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The Papers of Charles Hamlin (mss24661) 362_01_001- Hamlin, Charles S., Scrap Book — Volume 190, FRBoard Members 205.001 - Hamlin Charles S Scrap Book - Volume 190 FRBoard Members CONHIANtiAL (FR) all BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence To The Files From Mr. Coe Date_shily_25,29.141— Subject: weeAfter correspondence with Mrs. Hamlin (see letters of May 25 and June 4, 1941) the items attached hereto and listed below, because of their possible confidential character, were taken from Volume 190 of Mr. Hamlin's scrap book and placed in the Board's files: VOLUME 190 Page 26 Letter addressed to Governor McDougal of Chicago by Director Geo. M. Reynolds informing him that Chicago would be obliged to call loans in order to reduce Federal Reserve borrowings. Page 31 Copy of telegram to Governor Young from Harry A. Wheeler asking that the Board be not swayed from their judgment in handling speculative group. Page 55 Correspondence with Board re termination of designation of Albany, N. Y., as a Reserve city. Page 57 Telegram from Paul Warburg to Governor Young concerning readjustment of discount rates--and effect thereof. Page 59 Memo to Board from Mr. Smead re Request for termination of Albany as Reserve city. Page 65 Memo to Files re Removal of Officers and Directors of F.R. Banks. Page 77 Earnings & Expenses of F.R. Banks. Page 81 Letter to Governors of all F.R. Banks re Designation and Termination of Reserve Cities. Page 151 Memo to Board from Mr. Wyatt re Power of Board to enforce principles regarding use of credit facilities of Federal Reserve System laid down in Board's letter of February 2, 1929. Szt Uslieuea Apnt.10 TO GOYMBNOR l'exVi.;AL OY JtICAGO 461E01,A. *ahilCTOR GMR(;t 1itArt,2.0 $t am tnoroughly convinced t:4,7t we in C.4.1.cf.to will be obliced to make a , vigorous cam!!%ign of cnlling lo'ns in order to reduce Yeder;1 Ueserve i a borrowings. Artaur .nd T have just rv,ci 4 t.lk upon this subject and he is thoroughly in ncc)rd with my viewpoint, Mai he ,r., s.iures me that upon nis he is goin to tiike hold of tnis matter return, waica will be March I vireuzly mnd force n reduction of our lorns, vhiet will enable our bank to materilly reduce its oblicntion at the Federal Reserve. in a director of the leederal Reserve, you cnn under*tand that I am more or less embarrassed becnuse (Jf the contiauation of that loan, but we have lived in the hope th,1 after the turn of the yeAi natural conditions qoull Adjust the matter to the satisfotion if nll of us, but this does not now seerii to be in tile cards, and t shall tnsist tar= our people doing i lore than tryinc, to sit on the liA ta prevent further expansion, because all now of tqe opinion thA nothing s:tart of a Vig)rous eff)rt forcing Iiluiiation of many lare lines of credit will accomplish our pUrpose. oilier stock r.autblitig. rind the I' The people SOOM to.'anvil lost tnplr I* rositions will have to take responsible wno in hre thous, tie has come *hen which they will not something do to the nni force horns t,e bull by the it is cle.irly yesterday, tock , s of shares like. ?tith sties of aver G,M,000 the Federal a.ivice of Reserve the shown that tae public has not profited by for matter a is point where it Burl, i:.nd I tnink we hhve now reached the is whatever do rami vizorously bank to get into the tviie each force a reduction in the ittlault )17 money that Is : necessary to nt borrowed eteAnst stock exchwe securities," VOLUME 190 PAGE 26 (copy) Chicago Ill 104 P Apr 2, 1929 Hon Roy A. Young, javerner Federal Reserve Board, Washington for easing pressure on speculative group and In face of growing clamor for ssing hope that Board will not be increase in rediscount rate am expre ent in matter. Someone must champion cause swayed from awn deliberate judgm are most important and whose rates of commercial loan group whose borrowings to rediscount increases° have been raised by banks in full proportion to their already heavy burden Present increase advocated by many would add nent restraining influence upon without in my judgment exercising any perma market operations. Harry A. heeler 233 p VOLUME 190 PAGE 31 44c ; Nalional Commercial Bank & TrusI Company Main Office 60 State Street Park Branch 200 Washington Ave. Capital $1,500,000. Surplus $ 3,000,000. Member or Fecleral Reserve System Am any, New York March 30th, 1929. To the Federal Reserve Board, Washington,D.C. Gentlemen:Under date of September 10th, 1928 the banks in the City of Albany, New York, members of the Federal Reserve System, made application to the Federal Reserve Board to terminate the designation of Albany, New York as a reserve city. (A copy of that application is attached herewith). The application was made through the Federal Reserve Bank, New York City. Since that time the other two banks in Albany, not members of the System, have joined in our request. We are now, therefore, representing all the banks of Albany. In a letter dated February 26th, 1929 (a copy of herewith) the Federal Reserve Board denied attached which is the Albany banks. In its denial the Board the request of stated that "many inequalities exist, which, in the opinion of the Board, can only be corrected by legislation, enacted after a complete study of the entire problem, which would put reserves on a more scientific basis", and also "the Board is inclined to correct inequalities, as far as possible, by raising the reserve requirements of member banks in cities comparable to those now designated as reserve cities." It might possibly take years to complete a survey with no assurance that Congress will change existing laws and we cannot find that reserve requirements have been increased to any extent to correct inequalities. Meanwhile zIlbany is forced to do business in the face of what amounts to unfair competition. We therefore again request a redesignation for the City of Albany on the grounds- volume 190 page 55 (1) That when Albany was designated as a reserve city we were the only city of that class between New York City and Cleveland, Ohio and our banks were, with few exceptions, the largest and strongest between New York City and Chicago. Our large deposits were accumulated because of the fact that Albany made a specialty of the collection of checks at par and country banks, so-called, were glad to carry their accounts in Albany, have their checks collected at Dar and their balances count as legal reserve. Durinr-: 1914 the banks of Albany had on deposit from other banks, not including Albany Savings Banks, arpro::-imately 340,000,000. When the Federal Reserve banks installed their collection system these deposits gradually NAllinal Commercial Bank 8c Trust Cl/any Sheet No.2 To Federal Reserve Board Continuing letter of March 30,1929. decreased until at the present time the bank deposits in the member banks in the City of Albany amount to 0,000,000. The position that Albany once held has been taken from it and the banks in Syracuse, Rochester and other cities have grown into institutions much larger than those in the City of Albany. In the meantime the Albany banks, in an attemrt to maintain their position, have found it necessary to reach out into industrial centers and compete for business with these larger banks. In this we have not been successful because of the increased expense of doing business, due largely to reserve requirements. (2) We have made a comparison of the amount due to banks and trust companies deposited in National Banks located in reserve cities on December 31st, 1914 and on December 31st,1928. 7re find that bank deposits increased in fifty-eight of the sixtyfour reserve cities and decreased in only six of them. The figures show that of these six reserve cities Albany lost more bank deposits proportionately and actually than any other reserve city in the entire United States. In 1914 the City of Albany was ninth in the list of reserve cities as regards deposits from other banks. The only cities in the entire United States carrying larger deposits from banks than Albany were York Chicago Boston Philadelrhia Pittsburgh Kansas City St.Louis San Francisco At the present time instead of being ninth among reserve cities, Albany is thirty-third. (3) Notwithstanding the statement of the Federal Reserve Board that the situation can only be corrected by legislation enacted after a complete study of the entire problem, v.e find that a number of changes have been made by the Federal Reserve Board. The banks of St.Louis made application for a reclassification from a central reserve city to a reserve city and it was granted. Charleston,S.C. and Tacoma, Wash., formerly reserve cities, have been taken out of that class upon request from the banks interested. It hardly seems to us that these requests have more justification than ours. (4) We wish to state most emphatically that the banks of Albany believe in and have supported, to the limit, the Federal Reserve System. When the System was organized we felt, NAIOnal Commercial Bank 8c Trust Coflany Sheet No.3 To Federal Reserve Board Continuing letter of March 30,1929 eon business accumulated s in bank deposits wBnddi s t Baeti. kt e i dr as of e Ngato hnf ho uao n aoes uvalotyhyatse t Nnlare n w e g ank e e Ynfaro yRtrs watoei fccei wn o t vdfrdNykoeie nuesenwgbaii r e re because of the lar in our city, that r narlst wYul hnfdns gyiei s e hdseoosti, s yn a/tP yr pro rewf iin t tes an eoe i ge tteahx m o ork ca l s. Y ih le s it n o l t e haltctae sti to be forced out o The First Trust Company of Albany, N.Y., now a member of the System, is not represented here today. rr.Becker, the President, desired us to say that because of the additional expense of doing business, due to the fact that Albany is a reserve city, that they now had a proposition before their Board of Direct:rs to resign their membership. Should they decide to with-3rov; from the System it would leave only two members in Albany and we, representing those two members, ask the Board to prevent this withdrawal if possible as we believe it would simply add additional burdens on the two remaining member banks. the reserve requireBelow is a tabulation ment of a tyPical -t-lbany bank if it were a non-member, also a member bank in a non-reserve city and a member bank in a reserve city: RESERVE REQUIREUENTS Demand Deposits Reserve City Non -Reserve City Non-Member Time Derosits /here carried Cash On Deposit 10% 3% 0 75 3% 0 105 40% If Albany was classified as a non-reserve city, the average reserve requirement for the year of 1928 would daily have been reduced approxi,lately $2,204,910.00, which capitalized at 55 would effect a reduction of S110,245.00 in operating costs. As non-members of the :Lederal Reserve System Albany banks could further reduce their operating costs approximately 0191,755.00. INTIOn.al Commercial Bank Se Trust CoIllany Sheet No.A To Federal Reserve Board Continuing letter of March 30,1929 The difference in operating cozt as a non-reserve city and a non-member of the System is $ 191,755.00 which we are willing to absorb for the privilege of continuing our membership in the System, but we believe it unfair to expect us to continue our membership with the present designation. We therefore respectfully reauest the Federal Reserve Board to reconsider our application for a redesignation. Yours very truly, NE/ YORK STATE NATIONAL BANK OF ALBi,NY NATIOrAL corrEncIAL BANK & TRUST CCIIPANY OF ALBANY FIRST TRUST COETANY OF ALBANY C 0 PY September 10, 1928 Federal iiessrve Board, aashington, D.C. Gentlemen:,e understand that under Section 11 of the Federal .q3serve .Act, the :tederal Aeserve 3ank has the power to "reclassify existine reserve and central reserve cities or to terminate their dosi-nation as such." .!:t present ilbany, few York is a reserve city and was so appointed years ar:o. teoause of this fact the banks here accumulated a larce volume of bank deposits an to the tim of the orca:Azation of the Zeders1 Reserve System. .;ince the organization of that 3ystem the bulk of this business has left our city. In Tune 191A the banks of Albany had a total of ,.;39,215,808.due to banks, and in June 1928 the total was 0.0,235,830. This is a reduction of practically „i29,000,000. The banks of this city, members of the Federal Reserve :'ystem, feel that 2,1bany should be reelassified and taken from the ressrve city list. 