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& \ . . j .‘A . 446\ FEDERAL RESERVE BOARD WASHINGTON. December 2, IS15. To the Federal Reserve Board. Your Committee on Redistricting has received and noted the copy of the opinion of the Attorney General addressed to The President of the United States, under date of November 22, 1915, to the effect that the Federal Reserve Board has not the power to abolish any one or more of the Federal Reserve districts, or any one or more of the Fed eral Reserve Banks located in the cities designated by the Reserve Bank Organization Committee. Your Committee feels that there has been a serious misunder standing, not only of the substance and purpose of its preliminary re port filed with the Board on November 13, 1915, but also of the motives which prompted it. Therefore, before making any further recommendations, your Committee is desirous of recounting briefly the facts:which led to its action and on which it based its recommendations, with the hojp'e that a better understanding of the facts as they appeared to yourCommittee may promote a common point of view and conduce to a continuation of the harmonious cooperation and mutual good will that has in the past char Ji' _ 2 - u o 446 acterized the work of the Board and stamped it with the approval of the public at large• On March 1, 1915, Mr. Elliott filed with the Board an opinion dealing with the general powers of the Board to review the determination of the Organization Committee, to readjust the Federal Reserve districts, to change the designation of the Federal Reserve cities, and to reduce the number of districts formed by the Organization Committee. It is to be roted, however, that, in this ojpinion, the question of reduction was re ferred to very briefly, and Mr. Elliott later advised the Board that the '-onsideration of this particular question was merely incidental to themain questions discussed in that opinion and that, should the question of reduction be specifically considered \?y the Board, he would appreciate an opportunity of reconsidering his earlier opinion on that particular point. In view of the doubts raised by Mr* Elliott, the Board decided to avail itself of the opportunity of Senator Owen's appearance faeforo it in the hearing of th® appeal of certain Oklahoma banks requesting a trans*. fer from the Dallas to the Kansas City District, to ask for his views con cerning the intent of Congress and the meaning of the Federal Reserve Act relating to the powers of the Board on this whole subject. The request for Senator Owen's views-was not accidental, but intentionally contem plated to instruct and guide the Board in disposing of pending appealsHis answer was that Congress meant to "give to the Board the powei: of the Government itself in dealing with this system" 446. - 3 - and that he thought the power of the Board "would extend even to the power of reducing the ddctricts". It is understood, of course, that this statement by Senator Owen was merely his own personal opinion and that it was made at a tine when another though closely related subject was under consideration, but it at least indicates that there was no decided impression in Senator Owen's mind that this power to reduce was not given the Board* The Board subsequently published in the June 1, 1915, Bulletin a resolution, which was passed unanimously on Kay 4, 1915, when both Governor Hamlin and Ur* Williams were presentj providing, among otherthings, as follows:. "That action on other pending petitions be deferred until further experience in the actual operation of the several districts, especially in the light of the hew clearing system which is about to go into offect, and of the extent to which State banks take uamburship in the Federal Reserve System, shall have provided the Board 'with the necessary data for a conclusion, it be*, ing the opinion of the Board that action on petitions relating to changes in cities designated as the loca tion of Federal reserve banks should be deferred until the Board shall have reached a conclusion from experi ence as i> any further readjustments in the boundaries of the. several districts, or in the number of districts, which may be desirable in the operation and development of tho Federal Reserve System." (Thu italics are ours) Your Committee is positive that no objection Was raised at that time by any member of the Board or by any Member of Congress, indicating dissent from the proposition that the Board had the right to reduce .J 4 446 - 4 the number of districts. Indeed, such an argument was never raised in the briefs of counsel on the various appeals heard by the Board. On October 19, 1915, the following vote was passed, "to refer the question of redistricting to a special Committee consisting of Mr. Delano, Mr. Harding and Mr. Warburg". Counsel for the Board were soon thereafter roquested to prepare opinions as to the legal right of the Board to reduce the number of districts. Mr. Cotton filed his formal opinion on November 22, 1S15, stating unqualifiedly that the Federal huserve Board is fully authorized by the Act to reduce the number of dis tricts. Mr. Elliott, who, in accordance with his own request, was re considering his earlier opinion of March 1, 1915, filed his opinion with the Governor on November 23, 1915, and on November 22, 1915, the Attorney General delivered his opinion addressed to The President. It may 'be noted,therefore, that at the time of making its preliminary report on November 13, 1915, your committee did not be lieve either that members of Congress would take the position that the Board was without power to reduce the number of districts or that mem bers of the Board would, in view of the unanimous resolution above quoted take that view unless forced to adopt it by the conclusive opinion of Counsel. Your committee began its work by elaborating a report submit ting definite alternative plans, but finally concluded that it would b. preferable to ask the Board first to pass upon the Question of policy and the principle involved.. Your committee had, however, reached a conviction that the country would be better served by a reduction in the number of 446 - 5 districts to eight or nine. The reasons on which this conviction was based seemed 'so convincing and conclusive to the committee that it hoped the Board might adopt unanimously the recommendation which it out lined. The committee is desirous of emphasizing in the strongest terms its absolute confidence, not only in the underlying