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MINUTES OF MEETINGS of the FEDERAL ADVISORY COUNCIL September 13-14, 1942 and of the EXECUTIVE COMMITTEE July 1, 1942 August 5, 1942 October 7, 1942 M IN U T E S O F M E E T IN G O F T H E F E D E R A L A D V IS O R Y C O U N C IL September 13, 1942 The third statutory meeting of the Federal Advisory Council for 1942 was convened in Room 936 of the Mayflower Hotel, Washington, D. C., on Sunday, September 13, 1942, at 2:00 P.M., the President, Mr. Brown, in the chair. Present: Mr. Charles E. Spencer, Jr. District No. 1 Mr. George L. Harrison District No. 2 Mr. William Fulton Kurtz District No. 3 Mr. B. G. Huntington District No. 4 Mr. Robert V. Fleming District No. 5 Mr. H. Lane Young District No. 6 Mr. Edward E. Brown District No. 7 Mr. S. E. Ragland District No. 8 Mr. Lyman E. Wakefield District No. 9 Mr. W. Dale Clark District No. 10 Mr. George M. Wallace District No. 12 Mr. Walter Lichtenstein Secretary jnt: Mr. Nathan Adams District No. 11 The Secretary of the Council announced that Mr. Adams did not expect to be present and that an alternate for him had not been appointed. On motion, duly made and seconded, the minutes of the Council meeting of May 17-18, 1942, and of the monthly meetings of the Executive Committee of July 1 and of August 5,1942, copies of which had been previously sent to the members, were approved. A discussion took place regarding the silver problem. It was decided to ask the Board of Governors whether any useful purpose would be served if the Council at this time reiterated the position it had taken on several previous occasions. The President of the Council discussed the situation which had led to a revival of interest in Regulation Q. After some discussion, it was decided not to draft a resolution on this subject, but to explore the situation further at the joint meeting with the Board of Governors. It was decided to draft a resolution to be presented to the Board of Governors, ask ing that the law governing renegotiation of contracts be amended so as to subordinate government claims to claims of banks arising out of renegotiated contracts. The Secretary of the Council was instructed to summarize for the benefit of Governor Ransom and the Board of Governors, generally, the information which the various mem bers of the Council had submitted as to the status of personal loans, etc., in their respective districts. Governor Ransom had specifically asked for this information. A discussion took place regarding the monthly Executive Committee meetings of the Council. It was agreed to discuss the matter with the Board of Governors at the 1 joint meeting and to suggest to the Board that the Secretary of the Council would furnish, in advance of each meeting, an agenda made up of suggestions sent to him by the various members of the Council. A discussion took place regarding the handling of rationing stamps by banks. It was agreed that the banks are best equipped to do the work but that there ought to be proper provision made for the following: (a) Compensation for the work, at least sufficient, to take care of the out-of-pocket expenses; (b) Priority for obtaining the necessary machines to do the work; (c) Relief from liability, except in cases of gross negligence; (d) Priority for the obtaining of additional necessary manpower required to do the job. There was some discussion regarding war loan deposit accounts in small banks which are not familiar with the problems involved; also discussion in respect to the program confronting banks due to men being drafted, some of whom are of little use for military purposes, but are very essential to the proper functioning of their respective institutions. The meeting adjourned at 6:00 P. M. WALTER LICHTENSTEIN, Secretary. 2 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL September 14, 1942 At 9:30 A. M., the Federal Advisory Council reconvened in the Board Room of the Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the chair. Present: Mr. Edward E. Brown, President; Mr. George L. Harrison, Vice President; Messrs. Charles E. Spencer, Jr., William Fulton Kurtz, B. G. Huntington, H. Lane Young, S. E. Ragland, Lyman E. Wakefield, W. Dale Clark, George M. Wallace, and Walter Lichtenstein, Secretary. The Secretary read a draft of a resolution, as follows: “The Federal Advisory Council is concerned about the possible danger that in the renegotiation of war contracts the credit position of a contracting concern may be altered to a point where credits extended in good faith to it may be endangered. “The Council suggests to the Board of Governors that it use its influence to the end that a provision be included in the law to protect banks and others who have so extended credit by making any claim or debt due to the Government, by reason of a renegotiation, subordinate to the claims of bona fide creditors. As the law stands at present any debt due the Government has a priority over debts due other creditors.” The above resolution was unanimously adopted. At 9:55 A. M., Mr. Fleming joined the meeting. A discussion took place regarding the possibility of a preferential rate on loans made by member banks at a Federal Reserve bank, based on government securities having a maturity of not more than a year. The meeting adjourned at 10:00 A. M. WALTER LICHTENSTEIN, Secretary. 