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772W . P . G . H A R D I N G . GOVERNOR • X OFFICIO MEMBERS A L B E R T S T R A U S S , VICE GOVERNOR ADOLPH C. MILLER CARTER LASS SECRETARY OF THE TREASURY ^ChAR IMAM CHARLES S . HAMLIN FEDERAL RESERVE BOARD J O H N 3KELTOH WILLIAMS COMPTROLLER OF THE CURRENCY V . T, C H A P M A N , SECRETARY R . 6 . E M E R S O N , ASSISTANT SECRETARY ADDRESS REPLY TO w . H . I l l LAY. FISCAL AOIHT WASHINGTON FEDERAL RESERVE BOARD October 2,1919. X-1689 Subject* Report of Co&wittee on advisability of transferring sub-Treasury Functions to federal Reserve Bonks, CONFIDENTIAL Dear s i r : please find enclosed, for your confidential information* a tentative difaft of repoH by a sib* committee of thecomtiiittbe appointed by ttie S@th6ta^y of the Treasury id ieptot on the gjteStioh Of the advisability of abolishing the sub-treasuries and of turning over their functions to the federal Reserve Banks. Will you be good enough to examine this c r i t i c a l l y , consulting the governor and other executive officers of the federal Reserve sank, and report at the earliest possible moment any suggestions or criticisms which you deslr# to males? please examine carefully each section of the draft of b i l l , and ptt in specific form any changes you may think desirable. Kindly acknowledge receipt. Very truly yours. Secretary* Letter to a l l federal Reserve Agents. X-1669 a Provisions of the Federal Reserve Act with respect to deposit in the Federal Reserve Banks of moneys in the General Fund of the Treasury* 773 ' The authority granted to the secretary of t£e Treasury under section 15 of the Federal Reserve Act, approved December 2}, 1913j relative to the use of the Federal Reserve Banks in conducting tjie financial transactions of the Government may he summarily stated as follows; (1) The moneys held in the general fund of the Treasury, except the f i v e per cent, fund for the redemption of outstanding national-bank notes and the funds provided in t h i s Act for the redemption of Federal reserve notes may, upon the direction of the Secretary of the Treasury, he deposited i n Federal Reserve Banks. (3.) Federal Reserve Banks, when required by the Secretary of the Treasury, shall act as f i s c a l agents of the united States. (3) The revenues of the Government or any part thereof may be deposited in such banks, (4) Disbursements of the Government may be made by checks drawn against such deposits* Federal Reserve Banks at present handle the greater portion of the Government Vs f i n a n c i a l transactions* The regular active national-bank depositaries of the Government located in the same c i t i e s with Federal reserve banks were directed by the secretary to transfer on January 2, 1916 to the respective Federal Reserve Banks in such c i t i e s a l l balances of public moneys held by them t o the credit of the Treasurer of the united States. The Federal Reserve Banks, from and a f t e r such date, bec*.ame active agencies of the government in the receipt, payment and accounting f o r a part of the public moneys * -2- X-lb89 a By reason of the f a c t s that (1) the banks and. t r u s t companies throughout the United States have had greatly increased financial transactions with the Federal Reserve Banks and t h e i r Branches due to the Government Loans, (&) the check clearing system of the Federal Reserve Banks through which approximate3y twenty thousand banks and t r u s t companies make t h e i r check clearings, (3) that clearing house balances in many Federal Reserve and Federal Reserve Branch c i t i e s are settled through the Federal Reserve Banks, and (4) other conveniences extended by the Federal Reserve Banks and their Branches to t h e i r member and clearing banks, the volume of the government*s f i n a n c i a l transactions now handled by the Federal Reserve Banks i s such a large p a r t of the t o t a l that in the opinion of t h i s Committee there i s no longer any necessity for the continuance of the Sub-treasuries of the United States for any purpose* Financial transactions of the Government performed by subtreasuries that are not performed by Federal Reserve Banks. The only Government transactions not now being handled by the Federal Reserve Banks and their Branches that form a part of the transactions of the Subtreasuries ms$ be stated as follows* (1) Redemption of subsidiary and minor coins of the United States. (2) Distribution of subsidiary and minor coins. (3) Payment of Government checks and warrants over the counter. While the transactions involving the redemption and d i s t r i b u t i o n of subsidiary s i l v e r and minor coins are large in the larger Subtreasury c i t i e s , yet both can be readily handled by the Federal Reserve Banks and t h e i r Branches with greater s a t i s f a c t i o n to banks desiring such