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511
A meeting of the Federal Reserve Board was held in Washington
Ofl
PildaY, December 22, 1933, at 12:40 p. m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Black, Governor
Hamlin
James
Thomas
Szymczak
O'Connor
Mr. Morrill, Secretary,
Mr. Wyatt, General Counsel,
Mr. Martin, Assistant to the Governor.
ALSO PRESENT:
Messrs. Harrison, Young, Norris, Seay,
Martin and Geery, Governors of the Federal Reserve Banks of New York, Boston,
Philadelphia, Richmond, St. Louis and
Minneapolis, respectively; and Messrs.
McKay, Gilbert and Fleming, Deputy
Governors of the Federal Reserve Banks
of Chicago, Dallas and Cleveland, respectively.
Governor Black stated that he had asked the representatives of
l'ederal reserve banks to meet with the Board in order that he might
e4
'
fille them in
confidence of certain recent developments. He added that
It
we's landerstood
that the representatives present from the Federal re8("e banks might upon their return to their banks make known these
cle7e1°1)Mellt2s in confidence, to the members of their respective boards
(1(1A-rectors
at meetingsto be called for the purpose.
thftellalon
read from a memorandum as follows:
were
Governor Black
"At a conference on Thursday, December 14th, the following
present:
The President
The Attorney General
The Acting Secretary of the Treasury
The General Counsel to the Treasury Department
The Governor of the Federal Reserve Board.
512
12/22/33
-2-
"It was stated by Mr. Morgenthau that the meeting was to
discuss a plan by which the Government would obtain the profit
upon the gold owned by the Federal Reserve Banks in event of
devaluation.
"Mr. Cummings then read a memorandum embracing a plan for
this purpose.
"My reaction to the plan was asked and after stating
several objections to it I asked time for its full consideration. This consideration has now been given and this memoran°Alm contains the conclusions reached.
"Before discussing the plan may I present four facts:
"First: Several weeks ago the President appointed a cOmmittee consisting of the Secretary of the Treasury, the Attorney
General and me, to consider the very question presented at the
conference
and to report to him. Immediately after the appointTent of this committee the questions involved were studied and
reported to the Secretary of the Treasury and to the Attorney
General that I was prepared to discuss them. This committee is
still in existence, has had 110 meeting and has made no report.
This statement is made solely for the purpose of making it
clear that the plan proposed by the Attorney General is not the
Product of this committee.
"Second: During the present administration the Federal
Reserve
System has operated in complete harmony with the ReverY Program of the Administration, as illustrated in part by
.te purchase during this period of $600,000,000 of governments
!
II an effort to supply funds foi- every credit need in aid of the
xecovery Program.
"Third: There has been no manifestation on the part of any
Reserve
Bank of any opposition to the proper disposition under
,
*1111 legal authority of the profit upon the Reserve System's gold
3 regard being had for the constitutional provision that
Alst compensation
be made for the property taken.
"Fourth: The gold in question is either in the Treasury or
in the twelve
Federal Reserve Banks. The gold of the System has
bee„
In the same places for approximately twenty years. There
been discussion for many months of devaluation and profit
13c)1
gold in event of devaluation. This discussion has not af4,
t:cted the location of one dollar of this gold. No effort has
IT en made or considered to change the possession of this gold.
will be made. The gold will remain right where it is in
eve
nt of devaluation until all question of the profit upon this
(-cl is legally settled. The Reserve Banks can be trusted to
this effect can be
made.extent, but if desired an agreement to
r
7is
In the light of these four statements of fact the plan
4 -tXested by the Attorney General must be discussed. This plan
411v°1ves:
513
12/22/33
-3-
(1) Action by the Treasury commandeering the gold holdings of the System. This action to be without publicity, to
be based upon authority of the law relating to the
protection
of the
currency system of the United States, to be applied after
usual banking hours without prior notice to the officers of the
Reserve Banks.
"(2) The demand at this hour and under these cOnditions
of all gold
in the vaults of the Reserve Banks, all gold held
by the
Federal Reserve Agents in trust for the holders of,
Federal Reserve notes, and all denominated 'equity' in the gold
of the System held by the Treasury.
11
(3) If the demands of the Government agents are not complied with then those agents are to post on the vaults of the
uanks a notice that all gold held therein is the property of the
United States.
11
(4) Compensation for the gold so commandeered is to be
rilMe by these government agents through the medium of a writing
stating that the bank is "entitled' to gold certificates for the
gold taken.
