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MINUTES OF MEETING of the FEDERAL ADVISORY COUNCIL September 19-20, 1938 MINUTES OF M EETIN G OF THE FEDERAL ADVISORY COUNCIL September 19, 1938 The third statutory meeting of the Federal Advisory Council for 1938 was convened in the Board Room of the Federal Reserve Building, Washington, D. C., on Monday, September 19, 1938, at 10:15 A. M ., the President, M r. Smith, in the Chair. Present: Mr. Thomas M . Steele Mr. W. W. Aldrich Mr. Howard A. Loeb Mr. Robert M . Hanes M r. Edward Ball Mr. Edward E. Brown Mr. Walter W. Smith Mr. John Crosby Mr. C. Q. Chandler Mr. R. Ellison Harding Mr. Paul S. Dick M r. Walter Lichtenstein District No. District No. District No. District No. District No. District No. District No. District No. District No. District No. District No. Secretary 8 9 10 11 12 Absent: M r. L. B. Williams District No. 4 On motion, duly made and seconded, the minutes of the meeting of the Council of May 15-17,1938, copies of which had been previously sent to the members, were approved. The Secretary announced that M r. L. B. Williams, representative of the Fourth District, had written expressing his regret that he would be unable to be present at this session of the Council and that the Federal Reserve Bank of Cleveland had decided not to send an alternate. The Secretary read a letter dated August 3,1938, from Mr. Chester Morrill, Secretary of the Board oi Governors of the Federal Reserve System, in which it was stated that the Board of Governors desired to have an expression of the Council’s own views in respect to the matters presented in the report dated May 17, 1938, in which were given the results of an investigation as to “How can the Federal Reserve System increase the value or scope of its services to member banks in practicable or desirable ways?” It was unanimously agreed that the Secretary be asked to request Mr. Williams, after correspondence with the three other members of his committee, namely Messrs. Smith, Harding, and Dick, to prepare a report to be submitted to the members of the Council prior to the November meeting in order that a final report might be submitted to the Board of Governors at the November meeting. It was agreed that the report should cover both matters of policy as well as technical operating problems. The Secretary read M r. M orrill’s letter of August 30, asking the opinion of the Council in regard to an amendment to Regulation F (Trust Powers of National Banks) proposed by the Pennsylvania Bankers Association, Trust Company Section. 1 M r. Loeb presented a letter dated September 2, 1938, from M r. Frank J. Drinnen, First Vice President of the Federal Reserve Bank of Philadelphia, in which the proposed amendment was discussed. At 11:15 A. M ., D r. E. A. Goldenweiser, Director, Division of Research and Statis tics, appeared before the Council and discussed the general financial and business situa tion. Dr. Goldenweiser left at 12:15 P. M . It was voted unanimously that the Federal Advisory Council recommend that the Board of Governors of the Federal Reserve System adopt, in principle, the amendment to Regulation F formulated by the Pennsylvania Bankers Association, Trust Company Section. It was agreed that M r. Loeb would try to formulate a report discussing somewhat in detail the proposed amendment and make suggestions in reference thereto. A discussion took place regarding the proposal made to have the Government establish credit banks chiefly for the purpose of making capital loans. The meeting adjourned at 12:50 P. M . for lunch with Vice Chairman Ransom, at which the discussion regarding credit banks was continued. The meeting reconvened at 3:20 P. M . It was voted to ask the Board to concur in having the November meeting of the Council take place on November 28 and 29 in order to avoid conflict with the annual convention of the American Bankers Association. M r. Steele discussed the question of asking the Board to resume its former practice of segregating in the figures of reporting member banks the loans made on collateral security from those otherwise secured and unsecured. M r. Steele stated that he had brought up the m atter at the suggestion of some banks in his district, but since then had been furnished a report made to the Board on this matter