coins f o r use or wishing their redemption on account of the advantages of the locations of the Federal Reserve Banks and t h e i r Branches as against, the locations of ( l e s s than one -3- X-1689 a , t h i r d the same number) the Subtreasuries. With respect to the payment tf Government checks and warrants over the counter, however, i t i s the opinion of this Committee that with the discontinuance of the Subtreasuries as cash payment points for the use of the public creditors and disbursing o f f i c e r s of the Government, and the continually decreasing number of national'-bank depositaries, i t i s necessary that the Federal Reserve Banks extend f a c i l i t i e s in t h i s respect at least equal to the Government agencies that they are replacing. This point i s covered in Section 9 of the tentative d r a f t of the b i l l presented herewith which gives the secretary of the Treasury authority to require Federal Reserve Banks to perform a l l duties heretofore performed at the Subtreasuries. While Section 15 of the Federal Reserve Act does not specifically prohibit the Secretary of the Treasury frow depositing in the Federal Reserve Banks the t r u s t funds, yet by limiting the moneys that can be deposited in such banks to the c l a s s i f i c a t i o n of funds specified under the heading of "moneys in the ^General Fund of the Treasury", i t would seem t o have been the intent not to make such deposits with the Federal Reserve Banks. These funds can readily be taken care of by the coinage mints and the Assay Office at New York and also the Treasurer of the , united States on account of the vault storage space available through the melt of standard silver dollars and sale of the resultant bullion under the terms of the Act of April 23,1918, In order, however, to make provision for unforseen contingencies that uay a r i s e in the future with respect to the Inderal Reserve Banks on account of deposits in the Treasury for credit in the Gold Settlement Fund and also deposits i n the 'Treasury for the redemption funds required under the Federal Reserve Act f o r the redemption of Federal B&serve notes, i t has been thought best t o incorporate -4- X-1689 a into the tentative d r a f t of the b i l l herewith submitted* a provision that would authorize the Secretary of the Treasury to keep special gold deposits with the Federal Reserve Banks. I t will be recalled that the amendment to the Federal Reserve Act, under date of June 21, 1917, authorized the Federal Reserve Banks and Federal Reserve Agents to keep the Gold settlement Fund on deposit with the Treasurer of the United States, such fund to be subject to the check Of the Federal Reserve Board and payable in gold. Deposits for credit i n the Gold Settlement Fund by the Federal Reserve Banks and the Federal Reserve Agents as well as deposits by Federal Reserve Banks and Agents for credit in the Gold redemption funds f o r redemption of Federal Reserve notes, have been made with the Assistant Treasurers of the United States under the authority of the Act of June 21, 1917. This has been quite a convenience to the Federal Reserve Banks and the Federal Reserve Agents and i t i s not believed wise to omit from the present b i l l discontinuing the Subtreasuries, some provision that will continue such conveniences. This, i t i s believed, i s f u l l y covered in Section 7 of the proposed d r a f t of b i l l discontinuing Subtreasuries* Federal Reserve Banks to perform sub treasury duties without reimbursement therefor from the Government. The expenses for the maintenance of the subtreasury system exclusive of salaries paid to the Assistant Treasurers of the United States are less than $500,000 per annua. It i s not believed that the cost to the Federal Reserve Banks of performing the Subtreasury duties w i l l equal t h i s sum, by reason of the f a c t that such banks necessarily maintain at present organizations which handle similar duties in almost every respect. Also, i t is not thought wise t h a t the Federal Reserve Banks should demand of the Government reimbursement f o r expenses incurred when taking over the — 5"* X-1689 a d u t i e s performed by the S u b t r e a s u r i e s due t o t h e f a c t t h a t i t w i l l be practically impossible t o s e p a r a t e such f u n c t i o n s from the normal f u n c t i o n s performed by t h e F e d e r a l Reserve Banks i n c o n n e c t i o n w i t h t h e i r d u t i e s a s d e p o s i t a r i e s cf p u b l i c moneys and f i s c a l agents of t h e United S t a t e s * When d i s t r i b u t e d among the twelve F e d e r a l Reserve Banks and t h e i r Branches t h e i n c r e a s e d c o s t t o any one F e d e r a l Reserve Bank or Branch w i l l n o t , i t i s b e l i e v e d , be s u f f i c i e n t t o cause any unnecessary or unusual h a r d s h i p . Replies