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The Papers of Charles Hamlin (mss24661) 367_02_001- Hamlin, Charles S., Scrap Book — Volume 236, FRBoard Members 205.001 - Hamlin Charles S Scrap Book - Volume 236 FRBoard Members ‘L. II BOARD OF GOVERNORS OF THE • FEDERAL RESERVE SYSTEM Office Correspondence To The Files From Mr. Coe Date August 11, 1941 Subject: 4/0.c After 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 Vol236 of Mr. Hamlin's scrap book and placed in the Board's files: VOLU1E 236 Page 13 Letter to United States Daily re article published about Board. Page 1 X-7307) Right to exercise trust powers of national banks formed through consolidations of national banking institutions previously authorized to exercise such powers. Page 19 Memo to Mr. Morrill from Mr. Van Fossen re Direct Loans to Individuals. Pages 23 & 25 Letter to F.R.Bk. of New York from Bank of France re gold movements and reply thereto. Page 29 Memo to Gov. Meyer from Mr. Smead re F.R. Bank functions for which they receive no reimbursement. Page 47 Memo to Board from Mr. Wyatt re constitutionality of legislation providing a unified commercial banking system for the United States. Page 73 Preliminary Memo for the Open Market Policy Conference January 4, 1933. Page 95 Confidential - Business and Credit Conditions. Page 113 Memo to Mr. Hamlin from Mr. Goldenweiser re possible use of blocked accounts for war debt payments. Page 125 Memo to Mr. Hamlin from Mr. Goldenweiser attaching a copy of the chart on gold and reserve bank credit which you requested at the time of the Open Market Policy Conference. Page 131 Letter to Mr. Hamlin from F.R.Bk. of N.Y. re borrowings by officers and employees of F.R. Banks. Page 151 (X-7325) Extension of Provisions of Section 10(b) and the second paragraph of Section 16 of the F.R. Act, as amended. Pages 74, 76, 77, & 80 Blank • COPY December 13, 1932. Dear Mr. Upham: If I have misread your comments on the Federal Reserve Board, by all means dismiss my letter. I no longer have here the issue of THE BANKING WEEK that my letter referred to, but your letter of December 13 is evidnce enough that what I took to be the point of your criticism was not at all What you had in mind. The criticism was plainly not directed at me; and, of course, it was only because of this fact that I took the liberty of writing to you as frankly as I did. My Impression was that the Board was being criticised unjustly in connection with an article of mine. Let us have lunch instead of letters; not this week, for I may be away from tomorrow until Monday; but some day when you are in this neighborhood take a chance on finding me in Roam 311. I send only part of my time in Washington, but I think that I shall be here most of next weektand I am fairly certain that I shall be here from December 26 to January 5. Sincerely yours, Cyril B. Upham, Esq., THE UNITED STATES DAILY Washington, D. C. JIM:A VOLUME 236 PAGE 13 • COPY 1,44- At/ THE UNITED STATES DAILY WASHINGTON December 13, 1932. Mr. J. M. Daiger, 719 — 15th Street, :.W., Washington, D. C. Dear Mr. DaiLer: I am glad to have your letter of December 9. My only knowledge of you has came from reading your article of a year ago on bank failures and the recent one on the Federal reserve system and politics, both of Which were so well and ably done that I have formed a high opinion of the author. May I comment frankly on your letter? I have no "concern" over the opening of the files of the Federal Reserve Board to writers. I agree with you that it should be done. Nor did I "overlook" the fact that you were writing of past rather than current events. I cannot agree that an "authentic and positive narrative style" covers the disclosure of R3serve Board votes or quotations from official documents. If the Board cannot dignify charges by answering them, I cannot see why they should dignify them by permitting access to their files to refute them. Certainly those files must have been made available to you by some one or some agency. I did not "manifestly assume" that your article was inspired or sponsored by the Board, because as a matter of fact, inquiry at the offices of the Board brought information that they knew nothing about it, and were equally puzzled as to where you got your facts. My • criticism, if it was criticism, was not directed at you, but at the person from wham you received your information. Perhaps I am entirely wrong, and the facts in your article have all been made public before. I have attended all of the Congressional committee hearings, I think, however, and several of your statements were new to me. For instance, where, outside of System records, have the following facts been made public: 1. The vote disalyoroving the proposal of the New York bank for a raise in the rate, referred to on page 27 of your article. 2. The quotation from a memorandum by Dr. Miller, quoted on page 28. 3. The quotation from the confidential report on page 29. 4. The quotation from Dr. Miller's telegram on the same page. 5. The vote on the credit-easing program, on the same page. 6. The quotation from "some of the Governore on the same page. 7. The vote on the Chicago rate, on page 30. had no intention of criticizing the Board for making past facts available to you, for I had no idea they did and was assured they did not. I think they might well make them available generally. I shall be very glad to discuss this matter with you in person if you will let me know when it is convenient for you. t suspect that we think very much alike, but getting together by correspondence is difficult. Sincerely yours, (Signed) C. B. Upham, Chief, Banking Division. CBU;fo •. Wino. FEDERAL RESERVE BOARD VVASHINGTON ADDRESS OFFICIAL CORRESPONDENCE TO X-7307 THE FEDERAL RESERVE BOARD December 13, 1932. SUBJECT: Right to exercise trust powers of national banks formed through consolidations cf national banking institutions previously authorized to exercise such powers. Dear Sir: As several of the Federal reserve agents have been advise d, in correspondence relating to particular cases, the Federal Reserve Board has decided that where a national bank succee ds to the right to exercise trust powers by virtue of a consol idation of two or more national banks under the provisions of the Act of Congress of November 7, 1918, it is preferable to isaue to the consolidated institution a certificate showing that it has the right to exercise trust powers previously granted tc the consol idating banks, rather than to grant to the consolidated instit ution a new permit authorizing it tc exercise trust powers. It is accordingly now the practice, when the Board receives advice frcm the Comptroller of the Currency that two or more national banks have consolidated under the provisions of the Act of November 7, 1918, and cne nr more cf such banks has been granted trust powers previously, tc send to the consolidated bank a certificate cf the kind descri bed above. A copy of the Board's letter tc the consolidated bank and a ccpy of the VOLUME 236 PAGE 15 • • • - 2- X-7307 certificate inclosed therewith are also sent to the Federa l reserve agent nf the district. In these circumstances it is not necessary for the consolidated bank to make a formal application for the certificate, but if in any such case yem find that the certificate has not been received the Board should be advised. When the Boardts Regulation F is next revised, Section III thereof will be amended so as to conform to the practi ce which the Board is following in cases of this kind. Very truly yours, Chester Morrill, Secretary. To all Federal reserve agents. j,4A- i144 Deaegabeir 1, 1932 r Direct Loans to IndiYirluals• horri 11 etc. Ur. Vrin ?assign ZIEL:z• Attached lAtreto is a statement shoeing the amber of sv91icetions of individuals. portnerships and eorporrItions for 1oans not granted by the 'Federal reserve Votes to ,-,ecersbtlr 3, 1932, inciladi e tabulation of the rriksons for net sirantieg the iCians applied for. It will be noted that of 561t str.,1tentior..6 r-7*.ised. as *town in the statement, 309 liere• bocr,‘Ise of unsatisfactory security; 235 poner not eligible; 12 loans 04ced Kith other books; 4 nresent cr4dit 4**aed adequate; and h denial of credit by other banks not shown. Lir'etloens to individuals, partnerships kno corporation* wasted by tbe raderul reserve beim, to Deoember 12 and. the *mount of sad, tome out. as follows: otandins!... on that date leer, digyAL,Ala inawaitt Ilarvery Company its et* Dogma Pot's* as! Stimairt C.so. Psi*aft& & Sons, Nook's/an CO., Tam. sirPh S• ite7or '.3ro tiApre id 11or-Niseines Co., tac. Verrill *It. )44. Co. Ihmw Jere*" flour Mills Os. Siatopelli 4 Co., Ibe. S. fluff 3eas. Ise. ?Maria p.erv facealk, N. r. Asterift, x, Y. T. lee York, $15.000 5.000 50.00D .15,000 4,000 50.000 Wee tort, N. Y. Nee York, N. Y. Nee fork, 4. i. T. Nee York, Clifton, g. I. Sew York. p. Y. T. Nee fork. 25,)00 15.500 125,000 31.030 50,000 20.300 11,V) 17,500 15..100 125000 31,000 25,000 15,300 10,000 3ent _of ;11i1,atialttit J. 1. Joule * J. si.noskiplo (Renkeln t McCoy) lift- to :(0fr1gerstor Co. VOLUME 236 PAGE 19 alsAaanaa Lafteaotg.r. Pa. :411.11the1 n.ht , Ilisnrfiald. Pa. 40s) 3.427 3.000 4.• 3.030 2 Aimed imasuumeat.pstasiLa _Atlanta Continental Turpentine Roslia itidusaini 'Foolery. Corf:L7)1414y Uississippi Cottot iood i r0cts Co. , Outstamdift lewd, MIIN• losavillis, Oa. $19.750 50,100 750 25.000 Jackson, Aso. 4.040 148.00C olis .1P1100r4a, ricelyn, Minn. t. Cloud, Minn. sinnsapolis, !Ann. 61.rito, 4ricelyn Cannt Irvin C'o. , S. C. ' tiiym Co. Ws0.11 anii Co. weak %,tooffryt Unit AapimA cf, 90,2147' 7•900' 7•500 la ow • 7.900 .000 ats NOW ,;(4113.041 Lumbar 54.000 :. irr*.ir Co. ca,pyisold to oliainste ronsmola. i'01101IrtnE I sn su=r1pry Gf tr30 sumq of omit% sonditt*** pro-mil/Ng in irAdustry, trade and agriculture of the Milsdelybia roderal 7,-Ieserve nistrict sOstitted Ponerber 9 * lain,10..,dritary to the summary of the ;4*P...tin:limn- re,nort contr,ined in our vossorostims of o, èø' 12, .71-044. The report satomittod by fitilmilapkie consists larrely of tabular statemoats, *er I to t) of which marelgy allow selarately for 10 ssimstaiitesiug g;roups, for rettil trade, for itolitsele trade, mad. for •11011411 NO° Notools, restiwarmnts, lmandrias, prates, oto.) the data contained in the preliminary report .:ieh was tiattosariserd in our November 12 goosorsabas. This section of the report is occowr7.nied by N sympsi* *f *elected individual replies to the questionnaire in rec.-teat to 4,7uipovit,trt fe.cilittes that would be improved ate credit were made available. if E.„ :(•;, ,•mrt 11 of the report is a table similar to the rprecedinei b.:at based or oesef, other than their oArn of disserving ar..licatts mho were unable to se report. 1 by corcernit replying to borrow front lood or other fittiftattertrt,ir (.11 1.314 replies to this section of the questionrAaire r)li. or 22 :ar cent knew- Of Mit errlicentz for credit. (so. h ini , sha the Thor* is slze A table Vitt of 71 replies, 2. or 314 per cett, believe there hat be* reduction in credit o-at of lino with the reduction in the volume of business; while to1e c. 10 shows ttitt of 146j r•rplies. or 147 per cent, believe that the cat in credit h no resulted in el. curtailulont of !raptness activity; teble ,t4,. 11, that of 1.159 repli?s. 15, or 11.4-1;er cent, believe that lcca ber4iNs; facilities eire not adstrJate to ts240 care of o-rdintri business requirp:netts; tftbIes 12 and 13 bile. the reduction in logn.e, investments and de- positA, etc., of member banks from ecto :wir 4. 1929, to Soptessb*r 30. 1932, end the rection in certain lines of b4singoss. I *to. •:yrt TT: of tall:0 rpt-crt. tables 'rice. 14 to 19 inclusive, is * tabu- 1Ftionof t!).0 replies to theetaionniairow by Indus trinl arese (74) in the Etiladolrhir tooderal reserve nistrict. lag credit as indicated tir tbm .-At *at Thegr, diffic-alty hobt4 n- replies r-ceived occurs the Jobnstown district Anti the least (none) in the Clearfield district. Over /to T,y,r, cent of replier received front the Altoona. Stiar:,re Go:saltier (N. .) sad Johnstown districts 'Atte tbst loos' balking fmcilities aro not tdiplaate. Thirty toe 140 \pee ceet of those rellyir4 to t.1 •Ik.testionnaire from the Altoona. Chem- bersburg, ..:1-torso Counties (ti. J.) arg Pottsville districts stet. that WO motad bt4 additionril stocit of roe asteriale or eap21ier if sufficient credit could be hod o, sultaole terse; net coat of replie* from the Johnstown ftistrict end t2 7er cent from the :2ha-hersbarig district state they have obsolete wtehinery rzoi e•lAiptoeat vticb 'could be replaced er normal butt- Ass conditions; knei over 3) •,--.or cent e,f replies received from the ,ihr.:re Zounties aad , ,listricts state tat replaceffents. ailditions or other improvements have been delved because if inability to obtain capital or credit. In Part 1Y of the report stre tablle 2C end 21 &hoeing credit experiences of farmers In tbe PhilAdelphis Naissial reser,. district. Of 457 replies 173, or 37.9 per cent. t,ed ***lot to obtain lease. other then mortgage lo n*, taring the 1,flet yens*, of which 125 arllicstions *ere! punted is fall erd 14 i with 7)4., irt. enrilict,.ticens not as yet ikallide Ivan. Of 295 ropliss, 20, or 6.7 per cent .r,d scvii.471t ,norttAge 'cote awing the past year, of *Act 7 epztlications 4rfi grt:tted. ir full, one In rfart, and principal rurpottes for fertiliser, eta.. illterest„ 21.1 17.6 Tow Lich 'it 3 had not as yet been acted anon. loans were desirfki were ve follows: Ms Seed. per cent; pay off other aebts, including torso and cent; r,* ecaipmant, inrrovsmonts, 13.t per cert. The agencies to *hi& ap.plications for loans wore :vide were; Bank, 59.4 per tent; merchants, life i nslirenoe, etc., 16.2 per cent; Dapertimost it Arricul- tare ben furl& 15.o 1.,er cent; riadorsa land btak, 6.3 per cent; sad, mortgage company .5 ,sr sem. of 32 reillos. 277. or 76.5 per cent, state that the efficiency of fares box been lowsred; cnd of 323 replies. 21, or 076 per cent, state tbia aopipowlt, facilities are in naad of repair or replacement. V,DIVIDUALS. PARTXTRFI4IS i.711 CCIPORATICrq POI/tos FIDVRAL 11Wr.14V- 34.7;AS - TO DICirliT/ 3, 1932 AP-AL:Ant:75 BY 71-7 Prve in-ks .4uston Noir Toes PhilAdolnh Clmv01 arAl Richmond . ktlEnte Chico St. Louis CT ORAvrlD Total 1 es r„ "or it Rrvntiric 1ars Ellnited for . i n.viibr.r of nn -Ilic.4ions 1 numbier of !,opne Ppr,,,r ' 7)mininl / not erf.ntfif1 during !annlicriticns nincod I ' ,7., !esint / -)F.yytr I not 1 of / vr itit !not grentPd, with I crwdit not Isfttisfaccribtlit' t tiCov,.12 IN'o v .19 !Nov trnc •3' July 21 to o th,tr bl. e 1 to ri ly not / t i • .1 eqi gi. 1 11 12.g. 0.•.10 4.• 1. 1 2 1. 2 b 50 1 ••• 7 , 1 11 1 3 ••• 1 47 112 134 32 41111 1 3 18 30 4 35 57 1 7 111 19 7 1 12 5 4 24 . 1 7 fs, 1 2 11 13 1 10 E 9 10 235 309 I 1 1 i I Asicurt of loans declined July 21 to $1.14.2to 3,32°.50 9b50000 76,000 6711.1:sib 1,902,2C5 1.320.400 271,30o 1 id nnet,po 1 1e ximsne ,:tty Utility, San li'rnnoisco 2 1 ( : i. : 1_ _i ll -- 1 1 1 12 I 1 i 267.000 114.1439 T.3,200 176,250 14 ! 9,497.270 3 I . rottl 22 2b 10 11 6 7 4 b I 5t14 1 rkijoroxtrnat"; It so-Atim,s not steted. o 0P Y (TRAISLATIT1 BANK OF FRANCE PARIS, Mardi THS 40,11WOR OF TIP BANK OF FRANCS 1932. ' To Ur. George L. Harrisen Governor of the 14deral Reserve Bank of lea York. Dear Lir. Govemon The recent gold movenents bet':Teen new York _nd Paris have caused, in the press of the United States as which .114, frequently biased. ell as of ?Arope, inaccurate comnents Oertain of these sLtaments, especially those for political reasons, show so much 1.ck of understanding of the nature ;Ald purpose of the operations of the Bank of France that they do not merit attmtion. There are some, hovvIvsr, which I believe it necessary to prevent from receiving credence; and which, A.though technically too groundless to be taken seriously in financial circles, pesent a thaver, in view of the v,ay in vhieh they are presented, of influencing public opini/n in the United States and of causing misunderstandings equally detrimental to our two countries. I have, therefore, considered it advisable to state precisely.for your own cake, the i)osition events have lead me to asstroe, so that you.may take it into consiaeration. I shall do no ith the friendly frankness rid& has al-4,493 chameterized our relations. !md to Allah I attacha particularly high value. In the re:)ort which I read a fel? 17eeks age at the general stockhold ers VOLUME 236 PAGE 23 2. Ipeeting of the Bank of France, I made an effort to define and justify the attitude of the Bank in view of the world crisis. I was lead to confirm our adherence to the principle of the eold stan-ard; being inspired, moreover, by the terms of the declaration ehich„ shortly before, thE heads of our tro governments had drawn up in comelete •Accord. I considered it e-visable, in the present period of uncertainty and doubt, to proclaim formally the firm decision of the Bank of France to remain true to the traditional principles ;hich have always determined its policy, 1mi which, es)ecially, have served as the basis of our monetary law. As you kno,, the Lar of June 25, 1928, does not peruit exchange assets to be included in the coverage for sight oblilAions of the Bank of France, which should assure an exclusively metellic basis for money, just as the Bank of Angkand and the Federal reserve banks. The liquidation of the devisen which the Bank of France h.d been obliged to acquire before the stebilizat.on 1' the franc, had been,. nevertheless, hindered from that time on by many Obstacles, eich it see.As to me to be useless to recall. Our constantly favorable balance of payments, and the firmness of the franc resulting therefrom, only permitted very limited sales of devisen. We effected these sales with all the more prydence since we were, above all, taeing care not to withhold oar cooperation frost the foreign -entral banks ind in this eay aggravate the uifficulties which they had to face. We have never, however, lost sight of the fact that the monetary law of Jun 25, 1328, imaicitly imeosed upon the Bank of France the obligation ( to liquidate its foreign assets. This is why we have continually endeavoeed, 3. by the encouragement of foreim financing on the Paris market, to bring about a reversal in the balance of pa,yraents which would have facilitated disposal of our deviser'. Unfortunately our efforts failed of success, and the technical measures - hich the French Government had taken, u,)on our rPer,tion, soon b ecuue useless, b fvause of an atmosphere of mistrust which sugh we had no means of At the tirae of your lat visit to Iturope, we discussed he question at length, and, 1.hile greatly de7)1orin,,-, the fact that causes foreign to our wishes did. not permit us to carry out the progrz.m which we consider-d d we easily reached agreement as to he principles which ought to d9teni._ne our policies and as to the final object $O be attained. The monetary crisis which dc•veloped in Zu.rope beginning with the spring of 1931, and which finally ended in the suspension of the convertability into gold of the pound sterling, confirmed my conviction that it rould be advisable to return eversy*:h.ere„ as soon as possible, to the true gold. standard.; and. that ourselves.at the Bank ar France ougnt to furnish an example by liquidating our holdings, which, up to a certain point, mieit have been considered as indicating the maintenance of a kind of artificial gold exchange standard. Messrs. Farnier and Lacour-Gayet had occasion, at the time of their visit to the United states in October, 1931, to discuss ,ith you the probleras raised. by the abandonment of this monetary systaa which. Ifter having given rise to such hopas, ::,._.used so much disappointment. I was particularly pleased that these conversl-Aions brought to light once more the perfect harmony of views which has always existed between our two institutions. . 4 Since natives of principle have caused me to foresee the necessity the of a policy of this nature, my decision has only been substantiated by and rhidh fall of the )ound sterling, wilt& grei.tly affected French oAnlon, resulted in consequences for the Bank of France of lthich you are aware. The application of this decision was put into operation under the pressure of this cirmostances, at a mouent Alidh, I must admit, as not favorable; but ly application was put into effect ,Athoat delay and was applied indiscriminate to all the foreign currencils which the Bank has in its portfolio. I made every effort to prevent this action of the Bank of France froa ng, accentuating the pressure from thich these currencies may k).ve been sufferi • ad I believe I succeeded f..n my efforts. The Bank operates, as much as possible, by direct sales on the market, and takes into account the market's powers of absorption. On the other hand I am too conscilus of the duties the implied by international cooperation to have considered, at z-:..ny time, possibility of a rapid conversion into gold of all our assets in York Eind other markets. I ao not dAbt, Govornor, that you have understood this 'purse of action. I would have deemed it superfluous to ex7lain this to you by letter, after the exChange of views by telephone which have already taken plse betueem you ana r. Crane on one hand ::nd my associates an the other, if Ali& has I had not thought .hat the confident and friendly collaboration ening beet established betlyerm our two institutions, should aid us in enlip;ht every the opinion of our two countries. It is in this sArit that we have made effort to :ice known to French public o )inion the real meaning of the recent 5. financial measures voted by the Amorict,n Congress. It seaus to me just as necessary to prevent an erroneous interpretation by, the press of the operations r7e undertake. 'For my part, I take advantage of every opportunity to rectify the errors of interpretation Which are "omitted. I know that you, also, take such nation ani I detire to thank you for doing SO. Please be good enough, dear Mr. Governor, to excuse this long letter and accept, inith my kindest .remetabninces, the assurance of my most cordial sentiments. (Signed) C. Moret. (Translated by Albes„ Liarch 23, 1932.) COPT April 9, 19'2. gy dear Mr. Governor: I am most grateful for your helpful letter of March 9 in which you are good enough to explain in detail the position Which events have led you to assume in regard to recent gold movements between New York and iris. Als you note in *your letter, it is entirely true that we in the Federal Reserve Bank of Ne- York have fully und - rstood course of ._ction which you have been constrained to rld appreciated the But even so, I dee?ly _,pprecite the spirit of cooperation which has led you to write me so fully on this subject. An you know, and as I have explained in the past to ;Ir. Parnier and ;Ir. Lacourh.Gayet, we have felt for some time that it would be desirable rather than hurtful from the point of view of our position to have the Bank of France cradually repatriate its dollar balances. In pinciple, I have never felt tnat it is rise for one central bank to hold too great a pro2ortion or too largo an amount of its reserves in the form of foreign exchange. Events in the past few years have demonstrated only too clearly malty of the failures of the gold exchange standard. Quite apart from the economic principles involved, there i • the further considratirm that foreign balances in too large an mount become a matter of pane interest to such an extent that, horvtirer indepen&mt a ce_Aral bank may be of ?olitical influence, there is alayo a risk of pane pres ure on the central bank L.t a time ..hen, from a monetary standpoint, it may be most inconvenimt to respad to that public pressure. In your own case, as you yourself intimate, VOLUME 236 PAGE 25 and largely because of the events of last fall, your own position regarding your foreign balances was influenced through circumstances which you were anxious to control but which, unha?pily could not be prevented. 1io7..4er, the manner in which you have carried through the conversion of a sUbst,ntial part of your foreign aseets into gold has, 5o far as we are Amerned, been ,z matter of complte satisfaction, and never once have you failed to :-how clearly your desire to carry out your policy in a hsl-oful and constructive fashion. It is mat unfortunate that some of the press here and in 'urope have at times misinterveted your policies and your motives. Rut ther has never been a time alien we have failed to understand either, or when ce have failed, wherever possible, to explain the caar)lete evidence of your desire to cansunmate your objectives in the leatl hurtfl manner possible. I waE, therefore, ,11 the more pleased to receive your letter which I have read to all of my directors znd which I have sent to the Federal Reserve Board, of which, as you know, the Secretary of the Treasury is a member. I hope it is not neceslary for me to as ure you that I shall continue to vail myself of every opport nity to correct any misinterpretation or misunderstanding of your position in Please let M2 he matter. thank you again not only for your letter but for the s)irit which -)rompted it, and believe MR, my dear :12.. Governor, with .a personal regards, laithfully yours, (.4gned) George L. Harrison, Governor. M. Clement Doret, Governor, Bank of Ifrance, Paris, France. G-LH: • COPY LeA- Ad& To Gov. Meyer From Er. Smead December 12, 1932. In compliance with your reouest there is given below a list of the more important functions performed by the Federal reserve banks for the United States Government for Which they receive no reinbursement. United States Government Security Operations 1. 