The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
M I N U T E S OF MEETING of the FEDERAL ADVISORY COUNCIL October 8 'io, 1939 MINUTES OF M E E TIN G OF THE FEDERAL ADVISORY COUNCIL October 8, 1939 The third statutory meeting of the Federal Advisory Council for 1939 was convened in Room 836 of the Mayflower Hotel, Washington, D. C., on Sunday, October 8,1939, at 10:40 A.M., the Vice President, Mr. Loeb, in the absence of the President, in the chair. Present : Mr. Thomas M . Steele Mr. Leon Fraser Mr. Howard A. Loeb Mr. T. J. Davis Mr. Charles E. Rieman (Alternate for Mr. Robert M. Hanes) Mr. Edward Ball Mr. Edward E. Brown Mr. Sidney Maestre (Alternate for Mr. Walter W. Smith) Mr. John Crosby Mr. John Evans Mr. R. Ellison Harding Mr. Paul S. Dick Mr. Walter Lichtenstein District District District District District No. No. No. No. No. 1 2 3 4 5 District No. 6 District No. 7 District No. 8 District No. District No. District No. District No. Secretary 9 10 11 12 The Vice President announced that Mr. Walter W. Smith was ill and, therefore, unable to attend the meeting. It was unanimously voted to instruct the Secretary to send a telegram to Mr. Smith, expressing the regret of the members of the Council at his absence and wishing him a speedy recovery, with the hope that he would be able to be present at the next meeting of the Council. The Secretary reported that, in accordance with the request of the Board of Governors of the Federal Reserve System, information had been given the Board, as far as such was possible, regarding complaints of undue centralization in the System in so far as such appeared in the statistics collected by a committee of which Mr. Lewis B. Williams had been chairman. It was decided to discuss the “ easy money” policy in accordance with the request transmitted in the letter, dated August 18,1939, from the Secretary of the Board of Gover nors of the Federal Reserve System to the Secretary of the Council. The feeling was expressed by most of the members of the Council that it would be undesirable to present a formal recommendation, but that it might be well to draw up a memorandum to form the basis of a discussion with the Board of Governors at the joint conference of the Board and the Council. Mr. Brown was asked to prepare such a memorandum. A discussion took place regarding the proposed investigation of the banking system as directed in an act introduced by Senator Wagner (S. R. 125). It was decided to invite Mr. D. J. Needham, General Counsel of the American Bankers Association, to discuss the matter. However, it was found that Mr. Needham was out of the city and not expected to return for several days. As there was a general feeling that nothing would be done in regard to this investigation of the banking system prior to the next meeting of the Council, it was decided to postpone consideration of this problem for the present. 1 There was some discussion in regard to the ruling of the National Labor Relations Board in favor of the C. I. O. in the Bank of America case. Mr. Steele pointed out that in view of the recent decisions of the Supreme Court of the United States, it was, in his opinion, very doubtful whether any action by banks seeking to have the ruling changed would be advisable at this time. No action wras taken in regard to the bill passed by the Senate which would exempt inter-bank deposits from being subject to payments to the Federal Deposit Insurance Corporation. The members of the Council lunched together in Room 859 from 12:30 P.M. to 2:15 P.M. and then reconvened in Room 836. Discussion took place regarding the various proposed amendments to the Federal Home Loan Bank Act, as approved June 22,1932. Mr. Dick pointed out that branches of these banks would be in competition with all classes of savings banks. The Secretary read a memorandum submitted by Mr. Loeb, which was made a part of the records of this meeting. It was finally agreed that the Chair appoint a committee to report back regarding the amendments to the Federal Home Loan Bank Act at the next meeting of the Council. The Chair appointed the following committee: Messrs. Dick, Chairman, Steele, and Hanes. Mr. Brown submitted a memorandum on “ easy money” policy, which was discussed at length. It was decided to request Messrs. Brown, Fraser, and Evans to re-draft the memorandum and incorporate in it a preamble. It was, however, unanimously agreed that the memorandum expressed the views of the members of the Council. The meeting adjourned at 4:00 P. M . WALTER LICHTENSTEIN, Secretary. 