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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY C O U N C IL N ovem ber 13, 1949 The fourth statutory meeting of the Federal Advisory Council for 1949 was convened in Room 932 of the Mayflower Hotel, Washington, D. C., on Sunday, N ovem ber 13, 1949, at 2:00 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 A complete list of the items on the agenda and the conclusions of the Council are to be found in the Confidential Memorandum to the Board of Governors from the Federal A dvisory Council, which follows on pages 41, 42 and 43. The meeting adjourned at 5:38 P.M. HERBERT V. P R O C H N O W Secretary. 39 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL November 14, 1949 At 10:00 A.M., the Federal Advisory Council reconvened in Room 932 of the May flower Hotel, Washington, 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 41, 42 and 43, listing the agenda with conclusions reached by the Council. The Memorandum was delivered to the Secretary of the Board of Governors at 12:35 P.M. on November 14, 1949. The meeting adjourned at 12:20 P.M. HERBERT V. PROCHNOW Secretary. 40 CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT M EETING ON NOVEMBER 15, 1949 1. What is the Board’s opinion on the proposal now being urged to make currency redeemable in gold coin, and, specifically, what is the Board’s opinion of the Reed Bill now before Congress which is designed to accomplish that purpose? While the Council does not consider it feasible or desirable at the present time to make currency convertible into gold coin, it believes convertibility is a desirable objective of our monetary policy. The Council also believes it would be advisable to have a thorough study made to determine what preliminary steps should be taken toward this objective. In view of continuing public uncertainty regarding the power of the Secretary of the Treasury, one of the preliminary steps should be the revision of the Gold Reserve Act of 1934 to make it clear that the power to change the price of gold resides only in the Con gress. Facing as we are the danger of a creeping inflation, the right to redeem currency in gold coin on demand would act as some check on a possible further deterioration in the purchasing power of the dollar. 2. The Board would like to have the current views of the members of the Council regarding probable economic and business conditions during the next three to six months. The Council believes that production and employment will remain at a high level in the months immediately ahead. There will probably be some decline in farm incomes and a decrease in private capital expenditures, but Federal deficit financing, insurance and bonus payments to veterans, capital expenditures by states and municipalities, and in creasing industrial costs due to wage increases and pension programs (which will make for higher prices) will probably result in an over-all inflationary pressure in the economy. 3. What suggestions does the Council have to make regarding System credit policy during that period? With the prospect for active business and with the inflationary forces now evidencing themselves, the Council believes the policy of the Reserve System should be toward firmer money. Through the use of open market operations and the re-discount rate, the Reserve System has ample powers to meet presently foreseeable problems. 4. Does the Council have any further comments to make with respect to the De cember financing? The viewpoint of the Council is the same as that expressed in its memorandum to the Board on September 20, 1949, which was as follows: “The Council believes that the Treasury’s announcement that it proposes to issue notes to refund the bonds coming due in December is a step in the right direction. As the program develops, it should include refunding into both inter mediate and longer-term issues. Too large a proportion of the Federal debt is now in short-term securities, especially when considered in connection with the amount of savings bonds outstanding and with the steadily shortening maturi ties of the present long-term issues.” 41 5. The Board has been asked to submit to the President the legislative program affecting the Federal Reserve System which the Board desires to have considered at the forthcoming session of Congress. The formulation of the Board’s views on that matter is now in process and it would be glad to have any advice or recom mendations that the Council might wish to make in that connection. The Council is not advised as to what legislative program the Board may desire to have considered at the forthcoming session of Congress. However, the Council has discussed with the Board various legislative proposals on different occasions. The Council has previously approved the following legislative proposals: (a) Bank holding company legislation—The Council has on many occasions urged the passage of bank holding company legislation, and is now in favor of the passage of such legislation. (b) Capital requirements for admission of state banks to membership in the Federal Reserve System, and for authority over the establishment of out-of-town branches of state member banks— In its memorandum to the Board on September 20, 1949, the Council favored H.R. 5749. The Council is still of the same opinion. (c) Purchase by the Federal Reserve Banks of government obligations directly from the Treasury— In its memorandum to the Board on March 11, 1947, the Council made the following statem ent: “The Council recommends that authority be given for a period of three years to make direct purchases up to 5 billion dollars from the Treasury. The Council believes that it would be advisable to review the matter again at the end of three years to determine if there had been any abuse of the power and also to determine whether the power should be further continued or be permitted to lapse. The Council cannot but be mindful of the fact that historically and in various countries direct borrowing by a government from the central bank has been a common vehicle of inflation.” The Council now recommends a renewal of this authority for a period of three years. (d) Modification of limitation on the cost of Federal Reserve Branch buildings—The Council in the past favored, and now favors, repeal of paragraph 9, section 10, of the Federal Reserve Act. The Council has expressed opinions on other legislative matters, as follows: (1) Section 13b— In connection with Section 13b of the Federal Reserve Act, the Council stated in its memorandum to the Board on September 20, 1949: “The Council is opposed to two government agencies having lending or guarantee powers in the same field and therefore would not favor giving additional guaran teeing powers to the Federal Reserve Banks in the industrial field.” The Council is still of the same opinion. (2) Consumer credit— The Council has in the past stated that it does not believe the Board should in time of peace have powers over consumer credit. The Council remains opposed to the granting of such powers to the Board. 42 (3) Possible changes in the law with respect to bank reserves— (a) The Council, as stated in its memorandum to the Board on September 20, 1949, is “unanimously of the opinion that neither the Board of Governors nor any Federal agency should have authority to fix the reserve require ments of non-member banks.” (b) The Council believes that changes in reserve requirements should be used rarely and only for adjustment to basic changes in the monetary situation. In dealing with the question of bank reserves, it has often been forgotten that to build and preserve a sound banking system banks must have earn ings sufficient to enable them to accumulate capital and pay adequate divi dends. There should, therefore, be an upper limit on reserve requirements. The Council believes that the limits now in the law are as high as are toler able, and give the Board sufficient power, with their other present instru ments of policy, to deal with any foreseeable situation. 6. Are there any matters in connection with the questionnaires sent out by the Douglas subcommittee of the Joint Committee on the Economic Report that the Council would like to discuss with the Board? Two members of the Council have been asked to testify before the Douglas subcom mittee of the Joint Committee on the Economic Report. It is not possible in this written memorandum for the Council to express an opinion on all of the questions in the question naire of the Douglas subcommittee. Members of the Council will be pleased to comment on any of the questions, should the members of the Board desire their viewpoints. 43 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL November 14, 1949 At 2:20 P.M ., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Messrs. 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. President Brown presented Mr. Frank Garfield of the staff of the Board of Governors, who spoke on “Economic Prospects.” HERBERT V. PROCHNOW Secretary. 