Full text of Mimeograph Letters and Statements of the Board : Copy of Confidential Memorandum of Counsel re the Board's Power Over Foreign Transactions of Federal Reserve Banks, Number X-4980, Volume 27, Page 268

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*

* (Confidential)

% 4980
October 20 , 1927.

To:

The Federal Reserve Board,

From:Mr. Wyatt- General Counsel•

Subject:

The Board* s power over foreign

transactions of Federal Reserve Banks.

\

The Board has requested an opinion with r e s p e c t to what
r e g u l a t i o n s , l i m i t a t i o n s and r e s t r i c t i o n s i t i s authorized to prescribe
as to f o r e i g n or i n t e r n a t i o n a l t r a n s a c t i o n s of Federal reserve banks,
and as to i t s general authority over such t r a n s a c t i o n s .

I understand

that the Board d e s i r e s to have the f o l l o w i n g p o i n t s covered in t h i s
opinion:
(1)

Whether the Board has power to r e g u l a t e , l i m i t ,

or r e s t r i c t t r a n s a c t i o n s i n v o l v i n g the opening of accounts, the appointment of correspondents, or the establishment of agencies in f o r e i g n
countries;
(2)

Whether the Board has power to r e g u l a t e , l i m i t ,

or r e s t r i c t dealings in b i l l s of exchange and bankers 1 acceptances
between Federal reserve banks and f o r e i g n central banks;
(3)

Whether the Board has power to r e g u l a t e , l i m i t ,

or r e s t r i c t dealings in gold between Federal reserve banks and f o r e i g n
c e n t r a l banks; and
(4)

Whether the Federal reserve banks may l a w f u l l y

charge a commission or f e e in connection with such f o r e i g n t r a n s a c t i o n s .
CONCLUSIONS-.
A f t e r c a r e f u l consideration of these questions, I have reached
the f o l l o w i n g conclusions;
(1)

Under the s p e c i f i c terms of s e c t i o n 14(e) of the

Federal Reserve Act, no Federal reserve bank may l a w f u l l y open or main-




t a i n accounts, appoint correspondents, or e s t a b l i s h agencies in f o r e i g n
c o u n t r i e s without f i r s t obtaining the consent of the Federal Reserve
Board; and the opening and maintenance of such accounts, the appointment
of such correspondents, the establishment of such agencies and the conduct through such correspondents or agencies of "any transaction"

auth-

o r i z e d by s e c t i o n 14 of the Federal Reserve Act f o r or on behalf of
other Federal reserve banks i s expressly made subject to such r u l e s and
r e g u l a t i o n s as the Federal Reserve Board may p r e s c r i b e .

In a d d i t i o n , the

Board has the power to order or d i r e c t Federal reserve banks to open and
maintain accounts, appoint correspondents and e s t a b l i s h agencies in
foreign countries.
(2) By v i r t u e of s p e c i f i c p r o v i s i o n s of the Federal Reserve Act, the Federal Reserve Board i s authorized and empowered to pres c r i b e r e g u l a t i o n s , r e s t r i c t i o n s and l i m i t a t i o n s governing d e a l i n g s in
b i l l s of exchange between Federal reserve banks and f o r e i g n c e n t r a l
banks.
(3) By v i r t u e of i t s r i g h t to e x e r c i s e general superv i s i o n over Federal reserve banks, and by v i r t u e of c e r t a i n other powers
s p e c i f i c a l l y granted in the Federal Reserve Act, the Federal Reserve
Board i s authorized to r e g u l a t e , l i m i t or r e s t r i c t important dealings
in gold i n v o l v i n g large amounts between Federal r e s e r v e banks and
f o r e i g n c e n t r a l banks under s e c t i o n 14(a) of the Federal Reserve Act,
(4) Whenever the Federal reserve banks enter into any
lawful transaction i n v o l v i n g the extension of c r e d i t t o , or the performance of any s e r v i c e f o r , a f o r e i g n central bank, they may l a w f u l l y charge
a reasonable commission or f e e f o r the extension of such c r e d i t or the
r e n d i t i o n of such s e r v i c e s .



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--2ZQ
X-4980

DISCUSSION.
The only one of these questions which presents any d i f f i c u l t y
i s the question whether the Board has the power to r e g u l a t e , l i m i t or
r e s t r i c t d e a l i n g s in gold between Federal reserve banks and f o r e i g n
c e n t r a l banks.

I s h a l l , t h e r e f o r e , d i s c u s s the other questions f i r s t

and take up t h i s more d i f f i c u l t question l a s t ,
FOREIGN ACCOUNTS, CORRESPONDENTS MP AGENCIES.
The a u t h o r i t y f o r Federal reserve banks to open and maintain
accounts,

appoint correspondents, and e s t a b l i s h a g en ci es in f o r e i g n

c o u n t r i e s i s conferred by the f o l l o w i n g language of Section 14:




"Every Federal reserve bank s h a l l have power:
11

(e) To e s t a b l i s h accounts with other Federal r e s e r v e
banks f o r exchange purposes and, with the consent or
upon the order and d i r e c t i o n of the Federal Reserve
Board and under r e g u l a t i o n s to be -prescribed by s a i d
board, to open and maintain accounts in f o r e i g n count r i e s , appoint correspondents, and e s t a b l i s h a g en ci es
in such countries wheresoever i t may be deemed b e s t
f o r the purpose of purchasing, s e l l i n g , and c o l l e c t i n g
b i l l s of exchange, and to buy and s e l l , with or without
i t s indorsement, through such correspondents or a g e n c i e s ,
b i l l s of exchange (or acceptances) a r i s i n g out of a c t u a l
commercial t r a n s a c t i o n s which have not more than n i n e t y
days to run, e x c l u s i v e of days of grace, and which bear
the signature of two or more responsible p a r t i e s , and,
with the consent of the Federal Reserve Board, to open
and maintain banking accounts f o r such f o r e i g n c o r r e s pondents or a g e n c i e s . Whenever any such account has
been opened or agency or correspondent has been appointed
by a Federal reserve bank, with the consent of or under
the order and d i r e c t i o n of the Federal Reserve Board,
any other Federal reserve bank may, with the cons ont
and approval of the Federal Reserve Board, be permitted
to carry on or conduct, through the Federal reserve bank
opening such account or appointing such agency or correspondent , any transaction authorized by t h i s s e c t i o n
under r u l e s and r e g u l a t i o n s to be p r e s c r i b e d bv fhe hoard."

X-4980
. < - * - )

,j

7

J

From a mere reading of t h i s language i t i s obvious that the
Federal Reserve Board i s given f u l l control of a l l t r a n s a c t i o n s conducted thereunder.

Ho Federal r e s e r v e bank may open or maintain accounts,

appoint correspondents, or e s t a b l i s h agencies in f o r e i g n c o u n t r i e s
except with the consent and subject to the r e g u l a t i o n s of the Federal
Reserve Board; and any Federal reserve bank must open and maintain
accounts, appoint correspondents, or e s t a b l i s h agencies in f o r e i g n
countries i f ordered or d i r e c t e d to do so by the Federal Reserve Board.
The opening and maintaining of such accounts, the appointment of such
correspondents, and the establishment of such a g en ci es i s e x p r e s s l y
made subject to " r e g u l a t i o n s to be prescribed by s a i d board."

No Fed-

e r a l reserve bank may open and maintain banking accounts through such
f o r e i g n correspondents or agencies without the consent of the Federal
Reserve Board.

Other Federal reserve banks may p a r t i c i p a t e in such

t r a n s a c t i o n s only with the consent and approval of the Federal Reserve
Board.

And a l l t r a n s a c t i o n s through such correspondents or a g en ci es

in which other Federal reserve banks p a r t i c i p a t e must be conducted
"under r u l e s and r e g u l a t i o n s to be prescribed by the Board."
This g i v e s the Board the f u l l e s t p o s s i b l e measure of c o n t r o l ,
and i t i s important to note that the r u l e s and r e g u l a t i o n s which may be
p r e s c r i b e d by the Board governing t r a n s a c t i o n s in which other of the
Federal reserve banks p a r t i c i p a t e p e r t a i n to a l l t r a n s a c t i o n s authorized
by

mny part of S e c t i o n . 1 4 , and i s not l i m i t e d to t r a n s a c t i o n s under

subdivision ( e ) .
DEALINGS IN BILLS OF EXCHANGE AND ACCEPTANCES.
The power of the Federal reserve banks to deal on the open
market in b i l l s of exchange and bankers' acceptances i s conferred by the



( - 5 - )

X-4-980

f i r s t paragraph of s e c t i o n 14, which reads as f o l l o w s ;
"Sec. 14. Any Federal reserve bank may, under r u l e s
and r e g u l a t i o n s prescribed by the Federal Reserve Board,
purchase and s e l l in the open market, at home or abroad,
e i t h e r from or to domestic or f o r e i g n banks, f i r m s , corp o r a t i o n s , or i n d i v i d u a l s , cable t r a n s f e r s and bankers'
acceptances and b i l l s of exchange of the kinds and maturi t i e s by t h i s Act made e l i g i b l e f o r r e d i s c o u n t , with or
without the indorsement of a member bank.11
I t i s obvious that a l l transactions conducted under authority
of t h i s paragraph are e x p r e s s l y made subject to "rules and r e g u l a t i o n s
p r e s c r i b e d by the Federal Reserve Board."
Further and more complete authority to control such transa c t i o n s i s conferred upon tho Federal Reserve Board by the f o l l o w i n g
paragraph of s e c t i o n 13:
"The discount and rediscount and the purchase and
~ c a l e by any Federal reserve bank of any b i l l s r e c e i v a b l e
and of domestic and f o r e i g n b i l l s of exchange, a i d of
acceptances authorized by t h i s Act, s h a l l bo subject to
such r e s t r i c t i o n s , l i m i t a t i o n s , and r e g u l a t i o n s as may be
imposed by tho Federal Reserve Board."
I t has been suggested that t h i s paragraph p e r t a i n s only to
domestic t r a n s a c t i o n s and g i v e s the Board no power over t r a n s a c t i o n s
in f o r e i g n countries; but, the broad language used by Congress i s not
subject to any such r e s t r i c t e d i n t e r p r e t a t i o n .

I t w i l l be noted that

i t a p p l i e s not only to the discount and rediscount but a l s o to the
purchase and

uale by any Federal reserve banks of any b i l l s r e c e i v a b l e

and of domestic and f o r e i g n b i l l s of exchange and of acceptances autho r i z e d by t h i s Act.

I t i s not l i m i t e d in terms to domestic t r a n s a c t i o n s

but i s couched in the broadest p o s s i b l e language and i s o b v i o u s l y
intended to include a l l purchases and s a l e s by any Federal r e s e r v e bank
of any b i l l s r e c e i v a b l e , domestic and f o r e i g n b i l l s of exchange, or
acceptances authorized by the Federal Reserve Act.



( - 5 - )

X-4980
3 7 3

I t has been suggested that i t was intended to apply only to
t r a n s a c t i o n s under s e c t i o n 13 and does not apply to d e a l i n g s under
s e c t i o n 14.

A glance at the l e g i s l a t i v e h i s t o r y of t h i s p r o v i s i o n ,

however, shows that i t could not p o s s i b l y have been intended to apply
only to s e c t i o n 13.

As contained in the o r i g i n a l Federal Heserve Act,

t h i s p r o v i s i o n applied only to rediscounts but i t was amended by the
Act of September 7, 1916, so as to apply also to purchases and s a l e s .
At th&t t i n e s e c t i o n 13 did not authorize Federal r e s e r v e banks to
purchase and s e l l b i l l s r e c e i v a b l e , b i l l s of exchange or bankers'
acceptances but d e a l t with discounts arid rediscounts and the only
a u t h o r i t y f o r the purchase and s a l e of b i l l s of exchange and acceptances by Federal r e s e r v e banks was contained in s e c t i o n 14.

