The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Note: xhe transcript, of the Secretary's notes x , not to be regarded as complete or e n tirely accurate and should be considered as being strictly for tho sole Council ° f thS Federal A ^ i s o r y W. L . S e c r e ta r y 's Notes on Meeting of the Federal Ad visory Council on November 16 , 1 9 41 , at 2 :0 0 P.M. in Room 782 of the Mayflower Hotel, Washington, . C• r .ljl \he L*iiw iregular . uxdii luuiiuer o ox L/HS r GClersJ Advisory Council were presAll members^ of the Federal .. who ...u_ had, informed• the Secretary of the Council ent except Mr. W. Dali* Clark that he would be at the m eeting on Monday, but' would m be unable to be present i the first, day . on The Minutes of the m eeting of the Council on September 14-15, were approved. 1% 1 , Brovin discussed certain aspects of Regulation W. He stated the Board did not pay any atten tion to the recommendations of the Council and es pecially not in respect to small personal loans. However, small business loans had been exempted from the operation of the Regulation and so much, at least,had been ga in ed . There was some discussion about small personal loans. Brown continued, saying that he believed the Council should dis cuss its own a ttitu de toward Regulation W, especially the following three points: (a) Opinion of C ouncil on non-purpose loans where the suggestion of the C ouncil iris been r e je c te d , (t>) Council m ight, of course, go into details but it was his view that the C ouncil would be w ell advised not to become involved as there is l i k e l y to be growing public sentiment about many of the fe atu res of R egulation W, (c) The Council might do nothing at a l l . In his o p i n i o n , Council should probably r e s tr ic t its attitude to ma the general p o lic y . Wakefield says we might r a ise the question as -O '*ne upon which Regulation Vv is b a se d . In his opinion it has , /fith inflation or any other pending problem. M t1 t £i n ,. to Ijrown stated t h a t , of course, the Council * 'i Council might ltion ’• • l c h t h e E xecutive Committee of the Co.mc.il took or the -2 - simply say th at the whole Regulation is wrong- and th at the Executive Order never to have been issued, but he himself questions the advisability of c ritic iz in g the P resident. Harrison points out th a t before there was any Executive Order ever issued the Council had pointed out th at there was really no need for measures of the type th a t are being considered here for o ff-se ttin g in flatio n or help ing the defense program. As fa r as the defense program is concerned, that is being taken care of by p r io r itie s , allo catio n s, et cetera. Wakefield and Brown discussed "selectiv e cred it control”. The l a t te r stated th a t Viner and perhaps Morgenthau believed that p rio ritie s w ill take care of reducing bank loans. Eccles, on the other hand, believes that there ought to be d ire c t action and the amount of cred it to be given by banks should be co n trolled. At present the group believing th at p rio ritie s and a l locations w ill be su ffic ie n t seems to be in control. I f control is merely through p r io r itie s , then th ere won’t be any governmental attempt to dictate to banks the nature of th e ir loans, but i f the policy favored by Eccles is followed, the chances are th a t the banks would have to obtain governmental approval in advance fo r every loan they desired to make. Clay sta ted th a t his information was th a t the Treasury is pushing "selective c re d it control" and wants examiners to have the rig h t to go into banks and even demand th a t loans already made which are not for purposes of aiding the defense program should be called . Harrison says the only way in which the Government can carry out its present apparent plan is to issue se c u ritie s bearing a rate which w ill enable banks to liv e . This has been done more or le ss in Great B ritain. The other way would bo fo r the Government to take over banks. There is a real danger that the whole p riv ate banking system might be wreeked. Brown suggests th a t the Council might present a resolution pointing out th at the whole s itu a tio n can be controlled by p rio ritie s ana allocations and th at the Council is opposed to the whole prin cip le of Regulation W; fur thermore, th at in the opinion of the Council the whole Regulation w ill tend to d iscred it the Federal Reserve System and lead to the control by Government of tne extension of a l l c re d it. However, the Executive Order having been is sued, the Federal Reserve Board is compelled to issue regulations under i t . The least the Council might do is to reaffirm the position of its own Execu tive Committee in regard to small personal loans. Brown sta ted th a t at the l a s t meeting, Leon Fraser, acting as a lte r nate for Mr. Harrison, had objected to the Council taking such action., point ing out th a t in Great B rita in , Canada, and not to mention Germany and other countries, c re d it is being controlled by the Government and th at he, Fraser, believed i t to be in e v ita b le . Harrison says th a t he agrees with Fraser, but that i t w ill be neces sary for the Government to issue special se cu ritie s for banks as has been done in Great B rita in . o ufh t http://fraser.stlouisfed.org/ I Federal Reserve Bank of St. Louis -3- Kurtz said th a t he believed in Regulation W and in Fraser's posi tion. If he were running the Government he would try to control the situa tion d irectly . Wakefield says Great B ritain has not issued any regulations. She has taken over p ra c tic a lly the property of a ll her citiz en s, and has le f t no place for investments except in Government se c u ritie s, but th is is a very different situ atio n from having the Government in control by means of regu lations which w ill probably p e rs is t a f te r the emergency is over. Hanes agrees with Kurtz and believes some of the mea sues taken w ill help to save many a finance company and many a small bank which may get into d iffic u ltie s i f th ere were not the compulsion by the Regulation of amortiza tion loans. Harrison says as a p ra c tic a l m atter nothing w ill be accomplished by saying th at the whole th in g is wrong, out at le a s t the Council as a whole should reaffirm the p o sitio n of i t s own Executive Committee. Kurtz says we should support p r io r itie s and allocations for they are certain to disappear as soon as the war is over. The people in charge of p rio ritie s and a llo c a tio n s are d o llar-a-y ear men who wish to go hone as soon as the emergency is ended, but the same is not true of alphabetical regula tions which w ill remain in existence long a f te r the war is over. Brown s ta te s th a t "selectiv e c re d it control” may be exercised through the ap p licatio n of p r io r itie s and allocatio n s much b e tte r than by means of permanent reg u latio n s. The former w ill disappear with the emergency and i t would be w ell fo r the Council to suggest th at