2. 3. 4. 5. 6. 7. Denominational axdhange of coupon bonds Interchaage of coupon and registered bonds Telegraphic t-_-ansfer of securities. Redemption of called or matured securities. Cancellation shipment of securities to the Treasury. Forwarding of registered bonds to the Treasury for redemption. Examination, verification and custody of collateral held against deposits in depositary banks. 8. Puxchase and sale of securities for Treasury account. Denository Functions. 1. Pay Government checks and warrants11 2. Pay coupons fmn Government -it;'ri 3. Transfer funds by telegraph. 4. Handle war loan deposits accounts with depositary banks; receive deposits of postal savings funds, post office funds, money o_.der funds; deposits on account of the is for the redemotion of national bank 5 per cert notes; interest on public deposits; and surplus deposits of public funds fran depositary banks. 5. Collect dhedks received in payment of income and other taxes, etc. Currengy Functions. 1. Receive United States currency and coin for exchalge and redemption. 2. Cancel and shin to WaShington currency unfit for circultion. Reports received fram the Federal reserve banks covering the cost of their various operations are set up on functional lines and consequently do not in many cases ihow separately the cost of that part of a given operation performed for the account of the United States Government. VOLUME 236 PAGE 29 • Such figures as are available Show the cost of handling the operations themselves, exclusive of rent, liht, heat, and power, and general overhead expenses. The cost (exclusive of such unapportioned exnenses) of handling United States Government securitiesIbr which the banks receive no reimbursement amounted to $394,780 during the fiscal year ended JureaD, 1932, the cost of paying Government checks to $116,910, and the cost of cashing Government coupons to $63,100. Separate figures are not available showing the cost of other operations performed for the United States Government, but you may be interested in knowing that the functions of the coin departments of the reserve banks, which include the coin functions formerly performed by the subtreasuries, were conducted during the fiscal year ended June 30 at a cost of $341,200, exclusive, as stated above, of rent, light, beat anti parer, and general overhead expenses. connection with the denositary In and coin functions -performed by the Federal reserve banks for the United States Government, the Government maintains a deposit account with the Federal reserve banks on which the Federal reserve banks pay no interest. The Federal reserve banks receive reimbursement from the United States Treasury for work in connection with new issues of securities, and also receive reimbursement from the Reconstruction Finance Corporation for operations conducted .or its account. 111•11•••••..•••-... L-9 December 3, 1932. • TO: The Federal Reserve Board. FROM: 7alter 7yatt, General Counsel. SUBJECT: Constitutionality of legislation providAng a unified commercial banking system for the United States. Senate Reselutio_i 71, adu;)ted. on May 5, 1930, directed the Committee on Bankin aJd Currency to conduct an i - xestigation and recommend legisla6ion "to provide for a mo.7e effective operation of the 'National and Federal reserve bankin,s systems of the country." Folloring extensive hearings by a sub-committee of uhich he was Chairman, Seartor Glass intro:luced Senate Bill 4115, 72nd Congress. At a hearing on the bill before the Com.dttee on Banhing and Currency on March 29, 1932, Governor Meyer presented a letter expressing the unanimous vieus of tile members of the Federal Reserve Board, uhich contained the following statement: "It shuuld be recognized that effective supervision of banking in this country has been seriously hampered by the cometition between member and non-member banks, and that the establishment of a unified system of banking under national supervision is essential to fundamental banking reform." Bankers had testified that certain provisions of the bill Tould make it difficult for member barLs to compete rrith nonmember banks and rould cause defections from the Federal Reserve System anft the 7ational Banking System; and during his testimony Governor Meyer called attention to the statement quoted above and stressed the fact that "effective supervision of banidng in this country has been seriously affected by competition -between mamter and nonmember ban2:s", and that "competition between the State and national banking systems has resulted in weakening both steadily." Thereupon Senator Glass requested Governor Meyer to "suggest to us a constitutional method of creating a unified banking sy:;tem in this country." 20-4, (12i-A ci c5 .036 17 • L-9 - 2In view of the circuustances under which this request was made, the history of our ban:zing Systela, and the provisions of Se..late Resolution Ne. 71, it appears that, by "creating a unified system", is meant bringing all commercial banking business in the United States into a single banking system subject to effective regulation ad supervision by the Federal Government. Congress has already created the National Banking System and the Federal Reserve System; and the problem is how to achieve uniformity of corporate powers, regulation a-id supervision with respect to banks engaged in the commercial banking business and to provide for their safe and effective operation, by eliminating the existing competition between the Federal Government and the forty-eight States for the privilege of granting charters to banks transacting that type of business. Since commercial banking necessarily involves the receipt of deposits subject to -ithdrawal b: chock, Congress can achieve that result if it can enact legislation which -ill have the effect of confining the business of receiving deposits subject to withdrawal by check to National banks, which have uniform powers under the National Bank Act , are subject to effective regulation and supervision by the Federal Government, and are required to be members of the Federal Reserve System. L-9 3 The question presented, therefore, is whether, in order to provide for a more effective operation of the National Banking System and the Fed— eral Reserve System, Congress has tile power under the Constitution to restrict the business of receiving deposits sllbject to withdrawal by check to National banks. A consideration of the decisions of the Supreme Court of the United States leaves no room for doubt that this question must be answered in the affirmative. Vhile numerous authorities supporting this conclusion are cited and discussed below, the principal reasons may be stated concisely as follows: 1. The power to create the National Banking System and the Federal Reserve System as useful instrumentalities to aid the Federd Government in the performance of certain inportant Governmental functions includes the porter to take such action as Congress may deem necess ary to preserve the existence and promote the efficiercy of those system s. McCulloch v. Maryland, 4 Meat. 316; Farmers and Mechan ics National Bank v. Dearing, 91 U. S. 29; Westfall v. United States, 274 U. S. 256. 2. Having provided the country with a National currency throug h the National Banking Systcm and the Federal Reserve System , Congress may constitutionally preserve the full benefits of such curren cy for the people by appropriate legislation. Cases, 12 Wall. 457. Veazie Bank v. Fenno, 8 Wall. 533; Legal Tender L-9 — 4 3. The existence of a heterogeneous banking structure in which -thc:-e have been more than 10,000 bank failures during the past twelve years constitutes a burden upon and an obstruction to interstate commerce; and Congress may enact appropriate legislation to correct this condition. United States v. Ferger, 250 U. S. 195; Stafford v. Wallace, 258 U. S. 495; Board of Trade v. Olsen, 262 U. S. 1. Any one of these graunds standing alone would be a sufficient con— stitutional justification for the enactment of legislation restricting the conduct of the com.aercial banking business to National banks; and, when all three grounds are co;Isidered together, there canbe no doubt that such legislation would be not only constitutional but also entirely appro— priate and in accordance with a proper division of authority between the Federal Governmeat and the States. Having the power to confine the commercial banking business to National banks, Congress can exercise that poyer in any manner which it deams appropriate and adequate for its purposes. It is not necessary that the legislation assume tho form of a revenue act or an act to regulate interstate commerce, though either of these means would be appropriate. I. THE POWER TO CREATE AND MAINTkIN A RLIKETG SYSTEM. Ample authority for the first conclusion stated above is contained in the opinion of Chief Justice Marshall the case of McCulloch v. lary-- land (1819), 4 Wheat. 316, 4 L. Ed. 579, wherein the Supreme Court of the United States established the following principles: 12-'5 -51. Congress has the power to create banks as convenient, appro- priate, and useful instrumentalities to aid the Federal Government in the performance of its functions. 2. This power is derived from a group of great powers, including the powers to lay and collect taxes, to borrow money, to regulate commerce, to declare and conduct wars, to raise and support armies and navies and, "To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof." 3. If the end be legitimate and within the scope of the Consti- tution, all the means which are appropriate, which are plainly adapted to that end, and which are not prohibited, may col:Istitutionally be employed to carry it into effect. 4. If a certain means to carry into effect any of the powers, ex- pressly given by the Constitution to the Government of the Union, be an appropriate measure, not prohibited by the Constitution, the degree of its necessity is a question of legislative discretion, not of judicial cognizance. 5. The States have no power by taxation or otherwise to retard, impede, burden, or in any manner control the operation of the Constitutional laws enacted by Congress to carry into execution the powers vested in the Federal Government. 6. The Constitution and laws of the United States are the supreme laws of the land; and "it is of the very essence of supremacy to remove • L-9 —6 all obstacles to its action within its own sphere." AplAying these principles, Congress has created the National Banking System and the Federal Reserve System, which are now recognized as appropriate, if not indispensable, agencies to assist the Government in the performance of certain essential Governmental functions. The States have no legal power to retard, impede, burden, or in any manner control the operation of these agencies; and Congress clearly has the right to enact such legislation as it may deem necessary to "remove all obstacles" to their safe and effective operation. If it deems it necessary to prevent banks organized under State laws from engaging in the commercial banking business in ordecto accomplish this object, Congress may lawfully do so. Since the decision of the Supreme Court in McCulloch v. Maryland is the legal foundation stone upon which OUT National Banking System, our Federal Reserve System and our Federal Farm Loan System have been built and their constitutionality sustained, that case should be considered in more detail. The essential facts giving rise to the decision were as follows: The Bank of the United States was „ranted a special charter by the Act of Congress approved April 10, 1816, and was authorized to estab— lish branches throughout the United States. It established its ilead office in Philadelphia and a branch in Baltimore, Maryland. The Legislature of the State of Ma2yland enacted a statute taxing all banks or bra-:.ches thereof in the State which were not chartered by the State and prescribing a penalty to be collected from the officers of any bank that failed to pay the tax. The Bank of the United States did not pay this tax on the transactions of its Baltimore branch, and a suit was brought against McCulloch, the Cashier • L-9 of the Branch, to recover the :IDnalty. McGulloch defended on the ground that the State law was uncon stitutional and void because it was in conflict with a valid Federal statute. The State contended that the Act of Congress chartering the Bank of the United States was unconstitutional and that, therefore, the State statute was valid. By a unanimous opinion, the Suorerle Court of the United State s held that the Act cf Congress chartering the Bank of the United States was valid and that the State law purporting to tax the ban": was invalid. The following quotations from the masterful opinion rende red by Chief Justice Marshall rrill illustrate the profuund reasoning upon Thich the Court's decision was based (4 Wheat. 407, 411, 415, 421, 422, 424): "Although, among the enumerated pu7ers of government , we do not find the word roarik, or 'incorpora tion', we find the great powers to lay and collect taxes; to borrow money; to regulate commerce; to declare and conduct a war; and to raise and support armies and navies. The sword and the purse, all the external relations, and no inconsiderable portion of the industry of the nation, are entrusted to its government. It can never be pretended that these vast power s draw after them others of inferior importance, merely because they are inferior. Such an idea can never be advanced. But it may with great reason be contended, that a government , entrusted with such ample powers, on the due execution of which the happiness and prosperity of the nation so vitally depends, must also be entrusted rith ample means for their execution. " ** "But the constitution of the United States has not left the right cf Congress to employ the necessary means for the execution of the power s conferred on the gover nment tc general reasoning. To its enumeration of powers is added that of making 'all laws which shall I be necessary and proper, for carrying into execution the foregoing powers, and all other powers vested by this constitution, in the Government of the United States, or in any department thereof.'" ** "To have prescribed the means by which government should, in 'all future time, execute its powers, would have been to change, entirely, the character of the instrument, and give it the ,properties of a legal code, It would have been an unwise attempt to provide, by immutable rules, for exigencies which, if foreseen at all, must have been seen dimly, and which can be best provided for as they occur. To have declared that the best means shall not be used, but those alone without which the power given would be nugatory, would have been to deprive the legislature of the capacity to avail itself of experience, to exercise its reason, and to accommodate its legislation to circumstances." "We admit, as all must admit, that the powers of the government are limited, and that its limits are not to be transcended. But we think the sound construction of the constitution must allow to the national legislature that discretion, with respect to the means by which the powers it confers are to be carried into execution, which will enable that body to perform the high duties assigned to it, in the manner most beneficial to the people. Let the end be legitimate, let it be within the scone of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited but consistent with the letter and spirit of the constitution, are constitutional." "If a corporation may be employed indiscriminately with other means to carry into execution the powers of the government, no particular reason can be assigned for excluding the use of a bank, if required for its fiscal operations. To use one, must be within the discretion of Congress, if it be an appropriate mode of executing the powers of government. That it is a convenient, a useful, and essential instrument in the prosecution of its fiscal operations, is not now a subject of controversy." "After this declaration, it can scarcely be necessary to say that the existence of state banks can have no possible influence on the question. No trace is to be found in the constitution of an intention to create a dependence of the government of the Union on those of the states, for the execution of the great powers assigned to it. Its means are adequate to its ends; and on those means alone was it expected to rely - 9- L-9 for the accomplishment of its ends. To impose on it the necessity of resorting to means which it cannot control, which another government may furnish or withhold, would render its course precarious; the result of its measures uncertain, and create a dependence on other governments, which might disappoint its most important designs, and is incompatible with the langua,s.e of the constitution. But were it otherwise, the choice of means implies a right to choose a national bank in preference to state banks, and Congress alone can make the election." (Italics supplied) Having announced that it was "the unanimous and decided opinion!' of the Court that the Act to incorporate the Bank of the United States was a law made in pursuance of the Constitution, and was a part of the supreme law of the land, the Chief Justice proceeded to consider the question whether the State could tax the bank (4 Wheat. 426, 427, 436): "This great principle is, that the constitution and the laws made in pursuance thereof are supreme; that they control the constitution and laws of the respective states, and cannot be controlled by them. From this, which may be almost termed an axiom, other propositions are deduced as corollaries, on the truth or error of which, and on their application to this case the cause has been supposed to depend. These are, lot, that a power to create implies a power to preserve. 2d. That a_power to destroy, if wielded by a different hand, is hostile to, and incompatible with these powers to create and to preserve. 3d. That where this repugnancy exists, that authority which is supreme must control, not yield to that over which it is supreme." ** ** ** ** ** ** "* * * It is of the very essence of supremacy to remove all obstacles to its action within its own sphere, and so to modify every power vested in subordinate governments as to exempt its own operations from their own influence. This effect need not be stated in terms. It is so involved in the declaration of supremacy, so necessarily implied in it, that the expression of it could not make it more certain. We must, therefore, keep it in view while construing the constitution." ** ** ** ** ** ** • -10- • "The court has bestowed on this subject its most deliberate consideration. The result is a conviction that the states have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control the operations of the constitutional laws enacted by Cogress to carry into execution the powers vested in the general government. This is, we think, the unavoidable consequence of that supremacy which the constitution has declared." (Italics supplied) In the case of Osborn v. United States Bank (1824), 9 Wheat. 738, 6 L. Ed. 204, substantially the same questions as had been considered by the Supreme Court in McCulloch v. Maryland, were presented in substantially the same form. Yielding to the request of Counsel, the whole subject was reexamined and the principles announced in McCulloch v. Maryland were restated and upheld. Considering more fully the question of the possession by the bank of private powers associated with its nublio authority and meeting the contention that the two were separable and that the public power should be treated as within, and the private power as without, the implied power of Congress, the Supreme Court expressly held that the authority of Congress was to be ascertained by considering the bank as an entity, possessing the rights and powers conferred upon it, and that the lawful power to create the bank and give it the attributes which were deemed essential should not be rendered unavailing by detaching particular powers and considering them alone and thus destroying the efficacy of the bank as a national instrument. The ruling of the court, therefore, was to the effect that, althaugh a particular character of business might not, when considered alone, be within the implied power of Congress, yet, if such business was appropriate • L-9 or relevant to the banking business, the implied power was to be tested by the right to create a bank and the authority to attach to it that which was relevant in the judgment of Congress to make the business of the bank successful. In rendering the opinion of the Court, Chief Justice Marshall said (9 Wheat. 860-863): "* * * That the mere business of banking is, in its own nature, a private business, and may be carried on by individuals or companies having no pocal connection with the government, is admitted; but the bank is not ouch an individual or company. It was not created for its own sake, or for private put.poses. It has never been ouppcsed that Congress could create such a corporation. The whole opinion of the court, in the case of McCulloch v. The State of Maryland, is founded on, and sustained by, the idea that the bank is an instrument which is 'necessary and proper for carrying into effect the powers vested in the government of the United States." ** ** ** ** ** ** "* * * Can this instrument, on any rational calculation, effect its object, unless it be endowed with that faculty of lending and dealing in money which is conferred by its charter? * * * The distinction between destroying what is denominated the corporate franchise, and destroying its vivifying principle, is precisely as incapable of being maintained as a distinction between the right to sentence a human being to death, and a right to sentence him to a total privation of sustenance during life. Deprive a bank of its trade and business, which is its sustenance, and its immortality, if it have that property, will be a very useless attribute. This distinction, then, has no real existence. To tax its faculties, its trade and occupation, is to tax the bank itself. To destroy or preserve the one, is to destroy or preserve the other." ** ** ** ** ** ** "* * * The operations of the bank are believed not only to yield the compensation for its services to the government, but to ST essential to the performance of those services. Those operations give its value to the currency in which all the transactions of the government are conducted. They are, therefore, inseparably connected with those transactions. • • L-9 - 12 They enable the bank to nation for which it was the very essence of its ments * * *.11 (Italics render those services to the created, and are, therefore, of character, as national instrusupplied) The charter of the Baril: of the United States, having expired in 1836, the country was left to depend for its currency on a multitude of State banks which sprang up under numerous different State laws, most of which contained either no provisions or inadequate provisions regarding capital, reserves and supervision. Having experienced the difficulty of conducting the War of 1812 without the aid of a Federal banking system, however, Congress, during the Civil 7ar enacted the National Bank Act on February 25, 1363, and revised it on June 3, 1864. This time it did not undertake to create a single bank with branches throughout the Union, but Provided for the creation of numerous local banks each independent of the other but all operating under a single banking law and under the supervision of the Treasury Department of the United States Government. In the case of Farmers and Mechanics ITational Bank v. Dearing (1875), 91 U. S. 29, 23 L. Ed. 197, the Supreme Court applied the doctrine s of its earlier decisions to National banks organized under the National Bank Act of 1864. The case involved the question whether State usury laws were applicable to National banks; and, in holding that they were not, the Court said (p. 33) : "The constitutionality of the act of 1864 is not questioned. It rests on the same principle as the act creating the second bank of the United States. The reasoning of Secretary Hamilton and of this court in McCulloch v. Maryland (4 Wheat. 316) and in Osborn v. Bank (9 Meat. 738), therefore, applies. The national banl:s organized under the act are instruments designed to be used to aid the government in the administration L--9 - 13 of an important branch of the public service. They are means appropriate to that end. Of the degree of the necessity which existed for creatincz. them, Congress is the sole judge. "Being such means, brought into existence for this purpose, and i-qtalded to be so employed, the States can exercise no control aver them, nor in any wise affect their operation, except in so far as Congress may see proper to permit. Aalything beyond this is 'an almse, because it is the usurpa-cion of power 7711iCh a single State cannot give'. Against the national will 'the States have no po-Ter, by taxation or otherwise, to retard, impede, burthen, or in any manner control the operation of the constitthonal laws exacted by Coneress to carry into execution the po,-ers vested in the General Government'. Osborn v. Bank, aupra; 7esto n and Others v. Charleston, 2 Pet. 466; Brown v. Ylarzr land, 12 Wheat. 