Full text of Minutes and Recommendations of the Federal Advisory Council : Meeting documents, May 15-17, 1949, Box 4, Volume 1946-1950

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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL
May 15, 1949
The second statutory meeting of the Federal Advisory Council for 1949 was convened
in Room 932 of the Mayflower Hotel, Washington, D. C., on Sunday, May 15, 1949,
at 2:25 P.M., the President, Mr. Brown, in the Chair.
Present:
Charles E. Spencer, Jr.
W. Randolph Burgess
Frederic A. Potts
Sidney B. Congdon
Robert V. Fleming
J. T. Brown
Edward E. Brown
W. L. Hemingway
Henry E. Atwood
James M. Kemper
J. E. Woods
Reno Odlin
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

On motion duly made and seconded, the mimeographed notes of the meeting held
on February 13, 14 and 15, 1949, copies of which had been sent previously to the members
of the Council, were approved.
President Brown reviewed the discussions which took place at a special meeting of
the Executive Committee of the Council held in Washington, D. C., on May 10 and 11,
1949, in connection with Senate Bill 1775 and Senate Joint Resolution 87.
The Council then unanimously approved the statement made by President Brown
on behalf of the Council before the Senate Committee on Banking and Currency on May
12, 1949, a copy of which is included with these minutes on pages 13 and 14.
The Council approved the suggestion that President Brown and Mr. Burgess each
write to Senator M aybank, in answer to Senator Maybank’s request for comments regard­
ing the current economic and financial problems of the country, instead of having the
Council prepare a written statement.
It was agreed that a copy of President Brown's letter to Senator McClelland on the
Reorganization Bill be sent to the Board of Governors; a copy of this letter appears
on page 15.
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 17, 18 and 19.
The meeting adjourned at 5:25 P.M .




HERBERT V. PROCHNOW

Secretary.

12

Statement on behalf of the Federal Advisory Council of the Federal Reserve
System presented by Edward E. Brown, President of the Federal Advisory
Council, to the United States Senate Committee on Banking and Currency,
May 12,1949. Mr. Brown is Chairman of the Board of The First National
Bank of Chicago, Chicago, Illinois.
Senate Bill 1775 has two purposes. The first is making permanent the temporary
power given the Reserve Board last summer to raise reserve requirements of member
banks by 4 percentage points on demand deposits and 13^ percentage points on time de­
posits. This temporary power, as Chairman McCabe then indicated, was an anti-inflation
measure. It gave the Board power to require member banks to immobilize some 4 billion
dollars of their funds and made this money unavailable to lend or invest.
This is exactly the opposite of what the present situation requires. For some months
business has been declining. The critical question is how far the recession will go.
This proposal to restrict the lending power of banks at a time when deflationary
forces are under way is untimely.
The Board says it may not use the power granted and as evidence points out it has
recently reduced reserve requirements. But the very possession of these powers by the
Board is deflationary. Every prudent banker will feel he must keep enough extra money
in short-term government securities to meet the reserves which the Board may call for
in its discretion at any time. The sword of Damocles may not fall but nobody who lives
under it can ignore its presence.
The proposed legislation is not only untimely; it is wholly unnecessary. No damage
will be done by the lapse of these powers on June 30. The effects were demonstrated last
week when the Board released about 134 billion of reserves. There was no disturbance to
the money market or the government security market. The Reserve Banks sold to the
member banks enough government securities to employ all the cash released. There was
simply a transfer of these securities from the Reserve Banks to the member banks. The
same thing will happen on June 30 if some 800 million of reserves are released by the lapse
of the present temporary authority. The Reserve Banks and the Treasury have the
powers to provide the securities to employ these funds pending demands from business
borrowers.
The Board says it wants some more power for future emergencies. It already has
powers with the discount rate and control of open market operations. If it wants still more
power the Board can get it by reducing reserve requirements well below the legal maxi­
mum of 26, 20 and 14 per cent, so that they will have leeway to raise them later.
Reducing reserve requirements substantially would do no harm just as it did no harm
last week. It would do good because it would tend to make the banks more aggressive in
their loan policies with the larger lending power they would have. It would relieve the
Reserve Banks of some of their overload of 20 billions of government securities.
On the second point, this bill goes far beyond the bill of last summer in its request
for new and enlarged powers for the Board of Governors of the Federal Reserve System.
They now ask the Congress for the first time for powers to require certain reserves from
6,500 non-member insured banks which are chartered by and are supervised by state
banking authorities, and whose reserve requirements are now set solely by state laws.
If such a fundamental change should be contemplated in the American traditional
dual system of banking, it ought to be the subject of separate and extended consideration
and not hung on another bill. This proposal changes the status of 6,500 non-member
banks, most of them country banks in all parts of the United States. There is no emergency
to justify rushing through this basic change.



13

The Federal Advisory Council is opposed to any further extension of the powers of
the Federal Reserve Board over consumer credit.
These powers were granted as a war measure for three purposes. The first was to
channel the maximum amount of savings of individuals into government bonds, so as to
enable the government to finance the war. The second purpose was to reduce the demand
for scarce commodities and lessen the upward pressure on their prices. The third was to
lessen possible credit expansion. As a war measure the powers were desirable and served
their purpose.
Today the government has no difficulty in getting all the money it needs and none
of the consumer durable goods are in short supply, with the exception of certain makes
of lower-priced cars. W ithin a few months even these cars promise to be in ample supply.
Credit today is declining and not expanding.
The emergency for which the powers were granted to the Federal Reserve Board is
past, and the powers so granted should pass with the emergency.
The Council is unanimous in believing that control over installment credit has no
permanent place in the American peacetime economy. To give any group of men, such
as the Federal Reserve Board, power to regulate the terms and conditions of installment
credit in peacetime can only injure the economy. The maximum terms of credit prescribed
tend inevitably to become the minimum terms for the great majority. It is our belief that
down payments, on the average, would probably be larger and terms of payment shorter
if no Regulation W were now in effect. Governmental changes in terms and conditions
from time to time on which installment credit can be extended cause confusion among
merchants and manufacturers who have adopted and advertised given terms of payment.
The seller of goods and the grantor of credit are in a better position than any Board
can be to judge what terms of credit should be extended to individuals and to vary such
terms as among individuals, and in accordance with changing conditions.
The Federal Advisory Council, therefore, is opposed to the passage of Senate Bill 1775
and Senate Joint Resolution 87.




14

FEDERAL ADVISORY COUNCIL
February 18, 1949

Dear Senator McClellan:
The Federal Advisory Council, a statutory body created under the Federal Reserve
Act and consisting of one banker from each Federal Reserve District elected by the sev­
eral Boards of Directors of the Federal Reserve Banks, has just met in Washington and
has observed the action of the House of Representatives in the passage of HR-2361. The
Council has also learned that hearings have been held on Senate Bill 526, both bills per­
taining to the reorganization of Government agencies.
The Council has further learned that in the House of Representatives the Board of
Governors of the Federal Reserve System, along with several other agencies, has been
eliminated from the general reorganization provisions so as to require separate action in
the event of a reorganization or change in any of its functions. We are also aware that in
the event of such an occurrence, Congress, by action of both Houses, can disapprove within
a sixty-day period.
As the members of the Council are all thoroughly conversant with the creation of
the Federal Reserve System and the intent of the Congress when it was created, particu­
larly under the guidance of the late Senator Glass, then Chairman of the House Banking
and Currency Committee, that the Board of Governors of the Federal Reserve System
was to be an agency of the Congress and not an agency subservient to the executive
branch, which intent was reaffirmed in the Banking Act of 1935, it would appear to the
Council that in the event of the reorganization provisions effecting the Board the Con­
gress should have to act affirmatively rather than through disapproval of both Houses.
We believe this is essential in our democratic form of Government because of the status
of the Federal Reserve System in the economy of the Nation.
Since its establishment in 1913, the Federal Reserve System has effectively dealt
with the problems of World War I, the intervening depression, World War II, and the
subsequent problems which the postwar period have brought about, and we strongly em­
phasize that we believe the Board of Governors of the System should continue to be pre­
served as an agency of the Congress as now constituted.
We, therefore, respectfully request that the Board of Governors be exempted from
the Reorganization Bill. In the event that it is later proposed to reorganize the Board of
Governors, it should be done by legislation requiring the concurrence of both Houses of
Congress. We hope this letter may be entered on your record and may be given the full
weight of your thoughtful consideration.
Very sincerely yours,
(Signed) EDWARD E. BROWN
President
The Honorable John L. McClellan, Chairman
Committee on Expenditures in the Executive Departments
United States Senate
Senate Office Building
Washington 25, D. C.




15

MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL
May 16, 1949
At 10:00 A.M ., the Federal Advisory Council reconvened in Room 932 of the May­
flower Hotel, W ashington, D . C.
Present: Mr. Edward E. Brown, President; Messrs. Charles E. Spencer Jr., W. Ran­
dolph Burgess, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, J. T. Brown,
W. L. Hemingway, Henry E. Atwood, James M . Kemper, J. E. Woods, Reno Odlin, and
Herbert V. Prochnow, Secretary.
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 Memorandum
which follows on pages 17, 18 and 19, listing the agenda items with the conclusions
reached by the Council. The M emorandum was delivered to the Secretary of the Board
of Governors at 12:25 P .M . on M ay 16, 1949.
The m eeting adjourned at 12:15 P.M .




HERBERT V. PROCHNOW

Secretary.

16

CO N F ID E N T IA L
M E M O R A N D U M TO T H E BO A R D OF GO VERNORS FROM T H E FE D E R A L
A DV ISO R Y C O U N C IL R EL A T IV E TO T H E A G EN D A FOR T H E JO IN T
M E E T IN G ON M A Y 17, 1949
1. D oes the Board of Governors propose to secure introduction of bank holding
com pany legislation in this session and attem pt to obtain enactment; and if that
is not intended in this session, what are the plans for bank holding company
legislation?
Bank holding com pany legislation has been the subject of joint discussions by the
Board and the Council on numerous occasions, but no legislation has been enacted. The
Council would appreciate knowing what action the Board m ay be contemplating on such
legislation.
2. R ecently there has been renewed discussion of the suggestion that the Federal
D eposit Insurance Corporation assessment be reduced and insurance coverage on
deposits increased. In a recent reply to a request from the Senate Banking and
Currency C om m ittee for a report on a bill to increase the insurance coverage from
$5,000 to $15,000, the Board stated that this change should not be considered
w ithout due regard to the reduction or elimination of assessments and a revision
of the basis for such assessments, and that the Board had instituted a careful
study w ith a view to placing itself in a position to respond to further inquiries
that the C om m ittee m ight wish to make. The Board would appreciate having
the views of the Council on the matters that should be taken into account in
making such a study and the conclusions that might be reached.
The Council is familiar w ith the discussions on this m atter which the Federal Deposit
Insurance Corporation has had with a com m ittee of the American Bankers Association.
W ithout being com m itted to any particular formula, the Council favors in general an
approach to this subject on the basis of these discussions.
Specifically, the Council believes any legislation should include the following points:
A. N o increase should be made in the present insurance coverage of $5,000;
B. The maxim um assessm ent in any one year should not exceed one-twelfth of
one per cent;
C. Provision should be made for maintaining the integrity of the fund by estab­
lishing a statutory formula for an autom atic scale of assessments, based on the
previous years’ losses and expenses, to range from no assessment, or an assess­
m ent of a nominal amount, under present conditions, to a maximum of onetwelfth of one per cent per annum.
In any study for the purpose of determining the adequacy of Federal Deposit Insur­
ance Corporation funds and the rate of assessments, the Council suggests the importance
of considering not only the possible losses of the Federal Deposit Insurance Corporation
but also the effect on bank earnings, capital and dividends of the steady drain of assess­
ments. These assessments reduce the power of the individual bank to make its own pro­
vision for losses.
3. In a recent letter to the Chairman of the Banking and Currency Committee of
the House, the Board took the position that action on Bill H. R. 1161, a bill to
provide for the conversion or absorption of national banks into State banks, should .




17

be deferred until consideration had been given to the problem of reserve require­
ments. Subsequently, Mr. Brooks, past president of the State Bank Division of
the American Bankers Association, wired the Board criticising that position.
Copies of his wire and the Board’s reply are attached. The Board would like to
have the comments of the Council on the Board’s position. (See pages 20 and 21.)
The members of the Council are in unanimous agreement that national banks should
have a right to convert to state charters as easily as state banks can convert to national
charters. The fact that state non-member banks may have different reserve requirements
than national banks should not be considered in connection with legislation authorizing
such conversion. The Council, therefore, feels that Congressional action on Bill H. R. 1161
should be considered without reference to reserve requirements.
4. It would be helpful to the Board if each member of the Council would be prepared
at the joint meeting to give a brief summary of the current and prospective busi­
ness and credit conditions in his Federal Reserve District.
Each member of the Council will be pleased to make a brief oral statem ent regarding
the current and prospective business and credit conditions in his Federal Reserve District.
5. Since the Council met on February 13-15, 1949, the Board has relaxed the provi­
sions of Regulation W on two occasions and has reduced margin requirements
from 75 per cent to 50 per cent. The Board would welcome the comments of the
members of the Council on these actions and their views as to what, if any, further
steps the Board or the Federal Open Market Committee might take at this time
to meet their responsibilities in the monetary and credit fields.
The Council is in agreement with the general direction of the action which the Board
has taken in relaxing the provisions of Regulation W, but calls attention to the fact that
the Board’s action has not yet gone as far in some respects as the Council recommended
in February. At that time the Council stated in its written memorandum to the Board,
“In connection with household furnishings and appliances, the Council favors
eliminating these articles from control inasmuch as they are now, with minor
exceptions, in ample supply.”
In view of the current economic trend, the Council feels even more strongly than it did in
February regarding the elimination of articles from control, and it now recommends that all
controls under Regulation Wbe dropped. As stated to the Senate Committee on Banking and
Currency, the Council favors the termination of the Board’s power over consumer credit.
The Council agrees with and approves the various steps the Board has taken in re­
ducing margin requirements.
The Council believes that under present conditions bank reserves now required are
unnecessarily high, and it recommends that the Board make further substantial reductions
in required reserves. Decreases in bank reserve requirements increase bank lending power
and encourage banks to proceed with more confidence in their lending and investing poli­
cies. They also enable banks to maintain their earnings, strengthen their ability to absorb
losses, and strengthen their capital funds. The Council has noted with approval the action
of the Open Market Committee in supplying securities to the market, and thus maintain­
ing orderly conditions, when reserve requirements were recently reduced.
The Council continues to feel that changes in reserve requirements are not a suitable
method of current credit control, but should be used only rarely for adjustment to basic
changes in the monetary situation. Changes in reserve requirements make difficult the
planning of banking operations.