before d irect credit control is put into e ffe c t a t le a s t the attempt should be made to control the situation by means of p r io r itie s and allo catio n s. I f th is is done, we are not shutting ourselves o ff from la te r asking for special secu rities for banks so that the banking system may continue to ex ist through the emergency. In Great B ritain and Canada where th ere are very few banks a l l necessary measures can be taken by consultation without le g is la tio n or formal regulation. In this country with approximately fifte e n thousand more or less independent banking u n its th ere can not oe consultations and voluntary action and i t is necessary to have much more formal action taken tha i in countries where there are only a few large banking systems. Kurtz points out th a t "selectiv e c red it control" is deflationary and when the war is over i t may be necessary to take an entirely different tack. Ragland and Huntington believe th at there is not any point in a t tacking the whole p rin cip le of Regulation V . They do think the position ol the Executive Committee should be confirmed. Hanes believes there i s n 't any point in repeating what we said be i t is probably b e tte r to cooperate than ju st oppose. Brown believes th a t i f there were no p o ssib ility of the Board changing i t s view on the non-purpose loans then there would be no sense in passing1 a reso lu tio n , but a m inority of the Board favors excepting non purpose loans from the Regulation and the position of the Council may help strengthen the hands of the minority i f there should be any change in senti ment. If we are to resolve about "selective cred it control” th is ought to be done in an e n tire ly separate resolution. Harding agrees with Hanes but thinks the recommendation of the Ex ecutive Committee should be approved. He agrees th a t any resolution on credit control should be e n tire ly separate. Clay agrees with Harding. Dick would lik e a preamble sta tin g the o rig in al position of the Council but would not object seriously i f th is were omitted. Then the posi tion of the Executive Committee should be confirmed, and there should be a separate reso lu tio n about c re d it co n tro l. Wakefield said Montgomery-Ward and Company had borrowed $43,000,000 but intended to pay o ff i t s loans and keep down i t s inventories and simply live from hand to mouth. Montgomery-Ytfard in carrying out th is intention has cancelled many of i t s commitments. Brown s ta te s th a t th is apparently is not- the policy of SearsRoebuck and Company and th a t, in fa c t, Sears had taken over in many instances orders cancelled by Montgomery-Ward. Harri son moved to reaffirm the action of the Executive Committee with respect to Regulation W and is ready to move a separate resolution rec ommending th a t c re d it control be carricd out by means of p rio ritie s and a l locations. ' A fter some fu rth e r discussion, Clay moved, and Haraitu: seconded formally, two re so lu tio n s, one to reaffirm the position of the Executive Com mittee v is-a -v is Regulation W and the other dealing with cred it control. Both measures were unanimously adopted and the chair appointed Harrison and Kurtz to draw up these two reso lu tio n s, Erov.Ti brings up the proposals fo r amending the u.E.C. Act. The Association of Investment Bankers of America has been ag itatin g for changes in the S.E.C. Act, concealing some of i t s a c tiv ity from commercial bankers. Out of the discussions which a committee of the A.I.B. has had with the Se curities and Exchange Commission came four classes of proposals. fore and 1. Changes agreed to by both the industry and the S.E.C. 2. Changes suggested by the S.E.C. and opposed by the in dustry. 3. Changes suggested by the industry and opposed by the S.E.C 4. Changes suggested by the industry about which the S.E.C. is entirely n eu tra l. After these discussions the A.I.B, got the Committee on In te rsta te and For eign Commerce of the House of Representatives to put forward a group of suggestions for amendments to the tv/o S.E.C. acts. This plan was followed in order to evade the. P re sid e n tia l Order which forbade Government agencies to propose le g is la tio n without f i r s t clearing th e ir proposals through the Budget Commi 11 e e . In the proposals as put forward there are three sections which above a ll others concern the banks: There is proposed a new subsec-tion (2)14. The present Act does not attempt to regulate non-public sales of se c u ritie s, though "puolic sale" is not defined in the Act. The new subsection states th a t "public sale" is anything by which the public in te re s t is affected , and thus any agency is included which accepts deposits, has premiums on p o licies, etc. The idea is that S.E.C. should have the rig h t to protect the depositors and policy holders against lo ss by requiring re g is tra tio n of loans above a certain amount. S.E.C. claims i t has not proposed th is provision but th a t i t does not oppose i t and Congress might well consider the question. A committee appointed by New York commercial banks asked that banks be excluded from the prevision, and a committee of the Investment Bankers agreed to th i s , fo r the A.I.B. was not seeking to hamper commercial banKs but was trying to prevent insurance companies from buying issues of securities privately. The S.E.C. objected to the exclusion of banks. Then i t was sug gested th at loans should be excluded that did not have any secu rities with coupons attached and were not based on any indenture or sim ilar instrument. If th is were adopted, term loans would be excluded from the operations of the section, but the p rin cip le of giving S.E.C. authority over commercial banks would remain. The Mew York committee unfortunately agreed to the suggestions of the A.I.B. and is th erefo re in a somewhat awkward position, but fin ally decided to go along with a l l other banks in opposing the new subsection. Bankers n atu ra lly fe e l that even with the exception agreed to by the A.I.B., the S.E.C. %'«ould be in the position of tho camel getting its nose into the tent as fa r as control of banks is concerned. Brown and Hanes were in Washington la s t weeK and had conferences with the Board of Governors, the Comptroller, and Crowiey oi the i'.D.I.o. -6- The Board of Governors (Ransom was away) agreed to oppose the section in ques tion, as did the F.D.I.C. and the Comptroller, and an excellent joint le tte r was issued by these three agencies, together with separate covering le tte rs , the best one being the covering l e t t e r of the Board of Governors. The cover ing le tte r of the F.D.I.C. mainly spoke of the glories of the F.D.I.C., while tho Comptroller*s l e t t e r was a rath e r colorless production. The Board’s le t ter was very strong and d ire c t. ahe Secretary of the Council, at the request of k r. Brov/n, read the joint l e t t e r of the Comptroller, Board of Governors, and F.D.I.C. opposing (2)14 in the S.E.C. proposals. Brown says there are