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CONFIDENTIAL 330 July 24, 1915. HEHORA/DUL-l o n t h e r i g h t o f t h e f e d e r a l r e s e r v e b o a r d t o r e * STRICT THE REDISCOUNT BY FEDERAL RESERVE BANKS OF ACCEPTANCES BASED ON THE EXPORT OF MUNITIONS OF TAR„ The question has been raised whether the Federal Reserve Board has the right, under the power to regulate, to restrict the rediscount by Federal Reserve Banlgs of acceptances based on the export of sar materials. Section 13 of the. Federal Reserve Act provides that "Any Federal Reserve Baik may discount acceptances which are based on the importation or exportation of goods and 7hich have a maturity at t u e of discount of not more than three months, and indorsed by at least one nenber bank." It is evident that an acceptance to be eligible for redis count under the provision herein quoted rust be based on the importation or exportation of goods. Congress, however, in defining this power of the Federal Reserve Banks, has made no restriction whatever on the character or quality of the goods exported. The sole l u i tation m this connection is that the acceptance be based on the importation or exportation of goods, and, if it covers such a transaction, it ijay, under the ten s of the Act, be redisrounted by the Federal Reserve Brnk irrespective of the kind, duality, or u l t m a t e use of the goods so exported or ii'ported, provided, of course, that the acceptance also possesses the requisite indorsement and maturity4 It is also provided in Section 13 that "The rediscount by any Federal Reserve Bank of any bills receivable and of domestic and foreign bills of exchange, and of acceptances authorized by this Act, shall be subject to such restrictions, limitations, and regulations as »ay be imposed by the Federal Reserve Board", and it night be argued, therefore, that the Board has the right under this provision to issue a regula tion to the effect that only those acceptances .hich are based on the export of non-contraband goods shall be eligible for rediscount. Such a regulation, even if intended by Congress, would be unconstitutional as a ligislative act. Many cases of the United States Supreme Court have clearly settled the principle that the po1 er of an administrative body, such as the Board, to regulate or to lrpose restrictions or Imitations on those rights or powers authorized by an Act of Congress is l i n t e d to the re re administration of such Act, to - 2 - 330 the raking of regulations which rill make the rail of Congress operative and effective. Any regulation which either unduly restricts or enlarges the powers or privileges conferred by Congress is void and of no effect, because an unconstitutional exercise of a purely legislative function. Congress has specifically authorized the discount of acceptances based on the exportation or importation of goods, If the Board should pass a regulation requiring that such banks should discount only acceptances based on the exportation of non-contraband goods, it would seen that it mould thereby improperly restrict the authority given by Congress itself. If it were legitimate to make such a regulation, the logical consequences would be that the Board could, if it caw fit, regulate that acceptances laced on the export of goods other than vegetable products should not be discounted, or that .acceptances based on the export of goods other than works of art should not be discounted; or, reductio ad absurdun, that acceptances based on the export of goods other than pea nuts should not be rediscounted. Such a power, if conceded, would enable the Board under the- guise of administration, , ‘ r *. completely to nullify the provisions of the Act, and its exercise would be clearly unconstitutional. It is to be noted incidentally that if the Board has the right, under the power to regulate, to restrict the discount of acceptances as previously indicated, it may also similarly limit the discount of commercial paper to paper the proceeds of which are tc be used, for instance, for certain limited agricultural pursuits. Uhat then does this .power to regulate involve? As in dicated by the cases decided in the Supreme Court, tho power to regulate confers on the body possessing it the right to make any regulation which will conduce to the effective operation and administration of the law as passed by Congress. Any regulation, however, which not only fails to promote an effective administration of that law, but rather tends to nullify it in whole or in part, is not such a regulation as may be ligitimately promulgated by any administrative body of the government., It seem3, therefore, that the Board can not restrict tho rediscount of acceptances to those accept?.nce3 which are based on any particular class of goods, or to acceptances based on goods being transported to any particular place or country. Such a regulation would be a discrimination clearly not con templated by Congress, and one which might well provoke just criticism of the Board. r 330 - 3 - There seems to be no doubt, however, that the power of the Board to regulate the discount of acceptances confers igpon it not only the power but also the duty to make certain restrictions, such as upon The total amount of acceptances rediscounted by any particular bank or banks, if it is seen at any par ticular time that the assets of any such bank or banks should be conserved for other more argent needs. The whole purpose of the Act demands that the Board possess such regulatory power in order to make effective the machinery provided by the Act for affording means of moving crops, for instance, or for preventing financial panics. Such a gensrr.l power, however, hac no relation to, and does not include the right to exclude a particular class of paper which could not be classified separately on any ground of financial policy, or for any reason1except perhaps to satisfy the complaints of certain persons inspired only by their own personal or emotional prejudices. In any event,, it is very certain that under the present regulations of the Board, any federal Reserve Bank may dis count acceptances based on the exportation of goods, whether war materials or not^ and it does not seem, for the,- reasons indicated, that the Board can legally issue a new regulation which would impose any restriction operating as a discrimination against any particular class of goods such a.3 war materials* Attention is respectfully directed to Mr, Elliott*s opinion, filed with the Board, which deals more generally with the broader question of the status of the Federal Reserve Banks, and with the question of the neutrality of the Unites States government in this matter. G. L. HARRISOiv, Assistant Counsel. 8/l6/l5. £>
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