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Minutes for To: September 23, 1959 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. 1/ 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 Lie maintained pursnAnt 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. Chin. Martin Gov. Szymczak Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King W Meeting with Presidents of the Fe ra sei Banks. A meeting of the Board of Governors of the Federal Reserve System with the Presidents of the Federal Reserve Banks was held in the Board Room of the Federal Reserve Building in Washington, D. C. on W ednesday, September 23, 1959, at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Mills Robertson Shepardson King Mr. Sherman, Secretary Mr. Landry, Assistant to the Secretary Messrs. Erickson, Hayes, Bopp, Fulton, Leach, Bryan, Allen, Johns, Deming, Leedy, Irons, and Mangels, Presidents of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco, respectively Mr. Dunne, Secretary of the Conference of Presidents of the Federal Reserve Banks Prior to this meeting there had been distributed to the members (311 the Board a memorandum of the topics that the Presidens would like to aiscuss. The topics, the statement of the Presidents with respect to and the discussion at this meeting were as follows: 1. Wrapped Coin--Costs and Charges. The Conference approved the formula for wrapped coin costs suggested by the May 29, 1959, report of the a2. hce2 committee on this subject, as modified by the August 19, 1959, report of the Subcommittee on Accounting. The Conference also voted to recommend to the Board of Governors (1) that the timing of imposition of wrapped coin charges based o72. the foregoing formula be left to the discretion of 9/23/59 -2individual Reserve Banks providing such service and (2) that the furnishing of free wrapped coin on a limited basis be permitted to continue at any Reserve Bank which feels that the imposition of charges might create substantial bank relations problems. In elaboration of the second part of the Conference recommenda- tion that the furnishing of free wrapped coin on a limited basis be Permitted at any Reserve Bank that felt a charge might create substantial ballk relations problems, Mr. Johns stated that in the context of the discussion that occurred it was the view of most of the Presidents that 13erhaPs it was not the business of the Conference to dictate haw an individUal Reserve Bank should be run. If there were to be a deviation fr"4 the application of the principle of recovering substantially the co sts of the service as computed under the formula that the Conference ha4 , a vProved, this would raise a question to be settled between the Individual Bank and the Board of Governors. Chairman Martin caJled for comments with respect to the ConfererIce recommendation on this subject. Mr. Hayes stated that in the absence of comments by others it BEled incumbent on him to expand on what Mr. Johns had said. The New York 10 438.4k was the only one that followed the procedure of furnishing lir4PpeA ' . eoin to some of its member banks without charge. He referred to th e /30ard's letter dated February 31 1959, to the Chairman of the 1"resid, ' IltSt Conference in which the Board indicated that it would be Arerer elae to leave to the management of the individual Banks the 9/23/59 -3- determination of whether or not a Reserve Bank should engage in coin ll'aloping service at all. Mr. Hayes pointed out that, unlike the seven Other Reserve Banks currently wrapping coin and charging member banks for this service, the New York Bank provided a small quantity of wrapped c°111 for country banks without charge, that it had been doing so for the Past 35 years, and that it could not possibly provide tellers' coin for the larger banks of the district without a major increase in facilities. T0 discontinue the service that had been provided for many years to some Of its country banks might cause substantial bank relations problems, Mr. Ray es said, and he hoped that the New York Bank would be permitted to c°4tinue the practice that it had been following. In response to a Illestion from Governor Shepardson, Mr. Hayes added that he was not 84ggesting that if the New York Bank made a charge to country banks for coin it would be forced to provide similar service for all of its member banks. His point was that the situation at the New York Bank eelTled to him to differ from that in the other districts furnishing this Governor Mills commented that the question raised was fandakellt Y one of the extent to which free services should be proviaed by the R eserve Banks to member banks. This was a question that in his deserved more study, particularly since the System might be cTereraphe. sizing the public relations angles with member banks. At some pirt he t e't that there must be a determination of the extent of the free servi ces that properly could be provided to the member banks. -4- 9/23/59 President Johns stated that implicit in this situation was the fact that the Presidents of all of the Reserve Banks other than New York had indicated their willingness and intent to recover substantially the costs of furnishing wrapped coin as determined according to the unifc)rx formula that had been approved by the Conference and submitted for the n Doard's consideration. Governor Robertson inquired whether, in making a recommendation that the timing of wrapped coin charges based on this formula be left to the individual Banks, the Presidents' Conference contemplated any c'tzteide limit as to when these charges would start. President Johns responded that the Conference had not set such 4 tin* but that some Banks desired leeway. He then suggested that Messrs. 41144 and Deming comment. Mr. Allen stated that the Chicago Bank was not recovering its f1111 costs at the present time but that it agreed with the idea that it 411°11141 be. At the present time, facilities for coin wrapping at Chicago Ige140 not as efficient as they would be when their present building program 1148 comPleted. He was reluctant to increase the charges this year for this service and perhaps find it necessary to reduce them in a year or would like to be in a position to continue with the present s•rrah---tement until 1960 or perhaps 1961, when Chicago would have an imk's3Ireci. coin wrapping operation and would be in a better position to leter,„4 —"Ile costs and appropriate charges for this service. 