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MINUTES OF THE JOINT CONFERENCE OF THE EXECUTIVE COMMITTEE OF THE FEDERAL ADVISORY COUNCIL, MEMBERS OF THE BOARD OF GOVERNORS, AND REPRESENTATIVES OF THE BOARD STAFF OF THE FEDERAL RESERVE SYSTEM August 1, 1950 At 10:50 A.M. a joint conference of the Executive Committee of the Federal Advi sory Council, the Board of Governors of the Federal Reserve System, and representatives of the Board Staff was held in the Federal Reserve Building, Washington, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Thomas B. McCabe; Governor Eccles; Messrs. Winfield W. Riefler, Assist ant to the Chairman; Woodlief Thomas, Economic Advisor to the Board; and Elliott Thurston, Assistant to the Board. Present: Members of the Executive Committee of the Federal Advisory Council: Mr. Edward E. Brown, President; Messrs. N. Baxter Jackson, Frederic A. Potts, Sidney B. Congdon, and Herbert V. Prochnow, Secretary. Absent: Mr. Robert V. Fleming. The Executive Committee was informed that the technical staff of the Joint Com mittee on the Economic Report (Senator O’Mahoney’s committee) is considering various proposals relating to taxation, government financing, bank credit, consumer loans, mort gage financing and bank reserve requirements, including the special reserve plan. The Board Staff had prepared a preliminary draft of a memorandum on “Fiscal and Credit Policies in Present Emergency”, dealing with the above subjects. The final draft of this Staff memorandum is to be sent to the Joint Committee on the Economic Report. The preliminary draft of the Staff memorandum was discussed at length and an opportunity was given the Executive Committee to make suggestions and to recommend changes. For example, the Executive Committee strongly recommended that in the dis cussion on excess profits taxes, the Staff memorandum should stress not only the tendency to wasteful expenditures and extravagances which these taxes encourage, but also that these taxes are inflationary unless they are accompanied by wage and salary controls. In connection with the discussion of a special reserve plan, the Executive Committee recommended that the Staff memorandum omit any specific reference to the Board’s approval of this plan in the past, so that there could be no implication that the Board now supported the special reserve proposal. The Staff memorandum listed various dis advantages of the special reserve plan. Chairman McCabe also stated that on the ques tion of reserves his view is that it would be better for Congress to mark time on the matter until the situation develops further and the Treasury financing program is more definite. Some discussion also took place about the possibility of working out a program of voluntary cooperation by banks, insurance companies, investment bankers and others, for restricting the extension of credit to the needs of those engaged in essential produc tion. Such cooperation might be arranged through the American Bankers Association and other associations. In addition, there was some discussion of the possibility of the establishment of so-called capital issues committees to provide a means of voluntary cooperation for re- 22 stricting credit of this type in a way that would benefit the general economy. In order that voluntary cooperation by banks making term loans, insurance companies and others might not be considered in violation of the Anti-Trust laws, it was very informally sug gested by a representative of the Attorney General’s office that Federal authorities might possibly approve such voluntary cooperation if the Federal Reserve banks had represent atives present at meetings of bankers and others discussing whether particular issues met this test. Chairman McCabe stated that it would be helpful in the present situation if the Executive Committee would be prepared to meet monthly with him, except in the months when the Council meets. The Executive Committee expressed its willingness to meet on this schedule. The meeting adjourned at 4:15 P.M. HERBERT V. PROCHNOW Secretary. 