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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL November 19, 1950 The fourth statutory meeting of the Federal Advisory Council for 1950 was convened in Room 1032 of the Mayflower Hotel, Washington, D. C., on November 19, 1950, at 2:00 P.M., the President, Mr. Brown, in the Chair. Present: District No. 1 Walter S. Bucklin District No. 2 N. Baxter Jackson Frederic A. Potts District No. 3 District No. 4 Sidney B. Congdon District No. 5 Robert V. Fleming District No. 6 J. T. Brown 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 DeWitt T. Ray (Alternate for J. E. Woods) District No. 12 James K. Lochead Secretary Herbert V. Prochnow Absent: J. E. Woods District No. 11 On motion duly made and seconded, the mimeographed notes of the meeting of the Council held on October 1, 2 and 3, 1950, 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 Advi sory Council, which follows on pages 35 and 36. The meeting adjourned at 5:48 P.M. HERBERT V. PROCHNOW Secretary. 33 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL November 20, 1950 At 10:00 A.M., the Federal Advisory Council reconvened in Room 1032 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, J. T. Brown, W. L. Hemingway, Joseph F. Ringland, David T. Beals; DeWitt T. Ray (Alternate for J. E. Woods); James K. Lochead and Herbert V. Prochnow, Secretary. Absent: Mr. J. E. Woods. 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 35 and 36, listing the agenda with conclusions reached by the Council. The Memorandum was delivered to the Secretary of the Board of Governors at 12:26 P.M. on November 20, 1950. The meeting adjourned at 12:14 P.M. HERBERT V. PROCHNOW Secretary. 34 CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON NOVEMBER 21, 1950 1. Selective credit controls: (a) What information do the members of the Council have with respect to the effects of Regulations W and X? (b) What are the views of the Council as to what, if any, action should be taken by the Board to change the existing Regulations W and X or to broaden their scope? (a) Regulations W and X have not been in operation sufficiently long to determine their full effect on the economy. New car sales have been reduced 10 to 15 per cent in some areas, although other sections report a decline as high as 50 per cent. The Pacific Coast and the South have apparently felt the impact of Regulation W more severely than the rest of the country. Because of the large volume of outstanding commitments, no reduction in real estate credit has yet occurred. Contractors report that when their present commitments are completed construction will decline substantially in volume. The decline in the price of lumber may be partly due to Regulation X. A simplification of the reporting forms for Regulation X, with a resulting reduction in the paper work required, would be highly desirable. (b) The Council is unanimously of the opinion that no change in Regulations W or X is desirable at this time. Members of the Council have previously discussed with the Board some of the diffi cult problems involved in working out a regulation covering industrial and commercial construction loans. The Council would appreciate the present views of the Board rela tive to the regulation of loans of these type?. 2. The Board has been asked by the President to submit its suggestions as to sub jects to be included in the State of the Union message and the Economic Report and the legislation which the Board desires to have considered at the session of the Congress which convenes in January. The Board is now formulating its views on these two matters and would like to have any advice or recommendations that the Council might wish to offer with respect to them. The Council does not know what subjects the Board contemplates recommending for inclusion in the State of the Union message and the Economic Report, or what legis lation the Board contemplates proposing at the session of the Congress which convenes in January. The Council would be interested in what the Board has in mind on these two matters, and would be glad to discuss them with the Board. 35 Until the economic situation has become clearer and until the effect of Regulations W and X (which the Council unanimously believes will materially reduce bank credit in the installment and real estate fields) can be more fully evaluated, the Council believes that it would not be desirable to introduce any legislation to change existing laws gov erning bank reserves. 3. One of the questions that has had a very important bearing on the credit policies of the System is the impact of the prospective defense program on the economy. The Board would be glad to have the comments of the Council on the economic and business situation over the next six months, particularly in the light of the probable impact of prospective expenditures for defense and the current infla tionary situation. During the next six months, according to the Council’s information, the cash budget of the Federal Government is expected to be in balance, or show a surplus. The credit impact of the defense program during this period will be chiefly due to requirements of manufacturers for money for plant changes and expansion to take care of government orders received or anticipated. The main impact for financing defense production is not likely to take place until after the middle of 1951. It is the opinion of the members of the Council that bank loans due to seasonal demands will probably increase from now until January, but they expect a decline in loans in their respective districts in January and February. Regulation W should cut new installment credit sharply by January or February. Regulation X should begin to reduce new construction credit by the middle of next year. It may be that the calendar year 1951 will show no increase in bank loans or only a moderate increase. The Council would be interested in knowing what steps have been taken to encourage voluntary agreements for the restriction of credit, and what the present attitude of the Department of Justice is regarding the legality or propriety of such agreements. 4. A discussion of the Treasury refundings for December and January. The Board is familiar with the views of the Council, as expressed in previous discus sions, regarding the necessity of shifting a portion of the debt to intermediate and longer maturities. The Council believes that the present is a desirable time to bring out an inter mediate maturity in connection with the refundings of December and January. If the members of the Board wish to express their views, the Council will be pleased to have them. 36 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL November 20, 1950 At 2:20 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, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, J. T. Brown, W. L. Hemingway, Joseph F. Ringland, David T. Beals; DeWitt T. Ray (Alternate for J. E. Woods); James K. Lochead and Herbert V. Prochnow, Secretary. Absent: Messrs. N. Baxter Jackson and J. E. Woods. Dr. Woodlief Thomas, with his associate, Mr. Arthur Hersey, from the Economic Staff of the Board of Governors, discussed the operations and functions of central banks. Dr. Thomas stated that his remarks were taken largely from a report which the Staff prepared for the Joint Committee on the Economic Report. A copy of the Report will be sent to each member of the Council providing Chairman McCabe approves its release. The meeting adjourned at 3:25 P.M. HERBERT V. PROCHNOW Secretary. 