Mr. Pengra. Tt was unanimously voted not to alter the wording of the reso:tutlon and to request the Board of Governors to make use of the 7solut10n at such time and in such manner as would seem advisple whenever the question of a change of the present act might pe under consideration." Upon motion by Mr. Szymczak, the letter was referred to the War Loans Committee for recorailendation as to the action to be taken by the Board on the Federal Advisory Council's resolution. Mr. Szymczak stated that during discussions of the indebtedness Wagner, who had resigned as Vice President of the Federal Reserve 13Et4hc of Cleveland, the suggestion was made that the policy and procedure ilt11 respect to retorts of indebtedness of officers of the Federal Reserve IklIk8 be reviewed and such steps taken as would be necessary to prevent a Nurreace of that kind. el/"ed With that in mind, Mr. Szymczak said, he had had drafts of two letters to the Chairmen and Presidents of the Fed- Reserve Banks (1) stating the policy to be followed in the future 11-t4 respect to indebtedness of officers and employees holding responsible 1831 9/18/42 Positions in the Federal Reserve Banks and (2) setting forth the procedure to be followed in connection with the handling of reports of indebtedness °I. such officers and employees. Following the reading of the drafts, there was a discussion of the r sasone for the Board's original letter of April 29, 1933 (X-7425), and tor the currently effective instructions which were sent to the Fed— eralReserve Banks in the Board's letter of June 25, 1937 (S-8). Refer— ence was made during the discussion to the fact that one of the reasons t(II* thA '''JYSteMis policy was the desire to avoid any situation that might restilt -in embarrassment to the Federal Reserve Banks or in questions be— ra. lsed as to the independence of the judgement of officers and emPloye ' 8 of the Federal Reserve Banks or as to their disinterestedness in the a, ' scharge of their official responsibilities, and it was pointed out that %,here was a much greater need for such a policy at the present time beca„, " '4 of the greatly expanded contacts of the officers and employees of the, reclp -r.114. Reserve Banks as the result of the increased responsibilities Placed on the Banks in such fields as the regulation of security loans, the l'eglaation of consumer credit, loans under section 13b of the Federal 4e8erve Aet, and the issuance of guarantees of loans under Executive Or— clet4 9112. Following the reading of the Board's letter of June 25, 1937 ) 'the members of the Board agreed that a letter restating the policy Ilith ePeot to indebtedness of officers and employees of the Federal Re— aerve Was not necessary. Mr. Szymczak stated that, inasmuch as 1832 -4this whole matter involved one aspect of the question of the relationship Of auditors to the boards of directors of the Federal Reserve Banks and , the -44111uners for the Board of Governors and since that subject vas on the agEtnda for the Conference of Chairmen, he would suggest that the question (4 the Procedure to be followed in carrying out the policy with respect to Illtedness of officers and employees be discussed with the executive COmmittee of the Chairmen's Conference which will meet in Washington on SePteMber 26, 1942, with the thought that the committee would present the Illatter at the Chairmen's Conference on October 5, 1942. This suggestion was approved unanimously, with the understanding that the members of the Board would send to Mr. Szymczak before September 26 any suggestions that they might have to make with respect to the procedure that should be followed, and that Mr. Szymczak would have the statement of procedure revised in the light Of these suggestions and would present the revised statement to the executive committee of the Chairmen's Conference at its meeting on September 26. At this point, Messrs. Paulger and Leonard left the meeting. Mr. McKee stated that yesterday a telegram was received from PresiYour,„, --46 of the Federal Reserve Bank of Chicago in which it was stated tho, 'lett Under the provisions of the Board's Regulation A, Discounts for and Advane es to Member Banks by Federal Reserve Banks, the notes issued by the Ilendix t Illation Corporation in connection with the credits to be extended °•that c orporation under the provisions of Executive Order 9112 would be 14eligibl -e for rediscount by the Federal Reserve Banks for the reason that 1_833 9/18/42 —5— theY were not negotiable. The wire also stated that it was felt that it *4114 facilitate placing the loan with numerous banks if the notes were made eligible for rediscount; that an informal ruling by the Board de— claring notes to be eligible would be advisable in the interests of the welsaffcrt because (1) the notes would probably be guaranteed to the ex— tents90 per cent, and (2) the Federal Reserve Bank, acting as agent for the ar Department, had complete knowledge of the borrower, its condition, aNterme of the loan; and that for these reasons the importance of nego— tiability was materially reduced. The question raised by Mr. Young's wire was discussed over the teie"Jne this morning by Mr. Vest with First Vice President Rounds of the p ede rm-1- Reserve Bank of New York, who addressed a telegram to the 13()arci in which the opinion was expressed that it would be necessary to coneid er each separate case upon its merits, and that as to the pending V credit to the General Motors Corporation it would be difficult to Nlsider the notes as now drawn as being eligible. The wire also stated t it was believed that the form of note and credit agreement could be 11.61eci in such a manner as to make it possible for the Board to determine thet the b Paper would be eligible, that subject to such revision it was tb highly desirable that the paper be considered eligible, and that rnatt e was imi3ortant as a means of assisting the banking system in raakizie al, 4 a-dable large amounts of credit for purposes of financing the war Programa. 