principles of the Federal Reserve Act, but also in the machinery provided for developing ■■oh principles into a System which has already brought immeasurable benefits to this country and which; whether with twelve banks or eight, will prove of inestimable value. That the number of banks and districts originally created was larger than is conducive, in the opinion of your committee, to ithe most efficient operation of the system and to the greatest safety of the country is not the fault of the Act, but is due to the fact that the Organization Committee, -which, though acting in the best of faith, could not, in the short time allotted to it, acquire such knowledge and experience as is absolutely necessary to a final determina tion of such an important question. The Attorney General has since denied the right of the Board to reduce the number of districts determined by the Organization Committee, and in view of that your committee is not desirous of making any further recommendations at this time. It wishes, however, to emphasize the fact that at the time of filing its preliminary report, no doubt existed in .its mind as to the -wisdom of reducing the number of districts in the near fu ture, but also the right of the Beard to make such a reduction. Your committee is ready to submit an abstract of the arguments 446 - 6 that were prepared by it when it supposed that the subject was to be dis cussed on its merits, and it is of the opinion still that these arguments will assert themselves sooner or later, and that the country will not rest satisfied until the Federal Reserve System shall have been developed to render its maximum possible efficiency. Furthermore, your committee fools that, if the adjustment is not made at this time, it is more than likely to be made at some future time, but with far greater difficulty and disturbance. In reviewing the evidence before the Organization Committee it was noted that, of the eighty-four witnesses, only nine redottmenled the formation of twelve districts; a large majority favoring not to exceed nine districts. Your committee concluded, as a result of its study of the ques tion, that the greatest protection from future disturbance was the immediate QO$ablishmec .anaystem enjoying its maximum degree of usefulness and service. try would not permit any subsequent interference The-^ with a machinery once perfected, whereas, weaknesses, such as those which seemod to your committee to exist now, offer a constant target for critics. For these reasons, not to mention the many practical advantages incident to carrying out, prior to January 1, 1916, any changes that might have been decided upon by the Board, your committee was sincerely anxious to secure prompt discussion and full consideration of its recommendations. As the chairman of the committee repeatedly stated, the desire for immediate consideration of the question was not prompted by any inten- v') if 446 - 7 - tion on the part of your committee to force the Board to take any unconsidored action, and the fact that the request of two members of the Board for another preliminary report in writing as to the reasons for its recommendations was opposed by the committee was, as explained by the committee, solely because it desired to have the report discussed without delay on its merits/and at that time lay before the Board all the facts and figures it had collected. practice ± Such a course was in consonance with our usual '- w3.C 3 * The committee had postponed filing its report on account ‘ of Secretary McAdoo’s absence in the west, and later waited until Mr. Hard ing had called on him at his house to apprise him informally of the views of the committee and secure any suggestions which he might see fit to make. The Secretary, however, was unable, because of his own illness, and later by illness in his family,, to <?iscuss the matter with Mr. Hard ing, and the .committee then filed its report on Saturday, November 13, 1915, fixing the following Monday for discussion by the full Board, the Secretary of the Treasury having stated to members that he would be en gaged on his report to Congress until the 15th, which the committee as sumed would leave him free after that date. However, consideration of the report was postponed until Monday, November S3, 1915, because cf the inability of the Secretary of the Treasury to be present until that date. At the meeting cf November 22d, the opinion of the Attorney Gen eral, already referred to, was presented; also, the letters of two United v .£ 446 -3 States Senators. While the committee does not wish to take up at this time the question of the propriety of Governor Hamlin's action in ask ing i'he President to secure this opinion without an authorizing vote of the Board, it thinks it proper to point out that, although this opinion, which practically tabled the subject, was presented, there had been at no time a discussion of the committee's original report of Novem ber 13th, or of the revised.report of November 17th. The committee, therefore, never had the opportunity which it desired to present fully and frankly its arguments and the data in its possession. Your committee believes that it would have been fairer to The President, to the Attorney General, and to the Federal Reserve System, if the case had been submitted to the Attorney General with a full pre sentation of arguments on both sides of the question. If the Attorney General, for example, had understood that no closing of banking offices was contemplated but that in every city whore a Reserve Bank was aban doned a branch bank would be established, he would not have been led to believe that the Committee's recommendation "would profoundly affect the currents of trade and alter the whole face of business throughout vast sections of the country,11 etc. If your committee was right in its conclusions as to the advis ability of a smaller number of districts, the permanency which the Attor ney General and every one of us desires for the future of the system would have been best secured by prompt and courageous action now. 446. - 9 Your Committee, however, fully appreciates the authority of the Attorney General’s opinion and, submitting to the conclusions reached therein recommends that tho Board abandon, at least for the present any plan of redistricting which involves the consolidation of any districts and that tho Board now address itself to the specific ap peals ponding and to such readjustments as r.ay bo permissible and prac ticable under tho Attorney