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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL May 18, 1952 The second statutory meeting of the Federal Advisory Council for 1952 was convened in Room 932 of the Mayflower Hotel, Washington, D.C., on May 18, 1952, at 2:20 P.M., the President, Mr. Brown, in the Chair. Present: Walter S. Bucklin Henry C. Alexander (Alternate for N. Baxter Jackson) Geoffrey S. Smith George Gund Robert V. Fleming Paul M. Davis Edward E. Brown V. J. Alexander Joseph F. Ringland David T. Beals De W itt Ray James K. Lochead Herbert V. Prochnow District No. 1 District No. 2 District No. 3 District No. 4 District No. 5 District No. 6 District No. 7 District No. 8 District No. 9 District No. 10 District No. 11 District No. 12 Secretary A bsent: N . Baxter Jackson District No. 2 On motion duly made and seconded, the mimeographed notes of the meeting held on February 17, 18, 19, 1952, copies of which had been sent previously to the members of the Council, were approved. A complete list of the items on the agenda for the meeting, and the conclusions of the Council are to be found in the Confidential M emorandum to the Board of Governors from the Federal A dvisory Council, which follows on pages 15, 16 and 17. The meeting adjourned at 6:25 P.M. H E R B E R T V. P R O C H N O W Secretary. 13 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL May 19, 1952 At 10:00 A.M., the Federal Advisory Council reconvened in Room 932 of the M ay flower Hotel, Washington, D.C. Present: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, Henry C. Alexander (Alternate for N. Baxter Jackson), Geoffrey S. Smith, George Gund, Robert V. Fleming, Paul M. Davis, V. J. Alexander, Joseph F. Ringland, David T. Beals, De Witt Ray, James K. Loehead, and Herbert V. Prochnow, Secretary. Absent: N. Baxter Jackson. 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 M emorandum which follows on pages 15,16 and 17, listing the agenda items with the conclusions reached by the Council. The Memorandum was delivered to the Secretary of the Board of Gov ernors at 12:40 P.M. on May 19, 1952. The meeting adjourned at 12:25 P.M. H E R B E R T V. P R O C H N O W Secretary. 14 C O N F ID E N T IA L M EM ORANDUM TO THE BOARD OF GOVERNORS FROM TH E FEDERAL ADVISORY COUNCIL RELATIVE TO TH E AG ENDA FOR TH E JOINT M EETING ON MAY 20, 1952 1. What are the business and economic prospects over the next six months? What suggestions does the Council have with respect to System credit policies during that period? Although economic conditions at present are reasonably stable, there is distinctly less optimism now among business men and bankers regarding the business outlook for the next six months than prevailed earlier this year. Employment, personal income, and activity in many lines continue at a high level, but there are weak spots in important industries, such as those engaged in manufacturing household appliances, house furnish ings, textiles, shoes and in meat packing. Inventories of most commodities and materials are in ample supply, and shortages have been largely eliminated. Assuming no important change in the international situation and no serious interruption of steel production, the Council does not expect either a severe decline or a sharp upward trend in business during the next few months. The majority of the Council thinks a slight recession in business activity is more probable than an upturn. The volume of bank loans has been declining. Considering the country as a whole, it appears at present that, apart from normal seasonal swings, the volume of bank loans will decline slightly in the balance of the year. Unless conditions change materially, the Council favors a continuance of the current rediscount rate and of open market operations which will make the rediscount rate effec tive and thus provide a reasonably firm money market and an orderly and flexible market for government securities. The Council approves the action taken relative to the suspen sion of the Voluntary Credit Restraint program and of Regulation W, in view of the decline in loans which had occurred and evidence of deflationary tendencies. If inflationary forces again become clearly evident, and assuming the Defense Production Act is extended by Congress, the Council recommends that the Voluntary Credit Restraint program be reactivated. During the period it was in effect it was an important influence in restraining unnecessary credit. 2. W hat effect is Regulation X having in the economy at the present time and what, if any, action should the Board take with respect to liberalization or suspension of the Regulation? Under present conditions, Regulation X no longer serves any useful purpose as re gards non-government guaranteed real estate credit. The regulation has not had a marked effect on the financing of lower-priced houses. It does result in hampering the construction and sale of higher-priced houses, and causes much needless irritation and injustice. The Council is unanimous in recommending that the Regulation now be suspended. 3. The Board would appreciate any comments that the Council might wish to make relating to the Bank Holding Company legislation discussed in Chairman Mar tin’s recent letter to Congressman Spence, Chairman of the House Banking and Currency Committee. A copy of the letter is attached.* *A copy of the letter and enclosures can be obtained at the Office of the Secretary of the Board of Governors. 15 The Council, as constituted from time to time in the past, has repeatedly expressed itself in favor of bank holding company legislation. In a letter to the Board of Governors on February 20, 1950, the Council approved bank holding company bill, S. 2318, then before the Committee on Banking and Currency of the Senate, with certain amendments which the Council understood were acceptable to the then Board. This bill had met the general approval of the bank holding companies with one important exception. No action was taken on S. 2318 by the Committee on Banking and Currency of the Senate, to which it had been referred, and the bill died with the 81st Congress. In view of the widespread operations of the various bank holding companies in dif ferent parts of the United States, the Council believes that a bank holding company bill should be initially drafted by the Board of Governors and the provisions of the draft fully discussed by the Board with the principal holding companies and others affected, before the Board urges the passage of any bank holding company legislation. The Council believes that the proposed bases for legislation stated in Chairman Martin’s recent letter to Congressman Spence should be discussed with the various bank holding companies and with bankers’ associations. Pending their being embodied in the draft of a bill and so discussed, and an opportunity given to consider their effect, the Council does not feel it can express an intelligent opinion about them. 4. The Board will also be glad to consider with the Council any questions which the members of the Council might have with respect to the study of the check collection system being undertaken under the auspices of the Federal Reserve System with the cooperation of the American and Reserve City Bankers Asso ciations. The members of the Council are pleased that a comprehensive and exhaustive study of the check collection system is being undertaken under the auspices of the Federal Reserve System and with the cooperation of the American and Reserve City Bankers Associations. The Council is also glad to note that the Federal Reserve System is not suggesting the study for the purpose of encroaching upon or weakening the correspondent bank relationships of the commercial banks, but solely for the purpose of reducing ex penses and increasing efficiency. It is important that any proposals growing out of the study be thoroughly analyzed and fully discussed if they are to meet with the general approval of the banks, without which there is little chance for their adoption. As the committee makes preliminary reports, the Council will welcome the opportunity to discuss them with the Board. 5. What legislative or other actions might be taken to improve the capital positions of banks and encourage increases in bank capital including actions that might be suggested by the study of excess profits taxes of commercial banks? For ex ample, what should be the attitude toward the issuance of preferred stock or capital debentures by member banks as a means of raising new capital? In connection with the Excess Profits Tax, the Council recommends that the Board strongly support favorable legislative action on the proposal of the special committee on excess profits tax of the American Bankers Association. In brief, this proposal provides that a bank be entitled to treat as borrowed capital six and two-thirds per cent of its deposits, other than United States Government and domestic inter-bank deposits. The proposed formula would lessen the present injustice to banks which are not allowed to include any portion of their principal indebtedness, that is, their deposits, in computing their invested capital base. Other corporations are allowed a high percentage of their total indebtedness if they use the invested capital base. Except for the smaller banks, almost 16 all banks find it necessary to used the invested capital method. The proposed change would not only enable banks to make highly desirable additions to their capital out of retained earnings, but would make it easier for them to sell additional common stock. All members of the Council are agreed that action on the Excess Profits Tax is the immediate and pressing need, if the banks are to meet the problem of increasing their capital. If favorable action is taken on the Excess Profits Tax, the question of the issuance of preferred stock or capital debentures tends to become less important. Particularly if there is no relief on taxes, it may be necessary for the banking supervisory agencies to change their attitude on the approval of the issuance of preferred stock or capital deben tures by banks. 