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MINUTES OF MEETING
of the
FEDERAL ADVISORY COUNCIL
February 15-16, 1942
and of the
MONTHLY MEETING
of the
EXECUTIVE COMMITTEE
March 12, 1942
O F F IC E R S A N D
M EM BER S
OF TH E
FED ERA L
A D V IS O R Y
C O U N C IL
For the Year 1942
OFFICERS:
President, Edward E. Brown
Vice President, George L. Harrison
Secretary, Walter Lichtenstein
EXECUTIVE COMMITTEE:
Edward E. Brown
George L. Harrison
William Fulton Kurtz
B. G. Huntington
Robert V. Fleming
S. E. Ragland
MEMBERS:
Charles E. Spencer, Jr.
George L. Harrison
William Fulton Kurtz
B. G. Huntington
Robert V. Fleming
H. Lane Young
Edward E. Brown
S. E. Ragland
Lyman E. Wakefield
W. Dale Clark
Nathan Adams
George M. Wallace
Federal Reserve District No. 1
Federal Reserve District No. 2
Federal Reserve District No. 3
Federal Reserve District No. 4
Federal Reserve District No. 5
Federal Reserve District No. 6
Federal Reserve District No. 7
Federal Reserve District No. 8
Federal Reserve District No. 9
Federal Reserve District No. 10
Federal Reserve District No. 11
Federal Reserve District No. 12
1
%
B Y -L A W S 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
ARTICLE I. OFFICERS
Officers of this Council shall be a President, Vice President, and Secretary.
ARTICLE II. PRESIDENT AND VICE PRESIDENT
The duties of the President shall be such as usually pertain to the office; in his ab
sence the Vice President shall serve.
ARTICLE III. SECRETARY
The Secretary shall be a salaried officer of the Council, and his duties and compen
sation shall be fixed by the Executive Committee.
ARTICLE IV. EXECUTIVE COMMITTEE
There shall be an Executive Committee of six (6) members of the Council, of which
the President and Vice President of the Council shall be ex officio members. To fill a
vacancy, the President, or in his absence, the Vice President shall be authorized to des
ignate as a member of the Executive Committee for a given meeting another member
of the Council other than one elected to the Executive Committee.
ARTICLE V. DUTIES OF THE EXECUTIVE COMMITTEE
It shall be the duty of the Executive Committee to keep in close touch with the
Board of Governors of the Federal Reserve System and with their regulations and pro
mulgations, and communicate the same to the members of the Council, and to suggest to
the Council, from time to time, special matters for consideration.
The Executive Committee shall have power to fix the time and place of holding
its regular and special meetings and methods of giving notice thereof.
Minutes of all meetings of the Executive Committee shall be kept and such minutes
or digest thereof shall be immediately forwarded to each member of the Council.
A majority of the Executive Committee shall constitute a quorum, and action of the
Committee shall be by majority of those present at any meeting.
ARTICLE VI. MEETINGS
Regular meetings of the Federal Advisory Council shall be held in the City of Wash
ington on the third Tuesday of the months of February, May, September, and November
of each year, unless otherwise directed by the Executive Committee.
A preliminary meeting of the Federal Advisory Council shall be called by the Secre
tary in accordance with instructions to be given by the President of the Council.
2
Special meetings may be called at any time and place by the President or the Execu
tive Committee, and shall be called by the President upon written request of any three
members of the Council.
A R T IC L E VII. A L TE R N A TE S
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 dis
cussions of the Council but shall not be entitled to vote.
A R T IC L E VIII. A M E N D M E N T S
These by-laws may be changed or amended at any regular or special meeting by
a vote of a majority of the members of the Federal Advisory Council.
February 15, 1942.
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M IN U T E S O F M E E T IN G
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
February 15, 1942
The first and organization meeting of the Federal Advisory Council for 1942 was
convened in Room 336 of the Mayflower Hotel, Washington, D. C., on Sunday, February
15, 1942, at 2:15 P. M.
Present:
Mr. Charles E. Spencer, Jr.
Mr. George L. Harrison
Mr. William Fulton Kurtz
Mr. B. G. Huntington
Mr. Robert V. Fleming
Mr. H. Lane Young
Mr. Edward E. Brown
Mr. S. E. Ragland
Mr. Lyman E. Wakefield
Mr. W. Dale Clark
Mr. George M. Wallace
Mr. Walter Lichtenstein
District No. 1
District No. 2
District No. 3
District No. 4
District No. 5
District No. 6
District No. 7
District No. 8
District No. 9
District No. 10
District No. 12
Secretary
Absent:
Mr. Nathan Adams
District No. 11
Mr. Edward E. Brown was elected Chairman pro tern and Mr. Walter Lichtenstein
Secretary pro tern.
The Secretary stated that communications had been received from the twelve Federal
Reserve banks, certifying to the election of their representatives in accordance with the
above list.
Upon nominations for the office of the President of the Council being called for, Mr.
Edward E. Brown was nominated. On motion, duly made and seconded, the nominations
were closed, and the Secretary was instructed to cast the ballot for Mr. Brown, who was
thereupon declared elected President of the Council for the year 1942.
Upon nominations for the office of the Vice President being called for, Mr. George
L. Harrison was nominated. On motion, duly made and seconded, the nominations were
closed, and the Secretary was instructed to cast a ballot for Mr. Harrison, who was there
upon declared elected Vice Preisdent of the Council for the year 1942.
The President, Mr. Brown, thereupon called for nominations for the four appointive
members of the Executive Committee. Messrs. W. F. Kurtz, B. G. Huntington, Robert
V. Fleming, and S. E. Ragland were nominated. On motion duly made and seconded,
these gentlemen were unanimously elected members of the Executive Committee for the
year 1942, the President and Vice President being ex officio members.
On motion, duly made and seconded, Mr. Walter Lichtenstein was elected Secretary
of the Federal Advisory Council for the year 1942 at a salary of $2500.00 per annum.
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On motion, duly made and seconded, the Council readopted the existing by-laws,
which are attached hereto and made a part of these minutes.
On motion, duly made and seconded, the minutes of the Council meeting of Novem
ber 16-17, 1941, copies of which had been previously sent to the members, were approved.
The Secretary presented his financial report for the year 1941, which had been audited
by Mr. J. J. Buechner, Assistant Auditor of The First National Bank of Chicago, which
on motion, duly made and seconded, was approved and ordered to be printed. The report
is attached hereto and made a part of these minutes.
On motion, duly made and seconded, the following resolution was unanimously
adopted:
“Resolved that the Secretary be and he is hereby authorized to ask each Federal
Reserve bank to contribute $350.00 toward the Secretarial and incidental expenses of
the Federal Advisory Council for the year 1942 and to draw on it for that purpose.”
The President of the Council discussed various suggestions made for the amendment
of Regulation W, and he also discussed at some length the proposed amendment to Sec
tion 7(d) of the Securities Exchange Act of 1934. He pointed out that this proposed amend
ment had been inadequately discussed at the hearings held by the Committee on Inter
state and Foreign Commerce of the House of Representatives, but that the Federal
Advisory Council had reserved the right to file a statement opposing the proposed amend
ment.
A lengthy discussion took place regarding the question of direct purchases by the
Federal Reserve System from the Treasury of issues of securities. In general, the members
of the Council were opposed to this, but recognized that, under existing conditions, it
might be necessary to give permission to the Federal Reserve System to make direct
purchases of government securities from the Treasury.
At 2:45 P. M. Mr. Adams joined the meeting.
A formal resolution was not adopted, but Mr. Harrison formulated the views of the
Council, as follows:
“The Federal Advisory Council believes that there is objection in principle to the
unrestricted right of a central bank to make advances to the Treasury, but in view of the
seriousness of the present emergency and in view of the interpretation put upon the pro
posed law that purchase of Government securities directly from the Treasury is subject
to the judgment of each Federal Reserve bank and not subject to the unrestricted direc
tion of the Open Market Committee, there is no practicable objection to the proposed
amendment.”
The subject of the pattern of financing the gap in the war program, which will have
to be closed by the banks, was then considered. At the end of the discussion, the President
of the Council pointed out that the members of the Council did not have any unanimity
of opinion and that, in fact, their views were so diverse that a general statement could not
be drawn up, but that the matter might well be discussed with the Board.
A discussion of reserve requirements then ensued. The Council unanimously voted,
on motion by Mr. Harrison, seconded by Mr. Fleming, that reserve requirements should
not be changed at present. The resolution, as finally adopted, reads as follows:
5
“The Federal Advisory Council believes that in principle, at least, reserve require
ments should remain as stable as possible and that changes in such requirements should
not be made unless clearly required by the credit situation. The Council is of the opinion
that there is no present need for a change in reserve requirements.”
On motion made by Mr. Harrison, seconded by Mr. Ragland, the following resolution
was unanimously adopted:
“The Federal Advisory Council suggests the desirability of the Treasury considering
favorably an increase in the amount of Treasury bills to be issued each week.”
It was decided not to take any action with respect to Regulation W, as the whole
situation had been altered as the result of the introduction of priorities and allocations.
In respect to the proposed amendment to Section 7(d) of the Securities Exchange
Act of 1934, it was decided that the President of the Council be asked to prepare a state
ment, giving the reasons for the opposition of the Council to the proposed amendment,
and that this statement should be forwarded to the Committee on Interstate and Foreign
Commerce of the House of Representatives.
The meeting adjourned at 6:00 P. M.
WALTER LICHTENSTEIN,
Secretary.
NOTE: The President of the Council prepared a statement, dated March 2,1942, stating
the reasons for the opposition of the Federal Advisory Council to the proposed amendment
to Section 7(d) of the Securities Act of 1934. A draft of this statement was sent to each
member of the Council, and the members of the Council having expressed their approval
of the statement, it was duly transmitted to the Chairman of the Committee on Interstate
and Foreign Commerce of the House of Representatives. It is attached hereto and made
a part of these minutes.
6
M a rc h 2, 1942
H onorable C larence F. L ea ,
C hairman , C ommittee on Interstate and F oreign C ommerce ,
H ouse of R epresentatives ,
W ashington , D. C.