Even at

t h i s l a t e date, the only authority in s e c t i o n 13 to purchase and s e l l
b i l l s of exchange i s the authority added by the A g r i c u l t u r a l Credits
Act of March 4, 1923, to purchase and s e l l b i l l s of exchange payable
at s i g h t or on demand which are drawn to f i n a n c e the domestic shipment
of nonperishable r e a d i l y marketable s t a p l e a g r i c u l t u r a l products.
I t i s obvious, t h e r e f o r e , that the a u t h o r i t y conferred upon
the Federal Reserve Board by the above quoted p r o v i s i o n of s e c t i o n 13
i s intended to apply to the purchase and s a l e of b i l l s of exchange and
bankers' acceptances by Federal reserve banks at home or abroad under
s e c t i o n 14.
In my opinion, t h e r e f o r e , the s p e c i f i c p r o v i s i o n s of the Federal Reserve Act authorize and empower the Federal Reserve Board to pres c r i b e r e g u l a t i o n s , r e s t r i c t i o n * , and l i m i t a t i o n s covering d e a l i n g s in
b i l l s of exchange .and bankers' acceptances between Federal r e s e r v e banks
and f o r e i g n c e n t r a l banks.



( - 7 - )

X-4980

r i g h t of f e d e r a l r e s e r v e s a m s t o iame a r e a s o n a b l e
chargb iii connection w i t h f o r e i g n t r a n s a c t i o n s .
Assuming that Federal reserve banks have power to engage in
t r a n s a c t i o n s whereby they s e l l or lend gold to f o r e i g n banks, purchase
b i l l s f o r the account of f o r e i g n banks or extend c r e d i t in any way to
f o r e i g n banks, have the Federal reserve banks the r i g h t to charge a
reasonable commission or f e e f o r to doir:g1
In my opinion i t i s an i n c i d e n t a l power of Federal reserve
banks to make a reasonable charge f o r any s e r v i c e l a w f u l l y rendered by
them, u n l e s s such charge i s p r o h i b i t e d by s t a t u t e or i s contrary to
public policy.

There i s no s t a t u t e p r o h i b i t i n g the making of charges by

Federal reserve banks in connection with dealings in gold or b i l l s of
exchange with f o r e i g n central banks, nor i s there anything in the Federal
Reserve Act to i n d i c a t e that such a charge should be considered contrary
to p u b l i c p o l i c y .

Assuming that the Federal r e s e r v e banks have power

to engage in these f o r e i g n t r a n s a c t i o n s , I am of the opinion, t h e r e f o r e ,
that they are l e g a l l y authorized to make a reasonable charge f o r the
s e r v i c e s which they render in that connection.
gold t r a n s a c t i o n s .
Section 14(a) authorizes and empowers the Federal reserve banks:
"(a) To deal in gold coin and b u l l i o n a t home or abroad, to
make loans thereon, exchange Federal r e s e r v e n o t e s f o r gold,
gold c o i n , or gold c e r t i f i c a t e s , and to contract f o r loans
of gold coin or b u l l i o n , g i v i n g t h e r e f o r , when necessary,
acceptable s e c u r i t y , including the hypothecation of United
S t a t e s bonds or other s e c u r i t i e s which Federal r e s e r v e banks
axe authorized to hold;"
This s e c t i o n does not e x p r e s s l y authorize the Federal Reserve
Board to r e g u l a t e , l i m i t or r e s t r i c t the e x e r c i s e of the powers conferred
thereby; but I am of the opinion that such a u t h o r i t y i s to be found e l s e 


( - 8 - )

X-4980

3"

where in the Act,
I am not f a m i l i a r with the d e t a i l s of the arrangements between
the Federal Reserve Bank of Hew York and the various c e n t r a l banks of
f o r e i g n countries; but i t i c ray understanding t h a t , whenever the Fede r a l Reserve Banks have undertaken to enter into t r a n s a c t i o n s with
f o r e i g n c e n t r a l banks i n v o l v i n g the purchase and s a l e of b i l l s of exchange or d e a l i n g s in gold, the Federal Reserve Bank of New York has
f i r s t entered into mutual arrangements with such c e n t r a l banks whereby
each bank appoints the other i t s correspondent or agent, and that the
t r a n s a c t i o n s which take p l a c e under these arrangements are conducted
by the Federal Reserve Bank of Hew York on behalf of a l l Federal Reserve Banks on a pro r a t a b a s i s .

Where t h i s i s done there can be

no doubt of the Board's power to p r e s c r i b e r u l e s and r e g u l a t i o n s governing a l l such t r a n s a c t i o n s which are authorized by any part of Section 14;
because the l a s t sentence of Section 14(e) provides that;
"Whenever any such account has been opened or
agency or correspondent has been appointed by a Fede r a l reserve bank, with the consent of or under the
order and d i r e c t i o n of the Federal Reserve Board,
any other Federal reserve bank may, with the consent
and approval of the Federal Reserve Board, be permitted
to carry on or conduct, through the Federal r e s e r v e
bank opening such account or appointing such agency
or correspondent, any transaction authorized by t h i s
s e c t i o n under r u l e s and r e g u l a t i o n s to be p r e s c r i b e d
by the board."
I t has been suggested that the words "any transactions" as used
here r e f e r only to the purchasing, c e l l i n g and c o l l e c t i n g of b i l l s of
exchange under a u t h o r i t y of subdivision (e) of Section 14; but, in
my opinion, no such r e s t r i c t e d i n t e r p r e t a t i o n can properly be given
to these words.



The words "any t r a n s a c t i o n authorized by t h i s section"

( - 9 - )

X-4980

are very broad in t h e i r scope and c l e a r l y include every transaction
authorized "by any part of Section 14, including the power granted by
Subdivision (a) to deal in gold coin and b u l l i o n at home or abroad.
In my opinion, t h e r e f o r e , t h i s p r o v i s i o n of s u b d i v i s i o n (e) of Section
14 s p e c i f i c a l l y authorizes the Board to p r e s c r i b e r u l e s and r e g u l a t i o n s
governing any and a l l t r a n s a c t i o n s in gold between a Federal r e serve bank and a f o r e i g n central bank which has been appointed as
the agent or correspondent of such Federal r e s e r v e bank, i f other
Federal reserve banks p a r t i c i p a t e in such t r a n s a c t i o n s .
Independently of the power conferred by s e c t i o n 1 4 ( e ) , however,
I am f u r the r of the opinion that the Federal Reserve Board i s authorized
to r e g u l a t e , l i m i t or r e s t r i c t i n t e r n a t i o n a l gold t r a n s a c t i o n s of the
Federal reserve bamcs, even when such t r a n s a c t i o n s are not conducted
through correspondents or agencies opened or e s t a b l i s h e d pursuant to
section 14(d).

This power in my opinion i s included in the power con-

f e r r e d by s e c t i o n 1 1 ( j ) "to e x e r c i s e general supervision over s a i d
Federal reserve banks" and the power conferred by Section l l ( i )

to

"perform the d u t i e s , f u n c t i o n s , or s e r v i c e s s p e c i f i e d in t h i s Act, and
make a l l r u l e s and r e g u l a t i o n s necessary to enable s a i d Board e f f e c t i v e l y to perform the same.
In view of the great importance of t h i s question, I s h a l l d i s cuss at length the nature and extent of the Board's power of general
supervision, the l e g i s l a t i v e h i s t o r y of the open market powers of
the Federal reserve banks, the r e s p e c t i v e f u n c t i o n s of the Federal
r e s e r v e banks and the Federal Reserve Board in the Federal Reserve
System and the r e l a t i o n of i n t e r n a t i o n a l gold t r a n s a c t i o n s to other



( - 10 - )

X-4980

t r a n s a c t i o n s over which the Board has been given s p e c i f i c powers.

Before

entering upon such a lengthy d i s c u s s i o n , however, I s h a l l s t a t e b r i e f l y
my reasons f o r the above conclusion.

'

1. I t has long been recognized that banking i s a b u s i n e s s a f f e c t e d with the p u b l i c i n t e r e s t and that banks are subject to r e g u l a t i o n
under the p o l i c e rower f o r the p r o t e c t i o n of the general w e l f a r e of
the people.
2. Because of their very nature and because of the f a r - r e a c h i n g
e f f e c t s of t h e i r p o l i c i e s .and transactions on the general w e l f a r e of
the people, t h i s i s e s p e c i a l l y true of Federal reserve banks.
3. Federal reserve banks are i n s t r u m e n t a l i t i e s of the Federal
government created f o r p u b l i c purposes and are at a l l times and in a l l
r e s p e c t s subject to the paramount authority of the Federal government.
4 . The Federal Reserve Board i s an arm of the Federal government
created f o r the purpose of administering the Federal Reserve Act and
e x e r c i s i n g general supervision over the Federal reserve banks, to the
end that they may f u n c t i o n in a manner b e s t c a l c u l a t e d to carry out
the purposes of the Federal Reserve Act, to serve the p u b l i c p o l i c y
of the United S t a t e s , and to b e n e f i t the people .of the United S t a t e s .
5.

The Board's general power of supervision includes the power

to sec that the Federal Reserve banks preserve.and p r o t e c t the banking
r e s e r v e s of the country with which they are entrusted, that they do
nothing which may endanger the solvency or soundness of t h e i r currency, that they carry out f a i t h f u l l y the purposes of the Federal
Reserve Act and that they comply in a l l r e s p e c t s with both the l e t t e r
and the s p i r i t of the law.



This power c a r r i e s with i t the power to

9 7 8

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X-4980

require the Federal r e s e r v e "banks to cease doing anything which i s u l t r a v i r e s or which might d e f e a t the purposes of the Federal Reserve Act or
which might be detrimental to the p u b l i c i n t e r e s t .

Moreover, t h i s power

i s to be construed l i b e r a l l y so as to enable the Board e f f e c t i v e l y to
safeguard the great p u b l i c i n t e r e s t s confided to i t .
6.

From an examination of the Committee reports and l e g i s l a t i v e

debates on the Federal Reserve Act i t i s p e r f e c t l y c l e a r that the power
of carrying on the regular routine everyday b u s i n e s s of the Federal r e serve banks and the power of determining l o c a l p o l i c i e s was entrusted
to t h e i r r e s p e c t i v e board of d i r e c t o r s , but the Federal Reserve Board
was created as "a general board of management" entrusted with the power
to overlook and d i r e c t the general f u n c t i o n s of the banks in order that
the Board, on behalf of the government, might r e t a i n some power over
the e x e r c i s e of the "broader banking functions" a f f e c t i n g the country
as a whole.
7.

To t h i s end, the Board was given power, among other t h i n g s ,

to review and determine the r a t e s of discount to be f i x e d by each
Federal r e s e r v e bank from time to time, to r e g u l a t e the open market
t r a n s a c t i o n s of the Federal reserve banks, to e x e r c i s e general superv i s i o n over the Federal reserve banks, and to make a l l r u l e s and
r e g u l a t i o n s necessary to enable the Board to perform the d u t i e s , funct i o n s or s e r v i c e s s p e c i f i e d in the Federal Reserve Act.
8.

The power to purchase and s e l l b i l l s of exchange and bankers'

acceptances in the open market was conferred upon the Federal r e s e r v e
banks in order to enable them to make t h e i r rediscount r a t e s e f f e c t i v e
and to p r o t e c t t h e i r gold r e s e r v e s , but t h i s power was subjected to



X-4980
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2 3 9

r e g u l a t i o n by the Federal Reserve Board in order that the Board might have
some control over the reserve p o s i t i o n s of the banks, the r e d i s c o u n t
r a t e s , and general c r e d i t conditions throughout the country.
9.

For the same reason, the Board was ~aven a great measure of

control over the other open market operations of the Federal reserve
banks, over their power to appoint correspondents, open accounts and
e s t a b l i s h agencies abroad, and over the transactions which might oe
conducted through such f o r e i g n correspondents and a g e n c i e s .
10.

The e f f e c t i v e n e s s of the powers thus conferred upon the

Board would be s e r i o u s l y impaired and the Board 1 s a b i l i t y to e x e r c i s e some
control over the rediscount r a t e s , open market operations and f o r e i g n
t r a n s a c t i o n s of the Federal reserve banks with a view to p r o t e c t i n g the
general c r e d i t s i t u a t i o n and overseeing the

11

broader banking functions"

a f f e c t i n g the country as a whole might be rendered nugatory i f the
Federal reserve banks could enter into transactions with f o r e i g n banks
i n v o l v i n g the purchase and s a l e , lending, borrowing and earmarking of
gold, thereby moving ^rcat q u a n t i t i e s of gold into or out of the
country, without being subject to any regulation or check by the Federal
Reserve Board.
11.