"Under this plan it is proposed to give the Government both
asession of and title to all gold in the vaults of the Reserve
Ana.nks, all gold held in a trust capacity by the Federal Reserve
'
- ents, and all gold held in the trust relations by the Treasury
Covered in the Gold Redemption Fund, the Federal Reserve Agents'
°ad Pund and the Federal Reserve System's Gold Settlement Fund.
"To this whole plan I enter my very earnest and serious objection. My objections are:
"(1) That the whole plan is of doubtful legality, and in
w opinion would be unwarranted in law.
t„ "(2) That under the plan the result desired cannot be ob71ned--that is, title to the gold would not in the end rest in
the
Government.
:1(3) The plan is unworkable.
"(4) The plan is unnecessary.
"
(
5) An attempt to put the plan in operation would result
di
barstrously to the Federal Reserve System and to the entire
credit situation, and would be inimical to the Ad-
r
Al_
aY I discuss these objections?
and in my
"EkrAL: The whole plan is of doubtful legality
Pini:)In would be unwarranted in law.
"This conclusion rests upon three bases:
(1) The problem as to the constitutionality of the Thomas
araendment.
vk 2This problem exists. There is a serious question whether
1-e Thomas Amendment is not unconstitutional in delegating legisvalidity of
att.
"power to the President. This question of the
514
12/22/33-
.-4-
"the Thomas Amendment is a vital one, because unless the Presidentts action is valid the Reserve Banks will in fact obtain no
Profit on their gold stocks. If the statute is unconstitutional
a-AY action by the President would be a nullity and the existing
Parity between the dollar and gold would not be affected by a
proclamation
reducing the value of the dollar. Again, if the
gold content of the dollar was reduced fifty per cent resulting
in a book profit to the Reserve Banks upon its gold, such profit would be lost if the present parity between the dollar and
gold were subsequently reinstated. If the entire profit of the
Reserve Banks on their gold were taken by the Government upon a
fifty per cent devaluation of the dollar, the subsequent restoration of the 20.67 ratio would result in wiping out the capital
and surplus of the Reserve Banks. Again, any action which is
taken with respect to the gold profit must be considered in view
!
ic est
ell,neTe:t
.atlatory requirement regarding the maintenance of gold
"(2) There is no authority in law for calling in the Reserve Banks.
' gold under the anti-hoarding provision, first, because
under the law the Reserve Banks have the right to buy and
hold gold;
second, because the law requires them to hold gold
s reserves; third, because some of their gold was turned over
!
B .them under GOvernraent order against hoarding and the Reserve
'
t llks were recognized as the proper agency for holding this re411rned gold; fourth, because the central banks of a nation holdgold, for reserves and as the base for the nationts credit
could hardly be
termed thoardefst.
"(3) There is no authority in law for calling in the reservegold under the provision that gold may be called in by the
Secretary
of the Treasury when 'such action is necessary to protect the
currency
system of the United States'. There could be
no
asserting that the currency system would be protected
by 1Te
de-riving sixty per cent of the currency of the country of its
gold
lasei.n It would appear superfluous to argue this question.
aw, (4) The Thomas Amendment does not in terms confer any
of "itY upon the President to deprive the Federal Reserve Banks
me,:4Y gold profit resulting from devaluation. The Thomas Amendvests no one, even by implication, with authority to deal
with
h the
Senate upon the bill show
at the su:bject. The debates in the
should. be taken was disprofits
question whether gold
cussed,;
e
that the Chairman of the Committee on Banking and Currency
:
c,
,
131*
.essed the view that the bill was not intended to cover that
:JJect, and that it could be dealt with later. Senator Fletcher
'sked whether the amendment provided any method by which any
Profitmade by those holding gold, at the date of devaluation,
Could. be
taxed. He replied there was not, and further that he
not favor
incorporating such a provision in the pending bill,
Z
515
2/22/33
'
"altho
. he was in sympathy with the proposal and believed that
it should be considered later. The determination as to -)rofits
must be made by Congress.
"S E__Lcsarl.L Under the plan the result desired cannot be obt
ained--that is, title to the gold would not in the end rest in
the Government.
It may oe possible under the plan to obtain actual or constructive nossession. As a matter of fact the gold of the reserve
banks now in the Treasury is as follows:
in the Gold Redemption Fund.
in Federal Reserve Agents' Gold Fund.
in the Gold Settlement Fund.
