The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL May 13, 1951 The second statutory meeting of the Federal Advisory Council for 1951 was con vened in Room 1032 of the Mayflower Hotel, Washington, D. C., on May 13, 1951, at 2:20 P.M., the President Mr. Brown, in the Chair. Present: Walter S. Bucklin District No. 1 N. Baxter Jackson District No. 2 David E. Williams (Alternate for Frederic A. Potts) District No. 3 Sidney B. Congdon District No. 4 Robert V. Fleming District No. 5 Paul M. Davis District No. 6 Edward E. Brown District No. 7 W. L. Hemingway District No. 8 Joseph F. Ringland District No. 9 David T. Beals District No. 10 Reno Odlin (Alternate for James K. Lochead) District No. 12 Herbert V. Prochnow Secretary Absent: District No. 3 Frederic A. Potts District No. 11 De Witt Ray District No. 12 James K. Lochead On motion duly made and seconded, the mimeographed notes of the meeting held on February 18, 19, 20, 1951, copies of which had been sent previously to the members of the Council, were approved. A complete list of the items on the agenda for the meeting, and the conclusions of the Council are to be found in the Confidential Memorandum to the Board of Governors from the Federal Advisory Council, which follows on pages 16, 17 and 18. The meeting adjourned at 5:45 P.M. HERBERT V. PROCHNOW Secretary. 14 M I N U T E S O F T H E 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 May 14, 1951 At 10:00 A.M., the Federal Advisory Council reconvened in Room 1032 of the Mayflower Hotel, Washington, D. C. Present: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, David E. Williams (Alternate for Frederic A. Potts), Robert V. Fleming, Paul M. Davis, W. L. Hemingway, Joseph F. Ringland, David T. Beals, Reno Odlin (Alternate for James K. Loehead), and Herbert V. Prochnow, Sectretary. Absent: Messrs. Frederic A. Potts, Sidney B. Congdon, De Witt Ray and James K. Loehead. The Council reviewed its conclusions of the previous day regarding the items on the agenda, and sent to the Secretary of the Board of Governors the Confidential Memo randum which follows on pages 16,17 and 18, listing the agenda items with the conclusions reached by the Council. The Memorandum was delivered to the Secretary of the Board of Governors at 12:20 P.M. on May 14, 1951. The meeting adjourned at 12:06 P.M. HERBERT V. PROCHNOW Secretary 15 CO N FID EN TIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON MAY 15, 1951 1. The Board would like to have the views of the Council on the prospective business and economic situation during the next six months and on the policies that should be followed by the System in the field of general credit controls. The Council believes, based on current economic trends, that business will continue active in the next six months. The total volume of loans in the next sixty or ninety days will probably move sidewise, and may even decline slightly, because of the liquidation of inventories. However, the banking system will shortly be confronted with large de mands for credit to finance new crops, defense plant expansion and the manufacture of defense products. The Council believes that by the Fall of 1951 the total loans required to maintain the defense effort and essential civilian production will exceed the volume of loans in the Fall of 1950. In this period of national emergency involving heavy defense expenditures, it is desirable for essential production and gross national product to rise. A larger volume of bank loans necessarily results. In addition, for the present at least, higher prices and wages have been frozen into the economy, and they require a larger volume of loans. In view of the economic outlook for the balance of the calendar year, the huge refunding program confronting the Treasury and the large amount of new money which the Treasury will require in that period, stability in the financial and credit field is highly desirable, and drastic or rapid changes in general credit controls should be avoided. Unless conditions radically change, the Council believes therefore that no upward change in reserve requirements is desirable in the next six months. Indeed it is quite probable that a decrease in reserve requirements may be necessary by the end of 1951. In view of Treasury requirements and the present unsettlement and nervousness in the Govern ment bond market, the Council also now believes that the rediscount rate should not be raised during the period immediately ahead. Open market operations should be con ducted on a basis that will supply the minimum reserves needed for essential business credit and for Treasury financing, and to maintain a reasonably stable market for Govern ment obligations at or around present levels. 2. What, if any, action should be taken by the Board with respect to changes in the terms of Regulation W, Consumer Credit, and Regulation X, Real Estate Credit? Regulation W has and is cutting into instalment credit and is accomplishing its intention. Regulation X is just beginning to show its effects due to the many starts and approvals made before its adoption, in which cases it does not apply. The Council after full discussion does not favor any change at present in the terms of Regulation W and Regulation X. 3. The program for voluntary credit restraint is now getting into operation and the Board would be pleased to have any comments that the members of the Council might wish to make as to the progress of the program in their respective districts and what results are being obtained. The program for voluntary credit restraint has met with the general approval not only of banks but of insurance companies and investment bankers. This general approval 16 is even greater than was anticipated. Although the regional committees have only re cently been organized and are just now getting in operation, the program has already resulted in much critical screening by banks of applications for loans as to their purpose. Many loans, particularly those for large amounts, have been turned down because they would not contribute to the defense effort or the carrying on of the essential civilian economy. Many borrowers have not applied for loans because of the knowledge that they would be declined because they could not meet the test of the program. The Council believes that as the program is better understood and is further imple mented and gets under way it will be increasingly effective in restraining unnecessary and undesirable credit expansion. The Council recommends the preparation and dis tribution at frequent intervals of additional literature and publicity materials on the subject to keep the program constantly before lenders and borrowers and in the press. The Council wishes to express its appreciation to the Board of Governors and the officials of the Federal Reserve Banks for their leadership and cooperation in getting the program under way. In particular, the former Chairman of the Board, Mr. McCabe, the present Chairman, Mr. Martin, and Governor Powell, who has direct charge of the program, are to be commended for their active and unremitting efforts to promote the program both with Congress, other departments of the Government, and with the banks and other lending institutions. The voluntary credit restraint program does not cover loans guaranteed by the Government or its agencies. The present program would be more effective if it involved not only private credit, but also loans so guaranteed. In this connection, the Council wishes to call attention to the following statement in its memorandum to the Board of Governors on February 20, 1951: “Government loans and guaranties of loans in all fields, including real estate, should be terminated, except where such loans are necessary for the defense effort.” Even if the demand for loans is restricted to those necessary for the defense effort and carrying on the essential civilian economy, the requests for credit for construction are and will be so heavy that the Council welcomes the action which the NPA has taken to require its approval of certain kinds of construction projects. The need of obtaining approval before materials can be obtained for construction should greatly help not only the conservation of scarce materials and labor but also should restrain credit expansion. 4. It has been proposed that additional authority granted to the Board of Governors over bank reserves take the form of a supplementary reserve on any increase in a bank’s loans from a base amount. Copies of memoranda relating to this and other suggested reserve requirement plans are attached and the Board would appreciate the views of the Council particularly with respect to the pro posed loan expansion reserve plan. In its memorandum to the Board on October 3,1950, the Council said that if economic conditions should clearly necessitate any change in the maximum statutory reserve requirements, the Council was unanimously of the opinion that the pattern used in 1948 should be followed, extending temporary authority for increased maximum cash reserves. The Council also then stated that it believed any authority granted should be for a period of not more than two and one-half years so Congress could review the matter. For reasons which have been discussed in the answer to Item One of the agenda, present economic conditions make it untimely for the Board now to urge legislation to increase maximum statutory bank reserve requirements. The Council does not approve any proposal in 17 any form to increase maximum statutory bank reserve requirements at this time. Under present international conditions it is obvious that the Congress will be in session almost continuously and could if necessary under radically changed conditions act promptly. The acceptance of any such proposal at present would be detrimental to the voluntary credit restraint program, and to Treasury financing in the months immediately ahead. Considering the large volume of credit which may be required this Fall for essential defense and civilian needs, and the magnitude of Treasury refunding and new financing, stability and confidence in the economy and in the Government bond market are highly to be desired. The proposed loan expansion reserve plan is undesirable in general for the reasons given, and specifically because it (1 ) would not meet fluctuating seasonal credit require ments, (2) would work injustices between various banks, (3) would tend to freeze each bank in the same pattern of investment it happened to have had at the base period, and (4) would fail to provide credit for areas which are growing rapidly in production. 