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M IN U T E S OF M E E T IN G OF TH E FED ER A L A D V IS O R Y C O U N C IL December 3, 1944 The fourth statutory meeting of the Federal Advisory Council for 1944 was convened in Room 1032 of the Mayflower Hotel, Washington, D. C., on Sunday, December 3, 1944, at 2:10 P.M., the Vice President, Mr. Spencer, in the chair: Present: District No. 1 Mr. Charles E. Spencer, Jr. District No. 2 Mr. John C. Traphagen District No. 3 Mr. William Fulton Kurtz District No. 4 Mr. B. G. Huntington District No. 5 Mr. Robert V. Fleming District No. 6 Mr. Keehn W. Berry District No. 7 Mr. Walter S. McLucas (Alternate for Mr. Edward E. Brown) District No. 8 Mr. Ralph C. Gifford Mr. Lyman E. Wakefield District No. 9 District No. 10 Mr. A. E. Bradshaw Mr. Ed H. Winton District No. 11 Mr. George M. Wallace District No. 12 Secretary Mr. Walter Lichtenstein The minutes of the meeting of the Council of September 17-18, 1944, a copy of which had been previously sent to each member of the Council, were approved. It was decided to ask the Board of Governors about the present status of the bill dealing with Regulation Q. At the suggestion of Mr. Wallace, it was decided to ask the Board of Governors to have the term “loan” in the pending bill to amend Section 13b of the Federal Reserve Act defined as follows: “The term ‘loan’ as used herein shall be construed as referring to a loan, discount or advance, including participation therein, and the term ‘guar antee’ as used herein shall be construed as including a commitment to make such guarantee.” The Board of Governors had submitted to the Council the suggestion that it discuss the criticisms appearing in Congress as to the earnings of banks on the government debt. A lengthy discussion took place in which the Council formulated its views somewhat as follows: The Council feels if anything is wrong in connection with the growing predominance of Government securities in bank earnings, it is that there is a certain maldistribution which, however, is due to the methods of the Treasury. In addition, it should be pointed out that the published figures of bank capital are nearly always considerably lower than they are in actual fact. Furthermore, the limit of bank earnings is in sight, due to the taxation on excess profits. Finally, it should be pointed out that the capital structure of banks is still inadequate and the increase in dividends paid by banks is less than in almost any other line of business or industry. The Council also expressed the view that any increase in bank dividends should be on the most conservative basis. The meeting adjourned at 4:25 P.M. W ALTER 6 L IC H T E N S T E IN , S e c re ta ry . M IN U T E S OF M E E T IN G OF TH E FED ER A L A D V IS O R Y C O U N C IL December 4, 1944 At 10:10 A.M., the Federal Advisory Council reconvened in the Board Room of the Federal Reserve Building, Washington, D. C., the Vice President, Mr. Spencer, in the chair. Present: Mr. Charles E. Spencer, Jr., Vice President; Messrs. John C. Traphagen, William Fulton Kurtz, B. G. Huntington, Robert V. Fleming, Keehn W. Berry, Walter S. McLucas, Ralph C. Gifford, Lyman E. Wakefield, A. E. Bradshaw, Ed H. Winton, George M. Wallace, and Walter Lichtenstein, Secretary. There was a discussion of the program agreed upon at yesterday’s meeting. The meeting adjourned at 10:15 A.M. WALTER LICHTENSTEIN, Secretary. 7 M IN U T E S O F JO IN T C O N F E R E N C E O F T H E F E D E R A L A D V IS O R Y C O U N C IL AND TH E BOARD OF GO VERNO RS O F T H E FE D E R A L R E SE R V E SY ST E M December 4, 1944 At 10:30 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 Marriner S. Eccles; Vice Chairman Ronald Ransom; Governors M. S. Szymczak, John K. McKee, and Ernest G. Draper; also, Messrs. Lawrence Clayton, Assistant to the Chairman; Elliott Thurston, Special Assistant to the Chairman; Chester Morrill, Secretary of the Board of Governors; S. R. Carpenter and Bray Hammond, Assistant Secretaries; Walter Wyatt, General Counsel; J. P. Dreibelbis, General Attorney; George B. Vest, Assistant General Attorney; E. A. Goldenweiser, Director, Division of Research and Statistics; Leo H. Paulger, Director, Division of Examinations; Edward L. Smead, Director, Division of Bank Operations; Carl E. Parry, Director, Division of Secur ity Loans, and Robert F. Leonard, Director, Division of Personnel Administration. Present: Members of the Federal Advisory Council: Mr. Charles E. Spencer, Jr., Vice President; Messrs. John C. Traphagen, William Fulton Kurtz, B. G. Huntington, Robert V. Fleming, Keehn W. Berry, Walter S. McLucas, Ralph C. Gifford, Lyman E. Wakefield, A. E. Bradshaw, Ed H. Winton, George M. Wallace, and Walter Lichtenstein, Secretary. Governor Ransom discussed the situation in respect to Regulation Q and stated that hearings were likely to be held on the Maybank Bill by the Senate Committee on Banking and Currency. In respect of the ratio of gold to member bank reserve balances and Federal Reserve notes in circulation, Chairman Eccles stated that legislation would be needed after the first of the year. He argued that gold reserves are not really needed at all and other cen tral banks do not have any such requirements at this time. In the case of the Bank of England and the Bank of Canada, all reserve requirements have been suspended. He also argued that the provision permitting Federal Reserve banks to deposit bonds as a guar anty for Federal Reserve notes ought to be made permanent. In respect to the amendment to Section 13b, Chairman Eccles stated since the Smaller War Plants Bill had been enacted into law, he doubted whether Congress would take any action in respect to the proposed amendment to Section 13b of the Federal Reserve Act. There was general agreement by the Council and the Board of Governors that in general banks should invest in short-term government securities and that on the whole it would be desirable that the earnings of banks should not increase largely at this time. The meeting adjourned at 12:30 P.M. WALTER LICHTENSTEIN, Secretary. 8 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL December 4,1944 At 12:35 P.M ., the Federal Advisory Council reconvened in the Board Room of the Federal Reserve Building, Washington, D. C., the Vice President, Mr. Spencer, in the chair. Present: Mr. Charles E. Spencer, Jr., Vice President; Messrs. John C. Traphagen, William Fulton Kurtz, B. G. Huntington, Robert V. Fleming, Keehn W. Berry, Walter S. McLucas, Ralph C. Gifford, Lyman E. Wakefield, A. E. Bradshaw, Ed H. Winton, George M . Wallace, and Walter Lichtenstein, Secretary. Dr. Goldenweiser appeared before the Council and gave an account of some of the economic forces, notably the monetary ones, which are likely to prevail after the war. The meeting adjourned at 1:00 P.M. WALTER LICHTENSTEIN, Secretary. 