two ocher sections in the proposal affecting banks. Section 17 says any report made to stockholders by directors and of ficers of any corporation which- is inaccurate, misleading, or contains false statements would subject such o ffic ers and directors to the same penalties imposed fo r f il i n g a fa ls e re g is tra tio n statement. At present banks are not subject to any re g is tra tio n requirements fo r the sale or purchase of .stock. The proposal, of course, sounds innocent and quite proper, but banks are simply not in a position to issue statements which might not be subject to attack. I f , fo r example, banks carry th e ir bonds below market value and do not state th is fa c t in th e ir reports to stockholders, they might be accused of suppressing p ertin en t inform ation. In many cases banks simply are not in a position to know what the present or ultim ate value of th e ir "charge-offs” may be. Likewise, i f reserves are set up for possible losses, and earnings are reported n e t, the S.E.C. might claim suppression of information. Banks now are supervised by the Comptroller or the F.D.I.C. or the Board of Gover nors, and each bank must make a sworn statement of i t s exact position to its supervisory au th o rity , and these supervisory a u th o ritie s examine banks very carefully, so th a t under present conditions, without any further regulation or law, banks are very closely supervised. The new proposal would merely give S.E.C. in q u is ito ria l ju ris d ic tio n over banks and thus subject banks to s t i l l another governmental agency. Under present conditions, banks are protected from p o litic a lly in spired s u its , fo r th ere is an understanding th at the Department of Justice will not d ire c t a United S tates D is tric t Attorney to bring su it against a bank except at the request of one of the regular supervisory au tho rities. This would change i f Section 1? of the proposed amendments to the S.E.C. Act were to be adopted. Hanes suggests th a t a resolution be adopted th at the Board of Gov ernors be asked to oppose Section 17. Ragland so moved, and Harding seconded, and the proposal was unani mously adopted. Brown. There is s t i l l a th ird section in the proposed amendments which was not o rig in a lly suggested by the investment bankers but is not i opposed by them, namely, th a t the S.E.C. should be given authority over a ll pension funds to which employees contribute, unless such fund is insured one hundred per cent with some insurance company. Brown gives the history of th is : namely, th at some time ago one of the research s ta ff of the S.E.C. made a study of pension funds and pointed out th at n eith er Federal nor S tate a u th o ritie s at present regulate or super vise any pension funds and members who have contributed to pension funds may find that they have lo s t th e ir protection as a re su lt of mismanagement of the fund in which they are in terested .. This was ju st a study and was nob intend ed to support immediate action. A short time ago the Johns-Manville Company offered a voluntary pen sion fund to i t s employees and the S.E.C. claimed th at even under the present Act voluntary funds were subject to the control of the S.E.C. and uohnsHanville Company submitted to th is ru lin g without taking legal action, as did Sears-Roebuck and Company in a sim ilar situ a tio n . Of course, every one knows there have been many abuses in connection with pension funds. The concern of the bsnks in the proposal is two-fold: in the f i r s t place, many large banks have pension funds of th e ir own, and secondly, many large in d ustrial com panies, such as the In te rn a tio n a l Harvester Company, have trusteed th e ir pen sion funds, generally with Meir York banks. In New York State, tru sts of which b eneficiaries liv e outside of the State are exempt from the State tax laws, and as a re s u lt i t is more favorable fo r a large concern to turn its pension fund over to a tr u s t company in Mew York than, for example, to one in Illin o is The proposal of the S.E.C. would be a f i r s t step toward giving the Commission control over insurance companies. As fa r as banks are concerned, th e ir pension funds, where existing, are subject to the examination of the usual bank examiners as regards the se cu rities and the lik e , though there is no attempt made by examiners to assess bank pension funds from an a c tu a ria l standpoint. Of course, the Mew York banks are concerned because they would lose much valuable business. There are, of course, people in the Government who think th at a ll old age pensions should be under Government auspicesj labor unions have always objected to p ri vate pension funds because, by these pension funds, employees are tied too closely to th e ir employers. In the case of a l l national banks, tru s ts are subject to examination, and in th is way examiners already have control. In the case of S tate banks, many S tates have sim ilar provisions. Harrison says opposition can be based on the fact that banks are now examined by banking a u th o ritie s and where these do not examine pension funds, le g is la tio n should be urged to have i t done by bank examiners, and not set up another au th o rity over banks in Washington. 3rown sta ted th a t he understood i t was the sense ol che meeting that there was to be a resolution to cover th is subject. The d e s ira b ility of regu latin g exchange charges, which had been suggested as a topic by Mr. Ragland, was taken up. Ragland pointed out th a t he trie d to have some action taken about a year ago, but nothing was done. Harding says th a t the tro u b le is the Board is afraid to approach Congress because Henry S teag all would then in s is t th at banks be again allowed to pay in te re st on demand d ep o sits. Heines suggests th a t th e absorption of exchange charges is bad bank ing practice, and th e Board th ere fo re should enforce Regulation Q. Brown and Huntington both fe e l th at the Board should not be asked to make regulations on su b jects which banks should regulate themselves. Brown thinks i t is a mistake to bring th is m atter to the Board because, afte r a ll, there are re la tiv e ly few banks affected . Harding: suggests th a t th e re not be any resolution, but th at the President of th e Council simply ask the Board about the situ atio n. The mat ter was le f t th ere. I t vras decided to discuss Mr. W akefield's question of the desir ability of the Treasury withdrawing i t s balances from special depositaries and placing them in Federal Reserve Banks to reduce excess reserves. Like wise, suggesting to the Board of Governors to work out a re cla ssificatio n of reserve c itie s , which would also lead to a su b stan tial reduction in excess reserves. I f th ese two and possibly sim ilar measures were carried out, there probably would not be any need to take action intended to increase the power of the Board of Governors over reserves by ra isin g the present maximum lim it of required reserves. Harding s ta