"While it is true that these funds are gold deposits -21aced
with the Treasury in trust for certain authorized statutory trust
p,urposes, the possession is with the Treasury. Title to these
Itunds could not be given to or vested in the Treasury by any ac0± the Governor or the Federal Reserve Agent or any other
officer of a Reserve Bank. The 'control' of a reserve bank is
yested by law in its 'Board of Directors', and any disposition of
lts gold with any legal authority could only be had by the Board
Directors. And, under the plan suggested, any demand of the
...reasury -anon or compliance with such demand by an officer of a
t eserve Bank would be ineffectual to vest title to the gold in the
vernment. For the sale reason—that is, lack of authority in
bank officers to pass title--no title could be vested in the
Overnment in the go1,1 coin or gold bullion, by action of the
rficers in compliance with the plan.
"A directors' meeting would have to be held and, laying aside
for the present 1,he authority of directors even in dealing with
,
gold reserve of a central bank, the holdings of such meetings
uld contravene the evidence nurnoses of the plan and the devalualon -oroposed coincident with the plan. That has been said. as
0 the imoossibility of passing of title under the plan is
es eeially applicable to the gold held by the Federal Reserve
46tc:ent, whether it is in his possession or is deosited in trust
,,
4".th the Treasury, since under the law this gold is held by him
as such
fllY as trustee for holders of Federal Reserve notes, and
ustee he would have no right to transfer the title to such
rust gold to the Government or any other party.
under the
"Again, title to the gold could not be obtained
declaring
")rol
writing
a
"ed plan by giving to the Reserve Bank
)
for its
certificates
ilat the Reserve Bank is 'entitled' to gold
such
of
That is not payment, and if payment, the giving
Congress
all °bligation is nrohibited under joint resolution of
brol;ating the gold clause, in which resolution the Government
language
8 Prohibited from making any obligation containing
or a
gold
in
ecifYing that the 'obligation shall be paid
'
si
r
n
j
Z
516
12/2246
tp
-6-
kind, of coin or currency.,
"The Reserve Banks have only $
of gold coin and
bullion that is not in the hands of the Treasury. Under the
Plan possession of this gold might be obtained, if it were not
for the lack of authority of the bank's officer to deliver
possession, but in no way under the plan could title be obtained.
"It would be futile to adopt a plan that could not accomplish
purpose
and which would not vest title in the Government.
it8
"Third: The plan is unworkable.
"This is true, first, because of the legal difficulties
discussed, especially the lack of authority in the bank's officers
to deliver title, and, second, because no bank officer, in the
absence of such authority, should dare to part with the bank's
gold and in my opinion would not take this responsibility, but
would immediately refer it to the directors upon whom the responsibilitY rests. This would involve the calling of a directors' meeting, the time involved in that procedure, the publication of devaluation to the bank's officers and to one hundred and eight
directors, and, however proper that might be since the survival
of the bank is involved, the plan would fall in this procedure and
d
evaluation would become public property.
"Consideration, too, should be given to the question as to
Whether these bank officials should be required to choose between
a- course which would subject them to the criticism of their directors, if they arrogated to themselves the power vested by law in
their directors, or a course which might subject tnem to the
PrIaltY of the law against hoarders. I am of opinion that these
Officers have not merited the necessity of such a choice, and I
r 1 also of opinion that the record of these banks in support of
a,
,
17 A
dministration's recovery program should preclude the possilit? of the imposition of such a plan upon them.
"Fourth. rielan
is unnecessary.
p
,
is not necessary to resort to this or any other plan
7
is full
-,1
1 sn
the law can provide very speedily a full plan. This
iy an can be provided by Congressional legislation which could
e had im-lediately after devaluation. This Congressional action
ratify the devaluation and remove the constitutional quesi°ne surrounding the Thomas Amendment. It' could provide for
rIPsnsating advantages to the Reserve Banks for taking their
"
,Tj-,d ana remove the constitutional doubt as to such taking
7!.thout compensation. It could give necessary protection to
Reserve Banks in event of a later revaluation. No private
1'n of devaluation could provide such necessary protection,
!
'nd the proposed plan is devoid of such protection.
It would remove the uncertain legal problems involved
iii a .,
PPlyini; the anti-hoarding law or laws for improving the
arellcy System in taking possession of this gold. It could
517
12/22/33
"make effective the title to the gold and could provide, through
Civing certain compensating advantages to the reserve banks, for
'Lie application of the profits made.
"All of this is so simple, so straight, and so effective
that it should be followed. It would remove a large element of
criticism which would follow devaluation under any other plan.
Congressional action is going to be absolutely necessary in
connection with devaluation. It can be of no practical effect
ratnout determination of many monetary problems involved in its
application. Congressional action could well embrace this problem of nrofits.
fth: An attempt to nut the plan into operation would reat disastrously to the Federal Reserve System and to the entire
anking and credit situation and would be inimical to the Administration.
