Full text of Minutes and Recommendations of the Federal Advisory Council : Meeting documents, November 14-16, 1954, Box 5, Volume 1951-1955

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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL

November 14, 1954
The fourth statutory meeting of the Federal Advisory Council for 1954 was convened
in Room 932 of the Mayflower Hotel, Washington, D. C., on November 14, 1954, at 2:10
P.M., the President, Mr. Brown, in the Chair.
Present:
William D. Ireland
District No. 1
Henry C. Alexander
District No. 2
Geoffrey S. Smith
District No. 3
George Gund
District No. 4
Robert V. Fleming
District No. 5
Wallace M. Davis
District No. 6
Edward E. Brown
District No. 7
W. W. Campbell
District No. 8
Joseph F. Ringland
District No. 9
Charles J. Chandler
District No. 10
George G. Matkin
District No. 11
John M. Wallace
District No. 12
Herbert V. Prochnow
Secretary
On motion duly made and seconded, the mimeographed notes of the meeting of the
Council held on September 19, 20 and 21, 1954, copies of which had been sent previously
to the members of the Council, were approved.
A complete list of the items on the agenda and the conclusions of the Council are to
be found in the Confidential Memorandum to the Board of Governors from the Federal Ad­
visory Council, which follows on pages 30, 31 and 32.
The meeting adjourned at 6 P.M.




HERBERT V. PROCHNOW

Secretary

28

MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL

November 15, 1954
At 10 A.M., the Federal Advisory Council reconvened in Room 932 at the Mayflower
Hotel, Washington, D. C.
Present: Mr. Edward E. Brown, President; Messrs. William D. Ireland, Henry C.
Alexander, Geoffrey S. Smith, George Gund, Robert V. Fleming, Wallace M. Davis,
W. W. Campbell, Joseph F. Ringland, Charles J. Chandler, George G. Matkin, John M.
Wallace, and Herbert V. Prochnow, Secretary.
The Council reviewed its conclusions of the previous day regarding the items on the
agenda and sent to the Secretary of the Board of Governors the Confidential Memorandum
which follows on pages 30, 31 and 32, listing the agenda items with conclusions reached by
the Council. The Memorandum was delivered to the Secretary of the Board of Governors
at 12 noon on November 15, 1954.
The meeting adjourned at 11:40 A.M.




HERBERT V. PROCHNOW

Secretary

29

CO N FID EN TIAL

MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL
ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR
THE JOINT MEETING ON NOVEMBER 16, 1954
1. What are the views of the Council with respect to the prospective business situa­
tion during the remainder of this year and the first six months of next year and
the probable changes that will take place in the volume and purpose of bank
loans in each of these periods?
Business generally is at a good level, but in a complex industrial economy there are
necessarily variations from district to district and from industry to industry. The effects
of the liquidation of inventories, some decline in investment in new plant and equipment,
the drop in defense expenditures, and the decrease in farm income have been largely offset
by substantial outlays for residential and public construction and by continued high con­
sumer spending. Aggregate economic activity has remained relatively stable. The slight
improvement which business has experienced this fall should continue during the balance
of 1954. There are at present no indications of any significant change, either upward or
downward, in the volume of business. After allowing for the usual seasonal movements,
the Council believes that the volume of business in the first six months of 1955 will con­
tinue the present slight upward trend.
So far this fall the increase in bank loans has been less than seasonal. The members of
the Council believe that, aside from loans to the Commodity Credit Corporation, the
volume of bank loans for the rest of the year will show less than the usual increase in this
period, and that banks will experience the normal loan liquidation after the first of the
year, followed by a seasonal increase in loans in the spring. The Council does not expect
any important change in the purpose of bank loans. There is, however, a continuing
tendency for the percentage of term loans made by banks to increase.
The foregoing conclusions are based upon the assumption that the Government will
not in the next six months, directly or by loans or guarantees to states or political sub­
divisions, bring about a considerably enlarged public works program, or substantially
increase defense expenditures. Such developments would undoubtedly be reflected in an
increase in economic activity and in the volume of bank loans.
2. What are the views of the members of the Council with respect to the System’s
current credit policies and what, if any, changes might be called for by develop­
ments during the balance of this calendar year or during the first two months of
1955?
The Council believes that current credit policies of the System have been helpful in
lessening the effects of the economic readjustments that have been taking place, and have
contributed to the maintenance of a good level of business activity. No important change
in these policies is at present indicated.
In general, open market operations have been well handled, but the Council is of the
opinion that the bill rate has in the last few weeks been unreasonably low and should now
be moderately higher. As the Council stated in its memorandum to the Board in February
1954, “the danger of disturbing the economy by making money unduly and artificially




30

cheap is as great as the danger of restricting business by too high interest rates, and a
consequent reduction in the use of credit.” A slight increase in the bill rate would have a
salutary economic effect and tend to restrain speculative activity.
3. In the light of the comments of the Federal Advisory Council at its meeting with
the Board in September, and the suggestions received from the Federal Reserve
Banks, the Board has given further study to the revising of Regulation A, adopted
by the Board in 1937. As a result of this study, certain changes have been made
in the draft sent to the members of the Council with Chairman Martin’s letter
of July 22, 1954. These changes will be forwarded to you as soon as possible and
the Board will be glad to have any comments that the Council might wish to
make at its November meeting.
The Council has carefully considered the redraft of Regulation A, dated November 1,
1954. The Council believes that the preface which it is proposed to print only in the Federal
Register should be incorporated in substance in the proposed statement of General Princi­
ples. Most bankers never see the Federal Register, and unless the substance of the preface
is incorporated in the statement of General Principles, very few bankers will know the
preface was ever published by the Board. If the preface is incorporated in substance in
the statement of General Principles, instead of printing it only in the Federal Register,
the Council sees no objection to the November 1 redraft of Regulation A.
4. What are the views of the Council on the question whether a commercial bank
should be authorized to issue preferred stock or debentures as a means of aug­
menting capital funds? If the policy of giving such authority were adopted, in
what circumstances should it be granted and what limitations should be applied?
There is a major difference between debentures, even if subordinated, and preferred
stock. Under present law interest on debentures is a deductible income tax item, but
dividends on preferred stock are not deductible. Consequently, primarily to gain a tax
benefit many banks if they had the authority might issue debentures rather than sell
additional preferred or common stock. The issuance of debentures or preferred stock with
questions of voting rights, sinking funds, and premiums for retirement would raise many
problems and should be permitted only under adequate supervision.
The Council believes that debentures should be issued only in emergencies, when
capital funds cannot be obtained otherwise, and where it is essential to protect depositors.
The Council believes that the right to issue preferred stock should be given only (1)
in emergencies to protect depositors, or (2) when it is clearly desirable to increase a bank’s
capital funds, and when the issuance of additional common stock could only be accom­
plished at a price which would seriously dilute the value of presently outstanding common
stock and materially injure existing shareholders.
The Council believes that any authority to issue debentures or preferred stock should
require the approval of the following Federal agencies for the different groups of banks:
1. National banks—Comptroller of the Currency;
. State member banks—Board of Governors; and
3. State nonmember banks—Federal Deposit Insurance Corporation.
The Council believes that a revision of Regulation F which would allow the exercise
2




