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Office Correspondence To. Governor hr.f\~\an From Miu JTyatt,- G«a«F«i4 Counsel FEDERAL RESERVE BOARD Date Subject: April Zot BEC'D IN FILE TON MAR 2 21933 rnr- ic-tr,? In accordance with the request which you made during our conference last night, I am handing you herewith the following: 1« Copy of letter written by Honorable Carter Glass, then Secretary of the Treasury, to the Attorney General holding that the Board has the power to initiate changes in discount rates, and copies of opinions to same effect by Acting Attorney General and Board*s Consulting Counsel. 2. A memorandum regarding additional changes in the bill which you asked me to list for further consideration, 3* Quotation from the provision of Section 4 of the federal Reserve Act, as amended by the Banking Act of 1933, which authorizes the Federal Reserve Board to suspend from the credit facilities of the Federal Reserve System any member bank which makes undue use of bank credit to finance speculation in securities, real estate or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions. I invite your especial attention to the following paragraph near the bottom of page 3 of Senator Glass1s letter: "Section 14 of the Act, dealing with open market operations, authorizes Federal reserve banks, in accordance with rules and regulations prescribed by the Federal Reserve Board, to engage in a variety of business transactions, the purpose being to enable these regional banks, by the permission or under the direction of the Federal Reserve* Board, to exercise a power on discount rates throughout the various regions or throughout the country tantamount to the power exercised over the money market by the Bank of England when it goes into the open markot to enforce its discount rates." This is excellent authority for the view that, under the original Federal Reserve Act, the open market powers were supplementary to the power overdiscount rates and that the Federal reserve banks could not engage in such operations without the permission of the Federal Reserve Board and must do so when directed by the Federal Reserve Board. I do not think the language of the law was adequate to carry out this intent; but this paragraph of the letter furnishes an excellent answer to any objection which Senator Glass might make to vesting such power in the Board. c Governor Eccles — 2 I also invite your attention to the following statement commencing at the bottom of page 3 of the opinion of the Acting Attorney General; "The scheme of the entire act is to have Federal reserve banks in different parts of the-country so that their operations may be accommodated to the business needs of each section, and to vest final power in the federal Reserve Board, so as to insure a conduct of business by each bank which will not be detrimental to the carrying out of the entire plan," Respectfully, Walter Y^yatt, General Counsel Attachments. (Copy) X- 4 9 45 (See X-3107a) Desamber 4 , 1919* Dear Mr. Attorney-3-eneraI: I am attaching a copy of an opinion of M, C. E l l i o t t , Consulting Counsel of the Federal Reserve Board, concerning the powers of the Board with respect to discount rates, with a viev: to asking you to investigate the question and to let me have your opinion on tha subject as At torney-Gener a l . I ai 'iy say that, while I concur fully with the opinion of M.T, E l l i o t t as far as i t goes, I think i t could have "been made even stronger had he known the facts as I know them. I,:y recollection is especially clear in regard to a l l of the circumstances connected with this feature of the Federal Reserve Act and there can "be no question of the intention of Congress to feive the Federal Reserve Board complete power in tha matter of fixiiqg the rate of rediscount. Since the rate was not necessarily to "be uniform throughout the country, the right to i n i t i a t e and propose rates was given to the regional banks respectively upon the presumption that each "bank would have intimate knowledge.of usages and conditions in i t s own territory; but it was also intended that the Federal Reserve Board should have complete jurisdiction over the whole subject of r a t e s , as i t wa3 realized by the proponents of the act that rate-making might, and frequently would, affect the co./_ &rc< and industry of the entire country. As originally drawn, the Federal Rese: B i l l , enumerating the povers of the Federal reserve "banks (subsection (d), Section 14), made rediscount rates "subject to review" ~oy the Federal Reserve Board. This term was thought by some members of the committee to bo broad ihc Attorney-General. X-4-91-5 (See &-3107a) enough in that definition of Webster's Dictionary, which