23 FEDERAL ADVISORY COUNCIL C o n fid e n tia l Summary o f a M eeting o f th e E x e cu tiv e Committee o f th e C o u n cil, members o f th e B oard o f G overnors and re p re s e n ta tiv e s o f th e B oard S ta f f a t 10:50 A.M. in th e F e d e ra l R eserve B u ild in g , W ashington, D. C. on A ugust 1 , 1950. On Ju ly 31, Chairm an McCabe telep h o n ed P re sid e n t Brown s ta tin g th a t i t vould be h e lp fu l i f th e E x e c u tiv e Committee o f th e C ouncil could meet w ith him in W ashington th e fo llo w in g m orning, August 1, to d isc u ss banking and fiscal problem s t h a t had a r is e n o u t o f th e Korean s itu a tio n . P resid en t Brown, M essrs. Jac k so n , P o tts and Congdon and th e S e c re ta ry vere p re se n t, Mr. F lem ing b e in g out o f th e c it y and unable to a tte n d . Chairman McCabe, G overnor E c c le s and M essrs. R ie f le r , Thomas and Thurston participated in th e in fo rm a l d is c u s s io n s w hich la s te d throughout th e day. The E x ecu tiv e Com m ittee was inform ed t h a t th e te c h n ic a l s t a f f o f th e Joint Committee on th e Economic R eport (S en a to r ©‘M ahoney's com m ittee) is considering v a rio u s p ro p o s a ls r e l a t i n g to ta x a tio n , government fin a n c in g , bank c re d it, consum er lo a n s , m ortgage fin a n c in g and bank re se rv e re q u ire ments, in c lu d in g th e s p e c ia l re s e rv e p la n . The Board S ta f f had p rep ared a prelim inary d r a f t o f a memorandum on " F is c a l and C red it P o lic ie s in P resen t Emergency", d e a lin g w ith th e above s u b je c ts . The f-Trial d r a f t of t h i s S ta f f memorandum is to be s e n t to th e J o in t Committee on th e Economic R eport. The p re lim in a ry d r a f t o f th e S t a f f memorandum was d isc u sse d a t len g th and an o p p o rtu n ity was g iv en th e E x e c u tiv e Committee to make su g g estio n s and recommend ch an g es. F o r exam ple, th e E x ecu tiv e Committee s tro n g ly recommended t h a t in th e d is c u s s io n on ex ce ss p r o f it s ta x e s , th e S ta f f memorandum should s tr e s s n o t o n ly th e ten d en cy to w a ste fu l ex p en d itu res and extravagances w hich th e s e ta x e s en co u rag e, b u t a ls o th a t th e se ta x e s a re in fla tio n a ry u n le s s th e y a re accom panied by wage and s a la ry c o n tro ls . In co n n ectio n w ith th e d is c u s s io n o f a s p e c ia l re se rv e p la n , th e Executive Committee recommended t h a t th e S t a f f memorandum omit any s p e c ific reference to th e B o a rd ’s a p p ro v a l o f t h i s p la n in th e p a s t, so th a t th e re could be no im p lic a tio n t h a t th e B oard now su p p o rted th e s p e c ia l re se rv e proposal. The S ta f f memorandum l i s t e d v a rio u s d isa d v an ta g e s o f th e s p e c ia l reserve p la n . Chairm an McCabe a ls o s ta te d t h a t on th e q u e stio n o f re se rv e s hie view is th a t i t would be b e t t e r f o r C ongress to mark tim e on th e m a tte r u n til th e s itu a tio n d ev elo p s f u r th e r and th e T rea su ry fin a n c in g program is more d e f in ite . Some d is c u s s io n a ls o to o k p la c e abo ut th e p o s s i b i l i t y o f w orking out a Program of v o lu n ta ry c o o p e ra tio n by b an k s, in su ra n c e com panies, investm ent bankers and o th e r s , f o r r e s t r i c t i n g th e e x te n sio n o f c r e d it to th e needs o f those engaged in e s s e n ti a l p ro d u c tio n . Such c o o p e ra tio n m ight be arran g ed through th e Am erican B ankers A s s o c ia tio n and o th e r a s s o c ia tio n s . In a d d itio n , th e r e was some d is c u s s io n o f th e p o s s i b il it y of th e establishm ent o f s o -c a lle d c a p i ta l is s u e s com m ittees to p ro v id e a means of voluntary c o o p e ra tio n f o r r e s t r i c t i n g c r e d it o f t h i s ty p e in a way th a t vould b e n e fit th e g e n e ra l economy. In o rd e r t h a t v o lu n ta ry co o p e ratio n by ■banks making term loans, insurance companies and others might not be considered in violation of the Anti-Trust lavs, it vas very informally suggested "by a representative of the Attorney General’s office that Federal authorities might possibly approve such voluntary cooperation if the Federal Be serve ■banks had representatives present at meetings