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MINUTES OF MEETINGS of the FEDERAL ADVISORY COUNCIL February 19-21, 1950 May 14-16, 1950 October 1-3, 1950 November 19-21, 1950 and of the MEETINGS of the EXECUTIVE COMMITTEE August 1, 1950 September 13, 1950 OFFICERS AND MEMBERS OF THE FEDERAL ADVISORY COUNCIL For the Year 1950 OFFICERS: President, Edward E. Brown Vice President, Robert V. Fleming Director, N. Baxter Jackson Director, Frederic A. Potts Director, Sidney B. Congdon Secretary, Herbert V. Prochnow EXECUTIVE COMMITTEE: Edward E. Brown Robert V. Fleming N. Baxter Jackson Frederic A. Potts Sidney B. Congdon MEMBERS: Walter S. Bucklin N. Baxter Jackson Frederic A. Potts Sidney B. Congdon Robert V. Fleming J. T. Brown Edward E. Brown W. L. Hemingway Joseph F. Ringland David T. Beals J. E. Woods James K. Lochead 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. 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 Executive Committee. 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 compensa tion shall be fixed by the Executive Committee. ARTICLE IV. EXECUTIVE COMMITTEE The Executive Committee, as indicated in Article I of the by-laws, 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 Executive Committee to keep in close touch with the Board of Governors of the Federal Reserve System and with their regulations and promulgations, 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 the power to fix the time and place of holding its regular and special meetings and methods of giving notice thereof. The Executive Committee shall have full power, as officers of the Council, to act for the Council between meetings of the Council. 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. 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. 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 dis cussions of the Council but shall not be entitled to vote. ARTICLE VIII. AMENDMENTS 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 19, 1950 3 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 19, 1950 The first and organizational meeting of the Federal Advisory Council for the year 1950 was convened in Room 932 of the Mayflower Hotel, Washington, D. C., on February 19, 1950, at 2:15 P.M. Present: Walter S. Bucklin N. Baxter Jackson Frederic A. Potts Sidney B. Congdon Robert V. Fleming J. T. Brown Edward E. Brown W. L. Hemingway Clarence E. Hill (Alternate for Joseph F. Ringland) David T. Beals J. E. Woods James K. Lochead Herbert V. Prochnow 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. 11 District No. 12 Secretary Absent: Joseph F. Ringland District No. 9 Mr. J. T. Brown was elected Chairman pro tem and Mr. Herbert V. Prochnow, 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 1950. The following officers were nominated and unanimously elected: Edward E. Brown, President Robert V. Fleming, Vice President N. Baxter Jackson, Director Frederic A. Potts, Director Sidney B. Congdon, Director Herbert V. Prochnow, Secretary On motion, duly made and seconded, the salary of the Secretary was fixed at $2,500, which has been the Secretary’s salary in previous years. On motion, duly made and seconded, the Council amended Articles I, III and IV of the by-laws. The by-laws, as amended, are a part of these minutes. The Secretary presented his financial report for the year 1949, which had been audited by Mr. J. J. Buechner, Assistant Auditor of The First National Bank of Chicago. The 4 report was approved and ordered placed on file. A copy of the report is attached and made a part of these minutes. On motion, duly made and seconded, the printed minutes for the meetings held on February 13, 14, 15, 1949; May 15, 16, 17, 1949; September 18,19, 20,1949; and Novem ber 13, 14, 15, 1949, copies of which had been sent previously to the members of the Council, were approved. On motion, duly made and seconded, a resolution was adopted authorizing the Secre tary to ask each Federal Reserve bank to contribute $350.00 toward the secretarial and incidental expenses of the Federal Advisory Council for the year 1950 and to draw upon it for that purpose. President Brown stated that Chairman McCabe had requested the Council’s view on the bank holding company legislation pending in Congress. The opinion of the Council is to be found in the letter from the Council addressed to the Secretary of the Board of Governors of the Federal Reserve System, dated February 20, 1950, and which appears on page 12. An extended discussion on Reserve Requirements followed, and in particular on the uniform reserve proposal of the Board Staff. All members of the Council were against the inclusion of non-member banks under the Board’s authority over reserves. The meeting adjourned at 5:45 P.M. HERBERT V. PROCHNOW Secretary. 5 REPORT OF THE SECRETARY OF THE FEDERAL ADVISORY COUNCIL For the Year Ended December 31, 1949 Balance on hand December 31, 1948...............$ 6,733.90 Salaries............................................$ 2,500.00 Conference Expenses................. 1,011.96 Assessments— 12 Federal Reserve Banks.. 4,200.00 $10,933.90 Printing and stationery............ 415.80 Postage, telephone and telegraph................................... 134.46 Balance on hand December 31, 1949................ 6,871.68 $10,933.90 Chicago, Illinois February 1, 1950 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 December 31, 1949, and certify that the above state ment agrees therewith. Respectfully, THE FIRST NATIONAL BANK OF CHICAGO (Signed) J. J. Buechner Assistant Auditor 6 MINUTES OF THE M EETING OF THE FEDERAL ADVISORY COUNCIL February 20, 1950 At 10:10 A.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D. C., for a meeting with the members of the Board Staff. Present: Members of the Board Staff of the Federal Reserve System: Dr. Woodlief Thomas, Dr. Ralph A. Young, and Messrs. Horbett, Collier, Noyes and Anderson. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, Frederic A. Potts, Sidney B. Congdon, J. T. Brown, W. L. Hemingway; Clarence E. Hill (Alternate for Joseph F. Ringland); David T. Beals, J. E. Woods, James K. Lochead, and Herbert V. Prochnow, Secretary. Absent: Mr. Joseph F. Ringland. The members of the Council and the Board Staff informally discussed the Staff’s suggestion on reserve requirements. It was stated in the course of the discussion that the nature of interbank deposits of the livestock banks significantly differs from interbank deposits of other banks and, therefore, the proposal would tend to be inequitable. In addi tion, it was suggested that inasmuch as the proposal would increase the reserves of a number of country banks, politically, it would be difficult to enact legislation. The meeting adjourned at 12:40 P.M. HERBERT V. PROCHNOW Secretary. 7 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 20, 1950 At 2:00 P.M. the Federal Advisory Council reconvened in the Board Room of the Federal Reserve Building, Washington, D. C., with the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, Frederic A. Potts, Sidney B. Congdon, J. T. Brown; Clarence E. Hill (Alternate for Joseph F. Ringland); David T. Beals, J. E. Woods, James K. Lochead, and Herbert V. Prochnow, Secretary. Absent: Messrs. Robert V. Fleming, W. L. Hemingway, and Joseph F. Ringland. Dr. Woodlief Thomas, Economic Advisor to the Board, spoke off-the-record on gov ernment securities. The meeting adjourned at 3:40 P.M. HERBERT V. PROCHNOW Secretary. 8 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM February 21, 1950 At 10:40 A.M., a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Thomas B. McCabe; Governors Marriner S. Eccles, M. S. Szymczak, Ernest G. Draper and James K. Vardaman, Jr.; also Mr. S. R. Carpenter, Secretary of the Board of Governors; Mr. Elliott Thurston, Assistant to the Board; Mr. Chester Morrill, Special Advisor to the Board; Mr. Winfield W. Riefler, Assistant to the Chair man; Mr. Woodlief Thomas, Economic Advisor to the Board; Mr. Ralph A. Young, Director, Division of Research and Statistics; Mr. George B. Vest, General Counsel, Legal Division; Mr. Merritt Sherman, Assistant Secretary; and Mr. J. E. Horbett, Assist ant Director, Division of Bank Operations. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, J. T. Brown, W. L. Heming way; Clarence E. Hill (Alternate for Joseph F. Ringland); David T. Beals, J. E. Woods, James K. Lochead, and Herbert V. Prochnow, Secretary. Absent: Mr. Joseph F. Ringland. The President of the Council stated that in accordance with the wish expressed by Chairman McCabe, the Council had not prepared a written memorandum of its conclu sions regarding the Staff Study on reserves, but that the Council was prepared to explore and discuss the subject with the Board. President Brown pointed out that under the Staff Study, the central reserve city banks will have lower reserves, the reserves of the reserve city banks will be about the same, while many of the country banks will be required to keep more reserves. Any plan which lowers the reserves for central reserve cities and increases them for country banks will meet opposition in Congress. An extended discussion followed in which members of the Council reiterated President Brown’s statement. In addition, it was stated that since the interbank deposits of the stock yards banks seemingly differ from the inter-bank deposits of other banks, the stock yards banks would be penalized. Chairman McCabe replied that the formula outlined in the proposal is subject to adjustment. He also expressed his appreciation for the excellent comments made by the members of the Council on the Staff Study. 9 Mr. Eccles stated that the proposal related to housekeeping and was desirable, but from the standpoint of controlling the money and credit supply of the country it would be ineffective. He added that the only way to provide adequate control was by a special reserve. Chairman McCabe suggested that the Council appoint a committee to work with the Staff on the reserve proposal. The meeting adjourned at 1:05 P.M. HERBERT V. PROCHNOW Secretary. 10 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 21,1950 At 2:15 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: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, Frederic A. Potts, Sidney B. Congdon, J. T. Brown, W. L. Hemingway;Clarence E. Hill (Alternate for Joseph F. Ringland); David T. Beals, J. E. Woods, James K. Lochead, and Herbert V. Prochnow, Secretary. Absent: Mr. Joseph F. Ringland. On motion duly made and seconded, President Brown was authorized to appoint a committee to work with the Board and the Board Staff in connection with the matter of reserve requirements. President Brown then appointed the following committee: Robert V. Fleming, Chairman David T. Beals J. T. Brown N. Baxter Jackson Frederic A. Potts The meeting adjourned at 2:25 P.M. HERBERT V. PROCHNOW Secretary. 11 COPY OF LETTER SENT TO THE SECRETARY OF THE BOARD OF GOVERNORS REGARDING BANK HOLDING COMPANY BILL S. 2318 February 20, 1950 Mr. S. R. Carpenter, Secretary, Board of Governors of the Federal Reserve System, Washington 25, D. C. Dear Mr. Carpenter: A few days before the present meeting of the Federal Advisory Council, Mr. McCabe telegraphed Mr. Brown asking the position of the present Council on bank holding com pany bill, S. 2318. The Council wishes to inform the Board of Governors that the Council approves bank holding company bill, S. 2318, subject to the inclusion of a satisfactory provision which would exempt wholly-owned or affiliated trust companies not doing a commercial banking business. It is felt by some of the members particularly interested that slight changes in language which would not effect any changes in substance might be desirable. Yours very sincerely, HERBERT V. PROCHNOW Secretary. 12 NOTE: This tr a n s c r ip t of the S e c re ta ry 1 s notes i s not to be regarded as complete or n e c e s s a r ily e n t i r e l y accurate. The transs c r ip t i s f o r the sole use of the members of the F e d e ra l A dvisory Council. The conc is e o f f i c i a l minutes f o r the en tire year are p rin ted and d is tr ib u te d l a t e r . j I j I | I | H.V.P. The S e c r e t a r y 's notes on the meeting of the F ed era l A d visory Council on February 19 ,19 5 0 , a t 2:15 P. M., in Room 932 of the Mayflower Hotel, Washington, D. C. A l l members of the F e d e ra l A d visory Council were present, e x cept Mr. Ringland. Mr. Clarence E. H ill, Chairman of the Board of Northwestern N ational Bank, Minneapolis, Minnesota, served as a lt e r n a t e f o r Mr* Ringland. Mr. J . T. Brown was e le c t e d Chairman pro tem and Mr. Herbert V. I prochnow was e le c te d S e c r e ta r y pro tem. I I The Secretary pro tem sta te d that communications had been received from the twelve F e d e ra l Reserve banks, c e r t i f y i n g to the e le c tio n of t h e ir respective re p re se n ta tiv e s on the Council f o r the year 1950* BY-LAWS On motion, duly made and seconded, A r t i c l e s I , I I I , and IV of the I by-lavs were amended to read as fo llo w s : ARTICLE I-OFFICERS The o f f i c e r s o f t h is Council s h a l l be a P resid ent, Vice President, three Directors and a S e c r e ta r y , a l l of whom, except the S ecretary, s h a ll I also serve as the E xecu tive Committee. ARTICLE III-SECRETARY The S e c re ta ry s h a l l he a s a la r ie d o f f i c e r of the Council and his duties and compensation s h a l l be f ix e d by the Executive Committee. ARTICLE IV-EXECUTIVE COMMITTEE The Executive Committee, as in d icated in A r t ic le I of the by-laws, 2r£ ll consist of the P re sid e n t, Vice P resid en t, and the three D irecto rs. The fo llo w in g o f f i c e r s were nominated and unanimously ele c te d : Edward E . Brown, P resid en t Robert V. Fleming, Vice President N. B a x te r Jackson, D ire cto r F re d e r ic A. P o tts , D ire cto r Sidney B. Congdon, D ire c to r Herbert V. Prochnow, S e c re ta ry on motion, duly made and seconded, the s a la r y of the Secretary was at as in previous y e a rs. The Secretary presented h is f in a n c ia l report fo r the year 1949 which teen audited by Mr. J 0 J . Buechner, A ssista n t Auditor of The F ir s t ^fional Bank of Chicago. The report was approved and ordered placed on J5le ^ w i l l be p rin ted and attached to the formal printed minutes. The printed minutes f o r the meetings held in 19 ^9 , which had been ?nt previously to the members of the Council, vere approved. A resolution vas adopted au th orizin g the Secretary to drav upon each <. deral Reserve bank f o r $350 tovard the s e c r e t a r i a l and in cid en tal ex;®nses of the F ed eral A dvisory Council f o r the year 1950. fA*nr HOLDING COMPANY LEGISLATION E. E. Brovn e x p la in s f o r the nev members of the Council the method procedure “fhe Council has used in recen t y e a rs. The Council holds a discussion on Sunday aftern o o n ; on Monday morning the Council prepares the vritten memorandum to be sent to the Board givin g the conclusions of the Council and req u estin g any a d d itio n a l information the Council d esires from the Board. The memorandum i s sent to the Board of Governors not later than noon on Monday. Monday afternoon the Council o r d in a r ily meets fith one of the economists of the Board s t a f f . On Tuesday morning, the Council and the Board hold a jo in t d is c u s s io n . Brovn e x p la in s, hovever, that for th is meeting McCabe had exp ressed the v is h that no v r it t e n memo randum be prepared but th at the Council and the Board consider the p rin cipal subject, "re se rv e requirem ents , 11 v ith o u t any v r i t t e n conclusions. Immediately p r io r to t h is meeting, McCabe telegraphed Brovn and stated that hearings might be held on the bank holding company b i l l v it h in the next month or tvo . McCabe vould ap p reciate knoving vhether the nev Councilfs vievpoint i s the same as th at held by the Council in 19^9. Brovn states that the bank holding company l e g i s l a t i o n has been under consideration f o r the l a s t f i v e or s i x years and that in 19^9 the Council expressed i t