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HI. April 1, 1935, Honorable Henry B. Steagall, Chairmanf Committee on Banking and Currency, House of Representatives, • ashinfton, D. C. Dear Mr. Steagallt I am inclosing for your information and for the consideration of your Committee a memorandum discussing Professor Valter E. Spahrfs criticisms of the drafting: of Title XI of the Banking Act of 1935 (H.R. 5357 and S. 1715). It is believed that roost of Professor Spahr's criti- cisms of the drafting of the bill are without meritf butf in order to eliminate argument about unimportant points $ the attached memorandum suggests certain detailed changes in the phraseology of the bill. All of the suggested changes are suraaari«ed on the last page of the memorandum for convenience. Pursuant to our telephone conversation this morning, I have requested the Board1s General Counsel to hold himself in readiness to render you cr your Committee any assistance which you may request. Cordially yours* / 's D Iiarriner S. Iccles, Governor. y Inclos'-re. MR:cba J 1 .J 3 1? MEMORANDUM RBGAHDIMG COMOTTS OF PROFESSOR WALTER E. SPAHR ON DRAFTSMAHSHIP OF TITLE II OF BAMKIW ACT OP 1938. (H.R.SSS7 and S. 1715) In his prepared statentst of oomnents on Title II of tho proposed Banking Aet of 1936$ Professor Spahr has presented an analysis of various sections of the Aet. In several plaees he states that sootions of the bill reveal "careless bill-drafting". It is respectfully suggested that nest of Professor Spahr*s criticisms nay be the result of "careless bill-reading". However, Professor Spahr9s criticism of the draftsmanship of the bill will be discussed below and a few changes will be suggested for the purpose of eliminating unnecessary argument* about unimportant points* 3n P*£* 6 of his mimeographed statement* Professor Spahr re* fers to the fact that, although the bill abolishes the office of Federal "imumrrm Agent* it provides (page 40, lines 14 to 16) that, "All duties prescribed by lav for the Federal Reserve Agent shall bo performed by such person as the Federal Reserve Board shall designate". He seems to think that this would authorise the Board to appoint a local representative at the Federal reserve bank who would per orm duties now performed by the Federal Reserve Agent* However* he over- looks or ignores tho fact that the bill (page 58, lines IS to 18) would repeal the paragraph of the I ederal )<**mrrm Act whieh provides -2- for the appointment of a Federal Reserve Agent and for his service as a local representative of the Federal Reserve Board* This, together with the amendments to section 16 of the ederal eserve Act contained in section 206 of the bill, would abolish all of the important functions of the Federal leave only a few odds and *D&*. eserve Agent and It was contemplated that sueh odds and ends would be taken care of by having the Federal Reserve Board designate the Governor of the bank or sons other offiocr of the bank appointed by its beard of directors to per* form the few remaining functions which the law assigns to the ; ederal ^^^rr9 Agent* Howeverf in order to eliminate any argument on this un- irnportant question, it is suggested that the bill be amended on page 40 by striking out the sentence commencing in line 14 and substituting the following i "All duties prescribed by lew for the Federal Reserve Agent stoll be performed by the Governor of the bank or lay sueh other person or persons as he may designate.K Professor Spahr states that the last paragraph ef section 201(a), page 40, lines 17*22, permitting present members ef the beards ef directors of the Federal mu^rrm banks to trim out their terms ''would sees to require a modification of these parts of t he bill which provide that this section shall be effective ninety days after enactment"• -5- Apparently the parts of the bill whioh rofessor Spahr think* should bo modified are those whioh provide as follows: "Sffeetive 90 days after the enactment of the Aot containing this aiaendknent9 the offioos of Governor and chairman of th« board of directors of oaoh l!ederal 'to* bank shall bo oombinod," (jp*ge 89, lino • ) • "Effective 90 days aft or tho enactment of the Aot oontainod in this amendment, any radoral Ras«rr# agent who shall not have boon appointed Gororaor of tho bank shall ooaso to bo a olass C dirootor and ohairoan of th« board of dir^tors.11 (Pago 40f 1 1 M 10). It will bo obMrvtd that tho abero provisions affoot only tho olass 8 dlrootor who is tho rodoral rosorvo agont and do sot apply to tho otter two olass C directors* Instead of providing ^that