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BOARD OF GOVERNORS

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OF THE

FEDERAL R E S E R V E S Y S T E M
WASHINGTON
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September 7, 19S8.

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O F F I C E O F THE: C H A I R M A N

Honorable M. S. Eccles,
Eccles Investment Company,
Ogden, Utah.
Dear Governor:
Enclosed, in accordance with my suggestion, is a
letter to j^ou from Dreibelbis informally outlining the situation with respect to the legal question which you wanted me to
refer to him. I suggested that he put it in the form of a
personal letter to you since the question can be dealt with
simply, rather than in a formal legal opinion.
It boils down to this: That he sees no insuperable
obstacles to a combination appointment, assuming that it were
felt to be wise procedure and assuming also that it were
buttressed with a formal opinion by the Attorney General as well
as some sounding out of the Senate to make sure that it does not
encounter undue obstacles there. The point is first, as I see
it, that if the will existed to do it, it is possible to argue
oneself around such legal difficulties as exist. These circumventing arguments may or may not be altogether persuasive or foolproof in a court of law, but they at least would seem to give a
justification, or rather, it is apparent that there is no absolutely insurmountable barrigr.
Apart from ^Llegal question, however, it seems to
me clear that it would be far preferable to approach this
question directly rather than by indirection. It will be necessary to obtain Senate confirmation, which would mean that one
branch of the legislature would have to acquiesce in any case,
and a good many Senators might properly object, I think, that in
creating these various offices by law it was not their intent or
the intent of Congress to have them lumped. There is particular
force in this view, I feel, because under the Banking Act of 1955
Congress specifically removed "political appointees" from this
Board.




Honorable M. S. Eccles

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(2)

September 7, 1938

In answer to the question which was presented to
you, I think that you should take the position that our counsel
do not say that such action is prohibited, but do feel that the
argument on legal grounds for taking such consolidating action
is open to question, but that apart from the fact that the legal
difficulties can be argued away by what possibly would be a
somewhat strained argument, viewing the matter from a broader
ground, it would be much better to ask both branches of Congress
to sanction the proposed action directly rather than to ask one
branch to ratify it indirectly and establish a precedent which
the Senate might not wish to establish. The more I think of it,
the more I am persuaded that it would be more difficult to win
over the Senate to this indirect method, especially Glass, who
would probably be adamant against this, than to present the case
directly by separate legislation to both branches of Congress in
the usual way. That, of course, is a matter of judgment or of
high policy.
Peace continues to reign here, precarious though it
is in Europe, with all eyes turned in that direction and gold
pouring in here at a horrifying rate again. On the political
scene, the Presidents purge seems to be a great boon to the
victims thereof because, of course, the real issue becomes lost
in the archaic nonsense about local sovereignty, states1 rights,
and local pride, just as the real issues in the Scottsboro, or
Mooney, or Sacco-Vanzetti cases became lost when outsiders attempt to intervene. Whether justice has been done is totally obscured in the inevitable surge of local pride and rush to defend
local processes of judicial procedure.




I feel as in the Supreme Court fight that the real
issue here fails to be properly understood by the mass of the
people. It is especially vital to you, I think, because your own
philosophy of how the Government should function and your own
carefully integrated practical approach are frustrated by the fact
that the setup makes it impossible, or virtually impossible, to
carry through a rational program in the national interestjf, because the allegiance of nominal members of the party in power is
to local communities and not to the head of the party. The titular
leader of the party is impotent except as he must bargain and trade
chiefly through the power of patronage. Thus he is continually

Honorable M. S. Eccles

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(3)