says: " "eviov looking over or examination with a view to amendment or Laprovumeat." A But some meters of the committee contended that the power of the Board should be stated as even more explicit and final; hence we added the words "and determination," so as to make the subsection road: "To establish from time to time, subject to review and determination of tho Federal Reserve Board, rates of discount to bo charged by the Federal reserve bank for each class of paper, which shall be fixed with a view of acsommodating commerce and business." In my report to Congress on the rill itself (H. R. 7837) I said, in elucidating this power of the Federal Reserve Board: "The powor granted in subsection (d) to fix a rate of discount is an obvious incident of the existence of the reserve banks, but the power has been vested in the Federal Reserve 3oard to review this rate of discount when fixed by the local reserve bank at its discretion. This is intended to provide against the possibility that the local bank might be establishing a dangerously low rate of interest, which the reserve board, familiar as it would be with credit conditions throughout the country, would deem best to raise." If the Federal Reserve Board has tho power to alter a rate of discount proposed by a Federal reserve bank for the reason that it might ce a dangerously low rate, it would, by the same token, have authorit" to reduce the discount rate for the reason that it might be dangerously high. Furthermore, in subsection (b) of Section 11 the Act confers even greater power upon the Federal Reserve Board than that of reviewing end determining the discount rate of the Federal reserve banks. It authorizes the Board: "To perrr.it, or, on the affirmative vote of at least five members of the reserve board, to require Federal reserve banks to rediscount the discounted paper of other Federal reserve banks at rates of interest oo be fixed by the Federal Reserve 3oard." It is inconceivable that a board having complete authority to O 3. The Attornoy-General. X-4945 (Sos X-T.l i regulate the rediscount rates "between Federal re63rv8 ban/rfl themselves should not have the lessor authority to regulate the discount rates tentatively fixed and proposed by Federal reserve o.*nJco. A^ain in paragraph 2 of Section 12 of. tho Federal Reserve Act it v/ill "be noted that among the authorised functions of the Federal Advisory Council is power "(3) to call for information and to make recommendations in regard to discount rates, rediscount business, note issue8, etc." If the Federal Reserve Board is not authorized to alter and amend and finally determine discount rates, vrhy should the ra&oral Advisory Council have been empowered l!tc make recommendations in regard to discount rates" to the Federal Reserve Board? Hour idle it would be for the Federal Advisory Council to be making recommendations to a board 'which hr>s no authority to apply or carry into effect the recommendations thus made! It ^ill be observed that the Federal Reserve Council is not authorized to make recommendations as to discount rates or anything else to Federal reserve banks, but only to the Federal Reserve Board* Section 14 of the Act, dealing with open market operations, authorizes Federal reserve banks, in accordance with rules and regulations prescribed by the Federal Reserve 3oard, to engage in a variety of business transactions, the purpose being to enable these regional banks, by the permission or under the direction of the Federal Reserve Board, to exorcise c. pouer on J.icccunt rites throughout the various regions or throughout the country tantamount to the jcver exercised over the money mrrtoot by the B?-nk of England vhon it gees into tho open market to enforce its discount rates* Finally, in Section 13 of the Act, it is provided: I X-4945 (see x-j&xyr-cs 4 . The Attorney-General "The discount and rediscount and the purchase and sale by any Federal reserve "bank of any bills receivable and of domestic ani. foreign "bills of exchange and of acceptances authorized by this act shall bo subject to such restrictions, limitations and regulations as may be imposed by the Federal Reserve Board." Thus all through the Act this complete power of review and determination and regulation of discount and rediscount rates is explioitly and implicitly given the Federal Reserve Board. Without it the Board would be poncrless to control operations of any rogionnl bonk in the system which might engage in transactions perilous to the entire system and to the commerce and industry »f the country. I would be obliged if you would carefully consider the matter and give me your conclusion at as early a day as possible. Sincerely yours, (s) Carter Glass, Secretary of the