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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL November 18, 1951 The fourth statutory meeting of the Federal Advisory Council for 1951 was con vened in Room 932 of the Mayflower Hotel, Washington, D. C., on November 18, 1951, at 2:50 P.M., the President, Mr. Brown, in the Chair. Present: District No. 1 Walter S. Bucklin N. Baxter Jackson District No. 2 Frederic A. Potts District No. 3 Sidney B. Congdon District No. 4 District No. 5 Robert V. Fleming District No. 6 Paul M. Davis District No. 7 Edward E. Brown District No. 8 W. L. Hemingway District No. 9 Joseph F. Ringland District No. 10 David T. Beals District No. 11 De Witt Ray District No. 12 James K. Lochead Secretary Herbert V. Prochnow On motion duly made and seconded, the mimeographed notes of the meeting of the Council held on September 16, 17 and 18, 1951, copies of which had been sent previously to the members of the Council, were approved. A complete list of the items on the agenda and the conclusions of the Council are to be found in the Confidential Memorandum to the Board of Governors from the Federal Advisory Council, which follows on pages 31 and 32. The meeting adjourned at 5:50 P.M. HERBERT V. PROCHNOW Secretary. 29 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL November 19, 1951 At 10:00 A.M., the Federal Advisory Council reconvened in Room 932 of the May flower Hotel, Washington, D. C. Present: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, Paul M. Davis, W. L. Hemingway, Joseph F. Ringland, David T. Beals, De Witt Ray, James K. Loehead, and Herbert V. Prochnow, Secretary. The Council reviewed its conclusions of the previous day regarding the items on the agenda and sent to the Secretary of the Board of Governors the Confidential Memorandum which follows on pages 31 and 32, listing the agenda with conclusions reached by the Council. The Memorandum was delivered to the Secretary of the Board of Governors at 11:00 A.M. on November 19, 1951. The meeting adjourned at 10:40 A.M. HERBERT V. PROCHNOW Secretary. 30 CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON NOVEMBER 20, 1951 1 . The Board would like to have any views the Council might wish to express on the prospective business and economic situation during the next six months and on the policies that should be followed by the System in the field of general credit controls. Assuming no major change in the economy, such as an all-out war or a substantial cur tailment of the defense program, the Council believes that business will be good in the months immediately ahead. Activity in certain lines, such as textile and shoe manu facturing, has been depressed. Considerable spottiness is likely in the next six months even if the over-all level of business is high. Retailers and suppliers have made considerable progress in liquidating excess inventories. By reducing their forward commitments also they have helped to lessen the inflationary pressures. Employment is high and savings are large, so that consumers have the current income and the backlog for substantial personal purchases. There is a noticeable apprehension on the part of many customers of banks relative to the future of business. This apprehension results in questioning the wisdom of further expansion programs, and has caused considerable postponement and some abandonment of construction and other capital expenditures. The members of the Council representing the highly industrialized districts report a continuing demand for loans, and believe that there will be some increase in the over all volume of loans in their districts. The members of the Council representing districts in which heavy manufacturing is not so important expect loans either to remain station ary or to decline. Under present conditions, A. The Council believes that the Open Market Committee has followed the proper policy of maintaining a flexible and orderly market for government securities and a reasonably firm money market. A continuance of this policy is recommended. The Council also believes that no change should now be made in reserve requirements or in the rediscount rate. Conditions may change by the next meeting of the Board and the Council. The Council will be pleased to review this item of the agenda again at that time. B. The Council believes the Voluntary Credit Restraint program has had, and is continuing to have, a salutary effect in restricting credit to loans essential to the defense effort and the functioning of the economy. The Council strongly urges continued emphasis on the program and drama tization of its objectives. 2. The Board would like to have a further discussion of the answers to be prepared in response to the questionnaire addressed to the Chairman of the Board by the Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report. Copies of the answers to the questions submitted to the Board will be sent to the members of the Council as they are prepared for sending to the Patman Committee. 31 The Council will be pleased to discuss the answers to be prepared in response to the questionnaire addressed to the Chairman of the Board by the Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report. 3. The Board would like to have an informal round table discussion participated in by all members of the Federal Advisory Council of the problem of the public debt in so far as it affects the responsibilities and operations of the Federal Reserve System. Members of the Council will welcome such an informal round table discussion. 32 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL November 19, 1951 At 2:15 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, Frederic A. Potts, Sidney B. Congdon, Paul M. Davis, W. L. Hemingway, Joseph F. Ringland, David T. Beals, De Witt Ray, and Herbert V. Prochnow, Secretary. Absent: Messrs. Robert V. Fleming and James K. Loehead. Mr. Arthur W. Marget, Director of the Division of International Finance of the Board of Governors, and his staff spoke on “Developments in International Finance, 1949-1951”. A copy of the remarks of Mr. Marget and his associates was given to each member of the Council. The meeting adjourned at 3:50 P.M. H E RB ER T V. PROCHNOW Secretary. 