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443
Memorandum by M r . Warburg
Submitted to the Board at
its meeting on December 3
£
Washington,
To
December 3, 1915.
the
FEDERAL RESERVE BOARD
Washington.
Sirs:
I take the liberty of submitting the following statement
and mamoranda with the object in view of doing my share in
establishing a basis of harmonious understanding and cooperation
in the Board, without which the best results cannot be achieved.
Like all of us,
1 regret very sincerely that the impression
has been created by the press and otherwise as if there were
personal differences in the Board.
Personally,
T cherish the
conviction that differences are not of a personal nature but
that we are dealing with honest differences of opinion and that
the best way of removing whatever may separate members of the
Board is to go to the root of these differences and to make a
determined effort to agree on the essential points on which there
is divergence of opinion, or,
if we cannot agree, to frankly
disagree upon the same and state the matter,
if necessary,
in
the form <5f majority and minority reports so that it may be u n
derstood that, inhere differences exist, they are not of a per
sonal nature but are based upon matters of principle.
My own
hope is that we may be able to agree cn all of these things b e
cause, after all, that is what will best further the objects ar.d
aims of the Federal Reserve Board to which we all are devoting
whatever is best, in us.
If I may be permitted to analyze the situation,
I would
*
y x
say that there are differences of opinion in the following iour
c’atters:
(1)
The problem of the general functions and the policy
to be pursued by Federal Reserve Banks.
X take the liberty of submitting herewith a memorandum
which I have prepared covering this problem.
I have no doubt
that we can reach a common ground of understanding on this
question.
(2)
The question of Government Deposits,
From the very beginning of the operation of the Federal
Reserve Banks there have been two different schools of thought
in this respect.
which,
I take the liberty of submitting a memorandum
if adopted,
would,
I believe,
relieve the situation.
It
would, at the same time, protect both the Secretary of the
Treasury and the powers of supervision and control of the Fedp~al Reserve Board.
(3)
The examination and reports of member banks and
rulings of the Comptroller.
This question, more than anything else, has produced irri
tation from time to time with member banks,
Banks and in the Board.
Federal Reserve
I believe that we are very close to
a point now where the problem could be disposed of to mutual
satisfaction.
Both in the case of Government deposits and the
case of the Comptroller’s reports the law creates a difficult
situation by preserving a dual control.
The problem is, can
the difficulties that no doubt exist be removed by administra
tive methods,
or shall it be necessary to cure the situation
(3 )
amendments of the law so that, with respect to reports and e x *
aminations, there will be created a unity of action?
stated,
As above
I strongly believe that it will be possible now to
definitely agree upon some satisfactory plan or to state public
ly the limited and legitimate degree to which $e do not agree.
This will cure the constant attempt of the press to magnify and
to sensationalize the situation.
(4)
The question of redistricting, and, involved in
that, the question of individual powers of m e m
bers of the Board.
I believe that,
in the very near future, the committee can
bring in a report concerning redistricting which probably will
dispose of any plan of dealing with this larger question but
will clearly establish the position of members of the Board as
to the desirability of a redistricting process at such time as
it should be practicable in case Congress should give the Board
the power to do so.
It will be of great advantage for the harmonious work of
the Board if3 at the same time, a clear understanding could be
reached as to xrhat are the individual powers of members of the
Board and how far are resolutions passed by the Board binding
upon all of them.
I stropgly believe that if we patiently dis
cuss these quest lone upon their merits and entirely disregard
the personal element we shall finally reach a very satisfactory
and clear understanding about all of these points.
I am somewhat taking the attitude of a surgeon who rather
goes to the root of an evil than deal with the surface disturb
ance by means of palliatives and court plaster.
The process mev
(4)
be a little liit more bothersome while it lasts but X am sincerely
convinced that it will bring more lasting and more satisfactory
results.
It is, to my mind,
inevitable that this operation
should be gone through because I can hardly see how we can write
a satisfactory report or deal with the question of amendments
unless and until we have reached a clear understanding about
these pending problems.
Respectfully,
(Signed)
.... Paul M, Warburg.
Memorandum on Question No
I
The policy to be pursued by Federal Reserve Banks must be
guided exclusively by the public interest
Federal Reserve Banks must neither fail to carry out trans
actions and exercise functions - which otherwise would redound to
the benefit of the country - for tne mere reason that they entail
heavy expense or loss, nor must they, on the other hand, conclude
transactions and exercise functions on account of the earnings
to be derived, m
case these transactions or functions would run
counter to the public interest, or would lessen the ultimate abil
ity of the Federal Reserve Banks to render the largest service
for the general benefit of the country.