31

of rights on its own bank stock held in the bank’s trust accounts would in many instances
facilitate the issuance of additional common stock by banks.
5. The Board would be glad to have any comments that the Council may wish to
make with respect to the report of the joint committee on check collections, which
was discussed briefly at the meeting of the Board and the Council in September
and at which time it was stated that the matter would be taken up with repre­
sentatives of the American Bankers Association at the time of its convention in
October.
Both its own committee which the Council appointed to study the question and the
members of the Council have reviewed the report recommending changes in the check
collection system. There are differences of opinion within the Council’s committee and
within the Council as a whole regarding various sections of the report.
The American Bankers Association, whose Administrative Committee discussed the
report at the time of the annual convention of the American Bankers Association in
October, will further consider the report at the spring meeting of its Executive Council
in April, and the Association of Reserve City Bankers will discuss the report again at its
May meeting. The Council understands that there are wide divergences of opinion within
both organizations regarding the report. The recommendations of the report cannot be
made effective without the support of both organizations. The Council and its committee
also wish to give further consideration to a number of the complicated questions which
the report presents.




32

m in u t e s

of

th e

m e e t in g

of

the

federal

a d v is o r y

c o u n c il

November 15, 1954
At 2:15 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. William D. Ireland, Henry C.
Alexander, Geoffrey S. Smith, George Gund, Robert V. Fleming, Wallace M. Davis,
W. W. Campbell, Joseph F. Ringland, Charles J. Chandler, George G. Matkin, John M.
Wallace, and Herbert V. Prochnow, Secretary.
Dr. Woodlief Thomas, Economic Adviser to the Board of Governors presented a
confidential summary of studies which the staff has made of various types of proposals
relative to reserve requirements. Each member of the Council was given a confidential
copy of “Review of Reserve Requirement Proposals and Studies.”
The meeting adjourned at 3:50 P.M.




HERBERT V. PROCHNOW

Secretary

33

MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL
AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

November 16, 1954
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 William McC. Martin, Jr.; Governors M. S. Szymczak, A. L. Mills, Jr..
and C. Canby Balderston; also Mr. S. R. Carpenter, Secretary, and Mr.Merritt Sherman,
Assistant Secretary, of the Board of Governors.
Present: Members of the Federal Advisory Council:
Mr. Edward E. Brown, President; Messrs. William D. Ireland, Henry C. Alexander,
Geoffrey S. Smith, George Gund, Robert V. Fleming, Wallace M. Davis, W. W. Campbell,
Joseph F. Ringland, Charles J. Chandler, George G. Matkin, John M. Wallace, and
Herbert V. Prochnow, Secretary.
President Brown read the first item on the agenda and the conclusions of the Council
as given in the Confidential Memorandum to the Board of Governors from the Federal Advis­
ory Council, as printed on pages 30, 31 and 32 of these minutes. A brief discussion of this
item followed, in which members of the Council and the Board participated.
President Brown then read the second agenda item and the conclusions of the Council
as given in the Confidential Memorandum mentioned above.
President Brown read the third item on the agenda and the conclusions of the Council
as expressed in the Confidential Memorandum cited above. A brief discussion followed.
The fourth item on the agenda, together with the Council’s conclusion as noted in the
Confidential Memorandum previously mentioned, then was read by President Brown.
In response to a query from President Brown, Chairman Martin stated that the
Board had received a number of inquiries on this matter.
President Brown then read the fifth item on the agenda and the conclusions of the
Council as stated in the aforementioned Memorandum.
Chairman Martin stated that the Board is continuing to study the subject.
The meeting adjourned at 12:40 P.M.




HERBERT V. PROCHNOW

Secretary

34

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T H E VOLUME A N D PU R POSE OF BANK LOANS

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M ONTHS O F N EX T Y E A R AN D

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S I T U A T I O N D U R I N G T H E R E M A IN D E R O F T H I S Y E A R A N D T H E F I R S T