s approval of bank holding company l e g i s l a t i o n subject to the inclusion o f a s a t i s f a c t o r y p ro v isio n vhich vould exempt vholly-ovned or a ffilia te d t r u s t companies not doing a commercial banking busin ess. Fleming b e lie v e s th a t the Council may v i s h to be sure of the exact language of the b i l l , p a r t i c u l a r l y the d e f in it io n s such as that of com mercial banking b u s in e s s 0 Bucklin s t a t e s th a t he i s not c e r t a in whether h is bank has approved ^ blTT as i t nov re a d s. Lockhead favors the b i l l . Hill says J . Cameron Thomson approves the b i l l . Jackson sees no reason for opposing the b i l l . Congdon Is for the b i l l . Fleming approves the b i l l . Hemlnpyay says he is for the b i l l , ftk. -------- - 3 - * ^ jr ^Brown approves the b ill. Mooda approves i t . peal3 approves i t . g ^ ^ B r o w n . The members of the Council approve the bank holding gis la I io n , su b ject to the in clu sio n of a s a tis fa c to ry provision I vould exempt wholly-owned or a f f i l i a t e d tru st companies not doing I commercial banking b u sin e ss. Bucklin ad v ises that he w i l l c a l l h is o ffic e in the morning to see I the present b i l l has been approved. E. E. Brovn in d ic a t e s he w i l l a ls o mention to McCabe that one or I members f e e l some s l i g h t changes in language, which would not e ffe c t I any changes in substance, may be d e s ir a b le . I Begays REQUIREMENTS E. E. Brown asks the members of the Council to comment on the memoI randuni which tne Board S t a f f prepared regarding reserve requirements. Fleming b e lie v e s the S t a f f su ggestion i s more moderate than previous proposalsonreserve requirements,, Congdon understands the Board was unhappy about the President's inclusion of the re se rv e q u estion in h is Message and that the Board is not too desirous of having l e g i s l a t i o n passed now. Fleming comments o f f -the -re cord on tbe p art of the P r e s id e n ts Message which included statements r e l a t i v e to re s e r v e s . E. E . Brown. The Council has a t various times in the past stated opposition to the in c lu s io n of non-member banks. Any le g is la t io n ?hich gave the Board the power to co n trol the reserve s of non-member banks *ould almost c e r t a i n l y r e s u l t in the d efeat o f such l e g is la t io n . There is Jons feeling that the va rio u s proposals on reserv e s are aimed at giving the Board not only g r e a t e r co n tro l o f the banking system, but also of the 5atire economy. Fleming a l s o agrees that many bankers b e lie v e the Board wishes a l l ;anks under I t s c o n tr o l, and a l s o d e sire s con trol of the economy. There a feeling th at the Board wishes to do away with the correspondent bankt « 8ystem. Fleming then tr a c e s the various proposals In the past re la tiv e reserve requirem ents. lrhfttk This whole matter of re se rv e s r a is e s the question of ie-her reserves should be f l e x i b l e or f ix e d . ^ E. e . Brown thinks the Board w i l l wish to include non-member banks, re lie v e s the question of f l e x i b l e and n o n -fle x ib le reserve requirew in come up f o r co n sid e ra tio n . ?^9Ininp b e lie v e s one o f the f i r s t questions the Council may wish to t h s 3 t a f f i s "What Is the form ula?” r - 4 - 1 p E. Brown. In order to have some order in the Council's dision'oT'THesub je c t of re se rv e requirem ents, perhaps the Council should I cU9S up f i r s t the Question of whether non-member banks should be included mt^d the Boardffs power to control re s e r v e s . I iifld0 | Rucklln understands the view of the Council on this subject has ¥ne in c lu sio n of non-member banks under the Board's authority. |tfejjelieves that h i s t o r i c a l l y interbank deposits have been more v o la tile , I :-i?i that money has been withdrawn h e a v ily by correspondent banks in periods |*!rcrises. In normal times Interbank deposits are probably more vo latile I °Ln other d ep o sits, and in periods of c r is e s , they seem to be very volI stileJackson i s not so sure that interbank deposits in normal times are g v o l a t i l e as some bankers b e lie v e . In f a c t , in c r is e s , savings have I Men very v o l a t i l e . Jackson does not believe that reserves should be the j Instrument of control, but ra th e r that open market operations and the reI recount rate should be the instruments of control. He re c a lls that Strong I "nCe said cred it should always be a v a ila b le at a p ric e „ against E. E . Brown p o in ts out the d i f f i c u l t i e s of the American Bankers ! association model sta tu te f o r reserve requirements in such a state as ! Illinois. In I l l i n o i s there are no reserve requirements for state banks, and it would be extrem ely d i f f i c u l t to change the statu tes. Any attempt to change the s it u a t io n in I l l i n o i s might lead into many other proposals for banking l e g i s l a t i o n . Brown asks i f any member of the Council thinks that non-member insured banks should be included under the Board's power to regulate r e s e r v e s . Bucklin b e lie v e s th at the members of the Council are a l l against the inclusion of non-member banks under the Board®s power, but the require ments for bank r e s e r v e s , as given in the laws of the 48 states, are very confusing. There does seem to be some need fo r voluntary improvement toward greater u n ifo rm ity * The American Bankers Association is trying to do this through the s t a te l e g i s l a t u r e s . Bucklin believes the A.B 0A. may be able to concentrate on t h is one feature of uniform reserves for the various s ta te s . Hemingway. The idea i s good, but there are real d if f ic u l t ie s in such states as I l l i n o i s , where a vote of the people is necessary<> 5. E, Brown. In I l l i n o i s the absence of state reserve requiremen na3 vorlced w e ll. The Council b e lie v e s in a dual banking system, whereby :&nks are not compelled to be under one cen tral control. Once control becomes c e n tra liz e d in a fe d e r a l agency, that agency w ill have complete control. ^tion. to J . T. Brown. So long as the Federal Reserve Board includes nonBanks in t h e i r reserve p rop osals, the Board w il l not get any le g is- J&ckson s t a t e s he would not favo r the Council making any suggestion the spates _about t h e i r laws r e l a t i v e to reserves. Fleming b e lie v e s E . E . Brown can state that the Council's position ^lns^he same as i t has' been on the question of the inclusion of non banks. http://fraser.stlouisfed.org/ ^ Federal Reserve Bank of St. Louis _ R _ ,t . T. Brovn thinks that Jackson touched upon an important point. qtates'~origInally sej- Up reserve requirements on the old idea of bank’s reserves vere meant to be* and the states had no idea of tffr3 ' peserve requirements as a means of credit control. uging Rucklin agrees v i t h J. T, Brovn. However, if the time ever comes iifls n ecessary to try to justify the various reserve requirements 1he spates, perhaps it vou l d be a good idea to have had the American i^kerS Association v o r k even more intensively vith the states. j. T. Brovn points out that In the Banking Act of 1935 power was n tcT the federal Reserve Board to change reserves in order to promote credit and economic expansion. Fleming moves that the Council express itself as opposed to the .