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MINUTES OF MEETINGS of the FEDERAL ADVISORY COUNCIL 1955 MINUTES OF MEETINGS of the FEDERAL ADVISORY COUNCIL February 1345, 1955 May 1547. 1955 September 18'205 1955 November 1345s 1955 OFFICERS AND MEMBERS OF THE FEDERAL ADVISORY COUNCIL For the Year 1955 O FFIC E R S: President, Edward E. Brown V ice President, Robert V. Fleming Director, W illiam D . Ireland Director, H enry C. Alexander Director, Frank R. Denton Secretary, Herbert V. Prochnow EXECUTIVE COMMITTEE: Edward E. Brown Robert V. Fleming William D. Ireland Henry C. Alexander Frank R. Denton M E M B E R S: W illiam D . Ireland H enry C. Alexander W illiam R. K . M itchell Frank R . D enton R obert V. Flem ing W allace M . D avis Edward E . Brown W . W . Cam pbell Joseph F. Ringland Charles J. Chandler G eorge G. M atkin John M . W allace District No. 1 District No. 2 District No. 3 District N o. 4 District No. 5 District N o. 6 District No. 7 District No. 8 District No. 9 District No. 10 District No. 11 District No. 12 1 BY-LAWS OF THE FEDERAL ADVISORY COUNCIL ARTICLE I. OFFICERS The Officers of this Council shall be a President, Vice President, three Directors and a Secretary, all of whom, except the Secretary, shall also serve as the E xecutive Com m ittee. ARTICLE II. PRESIDENT AND VICE PRESIDENT The duties of the President shall be such as usually pertain to the office; in his absence the Vice President shall serve. ARTICLE III. SECRETARY The Secretary shall be a salaried officer of the Council, and his duties and com pensa tion shall be fixed by the E xecutive C om m ittee. ARTICLE IV. EXECUTIVE COMMITTEE The E xecutive C om m ittee, as indicated in Article I of the by-law s, shall consist of the President, Vice President, and the three Directors. ARTICLE V. DUTIES OF THE EXECUTIVE COMMITTEE It shall be the duty of the E xecutive C om m ittee to keep in close touch w ith the Board of Governors of the Federal R eserve System and w ith their regulations and promulgations, and to com m unicate the sam e to the m em bers of the Council, and to suggest to the Council, from tim e to tim e, special m atters for consideration. The E xecutive C om m ittee shall have the power to fix the tim e and place of holding its regular and special m eetings and m ethods of giving notice thereof. The E xecutive C om m ittee shall have full power, as officers of the Council, to act for the Council betw een m eetings of the Council. M inutes of all m eetings of the E xecutive C om m ittee shall be kept and such m inutes or digest thereof shall be im m ediately forwarded to each m em ber of the Council. A m ajority of the E xecutive C om m ittee shall constitute a quorum, and action of the Com m ittee shall be by m ajority of those present at any m eeting. ARTICLE VI. MEETINGS Regular m eetings of the Federal A dvisory Council shall be held in the C ity of W ashington on the third T uesday of the m onths of February, M ay, Septem ber and Novem ber of each year, unless otherwise directed by the E xecutive Com m ittee. A preliminary m eeting of the Federal A dvisory Council shall be called by the Sec retary in accordance w ith instructions to be given by the President of the Council. Special m eetings m ay be called at any tim e and place by the President or the Execu tive Com m ittee, and shall be called by the President upon w ritten request of any three members of the Council. 2 ARTICLE VII. ALTERNATES In the absence of the regular representative of any Federal Reserve District, the Board of Directors of the Federal Reserve Bank of that District may appoint an alternate. The alternate so appointed shall have the right to be present at all the meetings of the Council for which he has been appointed. He shall have the right to take part in all discussions of the Council but shall not be entitled to vote. ARTICLE VIII. AMENDMENTS These by-law s m ay be changed or amended at any regular or special meeting by a vote of a m ajority of the members of the Federal Advisory Council. February 13, 1955 3 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 13, 1955 The first and organizational m eeting of the Federal A dvisory Council for the year 1955 was convened in Room 932 of the M ayflower H otel, W ashington, D .C ., on February 13, 1955, at 2:10 P.M . Present: William D . Ireland Henry C. Alexander William R. K . M itchell Frank R. D enton Robert V. Flem ing W allace M . D avis Edward E. Brown W. W. Cam pbell Joseph F. Ringland Charles J. Chandler George G. M atkin John M . W allace Herbert V. Prochnow D istrict N o. 1 D istrict N o. 2 D istrict N o. 3 D istrict N o. 4 D istrict N o. 5 D istrict N o. 6 D istrict N o. 7 D istrict N o. 8 D istrict N o. 9 D istrict N o. 10 D istrict N o. 11 D istrict N o. 12 Secretary Mr. Robert Flem ing was elected Chairm an Secretary pro tem. pro tem and M r. H erbert V. Prochnow, The Secretary pro tem stated that com m unications had been received from the tw elve Federal Reserve banks, certifying to the election of their respective representatives on the Council for the year 1955. The following officers were nom inated and unanim ously elected: Edward E. Brown, President Robert V. Flem ing, V ice President W illiam D . Ireland, Director H enry C. Alexander, Director Frank R. D enton, Director Herbert V. Prochnow, Secretary On motion, duly made and seconded, the salary of the Secretary was fixed at $3,000 annually. On motion, duly made and seconded, the C ouncil approved the by-laws, copies of which are a part of these m inutes. The Secretary presented his financial report for the year 1954, which had been audited by Mr. Irving E. Carlson, A ssistant Auditor of T he First N ational Bank of Chicago. The report was approved and ordered placed on file. A copy of the report is attached and made a part of these m inutes. 4 On m otion, duly m ade and seconded, the printed minutes for the meetings of the C ouncil held on February 14, 15, 16, 1954; M ay 16, 17, 18, 1954; September 19, 20, 21, 1954; N ovem b er 14, 15, 16, 1954; and the mimeographed notes of the meeting held N ovem b er 14, 15, 16, 1954, copies of which had been sent previously to the members of the C ouncil, were approved. On m otion, duly m ade and seconded, a resolution was adopted authorizing the Secretary to ask each Federal Reserve bank to contribute $450.00 toward the secretarial and incidental expenses of the Federal Advisory Council for the year 1955, and to draw upon it for th a t purpose. A com plete list of the item s on the agenda for the meeting and the conclusions of the C ouncil are to be found in the Confidential M em o ra n du m to the Board of Governors from the Federal Advisory Council, which follows on pages 8, and 9. T he m eetin g adjourned at 5:45 P.M . HERBERT V. PROCHNOW Secretary 5 REPORT OF THE SECRETARY OF THE FEDERAL ADVISORY COUNCIL For the Year Ended D ecem ber 31, 1954 Balance on hand, December 31, 1 95 3 ................. $ 7,398.27 Assessments— 12 Federal R eserve B a n k s.. S alaries............................................... $ 3,000.00 5,400.00 Conference E xp en se.................... 1,208.21 Printing and S tation ery ............ 