5. The desirability of the Federal Reserve Board undertaking a study of the prospective demands for and supply of credit over the next six to twelve months, the study to include: A. Requirements for new productive plant, inventories and working capital, that cannot be financed from retained earnings and savings (Prospective outlays for new plant in 1951 are now estimated at $23,910 million); B. Amount of bank financing of Federal expenditures that will be required; C. Estimated extent of net redemptions of savings bonds, and the methods of payment; D. Amount by which private credit can be contracted in non-essential lines. If such a study indicates that the demand for credit is likely to exceed the prospective supply of available funds, a decision should be reached as to whether demand is to be decreased by further restrictions, or whether the supply is to be allowed to increase. The Council believes it would be advisable to maintain a continuing study of the kind suggested above. 18 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL May 14, 1951 At 2:20 P.M., the Federal Advisory Council convened 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, David E. Williams (Alternate for Frederic A. Potts), Robert V. Fleming, Paul M. Davis, W. L. Hemingway, Joseph F. Ringland, David T. Beals, Reno Odlin (Alternate for James K. Lochead), and Herbert V. Prochnow, Secretary. Absent: Messrs. Frederic A. Potts, Sidney B. Congdon, De Witt Ray and James K. Lochead. Dr. Woodlief Thomas, Economic Advisor to the Board of Governors, and Dr. Frank R. Garfield, Advisor on Economic Research, together with members of the Board Staff, presented a visual-audio report on business conditions. The meeting adjourned at 4:05 P.M. H E R B E R T V. P R O C H N O W Secretary. 19 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM May 15, 1951 At 10:30 A.M., a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Wm. McC. Martin, Jr.; Governors Marriner S. Eccles, M. S. Syzmczak, R. M. Evans, James K. Vardaman, Jr., Edward L. Norton and Oliver S. Powell; also, Mr. S. R. Carpenter, Secretary of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, David E. Williams (Alternate for Frederic A. Potts), Sidney B. Congdon, Robert V. Fleming, Paul M. Davis, W. L. Hemingway, Joseph F. Ringland, David T. Beals, Reno Odlin (Alternate for James K. Loehead), and Herbert V. Prochnow, Secretary. Absent: Messrs. Frederic A. Potts, De Witt Ray and James K. Loehead. The President of the Council read the first item on the agenda and the conclusions of the Council as given in the Confidential Memorandum to the Board of Governors from the Federal Advisory Council, as printed on pages 16, 17 and 18 of these minutes. At Chairman Martin’s suggestion, a round table discussion followed. President Brown then read the third item on the agenda and the conclusions of the Council as given in the Confidential Memorandum mentioned above. Governor Powell, at Chairman Martin’s suggestion, commented on this program. He mentioned that the American Bankers Association suggested that banks send cus tomers a statement of principles regarding the voluntary program. The President of the Council read the second item on the agenda and the conclu sions of the Council given in the Confidential Memorandum, mentioned above. President Brown read the fourth item on the agenda and the conclusions of the Council as stated in the Confidential Memorandum previously mentioned. President Brown read the fifth item on the agenda and the conclusions of the Council as given in the Confidential Memorandum referred to above. Chairman Martin read the following statement of Ralph Young of the Staff, re garding item five: “The Board’s research staff is already engaged in continuing studies of prospective demands and supply of credit along the lines suggested by the Federal Advisory Council. As one phase of this program, the staff is pioneering in developing a special 20 framework for showing the money and credit flows record—sources and uses of funds —of each major sector of the economy. This special undertaking, which has been in process for the past four years, is now at an advanced stage and it is expected that the basic historical tables will be made available to the public within the next six months. “The matter of projecting these figures six to nine or twelve months ahead, presents many difficult technical problems and must at this stage of our empirical knowledge remain a judgment procedure. Gaps in the availability of critical current data, of course, present many handicaps to effective projection work. The filling of such gaps is not alone a matter of the statistical work of the Board, but also of the sta tistical work of other Government agencies and private organizations. Progress in this work is likely to be hampered in the immediate future because appropriations for the statistical programs of a number of Government agencies are being seriously cut back. “On the basis of existing data, the Board’s staff is not hopeful that reasonable ways can be devised of estimating the amount by which private credit can be contracted in non-essential lines. The Council may wish to give consideration to suggestions as to how such estimate might be developed.” The meeting adjourned at 1:18 P.M. HER B ER T.V . PROCHNOW Secretary. 21 T h is NOTE: transcript of the Secretary's notes is not to be regarded as complete or necessarily entirely accurate. The trans cript is for the sole use of the members of the Federal Advisory Council. The con cise o ffic ia l minutes for the entire year are printed and distributed later. H .V .P . The Secretary’ s notes on the meeting of the Federal Advisory Council on May 13, 1951, at 2 :2 0 P .M . in Room 1032 of the Mayflower Hotel, Washington, D .C . All members of the Federal Advisory Council were present except Mr. Potts, Mr. Ray, and Mr. Loehead. Mr. David E . Williams served as an alternate for Mr. Potts, and Mr. Reno Odlin served as an alternate for Mr. Loehead. The Council approved the Secretary’ s notes for the meeting of February 18-20, 1951. * * * * * * * * THE BOARD WOULD LIKE TO HAVE THE VIEWS OF THE COUNCIL ON THE PROS PECTIVE BUSINESS AND ECONOMIC SITUATION DURING THE NEXT SIX MONTHS AND ON THE POLICIES THAT SHOULD BE FOLLOWED BY THE SYSTEM IN THE FIELD OF GENERAL CREDIT CONTROLS. IT HAS BEEN PROPOSED THAT ADDITIONAL AUTHORITY GRANTED TO THE BOARD OF GOVERNORS OVER BANK RESERVES TAKE THE FORM OF A SUPPLEMEN TARY RESERVE ON ANY INCREASE IN A BANK'S LOANS FROM A BASE AMOUNT. COPIES OF MEMORANDA RELATING TO THIS AND OTHER SUGGESTED RESERVE REQUIREMENT PLANS ARE ATTACHED AND THE BOARD WOULD APPRECIATE THE VIEWS OF THE COUNCIL PARTICULARLY WITH RESPECT TO THE PROPOSED LOAN EXPANSION RESERVE PLAN. Brown states that Items 1 and 4 of the agenda, as given above, might be discussed at the same time as they are related. Fleming speaks off-the-record on the question of bank reserves. Brown. Ralph Young feels i f reserves are increased on the old basis that the Federal Reserve System would have to buy securities. The E c c le s ’ special reserve idea is not being promoted even by Eccles. Brown told Ralph Young that if the Staff wished to create a special monopoly for a bank that had a large amount of loans, the loan re serve expansion Idea would help to do it . Fleming again speak off-the-record, after which he comments that any new reserve proposal would k ill the credit restraint program and trap the Treasury. Fleming points out the relationship between gross national product, deposits, and loans. Bank loans are lower in re lationship to gross national product now than they were in the de pression year of 1939* Jackson reads from the National City Bank Bulletin of May 1951, as follows: "According to a special study appearing in the 1952 Government budget document, the total loans, guarantees and credit commitments by wholly-owned government enterprises w ill amount to $4 4 .4 billion at the end of the current fis c a l year on June 30; and not even this huge total covers everything, since for various reasons it excludes numerous other agencies under government sponsorship, including the Commodity Credit Corporation. The to ta l, moreover, is on the rise, the June 30 , 1951, figure indicating an increase of $9 | b il l io n , or 27 per cent, over the comparable figure last year. By June 30 ,195 2, a further increase of $4-| b illio n is expected. This is in a period of mounting in flationary pressures when the authorities are imposing restrictions on numerous types of private le n d in g ." Jackson states that bank loans only increased 20 per cent in the same period. He discussed with Sproul the relationship between gross national pro duct and bank loans, and Sproul agrees on the general principle that with a greater gross national product and with an expanding economy, more bank loans r e s u l t . Fleming speaks off-the-record on the attitude of some govern ment o ffic ia ls on leg islatio n giving the Board additional powers to increase bank reserves . Brown states that the question of the relationship of gross national product and bank loans has in it some of the old problem, which was fir s t the hen or the egg. It is also part of the argument of whether loans have caused higher prices or whether higher prices have increased the volume of lo a n s . Fleming calls attention to the refusal of a large investment firm to bid on the West V ir g in ia bonus issue. Davis states that Halsey Stuart & Co. also have reported that they would not bid on the i s s u e . Fleming. In .1950, housing starts numbered 1 ,4 0 0 ,0 0 0 . It was hoped by Regulation X to reduce the number to not over 8 5 0 ,0 0 0 . It now appears that the starts this year may total 1 ,0 0 0 ,0 0 0 to 1 ,2 0 0 ,0 0 0 . There Is a serious question as to where the money re quired may be obtained. Brown. No bankers wish increased reserves now., Jackson reports that the Federal Reserve System Staff has given the Federal Reserve Bank of New York the loan expansion reserve plan'. Brown. The Council in the past has said that if an increase in reserves becomes necessary, the increase should be in the form of cash reserves, according to the present method. Senator Maybank, according to the newspapers, wishes some plan for increasing reserves. Robertson is against an increase in reserves. Jackson states that Robertson