^ jus ion or non -me mbe r banks under the B o a r d 11s authority. Woods seconds the motion,, E , Bo Brovn states, af t e r a shov of hands, that all members of the 'ouncil are against the inclusion of non-member banks under the B o ard8s authority over reserves. The next matter is the question of whether it is desirable to have flexible or inflexible reserves. Brovn believes in flexible reserves, and he says that the Board has favored flexibility. Hemingvay thinks f l e x i b i l i t y fails in its purpose. Today flexi bility works out to be a quest i o n of vhether the Federal Reserve banks or the commercial banks ovn the government bonds. Fleming states that f le x i b i l i t y has been permitted so long, it will be impossible to insert i n f l e x i b i l i t y in the law. Be believes the reserve proposal in the S t a f f ’s m e m o r a n d u m is relatively mild. It may be better to accept it and get the qu e s t i o n of reserve requirements settled for some time . Congdon does not believe y o u can get flexibility taken out of the lav. He thinks the thirty per cent figure for reserve requirements for interbank deposits is too high. Lochead agrees v i t h Congdon that it vould be very difficult to change nov from the p o s i t i o n of flexible to fixed reserves. Jackson believes the evidence shovs that the controls available •° the Federal Reserve S ystem v o r k e d veil over many years vithout the Astern trying to make reserves serve as a means of credit control. L ochead. The rediscount control did not vork too veil in 1921. Bucklin. A s s u m i n g it vere possible to get a fixed reserve, would jCe members of the Council favor it? ^ Fleming. If ve a fixed reserve insist on the principle \ not like . she! of a fixed reserve, ve may r - 6 - s t a t e s he w o u ld p r e f e r a f i x e d reserve, but, p ra c tic a lly , s- n0t b e l i e v e I t i s p o s s i b l e t o g e t i t . Our o p p o s i t i o n to the p r i n 6® i 0f a f l e x i b l e r e s e r v e w ou ld p r o b a b l y be i n e f f e c t i v e , and as a r e s u l t c fli£ht 1030 t h i n s 3 we w o u ld o t h e r w i s e g e t . p o t t s . The B o ard u n d o u b t e d l y b e l i e v e s f l e x i b i l i t y has worked and d0Sl JSBIe. P o t t s f a v o r s t h e f l e x i b l e r a t e . 1 is Hemingway. The B o a rd p r o p o s e s now t o make a fu n d am en ta l change i n .erv e "^ Q u*r e ^i e n t s ' a n d ^ mi S h t ^e d e s i r a b l e a t th e same time to see ^ 5a fixed r e s e r v e c a n be o b t a in e d * J. T, Brown a g r e e s w i t h Congdon and P o t t s . Woods w ould l i k e a f i x e d r e s e r v e , b u t does n o t t h i n k i t i s p o s s i b l e obtain i t . B eals b e l i e v e s w i t h J a c k s o n t h a t t h e f e a r p s y c h o lo g y i s n o t as -rest w ith I n t e r b a n k d e p o s i t s a s w i t h o t h e r t y p e s o f d e p o s i t s . E. E. Brown com ments t h a t i n p e r i o d s o f s t r e s s h i s bank e x p e r i e n c e d 3ubstantial c o r r e s p o n d e n t b a n k w i t h d r a w a l s . Flem ing re m a rk s t h a t h i s o u t - o f - t o w n c o r r e s p o n d e n t s d id n o t w i t h draw he a v I T y i n t i m e s o f c r i s e s . Congdon. A r e s e r v e d o e s n o t r e a l l y p r o t e c t a bank i n a c r i s i s . Congdon says he r e c e i v e d a F e d e r a l R e s e r v e s c h e d u le showing a v a i l a b i l i t y sooner th a n i t was p o s s i b l e t o c o l l e c t th e f u n d s . E. E. Brown s a y s t h a t i n th e S t a f f s t u d y , c e n t r a l r e s e r v e c i t y banks may have lo w e r r e s e r v e s , b u t a n o t h e r f a c t o r to c o n s i d e r i s w h e th e r the whole p l a n t e n d s t o do aw ay w i t h c o r r e s p o n d e n t b a n k in g b u s i n e s s . P o tts r e p o r t s he t a l k e d w i t h K a r l Bopp y e s t e r d a y . P o t t s does n o t think Bopp i s t r y i n g t o p e n a l i z e t h e b a n k s , b u t t h a t Bopp b e l i e v e s th e correspondent b a n k i n g r e l a t i o n s h i p w o u ld be f i r m l y f i x e d i n o u r b a n k in g structure i f a r e s e r v e p r o p o s a l , s u c h a s h i s , s h o u ld be a d o p te d . Congdon q u e s t i o n s w h e t h e r Bopp i s c o r r e c t i n t h i s o p i n i o n . J. T. Brown r e p o r t s t h a t i n h i s b an k t h e S t a f f r e s e r v e s u g g e s t i o n 7ould work o u t a s f o l l o w s : P e r c e n t a g e I n c r e a s e o r D e c re a se O ver P r e s e n t R eserv e_______ Congdon In tro d u c to ry R eserv e R equirem ent + 1 3 .6 6 Maximum R e s e r v e R e q u ir e m e n t + 5 6 .2 7 Minimum R e s e r v e R e q u ir e m e n t - 2 8 .8 7 4 E. E. B row n. A t p r e s e n t o r d i n a r y demand d e p o s i t s and i n t e r b a n k ofPosit8~ have t h e same r e s e r v e r e q u i r e m e n t s . Brown a s k s how many members ^ the C ouncil b e l i e v e a d i f f e r e n t i a t i o n I s n e c e s s a r y i n r e s e r v e r e q u i r e as b etw ee n t h e s e two t y p e s o f d e p o s i t s . y0 Woods s t a t e s t h a t r e s i s t a n c e t o th e S t a f f ! s r e s e r v e s u g g e s t i o n come fro m c o u n t r y b a n k s b e c a u s e o f th e h i g h e r r e s e r v e s r e q u i r e d . - 7 - E. E« Brow n. The p r o p o s a l re d u c e s r e s e r v e s in c e n t r a l re s e rv e city banks "but i t i n c r e a s e s r e s e r v e s i n a number of the co u n try banks, p o l i t i c a l l y the c o u n t r y banks a r e much more p o w e r f u l, and the p ro p o sa l vould have t r o u b l e i n C o n g re ss. Congdon. I f th e C o u n c il s h o u ld approve the S t a f f * s su g g e s tio n , in creases i n r e s e r v e s s h o u ld be a c r o s s the b o ard by the same number of Percentage p o i n t s . I f o t h e r demand d e p o s i t s a re r a i s e d from te n p er cent (0 twelve p e r c e n t , t h e n i n t e r b a n k d e p o s i t s sh o u ld go up two p o i n t s , or from tw enty p e r c e n t t o tw e n ty -tw o p e r c e n t . The Board should n o t be allowed to r a i s e r a t e s so t h e y p e n a l i z e i n t e r b a n k d e p o s i t s only, o r more than the o t h e r t y p e s o f d e p o s i t s . E . E . B row n. There a r e now two t y p e s of d e p o s i t s and th re e c l a s s e s 0f c i t i e s -. Under t h e new p l a n t h e r e a r e t h r e e ty p e s of d e p o s i t s . B u c k l i n . The B o ard may arg u e t h a t i t i s n o t sound to in c re a s e two points a c r o s s t h e b o a r d , f o r ex a m p le , as t h a t g iv e s l e s s of a p ercen tag e increase t o i n t e r b a n k d e p o s i t s , E. E, Brown b e l i e v e s th e B oard may arg u e t h a t th e r e a re tim es when the Board w is h e s t o p u t p r e s s u r e on th e money c e n t e r s . T h e re fo re , the 3oard would s t a t e i t m ust have th e r i g h t t o change th e r a t e s in d i f f e r e n t proportions on d i f f e r e n t d e p o s i t s . J . T. B row n. R e s e rv e c i t i e s and c e n t r a l r e s e r v e c i t i e s were in e x ist e n c e " T o r ^ T f t y ~ y e a r s b e f o r e t h e F e d e r a l R eserv e A c t. When E c c le s r e wrote th e F e d e r a l R e s e rv e A ct i n 1935 he d i d n o t change t h i s p a r t of the Act. The B o ard h a s a u t h o r i t y t o d e c l a s s i f y a r e s e r v e o r c e n t r a l re s e rv e city, or t o c l a s s i f y i t a s s u c h . T h is new r e s e r v e p r o p o s a l i s n o t n e c essary. The B o a rd was a b l e t o a r r a n g e f o r th e d e c l a s s i f i c a t i o n o f Grand Rapids. (At t h i s p o i n t t h e r e was a n o f f - t h e - r e c o r d d i s c u s s i o n on the m a t t e r o f l o a n s t o s m a l l b u s i n e s s , and on the p r e s e n t s t a t u s o f th e F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a ti o n B i l l ) . The m e e ti n g a d j o u r n e d a t 5 “^5 P.M. - 8 On February 20, 1950 at 10s 10 A.M. the Federal Council convened in the Board Room of the F e d e r a l R e se r v e B u ild in g f o r a meeting v it h the mem bers of the Board S t a f f . A l l members of the Council vere present except Mr. Ringland. Mr* Clarence E. H ill served as an a lte r n a te fo r Mr. Ringland. The fo llo v in g members of the Board S t a f f vere presents Dr. Woodllef Thomas, Dr. Ralph A. Young, and Messrs. Horbett, C o llie r , Noyes and Anderson. Advisory E. Brovn su ggests th at the Council and the S t a f f discuss in f o r is~sugge s tio n s on reserve requirements. Brovn asks about ^ t r e a tm e n t o f c a s h I t e m s . Young rep o rts th a t the plan has been under discussion