"This is equally true whether the plan succeeds or fails. It
would be unwise to subject the System, the banking situation, and
the Administration to the harsh criticism that will follow the
attempt. It would be more unwise to accept the criticism and then
fail in the plan, and this outcome would seem certain.
"We must realize what is being suggested. It is to take the
gold reserves from the System and to replace them with gold certificates that may not be redeemed in gold; to deprive the System of
what the law says it must have; to leave sixty per cent of the curl'efleY off the gold base that the law requires; to do this without
Itlotice even to the Central Banks themselves; to raise large ques,10fl5 of the goodness of reserve currency; to jeopardize in cerin contingencies even the solvency of the Reserve System; to have
the reaction
of this situation upon the banking structure of the
nntry, probably to cause large withdrawals from the Reserve Banks
'flemselves: all followed by a distrust of the whole banking structure•
c, "The method of anproach of this plan will bring its own criti_t8m. All this without necessity when the straight path is the
!_11:re?le path to the end desired. The Administration should not be
"IlbJected to this criticism.
"1 respectfully suggest that the success of the proposed plan
reevo+.
in putting title in the Treasury to the gold should be
Treasury the
theast thingthe Administration should want. In the Treasy
Cold
(2) could
or
1110 (1) remain in the treasury and not be used,
"
c- sold by the Treasury and this it would not want to do, or (3)
117
1 1d serve as the base for an issue of gold certificates, and then
A,Ader the law could be used for no other purpose. Neither the
7-ministration nor the Treasury would want such an issue of gold
certifieates nor such a limitation upon the gold. At present gold
T7tificates are not allowed to circulate. If circulated by the
TreesIlrY they must be redeemed in gold by the Treasury, or the
easurY would be in the anomalous position of issuing gold certi-
r
518
12/22/33
-8_
"ficates not redeemable in gold. If redeemable in gold, then
three or more billions of gold would be payable to the public
on these gold certificates and could be hoarded or exported
by the public. And this in the face .of the present policy of
the Administration in respect to gold.
"As against this defenseless situation, in view of our
present policy with respect to gold, exactly the reverse would
)
c oollr if the gold was left in the Federal Reserve Banks. There
all the gold would be for reserve purposes, and as the base for
an issue of currency redeemable in gold or lawful money. Federal
reserve notes would be issued and the present policy in regard
to cola would be preserved. The profit on the gold as allocated
by Congress to the Government would be credited by the Reserve
lablks to the Government and would be available in lawful currency
or in deposit credit for meeting Government obligations. The
Cold would remain in the Reserve Banks for other purposes in
accord with Governmental policy.
"I trust it may not be necessary but in conclusion I must
ask, if my objections are overridden and this plan is adopted,
that the confidence reposed in me in this matter be broadened
to embrace the Governor and Chairman of each reserve bank so
that they may be fully informed and be guided by their own view
of their responsibility in the matter.
"I regret the length of this memorandum. To have said less
would have been to fail the Administration and to fail the Reserve System. This I would not do.
Respectfully submitted,
Governor, Federal Reserve Board.
"Total gold in the Treasury and in Federal Reserve Banks is
$4,012,918,000
Or this
$4,012,918,000, $3,201,941,000 is held in the
different
agencies of the Treasury as follows:
San Francisco Mint
New York Assay Office
Philadelphia Mint
Denver Mint
Seattle Assay Office
New Orleans Assay Office
Cashier's Office, Washington .
1,439,799,000
879,610,000
503,075,000
365,022,000
2,194,000
1,308,000
10,933,000
Total . . . 3,201,941,000
519
12/22/33
-9--
The remaining $810,977,000 of gold coin and. bullion is
located in the Federal Reserve Banks as follows:
New York
Chicago
San Frpncisco
Boston
Richmond
Cleveland
Philadelphia
St. Louis
Minneapolis
Dallas
Kansas City
Atlanta
Total
$406,430,000
134,707,000
92,906,000
47,616,000
29,443,000
22,738,000
20,549,000
12,476,000
11,849,000
11,805,000
11,280,000
9,137,000
810,977,000
"In addition to gold coin and bullion the Federal Reserve Banks
hold gold certificates as follows:
New York
Chicago
San Francisco
Boston
Richmond
Cleveland
Philadelphia
St. Louis
Minnearolis
Dallas
Kansas City
Atlanta
Total
$264,797,000
314,059,000
29,160,000
48,644,000
23,717,000
.89,332,000
92,870,000
16,180,000
18,462,000
12,478,000
18,087,000
15,010,000
942,796,000
ld of the Federal Reserve Banks in the Treasury is as
Iollows:
Collateral for Gold Certificates
held by Federal Reserve Banks
Federal Reserve Agents gold fund
collateral for Federal Reserve notes)
$942,794,000
1,105,174,000
Gold Settlement Fund
673,403,000
Gold Reaermption Puna
40,888.000
Total
2,762,259,000
5"0
12/22/33
-10"The total gold reserves of the 12 Federal
$3,573,236,000
Reserve Banks are
Gold in the Treasury other than Federal
Reserve Gold is
439,682,000
Of this $219,391,000 is collateral for gold
certificates in circulation ,outside of Federal Reserve Banks and $156,039,000 is reserves against United States notes, $30,329,000
against redemption funds for national bank
notes and Federal Reserve bank notes and
$33,923,000 free gold.
