19490804_Minutes.pdf

Minutes of actions taken by the Board of Governors of the

ederal Reserve System on Thursday, August 4, 1949. The Board met

ilathe Board Room at 10:30 a.m.

PRESENT: Mr. McCabe, ChairmanMr. EcclesMr. DraperMr. Clayton

Mr. Carpenter, SecretaryMr. Hammond, Assistant Secretary

Mr. Morrill, Special AdviserMr. Riefler, Assistant to the Chairman

Mr. Vest, General CounselMr. Thomas, Director, Division of Re-

search and Statistics

Mr. Leonard, Director, Division of Bank

OperationsMr. Bethea, Director, Division of Admin-

istrative Services

Mr. Young, Associate Director, Division

of Research and Statistics

Before this meeting there had been distributed among the mem-

bels8 °I' the Board copies of a draft of a reply, prepared in accord-

841ce th Previous discussions of the Board, to the request received

Not senator McClellan, Chairman of the Senate Committee on Expendi-

t134.e8 ill the Executive Departments, for the views of the Board con-

the provisions of S. 2073 which affect the Federal Reserve

SYstem2073 being a bill making certain changes in laws appli-

toregulatory agencies of the Government so as to effectuate

Isecommendations regarding regulatory agencies made by the Commis-

°rganization of the Executive Branch of the Government. All

r the Illembers present with the exception of Mr. Eccles stated that they

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8/4/49

had read the

who had just

read it, The

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draft and that they favored its transmittal. Mr. Eccles,

returned from the West, had not had an opportunity to

Secretary stated that word had been received from

the absent members of the Board that they had read the draft and

41)roved it.

During the ensuing discussion, it was stated that recently

SenatorMcClellan had recognized that the provisions of the bill

ih so far as they related to the Board of Governors and the Securi-

and Exchanee Commission involved matters calling for the atten-

14°11 or the Senate Banking and Currency Committee and in order to

the matter that direction, Senator Maybank, Chairman of that

er4zlittee, had introduced a similar bill (S.2340) containing the4izie

131.°1/isions relating to the Board. It was agreed, therefore,thEtt t

he Board's reply, which otherwise would have been sent to Sen-ator m

cCiellan, be sent to Senator Maybank with a copy to Senatorkeeielieua.

Mr. Clayton moved that the letterbe approved, with the understanding thatif, after reading the draft, Mr. Eccleshad any changes to suggest, they wouldbe presented to the Board, that other-wise the letter would be sent to the Bu-reau of the Budget in accordance withthe usual procedure, and that upon re-ceipt of clearance from the Bureau ofthe Budget it would be transmitted toSenator Maybank without further actionby the Board.


8/4/49-3-

This motion was put by the Chair

and carried unanimously.

Secretary's Note: Mr. Eccles had no

changes to suggest in the letter, and

it was sent to the Budget Bureau onAugust 11, 1949, in the form approvedby the Board, as follows:

"This is in response to your request of July 29, 1949,for the views of the Board concerning the provisions of S.2340 which affect the Federal Reserve System. The bill4ould make certain changes to effectuate recommendations of

Commission on Organization of the Executive Branch of'the Government which was primarily concerned with more effi-cient and economical operation of the Government. The Fed-eral

Reserve System would be affected in two respects:1. Future appointments to fill vacancies on

the Board would be made so that as soon as

possible not more than four members of the

Board would be members of the same politi-cal party.

2. Internal management of the Board, its re-

lations with Congress, and execution of its

policies would be performed on behalf ofthe Board by the Chairman who would haveexclusive and final authority with respectto these matters.

