The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Form No. 131
Office Correspondence
\\To Governor Meyer* .
XV
'
FEDERAL RESERVE
BOARD
Subject
Date O cto b e r 1 5 , 1930
63 J
-Mr* MoClelland*
2—8495
iie f e r r in g to th e d is c u s s io n w h ich to o k p la c e a t th e m e e tin g t h is morn
in g w ith re g a rd to th e e f f e c t o f p u rch a se s and s a le s by F e d e ra l re s e rv e banks
o f f o r e ig n e x ch a n g e, and th e r e s p o n s ib ilit y o f th e B oard in c o n n e c tio n w ith
suoh p u rch a se s and s a le s , th e re i s g iv e n below a s h o rt memorandum o f th e c o n s id e ra
t io n w h ich h as been g iv e n by th e Board to t h is m a t t e r.
At th e m e e tin g on Ju a $ 3 0 , 1 9 2 ? t Mr* M i ll e r s ta te d he thought some a c
t io n sh o u ld be ta k e n by th e B oard to c l a r i f y i t s r e s p o n s ib ilit y w ith re s p e c t to
th e p u rch a se and s a le by F e d e ra l re s e rv e b a sk s o f b i l l s o f exchange and b a n k e rs ’
a cce p ta n ce s in f o r e ig n money m ark e ts and t h a t he w ould b r in g th e fo llo w in g mo
t io n u p f o r a c t io n a t th e n e x t m eetings
" J h a t i t he th e se n se o f th e F e d e ra l a e s e rv e B oard th a t th e au
t h o r it y c o n fe rre d upon i t in s e c t io n 1 3 o f th e F e d e ra l d e se rv e lo t re a d
in g !
’ The d is c o u n t and re d is c o u n t and th e p u rch a se and s a le by any Fed
e r a l re s e rv e bank o f any b i l l s re c e iv a b le and o f d o m e stic and f o r e ig n
b i l l s o f e x ch an g e, and o f a cce p ta n ce s a u th o ris e d by t h is A ct* s h a ll be
s u b je c t to su c h r e s t r ic t io n s , lim it a t io n s f and r e g u la t io n s as may be
im posed by th e F e d e ra l ile s e rv e B o ard ’ , a p p lie s to th e p u rch a se and
s a le o f b i l l s o f exoha i^ e and a cce p ta n ce s made ab ro ad a s w e ll a s a t
home and th a t the Board r u le th a t su ch p u rch a se s and s a le s a re s u b je c t
to suoh r e s t r ic t io n s , lim it a t io n s and r e g u la t io n s a s i t may se e f i t
to im p o se .”
In re sp o n se to a re q u e s t th a t he subm it an o p in io n a s to w h eth er Mr*
H i l l e r 9* m o tio n w as * c o r r e e t state m e n t o f th e le g a l s it u a t io n , th e B o ard vs
C o u n se l a d v is e d t h a t in h is o p in io n th e re c o u ld be no doubt a s to th e c o r r e c t
n e s s o f th e c o n c lu s io n s s t a te d in M r* M i ll e r ’ s m o tio n ; a ls o , th a t the lan g u ag e
o f th e A ct i s a ll - i n c l u s i v e so d a p p lie s t o th e p u rch a se and s a le o f b i l l s o f e x
change and bankers* a cce p ta n ce s a b ro a d a s w e ll ms to p u rch a se s and s a le s a t
hone a p p e a rs so c le a r ly f r a s a re a d in g o f th e s t a t u t e i t s e l f th a t no argum ent
w as n e c e s s a ry to su p p o rt M r* H i l l e r 9* c o n c lu s io n *
She e n t ir e m a tte r was c o n s id e re d a t th e m e e tin g o f th e B oard on July
6 , and th e fo llo w in g m o tio n was adopted*
"T h a t i t be th e se n se o f th e F e d e ra l D e se rve B oard th a t th e
a u t h o rit y c o n fe rre d upon i t by S e ct ioacis 13 and 14 o f th e F e d e ra l R e se rv e
A c t , w ith re s p e c t to th e p u rch a se and s a le o f b i l l s o f exchange and a c
ce p ta n c e s » a p p lie s t o su ch p u rc h a s e s and s a le s made ab ro a d a s w e ll as
a t hone* and t h a t the B oard r u le th a t su ch p u rc h a s e s and s a le s a re su b
j e c t t o l i e re g u la t io n and a p p ro v a l* 1*
A t th e m e e tin g o f th e E x e c u tiv e Com m ittee on J u ly 1 2 , th e B oard ’ s Coun
s e l was in s t r u c t e d to p re p a re and su b m it a re g u la t io n s u c h a s co n tem p la ted by
th e above a c t io n *
Ufcder d a te o f A ugust 1 7 , M r* W yatt su b m itte d a memorandum to
Reproduced from the U nclassified
I D eclassified
Holdings of the National A rchives
tho B oard r« q u # * tln g moro » p * o ifio is * t m o tio n * as to III* c h a r* o t« r o f tfcO r e
g u la tio n * w h io k & * Board da ai rod to p ro w o lg ato on t h is s u b ja o t and t&o gonaral
n atu r# o f th a r o a t r io t io n a , i f an y, w hioh tho B oard d as 1 ro d to p la o a upon tha
p fe h a a o and sai* o f * iU * o f o xo h in ^o and, fcanfcora* to o o p taao o s *fe*o*&»
w ith Mr* % * t t f * ro < p o * t toofor* i t , tho B oard gavo f u r t h o r oonsi dora
tion to tho mattor at tfc* mooting on August $0, 192T, tm t a c t io n waa d o fo w A *
31aoo that ti»o , whilo tha quoation haa boon d lse u a a o d in oonnootion with o t lio r
aubjoota wfcio& havo aante boforo tha Board, no action ha# baan takon. Howaror,
uadar d ato of 0ot©}*o£ 20* l$2Sf* Mr.
oalsalttod a d o ta U o d raofflorajidm on tho
sm tojoot, ^ffc^B oajpd** Powor Qt$t Foroign fra n s a o iio n * of tho fo d o ra l aoaoiro
Banks”, a Oft# Of whioh la attao h o d for $mt information.
Reproduced from the Unclassified I Declassified Holdings of the National Archives
F o r m N o . 131.
dence
ii
O i i i c e
FEDERAL RESERVE
BOARD
^ ^ ' ' Oototer 5, 1930.
Subject:
At the meeting of the Board on November 7, 1929, following a
discussion of a possible regulation covering open market operations,
Governor Yocffig'sTafced that he would endeavor to work out a form of
regulation along the lines discussed and submit it to the Board
later.
In view of the later adoption, by the System, of the revised
/
plan of open market procedure, no further consideration was given
to the matter of a regulation*
/
Reproduced from the Unclassified I Declassified Holdings of the National Archives
F o r m n o . 131
Urhce Correspondence
To—
..D r, M ille r ,
From .
_____
Mr* M cC le lla n d * ___________________
FEDERAL RESERVE
B0ARD
F e b ru a ry 2 1 . 1950
Subject:________________
33
*
3
___________________________________
In accordance with your request, there is given below the record
of the Board*s action, as shown by the minutes, with regard to:
1*
The proposed regulation by the Board of the purchase and sale by Federal re
serve banks of bills of exchange and bankers* acceptances abroad.
2*
The question of the procedure to be followed in the establishment of buying
rates on acceptances at Federal reserve banks*
3.
The proposed regulation covering open market operations at Federal reserve
banks*
1* Regulation by the Board of the purchase and sale by Federal
reserve hanks of bills of exchange and bankers* acceptances abroad*
At the meeting of the Board on June 30, 1927, you stated you thought
some action should be taken by the Board to clarify its responsibility with re
spect to the purchase and sale by Federal reserve banks of bills of exchange and
bankers.* acceptances in foreign money markets and that you would bring the follow
ing motion up for action at the next meeting:
**That it be the sense of the Federal Reserve Board that the author
ity conferred upon it in Section 13 of the Federal Reserve Act reading: *The dis
count and rediscount and the purchase and sale 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 may be imposed by the Federal Reserve Board*, applies to the pur
chase and sale of bills of exchange and acceptances made abroad as well as at home
and that the Board rule that such purchases and sales are subject to such re
strictions, limitations and regulations as it may see fit to impose* **
This matter was considered at the meeting on July 6, 1927, and the
following motion, submitted by you, was adopted:
"That it be the sense of the Federal Reserve Board that the author
ity conferred upon it by Sections 13 and 14 of the Federal Reserve Act, with re
spect to the purchase and sale of bills of exchange and acceptances, applies to
such purchases and sales made abroad as well as at home, and that the Board rule
that such purchases and sales are subject to its regulation and approval,”
At the meeting of the Executive Committee on July 12, 1927, coun
sel was instructed to prepare and submit to the Board a regulation such as contem
plated by the above action, and at the meeting on Aug. 30, at which time a memoran
dum from counsel requesting further information as to the character of the regula
tion which the Board desired his office to prepare was discussed, action on the
matter was deferred* Since th a t date no further action lia s been taken by the
Board. However, the motion introduced by you on October 29, 1929, referred to la
Reproduced from the Unclassified I Declassified Holdings of the National Archives
-2 -
ter in this memorandum, contemplated the regulation by the Board of the purchase
and sale of bills abroad.
2* The nestion of procedure to bo followed in the establishment
off buying rates on acceptances at Federal reserve banks.
At the meeting of the Board on January 3, 1929, following receipt
Of advice from the Federal Heserve Bank of New York of an intended change in the
schedule of effective buying rates at that bank, the Governor stated that in his
opinion new schedules of buying rates should not be made effective until approved
by the Board. A general discussion followed regarding the procedure which has grown
up in the matter of the establishment of buying rates at the federal reserve banks,
whereby, after approval by the Board of a minimum rate, currently effective rates
are established by the bank without prior reference to the Board, and it was the
consensus of opinion that such rates should be established, subject to the review
and determination of the Board, in the same manner as rates of discount and that
the present procedure should be revised.
The need of a change in the present procedure was discussed further
at the meeting on January 4, and upon your motion, the Governor was "requested to
prepare for action by the Board, draft of a regulation superseding all existing re
gulations or practices governing bill rates, which will make all rates subject to
review and determination by the Board in the same manner as discount rates are now
subject to review”. It was also suggested by Mr. Cunningham that a meeting be held
for the purpose of discussing fully the policy of the Federal Reserve System with
regard to the purchase and holding of acceptances, with a view to having the Board
fully informed as to just what the effect of the policy is and with the further
thought of creating, if possible, a broader distribution of bills.
Occasioned by an advance in the schedule of effective buying rates
at the federal Reserve Bank of New York, at the meeting on February 15, 1929, the
Governor was authorized, on the occasion of his next visit to New York, to discuss
with the directors of the New York Bank the formulation of a procedure under which
buying rates could be considered by the Board before they are made effective by the
bank. At the meeting on March 21 the Governor reported that he had discussed the
matter while in New York, particularly with Deputy Governor Kenzel who advised him
that in ordinary times he believed the bank could operate if it were authorized to
adjust the bill rate within one-half of one percent under the discount rate of the
bank, but that at the present time with the bill market so uncertain he did not feel
that anything could be done except to follow the market rates. The Governor also
suggested that it would be desirable to have a conference between the members of
the Board and the directors of the Federal Reserve Bank of New York for a full ex
change of views regarding the situation. This suggestion was taken up with the New
York directors through Governor Harrison who reported that the idea of a conference
with the Board appealed to his directors and that they had asked Mr. Woolley and
Governor Harrison to meet with the Board in Washington as soon as convenient. On
June 5, 1929, Messrs. licGarrah, Mitchell, Reybum and Treman met with the Board,
but as the matter of the proposed increase in the discount rate of the Federal Re
serve Bank of New York was of first importance at that time, there was no discus
sion of procedure in connection with the establishment of buying rates for bills.
Discussion with regard to the present procedure was had at the meet-
Reproduced from the Unclassified I Declassified Holdings of the National Archives
—
in g on A u g u st 9 , a t w h ich tim e a n o th e r change i n th e New Y o rk s c h e d u le o f b u y in g
r a t e s was n o ted w ith a p p ro v a l b y th e B o a rd . F o llo w in g f u r t h e r d is c u s s io n a t th e
m e etin g on A u g u st 1 0 , you su b m itte d th e fo llo w in g memorandum a s a b a s is f o r d is c u s
s io n o f a new tem p o ra ry p ro ce d u re w ith re g a rd to th e d e te rm in a tio n o f b u y in g r a t e s
on b i l l s b y th e F e d e ra l R e se rv e B o a rd :
wl* The s u c c e s s f u l a p p lic a t io n o f th e g e n e ra l lin e s o f c r e d it po
l i c y adopted b y th e B o a rd a t th e c o n c lu s io n o f th e re c e n t c o n fe re n c e w ith th e Gov
e rn o rs depends la r g e ly i f n o t m a in ly , upon th e d eg ree o f a c c u ra c y w ith w h ich p u r
c h a s e s o f b i l l s a re a d ju s t e d to th e tre n d o f c o n d it io n s fro m week to w eek and po s
s ib ly som etim es d u rin g s h o rt in t e r v a ls .
2 . The m a tte r i s one o f to o much im p o rta n ce , in v o lv in g a s i t d oes
th e a p p lic a t io n o f a n a t io n a l p o lic y , to be l e f t to th e d e te rm in a tio n o f th e Re
s e rv e Bank o f New Y o rk e ven though th e g re a t b u lk o f th e b i l l s w i l l o r ig in a t e and
be o ffe re d t h e re . I t s h o u ld have th e jo in t a t t e n t io n o f th e F e d e ra l R e se rv e B o a rd
and su ch o th e r le a d in g re s e rv e banks b e s id e New Y o rk a s ca n c o n v e n ie n t ly be con
s u lte d *
3 . F o r t h is p u rp o se some tem p o rary w o rk in g arrangem ent d u rin g
th e re m a in d e r o f th e y e a r seem s d e s ir a b le . L a t e r , when th e R e se rv e System i s on a
more n o rm al b a s is o f o p e ra tio n , a change in th e w o rk in g arrangem ent ca n be m ade,
b e t t e r ad ap ted t o o rd in a ry c o n d itio n s * T h at i s a m a tte r t h a t m igh t w e ll be c o n s i
d ere d a t th e autumn c o n fe re n c e s o f b an ks w ith th e B o a rd .
4* Change o f r a t e b e in g th e m ethod b y w h ich th e flo w o f b i l l s to
th e re s e rv e bank i s c h ie f ly re g u la t e d , c o n s ta n t a t t e n t io n w i l l have to be g iv e n to
th e ra t e a t w h ich o f f e r in g s o f b i l l s a re com ing tin d e r any g iv e n r a t e , w ith th e v ie w
o f d e te rm in in g w h eth e r th e y sore com ing to o r a p id ly o r to o s lo w ly to s a t is f y th e ob
je c t iv e s o f th e System *s autumn p o lic y *
5* The b i l l ra t e s h o u ld , t h e re fo re , be u n d e r c o n s ta n t re v ie w b y
the B o a rd , w ith pow er in a com m ittee o r in th e G o vern o r o f th e B oard to a u t h o riz e
and a p p ro ve ch an ges in b u y in g r a t e s in a cco rd a n ce w ith th e v ie w s o f th e B o ard o r in
a cco rd a n ce w ith sudden changes o f c o n d it io n s w h ich c a l l f o r im m ediate a c tio n *
6* I t i s su g g e ste d th a t th e B o ard sh o u ld b e g in th e autumn p o lic y
b y d e te rm in in g th e lo w e r lim it o f th e b u y in g r a t e o f b a n k e rs a c c e p ta n c e s a t 5$ t h is ra t e to re m a in in e f f e c t u n t i l changed b y jo in t a c t io n o f th e b an ks and B o a rd .
Changes in th e a c t u a l b u y in g r a t e above th e 5$ r a t e c o u ld , a s su g g e ste d ab o ve , be
made b y a com m ittee o f th e B o ard o r b y th e G o ve rn o r a lo n e , s h o u ld th e com m ittee
n o t be p ro m p tly a v a ila b le . I n o rd e r th a t th e com m ittee s h o u ld be f u l l y in fo rm e d
on c o n d it io n s s u g g e s tin g a change o f r a t e , th e G o ve rn o r s h o u ld keep in c lo s e to u ch
w ith r e s e rv e b an k s a s f a r a s p r a c t ic a b le .
7 . C o n s id e ra t io n sh o u ld be g iv e n to th e a u t h o riz a t io n o f buy
in g r a t e s u n d e r 5$ in d i s t r i c t s o u t s id e o f New Y o rk on a c c e p ta n ce s o r ig in a t in g w ith
in th e d i s t r i c t s , a s lo n g a s th e y h ave 5 $ d is c o u n t r a t e s . n
T h is memorandum w as made th e s p e c ia l o rd e r o f b u s in e s s f o r th e meet
in g on th e 1 5 th a t w h ich tim e f u r t h e r d is c u s s io n ensued w ith re g a rd to th e p o s s ib i
l i t y o f w o rk in g o u t a new p ro c e d u re . G o v e rn o r H a r ris o n and M r. K e n z e l w ere p re s e n t
and a d v is e d th e B o a rd o f th e p re s e n t p ro ce d u re and th e d e s ir a b ilit y o f c o n t in u in g
to g iv e th e o p e ra tin g o f f ic e r s o f th e New Y o rk bank some le e w ay in th e m a tte r o f
ch a n g in g th e e f f e c t iv e b i l l r a t e s . G o ve rn o r H a r ris o n su g g e ste d t h a t th e m in im um
r a t e a u t h o riz e d b y th e B o ard sh o u ld have some r e la t io n to th e d is c o u n t r a t e o f th e
b an k, ru n n in g in noxm al tim e s , one—h a lf p e rc e n t b elo w th e d is c o u n t r a t e w ith a max
imum o n e -h a lf p e rc e n t above th a t r a t e . G o v e rn o r Young su g g e ste d a m inimum r a t e o f
Reproduced from the Unclassified I Declassified Holdings of the National Archives
-4 5$ w ith a maximum o f
fo llo w in g lin e s :
&fo, and a f t e r some d is c u s s io n su g g e ste d a p ro ce d u re a lo n g th e
"T h a t th e B o a rd a u t h o riz e a minimum r a t e o f 3$ and a maximum r a t e
o f &fo9 t h a t th e B o a rd th e n g iv e t o th e E x e c u tiv e Com m ittee o r th e E x e c u tiv e O f f ic e r
a u t h o r it y to ap p ro ve e f f e c t iv e r a t e s w it h in th e minimum and maximum a p p ro ved b y th e
B o a rd ; and t h a t th e o p e ra tio n o f th e b i l l p o lic y be l e f t to th e o f f ic e r s o f th e New
Y o rk B ank u n t i l a p o in t i s re a ch e d w here th e New Y o rk d ire c t o rs , o r th e B o a rd f e e l
t h a t b i l l s a re b e in g a ccu m u late d to o r a p id ly o r to o s lo w ly , in w h ich e v e n t th e mat
t e r o f a change i n th e e f f e c t iv e r a t e , and i f n e c e s s a ry , th e minimum and maximum
r a t e s w ould be b ro u g h t up f o r d is c u s s io n .”