434.00 Postage, Telegram s and T eleph on e........................... 6.06 B alance on hand, D ecem ber 31, 1 95 4 ................. $12,798.27 8,150.00 $12,798.27 Chicago, Illinois February 1, 1955 To the Federal Advisory Council: I have audited the books, vouchers, and accounts of the Secretary of the Federal Advisory Council for the year ended Decem ber 31, 1954, and certify that the above statem ent agrees therewith. R espectfully, T H E F IR S T N A T IO N A L B A N K O F CHICAGO (Signed) Irving E. Carlson A ssistant Auditor 6 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 14, 1955 A t 10 A .M ., the Federal Advisory Council reconvened in Room 932 of the M ay flower H otel, W ashington, D .C ., the President, Mr. Brown, in the Chair. P resent: M r. Edward E. Brown, President; Messrs. William D. Ireland, Henry C. A lexander, W illiam R. K . M itchell, Robert V. Fleming, Wallace M . Davis, W. W. C am pbell, Joseph F . Ringland, Charles J. Chandler, George G. M atkin, John M. W allace, and H erbert V. Prochnow, Secretary. A bsent: M r. Frank R. D enton. T he C ouncil review ed its conclusions of the previous day regarding the items on the agenda, and sent to the Secretary of the Board of Governors the Confidential M em orandum w hich follow s on pages 8 and 9, listing the agenda items and the conclusions reached by the C ouncil. T he M e m o r a n d u m was delivered to the Secretary of the Board of Governors at 11:40 P .M . on February 14, 1955. T he m eeting adjourned at 11:20 P.M . HERBERT V. PROCHNOW Secretary 7 CONFIDENTIAL M EM O R A N D U M TO T H E BO A R D O F G O V E R N O R S FR O M T H E FE D E R A L ADVISO RY CO UN CIL R E L A T IV E TO T H E A G E N D A FO R T H E JO IN T M E E T IN G O N F E B R U A R Y 15, 1955 1. The Board would like to have the com m ents of the mem bers of the Council on the business and econom ic outlook throughout the winter and spring m onths and the probable dem and for bank loans in that period com pared w ith the same period in 1954. Business activity generally is at a high level in all the districts. The autom obile and construction industries, which affect the production of m any other major industries, especially steel, are in a significant m easure responsible for the increased volum e of business in recent weeks. R etail sales are good. Inventory accum ulation is moderate. Consumer demand is strong, and business sentim ent is favorable. The members of the Council believe that the business and econom ic outlook for the winter and spring m onths is good. In m ost of the districts it is expected that loans for business and commercial purposes will be slightly less than in the first half of 1954. But an increase in loans on real estate, for consum er credit, to investm ent dealers, and to mortgage bankers to finance new construction will more than offset any decrease in business and commercial loans so that total bank loans for the winter and spring m onths will be slightly above the preceding year, w ith som e variation probable from district to district. 2. In addition to the view s of the Council on the general business situation, the Board is interested in knowing the thinking of the m em bers of the Council with respect to the following m atters: a. The Board would like to have the view s of the Council w ith respect to arrangements recently m ade by insurance com panies under which they place temporarily w ith banks m ortgages acquired by the com panies. For a number of years, it has been custom ary for m ortgage brokers representing insurance companies to borrow tem porarily from local banks for the purpose of carrying mortgages to be acquired by the insurance com panies under com m itm ents given by them . In many cases the carry is for a period beyond the date on which the insurance companies had originally planned or contracted to take up the m ortgages. Such extended carrying arrangements are ordinarily made by the m ortgage broker after a request by the insurance company to him. Occasionally the insurance com pany will m ake a direct request to a bank for such a carry. The Council is aware of one im portant recent case in which an insurance com pany has arranged for banks to carry mortgages already owned by it under a repurchase agree ment. The Council understands that in this instance the insurance com pany does not operate primarily through mortgage brokers, but through its own direct agents. The transaction to which reference is made is obviously neither illegal nor improper. There have been in banks over the years m any types of carrying agreem ents, and they have been helpful in the desirable objective of evening out the flow of savings into 8 in vestm en t. T he increase at present in the volum e of such carrying arrangem ents stem s in part from th e housing boom , and m ay be an indication of a possible inadequacy of savings, or capital form ation, to m eet current capital expenditures. A n y sustained tendency for cap ital expenditures to outrun capital form ation will result in inflation w ith its atten d an t econom ic problem s. b. T o w h at exten t is m oney borrowed from banks in the form of “non-purpose” loans being used to purchase stocks? W hat could be done by bank supervisory authorities to restrict such borrowing should it becom e excessive? T he m em bers of th e C ouncil believe that the am ount of “non-purpose” loans w hich have been m ade to purchase stocks is relatively insignificant, and that no recent im portant increase in such loans has occurred. H ow ever, it is difficult and often im possible clearly to trace th e u ltim a te use m ade of borrowed funds. In the case of “non-purpose” loans, there does n ot appear to be any satisfactory and effective w ay of policing such loans w hich policing w ould n o t in volve banks in constant and continuing harassm ent of their cu s tom ers. T he C ouncil does not believe that there is any present or threatened situ a tio n w hich w ould w arrant further action by the supervisory authorities. c. C oncern contin ues to be expressed in som e quarters as to the soundness of current d evelop m ents in the residential construction and m ortgage field. T o w h at ex ten t do the m em bers of the C ouncil share this concern? T he housing boom w hich w as experienced in 1954, and is continuing into 1955, has been a m ajor influence in sustaining the entire econom y. H ow ever, the present extra ordinary rate of hou sin g starts is in a large m easure the result of the exceptionally liberal term s establish ed b y legislation last year. W ith the current upturn in business, th e C ouncil is concerned th a t th e continuing encouragem ent to a further expansion in th e housing boom , due to th e present legislation, will ultim ately have unfortunate repercussions in the econom y. T he m em bers of the C ouncil therefore believe th at present legislation should be changed to provide (1) th at reasonable dow n paym ents be m ade on F H A and VA m ortgages and (2) th a t m aturities be shortened. d. W h at w ill be the trends in consum er credit and particularly in consum er in stalm en t credit during the next six m onths? T he m em bers of the C ouncil believe th at consum er credit and consum er instalm ent credit w ill increase during the next six m onths, because of the high rate of autom obile sales, and th e increase in housing com pletions w ith the dem and new houses create for various ty p es of household equipm ent. T he liberalized provisions of T itle I m ay also tend to increase th e volum e of instalm ent credit. 