My dear Mr. Lea:
Your Committee’s hearings having been concluded, the Federal Advisory Council
of the Federal Reserve System desires to express its attitude on the proposed amendment
to Sec. 7(d) of the Securities Exchange Act of 1934 through the means of this letter,—
in accordance with the privilege reserved for us by you last month through the good
offices of the Board of Governors of the Federal Reserve System. Inasmuch as the Com
mittee Print states that this amendment is proposed by the Board of Governors, we have
refrained from comment pending our discussion of it with the Board of Governors at our
meeting with them on February 16, 1942 in Washington. They are aware of our intention
to file a memorandum in opposition to the amendment and interpose no objection to our
doing so.
The presentation of the American Bankers Association in opposition to this proposed
amendment (by memorandum, dated January 28, 1942, signed by Mr. A. L. M. Wiggins,
Chairman of the Association’s Committee on Federal Legislation) clearly discloses the
purpose and limited scope of the existing Sec. 7(d) of the Securities Exchange Act of
1934, to-wit,— the regulation of loans secured directly or indirectly by securities “for
the purpose of purchasing or carrying any security registered on a national securities
exchange”. In other words, borrowings from banks, secured by the pledge of securities, were
to be and are subject to regulation only to the extent that the purpose of such borrowings
brings them within the scope of the Securities Exchange Act (Sec. 2) as a transaction in
securities “commonly conducted upon securities exchanges and over-the-counter markets”.
The proposed amendment would confer authority on the Board of Governors of the
Federal Reserve System to regulate any extension of credit by anyone to anyone for the
purpose of purchasing or carrying any type of security in transactions unrelated to the
purposes and scope of the Securities Exchange Act. Under the amendment, for instance,
a man working his way up in a small corporation, the stock of which is unregistered, could
borrow money to purchase some of such stock only within such margin limitations as
might be set by the Board of Governors of the Federal Reserve System. A bank, familiar
with the corporation and its management and the capacity and character of the borrow
ing purchaser, frequently meets the requirement of the purchaser by loaning him sub
stantially the full purchase price of the stock. Such a transaction, of course, has no relation
to the purpose of the Securities Exchange Act of 1934 and any loan limitation predicated
on some arbitrary valuation of the stock to be purchased and pledged behind the loan
serves no useful economic purpose. Another illustration,— if on the death of the owner
of a closed corporation, the stock of which is unregistered, his heirs, none of whom are
qualified to carry on the business, desire to avail themselves of the best, if not the only,
market for the stock by selling it to men active in the management of the corporation,
any loan for the purpose of puchasing such stock, to be secured by a pledge of the stock
when acquired, should obviously be left to stand on its own merits and any arbitrary
limitation on such a transaction can serve no purpose contemplated in the Securities
Exchange Act of 1934 or any other useful purpose that we can envisage. Again, the begin
nings of many small corporate enterprises depend on the ability of the incorporators to
borrow liberally against the value of their stock in the new corporation,— from banks
or individuals or jointly from both. What is the occasion for imposing limitations on their
capacity to do so? As a general query, why should anyone be limited, other than by the
7
merits of the particular case, in his capacity to borrow money to buy any security, if
the acquisition of that security is unrelated to any purpose contemplated by the Securities
Exchange Act of 1934?
Incidentally, if the power sought under the proposed Sec. 7(d) were granted, how
could it be administered as a practical matter in any workable regulatory formula? The
maximum loan value of the particular security would have to be related percentage-wise
to some price. The regulatory formula must predicate the determination of that price on
some reasonably simple and clear standard in order to avoid utter confusion or substantial
elimination of the type of transaction being regulated. The “current market price” of
securities dealt with on the security exchanges affords a simple and readily ascertainable
figure on which to base the loan values of securities traded on the exchanges. Stocks not
registered on an exchange or dealt in actively in over-the-counter markets, encompassed
by the proposed amendment, have no such current market price and the determination
of their price for loan purposes in ordinary banking transactions depends on a multitude
of circumstances and considerations, rarely the same in any two cases, which cannot be
rationally reflected in any workable regulatory formula. There are limits to the regulatory
refinements within which the national economy can effectively function.
The Federal Advisory Council unanimously opposes the adoption of the proposed
amendment to Sec. 7(d) because the new regulatory power therein sought (1) does not
belong in the Securities Exchange Act of 1934, not being pertinent to the accomplishment
of any purpose of that Act, and (2), standing independently, is both unnecessary and
undesirable. If, in view of war requirements, it is deemed necessary to impose such credit
controls, they should and can be effected under existing emergency legislation. A control,
such as contemplated in the amendment to Sec. 7(d), should not under any circumstances,
we believe, be incorporated in non-emergency legislation until its necessity and desir
ability have been clearly demonstrated.
It should be remembered that the proposed amendment to Sec. 7(d), concededly, is
not designed as a regulatory control over the merits of a particular loan for the protection
of the lending bank. Existing supervisory controls over banks in such respects have
proved sufficient. Moreover, the proposed amendment is not designed for the protection
of the banking structure as a whole, i.e., as a limitation on the aggregate extensions of such
credits based on the over-all quantity which may be prudently and safely absorbed by
the banking structure. Sec. ll(m) of the Federal Reserve Act (1935) already provides
the Board of Governors of the Federal Reserve System with a power to establish loan
limitations to prevent “the undue use of bank loans for the speculative carrying of secur
ities”. Incidentally, the Board of Governors has found no occasion for the exercise of
this Sec. ll(m) power,— because, it may be assumed, (1) its regulation of loan values
in respect of registered securities under the existing Sec. 7(d) of the Securities Exchange
Act of 1934 has apparently removed any need for the exercise of its Sec. ll(m) powers
over banks in respect of credit extensions involving a purchase or carry of registered
securities and (2), presumably, no need for the exercise of the Sec. 11 (m) powers has
arisen in respect of the purchase or carry of any other type of securities.
The avowed objective of the proposed amendment to Sec. 7(d) is to create a mech
anism for imposing loan limitations on any borrowing, from banks or elsewhere, involving
the purchase or carry of any unregistered security,— in other words, to extend the existing
Sec. 7(d) regulatory power into the unregistered security field and apply it to borrowings
having no relation to a transaction in securities “commonly conducted on security ex
changes and over-the-counter markets”. We fail to see any public interest that justifies
such an additional regulatory power. We can foresee, however, the disruptive and desstructive impacts on every day transactions affecting intimately the aspirations and wel
fare of numberless individuals,— if such an unlimited regulatory power should ever be
granted and applied. It is to be hoped that the proposed amendment will not be adopted
8
in the absence of some preponderant showing that it is requisite for the protection of
some specific public interest which outweighs the individual hardships it will entail.
Mr. Parry, Chief of the Division of Security Loans of the Board of Governors of the
Federal Reserve System and apparently the most active proponent of the amendment,
in his testimony before your Committee on January 20, 1942 in its support, concedes
that it goes beyond the scope of the Securities Exchange Act of 1934 and states frankly
that the additional type of control sought by the amendment is not predicated on any
need for it up to the present time but should be made available as an independent control
measure against the potentiality of its need in the future. We submit that a governmental
regulatory power should not be created on any such hypothesis,— particularly so in this
instance in the absence of any inquiry into the potential imminence of its potential need
and its potential desirability in the light of the degree of such potential need if and when
it may arise. Moreover, the granting of such regulatory power in anticipation of its future
need automatically raises at least the prospect of any untimely exercise of the power by
the grantees on the simple human defensive reaction that they will be charged with
dereliction of duty if they do not proceed to carry out the “Congressional mandate”.
We readily accept any governmental control of our national economy essential to
war requirements. We may easily reconcile ourselves to the necessity of governmental
controls of our peace-time economy in the light of a demonstrated national interest.
Without any inconsistency, however, we can, we believe, validly oppose the creation of
regulatory powers in the absence of any national interest or requirement. We, therefore,
urge that the proposed amendment of Sec. 7(d) be rejected.
This memorandum has the unanimous approval of all of the twelve members of the
Federal Advisory Council and is respectfully submitted on their behalf.
FEDERAL ADVISORY COUNCIL
(Signed) E. E. Brown ,
President
9
i
R E P O R T O F T H E S E C R E T A R Y 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
F o r th e Y e a r E n d in g D e c e m b e r 3 1 , 194 1
Balance on hand December
31, 1940.......................... $4,596.58
Salary..........................................$2,500.00
Conference expenses..................
Assessment—Twelve Federal
Reserve Banks................ 4,200.00
834.74
Printing & stationery................. 362.25
Postage, telephone, and
telegraph.................................
71.03
Miscellaneous.............................
35.78
Balance on hand December
31, 1941.................................. 4,992.78
$8,796.58
$8,796.58
Chicago, Illinois
January 6, 1942
To the Federal Advisory Council:
I have audited the books, vouchers, and accounts of the Secretary of the Federal
Advisory Council for the year ending December 31, 1941, and certify that the above
statement agrees therewith.
Respectfully,
THE FIRST NATIONAL BANK OF CHICAGO,
By J. J. Buechner,
Asst. Auditor
10
M IN U T E S
OF
M E E T IN G
OF TH E
FED ERA L
A D V IS O R Y C O U N C IL
February 16, 1942
At 10:00 A. M., the Federal Advisory Council reconvened in the Board Room of the
Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the Chair.
Present:
Mr. Charles E. Spencer, Jr.
District No. 1
Mr. George L. Harrison
District No. 2
Mr. William Fulton Kurtz
District No. 3
Mr. B. G. Huntington
District No. 4
Mr. H. Lane Young
District No. 6
Mr. Edward E. Brown
District No. 7
Mr. S. E. Ragland
District No. 8
Mr. Lyman E. Wakefield
District No. 9
Mr. W. Dale Clark
District No. 10
Mr. George M. Wallace
District No. 12
Mr. Walter Lichtenstein
Secretary
Absent:
Mr. Robert V. Fleming
District No. 5
Mr. Nathan Adams
District No. 11
The draft of the resolution dealing with reserve requirements, which will be found
in the minutes of the previous meeting, was presented and approved.
