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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 16, 1951 The third statutory meeting of the Federal Advisory Council for 1951 was convened in Room 932 of the Mayflower Hotel, Washington, D. C., on September 16, 1951, at 2:10 P.M., the President, Mr. Brown, in the Chair. Present: District No. 1 Walter S. Bucklin District No. 2 N. Baxter Jackson District No. 3 Frederic A. Potts District No. 4 Sidney B. Congdon District No. 5 Robert V. Fleming District No. 6 Paul M. Davis District No. 7 Edward E. Brown District No. 8 W. L. Hemingway District No. 9 Joseph F. Ringland District No. 10 David T. Beals District No. 11 De Witt Ray District No. 12 James K. Lochead Secretary Herbert V. Prochnow On motion duly made and seconded, the mimeographed notes of the meeting of the Council held on May 13, 14 and 15, 1951, copies of which had been sent previously to the members of the Council, were approved. There was a long off-the-record discussion in which all of the members of the Council participated. 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 24 and 25 of these minutes. The meeting adjourned at 5:51 P.M. HERBERT V. P R O C H N O W Secretary. 22 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 17, 1951 At 10:00 A.M. ,the Federal Advisory Council reconvened in Room 932 of the May flower Hotel, Washington, D. C. Present: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, N. Baxter Jackson, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, Paul M. Davis, W. L. Hemingway, Joseph F. Ringland, David T. Beals, De Witt Ray, James K. Lochead, and Herbert V. Prochnow, Secretary. The Council reviewed its conclusions of the previous day regarding the items on the agenda and sent to the Secretary of the Board of Governors the Confidential Memo randum to the Board of Governors from the Federal Advisory Council, which follows on pages 24 and 25, listing the agenda items with conclusions reached by the Council. The Memorandum was delivered to the Secretary of the Board of Governors at 12 noon on September 17, 1951. The meeting adjourned at 11:45 A.M. HERBERT V. PROCHNOW Secretary. 23 C O N FID EN TIAL M EMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON SEPTEMBER 18, 1951 The Council would appreciate receiving from the Board of Governors copies of the questionnaires submitted to the Board and to the Federal Reserve Banks by the Patman Subcommittee, and copies of the answers which the Board and the Federal Reserve Banks may make to the questionnaires. If the Board so desires and there is opportunity, the Council would be glad to discuss the answers of the Board to the questionnaire before thay are submitted to the Patman Subcommittee. ★ ★ 1. ★ ★ The Board would like to have any views the Council might wish to express on the prospective business and economic situation during the next six months and on the policies that should be followed by the System in the field of gen eral credit controls. Barring a full-scale war, or a serious lag in the defense program, the Council believes that business during the next six months will be active and will also show a seasonal increase. The demand for credit, partly for seasonal purposes and partly because of the impact of defense production, will markedly increase the volume of bank loans. Under these conditions, A. The Council believes that bank reserve requirements should not be raised but that, a decrease in reserve requirements may be necessary; B. The Council is opposed to an immediate increase in the rediscount rate, but the situation may change rapidly and the Council may have a different view by the time of its next regular meeting with the Board; and C. The Council believes that the expected increase in loans plus anticipated deficit financing will probably necessitate providing the banking system with additional reserves either through lower reserve requirements or open market operations. As between these two alternatives, a majority of the Council would favor providing the increased reserves by a reduction in reserve requirements rather than through the Federal Reserve Banks acquiring a large additional amount of Government securities by open market operations. The council does not believe that under presently anticipated conditions, and with the Voluntary Credit Restraint program in continued operation, a decrease in reserve requirements would acceler ate the increase in loans which the Council believes is necessary and inevitable this fall. 2. What are the prospects with respect to total changes in the volume of bank loans during the rest of the current year? The Council is unanimously of the opinion that the volume of bank loans will in crease during the rest of the current year. An increase in bank loans is inevitable if defense production is to be financed and if the necessary requirements of the economy are to be met. 3. In the event strong inflationary pressures should reassert themselves, the limi tations imposed by recent legislation on the authorities of the Board over con sumer and real estate credit would make it impossible for these authorities to 24 be used effectively as instruments of selective credit regulation. What would be the recommendations of the Council as to what, if any, recommendations should be made by the Board to the Congress with respect to the removal of the limi tations? The Council on previous occasions has stated, and it still believes, that authority over consumer and real estate credit should not be given to the Board when peace-time conditions prevail. With the existence of a partial war economy, the Council approved granting to the Board, for a limited period, the authority for such selective credit regu lations. The Council believes that the imposition by recent legislation of limitations upon the authority previously granted the Board by Congress over consumer and real estate credit was a serious mistake. At an appropriate time the Board should ask for the removal of these limitations. 