37 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM November 21, 1950 At 10:38 A.M., a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Thomas B. McCabe; Governors Marriner S. Eccles, M. S. Szymczak, R. M. Evans, 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, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, J. T. Brown, W. L. Hemingway, Joseph F. Ringland, David T. Beals; DeWitt T. Ray (Alternate for J. E. Woods); James K. Lochead and Herbert V. Prochnow, Secretary. Absent: Messrs. N. Baxter Jackson and J. E. Woods. 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 Advi sory Council, as printed on pages 35 and 36 of these minutes. There was a brief dis cussion of the effects of Regulations W and X. President Brown then read the second agenda item and the conclusions of the Council as recorded in the Confidential Memorandum previously mentioned. Chairman McCabe stated that a hard battle is going on in Washington over direct controls versus indirect controls. There was a review of the present situation regarding voluntary agreements to restrict large loans. President Brown read the third agenda item and the conclusions of the Council as found in the Memorandum which is a part of these minutes, following which there was a short discussion. President Brown then read the fourth item of the agenda dealing with the Treasury refundings for December and January and the conclusions of the Council as given in the Confidential Memorandum previously cited. An extended discussion followed, a portion of which was off-the-record. It was agreed that the next meeting of the Council would be held February 18-20, 1951. The meeting was adjourned at 1:23 P.M. HERBERT V. PROCHNOW Secretary. 38 NOTE: This tran. notes is not to H°ript the ^ necessarily ent-i ,reSarded as fcretary's cript is for the ^ ¥ aocurate Th t te or H.V.P ©Voi 0 The Secretary's nnf0. Federal Advisory Counci? th® meetlng of the 1950, at 2 P.m in ^ \ ° n November 1 9 Hotel, Washington, D.c " 1 All °f £he ^ ^ o w e r Federal Advisory Council t l members of the Mr. Woods. Mr. De Witt T r! Present except alternate for Mr. Woods. ’ served as an The Council approved the Secretary's notes fn, the Council on October .1, 2 , and 3 , 1 9 5 0 for the meeting of A DISCUSSION _0F THE TREASURY REFUNDINGS FOR DECTMBKH AND JANUARY. E*_E_-. Brown reads all items of the Agenda. (There ls off-the record comment regarding special reserves and the Treasury refund ings for December and January). E. E. Brown believes it would be desirable, first, to discuss item 4 of the Agenda, dealing with the refundings of the Treasury for December and January. Following the off-the-record discussion on the Treasury refundings, Brown states that the Council may report to the Board that the Council feels that it is desirable at this time to consider bringing out an intermediate maturity in connection with the December and January refundings * The Council may also state that it would appreciate the views of the Board, if they desire to express them. Congdon agrees with Brown that this is a good time to go to an intermediate maturity in connection with the December and January refundings. Bucklin asks whether the Board might increase reserves in rneantimeo mi rrht in its discussion with E. E. Brown says t h a t the Counci futurity is brought out it the Board, s t a t e that if an ^nter^ ^ eration between the various would be desirable to have c l o s e 0 0 P wi t h the Council's view, banking agencies. The Board is subject of lengthening expressed on previous occasions, o familiar with the A.B.A. maturities,, The Board is also undou Committee's recommendations. bQnds have not . Jackson understands that the f*d“ g l £ Bt£e past ninety days, been ais large in recent days as - 2 - K. E. B ro w n . T h e r e h a s b e e n a n i n c r e a s e i n s a v i n g s d e p o s i t s b a n k s i n N o v e m b e r, c o m p a re d t o t h e sam e tim e a y e a r ago. The T r e a s u r y w i l l h a v e a c a s h s u r p l u s , b u t n o t a b u d g e t a r y s u r p l u s , f o r th e f i s c a l y e a r e n d i n g i n J u n e . Chicago R i n g l a n d . I s n ’t i t n a t u r a l t o e x p e c t a n i n c r e a s e i n s a v i n g s 5s th e d e f e n s e p r o g r a m p r o g r e s s e s ? E. E. B ro w n . One o r tw o l a r g e c o m p a n ie s h a v e i n c r e a s e d t h e o f t h e i r e m p l o y e e s w ho a r e b u y i n g s a v i n g s b o n d s on t h e p a y ro ll d e d u c tio n p la n . number Ray reports th at savin gs bonds in his area are not moving so through p a y r o ll d ed u ction s. E. E. Brown. There i s undoubtedly some fe e lin g th at i t would be easier to promote savin gs bond programs i f there was a new tax program and greater economy in the non-defense expenditures of the government. Ray b e lie v e s th a t i f "E" bonds were tax exempt up to a certa in amount i t might be a r e a l in c e n tiv e in th e ir s a le . SELECTIVE CREDIT CONTROLS s (a) WHAT INFORMATION DO THE MEMBERS OP THE COUNCIL HAVE WITH RESPECT TO THE EFFECTS OF REGULATIONS W AND X? (b) WHAT ARE THE VIEWS OF THE COUNCIL AS TO WHAT, IF ANY, ACTION SHOULD BE TAKEN BY THE BOARD TO CHANGE THE EXISTING _______ REGULATIONS W AND X OR TO BROADEN THEIR SCOPE?______________ E. E. Brown asks Lochead to comment on part (a) of item 1. Lochead. The P a c ific Coast would lik e R egulation W changed so that f if t e e n months would be perm itted fo r paying the cost of a car, with the fr e ig h t to be trea ted sep a ra tely . The freig h t on a car to the P a c ific Coast may amount to $300, which is considerably higher than i t is fo r oth er s e c tio n s of the country. The resu lt Is that the car buyer fa ces s u b s ta n tia lly higher payments than he raight have in other areas of the country. Floor loans are up. New car sa les have dropped o f f as much as f i f t y per cent on the Pacific Coast. R egu lation X is not causing so much conern. The decline in lumber p r ic e s is only p a r tly due to R egulation X. E. E. Brown. R egu lation X has not so far slowed con stru ction in the- Middle West. Ringland b e lie v e s th at there w i l l be a run o ff in in stallm en t loans because of R egu lation W. Some d ealers are w ithholding cars from the market ex p ectin g p rice in c r e a se s. There has been no rea l effect yet from R