18

There now seem to us to have been basic changes in the situation justifying lower
required reserves than the twenty-six, twenty and fourteen per cent maximums of the
Banking Act of 1935. It would seem wise to lower requirements to a level which can be
maintained over a considerable period.
6. Consideration of the refunding of maturing Government obligations, having in
mind the need of the banking system for obligations of medium term and the
allied question of removal of restrictions against purchase by banks which now
apply to certain of the outstanding Government obligations.
In connection with the refunding of maturing Government obligations, the Council
recommends the following action:
A. The issuance of notes or bonds of intermediate maturities to meet a shortage
of such securities in the market;
B. The shifting of a portion of the Federal debt to longer maturities. Even a
’67-’72 maturity is not now long term. The policy of increasing the amount of
the debt payable or in short term maturities may create a serious problem at
a later date.
The Council is not prepared to recommend at this time the removal of restrictions
applying to those Government securities which are now ineligible for purchase by com­
mercial banks.




19

COPY OF W ESTERN UNION TELEGRAM
Denver, Colorado
April 4, 1949
S. R. Carpenter,
Secretary, Board of Governors
Federal Reserve System.
Was greatly surprised and disturbed to learn of the opposition of the Board to H. R. Bill
1161 the bank conversion bill. Reference is made to your explanation of the Board’s posi­
tion in the March 30th issue of the American Banker. The argument given for the Board’s
stand seems feeble to us and is anything but convincing. In our opinion the Board has
tremendously lowered its dignity by using its opposition to this bill as a club over the
nonmember banks of the country. The Board’s unfortunate stand on this question will
definitely create ill will on the part of thousands and thousands of nonmember banks
which will take years to erase. So much more can be accomplished by working together
as supervisor agencies and banking systems. Surely harmony not dissension is the solution
of our banking problems. I vigorously appeal to the Board through you to withdraw its
opposition to this long overdue correction of equalization between the two great banking
systems of the country.
A lw o o d M. B r o o k s, President
Central Bank & Trust Co., Denver, Colorado
Immediate Past President of State Bank
Division American Bankers Association




20

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
April 21, 1949
Mr. Alwood M. Brooks, President,
Central Bank & Trust Co.,
Denver, Colorado
Dear Mr. Brooks:
The Board is glad that you expressed frankly in your wire of A.pril 4 your views with
respect to the position which the Board of Governors has taken in its letter to Chairman
Spence with respect to H. R. 1161, the national bank conversion bill. It would appear,
however, that you have misinterpreted the reasons for that position, and the Board has
asked me to restate these reasons in the light of your comments.
It was not the intention of the Board to oppose the bill as “a club over the nonmember
banks of the country” or as a means of influencing the passage of legislation applying supple­
mental reserve requirements to nonmember banks. Rather, the Board’s position recognizes
that as long as the present situation with respect to reserve requirements continues, mem­
ber banks (including national banks) will be at a distinct disadvantage; and that, since
this discrimination might influence a substantial number of national banks to convert into
State institutions, it would not be a service to the dual banking system to remove the
impediment to the conversion of national banks at this time.
In his testimony before the Joint Committee on the Economic Report last February,
Chairman McCabe stated that, “It would be grossly inequitable to limit the (supple­
mental reserve) requirements to member banks alone. Member banks already carry higher
effective reserves than nonmembers, while nonmember banks benefit by the strength
which the very existence of the Federal Reserve System gives to the credit structure. It
is unfair to have member banks bear the entire burden of actions in the monetary field
undertaken in the public interest. I have found member banks, particularly small member
banks, becoming restive because of the inequitable application of reserve requirements.
Failure to include all insured banks would seriously impair the effectiveness of national
monetary policy.”
You refer to equalization between the two great banking systems of the country. It
is to be remembered, however, that our dual banking system embraces not only a duality
as between national banks and State banks but a duality also as between member banks
of the Federal Reserve System and nonmember banks. Too often there is a tendency to
forget that national banks and State member banks should be protected from discrimina­
tory advantages possessed or sought by nonmember State banks and that this should be
the equal concern of banking authorities along with the protection of nonmember State
banks from discriminatory advantages possessed or sought by national banks as a class
or State member banks as a class. It is under this principle that we feel that supervisory
agencies and the banking systems, to use the phraseology in your telegram, should work
together to the end that harmony and not dissension might bring a solution to our banking
problems.
Congress must be the arbiter as regards discriminatory situations arising from Federal
statutes respecting banking. Until such time as Congress gives adequate consideration to
the problem of supplemental reserve requirements in relation to insured nonmember banks,
we do not feel that H. R. 1161 should be enacted. Thus, in our recent letter to Chairman
Spence of the House Banking and Currency Committee, the Board said: “In the circum­
stances the Board hopes that action with respect to H. R. 1161 can be deferred until con­
sideration has been given to the problem of reserve requirements.”
Very truly yours,
(s) S. R. C a r p e n te r
S. R. Carpenter
21
Secretary.




MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL
May 16,1949
At 2:00 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. Charles E. Spencer Jr., W. Ran­
dolph Burgess, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, J. T. Brown,
W. L. Hemingway, Henry E. Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and
Herbert V. Prochnow, Secretary.
Dr. Ralph A. Young, Associate Director, Division of Research and Statistics of the
Federal Reserve System, spoke on the subject, “The Economic Situation and Outlook.”




HERBERT V. PROCHNOW

Secretary.

MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL
AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
M ay 17, 1949
At 10:38 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, James K. Vardaman, Jr., and Lawrence Clayton; also Mr. S. R. Car­
penter, Secretary of the Board of Governors.
Present: Members of the Federal Advisory Council:
Mr. Edward E. Brown, President; Messrs. Charles E. Spencer Jr., W. Randolph
Burgess, Sidney B. Congdon, Robert V. Fleming, J. T. Brown, W. L. Hemingway, Henry
E. Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and Herbert V. Prochnow,
Secretary.
Absent: Frederic A. Potts.
President Brown reported that the Council had requested that the Board of Governors
be exempt from the Reorganization Bill. The Secretary of the Council gave the Secretary
of the Board a copy of a letter on this subject included in these minutes on page 15.
Chairman McCabe stated that the Board has not engaged in any activity in its own
behalf and that the Board appreciates the Council’s action.
President Brown reported further that the Council unanimously approved the state­
ment which he presented to the Senate Committee on Banking and Currency on behalf
of the Council. The statement appears on pages 13 and 14.
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 17, 18 and 19 of these minutes.
Chairman McCabe replied that it is the Board’s intention to introduce legislation,
but that this session of Congress may not consider the legislation even if it goes to hearings.
President Brown then read the second item on the agenda and the conclusions of the
Council as given in the Confidential Memorandum mentioned above.
Chairman McCabe remarked that the Board’s study is not complete, and that the
Board therefore is reserving the right to make suggestions on the subject later.
The President of the Council read the third item on the agenda and the conclusions
of the Council given in the Confidential Memorandum, mentioned above.
At the suggestion of Chairman McCabe, the fourth item of the agenda was deferred
until the latter part of the meeting.




23

President Brown read the fifth item on the agenda and the conclusions of the Council
as given in the Confidential Memorandum referred to above. There was a lengthy discussion
introduced by Dr. Burgess, part of it off the record, between members of the Board and
the Council on the whole matter of reserves and monetary policy generally.
The President of the Council then read the sixth item on the agenda and the con­
clusions of the Council as given in the Confidential Memorandum cited above. A brief
discussion followed.
President Brown read the fourth item on the agenda, and each member of the Council
commented briefly on business and credit conditions in his district.
The meeting adjourned at 1:23 P.M.
HERBERT V. PROCHNOW
Secretary.




MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL
May 17, 1949
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. Charles E. Spencer Jr., W. Randolph
Burgess, Sidney B. Congdon, Robert V. Fleming, J. T. Brown, W. L. Hemingway, Henry E.
Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and Herbert V. Prochnow, Secretary.
Absent: Mr. Frederic A. Potts.
The Federal Advisory Council voted unanimously to give the Executive Committee
of the Federal Advisory Council full power to act for the Council on any matters which
might arise before the next meeting of the Council on September 18, 19 and 20, 1949.
The meeting adjourned at 2:18 P.M.




HERBERT V. PROCHNOW

Secretary.

25

- 1 NOTE:
This transcript of the Secretary’s
notes is not to be regarded as complete or
necessarily entirely accurate.
The tran­
script is for the sole use of the members
of the Federal Advisory Council.
The con­
cise official 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 15, 1949, at
2:25 P.M., in Room 932 of The Mayflower Hotel,
Washintgon, D.C.
All members of the Federal
Advisory Council were present.
E. E. Brown asks for approval of the Secretary's notes of the
last meeting of the Council, which was held on February 13, 14 and 15,
19^9, and the notes were approved.
Brown reviews the discussions which
took place at the special meeting of the Executive Committee of the
Council held in Washington, D.C. on May 10 and 11, 1949, in connection
with Senate Bill 1775 and Senate Joint Resolution 87.
Brown also
reviews the testimony which Fleming had given on behalf of the American
Bankers Association and which he and Burgess had given on behalf of the
Federal Advisory Council before the Senate Committee on Banking and
Currency.
Brown then asks the Secretary to read the statement which
Brown had made on behalf of the Federal A d v i s o r y Council before the
Senate Committee.
Each member of the Council was also given a copy of
the statement.
On motion made by Fleming and seconded by J. T. Brown,
the Council unanimously approved the statement which Brown had made on
Senate Bill 1775 and Senate Joint Resolution 87 before the Senate
Committee on Banking and Currency on May 12, 194-9- A copy of the
statement is included in the minutes of the Executive Committee meeting
for May 10 and 11, 1949SUGGESTIONS TO SENATOR MAYBANK REGARDING THE ECONOMIC SITUATION
E. E . Brown states that Senator Maybank had asked Brown during
his testimony to transmit to the Senate Committee any suggestions the
Council might care to make that would be helpful in meeting the current
economic and financial problems of the country.
Brown says that if the
Council prepared a written communication, it probably would be neces­
sary for the Council to comment on taxes, housing, the budget, and
many other subjects.
In his experience with the Council, Brown has
found it is not advisable to issue broad public statements of this
character, as such statements tend to destroy the effectiveness of the
Council on banking matters.
He suggests that he and Burgess write
letters to Senator Maybank, which course of procedure met with the
approval of the members of the Council.
REORGANIZATION B ILL

Fleming discusses what has taken place regarding the
Reorganization Bill and asks that the copy of President Brown's letter
to Senator McClellan on the Reorganization Bill be given to the Board



-2of Governors in order that the Board may see what the Council has done
in its effort to be helpful to the Board.
E. E. Brown suggests that a copy of Fleming's letter to Brown
on this subject also be given to the Board of Governors.
Copies of
these letters had been previously sent to members of the Council.
DOES THE BOARD OF GOVERNORS PROPOSE TO SECURE INTRODUCTION OF BANK
HOLDING COMPANY LEGISLATION IN THIS SESSION AND ATTEMPT TO OBTAIN
ENACTMENT:
AND IF THAT IS NOT INTENDED IN THIS SESSION, WHAT ARE THE
PLANS FOR BANK HOLDING COMPANY LEGISLATION?
E. E. Brown states that at a dinner to which Burgess had in­
vited Wolcott the latter said the bank holding company bill was dead
or dormant.
Wolcott doubts whether it will be brought up at this
session of Congress.
Odlin wishes to have the question brought up to the Board.
The
proposed bank holding company legislation has been the subject of dis­
cussion by the Council and the Board on various occasions, and many
bankers in his district would like to know what action the Board may
be contemplating on the proposed legislation.
E. E- Brown advises that he will raise the question of bank
holding company legislation with the Board and will ask Odlin to com­
ment regarding it.
RECENTLY THERE HAS BEEN RENEWED DISCUSSION OF THE SUGGESTION THAT THE
FEDERAL DEPOSIT INSURANCE CORPORATION ASSESSMENT BE REDUCED AND INSUR­
ANCE COVERAGE ON DEPOSITS INCREASED.
IN A RECENT REPLY TO A REQUEST
FROM THE SENATE BANKING AND CURRENCY COMMITTEE FOR A REPORT ON A BILL
TO INCREASE THE INSURANCE COVERAGE FROM $5,000 TO $15,000, THE BOARD
STATED THAT THIS CHANGE SHOULD NOT BE CONSIDERED WITHOUT DUE REGARD TO
THE REDUCTION OR ELIMINATION OF ASSESSMENTS AND A REVISION OF THE BASIS
FOR SUCH ASSESSMENTS, AND THAT THE BOARD HAD INSTITUTED A CAREFUL
STUDY WITH A VIEW TO PLACING ITSELF IN A POSITION TO RESPOND TO F U R ­
THER INQUIRIES THAT THE COMMITTEE MIGHT WISH TO MAKE.
THE BOARD WOULD
APPRECIATE HAVING THE VIEWS OF THE COUNCIL ON THE MATTERS THAT SHOULD
BE TAKEN INTO ACCOUNT IN MAKING SUCH A STUDY AND THE CONCLUSIONS THAT
MIGHT BE REACHED.
Fleming states that Eccles told him he thought the assessment
should be reduced.
E . E . Brown says that a committee of the American Bankers
Association Is working on this matter.
He states that Stonier talked
with Harl and Harl does not wish the assessment eliminated.
The
American Bankers Association formula has a scale of assessments r u n ­
ning from one-twelfth of one per cent to one-ninety-sixth of one per
cent per year.
The expenses of operating the Federal Deposit Insur­
ance Corporation plus the losses would come out of the earnings of the
fund.
The assessments would vary, depending upon the relationship of
the expenses and the losses to the earnings.
There does not seem to be
any pressure by Harl to raise the coverage above $5,000.
Harl,
Vandenberg and Snyder will have the most influence on any proposed
legislation.




- 3 Hemingway. Vandenberg wishes the assessment reduced from onetwelfth to one-twenty-fourth.
Atwood states Harold Amberg told him Harl would accept the p r o ­
posal of one twenty-fourth of one per cent per annum.
Odlin asks whether there is anything sacred about dealing in
figures of one-twelfth, one-forty-eighthand one-ninety-sixth of one
per cent.
Fleming believes that the activity in behalf of legislation
on this matter should be directed through
the American Bankers
Association Committee which is working with the F.D.I.C.
Brown thinks that the Council can say to the Board of
Governors that the Council is familiar with the discussions on this
matter which have been carried on by the Federal Deposit Insurance
Corporation and the Committee of the American Bankers Association.
Without being committed to any particular formula, the Council may
say that it favors in general an approach to this subject on the
basis of these discussions.
The Council believes any legislation
should include the following points:
(1) No increase in the present
insurance coverage; (2) A maximu m assessment not in excess of onetwelfth of one per cent per year; and (3) A scale of assessments,
based on the losses and expenses of previous years, to range from no
assessment, or an assessment of a nominal amount, under present c o n ­
ditions, to a m a x i m u m of one-t welfth of one per cent per annum.