6. Do the members of the Council have any comments on or suggestions with respect to the Patman hearings? The members of the Council commend the Chairman and members of the Board and the Presidents of the Federal Reserve Banks for the able manner in which they prepared and presented the answers to the questions submitted to them by the Patman Subcom mittee, and on their testimony before it. The Council hopes that these answers and the hearings generally will promote a more intelligent and widespread understanding of the functions, duties, and problems of the Federal Reserve System. The Council will be pleased to discuss the final report of the Patman Subcommittee if the Board desires to do so after the report is released. 17 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL M ay 19, 1952 At 2:35 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D.C., the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, Henry C. Alexander (Alternate for N. Baxter Jackson), Geoffrey S. Smith, George Gund, Robert V. Fleming, Paul M. Davis, V. J. Alexander, Joseph F. Ringland, David T. Beals, De Witt Ray, and Herbert V. Prochnow, Secretary. Absent: Messrs. N. Baxter Jackson and James K. Loehead. Dr. Woodlief Thomas, Economic Advisor to the Board of Governors, discussed the subject, “A Year of Flexible Credit Policy.” The meeting adjourned at 4 P.M. H E R B E R T V. P R O C H N O W Secretary. 18 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM M ay 20, 1952 At 10:30 A.M ., a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, D.C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman WTm. McC. Martin, Jr.; Governors M. S. Syzmczak, R. M. Evans, Oliver S. Powell, A. L. Mills, Jr. and J. L. Robertson; also Mr. S. R. Carpenter, Secretary of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, Henry C. Alexander (Alternate for N . Baxter Jackson), Geoffrey S. Smith, George Gund, Robert V. Fleming, Paul M . Davis, V. J. Alexander, Joseph F. Ringland, David T. Beals, De W itt Ray, James K. Lochead and Herbert V. Prochnow, Secretary. Absent: Mr. N . Baxter Jackson. The President of the Council read the first item on the agenda and the conclusions of the Council as given in the Confidential M em orandum to the Board of Governors from the Federal A dvisory Council, as printed on pages 15, 16 and 17 of these minutes. A discussion followed in which members of the Council and the Board participated. The President of the Council read the second item on the agenda and the conclu sions of the Council given in the Confidential M em orandum mentioned above. There-was an off-the-record discussion of Veterans’ Administration loans. President Brown then read the third item on the agenda and the conclusions of the Council as given in the Confidential M em orandum mentioned above. Governor Robertson at Chairman Martin’s suggestion commented on this item. President Brown read the fourth item on the agenda and the conclusions of the Council as stated in the Confidential M em orandum previously mentioned. Governor M ills outlined the program and some of the preliminary plans in detail. President Brown read the fifth item on the agenda and the conclusions of the Council as given in the Confidential M em orandum referred to above. The sixth item on the agenda and the conclusions of the Council as recorded in the Confidential M em orandum attached were then read by President Brown. Chairman Martin said that the Board would like very much to discuss the subject again with the Council after the final Patman report is published. The meeting adjourned at 1:05 P.M . H ER BER T V. P R O C H N O W Secretary. 19 NOTE: T h i s t r a n s c r i p t o f th e S e c r e t a r y 's n o t e s i s n o t to b e r e g a r d e d as com plete or n e c e s s a r ily e n t ir e ly accurate* The tra n ss c r i p t i s f o r t h e s o l e u s e o f t h e members o f t h e F e d e r a l A d v is o ry C o u n cil* The con c i s e o f f i c i a l m in u t e s f o r th e e n t i r e y e a r are p r in t e d and d is t r ib u t e d l a t e r . H. V. P. T h e S e c r e t a r y 's n o t e s o n t h e m e e t in g o f the F e d e r a l A d v i s o r y C o u n c i l o n M ay 1 8 , 1 9 5 2 a t 2 : 2 0 P . M . i n Room 9 3 2 o f t h e M a y f l o w e r H o t e l , W a s h i n g t o n , D * C* A l l members o f t h e C o u n c il w e r e p r e s e n t e x c e p t M r* N* B a x t e r J a c k s o n * M r * H e n r y C* A l e x a n d e r , P r e s i d e n t , J * P* M o rga n & C o m p a n y , I n c * , N ew Y o r k , s e r v e d as a l t e r n a t e fo r M r. Jackson. The C o u n c il February 17- 19, approved the S e c r e t a r y 1s n o tes f o r t h e m e e t in g on 1952. # * * -Hr * -* WHAT ARE T H E B U S IN E S S AND ECONOMIC PR OSPECTS OVER T H E NEXT S I X MONTHS? W HAT S U G G E S T IO N S DOES T H E C O U N CIL HAVE W IT H RESPECT TO SYSTM C R E D IT P O L I C I E S D U R IN G THAT P E R IO D ? B ro w n r e a d s I t e m of the C o u n cil B u ck lin . Other than not 1 on th e express h is v ie w s re g a rd in g th e ite m . Some u n i t s seasonal u n fo rtun ate if o f the t e x t il e changes, show a n y i n c r e a s e . extent on th e steel a g e n d a a n d s u g g e s t s t h a t e a c h member t h e vo lu m e o f b a n k l o a n s w i l l p r o b a b l y T h e Im m e d ia t e b u s i n e s s d e c is io n expressed in p ro b ab ly b e one o f perso nally f e e l s in fla tio n a ry * that r a t e a n d o p e n m a rk e t p o l i c y . staff r e l a t i v e to b u s i n e s s and of a gradually ris in g t h e t r e n d may b e a l i t t l e He fa v o r s B u c k lin favo rs co n d itio n s. sum m ary w a s t h a t t h e r e m a in d e r o f 1 9 5 2 w o u l d sta b ility op en m a r k e t p o l i c i e s . th is w o u ld b e most a summary o f i n f o r m a t i o n p r o v i d e d b y t h e F e d e r a l R e s e r v e B a n k o f New Y o r k T he v i e w It a n e a s y m oney p o l i c y * cu rren t re d isc o u n t Henry A lexan d er presents o u t l o o k d e p e n d s to a l a r g e and la b o r p ro ble m s. we s l ip p e d b ac k in to a c o n tin u an c e o f t h e i n d u s t r y a r e com ing b a c k * e co n o m y. A lexan d er m ore d e f l a t i o n a r y t h a n a c o n t i n u a n c e o f th e p r e s e n t r e d i s c o u n t r a t e an d -2Lochead rates a s k s A l e x a n d e r 's v ie w s r e g a r d i n g the f u t u r e t r e n d o f i n N ew Yorlc C i t y . Henry A le xan d e r states is in terest t h e r e i s no some s t r e t c h i n g o u t ox t e r m s * T h e volum e o f b a n k l o a n s w i l l p r o b a b l y show some s e a s o n a l f l u c t u a t i o n s , in c r e a s e i n c u t t in g o f i n t e r e s t r a t e s , b u t t h e r e b u t A l e x a n d e r does n o t e x p e c t a n y r e a l t h e v o lu m e o f l o a n s * T h e l o a n volum e o f h i s b a n k i s down s in c e D ecem ber* Fleming asks whether the 3 per cent rate has been broken on the Pacific Coast# Loehead says h e know s o f no Vance A le x a n d e r th in k s k e e p b a n k s fr o m cases w here t h i s t h a t t h e i n c r e a s e i n b a n k c o s t s s h o u l d h e l p to cu ttin g in te r e s t rates* S m it h r e p o r t s t h a t h i s v i e w s o n i h e b u s i n e s s su bstantially the v ie w t h a t the at p r e s e n t w i t h e c o n o m ic no m a j o r stay about o f t h o s e w ho Brown* The s it u a t io n are A summary o f t h e F e d e r a l R e s e r v e B a nk o f P h i l a d e l p h i a econom ic expressed s i t u a t i o n w o u l d p r o b a b l y r e m a in a b o u t as i t i s c h a n g e up o r so m e w h a t m i x e d * situ a tio n w i l l the v ie w s an d econom ic s im il a r to th o s e o f H enry A lexan d er* c o n d itio n s p r e p a r e d b y bankers i s r a t e has b e e n b r o k e n * There are as it is down* S m it h sa y s s e n t im e n t among some who f e e l t h a t t h e at p re se n t, b u t he i s econom ic i n c l i n e d to share a r e m ore p e s s i m i s t i c * B o a r d h a s t h e m ost c o m p le t e f i g u r e s on t h e b u s i n e s s an d e co n o m ic s i t u a t i o n , b u t t h e m em bers o f t h e C o u n c i l a r e p r o b a