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MINUTES OF MEETING of the FEDERAL ADVISORY COUNCIL November 17-19, 1940 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL November 17, 1940 The fourth statutory meeting of the Federal Advisory Council for 1940 was convened in Room 936 of the Mayflower Hotel, Washington, D. C., on Sunday, November 17, 1940, at 2:00 P. M ., the President, Mr. Brown, in the Chair. Present: District No. District No. District No. District No. District No. District No. District No. District No. District No. District No. Secretary Mr. Thomas M. Steele Mr. Leon Fraser Mr. Howard A. Loeb Mr. B. G. Huntington Mr. Ryburn G. Clay Mr. Edward E. Brown Mr. S. E. Ragland Mr. John Crosby Mr. John Evans Mr. Paul S. Dick Mr. Walter Lichtenstein 1 2 3 4 6 7 8 9 10 12 Absent: Mr. Robert M . Hanes Mr. R. Ellison Harding District No. 5 District No. 11 On motion, duly made and seconded, the minutes of the Council meeting of October 6-8, 1940, copies of which had been previously sent to the members, were approved. The Secretary stated that Mr. Harding expected to arrive later in the afternoon and that Mr. Hanes planned to arrive tomorrow. Mr. Fraser reported for the Special Committee on “Easy Money” Policy. He ex plained that it had been found necessary to postpone the meeting with a committee of the Board of Governors which had been originally set for Friday, November 15, 1940. It was now planned to have the meeting of the two committees take place in the after noon of Monday, November 18. Mr. Fraser reported at length regarding a conversation he had had in New York last week with Chairman Eccles, in which the latter had outlined a proposal for a compre hensive statement dealing with financial and fiscal policies to be prepared under the direction of the Board of Governors, and which conceivably might be submitted to Congress and concurred in by the Federal Advisory Council and the Conference of the Presidents of the twelve Federal Reserve Banks. Mr. Steele read a memorandum in which he argued that the statement of the Board might be more effective if it were presented independently and without any cooperation on the part of the Federal Advisory Council. Mr. Brown summed up the discussion as follows: (a) Can the Council agree with the Board of Governors and the Federal Reserve Banks on a general statement which obviously would have to consist of gen eralizations, such as that it is desirable to have United States bonds bought by private investors, that it is necessary to balance the budget, etc., without be coming more specific? 1 (b) Assuming there was an agreement on a very general statement, would it have any effect on public opinion and on Congress? (c) It is necessary to answer questions (a) and (b) before the Council can decide whether or not it would be best to suppress its statement on “easy money” and become a party to a general statement such as has been outlined. At 2:45 P. M. Mr. Harding joined the meeting. At 3:00 P. M. Mr. J. O. Brott, Assistant General Counsel of the American Bankers Association, joined the meeting in order to discuss the topic placed on the agenda by Mr. Huntington, dealing with the tax treatment of charged-off assets and recoveries of banks and the tax treatment of gains and losses resulting from the sale of capital assets by banks. Mr. Brott stated that a committee of the American Bankers Association was discussing these problems with the proper officials of the Internal Revenue Bureau and it was hoped to obtain a ruling on these problems in the near future. Mr. Brott left the meeting at 3:30 P. M. After some discussion it was decided that it would be inadvisable for the Federal Advisory Council to approach the Board of Governors on a matter which dealt with administrative details of another Department of the Government and that it would be better to let the American Bankers Association, the Comptroller’s office, and the Federal Deposit Insurance Corporation handle these matters. On motion made by Mr. Steele, and seconded by Mr. Loeb, the following resolution was adopted: “It was voted unanimously that the Federal Advisory Council adopt the general practice of giving to the press, after each meeting, a statement by its President. It is intended that this statement be general in its terms, unless for some special reason it should be thought best to go into details. It is expected that ordinarily, before issuing a statement, the President of the Council will consult with the Chairman of the Board of Governors or such representative of the Board as the Chairman may designate. It is not intended to change hereby the procedure governing the publication of the Council’s resolutions or recommendations as fixed by a resolution adopted on November 20,1934, by the Federal Advisory Council in agreement with the then existing Federal Reserve Board. “The resolution of November 20, 1934, read as follows: ‘It is the opinion of the Federal Advisory Council as at present constituted that when the Council desires to give publicity to its proceedings it should, by itself or through its representatives, discuss such resolutions or recommendations with the Federal Reserve Board and request that these be given publicity. A reasonable opportunity should be given to the Federal Reserve Board to consider and comply with the request of the Council, and the Council itself should not give publicity to its resolutions or recommenda tions unless the Board, after due consideration, should be unwilling to comply with the request of the Federal Advisory Council to give the desired publicity.’ ” The meeting adjourned at 5:45 P. M. WALTER LICHTENSTEIN, Secretary 2 M IN UTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AN D TH E BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM November 18, 1940 At 10:30 A. M. a preliminary 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, Chester C. Davis, and Ernest G. Draper; also Messrs. Lawrence Clayton, Assistant to the Chairman of the Board of Governors; Elliott Thurs ton, Special Assistant to the Chairman of the Board of Governors; Chester Morrill, Secretary of the Board of Governors; S. R. Carpenter, Assistant Secretary of the Board of Governors; and E. L. Smead, Chief of the Division of Bank Operations. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Mr. Howard A. Loeb, Vice President; Messrs. Thomas M. Steele, Leon Fraser, Robert M. Hanes, Ryburn G. Clay, S. E. Ragland, John Crosby, John Evans, R. Ellison Harding, Paul S. Dick, and Walter Lichtenstein, Secretary. The President of the Council stated that the Council would be glad to hear anything the Board wished to say concerning problems of financing the defense program, since it was indicated in a letter from the Secretary of the Board of Governors, dated November 1,1940, and addressed to the Secretary of the Council, that the Board wished to discuss this with the Council and special mention was made of “a plan designed to increase the participation of small business enterprises in the program.” Vice Chairman Ransom suggested that Governor Draper bring the members of the Council up to date. Governor Draper thereupon presented the plan under which the Federal Reserve banks and branches would act as centers of information in respect to Government con tracts in order that the small business men might be able to obtain proper legal and other assistance and not be compelled to travel constantly to Washington. It was not intended in this way to bring added business to the Government agencies, but rather to assist small business men to obtain financial assistance from the commercial banks. Governor Davis pointed out that it was desired to use the productive capacity of every part of the country and to decentralize, as far as possible, the handling of armament contracts. The Federal Reserve System had about 36 offices spread throughout the country and specially designated men in each such office would be asked to familiarize themselves with the various details of the defense problems. In further discussion, it was pointed out by various members of the Board that by this plan it was hoped to utilize resources scattered over the country and thus prevent bottlenecks in production. It was not intended in any way by this program to increase loans made under Section 13b of the Federal Reserve Act. The initiative for this plan came from the Advisory Commission to the Council of National Defense, and not from the Federal Reserve System. The President of the Council stated that the banks were desirous of assisting in every way possible. Chairman Eccles then presented his plan for having a statement prepared in which the Federal Advisory Council and the Federal Reserve Banks might concur, this state ment to be presented to Congress. The President of the Council stated that it might be difficult to obtain an agreement if the statement went into detail but it might be possible to obtain a useful statement, general in its terms, in which the various constituent parts of the Federal Reserve System might concur. It was also conceivable that the statement might consist of two separate parts, one of which would be agreed to by the Council and the Federal Reserve banks, while the other part would be a statement supported only by the Board of Governors and not concurred in by the Council and the Federal Reserve banks. The members of the Council agreed that it would be desirable to have the committee of the Council appointed for this purpose meet with a committee of the Board of Governors to consider the possibility of an agreement and the procedure to be followed. The meeting adjourned at 1:00 P. M. and the Council had lunch with the Chairman of the Board of Governors. WALTER LICHTENSTEIN, Secretary 4 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL November 18, 1940 At 2:15 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. Howard A. Loeb, Vice President; Messrs. Thomas M. Steele, Leon Fraser, Robert M. Hanes, Ryburn G. Clay, S. E. Ragland, John Crosby, John Evans, R. Ellison Harding, Paul S. Dick, and Walter Lichtenstein, Secretary. The Council listened to a discussion of business conditions presented by Dr. E. A. Goldenweiser, Director of the Division of Research and Statistics of the Board of Govern ors, in which it was pointed out that there had been a very large increase in production and that there were no evidences that there is likely to be a drop in the near future. Dr. Goldenweiser left the meeting at 3:00 P. M., after which the Council adjourned. WALTER LICHTENSTEIN, Secretary. 5 M IN UTES OF M E E TIN G OF THE FEDERAL ADVISORY COUNCIL November 18, 1940 At 6:00 P. M. the Federal Advisory Council reconvened in Room 936 of the May flower Hotel, Washington, D. C., the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Mr. Howard A. Loeb, Vice President; Messrs. Thomas M. Steele, Leon Fraser, B. G. Huntington, Robert M. Hanes, Ryburn G. Clay, S. E. Ragland, John Crosby, John Evans, R. Ellison Harding, Paul S. Dick, and Walter Lichtenstein, Secretary. Mr. Fraser made a statement covering the meeting of the Committee on “Easy Money” Policy of the Council with a committee of the Board of Governors and stated that the spirit of the meeting had been excellent and asked the Secretary of the Council to read the statement which had been agreed upon by both committees, which is as follows: “The two committees have agreed that the Council does not waive any rights as to publication of its memorandum on the ‘easy money’ policy, and the Board maintains its right to prepare an answer to the Council’s memorandum to be published together with the memorandum of the Council. However, until the Board has prepared and com municated to a committee of the Council a draft of a more