Treasury. The Honorable, The Attorney General, Washington, D. C. CO^Y. X-310?a EB^BTMENT OF JUSTICE, December 9, 1919• Dear Mr. Secretary: In response to your request for my opinion concerning the powers of the Federal Reserve "Board to regulate discount rates of the several reserve banks, I reply as follows: By section 14 of the Act of Congress, designated by the short title "Federal Reserve .Act" (Act of Dec. 23, ±'jl}, j6 Stat.251), it is provided that "every Federal reserve bank shall have power" (d)to establish from time to time, subject to review and determination of the Federal Reserve Board, rates of discount to be charged by the Federal reserve bank for each class of paper which shall be fixed with a view of accommodating commerce and business. By section k of said act each Federal reserve bank is under the supervision and control of its own board of directors, subject, however, to the provision of section 11 of said act which provides, in part, that The Federal Reserve Poard shall be authorized and empowered * * * (j) to exercise general supervision over said Federal reserve banks. I -2- Said Federal Reserve Board i s a l s o further authorised arid empowered to examine a t i t s d i s c r e t i o n tne accounts, boo .s and a f f a i r s of each Federal reserve ban* * • * and to require such statements and reports as i t may iee*a necessary. (Sec.11. subdiv.a.) / , By section 12 thore i s also created a Federal Advisory Council composed of representatives chosen in tne manner prescribed in said section, which i s to confer d i r e c t l y with the Federal Reserve Board. Among i t s powers i t i s authorized to " c a l l for infor- mation, to make recommendations in regard to discount r a t e s , r e d i s count business",, e t c . The question for determination i s whether, taking into consideration the language of section 14 (d), giving the power to the Federal reserve banks to e s t a b l i s h from time to tiias r a t e s of iisc^unt, "subject to review and determination of the Federal Reserve Beard", and the further power of the Federal Reserve Board to exercise general supervision over said Federal reserve banks, the power of the Federal Reserve Loai1 i s limited to reviewing and approving or disapproving r a t e s of discount made by such bank8j or whether said Board /ray, in tne exercise of i t s powers, from time to time review the r a t e s of discount in use and direct specific changes and a l t e r a t i o n s thereof. The l e g i s l a t i v e history of the a c t shows t h a t a s originally drawn section 14, suosec. (d) conferred the power upon the Federal reserve banks to make discount r a t e s "subject to review" by the Federal Reserve Board, and that said section was amended in committee by adding the words "and determination" a f t e r the word ao as to make said section read a s now enacted^ -3. X-31O7a It is quite evident tnat if tne Federal Reserve Beard is con- fined to the povver to review and approve or disapprove rates of discount rrade by the Federal reserve banks, and is without power to it, itself direct specific cnanges, the words "and determination" are wholly without significance. The ver/ signification of tne ;;ord "determination" used in such a connection, carries with it the right to pass upon and to decide and fix, and thus determine what should be done. Coupling this with the power given the Federal Reserve Beard to supervise the business of eacn Federal reserve ban*., taking also into consideration tne recommendations contemplated by tn© Advisory Council to the Federal Heserve Beard in regard to discount rates, such pc.jr would be futile if such Federal Reserve Board could not, if agreeing to such recommendations, direct them to be carried out. I think it is quite clear that tne Federal Reserve Board is the ultimate authority in regard to rediscount rates to be charged by tne several Federal reserve banks and may prescribe such rates. This is in ail cases necessarily a review of rates existing at the tine in the bank,, and tnerefore strictly calls for tne exercise of this power; the determination reached by tne Beard carries with it the exercise of tna power of determination specified in sec. 1~, subdiv. (d); and also exercises the power of supervision granted in sec. 11, subdiv. (j). Tne scheroe of .. 