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MINUTES OF M EETING OF THE FEDERAL ADVISORY COUNCIL November 14, 1948 The fourth statutory meeting of the Federal Advisory Council for 1948 was convened in Room 932 of the Mayflower Hotel, Washington, D. C., on Sunday, November 14 ,1948, at 2:10 P.M., the President, Mr. Brown, in the Chair. Present: Charles E. Spencer, Jr. District No. 1 W. Randolph Burgess District No. 2 David E. Williams District No. 3 John H. McCoy District No. 4 Robert V. Fleming District No. 5 J. T. Brown District No. 6 Edward E. Brown District No. 7 James H. Penick District No. 8 Henry E. Atwood District No. 9 J. E. Woods District No. 11 Reno Odlin District No. 12 Herbert V. Prochnow Secretary Absent: James M. Kemper District No. 10 President Brown stated that a director of the Federal Reserve Bank of Chicago had given him a resolution which it was anticipated the Board of Directors of that bank would be asked to consider. The director of the Federal Reserve Bank of Chicago requested that President Brown present the resolution to the Federal Advisory Council for its con sideration. The resolution follows: RESOLUTION WHEREAS, the Board of Governors is committed to the policy of maintaining for the foreseeable future the 2y2% interest rate on long-term United States Government bonds, and the Federal Reserve System’s holdings of such bonds have increased from $427,540,000 on November 12, 1947, to over $9,171,000,000 on November 3, 1948, and may continue to increase at a very substantial rate, particularly in the event reserve requirements of member banks are further increased, and WHEREAS, the book (or actual) loss on the Federal Reserve System’s holdings of Government bonds may reach sizable proportions should the Board of Governors at some future time materially reduce or discontinue its present support level of the long term issues of Government bonds, and WHEREAS, in times of financial stress the Federal Reserve Banks (in addition to discounting eligible paper) may be called upon to make a large volume of loans to mem ber banks pursuant to Section 10 (b) of the Federal Reserve Act (enacted February 27, 1932), as amended, upon which extensive losses may be sustained, and WHEREAS, there is a great disparity between the combined paid-in capital and sur plus of the twelve Federal Reserve Banks and their combined deposit liability, it is 36 the consensus of this Board, all of the circumstances considered, that it would be de sirable at this time to increase the paid-in capital of the Reserve Banks by calling on member banks as soon as practicable for the remaining 50% of their respective capital subscriptions, thereby siphoning approximately $200,000,000 from the mem ber banks into the System, which action would be deflationary in its effect and, there fore, desirable under present economic conditions; now, therefore be it RESOLVED: That the Directors of the Federal Reserve Bank of Chicago recommend to the Board of Governors that they provide at the earliest possible date for an increase in the paid-in capital stock of the Federal Reserve Banks by calling upon all member banks for the payment of the remaining 50% of their respective capital stock sub scriptions pursuant to Paragraph 3 of Section 2 of the Federal Reserve Act. The members of the Council decided that the resolution above might merit consid eration at a later date, but that now was not an opportune time to urge action on it. The following items on the agenda were then discussed: 1. THE QUESTION OF THE REORGANIZATION OF FEDERAL CREDIT AGENCIES IN VIEW OF THE ACTIVITIES OF THE HOOVER COM MITTEE. 2. A DISCUSSION OF FURTHER STEPS IN CONNECTION WITH RESERVE REQUIREMENTS, AS WELL AS THE QUESTION OF THE TIM ING OF RATES ON SUBSEQUENT GOVERNMENT ISSUES. It was agreed by the members of the Council and the Board that the discussion would be informal and without the preparation of written memorandums as had been the custom in recent meetings of the Council and the Board. During the course of the discussions, it was decided to prepare written memorandums, especially since Chairman McCabe re quested a written copy of President Brown’s summary of the Council’s viewpoint on the staff report of the Hoover Committee. Consequently, there are printed in these minutes on pages 43 to 50, inclusive, three written memorandums which were prepared following the meeting of the Council and the Board on November 16, 1948, and sent to the Board of Governors. The first memorandum will be found on pages 43 and 44; the second on pages 45, 46, 47 and 48; and the third on pages 49 and 50. The meeting adjourned at 6 P.M. HERBERT V. PROCHNOW Secretary. 37 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL November 15,1948 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, David E. Williams, John H. McCoy, Robert V. Fleming, J. T. Brown, James H. Penick, Henry E. Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and Herbert V. Prochnow, Secretary. The Council continued its discussions on the agenda which began at the meeting on November 14. The conclusions of the Council on these items of the agenda are to be found in memorandums printed in these minutes on pages 43 to 50, inclusive. President Brown asked whether the Council had any changes to suggest in the Sec retary’s mimeographed notes for the meetings held on February 15-17, 1948, April 25-27, 1948, and September 19-21, 1948. There were no suggested changes. The meeting adjourned at 12:15 P.M. HERBERT V. PROCHNOW Secretary. 38 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL November 15, 1948 At 2:00 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Messrs. Charles E. Spencer, Jr., W. Ran dolph Burgess, David E Williams, John H. McCoy, Robert V. Fleming, J. T. Brown, James H. Penick, Henry E. Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and Herbert V. Prochnow, Secretary. President Brown presented Dr. Frank A. Southard, Jr., Associate Director, Division of Research and Statistics of the Federal Reserve Board, who spoke on “Current Develop ments in International Finance.” The meeting adjourned at 3:30 P.M. HERBERT V. P R O C H N O W Secretary. 39 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM November 16, 1948 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 Thomas B. McCabe; Governors Marriner S. Eccles, 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, David E. Williams, John H. McCoy, Robert V. Fleming, J. T. Brown, James H. Penick, Henry E. Atwood, James M. Kemper, J. E. Woods, Reno Odlin, and Herbert V. Prochnow, Secretary. The members of the Council and the Board then considered the following agenda item: A DISCUSSION OF FURTHER STEPS IN CONNECTION WITH RESERVE REQUIREMENTS, AS WELL AS THE QUESTION OF THE TIMING OF RATES ON SUBSEQUENT GOVERNMENT ISSUES. President Brown presented the views of the Council, which were later submitted to the Board in written form and are inserted in these minutes on pages 43 and 44. Dr. Burgess presented figures showing expenditures for new durable goods, and stated that it was important to emphasize these expenditures when considering the problem of inflation, rather than to place constant emphasis on bank reserves and banks as the source of the inflation. A memorandum which Dr. Burgess prepared on this subject and which was later sent to the Board of Governors, following approval by the Executive Committee of the Federal Advisory Council, appears on pages 45, 46, 47 and 48. Chairman McCabe stated that it was important to know something of the type of capital expenditures, as some capital expenditures are good and some are bad. Mr. Eccles stated that the last increase in reserves merely sterilized the inflow of gold and the purchase of securities from insurance companies and others. Mr. Odlin commented that the price mechanism performs an important function in our economy; inflation can not be stopped simply by increasing reserves. The members of the Council and the Board discussed the question of the reorganiza tion of Federal credit agencies in view of the activities of the Hoover Committee. Presi dent Brown then presented the conclusions of the Council, which were later submitted to the Board in written form and are inserted in these minutes on pages 49 and 50. Chairman McCabe stated that the Board had not yet made a study of the Staff Report on the Federal Reserve Board for the Committee on Independent Regulatory Commissions of the Hoover Commission. There was some discussion of the operation of the dual banking 40 system, as well as discussion regarding the advantages and disadvantages to small banks of membership in the Federal Reserve System. Chairman McCabe and Mr. Eccles indicated that the Board and the Council were in agreement with the Council’s statement regarding the independence of the individual Federal Reserve banks, as expressed in the Memorandum to be found on pages 49 and 50, of these minutes. There was a very brief discussion regarding recommendations the Council might make to the Board relative to possible banking legislation. The Board of Governors did not indicate the nature of any banking legislation which it might present to the Congress for consideration. The meeting adjourned at 3:10 P.M. HERBERT V. PROC H N O W Secretary 41 MINUTES OF THE MEETING OF THE EXECUTIVE COMMITTEE OF THE FEDERAL ADVISORY COUNCIL November 16, 1948 At 3:17 P.M., the Executive Committee of the Council convened in the Conference 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., Robert V. Fleming, W. Randolph Burgess, David E. Williams, John H. McCoy, and Herbert V. Prochnow, Secretary. The Committee discussed the subject matter of a statement that might be prepared and given to the Board relative to the Board’s possible recommendations to the President regarding bank legislation. It was decided to send the Board the Memorandum which was later prepared and approved by the Executive Committee, and which appears on pages 43 and 44, in these minutes, together with the Memorandum prepared by Dr. Bur gess, which was likewise approved by the Executive Committee, and which appears on pages 45, 46, 47 and 48 in these minutes. The Memorandum by Dr. Burgess was sent by him to Chairman McCabe on November 19, and the Memorandum which appears on pages 43 and 44 was sent by the Secretary of the Council to the Secretary of the Board of Governors on November 22, 1948. On December 4, 1948, the Secretary of the Federal Advisory Council sent to the Secretary of the Board of Governors for the attention of the Board, the Memorandum which appears on pages 49 and 50 of these minutes relative to the Staff Report on the Federal Reserve Board, for the Committee on Independent Regulatory Commissions of the Hoover Commission. The meeting adjourned at 3:50 P.M. HERBERT V. PROCHNOW Secretary. 42 MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL, NOVEMBER 22, 1948 The unforeseen outcome of the election has brought at least a temporary reluctance on the part of business concerns in some sections of the country to promote further capital expansion programs. This hesitation to proceed with business plans will probably continue until the Administration program relating to taxes, labor legislation, and other measures concerning business has been announced and the attitude of the new Congress can be appraised. The election has also affected the security markets. The government bond mar ket has been stronger, partly because of the feeling that the Administration will maintain the present support policy for government securities, and partly because of the feeling that it is likely the volume of new corporate securities offered will be less because of the cancel lation or postponement of expansion plans and that a government bond yielding 2 Yi per cent may be an attractive investment in comparison with the probable yield on the reduced supply of high grade corporates. The members of the Council do not now find any clear and uniform economic trend evident throughout the twelve Federal Reserve districts. The Council, therefore, believes that until the trend following the election becomes much clearer, it would not be advisable “to rock the economic boat.” Specifically, the Council believes it would not be desirable under present circumstances to change (1) the reserve requirements, (2) the rediscount rate, or (3) the support policy for government securities. The Council further believes that increasing bank reserves is not the proper method of dealing with the problem of inflation. One of the results of an increase in bank reserves under current conditions is the transfer of government securities from banks to the Federal Reserve Systen, thereby largely nullifying any possible benefits from increasing the reserves and making the problem of debt management by the Treasury more difficult. An increase in member bank reserves not only makes membership in the System less desirable, but it also affects the earnings of some banks adversely. The overall earnings of banks may be satisfactory, but the arbitrary character of an increase in reserves in all banks affects the earnings of individual banks unfairly. The repeated emphasis on bank deposits and on the banks as a major factor in causing inflation gives the public an erroneous impression of the principal reasons for the current inflation, which are to be found in the great expansion in the production of durable goods including housing and in large expenditures for defense, foreign aid and