Any s t a t u t e must be construed as a whole and in such a

way as to carry out the i n t e n t of the l e g i s l a t u r e .

The i n t e n t of the

l e g i s l a t u r e must be obtained by reading the act as a whole and not by
construing i s o l a t e d provisions of the same witnout any r e f e r e n c e to
t h e i r r e l a t i o n to the other p r o v i s i o n s of the act or the e f f e c t of
such construction upon other p r o v i s i o n s of the a c t .
To construe the Board's powers

51

to e x e r c i s e general super-

v i s i o n over t h e Federal reserve banks n and

11

to perform tne d u t i e s ,

12.




( - 13 - )

X-4980

f u n c t i o n s or s e r v i c e s s p e c i f i e d in t h i s act and to make a l l r u l e s and
r e g u l a t i o n s necossary to enable said Board e f f e c t i v e l y to perform the
same" s t r i c t l y and in such a way as not to include the power to e x e r c i s e
some control over i n t e r n a t i o n a l gold t r a n s a c t i o n s , would c l e a r l y defeat
the broad purposes of the Federal Reserve Act and g r e a t l y impair the
Board's f u n c t i o n as a

11

general board of management11 entrusted with the

power to overlook and d i r e c t the general f u n c t i o n s of the banks in order
that the Board, on behalf of the government, might r e t a i n some power over
the e x e r c i s e of the ^broader banking functions" a f f e c t i n g the country as
a whole.
13.

Dealings in gold between the Federal r e s e r v e banks and f o r e i g n

c e n t r a l banks are t r a n s a c t i o n s of importance to the e n t i r e Federal Heserve System and to the public i n t e r e s t s of the United S t a t e s as a whole,.
Normally large amounts are involved in these d e a l i n g s .

Frequently i n

such t r a n s a c t i o n s the funds of the Federal reserve banks are i n v e s t e d
in or represented by a s s e t s l o c a t e d in f o r e i g n c o u n t r i e s .

This use of large

amounts of the funds of the Federal Reserve System mignt cause a s e r i o u s
r e s t r i c t i o n upon the amount of funds a v a i l a b l e f o r use in t h i s country
and harmful r o s u i t s upon the Federal Reserve System or upon the business
i n t e r e s t s of t h i s country might ensue.

I t could s e r i o u s l y a f f e c t the

gold r e s e r v e s of the country and the e f f e c t i v e n e s s of the rediscount
rate.
14.

Under t h e s e circumstances, the question whether and to what

extent Federal reserve banks should engage in t r a n s a c t i o n s of t h i s kind
i s an important question of p o l i c y to the Federal Reserve System as
a whole.



The p r a c t i c a l r e s p o n s i b i l i t y of such t r a n s a c t i o n s i s one

( -

14 -

)

X-49S0

? 8 i
which in the l a s t a n a l y s i s , must r e s t upon the Federal Reserve Board.
If the Federal Reserve Board's power of general supervision over Federal reserve banks i s to have any p r a c t i c a l e f f e c t or i s to "be given any
s u b s t a n t i a l meaning, i t must be considered to extend to and include the
r e g u l a t i o n or r e s t r i c t i o n of such important a c t i v i t i e s of Federal r e s e r v e
banks as these i n t e r n a t i o n a l d e a l i n g s in gold, which may impair the e f f e c t i v e n e s s of the rediscount r a t e and the open market t r a n s a c t i o n s over
which the Board i s e x p r e s s l y given a large measure of c o n t r o l .
I am of the opinion, t h e r e f o r e , that by v i r t u e of i t s r i g h t to exe r c i s e general supervision over Federal reserve banks the Federal Reserve
Board i s empowered and authorized to r e s t r i c t or r e g u l a t e important d e a l i n g s in gold i n v o l v i n g s u b s t a n t i a l amounts between Federal r e s e r v e banks
and f o r e i g n c e n t r a l banks under s e c t i o n 14(a) of the Federal Reserve Act
and that accordingly the Federal Reserve Board may, i f i t so d e s i r e s ,
require Federal reserve banks to obtain i t s approval b e f o r e entering into
such t r a n s a c t i o n s .
. FURTHER DISCUSSION MP CITATION OF AUTHORITIES.
The above i s only a summary of the reasons f o r my conclusions
regarding the Board's power to e x e r c i s e supervision and control over
i n t e r n a t i o n a l gold t r a n s a c t i o n s .

In view of the vast importance of t h i s

subject, I have made a very lengthy and complete study and f e e l that I
should submit below f o r f u t u r e r e f e r e n c e the r e s u l t s of that study and
the c i t a t i o n s of such a u t h o r i t i e s as I have found.
GENERAL SUPERVISORY POWER.
I have made a c a r e f u l and thorough study of the Board's general
supervisory power and of the l e g a l a u t h o r i t i e s regarding the general
supervisory or v i s i t a t o r i a l powers in general.

I submit the f o l l o w i n g

d i s c u s s i o n of that subject f o r the Board's f u r t h e r information.




o&r
X-4980

( — 15 — )

I t i s customary in American law to vest in some board, commission,
or o f f i c e r , the power to e x e r c i s e general supervision over c e r t a i n types
of corporations such as common c a r r i e r s , insurance companies, and banks,
which are a f f e c t e d with a p u b l i c i n t e r e s t .

Furthermore, under American

law a l l corporations are chartered by the Government and have only such
powers as are e x p r e s s l y granted in t h e i r charters or in the laws under
which they are incorporated and such i n c i d e n t a l powers as are necessary
to the e x e r c i s e of the powers e x p r e s s l y granted.

I t i s w e l l s e t t l e d that

by i m p l i c a t i o n they are forbidden to e x e r c i s e any other powers.

The Stat*

t h e r e f o r e , i s i n t e r e s t e d in any attempt by a corporation to exceed i t s
corporate powers and i t i s w e l l s e t t l e d that the State i s the one to comp l a i n of any u l t r a v i r e s a c t s of a corporation and i s the only one which
can i n s t i t u t e quo warranto proceedings to compel a corporation to cease
performing u l t r a v i r e s a c t s .

The d u t i e s of boards, commissions or

o f f i c e r s charged with general supervision over corporations a f f e c t e d
with a public i n t e r e s t , t h e r e f o r e , are primarily to see that such corp o r a t i o n s do not exceed t h e i r lawful powers and that they carry out the
purposes of t h e i r organization in such a way as to b e n e f i t rather than
injure the p u b l i c , and to prevent or check any abuses of any character.
This power, in i t s general nature and purpose i s quite similar to,
i f not the same as, the common law power of v i s i t a t i o n .

A d i s c u s s i o n of

the a u t h o r i t i e s on the subject of v i s i t a t o r i a l powers, t h e r e f o r e , may
throw some l i g h t on the extent of the Board*s d u t i e s and powers in the
premises.
The v i s i t o r s of eleemosynary and e c c l e s i a s t i c a l corporations at
common law, however, f r e q u e n t l y performed a l l the f u n c t i o n s and p o s s e s s e d
a l l the powers which are now divided between the d i r e c t o r s of banks and
*

the governmental a u t h o r i t i e s having supervision over them; and i t i s im


"383
(

-

15 -

)

X-4960

portant to koop t h i s in mind while reading the a u t h o r i t i e s quoted "below;
B o u v i c r ' s Law Dictionary, (p. 3404) d i s c u s s e s t h i s subject as f o l l o w s :
" V i s i t a t i o n . The act of examining into the a f f a i r s of a

corpora-

tion.
"The power of v i s i t a t i o n i s a p p l i c a b l e only to e c c l e s i a s t i c a l
and eleemosynary corporations. 1 Bla. Com. 480. The v i s i t a t i o n of c i v i l
corporations i s by the government i t s e l f , through the medium of the
courts of j u s t i c e . See 2 Kent, 240. In the United S t a t e s , the l e g i s l a t u r e
i s the v i s i t o r of a l l corporations founded by i t f o r p u b l i c pviposos;
Dartmouth College v. Woodward, 4 Wheat. (U.S.) 518 4 L. Ed. 629.
*

*

*

*

*

*

*

*

*

*

*

*

"All eleemosynary corporations who are .to r e c e i v e the c h a r i t y
of the founder have v i s i t o r s i f they are e c c l e s i a s t i c a l corporations;
and i f a p a r t i c u l a r v i s i t o r i s not provided by the founder, then the
Ordinary of the p l a c e i s the v i s i t o r ; i f they are l a y corporations,
the founder and h i s h e i r s are perpetual v i s i t o r s ; 5 Mod. 404. I t i s a
necessary incident of an eleemosynary corporation; 1 Mod. 82; "a power
to correct abuses and to enforce due observance of the s t a t u t e s of the
c h a r i t y , but not a power to revoke the g i f t s , to change u s e s or d i v e s t
r i g h t s ; " Allen v. McKean 1 Sunn. 275, Fed. Cas. Mo. 229, per Story, J.
"A v i s i t o r has the r i g h t of i n s p e c t i n g the a f f a i r s of the
corporation, and superintending a l l o f f i c e r s who have charge of them
according to the s t a t u t e s of the founder, without any control or r e v i s i o n
of any other person or body, except the j u d i c i a l t r i b u n a l s , by whose
a u t h o r i t y and j u r i s d i c t i o n he may be r e s t r a i n e d and kept within the l i m i t
of the granted powers, and made to regard the general laws of the land;
in r e Murdock, 24 Mass. 303. Ho. appeal lay from a v i s i t o r u n l e s s he
v i s i t s qua Ordinary, when an appeal lay to the Crown in Chancery. I t was
baid by Lord Camden that v i s i t a t i o n i s despotism u n c o n t r o l l e d and without
appeal; Grant, Corp. 534. See, g e n e r a l l y , Tudor, Charitable Trusts;
Stephens, S t a t u t e s Relating to E c c l e s i a s t i c a l , e t c . , I n s t i t u t i o n s ; Report
of Oxford Commission (1852); 7 Com. Dig. 545; 21 Viner, Abr. 587. See 34
L. Mag. and Rev. 40, as to Oxford and Cambridge U n i v e r s i t i e s .
"In Massachusetts i t i s h e l d that the v i s i t a t i o n of eleemopynary
corporations according to the common law i s in f o r c e except as a l t e r e d by
s t a t u t e ; In re Murdock, 24 Mass. 303; such s t a t u t e s may v e s t v i s i t a t o r i a l
power in the c o u r t s , in the absence of a personal v i s i t o r , or even where
there i s one; In re Taylor Orphan Asylum, 36 Wis. 534; but where v i s i t a t o r i a l power i s conferred on c e r t a i n p u b l i c o f f i c e r s , the courts may not
i n t e r f e r e u n l e s s such v i s i t o r s should act contrary to law; Nelson v.
Cashing, 2 Cush. (56 Mass.) 519.
"Even where a t e s t a t o r , in founding a h o s p i t a l , d i r e c t e d that the
t r u s t e e s should annually report t h e i r a c t s to the court and give bonds,
i t was h e l d that the court had no v i s i t a t o r i a l power or other supervision