'Zhu bank deposits aro rxadually beina transferred fron Albany, each year showing a further decline. iC therofol-o would formally re-uost your 3oard to teminate our classification as a reserve city. MIMS very truly, 1:ationa1 ,3ommorcial lank & Trust Co.of Jabany (Sicned) -resident ,tate New Yor'7 ' ational lank of Albany 1. 1rederick oDonald . 7 resilent 7irst Trust Company of Albnay (Signed) (Signed) John L.locl:er Presid6a- COPY 710)1:: I) ASHTTil.CTOU -ebrunry 2, 1929 Dear !Tr. Case:This will acknowledge receipt of your letter of Zebruary 19th, eith mi7ard to the applieation of weeLber banks in Albany for the termination of the desination of thnt city as a reserve city. The =ioard has acein reviewed the ap71ioation and has jeen careful consideration to all o. the areum(nts presented. Under the present law, where the sane character of deposit su)ject to the sane condl.tions and possible withdrawals may carry a reserve of seven, ten or thirteen per cent because of location, it is not an easy problem for the board to put reserves on an entirely equitable basis and naturally nnny inequalities exist, which, in the oninion of the Hoard, can only be correctel bylecialntion, enacted after a complete study of the entire problem, that would put roeerves on a more scientific basis. The Ronrd has received mealy other applications leverlir reserves at certain points, but it is for laolined to correct inequalities, so far as eossible, by raisin 7 the reserve requirements of nember banks in cities comparable to those now desionated as reserve cities. The 71oard, therefore, has decided to deny the rcuest of the Jabany =Labor banks and at the same time assures them that it will use its efforts towards higher reserves in other cities where oonditions exist similar to those in Albany. /ery truly yours, (3ined) Covernor J.r.Caso, Deeuty Governor, Federal -eeserve lank, Nee York City -----... COPY • TREASURY DEPARTMENT Telegraph Office. CD New York N Y April 1 1929 Governor Roy A Young Federal Reserve Board Washington, D. C. In order to demonstrate the utter anomaly of the prevailing open market rates on the Federal reserve banks the International Acceptance Trust Co. sent on Thursday to the Federal Reserve Bank for rediscount at the rate of five percent a bankers acceptance of some twelve thousand dollars from a batch of bills we had received from South American banks to be credited it under discount Stan The Federal Reserve Bank had of course no choice but to rediscount it at five percent unless it would have wished to adopt the impossible attitude of treating a bankers acceptance endorsed by a member bank as inferior to a promissory note similarly endorsed Stop You can readily see what confusion and embarrassments result from present conditions Stop In the practice of central banks open market rates in the bill market have never been employed except when central banks desired to buy prime paper below the official discount rate at which all entitled to deal with them may put in their paper Stop Whenever the open market rate reaches the official rate it naturally ceases to exist Stop It would be as incomprehensible to central bank managers in Europe as it is to me how a central bank can have an open market rate for the finest paper at a higher rate than the wide open rediscount rate at which the central bank buys the lower quality plus of course the finest Stop Customers who remit acceptances for discount through a member bank are entitled to expect that the bill will be credited to them at the lowest rate available to such member bank minus a reasonable compensation for endorsing the bill of say one eighth one quarter percent per annum Stop As it is a customer dealing with two member banks at the same time might find that one operates by rediscounting with a Federal reserve bank while the other out of consideration for the Federal reserve bank might place the bills five eighth percent higher in the open market and naturally would lay himself open to reprimands and claims on the part of his customer Stop I cannot see how these conditions within the briefest space of time will fail to lead to all acceptances being endorsed to the Federal reserve banks and in this process the further anomaly will arise that acceptances of identical character might be rediscounted at San Francisco at four one half percent While in Eastern Federal reserve banks they would be rediscounted at five percent Stop May I urge you and your colleagues with all the seriousness of which I am capable to end the present confusion at the earliest possible moment unless all the work that has been done in the past to develop a bill market on which eventually the Federal Reserve System must rest is to be destroyed and the prestige that we have gained in foreign lands is to be broken down Stop Moreover when one observes that the rediscounts of the Federal Reserve System amount today to an aggregate of over one billion dollars at a period When they VOLUME 190 PAGE 57 far • -2- should be low it is impossible to indulge in the belief that the relatively low rediscount rates are not in full effect today Stop A continuation of the experiment in the face of the unbroken stock exchange speculation and a continuation of the present controversy with all the incidents that it provokes both in Washington and New York create a situation of the gravest danger and the Board is playing with fire if not with dynamite Stop May I respect fully suggest that a way out of the present dilemma might be found by increasing the rediscount rate for commercial paper to five one half percent raising at the same time the rate for fifteen day member bank notes whether secured by commercial paper or by Governments to six percent This would enable the banks to rediscount bonafide commercial paper at the lower rate which would satisfy business while for the fifteen day note Which is the main instrument for_ type of bank borrowing from which a seepage into the stock exchange most readily 1_, occurs the six -percent rate would be applied Stop If together with the readjustment of the rediscount rates it would:be announced that further advances might follow if the Boards hands were forced in that direction I believe that a dampening effect would result such as the Board desires with hardly any harm to business Stop In any ease the Board would then have done its duty in the normal way plainly indicates by existing market rates and would to that extent relieve itself of a grave responsibility Stop Hoping you will pardon this intrusion and with warm regards (Signed) Paul M. Warburg eerch 29, 1929 #gral Reserve Board N. Mr. grad I Request for termination of Albany as reserve city. In connection with the hearing which the Board has granted to representatives of member banks in Albany, which have applied for the termination of the designation of that city as a reserve city, we have prepared twc tablas attached hereto showing: (1) member Deposit ana required reserves on eecember 31, 1928 banks in rueerve citiea in which no iederal reserve bank or branch is located and the excess of reserves reauired to be carried by such banks over what they would be reeuired to carry as country banks; (2) Iepoeits and required reserves on December 31, 1928 of mexber banks in 33 non-reserve cities and the additional reserves which rach banks would be reouiree to carry if the cities were decignatec as reserve cities. From the first statement mentioned it will be seen that member banks in the 27 reserve cities in which no Federal reserve bank or branch is located are required to ce.rry aeeroximetely $27,GOC,030 more reserves with the Federal reseeee banks than they would be required to carry as country banks, and that the member banks in Albany are required to carry about $1,900,u;;0 more. On December 31. 1928 there were 8 reserve cities in which no Federal reserve bank or branch is located which had a larger volume of bank deposits than did member banks in Albany, and 18 such cities in which the bank deposits of member banks were less than in Albany. As will be seen from the table attached hereto, there was no non-reserve city on December 31, 1928, in which member banks had bank deposits of as much as $10,000,300. Consequently, bank deposits of the three member banks in Albany, which were $13,000.000 on December 31, were materially above those of member banks in any non-reserve city. VOLUME 190 PAGE 59 D7POSITS "IITD REQVIP2,D liES=VES DEC1.11.SM 31, 1928 OF :ET.SER BAITICS REbhi-C,T, IIT WHICH :TO FEDT1-1‘,.L 11:757.7.711 at:TIC OR BR V.TCH IS LOC_%.TED, .4:1-.D THE ECCESS OF SUCH =5:Tin-ES OVER RES:MVES THAT 7:OULD BE ItEQUIRED OF COTTTRY BAIIKS (Amunts in thousands of dollars) Due to banks ** Reauired reserves PoDulaRatio to 7et Time Total Excess over tion in knount total demand de-posits de-oosits countryAt 1927* present bank-basis I denosits deposits Albany 120,000 13,342 13.1 63,861 24,544 101,997 7,122 1,916 Washington Milwaukee Indiana-)olis Toledo 540,000 536,000 374,000 305,000 13,897 33,099 23,6-02 8,295 10.0 15.s 20.9 8.4 7b,278 111,325 64,393 38,3o9 44,00S 67,261 24,96s 49,89s 13s,365 209,948 113,145 98,733 8,948 13,151 7488 5,32s 2,289 3,34o 1,931 1,149 columbus Oahland St. ?aul Fort ;orth 291,00o 267,000 250,000 164,000 14,127 5,650 25,162 24,370 13.2 16.7 20.7 27.6 63,5o2 22,523 64,616 52,310 2o,179 6,961 39,627 15,608 107,3, 17 33,892 126,133 38,272 7,195 2,461 7,651 5,699 1,9o5 G75 1,939 1,569 Grand Rapids Tulsa Des Moines Ilansas City Kans. 162,000 150,000 149,000 118,000 6,301 26,871 10,830 3,774 7.4 24.1 20.4 28.0 33,749 75,520 34,464 7,616 43,944 17,790 1°,579 3,290 85,210 111,384 53,077 13,467 4,693 5,086 3,763 861 1,013 2,256 1,034 229 Savannah Wichita Peoria Sioux City 100,000 96,000 84,00o 79,000 16,155 10,190 4,512 8,060 20.5 26.2 13.8 28.5 33,731 24,790 16,354 13,342 30,o66 6,975 12,583 8,207 7s,992 38,941 32,643 28,282 4,275 2,68g 2,013 1,580 1,012 744 490 400 79,000 70,000 62,000 54,000 9,621 7,276 3,644 10,461 32.8 31.0 16.5 34.1 7,847 3,485 29,345 23,460 2,642 11,354 St. Jose2h Lincoln Topeka Cedar Rapids Galveston .Waco Pueblo Dubuque 5o,000 46,0o0 44,0oo 42,000 Ogden Muskogee 38,000 33,000 TOTAL, 27 cities 4,303,000 304,789 7,279 6,209 18.2 908,250 1,817 475 413 22,084 30,646 1,481 1,670 1,691 477 405 13,994 7,417 5,587 6,911 31,319 21,s13 2o,s32 12,116 1,805 1,393 1,07s 652 416 351 273 134 1,541 4,754 11,831 13,184 774 764 218 186 500,023 1„676,478 105,827 27,249 *Census Bureau estimates, except that population marked (*). is taken from July 192g Rand-Mally Bankers Directory. **Does not include am,ounts due to Federal reserve banks, certified and I,fficers' chocks, and cash letters of credit and travelers' checks. FEDERAL RESERVE BOARD DIVISIO OF BAITK OPERATIMS nARCH 29, 1929. C. (st. 614sa) *a/ DEPOSITS KID REV 1: icwark Syracuse 3uluth 2ampa (21,0 I PIR7 RESTRVES aiT Maa.BER 31, 1928, 0 YZ53:2 BAIIKS 331:401T-RSERVE CITI2S, LTD ADDITIGNIL RIISERVES THAT 7OULD BE R77-).WIR7D IF THEY '::ZIRE DESIGgArITD AS R262727E CITIES (1)Cities with ,;;5,000,000 or more of bank del)osits (2)Other cities with .po-pulation of 125,000 or more. (Amounts in thousands of dollru.