te d th a t the present amount of war loan deposit is about £734,000,000, and p u ttin g t h is in the Treasury would really have very l i t t l e effect on excess re se rv e s. I t vras decided to drop th is question. Harrison withdrew both of his questions which appeared on the agenda, "Bank C ap ital and Bank Earnings" and "Treasury Financing with p artic ular reference to the type of issues th a t might go into the hands ol perma nent investors and types th a t are much more appropriate and suitable for oank investors". Harrison sta te d th a t under present conditions he did not^ see ^that ‘.he JOi ra tio of c a p ita l to deposits has any sense. He believes that depos its w ill increase and earnings decrease. W akefiell b eliev es dividends may go up. H am son thinks th ere w ill be pressure to increase the wages of bank employees su b sta n tia lly . Brown sta ted th a t he believes New York banks were paying a much larger proportion of th e ir earnings in dividends than formerly. In Chicago, the^large banks are paying only about half of th e ir earnings out in the form of dividends. New York banks in the 20’s made large amounts of money on ca ll loans, bond tra n sac tio n s, and the lik e . He thinks th at the agitation for having a ra tio has been decreasing. Harrison says the padding of subscriptions for bond issues should be discouraged. Brotvn suggested th a t th is might be accomplished i f purchasers were required to f i l e a statem ent giving an undertaking th at bonds subscribed for and bought would not be reso ld before the expiration of six months a fte r pur chase. Harrison agreed and suggested th a t a temporary registered c e r t if i cate might be issued fo r six months and only a f te r th at period would the bonds actually be handed over to the purchaser. The meeting adjourned at 5*45 p.m. -10- S ecretary 's Notes on Meeting of the Federal Ad visory Council of November 17, 1941, at 10:00 A.M., Board Room, Federal Reserve Building, Washington, D.C. All members of the Council were present, including Mr. W. Dale Clark. I t was decided not to present a resolution about "selective credit control", but have the President of the Council sta te the views of the Council o ra lly . The d ra ft of the resolution on Regulation t\’ was pre sented and put in to fin a l form. Copies of the resoltuion were given to each member of the Council and la t e r to a l l those representing the Eoard of Governors at the meeting. The meeting adjourned a t 10:30 a.m. -1 1 - S ecretary 's Notes on Meeting of the Federal Ad visory Council of November 17, 1941, at 10:35 A.M., Board Room, Federal Reserve Building, Washington, D.C. The Council met with the board. Of the Board, the following were present: Eccles, Ransom, Szymczak, Draper, McKee, M o rrill, Clayton, Carpenter, Wyatt, and Thurston. Brown sta te d on behalf of the Council the sa tisfa c tio n the mem bers of the Council had in the jo in t l e t t e r on section (2)14 of the S.E.C. proposals, and also the covering l e t t e r . Brown sta ted th a t a l l members of the Council were in accord. He also to ld the Board th a t the members of the Council f e lt th a t the covering l e t t e r of the Board was b e tte r than the cov ering le tte rs of the other two agencies. Brown went on to s ta te th a t Sec tion 1? seemed innocuous but i t has given the Council much concern, and the Council hopes th a t the Board w ill object to i t . By im plication i t may mean that banks would be affe c te d in th a t i t would cover th e ir annual statements and make o ffic ers and d ire c to rs lia b le i f th ere was any lack of f u ll in fo r mation about reserves. I t must be pointed out th a t the value of reserves is, after a l l , a m atter, to a c e rta in ex ten t, of individual opinion. S.E.C. would have the duty to go in to th e banks to discover whether earnings and assets are c o rrectly sta te d . At p resen t, J. S. D is tric t Attorneys w ill s ta r t suit against o ffic e rs and d ire c to rs of banks only as requested to do so by the present supervisory examining bodies. As i t i s , banks now make sworn statements to the supervising a u th o ritie s and th is new regulation might prove very vexatious. I t might lead to a supervision on the part of S.E.C. of banks generally. .McKee sta te d th a t he thought th is section might be negotiated out and deleted as fa r as banks are concerned. Brown undertook to show the danger th a t would be involved i f bonds were written down and th e whole question of reserves would create great d iffi culty. McKee agreed with brown ar^ said he believed, as fa r as the super vising agencies are concerned, sectio n 17 i s re a lly more important than (2)14. Eccles sta te d th a t i f the proposals had been in the form of a b i l l it would have been necessary to submit the b i l l to a l l in te re ste d govern mental bureaus. He doubts, however, whether le g is la tio n w ill develop out of such proposals. I f th e b i l l were to pass as a re s u lt of such proposals, it would be the f i r s t time in the h is to ry of le g is la tio n th a t i t had hap pened. If a b i l l a c tu a lly should pass the House, i t would have to go to the Senate, where i t would be re fe rre d to the Banking and Currency Committee, and Zccles fe e ls c e rta in th a t the provisions about which th ere has been d is cussion would not get through th a t Senate Committee. Hearings would be held r^nd supervisory agencies, bankers, and insurance companies would be heard. -1 2 - McKee says th a t the reason th a t the proposals were in the form that they were was in order to avoid the Budget Bureau. Brown was glad to know th at the Board is opposed to Section 17. Another section is one dealing with pension funds. This is intended to support the view of the S.E.C. th a t i t has ju risd ic tio n over pension funds on tne ground th a t i t is equivalent to a security being offered to members. This clause arose from a study made under S.E.C. auspices. He told the history of the development as he did at the meeting of the day before. The banks had two in te re s ts in th is section: (a) banks have pension funds, (b) banks have many pension funds tru ste ed with them by large in d u strial cor porations. This is e sp ec ially tru e of th e New York banks. The danger is that the big corporations w ill drop th e ir pension funds rather than under go supervision. This would cut across a l l kinds of business and, therefore, the Council would be glad to have the Board oppose th is clause i f i t can see its way clear to do so. Ransom s ta te s th a t his b e lie f is th a t the intention, at least orig inally, was simply to see to i t th a t pension funds were administered by an independent tru s te e . He d o esn 't know i f th is is s t i l l the plan, but he ad mits that the sectio n in question may defeat i t s own purpose; however, i t isn’t clearly a banking question. Brown suggests i t might be possible to have the Board object to the inclusion of bank pension funds and tr u s t funds