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1541 A meeting of the Board of Governors of the Federal Reserve m With the Federal Advisory Council was held in the offices of S the Eoard of Governors in Washington on Tuesday, September 20, 1949, at 10:40 a.m. PRESENT: Mr. Mr. Mr. Mx. Mx. Mx. McCabe, Chairman Eccles Szymczak Draper Vardpman Clayton Mx. Carpenter, Secretary Messrs. Spencer, Burgess, Potts, Congdon, Fleming, J. T. Brown, E. E. Brown, Atwood, Kemper, Woods, and Odlin, members of the Federal Advisory Council from the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively. Mr. Prochnow, Secretary of the Federal Advisory Council Before this meeting the Board had received from the Council e. nismorandum of the matters which the Council wished to discuss with the, Adoard. et At this meeting President Brown read the Council's state- With respect to each of the topics and the discussion was sub- i44a1tially as follows: 1. H. R. 1689, Executive Salaries. In connection with H. R. 1689, the Council has unanimously approved the resolution which follows for transmission to Senator Maybank as Chairman of the Senate Committee 04 Banking and Currency: 1_542 9/20/49 -2RESOLUTION "The Federal Reserve Ststem is this country's Central Bank. Its decisions are of grave importance for the Nation's well-being. They influence the trend of business and employment. "The Board of Governors of the Reserve System is the top command of the System. It should be manned by the ablest and best qualified people in the country. When the System was set 11D, the salaries of the Board were placed at the same level as members of the Cabinet and that relationship has been continued until the present. "H. R. 1689 would break this sound tradition by treating the Board simply as a minor regulatory agency. This would lower the prestige of the Board and make it much more difficult to persuade able men to be its members. It would impair its influence upon banks and the public and cripple it for its essential service to the Nation. "We recommend that members of the Board be placed on a higher salary level, preferably $20,000." During an informal discussion of the resolution, President 4°14:4 stated that copies thereof were handed to Senator Maybank yes% by members of the Council. tel 2- Discount rates at Federpl Reserve Banks and business trends during the remainder of year. In view of changed economic conditions and the present level of the Government securities market, what should be the policy of the Federal Reserve System with respect to the rediscount rate? The Council believes that under current conditions it is desirable to retain the present rediscount rate. Any reduction in the rate now would only tend to ease money rates at a time when rates are historically very low. With deficit financing, e'lld with business showing some improvement, it is not desirable to lend encouragement to a possible inflationary trend. Normally 9/20/49 -3- the rediscount rate should be a penalty rate. The present rate is low for a period of relative prosperity. A reduction in the rediscount rate now would also tend to increase the pricec of Government securities and would therefore make More difficult the Treasury and Open Market Committee responsibilities in connection with the Government security markets. What are the views of the Council as to business trends during the remainder of 1949? The business trend at present is moderately upward from its low of recent months, and it is probable that it will continue upward for the remainder of 1949. Developments Which might threaten a continuance of this trend are strikes in such major industries as steel, coal and the railroads and effects of the British devaluation. Since these two topics were related, they were discussed to- Rether. Amplifying the statement on the first topic, President Brown stateA -- that since July there had been very rapid improvement in busi488 sentiment, that orders had increased to about the level of 1948, that there was demand for a fourth round of wage increases some of vere being granted, and that further Treasury deficits were in 1413ect. He also said that with greatly improved business sentiment 1 the possibility of further wage increases it was the view of the ' 64 ' ca that no action should be taken which might start another inspiral, that a majority of the Council felt that the recession had not gone far enough, and that the trend had started up again bet() a number of necessary price adjustments had been made. Commenting particularly on the second question, President Brown 1544 9)%/49 -4- "gated that; because of the greatly improved business sentiment in eco$3 districts, a number of capital expansion programs were being l'ellved, and that it was felt that barring severe strikes and pos81131e adverse effects of such things as the British devaluation 1514141Les8 would be good for the balance of the year and would stay t the present levels or increase somewhat in volume. The Council IrEts aot prepared, he said, to say what the situation would be after the turn of the year but indications of a sustained upward trend Vel'e not nearly as clear as for the rest of the current year. Chairman McCabe referred to the last sentence of the Council's C _ -41Lent on business trends for the balance of 1949 and raised the (111"tion whether that comment was entirely consistent with the views or Council on the reduction of the discount rate. Members of the Council indicated the opinion that a reduction In ri4 -48count rates would not have any effect on a situation resulting trft.