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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL October 1, 1950 The third statutory meeting of the Federal Advisory Council for 1950 was convened in Room 932 of the Mayflower Hotel, Washington, D. C., on October 1, 1950, at 2:10 P.M., the President, Mr. Brown, in the Chair. Present: District No. 1 Walter S. Bucklin District No. 3 Frederic A. Potts 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: N. Baxter Jackson District No. 2 J. E. Woods District No. 11 On motion duly made and seconded, the mimeographed notes of the meeting of the Council held on May 14, 15 and 16, 1950, and of the meetings of the Executive Com mittee held on August 1, 1950, and September 13, 1950, copies of which had been sent previously to the members of the Council, were approved. President Brown reviewed the subjects discussed at the meetings of the Executive Committee of the Council held August 1 and September 13, 1950. A complete list of the items on the agenda for the meeting 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 28 and 29 of these minutes. In addition, it was agreed that the Council ask the Board what steps it had taken to obtain voluntary cooperation to curtail credit in accordance with the provision of Public Law 774. Furthermore, it was agreed to pursue the subject with Dr. Stonier of the American Bankers Association. The meeting adjourned at 6:05 P.M. HERBERT V. PROCHNOW Secretary. 26 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL October 2, 1950 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, 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 to the Board of Governors from the Federal Advisory Council, which follows on pages 28 and 29, listing the agenda items with the conclusions reached by the Council. The Memo randum was delivered to the Secretary of the Board of Governors at 11:50 A.M. on October 2, 1950. The meeting adjourned at 12:00 A.M. HERBERT V. PROCHNOW Secretary. 27 CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON OCTOBER 3, 1950 1. What further consideration has been given by the Council, or the Special Com mittee appointed by the Council for the purpose, to the proposal to base reserve requirements of a member bank on the character of the bank’s deposits rather than on the location of the bank? The Council has considered further the proposal to base reserve requirements of a member bank on the character of the bank’s deposits rather than on the location of the bank. When the proposal was discussed with the Board in February, 1950, it developed that one of the first matters requiring consideration would be the problem confronting the livestock banks. No formula or agreement in principle has so far been developed for meeting this problem. In addition, under the proposal a considerable percentage of coun try banks would have been required to maintain higher reserves if total over-all reserves are maintained at the present level. It was apparent that to obtain acceptance of the proposal from the country banks it would be necessary initially at least to reduce over-all reserves. With present inflationary trends, a reduction in over-all reserves would obviously be undesirable. In view of prevailing unsettled conditions, any proposal for changing the method of determining bank reserves would be disturbing to the banking system at a time when the complete cooperation of the banks is necessary to the efficient functioning of the economy. The method now used to determine reserves is thoroughly familiar to the banks, and the banking system has for many years operated effectively under it. The Council therefore does not favor a change to the uniform reserve proposal at this time. Before any steps are taken to request authority to increase maximum statutory reserve requirements, the results of the regulation of consumer credit, including more stringent consumer credit regulation, and the results of the regulation of real estate credit should be studied and evaluated. Cooperative voluntary restrictions in the extension of inflationary credit, authorized and intended by the Defense Production Act of 1950 and the President’s directive of September 9, 1950, giving control over agreements for such voluntary restrictions to the Board, should be tried with the cooperation of banking and other financial associations. We recommend that prompt steps be taken by the Board to initiate and stimulate such voluntary agreements. If economic conditions should thereafter clearly necessitate any change in maximum statutory reserve requirements, the Council is unanimously of the opinion that no special reserve in any class of government securities should be adopted, but that the pattern used in 1948 should be followed, extending temporary authority for increased maximum cash reserves, with the present division for reserve purposes of central reserve, reserve and country banks continued. Any authority granted should be for a period not to exceed two and a half years so Congress would have the right to review the matter. 2. In accordance with the discussions between Chairman McCabe and President Brown, it is understood that the Council will be prepared to discuss the reduc tion to two days of the maximum deferment for cash items. 28 The Council believes in time schedules which are actual and not artificial. Avail ability should be as prompt as it is possible to make it with the best transportation facilities, but it is an unsound practice to give credit for reserve purposes for an item before it is actually collected. Apart from the fundamental principle that an item should not be credited until it has reached its destination and has been collected, the proposed reduction to two days of the maximum deferment for all cash items would result in more float, and thus in more inflation at a time when efforts are being made to curb inflationary trends. The Council therefore does not favor the proposed reduction to two days of the maximum deferment for all cash items. 29 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL October 2, 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, 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); and Herbert V. Prochnow, Secretary. Absent: Messrs. J. E. Woods and James K. Lochead. President Brown presented Dr. Woodlief Thomas of the Staff of the Board of Gov ernors, who in turn introduced a number of other members of the Board Staff, who made a visual-verbal presentation on “The Current Economic Situation and Outlook”. The meeting adjourned at 3:25 P.M. HERBERT V. PROCHNOW Secretary. 