X-4980

n

i

( -17- )
Jenkins v . Berry, :!IP Ky. 350, S3 S . f . 594.
"The v i s i t a t o r i a l power of a court over a cemetery a s s o c i a t i o n does
not a u t h o r i z e i t to s u b s t i t u t e i t s own "business judgment f o r t h a t of t h e
a s s o c i a t i o n ; Roanoke Cemetery Co, v . Goodwin, 101 Va. 605, 44 S.E. jSS•
"Under t h e v i s i t a t o r i a l powers of a s t a t e over c o r p o r a t i o n s doing
b u s i n e s s w i t h i n i t s borders, i t i s competent f o r i t to compel such corporat i o n s to -produce t h e i r books and papers f o r i n v e s t i g a t i o n and to require the
testimony of t h e i r o f f i c e r s and employees to a s c e r t a i n whether i t s laws
have been complied with, and this power extends to the production of books
and papers kept o u t s i d e of the s t a t e , and a s t a t u t e r e q u i r i n g such production
does not amount to an unreasonable search or s e i z u r e or a d e n i a l of due
p r o c e s s of law; Consolidated R. Co. v . Vermont, 207 U. S. 5 4 l , 28 Sup. Ct.
17S, 52 L. Ed. 327, 12 Ann. Cas. 658; Hammond P. Co. v . Arkansas, 212 U.S.
322, 29 Sup. Ct. 370, 53 1 . Ed. 530, 15 Ann. Cas. 645. A c o r p o r a t i o n , b e i n g
the c r e a t u r e of t h e s t a t e , has not the c o n s t i t u t i o n a l r i g h t to r e f u s e to
submit i t s books and papers f o r an examination a t the s u i t of t h e s t a t e , and
an o f f i c e r of a c o r p o r a t i o n charged w i t h criminal v i o l a t i o n of a s t a t u t e
cannot p l e a d the c r i m i n a l i t y of the c o r p o r a t i o n as a r e f u s a l to -produce i t s
books; Hale v . Hezikel, 201 U. S. 43, 26 Sun. Ct. 370, 50 L. Ed. 6^2. A c o r p o r a t i o n i s bound to f u r n i s h information when c a l l e d f o r by the s t a t e , so
f a r as reasonably p o s s i b l e , and s t a t e the f a c t s which excuse them from answering more f u l l y ; S t a t e v . Express Co., 81 Minn. 87, 83 H.W. 465, 50 I . E . A .
667, 83 Am. S t . Rep. 366; by s t a t u t e the r i g h t e x i s t s i n Kansas; See Western
U. T e l . Co. v . A u s t i n , 67 Kan. 208, J2 Pac. 85O.
"It may be considered t h a t , to a c e r t a i n e x t e n t , r a i l r o a d comm i s s i o n s are t h e machinery c r e a t e d by law f o r the e x e r c i s e of v i s i t a t o r i a l
•power.
"This power does not include the common law r i g h t of the shareholder
to i n s p e c t the books of the corporation; G-uthrie v . Harkness, 199 U.S.
148, 26 Sup. Ct. 4, 50 L. Ed. 130, 4 Ailn. Cas. 433."
In the famous Dartmouth College Case, 17 U.S. (4 Wheat) 517, 672,
Mr. J u s t i c e S t o r y d i s c u s s e s the s u b j e c t of v i s i t o r s of eleemosynary corpora t i o n s as f o l l o w s :
"To a l l eleemosynary c o r p o r a t i o n s , a v i s i t a t o r i a l power
a t t a c h e s , as a n e c e s s a r y i n c i d e n t ; f o r t h e s e c o r p o r a t i o n s b e i n g
composed of i n d i v i d u a l s , s u b j e c t to human i n f i r m i t i e s , are l i a b l e ,
as w e l l as p r i v a t e p e r s o n s , to d e v i a t e from the end of t h e i r i n s t i t u t i o n . The law, t h e r e f o r e , has provided, that there s h a l l somewhere
e x i s t a power to v i s i t , inquire i n t o , and c o r r e c t a l l i r r e g u l a r i t i e s
and abuses i n such c o r p o r a t i o n s , and to compel the o r i g i n a l purposes
of c h a r i t y to be f a i t h f u l l y f u l f i l l e d . 1 31. Com. 480. The nature and e x t e n t of t h i s v i s i t a t o r i a l power has been expounded w i t h
admirable f u l n e s s and accuracy by Lord Holt i n one of h i s most c e l e brated judgments. P h i l l i p s v . Bury, 1 Ld. Raym. 5; s . c . 2 T.R. 3^6.
And of common r i g h t , by the d o t a t i o n , the founder and h i s h e i r s are the
l e g a l v i s i t o r s , u n l e s s the founder has appointed and a s s i g n e d another pej>son to be v i s i t o r . For t h e founder may, i f he p l e a s e , a t t h e time of the



( -IS- )

X-4980

endowment, part w i t h h i s v i s i t a t o r i a l power, and the
person to whom i t i s a s s i g n e d w i l l , i n that c a s e , p o s s e s s
i t i n e x c l u s i o n of the f o u n d e r ' s h e i r s . 1. B l . Com. 482.
*** But where t r u s t e e s or governors are incorporated
to manage the c h a r i t y , the v i s i t a t o r i a l power i s deemed
to b e l o n g t ° them i n t h e i r corporate c h a r a c t e r . P h i l i p s
v . Bury, 1 Ld. Haym. 5? s . c . 2 T.R. 346; Green v . Rutherforth,
1 Ves. 472; Attorney-General v . Middleton, 2 I t i d . 3 2 7 ;
Case of Sutton H o s p i t a l , 10 Co. 2 3 , 3 1 . "
That the power to s u p e r v i s e and examine "banks i s a v i s i t o r i a l
power i s i n d i c a t e d "by the f o l l o w i n g passage i n Morse on Banks and
Banking (5 Ed.) Vol 1, p . 4 4 :
"A s t a t e may i n v e s t the s u p e r v i s i o n of banks i n a bank
commissioner or other examiner, and grant to him v i s i t o r i a l
powers over banks and impose upon him the duty of examination
of banks, the i n v e s t i g a t i o n of t h e i r s o l v e n c y , and the winding
up of t h e i r a f f a i r s i f the p r o t e c t i o n of the d e p o s i t o r s demands
such a c t i o n . He may examine the records of the bank, change
the p e r s o n n e l of the board of d i r e c t o r s , and e s t a b l i s h r u l e s
f o r the proper d i s c h a r g e of h i s duty. His power should not be
unduly narrowed by c o n s t r u c t i o n , nor can he be removed by the
governor."
In Guthrie v . Harkness, 199 U.S. 148, a stockholder i n a n a t i o n a l bank
a p p l i e d f o r l e a v e to i n s p e c t the books, accounts and l o a n s of the bank f o r
the purpose of a s c e r t a i n i n g the v a l u e of h i s s t o c k . Upon r e f u s a l to a l l o w
proceedings
such i n s p e c t i o n , he i n s t i t u t e d / t o compel the o f f i c e r s of the bank to permit
him to examine t h e books.

One of the d e f e n s e s made on b e h a l f of t h e

o f f i c e r s was that the common law r i g h t of t h e s t o c k h o l d e r to i n s p e c t
the books of a c o r p o r a t i o n i s cut o f f as to s t o c k h o l d e r s of n a t i o n a l
banks by S e c t i o n 5241 of the Revised S t a t u t e s , which p r o v i d e s

that

"Ho a s s o c i a t i o n s h a l l be s u b j e c t to any v i s i t o r i a l powers other than
such as are authorized by t h i s t i t l e or are v e s t e d i n the courts of
justice.11

The court h e l d that the stockholder was e n t i t l e d to examine

the books of the bank and that the o f f i c e r s t h e r e o f must permit him
to do s o .




Mr. J u s t i c e Day s a i d :

X-4980

•rs

( -19- )

36

"But, i t id s a i d , the r i g h t of the shareholder t o i n s p e c t
the "books i s cut o f f "by s e c t i o n ^2kl, p r o v i d i n g 1 no a s s o c i a t i o n
s h a l l be s u b j e c t to any v i s i t o r i a l powers other than such as are
a u t h o r i z e d by t h i s T i t l e , or are v e s t e d i n the c o u r t s of j u s t i c e .
•We are unable to f i n d any d e f i n i t i o n of ' v i s i t o r i a l powers* which
can be h e l d to i n c l u d e the common law r i g h t of the shareholder to
i n s p e c t the books of t h e corporation * * *.
*

*

*

*

*

*

*

*

*

*

*

"The meaning of t h i s s e c t i o n was b e f o r e Judge Baxter i n the
c a s e of F i r s t Nat. Bank of Youngstown v . Hughes, 6 Fed. Rep. 737»
and of the meaning of the term ' v i s i t o r i a l powers', as used i n
s e c t i o n 5241, that learned judge s a i d :
' V i s i t a t i o n , i n law, i s the a c t of a superior or superi n t e n d i n g o f f i c e r , who v i s i t s a c o r p o r a t i o n t o examine i n t o
i t s manner of conducting b u s i n e s s , and e n f o r c e an observance
of i t s laws and r e g u l a t i o n s . B u r r i l l d e f i n e s the word to mean
" i n s p e c t i o n ; superintendence; d i r e c t i o n ; r e g u l a t i o n . " 1
"At common law the r i g h t of v i s i t a t i o n was e x e r c i s e d by the King
as to c i v i l c o r p o r a t i o n s and as t o eleemosynary ones by the founder
or donor. 1 Cooley's Blackstone, 481.
' I n the United S t a t e s the l e g i s l a t u r e i s the v i s i t o r of a l l corporations c r e a t e d by i t , where there
i s no i n d i v i d u a l founder or donor, and may d i r e c t j u d i c i a l proceedings a g a i n s t such c o r p o r a t i o n s f o r such abuses or n e g l e c t s as would
at common law cause f o r f e i t u r e of t h e i r c h a r t e r s . ' 1 C o o l e y ' s Blackstone, 482,note.
"In the case b e f o r e us the Supreme Court of Utah quotes from
M e r r i l l on Mandamus as f o l l o w s :
' V i s i t o r s of c o r p o r a t i o n s have power to keep them
w i t h i n the l e g i t i m a t e sphere of t h e i r o p e r a t i o n s , and to
c o r r e c t a l l abuses of a u t h o r i t y , and to n u l l i f y a l l i r r e g u l a r "Proceedings. In America there are very few c o r p o r a t i o n s which have -private v i s i t o r s , and i n the absence
of such, the S t a t e i s the v i s i t o r of a l l c o r p o r a t i o n s . '
"In no case or a u t h o r i t y that ""e have been able to f i n d has
there been a d e f i n i t i o n of t h i s r i g h t , which would i n c l u d e the
p r i v a t e r i g h t of the shareholder to have an examination of the b u s i ness i n which he i n t e r e s t e d , and the r i g h t of d i s c o v e r y of the
methods and means by which the agents of the c o r p o r a t i o n are cond u c t i n g i t s a f f a i r s . T h e r i g h t of v i s i t a t i o n b e i n g a p u b l i c r i g h t ,
e x i s t i n g i n the S t a t e f o r the purpose of examining i n t o the conduct
of the corporation w i t h a view to keeping i t w i t h i n i t s l e g a l powers,
Congress had i n mind i n p a s s i n g t h i s s e c t i o n that i n other s e c t i o n s
of the law i t had made f u l l and complete p r o v i s i o n f o r i n v e s t i g a t i o n
by the Comptroller of the Currency and examiners appointed by him,
and, a u t h o r ! z i n g the appointment of a r e c e i v e r , t o take p o s s e s s i o n
of the b u s i n e s s with a view to winding up the a f f a i r s of the bank,
i t was the i n t e n t i o n that t h i s s t a t u t e should c o n t a i n a f u l l code of



2 - 7
(

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)

X-4980

"provisions upon the subject, and that no s t a t e law or enactment
should undertake to e x e r c i s e the r i g h t of v i s i t a t i o n over a nat i o n a l corporation. Except i n so far as such corporation was l i a b l e
to control i n the courts of .justice, t h i s a c t was to he the f u l l
measure of v i s i t o r i a l power.11
The Board's power to e x e r c i s e general supervision over Federal reserve "hanks and examine i n t o t h e i r a f f a i r s i s quite s i m i l a r to the corresponding
power of the Comptroller of the Currency over n a t i o n a l banks, and i t would seem
that the nature and purpose of the Board's power must be p r a c t i c a l l y the same as
that of the Comptroller's.
In the case of State v. Morehead, (Nebr.) 155 U. W. 879, the court i n
d i s c u s s i n g the r i g h t of the State Banking Board to r e f u s e to i s s u e a charter to
a savings bank s a i d :
"When the general r u l e of statutory c o n s t r u c t i o n i s applied
and s e c t i o n 16 i s considered in connection with the other p r o v i s i o n s , i t must be h e l d that the board i s v e s t e d with a u t h o r i t y not
only to c o r r e c t e v i l s that may creep into the management of an e x i s t ing bank, but to guard against dangers, that may threaten i n s t i t u t i o n s
about to be formed.
" "The power to compel,beforehand, co-operation,
and thus, i t i s b e l i e v e d , to make a f a i l u r e u n l i k e l y and
a general panic almost impossible, mast be recognized, i f
government i s to do i t s proper work, u n l e s s we can say
that the means have no reasonable r e l a t i o n to the end. Noble
State Bank v. Haskell, 219 U.S. 104, 112, 31 Sup. Ct. 186,
188 (55 L. Ed. 112, 32 L . R . A . ( F . S . ) 1062, Am. Cas. 1912A,487).'
" * * * V«e think the i n t e n t i o n of the L e g i s l a t u r e was to v e s t
the banking board with general control and w i t h authority to do a l l
things reasonably necessary for the p r o t e c t i o n of depositors throughout the s t a t e . The Board a l s o stands i n t h e nature of a t r u s t e e f o r
t h i s guarantee
fund, and i t i s i t s duty to take such precautions as
may be necessary to p r o t e c t i t s i n t e g r i t y . The terms 'general superv i s i o n and c o n t r o l 1 v e s t the banking board with d u t i e s of a very high
order, and they are not to be p e r f u n c t o r i l y discharged, but to be adm i n i s t e r e d with the h i g h e s t degree of i n t e l l i g e n c e and d i s c r e t i o n .
"It i s customary f o r L e g i s l a t u r e s to grant to a d m i n i s t r a t i v e
bodies of t h i s character the power to adopt r u l e s , t y - l a w s , and
r e g u l a t i o n s reasonably necessary to carry out the purpose for which
they are created, and t h i s grant i s not an improper d e l e g a t i o n