9 NOTE: Th is transcript of the Secretary*s notes is not to ft regarded as complete or necessarily e n tire ly acc u rate. The transcript should be considered as being s t r i c t l y for the sole use of the members of the F ederal Advisory Council. W. L . Secretary* s notes on meeting of the Federal Ad visory C ou n cil on December 3 , 1 9 4 4 , at 2 :1 0 P . 51., in Room 1032 o f the Mayflower H o te l, Washington, D . C A ll members of the F ederal Advisory Council rere p re s e n t, except that M r. Walter S . McLucas served as a lte r n a t e fo r M r. Edward E . Bro^n. As Mr. Brown was not p r e s e n t , the V ice President of the Council, Mr. Charles S . Spencer, J r . , p resided. Mr. Winton was not present when the meeting began but a rr iv e d a t 3 : 1 0 P . M. The minutes o f the meeting o f the Council of S e p te m b e r 17-18 19U , copies of -»hich had b^en p rev io u sly sent to the members of the Council, vrere approved. REGULATION Q It was decided to ask the Board what the present status was. LIBERALIZATION OF 13B W allace. The language d e fin in g the terra "loan* should be the sane as i t appears in the V lo a n s . Spencer. I t might be w e ll to present to the Board the sug gestion made by Mr. W a lla c e , re ad in g as fo llo w s : "The term fl o n n l as u se d h erein s h a ll be construed as re fe rr in g to a l o a n , disco unt or advance, in clu din g p articip atio n t h e r e i n , and the term * guarantee* as used herein shall be construed as in c lu d in g a comm‘ tment to make such g u a r a n t e e .” It W':s agreed to discu ss t h is matter with the Board. iLg "A'iNIHGS OH GOV :RNM£MT SECURITIES Berry re'td a memorandum b e a rin g on the is s u e of Government curl lien and he pleads that long-term bonds (f i v e years and more) -2- cihoul'^ be issued to the u blic and short-t^rm loans restricted to banks. Fleming says the Treasury seems to want a lo^er rate than at Wallace states that at the last drive three-fifths of the sales pr©5»®nt. tere bonds but about S5Q m illion were bought on which premiums had to be paid to dealers and others, Fleming says insurance companies can buy for about %2 billion in new *noney each y e a r. Corporations w ill sell their sevon-eighths and piailar holdings and these, therefore, ultimately, w ill have to be taken up by the banks. Traphagen not sell readily. Kurtz says cor:x>rations w ill not buy bonds which they can says in h is area corporations are not buying bonds. Berry. I f one and one-quarter per cent paper were increased in volume, this would probably go to the smaller banks and thus increase the earnings of such sm aller banks and take the holdings out of the banks in the larger centers. In other words, the smaller banks should be given a better chance than they have at present. Snencer r a is e s the question whether the Treasury can do a refunding job at th is tim e. ^ a & e f ie l d . There should not be any effort made to refund short-term se c u ritie s such as b i l l s and certificates. These short-term securities enable banks to invest their reserve funds, and it giv°s them a little return and a t the same time maintains their liquidity. It gives the Treasury %LQ b i l l i o n at a very low rate. Small banks should buy the two per cent bonds and pay a premium i f necessary. K urtz. In the Third D is t r ic t small banks have actually bought ao^e short-term s e c u r itie s than have the big banks. Berry. Berry says a program ought to be developed which would distri bute earnings better than they are distributed at present. f e n c e r wants to know i f i t i s n 't true that if banks get into the excess p ro fit^ bracket whether they w ill not prefer smaller earnings on account of the ^ho le tax s it u a t io n . Wallace thinks at the present time the program should not be disturbed for i t would be very undesirable to have the average rate of interest which the Government pays increased. f a k e fle ld says that there would be no advantage that he can see -3 - ln refunding b i l l s and c e r t i f i c a t e s . I t is a t th is tim e th a t Mr. '"into n jo in e d the m eeting. y in ton. There was too much short-term financing a feTrr months *.to but that has probably come to a conclusion. He believes the Treasury right in its program and it is good to have the short-term financing it gives the banks more l i q u i d i t y . Spencer proposes the second question asked by the Board — whether short-term debt should be refunded. Kurtz states that on the whole the Council thinks i t better to iait with any refunding u n t i l the situation has s ta b iliz e d . He does not think this is the time to try any refunding. Traphagen believes the Government must keep the service on the debt lo'' as possible and he questions the wisdom of refunding at this time ev n i f it could be done. He moves that the answer to the question raised by the Board be nNon , to v hich Fleming adds that the Government should sell as many long-term s e c u r it ie s to the public as possible but that there should not be any r e fu n d in g . There is general agreement to this proposal. Wakefield says y^hen people begin to spend and cash in their bonds the banks i l l have tc take over and th^n banks should try to have s ”>uch of short-term s e c u r itie s a t lo r rates as possible because otherwise b>.nk earnings *’i l l increase and there would be a g itatio n to have the Govtrnaent take over the v-hole ban kin g system. Berry wants medium-term s e c u r it ie s to go to small b a n ks. Spencer proposes the second question asked by the Board — whether a larger p o rtio n of the earn in g s of banks should be r e ta in e d for additions to c a p it a l and surplus r a th e r than p a id out in increased dividends. Kurtz p o in ts out that in c r e a s e in earn in gs since 19 40 was only Der cent as a g a in s t 1 0 0 per cent in crease in d e p o s its . D iv iden ds actually in that p e r io d went down 1 per ce n t. Taxes went up 10 0 per cent *hile salaries and wages v?ent up 22 oer c e n t. He does not th in k the allocation of s e c u r it ie s i s r e a l l y very b a d . He givns the fo llo w in g table: 23—1/2 (Amounts in thousands o f d o lla rs ) 1940 210,000 100.000 823,000 429, o o o Set Ramings 402,000 Dividends Tax#*s Salaries 400.000 "•P.Gov’ ts. 1 4 , 1941 1942 418,000 1943 496,000 208,000 c1 p /? 