44 M IN U T E S OF JOINT CO NFERENCE OF TH E FEDER AL ADVISORY COUNCIL A N D TH E BOARD OF GOVERNORS OF TH E FEDER AL R ESERV E SYSTEM November 15, 1949 At 10:45 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 M. S. Szymczak, Ernest G. Draper, R. M. Evans, James K. Vardaman, Jr., and Lawrence Clayton; also, Mr. S. R. Carpenter, 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, 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. President Brown stated for the record that the Council approved unanimously the report of its Sub-committee on F.D.I.C. assessments, which is found on pages 36, 37 and 38, of these minutes. The Chairman of the Board was given a copy of the statem ent. President Brown then 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 41, 42 and 43, of these minutes. Chairman McCabe reported that all members of the Board agreed with his statement on gold as given in his reply to the questionnaire of the Douglas Sub-committee, and that he believes there is substantial agreement between the Council and the Board on this subject. Dr. Burgess replied that while there is agreement as to the present situation, there is a real difference as to the long term, the Council believing that the right of convertibility should eventually be granted to our citizens. President Brown then read the second agenda item and the conclusions of the Council as recorded in the Confidential Memorandum previously mentioned. President Brown read the third agenda item relating to credit policy, and the con clusions of the Council in the Memorandum which is a part of these minutes. Chairman McCabe stated that the effects of devaluation in this country were almost nil, and much less than expected. President Brown then read the fourth item of the agenda and the conclusions of the Council as given in the Confidential Memorandum previously cited. Chairman McCabe asked what the Open Market Committee should do. Dr. Burgess replied that the Federal Reserve System should sell some bonds. 45 President Brown read the fifth item on the agenda and the conclusions of the Council as expressed in 5a in the Memorandum mentioned above. Chairman McCabe inquired if the Council would support the holding company bill when the hearings start, perhaps early in the next Congress. He pointed out that the Coun cil at its meeting with the Board in September had made one exception on the question of exempting wholly-owned trust companies. President Brown replied that he believed the Board could rely on the support of the Council on this legislation. President Brown then read item 5b and 5c as given in the Memorandum mentioned. In connection with 5c, Mr. Fleming suggested it would be helpful for the Council to know what use the Federal Reserve System had made of its right to purchase government obli gations direct from the Treasury. Chairman McCabe agreed to furnish the information. President Brown then read item 5d as given in the Memorandum. A lengthy discussion on Section 13b of the Federal Reserve Act followed between members of the Council and the Board. President Brown read item 5(2) as given in the Memorandum. President Brown asked if there were any other proposals the Board intended to sub mit to Congress. Chairman McCabe replied that the Board had not prepared its full pro gram, but that some ideas are mentioned on page sixty-one of the printed reply of the Chairman to the Douglas Sub-Committee. President Brown then read the sixth agenda item and the conclusions of the Council as given in the aforementioned Confidential Memorandum. Governor Szymczak stated that the establishment of a Monetary Commission may be one result of the work of the Douglas Sub-Committee. Dr. Burgess inquired if the Board still favors a Monetary Commission. Chairman McCabe replied that the Board was on record for it. It was agreed that the next meeting of the Council would be held February 19-21, 1950. The meeting was adjourned at 1:20 P.M. HERBERT V. PROCHNOW Secretary. 46 NOTE: This transcript of the Secretary1s notes is not to be regarded as complete or necessarily en tirely accurate. The transcript is for the sole use of the members of the Federal Advisory Council. The concise 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 November 13, 19?9, at 2 P.M., in Room 932 of The Mayflower Hotel, Washington, D.C. All members of the Federal Advisory Council were present. The Council approved the Secretary* s notes for the meetings of the Council held in May and September 1949. REPORT OF THE SUB-COMMITTEE OF THE FEDERAL ADVISORY COUNCIL ON FDIC ASSESSMENTS._________________________________ __ E . E . Brown commends the sub?*committee for its- report. Council unanimously approved the report. The Fleming reports briefly off-the-record on the present status of the various proposals regarding FDIC assessments and coverage. WHAT IS THE BOARD*S OPINION ON THE PROPOSAL NOV BEING URGED TO MAKE CURRENCY REDEEMABLE IN GOLD COIN, AND, SPECIFICALLY, WHAT IS THE BOARD* S OPINION OF THE REED BILL NOW BEFORE CONGRESS WHICH IS DESIGNED TO ACCOMPLISH THAT PURPOSE?________ E . E . Brown asks Atwood to comment on this item on the agenda. Atwood states that a director of his bank had raised the question with him. E . E . Brown. Do any members of the Council believe it would be desirable to permit convertibility into gold coin at once? Brown calls attention to the address which Burgess made at the American Bankers Association convention at San Francisco on October 31, 1949. In that address Burgess stated, "There is a group of people today asking for the restoration of the full gold standard Immediately in the United States. Today we have a dollar that is convertible into gold for foreign governments and central banks; these people are asking for the saane rights to hold gold for our own citizens. In principle I believe these people are right, though I think they are wrong in their timing, and overem phasize the immediate benefits. The gold standard is an Inter national system and calls for basically sound money in many countries before it will work. When European and world monetary reconstruction has restored free convertibility at least among the principal currencies, the time will be ripe to readopt the principle of an unrestricted gold standard here. If you try to force the pace by resuming gold payments before the foundations are laid through government policies on the budget, on credit, and on prices, the gold released may simply move out into hoards and become the tool of the speculator. Gold payments are only part of the building of sound money, and they are in a sense the capstone of the arch. If you put on the capstone before the structure is sound, the arch collapses. Gold payments are the seal of approval of good money." E. E. Brown says that the Council may not favor immediate convertibility, although it may favor it for the long pull. Atvood states that the director of his bank reviewed a re cent Treasury statement which showed an increase In the deficit and other trends which were not reassuring in relation to our fiscal policies. The director believed it was important to per mit convertibility so United States citizens could convert part of their property into gold. If enough citizens converted, it would warn the government that the people did not have confidence in the fiscal policies of the government. E. E. Brown asks each member of the Council for an expression of opinion* Odlin favors convertibility eventually, but believes it is not now practicable* Fleming believes it would be untimely at present. Woods agrees with the comments Burgess made in his address. He does not believe convertibility is desirable at present. Congdon is inclined to believe it is not desirable now. Burgess states that in view of continuing uncertainty regarding the power of the Secretary of the Treasury, the Gold Keserve Act of 193^ should be revised to make it clear that only the Congress has the power to change the price of gold. Clarification of the present law is a preliminary step toward convertibility. Potts does not believe this is the time to permit converti bility. He favors it for the future* Kemper favors it for the future and believes the sooner it comes the better it will be. However, at the moment it is per haps not practical in view of worUd conditions • Kemper would favor planning for it now as a sound objective of our monetary policy. Hemingway believes the Council might state that it favors convertibility eventually and would recommend a study to deter mine what steps are necessary to accomplish it* J . T . Brown does not think it would be practical immediately, but It is highly desirable to take the steps necessary to accom plish it eventually. - 3 - Spencer thinks there would be a run on gold If converti bility were permitted now. This would be especially true if people thought the gold price might be increased. Converti bility is not desirable immediately, but It is a sound future objective. Atwood calls attention to the fact that we are in a time of peace and prosperity and are running a substantial Federal deficit. He agrees with Hemingway that a study should be made to determine what steps are necessary to bring about converti bility. Burgess agrees with Hemingway1s suggestion. In principle Burgess favors convertibility as one of the limitations on a central bank. The Board of Governors continually asks for re moval of limitations and more powers. Gold convertibility is one of the essential parts of a sound monetary policy. E. E. Brown. The Council may state that it is not feasible or desirable at the present time to make currency convertible into gold coin. However, the Council believes It is highly de sirable constantly to work toward a policy of making currency convertible into gold coin at the earliest time international conditions will permit. In view of the continuing public un certainty regarding the power of the Secretary of the Treasury, one of the preliminary steps should be the revision of the Gold Reserve Act of 1934 to make it clear that the power to change the price of gold resides only in the Congress. Odlin does not think it would be practical if it were done immediately. Atwood asks whether there might be a run on gold. Burgess states that it is very possible that there might be a run on gold. Hfimingwav. Recognizing that convertibility Is a desirable objective, definite steps should be taken to work for it* E . E. Brown believes the country is in a creeping inflation, and convertibility would tend to stop it. The Council might state that it believes conversion of currency into gold coin is a desir able step to prevent a steady deterioration in the purchasing power of the dollar. THE BOARD WOULD LIKE TO HAVE THE CURRENT VIEWS OF THE MEMBERS OF THE COUNCIL REGARDING PROBABLE ECONOMIC AND BUSINESS CONDITIONS DURING THE NEXT THREE TO SIX MONTHS.