1834 9/18/42 —6— Mr. McKee said that it -would be helpful in connection with the tw° credits if a decision could be reached on a solution of the eligibil% problem as Promptly as possible, and that the matter was important because cf the fact that, if the Paper was not to be considered as eligible tcis discount, it could be acquired by the Federal Reserve Banks only as c°11ateral for an advance under section 10(b) of the Federal Reserve Act Which) Under the provisions of that section, would carry a rate at least 1/2 of 1 J- per cent greater than the discount rate for loans and advances 14.1der . sections 13 and 13a of the Federal Reserve Act. He added that the coat of borrowing money was one of the elements entering into the cost of war. c_ ontracts, that for that reason the General Motors Corporation had 41414 ey - erY effort to reduce to a minimum the interest rate on the credit to b_ ' extended to it, and that it was felt the paper would circulate much tore fre e-LY if it were eligible for discount at a Federal Reserve Bank. e the further statement that he would like to see the Board take ac1° t101 n .the matter in such form as would furnish a solution to any similar 24see t at -,ght mA arise in the future. At the request of Mr. McKee, Mr. Vest explained that there were thre_ 'Points to be considered: (1) The notes involved would have a matuor 90 daYs but would be issued under a commitment which, in the case ot the a eneral Motors credit, would run for three years, so that there was 'VAeat4 kEtte 4-an whether the obligation was for 90 days or for a longer period. irel‘ might be the situation between the borrower and the lender, the 1835 9/18/42 -7Federal Reserve Bank would be under no obligation to accept a renewal of a latilthig 90-day note and, therefore, the notes could be regarded as eligible so far as that question was concerned. (2) Under the provisions °I' the guarantee agreement, which would be incorporated by reference in each note, the maturity of the obligation would be subject to suspension Lithe event of the cancellation by the Government of war contracts with the borrower. In such a contingency, therefore, the maturity of the note ktght bp 4.0nger than 90 days and might become indefinite, and, although techajeallY the maturity might be regarded as longer than 90 days, as a Ptlletical matter that would not be the case until the cancellation of e°1114'aas occurred, which would not be likely to happen except perhaps isolated cases until the war was over. In these circumstances, the 1141'4 would be justified in taking the position that such a contingency 11°11141 not be a bar to regarding the paper as being eligible for discount 141tia sUch time as cancellation of contracts actually occurred. (3) The 14-3113°I ' aticm by reference in the notes of the provisions of the guarantee at% ernent relating to the suspension of the maturity renders the notes none, and under the Board's Regulation A in its present form nego— qab. . IlltY was one of the requirements for eligibility. Although such a vestli_e r Merit, was not ir. the law, it was placed in the Board's Regulation A ae a Illear18 of protecting the Federal Reserve Banks against certain legal ,...Lectchr 44tsees of non-negotiable paper. In these circumstances, if the ahould 44.1.8 , 4x1 decide to do so, it could take action in the form of (a) the Federal Reserve Banks that it would have no objection to 1_836 W18/42 -8- their d iscounting the notes issued under the General Motors and Bendix Aviation Corporation credits notwithstanding the fact that the notes were hat ne gotiable, (b) amending Regulation A to eliminate the requirement that Paper must be negotiable in order to be eligible, or (c) amending Regulati4r1A so that negotiability would not be required in connection with paper rePreseriting loans guaranteed in whole or in part under the provisions of 4?"elltive Order 9112. All of the members of the Board present indicated that if action wre taken they would favor action in the latter form. Ur. Vest stated that another point that should be given consid- "#i°n by the Board was that the Federal Reserve Banks expressly act as tiseel agents of the United States on behalf of the armed services and the Maritime Commission in issuing guarantees on war loans, and, in the OrEtt a Federal Reserve Bank acquired by discount or as collateral for an advarice a note representing a guaranteed loan, it would stand in the dual 1138iti°4 or agent of the guarantor and as lender with respect to the same P4Per's that it was possible at least theoretically that at times these iritereets might be in conflict, and that while the question was not rege1/4I'deci as Particularly important it was felt that the Board should conzider whether there would be any possibility of the Federal Reserve Banks beillg criticized for occuPYing such a dual position. After some discusaion of this point, the meeting recessed and Notivened at 3:00 p.m.. w ith the same attendance as at the close of the 9/18/42 plornite -9session except that Messrs. Leonard and Paulger and Mr. Myrick, 14°111-cal Assistant in the Division of Bank Operations, were in attendance. There was presented a draft of an amendment to the Board's Regulatio ,A -4 