The draft of the resolution dealing with the issue of Treasury Bills, which was adopted
at the previous meeting, was presented and approved.
The meeting adjourned at 10:15 A. M.
WALTER LICHTENSTEIN,
Secretary.
11
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 G O V ERN O RS O F T H E F E D E R A L R E SE R V E SY ST E M
February 16, 1942
At 10:30 A. M., a joint conference of 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 and Ernest G. Draper; also, Lawrence Clayton, Assistant to the Chairman;
Elliott Thurston, Special Assistant to the Chairman; Chester Morrill, Secretary of the
Board of Governors; Liston P. Bethea and S. R. Carpenter, Assistant Secretaries;
Walter Wyatt, General Counsel; Magruder Wingfield, Assistant General Counsel; E. A.
Goldenweiser, Director, Division of Research and Statistics; Leo H. Paulger, Chief,
Division of Examination; Edward L. Smead, Chief, Division of Bank Operations, and
Carl E. Parry, Chief, Division of Security Loans.
Present: Members of the Federal Advisory Council:
Mr. Edward E. Brown, President; Mr. George L. Harrison, Vice President; Messrs.
Charles E. Spencer, Jr., William Fulton Kurtz, B. G. Huntington, Robert V. Fleming,
H. Lane Young, S. E. Ragland, Lyman E. Wakefield, W. Dale Clark, Nathan Adams,
George M. Wallace, and Walter Lichtenstein, Secretary.
The President of the Council brought up the matter of reserve requirements, and
the Chairman of the Board of Governors discussed the issue at considerable length.
The President of the Council stated that he thought there was not any disagreement
between the Board and the Council on the subject of reserve requirements.
The Chairman of the Board of Governors discussed at some length the whole fiscal
situation.
The Secretary of the Council read the resolution dealing with the issue of Treasury
bills.
The President of the Council read the statement, as drawn up by Mr. Harrison,
giving the views of the Council as to the direct purchases of government securities by the
Federal Reserve Bank.
The Chairman of the Board of Governors denied that he had ever said that a local
Federal Reserve bank should have any voice as to the decision as to when direct purchases
are to be made. In his opinion, the whole matter would have to be left in the hands of the
Open Market Committee.
Governor McKee joined the meeting at 12:10 P. M.
A lengthy discussion took place about war financing in respect to which the Chairman
of the Board of Governors made a lengthy statement.
The President of the Council brought up the matter of the proposed amendment
to Section 7(d) of the Securities Exchange Act of 1934. He stated that the Council felt
12
that permanent power to regulate the margin requirements in the case of collateral loans
made on unregistered securities should not be given to the Board of Governors. He pointed
out some of the reasons why the members of the Council are opposed to the proposed
amendment.
The President of the Council stated, furthermore, that the Council wished to file a
statem ent w ith the Com m ittee on Interstate and Foreign Commerce of the House of
Representatives.
The Chairman of the Board of Governors stated that the Board did not have any
objections to the filing of such a statem ent as proposed by the Federal Advisory Council.
The President of the Council asked the Board of Governors what its attitude would
be if the E xecutive Com m ittee of the Council arranged to meet with the Board of Gover
nors once a m onth, even though it be for only a brief period. He said that the members
of the Council felt that such meetings during the present emergency would be advan
tageous. The members of the Board of Governors stated that they were willing to meet
with the E xecutive Com m ittee of the Council once a month. The Secretary of the Board
of Governors and the Secretary of the Council were instructed to work out a schedule
for such m onthly m eetings.
The m eeting adjourned at 1:55 P. M .
W ALTER LICHTENSTEIN,
Secretary.
13
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 G O V ER N O R S O F T H E F E D E R A L R E S E R V E SY ST E M
February 16, 1942
At 2:50 P. 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:
Vice Chairman Ronald Ransom; Governors M. S. Szymczak, John K. McKee; also,
Chester Morrill, Secretary of the Board of Governors; Liston P. Bethea and S. R. Car
penter, Assistant Secretaries of the Board; Walter Wyatt, General Counsel; George B.
Vest and Magruder Wingfield, Assistant General Counsels; E. A. Goldenweiser, Director,
Division of Research and Statistics; Leo H. Paulger, Chief, Division of Examination;
Edward L. Smead, Chief, Division of Bank Operations, and Carl E. Parry, Chief, Divi
sion of Security Loans.
Present: Members of Federal Advisory Council:
Edward E. Brown, President; Messrs. Charles E. Spencer, Jr., William Fulton Kurtz,
B. G. Huntington, Robert V. Fleming, H. Lane Young, S. E. Ragland, Lyman E. Wake
field, W. Dale Clark, Nathan Adams, George M. Wallace, and Walter Lichtenstein,
Secretary.
Governor McKee stated that he had in mind three subjects concerning which he
wished the advice of the Council:
1—Certain provisions under Regulation Q
2—Taxation of bank stock dividends and the effect on bank supervision
3—Proposal to repeal the prohibition against member banks of the Federal Reserve
System paying dividends or making loans while their reserves are deficient.
In respect to 1, Governor McKee expressed the opinion that there ought to be a
notice of withdrawal required from savings bank depositors.
The sentiment of the Council seemed to be to let matters rest and not attempt to
make any changes at this time. In respect to 2, Governor McKee felt that stock dividends
by banks should not be treated as current income, for it is desirable in certain instances
that banks increase their capital, and, at the present time, it is difficult for banks to in
crease their capital by selling stock in the open market. A request for legislation of this
kind would have to come from the supervising authorities for the purpose of placing
banks in position to protect exposed assets.
There was some discussion. The President of the Council summed up the feeling of
the members that, while being in sympathy with the suggestion of Governor McKee, it
seemed doubtful whether it would be possible to obtain legislation to exempt bank stock
holders from any tax levied on others.
In respect to item 3, Governor McKee stated that he believed it was inadvisable,
especially under present conditions, to maintain the rigid requirement that reserves must
be intact at all times. He believed, e. g., that when, at tax periods in some states, with
drawals are unusually heavy, banks might, for a very temporary period, be allowed to
14
make use of their reserves and thus avoid the necessity of liquidating any of their bond
portfolio. There was a feeling on the part of members of the Council that exceptions made
in connection w ith reserve requirements would create trouble, and the President of the
Council stated that if the computation of reserves in the case of banks located in reserve
and central reserve cities was on a weekly basis, as is true of country banks at the present
time, the difficulties, to which Governor M cKee referred, would in large part be averted.
The m eeting adjourned at 3:30 P. M .
WALTER LICHTENSTEIN,
Secretary.
15
M IN U T E S O F M E E T IN G
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
February 16, 1942
At 3:35 P. M., the Federal Advisory Council reconvened in the Board Room of the
Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the chair.
Present: Edward E. Brown, President; Messrs. Charles E. Spencer, Jr., William
Fulton Kurtz, B. G. Huntington, Robert V. Fleming, H. Lane Young, S. E. Ragland,
Lyman E. Wakefield, W. Dale Clark, Nathan Adams, George M. Wallace, and Walter
Lichtenstein, Secretary.
The Council listened to a discussion of business conditions presented by Dr. E. A.
Goldenweiser, Director of Research and Statistics of the Board of Governors. He discussed
in considerable detail the questions arising as a result of the war, the effect of the war
on business conditions, the fiscal policy of the government, and the role of the Federal
Reserve System in the present emergency.
The meeting adjourned at 4:15 P. M.
WALTER LICHTENSTEIN,
Secretary.
16
The
is
of
Note:
transcript
the Secretary^
notes
not
regarded at* ccaplete
necessarily entirely accurate* The
transcript should be considered ap bein.* strictly for the sole use of the
aeftbors of the Federal Advisory Council*
or
to be
* • L.
Secretary1s notes on meeting of the Federal Advisory
Council on February 15, 1942, at 2iOQ p. a *, in
room 336 of the Mayflower Hotel, Washington, D* C.
All the regular sssbers of the Federal Advisory Council were
present at the beginning except Mr. S&th&n Adaas who joined the meeting
at 2*45 ?• a* Mr. Edward E* Bro^n was elected Chai**aan pro tea, and
ir. Walter Lichtenstein Secretary pro tea*
The Secretary stated that coassunications had been received froa
t U the twelve Federal Beserve Ban^s certifying tc the ©lection of their
represents lives.
Upon nominations for the office of President of the Council be
ing called for, Mr. Edward E. Brcrr- wss Bcalo* tad and un&niaously elected.
Upon nominations for the office of Vice President beinr called for,
Er. George L* Harrison *as noiain ted and unanimously elected*
The following four members of the Council were elected as ap
pointive seabor® of the Fjceeutiwe Coswiitteet Messrs. TU F. Kurtz, B* G.
Boatington, Robert V. Fle&ing, and ‘ . E. Ragland.
Mr. Walter Lichtenstein «a* elected Secretary of the Federal
Advisory Council for the year 1942 at a salary of $2500 per annua.
She Council readopted the existing By-laws *hich will be print
ed snd attached to the formal minutes of the Council i?hen these are dis
tributed to the seabers.
The Secretary presented his financial report fcr the year 1941
*hich ras approved and ordered to be printed. As usual, it >ras voted to
authorise the Secretary to draw upon each Federal Reserve Bank for f‘350
to pay fcr secretarial and incidental ex enses*
The minutes of the Council meeting of Hcveaber 16-17, 19£1 were
approved.
Bro*n referred to the various suggestions made for the amendment of
R efla tio n K* then fee spoke of tho proposed amendment to 7(d ) of the Securities and
Exchange Comsdssion Act of 1934# «tilcb i. intended to give the BonrA of Governors
of the Federal Reserve System the enne power of regulation over unlisted securities
*fcieh it now has over listed s e c u r itie s , bonds, and the like, an exception being made
for Government bonds, as well as State and municipal bondn. Parry *as the only
representative of the Bosrd who testified at the hearings of the House Committee
cm Interstate and Foreign Commerce, and he ims cm the star; 1 only fifteen minutes.