September 7, 1938

forced to make -unsatisfactory compromises and to abandon major
policies and programs. This is an old story to you, but ultimately almost every discussion is bound to lead back to this
central fact that the Government is not organized on a basis to
carry through a national program except as such a program may
happen to coincide with local interests—something which happens
chiefly when it comes to dipping money out of the Treasury and
ladling it out to the local voters.
Up to this hour no final decision has been reached
on the financing, which seems to hang on the Secretary1s feeling
about what may develop abroad. I believe Mr. Ransom has given
you the details with reference to alternative suggestions. My
own unimportant feeling is very strongly that the best approach
would be to go ahead as if we expected no explosion and that the
backing and fiLling which hinges on apprehensions about Europe
only serves to generate uneasiness in this country.
I am enclosing a copy of the text of the report to
the President on labor conditions in England because this seems
to me to be a very important and interesting document, which you
may not want to bother with while on vacation, but in case you
might xvish to have some heavy reading late at night, I am sending
it along.
Russ Smith was kind enough to send the text of the
Adams oration. It is a hard diatribe to answer because it is
chiefly emotional, illogical and hard to pin down at any ooint,
but for whatever use it may be, I shall airmail you about tomorrow
night what would seem to me to be the best counter-blast, though I
know that you need no promoting and have the answers more completely and in better form than I would have. However, I have
asked Dr. Goldenweiser to go over this speech and give me the
benefit of his views.




Incidentally and again with apologies for encroaching on your too much occupied time, you might want to think over
the question of dealing with reserves along the lines that Goldenweiser is just about prepared to recommend; namely, that beyond a
given point to be fixed by the Board, further acquisitions of deposits by member banks (and, of course, this would involve covering at least all insured banks in the System) would not constitute

Honorable M. S. Eccles

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(4)

September 7, 1958

a basis for a multiple expansion of loans. There are, of course,
some difficulties with this or, for that matter, any scheme but
this sounds to me like the simplest approach, and as far as I
have gone into it, the chief difficulty would be in ear-marking
deposits subject to multiple expansion and those not so subject.
Goldenweiser does not consider this by any means insuperable.
What appeals to me most about the scheme is that I think it
would be easier to sell than either 100$ reserves or that old
plan based on velocity of deposits, which would not be applicable
in any case to the present situation. Also, it seems to me that
there would be relatively little resistence from the banking system as compared with taking their multiple expansion privileges
away from them after they have once been created,




Goldenweiser1s scheme, of course, involves doing
away with different reserve requirements for different classes
of banks, and contemplates allowing the banks to count vault
cash as reserves. The scheme would work, it seems to me, for
the banking system as a whole without bearing down on individual
banks, a.nd the knottiest operation difficulty would be in the
transfer of deposits from one bank to another in order to prevent a non-multiplying deposit from becoming a multiple one in
another bank,
Goldenweiser and apparently his staff feel that the
solution of the problem lies along this line, and my only excuse
for mentioning it to you is in the thought that while pulling
trout, salmon, tarpon, or whatever it is you catch out there,
out of the water you might entertain one portion of your restless
mind by thinking this through to its correct conclusion.
While I am a man of peace and like it quiet, there
is such a thing as too much of it until one gets to feeling very
useless. While I may live to regret it, I do not mind saying at
the moment that I miss your stimulating presence, as I am sure
your colleagues on the Board do too, however much they may growl
occasionally. After all, a growl is better than a yawn.

Faithfully,

enclosures

BOARD DF GDVERNDRS
*********

DFTHE

FEDERAL RESERVE SYSTEM
WASHINBTDN
ADDRESS OFFICIAL CORRESPONDENCE
TO T H E BOARD

*******

August SO, 1938

Mr* Marriner S. Eccles,
Ogden, Utah.
Dear Mr. Eccles:
Shortly after you left, Elliott Thurston asked me to
look into and advise you with respect to the power of the President to effect substantial consolidation of Federal supervision
through the exercise of his appointive power. Since the request,
I have given a good deal of study to the question and it has
given me so much trouble that aside from the narrow question of
the legality of such procedure I would like to pass on for your
consideration a few comments with respect to some of the problems
which arise or could arise.
First, there are legal obstacles to the plan which I
will enumerate briefly, as follows:
1. Section 10 of the Federal Reserve Act requires
that Board members "devote their entire time to the business of
the Board.tt
2. There are several Federal statutes of general
application directed against using appropriated funds for payment
to any person receiving more than one salary when the combined
amount of said salaries exceeds the sum of #2,000 and prohibiting
a person who holds an office, the salary or annual compensation
attached to which amounts to the sum of #2,500, from being appointed to or holding any other office to which compensation is
attached.
3. The legislative history made by Congress when
the Comptroller of the Currency was eliminated as a member of the
Board could prove embarrassing should an attempt be made to reestablish the ex officio relationship through exercise of the
appointive power.