___________________ E. E- Brown asks the members of the Council for their views. Odlin states that inflationary elements may be in the ascend ancy in the immediate future, but he is disturbed about the longer tenn. - 4 - Fleming.We have had an inventory deflation, but have now moved out of it. With the large amounts of money which will probably be spent in the months immediately ahead, plus the inflationary effects of the coal and steel strikes, business should be active* Woods. Although inflationary elements are at work, he believes there may be some falling off in prices in the next six months. The cotton yield has been bountiful. The last estimate gave Texas 5*6 million bales, or about 38 per cent of the total for the country. Oil production is up. The wheat crop has been large. Business in his district is generally good. Congdon. Business is comparatively good in his area with the settlement of the strikes. The automobile and tire indus tries look good. He is inclined to expect rather good business in the months immediately aiiead. Potts. His district was probably as hard hit as most areas because of the steel and coal strikes. There are some sore spots because of the devaluation of foreign currencies, with the loco motive industry as one example where foreign competition ha3 become more difficult. Kemper. The outlook is for an upturn in volume. trade is better. Business generally looks good. Retail Hemingway> Conditions are spotty in his district. Business is somewhat lower in volume and considerably lower in profits than it was a year ago. J. T. Brown. His district has little cotton compared to the past. Retail sales are up, but profits are down, which indicates inventories are being sacrificed. He trusts that the situation in his district does not indicate the pattern. S-pencer. Retail sales are beginning to increase. The Christmas trade should be substantial. Manufacturing has started to pick up. The shoe industry is in better condition, and tex tiles are better. He expects a large volume of retail trade and manufac turing. Atwood. Farm income will be down this year over last year, but the farmer is still prosperous. Business generally is very good and is better than any year except possibly 1948. Burgess. It looks like good business in the months imme diately ahead. Private capital expenditures may decline somewhat, but veterans1 Insurance and bonus payments, as well as deficit financing, give an overall inflationary effect. E . £. Brown expects good business. The steel strike may mean some readjustment downward for some weeks. However, the steel companies are swamped with orders. Retail trade is down - 5 somewhat, b ut b u s i n e s s w i l l p r o b a b l y be active over the n e x t six months. P r o f i t s m a y b e d o w n a little, b u t no real decline in business appears p r o b a b l e in the m o n t h s i m m e d i a t e l y ahead. The Council m a y s t a t e t h a t the v o l u m e of p r o d u c t i o n a n d employment rema i n high, a l t h o u g h there m a y be some s h a d i n g of profits. Deficit f i n a n c i n g a n d w a g e i n c r e a s e s in the f o r m of p e nsions m ay cause i n f l a t i o n a r y p r e s s u r e s . The r e s u l t is that business will p r o b a b l y be a c t i v e i n the n e x t three to six m o n t h s . Fleming. The Council may say that the ultimate effects of devaluation are not yet clear. WHAT SUGGESTIONS DOES THE COUNCIL HAVE TO MAKE REGARDING SYSTEM CREDIT POLICY DURING THAT PERIOD?_______________ Burgess. The Federal government may have a deficit of over $5 billion. Heavy bonuses for veterans, and large expenditures by state and local governments are all being made possible through financing at extremely low interest rates. E. E. Brown. With deficit financing and higher prices, in terest rates should not be lowered. (At this point there was an off-the-record discussion on interest rates.) Burgess. With greater business activity, large expenditures by national, state and local governments, a substantial govern ment deficit and heavy spending for veterans1 payments, sound central bank policy requires higher interest rates. E. E. Brown. With a large government deficit, with insur ance and bonus payments to veterans and with wage increases through pensions, the Council may say that it believes the policy of the Board and the Open Market Committee should not be one of cheapening money, but of firming interest rates. Burgess. The inflation comes from the government. E. E. Brown. The Board has ample- powers over reserves. The System should use open market operations and the rediscount rate, and these instruments are ample to meet presently forseeable problems. DOES THE COUNCIL HAVE ANY FURTHER COMMENTS TO MAKE WITH RESPECT TO THE DECEMBER FINANCING? __________________ Fleming states that in answer to this question the Council might repeat the comments which it made to a similar question in the September meeting. E. E. Brown says the Council may say that its attitude is the same as that expressed in September as follows: f,The Council believes that the Treasury1s announcement that It proposes to issue notes to refund the bonds coming due in December is a step in the right direction. As the pro gram develops, it should include refunding into both inter - 6 - mediate and longer-term issm=>=. m of the Federal debt is nov in ^hort-te™8® a P o r t i o n especially when considered in oZ L h ? securities, of savings bonds outstanding and^ith ?b W1? 1 the amount ening maturities of the pres ent^long- term ! £ £ * Sh°rt' THE BOARD HAS BEEN ASKED TO SDBMTT <rn m lATXVE PROGRAM AFFECTING THE FT O e L l r ^ f p ^ ! ^ NT ™ H»ISBOARD DESIRES TO HAVE CONSIDERED SYSTEM WHICH THE CONGRESS. THE FORMULATION OF THE ROA^.? MIWG SESSION OF IS NOW IN PROCESS AND IT WOULD BE 0K MATTER S S f I0KS ^ ^ C0TOCIL s p e c i T i f i t e m f o r f l g S l a S ? 11 a L ir g L g * ^ t0 eX press l t s °P ln io n Burg S3 3 states he will testify shortly before .thP of the Joint Congressional Committee on the Economic Report? E t,E.Bro-gn says that he will testify later. For the infor mation of the Council, he expects to testify as follows: (l) He vill comment on the overall relationship of the Treasury and the Federal Reserve System. He believes the central bank must be responsive and go along in general with the administration in power, but the central bank must have an independent status which will enable it to offer strong objections when necessary. The Board should not be a department of the Treasury. The Council has expressed itself on this, and Brown is in agreement with the Council^ previous statement. (2) Reserve requirements should be flexible. The upper limit should be at a point where banks can live and make a profit. The Board should not have powers that will permit the Board to put banks out of business. It is already impossible to sell bank stock, except at a price below its liquida ting value. He believes the Board has ample power over reserves now. (3 ) The Board should not have control over the reserves of non-member banks. The greatest restraint on arbitrary action of the Board is the power of a bank to leave the System. Burgess says that he will comment upon essentially ame points. He wishes to add that in varl^ % ^ ^ f ; “ ^ v e ?fauirethe state banking board has the power t S ^ Board Qf ments to keep them in line with those n x y Governors. v,-Tc fmiT’th Doint the idea that the E. E. Brown will state in hi some agenCy other than a examining of banks shou^ L bcomi3troller' s office has had the policy making agency. The Comptroxxe longest experience in examing bank Board of New York Woods asked Burgess whether the the 3ame as those of the State-must fix reserve r e q u i r e m e n t s , tne Federal Reserve System. - 7 - B u r g e s s replies that the Banking Board may use its own judgment* In connection with McCabe’s reply to the questionnaire of the Douglas Subcommittee, McCabe makes no reference to the fact that banks should have adequate earnings, Burgess thinks the might advise the President that the Board does not wish to recommend additional banking legislation and can get along satis factorily with present legislation, Board E . E . Brown states that the Council is already on record on legislative matters like Regulation W, authority over reserves of non-member banks, Section 13b, and bank holding company legis lation. Fleming thinks the Board should advise the Council what : legislative program it has in mind so the Council can discuss the program. J. T. Brown reports that the Board has sent a telegram to the Federal Reserve Bank of Atlanta asking for opinions on vari ous legislative proposals. J. T. Brown reads the list of legis lative items mentioned in the telegram. Congdon believes the Council should state specifically where it stands on various legislative proposals. E. E. Brown says that the Council may state that it is difficult to make specific comments to the Board when the Council does not know what legislative proposals the Board anticipates submitting to the President. However, the Council may state that in the past it has expressed opinions on various legislative pro posals, and it may then list the proposals. Burgess believes the Board would be wise if it did not ask for authority over the reserves of non-member banks. The Council should also emphasize that banks should be permitted to earn a living. The question of bank reserves is one of the most im portant. E . E . Brown. On the question of reserves, the Council may state that it does not approve giving the Board power over the reserves of non-member banks, and that it is opposed to any in crease in the reserve requirements of member banks. The Council may add that it would be pleased to consider any specific plan but would oppose any proposal if it necessitated an increase in the maximum reserves. The Council may also say that it has pre viously dealt with the matter of buying government securities directly and recommends at this time renewal of that power for three years. - 8 - ARE THERE ANY MATTERS IN CONNECTION WITH THE QUESTIONNAIRES SENT OUT BY THE DOUGLAS SUBCOMMITTEE OF THE JOINT COMMITTEE ON THE ECONOMIC REPORT THAT THE COUNCIL WOULD LIKE TO DISCUSS WITH THE BOARD_____________________________________ E. E. Brown. The Council may state that two of its members have been asked to testify before the Douglas Subcommittee. The Council cannot in a brief written memorandum express an opinion on all of the questions asked by the Douglas Subcommittee* Members of the Council will be pleased to comment on any of the questions, should the Board desire their viewpoints. The meeting adjourned at 5:38 P.M. THE COUNCIL CONVENED AT 10 A.M. ON NOVEMBER 14, 1949, IN ROOM 932 OF THE MAYFLOWER HOTEL, WASHINGTON, D. C. ALL MEMBERS OF THE FEDERAL ADVISORY COUNCIL WERE PRESENT. 