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-2Gund. Business is quite good because of activity in
connection with the new automobile models. Some improvement in
employment is expected in the district.
Department store sales are
down. Home building has been stimulated by the new liberal financing
terms. Loans declined in October but in November have increased
slightly. Bank loans w ill probably follow, in general, a seasonal
pattern in the next few months.
Fleming.
Bank loans are higher. Business conditions
generally are good in the district. Department store sales are higher,
except in Baltimore and Richmond, where they are a little lower.
Construction is booming, primarily residential, and there has been
some pickup in the sale of old houses. Conditions in the coal
industry are not satisfactory. Business prospects over the next six
months look reasonably good. Bank loans w ill probably follow a
seasonal trend for the rest of 195b and for the first half of 1955.
Davis.
Consumer spending is good. The construction industry
is strong. There has been no real upswing or substantial im­
provement in business.
The crops are somewhat less than 1953*
Oddly enough, the drought has had little influence on retail sales,
but the effects of the drought may be felt in sales a little later.
Business generally is moderately better and Davis expects this to
continue. Bank loans in the district may be a little below a year ago.
Brown. Business generally is good. Housing construction
has been stimulated because of liberal financing terms. Bank loan
demand shows less than the usual seasonal increase. There is some
trend to term loans. Business w ill probably.continue the present
slight upward trend. Brown is concerned about the future of
residential construction in the latter part of 1955, and what might
happen in the automobile industry i f car sales should fall below
estimates.
Campbell. Business in the district is a little below last
year, ketail sales are holding up well.
Campbell is concerned over
the agricultural situation and the problem of acreage restriction.
He anticipates bank loans w ill show the usual seasonal trend during
the latter part of this year and the first six months of 1955.
Ringland. Business generally is good. The crop is the second
largest in history. Department store sales are at a good level. Banks
in the district have more loans, except in the metropolitan areas. At present
the demand for loans, except for term loans, is somewhat lower than
a year ago.
Bank loans in 1955 w ill probably follow the usual
seasonal pattern.
Chandler. Department store sales are up.
Construction is
strongT The agricultural situation is spotty, because some areas have
had sufficient rain, whereas other areas have had drought conditions.
Cattle prices have held up quite w ell.
The city banks have had a
reasonably good demand for credit.
Except for the usual seasonal
trend, Chandler does not believe there w ill be an exceptionally strong
demand for bank loans.
Public construction continues at a high level.
The expenditures for the Air Academy in Colorado are adding to the
volume of business in that area.



-3-

tk in . B usiness i s
b est le v e l for th e year. Bank

Md
generally good. Department store
Soles rfe~5Bout two per cent below a year ago. Employment is at the
deposits are up about ten per cent.
Agricultural production is down for the year. Loans are above a
Matkin expects bank loans will follow the usual seasonal
the months immediately ahead. Business will probably con­
tinue
a slight upward trend in the next few months, except
that agricultural income
oil income may be lower.

year ago.
trend in
to show

and

W allace.
lumber strike

Business has been quiet this summer because of the
in the Northwest, but business in the Northwest is now
good. In Utah the copper strike is over, and labor conditions in the
industry are back to normal. Bank loans have declined and there has
been some trend to term loans. Loans for the balance of 195k will
probably show some increase. California is experiencing a strong
increase in its population. By the middle of next year, Wallace be­
lieves the construction industry may reach its zenith. Loans for modern­
ization of homes may help real estate loan volume next year. Supplies
in the agricultural industry and in real estate are high and it may be
that these big segments of our economy will have to slow down. The
first six months of next year look reasonably good, but there may be a
softening in the economy after that period.
Brown. The Council may state to the Board that conditions vary
from district to district and from industry to industry, but as a
whole, business is at a good level. Tne volume of business will
probably continue the present slight upward trend during the first
half
* of next year. So far, the seasonal increase in bank loans
uas been less than usual. Apart from Commodity Credit Corporation
paper, bank loans will probably show less than the usual seasonal in­
crease during the remainder of 1 95k« Bank loans in 1955 are expected
to follow the normal seasonal pattern, with a decrease early in the
year and an increase in the spring. The foregoing views are based
upon the assumption that the government will not embark on large public
works or make exceptionally large defense expenditures. Such large ex­
penditures would undoubtedly be reflected in an increase in the volume
of bank loans and in business activity.

A lexander. In order to take advantage of low rates, some borrowers
are using term loans rather than borrowing on a short term basis.
Smith.
costsT

The pressure from the standpoint of business is interest

”
ITEM I I

WHaT AT?F THF VTFWS OF THE MEMBERS OF THE COUNCIL WITH RESPECT TO THE
SYSTEM^S C U R R ^ T CREDIT P O L IC IE S JiKD WHaT, IF AN Y, CHANGES MIGHT BE
K
DURING THE BAlANCE OF TH IS CALENDBH M

OR DURING THE FIRST TWO MONTHS OF 1955?

Brown mentions th at in a le t te r to him Gund has
t h e ^ e s tio n
of a H i ^ r margin on sto ck s. (O ff-the-record comments). Brown ohinks
b i l l rate has been sloppy. (Members o f the Council a l l agree.)



r a i s e d

-uAlexander believes that excess reserves of $1 billion are too
large j, but that excess reserves of $200 million to $300 million are
too low. He thinks the bill rate should be a little higher, and a
little tightening in the money market would be desirable.
Brown believes a bill rate of 1 . 0 5 per cent to 1 . 2 5 per cent would
be better than .85 per cent to .88 per cent. The speculation in the
stock market concerns him. (Off-the-record comments on business mer­
gers and present trends).
Smith

believes money is too easy (Other members agree).

Brown can see no justification for increasing present stock
margins. The Board might issue a warning on speculation without chang­
ing the margins.
Alexander would not favor raising the margin to 75'per cent.
Fleming would not favor raising the margin to 75 per cent unless loans
to brokers went up substantially.
Alexander.
conducted.

In general, open market operations have been well

Brown. The Council may state it feels open market operations and
current credit policies of the Board have been useful. In recent weeks
the bill rate has dropped sharply. Open market operations should be con­
ducted to bring the bill rate up to a figure of 1.10 per cent to
per
cent. Unless the Treasury should sell a considerable amount of new issues
to banks in the balance of the year, which seems unlikely, the present
credit policies should be continued and the bill rate should be kept approxi­
mately within the limits stated above. The Council believes even such a
slight increase in the bill rate as suggested would have a salutary economic
effect. The Council pointed out in its Memorandum to the Board in February
195U that n...the danger of disturbing the economy by making money unduly
and artificially cheap"is as great as the danger of restricting business
by too high interest rates, and a consequent reduction in the use of
credit.n

1.25

Alexander believes it may not be desirable to mention specific rates.
(All members of the Council agree).
Wallace asks whether any comment should be made on reducing reserve
requirements.
Brown does not believe conditions now justify reducing reserve
requirements• (Members of the Council agree).
ITEM I I I

IN THE LIGHT OF THE COMMENTS OF THE FEDERAL ADVISORY COUNCIL AT ITS
MEETING WITH THE BOARD IN SEPTEMBER, AND THE SUGGESTIONS RECEIVED FROM
THE FEDERAL RESERVE BANKS, THE BOARD HAS GIVEN FURTHER STUDY TO THE
REVISING OF REGULATION A, ADOPTED BY THE BOARD IN 1937. AS A RESULT OF
THII STUDY, CERTAIN CHANGES HAVE BEEN MADE IN THE DRAFT SENT TO THE MEMBERS
OF THE COUNCIL W ITH CHAIRMAN M ARTIN'S LETTER OF JULY 22, 195b. THESE
CHANGES ’/.ILL BE FORWARDED TO YOU AS SOON A S POSSIBLE AND THE BOa RD WILL BE
GLkD TO fo.VE ANY COMMENTS THAT 1HE COUNCIL MIGHT WISH TO MAKE AT ITS


NOVEMBER MEETING.