3. W hat h ave been the effects of System credit policies since the last m eeting of the C ouncil? Should these policies be changed in any w ay in the light of the business and econom ic situation in the foreseeable future? S ystem credit policies since the last m eeting of the C ouncil have been extrem ely w ell handled and have been helpful to the econom y. T he C ouncil is in accord w ith the actions of the S ystem in open m arket operations, in leaving the rediscount rate unchanged, and in raising m argin requirem ents on stocks. T he m ain effect of raising m argin requirem ents w as psych ological, but w as constructive. T he C ouncil has no change to suggest in System credit policies under present con ditions. H ow ever, if stock m arket prices should have a further rapid rise, even if it in volves no appreciable further use of credit, the Council believes consideration should be given to an additional increase in m argin requirem ents. 9 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 14, 1955 At 2:15 P.M ., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, W ashington, D.C. Present: Messrs. William D . Ireland, H enry C. Alexander, W illiam R. K. M itchell, Robert V. Fleming, Wallace M . D avis, W. W. Campbell, Joseph F. Ringland, Charles J. Chandler, George G. M atkin, John M . W allace, and Herbert V. Prochnow, Secretary. Absent: Mr. Edward E. Brown, President, and Mr. Frank R. D enton. Dr. Woodlief Thomas, Economic Adviser to the Board of Governors of the Federal Reserve System, and members of the Staff presented an audio-visual report on “Recovery in the United States and Expansion Abroad” . Copies of the remarks were distributed to the members of the Council. The meeting adjourned at 3:50 P.M . HERBERT V. PROCHNOW Secretary 10 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM February 15, 1955 A t 10:30 A .M ., a joint conference of the Federal A dvisory C ouncil and the B oard of G overnors o f th e Federal R eserve System was held in the Board Room of th e Federal R eserve B uild in g, W ashington, D .C . P r e se n t: M em b ers of the Board of G overnors of the Federal R eserve S y ste m : C hairm an W m . M cC . M artin, Jr.; G overnors M . S. Szym czak, R . M . E van s, Jam es K . V ardam an, Jr., A . L. M ills, Jr., J. L. R obertson, and C. C anby B alderston; also M r. S. R . C arpenter, Secretary, and M r. M erritt Sherm an, A ssistant Secretary of th e B oard of G overnors. P resen t: M em b ers of the Federal A dvisory C ouncil: M r. E dw ard E . B row n, P resident; M essrs. W illiam D . Ireland, H enry C. A lexander, W illiam R . K . M itch ell, Frank R. D en ton , R obert V. Flem ing, W allace M . D avis, W . W . C am pbell, Josep h F . R ingland, C harles J. Chandler, G eorge G. M atk in , John M . W allace and H erbert V. P rochnow , Secretary. P resid en t B row n read the first item on the agenda and the conclusions of th e C ouncil as expressed in th e Confidential M e m o r a n d u m to the B o a r d of Governors fr o m the Federal A dvisory Council, as printed on pages 8 and 9 of these m inutes. C hairm an M artin asked how m uch im pact the earlier introduction o f new autom obile m odels has had on seasonal trends? M r. A lexand er replied th a t he believes the spring season has been qu ite fully anticip ated . T h e P resid en t o f th e C ouncil then read Item II (a) of the agenda and the conclusions of th e C oun cil as expressed in the Confidential M e m o r a n d u m previously m entioned. P res ident B row n added present indications are th at capital form ation is not keeping up w ith capital expen ditures. C hairm an M artin said th a t w hen an insurance com pany pledges m ortgages to borrow still m ore, it is th e beginning of pyram iding w hich is dangerous if carried to excess. the P resid en t B row n read Item II (b) and the conclusions of the C ouncil as reported in m entioned above. Confidential M e m o r a n d u m Item II (c) and the conclusions of the C ouncil as noted in the Confidential M e m o r a n d u m were then read b y P resident Brow n. T he P resid en t o f the C ouncil read Item II (d) and the conclusions of the C ouncil as stated in th e Confidential M e m o r a n d u m cited above. A general discussion follow ed the reading of Item II (b), (c), and (d) of the agenda and the con clu sion s of the C ouncil. 11 President Brown then read Item III and the conclusions of the Council as reported in the Confidential M em orandum mentioned above. At Chairman M artin’s suggestion, Governor Robertson reported on the new H olding Company Bills pending in Congress. Chairman M artin stated that the m eeting had been very helpful to the Board. The meeting adjourned at 12:55 P.M . HERBERT V. PROCHNOW Secretary 12 NOTE: This transcript of the Secretary's notes is not to be regarded as complete or necessarily entirely accurate. The transcript is for the sole use of the members of the Federal Advisory Council..- The concise official minutes for the entire year are printed and distributed later. H. V. P. The Secretary's notes of the meeting of the Federal Advisory Council on February 13, 1955, at 2:10 P. Mo, in Room 932 of the Mayflower Hotel, Washington, D. C • All members of the Federal Advisory Council were present. Robert V. Fleming was elected Chairman ftro tem and Herbert V, Prochnow was elected Secretary pro tem. The Secretary pro tem stated that communications had been received from the twelve Federal Reserve Banks, certifying to the election of their respective representatives on the Council for the year 1955. On motion, duly made and seconded, the by-laws were approved. The following officers were nominated and unanimously elected: Edward E. Brown, President Robert V. Fleming, Vice President William D. Ireland, Director Henry C. Alexander, Director Frank R. Denton, Director Herbert V. Prochnow, Secretary On motion, duly made and seconded, the salary of the Secretary was fixed at $3,000 annually. The Secretary presented his financial report for the year 195H, which had been audited by Mr. Irving E. Carlson, Assistant Auditor of The First National Bank of Chicago, The report was approved and ordered placed on file. It will be printed and included in the formal printed minutes. A motion was adopted authorizing the Secretary to draw upon each Federal Reserve Bank for $U50 for the secretarial and incidental expenses of the Federal Advisory Council for the year 1955. The Council approved the Secretary's notes for the meeting of November lU-16, 195U. The printed minutes for all the 19Sh meetings of the Council, copies of which had been sent previously to members of the Council, also were approved. P residen t to p re sid e . Brown was slig h tly in d isp o se d and asked V ice P re sid e n t F lem in g -2ITEM I THE BOARD WOULD LIKE TO HAVE THE COMMENTS OF ^HE MEMBERS OF THE COUNCIL ON THE BUSINESS AND ECONOMIC OUTLOOK THROUGHOUT THE WINTER AND SPRING MONTHS AND THE PROBABLE DEMAND FOR BANK LOANS TN THAT PEFTOD COMPARED WITH THE SAME PERIOD IN 195b.___________________ Ireland. The econoirgr in the first district is on a firm basis. Some readjustments are still being made in textiles, and there is some pressure on prices. Department store sales and savings are rood. Bank loans probably will increase moderately in the next six months and total bank loans probably will be a little higher than they were in the first six months of 19#?, which may be contrary to the national trend. Alexander. At the time of the last meeting of the Council, business was lagging in the second district, but it is now showing substantial improvement. Employment is better, construction is at a high level, and general business activity is strong. January retail sales were up over a year ago. The textile business is not strong, but it is better. Total bank loans for New York City are up slightly, although business loans are down. Alexander believes bank loans may rise in the Spring. Consumer credit may also rise with the increase in auoomoDile sales. Bank loans should be on the firm side and may get back close to the 195h level* Denton. Business in the district is good and is tied closely to the automobile situation. Consumer loans are increasing. Larger commercial loans have given little indication of increasing. Consumer goods are in substantial demand. Retail business is quite satisfactory. The construction industry may, to some extent, be borrowing from the future. Denton’ s bank