2 MINUTES OF M E E TIN G OF THE FEDERAL ADVISORY COUNCIL October 9, 1939 At 10:05 A. M. the Federal Advisory Council convened in the Board Room in the Federal Reserve Building, Washington, D. C., the Vice President, Mr. Loeb, in the Chair. Present: Mr. Howard A. Loeb, Vice President; Messrs. T. M. Steele, Leon Fraser, T. J. Davis, C. E. Rieman, Edward Ball, E. E. Brown, Sidney Maestre, John Crosby, John Evans, R. E. Harding, P. S. Dick, and Walter Lichtenstein, Secretary. At the beginning of the meeting, Mr. Rieman was not present, but joined the meet ing at 10:25 A. M. The Secretary of the Council reported that, in accordance with instructions, he had sent a telegram to Mr. Smith. The Secretary read a draft on “ easy money” policy submitted by Messrs. Brown, Fraser, and Evans. A very exhaustive discussion took place regarding the memorandum submitted and many changes in detail were suggested. At 11:10 A.M . Dr. E. A. Goldenweiser, Director, Division of Research and Statistics, appeared before the Council and discussed the general financial and business situation. Dr. Goldenweiser left at 12:35 P. M. and the Council adjourned at 1:00 P. M. for luncheon with Chairman Marriner S. Eccles. The meeting reconvened at 3:40 P. M. Discussion continued regarding the memorandum embodying the views of the Coun cil on “ easy money” policy, and it was unanimously agreed to present the following at the joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System as representing the unanimous opinion of the members of the Council: “ In connection with further consideration of the ‘easy money’ policy, as suggested in the letter of the Secretary of the Board of Governors of the Federal Reserve System to the Secretary of the Federal Advisory Council, dated August 18,1939, the Federal Advis ory Council was led to examine the recent changes in the yields of corporate and Govern ment bonds. As to the general topic of extreme easy money, the Council reaffirms the views expressed in its recommendation to the Board of Governors, dated June 6,1939. “ While the Council fully recognizes the need in a grave emergency, such as that recently experienced, of taking steps designed to preserve an orderly market in Govern ment securities, it also believes that the market price of Government bonds should be allowed to find its natural level, free of official intervention, as rapidly as possible con sistent with an orderly market. “ The operations of the Open Market Committee, acting for the Federal Reserve banks, in maintaining an orderly natural market (as distinguished from a pegged market) should not be influenced by its judgment as to what the proper price level should be, but that level should be the result of general operations of willing normal buyers and sellers. Neither should it be influenced by any considerations of maintaining or extending the former policy of extremely easy money. 3 “ The Council believes that any policy of maintaining an orderly natural market in Government securities makes advisable the sale of the bonds and notes bought in the process of maintaining an orderly market as and when the free market will absorb them, and that these bonds and notes should not be withheld with a view to forcing the price of bonds back toward pre-September prices.” The meeting adjourned at 4:10 P. M. WALTER LICHTENSTEIN, Secretary. 4 MINUTES OF JOIN T CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM October 10, 1939 At 10:40 A. M. a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Marriner S. Eccles; Vice Chairman Ronald Ransom; Governors John K. McKee, Chester C. Davis, and Ernest G. Draper; also Messrs. Lawrence Clayton, Assist ant to the Chairman of the Board of Governors;Elliott Thurston, Special Assistant to the Chairman; Chester Morrill, Secretary of the Board of Governors; L. P. Bethea, Assistant Secretary of the Board of Governors; Walter Wyatt, General Counsel for the Board of Governors; J. P. Dreibelbis, Assistant General Counsel of the Board of Governors; L. P. Paulger, Chief, Division of Examinations; R. F. Leonard, Assistant Chief, Division of Examinations; Dr. E. A. Goldenweiser, Director, Division of Research