Gold certificates in circulation outside of
Federal Reserve Banks, $219,391,000, and gold
In circulation outside of Federal Reserve and
Treasury, $311,045,000."
At 12:58, during the course of the reading of the memorandum,
Chair
man Rewton and Acting Governor Johns, of the Federal Reserve Bank
(If. Atlanta, having just arrived by train from Atlanta, entered the meetana
Meetinp
rtleeti
at 1:54 n. m. Mr. Miller entered the meeting.
At 2:58 the
was adjourned and at 4:24 n. m. those present at the morning
rePssembled, with the exception of Messrs. O'Connor and Martin.
At 4:40 p. m. the Board members withdrew and at 5:15 D. m. all
who
"a been present at the previous meetings reassembled, with the ex-
ception
of Messrs. O'Connor and. Martin.
During the meetings a number of the Governors present asked
that
they be
carry
furnished some statement in writing which they could
134cit
with them to their boards of directors and it was agreed on the
Dart or
the Board that a statement of the Board's position should be
DreDez
ed- It was also agreed on the part of the Governors that they
!Iolaa
1)1'eDare a statement of their views.
The understanding was also
521
12/22/33
-11-
reached that the meetings of the boards of directors of all of the
?Mersa reserve banks would be called for Wednesday, December 27, 1933.
In the course of the discussion reference was made to an opinion
wadressed
to the Federal Reserve Board under date of December 21 by Mr.
liewt°11 D. Baker, who had been retained by the Board as special counsel
14 this matter.
A copy of this opinion and a supplemental memorandum
'
844ressed to Governor Black: by Mr. Wyatt under date of December 22,
1933, will be found attached hereto.
SECRETARY'S NOTE:
At a separate meeting of Board members,
4 st
atement of the Board's position was formulated and at a subsequent
meeting the same day this opinion was read to the Governors. The Board
later
received from Governor Harrison a statement of the views of the
(h)
lrern
-°rs, copies of which, he informed the Board, were furnished to
all of the Governors.
The statement read as follows:
"The conference considered the report which Governor Black
made to the
meeting relative to the desire of the Administra,
tion to
make appropriate arrangements to secure title of all
Cold held by the Federal Reserve banks or Federal Reserve Agents
t
'1(3 that if and when the President of the United States decides
13° exercise the power to devalue the dollar conferred upon him
lle so-called Thomas Amendment, the profit on any such gold
L:Ju-Ld automatically and simultaneously inure to the benefit of
‘ns tililited
States.
di
While those present, of course, have had no opportunity to
:
d scuss the various questions presented with their respective
reotore, it was nevertheless their informal opinion that the
P
et °fit on gold held by the Federal Reserve System resulting from
00'egal devaluation of the dollar Should in principle go to the
v ernment. They feel it is most important, however, to point
1:t that the choice of steps taken or the procedure followed by
t4 e Government to realize this profit, in the event of devaluali'°11, have many serious aspects and that in the interest of the
public, any
sclera' Reserve
System, the member banks, and the
ji
Z
522
12/22/33
-12-
II
plan adopted should, in the orinion of the Conference, definitely
avoid divesting the Federal Reserve banks, for any period of time,
of both the title and the right to the gold held by them
as reserve against their notes or their deposits.
"The Conference is of the opinion that any procedure which
even in the slightest degree disturbs the confidence of the public in the integrity of the position of the Federal Reserve banks
or the sanctity of their gold reserve will probably result in a
banking crisis the extent of which it is difficult to estimate.
In these circumstances it is believed that there is the gravest
rlsk to any plan of action, designed to give to the Government
the gold profit resulting from devaluation, which is based on
the hypothesis that the title and the right to all gold held in
the reserves of the Federal Reserve System is to be transferred
to the Treasury, leaving title to no gold in the Federal Reserve
The Governors, in the short time available today to study
the question, see no way by which the profit on gold resulting
from devaluation can be transferred to the Government, without
the serious threat to public confidence in our banking system,
.except by appropriate Congressional action which at the same time
provides for the protection of the necessary gold reserve against
the obligations of the Federal Reserve banks.