In carrying out their policy they must neither compete for
the sake of competition nor not compete for the sake of avoiding
competition
In carrying out functions with which they are
charged by the law they must compete or not compete as the public
interest requires
If we agree on this premise, we must then ask ourselves, in
whe-t way do Federal Peeerve Banks serve the public interest?
The function of Federal Reserve Banks is to provide a safe
system of banking (free from our heretofore periodical collapses)
and more stable and equal interest rates than we have nad m
tne
past
Broadly speaking, the problem of banking may be summed up
m
the following quotation
"If banks were to keep, m cash, all the money deposited
with them, business would come to a standstill and a cri
sis would ensue
If banks were to lend indiscriminately
to those who apply for loans all the money on deposit
with them, a geneial panic and collapse would follow s
short period of overstimulation
Between these two ex-
(3A)
tremes lies the middle course, the finding of which is the
problem, and its practise the art of banking."
To find and preserve this middle course is the particular
function of the Federal Reserve Bank System.
The present maximum lending power of the entire Federal Re
serve System is about $600,000,C O O .
The total loans and invest
ments by national banks amount at present to about f8,000,000,000;
those of the State banks to $?,500,000,000.
It is abvious that
it cannot possibly be the object of the Federal Reserve System,
by competition,
to substitute a lending power of ..$600,000,00C for
that of all the banks of the country, amounting to f15,500,000,000.
The aim of the system must rather be to keep this gigantic
structure of loans and investments, which is largely carried by
bank deposits,
from over expanding so that, as the natural and
inevitable result,
conversely,
it may not be forced to over contract,
and,
to avoid over contraction with all its hardships and
the inevitably resulting over expansion.
Effectively to deal with the fluctuations of so gigahtic a
structure is a vast undertaking for which the resources of the
Federal Reserve System are none too large at this time.
task is to be accomplished successfully,
If the
it cannot be done by op
erations which are continuous and of equal force at all rimes, bur
only by carrying out a very definite policy of not only employing
funds vigorously -at certain times but, with equal vigor, not to
employ funds at others.
That during periodsocf actual employment
the Federal Reserve Banks will make large earnings and that durin?
periods where a restricted activity of Federal Reserve Banks is
rendered necessary by general conditions, their -earnings should oe
smaller, are incidents'which have no bearing upon ..the measure ex
their usefulness;
Federal Reserve Banks, when accumulating funds,
are exercising as useful a function as when they ate employing the
.
same.
.
.
*
If safety and stabilization of rates form the soundest
foundation for general prosperity, everything that the Federal Re
serve Banks dp in avoiding excessive rats3, both tec high and too
low, redounds to the benefit of the nation, and the niefe fact of
the general confidence in this stability and the knowledge that
fuA&s are in reserve and available brings about the freest use of
credit facilities at liberal rates’ all over the country.
If the
potential or actual employment of §600,000,000 can have this ef
fect upcn loans and' investments of ?15,500,000,000 (of.which
{13,50C,GOO,CCC are loans and discounts) the usefulness of the
*
Federal Reserve Sysrom has been proven.
That does not mean that
7Tl*en cnce vs shall' have passed through a period 6f active money
we shall ever have to contemplate conditions where the entire
funds ci the Federal Reserve Banks will lie idle.
A certain pro
portion will always reinain in active service^ and there will be
no doubt abfcut taelr ability to earn their running expenses or
•chat, wh::n bftce they cc.cupy their proper field, of operations - and
averaging their operations over a reasonable period - they will
earn their dividends, but time must be given them for this.
If Federal Reserve Banks should find permanent difficulty
in earning their dividends, remedy must not be sought by improper
ly using, their funds but rather by carefully investigating whe
ther cr net organic defects exist which might be overcome.