He spoke on 7(d) for only fiv e minutes, and stated that speculation In lifted secur
ities airrht spill over into unlisted securities, and under existing conditions that
eight create an ini la tio m ry movement. It would, therefore, he very desirable If
the Bovrd had the pc? er in case of necessity to prevent violent s ecul^tion in
this class of securities if such should arise. Brown went on to point out that
such a provision warn unnecessary and might work considerable hardship* For ex
ample, if an o?mer of most of the shares of stock o: a closely held cor ora tic»
should die and his employees should want to buy the business, then ^ bank could not
ma£e a loan for such a purpose except subject to the. re>rulations of the Bo rd*
Such power in the hands of the Board would menn a further step toward complete
credit control* There isn*t any point in roviding against a speculative move
ment in these securities at the present tiise, for as long as the emergency la^ts
the President can no^ confer the necessary :ower u on the Bo rd under the Trading
with the Enemy Act; consequently there lsn*t any need for permanent legislation
on this subject a t th is tim e. Th is whole ratter
presented at the hearings
of the Congressional Committee as if tho suggestion had been fully agreed to by
the Securities and Exchange Commission and the Investment bankers*
Bro^n brought up the question of direct purchases by the Feder&l Re
serve System from the Treasury of issues of securities* If direct purchases are
to be made they should be limited probably to Issues *dth maturity of not
more than one ye r, and also limited as to amount* The Senate has passed the
bill permitting direct purchases, and the bill has also been recommended by
the Rouse Cos&mittee* However, much opposition tc it has arisen in the House*
It may be recalled that when the bill which ultimately became the Banking Act
of 1935 sas being considered, Eccles wanted the power to sake direct purchases
aad also the right to raise reserve requirements to 100%* Re also asked that
the functions of the Open Market Cossaittee be transferred entirely to the Board*
Fleming regards the power as a very dangerous one, though recognir.es
in certain emergencies It might be needed*
Wakefield* Eccles has a plan to nullify all influence of local Fed
eral Reserve Bank bc .rds and to eliminate all banker influence on these boards*
In other words, he wants the Board to have full control*
Harrison believes it very d^n^erous to give such a power without any
limitation* Re believes it was the power of the central banks to buy directly
from the Treasury that caused the financial downfall after the last war of both
Gerwany and Frnnce* The power in question m y be needed in an emergency,
and it fflust be remembered that at ti^es the Bank of England has gone into
the earket and bought up ® whole issue in order to prevent any violent fluc
tuations*
»»«,*;afield* ??* are at present partners in business with the Govera
sest helping it to finance the war, and it is essential to kmve the machinery
tc stave off a financial disaster and during the present emergency it may
be necessary to give the Board the power for which it has asked* It simply
cannot be permitted that a Government is rue should fail*
Harrison does not *now hovr effective any limitation that could be
■ade aay be, but at any rate the Congress and the Government generally will
then be sade to realise that the power aay be a very dangerous one* He be
lieves that direct porcha ses would be* handled by the Open JIar&et Co*ssittee,
but he is under the impression that Eccles does not believe that it would
rest in the Open Market Committee*
Brotra fss.de a statement that Congressman Charles S. Dewey saw Bell,
and apparently Bell believes that the po^er should be limited to the pur
chase of six-months1 bills* Ke goes on to say that he was rather of the
opinion that the Administration wants the bill enacted into law*
Ragland
dees not think there is any need of Federal Reserve Banks
buying directly from the Treasury*
Brown* In 1934-35 bankers felt that if Government credit wesnft
good, then it was desirable to h&ve Government securities decline in price
and thus make the situation evident* Ho* we have a different situation and
it would be a major disaster if an issue *ere to fail* At the present time
the proposal is not coupled with any frug^estion of unlimited control over re
serves* As a matter of fact, the Treasury at the present time probably wants
reserves lowered, and, furthermore, the proposed bill provides that the power
granted cease either in 19££ or six months after the m r is over* There is
soae danger that if too such opposition to the bill develops, it may resruit
in proposals to give unlimited power to the Board and couple this with smlimited porer over reserves*
Harrison suggests that the Council better not do anything that is
futile, and it may be well simply to strte that the Council has discussed the
aatter* Fhile it is opposed to the general principle of direct purchases,
BfTertheless in viei? of Socles1 statement that the Open Market Committee can
not ?ive a mandate to ®aice direct purchases but this ^ould rest in the hands
of the local Federal Reserve Batus, therefore the Council at the present time
will not oppose the b ill.
Suencer
has also heard that the Treasury vants reserves lowered*
—4—
Fleming igreea &ith Karr Iron that accepting Eccice* interpretation
of this would bo & more effective limitation than tho limitation to gix-ecnths
bills or the like* As Ion- as a government' 1 body does not have the full
power to mass the purchases, t h e r e is n 't any serious objection.
Brown. At the present time cooaerci il tenks say accept ^ar loan
deposit accounts only up to 100$ of capital and surplus* On February 13
the Treasury issued a regulation permitting commercial hanks to take war
loan deposit accounts amounting to 150? of capital and surplus. Furthermore,
the local Federal Reserve Banks have been informed that in case of any special
esergency, banks may be authorised to acce. t s t i l l larger v*ar loan de
posit accounts*
All the sombera present were asiced as to th eir respective opinions
and all agreed with Harrison rfco put into w r it in g the v i e * of the Council
as follows:
*The Federal Advisory Council believes that there is
objection in principle to the unrestricted right of a central
bank to sake advances to the Treasury, but in view of
the seriousness of the present emergency and in vie* of the
interpretation put upon th#» proposed law that urchase of
Government securities directly from the Treasury is subject
to the judgment of each Federal Reserve Bank and not subject
to the unrestricted direction of the Open Market Co&mittee,
there is no practicable objection to the proposed amendment.*
The subject of the pattern of financing the gap in the war program
which will have to be closed by the banks was then considered*
Kurts is very much concerned by possible attempts of the Treasury
to sticx too closely to financing the war by orthodox methods. This would
result in the trebling of Government holdings in commercial banks* Kurtz
points out that banking institutions would not be able to stand up against
demands made by the Treasury* I f every few months a new issue is put out,
then bonds will gradually decline with very bad results. &e believes that
arrangeaents should be made to put out long-term bonds at a fixed rate in a
Bort of tap issue. This will make investment funds available and the bill
saricet csn then be held in reserve. Banks can do a good job if bond prices
remain more or less stable, otherwise in 15 to IB months we cay suddenly dis
cover that bonds have fallon greatly in price. After all he questions whether
our banking structure can absorb an indefinite amount oi bonds.
Ea&efleld does not believe the maturity is an all-important factor,
•bile Kurt* thinks there is a great difference betreen bonds having a maturity
up to 10 years, and those running for 25 to
years.
30
Harrison
thinks many of these sp e cia l issues by the Treasury are
but a survey should be isade as to how such investment **»eney is really
available and tjive each class o f investors what it ^a n ts .
vronfj,
-5^atcefiold thinks it oul : be snxch better If there nasn11 all this
oversubscription of bonds because the result is it if- ira o^sib e to tell hew
strong the market really i s .
S;:n?ncer thinks there ought to be sossv? limitation placed upon indef
inite growth of de osits resulting in the capital structure of banks b^ing
completely out of lin^ with their lia b ilitie s. He believer that after the
limit of deposits ip re&ched a ll future investments should be in a Government
security of a lo* rate which does not fluctuate in value to any extent. Re
believes that a ton-year maturity is too long a period.
Boo- n says he does not ®ae *?hy the b ill n r k e t vouid not take care
of the situation just as well as bonds.
Spencer says that his idea is to have a certain class of issues
open only to banks and that th«y should be in the nature of a tap issue.
Study should be made of ho* banks can use increased deposits to buy this
special type of bonds available only for banks.
Wallace is afraid of the su&jertion as it would limit the saricet
for bonds outstanding at the present time.
Huntington believes a special issue of bonds ^ould be good but it
would bo rather difficult to fix a rate fair to a ll. Ke does not think there
ought to be anything cog ulsory about the buying of bonds, and the bonds should
carry a rate sufficiently high to enable banks to live.
ffakefieid says he doesn't have a very fixed opinion on the subject
but he dees object to a legal restriction on the amount of deposits a bank
aay receive. He feels that this would simply involve further control by the
Government c/ver money, and *ould result in credit becoming a purely fOTemaental function. Banks then ^ould be more or less service institutions. He
thinks if such provisions were put into effect as suggested they *ould remain
to hnunt b^nkf? for all tine, and very careful consideration should be given
to any such measures.
Clark would leavy things as they are except provide for a tap issue
of fairly long-term maturity.
Harrison thinks it is a question of sound fiscal administration.
There ourht to be special issues for investors of different categories. In
Britain the ban&s are financing the war and bills are issued with a rate of
1-1/83, and ao in a sense the banks are being subsidised, fie objects to se
curities which really represent * demand liability on the pirt of the Govern
ment, and he would like to see the amount of issue of defense bonds limited
to a givs?n ;>ercentage of the total nation'll debt.
Brown wants to Know what is bein^ done about having hsnks buy long
term bonds with relatively high prices, and in case of trouble, de- ending
upon the Government to taJce care of the situation.
K&rrlgon says th a t th e re c u # it to
& a e c u rity tc tak e c*re o f spec Vel
B 9 td 9 «
Flealng objects to further restrictions to be imposed u on bunks* He
believes that the present orthodox system eight w ell be continued but the
b&*us should not take securities having a maturity of
th*n tsn years*
Insurance com;*niee and similar imreitert* wight veil take tfce longer tern se
would be entirely in favor of h&vln* banks forbidden tc take se
curities of sor* than ten years
sore
curities: • He
Ragland thinks a study should be etade of the situation but go on with
the present method at this time*
Young believe** in a study of Treasury need,*?, and a second study of
the sources to eeet the various- needts* He is in favor of lim iting b^nks to
ten-year ssaturitie*;*
Adams says that a l l th is needs a lot of study* &e believes defense
bonds are bad* There ought to be certain typer of bonds which banks cannot
buy, and an issue o f bonds at a rate which w i l l sake these attractive tc gen
eral investors* He believ es a non-negoti&ble bond is fundamentally u ndesirable.