made the same comment to him. Fleming believes any reserve legislation now would be detrimental to the Treasury. The banks are .tight. Hemingway. At French Lick, the general feeling among the bankers was that it was not desirable to have any increase in reserves now. However, i f any plan is adopted to increase reserves, it should follow the pattern used in 1948, extending temporary authority for increased maximum cash reserves. The Council made a statement along these lines on October 3, 19 50. The Council also then said it be lieved any authority granted should be for a period of not more than two and one-half years so Congress could review the matter. Brown believes the larger insurance companies are relatively t ig h t . Hemingway. The Board has suggested four methods of increasing reserves and has asked the C o u n cil's opinion. We may state we pre fer the cash reserve proposal, I f any new authority is granted. Jackson suggests that the Council state it is against increas ing reserves in any form. Bucklin a g r e e s . Brown believes that the Council w ill not weaken its statement i f it expresses a preference for the cash reserve plan, if increased reserves should become necessary. The staff is strongly for the loan expansion reserve plan. The Council can say that economic con ditions now are even more unfavorable to an increase in reserves than they were last October. Fleming thinks the Council should dramatize the situation more fu lly in its memorandum. Congdon asks who w ill finance the defense program. Brown thinks the Council may give reasons why it does not favor any increase in reserves; then it may state in its memorandum that if conditions change, making an increase in reserves desirable, the Council would favor cash reserves, along the lines stated in Its memorandum to the Board on October 3, 1950. Flem ing. The Council may also emphasize that any bank reserve legislatio n now would be detrimental to the voluntary credit re straint program and to the Treasury. Brown believes the loan expansion reserve plan is undesirable because it would not be practical with the seasonal movement of crops; it would work injustices between banks; and it would freeze a ll banks into the same pattern. Brown then asks for an expression from the members of the Council regarding business and economic con ditions in their respective d is t r ic t s . Fleming reports that the textile industry is spotty and sick. There is pressure for mortgage money. Banks w ill be well loaned up this f a l l , with new crop loans, the normal needs of business and de fense programs. The tobacco crop looks good. Department store sales are o f f . Hemingway states that loans should run off somewhat in the immediate fu ture, but then agricultural loans w ill pick up and total loans this f a l l w ill be larger than last f a l l . Rlngland agrees with Hemingway. Loans w ill run off for awhile and then go h ig her. A larger loan total may be expected this fa ll as compared to last f a l l . Jackson. The textile business is off with sales and price cuts to move various lines of merchandise. Department stores and chain stores have tended to overexpand Inventory. Many types of household appliances are piled up. In July, tobacco, cotton and grain loans w ill come in and probably more than offset the liquidation of loans. Loans next f a l l may be higher than they were last fa ll or this spring. B e a l s . The outlook for the winter wheat crop is bad. Country banks are hard up and w ill be harder up. The demand for loans w ill probably be higher this f a l l than it was a year ago because of the increase in the demand for defense lo a n s. -5 “ W illia m s. The s o f t goods s i t u a t i o n I s the same as i n the o ther d i s t r i c t s . The p e a k o f lo a n s h as b e e n r e a c h e d f o r the p r e s e n t , but lo a n s w i l l p r o b a b l y be h i g h e r i n the f a l l . D e p a r tm e n t s to r e s a l e s a re o f f . Odlln expects l o a n s to go h i g h e r . d u r i n g th e l a s t w ar d i d n o t r e t u r n E a s t . p u lp a n d p a p e r , a r e s t r o n g . P o p u l a t i o n w h ic h w en t W est B a s i c i n d u s t r i e s , s u c h as J a c k s o n g i v e s o f f - t h e - r e c o r d f i g u r e s on one l a r g e com pany w i t h a heavy b a c k lo g of o r d e r s . I t may e v e n be n e c e s s a r y to r e d u c e b a n k r e s e r v e s to m eet r e q u i r e m e n t s f o r p r o d u c t i o n . D a v i s t h i n k s l o a n s w i l l go dow n t e m p o r a r i l y I n the c i t i e s b u t not p a r t i c u l a r l y i n t h e c o u n t r y b a n k s . He e x p e c t s c r o p l o a n s I n the f a l l w i l l f u r t h e r i n c r e a s e t h e l o a n t o t a l . T h e r e w i l l be some in v e n to ry l i q u i d a t i o n in the m e a n tim e . D a v i s r e p o r t s t h a t th e e c o n o m is t o f t h e F e d e r a l R e s e r v e B a n k o f A t l a n t a b e l i e v e s t h e p r e s e n t s u r p l u s e s o f some h o u s e h o l d a p p l i a n c e s w i l l d i s a p p e a r i n th e f a l l because of the dem and. B u ck lin . that already The situ a tio n d e sc rib e d . a p p l ia n c e s , as w ell lo an s no liq u id atio n . large even h ig h e r in as b e lie v e s they Labor Large dem and fo r more ahead lo aned sho u ld up other d u c tio n estate The a g a in v e n to rie d and w ill a year ago. There c ity about in same the fo r fall F in a n c e are p ro d u c tio n . w ith w ill c o m p an ie s and be have had o v er- in v en to ried there is Country Consum er B u ck lin a t im e lo an s som e as electric in v e n to rie s. p lanned banks. the and sid e w ise no w is d efen se by are in the can is b u sin e ss to in a tim e , due to fo r d efen se and other in six the re q u ire m e n ts the fall of than a heavy banks lo an s are the sam e the Board co n tin u e m onths In that w ill h ig h in crease 1951 than they have are but in Brown v ie w p o in t the next m ove p ro d u c tio n total w ere lo an s In the reported the the M oney expects the C o u n c il or fo r Total d e c lin e crops e ssen tia l they fall real m onths. sid e w ise , and re larg e b e lie v e s of w ill o v er- in Brown six so but but been in v e n to rie s. defense w ill som ewhat co m m itm ents. 1950. as decreased In v e n to rie s, p ro bably in are There the activ e red u ctio n p lan ts, th eir had have stores com pany we about lo an s slow ly. in su ra n c e to lo ans reduce proceed is cotton try in g w ill next and Departm ent fo r c iv ilia n the C h ic a g o fall. fall report in G rain a g a in st C o u n c il that situ atio n p ro bably lo an s lo ans h ig h e r that fo r heavy move exp a n sio n is a u to m o b ile s have w ill tig h t. the d istric ts. in c re a se more is m oney than used expects were p lan t d istric t d e c lin e . Brown. in He lo an s. Congdon. New a nd d istric t in situ a tio n s. h is telev isio n , h is than some d e c l i n e in of w ill be 1950. The -6C o u n c il b e l i e v e s t h a t an i n c r e a s e in g ro ss n a t i o n a l p ro d u c t r e s u l t s in an i n c r e a s e i n lo a n s . H i g h e r p r i c e s a re a l s o f r o z e n in t o the economy at l e a s t f o r th e p r e s e n t , and th e y w i l l n e c e s s i t a t e a la r g e r volume o f l o a n s . B u ck lin. and c h a n g e s i n It is q u ite e s s e n t ia l the econom y. not to go too fast w it h c o n t r o l s Brown. The l a t t e r h a l f o f the f i r s t ite m on the a g e n d a , r e l a t i v e to g e n e r a l c r e d i t c o n t r o l s , a p p a r e n t l y r e f e r s to the r e d i s c o u n t r a t e , o p en m a r k e t o p e r a t i o n s , a n d b a n k r e s e r v e r e q u i r e m e n t s . (B ro w n talks o ff- th e- reco rd) . B ro w n a s k s the o p i n i o n o f the C o u n c i l r e g a r d i n g a c h a n g e i n b a n k r e s e r v e s a nd the r e d i s c o u n t r a t e . A ll members o f th e C o u n c i l a re a g r e e d t h a t no c h a n g e s h o u ld be made in the m onths i m m e d i a t e l y a h e a d . S t a b i l i t y i s e s p e c i a l l y im p o rtan t at present. Jackson. S p r o u l b e l i e v e s t h a t r a i s i n g th e r e d i s c o u n t r a t e w ould h e l p c u r t a i l c r e d i t , b u t he f e a r s w h a t i t w o u ld do to th e governm ent bond m a r k e t . O d l l n b e l i e v e s th e C o u n c i l m ig h t s t a t e t h a t i t t a l k o f r a i s i n g r e s e r v e s , w h e r e a s r e s e r v e s may h av e is a b s u r d to to be r e d u c e d . Brown. Th e C o u n c i l may s t a t e i n i t s memorandum t h a t i t can see no r e a s o n now f o r r a i s i n g r e s e r v e s i n th e p e r i o d im m e d ia t e ly a h e a d . I t may e v e n be d e s i r a b l e to c o n s i d e r r e d u c i n g r e s e r v e s l a t e r . W ith the huge r e f u n d i n g p r o g r a m c o n f r o n t i n g the T r e a s u r y , and the la r g e amount o f n ew m oney w h i c h t h e T r e a s u r y may r e q u i r e , the C o u n c i l does not b e l i e v e t h a t r e s e r v e r e q u i r e m e n t s s h o u l d be i n c r e a s e d , or t h a t the r e d i s c o u n t r a t e s h o u l d be r a i s e d i n th e p e r i o d im m e d ia t e l y a h e a d . O pen m arket o p e r a t i o n s s h o u l d be c o n t i n u e d on a b a s i s t h a t w i l l s u p p l y the m inim um r e s e r v e s n e e d e d f o r b u s i n e s s a n d f o r T r e a s u r y f i n a n c i n g , and m a i n t a i n a r e a s o n a b l y s t a b l e m arket f o r governm ent o b lig a t io n s at or around p re se n t l e v e l s . WHAT, I F A N Y , A C T IO N S H O U L D BE TAKEN BY THE BOARD W IT H RESPECT TO CHANGES IN THE TERMS OF R E G U L A T IO N W , CONSUMER C R E D I T , AND REGULAT IO N X , R E A L E S T A T E C R E D IT ? __________________________________________________________ B row n a s k s e a c h member o f th e C o u n c i l chan ge i s d e s i r a b l e now i n R e g u l a t i o n W . w hether O dlln. The r e q u i r e d m o n t h ly p ay m en ts on c a r s c ritic ize d . The a v e r a g e a g e o f a u t o m o b i l e s on the He f a v o r s no c h a n g e i n R e g u l a t i o n W a t p r e s e n t . he b e l i e v e s any are b e in g r o a d is 8 ^ y e a r s . -7Congdon b e l ie v e s R e g u l a t i o n W Is (A t t h i s p o i n t a l l change was d e s i r a b l e at s a t i s f a c t o r y at p r e s e n t . members o f the