30 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM October 3, 1950 At 10:45 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, James K. Vardaman, Jr., Edward L. Norton, 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, 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. Frederic A. Potts 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 28 and 29 of these minutes. An extended discussion followed on reserve requirements, and the general problem of inflation. The President of the Council then read the second item on the agenda, and the conclusions reached by the Council, as expressed in the Confidential Memorandum pre viously mentioned, after which there was a brief discussion of the item. The meeting adjourned at 1:32 P.M. HERBERT V. PROCHNOW Secretary. 31 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL October 3, 1950 At 2:40 P.M., the Federal Advisory Council reconvened in the Board Room of the Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, 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, Frederic A. Potts and J. E. Woods. After some discussion as to the best method of making the agreements for voluntary cooperation effective, it was decided that as a preliminary step, Messrs. Fleming and Hemingway would talk with Dr. Stonier of the American Bankers Association. In addi tion, it was agreed that President Brown would discuss the matter with James E. Shelton, President of the American Bankers Association. The meeting adjourned at 3:25 P.M. HERBERT V. PROCHNOW Secretary. 32 NOTEs This t r a n s c rip t of the Secretary's notes is not to be regarded as complete or necessarily e n t ir e ly accu rate. The tran scrip t Is for the sole use of the members of the Federal Advisory Council. The concise o f f i c i a l minutes for the entire year are printed and d istrib u te d la t e r . H. V. P. The S e c r e t a r y 5s notes on the meeting of the Federal Advisory Council on October 1 , 1950, at 2 :10 P.M., in Room 932 of the Mayflower Hotel, Washington, D.C. A ll members o f the Federal Advisory Council were present except Mr, Jackson and Mr. Woods. Mr.De Witt T. Ray served as an altern a te fo r Mr. Woods. The Council approved the S e c re ta ry 's notes for the meeting of the Council on May 1 4 , 15> and 16 , 1950> and for the meetings of the Executive Committee o f the Council on August 1 and September 13, 1950. REVIEW OF SUBJECTS DISCUSSED AT THE EXECUTIVE COMMITTEE MEETINGS OF THE COUNCIL HELD ON AUGUST 1 AND SEPTEMBER 13, 1950._______________ E. E» Browne Before considering the items on the agenda, E. E. Brown reviews FEe s u b je c ts discussed at the meetings of the Execu tive Committee o f the Council held August 1 and September 13 , 1950. The members of the Council have each received a copy of the Board Report to the J o in t Committee on the Economic Report on "Fiscal and Credit P o lic ie s In Present Emergency.” The preliminary draft of this report was the su b je ct o f discussion at the Executive Committee meeting on August 1 . Brown d iscu sses the d i f f i c u l t i e s confronting the Board in the p rep aratio n of Regulation X dealing with real estate controls. The most p erp lexin g problem in connection with real estate controls r e l a t e s to loans to in d u s t r ia l and commercial concerns. Brown mentions a ls o the d iscu ssio n by the Executive Committee with the Board r e l a t i v e to vo lu ntary cooperation on the part of commercial banks, Investment concerns and insurance companies to r e s t r ic t the extension of la rg e loans f o r longer periods where such loans might be considered i n f l a t i o n a r y in ch a ra cter. He c a lls attention to the in clusion in Public Law 77^ and the Executive Order cf the President of September 9, 1950 , of se c tio n s r e la tin g to voluntary cooperation. Lochead thinks th at the r e a l estate credit situation has many dangers in I t . I t could be the route by which socialism would enter the American economy as i t did in England. Fleming comments that Mr. F ish er Is an excellent person to sit in on the hearings on r e a l e sta te controls. E. E. Brown s t a t e s that I t is hard to regulate real estate loans to la rg e in d u s t r ie s when a portion of any commercial loan to a large in d u stry may be used fo r construction. I t is d if f ic u l t to work out good c r e d it co n trols f o r re s id e n tia l construction, but it an i n f i n i t e l y g r e a t e r problem to work out any sa tisfacto ry regu lation covering commercial and in d u s tria l credit relating to real - 2 - e s t a te construction. E. E. Brown reports that on September 13, the Committee expressed the opinion that Regulation W would have to be tightened to be e f f e c t i v e . Ex e c u ti v e (At t h is point there was an off-the-record discussion on the r e la tio n s h ip of the Board of Governors with the Treasury. In te r e s t rates on government obliga tio n s , the rediscount r a t e , open market operations, and other r e la te d su b jects were included In the o f f the-record d is c u ss io n ). WHAT FURTHER CONSIDERATION HAS BEEN GIVEN BY THE COUNCIL, OR THE SPECIAL COMMITTEE APPOINTED BY THE COUNCIL FOR THE PURPOSE, TO THE PROPOSAL TO BASE RESERVE REQUIREMENTS OF A MEMBER BANK ON THE CHARACTER OF THE BANK'S DEPOSITS RATHER THAN ON THE LOCATION OF THE BANK?_____________________________________________________________ E. E. Brown asks Fleming, as Chairman of the subcommittee of the Council on t h is su b je c t, to comment on th is item on the agenda. Fleming. The subcommittee of the Council was confronted with the consideration of two q u estion s: (1) Could the uniform reserve proposal be changed to elim inate the problems with which the l i v e stock banks were confronted; and (2) What could be done to meet the problem of higher re s e rv e s which would be required of a number of country banks. A meeting was held in Kansas City regarding which Mr. Beals has p r e v io u s ly reported. Beals s t a t e s that at the Kansas C ity meeting i t was agreed that the Federal Reserve S t a f f was to t r y to find solutions fo r some of the problems r a is e d . R ep resen tatives of the Federal Reserve banks and of the liv e s t o c k banks were present. No word has been received from the Federal Reserve S t a f f since that meeting. Fleming s t a t e s th at he talked with Woodlief Thomas of the S t a f f , and Thomas did not think i t was advisable to go any fu rth er with th is reserve proposal at p rese n t. Thomas did not know the item was on the agenda. This item may have been put on the agenda fo r the purpose of opening up the whole question of re s e rv e s , although a top s t a f f man, Woodlief Thomas, b e lie v e s co n sid eration of th is subject