Bro^n points out th^t the members of the Council do not have any unan
imity of opinion, &nd in a c t , t h e ir vie*?s are go diverse that a general st^.tesent cculd not be drawn up but the matter sig h t w ell be discursed with the Board*
Bro^n then suggested discussion of the attitude of the Council toward
reserve requirements* Horgmthau *unta reserves lowered to induce banks tc buy
more bunds, ^hile Eccles wants reserve requirements, if anything, increased in
order to force funds into the Federal Reserve Banks which then c*n buy the bonds*
He also surge ?»tp that the "Executive Committee of the Council in future meet once
a aonth a? long as the emergency lasts*
3ro-n al^c .'ointst out that changes in reserve requirements might be
made by executive order*
Ldamg f*ays he prefers to leave the reserve requirements ms at present
since the lowering of requirements ^ould merely increase deposits at a result
of pyramiding*
Huntington
b e lie v e s that i t is wronc? tc l e t reserve requirements be
determined by the s h i f t i n g need fo r the s il e of bonds*
points out that when the jo in t st&tercent of December 31, 19£0
was issued we were fa ce d by a s p i r a l of in fla t io n *
fce were not at w ar, there
w ere n K any controls over p rices or the l i k e , there w ^ s n H any Lend-Lo^se,
and the re s u lt of i t a l l was th a t gold ras flow ing in very lnrge amounts into
the country*
IJorgenthau fear? the reserve s itu a tio n in New Tork i s such that
Brora.
rery soon He* Tcrk bm'ss *111 not bo in a position to buy bonds freely. New
Yorfc bants have lo.nt large amount a of deposits, ^hilo practically ill ether
sections of tho country hrsve gained.
Floalng
says that at present ^e are faced .vith {shortages in sany
things, and the needs? nave changed ©completely since Beceaber 31 * 1940*
Tte&efield states that in h i? opinion i t is not • ige to reduce re
serve requirements at present, but i f the needs o f the Treasury should re
quire i t , it T*ould have to be do ne.
Harrison f e e ls thc.t the rsechaniss o f changing reserve reouira&erts
should not be reported to exce t in car© of gre*t need, and he doubts whether
the Council b eliev es that the need i s s u ffic ie n t ly grevt at this time.
There should be as fa r at? p o ssible s t a b ilit y in reserve requirements, and
there should not be frequent ch a n ges. At the noment the Treasury does not
seed nev fin a n c in g , and so c e r t a in ly a t this tise reserve requirements
should be le ft as they 'ire.
Brown
b eliev e s that the Council might well pass a resolution on the
subject.
The Council unanimously v o te d , on motion by Harrison seconded by
Fleeing, that reserve requirements should not be changed et present. The
resolution as f i n a l l y adopted reads as fo llo w s:
The Federal Advisory C ou n cil believes that in prin
c ip al at l e a s t , reserve requirements should remain as
stable as p o ssible and that changes in such requirements
should not be nade u n le s s clearly required by the credit
s it u a t io n .
The Council i s o f the opinion that there is
no present need for a change in reserve re uiresientf.
Harrison points out that the B ritish have always bad during the war
* much larger issue o f b i l l s than we have ever h a d .
Bro*n
mould ii£ c to s^e a larger issue of b i l l s , which would help
to deflate d e p o s its .
I f the rate oa b i l l s were fix e d between 3/8 and 3 /4 of
'i l^rge aaount o f cor orate funds and unused funds of States and municipal
ities would be put in to b i l l s and thus taken out o f banks.
On motion «s&de by H a rriso n and seconded by ?agland, the following
re olution srar
j unanimously adopted:
The Federal Advisory Council suggests the desirability
of th^ Treasury considering favorably sn increase in the
amount o c Treasury b ills to he issued each week.
-g-
Loans to in d u s try
in *ind*
induatr/
*
r
Soerd
Xurtr suggest that the Council find cut •hat the
re -lly has
The Council i s opposed, a& i t d'ses net beiiev* in direct ioaas to
b y t h e cen tra l baniting s y s t e m .
?;e;TUl&tion H
H&rrlsaa
suggests that nothin- be don© about Herniation W. After
a ll, it has l i t t l e iaportance at present an the whole situation i? *'^«con care
of by- p rio rities and a llo c a t io n s .
Bro^n discu sses the proposed amendment to section 7 (i ) of the
Securities and Exchange Act of 1934* He feels certain that the Council is
opposed to this amendment, and he suggests that it be discussed frith the Bo^rd
and a letter sent to the Interstate and Foreirn Commerce Coas&ttee of the
House stating the p o sitio n o f the Council*
B ^rrisoa believer that the whole purpose is to enable Bender^on of the
Office of Price A*5*lnistraticn and C i v i l i m Supply to get control of the sertgage loans eade by insurance c;m >anies
Wakefield
suggests that Government o ffic ia ls be warned to be sore
careful in statements such as tapping saving?, ^hich cause trouble a ll ever
the country* &e alix> disc u sse d fa ls e statements in advertising put out by
the Federal Savings and Loan Associations
The s e ttin g adjourned at
6
Ti'anniiwnfiB
gfrqwn r*' :-ces the statement that ha understands the Council is opposed
to the proposed aat-' idnent, and that he w ill send a letter to the Interstate
and Foreign Coraisorce Cooaitte© o f ths Kousa stating the position of the Council*
p . a*
\
Secretary* a nctee on meeting; of tho Federal
Advisor*/ Council on February 1 6 , 19 42 , at
1 0 :0 0 a* s u , in the Bourd Roos of the Federal
Reserve B u ild in g , Washington, D* C*
A l l aenbero of the Council were present except
Uessrum Fleainc and A&aias*
The d raft of the resolution dealing
*?ith reserve re
quirements, which v?as adopted at the previous aeeting, *as pre
sented and approved*
The d raft o f the resolution dealing *;itfa the issue
of Treasury b i l l s , which was adopted at the previous aeeting,
was presented and approved*
The see ting adjoiiroed at 1 0 il5 a* a*
-10Secretary f s notes on meeting of the Federal
Advisory Council on February 16* 1942, at
1 0 *3 0 a . a * , in the Board Room of the Federal
Reserve Building!, Washington, D . C*
The Council a et vith the Bo r d . Ail c e t e r a of thft Council ^ere
present e x c e ;t Ur* Flem ing, -ho joined the meeting ut 1 0 :5 0 & . * . Of the
Board, the following ^ere present:
E cc le s, Ransom, Szyncz&k, ICcX.ee, Draper,
Clayton, Tburstcn, M o r r il l , Bethea, Carpenter, Syatt, W ingfield, Goldenveiner, Paulger, Smesd, and P arry. I t should be noted that Governor &c&ee
was not present at the beginning o f the meeting, but joined it at 12:10 p . m.
The Secretary of the Council read the re elution dealing with reserve
requirements.
Brcvn says that the Council recognises that in the present situa
tion there m y have to be m-Men changes, but thinks that at . regent change
is not needed.
E c c le s :
Reserve requirements have not been formally considered
However, i t has been suggested that the
problem say nave to be considered w ithin a month or go. He does not believe
that the reserve requirements should be lowered at present.
I f rates of the
short-term money market are a t present s t i l l below 3/8 of l£ , it weald not
appear as i f there war* any n^ed to ease up the situation any further. To
be sur*, Sew Y ork, a t th is ti; 3®, doe# not have es large a proportion of e cess reserves a*? it has had in the past* Xt a ll gets dc*n to a question of
hoe to finance the w a r .
I f the Treasury desires to continue tc have over
subscriptions by breaks and wants the banks to be the chief uy^rs of bonds,
thon it is d e s ir a b le , o b v io u s ly , to have larger amounts of excess reserves*
If the Treasu ry, however, means what it says - that it wishes t have as
such of the financing as p ossible done outride of the banxs, then, obviously,
large funds in the banks must be tapped. With banks having larger deposits
and fewer Governmental r ec u r itie s a vailable for investors, everything ought
to be done to avoid a fu rth er expansion o f bank deposits by having banks buy
sost of the Government s ec u r itie s *
I f money in circulation continues to in
crease and hoarding gees o n , then i t say beeose necessary to do something
^bout reserve requirem ents.
On the whole, open market operations are to be
preferred to changes in reserve requirements* Something sd^ht be done in
connection with changing the present arrangement of the three classes of
banks, to-wit:
banks in central reserve c i t i e s , banKs in reserve c it ie s ,
and a ll others*
I f the st- tute were amended, Chicago ou ht not to be a cen
tral reserve c i t y , for a fte r a l l , the flow of money Is fundamentally in and
out of Me* York and rates are la rgely determined by the situation in the New
Tcrfc jfioney market*
For this reason, i t may a t times be highly desirable tc
have reserve requirements in New tork changed and not affect other parts of
by the Bosrd and the Treasury*
•li
the co un try ,
E c c le s st te s t h a t these ?*re a er a ly h is personal v ie w s , but he
believes the other a-stbers o f the Bo rd a g r e e .
R a n »o n t g ;,y » c z a k , and Draper thereupon stated that th*>y were in
agreement v it h the C h a in r & n *
Brown s t a t e s t h a t he does a c t b e lie v e there i s s.ny disagreement
between the Board and the C o u n cil and th a t the n atter has b*en merely
brought up in consequence o f a pergonal and c o n fid e n t ia l rea&rk made to
Broan by Secreta ry o f the Tre asu ry &orgenthau*
Hanson a g r e e s *?ith Bro vn that in fcheae tirses changes may have to
be aade rather s u d d e n ly .
E c c le s ; JSorgenthau s a id to Eccles that h e *o a id l ik e a discussion
about reserve requirem ents a f t e r the inco&e tax collectio ns o f March 15 ere
out o f the w ay.
Secies* to ld h i a that before reserve requirements were con
sidered, i t adLght be w e ll to have soae e n s i d e r a t i o n given to a long range
program for e v e ry th in g de ended on what the Trenaury r e ally w anted.