comprehensive statement upon which the Board and the Council may agree, the whole question of publication of the Council’s memorandum and all matters relative thereto will be left in abeyance.” On motion by Mr. Crosby, seconded by Mr. Dick, it was unanimously voted to state to the Board of Governors that the Council had received the report of its committee and had voted to continue the same committee in the hope that the Board would speedily prepare and communicate to the Committee a preliminary statement of the kind outlined by Chairman Eccles. The Council approved unanimously the joint statement of the two committees as read by the Secretary of the Council, and it further authorized the President of the Council, in case any member of the committee should be unable to serve, to appoint a substitute for him. Mr. Steele presented a resolution seeking to arrange for a four-year membership on the Council, reading as follows: “It was voted unanimously that the Federal Advisory Council recommend to the Conference of Chairmen of the Federal Reserve Banks that it give serious consideration to the adoption by the respective boards of directors of the Banks of a regular plan of rotation among the members of the Federal Advisory Council, such plan to be carried out through voluntary cooperation by the Banks rather than through any change in the statutes. It is the suggestion of the Council that a plan of four year membership on the Council with a consequent change of three members each year be inaugurated. This would give to the Council a sufficient continuity of membership so that its efficiency as a continuing body could be maintained, while at the same time it would permit a sufficient amount of change to insure fresh points of view, prevent too great a crystallization of policies, and avoid the danger of too long continuance in office of any single member.” Mr. Loeb seconded Mr. Steele’s resolution, which was unanimously adopted. The meeting adjourned at 7:10 P. M. WALTER LICHTENSTEIN, Secretary 6 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL November 19, 1940 At 10:10 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. Howard A. Loeb, Vice President; Messrs. Thomas M. Steele, Leon Fraser, B. G. Huntington, Robert M. Hanes, Ryburn G. Clay, S. E. Ragland, John Crosby, John Evans, R. Ellison Harding, Paul S. Dick, and Walter Lichtenstein, Secretary. The Secretary of the Council read the resolution dealing with the suggestion for a regular plan of rotation among the members of the Federal Advisory Council. This appears in the Minutes of the previous day. The resolution was formally adopted. The Secretary of the Council then read the final form of the resolution providing for a statement by the President of the Council to the press after each meeting of the Council. This resolution appears in the Minutes of the meeting of November 17, 1940. The resolu tion was formally adopted. The Secretary of the Council then read the agreement arrived at by the Committee on “Easy Money” of the Council and a special committee of the Board. This resolution appears in the Minutes of the previous day. This resolution was formally adopted. The meeting adjourned at 10:20 A. M. WALTER LICHTENSTEIN, Secretary 7 M INUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM November 19, 1940 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 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 of the Board of Governors; Elliott Thurston, Special Assistant to the Chairman of the Board of Governors; Chester Morrill, Secretary of the Board of Governors; L. P. Bethea and S. R. Carpenter, Assistant Secretaries of the Board of Governors; Walter Wyatt, General Counsel of the Board of Governors; L. H. Paulger, Chief of the Division of Examinations; E. A. Goldenweiser, Director of the Division of Research and Statistics of the Board of Governors; E. L. Smead, Chief of the Division of Bank Operations of the Board of Governors; and Carl E. Parry, Chief of the Division of Security Loans of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Mr. Howard A. Loeb, Vice President; Messrs. Thomas M. Steele, Leon Fraser, B. G. Huntington, Robert M. Hanes, Ryburn G. Clay, S. E. Ragland, John Crosby, John Evans, R. Ellison Harding, Paul S. Dick, and Walter Lichtenstein, Secretary. There was a lengthy discussion of a letter addressed by the Honorable Jesse H. Jones to the Secretaries of War and Navy which appeared in this morning’s newspapers. In this letter Mr. Jones, on behalf of the Reconstruction Finance Corporation, offered to finance plant facility construction contracts at low rates, and under conditions which might possibly make it difficult for private banks to compete with the Government lending agencies. Various members of the Board of Governors stated that they had not had any previous information of this letter, but it was pointed out that possibly the Army and Navy had requested some such action, because these two departments of the Govern ment had at various times insisted that if the payment of contracts were guaranteed by the Government, the maximum rate to be charged for the financing of such contracts should not exceed 1Y i per cent. The President of the Council stated that it would be foolish to jump to conclusions and it might be that Mr. Jones was either not being quoted correctly or that his letter was subject to some other interpretation, but that at the moment it did appear as though the willingness of private institutions to help in the financing would be without avail. Even where the Government guaranteed the payment of a contract, a private institution would always be subject to the danger that a Government department might refuse payment on the ground that not all specifications had been followed. On the other hand, if the Reconstruction Finance Corporation lent money, it really would be one depart ment of