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MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 19, 1954 The third statutory meeting of the Federal Advisory Council for 1954 was convened in Room 932 of the Mayflower Hotel, Washington, D. C., on September 19,1954, at 2:10 P.M., the President, Mr. Brown, in the Chair. Present: William D. Ireland District No. 1 Henry C. Alexander District No. 2 Geoffrey S. Smith District No. 3 George Gund District No. 4 Robert V. Fleming District No. 5 Wallace M. Davis District No. 6 Edward E. Brown District No. 7 W. W. Campbell District No. 8 Joseph F. Ringland District No. 9 Charles J. Chandler District No. 10 George G. Matkin District No. 11 John M. Wallace District No. 12 Herbert V. Prochnow Secretary On motion duly made and seconded, the mimeographed notes of the meeting of the Council held on May 16, 17 and 18, 1954, copies of which had been sent previously to the members of the Council, were approved. 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 21 and 22 of these minutes. Also included on pages 23 and 24 is a letter dated July 28, 1954, from President Brown to Wm. McChesney Martin, Chairman of the Board of Governors, regarding the tentative draft of a revision of Regulation A. The meeting adjourned at 5:18 P.M. HERBERT V. PROCHNOW Secretary 19 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 20, 1954 At 10 A.M., the Federal Advisory Council reconvened in Room 932 of the Mayflower Hotel, Washington, D. C. Present: Mr. Edward E. Brown, President; Messrs. William D. Ireland, Henry C. Alexander, Geoffrey S. Smith, George Gund, Robert V. Fleming, Wallace M. Davis, W. W. Campbell, Joseph F. Ringland, Charles J. Chandler, George G. Matkin, John M. Wallace, 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 Memorandum to the Board of Governors from the Federal Advisory Council, which follows on pages 21 and 22, 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 20,1954. The meeting adjourned at 11:45 A.M. HERBERT V. PROCHNOW Secretary 20 CONFIDENTIAL M EM ORANDUM TO TH E BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT M EETING ON SEPTEM BER 21, 1954 . A discussion of the draft revision of Regulation A, copies of which were sent to members of the Council by Chairman Martin. 1 The Council is not aware of any reason for revision in the statement of general principles which serves as a foreword for Regulation A in its present form. The Council unanimously believes that for the member banks to be able to obtain money through discounts and advances is highly important, both for the successful operation of the Fed eral Reserve System and for the general economy. The Council is opposed to any state ment of principles which implies that the use of discounts or advances by member banks is to be restricted. The proposed statement of general principles would inevitably be so construed, both by the Federal Reserve banks and the member banks. The Federal Reserve System has operated effectively under Regulation A in its present form since 1937. The Council believes the statement of general principles contained in the present regulation is entirely adequate and has the advantage of being understood and accepted by the banks. The changes proposed in the body of Regulation A constitute with minor exceptions a restatement and rearrangement without particular significance. The Council sees no real advantages in these proposed changes. While the Council is not opposed to the proposed restatement and rearrangement, it believes it is better to leave unchanged the language of the regulation with which banks are familiar through many years of operation. 2. What are the views of the Council with respect to the prospective business situation during the remainder of this year and the first three months of next year and the probable changes that will take place in the volume and purpose of bank loans in each of these periods? While there are some variations in the business situation from district to district, and even more marked differences from industry to industry, the economic pattern over the country is generally uniform, with business at a reasonably good level and on a rela tively even keel. The Council does not believe that any significant business upsurge or decline will occur in the next three months or in the first quarter of next year. The main tenance of consumer spending at a relatively high level and large outlays for construction are two major factors helping to sustain the economy. Over-all construction activity will probably continue at about the present level for the next three months, but there are indications that it may decline somewhat during the first quarter of 1955. At the present time there is no sign of a decline in consumer spending over the next six months. The Council believes that the seasonal increase in bank loans in the next three months will be less than normal. The Council expects a normal seasonal contraction in bank loans during the first quarter of the coming year. If the Commodity Credit Corporation should borrow a considerable amount on certificates, or if the Federal National Mortgage Association should borrow a large amount of money from banks, it would result in a substantial increase in bank loans. Apart from these two possible borrowings, the Council does not expect any important change in the purpose of loans. 21 These views of economic conditions and bank loans assume that there will be no significant change in the international situation which would materially affect the domestic economy. 3 . The Board would like to have the views of the members of the Council with respect to the System’s current credit policies and what, if any, changes might be called for by developments during the balance of the calendar year. The members of the Council believe that recent credit policies of the System have been constructive and were an important factor in maintaining business in a period when economic readjustments have been occurring. The June, July, August reduction in reserve requirements was timely and open market operations since then have been extremely well handled. Government financing for new money in substantial volume is imminent, and the greater part of it will have to be provided by the banks. Considerable additional reserves will be required. As previously stated, unless there are unforeseen foreign developments which would have an important effect on the volume of bank loans, the Council does not expect a normal seasonal increase in loans this fall. The Council believes that the reserves necessary for successfully handling the anticipated government financing, whether done directly by the Treasury or through borrowing by the Commodity Credit Corporation or the Federal National Mortgage Association, can and should be provided by open market operations rather than by presently reducing reserves. 4. What, if any, suggestions does the Council have as to legislation that the Board might support or sponsor in the forthcoming session of the Congress? The Council does not at this time have any suggestions as to legislation that the Board might support or sponsor in the forthcoming session of the Congress. If the Board has any suggestions for legislation it may support or sponsor in the forth coming session, the Council will be pleased to discuss them with the Board. 