I f finan
cing i f to be done l a r g e l y through banka, than reserves sav have to be
lowered. The S e c r e t a ry o f the T reasu ry agreed to have a f u l l discussion o f
the vhole prograa b e fo r e g iv in g c o n side ratio n s p e c ific a lly to the question
of reserve requirem ents*
Socles n o te s that there s ig h t r o ll be aoae other
types of securities* b e s id e s merely defense bonds, ^ a n financing o f 2g b il
lion d o lla rs a &oath i s r e q u ir e d , as w i l l shortly be the c ase , the situation
requires very d i f f e r e n t a s s u r e s fr o a those taken in aore noraal t in e s .
Harrison
says l i f e insurance cogpaaiea asuat know -shat the long
range ..>rogras i s to be because a t the present tiise, they do not fe e l free to
buy Government brands a t the p resen t low rate to the extent that they would
if they knew *rhat the future s it u a t io n in connection «ith the Government
bond smrket is to b e .
I f the insurance coapanies were told to buy Zkf bonds
freely as a p a t r io t ic d u ty , they ^o uld do ao ritho u t any h esita tio n *
Eccles*
I t is true everywhere in the world that there ia a feelin g that
central bunks do n o t p la y any part in the t’rar economy* In this view,
the quantity o f no sey i s not important as prices are controlled and goods are
rationed, and as a r e s u l t , people cannot do anything with money. Henderson
does not believe t h is to be true and Eccles is in agreement with Henderson on
this sub ject.
The B r itis h and the Gerraans also recognise that everything pos
sible mist be done to reduce funds in the hands o f the people* A proper tax
•ysten and proper fin a n cin g w i l l us« the e xisting funds for the purpose of
ptsrehaalng Government sec urities and w ill avo id, as far as p o s s ib le , creating
Q«*w funds. There are people in the Treasury who lean toward the school which
bolds the view that the amount of money is unimportant. However, the whole
trend is toward the view that funds in the bands of the people should be
-1 2 restricted, as far as p o ssib le*
Even in C?enaany, in spite of her great,
direct control over the s it u a t io n , it was found that price control and ration
ing, alone, w i l l not do the job*
Consequently, .o-called "iron savings"
*ere introduced by ^hieh savings are forced into the purchase of Govern®eat
securities, bearing a rate of 3^ .
The Secretary o f the Council read the resolution dealing ^ ith the
issue of Treasury B i l l s *
Brov-.n points out that it tould be most desirable to have a larger
supply of Treasury b i l l s than exists at present and suggests that instead of
issuing around 150 B i l l i o n d o ll trs a week, the &sount be raised to 300 mil
lion dollars a ^eek*
I f th is were done, many corporations, states, and arunielpslities would be b i l l i n g to put their surplus funds into Trsasarv bills*
They are not interested in the present lor rate, bit they would : i f the
rate went to about 1 / 4 of \%* I f this were done, the rise in ban* deposits
would be checked somewhat and also the flov of fun is between banks would
diminish. Ke pointed cut that since tlie rate has gone above 1 /4 of l£ , the
State of I l l i n o i s and sos*e r a ilr o a d s , nbout which he is informed, have begun
to buy Treasury b i l l s .
There is needed, however, a more stable market for
these b ills and a la rg e r supply o f them.
Ecclesg
The Open Market Committee hag suggested to the Treasury
that there should be sore b i l l s issued but the Open Market Committee is not
undertaking to s u ^^e ^t the aiaount* The Treasury o ffic ia ls do not sees to
disagree with th is v ie w , but simply have not done anything about the matter.
There are various ways of preventing savings from becoming too large. Thus,
for example, the Treasury might reduce balances in the banks and have the
Open Market Committee buy ju s t prior to the various tax periods} then, in ad
dition, w ithholding taxes o f various kinds sight also be introduced.
Bro~~n says b i l l s would work automatically, while the other methods
would not.
I t aigfct be i f the supply of b i l l s were increased and other simi
lar steps taken that the great swings, now existing in the flow of funds into
and out of in d iv id u a l b an ks, misfit be prevented, and also the present large
swings between various d is t r ic t s might be checked sosewhat. This large flow
of funds in and out o f d i s t r ic t s is due to the action of Lend-Lease and pro
duction of **&r goods, w h ic h , at various t in e s , result in unusually 1 urge pay^sent;) being made in ce r ta in d i s t r i c t s , the funds for this urpose being
withlr&wn fr c a other d i s t r i c t s .
In connection with the longer range program,
there is act any consensus on the part of the Council. In connection with
direct urchases o f issues by the Federal Peserve Banks, the st tesient as draitn
up by H<orison, g iv ia c the views of the C ouncil, ^as re^d by Bro*n: namely,
that "the F ederal Advisory Council believes that there is objection in prin
ciple to the u n r es tr ic ted r i ^ h t of a central bank to sake advances to the
-13-
Treasury, but in view o f the seriousness of th« present emergency, and in view
of the interpretation put upon the proposed law that the mrchase of Govemaent securities d ir e c tly frost the Treasury is subject to the judgment of ench
Federal ^eserv* B*nk and not subject tc the unrestricted direction of the O^en
Market Committee, there i s no practicable objection tc the jro posed amend'asat*”
Eccles
denied that he ever said that the
should have any voice in the decision of the direct
be useless i f any such interpretation wer*? made and
under i t , and the matter rculd be le ft in the hands
as at present*
local Federal Tteserve Bank
jurch&pes. the law would
no action would be taken
of the Open Market Committee,
Ransom pointed c at that the b i l l pending in Congress
sibly have the meaning stated by Brown, and he pointed out th*t
proposes is to take out the l a s t s ix words, re? ding:
"but only
market* of Section H * 3 (b ) o f the Federal Reserve Act* Ransom
to Section 12A under which the present Open Market Comritt^e is
could not pos
all the b ill
iw the open
iso referred
constituted*
Harrison
said he had an idea when he heard of the interpretation pre
sented by B w n that the argument ~r-s that direct urchases are not op n market
operations and t h a t , therefo re, the right of decision to make them would revert
to the local Federal Reserve Bank.
gccles disagrees *?ith the Council on the whole question and also
dees not believ e that the d ir e c t purchases caused the d iffic u ltie s in Gerr;any
and France, and he had D r . Goldenweiser distribu te a memorandum discussing
this question*
H arrison
states that he does not f e e l there is any real difference
between the C ouncil and the Bonrd on the need o f the enactment of the pro
posed b ill*
The Council believ es that with or without the supposed interpre
tation, the b i l l should he p assed .
Bro^n
agrees with Harrison*
Ransom states h is view that with some limitation as to possible
tcount and ch a rac te r, the d ir e c t
urchasing should be permitted,even after
the present emergency has passed*
Bro*?n r e ite r a t e s that the Council is in favor of the present b ill
and as tc p^rmsnent arrangements - that, at the moment, after a l l , is an
academic question*
Bro^p brings up the question of the r-attera of v~ar financing* The
•embers of the Council were not in agreement exce t that they a ll felt that
there should be some plan*
The Treasury seems to be follo'rin r_ a h‘ind—to—mouth
policy, borr winp as the a; ending departments of the Government need money.
The defense bonds are a demand l i a b i l i t y on the Treasury and therefore involve
-u-
a certain amount o f danger* There* a r e many schools of thought as to what
should be done. The Council feels that the Board must have considered the
problems, and the aeabere of the Council «culd very such li&e to have the
Board* s v ie s s.
Ransom In turn roggexte that it v.ould &« of rpre*.t value to the Board
to £nc* what the d iffe r e n t lines of t h o u ^ t of the a~mbers of the Council »©r«.
The 3o<rd has had discussions for months with the Treasury and vhile there has
been soae progress Tsade, no d e fin it e plan has been evolved.
Bro n says that the Council has about eight different plans In mind.
Flesd.ni: says that there was an agreement among members of the Coun
cil that securities bought by banks should not have a maturity beyond ten years.
Eccles states that he does not see any difference between registered
and ncn-negoiiable instruments on the one hand and other bonds in go far as
desand l i a b i l i t y i s concerned. He believes i t *ottld be inappropriate to dis
cuss in detail the memorandum submitted by the Bo rd to the Treasury prior to
discussing i t ®ith the Treasury. He does not see any objection, howeverf in
telling the members c*f the Council of certain o f the principle* upon Thich the
Rsaor&ndua submitted to the Treasury is based.
At this p o in t Governor HcKee joined the meeting, it b ing 1 2 ;I0 p . s .
Kccles aays the fe e lin g o f the Board is that bsnks should be used
for financing only a * s le s t repo rt, i . e . , sfter a l l other funds have been
tapped as fa r as p o s s ib le .
The Board fee ls the Treasury has not gone as far
as it might in th is d ir e c t io n .
I t ?ould be inadvisable to do the financing
on the scale required throu h the open market. I f that were to be dene, then
excess reserves would have to be? i n c r e s e d and the Bo rd would have to take
action on reserve requirements wicb sooner than it sight wish to do. In the
case of open market operatio ns, banks are the underwriters and i f banks sold
off some of their s e c u r it ie s , there would arise, the problem of a secondary
market.
I f private investors buy under such conditions, they have found they
suat usually ; *&y a premium. There are large corporation balances test are
not being used and there are also private investors vith large uninvested
funds, euch as trusts and the l i k e .
At present there are rarely any Goveraaent securities which the??® people wish to buy. The defense bonds now being
sold »ere designed fo r a certain class and there should be other securities
designed for other c l a s s e s . There should be a tap issue. I t eight be pro
vided that this l a s t class o f security could be cashed only after giving
notice say of anywhere bet* eon th irty and ninety days. There ai^ht be a further
provision that the rate o f interest might increase the longer the security
was h e ld . P'ir tould be p aid, but the instrument *?ould not be negotiable and
ban£3 r.ould not be allowed to buy this Instrument* Then there might ^ell be
another issue soeewhat sim ilar to Series G which ^ould be siade available to
insurance eoapaniee and s ia ila r long-term investors.
15Bro?n quentions hether cor orations have as large funds ae soseti«e» are thought to
a v a ilab le.
A discussion took place about railroad
funds *nd the l i * e .
At 12x20 P . M. Sccler le ft the meeting.