4. What comments does the Council have to make with respect to the program for voluntary credit restraint and the manner in which it has operated? At its May meeting with the Board, the Council stated that the Voluntary Credit Restraint program had met with the general approval not only of banks but also of insurance companies and investment bankers. The program continues to meet with their strong approval. The regional committees throughout the country are now fully organized and functioning. Many loans, aggregating a very large dollar amount, which would not promote either the defense effort or the efficient functioning of the civilian economy, and which without the Voluntary Credit Restraint program would be made, are not being granted by banks or other financial institutions. The knowledge that such loans will be declined has resulted in many would-be borrowers not applying for them. The Council would like to express again to the Board of Governors, the officials of the Federal Reserve Banks and Governor Powell, who is directly in charge of the program, appreciation for their active and effective efforts to restrict unnecessary and undesirable credit. The Council recommends more extensive use of literature, news releases, addresses, and other suitable media to bring and keep before lenders and borrowers the objectives of the program. The Council would like to reemphasize the statement made to the Board in February and again in May of this year, that “Government loans and guaranties of loans in all fields, including real estate, should be terminated, except where such loans are necessary for the defense effort.” The present Voluntary Credit Restraint program does not en compass loans guaranteed by the Government or its agencies. The program would be more effective if it included not only private credit, but also loans so guaranteed. 5. Is the V-loan program operating satisfactorily and to what extent is it meeting the need for defense production loans? Due primarily to slowness in getting action on applications, which delay is not the fault of the Federal Reserve Banks or their staffs, the Council believes the V-loan program is not working as well as was anticipated or as it should. 25 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 17, 1951 At 2:30 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D. C., the President, Mr. Brown, in the Chair. Present: Mr. Edward E. Brown, President; Messrs. Walter S. Bucklin, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, Paul M. Davis, W. L. Hemingway, Joseph F. Ringland, David T. Beals, De Witt Ray, James K. Lochead, and Herbert V. Prochnow, Secretary. Absent: Mr. N. Baxter Jackson. Dr. Ralph A. Young, Director of the Division of Research and Statistics of the Board of Governors, spoke on the subject, “How Much More Inflation?”. Each member of the Council received a copy of Dr. Young’s remarks. The meeting adjourned at 4:00 P.M. HERBERT V. P R O C H N O W Secretary. 26 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM September 18, 1951 At 10:35 A.M., a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Governors M. S. Szymczak, R. M. Evans, 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, Frederic A. Potts, Sidney B. Congdon, Robert V. Fleming, Paul M. Davis, W. L. Heming way, Joseph F. Ringland, David T. Beals, De Witt Ray, James K. Lochead, and Herbert V. Prochnow, Secretary. President Brown read the preliminary paragraph of the Confidential Memorandum to the Board of Governors from the Federal Advisory Council, which is printed on pages 24 and 25 of these minutes, dealing with the questionnaires of the Patman Subcom mittee. An off-the-record discussion followed. The President of the Council read the first item on the agenda and the conclusions of the Council as given in the Confidential Memorandum printed on pages 24 and 25 of these minutes. 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 , previously mentioned. President Brown then read the third item on the agenda and the conclusions of the Council as expressed in the Confidential Memorandum to the Board, attached. The fourth item on the agenda and the conclusions of the Council as stated in the one of the most effective features of the program is that banks can now decline loans requested by good customers but which are not necessary to the economy or to defense production without fear of losing these customers to other banks. Confidential Memorandum cited above were then read by President Brown. He added that Governor Powell stated that there had been some mention of how to make the Vol untary Credit Restraint program effective if the government agencies continued to extend credit freely. He said that a sub-committee of the Wilson Committee sent a report to the President strongly urging government agencies not to grant credit which the banks had turned down. A part of this report in support of the Voluntary Credit Restraint program was read to the Council by Governor Powell. 27 President Brown expressed the appreciation of the Council to Governor Powell for his report. The President of the Council then read item five on the agenda and the conclusions of the Council as expressed in the Confidential Memorandum to the Board. An off-therecord discussion followed. The meeting adjourned at 1:54 P.M. HERBERT V. P R O C H N O W Secretary. 