419; Dobbins v. 2rie County, 16 Pet. 435. "The por7er to create carries with it the power to precerve. The latter is a corollary fro:.1 the forme r." (Italics aupplied) In Davis v. Elmira Savings Bank (1396), 161 U. S. 275, 16 Sup. Ct. 502, the same question aroce in another form. The legislature of the State of New York provided by law that a savings bank organized under the laws of that State should have a preference as a depositor in other banks in case of the insolvency of the latter, and it 7as saugh t to apply this provision to the case of a deposit by a savi-ag_;s ba-fic in a Natio nal bank which had subsequently become insolvent. The Supreme Court of the United States held that such a provision of a State la,- could not apply to National ba-nl:s, because it was in conflict with that Provision of the National Bank Act which reouires the assets of an insolvent National bank to be distributed ratably among its creditors. In so holding, the Court said: (p. 503) TNational ba.-12:s are instrumentalities of the federal L-overnment, created for a public purpose, and as such necessarily subject to the paramount authority of the United Stat.)s. It 2 - ollows that an attempt by a State tI definu their duties or coatrol tA.c conduct cf their affairs is absolutely void, wherever such attempted exercise of authority expressly conflicts with the laws of the United States, and either frustrates the purpose of the national legislation or impairs the fficiency of these agencies of the Federal government to discharge the duties, for the nerformance of which they were created. These principles are axionatic, and are sanctioned by the repeated adjudications of this court." (Italics su:o-aied) In Easton v. Iowa (1903), 188 U. S. 220, 23 Sup. Ct. 288, Easton, the president of a National bank was convicted in the State court under a State law making it a crime to receive deposits while the bank was insolvent. On appeal, the Supreme Court of the United States held that the State law had no application to a National bank. In SD holding, the court said (pp. 290, 293): u * * * the Federal legislatian creating and regurlating national banks * * * has in view the erection of a system extending throughout the country, and independent, so far as powers conferred are concerned, of state legislution if permitted to be a- y)licable, might impose limitations and restrictions as various and as numerous as the States. Having due regard to the national character and purposes of that system, we cannot concur in the sughgestions that national banks, in resnect to the -Dowers conferred upon them, are to be viewed as solely organized and o-perated for private gain. The principles enunciated in McCulloch v. Maryland, 4 Wheat. 316, 425, and in Osborn v. United States Bank, 9 Wheat. 738, though expressed in respect to banks incorporated directly by acts of Congress, are yet applicable to the later and present system of national banks." ** ** ** ** ** ** "Our conclusions, upon principle and authority, are that Congress, having power to create a system of national banks, is the judge as to th2 extent of the -oowers which should be conferred upon such banIcs, and has the sole nower to regulate ana control the exercise of their operations; not comnetent for state legislatures to interfere, whether with hostile or friendly intentions, with national banks or their officers in the exercise of the powers bestowed u7oon them by the general government." (Italics supplied) L-9 Od• dna Having been denied the rif;ht to iropose limitations and restrictions uIIn National bani:s, the States have gra:o.ted increasingly liberal powers to competing State banl:s a:1d, ia many instances, have uubjected them to fewer restrictio:as and less effective regulation and supervision. This has led Co-,gress to modify the safeguards contained in Vie origin al National Bah's. Act, in order to enable National ban:!1:s to compete with State ba:12zs and thus to preserve the existeace of tho 7ational Ban2:ing S:,stem. Such com, petitioa bet-een the Federal Govan:1_103A and the various States has led to amre and more laxity in bank regulation and supervision. Lioreaver, when Congress has uadertaken to enact legislation designed to H provide for the safer and more effective use of the assets of National banldng associations!' it has been told that the proposed legislation !7ould ladize it dault for 1Tational ban2m to compete rith State banks and rauld cause National ba:::s to reorganize as State banks. Since nit is not competent for State legislatures to interf ere * witS natioaal banks or their officers in the exercise of eISwers be- stowed upon thun by the general GovJrnuent", they cannot IS so indirectly by graatini; State banh:s compeve advantages; and, if the compeon of State ba22:s interferes with the safe and effective operation of National baalm, Congress can put an end to sudh interferunce rith the national purpose by prJvcating State baalm from competiag -ith National S mrca Ircom baaldag business. First National 3a,n2: v. Union Trust Co. (1917), 244 416, 37 Sue. Ct. 734, turned upon the constitutionality of Section 11(h) of the * * • • L-9 - 16 Federal Reserve Act, which gran ted to National banks the right to act , in certain circumstaices, as trustees, executors and administrators. It was contended that, unlike the busine ss of banking, there was no natural coanection or relation ship between acting in these capa cities and carrying on the fiscal oper ations of the Federal government and that, moreover, the legislation cons tituted a direct invasion of the sov ereignty of the States, which control not only the devolution of the esta tes of deceased persons and the cond uct of private business within the States, but as well the creation of corp orations and the qualifications and duties of such as may engage in the bus iness of acting as trustees, exea utors and administrators. The Supreme Court of the United States, however, todk cognizance of the fact that Cong ress had authorized National banks to act in these capacities in order to enab le them to compoete with State corporations rhich were authorized to tra nsact such busiaess in connection with their ba-ikiag business; aad the , refore, the Court austained the constitutionality of the law. In rendering the opinion of the Cour t on this question, Chief Justice White reviewed the earl ier decisions of the Supreme Cour t in the cases of McCulloch v. Maryland and Osborn v. Bank and said (p. 737): " * * * What those cases establis hed was that although a business was of a privat e nature and subject to State regulation, if it was of such a character as to cause it to be incidental to the succes sful discharge by a bank chartered by Congress of its pub lic functions, it was competent for Congress to give the bank the power to exercise such private busine ss in cooperation with or as part of its public authority . Manifestly this excluded the power to the State in suc h case, although it might possess in a general sense aut hority to regulate such business, to L-9 use that authority to prohibit such business from being united by Congress with the banking function, since to do so would be but the exertion of State authority to prohibit Congress from exerting a power which, under the Constitution, it had a right to exercise. From this it must also follow that even although a business be of such a character that it is not inherently considered susce ptible of being included by Congress in the powers confe rred on national banks, that rule would cease to apply if, by State law, State banking corporations, trust compa nies, or others which, by reason of their business, are rival s or quasi rivals of national banks, are permitted to carry on such business. This must be, since the State may not by legislation create a condition as to a particular busin ess which would bring about actual or potential competition with the business of national banks, and at the same time deny the power of Congress to meet such creat ed condition by legislation appropriate to avoid the injur y which otherwise would be suffered by the national agenc y." (Italics supplied) Likewise, the States may not, by granting incre asingly liberal powers to State banks and trust companies, create a competitive situation that makes it impossible for Congress to prese rve the existence of the National Banking System without removing the safeguards necessary to make it a safe and effective system and at the same time deny the right of Congress to meet the situation by putting an end to such competition. In the case of State of Missouri v. Duncan (1924 ), 265 U. S. 17, 44 Sup. Ct. 427, the Burnes National Bank of St. Joseph, Missouri, being duly authorized to act as executor by a permit issued by the Federal Reserve Board under the provisions of Section 11(k) of the Federal Reserve Act, was named as executor by a citizen of Misso uri who died leaving a will. The bank applied to the Probate Court for letters testamentary but was denied appointment on the ground that National banks were not permitted to act as executors under the laws of Missouri. Thereupon, the National bank applied to the Supreme Court of the State for a writ of mandamus to require the L-9 - 18 judge of the Probate Court to issue letters testamentary. The Supreme Court of Missouri denied a writ of mandamus and an appeal was taken to the Supreme Court of the United States, which reversed the opinion of the State court and held that the Probate Court had no right to deny the National bank letters testamentary. After quoting the second paragraph of Section 11(h) of the Federal Reserve Act, as amended by the Act of September 26, 1918 (40 Stat. 967), the Supreme Court said, through Mr. Justice Holmes (pp. 23, 24): "* * * This says in a roundabout and polite but Ili-mistakable way that whatever may be the State law, national banks having the permit of the Federal Reserve Board may act as executors if trust companies competing with them have that power. The relator has the permit, competing trust companies can act as executors in Missouri, the importance of the powers to the sustaining of competition in the banking business is so well known and has been explained so fully heretofore that it does not need to be emphasized, and thus the naked question presented is whether Congress had the power to do what it tried to do." ** ** ** ** ** ** "The States cannot use their most characteristic powers to reach unconstitutional results. Western Union Telegraph Co. v. Kansas, 216 U. S. 1. Pullman Co. v. Kansas, 216 U. S. 56. Western Union Telegraph Co. v. Foster, 247 U. S. 105, 114. There is nothing over which a State has more exclusive authority than the jurisdiction of its courts, but it cannot escape its constitutional obligations by the device of denying jurisdiction to courts otherwise competent. Kenney v. Supreme Lodge of the World, 252 U. S. 411,415. So here--the State cannot lay hold of its general control of administration to deprive national banks of their power to compete that Congress is authorized to sustain." (Italics supplied) Nor would it seem that the States, through the exercise of their power to charter banks, can maintain a situation which impairs the efficiency of the National Banking System and the Federal Reserve System. The L-9 — 19 — power to create these systems includes the power to preserve them; and Congress can eli::inate the ruinous competition that now exists between the Uational Banking System and the forty—eight State bankinc; systems if it finds it necessary to do as a means of preserving the efficacy of its own instrumentalities. In Westfall v. United States (1927), 274 U. S. 256, 47 Sup. Ct. 629, the defendant, who was not even an official of any member bank of the Federal Reserve System, was indicted for aiding and procuri ng a branch manager of a State bank which was a meber of the Federal Reserve System to misaoply the funds of the bara- in violation of a provision of Section 9 of the Federal Reserve Act. He attacked the constitutionality of the Statute on the ground that Congress had no power to punish offense s against the property rights of State banks and that the statute is so broad that it covers such offenses when they would not result in any loss to the Fed— eral Reserve Bank. The Supreme Court of the United States, however, held that the statute was constitutional and said (p. 258): It* * * And if a state bank chooses to come into the System created by the United States, the United States may punish acts injurious to the System, although done to a corporation that the State also is entitled to protect. The general proposition is too plain to need more than statement. That there is such a System and that the Reserve Ban;cs are inter— ested in the solvency and financial condition of the members also is too obvious to require a repetition of the careful analysis presented by the Solicitor General. The only sug— gestion that may deserve a word is that the statute applies indifferently whether there is a loss to the Reserve Banks or not. But every fraud like the one before us weakens the member bank and therefore weakens the System. Moreover, when it is necessary in order to prevent an evil to make the law eIbrace more than the precise thing to be prevent ed, it may do so. It may punish the forgery and utterance of spurious interstate bills of lading in order to protect the genuine • L-9 — 20 — commerce. United States v. Ferger, 250 U. S. 199. See further Southern Ry. Co. v. United States, 222 U. S. 20, 26. That principle is settled. Finally Congress may employ state corporations with their consent as instru— mentalities of the United States, Clallam County v. United States, 263 U. S. 321, and may maLe frauds that impair their efficiency crimes. United States v. Walter, 263 U. S. 15". (Italics supplied) If Congress can go to that length in order to protect the Federal Reserve System from a relatively minor danger, it can relieve the member banks of that System of the competition of nonmember banks for commercial banking business, in order to protect the Federal Reserve System from the greater danger of having the efficiency and safety of its operations im— paired by such competition. If, in order to accomplish this object, it deems it appropriate to restrict the transaction of a commercial banking business to National banks, which are required to be members of the Federal Reserve System, Congress clearly has the right to do so. A brief review of the history of Federal banking legislation will disclose that Congress already Ilas made two atte_pts to create a unified banking system for the United States and that, in the language of Mr. Justice Holmes in State of Missouri v. Duncan, "The naked question pre— sented is whether Congress has the power to do what it tried to do." When it enacted the National Bank Act, Congress recognized that banking is a matter of "National public interest and attempted to create a unified banking system under Federal supervision. As will be shown in more detail hereinafter, the Act of March 3, 1865, which imposed a prohibitive tax on the circulating notes of State banks, was intende d not only to provide a uniform currency but also to compel State banks to L-9 - 21 convert into National banks. It succeeded in eliminating State bank currency and almost succeeded in eliminating State banks ; but the State banks overcame the handicap of not being able to issue currency and multiplied in number until, by 1910, their number was almost twice that of National banks. By the enactment of the Federal Reserve Act of Decem ber 23, 1913, Congress made another attempt to create a unifi ed banking system, by requiring all National banks in the continental United States to become members of the Federal Reserve System and inviting State banks to do so volunt_..rily. This object was recognized by the Federal Reserve Board in a circular issued on June 7, 1915, and published in the Federal Reserve Bulletin for July, 1915, at page 145, wherein the Board said: "A unified banking system, embracing in its membership the well-managed banks of the country, small and large, State and National, is the aim of the Federal reserve act. There can be but one Ameri can credit system of nation-ride extent, and it will fall short of satisfying the business judgment and expectation of the country and fail of attaining its full potentialities if it rests upon an incomplete foundation and leaves out of its membership any considerable part of the banking strength of the country." When we entered the Great War, however, only 53 State banks with resources aggregating $756,000,000 had become membe rs of the Federal Reserve System, and, in order to induce additional State banks to become members, so that the financial resources of the Nation might be mobilized for the great struggle then confronting it, Congress made a number of concessions which materially diminished its own control over State member banks of the Federal Resarve System. By the Act of June 21, 1917, (40 Stat. 232), it eliminated the L- 9 requirements of the original Federal Reserve Act that State member banks must comply with the loan limitations of the National Bank Act and must I- examined at least twice a year by the Compt roller of the Currency and provided that, subject to the provisions of the Feder al Reserve Act and the regulations of the Federal Reserve Board made pursu ant thereto, such I.nks should retain their full charter and statutory rights as State banks or trust companies and might cmtinue to exercise all corporate powers granted by the States in which they were created. On October 13, 1917, the President of the United States appea led tI the State banks and trust companies to become members of the Federal Reserve System for patriotic purposes, saying that, "The extent to which our country can withstand the financial strains for whichwe must be pre— pared will depend very largely upon the stren gth and staying power of the Federal Reserve Banks." (Aan. Rep. F.R. Board, 1917, p. 9.) Notwithstanding these concessions by Congress and this appeal of President Wilson, hewever, there were only 936 State member banks with resources aggregating $7,338,813,000 in the Federal Reserve Systeu on January 1, 1919. Only 11 per cent of the State banks had becom e members of the Federal Reserve System, and those banks held onl-,7 .5-r ce-at of the resources of all State banks and trust cocmanies in the country. Rep. F.R.Bcar:', 9-1.2, pp. 26 azia 27.) Moreover, at the 72eak of State bank membership , which occurred on June 30, 1922, there were only 1648 State banks and trust companies which were members of the Federal Reserve System out of a total of approximately 20,000 State banks and trust companies in the country; and the member State banks and trust companies held only 51 per cent of the total re— sources of all State banks and trust companies. (Ann. Rep. F.R. Board, 1922, p. 29; Ann. Rep. Comp. Cur., 193i, pp. 3, 5). And on June 30, 1932, there were only 835 State member banks and trust companies in the Federa l Reserve System. Furtl-iermore, the amaadments af June 21, 1917, which were enacte d in order to induce State banks to became members of the Federal Reserv e System voluntarily, had greatly weakened the control of the Federal Govern ment over State member banks; the successive amendments to the National Bank Act, --Thich were intended to enable National banks to compete zore effectively with State banks, had materially lo-Tered the standard previously set by the National Bank Act; the "better supervision of banidne, 71lich is one of the major purposes of t:le Federal Reserve Act, had been seriously impede d; and the ten years 1921 to 1931 witnessed numerous failures of State member banks and a larger number of failures of NL,tional br,nks than had occurred previously in the entire history of the Nationl Banking System from 1863 to 1921. Mr. Eugene neyer, then Managinc Director of the War Einance Cor— poration, made the following statement on January 31, 1923, in testifying before the Committe. : on Bai.lking and Currency of the Hollse of Representa— tives (HearinGs on S. 4280, 67th Congress, Part I, -a. 56): "There are in our dual system system, a national system, the latter necessarily many difficulties involved of banking. We have a State banking ba±ing system, and a Federal reserve having a membership derived from both 24 - L-9 the State and the national systems. The State banking departments supervise the State banks, and the Compt roller of the Currency supervises the national banks, while the Federal reserve system has a supervision of its own for the member banks, and there has been at times some dispo sition to competition between the State and the natio nal banking systems. "The State banking laws frequently permit practices which national banks can not legally engage in. This is creating competition between the two systems which can not be regarded as wholesome and may lead to the gradwil weakening of both. * * * The competition that exist s at the present time between State and natio nal banks can not fail to remind one of the competition that prevailed a generation ago among the various States seeking to become domiciles for corporations--a competition that was based upon the laxity of the laws governing incor poration. Nothing could be more disastrous than competitio n between the State and national bankinq group s, based upon competition in laxity." (Italics supplied) In testifying before the Committee on Ways and Means of the House of Representatives on April 27 and 28, 1932, in his capacity as Governor of the Federal Reserve Board and Chairman of the Board of Directors of the Reconstruction Finance Corporation and in the light of his experience as Managing Director of the War Finance Corporatio n, Mr. Eugene Meyer discussed this subject again. (Hearings re Payme nt of Adjusted Service Certificates, 72nd Congress, 1st Session, pp. 631, 642, 643). His testimony was, in part, as follows: "Personally I feel, as I stated to a subcommitt ee of the Banking and Currency Committee the other day, that we will never have a satisfactory banki ng system in the United States until banks of depos it, commercial banks, can be gathered under one chartering , gunervising, and regulatory power. The constant compe tition between State and National banking systems has resul ted in a weakening of the laws and the safeguards of both systems which I think contributed in no gmall degre e to the ex- cesses of the inflation period and to the suffering of the deflation period. The minds of the committees charged with banking and currency responsibilities are engaged in studying this problam. ** "I am entirely in favor of maintaining State rights to the extent that they can properly be mnin— tained. But there are various functions over which the Federal Government has had to assume jurisdiction. We have the postal service and have had it since the beginning of the Government. As other activities I- come national and interstate on a greater scale, I feel that we must take account of these changed con— ditions. We must have elasticity in our conception of decentralization and the advantage of local control when there are vital changes in financial and economic conditions." This subject was also discussed by Mr. Owen D. Young, Deputy Chair— man of the Federal Reserve Bank of New York, in his testimony before the subcommittee of the Senate Committee on Banking and Currency on February 4, 1031. (Hearings pursuant to Senate Resolution No. 71 of the 71st Congress, PP• 353 et seq.). He said: "I want to say, first, Mr. Chairman, * * that all commer— cial deposit banking in the United States should be carried on under one law, that examination of banks and their con— trol should be under one authority. Their reserves should be moobzed in the •Federal Reserve system. Then we could I evelop for the country as a whole a sound banking system, and definitely fix responsibility. That would mean that all banks of deposit, as distinguished from savings, should be national banks. "Az it is now, banks are cha7-tered both by the National Government and by each of the 48 :tcaT,e;1 They are in compe— tition, each endeavoring to offer the most attractive charters and the most liberal laws, to say nothing of the liberality of administrative officials in interpreting the laws. The na— tional banking act has to colLpete not only with the most con— servative States but the most liberal ones. Consequently, there has been a constan tendency to liberalize banking laws and to weaken their administration. In such cases the arguaent is always made that it is desirable to liberalize the law so as to enable the banks to be of great service to borrowers. "The first question always regarding banks doing a demand deposit business should be the safety of the deposits and the ability of the bank to return them to depositors instantly on request, unless they be time deposits. No thought of service to borrowers should be permitted to impair the safety and security of deposits. Banks of deposit are, after all, primarily custodians of liquid funds. Only such use of :such funds should be permitted as may be consistent with the interests of the depositors. "In the early years of our Government, our business was largely done by currency moving from hand to hand. It was felt at that time, and properly so, that we should have a