-sBrown does not see why the regulation should be changed, but the
presenFTIraft is much better than the previous revisions of the regulation.
(Off-the-record comments)*
Chandler thinks the present draft is perhaps as good as may be obtained.
Ringland believes the draft has undesirable aspects.
Ireland,

VJhat is the purpose of two forewords?

Matkin believes the first foreword is stronger than any statement that
has previously been made.
Ringland The Council might say that the new statement of General Prin­
ciples with the foreword incorporated is agreeable, but that the Council sees
nothing to be gained in comparison with the present statement of General
Principles. (Off-the-record comments).
Brown. The first foreword will only be printed in the Federal Register
and not in the regulation itself.
Alexander. If the revision were put in right shape, he would accept
it since the Board seems to wish to revise it. However, he can see no real
need for the revision.
Brown thinks the substance of the foreword which is to appear in
the Federal Register should be incorporated in the statement of General
Principles.
Wallace moves that the redraft, dated November 1, 195U, be approved
if the preface to be printed in the Federal Register is included in sub­
stance in the statement of General Principles. (All members of the
Council agree).
Brown. The Council may state it has considered the redraft of
Regulation A, dated November 1, 195h» The Council urges and feels strongly
that the foreword, which it is proposed be printed only in the Federal Re­
gister, be incorporated in substance in the statement of General Principles.
Once the regulation is printed, many banks not having access to the Federal
Register will not recall the foreward printed in the Federal Register.
If the proposed foreward to appear only in the Federal Register is incor­
porated in the statement of General Principles,’ the Council would see no
objection to the November 1, 195k redraft of Regulation A.
ITEM IV
WHAT ARE THE VIEWS OF THE COUNCIL ON THE QUESTION WHETHER A COMMERCIAL
BANK SHOULD BE AUTHORIZED TO ISSUE PREFERRED STOCK OR DEBENTURES AS A
MEkNS OF AUGMENTING CAPITAL FUNDS? IF THE POLICT OF GIVING SUCH AUTHOR­
ITY WERE ADOPTED, IN WHAT CIRCUMSTANCES SHOUID IT BE GRANTED AND WHAT
LIMITATIONS SHOULD BE APPLIED?.
Brown, does not know from what original source this item actually came.
Ireland, Fleming, Alexander (Off-the-record comments).




-6Brown states that it is necessary to differentiate between debentures and
preferred stock. The interest on debentures is a tax deductible item, but the
dividends on preferred stock are not deductible. There might therefore
be considerable pressure on banks to issue debentures because of the tax
deduction. If banks are loaded up with preferred stock or debentures,
it would tend to lessen the opportunity to increase capital in the future by
common stock. Some banks wish to issue preferred stock because they do not
want to dilute their common stock. Sometimes also banks are faced with
problems of increasing common stock because a part of their stock is held
in trust accounts in their banks and these accounts, under Regulation F,
cannot exercise their rights. Debentures should be icsued only in emergencies
and where it is necessary to protect the depositors. Preferred stock should
be issued only in emergencies to protect depositors and when the issuance
of additional common stock would seriously dilute the value of the present
common stock and injure the existing shareholders. Regulation F. should be
amended to allow the exercise of rights on bank stock held in the banks'
own trust accounts.
Fleming states that the rights in trust accounts can be sold in
sufficient amounts to get cash to buy stock of the bank.
Ringland, In the case of either preferred stock or debentures, the
public would probably consider it as borrowed money.
Alexander believes the authorities should withdraw their ban on the
issuance of preferred stock and debentures. He favors granting the right to
issue preferred stock or debentures in modest amounts under proper supervision.
Fleming. National banks can issue only preferred stocks, and cannot
issue debentures. A state member bank can issue debentures, so we might
have some disintegration in the national banking system.
Ringland.
advantage.

A national bank might change to a state charter to get the

Wallace thinks it might be unwise to give an answer to this whole
question until it can be discussed with banks in areas growing rapidly
in population, but which have not accumulated capital in adequate amounts
to meet the needs of the community,
Alexander states that the Comptroller formerly argued that issuing a
preferred stock placed a still heavier burden on the common stock which
was already over-burdened. Alexander, however, thinks it gives additional
protection to depositors. He believes each case should be studied individually.
Smith believes that banks, subject to proper supervision, should be
free tcTdo essentially what private corporations may do in this respect.
Brown. The Council may point out the essential differences between
preferred stock and debentures. If debentures are permitted,many banks
would use this route to get a tax advantage. The issuance bj banks of
preferred stock with different voting and retirement provisions would
raise many complicated problems. The Council is not prepared to say that
debentures should never be issued, but the restrictions should be greater.
Debentures should be issued only in emergencies when it is essential to
protect depositors. Preferred stock should be issued (l) only in emergencies to