9/23/59 -5Mr. Deming stated that much the same situation existed at the Minneapolis Bank except that the period was considerably shorter. He th°ught that perhaps in eight or nine months the Minneapolis Bank would be at a point where it would wish to apply the costs determined by the suggested formula. Chairman Martin stated that the recommendation of the Presidents' Conference on this as well as on other topics would be taken up at a subseglient meeting of the Board and the Presidents informed of the Board's Views 2. Management Development. The Board's letter of August 11, 1959, requested Conference consideration of (a) desirability of eliminating this function as a separate item in Reserve Bank accounting and CO possible alternative reporting methods. The Conference concurred in the recommendation of its Committee on Collections and Accounting that the function be consolidated in the function "Training and Education" with a memorandum segregation for any desired classification of the personnel charges involved. President Mangels commented briefly on this topic, stating that eleve 4 1958. Banks or branches had shown minor expenses under this item during He added that separate memoranda records could be maintained by the l'rsonnel departments of the Banks and information on costs fc,r the 11141/agenlent development program furnished upon request. There was no further discussion of this topic. 3. Armored Car Service. Following the Board's letter of August 6, 1959, the Subcommittee on Cash, Leased Wire, and Sundry Operations canvassed the Reserve Banks concerning (a) extent and use of armored car -6- 9/23/59 service and (b) possible desirability of Reserve Bank ownership and operation of such cars. The Conference adopted the recommendation of the Committee on Miscellaneous Operations that such operation would not be feasible at times in view of (a) the substantial costs involved, (b) the anticipated resultant pressures for increased armored car service to member banks, and (c) the potential of drivers and other employees as a target of union organizations. In commenting on the recommendation of the Presidents' Conference, Mrs Pulton said that the Reserve Bank Presidents felt that ownership and °Iperation of armored cars by the Reserve Banks would get them into an el'ea• of transportation that was not the type of thing in which the Reserve ' ikilks should be engaged. Not only would the Banks be exposed to possible 141-tollization by the Teamsters Union, but there would be an increased 1)1‘c3blem of safeguarding transportation at longer distances. Mr. Hayes noted that a key consideration as to the practicability t having the Reserve Banks operate their awn armored cars wouli be the lcle variation in needs from day to day. For example, at New York on 2°Ille days three armored cars would meet the need, while on others as taalay as 24 were required. 4. Personnel. The Conference concurred in the recommendations of its Committee on Personnel that the Subcommittee on Personnel proceed to undertake study and submit recommendations on: (1) supplementing allowances of retired employees; (2) accident insurance for Federal Reserve employees in travel status; and (3) major medical insurance for retired personnel. (Consideration of these pending matters }IPA been deferred until implementation of the major medical program had been effected.) There was no discussion of this topic. 9/23/59 -75. Reserve City Classification. Following the Board's letter of July 31 to the individual presidents, the topic of new standards for reserve city classification was referred to the Committee on Legislation for study and recommendation. In response to such action the Conference received a report, dated September 9, 1959, from the Subcommittee on Legislation. After extended discussion, the Conference voted (1) to submit such report to the Board, emphasizing the tentative nature of the conclusions therein, with the thought that the report might be helpful in evaluation of the problems involved, (2) to concur specifically in the report's conclusion (page 1-5) that "basic changes should not be made in the standards now used unless a reasonable case can be presented in support of such changes", (3) that accumulation of possible supporting evidence to such a case requires expeditious research and testing, in which the Reserve Banks will be happy to participate, if the Board wishes, through a joint committee of Board and Reserve Bank personnel, and (4) to suggest use of interbank balances as the primary principle by which a simple, well-known, and practicable basis of reserve city classification may be obtained. The Conference also voted to recommend to the Board: (1) that a modest start be made this fall in use of vault cash for reserve purposes in such amount as will not require substantial offsetting open market operations; (2) to consider in the near future the more pressing applications for reclassification to country bank status (as permitted under the recently amended statute), using for the time being the present basis for reserve city classification as the major criterion but with consideration of other factors suggested by the subcommittee report; and (3) to eliminate (either by one action or in stages), as soon as an opportune time arises, the existing central reserve city differential, although this problem is less pressing than the matters of vault cash and individual bank reclassification. Mr. Johns stated that the Board's letter of July 31, 1959, re- €41'dln, this topic had been referred to the Presidents' Confezence 4 fe. ? r 11)rt) 9/23/59 -8- Committee on Legislation of which Mr. Hayes is Chairman, in view of the fact that that Committee previously had done considerable work on the stibject when the legislative proposal was before the Congress. He then called upon Mr. Hayes. Mr. Hayes said that the Conference Subcommittee had prepared a zbePort dated September 9, 1959, copies of which had been furnished to the Board. After commenting briefly on that report and on the statement 8Vbmitted by the Presidents' Conference at this meeting, Mr. Hayes rel'erred specifically to the Conference recommendation that a modest start be m„ -matue this fnll in use of vault cash for reserve purposes in such anlolant as will not require substantial offsetting open market operations. The Conference had in mind that there would be seasonal needs for reserves this 'all, he said, and that some release of vault cash might be made to hei P meet these needs and thus to lessen the need for open market operations. It this were done in a modest amount, it would not be necessary to offset the vault cash thus released by subsequent sales of securities from the 8Eltem Account after the end of the year. *1314 In response to a question Governor Robertson, Mt. Hayes said that the Conference had not con- ' a- in detail the possibility of increasing the time schedule for Qreclits for checks collected to a maximum of three days as a means of ti 84-1Y offsetting reserves that might be released through counting 11, all-it cash. He recalled that the Presidents' Conference had been 1311-t wide open on this question last year, and, in view of the limited title available, it had not gotten into the matter again at this meeting. 