should be held In abeyance. Hemingway read the follow ing report which was adopted by the Advisory Committee on S p e c ia l A c t i v i t i e s of the American Bankers Association; MI t was unanimously agreed by the Committee to recommend that in view o f the present c r i t i c a l foreign situ a tio n , which requires fu llest cooperation by the banks, any plan fo r changing the method of determining bank r e s e r v e s , such as the Uniform Reserve Plan outlined by the S t a f f of the Board o f Governors of the Federal Reserve System, or the S p e cial Reserve Plan providing compulsory investment by the tanks in government s e c u r i t i e s , would be disturbing to the banks and the economy, and that i t would th erefo re be much more e f f e c t iv e to adhere to the presen t system of determining reserve s, which is so *ell understood and i s working without serious f r i c t i o n . ” E. E. Brown. Hemingway. The re so lu tio n apparently favors the present plan. Yes, th at is the in ten t. E. E . Brown questions whether modest increases in the interest rate w ill m a te r ia lly r e s t r i c t cred it or that Regulation W, with the p re s e n t terms, w i l l g r e a t ly c u r t a il c red it. Some increase in reserve requirements may be found necessary I f the inflationary trend con tinues. I t may be d e sira b le in the Council's memorandum to follow the suggestion of the A.B.A. resolutio n , which Hemingway has read, of keeping the present reserve method, although it may be considered unfair to the c e n t r a l reserve c i t y banks and to some reserve city banks. Brown s t a t e s th at i f the sp ecial reserve idea Is adopted he would not favo r a s p e c ia l type of security for the special reserve, but would fa v o r regular short-term issues for the special reserve. He believes i f a s p e c ia l reserve should be approved that it would be undesirable to have one type of issue for the public and a different type of issu e fo r the sp e c ia l reserve. Fleming b e lie v e s the sp e c ia l reserve idea is bad because it opens the way to the s o c ia liz a t io n of banks. He agrees with E . E . Brown that any in crease in reserves should be made on the basis of the present plan* that i s , c e n t r a l reserve, reserve, and country banks rather than to in s t i t u t e a sp ecial reserve. J . To Brown comments that the idea of the Comptroller that a bank should not have r i s k a s se ts to c a p ita l in excess of a certain ratio is approaching the s p e c ia l reserve backwards and in a sense amounts to the same th in g . Hemingway s t a t e s that the Comptroller's idea is to take the total a s s e t s , deduct the cash and governments and c a ll the other assets ’’r i s k a s s e t s . ” He understands that the ra tio which has been discussed is 6 or 6|- times the c a p it a l. E. E. Brown says th a t Robertson did not mention the 6 or 61ratio in his prepared speech before the American Bankers Association Convention, but did mention the r a tio in a special conference with questions and answers. I f the banks are faced with an increase in reserves, no i n t e r e s t would be paid on cash reserves. With a special reserve, in t e r e s t would be paid. I t is possible to have a special reserve with re g u la r short-term governments e lig ib le for the reserve, or a sp e c ia l r e s e rv e w ith only a p a rtic u la r type of security issued for this r e s e rv e . Brown favo rs the cash reserve, despite the loss of in te r e s t , over e it h e r type of sp ecial reserve, because of his fear of what a s p e c ia l reserve might eventually lead to for the bank ing system. Bucklin asks i f Brown is speaking of a reserve over and above the present maximum l i m i t s . E . E . Brown s t a t e s that he is speaking of a reserve over the Present maximum i f a higher reserve should temporarily become neces sary. Fleming. I f i t becomes necessary, Fleming favors a temporary increase in cash re s e r v e s follow ing the 1948 pattern. He does not favor burying the uniform reserve plan, but at present he believes is not d e s ir a b le to change the method of determining reserves. - 4 Eo E . Brown s t a te s that in the memorandum of the Council to the Board, the Counci 1 may point out that under the uniform reserve proposal o v e r - a l l reserve requirements would be reduced. It would n e c e s s a r y to reduce reserve requirements for the country banks in order to obtain adoption of the proposal. With the present in flationary trend any reduction in reserves is undesirable. In addition, the liv e s t o c k banks have been dealt with unfairly in the S t a f f p rop osal, and the S t a f f has presented no formula for meeting the problem of the liv e s to c k banks. I f there is to be an increase in the maximum sta tu to ry reserves, i t should follow the present plan under which reserves are based upon the c la ssifica tio n of banks as c e n t r a l re s e rv e , reserve, and country banks. The memo randum of the Council to the Board may also state the Council is unanimously o f the opinion that i f any Increase in the maximum statutory re se rv e s i s c l e a r l y necessary, the increased reserves should follow the p a tte rn of 19 ^8 , with authority given to increase reserves f o r a period not to exceed 2? years so Congress could have the rig h t to review the authority,, Moreover, before consider ing any increase in the maximum statu tory reserve requirements, careful study should be made of the e ffe c t of the regulation of consumer c r e d it , includ in g a tightening of the consumer credit regulation, and the e f f e c t o f the regulation of real estate credit. ice. Potts asks whether the Council favors laying this proposal on Bucklin thinks i t i s necessary only to say that at the present time the Council does not favo r a change to the uniform reserve proposal. Ray. Does the Council favor an immediate increase in reserves over the present l e g a l maximum reserve requirements? Eo E, Brown. The Council only favors an increase in the max imum sta tu to ry re s e rv e s i f the fin a n c ia l situation c le a rly makes an increase d e s ir a b le . In that event, the increase should follow the present method o f determining re se rv e s. IN ACCORDANCE WITH THE DISCUSSIONS BETWEEN CHAIRMAN MCCABE AND PRESIDENT BROWN, IT IS UNDERSTOOD THAT THE COUNCIL WILL BE PRE PARED TO DISCUSS THE REDUCTION TO TWO DAYS OF THE MAXIMUM DEFERMENT FOR CASH ITEMS ___________ _ Eo E. Brown reads item two on the agenda and states that the Board of Governors had voted to put into practice the reduction to two days of the maximum deferment fo r cash items. Brown