and Statistics; E. L. Smead, Chief of Division of Bank Operations, and C. E. Parry, Chief of the Division of Security Loans of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. Howard A. Loeb, Vice President; Messrs. T. M. Steele, Leon Fraser, T. J. Davis, C. E. Rieman, Edward Ball, E. E. Brown, Sidney Maestre, John Crosby, John Evans, R. E. Harding, P. S. Dick, and Walter Lichtenstein, Secretary. The Secretary of the Council read the statement on “ easy money” policy appearing in the minutes of the meeting of October 9, 1939. A long discussion took place between the members of the Council and the members of the Board. The members of the Council presented some criticisms as to certain details in respect to the methods employed in carrying out the recent decisions of the Open Market Committee, but stated that they were in accord with the general policy adopted by the Open Market Committee during the recent emergency brought on by the outbreak of the European war. The principal criticism on the part of members of the Council was in respect to the requirement that for a time names of proposed sellers of Government bonds, if these were offered directly to the Federal Reserve banks, had to be revealed by the agent of the seller. Members of the Council felt that this might prevent a certain amount of entirely justifiable selling, and in so far as this was true, interfered with the establishment of an orderly natural market. Members of the Board of Governors stated that the memorandum of the Council was not critical and also declared that they were entirely satisfied with the answers made by individual members of the Council to various questions raised by members of the Board. In concluding, Chairman Eccles made a lengthy statement, explaining his position and what his policy in the past had been. The meeting adjourned at 12:30 P. M . WALTER LICHTENSTEIN, Secretary. 5 MINUTES OF M E E TIN G OF THE FEDERAL ADVISORY COUNCIL October 10, 1939 At 12:35 P. M . the Federal Advisory Council reconvened in the Board Room of the Federal Reserve Building, Washington, D. C., the Vice President, Mr. Loeb, in the Chair. Present: Mr. Howard A. Loeb, Vice President; Messrs. T. M. Steele, Leon Fraser, T. J. Davis, C. E. Rieman, Edward Ball, E. E. Brown, Sidney Maestre, John Crosby, John Evans, R. E. Harding, and P. S. Dick. It was unanimously voted to adopt the memorandum on “ easy money” policy as expressing the views of the members of the Council and to instruct the Secretary to place the statement upon the minutes of the Council. It was also unanimously voted to request each member of the Council to give a copy of this statement to his respective local Federal Reserve bank. The meeting adjourned at 12:50 P. M. WALTER LICHTENSTEIN, Secretary. 6 COPY October 2, 1939 COMMENTS ON THE AMENDMENTS TO THE FEDERAL HOME LOAN BANK ACT. HOME OWNERS' LOAN ACT OF 1933 AND THE NATIONAL HOUSING ACT Proposed in the 1st Session of the Seventy-sixth Congress I t seems e n t ir e ly w ith in the scope o f the Federal Advisory Council to review these amendments and to make su ita b le representations to ihe Board o f Governors o f the Federal Reserve System as the contents of the amendments are r e la t e d to nthe general a f f a i r s o f the reserve banking system” . The proposed broadening o f c re d it powers o f the federal mortgage-lending agencies would a f f e c t the reserve conditions of the re serve banks and the banking str u c tu r e as a whole. The proposed amendments are o b jectio n ab le on se v e r a l grounds. The Federal Home Loan Bank A c t, as approved June 22, 1932, was adopted primarily to fu r n ish a more f l e x i b l e means by which various building, savings and loan a s s o c ia t io n s , and other in s t it u t io n s engaged in making long term home-mortgage loan s might fu r n ish c r e d it fo r home building, ^ thereby encourage home ownership. I t was to provide a source o f reserve credit for these agencies in p eriod s o f f in a n c ia l emergency. The twelve Hone Loan banks created under t h i s Act were to make advances on the se flirtty of home mortgages to t h e ir members. For that reason these banks permitted to accept as c o l l a t e r a l mortgages on properties designed -2 - f or r e s i d e n t i a l use fo r no more than fou r fa m ilie s . The proposed amend ments would remove th