-7protect depositors or (2) when it is necessary to increase a bank’s capital
funds, and when the issuance of additional common stock would only be possible
at a price vhich would seriously dilute the value of the outstanding common
stock and injure the existing share-holders. Any authority to issue debentures
or preferred stock should require the approval of the Comptroller of the
Currency for national banks, the Board of Governors for state member banks
and the Federal Deposit Insurance Corporation for sta te non-member banks.
The Council may also suggest that a revision of Regulation F would
be desirable to permit the exercise of rights on its own bank stock held
in the bank’s trust accounts.
ITEM V
THE BOARD WOULD BE GLAD TO HAVE ANY COMMENTS THAT THE COUNCIL MAY WISH
TO MAKE WITH RESPECT TO THE REPORT OF THE JOINT COMMITTTEE ON CHECK
COLLECTIONS, WHICH WAS DISCUSSED BRIEFLY AT THE MEETING OF THE BOARD
AND THE COUNCIL IN SEPTEMBER AND AT WHICH TIME IT WAS STATED THAT THE
MATTER WOULD BE TAKEN UP WITH REPRESENTATIVES OF THE AMERICAN BANKERS
ASSOCIATION AT THE TIME OF ITS CONVENTION IN OCTOBER.
Fleming. All members of the committee have had copies of the report.
It is generally agreed that the return of items to the original collecting
bank should not be approved. The American Bankers Association will consider
the report further at its Spring meeting in April. The Association of
Reserve City Bankers0jjill consider the report at its May meeting. There
are wide differences some of the recommendations in the report. Fleming
states that the Council committee is not yet ready to report.
Davis. (Off-the-record comments). The report is to b e considered
further by the Reserve City Committee. Davis presents objections to some
features of the report and gives illustrations of the routing of some items
at present.
Ringland.

(Off-the-record comments).

Brown believes it is not desirable for the Council to make any recommendaticr
or report now. The Council may state to t he Board that the reoort has been
carefully discussed, and that there are differences of opinion in the Council
and in the committee of the Council. The American Bankers Association will
consider the report at the Spring meeting of its Executive Council, and
the Association of Reserve City Bpnkers will discuss the report at its May
meeting. The Council will keep the matter under discussion.
The meeting adjourned at 6 P.M.




THF FEDERAL ADVISORY COUNCIL CONVENED AT 10 A. M. ON
NOVEMBER 15, 195U, IN ROOM 932 OF THE MAYFLOWER HOTEL,
WASHINGTON, D.C. ALL MEMBERS OF THE COUNCIL WERE
PRESENT.
The Council prepared and approved the attached Confidential Memorandum
to be sent to the Board of Governors relative to the Agenda for the joint
meeting of the Council and the Board on November 16, 195U. The memorandum
was delivered to Mr. Carpenter, Secretary of the Board of Governors at 12 noon
on November 15>, 195U. It will be noted that each item of the Agenda is
listed together with the comments of the Council,
The meeting adjourned at 11:1*0 A. M.




CONFIDENTIAL
MEMORANDUM TO THE BOARD OF GOVERNORS
FROM THE
FEDERAL ADVISORY COUNCIL
RELATIVE TO THE AGENDA FOR THE JOINT 'MEETING
ON NOVEMBER 16, 19541.

What are the views of the Council with respect to the pro­
spective business situation during the remainder of this
year and the first six months of next year and the prob­
able changes that will take place in the volume and
purpose of bank loans in each of these periods?

Business generally is at a good level, but in a complex industrial
there are necessarily variations from district to district and from
industry to industry. The effects of the liquidation of inventories, some
decline in investment in new plant and equipment, the drop in defense ex­
penditures, and the decrease in farm income have been largely offset by
substantial outlays for residential and public construction and by continued
high consumer spending. Aggregate economic activity has remained relatively
stable. The slight improvement which business has experienced this fall
should continue during the balance of 1954-• There are at present no indica­
tions of any significant change, either \ipward or downward, in the volume of
business. After allowing for the usual seasonal movements, the Council
believes that the volume of business in the first six months of 1955 will
continue the present slight upward trend.
economy

So far this fall the increase in bank loans has been less than
seasonal. The members of the Council believe that, aside from loans to the
Commodity Credit Corporation, the volume of bank loans for the rest of the
year will show less than the usual increase in this period, and that banks
will experience the normal loan liquidation after the first of the year,
followed by a seasonal increase in loans in the spring. The Council does not
e::pect any important change in the purpose of bank loans. There is, however,
a continuing tendency for the percentage of term loans made by banks to
increase.
The foregoing conclusions are based upon the assumption that the
Government will not in the next six months, directly or by loans or guaran­
tees to states or political subdivisions, bring about a considerably enlarged
public works program, or substantially increase defense expenditures. Such
developments would undoubtedly be reflected in an increase in economic
activity and in the volume of bank loans.
2.

Vhat are the views of the members of the Council with re­
spect to the System's current credit policies and what,
if any, changes might be called for by developments during
the balance of this calendar year or during the first two
months of 1955?

The Council believes that current credit policies of the System
have been helpful in lessening the effects of the economic readjustments that




-2-

have been taking place, and have contributed to the maintenance of a good
level of business activity. No important change in these policies is at
present indicated.
In general, open market operations have been well handled, but
the Council is of the opinion that the bill rate has in the last few weeks
been unreasonably low and should now be moderately higher. As the Council
stated in its memorandum to the Board in February 195A, "the danger of
disturbing the economy by making money unduly and artificially cheap is as
great as the danger of restricting business by too high interest rates, and
a consequent reduction in the use of credit." A slight increase in the bill
rate would have a salutary economic effect and tend to restrain speculative
activity.
3.

In the light of the comments of the Federal Advisory
Council at its meeting with the Board in September, and
the suggestions received from the Federal Reserve Banks,
tne Board has given further study to the revising of
Regulation A, adopted by the Board in 1937. As a result
of this study, certain changes have been made in the
draft sent to the members of the Council with Chairman
Martin's letter of July 22, 1954-• These changes will be
forwarded to you as soon as possible and the Board will
be glad to have any comments that the Council might wish
to make at its November meeting.

The Council has carefully considered the redraft of Regulation A,
dated November 1, 1954-• The Council believes that the preface which it is
proposed to print only in the Federal Register should be incorporated in
substance in the proposed statement of General Principles. Most bankers
never see the Federal Register, and unless tne substance of the preface is
incorporated in the statement of General Principles, very few bankers will
know the preface was ever published by the Board. If the preface is in­
corporated in substance in the statement of General Principles, instead of
printing it only in the Federal Register, the Council sees no objection to
the November 1 redraft of Regulation A.
4.

What are the views of the Council on the question
whether a commercial bank should be authorised to issue
preferred stock or debentures as a means of augmenting
capital funds? If the policy of giving such authority
were adopted, in what circumstances should it be granted
and what limitations should be applied?