"In the event that the Government decides that Congressional
.ction is inadvisable or inappropriate but that the profit Should
be given to
the Government by other means, the Governors are of
the opinion that no steps can be taken by the Federal Reserve Bank
except by action of their respective boards of directors. Having
in mind the importance of a thorough exploration of the various
Possibilities presented today for our consideration, the Governors
are arranging for meetings of their respective directors on or before next Wednesday."
Thereupon the meeting adjourned.
143---GALL n
Secretar.
4
:9Provea:
Governor.
523
December 22, 1933.
Dear Governor Blacl::
Following the delivery to you of
r. Baker's written
()Pinion of December 21, 1933, you called Lttention to the fact
that the cp4 nicn Ed not specifically state his views as to what
action should be taken if a forrnal demand for the gold should be
made upon the Federal reserve banks and agents by a representative
of the Treasury Department pursuant to an order or requisition issued
by the Secretry of the Treasury under the provisions of Section
11(n) of the Federal Reserve .A.ct either with or without a tender of
gold certificates in payment therefor.
I understood la-. Baker to reply substantially as follows:
In such event he would suggest that the Federal reserve
bank8 and agents very carefully refrain from doing anything which
might be construed as constituting a waiver of any legal rights which
theY might have or as an adedssion of the legality of the 6ecretary
of the
..reasury's demand or request or any action taken thereunder,
but that the
Federal reserve banks and the Federal reserve agents
ah°111d yield possession of the gold under formal legal protest,
rece4...
.,-vIttc under formal protAt any gold certificates or other form
of currenc ;i
tendered and deliver to the representative of the Treasury
DePartment a dignified written statement giving notice that the bank
was. acting under erotest and with full reservation of its legal
rights in the
premises.
Respectfully,
alter
General Counsel.
524
December 21, 1933
TO
The Federal Reserve Board.
The questions to be considered arise out of the desire of
the
Treasury of the United States to sucure title to the gold in the
P"session of the Federal reserve banks in anticipation of a reduction
the value of the gold dollar, so that the profit resulting will
—
becoum
property of the Federal Government.
The gold in question is in five categories:
the
Free gold in
Possession of the Federal reserve banks, gold pledged with the
l'ecieral Reserve Agents and in their possession, gold pledged with
the Feder al
Reserve Agents and deposited in the Treasury, the Gold
Ileclemption Fund and the Gold Settlement Fund deposited in the Treasury
IV the
Federal Reserve Banks.
In some instances this gold is in coin
°r bUllimas and, in some, in the form of gold certificates.
For
eillIPlicity it is assumed that the President, in the exercise of the
PITher ootferred upon him by paragraph (b)(2) of Section 43 of the Act
4PProved
Ilay 12, 1933, (the Thomas Amendment) as amended by public
Ilell°14ti°n approved June 5, 1933, is about to proclaim a less weight,
ix
€ltEti318 of gold, as "the standard unit of value" or dollar, and that
the
difference between the gold in such new standard and the gold in
the existing dollar will constitute a profit to the holder. Clearly,
ir t
"0 gold now in the possession of the Federal reserve banks can
be t
rellsferred with title to the Government before the proposed change
525
0 the
Federal Reserve Board
2
in standard is made, the profit will inure to the Government and if
elleh Change is made while the possession and title to the gold is
still in the hands of the Federal reserve banks the profit would
accrue to the banks.
It may be assumed that the profit in question, if permitted
in the first instance to accrue to the banks, would be subject to the
Power of Congress to be covered into the Treasury after due provision
had been made to
meet all the obligations of the Federal reserve banks,
in view of the power reserved to Congress to abolish the Federal
Reserve System and upon liquidation to reeeive for the benefit of the
Gelrerflment all surplus remaining after the obligations of the banks
to their depositors and stockholders were fully satisfied. If, therefore, it should be provided by an act of Congress that all or any part
cif the prospective surplus should be paid over to the Treasury, the act
14°111d be valid and effective as to so much of said profit as would
ill fact constitute a liquidated surplus above the obligations of the
bulks.