9/23/59 -9Responding to a further question from Governor Szymczak, Mr. 118•Yes noted that the Subcommittee's report had touched upon the question Of' increasing reserve requirements as an offset to permitting the counting c)f vault cash but that it did not discuss such action in terms of it being 4 desirable possibility. Mr. Johns added the comment that there had been some discussion (3t a possible increase in reserve requirements at the Conference but that there was no enthusiasm for such action. Governor Balderston then inquired of Mr. Hayes whether the Confer1 considered linking together action on the vault cash proposal a request for more detailed reports that would assist in providing bett er figures on the money supply. To this, Mr. Hayes responded that the Conference had not c.:ime t3 ' °14:113s with several of the detailed problems connected with this legislatio , - and that he was sure the Conference had not contemplated any elvterisive additional collection of data in connection with implementirz they eAllt cash provision. Governor Shepardson stated his understanding that any plan for eotwtin -g vault cash would probably have to be accompanied by some (I:olupenklti/Ip offset, perhaps through increasing reserve requirements. He lied whether the Conference had considered the possiblity of taking e4\rellqta -ge of the seasonnl need for additional reserves during the latter 1.)Firt 0 r this year as a time for releasing some of the vault cash, with 9/23/59 _10_ the tu Liought that advantage also could be taken of the return flow to the 881ks of reserves after the first of the year by raising reserve requiretents as a means of recapturing some of the reserves. Mr. Hayes noted that the Subcommittee report to which he had referred earlier contained a number of conclusions regarding the subject °t vault cash. The Conference had not debated these in fUll, although It generally went along with the Subcommittee's report. His recollection /148 that the Conference did not contemplate a large release of reserves tb °11g11 vault cash. If, however, a large release were made, he thougelt tiaat aa increase in reserve requirements might be explored. Governor Balderston noted that under certain circumstances a release of vault cash might cause a differential of 4 or 5 percentage 13°111ts between reserve requirements for banks that were classed as rye city banks and those classed as country banks. He suggested that in the event the differential in real reserve requirements were (111-ite large, pressure would be increased for reclassification of indi- banks from the reserve city status to country bank status. Mr. Hayes observed that this was a valid point. He aaded that Q.though the Presidents had not had an opportunity to consider all of thee matters in detail it was generally their view that some actin to 1.„ .t,rmit vault cash to be counted against reserve requirements during the tall months of this year would be desirable. Mr. Bryan stated that on the matter of moving to a thre.e-lay 1'44)1:111111m deferment schedule, Mr. Mangels had brought this questioK. 9/23/59 -11- 14 Conference discussion but, being pressed for time, it was not debated 141\111. He (Mr. Bryan) recalled that he was one of the Presidents who 1448 oPPosed to moving from a two- to a three-day deferment schedule when this matter was considered earlier and that he had voted vigorously against it. Nevertheless, if the Board wished to make a massive in- iection of new reserves in connection with the vault cash proposal, he '7°11-La state now that, if the deferment question was taken off the table a45- considered again, he might wish to change his position in view of the new legislation. In other words, Mr. Bryan said, he did not think the Proposal for moving to a three-day maximum deferment schedule in c°1111ection with implementing the vault cash proposal should be fully l'Uleci out of consideration. Governor Robertson said that he thought this was pl'obably the 111(3q important and difficult administrative problem facing the System He suggested that it would be helpful to all concerned if the q ' Ildividual views of the Presidents could be put in memoranThm form e41 sent to the Board. Mr. Hayes stated that he was delighted to hear this ccmment. The of the Subcommittee on Legislation had listed several steps that Nict be taken in connection with the new legislation and these, he thought, Z110124 be considered by whatever group was testing and analyzing the rroblem "et allaards of classification for cities and for banks. This .1, 12Li amount to e. verY intensive study by a task force which the Presidents' Sacmmittee 9/23/59 -12- thought might consist of a joint committee including representatives tram all parts of the System. Governor Balderston stated that he felt the System was in a difficult position. It had asked the Congress to grant the authority to count vault cash to remedy inequities among banks, and it also hail ' e sksd for the authority on the grounds that this would help to disselainate currency around the country as an emergency defense measure. These two considerations made him incline toward the view that the 13°ara should not delay in implementing the legislation that had now been Passed by the Congress. Consequently, vault cash should be cut °14 tram the herd and dealt with promptly as a problem that is administl'EttivelY solvable at this time, leaving for more extensive study the natter of standards of classification of cities and individual banks. r4g18 Problem of classification had been under study off and on for 1484Y Years and he felt that it would take a at deal of analysis bero_ 'e a satisfactory arrangement could be agreed upon. He would iota /11th Governor Robertson in inviting comments from the Reserve tkit 8 as to haw the System might proceed this fall, or at the latest j 4411arY of 1960, to permit vault cash to be counted either in whole or in. Party with or without compensating action through changing reserve l'e"irements. Chairman Martin said that it would be desirable to bear in mind til4t the 1-reasury on three occasions had brought up the problem of the ty t'tt*)., 9/23/59 -13- Mint in supplying coin in connection with permitting the counting of vault cash. While those in the Federal Reserve might have a different 11%r, this was a problem with which the Treasury was very much concerned, as indicated by its representatives having raised the question (7)4 three separate occasions. Before moving on vault cash the Board *xxla have to have definitely in mind all aspects of this particular Vestion. He agreed with the suggestion that anyone who wished to cc3nle forward with ideas for dealing with the problem should feel at liberty to submit his ideas. For himself, the Chairman said that the 111°I1 e he had thought about the matter the more he had come to the concilleion that sooner or later the System was going to have to start off t 1111°Ite point into umcharted ground because he did not believe that E1 Y amount of study of this problem would obviate the necessity for a Ce/tain amount of experimentation. 