You th e n su g g e ste d a maximum o f 5 -1 /2 $ in s t e a d o f &fo and a f t e r some
d is c u s s io n i t was v o te d "th a t in th e ab sen ce o f a quorum o f th e B o a rd th e E x e c u tiv e
C a n m itte e , o r in i t s a b se n ce , th e E x e c u tiv e O f f ic e r o f th e B o ard be a u th o riz e d to
ap p ro ve e f f e c t iv e b u y in g r a t e s w it h in th e lim it s o f a 5$ minimum and th e 5 - l/ 2 $
maximum, e x c e p tin g th e F e d e ra l R e se rv e B anks o f D a lla s and A t la n t a w here 4 - 7 /0 $ and
4 -1 /2 $ r a t e s a re now i n e f f e c t on s h o rt m a t u r it ie s and th e F e d e ra l R e se rv e B ank o f
R ichm ond, w here a r a t e o f 5 -5 /0 $ h a s been e s t a b lis h e d on lo n g m a t u r it ie s , su ch r a t e s
a p p ly in g to b i l l s o r ig in a t in g in th e r e s p e c t iv e d i s t r i c t s . »
F u rt h e r d is c u s s io n was had a t th e m e etin g on O cto b e r £8 a t w h ich tim e
you moved to have th e a c t io n o f th e B o ard v o te d on A ug ust 1 5 amended to re a d a s f o l
lo w s:
"T h a t no change in b i l l r a t e s s h a ll be e f f e c t iv e u n t i l a f t e r ap p ro v
a l b y th e F e d e ra l R e se rv e B o ard and t h a t in th e ab se n ce o f a quorum o f th e B o a rd ,
th e E x e c u tiv e Com m ittee, o r in i t s a b se n ce , th e E x e c u tiv e O f f ic e r o f th e B o a rd , be
a u th o riz e d to ap p ro ve e f f e c t iv e b u y in g r a t e s w it h in su ch minimum and maximum r a t e s
a s may be appro ved b y th e B o a rd . n
A c t io n on t h is m o tio n w as d e fe rre d and s in c e th a t d a te no f u r t h e r
a c t io n h a s been ta k e n b y th e B o a rd , any p o s s ib le d is c u s s io n re g a rd in g th e m a tte r b e
in g in c o n n e c tio n w ith changes in b u y in g r a t e s a t th e New Y o rk Bank*
5*
P roposed r e g u la t io n c o v e rin g open m arket o p e ra tio n s a t F e d e ra l
r e s e rv e banks*
A t th e m e etin g on O cto b e r 2 9 , 19 2 9 , f o llo w in g a r e p o rt by th e Gov
e rn o r o f th e P u rch a se b y th e F e d e ra l R e se rv e B ank o f New Y o rk , upon a u t h o r it y o f
i t s d ir e c t o r s b u t w ith o u t p re v io u s a p p ro v a l b y th e B o a rd , o f $ 5 0 ,0 0 0 ,0 0 0 o f G overn
ment s e c u r it ie s , Mr* Jam es su b m itte d th e fo llo w in g m o tio n :
"W hereas, th e a c t io n o f th e F e d e ra l R e s e rv e Bank o f New Y o rk i n p u r
c h a s in g Governm ent s e c u r it ie s f o r i t s own a c c o u n t, w ith o u t f i r s t s e c u rin g the ap
p r o v a l o f th e F e d e ra l R e se rv e B o ard a n d /o r th e Open M a rk e t In v e stm e n t Com m ittee, i s
c o n t ra ry to th e le t t e r and s p i r i t o f th e s o - c a lle d ’ g entlem en ’ s agreem ent’ u n d e r
w h ich th e Open M arke t In v e stm e n t Com m ittee w as form ed and h a s fu n c tio n e d d u rin g th e
la s t f iv e y e a rs o r m ore, and
’’W hereas, i t was o b v io u s ly th e in t e n t io n o f C o n g re ss in p a s s in g th e
F e d e ra l R e se rv e A c t , t h a t th e F e d e ra l R e se rv e B o ard s h o u ld have c o n s id e ra t io n in
open m arket o p e ra t io n s ,
"Now, t h e r e fo r e , b e i t r e s o lv e d , th a t C o u n se l be in s t r u c t e d to draw
up and su b m it to th e B o a rd a s u it a b le r e g u la t io n p u t t in g th e f i n a l a p p ro v a l o f open
Reproduced from the Unclassified I Declassified Holdings of the National Archives
-5market operations with the Federal Heserve Board.”'
Mr. Hamlin then submitted the following resolution, as a substitute
for the one submitted by Mr. James:
"Whereas, a difference of opinion has arisen in the Board as to the
expediency of the action of the Federal Reserve Bank of Hew York, - whether acting
on its own initiative or under the Open Market Investment Committee, or both, in pur
chasing $50,000,000 of Government securities,
,fNow, therefore, be it resolved, that Counsel be directed to prepare
a draft of regulation covering all purchases, in the future, of Government securities
by the Open Market Investment Committee or by any individual Federal reserve bank.**
You then moved as a substitute for the resolutions submitted by Messrs.
James and Hamlin, the following:
"That Counsel be instructed to prepare Tor submission to the Board
draft of an Open Market regulation covering purchases and sales of bills, purchases
and sales of Government securities and purchases and sales of foreign bills, the lat
ter in accordance with action taken by the Board on July 6, 1927".
At the meeting on October 31, 1939, Mr. James submitted draft of a
proposed regulation on the subject of open market operations, consideration of which
was made the special order of business for the meeting on November 5. At that meet
ing Mr. James filed two alternative drafts of the proposed regulation, and Governor
Young suggested that the Board consider the adoption of a very brief regulation pro
viding merely that except with the approval of the Federal Reserve Board, no Federal
Heserve bank shall engage in open market operations in securities having a maturity
in excess of 15 days, and that a letter then be addressed to all Federal reserve
banks advising that the Board contemplates putting such a regulation into effect and
asking for their reactions. He submitted a form of regulation which was amended dur
ing the discussion and adopted as follows, it being the understanding that the effec
tive date would be left for subsequent determination:
f'Except with, the approval of the Federal Reserve Board, no Federal
reserve bank shall (a) buy any bonds, notes, certificates of indebtedness or Trea
sury bills of the United States, having a maturity in excess of 15 days, or (b) sell
any bonds, notes, certificates of indebtedness, or Treasury bills of the United
States. w
The Governor was then requested to prepare for consideration by the
Board, draft of a letter to all Federal reserve banks transmitting the regulation,
and at the meeting on November 7 he reported that he had consulted the Board's coun
sel who advised him that after further consideration he is of the opinion that there
is considerable doubt of the legality of the regulation adopted by the Board. Other
legal forms of a regulation were discussed at this meeting and the Governor stated
he would endeavor to work out another form of regulation along the lines discussed
and submit it to the Board later. Since that time no action has been taken.
Reproduced from the U nclassified
I D eclassified
Holdings of the National A rchives
sponaence
I n a cco rd a n ce w ith y o u r re q u e s t , th e re i s g iv e n below th® re c o rd
o f th e B oard*e a c t io n , a s shown by th e m in u te s, w ith re g a rd t o :
1*
The p ro p o sed r e g u la t io n by th e B oard o f th e p u rch a se and s a le by F e d e ra l r e
s e rv e banks o f b i l l s o f exchange and b an kers* a cce p ta n ce s a b ro a d .
2.
The q u e s t io n o f th e p ro ce d u re to be fo llo w e d In th e e sta b lis h m e n t o f b u y in g
r a t e s on a cce p ta n ce s a t F e d e ra l re s e rv e b a n k s.
3*
The pro posed r e g u la t io n c o v e rin g open m arket o p e ra tio n s a t F e d e ra l re s e rv e
b a n k s.
1.
re s e rv e ban ks o f b i l l s
/
R e g u la tio n b y th e B oard o f th e p u rch a se and s a le by F
o f exchange and b a n k e rs » a c c e p ta n c e s abroad*
At the ja a e tin g o f the B oard on June 3 0 , 19 2 7, you s ta te d you thought
some a c t io n sh o u ld be ta k e n b y th e B oard to c l a r i f y i t s r e s p o n s ib ilit y w ith re
s p e c t to th e p u rch a se and s a le by F e d e ra l re s e rv e banks o f b i l l s o f exchange and
b an kers* a c c e p ta n c e s i n f o r e ig n money m arkets and th a t you w ould b r in g th e fo llo w
in g m otion up f o r a c t io n a t th e n e x t m e e tin g :
\
"T h at i t be th e se n se o f th e F e d e ra l R e se rv e B o ard th a t th e a u th o r
i t y c o n fe rre d upon i t in S e c t io n 13 o f th e F e d e ra l R e se rv e A ct re a d in g :
*The d is
co u nt and re d is c o u n t and the p u rch a se and s a le by any F e d e ra l re s e rv e bank o f any
b i l l s r e c e iv a b le and o f d o m e stic and f o r e ig n b i l l s o f exchange, and o f a cce p ta n ce s
a u th o riz e d by t h i s A c t, s h a ll be s u b je o t to su ch r e s t r ic t io n s , lim it a t io n s , and
r e ^ t le iiG B * a » m y be ia$*o«*d by th e F e d e ra l R e se rv e B o a rd * , a p p lie s t o th e p u r
ch a se and s a le o f b i l l s o f exchange and a c c e p ta n c e s made abro ad a s w e ll a s a t home
and th a t th e B o ard ru le * t h a t s u o h p u rc h a s e a and s a le s a re s u b je c t to su ch r e
s t r ic t io n s , lim it a t io n s and r e g u la t io n s a s i t n ay se e f i t to im p o se ."
T h is m a tte r wjtis c o n s id e re d a t th e m e etin g on J u ly 6 , 1 9 2 7 , and the
fo llo w in g m o tio n , su b m itte d /o y you, was adopted?
•T h at i^ |jjS th e se n se o f th e F e d e ra l R e se rv e B oard th a t the a u th o r
it y c o n fe rre d upon it ^ o y S e c t io n s 13 and 14 o f th e F e d e ra l R e se rv e A c t, w ith re
s p e c t to th e p u rch a se and s a le o f b i l l s o f exchange and a c c e p ta n c e s , a p p lie s to •
su ch p u rch a se s a n d /s a le s made abroad as w e ll a s a t hcsae, and th a t the B oard r u le
t h a t su ch p u rch a se s and s a le s a re s u b je c t to i t s re g u la t io n and a p p r o v a l."
/
A t the m eetin g o f th e Executive "Jconittee on J u ly 1 2 , 19 27, coun
s e l was in s t r u c t e d to p re p a re and su b m it to the B oard a r e g u la t io n su ch a s contem
p la t e d b V t h e above a c t io n , and a t the m eeting o r lu l^ r 3 0 , a t w h ich tim e a mer^orandum frcptf counsel^ requesting further in fo rm a tio n as to the character of the regula**
t io £ w hich the B oard d e s ire d h is o f f ic e to p re p a re was d is c u s s e d , a c t io n on th e
m a fW r was d e fe rre d . S in c e that d ate no f u r t h e r a c t io n has been ta k e n by th e
B o a rd . H ow ever, th e m o tion in tro d u c e d by you on O cto b er 2 9 , 19 29 , r e f e r r e d to l a
Reproduced from the Unclassified I Declassified Holdings of the National Archives
4
«»2«*
t e r in t i l l s memorandum, co n tem p lated th e r e g u la t io n b y th e B oard o f th e p u rch a se
and s a le o f h i l l s abroad*
3* The q u e s tio n o f p ro o e d u re to be fo llo w e d In th e e sta b lis h m e n t
o f b u y in g r a t e s on ao o ep tan ees a t F e d e ra l re s e rv e hanks*
A t th e m e etin g o f th e B oard on Ja n u a ry 3 , 19 29 , fo llo w in g r e c e ip t
o f a d v ic e fro m th e F e d e ra l R e se rv e Bank o f Hew Y o rk o f an in te n d e d change in th e
s ch e d u le o f e f f e c t iv e b u y in g r a t e s a t th a t b an k , th e G o ve rn o r s t a te d t h a t in h is
o p in io n new s c h e d u le s o f b u y in g r a t e s s h o u ld n o t be made e f f e c t iv e u n t i l ap p ro ved
b y th e B oard* A g e n e ra l d is c u s s io n fo llo w e d re g a rd in g th e p ro o e d u re w h ich h as grown
up i n th e m a tte r o f th e e sta b lis h m e n t o f b u y in g r a t e s a t th e F e d e ra l re s e rv e b a n k s,
w hereby, a f t e r a p p ro v a l by th e B o ard o f a minimum r a t e , c u r r e n t ly e f f e c t iv e ra t e s
a re e s t a b lis h e d b y th e bank w ith o u t p r io r re fe re n c e to th e B o a rd , and i t was th e
co n se n su s o f o p in io n t h a t su ch r a t e s sh o u ld be e s t a b lis h e d , s u b je c t to th e re v ie w
and d e te rm in a tio n o f th e B o a rd , in th e same m anner a s r a t e s o f d is c o u n t and th a t
th e p re s e n t p ro ce d u re s h o u ld be re v is e d *
need o f (a change in th e p re s e n t p ro ce d u re was d is c u s s e d f u r t h e r
a t th e m e etin g on Ja n u a ry 4 , and u po n f o u r m o tio n , the G o ve rn o r was "re a u e s te d to
p re p a re f o r a c t io n b y th e B o a rd , d r a f t o f a r e g u la t io n s u p e rs e d in g a l l e x is t in g r e
g u la t io n s o r p r a c t ic e s g o v e rn in g b i l l r a t e s , w h ich w i l l make a l l r a t e s s u b je c t to
re v ie w and d e te rm in a tio n by th e B o ard in th e same m anner a s d is c o u n t r a t e s a re now
s u b je c t to revie w * * I t was a ls o su g g e ste d by Mr* Cunningham t h a t a m e etin g be h e ld
f o r th e p u rp o se o f d is c u s s in g f u l l y th e p o lic y o f th e F e d e ra l R e se rv e sy ste m w ith
re g a rd to th e p u rch a se and h o ld in g o f a c c e p ta n c e s , w ith a v ie w to h a v in g th e B oard
f u l l y infoxm ed a s to ju s t what th e e f f e c t o f th e p o lic y i s and w ith th e f u r t h e r
th o u gh t o f c r e a t in g , i f p o s s ib le , a b ro a d e r d is t r ib u t io n o f b i l l s *
O cca sio n e d by an ad van ce in th e s c h e d u le o f e f f e c t iv e b u y in g r a t e s
a t th e F e d e ra l R e se rv e Bank o f New Y o rk , a t th e m e etin g on F e b ru a ry 1 5 , 1989, th e
G o ve rn o r was a u th o rise d # on th e o c c a s io n o f h is n e x t v i s i t to New Y o rk ,, to d is c u s s
w ith th e d ir e c t o r s o f th e New Y o rk B ank th e fo x m ila t io n o f a p ro o e d u re w ader w h ich
b u y in g r a t e s c o u ld b e c o n s id e re d b y th e B o ard b e fo re th e y a re made e f f e c t iv e b y th e
bank* A t th e m e etin g o s M arch 8 1 th e G o ve rn o r re p o rte d t h a t he had d is c u s s e d th e
n a t t e r w h ile i n New Y o rk , p a r t ic u la r ly w ith D eputy G o ve rn o r K e n z e l who a d v is e d him
t h a t i n o rd in a ry tim e s he b e lie v e d th e bank c o u ld o p e ra te i f i t w ere a u th o riz e d to
a d ju s t th e b i l l r a t e w it h in o n e -h a lf o f one p e rc e n t u n d e r th e d is c o u n t r a t e o f th e
b an k, b u t th a t a t th e p re s e n t tim e w ith th e b i l l m arket so u n c e r t a in he d id n o t f e e l
th a t a n y th in g c o u ld be done e x ce p t to fo llo w th e m arket ra te s * The G o ve rn o r a ls o
su g g e ste d th a t i t w ould b e d e s ir a b le to have a co n fe re n c e betw een th e members o f
th e B oard and th e d ir e c t o r s o f th e F e d e ra l R e se rv e Bank o f New Y o rk f o r a f u l l ex
change o f v ie w s re g a rd in g th e s it u a t io n * T h is s u g g e s tio n w as ta k e n up w ith the New
Y o rk d ir e c t o r s th ro u g h G o ve rn o r H a rris o n who re p o rte d t h a t th e id e a o f a c o n fe re n c e
w ith th e B o ard a p p e a le d to h is d ir e c t o r s and t h a t th e y had a sk e d Mr* W o o lle y and
G o ve rn o r H a rris o n to meet w ith th e B o ard in W ashingto n a s soon a s co n v e n ie n t* On
June 5 , 19 2 9 , M e ssrs* M cG arrah , M it c h e ll, R eyburn and Trem an m t w ith th e B o a rd ,
b u t a s th e m a tte r o f th e p ro p o sed in c re a s e in th e d is c o u n t r a t e o f the F e d e ra l Re
s e rv e B ank o f New Y o rk was o f f i r s t im p o rtan ce a t th a t tim e , th e re was no d is c u s *
s io n o f p ro o e d u re In c o n n e c tio n w ith th e e s ta b lis h m e n t o f b u y in g r a t e s f o r b i l l s *
D is c u s s io n w ith re g a rd to th e p re s e n t p ro o e d u re was had a t th e m eet-
R eproduced from the U nclassified / D eclassified Holdings of the National Archr
3—
ing on August 9, at whioh time another change in the New York schedule of buying
rates was noted with approval by the Board* Following further discussion at the
meeting on August 10, you submit tod the following memorandum as a bail# for discus*
sion of a new temporary procedure with regard to the determination of buying rates
on bills by th© Federal Reserve Board?
"1. The successful application of the general lines of credit po
licy adopted by the Board at the conclusion of the recent conference with the Gov
ernors depends largely if not mainly, upon the degree of accuracy with which pur
chases of bills are adjusted to the trend of conditions from week to week and pos
sibly *Gffl»tJteW0 during short intervals.
2. The matter is one of too much importance, involving as it does
:::$&*• application of a national policy, to be left to the determination of the Re
s e rv e Bank of New York even though the great bulk of the bills will originate and
be offered there. It should have the Joint attention of the Federal Reserve Board
and such other leading reserve banks beside New York as can conveniently be con
sulted.
3. For this purpose some temporary working arrangement during
the remainder of the year seems desirable. Later, when the Reserve System is on a
more normal basis of operation, a change in the working arrangement can be made,
better adapted to ordinary conditions. That is a matter that night well be consi
dered at the autumn conferences of banks with the Board.
4. Change of rate being the method by which the flow of bills to
the reserve bank ie chiefly regulated, constant attention will have to be given to
the rate at which offerings of bills are coming under any given rate, with the view
of determinicljiwhethar they are coming too rapidly or too slowly to satisfy the ob
jectives of the System’s autumn policy.
5. The bill rate should, therefore, be under constant review by
the Board, with power in a cocmittee or in the Governor of the Board to authorize
and approve changes in buying rates in accordance with the views of the Board or in
accordance with sudden changes of conditions which call for immediate action.
6. It is suggested that the Board should begin the autumn policy
by determining the lower limit of the buying rate of bankers acceptances at 5$ this rate to remain in effect until changed by joint action of the banks and Board.
Changes in the actual buying irate above th© 5$ rate could, as suggested above, be
made by a committee of th© Board or by th© Governor alone, should th© oomltte©
not be promptly available. In order that the committee should be fully informed
on conditions suggesting a change of rate, the Governor should keep in close touch
with Reserve banks as far as practicable.
7. Consideration should be given to the authorization of buy
ing rates under Ojt in districts outside of New York on acceptances originating with
in the districts, as long as they have 5$ discount rates."