veterans’ assist ance. Attempts to control through monetary policy an inflation which has resulted from conditions largely outside the banking system are certain to be unsuccessful. The Council appreciates that members of the Board have on some occasions called attention publicly to those factors outside the banking system which are principally re sponsible for the inflation. If these facts could be reemphasized whenever the occasion permits, it would be very helpful to a better public understanding of the situation. With the conditions now prevailing, any proposals to increase reserves under the present authority, to request additional authority to impose still higher reserves, or to seek authority for special reserves for banks would in view of the foregoing comments be opposed by the Council, and by bankers generally, as detrimental to the best interests of the economy. The Council believes it would be helpful if a comprehensive study could be made of the whole question of bank reserves, including such subjects as the purposes bank reserves serve, whether authority to vary reserves should be granted or whether they should be fixed definitely by legislation, and the proper relationship of reserves to the various classes 43 of deposits, and to the size and location of banks. This study might be undertaken by a committee including representatives of the banking agencies of the Federal government, the banking departments of the state governments and the banks. An objective and ex haustive study in this field would be a useful guide to ultimate legislation. In relation to the matter of interest rates on Government securities, the Council has at other times stated that under present conditions it would be beneficial to our economy to have a modest rise in short term rates. Even a small increase in these rates is helpful in reducing the demand for credit by making both borrowers and bankers aware of the dangers in the present situation. The timing of any increase in such rates should be a matter of agreement between the Board of Governors and the Treasury. PRESENT CAUSES OF INFLATION IN EXPENDITURES FOR DURABLE GOODS November 19, 1948 Whereas the increase in bank loans and investments, and in bank deposits appears now to be checked, this is not true of expenditures for durable goods, which show con tinued expansion. These are financed largely through the capital markets, through life insurance companies, or through business savings. The figures are shown in the attached table and chart, which indicate that expendi tures for new durable goods in 1948 are likely to total about $57 billion. This is more than twice as large as in the late ’20’s, and shows an increase of $8 billion over 1947. It is in this area that the active factors in the recent inflation are to be found, rather than in bank credit, which is the short term operating fund necessary for current opera tions when the volume of the country’s business is so large. With some increase in armament expenditures likely to occur, the greatest danger of inflation lies in this area of durable goods. It is these huge expenditures which tend to run beyond our supply of labor and materials, and far beyond the amount of the nation’s savings and lead to sales of securities to the Federal Reserve Banks. Expenditures of this sort have a doubly inflationary effect, because to a considerable extent production in this field involves the payment of wages and the purchase of materials, which creates purchas ing power, but does not create the things that individuals may buy with the money. A large part of these expenditures is good and necessary for the long term progress of the country. We need more houses, more utility capacity, more hospitals, new produc tive machinery, and new locomotives. The problem is one of timing. We have been trying to do too much too fast, and that has been largely responsible for rising prices. If the present hesitation in business proves temporary, and the inflationary trend is resumed, we ought to turn our attention to these expenditures on durable goods as the active cause of inflation. It is there that something should be done to spread operations over a longer period and so reduce the inflationary pressure. If the same critical examination and campaign of public education were undertaken in this field as the bankers have voluntarily undertaken in the field of bank credit, the inflationary forces could be dampened down. The problem is, therefore, to find methods of giving leadership and responsibility in this field comparable to what has been done in bank credit. Expenditures for durable goods cover a wide range, from business plant and equip ment, through railroad equipment, housing, automobiles, and public spending by the Federal government and by states and municipalities. To deal with such a diverse group of institutions and people calls for respected leadership. It is suggested that a capital goods committee be appointed by the President, con sisting of such government officials as the Secretary of the Treasury, the Chairman of the Federal Reserve Board, The Secretary of Commerce, the Chairman of the S.E.C., and the Chairman of the National Resources Board; and consisting also of public representatives, such as a banker, an insurance president, an industrialist, an agriculturist, and a labor leader. 45 It is suggested that this committee be asked to examine the country's plans and pro gram of expenditures for durable goods, and make recommendations to the government, to business, and the general public as to what types of durable goods expenditures might wisely be postponed in order to avoid congestion of plants and markets, and practicable methods of achieving this goal. The recommendations of such a committee would carry great weight with insurance companies, business concerns, and the Federal and state governments. This proposal would have the advantage of focusing public attention on the place where the inflationary danger is greatest. 46 EXPENDITURES FOR NEW AND DURABLE GOODS Billions of Dollars Producers C onsumers Plant & Durable Institutional Total Total Equipment Housing Goods Total (Private) Private Public 5.5 14.5 .9 1.8 7.3 .2 1919 7.1 1.7 6.4 1920 8.3 8.2 16.7 1.2 .2 2.0 5.1 7.1 1921 5.2 12.6 1.5 .3 3.4 5.7 1.7 1922 5.8 9.1 .4 15.3 4.4 7.3 11.7 20.0 1923 7.9 .4 1.6 4.8 1924 7.7 7.2 20.0 1.9 11.9 .5 5.1 7.8 21.7 2.1 1925 8.2 12.9 .6 4.8 8.5 13.4 23.2 2.1 1926 9.1 .7 4.6 8.1 12.7 22.2 2.4 1927 8.8 .7 4.4 8.6 1928 8.8 16.9 .7 22.5 2.5 3.2 9.2 12.4 2.4 1929 10.1 .6 23.1 7.0 1.8 17.7 2.8 1930 8.3 8.9 .5 1.4 5.3 6.7 12.2 .4 2.6 1931 5.1 .5 3.3 .2 6.9 1.8 1932 2.8 3.9 .4 3.4 3.8 .1 6.3 1.3 1933 2.4 .4 4.4 4.8 2.0 1934 3.4 .1 8.3 5.5 6.4 .8 .1 10.8 1.8 1935 4.3 1.4 7.1 8.4 14.4 .2 1936 5.8 3.3 1.7 7.7 9.5 .2 17.2 2.8 1937 7.6 5.8 7.4 .2 13.1 3.4 1.6 1938 5.4 3.4 2.2 6.4 .2 8.6 14.8 1939 6.0 2.5 7.4 17.5 9.9 .2 3.6 1940 7.4 12.0 .2 6.7 1941 9.4 2.9 21.6 9.1 7.7 .1 14.8 13.8 1942 7.0 1.4 6.3 9.2 6.6 12.6 .8 7.3 1943 5.3 6.2 .1 13.2 3.6 6.8 1944 6.4 .6 7.7 8.5 .1 .8 16.6 3.1 1945 8.0 2.2 3.4 16.2 19.6 .4 34.0 1946 14,0 1947 19.1 5.5 21.0 26.5 .5 46.0 3.1 7.4 30.4 4.2 1948 22.0 23.0 .8 53.1 — Grand Total 15.5 17.9 14.1 16.9 21.6 21.9 23.8 25.3 24.6 24.9 25.5 20.4 14.8 8.7 7.6 10.4 12.6 17.7 20.0 16.4 18.3 21.1 28.3 28.6 21.8 16.8 19.7 36.2 49.1 57.3 Sources: 1919-1938—Federal Reserve Bulletin, Sept. 1939, “Estimated Expenditures for New Durable Goods 1919-1938”, George Terborgh. 1939-1945—Federal Reserve Bulletin, Sept. 1946, “Estimated Durable Goods Expenditures, 1939-45”, Doris P. Warner and Albert R. Koch. 1946-1948—Confidential Federal Reserve Report, October 6, 1948, “Estimated Durable Goods Expenditures 1946-1948”, Albert R. Koch. November 12, 1948 47 Expenditures for Durable Goods Billions of Dollars MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL Relative to the Staff Report on the Federal Reserve Board for the Committee on Independent Regulatory Commissions of the Hoover Commission The foreword of the preliminary Staff Report on the Federal Reserve Board states that the Report has not yet been considered by the Committee on Independent Regulatory Commissions. It further states that “it reflects only the views of the staff member who prepared it and is still subject to revision by him.” Consequently, no attempt is made in this memorandum of the Federal Advisory Council to analyze in detail and exhaustively the subjects discussed in the preliminary Staff Report. The Council wishes to state some of the broad principles which it believes merit serious consideration in any discussion of the functions of the Federal banking and credit agencies. 1. The Council believes in the maintenance of the dual banking system. No change should be made which would weaken this system. Even if it were desirable to have a single unified banking system, it would be politically impossible to establish it at the present time. Experience over many years indicates that the checks and balances which a dual banking system provides, as well as the healthy competition which it promotes, have been constructive and helpful in the growth and development of the American economy. 2. Although historical experience indicates that a nation cannot have a completely independent central bank, it is highly desirable that the central bank have the maximum practical independence of thought and action. The difficult problem is one of maintaining reasonable independence of the Board, while providing at the same time the desired co-operation with the objectives of the Ad ministration. The Board should obviously not be subservient to the Treasury and to every change in its viewpoint. However, the Board must necessarily find practical means of co operating with the Treasury in the development of sound fiscal and monetary policies. The Council does not approve the suggestion in the Repost for reducing the size of the Board of Governors to five members. It would lessen the prestige and influence of the Board, and it might create the uncertainty of possible changes in the size of the Board whenever a new Administration took power or at other times. The Board is not too large now for the effective discharge of its important responsibilities. The Council does not believe the proposal for an Under Secretary of the Treasury for Banking would be practical. In discussions of important matters of monetary policy, when he would be expected to express Treasury policy, he would undoubtedly be reluctant to state his viewpoint until such time as he had had time to confer at length with the Sec retary of the Treasury. Experience in previous years when the Secretary of the Treasury served on the Board also was not satisfactory. 3. The Council does not favor the creation by statute of an Economic Policy Council which would be set up to facilitate making and executing “Federal policy with respect to credit, finance, lending, bank supervision and other economic activities.” An Economic Policy Council with these responsibilities would weaken the importance and influence of both the Secretary of the Treasury and the Board of Governors. In addition, ample authority now exists, without further legislation, for the President to establish an Economic Policy Council. 49 4. The Council favors substantially higher salaries for the members of the Board of Governors so that the remuneration may bear some relationship to the responsibility of the Board, and so that men of the highest competence may find it possible to serve in this capacity. 5. The Council believes the maintenance of the independence of the individual Fed eral Reserve banks is of special importance. The directors of the individual Federal Reserve banks should continue to have the authority to elect the presidents of their respective banks, and the presidents of the Federal Reserve banks should continue their present par ticipation in the activities of the Open Market Committee. Adequate salaries and reason able independence in the management of the individual Federal Reserve banks offer the greatest assurance that men of ability will find executive positions in these banks attractive. 6. The Council is opposed to any program which would place the functions of bank supervision and examination under the control of the banking agency which has the re sponsibility for monetary policy. The Council does not believe it is sound to combine bank examination and supervision with the objectives of fiscal and monetary policy. Bank exam inations should be objective and should not be used to carry out fiscal and monetary policies. Because of the particular responsibilities which they discharge daily, bankers are in the best position to determine the practical wisdom of fiscal and monetary policies. They may, on occasion, feel impelled to criticize such policies, and they will be reluctant to do so if bank examinations and supervision are under the control of the banking agency making policies. Bankers who are critical may fear retaliation in bank examinations. To restrict in any way the freedom to speak freely would be unfortunate both for the banking system and the American economy. December 3, 1948. 