IN A RECENT LETTER TO THE CHAIRMAN OF THE BANKING AND CURRENCY COM­
MITTEE OF THE HOUSE, THE BOARD TOOK THE POSITION THAT ACTION ON
BILL H. R. 1 1 6 1 , A BILL TO PROVIDE FOR THE CONVERSION OR ABSORPTION
OF NATIONAL BANKS INTO STATE BANKS, SHOULD BE DEFERRED UNTIL CONSIDER­
ATION HAD BEEN GIVEN TO THE PROBLEM OF RESERVE REQUIREMENTS. SUB­
SEQUENTLY, MR. BROOKS, PAST PRESIDENT OF THE STATE BANK DIVISION OF
THE AMERICAN BANKERS ASSOCIATION, WIRED THE BOARD CRITICIZING THAT
POSITION. COPIES OF HIS WIRE AND THE BOARD’ S REPLY ARE ATTACHED.
THE BOARD WOULD LIKE TO HAVE THE COMMENTS OF THE COUNCIL ON THE
BOARDfS POSITION.
E, E. Brown asks the opinion of the members of the Council on
this question which the Board has submitted.
Hemingway b e l ie v e s n a tio n a l banks should have the r ig h t to
convert r e a d i l y to s t a t e c h a r t e r s .
H. R.

Burgess s t a t e s th at there i s no r e la t io n s h ip between B i l l
l l b l and the m atter of r e s e rv e requirem ents.
Hemingway a g r e e s .




- 4 E. E. Brown says that many national banks may wish to get out
of the Federal Reserve System because of reserve requirements.
Congdon does not believe obstacles should be placed in the way
of conversion or absorption of national banks into state banks.
Woods thinks the Board wishes the Council1s views on the
B o a r d ’s correspondence with Mr. Brooks.
Fleming believes that national banks should have the right
to convert to state charters as readily as state banks can convert
to national charters.
E. E. Brown asks how many members of the Council believe that
national banks should have a right to convert to state charters as
easily as state banks can convert to national charters.
All members
agree that national banks should have this right.
The Council also
believes that the fact that state non-member banks may have different
reserve requirements than national banks should not prevent suoh con­
version.
In view of this position of the Council, the Council sees
no reason why Congress should postpone action on Bill H.R. 1161 until
consideration has been given to tW e problem of reserve requirements.
IT WOULD BE HELPFUL TO THE BOARD IF EACH MEMBER OF THE COUNCIL WOULD
BE PREPARED AT THE JOINT MEETING TO GIVE A BRIEF SUMMARY OF THE CURRENT
AND PROSPECTIVE BUSINESS AND CREDIT CONDITIONS IN HIS FEDERAL RESERVE
DISTRICT.
_____________
E. E. Brown states that he will call on each member of the
Council to comment relative to this item when the Council meets with
the Board.
SINCE THE COUNCIL MET ON FEBRUARY 13-15, 19^9, THE BOARD HAS RELAXED
THE PROVISIONS OF REGULA T I O N W ON TWO OCCASIONS AND HAS REDUCED MARGIN
REQUIREMENTS FROM 75 PER CENT TO 50 PER CENT.
THE BOARD WOULD WELCOME
THE COMMENTS OF THE MEMBERS OF THE COUNCIL ON THESE ACTIONS AND THEIR
VIEWS AS TO WHAT, IF ANY, FURTHER STEPS THE BOARD OR THE FEDERAL OPEN
MARKET COMMITTEE MIGHT TAKE AT THIS TIME TO MEET THEIR RESPONSIBILITIES
IN THE MONETARY AND CREDIT FIELD.
________________________

E. E.

Brown says he told the Senate Committee that up to the
first of this year the Board had done a comparatively good job in
administering Regulation V, but since January 1 he did not believe,
the Board had acted soon enough.
The Board may have been afraid to
abandon credit controls for fear that the Board's position might be
weakened when it asked for an extension of Regulation W.
Fleming thinks the Board was pushed into action.
C o n g d o n . The Board is asking whether the Council approves or
disapproves of the Board's action.

E . E . Brown says the Council may say that it agrees with the
action the Board has taken in reducing margin requirements and that
the Council approves the actions taken by the Board under Regulation W



-

5

-

since the Council's last m e e t i n g w i t h the Board.
The Council ma y
also say that in vi e w of the cu r r e n t economic trend the Council feels
even more strongly than it d i d in F e b r u a r y r egarding the e l i m i nation
of articles from control, and it n o w recommends that all controls
under R e g u l a t i o n W be dropped.
Hemingway asks w h e t h e r
margin requirements.

the B o a r d should have the power over

E. E. B r o w n states that it is in the law.
If m a r g i n r e q u i r e ­
ments are re d u c e d f u rther it m a y f r i g h t e n the public.
A further
reduction in m a r g i n r e q u i r e m e n t s on stocks m i g h t be misunderstood.
Burgess doubts w h e t h e r margins
Such action might be misinterpre t e d .

should be re d u c e d further now.

E. E. B r o w n says that Burgess and he both stated in their
testimony to the Senate Committee that reserves should be reduced.
A reduction in reserves would give the B o a r d more leeway to increase
them at a later date, if necessary.
H e m i ngway thinks that if the Council urges the B o a r d to d e ­
crease reserves so they can increase them at a later date, the
Council is in part agreeing w i t h the argument of the B o a r d about the
use of reserves as an instrument of credit control.
Burgess.

There are other reasons for reducing reserve r e q u i r e ­

m e n ts.
The F e deral Reserve System has too m a n y government securities
an d r e d u c i n g reserves would move out some of these securities.
Re­
d u c i n g reserves wo u l d also strengthen the earning position of banks
an d help them build their capital positions.
Sproul said in his
s t a t e m e n t that reserves should not be used as an instrument of dayt o - d a y control.

at r a r e

E. E. Brown believes that reserves should only be changed
intervals.

Burgess thinks the present reserves are too high, particularly
in view o f bank earnings and the amount of governments held by the
F e d e r a l Reserve System.
O d l i n b e l i e v e s t h a t t h e C o u n c i l m i g h t w e l l s t a t e i n i t s m em o­
ran d u m t o t h e B o a r d t h a t t h e C o u n c i l c o n t i n u e s t o feel t h a t c h a n g e s
in r e s e r v e r e q u i r e m e n t s a r e n o t a s u i t a b l e m e th o d o f c u r r e n t c r e d i t
c o n t r o l, b u t s h o u ld b e u s e d o n ly r a r e l y f o r a d ju s tm e n t to b a s ic
changes in th e m o n e ta ry s i t u a t i o n .
C h an ges i n r e s e r v e r e q u ir e m e n ts
m ake d i f f i c u l t t h e p l a n n i n g o f b a n k i n g o p e r a t i o n s .
T h ere h ave b een
b a s ic c h a n g e s i n th e s i t u a t i o n j u s t i f y i n g lo w e r r e q u ir e d r e s e r v e s
t h a n t h e t w e n t y - s i x , t w e n t y a n d f o u r t e e n p e r c e n t m a x im u m s o f t h e
B a n k in g A c t o f 1 9 3 5 .
I t w o u ld seem w is e to lo w e r r e q u ir e m e n t s t o a
l e v e l w h ic h c a n b e m a i n t a i n e d o v e r a c o n s i d e r a b l e p e r i o d .

tre n d ,

E . E . B ro w n .
a s u b s ta n tia l




A s s u m in g a c o n t i n u a n c e o f t h e p r e s e n t e c o n o m ic
r e d u c t i o n i n r e s e r v e s w o u ld b e d e s i r a b l e .

- 6

-

CONSIDERATION OF THE REFUNDING OF MATURING GOVERNMENT OBLIGATIONS,
HAVING IN MIND THE NEED OF THE BANKING SYSTEM FOR OBLIGATIONS OF
MEDIUM TERM AND THE ALLIED QUESTION OF REMOVAL OF RESTRICTIONS
AG A IN ST PURCHASE BY BANKS WHICH NOW APPLY TO CERTAIN OF THE OUTSTANDTNG GOVERNMENT O B LIG A TIO N S.________________________________________________________________
(A t t h i s

p o in t

th ere

w as

an

o ff-th e -re c o rd

d is c u s s io n )

B u r g e s s b e l i e v e s t h a t i f r e s e r v e r e q u ir e m e n ts a r e re d u c e d th e
Open M a r k e t C o m m i t t e e s h o u l d b e p r e p a r e d t o o f f e r n o t e s o r b o n d s o f
in t e r m e d ia t e m a t u r i t i e s to m eet a s h o r t a g e o f su c h s e c u r i t i e s In th e
m a rk e t.
C o n gd o n b e l i e v e s t h e T r e a s u r y s h o u ld p u t o u t in t e r m e d ia t e
m a t u r i t ie s e s p e c i a l l y w it h th e p o s s i b l e la p s e o f th e e m e rg e n c y r e ­
serv e l e g i s l a t i o n .
F l e m i n g t h i n k s t h e p o l i c y o f c o n s t a n t l y i n c r e a s i n g th e am ount
o f dem and a n d s h o r t t e r m i s s u e s o u t s t a n d i n g w i l l c r e a t e a s e r i o u s
p r o b le m a t a l a t e r d a t e .
E . E . B ro w n a g r e e s .
B r o w n s t a t e s t h a t t h e C o u n c i l m ay
recom m en d : ( 1 ) T h e i s s u a n c e o f n o t e s o r b o n d s o f i n t e r m e d i a t e m a t u r ­
i t i e s t o m e e t a s h o r t a g e o f s u c h m a t u r i t i e s i n th e m a r k e t; and (2 )
th e s h i f t i n g o f a p o r t i o n o f t h e f e d e r a l d e b t t o l o n g e r m a t u r i t i e s . .
E ven a ' 6 7 " ' 7 2 m a t u r i t y i s n o t now lo n g - t e r m .
The

m e e tin g




a d jo u r n e d

at

5 :2 5

P . M.

- 7

-

THE C O U N CIL CONVENED AT 1 0 A .M . ON MAY
1 6 , 1 9 ^ 9 , IN ROOM 9 3 2 OF THE MAYFLOWER
HO TEL, WASHINGTON, D . C .
A L L MEMBERS OF
THE F E D E R A L A D VISO RY CO UNCIL WERE P R ESEN T .

The 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 t h e 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 t o t h e B o a r d o f G o v e r n o r s r e l a t i v e t o t h e
agenda for the j o i n t m e e t i n g o f t h e C o u n c i l a n d t h e B o a r d on M ay 1 7 ,
1949.
The M em o ran d u m w a s d e l i v e r e d t o t h e S e c r e t a r y o f t h e B o a r d o f
Governors at 1 2 : 2 5 P .M . o n M ay 1 6 , 1 9 4 9 .
I t w i l l be n o te d t h a t e a c h
item of the a g e n d a i s l i s t e d w i t h t h e c o m m e n ts o f t h e C o u n c i l o n t h e
item.
The m e e t i n g a d j o u r n e d




at

12 :15

P .M .

CONFIDENTIAL
MEMORANDUM TO THE BOARD OF GOVERNORS
FROM THE
FEDERAL ADVISORY COUNCIL
RELATIVE TO THJ AGENDA FOR THE JOINT MEETING
ON MAY 1 7 , 19 4 9

1.

Does th e Bear’d o f G o v ern o rs p ro p o se to se c u re in t r o d u c d u c tio n o f bank h o ld in g company l e g i s l a t i o n in t h i s
s e s s i o n and a tte m p t to o b ta in en actm en t; and i f t h a t i s
n o t in te n d e d i n t h i s s e s s i o n , w hat a r e th e p la n s f o r
bank h o ld in g company l e g i s l a t i o n ?

Bank h o ld in g company l e g i s l a t i o n h a s been th e s u b je c t o f j o i n t d i s ­
c u s s io n s by th e B o ard and th e C o u n c il on numerous o c c a s io n s , bu t no l e g i s ­
l a t i o n h a s been e n a c t e d .
The C o u n c il w ould a p p r e c ia t e knowing what a c t io n
th e B o ard may be c o n te m p la tin g on su ch l e g i s l a t i o n .
2.

R e c e n t ly t h e r e h as been renew ed d i s c u s s i o n o f th e su g­
g e s t i o n t h a t th e F e d e r a l D e p o s it In s u r a n c e C o r p o r a tio n
a s s e s s m e n t be re d u ce d and in s u r a n c e c o v e ra g e on d ep o s­
i t s in c r e a s e d .
In a r e c e n t r e p l y t o a r e q u e s t from th e
S e n a te B an kin g and C u rre n cy Com m ittee f o r a r e p o r t on
a b i l l t o i n c r e a s e th e in s u r a n c e c o v e ra g e from '"5>000
to 3 1 5 , 0 0 0 , th e B o a rd s t a t e d t h a t t h i s change sh o u ld
n o t -be c o n s id e r e d w it h o u t due r e g a r d t o th e r e d u c t io n
o r e li m in a t i o n o f a s s e s s m e n t s and a r e v i s i o n o f th e
b a s i s f o r su ch a s s e s s m e n t s , and t h a t th e B o ard had
i n s t i t u t e d a c a r e f u l stu d y w it h a v ie w t o p la c in g i t ­
s e l f i n a p o s i t i o n t o resp o n d t o f u r t h e r i n q u i r i e s t h a t
t h e Com m ittee m ig h t w is h to m ake. The B o ard w ould ap­
p r e c i a t e h a v in g th e v ie w s o f th e C o u n c il o n -th e m a tte r s
t h a t sh o u ld be ta k e n i n t o a c c o u n t i n m aking such a
stu d y and th e c o n c lu s io n s t h a t m ig h t be r e a c h e d .

The C o u n c il i s f a m i l i a r w it h th e d i s c u s s i o n s on t h i s m a t te r w hich th e
F e d e r a l D e p o s it In s u r a n c e C o r p o r a tio n h a s had w it h a com m ittee o f th e
Am erican B a n k e rs A s s o c i a t i o n . W ithout b e in g com m itted to any p a r t i c u l a r
fo r m u la , th e C o u n c il f a v o r s i n g e n e r a l an a p p ro a c h t o t h i s s u b je c t on th e
b a s is o f th e se d is c u s s io n s .
S p e c i f i c a l l y , th e C o u n c il b e l i e v e s any l e g i s l a t i o n
fo llo w in g p o i n t s :

sh o u ld in c lu d e th e

A.

No i n c r e a s e sh o u ld be made i n th e p r e s e n t in s u r a n c e
c o v e r a g e o f 0 5 ,0 0 0 ;

E.

The maximum a s s e s s m e n t in any one y e a r sh o u ld n o t
e x c e e d o n e - t w e lf t h o f one p e r c e n t ;




C.