6. Retail Trade Statistics. The Conference con- sidered the proposal made by the Bureau of the Budget that, appropriations permitting, the Bureau of the Census take over the retail trade statistics program on July 1, 1960. The Conference noted that under the proposal the Federal Reserve System, including the individual Reserve Banks, would have the opportunity to contract with the Bureau of the Census for more detailed information (e.g.: data for standard metropolitan statistical areas) than that contemplated by the Census program. The Conference voted to recommend to the Board that the proposal be adopted. The Conference also voted to authorize its Committee on Research and Statistics to evaluate staff suggestions for technical deletions and 9/23/59 -14modifications of department store statistical series without formal reference to the Conference. The Committee was authorized to dispose of relatively insubstantial matters on its awn initiative and to communicate with the presidents in other cases. President Irons stated that Mr. Young, Director, Division of Research and Statistics, had given him a copy of a memorandum dated SePtember 181 19591 specifying what the Bureau of the Census anti the hreau of the Budget planred to do: namely, to seek a $40o,000 budget 41513r0priation for fiscal year 1961 to enable Census to take over resPolasibility for department store data and to provide statistics for the United States as a whole and for standard metropolitan statistical .4reas. He observed further that the opportunity for individual Reserve ItS to contract with the Bureau of the Census for more detailed l'egi°nal information was believed by the Conference to be a desirable Ell tech to a problem that had been discussed for years. It would not °44'llelp the Reserve Banks to maintain their contacts with department tolles, but it would assist in solving the public relations problem that vas inevitable in a shift of responsibility for the department F3to re statistics that had. been collected by the Federal Reserve since 1919. It — Was on this basis that the Conference recommended adoption of the 813Proach suggested, and it haa authorized its Committee on Research tl4c1 Stti a--stics to take certain steps as a means of expediting the program Otrtiirleci 9/23/59 -15- 7. Emergency Planning--Commercial Banks. The Conference voted to approve the recommendations made by its Special Committee on Emergency Planning as a result of a letter from Mr. John J. McCloy, Chairman of the Advisory Committee on Commercial Bank Preparedness, to Mr. Hayes, expressing disappointment on the progress of emergency planning in commercial banks and requesting a general summary from each Reserve Bank as to possible reasons for inaction on the part of commercial banks in its district. The Special Committee's recommendations were (1) that each Reserve Bank provide the Special Committee with its views on reasons underlying any delay in commercial bank emergency planning in its district, and (2) that the Board of Governors consider a joint program with the other two Federal bank supervisory agencies whereby the status of emergency planning operations in each bank examined would be discussed briefly in the open section of the examination report. After Mr. Hayes had commented on the recommendations of the SPeciel. Committee on Emergency Planning, which are set forth above and 14lich the Conference hm-A voted to approve, Governor Robertson stated that Ile felt it desirable to obtain the views of the Presidents as recommended °4 reasons underlying any delay in commercial bank emergency planning. With respect to the recommendation that the Board of Governors consider 4 Joint program with the other Federal bank supervisory agencies looking tWe.rd discussion of emergency planning operations of commercial banks in tile(Ten section of the examination report, Governor Robertson said that th18 Ilas a matter that had been discussed among the supervisory agencies. IleY had concluded that they should make no out and out effort to carry th18 Planning forward until a decision had been reached as to what the 151'01"4m for banking would be in an emergency. This was because it was 111113°1tant to the banks in making plans to know what approach was to be teate 4, that is, whether banks were to be closed, or whether the approach 9/23/59 -16- Ifte to be one where the banks would remain open. Once a program was definitely formulated, there could be an all-out attempt to sell the banks on making preparedness plans. At that time, Governor Robertson said) the first step toward selling t1 program probably should be taken by a bankers' committee such as the one now headed by Mr. McCloy, to be f°110wed up by the State bankers' associations and then by the supervie°rY agencies. After that, in his opinion, it would be appropriate t° Put comments regarding the planning of individual banks in the open section of the examination report. Mr. Hayes said that there was a great deal to what Governor Robertson said. However, he was concerned about relations with corn- bankers as regards the present program, which the Federal Reserve 4E/4 been urging upon them. If the System now took the view that it shoUld not press for this program, there was a danger that the banks laight become confused as to what was desired of them at the moment. Governor Robertson agreed that this danger existed but said he cIld not believe the banks could be told just what was wanted of them it was known what the program was to be. President Johns said that Governor Robertson had explained to 418 satisfaction what we were waiting for, and he then inquired as to 11°n1 the banks were waiting on for a decision regarding the approach to be taken. Governor Robertson responded that the program must be one that leeverlament was behind. An effort was being made to work out a program 9/23/59 between the Federal Reserve and the Treasury and, once that was agreed uPon, the program for the commercial banks could go forward. In response to a question from Mr. Leach as to cash agent banks, Governor Robertson said that there had been no change in the plans along that line or as to check collection, and he did not believe that anything was likely to result in a decision against having cash agent banks set up. Governor Shepardson inquired why many of the things pertinent t° a defense planning program for commercial banks might not now press ahewi, Mr. Hayes responded that banks could go ahead in planning for 115 aPPointment of officers to handle the operations of the bank, setting UP records systems, (Ind in planning for protection of assets as well as some other matters. It was difficult to get into some important aspects cst Planning or to get enthusiasm until the banks knew what it was intended that they should accomplish in an emergency. Governor Robertson added the comment that if the group now working (14 the Program were to build up enthusiasm through a strong selling , Drag --am and find itself unable to answer questions as to what was really eZPected of the banks, there might be a let-down that would put the whole Program back. He also said, in response to a comment by Governor Balderston, tilt in general the largest banks of the country had moved farther along fit'bt defense planning than had the smaller banks. 