had sug gested to the Board th at the actu al adoption of this time schedule should be d eferred u n t i l the Council could discuss the matter. Under present c o n d itio n s, anything that increases a v a ila b ilit y adds to in f la t io n . The Chicago banks are not enthusiastic about the proposal but might not fig h t i t . The proposal is uneconomic and unsound as i t g iv e s c r e d it to an item before i t is actually collected. Congdon. I t Is uneconomic and unsound. - 5 - E . E. Brown. The Board of Governors believes i t would save a great deal of bookkeeping. Fleming. I t means that national companies would have funds available to them before they were co llected , and their treasurers would n a tu ra lly take advantage of that situation. Lochead, No matter how the Council votes, the Board w ill p ro b a b ly adopt the procedure. J . T. Brown p resen ts fig u re s showing that the float in the with the two day plan would be increased around $100 million. He states that the Board ta lk s on one hand against inflation and then on the other hand argues fo r th is measure which is inflationary. A number of the d i s t r i c t s have two day a v a il a b i li t y within the d is tr ic t s , prom a s e l f i s h standpoint, h is bank would probably be helped, but he believes the procedure would be unsound. System Flemingo A v a i l a b i l i t y should be as prompt as it is physically possible to make it * Immediate a v a i l a b i l i t y would mean keeping a credit f i l e on e v e ry name. Ray. sound. The Board could go to one day as e a s ily as two days. B u ck lln . The proposal i s in fla tio n a ry and economically un E. E. Brown. The Council does not object to a time schedule which is a c tu a l. P resent time schedules have been shortened with improvements in tra n s p o rta tio n . A c it y in Maine obviously may not be able to c o l l e c t an item in two days in Arizona. The Council may state I t i s opposed to any plan which gives credit for funds not a c tu a lly c o lle c t e d . Apart from the fundamental proposition that an item should not be cred ited u n til i t has reached it s destin ation and has been c o lle c t e d , the proposed reduction to two days would r e s u lt In more f l o a t and in more in fla tio n . #*#*•**#**#■ ***** E. E. Browns In connection w ith the r e s t r i c t i o n of bank credit Brown asks who should take the lead in obtaining voluntary cooperation to cur ta il c re d it in accordance with the provisions of Public Law JJk. Fleming b e lie v e s i t ad visab le to ask the Board what steps it has taken. He a ls o su ggests that he w i l l ask Stonier about A. B. A. participation in the general program fo r the restric tio n of bank credit. The meeting adjourned at 6s05 P»M. - 6 THE COUNCIL CONVENED AT 10:00 A.M.,ON OCTOBER 2, 1950 IN ROOM 932 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 Council continued I t s off-the-record discussion of the previous day on the re la tio n sh ip of the Board of Governors to the Treasury, In t e r e s t ra te s on government obligations^ the rediscount ra te , open market operations and other related subjects were in cluded in the d is c u ss io n . The Council prepared and approved the attached Confidential to be sent to the Board of Governors relative to the Agenda fo r the jo in t meeting of the Council and the Board on October 3, 1950. The Memorandum was delivered to the Secretary of the Board of Governors at 1 1 : 5 0 A.M. on October 2, 1950. It w ill be noted that each item of the agenda i s lis te d with the comments of the Council on the item. Memorandum The meeting adjourned at 12^00 a. M. CONFIDENTIAL MEMORANDUM TO THE EOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON OCTOBER 3, 1950 1, Vhat f u r th e r c o n s id e ra tio n has been given by th e C ouncil, or the S p e cia l Com m ittee a p p o in te d by th e C ouncil fo r th e pu r pose, to th e p ro p o sa l to b ase re s e rv e req u irem en ts of a mem ber bank on th e c h a r a c te r o f th e bank’ s d e p o s its r a th e r than on the lo c a tio n o f th e bank? The Council has c o n sid e re d f u r th e r th e p ro p o sa l to base re se rv e r e quirements of a member bank on th e c h a r a c te r o f th e b a n k 's d e p o sits ra th e r than on the lo c a tio n o f th e bank. When th e p ro p o sa l was d iscu ssed w ith the Board in F eb ru ary , 1950, i t d ev elo p ed t h a t one o f th e f i r s t m a tte rs requiring c o n sid e ra tio n would be th e problem c o n fro n tin g th e liv e s to c k banks. No form ula o r ag reem en t in p r in c ip le has so f a r been developed fo r meeting th is problem . In a d d itio n , u n d er th e p ro p o sa l a c o n sid e ra b le p e r centage of country banks w ould have been re q u ire d to m ain tain h ig h er r e serves i f to ta l o v e r - a ll r e s e rv e s a re m a in ta in e d a t th e p re s e n t le v e l. I t vas apparent th a t to o b ta in a c c e p ta n c e o f th e p ro p o sa l from th e country banics i t would be n e c e s sa ry i n i t i a l l y a t l e a s t to reduce o v e r - a ll re s e rv e s. With present in f la tio n a r y tr e n d s , a re d u c tio n in o v e r - a ll re se rv e s would obviously be u n d e s ira b le . In view o f p r e v a ilin g u n s e ttle d c o n d itio n s , any p ro p o sal fo r chang ing the method of d e te rm in in g bank r e s e rv e s would be d is tu rb in g to th e banking system a t a tim e when th e com plete c o o p e ra tio n of th e banks is necessary to th e e f f i c i e n t f u n c tio n in g o f th e economy. The method now used to determ ine r e s e rv e s i s th o ro u g h ly f a m ilia r to th e banics, and th e banking system has f o r many y e a rs o p e ra te d e f f e c tiv e ly under i t . The Council th e re fo re does n o t fa v o r a change to th e u niform re s e rv e p ro posal a t th is tim e. Before any s te p s a re ta k e n to r e q u e s t a u th o r ity to in c re a se maximum statutory re se rv e re q u ire m e n ts , th e r e s u l t s o f th e re g u la tio n o f consumer credit, in clu d in g more s tr in g e n t consum er c r e d it r e g u la tio n , and th e r e sults of the re g u la tio n o f r e a l e s t a te c r e d it should be stu d ie d and ev alu ated. C ooperative v o lu n ta ry r e s t r i c t i o n s in th e e x te n sio n o f i n f la t io n ary c re d it, a u th o riz e d and in te n d e d by th e D efense P ro d u ctio n Act o f 1950 the P re s id e n t's d ir e c t iv e o f Septem ber 9 , 1950, g iv in g c o n tro l over agreements fo r such v o lu n ta ry r e s t r i c t i o n s to th e Board, should be t r i e d v i th the co o p eratio