5. While the Board of Governors has not had an opportunity to discuss with the Presidents of the Federal Reserve Banks, or to reach any conclusions on, the report of the Joint Committee on Check Collections submitted to the American Bankers Association, the Association of Reserve City Bankers, and the Con ference of Presidents of the Federal Reserve Banks, the Board will be glad to have at this meeting any comments that the members of the Council might have to offer with respect to the report. The report of the Joint Committee on Check Collections represents long and thought ful study and is a comprehensive analysis of a subject important to all bankers. The members of the Council are familiar with the general outlines of the report and with the major objectives of the study, but they have not had an opportunity to give the report the detailed and careful consideration it merits, and to appraise the recommendations made. The Council has appointed a committee to study the report and advise the Council. The Council would prefer not to comment on the report until its committee has made its study. Whether the recommendations of the report can become effective will depend largely on the reactions of the banks of the country. The committees of the American Bankers Association and the Association of Reserve City Bankers have not yet had an adequate opportunity to consider it. 22 Letter from Edward E. Brown, President of the Federal Advisory Council, to Wm. McChesney Martin, Chairman of the Board of Governors, regarding the tentative draft of a revision of Regulation A. July 28, 1954 Hon. Wm. McC. Martin, Jr. Chairman, Board of Governors Federal Reserve System Washington 25, D. C. Dear Bill: Thank you for sending me in your letter of the 22nd, tentative draft of a revision of Regulation A. I have gone through this draft, but of course have had no opportunity to discuss it with the other members of the Federal Advisory Council. The Council will undoubtedly want to discuss it at our September meeting, and I trust that the Board will welcome a discussion with the Council on the matter. I find little new matter in the redraft of the regulation proper. The important new thing is the “Foreword”. The redraft of the regulation proper itself is largely a rearrange ment and restatement of the present Regulation A. The new matter contained in the “Foreword,” with the subheading “General Principles,” reflects the theory that the use of the borrowing and rediscount privileges by banks should be materially restricted and restrained. While the language has been greatly watered down from the earlier drafts, the basic idea of the desirability of restricting still persists. This is apparently on the theory that, if banks have any considerable degree of freedom in rediscounting or borrowing, it would interfere with the effect of open market operations by the Open Market Committee, and that this would be undesirable. With this theory I do not agree. I think that in an economy as widespread and com plicated as that of this country, better results are to be obtained by the interplay of the actions of individual banks which rediscount or borrow than by decisions of the Open Market Committee. I do not think that any “Foreword” or a statement of “General Principles” should operate to encourage an individual Federal Reserve Bank to unduly discourage borrowing by member banks. The wording of this present draft represents a great improvement over earlier drafts, and it will not limit or discourage borrowing in the way earlier proposed revisions of the Regulation would have done. But I still think the present draft goes too far. It will tend to make some, if not all, of the twelve Federal Reserve banks unduly restrictive in passing upon applications for credit by member banks. Specific criticism and suggestions of the “Foreword” I would have to make include the following: On page IV under (1), after the words “Maturities of such borrowing are normally short,” I would suggest the addition of the words “generally not over a few months.” My reason for this suggestion is that in the South, when the cotton crop is coming into maturity, and after it has been harvested; in the Southwest with the wheat harvest, 23 and in many parts of the country when a demand for credit comes in the Fall, and lasts until after the Christmas holidays, banks are frequently justified in borrowing for several months. In Illinois we have another and uncommon condition caused by our tax laws, where bank deposits are assessed for taxation as of April 1. This causes not only a large loss in deposits over April 1, but causes a great demand for Government Bills shortly before that date. It has been the custom of many Illinois banks to buy Bills as long as ninety days before April 1, and hold them, in order to meet the demand for them from their customers. This has caused borrowing from around January 1 to April 1 by Illinois banks, and such borrowings were made without regard to any possibility of profit in the differential between the rediscount rate and the rate on the Bills. Generally when the banks have had to borrow to carry such Bills they have lost money, because there has been a differential against them between the Bill rate and the rediscount rate. I consider such borrowing entirely justified. Similar unusual reasons for borrowing undoubtedly exist in other states. On page V under (4), I think it would be advisable to put in after the words “over a considerable period of time” (generally not more than a few months). On page V under (5), there can be no objection to a statement that Federal Reserve credit should not be extended for the purpose of obtaining a tax advantage through the borrowing. I think the statement that Federal Reserve credit is not extended where it appears that the member bank’s principal purpose is to profit from rate differentials should either be omitted or considerably modified. If there is a material differential between the rediscount rate and the rate on short-term commercial loans, or short-term Government obligations, I think the interests of the economy are served in having banks borrow, even though their motive may be profit. The obvious procedure in such circumstances, where the Federal Reserve Board thinks total borrowings by banks are becoming unduly large, is to raise the rediscount rate. As I stated in the beginning of this letter, I have had no opportunity to confer about the draft with the other members of the Federal Advisory Council, but I am sure we will want to discuss it at our September meeting. I am sending a copy of this letter to all members of the Advisory Council, in the hope that I might get some reaction from them. With best regards. Sincerely yours, Edward E. Brown 24 MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL September 20, 1954 At 2:15 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. William D. Ireland, Henry C. Alexander, Geoffrey S. Smith, George Gund, Robert V. Fleming, Wallace M. Davis, W. W. Campbell, Joseph F. Ringland, Charles J. Chandler, George G. Matkin, John M. Wallace, and Herbert V. Prochnow, Secretary. Dr. Ralph Young, Director of the Division of Research and Statistics of the Board of Governors of the Federal Reserve System, discussed the current economic situation. Dr. Young submitted a summary of his remarks, a copy of which was subsequently sent to each member of the Council. The meeting adjourned at 3:30 P.M. HERBERT V. PROCHNOW Secretary 25 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM September 21, 1954 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: Chairman Wm. McC. Martin, Jr.; Governors M. S. Szymczak, James K. Vardaman, Jr., J. L. Robertson, A. L. Mills, Jr., Paul E. Miller, and C. Canby Balderston; also, Mr. S. R. Carpenter, Secretary, and Mr. Merritt Sherman, Assistant Secretary of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. Edward E. Brown, President; Messrs. William D. Ireland, Henry C. Alexander, Geoffrey S. Smith, George Gund, Robert V. Fleming, Wallace M. Davis, W. W. Campbell, Joseph F. Ringland, Charles J. Chandler, George G. Matkin, John M. Wallace, and Herbert V. Prochnow, Secretary. The President of the Council read the first item on the agenda and the conclusions of the Council as given in the Confidential Memorandum to the Board of Governors from the Federal Advisory Council as printed on pages 21 and 22 of these minutes. A brief discussion followed. Chairman Martin stated that the fact that Regulation A has been operating since 1937 does not mean it should not be reviewed and that desirable changes should not be made. He added that he did not believe there is much difference between the viewpoints of the Council and the Board. Governor Mills said that it is the Board’s assumption that the banks and the public want the various regulations under constant review. An extended discussion followed in which members of the Board and the Council participated. Chairman Martin said that the discussion had been very helpful. President Brown read the second item on the agenda, and the conclusions reached by the Council, as expressed in the Confidential M emorandum , previously mentioned. President Brown then read the third item on the agenda and the conclusions of the Council as expressed in the attached Confidential M emorandum to the Board. General discussion followed the reading of items two and three of the agenda. 