is lim it a t i o n , so th at an advance may be made on a mortgage up to $ 1 0 0 ,0 0 0 , and th e m aturity o f such a mortgage would be extended from twenty to tw e n ty -fiv e years* As the proposed amendments would permit Federal Home Loan banks to make advances on c o l l a t e r a l secured by any f i r s t mortgage, they would place the members o f the Federal Home Loan banks - building and loan as sociations, fed era l savings and loan a s s o c ia tio n s , e t c , - in direct com petition with banks, insurance companies, and other in stitu tio n s making first mortgage loans on business as w e ll as home p ro p erties. This broaden ing of the powers o f savings and loan a sso c ia tio n s in e f fe c t would establish another banking system o u tsid e o f the present supervision and control. Federal Home Loan banks are authorized to issu e bonds and deben tures. The proposed amendments would a ls o authorize the Secretary of the Treasury to buy these bonds and debentures and in turn issu e Treasury bonds to raise the necessary funds with which to pay fo r such ob lig a tio n s. Treasury bonds so issu ed are to be tr e a te d as public debt. The The significance of this provision i s fu r th e r emphasized by the fa c t that any impairment of capital of a Federal Home Loan Bank - a minimum o f such c a p ita l being $5,000,000 fo r each bank subscribed t y the Secretary o f the Treasury - would result in a lo s s to the Treasury. As each Federal Home Loan Bank has powers to accept deposits from its members, to in v est in o b lig a tio n s o f the United S ta te s, and to borrow funds, i t is not u n lik e ly th a t the twelve Federal Home Loan banks may a c Suirs government s e c u r itie s and then use them as c o lla te r a l fo r borrowing from the Reserve banks. While the Reserve banks under the present laws -3 and regulations presumably enjoy a considerable la titu d e o f discretion in accepting or r e je c tin g such o b lig a tio n s , i t is conceivable that a stringent situ ation might a r ise wherein such a d isc re tio n would become purely academic• By means o f in te r p r e ta tio n s , r e g u la tio n s, or enactment of additional laws, the Federal Reserve banks may be forced to make advances, secured by govern ment ob liga tio n s, to the Federal Home Loan banks, as w ell as other govern mental credit agencies having powers to in v est and to borrow. The proposed amendments co n stitu te a step in th at d irectio n and are therefore dangerous to the reserve conditions o f the banking system. The Home Owners1 Loan Act o f 1933 was adopted to provide r e l i e f with respect to home mortgage indebtedness, to finance home mortgages, to extend r e lie f to the owners o f homes occupied by them, and who are unable to amortize th e ir debt elsew here. The purpose o f th is Act and that o f the Home Loan Bank Act was to encourage people to save enough to make a down payment on a home and to a s s i s t those in d is t r e s s , and i t was never intended that savings and loan a sso c ia tio n s would do a savings bonk business. The proposed amendments broadening c r e d it powers o f such associations would change the o r ig in a l in te n tio n and tend to aggravate further the existin g relationship between the a sso c ia tio n s and the banking and insurance systems of providing mortgage c r e d it . Under the N ational Housing A c t, there was created a Federal Savings and Loan Insurance Corporation, a t i t l e which i s proposed to be changed to Federal Savings Insurance Corporation. 15,000 for each ’’ insured account” . The insurance coverage i s placed at I t i s estimated that the average amount invested by in d ivid uals in the shares o f Federal Savings and Loan Associations does not exceed $700. ^ Every e f f o r t i s being made to extend Federal Savings Loan Associations and place them in competition with savings banks, -,4- cooperative banks, mutual savings bank, state chartered building and loan a sso c ia tio n s, and other th rift institutions. The proposed as well as previous amendments apparently give no regard to the safeguard and limitations to tfhich other existing institutions must subscribe. Federal Savings and Loan associations, newly established and those converted from state associations, have been charged with unfair solicitation of