n o f b anking and o th e r f in a n c ia l a s s o c ia tio n s . We re c onanend th a t prom pt s te p s be ta k e n by th e Board to i n i t i a t e and stim u la te such voluntary ag reem en ts. -2- If c o n d itio n s should th e r e a f te r c le a rly n e ce ssita te any change in maximum s ta tu t o r y re s e rv e req u irem en ts, the Council is unani mously of the o p in io n t h a t no s p e c ia l re se rv e in any class of government securities s h o u l d be a d o p te d , b u t th a t th e p a tte rn used in 1948 should be followed, ex ten d in g tem p orary a u th o rity fo r increased maximum cash reserves, w ith th e p re s e n t d iv is io n f o r re se rv e purposes of cen tral re serve, reserv e and c o u n try banks c o n tin u ed . Any a u th o rity granted should be for a p eriod n o t to exceed two and a h a lf y ears so Congress vould have the right to review th e m a tte r. economic 2. In acco rd an ce w ith th e d is c u s sio n s between Chairman McCabe and P re s id e n t Brown, i t i s understood th a t the Council w ill be p rep ared to d is c u s s th e re d u c tio n to two days of the maxi mum d eferm en t f o r c ash ite m s. The C ouncil b e lie v e s in tim e sch ed u les which a re a ctu al and not a r t i fic ia l. A v a ila b ility sh o u ld be a s prom pt as i t is p o ssib le to maice i t vith the b e st tr a n s p o r ta tio n f a c i l i t i e s , b ut i t is an unsound p ractice to give c re d it fo r re s e rv e p u rp o se s f o r an .item before i t is a ctu ally col lected. A part from th e fu n d am en tal p rin c ip le th a t an item should not be credited u n ti l i t has re a c h e d i t s d e s tin a tio n and has been co llected , the proposed re d u c tio n to two days o f th e maximum deferm ent for a ll cash items vould r e s u lt in more f l o a t , and th u s in more in f la tio n a t a time when ef forts are b ein g made to c u rb in f la tio n a r y tre n d s. The Council therefore does not fav o r th e p ro p o sed re d u c tio n to two days of the maximum deferment for a ll cash ite m s. - 7 THE COUNCIL CONVENED IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING AT 2:20 P.M. ON OCTOBER 2, 1950. ALL MEMBERS OF THE COUNCIL WERE PRESENT EXCEPT MR. LOCHEAD AND MR. WOODS. MR. DE WITT T. RAY SERVED AS AN ALTERNATE FOR MR. WOODS. Dr. Woodlief Thomas introduced a number of members of the Board S t a f f who made a v is u a l-v e r b a l presentation on "The Current Economic S itu a tio n and Outlook.” Copies of the discussion were distributed to members o f the Council. The meeting adjourned at 3:25 P.M. - 8 ON OCTOBER 3, 1950, AT 10;45 A.M. THE FED ERAL 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. ALL MEMBERS OF THE COUNCIL WERE PRESENT EX CEPT MR. POTTS AND MR. WOODS. MR. DE WITT T. RAY SERVED AS AN ALTERNATE FOR MR. WOODS. THE FOLLOWING MEMBERS OF THE BOARD OF GOVERNORS WERE PRESENT; CHAIRMAN MC CABEj GOVERNORS ECCLES, SZYMCZAK, EVANS, VARDAMAN, NORTON AND POWELL. MR. CARPENTER, SECRETARY OF THE BOARD OF GOVERNORS, WAS ALSO PRESENT. WHAT FURTHER CONSIDERATION HAS BEEN GIVEN BY THE COUNCIL, OR THE SPECIAL COMMITTEE APPOINTED BY THE COUNCIL FOR THE PURPOSE, TO THE PROPOSAL TO BASE RESERVE REQUIREMENTS OF A MEMBER BANK ON THE CHARACTER OF THE BANK'S DEPOSITS RATHER THAN ON THE LOCATION OF THE BANK? _______________________ _____ E. E. Brown reads Item 1 . on the agenda and the conclusions of the Council as expressed in the C onfid ential Memorandum to the Board attached. He s t a t e s th at the C o u n cil’ s Sub-committee of which Mr. Fleming is Chairman, arranged a meeting with rep resen tatives of the Board S t a f f and the l iv e s t o c k banks. The Board S t a f f was to p re pare a report in connection with the discussion that took place at the meeting, p a r t i c u l a r l y in r e l a t i o n to a p ossible solution for the problem which the l iv e s t o c k banks would face under the uniform r e serve proposal. This report has not yet been received. In ad d ition , the fa ct that a number of country banks would have t h e ir reserve s in creased would undoubtedly s t i r up the situ a tio n p o l i t i c a l l y . Brown states that the Council may attach more sig n ific a n c e than the Board to the idea of vo lu n tary cooperation, but the Council b elie v e s that it is of importance. The American Bankers A ssociation can be of help, but the r e s t r i c t i o n of c r e d it through voluntary cooperation needs the a s s is ta n c e of the Investment Bankers A ssociation, insurance companies, and o th e rs. Brown urges the Board to take action in connection with the p ro v isio n s of The Defense Production Act of 1950. The Council b e lie v e s th at i f an in crease in the present maximum statutory re se rv e s i s c l e a r l y req u ired, i t would be b e tte r to have cash re s e rv e s, even i f they cost more to the banks. McCabe asks whether the Council b e lie v e s the uniform reserve Is correct in p r in c i p l e , though i t may not be the righ t time to adopt i t . E. E . Brown. The c e n t r a l reserve c i t y banks and most reserve ° it y banks would probably favo r the uniform reserve plan. Many of the country banks would undoubtedly not favor the plan. The Council - 9 it s e lf is d ivid ed . I f the plan could be worked out to s a t i s f y the banks and the liv e s t o c k banks, i t might be accepted. country McCabe. Looking a t the plan o b je c t iv e ly , w i th o u t a s e l f i s h v ie w p o in t^ i s i t a d e s ir a b le change? Hemingway b e lie v e s many banks would favor the plan, i f the Board i t s e l f would look at i t o b je c t iv e ly . A number of bankers in his D is t r ic t f e e l th a t the Board would go to any length to get mem bers for the System, d e sp ite any in ju ry that might be done to the correspondent banking b u s in e s s . McCabe asks whether the bankers are ju s t i f i e d in th is b e l i e f . Hemingway. Many o f them are sin cere in th e ir fe e lin g . Fleming. Two d i f f i c u l t problems were presented in the uniform reserve plans ( 1 ) The l iv e s t o c k banks were d ealt with u n fa ir ly ; and (2) A number of country banks would have higher reserves. A committee c o n s is tin g of re p re se n ta tiv e s of the Board S t a f f and the livestock banks d iscu ssed the problem o f the liv e s to c k banks, but the S t a f f has not submitted any report fo r meeting the p a r tic u la r problem of the l i v e s t o c k banks. Beals. The purpose of the meeting of the S t a f f and the repre sentatives of the l iv e s t o c k banks was in part to determine whether inter-bank d ep o sits o f l iv e s t o c k banks were