b l y c l o s e r to day - to- day b u s i n e s s and have and t h e a b e t t e r u n d e r s t a n d in g o f b u s in e s s p sy ch o lo g y general outlo ok. S m ith * In g eneral, som ewhat p e s s i m i s t i c * b u s i n e s s m en i n h i s He f a v o r s a d i s t r i c t a r e i n c l i n e d to b e co n tin u a n c e o f th e p r e s e n t re d is c o u n t rate a n d a n o p e n m a r k e t p o l i c y o f k e e p i n g m oney r e a s o n a b l y t i g h t . -3Gund» are In d u stria l some s e c t i o n s a c t iv it y i n h is d is t r ic t i s at a h ig h le v e l* T h er e h e r e a n d t h e r e i n w h ic h t h e r e h a v e b e e n c u t b a c k s i n p r o d u c t io n , but these lo an s o f h is b a n k w e r e i n c r e a s i n g b u t a r e now down s l i g h t l y . are u p * If ca p ital a r e no t e s p e c ia lly n o tic e a b le in h is d istrict. The Tim e d e p o s it s e x p e n d it u r e s , p r iv a t e and p u b l ic , hold u p , b u s in e ss sh o u ld c o n t i n u e t o b e r e a s o n a b l y g o o d . prim e r a t e w i l l ho ld. He i s w i l l b e dow n t o 2 - 3 /U p e r G und d o u b ts v e r y much i f t h e p r e s e n t i n c l i n e d to b e l i e v e that b y l a t e October i t cent. He f a v o r s a c o n t in u a n c e o f t h e p r e s e n t r e d is c o u n t r a t e a n d o p e n m a r k e t p o l i c y . F le m in g . te xtile s, and The F ift h coal stocks C o n s t r u c t i o n v o lu m e i s e m p lo y e e s . D istric t is a g ood d e a l lo an s some l a y o f f s o f are down. Bank l o a n s , rate c o n s t r u c t io n T ob acco i s except fo r I n d i v i d u a l demand d e p o s i t s o f p e ssim is m o n i n t e r e s t r a t e s . present re d isc o u n t He b e lie v e s so m e w h at s t r o n g e r n o w t h a n t h e i n f l a t i o n a r y f o r c e s . su sp en d R e g u l a t i o n W . reassert to b e l i e v e the Treasury w ill a l o n g term 3 p e r c e n t b o n d . b u s in e ss som e who b e l i e v e are f u l l are down a n d D a v i s d e p o sits has s l o w e d up them selves. the d e fla tio n a ry The C o u n c il t h e r e m ay so o n b e e xp ec t any r e a l R e t a il b u s in e ss F l e m in g i s alth o u gh bank c le a r in g s some t y p e o f g o o d s , does not are u p . issu e that of to s e a s o n a l f l u c t u a t i o n s . S a v in g s c o n t in u in g t h e t h e B o a r d shoiild r e a c t i v a t e t h e V o l u n t a r y C r e d i t R e s t r a i n t in f l a t i o n a r y te n d e n c ies The w a r e h o u s e s There i n v i e w o f p r e s e n t c o n d i t i o n s i t w as w i s e t o program i f T here a r e a re A s s u m in g t h e e x t e n s i o n o f t h e D e f e n s e P r o d u c t i o n A c t approved b y C o n g r e s s , D a v is b e l i e v e s expected defen se, are do w n . F l e m in g f a v o r s an d open m arket p o l i c i e s . may s t a t e to t h e B o a r d t h a t is th e re have b e en c ro p o n r e c o r d . are Cotton, R e t a i l trade has be en d is a p p o in t in g . Crops w i l l p r o b a b ly be a t a near- record h i g h . and t o t a l fa c to rs are h ig h . up b u t to b e t h e s e c o n d l a r g e s t down, i s p r e d o m in a n t l y a g r i c u l t u r a l . are h ig h e r . a p ick u p i n th e t e x t i l e in c lu d in g cellophan e. in c re a se i n l o a n s , is not in c lin e d in d u stry . B a nk l o a n s e x c e p t ch an g e s due o f f 7 per cent over a year ago. He f a v o r s a c o n t i n u a n c e o f t h e p r e s e n t r e d i s c o u n t r a t e -uand o p e n m a r k e t p o l ic y ® Vance A l e x a n d e r . d e p o s its a r e u p . cotton l o a n s . Dem and d e p o s it s a re ab o u t t h e same as l a s t y e a r . Loans a r e h o l d i n g up f a i r l y w e l l . C o n stru c tio n i s h ig h e r than exp ec ted . H is b a n k s t i l l h a s some A c t i o n w h ic h w as t a k e n r e l a t i v e to t h e V o l u n t a r y C r e d i t R e s t r a i n t program was w i s e . to f o r e c a s t crops in h is last y e a r . In te r e s t in th e r e d i s c o u n t R ing lan d. a r e up o v e r a y e a r a g o . to A l e x a n d e r f a v o r s no e arly change i n h i s b a n k a r e o f f a b o u t l £ p e r c e n t , b u t t h e d e c l i n e h as la r g e p a rt b y the in cre ase in in terest r a t e s . It is r a t e o r o p en m a r k e t p o l i c y . largely a g r ic u l t u r a l . to e m p lo y . It d i s t r i c t , b u t p r o b a b l y n o t as much co tto n w as p l a n t e d as rates Loans b e en o f f s e t i n S a v in g s looks Em ploym ent i s lik e h ig h . H i s b a n k has d i f f i c u l t y f i n d i n g p e o p le a good y ear f o r b u s in e s s . 3 per cent b e h in d l a s t y e a r . The d is t r ic t is D ep artm en t- sto re s a l e s a r e R i n g l a n d f a v o r s no ch ang e i n t h e r e d i s c o u n t r a t e or open m a rk e t p o l i c y . B eals. The M o is t u r e i s good. in d u strial d istrict in larg ely agricultu ral. Em ploym ent i s a c tiv ity real in c r e a s e is in the sales. crops a t l o w e r p r i c e s h ig h . d istr ic t. T h e r e are g ood p r o s p e c t s f o r g r e a t e r S u s p e n s i o n o f R e g u l a t i o n W h a s b r o u g h t no R e t a il trade is are p r o b a b le . of r e d is c o u n t r a t e an d op en m arket p o l i c y . states accurately i n and gas are store s a l e s in ter est that B eals R a y 's d istric t. the b ig g e st a r e 15> p e r are m ade. apparent. h o u sin g B eals favo rs comments a l s o D istric t E leven i s Loans w il l average. is not go o d. Good There is c o n t in u a n c e o f t h e p r e s e n t d e sc r ib e d the s it u a t io n q u it e g e t t i n g go o d r a i n s n o w . B u sin ess g e n e r a lly is cent above a year ago , b u t the p r o f it the crop l o a n s is p r o b a b l y o v e r b u i l t . h is rates. in c o m e p r o d u c e r s . are down fr o m D e c e m b e r 3 1 . The in b e t t e r than the n a tio n a l The p a c k in g b u s in e s s some d i s c u s s i o n Ray e asie r Crop p r o s p e c t s a r e g o o d . good. O il D ep artm en t i s n o t so g o o d . Loans p r o b a b l y show some d e c l i n e u n t i l f a l l when Some t e n d e n c y t o w a r d s o f t n e s s i n i n t e r e s t r a t e s i s situ a tio n is Ray fav o rs r e a c h in g a c r i t i c a l p o i n t , becau se h is area a c o n t in u a n c e o f t h e p r e s e n t r e d i s c o u n t r a t e -5and open market policy# Loehead reports a large carryover of canned goods in his district* The majority of bankers outside Los Angeles are on the pessimistic side, which view he shares* Japanese goods are coming into the Pacific coast* Regulation W may result in some pickup for a month or so* The suspension of Loehead favors a continuance of the present rediscount rate and open market policy® Brown reports that the bankers and business men in his district are inclined to be pessim istic* business a c t iv itie s . He expects that there w ill be some recession in The machine tool industry is holding up* implement production is being cut* The household appliance business is bad* There has been some curtailment in the crushing of soy beans* having a d iffic u lt time* Agricultural Employment is high* Meat packing is Brown favors a continuance of the present rediscount rate and open market policies# The Council may state to the Board that i t feels the situation at present is reasonably stable, but there is bearish sentiment among business men and bankers# business activity are declin in g. Bank loans and The Council favors continuance of the present rediscount rate and open market p o lic ie s . Assuming that Congress extends the Defense Production A c t, the Council believes that the Voluntary Credit Restraint program should be reactivated i f inflationary forces again become strongly evident# The Council approves the action taken in regard to Regulation W , in view of present conditions* WHAT EFFECT IS REGULATION X HAVING IN THE ECONOMY AT THE PRESENT TIME AND WHAT, IF ANY, ACTION SHOULD THE BOARD TAKE WITH RESPECT TO LIBERALIZATION OR SUSPENSION OF THE REGULATION?