received by t h i s Committee from the s e v e r a l F e d e r a l Reserve banks r e l a t i v e t o a b s o r p t i o n by them of these c o s t s without s p e c i f i c reimbursement by congress, have i n d i c a t e d t h e i r w i l l i n g n e s s t o accept the Subtreasury d u t i e s without reimbursement. Date for proposed act authorizing discontinuance of Subtreasuries to be e f f e c t i v e . By reason of t h e f a c t s t h a t (1) the Federal Reserve Banks have n o t a t p r e s e n t s u f f i c i e n t accomodations, i n c l u d i n g v a u l t s , f o r t h e a d d i t i o n a l work t h a t may be p l a c e d on them i n the event of t h e discontinuance of the S u b - T r e a s u r i e s , (2) t h a t s e v e r a l of such Banks have i n contemplation the e r e c t i o n of t h e i r own b u i l d i n g s and (3) t h a t a p p r o p r i a t i o n s f o r the maintenance of the Sub-Treasuries t o the c l o s e of the f i s c a l year 1920 have been made, i t i s recommended t h a t the d i s c o n t i n u a n c e of the Sub-Treasuries be not made e f f e c t i v e u n t i l the c l o s e of b u s i n e s s on June 30,1921. Subtreasury buildings owned by the Government. The only b u i l d i n g s owned by the Government t h a t a r e used e x c l u s i v e l y f o r s u b t r e a s u r y f u n c t i o n s a r e those a t Sew York and San Francisco* while i t i s b e l i e v e d t h a t t h e coinage Mints and t h e Assay O f f i c e a t New York w i l l p r o v i d e s u f f i c i e n t v a u l t space f o r t h e s t o r a g e of t h e T r u s t Funds, i t i s -6- X-1639 a recommended t h a t t h e above mentioned b u i l d i n g s "be n o t assigned t o o t h e r uses u n t i l the T r u s t Funds a r e e f f e c t i v e l y t r a n s f e r r e d * In view of the f a c t t h a t i t i s proposed to have the F e d e r a l Reserve Banks take over the d u t i e s now performed by the Subt r e a s u r i e s without compensation from the Government, i t i s deemed j u s t and proper t h a t a l l equipment now i n use by t h e s e v e r a l Subt r e a s u r i e s belonging t o t h e Government s h a l l be turned over t o t h e F e d e r a l Reserve Banks without c o s t to such banks, or such p o r t i o n thereof as may be d e s i r e d by the Federal Reserve Banks* All such p r o p e r t y not so taken over by the F e d e r a l Reserve Banks s h a l l be forwarded t o the General Supply Committee f o r d i s p o s i t i o n i n accordance w i t h e x i s t i n g r u l e s and r e g u l a t i o n s . X-1689 to BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That the Subtreasuries of the United States located at Baltimore, Mi., New York, N. Y-, Philadelphia, pa., Boston, Mass., Cincinnati, Ohio., Chicago, 111,, St. Louis, mo. , New Orleans, La. and San Francisco, Calif shall be discontinued at such date with respect to each such Subtreasury as may be determined by the Secretary of the Treasury, but in no case l a t e r than the close of business on June 30, 1921, and thereafter a l l o f f i c e s created under existing laws at each such Subtreasiary so discontinued shall be abolished. All laws or parts of laws prescribing or defining the duties to be performed by an Assistant Treasurer of the United states at any Subtreasury are hereby repealed. 2» &11 gold and silver coins and bullion held in such subtreasuries, forming part or a l l of the Trust Funds to secure outstanding gold c e r t i f i c a t e s , silver c e r t i f i c a t e s ana Treasury Notes of 18901 the Gold Reserve Fund to secure United States Notes am Treasury Notes of 1890 and the Gold Settlement Fund held in such Subtreasuries under the provisions of the Act of June 21, 1917, shall be transferred to the Mints of the United States at Philadelphia, p a . , Denver, Colo., San Francisco, C a l i f , , and the Assay Office at New York, N« Y., or to the Treasurer of the United States at Washington, as the Secretary of the Treasury may d i r e c t • 3» All paper currency of any kind or description neld in such subtreasuries shall be transferred to the Treasurer of the United States at Washington, except, however, such amounts not forming a part of the Trust Funds, may be transferred to the Federal Reserve Banks as the Secretary of the Treasury may d i r e c t . -24. X-lb89 b All subsidiary silver and minor coins held in such sub- treasuries shall be transferred to the Federal Reserve Banks, or to the Treasurer of the United States at Washington or to the Mints of the United States at Philadelphia, Pa., Denver, Colo., and San Francisco C a l i f . , and the Assay Office at New York as the Secretary of the Treasury may d i r e c t . 