$) .\le, to banks ** Required reLerves PenulaRatio to Time Total Additional tion in Amount total defrand de-oosits de)osits At on rcserve1927* denosits clei)osits present city basis 1.11CITIL'S 7ITH $5,000,000 OR MORE OF BA1TK DEPOSITS 467 1 000 1 9,353 2.9 201,770 101,515 322,790 17,169 6,053 197,000 5,675 3.6 107,924 42,787 156,578 8,339 3,237 115,000 7,261 13.9 24,452 21,158 52,086 2,346 734 108,000 7,130 15.5 18,043 20,227 45,050 1,570 c,41 Shreveport 78,000 7inston Salem 77,000 Sacramento 75,000 Knoxville 102,000 9,473 7,468 3,349 5,116 Charleston Chattanooga E.St.LGuis Nat.Stk.Yds. Joliet 75,000 73,000 21.9 15.6 22.0 25,646 22,227 9,513 17,712 5,179 6,718 1)4.5 11.7 15.14. 20,819 14,926 13,840 18,725 73,000 42,000 7,918 5,083 29.4 17.0 TOTAL, 12 cities 1,482,000 84,723 9.6 43,180 2,081 769 10,743 14,212 23,494 17,940 47,933 37,919 35,248 44,361 43,519 2,087 1,780 1,471 1,674 1,849 667 624 448 );15 552 16,213 15,223 7,647 11,172 26,974 29,843 1,364 1,401 487 455 499,308 298,120 885,511 43,931 14,993 (2) NON-RESEM CITIES NOT MCLUDZD ABOVE, WITH POPULATION OF 125,000 OR MORE Rochester 325,000 Jersey City 322,000 Providence 281,000 Akron *203,000 771 3,520 4,588 1,517 1.3 2.1 1.5 1.9 124,094 29,498 7orcester :ew Haven Dayton 7orfolk 196,000 185,000 131,000 3,983 859 5.1 1.6 57,011 28,113 455 1.1 179,000 25,409 4,344 3.9 24,651 169,000 165,0001 147,000 .144,000 1,107 2,448 1,800 4,395 1.6 3.1 24,511 70,442 42,555 3.5 23,666 4.9 36,135 *144,000 1,020 144,000 3.0 16,459 143,000 140,000 1,345 322 2.0 .6 24,533 15,722 1,243 5.1 Trenton ;137,000 Camden - '0133,000 Fall River 133,000 Long Beach *129,000 610 1,248 1,050 582 7i1mington 126,000 TOTAL, 21 cities 3,734,000 Youngstown Hartford Springfield Scranton. -% Bridgeport Patron.. Flint . Miami 4 15,194 85,539 39,647 58,387 2,463 72,162 166,346 8,153 175,3.39 306,181 13,947 45,099 79,193 3,436 16,401 24,302 546 2,566 3,723 885 78,424 54,521 4,483 2,697 13,443 41,506 13,696 46,870 2,132 2,286 24,654 59,120 78,159 51,317 5,047 2,396 47,920 69,948 3,967 736 2,113 710 1,085 14,455 34,165 1,586 494 39,726 41,117 66,804. 57,780 2,909 2,334 736 472 12,781 9,982 24,211 1,194 384 1.5 2.6 5.6 2.3 24,247 24,265 15,872 14,826 15,695 21,768 2,273 41,370 47,356 18,812 2,168 2,352 1,179 728 728 476 9,895 25,689 1,335 444 1,034 2.3 40,716 5,054 47,905 3,002 1,221 33,292 2.6 72,108 22,102 3,869 73,6314 66)4,6521,1456,56141 2,992 1,710 843 762 740 *Census Bureau estimates, except that population marked (*) is taken from July. 1925 jankors DillAPtory. **Does not incYude amounts due to F. R. banks, cotifted and officerst checks, and cash letters of credit and travelers' checks. FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS • MARCH 29, 1929. (St. 61)48) • S--41.4-- 444 )6 Cd 6 MEMORANDUM FOR THE FILES Subject: Removal of Officers and Directors of Federal Reserve Banks. When the original Federal Reserve Act first passed the House Section 12(f), which is now Section 11(f) thereof, read as follows: "To suspend the officials of Federal reserve banks and, for cause stated in writing with opportunity of hearing, require the removal of said officials for incompetency, dereliction of duty, fraud, or deceit, such removal to be subject to approval by the President of the United States." In the Senate this Section was changed to read as follows: "To suspend or remove any officer or director of any Federal reserve bank, the cause of such removal to be forthwith communicated in writing by the Federal Reserve Board to the removed officer or director and to said bank." The Senate amendment was accepted by the House and written into the original Federal Reserve Act as finally enacted. The following extract from a speech made in the Senate by Senator Reed, while the original Federal Reserve Act was being debated in that body, throws much light on the purpose of this amendment (Congressional Record, Volume 51, Part I, Page 174; Dec. 4, 1913, 63rd Congress, and Session): "POWERS OF RESERVE BOARD INCREASED. "The Federal reserve board, appointed by the President, is, by the two amendments I have set out, given absolute command of the system. It can make the regional directors perform their full duty with fairness and impartiality to all. "We followed these amendments with others of equal importance. We gave the reserve board the unrestricted right to remove any of the directors of a regional bank. Here is the language: 'The Federal Reserve Board shall have power to suspend or remove any officer or director of any Federal reserve bank, the cause of such removal to be forthwith communicated in writing by the Federal Reserve Board to the removed officer or director and to said bank.' The House bill only gave a restricted right of removal." VOLUME 190 PAGE 65 S 2 Mr. BORAH. Mr. REED. "Mr. President-- °I will yield in one moment. The lawyers of the Senate will observe that that power of removal is absolute. There is no trial demanded. It vests in the Federal Reserve Board the right to remove. The solitary requirement is that after removal has taken place, or coincident with it, the reason shall be put upon the public records in order that the board may be judged by its acts." The PRESIDING OFFICER. "Does the Senator from Missouri yield to the Senator from Idaho?" Mr. REED. "I yield to the Senator." Mr. BORAH. "As I understand the change which was made as to the power of removal, it rests now solely and exclusively within the discretion of the Federal Board." ••• Mr. REED. "Yes, sir." Mr. BORAH. "There is no one to review it and no reasons need be assigned for the removal, but after the removal the reasons shall be communicated to the bank." Mr. BE. "That is the fact. It was intended to vest the power of removal absolutely -- to give the Federal Board the right to remove, without question, any director, and the Board is not compelled to specify any particulars and have trials and hearings; its mandate of removal is final. "The safeguard against an abuse of that power (and it is a very great power) is found in the fact that this board will be composed of men of the highest character. It will be the supreme court of finance. The board will be appointed by the President himself, and must be confirmed by the Senate. It is required to state its reasons for the removal. If it states trifling reasons that do not justify its action, it will place itself in a sad position before the bar of public opinion. We need not therefore fear an abuse of its powers. "But another reason why the power will never be misused is that the board can not appoint the successor of the director removed. There is no incentive to remove a man except for real cause, because the power that removes can not, in pursuit of any scheme it may have, • -3put some favorite man in the place of the man removed. The power may be thought to be somewhat arbitrary, but I believe that it is necessary to vest this power in the Federal Government if we give to the banks the majority of the directorate of the regional banks. "Putting together, then, these several provisions to which I have adverted, I believe we can say to the country with a clear conscience that while we have drawn these banks together into this great system, while we have given them a common stock ownership, while we have placed the control of the regional banks in the hands of the bankers, we have at the same time so safeguarded every avenae and so locked every door that the people may be content. In the last analysis the Federal reserve board, appointed by the President and representing the entire country, has complete and absolute power, and will control the entire system and prevent discriminations, combinations, or other wrongs." J 411 0 March 30, 19'e9. Memorandum for the Files. cs rve Banks. SUBJECT: Removal of Coficers and directors of Federal ilese The following quotation from the Congressional Record, Volume 51, ive history Part I, Page 530, throws further light upon the purpose and legislat of this provision of the Federal Reserve Act : to what has MR. OIGORMAli. "I merely desire to say a word supplementary I think it is quite been said by the Senator from Colorado ( Mr. Shofroth), and cribe— to the so—called pertinent; The members of the committee Who subs rtained by the Senator from Owen amendment were not unmindful of the view ente guarding member banks from Nebraska (Mr. Hitchcoch) regarding the need of safe cers of the regional tanks. Possible discrieAnation on the aart of the offi estion of the Senator from To make discrimination impossible, it was the sugg banks be deprived of all discretion Nebraska that the members of the regionel s up to a certain figure, even and be compelled to make loans or allow discount transaction." though their own judgment condemned tihe provided, in suostance, that any "The bill as it stood at that time complaint of discrimination or favoritism aggrieved bank could com unicate its Washington. It was said in that connec— to the members of the reserve board in conceived the oossibility of a tion th-t that would invoeve delay and scree re it could secure suitable redress .ember bank bein,f, forced to the wall befo time providtd that the Federal reserve in that manner,because the bill at that to give a hearing to the six of the board in Washington would be renuired be removed." before any one of the six could nine members of t'ee reeional bank rn— , in suostance, that the three gove "The bill at that ti.,e provided rve rese o.1 Peder the b:enk could be removed by — mental apeointees in each regional busi of ves tati Provided tl-let the three represen boaea a:ter a hearing. It also but ing; hear a of ti_em, could be removed after ness in the district, or any one the three rep— Federal reserve board to remove no power was conferred upon the rve board." would be on the Federal rese resentatives of the le-enle_ers who n of the er having in mina tee objectio "At that stage of the matt uloonthe members of chaned the bill and conferred we , aska Nebr from tor Se.la mited oower to arbitrau, unrestricted and uali reserve board in ",:ashineton reserve bank, including even the cers of offi nine the of one y ever ve ary remo vas thought that with that sueLa representarives o-f the benkers. It officer of a reserve board in oashington no power lodged in the Federal any of the mem— nst agai nate ced to discrimi inau Le d coul bank rve rese Feeeral bill stands use, as the provision in our beca cted affe rict dist the in ber banks of the regional to believe that the officers come,unicate now, if a member bank has reason once ly and imparti .11y it can at eefore banae are nottreating it fair laid evidence reserve board and if the eill bank its complaint to the Federel the regional the offending officer of tory sfac sati statute is d the boar of the reouirement a hearing, the only out with ted nita deca state l shal be at once rve board oloce the Federal rese s take val remo the tat when " its reasons for the removal. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS March 1929. Total earnim,s of the Federal reserve banks in March were $524,000 more than in February, as a result of an increase during the month of $b90,000 in earnings from discounted bills, S114,000 4from U. S. securities, and $14,000 from miscellaneous sources, offset in part by a decrease of 294,000 in earnings from purchased bills, is compared with March 1928 there was an increase of q1,970,000 in total earnings. Current expenss (exclusive of cost of Federal reserve currency) aggregated S2,169,000, as compared with $2,1S4,000 in the month preceding and 4`x2,168,000 in March of last year. First Quarter 1929. During the first three months of the year earnings totaled $17,91,000 as compared with „i11,667,000 for the corresponding period last year, and $10,349,000 for the first quarter of 1927. Current expenses (exclusive of cost of Federal reserve currency) amounted to $6,590,000 during the 3-month period, an increase of about ,3111,000 over the corresponding period last year. ifter providing for all current expenses and dividend requirements, the Federal reserve banks on March 31 had a balance of,419,000 available for losses, depreciation allowances, surplus and franchise tax as compared with a balance of $5,623,000 at the end of February and of $2,659,000 at the end of March 1928. VOLUME 190 (St. 6161) PAGE 77 .:.:r. Hamlin ell CONFIDENTIAL Not for publication EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS, MARCH 1929 1:onth Federal Reserve Bank counted 1 bills 1.44. 444 of Earnings from U. S. Other sccurisources ties Total St. 6161 March 1 20 Current net Current expenses earnings Exclusive Ratio to of cost of Amount paid-in Total F.R.ourrency capital Per cent $152,763 $173,492 $231,578 26.4 521,613 827,210 17.8 557,237 156,642 181,596 410,596 32.3 228,385 314,380 25.2 204,903 I 328,064 236,270 89,329 112,038 $22,761 145,999 64,115 90,422 $6,881 27,426 2,763 12,241 1,384,447 592,192 542,765 183,406 219,379 891,833 204,180 52,802 52,812 110,048 36,866 6,190 12,538 105,733 65,114 3,795 10,814 35,915 1,610 246,193 295,543 1,143,529 307,770 119,101 102,514 301,583 106,273 132,061 110,069 315,844 118,521 114,132 185,474 827,685 189,249 Minneapolis 60,132 40,305 33,573 Kansas City 121,867 42,321 33,124 Dallas 61,0)01 67,767 38,40s San Francisco 324,992 145,673 4s,448 TOTAL Mar. 1929 4,044,497 1,122,796 666,425 alb. 1929 3,354,719 1,416,869 552,206 r. 1928 1,715,862 982,810 1,211,562 Jan.-Mar.1929 11,041,494 4,393,960 1,997,829 1928 4,530,841 2,943,011 3,782,497 F7DER1L R7SERITE BO',RD DIVISION OF BANK OPTIONS APRIL 9, 1929. 9,361 29,423 12,532 9,145 143,371 226,735 179,751 528,259 73,g79 137,788 101,949 190,451 83,359 161,707 113,036 197,319 60,012 65,028 66,715 330,940 161,907 5,955,625 147,424 5,471,218 11.5,019 4,025,643 458,1q4 17,891,477 41'0,806 '1,667,155 2,169,459 2,1E:4,228 2,167,555 6,589,542 6,476,725 2,372,626 2,366,055 2,274,050 7,021,790 6,834,503 *On York Philadelphia Cleveland : Richmond Atlanta Chico St. Louis C. $238,863 974,752 435,985 $136,565 $405,070 January - ::larch 1929 Available for Current reserves net Dividend. surplus and earnings accured franchise tex* $892,122 $151,957 2,781,669 790,655 1,011,843 220,705 1,074,252 219,004 $716,687 1,973,920 762,703 21.6 41.1 51.7 40.5 359,186 642,004 2,052,376 479,775 92,668 79,166 279,7)01 81,859 254,123 552,445 1,740,376 355,928 22.8 17.8 17.7 36.1 198,798 213,838 272,933 890,891 45,799 64,012 65,603 161,309 149,811 205,691 714,907 3,622,999 27.9 3,105,163 27.0 1,7ril,593 15.2 10,669,687 29.1T-- 10,869,687 2,252,481 11-,e3,65 14.4 4,$32,652 2,026,380 8,418,941 2,659,067 842,097 150,253 *After adjustment for current profit and loss entries, purchases of furniture and equipment, etc. • FEDERAL RESERVE BOAFIR,ii 12, 1929 St. 6148 SUBjECT: DesignatiVnAsPaTTe-9nrilination of Reserve Cities ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD Dear Sir: As you were advised at Board has under consideration a to terminate the designation of nection therewith the Board had are enclosed, showing the recent Governors' conference, the request from member banks in Albany, N.Y., that city as a reierve city, and in contwo statements prepared, copies of which 1.Deposits and required reserves on December 31, 1928 of member banks in reserve cities in which no Federal reserve bank or branch is located, and the excess of such reserves over those that would be required of country banks. 2. Deposits and required reserves on December 31, 1928 of member banks in 33 non-reserve cities, and additional reserves that would be required if they were designated as reserve cities. You were also advised at tho conference that a member of the Board has introduced a resolution which, if adopted, would require that all cities in Which the ratio of amounts due to banks to total deposits of member banks is 10 :der cent or more, be classified as reserve cities. The Board has this resolution under consideration and is endeavoring to rork out some formula whereby either tho ratio of bank deosits to total deposits or thc aggregate amount of bank deposits, or a combination of the two, might be used as the basis of determining dlethar or not a given city should be designated as a reserve city. The Board would like to have you give consideration to this question in the light of conditions existing in your district, and .advise it whether or not in your opinion some formula along the line mentioned can be worked out for use as guide in designating reserve cities, also how formula that you may develop would work out for each city in your trict that would be affected. It is also requested that you advise the Board Whether in youropinion some modification of the formula might be used I! in designating central reserve cities. By order of the Federal Reserve Board. Very truly yours, VOLUME 190 PAGE 81 Enclosure LETTER TO ALL GOVERNORS* E. M. McClelland, Assistant Secretary. IL • • D7P0SITS AND REQUIR2D RESIMS Of DECE:!BER 31, 1928 OF :ER BANKS IN REST CITI:S If 'iTHICH 70 FED= TOK OR BRUCH IS LOCATED, 4.1-.D THE EXCESS OF SUCH 171ESVES OVER RESERVES THAT WOULD BE REWIRED OF COUNTRY BANKS (Amounts in thousands of dollars Due to banks ** .e uired reserves PopulaRatio to Yet Time Excess over Total tion in Amount total demand deposits de-oosits At country1927* de, ?osits deposits present bank-basis 4 Washington !Iilwaukee Indiananolis Toledo 120,000 13,342 540,000 13,397 536,000 33,099 374,000 23,602 305,000 8,295 10.0 15.8 20.9 3.)4 76,273 111,325 64,393 38,309 24,544 101,597 44,006 138,335 67,261 209,948 24,968 113,145 49,898 98,733 Columbus Oakland it. 'au]. Fort Worth 291,000 14,127 13.2 267,000 5,650 16.7 250,000 26,162 20.7 164,000 24,370 27.6 63,502 22,523 64,616 52,310 23,179 107,337 6,961 33,892 39,627 126,133 15,608 88,272 Grand Rapids Tulsa Des Moines I;.ansas City Kans. 162,000 6,301 150,000 26,8.71 149,000 10,830 118,000 3,774 7.4 24.1 20.4 28.0 33,749 75,520 34,464 7,616 43,944 85,210 17,790 111,364 10,579 53,077 3,290 13,467 Savannah Wichita Peoria Sioux City 100,000 16,155 20.5 96,000 10,190 26.2 84,000 4,512 13.8 79,000 8,060 28.5 33,731 24,790 16,354 13,342 30,066 6,975 12,588 78,992 38,941 32,643 8,207 28,262 32.8 31.0 16.5 34.1 15,817 13,761 15,912 13,501 7,847 3,485 2,642 11,354 Albany 13.1 63,861 7,122 1,916 8,948 13,151 7,16 5,328 2,289 3,340 1,931 1,149 7,195 2,461 7,651 1,905 675 1,939 5,699 1,569 4,693 1,013 8,086 2,266 1,034 229 3,763 861 4,275 2,88 2,013 1,580 1,012 744 490 1,817 1,481 1,670 1,691 475 413 477 405 416 351 273 134 400 St. Joseph Lincoln Topeka Cedar Rapids 79,000 9,621 70,000 7,276 62,000 3,644 54,000 10,461 Galveston Waco Pueblo Dubuque 50,000 46,00o )01,000 42,000 8,569 27.4 2,541 11.6 5,850 28.1 848 7.0 1 13,848 11,695 9,098 4,447 13,994 7,417 5,587 6,911 12,116 1,805 1,393 1,078 652 Ogden Muskogee 38,000 33,000 4,793 40.5 1,949 14.3 7,279 6,209 1,541 4,754 11,831 13,184 774 764 218 186 908,250 500,023 1,676,478 105,827 27,249 23,345 23,480, 22,034 30,646 31,319 21,813 20,832 TOTAL, 27 cities 4,303,000 304,789 18.2 *Census Bureau estimates, except that population marked (*) is taken from July 1928 Rand-Mcfally Bankers Directory. **Does not include amounts due to Federal reserve banks, certified and officers' chocks, and cash letters of credit and travelers' checks. FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS :ARCH 29, 1929. C. (St. 61)48a) 16. • DEPOSITS AND ROIRED RESERVES 0: DECEMER 31, ET IR 0, OF :.:E1.37.1,R BANK S 33 NON-RESMaVE CITI7S, An ADDITIOAL RESRVES THAT ViOULD BE REQUIRED ii IF THEY WERT DESIUATED AS RESERVE CITIES (1) Cities with $5,000,000 or more of bank ae-?osits (2) Other cities 7/ith population of 125,000 or morc (Amounts in thousand. f dollars) Due to banl:s** Required reserves Popula Net Ratio to TirLe Total Additional tion in At Amount i total demand depos its dcDos its on reserve1927* deposits present . 'de-posits' cit7,7 basis (1) CITIES 'ITCH $5,000,000 OR moaE OF BANK DEPOSITS 2.9 201,770 101,515 322,790 17,169 3.6 107,924 42,787 156,578 6,639 115,000 7,261 13.9 24,452 21,15s 52,os6 2,346 106,000 7,130 15.6 16,043 20,227 45,060 1,870 467,0oot 9,353 197,000 5,675 Newark Syracuse Duluth Tampa Shreveport 7c,000 Winston Salcm 77,000 Sacramento 75,000 Knoxville 102,000 Charleston Chattanooga E.St.Louis & Nat.Stk.Yds. Joliet 9,473 7,466 6,349 5,116 21.9 15.6 22.0 14,5 25,646 22,227 20,819 14,926 75,000 73,000 5,179 6,716 11.7 15.4 13,340 18,725 73,000 42,000 7,918 5,083 29.4 17.0 15,213 15,223 TOTAL, 12 cities 1,482,000 64,723 499,008 296,120 065,511 43,931 (2) NOZ-RESERVE CITIES NOT ETCLUDED ABOVE, 7ITH POPUIkTIOY OF 125,000 OR Rochester 325,000 771 1.3 18,194 39,647 53,667 2,463 Jersey City 322,0001 3,520 2.1 ' sc5,539 72,152 166,346 g,153 Providence 281,000! 4,588 1.5 124,094 '75,339 306,181 13,947 Akron *206,000; 1,517 1.9 29,458 45,659 79,193 3,436 Worcester Yew Haven Dayton Norfolk 195,000 185,000 131,000 179,000 Youngstown Hartford Springfield Scranton 169,000 166,000 147,000 144,000 3,983 859 455 4,344 .)•' 5.1 1.6 1.1 a.9 1.6 3.1 3.5 4.9 57,011 26,113 25,409 24,651 16,401 24 ,302 4,463 2,697 13,443 s,696 2,182 2,266 *144,000, 144,000: 143,000, 140,000, 3.0 2.0 Trenton Camden Fall River Long Beach 137,000: 133,000; 133,000 *129,000' 1.5 2.6 5.0 2.3 24,247 24,265 15,872 15,695 21,760 2,273 14,626 41,370 47,356 16,612 9,695 126,000: 1,0C4 2.3 40,716 5,054 5,734,000!38,292 2.6 Wilmington TOTAL, 21 cities 3,237 734 541 14,993 546 2,566 3,723 665, 1,710 843 762 740 24,511 70,442 23,666 36,135 Bridgeport Paterson Flint Miami .6 5.1 .'1,053 16,459 24,533 15,722 12,761 25,669 2,166 2,352 1,173 1,335 72g 726 476 444 47,905 3,CO2 1,221 736,6s4 66,-,652 4- 4s6,564 72,100 22,102 *Census Bureau estimates, except that population marked (*) is ta.en from July 1926 Bankers Directory, **Does not include amounts due . to F. R. banks , certified and officers' checks, and cash letters of credit and travelers' chc1:-.s. FEDERAL RESERVE BOARD DIVISIO OF B.OK OPERATIO:S MARCH 29, 1)29. (St. 6146b) C3-‘4,11-ak • , , f Of 2. 