( --21-

X-498.d:?S8

)

;,

of authority* Blue v* Beach, 155 Ind. * 121, 56 N.E. 89*
50 L.R.A. 64, 80 AM. S t . Rep.. 195 and Gases cited* Thia
i s h e l d g e n e r a l l y to he the rule i n matters comiiig w i t h i n
the p o l i c e pdwer of the s t a t e .
that the "banking business
comes w i t h i n that power i s no longer an open question.
"'The p o l i c e power extends to a l l the great p u b l i c needs
(Cornfield v. United S t a t e s , 167 U.o. 518, (17 Sup. Ct. 864,
42 L. Ed. 260) and i n c l u d e s the enforcement of commercial
conditions such as the p r o t e c t i o n o f bank d e p o s i t s and checks
drawn a g a i n s t them by compelling; cooperation so as to prevent
f a i l u r e and p a n i c . ' (Noble State Bank v. Haskell, 219 U. S. 104)
"The b u s i n e s s of banking coming within the p o l i c e power of
the s t a t e , the same rule of construction may be applied to banking
a c t s and to r u l e s and r e g u l a t i o n s e s t a b l i s h e d by banking boards as
a p p l i e s to a c t s c r e a t i n g other administrative bodies coming w i t h i n
the p o l i c e power. The Supreme Court of Judicature of Indiana, i n
d i s c u s s i n g t h i s phase of the question, in Blue v. Beach, supra,
says:
" 'While i t i s true that the character or nature of
such boards i s administrative only, s t i l l the powers
conferred upon them by the L e g i s l a t u r e , i n view of the
great p u b l i c i n t e r e s t s confided to them, have always
r e c e i v e d from the courts a l i b e r a l construction, and
the right of the L e g i s l a t u r e to confer upon them the
power to make reasonable r u l e s , by-laws, and regulat i o n s , i s g e n e r a l l y recognized by the a u t h o r i t i e s . 1,1
The case of Great Northern Railway Company v. Snohomish County»
48 lash*. 478, 93 Pac. 924, involved the construction of a S t a t e s t a t u t e r e quiring the State Board of Tax Commissioners to e x e r c i s e "general supervision"
over a s s e s s o r s and county boards of e q u a l i z a t i o n and the assessment of t a x able property i n order to secure e q u a l i t y i n t a x a t i o n .

'The case turned upon

the proper meaning of the term "general supervision" - whether i t authorized
the Commissioners to act merely i n an advisory capacity or whether i t authorized
them to c l a s s i f y i n t e r - c o u n t y r a i l r o a d s and f i x the value thereof f o r the
purpose of t a x a t i o n .

The court h e l d that the s t a t u t e authorized the Com-

missioners to c l a s s i f y i n t e r - c o u n t y r a i l r o a d s and f i x the value thereof f o r
purposes of t a x a t i o n ; that the words "general supervision"imply something



(

)

X-4980

more than a mere power to advise and. suggest; that they confer authority
to oversee and review the a c t s and correct errors of those over whom the
right of supervision i s granted.

In the course of the opinion the court s a i d

h

^ h i l e these several -revisions "bear more or l e s s d i r e c t l y
on t h e question under consideration, the case turns p r i n c i p a l l y
on tile meaning of the term * general s u p e r v i s i o n ' i n the act def i n i n g the powers and duties of the s t a t e "board of tax commiss i o n e r s . * * * The s t a t e hoard of tax commissioners i s given
general s u p e r v i s i o n over a s s e s s o r s and county "boards of e q u a l i zation, to the end that a l l taxable property s h a l l "be placed on
the assessment r o l l s and equalized as "between the d i f f e r e n t count i e s and m u n i c i p a l i t i e s , so that e q u a l i t y of t a x a t i o n s h a l l "be s e cured according to the provisions of law. What i s meant by 'general supervision 1 ? Counsel f o r respondents contend that i t means
to confer with, to a d v i s e , and that the "board a c t s i n an a d v i s ory capacity only. We cannot "believe that the L e g i s l a t u r e went
through the i d l e formality, of c r e a t i n g a "board thus impotent. Def i n i n g the term 1 general supervision 1 in Vantongeren v. Hefferman, 5
Dak. 180, 38 N.W. 53, the court s a i d : * The Secretary of the Int e r i o r , and under h i s d i r e c t i o n , the Commissioner of the General
Land O f f i c e , has a general "supervision over a l l p u b l i c business
r e l a t i n g to the p u b l i c l a n d s . n %hat i s meant by "supervision"?
Webster says, supervision means "to oversee for d i r e c t i o n ; to
superintend; to i n s p e c t ; as to supervise the p r e s s f o r correction."
And, used i n i t s general and accepted meaning, the Secretary has the power to oversee a l l the a c t s of the l o c a l o f f i c e r s for t h e i r d i r e c t i o n , or, as i l l u s t r a t e d by Mr* Webster, he
has the power to supervise t h e i r a c t s for the purpose of c o r r e c t ing the same; and the same power i s e x e r c i s e d by the Commissioner under the Secretary of the I n t e r i o r .
I t i s c l e a r , then, t h a t
a f a i r c o n s t r u c t i o n of the s t a t u t e g i v e s the Secretary of the
I n t e r i o r , and under h i s d i r e c t i o n , the Commissioner of the General Land O f f i c e , the power to review a l l the a c t s of the l o c a l
o f f i c e r s , and to c o r r e c t , or d i r e c t a c o r r e c t i o n o f , any errors
committed by them.
Any l e s s power than t h i s would make the
"supervision" an i d l e act - a mere overlooking without power of
c o r r e c t i o n or s u g g e s t i o n . 1
Defining the l i k e term i n State v.
F.E, & M.V. R,R. Co., 22 Hebr. 313, 35 IT.W, 118, the court
said;
'Webster d e f i n e s the word "supervision" to be "the act of
overseeing; i n s p e c t i o n ; superintending." The board t h e r e f o r e i s
c l o t h e d with the power of overseeing, i n s p e c t i n g , and superintending the railways within the s t a t e , f o r the purpose of carrying i n t o e f f e c t the p r o v i s i o n s of t h i s a c t , and they are
c l o t h e d with the -power to -prevent unjust discrimination
against e i t h e r persons or p l a c e s . 1 I t seems to us that the term
•general supervision 1 i s c o r r e c t l y d e f i n e d i n these c a s e s . Cert a i n l y a person or o f f i c e r who can only advise or suggest to
another has no general supervision over him, h i s a c t s or h i s conduct."
S i m i l a r l y , i t would seem that the Board 1 s power to e x e r c i s e "general



(-23)

X-4980

supervision" over the Federal reserve banks would include the power to
require the Federal reserve 'banks to carry out the purposes of the Act
and to check any p r a c t i c e s which would be detrimental to the p u b l i c i n t e r e s t or i n c o n s i s t e n t with the purposes of the Act.

Certainly, the Board's

power of general supervision should not be construed i n such a way as to
"make the ' s u p e r v i s i o n ' an i d l e act - a mere overlooking without power
of c o r r e c t i o n or suggestion."
On the other hand, there are some c a s e s i n d i c a t i n g the l i m i t a t i o n s
on t h i s power of general s u p e r v i s i o n .
One of such c a s e s i s that of State v . Bronson, (Mo.) 21 S.W.1125.
The c o n s t i t u t i o n of Missouri provides that "She supervision of i n s t r u c t i o n
i n the p u b l i c schools s h a l l be v e s t e d i n a board of education whose powers
and duties s h a l l be p r e s c r i b e d by law."

The l e g i s l a t u r e passed a law

creating a commission to purchase the books necessary f o r use i n the s c h o o l s .
This law was objected to by the d i r e c t o r s of a school d i s t r i c t as being
u n c o n s t i t u t i o n a l on the ground that i t was i n v i o l a t i o n of the powers
v e s t e d i n the board of education "ty the c o n s t i t u t i o n .
The court h e l d that the s e l e c t i o n and purchase of the school
books docs not come within the f a i r meaning of the words "the supervision
of instruction" and the law does not v i o l a t e the c o n s t i t u t i o n a l p r o v i sion,

In so holding the court said:
"With such a general system of p u b l i c schools i t
mast be evident that when the c o n s t i t u t i o n says the superv i s i o n of i n s t r u c t i o n s h a l l be v e s t e d i n the s t a t e board
of education, i t does not mean that t h i s board s h a l l enter
into the d e t a i l s of g i v i n g i n s t r u c t i o n or carrying on the
schools.
All t h i s i s and may be l e f t to subordinate o f f i c e r s .
I t means no more than a general oversight over the matter of
instruction."




( -24- )

X-4S80

f
. <esj' ?,J- ......

In the case o f Roanoke Cemetery Co. v. Goodwin, 101 Va. 605,
44 S.E. 769, the lower court had reviewed the reasonableness of reg u l a t i o n s p r e s c r i b e d by the cemetery a s s o c i a t i o n f o r the conduct of i t s
business and the f e e s charged for opening graves and had i s s u e d a decree whereby the court undertook to p r e s c r i b e i t s own r u l e s and reg u l a t i o n s f o r the management of the a f f a i r s of the company, even going to
the extent of determining the fund out of which the salary of the superintendent should be paid.
that the decree-

The Supreme Court of Appeals i n V i r g i n i a h e l d

exceeded the power of the court and s a i d :

"It i s not permissible f o r a court to thus subs t i t u t e i t s own business d i s c r e t i o n and judgment f o r
that of the company; i t s v i s i t o r i a l powers have no
such scope. 1 Clark & Marshall, p. 547. 11
S i m i l a r l y , i t might be said that the authority to e x e r c i s e general s u p e r v i s i o n over the Federal reserve banks does not carry with i t
the duty to enter i n t o the d e t a i l s of operating the banks nor the authori t y f o r the Federal Reserve Board to s u b s t i t u t e i t s own business judgment and d i s c r e t i o n f o r that of the d i r e c t o r s .
Without attempting to l a y down a p r e c i s e d e f i n i t i o n of the Board's
power of general supervision, i t may be s a i d that g e n e r a l l y i t includes
the power and c a r r i e s with i t the duty to see that Federal reserve
banks do not exceed t h e i r corporate powers; that they do not discriminate i n favor of or a g a i n s t any c l a s s of the p u b l i c or any member
banks; that they preserve and p r o t e c t the banking reserves of the country with which they are entrusted; that they do not do anything which
may endanger t h e i r solvency or the soundness of t h e i r currency; that
they carry out f a i t h f u l l y the purposes of the Federal Reserve Act; and
that they comply i n a l l r e s p e c t s with both the l e t t e r and



s p i r i t ' of

(

the law.

-25-

)

X-4980

I am f u r t h e r of the opinion that t h i s power c a r r i e s with i t the

o q

power to require the Federal reserve "banks to cease doing anything which
i s u l t r a v i r e s which might defeat the purposes of the Federal Reserve
Act or which might be detrimental to the p u b l i c i n t e r e s t .
Lore over, t h i s power i s to "be construed l i t e r a l l y so as to enable
the Board e f f e c t i v e l y to safeguard the great p u b l i c i n t e r e s t s
it.