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 November 15, 1949* The Memorandum vas delivered to the Secretary of the Board of Governors at 12:35 on November 14, 1949* It will be noted that each item of the agenda is listed vith the comments of the Council on the item. The meeting adjourned at 12:20 P.M. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON NOVEMBER 1$, 1949 1. What is the Board's opinion on the proposal now being urged to make currency redeemable in gold coin, and, specifically, what is the Board's opinion of the Reed Bill now before Congress which is designed to accomplish that purpose? IJhile the Council does not consider it feasible or desirable at the present tLme to make currency convertible into gold coin, it believes con vertibility is a desirable objective of our monetary policy. The Council also believes it would be advisable tc have a thorough study made to determine what preliminary steps should be taken toward this objective. In view of continuing public uncertainty regarding the power of the Secre tary of the Treasury, one of the preliminary steps should be the revision of the Gold Reserve Act of 1934- to make it cler-r that the power to change the price of gold resides only in the Congress. Facing as ire are the danger of a creeping inflation, the right to redeem currency in gold coin on demand would act as some check on a possible further deterioration in the purchasing power of the aolle*r. 2. The Board would like to have the current views of the mem bers of the Council regarding probable economic and business conditions during the next three to six months. The Council believes that production and employment will remain at a high level in the months immediately ahead. There will probably be some de cline in farm incomes and a decrease in private capital expenditures, but Federal deficit financing, insurance and bonus payments to veterans, ccpiti.l expenditures by states end municipalities, and increasing industrial costs due to wage increases and pension programs (which will make for higher prices) will probably result in an over-all inflationary pressure in the economy. 3. Uhat suggestions does the Council have to make regarding System credit policy during that period? Vith the prospect for active business and with the inflationary forces now evidencing themselves, the Council believes the policy of the Feserve System should be toward firmer money. Through the use of open market oper ations and the re-discount rate, the Reserve System has ample powers to meet presently foreseeable problems. 4. Does the Council have any further comments to make with respect to the December financing? The viewpoint of the Council is the same as that expressed in its memo to the Board on September 2 0 , 1 9 4 9 , which was as follows: randum "The Council believes that the Treasury's announcement that it proposes to issue notes to refund the bonds coming due in December is a step in the right direction. as the program develops, it should include refunding into both intermediate and longer-term issues. Too large a proportion of the Federal debt is now in short-term securities, especially when considered in connection with the amount of savings bonds outstanding and with the steadily shortening maturities of the present long-term issues." 5. The Board has been asked to submit to the President the legis lative program affecting the Federal Reserve System which the Board desires to have considered at the forthcoming session of Congress. The formulation of the Board's views on that matter is now in process and it would be glad to have any advice or recommendations that the Council might wish to make in that connection. The Council is not advised as to what legislative program the Board may desire to have considered at the forthcoming session of Congress. However, the Council has discussed with the Board various legislative proposals on different occasions. The Council has previously approved the following legislative proposals (a) Bank holding company legislation— The Council has on many occasions urged the passage of bank holding company legislation, and is now in favor of the pas sage of such legislation. (b) Capital requirements for admission of state banks to membership in the Federal Reserve System, and for authority over the establishment of out-of-town blanches of state member banks— In its memorandum to the Board on September 20, 1 9 4 9 > the Council favored H.R. 5 7 4 9 . The Council is still of the same opinion. (c) Purchase by the Federal Reserve Banks of government obligations airectly from the Treasury— In its memorandum to the Board on march 1 1 , 1 9 4 7 , the Coun cil made the following statement: -3"The Council recommends that authority be given for s period of three years to make direct purchases up to 5 billion dollars from the Treasury. The Council be lieves that it would be advisable to review the matter again at the end of three years to determine if there had been any abuse of the power and also to determine whether the power should be further continued or be permitted to lapse. The Council cannot but be mindful of the fact that historically and in various countries direct borrowing by a government from the central bank has been a common vehicle of inflation." The Council now recommends a renewal of this authority for a period of three years. (d ) Modification of limitation on the cost of Federal Reserve Branch buildings— The Council in the past favored, and now favors, repeal of paragraph 9 5 section 10, of the Federal Reserve Act. The Council has expressed opinions on other legislative matters, as follows: (1) Section 13b— In connection with Section 13b of the Federal Reserve net, the Council stated in its memorandum to the Board on September 20, 1949s "The Council is opposed to two government agencies hav ing lending or guarantee powers in the same field end therefore would not favor giving additional guarantee ing powers to the Federal Reserve Banks in the indus trial field." The Council is still of the same opinion. (2) Consumer credit— The Council has in the past stated that it does not believe the Board should in time of peace have powers over consumer credit. The Council remains opposed to the granting of such powers to the Board. (3) Possible changes in the law with respect to bank reserves— (a) The Council, as stated in its memorandum to the Board on September 20, 1949, is "unanimously of the opinion that neither the Board of Governors nor any Federal agency should have authority to fix the reserve requirements of non-member bcnks." - L - (b) 6. The Council believes that changes in i*eserve requirements should be used rarely Lnd only for adjustment to basic changes in the monetary situation. In dealing with the question of bank reserves., it has often been forgotten that to build and preserve a sound banking system banks must have earnings sufficient to enable them to accumulate ccpital and pay adequate dividends. There should, therefore, be an upper limit on reserve requirements. The Council believes that the limits now in the law are as high as are tol erable, and give the Board sufficient power, with their other present instruments of policy, to deal with any foreseeable situation. Are there any matters in connection with the questionnaires sent out by the Douglas subcommittee of the Joint Committee on the Economic Report that the Council would like to discuss with the Board? Two members of the Council have been asked to testify before the Douglas subcommittee of the Joint Committee on the Economic Report. It is not pos sible in this written memorandum for the Council to express an opinion on all of the questions in the ouestionnaire of the Douglas subcommittee. bers of the Council will be pleased to comment on any of the questions, should the Mem b e r s of the Board desire their viewpoints. - 10 - THE COUNCIL CONVENFr) ttvt % « ° S Ls S 5 i F m S p & ' s J L s ™ „ „ . - a r ’s a i s ' B s a ^ Mr. Garfield prepared the f o i l ™ , lowing summary o f M o v, t?r*m\Tr\mrrn *n h i s rem arks ECONOMIC PROSPECTS Ne x t s i x w eek s With the steel strike settled i o p e r a t i n g a g a i n , industrial production la®t .We®k and coal mines and m in es -- for the whole month of N o v p ™ k ^ t * facto^ies a t 168 p e r cent of the 1 9 3 5 - 3 9 averaep ! 