The Commission made no separate report on the FederalReseSystem, The System was enumerated among the inde-

f'Agent regulatory commissions which are the subject of one44,1)°1't which notes, however, with respect to the expenses

te:

these agencies, that the costs of the Federal Reserve Sys-not a charge on the taxpayers. This report makes

ei!cific recommendations affecting certain regulatory agen-R;:s while the only recommendations applicable to the Federalallerve System, as such, were general recommendations as to

regulatory agencies covered by the report. The only4ument dealing specifically with the Reserve System, whichr: made public by the Hoover Commission, is a task forceaiPsort which comments favorably upon the 'efficiency andtakli tch' with which the System performs its functions and.02$ no recommendation that the non-partisan character ofti7 Board be abandoned in favor of a bi-partisan Board, al-uugh it suggests other changes.


I

8/4/49-4-

"The Board strongly opposes the two provisions appli-cable to the System in S. 2340 and believes that anyChanges made in the structure, responsibilities and func-

ti°ning of the System should derive from a comprehensivemoneta rY and credit study under the direction of the Con-gress rather than from the necessarily cursory inquiry ofthe Hoover Commission in this field which did not lead toan examination into or a report on these special problemshY the Commission itself.

"As to the first provision, this would be entirelycontrary to the spirit and intent of the Federal ReserveAct which was carefully drawn to insure that the FederalReserve System would be non-partisan. Throughout its his-torY, the System has been at pains to abstain from parti-

!a4shiP of any character and the Board has enforced a ruleuhat

ofand officers of the 12 Federal Reserve Banks

eIld their 24 branches must not be identified with partisan°r political activities.

Act "As the principal proponent of the Federal Reserve

/ Senator Glass insisted that members of the Board should',j'e appointed without regard for political affiliations andhe recounted in his book, 'An Adventure in Constructive Fi-

re', that President Wilson, in whose first administration4.1_e Act became law, 'purposely refrained from contact with;rele Federal Reserve Board because he wanted the Board to

with Perfectly free to pursue its course within the law

e .-t1714,a. particle of constraint or restraint from the Ex-

"BY its nature the Federal Reserve System, and indeedIlit7 central banking organization, should bring to bear on8,r 4etarY and credit problems for which it is primarily re-nsibple independent judgment and action free, so far as

sts!ible, from extraneous influence. It is explicit in thee'em ents of the authors of the Federal Reserve Act and

nlicit in the Act itself as a basic principle that the;;Icteral Reserve System as an agency of Congress should beth:. non-partisan, non-political basis. The law provides

in selecting the members of the Board who are ap-th,2

- 1ted by the President with the advice and consent of

tc(.; Senate, not more than one of them shall be selectedany one Federal Reserve district and that the Presi-

ri-6 shall have due regard to a fair representation of theesancial, agricultural, industrial and commercial inter-te,s_ and geographical divisions of the country. Their13i;w.s are fixed in such manner as to provide for the ex-

On of the term of not more than one member in any


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"two-year period. They are required to devote their en-tire time to the business of the Board and to make annualreports to the Congress.

"The responsibilities of the Board as the governing.1,3c1c17 of the Federal Reserve System are carried out in thelight of economic considerations, as evidenced by variousProvisions of the Federal Reserve Act which require thatactions of the System shall be taken with a view to accom-!odating commerce and business and with regard to theirbearingupon the general credit situation of the country,or with a view to preventing injurious credit expansion orcontraction, or for the maintenance of sound credit condi-tions.

"S. 2340, however, would make the political historyand affiliations of each future appointee to membership onthe Board an essential factor in the consideration of hisqualifications and might prevent the appointment of a per-8°11 Well qualified by training and experience to serve ase. member. By this means there could be injected into the

Federal Reserve System, at the top, political points oftiel4 which might take precedence over economic considera-c;'1°ns. This provision, coupled with the provision that thethairman of the Board shall have exclusive and final au-°11-tY with respect to its internal management, its rela-tions

with Congress, and the execution of its policies,c°111d result in a single political appointee controllingthe

Policies of the Federal Reserve System. Under the ex-Plan the organization of the Board's staff and the

sears of the Board's policies have developed over the

,r8 on a strictly non-political basis, as a fundamentalprto'Lliciple. Every important appointment and change in thefliard l e staff is approved by the Board; this is not the

re-"cti°11 of any single member. Specific rules of the Board_quire that every member of the Board's staff be appointedor

Promotedon the basis solely of his merits and qualifi-10,1°fle and over the years the Board has built up a staffelah intellectual integrity and backgrounds of experience

'.raining in the subjects to which employees are respec-velY assigned.