3 M IN U T E S O F JO IN T C O N F E R E N C E O F T H E F E D E R A L A D V IS O R Y C O U N C IL AND TH E BOARD OF G O V ERN O RS OF T H E F E D E R A L R ESER V E SY STEM September 14, 1942 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: Vice-Chairman Ronald Ransom; Governors John K. McKee and Ernest G. Draper; also Messrs. Lawrence Clayton, Assistant to the Chairman; Elliott Thurston, Special Assistant to the Chairman; Liston P. Bethea and S. R. Carpenter, Assistant Secretaries, Board of Governors; Walter Wyatt, General Counsel; J. P. Dreibilbis and George B. Vest, Assistant General Counsels; E. A. Goldenweiser, Director, Division of Research and Statistics; Leo H. Paulger, Chief, Division of Examination; Carl E. Parry, Chief, Division of Security Loans; David M. Kennedy, Assistant Chief, Government Security Section, Division of Research and Statistics. Present: Members of Federal Advisory Council: Mr. Edward E. Brown, President; Mr. George L. Harrison, Vice President; Messrs. Charles E. Spencer, Jr., William Fulton Kurtz, B. G. Huntington, Robert V. Fleming, H. Lane Young, S. E. Ragland, Lyman E. Wakefield, W. Dale Clark, George M. Wallace, and Walter Lichtenstein, Secretary. The Secretary of the Council read the resolution dealing with the renegotiation of contracts. It was suggested that a committee of the Council meet with Mr. Maurice H. Karker, Chairman of the War Department Price Adjustment Board, or some represen tative, and discuss the subject. A somewhat lengthy discussion took place regarding the whole problem. The President of the Council appointed a committee consisting of Messrs. Spencer, Wakefield, and Wallace, with himself as member, ex-officio, to meet with Messrs. McKee, Draper, Clayton, and Charles O. Pengra, Counsel, War Department Price Adjustment Board. A discussion took place in respect to Regulation Q, and the various aspects of the question were considered without any agreement being reached. The Secretary of the Council presented a summary of the information obtained in answer to the questions of Governor Ransom regarding the status of various types of loans. In general, it was shown that practically all types of individual loans are declining in all the districts, as well as most kinds of real estate loans. In respect to the silver question, the Board of Governors felt that it might be best for the Council not to take any action at this time. The President of the Council brought to the attention of the Board of Governors the feeling of the members of the Council that small banks should not be forced to open war loan deposit accounts. The President of the Council brought to the attention of the Board of Governors the problems of the banks in the handling of rationing stamps. 4 A discussion took place regarding the desirability of monthly meetings of the Executive Committee of the Council. It was agreed that these be continued, but that the Board of Governors should be furnished prior to the monthly meetings with a list of topics that the Executive Committee expected to discuss with the Board of Governors. Governor McKee raised the question of surety company bonds in connection with Regulation V loans. He stated that the armed services do not wish to have surety bonds issued to protect banks because it is felt that in such an event the banks would be less concerned about the supervision of contracts. It was suggested to the Board of Governors that this whole matter was connected with the question of man power. If the armed services continue to take away key men from banks, these would soon be left without adequately experienced staffs to do the necessary supervising. A discussion took place as to whether loans made under Regulation V are eligible for rediscount. It was stated that these might be eligible under 10b at a rate of one-half of one per cent higher than those based on the usual eligible paper. The meeting adjourned at 1:20 P. M. WALTER LICHTENSTEIN, Secretary. 5 M IN U T E S O F M E E T IN G O F T H E F E D E R A L A D V IS O R Y C O U N C IL September 14, 1942 At 2:45 P. M., the Federal Advisory Council reconvened in the Board Room of the Federal Reserve Building, Washington, D. C., the Vice President, Mr. Harrison, in the chair. Present: Mr. George L. Harrison, Vice President; Messrs. William Fulton Kurtz, B. G. Huntington, H. Lane Young, S. E. Ragland, W. Dale Clark, and Walter Lichtenstein, Secretary. Messrs. Brown, Spencer, Wakefield, and Wallace were at a meeting with Messrs. Pengra, McKee, Draper, and Clayton. Dr. Goldenweiser appeared before the Council and discussed the business situation and the reserve situation. At 3:00 P. M., Messrs. Brown, Spencer, Wakefield, and Wallace joined the meeting. Dr. Goldenweiser left the meeting of the Council at 3:35 P. M. Mr. Brown reported regarding the committee meeting with Mr. Pengra and mem bers of the Board of Governors. It was decided that the Council should present the resolution, previously adopted, to the Board of Governors, not with the idea that the Board would do anything about the matter at present, but so that whenever the question came up in Congress, the Board might have the Council’s resolution in mind. It was unanimously voted that the Secretary of the Council send to the Board of Governors of the Federal Reserve System a copy of the resolution so that the Board might be informed as to the views of the Council on the subject of renegotiation of contracts. The meeting adjourned at 3:45 P. M. WALTER LICHTENSTEIN, Secretary. 