9/23/59 -18Mr. Erickson inquired whether a decision on the approach to be taken by banks might be reached in the near future, and Chairman Martin said that he thought a conclusion on this point might be arrived at /.71-th1n a reasonable period of time. 8. Reserve Bank Capital Accounts. The Board's letter of July 17) 1959) addressed to the Presidents requested a review of the Reserve Bank capital accounts, and the topic was referred jointly to the Committees on Collections and Accounting and on Research and Statistics for preliminary study. Following oral reports by the respective Chairmen of the Committees) the Conference engaged in extended discussion of various aspects of the subject with particular reference to certain basic principles and problems involved, preliminary to a general exchange of views with the Board of Governors. The members of the Conference were of the unanimous opinion that it would be desirable for Reserve Banks to retain their present form of capital structure but were not prepared at this time to suggest specific amounts or ranges for the components of such structure outside the statutorily determined capital stock account. The Conference also voted to refer (1) the question of the adequacy and level of the reserve for registered mail losses under the Loss Sharing Agreement to the Insurance Committee and (2) the question of fixed assets accounting to its Committee on Collections and Accounting. Mr. Irons said that the Committee on Research and Statistics realized tliat this was a topic on which there could be wide differences of opinion 843 /fell as extended discussion. The Committee had attempted to develop ooze 131sinoip1es as to whether capital and surplus accounts were appropriate 'a Federal Reserve Bank. The Committee's report) copies of which had r°1 b e-- fUrnished earlier for distribution to the members of the Board, took the Position that as a matter of principle it would be desirable for the Reeerv e Banks to retain the present form of capital structure and financial itecolla ts, and this position had been endorsed unanimously by the Conference 9/23/59 -19- of Presidents. Mr. Irons noted that, while this did not indicate how much should be kept in any of these capital accounts, the Conference did genertt ' 11Y take the approach that/the Federal Reserve Banks should be somewhat statlar to what could be supported for private business or banking instituti°ns, giving some recognition that there might be reason for modifications between the two. If, however, the position were that there was something Short of Government in the nature of the Federal Reserve Banks, then that P°sition should_ be reflected in the 'ina,ncial organization of the Reserve 5 44k and in their statements and accounts. In using the phrase that the Reserve Banks should "retain their present form of capital structure" the °°4ference had in mind that this included retention of contingency reserves reserves for depreciation. Mr. Irons noted that the Conference also licYted- unanimously to refer the question of the adequacy and level of the l'e8srve for registered mail losses under the loss sharing agreement to the I4811r9110e Committee of the Presidents' Conference for study and recommenc14tiOn as to what might be a defensibLe amount of such reserves, and that it 1,..1 referred to the Committee on Collections and Accounting the question °I" fixed assets accounting and the amounts of reserves for depreciation on 1\Irrtiture and equipment. Coate relaCe Mr. Irons added that one otter conclusion of the was that the Federal Reserve System should be very careful to be c°4sistent in what it claimed for itself. It did not believe that the System e°4sistently could, on the one hand, claim an exemption from certain measures th_ grounds that it was other than Government and then come along and claim TOr a ec°114ting purposes that it was quasi-Government. Mr. Irons concluded his state, "nt with the commerrt that in further study of this matter the Confer'either through appropriate committees or otherwise, would be glad to 9/23/59 -20- Wait with the Board in trying to arrive at conclusions that would be defensible in terms of the basic principles that were accepted for institutions such as the Federal Reserve Banks. Governor Robertson said that, sifting through the report of the Comlaittee on Research and Statistics, he had tried in vain to find some reason '‘Ythe System should have the various capital accounts referred to other than that it wished to paint a picture that it VAS comparable to a private instit141°11. He doubted that this would be an answer to any Congressional corntee as to why Federal Reserve Banks needed these accounts. Mr. Irons said that reference had been made to the fact that the l'eciel'al Reserve Banks could operate even if they did not have capital, surplus, or Co atingency reserves. That was not being questioned. However, Mr. Irons 8k41, there was more to the problem than that, and he cited an expression 43ecl hY Mx. Bryan, President of the Atlanta Bank, that the capital and MA accounts of the System were symbolic: the System could operate with" catt them, Just as the country could operate without a flag. He went on to tS4 that if the Reserve Banks were to operate without capital, he thought sixoUld abandon any concept of their being "banks" and, instead, call the leral Reserve a monet : authority. He did not think this was what the 3tenl wanted, and he did not think that a majority of the Congress wanted : c°11cept. To try to answer the question suggested by Governor Robertson, 1r°11s said he thought the absence of capital accounts for the Federal Reaerve Banks would mean their complete nationalization. Some might say thAt thi was already true in practice, but personAlly, he did not think 1317" true, and he did not wish to lose any more than had already been 9/23/59 -21- lost toward full nationalization of the System. The Federal Reserve Performed in its day-to-day operations a good many things that were truth1\a1y banking, such as check collection, and none would deny that the mixed element of activities included some that were purely governmental, such as credit policy. studY than Mr. Irons felt that the whole question needed much more had been given to it in order that the System might develop a more plausible and foolproof defense than it now had. Governor Robertson said that, at the time the Federal Reserve was 8et Up, reasons were advanced for the form it took, and he felt that if it had not already been done the Committee of the Presidents' Conference 8hould look into that history to see what was then thought of the value cf this symbol. Mr. Irons said that the Committee had gone into this to some ecterit and it had attempted to touch upon the historical aspects in the ealcrandum that bad been distributed. He thought that a good case could be -Q44e for the position the Committee on Research and Statistics had ta 'keril adding that a historical study would call for intensive and highlev-, research. He agreed with Governor Robertson