This memorandum was made the special order of business for the meet
ing on the ISth at whioh tfcse ^ r t h e r disoussion ensued with regard to the possibi
lity of working out a new procedure. Governor Harrison and Mr. Kenzel were present
and advised the Board of the present procedure and the desirability of continuing
to give the operating officers of the New York bank some leeway in the matter of
changing the effective bill rates. Governor Harrison suggested that the minimum
rate authorized by the Board should have some relation to the discount rate of the
bank, running in noxmal times, one-half percent below the discount rate with a max
imum one-half percent above that rate. Governor Young suggested a minimum rate of
Reproduced from the Unclassified / Declassified Holdings of the National Archives
-4 w ith a maximum o f 6 $ , and a f t e r some d i e cu s a io n su g g e ste d a p ro ce d u re a lo n g th e
fo llo w in g lin e s :
"T h a t th e B o ard a u t h o riz e a minimum r a t e o f 5$ and a maximum ra t e
o f ©$, th a t th e B o ard th e n g iv e to th e E x e c u tiv e Com m ittee o r th e E x e c u tiv e O f f ic e r
a u t h o r it y to a p p ro ve e f f e c t iv e r a t e s w it h in th e minimum and maximum ap p ro ved b y th e
B o a rd ; and th a t th e o p e ra t io n o f th e b i l l p o lic y be l e f t to th e o f f ic e r s o f th e New
Y o rk Bank u n t i l a p o in t I s reao h ed w here th e New Y o rk d ir e c t o r s o r th e B o ard f e e l
th a t b i l l s a re b e in g accu m u late d to o r a p id ly o r to o s lo w ly , in w hio h e v e n t th e m att e r o f a change in th e e f f e o t lv e r a t e , and i f n e c e s s a ry , th e minimum and maximum
r a t e s w ould be b ro u g h t up f o r d is c u s s io n * ”
//
j/
You th e n su g g e ste d a maximum o f 5 - l/ a jt In s t e a d o f 8f> and a f t e r some
d is c u s s io n i t w as "vo ted kt h a t In th e ab se n ce o f a quorum o f th e B o ard th e E x e c u tiv e
Com m ittee, o r in i t s a b se n ce , th e E x e c u tiv e O f f ic e r o f th e B o ard be a u th o riz e d to
r.
a p p ro ve e f f e c t iv e b u y in g r a t e s w it h in th e lim it s o f a 5# minimum and th e 5-1/255
11
maximum, e x c e p tin g th e F e d e ra l R e se rv e B anks o f D a lla s and A t la n t a w here 4 -7 /8 $ and \\
4 -1 /3 $ r a t e s a re now i n e f f e c t on s h o rt m a t u r it ie s and th e F e d e ra l R e se rv e Bank o f
1
Richm ond, w here a r a t e o f 5-5/036 h a s been e s t a b lis h e d on lo n g m a t u r it ie s , su ch r a t e s
a p p ly in g to b i l l s o r ig in a t in g in th e r e s p e c t iv e d is t r ic t s * "
F u rt h e r d is c u s s io n was had a t th e m e etin g on O cto b e r 28 a t w h ich tim e
you moved to have th e a c t io n o f th e B o ard vo te d on A ugust 1 5 amended to re a d a s f o l
lo w s!
"T h a t no change in b i l l r a t e s s h a ll be e f f e c t iv e u n t i l a f t e r ap p ro v
a l b y th e F e d e ra l R e se rv e B o ard and th a t in th e ab se n ce o f a quorum o f th e B o a rd ,
th e E x e c u tiv e Com m ittee, o r in i t s a b se n ce , th e E x e c u tiv e O f f ic e r o f th e B o a rd , be
a u th o riz e d t o a p p ro ve e f f e c t iv e b u y in g r a t e s w it h in su ch minimum and maximum r a t e s
a s may be appro ved by th e B o a rd ."
A c t io n on t h is m o tio n was d e fe rre d and s in c e th a t d a te no f u r t h e r
a c t io n h a s been ta k e n b y the B o a rd , any p o s s ib le d is c u s s io n re g a rd in g th e m a tte r be
in g in c o n n e c tio n w ith ch an ges in b u y in g r a t e s a t th e New Y o rk B ank.
3.
P ro p o se d r e g u la t io n c o v e rin g open m arket o p e ra tio n s a t F e d e ra l
r e s e rv e b a n k s.
j
A t th e m e etin g on O cto b e r 2 9 , 19 2 9 , fo llo w in g a re p o rt b y th e Gov
e rn o r o f th e p u rch a se b y th e F e d e ra l R e se rv e Bank o f New Y o rk , upon a u t h o r it y o f
i t s d ir e c t o r s b u t w ith o u t p re v io u s a p p ro v a l b y th e B o a rd , o f $ 5 0 ,0 0 0 ,0 0 0 o f G overn*
ment s e c u r it ie s , M r. Jam es su b m itte d th e fo llo w in g m otions
"W h ereas, th e a o t lo n o f th e F e d e ra l R e se rv e Bank o f New Y o rk in p u r
c h a s in g Governm ent s e c u r it ie s f o r i t s own a c c o u n t, w ith o u t f i r s t s e c u rin g th e ap
p ro v a l o f th e F e d e ra l R e se rv e B o ard a n d /o r th e Open M arke t In ve stm e n t C o m a ltte e , i s
c o n t ra ry to th e le t t e r and s p i r i t o f th e s o - c a lle d ’ gentlem en ’ s agreem ent* u n d e r
w h ich th e Open M arket In ve stm e n t Com m ittee was form ed and h a s fu n c t io n e d d u rin g th e
la s t f iv e y e a rs o r m ore, and
"W hereas, i t was o b v io u s ly th e in t e n t io n o f C o n g re ss in p a s s in g th e
F e d e ra l R e se rv e A c t , t h a t th e F e d e ra l R e se rv e B o ard sh o u ld have c o n s id e ra t io n in
open m arket o p e ra t io n s ,
"Now, t h e r e fo r e , be i t re s o lv e d , th a t C o u n se l be in s t r u c t e d to draw
up and su b m it to th e B oard a s u it a b le r e g u la t io n p u t t in g th e f i n a l a p p ro v a l o f open
ft
Reproduced from the Unclassified I Declassified Holdings of the National Archives
m arket o p e ra tio n s w ith th e F e d e ra l R e se rv e B o a rd .”
Mr* H a m lin th e n su b m itte d th e fo llo w in g r e s o lu t io n , a s a s u b s t it u t e
f o r th e one su b m itte d b y Mr* Jam es i
"W hereas, a d if f e r e n c e o f o p in io n h as a r is e n in th e B oard a s to th e
e x p e d ie n cy o f th e a c t io n o f th e F e d e ra l R e s e rv e Bank o f New Y o rk , * w h eth e r a c t in g
on i t s own i n i t i a t i v e o r u n d e r th e it e e n ^ llp k e t In ve stm e n t Go m it t e e , o r b o th , in p u r*
c h a s in g $ 5 0 ,0 0 0 ,0 0 0 o f Governm ent s e c u r lf f e s ,
"New, t h e r e fo r e , be i t r e s o lv e d , t h a t C o u n se l be d ir e c t e d t o p re p a re
a d r a f t o f r e g u la t io n c o v e rin g a l l p u rc h a s e s , in th e f u t u r e , o f Governm ent s e c u r it ie s
by th e Open M arke t In v e stm e n t C o m alttee o r b y any in d iv id u a l F e d e ra l re s e rv e b a n k .* .
You th e n moved a s a s u b s t it u t e f o r th e r e s o lu t io n s su b m itte d by M e s s rs .
Jam as and H a m lin , th e fo llo w in g :
"T h a t C o u n se l be In s t r u c t e d to p re p a re f o r s u b m is s io n to th e B oard
d r a f t o f an Open M arket r e g u la t io n c o v e rin g p u rc h a s e s apd s a le s o f b i l l s , p u rc h a s e s
and s a le s o f Governm ent s e c u r it ie s and p u rc h a s e s and s a le s o f f o r e ig n b i l l s , th e l a t
t e r i n a cco rd a n ce w ith a c t io n ta k e n by th e B o ard on J u ly 6 , 1 9 8 7 ".
A t th e m e e tin g on O cto b e r 3 1 , 1 9 2 9 , Mr* Jam es su b m itte d d r a f t o f a
p ro p o se d r e g u la t io n on th e s u b je c t o f open m arket o p e ra t io n s , c o n s id e ra t io n o f w h ich
was made th e s p e c ia l o rd e r o f b u s in e s s f o r th e m e etin g on N oveober 5* A t t h a t meet
in g Mr* Jam es f i l e d two a lt e r n a t iv e d r a f t s o f th e p ro p o se d r e g u la t io n , and G o ve rn o r
Young su g g e ste d t h a t th e B o ard c o n s id e r th e a d o p tio n o f a v e ry b r i e f r e g u la t io n p ro
v id in g m e re ly t h a t e x ce p t w ith th e a p p ro v a l o f th e F e d e ra l R e se rv e B o a rd , no f e d e r a l
R e se rv e bank s h a ll engage in open m arket o p e ra tio n s in s e c u r it ie s h a v in g a m a tu rity
in e x c e s s o f 15 d a y s, and th a t a le t t e r th en be a d d re sse d to a l l F e d e ra l re s e rv e
banks a d v is in g t h a t the B oard co n te m p la te s p u t t in g su ch a r e g u la t io n in t o e f f e c t and
a s k in g f o r t h e ir r e a c t io n s . He su b m itte d a f o r a o f r e g u la t io n w h ich was amended d u r
in g th e d is c u s s io n and ado pted a s f o llo w s , i t b e in g th e u n d e rsta n d in g t h a t th e e f f e c
t iv e d ate w ould be l e f t f o r su b seq u e n t d e te rm in a tio n :
"E x ce p t w ith th e a p p ro v a l o f th e F e d e ra l R e se rv e B o a rd , no F e d e ra l
re s e rv e bank s h a ll (a ) buy an y b o n d s, n o te s , c e r t if ic a t e s o f in d e b te d n e ss o r T re a
s u ry b i l l s o f th e U n ite d s t a t e s , h a v in g a m a t u rit y In e x c e s s o f 15 d a y s, o r (b ) s e l l
an y b o n d s, n o te s , c e r t if ic a t e s o f in d e b te d n e ss , o r T re a s u ry b lU a o f th e U n ite d
S t a t e s .*
The G o v e rn o r was th e n re q u e s te d to p re p a re f o r c o n s id e ra t io n b y th e
B o a rd , d r a f t o f a le t t e r to a l l F e d e ra l re s e rv e b an k s t ra n s m it t in g th e r e g u la t io n ,
and a t th e m e etin g on November 7 he re p o rte d t h a t he had c o n s u lte d th e B o a rd * s coun
s e l who a d v is e d him t h a t a f t e r f u r t h e r c o n s id e r a t io n he i s o f th e o p in io n t h a t th e re
i s c o n s id e ra b le doubt o f th e le g a lit y o f th e r e g u la t io n adopted by th e B o a rd . O th e r
le g a l fo rm s o f a r e g u la t io n w ere d is c u s s e d a t t h is m e e tin g and the G o ve rn o r s ta te d
he w ould e n d e av o r t o w o rk o u t a n o th e r fo rm o f r e g u la t io n a lo n g th e lin e s d is c u s s e d
and su b m it i t to th e B oard la t e r *
S in c e t h a t tim e no a c t io n h a s been taken*
Reproduced from the Unclassified I Declassified Holdings of the National Archives
REC'D IN FILES SECTION
APR 1 7 1940
;■ •
-
lov<wber 8, 1929
Bear S ir i
v
I
Section 14(b) of the federal Reserve Act mtfo&rim* •Tory
Vsder&l reserve bank,
bay and s e ll, at hoaa or abroad, bonds and
notes o f the ttelted Staten, * * * such purchases to be made la accord
ance with rales and regulations prescribed bar the federal Heserve Board.*
Sfcid r t h is provision the ?ederal Heserve Board has promul
gated tha following regulation to beoo*e effective at a future data to
be fixed bgr the Itederal Heeenre Boards
"Ixcept with tha approval a f fee federal
Beserve Board, a federal Reserve Bank shall aot
bay or hold for its o*a account obligations of
the t<ad States Goverlasant haring a maturity
In excess o f one day ia an onoaat 1st oxcese o f
tha mime*tbad capital of soeh Federal teserve
Back. •
the words *tpr Its own aoooaxit* are intended to exclude tha ja r ehase of Govenwient obligations voder resale.agreeasnats aad transactions,
wherefey Hedaral reoarva banks bar Ooveraeeni obligations fo r the mmm%
of as»ber banks aad own the* for aot aore than one day pending delivery.
The exclusion froo the limitation o f Goveraaent obligations aot
"having a naturlty la excess o f one day* w ill enable tha
^ shbIeii to
continue their practice o f givlog the Treasury the aeoaasary assistance
to cover day to day overdrafts during tax paying periods.
Kindly advise the Board at the earliest possible date what ex
ceptions, i f any. to tha above regulation yonr bank desires to have ap
proved for i t at the tiae the regulation is aada effective, ia order to
avoid any undue disturbance of your preseat situation.
fery truly yours.
B. 4* Young,
Ooveroor^
Vf omc sad
LS
3 .£ T 3 '
'
jKEC’D IN FILES SECTION
wr
(
/'PR 1 7 1940
PBOPOSAL TOE BEQULATIOM.
O
/(jio
The p u rch a se o r s a le o f Governm ent s e c u r it ie s s h a ll be go verned p r im a r ily
w it h re g a rd to t h e ir e f f e c t upon the g e n e ra l c r e d it s it u a t io n , and th e y s h a ll
n o t be p u rch a se d by an y in d iv id u a l re s e rv e bank f o r the p u rp o se o f in c r e a s in g
e a m ix g s .
G e n e ra lly sp e a k in g a l l fu t u re p u rc h a s e s o f Governm ent s e c u r it ie s
if
s h a ll be made by the open a a rk e t in v e stm e n t co m m ittee, b u t/th e d ir e c t o r s o f
a n y f e d e r a l re s e rv e bank c o n s id e r th a t a lo c a l em ergency r e q u ir e s a p u rch a se
o f Governm ents a prom pt re p o rt m ost be made to th e T e d e ra l R e se rv e B o ard and
s u ch p u rc h a s e s s h a ll not exceed th e c a p it a l o f th e lo c a l re s e rv e b an k , w ith o u t
p r io r a p p ro v a l by the f e d e r a l B e se rv e B oard*
T h is s h a ll not a p p ly , ho w ever,
to th e p u rch a se and s a le o f s e c u r it ie s h a v in g a m a tu rity o f 1 5 d ays o r le s s *
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REC’D IN FILES SECTION
|y
j
APR 1 7 1940
ip
The date upon wnich this regulation
— “£>
shall became effective has >
been left for future determination by the Board.
The words “for its
own account’1 can be interpreted to mean as excluding purchase and resale
agreeiaent^and over-the-nig/it.transactions, where banks buy and
own,
»
delivery^
The limitation covered by tne following words
"having a maturity in excess of one day11 will enable the He serve
Banks to follow the usual practice of the past of giving tne Treasury
the necessary assistance to cover day to day overdrafts during tax
paying periods.
The Board, therefore, woycld appreciate your advising it at
as eerly dajffe as possible^-as-U> approvals, i& your opinion, the B
^ g kjSCi
wjyia. I’
igryjp to give your bank so that the present position of your
iwsfrtfrufriTTY; will not be unreasonably disturbed .
OS' for
, / /FRASER
Digitized
/
tvEC'D IN FILES SECTION |
APR 1 7 1940
•
•
t_ _________
/
The d a te upon w h ich t h is re g u la t io n
s h a ll become e f f e c t iv e h a t
been l e f t f o r fu t u r e d e te rm in a tio n by th e B o a rd .
The v o rd e “ f o r i t s
own a cco u n t" can be in t e rp re t e d to mean as e x c lu d in g p u rch a se
nd r e s a le
agreem ents and o v e r-t h e -n ig h t t r a n sectio n s ,e h e re banks buy and
own, c o v e rin g d e liv e r y .
The lim it a t io n co ve re d by to e fo llo w in g w ords
" h a v in g a m a tu rity in e x c e s s o f one day* w i l l e n a b le th e B e se rv e
B anks to f o llo w the u s u a l p r a c t ic e o f the past o f g iv in g the T re a s u ry
th e n e c e s s a ry a s s is t a n c e to c o v e r day to day o v e rd ra ft s d u rin g ta x
p a y in g p e rio d s .
The B oard* th e re fo re * w ould a p p re c ia t e y o u r a d v is in g i t a t
a s e a r ly d a te a s p o s s ib le a s to a p p ro v a ls , in y o u r o p in io n * th e B oard
w ould h ave to g iv e y o u r bank so th a t the p re s e n t p o s it io n o f y o u r
in s t it u t io n w i l l n o t bo u n re a s o n a b ly d is tu rb e d
■r *D IN FILES SECTION
#
£
■
I
APR 1 7 1 9 4 0
Novuiaber 5, 1929
D ear S i r :
•
Section 14(b) of the Federal Reserve Act authorizes
every Federal reserve bank. "To buy and sell, at hone or abroad, bonds,
and notes of the United States, and bills, notes, revenue bonds, and
warrants with a naturity frata date of purchase of not exceeding six
months, * * *such purchases to be made In accordance with rules and
regulations prescribed by the Federal Reserve Board*n
Under this* provision the following regulation has
been adopted by the Board:
Except with the approval of tho Federal R e se rv e
Board, no Federal reserve bn k shall (a) buy any bonds,
notes, certificates of indebtedness or Treasury bills of
the United States, having a natux'ity in excess of fifteen
days, or (b) sell any bonds, notes, certificates of in
d e b te d n e ss, or Treasury bills of the United States*
The date on which this regulation shall
become effec
t iv e has been left for futux*e detexnination by th e Board, which real
iz e s that under its provisions, certain every-day operations, whioh
a re engaged in by the Federal reserve banks for their own account and
f o r the aeoount of their merober banks in a jaore or less routine man
n e r, nay be unnecessarily harapered* The Board would, therefore, ap
p r e c ia t e receiving froa you a t the earliest possible date, an expres
s io n o f the views of your officers and directors on the siatter*
Very truly yours,
R. A* Young,
Governor*
r
NOV
& '929
NOV 7 '929
Mr
I
/
ADDRESS O FFIC IAL CORRESPONDENCE TO
T H E FEDERAL. RESERVE BOARD
Dear Sir:
Section 14(b) of the Federal Reserve Act authorizes
every Federal reserve bank "To buy and sell, at home or abroad, bonds,
and notes of the United States, anil hi 111 /nTitrin j Tarni n TnnnjwL nnl
wftrrpifcts K
i
t
h
f
H
ir n ttrlrr" nff inrrriii inn nifi aat m m
nttnc
swift, * * *such purchases to be made in accordance with rules and
regulations prescribed by the Federal Reserve Board,n
Under thie provision the following regulation has
been adopted by the Board:
Except with the approval of the Federal Reserve
Board, no Federal reserve bank shall (a) buy any bonds,
notes, certificates of indebtedness or Treasury bills of
the United States, having a maturity in excess of fifteen
days, or (b) sell any bonds, notes, certificates of in
debtedness, or Treasury bills of the United States*
The date on which this regulation shall become effec* tive has been left for future determination by the Board, which real
izes that under its provisions, certain every-day operations, which
are engaged in by the Federal reserve banks for their own account and
for the account of their member banks in a more or less routine man
ner, may be unnecessarily hampered* The Board would, therefore, ap
preciate receiving from you at the earliest possible date, an expres
sion of the views of your officers and directors on the matter*
Very truly yours,
R. A. Young,
Governor*
REC’D in file s section
Form
'
APR 171940
FEDERAL RESERVE
BOARD
Oh ice Correspondence
_ — .n>
Subjec«:.
To
From.
mItjifa
r?