the Government lending to another department and therefore the situation would not be at all comparable to the one in which a private lender would find himself. The President of the Council stated that at a meeting of the Council yesterday evening, the Council had agreed to the statement prepared by the Committee on “Easy Money,” representing the Council, and a special committee of the Board. The Secretary of the Council read the agreement, which appears in the Minutes of the previous day. 8 The President of the Council stated that it was hoped that the two committees would work as rapidly as possible, for some of the members of the Council’s committee would not be on the Council next year, and for the sake of continuity it would be desirable to have the work completed while the present members of the Council were still in office. The President at this point raised the question of the continuity of the Council and asked the Secretary of the Council to read the resolution suggesting a regular plan of rotation among the members of the Federal Advisory Council. This resolution appears in the Minutes of the previous day. On request, the Secretary of the Council stated that Mr. Steele had moved the adoption of the resolution and his motion had been seconded by Mr. Loeb. At 11:10 A. M. Governor Chester Davis joined the meeting. The various members of the Board of Governors stated that they believed the sug gestion of the Council was a good one and was an improvement upon the present system. Chairman Eccles expressed the hope that if the contemplated joint report could not be completed before a new Council took office, that possibly some arrangement might be made for continuing the services of the present members of the Council]s committee on that committee until such time as a joint report had been prepared or until it had been decided that it was impossible to reach an agreement on a report. The Secretary of the Council read the resolution expressing the desire of the Council to have the President of the Council, at the end of each meeting, issue a formal statement to the press. This resolution appears in the Minutes of the meeting of November 17,1940. There was considerable discussion, but the members of the Board of Governors did not seriously object to the proposed procedure, and in fact thought that it might be well to make some such attempt. The meeting adjourned at 12:20 P. M. WALTER LICHTENSTEIN, Secretary 9 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL November 19, 1940 At 12:30 P. M. the Federal Advisory Council reconvened in the Board Room in the Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Mr. Howard A. Loeb, Vice President; Messrs. Thomas M. Steele, Leon Fraser, B. G. Huntington, Robert M. Hanes, Ryburn G. Clay, S. E. Ragland, John Crosby, John Evans, R. Ellison Harding, Paul S. Dick, and Walter Lichtenstein, Secretary. The President of the Council suggested that action in the matter of the letter of the Honorable Jesse H. Jones be left to the Executive Committee of the Council. Mr. Crosby so moved, and this was seconded by Mr. Evans, and the procedure suggested by the President of the Council was unanimously approved. The President of the Council read the statement which he proposed to release to the press after the adjournment of this meeting, and his statement met with the approval of the members of the Council. At 12:50 P. M. Mr. Harding left the meeting. At 12:55 P. M. Mr. Fraser left the meeting. Discussion continued regarding the letter of Mr. Jones and the general feeling was that if the President of the Council, on further investigation, thought it would be desirable to issue a letter or a statement on the subject, he might do so, and consult in that case with members of the Executive Committee. The meeting adjourned at 1:10 P. M. WALTER LICHTENSTEIN, Secretary 10 November 18, 194-0 Special Committee to Consider Memorandum of Federal Advisory Council on "Easy Money Policy" Representing the Board of Governors of the Federal Reserve System: Governors E c c les, Ransom and Szymczak Representing the Federal Advisory Council: Hanes and Evans Also present from the Board: Thurston Also present from the Council: Messrs. Fraser, Loeb, Messrs. M o rrill, Goldenweiser and Mr. Lichtenstein The meeting took place in the Board Room beginning at 3 ; 15 p.m. Fraser says that there are two questions interrelated in which the Council is interested in connection with the p o ssib ility o f a jo in t statem ent. I t is obvious that a joint committee th is afternoon cannot get out such a statement. I t i s , therefore, de sir a b le fo r the Board to get out a preliminary or f ir s t draft to be sent to the members of the Council as soon as possible and then e ith e r correspondence can be conducted about th is draft or another meeting may be arranged. I t is essen tia l that the members of the C ouncil, or the members o f the committee of the Council, be shown the prelim inary d raft so that the memorandum in question w ill not be a fix e d one which the Council would have to take or leave. The Council can then be h e lp fu l in tho production of a fin a l d raft. E ccles suggests that in case the Board would withdraw it s question o f A p r il 2 ? , 19A0, the Council would withdraw it s answer. This i s based on the b e l i e f th a t, fundamentally, conditions have changed and there i s no point in discussing the question of easy money in a sort o f vacuum. Eraser r e p lie s that perhaps there is no need to withdraw e ith e r question or answer but, i f an agreement were reached on some jo in t statement covering more or le s s the same top ic, then the ques tio n o f p u b lica tio n might bo waived. This would be especially true i f the jo in t statement contained or included some of tho rccoimnendatio n s beginning on page 5 o f the Council’ s memorandum. E ccles says th a