_______________________ Brown believes Regulation X should be suspended# (All members of the Council concur.) Fleming reports that the only people who are doubtful about suspending Regulation X are some of the lenders, as Regulation X tends to protect them from additional demands. regulation suspended. The builders and suppliers, generally, would lik e to see the Brown. Regulation X seems to have little effect on lower priced houses and it causes a lot of irritation in connection with the construction and sale of higher priced houses* THE BOARD WOULD APPRECIATE ANY COMMENTS THAT THE COUNCIL MIGHT WISH TO MAKE RELATING TO THE BANK HOLDING COMPANY LEGISLATION DISCUSSED IN CHAIRMAN MARTIN'S RECENT LETTER TO CONGRESSMAN SPENCE, CHAIRMAN OF THE HOUSE BANKING AND CURRENCY COMMITTEE. A COPY OF THE LETTER IS ATTACHED._______________________________________ i1 Brown traces at some length the historical background of bank holding company legisla tio n and the various bills which have been introduced from time to time. Ray explains certain problems relative to affiliated banks in Texas. Ringland believes the whole question of bank holding company legislation is overrated. There is not more than one group, if there is even one, which is trying to "gobble up" banks. Ringland's group is smaller than it was. The Independent Bankers Associations are not just after holding companies^ they are after the "b ig " or "monopoly" banks. The independents say they are against holding companies because they have, in effect, branches. Actually, these banks operate separately. Lochead favors a bank holding company b il l that would prohibit holding companies from owning stock in non-bank corporations. He is not personally so interested in whether they cross state lin e s . Brown believes the problem is more complex and cites cases of holding companies where certain types of exceptions in any holding company b ill are necessary i f leg isla tio n is to be satisfactory. Fleming. Unless Congress finds it necessary to come back for another session because of the steel and labor problems, this legislation does not have a chance now. Brown believes a discussion of this matter at present is largely academic, but there is pressure for legislatio n . The Spence B ill does not appear workable, and Brown does not believe the Board's proposals are practical. The Council might -7reiterate its previous stand, as expressed in its letter on February 20, 19^0, approving the bank holding company b ill S# 2318 with certain amendments. This bill had been approved by the Board, the Council, bank holding companies and bankers' associations# Ringland believes the Council could say it does not object to a workable holding company b i l l , but that no workable legislation has been presented# Lochead suggests that the Council might go back to its previous position. Ringland asks whether the Council might not state that it would present its views at the next meeting after a further consideration of this item on the agenda# Brown replies that the Council has discussed this subject on so many occasions in the past that he is reluctant to make any commitment for the Council to express a definite viewpoint at its next meeting* Definite conclusions can only be expressed after the Council has seen proposals which are in legislative form# Moreover,these proposals should have been examined by holding company groups, bankers associations, and others who are interested. The Council may state that from time to time in the p ast, it has repeatedly expressed itself in favor of bank holding company legislation# In a letter to the Board on February 20, 19^0, the Council approved b i l l S# 2318, then before the Banking committee of the Senate, with certain amendments which the Council was informed were acceptable to the then Board# This b i l l had been given the general approval of the bank holding companies, with one notable exception# No action w a s taken on S . 2 3 1 8 b y the Committee on Banking a n d Currency o f the Senate, to which i t had been referred, and the b il l died with the 8lst Congress# In view of the widespread operations of the various bank holding companies in different parts of the United States, the Council believes that a bank holding company b il l should be i n it ia l l y drafted by the Board of Governors and the provisions of the draft fu lly discussed by the Board with the principal holding companies and others affected, before the Board urges the passage of any bank holding company -8legisla tio n . The Council believes that the proposed bases for legislation stated in Chairman M a r t in 1s recent le t t e r to Congressman Spence should be discussed with the various bank holding companies and with bankers* associations# Pending their being embodied in the d r a ft of a b i l l and so discussed, and opportunity given to consider th e ir e ffe c t , the Council does not fe e l i t can express an intelligent opinion about then . THE BOARD WILL ALSO BE GLAD TO CONSIDER WITH THE COUNCIL ANY QUESTIONS WHICH THE MEMBERS OF THE COUNCIL MIGHT HAVE WITH RESPECT TO THE STUDY OF THE CHECK COLLECTION SYSTEM BEING UNDERTAKEN UNDER THE AUSPICES OF THE FEDERAL RESERVE SYSTEM WITH THE COOPERATION OF THE AMERICAN AND RESERVE CITY BANKERS ASSOCIATIONS.__________________________________________________________ Brown reads Item k and states the Council has been informed there is no desire by the Federal Reserve System to encroach upon the correspondent bank business. I t w i l l take a number of months to work out this study and "s e l l 11 it to the b anks. The Council may state i t is pleased the study is being undertaken. Vance Alexander. The Administrative Committee of the American Bankers Association at it s recent meeting at White Sulphur Springs agreed that this study should be undertaken. Alexander believes the Council should approve the study and state i t understands the study is not being undertaken for the purpose of encroaching upon the correspondent bank relationships of the commercial banks. Brown believes that the Council should approve the study and should mention that it understands the study was not meant to weaken the correspondent bank relationships of the banks. Any study along the lines suggested must be thoroughly analyzed and discussed, i f i t is to meet the approval of the banks. As the Committee makes preliminary reports, the Council w ill be pleased to have the opportunity to see them. WHAT LEGISLATIVE OR OTHER ACTIONS MIGHT BE TAKEN TO IMPROVE THE CAPITAL POSITIONS OF BANKS AND ENCOURAGE INCREASES IN BANK CAPITAL INCLUDING ACTIONS THAT MIGHT BE SUGGESTED BY THE STUDY OF EXCESS PROFITS TAXES OF COMMERCIAL BANKS? FOR EXAMPLE, WHAT SHOULD BE THE ATTITUDE TOWARD THE ISSUANCE OF PREFERRED STOCK OR CAPITAL DEBENTURES BY MEMBER BANKS AS A MEANS OF RAISING NEW CAPITAL?___________ -9Flem±ng had originally felt that this year was not a good time to seek tax relief. He did not feel there would be a general tax bill this year* He understands now there may be a fifty- fifty chance of getting some tax relief for the banks. (At this point there were off-the-record comments). Brown. In connection with the excess profits tax, there is politically no chance of getting a ll deposits deducted. The Council may state that it recommends the proposal of the special committee on the excess profits tax of the American Bankers Association. proposal. The Council may recommend that action be taken on this (Off-the-record comments on preferred stock for banks). There is some objection to preferred stock and debentures because insurance companies require a sinking fund. Banks are, therefore, not really building their capital permanently if they have a sinking fund. Fleming states he does not think it would be wise for banks to go back to the issuance of preferred stock, in view of the previous use of preferred stock at the time of the depression. Brown. The public psychology may be bad. A bank cannot increase its capital without the consent of the Comptroller, so the Comptroller can actually prevent the issuance of preferred stock. Vance Alexander. Preferred stock does not have to be sold with a sinking fund feature. Brown. National banks cannot sell debentures. Fleming believes that i f bankers advocate the issuance of preferred stock and debentures, they wi l l not get tax r elief* Ray. I f banks do not get tax r e lie f, how can they adequately build their c a p ita l? Davis. The Council may state i t would prefer to see tax relief before recommending the issuance of preferred stock or capital debentures. Fleming. (Off-the-record comments). -1 0 - Brown. A ll members of the Council are agreed that action on the excess profits tax is the immediate and pressing need to meet the problem of increasing bank capital* I f that problem can be solved, the issuance of preferred stock and capital debentures becomes less important. In the event there is no relief on taxes, i t may be necessary for the banking agencies to change their attitude regarding the issuance of preferred stock and capital debentures. DO THE MEMBERS OF THE COUNCIL HAVE ANT COMMENTS ON OR SUGGESTIONS WITH RESPECT TO THE PATMAN HEARINGS?