3 ; :ire act is to riiva Federal reserve banks in different parts of tne country so tnat their operations nay be accommodated to the business needs of each section, and to vest final * • power in the Federal Reserve Beard, GO as to insure a conduct of business by eacn bank which will not be detrimental to the carrying out of the entire plan. The powers of the Federal Reserve Board are therefore to be exercised in regard to each reserve bank as the conditions surrounding said bank may dictate, keeping in view the general purpose and plan of the Federal Reserve Act. Bearing in mind such general purpose, I am of the opinion tnat the Federal Reserve Board has the right under the powers conferred oy the Federal Reserve Act, to determine what rates of discount should be charged from time to tirce by a Federal reserve bank, and LL^der their powers of review ar.d supervision, to require such rates to be put into effect by such bank. Very respectfully, (Signed) Alex. C. Kin Acii--- Anton 3 • General. Hon. Carter Glass, The Secretary of the Treasury, Washington, D. C. ) '-(Copy) (See X-4945-a x-7lD7-a - Dec. S, 1919) October 30, 1919. My dear George: I have your memorandum of the 29th, which refers to the ri^ht of the Federal Rescve Board to i n i t i a t e and control discount ratos of Federal rcoorve banks, and note that the Board desires my opinion on this subject: The determination of this Question involves ::r Interpretation of that part of Section 14 which reads as follows: "•Every Federal reserve bank shall have po'.ver ****(d ) to establish fron: time to time, subject to review and determination of the Federal Reserve Board, rates of discount to b ; charged by the Federal reserve bank for each class of paper which has been fixed with a view of accommodating commerce and busiiess." It i s , of course, clear froffl this that any rate established, by ; Fo&er reserve bank is subject to review and determination of the Federal Reserve ID; r i , but the qu.estion you havo under consideration is whether the Board, on it3 c--:. ..otion, my i n i t i a t e or establish discount rates for Federal resarve b,x.:kd, or 1:1" a rate has 7been established, reviewed and approved by the Board, "hethc-" the 50' subsequently " may require the bank to change this rate. This involves a considor tion of the relative Dowers of the Federal Reserve Board and of the bo?ad of directors of a Federal reserve bank to control and supervise the operation;: of fh bank. Sectioi- 4 of the Federal Reserve Act provides in part a.s follows: "Every Federal reserve bank shall be conducted under supervision and control of a Borjrd of Directors. The Board of Directors shall perform the duties usually appertaining to the office of directors of banking .- ssociations, and a l l ^ such duties as are prescribed by law. 3aid board shall administer the affairs of said bank fairly and impartially a .d without discretion in favor of or against any member bank or banks, and ^^XXr subject to the provisions of law Kid the orders of the Federal Reserve Board, extend to each member bonk such discounts, advancements and accommodations as may bo safoly and reasonably merle, with due regard for the claims and donaiids of other banks." Section 11 of the Federal Reserve Act, -rhich deals with tho pov/eru of the Federal Reserve Board, "orovidos in part as folio.'a: "The Federal Reserve Board shall be authorised and empo'vered *****(j) to exorcise general supervision over said Federal reserve banks." Considering these two provisions of the Act v/hich relate to the supervision rnd control of tho operations of the Federal reserve banks, i t appears that the directors of the bank are intrusted with the operations or management of the bank's affairs; that they arc vested with the po\7er to perform the usu.-rl ordinary duties of bonk directors. In the exercise of these porers, hov.cver, they are subject to the orders and to the general supervision of the Federal 7 T.-4945-a (See X-3107-a - Deo.9,1219) serve Board. Considering *he context and the general purooses of the Act, i t may be assumed that Congress did not intend that the Federal Reserve Board should perform the functions usually performed by the board of directors of a bcnk. Co^-osi howevsr, did give the Federal Reserve Board very broad general porori to mrporvi^e the operations of a bank and to see thot these operations are conducted in s t r i c t accordance with the provisions of the Act and with those regulations and rulings which the Federal Reserve Board, under the terms of the Act, ia r.uth., orized to make and enforce. I It is hardly necess-.xy to call attention to the various provisions in the Act which sustain the theory, "out «o i l l u s t r a t e the extent of the control over the bank's operations that is Tested in the Federal Reserve Board, i t Till bo recalled that (mo of the porcrs enumerated in Section 11, is the powor "to suspend or remove any officer cr director of any Federal Reserve Bank, the cause of ouch removal to bo forthwith communicated in writing to the Federal Reserve Board, to the removed officer, or director, and to said bank." To sum up briefly the relative powers