Concerning the legal requirement that members of the

Mr. Marriner S. Eccles - 2

Board shall "devote their entire time to the business of the Board"
the point has been made that a member of the F.D.I.C. board could
not perform his lawful duties as such and at the same time devote
his entire time to the business of the Board of Governors. Obviously this is one interpretation which could be put upon the
provision* However, I feel that the purpose of the provision is,
within the limits of reason, to prohibit a member of the Board
from devoting his time to his ora business as distinguished from
the Board's business and that it should be so construed. Since
so much of the Board's business is in common with the business
conducted by the other agencies, it could be validly argued that
a member of the Board in devoting the necessary portion of his time
to such matters but, for purposes of efficiency and economy, acting
nominally in another capacity, would be devoting his time to the
business of the Board within the meaning and purpose of the prohibition.
With respect to the general statutes directed against
holding two offices and drawing two salaries, an argument can be
made to the effect that they are inapplicable by their own terms.
The argument, however, has weaknesses. I am persuaded, therefore,
that in order to negative the effect of such statutes specific
exemptions with respect to the particular offices in question must
be found.
The employment, compensation, leave, and expenses of the
members of the Board are said by the Federal Reserve Act to be
governed solely by its provisions. This may be argued as exempting
members of the Board from the general statutes relating to employment and compensation.
?fith respect to the F.D.I.C, it is provided that "nothing
in this or any other Act shall be construed to prevent employment
and compensation as an officer or employee of the corporation or
any officer or employee of the United States in any board, commission, independent establishment, or executive department." The
general rule is that the directors of a corporation are officers.
Hence, it can be argued that directors of the F.D.I.C. are exempted
from the provisions of the general statutes.
The exemption of the Comptroller of the Currency from the
general statute would have to come from the fact that he is a director of the F.D.I.C.
To many these arguments may appear fatuous. Furthermore,
I doubt if it ever occurred to any member of Congress that the




Mr. Marriner S. Eccles - 5

particular provisions of the Federal Reserve Act would have the
effect here given to them. Nevertheless they are susceptible to
such interpretation, and my feeling is that if the President made
the appointments and if the Senate confirmed them the job would
be done and would remain done. Therefore, while the question is
undoubtedly one with respect to which a lawyer would be much happier if his case were stronger, I believe that it would be a
mistake dogmatically to advise that it could not be done. Furthermore, since it is one of those questions which cannot be resolved
with complete assurance and positiveness, it would be desirable
to proceed only after advice by the Attorney General.
Diverting to the more practical side of the matter, one
should be reminded that if there were a common will upon the part
of the directing heads of the three agencies to accomplish the
desired result, it would seem possible to do so upon a more informal basis without the necessity of making appointments which
would interlock the relationships of the directing heads. For instance, with a common will to do the job, functions now duplicated
could, by agreement, be exercised by only one of the three agencies
which in turn could make its facilities and the results of its
activities available to the other two* Thus, by agreement only
one agency would gather statistics and only one agency would conduct examinations, but the examiners could carry commissions from
the three agencies. Similar adjustments might be made with respect
to all duplicated functions.
It is assumed that the principal reason for attempting
consolidation in the manner suggested would be to avoid the necessity of legislation. Haturally, it would be desirable not to
burden Congress unnecessarily if the desired result could be obtained otherwise. However, it must be remembered that in each case
the appointments are by and with the advice and consent of the
Senate. The objective sought to be accomplished by making the appointments would be patent upon their face. In effect, therefore,
one house of Congress would still be giving its approval or at
least would be in a position to disapprove. In such circumstances
it would appear desirable first to decide whether or not Congress
might not desire to give more direct approval to the plan, or none
at all. And here again one must face the fact that the Senate
would be asked to do by indirection the very contrary of that which
it expressly did in enacting the Banking Act of 1935, to wit, to
make the Comptroller of the Currency again a member of the Board
of Governors.




For these reasons, I am persuaded that a direct approach

Mr* Marriner S. Eccles - 4

to the question is the more desirable one to be followed, but at
the same time I would not say, strictly as a legal proposition,
that it could not be done otherwise•
In conclusion, the provisions of seotion 10 of the Federal Reserve Act prohibiting the selection of more than one member
of the Board of Governors from any one Federal Reserve District
should not be overlooked* This is a limitation with which I assume
all are familiar*




Very truly yours,

J* P. Dreibelbis.