/
Except with the appraw^l. of the Federal Reserve Board, no
( fiy I fc 11
f
Federal He serve Bank saall puBAaejyfiu, rail, a
any
obligations of tne United States Government hav:Lng a maturity
in excess of fifteen cJLays#
s
A / y $^<MsWUr\~
■1
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X lli-U.
%
6 1929
.
H -v
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<ir.mu.iKt
t m m
OHB M11B
i s s IAs a
Tho 11m, bmmbt«
o r fo r
Dm
aaooaat
a lt h «
fit* of
o f f s e t upoo
wohmm o f i l l gmrahaoaa «»A m U i aada fagr
o f IM im l n a « m
baafra lm Ite
in d flfs a .^ o it n o
oeooMBQgating o o a a a r e * i » d
tho | «M ral
e re d it
ttlQM
i
t f u u i e l t r aad
totȣ o f I M U oa 14 o f tho
a.
idjaa
opn
M t, ahall
Im sU
m i
M rto t,
bo
jm r a a a a t
to
th o
isven od primarily
ana *ith
r e f t f i to t h o l r
altaatloa.
11m aaoaai of a ll lavoatattata aoqalrod la tho opoa aarfcot parsusat to tho
pmvislofti of 3a*tloa 14 o f tho ifoitr^l Hooorvo
«t aad hold I f or ffcr tho ao-
ooint of oftoh odor tl rasarvo hook shall aot ho lo st thaa a certain iduwit nor
■ o n thaa a oortaia othar aawaat to ho flaad trm tla * to Ih o iqr tha %daral
Jtoooroo Board* wrcapt that this Iteltatto a sh all aot apply toi
(1 )
To^ovftiy parohaooa aad aaloa of Ualtod fetatoa aoadst uoto»«
oortifloatoa o f ladohtadxiaso aad
tvaauxy h&lla for tho oooeeabcm^tloa or
aecoaat of tho ’J'vaaaar* of tia Uaitod
tales la naouata n ^ a s t t i hr tha
ftaaoarr fa r porloda aot la oaoosa o f fift&sn d:^ras or
(2 )
Othar iavoataaata aada la oaorgoaclaa to aeaoaaeoato spa*
o lfta aaihar haaka.
a « i t o * i n - HwUimt *■ frt *
ffaaopt a/tar a^fdjrlaft fa r aad raaaivli^ tha approval of tha radoral
^aaoroo Board* m fotiaral rooorvo hak ohall aaeaisa la« ar ayto dafialta
Ottalhwftta fo r, traaaaoti&aa with forolga gpyina ia t s, foralga fcaaka or
forolga haakora imwolwim tha ^arahaaa* aala* asohaaga* loaa* plo%ts, or
oagaartriag of cold* gold aala or «d1o eortlfloatoa*
NOV
$
1929?
Reproduced from the Unclassified I Declassified Holdings of the National Archives
p
....................... .................. ....................................................................................
'X S & U IN FILES SECTION
APR 1 7 1940
■33>3
e
h - 3
r
E x ce p t w ith th e a p p ro v a l o f th e F e d e r a l R e se rv e B o a rd , no
F e d e ra l R e se rv e
Dank
s h a ll (a ) buy
any
b o n d s, n o te s , c e r t if ic a t e s o f
in d e b te d n e ss o r T re a s u ry b i l l s o f th e u n it e d S t a t e s , h a v in g a m atur
i t y i n e x o ess o f f if t e e n d a y s, o r (b ) s e l l any bon d s, n o te s , c e r t i
f ic a t e s o f In d e b te d n e ss, o r T re a s u ry b i l l s o f th e U n ite d S t a t e s .
4
RpC'D IN FILES SECTION
* *
APR 1 7 1 9 4 0
tea •
r
/////* ?
Except with the approval of the Federal Reserve Board,
no F e d e ra l R e se rv e bank s h a ll (a ) buy an y b o n d s, n o te s ^ c e r t i
ficates of indebtedness or Treasury bills of the united States,
NOV 6 1929
REC’D in files section
APR 17 1940
/
X,
Except with the <r>err 1,naU rn of the Federal Reserve Board, no
Federal Reserve Bank shall jeagugo .. in
cfwi1■Etiiirko% top«n■
autfrMFfrgqa-Tn a e r» - th e--tf f o t t ' 9 o f
""i
c, T )
-•gfpurchase, sell^<3*aH5H any "bonds, notes, or certificates
of indebtedness or Treasury hills of the United States, having
a maturity nt A M tiim ttfr-pm^iTTm in excess of fifteen days.
i
/ /
/
/
{oamamuL
-
rd p re lim in a ry d r a f t - Movet&bet
I
1929}
I R rZ. CCI' D IN FILES SECTION
aaKjiiaBtt Qg&\iso»x.
*
lasiiaa I - S»ft»wai
rb« t l
|C -
4 * , uianae r , c h a r a c t s r ana voium s o f a it open at*rk«t o p e r a t ic os a n -
gaged ia by tfeu e ral re s e rv e baa** under S e ctio n 14 o f th e F e d e ra l R e se rv e A ct
s h a ll be go verned p r im a r ily w ith a v ie w o f accom m odating commerce and b u s in e s s
and w ith re g a rd to t h e ir o f fe e t upon th e g e n e ra l c ro d l^ s it u a t io n .
3*gt.top
The a g g re g a te amount e f a l l open m arket in v e stm e n ts made by o r f o r th e a c
co u n t o f th e F e d e ra l re s e rv e banks u n d e r S e c tio n 14 o f th e F e d e ra l R e se rv e A ct
s h a ll conform to lim it a t io n s im posed fro ® tim e to tim e by the F e d e ra l R e s e rv e
B o ard , e x ce p t th «t su ch lim it a t io n s s t a l l n o t at>ply to :
( i)
Tem porary p a re h a se s and s a le s o f U n ite d S ta te s bonds, n o te s , c e r t
c a t e s o f in d e b te d n e ss and T re a su ry b i l l s f o r th e accom m odation o r a cco u n t o f the
T re a s u ry o f tn s U n ited S ta te s in am ounts re q u e ste d by th e T re a s u ry f o r p e rio d s
n e t l a e x c e ss e f f if t e e n d a y s; o r
*fr ( 2 ) O th er in ve stm e n t* made la e m erg e n cies to accommodate s p e c if ic member
b a n k s.
III.- gwuUn<«-lR.-%»JLq
E x ce p t a f t e r a p p ly in g f o r and r e c e iv in g the a p p ro v a l o f th e F e d e ra l R e
s e rv e B o ard , no F e d e ra l re e e rv e bank s h a ll engage in , o r ioake d e f in it e co m ^ ltmente f o r , t r a n s a c t io n s w ith fo re ig n governm ents, fo re ig n b nr; tea o r fo re ig n bank
e r s In v o lv in g th e p u rch a se , s a le , exchange, lo a n , p le d g e , o r e arm a rk in g o f g o ld ,
gold c o in o r g o ld c e r t if ic a t e s .
NOV 5 ”1329
Reproduced from the Unclassified I Declassified Holdings of the National Archives
l'o r m N o - 131
CV5; u • Correspondence
To
V n r•
_____
FED ERAL RESERVE
BOARD
___
REC’D IN FILES SECTION
Subject:.
APR 1 T 1S40
From
At
m a t in g toftRgr
rw
S m m a iite & lttad
fce r o£ tfc® B oar4» a d r a f t o f a
ttmmm
C&m iivtm ktlzm o f t M s p*agxw»4
feutiJNMMi f o r ttu»
o f th e S a o rd
ftm&M&rik t »
m*r§T&Srm
a a rlB it
* ?aer**
m om *
;n i4 » tt*** s p e c ia l o rt e *
Itada& ky, K^wcsftKsr S»
Reproduced from the Unclassified I Declassified Holdings of the National Archives
fU ilW
V
tf AWWW
APR 1 7 1940
Form N o. .131.
Office Correspoiidence
To
Pr . H IX U r____
FEDERAL RESERVE
BOARD
‘333 e
Object:.
From Ite J^ ^ U a a d ,
2—S495
a po
In a cco rd a n ce w ith y o u r re q u e s t , th e re i t fo c te d
1m lIo n adopted “by th* B o ard on J u ly 6 , 19 27;
the re e o -
"T h a t it be the se n se of th e federal B e e e rre B o ard th a t
th e a u t h o r it y c o n fe rre d uqpon i t b y f e c lt o * * ;!# end 1 4 o f
th e tfs d e ra l R e se rv e A c t, w ith re s p e c t to th e p a rch a * o and
e a le o f b i l l s -$t exchange and a c c e p ta n c e s , a p p lie s 'to * te h
p u rc h a s e s and s a le s made ab ro a d a s w e ll a e a t home, aad th a t
the B o ard r u le th a t su ch p u rch a se * and s a le s a re s u b je c t %q
i l l rtgui&tion and a p p r o v a l."
-
-3
.
Reproduced from the Unclassified / Declassified Holdings of the National Archives
(Confidential)
X-4980
O
c tober^ » 1927 •
To:
The Federal Reserve Board,
Prom:Mr. Wyatt- General Counsel.
Subject:
The Board's power over foreiga
transactions of Federal Reserve Banks.
The Board has requested an opinion with respect to what
regulations, limitations and restrictions it is authorized to prescribe
as to foreign or international transactions of Federal reserve banks,
and as to its general authority over such transactions.
I understand
that the Board desires to have the following points covered in this
opinion:
(1)
Whether the Board hsis power to regulate, limit,.
or restrict transactions involving the opening of accounts, the appoint
ment of correspondents, or the establishment of agencies in foreign
countries;
(2)
Whether the Board has power to regulate, limit,
01s restrict dealings in bills of exchange and bankers’ acceptances
between Federal reserve b&tiks .and foreign central banks;
(3)
Whether the Board has power to regulate, limit,
or restrict dealings in gold between Federal reserve banks and foreign
central banks; and
(4)
Whether the Federal reserve banks may lawfully
charge a commission or fee in connection with such foreign transactions*
CONCLUSIONS.After careful consideration of these questions, I have reached
the following conclusions:
(1)
Under the specific terms of section 14(e) of
Federal Reserve Act, no Federal reserve bank may lawfully open or main-
Reproduced from the Unclassified I Declassified Holdings of the National Archives
( “ 2 -
)
X -^ 9 8 0
tain accounts, appoint correspondents, or establish agencies in foreign
countries without first obtaining the consent of the Federal Reserve
Board; and the opening and maintenance of such accounts, the appointment
of such correspondents, the establishment of such agencies and the con
duct through such correspondents or agencies of "any transaction11 auth
orized by section 14 of the Federal Reserve Act for or on behalf of
other Federal reserve banks is expressly made subject to such rules and
regulations as the Federal Reserve Board may prescribe.
In addition, the
Board has the power to order or direct Federal reserve banks to open and
maintain accounts, appoint correspondents and establish agencies in
foreign countries.
(2) By virtue of specific provisions of the Federal Re
serve Act, the Federal Reserve Board is authorized and empowered to pre
scribe regulations, restrictions and limitations governing dealings in
bills of exchange between Federal reserve banks and foreign central
banks*
(3) By virtue of its right to exercise general super
vision over Federal reserve banks, and by virtue of certain other powers
specifically granted in the Federal Reserve Act* the Federal Reserve
Board is authorized to regulate, limit or restrict important dealings
in gold involving large amounts between Federal reserve banks and
foreign central banks, under section 14(a) of the Federal Reserve Act.
(4) Whenever the Federal reserve banks enter into any
lawful transaction involving the extension of credit to, or the performrance of any service for, a foreign central bank, they may lawfully charge
a reasonable commission or fee for the extension of such credit or the
rendition of such services.
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X-4980
( - 4 - )
From a mere reading of this language it is obvious that the
Federal Reserve Board is given full control of all transactions con
ducted thereunder.
No Federal reserve "bank may open or maintain accounts,
appoint correspondents, or establish agencies in foreign countries
except with the consent and subject to the regulations of the Federal
Reserve Board; and any Federal reserve bank must open and maintain
accounts, appoint correspondents, or establish agencies in foreign
countries if ordered or directed to do so by the Federal Reserve Board.
The opening and maintaining of such accounts, the appointment of such
correspondents, and the establishment of such agencies is expressly
made subject to "regulations to be prescribed by said board,”
No Fed
eral reserve bank may open and maintain banking accounts through such
foreign correspondents or agencies without the consent of the Federal
Reserve Board.
Other Federal reserve banks may participate in such
transactions only with the consent and approval of the Federal Reserve
Board.
And all transactions through such correspondents or agencies
in which other Federal reserve banks participate must be conducted
"under rules and regulations to be prescribed by the Board.”
This gives the Board the fullest possible measure of control,
and it is important to note that the rules and regulations which may be
prescribed by the Board governing transactions in which other of the
Federal reserve banks participate pertain to all transactions authorized
by
®ny part of Section 14, and is not limited to transactions under
subdivision (e).
market
DEALINGS IN BILLS OF EXCHANGE M S ACCEPTANCES.
The power of the Federal reserve banks to deal on the open
in bills of exchange and bankers1 acceptances is conferred by the
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X-4980
first paragraph of section 14, which reads as follows;
"Sec. 14. Any Federal reserve bank may, under rules
and regulations -prescribed by the Federal Beserve Board,
purchase and sell in the open market, at home or abroad,
either from or to domestic or foreign banks, firms, cor
porations, or individuals, cable transfers and bankers’
acceptances and bills of exchange of the kinds and matur
ities by this Act made eligible for rediscount, with or
without the indorsement of a member bank.”
It is obvious that all transactions conducted under authority
of this paragraph are exoressly made subject to "rules and regulations
prescribed by the Federal Reserve Board."
Further and more complete authority to control such trans
actions is conferred upon the federal Reserve Board by the following
paragraph of section 13:
"The discount and rediscount and the purchase and
~cale by any Federal reserve bank of any bills receivable
and of domestic and foreign bills of exchange, aid of
acceptances authorized by this Act, shall bo subject to
such restrictions, limitations, and regulations as may be
imposed by the Federal Reserve Board."
It has been suggested that this paragraph pertains only to
domestic transactions and gives the Board no power over transactions
in foreign countries; but, the broad language used by Congress is not
subject to any such restricted interpretation.
It will be noted that
it applies not only to the discount and rediscount but also to the
purchase and
sale by any Federal reserve banks of any bills receivable
and of domestic and foreign bills of exchange and of acceptances auth
orized by this Act.
It is not limited in terms to domestic transactions
but is couched in the broadest possible language and is obviously
intended to include all purchases and sales by any Federal reserve bank
of any bills receivable, domestic and foreign bills of exchange, or
acceptances authorized by the Federal Reserve Act.
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X-4980
(Confidential)
October^, 1927 •
To:
The Federal Be serve Board,
Prom:Mr. Wyatt- General Counsel,
Subject:
The Board's power over foreign
transactions of Federal Reserve Banks.
The Board has requested an opinion with respect to what
regulations, limitations and restrictions it is authorized, to prescribe
as to foreign or international transactions of Federal Reserve banks,
and as to its general authority over such transactions.
I understand
that the Board desires to have the following points covered in this
opinion:
(1)
Whether the Board hals power to regulate, limit,
or restrict transactions involving the opening of accounts, the appoint
ment of correspondents, or the establishment of agencies in foreign
countries;
(2)
Whether the Board has power to regulate, limit,
tfeotriet dealings in bills of exchange and bankers’ acceptances
between Federal reserve fefcttktt and foreign central banks;
(3)
Whether the Board has po^el* td reguikto, limit,
or restrict dealings in gold between Federal reserve banks and foreign
central banks; and
(4)
Whether the Federal reserve banks may lawfully
charge a commission or fee in connection with such foreign transactions;
CONCLUSIONS.
After careful consideration of these questions, I have reached
the following conclusions:
Federal
(1)
Under the specific terms of section 14(e) of
Reserve Act, no Federal reserve bank may lawfully open or main-
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D E C L A S S IF IE D
Authority^T,)
X-54-9SO
( - 2 - )
tain accounts, appoint correspondents, or establish agencies in foreign
countries without first obtaining the consent of the Federal Reserve
Board; and the opening and maintenance of such accounts, the appointment
of such correspondents, the establishment of such agencies and the-con
duct through such correspondents or agencies of "any transaction11 auth
orized by section 14- of the Federal Reserve Act for or on behalf of
other Federal reserve banks is expressly made subject to such rules and
regulations as the Federal Reserve Board may prescribe.
In addition, the
Board has the power to order or direct Federal reserve banks to open and
maintain accounts, appoint correspondents and establish agencies in
%
foreign countries.
(2) By virtue of specific provisions of the Federal ReJ
serve Act, the Federal Reserve Board is authorized and empowered to pre
scribe regulations, restrictions and limitations governing dealings in
bills of exchange between Federal reserve banks and foreign central
banks.
(3) By virtue of its right to exercise general super
vision over Federal reserve banks, and by virtue of certain other powers
specifically granted in the Federal Reserve Act, the Federal Reserve
Board is authorized to regulate, limit or restrict important dealings
in gold involving large amounts between Federal reserve banks and
foreign central banks, under section 14(a) of the Federal Reserve Act.
(4) Whenever the Federal reserve banks enter into any
lawful transaction involving the extension of credit to, or the perform
ance of any service for, a foreign central bank* they may lawfully charge
a reasonable commis-sion or fee for the extension of such credit or the
rendition of such services.
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DISCUSSION.
The only one of these questions which presents any difficulty
is the question whether the Board has the power to regulate, limit or
restrict dealings in gold between Federal reserve hanks and foreign
central hanks.
I shall, therefore, discuss the other questions first
and take up this more difficult question last.
FOREIGN ACCOUNTS, COBHESPONDMTS AID AGENCIES.
The authority for Federal reserve hanks to open and maintain
accounts,
appoint correspondents, and establish agencies in. foreign
countries is conferred by the following language of Section 14:
"Every Federal reserve hank shall have power:
"(e) To establish accounts with other Federal reserve
banks for exchange purposes and, with the consent or
upon the order and direction of the Federal Reserve
Board and under regulations to be -prescribed by said
board, to open and maintain accounts in foreign coun
tries, appoint correspondents, and establish agencies
in such countries wheresoever it may be deemed best
for the purpose of purchasing, selling, and collecting
bills of exchange, and to buy and sell, with or without
its indorsement, through such correspondents or agencies,
bills of exchange (or acceptances) arising out of actual
commercial transactions which have not more than ninety
days to run, exclusive of days of grace, and which bear
the signature of two or more responsible parties, and,
with the consent of the Federal Heserve Board, to open
and maintain banking accounts for such foreign corres
pondents or agencies. Whenever any such account has
been opened or agency or correspondent has been appointed
by a Federal reserve bank, with the consent of or under
the order and direction of the Federal Heserve Board,
any other Federal reserve bank may, with the conscnt
and approval of the Federal Heserve Board, be permitted
to carry on or conduct, through the Federal reserve bank
opening such account or.appointing such agency or cor
respondent, any transaction authorized by this section
under rules and regulations to be -orescribed by the hoard."
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( - 4 - )
From a mere reading of this language it is obvious that the
Federal Reserve Board is given full control of all transactions con
ducted thereunder.
No Federal reserve bank may open or maintain accounts,
appoint correspondents, or establish agencies in foreign countries
except with the consent and subject to the regulations of the Federal
Reserve Board; and any Federal reserve bank nrust open and maintain
accounts, appoint correspondents, or establish agencies in foreign
countries if ordered or directed to do so by the Federal Reserve Board.
The opening and maintaining of such accounts, the appointment of such
correspondents, and the establishment of such agencies is expressly
made subject to "regulations to be prescribed by said board,”
No Fed
eral reserve bank may .open and maintain banking accounts through such
foreign correspondents or agencies without the consent of the Federal
Reserve Board.