d iffe r e n t from the in t e r bank deposits of other banks. The S t a f f said they would consider the views of the l iv e s t o c k banks, but they were not sure that the livestock banks had proved t h e i r case. Fleming. Dr. Thomas sa id he b elie v e d , in view of the Korean situation, that t h is was not the time to introduce the plan, p a rtic u la rly because a number o f country banks would oppose i t . McCabe. A ft e r the e le c t io n , i f Congress asks the Board's opin ion of the uniform re se rv e p lan , what does the Council believe the Board should express as i t s view. Fleming. Even i f the liv e s t o c k bank problem is met, a reduc tion of reserves now to meet the objections of country banks would be unwise in view of in f l a t io n a r y trends, Jackson s t a t e s that E. E. Brown may be relu ctan t to speak, because of the p o s it io n of his bank as a cen tral reserve c i t y bank. Jackson cannot understand why there are three c l a s s if ic a t io n s of banks in New York c i t y —’C e n tr a l re se rv e , reserve c it y and country. The gain in in ter-b an k d ep o sits has not been in the cen tral reserve city banks. - 10 E. E. Brown b e lie v e s the present b asis of determining reserves However, the p re s e n t plan has worked e f f e c t i v e l y and the banks understand i t . Iq an accident h i s t o r i c a l l y , and i t has no lo g ic . Powell. I f many country banks are penalized, perhaps the fo rm u la needs adjustment. Fleming. The m a jo rity of country banks would not be a ffe c te d , but the minority would be very vo cal. H em in g w ay . I f the Board f e e l s there are in e q u a litie s in the r e s e rv e s at p re se n t, the Board can ad just them. Szymczak. The Board cannot meet the s itu a tio n . One bank in a city may have correspondent bank business and another one may not have i t . The Board cannot meet that problem with i t s present powers. We are d iscu ssin g something about which we do not propose to do anything, McCabe in d ic a t e s to Szymczak that he is not sure that the Board w i l l not do anything. McCabe s ta te s that Powell is the member of the Board resp o n sib le f o r th is general su bject. Fleming thinks the problem has p o l i t i c a l aspects as related to country banks<, E, E. Brown asks whether the Board has started any action on voluntary cooperation under Public Law 774. McCabe. The law has ju s t passed. The Board b e lie v e s i t might start some a c tio n l o c a l l y , say in Chicago, as long as E. E. Brown suggested the id e a . McCabe su ggests that Harold Amberg or Prochnow work with some member o f the Board in ca rry in g out the idea fo r voluntary cooperation. E. E, Brown says i t i s im possible to s t a r t with Chicago alone, as Chicago banks compete p a r t i c u l a r l y with New York, P hilad elphia and Boston, He su ggests that the Board work with the American Bankers A sso cia tio n , McCabe asks Powell to comment on the subject of voluntary cooperation. Powell s t a t e s th at the m atter is nebulous in his mind. He asks ju st what type o f loan the Council has in mind. He a lso asks whether S to n ier i s f a m i l i a r with the type o f loans that should be restricted . Fleming. The F e d e ra l Reserve banks in t h e ir resp e ctive d i s trict s~To\IXa form committees o f commercial bankers, investment bankers and insurance men. - 11 E « Eo Brown s t a t e s that committees could be set up something like the informal c a p i t a l issu e s committees of World War I on which he served* He b e lie v e s committees would be needed in each Federal Reserve D i s t r i c t to meet once or twice a week. Perhaps a sub committee could be formed f o r a l l D is t r ic ts to lay down the rules as to the types o f loans to be re s tric te d . The d iffic u lt y is in long-term loans and not short-term loans. Some loans are clearly in flatio n ary! some are not in fla t io n a r y i and some are in a twilight zone. Brown su ggests as members of the committees in the D istricts, commercial bankers, investment bankers. Insurance men and represen tatives of borrowerso The p resid ent of the Federal Reserve Bank in New York, f o r example, might contact the head @f the clearing house in New York f o r suggestions as to commercial bankers to serve. In the beginning at l e a s t the r e s t r ic t io n s would apply principally to loans of la rg e amounts and longer maturity. McCabe re p o rts th at the Board is going forward with its regu lation of r e a l e s t a t e c r e d it and hopes to have Regulation X out in a matter of days. The Board i s also studying the e ffe c t of Regula tion W and w i l l give i t more wb it e " i f necessary. He points out the increase th at has taken p lace in bank c re d it. Eo Eo Browno A la rg e part o f the increase in loans is in real estate loans. A number o f loans are also made to department stores for carrying t h e i r accounts re c e iv a b le . The reports showing the ex pansion of bank c r e d it include the loans made to department stores for carrying accounts r e c e iv a b le , but in other places the reports show the in cre a se in accounts rec eiv a b le, so that there is some duplication in the re p o r ts . Brown sta te s that cotton and wheat prices are higher and more money is required to carry these commod it i e s . Cotton i s moving to the m ills , whereas a year ago i t went into government loans * E c c le s . At th a t time the government borrowed so the total loans were the same. Eo Eo Brown. Some o f the funds of the government agency were obtained by the s a le o f s e c u r i t i e s . McCabe. Aside from Regulation W, Regulation X and voluntary agreements, what can the Board do to curb bank credit? Jackson. A la r g e amount of cre d it is going to finance com panies and t h i s area could be "cooled o f f . " E. E o Brown a ls o s t a t e s that a large amount of the increase in bank loans re p re se n ts loans to finance companies. Lochead asks regarding the status of Regulation X. - 12 - McCabe r e p l ie s that there are two principal restrictions: n ) the down payment % and (2) the maturity. He states that Norton has done a thorough job. Each group that comes in to discuss the provisions o f t h is Regulation is asked to vote confidentially in dicating what r e s t r i c t i o n s i t would estab lish . Norton. Mr0 F o le y has stated that the restriction s should be heavy. What i s heavy or lig h t is a matter of opinion. One in surance company argued fo r heavy re s tric tio n s and a labor group argued fo r l i g h t r e s t r ic t i o n s * When the Board examined the con fid en tial votes o f t