„ President Brown '.141 strikes and devaluation of foreign currencies. etated that it was not expected that strikes in steel and coal would be . 0 4 long duration but that if they lasted a month or more the ef- reet8 would be serious. He also said that it would be impossible to "43.111ate the effects of devaluation of foreign currencies for a month tvo. Chairman McCabe reviewed for the confidential information of the Itembers of the Council the background of the recent discussions 1545 9/201/49 the Board of Governors of a reduction in the discount rates at the Pederal Reserve Banks and of the reasons that had been advanced tiO1' taking or for withholding approval of such a reduction at this time. There was a general and informal discussion of the problem or 'liscount rates in the light of existing conditions including the -Luation of foreign currencies. The members of the Council were 1114e11ialous in their view that a reduction in the rate would accomplish 11"seful purpose, but on the other hand would "break" the two pere t rate charged by banks on prime commercial paper and would reduce 111.1; "on long-term investments which were already too low to provide eillaciequate return for savings funds in the hands of insurance comtille8) savings banks, savings and loan associations, endowments, and °tiler investors. They also were in agreement that a reduction in the discount rates would not be effective in reducing lending rates to 4'411 borrowers. There was also discussion of the history of Federal Reserve rediscount rates during and since the war, the function that the ulscount rate might be expected to perform in the present sit-4/ and whether there would be justification for reducing the bY only 1/8 of one percent to bring it in line with the market l'Ette on Treasury certificates or for establishing of a preferential l'ate on rediscounts secured by Treasury bills and certificates. 1541 9ht/49 -6President Brown raised the question whether, if the discount rate were reduced, the rate on certificates would go to one percent. 14441there of the Board stated that the certificate rate would be detel lited by the open market policies of the System and a reduction that rate to one percent would not follow from a reduction in the cliscount rate alone. The discussion was concluded by a statement in which the member., * of the Council appeared to concur that there was little immediate telationship between a reduction in the discount rate and the possible rtects of the devaluation of foreign currencies but that such a rethe 14ti°11ship might develop later when the effects of devaluation on busitless situation in this country became more apparent. 3. System credit policy. Does the Council have any comments to make on the credit policy actions taken by the Federal Reserve System since the last meeting of the Council? The Council is in agreement with the June statement indicating a departure from the policy of maintaining a fixed Pattern of rates. The Council also approves the reductions it reserve requirements that have been made. These actions have been an encouraging influence on business sentiment. Looking backward, the Council believes it would have been helpful if the Federal Reserve System had released securities to the market more promptly in late June and early July end if interest rates had not been permitted to fall so low. The Council also believes the whole bond market would be in sounder condition if the System had released and were currently releasing bonds more freely from its portfolio. I 54"/ 9120/49 -7The discussion of this topic brought out the point that the "sentence of the Council's statement referred particularly to 4 1/1eligible bonds of which the System's holdings were substantial. 