it, Discounts for and Advances to Member Banks by Federal Reserve Banks $ Which would add the following sentence to subsection (h) of sec- A. of the regulation: "The requirement of this section of the Regulation that a note, draft or bill of exchange be negotiable shall not be applicable with respect to any n", draft or bill of exchange evidencing a loan which is in whole or in part the subject of a guarantee or commitment by the War Department, Navy Department, or United States Maritime Commission pursuant to Executive Order No. 9112." Mr. Ransom inquired whether the Legal Division was prepared to 4414er aa opinion that the proposed amendment was within the authority of the Board of Governors. Messrs. Dreibelbis and Vest answered in the aftirltative, and in response to Mr. Ransom's request stated that they would "kit 4.4 opinion to the effect that it was within the Board's authority to take the steps outlined by Mr. Vest as a possible solution of the 131'444 of eligibility of paper evidencing loans guaranteed under Ex- eeljtive °rder 9112. Mr. McKee stated that, if the decision were reached by the Board that the paper in question should be regarded as eligible for discount, he w°111c1 like to see the Federal Reserve Banks, instead of rediscounting the paper, take it in the form of collateral for advances to member banks 1838 9/18/42 114der the -10provisions of section 13 of the Federal Reserve Act. Mr. Vest stated that there would be no legal distinction in the authority of the Federal Reserve Banks to take the paper as a rediscount or as collateral f(Ir a menber bank advance. At the conclusion of the discussion, Mr. McKee moved the adoption of the following resolution: Resolved, That subsection (h) of section 1 of Regulation At Discounts for and Advances to Member Banks by Federal Reserve Banks, be amended, effective immediately, by adding at the end thereof the following sentence: Z he requirement of this section of the Regulation that a note, wit e-rt i_ or bill of exchange be negotiable shall not be applicable a 14 respect to any note, draft or bill of exchange evidencing or °an which is in whole or in part the subject of a guarantee st °Illmitment by the War Department, Navy Department, or United e. es Maritime Commission pursuant to Executive Order No. 9112." Mr. McKee's motion was out by the chair and carried, Mr. Ransom not voting. Mr. McKee then moved that the Board advise the Federal Reserve Banks that (1) the issuance of 90-day notes under a credit agreement made under Executive Order 9112 and running for a longer period, and (2) the incorporation by reference of the standard form of agreement in notes evidencing loans guaranteed under that order, under which agreement in the event of cancellation by the Government of war contracts held by the borrower a suspension of the maturity of the notes might be involved, would not affect the maturity of the notes so as to render them ineligible for discount prior to such suspension. This motion was put by the chair and carried, Mr. Ransom not voting. 1839 9/18/42 -11Further reference was made to the dual position in which the Fed- era.Resee Banks might be placed as agent for the guarantor and as lender connection With guaranteed loans. Mr. McKee moved that advice of the Board's action with respect to eligibility of notes representing guaranteed loans be transmitted to the armed services and to the Maritime Cornmission, calling their attention to the dual position in which the Federal Reserve Banks would be placed in the event they acquired such notes. This motion was put by the chair and carried unanimously. At this point, Mr. Vest withdrew from the meeting. Mr. Szymczak then presented a memorandum addressed to the Board bY Mr. Paulger under date of September 18, 1942, with respect to the re- latio of the auditors at the Federal Reserve Banks to the boards of (14ect --s Of the Banks and to the examiners for the Board of Governors. 2/mezsk suggested that the Board agree on the numbered sentences contgrieci ln the first paragraph of the memorandum, or some revision thereof, " 18 for discussion with the Chairmen of the Federal Reserve Banks atthe, 11 'conference on October 5, 1942. The portion of the memorandum Nterr ed t° by Mr. Szymczak was read by Mr. Paulger, and the ensuing disNieton related largely to the question of the relationship of the auditor 11°ard's examining staff and to the question whether the examiners be free to discuss important matters with the auditor in the ab44ce cf the Chairman, Deputy Chairman, or auditing committee. There was ale() a discussion of the question who should call conferences of auditors. 1_840 9118/42 -12At the conclusion of the discussion, upon motion by Mr. Szymczak, the following statement was approved by unanimous vote, with the understanding that Ur. Szymczak would discuss it with the executive committee of the Chairmen's Conference at the meeting of the committee on September 26, 1942: _ "In order to bring about a more effective functioning of the udit departments of the Federal Reserve Banks and a clearer unerstanding of the Auditor's duties and responsibilities and his relationse to the board of directors of the bank and the Board's Illiners, the following principles should be recognized and intained: 1- Emphasis must be placed upon the special nature of the Auditor's position in the bank which differs generally in lines of authority and responsibility from that of operating officers. The Auditor is responsible directly to the board of directors of the Reserve Bank through its Chairman or an audit committee. Therefore, it is imperative that the board