because these are a ll subject, at le a s t as fa r as th e a sse ts are concerned, to present bank exam ining a u th o ritie s, though i t must be admitted tn a t the actu arial situation is not taken in to account in th ese examinations. The Board s t a f f did not analyze th is section, but Wyatt pointed out that th is was without sig n ific an ce , as the analysis was made by a law clerk who was not fa m ilia r with the discussions th a t had taken place. As a matter of fa c t, department o f f ic ia ls who had sat in on the discussions were very cognizant of th is sectio n . Eccles says i t might weaken the e ffe c t of the opposition of Govern ment agencies to c e rta in other sections i f they were to oppose the pension fund provision, in view of the bad record made by so many pension funds. A very constructive suggestion would re a lly be necessary i f criticism s were to be offered. McKee says a c a re fu l study must be made before the Board assumes a definite p o sitio n and he suggests th a t i t would be b e tte r to wait and see what is really going to be done. The chances are th a t th is p articu lar sec tion, which is very f a r down on the l i s t , w ill not be up for consideration until next year. Brown agrees w ith what Eccles has said and realizes th at the Board may not bo able to oppose th e sectio n , but a l l th at the Council is asking is that the Eoard should give the m atter careful consideration and study the section somewhat. -13- The Secretary of the Council read the resolution adopted bearing on R e g u l a t i o n W. Brown sta te d th a t the Council was glad to see that small business loans had been exempted from the provisions of the regulation. Szyraczak defends the present provision. Hanes asks whether th is provision makes allowance for people who are dependent for income upon q u arte rly dividends and therefore could not make instalment payments on a monthly b asis. Ransom believes the m atter may be taken care of by interpretation, bat Wyatt sta te s th is would s tr a in the language of the present regulation to a considerable extent. Eccles s ta te s th e re is an important group in the Treasury that be lieves there is g reat danger of a serious in fla tio n resu ltin g from an excess purchasing power of six to nine b illio n d o lla rs. I t is estimated that there is that much spending power in the population in excess of goods available. Much greater taxes are requireo. Eccles himself doubts whether the danger is quite as imminent as some of th ese Treasury o ffic ia ls believe, but if taxes and c red it co n tro l w ill not check in fla tio n , then we shall have a ra tioning system covering a l l c iv ilia n goods and price control. McKee says th a t loans made for the purpose of encouraging th r if t will not hurt th e economy. Harrison says th a t i t is a l l ridiculous as long as wages and farm commodities are exempt from a l l co n tro ls. Sccles says i t is c le a r th a t the Executive Order would govern term loans and open book account. Brown says w hile th e Council did not pass a resolution, i t was the belief of a l l members of the Council th a t a f u ll t r i a l should be given to priorities and a llo c a tio n s before an attempt is made to impose "selective credit control11. He b eliev es th a t present increases in bank loans are to a very large proportion fo r defense purposes or for carrying commodities of 'y.Lch the Government d e s ire s to have accumulations. Credit control in banks or capital issues co n tro l should not be tr ie d u n til a l l other means are exH'iusted. The Council b eliev es th a t p r io r itie s and allocations w ill end with t;‘;e emergency, but th e a b o litio n of c re d it control would be much more d if f i cult, especially in view of th e fact th at th ere is a group in the Government which wants s o c ia liz a tio n of c re d it and banking. Eccles p oints out th a t i f a llo c atio n s cover more and more items, then you w ill f in a lly have a complete ratio n in g system. Allocation and price control go together, while cred it control is something supplementary. We reached th is point as y et, but i t is impossible to t e l l what the future w ill bring. I t is the duty of the Government to use such powers as are given to prevent p rices ris in g . Thus Regulation W is a part of credit control and i f the Board had not taken over th is function, then the Price Control Board or some other agency would have been given the job. All building except defense construction has p ractically stopped, sc further c red it r e s tr ic tio n is not needed in th at fie ld . Perhaps, how ever, the price of e x istin g houses and of farms may ris e . So long as there is not a complete p rice control, cred it must be controlled. Brown, in answer to a question, sta tes th at rates on commercial loans have gone up somewhat. He re ite ra te s the sentiment of the Council in respect to a llo c a tio n versus "selectiv e credit control". Ransom fe e ls th a t th ere may be need of general credit control by the Federal Reserve System. r McKee wants to know why th ere has been a sharp drop in sales of automobiles. Eccles says th e re is an over-bought condition, and dealers are holding back d e lib e ra te ly , p a rtly because they wish to keep some stock for next year, as the number of autos produced w ill be very much reduced, and they also do not wish to s e l l at present, fo r most of them have had an ex cellent year, and consequently fe e l th a t th e ir income taxes w ill be very high, while next y ear may be a much poorer year, so th at they will be in a lower bracket than they are now. Brown asks the opinion of the Board about Regulation Q, and em phasizes th a t he i s doing th is without desirin g in any way to make the ques tion controversial. He p oints out th a t the Council i t s e l f has always been divided in i t s views. Formerly, the Board wanted the F.D.I.C. to join i t in the supervision of the absorption of exchange charges. Danger, however, has been th a t i f the re g u la tio n were enforced, a l l the small banks would immediately bring p ressu re to abolish the provision forbidding the payment of interest on demand d ep o sits. Eccles says the question has been on ice so long th at i t is dead, and he feels th a t you cannot decti with th is problem without considering the related problem of membership in the Federal Reserve System, so he would prefer to leave the whole question on ice . Ransom says th e re i s no use going into the m atter of in tere st pyments. There is a very strong m inority who objects to the enforcement of Regulation w and Congress would be swamped by people who would want a repeal of the provision covering in te re s t payment on demand deposits. He doesn't see any use in enforcing the rule u n til i t can be brought about that a ll banks w ill be under th e same ru le. In the meantime, the Board is getting a flood of l e t t e r s asking th a t the regulation be enforced. h a v e n 't -15- Eccles claims th at i f the