81dent Brown stated that ineligible Treasury bonds had gone up 418414ch as two points, that such an abrupt rise had affected the en'e high-grade corporate bond market, and that it would be better til It sales from the System account could be used to counteract this This matter was discussed in the light of the June 28, 1949, teslent of the Federal Open Market Committee, the policies fol' ste 144" by the Committee since that time, and what the policy with reePect to market rates should be under the conditions that had Treasury refundin program. Does the Council wish to express any opinion at this time with respect to the future refunding program of the Treasury? The Council believes that the Treasury's announcement that it proposes to issue notes to refund the bonds coming due in December is a step in the right direction. As the Program develops, it should include refunding into both intermediate and longer-term issues. Too large a proportion of the Federal debt is now in short-term securities, especially when Considered in connection with the amount of savings bonds outstanding and with the steadily shortening maturities of the Present long-term issues. Question was raised by members of the Board whether the longer teral Issues referred to in the above statement would include bank ISIS ' 91/2449 -8- eligibles or only restricted issues, and President Brown stated tIlat the Council was thinking only of ineligible bonds. Mr. Bur- felt, however, that some of the issues should be bank eligibles. Ill reSponse to an inquiry by Mr. Eccles as to whether there would he iUstification for issuing long-term eligible bonds to banks while the Market for Treasury securities was being supported, Mr. Burgess 814tted that he felt there should be some ten-year bank eligibles 114a that eventually it would be necessary to move in the direction or entirely free market. Mr. Eccles questioned whether there would be justification kr refunding in an easy money mArket at low rates which would cause the issues to decline below par if rates moved substantially higher, 844 President Brown stated that it would be necessary to announce bethe securities were issued that there was no intention to supthem. During a discussion of the responsibility of the Treas- /IrYvith respect to issuing long-term securities at low rates, Mr. kirg ess expressed the opinion that the present low rates on Govern- Securities were preventing the Government from refunding with Loh,-46tdr term issues. Mr. Clayton inquired whether the second sentence of the Counilts statement was not intended to read: "AB the program develops S.8 money market conditions become more nearly normal, the pro- should include refunding into intermediate and longer term 1519 9/20/49 b0148.“ -9Members of the Council agreed that the sentence as stated 1:714r. Clayton expressed the Council's intention. Chairman McCabe stated that he did not think there was disaMent between the Council and the Board on the statement in the 1141-sed sentence. 5. Legislation. What are the views of the Council with respect to the following legislative proposals: a. A basic revision in the law relating to reserve requirements which would base requirements on types of deposits rather than location of the bank, and would be applicable to nonmember as well as member banks. The Council is unanimously of the opinion that neither the Board of Governors nor any Federal agency should have authority to fix the reserve requirements of nonmember banks. As to the reserves of member banks, while the Council recognizes that there is some lack of logic in the present basis for determining reserves, the banking system has over the years grOWn up with this arrangement and has operated effectively Under it. Before the Council expresses its opinion on a change to some other basis, the Council desires more opportunity to study specific proposals and their effects on individual banks and on the banking system. President Brown stated that the Council had had the benefit Ot th-e stat..ments of Mr. Bopp, Vice President of the Federal Reserve Philadelphia, before the National Association of State Bank Nl)er-17-Lsors 4 last year an of Mr. Szymczak before the Wisconsin School "k4king, that the statements intentionally were not explicit on the percentages that would be prescribed under the plan, and that the 9/20/49 -10- Mall included the application of the uniform reserve requirements to ZonmeMber banks. As stated previously, he said, the Council feels 1 81*()Ile Y that no one in the Federal Government should have authority to Prescrfbe reserve requirements for nonmember banks for the reason that - it that were done there would, in effect, be only one banking "em in place of the present dual system. Chairman McCabe referred to the wide variation in reserve retarements of banks under State laws as compared with the requireImposed on member banks and asked from where the leadership II" to come to bring about a correction of that situation. He also said that while he believed in the dual banking system, that system ell°414 be a sound one and the present reserve requirements of State batik 8 could not be regarded as sound. He also asked if the correspon- necessary dent banks did not take leadership in bringing about the r'ecti0n who could be looked to