26 The fourth item on the agenda was then read by the President of the Council, who added that the Council would be ready, when it might be possible to achieve it, to support legislation that would raise the salaries of the members of the Board. Chairman M artin stated that the Board does not have any legislative proposals at present, but that it hopes to have some legislative proposals ready by the next meeting of the Council. If possible, copies of such proposals will be sent to members of the Council in advance of the next meeting. President Brown then read the fifth agenda item and the conclusions of the Council as reported in the Confidential M em orandum attached. The m eeting adjourned at 12:35 P.M . HERBER T V. PROCH NOW Secretary 27 NOTE: This tra n s c r ip t of the S e c r e ta r y 's notes i s not to be regarded as complete or n e c e s s a r il y e n t ir e ly accurate* The tra n s c r ip t is for the sole use of the members o f the F e d e r a l A dvisory C o u n c il. The con c is e o f f i c i a l minutes for the entire year are p r in t e d and d is t r ib u t e d l a t e r . The S e c r e t a r y ’ s notes of F e d e ral A d viso ry Council at 2 : 1 0 P .M . i n Room 932 H o t e l, W ash in g to n , D .C . F e d e r a l A d viso ry C ouncil the meeting o f the on September 1 9 , 1 9 5 ^ , of the Mayflower A l l members of the were p re se n t. The C ouncil approved the S e c r e t a r y ’ s notes for the meeting of the Council on May 1 6 , 1 7 and 1 8 , 19 5 U . * * * * * ITEM I A DISCUSSION OF THE DRAFTEEVISION OF REGULATION A , COPIES OF WHICH WERE SENT TO M M BERS OF THE COUNCIL BY CHAIRMAN MARTIN Brown suggests that most o f the d isc u ssio n should probably be given to this item b eca use of i t s importance r e l a t i v e to the other item s. (Offthe-record comments). Irela nd agrees w i t h the general views expressed in Brown's le tte r to M artin. (Off- the- record comments)* Ir e la n d thinks i t would be very d iffic u lt to adm inister the r e g u la tio n as between d i s t r i c t s . (A copy of Brown's le tte r to M artin w i l l be found b e g in n in g on page 7 o f these notes.) Brown* I s there any need for a new Foreword? (Off-the-record comments.) Alexander agrees w ith the general p r in c ip le s expressed in Brown’ s letter to M a r t in . I f the Foreword becomes a part of R eg ula tio n A , i t lends a r e s t r ic t i v e tone to the r e g u la tio n . Smith thinks there is no s u b s ta n tia l change in the r e v is io n o f the body of the r e g u l a t i o n . The Foreword can be in te rp re te d so i t is innocuous, but i t can a ls o be in te rp re te d so i t is r e s t r i c t i v e . Gund is in agreement that i t is not ad v isab le to put so much em phasison r e s t r i c t i o n . Fleming concurs w ith Brow n’ s le tte r to M a rtin . He thinks thr Fore word In 'the present R eg ulatio n A is e n t ir e ly adequate. Alexander reads the Foreword of the present Regulation A . re corH^cominents ) . (Off- the Fleming says he would favor keeping the statement of general in ste a d of adopting the rev ise d form. principles in the present r e g u la t io n , -2 Davis agrees w ith the views expressed by the other members of the Council* Campbell is also in agreement. Chandler states that he did not have the f u l l background on this subject u n t il he came to the m eeting. He agrees with the views o f the other members of the C ouncil, Matkin comments that he sees nothing wrong in making a loan for p ro fit He b e lie v e s there i s no reason for changing the foreword o f the present r e g u la tio n . W allace supports M a t k in 's view# Brown There i s obviously no divergence of opinion on this m atter. Everyone is strongly opposed to a restrictive policy in the use of the discount window* The members of the Council see no reason for any change in the present foreword# The revision in the body of the regulation makes no significant changes. The Council may report to the Board that the Council members unanimously believe that obtaining money by member banks through rediscounts or advances is highly important to the success of the Federal Reserve System and the economy generally# The Council is opposed to any policy that is r estric tiv e in the use of discounts or advances by member banks. We believe the proposed statement of general principles would inevitably be so construed both by the Federal Reserve banks and the member banks# Therefore the Council is opposed to it# We have operated since 1937 under Regulation A , and we see no reason for changing the present statement of general principles contained in Regulation A# The changes proposed in the body o f the regulation constitute a restatement and rearrangement without major sig n ificance# The Council sees no advan tage to the rearrangement generally# In the oral d isc u s sio n , we may state that in an economy as widespread and complicated as that of the U nited S t a te s , better r e su lts are to b e obtained b y the interp lay of the actions o f i n dividual banks which rediscount than by decisions o f the Open Market Committee. ITEM II WHAT ARE THE VIEWS OF THE COUNCIL WETH RESPECT TO THE PROSPECTIVE BUSINESS SITUATION DURING THE REMAINDER. OF THIS YEAR AND THE FIRST THREE MONTHS OF NEXT YEAR AND THE PROBABLE CHANGES THAT W IL L TAKE PLACE IN THE VOLUME AND PURPOSE OF BANK LOANS IN EACH OF THESE PERIODS? Ir e l a n d . No important changes have taken place i n b u sin e ss since the last m eeting. Business has held up w e l l , but so far has not had the anticipated F a l l seasonal increase# Department store sales i n the d is t r ic t are about the same as a year ago# The t e x t ile b usin ess has h eld up f a i r l y well# Ir e la n d does not look for an increase in the volume of loans in the next three months o f th is year or in the f ir s t quarter of next y ea r . Alexander# Business is moving sidewise# Consumer spending is holding up w e l l , and construction is booming# Manufacturing in general is off# Unemployment continues about the same# Commercial loans are down# A strong seasonal demand for loans has not materialized# Business w i l l prob ably go sidew ise for the next s ix months# C apital expenditures may show some d e c lin e . I f construction should f a l l in volume, the situ atio n might -3beconie more serious. Construction and consumer spending are playing an important part in holding up the economy. The seasonal increase in bank loans in the next three months will probably be less than normal. Alexander sees no heavy demand for credit® Smith# The situation in the Third District is similar to that in Districts One and Two. Suburban sales are up over store sales in the city* There will probably be some reduction in construction in the months ahead* The seasonal demand for bank credit has been weak* Telephone company collections in the district are better. Gund* There is no great change in industrial activity. Employment in Cleveland declined because of automobile changeovers. Department store sales are under a year ago. The demand for commercial loans has declined. Consumer installment credit is up from the previous month, but is down compared to a year ago. Gund expects some improvement in the first quarter of 1955 and some improvement in the inventory situation. Davis The Southeast has been hit by drought and heat, and the business situation may grow worse because the drought effects are not fully felt for some time. Construction remains strong. There is great activity in ship building. Loans are a little above a year ago. Cotton is moving into the mills and not into the government loan. Loans will increase somewhat seasonally* Fleming. Bank loans have held up well. Demand deposits are off. Savings are up. Textiles have shown some improvement. Employment has shown some increase. The tobacco crop is better* Retail sales are up* Manu facturing and coal production are down, but construction is up. Fleming does not expect a major decline in business but anticipates a more or less sidewise movement* He believes the demand for bank loans will be less than seasonal. Brown. The Chicago pattern is similar to that of the rest of the country. Conditions in the agricultural implement and coal mining in dustries are not good* Banks have not experienced a normal increase in loans, and there is no strong demand for credit. It is expected the increase in loans for the balance of the year will be less than normal, and there will probably be a normal seasonal contraction in loans during the first quarter of 1 9 5 5 . Campbell. Business activity is not much less than it was a year ago. Retail business is about the same as it was last year. Unemployment is a little lower. Considering the drought, conditions are relatively good. Some money