Full text of Minutes and Recommendations of the Federal Advisory Council : Meeting documents, April 25-27, 1948, Box 4, Volume 1946-1950

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MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL
April 25, 1948
The second statutory meeting of the Federal Advisory Council for 1948 was convened
in Room 932 of the Mayflower Hotel, Washington, D. C., on Sunday, April 25, 1948, at
2:10 P.M., the President, Mr. Brown, in the Chair.
Present:
District No. 1
Charles E. Spencer, Jr.
District No. 2
W. Randolph Burgess
District No. 3
David E. Williams
District No. 4
John H. McCoy
District No. 5
Robert V. Fleming
J. T. Brown
District No. 6
Edward E. Brown
District No. 7
James H. Penick
District No. 8
Henry E. Atwcod
District No. 9
James M. Kemper
District No. 10
J. E. Woods
District No. 11
Reno Odlin
District No. 12
Secretary
Herbert V. Prochnow
The Council accepted with regret the resignation of Mr. Walter Lichtenstein as Sec
retary, and on motion duly made and seconded elected Mr. Herbert V. Prochnow as
Secretary.
A complete list of the items on the agenda for the meeting, and the conclusions of
the Council are to be found in the Confidential Memorandum to the Board of Governors from
the Federal Advisory Council, which follows on pages 18 and 19.
A brief discussion also took place regarding the Bank Holding Company Bill.
The meeting adjourned at 5:50 P.M.

HERBERT V. PROCHNOW

Secretary.

MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL
April 26,1948
At 10:00 A.M., the Federal Advisory Council reconvened in Room 932 of the May
flower Hotel, Washington, D. C.
Present: Mr. Edward E. Brown, President; Messrs. Charles E. Spencer, Jr., W. Ran
dolph Burgess, David E. Williams, John H. McCoy, Robert V. Fleming, J. T. Brown,
James H. Penick, Henry E. Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and
Herbert V. Prochnow, Secretary.
The Council reviewed its conclusions of the previous day regarding the items on
the agenda, and sent to the Secretary of the Board of Governors the Confidential Memoran
dum which follows on pages 18 and 19, listing the agenda items with the conclusions reached
by the Council. The M e m o r a n d u m was delivered to the Secretary of the Board of Gover
nors at 12:23 P.M. on April 26, 1948.
The meeting adjourned at 12:10 P.M.
HERBERT V.PROCHNOW
Secretary.

CONFIDENTIAL

MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL
ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT
MEETING ON APRIL 27, 1948
1. It is understood that the Federal Reserve System is now considering a program of
allowing, first, immediate credit on all sendings to the Federal Reserve System of
transit items, regardless of the number of days it may take to collect either by air mail
or train, and second, the possible elimination of sorting transit items by reserve districts
and direct sendings to the Federal Reserve banks and their branches. These procedures,
if contemplated, involve important changes in the functioning of the banking system,
and it would be most desirable for the Board of Governors and the Council to discuss
them.
In relation to the first part of this question, the Council wishes to restate its posi
tion as expressed on page five of its memorandum to the Board of Governors on
November 18, 1947, as follows: “No changes in the check collection processes
should result in making items available sooner, on the average, than the period
required for their collection. For example, for the Federal Reserve banks to make
all items immediately available would be unsound, as it would make funds avail
able when they were not actually collected. It would be the equivalent of granting
a loan without interest and of paying a cash subsidy for deposits in the Federal
Reserve banks.”
Also, adding the amount of float to bank reserves would be inflationary. Such
an unrealistic banking practice invites abuses.
2. In view of the change in the Government’s budgetary prospect which will considerably
reduce further retirement of marketable debt and which may mean a cash deficit, what
should be the System’s recommendation as to types of securities (maturities, yields,
eligibility) that should be offered by the Treasury for refunding or for new money?
The Council does not believe it can be assumed that the budget will show a cash
deficit. There is as yet no conclusive evidence indicating the direction of the eco
nomic trend in the coming months. As to new issues, the following comments
are made:
A. The basic principle to follow is that as much as possible of the short term debt
should be funded into securities which will be purchased and retained by non
bank investors.
B. The markets will not now absorb large amounts of non-eligible securities.
However, the Federal Reserve System should sell bonds out of its portfolio, at
or near present prices, whenever there is a demand in the market for them.
C. Emphasis should continue to be placed upon the sale of E, F, and G bonds, and
the amount of F’s and G’s which an investor may acquire should be increased.
D. Bills and certificates should be sold at slightly higher rates than now prevail as
a means of selling to non-bank investors, reducing the incentive for banks to
lengthen maturities and as a means also of keeping some pressure on credit.
3. What should be done in the monetary and credit field to counteract the inflationary
pressures that may be created by the new defense proposals and the world aid program?

The balance between deflationary forces and inflationary forces is not yet clear.
As recently as thirty days ago, the deflationary factors were in the ascendancy.
It is too early to determine whether the new defense proposals and the increase
in the program for world aid will lead to a resumption of inflationary forces. Until
the trend is clearer, it would not appear necessary or wise to give the Federal
Reserve System added powers to increase banks’ reserve requirements. The very
granting of such powers might in itself have injurious deflationary effects. If
the armament program is expanded beyond present estimates, it may require
added amounts of bank credit rather than less.
In the meantime the powers which the System and the Treasury already possess,
without new legislation, are large. The Board has the power to raise the discount
rate, which is an effective method of calling public attention to the desirability
of checking credit expansion. The Reserve System has recently demonstrated that
through relatively slight changes in open market policy it can greatly influence
bank operations, the security markets, and business. Although the Board has
raised the reserve requirements of the central reserve city banks from 20 to 22
per cent, the Board still has the power to increase these particular reserve require
ments to 26 per cent.
Many foreign nations have given up large amounts of their gold reserves in the
past year or two, so that our gold imports in the immediate future are unlikely
to be as large as they have been. Moreover, the Open Market Committee may
sterilize gold imports by selling United States securities or letting them run off
without replacement.
The recent trend in bank loans has demonstrated that the banks generally are
following a cautious and conservative loaning policy.

MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL
April 26, 1948
At 2:00 P.M., the Federal Advisory Council convened in the Board Room of the
Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the Chair.
Present: Mr. Edward E. Brown, President; Messrs Charles E. Spencer, Jr., W. Ran
dolph Burgess, David E. Williams, John H. McCoy, Robert V. Fleming, J. T. Brown,
James H. Penick, Henry E. Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and
Herbert V. Prochnow, Secretary.
Dr. Ralph A. Young, Associate Director, Division of Research and Statistics of the
Federal Reserve System, spoke on the subject, “The Economic Situation and Outlook”.
The meeting adjourned at 3:45 P.M.
HERBERT V. PROCHNOW
Secretary.

MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL
AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
April 27, 1948
At 10:35 A.M., a joint conference of the Federal Advisory Council and the Board of
Governors of the Federal Reserve System was held in the Board Room of the Federal
Reserve Building, Washington, D. C.
Present: Members of the Board of Governors of the Federal Reserve System:
Chairman Thomas B. McCabe; Governors M. S. Szymczak, Ernest G. Draper, R. M.
Evans, and Lawrence Clayton; also Mr. S. R. Carpenter, Secretary of the Board of
Governors.
Present: Members of the Federal Advisory Council:
Mr. Edward E. Brown, President; Messrs. Charles E. Spencer, Jr., W. Randolph
Burgess, David E. Williams, John H. McCoy, Robert V. Fleming, J. T. Brown, James H.
Penick, Henry E. Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and Herbert V.
Prochnow, Secretary.
The President of the Council read the first item on the agenda and the conclusions
of the Council as given in the Confidential Memorandum to the Board of Governors from the
Federal Advisory Council, as printed on pages 18 and 19 of these minutes. President Brown
then stated that the Council believed it would be helpful on matters of this kind if the
Federal Reserve staff would discuss them with the proper committees of the American
Bankers Association, the Association of Reserve City Bankers, and experienced operating
officials of banks.
Chairman McCabe stated that the whole matter was discussed with a committee of
the Association of Reserve City Bankers in January; the committee was assured that the
matter would be given careful consideration and would be taken up with the Federal
Advisory Council before anything would be done. Chairman McCabe further stated,
assuming anything is finally done, a year or two would be needed in order to consider the
matter properly.
President Brown then read the second item on the agenda and the conclusions of the
Council as given in the Confidential Memorandum to the Board of Governors from the Federal
Advisory Council as found in these minutes on pages 18 and 19.
Mr. Szymczak asked whether point A in the Council’s conclusions on the second item
on the agenda meant that as short-term securities mature, the Treasury should go into
long-terms.
Dr. Burgess replied that the Council’s comment referred to savings bonds especially,
and that point A of the Council’s memorandum was a long-term objective to be kept in mind.
President Brown and Chairman McCabe agreed that there was probably no funda
mental difference between the Council and the Board on this item of the agenda.
The President of the Council read the third item on the agenda and the conclusions
of the Council as given in the Confidential Memorandum, mentioned above. Various mem
bers of the Council emphasized that it would be undesirable at present to introduce any
proposals to increase bank reserves. Several members of the Council suggested that a
study should be made of the whole question of reserves.