t, as a matter o f record, i t would be de s ir a b le to have both question and answer withdrawn, for i f these are -2- l e f t in the reco rd then th ere ought to be in the record a ls o an an swer by the Board t o the C o u n c il’ s memorandum o r , in any even t, the re co rd ought to show th a t the C ou n cil had r e v is e d i t s answer in such a fa s h io n th a t th e Board would not f e e l under any n e c e s s it y o f making a fu r t h e r r e p ly . I t was agreed f i n a l l y th a t t h i s phase o f the m atter be p ostp on ed , i t b ein g understood th at in the meantime the Board does not w aive i t s r ig h t to f i l e an answer and the C ouncil does not waive i t s p o s i t i o n , but both s id e s w i l l w ait and see v/hat d ev elo p s. Evans b e lie v e s any jo in t statem ent must in clu d e the e s s e n t i a l s o f the C o u n c il’ s memorandum, fo r i f present easy money c o n tin u e s , i t w i l l be d i f f i c u l t fo r p r iv a te in d ustry to fu n c tio n p r o p e r ly . E c c le s says i t i s o b v io u sly the duty o f the Board to ad v is e on f i s c a l and f i n a n c i a l p o l i c i e s . The Board i s the creatu re o f Congress and i s not under any other governmental agency o f o f f i c i a l such as a c a b in et o f f i c e r . N e v e rth e le ss, no c e n tra l banking system today has an independent s t a t u s . Of t h is the Board i s con s c io u s and so i t o ccu p ies a 'p o s i t i o n d iffe r e n t from that o f the Re serve Banks and p r iv a te banks. The Board i s the connecting lin k between the Government and the Federal Reserve Banks and the p riv a te banking system , and the Board cannot lo s e sig h t o f i t s r e la tio n s h ip to the Washington p ic t u r e . I t must handle i t s p o s itio n c a r e fu lly w ithout at the same time becoming a more rubber stamp. Consequently, in speaking o f in t e r e s t r a t e s , i t i s necessary to watch the emphasis. R ates are not an end in th em selves. Some way must be found ( l ) to d eal w ith e x c e s s iv e ly easy money, excess re se rv e s, e t c . , (-2 ) to do fin a n cin g o f d e f i c i t s o u tsid e o f the banking system (there i s no need o f c r e a tin g more d e p o sits and the Treasury should seek to tap funds o u tsid e o f the b a n k s), ( 3 ) to have a tax system that w ill tend to brin g about a balanced budget so that when there i s f u l l employment and f u l l use o f productive c a p a c ity , d e f i c i t financing w ill d isap p ear, and (4) to avoid b o ttle n e c k s . I f reference is made merely to the one item o f in te r e s t r a t e s , it would appear as i f banks were the only c o n sid era tio n in the p ic tu re and that no atten tio n was being ‘ given to the much broader problems. Not merely the monetary question must be con sid ered, but a ls o the f i s c a l situ a tio n and, on the other hand, d ir e c t c o n tro l o f b o ttle n e c k s, e t c . , must a lso be considered. -^ o e e Loeb p oin ts out that p o ssib ly on some points the Council ur t he r - than ‘J* E ccles says that t h is would depend on v/hat the points are but the Council is not n ecessarily lim ited by the action of the Board. The Board f e l t that the memorandum on "Easy Money" put the Board in an u n fair l i j h t and did not t e l l the whole story. For example, there w asn't any d is tin c tio n made between the Board and the Admin is tr a tio n . However, the C ouncil’ s righ t to express i t s point of view i s not at a l l being questioned. Fraser points out that i f money i s too cheap i t w il l not be p o ssib le to in te r e s t p rivate in vestors in Government s e c u r itie s . The banking system f e e l s that the Board, even now, has not made any statement as i s being contemplated here, now that conditions have changed and easy money i s not h e lp fu l. E ccles says that since 193 - easy money has not been an aid in the situ a tio n and he claims to have made speeches to th is e ffe c t. Ransom f e e l s that the Council in i t s memorandum has over emphasized what the Board has said and has paid l i t t l e atten tion to what the Board has r e a lly done. E ccles says that he made a speech in S t. Louis dealing with t h is whole question but that he had to bring in the tax prob lem f o r , a ft e r a l l , in te r e s t rates are not something that operate in a vacuum. When reserve rates were raised , bankers c r itic iz e d se v e r e ly . How many bankers are there who would be w illin g to have the tax program, reserv e s, gold and s ilv e r dealt with as they should be? Fraser repeats that there i s n 't a banker in the country who would o b je c t to the s t e r i l i s a t i o n of gold or some other e ffe c t iv e method. Szvmczak wants to know what the banking attitu d e would be i f the Board asked fo r more power to lim it excess reserves. Evans r e p lie s that the trouble i s i t would not be an auto matic fu n ction . Eccles says that a l l he asked in 1935 was the power to lim it excess reserves to £ 500 , 000,000 or ^ 1 ,0 0 0 ,0 0 0 ,0 0 0 . In other words, there would have been an automatic point. Today he questions whether i t i s d esira o le to have the control r ig id or en tirely auto matic because i t i s too d i f f i c u l t to see ahead. Evans says Eccles aid not s e l l his ideas in 1935 and bank ers f e l t that Eccles wanted power to give him unlimited control over -4- reserves and th a t, th erefore, the banker from day to day did not know what lending p olicy to adopt. Ransom points out that under present conditions the Treas ury can n eu tralize any action of the Board by the authority given i t under the Thomas Amendment and the Act creating the s ta b iliz a tio n fund. The question i s whether the Federal Reserve System i s or is not a cen tral bank. Eccles f e e ls th a t, in sp ite