Other Federal reserve banks may participate in such
transactions only with the consent and approval of the Federal Reserve
Board.
And all transactions through such correspondents or agencies
in which other Federal reserve banks participate must be conducted
"under rules and regulations to be prescribed by the Board."
This gives the Board the fullest possible measure of control,
and it is important to note that the rules and regulations which may be
prescribed by the Board governing transactions in which other of the
Federal reserve banks participate pertain to all transactions authorized
by
mny part of Section .14, and is not limited to transactions under
subdivision (e),
DEALING-S IN BILLS OF EXCHANGE AND ACCEPTANCES.
The power of., the Federal reserve banks to deal on the opepi
market in bills of exchange and bankers* acceptances is conferred by the
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D E C L A S S IF IE D
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( - 5 - )
X-4980
first paragraph, of section 14, which reads as follows;
"Sec, 14. Any Federal reserve Dank may, under rules
and Regulations prescribed by the Federal Reserve Board,
purchase and sell in the open market, at home or ahroad,
either from or to domestic or foreign banks, firms, cor
porations, or individuals, cable transfers and bankers’
acceptances and bills of exchange of the kinds and matur
ities by this Act made eligible for rediscount, with or
without the indorsement of a member bank."
It is obvious that all transactions conducted under authority
of this paragraph are expressly made subject to "rules and regulations
prescribed by the Federal Reserve Board."
Further and more complete authority to control such trans
actions is conferred upon the Federal Reserve Board by the following
paragraph of section 13;
"The discount and rediscount and the purchase and
~cale by any Federal reserve bank of any bills receivable
and of domestic and foreign bills of exchange, aid of
acceptances authorized by this Act, shall bo subject to
such restrictions, limitations, and regulations as may be
imposed by the Federal Reserve Board."
It has been suggested that this paragraph pertains only to
domestic transactions and gives the Board no power over transactions
in foreign countries; but, the broad language used by Congress is not
subject to any such restricted interpretation.
It will be noted that
it applies not only to the discount and rediscount but also to the
purchase and
sale by any Federal reserve banks of any bills receivable
and of domestic and foreign bills of exchange and of acceptances auth
orized by this Act.
It is not limited in terms to domestic transactions
but is couched in the broadest possible language and is obviously
intended to include all purchases and sales by -any Federal reserve bank
of any bills receivable, domestic and foreign bills of exchange, or
acceptances authorized by the Federal Reserve Act.
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^
^
( - 5 - )
X-4980
It has been suggested that it was intended to apply only to
transactions 'under section 13 and does not apply to dealings under
section 14.
A glance at the legislative history of this provision,
however,- shows that it could not p.ossibly have been intended to apply
only to section 13.
As contained in the original Federal Reserve Act,
this provision applied only to rediscounts but it was amended by the
Act of September 7, 1916, so as to apply also to purchases and sales.
At that time section 13 did not authorize Federal reserve banks to
purchase and sell bills receivable, bills of exchange or bankers'
acceptances but dealt with discounts and rediscounts and the only
authority for the purchase and sale of bills of exchange and accept
ances by Federal reserve banks was contained in section 14.
Even at
this late date, the only authority in section 13 to purchase and sell
bills of exchange is the authority added by the Agricultural Credits
Act of March 4, 1923, to purchase and sell bills of exchange payable
at sight or on demand which are drawn to finance the domestic shipment
of nonperishable readily marketable staple agricultural products.
It is obvious, therefore, that the authority conferred upon
the Federal Reserve Board by the above quoted provision of section 13
is intended to apply to the purchase and sale of bills of exchange and
bankers’ acceptances by Federal reserve banks at home or abroad under
section 14.
In my opinion, therefore, the specific provisions of the Fed
eral Reserve Act authorize and empower the Federal Reserve Board to pre
scribe regulations, restriction©, and limitations covering dealings in
bills of exchange and bankers’ acceptances between Federal reserve banks
and foreign central banks*
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D E C L A S S IF IE D
Authority
(
I
I
( - 7 - )
X-4S80
. .
RIGHT OF FEDERAL RESERVE BANKS TO MAKS A REASONABLE
CHARGE IN CONNECT ION WITH FO REIGN TRANSACTIONS.
Assuming that Federal reserve banks have power to engage in
transactions whereby they sell or lend gold to foreign banks, purchase
bills for the account of foreign banks or extend credit in any way to
foreign banks, have the Federal reserve banks the right to charge a
reasonable commission or ,fee for lo 'doing's
In my opinion it is an incidental power of Federal reserve
banks to make a reasonable charge for any service lawfully rendered by
them, unless such charge is prohibited by statute or is contrary to
public policy.
There is no statute prohibiting the making of charges by
Federal reserve banks in connection with dealings in gold or bills of
exchange with foreign central banks, nor is there anything in the Federal
Reserve Act to indicate that such a charge should be considered contrary
to public policy.
Assuming that the Federal reserve banks have power
to engage in these foreign transactions, I am of the opinion, therefore,
that they are legally authorized to make a reasonable charge for the
services which they.render in that connection.
GOLD TRANSACTIONS.
.Section 14(a) authorizes and empowers the Federal reserve banks:
"(a) To deal in gold coin and bullion at home or abroad, to
make loans thereon, exchange Federal reserve notes for gold,
gold coin, or gold certificates, and to contract for loans
of gold coin or bullion, giving therefor, when necessary,
acceptable security, including the hypothecation of United
States bonds or other securities which Federal reserve banks
are authorized to hold;11
This section does not expressly authorize the Federal Reserve
Board to regulate, limit or restrict the exercise of the powers conferred
thereby; but I am of the opinion that such authority is to be found else
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D E C L A S S IF IE D
Authority(~~( ) i'- A
I
I
( - 8 - )
X-4980
where in the Act,
I am not familiar with the details of the arrangements between
the Federal Reserve Bank of Few York and the various central banks of
foreign countries; but it is my under standing that, whenever the Federal Reserve Banks have undertaken to outer into transactions with
foreign central banks involving the purchase and sale of bills of ex
change or dealings in gold, the Federal Reserve Bank of Hew York has
first entered into mutual arrangements with such central banks whereby
each bank appoints the other its correspondent or agent, and that the
transactions which take place under these arrangements are conducted ■
by the Federal Reserve Bank of Mew York on behalf of all Federal Re|
serve Banks on a pro rata basis.
Where this is done there can be
no doubt of the Board1s power to prescribe rules and regulations govern
ing all such transactions which are authorized by any part of Section 14;
because the last sentence of Section 14(e) provides that:
"Whenever any such account has been opened or
agency or correspondent has been appointed by a Fed
eral reserve bank, with the consent of or under the
order and direction of the Federal Reserve Board,
any other Federal reserve bank may, with the consent
and approval of the Federal Reserve Board, be permitted
to carry on or conduct, through the Federal reserve
bank opening such account or appointing such agency
or correspondent, any transaction authorized by this
section 'under rules and regulations to be prescribed
by the board."
It has been suggested that the words "any transactions" as used
here refer only to the purchasing, Gelling and collecting of bills of
exchange under authority of subdivision (e) of Section 14; but, in
my opinion, no such restricted interpretation can properly be given
to these words.
The words “any transaction authorized by this section"
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d e c l a s s if ie d
Authority<^t, )
( - 9 - )
X-4980
are very broad in their scope and clearly include every transaction
authorized "by any part of Section 14, including the power granted by
Subdivision (a) to deal in gold coin and bullion at home or abroad.
In my opinion, therefore, this provision of subdivision (e) of Section
14 specifically authorizes the Board to prescribe rules and regulations
governing an;/ and all transactions in gold between a Federal re
serve bank and a foreign central bank which has been appointed as
the agent or corresi>ondent of such Federal reserve bank, if other
Federal reserve banks participate in such transactions.
Independently of the power conferred by section 14(e), however,
I am further of the opinion that the Federal Hoserve Board is authorized
to regulate, limit or restrict international gold transactions of the
Federal reserve bancs, oven when such transactions are not conducted
through correspondents or agencies opened or established pursuant to
section 14(e).
This power in my opinion is included in the power con
ferred by section 11 (j) 11to exercise general supervision over said
Federal reserve banks'* and the power conferred by Section 11(i) to
’’perform the duties, functions, or services specified in this Act, and
make all rules and regulations necessary to enable said Board'effec
tively to perform the same.
In view of the great importance of this question, I shall dis
cuss at length the nature and extent o-f the Bo<?rd* s power of general
supervision, the legislative-history of the open market powers of
the Federal reserve banks, the respective functions of the Federal
reserve banks and the Federal Hoserve Board in the Federal Reserve
System and the relation of international gold transactions to other
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( - 10 - )
X-4980
transactions over which tho Board has "been given specific powers.
Before
entering upon such a lengthy discussion, however, I shall state briefly
my reasons for the above conclusion.
1.
It has long been recognized that banking is a business af
fected with the public interest and that banks are subject to regulation
under the police power for the protection of the general welfare of
the people.
2. Because of their very nature and bocause of the far-reaching
effects of their policies and transactions on the general welfare of
the people, this is especially true of Federal reserve banks.
3. Federal reserve banks are ins trumen tali ties of tho Federal
government created for public purposes and are at all times and in all
respects subject to the paramount authority of the Federal government.
4. The Federal Reserve Board is an arm of the Federal government
created for the purpose of administering the Federal Reserve Act and
exercising general supervision over the Federal reserve banks, to the
end that they may function in a manner best calculated to carry out
the purposes of the Federal Reserve Act, to serve the public policy
of the United States, and to benefit the people of the United States.
5.
The Board’s general power of supervision includes the power
to see that the Federal reserve banks preserve and protect the banking
reserves of the country with which they are entrusted, that they do
nothing which may endanger the solvency or soundness of their cur
rency, that they carry out faithfully the purposes of tho Federal
Reserve Act and that they comply in all respects with both the letter
and the spirit of the law.
This power carries with it the power to
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A u t h o r i t y j?
( - 11 - )
X-4980
require the federal reserve banks to cease doing anything ^hich is ultravires or which might defeat tha purposes of the Federal Reserve Act or
which might "be detrimental to tho public interest.
Moreover, this power
is to be construed liberally so as to enable the Board effectively to
safeguard the great public interests confided to it..
6.
From an examination of the Committee reports and legislative
debates on the Federal Reserve Act it is perfectly clear that the power
of carrying on the regular routine everyday business of the Federal rsBQBvc banks and the power of determining local policies was entrusted
to their respective board of directors, but the Federal Reserve Board
was created as "a general board of management11 entrusted with the power
to overlook and direct the general functions of the banks in order that
the Board, on behalf of the government, might retain some power over
the exercise of the -"broader banking functions” affecting the country
as a whole.
7.
To this end, the Board was given power, among other things,
to review and determine the rates of discount to be fixed by each
Federal reserve bank from time to time, to regulate the open market
transactions of the Federal reserve banks, to exercise general super
vision over the Federal reserve banks, and to make all rules and
regulations necessary to enable the Board to perform the duties, f■unc
tions or services specified in the Federal Reserve Act.
8.
The power to purchase and sell bills of exchange and bankers’
acceptances in the open market was conferred upon the Federal reserve
banks in order to enable them to make their rediscount rates effective
and to protect their gold reserves, but this power was subjected to
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DECLASSIFIED
Authority(^Q
X-4980
( - 12 - )
regulation by the Federal Boscrve Board in ordor that the Board might have
some control over the reserve positions of the banks, the rediscount
rat§s, and general credit conditions throughout the country.
9.
For the same reason, the Board was given a great measure of
control over the other open market operations of the Federal reserve
banks, over their power to appoint correspondents, open accounts and
establish agencies abroad, and over the transactions which might be
conducted through such foreign correspondents and agencies.
10.
The effectiveness of the powers thus conferred upon the
Board would be seriously impaired and the Board’s ability to exercise some
control over the rediscount rates, open market operations and foreign
transactions of the Federal reserve banks with a view to protecting the
general credit situation and overseeing the “broader banking functions11
affecting the country as a whole might be rendered nugatory if the
Federal reserve banks could enter into transactions with foreign banks
involving the purciia.se and sale, lending, borrowing and earmarking of
gold, thereby moving ~roat quantities of gold into or out of the
country, without being subject to any regulation or check by the Federal
Reserve Board.
11.
Any statute must be construed as a whole and in such a
way as to carry out the intent of the legislature.
The intont of the
legislature must be obtained by reading the act as a whole and not by
construing isolated provisions of the same without any reference to
their rolation to the other provisions of the act or the effect of
such construction upon other provisions of the act.
12.
To construe the Board’s powers "to exercise general siaper-
vision over the Federal reserve banks" and "to perform the duties,
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DECLASSIFIED
Authority(*T)
( - 13 - )
X-4980
functions or services specified in this act and to make all rules and
regulations necessary to enable said Board effectively to perform the
same” strictly and in such a way as not to include the power to exercise
some control over international gold transactions, would clearly defeat
the broad purposes of the Federal Reserve Act and greatly impair the
Board’s function as a "general board of management” entrusted with the
power to overlook and direct the general functions of the banks in order
that the Board, on behalf of the gpvernment, might retain some power over
the exercise of the ^broader banking functions'1 affecting the country as
a whole,
13,
Dealings in gold between the Federal reserve banks and foreign
central banks are transactions of importance to the entire Federal Re
serve System and to the public interests.of the United States as a whole.
Normally laxge amounts are involved in these dealings.
Frequently in
such transactions the funds of the Federal reserve banks .are invested
in or represented hy assets located in foreign. countries.
!This use of large
amounts of the funds of the Federal Reserve System mi grit caus*c a serious
restriction upon the rmount of funds available for use in this country
and harmful rosults upon the Federal Reserve System or vpjn the business
interests of this country might ensue.
It could seriously affect the
gold reserves of the country and the effectiveness of the rediscount
rate.
14.
Under these circumstances, the question whether and to what
extent Federal reserve bonks should engage in transactions of this kind
is an important question of policy to the Federal Reserve System, as
a whole.
The practical responsibility of such transactions is one
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( - 14 - )
X-4980
which in the last analysis, must rest upon the Federal Reserve Board.
If the Federal Reserve Board's power of general supervision over Fed
eral reserve banks is to have any practical effect or is to be given any
substantial meaning, it must be considered to extend to and include the
regulation or restriction of such important activities of Federal reserve
banks as these international dealings in gold, which may impair the ef
fectiveness of the rediscount rate and the open market transactions over
which the Board is expressly given a large measure of control.
I am of the opinion, therefore, that by virtue of its right to ex
ercise general supervision over Federal reserve banks the Federal Reserve
Board is empowered and authorized to restrict or regulate important deal
ings in gold involving substantial amounts between Federal reserve banks
and foreign central banks under section 14(a) of the Federal Reserve Act
and that accordingly the Federal Reserve Board may, if it so desires,
require Federal reserve banks to obtain its approval before entering into
such transactions.
•FURTHER DISCUSSION AND CITATION OF AUTHORITIES.
The above is only a summary of the reasons for my conclusions
regarding the Board's power to exercise supervision and control over
international gold transactions.
In view of the vast importance of this
subject, I have made a very lengthy and complete study aid feel that I
should submit below for future reference the results of that study and
the citations of such authorities as I have found.
GENERAL SUPERVISORY POWER.
I have made a careful and thorough study of the Board's general
supervisory power and of the legal authorities regarding the general
supervisory or visitatorial powers in general.
I submit the following
discussion of that subject for the Board*f further information.
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It is customary in American law to vest in some board, commission,
or officer, the power to exercise general supervision over certain types
of corporations such as common carriers, insurance companies, and banks,
which are affected with a public interest.
Furthermore, under American
law all corporations axe chartered by the Government and have only such
powers as are expressly granted in their charters or in the laws under
which they are incorporated and such incidental powers as are necessary
to the exercise of the powers expressly granted.
It is well settled that
by implication they are forbidden to exercise any other powers.
The State,
therefore, is interested in any attempt by a corporation to exceed its
corporate powers and it is well settled that the State is the one to com
plain of any ultra vires acts of a corporation and is the only one which
can institute quo warranto proceedings to compel a corporation to cease
performing ultra vires acts.
The duties of boards, commissions or
officers charged with general supervision over corporations affected
with a public interest, therefore, are primarily to see that such cor
porations do not exceed their lawful powers and that they, carry out the
purposes of their organization in such a way as to benefit rather than
injure the public, and to prevent or check any abuses of any character.
This power, in dts general nature and purpose is qaite similar to,
if not the same as, the common law power of visitation.
A discussion of
the authorities on the subject of visitatorial powers, therefore, may
throw some light on the extent of the Board1s duties and powers in the
premises.
The visitors of eleemosynary and ecclesiastical corporations at
comfnon law, however, frequently performed all the functions and possessed
all the powers which are now divided between the directors of banks and
the governmental
authorities having supervision over them; ori&it is im-
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portant to koep this in mind while reading the authorities quoted “below:
Bouvier*s law Dictionary, (p* 3404) diiicusses this subject as follows:
"Visitation. The act of examining into the affaii*s of a
corpora
tion;
"The power of visitation is applicable only to ecclesiastical
and eleemosynary corporations. 1 Bla. Com. 480. The visitation of civil
corporations is by the government itself, through the medium of the
courts of justice. See 2 Kent, 240. In the United States, the legislature
is the visitor of all corporations founded by it for public jnaepooca;
Dartmouth College v. Woodward, 4 HTheat. (U.S.) 518 4 L. Ed. 629.
"All eleemosynary corporations who are to receive the charity
of the founder have visitors if they are ecclesiastical corporations;
and if a particular visitor is not provided by the founder, then the
Ordinary of the place is the visitor; if "chey are lay corporations,
the founder and his heirs are perpetual visitors; 5 Mod. 404. It is a
necessary incident of an eleemosynary corporation; 1 Mod. 82; "a power
to correct abuses and to enforce due observance of the statutes of the
charity, 'but not a power to revoke the gifts, to change uses or divest
rights;" Allen v. McKean 1 Sumn. 276, Eed. Cas. No. 229, per Story, J.
"A visitor has the right of inspecting the affairs of the
corporation, and superintending all officers who have charge of them
according to the statutes of the founder, without any control or revision
of any other person or body, except the judicial tribunals, by whose
authority and jurisdiction he may be restrained and kept within the limits
of the granted powers, and made to regard the general laws* of the land;
in re Murdock, 24 Mass. 303, No. appeal lay from a visitor unless he
visits qua Ordinary, when an appeal lay to the Crown in Chancery. It was
baid by Lord Camden that visitation is despotism uncontrolled and without
appeal; G-rant, Corp. 534. See, generally, Tudor, Charitable Trusts;
Stephens, Statutes Relating to Ecclesiastical, etc., Institutions; Report
of Oxford Commission (1852); 7 Com. Dig. 545; 21 Viner, Abr, 587. See 34
L. Mag. and Rev. 40, as to Oxford and Cambridge Universities.
•
"In Massachusetts it is held that the visitation of eleemopynary
corporations according to the common law is in force except as altered by
statute; In re Murdock, 24 Mass. 303; such statutes may vest visitatorial
power in the courts, in the absence of a personal visitor, or even where
there is one; In re Taylor Orphan Asylum, 36 ¥is. 534; but where visita
torial power is conferred on certain public officers, the courts may not
interfere unless such visitors should act contrary to law; Nelson v.
Cushing, 2 Cush. (56 Mass.) 519.