exoects about a 6 per cent increase in loans, largely consumer credit, but it is not expected that the total loans in the bank will be as large as they were a year ago. Fleming. Bank loans have declined somewhat since the first of January, but the decline is not as great as it was a year ago. Some pickup in loans ‘ « anticipated this Soring, but the total volume of bank loans will probably not be as large as it was a year ago. Department store sales at Christmas were excellent, and they were good in January up to the recent bad weather. Car sales are very good. Tobacco production is increasing* Davis. The economic situation in the district is generally good. There is no appreciable carryover of debt in the district. Business loans in the larger citie# are up over a year ago. Davis expects the trend of loans to be up moderately through Spring. Brown. Good business is expected through the Winter and Spring months. The heavy production of automobiles should result in some slowing down later for the industry. Business loans will be up moderately, but will probably not reach as high a level as they did a year ago. Loans on real estate, to -3in v e stm en t d ealers, new c o n s t r u c t i o n , lo an s. Total bank a little above fo r consum er w ill tend loans the sam e C a m p b e ll# N on- farm s e a s o n a l l y .* Cash about 8 cent go u p per slig h tly , Consum er of the and year real some be above in estate c r e d it is and been no w ith is anH the the the are brokers b u s in e ss m onths fo urth quarter 11 m onths next six m onths, sales and a risin g # unusually above to and fin a n c e co m m e rc ia l p rob ab ly the S p rin g , in but bank sam e w ill not m ore were w ill of lo an s p e rio d m onths does up 195U v o lum e A u to m o bile the was of b u sin e ss larger Total good# in c re a se th is in S p rin g first som ew hat sh o uld loans up, d istric t larg ely u n em p lo y m en t# the be m ortgage be sales p ro b ab ly co n stru c tio n # in in than down the first half 195U# are at a h ig h ahead# R in glan d b eliev e these expects lo ?m s w ill levels# g o in g real in fo r In to d eclin e 195> U. retail loans p ro b ab ly C h an dler# The have 1953# and any W in ter in em plo ym ent h ig h e r b u sin e ss 195U the perio d B u s in e ss Consum er rise fo r cred it, o ffset re c e ip ts fro m w ith w ill R in g lan d . level. farm to drought the has had because about of Departm ent lo ans of real store m any three years estate sales country and of drought# Bank co n stru c tio n are up® banks are C attle down, p ric e s but lo ans loans# the are There lo w , loams of city banks are up# Matkin# Business is good and there is more optimism than usual. They hope that the drought may be broken# The district produced more cotton than it did the year before# There are dangers in the present honsing situation. The demand for loans has been strong# Consumer credit is expected to increase. Installment oaoer terms are lengthening. There should be some increase in bank loans in the Spring# Wallace. Business has been good. The aircraft industry has done exceptionally w ell. Construction is at a high level. Retail sales are up# The increase in unemployment during the Winter has been less than usual# ^he new cars have had an excellent reception. There has been a serious drought in the area. Loans are up a little now compared to a year ago, and Wallace expects a moderate uptrend in loans to a level somewhat above a year ago. Mitchell. Unemployment has been at a comparatively higher level in the district than it has been over the rest of the country. Department store sales are now up. Automobile sales are exceptionally -good. Business for the first half of 1955 should be good# Mitchell expects a slightly rising trend in business loans. Total loans are about equal to a year ago. Consumer credit loans will continue to rise and construction loans may go even higher than they are at present. Total bank loans probably w ill be somewhat higher in the first six months of 1955 than they were in 19^lu Fleming, The Council may state that all districts anticipate a good level of business for the Winter and Spring months. Total bank loans dur ing the period probably w ill be slightly above the preceding year with some variation probable from district to district. ITEM II IN ADDITION TO THE VIEWS OF THE COUNCIL ON THE GENERAL BUSINESS SITUATION * THE BOARD IS INTERESTED IN KNOWING THE THINKING OF THE MEMBERS OF THE COUNCIL WITH RESPECT TC THE FOLLOWING MATTERS: a. THE BOARD WOULD LIKE TO HAVE THE VIEWS CF THE COUNCIL WITH RESPECT TO ARRANGEMENTS RECENTLY MADE BY INSURANCE COMPANIES UNDER WHICH THEY PLACE TEMPORARILY WITH BANKS MORTGAGES ACQUIRED BY THE COMPANIESo Fleming reads Item II (a) and asks the members of the Council to express their views. Brown states that for a number of years banks have been extending credit to mortgage bankers on a hit or miss basis in relatively small amounts. The recent transaction involved a very large sum and was for a rate of interest that many considered relatively high. One problem in connection with this matter is the question of the extent to which insurance companies are heavily committed on such obligations. Alexander has heard of no other cases involving large amounts. Fleming states that there are cases of insurance companies who have agents or mortgage brokers who borrow from the banks. Ireland mentions another case in ■which a company sold some of its corporate bonds to handle such financing. Alexander says that the large loan which was made recently by one company was not illegal, but it raises the question of using two years* savings in one year. This is related to Item II-c. The recent large loan which was made by an insurance company tends to accelerate the housing boom. Ringland. Perhaps this/what the Board of Governors had in mind when they included this item on the agenda. applies Brown. This problem*not only to housing but to other fields* It indicates that capital expenditures may be tending to outrun capital formation. Alexander reports on a recent survey which pointed out that there may be a shortage in the capital required in 1955* Banks would be expected to make up the difference between savings and capital expend itures. Fleming believes that, on balance, insurance companies have been sellers of (iovernment obligations. Brown* The Council may state that it knows of no recent important departure, except one, from the customary procedure of having mortgage brokers borrow from their local banks® The Council understands that the method recently employed by one large borrower is due to the fact that this company does not have mortgage brokers* ^Alexander* There are many types of carrying arrangements in banks and they have been used over a period of many years to even out the flow of savings into investment* The increased volume of carrying may be a manifestation of the inadequacy of savings to take care of capital expenditures* The present situation stems, in part, from the housing boom* Brown* The recent large transaction may indicate that the capital supply is less than capital expenditures* The transaction referred to is obviously neither illegal nor improper* ^finy sustained tendency for capital expenditures to outrun capital formation would create an in flationary situation* ITEM II b. b. TO WHAT EXTENT IS MONEY BORROWED FROM BANKS IN THE K)RM OF "NONPURFGSE" LOANS BEING USED TO PURCHASE STOCKS? WHAT COULD BE DONE BY BANK SUPERVISCRY AUTHORITIES TO RESTRICT SUCH BORROWING SHOULD IT BECOME EXCESSIVE? Fleming reads Item II b. and asks for the views of the members of the Council* Fleming states that it is very difficult to determine what funds are going into the stock