and it had convinced him that the value of segregating these figures was not sufficient to justify the Board in resuming the former practice. A discussion took place regarding the desirability of having the Board of Governors of the Federal Reserve System, or some other im partial agency, make an investigation into the credit needs of business throughout the country analagous to that in the Seventh Federal Reserve D istrict made in 1934 under the direction of Messrs. Hardy and Viner. President Sm ith appointed a committee, consisting of himself, Messrs. Brown and Harding, to confer w ith the Secretary of the Treasury and suggest that the Treasury undertake the investigation made under its auspices. The Secretary of the Council arranged to have the committee confer with Secretary Morgenthau at 11:00 A. M . on Tuesday, September 20. The meeting adjourned at 4:00 P. M . W A LT ER LIC H T EN ST E IN Secretary. 2 M IN U TES OF M E E T IN G OF TH E FED ERAL ADVISORY COUNCIL September 20, 1938 At 10:10 A. M ., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D . C., the President, M r. Smith, in the Chair. Present: M r. W alter W . Sm ith, President; M r. Howard A. Loeb, Vice President; Messrs. T. M . Steele, W . W . Aldrich, R. M . Hanes, Edward Ball, E. E. Brown, John Crosby, C. Q. Chandler, R . E. Harding, P. S. Dick, and Walter Lichtenstein, Secretary. M r. Steele read the report explaining why the method of reporting secured and unsecured loans had been changed. It was agreed to drop the matter. The meeting adjourned at 10:20 A. M . W A LT ER LIC H T EN ST E IN , Secretary. 3 MINUTES OF JOINT CO N FEREN CE OF TH E FEDERAL ADVISORY COUNCIL AND TH E BO ARD OF GOVERN ORS OF TH E FEDERAL RESERVE SYSTEM September 20, 1938 At 10:30 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 Chairm an Ronald Ransom; Governors Chester C. Davis, John McKee, and M . S. Szymczak; also Messrs. Lawrence Clayton, Assistant to the Chairman of the Board of Governors; W alter W yatt, General Counsel for the Board of Governors; Chester Morrill, Secretary of the Board of Governors; L. P. Bethea and S. R. Carpenter, Assistant Secretaries of the Board of Governors; Dr. E. A. Goldenweiser, Director, Division of Research and Statistics, Board of Governors; Carl E. Parry, Chief of Division of Bank Loans, B. M . Wingfield, Assistant General Counsel; E. L. Smead, Chief, Division of Bank Operations; E lliott Thurston, Special Assistant to the Chairman, and C. E. Cagle, Assistant Chief, Division of Examinations. Present: Members of the Federal Advisory Council: M r. W alter W . Sm ith, President; M r. Howard A. Loeb, Vice President; Messrs. T. M . Steele, W . W . Aldrich, R. M . Hanes, Edward Ball, E. E. Brown, John Crosby, C. Q. Chandler, R. E. Harding, P. S. Dick, and Walter Lichtenstein, Secretary. President Sm ith informed the Board that owing to the fact that M r. L. B. Williams had been in Europe all summer and was absent from this meeting, it had been found impossible for the Council to subm it at this time a report giving the views of the Council itself on “How can the Federal Reserve System increase the value or scope of its services to member banks in practicable or desirable ways?” President Smith stated such a report would be presented to the Board either before or at the time of the November meeting. M r. Loeb reported regarding the suggested amendment to Regulation F, concerning which some discussion took place. At 10:50 A. M . the committee appointed to meet with the Secretary of the Treasury, namely Messrs. Sm ith, Brown, and Harding, left, and M r. Loeb, the Vice President of the Council, took the Chair. A discussion took place regarding the desirability of establishing so-called inter mediary credit banks. It was announced that there would be a joint meeting of the Council with the Board and the Presidents of the twelve Federal Reserve Banks at 2:15 P. M . The meeting adjourned at 11:20 A. M . W A LT ER LIC H T E N ST E IN , Secretary. 