egulation X. Ringland does not expect con stru ction loans to d eclin e much in the near fu tu re. The sp ecu la tiv e b u ild er be h it . The Board should not change R egulations W or X. heavily - 3 Hemingway. There has not been too much change in his D istrict in the situ a tio n in new ears as a resu lt of Regulation W, and there has been le s s change because of Regulation X, If inflation is to be controlled, somebody must be hurt* Hemingway believes Regulations V and X should not be changed. Bealso R egu lation W resu lted in a decrease of fifty per cent in automobile s a le s . Some new cars are said to be sellin g at a discount. Beals b e lie v e s that Regulation W should not be changed. The complaint on R egulation X involves the amount of paper work necessary, as the R egulation seems to be unnecessarily complicated and cumbersome. B eals would not change Regulation X, except to make it e a s ie r to work under. J. T„ BrownP Car s a le s may be down as much as fifty or sixty per cent, but i t i s always the dog that is h it that squeals. He believes the d ea le rs have been loaded with cars, and that these have backed up in to the banks for loans. The change from twentyone to f if t e e n months may have been too d rastic. However, J. T. Brown would not now change R egulations W or X. Jackson understands th at in some cases new cars can be bought at a d iscou n t« I t i s too e a r ly to know the real effect of Regula tion W. The bad s itu a tio n in h is area is in used cars. Some used car dealers may have to go out of bu siness. Automobile manufacturers have been producing at the rate of eight m illion cars a year and that could not go on fo r e v e r . Five m illion cars next year would be good. It i s too e a r ly to pass judgment on Regulation W. It is also much too e a r ly to draw any d e fin ite conclusions regarding Regulation X. The number of new homes in New York has dropped sharply. S p ecu la tiv e borrowers w ill be curtailed. Regulation X w ill pinch some who should be pinched. The purpose of regulations is to curb c r e d it . Jackson would not change Regulations W or X at present. Potts s t a t e s that h is views would be substantially along the same lin e s as those given by Jackson. Some of the large finance companies do not lik e R egulation W0 Some large companies are not making commitments as th e r e s u lt of Regulation X. He thinks it w ill be at le a s t s ix months before Regulation X takes a real b ite. Potts b e lie v e s R egu lation s W and X should not be changed at present. Ray reports th at R egulation X has had l i t t l e effect in his area up to the p resen t tim e. Those producing homes on a mass basis may already have been h it some. So far there is no real serious effect. In con nection w ith Regulation W, some new cars are being offered at le s s than l i s t p r ic e s . He comments regarding one dealer in p articu lar who has offered cars at le ss than l i s t prices, which has helped k i l l the new car market in his d is t r ic t. The "post-war used car" market i s s e r io u s ly a ffe c te d . Regulation W is also pinch ing some appliance and fu rn itu re bu sin esses, which s e ll primarily low-priced prod ucts. Ray would not change Regulations W and X at Present. - 4 Congdon. The used car market is bad. New cars are piling up to some extento However, the Board should stand by Regulation W. jo material e f f e c t i s apparent as a resu lt of Regulation X. It may reduce b u ild in g s u b s ta n tia lly in his d is tr ic t next year. Some of"this reduction would be h igh ly d esirab le. The Board should stand by R egulation X„ Ray. The autom obile manufacturers may help by cutting down production. Some d e a le r s may f e e l compelled to take cars to hold their fran ch ises. Bucklin. R egulation X has had very l i t t l e effect on the volume of r ea l e s t a t e co n stru ctio n . The administration of the Regulation in r e la tio n to the oral and written sommitments is so loose that the volume may not be cu t. Bucklin does not believe Regulations W and X should be changed at present. There has been a storm of p r o te st on R egulation W„ His bank does a substantial amount of b u sin ess in th is general fie ld in New England. Floor plan loans are up. Perhaps the change from twenty-one months to fifteen months was too d r a s t ic , but Bucklin would not change Regu lation W now. J, T. Brown. One item th at has been overlooked in Regulation Wis the q u estion o f s in g le payment loans. A borrower may borrow the fu ll amount on a s in g le payment loan and go out and buy a car. This situ a tio n cannot be e a s i l y corrected. E. E. Brown. The op in ions o f the members of the Council, which have been ex p ressed * in d ica te they do not believe that the Board should change R egu lation s W or X now. Brown does not believe the effe c t on new car s a le s in h is area has been too serious. Unless auto production i s c u t, say to 5 m illio n cars annually, the alloca tion of s t e e l may fo llo w . R egulation W is more desirable than the allocation o f products lik e s t e e l . Automobile sales have been re duced in some s e c tio n s 50 or 60 per cen t, and in others 10 or 15 per cent. The P a c ific Coast and the South apparently have been hit the hard est. Because of the large volume of outstanding com mitments, no red u ctio n in r e a l e s ta te credit has yet occurred. Con tractors s ta te th a t when th e ir present commitments are completed, construction may d e c lin e s u b s ta n tia lly in volume. A sim plification in reporting forms fo r R egulation X would be desirable. Brown understands th at th e Board i s working on a regulation dealing with commercial and in d u s t r ia l con stru ction loans. Brown suggests that it would be d e s ir a b le to ask the members of the Board what their views are on the R egu lation o f commercial and industrial construction loans, as there are many d i f f i c u l t i e s in connection with the regu lation of such lo a n s. - 5 BOARD HAS BEEN ASKED BY THE PRESIDENT TO SUBM IT IT S SUGCESTIONS AS TO SUBJECTS TO BE INCLUDED IN THE STATE OP THE UNION MESSAGE AND THE ECONOMIC REPORT AND THE LEGISLATION WHICH THE BOARD DE SIRES TO HAVE CONSIDERED AT THE SESSION OP THE CONGRESS WHICH CONVENES IN JANUARY. THE BOARD IS NOW PORMULATING ITS VIEWS ON THESE TWO MATTERS AND WOULD LIKE TO HAVE ANY ADVICE OR RECOMMENDATIONS THAT THE COUNCIL MIGHT WISH TO OFFER WITH RESPECT TO THEM,, ______________ th e E . Eo B ro w n r e a d s I t e m 2 a n d s t a t e s t h a t u n t i l th e e f f e c t o f R e g u la tio n s W a n d X c a n b e m o re f u l l y d e t e r m i n e d , i t d o es n o t seem d e sira b le to c o n s i d e r a n y l e g i s l a t i o n in c r e a s in g re s e rv e s or s e ttin g up s p e c i a l r e s e r v e s . A t t h e f o r t h c o m i n g s e s s i o n o f th e C o n g re ss, no a d d i t i o n a l l e g i s l a t i o