There is a major difference between debentures, even if sub­
a n d preferred stock.
Under present law interest on debentures
is a deductible income tax item, but dividends on preferred stock are not
ded u ctible.
Consequently, primarily to gain a tax benefit many banks if
they had the authority might issue debentures rather than sell additional
p r e fe r r e d or common stock.
The issuance of debentures or preferred stock
v i t h q u e s t i o n s o f voting rights, sinking funds, and premiums for retirement
would r a i s e m a n y p r o b l e m s a n d should b e p e r m i t t e d only under adequate

o rd in ate d ,

su p ervision .




-3The

C o u n c il

em ergen cies,

when

is e s s e n t i a l

to

b eliev e s

c a p ita l

protect

funds

that

debentures

cannot

be

sh o uld

o b ta in e d

be

is su e d

o th erw ise,

o nly

in

and w here

it

d ep o sito rs.

T h e Council believes that the right to issue preferred stock
be given only (1) in emergencies to protect depositors, or (2)
when it is clearly desirable to increase a bank's capital funds, and vhen
the issuance of additional common stock could only be accomplished at a
price which would seriously dilute the value of presently outstanding
coonon stock and inaterialiy injure existing shareholders.

should

The Council believes that any authority to issue debentures or
preferred stock should require the approval of the following Federal
agencies for the different groups of banks:
1.

National banks—Comptroller of the Currency;

2.

State member banks— Board of Governors; and

3.

State nonmember banks—Federal Deposit Insurance
Corporation.

The Council believes that a revision of Regulation F which would
allow the exercise of rights on its own bank stock held in the bank's trust
accounts would in many instances facilitate the issuance of additional
common s t o c k

5.

by b a n k s .

The Board would be glad to have any comments that the
Council may wish to make with respect to the report of
the joint committee on check collections, which was dis­
cussed briefly at the meeting of the Board and the
Council in September and at which time it was stated
that the matter would be taken up with representatives
of the American Bankers Association at the time of its
convention in October.

Both its own committee which the Council appointed to study the
question and the members of the Council have reviewed the report, recommend­
ing changes in the check collection system.
There are differences of
o inion within the Council's committee and within the Council as a whole
regarding various sections of the report.
American Bankers Association, whose Administrative Committee
the report at the time of the annual convention of the American
Bankers Association in October, will further consider the report at the
spring m e e t i n g of i t s Executive Council in April, and the Association of
Peserve C i t y Bankers will discuss the report again at its M a y meeting.
The

d is c u s s e d

Tre Council u n d e r s t a n d s t h a t t h e r e a r e w i d e d i v e r g e n c e s o f o p i n i o n w i t h i n
both o r g a n i z a t i o n s r e g a r d i n g t h e r e p o r t .
Th e r e c o m m e n d a tio n s o f th e r e p o r t
cannot be m ad e e f f e c t i v e w i t h o u t t h e s u p p o r t of b o t h o r g a n i z a t i o n s .
The
Council and i t s c o m m i t t e e a l s o w i s h t o g i v e f u r t h e r c o n s i d e r a t i o n to a
number of the c o m p l i c a t e d q u e s t i o n s w h i c h t h e r e p o r t p r e s e n t s .




9

- ~

THE FEDERAL ADVISORY COUNCIL CONVENED IN THE BOARD
ROOM OF TH E FEDERAL RESERVE B U IL D IN G , WASHINGTON,
D . C . AT 2 : 1 5 P . M . ON NOVEMBER 1 5 , 1 9 5 U .
ALL MEMBERS
OF THE COUNCIL WERE PRESENT.

Dr. Woodlief Thomas, Economic Adviser to the Board presented a
confidential summary of studies which the Staff h?s made of various
types of proposals relative to reserve requirements. Each member of the
Council was given a confidential copy of "Review of Reserve Requirement
Proposals and Studies."
The meeting adjourned at 3*50 P.M*




-10-

0N NOVEMBER 16, 1 9 $ h , AT 10s30 A.M., THE FEDERAL ADVISORY
COUNCIL HELD A JOINT MEETING WITH THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM IN THE BOARD ROOM OF THE FEDERAL
RESERVE BUILDING, WASHINGTON, D. C.

ALL MEMBERS OF THE COUNCIL WERE PRESENT. THE FOLLOWING
MEMBERS OF THE BOARD OF GOVERNORS WERE PRESENT; CHAIRMAN
MARTIN, AND GOVERNORS SZYMCZAK, MILLS AND BALDERSTON. GOVERNORS
VARDAMAN AND ROBERTSON WERE ABSENT, MR. CARPENTER, SECRETARY,
AND MR. SHERMAN, ASSISTANT SECRETARY OF THE BOARD OF GOVERNORS,
WERE ALSO PRESENT.
ITEM I
WHAT ARE THE VIEWS OF THE COUNCIL WITH RESPECT TO THE PROSPECTIVE
BUSINESS SITUATION DURING THE REMAINDER OF THIS YEAR AND THE FIRST
SIX MONTHS OF NEXT YEAR AND THE PROBABLE CHANGES THAT WILL TAKE
PUCE IN THE VOLUME AND PURPOSE OF BANK LOANS IN EACH OF THESE
PERIODS?
Brown reads Item 1 and the conclusions o f the Council as expressed in
the C onfidential Memorandum to the Board attach ed . Business men seem to be
slig h tly more o p tim istic than they were a few months ago* F ortun ately, the
Board did not ask for the Council fs views fo r the next tw elve months in stead
of the next six months. The lib e r a liz e d terms fo r r e a l e s ta te fin an cing
may prove to be a temporary stimulant, and this stimulant may not last all
of next year. There is a tendency for bank loan portfolios to show an
increasing percentage of term loans, and in some cases the maturities are as
long as ten years.
Martin asks whether the current improvement in business is seasonal
or slightly more than seasonal.
Alexander. Business in his district is below the national level. The
apparel business is not good. The railroad equipment business is slow.
Construction is up, but not as much as it is over the nation. Farm income
is down. Alexander believes the present improvement is a little more than
seasonal. Many business men think that the middle-of-the-road policy stood
up well in the election.
Ireland. Business in the first district is at a good level. The shoe,
paper and apparel industries are all doing better. Retail sales are up.
Construction awards are high. The upturn is a little more than seasonal.
Martin. Will the estimated 1,100,000 cars to be produced in NovemberDecember cause a glut in the car market after the first of the year?
Alexander. It is estimated that business for 1955 for the automobile
industry as a whole will be about the same as 19$U. The inventory of 1 9 %
models is very low. Consequently, 19£? starts on a reasonably good basis.
1 9 was a good automobile year. Banks are looking for loans. Many com­
panies are refunding their short-term debt into longer term loans at
attractiv e rate s .
Smith. Term loans are being made in great volume in Philadelphia.
There is a better feeling among business men. Bell Telephone reported a
substantial improvement in new orders in October.