C o u n c il c o n c u r r e d t h a t no p resen t in R e g u la t io n W .) F l e m i n g s t a t e s I t m ight be d e s i r a b l e i n c o n n e c t i o n w i t h R e g u l a t io n X to d i s c u s s i t s a p p l i c a t i o n to o ld h o u s i n g . B ro w n comments t h a t the B o a r d d i d not a s k about but a b o u t th e o p e r a t i o n o f R e g u l a t i o n X . B u ck lin reports g e ttin g t i g h t . that the so urces o f funds new l e g i s l a t i o n , fo r m ortgage lo an s are F l e m i n g s t a t e s t h a t th e q u e s t i o n o f e x t e n d i n g R e g u l a t i o n X to o ld h o u s i n g c a n be b r o u g h t out i n the d i s c u s s i o n w i t h the B o a r d . Jackson b e lie v e s h o u sin g , u n le s s it is no go v ern m en t g u a r a n t i e s s h o u l d be d e f i n i t e l y defen se h o u s in g . Is su e d fo r B r o w n s a y s t h a t he w elc o m e s th e a c t i o n w h ic h th e NPA h as t a k e n to r e q u i r e a p p r o v a l o f c e r t a i n k i n d s o f c o n s t r u c t i o n p r o j e c t s . In c o n n e c t i o n w i t h th e a n s w e r to Ite m I I I o f the A g e n d a , the C o u n c i l may q u o te p a r a g r a p h D fr o m i t s memorandum to th e B o a r d on F e b r u a r y 2 0 , 1 9 5 1 , r e a d i n g as f o l l o w s : ’’G o v e rn m e n t l o a n s a n d g u a r a n t i e s o f lo a n s i n a l l f i e l d s , i n c l u d i n g r e a l e s t a t e , s h o u l d be t e r m i n a t e d , e x p e c t w here su c h lo a n s a re n e c e s s a r y f o r the d e f e n s e e f f o r t . ” (Brown n o t e s t h a t a l l members o f t h e C o u n c i l R e g u la t io n X i s d e s i r a b l e at p r e s e n t .) agree t h a t no chan ge in THE PROGRAM FOR V OLU N TA R Y C R E D IT R E S T R A IN T I S NOW G E T T IN G INTO O P E R A T IO N AND TH E B O A R D WOULD B E P L E A S E D TO HAVE ANY COMMENTS THAT THE MEMBERS OF THE C O U N C IL M IGH T W IS H TO MAKE AS TO THE PROGRESS OF THE PROGRAM I N T H E IR R E S P E C T IV E D I S T R I C T S AND WHAT RESULTS ARE B E IN G O B T A I N E D . F l e m in g r e p o r t s t h a t th e v o l u n t a r y c r e d i t r e s t r a i n t p rogram is b e g i n n i n g to b i t e . He b e l i e v e s i t w o u ld be h i g h l y d e s i r a b l e f o r the C o u n c i l to g i v e c r e d i t i n i t s memorandum to fo r m e r C h a ir m a n M c C a b e , C h a ir m a n M a r t i n , G o v e r n o r P o w e l l a n d th e o t h e r members o f t h e B o a r d , as w e l l as to o f f i c i a l s o f t h e F e d e r a l R e s e r v e b a n k s , f o r t h e i r c o o p e r a t i o n i n p r o m o t in g th e v o l u n t a r y c r e d i t r e s t r a i n t p r o g r a m . H e m in g w a y s t a t e s t h a t t h e b a n k e r s a r e i n e a r n e s t a b o u t the p r o g r a m , a n d he I s h o p e f u l o f r e s u l t s . He h as n o t had a c han ce c h e c k w i t h i n s u r a n c e c o m p a n ie s a n d in v e s t m e n t h o u s e s . to -8R ln glan d. Th e l a r g e r ban ks h ave d e c l i n e d a number o f l o a n s . Many s m a l l e r b a n k s a re m akin g i n q u i r i e s abo ut lo a n s to w h ic h the program w o u ld a p p l y . Jackson b e lie v e s He c a l l s a t t e n t i o n to has b e e n t u r n e d d o w n . the the c r e d i t r e s t r a i n t p rogram is t a k i n g h o l d . f a c t t h a t the W est V i r g i n i a bonus is s u e F le m in g . M ore l i t e r a t u r e on the program s h o u ld be p r e p a r e d and the p ro g ra m s h o u l d be g i v e n g r e a t e r p u b l i c i t y . D av is says fu ll p age ads h ave appeared in h is d istric t. B eals . T h e p r o g r a m h as j u s t s t a r t e d i n h i s d i s t r i c t . M e e t in g s are b e i n g s c h e d u l e d i n v a r i o u s c i t i e s . A few b a n k e r s h ave f e l t i t was a F e d e r a l R e s e r v e a c t i v i t y . Some b a n k s w i t h a s m a ll volum e o f lo a n s h av e f e l t t h a t t h e y n e e d n o t be so s t r i c t . W illia m s . T h e c l e a r i n g h o u s e i n h i s com m unity u s e d a f u l l page a d v e rtise m e n t. B a n k e r s h av e a c c e p t e d th e p r o g r a m . He do es not know the s i t u a t i o n r e g a r d i n g i n s u r a n c e a n d in v e s t m e n t c o n c e r n s . O d l i n s t a t e s he p r o b a b l y h a s the o n l y s o u r n o te on the p r o g r a m . Two o f t h e b a n k s on t h e C o a s t , i n a n s w e r to a q u e s t i o n by C h a ir m a n M a r t i n a t a m e e t i n g r e c e n t l y , s a i d t h a t the p ro gram w o u ld h av e no real r e s u lt s . O d l i n i m m e d ia t e l y a t t e m p t e d to g iv e C h a ir m a n M a r t i n the o p p o s i t e i m p r e s s i o n . M o st b a n k s hope to make the p ro g ra m effe c tiv e . B r o w n s t a t e s t h a t th e r e a s o n the two b a n k e r s h av e made t h i s s t a t e m e n t may h a v e b e e n b e c a u s e o f a tio n there . D a v is. The program is w o rk in g fro m the C o a s t may a p artic u la r s it u out w e l l . B u c k l i n > T h e r e h a s b e e n a l i t t l e d e l a y i n h i s d i s t r i c t in g e ttin g s t a r t e d . He b e l i e v e s b a n k e r s i n h i s d i s t r i c t a re e n t h u s i a s t i c a b o u t th e p r o g r a m . B u c k l i n s t a t e s t h a t th e w h o le i d e a o f a v o l u n t a r y c r e d i t r e s t r a i n t p r o g r a m , w h i c h s t a r t e d i n th e C o u n c i l , is an e x c e l l e n t o n e . I n most s e c t i o n s o f the c o u n t r y the p ro gram is b e c o m in g k n o w n . I n h i s d i s t r i c t t h e y a r e p l a n n i n g on s e n d i n g out more l i t e r a t u r e to g e t p u b l i c i t y . Congdon. Th e program is w o rk in g w e l l in h is d istric t. Brown. T h e p r o g r a m i s a l s o w o r k in g w e l l i n h i s d i s t r i c t . He b e l i e v e s th e i n s u r a n c e c o m p a n ie s and in v e s t m e n t b a n k e r s a re c o o p e r a t i n g . T h e d r o p i n b o n d p r i c e s h a s a l s o ham p ered bond h o u s e s . The C o u n c i l may s t a t e i n i t s memorandum to th e B o a r d t h a t governm ent Digitized FRASER lo afor ns a n d g u a r a n t i e s a r e n o t i n c l u d e d i n the p r o g r a m , and c r e d i t -9r e s t r a i n t w o u ld be f a r more e f f e c t i v e I f governm ent lo a n s and g u a r a n t i e s c o u l d be r e s t r i c t e d . He a g a i n c a l l s a t t e n t i o n to the f o l l o w i n g p a r a g r a p h D i n the C o u n c i l 's memorandum to the B o a r d on February 2 0 , 1 9 5 1 : ’’G o v e rn m e n t l o a n s and g u a r a n t i e s o f lo a n s i n a l l f i e l d s , i n c l u d i n g r e a l e s t a t e , s h o u l d be t e r m in a t e d , e x c e p t w here su c h lo a n s are n e c e s s a r y f o r the d e f e n s e e f f o r t . ” Brown s u g g e s t s t h i s p a r a g r a p h be i n c l u d e d i n the memorandum to the Board fo r t h i s m e e t in g . The C o u n c i l may a l s o s t a t e t h a t i t welcom es the a c t i o n o f NPA I n r e q u i r i n g a p p r o v a l fo r p r o j e c t s t a k i n g la r g e am ounts o f s t e e l . THE D E S I R A B I L I T Y OF THE FEDER AL RESERVE BOARD UNDERTAKING A STUDY OF THE P R O S P E C T IV E DEMANDS FOR AND SU PPLY OF C R E D IT OVER THE NEXT S I X TO TW ELVE M ONTHS, THE STU DY TO IN C L U D E : A. RE Q U IR E M EN TS FOR NEW P R O DU C TIV E P L A N T , IN V E N T O R IE S AND W ORK IN G C A P I T A L , THAT CANNOT BE F IN A N C E D FROM RETA INED E A R N IN G S AND S A V IN G S (P R O S P E C T IV E OUTLAYS FOR NEW PLANT I N 1 9 5 1 ARE NOW E S T IM A T E D AT $ 2 3 , 9 1 0 M I L L I O N ) : B. AMOUNT OF BANK F IN A N C IN G OF FEDER AL E XP E N D ITU R E S THAT W IL L B E R E Q U IR E D : C. E S T IM A T E D E X T E N T OF NET REDEM PTIO N S THE METHODS OF PAYM ENT: D. AMOUNT B Y W H IC H P R IV A T E C R E D IT OF S A V IN G S B O N D S , CAN BE CONTRACTED AND IN NON- E S S E N T IA L L IN E S . I F SUCH A S T U D Y IN D IC A T E S THAT THE DEMAND FOR C R E D IT IS L IK E L Y TO EXCEED THE P R O S P E C T IV E S U P P L Y OF A V A IL A B L E F U N D S , A D E C I S I O N SHOULD BE REA C HED AS TO WHETHER DEMAND I S TO BE DECR EASED BY FURTHER RES T R I C T I O N S , OR W HETHER THE SU P P LY IS TO BE ALLOWED TO IN C R E A S E . B ro w n s t a t e s no one i n g o v e rn m en t c a n g iv e any r e a s o n a b l y a c c u r a t e e s t i m a t e o f m i l i t a r y e x p e n d i t u r e s , a nd w i t h o u t s u c h an e s t i m a t e no s t u d y o f t h i s k i n d w o u ld be r e a l l y c o m p l e t e . The C o u n c il may s t a t e I t b e l i e v e s s u c h a s t u d y s h o u l d be made a n d s h o u l d be a c o n tin u in g The study. m e e tin g a d jo u rn e d at 5 :^ 5 P .M . -10THE C O U N C IL CONVENED AT 1 0 A .M . ON MAY 1 4 , 1 9 5 1 , IN ROOM 1 0 3 2 OF THE MAYFLOWER H O T E L , W A S H IN G T O N , D . C . A LL MEMBERS OF THE F E D E R A L A D V IS O R Y C OU N C IL WERE PRESENT, E X C EPT M R . R A Y , M R . CONGDON, M R. POTTS AND M R. LOCHEAD. M R . D A V ID W IL L IA M S SERVED AS AN A LTERNATE FOR MR . POTTS AND M R . O D L IN SE R V ED AS AN ALTERNATE FOR M R. LO C H EA D . M R. CONGDON WAS AT THE M EETINGS ON MAY 13 and 1 5 , BUT HAD TO BE AWAY FROM T H IS MEETING ON IM PORTANT B U S IN E S S AT H IS B A N K . T h e C o u n c i l p r e p a r e d a n d a p p r o v e d the a t t a c h e d C o n f i d e n t i a l Memorandum to be s e n t to the B o a r d o f G o v e r n o r s r e l a t i v e to the A g e n d a f o r t h e j o i n t m e e t i n g o f t h e C o u n c il and the B o a r d on May 1 5 , 1951. Th e Mem orandum w as d e l i v e r e d to the S e c r e t a r y o f the B o ard o f G o v e r n o r s a t 1 2 : 2 0 P . M . on May 1 4 , 1 9 5 1 . I t w i l l be n o t e d that e a c h it e m o f t h e a g e n d a i s l i s t e d t o g e t h e r w i t h the comments o f the C o u n c il. Th e m e e tin g a d jo u r n e d at 1 2 :0 6 P .M . C O N F ID E N T IA L MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON MAY 15, 1951 1. The Board would lik e to have the views of the Council on the prospective business and economic situ ation during the next six months and on the p o lic ie s that should be f o l lowed by the System in the fie ld of general cred it controls. The Council b e lie v e s, based on current economic trends, that busi ness w ill continue a c tiv e in the next six months. The