will be spent on irrigation. There should be some seasonal increase in loans. Chandler. The Tenth District follows the national pattern generally. Kansas and Oklahoma are under strict oil prorationing. Consequently, Colorado is now producing 23 per cent as much oil as Oklahoma. Con struction is up. Department store sales are slightly above a year ago. There has been a heavy sale of air conditioners, as a result of the hot weather. Agricultural conditions are spotty. The wheat crop was about 85 per cent of normal. Loans are up slightly over a year ago. Chandler expects the regular seasonal loan demand this Fall and expects that the district will have normal business in the first quarter of 1955* -uMatkin. Department store sales are under a year ago. Construction is above 1953* Non-agricultural employment is up somewhat. Cash farm income may be below 1953* Bank loans have declined. The volume of bank loans for the next three months w ill depend on a seasonal pickup of business. So far there is no evidence of a real business pickup. Matkin does not expect a normal seasonal increase in loans. Wallace. There have been copper and lumber strikes in the district* The seasonal increase in business has been less than normal. Construction is down from the national average. School, highway and military con struction look a lit t l e better. Automobile assemblies are down, but ship building is b etter. The steel industry is somewhat above the national average* Farm income w ill probably be 8 per cent to 10 per cent below 1953* Bank credit has followed the national pattern, but consumer credit is below the national average. The increase in bank loans in the next three months w ill probably be less than normal* Ringland* Business is on a relatively even keel* Agricultural income is about even with last year. Crops generally are good and the overall situation is quite good. Ringland expects bank loans to increase about on a seasonal pattern. Brown. The Council may state that there are some variations from district to district and even more marked differences from industry to industry, but the economic pattern, generally^, is uniform throughout the country. Business is reasonably good and is moving sidewise. There are few indications of any important increase in business in the next six months. It is anticipated that the increase in bank loans in the next three months w ill be less than normal. During the first quarter of 1955, there w ill probably be the normal seasonal contraction in bank loans. I f the Commodity Credit Corporation should borrow a considerable amount on certificates or i f the Federal National Mortgage Association should borrow a large amount of money from banks, these borrowings would result in a substantial increase in bank loans. These remarks are predicated on the fact that no important international crisis w ill occur. ITEM III THE BOARD WOULD LIKE TO HAVE THE VIEWS OF THE MEMBERS OF THE COUNCIL WITH RESPECT TO THE SYSTEM’S CURRENT CREDIT POLICIES AND WHAT, IF ANY, CHANGES MIGHT BE CALLED FOR BY DEVELOPMENTS DURING THE BALANCE OF THE CALENDAR YEAR. Brown policy. asks whether there is any disagreement on the Board’ s credit Gund states he would go along with the present market policies of the Board. .Alexander believes that the Board’ s credit policies have been sound and open market operations have been extremely well conducted. (All members of the Council agree with this viewpoint*) Brown. (Off-the-record comments)* To the extent that the banks provide the money for the government financing in the next three months, some additional reserves w ill be needed. What is the best method of providing -5- the reserves? Fleming, (Off-the-record comments*) Brown thinks i t i s probably b etter to use open market operations at f i r s t , and then resort to a reduction i n reserves late r i f i t is necessary* Alexander comments that he d is lik e s passing any opportunity to suggest a reduction in r e s e r v e s , but he would favor the open market operations now* Fleming in reserves. R ingland favors the open market operations now, rather than a reduction does not b e lie v e a reduction in reserves is desirable now. Brown states that the Council may report to the Board that large additional reserves w i l l be required for the government finan cing that is imminent and that reserves should be sup plied by open market operations to insure the sucess of the fin an cin g * Since the Council does not expect the normal seasonal increase in bank loans this Fall,, the Council b e lie v e s the necessary reserves can be provided by open market operations* ITEM IV WHAT, IF ANT, SUGGESTIONS DOES THE COUNCIL HAVE AS TO LEGISLATION THAT THE BOARD MIGHT SUPPORT OR SPONSOR IN THE FORTHCOMING SESSION OF THE CONGRESS? Matkin reports that he has received a proposal suggesting an increase in the s a la r ie s of the members of the Board* Fleming says an increase i n the s a la rie s of Board members i s desirable and traces the history o f such proposals* Brown thinks i t is f u t i l e to suggest le g is la t iv e proposals u n t il we see the makeup of the next Congress. The Council may say to the Board that i t does not at this time have any suggestions as to l e g i s lation the Board might support or sponsor in the forthcoming session of the Congress* Alexander. The Council may state i t hopes the Board w i l l continue its study of reserve requirements to develop a fe a s ib le and generally acceptable p la n , which may late r be embodied i n l e g i s l a t i o n . (This matter was submitted to a vote of the Council but the vote was so close i t was decided not to includ e the suggestion in the report of the Council to the Board)* Brown* The Council may also state to the Board that i f the Board has any suggestions for l e g is l a t io n , the Council w i l l b e pleased to discuss them with the Board* -6- ITEM V WHILE THE BOARD OF GOVERNORS HAS NOT HAD AN OPPORTUNITY TO DISCUSS WITH THE PRESIDENTS OF THE FEDERAL RESERVE BANKS, OR TO REACH ANY CONCLUSIONS ON, THE REPORT OF THE JOINT COMMITTEE ON CHECK COLLECTIONS SUBMITTED TO THE AMERICAN BANKERS ASSOCIATION, THE ASSOCIATION OF RESERVE CITY BANKERS, AND THE CONFERENCE OF PRESIDENTS OF THE FEDERAL RESERVE BANKS, THE BOARD WILL BE GLAD TO HAVE AT THIS MEETING ANY COMMENTS THAT THE MEMBERS OF THE COUNCIL MIGHT HAVE TO OFFER WITH RESPECT TO THE REP CRT. Brown. The report is lengthy and must be read in fu ll to be under stood! Some sections are controversial. There is already opposition by some reserve city banks. Brown reports on the views of reserve city bankers in some d is tr ic ts . He doubts whether members of the Council are as yet sufficiently informed regarding all aspects of the report. Brown then suggests the appointment of a committee consisting of Fleming, Alexander and Smith to study the report and advise the Council, (All members of the Council approve Brown's suggestion), (Off-therecord discussion on the report) The meeting adjourned at 5>sl8 P* M, Letter from Edward F ^ Council to Wm. McChesney tertineSr>!ent °f the Federal Advisory Governors, r e g a l i n g the tentative d " o f * Regulation A . arait oi a revision of July 28, 195k Hon. Tftn. McC. M artin, Jr. Board o f Governors Federal Reserve System Washington 2$ , D. C Chairman, Dear B ill: * J x 4. ^ ank y°u fo r sending me in your le t t e r o f the 22nd, te n ta tiv e d ra ft of a r e v isio n o f R egulation A. have had no bers of the undoubtedly and I tr u st the Council I have gone through th is d r a ft, but o f course opportunity to d iscu ss i t with the other mem Federal A dvisory C ouncil. The Council w ill want to d isc u ss i t a t our September m eeting, th a t the Board w i l l welcome a d iscu ssio n with on the matter* I fin d l i t t l e new m atter in the red raft o f the regulation proper. The im portant new thing i s the forew ord". The redraft o f the reg u la tio n proper i t s e l f is la r g ely a re arrangement and restatem en t of the p resent Regulation A. The new matter contained in the "Foreword,” w ith the subheading "General P r in c ip le s," r e f le c t s the theory th at the use of the borrowing and red isco u n t p r iv ile g e s by banks should be m aterial ly r e s tr ic te d and r e str a in e d 0 While the language has been greatly .watered down from the e a r lie r d r a fts, the b asic idea of the d e s ir a b ility of r e s tr ic tin g s t i l l p e r s is ts . This is apparently on the th eory th a t, i f banks have any considerable degree o f