of the Treasury, the s t a b il iza tio n fund did not play much of a role a s, a fte r a l l , i t involves only $ 2 ,0 0 0 ,0 0 0 ,0 0 0 . The Thomas Amendment and the S ilv e r Purchase Act should be repealed. There i s great need of cooperation between the Treasury and the System as regards f i s c a l p o lic y . In the face of d e f i c i t s , a cen tra l bank cannot be too independent. Fraser says that there i s substantial agreement that i f we should be drawn in to the war, either in the East or in the West, we must be prepared f i s c a l l y and fin a n c ia lly ju st as much as we must be in respect to armaments. He agrees with Evans that bankers are a fra id to give a few people complete power to manage reserves fo r the powers might be used to accomplish r e su lts which have l i t t l e or nothing to do with fin a n c ia l and f i s c a l p o lic ie s . Eccles admits that there i s real basis fo r such fears and says the Board h esita te d to lower reserves in 1933. He points out that the Council apparently approved the action of the Board at the time and that in p ra ctice i t r e a lly did not change the situ a tio n . Ransom agrees th a t, in lig h t of everything, the decision to reduce reserve requirements in 193^ was a wise one. Fraser read recommendations made by the Council beginning on page 5 o f the memorandum and inquires whether there i s any objec tio n to any o f these recommendations. E ccles sta te s that he would be w illin g to go even fu r ther i f the whole statement i s put in the righ t perspective. Since 193S, easy money has not been needed but in te r e st rates must be placed in the rig h t framework i f the report i s to be e ffe c tiv e . The Board's p o r tfo lio i s being reduced but, in lig h t of occurrences of the la s t two or three weeks, i t i s very fortunate that the System did not run out of ammunition e a r lie r . This ammunition must be conserved and the p o r tfo lio must not be allowed to run down to the subsistent p oin t. Eccles would not h e sita te to explain to a committee of Con gress many questions which i t would be d i f f i c u l t to ra ise in a state ment . lows: 1. 2. 3. 4. 5. 6. Kan 5om read a prepared statement, oi' objectives, as folAvoid bottlenecks. Prevent a collapse when defense program is finished. Deal with excess reserves. Do not increase deposits by having banks buy more bonds. Balance the budget. Have a tax program to help bring about these objec tiv e s . Eccles points out that one of the things that ought to be discussed i s the need of more unification in the banking system f o r , at present, 60 per cent of the banks are not in the System and i t i s r e la t iv e ly easy for any member of the System to get out of the System so that banks might fe e l th at, i f reserve requirements were increased too much, i t would be more p rofitable not to remain in the System. Loeb suggests that the Federal Deposit Insurance Corpora tio n Act might be amended so as to make the Federal Reserve System more e f f e c t iv e , but Eccles and Ransom objected to giving the Federal Deposit Insurance Corporation power over reserves. Eccles repeats that i t w ill be necessary to discuss excess reserves and probably the causes of excess reserves must bo discussed. He d o esn 't know whether the board would be w illin g to go so far as to in d icate that the fu rth er a cq u isition of gold might be checked, but an amendment of the Johnson Act permitting Great Britain to borrow on s e c u r itie s might be mentioned. The question i s whether possibly d i rect grants should be made. I t might be put in such a way that r e f erence need not be made d ir e c tly to Great Britain but rather to permit an agency of any nation whose cause we are supporting to use it s a sse ts as c o lla t e r a l fo r advances. A lso, instead of leasing naval and a ir b a ses, why couldn' t we buy outright those that are apparently needed fo r our defense purposes? Fraser suggests that as gold came in , required reserves might be increased on t h is ad d itional gold to the same amount as the gold coming in . Eccles p oints out that excess reserves are not evenly dis trib u te d throughout the country and there are parts of the country where loans have increased without much increase in deposits. The question of excess reserves i s r e a lly a problem of the money market and there cannot be a blanket regu lation . New York has $3,000,000,000 -6- of the excess reserves and an increase in reserve requirements might w ell be applied to the money market loan. This would make i t easier to reverse the action i f the situation should change and the Board or the Reserve Banks would have t.o consult the money market. He claims he is not opposed to interbank deposits. He has been fo r a unified banking system so as to have better mone tary co n trol. He believes that deposit insurance charged on re serves carried in the Federal Reserve Banks should be discontinued. I t seems rid icu lou s to charge insurance on funds that are locked up. I t i s impossible to treat of the in terest rate structure with out dealing with some of these other matters to which reference has been made. He would lik e to see a statute increasing required re serves of a l l banks, not merely of member banks. In th is connection Mr. Lichtenstein read a statement em bodying what he understood to be the agreement of the two commit t e e s , reading as fo llo w s: "The two committees have agreed that the Coun c i l does not waive any rig h ts as to publication of i t s memorandum on the ’ easy money’ p o licy , and the Board maintains i t s righ t to prepare an answer to the Council’ s memorandum to be published together with the memorandum o f the Council. However, u n til the Board has prepared and communicated to a committee of the Council a draft of a more comprehensive statement upon which