________________ _______________________ Brown states that the Council may commend the Chairman and members of the Board and the Presidents of the Federal Reserve banks for the competent way in which they prepared and presented the answers to the questions submitted to them by the Patman Subcommittee. The Council hopes the hearings may promote a more intelligent understanding of the problems and functions of the Federal Reserve System. The Council w ill be pleased to discuss the fin a l report of the Patman Subcommittee with the Board when the report is released. (The members of the Council agree with this summary by B row i). Smith. The President of the Federal Reserve Bank of Philadelphia has raised the question of whether it may not be possible to prepare a simplified statement of the Patman hearings. The published statements of the answers to the questions and of the hearings are long and involved, and bankers and the public generally may not receive the f u l l benefit of the material prepared and the discussions at the hearings. Brown believes that it would not be desirable to publish a statement before the final Patman report is available. Perhaps the Board would be interested in preparing a statement at that time. The meeting adjourned at 6 :2 5 P« M. ’ * \ -11- THE FEDERAL ADVISORY COUNCIL CONVENED AT lOsOO A.M. ON MAY 19, 1952, IN ROOM 932 OF THE MAYFLOWER HOTEL, WASHINGTON, D. C. ALL MEMBERS OF THE COUNCIL WERE PRESENT, EXCEPT MR. N. BAXTER JACKSON» MR. HENRY C. ALEXANDER SERVED AS AN ALTERNATE FOR MR. JACKSON. The Council prepared and approved the attached Confidential Memorandum to be sent to the Board of Governors relative to the Agenda for the joint meeting of the Council and the Board on May 20 ^ 1952© The Memorandum was delivered to the Secretary of the Board of Governors at 12slt0 P, M« It w ill be noted that each item of the Agenda is listed together with the comments of the Councilo The meeting adjourned at 12s 25 M. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON MAY 20, 1952 What are the business and economic prospects over the next six months? What suggestions does the Council have with respect to system credit policies during th at period? Although economic conditions at present are reasonably stab le, there is d istin c tly less optimism now among business men and bankers regard ing the business outlook for the next six months than prevailed e a rlie r this year. Employment, personal income, and a c tiv ity in many lin es con tinue at a high lev e l, but there are weak spots in important in d u stries, such as those engaged in manufacturing household appliances, house furnish ings, te x tile s, shoes and in meat packing. Inventories of most commodities and m aterials are in ample supply, and shortages have been largely elim i nated. Assuming no important change in the in tern atio nal situ atio n and no serious interruption of ste e l production, the Council does not expect either a severe decline or a sharp upward trend in business during the next few months. The m ajority of the Council think a slig h t recession in busi ness activ ity is more probable than an upturn. The volume of bank loans has been declining. Considering the country as a whole, i t appears at present that, apart from normal seasonal swings, the volume of bank loans w ill decline slig h tly in the balance of the year. Unless conditions change m aterially, the Council favors a con tinuance of the current rediscount ra te and of open market operations which will make the rediscount ra te effective and thus provide a reasonably firm money market and an orderly and fle x ib le market for government se c u ritie s. The Council approves the action taken re la tiv e to the suspension of the Voluntary Credit R estraint program and of Regulation W, in view of the decline in loans which had occurred and evidence of deflationary tendencies. If inflationary forces again become clearly evident, and assuming the De fense Production Act is extended by Congress, the Council recommends th at the Voluntary Credit R estrain t program be reactivated. During the period it was in effect i t was an important influence in restrain in g unnecessary credit. 2. What effect is Regulation X having in the economy a t the present time and what, i f any, action should the Board take with respect to lib e r a liz a tio n or suspension of the Regulation? Under present conditions, Regulation X no longer serves any use ful purpose as regards non government guaranteed re a l estate cre d it. The r&gulation has not had a marked effect on the financing of lower-priced houses. I t does re su lt in hampering the construction and sale of higherpriced houses, and causes much needless irrita tio n and in ju stic e . The 1 . -2- unanimous in recommending that the regulation now be suspended. 3. The Board would appreciate an}' comments that the Council might wish to make relating to the Bank Holding Company leg islatio n discussed in Chairman Martin’s recent le tte r to Congressman Spence, Chairman of the House Banking and Currency Committee. A copy of the le tte r is attached. The Council, as constituted from time to time in the past, has repeatedly expressed its e lf in favor of bank holding company legislation. In a le tte r to the Board of Governors on February 20, 1950, the Council approved bank holding company b ill, S. 2318, then before the Committee on Banking and Currency of the Senate, with certain amendments which the Council understood were acceptable to the then Board. This b ill had met the general approval of the bank holding companies with one important ex ception. No action was taken on S. 231S by the Committee on Banking and Currency of the Senate, to which i t had been referred, and the b ill died with the 81st Congress. In view of the widespread operations of the various bank holding companies in d ifferen t p arts of the United States, the Council believes that a bank holding company b ill should be in itia lly drafted by the Board of Gov ernors and the provisions of the d raft fu lly discussed by the Board with the principal holding companies and others affected, before the Board urges the passage of any bank holding company leg islatio n . The Council believes th at the proposed bases for legislation stated in Chairman M artin’s recent le tte r to Congressman Spence should be discussed with the various bank holding companies and with bankers’ asso ciations . Pending th e ir being embodied in the draft of a b ill and so d is cussed, and opportunity given to consider th e ir effec t, the Council does not feel i t can express an in te llig e n t opinion about them. 4. The Board w ill also be glad to consider with the Council any questions which the members of the Council might have with respect to the study of the check collection system being undertaken under the auspices of the Federal Reserve System with the cooperation of the American and Reserve City Bankers A ssociations. The members of the Council are pleased that a comprehensive and exhaustive study of the check collection system is being undertaken under the auspices of the Federal Reserve System and with the cooperation of the American and Reserve C ity Bankers Associations. The Council is also glad to note th at the Federal Reserve System is not suggesting the study for the purpose of encroaching upon or weakening the correspondent bank relationships of the commercial banks, but solely for the purpose of reducing expenses and increasing efficien cy . I t is important that any proposals growing out of the study be thoroughly analysed and fu lly discussed i f they are to meet with the general approval of the banks, without which there is l i t t l e chance for th e ir adoption. As the committee makes preliminary reports, the Council will welcome the opportunity to discuss them with the Board. Counc.il i s -3$. l/hat le g is la tiv e or other actio n s might be taken to im prove the c a p ita l p o sitio n s of banks and encourage in creases in bank c a p ita l including actions th a t might be suggested by the study of excess p ro fits taxes of commercial banks? For example, what should be the a ttitu d e toward the issuance of preferred stock or cap i t a l debentures by member banks as a means of ra isin g new c a p ita l? In connection w ith the Excess P ro fits Tax, the Council recommends t h a t t h e Board stro n g ly support favorable le g is la tiv e action on the pro posal o f the sp e c ia l committee on excess p ro fits tax of the American Bankers Association. In b rie f, th is proposal provides th a t a bank be e n title d to t r e a t as borrowed c a p ita l six and tw o-thirds per cent of i t s d ep o sits, other than United S ta tes Government and domestic inter-bank d ep o sits. The pro posed formula would lessen the present in ju stic e to banks which are not a l l o w e d to include any portio n of th e ir p rin cip a l indebtedness, th at is , th eir d ep o sits, in computing th e ir invested c a p ita l base. Other corpora tions are allowed a high percentage of th e ir to ta l indebtedness i f they use the invested c a p ita l base. Except fo r the sm aller banks, almost a ll banks f i n d i t necessary to use the invested c a p ita l method. The proposed change w ould not only enable banks to make highly d esirab le additions to th e ir capital cut of retain ed earnings, but would make i t easier fo r them to s e ll a d d i t i o n a l common stock. A l l members of the Council are agreed th a t action on the Excess P r o f i t s Tax i s the immediate and pressing need, i f the banks are to meet the p ro b le m of increasing th e ir c a p ita l. I f favorable action is taken on the E x c e s s P ro fits Tax, the question of the issuance of preferred stock or c a p i t a l debentures tends to become less im portant. P a rtic u la rly i f there is no r e l i e f on tax es, i t may be necessary fo r the banking supervisory a g e n c ie s to change th e ir a ttitu d e on the approval of the issuance of pre fe r r e d stock or c a p ita l debentures by banks. 