Hc£ee s&ye there ought to be a variety of bond** tc meet various
neede, to which Harrison agreas* There are too in&ny 'aanKs ^hose limitation
of capital structure is out of lin e v ith their deposits. There is a danger
they *culd buy too aany bonds and get into serious trouble.
Wakefield points out how trusts are plaited in subscribing for bonds.
For exaapie, & bank cannot s e ll Government bonds to a trust frcx its o*?n port
folio and to buy these bonds in the open »»rket is aost unsatisfactory#
Harrison
thinks a registered bond *hich had a nix-sonths period be
fore it cculd tie redeemed would cut out the so-called "free r id e r s ", but prob
ably weald not e l i a i n « t e the & a a ll b a n ^s. To be sure, when the war is over
ami people esay need the aoa-sy b a d ly , there may be a sudden great de’aand on
the Treasury at a t ia e when i t v i l l be hardest for the Treasury to aeet the
deaand.
, * .e fie ^ d x Brinks are involved vith the Govem aent now to such an
extent that their solvency depends alsaost e n tir e ly uooa ^o v o m ae a t s e cu ritie s.
The result is that there is needed a long-range vie--* as to ^hat the rate pat
tern is? to be.
At 12x40 P . M. I cc les returned.
W akefieldx For t h is re son he be lie v e s the fed e ral Reserve ?ystoa
2Bist
have the r ig h t to buy d ir e c tly froa the Treasury so as to ha^e complete
control of the rate s tr u c t u r e .
RanuJB says he doe* not be lie v e that direc t purchasing n e c e s^ r il y
fboold becoae a
raanent fe a t u r e , but a fte r the emergency is over, this ques
tion should be given c a r e f u l consideration*
Sgc&ee s a /s that there i s a scheme for perralttin^ bamcs tc? buy bonds
for indiv id uals and advance the funds fo r this ;u rpcse fo r a certain p er io d ,
for ■Fhich a service charge *?ould be a a d e .
Then i f the indiv id ual could not
keep his contract with the ban k, the bank ?o uid h&v«* th$ right to redeea the
bond in question im m ediately.
In th is way the banks would get a l i t t l e back
of their ex en&ee in cu rred by s o ilin g defense bonds*
L ecies» raimftlng h i s foraer d is c u s s io n :
To accoaplish the jaaxiaua
financing o utside o f bank**, there should be tap Issu es provided tc fleet the
needs of d if f e r e n t types of investors*
I f this did not brin g in enough fu nd s,
then ifiguet; dasignad p r i n c i p a l l y fo r banks *’ouid have to be put out and per
haps in that case banks would have soae preference in the purchase o f f^uch
-16issuss. This T'ouid reduce the amount of wnr et i su^f an;.* barncs would not
have to buy as aaich; the pressure cn the Board to reduce reserve requirements
could lessen &t% banks undvr such conditions would have sufficient funds to
buy a ll the Government se curities necessary, in so far as the?e were not
taknn up by non-banking purchases.
Tr&Ilaoe
terra a?ecuriti« *
asks *hetfter buries could be prohibited from buyinr long
Ecoies Bays that i t is conceivable that the purchase of lonp ter*
securities by bsnits, i» e* , beyond ten vestrs, ~i ht be limited to $ose ratio
of amount of such bonds purchased to the amount of the true sayings deposits
of a bank*
Harrison
suggests a non-negotiable registered tap issue on i*hlch
it sight be; pe m i tied to borrow money so that the Treasury would not be
called upon to se a t as large a demand l i a b i l i t y as sight otherwise be the
case*
Eccles thinks th is mii$it be done* He believes i t voula mean that
investors s ig h t buy acre f r e e l y , knowing that, I f necessary, they could bor
row on the bends even though they mi^ht never do so* I f the short ter® rate
should reach & point where i t caused the rat© on the lo»£ terra issues to go
up, then the Treasury would have tc su. port the short ter® rate in order to
prevent the price o f long tors bonds fro® dropping*
Is sorry that* the
rate of a ye-.r ago w&;4 not a &ininin ed*
I f an att**mpt wore made to revert to
the rate of a year a g o , i t * culd neon that issues which have been ;:ut out
since and -;hieh are now s e l l i n f at a premium *culd drop in price* So far
the very p lig h t increase in the short tera rate has not affected the long
tern rate*
In B ritain the banks were practically subsidised at the outbreak
of the war*
The B r it is h Government allowed the bond m >.rket to decline* Then
a price was fix e d belov
;f which securities could not be sold* This lov>ar iia it
has gradually bees r a i s e d ,
nl the tap is s u e , open to purchase by banks, pays
a little better rate so that banks get a certain advantage* We started in
the war a" a tia© when rates were getting lov er and maturities lengthening
and this s it u a t io n fix e d a kind of a bench a^rk which it is rather d ifficu lt
to change, though *•» may have tc do so*
In Britain bancs are cabled upon
only as a l a s t resort*
Brown brings up the setter of th® amendment to faction 7 (d ) of the
Securities Exchange Act o f 1934*
The Council feels that a permanent po*er to
re^alf te the amount of margin requirement in connection frith unregistered se
curities ought not be giv n to the Bo rd of Governors* In so far at this aay
be needed for the present emergency, the President now has the po ©r to confer
such authority under the? Trading * ith the Enemy Act* There are too many cases
where loans must be made on unregistered securities in order to settle eat- tes
and the lik e *
Furthermore, in most instances unregistered securities are those
of smaller corporations clo sely h e ld , and it is just impossible to determine
unrier a regulation the value of such, eecuritiee* He questions very seriously
whether there is any danger of In fla tio n from this fcource*
-17-
Ifogae pointy out that when this natter of the proposed amendments
to th© Securities Exchange Act of 1934 was discussed the Ba rd had before
it e Eetaorandum, of which a copy had ai:K> been given to the members of the
Council* M e « co n fessed, he vever, that hs did not realise that the sug
gested amendment vaa? included in the seaaor&ndum.
3rom
says he is not discussing th© past but ^culd like to go
into the merit#* o f the question.
Perrys More than a year ago ^hen the matter case up, the invecta©nt bankers and the Securities Exchange Cosaspd&sion submitted to Congress
all the suggestions that had been & a d e . Parry himself sat in cn the con
ferences held by the Secu rities Exchange CcBfiissioB at that tiae* The Fed
eral Reserve System made some suggestions merely intended to clarify the
law, but the suggestion to amend Section 7(d) was one which s?ent beyond the
a*»re B a t t e r of c±arif ic a t io n .
The Bo :rd was desirous of obtaining the s-ae
power ov*r unregistered securities as it now h*i£ over registered securities.
Be wished tc point o u t, however, that this porer doe* not cower loans on
securities as such, bat merely loans Rade for the purpose of buying or trad
ing in such s e c u r it ie s .
The Board's feelin g was that it sould m .ae its regu
lation covering purchase of securities such simpler and tlie idea was solely
to give the Bo rd pcreer in case the public should rush into the purchasing
of unregistered s e c u r it ie s * He admitted it sight be* impossible to draw a
regulation which could be made to apply to closely held securities which are
never traded in*
Eccles
asked «ho made the suggestion.
Parry answered that it case from the Federal Reserve System, was
approved by the S e c u r itie s Exchange Commission, and was not objected to by
the representatives o f tlie investment bankers*
Eccles wanted to know fro© Parry i f the Securities Exchange Com
mission would ^ant to take over this : >o^er i f the Board opposed the assndaent*
Parry stated that he believed the Securities Exchange Coanission
would try to take over the porer i f the Bo rd did not have i t .
ScSee
says that in h is opinion i f the amendment -ere adopted, it
wouii Impede the flow of capital into new enterprises*
Eccles
says that the whole discussion strikes hiss as purely academic
beoense he does not believe that the suggestions made to Congress w ill result
in a b i l l .ittd therefore questions whether any law w ill be enacted. So far
the hearings have dea lt purely with suggestions, * n i the House Committee on
Interstate and Foreign Commerce did not have an actual b ill before i t .
Brown says the Council wishes to f il e a statement with the Inter
state and Foreiim Cossm-*ree Committee o f the House* H© doubts whether the
-18-
amendment to Section 7 ( d )
v i l l be approved by the House Comittae* As be
said before, a s far as danger of in fla tio n is concerned if that should arise, the
President has assole ’*rser tc give the Soar'd, cr anyone else, control over
the eituatico during th« period of the ^Bergency*
Kccles
say* the Codicil should f ile its objections with the House
Cossaittee*
rangoa also states that there &ren*t any objections to having the
Council f i l e an adverse report with the House Committee on the proposed
asendraent to Section 7 ( d ) .
Farrjr:
There i s a proposal before Congre^r th it there be trans
ferred to the Board o f Governors the present pover of the Securities Ex
change Commission to in v estigate the solvency of brokers for the urpose of
protecting in v esto rs.
The 3o rd stated to the H o w * Cossittee that it pre
ferred to leave matters an they *are at present*
Brown: How *o u ia the Bo ird of Governors feel i f the Executive
Committee of the Council arranged to aeet * Ith the Bo rd cnee a month even
i f it be only for an hour? The members of the Council feel that such saeetings would be advantageous during the present emergency*
Socles stated that he personally could sot se«, any objection to
such aeetings provided they T?ere on sose regular schedule* At least a majority
of the members of the Bo rd could arrange to be present. Eccles agreed Hie
other nsabers of the Board ho?" they fe lt about i t and none of the® had any
objections. * t
decided that the Secretary of the Bo rd of Governors
and the Secretary of the Council should work out sose rchedule for the; e
*onthly s e e t in g s .
gcfCee wished to brinr up some other Batters, bait it wm?? decided
to do so a fte r lunch and the meeting adjourned at 1 :5 5 P* a.
-19S e creta ry 's notes on aeetiag of the "iederal Advi cry
Council on February 1 6 , 1942, ht 2*50 P .
In the 3o rd
Room o f the Federal Keserve Building, ?ashin/ton, D. C.