50 - 1 - NOTE: This tra n scrip t $ f the Secretary’ s notes i s not to be regarded as complete or n e c e s s a r ily e n t ir e ly accurate. The tra n s c rip t i s fo r the sole use of the members of the Federal Advisory Countil. H. V. P. The S e c r e t a r y ’ s notes on the meeting of the Federal Advisory Council on November 14 , 1948, at 2 :1 0 P.M. in Room 932 of the Mayflower Hotel, Washington, D. C. All members of the Federal Advisory Council were presen t, except Mr. Kemper who was unavoidably detained u n til la te in the afternoon because of transportation delays. THE QUESTION OF THE REORGANIZATION OF FEDERAL CREDIT AGENCIES IN VIEW OF THE ACTIVITIES OF THE HOOVER COMMITTEE. E. E. Brown s t a t e s th at a day or two a ft e r Burgess had submitted : this item, Chairman McCabe telephoned Brown and suggested that the | discussion of t h is item and the proposal fo r a National Monetary Commission should be informal and without w ritten statements on the part of the Council or the Board. Brown reports that a l l members of the Executive Committee agreed to th is procedure and he informed McCabe who also obtained the agreement of the members of the Board. Before discussing the above Item, Brown reports that a director of the Federal Reserve bank of Chicago had given him a resolution which i t is expected ; the Board of D irecto rs of that bank would be asked to consider this week. The d ire c to r requested that Brown present the resolution to the Council for i t s c o n sid era tio n . The reso lu tio n follows: R E S OL UT I ON WHEREAS, the Board of Governors is committed to the policy of maintaining fo r the fo re se e a b le future the 2 1 / 2# in terest rate on long term United S ta te s Government bonds, and the Federal Reserve System’ s holdings of such bonds have increased from $427,5^0,000 on November 12, 1947, to over $ 9 ,17 1,0 0 0 ,0 0 0 on November 3, 19^8, and may continue to increase at a very s u b s ta n t ia l r a t e , p a r t ic u la r ly in the event reserve requirements of member banks are fu rth er increased, and WHEREAS, the book (or a c tu a l) lo ss on the Federal Reserve System’ s holdings of Government bonds may reach sizab le proportions should the Board of Governors at some future time m aterially reduce or discontinue its present support l e v e l of the long term issues of Government bonds, and WHEREAS, in times of f in a n c ia l s tr e s s the Federal Reserve Banks in addition to d iscounting e l i g i b l e paper) may be called upon to make a large volume of loans to member banks pursuant to Section 10 (b) of the Federal Reserve Act (enacted February 27, 1932), as amended, upon "hich extensive lo s s e s may be sustained, and - 2 WHEREAS, there i s a great d isp a rity between the combined paid-in „apital and surplus of the twelve Federal Reserve Banks and their com bined deposit l i a b i l i t y , i t i s the consensus of this Board, a ll of the ,j_rcu m stan ces considered, that i t would be desirable at this time to increase the p a id -in c a p it a l of the Reserve Banks by calling on member tanks as soon as p ra c tic a b le fo r the remaining 50$ of their respective capital su b scrip tio n s, thereby siphoning approximately $200,000,000 from the member banks in to the System, which action would be defla tio n a ry in i t s e f f e c t and, therefo re, desirable under present economic conditions; now, th e re fo re be i t RESOLVED: That the D irectors of the Federal Reserve Bank of Chicago recommend to the Board of Governors that they provide at the e a r l i e s t p ossib le date fo r an increase in the the Federal Reserve Banks by c a llin g upon a l l ment of the remaining 50$ of th e ir respective tions pursuant to Paragraph 3 of Section 2 of paid-in capital stock of member banks for the pay capital stock subscrip the Federal Reserve Act. * * * * * * * * * * E. E, Brown asks the Council for i t s opinion regarding the resolution. The members of the Council believe that the proposal in the resolution may merit consideration at a later date, but this is not an opportune time to urge action on i t . The banks might be charged with t r y in g to obtain increased earnings by this means. Brown then states, in connection with the f i r s t item on the agenda, that the last Congress had appointed a Commission to make recommendations for streamlining the operations of the government and increasing its efficiency. Various ta sk groups were formed to make the preliminary studies. George L. Bach has made a preliminary study of the Federal banking and c r e d it a g e n cie s. Brown reports that Bach’ s study has some bias but is f a i r l y w e ll done. Bach traces the historical development of the Federal Reserve System, including the d iffic u lt problem of giving the Board of Governors maximum independence, while having the Board responsive at the same time to the objectives of the Administra tion, p a r t ic u la r ly the T reasury. The report says that making the Board of Governors a p art of the Treasury is not desirable because the Treasury thinks in terms of r a is i n g money, and those measures which will help i t s p e c i f i c a l l y . I f the Board should disagree with the Treasury, i t would be d i f f i c u l t fo r the Board to be effective. A rcajor question i s how can g re a te r coordination be brought about so that the Board can r e t a in independence and s t i l l cooperate with the objec tives of the T reasu ry. Brown s t a te s that the Bach report suggests re ccing the Board from seven to f iv e members, four of whom would be aPP0inted fo r e ig h t y e a rs each, which would mean one member going out office every two y e a r s . The f i f t h member of the Board would be an ^ssistant S e c re ta ry o f the Treasury for Banking. Provision is made £or giving the P resid en t power to remove the Chairman of the Board. The report also s e t s up an Economic Council, but it would have no P°>Jer to issue d i r e c t i v e s . Fleming understands that the person who prepared this report spent'lTbQut twenty minutes each with the head of the FDIC and the str o lle r . E. E. Brown. The report says that lo g ic a lly the goverrvnent should iwn the stock of the Federal Reserve banks but that this is not too important. The report suggests electin g Federal Reserve bank directors ^ they are now chosen. The report also suggests that the presidents \} the Federal Reserve banks should be appointed by the Board of governors and confirmed by the d irecto rs of the Federal Reserve banks. prown states that he d i s l i k e s th is la t t e r suggestion as there have seen instances in the p ast when attempts have been made to appoint .r e s id e n ts of Federal Reserve banks for p o litic a l reasons when it would help to stra ig h te n out d i f f i c u l t situations which had arisen in Washington. The rep ort a lso suggests that with a Board of five ambers, no p resid en ts o f the Federal Reserve banks should be on the jpen Market Committee. The report also discusses bank supervision under th e Comptroller, the FDIC and the Federal Reserve System. It states that l o g i c a l l y there should be only one system of bank super vision but that th is i s not p o ssib le now. The report adds that where as there is some waste now because of the present system of examina tion., th e waste i s not too se rio u s. The report also expresses the belief that bank examination and supervision should be interrelated with monetary p o lic y . Brown b e lie v e s that the officers of banks would be the persons most l i k e l y to c r i t i c i s e Federal Reserve policy, and they would h e s ita te to be c r i t i c a l of policy i f the supervision and examination of t h e ir banks were related to monetary policies. Fleming. Edgar E. Mount joy telephoned him and said that the Executive Committee o f the National Bank Division of the American Binkers Association was d r a ft in g a statement protesting any weakening of the functions and p o s itio n of the Office of the Comptroller of the Currency. Burgess s t a t e s th at Haynes f e l t that the Comptroller’ s Office should not be under the Treasury where i t may be used for political purposes. Haynes may have thought of the Federal Reserve Board as the place to put the fu n ctio n s of the Comptroller's o ffice, but Burgess thinks that those who d iscu ssed the matter with Haynes have convinced him of the u n d e s ir a b il it y o f the move he may have had in mind. The language describin g the r e s p o n s i b i l i t i e s of the Comptroller’ s offite could indicate c l e a r l y that su pervision was separate from the functions of the Secretary of the Treasury as i t has always been up to recent years. Fleming. The C o m p tro ller’ s o ffic e is pleased with the National ^ank Division l e t t e r , but thinks the language could be strengthened. ; ieming b elieves McCabe i s not p a r t ic u la r ly anxious to have the supervisory powers, whereas E c c le s wishes to have them. E. E Brown asks whether the r e s u lt s of the election have made *ny change in the su ggestio n f o r a National Monetary Commission. He ^3 under the im pression that the idea was suggested on the basis of ; r*e anticipated e l e c t io n o f Governor Dewey. Brown is inclined to elieve that i t would be unwise to advance the idea of a National onetary Commission at the present time. ’o ]fer £ess s t a t e s th at he talked with Mr. Mitchell who believes that k ittle should be done or proposed now. I f we look at the banking R a t i o n o b je c t iv e ly , and assume we could get Congress to do anything ,? wjsh, there i s a c t u a l l y very l i t t l e that needs to be done urgently, f|rticularly when one co n sid ers the r i s k attached to introducing any - 4 Fleming in the Bach b e liev es Snyder is opposed to many study. of the conclusions E- E. Brown asks the opinion of the Council regarding the idea Monetary Commission, and a l l members of the Council agree that i t i s not d e sira b le now to suggest i t . f a N ational Burgess thinks that one of our principal jobs as bankers is to remove the emphasis now given to monetary policy as the cause of our rroblems. Atwood reports that John S. Graham, Assistant Secretary of the m^asury, t o l d him he was su rprised that no insurance executive had answered Parkinson. E. E. Brown b e lie v e s that the Council might express its opinion on some of the general aspects of the Bach report. away Fleming asks whether in substance the report does not aim at doing the dual banking system and centralizing authority. with E. E. Brown i s opposed to ce n tra liz in g supervision in a Board that has policy-making fu n ctio n s. The bankers are going to be the main policy c r i t i c s , and i t would be c le a r ly undesirable to place them in a p o sitio n where they would hesitate to c r it ic is e policies because of a p o ss ib le r e t a l i a t i o n in the examination of their banks. Odlin thinks t h is rep o rt i s a d e fin ite step to nationalize banks. E. E Brown. There i s a lso the question of giving the Board power to se le c t the p re sid e n ts of the Federal Reserve banks. Fleming. A p re sid e n t of a Federal Reserve bank who had been selected by the Board o f Governors would hardly dare to oppose the special reserve p lan as Sproul did. In cidentally, Senator Glass felt that Secretary Mellon was too dominant on the Federal Reserve Board. Burgess b e lie v e s th a t to have the Secretary of the Treasury on the Board of Governors weakens the Board. He states also that having a top coordinator weakens the p o sitio n of the Secretary of the Treasury. Fleming favors a sa la ry of $25,000 for the members of the Board. J- T. Brown asks whether the s a la r y provision is a part of the r'rieraT Reserve A c t . iL-E* Brown s t a t e s that the matter of increasing the salaries of ';;ard members could be included with suggested increases in other l^ernment s a l a r i e s , and i t might not be necessary to rewrite the eral Reserve A ct. gurgess b e lie v e s i t i s not d e sira b le to dignify this preliminary it ^rfc b y in d e t a ile d d is c u s s io n of i t . I t would be better to discuss 1n its broader a sp e c ts and philosophy. - 5 - y E. Brown s t a t e s that E ccles wishes the reserves raised and jpf does n o t . Sn)de Fleming b e lie v e s the Board has negatived any ^t}CTpated from r a i s i n g reserve requirements. K. E. Brown. gain it may have The question of the independence of the Board and he n e c e s s i t y fo r going along with the Administration is one of the problems. Burgess. In country a f t e r country, the central banking author ities-!^ the la s t a n a ly s is have had to go along with the Administra tion. A government i s wise which keeps the central banking authority independent so the c e n t r a l banking authority can take the criticism ^en the brakes have to be put on an in fla tio n . Burgess questions tether the person who wrote t h is preliminary report ever heard of rhis principle of c e n t r a l banking. E. E. Brown s t a t e s th at he i s strongly in favor of maintaining the dual banking system. B a s i c a l l y , any overhauling of the banking system should aim at p re se rv in g the dual system. Odlin thinks the Council should comment on the report in terms of broad p rin cip le s., E. E. Brown summarizes some of the broad principles upon which the Counc i 1 agr e e s : (1) On the whole the Council believes that the dual ranking system should be maintained. I t should not be weakened. 