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FEDERAL RESERVE BOARD WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE T O T H E FEDERAL RESERVE BOARD June 6, 1924. X-4075 SUBJECT: Opinion of Counsel re X-3953* Bear Sir: A reading of the report of the recent Governors1 Conference d i s c l o s e s the f a c t that there i s apparently some doubt i n t h e minds of certain of the Governors as t o the l e g a l i t y of the Federal reserve banks acting in accordance with the ruling of the Board as contained in i t s l e t t e r of January 25, 1924, X-3953, which permits Federal ressrve banks to treat shipments of currency in t r a n s i t to and from member banks as part of their lawful reserves, when applying the prescribed penalties for d e f i c i e n c i e s . For ycur information, there i s enclosed herewith a copy of an opinion rendered by the Board * s Counsel as to the l e g a l i t y of the practice i n question# Very t r u l y yours, B. R. Crissinger, Governor, Enclosure: TO GOVERNORS OF ALL F. R. 3AHKS. x*4o75a To Federal Reserve Board Erom Mr. Wyafct, General Counsel SUBJECT: COPY _,_vK March 28, 192^« Currency in transit as legal reserve balances* In the attached l e t t e r , Governor Strong of the Federal Reserve Dank of New York questions the Board*s l e g a l authority to permit Federal reserve "banks to count currency i n transit as part of the required reserve "balances of member banks * His argument i s based, largely upon the language of Section 19 of the Federal Reserve Act, which provides in part that each member bank 11 shall hold and maintain with the Federal reserve bank of i t s d i s t r i c t an actual net balance equal to not l e s s *** than" a certain percentage of i t s deposits - In Governor Strong 1 s opinion, this provision requires that member bank reserves must be kept on deposit with the Federal reserve bank and he argues that currency in t r a ns i t can not be considered as hold with the Federal reserve bank * I agree with Governor Strong that the required reserve balances of member banks must be held with their Federal reserve banks, and I also agree that ordinarily currency in transit i s net thus held• In legal contemplation, however , currency in transit may be considered to be held by a Federal reserve bank i f the railroad company, the express company, or other carrier i s l e g a l l y i t s agent for the purpose of receiving and holding such currency* In the eyes of the law,custody and possession of an agent are the custody and possession of the principal* Currency in t r a n s i t , therefore, w i l l l e g a l l y c o n s t i t u t e part of the required reserves of a member bank, provided the carrier i n such case i s the agent of the Federal reserve bank and receives and holds such currency for the Federal reserve bank rather than for the member bank* I have not s u f f i c i e n t information as to the arrangements which the several Federal reserve banks have made for shipping currency to and from their irember banks to enable me to determine d e f i n i t e l y whether the carrier i s in f a c t the agent of the Federal reserve bank for the purpose of r e c e i v i n g and holding such currency* I understand , however, that the Federal reserve banks pay the transportation charges and insure such shipments i n their own names, and i f t h i s is true i t i s a strong indication that the carriers are the agents of the Federal reserve banks. If i t i s decided to have the carriers act as the agents of the Federal reserve banks for t h i s purpose, however, i t would be advisable to cover the matter by express contracts with both the carriers and the member banks * i n order that there may be no doubt as to the l e g a l r e l a t i o n of the parties or the l e g a l t i t l e to the currency. I can s e e no l e g a l reason why arrangements to this end could, not be made and i f they are made, I believe that the Board ^^ild^be acting within i t s l e g a l authority i n permitting Federal reserve banks to county in transit under such shipping arrangements as part of the reserve balances of their member banks. Unless, however, the carriers are the agents of the Federal reserve banks for the purpose of receiving and holding shipments of currency, I b e l i e v e the Board has no authority to rule that currency in transit nfey be considered in computing reserve requirements or penalties for d e f i c i e n cies i n reserves of member banks. The greater part of Governor Strong*s l e t t e r deals with various p r a c t i c a l reasons why i t would be inadvisable to count currency in t r a n s i t as part of member bank reserves* These considerations r a i s e important questions of policy for the Board i s determination and , i n my opinion, this entire matter should be decided as a question of policy rather than of law. Respectfully, (Signed) WALTER WYATT, General Counsel*
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