this •option shall bo •ffootlvo 90 days aftor •naotasntn as statod by -rofossor Spahr, tho abovo quotod portions of the bill msr^ly pro* vido that tho offloos of Governor and rederal reserve agent shall be combined and that a Federal roserve agent who has not been appointed Governor shall oease to be a olass C dirootor 90 days after the enactment of the Act* The paragraph whleh Profeesor Spahr cites provides that no xaember of the board of directors, other than the Governor and Vlee Governor, shall wmrrm as a dirootor for sore than two oone+outiv* t«ms of three years eaeh. Hbut this shall aot provent th* present lneu»bents from serving oat the remainders of their present terms" • It is obviou* that th« word ^thls91 r%tmr% only to the provisions of the paragraph in whleh it oeours. Only by oonstruing ths 'U word "thia" to aaan "thie eeotion" oould a eoofliet bo oroatod between tha paragraph in whieh auoh ward appears and tha above quoted proriaiona regarding tha Fodoral roaorro agent* It is submitted, thoro- forof that Prefeasor Spahr's oaament upon thia point ia tha raault oithor of a strained construction or a hasty reading. On page 6 offadememorandum, Professor Spehr says that, "Section 208(2) provides a moana by whioh Mr* riaalin my rotiro at onco and Ifossrs. Mil lor and Jaaaa ir 1936, thua ronoring from tho Board in a vary short timo9 oron if moro arbitrary nothoda aro not uaod, its throo most axporlonood mambors« In ordor to aliminato an> •rguaont about this point* it is suggostod that tha Ull bo amondodf on pago 4S* lino 8f by Inaorting baforo tho quotation narka tho following a ^Nothing in thia sootion shaJLl proront tho Prosidont from roappointing any aaaibor of tho I odoral Rosorro Board holding offioo o« July lt 1936." Although rofoasor Spahr did not mantlon this pointy it is also aug^ostad that# in ordor to diminiah tha possibility of raeanaios in tho msBiborship of tho Board, tha bill bo anondod* on pago M f by inserting botwoon linos 21 and 22 tho following aow paragraph! (4) By adding at tha and of tha second paragraph tho following* "Jpon tho aspiration of their terms of of flee* saoabers of tha • odoral Hesorre Board shall continue to $erre until their soaoessors are appointed asd ha^e qualified#n -S- Slttllar bills with referenoe to M i b t n of the Interstate Cosaaission piiNd the House oa March 4 t 1986 (H.R* 47fci) and the Semate oa February 12f 198$ (S.946)i and it is believed that provision should bo made for members of tho ederal Reserve Board to hold oror until thoir suooossors aro appointed and have qualified* Professor Spahr's next criticism of the draftsmonship of the bill is direoted at the provision of seotion 208(2) (page 42, line 17) that eaeh member of the Federal Reserve Board retiring at age 70 "nho shall hare serred for at least 5 years shall reoeiv** during the remainder of his life, retirement pay in an amount equal to the annual salary paid to appointlTe members prior to the enaotiaezifc of the Aot ooartainiiig this amendment". The professor interprets this provision to mean that a retiring board member would receive a total pension of ?12t000 "for the rest of his life", rather than annual retlrnaaat pay In the amount of 112*000• It is believed that a reasonable con- struction of the language of this provision as it nmr stands is that a retiring board member who has reached 70 years of age and who has served 6 or more years shall reeelve annual retirement pay based upon the years served9 the yearly smouat to be determined by the number of years served multiplied by $1*000, but not to exoeed $12,000 per annuia. iven Professor Spahr states that the seotion "probably was intended" to have this offeet* However, even if Professor Spahr's criticism of the provision has any substance, it can be removed by ths insertion of the word "annual" before the word * retirement1* In two places* (^age 42, lines 19 and 23)• rofessor Spahr also suggests that the word *&mm&" sorted after the word "year" on page 42, line 25, be in- It seems that an unprejudiced reading of the language of this proriso makes it clear that the words "each year* in line 26 mean eaeh year that the retiring member has served* The words "of sueh serrloe" on page 43, line 1 clearly modify the word *ym*r* in both instances *here sueh word appears in line 25 of page 42* It thus appears that the Insertion of the T*ord "annual11 before the word "retirement* in two places as suggested above will eliminate any possible doubt as to the meaning of this section whleh Professor Spahr finds so "badly muddled!