7 e estimated O ctober and 173 in September. The rate in Tv?Partd Wlth l6^ in 175 if the coal mines continue to operate aSd be over levels reached in many lines after S c o ^ L ^ g u s t ^ f September are maintained. So far these advanced levels -- in the output of textiles, paper, furniture, household Appliances lum ber, an d o t h e r building materials — ar>e being l a r S l v m ain tain e d . Auto assemblies are deelinir^ from the peak level re a c h e d t h i s autumn, owing in part to model change overs. Heavy demand for s t e e l , including substantial orders to replenish in v e n t o r i e s depleted during the six-week strike, will probably orine: o u t p u t to a level close to capacity and higher than at any tim e s i n c e early spring. Immediate prospects for commodity prices are fairly uncertain. Advances have occurred recently in prices of carpets, tires, some grades of lumber, copper, and steel scrap; somewhat earlier there were increases in numerous textile items. Coffee h a s shown a spectacular advance on crop news from Brazil. S t r o n g dem ands for finished steel and added pension costs at l e a s t make v e r y unlikely any price reductions such as purchasing a g e n t s for steel consumers were looking forward to last summer. On the other hand, in agriculture large crop supplies tend to P re v e n t price advances and currently prices of hogs are declining seasonally under the impact of heavy marketings. Imports of^goods, vhich were at a low level this summer , have been increasing lately, b r i n g i n g more downward pressure on the price structure at numerous p o in ts. In consumer markets meat prices have been declining l a t e l y ; r e n t s , however, have continued to advance. The gross national product figures if m^thly, might show a rise w i t h increased Pr 0d^ ctl 0? 1 itrl®ohablv show little coal mines but on a quarterly basis they will P change from the third to the f o u r t h quarter T t o y inflicawa f e l i n e f r o m t h e s e c o n d t o th e t h i r d q u a from t he end o f because the low point of the decline ine« t i v i t 7 ^ , . ^948 was i n J u l y , t h e f i r s t month o f th e - 11 a t year-end What sort of levels will activity and prices be at as the old year e n d s and the new begins, four years and four months after V-J Day? A t that time population will be at a new high, close to 1^0 m i l l i o n and 16 per cent above the 1935-39 average. The number employed will be up over a third, industrial production three fourths, and all production almost that much. Reflecting price as well as production increases, gross national product will be at an annual rate of about 255 billion, roughly three times the 1935-39 average. In the price field, wholesale quotations are up 90 per cent, consumer prices nearly 70 per cent, and farm land values over 100 per cent. In general, then, production levels vill be very high in comparison with prewar and fairly high in re lation to peacetime capacity. Prices also will be at levels very much higher than before the war, up much more than the prices of the 1920 's were from pre-World War I levels. The levels indicated for the year-end are moderately below the 1948 peaks, 2 per cent for total employment, 10 for in dustrial production and wholesale prices, 3 for consumer prices, 4 for farm land values. There have been sharp adjustments in particular commodity prices in various periods (wheat and corn in 1948, nonferrous metals in the spring of 1949) and in particular production activities (textile yarns and fabrics in 1948 and early 1949. machinery production from the end of 1948 to the middle of 1949); they have occurred serially, however, within a general frame work of high demand and activity. The decline this year was more widespread than earlier postwar reductions in activity but important advances to new record levels were occurring in the automobile and housing industries at the time when numerous other activities were reaching their low points. First half of 1950 The view most widely held by System economists attending the meeting of the Current Business Developments Committee in Dallas three weeks ago, and also by other economists, has been that pro duction in mld-1950 would be at or slightly below the level of the third quarter of 1949 and that commodity prices would be somewhat lover. It has been noted that the recent strikes might result in marked fluctuations in activity meanwhile. Each economist has his own peculiar way of looking at the prospects but there has been considerable agreement on the view that demands for plant and equipment, for new housing, and for autos vould decline, at least moderately. Commonly note Is made also of the downward pressures on prices exerted by large supplies of crops and increasing marketings of livestock. Increased foreign competi tion is expected, particularly abroad. On the other hand, state and local expenditures on needed schools, highways, and the like are expected to continue expanding and Federal outlays are expected to rise somewhat further. It is in the first half that most of the National Service Insurance Dividend payments, amounting to 2.8 billion - 12 - dollars, will made and while there is a wide difference of opinion as to the importance of this, no one doubts that it will £0 in the direction of strengthening consumer demand, at least temporarily. Because the downward pressures mentioned are ex pected to exceed upward pressures, prices are expected to be stable or declining and this is expected to ms an that changes in inventories held by business enterprises will not be important. This would be in sharp contrast to the situation in most of the postwar boom period when considerable production went into such inventory accumulation. A neutral position would differ moder ately from the situation which has prevailed beginning in the second quarter this year, with inventories declining somewhat as production has been somewhat below consumption. Those who held this general view of prospects do not expect a return to peak levels, partly because they think that many of the stimulating effects of the shortages of goods and the abundance of money created during the war are of a temporary nature. They believe the deferred demands have been largely met and that the price-cost-income adjustments which have occurred have not been adequate to assure full production and employment on a continuing basis. They think that the end of the latest decline came quickly this summer, partly because of various Govern ment props to income, -- such as the agricultural price support program and the foreign aid program. They point out that efforts will be made to restrict acreages of many important crops in 1950 and that farm cash receipts may show a decline of 10 per cent, following a similar decline in 19 ^ 9 . Another view of prospects is that activity will return to peak levels and that prices will be at least maintained. This is still a minority view but inquiries concerning this possibility have been increasingly frequent lately. One argument is that once a revival is under way it is likely to gain momentum. The revival this past summer is regarded as primarily self-generating rather than stimulated by any war scare or special Government programs. The strength of demand for autos and housing during a period of fairly widespread weakness in markets is regarded as evidence that there are some deferred demands yet to be met, and that, with judicious price adjustments, markets are still available for a very large volume of output. On the out look for capital goods, the position is that basic needs are very great -- consumption is high, obsolescence is very rapid, and wage rates are higher than ever; that costs of new equipment are not likely to decline enough to make waiting worthwhile, and may even increase if steel prices are advanced; that funds are readily avail able from large retained earnings or other sources; and that, conse quently, in a period of revival, outlays for plant and equipment are likely to be in very large volume. Inquiries concerning the Possibility of devaluation of the dollar suggest that some of those expecting higher activity are thinking in terms of rising prices and inflation. - 13 - A third view, for which it is now difficult to find a defender, has been that an important decline in activity would under way before the end of the first half. In this view, postwar adjustments have been quite inadequate (note the con tr a st with 1920 -2 1 ) and neither producers nor consumers (at home 0r abroad) will continue in the market indefinitely at current price levels. The current revival in some of the nondurable goods lines is regarded as partly speculative and not fully war ranted by sales of finished products to ultimate consumers; while department store sales of household appliances and furniture have shown some recovery, apparel sales are at rather low levels. On c a p it a l expenditures, it is argued that the railroads and many manufacturing industries have already curtailed outlays consider ably, that many other postwar programs are nearing completion, and that the incentives for undertaking new programs are not ade quate to prevent a continuing decline in this area for some time. Alternative interpretations of recent events One way to check on the plausibility of various views is to take a look at recent important events and see which way they may be expected to push things from previously established and known positions. In the past two months there have been many im portant developments. 