'hecks and balances which a dual banking system provides have been constructive; (2) The Council r e a l i z e s the problem of maintaining the independence of the Board a t the same time the Board works with the Administration. Some independence of thought and action by the Board is desirable. The Board should not be subservient to every wish and lewpoint of the T rea su ry, but i t w i l l also find many practical ways ^ cooperating with the A dm inistration; (3) The Council does not favor an Economic Council. This 'Ouncil would weaken the p o s itio n both of the Board of Governors and ■^Secretary of the T rea su ry. Moreover, the President has ample '“‘thority to appoint a Council without additional legislation ; (4) The Council fa v o rs su b sta n tia lly higher salaries for members of the Board o f Governors; ,,,, (5) The Council b e lie v e s that the Independence of the in;_Mial Federal Reserve banks i s of prime importance, including such /'.'ters, for example, as the e le c t io n of the president of a Federal ; f f ye bank by i t s d ir e c t o r s and the p articip atio n by the presidents r, '^e Federal Reserve banks in the a c t i v i t i e s of the Open Market '^ itte e j (6 ) The Council opposes combining the functions of ban and examination with the objectives of fisc a l and monetary Y licy. Bank examinations should be objective and should not be to carry out f i s c a l and monetary p o lic ie s. Bankers may on Occasion wish to c r i t i c i s e Federal Reserve p olicies, and they w ill be °elUctant to do so i f bank supervision is Interrelated with fiscal !nci monetary p o lic y . They w i l l h esitate to c r it ic is e policies because possible r e t a l i a t i o n in bank examinations. Freedom of speech would v restricted to the detriment of the banking system. mervision that the Penick s ta te s that he came to the meeting with the Impression the Hoover rep ort was a dead cock in the p it. He doubts whether Democrats would accept i t , they E. E. Brown thinks they might take those parts of the report felt they could use. - 7 - A DISCUSSION OF FURTHER STEPS IN CONNECTION WITH RESERVE REQUIREMENTS, AS WELL AS THE QUESTION OF THE TIMING OF RATES ON SUBSEQUENT GOVERNMENT ISSUES. K. E. Brown. I t i s w ith in the power of the Board of Governors r e s e r v e s , but the f i x i n g of in terest rates is within the :;wer of the T reasury, except as i t involves the activities of the Ven Market Committee. Brown then comments off-the-record on some of ;L developments in b u sin ess since the election, indicating cancella tions of c a p i t a l expansion programs and a reluctance to proceed with ,u5h plans u n t il the A d m inistration program on excess profits taxes, Mbor le g is la tio n and other m atters i s announced. ^ increase Fleming thinks the Council should ask whether the Board proposes to advance t h e s p e c ia l re s e r v e plan or what the Board may have in Sind. He b e lie v e s they are planning some move. Atwood asks how one can account fo r present bond prices. B urgess. One reason f o r the present bond prices is the belief that the Adm inistration i s determined to hold prices,and people accept the ability and w il li n g n e s s o f the Administration to support govern ment security p r i c e s . In a d d itio n , as E. E. Brown has suggested, there are c a n c e lla tio n s o f some c a p i t a l p rojects. If the Administra tion should proceed w ith an e x ce ss p r o f it s tax, and other proposals which would cause more h e s i t a t i o n in business, there might be a re cession. S. E. Brown th in k s the people b e lie v e this Administration will hold bond p r ic e s . Spencer. I f the A d m in istratio n enacts an excess profits tax, he believes that in d u s t r ie s would not be inclined to expand. Some u t i l i ties, however, may continue to expand. Burgess. The trend i s not c l e a r . Some business concerns are cancelling t h e ir expan sion programs while others are going ahead. If there is to be f u r t h e r i n f l a t i o n , i t w i l l be in durable goods. Williams. Consumer c r e d i t has declined. Some smaller industrial 'Oncerns are beginning to slow down and la rg e r concerns are inclined 0 wait regarding p la n t expan sion . Fleming. R eal e s t a t e a c t i v i t i e s are down, but the u t ilit ie s are c°ntinuing to expand. L T. Brown s t a t e s th a t there are no large manufacturing concerns h is^ a istric t. R e a l e s t a t e and housing are showing a rather marked ''^ne. The tendency i s to sto p , look and lis t e n . 32^22. comments th a t b u sin e ss in his d is t r ic t is going along c" • A few companies may be slow ing up but the u t i l i t i e s and oil C I r n*es are s ^ i l l expanding. Consumer cred it is o ff, and the second e r market i s d e f i n i t e l y o f f . - 8 Atwood says that the trend is mixed although he has not heard of major cancellations of expansion programs. He thinks it is too early to trace any definite economic trend. His district has never been as prosperous as it has been in the last few years. any Penick reports there has been no real slowing up of business activity in his district. Retail business activity is high, and the cotton and rice crops have been good. J. T. Brown states that in his section the merchants have heavy in v e n to rie s. Woods reports business in his district is good, especially in Texas. A very p rofitable crop is being marketed. He has heard of major cancellations of construction. Small construction is still no going ahead. Some farmers are inclined to increase their acreage. Oil production has e x c eeded the all-time high, Odlin. The s i t u a t i o n in his district is complicated by the shipping s t r i k e . There have been substantial expenditures for power. Oregon and W a s h i n g t o n vo t e d for large pensions and bonuses. A great deal of school c o n s t r u c t i o n is going on. The used car market is down. Odlin has not noted any serious overstocking in inventories. He has been told that there is no real lumber market and that the honeymoon in lumber may be over, although the plywood market is still good. Odlin cannot say that the deflation has come, but he feels that every day we are a day nea r e r it. The apple market is not good. E. E. Br o w n states large paper com p a n y w h o good. that he has talked with a representative of a says that the market for fine paper is not Burgess. Fr o m the comments which have just been made it is obvious that the pic t u r e is not clear. From the standpoint of the Board it would be logical not to make any deflationary move at present. If there Is any i n f l a t i o n , it is not in bank credit but in durable goods. Burgess th e n pre s e n t s members of the Council with copies of the two pages w h i c h follow Indicating the expenditures for new durable goods. November 19, 191*8 Present Causes of Inflation in Expenditures for Durable Goods Whereas the increase in bank loans and investments, and in tank deposits appears now to be checked, this is not true of ex penditures fo r durable goods, which show continued expansion. These are financed la r g e ly through the ca p ita l markets, through life in surance companies, or through business savings. The fig u r e s are shown in the attached table and chart, which indicate that expenditures fo r new durable goods in 1948 are likely to total about $57 b i l l i o n . This is more than twice as large as in the late ' 2 0 's , and shows an increase of $8 b illio n over 1947. I t is in th is area that the active factors in the recent inflation are to be found, rather than in bank credit, which is the short term operating fund necessary for current operations when the volume of the co u n try 's business Is so large. With some increase in armament expenditures lik ely to occur, the greatest danger of i n f l a t io n l i e s in this area of durable goods. It is these huge expenditures which tend to run beyond our supply of labor and m a te r ia ls , and f a r beyond the amount of the nation’ s savings and lead to s a le s of s e c u ritie s to the Federal Reserve Banks. Expenditures of t h is so rt have a doubly inflationary effect, because to a considerable extent production in this fie ld involves the pay ment of wages and the purchase of m aterials, which creates pur chasing power, but does not create the things that individuals may buy with the money. A larg e p art of these expenditures is good and necessary for the long term progress of the country. We need more houses, more u tility c a p a c ity , more h o s p it a ls , new productive machinery, and new locomotives. The problem is one of timing. We have been trying to do too much too f a s t , and that has been larg ely responsible for rising p ric e s . I f the present h e s it a t io n in business proves temporary, and the in fla t io n a r y trend is resumed, we ought to turn our attention to these expenditures on durable goods as the active cause of inflation. It is there that something should be done to spread operations over a longer period and so reduce the in fla tio n a ry pressure. I f the same c r i t i c a l examination and campaign of public were undertaken in th is f i e l d as the bankers have voluntar ily undertaken in the f i e l d of bank cred it, the inflationary forces ": ould be dampened down. The problem i s , therefore, to find methods Z'1 giving lead ersh ip and r e s p o n s ib ilit y in this fie ld comparable to has been done in bank c r e d it . ;3ucatlon - 2 - Expenditures for durable goods cover a vide range, from business plant and equipment, through railroad equipment, housing, automobiles, and public spending by the Federal government and by states and municipalities. To deal with such a diverse group of institutions and people calls for respected leadership. It is suggested that a capital goods committee be appointed by the President, consisting of such government officials as the Secretary of the Treasury, the Chairman of the Federal Reserve Board, The Secretary of Commerce, the Chairman of the S.E.C., and the of the National Resources Board; and consisting also of representatives, such as a banker, an insurance president, an industrialist, an agriculturalist, and a labor leader. Chairman public It is suggested that this committee be asked to examine the country's plans and program of expenditures for durable goods, and make recommendations to the government, to business, and the general public as to what types of durable goods expenditures might wisely be postponed in order to avoid congestion of plants and markets, and practicable methods of achieving this goal. The recommendations of such a committee would carry great weight with insurance companies, business concerns, and the Federal and state governments. This proposal would have the advantage of focusing public attention on the place where the inflationary danger is greatest. Expenditures for New Durable Goods Billions of Dollars Producers Plant & Equipment 1919 7.1 1920 8.3 1921 1922 1923 192/* 1925 5.2 5.8 7 *9 7.7 8 .2 1926 9.1 1928 1929 8 .8 10.1 1930 8.3 1932 1933 1934 2 .8 2.4 3 .4 1927 1931 W35 W36 W37 1938 W39 1940 1941 1942 1943 1944 1945 1946 1947 1948 Consumers Durable Goods msing 8 .8 5.1 4.3 5.8 7 .6 5.4 6.0 7.4 9.4 7.0 5.3 6 -4 8.0 14.0 19.1 22.0 Total Institutional (Private) Total Private Total Public Granc Tota: 1.8 5.5 7.3 .2 14.5 .9 15.5 1.7 2.0 3.4 4-.4 4.8 6.4 5.1 5.7 7.3 7.2 8.2 7.1 9.1 11.7 11.9 .2 .3 .4 .4 .5 16.7 12.6 15.3 20.0 20.0 1.2 1.5 1.7 1.6 1.9 17.9 14.1 16.9 21.6 21.9 5.1 4.8 4.6 4.4 3.2 7.8 8.5 8.1 8.6 9.2 12.9 13.4 12.7 16.9 12.4 .6 .7 .7 .7 .6 21.7 23.2 22.2 22.5 23.1 2.1 2.1 23.8 2.4 2.5 2.4 25.3 24.6 24.9 25.5 1.8 1.4 .5 •4 •4 7.0 5.3 3.3 3.4 4.4 8.9 6.7 3.9 3.8 4.8 .5 .4 .2 .1 .1 17.7 12.2 6.9 6.3 8.3 2.8 2.6 1.8 1.3 2.0 20.4 14.8 8.7 7.6 10.4 .8 1.4 1.7 1.6 2.2 5.5 7.1 6.4 6.4 8.4 9.5 7.4 8.6 .1 .2 .2 .2 .2 10.8 14.4 17.2 13.1 14.8 1.8 3.3 2.8 3.4 3.4 12.6 17.7 20.0 16.4 18.3 2.5 2.9 1.4 .8 .6 7.4 9.1 6.3 6.6 6.2 9.9 12.0 7.7 7.3 6.8 .2 .2 .1 17.5 21.6 14.8 12.6 13.2 3.6 6.7 13.8 9.2 3.6 21.1 28.3 28.6 21.8 16.8 .8 3.4 5.5 7.4 7.7 16.2 21.0 8.5 19.6 26.5 30.4 .1 .4 .5 .8 16.6 34.0 3.1 2.2 3.1 4.2 19.7 36.2 49.1 57.3 1.1 5.8 23.0 — .1 1. 46.0 53.1 SourCes. - I93B - Federal Reserve Bulletin, Sept. 1939, "Estimated Expendi tures for New Durable Goods 1919-1938", George Terborgh. 1939 - 1945 - Federal Reserve Bulletin, Sept. 194-6, "Estimated Durable Goods Expenditures, 1939-4.5", Doris P. Warner and Albert R. Koch. ^ 4 6 - 19/^g - Confidential Federal Reserve Report, October 6, 1946, "Estimated Durable Goods Expenditures 1946-48", Albert R. Koch. , Ho\ v u i n ^ _ I 12. 