6. Do the members of the Council have any comments on or sug gestions with resp ect to the Patman hearings? The members of the Council commend the Chairman and members of the Board and the Presidents of the Federal Reserve Banks fo r the able manner in which they prepared and presented the answers to the questions submitted to them by the Patman Subcommittee, and cn th e ir testimony before i t . The Council hopes th a t these answers and the hearings generally w ill promote a more in te llig e n t and widespread understanding of the functions, d u ties, and problems of the Federal Reserve System. The Council w ill be pleased to d is cuss the fin a l report of the Patman Subcommittee i f the Board desires to do so after the repo rt is released. -12THE FEDERAL ADVISORY COUNCIL CONVENED IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING AT 2 :3 5 P.M. ON MAY 19, 1952. ALL MEMBERS OF THE COUNCIL WERE PRESENT EXCEPT MESSRS. LOCHEAD AND JACKSON. MR. HENRY C. ALEXANDER SERVED AS AN ALTERNATE FOR MR. JACKSON. Dr. Woodlief Thomas discussed the subject, UA Year of Flexible Credit Policy'*. An outline of Dr. Thomas discussion follows: A YEAR OF FLEXIBLE CREDIT POLICY Policy guides Objective of Federal Reserve policy is repeatedly stated to be to assist stable economic growth. Mechanism is to influence supply, a v a ilab ility , and cost of credit in a manner that w ill contribute to that end. Tests of effectiveness or of need for change in policy arer (1 ) Rate of growth in output Relation to capacity Relation of components to probable demand Is expansion too great in some important areas? (2 ) Employment, unemployment, and income Is unemployment increasing? Are employment demands pressing so hard on labor supply as to stimulate general increases in wages? Are wage and salary increases adding to incomes in excess of goods available for purchase? (3) Rate of credit and monetary expansion Relation to business a ctivity Liquidity needs of public Sus tainabili ty (U) Changes in prices Major test of balance between demand for goods and available supply - not sole guide. Rising prices indicate excess of demand; fa llin g deficiency Some fluctations desirable to permit market adjustments None of these tests should be considered as absolute or unchanging guides. Their use requires high degree of judgment* Charts Developments in past year Prices 1. Price rise ended, with marked declines in some items. Most significant indication of abatement of inflationary pressures. Fasic Wholesale Consumer Declines represent principally reactions from excessive and speculative advances. Major price indexes are now 10 to 12 per cent above June 1950 A year ago varied from 2 or 3 per cent to over 50 per cent increases Now more balanced price structure No further inflation 2. Production continued at high level with further expansion in some lin es. Contraction in some others. Industrial production index rose to 222, now about 215 Total GNP up about 20 b illio n , or 6 per cent (less than half represents higher prices) G.N.P. principal In real terms total output a new high Components Defense output— including services of military establishment and related governmental activities— increased by nearly 20 b illio n dollars, annual rate. Business expenditures for plant and equipment also increased— about 5 b illio n annual rate. Currently a ll time high. Housing reduced moderately. Commercial construction reduced substantially. Substantial decline in rate of inventory accumulation— slight liquidation i n business inventories recently. Consumption expenditures practically unchanged. Substantial decline in durable goods about offset by increase in others. Selected Business Indicators Production picture shows considerable diversity— near capacity in some lin e s , while others have unused capacity. Supplies generally ample, no pressure for expansion except in some defense and related a ctiv itie s. 3* Employment, unemployment and income Additional 5 0 0,00 0 supplied to armed forces in past year, total of 2 ,0 0 0 ,0 0 0 since June 1950 Decrease in unemployment to about 1 .6 million - close to mimimum Charts 3. -lU- Employment, unemployment, and income (continued) Chart Book Employment less than a year ago—-which was all time high. pp. 53 & 51* Increase in productivity. Average hourly earnings continued to increase Up 5 per cent in past year lU per cent since mid-1950, compared with 10 per cent for consumer prices. Income continued to grow until late 1951. personal income Little change since. Disposable income (after taxes) reduced slightly this year. Consumers contractual obligations for debts, insurance, etc ., increased— uncommitted income rose less than cost of living from mid-1950 to spring 1951• Some improvement in past year. Consumers reduced expenditures relative to income, also reduced credit expansion, increased liquid savings. Better off now than a year ago. Potentially inflationary. li. Credit developments Loans - bank and noribank - continued to expand, but at slackened pace. Holdings of Government Securities Nonbank lending more closely related to current savings. Loans Connercial Banks Bank loans Changes in Loans by Industries Liquidation of Government securities diminished. absorbed by other investors. Partly Persistent growth in defense borrowing, presumably needed for expansion in output, some slackening recently. Largely seasonal fluctuations in other business Greatly slackened increase in real estate and consumer loans. Some banks increased holdings of Government securities Funds in excess of loan demand D esire for more l iq u id it y A ttra ctio n of rates Private money supply expansion i n past year At record peacetime rate - $10 b i l l i o n , against 5 b i l l i o n i n previous 12 months -15Charts h» C redit developments (continued) Made possible by continued increase in bank loans and securities other than U .S ., at diminished rate (6-1/2 b illio n ) Bank purchases of Government securities (1 b illio n ) Increase in gold stock (1-1/2 b illio n ) Decrease in Treasury balances (1-1/2 b illio n ) Deposits ana Currency Would appear to indicate failure of policy as restraint on in fla t io n Examine nature of expansion Time deposits up 2-1/2 b il l i o n vs. decline— these are savings Currency up 1-l/U b illio n - 5 per cent Some savings, some increased business needs, etc. Demand deposits up 5 b i l l i o n , slightly less than last y ear. Only 6 per cent - about same as G .N .P . Turnover of deposits reduced. R eflects working needs plus desire for liq u id it y , i n view o f reduced liq u id ity of Governments. Evidently not in flatio n ary currently, but potentially so. Role of Federal Reserve i n past year R equired reserves increased by 600 m illion since early April 1951 L it t l e net increase since November Member bank reserves and related itens Ceased to supply reserves through purchase of Government securities Decreased by 800 m illion since April 1 1 , 1951 Purchases in periods of Treasury refunding and in December o ff set by other sale s. Reserves absorbed by currency increase - 1 - lA b il l i o n T otal o f 2 . 6 funds needed to meet drain on reserves and increase in req uired r e s e r v e s . Reserves sup p lied b y gold inflow and decrease in foreign balances about 1 - 3 A b i l l i o n Other fac to rs vary from day to day Excess reserves reduced - 1;00 m illion - but change considerably Member bank borrowings at Federal Reserve increased Varied from below 200 m illion to over 1 b il l i o n Role of Federal Reserve in past year (continued) Occasionally larger than excess reserves Treasury balances and flo at have varied considerably* These have important temporary effects on money market* Operation o f policy of neutrality Long-run effectiven ess of Federal Reserve policy depends on long-run facto rs not temporary variatio ns. Net additions to bank reserves pe rmitted should be as close as p o ssible to minimum needed to maintain balanced economy. D i f f i c u l t to measure - some increase may be needed* Short-run v a riatio ns met by advances to member banks. Treasury bill rates and When banks do not need to borrow, evidence of la x money situatio n When borrowings induce undue liq u id a t io n of c r e d it , evidence of undue stringency. nember bank borrowings Would be r e fle cte d in money r a t e s , before r e fle c t io n in credit expansion or contraction. R e la tio n of borrowings and money rates. A ffected also by d is t rib u tio n among banks of reserves, borrow ings, and loan demands* Considerable day to day s h ift in g . Federal Reserve intervention needed only in case of these extreme s it u t io n s . Problems for 195>2 4 To meet Treasury d e f i c i t - I or 5> b i l l i o n for whole year 9 b i l l i o n f o r la st eight months Borrowingneeds probably over 10 b i l l i o n for next 8 months (includ in g redemptions of bonds) Probably b b i l l i o n or more from corporations Ilaybe some from in d iv id u a ls and in stitu tio n s Banks and Federal Reserve need to buy some - have decreased 2-1/2 b i l l i o n so f a r t h is y e a r . Large volume of new issu es of sec urities Corporate issu es orobably more than la s t y ear. State and l o c a l gDvernment issues s t i l l large Mortgage demand expected to decrease but may not* probleras for 195>2 (continued) Consum er c r e d i t -17- a q u e stio n - ? B u s in e s s c r e d i t s h o u l d b e l e s s more t a x a c c r u a l s . t h a n l a s t y e a r - l e s s in v e n t o r y e x p a n s i o n , Some net increase Some f u r t h e r e x p a n s i o n i n money s u p p ly - s h o u l d b e l e s s th a n l a s t y e a r * Much depends on Treasury's ability to borrow from individuals and institutions• Will need to compete against other demand - perhaps strong ones. The meeting adjourned at k P.M. -18ON MAY 2 0 , 1 9 5 2 , AT 1 0 :3 0 A . M . , THE FEDERAL ADVISORY COUNCIL HELD A JOINT MEETING WITH THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING, WASHINGTON, D .C . ALL MEMBERS OF THE COUNCIL WERE PRESENT EXCEPT MR. N . BAXTER JACKSON. MR. HENRY C . ALEXANDER SERVED AS ALTERNATE FOR MR. JACKSON. THE FOLLOWING MEMBERS OF THE BOARD OF GOVERNORS WERE PRESENT: CHAIRMAN MARTIN, GOVERNORS SZIMCZAK, EVANS, POWELL, MILLS AND ROBERTSON. MR. CARPENTER, SECRETARY OF THE BOARD, AND MR. MERRITT SHERMAN, ASSISTANT SECRETARY OF THE BOARD, ALSO WERE PRESENT. WHAT ARE THE BUSINESS AND ECONOMIC PROSPECTS OVER THE NEXT SIX MONTHS? WHAT SUGGESTIONS DOES THE COUNCIL HAVE WITH RESPECT TO SYSTEM CREDIT POLICIES DURING THAT PERIOD?