33 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM November 20, 1951 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 William McC. Martin Jr.; Governors M. S. Szymczak, James K. Varda man Jr., and Oliver S. Powell; also, S. R. Carpenter, Secretary of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, Paul M. Davis, W. L. Heming way, Joseph F. Ringland, David T. Beals, De Witt Ray, James K. Lochead, and Herbert V. Prochnow, Secretary. President Brown read the first item on the agenda and the conclusions of the Council as given in the Confidential Memorandum to the Board of Governors from the Federal A d visory Council, as printed on pages 31 and 32 of these minutes. Discussion of the Volun tary Credit Restraint program and the future demand for credit followed, in which mem bers of the Council and the Board participated. President Brown then read the second agenda item and stated that the members of the Council believe that the Staff has done good work in preparing those answers which so far have been submitted to the Council for review. Chairman Martin stated that the Board will be pleased to send to the Council copies of the other answers as completed. Chairman Martin also said that the Board would welcome individual opinions from the Council members by letter. President Brown read the third agenda item as given in the Memorandum to the Board of Governors. An extended discussion followed in which members of the Council and the Board participated. It was agreed that the next meeting of the Council should be held February 17-19, 1952. The meeting adjourned at 12:46 P.M. HERBERT V. P ROC H N OW Secretary. 34 NOTE: T h i s t r a n s c r i p t o f th e S e c r e t a r y ’ s n o t e s i s n o t t o b e r e g a r d e d a s co m p le te o r n e c e s s a r ily en tir ely accu rate. The t r a n s c r i p t i s f o r t h e s o l e u s e o f th e members of the F e d e r a l A d v is o ry C o u n c il. The c o n c i s e o f f i c i a l m in u t e s f o r the e n t ir e y e a r a r e p rin ted and d is t r ib u t e d la te r* H. The S e c r e t a r y ’ s notes V. P. on t h e m e e t in g of th e F e d e r a l A d v i s o r y C o u n c i l on N o v e m b e r 1 8 , 1 9 5 1 a t 2 : 5 0 P . M« i n Room 9 3 2 o f t h e M a y f l o w e r H o t e l , W ash ingto n , D . C . A l l members o f t h e C o u n c i l were p re se n t. The C o u n c il approved of Septem ber 1 6 - 1 8 , the S e c r e t a r y ’ s n o t e s f o r t h e m e e t in g 1951* THE B O A R D W OU LD L I K E TO HAV E A N Y V IEW S T H E C O U N C IL M IG H T W I S H T O E X P R E S S ON T H E P R O S P E C T IV E B U S IN E S S AND ECONOM IC S IT U A T IO N D U R IN G THE N E X T S I X MONTHS AND ON THE P O L I C I E S THAT S H O U LD B E F O L L O W E D B Y T H E SY STEM GENERAL C R E D IT Brown re a d s Ite m II, Brown IN THE F I E L D OF CONTROLS. the three states su b m itted f o r the Q u es tio n n a ire deal it e m s that C o u n cil the on th e a g e n d a . q u e stio n s to r e v i e w p r im a r ily w ith in the and In relatio n to answ ers the B oard co n n e c tio n w it h statistica l has t h e Patm an and h i s t o r i c a l q u e s t i o n s . There m ay b e som e d i s c u s s i o n r e g a r d i n g t h e q u e s t i o n w h i c h r e l a t e s to t h e pOTrers o f t h e o f f i c i a l s a n d d i r e c t o r s o f t h e F e d e r a l R e s e r v e b a n k s . Brown th e n a s k s o f the t h e m em bers of the C o u n c i l to g iv e th e ir v ie w s on It e m I agenda* Lockhead. concerned w i t h Bankers several the la r g e and b u s in e s s phases is p ric es. There b u s in e ss in te r e s ts on th e P a c i f i c e co n o m ic outlo o k. Lo ckh ead t h in k s but R egulatio n X B rovm states also is not that the situ a tio n . Coast are One o f th e p o p u l a t i o n a n d w h a t m ay h a p p e n to m e a t a very large as men on t h e P a c i f i c the b u s in e s s p r o b le m s is cattle of su pp ly of R egulatio n W e ffe c tiv e te rm canned goods. C o a s t a r e b e c o m in g b e a r i s h as "g e n e r a l it is q u ite Some on t h e e ffec tiv e , sh o uld b e . credit c o n t r o ls ” in Ite m I agenda d o e s n o t r e f e r t o s e l e c t i v e c r e d i t c o n t r o l s b u t to s u c h c o n t r o l s as o p e n m a r k e t o p e r a t i o n s , t h e r e d i s c o u n t r a t e a n d r e s e r v e of the re q u irem e n ts. Lockhead b e lie v e s that in te r e st rates sho uld b e the open m ark et a n d sh o uld n o t b e a r t i f i c i a l . present the in ch an g in g re d isc o u n t rate d e t e r m in e d b y He d o e s n o t b e l i e v e or reserve r e q u ir em e n ts . at - 2 - R ay * D e p o s i t s a n d l o a n s i n h i s a r e a a r e a t a n a ll- t im e p e a k a n d h e b e l i e v e s t h e y may go h i g h e r * T h e p e t r o le u m i n d u s t r y n e e d s e v e n m ore m o n e y . P e r h a p s b y F e b r u a r y l o a n s may d e c l i n e m o d e r a t e l y . T h e r e i s a n a i r o f o p t im is m i n h i s d i s t r i c t . I n v e n t o r i e s a r e show i n g some d e c l i n e . R a y s e e s no r e a s o n f o r a c h a n g e i n t h e r e d i s c o u n t ra te or i n r e se rv e r e q u ir em e n ts . In t e r e s t r a t e s , l o c a l l y , a r e h ig h e r* H o u s i n g , e s p e c i a l l y i n t h e m i d d l e b r a c k e t - $ 1 2 , 0 0 0 to $25> ,000 - h a s t a p e r e d o f f , b u t t h e m a r k e t s f o r h o u s e s i n t h e l o w e r and h i g h e r p r i c e b r a c k e ts a r e good* A l l i n a l l , c o n d i t i o n s l o o k good i n h i s d i s t r i c t . B eals* The e c o n o m ic situ atio n in h is d istr ic t is n o t as a c t iv e as i t i s i n T e x a s . R e t a i l s a l e s a r e n o t m uch h i g h e r t h a n a y e a r a g o , a n d t h e y w e r e l o w e r t h a n l a s t y e a r , up to a f e w w e e k s a g o . There is a c a t t le p o p u latio n of about 9 1 ,0 0 0 ,0 0 0 . W hen y o u c o n s id e r the U n ite d S t a t e s p o p u l a t i o n ^ /w e i g h t o f c a