that this was a question that would have to be answered sooner or later, and this was another reason Vhy committee of the Conference would be delighted to work, either inde1)ellclelltlY or jointly with the Board, in further study of the subject. Chairman Martin said that it was important to bear in mind the l'easons why this topic came up now. It had been raised in hearings 9/23/59 -22- before the Congress this year, but in addition for three years the Bureau °f the Budget hml had a staff recommendation that would take over to the Government all of the surplus of the Federal Reserve Banks. The System 44 been fortunate in having an Administration that was sympathetic to the general position of the central bank. However, the Director of the 141dget had discussed the matter with him (Chairman Martin) this past 81Muner, and a bill actuslly had been drafted for the purpose indicated. TIle Chairman noted that there was little difficulty in defending the PrilleiPle Mr. Irons had stated with those who are already sympathetic vith that approach, but the amount of the surplus or of contingency or clePr eciation reserves was another matter. Here the System could be aeclused of padding the accounts, and it would be in a difficult spot it this question cape up. He was glad that the session of the Congress illet ended had come without action by the Congress or by a Committee for reviev of this question. He hoped that before the next session of the C°48ress opened the System would have a positive and definite approach 8414 that it would be able to get something to the Chairmen of both the te and the House Banking and Currency Committees fairly early in ae4h. -Q-17"Y before anyone else raised the question. This was the real S 1141 t°1' ta11ce of the topic and was why it hivi been placed on the agenda 1)relitILiflay discussion at this meeting. This was something that clula' move very fast. In May of this year the question was not active, bt - uu-Ly when other matters were being debated the subject was causing Berl° 118 concern among the friends of the System in the Congress. 9/23/59 -23Mt. Bryan withdrew from the room at this point. Governor King stated that, as he understood the history of the System,it was set up in the way it was in order to obtain the confiaence and support of the banking community. To depart from that concept vould be breaking faith with a large group of those who had helped found the System. If the illusion were created that the System was trying to Ilecumulate reserves unnecessarily, that would be a detriment to the SYstem and to the whole country. He questioned whether there was any /'ellecla for a reserve for contingencies. There might be a valid reason t°11 a reserve for registered mail losses, but to have a reserve for tingen0ie5 c°4 created an illusion: it did not cover anything that was 11°t covered in surplus. His feeling was that the System should move to aiepel such illusions that were certain to work to the detriment ot the System. Mr. Erickson inquired of Governor Robertson whether, in view or hie interest in examination procedures and banking structure problems, Ile hada found that the fact the Federal Reserve was set up in the same 18.Y lie commercial banks had helped convince member banks that they 84°uld increase their capital. He added that this had been found liell3t11-1. in the Boston District. Governor Robertson responded that be could not remember any 111431 e in which an analogy to a Federal Reserve Bank had been brought 114° the Picture where examiners were attempting to get a commercial 4trik to increase its capital. 9/23/59 -24Mr. Hayes said that he was in thorough agreement with the Confer- ence approach to this problem. He agreed with Chairman Martin that the System should make a positive approach to it, and he assumed that this merely meant explaining what the System was doing and why. If it meant 8 'Positive approach in the way of giving up some of its funds, he would not advocate that because that would be prejudging. et16 ' 1113 The System might with doing that but it should not take that approach now. The fatt that these reserves were mentioned in the present Federal Reserve Act and in the original Federal Reserve Act should carry great weight, in Mr. Hayes' opinion. The Reserve Banks performed many banking services arld charged for these on a true cost basis. That meant they should definitely use accepted accounting principles. He was impressed, 7ae With the fact that the public both here and abroad looked on the Peae„, -111,-L Reserve Banks as organizations run in a business way. Without easti4g asPerralons on Government, theirs was a different method of 74‘1111ning accounts, an.. this had been a strength of the Federal Reserve 8Ystem with the public and abroad. Mr. Hayes said that he thought any chs.„ in that approach should be made with great reluctance and probably rio t 4"t all. There was a question in his mind as to whether the burden rpr --00f Was not on those who thought the Systam should give up some of its 'Inds, rather than on the System to say why it should not. Mr. Hayes went on to say that he started with the assumption that 14 view of the size of the System's operations and of its 9/23/59 -25- assets and its broad scope, it was not overcapitalized. It was easier to Clt down capital accounts than to build them up. Perhaps the System should be in position to take on functions that seemed desirable and for it might have to absorb losses, for example a stabilization account. Whatever the System did in giving up sizable sums to the Treasury was g°14g to be a matter subject to the charge that the System was helping a given Administration to get a budget balanced. For these and other reasons, 14r* Hayes thought that the System should move very slowly, should do a lot of hard thinking, and should not contemplate any major action soon. Mr. Leedy said that the Conference action had been reflected c°1*1 ' ectlY in the statement submitted to the Board: it had endorsed the 84)P1'oach stated in the report of the Committee on Research and Statistics. Re had sensed, however, that at least a majority of the Presidents believed t4at the System should not continue indefinitely to be accumulating surplus. Peri:18.13s a majority would subscribe to the reimposition of the franchise tax (14 tbe Federal Reserve Banks, and perhaps a majority would not continue to anDhon off 10 per cent of earnings after payment of dividends but 14'cltlid limit further adaitions if some agreement could be reached as to the Pl'oPer level of the surplus account. Mr. Leedy said he also sensed he feeling that there was little need for any large contingency reserve 414dItion to surplus. to In the light of what Chairman Martin had said as Ithat had developed this past summer, he assumed that it would be com- 131etelY consistent with the recommendation of the Presidents' Conference tlIelt there be further study of the subject with the idea of assisting the 9/23/59 -26- Board (provided that was what the Board desired) so that