's 411 2/67 X-6260 March 7, 1929. COPY TO: The Federal Reserve Board FROM: Mr. Tyatt, General Counsel, SUBJECT: Power of Board to enforce principles regarding pro-oer Use of credit facilities of Federal Reserve System laid down in Board's letter of February 2, 1929. CONFID7iNTIAL At the Board meeting on March 5th, I was requested "To report as to what powers the Board has under the Federal Reserve Act for the enforcement, should it become necessary, of the principles regarding the proper use of the credit facilities of the Federal Reserve System, laid down in the Board's letter of February 2nd to all Federal reserve banks." The following paragraphs of the Board's letter contain the statement of principles referred to: "The Federal Reserve Act does not, in the opinion of the Federal Reserve Board, contemplate the use of the resources of the Federal reserve banks for the creation or extension of speculative credit. A member bank is not within its reasonable claims for rediscount facilities at its Federal reserve bank when it borrows either for the purpose of making speculative loans or for the purpose of maintaining speculative loans. "The Board has no disposition to assume authority to interfere with the loan practices of mez_ber banks so long as they do not involve the Federal reserve banks. It has, however, a grave responsibility whenever there is evidence that mez.ber banks are maintaining speculative security loans with the aid of Federal reserve credit. When such is the case the Federal reserve bank becomes either a contributing or a sustaining factor in the current volume of speculative security credit. This is not in harmony with the intent of the Federal Reserve Act nor is it conducive to the wholesome operation of the banking and credit system of the country." It would appear, therefore, that the Board desires to be informed as to the powers which it has under the Federal Reserve Act which caald VOLUME 190 PAGE 151 S X-6260 -2- be used to prevent member banks from using Federal reserve credit for the purpose of making or maintaining speculative security loans. In view of the further remarks contained in the press statement issued by the Board under date of February 5th (X-6233) and -pub- of the Federal Reserve Bulletin for February, 1929, lished on pace(43 to the effect that, "the great and growing volume of speculative credit has already produced some strain, which has reflected itself in advances of from 1 to mercial use," per cent in the cost of credit for com- I assume that the Board does not wish to know what powers it might exercise with a view of tightening the general credit situation, such as the power to increase the rediscount rates or further restrict the volume of open market investments of the Federal reserve banks. 7ith this understanding, I shall endeavor to point out certain powers which the Board possesses under the Federal Reserve Act and which might be exercised with a view of accomplishing the above purposes. :n suggesting these powers, however, it is my intention merely to inform the Federal Reserve Board of its lawful rights; and the mention of these rights is not intended as a suggestion that they should be exercised. The question whether these rights ought to be exercised is a question of policy on which I intend to express no opinion.OPIYION. (1) Under Section 13 of the Federal Reserve Act, the Board has ample power to prescribe such restrictions, limitations and regu- X-62(z0 -3- lations overning the rediscount of notes, drafts, bills of exchange and bankers' acceptances, the making of advances to member banks on their oromissory notes, and the purchase of bills of exchange, bankers' acceptances and government, State, and municipal securities (including purchases under so-called repurchase agreements), as may be necessary to prevent member banks from using the credit resources of the Federal Reserve System for the purpose of aking or maintaining speculative security loans. (2) Thus, the Board could, if it deems it advisable, prescribe a regulation forbidding any Federal reserve bank to rediscount any paper for, make any loan or advance to, or purchase any bills of exchange, bankers' acceptances, or government, State, or municipal securities (under repurchase agreements or otherwise) from, any member bank which at the time: (1) Has loans outstanding to brokers or deal- ers in stocks, bonds or other investment securities; or (2) has unreasonably large amounts of speculative loans outstanding to customers secured by stocks, bonds, or other investment securities, or the proceeds of which have been or are to be used for the purpose of carrying or trading in stocks, bonds, or other investment securities. (3) The Board has ample power to enforce such a regulation by suspending or removing from office the officers and directors of any Federal reserve bank which violates it. (,.) The Board has no independent power under Section 4 of the Federal Reserve Act to issue orders restricting or qualifying the right of mec,ber banko to demand of their Federal reserve banks "such discounts, advancements, and accommodations as may be safely and 4... • X-6260 -4- reasonably made with due regard for the claims and demands of other member banks". (5) This right of member banks, however, is expressly made sub- ject to the exercise of such powers as the Federal Reserve Board has under other provisions of the Federal Reserve Act, including the power under Section 13 to prescribe restrictions, limitations and regulations governing the discount and rediscount and the purchase and sale by any Federal reserve bank of any bills receivable and of domestic and foreign bills of exchange and of acceptances; and the Board could order a Federal reserve bank to cease violations of any such restrictions, limitations or regulations which it may have (6) prescribed. The Board could, if it so desires, prescribe a special rate (higher than the rediscount rate on industrial, commercial or agricultural paper) for advances to member banks on their promissory notes secured by bonds or notes of the Government of the United States. DISCUSSION I. Section 13 of the Federal Reserve Act contains the following provision: "The discount and rediscount and the purchase and sale by any Federal reserve bank of any bills receivable and of domestic and foreign bills of exchange, and of acceptances authorized by this Act, shall be subject to such restrictions, limitations, and regulations as may be imposed by the Federal Reserve Board." This, in my opinion, confers upon the Federal Reserve Board ample power to prescribe such restrictions, limitations and regulations governing the rediscount of notes, drafts and bills of exchange • • X-6260 -5by Federal reserve banks, the making of advancements by Federal reserve banks to member banks on the promissory notes aS such member banks, and the purchase and sale of bankerst acceptances, bills of exchange, and Government, State and municipal securities under Section 14 (including the purchase of such bills, acceptances, and securities under repurchase agreements) as may be necessary to prevent member banks from using the credit resources of the Federal Reserve System for the purpose of making or maintaining speculative loans. The above quoted provision of Section 13 has heretofore been considered by this office and it has been found that it aprAies not only to rediscounts under Section 13 but also to purchases and sales at home or abroad under Section 14. (See my opinion of October 20, 1927 (X-4980), pages 5 and 6, a copy of which is attached hereto.) It also applies to the making of advances to member banks on their promissory notes under the seventh paragraph of Section 13 (See opinion of Mr. Vest dated June 21, 1928, (X-6124-a), a copy of which is attached hereto. The question might be raised whether this paragraph pertains to the rediscount of notes and "drafts" as well as bills of exchange and bankers' acceptances, but it is clear that notes and "drafts" are included in tie term "bills receivable". Thatterm has been held by the courts to include promissory notes, bills of exchange or other instruments for the pay. ment of money. (See Words and Phrases, Bouvierts Law Dictionary, and authorities cited therein.) The term "bills receivable" would seem to apply also to bonds and notes of the United States and bills, notes, revenue bonds and warrants issued by States, counties, districts, political subdivisions and municipalities, since all such obligations are "instruments for the • X-6260 -6- payment of money". Even if the above-quoted paragraph in Section 13 does not apply to these classes of seQurities, however, the Board has ample power under Section 14(b) to prescribe rules and regulations governing the purchase of such securities. The Board has power, therefore, to prescribe rules and regulations governing practically every method by which a member bank obtains credit accommodations from a Federal reserve bank, including not only the rediscount of notes, drafts, bills of exchan_e and bankers' acceptances, but also borrowings by member banks from Federal reserve banks on the promissory notes of such member banks and sales of bills of exchange, bankers' acceptances and Government and municipal securities to Federal reserve banks under Section 14, including sales under so-called "repurchase agreements". The exercise of all these powers is by the above quoted paragraph of Section 13 made subject to "such restrictions, limitations and regulations as may be imposed by the Federal Reserve Board." There is no limitation in the law on the character of restrictions, limitations and regulations which the Board may prescribe; and the matter is left to the discretion of the Federal Reserve Board, subject only to the usual qualification that the restrictions, limitations \_ • -7- X-6260 and regulations prescribed by the Board must not be in conflict with other provisions of the Federal Reserve Act and must not be arbitrary, capricious or unreasonable. Any restriction, limitation, or regulation which is reasonably calculated to carry out the purposes of the Federal Reserve Act and the policies which Congress had in mind when it enacted the Federal Reserve Act would clearly be reasonable and within the Board's power. Certain of these purposes and policies were summarized as follows on page 33 of the Board's Annual Report for the year 1923: • "The Federal reserve act has laid down as the broad principle for the guidance of the Federal reserve banks and of the Federal Reserve Board in the discharge of their functions with respect to the administration of the credit facilities of the Federal reserve banks the principle of 'accommodating cormerce and business.' •(Sec. 14 of the Federal reserve act, Par.(d).) The act goes further. It gives a further indication of the meaning of the broad principle of accommodating commerce and business. These further guides are to be found in section 13 of the Federal reserve act, where the purposes for which Federal reserve credit may be provided are described as 'agricultural, industrial, or commercial purposes'. It is clear that the accommodation of commerce and business contemplated as providing the proper occasion for the use of the credit facilities of the Federal reserve banks means the accommodation of agricultum, ihdustry, and trade.