national and uniform currency. Consequently, Congress was given power to coin money and regulate the value thereof. This power was made effective as to paper money by the national bank act. Now our business is carried on mostly by transfers of bank deposits, currency forming only a small part of our money transfers. If control of our currency were necessary in the beginning by the Federal Government, control of our bank deposits by it now would seem desirable. We have transferred, either affirmatively or by acquiescence, many powers to the Federal Government which ought not to be there. I am bitterly opposed to the impairment of the rights of the States in their appropriate field. It does seem strange, however, that in the face of such gravitation toward Federal authority, we should have retained divided rather than unified power over our deposit banking system. "Except for the currency in our pockets, our banks of deposit hold the liquid capital of the people of the United States. The transfer of this capital from one of us to another, promptly and safely, should be facilitated. That means, however, that every bank of deposit is truly engaged in a national business. Its soundness and safety is of concern to our people everywhere. Our business of deposit banks is not local in character; it is, and should be, national. Therefore, in my judgment, it should be governed by the national law. ** ** ** ** ** ** "I should hope, sir, that you might find a way to bring • - 27 - L-9 all State banks holding themselves out to do a national business and carrying demand deposits into the Federal reserve system by compulsion." Having failed to accomplish fully its purposes by creating the Federal Reserve System and inviting State banks to become members voluntarily and by modifying the safeguards contained in the National Bank Act and the Federal Reserve Act, in order to encourage the organization of National banks and to induce State banks to become members of the Federal Reserve System, Ccngress may resort to other meaaures. and resort to compulsion. It can abandon inducement In other words, it can prevent the transaction of a commercial bankdng business except by National banks, Which must be members of the Federal Reserve System. That Congress has the power to adopt this means to accomplish its great objects follows necessarily from the fundamental princip les established by the Supreme Court of the United States in its decision in the case of McCulloch v. Maryland and the other cases discussed above; but there are also other reasons and additional authorities for this conclusion. II. THE POWER TO PROVIDE A NATIONAL CURRENCY. A separate and independent ground for the above conclusion anE an effective mothod of bringing all commercial banking into the Naticnal Banking System is found in the measures adopted by Congress to provide a National currency for the Nation and in the decisions of the Supreme Court regarding the constitutionality of such measures. By the Act of Mardh 3, 1865 (13 Stat. 484), later reenacted as the Act of July 13, 1866, (14 Stat. 146), Congress imposed a tax of 10 per cent L-9 on the circulating notes of State banks paid out by National or State banks. The avowed purpose of this legislation was to create a uniform currency by driving the circulating notes of State banks out of existence and, if necessary, by driving all State banks into the National Banking System; and the Supreme Court of the United States upheld its constitu— tionality. Veazie Bank v. Fenno (1869), 8 Wall. 533, 19 L. Ed. 482. How near this legislation came to creating a unified banking system is indicated by the fact that up to November 15, 1864, there were only 584 National banks with capital aggregating $81,961,450 and, by October 1, 1865, there were 1,566 National banks capitalized at $276,219,450. In 1862, prior to the passage of the National Bank Act there were 1,492 State banks; in July, 1864, there were 467 National banks and 1,089 State banks; in 1865 there were 1294 National banks and 349 State banks; in 1866, there were 1634 National banks and 297 State banks; and by 1868, the number of State banks fell to 247, the lowest figure for any time since 1857. (Report, National Monetary Commission, Volume 5, pp. 22, 103; Annual Report, Comp. Our, 1931, p. 3.) It is appropriate, therefore, to examine in this connection not only the legal basis for the decision of the Supreme Court in the dase of Veazie Bank v. Fenno, but also the circumstances giving rise to that opinion. While the situation then confronting Congress assumed a different form, the problem of the Sixties and the method of its solution furnish a guide to the method of dealing with the problem of effecting desirable reforms in our present banking system. L-9 - 2 _ In his report to Congress dated November 23, 1863, (p. 57) the Comptroller of the Currency said: "* * * The idea that the national banks cannot supersede the State banks without breaking them down and ruining their stockholders is an erroneous one, and can only be honestly entertained by those who have not carefully considered the subject or noticed the process of conversion, which has changed some banks in the west, and is changing others in the east, from one system to the other. No war is being waged, or is intended to be waged, by the na-ional system upon State institutions. So far from it, it opens the way by which the interests of stockholders can be protected, at the same time that the character of their organizations is changed. it* * * The amount of losses which the people have sustained by insolvent State banks, and by the high rate of exchanges--the result of a depreciated currency--can hardly be estimated. That some of the new States have prospered, notwithstanding the vicious and ruinous banking systems with which they have been scourged, is evidence of the greatness of their resources and the energy of their people. The idea has at last become quite general among the people that the whole system of State banking, as far as circulation is regarded, is unfitted for a commercial country like ours. The United States is a nation as well as a union of States. Its vast railroad system extends from Maine to Kansas, and will soon be extended to the Pacific ocean. Its immense trade is not circumscribed by State lines, nor subject to State laws. Its internal commerce is national, and so should be its currency. At present some fifteen hundred State banks furnish the people with a bank-note circulation. This circulation is not confined to the States by which it is authorized, but is carried by trade or is forced -cy the banks all over the Union. People receive it and pay it out, scarcely knowing from whence it comes or in what manner it is secured. Banks have been organized in some States with a view to lending their circulation to the people of others. Probably not one quarter of the circulation of the New England bank is needed or used in New England--the balance being practically loaned to other States. The national currency system is intended to change this state of things, not by a war upon the State baAks, but by providin g a means by which the circulation which is intended for national use shall be based upon national securities through associations organized under a national law." (Italics supplied) L-9 - 30 In his report of November 25, 1864, (p. 54) the Comptroller of the Currency said: "As long as there was any uncertainty in regard to the success of the national banking system, or the popu lar verdict upon its merits and security, I did not feel at liberty to recommend discriminating legislat ion against the State banks. It is for Congress to dete rmine if there is any longer a reasonable uncertainty on thes e points, and if the time has not arrived when all thes e institutions should be compelled to retire their circulat ion. It is indispensable for the financial success of the treasury that the currency of the country should be under the control of the government. This cannot be the case as long as State institutions have the right to flood the coun try with their issues. As a system has been devised under whic h State banks, or at least as many of them as are needed, can be reorganized, so that the government can assu me a rightful control over bank note circulation, it coul d hardly be considered oppressive if Congress should proh ibit the further issue of bank notes not authorized by itse lf, and compel, by taxation, (which should be sufficie nt to effect the object without being oppressive,) the with drawal of those which have been already issued. My orm opinion is, that this should be done, and that the sooner it is done the better it will be for the banks themselves and for the public. As long as the two §;rstems are contending for the field, (although the result of the contest can be no long er doubtful,) the government cannot restrain the issue of pape r money; and as the preference which is everywhere give n to a national currency over the notes of the State bank s indicates what is the popular judgment in regard to the meri ts of the two systems, there seems to be no good reason why Congress should hesitate to relieve the treasury of a seri ous embarrassment, and the people of an unsatisfactory circulation." (Italics supplied) The circumstances giving rise to the enactment of the Act of March 3, 1865, and the purposes sought to be accomplished thereby were graphically described by Senator Sherman, Chairman of the Finance Committee, when he reported the Bill to the Senate on February 27, 1865 . His entire speech is worthy of careful study; but the following quotations will suffice. (Congressional Globe, 38th Congress, 2nd Session, pp. 1138 , 1139.) "The people of the United States having definitely determined to prosecute war, it only remained for Congress to provide the rays and means to carry it on. * * * * I still think that with parsimonious economy and heavy taxes from the beginning, we might have borrowe d money enough on a specie basis to have avoided a suspension of specie payments; bUt when it came we were without a currency and without a system of taxation. Gold disappeared and was hoarded by banks and individuals. It flowed in a steady stream from our country. By the SubTreasury act we could not use the irredeemable bills of State banks, and with the terrible lessons of 1815 and 1837 staring us in the face, no one was bold enough to advise us to make as a standard of value the issues of fifteen hundred banks founded upon as many banking systems as there were States. Under these circumstances we had but one resource. "We had to borrow vast sums, and as a means to do it we had to make a currency. This was done by the issue of United States notes. Subsequently, to unite the interests of private capital with the security of the Government as a basis of banking, we established a system of national banks, and upon this currency, as a medium for collecting taxes and borrowing money, have waged a war unexampled in the grandeur of its operations, and, as I trust, soon to be crowned with unconditional success. ** ** ** ** ** ** "A. still more important feature of this bill is the section to compel the withdrawal of State bank notes. As the volume of currency affects the price of all commodities, I have no dotbt the amount of such paper money now outstanding adds to the cost of our purchases $50,000,000. The refusal of Congress, at the last session, to pass restrictive measures to compel its redemption has seriously affected the value of our currency. The national banks were intended to supersede the State banks. Both cannot exist together; yet, while the national system is extending, the issues of State banks have not materially decreased. Indeed, many local banks have been converted into national banks, and yet carefully keep out thcir State circulation. They exact interest from the people on this circulation, and yet avail themselves of the benefits of the new system. They transfer their capital to national banks, issue new circulation upon it, and yet studiously keep out the old. They issue two circulations upon the same capital. It is far better at once to abandon the national banking system than to leave it as a cloak for outstanding State issues. "If the State banks have power enough in Congress to prolong their existence beyond the present year, we had better suspend the organization of national banks. As the first -32-- L-9 friend of this measure in the Senate, I would vote today for its repeal rather than allow it to be the agency under which State banks can inflate our currency. And the power of taxation cannot be more wisely exercised than in harmonizing and nationalizing and placing on the secure basis of national credit all the money of the country." (Italics supplied) The various legislative steps leading up to the passage of the Act of July 13, 1866, were stated as follows in the opinion of the Supreme Court in the case of Veazie Bank v. Fenno by Mr. Chief Justice Chase, who had been Secretary of the Treasury during the events related (8 Wall. 536-540): "At the beginning of the rebellion the circulating medium consisted almost entirely of bank notes issued by numerous independent corporations variously organized under State legislation, of various degrees of credit, and very unequal resources, administered often with great, and not unfrequently with little skill, prudence and integrity. The acts of Congress, then in force, prohibiting the receipt or disbursement, in the transactions of the National government, of anything except gold and silver, and the laws of the States requiring the redemption of bank notes in coin on demand, prevented the disappearance of gold and silver from circulation. There was, then, no National currency except coin; there was no general regulation of any other by National legislation; and no National taxation was imposed in any form on the State bank circulation. "The first act authoriting the emission of notes by the Treasury Department for circulation was that of July 17th, 1861. The notes issued under this act were treasury notes, payable on demand in coin. * * * "On the 31st of December, 1861, the State banks suspended specie payment. Until this time the expenses of the war had been paid in coin, or in the demand notes just referred to; and, for some time afterwards, they continued to be paid in these notes, which, if not redeemed in coin, were received as coin in the payment of duties. "Subsequently, on the 25th of February, 1862, a new policy became necessary in consequence of the suspension and of the condition of the country, and was adopted. The notes hitherto issued, as has just been stated, were called treasury notes, and were payable on demand in coin. The act now passed author- ized the issue of bills for circulation under the name Unitea States notes, made payable to bearer, but not expressed to be payable on demand, * * * . I "This currency, issued directly by the government for the disbursement of the war and other expend itures, could not, obviously, be a proper object of taxation. "But on the 25th of February, 1863, the act authorizing National banking associations was passed, in which, for the first time during many years, Congress recogn ized the expediency and duty of imposing a tax upon curren cy. By this act a tax of two per cent.annually was impose d on the circulation of the associations authorized by it. Soon after, by the act of March 3d, 1863, a similar but lighter tax of one per ce,t. annually was impose d on the circulation of State banks, in certain proportions to their capita l, and of two per cent. on the excess;and the tax on the National associations was reduced to the same rates. *E * Ii ** ** ** ** ** "At a later date, by the act of June 3d, 1864, which was substituted for the act of February 25th, 1863, authorizing National banking associations, the rate of tax on circulation was continued and applied to the whole amount of it, and the shares of their stockholders were also subjected to taxation by the States; and a few days afterwards, by the act of June 30, 1864, to provide ways and means for the support of the government, the tax on the circulation of the State banks was also continued at the same annual rate of one per cent. as before, but payment was requir ed in monthly instalments of one-twelfth of one per cent. with monthly reports from each State bank of the amount in culation. "It can hardly be doubted that the object of this provision was to inform the proper authorities of the exact amount of paper money in circulation, with a view to its regulation by law. The act just referred to was * * * followed some months later by the act of March 3d, 1865, amendatory to the rrior internal revenue acts, the sixth section of which provides, 'that every National banking association, State bank, or State banking association, shall pay a tax of ten per centum on the amount of tee• of any State bank, or State banking association, paid out by them after the 1st day of July, 18661. "The same provision was re-enacted, with a more extendea aDplication, on the 13th of July, 1866, in these words: 'Every National banking association, State bank, or State banking association, shall pay a A.f ten per centum on the amount of notes of any person, State bank, or State banking association used for ciraulation, and paid out by them after the first day of August, 1866, and such tax hall be assessed and paid in such manner as shall Iprescrbed i by the Commissioner of Internal Revenue.' "The constitutionality of this last provision is now drawn in question, and this brief statement of the recent legislation of Congress has been Lade for the purpose of placing in a clear light its scope and bearing, especially as developed in the provisions just cited. It will be seen that when the policy of taxing bank ciraulation was first adopted in 1863, Congress was inclined to discriminate for, rather than against, the ciraulation of the State banks; but that when the country had been sufficiently furnished with a National currency by the issues of United States notes and of National bank notes, the discrimination was turned, and very decidedly turned, in the opposite direction." Let us consider the present problam in the light of past experience: By the Revenue Act of 1932, =proved June 6, 1932, Congress recently imposed a tax of 2 cents on each check, without making any distinction between checks drawn on State banks and those drawn on National banks. Is there any reason why Congress could not increase this tax to 10 per cent of the amount of each check but exempt therefrom the checks drawn upon National banks and Federal reserve banks, the instrumentalities which it has created to aid the Government in the performance of certain important functions? While there are other grounds for holding that Congress could do so, adequate grounds for such a conclusion are contained in the reasons given by Mr. Chief Justice Chase for the court's decision in the case of Veazie Bank v. Fenno. 36 After disposing of the contentions that the tax was a direct tax and had not been apportioned among the States, as required by the Constitution, and that the act imposing the tax impaired a franchise granted by the State, which it was urged Congress had no right to do, he stated and disposed of the principal question as follows (8 Wall. 548-550): "It is insisted, however, that the tax in the case before us is excessive, and so excessive as to indicate a purpose on the part of Congress to destroy the franchise of the Bank, and is, therefore, beyond the constitutional power of Congress. "The first answer to this is that the Judicial cannot prescribe to the Legislative Departments of the Government limitations upon the exercise of its acknowledged powers. The power to tax may be exercised oppressively upon persons, but the responsibility of the Legislature is not to the courts, but to the people by whbm its members are elected. So if a particular tax bears heavily upon a corporation, or a class of corporations, it cannot, for that reason only, be pronounced contrary to the Constitution. "But there is another answer which vindicates equally the wisdom and the power of Congress. "It cannot be doubted that under the Constitution the power toprovide a circulation of coin is given to Congress. And it is settled by the uniform practice of the government and by repeated decisions, that Congress may constitutionally authorize the emission of bills of credit. It is not important here to decide whether the quality of legal tender, in payment of debts, can be constitutionally imparted to these bills; it is enough to say, that there can be no question of the power of the government to emit them; to make them receivable in payment of debts to itself; to fit them for use by those who see fit to use them in all the transactions of commerce; to provide for their redemption; to make them a currency, uniform in value and description, and convenient and useful for circulation. These powers, until recently, were only partially and occasionally exercised. Lately, however, they have been called into full activity, and Congress has undertaken to supply a currency for the entire country. -.36- L-9 "The methods adopted for the supply of this currency were briefly explained in the first part of this opinion. It now consists of coin, of United States notes, and of the notes of the national banks. Both descriptions of notes may be properly described as bills of credit, for both are furnished by the government; both are issued on the credit of the government; and the government is responsible for the redemption of both; primarily as to the first description, and immediately upon defaul t of the bank, as to the second. When these bills shall be made convertible into coin, at the will of the holder , this currency will, perhaps, satisfy the rants of the commun ity, in respect to a circulating medium, as perfectly as any mixed currency that can be devised. "Having thus, in the exercise of undisputed constitutional powers, undertaken to provide a currency for the whole country, it cannot be questioned that Congre ss may, constitutionally, secure the benefit of it to the people bv appropriate le_gislation. To this end, Congre ss has denied the quality of legal tender to foreign coins, and has provided by law against the imposition of counterfeit and base coin on the community. To the same end, Congre ss may restrain, by suitable enactments, the circulation as money of any notes not issued under its own author ity. Without this power, indeed, its attempts to secure a sound and uniform currency for the country must be futile. "Viewed in this light, as well as in the other light of a duty on contracts or property, we cannot doubt the constitutionality of the tax under consideration." (Italics supplied) Likewise, having undertaken to provide an elasti c currency for the country by enacting the Federal Reserve Act, which authorized the issuance of Federal reserve notes through the Feder al reserve banks, Congress may constitutionally secure the benefit of that curren cy to the people by appropriate legislation. Federal reserve notes are secured by the asset s of Federal reserve banks; and the Federal reserve banks depend largely upon their member banks to furnish the assets required for this purpose. They derive all their cap- ital from subscriptions by member banks to their capital stock and most of their deposits consist of the legal reserves deposited with them by their member banks. In normal times, Federal reserve notes are secured largely by eligible paper acquired by the Federal reserve banks from their member banks, and, as pointed out by the Federal Reserve Board in the circular Quoted in I_ rt above, the Federal Reserve Act contemplated the creation of a banking system which would include most, if not all, of the commercial banks in the country. This result not having been accomplished by teUeods heretofore adopted, it would seem clear that Congress has the power to enact appropriate legislation in order to preserve for the Nation. the full benefits of the flexible aurrency which it undertook to provide by the enactment of the Federal Reserve Act. If it finds that, in order to accomplish this purpose, it is necessary to prevent the transaction of a commercial banking business except by National banks, which must be members cf the Federal Reserve System, Congress may constitutionally adopt this means and the cSurts will not interfere; because the degree of the necessity for the enactment of sudh legislation is a question of legislative discretion, not of judicial cognizance. McCulloch v. Maryland. At one time it was contended that Congress is not authorized to provide the people of e-In States with a National currency, that the only power of this general character granted to it was the power to coin money and regulate the value thereof, and that this power is confined to matters pertaining to metallic money. - 33 Such an argument was answered, however, in the decision of the Supreme Court of the United States in the Leal Tende r Cases (1871), 12 Wall. 457, 20 L. Ed. 287, wherein the Supre me Court upheld the validity of certain acts of Congress making United States notes and Treasury notes legal tender for the payment of debts. In that case, the Court, speaking through Mx. Justice Strong, said (544546): "It is not easy to see why, if State bank notes can be taxed out of existence for the purposes of indirectly making United States notes more