1. The strikes have clearly reduced stocks of steel and coal and the settlements will raise production costs somewhat. A period of heavy purchases of steel may well provide a stimulus even though some of the demands will be of a tem porary sort. The idea that steel production will be at capacity for six months - - a guess of three months might be more realistic -- certainly seems to provide a basis for confidence and forward commitments quite different from that in a period of declining steel output, such as the second quarter of 1949. An alternative view is that however bene ficial capacity operations for a time may be, the postponement of price reductions or the substitution of price increases for steel (and perhaps other products) may be harmful, restricting purchases of final products. 2. Announcement of atomic explosion in Russia. This appears to have contributed to such actions as Congressional agreement on a larger appropriation for arms aid to Europe; Congressional removal of restrictions on spending procedure of the Atomic Energy Commission; and the pushing of plans for economic in tegration of Western Europe. It has also led to much talk, some apparently more serious than before, concerning the possibility of international control. Continued active participation in world affairs seems likely to mean substantial U. 3. expenditures in one form or another for a long time to come and more rather than less in the first half of 1950 . 3. Devaluation. This can be viewed as having had little effect; an index of dollar prices of eight materials imported from the - 14 ste r l i n g area, using the 1948 average as 100, on November 11 Vas at o5, down only 7 points from the September 15 figures and up 1 point from the June average. Declines in imported finished goods since September 15 have been fairly limited also. Two months, however, is a very short period for the effects of devaluation to appear and some of the more im portant effects may appear in the export markets temporarily held by the United States in the postwar period. The whole foreign trade adjustment process now occurring as a result of devaluation, and also of reductions in trade restrictions, may exert more downward influence on business in the United States during the first half of 1950 than many anticipate. Meanwhile costs of imported goods in devaluing countries have been greatly Increased; In the United Kingdom, for example, cotton is up 24 per cent and most nonferrous metals are up 30 per cent. How successful the efforts to prevent further inflation abroad and put trade on a more sustainable basis may be is yet to be determined. 4 . October housing starts at 100,000. This is the sixth month in a row with starts at or close to 100,000. The October figure last year was 73,000. The indicated total for 1949 is 1,000,000 units as compared with 931,000 last year. There can be no question that the record is one of great strength in the residential building field even though some of the volume has been achieved by lowering prices and by building smaller houses. Financing arrangements, both for rental housing, which has been built in considerable volume this year, and for owned housing, have been eased to a point which seems to some economists to be unsound but for the immediate future a high level of activity in this field seems assured. 5. U. S. passenger car production at 489>000 (estimate) in October and about 5,100,000 for the year. October output is below the August-September peak rate but is much higher than had been generally anticipated. Total for year will be above 1929 by 10 per cent or more and above 1948 by 30 per cent. Meanwhile output of replacement parts has declined but the record for the industry is a very impressive one and it has been achieved in the face of many declines in the economy. Stocks of passenger cars In the hands of dealers have increased but the proportion of output going into dealers stocks has been very small and generally dealers are not overstocked. This is another field where price adjustments (higher trade-in values and lower usedcar prices) have helped to increase volume. The big question is how long consumers will remain in the market and what additional inducements they may be offered. About 35.7 million passenger cars will be in use by the end of the year. This is 6.1 million more than in 1941 but 14 million of the 35.7 million are over 10 years old whereas in 1941 only 5 million fell in this group. Also, highways are being crowded — dis couraging some potential car buyers as well as encouraging ex pansion of highway programs. In the first half of 1950, however, it now appears that output may continue at a very high level. - 15 - c 7 . F r e ig h t car deliveries at 4,500 in October. Such deliveries have been declining rapidly from a peak of over 10,000 a month early in the year and backlogs of unfilled orders are down from 1 2 0 , 0 0 0 a year ago to 1 7 , 0 0 0 . This is a reminder that backlogs of orders in many lines have been sharply re duced and also that there are real problems in connection with capital expenditure programs. Freight car loadings before the s t r i k e s were running 20 per cent below a year ago and a reduc tion in business of this amount is very discouraging to capital outlays. Only a few inquiries for freight cars have been received lately. Orders for diesel locomotives continue in substantial volume — because they make possible large savings in operating expenses. Man-hours in machinery industries in September 3 1/2 per cent above August and July. Is this a reversal of the downtrend which had brought man-hours in these industries down over 20 per cent since December? Or is it just a seasonal rise in output of household appliances, which are included along with industrial machinery of all sorts? For the moment it does seem to mean an end to the steady decline here but figures for one or two months are not very persuasive and much of the rise appears to have been seasonal. However, appliance sales at retail (seasonally adjusted) have increased since late last spring. In other (much more important) machinery lines there is not much evidence of any rise; in some quarters foreign as well as domestic demands are expected to show further reductions. How far prospective declines in capital outlays have already been reflected in reduced machinery output is a moot question, (incidentally, preliminary figures show capital outlays by manu facturing concerns in Philadelphia estimated to be down 24 per cent in the period from October 1949 to September 195° as compared with the preceding 12-month period.) 8. Relative stability in wholesale prices since early July. One way to look at this is to say that, with devaluation abroad and increased agricultural supplies in this country, little change Is an evidence of strength. On the other hand, it may be argued that the volume of business buying was very great in this period and that if prices did not advance on the average (some, like nonferrous metals, did rise somewhat) in this period they are not likely to go up in the near future. Some of the argument that business will be sustained or improve further in the first half is based on the idea that moderate price reduc tions stimulate consumption. Another part of the argument is based on the Idea that because prices are not expected to go lower buyers recently out of the market will reenter it. These positions are not necessarily inconsistent because they may refer to different commodities and markets. As yet, prospects in this field are not very clear but a strong case can be made that the main drift is still downward. - 16 - These are only some of the important recent developments -- nothing has been said about consumer credit, commercial loans, t h i r d q u a rte r profits o r the New York elections. Certain of the develop ments discussed are subject to very different interpretations. Each man will have his own peculiar system of selecting and counting, omitting and duplicating. The view which appeals to me right now is a sort of upper middle view, a view that activity will be a little higher in June of 1950 than in the third quarter of 19^9 but not up to the peak at the end of 19^8. Prices may be somewhat lower than in the third quarter or at present. - 17 - On November 15, 19^9, at 10:45 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. All members of the Council vere present. The following members of the Board of Governors vere present: Chairman McCabe; Governors Szymczak, Draper, Evans, Vardanian and Clayton. Mr. Carpenter, Secretary of the Board of Governors, vas also present. REPORT OF SUB-COMMITTEE OF THE FEDERAL ADVISORY COUNCIL ON F. D. I. C. ASSESSMENTS_______________________________ E. E. Brown states for the record that the Council approved unanimously the report of Its Sub-Committee on FDIC Assessments. The Chairman of the Board vas given a copy of the statement. WHAT IS THE BOARD1S OPINION ON THE PROPOSAL NOW BEING URGED TO MAKE CURRENCY REDEEMABLE IN GOLD COIN, AND, SPECIFICALLY, WHAT IS THE BOARD* S OPINION OF THE REED BILL NOW BEFORE CONGRESS WHICH IS DESIGNED TO ACCOMPLISH THAT PURPOSE?