____________________________________________________________ Brown reads item 1 of the agenda and the conclusions of the Council, as expressed in the Memorandum to the Board attached. The members o f the Council are inclined to be more p e s s im is tic about the business and economic outlook than Dr. Woodlief Thomas, who d iscussed the subject w ith the Council yesterday. The Council believes b usin ess w i l l d ecline somewhat in the months immediately ahead. A moderate decline would probably be economically healthy. The Open Market operations have been conducted w ith great s k i l l * Martin. I f the in f l a t io n a r y pressures return, would the Council recommend reactivating Regulation W , or th e Voluntary Credit R estrain t program, f i r s t * Brown rep lies that speaking f o r h im s e lf, he would reactivate the Voluntary Credit Restraint program f i r s t . There i s a large supply of household d urab les, and Regulation W would not b e so important at f i r s t . Powell. handled? In view o f B ro w n 's comment, how should the finan ce companies be The fin an ce companies were a "s t i c k y " spot in the Voluntary Credit Restraint program. Powell took the view that the fin an ce companies were re s tr ic te d ty Regulation W in the Voluntary C redit R e stra in t program. Davis believes the fin a n c e companies w i l l tend to regulate themselves and w i l l n°t go too far on w eakening term s. Powell. We are, of course, ta lk in g i n a vacuum in which the immediate prospects of reactivating R eg ulatio n W or the Voluntary Credit R estrain t program are remote. -19Martin thinks the public and many Congressmen are so convinced that the Voluntary Credit Restraint program was an outstanding success that they wonder whether Regulation W could not be made voluntary too* Some of these people believe that Regulation W expresses a desire of the Board to control the economy* Fleming b elieves i t might be advisable fo r Martin to appear before the House committee and urge the extension of the Defense Production Act as i t relates to banking and credit* Brown b elie v e s that authority fo r the Voluntary Credit Restraint program and Regulation W should be extended* He i s not so certain that i t would be advisable to extend Regulation X or the control over prices and wages. (Fleming makes some off-the-record comments)• Martin asks whether any member of the Council believes there w i l l be a major upturn or a serious decline in the economy. Loehead Martin expects a d e c lin e , but not a major downward trend. asks how much of the concern about the business outlook i s due to the coming e l e c t io n . Loehead b e lie v e s the economic situation would be worse i f there were no election in the o f f i n g . B e a ls . The bankers are div id ed into two groups. The u lt r a conservative bankers are very p e s s im is t ic , and they expect the decline to grow more se rio u s. The other group b e lie v e s the present situ atio n i s one of l e v e llin g o f f and i s not a major d e c l i n e . district i s good. Crop prospects are good. Department store b usiness in his I t i s d i f f i c u l t to t e l l to what extent the views on the business outlook are colored by p o l i t i c a l o p inions. The s it u a t io n i n D i s t r i c t 1 1 i s su b sta n tially sim ilar to that described by Beals i n his d i s t r i c t . However, the larg e st cash "c ro p 11 in D i s t r i c t 11 i s o i l . The d is t r ic t i s now g etting r a i n s . Department store sales are u p , but management tends to be p e s s im is tic because p r o fits are not so good. Business b e lie v e s there will be a change i n A dm inistration and so is in c lin e d to look at the election -20 outlook o p tim istic ally . There i s no unemployment in the d is t r ic t , and i t is d iffic ult to h ire people. Lochead asks whether R ay's bank is open on Saturday. Ray reports that they are open u n t il noon on Saturday. Lochead r e p lie s that being open on Saturday may make i t more d i f f i c u l t to get employees. Ringland states that bankers and business men in his d is t r ic t are not o p tim istic . ; Loans in his b an k, which i s the largest bank in the d is t r i c t , are o ff f i f t e e n per c e n t . Gund. There i s a fe e lin g i n his d is t ric t that there w ill be some business decline, but that i t w i l l not go too f a r . Vance A lexan d er. Even with high priced cotton, costs are going u p , so that profit margins are narrowed. As a whole, the fe e lin g in his d is t r ic t i s that they can look forward to good business in the South* WHAT EFFECT IS REGULATION X HAVING IN THE ECONOMY AT THE PRESENT TIME AND WHAT, IF ANY, ACTION SHOULD THE BOARD TAKE WITH RESPECT TO LIBERALIZATION OR SUSPENSION OF THE REGULATION?________________________________________________ Brown reads Item 2 o f the agenda and the conclusions of the Council, as expressed in the Memorandum to the Board attached* The Council does not know whether there are any le g a l problems involved i f Regulation X is suspended. (There was an off-the-record discussion regarding Veterans' Administration loans). Evans thinks that Regulation X has had a restraining influence on Veterans' Administration lo a n s . Evans would be glad to have the opinions of the Council regarding housing in th eir respective d is t r i c t s . Lochead reports there are a number of higher priced apartments av ailable in his a re a . Ray. There i s no housing shortage in D a ll a s . There are about 8 ,0 0 0 unoccupied apartments, according to the real estate people. overbuilt. i The area appears B e a ls . The situation Ray describes is not true in Beals1 d is t r ic t * The older houses are stick y , but small houses are selling* Gund. There is a housing shortage which w i l l probably be corrected by F a l l . The higher p riced and older houses are sticky* Bucklin. There is some surplus housing in his d is t r i c t . Smith thought the housing situation was sticky in his d is t r i c t , but a survey did not reveal th is condition. However, he thinks the housing s itu atio n i s reaching a point where the market w i l l be saturated* Davis reports that i n his d is t r ic t the sm aller, lower p ric ed houses are se llin g , but higher p riced houses are not s e llin g , in part because of Regulation X . He believes housing has reached the saturation point* Henry Alexander reports that he is not thoroughly fa m ilia r w ith the housing situation because he has not made a special study of i t . However, he believes that the scramble fo r apartments is over, and that the supply of housing units i s more nearly equal to the demand now. Vance A le xan d er. Fewer higher p riced homes are being b u i l t in his d is t r ic t * Building m aterials are i n ample supply, and the need fo r ad d itio n al housing i s much less pressing* Ringland* Many companies i n the housing industry which were borrowing are now out of debt* Brown. Housing i s tending to reach a saturation point* I n Chicago proper, houses are s t i l l being b u i l t and s o ld , but the sa le is slow and the market i s less active* THE BOARD WOULD APPRECIATE ANY COMMENTS THAT THE COUNCIL MIGHT WISH TO MAKE RELATING TO THE BANK HOLDING COMPANY LEGISLATION DISCUSSED IN CHAIRMAN M ARTIN'S RECENT LETTER TO CONGRESSMAN SPENCE, CHAIRMAN OF THE HOUSE BANKING AND CURRENCY COMMITTEE. A COPY OF THE LETTER IS ATTACHED. Brown reads Item 3 of the agenda and the conclusions of the C o u n cil, as expressed in the Memorandum to the Board attached* He states that the Council cannot discuss bank holding company l e g is la t io n on the b asis o f general p r in c ip l e s . The Council has on many occasions recommended the passage o f bank holding company -221 eg i slat ion* A great deal of