28 NOTE: This tra n scrip t of the Secretary's n o tes i s not to be regarded as complete or n e c e ssa r ily e n tir e ly accurate. The tran s c r ip t is fo r the so le use o f the members o f the Federal Advisory Council. The con c is e o f f ic ia l m inutes fo r the en tire year are printed and d istrib u ted la te r . H. V. P. The S ecreta ry ’s notes on the meeting of the Federal Advisory Council on September 16, 1951 at 2:10 P. M. in Room 932 o f the Mayflower H otel, Washington, D. C. A ll members of the Federal A dvisoiy Council were present. The C ouncil approved the S ecretary's notes fo r the meeting o f May 13-15, 1951. * * * * * * * * * -* * -* * (There was a long o ff-th e-reco rd d iscu ssion p articip ated in by a ll members o f the Council) PATMAN SUBCOMMITTEE Brown su ggests th a t the Council ask the Board o f Governors fo r a copy o f the q u estion n aire which the Patman Subcommittee has presented to the Board. A ll members o f the Council agree. Hemingway s ta te s th at an American Bankers A ssociation committee w ill meet to d iscu ss the proposed a c t iv it ie s o f the Patman Subcommittee. The American Bankers A ssociation committee would welcome the view p oin ts o f the Council on th is su b ject. Brown. The su b ject i s so broad, covering the e n tire banking system , th a t i t i s d if f ic u lt to give a b r ie f expression o f the view p oin ts o f the members o f the Council on a ll phases o f i t . Lockhead b e lie v e s the A ssociation o f Reserve C ity Bankers should work w ith the American Bankers A ssociation . Fleming s ta te s th a t i t should be r e la tiv e ly easy for the American Bankers A ssociation and the A ssociation o f Reserve C ity Bankers to work togeth er because Mr. Dodge has been president of the American Bankers A sso cia tio n and i s now p resident o f the A ssociation o f Reserve C ity Bankers. Brown. The Council a lso may wish to ask the Board fo r a copy o f any q u estion n aire the Patman Subcommittee has or may submit to the Federal Reserve Banks. - 2 - THE BOARD WOULD LIKE TO HAVE ANY VIEWS THE COUNCIL MIGHT WISH TO EXPRESS ON THE PROSPECTIVE BUSINESS AND ECONOMIC SITUATION DURING THE NEXT SIX MONTHS AND ON THE POLICIES THAT SHOULD BE FOLLOWED BY THE SYSTEM IN THE FIELD OF GENERAL CREDIT CONTROLS. Brown. B u sin ess, barring war, w ill be a c tiv e with a seasonal in crea se. The d efen se production loans w ill come on top of present loans. Flem ing. I f th e Treasury balance is kept at $5 b illio n , then th e Treasury w i ll need $ 1*2 b illio n o f new money. I f the Treasury balance i s kept a t only $3 b illio n , the Treasury w ill need $2^- b illio n of new money. Brown. The Board apparently agrees w ith the Treasury that the new money must come from the banks. Consequently, any increase in reserve requirem ents is ou t. There w ill be a heavy demand for loans to carry the fin a n cin g o f crops such as soy beans, cotton , and tobacco and fo r loans to fin an ce defense production. I t w ill be necessary for the Federal Reserve System to puinp more reserves in to the banking system , and th a t process i s in fla tio n a r y . I f more reserves are not put in to the banking system , then there is a p o s s ib ility that in te r e st rates w ill r is e . The Board r e a liz e s th a t the Treasury o fferin g s must not f a i l . There i s a question o f whether i t is b e tte r to allow sh ort term ra te s to r is e or to pump in reserv es. Flem ing. The Treasury has come to the conclusion that i t would lik e the debt spread ou t, when and as i t can be done. I t is not p o ssib le to fin a n ce fo r long-term periods now. There i s no long term money a v a ila b le in insurance companies. Jackson. Seventy per cen t o f the corporate taxes w ill be c o l le c te d in th e f i r s t s ix months o f 1 9 5 2 . Brown. The demand fo r b u sin ess loa n s, p artly seasonal, and p a rtly as a r e s u lt o f the impact o f defense production, w ill markedly increase the demand fo r c r e d it.(A ll members o f the Council agree). Brown asks the members o f the Council what p o lic ie s should be follow ed under th ese co n d itio n s. Lockhead does not favor r a isin g eith er reserve requirements or the red iscou n t ra te . He would be in clin ed to use the open market and to allow the short-term ra tes to r is e fr a c tio n a lly . Flem ing. With the pressure fo r loan s, the Board may have to reduce reserv e req u irem eits. He does not favor ra isin g reserve r e quirements or r a isin g the red iscou nt r a te . Fleming does not b e lie v e in freezin g the r a te p attern u n til the defense needs become clea rer. I t may be n ecessa ry to go a l i t t l e higher w ith r a te s. Hemingway does not favor r a isin g reserve requirements but might r a ise- the red iscou n t r a te s lig h t ly . He would be in clin ed to l e t the ra te of in te r e s t r is e fr a c tio n a lly . - 3P otts doubts whether i t i s p o lit ic a lly possible to reduce reserve requirem ents. He favors open market operations, as a means o f providing reserv es, because the impact on the banking system i s le s s severe. Jackson. The loan demand in New York is heavy. A ll banks in New York look fo r a steady increase in the volume o f loan s. I f the banks are to extend more c re d it to take care of the necessary requirements o f the economy and the defense program, they cannot ab sorb government fin an cin g w ithout having reserves pumped into the system . He b e lie v e s there i s a r e la tiv e ly large amount o f uninvested pension funds in New York. These funds would not buy long-term s e c u r itie s but th ey might take short term s. Brown. There i s a tendency for corporations now to put money in short term s. Jackson s ta te s th a t he favors some increase in the rediscount rate as i t may have a d eterren t e f f e c t on prospective borrowers. Ray. There are no surplus reserves in h is d is t r ic t . He does not favor an Increase in reserve requirem ents, but he b e lie v e s an in crea se in the red iscou nt ra te might be h elp fu l. Ray sta te s that the reserve requirem ents may a c tu a lly have to be reduced. Congdon favors a moderate f le x ib i li t y in short-term rates and a reduction in reserv e requirem ents. He b e lie v e s i t i s b etter to have government s e c u r itie s in the hands of the banks than in the hands o f the F ederal Reserve banks. Congdon does not favor ra isin g the red iscou nt r a te . He b e lie v e s i t i s b etter to lower reserve re quirements than to use the open market method of providing reserves. Ringland favors a fr a c tio n a l increase in short-term ra tes and a reduction in reserve requirem ents. He also favors a s lig h tly higher rediscount r a te . Davis rep orts th a t there has been a large reduction in loans in h is d is t r ic t . He favors reducing reserve requirements and in creasin g the red iscou n t r a te . He also favors s lig h tly higher sh ort term r a te s . He s ta