market* Brown comments that a business or an individual may use funds to buy stock and later borrow for business purposes* It is difficult, if not impossible, to trace the use of funds* (Off-the-record comments)* Alexander* Many illustrations could be given of the difficulty of tracing the exact purpose for which a loan is made* Brown ing stocks* knows of no large increase in loans for the purpose of buy There always has been some use of funds for buying stocks* Alexander* If the borrower says he is borrowing to purchase stocks, the purpose is known and it is a stock loan. If the purpose is not known, the loan obviously cannot be classified as being used to purchase stocks* Brown. The amount of wnon-purposeM loans outstanding for buying stocks is insignificant. The Council may state it knows of no important increase in such loans. The Council also knows of no effective way of policing such loans, which would not lead to great difficulties between banks and their customers* 6 ITEM II Co c. CONCERN CONTINUES TO BE EXPRESSED IN SOME QUARTERS AS TO THE SOUND NESS OF CURRENT DEVELOPMENTS IN THE RESIDENTIAL CONSTRUCTION AND MORTGAGE FIELD. TO WHAT EXTENT DO THE MEMBERS OF THE COUNCIL SHARE THIS CONCERN? Fleming shares the concern of those who are troubled by current developments in the residential construction and mortgage field* Wallace, When a borrower gets a thirty year mortgage, he is not borrowing', but is simply paying rent. The borrower can walk out aiy time, F le m in g . concern about The th is C o u n c i l m ay state that it is u n an im o u s in sh arin g the situ atio n . Brown states that the Council may have to indicate the extent of its concerru The present housing legislation expires in 1957* and there are many veterans who have not taken advantage of it. There are some persons who argue that the law should be extended so it expires at a later date, which would spread out the use of this financing by veterans over a longer period. Brown believes this is unwise. He believes the law should be changed so that maturities are shortened $nd reasonable down payments are required on FHA and VA mortgages* Fleming, The Council recognizes that the construction boom was a sustaining influence in the economy in 195U* However, with a business upturn, there should be somedaaopening down in the legislation to provide? (1) Reasonable down payments on vA and FHA mortgages; and: (2) Shorter maturities, ITEM II d. d. WHAT WILL BE THE TRENDS IN CONSUMER CREDIT AND PARTICULARLY IN CONSUMER INSTALMENT CREDIT DURING THE NEXT SIX MONTHS? Fleming states that he believes it is the opinion of the Council that consumer credit will increase during the Winter and Spring months. Brown, The Council may state that consumer credit will increase because of the high rate of automobile sales, and the increase in hous ing completions with the demand new houses create for various types of household equipment. Wallace. The liberalized provisions of Title I may further increase the volume of instalment credit. -7ITEM I I I WHAT HIVE BEEN THE EFFECTS CF SYSTEM CREDIT POLICIES SINCE THE LAST MEETING OF THE COUNCIL? SHOULD THESE POLICIES BE CHANGED IN ANY WAY IN THE LIGHT OF THE BUSINESS AND ECONOMIC SITUATION IN THE FORESEEABLE FUTURE? Brown. The Federal Reserve System has been a net purchaser of Treasury Bills, which was undoubtedly done to help the Treasury in the recent financing* The System has done a good job in the open market. Alexander states that he would not be inclined to raise the rediscount rate now. There are two views: One that credit should now be tightened somewhat because of the business upturn and to keep the level of business even; the second view is that there is no certainty that the business upturn will continue,, (Off-the-record comments). Brown would not like to see any move by the Board which would prevent ^digesting” the recent 3 per cent, UO year issue, and he does not believe this issue has been fully " digested” yet. Fleming. (Off-the-record conments). Brown. System credit policies since the last meeting of the Council have been extremely well handled. The Council may say it has no material change to suggest in present policies under current conditions. The Council is in accord with the policies of the System in open market operations, in leaving the rediscount rate unchanged, and in raising margin requirements on stocks. The psychological effect of raising margin requirements was beneficial. If the stock market continues to rise rapidly, even if there is no undue use of credit, the Council believes consideration should be given to an additional increase in margin re quirements. The meeting adjourned at P«M« -8T H E C O U N C IL CO N VEN ED AT 1955, D. C. I N ROOM 1 0 :0 0 A . M . ON FEBRUARY l U , 9 3 2 O F THE MAYFLOWER H O T E L , W A S H IN G T O N , A L L M EM BERS OF THE F E D E R A L A D V IS O R Y WERE PRESENT EXCEPT M R . C O U N C IL D E N T O N , WHO HAD TO RETURN TO H I S BANK TO A T T E N D A BOARD M E E T IN G . The C o u n c il Mem orandum t o b e fo r the jo in t p r e p a r e d and approved the a tta c h ed C o n fid e n t ia l s e n t t o t h e B o a r d o f G o v e r n o r s r e l a t i v e to t h e A g e n d a m e etin g of the The M em oran dum w a s d e liv e re d Governors a t 1 1 :U 0 A .M . each i t e m the of The m e e tin g agenda C o u n c i l a n d t h e B o a r d on F e b r u a r y 1 5 , to M r . Carpenter, on F e b r u a r y li|, is liste d ad jo u rn ed at 1955. to g e th e r w ith 1 1 :2 0 AoM« Secretary It 1955. of the B o ard of w i l l be no ted that the com m ents o f th e C o u n c i l . CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS from the POT a t t ™ 1 ’ ^ ESERAL ADVISORY COUNCIL ni!E AG F0R THE JOINT MEETING ON FEBRUARY 1 5 , 1 9 5 5 o f8the° C o u p o n d ^ ? " . . ? h e w“ t e r bank lo an s period in 1 9 $/+. .nd same J " fo r h a v e t h e 0 0 ™ e n t s o f t h e m e m b er s b u s i n e ' ^ a n d eco n o m ic o u t lo o k a n d s p r i n g m onths a n d th e p r o b a b le i n t h a t p e r io d com pared w it h the Business activity generally is at a high level in all the dis tricts.^ The automobile and construction industries, which affect the production of many other major industries, especially steel, are in a significant measure responsible for the increased volume of business in recent weeks. Retail sales are good. Inventory accumulation is moderate. Consumer demand is strong, and business sentiment is favorable. The members of the Council believe that the business and econ omic outlook for the winter and spring months is good. In most of the districts it is expected that loans for business and commercial purposes vill be slightly less than in the first half of 1954-• But an increase in loans on real estate, for consumer credit, to investment dealers, and to mortgage bankers to finance new construction will more than offset any decrease in business and commercial loans so that total bank loans for the winter and spring months will be slightly above the preceding year, with some variation probable from district to district. 2. brokers tank s In addition to the views of the Council on the general business situation, the Board is interested in knowing the thinking of the members of the Council with respect to the following matters: a. The Board would like to have the views of the Council with respect to arrangements^recently made by insurance companies under which they place temporarily with banks mortgages acquired by the companies. For a num ber p r e s e n tin g for c o m p a n ie s th e p u rp o fe under of years, in su ran ce of carry in g co m m itm ents g iv e n u eb unaer uu a p erio d beyond the date ^ it has co m p an ies been to custom ary borrow m ortgages to be by In m any them . f o r m ortgage te m p o r ar ily acq u ire d cases b lch t^e insurance companies f ^ ^ e m ortgages. Such by the had extended fro m the lo cal in su ra n c e carry is fo r o r ig in a lly carry in g a r w n ™ t s ° a r e ao rd in arily made by the mortgage broker after a request by the i n s u r a n c e company to him. O c c a s i o n a l l y the insurance company w i l l make a direct request to a bank for such a cairy. 