1948 Expenditures for Durable Goods Billions of Dollars - 9 Odlin believes it is time to ask the Board to leave the bank reserve position alone, as banks are controlling their credits satis factorily . Burgess believes that the Board will ask for more power. By its arbitrary action on reserves the Board has reduced the earnings of s‘ome banks. The ratio of earnings of banks to capital is much less than the comparable ratio of earnings of business to capital. S. E. Brown thinks that there may be some differences of opinion on the question of earnings, in view of the prices at which stocks of c o r p o r a t i o n s are selling. Odlin says that the banks are entitled to be free from the "heckling"at least for a time. Fleming does not believe the banks can increase their interest rates at present. Spencer believes the two per cent rate is soft. Fleming states that McCabe was influenced by a statement of Kurtz that the increase in interest rates will offset the losses banks have experienced because of the higher reserve requirements. Burgess. The holdings of the Federal Reserve System have in creased when they should have decreased. If the demand for capital exceeds the s u p p l y,then the price should go up. P.P.I.C. ASSESSMENT. Burgess states that the banks were promised relief when the fund reached one b i llion dollars. E. E. Brown b e l i e v e s it w o u l d be desirable to raise any question a s s e ssment through some channel other than the cf relief on the FDIC Board of G o v e r n o r s . Spencer thinks Board. it w o u l d be a mistake to take it up with the E. E. B r o w n . Af t e r various members of the Council agree with viewpoint, B r o w n states that it is apparently the sentiment Council that it w o u l d not advisable to take up this matter Board of Governors. Spencer's of the with the The meeting be a d j o u r n e d at 6 P.M. r - 10 - The Council convened at 1 0 : 0 0 A.M* on November 15, 19^8, in Room 932 of the Mayflower Hotel, Washington, D. C. All members of the Council were present* E. E. Brown suggests th a t the Council continue with its discussion of the second item on the agenda which was not completed yesterday. The item reads as follows: "A discussion of f u r th e r steps in connection with reserve requirem ents, as well as the question of the timing of ra te s on subsequent government issu e s." Burgess believ es th a t i t is the resp o n sib ility of the Council to report to the Board the unfavorable sentiment of bankers generally regarding the recent increase in reserves. He thinks the emphasis on bank reserves has been overdone. The increase in re serves did not do any r e a l good; i t merely transferred securities to the Federal Reserve System. Burgess does not believe the Board should move fu rth er in th is d ire c tio n . The increase in reserves actually did damage to a number of banks. I t may be true that the over-all position of banks was not injured, but individual banks were affected adversely. The increase in bank reserves and a l l the d is cussion about i t have given the people the impression that the in flation is due to the banks* I f there is an in fla tio n , i t is in the field of durable goods. The Board cannot avoid the responsibility of dealing with this s itu a tio n . The pegging of government bonds is making the in fla tio n p o ssib le . The Board cannot say that the expan sion in durable goods is outside i t s re s p o n sib ility , as the Board makes this expansion p o ssib le by pegging bond prices. When there is a demand in excess of the supply, p rices normally ris e ; this same principle should apply to i n t e r e s t ra te s . The Board might also use its influence with c i t i e s , s ta te s and m unicipalities by urging them to postpone construction a t the present time. The Board should also suggest to insurance companies th a t they use only th eir savings and n°t the proceeds from t h e i r sales of government secu rities. Williams asks how th is question w ill be dealt with in the ^cusslon with the Board. B. E, Brown re p lie s th a t McCabe suggested the discussion should be informal and th a t w ritte n statements should not be prepared. 5rovn states he Is not in complete accord with the statement by urgess. He is not c e rta in th a t the Board's action may not have re gained banks somewhat in th e ir lending a c tiv itie s . I t may have kept °®e banks from making sp e c ia l or marginal types of loans. Sooner or we shall have a recessio n - possibly a sharp one - and i f the - 11 - ard can then decrease reserve requirements considerably, i t may be % ful. Brown also s ta te s th at he does not agree with Leffingwell ^ a t r e s e r v e s should be fixed by law, with the Board given no power to change reserves. Burgess s ta te s th a t he is inclined to agree with ^ffingvell. E. E. Brown asks whether Burgess has changed his views so that he now favors removing the peg or whether he believes as he formerly did in a s lig h t drop in the peg. Burgess s ta te s th a t his views have not changed. He would favor dropping the peg to around 98 or 99. J. T. Brown asks whether the recent election upset will tend to curb the expansion in durable goods. Burgess re p lie s th a t no one knows whether or not the present situation is temporary. Odlin believes th a t the emphasis by the Board of Governors on bank reserves is lik e tre a tin g the rig h t arm for a disease of the vhole body. £he Board i t s e l f is engaged in the expansion of durable goods by constructing new branch buildings. Fleming. The Council approved building branches. Burgess. However, the Council did not approve construction of the buildings now. Fleming re p o rts th a t Woodlief Thomas told him that the insurance company sa le s of s e c u r itie s p ra c tic a lly ceased a fte r the election* E. B. Brown thinks we may be in for a recession which will stop the expansion in c a p ita l goods. If fear develops, the recession nay go a long way. Brown asks whether the Council has changed its viewpoint on pegging and fin d s there is apparently no change in the viewpoint of the members of the Council as previously expressed. Burgess b eliev es the Board w ill ask Congress for more authority over bank re s e rv e s , and he thinks the Council should meet this issue* He s ta te s th a t i f you were in the d r iv e r ’s seat, you Probably would not do anything r ig h t now. Burgess is inclined to Mieve that the power to change reserves should be in the hands tf ^ngress; if i t is placed in the Board’s hands, i t should be used ^7 on extreme occasions. I t gives the Board power to change the rjles at any time. E. E. Brown s ta te s th a t the Council is obviously in agreenot u n til the s i t u a t i o n becomes much c le a re r, the Board should ? disturb the reserve requirem ents or the support prices on lilce£nment bonds. The Council also finds th at banks generally dise(* the recent increase in reserve requirements and that this - 12 increase injured individual banks. The Council is also opposed to any further grant of power by Congress for an increase in reserve requirements. Burgess asks whether the Council should not also add that constant emphasis on bank reserves has given the people a picture that is out of focus, and one that has failed to place the emphasis 0n other aspects of the economic situation, such as the expansion in durable goods where i t belongs. E. E. Brown says that the Council could add that it believes the extension of bank c re d it, other than that encouraged by the government, for example, in housing, has played a very small part in inflation. I t is up to the Board to call attention to the fact that the main expansion has been In other directions. He is inclined to believe that lowering the bond peg w ill increase the sales of bonds, because of fear, and he doubts whether the insurance companies would cease selling. The insurance companies could be helpful if they vould make th e ir investments in capital goods only out of savings and not out of the sale of se c u ritie s . Burgess s ta te s th at there are dangers in the course he has suggested, but the Council cannot afford merely to walk around the problem. Spencer thinks some insurance companies have stopped selling because they have been talked to by government officials. E. E. Brown says the election was won with promises for low cost housing and for the support of farm prices. Consequently, the Administration, Congress and the Board of Governors will hardly be inclined, under these conditions, to refuse to carry out their promises. Fleming thinks th at the special reserve plan may be brought out again. Atwood asks Kemper to express his views on business con ditions in his d i s t r i c t , as Kemper was not able to be present yesterday when other members of the Council reported on conditions in their respective d i s t r i f t s . Kemper does not believe the bond peg will be dropped. Therefore, i t may be b e tte r to forget i t for the present. He thinks the Board w ill ask for higher reserves. He also believes we shall have a continuation of wage increases.. Kemper believes there is a great deal of powder to explode before the recession begins. Penick asks whether there is any indication that the infla tion has run i t s course in Kemper’s d is tr ic t. Kemper, The department store sales in his district were off sharply a f te r the e le c tio n . However, there has been a big trop °f corn, and c a ttle prices are holding quite well. - 13 - states that the point he was making is that you something with nothing. He believes the Council should point out that the problem of inflation exists in the area of durable goods. Odlin says that if i t comes to a question of more bank re serves or government control of insurance companies, he would favor more bank reserves. He greatly dislikes the extension of government authority over any other field . Penick. I f the Board is working for higher reserves, then the Council ought to meet the issue frankly. Odlin believes that the Board should be notified that the Council w ill oppose any recommendations the Board makes for increased reserves. E. S. Brown thinks the Treasury would oppose the special reserve plan i f i t came up. Burgess believes the Council should call attention to the area where the problem e x ists, and that is In durable goods. The Council can at le a st say, "The coon is up this tree, not that one1'. Fleming. The Council can say to the Board that, as we see it at this time, i f there is a proposal to increase reserves, we shall oppose i t , E. E. Brown states that his opinion may differ from that of the Council, but he thinks the suggestions made by Sproul on reserves have some merit. Brown is not certain he would necessarily oppose any change in the present law. The primary purpose of reserves is to meet an emergency, and he does not like Leffingwell’s idea that you cannot lower reserves in an emergency. However, he does not believe either that the Board should have power to strangle the banks. Burgess does not think the Council has a closed mind against any change. The increase in reserves is not a method to be used as i t was recently. Any proposed change should require long consideration by the Board, the Council and the banks. J . T, Brown understands that an effort will be made to make the reserve requirements apply both to member and non-member banks, and he thinks that w ill make plenty of trouble. Odlin. The Council can state that It has no objection to a consideration of the whole question of reserves. Woods. The Council could add more emphasis to the idea that banks have not been responsible for the inflation. #is bank takes the stand that i t is not making speculative loans. He thinks the increase in reserves has tended to restrain credit extension. Burgess never meet I - 14 - Are we not In danger then of admitting that greasing reserves Jias re stra in ed credit? S. E. Brown thinks th at the recent increase in reserves c h e c k e d lending in small banks. Woods agrees. Burgess assumes th at the country banks sold some govern ments to meet the increased reserve requirements. Woods reports th at the country banks did not s e ll many securities. Spencer* The ta lk of removing the peg probably induced some medium or sm all-sized banks to s e l l governments. (At this point several members of the Council suggested th at while country banks may not have sold many s e c u ritie s to meet the increase in reserves, they did draw down balances from th e ir correspondents in larger communities and their correspondents in turn had to s e ll se c u ritie s ). Woods. I f an increase in reserves does r e s t r i c t credit to any extent, the Council cannot argue that more reserves would not restrict credit fu rth e r. F in ally , with higher and higher reserves, the banks would get to the bottom of the b a rre l in th eir a b ility to lend. Burgess. I t is a deep b a rre l. Burgess says that Brown has the Council’s viewpoint on th is question, but the Board may also wish to know the Council’s viewpoint regarding the short-term rate . There may be some value in a s lig h t increase in this rate . E. E. Brown. The sale of long-term governments at present at least has p ra c tic a lly stopped, regardless of whether i t is due to more confidence that the bond peg w ill be held, or due to the feeling that recession is imminent. Brown then comments, #ff- the -record, on certain discussions th a t have taken place on the b i l l and c e rtific a te rates. Atwood asks whether a 1 3/8 per cent rate would mean a higher rediscount rate* Burgess does not believe a 1 3/8 per cent rate would require raising the rediscount ra te . E. E. Brown sta te s that from the discussion which has taken Place, he believes the Council is agreed that for the next two or three months, u n til the situ a tio n is clearer, i t would not be d e sir able to change (l) the reserve requirements; (2) the rediscount rate; °r O) the support policy for government secu rities. Burgess. i - 15 - Burgess suggests adding to the summary Brovn has given the Council's views on a 1 3/8 per cent certificate rate in January. B u r g e s s would favor raising the certificate rate in January. E. S. Brown would not be inclined to favor raising the c e r t i f i c a t e rate in January for the reasons he has given off-therecord. T h e question is really one of whether the rate should be r a i s e d i n January; April can be considered when the t i m e arrives. Burgess says that the Council has previously Indicated that it is in favor of a modest increase in the short-term rate, E. S. Brown agrees that the Council may state to the Board that the Council has been in favor of a modest increase in the short term rate, but the timing should be a matter of agreement between the Board and the Treasury. Burgess agrees that the Council should state it does not favor rocking the boat at present although i t favors a modest increase in short-term ra te s. The exact timing should be a matter of agreement between the Treasury and the Board. * * * * * * * * (Brown asks whether any member of the Council has any changes to suggest in the Secretary's mimeographed notes for the meetings held on February 15-17, 19^8, April 25-27, 19^8, and September 19-21, 19^8. There were no suggested changes.) The meeting adjourned at 12:15 P*M. - 16 - The Council convened in the Board Room of the Federal Reserve Building at 2 :0 0 P.M. on November 15, 19^8, to hear Dr. Frank A. Southard, J r ., Associate Director of the Division of Research and S tatistics of the Federal Reserve Board. All members of the Council were present. ************************ of E. E. B r o w n p r e sents Dr. Southard who speaks on the subject "Current D e v e l o p m e n t s in International F i n a n c e ” . An outline Dr. S o u t h a r d ’s tal k follows: - 17 CONFIDENTIAL CURRENT DEVELOPMENTS IN INTERNATIONAL FINANCE X, The current situation in international finance. A. P r o d u c t i o n . 