P r o v is i o n sh o u ld be made f o r m a in ta in in g the
i n t e g r i t y o f th e fund by e s t a b l i s h i n g a s t a t u ­
t o r y fo rm u la f o r an a u to m a tic s c a l e o f a s s e s s ­
m e n ts, b ase d on th e p r e v io u s y e a r s ' l o s s e s and
e x p e n s e s , to ra n g e from no assessm en t.- o r an
a s s e s s m e n t o f a nom in al am ount, u n d er p r e s e n t
c o n d it io n s , to a maximum o f o n e - t w e lft h o f one
p e r c e n t p e r annum.

I n any stu d y f o r th e p u rp o se o f d e te rm in in g th e adeq u acy o f F e d e r a l
D e p o s it In s u r a n c e C o r p o r a tio n fu n d s and th e r a t e o f a s s e s s m e n t s , th e Coun­
c i l s u ^ e s t s th e im p o rtan ce o f c o n s id e r in g n o t o n ly th e p o s s i b le l o s s e s o f
th e F e d e r a l D e p o s it In s u r a n c e C o r p o r a tio n b u t a l s o th e e f f e c t on bank
e a r n i n g s , c a p i t a l and d iv id e n d s o f th e s te a d y d r a in o f a s s e s s m e n t s . These
a s s e s s m e n t s re d u c e th e pow er o f th e i n d i v i d u a l bank to make i t s own p ro ­
v is io n f o r lo s s e s .
3.

In a r e c e n t l e t t e r t o th e Chairm an 01 th e Banking and
C u rre n c y Committee o f th e H ouse, th e B oard took th e
p o s i t i o n t h a t a c t i o n on B i l l H. R. 1 1 6 1 , a b i l l to p r o ­
v id e f o r th e c o n v e r s io n o r a b s o r p t io n o f n a t i o n a l b an k s
in t o S t a t e b a n k s, sh o u ld be d e f e r r e d u n t i l c o n s id e r a ­
t i o n had been g iv e n t o th e problem o f r e s e r v e r e q u i r e ­
m e n ts.
S u b s e q u e n tly , M r. B r o o k s , p a s t p r e s id e n t o f th e
S t a t e Bank D i v i s i o n o f th e A m erican B a n k e rs A s s o c i a t i o n ,
w ir e d th e B o ard c r i t i c i s i n g t h a t p o s i t i o n .
C o p ie s o f
h i s w ir e and th e B o a r d ’ s r e p l y a r e a t t a c h e d . The B oard
w ould l i k e t o h ave th e comments o f th e C o u n c il on th e
B o a r d 's p o s i t i o n .

The members o f th e C o u n c il a r e in unanim ous agreem en t t h a t n a t io n a l
banks sh o u ld have a r i g h t t o c o n v e r t to s t a t e c h a r t e r s a s e a s i l y a s s t a t e
b an ks can c o n v e r t to n a t i o n a l c h a r t e r s .
The f a c t t h a t s t a t e non-member banks
rxy h ave d i f f e r e n t r e s e r v e r e q u ir e m e n ts th an n a t i o n a l ban ks sh o u ld n o t be
c o n s id e re d i n c o n n e c tio n w it h l e g i s l a t i o n a u t h o r iz in g su ch c o n v e r s io n . The
C o u n c il, t h e r e f o r e , f e e l s t h a t C o n g r e s s io n a l a c t i o n on B i l l H. R. 1 1 6 1
sh o u ld be c o n s id e r e d w it h o u t r e f e r e n c e t o r e s e r v e re q u ire m e n ts .
4..

I t w ould be h e l p f u l to th e B o ard i f e a ch member o f th e
C o u n c il w ould be p r e p a r e d a t th e j o i n t m e e tin g t o g iv e
a b r i e f summary o f th e c u r r e n t and p r o s p e c t iv e b u s i­
n e s s and c r e d i t c o n d it io n s i n h i s F e d e r a l R e se rv e
D is tr ic t.

\

Each member of the Council will be pleased to make a b r i e f o r a l state­
ment regarding th e current and prospective business and credit conditions
in his Federal Reserve District.




-3 5.

S in c e th e C o u n c il met on F e b ru a ry 1 3 - 1 5 , 19 4 9 , th e Board
h a s r e l a x e d th e p r o v i s i o n s o f R e g u la tio n ¥ on two
o c c a s io n s and h a s re d u ce d m argin re q u ire m e n ts from 7 5 p e r
c e n t t o 50 p e r c e n t .
The B oard would welcome th e comments
o f th e members o f th e C o u n c il on t h e s e a c t io n s and t h e i r
v ie w s a s to w h a t, i f a n y , f u r t h e r s t e p s th e Board o r the
F e d e r a l Open M ark et Com m ittee m ight ta k e a t t h i s tim e to
m eet t h e i r r e s p o n s i b i l i t i e s i n th e m onetary and c r e d i t
fie ld s .

The C o u n c il i s i n a g re e m e n t w it h th e g e n e r a l d i r e c t i o n o f th e a c t io n
v h ic h th e B o ard h a s ta k e n i n r e l a x i n g th e p r o v i s i o n s o f R e g u la tio n U, b u t
c a l l s a t t e n t i o n t o th e f a c t t h a t th e B o a r d ’ s a c t i o n h as n o t y e t gone a s
f a r in some r e s p e c t s a s th e C o u n c il recommended in F e b r u a ry . A t t h a t tim e
the C o u n c il s t a t e d i n i t s w r i t t e n memorandum t o th e B o a rd ,
" I n c o n n e c t io n w it h h o u se h o ld f u r n is h i n g s and a p p l i ­
a n c e s , th e C o u n c il f a v o r s e li m in a t i n g th e s e a r t i c l e s
fro m c o n t r o l in asm u ch a s th e y a r e now, w ith m inor
e x c e p t i o n s , i n am ple s u p p l y ."
In v ie w o f t h e c u r r e n t econ om ic t r e n d , th e C o u n c il f e e l s even more s t r o n g ly
than i t d id i n F e b r u a r y r e g a r d i n g th e e li m in a t i o n o f a r t i c l e s from c o n t r o l,
and i t now recommends t h a t a l l c o n t r o ls u n d e r R e g u la t io n V be dropped. As
s t a t e d t o th e S e n a te Com m ittee on B an k in g and C u rre n c y , th e C o u n c il f a v o r s
th e t e r m in a t io n o f th e B o a r d ’ s pow er o v e r consum er c r e d i t .
The C o u n c il a g r e e s w it h and a p p ro v e s th e v a r io u s s t e p s th e Board h as
tak en i n r e d u c in g m a rg in r e q u ir e m e n t s .
The C o u n c il b e l i e v e s t h a t u n d e r p r e s e n t c o n d it io n s bank r e s e r v e s now
r e q u ir e d a r e u n n e c e s s a r i l y h i g h , and i t recommends t h a t th e Board make
f u r t h e r s u b s t a n t i a l r e d u c t io n s i n r e q u ir e d r e s e r v e s .
D e c r e a s e s in bank
r e s e r v e r e q u ir e m e n t s i n c r e a s e bank le n d in g pow er and en co u rag e banks to p ro ­
ceed w ith more c o n fid e n c e i n t h e i r le n d in g and i n v e s t i n g p o l i c i e s .
They
a ls o e n a b le b a n k s t o m a in t a in t h e i r e a r n i n g s , s t r e n g t h e n t h e i r a b i l i t y to
ab so rb l o s s e s , and s t r e n g t h e n t h e i r c a p i t a l fu n d s . The C o u n c il h as noted
w ith a p p r o v a l th e a c t i o n o f th e Open M ark et Committee in su p p ly in g s e c u r i ­
t i e s to th e m a r k e t, and t h u s m a in t a in in g o r d e r ly c o n d it io n s , when r e s e r v e
re q u ire m e n ts w e re r e c e n t l y r e d u c e d .

The Council continues to feel that changes in reserve re q u ire m e n ts
are not a suitable method of current credit control, but should be u sed
only rarely for adjustment to basic changes in the monetary s i t u a t i o n .
Changes in reserve requirements make difficult the planning of b an kin g
operations.




-KT here now seem t o u s t o have been b a s i c ch an ges in the s i t u a t io n
j u s t i f y i n g l o v e r r e q u ir e d r e s e r v e s th an th e t w e n t y - s i x , tw enty and
fo u r te e n p e r c e n t maximums o f th e B an kin g A ct o f 1 9 3 5 • I t would seem
v i s e t o lo w e r r e q u ir e m e n ts to a l e v e l w hich can be m ain tain e d o v e r a
c o n s id e r a b le p e r i o d .
6.

C o n s id e r a t io n o f th e r e fu n d in g o f m atu rin g Government
o b l i g a t i o n s , h a v in g i n mind th e need o f th e ban kin g s y s ­
tem f o r o b l i g a t i o n s o f medium term and th e a l l i e d
q u e s t io n o f re m o v a l o f r e s t r i c t i o n s a g a i n s t p u rch ase by
b an ks w h ich now a p p ly t o c e r t a i n o f th e o u tsta n d in g
Governm ent o b l i g a t i o n s .

I n c o n n e c t io n w i t h th e r e fu n d in g o f m atu rin g Government o b l i g a t i o n s ,
th e C o u n c il recommends th e f o llo w in g a c t i o n :
A.

The i s s u a n c e o f n o t e s o r bonds o f in t e r m e d ia t e
m a t u r i t i e s t o m eet a s h o r ta g e o f su ch s e c u r i t i e s
i n th e m a r k e t;

B.

The s h i f t i n g o f a p o r t i o n o f th e F e d e r a l d e b t to
lo n g e r m a t u r it ie s .
Even a *6V—f7 2 m a t u r it y i s n o t
now lo n g te rm . The p o l i c y o f i n c r e a s in g th e
am ount o f t h e d e b t p a y a b le on demand o r in s h o r t
term m a t u r i t i e s may c r e a t e a s e r i o u s problem a t a
la t e r d a te .

The C o u n c il i s n o t p r e p a r e d t o recommend a t t h i s tim e th e rem oval o f
r e s t r i c t i o n s a p p ly i n g t o t h o s e Governm ent s e c u r i t i e s w h ich a r e now i n ­
e l i g i b l e f o r p u r c h a s e by co m m e rc ial b a n k s .




COPY OF WESTERN UNION TELEGRAM

Denver, Colorado
April 4, 1949

S. R. Carpenter,
Secretary, Board of Governors
Federal Reserve System
V/as greatly surprised and disturbed to learn of the
o p p o s itio n

bill.
t io n
g iv e n

of the Board to H. R. Bill 1161 the bank conversion

Fieference is made to your explanation of the B o a r d ’s posi­
in

the March 30th issue of the American Banker.

for the B o a r d ’s stand seems feeble to us and Is anything but

convincing.
d ig n ity

In our opinion the Board has tremendously lowered its

by using its opposition to this bill as a club over the

nomr.ember banks of the country.
t h is

The argument

The B o a r d ’s unfortunate stand on

question will definitely create ill will on the part of

th o u san d s

to erase.

and thousands of nonmember banks which will take years
So much more can be accomplished by working together as

supervisory agencies and banking systems.
d is s e n s io n
appeal to

is the solution of our banking problems.
th e

lo n g o v e r d u e
b a n k in g

Surely harmony not
I vigorously

Board through you to withdraw its opposition to this
correction o f

sy ste m s




of t h e

equalization between the two great

country.

ALWOOD M. BROOKS, PRESIDENT
CENTRAL BANK & TRUST CO., DENVER, COLORADO
IMMEDIATE PAST PRESIDENT OF STATE BANK
DIVISION AMERICAN BANKERS ASSOCIATION

Y
April 21, 1949

Mr. Alwood M. Brooks, President,
Central Bank & Trust Co. ,
Denver, Colorado
Dear Mr. Brooks:
The Board is glad that you expressed frankly in your
wire of April 4 your views with respect to the position which the
Board of Governors has taken in its letter to Chairman Spence
with respect to H. R. 1161, the national bank conversion bill.
It would appear, however, that you have misinterpreted the reasons
for that position, and the Board has asked me to restate these
reasons in the light of your comments.
It was not the intention of the Board to oppose the bill
as "a club over the nonmember banks of the country" or as a means
of influencing the passage of legislation applying supplemental
reserve requirements to nonmember banks.
Rather, the Boardls
position recognizes that as long as the present situation with
respect to reserve requirements continues, member banks (including
national banks) will be at a distinct disadvantage; and that, since
this discrimination might influence a substantial number of
national banks to convert into State institutions, it would not be
a service to the dual banking system to remove the impediment to
the conversion of national banks at this time.
In his testimony before the Joint Committee on the
Economic Report last February, Chairman McCabe stated that, "It
would be grossly inequitable to limit the (supplemental reserve)
requirements to member banks alone.
Member banks already carry
higher effective reserves than nonmembers, while nonmember banks
benefit by the strength which the very existence of the Federal
Reserve System gives to the credit structure.
It is unfair to
have member banks bear the entire burden of actions in the monetary field undertaken in the public interest.
I have found member
banks, particularly small member banks, becoming restive because
of the inequitable application of reserve requirements.
Failure
to include all insured banks would seriously impair the effective­
ness of national monetary policy."




Mr. Alwood M. Brooks - 2
Y o u refer to equalization between the two great banking
systems of the country.
It is to be remembered, however, that our
dual banking system embraces not only a duality as between national
banks and State banks but a duality also as between member banks of
the Federal Reserve System and nonmember banks.
Too often there is
a tendency to forget that national banks and State member banks
should be protected from discriminatory advantages possessed or
sought by nonmember State banks and that this should be the equal
concern of banking authorities along with the protection of nonmember State banks from discriminatory advantages possessed or
sought by national banks as a class or State member banks as a
class.
It is under this principle that we feel that supervisory
agencies and the banking systems, to use the phraseology in your
telegram, should work together to the end that harmony and not
dissension might bring a solution to our banking problems.

Congress must be the arbiter as regards discriminatory
situations arising from Federal statutes respecting banking.
Until
such time as Congress gives adequate consideration to the problem
of supplemental reserve requirements in relation to insured nonmember banks, we do not feel that H. R. 1161 should be enacted.
Thus, in our recent letter to Chairman Spence of the House Banking
and Currency Committee, the Board said:
"In the circumstances the
Board hopes that action with respect to H. R. 1161 can be deferred
until consideration has been given to the problem of reserve
requirements."




Very truly y o u r s ,

(s) S. R. CARPENTER

S. R. Carpenter,.
Secretary.

- 8

-

THE COUNCIL CONVENED IN THE BOARD ROOM
OF THE- FEDERAL RESERVE BUILDING AT 2 P.M.
ON MAY 16, 19^9, TO HEAR DR. RALPH A.
YOUNG, ASSOCIATE DIRECTOR, DIVISION OF '
RESEARCH AND STATISTICS, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM.
ALL MEMBERS OF THE COUNCIL WERE .PRESENT.
* * * * * * * * * *

je c t
ta lk

E. E. Brown presents Dr. Ralph A. Young, who speaks on the sub­
"The Economic Situation and Outlook".
A copy of Dr. Young's
is attached.