6 F E D E R A L A D V IS O R Y C O U N C IL W a sh in g to n , D . C . S e p t e m b e r 16, 1942 D e a r M r . M o r r i l l: Acting under instructions of the Federal Advisory Council, I beg to transmit to you herewith a copy of a resolution adopted at the recent meeting of the Council on Sep tember 14. This resolution was presented to the Board of Governors at the joint meeting with the Council on September 14, but it was understood that the Council would reconsider the subject after a committee of the Council had met with a committee of the Board and Mr. Charles O. Pengra, Counsel, War Department Price Adjustment Board. I am instructed by the Council to inform you that the Council considered the matter at its afternoon session after it had listened to a report of the meeting of its committee with the committee of the Board and Mr. Pengra. It was unanimously voted not to alter the wording of the resolution and to request the Board of Governors to make use of the resolution at such time and in such manner as would seem advisable whenever the ques tion of a change of the present act might be under consideration. Very truly yours, (Signed) WALTER LICHTENSTEIN, Secretary. Mr. Chester Morrill, Secretary, Board of Governors of the Federal Reserve System, Washington, D. C. 7 The t r a n s c r i p t o~ th e S e c r e t a r y ’ s n o te s Is n o t t o b e r e g a r d e d a s c o m p le te o r n e c e s s a r i l y ■ •'ntirely ac curate* The t r a n s c r i . t sh o u ld be c o n s id e re d as being s t r i c t l y ?'or t h e sole u s e of th e members of th e Fed NOTE* eral Advisory Council. If. L. Secretary*® notes on meeting of the Federal Advisory Council on September 13, 1942, at 2:00 P . H. in Eooa 936 of the Mayflower Hotel, Washington, D. C. A ll aesa e r s o f the Federal Advisory C o u n c il, xcept Mr* Mathan Adams, were present. The Secretary stated he understood there w o uld n o t b e an a l t e r n a t e f o r ttr* Ada?:is* The ainutee of the Council meeting of May 17-18, an d of the monthly meetings of the Executive Cofflalttee of July 1 a n d of August 5 were approved. SIL7-R PROBLEM Huntington asked whether it sight of the Council. be well to r e s t te the position Wallace aaye the trouble is due to the senators from the eight silver states. The problem is acute now on account of conrerclal demands for silver, e. g ., it is possible to use silver for the lining of tin cans. Harrison suggests asking the Board whether any useful purpose vould be served i f the Council at this time reiterated its position and passed a nee resolution or recon&andation. It was decided to follow the suggestion of 1r . Harrison* -EMULATION Q Brom * The situation in respect to Regulation Q has become acute due to the attitude o f the Live Stock; National Banic of Omaha. This Bank resigned frca the Csaha Clearing House in order tc be able to waive exchange charges. The result has been that the Live Stock national has greatly increased its inter-ban* deposits at the ex enee of S t. Louis and other banks, and the Conptroiler of the Currency has been asked to enforce the law. In this con nection the Secretary, at U r. Bro^n, s request, read a certain letter be&ring on the subject. M im ing stated that it was his understanding that the heads of the respective co®sltteee of the t^o Houses of Congress had suggested not to , ut into effect ruling relating to Regulation Q . The whole situation really de pends nore u_ on the F . D . I . C . than it does u on the Board of Governors. Brorn state? that he is not in favor of Regulation Q because It seems to his that it opens the door to regulating not merely exchange charges but every kind of service a bank performs, such as, giving credit information, printing checks, keeping securities, collecting coupons, and what not* I f c a r r i e d far enough it '.ould cean the end of private banking* ffe k e fie ld doubts whether the matters brought up by Brown are really a factor* Coapetition is b r e w in g down all safeguards* Banks are raiding aach others* territory and obtaining accounts by offering «11 sorts of free service* Brown states that he has been told th^t th« suggestion has been made to pay 3 /8 per cent to banks on their excess reserves. He points out that this ould completely k ill inter-bank deposits. It was decided not to draft a resolution on this subject but to ex plore the situation at the meeting with the Board. mBGOTIATIQS Of' CONTRACTS Wakefield states that the provision* of the act sre much too broad and are very dang rous to banking, i . e . , it say become a very dangerous sit uation for the customers of banks and thereby for the blinks themselves. He believes the Government should in general have the right to renegotiate con tracts but subject to certain limitations* He points out that at present the Government may reopen the subject any time within three ye*irs after the coapletipn of a contract* Wallace suggests that a l l claims of the Government, including those arising cut of renegotiated contracts, should be subordinate to bank claims as long as loans sade on the h«sii of *uch a contract are still outstanding* Brown suggest: & resolution to be presented to the Bo ird asking that the law covering renegotiating be amended so as to subordinate bank cleims to Government claims including those arising out of renegotiated contracts* This was agreed to . OF GOVERNOR RAKSOM ?.£QUKT LOANS. ETC. FOP. INF03KATICH ABOUT THE FTATI?8 OF PBRTCNAL The various members of the Council discussed the situation in their respective d is t r ic t s , and the Secretary of the Council was instructed to summarize this information for the benefit of Governor Hansom* 10HTHLY FXKCUTIVZ COM^ITTi! MEETINGS Harrison states that the lav permits the Council to meet as often as it pleases, and it has the ri$v t to ask questionf on any subjects con nected with the Federal Reserve System* -3Fl<:gln,>r r?uggent;- giving the Bo rd an agenda in advance of each meet ing, and that the Secretary of the C unc.il in advance of each meeting ask ©very member of the Council for possible miitgestions* It was agreed to take up the mattor with the Board at the joint meeting* proposed Fleming states that the Board is going to raise the question of the handling of rationing stamps by b an k s* Hakefield understands that tfcc question is goinr to be raised about paying all subscriptions to Government issues by Beans of War Loans Deposit account instead of by cash* Harrison discusses the following topicss (a) There are credit ars&s not yet occupied by war financing! (b) Banks should be billing to borrow again by means of rediscounts ; (c) There night be a