Blue v. Beach, 155 Ind. 121, 45 N.E. 89.

confided to

As s t a t e d i n State v. Moreland,

supra, "The terms 'general supervision and c o n t r o l 1 v e s t the banking board
with d u t i e s of a very high order, and they are not to be p e r f u n c t o r i l y
discharged, but to be administered with the h i g h e s t degree of i n t e l l i g e n c e
and d i s c r e t i o n . "
On the other hand, I am of the opinion that t h i s power does not
carry with i t e i t h e r the duty or the power to i n t e r f e r e in the d e t a i l s
of the operation of the Federal reserve banks or to s u b s t i t u t e the Board's
own business judgment and d i s c r e t i o n f o r that of the d i r e c t o r s of the
Federal reserve banks.
I t does, however, include the power to check any a c t i o n s on
the part of the Federal reserve banks which would n u l l i f y or impair the
e f f e c t i v e e x e r c i s e of any lawful powers of the Federal Reserve Board
or which would c o n s t i t u t e an evasion of any c o n t r o l which the Federal
Reserve Board i s authorized to e x e r c i s e over the general c r e d i t p o l i c i e s
of the System as a whole.

Vtithin t h i s c l a s s of a c t i o n s which a r e subject

to r e g u l a t i o n under the Board's general supervisory po»»er would c l e a r l y
be included i n t e r n a t i o n a l d e a l i n g s i n gold, which might tend to a f f e c t
or impair the e f f e c t i v e n e s s of the rediscount r a t e , which i s e x p r e s s l y
made subject to review and determination by the Federal Reserve Board, or
which would n u l l i f y the e f f e c t of the Board's r e s t r i c t i o n s on the open
market operations of the banks.



THE RELATIVE FU1ICTI0KS OF THE BOARD AND TEE BALQCS
AS SSQviK BY LEGISLATIVE HISTORY.
That these views, based, upon a purely l e g a l i n t e r p r e t a t i o n of the
Board's powers, are i n accordance with the i n t e n t of Congress at the time i t
enacted the Federal Reserve Act appears from the f o l l o w i n g passages i n the r e port on the o r i g i n a l Federal Reserve Act submitted to the House of Representat i v e s "by Mr. Glass, on "behalf of the Banking and Currency Committee,

under

date of September 9, 1913 (pages 16, 18, 19, 42 and 4 6 ) :
''In order that the banks may be e f f e c t i v e l y inspected,
and i n order that they may pursue a banking p o l i c y which
s h a l l be uniform and harmonious f o r the country as a whole, the
committee proposes a general board of management i n t r u s t e d with
the power to overlook and d i r e c t the general f u n c t i o n s of the
banks r e f e r r e d t o . To t h i s i t a s s i g n s the t i t l e of 1 The Federal
reserve board.'"
*

*

*

*

*

*

*

"The only f a c t o r of c e n t r a l i z a t i o n which has been provided
i n the committee's plan i s found in the Federal reserve board,
which i s to be a s t r i c t l y Government organization created f o r
the purpose of i n s p e c t i n g e x i s t i n g banking i n s t i t u t i o n s and of
r e g u l a t i n g r e l a t i o n s h i p s between Federal r e s e r v e banks and between
them and the Government i t s e l f . Careful study of the elements of
the problem has convinced the committee that every element of advantage found to e x i s t i n cooperative or central banks abroad can
be r e a l i z e d by the degree of cooperation which w i l l be secured
through the reserve-bank plan recommended, while many dangers and
p o s s i b i l i t i e s of undue control of the resources of one s e c t i o n by another w i l l be avoided. Local control of banking, l o c a l a p p l i c a t i o n
of resources to n e c e s s i t i e s , combined with Federal supervision, and
l i m i t e d by Federal authority to compel the .joint a p p l i c a t i o n of bank
resource^ to the r e l i e f of dangerous or s t r i n g e n t c o n d i t i o n s i n any
l o c a l i t y are the c h a r a c t e r i s t i c f e a t u r e s of the p l a n as now put
forward. The l i m i t a t i o n of business which i s proposed i n the s e c t i o n s governing r e d i s c o u n t s , and the maintenance of a l l operations
upon a f o o t i n g of r e l a t i v e l y short time w i l l keep the a s s e t s
of the proposed i n s t i t u t i o n s i n a s t r i c t l y f l u i d and a v a i l a b l e
condition, and w i l l insure the presence of the means c f accommodat i o n when banks apply f o r loans to enable them to extend to t h e i r
c l i e n t s l a r g e r degrees of a s s i s t a n c e i n b u s i n e s s . I t i s proposed
that the Government s h a l l r e t a i n a s u f f i c i e n t power over the r e s e r v e
banks to enable i t to e x e r c i s e a d i r e c t i n g a u t h o r i t y when necessary
to do so, but that i t s h a l l i n no way attempt to carry on through i t s
own mechanism the routine operations of banking which require d e t a i l e d



( -27- )

X-4980

%

knowledge of l o c a l and individual c r e d i t s and which determine
the a c t u a l use of the funds of the community i n any given
i n s t a n c e . In other words, the reserve-"bank plan r e t a i n s to
the Government power over the exercise of the "broader "banking
f u n c t i o n s , while i t l e a v e s to i n d i v i d u a l s and p r i v a t e l y owned
i n s t i t u t i o n s the a c t u a l d i r e c t i o n of r o u t i n e . "
*

*

*

*

*

*

*

"In t h i s s e c t i o n p r o v i s i o n has "been made f o r the
c r e a t i o n of a general board of control a c t i n g on behalf of
the n a t i o n a l Government f o r the purpose of o v e r - s e e i n g the
reserve "banks and of a d j u s t i n g the banking t r a n s a c t i o n s of one
p o r t i o n of the country, as well as the Government deposits t h e r e in, to those of other p o r t i o n s . u
"(e) In paragraphs(e), ( f ) , ( g ) , (h), and ( i ) are conveyed powers which are l a r g e l y s e l f - e x p l a n a t o r y and about which
there can be l i t t l e or no question, granting the general idea of
e f f e c t i v e Government oversight through a Federal r e s e r v e board
or some similar o r g a n i z a t i o n . "
The power of carrying on the reg u l a r routine every-day business of
the Federal reserve banks, t h e r e f o r e , and of determining the l o c a l p o l i c i e s
was entrusted to t h e i r r e s p e c t i v e boards of d i r e c t o r s , but the Federal Reserve
Board was c r e a t e d as "a general board of managementM entrusted with the power
to overlook and d i r e c t the general functions of the banks in order that the
Board, on behalf of the Government, might r e t a i n some power over the e x e r c i s e
of the

11

broader banking functions" a f f e c t i n g the country a s a whole.
That the open market operations of the Federal r e s e r v e banks and

t h e i r t r a n s a c t i o n s with f o r e i g n central banks i n gold, c r e d i t s and b i l l s of
exchange i s a f u n c t i o n a f f e c t i n g the country as a whole, seems p e r f e c t l y obvious, and i t would seem to f o l l o w that the Board was intended to have a
control over a l l such operations.

This w i l l appear more c l e a r l y from a con-

s i d e r a t i o n of the h i s t o r y and nature of such t r a n s a c t i o n s .




( -28- )

X-4S80

h i s t o r y and t t a t u h s OF OPEN market f u i t c t j o n s .
The report of the House Banking and Currency Committee (pp. 52 and 53)
d i s c u s s e s s e c t i o n 15 of the o r i g i n a l Federal Reserve B i l l , which l a t e r became
s e c t i o n 14 of the Federal Reserve Act as f o l l o w s :
"Section 15.
"It w i l l have been observed that the t r a n s a c t i o n s aut h o r i z e d i n s e c t i o n 14 (now s e c t i o n 13 of the Federal Reserve Act)
were e n t i r e l y o f a nature o r i g i n a t i n g with member banks and i n v o l v i n g a rediscount o p e r a t i o n . I t i s c l e a r l y n e c e s s a r y t o extend the p e r m i t t e d t r a n s a c t i o n s of t h e Federal r e s e r v e banks
beyond t h i s very narrow scope f o r two reasons:
H

1• The d e s i r a b i l i t y of enabling Federal r e s e r v e banks
to make t h e i r r a t e o f discount e f f e c t i v e i n the general market
at those times and under those c o n d i t i o n s when r e d i s c o u n t s were
s l a c k and when t h e r e f o r e there might have been accumulation of
funds i n the r e s e r v e banks without any motive on the p a r t o;f
member banks to apply f o r r e d i s c o u n t s or perhaps with a strong
motive on t h e i r p a r t not to do s o .
"2. The d e s i r a b i l i t y of opening an o u t l e t through which
the funds of Federal r e s e r v e banks might be p r o f i t a b l y u s e d a t
times when i t was sought to f a c i l i t a t e t r a n s a c t i o n s i n f o r e i g n
exchange or t o r e g u l a t e gold movements.
"In order to a t t a i n t h e s e ends i t i s deemed w i s e to a l l o w
a r e s e r v e bank, f i r s t of a l l , to buy and s e l l from anyone whom i t
chooses the c l a s s e s of b i l l s which i t i s a u t h o r i z e d to r e d i s c o u n t .
The r e s e r v e bank e v i d e n t l y would not do t h i s u n l e s s i t should be
i n a p o s i t i o n which, as already s t a t e d , f u r n i s h e d a s t r o n g motive
f o r so doing. Outright purchases i n the open market would of
course r e q u i r e the payment of the f a c e of the paper l e s s d i s c o u n t ,
whereas r e d i s c o u n t o p e r a t i o n s would r e q u i r e simply the h o l d i n g of
a r e s e r v e of 33 l / 3 per cent behind the n o t e s i s s u e d or d e p o s i t
accounts c r e a t e d i n t h e course of the r e d i s c o u n t o p e r a t i o n . Apart
from t h i s fundamental permission, i t was deemed w i s e to allow the
banks to buy c o i n and b u l l i o n and borrow or l o a n thereon and to
deal i n Government bonds. The power granted i n s u b s e c t i o n (d) to
f i x a r a t e of discount i s an obvious i n c i d e n t to the e x i s t e n c e of
the r e s e r v e banks, but the -power has been v e s t e d i n t h e Federal
r e s e r v e board to review t h i s r a t e of discount when f i x e d by the
l o c a l r e s e r v e bank at i t s d i s c r e t i o n , This i s intended to provide
a g a i n s t the p o s s i b i l i t y that the l o c a l bank might be e s t a b l i s h ing a dangerously low r a t e of i n t e r e s t , which the reserve board,




(

-29-

)

X-4980

f a m i l i a r as i t would "be with credit conditions throughout the
country, would deem best to r a i s e .
"The f i n a l power to open and maintain "banking
accounts i n f o r e i g n c o u n t r i e s for the puroose of dealing
i n exchange and of buying f o r e i g n "bills i s necessary in
order to enable a reserve bank to e x e r c i s e i t s f u l l power in
c o n t r o l l i n g g o l d movements and i n f a c i l i t a t i n g payments and
c o l l e c t i o n s abroad."
The open market powers granted to Federal reserve banks under Sect i o n 14, t h e r e f o r e , were designed primarily to enable the Federal reserve
banks to make t h e i r discount

r a t e s e f f e c t i v e , to f a c i l i t a t e t r a n s a c t i o n s

i n f o r e i g n exchange, and to regulate and control gold movements.

The

banks were g i v e n power to f i x discount r a t e s subject to review and determination by the Federal Reserve Board, and i t was explained that the
power to review discount r a t e s was v e s t e d i n the Federal Reserve Board
i n order to provide against the p o s s i b i l i t y that a Federal reserve bank
might e s t a b l i s h a dangerously low r a t e which the Federal Reserve Board, in
view of general c r e d i t conditions throughout the country, might consider
inadvisable.
Having the power to review and determine rediscount r a t e s i t
would seem necessary that the Federal Reserve Board should a l s o have power
to review, r e g u l a t e , and r e s t r i c t any t r a n s a c t i o n s which might have a bearing on the e f f e c t i v e n e s s of the rediscount r a t e .
Obviously, the investment of Federal r e s e r v e funds abroad would
have a bearing on the e f f e c t i v e n e s s of the rediscount r a t e and the Federal
Reserve Board was given s p e c i f i c power to r e g u l a t e , l i m i t and r e s t r i c t
the purchase and s a l e of b i l l s of exchange.