Chairman MiCLabe asked whether banks would prefer a special reserve requirement
or an increase in regular reserves. In the discussion, a number of the members of the Council
indicated that neither an increase in the regular reserves nor special reserves were advisable.
Chairman McCabe reported that he was sending a letter to the Federal Reserve banks
asking for their opinions on the matter of reserve requirements. Chairman McCabe asked
whether the Executive Committee of the Council would be ready to meet on short notice
with the Board. President Brown assured him that the Executive Committee could meet
with the Board any time upon a few days’ notice.
During the discussion, the program of the American Bankers Association urging re
straint in the extension of credit was commended. Dr. Burgess pointed out that the weak
argument of the Board was the argument that the Board has no powers to restrict credit
expansion, whereas the Board has ample powers.
The meeting adjourned at 12:50 P.M.
HERBERT V. PROCHNOW
Secretary.

MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL
April 27, 1948
At 3:00 P.M ., the Federal Advisory Council convened in Room 654 of the M ay
flower Hotel, Washington, D. C., the President, Mr. Brown, in the Chair.
Present: Mr. Edward E. Brown, President; Messrs. Charles E. Spencer, Jr., W. Ran
dolph Burgess, David E. Williams, John H. McCoy, Robert V. Fleming, J. T. Brown,
Henry E. Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and Herbert V. Prochnow,
Secretary.
Absent: Mr. James H. Penick.
There was a discussion on the advisability of giving the Board of Governors a written
statement of the Council’s viewpoint on the present situation in the financing of housing
and real estate. The Board of Governors had indicated that a statement from the Council
would be appreciated, and might be sent to the proper Committees of Congress by the
Board in support of the Board’s position on these matters.
After some discussion, the Council adopted the following resolution, which was sent
with the letter below to the Secretary of the Board of Governors:
Resolution Adopted by the Federal Advisory Council on April 27, 1948.
The Board of Governors has asked the judgment of the Council on the housing situa
tion and on the position taken by the Board on the financing of housing programs.
The Council is in general agreement with the analysis of the problem stated by Mr.
Eccles before the Joint Committee on the Economic Report on November 25, 1947.
The desired objective is to build as rapidly as possible the housing veterans and others
so urgently need of sound quality, and at prices they can afford to pay and retain
ownership. The capacity of the building industry is limited. Attempts to force building
beyond that capacity by excessive loans or unsound subsidies lead to shortages of
labor and materials, higher prices, and poor quality construction by speculative and
unqualified builders. We approve the specific suggestions on housing legislation now
before Congress in the Board’s letter of April 5, to Senator Tobey.
Washington, D. C
* * * * *
April 30, 1948
Mr. R. S. Carpenter, Secretary
Board of Governors of the Federal Reserve System
Washington 25, D. C.
Dear Mr. Carpenter:
You will please find enclosed a Resolution of the Federal Advisory Council with ref
erence to the financing of housing.
The Board of Governors may feel free to use this Resolution in connection with the
hearings of any Congressional Committee on this subject.
Very sincerely yours,
(Signed) Herbert v. prochnow
Secretary.
The meeting adjourned at 4:00 P.M.

HERBERT V. PROCHNOW

Secretary.

ACTION OF THE EXECUTIVE COMMITTEE OF THE FEDERAL ADVISORY
COUNCIL ON H.R. 2799.
The following letter, which is self-explanatory, was received by President Brown
THE RIGGS NATIONAL BANK
OF
WASHINGTON, D. C.
Postal Zone 13
May 12, 1948

A IR M A IL

Mr. Edward E. Brown, President
Federal Advisory Council
c/o First National Bank
Chicago, 111.
Dear Ned:
Late yesterday afternoon, Governor Clayton called me on the telephone and stated
that they were anxious to have some support if it was obtainable from the Executive
Committee of the Federal Advisory Council in connection with a proposed amendment
to the Federal Home Loan Bank Act.
Governor Clayton stated that, while the Board had originally been consulted on this
matter, they had not been consulted on the draft of the amendment which had been cleared
by Mr. Foley, Administrator of the Housing and Home Finance Agency and the Bureau
of the Budget, and there were certain features of the legislation which they felt were un
desirable^ I told Governor Clayton that the only thing we could do was to take a mail
vote and if our minds could meet, possibly a resolution could be adopted by the Executive
Committee of the Council which would be helpful.
I requested Governor Clayton to forward me sufficient copies of the proposed amend
ment and the Board of Governors’ objections in order that I may transmit them to you
as President of the Council, so that if you felt it was desirable you could have Mr. Proch
now, Secretary of the Council, forward them to the various members of the Executive
Committee for their information and comments, or possibly a proposed resolution if you
concur with the viewpoint of the Board of Governors. It is not necessary for Mr. Prochnow
to send one to me and in order to expedite the matter, I am enclosing five copies of the
proposed amendment and the features of the Bill to which the Board of Governors object.
I have not had an opportunity yet to read the proposed amendment and the Board’s
comments but I will do so promptly and will be in a position shortly to give you my
viewpoint on this matter.
Yours very sincerely
(Signed) robert v. Fleming
Second Vice President
Federal Advisory Council
Enclosures
As a result of the above letter, the members of the Executive Committee approved
by mail the following resolution:

RESOLUTION ADOPTED BY THE EXECUTIVE COMMITTEE OF THE
FEDERAL ADVISORY COUNCIL ON MAY 17, 1948
In connection with the proposed amendment to H.R. 2799, the Executive Committee
of the Federal Advisory Council is in agreement with the Board of Governors of the Fed
eral Reserve System that the following three features of the proposed amendment are
undesirable:
1. Section 3 of the amendment would authorize the Secretary of the Treasury to
purchase up to $1 billion of the obligations issued by the Home Loan Banks. If such
authorization is provided at all, it should be limited to well defined emergency situations.
2. Section 6 of the amendment would direct the Secretary of the Treasury to loan
to the Federal Savings and Loan Insurance Corporation up to $750 million, as determined
by the Home Loan Bank Board. It is appropriate that the Federal Savings and Loan
Insurance Corporation, as a Government Corporation, should obtain its funds from the
Treasury; but it should first be required to buildup adequate reserves to avoid an unneces
sary burden on the Treasury.
3. Section 8 of the amendment would make insured share accounts of savings and
loan associations lawful investments for fiduciary and public funds. Such shares are not
appropriate investments for such funds, but the fact that they were approved as such
would convey a misleading sense of liquidity to other investors.
* * * * *

The resolution above was sent to the Secretary of the Board of Governors with the
letter which follows:
May 18, 1948
Mr. S. R. Carpenter, Secretary,
Board of Governors of the Federal Reserve System,
Washington 25, D. C.
Dear Mr. Carpenter:
You will please find enclosed a Resolution of the Executive Committee of the Federal
Advisory Council, with reference to the proposed amendment to H.R. 2799. The Board
of Governors may feel free to give this Resolution to the appropriate Committees of Con
gress, or to the confreres if the bill goes to conference.
Very sincerely yours,
(Signed) Herbert v. prochnow
Secretary.

NOTEs This transcript of the Secretary's
8 xa not to ^ regarded as complete
or necessarily entirely accurate. The
transcript is for the sole use of the
members of the Federal Advisory Council.
H. V. P.
he Secretary’s notes on the meeting of
the Federal Advisory Council on April 25.
19ho, at 2;!0 P. *. in ioom 932 of the
Mayflower Hotel, Washington, D. C. All
members of the Federal Advisory Council
were present.
vx
Th? Gouncil accepted with regret the resignation of Walter
Lichtenstein as Secretary, and on motion duly made and seconded, elected
Herbert V* Prochnow as Secretary*
• • * * «
IT 13 UND2?3T0CD THAT THS FEDERAL W S S M V S SY5T3K IS tKM
CONSIDERS^} A PROGRAM OF ALLCWUC, FIRST, BSSDIATE CREDIT
ON ALL SENDINGS TO THE FEDERAL RESERVE SYSTEM OF TRANSIT
ITEMS, REGARDLESS OF THS NUMBER OF DAIS IT SAY TAKE TO
c o l l e c t h i t h e r b y a i r m a i l o r t r a i n, and second, ths
POSSIBLS ELIMINATION OF SORTING TRANSIT ITEMS BY SESSSfB
DISTRICTS AND DIRECT SENDINGS TO THE FEDERAL RESERVE BANKS
AND THEIR BRANCHES. THESE P30CKDDR2S,IF CONTEHPLATED,
INVOLVE IMPORTANT CHANGES IN THE FUNCTIONING OF THS BANKING
SYSTEM, AND IT WOULD BE MOST DESIRABLE FOR THE BOARD OT
GOVERNORS AND THE COUNCIL TO DISCUSS THSH._________________
E. S. Brown asks Flaming to comment on this item.
Fleminp states that the addition of the float to bank reserves
would be distinctly inflationary, and that it is definitely unsound banking
practice to make funds available before they are a c t u a l l y collected. He

S S 5 3 S S T 5 J —

S iS S .