4 M IN U TES OF M E E T IN G OF T H E FED ERAL ADVISORY COUNCIL September 20, 1938 At 11:30 A. M . the Federal Advisory Council reconvened in the Board Room in the Federal Reserve Building, Washington, D. C., the President, Mr. Smith, in the Chair. Present: Mr. Walter W. Smith, President; Mr. Howard A. Loeb, Vice President; Messrs. T. M . Steele, W. W . Aldrich, R. M . Hanes, Edward Ball, E. E. Brown, John Crosby, C. Q. Chandler, R. E. Harding, P. S. Dick, and Walter Lichtenstein, Secretary. Mr. Brown reported for the committee which had conferred with the Secretary of the Treasury that the Secretary agreed that it would be highly desirable to make an investi gation of the credit situation in the whole country such as had been suggested. He pointed out, however, that in 1934 the Treasury had at its disposal some unallocated funds which it was able to use to pay the expenses of such an investigation. He stated that Mr. Viner was in Washington at the moment and he would consult with him and let the Federal Advisory Council know his decision within a fewTdays. The Secretary o f the Council read comments regarding the form of the proposed amendment to Regulation F which had been prepared by the Federal Reserve Bank of Philadelphia, a copy of which is attached to these minutes. The Council concurred in the suggestions submitted by the Federal Reserve Bank of Philadelphia but believes there should be two changes: 1. In paragraph 2, page 22, of the memorandum of the Pennsylvania Bankers Association, Trust Company Section, the basis of admissions and withdrawals from the fund should be left to the legislation of each particular state. 2. In paragraph 7, page 31, the Federal Reserve Bank of Philadelphia suggested that “ it would be well to add to the end of the indented paragraph on page 32 a statement to the effect that if the fund remains closed for nine consecutive months because of excessive illegal investments and/or depreciation it shall be placed in liquidation.” The Council believes that it would be better to extend the period mentioned from nine to twelve months. With the exception o f the changes noted above, the Council agreed unanimously to subscribe to the comments made by the Federal Reserve Bank of Philadelphia regarding the proposed amendment to Regulation F. The meeting adjourned at 12:05 P. M . W A LTER LICHTENSTEIN, Secretary. 5 MINUTES OF JOIN T CO N FEREN CE OF THE FEDERAL ADVISORY COUNCIL, THE BOARD OF G OVERN ORS OF T H E FED ERAL RESERVE SYSTEM, AND T H E PR E SID E N TS OF TH E FED ERAL RESERVE BANKS September 20, 1938 At 2:15 P. M . a joint conference of the Federal Advisory Council, the Board of Governors of the Federal Reserve System, and the Presidents of the Federal Reserve Banks was held in the Board Room of the Federal Reserve Building, Washington, D. C., Vice Chairman Ransom, o f the Board of Governors of the Federal Reserve System, presiding. Present: Members of the Board of Governors of the Federal Reserve System: Vice Chairman Ronald Ransom; Governors Chester C. Davis, John McKee, and M. S. Szymczak; also Messrs. Lawrence Clayton, Assistant to the Chairman of the Board of Governors, Walter Wyatt, General Counsel for the Board of Governors; Chester Morrill, Secretary of the Board of Governors; L. P. Bethea and S. R. Carpenter, Assistant Secretaries of the Board of Governors; Dr. E. A. Goldenweiser, Director, Division of Research and Statistics; Carl E. Parry, Chief of Division of Bank Loans; E. L. Smead, Chief, Division of Bank Operations; J. P. Dreibelbis, Assistant General Counsel, and Elliott Thurston, Special Assistant to the Chairman. Present: Presidents of the Federal Reserve Banks: Messrs. R. A. Young (Boston), G. L. Harrison (New York), J. S. Sinclair (Phila delphia), M . J. Fleming (Cleveland), Hugh Leach (Richmond), Oscar Newton (Atlanta), G. J. Schaller (Chicago), W. M cC . Martin (St. Louis), J. N. Peyton (Minneapolis), G. H. Hamilton (Kansas City), B. A. McKinney (Dallas), and W. A. Day (SanFrancisco); also Dr. John H. Williams of the Federal Reserve Bank of New York, and H. H. Kimball, Secretary of the Presidents’ conference. Present: Members of the Federal Advisory Council: Mr. Walter W. Smith, President; Mr. Howard A. Loeb, Vice President; Messrs. T. M. Steele, W. W. Aldrich, R. M . Hanes, Edward Ball, E. E. Brown, John Crosby, C. Q. Chandler, R. E. Harding, P. S. Dick, and Walter Lichtenstein, Secretary. Dr. Williams gave a short account of the present business and financial situation. Mr. W. W. Smith introduced the subject of the proposed intermediate credit banks and a discussion followed regarding the readiness of banks to make available