0uflre of one important recent case in which an The Council 1 fQr banks to carry mortgages already owned insurance company has arrangt-u -2- by i t under a repurchase agreement* The Council understands th at in th is the insurance company does not operate prim arily through mortgage brokers, but through i t s own d ire c t agents. The transaction to which reference is made is obviously n eith er ille g a l nor improper. There have been in banks over the years many types of carrying a r r a n g e m e n ts , and they have been helpful in the desirable objective of evening out the flow of savings into investm ent. The increase a t present in the volume of such carry in g arrangements stems in part from the housing boom, and may be an in d ica tio n of a possible inadequacy of savings, or capital form ation, to meet current cap ital expenditures. Any sustained tendency for c a p ita l expenditures to outrun cap ital formation w ill re su lt in in flatio n w ith i t s atten d an t economic problems. b. To what ex ten t is money borrowed from banks in the form of "non-purpose" loans being used to purchase stocks? What could be done by bank supervisory a u th o ritie s to r e s tr ic t such borrowing should i t become excessive? The members of the Council believe th at the amount of "nonpurpose" loans which have been made to purchase stocks is re la tiv e ly in significant, and th a t no recen t im portant increase in such loans has occurred. However, i t is d if f ic u lt and often impossible clearly to trace the ultim ate use made of borrowed funds. In the case of "non-purpose" loans, there does not appear to be any sa tisfa c to ry and effective way of policing such loans which p o licin g would not involve banks in constant and continuing harassm ent of th e ir customers. The Council does net believe that there is any presen t or threatened situ a tio n which would warrant further actio n by the supervisory a u th o ritie s. c. Concern continues to be expressed in some quarters as to the soundness of current developments in the re s id e n tia l construction and mortgage fie ld . To what ex ten t do the members of the Council share th is concern? The housing boom which was experienced in 1954-> and is continu ing into 1955, has been a major influence in sustaining the en tire economy. However, the p resen t ex trao rd inary ra te of housing s ta rts is in a large measure the r e s u lt of the exceptionally lib e ra l terms established by legislation la s t year. With the current upturn in business, the Council is concerned th a t the continuing encouragement to a fu rth er expansion in the housing boom, due to the present le g isla tio n , w ill ultim ately have unfortunate repercussions in the economy. The members of the Council therefore believe th a t presen t le g is la tio n should be changed to provide (1) that reasonable down payments be made on FHA and VA mortgages and (2) th at m aturities be shortened. in stance -3d. What w ill be the trends in consumer cred it and p a rtic u la rly in consumer instalm ent cred it during the next six months? The members of the Council believe th at consumer cred it and con sumer instalm ent c re d it w ill increase during the next six months, because of the high ra te of automobile sa le s, and the increase in housing comple tions with the demand new houses create fo r various types of household equipment. The lib e ra liz e d provisions of T itle I may also tend to increase the volume of instalm ent c re d it. 3. Uhat have been the e ffe c ts of System cred it policies since the la s t meeting of the Council? Should these p o lic ie s be changed in any way in the lig h t of the business and economic situ a tio n in the foreseeable future? System c re d it p o lic ie s since the la s t meeting of the Council have been extrem ely w ell handled and have been helpful to the economy. The Council is in accord with the actions of the System in open market operations, in leaving the rediscount rate unchanged, and in raisin g margin requirem ents on stocks. The main effec t of raisin g margin require ments was psychological, but was constructive. The Council has no change to suggest in System cred it policies under present co n d itio n s. However, i f stock market prices should have a further rapid r is e , even i f i t involves no appreciable fu rth er use of credit, the Council believes consideration should be given to an addi tional increase in margin requirem ents. -9- THE COUNCIL CONVENED IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING, WASHINGTON, D .C ., AT 2 : 1 5 P.M. ON FEBRUARY 1 U , 1 9 5 5 . ALL MEMBERS OF THE COUNCIL WERE PRESENT EXCEPT PRESIDENT BROWN, WHO WAS SLIGHTLY INDISPOSED, AND MR. DENTON. Dr. W oodlief Thomas, Economic Adviser to the Board of Governors, and members of the S t a ff presented an audio-visual report on "Recovery in the United States and Expansion Abroad". Copies of the remarks were distributed to the members of the Council. The m e e tin g adjo u rn ed at 3 :5 0 P .M . -10- 0N FEBRUARY 1 5 , 1955, AT 1 0 :3 0 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, WASHINGTON, D . C. ALL MEMBERS OF THE COUNCIL WERE PRESENT. THE FOLLOWING MEMBERS OF THE BOARD OF GOVERNORS WERE PRESENT: CHAIRMAN MARTIN; GOVERNORS SZYMCZAK, EVANS, VARDAMAN, ROBERTSON, MILLS AND BALDERSTON. MR. CARPENTER, SECRETARY, AND MR. SHERMAN, ASSISTANT SECRETARY, OF THE BOARD OF GOVERNORS, WERE ALSO PRESENT. ITEM I THE BOARD WOULD LIKE TO HAVE THE COMMENTS OF THE MEMBERS OF THE COUNCIL ON THE BUSINESS AND ECONOMIC OUTLOOK THROUGHOUT THE WINTER AND SPRING MONTHS AND THE PROBABLE DEMAND FOR BANK LOANS IN THAT PERIOD COMPARED WITH THE SAME PERIOD IN 195U. Brovm reports the electio n o f the following o fficers of the Council: Edward E . Brown, President Robert V . Fleming, Vice President W illiam D* Ir e lan d , Director Henry C. Alexander, Director Frank R . Denton, Director Herbert V . Prochnow, Secretary Brown reads Item I and the conclusions of the Council as expressed in the Confidential Memorandum to the Board attached. The members of the Council are agreed regarding the business outlook through the Spring of 1955. The Council appreciates the fa ct that the Board did not ask for the views of the Council regarding the outlook for the last six months of 1955. Some members of the Council have considerable doubt about the continuance of the high level of activity. For example, it does not seem possible that automobile output can continue at the present high le v e l. Martin. How much impact does the earlier introduction of new automobile models have on seasonal trends? Alexander thinks automobile production of 160,000 or 165,000 cars a week is at a level that even the most optimistic persons do not believe can be maintained throughout 1955. He believes the Spring season has been quite fully anticipated, and the automobile output has been a real factor in the upward movement of in d u s tria l production. Fleming. Car sales in the f i f t h d is tr ic t are up sharply. Martin asks whether these car sales are being borrowed from the usual Spring sales. Denton reports that h is d is t r ic t is concerned with those industries which supply the materials that go into cars. A number of producers of materials