- The extension of credit for purposes 'covering merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the Government of the United States, is not permitted by the Federal reserve act. The Federal reserve system is a system of productive credit. It is not a system of credit for either investment or speculative purposes. Credit in the service of agriculture, industry, and trade may be described comprehensively as credit for productive use. The exclusion of the use of Federal reserve credit for speculative and investment purposes and its limitation to agricultural, industrial, or commercial purposes thus clearly indicates the nature of the tests which are appropriate as guides in the extension of Federal reserve credit, ‘11 • X-6260 -8"They clearly describe the nature or character of the purposes for which such credit and currency may be extended. The qualitative tests appropriate in Federal reserve bank credit administration laid down by the act are, therefore, definite and ample." That this is an accurate statement of certain of the purposes which Congress had in mind when it enacted the Federal Reserve Act can be conclusively demonstrated by a review of the legislative history of the Act. After defining the character of paver which is eligible for rediscount at Federal reserve banks, Section 13 provides that: "Such definition shall not include notes, drafts or bills covering merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds or other investment securities, except bonds and notes of the Government of the United States." The policy of this provision is indicated by the following: passages from the report of the Committee on Banking and Currency of the House of Representatives on the original 1Thderal Reserve Act ( H.R. Report No. 69, 63rd Congress, 1st Session, pages 11, 19, 20, 48, 59, 62 and 63): ESSENTIAL FEATURES OF REFORM. "The other plans before the committee or examined by it have likewise been found unsatisfactory-some for reasons analogous to those which made the Aldrich bill unacceptable, others because of defective detail, erroneous principle, or faulty construction. An effort was, however, made to ascertain the constituent elements of these measures and of the Aldrich bill, common to all, which should be recognized and provided for in any new plan because representing the fundamentals of legislation. It is believed that these are as follows: "1. Establishment of a more nearly uniform rate of discount throughout the United States, and thereby the furtishinc of a certain kind of preventive against over expansion of credit which should be similar in all parts of the country. X-52,50 "2. General economy of reserves in order that such reserves might be held ready for use in -Jrotecting the banks of any section of the country and for enabling them to go on meeting their obligations instead of suspending payments, as so often in the -oast. "3. Furnishing of an elastic currency by the abolition of the e::isting bond-secured note issue in whole or in part, and the substitution of a freely issued and adequately protected system of bank notes which should be available to all institutions which had the proper class of paper for presentation. 154. Management and commercial use of the funds of the Government which are mu isolated in the Treasury and subtreasuries in large amounts. "5. General supervision of the banking business and furnishing of stringent and careful oversight. "6. Creation of market for commercial paper. "Othc,r objects are sought, incidentally, in these plans, but they are not as basic as the chief purposes thus enumerated. "TRANSFER OF RESERVES. "Reference has been briefly made to the fact that the committee's proposals provide for the transfer of bank reserves from existing banks which hold them for others to the proposed reserve banks. At present the national banking act recognizes three systems of reserves: 'The original reason for creating this so-called 'pyramidal' system of reserves was that inasmuch as central banking institutions were absent, and inasmuch as banks outide of centers were obliged to keep exchange funds on deposit with other banks in such centers, it was fair to allow exchange balances with such centrally located banks to count as reserves inasmuch as they were presumably at all times available in cash. * As matters have developed, it has been vicious in the extreme. Coupled with the inelasticity of the bank currency, the system has tended to create periodical stringencies and periodical plethoras of funds. Banks in the country districts unable to withdraw notes and contract credit when they have seen fit to do so, because of the rigidity of the bond-secured currency, have redeposited such fundspdth other banks in reserve and central reserve cities and have thus built up the balances which they were entitled to keep there as a part of their reserves. Moreover, S -10X-6260 "the -practice of thus redepositing funds having been once established, it has been carriec, to extreme lengths, and at times has been decidedly injurious in its influence. The payment of interest on deposits by banks in the centers has been used for the purpose of attracting to such banks funds which otherwise would have gone to other centers or to other banks in the sane centers or which would have been retained at home. The funds thus redeposited, even when not attracted by any artificial means, have of course constituted a demand liability, and have been so regarded by the banks to which they were intrusted. !'In consequence, such banks have souc,ht to find the most profitable means of employment for their resources and at the same time to have them in such condition as would ,)ermit their prompt realization when demanded by the de-oositing banks which out the.: there. The result has been an effort on the part of the national banks, particularly in central reserve cities, to dispose of a substantial portion of their funds in call loans protected by stock-exchange collateral as a rule. This was on the theory that, inasmuch as listed stock-exchange securities could be readily sold, call loans of this type were for oractical purposes equivalent to cash in hand. The theory is of coarse close enough to the facts when an effort to realize is made by only one or few banks, but is entirely erroneous whenever the attempt to withdraw deposits is made by a number of banks simultaneously. At such times, the banks in central reserve and reserve cities are wholly unable to meet the demands that are brought to bear on them by country banks; and the latter, realizing the difficulties of the case, seek to protect themselves by an unnecessary accumulation of cash which they draw from their correspondents, thereby weakening the latter and frec2uently strengthening theelselves to an undue degree. Under such circumstances the reserves of the country, which ought to constittte a readily available homogpneous fund, ready for use in any direction where sudden necessities may develop, are in fact scattered and entirely lose their efficiency and strength owing to their being diffused through a great number of institutions in relatively small amount and thereby rendered nearly unavailable. This evil has been met in times -oast by the suspension of specie -Dayments by banks and by the substitution of unauthorized and extra-legal substitutes for currency in the form of cashiers + checks, clearing-house certificates and other methods of furnishing a medium of exchange. Needless to say such a method of meeting the evilisthe worst kind of makeshift and is only somewhat better than actual disaster. "HOLDIITG OF FUNDS. "The committee believes that the only way to correct this condition of affairs is to provide for the holding of reserves by duly qualified institutions which shall act primarily in the public interest and whose motives and conduct shall be so absolutely well known and above suspicion as to inspire unquestioning confidence on the part of the community. It believes X-5250 -11- "that the reserve banks which it proposes to -provide for will afford such a type of institutions and that they may be made - the effective means for the holding of the liquid reserve funds of the country to the extent that the latter are not needed in the vaults of the banks themselves. * * * "Section 20 (i.e., section 19 of the Federal Reserve Act) seeks to readjust the reserve reouireirients now provided by the national banking act in such a way as to make them conform to the dictates of scientific banking, and to adjust them to the provisions of the proposed bill. The following Llain objects have been had in mind: "1. To abolish entirely the present system of redeposited or 'pyramided' reserves. "2. To establish a moderate required reserve actually to be held in cash in the vaults of the banks. "6. To prescribe a secondary reserve to take the form of a credit with the Federal reserve bank-.s. "In outlining the general philosophy of the proposed banking bill it was pointed out that the existing sys tem of redeposited reserves gives rise to cheap money for stock-exchange speculation in the centers while it fails to - provide in times of panic a IL)P upon which the country can . draw with assurance, because at such times dock-exchange securities can not be easily liquidated, so that call loans are unavailable as a resource, and the city banks in self-defense have deemed themselves warranted in suspending specie payments. It is contended, however, that these difficulties and irregularities of the existing system are mese' blemishes lroon the surfac of an otherwise desirable state of affairs, and that there is and sufficient economic reason for maintaining the present sys tem of redeposited reserves at least in oart. This claim may be reduced to a series of propositions as follows: "1. The redeposited reserves are placed with the city banks not for stodk speculation, but in large measure at least to supply exchange funds upon which the de-positing banks may draw. "2. The redeposited balances must be kept with the anks which now hold them, because the country banks look to these city banks for accommodation and the latter .gauge the sIi11•% of accommodation to be granted them by the size of the balances. I -12- 111 "3. The country banks, and in general all banks makthe redo sits get a rate of interest thereon. They are thus able to make use of a reserve which would otherwise be 'dead'' and which when held in cash or in the Federal reserve banks will yield them no revenue, the latter banks being forbidden by the terms of the bill to pay interest on deposits. "These contentions are worthy of careful study, because they are widely urged. "The second point already noted has even less force than the first. Not only does the proposed bill provide more extensive facilities for rediscount than have ever been known, but even if it didnot do so, and even if, as alleged, there are many kinds and classes of security not eligible for rediscount under the bill which country banks can use as a basis for accommodation only with city banks, it would still remain true that this does not afford any warrant for demanding the maintenance of the existing situation.