)30, This bill, however, would place in the hands of onech;l'cl member -- the one designated by the President asre,i.1,111an -- exclusive authority over the staff with the same

of the

as if he were a single administrator. Thus the staffif the Board would be responsible only to the Chairman, and

a Politically-minded Chairman were to be appointed the


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It

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staff could be reorganized on a purely political basisand such considerations would no doubt enter into staffreports and recommendations.

"The provisions of S. 2340 go beyond the recommenda-tion as to administrative responsibility contained in theHoover Commission Report which states in this connectionthat 'This recommendation does not derogate from the statu-t°rY responsibilities placed upon the other members of theCommission. They remain exactly as they are'. However,

under the bill the other six members of the Board would bedeprived of the essential meRns for their independent ap-Praisal of facts and policies without which their voting

trtvileges would be rendered futile. The Chairman would! in a position to effectuate his will through the medium

his control of the staff organization. This would be11111'41r, not only to the other members of the Board, but toLhe staff as well, who now feel and are so instructed thattheir responsibility is to the Board as a whole and not8°1elY to any individual member.the" Furthermore, there is a fundamental inconsistency in

suggestion that increased responsibility for admini-stration be placed on the Chairman. He more than any othermeMber has to carry the load of initiating and determining8°ard policy. Therefore, rather than placing greater re-

VPonsibility on him for administrative detail, he and the,ler members should be relieved of that responsibilitytflich should be carried by the staff. As a practical mat-' should it be necessary or desirable for the purposes

'1'4' More effective internal operation to assign to the staffA°re of the administrative work of the Board, that can be'1311e without legislation.ut The proposals embraced in this bill become still moret,desirable when considered in the light of the fact that

4a seven members of the Board of Governors are a majorityth 12 members of the Federal Open Market Committee,

Wj.tblished by the Federal Reserve Act, which is chargedT'll a major responsibility in the field of credit policy.h4 other five members of this Committee are Presidents oferal Reserve Banks who are appointed as Presidents by

4a directors of their banks with the approval of the Boardor Governors on a strictly non-partisan basis. The staffta the Board as well as the staffs of the Federal Reservetjlks serve this Committee and customarily the Chairman of)4:Le Board of Governors is elected as Chairman of the Open'rket Committee while a President of a Federal Reserve


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"Bank is customarily elected as Vice Chairman of the Com-mittee. The effect on this Committee of the injection ofPolitical considerations into the membership of the Boardof Governors and the personnel of its staff would be diffi-cult -4--0 appraise but would undoubtedly be disadvantageous.

"The Board of Governors appreciates very much yourcourtesy in requesting its views and hopes that, if furtherConsideration is to be given to this bill in relation tothe Federal Reserve System, the Board will be given an op-Portunity to be heard."

Thereupon, all the members of the staff, with the excep-

tion of Messrs. Carpenter and Riefler, withdrew from the meeting.

There then ensued an informal discussion of organization

illtters affecting the Board and of the action that might be taken

%1ith respect to them. During the discussion, a suggestion was made

that1 it was believed that the views of the absent members

°t the Board with respect to these matters were known, they were

"811ch character that action should be deferred until all of the

b114413e1.8 of the Board could be present. It was stated that the Clay-ton

Act Proceeding against Transamerica would be recessed during

the latt

er Part of August and early part of September and that itVEtt

ecPected that Mr. Evans would be in Washington during the earlykt Of the latter month.

It was agreed that since it appeared that all of the members

theBoard could be present at a meeting of the Board on September

a decision should be reached at that time.

