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1353 A meeting of the Board of Governors of the Federal Reserve System with the Federal Advisory Council was held in the offices of the Board of Governors in Washington on Tuesday, September 21, 1954, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Szymczak Vardaman Mills Robertson Miller Balderston Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Messrs. Ireland, Alexander, Smith, Fleming, Davis, Brown, Campbell, Ringland, Chandler, Matkin, and Wallace, members of the Federal Advisory Council from the First, Second, Third, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively Mr. Prochnow, Secretary of the Federal Advisory Council Before this meeting the Federal Advisory Council submitted to the Board of Governors a memorandum setting forth the Council's views on the subjects to be discussed with the Board at this joint meeting. The statement of the topics, the Council's views, and the discussion Iiith respect to each of the subjects were as follows: 1. A discussion of the draft revision of Regulation A, copies of which were sent to members of the Council by Chairman Martin. The Council is not aware of any reason for revision in the statement of general principles which serves as a foreword for Regulation A in its present form. The Council unanimously 9/21/54 -2- believes that for the member banks to be able to obtain money through discounts and advances is highly important, both for the successful operation of the Federal Reserve System and for the general economy. The Council is opposed to any statement of principles which implies that the use of discounts or advances by member banks is to be restricted. The proposed statement of general principles would inevitably be so construed, both by the Federal Reserve banks and the member banks. The Federal Reserve System has operated effectively under Regulation A in its present form since 1937. The Council believes the statement of general principles contained in the present regulation is entirely adequate and has the advantage of being understood and accepted by the banks. The changes proposed in the body of Regulation A constitute with minor exceptions a restatement and rearrangement without particular significance. The Council sees no real advantages in these proposed changes. While the Council is not opposed to the proposed restatement and rearrangement, it believes it is better to leave unchanged the language of the regulation with which banks are familiar through many years of operation. President Brown stated that all of the members of the Federal Advisory Council felt that the theory back of the proposed statement of Principles and the revision of Regulation A was that the Board considered it desirable to restrict the use of the discount window at the Federal Reserve Banks beyond what had been customary in the past, perhaps with the idea of encouraging the control of reserves almost entirely through °Pen market operations. He stated that since the System was started in 1913 it had become an accepted practice that a bank which was solvent, 'which was not engaged in unsound practices, which was not loaning an unclUe Proportion of its resources for speculation in the stock market or in commodities, and which had a considerable volume of short-term paper could 9/21/54 -3- get money from the Federal Reserve Banks almost automatically. Bankers generally realized, President Brown continued, that if a bank was a continuous borrower over an unduly long period of time the local Federal Reserve Bank would talk with it and in extreme cases might cut it off from the use of the discount window. It was President Brown's view, however, which he stated was Shared unanimously by the members of the Council and which they felt would be the obvious interpretation of commercial banks, that the proPosed revision represented a step toward restriction of the use of the discount privilege. This, he said, the Council unanimously felt Would be a great mistake. President Brown referred to the situation early in 1953 when many commercial banks gained the impression that the Federal Reserve System did not wish to have them use the discount window and to the subsequent change in that feeling in the spring of 1953 when for some reason the System changed its approach, the attitude of the Reserve Banks settled back to normal, and member banks again were able to borrow without being asked whether they would liquidate such borrowwithin two or three days. President Brown added that the Council 14°111d appreciate having the views of the Board as to why the proposed revision seemed to be desirable. Chairman Martin stated that in his view the study of the diemechanism had been very beneficial. With reference to the Council's e°n1ment that Regulation A in its present form, which had been adopted in 1937, was working satisfactorily, Chairman Martin stated that without '6 9/21/54 -4- implying any criticism of anything done in the past, it was his view that when an operation had been carried on for aslong a period of time as had the discount operation without a change in the regulation it was desirable to have a review made of the matter, especially in view of the fact that the discount function had been used very little for many Years prior to 1952. While he did not feel there was a