-11

Salderston.
Smith.

Are a large number of term loans for more than five years?

Many are over five years.

Chandler. Business in the 10th district is not up more than seasonal#
The fact that farmers voted as they did does not indicate any great dis­
satisfaction on their part.
Gund. The coal industry is in somewhat better condition.
are down. Savings have increased markedly.

Retail sales

Fleming. The coal industry is better, but it is still five per cent
off from a year ago. Construction is strong. Bank loans are up a little.
Department store sales are good, except for Baltimore and Richmond. The
gross national product is off from about $365 billion in 1953 to about $356
billion in 195U. Term loans are increasing.
Brown. (Off-the-record comments on term loans)*
Martin. Is there apprehension regarding real estate credit and consumer
credit terms?
lund.

There is no apprehension on consumer credit in his district.

Brown

states that he did not include consumer credit in his comments.

Ringland understands there is some weakening of consumer credit terms
by some finance companies, and that the banks are relaxing terms in order
to compete.
Smith.

There is a tendency to push out the terms on modernization loans.

Szymczak. Is there any apprehension for the last half of 1955 because of
liberal mortgage financing?
Brown. Any apprehension regarding the last half of 1955 is not entirely
based on mortgage financing. The time is approaching when the demand for
housing may be largely met. In addition, if only 5,000,000 cars should be
sold in 1955, compared to some preliminary estimates of approximately 5,300,000,
there may be some problems, especially with large production in the last two
months of 195U. Brown believes that residential construction may be a problem
in the last half of 1955*
Balderston.

Did the Council discuss the agricultural situation?

Brown. The Council discussed the agricultural situation in a general
way. Despite the assumed dissatisfaction of the farmer, the election did
not reflect dissatisfaction in many states. Brown expects farm income may
show a further decline of four or five per cent.
Wallace. By the middle of next year the whole economy may need a new
appraisal, Tjecause of the large supplies in such fields as agriculture and
housing.



Davis, The Southeast was hit hard by drought. However, cities in that
area have not yet felt the effects of the drought. There are some who
believe the effects of the drought may not be felt in retail sales until
February.
Campbell believes the comments Davis has made also apply
to his district. With a good season in 1955, the farm situation
wjulti be improved. Business has held up in the district. Retail store
sales are satisfactory.
Mat-kin. Farm income is off slightly and Matkin expects it to be
more next year. The decrease in acreage is one cf the real problems.
Fach year the farmers are expected to cultivate smaller acreage and this
creates serious income problems. New residential construction is near the
saturation point.
cff

ITEM II
WHAT AR- THE VIEWS OF THE MEMBERS CF THE COUNCIL WITH RESPECT TO
THE SYSTEM’S CURRENT CREDIT POLICIES AND WHAT, IF ANY, CHANGES
MIGHT BE CALLED FOR BY DEVEOLOPFMTS DURING THE BALANCE OF THIS
CALENDAR YEAR CR DURING THE FIRST TWO MONTHS OF 1955?
Brown reads Item I I and the conclusions of the Council as expressed in
the Memorandum to the Board attached. The Council was reluctant to suggest
a specific range of rates for b ills, but in the discussion, the rates mentioned
ranged from a little atove one per cent to one and one-fourth per cent. When
the bill rate goes too low, there is a tendency to make loans for longer terms
and even tc finance stocks and mergers. (Off-the-record comments on the
stock market).
Alexander believes the bill rate should be increased moderately. The
present tendency to combine companies is one outcome of an overbundance of
noney. Perhaps a little less active ease would be desirable. A b ill rate
around one per cent or a little higher would be salutary.
Martin. The Board has no fixed views on these matters.
noney markets every day.

We watch the

Flering u derstands there will be no new cash requirements this fa ll on the
part o? the Treasury.
Martin has the same understanding. The Board is aware of the money
market situation and studies it every day.
Brown.

(Off-the-record comments on stock market margins)

Martin-

(Off-the-record comments on stock market margins)