...iubmW

„ d «. p ~ u »

would spread to banks.
fftil owinj* statement from the memorandum oi
E. E. Brown reads uhe iox
g November 18. 19U7: "No dhanges
the Council to ttieTBoard of G ° v ^ o ^ _ ^ r^suit in making items available
In the check collection P*™-®”
required for their collection,
sooner, on the a v s r a r . e , t^an _
•
^
to make all itans Immediately
For example, for the Fedef 1 ”0®?7to.jldmake funds available #ien they were
available would be unsound,
the equivalent of granting a loan
not actually collected. It would oa tne eq

-2 -

without interest and of paying a cash subsidy for deposits in the Federal
Reserve banks." Brown states that at the time the Council discussed this
natter with the Board in November 19h7, Eccles said he was not interested
in what effect a Federal Reserve policy of making items immediately avail
able would have upon the correspondent banking system. Eccles also stated
that when the economic situation was such that immediate availability
would not add to the inflationary trend he would take steps to place it
In operation. Brown believes the Council should reiterate its foraer
position in this matter. It is clearly obvious that adding the amount of
float to the reserves would be distinctly inflationary.
Fleming thinks the language used in the previous memorandum of
the Council on this question was good, but believes it might be amplified.
E. E. Brown states that the matter of making items immediately
available Is one of principle and not of mechanics. It is an unsound
banking principle.
Keeper. It makes funds available without interest and without
security.
Penick. If banks receive immediate availability, they will pass
it on to'industry, and eventually it will be a subsidy to customers.
Keeper. It makes kiting possible.
£. E. Brown states that it could be said it promotes kiting.
Odlin. The banks have built up a system for collecting checks,
and it is a dangerous practice to overthrow an established and smoothly
operating process for a practice that is clearly unsound.
Fleming believes it would tend to break down correspondent bank
relationships!^
Penick asks whether it might be advisable for tbs Council to
submit an liens for the agenda at the next meeting indicating various
practices that the Federal Reserve System has adopted, such as the absorp
tion of postage and other steps, all of which have tended to break down
correspondent bank relations.
McCoy is inclined to believe it might not be best to submit such
an agenda item, as he thinks the Federal Reserve staff is not concerned
about any injury it may do correspondent bank relationships.
E. E. Brown asks in connection with the second part of this agenda
item whether it might not be advisable for the Council to stay away from
any discussion of it.

McCoy thinks the Federal Reserve System could save banks their
costs on sorting. It would be beneficial if the Federal Reserve banks
took items just as they come.

Kemper states that If his bank dumped items on the Federal Reserve
bank, his bank would lose one of its best talking points with correspondent
banks. He believes that what the Federal Reserve System is aiming at is
to get all items directed to the Federal Reserve banks and then obtain the
bank balances. In connection with availability, his bank charges customers
exactly the time required to make an item available.
Spencer comments that the availability schedule in his bank was
disrupted last winter because of the weather.
E. E. Brown states that the correspondents
quicker availability than if they send their items
Reserve bank. He does not believe that the second
item, dealing with sorting, is as important as the

of his bank receive
through the Federal
part of this agenda
first part.

Fleming thinks the Federal Reserve System will use sorting as a
means of getting correspondent bank balances.
Burgess. The question of sorting is one of working out the best
procedure gradually,and not making sweeping changes.
Woods states that his bank sends its items directly to its corres
pondent in ballas which sorts the items.
Atwood. The Federal Reserve Bank of Minneapolis does not require
sorting for most banks now. There are not over a dozen banks in the district
which are required to sort.
Fleming thinks the Federal Reserve System should make any changes
in the handling of items gradually and after conferences with the proper
committees of the American Bankers Association, the Association of Reserve
City Banks, and experienced operating officials of banks*
S.
S. Brown suggests that the memorandum to be given to the Board
of Governors should include the paragraph which he had quoted earlier
from the memorandum to the Board of Governors on November 18, 19U7*

Ilf VIEW OF THE CHAKOE IN THE OOVEBWSNT’S
BUDGETARY PROSPECT M ICH WILL CONSIDERABLY
REDUCE FURTHER RETIREMENT OF MARKETABLE
DEBT AND WHICH MAY MEAN A CASH DEFICIT,
1HAT SHOULD BE THE STSTEW'S RECOMMENDATION
AS TO TYPES OF SECURITIES (MATURITIES, HELDS,
ELIGIBILITY) THAT SHOULD BE OFFERED BY THE
TREASURY FOR REFUNDING OR FOR NEW MONEY?

-u-

BurgQSs states (1 ) that it cannot be assuned the budget will show
a cash deficit; (2 ) as to general business, no one knows whether the
inflationary trend will be resumed in the near future; and (3) if the
inflationary trend is resumed, the Board still has ample powers to deal
with the situation as indicated In the open market on December 2U. If
the inflationary trend is resumed, then as many securities as possible
should be sold outside the banks* Not enough has been done to make the
savings bonds attractive.
2.
S. Brown asks whether there woaid be a market for a long-term
2 ^ per cent bond, non-eligible to banks.
Burgess does not believe so. Moreover, the Federallieserve banks
have several billions of dollars of long term bonds in their portfolios
which they should sell whenever there is a demand in the market for them.
The sale of these bonds, which are held in the portfolios of the Federal
Reserve banks, and the increased sale of saving bonds are ways of meeting
the problem. The Federal Reserve banks have plenty of long-term obli
gations in their portfolios that could be sold.
E. E. Brown. The Federal Reserve banks bought a considerable
amount ot long-term, non-eligible securities. Brown does not understand
why they have not sold them*
Fleming states that Senator Taft has remarked that he questions
some of the estimates which are presented on the economic trend, in view
of the inaccuracy of some previous estimates.
E. E. Brown believes that the Council should include in its answer
to this agenda item a recommendation (a) that bills and certificates
should be sold at somewhat higher rates than now prevail; (b) that emphasis
should be placed on the sales of B, F and G bonds with the limit on the
F*s and Qfs raised; and (c) that bonds should be sold out of the portfolio
of the Federal Reserve System whenever there is a demand for them. In
view of the holdin.7 3 of the Federal Reserve System, there is no need now
for issuing long-term ineligibles.
Burgess agrees with this statement. He adds that over a period
a refunding job should be done. As of today, there is no real market
for long-term bonds.
B. E. Brown repeats that the Federal Reserve System ought to
sell some of its bonis.
Burgess states that the principle to follow is that refunding
should take place whenever there is an opportunity. There are the
savings bonds and the securities held in the Federal Reserve System port
folio to meet the present problem.

E. E. Brown. The current bond campaign does not look very
hopeful. The principle which should be followed is that as much as
possible of the short—terra debt, whether in or out of the banking systaci,
should be refunded into non-eligible securities. The market now will
not take a large amount of non-eligibles. Bills and certificates should
be sold at slightly higher rates than no* prevail. Emphasis should be
placed on the sale of B, F and Q bonds and the amount of F ’s and G ’s
which an investor may acquire should be increased. The Federal Heserve
System should sell out of its portfolio, at or about present levels,
whenever there is a demand in the market for non-eligible securities.
Burgess. The Increased bill rate has led to a wider distri
bution outside of the banks.
WHAT SHOULD BE DONS IN THS MONETARY AND CHEDIT FIELD
TO COUNTERACT THE INFLATIONARY PRESSURES THAT MAY BE
CREATED BY THE NSW DEFENSE PROPOSALS AND THS 10RLD
AID PROGRAM?
Fleming asks whether the aaount to be spent for world aid will
be larger than it was last year.
Burgess states that the actual expenditure for world aid may
be little or no more than last year. Defense expenditures are larger.
Last year many foreign nations gave up large amounts of their gold reserves
so that our gold imports in the near future are not likely to be as large
as they have been. Consequently, some foreign nations will not be able
to spend as much here this year as they have in the past year. Burgess
estimates that perhaps **600 million or $700 million in new gold will come
from South Africa.
The Open Market Committee has the power to sterilise
gold imports b y selling United States securities or letting them run off.
Spencer states that his associates do not believe gold
imports this year will be as hi^i as
billion.

Fleming# A competent banker will adjust his reserve position
to meet any higher reserves the Board may have the power to require. He
mentions that Eccles testified just before McCabe took the office of
Chairman.

(At this point there was an off-the-record discussion on reserve require
ments and related subjects).
* # * *

# * * *

Fleming reads Jfton Eccles1 most recent testimony indicating
Eccles' belief that an increase in reserve requirements can be made to
apply to all banks.