_____ E . E . Brown reads Item 1 on the agenda, as given above, and the conclusions of the Council as submitted in its Memorandum to the Board dated November 15, 19^9• All members of the Council are agreed that it is not feasible at present to make our currency convertible into gold coin. Most businessmen are concerned re garding the possibility that the price of gold may be changed. Although the President and the Secretary of the Treasury have said the price would not be changed, there continues to be uncer tainty because of the language of the Gold Reserve Act of 193^• Fleming reads a news letter which states that there may be a loophole in the law that would permit the gold price to be changed. Szvmczak says that the law clearly states the gold price can be changed only by the Congress. McCabe believes that the big question is whether you want the whole question of gold to be reopened in the Congress. If you ask for a revision of the Gold Reserve Act of 193^, it is possible that the whole question of gold would be debated at length in Congress, and there would be no certainty regarding the outcome of the debate* McCabe reports that all members of the Board agree with McCabe!s statement on gold as given in his reply to the questionnaire of the Douglas Subcommittee. McCabe believes that on the price of gold there is substantial agree ment between the Council and the Board. Burgess. There is a real difference of opinion between the Council and the Board, not as to the present situation, but as to long term. The members of the Council believe that our citi Digitizedthe for FRASER zens should eventually be given the right to convert currency into - 18 - gold. Burgess mentions th a t the Greek drachma is today being s t a b i l i s e d through sales b y the cen tral bank of gold sovereigns in the open m arket. McCabe says th a t in th is country people have confidence in their money. Odlin re p lie s th a t he questions vhether people are confident that th e ir money v i l l not depreciate in value. McCabe does not believe i t is desirable nov to raise the question in Congress of the pover of the Secretary of the Treasury. Fleming. The question is not one of vhether the present Secretary vould devalue or vhether the major o ffic ia ls of the present A dm inistration vould favor devaluation. They have stated th eir opposition to devaluation of the d o lla r. I t is a question of vhether the lav provides any loophole vhereby some successor might devalue. E . E . Brovn asks vhether i t might be possible to get an opinion of the A ttorney General vhich might stop the continuing discussion regarding a change in the price of gold. THE BOARD WOULD LIKE TO HAVE THE CURRENT VIEWS OF THE MEMBERS OF THE COUNCIL REGARDING PROBABLE ECONOMIC AND BUSINESS CONDITIONS DURING THE NEXT THREE! TO SIX MONTHS.____________________ E. E. Brovn reads Item 2 on the agenda and the conclusions of the Council as expressed in the Memorandum to the Board vhich is included in these m inutes. Brovn assumes th at the vievpoint given by Frank G arfield yesterday in h is discussion v ith the Council on ’’Economic P ro sp ects” represents the opinion of the Board s ta f f . Brovn comments th a t sales of re frig e ra to rs, vashing machines, vacuum 'Cleaners ;jid even radios are a ll increasing. McCabe. The economists of the tvelve Federal Reserve banks are meeting in Washington nov. One of them said th at he thought June 1950 vould be about 5 to 15 per cent above the th ird quarter of 1949. Most of the economists present agreed, although some thought the fig u re s might be even h ig h er. The economists from Cleveland and Chicago vere more conservative. Oril in asks v h eth er the fig u res vere d o lla r figures and vhether the econom ists vere considering possible increases in prices. McCabe. The fig u re s rep resen t d o lla r volume. Odlin s ta te s th a t he had in mind p rice increases vhich vould flake d o lla r volume la rg e r. - 19 Brown. There has been a change in public psychology since the Bethlehem S teel settlem en t. Without in any way ques tioning the opinions of the econom ists, Brown feels th a t the economists n e c e ssa rily may g et th e ir figures a l i t t l e l a t e r than the commercial bankers, because the commercial bankers are in direct contact w ith in d u stry . The bankers, therefore, become aware of changed conditions e a r lie r . VHAT SUGGESTIONS DOES THE COUNCIL HAVE TO MAKE REGARDING SYSTEM CREDIT POLICY DURING THAT PERIOD?_________________ E. E. Brown reads Item 3, as given above, and the comments of the Council as expressed in the Memorandum to the Board which is a p a rt of these n o te s. The Council is pleased th a t the re discount ra te was not reduced a t the time the Council and the Board discussed the m atter in September. The Council believes that in view of p resen t conditions, in te re s t rates should be firmed. McCabe thinks th a t the Federal Reserve Bank of New York was concerned in September w ith the possible e ffe c t of the devaluation of foreign cu rren cies. McCabe sta te s th at he has noticed the views of the members of the Council and the Board are constantly changing because of changing economic conditions. He wonders what the situ a tio n w ill be in three months. Spencer. Whatever economic conditions w ill be, we know they w ill not be the same. McCabe. The e ffe c ts of devaluation in th is country were almost n il and were much le ss than McCabe expected. Potts asks i f there is any ta lk of d iffic u ltie s ahead, perhaps in June 1950. McCabe. Some economists think th at there w ill be d iffic u l ties by next summer. However, McCabe thinks th at as long as Federal, s ta te and lo c a l governments continue spending large amounts of money, there is l i t t l e likelihood of depression. Vardaman believes th a t the effects of devaluation may not be fe lt fo r several months. A possible decrease in private cap ital expenditures may be a d eflatio n ary facto r, but high wages and in creased pensions should lead more businesses to modernize so they can reduce co sts. Fleming- Perm ission fo r accelerated depreciation might help modernization. Spencer. Many businesses are concentrating'on improving th e ir inventory turnover. Spencer describes the great improvement in production through modem equipment in the brass industry. E. E. Brown. The same condition prevails in the o il indus tr y . v ., E . - 20 - POES THE COUNCIL HAVE ANY FURTHER COMMENTS TO MAKE WITH ?TE.q?Kf!T TO THE DECEMBER FINANCING? n-------------------- _ E. E. Brown reads Item 4 as given above and the conclusions of the Council as expressed In the Memorandum to the Board as given in these n o te s. The opinions of the Council remain the same as they were in September, esp ecially in view of the large Federal d e f ic it. Szvmczak. The Council does not In dicate th at the longertenn bonds should be fo r banks. E. E. Brown*. No. Burgess. Some of the ad d itio n to the debt should be in longer-term bonds. In te r e s t ra te s should be firmed to accomplish this o b jectiv e. P resent in te re s t ra te s are an in v ita tio n to states and m u n ic ip a litie s to overborrow. Szymaczak. In creasin g reserves might help to correct the situ atio n . McCabe asks what the Open Market Committee should do. Burgess. The System should s e ll some bonds. E. E. Brown. The System should s e ll some of the bonds which i t now holds. P resent low in te re s t ra te s tend also to cause p r i vate borrowers to overborrow. The Council would favor sellin g re stric te d issu es out of the System*s p o rtfo lio . McCabe. The Treasury today would probably h e sita te to go beyond a note issu e . McCabe does not believe the Council and the Board are fa r a p a rt in th e ir thinking on th is m atter. THE BOARD HAS BEEN ASKED TO SUBMIT TO THE PRESIDENT THE LEGIS LATIVE PROGRAM AFFECTING THE FEDERAL RESERVE SYSTEM WHICH THE BOARD DESIRES TO HAVE CONSIDERED AT THE FORTHCOMING SESSION OF CONGRESS. THE FORMULATION OF THE BOARD*S VIEWS ON THAT MATTER IS NOW HT PROCESS AND IT WOULD BE GLAD TO HAVE ANY AD VICE OR RECOMMENDATIONS THAT THE COUNCIL MIGHT WISH TO MAKE IN TEAT CONNECTION.____________________________________________ . E. E. Brown begins to read Item 5 given above and the conclu sions of the Council as expressed in i t s Memorandum to the Board as given In these n o tes. McCabe asks perm ission to in te rru p t as Brown reads the comments of the Council on bank holding company le g isla tio n . McCabe asks whether the Council w ill accept the present holding company b ill and support i t when the hearings s ta r t, perhaps early in the next Congress. McCabe says th a t the Council made one exception a t its last meeting on the question of exempting wholly-owned tru s t com panies . - 21 - Atwood b e lie v e s the bank holding company group favors the bill ♦ McCabe. Would th e Council support the b ill? Odlin a. The C ouncil is on record many times in support of the le g is la tio n . e , E T Brown b e lie v e s the Board can count on the Council in support of the bank h o ld in g company b i l l . Er E. Brown reads p o in ts (b) and (c) of Item 5, and the opinion of the C ouncil, as expressed in the Memorandum of the Council to the Board, which is a p a rt of these n o te s. In con nection w ith p o in t (c ), d ealin g w ith d ire c t purchases of govern ment o b lig atio n s by the F ed eral Reserve banks from the Treasury, Brown b eliev es th e re have been no abuses of th is power, but the Council thinks i t ad v isab le to review what actu al use was made of the power. Fi ftming th in k s i t would be advisable to see the record of what a c tu a lly took p lace under th is power. McCabe agrees to provide the inform ation. E. E. Brown continues reading p o in t (d) of Item 5 of the agenda w ith the conclusions of the Council, as expressed in the Memorandum of the Council to the Board which is a p a rt of these no tes, d ealin g w ith the co st of Federal Reserve branch buildings. Brown s ta te s th a t the Board should have power over the con stru ctio n of i t s b u ild in g s. Vard^man says the Board has extensive building p lan s. E. E, Brown continues reading the comments of the Council dealing w ith S ection 13b, as expressed in the Memorandum of the Council to the Board which is a p a rt of these no tes. McCabe asks w hether the Council has read his comments on this su b ject, as given in h is rep ly to the questionnaire of the Douglas Subcommittee. E. E. Brown re p o rts th a t the members of the Council have read McCabe!s comments. McCabe, The F ederal Reserve System would not make