n c o v e r i n g b a n k r e s e r v e s s h o u ld be recommended by th e B o a rd t o t h e P r e s i d e n t * Jackson0 Should the Council c a ll attention to the fact that the Board s t i l l has power to increase reserves further under the present statu tes* Hemingway* An in crea se in the reserves now might create further trouble between the Federal Reserve System and the Treasury, and he believes i t would not be d esira b le to mention that the Board s t i l l has unused power* E. E* Brown b e lie v e s i t would be desirable to emphasize strong ly that no change be made in the e x istin g laws covering bank re serves at the forthcom ing se ssio n of Congress* In connection with the general q u estion o f su b jects the Board may recommend for the State of the Union Message and the Economic Report, and legislation which the Board may d e sir e to have considered at the January Session of the Congress, Brown b e lie v e s i t would be desirable for the Council to s ta te th a t i t would be in terested in knowing what le g is lation the Board may have in mind* Ray. The country is in te r e ste d in reducing non-defense ex penditures and b alan cing the budget* E* E* Brown s t a t e s th at th is subject can be discussed in con nection with item 3 on the agenda, ONE OF THE QUESTIONS THAT HAS HAD A VERY IMPORTANT HEARING ON THE CREDIT POLICIES OF THE SYSTEM IS THE IMPACT OF THE PROSPECTIVE DEFENSE PROGRAM ON THE ECONOMY. THE BOARD WOULD BE GLAD TO HAVE THE COMMENTS OF THE COUNCIL ON THE ECONOMIC AND BUSINESS SITUA TION OVER THE NEXT SIX MONTHS <, PARTICULARLY IN THE LIGHT OF THE PROBABLE IMPACT OF PROSPECTIVE EXPENDITURES FOR DEFENSE AND THE CURRENT INFLATIONARY SITUATION. ______________________________ E» E. Brown* The impact of many government defense expendi tures^ i l l not come u n t il a fte r more than six months have elapsed* Many banks are g e ttin g req u ests for bank credit related to defense. Some in d ivid u als th in k th a t we may be in for somewhat of a slump ** January or February because the inventory pipe lines are fairly *el l f i l l e d . - 6 - some Lochead believes it is possible we may have an oversupply of products this coming year, E. E. Brown asks the Secretary to read a copy of a letter, November Ij, 1950, which McCabe has written to the chief ex ecutive o ffic e r s o f the member banks . The le tte r w ill be received by most banks on November 20. Beals had received a copy of the letter from the p resid en t of the Federal Reserve Bank of his d is trict before he l e f t fo r the Council meeting. The letter asked the banks to s c r u tin iz e th e ir c r e d its ca refu lly and to curb the in fla tionary trend by r e s t r ic t in g bank cred it, Ray comments th at the cotton crop was much smaller than a year ago, but that the p r ic e s were up 50 per cent, with the result that more bank c r e d it was required to finance the crop. He believes that by mid-January the co tto n loans w i l l be down, E. E, Brown rep orts bank loans in his bank are up sharply. Jackson asks whether Brown finds any evidence of speculative loans among h is bank°s loan s, E. E, Brown, No, Jackson s t a t e s th at he does not find any evidence of specula tive loans in the c r e d its of h is bank e ith e r . Ray s ta te s th at there are p r a c tic a lly no speculative loans in his area, Congdon, Perhaps the Council could say that the cash budget is in balance ; current tax ra tes may balance the cash budget with a $30 b illio n d efense budget. I t may be possible to get through the calendar year 1951 w ith a moderate in fla tio n and a reason ably supply o f consumer goods. Some d islocation s in the economy are to be exp ected. R egulations W and X should do much to free materials. Some loans to bu siness may be necessary to further the defense program., E, Eo Brown. For th e period o f the next six months the cash budget of the fe d e r a l government w ill be balanced according to the best inform ation we have a v a ila b le . Defense spending may require some b usin esses to borrow from banks. He thinks the loans of his bank may d eclin e e a r ly in 1951 ° The increase in bank loans has been cue to such fa c to r s as the r ise in the price of cotton and other commodities, heavy borrowing by finance companies, and the accumulation of in v e n to r ie s by department stores and mail order houses. Between now and January, Brown thinks the loans of his bank may in crease but a fte r January 1st they may run off rather sharply. Lochead agrees th at there may be a run-off of loans beginning in January. d a t e d - 7 - R ingland agrees. Congdon agrees th at there may be a decline of loans beginning in January. He a lso suggests that the attention of the Board be called to the fa ct that i t i s impossible to have an expansion in our economy to include defense production without having a com parable expansion in c r e d it, Bucklin agrees, Ray agrees. There are a large number of o il loans in Texas to provide needed o i l production. Potts b e lie v e s there may be a decline in loans after January 1, Jackson agrees, and he b eliev es that after the early part of 1951, the trend in bank loans w ill depend upon defense expenditures. E. E. Brown, Many companies that needed funds in World War II are fin a n c ia lly stronger than they were at that time, J. T, Brown b e lie v e s that the trend of bank credit beginning in January may be down* but by May and June some money may flow back to a g ricu ltu re. Beals s ta te s th at a fte r good crops for a number of years, his part of the country may be due for a bad crop year. The wet summer which they had r e su lte d in good pasture and row crops. The farmers bought lambs and ca lv es which went up in price, and there should be some liq u id a tio n in th ese loan s. Nature has helped run up loans, Hemingway. The con d ition s in his D istr ic t are about the same as in the other d i s t r i c t s . He expects a decline in loans after the fir st of the year. A fter the d eclin e in cred its, loans may go back up again, as everyone seems to be jubilant and expects to make money. If i t is desired to lim it bank c r e d it, It might be possible to lim it the amount of loans to bank c a p ita l. Congdon. However, i f one bank can!t make loans because of the limit in r e la tio n to i t s c a p ita l, another bank w ill have the capital to do i t . Bucklin 4.s in c lin e d to b eliev e that loans w ill increase again after~a dec 1 ine in January. Congdon think s the A. B. A. could do a great deal in helping to curb in fla tio n a r y c r e d it. E. E. Brown b e lie v e s the A. B. A. Credit Policy Committee ran into trouble in working out a program for the voluntary cooperation banks and insurance eompa*ies to r e s tr ic t credit. He understands that the Department of J u stice set up some obstacles and that McCabe is to talk w ith McGrath. He b eliev es i t would be desirable to ask the Board what the s itu a tio n is regarding voluntary agreements to restrict c r e d it. The meeting adjourned at 5^48 P. M. - 8 - THE COUNCIL CONVENED AT 1 0 :0 0 A. M ., ON NOVEMBER 2 0 , 1 9 5 0 IN ROOM 1032 OP THE MAYFLOWER HOTEL, WASHINGTON, D. C. ALL MEMBERS OF THE FEDERAL ADVISORY COUNCIL WERE PRESENT EXCEPT MR. WOODS. MR. DE WITT T . RAY SERVED AS ALTERNATE FOR MR. WOODS. The 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 t h e a t t a c h e d C o n f i d e n t i a l Memorandum t o b e s e n t t o t h e B o a r d o f G o v e rn o rs r e l a t i v e t o th e Agenda f o r t h e j o i n t m e e t i n g o f t h e C o u n c il an d th e B oard on November 2 1 , 1 9 5 0 • T h e M em orandum w as d e l i v e r e d t o th e S e c r e ta r y of th e B o a rd o f G o v e r n o r s a t 1 2 s 2 6 P . M. on N ovem ber 2 0 , 1950. I t w i l l be n o t e d t h a t e a c h i t e m o f t h e a g e n d a i s l i s t e d t o g e t h e r w ith the com m ents o f t h e C o u n c i l . The m e e t i n g a d j o u r n e d a t 1 2 ; l 4 P . M. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON NOVEMBER 21, 1950 I Selective credit c o n tr o l s : (a) What in fo rm a tio n do th e members of th e Council have w ith r e s p e c t to th e e f f e c t s o f R egulations V and X? (b) Vhat a re th e view s o f th e C ouncil as to what, i f any, a c tio n sh o u ld be tak en by th e Board to change th e e x i s t i n g R e g u la tio n s W and X o r to broaden t h e i r scope? (a) R egulations V and X have n o t been in o p e ra tio n s u f f ic ie n tly long to determine t h e i r f u l l e f f e c t on th e economy. New car s a le s have been red u c e d 10 to 15 p e r c en t in some a re a s, a l though other s e c tio n s r e p o r t a d e c l in e a s h ig h a s 50 p e r c en t. The P a c ific Coast and the South have a p p a r e n tly f e l t th e im pact of R egulation W more severely than the r e s t o f th e c o u n try . Because of th e l a r g e volume o f o u ts ta n d in g commitments, no reduction in real esta te c r e d it h as y e t o c c u r re d . C o n tra c to rs re p o r t t h a t when t h e i r present commitments a r e co m p leted c o n s tr u c tio n w i l l d e c lin e s u b s ta n tia lly in volume. The d e c lin e in th e p r i c e o f lum ber may be p a r t ly due to Regula tion X. A s im p lif ic a tio n o f th e r e p o r t i n g forms f o r R egulation X, with a resulting red u ctio n in th e p a p e r work r e q u ir e d , would be h ig h ly d e s ira b le . (b) The Council i s u n anim o u sly o f th e o p in io n t h a t no change in Regu lations V or X i s d e s i r a b l e a t t h i s tim e . Members of th e C o u n cil have p r e v io u s ly d is c u s se d w ith th e Board some of the d i f f i c u lt problem s in v o lv e d in w orking o u t a r e g u la tio n covering industrial and com m ercial c o n s t r u c ti o n lo a n s . The Council would a p p re cia te the present views o f th e Board r e l a t i v e to th e r e g u la tio n o f lo an s o f these types. 2. The Board h a s been a sk e d by th e P r e s id e n t to submit i t s su g g e stio n s a s to s u b je c t s to be in c lu d e d in th e State o f th e Union m essage and th e Economic R eport and the l e g i s l a t i o n which th e Board d e s i r e s to have considered a t th e s e s s io n o f th e C ongress which con venes in J a n u a ry . The Board i s now fo rm u la tin g i t s views on th e s e two m a tte r s and would l i k e to have any advice o r recom m endations t h a t th e C ouncil might wish to o f f e r w ith r e s p e c t to them. -2 - Xh© C ouncil d o es n o t know what s u b je c ts th e Board contem plates recom, ding f ° r in c l u s io n th e S t a t e o f the Union message and the Economic ®^ort , or v h a t l e g i s l a t i o n th e Board c o n tem p lates proposing a t the se ssio n ^ pthe Congress which con ven es in J a n u a ry . The C ouncil would be interested ,'hat the Board has in mind on these two matters, and would be glad to d i s cuss them with th e B o ard . U ntil th e econom ic s i t u a t i o n h a s become c le a r e r and u n t i l th e e f f e c t of Regulations V/ and X (w hich th e C o u n cil unanim ously b e lie v e s w ill mate rially reduce bank c r e d i t in th e i n s ta llm e n t and r e a l e s ta te f ie ld s ) can be „jore fu lly e v a lu a te d , th e C o u n cil b e lie v e s t h a t i t would n ot be d e s ira b le to introduce any l e g i s l a t i o n to change e x is ti n g laws governing bank r e s e rv e s . 3 . One o f th e q u e s t io n s t h a t h a s had a very im portant b e a rin g on th e c r e d i t p o l i c i e s o f th e System i s the im pact o f th e p r o s p e c tiv e d e fe n se program on the economy. The Board would be g la d to have th e com ments o f th e C o u n c il on th e economic and b u sin ess s i t u a t i o n o v e r th e n e x t s ix m onths, p a r t i c u l a r l y in the l i g h t o f th e p ro b a b le im pact o f p ro s p e c tiv e ex p e n d itu re s f o r d e fe n se and th e c u rr e n t i n f la tio n a r y situ a tio n . During th e n e x t s i x m onths, a c c o rd in g to th e C o u n cil’s in fo rm atio n , the cash budget o f th e F e d e r a l Government i s ex p ected to be in balan ce, o r show a surplus. The c r e d i t im p act o f th e d efen se program durin g t h i s p erio d w ill be chiefly due to re q u ire m e n ts o f m an u fa c tu rers fo r money f o r p la n t changes and expansion to ta k e c a re o f government o rd e rs re c e iv e d or a n tic ip a te d . The main impact f o r f in a n c in g d e fe n se p ro d u c tio n i s n o t l ik e ly to take p lace un til after the m iddle o f 1951 * I t i s the o p in io n o f th e members o f th e Council th a t bank loan s due to seasonal demands w i l l p ro b a b ly in c r e a s e from now u n t i l Jan u ary , but they ex pect a d e clin e in lo a n s in t h e i r r e s p e c tiv e d i s t r i c t s in January and February. Regulation V should c u t new in s ta llm e n t c r e d it sh arp ly by January o r February. Regulation X should b e g in to reduce new c o n stru c tio n c r e d it by the middle o f next year. I t may be t h a t th e c a le n d a r y e a r 1951 w ill show no in c rea se in bank loans or o n ly a m oderate in c r e a s e . The Council would be i n t e r e s t e d in knowing what step s have been taken to encourage v o lu n ta ry agreem ents f o r th e r e s t r i c t i o n of c r e d it , and vhat the present a tt it u d e o f th e Departm ent o f J u s t ic e i s reg ard in g the l e g a li ty or propriety of such ag reem en ts. 4. A d is c u s s io n o f th e T reasury refu n din g s fo r December and Ja n u a ry . The Board is fa m ilia r w ith the views of the Council, as expressed in pre71°us discussions, regarding the n ec e ssity of sh iftin g a portion of the debt to intermediate and lo ng er m a tu ritie s. The Council believes th a t the present ls a