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March 20, 1947.
Honorable Brent Spence,
House of Kepreacntati-res,
¿ash iagton, D* C.
Dear Mr. Spenc«i
Kef erring to our telephone conversation regarding the
extension of the authority of the Federal keserre Banks to purchase
Goremaent aecuritlea directly froa the United States, as provided
In B.ft. 2412» 1 enclose herewith a memorandum which sbowa that it
would net be possible to use the authority contained in the Tboiaas
Aaiencmsnt for this purpose. I am £lad you called me with regard
to this and X hope that this me&oranduje will adequately answer any
questions that «ay arise is this connection.
Sincerely yours,
M. S. ¿.cclee,
Chairman.
Enclosure
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3/19/47
THIS C0I"Ï FOR CflAXHMAN ECCL1SS
March £0, 1947.
Honorable Jess® f, ¿olcott,
Haasftof kepresentatives,
»ashington, I. C.
Bear 4®r. fcolcott:
In connection with t < proposed extension of the authority
h?
of t * Federal Reserve ¿sanka to purchase Governs&ent securities dise
rectly five the United Stat»«, as provided in B.&. £413, Congressman
Spence telephoned a« to say that ideations »rare being raised as to
why the authority contained in the Thoisas Amendaant of May 12, 1953,
could not be used aa a substitute for the suthority provided in tha
bill. Knowing of your interest in the setter, I a* enclosing herewith a copy of the memorandum which I as sending to Congressman Spence
in this connection and afoich I believe adequately answers any questions in this regard.
Sincerely yours,
». S. Eccies,
Chairman.
&n closure
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3/19/47
TEES COPY FOR CHAIRMAN ECCLES
KTFICT OF THOMAS AXXKE&2ST OB KEKD FOK EXVEKDXS9
AUTHORITY OF 7S£8S£L B1*KR¥S BANSS TC KAK* J2XBSC?
FUSCHASX3 OF GOVimilKT SECa«ITI£S
Ther« la now pending before the House of Kepresentetlvea
E.iu £41?, which would extend until July 1, 19S0, the authority of
the federal Reserve Banks to purchase Government securities direotly
fros the United States up to an aggregate »mount at any one time of
$5*000,000,000 and the question has been raised as to whether the socalled Thomas Amendment of *my 12, 193S, affects in any way the necessity
for the extension of this authority.
The Thomas Amendment authorizes the President, upon making
certain findings, to direct the Secretary of the Treasury to enter into
agreements Kith the federal Bescrve System under which the Federal Reserve
Banks will purchase directly and hold for an agreed period of time Treasury bills or other Government obligations in as aggregste sum of 15,000,000,000.
These provisions, however, do not in any way eliminate or reduce the necessity
for the authority of the Federal Reserve Banks to purchase Government securities directly from the Jnlted States, which is contained in section 14
of the Federal Reserve Act and which would be extended by H.&* £415.
The authority contained in the Thomas Amendment, even if legally
still in effect, could not be used under present conditions. In order
that the authority in the Thomas Amendment be used, it is required by the
law that the President "upon investigation" find that one or more of the
following conditions exists
"(1) the foreign coaaaerce of the United States is adveraely
affected by reason of the depreciation in the value of the
currency of any other government or governments in relation
to the present standard value of gold, or
*{2) action under this section is necessary in order to regulate and maintain the parity of currency issues of the United
States, or
an economic emergency requires an expansion of credit, or
*(4) an expansion of credit is cecesser to secure by international agreement a stabilisation at proper levels of the
currencies of various scvernment»*.
It is obvious that the President could not properly make amy
one of these four findinge at this time* The effect upon the foreign
commerce of the United States of the depreciation in a foreign currency
has no relation to the purchase of Government securities directly from
the Treasury by the Federal Reserve ¿anks. Likewise, no action under
the Thomas Amendment is necessary in order to maintain the parity of
THIS COPY FOK CHAIi&IAN ECCLES
currency issues of the United Stmt es. Moreover, there is no economic
emergency wrich retires an sxpanelon of creditf nor 1» ac expansion
of eredit necessari- to secure stabilisation of currencies by international agreenent, especially In vie« of the Brettor *oods Agreementa
which »ere set up for this purpose, Under present conditions, therefore, it would be entirely inappropriate for the President to :cake any
of the findinga required by the Thomas Amendment, and it is moat unlikely that he would be in a position to do so at any ti*® in the near
future.
The finding* which the President would have to sake in order
to m#ke the Thomas Amendment effective relete to conditions which might
be present in a major emergency—one that is likely to continue for
some time and that requires drastic actions to meet it. I o is w as the
t
case in 1933 «hen the Thomas Amendment «as enacted. The authority in
H.B. £419 is intended to be used, whether in emergencies or otherwise,
in order to »set temporary situations and contingencies.
For the reasons stated the Thomas Amendment would is no sense
be an effectir* substitute for or supplement to the authority in the
Federal Reaerre Act «hi eh would be extended by H.H, £41S.
furthermore, there la considerable doubt as s legal matter
whether this provision of the Thomas Amendment of
l£v 1953, was
not repealed by implication by the amendments to the Federal keserre
Act contained In the Banking Aet of 1935 which required ¿ - r chases by
.u
the Le e m Banks to be mede only in the open aarket. This doubt was
increased by the action of Corsgrees in 1942 in making an exception to
the requirement that all such purchases be in the open market» by permitting direct purchases up to $5,000,000,000 for a limited period*
In this connection, the renate Committee Report in 1942 {No, 989,
77th Cong,) said that the limited authority for direct furehaaes
•soul« rerire powers formerly vested in Federal Keseree ranks so aa
to permit these banks to i&ake direct purchases of Government securities,"
If it was E 'cessary to pass legislation in 1942 in order to rewire those
powers, it is equally necessary now to pass legislation in order to make
a further extension of those powers. As a matter of fact, this authority
was extended on three previous occasions by the Acts of recember £0,
1944, December 38, 1945, and June £9, 1946.
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