fo r several 'The System had a committee headed by Karl Bopp vhich studied the years • Question. H orbett s t a t e s th at cash items vould be deducted from demand ogits other than interbank d e p o sits. There has been some discussion ^'allowing the deduction of cash items from Interbank deposits in the ?ase of a bank engaged l a r g e l y in interbank b u sin ess. Thomas rep o rts th a t one of the problems vhich has confronted the Staff is- th a t of determ ining the exact deductions to allov. Congdon. I f the S t a f f re q u ire s a higher percentage of reserves against interbank d e p o sits, i s i t not Imperative that deductions be determined f a i r l y a g a in s t these d ep o sits as v e i l as again st other demand deposits? E. S. Brovn. The treatment of items in process of c o lle c tio n , ?hich vas not f u l l y covered in t h is r e p o r t, i s a very important matter. Beals s t a te s th at the interbank d ep osits in h is bank are d iffe re n t ."rom the interbank d ep o sits In many other banks. The movement of his country bank d ep o sits i s probably d i f f e r e n t because of the nature of the business of his country correspondents. Live stock i s marketed the f i r s t of the veek so that the proceeds come in the f i r s t of the veek, and they are paid out the l a t t e r p art of the veek 0 B ea ls rep orts h is bank has a veekly cycle, as v e i l as a season al sv in g . Thomas. There are vide svin gs of d ep o sits a ls o in the cotton banks ^ a ciiy such as Memphis. 0 P P o tts. What i s the underlying philosophy in the proposal vhich the -taff is making? Why i s a change suggested from the geographical b a sis a type-of-deposit c l a s s i f i c a t i o n ? t Thomas s t a t e s that Bopp presented the report vhich d ealt v i t h a o S - o f ^ p c s i t c l a s s i f i c a t i o n b a s is and that Horbett and one or tvo t&ers of the S t a f f had developed the Idea. The only purpose of the v ^ 1a study i s to strengthen the banking system and the banks and not ° r®make the banking system. The S t a f f study i s , in a sense, a modi f 1 '^ion of a theory vhich has long been held in the banking system; i t ^JUld correct the idea of exclu d in g vau lt cash. With respect to the cor3Pondent banking system, the plan i s n e u tr a l. I t vould n eith er encourage - 9 - ir discourage correspondent banking, except that i t recognizes the corIn theory, the S ta ff study works, but in its practical ap p licatio n seeming in ju s tic e s arise in 3ome cases. I f the ?ian is desirable in i t s e l f , perhaps one of the prices necessary w ill be some Increases in the reserves of some banks as against decreases in the ^serves of other banks. During the Introduction of the plan some banks tfould gain reserves as again st others, but these gains would gradually be eliminated. The ce n tra l reserve c it y banks would benefit the most with the reserve c i t y banks next; the country banks would benefit the least. The question is whether the gains are enough to ju s t i f y the price, ^ sp on d en t banking system. Jackson. In computing th e ir re se rv e s, would the country banks have a cred it of 26 per cent to J>0 per cent? Horbett. Yes. Without disturbing the interbank relationship, this plan would r e s u lt in considering balances due from banks as a part of the reserve. Jackson. The banks are today more liq u id than ever. Is i t necessary to set up a new plan which would re s u lt in the same volume of reserves we now have? Thomas. The very f a c t that banks are more liq uid is one reason vhich may be given fo r in creasin g the reserves to immobilize a part of the liquid a s s e ts of the banks. With greater liq u id it y , the banks have more opportunity to expand c r e d it . I t cannot be assumed that the banks f ill take the funds a v a ila b le to them from lower reserves and buy govern ments, Jackson s ta te s that he app reciates the answer Thomas has given as it indicates that the control of cre d it is a basic part of the philosophy back of the proposal. Congdon. O r ig in a lly there was no f l e x i b i l i t y in reserves. Thomas. That i s c o rre c t, but when the United States experienced the heavy in f low o f gold i t became necessary to control reserves. J . T. Brown asks when the concept of using reserves to control credit o r ig in a lly arose „ Thomas r e p lie s that the control of cred it through reserves always has been t r a d it io n a l In any d iscussion of re se rv e s. Young. Two or three years a f t e r the establishnBnt of the System, the Federal Re serve Board made a statement to Congress on the general object of having d ep osits and cre d it expand in order to meet the needs an expanding economy. Thomas. Reserves were required against bank notes o rig in a lly , and this was a way of lim itin g c r e d it . The le v e l of reserve requirements does control c r e d it . That i s a f a c t reg ard less of the purpose of the reserve ^Qulrem ents, j . T, Brovn. Forty-seven of the fo rty-eigh t states have reserve uirements^ J . T. Brovn asks vhether these states had in mind conolling the money markets through th eir reserve requirements. He be lieves courts have always construed reserves as a means of protecting }^e banks rather than as an instrument of credit control. Thomas. Regardless of vhat Congress, the courts, or the states had mind, reserves vhich are not tied up have a potential pover to expand ^edit. The question i s , assuming that ve have a system of reserve re tirements, vhat i s the best system? Under the present plan we determine ^serves by a c l a s s i f i c a t i o n of c i t i e s . J. T. Brovn asks vhether the S t a f f study is a proposal for taking -re s sure o ff the koard. Young. The study i s more than a matter of taking pressure off the Hovever, no fe d e ra l agency should have such pressure put on i t . Board. E. E. Brovn s t a te s that the banks vould oppose the change i f they any change vould increase the t o t a l required reserves over the | present maximum. thought Young. The maximum percentages in th is proposal in the aggregate are not_planned to be in excess of the present maximum requirements. In dividual banks may fin d them la r g e r , but fo r a l l banks the to ta l is not planned to be la r g e r . E. E. Brovn. One of the d i f f i c u l t i e s of the plan is that i t re duces the reserve s of c e n tra l reserve c i t i e s the most, and a ctu ally in creases the reserv e s of a number of country banks. P o lit ic a lly , i t vould be d i f f i c u l t to enact l e g i s l a t i o n of th is character. Hemingvay asks hov the S t a f f a rriv e d at 20 per cent fo r other de mand deposits and 30 per cent f o r interbank d eposits. Young. In gen eral, in s e ttin g up the plan, ve trie d to tie up the same t o t a l re s e rv e s as ve nov have. The percentages are experimental. The S ta ff has no good b a s is f o r the d ifferen ce betveen 20 per cent and 30 per cent. Jackson does not believe the difference in actual practice is as great a¥ the difference betveen 20 per cent and 30 per cent, or a 50 per cent difference. E. E. Brovn s t a te s that v o l a t i l i t y depends on vhether you are speaking of v e l o c i t y or in creases and decreases in the le v e l of deposits. Young. Using 26, 15 and 4 as the basis, the net result vould Increase excess reserves by three billion dollars and that is a great deal. Thomas. In connection vlth the question of vhether this proposal vould encourage or discourage the continuance of the correspondent banking 3ystem, It may be said that the country cannot have a unit banking system Without a correspondent banking system. Congdon b e lie v e s the S t a f f study probably does not discourage country banks from ca rry in g balances v it h correspondent banks. - 11 - potts sta te s th a t Thomas1 remarks would seem to indicate a change TtFTfcide of the Board on correspondent banking. 