It is not, however, proposed now to seek legislation of this
e°rt. but it is rather suggested that at the invitation of the Treasury
the Federal reserve banks, acting upon the advice of the Federal
Reserve Board,
should voluntarily surrender their gold to the Treasury
knd receive in exchange therefor gold certificates. The theory of this
4PPeara to be that the effect of this would be to vest in the Federal
526
.45 federal
Reserve Board
T0
t
3
Government title to the gold and replace it in the Federal reserve banks
with eo-oalled
gold certificates which could be redeemed by the Federal
Government, after devaluation, by quantities of coin or bullion calculated into
11(1111.7elent dollars at the less content in grains of gold.
Whether the Federal reserve banks should voluntarily comply with
this r°quest
or be advised so to comply by the Federal Reserve Board is
the
question to be considered.
•
Several important considerations must be remembered. The valid.
itY of the
so-called Thomas Amendment has never been judicially passed upon.
801115 of its
features are open to grave doubt. It is possible to question
the
constitutional validity of the delegation by Congress of the powers
ther
(14:11 confided
to the President. Only a future judicial determination
0044
the
make certain that a new standard unit of value, when proclik114 A
5 bY the President, will be a valid standard.
'
The powers
and duties of the Federal Reserve Board and of the
Peclartti
reserve banks must also be held in mind.
Reeerve
With regard to the Federal
Board, it is clear that it has no power to direct the Federal
Ileaerve banks
to enter into the proposed arrangement.
The Federal Reserve
8:4114111414 created
primarily to furnish an elastic and reliable currency.
c3biect was
directed to be attained by the creation of real as
4ietillguished from fiotitious or theoretical reserves and by expanding
ecntrket
1216 the currenay to meet the needs of business. The System
i44Qt charged
with the operation of the Treasury of the United States
(1:k413t thIlt it may be used as a fiscal agent, but the language of much of
527
To the
Federal Reserve Board
4
the
Act and the whole spirit of
it plainly impose upon the Federal
reserve banks, F:s
trustees of important public interests, the duty of
8
4 u1ing the soundness of Federal
Reserve currency and of the banking
alratem of the United
States which is subjected to a disciplinary control
to 41,
e extent at least that banks
become members of the System by bec°ming s
tockholders of Federal reserve banks.
The Treasury and the Federal Reserve
System, therefore, have
eeParate responsibilities.
While it is obviously expected that the
tw° IltZencies
will cooperate, within the limits of their
powers, in the
cl'estion and
maintenance of a sound and harmonious financial system,
the Federal
Reserve System is nevertheless an independent agency exereieing its
functions free from control by the Treasury and in response
to it'll own
obligations as they are stated by the law of their creation and
theiv,
-4 own boards of directors, acting under
the responsibility of
de termine
to be consistent with the law and in furtherance of its
PUrPose.
The gold in
the hands of the Federal Reserve System is there
14141'
statutory requirement for specific
purposes. The Federal Reserve
selected by the Federal Reserve
Board are the custodians of a
ellbatEizItui
Partt of this gold, but the limit of
their powers and the
1141744e of
their custody are definite.
All of this gold is dedicated to
14414
cUltir objects
and cannot lawfully be used for any other object.
It seems
clear that neither the Federal reserve banks nor the
528
froths
Federal Reserve Board
Federal
5
Reserve Agents have any right to prejudice the safety or
"lvelicY Of any of the
purposes for which gold is entrusted to them
"ealing With the gold in any way or for any
reason which, in. their
JUd
-116, does not further the
object of the trust upon which they hold
it. si
-rice by the terms of the problem whichwe are considering the
hese. 4
'
84°n and title of this gold is sought
as a means of transferring
tot
"'e Federal
Government and from the banks an anticipated profit
a„
-47 action
taken in furtherance of that purpose is taken with
edge
of the proposed devaluation of the gold
dollar, it in clear
that
twither the
Federal reserve banks nor the Federal Reserve Agents
hoe
allY right, by
voluntary agreement, to cooperate in the proposed
U4dert ki
a -4. They are trustees
who must resolve all doubts in favor of
their t
11.18t and who
cannot be called upon to waive rights of their trust,
8 the
tnaY hereafter
be determined, by present acquiescence in a plan
or
- af
fecting the property in the trust when their own action
is
40t
tated by a
belief that the action proposed will benefit the trust.
1 arils
therApore,
—
of the opinion that neither the Federal reserve
banks
he
Federal Reserve
Agents should voluntarily cooperate in the pro-
1+
.is
This
1111der ellgtasted
leaves other aspects of the problem of the
greatest gravity.
that representatives of the Treasury Department
operating
aUbsect4
4.c41 (n) of Section 11 of the Federal Reserve Act,
bY8
as amended
eotion.
the Act of March 9, 1933, make a formal
demand upon Federal
Ve
"ke and Federal Reserve Agents for
the delivery of all gold coin,
4v
529
Toth
geld
6
Federal Reserve Board
bu1i0n and gold certificates owned by them, such action being
Predicated upon the power of the President to fix the new standard
alld the requirement that all other currency of the Government be mainat a parity with the standard so fixed.