credit to small businesses. Vice Chairman Ransom discussed the desirability of possibly breaking down the statistics, ordinarily reported, in such fashion that there would be a differentiation made between renewal of old loans and new loans and also reports made of new lines of credit granted by banks. Dr. Goldenweiser pointed out that if either reporting member banks or all banks were to report regarding the amount of new loans, renewals, reasons for turning down loans, 6 etc., it would be necessary to obtain this information for a given period of time. He made it clear that statistics of this nature would have no meaning if the amounts were merely given tor one single day. Dr. Goldenweiser pointed out that there is a certain gap in the investigations that have been made or are likely to be made on this whole question of granting of credit. Consideration in these investigations is given to businesses which are going on and busi nesses which are failing possibly because they have not been able to obtain credit, but, of course, no information is gathered regarding enterprises which are non-existent but which would have been created if credit had been available. In other words, it is entirely conconceivable that there are individuals who have the ability and the desire to start pro ductive enterprises but who cannot obtain any capital with which to do so. Naturally, as such enterprises are merely hypothetical and not actually in existence there is no infor mation to be obtained regarding them. The meeting adjourned at 4:05 P. M . W A LTER LICHTENSTEIN, Secretary. 7 Federal Heserve Bank of Philadelphia :vriri£ the form of the proposed amendment to Regulation F ---- 6--------------- ------------------------------------- .. p |gS w 09 ir (1 ). We suggest that the last portion of this paragraph read * somewhat as fo llo w s : "unless such investment is authorized or permitted by sta tu tory provision s o f the s ta te , e t'j." This wording i s more in harmony with that o f subsection (a) o f th is s e c tio n . Par. (2 ). A question may be ra ised as to whether i t is proper that the basis o f admissions and withdrawals from the fund be the actual amount invested by the pa rticip a n t rather than a pro portion of the t o t a l o f the fund. Although the la tt e r method probably is b e tte r f o r determining the flu ctu a tin g in terests o f p a rticip a n ts in a common tru st fund co n sistin g o f se cu ri t ie s , i t seems more p ra ctica b le to use the former metnod in dealing with in te r e s ts in mortgage investment funds, the appraised values o f which do not flu ctu a te to any great ex tent and whose values are more a matter o f judgment by a few real esta te appraisers than a d a ily expression o f the judg ment o f hundreds or thousands o f actu al or p oten tia l buyers. Par. (4 ), v/e suggest that the last clause of the second sentence bebinning at line 9 read as follows: "ana, if it finds that the condition of the Common T'mst Fund is such that the funds oi ouch trust might not lav/fully be invested in a participa tion therein at that time, or that such investment would be contrary to provisions of this section, funds of such trust -2- shall not be so invested". We are dealing with a reflation, as well aa a la\j, and it is conceivable that the laws o f some states mi^ht penr.it participations which would not be in con formity with tho requirements ol this subsection. n . (6) 25. Pal* v I t might be w ell to make the fo llo w in g su bstitu tion s in the wording o f th is paragraph Lina 1 5 8 10 13 18 - "Reviewed" fo r "determined" "F.eview" f o r "determine" "Review" fo r "determ ination" "Review" fo r "determ ination" "Review" f o r "valu ation " "Review" fo r "determ ination" These changes are suggested in order to avoid the impression that the tru st committee is required to reapp raise, at throe months* in te r v a ls , the re a l e sta te owned and that securing the mortgages in the fund. It is a lso suggested that the fo llo w in g wording be added, e ith a follow in g the f i r s t sentence on pa^e 23 or as a footn ote - " I t is not the in ten tion o f t h is provision to require an appraisal o f rea l esta te owned or secu ring a mortgage more frequ ently than once every three years as h erein a fter provided". 