preferential rediscount rate on short-term Government securities; (d) Methods of selling Government securities; (e) Constant decline of retie of bank capital to deposits* The old rule of thumb w ill not work under present conditions* Fleming reverting to the problem of 0* P* A* He states that there isn*t any question that the banks are best equi ped t do the work of handling ration stamp#* The banks should, however, see to it that proper provisions are made for the followingi (a ) Compensation for the work, at least suf ficient tc take care of the out-of-pocket expenses; (b) Priority for obtain ing the necessary machines to have the work done; (c) Relief from liability, except in the case of grosf? negligence; (d) Priority for obtaining the necessary additional man power which w ill be required to do the job. Brown brings up the question of forcing War Loan Deposit accounts on banss, especially se?all banks ^ho are not familiar with the problems in volved* &e al.no raises the question of the Hation&l Service Act* Banics are suffering from men being called up «ho are of little use for military purposes but are very essential to their respective institutions; he feels that this is a subject which had better be handled by the A* B* A* than by the Council, and he does not propose to bring i t up at the joint meeting* Finally, Brosrn state* that he has been informed there may be s possibility at this time of getting r id of Postal Savings which is conflicting with the sale of E, F, and G bonds. This is also a topic which had better be handled by the A. E. A* The meeting adjourned at 6*00 P* M* Secretary*s notes on meeting of the Federal Advisory Council on September 14., 1942, at 9*30 A# V. in the Board Room of the Federal Reserve Building, W a s h in g to n , D . C* p re s e n t. tra c ts . All Berbers of the Council, except Messrs* Fleming and Adaas, were The Secretary read the draft bearing on the re-negotiation of con was adopted '*ith some slight revision and reads as follows* It •The Federal Advisory Council it? concerned about the possible danf;@r that in the re-negotiation of wer contracts the credit position of a contracting concern may be alter ed to a point where credits extended in good faith to it say be endangered. “ The Council suggests to the Boi rd of Governors that i t use its influence to the end that a provision be in cluded in the law to protect h&nks and others **ho have so extended credit by making any claim or debt due to the Gov ernment, by reason of a re-negotiation, subordinate to the claims of bona fide creditors* As the law stands at present any debt due the Government has a priority over debts due other credito rs.* At 9*55 A* M* Mr. Fleming joined the meeting* There was some discussion about preferential rates on Government securities having maturities of not sore then a year* Fne meeting adjourned at 1 0 :0 0 A* M. -5- Secretary*s notes on Joint iseeting of the Federal Adviaory Council and the Bo.,rd of Governors of the Federal Reserve Systen on September 1 4 , 1942, at 10 i4 0 A* M* in the Board Room o f the Federal Reserve Building, Washington, D* C* The Council net with the Bo ;rd and a l l aefcbers of the Council were present, except Mr. Adana. O f the Bo rd the following were preeentj Hr. Hanson, Mr. McKee, Mr. Draper; also Messrs. Clayton, Thurston, Bethea, Carpenter, Wyatt, D r e ib e lb is , V e s t , Goldenweiser, Paulger, Parry, and David )f. Kennedy, A ssistant C h ie f, Govc-rnaent Security Section, Division of Re search and S t a t i s t i c s . Hie Secretary of the Council read the resolution dealing with the re-negotiation of contracts* Brora explained in d e ta il t!le danger to the banks arising out of the present law and a lso pointed cut that it nay interfere with further financing of soae concerns engaged in important war *ork. KcKee suggested that i t ® i$ it bf> well i f a conxdttee of the Council set sith Mr. Maurice H* Karker, Chairnsn of the War Dep&rtsent Price Adjustaent Board, and discuss the subject with him. I f Mr. K^rker is not available, perhaps soieebody else concerned with these problems jsay be able to ?eet with Beaters of the Council* Be went on to say that the subject has been handled by Eccles, Draper, and h in s e lf* The War and Navy Departments and the Mari time Ccssdssion each have a co^sittee of their own. In the case of the Aray there are committees for the various branches of the service like the Signal Corps. Ordnance, however, has in addition to a central cam ittee thirteen subordinate eo- a it t e e s situated in various parts of the country. In the case of the Snvy and the Maritime Concission, the business is centralized but the Aray has decentralized* However, even in the case of the Arny the central board has retained in its own hands sane of the largest contracts and il l review re-negotiated contracts* The danger is that any certificate, even one issued by the main committee, nay be attacked after the war* McKee hiaself believes that there should not be p^raitted a reopening of the question after a f in ^ l c ertific ate has been issued* He suggests that i f the Council kaew the srhoie story it night wish to change the wording of its resolution. Bro^n says that h is understanding is that a super-board is to lay down the general rules with an idea that the whole prograa should fit in with the anti-inflation progran, labor p olicy, etc . Various services have set up separate cociraittees* The Ordnance Department is by far the cost inportant* Local boards report to the central Ordnance Bonrd in Washington* The daises of banks and contractors furnishing icaterials are subordinated to those "6« of the Government* There is danger that i n some cases field m e n say take A O t i o n which w ill actually endanger the solvency of soae concerns* Armed s e r v i c e s are well aware that future