5* All replacements of mitilated or u n f i t United States paper currency and redemptions of united States paper currency and subsidiary silver and minor coins shall hereafter be wade by the Federal Reserve Banks and t h e i r Branches and the Treasurer of the united States, and subsidiary silver and minor coinsmay be redeemed at the Mints and Assay Offices of the United States, a l l in the discretion of the Secretary of the Treasury and under such rules and regulations as he may prescribe b. Gold c e r t i f i c a t e s in denominations of ten thousand dollars now authorized to be issued in the discretion of the Secretary of the Treasury and payable to the order of a specified payee upon a deposit of an equal amount in gold coin or bullion may hereafter be issued, in the discretion of the Secretary of the Treasury, by the Federal Reserve Banks upon transfer to the Treasurer of the united States by such Federal Reserve Banks of an equal amount in gold through check on the Gold Settlement Fund held by the Treasurer of the United States to the credit of the Federal Reserve Board or through gold payments to the Treasurer of the United States or to the Mints and Assay Offices of the touted States as the Secretary of the Treasury may d i r e c t . For the -3- X-16S9 b purpose of t h i s section the Secretary of the Treasury is authorized to keep such supply of blank, c e r t i f i c a t e s in the j o i n t custody of the Federal Reserve Agents and the Federal Reserve Banks as may be necessary, 7* If in his opinion i t may be necessary, and notwithstanding the provisions of Section 2 of t h i s Act, the Secretary of the Treasury i s hereby authorized to establish and maintain with the Federal Reserve Banks and their Branches special gold deposits of t r u s t , redemption and reserve funds which shall be held by such banks in a special gold account to the credit of the Treasurer of the united s t a t e s , subject to withdrawal on demand without notice, and no part of such special gold deposits so held shall be counted by the Federal Reserve Banks as part of their gold assets nor included in deposits against which reserves must be maintained, but the t o t a l amount shall at a l l times on their books and in a l l public statements, be shown separately, as a deduction from the t o t a l gold holdings of such banks, 8. Hereafter, national banks may make deposits in Federal Reserve Banks and their Branches to the credit of the Treasurer of the united States for credit in the f i v e per cent, fund to redeem t h e i r circularting notes, and similarly deposits may be made by national banks to r e t i r e their notes from circulation, and so much of existing provisions of law requiring such deposits to be made with the Treasurer of the United States in lawful money, i s hereby repealed. Nothing in t h i s section shall prohibit the secretary of the Treasury from requiring such deposits 782 ) -4- X-lbgy b to "be made in lawful money if in his opinion such action may be necessary# 9* Except as herein specifically provided, a l l duties hereafter, performed at the Subtreasuries, shall be performed by the Federal Reserve Banks and their Branches, .the Treasurer of the united States, or the Mints and Assay Offices of the United States under such rules and regulations as the Secretary of the Treasury may d i r e c t . 10. All employees in the Subtreasuries in the classified Civil Service of the united States who may so desire, s h a l l be eligible for transfer to c l a s s i f i e d Civil Service positions under the control of the Treasury Department, or if their services are not required in such Department they may be transferred to f i l l vacancies in any other executive Department with the consent of such Department« To the extent that such employees possess required qualifications they shall be given preference over new appointments in the c l a s s i f i e d Civil Service under the control of the Treasury Department in the c i t i e s in which they are now employed. Nothing in this section shall be construed to prevent the Secretary of the Treasury from r.igiV-ing request of the Federal Reserve Banks to take over a l l employees in the Subtreasuries and to continue payment of not less than their present rates of annual compensation for at least a period of one year from date of July 1, 1921, or to cause such employees during such period to lose their c i v i l service status. 783 % -5- 11. x-lo89 b Hereafter the Federal Reserve Banks or Branch Federal Reserve Banks shall not be required to give bond, either with or without surety f o r the issuance of duplicate checks or warrants in l i e u of such checks or warrants cashed by said banks or branch banks or for coupons cashed, and subsequently lost in t r a n s i t between said banks and the office of the Treasurer of the united States at Washington, D.C. 12. All laws and parts of laws inconsistent with the provi- sions of this act are hereby repealed.
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