Accordingly, the Secretary was


8/4/49 -8-

requested to inform the absent members

of the Board of the discussion at this

meeting and to advise them that at a

meeting of the Board to be held on

Tuesday, September 6, 1949, at 10:30a.m. final action on the matters in

question would be taken.

The members of the staff who had left the meeting returned at

tlusPoint,

There was read a draft of reply to a letter dated August 2,

1949, from Senator Maybank, Chairman of the Senate Banking and Cur-

Isle3r Committee, requesting the views of the Board on S. 2344, the

1)1111ciPe1 provisions of which would remove the maturity limitationso4 10

ells 'wide by the Reconstruction Finance Corporation and increase

toI'D billion the aggregate lending authority of the Corporation.

Certain changes were suggested in

the letter, and it was agreed that it

shou2d be revised and presented for fur-

ther consideration at the meeting of the

Board to be held tomorrow.

Chairman McCabe referred to the recent discussions of the Board

/lith'esPect to action to reduce reserve requirements of member banks

4411 toth2 decision at the meeting on July 29, 1949, to give further

el'atlon to the matter at a meeting of the Board today.

The problem was discussed in the light of the memorandum pre-

edit operations under present conditions and the possible

by the staff under date of July 29, 1949, on the framework for

ttect ,p-' a reduction in reserve requirements on interest rates. There


8/4/49-9

V4 agreement that action by the Board should not be taken unless it

le.s accompanied by action by the Federal Open Market Committee to re-

duce the System's holdings of Treasury securities to absorb the funds

N.eased by the reduction in reserve requirements in order that there

ad. be

iliterest

ne substantial change in the present level of short-term

rates.

During

2:15 P.m. with

8e8sion except

the discussion, the meeting recessed and reconvened at

the same attendance as at the beginning of the morning

that Mr. Bethea was not present.

Because of the close relationship between a reduction in re-

41've requirements and System open market policy, it was agreed

'111-ran,,

81-3r by the members present that no formal action should bet e

t 0 reduce reserve requirements until it was determined whetherthe

reder8a Open Market Committee at its meeting tomorrow would take

aetio4 tcelcorb by open market operations the reserves that would be

8ecl by such a reduction, but that in the

by the Committee, the Board should take

1)o.hitto be effective on the following dates, during which period

thetaat r •

u-ing Treasury bills in the System open market account would

131'0Zimately equal to the reduction in reserve requirements:

event such action were

action following the

of the Federal Open Market Committee to reduce reserve re-

ttlent8 by 2 percentage points on demand deposits of all member


1337

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Central Reserve andReserve City Banks 1/2% on August 111/2% on August 181/2% on August 251/2% on September 1

Non-reserve CityBanks 1% on August 1

1% on August 16

Following an informal discussion of the range at

Stelll should buy and sell Treasury bills in the period followingthe

which the

acti°ns of the Board and the Federal Open Market Committee as

14e4tic)11ed above, reference was made to what action, if any, should

be te---11 with respect to Federal Reserve Bank discount rates. No

nlight

the.6.c-ter would be

decision was reached, but it was the consensus that action

Well be deferred until shortly after the first of September when

considered again.

Mr, Leonard presented a memorandum dated August 4, 1949,

l'hich he stated that the directors of the Federal Reserve Bank

Chica.go had voted to accept low bids for the addition to the

lltr°1-t Branch building

%)vernors, had authorized

detail of the bids and

in the memorandum and

637,000 for the building1e85

than the estimates previously submitted.

to

and, subject to approval by the Board of

expenditures of $3,864,856 for that purpose.

additional costs and allowances was set

indicated a cost of approximately

proper and an overall cost of some $235,-

Mr. Leonard recommended that the Board interpose no objectionthe a

ccePtance of the bids as proposed and stated, in response to


8/4/49 -11-

that he unAerstood Mr. Vardaman favored such action.

