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f e d e r a l r e s e r v e b o a r d
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WASHINGTON
ADDRESS OFFICIAL CORRESPONDENCE T O
T H E FEDERAL RESERVE BOARD
June 27, 1929
S t . 6248
Dear
S i r :
At t he last Governors ' conference, consideration was given t o
to pi c I I I -D Redemption Fund
f o r
Federal reserve notes.
I s
there
an y need f o r t wo separate funds? a n d t h e conference voted that the
Chairman appoint
a
committee
t o
confer with
t h e
Treasury of f ic ia l s
an d express th e opinion of the conference that a n effor t should be
made t o do a w # with t h e Federal reserve agents' redemption fund i f
agreeable
t o t h e
Treasury,
The
secre ta ry
of t he
Governors' confer-
ence h a s since advised oe t h a t th e Chairman appointed Mr. I.R.Rounds
of the Federal Reserve Bank of Hew York and myself a s t h e committee
t o
confer with
t h e
Treasury of f ic ia l s .
F o r your information, I am enclosing a copy of a memorandum
dated March
28, 1929
with reference
to
this subject which explains
t h e h i s t o r y of the two separate redemption funds and t he use made
of
them
b y t h e
several Federal reserve banks which,
i t
wi l l
b e
noted, i s n o t uniform.
Information
now
avai l able indica tes that
ten of the
Federal
r e -
serve banks make cross entries between th e agent's redemption fund
a n d t h e bank's redemption fund i n connection with a l l shipments of
mutilated Federal reserve notes to the Treasury by them or by other
Federal reserve banks
f o r
their account while
two of the
banks make
no e n t r i e s tiiatever i n th ei r redemption fun ds i n connection with such
ship ment s. These banks merely reduce on t h e i r own books th e amount
of
Federal reserve notes outstanding.
I f t he
procedure followed
b y
these two banks i s adopted by the other t en the only Federal res erv e
notes which will b e charged to the redemption fund b y t h e treasury
wil l b e those rec ei ved from sources other than t h e Federal reserve
banks a n d such redemptions can be accomplished through th e bank's
redemption fund
a s
e a s i l y
a s
through
th e
agent's redemption fund.
I t would seem fr om t h e above that there i s no occasion f o r t h e main-
tenance
of the two
separate redemption funds
a n d t h e
el iminat ion
of
one would n o t only simplify somewhat th e accounting procedure inci-
dent
t o t h e
re t i rement
of
Federal reserve notes
b u t
would also make
i t
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necessary
t o
show only
on e
redemption fund
i n
publ ished repor ts ,
thereby removing a source of confus ion to many students of the System,
Since t h e suggestion f o r t h e discontinuance of one of the
redemption funds was fi r s t made another very pr ac ti ca l reason h a s
developed which seems t o make t h e change de si ra bl e. Under t h e p r o -
cedure followed
b y a
major i ty
of the
banks, tr a n sf er s
a r e
made between
the two funds upon receipt of notice from t h e Treasury that Federal r e -
ser ve not es have been re ce iv ed
f o r
ret i rem ent . This ne ce ss i ta tes main-
t a i n i ng a close watch on the amounts of th e respective redemption funds
i n
order that there
may be a t a l l
times
a
su ff ic ie n t balance
t o
e f f ec t
t h e redemptions. I n view of th e impending change i n t h e s ize of the
currency, several
of the
Fe de ra l res er ve banks have though t t h a t some
change of procedure would be necessary i n order that t h e more rapid r e -
t i rement
of
Federal reserve notes which
i s
ant ici pat ed fol low ing July
10 can he made wit hout building up too large a redemption fund an d thus
poss ib ly deple t ing t h e reserves agains t deposi ts . The procedure su gges t-
e d i s a s fol lows:
1 s t - That with t h e approval of the Secretary of the Trea-
sury, t h e ag en ts ' redemption fu nd s be closed a n d a l l
Federal reserve notes presented t o t h e Treasury f o r
redemption be redeemed out of the banks' go ld redemp-
tio n fun d. This, of course, would be done with the
understanding that i f a t any future time circumstances
should arise making desirable
t h e
maintenance
of
such
funds , t h e Secretary would request t h e Federal Reserve
Board
t o
require each agent
to
r e e s t a b l i s h
h i s
fund.