3 .5 203,000 -1 211,000 149.000 200,000 129 ,000 487,000 470.000 426,000 48 , 182,000 /?.25 25 , 408,000 ,000 17,753 ?a k e f ield says there is a great danger t o the banks in the moveby Patman. The basic result of this would be a control til c r e d i t by the Government and thereby ultimately ” 11 corporations °\ individuals would be subject to a r ig id Government control. He believes the A# 5* A* should devote i t s e l f to a campaign of education to show the iaplicatioas inherent in the control of credit by the Government and the dang®* there would be in a costless financing of tho war. t in augurated Kurtz replies that he believes there was more danger of such a .jevelopnent in the adm inistration of Andrew Jackson than there is now. Wakefield said a beginning of the movement was made with Regula tion TV# Eccles wanted s e le c tiv e credit control which would really mean complete governmental c o n tro l. The Council fe e ls i f anything is wrong in connection with the growing predominance of Government securities in bank earnings, it is that there is a certain m aldistribu tio n ^ h ic h , however, it? due to the sethods of the Treasury. In a d d it io n , i t should be pointed out that the published figures of bank c a p it a l are nearly always considerably lower than they are in actual f a c t . Furthermore, the limit of bank earnings is in sight due to the taxation on excess p r o fit s . Finally, it should be Pointed out that the c a p ita l structure of banks is s t ill inadequate and the increase in dividends p a id by banks is less than in almost any other line of business or in d u s try . The Council b e lie v e s any increase in bank dividends should be on a most conservative b a s i s . The question should anything be done now is really answered in the t^o preceding paragraphs# This is certainly not the time to "rock the bo at". The war s it u a tio n is s t i l l such that it is too early to try tc make any changes in the machinery at this time. DECLINE OF THE RATIO OF GOLD TO MTiMBER BANKS RESERVE BALANCES AND Plp-^L RgSSRVf; NOTES IN CIRCULATION It was decided to discuss th is matter with the Board. The meeting adjourned at 4,2?5 P# M. -5The Council reconvened in the Board Room of the Federal Peserve Ruilding, at 10s 10 A . M , , on December 4 , 19 LL. A ll members of the Council were present, exce >t that Mr. Walter S , McLucas repre sented Mr, E , E , Brown, The VicePresident of the Council, Mr, Charles E. Spencer, J r . , presided. There was a discussion of the program agreed upon at yesterday1s aeeting. The meetinp adjourned at 1 0 :1 5 A , M, -6 - At 1 0 :3 0 A . M ., the Council held a joint meeting with the Board of Governors of the Federal Re serve System. A ll members o f Council were present except that Mr. McLucas represented Mr. Brovm. The Vice P resident of the C o u n c il, Mr. Charles E. S p e n c e r ,J r ., p re s id e d . The fo llo w in g members of the Board of governors were p re sen t: Chairman Eccles; Vice Chairman Ransom; Governors Szymczak, McKee, and Draper; a l s o , M essrs. Clayton, Thurrton, M orrill, Carpenter, Bray Hammond (Assistant Secretary), G oldenw eiser, W yatt, D r e ib e lb is , V est, Smead, P au lg e r, P arry , and Leonard. regulation q Ransom. Hearings are to be begun in the Senate on Thursday. This nay be an attempt to push the B i l l through in this session, as Con gress now is l iv e ly to remain in Washington u n t il at least December 2 0 . The Board -rill try to bring d t n e s s e s in opposition to the B i l l . Congress aidit do one of three t h in g s : (1 ) i t might repeal the prohibition against payment of in te rest; (2 ) i t might s p e c if i c a l l y permit banks to impose ex change charges; (3) permit the Federal Reserve System to administer the provisions of the law. He b e lie v e s the B i l l can be defeated but it de pends entirely as to whether bankers are w illin g to come and stay for the hearings. It is rather im pressive that the A ssociation of Credit Men and 28 of the State Bankers A s s o c ia t io n s , as well as the ABA and the Associa tion of Reserve C ity Bankers are a l l opposed to the repeal of prohibition against interest and perm ission to impose exchange charges. DECLINE OF THE RATIO OF GOLD TO MEMBER BANKS1 RESERVE BALANCES AND FEDERAL P2S7JIYF NOTES 114 CIRCULATION. Eccles states l e g is l a t io n w i l l be needed after the f ir s t of the year. It was agreed unanimously by the Open Market Committee that the only fnnk and open way to correct the situ atio n was by means of le g is la t io n . As far as the gold in the s t a b i l i z a t i o n fund is concerned, this is being reserved to carry out the p rovision o f the Bretton Woods Conference. As a natter of fact gold reserves are not needed at a l l and other central ^anks do not have any such requirem ents. A gold reserve under present conditions is a purely academic m atter. He would p refer to have a ll such reserve requirements suspended as has been done in the case of the Bank of England and in the case o f the Bank o f Canada. I f there i s n 't any correc tion in the s itu a tio n , i t would merely m«°.n that the Federal Reserve System could no longer support the Government bond market and the Federal Reserve System instead of buying bonds would hav^ to s e l l . This would create a v^ry -7- eeriou.C! situation. The provision permitting the Federal Reserve Banks to prosit bond? as a guarantee o f Federal Reserve note s expires on June 30, 19,45. As a matter of f a c t , the permission to do this should be made permanent, as there have not been any e lig ib le b ills for a long time so that unless the provision refe rr e d tc is kept in force there would have to ^ * hundred per cent gold coverage behind the Federal Reserve notes which is utterly impossible at p re se n t. There is more currency outstanding now than can be covered one hundred per cent by gold without taking into ac count the gold coverage required against deposits. A LI 3r?-ALI2ATI0N OF S E C T IO N 13b. Spencer reads the formula presented by Wallace which is given in the minutes of yesterday1e m eeting. Wallace fe e ls that the statement in H .R . 