te s th at th e ir loans w ill probably increase but l i t t l e above l a s t y ea r. B e a ls . The flo o d in h is d is t r ic t has changed the a ttitu d e o f the Federal Reserve bank so that there has been le s s pressure to promote the c r e d it r e str a in t program. The fe e lin g is th at everything should be done to a s s is t industry and the public back to a more normal b a s is . He exp ects higher loans in h is d is t r ic t th is fa ll. B ucklin. Banks in h is d is t r ic t a n tic ip a te su b sta n tia lly higher loans t h is f a l l . He favors a f le x ib le short-term r a te , perhaps a l i t t l e h igh er. The government w ill have to r a ise ra tes to obtain any larg e amount o f new money. A dditional reserves w ill have to be provided for the banks to take care o f e ss e n tia l needs th is f a l l . Bucklin favors a s lig h tly higher rediscount r a t e ,if i t does not ad v e rse ly a ffe c t the government market. - hP otts expects a new a ll-tim e high in the volume o f loans in h is d is t r ic t . Reserves have been tig h t. P otts favors moderate f l e x i b i l i t y in the short-term r a te , but he does not favor a higher red iscou n t r a te . He prefers open market operations rather than lower reserve requirem ents as a means of providing reserves that may be needed th is f a l l . Fleming reports that one factor may retard the expenditures for defense production* Unless a large volume of scrap becomes available for defense production, defense expenditures may be re tarded. Brown says a much higher loan to ta l i s an ticip ated th is f a l l in the Seventh Federal Reserve d is t r ic t . He b e liev es the Board must con sid er the p o s s ib ility o f having to provide reserves. He does n ot favor r a isin g the rediscount r a te . Summarizing the views o f the C ouncil, he sta te s th a t a l l members of the Council f e e l reserve requirem ents should not be raised but i t may be necessary to con sid er low ering reserve requirem ents. A fter a showing of hands on the q u estion , Brown sta te s the Council is opposed to an immediate r a ise in the rediscou nt rate but the situ a tio n may change ra p id ly and the Council may have a d iffe r e n t view by the time of it s next regular m eeting in November. The expected in crease in loans th is f a l l , plus a n ticip a ted d e f ic it fin an cin g, may n e c e ssita te lower reserve requirem ents or open market operations by the Federal Reserve System, as a means o f providing the banking system with r ese rv e s. A fter a showing o f hands on the question, Brown sta te s th a t a m ajority o f the C ouncil favors the reduction o f reserve requirements in preference to open market operations* The Council may a lso s ta te to th e Board th at i t does not b e lie v e that under present con d ition s a decrease in reserve requirements would ac c e le r a te the in crea se in loans which the Council b e lie v e s is n ecessary and in e v ita b le th is fall® WHAT ARE THE PROSPECTS WITH RESPECT TO TOTAL CHANGES IN THE VOLUME OF BANK LOANS DURING THE REST OF THE CURRENT IEAR? Brown. Previous d iscu ssio n has in d icated th at the Council is unanimously o f the opinion that the demand fo r loans w ill increase during the r e s t o f the current year. The Council may a lso sta te to the Board th a t i t b e lie v e s an in crease in bank loans is in ev ita b le i f defense production is to be financed and i f the necessary require ments o f th e economy are to be met. Congdon b e lie v e s in v en to ries may show some d eclin e. Brown s ta te s he w ill explain o r a lly to the Board th a t, under pressure o f the banks, many overinventoried situ a tio n s w ill be corrected , but loans to fin an ce cotton , tobacco, and other commodities w ill be up. -5IN THE EVENT STRONG INFLATIONARY PRESSURES SHOULD REASSERT THEM SELVES, THE LIMITATIONS BIPOSED BY RECENT LEGISLATION ON THE AUTHORITIES OF THE BOARD OVER CONSUMER AND REAL ESTATE CREDIT WOULD MAKE IT IMPOSSIBLE FOR THESE AUTHORITIES TO 3E USED EFFECTIVELY AS INSTRUMENTS OF SELECTIVE CREDIT REGULATION. WHAT WOULD BE THE RECOMMENDATIONS OF THE COUNCIL AS TO n/HAT, IF ANY, RECOMMENDATIONS SHOULD BE MADE BY THE BOARD TO THE CONGRESS WITH RESPECT TO THE REMOVAL OF THE LIMITATIONS? Hemingway. I f th e Board i s to be resp o n sib le fo r the volume o f consumer and r e a l e s t a te c r e d it , the Board should have a u th o rity . He agrees w ith Chairman M artin ’s statem ent to th e Congress on th is m atter. Brown. The C ouncil may su ggest th a t the Board ask Congress to ranove th e lim ita tio n s placed upon i t s a c tio n s. I f Congress i s un w illin g to remove th ese lim ita tio n s , then Congress should take the power from th e Board. Flem ing. Someone may say th a t i f th e Board should have com p le te a u th o rity over consumer and r e a l e sta te c r e d it, perhaps i t should have com plete a u th o rity over r ese r v e s. B u ck lin . The C ouncil may say th a t i f there are to be s e le c t iv e c r e d it c o n tr o ls , such as X and W, th e Council f e e l s th a t a u th o rity over such c o n tr o ls and th e ir ad m in istration should be placed in the Board o f Governors. Flem ing. We may s ta te th a t th e lim ita tio n s placed on the Board were a m istake* Brown. The C ouncil may su g gest th a t i f any recommendations are made by the Board to the Congress they should be fo r the removal o f such lim ita tio n s,. The C ouncil on p revious occasion s has sta te d , and i t s t i l l b e lie v e s , th a t au th ority over consumer and r e a l e sta te c r e d it should not be given to th e Board in peacetim e c o n d itio n s. The Council approved, under p resen t co n d itio n s, the granting o f au th ority to th e Board fo r such s e le c t iv e c r e d it reg u la tio n s fo r a lim ited p eriod . The C ouncil b e lie v e s th at the lim ita tio n s , imposed by recen t le g is la t io n on the Board’s au th ority over consumer and r e a l e s ta te c r e d it, c o n stitu te d a mistakeo The C ouncil b e lie v e s th at at the appropriate tim e th e