to ta l volume of loans in the next six ty or n in ety days w ill orobably move sidew ise, and may even decline s lig h tly , because of the liq u id ation of in ven tories. However, the banking system w ill sh o rtly be confronted with large demands for credit to finance new crops, defense plant expansion and the manufacture of defense products. The Council b eliev es th at by the F all of 1951 the to ta l loans re quired to maintain the defense e ffo rt and e sse n tia l c iv ilia n production w ill exceed the volume of loans in the F a ll of 1950. In th is period of national emergency involvin g heavy defense expenditures, i t is desirable for esse n tia l production and gross n ation al product to r is e . A larger volume of bank loans n ecessa rily r e s u lts . In add ition, for the present at le a s t, higher prices and wages have been frozen in to the economy, and they require a larger volume of loans. In view of th e economic outlook for the balance of the calendar year, the huge refunding program confronting the Treasury and the large amount of new money which the Treasury w ill require in that period, s ta b ility in the fin a n c ia l and c re d it f ie ld is highly d esirab le, and drastic or rapid changes in general cred it controls should be avoided. Unless conditions rad ically change, the Council b eliev es therefore that no upward change in reserve requirements is d esira b le in the next six months. Indeed i t is quite probable that a decrease in reserve requirements may be necessary by the end of 1951. In view o f Treasury requirements and the present u n se ttle ment and nervousness in the Government bond market, the Council also now believes that the rediscount rate should not be raised during the period immediately ahead. Open market operations should be conducted on a b asis that w ill supply the minimum reserves needed for e sse n tia l business cred it and for Treasury fin an cin g, and to maintain a reasonably stable market for Government o b lig a tio n s at or around present le v e ls . 2. What, i f any, a ction should be taken by the Board with respect to changes in the terms of Regulation W, Con sumer C redit, and Regulation X, Real E state Credit? Regulation W has and is cu ttin g into instalm ent cred it and is accomplishing i t s in ten tio n . Regulation X is ju st beginning to show it s -2e f f e c t s d u e to t h e m any s t a r t s and a p p r o v a l s made b e f o r e i t s a d o p t i o n , in w hich c a s e s i t d o e s n o t a p p l y . T h e C o u n c i l a f t e r f u l l d i s c u s s i o n do e s n o t fa v o r a n y ch ange at p r e s e n t i n t h e term s o f R e g u l a t i o n W and R e g u l a t i o n X . 3. The program f o r v o l u n t a r y c r e d i t r e s t r a i n t i s now g e t t in g i n t o o p e r a t i o n and t h e Bo ard w o uld be p l e a s e d to have a n y comments t h a t t h e members o f th e C o u n c il m ig h t w is h to make as to t h e p r o g r e s s o f th e program in t h e i r r e s p e c t i v e d i s t r i c t s a n d w hat r e s u l t s a r e b e i n g o b t a i n e d . The program f o r v o l u n t a r y c r e d i t r e s t r a i n t h a s met w i t h t h e g e n e r a l a p p r o v a l n o t o n l y o f b a n k s b ut o f in s u r a n c e co m pa nies and in v e stm e n t bankers. T h i s g e n e r a l a p p r o v a l i s e v e n g r e a t e r t h a n was a n t i c i p a t e d . A lt h o u g h t h e r e g i o n a l co m m ittee s have o n l y r e c e n t l y b e e n o r g a n is e d and a r e j u s t now g e t t i n g i n o p e r a t i o n , t h e program has a l r e a d y r e s u l t e d i n much c r i t i c a l s c r e e n i n g b y b a n k s o f a p p l i c a t i o n s f o r lo a n s as to t h e i r p u r p o s e . M any l o a n s , p a r t i c u l a r l y t h o s e f o r l a r g e a m o u n ts, have b e e n t u r n e d down b e cause t h e y w o u ld n o t c o n t r i b u t e to t h e d e f e n s e e f f o r t or th e c a r r y in g on o f th e e s s e n t i a l c i v i l i a n eco n o m y . M any b o r r o w e r s have n o t a p p l i e d f o r l o a n s b e c a u se o f t h e k n o w le d g e t h a t t h e y w o u ld be d e c l i n e d b e c a u s e th e y c o u ld not meet th e t e s t The is furth er o f the program . C o u n cil b e l ie v e s im p le m e n te d a n d that as t h e program i s gets under way i t in r e s t r a i n i n g u n n e c e s s a r y an d u n d e s i r a b l e b e t t e r u n d e r s t o o d and w i l l be i n c r e a s i n g l y e f f e c t i v e credit exp an sio n . The C o u n c i l recommends t h e p r e p a r a t i o n and d i s t r i b u t i o n a t f r e q u e n t i n t e r v a l s o f a d d i t i o n a l l i t e r a t u r e a n d p u b l i c i t y m a t e r i a l s on t h e s u b j e c t to k e e p th e program co nstan tly b e fo r e The G o ve rn o rs a n d lenders a n d b o r r o w e r s an d i n th e p r e s s . C o u n c il w is h e s the o f f i c i a l s s h i p and c o o p e r a t i o n in form er C h a ir m a n o f t h e to of express its a p p r e c i a t i o n to th e B o ard o f th e F e d e r a l R e s e r v e B a nk s f o r t h e i r l e a d e r g e t t i n g t h e p ro gra m u n d e r w a y . Board, M r. McCabe, the present In p a r tic u la r , th e C h a ir m a n , M r . M a r t i n , an d G o v e rn o r P o w e l l , who h a s d i r e c t c h a r g e o f th e p r o g r a m , a r e to be com mended f o r t h e i r a c t i v e a n d u n r e m i t t i n g e f f o r t s to prom ote t h e p rog ram b o t h w ith C o n g re ss, other le n d in g The other departm ents o f the v o lu ntary cr ed it more e f f e c t i v e i f i t guaranteed. In th is 20 , 1951: and w i t h t h e b a n k s an d r e s t r a i n t program d o e s n o t g u a r a n t e e d b y t h e G o v e rn m e n t or i t s fo llo w in g G o v e rn m e n t , in stitu tio n s. statem ent such lo an s co ver l o a n s The p r e s e n t program w o u ld be in v o lv e d not o n ly p r iv a t e c r e d i t , but a lso lo an s c o n n e c t i o n , t h e C o u n c i l w i s h e s to c a l l a t t e n t i o n in "G o v e r n m e n t in clu d in g ag e n c ie s. its lo an s real are so to th e memorandum t o th e B o ard o f G o v e r n o r s on F e b r u a r y and g u a r a n tie s estate, o f loans in s h o u l d be t e r m i n a t e d , necessary for th e d e f e n s e all fie ld s, e x c e p t w h ere e f f o r t .” -3 Even i f the dem and f o r lo a n s i s r e s t r i c t e d to th o s e n e c e s s a r y fo r d e f e n s e e f f o r t a n d c a r r y i n g on the e s s e n t i a l c i v i l i a n econom y, the reouetftfl f o r c r e d i t f o r c o n s t r u c t i o n a r e and w i l l be so h e avy th a t t h e C o u n c il vt l -o.ues th e a c t i o n w h ic h t h e NPA has t a k e n to r e q u ir e i t s a p p r o v a l o f ctrL-ain k i n d s o f c o n s t r u c t i o n p r o j e c t s . The n e e d o f o b t a i n i n g a p p r o v a l b e fo r e m c t e r i a l s ca n be o b t a i n e d f o r c o n s t r u c t io n sh o u ld g r e a t l y h e l p no t o n l y c o n s e r v a t i o n o f s c a r c e m a t e r i a l s and l a b o r but a l s o sh o u ld r e s t r a i n credit e x p a n sio n . the the . I t h a s b e e n p r o p o s e d t h a t a d d i t i o n a l a u t h o r i t y g r a n te d to t h e B o ard o f G o v e r n o r s o v e r bank r e s e r v e s tak e t h e form o f a s u p p l e m e n t a r y r e s e r v e on a n y i n c r e a s e i n a b a n k 's l o a n s fro m a b a s e am o u n t. C o p ie s o f memoranda r e l a t i n g t o t h i s a n d o t h e r s u g g e s t e d r e s e r v e re q u ir e m e n t p l a n s are Le a t t a c h e d and th e B o ard w o u ld a p p r e c i a t e th e v ie w s o f th e C o u n c i l p a r t i c u l a r l y w i t h r e s p e c t to th e p ro p o sed l o a n e x p a n s io n re se rv e p la n . In i t s memorandum to t h e B o ard on O c t o b e r 3? e co n o m ic c o n d i t i o n s s h o u l d c l e a r l y n e c e s s i t a t e that i f 1 9 5 0 , t h e C o u n c il a n y c h a n g e i n th e said maximum s t a t u t o r y r e s e r v e r e q u i r e m e n t s , t h e C o u n c i l w as u n a n im o u s l y o f t h e o p in io n t h a t t h e p a t t e r n u s e d i n 19-43 s h o u ld be f o l l o w e d , e x t e n d i n g tem p o rary au th o rity fo r i n c r e a s e d maximum c a s h r e s e r v e s . The C o u n cil a lso then sta te d that i t b e l i e v e d a n y a u t h o r i t y g r a n t e d s h o u l d be f o r a p e r i o d o f n o t more t h a n two an d o n e - h a l f y e a r s so C o n g r e s s c o u l d r e v i e w th e m a t t e r . For r e a s o n s w h i c h have b e e n d i s c u s s e d in the a n sw e r to It e m One o f t h e a g e n d a , econom ic c o n d i t i o n s make i t u n t i m e l y f o r t h e present B o a rd now to u r g e l e g i s l a t i o n to i n c r e a s e maximum s t a t u t o r y b a n k r e s e r v e r e q u i r e m e n t s . T h e C o u n c i l does not a p p ro v e a n y p r o p o s a l i n a n y fo rm t o i n c r e a s e maximum s t a t u t o r y bank r e s e r v e r e q u ir e m e n t s a t t h i s t i m e . U n d e r p r e s e n t i n t e r n a t i o n a l c o n d it io n s i t is o b v io u s t h a t t h e C o n g r e s s w i l l be i n s e s s i o n alm ost c o n t i n u o u s l y and c o u ld i f n e c e s s a r y u n d e r r a d i c a l l y ch a n g e d c o n d i t i o n s a c t p r o m p t ly . The a c c e p t a n c e o f a n y s u c h p r o p o s a l a t p r e s e n t w o u l d be d e t r i m e n t a l to th e v o l u n tary credit re str a in t program , and to T r e a s u r y f i n a n c i n g i n t h e m onths im m e d ia t e ly a h e a d . C o n s i d e r i n g t h e l a r g e volum e o f c r e d i t w h ic h may be r e q u ired F a l l f o r e s s e n t i a l d e f e n s e and c i v i l i a n n e e d s , and t h e m a g n itu d e th is economy and o f T r e a s u r y r e f u n d i n g a n d new f i n a n c i n g , in th e T he p r o p o s e d fo r th e a tin g banks, it reasons seasonal (3 ) h ap p e n e d to credit g iv e n , cred it w o u ld tend have lo an and exp ansio n reserve plan s p e c i f i c a l l y because re q u ir em e n ts , to f r e e z e (2 ) it w o u ld w o rk e a c h b an k i n h ad at t h e b a s e fo r areas w h ic h are 5. stab ility and c o n f i d e n c e i n th e G overn m ent b o n d m ark e t a r e h i g h l y to be d e s i r e d . p e rio d , th e and is u n d es ira b le (1 ) b