4$0£ is not sufficiently clear and the d e fin itio n of "l o a n " should be made to correspond with the Drovisions in the V lo a n s . means the Siitue rlthout trie the m atters. Re to sta te d Vest thinks the b i l l formula intro duced by Wallace as it would with i t . In drafting b ill he tried to sake it as short as p o s s ib le and so omitted a ll defin itio n s, expecting tint regulations would take c a r e o f these There is no objection to putting in the p ro v isio n suggested by Wallace except that it ''ould mean other doubtful terms would a lso have to be defined. took it for granted that the Board would have the necessary power define the terras of the law though that is not s p e c i f i c a l l y in the B i l l . Eccles says the B i l l is not l ik e l y to come up this session and so it «rili lapse and he does not propose to have it reintroduced in the next Congress. The Sm aller War P lan ts B i l l which has been passed takes care of the matter. I t passed because no one appeared in opposition to i t . It le^ns that probably the so-called b i l l i o n dollar b il l w ill also be enacted into law and the r e su lt w i l l be that the banks w ill meet with direct com petition such as they have not had b e fo r e . The bankers are to blame for this situation, for the ABA opposed the amendment to 13b and consequently there was nothing with which to oppose the Smaller War Plants B ill. Fleming states in fa ir n e s s to the ABA it ought to be pointed out position was taken in the Convention held in 19A3 where a resolu tion -*as passed in opposition a l l forms of guaranteed loans. It proved iapocpible 194-4 Convention to change this position. thet its to get the to M k ::.v^ ihgs on government sec u r ities . Spencer. As he understands i t , refunding means transforming short ens ieb+ into long-term d e b t . At the present time probably no more can be ■done th^jj the Treasury is doing because new money is constantly being re- -8 - volufl*6 McKee asks whether i t ',rould not be possible to increase the total longer—terra s e c u r itie s . Three to four year note? mipht be very help-111' Eccles says there is an erroneous conception in respect to the n?ed of refunding short-term debt. Bank earnings are becoming excessive. 4s a matter of fa c t i t i s n ft a question urgent at this moment, but one which v?ill arise during the postwar period. Fleming. Corporations wanted securities of 7 /8 per cent and wished to b u ild up depreciation reserves in the form of short-term securities which could readily be sold. VTien these securities •are sold by the corporations, the banks w ill have to buy them. 1-1/4 as McKee. More and more anxiety is being shown about short-term debt and i f thr^e to four year notes could be built up funds *’ould be re leased for further short-term borrowing. sue some Fleming says the ABA committee suggested that the Treasury is s e c u r it ie s , but this was refused. 1 -1/4 McKee says the trouble w i l l come when corporations must sell, and he wishes to have the banks in a position where they w ill be able to buy the securities forced in to the market. Eccles disa g ree s as he believes i t would be most dangerous to have the service on the debt increased. As a matter of fa ct, it would be prefer able to have the rate brought down as the British succeeded in doing. McKee feels there should be a better distribution of maturities. Eccles doubts whether business during the reconversion period will sell anything lik e the amount expected. At present industry is carrying all its inventories and p aying operating expenses. I t must, therefore, be assuaed that after the war the corporations w ill have their present inventories paid for and there w i l l not be any need to sell bonds. W ak e field . The problem is not a present one but relates to the welfare of the banking system and o f industry after the war. There is n ’ t any question that there w i l l be gre^t pressure upon Government and business after the war to provide for a very high level of employment. He believes the short—term s e c u r it ie s w il l be sold by cor orations and the banks will have to buy them, and he thinks i t very important that the cost to the Government of se rv ic in g the debt be not increased. Consequently, he re gards it desirable to have as much as possible in short-term securities and if this is done he doubts whether there w ill be any problem. Eccles reads from a statement which he had prepared for the Open Market Committee and the Treasury some months ago. In this statement he points out that past tr ad itio n has been to refund short-term securities £nto long-term ones and thus avoid a pressure for money at an inopportune time. He doubts whether this is necessarily true of a Government which completely controls the money market. I f refunding were to take place now, the interest charge on tlie debt would be incr *; sed and a certain amount of f l e x i b i l i t y i*ould be l o s t . I f the earnings of banks continue to mount, both and the Government T*ill be subject to attack. As a matter of fact, if the banks undertook to hold more and more long-term securities, they ^ould be in greater danger of sufferin g lo s se s . He pointed out that in his speech at Los Angeles, the Secretary of the Treasury predicted that interest rates will not increase; l o ”' rates encourage business and industry. There isn 't any need for a wholesale refunding of short-term debt, for it will merely increase the cost to the taxpayer and also mean mo?’e risk to holders of bonds due to the p o s s i b i l i t y of a change in interest rates. So much for Sr. Morgenthau. Eccles him self be lie v e s that banks should hold as far as possible only b il l s and c e r t if ic a t e s , certainly in so far as these are held against demand d e p o s its . He is sorry to see that banks are now tending to buylonger-term s e c u r it ie s . Wallace thinks people are short-term minded. Ife have not as yet aoproached the B r it is h s it u a t io n . We have only about a third of our debt in short-term, w hile in the ce_se o f Great Britain it amounts to pbout onefc&lf the total. Ha be liev es refunding is not possible at present and that as a matter of fa c t the proportion of short-terms should be increased rather than decreased. Eccles says that banks went for the twos to such an extent that after the last drive the dealers did not have any supply of twos. It is crarious to note that even between drives when the Treasury is drawing down the ~-ar Loan Deposit A ccounts, banks did not sell bonds but actually bought '■'■ends and instead sold -3 b i l l i o n in b i l l s . terry says the B r it is h gave the banks b ills bearing the rate of an-i gave them in s u f f i c ie n t amounts so the banks could pay their over head ini their normal dividend requirements. With u s , the smaller banks cannot meet th ?ir overhead by buying b il l s and certificates and as a result they buy longer-term s e c u r it ie s . 