15 ^ Thomas r e p l ie s th at he does not know whether the Board has any al~attitude on correspondent banking, although individual members of ^Board may have o p in io n s. The S t a f f proposal counts vault cash and ^ludes a larg er percentage of correspondent bank balances in reserves. 6 Hemingway comments th at i f the cen tral reserve c ity banks have less ^rvesT then some banks must have more reserves i f the to ta l reserves up are to remain the same as at p resen t. Potts thinks more study should be given to the large differen tial ^tveen interbank and other demand deposits. Thomas. The large d if f e r e n tia l makes i t possible for country banks >0 carry larger correspondent bank balances. J. T. Brown. As a p u re ly p o l i t i c a l question, i t would be d iffic u lt to obtain approval of the plan as the country banks would oppose I t . Young.As a t e c h n ic a l group, the S t a f f is not concerned with the political aspects of the problem, but rather whether i t is desirable for the banking system. Thomas. This plan would tend to lessen the sh iftin g of interbank deposits in times of s t r e s s . Woods asks whether there has been any demand from reserve city banks or other banks f o r a change in reserve requirements. Thomas. From the beginning of the Federal Reserve System the question of reserves has been co ntinuou sly studied. Young. The members o f the S t a f f are not here as advocates of a I P&rticular plan, but they are here merely to present a plan. Thomas. Many of the persons from the Federal Reserve System who *ns?erecT the Douglas q u estio n n a ire b elieve a change in the present reserve , ^quirements i s n e c e s s a r y . E. E. Brown s t a t e s th a t a member of the Council i s confronted with ^rious considerations In weighing the value of any new reserve proposal. * thinks of the p ro p o sal in r e l a t i o n to h is own bank, but he also repre s s a ll the banks In h is F e d e ra l Reserve d i s t r i c t and these banks range size from the s m a lle s t to the l a r g e s t . The member of the Council must think of the b e st i n t e r e s t s of the country. "u Beals p oin ts out th a t the stock yards banks are seriously penalized S taff study. Young. There i s no Intent to harm any group of banks, and the S ta ff ’usyea more work should be done on the study. Congdon a sk s w h eth er any stu d y has been made w hich would show the X atllttT o r" 'd emand d e p o s it s in r e s e r v e s c i t i e s as a g a in s t th o se in country tianfc3 • Thomas sa y s t h e r e i s a d i f f e r e n c e betw een th e movement o f demand ^ poSlt s i n d i f f e r e n t c i t i e s . Horbett commsnts that the question of reserve c ity c la s sific a tio n s m come up again under the formula. There are now fift y - e ig h t reserve The Board has designated f if t e e n during the l i f e of the System aid five have had t h e i r c l a s s i f i c a t i o n s terminated. The Board f i r s t d is used the question of a new b a sis fo r reserves in i t s 1917 report. In Certain reserve c i t i e s , the banks must vote at the end of 1950 regarding a continuance of the c i t y as a reserve c i t y . This matter now comes up every three y e a rs. The meeting adjourned at 12s40 P.M. * * * * * * At 2:00 P.M. the Council reconvened in the Board Room, with a l l asmbers present except Fleming and Hemingway, fo r an off-the-record d is cussion on government s e c u r it ie s by Dr. Woodllef Thomas. The meeting adjourned at J>%40 P.M. - 13 On February 2 1 , 1950* at 10:40 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. A ll members of the Council were present except Mr. Ringland. Mr. Clarence E. H ill served as an alternate fo r Mr. Ringland. The follow ing members of the Board of Governors were presents Chairman McCabe, Messrs. E c c le s, Szymczak, Draper and Vardaman. In ad d itio n , there were present Mr. Carpenter, S ecretary of the Board of Governors; Mr. Thurston, A ssista n t to the Board; Mr.Morrill, S p e cia l A dviser to the Board; Mr. R ie fle r , A s s is ta n t to the Chairman; Mr.Thomas, Economic A dviser to the Board; Mr. Young, Director, D iv isio n of Research and S t a t i s t i c s ; Mr.Vest, General Counsel of the le g a l D ivision; Mr. Sherman, A ssista n t 3ecretary;and Mr. Horbett, A ssista n t D irector, Division of Bank Operations. E. E. Brown. In accordance with the wish expressed by Chairman McCabe, the Council has not prepared a w ritten memorandum of it s conclusions regarding the S t a f f study on r e s e rv e s . The Council is prepared to explore and discuss the su bject with the Board. Brown points out that under the Staff study the c e n tra l reserve c i t y banks w i l l have lower reserves, the reserve c it y banks w i l l be about the same, and many of the country banks will be required to keep more re s e rv e s . P o l i t i c a l l y , any plan which lowers reserve requirements f o r c e n tra l reserve c i t i e s and increases them for many country banks w i l l meet opposition In Congress. The comments in the Presidents message regarding reserve s were somewhat disturbing to bankers. If the plan In the S t a f f study were to go into e f f e c t , i t would probably be necessary to change the proposed plan so I t would not so severely penal ize country banks. MeCabe comments o ff-th e -re c o rd on the portion of the P resid en ts ass sage dealing with re se rv e s and installm ent c re d it. E. E. Brown. Each Council member n e c e s s a r ily thinks of any reserve proposal In connection w ith h is bank, the banks of his c it y , and the banks of the Federal Reserve d i s t r i c t he rep resen ts. In each Federal Reserve ^ s tric t he w i l l fin d banks that d i f f e r widely in s iz e . A member of the Council also w i l l n e c e s s a r ily consider the e f f e c t of any reserve proposal the country as a whole. J , T, Brown s t a t e s that he has no preconceived ideas regarding the Jt&ff study, but he I s g r e a t ly In terested in the welfare of country banks, ^nere is J u s t i f i c a t i o n f o r some d if f e r e n t ia t io n between country and c ity Danlcs. a reasonable man would have to admit that a system of reserves ^&t started in 1864 might need overhauling by 1950. Brown commends the jjUff for the c a r e fu l study i t has made of the whole question of reserves, ^ e v e r , he s t a t e s that the S t a f f said any new plan would probably be set p on the b a s is o f locking up approximately the same reserves as are now ^ j^ked up. The S t a f f In dicated that the central reserve c it ie s might M lower re se rv e s under the S t a f f plan, but that country banks would & V/* to keep more r e s e r v e s . The stockyards banks would be severely - ▼ 14 - , 0(j. The d e t a i l s of any Plan have not been submitted. I f any plan is ■^accepted, i t should not penalize country banks so seriously. Brown ^ , ons the a d v i s a b i l i t y of any plan ■which would be detrimental to so many t^5 without accomplishing any r e a l good. Brown then presents the following ^ :S q to indicate how the S t a f f proposal would a ffe c t his bank: figure3 * percentage Increase or Decrease Over Present Reserves In tro d u cto ry Reserve Requirement +13.66 jkximum Reserve Requirement +56.27 Minimum Reserve Requirement -28.87 Woods sta te s he does not know how a l l the banks in his d is tr ic t would 1 afeut the S t a f f Study Schedules. Consequently, he is reluctant to exf ss an opinion. Would lik e to see fu rth e r as to how the proposed changes . :d a f fe c t banks o f v a rio u s c l a s s e s . Would lik e e sp e c ia lly to have the banks in the d i s t r i c t have t h e i r s t a t i s t i c i a n s study the proposals and pertain how they would be a f f e c t e d . Woods sta te s that he is re a lly a coun% banker but even so, 25 $ to 30$ of h is deposits are interbank deposits, j thought that any change th a t would increase reserve requirements over the •oquirements f ix e d by the present law would meet with stubborn resistance. :;at this would be e s p e c i a l l y true of country banks which greatly out-number preserve c i t y and la rg e c i t y banks. He understands that the Introductory Schedule which the S t a f f Study used was based on the present schedule of re serve requirements; th at i s , f o r country banks, 12 $ of Demand Deposits, and rointed out that 1 2 $ on Demand Deposits i s alread y 70$ above the present linimun (7$) perm itted under the law. McCabe s t a t e s th a t the formula i s subject to adjustment. Bemingway. Does t h is mean changes without notice? McCabe. No. I mean a change in the b a s is . The whole study is in an ^bryonic stage. Congdon says h is bank i s probably t y p ic a l of those in his general ?