convenient and useful for commercial purposes, the same end may not be secured directly by ma;:ing them a legal tende r. "1 * * The Constitution was intended to frame a government as distinguished from a league or compa ct, a government supreme in some particulars over States and people. It was designed to provide the same currency, having a uniform legal value in all the States. It was for this reason the power to coin money and regulate its value was conferred upon the Feder al government, while the same power as well as the power to emit bills of credit was withdrawn from the States. The States can no longer declare what shall be money, or regulate its value. Whatever power there is over the currency is vested in Congress. If the power to declare what is money is not in Congress, it is annihilated. * * * it might be argued with much force that when it is considered in what brief and comprehensive terms the Constitution speal:s, how sensible its framers must have been that emergencie s might arise when the precious metals (then more scarc e than now) might prove inadequate to the neces sities of the government and the demands of the people--wh en it is remembered that paper money was almost exclusivel y in use in the States as the medium of exchange, and when the great evil sought to be remedied was the want of unifo rmity in the current value of money, it might be argue d, we say, that the gift of power to coin money and regul ate the value thereof, was understood as conveying general power over the currency, the power which had belon ged to the States, and which they surrendered." (Ital ics supplied) In a separate concurring opinion, Mr. Justice Bradley said (p. 562): "Another ground of the power to issue treas ury notes or bills is the necessity of providing a proper currency for the country, and especially of providing for the failure or disapnearance of the ordinary currency in times of financial nressure and threatened collapse of commercial credit. Currency is a national necessity. The operations of the government, es well as private transactions, are wholly dependent upon it. The State governments are prohibited from making money or issuing bills. Uniformity of money one of the objects of the Constitution. The coinage of money and regulation of its value is conferred upon the General government exclusively. That government has also the power to issue bills. It follows, as a matter of necessity, as a consequence of these various provisions, that it is specially the duty of the General govern ment to provide a N, tional currency. The States cannot do except by the charter of local banks, and that remedy, if strictly le,;itimate and constitutional, is inadequate, fluctuating, uncertain, and insecure, and o-oerates with all the partiality to local interests, which it was the very object of the Constitution to avoid. But regarded as a duty of the General government, it is strictly in accordance with the spirit of the Constitution, as well as in line with the national necessities." (Itali cs supplied) The tax imposed by the Act of july 13, 1863, accomplished the object of eliminating the circulating notes of State banks and thus giving us a National currency of uniform value; but it has not accomplished the object of eliminating the competition of State banks and thus creating a unified coRlluercial banking sYstem as a basis for that currency. Prior to the Civil War, banks derived most of their profit s from the issuance of circulating notes and relied to a much lesser extent than they do now on denosits as a source of earning power. In fact, the amount of their circulating notes frequently exceeded the amount of their deposits. (Rens National Monetary Commission, Vol. 5, pp. 16, 27.) It was expected, therefore, that the imposition of a prohib itive tax on their circulating notes would cause all State banks either to convert into National banks or to go out of business. LT A way was soon fuund, however, to conduct a profitable banking buiness without issuing circulating notes. It was through the devel— opment of the use of checks in lieu of currency as a means of payment. This was convenient to depositors and profitable to the banks, since the latter could enjoy the uge of eUSne pending its withdrawal and even while the checks were in process of collection; anC. the practice was en— couraged by National banks as well as State banks. Moreover, arrangements facilitating the easy flow of dhecks throughout the country made the use of checks so popular that it has been estimated that, at the present time, more than 90 per cent of all payments are made by mans of checks. Checks, therefore, have to a very large extent taken the place of currency as a medium of payment; and State banks, operating under laws allowing a greater latitude and requiring less rigorous gupervision and regulation than the National Bankhave grown in number until, in the peak year of 1921, there were 20,349 State banks (other than mutual savings S_ nks) compared with 8,154 National banks and, in 1931, there were 13,728 State banks compared with 6,805 National banks. The reduction in the num— ber of banks of both classes resulted principally from failures and con— solidations. (Ann. Rep. Campt. Citurrency, 1931, p. 3.) Morewver, with the return of the predominance of State b5.anks, many of teSsadanag of a heterogeneoug banking structure have reappeared in another form; and checks, which have replaced currency as the principal medium of payment, frequently prove to be an ineffective medium. Checks go unpaid because the banks upon which they were drawn have failed. Bal— git L-9 ances azainst which depositors expected to draw checks in settlement of their business transactions are unavailable for that purpose, because the banks have closed their doors. Not only has the effective oneration of the Nntional Banking System d the Federal Reserve System been seriously impaired by the "competition in laxity" of bank regulation and supervision, described in the statements of Governor Meyer and MT. Owen D. Young quoted above, but the proport ion of National banks to the total number of commE:rcial banks in the country has fallen from 87 per cent in 1868 to 33 per cent in 1931; and only 38 per cent of all the commercial banks were members of the Federal Reserve System in 1931. A material -Jortion of commercial banking business, therefore, is cII ucted outside of the Fede2a1 Reserve SyLtem and contrib utes nothing to the basis for our currency. The tax on circulating notes having become ineffective as a result of the use of checks in lieu of currency, Congress has the right to bring the Act of July 13, 1866, un SISate by making the tax applicable to checks drawn on State banks. III. THE POTER TO REGULATE AND PROTECT INTERSTATE colairzu. Either one of the two grounds discussed above is sufficient to sustain the conclusion herein reached; but there is still another separat e ground upon which the same conclusion could be sustained inde-oendentl y. The right tI enact legislation to mall banks more reliable instrumentaes of inter— state commerce is included in the power granted to Congres s by Section 8 of Article 1 of the Constitution, "To regulate commerco with foreign nations, and among the several states, and with the Indian tribes." L-9 — 4 — In a long series of decisions, this clause of the Constitution has been held to give Congress control over all -phases of interstate commerce, as well as over all other matters so connected with interstate commerce as to require Congressional control over them in order to make effective the control over such commerce itself. The rule of these decisions is that "commerce" does not include merely the transfer of goods, but that the proper regulation of commerce must include the regulation of all as-oects of commerce and of all instrumentalities upon which the carrying on of commerce depends. Mondou v. New York, New Haven, and Hartford R. R. Co., 223 U. S. 1, 32 Sup. Ct. 169. Since the trans )ortation system of the country is regarded as an essential instrumentality to this end, it has, under the Commerce Clause, been subjected to Congressic,nal regulation on a vast scale. Railroad cars not used in interstate commerce, but which may be placed in the same train with those that are, must conform to the Federal Safety Appliance Act. Ct. 2. Southern Railway Co. v. United States, 222 U. S. 20, 32 Sup. Intrastate freight rates are subjected to Federal regulation when they interfere with interstate rates. Chicago, B. and Q. Railroad Commissi.m of Wisconsin Y. R. R. Co., 257 U. S. 563, 42 Sup. Ct. 232. The issuance of fraudulent bills of lading is punishable under a Federal statute, even when they cover no interstate shipment. 199, 39 Sup. Ct. 445. United States v. Ferger, 250 U. S. Stockyards, although engaged in dealing locally in live stock, are subjected to Federal control, because they are essential cogs in the machinery of interstate commerce. 495, 42 Sun. Ct. 397. Stafford v. Wallace, 258 U. S. The same is true of the principal grain markets. Board of Trade of City of Chicago v. Olsen, 262 U. S. 1, 43 Sup. Ct. 470. The decisions contain many other examples of a similar nature. 111 - 43 - L-9 Although the courts have held that the . - powers of Congress under the Commerce Clause extend to a great variety of matters related to cormerce-from the quality of radio broadcasting stations to the criminality of traffic in certain articles--no judicial interpretation nor any extension of the literal terms of that Clause is necessary to make it include the very essentials of commerce, i.e., the acts of transferring the goods and of transmitting the consideration for them. other. The one is as essential as the A breakdown in the means of payment would be as disastrous as a breakdown in the means of shipment, since virtually every commercial transaction requires the services of a cor..mercial bank for its consummation. That the power to regulate commerce among the several States includes the power to remove obstructions and impediments to such commerce and to regulate the instrumentalities as well as the articles of that commerce is too well settled by numerous decisions of the Supreme Court to require argument. Ye attempt will be made, therefore, to review the multi- tude of decisions of the Sunreme Court regarding the extent of this important 1--Jower. A few leading cases will suffice. The scope of the -oower of Congress over interstate commerce was stated concisely by the Supreme Court in Mondou v. Now York, N. H. & H. R. R. Co. (1911), 223 U. S. 1, 32 Sup. Ct. 169, wherein the Court sustained the validity of the Federal Employeest Liability Act and reaffirmed the rower of Congress to determine the necessity for, and to enact, uniform National legislation to re-olace the variant State legislation governing the same subject (pp. 173, 174 ): L-9 "The clauses in the Constitution (art. I., sec. 8, clauses 3 and 18) which confer uDon Congress the power Ito regulate commerce * * * among the several states,' and to make all laws which shall be necessary and proper' for the purpose, have been considered by this court so often and in such varied connections that some propositions bearing upon the extent and nature of this -power have come to be so firmly settled as no longer to be open to dispute, among them being these: "1. The term 'commerce' comprehends more than the mere exchange of goods. It embraces commercial intercourse in all its branches, including trans-oortation of passengers and property by common carriers, whether carried on by water or by land. "2. The lphrase 'among the several states' marks the distinction, for the purpose of governmental regulation, between commerce which concerns two or _ore states and commerce which is confined to a single state and does not affect other states,— the power to regulate the former being conferred upon Congress and the regulation of the latter remaining with the states severally. "3. 'To regulate,' in the sense intended, is to foster, protect, control, and restrain, with appropriate regard for the welfare of those who are immediately concerned and of the public at large. 114, This power over commerce among the states, so conferred upon Congress, is complete in itself, extends incidentally to every instrument and agent by which such commerce is carried on, may be exerted to its utmost extent over every part of such commerce, and is subject to no limitations save such as are prescribed in the Constitution. But, of course, it does not extend to any matter or thing which does not have a real or substantial relation to some part of such commerce." (Italics supplied) That these considerations apply as much to the instruments as to the agents of such commerce, is shown bj the brilliant passage which immediately follows in the opinion (p. 174) : "As is well said in the brief prepared by the late Solicitor General: 'Interstate commerce—if not always, at any rate when the commerce is trans-oortation—is an act. Congress, of course, can do anything which, in the exercise by itself of a fair discretion, may be deemed appropriate to save the act of interstate commerce from prevention or inter- L-9 -45ruption, or to make that act more secure, more reliable, or more efficient. The act of interstate commerce is done by the labor of men and with the help of things ; and these men and thngs are the agents and instruments of the commerce. If the agents or instruments are destro yed while they are doing the act, commerce is stopped; if the agents or instruments are interrupted, commerce is interrupted; if the agents or instruments are not of the right kind or quality, commerce in consequence becomes slow or costly or unsafe or otherwise inefficient; and if the conditions under which the agents or instruments do the work of commerce are wrong or disadvantageous, those bad conditions may and often will prevent or interrupt the act of commerce or make it less expeditious, less reliable, less economical, and less secure. Therefore, Congress may legislate about the agents and instruments of interstate commer ce, and about the conditions under which those agents and instru ments perform the work of interstate commerce, whenever such legislation bears, or, in the exercise of a fair legisl ative discretion, can be deemed to bear, upon the reliability or promptness or economy or security or utility of the interstate commerce act." (Italics supplied) If banks are destroyed, commerce is stopped; if banks are suspended, commerce is interrupted; if banks are not of the right kind or quality, commerce in consequence becomes slow or costly or unsafe or otherwise inefficient"; and if the laws, regulations and suerv ision under which banks perform their functions are wrong or inadequate, "these bad conditions may and often will revent or interrupt the act of commerce or make it less expeditious, less reliable, less economical, and less secure". Therefore, it would seem that Congress may legislate about banks as agents and instruments of interstate commerce and may .- prescribe the conditions under which banks . - perform the work of finally consummating transa ctions in interstate comlaerce, "whenever such legislation bears, or, in the exercise of a fair legislative discretion, can be deemed to bear, upon the reliability or promptness or economy or security or utility" of the act of interstate comierce. L-9 - 46 The fundamental incentive for interstate commerce is profit; and no transaction in interstate commerce is finally consummated until 7)ayment has boon received for the goods which have been sold and shipped. In nruly instances, the very act of shinping goods in interstate commerce is inseparably connected with the forwarding, through a series of banks, or bills of lading attached to bills of exchange which must be -paid or acce-)ted before the goods are released. The ultimate payment which consti- tutes the object and the final act of nearly every transaction in interstate co:nmerce is made by means of a check drawn upon a bank in one State in favor of a oayee in another State; and such checks are forwarded for collection through a series of banks scattered over at least two, and frequently more, different States. Banks, therefore, are essential instru- mentalities of interstate commerce. Nearly every bank failure delays or prevents the final consummation of numerous transactions in interstate commerce by preventing or delaying the payment of the checks given in settlement therefor; and Congress clearly would be justified in finding that a heterogeneous banking system in which there have been more than 10,000 suspensions involving deposits amountin g to nearly 5 billion dollars since 1920, is a burden upon and an obstructi on to interstate commerce. Since "Congress * * * can do anything which, in the uxerci:,e by itself of a fair discretion, may be deemed ao-nropriate to save the act of interstate commerce from nrevention or interruption, or to make the act more secure, more reliaJle, or more efficient", it would seem clear that Congress can create a unified banking system in order to remove such an - 47 - L-S obstruction and burden to interstate commerce. In Houston, etc. R. Co. v. United States (1914), 234 U. S. 342, 34 Sup. Ct. 833, wherein the Supreme Court sustained the validity of an Act of Congress regulating purely intrastate freight rates when such rates were foune. by the Interstate Commerce Commission to interfere with interstate rates, the Court said: (p. 836) "It is unnecessary to repeat what has frequently been said by this court with respect to the complete and paramount character of the power confided to Congress to regulate commerce among the several states. It is of the essence of this power that, where it exists, it dominates. Interstate trade was not left to be destroyed or impeded by the rivalries of local government. The purpose was to make impossible the recurrence of the evils which had overwhelmed the Confederation, and to provide the necessary basis of national unity by insuring 'uniformity of regulation against conflicting and discriminating state legislation.' By virtue of the comprehensive terms of the grant, the authority of Congress is at all times adequate to meet the varying exigencies that arise, and to protect the national interest by securing the freedom of interstate commercial intercourse from local control." (Italics supplied) It has been recognized that one of the principal reasons for subjecting interstate commerce than local regulation and matters related to it to National rather is the fact that interstate commerce "is of National importance, and admits and requires uniformity of regulation." Walton v. Missouri (1)376), 91 U. S. 275. In Yondou v. New York, N. H. & H. R. Co., supra, the court said: (p. 175) "We are not unmindful that that end was being measurably attained through the remedial legislation of the several states, but that legislation has been far from uniform, and it undoubtedly rested with Congress to determine whether a national law, operating uniformly in all the states, upon all carriers by L-9 -48railroad engaged in interstate commerce, would better slibserve the needs of that commerce." (Italics supplied) Obviously the same nrinciple applies to banks or a banking system which Congress has created. See Easton v. Iowa, sunra, wherein the Court said that the national bank legislation "has in view the erection of a system extending throughout the country, and independent so far as powers conferred are concerned, of State legislation which, if permitted to be ay?licable might impose limitations and restrictions as various and as numerous as the States". It is not only within the power of Congress, therefore, to create a unified banking system in order to remove existing impediments and obstructions to interstate commerce resulting from the existence of 48 different State banking systems, but it is also right, meet and proper for Congress to do so, since the object is a N tional one which can be dealt with effectively only by the National legislature. This conclusion is not based upon the theory that the banking business is itself commerce, but upon the fact that banks are instrumentalities of interstate commerce and that an unsound and unsatisfactory banking system is a burden upon and an imediment to interstate commerce. If, therefore, Congress decides to solve this problem through the exercise of its powers over interstate commerce and as a means to removing an obstruction to interstate commerce, it need not confine the legislation to transactions of an interstate character, but may legislate for the banking system as a whole; since every commercial bank actually functions as an instrumentality of interstate commerce and every failure of a commercial bank obstructs and impedes the consummation of numerous transactions in interstate commerce. — 49 — L-2 The effective regulation of interstate commerce requires the regulation of some matters which in and of themselves are not interstate commerce, but which have a direct relationship to such commerce. In 3ther words, if the transaction which is of itself purely intrastate is a vital part of interstate coouerce, the regulation of that transaction may be undertaken by Congress under the Commerce Clause. In Stafford v. Wallace (1922), 258 U. S. 495, 42 Sup. Ct. 397, the Court considered the validity of an Act of Congress which, among other things, provided for Federal supervision and control of stockyards. The Court found that, although many of their transactions are purely local, the business of the .-L)ackers and of the stockyards is an integral and essen— tial part of the interstate commerce in live stock and meat, and accordingly held the statute to be a valid exercise of the power conferred on Congress by the Commerce Clause. In rendering the opinion of the Court, Mr. Chief Justice Taft said (pp. 517, 521): "* * * The only question here is Whether the business done in the stockyards, between the receipt of the live stock in the yards and the shipment of them therefrom, is a Dart of interstate commerce, or is so associated with it as to bring it within the power of national regulation. A similar question has been before this court and had great consideration in Swift v. United States, 196 U. S. 375, 25 Sup. Ct. 276, 49 L. Ed. 518. The judgment in that case gives a clear and comprehen— sive exposition, which leaves to us in this case little but the obvious application of the principles there declared. ** ** ** ** ** ** "* * * Whatever amounts to more or 4ss constant practice, and threatens to obstruct or unduly to burden the freedom of interstate co=erce is within the regula— S — 50 — tory power of Congress under the commerce clause, and it is primarily for Congress to consider and dc— cide the fact of the danger and meet it. This court will certainly not substitute its judgment for that of Congress in such a matter unless the relation of the subject to interstate commerce and its effect upon it are clearly non—existent." (Italics supplied) Two cases dealing with Congressional legislation regarding grain futures markets have an important bearing not only upon the right of Con— gress to regulate the commercial banking business in order to prevent an obstruction to interstate commerce but also upon the proper method of preparing such legislation. In the first of these cases, Hill v. Wallace (1922), 259 U. S. 44, 42 Sup. Ct. 453, an Act of Congress designed to regulate the conduct of business of Boards of Trade through the exercise of the power of taxation was held to be unconstitutional. In Board of Trade v. Olsen (1923), 262 U. S. 1, 43 Su:Q. Ct. 470, however, the Court upheld the validity of a statute having the same object, on the Ground that it was intended to remove an obstruction or interference with interstate commerce in the form of price manipulation and control in these markets. Unlike the statute held unconstitutional in Hill v. Wallace, the statute which was sustained as constitutional in Board of Trade v. Olsen clearly stated its relation to interstate commerce. It contained a recital and finding of the facts disclosed in the hearings and committee reports, to the effect that transactions in grain involving sales for future delivery as commonly conducted on boards of trade are affected with a 1Tational public interest and that they are susceptible of s-peculation, manipulation and con— trol resulting in fluctuations in prices which constitute an obstruction to and a burden upon interstate commerce in grain. L-9 - 51 With certain exceptions, the Act forbade boards of trade to use the mails or interstate telephone, telegraphic, wireless, or other communication in offering or accepting sales of g.'ain for future delivery or to disseminate prices or quotations thereof, unless such boards of trade are located at terminal mE'rkets which have been designated by the Secretary of Agriculture as contract markets, comply with certain regulations and restrictions contained in the Act, and submit to the supervision of the Secretary of Agriculture. In rendering the opinion of the Court sustaining the constitutionality of the Act, Mr. Chief Justice Taft said (282 U. S. 31-41, 43 Sup. Ct. 475-479): "Appellants contend that the decision of this Court in Hill v. 7allace, 259 U. S. /111, is conclusive against the constitutionality of the Grain Futures Act. Indeed in their bill they -oleaded the judgment in that case as res judicata in this, as to its invalidity. The act whose