STRICTLY CONFIDENTIAL
THE ECONOMIC SITUATION AND OUTLOOK

by
Dr. Ralph A. Young, Associate Director,
Division of Research and Statistics,
Board of Governors of the Federal Reserve System.

Economic tendencies since last fall and particularly since the
turn of this year suggest that the immediate postwar restocking and in­
flation boom has largely run its course.

In fact, recent developments

have shown a sufficiently broad and consistent pattern of downward drift
as to justify an expectation of continuing moderate recession for the
remainder of 19u9.

VJhether actual economic decline will extend this long,

or continue longer, is, of course, a moot question.
insight into the economic forces at work.

No one possesses full

After ten years of inflationary

upsurge, there is probably a substantial accumulation of disparities and
distortions to be corrected before forces of economic expansion again be­
come dominant.

At the same time, it is important to recognize that there

are various powerful sustaining forces in the current situation that were
not present in past culminations of extended periods of inflationary
economic expansion.

These forces may carry us through a period of re­

adjustment without serious idleness of manpower and capacity.
While a readjustment period which might be characterized as
stagnation at relatively high levels of activity is a possibility, the
weight of evidence, I think, supports an expectation of more or less ex­
tended recession running at least through this year.

If downward drift

turns out to be the dominant course of economic tendency, the words
"depression" and "deflation" will increasingly supplant the expression




-2 "healthy readjustment’' in describing the over-all situation.

What are

the grounds for believing that the composite indications of recent eco­
nomic tendencies point towards a continuing downward drift:
First is the generality of the declines since last fall in
industrial production, in factory manhours and employment, and
in prices. Declines have been much more widespread and note­
worthy than in preceding "soft" phases of postwar activity, e.g.,
the spring and summer of 19U7 and the first quarter of last year.
Since October last, employment has fallen in every major non­
agricultural area except public utilities, and manhours worked
are off in each major industrial group in manufacturing. Indus­
trial production has contracted in thirteen of the nineteen in­
dustry groups covered by the Federal Reserve index of industrial
production, and in the other six groups there has been either no
or only a very moderate increase.
Second, while declines in broad measures of economic activity
and prices have thus far been moderate, many of the more sensitive
measures have shown declines that cannot fairly be described by
any other adjective than "large". The general level of wholesale
prices at the end of April was 8 per cent below the peaks of last
summer, and the index of basic commodity prices was off 26 per cent.
Industrial production in April was 8 per cent below its postwar
peak of late 19U8. Total manhours worked in factories in March
were 9 per cent below a year ago. Declines in manhours have been
particularly sharp in durable and semi-durable manufacturing lines.
Declines in physical production have been especially large in
lumber, machinery, textiles, paper, rubber,chemicals, and alcohol­
ic beverages#
Third, even in such industries as metals and metal products,
in which a few months ago demand appeared to be the strongest,
there is now considerable evidence of weakness. Steel consump­
tion in recent weeks has been declining,tending to make the cur­
rent rate of steel output in excess of consumption.
Fourth, sustained high levels of postwar production at rising
prices have virtually eliminated deferred demands for most con­
sumer goods,and to a large extent for houses. Furthermore, inven­
tories generally have been replenished at all stages of production
and distribution. Many industries have been left producing at
higher rates than are being sustained by current sales to con­
sumers at current high prices and tendencies towards involuntary
inventory accumulation, notably of finished goods, are reasonably
well marked. Attempts to reduce inventories and to bring them in
line with apparent demand is resulting in cutbacks in production




-3and price reductions,with particularly sharp price reductions fcir
materials.
Fifth, the scrappage of passenger cars since the war has been
running significantly below the prewar rate, suggesting a continu­
ing large backlog of demand. On the other hand, the industry has
shifted its output quite markedly towards medium and higher priced
cars. It used to be said that it took a $ 5 ,0 0 0 annual income to
buy and maintain a car costing $2,000. The purchase of new cars
in this price class has increased, relative to prewar, eight to
twelve times the increase in income receivers in the ^5,000 and
over income class. The medium and high-priced automobile market
may experience considerable softening after this present seasonal
buying period is over.
Sixth, the housing market is commencing to feel the impact
of a tapering off in the rate of family formation, in the birth
rate, and in average family size. These are basic market factors
and their appearance concurrently with the substantial satisfac­
tion of backlog housing demand can seriously aggravate any soften­
ing of residential construction activity. It should be pointed
out that residential construction has a large multiplier effect
in spending for streets, water supply, sewage disposal, schools,
and other facilities. The impact on the economic situation of
declining construction of new housing is not fully absorbed by
an offsetting expansion in other types of construction.
Seventh, high prices in relation to costs and in relation
to current demand, in many markets, together with various con­
spicuous disparities among prices, suggest that more price
adjustments are needed to e stablish a sustainable level and
balance of prices.
Meanwhile, buyers who have funds or financ­
ing available may in many cases be inclined to wait for further
price reductions.
Eighth, farm prospects, assuming favorable growing and harvest
conditions, are for large crops and continued pressure of supply
on prices.
Ninth, foreign demands for American industrial goods are less
urgent than earlier and are tending to taper off. On the other
hand,foreign supplies of materials and other goods are more ample
and available and hence a more active supply influence in domestic
market conditions.
Tenth, private expenditures for plant and equipment and con­
struction purposes have been declining recently and current
indications are for further declines. Business has been spending
on plant and equipment at an unprecedented rate in an attempt to




make up fo r under-investment during the war and to provide ade­
quate capacity fo r meeting demand a risin g out of high postwar in ­
comes. With many of the e a rly expansion plans completed or near­
ing completion, new expenditures are now being curtailed# Planned
outlays for current or additional programs show a moderate reduction
for 19h9 as a whole, and, except for the u t i l i t y industry, a sub­
stantial decline fo r the second h a lf year#
Eleventh, the rk tio of personal savings in relation to dis­
posable income which has been risin g stead ily since the second
quarter of la s t year, has continued to r is e this year despite
some decline in disposable income. There i s also evidence of a
tendency towards larger liquid asset holdings of individuals.
Apparently these tendencies are associated with the mounting
buyer resistance which has been encountered at current price
levels in many durable goods lin es and in the urban dwelling
area, especially for houses in the upper price brackets.
Twelfth, credit and capital demands have tapered off and an
excess of maturities over n e w credits has reduced sharply the
volume of outstanding loans at banks.
N e w security financing,
total corporate profits, and undistributed earnings have all been
at a somewhat lower level i n the first quarter of this year.
In
this connection, it is also significant that the direct use of
personal savings for investment by farm operators and other un­
incorporated business also appears to have fallen off.
Thirteenth, indicative of the over-all strength of recent con­
tractive influences is the fact that business activity and prices
have been declining since last fall despite a substantial increase
in Federal expenditures on goods and services.
While such expendi­
tures will probably increase further during 19h9, it is unlikely
that the additional increase will fully offset declines in private
spending.

Further recession which might be expected from these indications may
take any one of a number of patterns, differing with respect to timing and
severity.

of

As I implied in my introductory comment, in view of the

existen ce

important strengths and cushions not available in prewar business reces­

sions, a moderate recession pattern seems to be the most reasonable expec­
tation.

Such a pattern would envisage further gradual and shallow declines

in various broad measures of activity in relation to current levels.

Thus

by the end of the year, a moderate pattern of decline would contemplate




-5 industrial production at about 170, wholesale prices down about 10 per cent,
consumer prices down about 6 per cent, and unemployment in the neighborhood
of 5 million.

A sizeable operating cash deficit for the Federal Government

amounting to about 2 billion dollars for the calendar year, and to about 5
billion for the fiscal year 1950, would be consistent with a moderate reces­
sion extending through the first half of next year.
It is obviously impossible to say with any assurance that such a
moderate pattern of recession will actually describe economic tendencies
during the months ahead.

In evaluating prospects and possibilities con­

siderable weight should be given to the following strengths and supporting
'

i

factors which will work to cushion further downward readjustment and to
prevent it from becoming cumulative:
First, as employment declines the Government automatically
pays out unemployment compensation benefits which partially main­
tain the income and expenditures of the unemployed.
Second, payments under the farm support program similarly
help to maintain income and reduce the dangers of unlimited
price declines.
Third, Federal expenditures on goods and services are in
large peacetime volume and some further increase is probable.
State and local government expenditures are expected to expand
steadily because of pressing needs for schools, hospitals, other
public buildings, and roads.
Fourth, individual holdings of liquid assets are large and
fairly widely distributed.
Fifth, current income also is probably better distributed
than in any prior boom period.
Sixth, the most recent survey of consumer buying expectations
indicates that there still remains a great deal of underlying
demand for automobiles, appliances, and houses. Potential demands
for goods and services at lower prices are great, Where substan­
tial price reductions have occurred recently, increased buying
has tended to absorb previously excessive stocks.




-6\

Seventh, industry and trade have had l i t t l e occasion to ex­
ercise re a l merchandising ingenuity since before the war. Their
merchandising s k i l l s are rusty. Putting these s k il l s again to
work so that our mass production system becomes f u lly reconverted
to a mass merchandising-production system w ill reestablish a
sensitive contact between consumption and production.
Eighth, commitments by producers considering capital outlays
are in part held back by present high construction and equipment
costs. There are no doubt substantial programs of capital expen­
ditures awaiting some downward readjustment in these costs.
Ninth, the fa c t of high and in flexib le wage costs in industry
w ill increase the emphasis placed on capital expenditures for cost
cutting improvements. Many new capital expenditure programs w ill
doubtless be developed and in itia te d under the pressure of narrower
margins between costs and prices.
Tenth, while a reduction in personal incomes and housing prices
may make part of our large mortgage debt vulnerable from the stand­
point of the borrower, Government guarantees backing a significant
proportion of such debt offer important protections to the lender.
Eleventh, the fact that the postwar period has generally been
free of speculative excesses in the securities markets, the strong
financial status of industry, and the great strength of the banking
system are factors that make a prolonged and drastic liquidation
less likely than in other periods oi' decline.
Twelfth, it seems qaite unlikely that the money supply will con­
tract materially — if at all; in fact, it seems likely that Treasury
deficit financing through the banks will more than offset any loan
contraction which might occur, thus having an expansive impact on the
money supply.
In view of recent declines and the prospect for still further de­

clines in economic activity and prices, it seems clear that public policy
should now be directed away from programs designed to curb inflation and di­
rected towards the attainment of stable output and employment at a satis­
factorily high level.

Appropriate programs are those that would:

(a)

Encourage business and consumer expenditures

(b)

Ease remaining restrictive policies affecting such expenditures

(c)

Assure the continued availability of an ample supply of lowcost credit to worthy borrowers, and




-7 (d)

Improve the e c o n o m y ' s f i scal a n d f i n a n c i a l structure.

Re ce n t p o l i c y m e a s u r es o f t h e R e s e r v e bystem, l i b e r a l i z i n g con­
sumer i n s t a l m e n t c r e d i t and s t o c k market r e g u l a t i o n s and l o w e r i n g member
bank r e s e r v e r e q u i r e m e n t s ,

a r e f u l l y c o n s i s t e n t w i t h t h e s e o b j e c t i v e s and

on t h i s o c c a s i o n ha ve been t a k e n i n good t i m e .

Some f u r t h e r l i b e r a l i z a ­

ti o n s i n t h e s e p o l i c y a r e a s may p r o v e t o be needed l a t e r .

Conceivably i t

may a l s o become d e s i r a b l e t o move i n such d i r e c t i o n s as t h e i s s u a n c e o f a
bank s u p e r v i s o r y s t a t e m e n t d e s i g n e d t o e nco ura ge bank l e n d i n g t o b u s i n e s s ,
perhaps combined w i t h some v o l u n t a r y program o f l o a n encouragement s p o n s o r e d
by the b a n k e rs t h e m s e l v e s .

If

s om et hin g more tha n moderate r e c e s s i o n i s i n ­

volved, some p o s i t i v e F e d e r a l R e s e r v e ( S e c t i o n 1 3 b ) i n d u s t r i a l l o a n program
may be needed.
A l t h o u g h t h e f o r e g o i n g comments a s t o t h e economic s i t u a t i o n and
outlook have c a r r i e d a b e a r i s h t o n e , i t i s i m p o r t a n t f o r p e r s p e c t i v e t o
remember t h a t d e c l i n e s i n a c t i v i t y and p r i c e s t o d a t e have b e e n r e l a t i v e l y
moderate.

Employment i s

s t i l l a t a high l e v e l .

small and s i n c e m i d - F e b r u a r y i t s

Unemployment i s r e l a t i v e l y

r a t e o f i n c r e a s e h a s t a p e r e d o f f . Consumer

p r i c e s a r e o n l y 3 p e r c e n t l o w e r t h a n t h e i r p e a k s o f l a s t summer and f o r two
months have shown l i t t l e

ch an ge .

Gross n a t io n a l product i n the f i r s t

quarter

was on ly 2 p e r c e n t b e lo w i t s p e a k r a t e i n t h e f i n a l q u a r t e r o f l a s t y e a r and
t o t a l p e r s o n a l income b y l e s s t h a n 2 p e r c e n t .

power,

I n t erm s o f r e a l p u r c h a s i n g

the d e c l i n e i n p e r s o n a l in com es ha s be en p a r t l y o f f s e t by l o w e r con­

sumer p r i c e s .
An ot h e r p o i n t w o r t h rem em ber ing i s t h a t we s t i l l h ave much u n e x ­
pended i n f l a t i o n a r y f u e l ,




and i f we do e x p e r i e n c e f u r t h e r moderate r e c e s s i o n

-8with T r e a s u r y d e f i c i t f i n a n c i n g expa nd ing the money su ppl y, we w i l l be s t o r ­
ing up s t i l l more i n f l a t i o n f u e l .

The r e a d j u s t m e n t we have been having and

seem l i k e l y to c o n t i n u e t o h ave i s i n p a r t a composite r esp on se t o spending
d e c i s i o n s of con sumers, bu si n e ss m e n ,

and f a r m e r s .

A r a p i d change i n the

g en e ra l c l i m a t e o f e x p e c t a t i o n c o u l d r e v e r s e t h e t r e n d o f spending propen­
s i t i e s by e a c h o f t h e s e g r o u p s .

Resumption o f i n f l a t i o n a r y t en d e n c ie s a t

some s t a g e i s no t w i t h o u t t h e bounds o f p o s s i b i l i t i e s .