The power of the
Seeretar..
y of the Treasury to make this demand is not wholly free from
4°tIbti and the effect of such a demand adversely made would manifestly
be di
sastrous* In the erection of the Federal Reserve System the
C(3110.
313s manifested its intention not to rest the currency authorized
to be .
Issued by Federal reserve banks upon the credit of the GovernZett.
"
b ed
The now well-established power of the Government to issue money
solely upon the Government's credit was not resorted to, but
Iltther a currency was created which rested upon values known to exist
i4 gold
,
anu certain commodities as represented by eligible paper. These
clbligations are, of course, the obligations of the United States when
i"ued but
the Federal reserve banks are entrusted with the custody of
(lerialite proportions of gold and other values as an assured basis for
the °bliZations.
roaerve totes
The people of the United States understand that Federal
rest upon gold, in substantial part, for their redemption
- and if it were suddenly to become known that all the gold in the
/11448 of
the Federal reserve banks had been taken over by the Government,
then
of an instantaneous and disastrous loss of confidence in
the
zrakt
volume of Federal reserve currency outstanding is apparent. It
14
311°13ted that the Government would pay for the gold so taken from the
Pod
eral
°serve banks and Agents in gold certificates, but it is a matter
530
To the
Federal Reserve Board
7
or common knowledge that the holders of gold certificates
cannot at
Present have them redeemed in gold. It would, therefore, follow
that
411 the gold had been taken
and in its place gold certificates left which,
though theoretically,
are not practically redeemable in gold. This would
111694 that the Federal
reserve notes issued would become an issue resting
°111Y upon the
credit of the Government, a thing which was not intended
When they
were authorized and does not seem to be intended by any of the
tacre recent
financial legislation.
The orderly way to deal with the difficulties presented by
this Bituation is obviously by an act of Congres
s. Such an act would
Pr°vide its own
machinery for determining the extent to which any profit,
PPIltslItlY accruing to the Federal reserve banks, could be treated as a
"
plus and covered into the public Treasur
y.
Such a course is free from
4frieultY in view of the fact that all the gold in the country is now
either 14 the possession of the Government
or in the possession of the
Peder
Reserve System and there subject to Congressional action. As
'
c ese is about to meet, no apparent embarrassment from lose of time would
hoe A.
1.0 be encountered.
It is, however, suggested that there is necessity
tor e
4r1Y Presidential action fixing the new standard before
Congress assembl
se and that those who are advising the Treasur hesitate
y
to have the
4" etandard
fixed until the gold held by the Federal Reserve System is
riret
4.4
the Treasury.
be di
r
sPfted
°r the
As a consequence, it may be that the Treasury will
to insist upon making demand upon the Federal Reserve banks
immediate surrender of the gold in their possession, and the
531
To the
Federal Reserve Board
8
Practical
question arises as to what should be done by the Federal
reserve banks and Agents in the event of such
demand.
Ae I have above indicated, I do not believe the Federal
Neerve banks
or Agents have a right voluntarily to comply with such
41341411d or to take any action which waives any rights they have with
tsgard to the gold
they now hold.
On the other hand, the consequences
f Public contention
and controversy as between the Treasury of the
Ullited States and the Federal Reserve System must be avoided, if possible,
Both the
Treasury and the Federal Reserve System are aware of the fact that
the tilses are unusually perilous and that such controversy might in itself
be
„
qlsastrous as any conceivable solution of the question of rights
14"lved.
I, therefore, venture to suggest that if the Treasury makes a
46111641d under subsection (n) of Section 11 of the Act, the Federal reserve
elld Agents should hand to the. Treasury Department, or its Demand Agent,
114 /+4
4
11- -"ng, a formal protest against the action proposed to be taken, so
froled as to
preserve and not waive any rights the Federal reserve banks
nt8
444 A8e
have with respect to the gold in question. I can see no
reaso
4 11/1Y the Treasury under such circumstances may not tender gold
certificates and rely upon the demand and tender to effect any change of
title
to the gold
which the Treasury may ultimately be held to have had
ri L
4t to
enforce.
if
Such a course would obviate any such controversy, and
ah..
"tion the Treasury can take either under the sections already cited
Or
EillY
other section of the applicable law is effective to transfer to it
the title
to this gold, it will have been transferred and the rights of the
14easury
with regard to it fully protected.
Newton D. Baker.
@FedFRASER