freedom in red iscou n tin g or borrowing, i t would in terfere w ith th e e f f e c t o f open market operations by the Open Market Committee, and th a t th is would be u n d esirab le. With th is th eory I do not agree. I think that in an economy as w idespread and com plicated as that o f th is country, b e tte r r e s u lts are to be obtained by the in terp la y of the a ctio n s o f in d iv id u a l banks which rediscount or borrow tnan by d ecisio n s o f the Open Market Committee 0 I do not think that any "Foreword" or a statem ent o f "General P rin cip les" should operate to encourage an in d iv id u al Federal Reserve Bank to unduly discourage borrowing by member banks* The wording o f t h is present d ra ft represents a great improvement over e a r lie r d r a fts, and i t w ill not lim it or d is courage borrowing in the way e a r lie r proposed r e v isio n s of the Regulation would have done. But I s t i l l think the present draft goes too fa r . I t w ill tend to make seme, i f not a l l , of the tw elve Federal Reserve banks unduly r e s tr ic tiv e in passing upon a p p li cations for c r ed it by member banks. -8- Page Two S p e c ific c r itic is m and suggestions of the ’’Foreword" I would have to make include the follo w in g: On page IV under ( 1 ) , afte r the words "Maturities of such borrowing are normally s h o r t ," I would suggest the addition o f the words "generally not over a few m onths." My reason f o r this suggestion i s that i n the So uth, when the cotton crop is coming in to m aturity, and after i t has been harvested; in the Southwest w ith th e -wheat harvest, and in many parts of the country •when a demand for c redit comes in the F a l l , and lasts u n til after the Christmas h o lid a y s , banks are frequently ju s t ifie d in borrowing for several months. In I l l i n o i s we have another and uncommon condition caused by our tax laws, where bank deposits are assessed for taxation as of April 1 . This causes not only a large loss in deposits over A pril 1 , but causes a great demand fo r Government B ills shortly before that date. I t has been the custom of many I l l i n o i s banks to buy B ills as long as ninety days before A p ril 1 , and hold them, i n order to meet the demand for them from their customers. This has caused borrowing from around January 1 to April 1 by I l l i n o i s ban ks, and such borrowings were made without regard to any p o s s ib il it y of p r o fit in the d iffe r e n t ia l between the rediscount rate and the rate on the B i l l s . Generally when the banks have had to borrow to carry such B il l s they have lo st money, because there has been a d iffe r e n tia l against them between the B i l l rate and the rediscount rate. I consider such borrowing e n tir e ly j u s t i f i e d . Sim ilar unusual reasons for borrowing undoubtedly e x is t in other sta te s. On page V under ( U ) , I think i t would be advisable to put in after the words "over a considerable period o f tim e" (generally not more than a few m onths). On page V under ( £ ) , there can be no objection to a statement that Federal Reserve c redit should not be extended for the purpose of obtaining a tax advantage through the borrowing. I think the statement that Federal Reserve credit is not extended where i t appears that the member b a n k ’ s p r in c ip a l purpose is to p rofit from rate diffe re n tia ls should eith er be omitted or considerably m odified. I f there is a material differential between the rediscount rate and the rate on short-term commercial loans, or short-term Government ob liga tio n s, I think the interests of the economy are served in having banks borrow, even though their motive may be profit. The obvious procedure in such circumstances, where the Federal Reserve Board thinks to tal borrowings by banks are becoming unduly large, is to r ais e the rediscount r a t e . Page Three As I stated in the beginning of this le t t e r , I have had no opportunity to confer about the draft with the other members of the Federal Advisory C oun cil, b u t I am sure we w i l l want to discuss it at our September m eeting. I am sending a copy o f this letter to a ll members of the Advisory C o u n cil, in the hope that I might get some reaction from them. With b e s t r e g ard s. Sin c e re ly yours, Edward £•„ Brown -10THE FEDERAL ADVISORY COUNCIL CONVENED AT 10 A .M . ON SEPTEMBER 20, 1 9 5 k , IN ROOM 932 OF THE MAYFLOWER HOTEL, WASHINGTON, D .C . ALL MEMBERS OF THE COUNCIL WERE PRESENT. The Council prepared and approved the attached Confidential Memorandum to be sent to the Board of Governors relative to the Agenda for the joint meeting of the Council and the Board on September 21, 195k* The Memorandum was delivered to M r. Carpenter, Secretary o f the Board of Governors at 12 noon on September 2 D , 1 9 5 k . I t -will be noted that each item of the Agenda is listed together -with the comments of the Council, The meeting adjourned at 1 1 :U 5 A .M . CONFIDENTIAL MEMORANDUh TO THE BOARD OF GO' ERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON SEPTEMBER 2 1 , 1 9Sh 1. A d isc u ssio n of the d r aft r e v isio n of Regulation A, copies of which were sent to members o f the Council by Chairman M artin. The Council is not aware of any reason fo r revision in the statement of general p r in c ip le s which serves as a foreword for Regulation A in its present form. The Council unanimously believes that for the member banks to be able to obtain money through discounts and advances is highly important, both for the successful operation of the Federal Reserve System and fo r the general economy. The Council is opposed to any state ment of p rinciples which implies that the use of discounts or advances by member banks is to be r e s t r ic t e d . The proposed statement of general principles would in e v ita b ly be so construed, both by the Federal Reserve banks and the member b a n k s . The Federal Reserve System has operated effectively under R egulatio n A in its present form since 1937. The Council believes the statement o f general prin ciples contained in the present reg ulation is e n tir e ly adequate and has the advantage of being understood and accepted by the banks. The changes proposed in the body of Regulation A constitute with minor exceptions a restatement and rearrangement without particular significance. The Council sees no real advantages in these proposed changes. Tihile the Council is not opposed to the proposed restatement and rearrange ment, it believes i t is b e tte r to leave unchanged the language of the regulation with vjhich banks are fa m ilia r through many years of operation. 2. Yihat are the views o f the Council with respect to the prospective business situation during the remainder of this year and the f i r s t three months of next year and the probable changes that w i l l take place in the volume and purpose o f bank loans in each o f these periods? W hile there are some variations in the business situation from d istric t to d i s t r i c t , and even more marked differences from industry to industry, the economic pattern over the country is generally uniform, vith business at a reasonably good le v e l and on a relatively even keel. The Council does not b e lie v e that any sig n ific a n t business upsurge or decline -will occur in the next three months or in the f ir s t quarter of next year. The maintenance of consumer spending at a relatively high level and large outlays for construction are two major factors helping to sustain the economy. Over-all construction ac tiv ity w ill probably contin ue at about the present le v e l for tne next three months, but there are indications that i t may decline somewhat during the f i r s t quarter o f 1955* At the present time there is no sign of a decline in consumer spending -2 over the next six months. The that the three m onths w i l l be less than a no rm al s e a s o n a l co n tractio n in bank lo ans the If in t h e n e x t C o u n c il co m in g y e a r . co n siderable A s so c ia t io n result i n p o ss ib le am ount sh o uld b eliev es the on borrow a larg e borrovdngs, in c re a se the or d u r in g t h e the in o f m oney not borrow a fro m b a n k s , any expects quarter o f N a t io n a l M ortgage Apart expect bank lo an s C o u n c il first Federal bank lo a n s. C o u n c il does The C o rp o ra tio n sh o u ld if am ount in in c re a se no rm al. i t w ou ld fro m t h e s e tw o im portant c h a n g e in o f lo an s. These th er e w i l