between now ar3 the end of the year when the System would be faced with making additions to its present surplus accounts it would have a view as to what program Should be followed at the end of the year. This would be his awn view. Governor Balderston said that he thought Hr. Leedy's comments ceae closer to the real problem before the System than anything else said thus far at this meeting. The System had lost the initiative on this IIrciblem, and the System and the Chairman were on the defense. Two questions, bcYth of which stemmed from decisions of the past that were arbitrary and /Iel'e not prompted by principle, were being asked: First, why does the Pecleral Reserve need a contingency reserve in addition to its surplus? S"Id, why does the System hold back 10 cents from every dollar after el4penses and dividends when that money could go to the Treasury/ Unless the System had a very clear answer to these two questions, and quite apart *am the principle stated this morning with which he (Governor Balderston) it would be desirable for Chairman Martin to be in a position to cliseu88 with the Chairmen of the Banking and Currency Committees a definite 131‘°Posa1 that would do the right thing by the Treasury and the country as 14ell„ as by the System. In Governor Balderston's judgment, it would be Ise for the System to do this before a proposal was submitted by some Of its critics. Mr. Leach said that, as to the need for a surplus, the Congress itself had established the principle that surplus should equal 100 per cent 9/23/59 -27- of slibscribed capital. Mr. Leach thought this could be taken as a itlinimun proper amount, but the problem was to justify accumulating any B11211245 above that amount. Mr. Johns commented that at its meeting yesterday the Conference 146t8 not really of a different view from many of the things being said 411°und the table this morning. However, it seemed to him that before the System pursued this subject further, it would be helpful to know 1411ether there was a view in the System that the Federal Reserve Banks clta not need any capital structure in order to operate. If this were the Prevailing view, then the question of how much there should be in el4111118 and contingency reserve and depreciation reserve would evaporate. AS had been stated, it VAS the nnanimous view of the Conference that the 444 should retain the present form of capital structure, and to the 1)l'esideats this seemed to be the place where they should try to get on ecc °11 ground. He could recR11 no position on the part of any member or the Conference of wishing to defend to the death the dollar amounts 14 those accounts. As indicated before, the question of the adequacy or the reserve for registered mail losses had been referred to the 11131111/*Ace Committee for study, and it seemed to some of the Presidents tilt the amount in that account was too high. With respect to Governor llobe l esoll's comment, Mr. Johns said that while the Bank of issue could ' °Pelbate without capital funds, this should be balanced off against the that the Reserve Banks look like the kind of banking organizations that Peolole are accustomed to look at, and in dealing with public confidence 9/23/59 -28- thi8 view seemed to be one that should be considered. It might be difficult to demonstrate the value of this point, but he felt that it should not he overlooked. Governor Mills remarked that if at any time the Federal Reserve aYstem came into a position where it would have to look to the national G°vernment to underwrite its risks and its potential for making losses, at that time the Federal Reserve would be effectively nationalized. Chairman Martin said that he had been bothered during the past sessi°n of Congress by what seemed to be basic deficiencies in the SYstem ts informational setup. Answers to questions that had been dealt with over the years seemed to have become lost and could not be l'ee'dilY located when they were needed. Senators or Congressmen who were tIlendly to the System had been extremely critical because they felt the 213tem had not developed machinery for answering simple questions that Q°Me uP. He -,7as perhaps concerned more with the public than with the Co4gres6, which was only reflecting the view that the Federal Reserve hIld not thought these problems through. On a question such as this 0rie, it vas not an answer to say that the System had been following its 1)1'esent procedure for many years and would like to continue doing the erne thing. Perhaps the System needed a historian who would be re- hie for developing material to respond to questions that might be Iplsesented by committees or individual members of the Congress or by the Public. 9/23/59 _29_ Mr. Johns raised a question about a formal study group in the System which might look into the question of capital accounts, and perhaps be helpful in meeting the problem that the Chairman had just mentioned. The Conference wished to make as great a contribution as possible, and it would be desirable to avoid duplication in use of the System's resources in further studies of the question. Governor Shepardson noted that the Presidents' Conference had irldicated its basic philosophy regarding capital accounts. He assumed that the Board would be reviewing this subject within the near future 8-4a would take a position regarding this basic philosophy. After this Illestion was resolved, it might be desirable to appoint a special cil7lamittee that would then proceed through the appropriate subcommittees to coasider any detailed problems that might develop out of the System 1108ition taken. In this connection, he noted that the topic had been l'eterred to the Conference Committee on Collections and Accounting, Pnd he vondered whether a report would be submitted by that Committee. Mr. Mangels said that so far as the Accounting Committee's part 14 the project was concerned, he had sent a "fishing" letter to the lol,e • sldents of the other Federal Reserve Banks. The purpose was to get thinking on the entire elimination of the reserves for contingen0/1 what should be done on depreciation, and on what should be the st4t118 of the surplus account. Of the five or six who had responded, the — Luaiority favored a reduction to some extent of the balance in the 9/23/59 -30- reserve for contingencies. ceiling on the surplus. They also agreed that there should be a Mr. Mangels then commented briefly on possible vays of limiting the amount of surplus, suggesting that there would be "aa logic in limiting it to 200 or 250 per cent of paid-in capital in view of the former franchise tax provision. He vent on to say that the tspet that seemed to be called for were (1) a policy determination, and °4 this the Conference view was indicated by its endorsement of the l'ePort from the Committee on Research and Statistics; (2) a decision Its to the extent to which surplus and reserve accounts should be mainte ' lxleci; and (3) consideration of the question of timing in the event a (lecision was reached to surrender some of the funds to the Treasury. So re ' r as accounting principles were concerned, Mr. Mangels said that one r the 4 directors of the San Francisco Reserve Bank who was a partner in 4at1onally-known firm of public accountants had expressed the view that ttlel ' e was no need at all for a Federal Reserve Bank to maintain a reserve t°11 contingencies, but he had not commented particularly on the capital e'ccolUlt itself. Governor Shepardson said that in mentioning the Accounting e°1zt1ttee he had in mind the need for review of the accounting principles 1111Thed so that the System could have a position that was not incona18tent with the views of persons in that field. Mr. Johns said that the Committee on Accounting and Collections a'lready been asked to study this matter and that he presumed the 9/23/59 -31- Committee would present additional views at a future meeting of the Conferand at a joint meeting of the Presidents with the Board. 