financing aay be endangered and thus *ar prociuction slowed up. In the last war the British were very vise and a s s u a e d losses necessary to protect banks and other creditors in order that production s i^ it go on unhampered. Vest points out that the Act of April 2 8, 19-42, requires all con tracts of over a hundred thousand dollars to be renegotiated in order to prevent excessive p ro fits. There is n 't any question that under fee law as existing at present, Government claims have priority over a ll others* McKee had hoped that the eosnittees would simply try to eliminate ex cessive p ro fits, unduly hi::h salaries, unnecessary expenses, etc. Committees are prepared to look at each contractor as a whole rather than at each sep arate contract. The tax b i l l should be amended to the end that when a certi ficate is fin a lly issued the matter be considered settled* He believes that if this could be done, most troubles facing creditors would be solved. Ransom points out that any ouch change as suggested would require legislation, and he does not xnow what the possibilities are of having the necess.ry b ills introduced into Congress. I f there should be any legislation proposed and hearings conducted, bankers sight ask that they be represented. Brown point® out that the tax question is only one angle and that the Council members dc not have access to Government regulations issued by the various renegotiation co&fclttces. A certificate does not prevent a situation froa arising whsre a ccaitract has been completed and on the basis of the profits aade under that completed contract, banks have sade new loans, only to have the whole subject matter reopened. Vest read the Act* Harrison suggests that a joint committee of th© Board and of the Council contact the proper Government o ffic ia ls . McKee says that since bankers under the V Regulation loans have becoae partners of the armed servioes, there ought not to be any longer sus picion of the bankers. He believes bankers on the basis of the financing of the war effo rt which they are undertaking might well approach the areed services. (ansoa thinks there sight well be a joint committee of the Bo rd and Council to contact the arsed services* comEittee. Perhaps some of the people concerned could meet a small group at luncheon. He suggests that an attempt be aade to aeet with Colonel A* J . Browning, Director of the Purchases Divi sion H sdquartera, Services of Supply, and Mr. Maurice H. Karker, Chairsan, War De artaent Price Adjustment Board* It was voted that Brown appoint a subco.Tt5rJ.ttee to meet with soae of the gentleaen suggested. Mr. Bro^n appointed as the committee of the Council, Messrs. Spenc >r, ’Sakefield, and Wallace, with htsaelf ag ex-officlo. The «ejsber5 of the Board who are to raeet with this group are Messrs. KcKee, D raper, and Clayton, the last representing the Chalnsan of the Board who wna absent. These two committees set at lunch t ith Mr. Charles 0 . Pengra, Counsel, War De ^artnent Price Adjustment Board. ?BGULATI0S Q Brown: A majority of the Council should probably like to see it en forced, except in such cases where the effort to collect exchange chargee would not pay the cost of bookkeeping involved. Ran3o p ; Either the statute should be changed or the F. D. I . C. find that, under the statute governing its action, It can issue a regulation identical with that of the Board. There Is danger that I f pressure were b ro u g h t that Congress would simply repeal the law prohibiting the payment o f interest on demand deposits. The Comptroller1a Office believes that the rule should be enforced an i t was laid do u by the Bo«rd in 1956. There isnft any question that the Board is not administering the law adequately} C ongress probably wssaft aware of the implications of the statute as passed. He suggests that the Council ask the F . D . I . C . to issue a regulation in har mony with that suggested by the Federal Reserve System. McKee says that perhaps interest on demand deposits should be re stored, subject to regulation by the Board# Wakefield says that deposits have been obtained in some sections of the country by doing defin ite services for the customer, and absorption of exchange charges is only one of the iterss. He points out that for example seme banks are safekeeping securities for their correspondent banks and t&ie complete charge o f the handling of these. Originally, a small charge was made for this work but a New lork bank offered to do the work for nothing and the result has been that other banks also waive all charges. He does not like the idea of regulation, but Regulation Q is there, and he thinks something should be done about it but he doesn*t know the solution to the problem. Xoung says that country banks made most of their money by charging on checks and they charge on par as well as non-par items. As a matter of fact Regulation Q would not interfere with the charges made on incoming checks. Ransom asks whether the Council ^ould favor using present Regulation or go back to the o rig in a l form. He suggests that cose sort of action be t&xen in the case of Omaha and East S t . Louis banks* T j assr-rioa off loans ( ransom) The Secretary of the Council presented the summary of the information obtained! —8 Practically all classes of personal loans have declined. Single naae paper in a year do«n 5 per cent* F . H* A* loans off 30 per cent; other real estate loan3 do^n 10 per cent* Policy loans in N* Y* Life dov-n about 2-3 ailllon a rjonth, equivalent to about 15 per cent decline for the year* Premiua loans not ris in g , «rhile surrender and lapsing of policies lowest in history of the cospany* Since March new business increasing* Defense housing loans increasing, but other F* H* A* loans just steady* In H* I* banks individual Ioann are declining* m strict 3* ' In Philadelphia individual loans down 10-12 per cent froia a year ago* Comrsercial hanks gen erally have not made F* fi* A. or other real estate loans, this fie ld b«ing left to wttual savings barucs* In Pennsylvania Co* insurance policy loans o ff 30 per cent, as rates of interest were raised* Chattel financing do^n 30 per cent and automobile loans dotsn -40 per cent* 4. Leans on insurance policies* 126 banks addressed, 27*7 per cent have shown increase; 42*9 per cent show decrease} 19*9 per cent no change and 9*5 per cent of the 126 did not nake such loans* D is tric t Governmental loans (F . H* A *, e tc .)