wide gulf be- tween the views of the Council and those of the Board regarding the proPosed change, he believed it desirable to try to bring the regulation in line with the changes that had taken place since 1937. Governor Mills then made a statement in which he said that it had been assumed that the Federal Advisory Council, the commercial bankSystem, and the general public would wish to have the Board keep its regulations and practices under continual study in order that they might be kept up to date in the light of whatever changes developed in banking Practices and in the economy generally. He felt that the study of the discount mechanism was much like the study of reserve requirements, that the need for it was brought about by the experience of early 1953 when SYstem Policy had turned to one of restriction as a means of avoiding a Period of threatened inflation. The study had indicated that the active se of the discount window in such a period had provided additional re8srves at the initiative of the member banks and that those were being d in a super-abundant amount which had the effect of counteracting the re strictive open market Policy. The fundamental idea back of the pro- Pc3eed revision, Governor Mills said, was to avoid a situation such as 9/21/54 President Brown referred to when, in the fall of 1952, banks made extensive use of the discount mechanism at a time when System policy was directed toward modest restraint. The proposed revision of the regula- tion and adoption of the statement of principles would provide a set of rules which would give some guidance to member banks as to what might be an appropriate use of the discount facility under varying circumstances, and which would help assure greater uniformity in administration of the discount facility at the several Federal Reserve Banks. Governor Mills said that while he could understand the misgivings that some might have regarding the interpretation that would be placed on the proposed revi81°n, he would be inclined to think the importance of such misgivings c°111d easily be over-emphasized. SYstem In connection with a reference to the committee which had studied the discount mechanism (Mr. Coleman, C hairman of the Federal Reserve Bank of Chicago, Mr. Williams, President Of the Federal Reserve Bank of Philadelphia, and Governor Mills) and to the Participation of members of the Board's staff as well as officers eLlIci staff members of the Federal Reserve Banks in the study, Governor Mille added the comment that a study of the discount rate was also being Made. Mr. Fleming said that he did not think any member of the Council believed it to be unwise to study the regulation or to make needed reviB ions in it. He stated reasons why in his judgment, however, circumstances 14 the winter of 1952-53 had been unusual and why the impression which had 1..)53 9/21/54 -6- been developed that the discount facility should not be used extensively was very disturbing to banks and to the market. Mr. Fleming added that while he was not against change, he did not think the situation which had developed in early 1953 warranted a more restrictive form of regulation. Chairman Martin suggested that a distinction should be drawn between the mistakes which may have resulted from administrative decisions and misunderstandings which may have arisen as a result of lack of clarification in the Board's regulation. He felt that a guide to the use of the discount window would be beneficial to the member banks and to the officers administering the function at the Federal Reserve Banks. Mr. Fleming agreed that there must be guides but he felt that care should be taken to keep the System in an elastic position so that it could meet conditions as they might develop. Governor Robertson suggested that the impression that the proPosed revision was a step toward restricting the use of the discount facility, to which President Brown and Mr. Fleming had referred, might be eliminated by having a statement included with the proposed revision at the time it was published in the Federal Register which would make clear that there was no intention to adopt a more restrictive policy than had existed in the past. There followed a general discussion of the proposed revision alaring which a number of the members of the Council expressed themselves "doubting the desirability of revising Regulation A at the present time. 9/21/54 Mr. Alexander felt that it was difficult to formulate a rule of general application and that on the whole it was better to leave any statement of general Principles out of the regulation in order to assure greater flexibility to the Federal Reserve Banks when such situations might arise. Mr. Ringland agreed with the views expressed by Mr. Alexander to the effect that when banks generally get the idea that funds are not available in a drastic situation a condition was created which could result in panic and in great harm to the economy. Mr. Smith felt that it was of some significance that all members of the Council had reacted to the proposed revision as being a restrictive stelp. This led him to believe that commercial banks also would inevitably look upon it as a restriction in the use of the discount window. In response to a question from President Brown as to the attitude Of the Federal Reserve Bank Presidents toward the proposed revision, Governor Robertson and Chairman Martin indicated that a majority of the Presidents now felt that a revision of the regulation with the general stateMent of principles would be desirable. Mr. Chandler felt that the psychological reaction of banks was imPortant and Mr. Ireland endorsed the views expressed by Mr. Chandler in which he stated that it seemed to him that to the extent the regulation Permitted each Reserve Bank President to interpret its applicability it 14ould result in departure from the objective of uniformity. 