of "bankers and others dis cussing vhether particular issues met this test. Chairman McCabe stated that it vould be helpful in the present situa tion if the Executive Committee vould be prepared to meet monthly vith him, except in the months vhen the Council meets. The Executive Committee ex pressed its villingness to meet on this schedule. The meeting adjourned at 4:15 P.M. Herbert V. Prochnov, Secretary. August 2 , 1950. r VOLUNTARY CONTROL OF CREDIT IN THE PRESENT EMERGENCY In the p re s e n t em ergency th e re is a g e n e ra l re c o g n itio n th a t in d u s trie s vhose production is e s s e n ti a l have a p r io r r ig h t to th e c re d it they re q u ire , that sp ec u la tiv e a c t i v i t i e s sh o u ld be c u r ta ile d and th a t every e f f o r t should be made to p re v e n t th e developm ent o f a s e rio u s in f la tio n a ry tre n d which might threaten our n a tio n a l w e lfa re . To accom plish th e se o b je c tiv e s i t may be necessary to r e s t r i c t c r e d it in v a rio u s a re a s of th e economy. The lim ita tio n of c re d it to e s s e n ti a l needs may be b y v o lu n ta ry o r com pulsory m ethods, o r by a combination o f b o th . We a re engaged in a s tru g g le to m a in ta in fre e in s titu tio n s in th e w orld. If our dom estic p o lic ie s a re t o be c o n s is te n t w ith our w orld o b je c tiv e s , every effo rt should f i r s t be made th ro u g h v o lu n ta ry c o o p eratio n to pro v id e th e credit which ou r e s s e n ti a l in d u s tr ie s r e q u ire , to c u r t a i l s p e c u la tiv e and prom otional a c t i v i t i e s , and to p re v e n t th e f u r th e r grow th of in f la tio n a ry facto rs. The Board o f G overnors o f th e F e d e ra l K eserve System would be h e lp fu l in fu rth e rin g v o lu n ta ry c o o p e ra tio n f o r th e r e s t r i c t i o n o f c r e d it to e sse n tia l needs by in d ic a tin g t o such groups as th e American Bankers A ssociation, A s s o c ia tio n o f R eserve C ity B ankers, Investm ent Bankers A ssociation, Am erican F in an ce C onference and th e s ta te com m issioners of banking, what ty p e s o f c r e d it sh o u ld be deemed d e s ira b le in th e p re se n t emergency. These groups co u ld p re p a re "e d u c a tio n a l" program s which would fam iliarize t h e i r members w ith th e ty p e s o f c r e d it w hich a re a t p re s e n t to be r e s tr ic te d . The r e s p e c tiv e groups cou ld keep th e Board o f Governors f u lly advised of th e s e p ro g ram s. However, to a s s u re t h a t c r e d it extended f o r lon g -term loan s and bond and stock is s u e s is r e s t r i c t e d to p ro d u c tiv e ch an n els, some s p e c ia l form of 2. cooperation among banks making term loans in the larger financial centers, insurance companies, and stock and bond houses, would seem highly desirable. This cooperation might take the form of so-called "capital issues committees/’ whose function i t would be to restrict capital issues to those that would b en efit the n ation al economy. It is quite certa in that such committees for voluntary cooperation in the present emergency w ill not be formed unless some assurance is offered of freedom from prosecution under the Anti-Trust laws. Meetings of c a p ita l issu es committees might be held at the Federal Reserve Banks in the larger fin a n cia l centers. Representatives of the Federal Reserve Banks could be present when the question was being discussed of whether p articu lar c a p ita l issu es would benefit the national economy. If the financing of e ss e n tia l production is to be expeditious and effective, voluntary such committees would have to have a high degree of autonomy in acting within the scope o f r e la tiv e ly broad sanctions from some governmental agency such as the Board of Governors actin g through the Federal Reserve Banks. In other words, the conclusions o f such committees would be ineffective if they must await reference to Washington for Federal Reserve Board approval or to the Department of J u stice or the Federal Trade Commission in respect of exemption from the A nti-Trust and Fair Trade laws. August 3, 19 50
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