I f we succeed as

an economy i n m a i n t a i n i n g r e a s o n a b l y h ig h l e v e l s o f a c t i v i t y as a l o n g e r run
matter, I am i n c l i n e d t o t h i n k t h a t , w i t h our huge f i n a n c i a l l i q u i d i t y , we
w i l l en co un te r r e c u r r e n t p e r i o d s o f marked i n f l a t i o n a r y p r e s s u r e s .
In conclusion, i t i s

c l e a r t h a t , w i t h the economy i n a phase of

r a p i d l y ch a n g i n g a c t i v i t y and p r o s p e c t s ,
constantly r e a p p r a is e d .

If

c u r r e n t t e n d e n c i e s w i l l need t o be

f u r t h e r developments a r e such as to r e q u i r e sub­

s t a n t i a l m o d i f i c a t i o n o f t h e e x p e c t a t i o n s h e re s u g g e s t e d , no h e s i t a n c y
should be f e l t i n d o in g s o .
an e x a c t s c i e n c e .

Economic p r o j e c t i o n i s a f a l l i b l e a r t and not

The p u r p o s e o f economic p r o j e c t i o n i s m e r e l y to s e t f o r t h ,

on the b a s i s o f a c a r e f u l s i f t i n g

o f variou s current data, a ten tative

p i c t u r e o f p o s s i b l e t e n d e n c i e s w h ic h m on e ta ry and banking p o l i c y ought to
take i n t o a c c o u n t i n making c u r r e n t d e c i s i o n s .
as good i n t h e a b s e n c e o f s u c h a p i c t u r e ,

The d e c i s i o n s might be j u s t

bu t a g a i n t h e y might be l e s s good,

-hat makes f o r good p o l i c y d e c i s i o n s i s no t t he a v a i l a b i l i t y o f i n f o r m a t i o n ,
b i t the e f f e c t i v e i n t e r p r e t a t i o n and u s e o f t h a t i n f o r m a t i o n by the p o l i c y
making mind.




On Ma> 17 ? 19^9, at 10:38 A M
thp> p ^
Advisory Council held a loint’mo ^
1
the Board of Governors of the £Ider2l Rpth
S y ste m in th e B o a rd Room o f th e F e d e r a l
Reserve Building.
-reaeral

6

A ll members of the Council were Dr e s ™ c „
cept Mr. Potts, who had been present for ?he
meetingsof the Council on May 1 5 and 16 , b u t
found it necessary to return to his bank be­
fore this meeting of the Council and the
Board.
The following members of the Board of
Governors were present:
Chairman McCabeGovernors Eccles, Szymczak, Draper, Vardaman
and Clayton; also Mr. Carpenter, Secretary of
the Board of Governors.
REORGANIZATION BILL
E. E. Brown reports that he has written Senator McClellan on
behalf of the Federal Advisory Council to request that the Board
of Governors be exempted from the Reorganization Bill and that in the
event it is later proposed to reorganize the Board of Governors it
should be done by legislation requiring the concurrence of both houses
of Congress.
He also states that Fleming has visited with Senator
McClellan on the same matter.
Brown comments that the Council has
tried to be helpful to the Board on this matter.
He asks the
Secretary of the Council to give to the Secretary of the Board copies
of correspondence of Brown and Fleming on this subject.
Fleming states that McClellan informed him he believed the
Board should be retained as an agency of the Congress.
Vardaman reports that McClellan said yesterday in the Senate
that there were two points in the Reorganization Bill on which he
would not yield.
One of the points was that he wished no exemption
of any agency under the Bill, and the other that he wished to give
either House of Congress the right to veto.
McCabe reports that the Board has_not engaged in any activity
in its own behalf on the Reorganization Bill, and the Board app
ciates the Council’s action.
SENATE BILL 1775 AND SENATE JOINT RESOLUTION 87
E. E. Brown states that the Secretary ° ^ ^ fB^ r^ he Council
?iven a copy of the statement he Pf?sen^
currency on May 12, 19^9before the Senate Committee on Banking an
d into seSsion because
Executive Committee of the Counci w
Resolution 87 were called
parings on Senate Bill 1775 and Sena e
days before the Council
J°r May 11, 1 2 and 13, 19^9, which was a
Committee of the Council
r'*pected to meet on May 15The
•^ . s i v the statement which
had f u n power to act and a p p r o v e d u n a n i m o u s l y ^ ^ pederal Advisory
;'r own p r e s e n t e d t o t h e S e n a t e Commit e u n a n im o u s ly .
C°uncil has now also a p p r o v e d the s t a te m e n



McCa be s a y s h e u n d e r s t a n d s so m e m e m b e r s o f t h e C o u n c i l f e e l
t h a t he h a s s h o w n b a d f a i t h b e c a u s e t h e h e a r i n g s w e r e c a l l e d a f e w
days b e f o r e t h e F e d e r a l A d v i s o r y C o u n c i l w as t o m e e t.
He s t a t e s t h a t
he f r a n k l y d i d n o t h a v e i n m i n d t h e s p e c i f i c d a t e s o f t h e m e e t i n g o f
the C o u n c i l .
F lem in g
ap p aren tly the
leg islatio n .

rep o rts that
o n ly b an k ers

t h e A m e r ic a n B a n k e r s A s s o c i a t i o n was
g ro u p w h ic h was a d v i s e d r e g a r d i n g the

DOES THE BOARD OF GOVERNORS PROPOSE TO SECURE INTRODUCTION OF
BANK HOLDING COMPANY L E G I S L A T I O N IN T H I S S E S S I O N AND ATTEMPT
TO OBTAIN ENACTMENT;
AND I F THAT I S NOT INTENDED IN T HI S
S E S S I O N , WHAT ARE THE PL AN S FOR BANK HOLDING COMPANY L E G IS L A T IO N ?
E. E . Brown r e a d s th e
O dlin p a r t i c u l a r l y h a s g i v e n
l e g i s l a t i o n a n d i s v e r y much
Board w hat t h e p l a n s a r e f o r

a b o v e i t e m on t h e a g e n d a and s t a t e s t h a t
a g r e a t d e a l o f thought to the proposed
i n t e r e s t e d in i t s enactm ent.
He a s k s t h e
b a n k 'h o l d i n g company l e g i s l a t i o n .

M c C a b e r e p l i e s t h a t n o o n e h a s g i v e n m o r e t h o u g h t , o r i s mor e
in te re ste d in th e l e g i s l a t i o n , than the B oard .
The B o a r d h a s t a l k e d
w ith a l l th e v a r i o u s b a n k in g g ro u p s and h as su b m itte d the p ro p o sed
l e g i s l a t i o n t o t h e FDIC an d t o t h e T r e a s u r y .
McCabe h a s a l s o t a l k e d
to S e n a t o r s M aybank and T o b e y .
S e n a t o r R o b e rtso n has asked Sen ato r
L u c a s a nd V i c e P r e s i d e n t B a r k l e y w h e t h e r a p r i o r i t y may b e o b t a i n e d on
the l e g i s l a t i o n .
S e n a t o r R o b e rts o n i s w i l l i n g to conduct h e a rin g s
when t h e b i l l i s i n t r o d u c e d .
McCabe e x p e c t s t o i n t r o d u c e t h e b i l l .
O d lin .
The B o a r d h a s d i s c u s s e d t h i s s u b j e c t f r e q u e n t l y w it h
the C o u n c i l , a n d on o t h e r o c c a s i o n s i n i t s p r i n t e d p u b l i c a t i o n s .
The
C ou n cil i s p a r t i c u l a r l y i n t e r e s t e d i n kn ow in g o f th e p la n s o f th e
Board f o r t h e a d v a n c e m e n t o f t h i s l e g i s l a t i o n t h r o u g h th e C o n g r e s s .
O d l i n s a y s so m e b a n k e r s i n h i s d i s t r i c t a r e s o n a i v e t h e y t h i n k he
can f i n d o u t f r o m t h e B o a r d e x a c t l y w h a t t h e B o a r d e x p e c t s t o d o r e ­
gard in g t h i s p r o p o s e d l e g i s l a t i o n .
O d lin a s k s i f t h e r e i s any chance
of the b i l l g o i n g t h r o u g h t h i s s e s s i o n o f C o n g r e s s .
He a l s o a s k s
whether th e l e g i s l a t i o n d e f i n i t e l y w i l l be in t r o d u c e d .
McCabe.
S e n a t o r R o b e r t s o n h as s a i d t h a t i f the l e g i s l a t i o n
comes t o h i m h e w i l l c o n d u c t h e a r i n g s .
S e n a t o r s R o b e r t s o n and T o b ey
are f o r t h e l e g i s l a t i o n , and McCabe b e l i e v e s S e n a t o r Maybank a l s o
favo rs i t .
O dlin
h earings can

asks
take

w hether
p la ce .

the

Board

w ill

in trod u ce

le g isla tio n

so

McCabe.
I t i s o u r i n t e n t i o n to in tro d u c e l e g i s l a t i o n , but the
p ro p o sed l e g i s l a t i o n may g o t o h e a r i n g s and s t i l l n o t be c o n s i d e r e d by
Congress in t h i s s e s s i o n .
H o w e v e r , i f i t g o e s t o h e a r i n g s and i s n o t
co n sid ered a t t h i s s e s s i o n , i t sh o u ld be n ear the top in p r i o r i t y in
the n e x t s e s s i o n o f C o n g r e s s .
O dlin

s t a t e s he w o u ld l i k e t o t e l l th e
e g i s l a t i o n w i l l be in tro d u c e d

Digitized
C o a sfort FRASER
that the l
http://fraser.stlouisfed.org/
he
h
e
l
d
Federal Reserve.Bank of St. Louis

b a n k s on t h e P a c i f i c
and t h a t h e a r i n g s w i l l

-

11

-

McCabe says he would like the express approval of the three
banking agencies on the proposed legislation.
Vardaman.

The bill must go to the Budget before it is sent to

Congress.

McCabe. The bill could go to the Budget first before the three
agencies approve it.
Eccles agrees this could be done.
RECENTLY THERE HAS BEEN RENEWED DISCUSSION OF THE SUGGESTION
THAT THE FEDERAL DEPOSIT INSURANCE CORPORATION ASSESSMENT BE
REDUCED AND INSURANCE COVERAGE ON DEPOSITS INCREASED. IN A
RECENT REPLY TO A REQUEST FROM THE SENATE BANKING AND CURRENCY
COMMITTEE FOR A REPORT ON A BILL TO INCREASE THE INSURANCE
COVERAGE FROM $5,000 TO $15,000, THE BOARD STATED THAT THIS
CHANGE SHOULD NOT BE CONSIDERED WITHOUT DUE REGARD TO THE
REDUCTION OR ELIMINATION OF ASSESSMENTS AND A REVISION OF THE
BASIS FOR SUCH ASSESSMENTS, AND THAT THE BOARD HAD INSTITUTED
A CAREFUL STUDY WITH A VIEW TO PLACING ITSELF IN A POSITION TO
RESPOND TO FURTHER INQUIRIES THAT THE COMMITTEE MIGHT WISH TO
MAKE. THE BOARD WOULD APPRECIATE HAVING THE VIEWS OF THE
COUNCIL ON THE MATTERS THAT SHOULD BE TAKEN INTO ACCOUNT IN
MAKING SUCH A STUDY AND THE CONCLUSIONS THAT MIGHT BE REACHED.
E . E . B ro w n r e a d s it e m tw o , a s g i v e n a b o v e , and th e c o n c l u s i o n s
w h ic h t h e C o u n c i l h a d s u b m i t t e d i n i t s C o n f i d e n t i a l Memorandum t o t h e
B o a rd d a t e d May 1 7 , 1 9 ^ 9 *
A c o p y o f t h i s Memorandum i s a p a r t o f
these n o t e s .
B r o w n s t a t e s t h a t t h e d i s c u s s i o n s o f t h e FDIC and t h e
ABA c o m m i t t e e p r o v i d e f o r a m i n i m u m a s s e s s m e n t o f 1 / 9 6 o f 1 p e r c e n t
an d a m a x i m u m a s s e s s m e n t o f 1/12 o f 1 p e r c e n t p e r y e a r .
There i s a
s l i d i n g s c a l e o f a s s e s s m e n t s b a s e d on t h e l o s s e s and e x p e n s e s o f
p revio u s y e a r s .
T h e l a s t f i g u r e s o f t h e FD IC f o r 1 9 ^ 5 show 9 6 . 5 p e r
cent o f th e num ber o f a l l d e p o s i t s a r e c o v e r e d b y in s u r a n c e and 43
per c e n t o f th e d o l l a r volu m e o f d e p o s i t s .
The C o u n c il i s f a m i l i a r
w ith th e P i t t s b u r g h p l a n and o t h e r p r o p o s a l s , b u t b e l i e v e s th e d i s ­
c u s s i o n s o f t h e F D I C a n d t h e ABA c o m m i t t e e p r o v i d e t h e b e s t a p p r o a c h .
The C o u n c i l b e l i e v e s t h e a s s e s s m e n t s h o u l d b e r e d u c e d .

based

McCabe
on r i s k

ask s w hether
and n o n - r i s k

the C o u n cil
assets.

has

co n sid ered

assessm ents

E . E . B row n s t a t e s t h a t t h e C o u n c i l knows o f t h i s s u g g e s t i o n .
I t would g i v e t h e l a r g e b a n k s t h e a d v a n t a g e , and p o l i t i c a l l y i t w o u ld
th erefore not have a chance o f a p p ro v a l.
F lem in g

understands

E . E . Brow n b e l i e v e s
H arl’ s d is c u s s io n s w ith th e
McCabe



asks

w hether

the

FDIC

favo rs

the

H arl fa v o rs a p lan
A .B .A . com m ittee.
a b ill

w ill

be

ABA a p p r o a c h .
alo n g

in tro d u ced .

the

lin e s

^f

- 12 E. E . Brown s a y s
p p i C an d o t h e r g r o u p s .
M cC abe

asks

any b i l l

w hether

the

needs

the

approval

o f the T re a s u ry ,

C ou n cil

has

talk ed w ith Snyder.

F l e m i n g r e p l i e s t h a t S n y d e r w a s n o t much i n t e r e s t e d i n t h i s
t i m e a g o , b u t i s m o r e i n t e r e s t e d no w.
There i s l i t t l e
th a t the
w i l l be i n t r o d u c e d and p a s s e d t h i s s e s s i o n .

matter some
p o s sib ility

b ill

McCabe r e p o r t s t h a t t h e B o a r d i s p r o c e e d i n g w i t h i t s s t u d y o f
the m a t t e r .
The B o a r d f e e l s t h a t t h e q u e s t i o n s o f a s s e s s m e n t s and o f
in c r e a s in g c o v e r a g e s h o u ld be c o n s id e r e d t o g e t h e r .
Flem in g

states

that

s om e

sm all

b a n k s w a n t more c o v e r a g e .