1. On a 1958 base, over-all production index, excluding Germany, reached 116; see attached table. Figures for Germany and Italy should be corrected to take account of the fact that 1938 was peak prevar year for them. 2. Barring setbacks, production should continue increasing. 3 . By te s t of production, Recovery Program is succeeding. B. Gold and dollar reserves. 1. S t i l l low, except in the United States, Switzerland, and one or two others. a. Note drain on dollar reserves, e.g ., in Latin America, associated with fu ll employment and in fla tion in contrast with drain due to depression. 2. Rate of drain slowing down because of better crops and fuel production, s tr ic te r import controls (e.g., Sweden), some improvement in European exports, some lessening of in fla tio n (United Kingdom, Italy ). Also important dollar aid from ERP, IMF, IB, and Ex-Im Bank. 3. But not much rebuilding of reserves--Canada, Italy, Belgium, Venezuela are exceptions. 4. Inflow to United States now running at rate of one b illio n per year of which, roughly, 300 million would come from reserves. C. Prices and budgets. 1. World situatio n generally one of rising prices and budget d e fic its. a. But sharp price increases not typical (France, Greece, China, exceptions). b. Also general progress in reducing budget deficits, in recognition of factor in inflation. 18 - - CONFIDENTIAL L E V E L OF I N D U S T R I A L P R O D U C T I O N IN E R P C O U N TRIES QUARTERLY (1938 Belgium 1946 I II III IV 1947 I II III IV 1948 I II Denmark 77.8 84.8 90.1 99.2 99.0 93.7 1 0 *1.0 102.5 France Western Germany Italy Sw e d e n 61.4 68.3 75. 9 92.7 103-3 94.7 95.9 100.7 100.4 110.9 110 .0 8o.3 90.0 85.8 83.8 89.1 91.1 105.3 113.3 119.0 106.3 120.0 136.3 137.6 136.0 137.6 97.9 111.5 110.9 121.7 79.5 82.4 101.7 I 06.6 125.3 133.3 139.6 141.9 124.1 93.0 100.3 91.3 95.7 25 .0 62.2 31.9 34.7 113.1 108.3 107.7 114.0 118.3 115 .6 115 .2 124.0 122.7 109.7 1X4.0 38.1 4o.3 Norway U n ited JOver-all Kingdom index 88.1 108.0 23.1 26. 4 30.5 30.0 3 6 .1 Nether lands 133.5 135.2 132.7 137.3 67. 3 82.7 77.0 89.7 108.2 100.8 - 100) 35.3 60 .I 7 1.5 66.0 12 2 .1 67.1 75.1 76.8 83.0 Over-all index, excluding Germany 81.1 90.6 91.6 '99.9 92.6 94.6 105.1 103.8 110.7 95.0 97.6 II 6.0 77.7 87.4 87.1 11^.2 - 19 2. ERP-area. a. Price trends (see Federal Reserve Bulletin) indicate situ atio n not dissim ilar to United States, except in France and Greece. b. Budget d e fic its reaching point where could be covered, p a rtic u la rly i f ECA local-currency counterpart can be u t i li z e d . 1. Local-currency counterpart problems, p a rtic u la rly with respect to: (a) Reduction of debt by use of counterpart. (b) D ifficulty of obtaining detailed programs for use of ECA, NAC, in passing on release of counterpart. (c) Use of the 5 per cent segregation for U.S. D. Balance-of-payments disequilibrium continues, 1. Chiefly a dollar gap, everywhere: Europe, Asia, Latin America, Canada. 2. Also a ste rlin g gap in Europe:' Sterling will be scarce by end of 1949. 3. No systematic figures as to ERP-area global balance. a. So far as United Kingdom is concerned, situation re la tiv e ly good: trade d e ficit with United States reduced from L21.6 million per month in third quarter 1947 to L9-3 million per month in July and August 1948; and with entire world from L67.9 million to L 3 6 . 4 million. But the gap is s t i l l large and United Kingdom is s t i l l losing gold-reserves now below $2 b illio n . b. U.S. trade with 16 ERP countries and Germany showed surplus of $174 million quarterly in 1938, $1,270 million in second quarter 1947, and $839 million in second quarter 1948. 11. Exchange-rate situation. A. Mexico as example of full-employment country encountering exchange in s ta b ility . 1. The d if f ic u lt choice: reduce imports, cut back domestic development, balance budget, re s tric t credit, in order to build up dollar reserves and hold peso steady; or le t peso-dollar rate fluctuate. - 20 B. - ERP-area. 1. In e a r l y stages of r e c overy effort, some overvaluation justified, w i t h emphasis on imports rather than exports. 2. B ut time c o m i n g w h e n exchange adjustments consistent w i t h b a l a n c e - o f - p a y m e n t s necessities must be faced, 3. V e r y r o u g h guess is that 1949 is still too early f or e x c h a n g e adjustments on wide scale. a. C i t e d c o n f l i c t of opinion: Hazlitt, Haberler, B a l o g h (latter w r i t i n g in Harris' new book on E c o n o m i c F o r e i g n Policy). b. B ut some c o u n t r i e s (Norway? Sweden? Denmark?) may be r e a d y for adjustment during 19 ^ 9 > provided they c a n a s s u m e s t e r l i n g - d o l l a r rate will not change. M y o wn h u n c h is that sterling-dollar rate will not c h a n g e d u r i n g 19 ^ 9 • * * * * * * * * * * * * * The m e e t i n g a d j o u r n e d at 3:30 P.M. On November 16 21 - lgiift F e d e r a l A d v i s o r y C o u ncil h p i h ° A ' M’ t h ® m e e t i n g w i t h t h e B o a r d o f r™ a j o i n t t h e F e d e r a l Reserve S y s t e m ? n e ^ ° r s o f Room o f t h e F e d e r a l Reserve B u U d i n g a rd All members and th e of the f m m o n , f o l l o w i n g m e m b ers o f l h e ^ o l r f ’ orespnt. ou aoard of G o v e r n o r s w e r e G o v e r n o r s E c c l e s , Szym czak, D r a p e r ^ E v a n f 6 ' V a r d a m a n a n d C l a y t o n ; a l s o Hr. C a r ^ e n l e ? ’ S e c r e t a r y o f t h e B oard o f G overnors ’ A D I S C U S S I O N OF F U R T H E R S T E P S IN CONNECTION WITH R E S E R V E R E Q U I R E M E N T S , AS W E L L AS THE QUESTION OF THE T I M I N G OF R A T E S ON S U B S E Q U E N T GOVERNMENT ISSIIF..^ E. E. B r o w n s t a t e s that M c C a b e tele p h o n e d him suggesting that the discussion of the H o o v e r r e p o r t be Informal and without written state ments. The C o u n c i l b e l i e v e s this pr o c e d u r e is desirable, and in view of the ou t c o m e of the e l e c t i o n the H o o v e r report may be less signifi cant than if D e w e y h a d w o n (Eccles c o m m e n t s ,"words of wisdom” ). Brown says that it m a y be d e s i r a b l e to consider the second item on the agenda first, as g i v e n above, and di s c u s s the first item on the agenda during the l a t t e r p a r t of this joint meeting. McCabe agrees. E. E. B r o w n s a y s t h a t the u n e x p e c t e d outcome of the election has brought at l e a s t a t e m p o r a r y r e l u c t a n c e on the part of business con cerns in some s e c t i o n s of the c o u n t r y to promote their capital expan sion programs. B u s i n e s s is c o n c e r n e d w i t h such questions as e ex cess profits tax, t he T a f t - H a r t l e y law and other matters affecting business. The C o u n c i l b e l i e v e s that b u s i n e s s concerns will be n- olined to wait on e x p a n s i o n p l a n s until t h e d o . is announced and t h e r e is some i n d i c a t i o n o w , 0 f the feeling The government bond m a r k e t is stronger, ed prices, and also that the Truman A d m i n i s t r a t i o n w i l l „me 0f new corporate securpartly because of the f e e l i n g that t e cancellation or postponement itiea offered w i l l be less b e c a u s e of the -= ^ ves that until the ' expansion plans. Th e C o u n c i l , clearer, it would be best trend following the e l e c t i o n b e c o m e s much c no(. be d r_ n°t to "rock the boat". The C o u n c i l believes rediscount to c h a n g e r^te, and (3) (1) the the support reserve r e q u irements,^ 2 ) ^ _ prices ® ea connection bank the C o u n c i l believe with the r e c e n t i n c r e a s e i n b a n g e neral s e n t i m e n t o f b a n k e r s reserves is n o t the p r o p e r m e t h Ration. Resent One of the r e s u l t s conditions is unfavorable. Inc re^ i e m of indealing w i t h the P ^ b l crease in b a n k reser of «« “ ®fer of 6 ^ ^ f n^any si,Pp ^ S erve S ys tem , f om b a nks to the F e d e r a l R ^ e r Possible b e n e f i t s r e s u l t i n g f Problem of d e b t m a n a g e m e n t by earnings of banks may be sat 1 s t reserves affects t h e earnings is willing to study the Digitized forC°uncii FRASER t h e r e ^ " f ^ d making the in c r e a s in g res e r v e s anj(_ ^ over. T r e a sury more d arbltrary in c re a se ^ but an dversely. indlvidual banks a ^ ^ question of ^ The fche - 22 - beSt method of determining the proper reserves. The study should be comprehensive one embracing all aspects of the subject. The repeated e m p h a s i s on bank deposits and on the banks as a major factor in causing inflation gives the public an erroneous impression of the principal causes of the current inflation, which are to be found, for example, in the great expansion in durable goods and in other areas of our economy that have been discussed on previous occasions by the Board and the Council. Attempts to control through monetary policy an inflation which has resulted from conditions largely outside the banking system are certain to be unsuccessful. The Council appreciates that members of the Board have on some occasions called attention publicly to those factors outside the banking system which are principally responsible for the inflation. If these facts could be reemphasized whenever the occasion permits, it would be very helpful to a better public understanding of the situa tion. With the conditions now prevailing, any proposals to require still higher reserves, or special reserves for banks, would be opposed by the Council and by bankers generally. In relation to the matter of interest rates on government securities, the Council has at other times stated that under present conditions it would be beneficial to our economy to have a modest rise in short term rates. However, the exact timing of any increase in such rates should be a matter of agreement between the Board of Governors and the Treasury. McCabe states that he thought an informal discussion on this whole subject would be desirable. Burgess presents to the members of the Board copies of the figures for expenditures for new durable goods which he had given to the Council previously, and which are included earlier in these notes. Burgess states it is important to emphasize these expenditures so that the public can be educated as to the significance of the durable goods expenditures as they relate to inflation, rather than to place con stant emphasis on bank reserves and on banks as the source of the in flation. McCabe. It is also important capital expenditures. Some capital bad. McCabe asks whether there is government securities by Insurance to know something of the type of expenditures are good and some are any information on the sale of companies. Burgess states he understands there is a distinct pause in the sales of government securities by the insurance companies. Fleming has been informed that the sales of government securities by insurance companies have practically dried up since the election. McCabe asks what the Council thinks of the allocation of raw materials. Burgess states he prefers someone else would speak on this Point" He believes that the restrictions may have been removed too soon on the size and type of building. Does the Council feel that the deflationary forces may greater than the inflationary forces? McCabe. be now - 23 E. E Brown states that the Council does not know. The opinions mixed"] Brown has f ound some *cancellations of expansion programs ifhis district. Eccles. The result of the election may have been beneficial. Tf theTelection brings a change in psychology, it will accomplish what * monetary authorities have been unable to do. D e w e y ’s election ay have meant a boom psychology. said. E. E. Brown replies that there may be much to what Eccles has Many business men are somewhat apprehensive. Evans. How soon will they get over this feeling? E. E. B r o w n . announces and the It depends on the program the Administration attitude of Congress. McCabe feels that to a certain extent the present attitude of