regulation were really being enforced, the very banks demanding enforcement now would oeg to le t sleeping dogs lie if it would mean, as i t undoubtedly would, th at in te re st would again have to be paid on demand d eposits. Brown asks whether the Board has any questions; he asks what ef fect, if any, has increase of reserve requirements had on country banking balances. Has the movement ceased? He fe els th at the to ta l decrease of excess reserves has been im pressive. Eccles suggests th a t the Council discuss the matter with Mr. Sinead in the afternoon. McKee says tne s h if t began in January of th is year because of in dustrial a c tiv ity , and not merely since there has been a rise in reserve requirements. Brown says tn a t the s h if t of reserves has been mostly true of New York and not of Chicago. Eccles p o ints out th a t the huge increase in currency in circula tion has had much to do with the decrease of excess reserves. I t is unfor tunate that long terra rig h ts and middle term rig h ts have been based on a very low rate of in te r e s t on s e c u ritie s issued. The re su lt has been that the speculator has gotten the b e n e fit and the re al investor has had to pay a premium. On the other hand, the Treasury cannot do i t s financing on a rising rate stru c tu re . I f th ere were a ris in g rate structure the investor would certainly object and would hold back because he would feel that the next issue might bring him a b e tte r ra te . Eccles feels th at issues of from twelve to fifte e n years ought to be on about a 2-1/2 per cent basis, but the market has been going up and the ra te is actu ally lower. I t is too la te to do anything now. Short ra te s 3 re going up slig h tly ; New York banks have been largely responsible in the past fo r the low short term rates but the situation is changing and while banks outside of New York are lik ely to be gin to buy heavily, he doubts i f the b i l l ra te w ill change very much. The meeting adjourned at 1:15 p.m. -16- S ecretary 's Notes on Meeting of the Federal Ad visory Council of November 17, 1941, at 2:40 P.M., Board Room, Federal Reserve Building, Viiashington, D. C. Council met alone, a l l members being present. Messrs. Goldenweis^r, Thomas, and Sinead met with the Council to discuss the reserve situation and general business conditions. Goldenweiser s ta te s th a t J. H. Riddle of the Bankers Trust Company of New York has w ritte n an ex cellen t a r tic le on the subject of the present reserve situ atio n . An a r t i c l e has also been prepared by a member of the Board’ s sta ff, and Goldenweiser w ill see th a t each member of the Council re ceives a copy of th is a r t i c l e . This a r tic le bears the date of November 13, 1941, and was w ritten by V ictor M. Longstreet. The decrease in the excess reserves is almost e n tire ly in New York. New York is the city which always loses reserves by changes of increase in reserve requirements and by the withdrawal of Treasury funds. On the other hand, New York has the advantage that arises from the imports of gold. I t used to a ttra c t funds by offering high interest payments on d epo sits when deposits were needed, but th is is now a closed avenue. I f short term ra te s were to ris e , then people might send money to New York to buy short term b i l l s , etc. Goldenweiser does not rejard the situ a tio n as one which need cause any alarm. I t is very doubt ful whether even under e x is tin g circumstances New York banks generally w ill dump any se c u ritie s upon th e market. At present excess reserves in New York are down to about eig h t hundred m illio n d o lla rs, and probably w ill go down to about fiv e hundred m illio n by the end of the year. At th is po int Goldenweiser l e f t and Woodlief Thomas took over. Thomas. I f currency in c irc u la tio n increases, the drain w ill con tinue, although o rd in a rily th e current is reversed a fte r January 1. I t is interesting to know th a t the c irc u la tio n of large denominations has been de creasing. N ational income a t present i s about ninety-two b illio n dollars, and some fu rth er r is e may be expected, but i t is lik e ly to become slower as we approach f u l l capacity of production. The process is lik ely to resu lt in a rise of short term money r a te s . Lend-lease has tended to re s tr ic t the im ports of gold. Furthermore, perhaps fiv e hundred m illion dollars has been taken out of New York in the form of loans made to customers of New York banks^f outside of the c ity of New York. There has been about OQO ri;Y>;0Ot^-ffrtfrThT^i currency and about one b illio n a d d itio n a l Government borrowing in New York, ind these have also been the forces tending to reduce excess reserves. Cer tain factors brought funds in to New York during the f i r s t half of the year, :*nd practically a l l th e a d d itio n a l money th a t came into New York during the first half of the year has gone out again since July 1. I t used to be fe lt tnat when the New York banks were in debt to the Federal Reserve Bank by about fifty m illion d o lla rs , th e situ a tio n was ju st about rig h t; i f the banks were in debt to the extent of t h i r t y m illion d o llars or less the market was 3%py, while i f the indebtedness of New York banks was more than about seventy-five m illio n , money was ti g h t. -17- Harrison and Thomas both doubt whether i t is true that New York in order to operate smoothly, need excess reserves of five hundred million d o llars, as is being stated . Business s itu a tio n . Mot much change since October, but there has been some slackening in speculative buying by business and consumers. In dustries cannot get the goods. K etailers accumulated stocks, but th e ir sales have been sm aller in October than they were in August and September when there was a great spurt due to the fear of new taxes on commodities and fear of the provisions of Regulation 1HI. Automobile trade is down, for which many explanations are made. Consumers bought cars e a rlie r as they fe lt the la te r cars might not be as good owing to the use of su b stitute m aterials. Un doubtedly, also, Regulation 1A/ has had some e ffec t. At the moment, dealers are not se llin g as many cars as are being produced, even though production for civilian consumption has been reduced by about 50 per cent. There seems to be a general h e s ita tio n . Production index in October was 160 and, allow ing for seasonal in flu en ces, the adjusted index is about 164 in October and may be 170 in December. At the beginning of the year the index was 140. In July the index was 160, so obviously, the ra te of increase has been slowing down, but the ris e fo r the year has been about 30 per cent. In non-defense industries the ris e as a whole has probably stopped. In defense industry, capacity has been in creasin g but th ere is a lim itatio n of production imposed by the amount of raw m ate rials av ailab le. Price trend is upward, for demand is growing and shortages e x is t. Unquestionably, the