"Even where a testator, in founding a hospital, directed that the
trustees should annually report their acts to the court and give bonds,
it was held that the court had no visitatorial power or other supervision;
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Jenkins v. Berry, '.!19 Ky. 350> ^3 S . 59^-•
"The visitatorial power of a court over a cemetery association does
not authorize it to substitute its own “business judgment for that of the
association; Roanoke Cemetery Co. v. Goodwin, 101 Va. 605 , ^ S.E. 7^9 •
’’Under the visitatorial powers of a state over corporations doing
business within its borders, it is competent for it to compel such corpora
tions to -oroduee their books and papers for investigation and to require the
testimony of their officers and employees to ascertain whether its laws
have been complied with, and this power extends to the production of books
and papers kept outside of the state, and a statute requiring such production
does not amount to an unreasonable search or seizure or a denial of due
process of law; Consolidated R. Co. v. Vermont, 207 U. S. 5^1» 28 Sup. Ct.
17S, 52 L. Ed. 327, 12 Ann. Cas. 658 ; Hammond P. Co. v. Arkansas, 212 U.S.
322, 29 Sup. Ct. 370, 53 L. Ed. 530, 15 Ann. Cas. 6^5- A corporation, being
the creature of the state, has not the constitutional right to refuse to
submit its books and capers for an examination at the suit of the state, and
an officer of a corporation charged with criminal violation of a statute
cannot plead the criminality of the corporation as a refusal to produce its
books; Hale v. Henkel, 201 U. S. U3 , 26 Sut). Ct. 370, 50 L. Ed. 652 . A cor
poration is bound to furnish information when called for by the state, so
far as reasonably possible, and state the facts which excuse them from an
swering more fully; State v. Express Co., SI Minn. 87, S3 N . W . U 6 5 » 50 L.R.A.
667 , 83 Am. St. Ret).
; by statute the right
exists in Kansas; See Western
U. Tel. Co. v. Austin, 67 Kan. 208, 72-Pac. 85 O.
366
”It may be considered that, to a certain extent, railroad com
missions are the machinery created by law for the exercise of visitutorial
power.
"This power does not include the common law right of the shareholder
to inspect the books of the corporation; Guthrie v. Harkness, 199 U.S.
l k B ,
26 Sup. Ct. k , 50 L. Ed. 130, k Ann. Cas. U 3 3 ."
In the famous Dartmouth College Case, 17 U.S. (U Wheat) 5^7* 6 72 ,
Mr. Justice Story discusses the subject of visitors of eleemosynary corpor
ations as follows:
f,To all eleemosynary corporations, a visitatorial power
attaches, as a necessary incident; for these corporations being
composed of individuals, subject .to human infirmities, are liable,
as well as private persons, to deviate from the end of their institution. The law, therefore, has provided, that there shall somewhere
exist a power,to visit, inquire into, and correct all irregularities
and abuses in such corporations, and to compel the original purposes
of charity to be faithful!;/ fulfilled^ 1 Bl. Com. UsoT Thena
ture and extent of this visitatorial power has been expounded with
admirable fulness and a.ccuracy by Lord Holt in one of his most cele
brated judgments. Phillips v. Bury, 1 Ld. Raym. .5 ; s.c. 2 T.R. jbG.
And of common right, by. the dotation, the founder and his heirs are the
legal visitors, unless the founder has appointed and assigned another per
son to be visitor. For the founder may, if he please, at the time of the
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endowment, part with his visitatorial power, and the
person.to whom it is assigned will, in that case, possess
it in exclusion of the founder's heirs. 1. Bl. Com. U82.
*** But where trustees or governors are incorrorated
to manage the charity, the visitatorial power is deemed
to belong to them in their corporate character. Philips
v. Bury, 1 Ld. Raym. 5? s.c. 2 T.R. 3^6; G-reen v. Rutherforth,
1 Yes. ^72; Attorney-G-eneral v. Middleton, 2 Ibid.327;
Case of Sutton Hospital, 10 Co. 23,3 l . » tt
That the power to supervise and examine banks is a visitorial
power is indicated by the following passage in Morse on Banks and
Banking (5 M . ) Vol 1, p.UU:
"A state may invest the supervision of banks in a bank
commissioner or other examiner, and grant to him visitorial
powers over banks and impose upon him the duty of examination
of banks, the investigation of their solvency, and the winding
up of their affairs if the protection of the depositors demands
such action. He may examine the records of the bank, change
the personnel of the board of directors, and establish rules
for the proper discharge of his duty. His power should not be
unduly narrowed by construction, nor can he be removed by the
governor.”
In Guthrie v. Harkness, 199 U.S. 1^8, a stockholder in a national bank
applied for leave to inspect the books, accounts and loans of the bank for
the purpose of ascertaining the value of his stock. Upon refusal to allow
proceedings
such inspection, he instituted/to compel the officers of the bank to permit
him to examine the books.
One of the defenses made on behalf of the
officers was that the common law right of the stockholder to inspect
the books of a corporation is cut off as to stockholders of national
banks by Section 52^1 of the Revised Statutes, which provides
that
"No association shall be subject to any visitorial powers other than
such as are authorized by this title or are vested in the courts of
justice."
The court held that the stockholder was entitled to examine
the books of the bank and that the officers thereof must permit him
to do so.
Mr. Justice Day said:
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"But, it is said, the right of the shareholder to inspect
the "books is cut off by section 52 ^-1 , providing ’no association
shall be subject to any visitorial powers other than such as are
authorized by this Title, or are vested in the courts of justice.
’We are unable to find any definition of 'visitorial powers' which
can be held to include the common law right of the shareholder to
inspect the books of the corporation * * *.
"The meaning of this section was before Judge Baxter in the
case of First Nat. Bank of Youngstown.v. Hughes, 6 Fed. Hep. 737»
and of the meaning of the term 1visitorial powers1, as used in
section 52 ^ 1 * that learned judge said:
1Visitation, in law, is the act of a superior or super
intending officer, who visits a corporation to examine into
its manner of conducting business, and enforce an observance
of its laws and regulations. Burrill defines the word to mean
"inspection; superintendence; direction; regulation." '
"At common law the right of visitation was exercised by the King
as to civil corporations'and as to eleemosynary ones by the founder
or donor. 1 Cooley's Blackstone, 1+gl.
'In the United States the legi
lature is the visitor of all corporations c rea/ted by it, where there
is no individual founder or donor,„ and may direct judicial proceed
ings against such corporations for such abuses or neglects as would
at common law cause forfeiture of their charters.' 1 Cooley's Blackstone, U82,notet
"In the case before us the Supreme Court of Utah quotes from
Merrill on Mandamus as follows:
'Visitors of corporations have power to keep them
within the legitimate sphere of their operations, and to
correct all abuses of authority, and to nullify all ir
regular •proceedings. In America there are very few cor
porations which have private visitors, and in the absence
of such, the State is the visitor of all corporations.'
"In no case or authority that ~re have been able to find has
there been a definition of this right, which would include the
private right of the shareholder to have an examination of the busi
ness in which he interested, and the right of discovery of the
methods and means by which the agents of the corporation are con
ducting its affairs.The right of visitation being a public right,
existing in the State for the •purpose of examining into the conduct
of the corporation with a view to keeping it within its legal powers,
Congress had in mind in passing this section that in other sections
of the law it had mide full and complete provision for investigation
by the Comptroller of the Currency and examiners appointed by him,
and, authorizing the appointment of a receiver, to take possession
of the business with a view to winding up the affairs of the bank.
It was the intention that this statute should contain a full code of
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“provisions upon the subject, and that no state law or enactment
should undertake to exercise the right of visitation over a na
tional corporation. Except in so far as such corporation was liable
to control in the courts of .justice, this act was to he the full
measure of visitorial power."
The Board's power to exercise general supervision over Federal re
serve banks and examine into their affairs is quite similar to the corresponding
power of the Comptroller of the Currency over national banks, and it would seem
that the nature and purpose of the Board's power must be practically the same as
that of the Comptroller»s.
In the case of State v. Llorehead, (Nebr.)- J55 N. W. 879, the court in
discussing the right of the State Banking Board to refuse to issue a charter to
a savings bank said:
"When the general rule of statutory construction is applied
and section 16 is considered in connection with the other provi
sions, it imist be held that the board is vested with authority not
only to correct evils that may creep into the management of an exist
ing bank, but to guard against dangers, that may threaten institutions
about to be formed.
" 'The power to compel,beforehand, co-operation,
and thus, it is believed, to make a failure unlikely and
a general panic almost impossible, must be recognized, if
government is to do its proper work, unless we can say
that the means have no reasonable relation to the end. Uoble
State Bank v. Haskell, 219 U.S. 104, 112, 31 Sup. Ct. 186,
188 (55 L. Ed. 112, 32 L.R.A.(F.S.) 1062, Am. Cas. 1912A,487).»
it* * *
think the intention of the Legislature was to vest
the banking board with general control and with authority to do all
things reasonably necessary for the protection of depositors through
out the state. The Board also stands in the nature of a trustee for
this guaraiitee
fund, and it is its duty to take such precautions as
may be necessary to protect its integrity. The terms 'general super
vision and control' vest the banking board with duties of a very high
order, and they are not to be perfunctorily discharged, but to be ad
ministered with the highest decree of intelligence and discretion.
"It is customary for Legislatures to grant to administrative
bodies of this character the power to adopt rules, by-laws, and
regulations reasonably necessary to carry out the purpose for which
they are created, and this grant is not an improper delegation
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;’of authority. Blue v. Beach, 155 Ind.» 121, 56 N.E. 89,
50 L.RtA. 64, 80 AM. St* Rep. 195 and cases cited. This
is held generally to he the rule in matters coming within
the police power of the state.
That the "banking business
comes within that power is no longer an open question.
" ‘The police power extends to all the great public needs
(Camfield v. United States, 167 U.a. 518, (17 Sup. Ct. 864,
42 L. Ed. 260) and includes the enforcement of commercial
conditions such as the protection of bank deposits and checks
drawn against them by compelling cooperation so as to prevent
failure and panic.* (Noble State Bank v. Haskell, 219 U. S. 104)
"The business of banking coming within the police power of
the state, the same rule of construction may be applied to banking
acts and to rules and regulations established by banking boards as
applies to acts creating other administrative bodies coming within
the police power. The Supreme Court of Judicature of Indiana, in
discussing this phase of the question, in Blue v. Beach, supra,
says:
M ‘While it is true that the character or nature of
such boards is administrative only, still the powers
conferred upon them by the Legislature, in view of the
great public interests confided to them, have always
received from the courts a liberal construction, and
the right of the Legislature to confer upon them the
power to make reasonable rules, by-laws, and regula
tions, is generally recognized by the authorities.1"
The case of Great Northern Railway Company v. Snohomish County.
48 lash. 478, 93 Pac. 924, involved the construction of a State statute re
quiring the State Board of Tax Commissioners to exercise "general supervision"
over assessors and county boards of equalization and the assessment of tax
able property in order to secure equality in taxation.
The case turned upon
the proper meaning of the teriji "general supervision" - whether it authorized
the Commissioners to act merely in an advisory capacity or whether it authorized
them to classify inter-county railroads and fix the value thereof for the
purpose of taxation.
The court held that the statute authorized the Com
missioners to classify inter-county railroads and fix the value thereof for
purposes of taxation; that the words "general supervision imply something
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more than a mere power to advise axid suggest; that they confer authority
to oversee and review the acts and correct errors of those over whom the
right of supervision is granted.
In the course of the opinion the court said:
’'Tihile these several revisions bear more or less directly
on the question under consideration,- the case turns principally
on tile meaning of the term ’general supervision' in the act de
fining the powers and duties of the state board of tax commis
sioners. * * * The state board of tax commissioners is given
general supervision over assessors and county boards of equali
zation, to the end that all taxable property shall be placed on
tho assessment rolls and equalized as between the different coun
ties and municipalities, so that equality of taxation shall be se
cured according to the provisions of law. What is meant by ’gen
eral supervision1? Counsel for respondents contend that it means
to confer with, to advise, and that the board acts in an advis
ory capacity only. We cannot believe that the Legislature went
through the idle formality of creating a board thus impotent. De
fining the term ’general supervision’ in Vantongeren v» Hefferman, 5
Dak. 180, 38 JT.vv. 5.3, the court said: 'The Secretary of the In
terior, and under his- direction, the Commissioner of the General
Land Office, has a general "supervision over all public business
relating to the public lands.” What is meant by "supervision”?
Webster says supervision means "to oversee for' diruction: to
superintend: to insooct: as to supervise the press for correc
tion."
And, used in its general and accepted meaning, the Sec
retary has the power to oversee all the acts of the local of
ficers for their direction, or. as illustrated by Mr-. Webster, he
has the power to supervise their acts for the purpose of correct
ing the same; and the same power is exercised by the Commission
er under the Secretary of the Interior.
It is clear, then, that
a fair construction of the statute gives the Secretary of the
Interior, and under his direction, the Commissioner of the Gen
eral Land Office, the power to review all the acts of the local
officers, and to corrcct, or direct a correction of, any errors
committed by them.
Any less power than this would make the
"supervision” an idle act - a mere overlooking without power of
correction or suggestion.1
Defining the like term in State v.
F.E. & l l . Y . R.R. Co., 2 2 Hebr. 313, 35 IT.*'. 118, tho court
said: ’Webster defines the word “supervision" to be ’’the act of
overseeing; inspection; superintending." The board therefore is
clothed with the power of overseeing, inspecting, and super
intending the railways within the state, for the purpose of car
rying into effect the provisions of this act, and they are
clothed with the power to prevent un.iust discrimination
against either persons or places.’ It seems to us that the term
’general supervision’ is correctly defined in these cases. Cer
tainly a person or officer who can only advise or suggest to
another has no general supervision over him, his acts or his conduct.”
Similarly, it would seem that the Board’s power to exercise "general
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supervision" over the Federal reserve banks would include the power to
require the Federal reserve banks to carry out the purposes of the Act
and to check any practices which woul d be detrimental to the public in
terest or inconsistent with the purposes of the Act.
Certainly, the Board's
power of general supervision should not be construed in such a way as to
"make the ’supervision* an idle act - a mere overlooking without power
of correction or suggestion.1’
On the other hand, there are some cases indicating the limitations
on this power of general supervision.
One of such cases is that of State v. Bronson, (Mo.) 21 S.¥.1125.
The constitution of Missouri provides that "ghe supervision of instruction
in the public schools shall be vested in a board of education whose powers
and duties shall be prescribed by law."
Tho legislature passed a law
creating a commission to purchase the books necessary for use in the schools.
This law was objected to by the directors of a school district as being
unconstitutional on the ground that it was in violation of the powers
vested in the board of education Ty the constitution.
The court held that the selection and purchase of the school
books does not come within the fair meaning of the words ’’the supervision
of instruction" and the law does not violate the constitutional provi
sion.
In so holding the court said:
"¥ith such a general system of public schools it
must be evident that when the constitution says the super
vision of instruction shall be vested in the state board
of education, it does not mean that this board shall enter
into the details of living: instruction or carrying on the
schools.
All this is and may be left to subordinate officers.
It means no more than a general oversight over the matter of
instruction."
I
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In the case of Roanoke Cemetery Co. v. Goodwin, 101 Va. 605,
44 S.E. 769, the lower court had reviewed the reasonableness of regula
tions prescribed by the cemetery association for the conduct of its
business and the fees charged for opening graves and had issued a de
cree whereby the court undertook to prescribe its own rules and regula
tions for the management of the affairs of the company, even going to
the extent of determining the fund out of which the salary of the super
intendent should be paid.
The Supreme Court of Appeals in Virginia held
that the decree* exceeded the power of the court and said:
"It is not pemissible for a court to thus sub
stitute its own business discretion and judgment for
that of the company; its visitorial powers have no
such scope. 1 Clark & Isarthall, p. 547. n
Similarly, it might be said that the authority to exercise gen
eral supervision over the Federal reserve banks does not carry with it
the duty to enter into the details of operating the banks nor the author
ity for the federal Reserve Board to substitute its own business judg
ment and discretion for that of the directors.
Without attempting to lay down a precise definition of the Board1
power of general supervision, it may be said that generally it includes
the power and carries with it the duty to see that federal reserve
banks do not exceed their corporate powers; that they do not discrim
inate in favor of or against any class of the public or any member
banks; that they preserve and protect the banking reserves of the coun
try with which they are entrusted; that they do not do anything which
may endanger their solvency or the coundness of their currency; that
they carry out faithfully the purposes of the federal Reserve Act; and
that they comply in all respects with both the letter and
spirit of
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I am further of the opinion that this power carries with it the
power to require the Federal reserve hanks to cease doing anything which
is ultra vires which might defeat the purposes of the Federal Reserve
Act or which might he detrimental to the public interest.
Loreover, this power is to be construed liberally so as to enable
the Board effectively to safeguard the great public interests
it.
Blue v. Beach, 155 Ind. 121, 45 K.E. 89.
confided to
As stated in State v. Moreland,
supra, "The terms 'general supervision and control' vest the banking board
with duties of a very high order, and they are not to be perfunctorily
discharged, but to be administered with the highest degree of intelligence
and discretion."
On the other hand, I am of the opinion that this power does not
carry with it either the duty or the po^er to interfere in the details
of the operation of the Federal reserve banks or to substitute the Board's
own business judgment and discretion for that of the directors of the
Federal reserve banks.
It does, however, include the power to check any actions on
the part of the Federal reserve banks which would nullify or impair the
effective exorcise of any lawful powers of the Federal Reserve Board
or which would constitute an evasion of any control which the Federal
Reserve Board is authorized to exercise over the general credit policies
of the System as a whole.
Yvithin this class of actions which are subject
to regulation under the Board's general supervisory po^er would clearly
be included international dealings in gold, which might tend to affect
or impair the effectiveness of the rediscount rate, which is expressly
made subject to review and determination by the Federal Reserve Board, or
which would nullify the effect of the Board's restrictions on the open
market operations of the banks.
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THE RELATIVE FUITCTIOSIS OF THE BOARD ASH)- THL BhM S
AS SHOVn'K BY LEGISLATIVE HISTORY.
That these views, based upon a purely legal interpretation of the
Board's powers, are in accordance with the intent of Congress at the time it
enacted the Federal Reserve Act appears from the following passages in the re
port on the original Federal Reserve Act submitted to the House of Representa
tives by Mr. Glass, on behalf of the Banking and Currency Committee,
under
date of September 9, 1913 (pages 16, 18, 19, 42 and 46)t
'■In order that the banks may be effectively inspected,
and in order that they may -pursue a banking -policy which
shall be uniform and harmonious for the country as a whole, the
committee proposes a general board of management intrusted with
the -power to, overlook and direct the general functions of the
banks frefarrfed to. To this it assigns the title of ’The Federal
reserve board.1,1
*
*
*
*
*
*
*
"The only factor of centralization which has been provided
in the committee’s plan is found in the Federal reserve "board,
which is to be a strictly Government organization created for
the purpose of inspecting existing banking institutions and of
regulating relationships between Federal reserve banks and between
them and the Government itself. Careful study of the elements of
the problem has convinced the committee that every element of ad
vantage found to exist in cooperative or central banks abroad can
be realized by the degree of cooperation which will be secured
through the reserve-bank plan recommended, while many dangers and
possibilities of -undue control of the resources of one section by an
other will be avoided. Local control of barking, local ap-plication
of resources to necessities, combined with Federal supervision, and
limited by Federal authority to compel the .joint application of bank
resources to the relief of dangerous or stringent conditions in any
locality are the characteristic features of the -plan as now -put
forward. The limitation of business which is proposed in the sec
tions governing rediscounts, and the maintenance of all operations
upon a footing of relatively short time v/ill keep the assets
of the proposed institutions in a strictly fluid and available
condition, and will insure the presence of the means of accommoda
tion when banks apply for loans to enable them to extend to tlieir
clients larger degrees of assistance in business. It is pro-posed
that the Government shall retain a sufficient power over the reserve
banks to enable it to exercise a directing authority when necessary
to do so, but that it shall in no way attempt to carry on through its
own mechanism the routine operations of banking which require detailed
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knowledge of local and individual credits and which determine
the actual use of the funds of the community in any given
instance. In other words, the reserve-bank -plan retains to
the Government -power over the exercise of the broader banking;
functions, while it leaves to individuals and -privately owned
institutions the actual direction of routine.“
*
*
*
*
*
*
*
"In this section provision has been made for the
creation of a general board of control acting on behalf of
the national Government for the purpose of over-seeing the
reserve banks and of adjusting the banking transactions of one
portion of the country, as well as the Government deposits there
in, to those of other portions.”