h e two, they found that the labor group’ s soc a lle d lig h t r e s t r i c t i o n s were heavier than the insurance company's s o - c a l l e d h e a v ie r r e s t r i c t i o n s . E. Eo Browno I s i t f a i r to ask by what percentage residential building may be c u t ? Norton r e p l i e s that they hope to eut i t from approximately l£ m illion s t a r t s t h is year to 800,000 or 900,000 next year. Norton reports that no one who w i l l d iscuss Regulation X with the Board believes i t w i l l have any e f f e c t fo r fiv e or six months^ because of advance commitments in the construction f ie l d . E c c le s , What the Board and the Council are talking about is in flation -~ a co n d itio n of permanent pressure for in flatio n . The country faces a s i x t y to se v e n ty -fiv e b illio n dollar budget. In flation must be stopped by a proper f i s c a l policy of the government. The country a ls o needs a tig h t bank loan p olicy. The Board should stop furth er expansion o f bank c r e d it , Any bank loan, regardless of i t s purpose, whether fo r production or not, increases the money supply. Too much money in r e la t io n to the supply of goods makes in flatio n . The Board cannot do much with f i s c a l p o licie s, except to advise. What the Board can do Is to control bank credit. Eccles has very l i t t l e hope f o r the voluntary method among 15,000 banks. The uniform re se rv e method i s good .housekeeping and it is more e q u ita b le , but i t does not meet the problem. You may eliminate the cen tral re se rv e c i t y c l a s s i f i c a t i o n and c a l l the large c itie s a ll reserve c i t i e s , but you w i l l never get a l l of the banks on the same b a s is . The only way you can meet the problem is by more re serves. The s p e c ia l re se rv e Is one plan. I t provides a special demand fo r sh ort-term paper at a sp e c ia l rate. It does not affect the rediscount r a t e . W iggins 5 position puts the Federal Reserve System at the w i l l o f the Treasury. The Federal Reserve System must support the government program, and so the resu lt of Wiggins' idea is that the Fed would pump reserves into the System. I f the Federal Reserve System must support government bonds with the rates Pegged, i t p la ce s the Fed eral Reserve System in the position of in creasing re se rv e s in a very in fla t io n a r y situ atio n . E. E. Brown. The s p e c ia l reserve increases reserves even i f you have two r a t e s . - 13 - E c c le s » W ith s p e c i a l r e s e r v e s th e r e m ust be in c r e a s e d t a x e s . E. Eo Brown, You a ls o have wage increases to consider. E c c le s„ Wage in cre a se s must also stop i f you are to curb i n flation! I t i s d i f f i c u l t to say whether p rice increases or wage increases come f i r s t . I t i s n ecessary to have a sound f i s c a l p o lic y and a sound Federal Reserve or monetary p o lic y . I f we do not stop inflation, we are going in to a g a rriso n sta te with a l l types of con trols., as t h is i s a permanent in fla t io n a r y s itu a tio n . We are only kidding ou rselves, I f we f a i l to stop bank c re d it expansion, and we face the lo ss of democratic c a p ita lism . Flemingo profits ? Has any study been made as to the e f f e c t of excess Eccles s t a t e s th at he does not know what kind of excess profits tax there w i l l be. Jacks on o I f you stop bank lo an s, do you not stop production, and thus in ju re the economy. E c c le s . We know th a t the supply of money i s e x c e ssiv e w ith a normal velo city ,. With g r e a t e r v e l o c i t y i t would be even w orse. Bank credit should not in c re a se w ith p r ic e s , but with production. Bank cred it has gone up f a s t e r than production, J . T. Brown, The government has re le a se d cotton and Southern bankers have had to in cre a se t h e i r loans to take up the cotton . E c c le s . As Southern bankers Increase t h e i r loans the Commodity Credit Corporation g e ts money to pay o f f i t s o b lig a tio n s , so th a t over the e n tir e country the t o t a l c r e d it should not in c r e a s e , Bucklin b e l ie v e s th a t the Board has an important new instrument in the new law p ro v id in g f o r v o lu n ta ry agreements. He does not believe that the only way to curb I n f l a t i o n i s to r a i s e r e s e r v e s . He believes the banks want to c o n tr o l c r e d it even though there are 15,000 banks. With t h i s new instrument the Board can take the in itia tiv e to g et la rg e banks to r e s t r i c t larg e lo an s. E a E. Brown th in k s the Board should work w ith the American Bankers A sso cia tio n on the m atter o f v o lu n ta ry agreem ents. Congdon s t a t e s th a t th ere are three types o f c r e d it th at need controls [1 ) loans to u ltim a te consumersj ( 2 ) loans f o r produc tive purposes th a t are not e s s e n t i a l ; ( 3 ) loans to b u ild up e x cessive in v e n to r ie s . R e g u la tio n W should cover number one. Volun tary cooperation through committees should reach number two, and number three can be reached by a program o f the American Bankers Association. - 14 E c c le s ^ I s th e D ep artm en t o f Commerce c o n tr o llin g in v e n to ry ? McCabe i s a larm ed o v e r th e p o s s i b i l i t y o f such in v e n to r y co n trol* as i t may le a d t o c o n t r o l o f th e com p lete econom y. W ashington is in an e m o tio n a l s t a t e and c o u ld head to com p lete c o n tr o l. Fleming. What would the attitu d e of the public be i f banks were required to hold government bonds. b o n d s. Szym czak. The law d o e s n o t s t a t e th e y m ust h old governm ent F lem in g . The s p e c i a l r e s e r v e w ould p ro v id e fo r i t . E c c le s „ Under th e s p e c i a l r e s e r v e a bank co u ld keep e it h e r cash or s h o r t-te r m g o v e r n m e n ts. Fleming. There does not seem to be genuine enthusiasm by the Board fo r the idea of vo lu n tary cooperation. E. E. Brown b e lie v e s the matter must be discussed with the American Bankers A sso c ia tio n . Vardaman. There have been two examples of cooperation* There was the American Bankers A sso cia tio n plan and the Broderick plan on mortgage fin an cin g in New York s t a t e . The l a t t e r plan was so sa tisfacto ry that a l l those who took part were indicted. This would not occur under the present law. Evans wishes to know what the C ouncil’ s views are on tightening Regulation W. The terms as announced are t ig h te r than the American Bankers A sso cia tio n committee recommended. E c c le s . The p u b lic is r a p id ly losin g confidence in the d o lla r . Dis-savings i s going on. I f the in f la t io n a r y trend i s n ’ t h it hard now, i t can develop to dangerous proportions. I f the people go out of d ollars in to goods* we s h a l l have tro u b le. There are even some persons who say that i f the banks tigh ten cre d it terms to require bigger down payments s the people w i l l take more money out of th e ir savings accounts to make the down payments. Consequently* savings would f a l l . Hemingway asks why the Board d oesn't announce t ig h te r terms, i f the"~objective i s sh arp ly to r e s t r i c t consumer c r e d it. McCabe. The Board tightened the terms even more than the bankers and fin an ce companies wanted. Fleming i s in c lin e d to fa v o r cu ttin g the terms to f if t e e n months^rather than to eighteen months. I f the Board reduces the terms to eighteen months, the public may buy more in an tic ip a tio n of a tightening o f the terms to f i f t e e n months. - E. Ej. Brown. fifteen months. 