We
must net forge-t, on she one hand, that the capitalization of the
(4)A
bank and the prescribed rates cf dividends are arbitrarily fixed
and that experience only can demonstrate whether or not these
are properly chosen
Personally, I ar inclined to think that
they are about right, provided, however, that the Federal Reserve
Banks are given the same powers as enjbyed by the European cen
t a l banks with respect to the note issue
the weakness of the
system, as at present devised, is that, unlike the European cen
tral banks, they cannot derive their chief profit from the note
circulation
In Europe, the Banque de France, the Eank of Eng
land, the Reichsbank and the other central banks have substanti
ally a monopoly on the note issue, and balances with these cen
tral banks and their notes are considered as cash by the banks of
the country
(The Bank of the Netherlands has a capital of
20.000. 000 florins and a note circulation of 300,000,000 to
400.000. 000 florins )
Our difficulty is a threefold one
first, we nave a note
issuing power superimposed upon an inelastic currency issued to
the limit of What the country can absorb, sfecond, 6ur notes are
not counted as reserves, the consequence of which is that, at
times, like the present, when additional currency for actual cir
culation is not required, we do not pay for our investments by
^he issue of Federal Reserve notes but by a loss of gold, and,
t*iird, that our inability to issue notes against gold, or gold
and comi ercial.paper, prevents us from broadening and strengthen
m g our banking power
At present we are tied down to the maxi
mum of the deposits of the member banks
Gold deposited for re
demption purposes with Federal Reserve Agents is a most desirable
IZ5
(5)A
aid powerful protection m
case of gold withdrawals
It does not
i
add, however, any additional hanking power
r.ui add
It replaces "but does
The vicious effect of these conditions 1 3 that we can
not deal boldly with the problem of Government bonds and the cir
culation secured by them
If v/e could increase our own free stock
of gold, that question could be solved and, with that, the prob
lem of our earnings
I make free to submit a memorandum suggesting how it can be
done, and apologize for the rough form of all statements, which
have been dictated hurriedly without regard to f o m
P. M.
13-3-1 b
It is proposed to amend
Section 16, clause (2 ) to read
as follows :
"Any Federal Reserve Bank may make application to the local
Federal Reserve Agent for such amount of the Federal Reserve notes
hereinbefore provided as it may require.
Such application should
be accompanied by a tender to the local Federal Reserve Agent of
collateral in amount equal tc the sum of the Federal Reserve notes
thus applied for and issued pursuant to such application.
The
collateral security thus^ offered shall be_ gold or gold certif icatss
and notes and bills accepted f or rediscount under the provisions of
Section^. 1JL or purchased under the provisions of Section 14 of this
Act_._^Whenever the gold deposited as collateral with the Federal
f
s
h
a
l
l
be less than 40^ of the aggregate amount of the
aggregate collateral deposited! the Fed_e_ral Reserve Board shall estab
lish a graduated tax." etc. r etc..
The force of this amendment would be that Federal Reserve nbtes
could be exchanged for gold and that the gold so accumulated would
become the free asset of the Federal Reser\e
Banks.
A3 the lav/
stands today the gold that accumulates against i3suo ^of Federal Re
serve notes accumulates in the redemption fund deposited with the
Federal Reserve Agent amd Cua3es to be the property of the Federal
Reserve Banks.
It can not serve as a basis for additional loan3 ,
but it renders only a service - though a most important one- in
being available in case of gold withdrawals.
The consequence is that
at present the Federal Reserve Banks are limited in their growth to
the amount of obligatory balances i d member banks with Federal Re
serve Banks,
While the optional balance may be deposited, it is not
t?!?.fv? to count on that
2-b
If the lav/ should be amended as here suggested, every note
holder in the country would bocome an additional depositor of the
Federal Reserve Banks and he woyld become a permanent depositor,
because it is safe to say that the amount of gold certificates
carried in the pockets of the people at this time would be per
manently carried in Federal Reserve notes*
It is safe to expect
that the Federal Reserve Banks would be strengthened by several
hundred million dollars of gold in this manner. If three hundred
millions v/ere added this would mean an additional loaning power
of 450 million dollars.
The far-reaching effeev of this process would be that the
Federal Reserve Banks thus strengthened could afford to deal on
a broad basis with the question of government bonds and Federal
Reserve notes.
At present Federal Reserve Banks are disinclined-
and correctly so- to adopt a policy of purchasing hundreds of mil
lions of government bonds
and issue against them Federal Reserve
bank-noies as long as.the gold supply which they command is not
larger thari it is now.
maintain a reserve of
While it is true that they need only to
5% against these Federal Reserve bank-notes,
it is equally true that these notes may be presented at any time
for payment in gold and that, from a point of view of the Federal
Reserve Banks, a
5% gold reserve would be insufficient.