to dramatize the need for correction. Mr. Congdon suggested the State bank supervisors as the —c8-1 group to take the matter up on the basis of improving the tte banking system and removing a threat to that system if the lleees sarY corrective action were not taken. Chairman McCabe questioned whether the State bank supervisors 11°111d be willing to undertake it. Mr. Szymczak referred to the special report of the Board, the, 4'ederal Advisory Council, and the Presidents of the Federal 1,55/ 912W49 -11- Reserve Banks to Congress in that 194o which included a recommendation increased reserve requirements be applied to nonmember banks. President Brown stated that that recommendation was made on the baeis of the likelihood of the United States being drawn into the/lar, the very large excess reserves existing at the time, and the 1)(3ssibi1ity that the reserves would be used in such a way as to 11e6tken the ability of the United States in the event it should get illto the war. the He did not think that the conditions existing at present time would justify such a recommendation. Mr. Eccles pointed out that the adoption of the recommendation 11°111-dhave had the same effect then as now so far as the dual bank14c, sYstem was concerned and that the question of the uniformity of reserves had nothing to do with the dual banking system as the same (14estion was involved in the decision to provide Federal deposit in814'811". It was not the intention, he said) that the Federal Reserve At e liminate the dual banking system, that it was intended that it -waY with the correspondent banking system, and that that was the iselle involved in the question of uniformity of reserve requirement re'ther than the dual banking system. Mr. Vardaman stated that he had reluctantly come to the conell), el°n that there should be some uniform statute, similar to the 1.41iro 1111 negotiable instruments law, which would cover reserve re(IllireMents of State member banks and that in his opinion the Ameri- S4r-12 9AW49 -12- celliknkers Association was the organization that should undertake to bring that about. Mr. J. T. Brown suggested that the difficulty lay in the 'et te that the States were not interested in reserve requirements as 811 instrument of credit control but rather from the standpoint of the original purpose of bank reserves to insure the safety and ligtlidity of bank deposits. He felt that if the law could be changed as to avoid using the Federal Reserve Banks as the sole depository 'l'squired reserves and permit State banks to carry their reserves r(11 Ilith their correspondent banks a satisfactory solution would be r°/1114. He felt that such a plan would be acceptable particularly illStates where it would effect a reduction in reserves required uncler State law. Several of the members of the Board and Council questioned Ilhethell Mr. Brown's suggestion would be effective or acceptable, 841 President Brown stated that the question involved also the autho,„ '"Y of the Board of Governors to change reserve requirements 111341 that as long as the Board had that authority there would be obtion to applying it to nonmember banks. b. The authority of the Federal Reserve Banks with respect to industrial loans. On March 11, 1947, the majority (with a minority dissenting) of the Council supported S. 4o8 with certain amendMeats but with the following qualification: 1553 9120/49 -13"The Council's support, with these amendments, of Bill 4o8 is given in the belief that some safety valve is desirable for emergency credit situations, and with the recommendation that the lending and agenguarantee powers of certain other government cury greatl be should cies, including the R.F.C., ated." termin be should tailed, and in many instances l, ConAt the time of the above statement by the Counci guaand g lendin the of gress was considering a restriction uent Subseq ions. situat rantee powers of the RFC to emergency there and , powers broad legislation has continued the RFC with l is no present prospect of reducing these powers. The Counci guaor g lendin having is opposed to two government agencies rantee powers in the same field and therefore would not favor Reserve giving additional guaranteeing powers to the Federal Banks in the industrial field. There was no discussion of this topic. c. H. R. 5749, introduced in the House of Representatives by Chairman Spence on July 25, 7_949, "To amend Section 9 of the for Federal Reserve Act, as amended, and other purposes." This bill, proposed by ements the Board, relates to capital requir for membership and the establishment of branches by member banks. The Council favors H. R. 749. view of the Council President Brown stated that it was the that the by State member banks establishment of additional branches 811°1134 be within the authority of the Board of Governors. S... 6. Plan for issuance and