Board may ask fo r th e removal o f th ese lim ita tio n s. WHAT COMMENTS DOES THE COUNCIL HAVE TO MAKE WITH RESPECT TO THE PROGRAM FOR VOLUNTARY CREDIT RESTRAINT AND THE MANNER IN WHICH IT HAS OPERATED? Fleming b e lie v e s the Board has done a good job w ith the Voluntary C redit R estra in t program, but he b e lie v e s i t needs more dram atizing. -6 - Brown. U nless the members o f the Council have other view s, the Council may in i t s memorandum to the Board reaffirm the C ouncil's p o sitio n , as expressed in the May memorandum, and emphasize the dram atization o f the program, but leave out reference to the NPA. IS THE V-LOAN PROGRAM OPERATING SATISFACTORILY AND TO WHAT EXTENT IS IT MEETING THE NEED FOR DEFENSE PRODUCTION LOANS? Lockhead. The V-Loan program takes too long in approving a p p lica tio n s. Congdon s ta te s th a t ad m in istratively the program is very slow and th at there are also delays in assign in g subcontracts. Brown comments a lso on the delay in the assignment o f sub con tracts and th e slow ness in g ettin g ap p lication s approved. (An o ff-th e -r e co r d d isc u ssio n fo llo w s.) The Council may sta te that the V-Loan program i s slow in g ettin g ap p lica tio n s through but that the delays are not the fa u lt o f the Federal Reserve banks, or th eir s t a f f s . The m eeting adjourned at P. M. - 7THE FEDERAL ADVISORY COUNCIL CONVENED AT 10 A.M. ON SEPTEMBER 17, 1951, IN ROOM 932 OF THE MAYFLOWER HOTEL, WASHINGTON, D. C. ALL MEMBERS OF THE COUNCIL WERE PRESENT. The Council prepared and approved the attached C onfidential Memorandum to be sen t to the Board o f Governors r ela tiv e to the Agenda for the jo in t meeting o f the Council and the Board on September 18, 1951* The Memorandum was d eliv ered to the Secretary o f the Board of Governors at 12:00 noon. I t w ill be noted th a t each item o f the Agenda i s lis t e d together w ith the comments o f the C ouncil. The m eeting adjourned at 11:1*5 A.M. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON SEPTEMBER 18, 1951 The Council would appreciate receivin g from the Board of Governors copies o f the q u estion n aires submitted to the Board and to the Federal Re serve Banks by th e Patman Subcommittee, and copies of the answers which the Board and the Federal Reserve Banks may make to the questionnaires. I f the Board so d esires and there is opportunity, the Council would be glad to d is cuss the answers o f the Board to the questionnaire before they are submitted to the Patman Subcommittee. -/<- -A ' -X ” -K- 1. The Board would lik e to have any views the Council might wish to express on the prospective business and economic s itu a tio n during the next s ix months and on the p o lic ie s that should be follow ed by the System in the f ie ld of gen era l c r e d it c o n tr o ls. Barring a f u ll- s c a le war, or a seriou s la g in the defense program, the Council b e lie v e s th at b u sin ess during the next s ix months w ill be activ e and w ill a lso show a season al in crea se. The demand for c r e d it, p artly for seasonal purposes and p a rtly because o f the impact o f defense production, w ill markedly in crea se th e volume o f bank loan s. Under these con d ition s, A. The Council b e lie v e s that bank reserve requirements should not be ra ised but that a decrease in reserve requirem ents may be necessary; B. The Council i s opposed to an immediate increase in th e red iscou nt r a te , but the situ a tio n may change ra p id ly and the Council may have a d iffe r e n t view by the tim e o f i t s next regular m eeting w ith the Board; and C. The Council b e lie v e s that the expected increase in loan s plus a n ticip a ted d e fic it fin an cin g w ill probably n e c e s s ita te providing the banking system w ith a d d itio n a l reserv es e ith er through lower re serve requirem ents or open market op eration s. As between th ese two a lte r n a tiv e s , a m ajority of the Council would favor providing the increased reserves by a reduction in reserve requirements rather than through the Federal Reserve Banks acquiring a large a d d itio n a l amount o f Government s e c u r itie s by open -2- market operation s. The council does not b elieve that under p resen tly an ticip ated con d ition s, and with the Voluntary C redit R estraint program in continued opera tio n , a decrease in reserve requirements would a cceler a te th e in crease in loans which the Council b eliev es is n ecessary and in ev ita b le th is f a l l . 2. What are the prospects w ith respect to to ta l changes in the volume o f bank loans during the r est of the current year? The Council i s unanimously of the opinion that the volume of bank loans w ill in crease during the r e s t of the current year. An increase in bank loans is in e v ita b le i f defense production is to be financed and i f the necessary requirem ents o f the economy are to be met. 3. In the event strong in fla tio n a r y pressures should reassert th em selves, th e lim ita tio n s imposed by recent le g is la tio n on the a u th o r itie s o f the Board over consumer and rea l e sta te c r e d it would make i t im possible for these authori t ie s to be used e f f e c t iv e ly as instrum ents o f s e le c tiv e cred it r eg u la tio n . What would b© the recommendations of the C ouncil as to what, i f any, recommendations should be made by th e Bosrd to the Congress w ith respect to the re moval o f th e lim ita tio n s? The Council on previous occasions has sta te d , and i t s t i l l be lie v e s , th at a u th o rity over consumer and rea l e sta te cred it should not be given to the Bos.rd when peace-tim e condition s p r e v a il. With the existen ce of a p a rtia l war economy, the Council approved granting to the Board, for a lim ited period, th e a u th o rity for such s e le c tiv e c re d it reg u latio n s. The Council b e lie v e s th a t the im p osition by recent le g is la tio n of lim ita tio n s upon the au th ority p rev io u sly granted the Board by Congress over consumer and rea l e sta te c r e d it was a serio u s m istake. At an