- 6-

B. E. Brown believe* that reserve requirements can be made
to apply to al 1 'hanWa, probably under the power to regulate the issuance
of currency.
Burgess# McCabe could very properly say that he has not had
an opportunity to study the whole complex problem of reserves, and,
therefore, would not wish now to make any recommendation on reserves. If
McCabe should propose an increase in reserves to Congress, it will
probably be defeated, and it will alienate state banks.
Atwood asks how the Republicans, who have just voted to reduce
taxes, could now vote to increase reserves. He believes McCabe would
find it impossible to get higher reserves at present.
E. S. Brown. If the defense expenditures are for atomic bombs,
guided missiles and similar projects, then the inflationary pressures may
not be serious. However, if there are expenditures for large military
ground forces, trucks, tanks and the shipment of military equipment abroad,
there may be a further upward pressure on the economy. S. E. Brown states
that if he were convinced we were going to have more inflation, he would
be inclined to be for an increase in reserves. If and when the economic
trend becomes clearer, it is time enough to consider an increase in reserve
requirements.
He is inclined to believe that the differences in reserve
requirements are perhaps too great between the country, reserve city and
central reserve city banks. He thinks any possible increase in reserve
requirements in the future should probably not be a flat percentage far
each group. E. S. Brown mentions merely as tentative figures to illustrate
his point, 20 per cent for country banks, 2U per cent for reserve city banks
and 28 per cent for central reserve city banks. A large increase in
reserve requirements, such as Eccles proposes, would mean that some banks
would have difficulty making adequate earnings, and the whole private banking
system might be endangered.
Atwood.
Is there any logical reason for present reserve require
ments, or does the whole matter of reserve requirements represent an acci
dental and haphazard development.
Burgess states that it is largely the latter.
E. £. Brown says the reserve requirements grew out of the
national ban king system, but they are not logical now. Sproul has argued
for uniform reserve requirements on demand deposits with a higher rate on
interbank deposits.
Atwood asks whether Eccles did not say that the whole reserve
requirements were set up on an illogical basis.
J. T. Brown. Considering the previous arguments of Sccles,
how can he now justify a blanket proi>osal?

ood understands a study is now under way in the Federal
Reserve System on the whole subject of reserves«
Atwood believes McCabe could state that he wishes to study
the question more fully.
Burgess. If a war psychology should dervalop in the country,
the banks will have to carry a heavier loan load*
B. E. Brown*
heavy lenders.

19U0

and

19U1

the banks were not particularly

Burgess comments that at that time we had large excess reserves
of around *6 billion.
E. E. 3rown. If the maximum requirements are raised, the
wirHantn requirements should not be raised, because a deflationary.period
might require that reserves be reduced. Any well-managed bank will keep
itself in a position to meet possible increased reserve requirements, if
these powers are given to the Board.
Fleming does not think there is anything in the next thirty
days or so to justify increased reserve requirements*
Odlin believes McCabe would make a mistake to align himself
with the present Board on an increase in reserves.
.lafuing states that any gold imports can be offset by selling
government securities. The increase in loans sinoe January is not very
large and much of it is in real estate loans*
E* E* Brown reports that retail store loans are up because
their credit sales are up. Finance companies are also using credit, but
some commodity loans are down.
Burgess states that mortgage debt is up, but this is a matter
of national policy. The government budget and consumer spending are
inflationary forces.
Odlin asks how the Council can do anything contrary to its
Rovember statement when everything the Council said then has been borne
out by the facts since that time.
Kemper. The Board will state that conditions have changed
since November because of the new defense proposals and the world aid
program.
E. R. Brown reports that he talked with Sewell Avery who
believed that thirty days ago deflationary factors vere in the ascendancy.

However, Avery now believes there is a changing attitude on the part of
buyers.
Brown states that those in favor of higher reserves may argue
that unless something is done now a crisis may arise and be on us before
new legislation can be enacted.
Burgess believes the Board has the necessary weapons now and
does not need new legislation.
He mentions the power to raise the redis
count rate, the large holdings of government securities in the portfolio
of the Federal Reserve System, the possibility of increasing reserves to
26 per cent in the central reserve cities and the building up of balances
in the treasury account in the Federal Reserve System.

/
Williams does not believe that reserve requirements should be
increased now," but™ thinks the Council might help McCabe to obtain a better
picture of the situation before he accepts the idea of higher reserve
requirements.
g. g« Brown mentions that the press states Winfield W. Riefler,
economics professor at the Institute for Advanced Study at Princeton,
will become assistant to McCabe, May 1.
Brown has known Riefler for sane
time. He wonders what Riefler*s position will be on increasing reserve
requirements.
Burgess thinks that Riefler believes somewhat in the managed
money idea, but he states .-tiefler has done some good work in various capa
cities and was connected with the National Bureau of Economic Research.
Fleming asks whether a few members of the Council should talk
with Secretary of the Treasury Snyder in the morning on this whole matter*
S. S. Brown suggests that Fleming see Snyder.
Fleming requests that Burgess accompany him. (It is agreed by
the Council that Fleming and Burgess should see Snyder in the morning.)
S. S. Brown* The balance between the inflationary and defla
tionary forces is extremely narrow. The armament program has introduced
a new factor, but he believes the Board has powers to meet the situation.
Any increase in reserves, such as proposed by Eccles, would so reduce the
earnings of some banks that they would be forced into risks carrying higher
rates, all of which would defeat the very objectives of the proposal. He
does not believe any legislation should be passed at this time.

Burgess. It is necessary to analyse carefully what an increase
in reserves would 3o. It would encourage some banks to take riskier loans.
Fleming. Many bank stocks are selling below book value now.
If their earnings-rail further, it would make it more difficult to increase
their capital.
McCoy. Many banks have as much on deposit with their correspondents
as with their respective Federal Reserve banks. If resorvo requirements are
raised, the banker will sell securities.

-9-

Odlln says that reserve requirements have followed a certain
pattern for a considerable time, and he does not think it would be desirable
to increase country banks say from 1U per cent to 20 per cent, which would
be almost a fifty per cent increase.
E* S. Brown states that hi 3 previous figures of 20 per cent,
2li per cent and 2b per cent for the three classes of banks were not meant
to be fixed and he was only speaking to illustrate a principle of a closer
relationship between the three classifications of banks*
Odlin. The proposal of the Board of Governors for increased
reserves is but a small part of the whole program, the major phase of which
is the Federal Budget* The confidential memorandum of the Council to the
Board of Governors on November 16, 19U7, listed other matters which were
far more important than the expansion of bank credit in the present economic
situation*
g, S. Brown. If banks are forced to raise interest rates as a
result of tighter reserves, government lending agencies will then be asked
to make loans at lower rates to veterans, small business concerns and other
groups, all of #iich will result in the futher injection of government into
the banking system*
BANK HOLDING OOMPAMY BILL
E* S. Brown asks Odlin whether he has any comment to make on
this legislations
Odlin indicates his displeasure with the recent A* B* A* state
ment*
E* B* 3rown thinks the A. B* A. statement on the bank holding
company legislation may have put Mthe nails in the coffin” regarding tnis
legislation for this session of Congress*
Kemper states that he has heard there nay be a new school of
thought on bank bolding company legislation*
The meeting adjourned at 5:50 P.M.

- 10-

The Council convened at 10:00 a.m. on April 26,
19U8, in Room 932 of the Mayflower Hotel,
Washington, D. C.
All norabers of the Council were present.
The Council prepared and approved the attached confidential
memorandum to be sent to the Board of Governors relative to the agenda for
the joint meeting of the Council and the Board on April 27, 19U8. The
memorandum was delivered to the Secretary of the Board of Governors at
12:23 p.m. on April 26, 19U3. It will be noted that each item of the agenda
is listed with the cadments of the Council on the item.
The meeting adjourned at 12:10 p.m.

-11-

CONFIDSNTIAL

HBMORANDOM

THE BOARD OF GOVERNORS
FROM THE
FEDERAL ADVISORY COUNCIL
RELATIVE TO THE AGENDA FOR THS JOINT WESTING
ON APRIL 26, 19U8
1.

It is understood that the Federal Reserve System
is now considering a program of allowing, first,
immediate credit on all sendings to the Federal
Reserve System of transit items, regardless of the
number of days it nay take to collect either by
air mail or train, and second, the possible elim
ination of sorting transit items by reserve dis
tricts and direct sendings to the Federal ?.eserve
banks and their branches* These procedures, if
contemplated, involve important changes in the
functioning of the banking system, and it would
be most desirable for the Board of Governor's and
the Council to discuss them.

In relation to the first part of this question, the Council
wishes to restate its position as expressed on page five of its memorandum
to the Board of Governors on November 18, 19U7, as follows: "Ho changes
in the check collection processes should result in making iteas available
sooner, on the average, than the period required for their collection. For
example, for the Federal Reserve banks to make all items immediately avail
able would be unsound, as it would make funds available when they were not
actually collected. It would be the equivalent of granting a loan without
interest and of paying a cash subsidy for deposits in the Federal Reserve banks*"
tionary*

Also, adding the amount of float tobank reserves would be infla
uch an unrealistic banking practice invites abuses.
2*

In view of the change in the Government1s budgetary
prospect which will considerably reduce further
retirement of marketable debt and which may mean a
cash deficit, what should be the System*s recosmendation as to types of securities (maturities, yields,
eligibility) that should be offered by the Treasury
for refunding or for new money?

The Council does not believe it can be assumed that the budget
will show a cash deficit* There is as yet no conclusive evidence indicating
the direction of the economic trend in the coming months. As to now issues,
the following comments are made:

- 12-

A* The basic principle to follow is that as much as possible
of the short terra debt should be funded into securities which will be pur
chased and retained b7 non-bank investors*

B.
The markets will not now absorb largo amounts of non-eligib
securities* However, the Federal Reserve System should sell bonds out of
its portfolio, at or near present prices, whenever there is a demand in the
market for them*
C* Emphasis should continue to be placed upon the sale of S, F,
and 0 bonds, and the amount of F*s and Gfs which an investor may acquire
should be increased*
D.
Bills and certificates should be sold at slightly higher
rates than now prevail as a means of selling to non-bank investors, reducing
the incentive for banks to lengthen maturities and as a means also of keeping
some pressure on credit.