spread between the amount of purchasing power av ailab le and the supply of goods is increasing. Taxes and other methods cannot absorb a l l additional buying power being cre ated. I f the ta x system did absorb a l l additional buying power created, i t would luin c e rta in whole classes of the population, for no tax system has ever been devised th a t bears equally upon a l l classes of the population in relation to th e ir income capacity. The meeting adjourned a t 3:45 p.m. banks, MINUTES OF MEETING of the FEDERAL ADVISORY COUNCIL November 16-17, 1941 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL November 16, 1941 The fourth statutory meeting of the Federal Advisory Council for 1941 was convened in Room 782 of the Mayflower Hotel, Washington, D. C., on Sunday, November 16,1941, at 2:00 P. M., the President, Mr. Brown, in the chair. Present: Mr. Charles E. Spencer, Jr. Mr. George L. Harrison Mr. William Fulton Kurtz Mr. B. G. Huntington Mr. Robert M. Hanes Mr. Ryburn G. Clay Mr. Edward E. Brown Mr. S. E. Ragland Mr. Lyman E. Wakefield Mr. R. Ellison Harding Mr. Paul S. Dick Mr. Walter Lichtenstein Absent: Mr. W. Dale Clark District No. 1 District No. 2 District No. 3 District No. 4 District No. 5 District No. 6 District No. 7 District No. 8 District No. 9 District No. 11 District No. 12 Secretary District No. 10 The Secretary of the Federal Advisory Council reported that Mr. W. Dale Clark had informed him that he would be unable to be present at this first session but would be present at the sessions on Monday. On motion, duly made and seconded, the minutes of the meeting of the Council on September 14-15, 1941, copies of which had been previously sent to the members, were approved. The President of the Council discussed certain aspects of Regulation W. He pointed out that while little attention had been paid to the recommendations of the Council, at least small business loans had been exempted from the operations of the Regulation. On motion made by Mr. Clay and seconded by Mr. Harding, it was unanimously voted to confirm the position of the Executive Committee of the Council in respect to Regulation W, and it was also voted to have a resolution prepared to deal with credit control. The Chairman appointed Messrs. Harrison and Kurtz to prepare both resolutions. The President of the Council then brought up the proposals that had been submitted to the Committee on Interstate and Foreign Commerce of the House of Representatives, which were an outgrowth of discussions that had taken place between representatives of the Association of Investment Bankers of America and the Securities and Exchange Commission. The President pointed out that there were three provisions specifically of interest to banks: (1) A new subsection designated as (2)14. The present Act does not attempt to regu late non-public sales of securities, though “public sale” is not defined in the Act. The new subsection states that “public sale” is anything by which the public interest is affected, 1 and thus any agency is included which accepts deposits, receives premiums on policies, etc. The idea is that the S.E.C. should have the right to protect depositors and policy holders against loss by requiring registration of loans above a certain amount. The S.E.C. has not proposed this provision but it does not oppose it and Congress might well consider the question. A committee appointed by New York commercial banks asked that banks be excluded from the provision, and a committee of the Investment Bankers agreed to this, for the A.I.B. was not seeking to hamper commercial banks but was trying to prevent insurance companies from buying issues of securities privately. The S.E.C. objected to the exclusion of banks. Then it was suggested that loans should be excluded that did not have any securities with coupons attached and were not based on any indenture or similar instru ment. If this were adopted, term loans would be excluded from the operations of the section, but the principle of giving the S.E.C. authority over commercial banks would remain. (2) The whole of Section 17 also is of great interest to banks. If the proposal embody ing Section 17 were to become law, any report made to stockholders by directors and officers of any corporation which is inaccurate, misleading, or contains false statements would subject such officers and directors to the same penalties as are now imposed for filing a false registration statement. At present banks are not subject to any registration require ments for the sale or purchase of stock. The proposal, of course, sounds innocent and quite proper, but banks are not in a position to issue statements which might not be subject to attack. If, for example, banks carry their bonds below market value and do not state this fact in their reports to stockholders, they might be accused of suppressing pertinent in formation. In many cases banks do not know what the present or ultimate value of their “charge-offs” are. Likewise, if reserves are set up for possible losses, and earnings are re ported net, the S.E.C. might claim suppression of information. Banks now are supervised by the Comptroller or the F.D.I.C. or the Board of Governors, and each bank must make a sworn statement of its exact position to its supervisory authority, and these supervisory authorities examine banks very carefully, so that under present conditions, without any further regulation or law, banks are very closely supervised. The new proposal would give the S.E.C. inquisitorial jurisdiction over banks and thus subject banks to still another governmental agency. (3) A proposal that the S.E.C. be given authority over all pension funds to which employees contribute unless such fund is covered completely by insurance in some recog nized insurance company. The President of the Council gave the background of this proposal, which is an outgrowth of a pure piece of research made by members of the staff of the S.E.C., which showed that neither Federal nor State authorities at present regulate or supervise any pension funds. The interest of banks in the proposal is twofold: (a) Many of the larger banks have pension funds of their own which are now, at least in the case of National banks, subject to examina tion by the regular examining authorities, and the same is true in the case of many State banks, so that the control of the S.E.C. would merely mean additional examination. (b) Many large industrial concerns have appointed banks, especially banks in New York, as trustees of their pension funds. Fundamentally, undoubtedly the S.E.C. is in favor of this proposal as it would be a first step toward giving the Commission control over insurance companies. A lengthy discussion took place and it was decided to discuss this whole matter further with the Board of Governors of the Federal Reserve System at the joint meeting and possibly present a resolution. 