l C r e d it c e rtific a te s, a su b stan tial the p u r p o s e C o m m o d it y seasonal be no v ie w s of w ould m a t e r i a l l y a f f e c t 3* e c o n o m ic sig n ific a n t co n ditio n s change the in d o m e stic the an d b a n k l o a n s in tern atio n al assum e th a t situ atio n iflhich econom y. The Board would lik e to have the views of the members o f the Council with respect to the System’ s current credit p o lic ie s and what, i f any, changes might be called for by developments during th e baLance of the calendar y e a r . The m em bers o f the S y s t e m h a v e ta in in g b u s in e s s o c c u rr in g . The t im e ly a n d of been in the a p e rio d June, Ju ly, open m arket C o u n cil b e lie v e c o n stru c tiv e and w ere that recent w hen e co n o m ic re a d ju s tm e n ts August o p eratio n s red uc tio n sin ce in then c red it p o lic ie s an im p o r ta n t reserve factor have in m ain been re q u ire m en ts w as have b e e n extrem ely w e ll h andled. G overnm ent f i n a n c i n g im m in e n t, and th e greater part of banks, C o n siderab le ad ditio n al stated, unless are an i m p o r t a n t expect there effect a norm al that th e b orro w ing b y the lu if legislatio n s e ssio n for fo rth co m in g The C o u n c il does of the If the Board be the th is fall. not As p r e v io u sly w h ich w ould have The the not C o u n c il b e lie v e s an ticip ated Treasury pro vided by or through Federal N a tio n a l open m arket o p eratio n s does the B o a rd m igh t at o f the th is support C o u n c il h a v e support as to or sponsor in Congress? tim e h ave or any s u g g e s t io n s sponsor in the Board has any s u g g e s t io n s fo r as to fo rth co m in g Congress* the is reserves. se ssio n m igh t the v o lu m e C o u n c il does h an dlin g C o rp o ra tio n or the sh o uld be th e req u ired. lo an s, lo ans su g g e s tio n s that the that in successfully re d u c in g any, w ill f o r e i g n d ev e lo p m en ts done d i r e c t l y by C r e d it can and le g isla tio n be p r o v id e d b y the volu m e o f b a n k w hether p resently l?Jhat, su b stan tial w i l l h a v e to reserves in c re a se C o m m o d it y L 'o rtg a g e A s s o c i a t i o n , rather t h a n b y the necessary fin a n c in g , n e w m oney i n it u n foreseen seasonal reserves g ov ern m en t on fo r legislatio n it m ay -3suDport o r sponsor pleased t o d i s c u s s 5. in the fo rth co m in g them w it h the se ss io n , the C o u n cil w i l l be Board. VJhile the Board o f Governors has not had an oppor tunity to discuss -with the Presidents of the Fed eral Reserve Banks, or to reach any conclusions on, the report o f the Joint Committee on Check Collec tions submitted to the American Bankers Association, the A ssociatio n of Reserve City Bankers, and the Conference o f Presidents of the Federal Reserve Banks, the Board w i l l be glad to have at this meet ing any comments that the members of the Council might have to o ffe r with respect to the report. The report of the Joint Committee on Check Collections repre sents long and thoughtful study and is a comprehensive analysis o f a subject important to a l l bankers. The members of the Council are familiar with the general outlines of the report and with the major objec tives of the study, but they have not had an opportunity to give the re port the d e tailed and careful consideration i t m erits, and to appraise the recommendations made. The Council uas appointed a committee to study the report and advise the Council. The Council would prefer not to comment on the report u n t il its committee has made its study. Whether the recommenda tions of the report can become e ffe ctiv e w ill depend largely on the reactions of the banks of the country,, The committees of the American Bankers A ssociatio n and the A ssociatio n o f Reserve City Baikers have not yet had an adequate opportunity to consider i t . -11THE FEDERAL ADVISORY COUNCIL CONVENED IN THE BOARD ROOM OF THE FEDERAL RESERVE BUILDING, WASHINGTON, D.C. AT 2tl!> P.M. ON SEPTEMBER 20, 1951*. ALL MEMBERS OF THE COUNCIL WERE PRESENT. Dr. Ralph A. Young, Director, Division of Research and Statistics of the Board of Governors of the Federal Reserve System, discussed the current economic situation. Dr. Young submitted the following summary of his remarks. THE CURRENT ECONOMIC SITUATION year the Since the early part of this broad aggregates used to summarize economic developments in the United states have shown remarkably little change* Gross national product and industrial pro duction stopped declining at that time and in the third quarter were both estimated to be at the same level as in the first quarter. Nonagricultural employment appears to be down by only 1 per cent. The indexes of vh olesale and consumer prices have remained practically unchanged near levels prevailing since the end of 1952. Demand de posits and currency together have been showing only about the usual seasonal movements. W h ile the b r o a d a g g re g a te s the p ast two q u a r t e r s , of some im p o rta n c e h a v e th e more have b een g e n e r a l l y unchang ed i n d etailed figu res been g o i n g show t h a t on i n p a r t i c u l a r f i e l d s . d e velo p m en ts N atio n a l security e x p e n d i t u r e s , a l t h o u g h down l i t t l e from the s e c o n d q u a r t e r , are considerably lo w e r t h a n t h e y w e re i n the f i r s t q u a r t e r . O u tla y s fo r producers d u r a b le goods have been d r i f t i n g downward s t e a d i l y . On the other hand, r e t a i l dem and h as b e e n up m o d e ra te ly and r e s i d e n t i a l b u i l d ing a c t i v i t y has c l e a r l y broken aw ay from e a r l i e r le v e l s on the u p s i d e . Residential c o n s t r u c t i o n i s now a t a h ig h e r l e v e l than at any other time except 1 9 5 0 , r e f l e c t i n g i n p a r t th e i n f l u e n c e o f e a s i n g m o r tg ag e c r e d i t terras. Common s t o c k p r i c e s have c o n t in u e d the advance begun la s t Septem ber. Time d ep osits have r i s e n s u b s t a n t i a l l y , c o n t r ib u t in g to a fu r th e r s t r e n g t h ening of the econom y’ s l i q u i d i t y . C o ntin ued in v e n t o r y l i q u i d a t i o n has brought in v e n to ry holdings of business down f u r t h e r to a more com fortable l e v e l , wi. th the reduction concentrated i n the d u r a b le goods f i e l d w here most o f the previo us ac c u mulation had o c c u r r e d . Economic a c t i v i t y a b r o a d , vfoich expanded w hile a c t i v i t y in th is country contracted l a s t y e a r , has contin ued to expand t h is y e a r . In Western Europe in d u s t r i a l p r o d u c tio n rose fu r th e r in the second q ua rte r. By June, when the A d viso ry Council last met, the leveling out process in the United States economy had gone on long enough so that many observers were asking whether we might be near a turning p o in t . Now, with a recent record of three more months of lit t le change over-all, those who expected c le a r evidence o f general recovery by th is time are somewhat disappointed while some of those who thought the economy would be settling down further are somewhat reassu re d . Consequently, the possibility of continued l i t t l e change over-all now appears to be taken rather more seriously by many observers than b e fo r e . -12As already noted, however, the record of the past three months has been one o f important developments i n particular fie ld s as w ell as little change over-all and i t can b e argued that some o f the special forces making for change f a i r l y soon— more lik e ly on the upside, but conceivably on the downside— are stronger than they were in June. In any event, one th in g that business history teaches is that a period of little change does not often perpetuate i t s e l f fo r very long. The meeting adjourned at 3 :3 0 P .M . -13ON SEPTEMBER 21, 195U, at 10:35 A. Mo, 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 COUNCIL WERE PRESENT EXCEPT MR. GUND. THE FOLLOWING MEMBERS OF THE BOARD OF GOVERNORS WERE PRESENT: CHAIRMAN MARTIN, GOVERNORS SZYMCZAK, VARDAMAN, RDBERT SON, MILLS, MILLER AND BALDERSTON. MR. CARPENTER, SECRETARY, AND MR. SHERMAN ASSISTANT SECRETARY OF THE BOARD OF GOVERNORS, WERE * ALSO PRESENT. ITEM I A DISCUSSION OF THE DRAFT REVISION OF REGULATION A, COPIES OF WHICH WERE SENT TO MEMBERS OF THE COUNCIL BY CHAIRMAN MARTIN._____________ Brown reads Item 1 