What should be done in the monetary and credit
field to counteract the inflationary pressures
that may be created by the new defense proposals
and the world aid program?

In the meantime, the powers which the System and the Treasury
already possess, without new legislation, are large. The Board has the power
to raise the discount rate, vh ich is an effective method of calling public
attention to the desirability of checking credit expansion. The Reserve
System has recently demonstrated that through relatively slight changes in
open market policy it can greatly influence bank operations, the security
aarkets, and business. Although the Board has raised the reserve requirements
of the central reserve city banks from 20 to 22 per cent, the Board still has
the power to increase these particular reserve requiredants to 26 per cent.
Many foreign nations have given up large amounts of their gold
reserves in the past year or two, so that our gold imports in the Immediate
future are unlikely to be as large as they have been. Moreover, the Open
Market Coamittee may sterilize gold imports by selling United States secu
rities or letting them run off without replacement.

-13The recent trend in bank loans has demonstrated that the banks
generally are following a cautious and conservative loaning policy.

-lllThe 'ouncil convened in the Board Room
of the Federal Reserve Building at 2:00 p.m.
on April 26, 19U8, to hear Dr. Ralph A.
Young, Associate Director, Division of
Research and Statistics of the Federal
Reserve System.
All mergers of the Council were present.

* *

E.
Brown presents Dr. Halph A. Young, who speaks on tbs
subject of wtho Economic Situation and Outlook”. A copy of Dr. Young’s
remarks are attached.
The

meeting adjourned at 3:U5

-asCONFIDENTIAL
TH2 ECONOMIC SITUATION AND OUTLOOK

Remarks by Halph A. Young, Associate director
Division of Research and Statistics
Board of Governors of the Federal Reserve System
before the
Federal Advisory Council— April 26, 19U8
The economy has now absorbed the largest deflationary fiscal
and monetary operation in its history for so short a period of time.
Over the past four-month period, December through ■.'arch, Federal Reserve
credit has been reduced by 1.6 billion dollars, and the total money
supply has been contracted by nearly

h billion.

The deflationary threat of this large fiscal and monetary
operation has proved to be a complete illusion. In retrospect, the accom
panying readjustoants in primary cocsaodity and financial markets were no
more than tremors, expressing temporary business fears and uncertainty.
After all, up to the beginning of the operation we had had the longest
period of sustained business activity on record— its beginning dates back
roughly to May

1938.

Furthermore, we have all been schooled in the

doctrine, fostered by business cycle theory, that an expansion period at
some point will be succeeded by a period of contraction. Accordingly,
many were prepared to believe that, with the main strength of inflationary
expansion forces possibly spent, and with many factors of unbalance in
the economic situation, the strains of deflationary fiscal and monetary
operations could well signal commencement of some, perhaps relatively
severe,

business

recession.

- 16-

Factors of Underlying Strength,— In our own estimates of the
outlook, prepared earlier In the year, we were inclined to discount any
serious business recession at this time and to anticipate, at least through
19U8, sustained high levels of production and employment with renewed,
but modest advance in the wholesale and consumer prices. In making this
estimate, we were impressed especially by the following factors of under
lying strength.
(1) The shear sise of the poblicfs stock* of liquid assets
available for spending; the maximum temporary reduction in this stock
resulting from first quarter fiscal and monetary operation could hardly
exceed two per cent.
(2) Personal

incomes and holdings

of liquid assets continued

to be widely distributed; wages were still advancing; and prospective tax
reduction would add to spending power.
(3) Backlog demands were still strong in many areas and business
expenditures on plant and equipment had the promise of beln£ well maintained.

(k)

Business inventories were not high in relation to sales

and farm inventories were comparatively low.
(?) Foreign purcnases of American goods would be sustained in
fairly large volume as a result of the Economic Cooperation Program.
(6) Fiscal operations, although temporarily deflationary,
would be inflationary on balance after the first quarter of the year.
4ith fairly active business, real estate, and consumer requirements for
credit, financing demands could easily exceed the current savings available
for such financing, with the result that a siseable portion of the demand

-17-

would have to be satisfied througi the banks* This would mean resumption
of bank credit and monetary expansion* The useable instruments of monetary
policy would probably not suffice, considering the potentialities for
additional bank reserves, to restrain such bank credit expansion*
These fundamental factors of strength continue to influence
our estimates of possible economic developments for the near-term future*
There are now, of course, still other strategic factors to be taken into
account. The most important of these is the certainty that defense expendi
tures, because of the threatening international situation, will be consider
ably larger than originally provided for in the budget for fiscal »U9.
Another important factor, however, is the rapidly changing psychology of
the business and financial community, as well as the public, with respect
to the business and inflationary outlook.
While a substantial increase in our national defense expendi
tures is a certainty, the final amount of such expenditures is highly
uncertain. On the basis of programs under consideration or seriously
mentioned, we are inclined to estimate a figure of about 2 billion dollars as the likely addition to Federal expenditures from this source for the
next fiscal year. This is, of course, on top of other expenditure increases,
particularly stemming from the program of Economic Cooperation, so that
total expenditures of the Government for the next fiscal year promise to
be approximately 5> billions higher than in fiscal *1*8.
Effects of Increased Federal Expenditures.— A substantial
increase In Federal expenditures over the next year will tend to have a
considerable lifting effect, direct and indirect, on total national product.

-18-

Other important lifting factors will be larger expenditures by State
and local governments, a further substantial increase in domestic private
investment, and sone additional expansion in consiraer expenditures. The
combined effect of these lifting factors may be a rise in total product
of from 6 to 8 per cent over the annual product rate of

2h$ billion dollars

experienced in the first quarter or this year. This would mean an annual
product rate of somewhat over 260 billion dollars during the first half
of next year.
An accompanying rise in business profits and personal incomes
would provide increased Federal revenues, so that, despite the recent tax
reduction bill, the Governments budget deficit might turn out to be
relatively snail, perhaps in the neighborhood of one billion dollars.
With funis available from continued sales of savings bonds and other public
debt receipts, it should still be possible for the Treasury to cover
from available cash funds voluntary redemptions by holders of maturing
issues. On the other hand, probably there will be no Treasury funds
available for retirement of Federal reserve-held debt, and some resort
to borrowing in the market is at least within the range of possibilities.
The prospective increase in Federal expenditures will have
another important effect on the general economic situation. The additional
expenditures are capable of absorbing, directly or indirectly, more than
the probable net addition to the nation*s labor supply.

Since, with a

rising national product, other new demands for labor are likely, a further
decline in unemployment and tightening of the labor market seems a
reasonable expectation. This will mean that pressures for advancing wages
will bo sustained.

-19-

Qeneral Economic Outlook,— On the whole, the economic outlook
Is for a continuing expansion of aggregate desand for goods and services*
iJhlle further expansion in industrial production is to be expected, it
seajs scarcely possible that such expansion, on the basis of existing
capacity, could exceed no more than 5> per cent* There should also be sone
expansion of output in service industries, but agricultural output, while
uncertain, is unlikely to surpass greatly the average of the past three
years. The outlook, then, sums up into a prospect for continuing inflationary
pressures and some further rise in prices.
It is extremely difficult to appraise the

changing psychological

attitudes of business and consumers towards this renewed Inflationary outlook.
Oar general feeling is that, while international uncertainties and the
domestic threat of the reimposition of economic controls could activate a
rush to buy available supplies of durable and seal-durable goods, the most
reasonable expectation is for those In strong financial positions to desire
to retain those positions.

If businesses and consumers conduct their

expenditure programs with reasonable restraint, the performance record
of the economy over the next twelve months should be one of gradually
advancing levels of production and employment, with some, but probably
not alarming, further Inflation of wholesale and consumer prices.
There are a number of considerations that may be adduced in
support of a pattern alon^ these lines. Among the more important of these
are the following:
(1)

Industry is only now completing its first postwar prog

of retooling and expansion. The initiation of second program may be

-20-

approached with greater conservatism than characterised the undertaking
of the first.
(2) Consumers, as well as businesses, have satisfied many of
their deferred demands for semi-durables and durables, except in the case
of automobiles, and housing demand is tapering off because of very high
prices on residential real estate.
(3) An increasing number of consumer units are operating-with
no liquid assets or with deficits, and with the high levels of consumer .
prices many more consumer units are experiencing reduced flexibility in
current expenditures and a reduced margin for savings.
(ii)

It now seems that the third round of wage increases will

be smaller than those of earlier rounds.
(5)

The banks, under continuing encouragement fron the ba

supervisory authorities and more aware of the need for loan restraint as
a result of the recent nation-wide educational program of the American
3ankers Association, may be less responsive than last year to the strong
credit demands that will likely confront them.

Voluntary Restraint on Credit Expansion.— This raises a very
pertinent question, namely, the extent to which voluntary restraint on
the part of bankers can be relied upon to hold down bank credit expansion
in a new situation of gradually mounting inflationary pressures.