t t l e and d i s t r i b u t i o n o v e r the U n it e d States, There the t o t a l are per c e n t. Loans in i s no a p p re c ia b le the is change perhaps but The demand f o r m o n e y i s B eals b e l ie v e s or in r e s e r v e B u c k lin in total of are h ig h in d e clin in g the a little o u tsid e no t lo o k t h a t m eat p r i c e s w i l l la rg e banks are Lockhead. year ago, that h is p o p u la tio n does and d e p o sits Loans d istrict ca ttle some i n d i c a t i o n s loan the b an ks som ew hat. v o lu m e in perhaps 10 the d i s t r i c t . B u sin ess than a y ear in h is bank ca n n in g and c a t t le excessive. In B e a l s 1 bank vo lum e o f l o a n s . less ac tiv e the to o d e c lin e in there th e ago. is h ig h e r in d u strie s , than a th e decreasing. there sh o u ld b e no ch ange in the re d isc o u n t rate re q u ir e m e n ts . asks Lockhead if he w i l l t o t a l l o a n vo lum e i s e x p la in fu r th e r h is h ig h er b u t that statem ent t h e dem and f o r m oney i s d ecreasing . Lockhead. fro m r e g u l a r day” in the Except fo r custom ers U n ite d R in g lan d * of the States Crops country, loan not expect are on ly present loan s to for reserve h is but go as lo w e r the it h ig h as In end o f have b e e n the crops to b e favors a last year. ago. good. peak. d isc o u n t r a t e , reserve m arket c o m m ittee . of the In some p a r t s req u irem en ts store co n d itio n s The re d isc o u n t rate co n d itio n s The are and the sales are and the generally good. R e t a i l trade i s t h is is no t true t o t a l v o lu m e o f p o lic ie s is do es changed. no m a j o r m ovem ent e i t h e r w a y . present There R in glan d Departm ent F av o rable s h o u l d n o t no w b e and m a n u fa c t u r e r s . c o n tin u a tio n ’’p a y h a v e n o t y e t b e e n com fro m t h e the E ig h t h D i s t r i c t about s t a t io n a r y w ith loans 191? 2 . T h e r e a r e m ore c a t t l e i n A r k a n s a s a n d M i s s i s s i p p i * f a i r l y w e l l o v e r i t s w o r s t in v e n t o r y p ro blem s, b u t o f a l l T fh o le sale rs in d u stries, He b e l i e v e s g eneral have been good. off s i x m onths* req u ir em e n ts H e m in g w a y . in is ca nning come d o w n . d istrict than a y ear next and to m ay come b y t h e C o n d itio n s dem and, slig h tly a n tic ip a te d in cattle te n d in g in c lu d in g M ontana, p letely harv ested. an a c t i v e the are lo an s seem s H em in gw ay re lativ e to the r e o p e ra tio n s of the open -3D a v is. T h e r e h a s b e e n some l i q u i d a t i o n o f l o a n s i n t h e S i x t h D istric t. T h e dem and f o r l o a n s h a s n o t b e e n p a r t i c u l a r l y h e a v y * The l o a n v o lu m e i s n o w a b o u t o n a n e v e n k e e l w i t h no m a jo r movement e i t h e r w ay* M a n u f a c t u r e r s a r e a l i t t l e u n e a s y a b o u t f u t u r e dem ands* No ch a n g e i s d e s i r a b l e n o w i n t h e r e d i s c o u n t r a t e , r e s e r v e r e q u ir e m e n t s o r open m a rk e t o p e r a t i o n s . Com m odity l o a n s a r e n o t a s l a r g e as a n t i c i p a t e d a t t h i s tim e o f t h e y e a r . B o rro w in g in the tobacco in d u s t r y has no t y e t started* T h e t o t a l v o lu m e o f l o a n s i s n o t a s h i g h as a y e a r ago* liv e F l e m in g * T h e F i f t h D i s t r i c t is p re d o m in a n tly a g r i c u l t u r a l . T o b acco , s t o c k , d a i r y p r o d u c t s , a n d c o t t o n are th e p r im a r y c r o p s . The departm ent stores are an ticip atin g a go od volum e o f C h r is t m a s b u s i n e s s . R e t a il in v e n t o r ie s have b een c o n sid e ra b ly reduced. B u ild in g is taper in g o f f . T h e lo w an d h i g h p r ic e d h o u ses a re h a v i n g the b e s t m a rk e ts, and h o u ses i n t h e m id d le p r i c e b r a c k e t a re h a v i n g a slo w m a rk e t. T h e vo lu m e of re d isc o u n t rate, loans is h o ld in g up. reserve Open M a rk e t C o m m itte e . make i t necessary By the f i r s t to r e v i e w the co ntrols. B y th e end o f 1 9 5 2 an c in g governm ent d e f i c i t s * Congdon m ent i s states tig h t* There i s There re q u irem e n ts h alf store sales lo an s in no r e a s o n now to c h a n g e th e some r e a l is in in the may general cred it p r o b le m s i n f i n extrem ely a c t i v e . a re ru nning of c o n d itio n s o f any ch anges T h e v o lu m e the la r g e banks p o lic ies of next y e a r , t h e r e m ay b e the Fourth D is t r ic t Departm ent is the p re se n t q u e stio n a h e a v y d e m an d f o r m o n e y . T h e v o lu m e o f or E m p lo y a t a good r a t e . o f V lo an s the d i s t r i c t is is not g r e a t. up su b stan o v e r a y e a r ago. Congdon's b a n k e x p e c t s a l a r g e r u s e o f i t s commitments than was made l a s t y e a r . P l a n t e x p a n s i o n i s g o in g on q u i t e r a p i d l y , a l t h o u g h t h e r e i s a lit t le m ore c a u t i o n . The e f f e c t of tia lly lo an th e M i l l s T p l a n w i l l b e b a d im m e d ia t e f u t u r e , vo lu ntary banks cred it b u sin e ss on the cash p o s it io n lo o k s a c tiv e in p r o g r a m has w o r k e d v e r y w e l l , have been f a i r l y w e ll sho uld now b e m ade t h e O p e n M a r k e t C o m m it t e e . c o n tin u e s m ade i n a c tiv e in credit The T h ir d a c tiv ity is leather, w ool, and q u ite h ig h . loan s is tric t. at a h ig h W ith seasonal in had a trend. in change i s d esira b le loans rate. a fle x ib le rayon re q u irem e n ts th e dem and f o r is h ig h ly in d u s t r ia liz e d . are e sp ec ially or the cred it steel p lant e x ce p tio n s, is im m e d ia te ly a h e a d . car lo a d in g s w h ic h d ow n a l i t t l e . by January. present D epartm ent in reserve Open m arket o p e r a tio n s Potts store of b u sin ess i n the d i s sho uld b e The P e n n s y lv a n ia is c o n t r a r y to t h e lo o k s f o r a. p o s s i b l e sales are o f f . re q u ir e m e n ts sh o u ld b e in T h e v o lu