constitutionality was in question in Hill v. Wallace was the Future Trading Act (c. 86, 42 Stat. 167). It was an effort by Congress, through taxing at a prohibitive rate sales of grain for future delivery, to regulate such sales on boards of trade by exempting them from the tax if they would comply with the congressional regulations. It was held that sales for future delivery where the parties were present in Chicago, to be settled by offsetting purchases or by delivery, to take place there, were not interstate commerce and that Congress could not use its taxing ower in this indirect way to regulate business not within federal control." ** ** ** ** ** ** 'The Grain Futures Act which is now before us differs from the Future Trading Act in having the very features the absence of which we held in the somewhat carefully framed languabe of the foregoing prevented our sustaining the Future Trading Act. As we have seen in the statement of the case, the act only lurports to regulate interstate commerce and sales of grain for future delivery on boards of trade because it finds that by manipulation they have become a constantly recurring 51.". burden and obstruction to that commerce. Instead, therefore, of being an authority against the validity of the Grain Futures Act, it is an authority in its favor." ** ** ** ** ** ** "It is impossible to distinguish the case at bar, so far as it concerns the cash c,rain, the sales to arrive, and the grain actually delivered in fulfi llment of future contracts, from the current of stock shipments declared to be interstate commerce in Stafford v. Walla ce, 258 U. S. 495, 42 Sup. Ct. 397, 66 L. Ed. 735. That case presented the question whether sales and purchases of cattle made in Chicago at the stockyards by commi ssion men and dealers and traders under the rules of the stockyards corporation could be brought by Congress under the supervision of the Secretary of Agriculture to prevent abuses of the commission men and dealers in exorb itant charges and other ways, and in their relations with packers prone to monopolize trade and depress and increase prices thereby. It was held that this could be done, even though the sales and. purchases by commi ssion men and by dealers were in and of themselves intra state commerce, the parties to sales and purchases and the cattl e all being at the time within the city of Chicago. " ** ** ** ** ** ** "This case was but the necessary consequence of the conclusions reached in the case of Swift & Co. V. United States, 196 U. S. 375, 25 Sup. Ct. 276, 49 L. Ed. 518. That case was a milestone in the inter pretation of the commerce clause of the Const itution. It recognized the great changes and development in the business of this vast country and drew again the dividing line between interstate and intra state commerce where the Constitution intended it to be. It refused to permit local incidents of great interstate movem ent, 7hich taken alone were intrastate, to characterize the movement as such. The Swift Case merely fitted the commerce clause to the real and practical essence of moder n business growth. It applies to the case before us just as it did in Stafford v. Wallace." ** ** ** ** ** ** "In the act we are considering, Congress has expressly declared that transactions and prices of grain in dealing in futures are susceptible to specu lation, manipulation, and control which are detrimental to the producer and con- L-9 sumer and persms handling grain in interstate co,Amerce and render reculation imnerative for the protection of such commerce and the national public interest therein. "It is clear fro41 the citations, in the statement of the case, of evidence before committees of investigation as to manipulations of the futures market and their effect, that we would be unwarranted in rejecting the finding of Congress as unreasonable, and that in our inquiry as to the validity of this legislation we must accept the view that such maninulation does work to the detriment of producers, consumers, eainpers and le,j_timate dealers in interstate commerce in grain and that it is a real abuse. ** "* * * The question of nrice dominates trade between the states. Sales of an article which affect the countryride price of the article directly affect the country-wide commerce in it. By reason and authority, therefore, in determining the validity of this act, we are orevented from questioning the conclusion of Congress that manipulation of the market for futures on the Chicago Board of Trade may, and from time to time does, directly burden and obstruct commerce between the states in grain, and that it recurs and is a constantly possible danger. For this reason, Congress has the power to provide the annronriate means adopted in this act by which this abuse may be restrained and %L.' (Italics supplied) Likewise, if Congress finds that our present banking system, whiCh has given rise to more than 10,000 bank failures since 1920, which necessarily have delayed and obstructed the consummation of innumera ble transaction3 in interstate commerce, is a burden upon and obstruction to interstate commerce, the Supreme Court would not be warranted in rejecting the finding of Congress as unreasonable or in concluding that legislation designed to correct this situation and remove vach an obstruction to interstate commerce is not a proDer exercise of the power to reGulate commerce among the States. If the purchase and sale of cattle by commission men, dealers and traders at the Chicago stock yards, and the sale of grain for future de- — 54 — L-9 livery on the Chicago Board of Trade and the dissemination of prices and quotations thereof, can be brought by Congress under the supervision of the Federal Government, on the ground that abuses in such business constitute obstructions to interstate commerce, it seems clear that the transaction of a commercial banking business, involving the payment of checks given in settlement of transactions in interstate commerce and the handling of innumerable bills of exchange secured by bills of lading growing out of transactions in interstate commerce, can also be brought under the supervision of the Federal Government. Such cases as Hammer v. Dagenhart (1918), 247 U. S. 251, 38 Sup. Ct. 529, and Bailey v. Drexel Furniture Company (1922), 259 U. S. 20, 42 Sup. Ct. 449, need not be distinguished in detail; because they relate to Fed— eral legislation wherein Congress attempted to deal with purely local ques— tions having no essential connection with interstate commerce; whereas com— mercial banking is a matter of National rather than local concern and is essentially connected with, and inextricably related to, interstate commerce. Federal legislation to relieve interstate commerce of the impedi— ments and obstructions resulting from a heterogeneous and inefficient bank— ing structure would not constitute an invasion of the rights of the States; because it would relate to a subject which the fathers of the Constitution clearly intended to intrust to the National Government, in order that we might have a Nation and not a mere confederation of States and in order that the free flow of commerce between the different parts of the Nation might not be impeded by State legislation. L-9 - 55 The importance of ban!zing as an indispensable aid to commerce has already been recognized by the Supreme Court of the United States in the case of "Zoble State Bank v. Haskell (1911), 219 U. S. 104, 31 Sup. Ct. 186, wherein the Court said, through Mr. Justice Holmes (p. 188): 11* * * Among matters of that sort probably few would doubt that both usage and preponderant opinion give their sanction to enforcing the primary conditions of successful com,lerce. One of those conditions at the present ti=e is the -oossibility of payment by cheeks drawn ar;ainst bank: deposits, to such an extert do checks replace currency in daily business. * * * Even the primary object * * * is not a private benefit, * * * but it is to make the currency of checks secure and by the same stroke to make safe the almost compulsory resort of depositors to banks as the only available means for keutoing money on hand. * * * " (Italics supplied) It is appropriate and in accordance 7ith the fundamental principles of our Government for Congress to undertake the task of maldng he currency of checks secureo;because it is essential to the free and unhampered flow of commerce between the States, the regulation of which is intrusted to Congress alone by the Constitution. If Congress should decide that more effective regulation and supervision of the commercial banking business is desirable in order to make the currency of checks secure, it is peculiarly fitting and proper that Congress should i.z‘dertake to provide that remedy; because the problem is not a local one but relates directly to matters of National concern which are expressl y intrusted to Congress by the Constitution. In the case of United States v. Ferger (1919), 250 U. S. 199, the Supreme Court of the United States sustained the constitutionality of Section zsl of the Act of August 29, 1916, (39 Stat. 538), which provides for L-9 — 56 — the punishment of any person who forges or counterfeits a bill of lading, even though that section applies to cases where no shipment from one State to another is made or intended. The Court held that, in order to protect and sustain interstate commerce, Congress may prohibit and punish the for— gery and utterance of -Ails of lading for fictitious shipments in inter— state commerce. In delivering the opinion of the Court, Mr. Chief Justice White said (250 U. S. 203-205): U * * * Thus both in the pleadings and in the contention as summarized by the court below it is insisted that, there was and could be no commerce in a fraudulent and fictitious bill of lading, therefore the power of Congress to regulate commerce could not embrace such pretended bill. But this mistakenly assumes that the power of Conpxess is to be necessarily tested by the intrinsic eAstence of commerce in the particular subject dealt with, instead of by the relation of that subject to commerce and its effect upon it. We say mistakenly assumes, because we thinl: it clear that if the proposition ,-,ere sustained it would destroy the power of Congress to regulate, as obviously that power, if it is to exist, must include the authority to deal with obstructions to interstate canmerce (In re Delps, 158 U. S. 564) and with a host of other acts which, because of their relation to and influence uponinterstate commerce, come within the Dower of Conrress to regulate, althcry4h the;, are not interstate commerce in and of them— selves. It would be superfluous to refer to the author— ities which from the foundation of the Government have measured the exertion by Congress of its power to regulate commerce by the principle just stated, since the doctrine is elementary and is but an expression of the text of the Constitution. Art. I, Sec. 8, clause 18. A case dealing with a somewhat different exercise of power, but affording a rood illustration of the ap-.)lication of the principle to the subject in hand, is First National Ba: v. Union Trust Co., 244 U. S. 416. ** L-9 " * * * That, as instrumentalities of interstate commerce, bills of lading are the efficient means of credit resorted to for the purpose of securing and fructifying the flow of a vast volume of interstate commerce upon which the commercial intercourse of the country, both domestic and foreign, largely depends, is a matter of common knowledge as to the course of business of which we may take judicial notice. Indeed, that such bills of lading and the faith and credit given to their genuineness and the value they represent are the producing and sustaining causes of the enormous number of transactions in domestic and foreign exchange, is also so certain and well known that we may notice it without prof. "With this situation in mind the question therefore is, Tas the court below right in holding that Congress had no power to prohibit and punish the fraudulent making of spurious interstate bills of lading as a means of pro— tecting and sustaining the vast volume of interstate com— merce operating and moving in reliance upon genuine bills? To state the question is to manifest the error which the court committed. * * * It proceeds further, as we have • already shown, upon the erroneous theory that the credit and confidence which suatains interstate commerce would not be lgpaired or weakened by the unrestrained right to fabricate and circulate murious bills of lading apparently concerning such commerce. Nor is the situation helped by saying that as the manufacture and use of the spurious interstate com— merce bills of lading were local, therefore the power to deal with them was exclusively local, since the proposition disregards the fact that the spurious bills were in the form of interstate commerce bills which in and of themselves in— volved the notentiality of fraud as far—reaching and all— embracing as the flow of the channels of interstate commerce in which it was contemplated the fraudulent bills would cir— culate. As the power to regulate the instrumentality was coextensive with interstate commerce, so it must be, if the authority to regulate is not to be denied, that the right to exert such authority for the purpose of guarding against the injury which would result from the rnaing and use of spurious imitations of the instrumentality must be equally extensive." (Italics supplied) The reference to the Court's decision in the case of First National Bank v. Union Trust Company, which appears at the end of the first paragraph quoted from the opinion in the Ferger case, is significant; because that is the case discussed elsewhere in this opinion, wherein the Supreme Court 58 — upheld the riht of Congress to grant trust powers to National banks in order to enable them to compete with State banks and trust companies. While that case dealt with a somewhat diff erent exercise of power, the Supreme Court recognized that it afforded a good illustration of the application of the principle to the subj ect dealt with in the Ferger case. Conversely, it would seem that the court would not hesitate to apply the principle underlying its decision in the Ferger case to the subject of banking. If bills of lading are instrumentalities of interstate commerce, so are checks and the banks upon which they are dram?, and if Congress has the right to prohibit and to punish the fraudulent making of spurious bills of lading in order to protect and sust ain the vast volume of interstate commerce operating and moving in reliance upon genuine bills, then Congress must have the right to enact legi slation to safeguard the use of checks in order to protect and sustain the vast volume of interstate commerce which is consummated by payments made by mean s of checks. Since the safe use of checks depends primarily upon the solv ency of the banks upon which they are drawn, Congress must have the righ t to enact legislation to promote the safer and more effective oper ation of commercial banks. Nor is Congress prevented from exercisi ng this power by the fact that part of the business of commerci al banks is purely local in character; but the power to regulate intersta te commerce "must include the authority to dcal with obstructions to interstate commerce * * * and with a host of other acts which, because of thei r relation to and influence upon inter— state commerce, come within the powe r of commerce to regulate, although • • L-9 59 they a2e not interstate co.nmerce in and of thamselves." If Congress in its wisdom should find that our heterogeneous bankir..g JtrlIcture, which has given rise to more than 10,000 bank failures in the last twelve years, constitutes a burden .mon or an obstruction to interstate commerce, therefore, there can be no doubt that Congress has the constitutional :power to correct the situation by bringing all commercial banking business into a sinc;le gystem subject to effective regulation and su)ervision by the Federal Government, to the end that the currency of checks upon Which practically every transaction in interstate commerc e deDends for its consummation may be made more secure. IV. METHODS '7ICH COULD BE ADOPTED. Having the power to enact such legislation, Congress could exercis e the -oower in any manner whf_ch it deems anropriate and adequate for this purpose. It is aot necessary that the legislation assume the form of a revenue act or an act to regulate interstnte commerce, though either of these means wold be ap-)ropriate. In the light of the decisions of the Supremo Court of the United States in Stafford v. Wallace, and Board. of Trade of Chicago v. Olsen, however, it would be desirable for such legislation to contain findings of fact and a recital of the Nntiona l objects to be attained, as did the Grnin Futures Act. Among the constitutional means which Congress could ado-A in order to acoomplish these objects or to aid in their accompl ishment are the following: 1. It could forbid the receipt of deposits subject to withdrawal by check by any individual, partnership or corporation other than a bank organized u]Zier the laws of the United States and provide suitable penalties for violations 2. of this prohibition. It could iirpose a prohibitive tax on all checks and similar documents drawn on, or payable at, banks not organized under the laws of the United States. 3. It could forbid any officer of the United States or any Federal reserve bank, National bank, Federal land bank, Joint Stock Land Bank, Federal Intermediate Credit Bank, or Federal Home Loan Dank to receive in ;Payment, on deposit, for the purposes of exchange or collection, or for any other purpose, any check drawn upon any bank not organized under the laws of the United States. 4. It could forbid any bank organized under the laws of the United States to make loans or extend credit to, or deposit any of its funds in, or permit the use of any of its facilities by, any commercial bank not organized under such laws. 5. It could forbid the deposit of public funds of the United States in any bank not organized under the laws of the United States. 6. It could exempt all National banks from taxation, State or Fed- eral, except taxes on real estate. In order to be completely effective, the legislation could combine several of the measures suggested above. this subject might include the follo7ing: Thus, a comprehensive bill on - 61 - (1) L-9 ress (on the basis of evidence A finding of facts by the Cong r evidence te Resolution No. 71 and othe already obtained pursuant to Sena for that, in order (a) to provide which may be produced) to the effect and n of the National Banking System the safe and more effective operatio benepreserve for the people the full the Federal Reserve System, (b) to the Congress, and (c) to relieve fits of the currency provided for by the and obstructions resulting from interstate commerce of the burdens iving to restrict the business of rece existing situation, it is necessary to k to National banks and thereby deposits subject to withdrawal by chec superto National regulation and subject all commercial banking business vision; (2) deposits subject to A prohibition against the receipt of nized under the laws of the United withdrawal by check except by banks orga States; (3) of the United States or A prohibition against any officer payof the United States receiving in any bank organized under the laws ection, or for any other purpose, ment, on deposit, for exchange or coll nized under such laws; any check drawn upon any bank not orga (4) nized under the laws of the A prohibition against any bank orga g credit to, depositing any of its United States making loans or extendin al of its facilities by, any commerci funds in, or permitting the use of any r such laws; banking institution not organized unde (5) on all checks or subA provision imposing a prohibitive tax at any bank not organized under stitutes therefor drawn upon or payable r „9 — 62 — ho of the United Statv; and (6) A. provision prescribing suitable penalties for violations of the above provisiins. If such legislation is enacted, its effective date necessarily would have to be loostooned for a sufficient length of time to avoid too 'sudden and revolutionary a change in our existing financial strlacture and to allow time for existing State banks to adjust themselves to the situation, by converting into National banks or discontinuing the transaction of apm— mercial bailking business. The time intervening between the enactment of such legislation and the date when it becomes effective could be devoted to the preparation and enactment of additi=1 legislation fief' the purpose of providing further for the more effective operation, regulation and supervision of the Nation/1:4' Banking System and the Federal Reserve System, by repealing undesirable amendments to the National Bank Act and Federal Reserve Act which grew out of the competition in laxity, equil-Ting the supervisory authorities with adequate powers to enable them to perform their functions more effectively, and adopting such other measures as might be deemed ayoropriate. Respectfully, Walter Wyatt, General Counsel. /14t. December 31, 1932. CONFIDEITTIAL PR-MIMI:NARY I\MAGRANDULI FOP. THE OPEN MARKET POLICY CCNITER aT CE, LANUARY 4, 1933. When the decision was made last February to begin open market purchases of securities the primary aim of the policy as revealed in the discussions was to check the unprecedented liquidation of bank credit which was exerting a seriously depressing influence on business and on prices. It was hoped that purchases of Government securities would enable member banks to pay off indebt— edness and accumulate some excess reserves, with the con.sequence that the pressure to liquidate might be lessened and a moderate expansion of bank credit might occur, which would exert sane influence in the direction of a recovery in business and in commodity and bond. prices. In the first half of the year funds made available by. open market operations were largely absorbed by gold exports land currency hoarding, but in the second half of the year both these mcrement s were reversed and, with the discontinuance of open market purchases, currency returns and gold imports were largely responsible far building up excess reserves and so became the active Iact or s operat ing towards the object ives ;Jai ch had been set for open market operations. Chanfies in Credit and Business There have been substantial results towards achieving the objectives outlined above. These results may be summarized as follows: (1) Member bank borTowim. When the open market policy was under discussion doubts were expressed as to the possibility of reaching the member banks outside of principal canters, whose borrowings accounted for a major part of reserve bank discounts. Since February 24 when purchases of government secur— ities were begun discounts have been reduced from RM3236 835,000,000 to ,.:3265,000,000. 2314 • BILLIONS OF DOLLARS 23 • tm?nt ••;-"' 7;/93?- - 1111FfIII WEEKLY REPORTING BANKS 22 21 LOANS & INVESTMENTS 19 -4 1 Mr1 MILLIONS OF DOLLARS 1000 111 . 111 1 . ALL MEMBER BANKS 800 I ev e‘v/ I I 600 %, BORROW!NGS k FROM F. R. BANKS I I I 400 1 k A 0 \•4°'`4 ,\ • I .4WO . SemilibNee 1,..ir 200 .... 1 14° J EXCESS RESERVES A SONDJFM AMJ JA SOND 1931 1932 laces! Reserves and indebtedness of All Lombor Banks, Compared with Loans and li.vestments of Weekly Renortint Banks 2 (2) Bank credit. Loans and investments of the reporting banks stopped declining in July and since that time have increased by $500,000,000. The in- crease was wholly in government securities though other fonms of credit have shown greater stability. The increase also was concentrated in New York, but in other parts of the country the decline in credit has been chocked. (3) Bond market. The bond market made a recovery of about 25% and then lost approximately half the gain. The reaction was followed by a number of weeks of relative stability, and there is now some evidence of renewed strength. In recent weeks buying of lone: term government securities by banks, insurance companies and investors has resulted in new high prices since the autumn of 19a, and this buying movanent appears to be spreading into other parts of the bond market. The prospects for an improved bond market are better than for some weeks past. (4) Commodity prices. Commodity prices rose about 3 per cent and sub- sequently lost all of this gain, reflecting in part the pressure of depreciated currencies upon world prices, and especially the weakness of sterling. While de- preciation of currencies has tended. to increase or stabilize domestic paper prices it has depressed world. gold prices by reducing the buying power of countries with depreciated currencies, and decreasing their production costs so they can sell at lo-:7er gold prices. (5) Rosiness. The volume of business as measured by production indexes rose about 14 per cent but has lost part of this gain. The present situation may be summarized by saying, that a good start was made toward recovery, that this movement has been interrupted, and is now hesitant and uncertain. The impr overlent in sentiment is perhaps even more marked than the improvement in the statistics; in recent weeks. but in -this respect also some ground has been lost Precedents in Earlier_ Depressions Whether or not these developments in business and in prices are to be viewed as disappointing depends very largely upon expectations. A camparison of recent developments with those of previous periods of depression shows that recent events have followed much the usual pattern of business recovery from depression which is usually highly irregular and uncertain in the early stages. The accompanying series of charts indicates the sequence of events in the more important depressions of the past fifty years. The anount of excess reserves that accumulated in New York banks in each of these periods, and the lapse of time before a sustained recovery in prices and in business activity got under way are summarized in the succeeding table. Excess reserves - N. Y. City Banks Amount ($ million) Period Per cent of Requirements 1884-185 1893-194 1896-'97 1908 1921-!22 26 to 64 34 to 67 39 to 100 37 to 74 33 to 55 25 to 38 30 to 58 11 to 18 (Practically none; borrowings equal to 1 1/2 times reserve requirements retired) 1932 (since Tuly ) 100 to 300 14 to 40 Lapse of time until .sustained rise in bond prices began 1884-185 1893-194 1896-197 1908 1921-/22 _ - about 6 months practically none none practically none within 3 months of substantial reduction in bank indebtedness. Lapse of time until sustained rise in business activity began 1884-185 - nearly a year and a half 1893-'94 - about 10 months 1896-197 - about 10 months _ about 6 months 19081921-122 - about 6 months after substantial reduction in bank indebtedness PERCENT +75 PER CENT +75 PER CENT +50 +50 +50 +25 +25 +25 RESERVE POSITION OF N.Y.CITY BANKS 0 MILLIONS 01$ 400 -25 MILLIONS OF $ 600 .