It is

fairly clear, I think, that the program of voluntary credit restraint has
had no proper test since its initiation near the end of last year.
The slackening in bank loan expansion since that time has
reflected primarily a small decline in the volume of business loans, and

-21-

this decline was heavily concentrated with Hew York and Chicago banks.
Reports indicate that the decline, at least in New York, was largely in
loans to

food

processing industries, to sales finance companies, and to

public utilities. Special factors were operative with each of these
borrower groups. On the other hand, for banks as a whole, loans to
consroers and real estate owners have continued to expand at about the
sane rate as last year. In addition, banks have added moderately to their
holdings of State and local government and corporate securities.
Banks have been going through a period of readjustment as a
result of fiscal and monetary pressures and of general economic uncertainty,
and reappraisal of lending policies would be a natural concomitant of
such a period.

Furthermore, the period has been one of seasonal slack in

business credit demand, with slackness accentuated by uncertainty as to
the economic outlook. If banking developments over the near tem are
consistent with the pattern that we are inclined to expect, then the first
real test of voluntary credit restraint as a weapon of monetary control
will cooe in the second half of the year, when pressures upon the banks
from additional borrowing demand will probably reach their full strength.
There will be little restraint upon the banks from fiscal operations
during this period, and monetary policy has little left in the way of
useable restrictive ammunition.
Prospective Bank Credit Demands.— Business borrowing demands
will probably be the most active element in the market for credit and
especially bank credit during the next twelve months. Even before the
recent developments in the tax, world aid, and rearmament fields, business

-22-

in the aggregate anticipated spending substantially store this year— about
15 per cent sore— on plant and equipment than it spent in 19U7*

Prom all

indications, such expenditures in 19U8 will amount to about twice the
amounts spent in 1929 and 19Ul» the two preceding high years. These
expenditure estimates for plant and equipment represent additional expan
sion programs of a wide variety of industries, with large dollar increases
over last year shown by trade, service, finance, camnunications, and trans
portation other than railroads.

They also include the extension of sizeable

expenditure programs in the railroad, electric utility, petroleum, food,
and chemical industries.
Another element in business borrowing demands will be increases
in business inventory and receivable holdings, and these will be farther
influenced by any price advances that occur. Business inventories are
still low relative to current sales by any prewar standards and In such
Industries as Iron and steel, nonferrous metals and petroleum they are
low by any standards*
Business profits both before and after taxes should reach
another all-time high this
should

also attain

volume

of funds

the
so

year,

and the volume of undistributed profits

a new high record, ^ihlle business will have a large

available from retained

amount is not

earnings

and other internal

likely tomeet all needs for financing asset

that considerable financing

sources,

expansion,

will have to be done through the market,

the insurance companies, and the banks.

In this connection, it

pointed out that business liquid assot holdings

ovar-oll

should be

can no longer

regarded as a possible source of funds for financing the acquisition of
other assets.

For all nonfinancial businesses as a group, such holdings

-23-

are no longer

high

relative to operating requirements, as compared to

prewar relationships.
asset

Moreover, since March of last year, business liquid

holdings have been increasing in about the same dollar volume as

the increase in accrued income taxes.
Real estate loans will be another area of substantial credit
I
demand.

Some tightening of the mortgage market has occurred and there

are reports of a fev banks which regard themselves
real estate field.

On the other hand,

loaned up in the

large volume of new mortages

continues and will continue to be generated as a result of the current
heavy construction activity.

Of the new mortgages placed with lenders

so far this year, banks have taken their fair share.

It should be recog

nised that the new housing program, now under consideration by Congress,
will, if enacted, greatly strengthen financing demands in tha residential
mortgage field.
In recent months, consumer loan outstandings at banks, despite
some seasonal reduction in aggregate consumes: installment credit volume,
have been rising at about the same rate as last year.

While a tapering-

off of backlog demand for consumers durable goods has been occurring— for
some items, demand has slackened markedly, current buying of consumer
durables as a group continues in substantial volume and likewise credit
demand for their financing.

There is nothing in the prospective situation

to suggest any abatement of expansion in consumer instalment credit volume;
on the contrary, the indications are for sustained strength of credit
demand in this area.
Credit demands of farmers
factor

in totalbank

may be

a somewhat more Important

credit demand this year than in the past two years.

-2UFaraera as a group are In exceptionally strong financial position and
have large liquid asset holdings.

Howevar, faro operating costs have

been rising in relation to fans income, and many more farmers than in the
past two years may be obliged to seek bank accommodation.
The point was made earlier that expenditures of
local governments are expected to rise this year.
this increase will be financed b y borrowing.

State and

A substantial part of

Although interest rates

to municipal borrowers have risen noticeably from a year ago, these govern
mental units are under pressure to make up urgent deficiencies in public
facilities and, in some cases, to provide special veterans

benefits,

"Tie

prospect is, therefore, that a sizeable volume of new State and municipal
issues will be seeking lodgment with the banks.

The likelihood of the

availability of a large volume of corporate securities has already been
mentioned.

This will further add to pressures for additions to bank

holdings of other securities.
Taking all of these considerations into account, voluntary
credit restraint has a very large responsibility to carry over the next
twelve months.

There should be no relaxation of efforts to impress upon

the banks the continuing need for vigilance in adhering to conservative
credit standards and tc ani-i-inflationary loan policies.
Prospects for Bank Profits.— In closing, I should like to
comment briefly on bank earnings prospects.

Generally speaking, net

profit levels will probably compare with those for

I9U7,

but, because

of some further increase in capital accounts, will decline moderately
when expressed as a percentage of these accounts.

The following factors

-25-

will probably make for an increase in aggregate bank earnings daring the
year: (1) some shift from low-yield Governments to higher-yielding loans
and other securities; (2) an absolute increase in the volume of loans and
other securities; (3) a higher average yield from both Governments and

loans, reflecting interest rate increases; and (U) a small increase in
earnings from service charges and miscellaneous sources. These factors
of increase will likely be offset, however, by increases in practically
all expense items, especially wa^es and salaries, and by some increases
in the volume of losses and charge-offs in excess of recoveries and profits
on loans and securities,

ttius, net current earnings will be up, but net

profits, in all likelihood, will be about the sane as for 19U7.

—26—

On April 27, 19U6, at 10:35 a.m., the
Federal Advisory Council held a joint
meeting with the Board of Governors of
the Federal Reserve System in the Board
Room of the Federal Reserve Building.
All

mexsbers

of the Council were present•

The following members of the Board of
Governors were present: Chairman McCabe;
Governors Ssymcsak, Draper, Evans and
Clayton; also, Mr. Carpenter, Secretary of
the Board of Governors.
IT IS UNDERSTOOD THAT THE FEDERAL RESERVE SYSTEM IS HOW
CONSIDERING A PROGRAM OF ALLOWING, FIRST, IMMEDIATE CREDIT OH ALL SENDINGS
TO THE FEDERAL RESERVE SYSTEM OF TRANSIT ITEMS, REGARDLESS OF THE NUMBER
OF DAYS IT MAY TAKE TO COLLECT EITHER BY AIR MAIL OR TRAIN, AND SECOND,
THS POSSIBLE ELIMINATION OF SORTING TRANSIT ITEMS BY RESERVE DISTRICTS AND
DIRECT SENDINGS TO THE FEDERAL RESERVE BANKS AND THEIR BRANCHES. THESE
PROCEDURES, IF CONTEMPLATED, INVOLVE IMPORTANT CHANGES IN THE FUNCTIONING
OF THE BANKING SYSTEM, AND IT WOULD BE MOST DESIRABLE! FOR THE BOARD OF
GOVERNORS AND THE COUNCIL TO DISCUSS THE?-?.

E. E. Brown reads the first item on the agenda and the answer
which the Council had prepared and submitted in its confidential memorandum
to the Board on April 26, 19U8. The Council also thinks making items avail
able immediately si^ht encourage some chains or groups of banks to engage
in kiting and so actually carry a fictitious reserve. In connection with the
second part of this question, the Council believes it is largely a matter
of banking mechanics, and it is not now necessary to discuss it with the
Board. However, it is suggested that in the interests of harmony, matters
of this kind should be discussed by the Federal Reserve staff with the
proper committees of the American Bankers Association, the Association of
Reserve City Bankers, and experienced operating officials of banks.
McCabe states that this whole matter was discussed with a
committee of the \ssociation of Reserve City Bankers in January; the
committee was assured that the matter would be given careful consideration,
and also would be taken up with the Federal Advisory Council before anything
would be done. Even assuming anything is finally done, a year or two will
be necessary for consideration of the matter.
IN VIEW OF THE CHANGE IN THE GOVERNMENT'S BUDGETARY PROSPECT
*HICH ULL CONSIDERABLY REDUCE FURTHER RETIREMENT OF MARKETABLE DEBT AND
WHICH MAT MEAN A CASH DEFICIT,WHAT SHOULD BE THE SYSTEM'S RECOMMENDATION
AS TO TYPES OF SECURITIES (MATURITIES, YIELDS, ELIGIBILITY) THAT SHOULD BE
OFFERED BY THE TREASURY FDR REFUNDING OR FOR NEW MONEY?_______________