are concerned about what w ill happen after the present "early Spring'1 sales °f the automobile companies. New cars are selling at a discount. Denton be lieves that new car sales are borrowing from next Spring and Summer. -11- Alexander believ es that automobile sales w ill be helped by an easing of installment sales terms. Brown. The demand for a ll kinds of appliances is strong. Denton does not think that total loans in the first half of 1955 w ill the f ir s t h alf of 1 9 5 U in his district, equal total loans in Vardaman asks whether there is any indication on the part of merchants that they are increasing inventories. He also asks whether banks are in terested in financing such inventory accumulation, Alexander, The general tone of business is optimistic, but merchants are cautious about bu ild in g inventories. The banks are s t ill out after loans, and are anxious to make them. Many loan inquiries are related to term loans. Businesses want standby arrangements. Some term loans are as long as ten or twelve y ea rs. The borrowing companies desire an easier position than that afforded by their regular borrowing. Instead of using debentures, for example, many companies prefer the term loan, because of its less r e stric tiv e fe a tu r e s . Brown states that h is bank has many large department stores as cus tomers^ Recently these stores began to follow a policy of not reducing inventories, but o f holding inventories steady. However, the stores at present are not accumulating inventories. The automobile agencies are accumulating inventories because they desire to hold their agencies. Alexander.(Off-the-record comments). Brown.(Off-the-record comments). ITEM I I IN ADDITION TO THE VIEWS OF THE COUNCIL ON THE GENERAL BUSINESS SITUATION, THE BOARD IS INTERESTED IN KNOWING THE THINKING OF THE MEMBERS OF THE COUNCIL WITH RESPECT TO THE FOLLOWING MATTERS: a. THE BOARD WOULD LIKE TO HAVE THE VIEWS OF THE COUNCIL WITH RESPECT TO ARRANGEMENTS RECENTLY MADE BY INSURANCE COMPANIES UNDER WHICH THEY PUCE TEMPORARILY WITH BANKS MORTGAGES ACQUIRED BY THE COMPANIES.__________ Brown reads Item I I (a ) and the conclusions of the Council as expressed in the Confidential Memorandum to the Board attached, (Off-the-record comments). Brown outlines the practice which insurance companies and mortgage brokers have followed in the past in financing mortgages through banks. Present indications are that capital formation is not keeping up with capital expenditures. He asks whether the Board knows o f any other cases, such as the recent large transaction which was described in the newspapers. Martin says there are other cases and "s tir r in g s ” of this type. Denton. banks? Is th is any differen t from the practice of brokers borrowing -12- M artin . The p r o c e s s e s a r e s i m i l a r , except th a t when an insurance company pledges m o rtg ages to b o r r o w s t i l l more, i t i s the beginning o f pyramiding. There i s t h e d a n g e r o f c a r r y i n g i t to e x c e s s . Vardaman thinks that as long as it is the big companies that operate across the country who do i t , it is not so dangerous. However, i f local insurance companies follow this practice, it might be dangerous. Alexander states that banks throughout the country are carrying mortgages for brokers, and in general this process is desirable, as it evens out the flow of savings into c ap ita l expenditures. However, he thinks it is a different matter, as Chairman Martin in d ic a tes, to borrow on mortgages for savings which are to come in the future. Ireland, has seen no evidence that there is an important move in the direction of t h is type of fin ancing . (Off-the-record comments). M itch ell. of financing. There is no s ign ifica n t move in his district to this type Denton states that in his experience the mortgage brokers, not the insurance companies, in it ia t e the move for mortgage financing. Mitchell reports that the loans of his bank are to mortgage brokers and are of the type which Alexander has indicated even out the flow of sav ings into investment, ITEM I I b. TO WHAT EXTENT IS MONEY BORROWED FROM BANKS IN THE FORM OF "NON-PURPOSE" LOANS BEING USED TO PURCHASE STOCKS? WHAT COULD BE DONE BY BANK SUPERVISORY AUTHORITIES TO RESTRICT SUCH BORROWING SHOULD IT BECOME EXCESSIVE? Brown reads Item I I (b ) and the conclusions of the Council as expressed in the Confidential Memorandum to the Board attached. Brown reports that none of the members of the Council have seen any important increase in "non-purpose" loans. Brown gives illu s tr a tio n s of the d iffic u lty of tracing the use of borrowed funds. Fleming asks whether the power given by Congress provides for the regula tion o7"non-purpose" lo ans. Szymczak. The regulation relates solely to the purpose of the loan. Vardaman. The Board cannot delve into "non-purpose" loans. V -13- ITEM II c , CONCERN CONTINUES TO BE EXPRESSED IN SOME QUARTERS AS TO THE SOUNDNESS OF CURRENT DEVELOPMENTS IN THE RESIDENTIAL CONSTRUCTION AND MORTGAGE FIELD. TO WHAT EXTENT DO THE MEMBERS OF THE COUNCIL SHARE THIS CONCERN?__________ Brown reads Item I I (c) and the conclusions of the Council as expressed in the C onfidential Memorandum to the Board attached. Every member of the C ouncil is concerned over the housing boom. The ra te of housing s ta rts is in excess of the ra te of fam ily form ation. Some persons have suggested th at the present housing le g is la tio n , which expires in 1957, should be extended in order to lessen the rush to b u ild now. Brovin believes th is would be unwise. Fleming. The s itu a tio n is a very d iff ic u lt one, as i t involves leg islatio n . Chandler. The housing boom is now extending in to the sm aller towns. Martin asks whether over-housing is here, There is a marked difference of opinion on th is question , esp ecially in d iffe ren t areas. Davis b eliev es i t depends on the area. Baton Rouge and New Orleans are short of housing. He b eliev es something may be done about the housing problem. He is not qu ite so concerned about the number of houses as he is about the quality. The housing a u th o ritie s are short of s ta ff . With a b ette r s ta ff they might be able to r e s i s t the pressure and lessen th e s ta r ts . The leg islatio n was meant not to make i t cheaper to own a home than to re n t one, b u tthis is true now. I t is e a sie r to own a house than i t is to rent one. Wallace b eliev es th a t when the m aturity of a mortgage is held to twenty years, the buyer expects to own a home, but when the m aturity is extended to twenty-five or th irty y ears, he has p ra c tic a lly no equity. With a th irty -y ear m aturity, there is p ra c tic a lly no lim it to the number of houses th a t w ill be b u ilt. We are making tra n sie n ts out of our young people. B alderston. What e ffe c t would over-building and a collapse have on the value of present homes and on mortgage financing in stitu tio n s? Brown. (O ff-th e-reco rd comments). Fleming. (O ff-th e-reco rd comments). Matkin. Houses a re so ld on a contract b a sis, but so l i t t l e is paid down that the buyer can walk off* Brown. I f th is i s a f a ir question, what does the Board think can be done in the absence of le g is la tio n ? M artin. The Board, as such, has no view on th is m atter. Personally, Martin believes th a t unless we a re su re we have an over-housed situ a tio n , money and credit is not the way to handle i t . He believes th e s itu a tio n is bad. Ringland th in ks i t might be a good idea to have the Board S taff analyze this whole problem. Ireland. (O ff-the-record comments). -Hi- M artin. Brown. M a rtin . ( O ff-th e -re c o rd comments). A ll th e members of th e Council have a r e a l concern over th e s itu a tio n . (O ff- t h e - r e c o r d c om m ents). ITEM II d. WHAT WILL BE THE TRENDS IN CONSUMER CREDIT ftND PARTICULARLY IN CONSUMER INSTALIKENT CREDIT DURING THE NEXT SIX MONTHS?