• 350 DEPOSITS OF N.Y. CITY BANKS 300 PRICE 140 BOND PRICES 80 60 —STOCK PRICES PER CENT +20 +10 NORMAL - 10 120 80 •.% • •‘.. 60 PER CENT STOCK PRICES +20 1 06 BUSINESS ACTIVITY_ 100 4 1910-1914.400 1883 1884 1885 0 RESERVE POSITION — OF N.Y. CITY BANKS BILLIONS OF $ 1.6 1.2 .=••• N.Y. CITY BANKS 1886 -100 BIL _ ONS OF S 7..5 ) 'STOCK PRICE5- DEPOSITS 4.0 +10 OF N.Y. CI T Y BANKS BOND PRICES STOCK PRICES BUSINESS ACTIVITY NORMAL -10 -20 1— PER CENT 250 -10 5.) PRI EM 16 )1 k `--3 STOCK PRICES 13 ) L 1 ) BOND PRICES • • 7) t...., I 4) PER CENT NORMAL 1 ) 3 -4 1 PER CENT 14 ). 200 150 12 Bob — WHOLESALE PRICES — 601 1910-1914.100 1907 1908 1909 100 10 1 WHOLESALE PRICES 50 mo-ist4i0o 1920 1921 1922 T BUSINESS ACTIVITY -2 -20 PER CENT 100 • •F N.Y. CITY BANKS 6. 1 BUSINESS ACTIVITY NORMAL DEPOSITS 7.( 6.) 50 --PER CENT +20 80 WHOLESALE PRICES 1896 1897 PER CENT +5 RESERVE POSITION OF N.Y.CITY BANKS +2 (BEFORE BORROWIN FROM F. .BANK) 70 1 BOND PRICES 401 PER CENT t10 40 1-PER CENT 50tRESERVE POSITION OF N.Y.CITY BANKS 0 (BEFORE BORROWING FROM F.R.BANK Aid NM 3.5 PRICE 90 0.8 601 60 WHOLESALE PRICES 40 1910-1914-100 1893 1894 1895 45 DEPOSITS or TO -20 PER CENT 80 r----1910-1914-100. -150 BILLIONS ors 5.0 lA BOND PRICES -10 -- PER CENT +25 100 BUSINESS ACTIVITY-NORMAL 60 j S- . 60 PER CENT +10 BUSINESS 0 ACTIVITY -20 PER CENT 80 WHOLESALE PRICES 1.0 80 10 120 DEPOSITS SI N.Y.P° CITY 140 .100 + 10 OF PRICE 1 60 BOND PRICES 1 20 25 400 300 — • PRICE 140 — 100 60 500 DEPOSITS OF N. Y. CiTY BANKS 400 80 600 500 120 -20 PER CENT 140- 0 ESERVE POSITION OF N.Y. CITY BANKS -25 MILLIONS 01$ 700 RESERVE POSITION OF N.Y. CIT BANKS 0 Federal Reserve Omit of New York Reports Department , 193Z. VV./ 8 Sequence of Events in Periods of Depressice WHOLESALE PRICES I 1910-1914« 100 -- 1 193 1933 a Lapse of time until sustained rise in commodity _prices began 1884-'85 1893-'94 1896-'97 1908 1921-'22 over two years limited rise after at least 1 1/2 years about one year gradual rise within 3 months; more rapid after 1 year - about a year after substantial reduction in bank indebtedness - Present and. Prospective Reserve Position. Excess reserves of member banks have generally been maintained since the November meeting of the conference at something above $500,000,000. Christmas currency demands proved smaller than were expected, and gold receipts which included the 95,550,000 debt payment of the Et'itish Government were larger than had been expected. Hence the member banks come to the end of the year with between $500,000,000 and $600,000,000 of excess reserves. after the turn of the year. This figure will be increased It remains to be seen how large the return flow of currency will be for we do not 'mow whether the small Christmas takings of currency were due wholly to the depressed conditions or reflected some return of money from The gold flow is definitely tav.-ard this country. hoard ing. From these two causes a gain to reserves may be anticipated in the next six weeks of anywhere from $200,000,000 to $400,000,000, in the absence of any unusual circirastances. In determining the effectiveness of any .ven amount of excess reserves in constituting pressure for the employment of finds several considerations appear important. (1) Location. Excess reserves are now largely concentrated in Ne and Chicago as shown on the attached chart. In both these cities, however, York the increase in excess reserves has been paralleled by an increase in amounts "due to banks" so that the excess funds really represent largely funds of out-of-town banks and the pressure to put these funds to work rests not alone on the TTe",-.. York and Chicago banks but on the banks generally throughout the country, The excess — Fedeiat Reportu axiz(3 NEW YORK CITY MILLIONS 1800 CHICAGO MILLIONS 1( 00 OTHER WEEKLY REPORTING BANKS MILLIONS 1600 MIL L IONS 1000 MILL 106L5 10. DUE TO 4-- Icoie 1600 Ill 800 1400 1400 00 600 1200 DU 800 DUE FROM .r: TO 00 1200 400 1000 DUE TO _ 1000 00 200 800 E XCESS RESERVES EXCESS RESERVES 800 200 EXCESS RESiERVES C 600, 1932 Excess Reserves and Amounts Due to Banks and Due from Banks of Weekly Reporting Banks in New York City, Chicago, and other Centers 1932 • 5 of reserves is thus widespread in its influence. (2) Time. The experience of the past summarized in a previous chart indicates that the effectiveness of excess reserves depends in part on the length of time they are hold. In previous periods of depression it has frequently taken six months to a year for very large amounts of excess reserves to find reflection in business. (5) Assurance of Continuance. The use of reserves depends in part on the confidence the banks feel in their continuance. In the pre-war days it was believed that excess reserves would continue until they were used; mechanim for absorbing them. there was no In recent months there has been =certainty as to the effects on excess reserves of Federal reserve policy or possible demands. upon the banks. Foreign Influence. During the year influences from abroad have been iwi.)ortant and at times dominating. Early in the year gold withdrawals were disturbing. When the gold movement turned ,strengthening our position but weakening the European position, depreciating exchanges became a depressing influence on world prices as noted above. The debt uncertainties were a disturbing influence second only to the political campaign. Debts, Prices, and Recovery. While the financial and business situation shows now a considerable improvernent from the position of mid-suurner the improvement is not sufficient and the direction of movement is not sufficiently well established to assure a solution to the major economic problem which confronts this country and other countries as well. That problem is whether the economic structure to conform to something like the present whether must be readjusted price level and volume of business or we may expect in a reasonable period of time sufficient advance from • • • 6 the present price level and sufficient resuraption of business activity so that a general readjustment of debts vrill not be necessary.. The condition of panic vthich prevailed last spring has been checked but the critical problem of prices and debts remains. It is clear that a continuance of the present price level and the Present volurae of business activity would involve a vast readjustment of the entire debt structure, including readjustment of a number of banking situations. The question arises whether the grinding process of deflation of recent mcnths must continue or whether it would be preferable to move decisively either for a more rapid deflation or for some measure of inflation. The improva.ne:nt which took place frcm mid-sumer into the autumn gave some reason to hope that recovery might go far enough and rapidly enough to relieve greatly the weight of debts. not. The quest ion now is whether that recovery can be resumed or The qu.estion is cannlicated by widespread public and political interest both in this caintry and abroad so that every decision in the field becomes in some sense a political quest ion. , 1.4-‘ 1144 • January 3, 1933 R.& S. Cr. 3 CONFIDENTIAL • BUSINESS AND CRTUT CONDITIONS Some of the factors in the business and credit situa tion to be considered in deciding on an open-market program are discussed in the following paragraphs. Business activity Business activity, after increasing substantially between July and September, has been relatively stable since that time, except for seasonal movements. Industrial production, as measured by the Board 's seasonally adjusted index, has continued through December at about pared with 5g 66 per cent of the 1923-1925 average as com- per cent in July, and factory employment and payrolls have also been maintained in recent months at a relat ively higher level. The value of construction contracts which increased in the third quarter, contrary to seasonal tendency, declined considerably in the fourth quarter; residential building continued to be an unusually small part of the total, while the proportion of public works was unusually large. Distribution of commodities by rail has continued at a relatively higher level since Septe mber. The value of commod- ities sold by department stores, however, showe d considerably less than the usual increases at the Christmas season and was mailer than a year ago, reflecting in large part lower prices. Wholesale commodity prices, after reaching a low level in June, increased during July, August, and early September, but since that time have declined by an amount slightly larger than the previous advance. The summer advance in wholesale prices was largely in farm products, foods , hides, and textiles; the subsequent decline has also been in prices of these commodities, particularly grains and livestock, and has reflected in part seasonal factors. Prices of cotton and other textile raw materials, which showe d a substantial increase, VOLUME 236 PAGE 95 2, have declined considerably, but are still somewhat above the low levels of early summer. In general, the increase in industrial production this fall has boon concentrated in industries producing non-durable goods, such as textil es and shoes. During recent months, however, there has been a marked increase in production of bituminous coal, and in December output of automobiles increased substantially in connection with the introduction of new models. Activity at textile mills continued at a relatively high rate in December, according to preliminary reports, and was at about the same level as in the correspondin g months of the two preceding years. Output of steel, however, was cosiderably smaller in December than in the preceding month, or than a year ago, Member bank credit Volume of member bank credit, as indicated by weekly statem ents of reporting member banks in leading cities, declined by $250,0 00,000 between the middle of October and the middle of December. This decline represented a further con- traction of loans, both on securities and other, with little change in the volume of the banksl investments. It banks in New York City there was a slight increase in loans and a larger increase in investments, while at banks outside of New York City both loans and investments were reduce d. The decrease of $250,000,000 in loans and investments of these banks during the past two months followed upon an increase of nearly $800,000,000 between July and October, so that the volume of credit in December was still $550,000,000 above its low level in mid-summer. Notwithstanding the decline in loans and investments, deposits of the reporting banks continued to increase. Time deposits increased by $155,000,000 between July and October and then declined by $50,000,000 to December 21; demand 3. deposits increased by $650,000,000 between July and October, and by an additional $345,000,000 since that time. This increase has been largely the result of a transfer of funds from Government to private account, and an increase in the volume of balances re-deposited by country banks with their city correspondents. The following chart shows the volume of funds of out-of-town banks NEW YORK FUNDS OF OUT-OF-TOWN BANKS Millionscf Dallas Millions Dollars 4000 4000 3000 3000 Total 2000 2000 000 0 1926 1927 in Ilew York City. 1928 1925 1930 1931 1932 These funds ordinarily consist of street loans and balances with correspondents. At the present time street loans for out-of-town banks are negligible and the total volume of $1,470,000,000 of out-of-town bank funds in New York consists of balances held there by correspondent banks. This amount, which represents largely the re-deposit of surplus funds of interior banks with their city correspondents, has increased by about $650,000,000 since 1+, last February. The increase in these balances since February has been about twice as large as the excess reserves of the banks in New York City. Increases in the volume of deposits since the middle of 1932 have been accompanied by further declines in the rate of turnov er of deposits; the growth in the means of payment has not been accompanied by an increase in the volume of payments. The rate of turnover of deposits, or their veloci ty, was 45 times per year in 1929, decreased to 26 by the last quarter of 1930, and to 16 by the last three months of 1932. Two charts are shown, giving the course of the principal items in the reporting member bank statement, and the course of loans and investments at banks in New York City, Chicago, and other cities . volume and Another chart shows the distribution of the excess reserves of member banks. • bILLIONS OF DOLLARS REPORTING MEMBER BANKS BILLIONS OF DOLLe ( Wednesday h ures 2 4 .. 22 Loans & Investments 2 .20 _ 18 16 Loans 14 4 12 10 110 Investments 8 v , I 6 6 u. s.Securities ...............- ....---,--...., .. ...• OtherSecurities 2 0 , 2 1 ti ti 1930 t 1 11111 tilli_ti_lit 1931 ti 1932. ti , i 1111 0 6 • • REPORTING MEMBER BANKS BILLIONS OF DOLLARS TOTAL LOANS & INVESTMENTS (Wednesday Figures) BILLIONS OF DOLLARS 1 14 II Banks Outside New York 8c- Chicago 12 12 10 10 NewYork City 6 Chicay 1 1930 'III lilt! 1931 1 1932 1 1 1 I 1 1 1933 I 1 0 7 EXCESS RESERVES OF MEMBER BANKS (Wednesday Figures) MILLI0N5 Of DOLL AR5 600 MiwoNs or DowiR3 600 500 500 400 400 300 300 200 200 100 100 Feb Mar Apr May June July Aug Sept Oct Nov DEC Gold movements Since the middle of June, this country's stock of monet ary gold has increased by $596,000,000, of which $105,000,000 was imported, $459,000,000 released from earmark, and $31,000,000 represente d domestic production and other minor items. This addition of $596,000,000 to the stock of gold represents a recovery of more than one-half of the gold lost by this country during the nine months preceding last June. The table shows the countries to which the gold was lost during the nine months and from which it was received in the following six months. 8. CHANGES IN UNITED STATES GOLD STOCK September 16, 1931 to December 28, 1932 (In thousands of dollars) Sept. 16, 1931 June 16, 1932 Sept. 16, 1531 to to to June 15, 1932 Dec. 28, 1932 Dec. 28, 1932 Chant-Jo in co1,3 sto-',-Net import (+) or export (-) Earmarking operations Domestic production, etc -1,107,507 777,105 358,514 28,112 +595,738 +105,528 +459,141 + 31,069 -511,769 -671,577 +100,627 + 59,181 France Netherlands Switzerland Belgium Siam Germany -1,003,423 - 165,288 112,979 - 121,334 14,649 12,860 +194,141 + 17,785 + 9,791 + 23,157 ... + 7,467 -809,282 -147,503 -103,188 - 98,177 - 14,649 - 5,393 Japan England. Canada China India. Mexico Czechoslovakia 205.753 45,467 56,386 + 20,662 + 15,557 + 13,112 9,008 + 10,681 +160,798 + 30,105 + 26,686 + 17,928 + 9,372 + 19,518 +216,434 +115,331 + 86,491 + 47,348 + 33,485 + 22,484 + 10,510 37,919 + 37,240 + 75,159 Gains from (+) or losses to (-): Other countries - 9. Taking the period as a whole there was a loss of gold to France of $809,000,000, to Netherlands of $148,000,000, and to Switzerland of $103,000,000, while receipts were $216,000,000 from Japan, $115,000,000 from England, $86,000,000 from Canada, $47,000,000 from China, $33,000,000 from India, and $22,000,000 from Mexico. Indications are that the gold inflow will continue in the next few months both as a result of this country receiving a consider— able part of the new gold mined and of continued imports from Canada, Mexico, and the Far East. The chart shows the total monetary gold stock of the United States from 1919 to date and brings out particularly the fact that 13sses of gold by this MONETARY GOLD STOCK OF THE UNITED STATES Millions of Dollars 5500 Millions of Dollars 5500 5000 5000 4500 L4500 4000 4000 3500 3500 3000 3000 2500 2500 2000 2000 1919 1920 1921 1922 1923 19-21. 1915 1926 1127 1928 1929 1930 1931 1932 • • 10. country in 1925, 1927-192S, and 1931-1932 have in each case been followed by a return flow of gold. The losses were in all cases clue to special ciraum- stances like the Dawes loan in 1925, the easy money and large volume of foreign loans in 1927, and the withdrawal of central bank balances in 1931-1932. The inflow of gold, on the other hand, has lasted over longer periods and has reflected in general the favorable position of the United States in its balance of international payments. Gold position of the Federal reserve banks As is indicated by the table below, the reserve ratio of the Federal reserve banks on December 2S was 62.7 per cent, the ratir, 7c.rving from 49.3 per cent in Minneapolis to 71.7 per cent in Boston. On that date the system had $1,330,000,000 of excess reserves, the largest amount, $432,000,000, being shown by the Chicago bank, and the smallest, $11,000,000, by the Dallas bank. The table shows also the amount of United States securities pledged as collateral for Federal reserve notes by the different Federal reserve banks and the extent to which they would be deficient in their gold position if the authority to pledge Government securities were withdrawn. a whole this deficiency would amount to $335,000,000. For the system as This deficiency could be made up to the extent of $264,000,000 if some arrangement were devised by which the banks would hold none of their own Federal reserve notes in vault. But even in that case there would still be a deficiency of $70,000, 000, indicating the great importance of having the provisions of the Glass-Steagall Act continued. • 0 11. GOLD POSITION OF THE FEDERAL RESERVE BANKS (Amounts in thousands of dollars) District Reserve ratio Excess reserves Federal reserve notes outstandin57 Eligible paper Collateral United States Gold securities Deficiency in gold (1) Own Federal reserve notes (P or cent) 71.7 107,511 218,931 13,360 21,400 205,571 - 19,606 21,127 New York 57.0 378,981 666,654 57,389 9,000 609,265 - 1,669 87,944 Philadelphia 56.7 67,028 255,800 49,561 52,000 206,239 - 45,839 16,176 Cleveland 59.2 90,881 301,546 26,111 85,000 275,435 - 70,642 13,501 Richmond 62.2 37,502 110,490 17,192 18,000 93,298 - Atlanta 55.6 27,643 115,861 25,590 32,000 90,271 Chicago 77.3 432,446 730,773 16,801 27,000 St. Louis 58.8 33,633 111,778 6,827 Minneapolis 49.3 13,404 84,407 Kansas City 58.3 32,497 Dallas 50.1 San Francisco 63.9 Boston Total 62.7 15,500 7,602 - 24,822 18,145 713,972 - 6,002 39,863 36,200 104,951 - 30,362 8,535 8,128 34,900 76,279 30,883 3,412 99,767 11,136 29,000 88,631 - 20,239 8,636 11,474 44,096 5,065 16,000 39,031 - 12,199 5,069 97,530 259,614 5,144 68,000 244,470 - 57,545 34,249 252,304 428,500 2,747,413 -335,308 264,259 1,330,537 ,999,717 (1) If no United States Government securities were pledged as collateral. • 12, Currency movements Return flow of currency from hoatds was resumed in December, after a period of two months in which there was little change in hoarded money. The chart shows the volume of money in circulation, after adjustment for seasonal variations, for the period from 1922 to 1932. 141woNs Or MONEY IN CIRCULATION DOLLARS Mama cr(bums ( 1 Wednesday Fitutes)' (Adjusted for Seasonal Variation) " i6 .5800 1584° 000 i5r 56001 5400 5400 5200 5200 5000 5000 00 4800 vo 4600 4600 4400 r'14° 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 On the basis of available information, it may be rouchly estimated that, barring unforeseen contingencies, the return flow of currency from the Christmas peak to the end of January will be about $200,000,000. National bank notes Issues of new national bank notes amounted to less than $1,000,000 dur— ing the week ending December 2. The rate of new issues reached a peak late A in Auguwt, cf $19,000,00b for the since then. i, and has been declining It averaged $12,000,000 per week in September, $8,000,000 per week in October, $4,000,000 per week in November, and $2,000,000 per week in December. One large bank in New York Cityhas retired its notes. Total new issues of national bank notes since passage of the Federal Home Loan Bank Bill amount to $164,000,000. These issues were distributed by Fed- eral reserve districts as follows: NEW NATIONAL BANK NOTES ISSUED AGAINST BONES: DECZMBER 28, 1932, INCLUSIVE JULY 22 TO (In thousands of dollars) Boston New York. Philadelphia. Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 3,228 19,822 8,962 8,357 5,205 8,304 24,481. 4,793 6,313 16,021 5,280 52,765 Total 163,533 National bank notes retired--including redemptions against which new issues have not yet been made (partly estimated) July 22 to December 28, 1932, inclusive.. 17,062 Increase in national bank notes outstanding July 22 to December 28, 1932, inclusive.. 