e t w e e n v a r io u s w o u ld f a i l in v e s t m e n t to p r o v id e gro w ing r a p i d l y in p r o d u c t io n . The d e s i r a b i l i t y o f t h e F e d e r a l R e s e r v e B o a rd u n d e r t a k i n g a s t u d y o f t h e p r o s p e c t i v e dem ands f o r a n d s u p p l y o f cred it over t h e n e x t s i x t o t w e l v e m o n t h s , t h e s t u d y to in c lu d e : general w ould n o t m eet f l u c t u in ju stice s same p a t t e r n o f (4 ) in -4A. R e q u ir e m e n t s f o r new p r o d u c t iv e p l a n t , i n v e n t o r i e s and w o r k in g c a p i t a l , t h a t canno t be f i n a n c e d from r e t a i n e d e a r n in g s and s a v in g s ( P r o s p e c t i v e o u t l a y s f o r new p l a n t i n 1 9 5 1 are now e s t im a t e d a t $ 2 3 , 9 1 0 b i l l i o n ) ; B. Amount of bank financing of Federal expendi tures that w ill be required; C. E s t im a t e d e x t e n t o f n e t r e d e m p t io n s o f s a v i n g s b o n d s , a n d t h e m eth ods o f paym ent; D. Amount by w h ic h p r i v a t e cred i t can be c o n tra c te d in no n- essential l i n e s . ie If such a study in d ic a t e s that t h e demand f o r credit is l i k e l y to exceed the p r o s p e c t iv e su pp ly o f a v a i l a b l e f u n d s , a d e c i s i o n s h o u l d be r e a c h e d a s t o w h e t h e r d e m and i s to be d e c r e a s e d b y f u r t h e r r e s t r i c t i o n s , or w hether the The C o u n c il in g study of the k in d su pp ly is b e lie v es to be a l l o w e d to i n c r e a s e . i t w o u l d be a d v i s a b l e suggested above. to m a in ta in a c o n tin u -11THE C OU N C IL CONVENED IN THE BOARD ROOM OF THE FEDER AL RESERVE B U IL D IN G AT 2 : 2 0 P . M . ON MAY 1 4 , 1951. A LL MEMBERS OF THE FEDERAL A DVISORY COUNCIL WERE P R E SE N T, EXCEPT M R. R A Y , MR. CONGDON, M R . POTTS AND M R . LO C H E A D . M R. D A V ID W IL L IA M S SERVED AS AN ALTERNATE FOR M R . POTTS AND M R . O D L IN SERVED AS AN ALTERNATE FOR M R. L O C H E A D . M R . CONGDON WAS AT THE M EETIN GS ON MAY 13 AND 1 5 , BUT HAD TO BE AWAY FROM T H I S M EETIN G ON IMPORTANT B U S IN E S S AT H IS B A N K . W o o d l i e f T h o m a s , Econom ic A d v i s e r to the B o a r d , and F r a n k R . G a r f i e l d , A d v i s e r on Eco no m ic R e s e a r c h , t o g e t h e r w i t h members o f the s t a f f , p r e s e n t e d a v i s u a l - a u d i o r e p o r t on b u s i n e s s c o n d i t i o n s . A co py o f t h e r e p o r t a c c o m p a n ie s t h e s e m i n u t e s . The m e e t i n g a d j o u r n e d at 4 :0 5 P .M . -12ON MAY 1 5 , 1 9 5 1 , AT 1 0 : 3 0 A . M . , THE FEDERAL A D V IS O R Y C OU N C IL HELD A J O IN T MEETING W ITH THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM I N THE BOARD ROOM OF THE FEDERAL RESERVE B U IL D IN G , W A S H IN G T O N , D . C . A L L MEMBERS OF THE C OU N C IL WERE PRESENT EXCEPT M R . P O T T S , M R. RAY AND M R. L O C H E A D . M R . D A V ID W IL L IA M S SERVED AS AN ALTERNATE FOR M R . POTTS AND M R . RENO O D L IN SERVED AS AN ALTERNATE FOR M R. LOCHEAD. THE F OLLOW IN G MEMBERS OF THE BOARD OF GOVERNORS WERE P R E S E N T : CHAIRMAN M A R TIN , GOVERN ORS E C C L E S , SZY M C ZA K , E V A N S , VARDAMAN, NORTON AND POWELL. M R . C AR PEN TER, SECRETARY OF THE BOARD OF G O V ER N OR S, WAS ALSO P R E S E N T . THE BOARD WOULD L IK E TO HAVE THE V IE W S OF THE C OU N C IL ON THE PROS P E C T IV E B U S IN E S S AND ECONOM IC S IT U A T IO N DUR ING THE NEXT S I X MONTHS AND ON THE P O L I C I E S THAT SHOULD BE FOLLOWED B Y THE SYSTEM IN THE F I E L D OF GENERAL C R E D IT C O N T R O L S . B r o w n r e a d s I t e m 1 o f the a g e n d a a n d the c o n c l u s i o n s o f the C o u n c i l , as e x p r e s s e d i n th e C o n f i d e n t i a l Memorandum to the B o a r d a t t a c h e d . The e l e v e n t h F e d e r a l R e s e r v e D i s t r i c t i s n o t r e p r e s e n t e d , b u t the f e e l i n g i n a l l th e o t h e r D i s t r i c t s i s t h a t lo a n s w i l l be h i g h e r by the f a l l o f 1 9 5 1 t h a n t h e y w ere i n the f a l l o f 1 9 5 0 . The C o u n c il u n d e r s t a n d s th e l a t t e r p a r t o f It e m 1 on the a g e n d a , m e n t io n in g g e n e r a l c r e d i t c o n t r o l s , r e f e r s to r e s e r v e r e q u i r e m e n t s , the r e d i s c o u n t r a t e , a n d o p e n m a rke t o p e r a t i o n s . I f i t w ere not f o r T r e a s u ry r e q u i r e m e n t s , a num ber o f the members o f the C o u n c i l w ou ld p ro bably fa v o r a h ig h e r r e d is c o u n t r a t e . I t i s h i g h l y d e s i r a b l e to h av e a s t a b l e g o v ern m en t b o n d m arket I n v ie w o f T r e a s u r y f i n a n c i n g . The C o u n c i l i s n o t i n f a v o r o f a p e g g e d go v ern m en t bo n d m a r k e t , but i t b e l i e v e s th e b o n d m a r k e t s h o u l d h av e a c h a n c e to s t a b i l i z e i t s e l f . F le m in g . I n v i e w o f th e a n t i c i p a t e d l a r g e g r o s s n a t i o n a l p r o d u c t , i n c l u d i n g d e f e n s e e x p e n d i t u r e s , demand f o r c r e d i t t h i s f a l l w i l l be v e r y h e a v y . M a r t i n s u g g e s t s a r o u n d t a b l e d i s c u s s i o n a nd i n v i t e s a l l members o f the B o a r d t o p a r t i c i p a t e , M a r t i n s a y s t h a t th e p r o b le m i s a f l u i d one. W i t h a n o r m a l t u r n o v e r o f l o a n s , the b a n k i n g s y s te m s h o u ld be a b le to ta k e c a r e o f l o a n r e q u i r e m e n t s . The h a n d s o f the B o a r d c a n not v e r y w e l l be t i e d on the t h r e e In s t r u m e n t s o f c o n t r o l - r e s e r v e s , the r e d i s c o u n t r a t e , a n d o p e n m arket o p e r a t i o n s . We a re b a l a n c i n g on a thin p in n a c l e . Th e B o a r d n o t i c e d the C o u n c i l ’ s e m p h a s is on the word " e s s e n t i a l " . Brown. Th e c re d it r e s t r a in t C o u n c i l to o k program . the w ord e s s e n t i a l from the v o lu n t a r y -13Vardanian d o e s n o t s e e how the d e f e n s e program ., t o g e t h e r w i t h the c i v i l i a n e c o n o m y , c a n be f i n a n c e d w i t h o u t a m a jo r d e g r e e o f i n fla tio n . He b e l i e v e s c i v i l i a n p r o d u c t i o n s h o u l d be c u t b a c k and t h a t the eco n om y s h o u l d n o t t r y to' c a r r y b o t h d e f e n s e a n d c i v i l i a n prod u e tio n * M a rtin . M a rsh a ll state s that b i l l i o n s o f a p p r o p r i a t i o n s f o r th e in flatio n . F lem in g . Pearl H arb o r. It is d iffic u lt to $2 b illio n s m ilit a r y is cut out o f e v e ry $ 1 0 needed because of c iv ilia n p ro d u c tio n w ith o u t a E c c le s o The q u e s t io n of f u r t h e r bank c r e d it is a q u e s t io n of more m o n e y . T h e o n l y r e a s o n f o r h a v i n g more m oney i s to g e t more g o o d so W i t h m aximum e m p l o y m e n t , w i t h t h e m i l i t a r y e s t a b l i s h m e n t g o in g i n t o l a r g e r s c a l e a c t i v i t y , we c a n o n l y i n c r e a s e p r o d u c t i o n b y lo n g e r hours of work and b e t t e r t e c h n i q u e s . C r e d i t f o r d e f e n s e p l a n t and f a c i l i t i e s m ust come f r o m c r e d i t now u s e d b y m u n i c i p a l i t i e s , s t a t e s , and c i v i l i a n s . C r e d i t f o r d e f e n s e p u r p o s e s s h o u l d be d i v e r t e d fro m c i v i l i a n u s e to d e f e n s e . D e f e n s e c r e d i t m ust n o t b e p l a c e d on to p of c iv ilia n c r e d it . T h at w ou ld be e x t r e m e ly d a n g e r o u s . A tig h t r e i n m ust b e k e p t o n c r e d i t . A l l o c a t i o n s a n d p e r m i t s m ust be u s e d fo r d e fe n s e p r o d u c t io n w h ic h is r e q u i r e d . s h o u l d be r e d u c e d a n d d i v e r t e d to d e f e n s e c i v i l i a n use a c t u a l l y in c r e a s e s e s s e n t i a l C r e d i t f o r c i v i l i a n u se use u n le s s the c r e d it fo r p ro d u c tio n . E c c le s agrees w i t h t h e C o u n c i l o n t h e q u e s t i o n o f th e r e d i s c o u n t r a t e a n d , i n g e n e r a l , w i t h t h e C o u n c i l ’ s v i e w s on th e n e e d f o r a s t a b l e g o v e r n ment b o n d m a r k e t . W i t h t h e T r e a s u r y 's f i n a n c i n g p r o b l e m s , th e governm ent bond m arket needs sta b ility but it need not be a pegged m arket. T h e m o n ey m a r k e t h a s b e e n t i g h t e n e d . T h e money m a r k e t d o e s not r e q u i r e a f r e e m arket b u t , r a t h e r , a m anaged m a r k e t . E c c l e s is n o t w o r r i e d a b o u t a l a c k o f c o n f i d e n c e i n t h e b o n d m a r k e t , a n d he i s co n fid e n t the Open M arket C o m m it t e e can s tab ilize the m arket at any tim e . T h e O p e n M a r k e t C o m m it t e e w i l l m eet i n t h e n e x t f e w d a y s a n d w i l l c o n s i d e r th e m a tter o f s t a b i l i z i n g the governm ent bond m a r k e t. E v e n d e f e n s e l o a n s b y b a n k s a r e c o m p e t i t i v e a n d , t h e r e f o r e , may a l s o be i n f l a t i o n a r y . T h e F e d e r a l R e s e r v e S y s t e m s h o u l d be i n a p o s i t i o n to s t e r i l i z e exp a n d in g excess loan s. reserves, except F lem in g . reduced E ccles in The w ou ld w h ic h d isa g re e a d e fla tio n a ry C o u n c il d id p ro v id e not w ith a six to one the id e a of b asis fo r redu cin g p erio d . say the reserves w ou ld have to be now. Brown. reserves reserves, w as The C o u n c i l 9s m em orandum m e n t i o n e d a p o ssib ility by the end of the that year. a redu ction in E c c l e s . The Open Market Committee can take care of the situa tion without reducing reserves. The open market activities constitute a very flexible instrument of control. The activities of the Open Market Committee permit greater flexibility than decreasing or in creasing reserves. You can do with open market operations exactly what the situation requires. Fleming states that the Treasury problems in the next six months are of very great importance. He does not believe that corporations will have a great deal to invest. Martin. The point Eccles has made is very important. balancing on a pinnacle. We are Fleming calls attention to the new crop loans and the heavy de fense loans that need to be made, Jackson states that