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. ~ .., ,... W. P. G. HARDI.il., •GiJO,;;;a,R ALBERT STRAUSS, VICE GoYIRNOR ADOLPH C. MILLER CHARLES S. HAMLIN Ex...OFP'ICIO M•Maau CARTER GLASS SICR~A.RY OP THI TREASURY CHAIIIIAII JOHN SKELTON WILLIAMS J. A. BRODERICK, SICRIETUY L. C. ADELSON, ASSISTANT SECIIETARY W, T. CHAPMAN, ASSISTANT SICIIETARY W. M. IMLAY, FISCAL MEIIT FEDERAL RESERVE BOARD COIIPTIOLLII OF THI CURRENCY WASHINGTON ADDitD8 ltiiPLY TO FEDERAL RESERVE BOARO December 20.,1918. X-1322 SUBJECT: United States Securities Pledged with Federal Reserve Banks. Dear Sir: The Federal Reserve Board 1 s attention has been called to the fact that Federal Reserve Banks (l) In some instances have accepted Liberty Bends o~ equities · therein, from depositary banks as security for war loan deposits., when the bonds or equities were., in fact, the property of the customers of the depositary bank. In the absence of express authority from the customer to re- hypothecate such securities, a transaction of this kind is of very doubtful legality. (2) Banking institutions in certain section ~f the country have accepted Liberty Bonds on deposit for their customers, agreeing to collect the interest for them and to return an equivalent amount of bonds upon demand. These bonds in some instances have been offered to Federal F~serve Banks as security for depos-its or advances. tn the absence of express authority from the custoner depositing such bonds., there is serious doubt of the right of the depositary bank to re-hypothecate or use these bonds., either as security for deposits or as collateral security for advances made. Aside from the legal questions involved., the acceptance of borrowed bonds as a basis for loans or advances from the Federal Reserve Bank, has X-1322 -2- a decided tendency to bring about undue inflation. The Governors of the Federal Reserve Banks as chairmen or head.a o! the local Liberty Loan organizations, have rr.ore or less definite 5~fcrrra- tion in regard to the amount of bonds purchased by the depositary bar.ks for their own account and th.e amount purchased for the account of custorr.ers. It is probable, therefore_, that the Federal Reserve Banks wo"J.ld be charged with notice of the ownership of the bones accepted either as collateral security for deposits or as collateral security for adva:1c..es made by the Federal Reserve Banks, if any question should later arise as to the true ownership of the bonds in question. This being true, it is important that to ~revent ~very precaution should be taken Federal ResGrve Banks from incurring any liability to the bond owners on account of transactions of this sort. It is accordingly sugeested that in accepting United States bonds as security for deposits or as security for advances made to rr.ember banks, the Federal Reserve Bank should, in case of doubt, require the depositary bank or member ban~;: tc fUe a certificate of o·Nnership of the bonds pledged or to furn5.sb a copy of the agreement between the· customer and the bank authorizing the hypothecation of the securities, or the Federal Reserve Bank might require all applications for rediscount or for advances and all pladge agreements used in connection with war loan deposits to show that all United States bonds offered as collateral security are the property of the bank or are used with the written sonsent of the owner. Kindly at.'knowledge receipt. Respectfully~ The Governor, Federal Reserve Bank, Governor.
@FedFRASER