"(e) In paragraphs(e), (f), (g), (h), and (i) are con
veyed powers which are largely self-explanatory and about which
there can be little or no question, granting the general idea of
effective Government oversight through, a Federal reserve board
or some similar organization."
The power of carrying on the regular routine every-day business of
the Federal reserve banks, therefore, and of determining the local policies
was entrusted to their respective boards of directors, but the Federal Reserve
Board was created as "a general board of management" entrusted with the power
to overlook and direct the general functions of the banks in order that the
Board, on behalf of the Government, might retain some power over the exercise
of the "broader banking functions" affecting the country as a whole.
That the open market operations of the Federal reserve banks and
their transactions with foreign central banks in gold, credits and bills of
exchange is a function affecting the country as a whole, seems perfectly ob
vious, and it would seem to follow that the Board was intended to have a
control over all such operations.
This will appear more clearly from a con
sideration of the history and nature of such transactions.
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HISTORY AND
11ATUB 2
X-4980
OF 0 P M KABKBT FUNCTIONS .
The report of the House Banking and Currency Committee (pp. 52 and 53)
discusses section 15 of the original Federal Reserve Bill, which later became
section 14 of the Federal Reserve Act as follows:
"Section 15.
"It will have "been observed that the transactions au
thorized in section 14 (now section 13 of the Federal Reserve Act)
were entirely of a nature originating with member 'banks and in
volving a rediscount operation; It is clearly necessary to ex
tend the permitted transactions of the Federal reserve hanks
"beyond this very narrow scope for two reasons:
"1. The desirability of enabling Federal reserve hanks
to make their rate of discount effective in the general market
at those times and under those conditions when rediscounts were
slack and when therefore there might have been accumulation of
funds in the reserve banks without any motive on the part o f
member banks to apply for rediscounts or perhaps with a strong
motive on their part not to do so.
"2. The desirability of opening an outlet through which
the funds of Federal reserve batiks might be profitably used at
times when it was sought to facilitate transactions in foreign
exchange or to regulate gold movements.
"In order to attain these ends it is deemed wise to allow
a reserve bank, first of all, to buy and sell from anyone whom it
chooses the classes of bills which it is authorized to rediscount.
The reserve bank evidently would not do this unless it should be
in a position which, as already stated, furnished a strong motive
for so doing. Outright purchases in the open market would of
course require the payment of the face of the paper less discount,
whereas rediscount operations would require simply the holding of
a reserve of 33 l/3 per cent behind the notes issued or deposit
accounts created in the course of the rediscount operation.. Apart
from this fundamental permission, it was deemed wise to allow the
banks to buy coin and bullion and borrow or loan thereon and to
deal in Government bonds. The -power granted in subsection (d) to
fix a rate of discount is an obvious incident to the existence of
the reserve banks, but the -power has been vested in the Federal
reserve board to review this rate of discount when fixed by the
local reserve bank at its discretion. This is intended to -provide
against the -possibility that the local bank might be establish
ing a dangerously low rate of interest, which the reserve board,
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DECLASSIFIED
Authority
( -39- )
X-4980
familiar as it would be with credit conditions throughout the
country, vould deem best to raise.
‘'The final power to open and maintain banking
accounts in foreign countries for the pur :ose of dealing
in exchange and of buying foreign bills is necessary in
order to enable a reserve bank to exercise its full power in
controlling gold movements and in facilitating payments and
collections abroad."
The open market powers granted to Federal reserve banks under Sec
tion 14, therefore, were designed primarily to enable the Federal reserve
banks to make their discount
rates effective, to facilitate transactions
in foreign exchange, and to regulate and control gold movements.
The
banks were given power to fix discount rates subject to review and de
termination by the Federal Reserve 3oard. and it was explained that the
power to review discount rates was vested in the Federal Reserve Board
in order to provide against the possibility that a Federal reserve bank
might establish a dangerously low rate which the Federal Reserve Board, in
view of general credit conditions throughout the country, might consider
inadvisable.
Having the power to review and determine rediscount rates it
would seem necessary that the Federal Reserve Board should also have power
to review, regulate, and restrict any transactions which might have a bear
ing on the effectiveness of the rediscount rate.
Obviously, the investment of Federal reserve funds abroad would
have a bearing on the effectiveness of the rediscount rate and the Federal
Reserve 3oard was given specific power to regulate, limit and restrict
the purchase and sale of bills of exchange.
Yvhile no specific power to
control gold movements was given to the Federal Reserve Board, it vvould
seem clear that the Federal Reserve Board was intended, in the exercise
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Authority(^T) 1, 1 ^ 5 *2?
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X-4S80
of its general supervisory pov.er, to have some control over gold trans
actions which might have a hearing on the effectiveness of the redis
count rate or which might affect general credit.conditions in this
country.
This is entirely consistent with the theory that the Boards
of Directors of the Federal reserve harks are intended to manage the
local transactions of the Federal reserve banks, but that the Fed
eral Reserve Board is given power to control any transactions which
might have a bearing on general credit conditions in this country,
or in the position of this country in the international money market.
RELATIONS B2TW3EIT 0P3N MARKET TRANSACTIONS, REDISCOUNT
RATES AND GOLD RESERVES.
The intimate relation between open market transactions, the
rediscount rate and international gold movements is further illus
trated by a report submitted to the Federal Reserve Board under date
of October 12, 1915, by Messrs. Warburg and Delano.
The Board at
that time had been giving very careful study to a proposal made by
Mr. McAdoo, Secretary of the Treasury, to have the Federal reserve
banks establish branches or agencies in Latin-American countries;
and the above mentioned report discussed the open market powers of
the Federal reserve banks in great detail, pointed out the proper
scope and purpose of such transactions, and the disadvantage of hav
ing too large a proportion of the Federal reserve banks’ funds in
vested in foreign countries.
This entire report is very illuminating
and the following passage is of especial interest in this connection:
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DECLASSIFIED
Authority( f t ) 1■!
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(-31-)
"The Federal Be serve Banks have "beer, organized as
custodians ?md conservators of the reserve money of the
member bonks. T^e l*iw permits member banks to count as
part of their reserve tho balances kept by then with
these Federal Reserve Banks, and it is the first duty
of the Federal Reserve Banks to maintain their funds in
a condition so liquid that their member banks *:ay confi
dently rely upon the ability of the Reserve B:mks to pro
vide gold and credit when required. This function of
tho Federal Reserve Banks is at no tine to bo considered
lightly, and in times of stress involves grave re
sponsibilities and difficulties. It is fror;. this point
of view that the law has imposed very distinct restrictions
as to the character of tho investments which may be made
by the Federal Reserve Banks, permitting only a certain
proportion of their funds to be normally invested and
requiring that such investments as are made be essentially
of a self-liquidating character, and of a short maturity.
It would be unsafe and would shake the foundations of
confidence on the part of the member banks as well as
of other nations should Federal Reserve Banks use a sub
stantial portion of their resources for investment in
Latin Jtoerican credits.
"Such procedure would run counter to all banking
practice in those countries where bonks of the character
of the Federal Reserve Banks have been in successful
operation for generations. Neither the Bank of England,
the German Reichsbank, the Banque of France, nor any
other of the government banks of the less important
countries has ever adopted such a policy. The operations
of those banks are primarily confined to transactions at
home, and foreign exchange transactions are engaged in only
as far ,as they may be considered necessary for the protection
of tho gold holdings of those government bonks. The leading
government banks nornally maintain a substantial holding
of ninety-day bills on such foreign countries as . are apt
to become important creditor nations from tine to time,
but these bills are drawn only on such countries as have
a well-established gold standard, well-developed discount
facilities, and a broad market where these bills can be
promptly resold, T^e object of these foreign holdings
can best be illustrated by a concrete case, e.g.,
should the 3*mk of the Netherlands find that exchange on
London advanced to a point where gold began to move from
Holland to England, it would offer for sale drafts on London
in order to counteract this movement. When its English cash
balance had been exhausted, the Bank of the Netherlands
would rediscount in London the long bills that it might
previously have accumulated and thus create new balances
with which to stop tho outflow of gold.
http://fraser.stlouisfed.org/
Federal
Reserve Bank of St. Louis
i
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DECLASSIFIED
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i Jiff'S ^
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’’Such foreign bills arc takon only on tho few fore
most financial powers.
It is to be e j e c t e d that Jii^orican
bankers1 acceptances Trill in the future, when peace shall
have been restored, becorie one of the privileged invest
ments of these government brinks • In order to r;aintain
their ’position* in the foreign exchange narlsst, it is
necessary for government banks to renew fron tine to tine
N their foreign paper as it natures, and it is for this
•purpose that they use accounts with correspondents in those
few countries, none but the strongest firms being selected
to act in this capacity. These firms or banks are permitted
to buy only first class banking paper, and they endorse
this paper to the government banks so that such government
banks do not run any risk of loss of capital in the trans
actions and so that the government banks hold only paper
which can at any time be resold in the open market or to
the foreign government banks if need be.
”It was this function of foreign correspondents or
agents that the writers of the Federal Reserve Act had in
mind when they provided that Federal Reserve Banks should
have the right, with the consent of the Federal Reserve
Board,
” ’to open and maintain banking accounts in foreign
countries, appoint correspondents, and establish
agencies, in such countries wheresoever it may deem
best for the purpose of purchasing, selling, and col
lecting bills of exchange, and to buy and sell with
or without its indorsement, through such correspondents
or agencies, bills of exchange arising out of actual
commercial transactions which have not more than
ninety days to run and which bear the signature of
two or more responsible parties.1
’’For operations as above described the powers granted by
the Act will no doubt be availed of to good advantage, when
normal conditions shall have been restored in the important foreign
exchange markets#
’’Your committee wishes to emphasize the fact that the
purpose of this paragraph was to give to the Jfederal Reserve
Banks a greater strength and additional liquidity by enabling
them to maintain a secondary gold reserve and to possess
themselves of assets upon which the Federal Reserve Banks
could realize in case, of need without being forced to con
tract the credit facilities granted at hone - the liquid
element of these foreign investments and the additional
protection that they would give to the Federal Reserve
System being the essential ground for permitting Federal
Reserve Banks to enter a foreign field.0
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(-33-)
The following passage from a preliminary report on this subject pre
pared by Mr. Warburg under date of October 4, 1915, also throws much light
on the history and purpose of Section 14 of the federal Reserve Act:
"When dealing with interpretations of the Act, a great
deal his often been said concerning the ’intention of the
writers of the law*. Inasnuch as paragraph (e) of Section 14
has been bodily taken over from the Aldrich Plan, we have to
go beyond the writers of the federal Reserve Act in order to
find the true intent of this paragraph, and inasnuch as Senator
Aldrich consulted roe concerning this particular phase of the
intended adt, and inasnuch as I suggested to Senator Aldrich
the insertion of this very paragraph, I nay be pardoned for
venturing to explain what its original intention was#
"The two paragraphs read as follows:
Section 14(e) of the Federal
Reserve Act provides that every
Federal Reserve Bank shall have
power:
ttwith the consent of the Federal
Reserve Board, to open and main
tain banking accounts in foreign
countries, appoint correspond
ents, and establish agencies in
such countries wheresoever it
may deen best.
for the purpose of purchasing,
selling, and collecting bills of
exchange, and to buy and sell,
with or without its indorsement,
through such correspondents or
agencies, bills of exchange arising out of actual commercial
transactions which have not raore
than ninety days to run and which
bear the signature of two or more
responsible parties,1
Section 36 of the Aldrich Plan
reads:
"National Reserve Association
to have power
to open and maintain banking
accounts in foreign countries;
to establish agencies in for
eign countries for the purpose
of purchasing, selling and col
lecting foreign bills of ex
change; to buy and sell, with or
without its indorsement, throu^i
such correspondents or agencies,
checks or prime foreign bills
arising out of contv&rcial trans
actions having not exceeding 90
da y s .to run and bearing the sig
nature of two or more responsi
ble parties.1
"It will be seen that the only substantial change was the in
sertion of the words ’bill of exchange’ where the Aldrich Plan
read ’foreign bills of exchange’ and ’prime foreign bills’.
"From actual operation (having been active in several banks
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(-34-)
"in foreign countries acting as correspondents or agents for
government ’banks in other countries) I was in a position to ap
preciate from my own experience the importance of the functions
of foreign correspondents or agents, and was anxious to secure
the advantages of such connections for our future financial
system.
The operations of these foreign agents for their gov
ernment banks are substantially as follows:
"Let me choose the Bank of the Netherlands as an illus
tration, though practically all important government banks have
been operating on similar lines.
"There will be certain times when, for economic reasons,
through the movement of products from or to the Netherlands into
or from other countries, or for extraordinary reasons, exchange
on Holland will move up to the gold exporting point or down to
the gold importing point. When the point is reached where gold
may leave the country, the 3ank of the Netherlands has two main
means of protecting itself; one is by increasing the discount
rate, which measure will result in higher interest rates apt
to attract foreign money into Holland and thereby to counteract
the flow of money from the country. The other is to sell from
its portfolio bills on foreign countries in order to create
balances in those countries and thereby provide means of pay
ment without shipping the yellow metal.
It, therefore, has
been the policy of foreign government banks to acquire foreign
bills of exchange on such countries as are apt to be creditor
nations from time to time and such countries only as have safe
gold standards and en,joy first class banking credit. These
purchases of foreign exchange on such countries are being
carried on whenever exchange is low or when interest rates
in the home country are so low that it would seem prudent for
the government bank to withdraw its funds from active employ
ment -at home and invest the funds thus withdrawn in foreign
countries, whence they pan be called back whenever rates become
active at home and whenever the influence of the government bank
may be used to advantage in preventing home rates from becoming
burdensome to the borrowing community.
"When acquiring a ninety day draft on a British bank,
the Bank of the Netherlands will draw interest on this bill
at the discount rate; but when the bill matures or if the
Bank of the Netherlands acquires checks on London, it creates
a balance which needs to be converted into an interest bearing
investment.
These balances will then be employed by the cor
respondents or agencies (whichever nar.ie we may give to them)
for the purchase of other ninety day drafts on London. Ac
cording to its requirements, the Bank of the Netherlands will
renew from time to time its foreign investments. The Bank
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<5
X-4980
(-35-)
of the Netherlands considers these foreign holdings r.s a second
ary gold reserve and continues them almost perpetually, with
such casual interruptions .as may 1)0001116 necessary for the pro
tection of its own gold holdings.
"It was the consideration of these conditions that led
to the insertion in the Aldrich draft of the clause above
quoted, and it will now ‘become apparent what was meant when
it was provided that the National Reserve Association - or the
Federal Reserve Banks - should have power to ’open and maintain
hanking accounts in foreign countries * * *, establish agencies
in such countries * * * for the purpose of purchasing, selling
and collecting bills of exchange’ and that they should be able
to ’buy and sell with or without its indorsement, through such
correspondents or agencies, bills of exchange * *
In ease
of a ’pinch'i the Bank of the Netherlands was to be in a posi
tion of ordering its correspondent to rediscount with the Bank
of England or in the open market millions of its holdings of
British acceptances so as to enable V n e Bank of the Netherlands
to draw a check against the balance so produced and so to protect
its gold-* That is why it was stipulated that the bills to be pur
chased by these agents should be ’prime bills’ and should net run
beyond ninety days and should bear the signature of two or more
responsible parties, so that these bills should be current bills
that the correspondents should be able to sell freely at all times
and bills on which a loss should practically be excluded.
"It ought to be stated that the foreign governments
select the strongest possible firms in foreign countries to
act for them as agents, and that they invariably buy these bills
with the indorsement of their agent (or correspondent) so that
they could lose only in case, not only the foreign correspondent
or agent should fail, but also the two additional signatures on
the bill,
"I an well aware of the fact that these banking habits
have developed as a protection in times of peace but that in
times of war these large foreign balances may be a source of some
anxiety.
It must be borne in mind, however, that government
banks normally work in times of peace and that these methods of
protecting their country against acute gold withdrawals or
against the tendency of too low rates of interest have effectually
met many an acute emergency, and furthermore that even in times of
war these balances have eventually been paid.
I might draw at
tention to the fact that a year ago, when we- were called upon
to meet our large ;iebts abroad* it would have been a great pro
tection for us if at that tine balances could have been made
available in London to meet this first onrush.
Reproduced from the Unclassified I Declassified Holdings of the National Archives
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Authority( ft)
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(-36-)
"My object in reviewing the origin and original intent
of this paragraph is to show that this clause was inserted
for the sole purpose of providing an additional piece of ma
chinery for the protection of the Federal Reserve System. Clear
ly, no other intention was underlying this soctioni”
The question whether the Federal reserve banks should establish
branches or agencies in Latin American countries was submitted to the
Governors * Conference, the Conference of Federal Reserve Agents and the
Federal Advisory Council, and, after obtaining the views of those three
different bodies, a further report was submitted to the Federal Reserve
Board under date of January 8 , 1916, by a committee consisting of
Governor Harding and Messrs. Delano and Warburg.
This final report
reads in part as follows:
"Your Committee is happy to report that complete agree
ment was found to exist in all three bodies with the principles
expressed by the 3oard at its meeting on October 27th, the
substance of which was published on that day in a notice
(Mimeograph 385) of which a copy is appended hereto. * * *
It is the first duty of the Federal reserve 'bonks to maintain
their funds in a condition so liquid that their member banks
may confidently rely upon the ability of the Federal reserve
banks to provide gold and credit when required, This function
of the Federal reserve banks is at no time to be considered
lightly and in times of stress involves grave responsibilities
and difficulties* * * * it would be unsafe and would shake
the foundation of confidence on the part of the member banks
as well as of other nations, should Federal reserve banks
use a cub-tontial portion*of their resources for investment in
Latin-American credit. Such procedure would run counter to all
banking practices in those countries where banks of the char
acter of the Federal reserve banks have been successfully oper
ated for generations * * *. The operations of these banks
are primarily confined to transactions at home,and foreign
exchange transactions are engaged in only as far as they may
be considered necessary for the protection of the gold -hold
ings of these Government banks. * * * (Discussion of opera
tions of European Central banks).
In order to maintain their
’position 1 in the foreign exchange market, it will be neces
sary for Government bonks to renew from time to time their
foreign paper as it matures, and it is for this purpose
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DECLASSIFIED
Authorityf t ) I
,(-37-)
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that they use accounts with correspondents in those foreign
countries, none but the strongest firms being selected
to act in this capacity* * * * It was this function of foreign
correspondents or agencies that your committee is confident
the writers of the Federal Reserve Act had in mind when they
provided that the Federal reserve banks should have the right,
with the consont of the Federal Reserve 3oard, to exercise
the poT/crs conferred under Section 14 (e) * * * • Your commit
tee has no :doubt that the purpose of this paragraph was to give
to the Federal reserve banks greater strength and additional
liquidity by enabling them.to maintain a secondary gold re
serve nni to possess themselves of assets upon which the Fed
eral reserve banks could realize in case of need without be
ing forced to contract the credit facilities granted at home the liquid element of these foreign investments and the ad
ditional protection that they would give to the Federal Re
serve System being the essential ground for permitting Fed
eral reserve banks to enter a foreign field. * * * Should
Federal reserve banks be empowered to lend to foreign
Governments notwithstanding the law ’clistinctly provides that
Federal reserve banks can now purchase only United States
Government securities and warrants of United States municipal
ities, carefully circumscribed and having a maturity of not
exceeding six months ? * * * Should Federal reserve bonks
be allowed to embarrass the Government by being themselves
important creditors of foreign Governments in case of war
with, or revolution in, such countries? Your committee is
very positive in its view that such enlarged powers should not
be granted; * * * it
While these reports arose out of a controversy entirely
different from, and extraneous to, the question now under consideration,
they serve to show the intimate connection between the open market powers
of the Federal reserve banks, the effectiveness of the rediscount rate, and
the protection of the gold reserves of the Federal Reserve System.