government loans and guarantees have had a substantial increase. He reads the following statement from the National City Bank of New T o r k Bulletin for May 1951: "According to a special study appearing in the 1952 Government budget document, the total loans, guarantees and credit commitments by wholly-owned government enterprises will amount to $44.4 billion at the end of the current fiscal year on June 30; and not even this huge total covers everything, since for various reasons it excludes numerous other agencies under government sponsorship, including the Commodity Credit Corporation. The total, moreover, is on the rise, the June 30, 1951, figure indicating an increase of $9i billion, or 27 per cent, over the comparable figure last year. By June 30, 1952, a further increase of $4^ billion is expected. This is in a period of mounting inflationary pressures when the authorities are imposing restrictions on numerous types of private lending.” These govern ment loans show a larger percentage of increase than bank loans. It is very difficult to convince the public and the banks of the neces sity of cutting bank loans when the government peddles government guaranteed loans freely. The peak of bank loans will probably come this fall and next spring. Eccles. In the last war, bank loans did not go up a great deal. The government financed loans through a huge government deficit. Eccles asks what good it is to have a balanced federal budget at the same time that banks expand credit. Congdon. In talking about artificial restraint on loan expan sion, we may overlook the natural forces at work in the banking system now. These natural forces are the result particularly of the effec tive Job the Board has done in freeing the government securities market, and they are also the result of the loan expansion which has | -15ta k e n p l a c e . i n g n ew lo ans. reserves. p o sits, It and rap id ly ported Banks in gen erally T h is is to is also the early phases in lev el Bankers. Loans 2 ater the phase of early a cc u m u latio n p rice of is no large i n c r e .s e s sharp p r ic e some the on in and the an up. That go u p to qr want the We fo r w ill The b u ild unb alan ce slo w ed in some of and have purposes the labor m ovem ent, how ever, w ill net be an lo ans go down about, total we w ill carry b u sin e ss. b in e d w ith the c o rre c tiv e m u st are m ake The it in to expected that the to use p o sitio n present open even to of som e larger the m arket over sharp be top of to of a liq u id ate, b u y in g agrees also defen se m onths fo r w h ic h t im e a go loans tim e . have of w ith on ahead. alread y ahead. am o u n t in lo ans D efen se some ban kin g passed expected and one. C ity liq u id a tio n . of Congdon as re some tend In c re a se p rices fo r a fo r was and the lack of de more w ill sup ply* lo ans h ig h e r econom y necessary present B o a r d 's T h is m o n ey system , to com p olicy w ill p ro v id e great deal of the needed. b e lie v e s the may be re c o g n ize fro zen fo rces M a rtin lo ans a to pro bably want w ill by seek Reserve because in v e n to rie s. c iv ilia n c iv ilia n of been reached down than has banks b rin g in g faster fact sc arc itie s som ew hat by expand have result not lo an s o v er- in v en to ries m ay no w im p o se d We are a v a ila b ility of T h is in v e n to rie s c iv ilia n be the lo ans d e c lin e . these and A sso c ia tio n liq u id a tio n , to p rices. Loans show s a n tic ip a tio n carry of boom p e r i o d . fo r up p ro p o rtio n s of Furtherm ore, situ a tio n a o ff in lim itatio n s C onseq uently, come of lo an ed a m atter the H isto ry study urge process d e sirab ility w ill an rise . that areas E ccles Loans longer by bo o m p e r i o d . Borrow ers There alth o ug h the a In v e n to ry in c re a se s. liq u id a te d . fund s. Young h e a v ily e n tirely in flu e n c e d cap ita l by R a l p h not are C o n g d o n 's dem ocracy in tow ard a n in teg rated m id st program . of on s t r o n g co n tro ls. We v iew s have an u n d e c lare d need If we p atie n c e had a w ar. a war He m e rit in th in ks we are econom y, we co uld a gro ping put now. THE PROGRAM FOR V O L U N T A R Y C R E D I T R E S T R A I N T I S NOW G E T T I N G IN T O O P E R A T IO N AND T H E B O A R D W O U L D B E P L E A S E D TO H A V E ANY COMMENTS T H A T TH E MEMBERS O F T H E C O U N C I L M IG H T W I S H TO MAKE AS T O TH E P R O G R E S S OF THE PROGRAM I N T H E I R R E S P E C T I V E D I S T R I C T S AND WHAT R E S U L T S ARE B E IN G O B T A IN E D . M a rtin asks P o w ell to com m ent on th is item . P o w e l l o We a r e j u s t b e g i n n i n g t o d e f i n e t h e t e r m '’e s s e n t i a l i t y ” and i t i s a d i f f i c u l t t e r m to d e f i n e . He h a s b e e n a m a z e d a t t h e num ber o f n ew c a r s t h a t h a v e b e e n p r o d u c e d a l l w i n t e r i n t h e f a c e o f the d e f e n s e e f f o r t . T h e t h i n k i n g t h e c o u n t r y o v e r I s b e c o m in g more u n i f o r m on o u r p r o b l e m s . M ore l i t e r a t u r e w i l l be c o m in g fr o m th e N a t io n a l C o m m ittee. N e x t M o n d a y (M a y 2 1 ) t h e N a t i o n a l C o m m ittee w i l l and c o n s i d e r r e a l e s t a t e p r o b l e m s o u t s i d e o f t h o s e a f f e c t e d by Digitizedmeet for FRASER http://fraser.stlouisfed.org/ R e g u la tio n X . We w i l l a l s o c o n s i d e r f o r e i g n m u n i c i p a l s , i n c l u d i n g Federal Reserve Bank of St. Louis - 16 - Canadian and Australian obligations. Banks are probably making too many loans to sales finance companies. They are also lending to building andloan associations. The word '’essentiality" is gradually being hammered out. He is amazed at what the defense agency considers essential - such as steel for certain highways which the National Com mittee might consider non-essential. The turnover of bank deposits is around 23 now, compared to 30 back in the late 1920's. Consequent ly, Powell thinks we could have an increase of 50 per cent in the turnover of deposits. There may be substantial reductions in real estate, consumer, and inventory loans. He does not agree with Eccles that we can say rigidly that our manpower is fully used. We are pro ducing far more now than we thought could be produced last fall. In addition we can import goods. The A. B. A. suggests that banks send customers a statement of principles regarding the voluntary program. Fleming believes it would help the banks if the letter which the A.B.A. suggests banks send out could say it was sent at the direction of the National Committee. Williams says that the operation of LIF0 is a considerable factor in freezing inventories. Powell. The inventory situation is more excessive in connection with retailers’ stocks than with industry. Williams. Some industry is over-inventoried. Eccles does not agree with Powell on the matter of the turnover of deposits. He believes the turnover will not be as great as it was in the past. Banks require larger deposits now than they did twenty years ago. This change is due to the fact that more banks now have service charges, which has resulted in building larger individual de posits. Consequently, the turnover is not so large. In 1929 we also had $6 billion of loans in the call money market and there are no such loans now. Vardaman states that he is getting inquiries on V-loans. There is no unanimity in the government on restrictive measures. The Administration has not spoken strongly enough for civilian restric tions. Every Congressman is hearing from home about bank loan re strictions. The bankers are being blamed. Congress will undoubtedly set up an agency for defense plant financing, and even perhaps for municipal financing. Consequently, when the banks, insurance com panies and investment houses restrict credit the pressure in turn is on Congress by the people for government agencies to extend the credit which the regular private lending agencies have declined. We are hollering down a hollow log, unless we get the Administration to re strict the civilian economy. -17WHAT, IP ANY ACTION SHOULD BE TAKEN BY THE BOARD WITH RESPECT TO CHANGES IN THE TERMS OF REGULATION W, CONSUMER CREDIT, AND REGULATION X, REAL ESTATE CREDIT?_______________________________________ Brown reads Item II and the conclusions of the Council as ex pressed in the memorandum to the Board attached. Martin asks Norton to comment on Item II. Norton states that the trend in starts is down, and presents the following figures: BUILDING STARTS 1950 January 79,000 February 83,000 March 117,000 April 133,000 1951 87,000 80,000 down 3,000 93,000 down 24,000 88,000 down 45,000 The backlog at present is about 550,000 housing units. About 60 per cent of the starts are now guaranteed by the government. Many of the insurance companies have shut down on the extension of credit for housing. The mortgage market will cut down the starts. Norton does not think they can hold the starts in 1951 to the figures they had hoped for, namely, 800,000 to 850,000. The starts in 1951 will probably go to one million. Eccles. Even in the defense housing areas builders are hesitating to enter, because they cannot finance the construction. Davis asks whether FNMA will be extended. Norton believes FNMA will be extended with the pressure that will come from Congress. Martin asks Evans to comment on Regulation W. Evans. Regulation W is an older regulation than Regulation X, so those who have to operate under it were more familiar with what was required. The Board is now being blamed because the regulation is said to be too strict. The Board sent some of the staff to study the Canadian regulations and found the restrictions were even tighter than ours. Only thirty per cent of the automobiles bought in Canada are purchased on an installment basis, whereas fifty per cent are bought on the installment plan in the United States. The Board is having some problem in connection with compliance, and expects to take criminal action. There have been some violations. (Off-the http://fraser.stlouisfed.org/ record Governor Evans mentioned some of these complaints and the Federal Reserve Bank of St. Louis - 18 - problems involved). Evans states that the Board would prefer not to relax the regulation. The regulation touches many low income people, and the argument is often used with the Board that these people are particularly hurt. Evans tells