* 16*3 per cent show increase; 4&*4 par cent show decrease} 10*3 per cent efaow no change} 23 per cent did not siake such loans* Mortgages* 2 0 *6 per cent increase} 64*3 per cent decrease} 12*7 per cent no change} 2 .4 per cent did not sake such loans* Single-payaent loans to individuals and not subject to Regulation W* 7*2 per cent increase} 7 3 * 8 per cent decrease} 17*5 per cent static* District 5 . A ll loans since Barch off 10 per cent while consuaer loans are do^n 32 per cent* District 6- Real estate loans down* Ehiie F . H. A* loans are not down much, n«w ones are not being ss&de. L ife insurance loans sore or less static* Col la te ra l loans have practically disappeared* Loans do\m about l / 3 in a year* May pick up rdtta cotton crop financing. ■ 9— Heal estate loans about the Bane* F . H. A. loans not aade by loop b&nzs, but are dcvn in outlying banks* Life insurance loans static. Personal loans down sharply. A ll loans down. Heal estate loans have almost disappeared* All classes of loans off 40 per cent in a year* May pick up in next few months due to cotton. Survey of 1st of Minneapolis, 1st of St. Paul, and Northwestern National shows: (a) Loans on l i f e insurance* no increase, no new ones* Gen erally derm. (b) Heal estate: noticeable dropping* In 1st of Minneapolis fro® $1,703,000 down to $ 1 ,5 0 0 ,0 0 0 . (c) Governmental (F. H* A*)i slight increase in case of Northwestern National, but there i s n H any local production. th strict 10. Insurance loans aore or less static. F* H* A. and other real estate loans declining and personal loans do^n. rH s t r i c t 1 1 . So report mstrict 12* Survey of Los Angeles, San Francisco, San Diego, Salt Lake C ity , and Portland: (a) Personal single-payaent loans* rapidly. Declining (b ) L ife insurance. Portland reports increase* In L . A . reached a peak last winter, but now declining somewhat, but an important branch of business. (c ) Real estate of a ll types down from February 25 froa 1389 million to $373 B i l l i o n for whole district* Demand for real estate loans shrinking, though F . H . A . outstandings up somewhat but rate of in crease has been diminishing. (d) People anxious to get out of debt and no tendency to shift from regulated to unregulated loans. Hot#i Dr. Parry stated after the Secretary of the Council had submitted tfce above report, together with detailed reports given hi® for District 4. and District 1 2 , that only in the cases of Districts 4 and 12 was there -10- a definite st a t e m e n t that p e r s o n s ! loans Imd been decreasing* The S e c r e t a r y of the Council cells attention to the fact that, not only in the cases of Districts 4 »nd 1 2 , but also in the cases of Districts 1 , 2 , 3 , 7 , and 1 0 , definite st^teiaents in the sususary of the report were made that individual loans have been declining. To be sure in the cases of Districts 4 and 1 2 , the information was such more detailed, but the Secretary of the Council fails to under stand what Dr* Parry meant by kis statesent* ;-ILV?a AP'-STIOH Brown asks whether the Board sees any advantage in having the Coun cil reiterate its position* He doesn't wish to have the Council "muddy the waters* in any way. McKee thinks the war effo rt w ill take care of the whole situation* It migbt be better for the Council to wait before taking any action as the timing of such action trould be a l l important* Wallace says there is n ft any special point in talking about the nat ter now. Wakefield agrees that McKee is right and that the timing of action is certainly a ll important. Brown says Board knows that the Council will help whenever the Board thinks it can be of service. <AR LOAK DEPOSIT ACCGUHTS Brown says the Council fee ls that banks in larger cities where they h&re reciprocal balances should have War Loan Deposit accounts but smaller ban*cs should not be forced to open mich accounts. There is some danger if the latter institutions have War Loan Deposit accounts, for these institu tions do not re a lize that the deposits may go out suddenly and unexpectedly, *nd they r^ould then be likely to dump their bonds on the a&rket* Mc&ee states that the Board has no knowledge of this and, if pressure ctae, it did not ccrae from the Board. He suggests that it may have been due to pressure of Victory Loan Committees or the Treasury. WaKefleld says that the pressure did probably come from Victory Loan Cofcffllttees. £«..?