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February 19, 1962.


Federal Open Market Committee


Mr. Sherman

For your information, there is attached a copy of a statement
of the legal authority for Federal Reserve foreign exchange operations prepared by Howard H. Hackley, General Counsel of the Committee,
and furnished, upon request, to the Joint Economic Committee.
Copies also have been sent to the Chairmen of the Banking and
Currency Committees of the Senate and House for their information.

Merritt Sherman, Assistant Secretary,
Federal Open Market Committee.


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It is understood that the Executive Director of the staff
of the Joint Economic Committee has orally requested a brief statement
regarding the legal authority of the Federal Reserve System to engage
in foreign currency operations or, as they are sometimes called,
foreign exchange operations.

The first paragraph of section 1 of the Federal Reserve Act
(12 U.S.C. 353) authorizes any Federal Reserve Bank to "purchase and
sell in the open market, at home or abroad, either from or to domestic
or foreign banks, firms, corporations, or individuals, cable transfers
and bankers' acceptances and bills of exchange. . . ." The term
"cable transfers" itself suggests dealings in foreign exchange, since
cable transfers are, of course, a medium through which the Reserve
Banks may acquire or dispose of holdings of foreign currency in the
form of balances with foreign banks.
Section 1(a) of the Federal Reserve Act (12 U.S.C. 354)
authorizes the Federal Reserve Banks to deal in gold at home or abroad
and to make loans on gold.

Section 14(e) of the Act (12 U.S.C. 358) authorizes any
Federal Reserve Bank, with the consent or upon the order and direction
of the Board of Governors and under regulations prescribed by the Board,
to open and maintain accounts in foreign countries, and to appoint

correspondents and establish agencies in such countries, and, through
such foreign correspondents or agencies, to buy and sell bills of exchange and acceptances. Whenever an account in a foreign country is
opened by a Federal Reserve Bank, any other Federal Reserve Bank may,
with the consent and approval of the Board, be permitted to carry on,
through the Reserve Bank opening such account, any of the transactions
authorized by section 14 of the Act.
All of these provisions were contained in substantially
their present form in section 14 of the original Federal Reserve Act.
The Report of the House Banking and Currency Comittee with respect to
the original Act stated that one of the objectives of the provisions
of section 14 was to provide an outlet through which funds of the Federal
Reserve Banks might be used in order "to facilitate transations in
foreign exchange or to regulate gold moments."
Holdings of foreign currency by the Federal Reserve Banks in
the form of accounts with foreign banks may arise through open market
purchases of cable transfers and bills of exchange, through sales of
gold to foreign banks, and through the establishment of cross-credits
or reciprocal balances between a Federal Reserve Bank and a foreign bank.

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To the extent that suchtransactions involve open market
purchases and sales, they are subject to direction and regulation by
the Federal Open Market
Committee under the provisions of section 12A
of the Federal Reserve Act (12 U.S.C. 263) which provides that "no
Federal Reserve Bank shall engage or decline to engage in open market
operations under section 14 of the Act except in
accordance with the
direction of and regulations adopted by the Comittee." Insofar as
such transactions involve the opening and maintenance of accounts with
foreign banks, they are subject also to the consent and regulations of
the Board of Governors of the Federal Reserve System.
There is, of course, no provision of present law that
specifically refers to foreign currency or foreign exchange operations
by the Federal Reserve System; and, accordingly, it cannot be said
that there is explicit and clear authority for such operations. However, in view of the provisions of law above mentioned, and without
attempting here to recite all of the reasons that lead to such conclusion, it is my opinion that the Federal Reserve Banks are authorized
by present law to engage in open market transactions in foreign exchange
subject to direction and regulation of the Federal Open Market Committee
and, for this purpose, to open and maintain accounts in foreign banks
subject to the consent and under regulations of the Board of Governors
of the Federal Reserve System.
In the course of consultations between the Board of Governors
and the Treasury Department regarding this matter, the Treasury Department advised the Board that the above-stated opinion has been concurred
in by the General Counsel for the Treasury Department and by the Attorney
General of the United States.

Howard H. Hackley, General Counsel,
Federal Open Market Comittee.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102