• j It Is stated ty "refessor Spahr that section 206 of H e bill ;t>age 45, line 18) "seems to be tacked on to the prooedlr^ pvrt* of section IS of the Federal Reserve Aet without any regard to how it affects the preceding paragraphs of that section". lie states that it would appear that most of the preceding paragraphs of section 18 are nullified but that it would be difficult to determine just what the law is* It would seem clear that the new paragraph to be added by section 206 of the Bill, being a later enactment would prevail s over any conflict ing provisions of ths present law* • 7- However, the question raised tyr Professor Spahr taay easily be eliminated by Inserting on page 45, line 21, at the beginning of the new paragraph added by section 206f the words. "Notwithstanding any other provision of law,11* With regard to section 208(1) of the bill (pags 46, H n * 16), rofessor Spahr states* "When a money Is legal tender for all pur- poses, It oan be used to pay all debts, public and private* This means, literally, that these notes could be used for lawful reserves and could be used to redeem any other currency* • * * In contradiction to this, lines 24-25 exclude these notes from the lawful money for reserve purposes in the Federal Reserve banks* This means that the Federal Reserve notes are not permitted to fulfill their functions as full legal t ender money* The two provisions are in direct conflict The "rofessor appears to be engaged in a somewhat circular process in the above argtaent* First he oritioises the prevision stating that Federal reserve notes shall be legal tender (which they already are under existing law) because he says It will enable suoh notes to be ueed as lawful reserves* Hcxt he attacks the provision which prevents Federal rmmmrrm notes from being counted as reserves, on the ground that stash prevision dees sot permit the notes to fulfill their functions as legal tender* It Is not olear whether Prefessor Spahr is indulging In a font of nental shado*»boxing or whether he is vague at to the meaning of the term nlegal tender'1. Legal tender is money whieh may lawfully be ueed aa a tender in payment of a debt. The question of what may oonrtitute reeerree la of oourae an entirely different matter and la governed by statute* that Federal reserve notea cannot be uaed aa rmnmrw The faot against do- posits with a Federal reserve bank creates no ineonaiatenoy with tho provision making suoh notes legal tender* rofessor Spahr states that there appears to be no good reason for repealing the provision of section 16 of the Federal R#» serve Aet for A 5 per cent redemption fund for Federal reserve notes with the Treasurer of t he United states* The profeaaor statesi 'The omission of the redemption fund may be due to careless billdrafting." The provision for the redemption fund was omitted intentionally and not as a result of "careless bill-drafting". Inasmuch aa th* fed- eral reserve banks laaintaln deposits with the freas^iry in the Gold ettlemont • und and the Treasurer can charge their accounts with all ederal reserve notes retired, it is not necessary to have a separate fund for this porpo&e. ^rofessor Spahr again alleges section 208(2) (page 48, line 15)# * careless bill-drafting" in He oo»pliiins that he words "or aubtreasuriesT are allowed to stand in the second line following the -9- last delation provided by section 806* This statement is apparent- ly caused ty the Professor1s inadequate information; since all of the proTieo in which such words appear was eliminated from section 16 of the Federal Reserve Aot by the Act of January 30, 1984* RESUME OF AMKHDMEMT8 MO* STOGBSTKD. On page 40, strike out the sentence oomeaeinc in line 14 and substitute the following* the Federal "All duties prescribed by law for ©serve agent shall be performed by the iorernor of the bank or ty such other person or persons as he m y designate." °ft page 429 before the werd "retirement" in lines 19 and 2S, insert the *or<l Mannual** n page 4St line 8, Insert before the quotation marks the following! "Nothing in this section shall prevent the President frcfst reap pointing any member of the Federal Rmtmm Board holding of floe on July lf 1956.* (in page 45, between lines 21 and 22# insert the following new paragraph! (4) By adding at the end of the second paragraph the followingt "Upon the expiration of their terms of office, members of the federal Reserve Board shall continue to serve until their successors are appointed and have qualified•" On page 46, line 21, immediately before the word "upon" insert: '• Notwithstanding any other prorlsion of law, %
@FedFRASER