360 9/21/54 -8The remainder of the discussion indicated that while the members of the Council would prefer to have the existing foreword of Regulation A continued rather than the proposed new foreword, they had no serious Objection to the latter other than that it would be interpreted as being more restrictive. They also felt that the principles, if adopted, should Provide a maximum of flexibility. 2. What are the views of the Council with respect to the prospective business situation during the remainder of this year and the first three months of next year and the probable changes that will take place in the volume and purpose of bank loans in each of these periods? While there are some variations in the business situation from district to district, and even more marked differences from industry to industry, the economic pattern over the country is generally uniform, with business at a reasonably good level and on a relatively even keel. The Council does not believe that any significant business upsurge or decline Will occur in the next three months or in the first quarter of next year. The maintenance of consumer spending at a relatively high level and large outlays for construction are two major factors helping to sustain the economy. Over-all construction activity will probably continue at about the present level for the next three months, but there are indications that it may decline somewhat during the first quarter of 1955. At the present time there is no sign of a decline in consumer spending over the next six months. The Council believes that the seasonal increase in bank loans in the next three months will be less than normal. The Council expects a normal seasonal contraction in bank loans during the first quarter of the coming year. If the Commodity Credit Corporation should borrow a considerable amount on certificates, or if the Federal National Mortgage Association should borrow a large amount of money from banks, it would result in a substantial increase in bank loans. Apart from these two possible borrowings, the Council does not expect any important Change in the purpose of loans. 1361 9/21/54 -9- These views of economic conditions and bank loans assume that there will be no significant change in the international situation which would materially affect the domestic economy. In response to a question from Governor Balderston, members of the Council commented upon the inventory situation. Mr. Alexander de- scribed reductions that had taken place in inventories during recent months, generally in industries where the need for such reductions appeared to have been greatest. On the whole, Mr. Alexander felt that the current inventory situation was not one to cause great concern. Messrs. Chandler, Brown, Ringland, Campbell, and Matkin commented on agricultural and employment conditions in their several districts,the general view being that while agricultural income in certain areas was being adversely affected by the drouth and reductions in prices in much of the country, the situation was reasonably satisfactory. They also commented on the employment situation, indicating that serious unemployment existed only in local situations or specific industries and was not general or widespread. 3. The Board would like to have the views of the members of the Council with respect to the System's current credit policies and what, if any, changes might be called for by developments during the balance of the calendar year. The members of the Council believe that recent credit policies of the System have been constructive and were an important factor in maintaining business in a period when economic readjustments have been occurring. The June, July, August reduction in reserve requirements was timely and open market operations since then have been extremely well handled. 9/21/54 -10- Government financing for new money in substantial volume is imminent, and the greater part of it will have to be provided by the banks. Considerable additional reserves will be required. As previously stated, unless there are unforeseen foreign developments which would have an important effect on the volume of bank loans, the Council does not expect a normal seasonal increase in loans this fall. The Council believes that the reserves necessary for successfully handling the anticipated government financing, whether done directly by the Treasury or through borrowing by the Commodity Credit Corporation or the Federal National Mortgage Association, can and should be provided by open market operations rather than by presently reducing reserves. In response to a question of Governor Szymczak's, President Brown stated that the Council had not discussed in detail the extension of mortgage credit on a liberal basis by institutions other than banks