collec:qm...2f_22ELaLE2n2E_STI2E. of the The Board would like to have the views al conpropos the on members of the Council dated August letter 10, tained in the enclosed d, or of Leonar Direct the 1949, addressed to Mr. ions, by Operat Bank Mr. Board's Division of Joseph J. Lawler, Third Assistant Postmaster I 55 -14- 9/20/49 General, outlining a plan which the Post Office Department has under consideration with respect to issuance and collection of Postal money orders. There is also enclosed a copy of a memorandum prepared by Mr. reLeonard under date of August 11, 1949, the of tatives represen garding a meeting of the of members Post Office Department with Board's staff at which the proposal was discussed. issuance The Council favors the proposal relating to the Federal the d provide and collection of Postal money orders expense Reserve Banks are fully reimbursed for their total for overamount le reasonab ta handling these items including a head. fully that President Brown stated that the Council realized ly the the Plan if adopted would make postal money orders virtual ectivalent of cashier's checks and would deprive a number of small allk8 of revenue derived from such checks. The Council felt, he said, hand, the that the loss would not be serious and that, on the other bettlk 8 ing money would be spared the expense and difficulty of collect °I.clezse under the existing cumbersome procedure. He added that banks 14 small communities all over the United States were plagued by the rs were very diffi4" that money orders received from their custome c144 to cash in the local post office and that while it was recogIlized that the plan would introduce a certain amount of competition . betti -en the post office and the commercial bank, it would increase the attractiveness of postal money orders and reduce the difficulties k5 and on balance would be desirable. °rba4 The Council had suggested , 1555 9/20/49 -15- 11141 reimbursement of the Federal Reserve Banks, he said, because 4//as felt that the Federal Reserve Banks should not be in the Position of subsidizing the post office. t Mr. VardsmAn said that President Brown's statemen answered 8. 11111:11ber he of questions which he had had about the proposal, but that n to undervAlestioned whether the post office should be permitted what was essentially a commercial banking function. He pre- to see the postal savings system discontinued rather than to t the proposal under discussion and felt that if the plan were 41°13ted it would result in the loss of income to small banks. able experMr. J. T. Brown stated that he had had consider le ce With the issuance of cashier's checks and the handling of 8-1 money orders, that the present procedure with respect to these " lo 01'(Iels8 created ninny difficulties for banks, that it was clear that orders, and that, it /f(111114 not be possible to abolish the use of money th, of the e4efore, the proposed plan was a very satisfactory solution Arobiera. 7. ..a2imotion of trust comalala_a2m bank holding ccmpanE legislation. include Should the holding company bill not s? trust companie an exemption for wholly-owned The Council believes that the holding company bill should be amended to exempt wholly-owned trust companies not doing a commercial banking business. Such an exemption would not interfere with the primary purpose of the bill. 9/20/49 -16In a brief discussion Chairman McCabe stated that while the 13110Posa1 might open the door for requests for other exemptions, the 44111 of Governors was willing to accept the suggestion. 8. the Authority of Federal Land Banks to Borrow from Federal Reserve Banks. The question of the attitude of the Federal Reserve Board toward H. R. 5512 which would give the Federal Land Banks the power to borrow from the Federal Reserve Banks for one year at the Federal Reserve discount rate. proviIn the judgment of the members of the Council the cenof use r imprope sions of H. R. 5512 would provide for an of n such adoptio The tral banking facilities and are unsound. similar for pressure legislation would inevitably lead to The Council Privileges by other Government lending agencies. on this bill. Board the Mould appreciate knowing the position of recently trans.. Chairman McCabe stated that this bill had been e on Banking from the Committee on Agriculture to the Committe 411 Currency of the United States Senate and that the position of he Board on the matter was not greatly different from that of the e tua Mr. Clayton traced the history of the bill and the considerati°4 Ilhich the Board had given to it. He stated that the approval of the bill at this particular time would be a signal for requests for E31-14ilar authority for other agencies of the Government and that for that reason the Board would oppose approval of the bill. If it h°111d appear that it would be approved, he said, the Board would 1557 9/20/49 -17- t , e•ttera r to have it amended so as to require that any advances to ecieral Land Banks be on the terms and at rates authorized for ad- by the Federal Reserve Banks under section 10b of the Federal Reserve Act or at least on a basis which would require that loans to ecleral Land Banks be not made on any more favorable terms than advelless could now be made to member banks. 