desirable time to b ring out an interm ediate m aturity in connection with the refundings of December and January. I f the members of the Board wish to express th e ir view s, the Council w ill be pleased to have them. - 9 - THE COUNCIL CONVENED IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING AT 2 s 20 P.M. ON NOVEMBER 2 0 , 1 9 5 0 . ALL MEMBERS OF THE COUNCIL WERE PRESENT EXCEPT MR. JACKSON AND MR. WOODS. MR. DE WITT T . RAY SERVED AS AN ALTERNATE FOR MR. WOODS. D r. W o o d l i e f T h o m a s , w i t h h i s a s s o c i a t e Mr. A r th u r H ersey from th e E conom ic S t a f f o f t h e B o a rd o f G o v e r n o r s , d is c u s s e d t h e o p e r a t i o n s an d f u n c t i o n s o f c e n t r a l b a n k s . D r. Thomas s t a t e d t h a t h i s rem ark s w e re t a k e n l a r g e l y f r o m a r e p o r t w h ic h th e S t a f f h a s p r e p a re d f o r s u b m i s s i o n t o t h e J o i n t C o m m itte e on t h e Econom ic R e p o r t. A copy o f t h e r e p o r t , w h i c h t h e s t a f f h a s p r e p a r e d f o r t h e J o i n t C o m m ittee, w i l l b e s e n t t o e a c h m em ber o f t h e C o u n c il i f D r. Thomas o b ta i n s t h e a p p r o v a l o f C h a ir m a n McCabe f o r i t s r e l e a s e . The m e e t i n g a d j o u r n e d a t 3 s 25 P.M . § - 10 - ON NOVEMBER 21, 1950, AT 10:38 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 COUNDIL WERE PRESENT EXCEPT MR. JACKSON AND MR. WOODS. MR. DE WITT T. RAY SERVED AS AN ALTERNATE FOR MR. WOODS. THE FOLLOW ING MEMBERS OF THE BOARD OF GOVERNORS WERE PRESENT : CHAIRMAN MC CABE; GOVERNORS ECCLES, SZYMCZAK, EVANS, AND POWELL. MR. CARPENTER, SECRETARY OF THE BOARD OF GOVERNORS, WAS ALSO PRESENT. SELECTIVE CREDIT CONTROLS: (a) WHAT INFORMATION DO THE MEMBERS OF THE COUNCIL HAVE WITH RESPECT TO THE EFFECTS OF REGULATIONS W AND X? (t>) WHAT ARE THE VIEWS OF THE COUNCIL AS TO WHAT, IF ANY, ACTION SHOULD BE TAKEN BY THE BOARD TO CHANGE THE EXISTING REGULA TIONS W AND X OR TO BROADEN THEIR SCOPE? E. E. Brown reads part (a) of Item 1 of the Agenda and the con clusions of the Council as expressed in the C onfidential Memorandum to the Board attach ed . McCabe asks what i s meant by a sim p lific a tio n of reporting forms for R egulation X. E. E. Brown s ta te s that reference is made to the form which the officer m u st^ fill ou t, in d ic a tin g that he is s a tis fie d i t is not a real estate tra n sa ctio n or th at i t Is a rea l e sta te transaction. A large company may use part of a loan from a bank for the purpose of building houses fo r i t s em ployees. The o ffic e r receiving the note, perhaps by m ail, does not n e c e ss a r ily know exactly how a ll the proceeds of the loan w i l l be used. (McCabe asks R ie fle r to jo in the meeting at th is point) R lefler s ta te s th at R egulation X has been sim p lified so far now that the problem has been one of g e ttin g adequate information on what is taking p lace under the R egulation. McCabe b e lie v e s the s itu a tio n E. E. Brown mentions is an ex ception rather than a common exp erien ce. R le fle r . The r e g is tr a n t must have a statement that the loan is or is not a r e a l e s ta te loan, which R ie fle r b eliev es is as simple as the form can be made. - 11 - F E. Brown b e lie v e s i t should e ith e r say the o ffic e r has no b eliev e the loan i s for rea l e s ta te , or nothing should from the o f f i c e r . Brown s ta te s he understands Mr. Fisher *pived various com p lain ts on th is matter of sim p lification of the S o rtin g forms. McCabe says R ie f le r and the s t a f f w i l l give careful consider a t i o n - ^ "the p o s s i b i l i t y o f s im p lific a tio n o f the reporting forms. E. E. Brown then reads part (b) of Item 1 on the agenda and he conclusions of the C ouncil as expressed in the Confidential M e m o r a n d u m to the Board attached* The Council does not believe any change should be made in the substance of Regulations W and X. The members of the Council have had many customers complain about Regu lation W, but Brown s t a t e s th a t R egulation W would not be a good Regulation i f it did not hurt someone. McCabe su g g ests th a t the C ouncil should get tic k e ts for rin g side seats for the h earin gs in Congress next week. The automobile dealers have waged a very stron g campaign among th eir Congressmen. Lochead. The com plaint on the P a c ific Coast is that i t costs about $300 for fr e ig h t to d e liv e r a car to that part of the country. Consequently, the P a c if ic Coast is penalized more than any other part of the country by R egu lation W. McCabe reports th a t fo r the f i r s t few days of November Seattle has had the same car s a le s i t had la s t year; Portland is down seven per cent; S alt Lake C ity i s down n in eteen per cen t, which is the greatest d eclin e of any o f the c i t i e s reporting. Cleveland had an increase of th ir ty -n in e per c e n t. Over a l l there does not seem to be any appreciable d e c lin e from comparable figu res la s t year. Used car sales are s l i g h t l y above la s t year. The price of older used cars is s tiffe n in g . E. E. Brown. Every member of the Council thinks the Board should not weaken the terms or con d ition s of Regulation W. I f Regu lation W is e f f e c t i v e , i t may help prevent the a llo ca tio n of s te e l. The complaints on R egu lation X w i l l come la te r . Lumber m ills in the Northwest have been a ffe c te d , but they would have suffered de clines in p rices w ithout R egulation X. Eccles. What might be c a lle d the grey market in lumber has Broken, but lumber p r ic e s are s t i l l higher than a year ago. Regula tion X had nothing to do w ith the break in lumber p ric es. McCabe. Our concern i s th at Regulation X has not cut back pro motion yet as we had hoped. Contractors may switch to multiple fusing, and the Board may issu e a supplement to cover that situ ation . 