The Council mat with the Bo r d and a ll ssabert c r the Council *?ere
present except Mr* Harrison* O f the Bo rd, the following were present I
Hanses, Szyacsak, McS.ee, M o rrill, Bethaa, C r tenter, Goldeiweieer, Wyatt,
Wingfield, V est, Saead, parry,and P &ulger.
McKee e & id he had three subjects concerning
advice of the Council*
hich he wished the
1.
C ertain provisions under Regulation Q ,
2.
Taxation o f stock dividends and the effect on fcrnk
sup erv isio n ,
3*
Proposal to repeal the prohibition arainst aeaber
banks of the Federal Reserve System paying dividends
or a&k in g loans while their reserves rere deficient
1*
In regard to the problee of F-egul.‘-tlon Q the law provides
that the Bo^rd of Governors and also the Federal Deposit Insurance Cor cration are tc ©ace so ie regulations governing the withdrawal of savings froa
b%nk9.
h’aither the Bo rd nor the F* D* I . C . has done anything. Some States
require notice of withdrawal and in others it can be weived* There is a
question whether i t E ig h t not be desirable tc enforce notice in order that
defense bonda be bought cut of current income rather than out of accuarulnted s&vin^c* A ls o , savings banks a r* suffering froa the withdrawal of
their de p o sits, p artly for the porposa of ; urchasinr defense bonds and
partly for purposes of hoarding.
I f notice were insisted upon, withdrawals
would be sore o r d e r ly . Pennsylvania requires a t^o weeks* notice but other
States do not have a sim ilar requirement. The conv^r«ion of savings into
defense bemads raay create trouble.
I f and when a customer desire? tc with
draw h is savings to buy defense bonds, he should b~~> allowed to dc i t . Ap
parently M e e wants a l l r e stric tio n s removed.
3ro^n says the sentisent of the Council s^esss to be to let the
aatter rest as I t is a t present and Regulation Q be allowed to stand with
out any change at the present time.
2.
McKee:
Capital distribu tio n by stock dividend* There is a
case pending in the Supreoe Court on the subject as to whether a stock div
idend is to be regarded as income* McKee *culd lik e to see a law which pro
vided thot in the case of banks where, ^fter a stock dividend, the capital
reaained 5 per cent o f the average l ia b il it y of the previous ye^r, the stock
dividend ^ould not be subjoct to ta x .
The present rule is that a stock div
idend is not "taxable as incone, but there is Seise likelihood that the Supreme
Court w ill over throw this r u le .
-20—
Brovn says the Council has sympathy 1th the suggestion of SScKee
but he thinks it very Jubious whether it ould b*; possible to obtain legis
lation exempting bank stockholders fro® any tax levied on others.
fccK^e says that such a request for legislation *Ottld have to soss
frc® the supervising authorities and rould be based on public interest, go
the bank ati.ght be in a position to protect expo* d assets. H© points out
that at present a bank slight have a s*sall capital an i relatively large sur
plus, tho large surplus wiped out but the capital not impaired* As lon^ as
the capital is not lapalrec&t the supervising authorities cannot do any
thing, though as a a a tte r of f a c t , the sur lus is really a ;v*.rt of the cap
ital structure of the bank* I f banks wer^ allowed to ay out surplus in the
fora of stock dividends for the urpose of increasing the capital it s e lf, a
sounder situation * o u l & prevail*
At the present time the rule is that stoek
dividends are not regarded as Income and McKee wishes the matter to be left
as it is at present*
Bro~n points cat that from the supervising authorities 1 stand
point there I s n H any power tc ssake good depleted srur lus as Ion 5 as cap
ital is not Impaired* KcKee^s point is that sur lu s is used as part of loan
basis, but at present there i s n f t any way to compel a bank to swike good its
depletion of su r p lu s .
3* McKee points out that the necessity of a hank at a ll ti&es
sjaintainlng it s reserv es in tact cr* tm& too such pressure* His belief Is
that tfciij provision should be wore fle x ib le so that when «t tax periods
withdrawals are h e &v y , banks r i^ h t for a very temporary period maxe use of
tfceir reserves and thus avoid the necessity of liquidating any of their
bond portfolio* %
believ es this sould al^o relieve some of trie pressure
non existing to lower reserve requirements*
W akefield
says i f any such regulation were in force there **ould
be constant pressure tc have exce tions made hr which a bank could use some
of Its reserves*
McKee wants to ?*&intaln the present reserve requirements but there
is a feeling that i f the Treasury is not able to s e ll issues e a s ily , then re
serve requirements *rill h ve to be lowered* I f banks do not have to l i uidate
at intervals, as is true at p rese n t, then there w ill also be less need for
the Federal Reserve System buying directly fro® the Treasury*
Brown Thinks th*t exce tions made would create trouble and charges
of favoritism*
I f reserve and central re servo cities were on a weekly basis
as country banks are at present instend of b ing on a biweekly basis, it
wouli help flatters very much and such a chanre ^ould not be subject to any
of the d i f f i c u l t i e s which McKee*s proposal sigh t create.
EfcXee stats? th *t h is aim is to keep o f f inflation and at the same
tiae keep reserve requirement r* r i g i d .
The see tint*; adjourned at 3 *3 0 p . m.
—21'
s
Secretary* notes on meeting of the Federal Advi^ory
Council of February 1 6 , 1 9 42 , at 3i35 ? • K . in the Board
Kooa of the Federal Reserve Building, Waa&ington, P , C.
The Council set stlone with Dr* Goldenr sise:’ , all n t b i r s of the
Council e x c « ;t M r. E&rriacn being present.
D r . Ooldersweiser discussed the buriners situation# The whole
business situatio n I s centered in the ^ar and in questions related thereto,
such as large Government ex enditures, production, Jlo of Boney, where it
goes, etc. G enerally the problem has been to find employment and accelera
ting the production o f the country in order to employ sore people. Now
the problem is to fin d the mmn to do the r.oric and to bring production up
to the point needed. The fir u r e s of the President of the United States for
production are reost important. K is statement meant that about one-half of
our national income is to go for «a r* This implies that i f *e take iron,
non-ferrous m etals, and sh ip p in g, thesf1 w ill have
taie up about 30 bil
lion dollars in 194.2, w h ile , as a natter of f a c t , at present those indus
tries are only on the basis of about 15 billio n d o H rs for the year.
Probably these in du stries csn use 5 b illio n dollars sore and 6 billion fur
ther can be used u ; by ecnv&r^lon of p lan ts. This s t ill leaves a gap of 4
billion d o lla r s , u h ic h , it ssust be retseisbered, is af such as the whole automobile industry amounted to in 19'JL.
tc
Goldenweiser states that he is using the current price level. The
limiting factors are lack of s k ille d labor, materials, capacity of plants,
and, probably most s e rio u s, transportation. It must be remembered that in
this ear the time element is a l l important. To put the matter in a finan
cial way, our n atio n a l income, le t us s&y, is approximate!;y at prosest 110
billion doll .r s , of which a: out one-half is to go into ifor production, the
othar h a lf being l e f t fo r c i v i l i a n u s e . I f h alf of the national income
goes into war production, which ultim ateiy, after a l l , flows into the hands
of the people, then how can a large price rise be prevented? What is it
tn&t nust stCf- in order not to interfere with the creation or ornament? One
thing undoubtedly is that there w ill not be any n -w plants built for civilian
purposes an ! the consumption of autos, refrigerator??, and the lifce w ill be
sharply reduced. Taxation is to be increased by 9 billio n dollars. But
when a l l is said and done isuch money is s t i l l left in the hands of corpora
tions r.nd in the bands of in d iv id u a ls .
I f the Treasury w ill issue se
curities a ealin ? to large invests rs such can be accomplished, t v n under
sue
circumstance?*, banks would s t i l l have an ample place for the absorption
of short and medium-tena s e c u r itie s * The Federal Reserve System shculd
start a campaign to fin d
ho the inverters could be. Up to the present, a
class of se c u ritie s has not been issued to appeal to cor orate investors*
-22—
The Federal Reserve System can do aany things and c*n especially find cut
where the funds a s k i n g laves tiaent are to be found* The sonsy supply of
the country Is an essen tial feature of the economic structure, but some
Hew Deal economists hav« bo«e» spre ding the dec trine that the question of
socey is n #t of any importance* To be cure it is perfectly trie that not
everything can be settled by the centrcl of money ^nd credits* On the
other hand, i t is a lso true that i f the money problem is so handled that
one country is drained of it s resources while another is flooded, a bad
situation r il l r e s u lt . H aturally , this latter point is of sore importance
for the poet w
situ atio n than it is at the present soment. It is necescary to £et rid of many fe tish e s* the sion^y mechanisas hse a wcrid-wlde
function snd a l l forms of government us^ it— democracy, tot a ll ter irailam,
cosniunism, etc*
Bror-n ac&s whether uci.ienweiser has any opinion as to whether
Use spending of soney w ill lag because materials are not available* Re
points out that the Ccv^m®f;nt has a.«,ked soya bean growers? to increase
their production by
psr c en t, b u t, on the other band, refiners have
been unable to obtain • t inless steel m< edsd to inerears their refining ca
pacity.
G o l i e w e l s e r admits there «ro a ny :if t'icultiee, but believes the
needed results c&n be a tta in e d . H isto rically speaking, except during the
depression, *e have u su a lly had a shortage of labo r, but now we are faced
practically for the f ir c t tisse in the history of the country with a short
age of m aterials.
Ragland
war economy.
a s ’<e ?-hat e ffe c t our large gold supply r i l l hrre on our
Goldenweiaer answers, non** at a i l . He does not gee any wav of
redis trib itin £ the f o l d . He says we must be farsighted and the 23 billion
dollars of geld n ig h t as r e l l be written o ff for the tire b a i»g . Certaany
and France were ruined by in fla tio n because they could not or *ould not
raise s u ffic ie n t funds by aeans o f taxation to saeet th^ir obi l o t i o n s — in
one case re a ra tio o s and in the oth^r the coi t of reconstruction* Under
such conditions, in fla t io n is bound to cose and the exact means by ^hich
it is produced ie r e la t iv e ly unimportant.
The meeting adjourned at 4 :1 5 F* M*
@FedFRASER