-27E. E. Brown reads the second item on the agenda and the
answer which the Council had prepared and submitted in its confidential
memorandum to the Board on April 26, 191*6. He also states that the Council
is in agreement with the general policy and attitude of the Board in the
last four or five months on the types of securities to be issued. The
Council believes the amount of F*s and 0*s which an investor may acquire
should be increased*

McCabe asks how large an amount of F'8 and 0*8 the Council
believes an investor should be permitted to acquire.
S. E. Brown believes the amount might be $200,000 to $250,000.
He also states that an increase in the certificate rate to 1-lA J»r cent
would encourage corporations to buy certificates. Every small increase
in yield encourages buyers.
McCabe understands several members of the Council will discuss
this subject with Secretary of the Treasury Snyder today.
Fleming replies that he anticipates this subject will be discussed
with Secretary of the Treasury Snyder at noon.
depress

McCabe asks whether increasing the limit on F*s and G*s would
on the long term 2-1/2*s.

the market

S. S. Brown does not think so. He believes that most investors
would prefer marketable securities.
McCabe reports that a committee of industrialists favored
increasing the amount of F*s and Q*s which an investor might purchase.
Burgess comments that the bond drive has recently started,
and that it is difficult to show good results. Re believes that liberalizing
the terms on the F*s and 0 fs would be helpfUl.
McCabe thinks there is * real opportunity to sell S's on the
pay roll deduction plan. He believes 25 per cent to 35 per cent of the
employees in plants could be induced to take E's on a pay roll plan.
Williams

states that raising the limits on the F's and

G ’s

would be helpful.
Siymcz-ak asks what is meant by point A in the Council’s answer
to the second item on the agenda as given in the confidential memorandum
of the Council to the Board on April 26, 191*8. He asks whether it means
that as short terms mature now we should
into long terns.

Burgess replies that the Council^ comaent now refers to
savings bonds especially. Part A of the Council's memorandum is a long
term objective to be kept in mind.

-28-

difference

K. E. Brown does not believe there Is any fundamental
between the Council and the Board on this second item of the agenda*

McCabe states that he believes they are in agreement.
WHAT STOLD BE DONS HI THE MOWETAHT AND CJIEDTT FIELD TO COURT32ACT THE INFLATIONARY PRESSURES THAT MAY BE GRZATED BY THE V3M DSFEH3E
PROPOSALS AND THS WORLD AID PROGRAM?
S. E. Brown reads the third itera on the agenda and the answer
which the Council had prepared and submitted in its confidential memorandum
to the Board on April 26, 19h&* Brown states that this is the $6h question,
and the Council has given most of its consideration to this item. The Council
is in unanimous agreement that additional powers should not be granted to the
Board now. In February the Council felt that although its members did not
know what the economic trend would be in the following months, they were
inclined to believe, on the evidence available, that the deflationary forces
were in the ascendancy. At the same time, Eccles and Woodlief Thomas indi
cated that although they did not know what direction the economic trend mi^it
take, they were inclined to believe that on the evidence available, the
inflationary forces were in the ascendancy. Actually, as it developed,
deflationary forces were set in motion and banters were considerably
concerned whether they could prevent a depression. Then came the President's
program. New economic forces may now be set in motion. No one can state
with assurance what direction the economy will take. The Council believes
that to ask Con-ress to raise the reserves or permit special reserves would
have a very injurious effect at a time when it is not apparent which way
"the cat will jump” . Should legislation be passed permitting the Board to
require higher reserves, most banks will increase their reserves so that
they are ready for the maximum which may be required. The Council understands

that V or V? procedures may be used to finance defense. Large amounts of
bank credit may be needed. It may be considered not important that larger
reserve requirements would reduce bank earnings. However, reduced bank
earnings would lessen the ability of banks to build their capital structures.

Increased reserves and reduced bank earnings would also lead some banks to
take loans involving greater risks with higher rates in order to get more
earnings. If interest rates to veterans and small business concerns increase,
the pressure would be on to have government lending agencies make the loans
at lower rates. The result would be that government obligations would have
to be sold to obtain i\inds. Kvery time there is a convention of builders

or real estate dealers now, there is a demand Tor government financing. For
the various reasons which we have indicated, the Council thinks higher
reserve requirements are unwise now. If the inflationary spiral should move
up sharply in the next few months, the Council might be inclined to reopen
the discussion.
Burgess. At the tins (December 31, 192*0) when the Special Report
to the Congress was made by the Board of Governors of the Federal Reserve
System, the Presidents of the Federal Reserve flanks, and the Federal Advisory
Council, it was thought that higher reserve requirements were desirable. But

-29-

the situation was entirely different then from what it is now. kt that
tine there were excess reserves of approximately |6 billion whereas new
there are practically no excess reserves. The level of required reserves
was also lower then than it is now. The Federal Reserve banks bad soallar
holdings of government securities than they have today. The Council believes
that the Board has adequate powers for the present situation. The action
on Christmas I?ve on the open market had a tremendous effect. The amcxint of
what might be terned immobile bank money actually runs now to a considerable
percentage of the funds of banks. Today the only source for capital In banks
is what the banks earn.
Fleming comments that the amount of gold imports this ysar may
not amount to more than half the total gold imports for last year.
Burgess states that Ralph Toung, in his remarks to the Council
yesterday, estiSate^ that gold imports in 19U8 would be about $1.5 billion.
^oods. The action in the open market on Ohristmas 3ve was very
effective. Banks' of the size he represents believo that higher reserves
would be damaging, and they would be against it unless it is imperative.
Re states that for Congress to give the Board the power to raise reserves
would be tantamount to raising the reserves, as it would lead banks to take
steps to prepare themselves in advance.
J. T. Brown believes that this item on the agenda clearlyrelates
to the suggestions already made to Congress on the matter. It would be a
very difficult problem to make an increase in reserves effective with both
member and non-member banks. If an increase in the reserves were not made
applicable to non-members, the difference in reserve requirements would be
very great. He mentions that about one bank in nine in his state is a member
of the Federal Reserve System, and states that he believes everything should
be done to induce banks to join the System. If, under an act of Congress, the
non-member banks were told that they would be compelled practically to double
their reserves, it would definitely antagonize these banks. It migftt start
a serious argument in Congress. Moreover, increasing reserves may drive
■any banks to seek earnings through loans of a character it would be
undesirable for them to make. Ko one seems to favor price controls and
other types of controls over our economy. Attention seems to be centered
on bank reserves. He believes that this represents an effort to shoot a
snow bird with a cannon. No one has any assurance of the direction our
economy will take in the months immediately ahead*
Sgymczak calls attention to the Special Report to the Congress
in 19U0 in which non-members were included*
J* T» Brown believes this is a time for harmony in the economy*
ilealng reads from the recent testimony of Zccles, in which
Heel os asked for an increase of 10 per cent in reserves on aggregate deaand

-30-

deposits and h per cent on time deposits in addition to present requirements*
Sccles mentioned that this increase would give the Board power to increase
bank reserves in the aggregate by a maximum of about $12 billion* Fleming
points out that Eccles also suggested in his testimony adding the special
reserve plan to the proposed increase in cash reserves* In other words,
Eccles requested power to increase the regular reserves and power to require
special reserves as well,

E* E* Brown states that in February, Sccles said he would like
authority to raise reserve requirements If necessary to 25 per cent, 30 per
cent, and 35 per cent, respectively, for country banks, reserve city banks
and central reserve city banks*
McCoy says that his bank has as r^uch due from banks as it has
in reserves, or about U0 per cent. If the reserves are increased, his bank
will sell bonds*
Ssymcaak aska why McCoy's bank should have deposits scattered
over the country.
McCoy replies that the bank’s customers expect different kinds
of service in various parts of the country.
McCabe asks which would hurt more— a special reserve requirement,
or an increase" in orthodox reserves*
Odlin suggests that the Board might find it helpful to quit
looking so closely at charts and examine the real problems of extending
credit in banks* He states that asking which plan the banks prefer is like
asking whether a person would prefer to lose his right leg or his left leg*
Odlin does not believe any increase in reserves is necessary, and he does
not believe that banks are making speculative loans.
Keaper states that he does not know which direction our economy
will take. Dr. Young* s talk yesterday did not indicate a very great
economic upswing this year. He believes that any consideration of reserves
should be confined to cash reserves and not special reserves, and he also
thinks consideration of the whole question of reserves may well be postponed.
Kestper does not like control of securities that a bank may buy, or control
of rates.
Szymczak says that on the matter of rates we are already so
deep in controls that it is hard to get out.
FlUiams thinks a thorough study of reserves— their historical
development and all aspects of the subject— would be enlightening. He
would suggest a postponement of consideration of higher reserves.

Penick believes ths program of the A* B. A. of urging restraint
in credit has bean quite effective. He also believes that to give the Board
power to increase reserves is essentially the same as using the power.