* * A 1":p /400 /4- * In view of the great difficulty of defining 'commercial paper,' the actual definition of the some has been leit to the Federal reserve board in order that it may adjr.st the definition to the practices -prevailing in different parts of •the country in regard to the transaction of business and the making of paper. For obvious reasons it is forbidden that any such paper shall be admitted to rediscount if made for the purpose of carrying stocks or bonds." From this, it is perfectly clear that one of the fundamental purposes of the Federal Reserve Act was to prevent the bank reserves of the country from being tied up in speculative loans on stocks, bonds and other investment securities. It is obvious, therefore, that it would be en- tirely in accordance with the purposes of the Federal Reserve Act and the policy of Congress when it enacted the Federal Reserve Act if the Board should promulgate restrictions, limitations and regulations designed to Prevent member banks of the Federal Reserve System from using the credit resources of the Federal Reserve System for the purpose of making • X-6260 -13or maintaining loans, the proceeds of which are used for the purpose of carryin;I: or trading in stocks, bonds or other investment securities. It is true that the above-quoted provision of the Federal Reserve Act excluding loans of this character from the definition of eligible paper, does not itself prevent member banks from discounting eligible paper and using the proceeds to make loans on stocks, bonds and other investment securities; but it is equally clear that the bvoad powers of the Federal Reserve Board to prescribe restrictions, limitations and regulations governing the operations of Federal reserve banks were intended to enable the Board to meet just such contingencies and to prescribe such rules, regulations and restrictions as :Iip:ht be necessary to [ supplement the express provisions of the Act and more fully to carry out the broad purposes of the Act. It has been argued that it is not inconsistent with the provisions of the FederalReserve Act for Federal reserve banks to make loans to, or to rediscount eligible paper for, member banks which at the time have surplus funds loaned to brokers or dealers in stocks, bonds and other investment securities; because it is impossible to trace the proceeds of any particular rediscount or advance to a member bank and show that the credit obtained from the Federal reserve bank is used for the purpose of making or obtaining such loans. While it may be true that this is not a technical violation of the Federal Reserve Act, it obviously is contrary to the policy of the Act, as indicated by the above quota,tions from the Committee report; and it clearly is within the Boards power to prescribe such rules, regulations and restrictions as may be nee- X-6260 -14- essa2y to prevent any such evasion of the express 7)ruvisions of the Act. One of the most direct, appropriate and effective powers which the Board could exercise for the enforcement of the princinles laid duwn in its letter of February 2, 1929, therefore, would be to Dreseribe a regulation forbidding any Federal reserve bankto rediscaunt any paper for, or to make any loans or advances to, or to purchase any bills of exchange, bankers' acceptances or Government, State, or municipal securities (either outr4ht or under repurchase agreements) from, any member bank which at the time: (1) Has loans outstanding to brokers or dealers in stocks, bonds or other Fj investment securities; or (2) Has unreasonably large al:_ounts of speculative loans outstanding to austomers secured by stocks, bonds, or other investment securities, or the proceeds of which have been or are to be used for the purpose of carrying or trading in stocks, bonds, or other investment securities. If the Board should decide to promulgate such a reulation, it probably would find it necessary, for practical reasons, to incorporate therein certain exceptions which would enable member banks embarrassed by sudden fluctuations in their reserves or their reserve requirements to obtain temporary accommodations at the 11 Faderal reserve bank until they cauld liquidate their investments in lo,Lns tc brokers or dealers in stocks, bonds or other investment securities. However, exce:ptions to cover this practical difficulty can be uevised; and, if the Board desires to promulgate such a regu- X-6280 -15- lation, T believe that a thoroughly --)ractical and workable regula- tion can be drawn. There can be no doubt that the Board has ample power to enforce such a regulation, or any other lawful regulation which it mi(Jat prescribe, since Section 11 (0 of the Federal Reserve Act authorizes the Board, "To suspend or remove any officer or director of any Federal reserve bank, the cause of such removal to be forthwith communicated in writing by the Federal Reserve Board to the removed officer or director and to said bank". This power to removal'is subject only to the condition that the Board communicate the cuase of sach removal in writing to the removed officer and to the Federal reserve bank. The cause of removal is not specified in the law but is left to the discretion of the Rederal Reserve Board, the only limitation being that it must be reasonable and not capticious or arbitrary. Clearly, the willful violation of a lawful regulation prescribed by the Federal Reserve Board would be a reason able and valid cause for the removal of any officer or director of any Federal reserve bank. • X-6260 -16The question:has been raised whether, under the following provision of Section 4 of the Federal Reserve Act, the Federal Reserve Board has power to order a particular Federal reserve bank to ceame or suspend the granting of any discounts, advancements or accomi.:odations to a particular member bank. "Said board shall administer the affairs of said bank fairly and impartially and without discrimination in favor of or against any mber bank or banks and shall, subject to the 'provisions of law and the orders of the Federal Reserve Board, extend to each member bank such discounts, advancements and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks." In view of the importance of this question, I have made a careful study of the legislative history of this -paragraph of the Federal Reserve Act before undertaking to construe it. A complete statement of the legislative history of this paragraph, with lengthy quotations from the debates in Congress, has been prepared by this office and will be furnished to any member of the Board desiring to read it; but I believe that a brief statement of the situation and one or two quotations from the debates will be sufficient for the purposes of this opinion. The above quoted paragraph was included in Section 4 of the Federal Reserve Act as originally enacted and has never been amended. It was not discussed in the reports on the original Federal Reserve Act either by the House Banking andCurrency Committee, by the Senate Committee, or by the conferees. This paragraph, however, was not contained in the _ A • X-62Ø -17bill when it passed the House of Representatives, but was inserted in the bill by the Senate Committee on Banking & Currency as a compromise between various conflicting views. It appears that certain Senators feared that the Federal reserve banks would come under the domination of the larger member banks and would discriminate against other member banks. It was feared that, through such discrimination, some member banks might be denied credit accommodations at the Feder(1 reserve banks when it was badly needed in times of emergency; and, in order to prevent such discrimination, it was proposed to amend the bill so as to provide that, "Each member bank shall be entitled as a matter of right to the rediscount of eligible paper to the full amount of its capital stock upon the lowest current rate of discount." This was incorporated in an amendment proposed by Senator Hitchcock and was the subject of a bitter fight both in the committee and on the floor of the Senate. It was felt, however, that such a provision would be absolutely contrary to accepted banking practices and would be extrem ely dangerous and unsound; and finally the above-quoted paragraph was instrted in the bill by the Senate Committee as a compromise. Senator Shafroth explained the matter as follows (Congressional Record for Dec. 13, 1913, Vol. 51, Part 1, page 859): Mr. SHAFROTH. "Mr. President, that clause was placed in that paragraph largely for the reason that the Hitchcock bill contained a provision for compulsory discounts, asserting that any member bank going with paper to a Federal reserve bank should be entitled, as • -18- X-6260 a matter of right, which it could enforce perhaps by mandamus, to compel the Federal reserve bank to discount that paper. We thought that was too extreme a provision; it was thow-ht wise that there might be conditions of the bank that Isauld not justify the discounting of its paper. For that reason we put in a clause, which to a large extent is advisory to them, but which, nevertheless, indicates the policy that should be pursued by them in making these discounts where they fairly can." It appears that this compromise was suggested by Senator Reed of Eissouri during the meetings of the Senate Committee on Banking an Currency and that the above quoted paragra7h was inserted in Section 4 of the Federal Reserve Act at his suggestion. Senator Reed's explanation of the purpose and effect of this paragraph, therefore, is entitled to great weight in construing it. On -pages 173 and 174 of the Congressional Record for December 4, 1S13, (Vol. 51, Part 1) Senator Reed explained this paragraph as follows: "Mr. President, we did not stop at that point. I myself had the honor of offering an amendment prescribing or defining the duties of these directors. It is as follows: "The board of directors shall perform the duties usually appertaining to the office of directors of banking associations and all such duties as are 72rescribed by law. "Said board shall administer the affairs of said bank fairly and impartially and without discrimination in favor of or against any member bank or banks, and shall, subject to the provisions of law and the orders of the Federal Reserve Board, extend to each member bank such discounts, advancements, and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks. "Mr. President, the importance of that amendment lies in the fact that for the first time it wrote into the bill 411 411 X-6260 language which commanded the directors of the regional banks to treat all member banks alike. It prohibits favoritism; it forbids discrimination; it gives to member banks the right to demand impartial treatment. The meAper bank is not left to solicit favors; it may insist upon rights. "Mr. President, the provisions I have just discussed might be ineffectual if it were not for the fact that at the same time we enlarged the powers of the Federal reserve board so that it can compel regional banks to obey this mandate of the law. We conferred this power by providing in section 11, paragra?h J, as follows: The Federal reserve board shall have power-"To exercise general supervision over said Federal reserve banks. "When, therefore, we imposed the duty upon the directors of the regional banks to treat all member banks fairly and impartially and without discrimination, and gave the Federal reserve board, which is appointed by the President of the United States, authority to exercise general supervision over the Federal reserve bank, we gave the Federal reserve board power and authority to compel the Federal reserve banks to be impartial in their dealings with member banks, The same authority empowers the Federal reserve board to protect the public against wrongs sought to be perpetrated by the reserve banks. The power conferred is sufficient to accomplish these endsi and if it be wisely exercised there is but slight danger of discrimination in favor of some bank and against others; or in favor of one section of the country and against another; or, I