of directors maintain a procedure whereunder the Auditor may have a regular and systematic manner of reporting to the board not only at meetings but in the intervals between meetings, and that he have adequate opportunity to discuss matters with the Chairman or the audit committe e. 2. The Chairman and the audit committee particularly should be interest ed in the activities of the Auditor and it is essential that this interest be made clearly evident to the Auditor. "3. In performing his duties, the Auditor must not be dependentupon any executive or operating officer for the security of his position. "4. The minutes of the board of directors or the • appropriate committee thereof should indicate action taken with respect to all reports, formal or informal, submitted by 45. the Auditor. To facilita te the work of the Auditor in ascertaining whether the bank's operations are being conducted in accordance with the policies adopted by the board of directors, the minutes of the board of directors and any 4A. committee thereof should be available to the Auditor. ' The board of directors and the Board of Governors have a common interest in seeing that the operating practices of the Federal Reserve Bank are sound and are in conformity with the law and with the Board's regulations. q 1841 9/18/42 -13- . 118 wThe Auditor and the Board's examiners occupy essentially the same position in relation to their respective principals. Therefore, it is important that close relations between the Auditor and the Board's examiners be maintained and that the Auditor feel free to discuss matters frankly with the examiners. The files of the Auditor must contain adequate evidence of all investigations made and of all reports made to the board of directors or a committee thereof, and all such . information must be available and furnished to the Board's examining staff. As needs may arise from time to time Conferences of Auditors shall be called by the Chairmen's Conference, or the Chairman thereof, or the Board of Governors after consultation with each other. In the event that the Auditors deem it necessary or desirable to hold a conference they should take up the matter with the Chairmen's Conference and the Board of Governors. Adequate notice of any conference of Auditors shall be given to all interested parties in order that each may submit suggestions and arrange to have representatives present." At the request of Mr. Szymczak, Mr. Leonard read an outline which he had Prepared for discussion of the program of the Division of Personnel uletration with respect to Federal Reserve Bank matters. Mr. Szymczak neteAthat the memorandum had been discussed with Mr. Ruml, Chairman of thechai rmenls Conference, on September 12 and had been revised in accord41" with - suggestions made at that time, and that if agreeable to the 5ard h e would like to discuss it with the executive committee of the Chairtneri 8 C°11ference at its meeting on September 26 and to present it at the t(Irthcomi --ng Chairmen's Conference. All of the members present indicated that th eir were in agreement with such a procedure. Lir. Szymczak reviewed for the information of the members of the to 41N1 th e conversations which he had had recently with the Presidents of 1842 9118/42 -14- tileFederal Reserve Banks of Cleveland, Richmond, Atlanta, Chicago, St. . LoIlls, and Dallas with respect to the steps that might be taken to ther.,„ vase the functions and services of the branches of the respective Federal. Reserve Banks. He stated that, if agreeable to the Board, he would 11-4t0 review the matter at the forthcoming Chairmen's Conference with a Iriew t• o obtaining approval by the Chairmen of the program of expansion of eAivities of the branches along the lines suggested in the conversations /Tith the presidents. Upon motion by Mr. Draper, Mr. Szymczakts Proposal was approved unanimously. Mr. SzYmezak then stated that it was proposed by Mr. Rua, Chairnian of 41. "'le Chairmen's Conference, to have a stenographic record made of the cha, lrmen's Conference on October 5 and that the members of the Board or Qc)vernors had decided informally to give a dinner for the Chairmen of the Pecleral Reserve Banks and the members, advisers, and certain members of the staff of the National Resources Planning Board on the evening of °°t()bel" 5/ and that he would recommend that the Board authorize the paykelt of the cost of the stenographic report and of the dinner. Approved unanimously. or the 14r. Ransom stated that, following the discussion at the meeting Board With the Federal Advisory Council on September 14 of how the learned on originated that small banks open war loan accounts, he had fr°rn Mr. McLarin, President of the Federal Reserve Bank of Atlanta, --•‘' the suggestion had been made in a telegram addressed by the Treasury 9/18/42 tO the -15- F c,eral Reserve Banks in which it was requested that the Federal Re— rite B. dnks and the Victory Fund Committees encourage banks which had war loan , ' cc°unts to increase the size of such accounts and banks which did not have such accounts to open them. There was agreement that in these 'cunistances nothing further needed to be done by the Board in the matter. At this Yatt cpint Messrs. Thurston, Paulger, Dreibelbis, Leonard, and Myrick left the meeting and the action stated with respect t0 the -matter hereinafter referred to was then taken by the Board: The minutes of the meeting of the Board of Governors of the Fed— e 1 Res erve System held on September 17, 1942, were appr ved unanimously. Thereupon the meeting adjourned.
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