and the conclusions of the Council as expressed in the Confidential Memorandum to the Board attached. Brown states that the Council believes Item I is the most important item on the Agenda. The Council realizes that the Federal Reserve Act does not give a member a "right" to use the discount window, but over the years banks following sound practices have been able to borrow as they needed funds* If any bank had not followed sound banking practices, or had borrowed for too long periods, the local Federal Reserve bank could decline to discount* The Council feels the proposed draft would be interpreted to mean that banks would be restricted in their use of the discount window* The Council would be interested in the Board's philosophy on the subject* The body of the revised draft contains no important changes. The significant change is in the statement of principles in the foreword. The Council would appreciate the Board’s views. Martin states he would like to speak regarding Regulation A and ask Mills also to speak, as Mills has been working on it* The fact that Regulation A has been operating since 1937 does not mean it should not be reviewed, and that desirable changes should not be made0 He does not believe there is too much difference between the viewpoints of the Council and the Board* In some respects the changes in banking since 1937 have been small, but in other ways they have been almost revolutionary. Martin believes the discount window, as such, is a part of the Federal Reserve System mechanics which should be carefully reviewed. Mills. The Board assumes that the banks and the public want the various regulations under constant review to keep them up-to-date* Similar studies are goirw on in connection with reserves. The need for this study came about in 1953, when the economic situation threatened to beccme highly inflationary. The danger arose that banks might be creating credit at a time when the Open Market Committee might be trying to restrict credit. When the Federal Reserve banks restricted access to credit, the banks were concerned that a privilege of theirs was being withdrawn. So it seemed desirable to have some guide for banks on this matter. The numerous revisions of the draft have resulted in changes suggested by various bankers and Federal Reserve Banks and their directors . The study being made regarding the discount rate may have an important bearing on Regulation A. Mills believes the misgivings regarding Regulation A may be over emphasized. He is doubtful the Regulation would be interpreted so strictly as to harm the System or the economy. Those who have worked on the revised draft ~1U~ include John Coleman, A1 Williams and M ills, plus the Staff of the Board, research men of various Federal Reserve banks and a conference of bankers vrho considered it* Flemings No member of the Council thinks the Regulation should not be under constant study, and the Council did not intend to convey that idea. Fleming traces the situation in 1953 and points out how the banks were in a tight position at that time, partly because of the Mills Plan0 Fleming does not believe the economic and credit situation in 1953 is a good situation upon which to base the need for a revision of Regulation A . Martin thinks Fleming’ s point is well takenc He admits the System has made mistakes. However, he states that when we go through ten years of a pegged market, some guides are needed as we change to freer markets and un ravel the situ atio n . Martin believes it is desirable to have guides that can be recognized. Brown thinks it is disadvantageous to change language unless there is some clear advantage to be gained. Szymczak. In 1953, Regulation A was not applied in the same way over the country. The purpose in a revision is to have the Regulation apply uniformily in a l l districts. Alexander states the draft reflects much fine workmanship and undoubtedly reflects the views of the men working on it . However, i f a restrictive poliry is set up under which credit is unavailable, it is d iffic u lt to establish a rule of just when credit is to be available* Alexander believes the matter is actually one of administration. I f the foreword is to be set up as a guide to restrict, then it is idle to say it does not restrict. He believes i t is best to leave it to administration, especially when one deals with something so crucial. The administration of the local Federal Reserve bank is a better guide. Alexander emphasizes that his point is the crucial nature of the availability or unavailability of credit. Ringland agrees with Alexander. There, of course, have been misuses of the discount window, but Ringland states it is a serious matter to set up a policy of restriction* Martin comments that he believes the cardinal sin of a central bank is unavailability of credit. Smith states that he could not find a specific statement in the revision that credit would be restricted, but the reaction of the members of the Council with long banking experience was that this is an attempt to restrict credit. Consequently, Smith felt that the reaction of bankers over the country would be similar to that of members of the Council. Brcrwn asks for the views of the presidents of the Federal Reserve banks on -this matter, i f their views are not held confidential. Martin replies that the views of the presidents of the Federal Reserve banks liave changed* M ills b elieves th at the presidents of the Federal Reserve banks would -15favor a statement o f p r in c ip le s , but would d i f f e r as to what they would say. There are undoubtedly seasonal swings for which the banks need funds and the Federal Reserve banks would want to be sure such needs are met. Robertson. The vast majority of the presidents of the Federal Reserve banks •would approve the last draft, provided the local Federal Reserve banks could make the decisions on credit needs„ Chandler. On this matter a ll members of the Council have the feeling that there is an attempt to restrict credit* Ireland. I f the vast majority of presidents of the Federal Reserve banks wish their own interpretation, do you not lose the guide you are trying to set up. The present draft is less objectionable than earlier drafts, and it is in a sense "watered down". Wallace was pleased with the way the 19$3 situation was resolved. With our experiences of the last twenty years, would i t not be advisable for the Federal Reserve System to woiic under the broadest principles. He sees no need for an additional restrictive statement. Szymczak. The discount window has not been used for a long time and the revision oi- the regulation is an attempt to find a sound basis of operation. Many of the persons in the System have not had experience with operating the discount window* Brown. Would it not be better to have the Federal Reserve officers who handle discounts meet and discuss their problems. Martin. The discussion has been helpful. ITEM I I WHAT ARE THE VIEWS OF THE COUNCIL WITH RESPECT TO THE PROSPECTIVE BUSINESS SITUATION DURING THE REMAINDER OF THIS YEAR AND THE FIRST THREE MONTHS OF NEXT YEAR AND THE PROBABLE CHANGES THAT WILL TAKE PLACE IN THE VOLUME AND PURPOSE OF BANKS LOANS IN EACH OF THESE ______________________________________________________ PERIODS? Brown reads Item I I and the conclusions of the Council as expressed in the Confidential Memorandum to the Board attached. The views of the Council as to the outlook for business are in such accord that one wonders i f there is something wrong. Declining returns may Qause a reduction in residential construction, but road and public construction w ill be at least a partially offsetting factor. The trend in consumer spending is primarily a psychological matter, but there is no indication at present that a real decline w ill come in the next six months. Martin. The views of the Council seem very clear, but Martin says he is troubled -when he tries to define the word "normal Wallape. The Council also struggled with the word normal. Balderston. inventories? Did any member of the Council express any concern as to -16- Brow n. were The C o u n c il com m ents b y a p r o b le m a s the they w ere A lexander. Th ere h a s situ atio n is m uch c o n s u m p tio n i s sid ew is e, and is no co n tin ue sid e plant several red uc tio n h ea lth ie r. to The be in at length, In v e n to ries o b serv a tio n s in v e n to rie s less than second- hand run n in g evid e n ce sp en d in g , of in v e n to rie s are but not there as serio u s ago. carry- over