1-1/8 Eccles doubts t h is and believes both larger and smaller banks are *011 taken care o f . Banks should never have been allowed to take any securi ties bearing a h ig h e r rate than 1 -1/2 per cent, but he did admit that the ■rend of bank earnings had not been foreseen. W akefield says excess p r o fit tax is taking care of the situation, wants banks to have short-term securit*'* es because for one thing no one c"!n tell at this time what the s h i f t of deposits mey be. He doubts whether ^ter this drive banks w i l l be very much interested in the twos. McKee says he wishes to make it plain that he is not interested in having the Government provide more earnings for banks, but there should be -10ftnou,-Th variation in maturities to prevent long-term securities from going to too much of a premium. Fccles. As long as you have a rate of 3 /8 anchored, it tends to jail the 7 /8 c e r tific ate s down to 3 /4 because under these circumstances the 7/8 certificates bear a premium. There i s n 't any problem as long as you *aintftin a 3 /8 buying r a te . He believes it would be good policy for the banks at this time tc reduce their service charges and pay their employees sere so that the public would f e e l that the banks are sharing their pros>-rity with the p u b lic. I t might also be well to raise the interest rate on savings. W akefield says he does not believe banks can afford to have their deposits represented by long-term securities and they really cannot afford tc have higher earnings with the result that more and more short-term secur ities will be and should be acquired by the banks. Eccles says he disagrees with the Comptroller of the Currency and the Federal Deposit Insurance Corporation as regards the capital ratio since, after a l l , Governments are the same as cash. With a *300 billion debt represented by bonds held by the p ublic, a declining bond market cannot be permitted, and in consequence the capital coverage in the banks is quite adequate under e x is tin g circum stances. I f cash in banks, Federal Reserve balances, and Governments are deducted from the amount of deposits, the ratio represents about a 40 per cent coverage. This is more than has ever existed before, and b e s id e s , the remainder of the assets are loans far superior to those o f the past* McSee points out that in the future the large depositors will be really the ones to supervise banks fo r they w ill take their deposits ?;hereever they are assured o f the best cap ital structure. Eccles says banks, a n d , fo r that matter, the Federal Reserve Banks, are becoming mere branches of the Treasury and this situation is not likely tc change in any foreseeable time* Since 1929 the Government has created ail ports of agencies which p r a c t ic a lly refunded defaulted obligations. At resent, about 75 per cent of the earning assets of banks are in the form of Governments, while in the case of the British banks the percentage is a amch lover one. Furthermore, B r itis h banks earn less on Governments than banks do here. He d o e sn ’ t belie v e there w ill be much borrowing by business after the war, and the assets of banks in the form of Governments are likely to rire to 30 per cent of the t o t a l. In most countries, banks are almost certain to be s o c ia l i z e d , but he hopes this may be avoided here. The meeting adjourned at 1 2 :3 0 P . M. -11The Council reconvened in the Board T-oom of the Federal Reserve Building, at 12:35 P. M. on December 4 , 1944A l l members o f the Council were present, except th a t M r, W alter S . McLucas represented Mr. Edward E . Brown, The V ic e President o f the Council, Mr, C h a rle s E . S p e n c e r , J r . , p r e s id e d , G o ld e n w e ise r . Are we in fo r in fla t io n immediately a ft e r the war? His views have not changed and he s t i l l b eliev es the danger not very gr^at but the need of m a in tain in g c o n trols a ft e r the w ar has become more acute. Of course, there alw ays has been the danger o f i n f l a t i o n . I f , however, the controls are kept up then the danger w i l l pass and we shall have to think chiefly ho^ to f i n d employment fo r returning soldiers and sailors and dismissed ^ a r w o r k e r s . The q u e stio n o f in f l a t i o n has become more acute because the war i s drag gin g on and so the demands o f people for ecods and the means o f buying goods are in c r e a s in g . This w i l l be es pecially true because the Government w i l l arrange fo r bonuses and easy credit for returning s erv ic e men. Furthermore, a l l oth^r countries ??ant billions of d o llars worth o f goods from us and thus there w ill be a great oressure upon our m arkets. I t i s n o t merely necessary to keep up price control but also there must be an a llo c a t io n of exports and of goods to cu? in d u s trie s. P r ic e control works only up to a certain p o in t; after that there i s m erely the development of a huge black market. In Europe, black markets have crowded the normal markets completely out of existence. The best thing fo r us to do is produce as much as p ossible and maintain a l l o c a t io n ; i f th is not done we may have an in fla tio n spirit ^hich w il l in c r e a s e a l l o f our postwar problems. There is a kind of creasing s o c ia liz a t io n a l l over the world and the only wav to avoid this is to Keen the economy on an even keel during the reconversion period. Exports to other countries fo r some time to come w ill be largely on a credit basis but in the long-run w ill be paid fo r by goods and ser vices. It is p o ssib le to conceive o f a s itu a tio n , in the course of the next twenty-five years, where we s h a ll have f u l l employment and w ill be glad to take imports on a much la rg e r scale than is true at present. It is doubtful 'bether i t 7ould be w ise at this time to go very far in the re duction of t a r iffs but there should be a gradual reduction by means of treaties such as were inaugurated by Mr. H u ll. It would be fa ta l i f re refused to lend money at present fo r the re h a bilita tio n of the ??orld and it Hust be remembered that we are about the only country that can do this lending on any large s c a le . As regards in terest rates, it is likely that the present rate w i l l become moT>e firm ly established and that there will not b® any tendency toward lowering of the r a t e . In the course of -12- rs there probably w i l l be some stiffen in g of the rate. The amounts *e are lively to lend abroad, while in absolute figures, large, Xll r e l a t i v e l y small in v i e w of our present debt situation. It ^trays seeded that the c ir c u la tio n of currency vrould begin to decline then payrolls a n d production declined but though payrolls and produc tion have declined circulatio n has continued to increase. The reason for this is probably that so much money is being; earned by people who v^ve not had any bank connections and who a re, therefore, carrying the (Qncy in actual cash. The meeting adjourned at 1 P . M. NECESSITY FOH FURNISHING DRAFTS OF BILLS TO FEDERAL ADVISORY COUNCIL The Fede a l Advisory Council at several of its meetings in ^cent months asked that the Board of Governors furnish to the Council t*cr its information and as a b a s is of discussion a draft of the holding ,0jpany bill which it understood had been prepared by the Board. The \mncil had considered the statement made in the Board*s 194-3 Annual p.eport with respect to recommended holding company legislation but itated that ithout more d e ta ile d information i t could not discuss the subject