If notes
could be exchanged freely for gold the additional loaning power
#
which would accrue to the Federal Reserve Banks by the accumula
tion of additional gold, could be used to provide the necessary
gold reserve against a large amount of Federal Reserve Bank-notes*
A very interesting suggestion has been made to the Board
( by Mr. Perrin? to the effect that any National Bank the charter
:
of v?hich would expire, should receive a renewal charter only upon
the condition that its power to issue notes against gcvernr.ent
bonds should cease; but that the Federal Reserve Banks should pur
chase the government bonds of these banks at par at the expiration
of the banks charter.
In this manner all the government bonds of
w o p U fall into the hands c f ‘the Federal Reserve Banks within
twenty years.
A portion of these bonds would doubtless be disposed
of in the market a3 government
3% bends and the Federal Reserve
Beard and the Federal Reserve Banks would have tc decide what por
tion they wished tc carry as one-year notes and v/hat portion as
2%
government bends against which notes could be issued.
If this plan were carried cut the unelastic government
secured currency would be made elastic by the Federal Reserve Banks
because it would be in their power to issue these notes at times
when there would be legitimate requirement for increased circula
tion and to withdrawn them from circulation at other times. Further
more, the question ofe arningu of Federal Reserve Banks would be
solved, because the larger the note issue of the banks, the larger
would become their revenue.
This revenue would be derived from
the government bonds and the mere government bonds would be dis*>
posbd of to the public, the more important would become the com
mercial business of the Federal Reserve Banks, because if we take
it that a certain amount cf currency is required and a large por
tion of this currency can only be issued against the collateral
of commercial paper, this commercial paper must go in the Federal
Reserve Banks.
Of course, if Federal Reserve notes should be made
available ftr reserve Zuosay cf member banks ( not of Federal Reserve
Banks, ns
sc many people appear to chink when the question ws.8
4-b
discussed in past years ! ) , this process would talcs place with sc
much mere effect. There is no doubt but that Federal Reserve Banks
will not find their ultimate and proper place until Federal Reserve
notes receive reserve qualities.
At present we have the anomalous
condition that the gold that comes into this country, which should
accumulate in Federal Reserve Banks, accumulates in member banks,
while the gold holdings of the Federal Reserve Banks hardly have
grov/n except where the amount of the additional r eserVe payments
had to be made under the lav/.
Ve furthermore have the anomalous
condition that at this time
when there is no demand for additional
%
circulation, any investment the Federal Reserve Bankd'make is being
paid^ not by Federal Reserve notes, but by
a loss of gold.
While it is most gratifying to see that the bankers who
so violently opposed as unsound ahy thought of counting Federal
Reserve notes as reserve, are now of their own accord coming
around to the opposite view; it still may be that Congress would
not yet Ve prepared for such a step*
Ii might in ihat case be
more advisable to proceed slowly and to ask at this time only
for the amendment as above outlined.
My own suggestion would be to increase the gold covered from
40$
to
60$
and begin to tax at
60$,
though beginning only with a
very low tax and increasing only very gradually,increasing more
rapidly when the geld cover falls below
would be
40$.
The effect, however,
that Congress and the country-would see that it is ex
pected normally to have a gold cover in excess of
in excess of
40$
and while we
60$
rather than
woulde xpect to issue more Federal
Reserve notes in thi3 case, we would; on the other hand, expect
to issue them normally cn a higher basis of gold protection. This
^•<rv
v *L;0
-5b-
effort may ultimately be helpful in persuading Congress to permit
these notes to be counted as reserves.
As it is nov; there is no
room for an elastic note issue for our elasticity has been tied to
a frayed rubber band which is already stretched to the limit j ^ h e
Federal Reserve Banks have no power of contracting under the pres
ent structure.
As above stated, nothing will help Federal Reserve
Banks more in finding their proper position and in securing suf
ficient earnings without feeing forced to use their reserve money,
in a v/ay which at times v/ould be unsafe and improper, than an,effec
tive. and sound note issuing power.
t-lf.W.
11-2-15
,
448.
1 - c.
liEKORANGUM ON QUESTION NO. 2.
■■
It is suggested “that tho Treasury develop gradually its:
accounts with the several Federal Resorve Banks*
Aftor a
reasonable period of actual operation the nature and the volume
of Treasury business at each point can thon bo ascertained as can
a? oo the expense of the Federal Roseirvo Banks* involved in the
operation of accounts.
It may thon bo.possible for the
Secretary of the Treasury to determine the amounts which ho
proposes to carry as fixed free balances with tho several banks
in order to sustain these accounts.