14th line. We suggest after the words "Common Trust Fund" the insertion of the words "exclusive of accrued income" in order to distinguish between principal and income in valuing the assets of the fund for the purposes of determining admissions and withdrawals* We suggest tho elimination of the comma aft or the word "situated" in line 15 and the insertion of tho words "who shall b e ’and the elimination of the comma after the word "directors" in line 14 T and the insertion of the word ’ ’ a n d ”. This suggested change is in order to remove any question as to whether the board cf di rectors or the appraisers shall inspect the real estate. ent”. The committee’s comment regarding paragraph (7) seems to im.'g, prove the te x t o f the paragraph, but we would suggest the addi tion o f a p ro v iso to the e f f e c t that not over 50$ o f the assets of a tru st having a book valu e o f $2,400 or more may be in v e s t ed in a fund operated under s u b s e c tio n ( d ) . Such a r e s t r ic t io n is believed d e s ir a b le to prevent the investment o f e x cessiv e portions o f the funds o f a t r u s t in a r e la t iv e l y n o n -liq u id medium. ■ par. (7)* Sixth li n e . We su ggest the in s e r t io n o f the w ords, "e x clu s iv e of income cash” , fo llo w in g the w ords, "Common Trust Fund". :1, Par. (7). In determining when the fund should be c lo s e d to adm issions or withdrawals we su ggest th a t th e re be added to the t o t a l o f as sets which are not l e g a l f o r t r u s t investm ent the d e p re c ia tio n , i f any, on s e c u r i t i e s o r o th e r a s s e t s in the fund. S e c u r itie s may be held in lim it e d amounts f o r sh o rt p eriod s and i t i s pos sible that at the time adm issions o r withdrawals are contem plated the s e c u r it i e s would not be worth c o s t or book va lu e. . Subject to the above su g g e s t i o n the committee*s comment follow ing this paragraph seems w o r t h y of adoption except that we be lieve it would be w ell to add to the end of the indented para graph on page 32 a stat e m e n t to the effect that if the fond re mains closed for nine consecutive m o n t h s because of excessive illegal investments and / o r depre c i a t i o n it shall be placed in liquidation. A _____________ - 4 - I a) u ^ We suggest that the a mo unt of income to be transferred to the reserve be based on semi-annual gross income, .and not on the to ta l o f p a r t ic ip a t io n s , in which event the r a tio might be "not less than 10 % nor more than 2 0 % o f the gross income". In the event that a s iz a b le amount o f cash, s e c u r itie s y ie ld in g small income, mortgages in d e fa u lt , or r e a l esta te should be held the gross income o f the fund would d e c lin e con siderably and it would not be e q u ita b le to continue to base the reserve accre tion s on the amount o f p a r t ic ip a t io n s as such a procedure would penalize the l i f e tenants o f tr u s ts in favor o f the remainder men. It is suggested th a t a p r o v is io n be in serted in th is paragraph requiring th at the r e se rv e be held in cash, or invested in United S tates Government s e c u r i t i e s . In view o f the f a c t that during the l i f e o f such a fund as is here contemplated th ere may be p r o f i t s on s e c u r it ie s as w ell as on rea l e sta te and m ortgages, i t would be w e ll to sta te that p r o fits from the s a le o f any fund a s s e ts s h a ll go in to the re serve. I t i s a lrea d y provided that lo s s e s s h a ll be absorbed by the reserv e. fg 7c ( J). We suggest that fo llo w in g the words "Common Trust Fund" in the third lin e th ere be added the words "pursuant to the provision s o f th is su b section governing w ithdraw als" or words o f sim ilar import. - 5 - „+•« The p rov ision s o f S ectio n 24 o f the Federal Reserve A ct do not n C o I ® 116 * require p e r io d ic am ortiza tion in amounts such as are required in sub-paragraph 2 o f paragraph ( 10) , pages 36 and 37 of the memorandum, and f o r t h is reason i t v:ould seem preferable not to admit to the fund mortgages which are authorized by Section 24 unless the am ortiza tion provision s conform to the applicable requirements o f tho proposed addition to Regulation F.
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