business. misrepresentation. These charges are based on direct or veiled For example, the word "federal" has been used freely, suggesting that such associations are protected t y the government; the word "guarantee” has been stretched to mean an assurance of dividend or interest payments; and that a ll funds invested in shares were "fu lly insured" and "prompt cash settlement" would be made in the case of failure. While these practices have been o ffic ia lly recognized and disapproved, it is difficult to control those who are in the field working in the interest of these associations. In short, Federal Savings and Loan Associations have been placed in and they have been prone to usurp a privileged competitive position largely because of advantages through tax exemption, investment policies, irregular examinations, and other features which may not be practiced ty the established th rift organizations. shares at the rate of U per cent. because They are able to pay interest on This is obviously unfair to savings banks of limitations, restrictions and requirements with respect to the maintenance of reserves, limited investment field s, nontax exemption, as veil as other minor restrictions which limit their earnings, so that these banks are unable to pay more than 2 per cent interest on savings accounts. It seems to be a clear case of private institutions, which have provided one - 5- of the most Important sources fo r c a p ita l formation, and are now being pushed to the wal l by the a sso c ia tio n s which are in e ffe c t encouraged and subsidized by the government regard less o f p ossible lo s s to the tax payers in the fu tu r e . The proposed extension of th eir powers i s an unjustifiable attempt to make fu rth er inroads into the existin g cred it structure by governmental agencies and th e ir s k i l l f u l l y contrived p o lic ie s and methods# The proposed amendments would fo s te r a further centralization of this type o f c re d it fin an cin g under the supervision o f a federal bureau responsible only to the President* Together with the existin g powers over credit, these amendments would tend to undermine the private in stitu tio n s unless such in s titu tio n s chose to abandon th e ir present charters or convert their business to Federal Savings and Loan A sso cia tio n s. This would mean a further exposure to the co n tro l and domination o f fed era l bureaus. Viewed from the p oin t o f money, c r e d it, and banking, the proposed amendments are h ig h ly o b jec tio n a b le because they tend to set up a nation wide branch banking system o f a p ecu lia r s o r t , to monetize mortgages o f long m aturities, and to c e n tr a liz e the management o f cred it under a p o litic a lly -c o n stitu ted fe d e ra l a u th o r ity . I t i s a further evidence of determined e ffo r t s to s o c ia liz e our banking and c re d it system - a most decisive step in breaking down our democratic processes* C O P Y gxc.srpt 'a a letter fron* Mr. £. U. Docker, August 22, 1939. "In an effort to amswer the questions pro poundad in your la tte r of July 18, I have re-exaainad the Material which furnished the bfcsis for the Federal Advisory Council*s report to the Federal Reserve Board oo the question of increasing the System's services to saember oanks* Cotnwents advocating ajor© authority for the District bank in a* aining »e»b<s s appear in letters fro* two State banks and *wo Sati nal bonks in the Second D i s t r i c t . One n ation al bsoik in the Second D is tr ic t expresses preference for the Comptroller1& examination, &nr one State bank in the Third Dis trict advocates an examination b y S ta te a u th o ritie s, of su ffic ie n t scope to satisfy *11 of the other supervising bodies. The rest of the cosrents oo examination tcvocate uniform ity, without expressing preference the agency which should asks the examination. b e t o On the question of the c e n tra lisa tio n o f authority in fa hington, the acntiscint of the banker* is against ouch centrali sation* There follows a tab u lation of the comments by D is tr ic ts , broken down into State end Bat tonal bants wherever possible* i^.axnst G c n tr ^ lj:^ ■j. n S tate D istrict 2 3 4 5 6 7 8 9 10 11 12 National 13 1 1 • Comment Comment «*» «* - In the Fifth, Seventh, f nd F,i$?th Districts, the banks were *ot identified as to type.*
@FedFRASER