is b eliev e d n e g a tiv e reduc tio n i n d is c u ss the C o u n c i l * C o u n c i l m ade the there consnner w i l l On the The in d u stry not of a year th b i l l i o n been a au to m o bile d id m em bers above of a but i t was the car m arket is is a m atter there is the Steel is m o v in g Everyone hopes of th e c o n su m e r p s y c h o l o g y . the H o w e v er, h ig h w a y and In and the better. B u s in e ss stro n g u p sw in g. th is in v e n to rie s . last year* a y e a r ago pro d u ctio n t h e e co no m ic p i c t u r e e x p e n d itu re s. re g a rd in g in q u e stio n p u b lic of a probable c o n st ru c t io n sh o uld be s t r o n g . R obertson M a rtin asks states C h andler. m ixed . about he is co n d itio n s also U n em p lo y m ent T h e w i n t e r -wheat w a s Pastures are dry F lem in g . in s one in the in t e r e s te d is not in ag ricu ltu ral th e se rio u s. about e ig h ty areas. u n em p loy m en t s i t u a t i o n . The agricu ltu ral to e i g h t y - f i v e situ atio n per cent of is n o rm al. se c tio n s« U nem plo ym ent is above a year ago, but it has shown some d e c l i n e recently. Brown. spotty i n In the that i t affected. For R in glan d . the areas Much they w i l l of the R etail shown n o i m p o r t a n t change* M atk in . fu tu re, The s o i l im p r o v e m e n t Szym czak. Brown. of e x t e n d in g co n ditio n s farm are g enerally good* e q u ip m e n t h ave g enerally ir o n d is tric t sales d istric t e s p e c i a l l y when p ro d u cin g and a are c i t i e s -where i n d u s t r i e s are good. of rather rain . asked th e There is some am ount w i l l b e equal Farm ers to g iv e and i n some norm al c r o p 0 There w i l l large alm o st needs ad versely uneihploymfent. s u ffe r e d fro m a d r o u g h t , th ey are U n e m p lo y m e n t i s have b e e n ore. three- fo urths ir rig a tio n , fo r n e w p a s t u r e s < > crops som e p ro d u cin g m ake a b o u t new in cities A g ric u ltu ra l C am p bell* co n sid e rab le D is tric t present exam ple, u n e m p lo y m e n t i n areas Seventh is to are up 19$3« spent be for seed U n e m p lo y m e n t h a s concerned cash crops about to put th eir la n d in to crops* D id the A num ber real C o u n c il co n side r o f m em bers estate th e c o m m e n te d m ortgages to hom e m o r t g a g e on t h e problem s t h ir t y y e ars w ith situ a tio n ? arisin g as a result no down p a y m e n t, IT EM I I I THE BOARD WOULD LIKE TO HAVE THE VIEWS OF THE MEMBERS OF THE COUNCIL WITH RESPECT TO THE SYSTEM1S CURRENT CREDIT POLICIES AND WHAT, IF ANY, CHANGES MIGHT BE CALLED FOR BY DEVELOPMENTS DURING THE BALANCE OF THE CALENDAR YEAR. ____________________________________________________ -17- Brow n r e a d s Item the C o n f i d e n t i a l o f o p en m a r k e t III and M em orandum o p eratio n s, c o n clu sio n s but all the tio n s have b e e n e x t r e m e l y w e l l h a n d l e d ., states in System have m em bers of A lexander that he reserves— a of the C o u n c il as Board attached* c r ed it p o l i c i e s a red uc tio n the the to t h e o f the b ee n co n stru c tiv e d islik e s s u b j e c t he C o u n c il th e b eliev e and t h a t p assin g by any knows expressed The C o u n c i l h a s b e e n that open m ark et o p p o rtun ity Board i s in critic a l to stu dy in g recent opera suggest th o ro ugh ly . However, i n t h e p r e s e n t s i t u a t i o n h e b e l i e v e s r e s e r v e s s h o u l d b e p r o v i d e d b y open m a r k e t o p e r a t i o n s 0 R in glan d banks h e says th in k s g eo g ra p h ic a l that at the risk of th a t th o se who w rote c la s sific a tio n for THE IF ANY, S U G G E S T IO N S D O ES BOARD M IG H T SUPPORT t h e New Y o r k a n d C h ic a g o F ederal Reserve bank reserv es w ere IT E M WHAT, o ffe n d in g the THE IN set up a IV C O U N C IL HA V E A S OR S P O N S O R Act an d n o t w it h o u t w isd o m . THE TO L E G I S L A T IO N F O R T H C O M IN G S E S S I O N THAT O F THE CONGRESS? Brown r e a d s It e m IV and th e the C o n f i d e n t i a l M em orandum C o u n cil w o u ld read y , when it legislatio n be th a t w ould M a rtin . The next m e e t in g to some of M a rtin th in k in the also the R in glan d . The co n clu sio n s the Board be p o ssib le of the to have reserve country is C o u n c il as to a ch ie v e of some l e g i s l a t i v e on ch anging banks a n d d i d the m uch to be said a it, to prop osals n o t move to as r e a d y b y the the g eo g r a p h ic a l summer w h e n m oney c e n te rs e s ta b lis h e d . it in the support fro m a h ig h lig h te d t h is e ffic ie n tly fo r that Board. reserves a c a l l m oney m a r k e t m ig h t be as expressed Brown st a t e s m e m b ers situ a tio n was m oney m a r k e t w o rk s There th e m igh t esp ecially th in k s of attached. s a la r ie s Board hopes the r e s e r v e s w e r e does n o t ra ise the C o u n c il , other b a s i s 0 for u s e . to He sh o uld , g e o g ra p h ica l b a s is fo r reserve req u ire m en ts. Sm ith . restriction s Som e P h i l a d e l p h i a banks on n a t i o n a l b a n k s in B ro w n t h i n k s the in powers b e t w e e n M a rtin F lem ing can b e g iv en T h is w i l l says and the m a tte r asks to q u e stio n state if the any raised n ation al sh o uld p e r m it th e m em bers little of raised q u e stio n s the real in . P h ila d e lp h ia banks re c e iv e legislativ e C o u n c il a have c o n n e c tio n w ith on C o u n c il is m atter due of th e lo an s. to th e real d ifferen ce estate of to w h ich the t h e B o a r d m ay p r e p a r e n e x t m e e tin g g iv e m o re tim e of the C o u n c il . to a co n sid e ra tio n of t h e p r o p o s a l s , M a rtin C o u n cil, if states the that Board the p rop osals w i l l be can agree on loans, study. prop osals ahead th e r e g a r d in g estate sent the p r o p o s a l s . to t h e m em b ers o f the -18IT E M V W H IL E T H E B O A R D O F GOVERNORS HAS NOT HAD A N O P P O R T U N IT Y THE P R E S I D E N T S O F THE F E D E R A L R ESER V E B A N K S, O N , THE REPORT OF THE A M E R IC A N THE JO IN T C O M M IT T E E BANKERS A S S O C I A T I O N , AND T H E C O N F E R E N C E O F P R E S I D E N T S W IL L BE G L A D T O HAVE AT THE C O U N C IL M I G H T B rown r e a d s T H IS HAV E TO Ite m V M E E T IN G A N Y the p o in ts on the report even C o u n c il has Robertson, The w ith in Board, as COMMENTS RESPECT co n clu sio n s a p p o in te d S U B M IT T E D T O OF R E S E R V E C I T Y OF THE FEDERAL RESERVE B A N K S, the C o n f i d e n t i a l M e m o r a n d u m to t h e w h ic h t h e ON C H E C K C O L L E C T IO N S THE A S S O C IA T IO N OFFER W IT H and TO D I S C U S S W I T H OR T O R EACH A N Y C O N C L U S IO N S T H A T THE MEMBERS OF TO T H E R E P O R T . of the C o u n c il Board a tta c h e d . banks. such, There B ro w n s t a t e s c o n sists as expressed in are v a ry in g v ie w that the of F le m in g , A lexander has not BANKERS, T H E BOARD c o n s id e r e d the c o m m itt e e and Sm ith . report, and has no c o m m e n t , F lan in g . co n sider it at M illso Reserve c o n v en tio n B ankers A s s o c ia t io n A d m in istra tiv e in Board cannot that concern of h an d lin g banks B row n, A m e rican The The p r o b l e m s The p r o b l e m The the are A tlan tic C ity add a n y th in g the banks checks is also to th e concern gro w in g C o m m it t e e w i l l n e x t m onth. d is c u ss io n th e b y leaps on th e Federal Reserve an d bounds report. System , and F e d e r a l sw am ped. There w i l l be a great deal of d is c u s s io n in b a n k s o ver the country on th e r e p o r t . The m e e t in g A fter the p r e s id e n ts m e e tin g , of the the Board Secretary the T r e a s u r y f o r and H . at 1 2 :3 5 Earl Cook, of Staff. the P °M . m em bers o f the F e d e r a l Reserve fe w m em bers Hum phrey, a d jo u rn e d o f the banks, Sp e c ia l Treasury; M o n e ta r y A f f a i r s$ C h a ir m a n , W. n e x t m e e t in g o f th e guests at Rando lph Ray M . G id n e y , F e d eral D e p o s it -* * The C o u n c il h ad t h e m e m b ers # C o u n c il w i l l # the the th e Board and a lu n ch eo n w ere Burgess, Under C o m ptro ller In su ra n ce # lu n ch eo n w it h of George M . Secretary of th e of Currency j C o rp o ra t io n . * be h eld Novem ber l b , IS a n d 1 6 , 1 9 5 k •
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