ith p r o fit . I t was a lso stated on behalf of the Council that it felt that it was le g a lly e n title d to information from the Board as tc proposed le gisla tio n v i t a l l y a ffe c t in g the banking system and that, apart from the question o f l e g a l i t y , the Council could not function and could not properly cooperate with the Board unless it were given such information. The Council was advised that the Board would consider the aatter at a meeting when a l l Board members were present. I t was suggested in this connection that the question involved was not chiefly a legal one but the much more important one of the Board and the Coun cil understanding each other and working together in the common cause. The Board has consulted i t s attorneys with regard to this aatter and has been advised that in th eir opinion the Board is not reuired tc disclose to the C o u n c il drafts of proposed b il l s to which the Board may be giving c o n sid e r a t io n . I t seeni3 obvious to the Board that the Council does not have the right tc call for a l l inform ation which the Board may have. For example, orders for removal o f o ffic e r s and directors under the provisions. c: section 30 of the Banking Act o f 1 9 33 cannot, because of the specific provisions of the s t a t u t e , be disclosed to others. Again, the Bo^.rd i=: given a d is c r e t io n in the law with respect to disclosure of examination reports of State member b a n ks. Moreover, there are cases in which it is m a n ifestly in a d v isa b le to permit advance knowledge to T9'Ch the public with respect to proposed changes in margin requireB«nts or proposed actio n s with respect to reserve requirements and similar matters. The mention o f these various subjects is sufficien t to show that there are c ertain fa c ts which the Board may not be re quired to disclose. The Board in the lig h t of a l l it s respo n sibilities ■ast exercise a sound d is c r e t io n w ith reference to the question. If the Board were requ ired to submit to the Council drafts of legisia tive b ills which i t has under co n sideratio n , it is entirely possible that the Council would f i n d i t advisable to ask the Board to sub mit to it drafts o f a l l b i l l s , or even drafts o f a l l proposed regulations *kich the Board might at any time have under study, regardless of the 8trige of their c o n sid e r a tio n . Th is would mean that practically a ll ac tons or jroposals r e l a t in g to the general a ffa ir s of the System which the Board might wish to c o n sid e r , through its s t a ff or otherwise, and *ren in the most te n ta tiv e way, would have to be furnished to the Council. -2^ v i o u s l y tills would gre tly impair the freedom of consideration of matters v the 3oard and make i t very d i f f i c u l t for it to operate effectively. rould be especially true in those cases where the Board, as not infrequently ha pens, is considering proposed legislation or proposed regu lations jointly >ith other agencies o f the Government, such as the Treasury oV the bank supervisory a g e n c ie s. I t would be necessary that the Council t,e given drafts of a l l such proposed legisla tio n or the regulations while still in tentative form. Such a p o s it i o n , taken to its logical conclusion, settle even make i t necessary fo r the Board to consult with the Council in each case before replying to the numerous requests which it receives from Coogress or the Budget Bureau fo r it s opinion with regard to pending or -reposed le gisla tio n . In s te a d o f not less than four meetings a year a:1 jonteaplited by the st a t u t e , i t ’vould b e necessary for the Board to have Tery frequent, perhaps almost d^.ily, meetings or contacts with the Council. Obviousl.' thr law did not so in tend and the Board*s ability to operate ef fectively -ould be s e rio u sly im paired. The Council i s not r e s tr ic t e d in giving advice or in making recom mendations to the Board by i t s fa ilu r e to see drafts of b ills which the Board has under consideration on any p articu la r subject. The Council is entirely free to formulate and d isc u ss with the Board its own drafts of :iils or recommendations on a n y subject in ^hich it is interested, whether or not the Board is studying the su b jec t. The Council may present such drafts to the Board in dep en dently of any drafts of b ills or contemplated recommendations '^hich the Board may have under consideration. For this purpose the Council can o b tain s t a t is t ic a l and factual information that the Board say have a v a ila b le on the su b je c t. Wholly asid e from any l e g a l question involved, the important consideration is to a r r iv e a t a reasonable and practical working arrangenent between the C ouncil and the Board under which each may properly dis charge its r e s p o n s ib ilit ie s under the law without in any way affecting the ability of the other to disch arge its lawful responsibilities, it is essential that the Board should not be under compulsion to furnish -raft3 of bills which i t has under consideration to fhe Council or to any one else if it fe e ls that such a c t io n vould be incompatible with the proper 'Uscnarge of its fu nctio n s or a f f e c t it s a b ilit y to carry out its respon sibilities. Furthermore in the n atu re of the case the Board must itself the judge of whether there i s adequate reason for declining a request the Council. The Board expects in the future as it has in the past to fumi-h to the Council any a v a il a b l e m aterial which may be requested un less for some good cause i t f e e l s that it should not do so. It is essen tial that the Council and the Board each give recognition to the functions ' responsibilities o f the o t h e r . Th is the Council should not expect to ■ “-Ceive from the Board any m a te rial which the Board for good reason f°els '^ui : not be d is c lo s e d , a n d , on the other hand, the Boa^d, recognizing M l f th«5 r e s p o n sib ilitie s o f the C o u n c il, should give to it all infor,s*tion -*hich the C ou n cil d e s ir e s whenever there is no sound reason "or not ^°inr so. Only in t h is way can the two bodies work together and accomplish &n :a which Congress had in mind in establishing them. LEGISLATION TO FINANCE BUSINESS IN THE POSTTAR PERIOD I TV'ould lilce to review b r ie f l y the pertinent facts in connection with legislation now pending for the fin ancing of business during the re conversion and postwar p e r io d , e s p e c ia lly the b i l l to authorize Federal Reserve Banks to guarantee loans and t h e b i l l to expand the authority of the Smaller Tlar Plants CorDoration, I t has I o n 1 .; been obvious that Congress would enact legislation to assist small business and p a r tic u la r ly to aid in the financing of small business. The only question has been and is ?