°up~ Tl is apparent th a t you cannot re v ise the e x is tin g reserve require*Jts without some seeming i n j u s t i c e s . Speaking generally, from the viewof his bank, the proposal i s not objectionable. He doubts whether proposal accom plishes much or i s jworth the e f f o r t . Congdon questions '-‘-her there should be a d i f f e r e n t i a l of ten points between the required Serves on other bank d e p o sits and interbank d ep osits. There may be basis f o r l a r g e r re s e r v e s in la r g e r c i t i e s . Some study is probably -'-ssary on t h is s u b je c t . Congdon b e lie v e s some formula might be worked pthat would c o r r e c t s itu a t io n s in in d iv id u a l banks under the present ;;5utements. I f the S t a f f study should be adopted, Congdon believes two Ss should be done: ( l ) in c re a se s or decreases in reserve requirements be an equal number of points across the board; and ( 2 ) the question Aloat on both interbank and demand deposits should be considered. L Brown asks B e a ls to comment on the S t a f f study. Brown states out of nine of the banks most se rio u sly affected by the reserve ;°3&1 are l iv e s t o c k banks. jkftls s t a te s that h is bank has a d e fin ite in te re st in the proposal, f‘ii>U3e ^ Je v a y in the proposal a f f e c t s his bank. Of the f i r s t hta ^an^s showing the l a r g e s t in creases in required reserves under the ^ eight are stockyard s banks. His bank has a weekly cycle and a sea,Jt cK l e . Anything th a t i s done to in te r fe r e with the livestock in and I t s fin a n c in g would be s e r io u s , as the livesto ck industry has important part In the American economy. Beals questions whether interare more volatile than other hank deposits. Prom the exfience of his own bank, he does not think so. He understands the reserve bankers have not found them more volatile, although he realizes there CL some members of the Council who hold a different view on this matter. 5 states the Staff has agreed that the proposal as it affects the live stock banks is so unusual that special study should be given to it. k d ep o sits Jackson reports that his district is one of great extremes, from >be large New Y o r k city banks to the smallest country banks. Any change that is made should be made only a f t e r the most careful study. He commends the Staff on the w o r k w h i c h has been done so far on the study. Jackson believes that at present the central reserve cities have what might be called a penalty reserve requirement, which was made to apply to a different tanking situation than we have now. He states that reserves were required originally in order to segregate a certain amount of funds for safety. Today reserve requirements are set up on a different basis. The psychology nov is that the B o a r d w i l l control the volume of credit through reserve requirements. He doubts w h e t h e r Interbank deposits are more volatile than other bank deposits. He also questions whether demand deposits in large city banks are more volatile than demand deposits in country banks. He feels that credit can be controlled by the rediscount rate and open market operations, M u c h thought should be given to the question of whether it is desirable to control credit b y means of reserve requirements, B u c k l l n . The protection w h i c h this plan affords in periods of ! trouble is a factor that appeals to him* He presumes that an additional advantage of the p l a n is that it simplifies the problem of the Board in handling reserve classifications. If the plan is adopted, it would have to be on a moderate basis and on a better basis than has now been set up for country banks, or the New England country banks would oppose it, ! The present p l a n is w o r k i n g well, and we should have to be certain that all possible inconsistencies and difficulties in a new plan were minimized. MeCabe asks if he m a y interrupt to express appreciation for the excelient comments w h i c h have so far been made by the members of the Council vho have had a n o p p o r t u n i t y to comment on the Staff study. Fleming states that he has tried to approach this study objectively 48 bis district represents a wide range of banks from the smallest country sank to large city banks. He wonders, w i t h Congdon, whether the differ?&tial between interbank and other demand deposits is too large. He ^lievesthat this proposal on reserves is the best one so far submitted. understands over 600 country banks would have their reserve requirements Uicreased, and he believes that this would meet with real opposition from jountry banks. He asks the Staff if he ma y have a list of the country canks in his district that w o u l d be required to maintain higher reserves. Thomas reports that about 5,800 country banks would have a decrease ^ their re serve requirements. 1 Fleming believes more study is necessary, but that the present plan 8 the test one so fa r prepared. - 16 Hemingway. I f i t i s agreed that the S t a ff had to lock up a certain total of r e s e r v e s , the S t a f f probably did as w ell as could be expected. Many bankers f e e l that the Board desires to eliminate a l l correspondent tanking business, or at le a s t to r e s t r i c t i t . A statement that this is not the B o a rd s o b jective would be highly d esirable. The S ta ff pointed out yesterday that i f the percentage of required re serves on interbank ^posits is reduced, i t w i l l r e s u lt in higher reserve requirements for country banks. Szymczak. I f t h is reserve proposal is accepted, i t w ill be the first o f f i c i a l reco gn itio n in the Federal Reserve Act of interbank busi ness, Fleming. The Fed eral Reserve banks can be of help to banks, but they cannot give as much a ssista n ce to correspondents as the large banks. Hemingway. The members of the S t a f f indicated they fe e l that correspondent banking business i s here to stay, and i f the Board is of a similar mind, i t would be h e lp fu l i f th is thinking could be widely d is seminated. The reserve c i t y banks would undoubtedly welcome such a statement. H i l l . In some ways the study is lik e the Hoover Re port-everyone is for i t except where i t steps on h is toes. H ill states that almost everything has been s a id by previous members of the Council so there is very l i t t l e f o r him to say about the plan. Perhaps there is too large a d iffe r e n t ia l between the re se rv e s required on interbank deposits com pared to other demand d e p o sits. He sta te s that i t would be necessary for him to study the e f f e c t of the plan on a number of banks in his d is t r ic t in order to determine b e t t e r the merit of the plan. P o t t s . I t i s an in t e r e s t in g fa c t that the Council represents a number of banks which are a ffe c t e d by the plan in unusual ways. Among the large banks, h is bank has an e x c e p tio n a lly large percentage of it s total deposits in the form of interbank deposits. Potts presents a chart showing the trend of d eposits in h is bank over a number of years. The chart does not in d icate that Interbank deposits are as v o la tile as the S ta ff ap p aren tly b e lie v e s . His interbank deposits have remained fairly steady. He b e lie v e s the d i f f e r e n t i a l between interbank and other demand d eposits i s too g re a t, although he understands that reducing the Percentage of re s e rv e s required on interbank deposits