E c c le s.
The B o a r d t o o k a p o s i t i o n s e v e r a l y e a r s ago a g a i n s t
r e d u c in g a s s e s s m e n t s u n t i l t h e c a p i t a l had b e e n p a i d o f f .
T he
c a p it a l was f i n a l l y p a id o f f l a s t y e a r .
F le m in g t h in k s t h a t th e p r i n c i p l e o f not r e d u c in g the a s s e s s ­
ment u n t i l t h e c a p i t a l w a s p a i d o f f w a s s o u n d , b u t now t h a t h a s b e e n
done.
In h i s ban k th e F e d e r a l D e p o sit In su ra n c e C o rp o ra tio n a s s e s s ­
ment a m o u n t s t o a b o u t $ 6 . 0 0 o n e a c h s h a r e o f s t o c k .

b illio n

H em ingw ay.
A n o th e r o b j e c t i v e was
and t h a t g o a l h a s b e e n r e a c h e d .

Burgess b e lie v e s th at
e x tra shove w ould be h e l p f u l
center.

to

b u ild

the

fund

to

$1

th e s i t u a t i o n i s such th at a l i t t l e
i n g e t t i n g t h i s w hole m a tte r o f f dead

Vardam an a s k s w h e t h e r a c o p y o f th e p r o p o s a l o f th e A m erican
B an kers A s s o c i a t i o n C o m m itte e and th e F e d e r a l D e p o s it In s u r a n c e
C orporation i s a v a i l a b l e .
F le m in g w i l l be g la d to le a v e in c o n fid e n c e w ith the Board
t h e c o p y E c c l e s now h a s .
The c r e d i t f o r t h e p l a n and t h e fo r m u la
sh o u ld be g i v e n t o t h 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 t i o n and
H arl.
Flem in g th in k s th e P it t s b u r g h p la n i s dead.
(A t

th is

p o in t

there

was

an

o ff-th e-reco rd

d iscu ssio n )

E cc le s.
The B o a r d h a s a d e f i n i t e i n t e r e s t i n t h i s m a t t e r .
Perhaps 80 p e r c e n t o f th e F e d e r a l D e p o s it In s u r a n c e C o r p o r a tio n
f u n d s come f r o m m e m b e r b a n k s .
An a s s e s s m e n t o f 1 / 1 2 o f o n e p e r c e n t
amounts t o o v e r $ 1 0 0 m i l l i o n a n n u a l l y and i s a v e r y l a r g e i t e m t o
come o u t o f b a n k e a r n i n g s .
T h is q u e stio n i s r e la t e d a ls o to debt
management.
Burgess s ta te s
assessm en t am ounts to
of banks r e c e i v e .




that
m ore

the F e d e r a l D ep o sit Insu rance
t h a n o n e - t h i r d a s much a s t h e

C orporation
sto ck h o ld ers

- 13 -

McCabe d o e s n o t t h i n k t h e B o a r d ' s i d e a s on t h i s w h o l e s u b j e c t
may t e g r e a t l y d i f f e r e n t f r o m H a r l ’ s f o r m u l a , b u t t h e B o a r d r e s e r v e s
t h e r i g h t t o m ak e a n y s u g g e s t i o n s i n d i c a t e d f r o m t h e s t u d y i t i s now
making on t h e s u b j e c t .
IN A RECENT L E T T E R TO THE CHAIRMAN OF THE BANKING AND CURRENCY
COMMITTEE OF THE HOUSE, THE BOARD TOOK THE POS ITION THAT ACTION
ON B I L L H. R . 1 1 6 1 , A B I L L TO PROVIDE FOR THE CONVERSION OR
ABSORPTION OF NATIONAL BANKS INTO STAT E BANKS SHOULD BE DEFERRED
UNTIL CO N SID ERA TI O N HAD BE EN G IV EN TO THE PROBLEM OF RESERVE
REQUIREMENTS.
S U B S E Q U E N T L Y , MR. BROOKS, PAST PRESIDENT OF THE
STATE BANK D I V I S I O N OF THE AMERICAN BANKERS AS SOCIATION , WIRED
THE BOARD C R I T I C I Z I N G THAT P O S I T I O N .
C O P I E S OF H I S WIRE AND
THE B O A R D 'S R E P L Y ARE ATTACHED.
THE BOARD WOULD L I K E TO HAVE
THE COMMENTS OF THE COUNCIL ON THE B O A R D 'S P O S IT IO N .
E . E . B row n r e a d s t h i s i t e m and t h e c o n c l u s i o n s w h ich th e
C o u n c i l h a s s u b m i t t e d i n i t s C o n f i d e n t i a l Memorandum t o t h e B o a r d
May 1 7 , 1 9 ^ 9 T h i s Memorandum i s a p a r t o f t h e s e m i n u t e s .

Bankers

Burgess says
A sso ciatio n

sage

E. E.
th is

in

t h a t th e S t a t e Bank D i v i s i o n
i s f o r the b i l l .

Brown u n d e r s t a n d s t h a t
se ssio n of Congress.

the

b ill

has

of

the

on

A m erican

no c h a n c e

of pas­

(AT THE S U G G E S T I O N OF McCABE ITEM 4 OF THE AGENDA WAS
DEFERRED FOR D I S C U S S I O N U N T I L THE LATTER PART OF THE
MEETING)
SINCE THE C O U N C IL MET ON F E B R U A R Y 1 3 - 1 5 , 1 9 ^ 9 , THE BOARD HAS
RELAXED THE P R O V I S I O N S OF RE GU LA TI ON W ON TWO OCCASIONS AND
HAS REDUCED MARGIN R EQ U IR EM EN T S FROM 7 5 PER CENT TO 5 0 PER
CENT.
THE BOARD WOULD WELCOME THE COMMENTS OF THE MEMBERS
OF THE COU NCIL ON T H E S E A C T I O N S AND T H E I R VIEWS AS TO WHAT,
I F ANY, FURTHER S T E P S THE BOARD OR THE F ED ER AL OPEN MARKET
COMMITTEE MIGHT TAKE AT T H I S T IM E TO MEET T HE IR R E S P O N S I ­
B I L I T I E S I N THE MONETARY AND C R E D I T F I E L D .
E . E . B r o w n r e a d s I t e m f i v e , a s g i v e n a b o v e , and t h e c o n c l u ­
sions o f t h e C o u n c i l a s e x p r e s s e d i n th e C o u n c i l ' s C o n f i d e n t i a l
Memorandum t o t h e B o a r d w h i c h i s i n c l u d e d i n t h e s e m i n u t e s .
McCabe s t a t e s t h a t t h e B o a r d h a s t a l k e d w i t h t h e f i n a n c e
com panies and t h e a u t o m o b i l e c o m p a n i e s , and h a s fo u n d t h a t a l t h o u g h
these p e o p le a r e o p p o se d t o R e g u l a t i o n W as a perm anent power t h e y
do n o t f a v o r t h e s u s p e n s i o n o f t h e r e g u l a t i o n n o w .
The a u t o m o b i l e
m a n u f a c t u r e r s f a v o r k e e p i n g t h e o n e - t h i r d do wn
but are
d i v i d e d on t h e m a t u r i t y .
On o t h e r i t e m s u n d e r R e g u l a t i o n W, t h e r e
a r e many d i f f e r e n t v i e w s .
The B o a r d ' s p o s i t i o n i s to m o d ify the
terms a s r a p i d l y a s c o n d i t i o n s p e r m i t .

payment

V a r d a m a n a s k s w h e t h e r t h e p e o p l e wh o w i s h a n e x t e n s i o n o f
R e g u la t i o n W d e s i r e t r a d e r e g u l a t i o n and n o t c r e d i t r e g u l a t i o n .
b e l i e v e s t h a t t h o s e who w i s h e x t e n s i o n may w i s h i t b e c a u s e t h e y

d esire to have i t u sed f o r tr a d e r e g u la t io n p u rp o se s.


He

- 14

-

McCabe s t a t e s t h a t s m a l l b u s i n e s s s e e m s t o w a n t t h e
t i o n , but- m a n y b i g b u s i n e s s e s a p p a r e n t l y f a v o r c o m p e t i t i o n
elim in atio n o f c o n t r o ls .
He s a y s t h a t V a r d a m a n ' s q u e s t i o n
upon t h e g r o u p s t o whom y o u s p e a k .
Atwood

asks

w hether

McCa be s t a t e s
whom y o u t a l k .

ag ain

V a rd a m a n may n o t
that

it

depends

be

reg u la ­
and t h e
depends

rig h t.

upon th e

b u sin ess

men w i t h

E . E . B r o w n s a y s t h a t he i s s u r p r i s e d a t M c C a b e 's s t a t e m e n t
as th e l a r g e f i n a n c e c o m p a n i e s h a v e t e s t i f i e d i n f a v o r o f l e t t i n g
the r e g u l a t i o n l a p s e .

is

that

Spencer b e lie v e s
of p ro fits.

that

anoth er

facto r

req u irin g

co n sid e ra tio n

O dlin s t a t e s t h a t i n h i s e x p e r i e n c e the term s und er the
r e g u l a t i o n b e c o m e n o t t h e maximum t e r m s b u t t h e minimum t e r m s .
E c c le s sa y s th a t C o n gress gave the a u th o r ity under R e g u la tio n
W f o r the p u rp o s e o f d e a l i n g w i t h an i n f l a t i o n .
E c c le s b e l i e v e s the
re u l a t i o n s h o u ld be r e p e a l e d when i t h a s s e r v e d i t s p u r p o s e o f c o n ­
tro llin g c r e d it.
I t w as n o t in t e n d e d t o be an v .in stru m en t f o r t r a d e
reg u latio n .

McCabe a s k s w h a t e f f e c t
may h a v e on i n t e r e s t r a t e s .
Spencer

says

there

w ill

the

be

lo w erin g

pressure

of

fo r

reserve

lo w erin g

req u irem en ts

them .

B u r g e s s s t a t e s t h a t when th e r e s e r v e r e q u ir e m e n t s w ere
low ered r e c e n t l y a g o o d j o b w a s done i n s u p p l y i n g s e c u r i t i e s t o th e
m arket.
I f r e s e r v e s a r e lo w e r e d f u r t h e r , t h e r e sh o u ld be an i n ­
creased s u p p l y o f n o t e s o r bo n d s o f i n t e r m e d i a t e m a t u r i t i e s t o meet
a shortage o f such s e c u r i t i e s in the m ark et.
F ’ s and G ’ s m ig h t a l s o
be made a v a i l a b l e t o b a n k s .
M cCabe. In the
su pplying s e c u r i t i e s ,
r a t e s and t h u s r e d u c e

ab se n ce o f any a c t io n by the T re a su ry in
w i l l the lo w e rin g o f r e s e r v e s reduce in t e r e s t
bank e a rn in g s?

B u rg ess r e p l i e s th a t the F e d e r a l R e se rv e System i s h o ld in g
a l a r g e amount o f s h o r t - t e r m s e c u r i t i e s w h ic h th e b a n k s c o u ld b u y .
T h e r e ma y b e s o m e t e n d e n c y t o r e d u c e r a t e s , b u t t h e n e t r e s u l t f o r
the b a n k s w o u l d b e t o i n c r e a s e e a r n i n g s .
M cC a be a s k s
len d in g r a t e s .
Spencer

says

w hether

that

Burgess s ta te s
pa t e s e v e n b e f o r e t h e



there

there

is

is

any w eaken in g

some

evid en ce

in

co m m ercial

bank

o f w eaken in g.

t h a t t h e r e w a s e v i d e n c e o f some w e a k e n i n g
rec en t d ecrease in re se rv e s.

in

E cc le s.
When b a n k c r e d i t w a s i n c r e a s i n g r a p i d l y t h e r e s e r v e s
required were i n c r e a s e d .
The b a n k s d i d n o t s u f f e r .
In f a c t , 1948
was t h e b e s t y e a r f o r b a n k e a r n i n g s .
Now we a r e i n a n o p p o s i t e s i t ­
uation .
We a r e e x p e r i e n c i n g t h e m o s t r a p i d d e c l i n e i n b a n k l o a n s i n
h istory.
B a n k s a r e l o s i n g e a r n i n g s b e c a u s e o f th e payment o f l o a n s .
Oth er l e n d e r s l i k e i n s u r a n c e c o m p a n i e s a r e c o m p e t i n g w i t h b a n k s f o r
the l o a n s a v a i l a b l e .
I f t h e B o a r d c o u ld f e e l t h a t banks would buy
the s h o r t - t e r m s e c u r i t i e s w i t h t h e f u n d s r e c e i v e d i f r e s e r v e s w e r e
low ered, th e r e s u l t w o u ld b e g o o d .
However, th e r e i s a p o s s i b i l i t y
that banks w ould u se a n y fu n d s r e c e i v e d from th e lo w e rin g o f r e s e r v e s
f o r th e p u r p o s e o f m a k in g u n d e s i r a b l e l o a n s and c u t t i n g i n t e r e s t
rates.
T h e r e f o r e , a r e d u c t i o n i n r e s e r v e s , w h ic h p r e s u m a b ly would
be d e s i r a b l e i n a p e r i o d l i k e t h e p r e s e n t , m i g h t n o t a c t u a l l y w o r k
out f o r t h e g o o d o f t h e e c o n o m y .

lick in g

E. E . Brown a g r e e s
on e a r n i n g s .

w ith

E ccles

that

b a n k s may b e

in

V a r d a m a n u n d e r s t a n d s t h a t some b a n k e x a m i n e r s a r e
em p h a sis on a s i x t o one r a t i o o f r i s k a s s e t s t o c a p i t a l
Congdon r e p o r t s

that

Robertson

says

th is

is

not

for

a

p lacin g
structure.

true.

Foods.
I n a n e x a m i n a t i o n r e c e n t l y o f a b a n k w i t h w h i c h he i s
f a m i l i a r , t h i s r a t i o w a s b r o u g h t up b y t h e e x a m i n e r .
A ll assets,
except c a s h and s h o r t - t e r m g o v e rn m e n ts w ere c o n s id e r e d r i s k a s s e t s .
Congdon t h i n k s t h i s
t he C o m p t r o l l e r ’ s o f f i c e .

m atter w i l l

Vardam an.
recessio n .

on s u c h

E c c le s.
could p r e v e n t a
est s t r u c t u r e .