General's opinion. There arc now pending before tho Board for disposal five applications, vizi First: The application of certain member banks located in Western Connecticut requesting that the terri tory in which they are located bo transferred fron the First to the Second Federal Reserve District. The Committee respectfully recommends that a date bo fixad for the hearing of oral arguments before the Board relative xo this appeal; Second: The application of certain member banks located in Wisconsin requesting that the territory in which thoy arc located bo transferred from the Ninth to tho Seventh Federal Reserve District. The Committee bospcctfully recommends that the Board sohd a letter ballot to all member banks of the Rinneapolis Dis trict involved in this appeal, requesting that thoy reply promptly to the Federal Reserve i 446 -1 0 - Board, stating whether they wish to he trans ferred to the Seventh or to remain in the Ninth District,, and stating also whether they feel that thoir interests are being harmed by remain ing in the Ninth District; Third: The application of certain member banks located in Louisiana requesting that the territory in which they are located be transferred from the Eleventh to the Sixth District. The committee respect fully recommends that, unless the Federal Re serve Bank of Dallas desires to be heard in the matter, the case of the Louisiana banks be decided upon the facts how in the possession of the Board without any further hearing, but if Dalsr las desires to be heard that a date for the hear ing be promptly fixed. Fourth: The application of member banks located in and Fifth Pittsburgh and Baltimore requesting that those cities be designated as Federal Reserve Cities in place of Cleveland and Richmond* respectively, Your committee wishes to call the Board's attention to the opinion of Mr. Elliott, dated March 1, 1915, which, in answer to the question "Can the Federal Reserve Board, under the terms of the Fed eral Reserve Act, designate other Federal Reserve Cities in place of o 446. - 11 - those seldOftcd by tho Organization Committee?", held that the Board has no legal power to change the designation of a Federal Reserve City unless such change is necessary in order to accommodate the convenience and customary course of business in a readjusted district. Hr. Elliott, in disposing of this point, stated: "If, therefore, the Board concludes that the districts arc not apportioned according to tho purpose and in tent of tho Act and determines that it is necessary to readjust such district,- it would seem clear that it possesses an implied power to change tho desig nation of the Federal reserve cities. If, however, tho districts are not readjusted, it scorns very doubt ful whether this power can bo implied, and to change tho designation of cities without readjusting the districts wotjJLd necessitate resolving this doubt in favor of the exercise of this power against the ap parent intone of Congress. " On the strength of this opinion of its Counsel, the Board might wellhbe justified in undertaking such changes in the designa tion of Federal Reserve Cities as nay be necessarily incident to the readjustment of the districts in which they arc located. the other hand, because in view of th-. great importance of the subject, and of the doubt expressed by Hr. Elliott, 'and also because of the uncertainty in the minds of the committee and this the On effect of particular Board the the opinion point, it suggestion of the sua-its that the Attorney for as to the intent General on consideration Governor be in- of 446 -1 2 - structed to address a letter to The President, aeicing him kindly to request the Attorney General to give his opinion on the following questions; (l) Can the Federal Reserve Board legally change the present lo cation of any Federal Reserve Bank? (2) (a) In the case where there has been no alteration in the district lines? and (b) In the case whore there has been such a readjusiment of district linos as in the opinion of the Board necessi tates the designation of a new Federal Reserve City in order that the convenience and customary course of busi ness may be accommodated as required by law? Must the Board, in exercising its admitted power to readjust, preserve the $4,000,000 minimum capitalization of each and every Federal Reserve Bank. Your coranittee finds itself unable to make any specific recom mendation relating to the changes in the designation of the cities of Cleveland and Richmond as Federal Reserve Cities in the Fourth and Fifth Districts, respectively, but it feels that any attempt to determine those questions should be deferred until the Board is advised finally and definitely, not merely of its power to el'tsJbgs f&jvdosignation of a city, but also, first, whether the power to make such a change is dependent upon further readjustments in the district lines, and, second, whether, if it is dependent upon such readjustments, the $4,GOD,000 capital limit must be preserved in making sudh changes in the district lines. 446 -1 3 - Your committee also fools that if this ratter is put up to the Attorney General, he should be advised that, while there are dis tinct features in the present adjustatist of districts which dc not com mend themselves to the best judgment of the committee, and do not in its opinion comply strictly with the injunction that due regard, must be had to the convenience and customary course of business, we recog nize tho difficulty of adjusting these matters so long as the Board is bound to preserve twelve districts, and at the same time maintain for each bank a capital large enough to command sufficient prestige and confidence. In his opinion the Attorney General formulated the query, "Would the power to readjust districts, which is expressly conferred Upon the Board, be .nullified or rendered impotent if tho power to % abolish districts and banks is withheld?” Your committee's response to this is that the ruling of the Attorney General, as a practical matter, nullifies the Board’s power to readjust the districts inas much as such readjustment of necessity must bo made with a view to preserving an adequate capitalization for each bank, several of which are now close to the limit prescribed for the Organization Com mittee and af smaller size than 4s conducive, in the opinion of your committ03, to the beet interests of the system. Respectfully submitted: F. A. DELANO Committee ' P. WARBURG W. ?. C-. HARD INC-
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