the Board and the Council may agree, the whole question of publica tio n of the C ou n cil's memorandum and a l l matters relative thereto w i l l be l e f t in abeyance." Both committees expressed th eir agreement witn tne state ment as read. For Release in Morning Papers of Tuesday, November 19 , 19^-0 FLA-60 FEDERAL LOAN AGENCY WASHINGTON November 18, l^+O. JESSE JOZIES, FEDERAL LOAN ADMINISTRATOR, TODAY MADE PUBLIC THE ATTACHED LETTER WHICH WAS SENT INDIVIDUALLY TO THE SECRETARY OF WAR AND THE SECRETARY OF THE NAVY: FEDERAL LOAN AGENCY WASHINGTON November 18, I 9U 0 Dear Mr. Secretary: You may r e c a ll that Congress increased the borrow ing authority of the RFC by $1,000,000,000 to enable i t to a s s is t in tho defense program - plant construction, et cetera and, while substantial commitments have already been made, ample funds are s t i l l availab le, and the Corporation wants to continue to be holpful wherever i t can. I t is desirable that banks finance as much of the defense program as they can handle properly, but whore credit is extended upon a d efin ite agreement for reimbursement by the War or Navy Department, the in terest rate should bear some r e la tio n to a government guaranteed obligation. I am writing to advise that where, in accordance with your establish ed p o lic y , there is a d efin ite undertaking on the part o f the War or Navy Department, in a manner mutually accept a b le , fo r reimbursement over a period of fiv e years, the RFC, eith er d ir e c tly or through banks or the Defense Plant Corpora tio n , w ill arrange or adjust such financing at an in terest rate o f 1 \) per annum 011 payments made within the period. For defense financing, for working capital and plant equipment and expansion, where there is no definite undertaking fo r reimbursement by the War or Navy Department, the interest rate w ill be appropriate to the credit factors of the individual case, but not more than Sincerely yours, (Signed) Jes^e H. Jones Administrator FEDERALADVISORY COUNCIL Statement for the Press For immediate release November 19, 1940, Edward E. Brown, the president of the Federal Ad v is o r y C ouncil, stated today that the Council had concluded i t s regular aAu a rte rly three-day meeting with a l l i t s members present from each of the twelve Federal Reserve D i s t r ic t s . The Council met twice with the Board of Governors o f the Federal Reserve System, in addition to holding sev e r a l session s o f i t s own. Various matters a ffe c tin g the Fed e r a l Reserve System were considered. Much time was given to d iscu ssion s o f ways and means by which the largest possible p a r tic ip a tio n of the banks o f the country and private cap ital could be obtained in connection with the financing of the de fense program. The Council reported that the banks of the country were anxious to p a rtic ip a te to the f u l l e s t possible extent c o n siste n t w ith sound banking and both the Board of Governors o f the Federal Reserve System and the Council were in agreement th a t as much o f the financing as p o ssib le should be done by the banking system . . rjnr.'T":} n n r • n n o ? /\r »=:.• 1: • ' m ; JAM I /- *o 1941 SPECIAL REPORT TO THE CONGRESS by the Board of Governors of the Federal Reserve System, the Presidents of the Federal Reserve Banks, and the Federal Advisory Council For the f i r s t time since the creation o f the Federal Reserve System, the Board of Governors, the Presidents of the twelve Federal Reserve Banks, and the members o f the Federal Advisory Council repre senting the twelve Federal Reserve D istr ic ts present a jo in t report to the Congress. This step is taken in order to draw attention to the need of proper preparedness in our monetary organization at a time when the country is engaged in a great defense program that requires the coordi nated e f f o r t o f the en tire Nation. Defense is not exclusively a m ili tary undertaking, but involves economic and financial effectiveness as w e ll. The volume o f physical production is now greater than ever be fore and under tne stimulus o f the defense program is certain to rise to s t i l l higher l e v e l s . Vast expenditures of the military program and th eir financing create ad d ition al problems in the monetary fie ld which make i t necessary to review our e x istin g monetary machinery and to place ourselves in a p o sitio n tc take measures, when necessary, to fo r e sta ll the development o f in fla tio n a ry tendencies attributable to defects in the machinery o f c re d it c o n tro l. These tendencies, i f unchecked, would produce a r is e o f p r ic e s , would retard the national e fio r t for defense and g re a tly increase i t s c o s t, and would aggravate the situation which may r e s u lt when the needs c f defense, now a stimulus, ia tei absorb 1 le s s of our economic productivity. While in fla tio n cannot be controlled by monetary measures alone, the present extraordinary situation demands that adequate means be provided to combat the dangers of overexpansion o f bank cred it due to monetary causes. The volume of demand deposits and currency is f i f t y per cent greater than in any other period in our h isto ry . huge and are increasing. Excess reserves are They provide a base for more than doubling the e x istin g supply o f bank c re d it. Since the early part of 1934 fourteen b i l l i o n d o lla rs of gold, the principal cause of excess reserves, has flowed into the country, and the stream of incoming gold is continuing. The n e cessa rily large defense program of the Government w ill have s t i l l further expansive e f f e c t s . Government secu rities have become the chief a sse t o f the banking system, and purchases by- banks have created addi tio n a l d e p o sits. Because of tne excess reserves, in terest rates have f a lle n to unprecedentedly low