those who argue this way that the regulation injures the low income group, but that inflation injures them even more, especially those on pensions. Brown. By and large the finance companies do not object to the regulation. The largest automobile companies also are not objecting. The Council does not believe Regulation W should be relaxed at present. Martin states there may be important increases ahead on V loans. Approximately 1 2 5 applications are being received each month. Vardaman understands the President signed the bill this morning. Eccles believes the Council could urge that defense financing be held to the minimum in connection with the construction of defense plant. There are thousands of applications and the amount involved is fantastic. Vardaman. The defense people are not interested in inflation. They are only interested in getting the goods. Vardaman cites the case of the rehabilitation of a certain plant that was not necessary. IT HAS BEEN PROPOSED THAT ADDITIONAL AUTHORITY GRANTED TO THE BOARD OF GOVERNORS OVER BANK RESERVES TAKE THE FORM OF A SUPPLEMENTARY RE SERVE ON ANY INCREASE IN A BANK'S LOANS FROM A BASE AMOUNT. COPIES OF MEMORANDA RELATING TO THIS AND OTHER SUGGESTED RESERVE REQUIREMENT PLANS ARE ATTACHED AND THE BOARD WOULD APPRECIATE THE VIEWS OF THE COUNCIL PARTICULARLY WITH RESPECT TO THE PROPOSED LOAN EXPANSION RESERVE PLAN. _______ Brown states that of all the reserve plans that have been con sidered the loan expansion reserve plan is probably the least practical and the least likely to be approved. Brown comments on the injustices of the proposal in relation to competing banks with different amounts of loans . Martin. The Board has taken no action on any reserve plan. The Wilson committee will probably make an announcement in a few days re garding its plans. Many members in Congress think the credit restraint program is promoted merely to avoid bank reserve legislation. We already have Regulation W and Regulation X and many persons think re serves are also a part of the problem. The Genera] Counsel of the Board has made an amendment to the loan expansion reserve plan (copies of this were &iven to the members of the Council). -19H em lng w ay . The p ro blem o f tig h te n in g c re d it is a h ig h ly d if fic u lt one. He c i t e s an a c t u a l c a s e o f t h e d i f f i c u l t y i n v o l v e d . It is p o s s i b l e t o o p e r a t e u n d e r t h e v o l u n t a r y c r e d i t r e s t r a i n t p r o g r a m , but I t i s d i f f i c u l t w h e n t h e p r o b le m s i n v o l v e t h o s e i n s o - c a l l e d e ssen tia l in d u s t r ie s . P o w e ll m e n tio n s a c a s e o f a m a n u fa c t u r e r c o m p e l l i n g a r e t a i l e r to t a k e a d d i t i o n a l u n i t s o f a p r o d u c t , a n d a n o t h e r c a s e o f a m a n u f a c t u r e r r e q u i r i n g a r e t a i l e r to b u i l d a l a r g e s h o w r o o m . P o w ell b e l i e v e s t h a t i t i s t h e b a n k e r s ' p r o b l e m to p r e v e n t t h e s e s i t u a t i o n s when t h e y i n v o l v e b a n k c r e d i t . S z y m c z a k s t a t e s t h a t w h a t H e m in g w a y i s s a y i n g i s a ll c o n tr o l o f c r e d i t w ould r e l i e v e the b a n k e r o f h i s Ju st w o u ld n o t h a v e m o n ey t o l o a n t o a n y o n e . O d lin . m oney, but s e e k in g It is all that does loans. rig h t not Bank to h elp lo an s say that le g itim ate m ust be at the banker b u sin e ss. a c e rta in t h a t the w o rrie s. is all The level out banks to over He of are support not th is econom y. Szym czak. in Korea w orse the K ey se rlin g s h o u l d com e p e rio d Eccles. to an fo llo w in g The overall talks of end, it m ore the w ou ld sup ply e x p a n sio n . fu rth er If in fla tio n the has tro uble gone, the be. of m oney m ust n o t in c rease faster than p r o d u c t i o n . R in g lan d . "e s s e n t i a l ” and banks of about tak e care w ill sim p ly of P lace the strictest there are still the the go sam e e ssen tia l to other a b l e , or t o i n s u r a n c e ly the p r o b l e m i s n o t of size Is of real in p roblem s. a c o m m u n it y . needs in te rp re tatio n There If of th eir custom ers, where bank c r e d it c o m p a n i e s , or t o e a s ily so lved. new crop governm ent lo an s m u st b e on may be these c o m m u n itie s E ccles b e lie v e s that l o a n s c a n be c u t d o w n . H e m in g w a y . now to t a k e c a r e not t h i n k s o . p o ssib le banks the cannot custom ers may b e agen cies. m ade, two but a v a il O b v io u s m any t y p e s th e re enough n o n - e s s e n t ia l c r e d it in the the e s s e n t i a l c r e d i t n e e d s ? The C o u n c il banks does Jackson. W here is the p e r c e n t a g e , or the l i n e , beyond w h ic h a banker sh o u ld not lo a n fu n d s ? W h e n do t h e b a n k s s i n i n t h e p e r c e n t a g e of t h e i r l o a n s i n r e l a t i o n to t h e i r d e p o s i t s , a n d w h a t i s a n e s s e n t i a l lo an ? O d lin . Bank loans can be a result as w ell as an effect. “20THE D E S I R A B I L I T Y OF THE F E D E R A L R E SERV E BOARD U N DER TA KIN G A STUDY OF THE P R O S P E C T I V E DEMANDS FOR AND S U P P LY OF C R E D IT OVER THE NEXT S I X TO TW E L V E M O N T H S , TH E S TU D Y TO IN C L U D E : A. R E Q U IR E M E N T S FOR NEW P R O D U C T IV E P L A N T , IN V E N T O R IE S AND W O R K IN G C A P I T A L , TH AT CANNOT B E F IN A N C E D FROM R E T A IN E D E A R N IN G S AND S A V IN G S (P R O S P E C T I V E OUTLAYS FOR NEW PLANT IN 1 9 5 1 ARE NOW E S T IM A T E D AT $ 2 3 , 9 1 0 M I L L I O N ) ; B. AMOUNT OF B A N K F IN A N C IN G BE R E Q U IR E D ; C. E S T I M A T E D E X T E N T OF NET R E D E M P T IO N S T H E M ETH ODS OF P A Y M E N T ; D. AMOUNT B Y W H IC H P R IV A T E E S SE N T IA L L IN E S . OF F E D E R A L E X P E N D IT U R E S C R E D IT THAT W I L L OF S A V IN G S B O N D S , CAN B E CON TRACTED AND IN NON- I F SUCH A S T U D Y I N D I C A T E S T H A T TH E DEMAND FOR C R E D IT I S L I K E L Y TO EXC EED TH E P R O S P E C T I V E S U P P L Y O F A V A IL A B L E F U N D S , A D E C I S I O N SHOULD BE REA C HED AS TO W HETH ER DEMAND I S TO B E D E C R E A S E D BY FURTHER RES T R IC T IO N S , OR W HETH ER TH E S U P P L Y IS TO BE A LLOW ED TO IN C R E A S E . B r o w n com m ents t h a t i t i s d i f f i c u l t to know w h a t t h e m i l i t a r y e x p e n d it u r e s w i l l b e , a n d no one p r o b a b l y c a n g iv e a c lo s e e s t i m a t e . F lem in g C ity B an kers states that suggested M a rtin r e a d s re g a r d in g Ite m V : the a c o m m it t e e the of th e A sso c ia tio n of Reserve study. fo llo w in g statem ent of R alph Young o f th e Staff "T h e B o a r d ’ s r e s e a r c h s t a f f i s a l r e a d y e n g a g e d I n c o n t i n u i n g s t u d ie s o f p r o s p e c t i v e dem ands and s u p p ly o f c r e d i t a lo n g the l in e s su g g e ste d by the F e d e r a l A d v is o r y C o u n c i l . As one p h a s e o f t h i s program , the s t a f f is p i o n e e r i n g f o r s h o w i n g t h e m oney a n d c r e d i t in d e v e lo p in g a s p e c ia l f l o w s r e c o r d -- s o u r c e s fr a m e w o r k and uses o f f u n d s -- o f e a c h m a j o r s e c t o r o f t h e e c o n o m y . T h is s p e c ia l u n d e r t a k in g , w h ic h h a s b e e n in p r o c e s s f o r the p a s t fo u r y e a r s , i s now a t a n a d v a n c e d s t a g e a n d i t i s e x p e c t e d t h a t t h e b a s i c h i s t o r i c a l t a b l e s w i l l be made a v a i l a b l e t o t h e p u b l i c w i t h i n the n e x t s i x m o n t h s . "T h e m a t t e r o f p r o j e c t i n g t h e s e f i g u r e s s i x to n i n e o r t w e lv e m onths a h e a d , p r e s e n t s m any d i f f i c u l t t e c h n i c a l p r o b le m s a n d must a t t h i s s t a g e o f o u r e m p i r i c a l k n o w l e d g e r e m a i n a j u d g ment p r o c e d u r e . G aps in the a v a i l a b i l i t y o f c r i t i c a l c u rr e n t d a t a , o f c o u r s e , p r e s e n t many h a n d i c a p s to e f f e c t i v e p r o j e c t i o n rk. T h e f i l l i n g o f s u c h g a p s I s n o t a l o n e a m a t t e r o f the Digitized w foroFRASER -21s t a t l s t l c a l w o r k o f t h e B o a r d , b u t a l s o o f th e s t a t i s t i c a l w ork o f o t h e r G o v e r n m e n t a g e n c i e s and p r i v a t e o r g a n i z a t i o n s . P r o g r e s s i n t h i s w o r k i s l i k e l y to be h am p ere d i n the im m e d ia t e f u t u r e b e c a u s e a p p r o p r i a t i o n s f o r t h e s t a t i s t i c a l p ro gram s o f a n u m b e r o f G o v e r n m e n t a g e n c i e s a r e b e i n g se rio u sly cut b a c k . " O n t h e b a s i s o f e x i s t i n g d a t a , th e B o a r d 's s t a f f i s n o t h o p e f u l t h a t r e a s o n a b l e w ay s c a n be d e v i s e d o f e s t i m a t i n g the am ount by w h i c h p r i v a t e c r e d i t c a n be c o n t r a c t e d i n nonessen tia l l i n e s . T h e C o u n c i l may w i s h to g i v e c o n s i d e r a t i o n to s u g g e s t i o n s a s to how s u c h e s t i m a t e m ig h t be d e v e l o p e d . ” E c c l e s s a y s t h a t i t i s n e c e s s a r y to r e s t r i c t c o n s i d e r a b l y the i s s u a n c e o f c e r t i f i c a t e s o f n e c e s s i t y a n d c o n v e n i e n c e , a nd i t i s n e c e s s a r y t o u s e a l l o c a t i o n s i n o r d e r to m eet o u r p r e s e n t p r o b l e m s . He b e l i e v e s t h a t t h e MB i g P o u r ” o f t h e W i l s o n C o m m it t e e , o f w h i c h M a r t i n i s a m e m b e r, c o u l d t e l l th e d e f e n s e p e o p l e to u se e x i s t i n g p l a n t s w h e r e v e r i t i s a t a l l p o s s i b l e to do s o . T h is co u n try cannot b u i l d s c h o o l s , f a c t o r i e s , a n d d e f e n s e p l a n t s a t th e same tim e w i t h o u t in flatio n . B r o w n m e n t i o n s to M a r t i n t h a t t h e C o u n c i l h a s a n E x e c u t i v e Com m it t e e w h i c h w i l l be p l e a s e d t o m eet a t a n y tim e on s h o r t n o t i c e to co n sider any m a tters r e g a r d i n g a d vice or i n f o r m a t i o n . The m e e tin g a d jo u rn e d at * The next m e e tin g of the * w h ic h M a r t in 1 :1 8 * * * and the B o a r d w o u l d lik e P .M . * C o u n c il * * w ill be S e p t e m b e r 16- 18, 1951*
@FedFRASER