business may be helpful. Draper thinks it may be helpful if it does not go too far. Spencer comments that the absence of a good equity market has meant more bank l o a n s . Eccles. We are trying to make up the backlog of shortages in various fields much faster than we should. The volume of credit we now have should be more than sufficient to meet our needs. Banks have expanded credit, whereas the government has reduced the supply of money. The banking system has completely nullified the government program. The attitude of the banks is one of trying to blame infla tion on everyone else but the bankers. The bankers should assume their share of the responsibility, because the backbone of an infla tion is money. The Board did not have the opportunity to restrict credit after W orld War II as was done after World War I. Fleming states that Eccles has not given the complete facts back of the situation. At the end of World War II there was a fear that we might have eight million persons unemployed. Higher wages were granted, and every encouragement was given to prevent an anticipated depression. Eccles. The government did promote housing and state and local governments did make large expenditures. The Council previously recom mended no increase in the reserves. The Board had to increase the reserves or withdraw the support of the peg. The last reserve in crease merely sterilized the inflow of gold and the purchase of secur ities from insurance companies and others. If reserves had not been increased, the banks could have expanded credit further. Fleming. How can the cost of living be reduced with support Prices for food? Eccles. Prices are not down to the support prices. - 24 J. T. B r o w n . What effect has government lending to a bank for cooperatives and the C.C..C. in promoting the inflation? If the government did not make loans, the cotton would be sold. Cotton is being put under the loan at prices above the market.. O d l i n states that he does not wish Eccles* remarks to go without further disagreement with the views Eccles has expressed. The price mechanism performs an important function in our economy. An inflation cannot be stopped simply by increasing reserves. Burgess. Credit expansion cannot be stopped as long as the spigot is open so insurance companies can sell government securities. Insurance companies sell their government securities and place the pro ceeds in the economy. If there is a volume of capital goods expansion, it will require bank credit. Banks are obligated to grant credit to customers to carry on their businesses after their capital goods ex pansion is an accomplished fact,, Emphasis is being erroneously placed on the banks as the cause of all the trouble. Szymczak. Assuming the insurance company selling and the capital goods expansion cannot be stopped, what else can be done? Burgess. The United States government has done nothing to cur tail its own capital expenditures. Szymczak. Just what can the Board do about Congress when the public has apparently approved further expenditures? Fleming reads figures from the monthly letter of the National City Bank of New York for November 19^8, showing that the biggest suppliers of new funds to the corporate bond and mortgage market this year have been the life insurance companies. Ec c l e s . The insurance companies are the worst offenders. in a dilemma on this problem. We are McCabe comments that this is an unusual situation where the regulatory body sits with those to be regulated and discusses major phases of the regulations. As the world and the United States drift to the left, it is important to preserve this freedom of discussion. Fleming. Only a few years ago everyone said the banks were not extending credit and now the responsibility for the inflation is blamed on them. There is a danger that the banker may be placed in the doghouse, and then the next step may be the government extension of credit. When that happens, the free enterprise system is through. Odlin asks whether the Board anticipates requesting more power over bank reserves; if so, the Council would like to have time to arrange a caravan to come to Washington to appear against the proposal McCabe. The Board has not had a meeting yet on the subject. - 25 THE QUESTION OF THE REORGANIZATION OF FEDERAL CREDIT AGENCIES IN VIEW OF THE ACTIVITIES OF THE HOOVER COMMITTEE Brown states that the Council finds itself in agreement on a number of major principles relative to the Federal banking and credit agencies. (1) The Council believes in the maintenance of the dual banking system. No change should be made which would weaken this system. The checks and balances which a dual banking system provides have been constructive. The Bach report states that all banks should logically be under Federal control,but it says that politically this is not possible. (2) The Council realizes the problem of maintaining the independence of the Board while providing at the same time reason able cooperation with the Administration. It is imperative that the Board have reasonable independence of thought and action. It should not be subservient to the Treasury and to every change in the view point of the Treasury. However, the Board should, whenever possible, find practical means of cooperating with the Treasury in the develop ment of sound fiscal and monetary policies. The suggestion in the Bach report for reducing the size of the Board to five, including an Assistant Secretary of Banking in the Treasury, is not desirable, as it would reduce the importance of the Board. (3) The Council also does not agree with that portion of the Bach report which favors the establishment of an Economic Council. An Economic Council would re duce the importance of the Board. Moreover, the government has power to create a council now, without asking for legislation. (4) The Council favors substantially higher salaries for the members of the Board of Governors. (5) The Council believes that the maintenance of the independence of the individual Federal Reserve banks is of special importance, including such matters, for example as the election of a president of a Federal Reserve bank by its directors and the partici pation by the presidents of the Federal Reserve banks in the activi ties of the Open Market Committee. (6 ) The Council opposes combining the functions of bank supervision and examination with the objectives of fiscal and monetary policy. Bank examinations should be objective and should not be used to carry out fiscal and monetary policies. Bankers may feel impelled on occasion to criticise Federal Reserve policy, and they may be reluctant to do so if bank supervision is interrelated with fiscal and monetary policy. Bankers who are criti cal may fear retaliation in bank examinations. Freedom of speech may be restricted to the detriment of the banking system. McCabe expresses appreciation for Brown's analysis of the Bach report and states that the analysis was most comprehensive and help ful. He states that the Board has not made a study of the Bach report. If the analysis that Brown has made could be studied point by Point, it would be very much worthwhile. He wonders if everyone has an understanding of the dual banking system and its limitations. He asks what there is that could be done to make the dual banking system more constructive and make it work better. Odlin states he believes it works well now. McCabe. Bankers in the small banks question the value of the Federal Reserve System. Atwood. It may be the matter of reserves which concerns them. - 26 McCabe r e p l i e d that reserves do concern particularly the small panics, b u t d e s p i t e the r e c e n t increase In reserves, the System has a gain in m e m b e r s . He asks w h a t can be done to make the System better. A t w o o d . One t h i n g reserves f u r t h e r . that ca n be done is not to increase the JS. E, B r o w n p o i n t s out that competitive pressures in the dual banking s y s t e m hav e b r o u g h t improvements in banking. He doubts whether s m a l l b a n k s in s m a l l cities do obtain real advantages from membership in the F e d e r a l R e s e r v e System. On the other hand, there are a n u m b e r of g o o d - s i z e d State banks that should belong. He does not be l i e v e m e m b e r s h i p s h o u l d be compulsory. J. T, B r o w n . T h e r e Is no real r e a s o n for some small banks to belong to the System. T h e y m a k e their income from small charges. Membership In the S y s t e m w o u l d give them all the disadvantages and none of the a d v a n t a g e s . McCabe. W o u l d it be a d v i s a b l e to make non-member banks subject to the same r e s e r v e r e q u i r e m e n t s as m e m b e r banks? J. T. B r o w n . It w o u l d be g r e a t l y opposed. McCabe. The s m a l l m e m b e r banks ments a p p l y to the n o n - m e m b e r banks. J . T . Brown thin k s favor making reserve require there is some selfishness in this viewpoint. M c C a b e ask s w h a t the C o u n c i l w o u l d say to the small member banks who c o m p l a i n of the d i s a d v a n t a g e s of the System. J. T. B r o w n . T h ere are d i s a d v antages in exchange requirements, reserve r e q u i r e m e n t s , a nd l o a n limitations. There Is room in our economy for b o t h m e m b e r a n d n o n - m e m b e r banks. Vardaman. Should the question of deposit insurance play a part? Should a bank having government insurance be required to have member ship? J. T. B r o w n . The F.D.I.C. was the result of a national emergency. The banks o w n the F e d e r a l R e s e r v e System, S z y m c z a k d i f f e r s w i t h J. T. B r o w n ’s viewpoint and states that only in a s e n s e do the b a nks own the System. McCoy. The s m a l l state b a n k e r remembers 195?• He remembers the Federal R e s e r v e b a n k r e q u i r e d e v ery n m - m e m b e r bank to ship currency in that p e r i o d . A n o n - m e m b e r b a n k can operate satisfactorily. Fleming. If a s m a l l n o n - m e m b e r bank carries correspondent accounts f r o m w h i c h It gets special services, It hesitates to split Its b a l a n c e s a n d giv e par t of them to the Federal Reserve bank fron whom It c a n n o t g e t s u c h p e r s o n a l service. - 27 P e n i c k . A s m a l l n o n - m e m b e r b a n k can c a rry a clearing account with a F e d e r a l R e s e r v e b a n k a n d g e t a l m o s t all the advantages of membership. large M c C a b e s t a t e s t h a t i n P h i l a d e l p h i a he h e a r d comments that the city b a n k s h a d u r g e d s m a l l b a n k s to w i t h d r a w from membership* Williams. The F e d e r a l R e s e r v e b a n k in the third district is making a r e a l e f f o r t to s e l l b a n k e r s on the value of mem b e r s h i p in the System, .* A t w o o d s t a t e s t h a t the s i t u a t i o n Is v e r y competitive in the ninth d i s t r i c t w i t h the F e d e r a l R e s e r v e b a n k g i v i n g forums, parties, and a r r a n g i n g o t h e r a c t i v i t i e s of i n t e r e s t to the bankers. Flem i n g states that po l i t i c a l l y bankers in one s y s t e m . it is i m p o s s i b l e to get all E. E. B r o w n s u g g e s t s t h a t some c o n s i d e r a t i o n be g i v e n now to the question o f tlie i n d e p e n d e n c e of the B o a r d of Governors. History has shown t hat a c e n t r a l b a n k c a n n o t be c o m p l e t e l y independent. It m a y be said t h a t the B o a r d m u s t g o a l o n g w i t h the A d m i n i s t r a t i o n and be a d epartment of the T r e a s u r y , b u t the Co u n c i l be l i e v e s it is highly desirable to h a v e the m a x i m u m a m o u n t of i ndependence in the Board. The B o a r d m u s t r e c o g n i z e , h o w e v e r , that if it opposes an A d m i n i s t r a tion too s t r o n g l y , w a y s w i l l be found- b y that A d m i n i s t r a t i o n to meet the sit u a t i o n . A p p o i n t m e n t s m a y be mad e to the B o ard so that they run out e v e r y two y e a r s , a n d there m a y be pressure for resignati ns. Such a s c h e m e as the B a c h r e p o r t suggests of having an Assistant Secretary of the T r e a s u r y f o r B a n k i n g is not desirable. The Secretary of the T r e a s u r y w a s at one time a m e m b e r of the Board. He attended meetings w h e n i m p o r t a n t m a t t e r s wer e b e i n g considered, and sometimes perhaps d o m i n a t e d the d i s c u s s i o n w i t h o u t knowing the facts. At other times the S e c r e t a r y of the T r e a s u r y sent an A s s i stant Secretary of the Treasury. The C o u n c i l does n o t favor red u c i n g the number of members of the B o a r d , as it b e l i e v e s the Board*s Influence would be weakened. F l e m i n g . E v e r y time a n e w P r e s i d e n t took office he might wish to reduce or c h a n g e the n u m b e r of m e m b e r s of the Board. McCabe. As Evans t h i n k s the B g c h report. a B o a r d we have not d i s c u s s e d the C o u n c i l made E. E. B r o w n r e p o r t s proposal for a n E c o n o m i c the Bach report. an e x c e p t i o n a l l y good statement on that the C o u ncil can see no advantage in the Council. Eccles. In c o n n e c t i o n w i t h the discussion on the independence °f the Board, the q u e s t i o n is "independence of what?" According to the sta t e m e n t of the C o u n c i l the Board Is not to increase reserves; it is not to change the r e d i s c o u n t rate; it is not to change the Sagged b o n d prices. The B o a r d is not to increase membership in the Federal R e s e r v e System. The Council believes merely that the status Quo should be main t a i n e d . Eccles then reads the following statement Digitized forftade FRASERby S e n a t o r Glass in 1913: - 28 Cong. - Rec., House of Representatives (Mr. Glass Sent speaking) * Soptember 10, 1913 "The aim of this measure is t'n t„ from banks other than those to w h i c h ^ h ^ s V 686™ 63 ultimately bank reserves will J I S / J.?elon«- 30 that of the banks to which they b e l o L « n * Pn t ? l n t h e vaults reserve banks „ the reserve b a n k s takiL ?