-j o

ITEM I I I

IN THE LIGHT OF THE COMMENTS OF THE FEDERAL ADVISORY COUNCIL AT ITS
MFFTING WITH THE BOARD IN SEPTEMBER, AND TFE SUGGESTIONS RECEIVED FROM
THE FEDERAL RESERVE BANKS, THE BOARD HAS GIVEN FURTHER STUDY TO THE REVISING
OF REGULATION A, ADOPTED BY THE BOARD IN 1937. AS A RESULT OF THIS STUDY,
CFRTAIN CHANGES HAVE BEEN MADE IN THE DRAFT SENT TO THE MEMBERS OF THE
COUNCIL WITH CHAIRMAN MARTINS LETTER OF JULY 22, 195U. THESE CHANGES WILL
FF FORWARDED TO YOU AS SOCN AS POSSIBLE AND THE BOARD WILL BE GLAD TO
HAVF ANY COMMENTS THAT THE COUNCIL MIGHT WISH TO MAKE AT ITS NOVEMBER KFETING.
Brown reads Item I I I and the conclusions of the Council as expressed
in the Memorandum to the Board attached. The .Council feels strongly that the
substance of the foreword should be in the statement of General Principles.
Probably not one-tenth of one per cent of the banks keep files of the Federal
Register.
Martin. Governor Mills has made a careful study of Regulation A and has
done much work on it*
Mills. We have provided a uniform application of principles for all banks,
but we have permitted some latitude for each Federal Reserve Bank to use its
judgmento There is some room for individual judgment.
Brown commends Mills for the work he has done on Regulation A, but
Brown again emphasizes that the substance of the foreword jhould be in the
statement cf General Principles.
Mills o Governor Robertson is the one who suggested that the foreword
be printed only in the Federal Register. The foreword could be included in
a letter of transmittal.
Brown does not believe that sending the foreword in a letter of
transmittal would be adequate.
Smith. In view of previous discussions in which the Council indicated
it felt the new regulation was planned to be restrictive, Smith believes
that including the substance of the foreword in the statement of General
Principles is desirable.
Alexander. The statement of General Principles could open or close with
the substance of the foreword.
ITEM IV
WHAT APE TH? VIEWS OF THE COUNCIL ON THE QUESTION WHETHER A COMMERCIAL
BANK SHOULD BE AUTHORIZED TO ISSUE PREFERRED STOCK OR DEBENTURES AS A
KFAKS OF AUGMENTING CAPITAL FUNDS?' IF THE POLICY OF GIVING SUCH AUTHORITY
WFRE ADOPTED, IN WHAT CIRCUMSTANCES SHOULD IT BE GRANTED AND WHAT
LIMITATIONS SHOULD BE APPLIED?
Brown reads Item IV and the conclusions of the Council as expressed
ir. the Memorandum to the Board attached. The Council has assumed that the
debentures would be deferred to other liab ilitie s, although the agenda item
did not 'ive this iniormation. The policy of issuing preferred stocks or
debentures was very useful in the 1930’ s. One argument against debentures



-lUis that they are somewhat lik e issu in g post-dated checks. The bank must set
a s i d e earnings each year to re tire them.
Consequently, the bank gradually
loses the b e n e fits of the c ap ital obtained by the debentures. Preferred stock
may also be used fo r acquiring banks, but Brown does not believe that is
generally d e s ir a b le .
The Council recommended Federal supervision, but all
state banks would n e c e s s a r ily also have to obtain state apprcval.
Brown suggests that the Board reexamine Regulation F . He states that this
item of the agenda presents a new su b je ct, and he does not know what
precipitated the question.
Martin ind icates that Governor Robertson placed the question on the
agenda and Robertson is out of the c it y .
The Boa^d is receiving various
inquiries on this matter.
Many in q u ir ie s grow out of a desire to acquire other
banks. I t is extremely d i f f i c u l t tc pass upon these inq ux*- ^ aa eacn case
differs from the others «> Martin says he has been guided by the question of
what is in the best p ub lic i n t e r e s t .
The Board must approve any issuance of
preferred or common stock o f a state member bank.
Brown. There are cases where i t is not desirable to give permission to
issue preferred stock .
However, there are cases where the price of the common
stock is depressed and a preferred issue would be desirable.
Smith does net b e lie v e that it should be said that preferred stock cannot
be issued.
Sometimes i t is desirable to issue preferred stock, but adequate
safeguards should surround the issuance of the stock. I t is a matter of
using judgment.
M artin, Many times an element of judgment is involved, and Martin does
not wish judgment to play too large a p a r t in the Board's decisions.
Fleming.
I t is p o ssible to have three types of preferred, and then the
problems become even more com plicated. The public interest and the interest
of the common stockholders should be considered*
Alexander.
The Council makes a strong distinction between debentures
and preferred stock.
ITEM V
THE

BOP ED W O U L D B E G L A D T O H A V E A N Y COMMENTS TH A T T H E C O U N C IL MAY W IS H

TO MAKE W I T H

RESPECT

C O L L E C T IO N S ,

W H IC H WAS

TH E C O U N C IL
WOULD B E
AT

reads

to t h is q u e s t i o n
d iffic u lt

of

a fin a l

o f Reserve

the

V

and
the

o p in io n

d ecisio n

C ity

the

Board

defers

on p a r t s
have
is

CF THE A M E R IC A N BANKERS ASSOCIATION

co n clu sio n s

a n s w e r ,,

req u ire

o f t h e s e tw o a s s o c i a t i o n s



CN CHFCK

OCTOBER.

attached.

u n til

Bankers

COM M ITTEE

A N D A T W H I C H T IM E I T WAS S T A T E D THAT TH F MATTER

C O N V E N T IO N I N

Ite m

to

JO IN T

B R IE F L Y A T T H E M E E T IN G O F THE BOARD AND

R E P R E SE N T A T IV E S

prob lem s w h ic h

d iffe re n c es
g iv e

UP W I T H

CF I T S

th e M em orandum

T H E R E P C R T OF TH E
D IS C U S S E D

SEPTEMBER

TAK EN

THE T I M E
Brow n

IN

TO

However,

thorough
of

of

the
at

necessary.

the

C o u n c i l as

report presents
The

C o u n cil

co n clu sio n s.

some

T h e r e are w id e

Bankers A s so c ia t io n
th eir

expressed in

t h e a n s w e r o f the C o u n c il

co n sid e ra tio n .

report.

th e A m erican
a rriv e d

the

F rankly,

cannot w ell
and th e A s s o c ia t io n
The c o o p e r a tio n

i

-15that

at

th is

Board has no p r o p o s a l

M a r t in

says

on

which a l l it s

ju n c tu re

>^e s h o u l d l i k e
members

are

to

report that the
relative to

agreed

r e se rv e r e q u i r e m e n t s .
A lexander
w hich i t h a s

s t a t e s
that although the Board has arrived at no proposal on
greed, he assumes the Board has not given up working on the

m atter•

Martin replies that the Board has not given up studying the subject.
Szymczak, Even i f the Board comes to an agreement on a reserve oroposal,
s t ill p a s s Congress, snd that means i t must have the approval of the tanks.
The Board has no b i l l read;/, unless the bankers have one tc submit.
i t must

M artin.
(Off-the-record comments on the possibility of a reserve
proposal passing the Congress.

a

Alexander. I f
proposal could be worked out so the banks could increase
their earning assets, he believes the banks would approve i t .
He feels the
19U8 proposal comes closest to bein g generally acceptable.

The meeting adjourned at 12:1*0 P .M .

The next meeting of the Council w i l l be held on February 13, 1^>




1955*