m e o f V now b e in g b u i l t m any l i n e s t h e m o n th s in B u sin ess some e x c e p t i o n s carpets. d e clin e at no c h a n g e or in conducted to No th e r e p r o v id e and o rd e rly m arket. Jackson. d iffic u lty . A large are The perhaps, because some c h a n g e m ay n e e d to b e altho u gh there te x tile s, Loans re d u c tio n d isc o u n t D istric t the reserve If s i x m onths, F o r the co n tro ls. level, a few n o t a b le at a h ig h l e v e l R ailro ad has re d isc o u n t r a t e , the n e x t the g e n e r a l Potts. the partly , Congdon b e l i e v e s a c tiv itie s of in lo an ed up . of b u sin ess. th e F o u r t h D i s t r i c t . T ex tile The m ills situ a tio n has m onths' su p p ly in of rayon m ills have been have had a great som e r e s p e c t s c o m p a re d t o o p e ra tin g under deal of been the w o r s t , a norm al o f co n sid era b le liq u id a tio n . w ith The a nine three m onths. The - uco n v e rte rs an d departm ent sto r e s h a v e taken l a r g e lo s s e s * T h e garm ent m a n u f a c t u r e r s h a v e a l s o h a d s e r i o u s p ro b le m s a n d h a v e h a d a v e r y d i f f i c u l t tim e . Other lin e s are a c t iv e . T h e dem and f o r m oney has n o t b e e n as g r e a t a s w a s e x p e c t e d , b u t t h e t o t a l v o lu m e o f l o a n s i s i n c r e a s i n g . A s t u d y w a s m ade f o r h i s b a n k b y L i o n e l D * E d i e c o v e r i n g v a r io u s f a c t o r s r e l a t i n g to t h e f i n a n c i a l p r o b le m s o f c o r p o r a t i o n s . The fo llo w in g f i g ures w e re o f p a r t ic u l a r in t e r e s t : MANUFACTURERS Cash and » governm ents " Tax " to sales » " 19hh - 1 0 . 6 $ o f s a l e s 1951 ~ 5 .1 $ of sales 5*0$ of sales accru als: W ar t a x « 19JUU h.7% o f s a l e s 7 °h% o f s a l e s '« 1 9 U 5 Present 1952 If in v e n to rie s were in 19^1, in the 7 .7 $ same r e l a t i o n to of sales sales t o d a y as t h e i n v e n t o r i e s w o u l d b e \ip $ 8 b i l l i o n * These f ig u r e s w o u ld in d ic a te that t h e r e m ay b e a rath er heavy demand f o r m o n e y b e c a u s e c o r p o r a t i o n s w i l l b e s h o r t o f c a s h i n t h e m on th s ahead. He u n d e r s t a n d s t h a t t h e r e h a s b e e n a c o n s i d e r a b l e l e t u p i n t h e dem and f o r a u t o m o b i l e s in t h e l a s t t h r e e w e e k s . B r o k e r s ' lo a n s a re down. T h e r e i s a l s o some l e t u p i n n e w h o u s i n g s t a r t s , Jackso n does not b e lie v e a n y change is d e s i r a b l e now m the r e d is c o u n t r a t e or in re se rv e re q u irem e n ts. B u ck lin . B u sin ess leather in d u s t r ie s is some e n c o u r a g e m e n t str u c tio n in d u stry Boston Banks some b a n k s C o m p a n ie s is in in in is Brovim. in dustries d e clin ed in D istric t is some d i f f i c u l t y , th e new o r d e r s easy, alth ou gh they that e x p er ien c e d . in the m onths in h is ban k a r e a s h ig h as No change B u sin ess sh arp ly in th e p ric e. correct The con C re d it in the in vo lu m e. in v e n to rie s im m e d ia te ly a h e a d . H i s b a n k h a s made th e y have b e e n the r e d is c o u n t very B u ck lin a n tic ip a te s rate or i n in th e reserve r e now# Seventh D is t r ic t le ath e r have in off th e ir lo an s d e sira b le sho e and does n o t h o ld tru e i n are Loans in The i n volu m e. In s t a llm e n t lo an s d e clin e good. alth o u gh r e c e n t ly there they are re c e iv in g . s h o w in g a n i n c r e a s e p ric e good c o n d i t i o n . B u sin ess last. the such as have b e g u n to in in not New E n g l a n d . tw elve m onths. q u ir e m e n t s is is re la tiv ely of some V l o a n s . last the Second th e w ool in d u s t r y have liq u id a t e d w e ll in v ie w an in c re a se in have been th e ir is had a d i f f i c u l t R etail and m a i l very a c tiv e . tim e . order in v en to ry s it u a t io n s . B r o w n 's bank is C alf Some sk in s have departm ent sto r es T h e m a c h in e in d u stiy getting r e q u e s t s f o r V l o a n s . leaders are q u e s tio n in g w hether the R ailro ad s are h esitatin g to o r d e r present pro sp erity w i l l fre ig h t cars, although they engines b e c a u s e t h e y can r e d u c e t h e i r costs. A num ber o f e x e c u t i v e s i n t h e s t e e l i n d u s t r y believe t h a t b y t h e l a t t e r o a r t o f 1952 steel w i l l b e p l e n t i f u l * L o a n s i n the Chicago b a n k s a r e up s u b s t a n t i a l l y o v e r a y e a r a g o . 'There is a heavy demand f o r l o a n s a t present* Brown believes that business i n the Seventh D i s t r i c t w i l l be active i n the months immediately a h e a d , and that there w i l l b e a w ill order d ie s e l -5 heavy demand for loans * There is a noticeable apprehension by cus tomers of banks relative to the future of business, and i f this appre hension becomes widespread, it may have a serious e f f e c t on construction and other capital expenditures. Crops in the district have been good. The soy bean crop has been large* The banks have probably had less de mand for loans than they anticipated, although the volume of loans is increasing. The Council may state that, at present, no change in reserve requirements or in the rediscount rate is desirable. Open market oper ations are being satisfacto rily handled. The members of the Council representing highly industrialized districts expect a continuing demand for loans with some increase in the total volume, whereas, members of the Council, in districts where heavy manufacturing is not so important, expect loans to remain stationary or to decline. Unless there is a major change in the economy, such as a full-scale war or a considerable curtailment of the defense program, business should be good in the im mediate fu ture. The inventory situation has begun to correct itself* Brown states t h a t in its memorandum to the Board the Council may also call attention to the apprehension of many customers relative to the future of business. Open market