would tend to pe nalize the country banks. Lochead s t a t e s th at in view of the comments which the other mein ters of the Council have a lre a d y made, there is l i t t l e he can add. He s*presses ap p re c ia tio n f o r the work of the S t a f f . E. E . Brown. The c e n tra l reserve c i t y banks have f e l t that their ^serve requirements have been too high, and they would welcome r e l i e f . The large banks would probably lik e the S t a f f proposal. The country banks ^ght f e e l that sooner or l a t e r they would get higher requirements. He *3 inclined to b e lie v e that the d i f f e r e n t i a l between interbank and other kmand deposits i s j u s t i f i e d . The country bank deposits in his bank have *°t increased lik e other demand deposits and time deposits. Brovn be e v e s the l iv e s t o c k banks w i l l need sp e c ia l consideration. It w ill be A a ls o to get a formula that w i l l be acceptable p o l it ic a ll y i f m Digitized^■fficult for FRASER country banks are penalized. g c c l e s . I f the F e d e r a l Reserve System i s designed f o r any purit~Ts designed to c o n tr o l the supply of money and c re d it--b o th the Mansion and the c o n t r a c t l o n ' The powers provided f o r c o n tr o llin g the d*vvl7 money and creci;i-t a re d iscount r a t e s , open market operation s, sU? jeserve req u irem en ts. In d is c u s s in g t h is proposal we are ta lk in g dimply a^out b e t t e r housekeeping. We are ta lk in g about an elephant and fly, but our emphasis i s on the f l y in t h is p ro p o sa l. The proposal * a housekeeping p ro p o s a l, and i t i s d e s i r a b le . But from the stand point of c o n tr o llin g the money and c r e d it supply of the country i t i s ^ e f f e c tiv e * Unless bank r e s e r v e s can be c o n tr o lle d , c r e d it cannot be controlled* L arge r r e s e r v e s tend to r e s t r i c t c r e d i t . The way to provide adequate con trol i s by s p e c i a l r e s e r v e s , p a r t i c u l a r l y in a period when ve operate w ith a d e f i c i t in the F e d e ra l budget. S p e c ia l reserve s would steriliz© the r e s e r v e s c re a te d by a d e f i c i t . The is su e s of handling a Federal d e f i c i t and c o n t r o l l i n g the c r e d it stru ctu re have not been met by this p roposal. The System con fron ts a dilemma. The dilemma is how to finance the T reasu ry w ith i t s huge d e f i c i t s . I f you are going to have d e f ic it s in a p erio d o f p r o s p e r it y / 't h e r e may be no s a t i s f a c t o r y vay out of the dilemma. As f a r as the correspondent banking business i s concerned, the i n t e r e s t o f the F ed era l Reserve System i s to get a l l banks into the System. Fleming. The System has not l o s t members. E c c le s . We should be in c r e a s in g the number of member banks. I f this proposal i s accep ted , we must be prepared to re le a se three b i l l i o n to four b i l l i o n d o l l a r s in r e s e r v e s . Otherwise the proposal could not be sold p o l i t i c a l l y . In other words, the banks would be given more earn ing assets^ but the a s s e t s should be frozen in short-term government securities in s p e c ia l r e s e r v e s . Draper s t a t e s he i s very sympathetic to the problems of the country banker as expressed by J . T. Brown and Woods. Szymczak says the d is c u s s io n has been e x c e lle n t . Vardaman. This i s a study and not a proposal or a plan. Be agrees vith Szymczak th at t h is study o f f i c i a l l y recognizes interbank business fo r the f i r s t time in the F ed era l Reserve A ct. However, the c l a s s i f i c a t i o n central reserve c i t i e s and reserve c i t i e s was implied recognition of interbank busin ess. We wish to maintain the correspondent banking r e la t io n ship. E c c le s . Banks do not give up t h e ir correspondent banking r e l a tionships vben they become members of the Federal Reserve System. I t is rc ^ l U3ion and not a f a c t th at I or the Board wish to destroy the cor3Pondent banking b u sin ess. Young b e lie v e s the major points of trouble have been brought out discussions with the Council. He would appreciate contacts with the b a t in g men in the p a r t ic u la r banks the members of the Council represent. • J. T. Brown asks whether the premise f o r the plan was to lock up °ut the same reserv e s as are locked up under the present plan. - Young. 18 - We took the present volume of reserves as a "basis. J . T. Brovn. I f you take the maximum amount of reserves nov per is sib le and apply th is amount to the nev proposal, a number of banks w ill p e n a liz e d . Perhaps you could fo llo v E c c le s 1 idea and release more re serves. E c c le s . I t i s o b v io u s a t once th a t th r ee b i l l i o n to fo u r b illio n dollars of1 r e s e r v e s v o u ld have to be r e le a s e d to o b ta in a c c e p ta b ility of the p ro p o sa l. McCabe. The Introductory b asis is one that reduces reserves about three b illio n d o l la r s . Young. We are not through experimenting v ith d ifferen t bases. McCabe s t a t e s he vould lik e also to hear from the operating men and wishes the Council vould appoint a committee to vork v ith the S ta ff. Council E. E. Brovn. One d i f f i c u l t y in appointing a committee is that the represents so many d if f e r e n t situ a tio n s. Szymczak. Perhaps a committee could be appointed to represent the country banks, the liv e s t o c k banks, the central reserve c it y banks and other major groups 0 McCabe. I t may be p ossib le f o r a member of the Council to head an operating committee. E . E . Brovn asks the S t a f f vhat d iffe re n tia tio n is made betveen certain types o f time and savings d ep o sits. Some time deposits may be like demand d e p o sits. Thomas. The S t a f f accepts in general the definitions in the regu lations"! The re are d if f e r e n t types of time deposits, but from the opera ting standpoint, i t has seemed d esirab le to include them a l l as time deposits. Horbett. Ninety per cent of time deposits are savings deposits. Thomas b e lie v e s there has been some overemphasis on the vay the Plan would penalize the country banks. A ctu a lly , only ten per cent of the country banks vould be penalized. The meeting adjourned at 1 :0 5 P.M. - 19 - At 2 :1 5 P.M. February 21, 1950, the Council reconvened in the a Room of the F e d e ra l Reserve B uilding. A ll members of tbe Council , 5 S V - ‘t It was moved by Hemingway and seconded by Congdon that President be authorized to appoint a committee to work with the Board and the B?c , sta ff in connection w ith the matter of reserve requirements. jo&ro President Brown then appointed the following committee: Robert V, Fleming, Chairman David To Beals J . T. Brown N. B a x te r Jackson F re d e r ic A. Potts The meeting adjourned a t 2 :2 5 P.M. * * * * * * * * The dates f o r the next two re g u la r meetings of the Council follow May 1 4 9 1 5 and 16 , 1950 October 1 , 2 and 3 , 1950 Copy o f l e t t e r s e n t t o th e S e c r e ta r y o f the Board of G overnors r e g a r d in g hank h o ld in g company h i l l S. 2318. February 20, 1950. Mr. S. R. Carpenter, S e c re ta ry , Board of Governors of the Federal Reserve System, Washington 25, D. C. Dear Mr. Carpenter: A few days before the present meeting of the Federal Advisory Council, Mr. McCabe telegraphed Mr. Brown asking the position of the p resen t Council on bank holding company b i l l , s. 2318. The Council wishes to Inform the Board of Governors that the Council approves bank holding company b i l l , S. 2318, subject to the in c lu s io n of a s a t is f a c t o r y provision which would exempt wholly-owned or a f f i l i a t e d tru s t companies not doing a commercial banking b u s in e s s . I t is f e l t by some of the members particularly in t e r e s t e d that s l ig h t changes in language which vould not e f f e c t any changes in substance might be desirable. Yours very sin cerely, Herbert V. Prochnow Secretary.
@FedFRASER