« A* RATIONING STAMPS Bro»n says that the Council believes that the banka are the best •qolpped to handle this matter but he feels that the banks should be re**bursed for out-of-pocket expenses; he points out that banks are already -11- having difficulty in obtaining sufficient machines and sufficient min power. The latter is true because draft boards have been holding that banking Is not an essential profession* McKee states that the Bonrd had a meeting with the OPA and sug gested that the whole business be placed on a unit cost basis. There should not be too many details and in general wholesalers should take care of the saaller retailers. The OPA is thinking of making a test in northern Hew York, namely, in Albany, Troy, and Schnectady. McKee also think® that trust departments in banks would be best equipped to handle this business, but Wakefield and others doubt this. Brown suggests that people employed on this work be regarded as Government agents and as banks would be doing the work without profit, they should at least be exempt from lia bility for errors honortly made. MONTHLY a r r i s e s OF THE IJ?.Gl?TfZ CO^riTTKE Brown points out that the Council feels strongly that the monthly are desirable. In accordance with a suggestion B a d e by the Chairaan of the Board, the Council has instructed its Secretary in the future to furnish the Board with an spends prior to each meeting of the Executive Coasdttee. He feels that conditions are clianging so rapidly that the q u a r t e r l y meetings of the whole Council are not sufficient. B e a tin g s Ransom says that the decision is entirely in the hands of the Coun c il. He points out that members of the Board of Governors are extremely busy at present but I f they can be furnished prior to the sonthly aeetin?s vith topics that are to come up and i f the Council feels such meetings are helpful to the System, the members of the Bo&rd will be very glad to seet the wishes of the Council. McKee raises the question of surety company bonds in connection with Regulation V lo an s. He states that there is a feeling that the snail con cern, i' it is able to insure the exposed risk, micht be able to obtain more business. Armed servicen do not desire surety bonds tc protect banks be cause they fe e l that in such an event ban&s would be less likely to super vise the contract and therefore the ar.^ed services would not be protected to the same extent as at present in having supervision over the contracts. For this reason the armed services in the event of there being surety bonds ^egulnrly issued to cover the exposed part of the loan ?ould not continue to be interested in Regulation V loans. Th© Army has had some trouble with a few of its contracts. A bank had been guaranteed 95 per cent of the contract price and as a result just did not do any supervising. HcKee also says that banks suat do their duty or V loans w ill simply disappear. Spencer points out that a ll that sort of thing is tied up with the question of man power. I f the armed cervices continue to take away key sen froa the banks, these w ill soon be le ft without an adequately experienced staff to do the necessary supervising. -12Fl*r?aing r e i t e r a t e s t h e s s b § and p o in ts o u t t h a t o f h i s s t a f f about 50 per c e n t h a r e o n l y b e e n w it h th e ba n k f o r a y e a r o r l e s s * McKee then raises another question! Whether soae of the larger Bade under Regulation V are eligible for rediscount. The Council o u g h t to consider whether pa er arising froaa such loans in to be considered as good for rediscount without any question. For example, General Motors paper is being advertised as eligible for rediscount; the same is true of Bendix* As a matter of fact the Board has not passed on the Batter. lo a n s Vest wonders whether technically such paper is eligible* It sight be eligible under 10b at 1 /2 of 1 per cent higher rate than the usual eligible paper. There is also the problea of possible cancellation and the question of continuous renewal* Under such circuastances does such a paper oeet the technical requirements of tlie law? Broyni I f eligible at 1 /2 of 1 per cent hi h-r than the customary rediscount rate, banks would probably find that entirely satisfactory. After all the rate of interest on this class of paper is euch that the banks will not suffer any lose i f the paper is rediscounted at a somewhat higher rate than the rate on the so-called eligible paper* Bro^n points out that under the present law any sound asset may be us^d as collateral for a loan* McKee says that the borr :>wers think th^y can get a better ra&e if their paper is elig ib le for rediscount* Brovn does not believe that the question of » -igibility has entered into the question of th*3 rate of interest at all* The meeting adjourned at I s 20 F . M* -13- Secretary 8 notea on meeting of the Federal Advisory Councix on September U , 1942, at 2*45 P . 8 ., in the Board Rocks of th e Federal Beserve Building. Washington, D. C* All aethers of the Federal Advisory Council, except Messrs* Fleming and Adams, were present, but Messrs. Brown, Spencer, Wakefield, and Wallace were at the Committee moating with Messrs. Pem-ra, McKee, Draper, and Clayton* Dr. Goldenweiser joined the Council. Sr. Harrison presided. In the absence of Mr* Brown, DE. GCLDCTTglSKR Dr* Goldenweigr?r. Currency in circulation is increasing largely bemuse people are away from their hosea, many without bank accounts, pay roils are increasing, and bank service charges are causing r_any people to use cash instead of chocks. Doubts whether there is increase of hoarding to any extent. This is also proved by the fact that the increase of currency in circulation is mostly in bills of small denominations. Prob ably about $2 billion is still in hoarding. The chances are that the present increase in cirrency in circulation will not increase except if prices should rise. To be sure, U million men in our o*m camps in the country will cause an increase in circulation. At the present time It dcesa’ t matter much to the country where money is boing held* As a setter of fact, the situation brings the Federal Reserve System closer to the tine when there will not be any excess reserves which means an easier control of th® money markets* Business situation is not changing very much* There is an in creased demand for goods\ military production is increased vhiie civilian production is decreased* On the 1935-39 basis, the index of production in July v&a 180* It is estimated that it was 183 in August and probably will reach 200 in September* M terials and man po^er_limit the increase of production and the