0r the next few months the decrease in housing w ill be less than the B°ard had hoped. j. E* E. Brown b e lie v e s that i f the Board issues another Regulation should cover only r e n ta l con stru ction , and should not try to cover - extremely d i f f i c u l t problem of regu latin g commercial and industrial asorTto required instruction. - 12 - A McCabe, regulation covering commercial and industrial conion is still in the work with nothing completed. The problem is very difficult. Nothing definite has been formulated, s t r u c t Riefler, Rental construction is what we are considering now, ge must move into multiple rental const ruction. The Board has no desire to curtail essential industrial construction, (Riefler left the meeting at this point) THE BOARD HAS BEEN ASKED BY THE PRESIDENT TO SUBMIT ITS SUGGESTIONS AS TO SUBJECTS TO BE INCLUDED IN THE STATE OP THE UNION MESSAGE AND THE ECONOMIC REPORT AND THE LEGISLATION WHICH THE BOARD DESIRES TO HAVE CONSIDERED AT THE SESSION OF THE CONGRESS WHICH CONVENES IN JANUARY, THE BOARD IS NOW FORMULATING ITS VIEWS ON THESE TWO MATTERS AND WOULD LIKE TO HAVE ANY ADVICE OR RECOMMENDATIONS THAT THE COUNCIL MIGHT WISH TO OFFER WITH RESPECT TO THEM, ____________ _ Brown reads Item 2 on the Agenda and the conclusions of the Council as expressed in the C on fid en tial Memorandum to the Board attached. Brown asks whether the Board would care to express its views on the matters covered in th is item, McCabe, The Board was disappointed with the C ou n cils answer. The Board thought the C ouncil turned the question around and asked the Board, The Board i s asked to submit i t s views to the President and to Congress * and i t must present a program, A hard battle goes on in Washington. One b a t t le is th at of d irect versus indirect con trols, There i s grea t p ressu re in Congress for direct controls. Even many b u sin ess men want c o n tr o ls. Fleming. Do they want a llo c a tio n s ? McCabe. No, Every person wants con trols that do not affect him. The a u th o r ity fo r R egu lation s W and X expires shortly. What would the Council su ggest as to i t s extension? What should the Board do on bank reserv es? The Board has sent out two appeals to bankers to curb c r e d it. The American Bankers A ssociation has also sent out appeals. Fleming s t a t e s th a t as fa r as Regulations W and X are concerned* the authority should be extended. The matter of voluntary agreements should be approved by the Department o f J u stice. McCabe says th at he p oin ted out to Mr. Ford of the Department of Justice th at the D ep a rtm en ts le t t e r would frighten bankers and insurance company e x e c u tiv e s . He trie d to make i t clear to Mr. Ford that to have banks and insurance companies work together was not the same as to have s t e e l companies working togeth er. One could hardly Picture the banks and Insurance companies holding a meeting to monopolize c r e d it. McGrath and Ford agreed that the banks and in surance companies should be perm itted to go ahead. It was suggested that a meeting be c a lle d in New York* and that the banks and insurance - 13 - ompanies draft a statem ent o f o b jectiv es. McGrath asked Ford to repare a le t t e r s ta tin g th at the representatives of the banks and i n s u r a n c e companies could go ahead with the blessing of the Depart ment of Justice* The recent le t t e r of the Department of Justice, which the bankers who had seen i t objected, w ill not be sent out * — B u ck lin thinks the meeting should be held in the New York federal Reserve Bank. McCabe thinks the Department of Justice should send Ford to the meeting. E. So Brown. The m ajority of the Council is opposed to Regu lations W and X in p eacetim e, but th is is not peacetime. Until the Russian situ a tio n c le a r s up, R egulations W and X should be continued. Credit w ill be needed in the rearmament program, so the Council questions the wisdom o f in crea sin g reserves. McCabe. How do you ex p la in to the public an expansion of bank credit of over e ig h t b i l l i o n d ollars in a year with a failure on the part of the Board o f Governors to do anything about it . Hemingway. Do you know yet in what areas the expansion in credit took p la c e ? McCabe. The Board does not know in d e ta il. Half was probably seasonal, and a large amount was probably for inventory. It is d ifficult fo r a bank to turn down cred it to a good customer when a competing bank may extend the c r e d it. McCabe believes the request he has made in h is l e t t e r of November 17 to member banks to restrict credit v o lu n ta r ily w i l l have some e f f e c t . Fleming. The two la rg e bankers8 association s can give great assistance in h elp in g to bring about a voluntary restriction of bank cred it. But the insurance companies are a new entry in the credit f ie ld . T h erefore, voluntary agreements for large loans, in which both banks and insurance companies are interested, are necessary. J0 T. Brown mentions the s itu a tio n of a large automobile dealer who borrowed th ree m illio n d o lla rs to take cars so he would not lose his fr a n c h is e . E ccles. I f banks make such loans, they permit a situation ^herelnanufacturers w i l l continue to send cars to dealers, _Flemlng does not b e lie v e you can turn o ff the spigot over nlght~ ^lx months ago the country was concerned with keeping bus iness going next year. The s itu a tio n has now turned. It takes time to turn the sp ig o t on and o f f . - 14 - Eccles, When you Increase the supply of money and cannot increase production appreciably, you promote inflation„ Unless the automo bile manufacturers get allocations* they will make as many cars as they can., You must curtail credit, not only at the consumer level (Regulation W), but also at the manufacturers9 level. Congdon. I f R egulation W works, as it now seems it may, the manufacturers w i l l c u r ta il production. automobile Eccles, Congdon. In time. You will need credit for defense production. Ray. How much of the e ig h t b illio n dollar increase in bank c r e d i t is in in sta llm e n t cre d it? EccleSo About fo r ty per cen t. McCabe. About th ree b i l l i o n of the increase in bank loans is in installm ent and consumer c r e d it. J. T. Brown. I t takes some time to e ffe c t a reduction in bank credit. Bucklin, Banks can be h e lp fu l in reducing the loans of finance companies. Ring land s t a t e s th at in h is bank the increase in bank loans has been la r g e ly se a so n a l. A fter the f ir s t of the year he expects a sharp reducion in bank lo a n s. McCabe. As long as an automobile dealer can get credit to take cars, why shouldn’t he take them i f he thinks prices are going higher. McCabe thinks we have had one wave of consumer buying and we shall have another. He b e lie v e s bank cred it w ill increase. Jo T. Brown. What do you propose to do i f the increase in bank credit cannot be stopped? McCabe. What happens w i l l depend p artly on what Congress does in connection w ith ta x e s . Labor and business must also realize that it is not p o s sib le to go on forcin g wages and prices constantly higher. The Board must do ev ery th in g p o ssib le to hold the lin e. Hemingway. The people in our D is tr ic t believe they are in the ®iddle of a boom and seem to be enjoying i t . McCabe b e lie v e s t h is is the general feelin g over the country. - 15 - K E. Browno The C ouncil b eliev es that the authority for Regu lation9 ^ and X should be extended0 The Council does not know what Board may have in mind in connection with reserves. If the soard were given the a u th o rity for higher reserves, or special re serves, the Board might f e e l the authority constituted a mandate to use the power, McCabeo Suppose that bank credit should continue to increase, tfhat shouicT be done? Hemingway, Perhaps the s ta te banking commissioners and other banking agencies might be h e