9. Deposit Insurance Coverage The Board has sent to the members of the Council a confidential staff study relative to deposit insurance coverage and the rate and base of deposit insurance assessments. The Board would appreciate the current views of the Council concerning any changes that should be made in deposit insurance coverage and the rate and base of deposit insurance assessments. stateOn May 17, 1949, the Council made the following deof subject Ment to the Board of Governors regarding the posit insurance: "The Council is familiar with the discussions on this ion matter which the Federal Deposit Insurance Corporat AssoBankers has had with a committee of the American ar ciation. Without being committed to any particul to approach an general formula, the Council favors in ons. discussi these this subject on the basis of "Specifically, the Council believes any legislation should include the following points: A. No increase should be made in the present insurance coverage of $5,000; B. The maximum assessment in ary one year should not exceed one-twelfth of one percent; C. Provision should be made for maintaining the integrity of the fund by establishing a 9/20/49 -18statutory formula for an automatic scale of assessments, based on the previous years' losses and expenses, to range from no assessment, or an assessment of a nominal amount, under present conditions, to a maximum of one-twelfth of one percent per annum. "In any study for the purpose of determining the adequacy of Federal Deposit Insurance Corporation funds and the rate of assessments, the Council suggests the importance of considering not only the possible losses of the Federal Deposit Insurance Corporation but also the effect on bank earnings, capital and dividends, of the steady drain of assessments. These assessments reduce the power of the individual bank to make its own provision for losses." The Council appreciates the opportunity it has been given to examine the confidential staff study, which the Council reas an important contribution to the consideration of this subject. The Council also appreciates the interest the Board is taking in these phases of Federal deposit insurance which are Of such vital importance to all banks. In the light of discussions now taking place among various interested groups, the CoUncil does not at this stage of these discussions wish to comMit itself to specific proposals. In the meantime the Council will give the matter further study. President Brown stated that some members of the Council had received the staff memorandum only just before leaving for this meeting, that some did not receive it until they reached Washington, and that therefore they would like very much to have additional time in which t° study it. He emphasized the Council's appreciation of the in- terest the Board had taken in this matter which was one of great imk)rtalace to member banks. He said that the study contained a great deal °I' very valuable information but that the matter was being disellas ea bY the Federal Deposit Insurance Corporation and others, and 1 Scq 9/20/4'9 -19- the Council did not feel that it should express its views until it he•cl had an opportunity to study the suggestions contained in the staff rael4t3randum further. Chairman McCabe stated that copies of the memorandum had been NIt to the Federal Deposit Insurance Corporation for comment and that the questionnaire sent out by the subcommittee of the Joint Comkittae on the Economic Report asked for views on this question. The e'118/lers to the questionnaire, he said, were to be filed not later thaz October 15, and it would be helpful if the comments of the Council -4-u. be received in time for consideration in that connection. During the discussion, Mr. Eccles suggested that the Council EtI Ploitt a committee to study the matter and submit its views to the BOEtrd.. President Brown stated that the Council would meet this after11°°11 to consider that suggestion. In response to an inquiry from Mr. Odlin, it was stated that there Ifts no intention to seek legislation on deposit insurance at th° current session of the Congress but rather to prepare a program WO]d be introduced at the beginning of, and acted upon early the next session of the Congress. President Brown stated that in the absence of objection, the IleIct regular meeting of the Council would be held on November 13-15, 1949. 15f0 9 20/49 -20Thereupon the meeting adjourned. Secretary.
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