15 - I f E ccles i s correct, the Board should go to E v a n s , E ig h ty per cent o f the automobile sales prior R egu lation were on more fa v o r a b le terms than the Regulation which were announced* to the ¥ terms McCabe. I f the Board tightens terms further, everyone w ill be down to Washington complaining, the automobile dealers, the Congress men and everyone e l s e 0 IN ACCORDANCE WITH THE DISCUSSIONS BETWEEN CHAIRMAN MC CABE AND PRESIDENT BROWN, IT IS UNDERSTOOD THAT THE COUNCIL WILL BE PREPARED TO DISCUSS THE REDUCTION TO TWO DAYS OF THE MAXIMUM DEFERMENT FOR CASH ITEMSo ________________ ____________________________________ E. E. Brown reads Item I I on the Agenda. It is nonsense to say a bank in Maine could c o lle c t an item in Arizona, in two days. At a time when the Board speaks about increasing reserves i t is il l o g ic a l to take a step that adds to flo a t and thus to the in f la tionary trend. McCabe asks Powell to comment, as Powell made the report to the meeting of the p re sid e n ts of the Federal Reserve banks dealing with this subject* Powell* The F ed eral Reserve banks have gradually reduced their time schedules * F igu res taken o f f in the summer of 19% indicate that changing from three to two days would only add $130 million daily to the f l o a t * Ever since 1916 there have been inequalities between D i s t r i c t s * Boston, New York and Philadelphia have a two day deferment between t h e i r D is t r ic t s * Recently some other Federal Re serve banks have gone to a two day deferment, either within the d i s t r i c t , or w ith in an area in the d is t r ic t * There are three bene f i t s of a two day deferments ( 1 ) i t eliminates inequalities now existin g between banks 1 ( 2 ) i t reduces the sorting problem of banks j (3) i t reduces the c l e r i c a l work of the Federal Reserve banks. There were 4,643 banks in 1949 that did not send any deferred items to the F e d e ra l Reserve Banks* E . E * Brown agrees that the adoption of this idea w ill not up set the n atio n al economy, but he s t i l l believes the idea is unsound. He does not agree th a t $130 m illio n is in sig n ific a n t. I f the idea of giving c r e d it b efore i t is due i s f i n a l l y accepted, the banking system is accepting an unsound id ea. Ringland s t a t e s that the e f f o r t s of the Federal Reserve System to cut down time schedules in re la t io n to improved transportation is appreciated. However, by g iv in g cre d it to an item before it is due, treasurers of n a tio n a l companies w i l l be induced to withdraw funds not a c tu a lly c o lle c te d * These treasurers have very sharp pencils. Powell thinks the Open Market Committee would use the funds i f the~treasurers d id n 5t . - 16 R in glan d b e l i e v e s th e t r e a s u r e r s w ould g e t th e r e f i r s t . Congdon. This i s a p p a r e n tly o n ly a s te p t o im m ediate a v a i l a b ility . E c c le s s t a t e s t h a t $ 130 m i l l i o n i s s m a ll in r e la t io n to th e to ta l volume o f b u s in e s s . J . To Brovm s t a t e s th a t the p r in c ip le of adding $130 m illio n daily to the i n f l a t i o n a r y fo rc e s i s bad at a time when the Board wishes to make e f f o r t s to combat i n f l a t i o n . Eccles b e lie v e s the country banks would favor i t , but the represents l a r g e l y c e n t r a l reserve and reserve c i t y banks. The Council n a t u r a lly opposes i t , because the members of the Council have correspondent bank b a la n c e s. E ccle s sta te s that he must look at it from the gen eral p u b lic good. When and i f he becomes a p riv ate banker, he w i l l probably look at i t from the standpoint of the p riv ate banks. Council Fleming asks whether the Board wishes the Council to contact the American Bankers A sso c ia tio n on voluntary cooperation. McCabe su ggests th a t the C ouncil, through Fleming, contact the American Bankers A sso c ia tio n regarding the matter of voluntary cooperation among banks. Fleming wishes the Board could have the presidents of the Federal Reserve banks, r e p r e s e n t a t iv e s o f the American Bankers Association, and the proper government o f f i c a l s present at a meeting so a l l would be informed. The meeting adjourned at I s 32 P.M. The next meeting o f the Council w i l l be held November 19* 20 and 21, 1950 . - 17 THE COUNCIL CONVENED IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING AT 2;40 P.M. ON OCTOBER 3o ALL MEMBERS OF THE COUNCIL WERE PRESENT EXCEPT MESSRS, POTTS, JACKSON AND WOODS, MR, DE WITT T. RAY SERVED AS' AN ALTERNATE FOR MR. WOODS. The members of the Council d iscussed in form ally the best method 0f m aking the agreements f o r volu n tary cooperation e f f e c t i v e . The o p in io n was expressed th a t i t would be impossible to set up com m itte e s over the e n t ir e country that would determine whether every loan o f every t y p e - s h o r t or long term— was in f la t io n a r y . I t was f e l t that there were two id e a s which would be p r a c t i c a l . One idea was to set u p r e g io n a l or c a p i t a l issu e s committees in the la r g e r cities dealing w ith la r g e r loans o f longer m aturity. The other s u g g e s tio n was th at the American Bankers A sso ciation work out a g e n e ra l program urgin g banks to r e s t r i c t c r e d it to e s s e n t ia l pur poses. It was agreed th a t Fleming and Hemingway would t a l k with Stonier regarding the su b je c t o f vo lu n ta ry cooperation, and E. E. Brown would d is c u ss the m atter w ith James E. Shelton, by telephone. The meeting adjourned at 3 s 25 P.M.
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