activities h a v e promoted fle x ib ility and a reasonably tight money market. Economic conditions may change by the next meeting of the Council, and the Council w ill be glad to review this item of the agenda at the next meeting. The Council may also state that the voluntary credit program has had a good effect and emphasis on i t should be continued with a dramatization of its objectives. THE BOARD WOULD LIKE TO HAVE A FURTHER DISCUSSION OF THE ANSWERS TO BE PREPARED IN RESPONSE TO THE QUESTIONNAIRE ADDRESSED TO THE CHAIRMAN OF THE BOARD BY THE SUBCOMMITTEE ON GENERAL CREDIT CONTROL AND DEBT MANAGEMENT OF THE JOINT COMMITTEE ON THE ECONOMIC REPORT. COPIES OF THE ANSWERS TO THE QUESTIONS SUBMITTED TO THE BOARD WILL BE S M T TO THE MEMBERS OF THE COUNCIL AS THEY ARE PRE PARED FOR SENDING TO THE PATMAN COMMITTEE There was an off-the-record discussion of some of the questions of the Pa:man Subcommittee and the answers which the Board of Governors had given to the members of the Council for their review. It was the opinion of the members of the Council that the answers which had been received dealt largely w ith h isto rical and statistical questions* The members of the Council w i l l state in their memorandum to the Board that they w ill be pleased to discuss the answers to be prepared in response to the questionnaire addressed to the C haim an of the Board by the Patman Subcommittee. Hemingway states that the United States Chamber of Commerce is prepared to take a public position strongly favoring the independence of the Federal Reserve System. THE BOARD WOULD LIKE TO HAVE AN INFORMAL ROUND TABLE DIS CUSSION PARTICIPATED IN BY ALL MEMBERS OF THE FEDERAL AD VISORY COUNCIL OF THE PROBLEM OF THE PUBLIC DEBT INSOFAR AS IT 'AFFECTS THE RESPONSIBILITIES AND OPERATIONS OF THE FEDERAL RESERVE SYSTEM. _ _ ___________ __________ ________ Drown aaks who would lik e to lead o ff in the discussion with the Board* Hemingway states that there ought to be a free and orderly market. In time of war a market can be pegged, but* otherwise it should not be. F le m in g b e l i e v e s t h a t p ie c e m e a l f i n a n c i n g i s w rong* The Treasury sh o uld h ave a c h a r t o f f u t u r e b o n d is s u e s w i t h l o n g e r m a t u r i t i e s . Congdon. The pay t h e g o i n g s e c u rity * rate Brown on t h i s T r e a s u r y m u s t do w h a t and suggests ite m o ffer the a c o rp o ra tio n d o e s , p u b lic what t h a t H e m in g w a y b e g i n on th e the i t w ish es as that is, to ty p e o f d isc u ss io n w it h the 3o a rd agenda. V-LOANS Brown r e a d s S* R* of the the Carpenter, "In v iew of the a q u e stio n delays a p p re cia te d to h a v e if C o u n c il paragraph from a l e t t e r the B o ard or perhaps sh all the take fo r of Governors the that If the Such C o u n c il to hope you w i l l m ay b e last addressed by to the m e etin g if to Secretary a he knew able in and to the C o u n c il w o u ld l i k e fo r su ita b le is m eet w it h the purpose d e sire d , the in d icate of we re p re se n ta tiv e co uld no advance w hat in C o u n c il i t w o uld b e D efense a re p re se n ta tiv e d isc u ss, be the of an a r r a n g e m e n t have of a p p lica tio n s, jo i n t m eetin g such necessary purpose* the the V - lo a n the Departm ent attend C o u n c il w is h e d d e sire d we q u e stio n s steps to at l e t me k n o w w h e t h e r of q u e stio n * that m o re h e l p f u l cases raised p ro c essin g you w o uld th is on h a n d in re p re se n ta tiv e d isc u ssin g is of C o u n c il: c o n c e rn in g the fo llo w in g Secretary event doubt be types of a d isc u ssio n som e o f the sp e c ific raised® n Brown then reads the fo llo w in g memorandum he had giv en to the Secretary o f the C o u n c il, and which was sent to Mr* Carpenter by the Secretary of the C o u n c il: " I think i t would be b e t t e r not to have a r e p rese n ta tiv e of the Department o f D efense meet w ith the Council on the question of V-loans* The members of the C ouncil themselves do not handle V-loans, and d is c u ss io n s w ith the Department of Defen se should be held betw een r e p r e s e n ta tiv e s of the banks s e le c te d by the A®B*A* or some other b a n kin g group b ec a u se they are t e c h n ic i a n s , and not w i t h members of the Council* who are n e c e s s a r i l y concerned w it h matters of general p o lic y ® M A l l members o f the C o u n c il agree w it h B r o w n ’ s view s on the m atter* The m eeting a djo u rned at 5 : 5 0 P®M® -7 - T H E F E D E R A L A D V IS O R Y C O U N C IL CONVENED AT 1 0 A . M . ON NOVEMBER 1 9 , 1 9 5 1 , IN ROOM 9 3 2 OF THE MAYFLOWER H O T E L , W A S H IN G T O N , D . C . A L L MEMBERS OF T HE C O U N C IL WERE PRESENT. T he C o u n c i l p r e p a r e d a n d a p p r o v e d to b e sent to m e e t in g the Board o f the C o u n c il w as d e l i v e r e d to the w il l be that noted comments o f the The m e e t i n g th e a t t a c h e d C o n f i d e n t i a l Memorandum o f Governors r e la t iv e and th e B o a r d Secretary each ite m on Novem ber 2 0 , o f the Board a t 1 0 j i ;0 A . M . 1951. liste d jo in t Th e Memorandum of G overnors a t 1 1 A .M . o f the A genda i s C o u n cil. a d jo u rn ed t o t h e A g e n d a f o r th e It t o g e t h e r w i t h th e C O N F ID E N T IA L MEMORANDUM TO T H E BOARD OF GOVERNORS FROM T H E F E D E R A L A D V IS O R Y C O U N C IL R E L A T I V E TO T H E AGENDA FOR T H E J O IN T M EETIN G ON NOVEMBER 2 0 , 1. The B o ard w o uld w ish to e x p r e s s 1951 l i k e to h a v e an y v ie w s t h e C o u n c i l m ig h t on t h e p r o s p e c t i v e b u s i n e s s and econom ic s i t u a t i o n d u r i n g t h e n e x t s i x m onths a n d on t h e p o l i c i e s t h a t s h o u l d b e f o l l o w e d b y t h e S y st e m i n t h e f i e l d o f general credit co ntro ls. A s s u m in g no m a j o r change in the econom y, s u c h as an a l l - o u t w ar or a s u b s t a n t i a l c u r t a i l m e n t o f t h e d e f e n s e p r o g r a m , t h e C o u n c i l b e l i e v e s that b u s i n e s s w i l l b e g