will add, the adoption of a policy by regional banks which will be oppressive to the public. Powers of Reserve Board Increased. "The Federal reserve board, appointed by the President, is, by the two amendments I have set out, given absolute command of the system. It can 'Lake the regional directors perform their full duty with fairness and impartiality to all. "We followed these amendments with others of equal importance. We gave the reserve board the unrestricted right to remove any of the directors of a regional bank. Here is the language: 'The Federal Reserve Board shall have power to suspend or remove any officer or director of any Federal reserve bank, the cause of such removal to be forthwith communicated in writing by the Federal Reserve Board to the removed officer or director and to said bank.' The House bill only gave a restricted right of removal." * * * * * * "Putting together, then, these several provisions to which I have adverted, I believe we can say to the country with a clear conscience that while we have drawn these banks together into this great system, while we have given them a common stock ownership, while we have placed the control of the regional banks in the hands of the bankers, we have at the same time so safeguarded every avenue and so locked every door that the people may be content. In the last analysis the Federal reserve board, apnointed by the President and representing the entire country, has X-6260 -20- complete and absolute power, and will control the entire system and prevent discriminationr„ combinations, or other wrongs." In view of this explanation, it is Quite clear that this pararaph alone was not intended to confer additional polAer upon the Federal Reserve Board but was intended to prescribe a rule governinE the administration of the affairs of the Federal reserve bank by the board of directors of the Federal reserve bank. to do two things: (1) This rule was intended To prevent discrimination either in favor of or :s are against any member bank; and (2) To make it clear that member banl, entitled as a matter of right to "such discounts, advancements and accommodations as may be safely and reasonably made with due reEard for the claims and demands of other member banks." it was contemplated that, if any Federal reserve bank should discriinate against any member bank or should deny it guch discounts, advancements and accommodations as might be safely and reasonably made with due regard to the claims and demands of other member banks, the bank so discriminated against could appeal to the Federal Reserve Board and ti-le Board could order the Federal reserve bank to comply with the law and to cease such discrimination. It was pointed out, however, that such power was included in the Board's power under Section 11 0) to exorcise general supervision over the Federal reserve banks and could be enforced by the exercise of the Board's power under Section 11 (0 to suspend or remove any officer or director of any Federal reserve bank. The power to exercise general supervision over the Federal reserve banks was inserted in Section 11 at the suggestion of Senator Reed, in order to enable the Board to enforce the above quoted paragraph -21- X-6250 of Section 4; and this shows clearly that the provision of Section 4 as not intended to confer any independent power Upon the Board. :oreover, the fact that the whole purpose of this paragraph ras to make it clear that member banks are entitled to reasonable credit accommodation from the Federal reserve banks without discrimination is clearly inconsistent with the thought that the same paragraph might :possibly confer power upon the Federal Reserve Board to order SI a Federal reserve bank to deny credit accommodations to a particular member bank. Such an order by the Federal Reserve Board might amount to the very kind of discrimination against individual banks which this paragraph was intended to prevent. The words "subject to the provisions of law and the orders of the Federal Reserve Board" obviously were inserted in this paragraph as a qualifying or saving clause similar to those found elsewhere in the Act and must have been intended to have substantially the following meaning; Subject to the provisions of law and to such orders, regulations, etc., as the Federal Reserve Board may lawfully promulgate pursuant to the power granted the Board under other _provisions of the Federal Reserve Act. I an of the opinion, therefore, that this language does not confer any additional power on the Federal Reserve Board and that any authority which the Board may have to issue orders qualifying the right of member banks to credit accommodations from the Federal reserve banks must be found elsewhere in the Act. The clause "subject to the provisions of law and the orders of • -22- X-6250 the Federal Reserve Board", however, is Laportant, since it makes the riht of men-.ber banks to credit accommodations from the Federal reserve banks subject to such rules, regulations and restrictions as the Federal Reserve Board may lawfully prescribe under authority granted elsewhere in the Act. Thus, it makes this right of the member banks sub- ject to such restrictions, limitations and regulations as may be imposed by the Federal Reserve Board under the paragraph of Section 13 discussed elsewhere in this opinion. V. Although the paragraph of Section 4 of the Federal Reserve Act discussed above does not itself confer any such power upon the Federal Reserve Board, it is perfectly obvious that, if the Federal Reserve Board should?rescrib.e a regulation forbidding any Federal reserve bank to rediscount any paper for, grant any loan to, or purchase any bills of exchange, bankers' acceptances or Government, State, or municipal securities from, any member bank which at the time has loans outstanding to brokers or dealers in stocks, bonds or other investment securities, the Board would have power to issue such orders in specific cases as might be necessary to stop violations of this regulation. Thlis, if such a regulation were promulgated and the Board should find that a particular Federal reserve bank is rediscounting paper for, or making loans to, a particular member bank which has loans outstanding to brokers or dealers in stocks, bonds or other investment securities, the Board could order the Federal reserve bank to cease re- • X-660 -23- discounting paper for, or making loans to, such member bank; and, if the Federal reserve bank should fail or refuse to comply with such an order, the Board could enforce its order by suspending or removing from office ( the offending officers and directors of the Federal reserve bank.. VI. The question has been raised whether the Board could, if it so desires, prescribe a special rate (higher than the rediscount rate on industrial, commercial or agricultural paper) for advances to member banks on their -promissory notes secured by bonds or notes of the Government of the United States. While this does not have a direct bearing on the main question discussed in this opinion, it has been suggested that it might have a very practical and helpful effect on the main problem confronting the Board in this connection. Thus, it has been suggested by one member of the Board that, in practice, most of the credit accommodations obtained from the Federal reserve banks by reserve city member banks which are at the same time lending large sums to brokers and dealers in investment securities are obtained in the form of advances on the promissory notes of such member banks secured by bonds and notes of the Government of the United States; that this practice might be checked if a higher rate of interest should be prescribed for borrowings in this form; and that such a higher rate of interest of interest would not increase the cost of credit to commerce, industry and agriculture. One member of the Board, therefore, requested me to cover this point in this opinion. The power to make advances to member banks on their promissory notes is conferred by the following paragraph of Section 13 of the Federal Reserve Act: • • -24- X-3260 "Amy Federal reserve bank may make advances to its member banks on their -promisery notes for a period not exceedinE fifteen days at rates to be established by such Federal reserve banks, subject to the review and determination of the Federal Reserve Board, provided such promissory notes are secured by such notes, drafts, bills of exchange, or bankers' acceptances as are eligible for rediscount or for purchase by Federal reserve banks under the :provisions of this Act, or by the deposit or pledge of bonds or notes of the United States." It will be noted that this paragraph provides that such advances shall be made at rates to be established by such Federal reserve 'conks, subject to the review and determination of the Federal Reserve Board. It will be noted that the language here used is very similar to that used in Section 14(d) pertaining to other rates of discount to be charged by the Federal reserve banks and that the qualifying clause "subject to review and determination of the Federal Reserve Board" is precisely the same, word for word, in both sections. The Attorney General of the United States has held that under Section 14(d) the Federal Reserve Board "has the right under the powers conferred by the Federal Reserve Act, to determine what rates of discount should be charged from time to time by the Federal reserve bank, and under their powers of review and supervision, to require such rates to be put into effect by such bank." (32 Op. Atty. Gen., p. 81.) It is perfectly obvious that the Board has the same power with respect to the rates at which Federal reserve banks may make advances on the promissory notes of member banks under Section 13 as it has over the rates of discount to be established under Section 14(d). It is well recognized that the Federal reserve banks may establish 4P I X-6260 -25- and the Foderal Roserva Board may approve, different rodiscaunt rates for different classes of paper; and it would seem that the same power could be exercised in aporovin. or fixing the rates at which advances will be made to member banks on their promissory notes under Section 13. While Section 13 does not contain the phrase "for each class of paper" found in Section 14(d), it is siLnificant that Section 13 uses the plural "rates" and does not merely authorize the fixing offla rate" at which Federal reserve banks may make advances to member banks. The fact that the subject is treated separately clearly indicates that the promissory notes of member banks constitute a separate class of paper; and it would seem obvious that this ciao:: of paper may be further subdivided into other tlasses accordinE to the maturity of the notes or the character of collateral security. It would seem perfectly obvious that member banks' promissory notes secured by Government bonds, which are not eligible for rediscount, are clearly in a different class from those secured by agricultural, industrial and commercial paper, which is eliEible for rediscount. I am of the opinion, therefore, that the Board could, Ii if it so desires, prescribe a special rate (higher than the rate of discount on industrial, commercial or agricultural paper) for advances to member banks on their promis2ory notes secured by bonds or notes of the Government of the United States. Respectfully, Walter Tyatt General Counsel. ' WW SAD VDB •
@FedFRASER