of the Federal Reserve Board nad of the Board of Directors of z bank, i t appears(a) That the Board of directors of a brink may supervise and control the operations of the bank so long as i t s affairs arc conducted in accordance with the provisions of law, the regulations of the Board authorized by lav/, and such orders issuod ^oy the Board as the Board is authorized by la's to issue; (b) Ihat the Federal Reserve Board is vested with pov/er to see that the operations of the bank are conducted in s t r i c t accordance 7<ith the law, itc authorized regulations and orders, to impose penalties for violations of the law, even to the extent of removing offending officers and directors. Coming now to consider the particular provision of the Act involved in the pending question, i t is necessary to determine f i r s t to v.rhat extent and subject to -"hc.t limitations the Board of Directors of a bonk is given control over the establishment of discount rates. Sec.4, which prescribed the general corporate powers of the bonk, contains among others, the following Seventh.- To exercise by i t s board of directors, or duly authorized officers or agents, all powers specifically granted by the provisions of this Act, and such incidental powers as shall be necessary to carry on tlio business of braking within the limitations prescribed by this Act." If no limitations '.;erc prescribed by the Act and no specific rcforci.ee had been made to the fixing of discount rates, i t -.vould seem to be clear that the Board of Directors would have power from time to time to establish discount rates as an incidental power necessary to carry on the business of banking within the limitations prescribed by the Act. •* X-4945-c (Sec X-7107-a - Dec, 11' -3If no limitations were prescribed by the Act ~nd no specific reference had "ooon made to the fixing of discount rates, it would seem to be clear thr.t the Board of Directors -ould have power from time to time to establish discount rates as an incidental power necessary to carry on the business of banking within the limitations prescribed by the Act. 4 Section 14, however, which enumerates certain special powers of the Federal reserve banks, imposes two limitations or restrictions on the power to fix discount rates. It provides in terms th^.t rates so established by th~ bank (a) shall bo subject to review .and determination of the Federal Reserve Board, (b) shall be fixed with a view of accommodating commerce and business. Any rate established must, therefore, conform to those two conditions and if the directors of the bank fix a rate which fails to conform to either of these conditions, the establishment of such rate becomes a violation of the provisions of the act and the 3oard under its supervisory power may clearly require the readjustment or reestablishment of such rate. In other words, whenever in the opinion of the Board, on established rate docs not accommodate commerce and busincss.it may require the directors of the bank to change the rate so as to meet this requirement. It may be argued that the discretion is vested in the board of directors of the bank to determine whether or not a rate fixed is fixed with a view of accommodating commerce and busii-ess. Considering, however, the context and general purposes of the Act it is not believed that this view can be maintained. Congress clearly intended this discretion to be vested in the Federal Reserve Board. To assist the Board in the control of this and other matters, it created by Section 12, the Federal Advisory Council, and authorized that Council "to confer directly with the Federal Reserve Board on general business conditions * * *; to call for information and to make recommendations in regard to discount rates. A centralized control of the discount rates is fundamental to the purposes of the Act and provision v/as accordingly made to furnish the Federal Reserve Board with the best possible information to enable it to exercise a proper discretion in this important matter. It is hardly necessary to emphasize the importance of this control. It affects international as well as our domestic banking and trade relations. My conclusions, therefore, arc, first, that the discretion is vested in the Federal Reserve Board to determine whether nay discount rate of a Federal reserve bank accommodates commerce and business; second, that the power to review and determine discount rates is a continuing power, which may be exorcised at any time. It necessarily follows from this that the Board of its own motion may require a Federal reserve bank to change an existing rate at any time, if in the opinion of the 3oard such rate does not meet the requirements of the statute. Very sincerely yours,
@FedFRASER