ood i n t h e m on th s im m e d i a t e l y a h e a d . A c t i v it y in c e r t a in l i n e s , s u c h a s t e x t i l e a n d sh o e m a n u f a c t u r i n g , h a s b e e n d e p r e s s e d . C o n s id e r a b l e s p o t t i n e s s i s l i k e l y i n t h e n e x t s i x m onths e v e n i f t h e o v e r all le v e l of b u s in e s s is sid e ra b le liq u id a tin g progress fo rw a rd co m m itm ents pressures. have t h e in also E m p lo y m en t current h ig h . they is in c o m e R e taile rs excess have h ig h and and th e and su p p lie rs in v e n to rie s . h e lp ed to sa v in g s lesse n are b acklo g fo r the larg e , h a v e made c o n By r e d u c i n g t h e i r in fla tio n a r y so t h a t consum ers s u b sta n tia l personal purchases. There is a noticeable apprehension on the part of many customers of banks relative to the future of business. This apprehension results in questioning the wisdom of further expansion programs, and has caused con siderable postponement and some abandonment of construction and other capital expenditures. T h e m e m bers d istr ic ts w i l l be report a some i n c r e a s e The members o f t h e ing i s n o t of the C o u n c il re p re se n tin g c o n t i n u i n g dem and f o r in the loans, o v e r - a l l vo lu m e expect loans e ith e r to h ig h ly in d u stria lize d b e lie v e that o f loans C o u n cil r e p r e s e n tin g d is t r ic t s so i m p o r t a n t the and in t h e ir there d istr ic ts . i n w h ic h h e a v y m a n u f a c t u r r e m a in s t a t i o n a r y o r to d e c lin e . Under present co n d itio n s, The Council believes that the Open Market Committee has followed the proper policy of maintaining a flexible and orderly market for government securities and a reasonably firm money market. A continuance of this policy is recommended. The Council also believes that no change should now be made in reserve requirements or in the rediscount rate. Conditions may change by the next meeting of the Board and the Council. The Council will be pleased to review this item of the agenda again at that time. A. -2B. The C o u n c il b e lie v e s the Volu ntary C r e d it R e str a in t p r o g r a m h a s h a d , a n d i s c o n t i n u i n g to h a v e , a s a l u t a r y e f f e c t i n r e s t r i c t i n g c r e d i t to l o a n s e s s e n t i a l t o the defen se e ffo rt C o u n cil stro n gly urges and the and d r a m a t iz a t io n 2. The Board w o uld answ ers to be addressed to of lik e to t h e the on t h e in g t o th e The in r e s p o n s e to a further d isc u ss io n in response the su b m itted to of the B o a rd by t h e Subcom m ittee C o p ie s o f t h e a n sw e rs the Board w i l l be p le a s e d t o d is c u s s q u e stio n n a ire be s e n t to for send Board w o u ld a d d r e s s e d to th e lik e to have in by a l l A d v is o ry C o u n c il affects o f the far as the Federal Reserve M em bers o f t h e the a n s w e r s to be p r e p a r e d C h a ir m a n o f th e B o a rd b y C r e d i t C o n t r o l a n d D e b t M a n ag em ent o f t h e J o i n t c u ssio n p a r t ic ip a t e d of the q u e stio n n aire P a t m a n C o m m it t e e . E c o n o m ic R e p o r t . d isc u ss io n . to t h e C o u n c il as th e y are p rep ared Committee on t h e it The C o n t r o l a n d D e b t M an agem ent o f t h e J o i n t on G e n e r a l The econom y. o b jec tiv e s. to have the S u b c o m m itte e 3. of the e m p h a sis on t h e program E c o n o m ic R e p o r t . C o u n cil w i l l the its C h a ir m a n o f q u e stio n s t h e m em bers c o n tin u e d prepared on G e n e r a l C r e d i t C o m m itte e fu n ctio n in g the an in fo rm a l round t a b l e d i s m em bers o f t h e F e d e r a l p ro blem o f the p u b l ic re sp o n sib ilities and in so o p e ra tio n s debt of System . C o u n c i l w i l l w e lc o m e su c h a n i n f o r m a l ro u n d t a b l e - 8THE FEDERAL ADVISORY COUNCIL CONVENED IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING AT 2sl5 P.M. ON NOVEMBER 19, 1 9 5 1 . ALL MEMBERS OF THE COUNCIL WERE PRESENT EXCEPT MESSRS. FLEMING AND LOCHEAD, BOTH OF WHOM WERE GIVEN COPIES OF THE DISCUSSION. Mr. Arthur W . Marget, Director of the Division of International Finance of the Board of Governors, and his staff, in International Finance 19U9-195>l.n spoke on "Developments A copy of the remarks of Mr. Marget and his associates was given to each member of the Council, The meeting adjourned at 3s50 P.M . - 9ON NOVEMBER 2 0 , 1951, AT 10?35 A .M ., THE FEDERAL ADVISORY COUNCIL HELD A JOINT MEETING WITH THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING, WASHINGTON, D .C . ALL MEMBERS OF THE COUNCIL WERE PRESENT« THE FOLLOWING MEMBERS OF THE BOARD OF GOVERNORS WERE PRESENTS CHAIRMAN MARTIN, GOVERNORS SZYMCZAK, VARDAMAN AND POWELL. MR. CARPENTER, SECRETARY OF THE BOARD, ALSO WAS PRESENT. THE BOARD WOULD LIKE TO HAVE ANY VIEWS THE COUNCIL MIGHT WISH TO EXPRESS ON THE PROSPECTIVE BUSINESS AND ECONOMIC SITUATION DURING THE NEXT SIX MONTHS AND ON THE POLICIES THAT SHOULD BE FOLLOWED BY THE SYSTEM IN THE FIELD OF GENERAL CREDIT CONTROLS. Brown reads Item 1 of the agenda and the conclusions of the Council, as expressed in the Memorandum to the Board attached. Barring a fullscale war and a substantial curtailment of the defense program, the mem bers of the Council believe that over-all business in the next s ix months w ill be good* There is considerable apprehension in business regarding the period following the next six months* Although there has been some spottiness in various l i n e s , i t is remarkable that the fa ilu re s have been so few, in view of the drastic decline in certain commodity prices. The Open Market Committee has shown s k il l in handling the market* The members of the Council are unanimous in their b e lie f that the present rediscount rate and reserve requirements should not now be changed* Banks in the in du strial distric ts expect higher loans, partly because of the M i l l s 1 Plan, which i t is anticipated w ill force corporations to borrow. Jackson. Business loans in New York have been