*hat kind of legislation would be enacted. The Smaller War Plants Corporation was created by the Act of June 11, 1942, which passed both houses of Congress without a single dis senting vote. Under th is la w , the Corporation was given a capital of $150,000,000 and was au th o rize d u n t i l Ju ly 1 , 1945 to make or participate in loans for mr and e s s e n t ia l c iv il ia n purposes. For some months past various proposals have been before Congress to enlarge and expand the author ity of the Corporation. In th is connection, the Baruch Report recommended that the lend ing authority of the Smaller Far Plants Cor oration "be extended to permit short-term loans to a s s is t small business in the ’ change-over* from rar tc peace". The Murray B il l ( S . 1 9 1 3 ) , introduced la s t May, provides 11,000,000,000 of cap ital fo r the Smaller War Plants Corporation and ex tends its existence u n t i l J u ly 1 , 1 9 4 7 . I t gives to the Chairman of the Corporation, as distin g u ish ed from the Corporation i t s e l f , broad authority to sake or guarantee loans both ^or reconversion and for peacetime operation. It Iso rould permit the Corporation to make arrangements to provide small business concerns with the b e n e fit s of patent rights acquired by the Govrmaent or by private in d iv id u a ls and to make a vailable to such concerns engineering and other technic .1 services and educational f a c ilit ie s of the Federal, State, and lo cal Governments. The b i l l , H . R . 5 1 2 5 , providing for the disposal of surplus Government property, contains p ro v is io n s , already approved by the Senate and the House conferees, g iv in g the Smaller Far Plants Corporation broad responsibilities with respect to the needs of small business for such surplus property and auth orizing the Corporation to purchase surplus property for ■resale or other d is p o s itio n ” to small bu sin ess. For such purposes it author izes the Smaller War Plants Corporation to make or .guarantee loans to small business enterprises in connection with the acquisition, conversion and operation of plants and f a c i l i t i e s . Furthermore, it provides that in cooperation with the surplus d is p o sa l agencies of the Government, the Corporation may arrange for sales o f surplus property to small business concerns on a credit or time >asis. This grant of authority is not limited or restricted in any way. -2 - A few weeks ago the Senate, without holding any hearings, took up and, without evidence of any dissenting vote, passed a bill increasing tie capital o:' the Smaller War Plants Corporation from £150,000,000 to $350, 000, 000. The b i l l is now pending in the House, ^t is obvious thst, because of the broadened authority of the Smaller War Plants Corporation under the Surplus Property B i l l , either this measure w ill be promptly en acted into law or some b i l l such as the Murray Bill which <’ives the Corpora tion iU , 000, 000,000 of c a p it a l w ill be passed. The Smaller War Plants Corporation has been given broad author ity in the Contract Settlem ent Act of 1 9 4 4 , as one of the Government contracting agencies, to provide interim financing in connection "ith the termination of war co n tracts. * t is not onl 3/ authorized but directed to Bftke interim loans and guarantees in order to assure that small business concerns receive f a ir treatment. Moreover, the director o Contract SettleBent is required to collaborate with the Corporation in protecting the interests o f' smaller war contractors in obtaining expeditious settlement and interim financing. As further evidence of the support for governmental assistance in the financing of small b u s in e ss , press reports quote Mr. &rug, Acting Chairman of the War Production Board, as saying when he appeared before the Senate rar In vestigating Committee, that it was even more important to small industries than to big companies to have production controls removed as Tuicicly as p o ssible. Then, in response to a suggestion from Senator Burton that the best thing that could be done for the small business man was to leave him alone, Mr. Krug stated that he thought that was correct excent that small businesses must have Government assured loans to tide them over the reconversion p erio d . Lc'-t me turn now to the Wagner-Spence B il l which relate? to the authority of the Federal Reserve Banks. When Mr. Baruch came down to Washington last F a l l , he requested suggestions from a number of people in the Government, including m yself, as to what measures might be recommended with respect to reconversion and postwar p o lic ie s . After some reflection, I proposed to him the id ea which was subsequently incorporated in S. 1918, the pending b i l l to amend section 13b o f the Federal Reserve Act, under ehich Federal Reserve B-nks would be authorized to guarantee loans made by financing in stitutio n s to business e n te rp rise s. The existing authority for the Baking of direct loans to business by Federal Reserve Banks would be ^liainHted from the la w . In makinr this proposal I stated that it was in tended merely as a supplementary source of postwar financing and that the so?t important means should be the use of private funds without any rovem•ental p articip atio n . As a result of my suggestions, the Baruch-Hancock -sport recommended t h a t, as a permanent source of credit for small and medium size enterprises on a basis of broader risks than banks can be ex acted to assume, the F e d eral Reserve System 's authority be expanded and liberalized. Although the report recommended a permanent authority, I , my self, have proposed that i t be extended only u n til 1949* I have also suggested amendments tc the b ill which ^ould limit the guaranteed portion of any loan to 90 per cent of the amount of the loan and would provide an overall limitation on the amount of outstanding guarantees of four times the amount of the guarantee fund, a maximum of somethin*? over £500,000,000, The b i l l introduced by Senator Wagner and Congressman Spence re ceived the endorsement of Mr. Baruch and also of Mr. Hinckley, Director of Contract Settlement, and of the War Department. Mr. Baruch, Mr. Hinckley, and the Secretary of Yrar have a ll written letters in support of the b ill. Xn addition, tho Treasury Department, in a letter from Acting Secretary Bell tc Chairman Spence, has interposed no objection to the b ill. ">hile there has been some lack of support for the b ill in the Reserve System and, I understand, by one member of the Federal Advisory Council, there has been strong opposition to the b ill from some o^ the bankers, particularly the American Bankers Association. Mr. Walter French, Deputy Manager of the