At^pod believes a study of the whole question of reserves should
be made. He thinks the development of reserve requirements has been a hap
hazard one. The whole development of reserves and the percentages required
do not make sense.
Sayncaak is inclined to agree and says a Federal Reserve study
is now being"aade.
t

Atwood. Why should we add 10 por cent to something that does not
sake sense?
E. E. Brown states that there is a wide difference of opinion
on the whole question of reserves. He asks why there should be an increase
in reserves on tine deposits from 6 per cent to 10 per cent. There is the
problem of competition with the mutual savings banks.
tevncaak. The simplicity of increasing the time deposit
requirement was the cause for the suggested increase.
McCabe. The president of a large bank has said that the super
visory authorities are not on the job in watching loans more critically*
Fleqing thinks the examiners have bean more critical in their
examinations.
Ssypczak« It is probably not possible to have an examiner
consider a loan with inflation in mind. Just what is an inflationary loan?
McCabe says that he is much concerned ewer this discussion and
the wide difference of opinion between the Council and the Board on the
matter. He has only been a member of the Board of Governors about twelve
days. The Board has made a recommendation to Congress, and the Council
thinks the recommendation is wrong. McCabe states that he will be called
to testify in Congress, and they will ask him, knowing the viewpoints of
the Council and tho Board, nv7hat is your (McCabe •s) viewpoint?11 If we
as suae the Inflationary spiral is up U per cent or 5 P^r cent, what position
should he take before Congress? McCabe asks the Council’s advice. He states
that the Administration is asking for controls, and anoth<ar group opposes
controls* What should he (McCabe) suggest? He believes Ralph Young’s
estimate shows deposits will increase $8 billion to $10 billion during the
balance of the year from the low point this year,
S. E. Brown states that the question of the direction of our
economic trend will depend considerably on agricultural prices. The
question of the direction of our economy is a delicate one, but it is

•32

possible that the peak of the inflation nay be over. However, if we
have tremendous expenditures for guns, movements of ground troops, and
similar items, we may have a strong inflationary development, E, S, Brown
does not accept KcCabe's assumptions.
i?le^ing states that he agrees with Senator Taft that the
economic trend is often not as bad as the estimates had indicated It might
be. He states that the effect of an Inflow of gold of perhaps $1*5 billion
in 19U8 can be offset.
Burgess states that the Open Market Committee may offset gold
imports by selling United States securities or letting them run off without
replacement.
Fleming. Even with increased expenditures, the budget may be
balanced, the deposit increase this year may not be over 3 per cent. His
bank has large swings, as all banks have, and they must take care of these
swings. He mentions that the estimate of Y/oodlief Thomas on the possible
increase in loans for the first quarter was considerably larger than the
increase which actually took place. Fleming says that if he saw anything
in the situation that would seriously affect the economy, he would favor
higher reserves. However, he does not see any need for these powers now.
Ssymcaak. The Council has given the Board nothing in writing
which the Board can send to Congress in connection with mortgage credit.
B. S. Brown reports that he testified regarding mortgage credit
before the Tobey Comid.ttee and the Joint Committee on the Economic Report.
Fleming reports that he

gave similar testimony.

Ssymcaak also wishes the Council might speak on consumer credit.

Fleming says the trouble with consumer credit is not with the
banks. He believes it was wrong to have the testimony by the Board before
the Joint Committee on the Economic Report on April 13f I9 I1B, in connection
with higher reserves, as the testimony was given just before the new
Chairman was confirmed, and placed him in an unfortunate postion.
Ssymcsak mentions that the Board had prepared a statement for
Congress last Kovemlxsr, and the new Chairman would have been in the same
position regardless of the statement before the Joint Committee on the
Economic Report on April 13, 19l$Odlin believes that too much emphasis is being placed on the
need for higher reserves when other factors are the basic cause of our
trouble.
Atwood asks whether McCabe would find it desirable to have a
study made of! t ie over-all question of reserves.

-33-

HcCabe reports that he is sending a letter to the Federal
Reserve banks, asking for their opinions on the natter of reserve require
ments, just as he asked the Council today.
Szymczak. There was no desire on the part of the Board of
3ovemors to appear before the Joint Committee on the Economic Report, but
the Board was asked to make a statement.
Fleming says that he has sympathy with ttcCabe on his problem.
Burgess states that he appreciates the position in which McCabe
has been placed, and suggests that there are three problems: (1) an economic
problem; (2) a political problem in Congress; and (3) a political problem
with banks. The Chairman of the Board of Governors is really the titular
head of the banking system of this country. If all of us work together, the
problem that confronts us can be met. The last time it was considered, we
went with a joint recommendation. Burgess believes that the weak argument
of the Board is their argument that they have no powers. He thinks that the
argument may arise because of the feeling during the war that the government
bond market was untouchable. The open market action in December was powerful
medicine, and it did not hurt the government bond market. From the point
of view of the economic problem, nothing would be lost by postponing action.
From the standpoint of the political problem in Congress, a proposal to
increase reserves would almost certainly lead to much argument. In connection
with the third probleo, the political problem with banks, the Chairman of the
Board might jeopardise his leadership. It is desirable for the Board to
support Eccles on short term rates and also to support him in his views on
mortgage credit. However, in connection with the proposals Sccles made on
reserve requirements, McCabe may say that it is a highly controversial
subject among bankers and economists, and he would like to defer action on
it until he has given the subject thorough consideration.
E. S. Brown comments that in Mexico where banks are subject to
a 50 per cent cash reserve, they have had inflation and they have a severe
recession now. A decline, even to 99j in the government bond market,
would have a tremendous effect, and a drop to 90 might seriously injure
the banking system. A small change in government bond prices would have an
important effect. E. E. Brown believes McCabe can state that he thinks
sufficient powers are in the hands of the Board now, and that he desires
to give more study to the particular question of reserves.
Odlin. Credit arises out of the demand of the people for the
credit. If banks do not extend credit, the prospective borrowers will
obtain it from the government, and it will be more inflationary than bank
credit.
Clayton asks, in relation to Odlin*s comment, whether it is
hopeless ever to ask for a control of credit. He says someone has stated
that we should not have higher reserves if we have no expansion, and

-3U-

sooeone else has said if we do expand, we should not have higher reSGIs one to Judge from these comments that either way, no higher reserves
are advisable?
E, E. Brown. If there are very large military expenditures
for large numbers of ground troops, then it may be necessary to prohibit
the manufacture of goods of various kinds in order to maintain an orderly
economy. A control of credit might be advocated if there were a large
speculative expansion of credit in banks*
McCabe expressed the appreciation of the Board for the Council’s
viewpoint on ihe various questions on the agenda. He hopes that the
Executive Committee of the Council will be ready to meet on short notice,
if necessary, with the Board.

S.
E. Brown replies that the Executive Committee can meet wit
the Board upon a few days* notice.
The meeting adjourned at 12:50 p.m«

(It was agreeable both to the members of the
Council and the Board to have the next
meeting on September 19-21, 19U8.)

The Council reconvened in Room 65L of the
Mayflower Hotel at 3:00 p*cu on April 27,
19U3. All members of the Council were
present, except l!r. Penick, who had plane
reservations requiring his departure.
There was a discussion on the advisability of giving the Board
of Governors a written statement of the Council’s viewpoint on the present
situation in the financing of housing and real estate. The Board of
Governors had indicated that a statement from the Council would be appre
ciated, and might be sent to the proper Committees of Congress by the Board
in support of the Board's position on these matters,
t

After some discussion, votes were taken on the following questions
(1) Does the Council wish to make any statement at
this time?
All members of the Council but one were in favor
of making a statement.
(2) If the Council desires to make a statement,
should the Council associate Itself with the
Board's viewpoint?
All members of the Council were in favor of
associating the Council with the statement of
Chairman Eccles on housing finance before the
Joint Committee on the Economic Report on
November 25, 19h7.
(3) Does the Council favor making a statement inde
pendent of the Board?
In view of the Council's vote on question (2),
this question proved unnecessary.
The Council asked Burgess to draw up a statement which the Board
might present to Congress as the Council's viewpoint*
The Council then adopted the following resolution which was
sent with the letter below to the Secretary of the Board of Governors:
Resolution Adopted by the Federal Advisory Council
on
April 27, 19U8
The Board of Governors has asked the judgment of the
Council on the housing situation and on the position
taken by the Board on the financing of housing programs.
The Council is in general agreement with the analysis
of the problem stated by Mr. Eccles before the Joint
Committee on the Economic Report on November 25, 19U7*

-36The desired objective Is to build as rapidly as possible the
housing veterana and others so urgently need of sound quality, and at
prices they can afford to pay and retain ownership. The capacity of the
building industry is limited. Atteapts to forco building beyond that
capacity by excessive loans or unsound subsidies lead to shortages of labor
and materials, higher prices, and poor quality construction by speculative
and unqualified builders. We approve the specific suggestions on housing
legislation now before Congress intho Board* s letter of April 5, to Senator
Tobey.
Washington, D. C.
* * * * * *

April

30, 19U8

Mr. S. H« Carpenter, Secretary
Board of lovemors of the Federal Reserve Systea
Washington 25, D. C.
Dear Mr. Carpenter:
You will please find enclosed a Resolution of the Federal
Advisory Council with reference to the financing of housing.
The Board of Governors may feel free to use this Resolution
in connection with the hearings of any Congressional Coraaittee on this
subject.
Very sincerely yours,

Herbert V* Prochnow
Secretary

The nesting adjourned at U:00 p.m#

Full text of Minutes and Recommendations of the Federal Advisory Council : Meeting documents, April 25-27, 1948, Box 4, Volume 1946-1950

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