E m phasis

I f you
slo p p y

be

a ra tio

cla rifie d

is

bad

in

by

a letter

a p eriod

had a h ig h enough r e s e r v e re q u ire m e n t,
s e c u r i t y m a r k e t and k e e p a more s t a b l e

Burgess.
A t some p o i n t p e r h a p s c o n s i d e r a t i o n s h o u l d be
to l i f t i n g t h e r e s t r i c t i o n s o n so m e l o n g e r t e r m b o n d s .
(A t

th is

p o in t

there

was

an

o ff-th e-reco rd

from

of

you
in ter­

g iven

d iscu ssio n )

Mc C abe.
I f i t i s assum ed t h a t th e T r e a s u r y does
about i s s u i n g i n t e r m e d i a t e s e c u r i t i e s , d o e s t h e C o u n c i l
re se rv e s sh o u ld be re d u c e d ?

nothing
s t i l l b elieve

E . E . B r o w n . The C o u n c i l s t i l l b e l i e v e s r e s e r v e s s h o u l d be
reduced, a n d i t h o p e s t h e T r e a s u r y w i l l s u p p l y t h e s e c u r i t i e s .
Burgess.
I f r e s e r v e s a r e r e d u c e d , the F e d e r a l R e se rv e System
ca n do a g r e a t d e a l w i t h i t s p o r t f o l i o o f $ 2 0 b i l l i o n , e v e n i f t h e
Treasury does not is s u e in t e r m e d ia t e n o te s or bonds.
A tw ood.
leeway l a t e r t o
r e sfor
e rFRASER
ves m erely
Digitized



I f th e r e s e r v e s a re re d u c e d , the
in crease reserves i f necessary.
go h i g h e r and h i g h e r .

Board w i l l
O th erw ise,

have
the

some

- 16 E cc le s.
O u t s i d e o f t h e money m a rk e t b a n k s , o t h e r ban ks want
h ig h e r r a t e s t h a n b i l l s and c e r t i f i c a t e s p r o v i d e .
A f t e r the banks
h a ve a l l t h e b i l l s a n d c e r t i f i c a t e s t h e y f e e l t h e y n e e d , f u r t h e r
r e d u ct i on s i n i n t e r e s t r a t e s w i l l r e s u l t .
B urgess does not a g re e .
Many b a n k s w o u ld l i k e t o i n c r e a s e
th eir sh o rt-te rm h o ld in g s .
Any p ro g ra m o f r e d u c i n g r e s e r v e s sh o u ld
proceed b y s t e p s .
CONSIDERATION OF THE REFUNDING OF MATURING GOVERNMENT
OBLIG ATIO NS , HAVING I N MIND THE NEED OF THE BANKING
SYSTEM FOR O B L I G A T I O N S OF MEDIUM TERM AND THE A LL IE D
QUESTION OF REMOVAL OF R E S T R I C T I O N S A GA IN ST PURCHASE
BY BANKS WHICH NOW A P P L Y TO C E R T A I N OF THE OUTSTANDING
GOVERNMENT O B L I G A T I O N S . _____________________________________________
E. E . Brown r e a d s Item
sions o f th e C o u n c il a s g i v e n
Memorandum t o t h e B o a r d w h i c h

s i x , a s g i v e n a b o v e , and t h e c o n c l u ­
in the C o u n c il's C o n fid e n tia l
i s in c lu d e d in th ese m inutes.

McCabe s t a t e s t h a t t h e E x e c u t i v e C o m m itte e o f
C o m m i t t e e w i l l m e e t F r i d a y , J u n e 3, a n d w i l l b e g l a d
C o u n c il's reco m m e n d atio n s.
E c c le s.
mean t o i n c l u d e
comments?

What d o e s t h e
both e l i g i b l e

’ 6 7 - '7 2 phrase
and i n e l i g i b l e

t h e Open M a r k e t
to c o n s id e r the

mean?
Does th e C o u n c il
s e c u r it ie s in i t s

E-. E . B r o w n .
When t h e C o u n c i l s t a t e s t h a t e v e n a ' 6 7 - 1 7 2
m a t u r i t y i s n o t now l o n g t e r m , i t r e f e r s t o t h e f a c t t h a t f i v e y e a r s
have e l a p s e d s i n c e t h e b o n d w a s i s s u e d a s a l o n g t e r m .
E c c l e s d o es n o t b e l i e v e a lo n g term (20 y e a r ) e l i g i b l e i s
d esirab le fo r b an k s.
Wh en a g o v e r n m e n t o f f e r s a t w e n t y - y e a r s e c u r i t y
e lig ib le f o r b an k s, the governm ent i s , in a se n se , p la c in g i t s
a p p r o v a l on t h e p u r c h a s e o f t h e s e c u r i t y b y b a n k s .
In a period of
r is i n g i n t e r e s t r a t e s , th e ban k s m ight s u f f e r l o s s e s .
R e f e r r i n g to
Point B u n d e r I t e m 6 o f t h e C o u n c i l ’ s c o n c l u s i o n s a s g i v e n i n th e
C o n f i d e n t i a l M e m o r a n d u m , E c c l e s s t a t e s t h a t t h e r e i s no p r o b l e m o f
the g o v e r n m e n t r a i s i n g t h e m o n e y .
E. E . Brow n r e p l i e s t h a t th e p ro b lem t o w hich the C o u n cil
r e f e r s i s n o t one o f w h e t h e r t h e g o v e r n m e n t c a n r a i s e th e money.
i s an o v e r a l l m a j o r p r o b l e m o f c o n c e n t r a t i n g t o o l a r g e a p o r t i o n
the d e b t i n d e m a n d o r s h o r t - t e r m m a t u r i t i e s and t h e d i f f i c u l t i e s
that m ight r e s u l t t h e r e f r o m .
I T WOULD BE H E L P F U L TO THE BOARD I F EACH MEMBER OF THE
COUNCIL WOULD B E P R E P A R E D AT THE J O I N T MEETING TO G I V E
A B R I E F SUMMARY OF THE CURRENT AND P R O S P E C T I V E B U S I N E S S
AMD C R E D I T C O N D I T I O N S I N H I S F E D E R A L R E S E R V E D I S T R I C T .
E. E . Brown r e a d s Item f o u r o f th e agen da, as g iv e n above,
and a s k s e a c h m e m b e r o f t h e C o u n c i l t o c o m m e n t b r i e f l y r e g a r d i n g
b u s in e s s and c r e d i t c o n d i t i o n s i n h i s d i s t r i c t .



It
of

- 17 Spencer r e p o r t s th a t the b u sin e ss s itu a t io n is sp o tty.
The
shoe i n d u s t r y i s o f f .
T h e t e x t i l e i n d u s t r y i s a l s o do w n.
There
h ave b e e n o n e o r t w o c a s e s o f s o c i a l l e n d i n g t h r o u g h t h e R . F . C .
The l o a n s w e r e f o r s o c i a l r e l i e f a n d w e r e n o t b u s i n e s s l o a n s .
Copper a n d b r a s s a r e a l s o d o w n .
H o w e v e r , some c o n c e r n s i n v a r i o u s
lines are d o i n g f a i r l y w e l l .
B u r g e s s s t a t e s t h a t h i s a n a l y s i s o f th e econom ic s i t u a t i o n
i s n o t much d i f f e r e n t from t h a t g i v e n b y R a l p h Y o u n g i n h i s r e p o r t
to the C o u n c i l .
T h e d o w n w a r d t r e n d i s b e c o m i n g e v i d e n t i n new
p lace s where i t was f o r m e r l y th o u g h t c o n d it io n s w ere good.
For e x ­
a m p l e , t h e r e a r e now e v i d e n c e s o f w e a k n e s s i n c o p p e r a n d s t e e l .
C o n d itio n s in h i s d i s t r i c t f o l l o w i n g e n e r a l the p a t t e r n f o r the
country.
Congdon.
C o n s t r u c t io n was s a t i s f a c t o r y f o r the f i r s t th re e
months o f 1 9 4 9 , b u t t h e r e w a s a l e t d o w n i n t h e f o u r t h m o n t h .
D epart­
ment s t o r e s a l e s a r e d o w n .
New a n d u s e d c a r s a l e s a r e g o o d .
There
a r e some s t r i k e s a n d so m e u n e m p l o y m e n t , b u t t h e d e c l i n e i n e m p l o y ­
ment h a s n o t b e e n d r a s t i c a n d l a b o r i s m o r e e f f i c i e n t .
F lem in g s t a t e s t h a t h i s d i s t r i c t i s not p r im a r ily i n d u s t r ia l.
Departm ent s t o r e s a l e s a r e down.
A u t o m o b i l e s a l e s a r e up w i t h t h e
e x c e p t io n o f one o r tw o c i t i e s .
S a v i n g s a r e down.
C o n stru ctio n ,
o t h e r t h a n e x p a n s i o n b y u t i l i t i e s , i s s l o w i n g down a n d t h e b u i l d i n g
o f homes i s t a p e r i n g o f f .
T h e t o t a l in c o m e f o r t h e d i s t r i c t w i l l be
le ss fo r 1949 th an f o r 19 4 8 .
J . T . B ro w n s t a t e s t h a t h i s r e p o r t i s somewhat s i m i l a r t o t h a t
of F le m in g 's .
H is d i s t r i c t i s not i n d u s t r i a l but i s la r g e l y
a g ricu ltu ra l.
T h e re i s a s e v e r e c u r t a ilm e n t in the c o tto n t e x t i l e
in d u stry.
T h e r e i s v e r y h e a v y p l a n t i n g o f c o t t o n , and i f w e a t h e r
c o n d i t i o n s a r e f a v o r a b l e t h e r e will b e a n e s p e c i a l l y l a r g e c o t t o n
crop.
E . E . B row n s t a t e s t h a t h i s d i s t r i c t i s r e p r e s e n t e d by
a g r i c u l t u r a l and m a n u f a c t u r in g i n d u s t r i e s .
M an u factu rin g a c t i v i t y
i s down e x c e p t a u t o m o t i v e a n d s t e e l , a n d t h e l a t t e r t w o i n d u s t r i e s
expect d e c l i n e s .
S o m e i n d u s t r i e s t h a t h a v e b e e n c l o s e d down h a v e
been o p e n i n g up on a r e l a t i v e l y n o r m a l b a s i s .
W ith f r e s h
vegetab les
c o m in g i n , v e g e t a b l e c a n n e r s m a y h a v e t o t a k e c u t s on some o f t h e i r
p r o d u c t s now h e l d i n i n v e n t o r y .
The m eat p a c k i n g i n d u s t r y h a s had
h eavy d e c l i n e s on some o f i t s p r o d u c t s i n c l u d i n g l a r d .
T he s t e e l
c o m p a n i e s e x p e c t t o o p e r a t e a t p e r h a p s 70 p e r c e n t t o 7 5 p e r c e n t b y
the end o f t h e y e a r .
B o t h m a n a g e m e n t an d l a b o r a r e b e c o m i n g more
e ffic ie n t.
H e m i n g w a y f i n d s a l i t t l e m o r e p e s s i m i s m among b u s i n e s s men
than was p r e s e n t tw o o r t h r e e m o n th s a g o .
There i s a d e c lin e in
b u ild in g a c t i v i t y .
H o u s in g p e r m i t s a r e o f f ab o ut o n e - t h i r d from
l a s t y e a r ; unem ploym ent i s n o t p a r t i c u l a r l y l a r g e , but th e hours
a r e down c o n s i d e r a b l y .
S om e m a n u f a c t u r e r s f e e l t h a t t h e y a r e g e t t i n g
nearer the bottom .



- 18 Atwood s t a t e s t h a t t h e m i l l i n g i n d u s t r y i s u n h a p p y .
The
p rice o f f l o u r i s l e s s th an th e c o s t o f w h eat.
Some m a r g i n a l c o n ­
cerns are out o f b u s i n e s s .
R e s i d e n c e b u i l d i n g i s do wn .
There are
i n c r e a s i n g Mf o r s a l e " s i g n s .
He d o e s n o t e x p e c t t h e i r l o a n s t o
d eclin e a g r e a t d e a l .
Kem per.
The e c o n o m ic s i t u a t i o n i n th e t e n t h d i s t r i c t co n ­
fo r m s s u b s t a n t i a l l y t o t h a t o f t h e o t h e r d i s t r i c t s .
There i s a
v e ry l a r g e w h e a t c r o p o f .2 2 5 t o 250, m i l l i o n b u s h e l s .
The o i l i n ­
d u s t r y i s o p e r a t i n g a t f u l l c a p a c i t y , b u t i s a b o u t t o c u t down on i t s
e xp lo ratio n a c t i v i t y .
I n h i s d i s t r i c t , a g r i c u l t u r e a nd o r d e r s f o r
defense have ten d e d t o b o l s t e r th e s i t u a t i o n .
W oods.
D e p a r t m e n t s t o r e s a l e s a r e do wn a b o u t e i g h t p e r c e n t
f o r t h e f i r s t f o u r m o n t h s o v e r t h e same p e r i o d l a s t y e a r .
C onstruc­
t i o n c o n t r a c t s f o r t h e s a m e p e r i o d a r e down a b o u t 1 5 p e r c e n t .
There
i s a marked d e c r e a s e i n o i l p r o d u c t i o n .
N o tw ith s ta n d in g the d e c lin e s
in b u s i n e s s , 19 4 9 w i l l n o t be to o bad com pared to 19 4 8 .
There i s
heavy c o t t o n p l a n t i n g and a t r e m e n d o u s ly h e a v y w heat c ro p .
Good,
ra in s have f a l l e n i n T e x a s , i n c lu d in g the d ry w e ste rn p a r t .
O d l i n b e l i e v e s t h e r e c e s s i o n may be a l i t t l e more s e r i o u s t h a n
i t had o r i g i n a l l y b e e n i n d i c a t e d i t m i g h t b e .
C a l i f o r n i a h a s had
d e c r e a s e d a c t i v i t y i n v a r i o u s i n d u s t r i e s , b u t h a s now h a d some co m eback.
The m o v i e s h a v e h ad s e r i o u s p r o b l e m s .
1 9 ^ 9 p r o m i s e s t o be a
good t o u r i s t y e a r f o r t h e P a c i f i c C o a s t ,
Lu m b er, p l y w o o d and p a p e r
have had d i f f i c u l t i e s .
The g e n e r a l p a t t e r n i s . s i m i l a r to th a t o f
th e r e s t o f t h e c o u n t r y , b u t p o s s i b l y t h e d e c l i n e i n b u s i n e s s may
h a ve b e e n f e l t a l i t t l e m o r e s e v e r e l y .

* * * * * * * * * *
The m e e t i n g

ad jo u rn ed

at

1:2 3

P.M .

* * * • » * • # * * * *
I t was

agreed

that

the

next

m e e tin g w ould

be

h eld

on S e p t e m b e r

18 -19 -

20, 1949.
* * * * * * * * * *

17,

T h e C o u n c i l r e c o n v e n e d i n t h e B o a r d Room a t
19 ^ 9 , w i t h a l l mem bers p r e s e n t e x c e p t P o t t s .

2 :15

P.M.

on May

The C o u n c i l v o t e d u n a n i m o u s l y t o g i v e t h e E x e c u t i v e C om m ittee
o f t h e C o u n c i l f u l l p o w e r t o a c t f o r t h e C o u n c i l on a n y m a t t e r s
w h i c h m i g h t a r i s e b e f o r e t h e n e x t m e e t i n g o f t h e C o u n c i l on
Septem ber 1 8 - 1 9 - 2 0 , 1 9 ^ 9 *
T he

m eetin g




ad jo u rn ed

at

2:18

P . M.