146,471 National bank notes outstanding, December 28, 1932 880,825 Position of the public debt The table below shows the volume and composition of the public debt on December 31, 1930, and November 30, 1932. During this period the total gross • debt increased from $16,000,000 to $21,000,000, all classes of obligations showing an increase: PUBLIC DT (In millions of dollars) Bonds Notes Certificates Bills Dec. 31, 1530 12,113 2,342 1,192 127 252 • 16,026 Nov. 30, 1932 14,257 3,539 2,036 642 330 20,06 2,144 1,197 846 515 78 4,780 Non-interestbearing ,debt Total gross debt Outstanding on: Increase from Dec. 31, 1930 to Nov. 30, 1932 December financing resulted in an increase of $15,000,000 in the public debt. The cost of Government borrowing on different kinds of paper in the last two years is shown below; it indicates that financing in December, 1932, was at the lowest cost on record. High (Month) Bonds Notes 3 3/8% 3 1/4 Certificates 3 3/4 Bills 3 (Mar. 1931) (Dec. 1531 and Sept. 1931) (Feb. and Mar. 1932) (Dec. 1931) 1/4 Low 3 (Month) % 2 1/8 3/4 0.09 (Sept. 1931) (Aug. 1932) (Dec. 1932) (Dec. 1532) IA,A44 Form No. 131 Office Correspontence To. Mr. Hamlin From Mr. Goldenweiser FEDERAL RESERVE BOARD Ehae January 7, 1933 Subject: _ 01,/ I transmit herewith a memorandum on blocked accounts prepared by Mr. Gardner of this division. The last para- graph discusses briefly your own suggestion in the matter. VOLUME 236 PAGE 113 2i8495 Form No. lat Office Correspontence FEDERAL RESERVE BOARD Subject: _Mr. Goldenweiser From Date December 291 1932 Possible use of blocked accounts for war debt payments Mr. Gardner GPO 2-8495 You have asked me to prepare a brief memorandum on the possible use of blocked accounts in connection with debt payments of foreign governments to the United States. I have done so on the rather doubtful assumption that these payments are to continue. The blocked account. -- A blocked account is designed to avoid difficulties involved in transferring funds abroad. Payments due abroad are paid by agreement in the currency of the debtor; and the account into which they are paid is "blocked" -- i.e., it can be employed only in certain ways specified in the agreement. In general such accounts take the form of deposits with banks in the debtor country. The banks are free to lend the funds out again as they do the proceeds of other deposits; but the creditors may draw upon their de'Dosits only for specified purposes such as the purchase of internal securities which in turn must be deposited in the blocked account. In particular foreign creditors cannot use blocked deposits to purchase their own currencies and thus transfer their funds home. Although the blocked account avoids the transfer problem, it leaves the debtor under full obligation to pay in his domestic currency. lief is afforded on that score. No re- All that happens is that a foreign debt is transferred into a domestic debt. Blocked account and war debts. -- It has been suggested that use of the blocked account might enable foreign governments to pay their annuities to the government of the United States, notwithstanding the diffi- • Mr. Goldenweiser, December 29, 1932 #2 culties created by the depression. Such an account would not relieve the budgets of the debtor governments; for the annuities would still have to be paid in local currencies. It would, however, remove pressure from their currencies on the exchanges. The chief country to which this method might be applied is England. England pays nearly two-thirds of the annuities, her international reserves are not large in view of the deficit in her international income, and her currency is unstable on the exchanges. France, on the other hand, the second largest debtor, has a budget problem but no transfer problem; and hence a blocked account would be of no use to her. Other countries would find their situations eased by the use of blocked accounts, but their payments to the United States are of relatively small importance. The English case. -- Even in the case of England it is doubtful whether all pressure on sterling from the American debt should be removed. A dis- count on sterling is one of the essential instruments for altering the British balance of payments in such wise as to make eventual transfer of the debt payments possible. Not only does such a discount promote exports of commodities and retard imports, but it has hitherto been successful in stimulating debt repayments by foreigners and repatriation of British capital held abroad. Unless the debt payments are never to be transferred, the corrective of a depreciated sterling exchange must be allowed to act. But two types of tempo- rary blocked accounts that might be justified are dealt with in succeeding paragraphs. Mr. Goldenweiser, - #3 December 29, 1932 Use of blocked account between payment dates. -- The blocked account might be used to spread over a half-year period payments which, if concentrated on a single day, might lead to collapse of the currency and chaotic conditions. The corrective to the balance of payments can best be supplied by orderly pressure on sterling exchange, not irregular thrusts. Had the British Treasury entered the exchange market in connection with its recent payment and endeavored to purchase $95,000,000 in the course of a few days, the effect on sterling would have been catastrophic. In fact it transferred to us a substantial fraction of the gold reserves of the Bank of England. As an alternative to either of these methods the Treasury might have been given the option of paying immediately into a blocked sterling account. -the proceeds of this account to be subsequently transferred into dollars at the discretion of the British authorities, subject to the condition that the whole transfer should be effected by June 15, 1933. This would spread the transfer of the payment over six months and accommodate it to the irregularities of other elements in England's balance of international payments. It would leave sterling under full pressure from the debt payments but it would distribute the pressure evenly. It would seem to be a sensible way of handling the situation if it were not for one fact. accumulate its There is no reason why the British Treasury should not 95,000,000 in the half year preceding December 15 rather than in the half year following. As a matter of fact, this is exactly what it did during the years when it was regularly making payment; and it would have done December 29, 1932 Mr. Goldenweiser, - #4 so again had it regarded the resumption of the annuities as settled. Even though taken somewhat by surprise the British Treasury and the Bank of England had foreign balances on December 15 just about sufficient to cover the annuity payment. In addition there were about C678,000,000 of gold in the issue department of the Bank of England and an unknown amount of gold in the Equalization Fund. As a means for distributing the trans- fers throughout the year, therefore, the blocked account system appears to be hardly necessary, though it might be called into play in occasional emergencies. Use of blocked account over a possible transition .)eriod.-- The other argument for the use of the blocked account in England is based on the possibility that England's international position is in process of improvement. There are grounds for believing that the present depreciation of sterling has not yet had its full effect upon the British balance of trade. British exporters still have a price advantage in world markets and importers are handicapped. Even without further decline in sterling it is quite possible that for the next year or two the excess of merchandise imports will continue to shrink. Furthermore as soon as world recovery sets in, the flow of income from British investments abroad and from shipping and financial services will build up. Assuming these developments, the restoration of England's net in- ternational income might make it possible for her in the course of two or three years to transfer the entire proceeds of a blocked account and to resume the transfer of current payments. If it were considered desirable to gamble on this outcome, permission might be given the British Treasury to • • Mr. Goldenweiser, December 29, 1932 accumulate payments in a blocked sterling account for a limited term of years. And if the British authorities held sterling at its present level through purchases of foreign currencies whenever there was a tendency for sterling to rise, they might acquire very substantial amounts of dollars before the end of the period. This pegging of sterling against a rise would be one of the curious features of the program; but it would be quite essential as the means of obtaining the maximum of dollars. Formally or informally, it would have to be part of the understanding on which permission to use a blocked account was granted. It might well prove to be the first step in the de facto stabilization of sterling. Whether or not the accumulation, at the outset, of a large blocked account waiting to be transferred would leave sterling too vulnerable on the downward side is an open question. It would have to be clearly understood by the public that no transfers would be effected except as sterling developed strength. whole situation. At best there would be something abnormal about the But if an attempt is to be made to keep the British war debt alive for an indefinite period of time, this use of the blocked account would perhaps be one of the most flexible means of accomplishing the end. Note on countries other than England. -- It has already been noted that France has no need of the particular kind of aid that is given by a blocked account. The gold and foreign exchange holdings of the Bank of France are ample to transfer any sums the French Government may see fit to provide in its budget. The other countries in debt to our government, • • • December 29, 1932 'Mr. Goldenweiser, however, will find difficulty sooner or later in making the transfer -with the possible exception of Belgium. There is some question as to how useful the blocked account would be in connection with these other countries. Ihith few exceptions they are attempting to support their currencies by restrictions of an emergency character on international trade and capital transactions. They have not permitted the corrective action of depreciated exchange on their interna— tional position to have full sway; and there is not in their cases the same ground for hoping for a marked improvement in their balance of payments in the next few years such as might reasonably be anticipated for England. These countries are relatively unimportant, however, and it might be well to extend to them upon request any privilege granted to England. It is just possible that some use might be made of such occasions to alter their ex— change policies for the better. Use of blocked account to finance American exports. It has also been suggested that the blocked account might be used to further American exports. English importers, for instance, might be permitted to borrow from the account on advantageous terms to finance their purchases in this country. Since the account would be in sterling the importers would have to borrow sterling; but with the proceeds they could buy dollars on the exchange market. If tIleir demand for commodities were merely transferred from other countries to the United States, there would be no additional pressure on sterling exchange from these transactions. The chances are, however, that there would be some tendency for a net increase of British imports and that the demands of importers for foreign currencies would render even more difficult the transfer of the war debt Mr. Goldenweiser, # payments to the American Treasury. December 29, 1932 It may be that this will not be looked upon as a vital objection to the plan, which in its essence appears a proposal that the British Government should finance British imports from the United States on advantageous terms -- and as a reward be relievea temporarily of making payment to the American Government. roinlY2slo. 131 SAt_ 110 Pffice Correspontence To Mr. Hamlin From _ Mr. Goldenweiser FEDERAL RESERVE BEARD Date January 11, 1933 Subject: OP. I am attachint; a copy of the chart on gold and reserve bank credit which you requested at the time of the Open-Market policy conference. VOLUME 236 PAGE 125 2-8405 1 BANK CREDIT • GOLD AND RE4RVE of Daily Millions of. Dollars Monthly Aglitrdges 7001 Millions of Dona figureS 6500 6500 Gold Plus Reserve BanK Credit 6000 6000 5500 5500 5000 5000 Monetary Gold 4500 4500 4000 4000 3500 350C 3000 3000 2500 250 2000 2000 1500 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 ,1500 1930 1931 1932 1933 FEDERAL RESERVE BANK OF NEWYORK January 11, 1933. Dear Mr. Hamlin: When I was in Washington recently you mentioned the possible desirability of some definite rule restricting borrowings by officers and employees of Federal Reserve Banks, end I said I would send you a copy of the printed rules of this bank covering this and other subjects. I am therefore sending you a copy of the "General Rules and Regulations for the Employees of the Federal Reserve Bank of New York", which have been in effect since 1926. You will note that these rules contain the following provisions with reference to borrowing: n2. Any employee of the bank who incurs any debt or other liability for the purpose of dealing in stocks, bonds, securities, commodities, or real estate for a speculative profit, or who, without the approval of the Governor of the bank, gives his or her indorsement upon any note or bill, or signs or agrees to act as surety or guarantor on any note, bond or contract, shall be subject to immediate dismissal. n3. Any borrowing made from any bank by an employee of this bank must be on such a basis that there shall be neither in fact nor in appearance any securing of credit by such employee on terms more favorable than his account in the lending bank would justify." While these printed rules in terms apply only to employees of the bank, it has always been recognized that the offirules cers as well as the employees should be governed by the two business quoted above, as well as by rule 4 relating to outside vmana11236 PAr4N 410 2• • FEDERAL RESERVE BANK OF NEW YOR activities. January 11, 1933. In fact, shortly after these rules were promulgated Governor Strong addressed a memorandum to all officers referring to rules 2, 3 and 4 and stating that the officers were expected to be governed by them. I enclose a copy of this memorandum, which is dated April 2, 1926. If there is any further information you would like from us I hope you will not hesitate to ask me for it. Yours faithfully, eo ge L. Harrison Governor. Fncls. Honorable Charles S. Hamlin, Federal Reserve Board, Washington, D. C. P.S.-In considering this subject you may be interested to read pages 306 to 327 of the stenographic record of the November 1925 Governors Conference, and pages 155 to 158 of the stenographic record of the March 1926 Governors Conference. G.L.H. EMP 1, 3 1M-3-. GENERAL RULES AND REGULATIONS FOR THE EMPLOYEES OF THE FEDERAL RESERVE BANK OF NEW YORK To the Employees: Attention of all employees is especially directed to the absolutely confidential nature of all their relations with this bank ; their acceptance of which is a condition of their employment and of the continuance of such employment. view of the ultra-confidential character of the work of the personnel of the Federal Reset-ye Bank and in view of the sometimes exaggerated importance attached even to informal or personal comments or statements made by Federal Reserve Bank employees concerning general banking matters, no employee of the Federal Reserve Bank shall, except so far as is necessary in the regular course of business, in any way disclose to anyone, within or without the bank, any information obtained in the course of his or her work, which in any way relates to the bank or its affairs and in particular to its relations with the United States Treasury, the Federal Reserve Board, the Federal Reserve Banks, member banks and foreign correspondents of this bank. Anyone guilty of a breach of this rule will S. subject to instant dismissal. • 2. Any employee of the bank who incurs any debt or other liability for the purpose of dealing in stocks, bonds, securities, commodities, or real estate for a speculative profit, or who, without the apIS val of the Governor of the bank, gives his or her indorsement IS any note or bill, or signs or agrees to act as surety or guarantor on any S. bond or contract, shall be subject to immediate dismissal. • 3. Any borrowing made from any bank by an employee of this I. nk must be on such a basis that there shall be neither in fact nor in appearance any securing of credit by such employee on terms more favorable than his account in the lending bank would justify. 4. No employee of the bank shall engage in any outside business activities which would in any way interfere with his giving full time and service to the bank. Any employee desiring to engage in any other outside business activity may do so only upon condition that he or she has first obtained the approval of the Governor of the bank. • 5. Telephone communications, no matter how trivial or exasperating should be given the most careful attention. Always answer your telephone promptly, giving first the name of the department and then the name of the person speaking. For example, "Securities Department—Mr. Smith speaking." 6. No loitering will be permitted within or in the immediate vicinity of the bank. 7. Personal telephone calls will not be permitted until after 5 p. m., except that such calls may be permitted in the discretion of chiefs of divisions in emergency cases. 8. All employees must enter and leave the bank by employees' entrance, No. 44- Maiden Lane. An identification card, which must be shown to the protection officer upon request, will be supplied to each employee. Bundles, bags, handgrips, valises or baggage shall be checked in the Check Room on "A" level. 9. No employee will be allowed to leave the bank during business hours, except by permission of his chief. Passes will be issued by chiefs to employees authorized to go out, and no employee will be allowed to leave the bank without such pass during business hours. No pass will be required, however, for employees leaving the bank I uring lunch period, between 10. No employee shall smoke in any part of the bank before p. m. on any business day and not before 1 :00 p. m. on Saturdays, except in the Men's Cafeteria and Rest Rootn during the luncheon period. 11. In the event of absence, the Investigating Section of the Administration Department should be notified as early as possible on the (lay of absence. 12. The Service Division should be immediately notified of any change of home address or personnel (marriage, change in dependents, deaths, etc.) GEORGE L. HARRISON, Governor. Pr— Sit 1141 1 • a0 P Y FEDERAL RESERVE BANK OF NEVV ;a YORK • OFFICE CORRESPONDENCE To All Officers. FROM Governor Strong. DATE April 2, 1926. SUBJECT: _ The attention of offiqers of the bank is especially desired regarding the following rules which have been incorporated in the rules for employee_of the bank: 2. Any employee of the bank who incurs any debt or other liability for the purpose of dealing in stocks, bonds, securities, commodities, or real estate for a speculative profit, or who, without the approval of the Governor of the bank, gives his or her indorsement upon aay note or bill, or signs or agrees to act as surety or guarantor on any note, bond or contract, shall be subject to immediate dismissal. 3. Any borrowing made from aay bank by an employee of this bank must be on such a basis that there shall be neither in fact nor in appearance any securing of credit by guch employee on terms more favorable than his account in the lending bank would justify. No employee of the bank shall engage in anY outside business activities which would in anY way interfere with his giving full time and service to the bank. Any employee desiring to engage in any other outside business activity may do so only upon condition that he or she has first obtained the approval of the Governor of the bank. These rules embody principles which I am sure will govern all of you in your relations with the bank, and my purpose in writing this memorandum is to express to you some of the reasons why my judgment is that it should be so. Officers of this bank have been selected on the basis of iItegrity, ability and character and are in a poson somewhat Sifferent from that of other bank officers, in that their position in this bank is peculiarly charged with a public trust. It is for this reason that, in my yudgment, they are under unusual obligations of miSc 3414 1 -lb 411 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE To All Officers FROM Governor_at=re. DATE April 2, 1926. 192_ SUBJECT: - 2restrictions in their business and personal conduct. It is my belief that every one of our officers keenly appreciates the peculiar position of trust and confidence which he occupies and that he will so conduct his business and financial transactions as to run no risk of suspicion that more favorable terms have been accorded to him in business matters by reason of his connection with this bank and so that there may not be any cause of embarrassment in his official relationship with member banks. As to the rule numbered two, I am sure it is apparent to all of you that the best interests of the bank require a complete understanding on the part of all of its officers and employees that all speculative enterprise or activity, and particularly that which involves the borrowing of money, must be scrupulously avoided. It is not tos- sible to make an absolute definition of "speculation" as distinguished from "investment," so that the distinction must be left to the character and judgment of individuals. I have great confidence that the offi- cers of this bank will be able to judge of this matter so that no act of theirs will in fact or in appearance be a violation of the spirit of the principle involved in the rule for emplcyees in question. Exactly the same considerations apply to the principle expressed in the rule numbered three of the rules for employees, and it is for the same reasons that I commend this principle to you for guidance. You will note that the principle expressed by the rule in question is a modification of the principle against borrowings of officers from member banks as expressed in the minute of the officers' _ . "Iry , 0 )( II-C 23 E To---/'All FROM • BANK AL R FEDERESERVE OF NEVV •YLi ORK 0 CORRESPONDENCE Officers, DATE April 2, 1926. in__ SUBJECT: verlizr__strong• 0_0 3 meeting of September 8, 1924. In like manner these reasons and considerations apply to the principle embodied in the rule numbered four of the rules for employees. You will recall that on June 11, 1924, I sent to each of the officers of the bank a memorandum explaining the necessity for the rule on this subject which was at that time adopted. The rule numbered four above referred to is the same rule in substance as the one which was.the subject of the memorandum of June 11, 1924. The change is S. in fSrm. This memorandum is intended to again express my belief that you will readily appreciate the necessity for the adoption of these principles. If observance of these requirements appears to involve sacrifices by the officers I can only say that I consider that guch sacrifices are a necessary condition of our work in this bank. Sometimes one hesitates to judge or decide doubtful points. I would like to feel that every officer of the bank has enough confidence in me promptly to express his doubts in any such case and give me an opportunity to talk it over. And this not only applies to the rules of the bank, but to any and every other matter.. am, ••• FEDERAL RESERVE BOARD WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD X-7325 January 13, 1933. SUBJECT: Extension of Provisions of Section 10(b) and the Second Paragraph of Section 16 of Feaeral Reserve Act, as Amended. Dear Sir: For your information there is transmitted herewith copy of a letter dated January 9, 1933, addressed to the Cliairman of tile Senate Committee on Banking and Currency by Governor Meyer in which the Federal Reserve Board recoinmended the enactment at this session of the Congress of appropriate legislation extending for at least one year from March 3, 1933, the authority conferred by section 10(b) and by the second paragraph of section.16 of the Federal Reserve Act as amended by the Act of February 27, 1932, known as the GlassSteagall Act. A similar letter bearing the same date was addressed to the Chairman of the House Committee on Banking and Currency. Very truly yours, Chester Morrill, Secretary. Inclosure. TO CHAIRMEN AND GOVERYORS OF ALL F. R. BAITICS. VOLUME 236 PAGE 151 COPY X-7325-a Jan 9 1933 Honorable Peter Norbeck, Chairman, Senate Committee on Banking and Currency, United States Senate, Washington, D. C. Dear Mr. Chairman: The Federal Reserve Board respectfully recommends that appropriate legislation be enacted at this session of the Congress extending for at least one year from March 3, 1933, the authority conferred by section 10(b) and by the second paragraph of section 16 of the Federal Reserve Act as amended by the Act of February 27, 1932, known as the Glass-Steagall Act. The Glass-Steagall Act amended the Federal Reserve Act by adding thereto section 10(b), which authorizes the Federal rereserve banks, until March 3, 1933, in exceptional and exigent circumstances and subject to the affirmative action of not less than five members of the Federal Reserve Board, to make advanc es to member banks which lack sufficient eligible and accept able assets to enable them to obtain adequate credit accommodations from the Federal reserve banks by the customary methods. 7hile demands upon the Fed- eral reserve banks for accommodations under sectio n 10(b) have not been large, the existence of the authority to extend such accommodations has been a helpful factor in the distur bed situation through which we have been passing and has enable d the Federal reserve banks to render service to individual member banks in a number of instances. The Glass-Steagall Act amended the second paragraph of "16 X-7325-a Honorable Peter Norbeck - (2) section 16 of the Federal Reserve Act so as to provide that until March 3, 1933, should the Federal Reserve Board deem it in the public interest, it may, upon the affirmative vote of not less than a majority of its members, authorize the Federal reserve banks to offer, and the Federal reserve agents to accept, as collateral security for Federal reserve notes, direct obligations of the United States. This amendment provides that such authorization shall terminate on March 3, 1933, and such obligations shall be retired as security for Federal reserve notes. On May 5, 1932, the Federal Reserve Board author- ized the Federal reserve banks to pledge direct obligations of the United States as collateral for Federal reserve notes and the procedure therefor was set out fully in the Federal Reserve Bulletin for the month of May, 1932, a copy of which is inclosed for your convenience. In the opinion of the Board, the authority granted by section 3 of time Glass-Steagall Act has served a very useful purpose. In this connection, it may be stated that the Federal reserve agents and the Governors of the Federal reserve banks have recommended unanimously that the authority conferred by these provisions be extended for at least one year and that the Federal Advisory Council, at its meeting in Washington on November 17, 1932, adopted the following resolution: "It is the sense of the Federal Advisory Council that Congress be asked to extend for a period of at least one year the provisions of Section 10(b) and Section 3 of the Glass-Steagall Bill, H. R. 9203." 111111." • I` X-7325-a Honorable Peter Yorbeck - (3) r co-isideration in 7hile the Glass-Steagall Act was unde of limiting to Earch 3, Congress the question of the advisability y conferred by the second and 1933, the poriod in rthich the authorit cised ,-,as discussed and it rras third sections thereof cuuld be exer ld indicate the wisdom of pointed out then that if experience shou e time before its expiraextending the period, there would be ampl ssary action. tion for Congress to take the nece The Federal Reserve t well consider the enactment of Board feels that the Congress migh , r'ith whatever safeguards may be these provisions in permanent form of the authority granted by deemed appropriate as to the exercise ion of the Board that, in them, but, in any event, it is the opin be highly desira-Jle to extend vier, of existing conditions, it would beyond liarch 3, 1933. such authority for at least one :ear Respectful Y, Eugene ileyer, Governor. Inclosure.
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