le v e ls . Some of them are well below the reasonable requirements of an easy money p olicy, and are raising serious, long-term problems fo r the future w ell-being of our charitable and edu c a tio n a l in s t it u t io n s , for the holders of insurance p o licies and savings bank accounts, and fo r the national economy as a whole. The Federal Reserve System finds i t s e l f in the position of be ing unable e f f e c t iv e ly to discharge a l l o f i t s r e sp o n sib ilitie s. While the Congress has not deprived the System o f resp o n sib ilities or of powers, but in fa c t has granted i t new powers, nevertheless, due to extraordinaryworld c o n d itio n s, i t s authority i s now inadequate to cope with the present ^ Lc'^" fe'xcess reserve problem. The Federal Reserve System, there fore, submits for the consideration of the Congress the following fivepoint program: 1. Congress should provide means for absorbing a large part of existing excess reserves, which amount to seven billion dollars, as well as such additions to these reserves as may occur. Specifically, it is recommended that Congress (a) Increase the statutory reserve requirements for demand deposits in banks in central reserve cities to 26%j for demand deposits in banks in reserve cities to 20%\ for demand deposits in country banks to 14$; and for time deposits in all banks to 6%. (b) Empower the Federal Open Market Committee to make fur ther increases of reserve requirements sufficient to absorb excess reserves, subject to the limitation that reserve requirements shall not be increased to more than double the respective percentages specified in paragraph (a). (Tne power to change reserve requirements, now vested in the Board of Governors, and the control of open market operations, now vested in the Federal Open Market Committee, should be placed in tne same body.) (c) Authorize the Federal Open Market Committee to change reserve requirements for central reserve city jamvS, or for reserve city banks, or for country banks, or or any combination of these three classes. (d) Make reserve requirements applicable t o j ceiving demand deposits regardless of wheta^r they are members of the Federal Reserve System. (e) Exempt reserves required under par-graphs (a), (b) and (d) from the assessments oi the Federal I Insurance Corporation. 2. Various sources of potential increases in e x c e s s r e s e r v e s should be removed. *?“ These include: the power to issue three o i l U o n s o g re e n b a ck s ; further monetization of foreign silv er; the power to issue silver ce rtifica te s against the seigniorage, now amounting to one and a half billion dollars on previous purchases of silv er. In view of the completely changed international situation during the past year, the jov;er further to devalue the dollar in terms of gold is no longer neces sary or desirable and should be permitted to lapse. I f it should be necessary to use the s ta b iliz a tio n fund in any manner which would affect excess reserves of banks of th is country, i t would be advisable i f it w^re done only afte r consultation with the Federal Open Market Committee whose responsibility i t would be to f i x reserve requirements. 3. Without in terferin g with any assistance that this Government may wish to extend to frien d ly nations, means should be found to prevent farther growth in excess reserves and in deposits arising from future gold acquisitions. Such a cq u isition s should be insulated from the credit sys tem and, once insulated, i t would be advisable i f they were not restored to the credit system except a fte r consultation with the Federal Open iarket Committee. 4* The fin a n cin g o f both the ordinary requirements of Govern ment and the extraordinary needs o f the defense program should, be accom plished hj drawing upon the e x is tin g large volume of deposits rather than '7 creating a d d itio n a l d e p o sits through bank purchases of Government secu-'’iti'-j". yre are in accord with the view thuvt the general debt lim it should :'f; raised; th at the s p e c ia l lim ita tio n s on defense financing should be removed; and that the Treasury should be authorized to issue any type of s e c u r i ties (.including fu lly taxable se cu ritie s) which would be especially suitable for investors other than commercial banks. This is clearly de sirable for monetary as w ell as f i s c a l reasons. 5. As the national income increases a larger and larger por tion of the defense expenses should oe met by tax revenues rather than by borrowing. Whatever the point may be at which the budget should be bal anced, there cannot be any question that whenever the country approaches a condition of f u l l u t iliz a t io n o f i t s economic capacity, with appropri ate consideration of both employment and production, the budget should be balanced. This w ill be e s s e n tia l i f monetary resp o n sib ility is to be discharged e ffe c tiv e ly . In making these fiv e recommendations, the Federal Reserve System has addressed i t s e l f prim arily to the monetary aspects o f the situ ation . These monetary measures are necessary, but there are protective steps, equally or more important, that should be taken in other f i e ld s , such as prevention of in d u stria l and labor b ottleneck s, and pursuance of a tax policy appropriate to the defense program and to our monetary and f i s c a l needs. I t is v i t a l to the su ccess o f these measures th a t there be unity of policy and f u l l co o rd in a tio n o f a c tio n by the various Govern mental bodies. securely. A monetary system d ivid ed a g a in st i t s e l f cannot stand In the period th a t l i e s ahead a secure monetary system i s essential to the success o f the d efense program and c o n s titu te s an in dispensable bulwark o f the N a tio n .
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