While no s p e c i f i c power to

control g o l d movements was given to the Federal Reserve Board, i t vvould
seem c l e a r that the Federal Reserve Board was intended, i n the e x e r c i s e



oct'

( -30- )

of i t s general supervisory power, to have some control over gold t r a n s a c t i o n s which might have a hearing on the e f f e c t i v e n e s s of the r e d i s count r a t e or which might a f f e c t general c r e d i t conditions i n t h i s
country.

This i s e n t i r e l y c o n s i s t e n t with the theory that the Boards

of Directors of t h e Federal reserve "banks are intended to manage the
l o c a l t r a n s a c t i o n s of the Federal reserve "banks, out that the Federal Reserve Board i s given power to control any t r a n s a c t i o n s which
might have a "bearing on general c r e d i t c o n d i t i o n s i n t h i s country,
or i n the p o s i t i o n of t h i s country i n t h e i n t e r n a t i o n a l money market.
RELATIONS BETWEEN OPEN MARKET TRANSACTIONS. REDISCOUNT
RATES AND GOLD RESERVES.
The intimate r e l a t i o n "between open market t r a n s a c t i o n s , the
rediscount r a t e and i n t e r n a t i o n a l gold movements i s f u r t h e r i l l u s t r a t e d "by a report submitted to the Federal Reserve Board under date
of October 12, 1915, "by Messrs. Warburg and Delano.

The Board at

that time had "been g i v i n g very careful study to a proposal made "by
Mr. McAdoo, Secretary of the Treasury, to have the Federal reserve
"banks e s t a b l i s h branches or agencies i n latin-American c o u n t r i e s ;
and the above mentioned report d i s c u s s e d the open market powers of
the Federal reserve banks i n great d e t a i l , p o i n t e d out the proper
scope and purpose of such t r a n s a c t i o n s , and the disadvantage of having too l a r g e a proportion of the Federal reserve banks' funds i n vested in foreign countries.

This e n t i r e report i s very i l l u m i n a t i n g

and the f o l l o w i n g passage i s of e s p e c i a l i n t e r e s t in t h i s connection:




X-4980 2 9 8
(-31-)

"The Federal Reserve Bnnks have "been organized, as
custodians and conservators of the reserve money of the
c e n t e r brinks. T^e law permits c e n t e r tanks t o count as
part of t h e i r reserve the t a l a n c e s kept t y then w i t h
t h e s e Federal Reserve Banks, and i t i s the f i r s t duty
of the Federal Reserve Banks to maintain t h e i r funds in
a c o n d i t i o n so l i q u i d that t h e i r nomtcr tanks "ray c o n f i d e n t l y r e l y upon the a t i l i t y of the Reserve Banks to provide <30Id and c r e d i t when required. This f u n c t i o n of
the Federal Reserve Banks i s at no t i r e to to considered
l i g h t l y , and in t i n e s of s t r e s s i n v o l v e s grave r e s p o n s i b i l i t i e s and d i f f i c u l t i e s . I t i s fron t h i s p o i n t
of view that t h e law has imposed very d i s t i n c t r e s t r i c t i o n s
as to the character of the investments which nsiy t e made
t y the Federal Reserve Banks, permitting only a c e r t a i n
proportion of t h e i r funds to t e normally invested and
r e q u i r i n g that such investments as are cade t e e s s e n t i a l l y
of a s e l f - l i q u i d a t i n g character, and of a sho£t maturity.
I t would t e unsafe and would shake the foundations of
confidence on the part of the c e n t e r tanks as w e l l as
of other nations should Federal Reserve Banks use a subs t a n t i a l p o r t i o n of t h e i r resources f o r investment i n
Latin Arerican c r e d i t s .
"Such procedure would run counter to a l l tanking
p r a c t i c e i n those countries where banks of the character
of the Federal Reserve Banks have been i n s u c c e s s f u l
o p e r a t i o n f o r g e n e r a t i o n s , n e i t h e r the Bank of England,
the German Reichstank, the Ban que of France, nor any
other of the government banks of the l e s s important
c o u n t r i e s has ever adopted such a p o l i c y . The operations
of those banks are primarily confined to t r a n s a c t i o n s at
home, and f o r e i g n exchange t r a n s a c t i o n s are engaged in only
as f a r ..as they may be considered necessary f o r the p r o t e c t i o n
of the gold holdings of these government tanks• The leading
government tanks normally maintain a s u b s t a n t i a l holding
of ninety-day b i l l s on such f o r e i g n c o u n t r i e s as
are apt
to become important c r e d i t o r nations from t i n e to t i n e ,
t u t these t i l l s are drawn only on such c o u n t r i e s as have
a w e l l - e s t a b l i s h e d gold standard, well-developed discount
f a c i l i t i e s , and a broad market where these b i l l s can be
promptly r e s o l d . The object of these f o r e i g n holdings
can b e s t t e i l l u s t r a t e d by a concrete case, e . g . ,
should the Bank of the Netherlands f i n d that exchange on
London advanced to a point where gold began to move f r o n
Holland to England, i t would o f f e r f o r s a l e d r a f t s on London
i n order to counteract t h i s movement. When i t s E n g l i s h cash
balance had been exhausted, the BnJik of the Netherlands
would rediscount in London the long b i l l s that i t might
p r e v i o u s l y have accumulated and thus create new balances
w i t h which to stop the outflow of g o l d .




(-32-)

X-4980

"Such foreign, b i l l s arc t a k e n , o:ily on the fevz f o r e most f i n a n c i a l powers. I t i s to be expected that Assprican
bankers' acceptances w i l l in the f u t u r e , when peace s h a l l
have been restored., be cone one of the p r i v i l e g e d i n v e s t ments of these government b-jiks. In order to rziintain
t h e i r ' p o s i t i o n ' in the foreign exchange market, i t i s
n e c e s s a r y f o r government banks to renew from t i n e to t i n s
t h e i r f o r e i g n paper as i t natures, and i t i s f o r t h i s
"purpose that they use accounts with correspondents i n those
few c o u n t r i e s , none but the strongest f i r n s being s e l e c t e d
to a c t i n t h i s c a p a c i t y , These f i r n s or banks are permitted
to buy only f i r s t c l a s s banking paper, and they endorse
t h i s paper to the government banks so that such government .
banks do not run any r i s k of l o s s of c a p i t a l in the t r a n s a c t i o n s and so that the government banks hold only paper
which can at any time be resold i n the open market or to
the f o r e i g n government banks i f need b e .
"It was t h i s f u n c t i o n of f o r e i g n correspondents or
agents t h a t the w r i t e r s of the Federal Reserve Act had in
mind when they provided that Federal Reserve Banks should
have the r i g h t , with the consent of the f e d e r a l Reserve
Board,
» ito open and maintain banking accounts in f o r e i g n
c o u n t r i e s , appoint correspondents, and e s t a b l i s h
agenc ie s in such countries wheresoever i t may deen
b e s t f o r the purpose of purchasing, s e l l i n g , and c o l l e c t i n g b i l l s of exchange, and to buy and s e l l w i t h
or without i t s indorsement, through such correspondents
or a g e n c i e s , b i l l s of exchange a r i s i n g out of actual
commercial t r a n s a c t i o n s which have not more than
n i n e t y days to run and which bear the .signature of
two or mare responsible p a r t i e s . '
"For operations as above described the powers granted by
the Act w i l l no doubt be a v a i l e d of to good advantage, when
normal c o n d i t i o n s s h a l l have been restored i n the important f o r e i g n
exchange markets.
"Your committee wishes t o emphasize the f a c t that the
purpose of t h i s paragraph was to g i v e t o the %deral Reserve
Banks a greater s t r e n g t h and a d d i t i o n a l l i q u i d i t y by enabling
them to maintain a secondary gold reserve and to p o s s e s s
themselves of a s s e t s upon which the Federal Reserve Banks
could r e a l i z e i n case of need without being forced to cont r a c t the c r e d i t f a c i l i t i e s granted at hone - the l i q u i d
element of these f o r e i g n investments and the a d d i t i o n a l
p r o t e c t i o n that they would give t o the Federal Reserve
System being the e s s e n t i a l ground f o r permitting Federal
Reserve Banks to e n t e r a f o r e i g n f i e l d . "




X-4930

(-33-)

The f o l l o w i n g passage from a preliminary report on t h i s subject p r e pared by Mr. Warburg under date of October 4, 1915, a l s o throws much l i g h t
on the h i s t o r y and purpose of Section 14 of the Federal Reserve a c t :
"When d e a l i n g with i n t e r p r e t a t i o n s of the Act, a great
d e a l has o f t e n been s a i d concerning the 1 i n t e n t i o n of the
w r i t e r s of the l a w ' . Inasnuch as paragraph (e) of Section 14
has been b o d i l y taken over from the Aldrich Plan, we have to
go beyond the w r i t e r s of the Federal Heserve Act i n order t o
f i n d the true i n t e n t of t h i s paragraph, and inasnuch as Senator
Aldrich consulted r.b concerning t h i s p a r t i c u l a r phase of the
intended act» and inasnuch as I suggested to Senator Aldrich
the i n s e r t i o n of t h i s very paragraph, I r:ay be pardoned f o r
venturing to e x p l a i n what i t s o r i g i n a l i n t e n t i o n was.
"The two paragraphs read as f o l l o w s :
S e c t i o n 14(e) of the Federal
Reserve Act provides that every
Federal Reserve Bank s h a l l have
power;
"with the consent of the Federal
Reserve Board, t o open and maint a i n banking accounts i n f o r e i g n
c o u n t r i e s , appoint corresponde n t s , and e s t a b l i s h agencies in
such c o u n t r i e s wheresoever i t
may deem b e s t .
f o r t h e purpose of purchasing,
s e l l i n g , and c o l l e c t i n g b i l l s of
exchange, and to buy and s e l l ,
w i t h or without i t s indorsement,
through such correspondents or
a g e n c i e s , b i l l s of exchange a r i s i n g out of a c t u a l commercial
t r a n s a c t i o n s which have not .-sore
than n i n e t y days t o run and which
bear the signature of two or nore
responsible p a r t i e s . '

Section 36 oJ the Aldrich Plan
reads:
"National Reserve A s s o c i a t i o n
to have power
to open and maintain banking
accounts in f o r e i g n c o u n t r i e s ;
to e s t a b l i s h agencies in f o r eign c o u n t r i e s f o r t h e purpose
of purchasing, s e l l i n g and c o l l e c t i n g f o r e i g n b i l l s of e x change; to buy and s e l l , w i t h or
without i t s indorsement, throu^a
such correspondents or a g e n c i e s ,
checks or prime f o r e i g n b i l l s
a r i s i n g out of coi-Efircial t r a n s a c t i o n s having not exceeding 90
days to run and bearing the s i g nature of two or more r e s p o n s i ble p a r t i e s . '

"It w i l l be seen that the only s u b s t a n t i a l change was the i n s e r t i o n of the words ' b i l l of exchange' where the Aldrich Plan
read ' f o r e i g n b i l l s of exchange' and 'prime f o r e i g n b i l l s ' .