As a matter of convenience he may arrange to have a weekly
or bi-weekly settlement with the Federal Reserve Banks, by
which any amounts in excess of tho agreed balance be paid into
the gold clearing fund for the credit cf the Treasury and con
versely, deficiencies- below the agreed balance would be made
good through the gold clearing fund..
There would then -.remain the free funds in the Treasury,
which will vary from time to time according to the receipts
and-disbursements of the Unitod States Government.
Broadly speaking, tho wr&tor doubts the wisdom of per
mitting those additional funds to be deposited with the
Federal Reserve Banks without the control and., supervision of'
the Federal Reserve Board.
While the own resources of 'Federal Reserve Banks and the
bulk of their deposits may be considered as "fixtures", upon
which it might bo safe to base a definite policy in granting
loans or issuing currency, the funds of the Government; ac
cording to tho wishos of Congress, may be of gigantic size
and may be reduced to zero.
Thesc Government deposits must therefore be: treated from
'a different point of view from that of the deposits of member
banks*
At tiroes, when the Government is apt to withdraw these
funds, the Foddral Reserve Banks should not employ them at all
and keep the funds practically intact (that is the same as
carrying a 100% reserve against thorn), at times, particularly
when the general banks are crowdflci .*wid*tnc Treasury balances
^rc large, or when for other roasons it may appoah advisable,
it may be proper policy for Federal Reserve Banks to use
freely the Government deposit and maintain
a
against theso deposits of only 35% as agdinst
deposits •
reserve
their other
With tho staggering si2c of oiir deposit structure
-(of 18 billion}} and the limited powejr of expansion of Federal
Reserve Banks (at present 600 milliohs figured on a 40% basis
And on the last statement of the Federal Reserve Banks) it will
bo Y*isc to keep an ahehor to windward
Expedience has shown'
that, tho end has always been reached or is quickly reached
whon a catastrophe occurs, and that it is of the very greatest
value to have some largo gold funds in actual reserve.
For
there is never enough gold in such circumstances and tho value
of tho froc treasure in the Julius Tower has been fully vindi
cated.
It would greatly add to the strength of our system
if wo could kcop tho free treasury funds as a secondary re
serve to bo drawn upon after the rediscounting power, between
"■y*5Ti. ■ '
■
8
5 i
■ ■. v«w
'
rTgwuva~Mv^i*<-'-'•
■'
448.
3- c
793
districts has boon bro.ught into full play to the highest
degree compatible with safety and conservatism and at tho same
time with the best interest of the country.
■
But there must be a certain latitude in applying this
rule and this%elasticity would be assur.-d if it worj left to
the discretion of the Federal Reserve 3o«a.rd from time to time '
to fix the rosorvos to bo kept by the Federal Reserve Banks
against Government deposits other than the fixed balances agreed upon.
Tho Treasury could then, through tho gold clear
ing fund, automatically deposit in the Federal Reserve System
■
its free funds, which would be allotted to the several banks
upon a certain key (basi.d upon capitalization or capital and
dcposits)ai:U be subject to special reserve requirements.
I
In
this runner the Federal Reserve Board could undertako tho res
ponsibility of supervising £he employment of these funds so
that tho Secretary of xno Treasury may be certain of his abil
ity of v/ithdrawing these funds when required without creating
a disturbance*
The power and duty of the Board oi directing
/
rediscount operations:.!? involved in this matteri
These
transactions may be nocessary in ordi-r to- withdraw, government
funds from some districts and for the safety and efficiency of
the system it is necessary that the Board exercise a control
over these funds in the Federal Reserve Banks Legally there can not b3 any objection to a stipulation by
the Secretary when making Government doposits to the offoct
that tho doposits shall be subject to such reserves as the
Board from time to time shall determine.
The Board, v/hen
j
448.
4 - C
studying this question some iionths ago, was advised by counsel
that ovin 'without such stipulation by the Secretary it could,
by its power to tax th- note issuo, secure compliance with
suggestions tlwb tho Board nj.gjrt so. fit to 1 ako to tho
Federal Rosorvo Banks m
this respect.
Fron -very f o m t of view, however, it would appear uore
desirable that the stipulation, as above suggested, bo made
by the Secretary of the Treasury.
Memorandum by Counsel is attacncd.
448
- X - d.
-
FEDERAL RESERVE BOARD
WASHINGTON
October 15,, 1915,
SUBJECT: Interest Charges on
Federal Reserve Notes.