^ ^ ln the reSional reserve city and central resert^ the place of exlsti to member banks.” Qity bank3 in their relation * * * * * * * * * * Eccles c o n t i n u e s b y r e a d i n g the following Report o f t h e B o a r d o f G o v e r n o r s f o r 1915 . "*** F o r m a n y y e a r s t h e A*™ 31 it has b e e n lawful for banks to count le J e < Z elr m tS« w i 1t h °ther b a n k s , It was never toe i n t e n t i o n of the F e d e r a l Reserve Act that member banks s h o u l d c o n t i n u e the m a i n t e n a n c e of these reserve accounts. On the c o n t r a r y , the full me a n i n g of the Act is manifestly o p p o s e d to s u c h a n idea* It is the plain conception of the A c t t h a t the r e s e r v e banks should, to a very large e x tent, if n o t e n t i r e l y , p e r f o r m the work that is now being done b y c o r r e s p o n d e n t banks in this ’respect. This means that the r e s e r v e b a l a n c e s to be carried in the future by the r e s e r v e b a n k s i n s t e a d of b y the correspondent banks s h o u l d s e r v e as the b a s i s for a system of clearing and c o l l e c t i n g the e x c h a n g e s of the country. Whatever can be d o m e to b r i n g a b o u t the prompt and effective use of this n e w s y s t e m of b a n k settlement vill be done." J. T. B r o w n . The S u p r e m e Court in the R i c h m o n d c a s e said the^f oregoing” s t a t e m e n t d i d n o t e x p r e s s the purpose for which the Federal Reserve S y s t e m was e s t a b l i s h e d . E c c l e s . S e l l i n g the ser v i c e s of_ the_ F ®der® 1 R ^®g®vgeb f S s eare0in non-members is e x t r e m e l y d ifficult. The e era ndent tanks, no p o s i t i o n to c o m p e t e w i t h the services of the correspona J. T. B r o w n s t a t e s that e v e r y time he ^ " g ^ t h e press about that it o u g h t to j o i n the System, ®°” ®r “ rs- P suc h statements seldom, some n ew p r o p o s a l of the B °®^d of Comptroller of the Currency ^ ever, a p p e a r f r o m the offices of the Comptroi ^ ^ has or the FDIC. J. T. Brown £ln?® changes its decisi n when it reads (At this point, 1 =05 P.M.,Jhe “eeti^adjo^ned^or^ after which the McCabe asks about meeti g the J ^ ^ ^ . C o u ncil s tional- M o n e t a r y C o m m i s s i o n . u n w i s e now to have o ,11 believes it tf0U^ p „ 0 useful purpose. E. E. B r o w n . The Counc ^ would ser Digitized for a FRASER National' M o n e t a r y Comm i s s i o n , - 29 If an objective group could study the whole question of bank reserves, it would be helpful. The prim a r y purpose of reserves has been to have them available for use in a national emergency. M c C a b e . Unless a commission has a great many bankers on it, it is apt to come up w i t h some new proposals. He thinks each new c o m mission tends to b r e a k d o w n checks and balances. E. E. B r o w n . In a National Monetary Crmmission you would have Congressmen as members or you would go outside and include bankers, in which case other groups, such as labor, would insist upon partici pation in the w o r k of the Commission. The Commission then probably would not be an objective one. In connection with the matter of salaries, the Council favors larger salaries for the members of the Board. McCabe. Higher salaries for the Board members would also mean higher salaries for members of the staff. E. E. B r o w n . The Council believes in considerable independence for the individual F e deral Reserve banks, including such matters, for example, as the election of the president of a Federal Reserve bank by its directors, and the participation by the presidents of the Federal Reserve banks in the activities of the Open Market Committee. There have been cases where the presidency of a Federal Reserve bank has been held open to take care of a political situation in Washington. McCabe thinks the idea in the Bach report of the Board appointing the presidents of the Federal Reserve banks is wrong. Eccles states he does not know where Bach got the idea. McCabe. In many of the Federal Reserve banks it is unfortunate that the bankers have taken no real interest in the election of the directors. He cites the case of the Federal Reserve bank of New York as one in which the b a n k e r s h a v e t a k e n a real interest in the e l e c t i o n of the d i r e c t o r s . M c C a b e r e c o m m e n d s that in e a c h district a live nominating g r o u p b e set u p to n o m i n a t e the directors. E. E. Brown states that the Council favors having the presidents of the Federal Reserve banks participate in the work of the Open Market Committee as at present. McCabe. The Board is in agreement with the Council on this matter. E. E. B r o w n . The B a c h r e p o r t favors com b i n i n g examinations, although it a d m i t s t hat the a m ount to be saved w o uld be small. The report a lso u r g e s c o m b i n i n g e x a m i n a t i o n and policy-making. The Council r e c a l l s t hat E c c l e s has u r g e d e a s i n g credit in periods of d e pression and t i g h t e n i n g c r e d i t in b o o m periods; the Council also recalls that E c c l e s has s u g g e s t e d using examinations to accomplish these objectives. The B o a r d ’s d u t y is to fix monetary policy, and if a banker c r i t i c i s e d the p o l i c y he might be subject to retaliation through examinations, if the p o l i c y - m a k i n g body also conducted the examinations. / - 30 Eccles s t a t e s this question. that the C o u n c i l is familiar with his views on E. E. B r o w n r e p l i e s that the C o u n c i l understands them, as Eccles has expressed t h e m s t r o n g l y on p r e v i o u s occasions. Eccles a s k s h o w the B o a r d can have a ny p o licy if it cannot change r e s e r v e s , the r e d i s c o u n t rate, or support prices and also is to have no a u t h o r i t y o v e r e x a m i n a t i o n s . B a s e d on experience, monetary p o l i c y a n d e x a m i n a t i o n are inseparable. If the B^ard is to contribute to the e c o n o m i c s t a b i l i t y of the country within the scope of monetary p o l i c y , it m u s t h a v e a u t h o r i t y over examinations. McCa b e b e l i e v e s examining a g e n c i e s . there is close c o o p e r a t i o n n ow between the V a r d a m a n s t a t e s t h a t som e of those in favor of a National Monetary C o m m i s s i o n t h o u g h t it m i g h t be u s e d as one means of c om bating a ny w i l d i d eas that m i g h t come f r o m the Hoover report. * * * * * * * * * The m e e t i n g a d j o u r n e d at 3 : 1 0 P.M. * * * * * * * * * As the m e e t i n g w a s to a d j o u r n the m e m b e r s of the Board stated that the P r e s i d e n t h a d a s k e d t h e m for r e c o m m e n d a t i o n s for possible legislation a n d t h a t these r e c o m m e n d a t i o n s w o u l d have to be submitted within a f e w days. The B o a r d sai d the C o u n c i l could submit to the Board a n y r e c o m m e n d a t i o n s it w i s h e d to make. * * * * * * * * * The E x e c u t i v e C o m m i t t e e of the C o u n c i l m et at 3:17 P.M.in the c o n ference r o o m of the B e a r d B u i l d i n g . All m e m bers were present except Fleming, b u t B r o w n i n f o r m e d F l e m i n g later in the d ay of the discussion. The C o m m i t t e e d i s c u s s e d the s u b ject m a t t e r of a possible s t a t e ment that m i g h t be p r e p a r e d and g i v e n to the B o a r d relative to the B o a r d ’s r e c o m m e n d a t i o n s to the P r e s ident. The Sec r e t a r y of the Council w i l l s e n d a l l m e m b e r s of the Council, as soon as It is a v a i l able, a n y s t a t e m e n t the E x e c u t i v e Com m i t t e e of the Council ma y submit to the B o a r d of G o v e r n o r s . The E x e c u t i v e C o m m i t t e e m e e t i n g a d j o u r n e d at 3*50 P.M. * * * * * * * * * * * The C o u n c i l a n d the B o a r d a g r e e d be held on F e b r u a r y 13-15, 19^9. that the next meeting would MEMORANDUM to the BOARD OF GOVERNORS from the FEDERAL ADVISORY COUNCIL November 22, 1948 The unforeseen outcome of the election has brought at least a temporary reluctance on the part of business concerns in some sections of the country to promote further capital expansion programs. This hesitation to proceed with business plans will probably continue until the Administration program relating to taxes, labor legislation, and other measures concerning business has been announced and the attitude of the new Congress can be appraised. The election has also affected the security markets. The government bond market has been stronger, partly because of the feeling that the Administration will maintain the present support policy for government securities, and partly because of the feeling that it is likely the volume of new corporate securities offered will be less because of the cancellation or postponement of expansion plans and that a government bond yielding 2 \ per cent may be an attractive investment in comparison with the probable yield on the reduced supply of high grade corporates. The members of the Council do not now find any clear and uniform economic trend evident throughout the twelve Federal Reserve districts. The Council, therefore, believes that until the trend following the election becomes much clearer, it would not be advis able "to rock the economic boat". Specifically, the Council believes it would not be desirable under present circumstances to change (l) the reserve requirements, (2) the rediscount rate, or (?) the support policy for government securities. The Council further believes that increasing bank reserves is not the proper method of dealing with the problem of inflation. One of the results of an increase in bank reserves under current con ditions is the transfer of government securities from banks to the Federal Reserve System, thereby largely nullifying any possible bene fits from increasing the reserves and making the problem of debt management by the Treasury more difficult. An increase in member bank reserves not only makes membership in the System less desirable, but It also affects the earnings of some banks adversely. The over all earnings of banks may be satisfactory, but the arbitrary character of an increase in reserves in all banks affects the earnings of in dividual banks unfairly. The repeated emphasis on bank deposits and on the banks as a major factor in causing inflation gives the public an erroneous im pression of the principal reasons for the current inflation, which are to be found in the great expansion in the production of durable - 2 ^oods including foreign aid and monetary policy largely outside housing and in large expenditures for defense, veterans’ assistance.. Attempts to control through an inflation vhich has resulted from conditions the banking system are certain to be unsuccessful. The Council appreciates that members of the Board have on some occasions called attention publicly to those factors outside the banking system vhich are principally responsible for the inflation. If these facts could be reemphasized vhenever the occasion permits, it vould be very helpful to a better public understanding of the situation. With the conditions nov prevailing, any proposals to in crease reserves under the present authority, to request additional authority to impose still higher reserves,, or to seek authority for special reserves for banks vould in viev of the foregoing comments be opposed by the Council, and by bankers generally, as detrimental to the best interests of the economy. The Council believes it vould be helpful if a comprehensive study could be made of the vhole question of bank reserves, including such subjects as the purposes bank reserves serve, vhether authority to vary reserves should be granted or vhether they should be fixed definitely by legislation, and the proper relationship of reserves to the various classes of deposits, and to the size and location of banks. This study might be undertaken by a committee including representatives of the banking agencies of the Federal government, the banking departments of the state governments and the banks. An objective and exhaustive study in this field vould be a useful guide to ultimate legislation. In relation to the matter of interest rates on Government securities, the Council has at other times stated that under present conditions it vould be beneficial to our economy to have a modest rise in short term rates. Even a small increase in these rates is helpful in reducing the demand for credit by making both borrovers and bankers avare of the dangers in the present situation. The timing of any increase in such rates should be a matter of agreement betveen the Board of Governors and the Treasury.
@FedFRASER