After a brief discussion of the

information contained in Mr. Leonard's

memorandum and the extent to which com-

mitments had been made against the

$10,000,000 limitation on the cost of

branch buildings contained in Section

10 of the Federal Reserve Act, the fol-

lowing telegram to Mr. C. S. Young,

President of the Federal Reserve Bank

of Chicago, was approved unanimously:

ti "Re your July 29 letter, Board will interpose no objec-

o,,- to awarding contracts for Detroit Branch building on

-asis of low adjusted bids amounting to $3,717,148, and inaccordance with recommendation of your directors authorizesa total expenditure of $3,864,856 which includes allowance

$100,000 for contingencies and allowance of $70,000 for

:St Partitions and barricades. It is understood that;40,000 contingency allowance will be used for minor changes

414 expenditures without prior submission to Board, but itrequested that any major items be submitted for Board'snsideration

At this point Messrs. Riefler, Vest, Thomas, Loenard, and Young

%lithcilse14) and the action stated with respect to each of the matters

tarter referred to was taken by the Board:


Nleral Reserve System on July 19, 1949, were approved unanimously.


Nral Reserve System on July 20, 21, 22, 25, 26, 27, 28, 29, 1949,

AllgUst 1, 2, 3, 1949, were approved and the actions recorded therein

eu nimously.

Memorandum dated August 3, 1949, from Mr. Bethea, Director


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c'r the Division of Administrative Services, recommending that the

z'esignation of Edward J. Beaton, a guard in that Division, be

ceelpted to be effective, in accordance with his request, at the close

ofbusiness August 10, 1949.

Approved unanimously.

Letter to Mr. Sproul, President of the Federal Reserve Bank

t)t Neu York, reading as follows:

"Receipt is acknowledged of Mr. Treiber's letterOf July 29, in which it is stated that leaves of ab-!?4ce with pay have been granted Mr. Arthur I. Bloom-

and Mr. John P. Jensen in order that they may!:ender assistance requested by the Korean Minister offinance on monetary and banking problems in Korea. AsIldicated in our letter of July 29 to Mr. Rounds onhis same subject, this arrangement meets with the ap-

Proval of the Board."


Letter prepared for Chairman McCabe's signature to Mr. S.Ileadley

613s3use, Versailles Road, Lexington, Kentucky, reading as fol-101,18

"We have your letter of July 26, 1949, advising thatYou hayto e accepted an invitation to become a member of thecoe'rd of Directors of the First National Bank and Trusttiollje-Alr of Lexington, Kentucky, and inquiring whether orthe it is mandatory for you to resign as a director of1 Cincinnati Branch of the Federal Reserve Bank of Cleve-

Board will be pleased to have you continue yoursx,v4-Lces as a director of the Cincinnati Branch for the

8zes of your term."The information which you were seeking regarding the

%;Ic_)intment and service of directors of branches may be

10 4d in the Board's regulation on the operation ofabnches. This regulation provides that the directors4'lloitted by the Board of Governors shall be persons who


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are not prjmnrily engaged in banking and preferably arenot directors of banks, although they may be stockholders.While this provision permits some latitude in the selec-tion of directors it follows the general principle estab-lished in the Federal Reserve Act that some of the direc-tors

of a Federal Reserve Bank should not be associatedwith commercial banks. The Board feels that it is in the

tublic interest to have diversified representation on the,c)ards of directors of the branches as well as the parentuank, and it has followed the general policy of selecting!8 itE appointees individuals who were not serving asuirectors of commercial banks. However, in instances wherea branch dIrector subsequently becomes a director of a com-n_lercial bank he usually serves out his current term as aairector of a branch.

"At the end of this year you will have served as adirector of the Cincinnati Branch for five years and, inaiccordance with the regulation, would have been eligible°I' an additional term of three years. The Board will re-butlosing your services as a director after this year0, we feel sure you will agree with the general principle

diversifjed representation on the boards of directorsbranches of Federal Reserve banks. We hope that your

Zervice with the commercial bank will permit you to main-11 a continued interest in the Federal Reserve System."


Chairman.


19490804_Minutes.pdf

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