appropriate time the Board should ask for the removal o f th ese lim ita tio n s. 4.. What comments does the Council have to make w ith respect to the program for voluntary cred it r e str a in t and the manner in which i t has operated? At i t s May m eeting w ith the Board, the Council stated th at the Voluntary C redit R estra in t program had met w ith the general approval not only of banks but a lso o f insurance companies and investm ent bankers. The program continues to meet w ith th e ir strong approval. The regional com m ittees throughout th e country are now fu lly organized and fu n ction in g. Many loan s, aggregating a very large d o lla r amount, which would not promote either the defense e ffo r t or the e f f ic ie n t fu n ction in g of the c iv ilia n economy, and which w ithout the Voluntary Credit R estraint program would be raade, are not being granted by banks or other fin a n c ia l in s titu tio n s . The know ledge that such loans w ill be d eclin ed has resu lted in many would-be borrowers not applying for them. -3The Council would lik e to express again to the Board of Governors, the o f f ic ia ls of the Federal Reserve Banks and Governor Powell, who is d irectly in charge o f the program, appreciation for th eir active and e ffe c tive e ffo r ts to r e s t r ic t unnecessary and undesirable cred it. The Council recommends more extensive use of lite r a tu r e , news releases, ad d resses, and other su ita b le media to bring and keep before lenders and borrowers the o b jectiv es of the program. The Council would lik e to reemphasize the statem ent made to the Board in February and again in May o f th is year, th at ”Government loans and guaranties o f loans in a l l f ie ld s , including rea l e s ta te , should be term inated, except where such loans are necessary for the defense e f f o r t .” The present Voluntary C redit R estrain t program does not encompass loans guaranteed by the Government or i t s agen cies. The program would be more e ffe c tiv e i f i t included not only p rivate c r e d it, but a lso loans so guar anteed. 5. Is the V-loan program operating s a tis fa c to r ily and to what exten t is i t m eeting the need for defense production loans? Due p rim arily to slow ness in g ettin g action on a p p lica tio n s, which delay i s not the fa u lt o f the Federal Reserve Banks or th e ir s t a f f s , the Council b e lie v e s the V-loan program i s not working as w ell as was an ticip ated or as i t should. THE FEDERAL ADVISORY COUNCIL CONVENED IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING AT 2:30 P.M. ON SEPTEMBER 17, 1951. ALL MEMBERS OF THE COUNCIL WERE PRESENT, EXCEPT MR. JACKSON. Dr. Ralph A. Young, D irector of the D ivision of Research and S t a t is t ic s o f the Board o f Governors spoke on the subject ,fHow Much More In fla tio n ? ” A copy o f Dr. Young's remarks was given to each member o f the C ouncil. The m eeting adjourned at 1; P.M. -9 - ON SEPTEMBER 13, 1951, at 10:35 A.M., THE FEDERAL ADVISORY COUNCIL HELD A JOINT MEETING WITH THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING, WASHINGTON, D.C. ALL MEMBERS OF THE COUKCIL WERE PRESENT. THE FOLLOWING MEMBERS OF THE BOARD OF GOVERNORS WERE PRESENT: GOVERNORS SZYMCZAK, EVANS, NORTON AND POWELL. MR. CARPENTER, SECRETARY OF THE BOARD, ALSO WAS PRESENT. PATMAN SUBCOMMITTEE Brown reads the prelim inary paragraph of the Memorandum to the Board o f Governors which is included in th ese notes. I t w ill be noted that th is paragraph deals w ith th e questionnaires of the Patman Sub committee. (An o ff-th e-reco rd discu ssion fo llo w s.) Szymczak. The Board w ill be pleased to provide the Council w ith d ra fts o f the Patman Subcommittee’s questionnaires and the answers when they are ready. The Board S ta ff is now working on the answers to the prelim inary d ra ft o f the questionnaire sent to the Board by the Sub committee. 7/hen the f in a l d ra fts o f the questionnaires are a v a ila b le, copies w ill be sen t to the Council. Hemingway sta te s th a t a questionnaire w ill probably Patman Subcommittee to the American Bankers A ssociation , of the A ssociation w ill d iscu ss the m atter in general in time o f the A sso cia tio n convention, September 30-0ctober Pow ell understands th a t questionnaires w ill a lso go certain econom ists and perhaps certain bankers. be sent by the and a committee Chicago at the 3, 1951 • to the Treasury, THE BOARD WOULD LIKE TO HA'\7E ANY VIEWS THE COUNCIL MIGHT WISH TO EXPRESS ON THE PROSPECTIVE BUSINESS AND ECONOMIC SITUATION DURING THE NEXT SIX MONTHS AND ON THE POLICIES THAT SHOULD BE FOLLOWED BY THE SYSTEM IN THE FIELD OF GENERAL CREDIT CONTROLS. Brown reads Item 1 o f th e agenda and the conclusions of the Council, as expressed in the Memorandum to the Board attached. The Council b e lie v e s th a t in view o f the a n ticip a ted volume o f d e f ic it fin an cin g, the short-term ra te may flu c tu a te fr a c tio n a lly , but no major change in the r a te would be d e sir a b le . The members of the Council b eliev e th at i t may be necessary to provide a d d ition al reserves fo r the banking system. The Council i s rather sharply divided as to whether th ese reserves should be provided by open market operations or lower reserve requirem ents. I t may be necessary to r a ise s lig h t ly the rediscount rate a t a la te r date. The Council b e lie v e s th a t the in crease in loans w ill be so large plus a n ticip a ted d e f ic it fin a n cin g, that ad d ition al reserves w ill be required by the banking system . Flem ing. The Treasury fig u res in d ica te that i f the Treasury is to keep a $5 b illio n balance i t w ill need $U-l / 2 b illio n of new money; i f a balance of on ly $ 3 b illio n i s kept, then $ 2 - 1 / 2 b illio n of new money w ill be needed. The question of reserves depends in part on the magnitude o f Treasury fin an cin g. - 10 - Jackson reports that the New York banks expect a continuing demand for money. Corporations w ill pay 35 per cent of their taxes in the fir s t quarter of 1952, and 35 per cent in the second quarter* In