increasing steadily for a number of weeks* He quotes figures regarding the fin a n c ia l po sition of corporations which were given to the Council at it s meeting on tha previous day, and which are found earlier in these notes* Mai$r cor porations are experiencing steadily shrinking working capital positions* Martin. Jackson. Martin. Has the loan volume been less than banks anticipated? I t is l e s s . Is i t substantially less? J ackson states that he would not use the word 11substantially” , but i t is l e s s , i f you consider a l l banks. Brown. The increase in loans has been less than anticipated over the country. Commodity lo an s, including cotton lo ans, are not as high as expected. Fleming asks whether the Board has given any consideration to the effect of the M i l l s 3 Plan. -10 Martin states that the Board has a study which was made by one of Congdon5s associates* Martin asks Powell to coiriment on the Voluntary Credit Restraint program* Powell* Loan expansion this Fall has been about what was expected seasonally* I f you take out the seasonal factor5 the chart line of loans has remained about level* I f you also take out about $800 million to $900 m illion of defense loans* it is clear that other loans have been hexd down® I f you take out defense loans and commodity loans., other loans are down* The volume of bond issues has also been held down* Bond issues have been held substantially to the essential needs of defense and the economy* The American Bankers Association is now making a survey of loans turned dowtu but this record cannot possibly be complete because many banks do not keep complete records of loans that are declined^ perhaps over the telephone* Lochead* Is i.t possible to restrict the credit going into housing? The housing program is bringing more inflation* Powell* The hands of the Federal Housing Administration are tied by Congress., To make any change in this respect you would have to go back and change the mandates of Congress* Powell has talked with FHA officials to get their cooperation^, but the Voluntary Credit Restraint program does not include these housing loans* Szymczak agrees with the C o u n c il s statement on business conditions. No one can now be sure of the direction which business w ill take. Some of the economic forces in the econoiry are moving up5 whereas others are moving down0 The over-all trend of loans is probably up* Defense expen ditures 9 plus plant and equipment expenditures5 may cause an upsurge in the volume of loans© Martin states that the expansion of loans is so much less than he expected that i t worries him in some respectse Martin expects a modest increase in loans to March*, beyond which he cannot see. Vardaman does not see any chance for the over-all demand for money to decrease* He believes fear has caused a hesitancy to borrow,, but he believes this w i l l disappear® In the South he found people borrowing from banks and on their insurance* They were doing everything possible to keep from using their own money* Money also was being put in safety deposit boxes* Every request for credit now is based on the argument of defense* Powell* Plant expansion5 inventories«, construction,, and consumer credit«, are all factors in the loan situation* the second quarter of next year the demand fo r new steel expansion may be over., and this may be some indication of what to expect in other industries* In 1951 plant expansion steadily increased throughout the year* The total volume of plant expansion in 1952 may be not fa r from that in 1951$ but it is possible that the pattern may be reversed with a declining volume through out the year,. Inventories are tapering o ff* A decline in plant expansion and decreasing inventories may reduce the demands fo r credit* He does not agree with VardamanSs views although a real war scare could conceivably cause an increase in loans® - 11 Potts asks -whether Powell expects a real decrease in loans in 1952. Powell states he expects a decrease in 1952* Vardaman comments that his views are based on hunches and guesses, -whereas P o w e l l ^ are based on statistics and are presumably unanswerable. However, Vardaman comments that he has seen several requests for further steel m ill expansion. He believes the government w ill try to make possible a large volume of goods for consumers at the same time it has a large defense program* I t is an election year and this w i l l be a factor* He cites the case of W illys Overland, which is bringing out a new car, despite government statements that the major effort in 1952 in the economy w ill be for defense* Vardaman believes that the Administration wishes a luxurious peace and f u l l preparation for war at the same time, so he does not believe the demand for loans w il l decline in 1952. THE BOARD WOULD LIKE TO HAVE A FURTHER DISCUSSION OF THE ANSWERS TO BE PREPARED IN RESPONSE TO THE QUESTIONNAIRE ADDRESSED TO THE CHAIRMAN OF THE BOARD BY THE SUBCOMMITTEE ON GENERAL CREDIT CONTROL AND DEBT MANAGEMENT OF THE JOINT COMMITTEE ON THE ECONOMIC REPORT* COPIES OF THE ANSWERS TO THE QUESTIONS SUBMITTED TO THE BOARD WILL BE SENT TO THE MEMBERS CF THE COUNCIL AS THEY ARE PREPARED FOR SENDING TO THE PATMAN COMICETTEE*________________ Brown* The Council believes the staff has done an excellent job in preparing those answers which have so far been submitted to the Council for consideration. The answers which the Council has received so far deal mainly with s ta tis tic a l and historical questions. Martin. The Board has sent to the Patman Subcommittee the answers to eleven questions, in order to show good fa it u in trying to meet the deadline for submission of the answers* There is an understanding with the Patman Subcommittee that the Board can make changes in the next, fortyfive days or so, even in the answers which have so far been submitted. The answers w i l l probably not be printed for 1;5 days. Ralph Young heads the s taff which is preparing the answers. I f the staff cannot agree on the answer to some question, the staff member who objects can present his case for decision to the Board* The Board w ill be pleased to send its