loans un less banks were in te re s te d up to ten per cent. The RFC could only make loans a fte r i t was determ ined th a t fin an cial assistance was not available from the commercial banks and the Reserve banks. He thinks the Federal Reserve Bank of Philadelphia has done a p a rtic u la rly good job in th is resp e ct. Congdon ask 3 whether situ a tio n s have developed where a bank In a smaller community has worked with the lo c a l Federal Reserve bank to compete with the correspondent bank in a large c ity ? The small bank may desire to have the lo c a l Federal Reserve bank take - 22 - a portion of a loan ra th er than share the loan with its city correspondent, fearin g th a t the c ity correspondent may eventual ly take a p art or a l l of the business from the small bank. McCabe does not think i t would be proper for the Federal Reserve bank to o ffe r th is kind of competition by working with smaller banks ag ain st c ity correspondents. The Board Would not approve th at p o licy. Draper agrees. E. E. Brown sta te s th a t th is has happened In Chicago. A bank, for example, in a community like Waukesha, may go eith er to Milwaukee or Chicago banks fo r help in financing a local company. Instead of going to e ith e r the Milwaukee or Chicago banks, the Waukesha bank may choose to go to the Federal Reserve Bank of Chicago, in order to avoid losing any of the business of its cus tomer to Milwaukee or Chicago. Brown states also that the policy of the RFC is lib e ra l, and th a t the Federal Reserve banks would have to be very lib e ra l to get loans in competition with the RFC. McCabe b eliev es the la rg er manufacturer would prefer to do business w ith the large c ity bank rath er than with the Federal Reserve bank as described in the case Congdon mentioned. Atwood asks whether the Board would refuse the authority it seeks, i f a b i l l passed Congress and le ft out the provision that the RFC could only lend money provided the commercial banks and the Reserve banks would not make the loans. McCabe says the reply to the Douglas Subcommittee is the reply of the Chairman and not of the Board. But he does not sp ec ific a lly answer the question as to whether he would decline the au th o rity he seeks i f the provision Atwood mentions were omitted from the le g is la tio n . McCabe states that the majority of the d ire c to rs of the Federal Reserve banks represent the banks, and he believes the bankers should p refer to have the authority he requests lodged in the Federal Reserve System. Spencer would p re fe r leaving these 3oans in the other cesspool. Kemper b eliev es th a t an important angle is being overlooked In the d iscu ssio n . He sta te s th a t i t has been said the lending operations under l^b worked out w ell, but Kemper believes that special co n sid eratio n should be given to the fact that the loans were made during a war. The conditions now are d ifferen t. The loans may be made fo r ten years. When the Federal Reserve System gets into th is type of business now i t is in a d ifferent business with d iffe re n t problems than i t faced making loans during the war. It w ill be com petitive w ith the banks, and the Federal Reserve loan p o lic ie s w ill be lib e r a l. Some commercial banks w ill favor loans in order to build lo cal in d u stries. The banks w ill take ten per cent and fig u re they can get out. There w ill be pressure from Congressmen on the members of the Board of Governors to see that the Federal Reserve banks make the loans. - 23 Draper. Do you think that the Boards of the local Federal Reserve banks would permit such pressure and follow the policy you have outlined? Kemper. I f you are going to make good loans, we have the machinery fo r making such loans now in the private banking system. The other loans should be in the cesspool of so cialized lending. Evans. I f any Congressman spoke to the Board we would simply say we have a d ecen tralized cen tral banking system, and such matters would be handled by the lo c a l Federal Reserve banks. Draper asks whether the Federal Reserve System should have the power to help small b u sin esses. Kemper thinks sec tio n 13b should be repealed. McCabe b e lie v e s the Council is making a mistake i f i t does not seek to s h i f t the emphasis from the RFC to the Federal Reserve System. The Council should o f f e r some a lte rn a tiv e instead of opposition. He has watched the trend to the l e f t over the years, and he thinks i t would be wise to o f f e r an altern ate plan to help the free e n terp rise system. Odlin. I f the F ed eral Reserve banks operate the lending function c o n se rv a tiv e ly , then the government would e s ta b lis h an other agency to make more l i b e r a l loans. McCabe asks i f the Council wishes to defeat a proposal he believes is co n stru c tiv e . Hemingway inquires whether th is lending a c t i v i t y did not originate in a depression. He a lso asks whether th is function is not outside that of a c e n tra l bank. Szymczak r e p lie s that many cen tra l banks make loans and accept deposits. Odlin. I s n ’ t t h is the only cen tral bank that i s n f t broke? McCabe thinks there i s more to th is matter than le t t in g the RFC go u n t il i t hangs i t s e l f with the banking system remaining mum. McCabe adds that we must attempt to preserve free e n te rp rise . Kemper. We cannot take small steps backward to socialism and think we are p reservin g fre e e n te rp ris e . Kemper does not believe a central bank p ro p erly may lend money to every small business with good ideas when the busin esses need venture c a p ita l. The losses would be tremendous. McCabe thinks p riv a te e n terp rise must o f f e r alte rn a tiv e ideas in this trend to so c ia lism , or we may go the way of England and other parts of the world. - 24 - Woods sta te s he seems to be the only representative present 0f small banking. The small banker might even b enefit from proposal. However, Woods b elieves that McCabe's pro posal would r e s u lt in unwise expansion of the functions of the F ed era l Reserve System. McCabe’s Vardanian inquires as to the propriety of taking banking for this function, instead of funds appropri funds of the-System ated by Congress. McCabe states that it is one and the same thing as the funds vould come out of the surplus of which ninety per cent now is turned back to the government. 2. E. Brown continues reading point 2 of Item 5 on consumer c r e d it with the opinion expressed by the Council in the Memorandum to the Board which is a p art of these notes. McCabe s t a te s that he told the Douglas Subcommittee that he has reviewed the question of consumer cre d it regulation many times. He does not w3 sh to press the matter. I t is la rg e ly a question now of someone e ls e urging that these controls over con sular cred it be re sto re d . He s t a te s a small automobile r e t a i l e r told him re c e n tly he would not mind having Regulation W back. Var daman. regulation? Does the small r e t a i l e r want i t as a trade E. E. Brown s t a te s that the small dealers as a rule want Regulation W as a trade re g u la tio n . Brown continues reading point 3 of Item 5 on bank re se rv e s with the conclusions of the Council as expressed in the Memorandum to the Board which is a part of these notes. McCabe s t a te s that in h is re p ly to the Douglas Subcommittee he toot an idea from J . T. Brown. J. T. Brown says he noticed the Chairman had taken the idea, and the Chairman had added a l i t t l e cracker a t the end. McCabe . J . T. Brown has said that a l l banks might have the same reserve requirements, but the non-members could carry th e ir reserves with t h e ir correspondents. J . T. Brown understands some s ta te s have banking boards which may f i x reserves at the same percentages required of member banks. E . E . Brown asks whether there are any other proposals the Board~rnay submit as p a rt of i t s le g isla tiv e program. McCabe . The Board has not prepared i t s f u l l program. Some ideas are mentioned on page sixty-one of the printed rep ly of the Chairman to the Douglas Subcommittee. ARE THERE ANY MATTERS IN CONNECTION WITH THE QUESTIONNAIRES SENT OUT BY THE DOUGLAS SUBCOMMITTEE OF THE JOINT COMMITTEE ON THE ECONOMIC REPORT THAT THE COUNCIL WOULD LIKE TO DISCUSS WITH THE b o a r d ?_______________________________________________________________________________________ E. E. Brown reads Item 6 and the conclusions of the Council as expressed in i t s IVkmorandum to the Board as given in these notes. Brown asks whether the Subcommittee i s planning to prepare l e g i s l a tion on th e e n tire f i e l d of banking as w ell as f i s c a l problems and other related aspects of the economy. Szymczak b e lie v e s the r e s u lt of the Subcommittee’ s work may be the establishment of a Monetary Commission. Burgess. Is i t f a i r to ask whether the Board s t i l l favors a Monetary Commission? McCabe. The Board i s on record f o r i t . Congdon hopes i f the Board completes a study on reserves and formulates any p roposal, the Board and Council may discuss the matter f u l l y . Burgess. Any such study should include a study on bank earn ings. There i s no comment on the n e c e s s it y fo r adequate bank earnings in the re p o rts on t h is su b ject from time to time. Banks now are worth more dead than a l i v e . Fleming suggests a ls o th a t i t would be h elp fu l i f the Council and the Board could work to g e th er on any study of the subject of reserves. * * * * * * * * * * The meeting adjourned a t 1 : 2 0 P.M. * * * * * * * * * * It was agreed that the next meeting of the Council would be held February 19 - 2 1 , 1950.
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