They show clearly thp.t one of the most important purposes of
the rediscount rate and the open market purchase of bills of exchrjige is to
protect the gold reserves of the Federal Reserve System.
Over the re
discount rates and the open market transactions the Federal Reserve
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
AuthorityC*T) j
Board is given a ^reat measure of control.
To s:i;>r that the Federal
Reserve Board could exercise this control over rediscount rates and
open market transactions with a view of protecting the gold
reserves
of.sthe Federal Reserve System but that it could do nothing to prevent
the Federal reserve banks from engaging in international transactions
in gold in such a way as to impair the gold reserves would be to give
the Federal Reserve Act an interpretation which clearly would defeat
the will of Congress.
Respectfully,
Walter Wyatt
General Counsel
WW-WLH-OMC-SAD
sro. 1s t.
O ffice Correspondence
To
F ed er*4
Fm
Mr^ayatt - General Counsel.
R e se rv e B a ^ rd
PBDCKAL RESERVE
BOARD
Date_August-I?, .. 1927.
Subject: Proposed Regulafcion..on Purchase
Bankers1
and Sale of Bills rf
Acceptances
APR 1 7 1 9 4 0
Fa'oc
On July 6th the Board adopted the following resolution?
43
"That it he the sense of the Federal Reserve
Board that the authority conferred upon it by Sections
13 and 14 of the Federal Reserve Act, with respect to
the purchase and sale of hills of exchange and accept
ances, applies to such purchases and sales made abroad
as well as at home, and that the Board rule that such
purchases and sales are subject to its regulation and
?pprov?l.**
I am advi sed by Mr. Eddy that on Juljf 12t>/the Board voted
to request this office "to prepare and submit to the Board in due
course the regulation contemplated by the above resolution**.
ir >
^
With the utmost respect, I desire to cell attention to the
fact that the question as to what restrictions or regulations the
Board desires to prescribe covering the purchase and sale of bills of
exchange ajid bonkers* acceptances abroad is purely’a question of policy
and I have not the slightest idea as to the character of regtiations or
restrictions the Board desires to promulgate o& this subject.
I
respectfully request, therefore, that the Board give me more specific
instructions as to the character of the regulations and the general
nature of the restrictions, if 8ny, which it desires to place upon
the purchase and sale of bills of exchange and bankers* acceptances
abroad, in order that I may intelligently proceed t‘o the preparation
of a regulation on this subject.
im
m
'j r H
F o rm N o . 131.
/
Urhce Correspondence/
X o _____ General C o u n s e l * ____________
From
/ FBDBRAL RESERVE
^
/
9:
Subierti
1 \a%
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!
**»*
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*'
s4/
^
APR 1 7 1 9 4 0
Mr« l&dy*
— jR
S s k -T m OFFICE OF COU '*L
t i w vas adopted:
"That it be the sense of the Federal R«»sarve Board that
the authority conferred upon it by Sections 12 and 14 of the
Federal Reserve Act, with respect to the purchase and sale of
bills of exchange and acceptances, applies to such purchases
and sales made abroad as well as at hone, and that the Board
4rule that such purchases and sales are subjeot to its regula
tion and approval.n
At the meeting this morning, it was voted to request you to prepare
and submit to the Board in due o curse the regulation contemplated by
the above resolution*
*—*m
F o rm H o. 181.
O ffice Correspondeiice
RDERAL RESERVE
BOARD
Date,
Subject:.
7
/ £
t e j&
b n
With respect to the attached memoranda from 4Ir* Killer and
the Board1a Counsel with reference to the responsibility of the
Board in connection with the purchase and sale by Federal reserve
bank8 of bills of exchange and bankers1 acceptances in foreign
markets, there is quoted below the motion adopted by the Board at the
meeting yesterday:
"That it be the sense of the Federal Reserve Board
that the authority conferred upon it by Sections 13
and 14 of the Federal Reserve Act, with respect to the
purchase and sale of bills of exchange and acceptances,
applies to such purchases and sales made abroad as well
as at home, and that the Board rule that such purchases
and sales are subjeot to its regulation and approval.•
333
r
J
rFoorm
r m NO.
m o. is
x.
131.
^>1
Office Correspoiftence naa^ atVE
T o _____ Federal Reserve Board,._________
Fm w
Mr. Wyatt______________________ _
ja y
A\rr
APR
17 1940
- -R
5. 1927.
Subject:JLoard1 s res
and sale of bills of exchange and hankers
acceptances in
Under date of June 30th jfr. Miller addressed & memorandum to
the Board which read as follows:
"In order to clarify the situation and responsibility of the
Board with respect to the purchase and sale by Federal Reserve
Banks of bills of exchange and bankers acceptances in foreign
money markets, I move "‘That it be the sense of the Federal Reserve Board that
the authority conferred upon it in Section 13 of the Federal
Reserve Act reading:
" '"The discount and rediscount and the purchase and
sale 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 may
be imposed by the Federal Reserve Board." '
applies to the purchase and sale of bills of exchange and ac
ceptances made abroad as well as at home and that the Board rule
that such purchases and sales are subject to such restrictions,
limitations and regulations as it may see fit to impose."
An opinion has been requested on the question whether the above is a cor
rect statement of the lsgal situation.
In ray opinion there can be no doubt as to the correctness of
the conclusions stated in Dr. M i l l e r s memorandum. That the language of
the Act is all-inclusive and applies to the purchase and sale of bills of
exchange and bankers' acceptances abroad as well as to purchases and sales
at home appears so clearly from a reading of the statute itself that no
argument is necessary to support Dr. Miller’s conclusion.
Pursuant to another request made by the Board, I am preparing a
comprehensive memorandum covering this and a number of related questions,
but it will not be ready for several days. There is room for some differ
ence of opinion as to the correct answer to some of the other questions
involved in the memorandum which I am preparing, but there is no doubt
about the point covered in Dr. Miller^s memorandum of June 30th*
Respectfully,
Wyatt,
Counsel *
WW MD
t / n k 'l
} ' >rrn K n , J U .
Office Correspoi fen ce
[ BOARD
■>U f 1 ^/»■*>/.
Subject:
_ lG 3 U I*V G
To
FEDERAL, R ESERVE
RgC'D IN FILES SECTION
A P R i 7 1940
From.
.. \J. Hiller*
J X
lc
In order to clarify the situation and responsibility of
the Board with respect to the purchase and sale by Federal Beserve
Ba^iics of bills of exchange and bankers acceptances in foreign iooney
markets, I move n
That it be the sense of the Federal Beserve Board that
the authority conferred upon it in Section 13 of ‘the Federal Eeserve
Act reading:
"The discount and rediscount and the purchase and
s&le by any Federal reserve banlc of any bills re
ceivable and of domestic and foreign bills of ex
change, and of acceptances authorized by this Act,
shall be subject to such restrictions, limitations,
and regulations as may be imposed by the Federal
Reserve Board.”
applies to the purchase and sale of bills of exchange and acceptances
made abroad as ■well as at home and that the Board rule that such pur
chases and sales are subject to such restrictions, limitations and
regulations as it Eiay see fit to impose. ##
f 1"
Jfl’S O A H T M W P J I W J
1UN 3 0 19:
Holdings of the National Archives
F o rm N o . 131.
O
l
O ffice CorrespouJence
^
FEDERAL RESERVE 4
rw j-une 27. 1927.
T o ___ — Federal Reserve Board___________ Subject:.____________ ______________
From____L * . (!i Millar.—_________________
______
______
In order to clarify the situation and responsibility of the
Board with respect to the purchase and sale “by Federal Reserve Banjis
of hills o f exchange and bankers accex>tances in-foreign money markets,
I move That it be the sense of the Federal Reserve Board that the
authority conferred upon the Board, in Section 13 of the Federal •Reserve
Act to impose "restrictions and limitations" upon such purchase and
sales ajjplies to purchase and sales made abroad as well as at home.
R ep rod uced from the U nclassified / D ecla ssified H oldings o f the N ational A rchives
3<!f**n*»ar Strong*
I hftit yaar
few* aak&d w
$£ i^rll _3 ® U u
If#
Hr* Slllott, to Infor*
«** whether It would ant be poaalble to make *
m l lag, without any obang© in tha la», aucfc as
jou da air* as to day# of .gt*©**
Ac soon as- 1
hear from M » I will 1#% ftwt know at oaea*
M
m
m
I
dotibt, fe&Nnpt#* that the CoMnittee will
accept the proposed &Ti©nda*nt.
Sincerely yours,
-•fBlgned) C,
S. Hamlin,
Gwernos*'*
Eon. Banjaxoln
&*♦*
SOfWpao**, Fedar&l 3*80$** Saak,
Haw !©*&#
Reproduced from the Unclassified I Declassified Holdings of the National Archives
A
*
/
FE D E R A L R E S E R V E BANK
weceivED
OF NEW YORK
APR 2 6 1916
SQVfcftNOR’S OFFICE
1
April 25th, 1916.
My dear Governor Hamlin:
Referring to my note of the 19th inst., written while
I was in Washington, I feel convinced that the slight changes
required in the Federal Reserve Act to enable us to purchase bills
in the London market are of great importance and should, if possiple, be passed with other amendments that are now pending.
Since returning home it has occurred to me that some of
the members of the Committee may feel that more extended state-
S '
ments of the reasons for this amendment are necessary than the
ones presented in my very brief letter.
be the case,
If that develops to
nay I ask you to advise me and I will be very glad
to attend in person or present a memorandum in detail on the sub
ject.
Yery truly yours,
.
/& /
Governor.
Hon. C. S. Hamlin,
Governor, Federal Reserve Board,
Washington, D. C.
BS Jr/vCM-2
b
-
*
Reproduced from the Unclassified I Declassified Holdings of the National Archives
February 2, 1915.
SUBJECT
ft
.144
Conditions attached to bills
of exchange and acceptances
affecting negotiability.
CARDEfl
My dear Governor:
I have the honor to acknowledge receipt
of your request for an opinion on the subject of
conditions attached to bills of exchange and ac
ceptances which affect their negotiability*
It is somewhat difficult to define in spe
cific terms what Conditions may or may not be pre
scribed in a bill of exchange without affecting the
negotiability of such bill since the negotiable in
struments laws of all the states are not identical
and the decisions of the various courts are by no
means uniform on this subject,
As I understand it, the Board has under
considerati6n the question of prescribing a method
by which bills of exchange or acceptances dealt in
by member banks or Federal reserve bahks may show
that such bills or acceptances grow out of trans
actions involving the exportation or importation
of goods without affecting their negotiability.,
and it is primarily upon this question that you
desire an opinion.
In dealing with this subject, it is im
portant to keep in mind the distinctive difference
between a bill of exchange and an acceptance, and
also the difference in status between an acceptor
and a drawer of a bill*
Section 126 of the negotiable instruments
lav; adopted by forty-one states and the District of
Columbia, defines a bill of exchange as an
"Unconditional order in writing
addressed by one person to another.,
signed by the person giving it, re
quiring the person to whom it is ad
dressed to pay on demand or at a fixed
or determinable future time a sum cer
tain in money to order or to bearer'**
Section 127 states that "A bill of itself does not operate as an as-,
signment of the funds in the hands of the drawee
available for the payment thereof, and the drawee
is not liable on the bill unless and until he ac
cepts the same"*
Until the bill is accepted, therefore, the drawer
is primarily liable and the bank discounting such bill can
have recourse only against the drawer of a prior endorser
in the event that the drawee, declines to pay such bill when
presented.
On the other hand, acceptance is defined by Sec
tion 132. of the negotiable instruments law as »
"The signification by the drawee of his assent
to the order of the drawer» The acceptance must be
in writing and signed by the drawee♦ It must ndt
express that the drawee will perform his promise by
any other means than the payment of money"*
When a bill has been accepted, the acceptor be
comes primarily liable and the contract of the drawer is
substantially changed to that of endorser*
It will be observed from the foregoing that a
bill of exchange, in order to be negotiable, must not only
be payable to order or bearer, so that title may be trans
ferred by the holder, but it must also be an unconditional
order to pay in money.
A conditional acceptance is defined in 4 Am. &
Eng. Encl. of law, 224, as an undertaking by a drawee to
pay, dependent, however, upon the performance or happening
of a stipulated condition or contingency. But as shown la
ter, a general acceptance of a conditional bill is also, in
effect a conditional acceptance. The terms, therefore, both
of the order to pay, as indicated by the bill of exchange when
drawn, and the acceptance as indicated by the language used by
the acceptor, must be free from qualifications or conditions if
the bill or acceptance is to retain in all respects its ne- \
gotiability and to be free from equities existing between
r
the drawer and the drawee or the acceptor. This being true,
the question arises as to what form may be used to show the
transaction on which the acceptance is based without destroy
ing its negotiability.
^
«
*^
1
The Federal Reserve Act provides that such hills
or acceptances must grow out of transactions involving the
exportation or importation of goods.
It is to he assumed,
therefore, that ultimately the proceeds of the sale of the
goods imported or exported are to he used, to extinguish the
debt evidenced by the acceptance.
To avoid any question of
negotiability, however, neither the bill as drawn, nor the
acceptance made must be in terms to indicate that the pay-,
ment is to be confined to such proceeds.
As stated by Nor
ton, on Bills and Notes, Third Edition, Page 138, "The true test is whether the drawee is con
fined to the particular fund, or whether, though a
particular fund is mentioned, the drawee may charge
the bill up to the general account of the drawer if
the designated fund turn out to be insufficient. It
must appear that the bill of exchange is drawn on
the general credit of the drawer. It must carry with
it the personal credit of the drawerj not confined to
any fund'1•
This being true of a bill of exchange, the ques
tion arises whether or not the contract of acceptance is
wholly independent of the terms contained in the bill*
The cases and authorities all agree that a general accept
ance of a bill of exchange is an undertaking on the part
of the drawee to pay the bill absolutely according to its
tenor.
4 Am. & Eng. Encl. of Law 207.
English Bills of Exch.*, Act, Sec. 17.
Oox v. National Bank, 100 U. S. 712
Bailey on Bills (2nd Am. Ed.) 154..
Consequently if the bill orders payment out of a
particular fund, a general acceptance thereof is an under
taking to pay out of that fund and no more, and it is, there
fore, a conditional acceptance, though general in form#
Hoagland v« Brck, 11 Neb. 580.
Newhall v. Olark, 3 Gush. (Has3 ) 376
Smith v . Wood, 1 N. J. Eq. 74.
Gook v. Wolfendale, 105, Mass*. 401.
It is to bo remembered, of course, that an accept-ance may be conditional and therefore non-negotiable, even
though the bill itself was unconditional, if the terms in
the contract of acceptance specify that payment is to be
made out of a particular fund or is dependent upon the hap*-
Reproduced from the Unclassified I Declassified Holdings of the National Archives
-4-
pening of a certain contingency^ As Justice Clifford
stated in Cox v. National Bank, supra, 11An acceptance
is an engagement to pay the bill according to the tenor
of the acceptance and k k ~
a general acceptance is
an engagement to pay according to the tenor of the bill,,
The difficult question, however, is to construe
the words used* to apply the test given in Norton* to deter
mine whether in fact the acceptance is conditional; or,
more specifically., to determine whether the drawee is con
fined to a particular fund merely by a reference on the
bill or in the acceptance to that fund. It is a ques
tion for the court to determine in each individual case,
because* the facts being proved or admitted, the ques
tion whether an undertaking is a conditional* acceptance
is a question of law £or the court to decide. Sproat
,v» Matthews 1 Term, R, 182,
It was held in Corbett v, Clark, 45 Wis«, 403,
that an order to "pay C, A* Corbett $183 and take the
same out of our share of the grain n was an unconditional
bill and a general acceptance thereof also unconditional.
The court held that this was a mere direction as to the
fund out of which the drawee was to reimburse himself. In
Redman v. Adams, 51 Maine, 433, where the words of the
bill were "charge the same against whatever amount may
be due me for my share of fish caught on board schooner
•Morning Star* ”, and the acceptance was general, the
court held that this was a mere reference to the fund
to call the attention to the drawee to his means of reimbursement.
The great majority of cases incline to the view
that the presumption is in favor of an unconditional or
der and unless the direction on the bill or acceptance
clearly and expressly directs payment to be made out of
a certain fund, the court will consider it merely as a
reference to the mode of reimbursement rather than ah
absolute restriction to the particular fund mentioned*
In a ca^e now pending before the U* S, Circuit
Court of Appeals, for the Second Circuit, Guaranty Trust
v« Hannav, the lower court held that "Value received
and charge the same to account of lOO/RSMI bales of cotton*"
written on a draft made it conditional because it limited
payment to the proceeds of this particular cotton#
The
draft being conditional, a general acceptance thereof was
conditional* Thus it is seen how difficult it is to de
termine how a court will rule on any specific case* The
rule or^test is always the same, but whether the facts
are within or without the rule is always a matter o.f
opinion. Extreme cases are easy to decide but as the
cases verge toward the center, the line of demarcation
becomes hazy and Ifficult of determination*
Reproduced from the Unclassified I Declassified Holdings of the National Archives
/
0. So H.
No, 5*
It would seem, therefore, that Federal reserve
hanks and member hanks should consider carefully the risk
involved in discounting hills of exchange or acceptances
which in terms indicate any particular fund or any partic
ular property out of which payment of the draft is to he
made, because of the doubt as to the construction that
might be put upon such an acceptance.
It’would be far
more prudent to require that the directions in a bill
of exchange bo to pay in money and to charge to tho ac
count of tho drawer, without any qualification as to any
particular fund.
There is no doubt, however, that a ref
erence, in general terms, on the face of a bill to the
fact that it is based on the importation or exportation
of goods would not make it conditional and non-negotiable
Respectfully,
(Signed)
11.
G. ELLIOTT.
Counsel-.
2/ 5 / 1 5 .
Reproduced from the Unclassified I Declassified Holdings of the National Archives
3
3
(j
January 21* 1915.
Doar tor, Sill® it i
I havo roaui or*r your opinion ao to tha discount
o f
M i l t of
oxchanga drown In good faith agalnot actually existing iraluae.
X
am a littla p u n l e d at tha auaoaary of coocluaione atatod by you on
pafO 6 .
Am 1 right in infarring that (a) rofora to caaae whara the bill
Is diacountad befora acceptance, in vhleh ease there must bo a lien!
Turning to (fc)* «ould aot praotieally in ovary caao the acceptor
hold the bill bf lading and taka it
In other words,
da
fr o m
tho bill which ho accept#!
you mean that tha discount of ouch a hill af ter
acceptance nay have no security^ tha accaptor feeing directly liable
iphether or not -ho ha« security!
filAoaroly youre,
tilled; 3'. 3, Hamliiu
H. C. Rlliatt, ^8 q *, Counsel,
Federal Reserve Board*
V - S
@FedFRASER