answers to the Council and have individual ooinions from Council members by le t t e r . Martin states he does not wish the Board*s answers to give the impression that the Board never makes a mistake. (Some off-the-record comments were made a t this tim e.) Vardaman asks Martin whether i t is his objective to get an opinion from the Council as a group, or whether he wishes the views of individual members of the Council. Martin believes i t would be impossible for the Council as a group to discuss a l l the answers and give a consolidated Council view. Fleming thinks Martin should submit to the Council only those questions which are highly important. (At this point there was an off-the-record discussion.) - 12 Hemingway. The United States Chamber of Commerce is prepared to testify regarding the desirab ility of independence of the Federal reserve System# Martin states that he has struggled conscientiously with the question, •'What is independence?” (At this point there was an off-the-record discussion.) THE BOARD WOULD LIKE TO HAVE AN INFORMAL ROUND TABLE DISCUSSION PARTICIPATED IN BY ALL MEMBERS OF THE FEDERAL ADVISORY COUNCIL OF THE PROBLEM OF THE PUBLIC DEBT INSOFAR AS IT AFFECTS THE RESPONSIBILITIES AND OPERATIONS CF THE FEDERAL RESERVE SYSTEM. Brown asks whether the Board wishes to speak fir s t on this question. Martin asks Vardaman to express his views, as Vardaman suggested the question, and has been urging that the Treasury get away from the handto-mouth financing* Vardaman* Over 6k per cent of the marketable debt matures in less than four y e a rs . In another three years, 78 per cent of the debt w ill mature in less than four years* Hemingway has for a long time held the view that something should be done to correct the situation Vardaman has described. Except in time of war, or perhaps when there are very heavy gold imports, government securities must fin d their level in a free market. Delay in reaching the decision to f in d a free market w i l l make it harder to accomplish. The American people see no r e a l appeal in government securities at present. I t is necessary to get away from the patriotic appeal to an investment basis on government bonds* Jackson believes there is an advantage in having savings bonds on a non-marketable b a s i s , but the other government market is a profess ional market* Jackson does not believe that the saver is concerned about what happens in the professional market* The ultimate cost to the public is greater under the present piecemeal financing* Fleming* A chart should be prepared with a plan for spreading out the debt* The penalty imposed to make investors hold savings bonds is a mistake* There may at present be no long-term money available, but a plan should nevertheless be drawn up so that the objective of spreading out the debt is clear and always before those who handle the debt* Y ar d m an . Can you see any hope of a revival of interest in long-term governments and savings bonds in the near future? Fleming believes the government can meet its problems this fiscal year, but that they may be more serious by the end of 1952 when the government may need more money* What w ill the Federal Reserve System do then, i f there are no reserves in the banking system? W ill i t be necessary to reduce reserve requirements, or raise interest rates on government securities? - 13 Jackson states that the American people have been increasing their savings substantially, but they have been putting these savings into savings accounts. The saver must have substantially the same rate on savings bonds that he can get from a savings account. Jackson believes that pension funds would buy governments on a realistic basis* Congdon* The process of spreading the debt into longer maturities is at best a slow one* He believes Fleming's idea of a chart showing the objectives is a good one* The objective of spreading the debt must be constantly before the o ffic ia ls responsible for the debt* The rate offered must meet the market* Freeing governments from the peg is only half of the problem. Brown believes long-term marketable issues could be sold at perhaps 2-3/U P61* cent to three per cent. There would be heavy purchases year after y ear. The 2 j , s would have to fin d their natural lev el. He suggests the p o s s ib ility of a 25 year or 30 year issue. The Federal Reserve is tied up with the Treasury in many ways, and i t could not let any issue f a il * The Federal Reserve System must work out with the Treasury a plan for spreading out the debt* Vardaman does not believe the Treasury can take care of its needs next F a ll in the market* D av is* The Treasury could take care of its requirements i f i t offered a satisfactory r a t e . Vardaman agrees. Potts believes th a t, except in time of extreme emergency, it is now agreed that the low interest rate theory is discredited* He also believes a longer term issue a t a higher rate could be sold* (Potts makes an off-the-record comment on the work of the Patman Subcommittee*) Bucklin* A l l members of the Council believe that the savings bonds must have an investment appeal, and that a chart of objectives, as Fleming has suggested, would be highly desirable* There may be some differences of opinion among members of the Council regarding the possibility of selling a long-term issue at a higher rate* The meeting adjourned at 12rl*6 P.M . * * * * * * * The Council and the Board agreed that the next meeting would be February 1 7 , 18 , 1 9 , 1 9 5 2 . * * * * * * * At 2 :2 5 P .M . Messrs* Brown, Bucklin, Congdon, Hemingway and BeaJs met in the Board Room to read a f i r s t draft of the Board's answer to Question B-8 of the questions submitted by the Patman Subcommittee to the Chaii lan of the Board. Other member: of the Council received copies of the fir s t draft of the Board's reply to Question B-8, but were unable to remain for this in formal meeting because o~ appointments or transportation reservations. There was no discussion* http://fraser.stlouisfed.org/ The meeting Federal Reserve Bank of St. Louis adjourned at 2 :5 0 P.M.
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