although there had been some comment to the effect that no-down-payment loans and loans of 30 years or more maturity were being made in a volume Which might well result in difficulties later on. It was noted that such loans were not generally being made by banks although some other institutions were granting mortgage credits without down payments and for maturities of 30 years or more. Mr. Alexander said that while he concurred in the Council's statement with respect to the desirability of providing additional reserves this fall through open market operations, he wished to reiterate views Previously expressed that he felt the Board should consider further reductions in reserve requirements. However, he did not think that a case for such a reduction could be made at this time. 1363 -11- 9/21/54 Mr. Fleming said he thought this represented the unanimous view of the members of the Council. Mr. Ringland commented that in his view there was much merit to the existing system of reserve requirements based on geographical differentials. 4. What, if any, suggestions does the Council have as to legislation that the Board might support or sponsor in the forthcoming session of the Congress? The Council does not at this time have any suggestions as to legislation that the Board might support or sponsor in the forthcoming session of the Congress. If the Board has any suggestions for legislation it may support or sponsor in the forthcoming session, the Council will be pleased to discuss them with the Board. Chairman Martin said, in response to a question from President Brown, that the Board had not yet agreed upon legislative proposals which might be made at the forthcoming session of Congress but that he hoped the subject would be discussed and that it would be possible to submit to the Council before its next meeting whatever program the Board had agreed upon. His own view was that legislation relating to reserve re- quirements, changing the basis from one of geographical differentials to one based on type of deposit, would be highly desirable. was not a matter on which the Board had taken any action. This he noted, Chairman Martin said that, if the Board agreed upon a proposal on this or other legislative matters prior to the next meeting of the Council, it would be glad to provide the Council with a statement regarding any legislative proposals for discussion at the next meeting. 1364 9/21/74 -12Mr. Ringland reiterated the view he had expressed previously, that there was a great deal of merit in having reserve requirements based on geographic differentials. In this connection, Mr. Smith stated that two of the national banks in Philadelphia had raised a question regarding the restrictions on real estate loans in section 24 of the Federal Reserve Act which resulted in placing national banks at a competitive disadvantage as compared with State member banks. He stated that while he was not familar with the provision in detail it might be something which should be given study. Chairman Martin stated that the matter was being reviewed. 5. While the Board of Governors has not had an opportunity to discuss with the Presidents of the Federal Reserve Banks, or to reach any conclusions on, the report of the Joint Committee on Check Collections submitted to the American Bankers Association, the Association of Reserve City Bankers, and the Conference of Presidents of the Federal Reserve Banks, the Board will be glad to have at this meeting any comments that the members of the Council might have to offer with respect to the report. The report of the Joint Committee on Check Collections represents long and thoughtful study and is a comprehensive analysis of a subject important to all bankers. The members of the Council are familiar with the general outlines of the report and with the major objectives of the study, but they have not had an opportunity to give the report the detailed and careful consideration it merits, and to appraise the recommendations made. The Council has appointed a committee to study the report and advise the Council. The Council would prefer not to comment on the report until its committee has made its study. Whether the recommendations of the report q65 k 9/21/54 -13 can become effective will depend largely on the reactions of the banks of the country. The committees of the American Bankers Association and the Association of Reserve City Bankers have not yet had an adequate opportunity to consider it. In a brief discussion of this topic Mr. Fleming stated that it was his belief that the report of the check collection study would be taken up by the Administrative Committee of the American Bankers Association at its convention to be held in Atlantic City in mid-October and that he contemplated arranging for Messrs. Smith and Alexander, who with himself had been appointed by the Council to make a study of the report, to meet with this committee for the purpose of discussing the matter. At Chairman Martin's request, Governor Mills commented briefly Oil the background which resulted in the study of the check collection function. President Brown stated that the next meeting of the Federal Advisory Council would be held on Sunday, Monday, and Tuesday, November 14, 15, and 16, 1974. Thereupon the meeting adjourned.
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