2 It was pointed out that the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation had pre sented a joint statement to the Committee on Interstate and Foreign Commerce of the House of Representatives opposing the new Section (2)14 to be added to the Securities Act of 1933. It was understood also that the Board was probably opposed to the other two sections of the proposals to which the President of the Council had made reference. The desirability of regulating exchange charges in a manner similar to that provided in Regulation Q was then discussed. It was decided that the President of the Council address an inquiry to the Board regarding the situation. After a short discussion it was decided to drop the question about the desirability of the Treasury withdrawing its balances from special depositaries and placing them in Federal Reserve banks in order to reduce excess reserves. Two other questions on the agenda were withdrawn. These were: (a) Bank Capital and Bank Earnings; (b) The types of government issues that might go into the hands of permanent investors and the types that might be more appropriate and suitable for bank investors. The meeting adjourned at 5:45 P. M. WALTER LICHTENSTEIN, Secretary. 3 M IN U T E S OF M E E T IN G OF TH E FED ERA L A D V IS O R Y C O U N C IL November 17, 1941 At 10:00 A. M., the Federal Advisory Council reconvened in the Board Room of the Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the chair. Present: Mr. Edward E. Brown, President; Mr. George L. Harrison, Vice President; Messrs. Charles E. Spencer, Jr., William Fulton Kurtz, B. G. Huntington, Robert M. Hanes, Ryburn G. Clay, S. E. Ragland, Lyman E. Wakefield, W. Dale Clark, R. Ellison Harding, Paul S. Dick, and Walter Lichtenstein, Secretary. It was decided not to present a resolution about “selective credit control”, but have the President of the Council state the views of the Council orally. A draft of a resolution on Regulation W was presented which, in its final form, reads as follows: “The Federal Advisory Council endorses and reaffirms the views expressed by its Executive Committee in a letter, dated August 16,1941, and addressed to Governor Ronald Ransom, making suggestions as to desirable amendments to Regulation W. The Council also wishes to endorse specifically the position taken by its Executive Committee at a meeting held in the Board Room of the Federal Reserve Building on September 26, 1941. The belief was expressed by the Committee at that time that Section 5(b) should be eliminated once a purpose test is adopted, i.e., if the statement of the borrower indicates that the loan is not being made to purchase a ‘listed article’ or to refund any indebtedness previously incurred in the pur chase of a ‘listed article’. While the public understands the restriction of instalment credit granted for the purpose of purchasing ‘listed articles’ the Council is fearful that restrictions by Regulation W of instalment credit granted for other purposes is subject to serious mis understanding and injurious public reaction.” The meeting adjourned at 10:30 A. M. WALTER LICHTENSTEIN, Secretary. 4 M I N U T E S O F J O I N T C O N F E R E N C E O F T H E F E D E R A L A D V IS O R Y C O U N C IL AND TH E BOARD OF GOVERNORS OF TH E FED ERA L R ESER V E SY STEM November 17, 1941 At 10:35 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 Marriner S. Eccles; Vice Chairman Ronald Ransom; Governors M. S. Szymczak, John K. McKee, and Ernest G. Draper; also Messrs. Lawrence Clayton, Assistant to the Chairman; Elliott Thurston, Special Assistant to the Chairman; Chester Morrill, Secretary of the Board of Governors; S. R. Carpenter, Assistant Secretary of the Board of Governors, and Walter Wyatt, General Counsel. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Mr. George L. Harrison, Vice President; Messrs. Charles E. Spencer, Jr., William Fulton Kurtz, B. G. Huntington, Robert M. Hanes, Ryburn G. Clay, S. E. Ragland, Lyman E. Wakefield, W. Dale Clark, R. Ellison Harding, Paul S. Dick, and Walter Lichtenstein, Secretary. The President of the Council stated on behalf of the Council the satisfaction the members felt in the joint letter of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, dealing with Section (2)14 of the S.E.C. proposals; also the members of the Council felt that the covering letter of the Board of Governors was an excellent one. The President of the Council then went on to state that the Federal Advisory Council also felt some concern about two other sections in the proposals, namely, Section 17 and the proposal dealing with the supervision of pension funds. The Chairman of the Board of Governors expressed some doubt as to whether these proposals would ever be enacted into law, as he felt reasonably certain that in any event the Senate Committee on Banking and Currency would be opposed to the proposals. The Secretary of the Council read the resolution bearing on Regulation W which appears earlier in these minutes. The President of the Council then stated that while the Council had decided not to present a resolution on the subject of “selective credit control’', he was authorized to state verbally that the members of the Council felt a fair trial should be given to the imposing of restrictions by means of priorities and allocations before any attempt be made to impose “selective credit control”. He pointed out that priorities and allocations would undoubtedly end with the present state of emergency, while it would be much more questionable whether “selective credit control” would disappear after the emergency were over. The President of the Council asked the opinion of the Board of Governors about Regulation Q, and emphasized that he was doing this without desiring in any way to raise controversial questions. The Chairman of the Board of Governors stated that on the whole it seemed to him desirable to leave this whole question quiescent at present, and there was general agree ment with this position. There was some general discussion about interest rates and Government issues. The meeting adjourned at 1:15 P. M. WALTER LICHTENSTEIN, Secretary. 5 M IN U T E S OF M E E T IN G OF TH E FED ERA L A D V IS O R Y C O U N C IL November 17, 1941 At 2:40 P.M., the Federal Advisory Council reconvened in the Board Room of the Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the chair. Present: Mr. Edward E. Brown, President; Mr. George L. Harrison, Vice President; Messrs. Charles E. Spencer, Jr., William Fulton Kurtz, B. G. Huntington, Robert M. Hanes, Ryburn G. Clay, S. E. Ragland, Lyman E. Wakefield, W. Dale Clark, R. Ellison Harding, Paul S. Dick, and Walter Lichtenstein, Secretary. Messrs. Goldenweiser, Thomas, and Smead met with the Council to discuss the reserve situation and general business conditions. Dr. Goldenweiser started the discussion in respect to the reserve situation but as he had to leave to keep another appointment, the discussion was continued by Mr. Woodlief Thomas, who discussed not merely the reserve situation but also general business con ditions. Mr. Woodlief Thomas finished the discussion at 3:45 P.M. and the meeting adjourned. WALTER LICHTENSTEIN, Secretary. 6
@FedFRASER