work was done on b i l l S. 2318, which everyone approved, except one important holding company* I t is necessary actually to see proposed leg isla tio n i n order to pass upon i t intelligently* Brown is inclined to believe that the te st set up fo r ownership in Chairman M artin's letter to Congressman Spence i s not a satisfacto ry t e s t . Loehead states that the most important point to him is the question of the ownership of other busin esses, that i s , non-bank businesses. the one of expanding over state boundaries. The next question is I t is probable that the independent bankers w i l l not have much money to promote bank holding company le g isla tio n un til some s p e c ific le g is l a t io n i s presented. M artin asks Robertson to comment on the subject, as he has studied i t a great deal* Robertson* a branch bill® le g is l a t io n . The Spence B i l l was an attempt to tie a holding company b i l l to I t i s f e l t that a l l agencies have to be behind bank holding company Consequently, the Board and its sta ff worked out a set of proposals as the b asis f o r l e g i s l a t i o n . They believed that a ll existing laws fa ile d to cover (l) u n restricted expansion., and (2) the acquisition of non-banking businesses. The proposals are made to cover the present situation , and not to anticipate developments which are years in the fu tu r e . w ill f i n a l l y ap p ly . No one can say now to whom the b i l l The Federal Reserve System is not interested in who administers any bank holding company law which may be enacted. The proposal for ownership would cover a l l bank holding companies now. Loehead asks how a certain large holding company would be covered with its low percentage o f ownership in many banks. Robertson states that the p articular holding company would, as of a certain date, be d eclared a holding company, as the test of ownership set up in the proposals covers th at company. considered a holding company. This particular company would thereafter be -23Rin^land states that most of the agitation for bank holding company legislation comes from two Independent Bankers Associations* These associations are not only against holding companies, but they are against "big” banks generally. Ringland believes the power under such legislation should not be in both a federal agency and the state banking supervisory authorities, as the state authorities have frequent turnovers in office. Robertson replies that the power would be in the federal agency, but that the states would have the right to legislate reserved to them. (Lochead and Ringland discuss off-the-record how bank holding company legislation would meet a specific situation) • Brown cites illustrations which show that it is necessary to have a definite legislative proposal < > if discussion on this subject is to be worthwhile. Szymczak believes there are three Important points to keep in mind. First, it is advisable to get some legislation, or later a bad bill may be passed; two, it is advisable to get support from all interested holding companies, bankers associations, and other groups which are concerned with the legislation; three, it is advisable to get agreement of the federal banking agencies. THE BOARD W IL L ALSO BE GLAD TO CONSIDER W ITH THE COUNCIL ANY QUESTIONS WHICH THE MEMBERS OF THE COUNCIL MIGHT HAVE W IT H RESPECT TO THE STUDY OF THE CHECK COLLECTION SYSTEM BEING UNDERTAKEN UNDER THE AUSPICES OF THE FEDERAL RESERVE SYSTEM W IT H THE COOPERATION OF THE AMERICAN AND RESERVE C ITY BANKERS ASSOCIAT I O N S . ______________________________________________________________________________ Brown reads Item U of the agenda and the conclusions of the Council, as expressed in the Memorandum to the Board attached. Brown emphasizes that the Council understands that the Board is not interested in anything but increasing the efficiency of the check collection system and lowering costs. In the past there have been those in and out of the Federal Reserve System who believed in doing away with correspondent banking relationships* but Brown does not believe the present Board holds those views. Martin states the Board is pleased with the Council's comments on this item and agrees with the statements expressed as the view of the Board regarding the purpose of the study* Mills. The Conference of Federal Reserve Bank Presidents suggested studying this subject* Preliminary plans have been made, and it is hoped soon to have questionnaires submitted to the principal interested banks through the American Bankers Association, the Association of Reserve City Bankers, and the Federal Reserve System* A coordinating engineer is to be brought in* is to be covered* An enormous field Mills reads the statement of the Board which indicates that the purpose of the study is to improve the efficiency of the check collecting system and not to encroach upon correspondent banking relationships* The Federal Reserve System will bear the expense of the coordinating engineer* Vance Alexander understands that the American Bankers Association Administrative Committee voted at its recent meeting at White Sulphur Springs that the coordinating engineer was not to have a vote on the committee which is to study the check collecting system* M-nig replies that this is the kind of information which the Federal Reserve System wishes to have as its proceeds with the study* WHAT LEGISLATIVE OR OTHER ACTIONS MIGHT BE TAKEN TO IMPROVE THE CAPITAL POSITIONS OF BANKS AND ENCOURAGE INCREASES IN BANK CAPITAL INCLUDING ACTIONS THAT MIGHT BE SUGGESTED BY THE STUDY OF EXCESS PROFITS TAXES OF COMMERCIAL BANKS? FOR EXAMPLE, WHAT SHOULD BE THE ATTITUDE TOWARD THE ISSUANCE OF PREFERRED STOCK OR CAPITAL DEBENTURES BY MEMBER BANKS AS A ______________ MEANS OF RAISING NEW CAPITAL? ■ Brown reads Item £ of the agenda and the conclusions of the Council as expressed in the Memorandum to the Board attached* Brown says the Council is familiar with the proposal of the Special Committee on Ehccess Profits Tax of the American Bankers Association, and he assumes the Board is familiar with this proposal* Erown states he will be pleased to give the Board the wording of the proposal, if the members of the Board do not have it . He feels that many banks in the excess profits tax are not making risk loans they would normally make* they make money, the excess profits tax takes a large sum? if they lose money, they do not gain proportionately and the loss may not be taken for years* The If -22Council hopes the Board will lend their support to the legislation. Preferred stock is not the most satisfactory method of raising capital, particularly with a sinking fund. Fleming understands that the American Bankers Association proposal has a good legislative possibility of acceptance this year. Fleming believes public psychology might be bad if banks had to issue preferred stock, in view of the fact that preferred stock was last issued in the depression of the 1 9 3 0 's . Fleming hopes the Board may support the proposed legislation. Powell reports that i f all excess profits taxes had been turned back into capital, it would take fifty years of excess profits taxes to increase the capital of banks one per cent. Powell believes the problem is a much larger one. The banks affected by the excess profits tax are small in number. Nor is there any clustering of banks with earnings just below where they would have to pay an excess profits tax® Vance Alexander asks Powell how he obtains these latter figures. A bank may turn down a borrower simply because it would subject the bank to an excess profits tax and there would be no figures to reveal that situation. Powell. The Board could not know such facts, but the Board does know there is no clustering of banks now just below the excess profits tax level. (Martin comments off-the-record on the views of one or two Congressmen on the excess profits tax). Martin does not know whether it is wise for the Board to back any tax proposal just at the close of a session. His opinion, as an individual, is somewhat skeptical. Fleming hopes the Board will continue the study, as he believes 19^2 will give more evidence of the need for relief from the excess profits tax. IX) THE MEMBERS OF THE COUNCIL HAVE ANT COMMENTS ON OR SUGGESTIONS W IT H ___ ____________ ___ RESPECT TO THE PATMAN HEARINGS? _ _ _ _ _ _ _ _ _ -2 6 Brown reads Item 6 of the agenda and the conclusions of the Council, as expressed in the Memorandum to the Board attached* Brown states that the position of the Board and the Federal Reserve System is now stronger than it was before the Patman hearings# All members of the Council are opposed to the "super duper" Committee or Council idea suggested at the Patman hearings* Martin believes that the Patman Subcommittee hearings may be only the beginning of the discussion, and the Board would like very much to discuss with the Council what steps should be taken after the final Patman report is published. The meeting adjourned at lsO£ P.M. # * -x- -* -* * The next meeting of the Federal Advisory Council will be October 5, 6 and 7, 1952.
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