other words, 70 per cent of the corporation taxes w ill be paid in the first six months of 1952c The only money which is available is short-term money, and the banks w ill undoubtedly be called upon to finance part of the government d e fic it. Szymczak. On balance, the insurance companies and savings banks may be selling government securities in the months immediately aheado Congdon believes that the worst place to lodge government securities is in the Federal Reserve System. To have them in the banks is bad enough, but he believes it is worse to have them in the Federal Reserve System* Congdon also believes that i f the banks need additional reserves it is better to reduce reserve requirements than to use open market operations to obtain more reserves* P otts s ta te s that he does not favor lowering reserve requirem ents. He b e lie v e s th a t open market operations are smoother and that the impact on the banking system is le s s severe. Szymczak. The economy seems to be moving in two d irectio n s—up and down. I t i s too ea rly to decide which way the economy w ill a ctu a lly move. The Treasury lean s in the d irection of larger balances, and tends to under—estim ate i t s revenues* One o f the important economic facto rs now is the large volume o f in v en to r ie s. Defense production i s also dragging i t s f e e t . There i s some tendency not to push defense production too stron gly. The Board thinks the Treasury w ill need $2*1 b illio n by the end o f the year, and the Board a n ticip a tes th at the new tax b i l l w ill y ie ld $ 1^.7 b illio n o f extra money, a part o f which w ill come in th is year. Szymczak does not b e lie v e a change in reserve requirements would be d esira b le. I f some change i s needed in the F a ll, he would prefer open market operations to the exten t necessary* Reducing reserve requirements would broadcast the situ a tio n to the whole country, and the Board would p refer open market op eration s. The Board is not thinking now o f a change in the red iscou nt r a te . The fe e lin g o f the Board at present i s ju st to s i t t ig h t . The Treasury could obtain money through b i l l s and tax a n tic i pation n o tes. The Treasury b e lie v e s there i s no money in the long or interm ediate market now. The Board agrees, but no one knows what the situ a tio n may be next June. Fleming b e lie v e s th a t some d e fin ite plan should be worked out for spreading the debt so th at th is o b jectiv e i s kept con stan tly in mind. Szymczak. The Board agrees. Jackson. The Council would not favor open market operations, i f it meant the accumulation of large government holdings in the Federal Reserve System. WHAT ARE THE PROSPECTS WITH RESPECT TO TOTAL CHANCES IN THE OF BANK LOANS DURING THE REST OF THE CURRENT YEAR? VOLUME - 11 - Brown reads Item 2 o f the agenda and the conclusions of the Council, as expressed in the Memorandum to the Board attached,, Although the volume o f r e t a il in v en to ries is down from la s t Spring, the volume is s t i l l high* Commitments are probably le s s than a year ago, but they are also probably s t i l l higho The demand fo r crop loans promises to be heavy. Szymczako The banks have been tig h t and have been borrowing at the Federal Reserve bankSo Manufacturers' inventories have gone up g rea tly . In some cases businesses have bought m etals which are not now being used to the exten t a n ticip a ted for defense production. Brown s ta te s he b e lie v e s Ralph Young estim ated a 12-1/2 per cent increase in the volume of loan s. The banks know that th eir customers are p ressin g h ea v ily fo r loan s. IN THE EVENT STRONG INFLATIONARY PRESSURES SHOULD REASSERT THEMSELVES, THE LIMITATIONS IMPOSED BY RECENT LEGISLATION ON THE AUTHORITIES OF THE BOARD OVER CONSUMER AND REAL ESTATE CREDIT WOULD MAKE IT IMPOS SIBLE FOR THESE AUTHORITIES TO BE USED EFFECTIVELY AS INSTRUMENTS OF SELECTIVE CREDIT REGULATION. WHAT WOULU) BE THE RECOMMENDATIONS OF THE COUNCIL AS TO WHAT, IF ANY, RECOMMENDATIONS SHOULD BE MADE BY THE BOARD TO THE CONGRESS WITH RESPECT TO THE REMOVAL OF THE LIMITATIONS? Brown reads Item 3 o f the agenda and the conclusions o f the Council, as expressed in the Memorandum to the Board attached. The Council b eliev es Congress made a m istake. However, the change has been as recent as July, so the Board can hardly go back to the Congress y et and ask fo r the removal of the lim ita tio n s . Szymczak. The Council o f Economic Advisers would have no open market op eration s, but would work only through s e le c tiv e cred it co n tro ls. The Council o f Economic Advisers even wanted a s e le c tiv e inventory control which the Board f e l t would not work. The Board did not b elieve that i t should y ie ld to the automobile dealers and extend the time for payment to eighteen months. The Board f e l t th a t, i f i t y ield ed , automobile dealers would fig u re th a t they only needed in the future to put pressure on Congress and the Board would y ield * Norton. Is there any evidence that there w ill be large batches of cheaper ($12,000) VA housing? (Various Council members report that there i s no evidence*) Norton b e lie v e s th at there are more expensive houses being b u ilt than at any time in h is experience. P otts asks whether Norton has the o v era ll fig u res on housing* Norton s ta te s he does not have the fig u res with him. However, housing sta r ts w ill run a l i t t l e over one m illio n in 19^1. There was a backlog o r ig in a lly o f 600,000. The backlog i s now down considerably* P otts asks Norton about the situ a tio n in m a teria ls. Norton. The contractors report they can get anything but copper* - 12 - RinglancL Is there a cubic footage lim itation ? Norton s ta te s th at he is not certain that there i s such a lim ita tio n . Congdon. I f mortgage money becomes easy, he b elieves there would be much low co st housingo Norton agreeso iTrlAT COMMENTS DOES THE COUNCIL HAVE TO MAKE WITH RESPECT TO THE PROGRAM FOR VOLUNTARY CREDIT RESTRAINT AND THE MANNER IN WHICH IT HAS OPERATED? Brown reads Item U o f the agenda and