_____________________________ Brown reads Item I I (d) and the conclusions of the Council as expressed in the C onfidential Memorandum to the Board attached. A ll members of the Council believe consumer c re d it w ill increase in the months ahead. M artin. Is th ere any concern regarding th is increase in consumer credit? Alexander has some concern. Robertson. W ill excess production in various in d u stries re su lt in longer credit terms and lower ra te s in order to move products? Robertson thinks this may be a re a l danger< > Brown. The Council b eliev es th a t com petition is forcing easier terms, but the Council did not discuss whether the Board should be given power under Regulation D to reg u late such c re d it. Brown’s personal opinion is th a t now is not the time to give the Board the powers of Regulation D. Alexander, The la s t time the Council voted i t was 11 to 1 against giving such powers. Alexander Glares Robertson’s views of the danger th a t terms may be eased because of excess production. Vardaman. A dvertising is appearing now in Washington th at you can buy a car for so much a month with no down payment. Ringlando Almost every im portant automobile dealer in the Twin C ities has a finance company of h is own. I f he gives too lib e ra l terms, the banks can decline to extend c re d it to h is finance company. ITEM I I I WHAT HAVE BEEN THE EFFECTS OF SYSTEM CREDIT POLICIES SINCE THE LAST MEETING OF THE COUNCIL? SHOULD THESE POLICIES BE CHANGED IN ANY WAY IN THE LIGHT OF THE BUSINESS AND ECONOMIC SITUATION IN THE FORESEEABLE FUTURE? Brown reads Item I I I and the conclusions of the Council a s expressed in the C onfidential Memorandum to the Board attached. At the present, time, the Council does not fe e l any need fo r a change in the rediscount ra te . The Council is concerned w ith the ris e in the stock market. The Council believes th at raising margin requirem ents was larg ely a psychological move, but i t did ?ive the market a tim ely warning. -15A le xa n d e r. The open market operations have been excellent. I f the market should have a further sharp r is e , Alexander would favor raising margin requirements a g ain . He thinks the System's credit policies have been very good. stock Brown states that, speaking for him self, i f there is evidence that capital formation i s f a il in g to keep up with capital expenditures, he would raise the rediscount rate. He does not think the time is here yet. A le x a n d e r a g r e e s . Martin expresses appreciation to the Council for its views on the items on the agenda. He states that these views have been very helpful. ->f -if- ■Hr Martin reports that Congressman Patman has introduced a b i l l which provides fcr auditing the Federal Reserve banks. Fleming states that he is opposed to any such b i l l . Brown reports that the Council has always opposed such a b i l l , and he believes the American Bankers Association and other banking groups would oppose i t . Vardaman states th a t, speaking for himself, he is opposed to such an audit of the Federal Reserve banks. The Federal Reserve System is an in strumentality of the Congress. I f any accounting group, such as, G. A. 0 . , or the Bureau of the Budget, is set up between the Congress and the Federal Reserve System, the System may be inclined to look more to the accounting group than to Congress, whose creature the System i s . However, the System is partly responsible for Patman*s proposed legislatio n , because the System has not given a f u l l accounting to the Congress, * ■* * * * * Martin asks Robertson to report on the new Holding Company B i l l . Robertson made the following report: There are two holding company b i l l s pending, one in the House by Representative Spence and one in the Senate. This b i l l is probably the most severe piece o f le g is la tio n that has been introduced since 19hl» It is not a death sentence as was the b i l l in 1938* It is a freeze b ill and would eventually mean a death sentence. It defines a bank holding company as one holding 25 per cent or more of the stock of two banks. It would require divestment of nonbanking business, would vest supervisory authority in the Federal Reserve, and would require approval of expansion, it would make it impossible for a holding company to expand in any State except where it s home o ffic e was located, and not even in those States unless le g is la tio n authorized i t . There is no state having such legisla but specific tion now, -16The Board will have to submit a report and testify on the bill about February 28. Robertson would guess the Board would be inclined to take the same position it took two years ago, that the legislation should be minimum rather than maximum legislation. It should be as simple as possible, should be adequate to cover those companies that ought to be covered, and should not give discretion to bring in others* It should require divestment of non banking businesses, and should require approval of expansions. The Board now would probably differ from that position by this refinements before, we had the exceptions in the definition of holding companies. Today the feeling is that there should be no exceptions in the definition, but the exceptions should be in the divestment section rather than in the definition. The feel ing would be that no matter what group you have - religious or charitable or what - they ought to be required to get approval0 The present bill would exclude mutual savings bankso The Board would take the position it is not espousing legislation, and it does not care, which agency is in charge of administering the law. We think if it is simple and policed by a criminal provision' rather than a civil one it does not make any difference who ad ministers it» In response to a q u e s tio n , Governor Robertson said he thought there was a better chance fo r an enactment of holding company le g is la t io n th is year than at any tiine in the past fiv e years 0 He would give i t about a fifty - fift y chance. He then commented on a p ro v isio n which would provide for a freeze of existing h olding companies i n the absence of s p e c ific state le g is la t io n authorizing them to expand. He noted that the adm inistering agency would get recommendations o f state a u t h o r itie s and the Comptroller of the Currency before permitting exp ansio n , Robertson said the farthest the law should gt was that if a holding company cannot expand in a s p e c ific state, the administering agency would not a u th o r ize such exp ansio n. He noted that some of the holding companies would p r e f e r th a t the adm inistering agency be required to accept the recommendation o f a state supervisory a u th o rity , whereas h is view was that the a d m in isterin g agency should consider such a recommendation but reach its own d e c is io n , except i n the case where the law s p e c ific a lly p ro h ib its expansion in a s t a t e . R ingland b e l i e v e s the im p lic a tio n s of the b i l l are more far-reaching than seem a p p a r e n t. T h is w hole q u estio n may b r in g up the subject of branch banking in some s t a t e s « * * * * * * Fleming expresses appreciation to the Board for the presentation given by the Board Staff on business conditions on Monday, February lU, 1955* The meeting adjourned at 12s55 P.M. * * * * * * The n ex t m eeting o f th e C oun cil w i l l be h eld on May 1$, 16 and 17, 1955.
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