9. Additional Items of Information Arising Out of Current Conference Meeting. In addition to the foregoing matters, the following items of possible interest to the Board were considered by the Conference. They are reported herein as a matter of information. a. The Conference received the summary of reports submitted to the Subcommittee on Collections by the Reserve Banks concerning the nature and extent of their adoption of recommendations contained in the November 25, 1958, report of the ad hoc committee of that Subcommittee. In presenting—Me summary, Mr. Plangels observed that adoption of recommendation seemed to have resulted in (1) improved System operating uniformity, and (2) some reduction in the amount of and fluctuations in float. The Conference noted that save for late presentation of remittance drafts and the treatment of Saturdays and holidays for availability purposes, there had been substantial adoption of the recommendation by Reserve Banks. The Conference voted to direct the Committee on Collections and Accounting to review Reserve Bank treatment of Saturdays for availability purposes with a view to possible System uniformity in this respect. b. The Conference accepted and approved (one President dissenting) the May 20, 1959, letter-report of the Insurance Committee recommending that money shipments between commercial banks "for the account of" a Reserve Bank be covered under the Loss Sharing Agreement if the shipments otherwise comply with the Loss Sharing Agreement and conform to the following statement of conditions: 1. The shipments should be made at the request of or under an arrangement approved by a Federal Reserve Bank. 2. The shipments should be for the benefit of a Federal Reserve Bank as evidenced by reduction in volume of shipments to or from the Federal Reserve Bank, resulting in decreased handling by and reduced costs to the Federal Reserve Bank.. 9/23/59 -323. Any costs of transporbWm of the shipments should be borne by a Federal Reserve Bank. 4. The shipments should be between member banks or offices of a member bank. c. The Conference accepted and approved the August 28, 1959, report of the Subcommittee on Electronics recommending (1) selection of the Federal Reserve Banks. of Boston, New York, an San Francisco for pilot installations of mechanized check handling equipment; (2) deferment until the December 1959 Conference (and submission of a subsequent Subcommittee report) of selection of other pilot installations under the program; and (3) that the Federal Reserve Banks of Philadelphia, Cleveland, and Chicago keep the Subcommittee advised of developments which might affect their selection for the latter installations or for additional pilot installations that might be recommended by the Subcommittee as a result of any further proposals from manufacturers. d. The Conference rejected by a vote of seven to five the recommendations of a joint rport, dated May 19, 1959, of the Insurance Committee and the Subcommittee of Counsel on Emergency Operations, viz. (1) adoption of System policy of complete protection of cash agent banks against all agency hazards, including risks of loss due to own negligence or breach of contract, and (2) implementation of this recommended policy by eliminating the negligence and breach of contract exception clauses from the form of agency agreement and covering the exceptions under the existing provi3ions of the Loss Sharing Agreement. The Conference (1) expressed its preference, as a matter of principle, that indemnification of cash agent banks be effected by Federal Reserve absorption of premium on an appropriate surety bond and (2) directed the Special Committee on Emergency Operations to re-examine and make recommendations on tha question of cash agent indemnification in the light of the foregoing expression of principle. Chairman Martin then referrea to a discussion that he had had with Dellling regarding use of the discount window. He added that he understood 9/23/59 -33- Of the reports by members of the Federal Advisory Council regarding the discussion of this subject at the Council's meeting with the Board °4 September 15, 1959, might have needed clarification. Mr. Deming said that when the Under Secretary of the Treasury ta Minneapolis recently he had expressed the belief that the large '441 "of the country that normally do Treasury underwriting do not recog41ze that they could come to the Reserve Banks to borrow during such Mr. Deming said that he had assured the Under Secretary that the banks in the Twin Cities understood that they could come in for this Pilr1)°8e• The Under Secretary's point was not that the Reserve Banks had been too restrictive in use of the discount window, Mr. Deming said, but tather that some of the larger banks did not understand its use in con4ettion with Treasury financings. Mr. Allen said that he was sure there was no misunderstanding °4 the part of the Chicago banks on this point. However, he had been "fthat disturbed at the report of the Chairman of the Federal Advisory C°114ell to the directors of the Chicago Bank last week when he said that the 14etibers of the Council 1110 the impression that the Board of Governors Itgl'eed that there should be greater access to the discount window during the ,Luxt few months and that the members of the Council had been encouraged to go bac— and lay the situation before their local Reserve Bank Boards. In. a brief discussion of the matter, Chairman Martin recalled some or the comments at the meeting with the Council. Should have read In the discussion, he e51dent of the Federal Advisory Council. 9/23/59 -34- he'd suggested to the Council that the members talk with their local b°ards of directors regarding the use of the discount window and he had eMPhasized the view that credit should be available at all times. He cild not believe, however, that the Council should have gotten the imPlieelsion that the Board felt a change in the administration of the discount window was called for. Thereupon, the meeting adjourned. Seciltary
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