the conclusions o f the Council, as expressed in the Memorandum to the Board attachedo One o f the most e ffe c tiv e fea tu res o f the program is to be found in the cases o f good customers o f large banks who requested loans which are not necessary to the economy or to defense p rod u ction The banks can now d ecline these loans w ithout fea r o f lo sin g these customers to other banks. There i s always a danger th at a fte r any new program i s once launched^ le s s p u b licity w ill be given to i t latero Brown urges the continuous use of lite r a tu r e , speeches, and oth er p u b lic ity m aterialso He comments th at many loans are extended by the government which the banks would not grant, but that i t i s probably d if f ic u lt to con trol these government loanso Szymczako Powell has done a very good job* I t is good to have insurance p eop le, investm ent bankers and commercial bankers working together., There i s some danger th at i f too many sm all borrowers are turned down they w ill go to Congress fo r help<, I f the Board'should have to use Section 13b, in ad d ition to the V-Loan program, they w ill do so to keep sn a il bu sin ess away from Congress 0 The m atter of government lending was taken up w ith the P resid en t, and he asked the government lending agencies to conform to the Voluntary C redit R estraint program., P ow ello The compliments regarding th is program belong to the n ation al committee and the region al committeeSo Powell sta te s he was aware during the la te summer th at the program was not g ettin g the p u b licity i t should, but p r ic e s were f a llin g and loans d eclin in g so he did not fe e l i t im perative to promote the program through p u b lic ity more actively.. However, on September 5 the N ational Committee met and decided to step up the p u b licity,, Powell favors having the p u b licity come from the regional groups• I t is b e tte r to stop the pressure fo r cred it lo c a lly by p u b licity before the req u ests for c r e d it are made0 There has been some question of how to make the Voluntary C redit R etraint program, e ffe c tiv e i f the government agen cies continue to extend c red it fr e e ly 0 The Wilson com m ittee gave good support to the program., A subcommittee (W ilson, Lawton and K eyserling) o f the W ilson Committee sent a report to the President stron gly urging government agen cies not to grant c re d it which the banks turn downo The report was in support of the Voluntary Credit R estrain t program, and a part o f i t was read to the Council by Powello Powell sta te s that the P residen t to ld Lawton o f the Budget Bureau to send the report as a d ire c tiv e to the government lending agencieso Powell sta te s th at com p la in ts which bankers or bankers a sso cia tio n s make regarding government loans should be s p e c ific , and include examples i f the Board is to be helpful* I f the Board i s given d e fin ite cases o f government loans which were unnecessary and not d esira b le, the cases can be taken up by the Board with - 13 - the proper a u th o ritie s in Washington*, Powell sta te s he has also w ritten to the heads o f the various government lending agencies and has received le t t e r s from them o fferin g to cooperateo He also has s t a t is t ic s on the a c t iv it ie s o f the various government lending agencies, and th eir loans have increased no more than banks 0 PoCoAo loans have not expanded any more than bankers 9 lo a n s„ Brown s ta te s that the savings and loan association s have groups working on the Voluntary Credit R estraint program 0 Pow ello The Voluntary Credit R estraint program has not tr ie d to in flu en ce Congress on FoHoAo or public housingo Szymczako The Board and its members have tried to make their influence felt on these matters» Brown r a ise s the question o f whether thought has been given to amending The Defense Production Act so that government loans would come under the programo Powell s ta te s he has stayed away from ra isin g th is question, because he f e l t th a t a l l the government agencies might gang up on the program and defeat it* Brown expresses the appreciation o f the Council to Powell for h is reporto IS THE V-LOAN PROGRAM OPERATING SATISFACTORILY AND TO WHAT EXTENT IS IT MEETING THE NEED FOR DEFENSE PRODUCTION LOANS? Brown reads Item 5 o f the agenda and the conclusions of the Council, as expressed in the Memorandum to the Board attachedo (An o ff-th e -r e c o r d d iscu ssion follow s)o Szymczak s ta te s th a t the Board can take some action on some o f the com plaints, because o f the in te r e s t o f the Federal Reserve System in V-LoanSo Davis asks how much money is a v ailab le under S ection 13b 0 Szymczak i s not c e r ta in , but b e lie v e s i t is around $2^0 m illio n <> Davis has been to ld th a t i t is only about $129 m illio n <, ■* * *- *- * Szymczak w ishes the Council to know that i t does not have to w rite out a ll o f the answers to item s on the Agendao The Council does not have to commit i t s e l f d e fin ite ly In w ritin g, but may leave agenda item s to be discu ssed orally® There may be item s where ad d ition al inform ation w ill be forthcom ing from the Board a t the m eeting, which may resu lt in a change in the C ou n cil's viewpoint* Szymczak w ishes the Council to know that the w ritten memorandum which the Council now prepares is not necessary, and need be used only in those cases where the Council p refers to w rite i t s answers to q u estion s on the Agendao - Ill Brown s t a t e s of a p re v io u s t h a t t h e w r i t t e n memorandum w as C h a ir m a n o f the r e s u l t of a r e q u e s t th e Boardo Szymczak comments that the previous Chairman had requested the written memorandum, but that the Board now feels it is not necessary3 except as the Council may wish to write its views0 The meeting adjourned at ls^h PoMo ■* -ft The Council and the Board agreed that the next meeting would be November 18-20 $ 195>lo The joint meeting with the Board w ill be on November 2 0 , 1951°
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