American Bankers Association, has made speeches op posing the le g is la t io n . As a r e s u lt of speeches by Mr. French and Robert M. Haynes, who is Chairman of the Postwar Small Business Credit Commission of the American Rankers A sso ciatio n , the Georgia Rankers Association went on record against the Wagner-Spence B i l l , as well as against the Murray Bill and the Taft B i l l . The la tte r two b i l l s are as far removed, in basic principle, from the '^agner-Spence B il l as the poles. The ’ agner-Spence B ill was designed to protect the private banking system from G-ovemment competition. The oth^r b ills s p e c ific a lly provide for direct Government competition. The attitude of the American Bankers Association appears to have been the cause of the distorted and untrue picture of the purposes and provisions of the bill which some o f the newspapers have presented in their editorials. The b i l l contains no authority whatsoever for Federal Reserve Banks to make d ir e c t loans to b u sin ess. On the contrary, it repeals the authority in the present law under which Federal Reserve Banks may make direct loans. The b i l l provides only for the guaranteeing of financing insti tutions against loos on loans to business enterprises and for commitments by the Reserve Banks to take over such loans from financing institutions. I am opposed to Federal Reserve Banks making direct loans to business and industry, and I so stated at the h earin g s on this b i l l . Any aspect of competition be tween the Federal Reserve Banks and commercial banking institutions instead of teinr' created by the b i l l would be eliminated. The b ill v-ould, in fact, enable the private banks, with the assistance of a guarantee, to make loans that otherwise ould be made by some Government agency. ^Thether or not lendin- banks wish to a v a il themselves of the guarant es provided by the b ill *ould be en tirely optional with them. I f they are in a position to make ruch loans 'ithout .-aiarantee, so much the better. Since a bank would have to pay a guarantee f e e , it n a t u r a lly would not ask for guarantee unless the loan *as such that i t could not a ffo rd to carry the entire risk. a Some o f the opposition to the b i l l has even gone so far as to try to ma/ce it appear that the measure provides for socialization o ’ credit. It is aimed at exactly the o pp o site. I t is no more a socialization of credit than was the authority to insure bank loans under the Federal Housing -4^dainistration. That authority encouraged and increased the business of banks in the housing f i e l d , and thus eliminated Government competition for such loans. Before the T'agner-Spen ce B il l was presented to Congress, I sub mitted it for comment to the presidents of the Federal Reserve Banks, to gether with a memorandum explaining the need for such a measure. As I stated at that time, w hile I did not consider this plan the chief answer to the financial problems o f small business, it seemed likely that due to the political appeal of other small business legislation, Congress would provide some additional governmental mechanism for small business financing during the reconversion period and thereafter. I referred to the Taft B ill, the M-hd B i l l , and the Murray B i l l . I further stated that we cannot expect sesbers of Congress to r e s is t p o litic a lly a pealing measures of this kind unless they have an acceptable alternative at hand. ?3iile I sympathize with the desire of the American Bankers Association tc have the banks stand on their own f e e t , it is u n r e a lis t ic to expect to beat something with nothing. "orh il e representatives of the ABA, as well as some of the bankers, have been openly or covertly opposing the Wagner-Spence B il l , which provides no competition with b a n k s , Congress has actually passed, with no evidence of opposition from the bankers, le g is la t io n directing the Smaller War Plants Corporation to provide interim fin ancing on terminated war contracts, the Senate has passed a b i l l auth orizing an increase of $200,000,000 in its capital, and the Surplus Property B i l l gives the Corporation broad authority to make loans d ir e c t ly in peacetime competition with banks. By trying to k i l l o ff a measure that would protect and safeguard the banks while at the same time doing nothing to head off legislation, al ready approved, s te a d ily expanding the powers and authority o^ a directly coapetitive Government agency, the opponents of the Wagner-Spence Bill have, in 27 oi in io n , done a d is s e r v ic e to the private banking system. No one, if I lay sa3/ so, has more co n sisten tly opposed than I have the encroachment of Government lending agencies upon what to my mind should be the province of the banics. In the decade I have been in Washington I have by every means vithin my power opposed e ffo r ts of the Home Loan Bank System, of the RACC, and other governmental a g e n c ie s , whether in the agricultural field or else where, to invade the realm of private banking. And I have as persistently, in FRA financing, in recommending leg is la tio n on agricultural loans, in war financing operations under the so-called V , VT and now the T loans, as well as in the agner-Spence B i l l , advocated the insurance or guarantee principle in order to f a c i l it a t e the ■'low of private credit and thus avoid the need for public unds disbursed by competitive Federal agencies. Not only would fa ilu r e to oass the Wagner-Spence Bill help to in sure passage of some measure embodying exactly the opposite principle, but it will t/9nrj accentuate an already acute situation. Rather than have Government agencies make direct loans with money borr owed prom the banks, it oul ‘ be much b e tter to have the banks make guaranteed loans, because in one case the banks are l iv in g on in terest on Government bonds while in the °ther they are gettin g income from their o’m loans, and are merely relying -5— uoon a guarantee. The latter is °ar less subject to criticism and political attack. For in stance, the banks hold billions of mortgages guaranteed under fHA and no one would think of c riticizin g that, even thourh it is more p r o fitab le to the banks than investing in Government bonds. The banks may iell be subject to attack, however, because of the fact that they are getting about h a lf of their gross income today from Government securities, without ^'hich they ould actually be in the red by more than $200,000,000, but with which their net p ro fits , after taxes, are more than 9 per cent on their capital accounts. I mention this in passing in order to round out the picture of the situation as I vie?? i t with respect to the pending measures on recon version and postwar financing.
@FedFRASER