My dear Mr. Warburg:
The question whether the Federal Reserve Board may impose different
rates of interest on the Federal reserve notes issued by the various Fed
eral reserve banks involves a construction of that portion of Section 16
of’the Federal Reserve Act which reads as follows:
"The Board shall have the right, acting through the Federal
reserve agent, to grant in whole or in part or to reject entirely
the application of any Federal reserve bank for Federal reserve
notes; but to the extent that such application may be granted
the Federal Reserve Board shall, through its local Federal Re
serve agent, supply Federal reserve notes to the bank so applying,
and such bank shall be charged with the amount of such notes and
shall pay such rate of interest on said amount as may be estab
lished by the Federal Reserve Bbahd, and the amount of such Fed
eral reserve notes so issued to any such bank shall, upon delivery,
together with such notes of such Federal reserve bank as may be
issued under section eighteen of this Act upon security of United
States two perccentum Government bonds, become a first amd para
mount lien on all the assets of such bank."
It will be observed that this paragraph provides in effect that
any individual Federal reserve bank which has been granted an applica
tion for notes whether in whole or in part, "shall pay such rate of in
terest on said amount as may be established by the Federal Reserve Board
This provision clearly indicates that the Board may charge such
rate of interest as it deems advisable on any particular or individual
issue of notes, and there is no intention on the part of Congress,either
express or implied, which demands
that tho Board fix a universal flat
rate of interest on all Federal reserve notes^
In other words, each
separate issu^j of notes, whether to the same or a different Federal
re .;rve bank,
may be subject to a different rate of interest.
448
- 2 - d.-
A contrary result would defeat the obvious intent of Congress to
enable the Federal Reserve Board to control, as far as possible, the
conditions governing the demand for credit And to enable the Board to
adapt not only rediscount rates but also the volume of Federal reserve
notes to the varying heeds of different sections of the country.
There
would not seem to be a more effective way of checking an undesirable in
flation o£ credits than to enfeble the Board to impose different rates of
interest on the various issues of Federal reserve notes.
The paragraph
quoted above clearly authorizes the Board to control not only the issue
of-notes to a particular bank but also to fix or determine the pressure
to be put upon any particular bank to retire such notes when issued.
The fact that the authority to fix such rate of interest is in
precisely the same sentence as that empowering the Board to regulate the
amount of notes issued to any individual bank, indicates that Congress
had in view a method of controling the circulation of Federal reserve
notes in each individual district.
The wording of this Section is broad enough not only to permit of
different interest rates in the different districts but also clearly au
thorizes the Board to charge e&ch Federal Reserve bank such rate of in
terest as it desires on each separate issue of notes made to that bank.
The Act says that the Board may grant the application of any Federal
reserve bank for Federal reserve notes, either in whole or in part, but
to the extent that such application is granted, "such bank shall be charged
with the amount of such notes and shall pay such rate of interest on said
amount as may be established by the Federal Reserve Board".
In other
448
- 3 - d. ■
^4 /
words, Congress specifies, in discussing the application of any Federal
reserve bank for notes, that the Board nay grant so much of that par
ticular application as it sees fit and shall charge such bank with the
amount of notes issued and may establish such rate of interest as it
sees fit !,on said amount".
It seems clear, therefore, that the Board may, at the time of granting
a'c yapplication for Federal reserve notes, fix such rate of interest as it
sees fit to be p^id on the notes issuefd
in compliance with that particular
application, and this rate is in no way dependent upon any previous rate
charged to that Federal reserve bank or to any other Federal reserve bank.
*
It is not to be supposed, however, that, should the Board at the
time of granting an application fail to fix any interest rate whatever,
it is precluded from imposing any interest charge in the future, because
the Act provides merely that the bank "shall pay such rate of interest x
x x x x x as may be established by the Federal Reserve Board," and it
may be established either at the time of issue oh at ahy time subsequent
thereto that the Board desires.
There may be considerable practical difficulty if the Board fixes
different rates of interest on different issues of notes made to the
same Federal reserve bank, because of the question of determining when
notes of the different issues are redeemed, but such a difficulty can
in no way limit or restrict the legal rights of the Board in this con
nection.
Anc it may be very easy to devise a method whereby, under
mutual agreement, any notes retired by a Federal reserve bank will be
assumed to be those on which the highest rate of interest is charged.
Respectfully,
(Sgd) G-. L. Harrison,
Hon. Paul M. Warburg,
Federal Reserve Board.
*
@FedFRASER