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17, 1934

Reserve Act of 1934.

Mr. Smead

In accordance with your request for comments on the above b i l l , the
following are submitted:
1. Revaluation


The bill provides that gold coin and bullion

now held by the Federal Reserve banks and Agents s h a l l be held in custody for
the account of the United States and payment therefor given by credits in the
Sold Settlement Fund and the Agents' Gold Fund, and that balances standing
to the credit of the Banks and Agents in the Gold Settlement Fund and the Agents'
Gold fund s h a l l hereafter be payable in gold certificates, which shall be in
such form and in such denotainations as the Secretary of t h e Treasury may

This provides a means whereby profits resulting from a decrease

in the gold content of the dollar may be taken by the Government without
any special action on the part of the Federal Reserve banks, and without
any change in the balance sheets of such banks.
2. Suggested verbal changes in b i l l .

Section g. Insert the words

"except gold purchased with gold certificates" after the word "purchased"
in the next to the last line of this section. Gold purchased with gold
certificates could not be included in the general fund of the Treasury.
Section 10 (a). Insert the words "with approval of the president"
after the word "Treasury" in line 2 .
Section 10 (b). Insert the words "or with Federal Reserve banks"
after the words "Treasurer of the United States" in line 5. Omit the
word " other" from line 8 and insert the words "other than the President"

Governor Black—


after the word " States" in line 9. Substitute the word "use" for the
word "expenditure" in l i n e 9•
3. Comment on above suggested changes. Section 10 (a) at drafted
gives the Secretary of the Treasury authority to assume complete control
of general credit conditions and to negative any credit policies which the
Federal Reserve System might adopt. This is an extremely broad power to
delegate to any man even in times of emergency, and no Secretary of the
Treasury should be permitted to exercise such powers without the approval
of the President. Likewise, i t would seem that the Secretary of the
Treasury should not be given unlimited power to use $2,000,000,000 as
a stabilisation fund except under the general authority of the President.
While i t may not be of particular importance it would seem that the
Secretary of the Treasury should have authority to deposit a l l or a portion
of the $2,000,000,000 stabilisation fund with the Federal Reserve banks,
as presumably stabilization operations could be carried out somewhat more
conveniently with funds on deposit with the Federal Reserve banks than
with funds on deposit with the Treasury i t s e l f .
4. Suggested addition to the bill. I t i s suggested that the following
words be inserted after the semi-colon at the end of l i n e 5 of Section 7,
"except that the Secretary of the Treasury shall use such profit s, to the
extent of the amount of the subscriptions of the Federal Reserve banks to
Class B stock of the Federal Deposit Insurance Corporation, to subscribe to
stock in that Corporation on behalf of the United States and upon such subscription

by the Secretary of t h e Treasury the Federal Deposit Insurance

Corporation shall return to the Federal Reserve banks the amounts paid in

Governor Black ~


on t h e i r subscriptions to Class B stock of that Corporation, and the
Federal Reserve banks are hereby relieved of the requirement contained i n
Section 12-B (c) of the Federal Reserve Act to subscribe to stock of the
Federal Deposit Insurance Corporation". Omit the word "and" and the following comma at the beginning of l i n e 6 and make the remainder of the section
a separate sentence.
5. General comments. Section 10 (a) of the b i l l gives to the Secretary of the Treasury practically unlimited powers to purchase, s e l l , discount
or 'negotiate at home o r abroad, drafts, checks, bills of

exchange, acceptances,

coin, bullion, cable transfers, foreign exchange, bonds, notes, evidences of

including the obligations of t h e United States or of any

foreign Government, and any obligations or securities in whatever currency
payable. This section not only gives the Secretary of t h e Treasury power
to buy and s e l l securities for the purpose of affecting the market prices
of United States


but to conduct operations for the purpose of

influencing the general credit situation throughout the whole country.
In fact, the powers contained i n this section would enable the Secretary
of the Treasury to negative any discount or open market policy adopted by
the Federal Reserve System and thus remove from the Federal Reserve System
any effective supervision over credit conditions. These are extraordinary
powers which i t would seem should be exercised only with the approval of
the President, and only during a definitely limited period. I t i s suggested,
therefore, that the following sentence be added at the end of Section 10 (a).
"The powers granted in this section may be exercised during the period of
the present emergency but in no case beyond June 30, 1935".