lp fu l. Eccles. What can th ey do? Bucklin. The examiners can go before the directors of a bank and say the bank i s making too many loans. Hemingway b e lie v e s the examiners could be helpful. McCabe. The average banker does not think he has expanded bank credit too fa r . In October 1950 bank loans averaged 3^ per cent of d ep osits of a l l commercial banks, which represents a steady increase in the p ercen tages over recent years. Beals s ta te s th at the bankers in the livestock banks to which he talked do b e lie v e th a t t h e ir loans are too high. The weather resulted in e x c e lle n t crops * and the resu lt has been large liv e stock loans. His loan s are up su b sta n tia lly . What should the livestock banks do In th a t case? McCabe r e p lie s he knows i t i s a d if f ic u lt problem. Eccleso I f the feed er s could not get cred it, they would not buy c a ttle . Ray. The government buys meat at certain prices and helps to sustain the p ric e s tr u c tu r e . One way would be to get the govern ment to reduce n on -d efen se exp en d itu res. E ccles. Reducing non-defense expenditures would not amount to a great d e a l. ONE OP THE QUESTIONS THAT HAS HAD A VERY IMPORTANT BEARING ON THE CREDIT POLICIES OP THE SYSTEM IS THE IMPACT OP THE PROSPEC TIVE DEFENSE PROGRAM ON THE ECONOMY. THE BOARD WOULD BE GLAD TO HAVE THE COMMENTS OP THE COUNCIL ON THE ECONOMIC AND BUSINESS SITUATION OVER THE NEXT SIX MONTHS, PARTICULARLY IN THE LIGHT OF THE PROBABLE IMPACT OP PROSPECTIVE EXPENDITURES FOR DEFENSE AND THE CURRENT INFLATIONARY SITUATION. E. E. Brown reads Item 3 on the Agenda and the conclusions theT Council as exp ressed in the Memorandum to the Board attached. Tne defense program o f the government may require that businesses obtain bank c r e d it fo r acq u irin g in v en to ries. In the last war bank •Loans went down and the government debt rose. - 16 - In 19^8 and 1949 we had seasonal increases in bank *pdiT witn sea so n a l d e c lin e s follow ing,, Why is there any reason Inthan believe ^he d e c lin e e a r ly in 1950 w ill be anything other the usual se a so n a l d e c lin e ? e . E, Brown. The Commodity C redit extended cred it in large amounts witnout bank c r e d it b ein g used. Now banks have had to loans on com m odities, J. T. Brown, Last year the Department of Agriculture reduced cottoiTproduc11 on to f i f t e e n m illio n a c r e s, Now the Department of Agriculture asks fo r t h i r t y m illio n acres next year. This expan sion w ill require lab or and machinery. Just how can you explain all these sharp r e v e r se s in th in k in g which a ffe c t the economy so Eccles, seriously? McCabe, These p lan s are d i f f i c u l t to understand, but the Deof A gricu ltu re i s the weathervane of Congress, Fleming, A ll of t h is means th at you can111 turn the spigot o ff and on quickly. I f you r a is e r e se r v e s, you may complicate the problem of Treasury refu n d in g s, P otts, In t h is d is c u s s io n one important element has been over looked, the recen t e l e c t io n , McCabe r e p lie s th a t the r e s u lt s of the e le c tio n are being re flect eTTn“Washin gt on, A DISCUSSION OF THE TREASURY REFUNDINGS FOR DECEMBER AND JANUARY E, E. Brown reads Item 4 on the Agenda and the conclusions of the Council as exp ressed in the C on fid en tial Memorandum to the Board attached. Brown r e a liz e s i t may be d if f ic u l t for the Board to discuss with the C ouncil m atters in th is connection which the Board may now be ta k in g up w ith the Treasury, Brown b elieves the Board is fam iliar w ith the recommendations of the American Bankers Association committee, McCabe r e p lie s the Board is fa m ilia r with these recommendations, McCabe asks whether the C ouncil would suggest freezing the short rate, i f you put out an interm ediate issu e you put pressure on the 3hort rate. McCabe asks the C o u n cilfls fe e lin g on the Board8s action in connection w ith the short rate? Fleming. The Board has accomplished i t s o b jectiv es. I f the Board- raised reserves the banks could not dump se cu rities without a penalty, That o b je c tiv e has been accomplished. partment - 17 K. E. Brown. Any fu rth er increase in the rates would not cut ff the extension of c r e d it by banks. I f the short-term rate went a b o ve one and a h a lf per c e n t, the holders of long-term two and a halves might tend to dump. Brown sta te s that personally he probably differs with the Board and the Treasury, but he would be inclined to let the long-term bonds d e c lin e . Potts b e lie v e s some f l e x i b i l i t y in the short-term rate is de s i r a b l e . He would not favor having i t known that the rate was frozen at one and a h a lf per c e n t. M cC abe. I f th e Treasury offered $8 b illio n of 1 7/8 per cent bonds f o r - seven or e ig h t years m aturity, what would happen? Fleming. The banks would r o l l over. Some corporations would want Tir s"Trom the System 8s p o r t f o lio . McCabe. Would the program of the American Bankers Association c o m m itte e r e su lt in an in cr ea se or decrease in the holdings of the System? Fleming. The h old in gs o f the System would probably stay the same.^ Eccles. The Board has done l i t t l e or nothing to restrict credit expansion. The C ouncil has a ls o suggested l i t t l e or nothing. In creasing the rate from one and a quarter per cent to one and a half per cent has not curbed bank c r e d it. The new idea of 1 7/8 per cent for a seven or e ig h t year m aturity merely freezes the one and a half per cent rate and c o s ts the Treasury more. Eccles would let the short-term rate be f l e x i b l e . When you change bank held short-term issues to in term ed ia tes, you provide le s s desirable paper for bank portfolios, and you in c r e a se th e c o st to the Treasury. Fleming asks E ccles what he would suggest. Eccles s t a t e s th a t he would put out a secu rity for investors. The method by which c r e d it should be r e s tr ic te d is by reserves, in cluding sp e c ia l r e s e r v e s . Interm ediate and longer-term issues do not help to meet the i n f la t i o n problem. E ccles would issue a one and a half per cen t one year c e r t i f i c a t e , but keep the rate f le x i ble. He would on ly peg the two and a half per cent non-bank paper. If we cannot curb bank c r e d it w ith a balanced federal budget, how are we going to curb i t i f we have a d e f ic i t in the federal budget, We are headed fo r a s tr a ig h t-ja c k e t of controls i f we do not act. Congdon. Do you w ish to put the banks in the stra ig h t-ja ck et? E ccles. No. The banks would s t i l l have much freedom. (At th is p oint th ere was a b r ie f off-th e-record discussion) * * * * * * The Board and the C ouncil agreed that the next meeting would 'a^e place on February 18, 19 and 20, 1951° The meeting adjourned a t 1:23 P.M*
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