"From a c t u a l operation (having been a c t i v e in s e v e r a l banks

X-4980
(-34-)
11

in f o r e i g n c o u n t r i e s a c t i n g as correspondents or agents f o r
government banks i n other countries) I was in a p o s i t i o n to app r e c i a t e from my own experience the importance of the f u n c t i o n s
of f o r e i g n correspondents or agents, and was anxious to secure
the advantages of such connections for our future f i n a n c i a l
system. The operations of these f o r e i g n agents f o r t h e i r government banks are s u b s t a n t i a l l y as f o l l o w s !
"Let me choose the Bank of the Netherlands as ail i l l u s t r a t i o n , though p r a c t i c a l l y a l l important government banks have
been operating on s i m i l a r l i n e s ,
"There w i l l be c e r t a i n times when, f o r economic reasons,
through the movement of products from or to the Netherlands i n t o
or from other c o u n t r i e s , or f o r extraordinary reasons, exchange
on Holland w i l l move up to the gold exporting point or down to
the gold importing p o i n t . When the point i s reached where gold
may leave the country, the Bank of the Netherlands has two main
means of p r o t e c t i n g i t s e l f ; one i s by increasing the discount
r a t e , which measure w i l l r e s u l t in higher i n t e r e s t r a t e s apt
to a t t r a c t f o r e i g n money into Holland and thereby to counteract
the flow of money from the country. The other i s to s e l l from
i t s p o r t f o l i o b i l l s on f o r e i g n c o u n t r i e s in order to create
balances in those c o u n t r i e s and thereby provide means of payment without shipping the yellow metal. I t , t h e r e f o r e , has
been the p o l i c y of f o r e i g n government banks to acquire f o r e i g n
b i l l s of exchange on such countries as are apt to be c r e d i t o r
n a t i o n s from time to time and such countries only as have s a f e
gold standards and enjoy f i r s t c l a s s banking c r e d i t . Tiiese
purchases of f o r e i g n exchange on such c o u n t r i e s are being
c a r r i e d on whenever exchange i s low or when i n t e r e s t r a t e s
in the home country are so low that i t would seem prudent f o r
the government bank to withdraw i t s funds from a c t i v e employment at home and i n v e s t the funds thus withdrawn in f o r e i g n
c o u n t r i e s , whence they can be c a l l e d back whenever r a t e s become
a c t i v e at home and whenever the i n f l u e n c e of the government bank
may be used to advantage i n preventing home r a t e s from becoming
burdensome to the borrowing community.
"When acquiring a ninety day d r a f t on a B r i t i s h bank,
the Bank of the Netherlands w i l l draw i n t e r e s t on t h i s b i l l
at the discount r a t e ; but when the b i l l matures or i f the
Bank of the Netherlands acquires checks on London, i t c r e a t e s
a balance which needs to be converted into an i n t e r e s t bearing
investment. These balances w i l l then be employed by the c o r respondents or a g e n c i e s (whichever name we may give to them)
f o r the purchase of other ninety day d r a f t s on London. According to i t s requirements, the Bank of the Netherlands w i l l
renew from time to time i t s f o r e i g n investments. The Bank




"

(-35-)

X-4980

of the Netherlands considers these f o r e i g n holdings as a secondary gold reserve and continues them almost perpetually* with
such casual i n t e r r u p t i o n s as may become necessary f o r the prot e c t i o n of i t s own g o l d h o l d i n g s .
"It was the consideration of these c o n d i t i o n s t h a t l e d
to the i n s e r t i o n i n the Aldrich d r a f t of the clause above
quoted, and i t w i l l now become apparent what was meant when
i t was provided that the National Reserve A s s o c i a t i o n - or the
Federal Reserve Banks - should have power to 'open and maintain
banking accounts in f o r e i g n countries * * *, e s t a b l i s h agencies
i n such countries * * * f o r the purpose of purchasing, s e l l i n g
and c o l l e c t i n g b i l l s of exchange 1 and that they should be able
to 'buy and s e l l with or without i t s indorsement, through such
correspondents or a g e n c i e s , b i l l s of exchange * *
In case
of a 'pinch5, the Bank of the Netherlands was to be i n a p o s i t i o n of ordering i t s correspondent to rediscount with the Bank
of England or in the open market m i l l i o n s of i t s holdings of
B r i t i s h acceptances so as to enable the Bank of the Netherlands
to draw a check a g a i n s t the balance so produced and so t o p r o t e c t
i t s g o l d . That i s why i t was s t i p u l a t e d that the b i l l s to be purchased by these agents should be 'prime b i l l s ' and should not run
beyond ninety days and should bear the signature of two or more
r e s p o n s i b l e p a r t i e s , so that these b i l l s should be current b i l l s
that the correspondents should be able to s e l l f r e e l y at a l l times
and b i l l s on which a l o s s should p r a c t i c a l l y be excluded.
"It ought to be s t a t e d that the f o r e i g n governments
s e l e c t the s t r o n g e s t p o s s i b l e firms in f o r e i g n c o u n t r i e s to
a c t for them as a g e n t s , and that they invariably buy these b i l l s
w i t h the indorsement of t h e i r agent (or correspondent) so that
they could l o s e only in case, not only the f o r e i g n correspondent
or agent should f a i l , but a l s o the two a d d i t i o n a l signatures on
the b i l l .
"I am w e l l aware of the f a c t that these banking h a b i t s
have developed as a p r o t e c t i o n in times of peace but that in
times of. war these large f o r e i g n balances may be a source of some
a n x i e t y . I t must be borne in mind, however, that government
banks normally work in times of peace and that t h e s e methods of
p r o t e c t i n g t h e i r country against acute gold withdrawals or
a g a i n s t the tendency of too low r a t e s of i n t e r e s t have e f f e c t u a l l y
met many an acute emergency, and furthermore that even in times of
war these balances have e v e n t u a l l y been paid. I might draw a t t e n t i o n to the f a c t that a year ago, when we were c a l l e d upon
to meet our large debts abroad,, i t would have been a great prot e c t i o n f o r us i f at that time balances could have been made
a v a i l a b l e in London to meet t h i s f i r s t onrush.




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X-4980
(-s6-)
"My object in reviewing the 'origin and o r i g i n a l i n t e n t
of t h i s paragraph i s to show that t h i s clause was i n s e r t e d
f o r the s o l e purpose of providing an a d d i t i o n a l p i e c e of machinery f o r the p r o t e c t i o n of the Federal Reserve System. Clearl y , no other i n t e n t i o n was underlying t h i s s e c t i o n l "

The question whether the Federal reserve "banks should e s t a b l i s h
branches or a ge ncies in Latin American c o u n t r i e s was submitted to the
Governors' Conference, the Conference of Federal Reserve Agents and the
Federal Advisory Council, and, a f t e r obtaining the views of these three
d i f f e r e n t b o d i e s , a further report was submitted to the Federal Reserve
Board under date of January 8, 1916, by a committee c o n s i s t i n g of
Governor Harding and Messrs. Delano and Warburg.

This f i n a l report

reads i n part as f o l l o w s :
"Your Committee i s happy to report that complete agreement was found to e x i s t i n a l l three bodies with the p r i n c i p l e s
expressed by the Board at i t s meeting on October 27th, the
substance of which was published on that day in a n o t i c e
(Mimeograph 385) of which a copy i s appended h e r e t o . * * *
I t i s the f i r s t duty of the Federal reserve banks t o maintain
t h e i r funds in a c o n d i t i o n so l i q u i d that t h e i r member banks
may c o n f i d e n t l y r e l y upon the a b i l i t y of the Federal reserve
banks to provide gold and c r e d i t when required. This f u n c t i o n
of the Federal reserve banks i s at no time to be considered
l i g h t l y and in times of s t r e s s i n v o l v e s grave r e s p o n s i b i l i t i e s
and d i f f i c u l t i e s . * * * I t would be unsafe and would shake
the foundation of confidence on the part of the member banks
as w e l l as of other n a t i o n s , should Federal reserve banks
use a . s u b s t a n t i a l p o r t i o n of t h e i r resources f o r investment in
Latin-American c r e d i t . Such procedure would run counter to a l l
banking p r a c t i c e s i n those countries where banks of the cnara c t e r of the Federal reserve banks have been s u c c e s s f u l l y operated for generations * * *. The operations of these banks
are primarily confined to t r a n s a c t i o n s at home,and f o r e i g n
exchange t r a n s a c t i o n s are engaged in only as f a r as t h e y may
be considered necessary f o r the p r o t e c t i o n of the gold h o l d ings of these Government banks. * * * (Discussion of operat i o n s of European Central banks). In order to maintain t h e i r
' p o s i t i o n ' in the f o r e i g n exchange market, i t w i l l be n e c e s sary f o r Government banks to renew from time to time t h e i r
f o r e i g n paper as i t matures, and i t i s f o r t h i s purpose




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5-4980

t h a t they -use a c c o u n t s w i t h correspondents i n t h o s e f o r e i g n
c o u n t r i e s , none but the s t r o n g e s t f i r m s b e i n g s e l e c t e d
to a c t i n t h i s c a p a c i t y . * * * I t was t h i s f u n c t i o n o f f o r e i g n
c o r r e s p o n d e n t s or a g e n c i e s t h a t your committee i s c o n f i d e n t
the w r i t e r s of t h e Federal Reserve Act had i n mind when they
p r o v i d e d t h a t the F e d e r a l r e s e r v e "banks should have the r i g h t ,
w i t h the consent of the Federal Reserve Board, t o e x e r c i s e
the powers c o n f e r r e d under S e c t i o n 14 ( e ) * * * . Your committ e e has- no doubt t h a t the purpose of t h i s paragraph was to g i v e
to the F e d e r a l r e s e r v e "banks g r e a t e r s t r e n g t h and a d d i t i o n a l
l i q u i d i t y by e n a b l i n g them to m a i n t a i n a secondary g o l d r e s e r v e rod t o p o s s e s s themselves of a s s e t s upon w h i c h the Fede r a l r o s o r v e banks c o u l d r e a l i z e i n case of need w i t h o u t b e i n g f o r c e d to c o n t r a c t the c r e d i t f a c i l i t i e s granted, a t home the l i q u i d element of t h e s e f o r e i g n i n v e s t m e n t s and the a d d i t i o n a l p r o t e c t i o n t h a t they would g i v e to the Federal Res e r v e System b e i n g the e s s e n t i a l ground f o r p e r m i t t i n g Fede r a l r e s e r v e banks to e n t e r a f o r e i g n f i e l d . * * * Should
F e d e r a l r e s e r v e banks be empowered t o l e n d to f o r e i g n
Governments n o t w i t h s t a n d i n g the law ' d i s t i n c t l y p r o v i d e s that
F e d e r a l r e s e r v e banks can now purcha.se only U n i t e d S t a t e s
Government s e c u r i t i e s and warrants of United S t a t e s m u n i c i p a l i t i e s , c a r e f u l l y circumscribed and h a v i n g a m a t u r i t y of not
e x c e e d i n g s i x months ? * * * Should Federal r e s e r v e banks
be a l l o w e d to embarrass the Government by b e i n g t h e m s e l v e s
important c r e d i t o r s of f o r e i g n Governments i n case of war
w i t h , or r e v o l u t i o n i n , such c o u n t r i e s ? Your committee i s
v e r y p o s i t i v e i n i t s view t h a t such e n l a r g e d powers should n o t
be g r a n t e d ; * * * 11
While t h e s e r e p o r t s arose out of a c o n t r o v e r s y e n t i r e l y
d i f f e r e n t from, and e x t r a n e o u s t o ,

the q u e s t i o n now under c o n s i d e r a t i o n ,

they serve to.show the i n t i m a t e c o n n e c t i o n between the open market powers
of the F e d e r a l r e s e r v e banks, the e f f e c t i v e n e s s of the r e d i s c o u n t r a t e , and
the p r o t e c t i o n o f the g o l d r e s e r v e s of the Federal Reserve System*
They show c l e a r l y that one of the most important purposes o f
the r e d i s c o u n t r a t e and the open market purchase of b i l l s of exchange i s t o
p r o t e c t the g o l d r e s e r v e s of the Federal Reserve System.

Over the r e -

d i s c o u n t r a t e s and t h e open market t r a n s a c t i o n s the F e d e r a l Reserve




30
X

( - 3 8 - )

Board i s given a great measure of c o n t r o l .

-

4 9 1

To say that the Federal

Reserve Board could e x e r c i s e t h i s control over rediscount r a t e s and
open market t r a n s a c t i o n s with a view of p r o t e c t i n g the gold

reserves

of^the Federal Reserve System but that i t could do nothing to prevent
the Federal reserve banks from engaging in i n t e r n a t i o n a l t r a n s a c t i o n s
in gold in such a way as to impair the gold reserves would be to g i v e
the Federal Reserve Act an i n t e r p r e t a t i o n which c l e a r l y would d e f e a t
the w i l l of Congress,
Respectfully,

Walter Wyatt
General Counsel

Wl-WLH-OMC-SAD