latter will probably reach its iimxt in the f^rst three months of 1943* National Income at present is about at the rate of $115 billion a years this ie the largest we have evwr had. Even on a con stant price basis it is about equivalent to about 100 feilxion a ye>- and this is higher than we liave ever had. Savings at present to about 325 billion a yoar or about twice the amount of last year* ***•? morv to bridge the inflationary gap than taxation. Savings, or involuntary, will be the biggest single source of « « * * ■ « - m m *, effort or kee. in? money in idleness in place of spending it. Good chance of -u- eseapimg serious inflation anci the probability is that it can b*» controlled* prices undoubtedly w ill continue to go up. At present 20 par cent up and aay ,^o 20 per cent more. Control of agricultural prices and better control of wagas will ao the job. At 3*00 P . U» Messrs. Brown, Spencer, Wakefield, and Wallace joined the meeting. GOLDENPTXSKR (Continued) Excess reserves havs? •’rone down in 1-1/2 years from 7 billion to 12 billion. The factors in Hew York reducing the reserves are: the Treasury drawing out sore funds from New York banka than nre received in that district, money in circulation increasing and only to a very small ex tent do withdrawals of bank balances have eny influence* This sort of situ ation always prevailed in New York, but there used to be offsets such as gold imports and movement of funds to Hew York for the purchase of secur ities* The purchases by the Federal Reserve System of Government secur ities has helped out the situation somewhat, but the Hew York ban*:s have used sore funds to buy Government securities than they have received in the fora of ne^ deposits* The situation in Chicago is similar to that in Hew York* In Chicago the reserve balances have not changed nuch because in that dis trict the Government spending is relatively larger than it is in Hew York The reduction of reserve requirements to 22 per cent in Haw 'fork and Chicago has increased excess reserve balances sosewhat, but the System will have to decide very soon whether it r il l continue to reduce reserve requirements or whether it should inrtuce 'tanks to borrow or whether it should carry on a much more strenuous campaign to sell Government securities to the people rather than to the bfinks* I f securities are sold tc banks on a huge scale then it is not important which of the three methods is used to handle the situation* (a) Reduction of reserves which is the worst wayj (b) Purchases of secur ities by the System* (c) Borrowing b^r banks which on the whole is the best of the three methods* I f we co&e out of the war with a debt structure where bonds are chiefly in the hands of one group, such as the banks, there may be attest is to avoid the service of the debt* I f the bond holdings are well distributed there is much less danger that there will be anything like repudiation. Kurts wants to £now hoT- we can sell more securities t the public. Goldenweiser says we must have more real drives than we have had. He thltucs the System should offset the increase of currency in circulation by the purchase of securities. Believes i f banks have to borr w then either the Treasury must increase r>hort—term rates or rediscount rates must be lowered. At present the differential between the short-term rate of 3/8 of 1 per cent &nd the rediscount rate of 1 per cent is too large. In his opinion, the shortr-term r te should go up. Harrison says preferential rate on Government securities after the last war got us into trouble. -15- Goldenv-ei : ^ r . Th^re Is en advantage in having people borrow froa the bunks to bay securities rather than hfive the banks borr w from the Systess to do so. The reason is that liquidation is easier if the people are in debt. It is better that corporations, such as insurance coao&nies, should borrow froa the comercLai banka than froa the Federal Beserve Banks. The reason is that i t Is better not to have too such direct contact of ^ftiblic generally vith the Federal reserve System. The Federal Reserve Banks should resaain banks for banker?. Dr. Goldenweiser left the aeeting at 3*35 P . K. 3ro~~n reported regarding the coarc.itt^e meeting ?ith Charles 0 . Pengra. Pengra stated that ths object of his board m s to prevent inflation by stop ping undue increase of costs. Patterson* Under Secretary of War, who heads the board was not trying to interfere with bank credit. Pengra board is not interested in large salaries, but Congress i s . Contracts entirely coapleted before April 21, 1942, are not subject to renegotiation. Pengra believes the board can iesue fin s! certificates 'or any tax year and Is trying to sake adjustment for a whol* year in the Biddle of a year except where there are sosse changes in underlying conditions. There Is soae question whether the board has the po«er to issue e final certific ate , and the opinion of the Attorney General is being asked* Bro^n s&ys that the Council «3iauld present Its resolution to the Bo. rd not with th* idea that the Bo rd should do anything about it at present but shenever the question is again brought up in Congress the Board sight b« r the Council*b resolution in mind. Pengra had said that Congress wanted to do ®any things by se&ns of It s laws thich his board not bothering about because in the opinion of his board it v?ould interfere with the war effort. However, at a later dat**, Congress sight agitate the question again. It ras to the Bo^rd of the Council, so to the views of unanimously voted that the Secretary of the Council send Governors of the Federal Reserve Systes the resolution of that the Bo?rd of Governors sight be officially informed &8 the Council on the subject of renegotiation of contracts. The meeting adjourned at 3*45 P . S .
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