2nd - That, t h e procedure incident to the ret i rement of Fed-
eral reserve notes
h e a s
fol lows:
a - That each Fe dera l res er ve bank cha rge to an
account en t i t l ed Mut i l i t ated Federal reserve
notes forwarded f o r redemption a l l notes of
i t s issue forwarded to Washington either by
i t s e l f
or by
ano ther Fede ral r es er ve bank
f o r
i t s accou nt. (This i s ident ical wi th t h e p r e -
sent -procedure).
b - That upon receipt of advice from t h e Treasury
that notes shipped by th e hank o r by another
Federal reserve hank f o r i t s account have
been received
i n
Washington entries
be
made
de bi t in g Federal reserve notes outstanding
an d
cr ed i t i ng Mut i l i ta ted Federal reserve
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S t . 6aUg
notes forwarded, f o r redemption thus acco mplis h-
i n g t h e re t i rement of tiae notes with a minimum
amount of bookkeeping. This procedure would, of
course necessi tate t h e Federal reserve agents
reducing on their books th e amount of Federal r e -
serve notes outstanding.
I t
would
n o t
require
e n t r i e s i n t h e redemption funds on the books of
th e
Federal reserve agents,
t h e
Federal reserve
banks
or t he
Treasury
of the
United States.
The
proposed change
i n
procedure
h a s
already been discussed
i n -
formally
n t h t h e
Treasury
and our
committee would like
t o
have your
advice a s promptly a s poss ib le as to whether or no t t he proposed plan
lias your approval. I f t h e plan meets with t h e approval of the agents,
t h e matter will be taken up with t h e Treasury formally With a view to
having t h e necessary instruct ions issued a t t h e ea r l i e s t p rac t i cab le
date.
Very truly yours,
E. L.
Smead, Chief,
Division
of
Bank Operations.
LETTER TO ALL FEDERAL RESERVE AGENTS*
Enclosure.
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March
28, 1929
M r. McClel land SUBJECT: Redemption fu nd s ^ga in s t Fe dera l
M r. Smead re se rv e no te s .
With regard t o top ic I I I . -D on the program f o r t h e next Governors'
Conference Redemption fu nd f o r Federal reserve notes. I s there any need
f o r t wo separate funds? I wish t o comment a s follows;
Section l 6 o f t he Federal Reserve A ct provides that t h e Board shall
require each Federal reserve bank t o maintain on deposi t i n t h e Treasury
of the
United States
a sum i n
g o ld su f f i c i en t
i n t h e
judgment
of the
Secretary of t he Treasury f o r t h e redemption of t h e Federal reserve notes
issued t o such bank, but i n no event less than 5 p e r cent o f t h e to ta l
amount of notes issued less t h e amount of gold o r g o ld ce r t i f i ca tes h e ld by
th e Federal reserve agent a s co l l a t e ra l secu r i ty . The same section also
provides that upon t h e request of t he Secretary of t he Treasury t h e Federal
Reserve Board sha ll r eq ui re
t h e
Federal reserve agent
t o
transmit to-the
Treasurer
of t he
United States
so
much
of t h e
gold held
b y h i m a s
c o l l a t e r a l
secur i ty f o r Federal reserve notes a s may be requ i red f o r t h e exclusive p u r -
pose o f t h e redemption of such Federal reserve notes. I t i s apparent from
t h e
above that
t h e Ac t
req u i res
t h e
Federal reserve banks
t o
maintain
a
gold redemption fund with t h e United States Treasurer f o r t h e redemption
of Federal reserve notes b u t th a t t h e maintenance of an agents' gold r e -
demption fund
i s
discret ionary with
t h e
Secretary
of t he
Treasury.
Under date
of
January
24, 191b, Mr.
McAdoo, then Secretary
of t he
Treasury, requested t h e Board t o require each Federal reserve agent t o
transmit gold equal
t o 5 p e r
cent
of the
amount
of
notes against which
gold h a d been deposited with h i m , t o t h e Treasury o f t h e United States f o r
t h e exclusive purpose o f t h e redemption of such notes. The establishment of
redemption funds
b y t h e
agents
was
necessary
a t
that time
a s a
number
of
t h e Federal reserve banks h a d deposited gold with t h e agents i n a n amount
equal t o t h e total amount of Federal reserve notes outstanding a n d t h e r e -
fore were
n o t
requ i red
t o
maintain
a
gold redemption fund with
t h e
United
Sta tes Treasury. From experie nce durin g t h e past several years there does
n o t
seem
to be
much pr os pe ct th at
any
Federal reserve bank will
i n t h e
future deposit gold with t h e agent equal t o t h e amount of Federal reserve
notes outstanding and consequently i t i s worthwhile t o review t h e u s e made
of
each
o f t h e
redemption funds
i n
order
t o
ascertain whether
the two
funds
a r e
necessary
o r
d es i rab le .
The present method of redeeming Federal reserve notes I understand
t o b e a s
foll ows : When Feder al re se rve note s
a r e
re tu rned
t o t h e
Treasury
f o r redemption b y a Federal reserve bank, other than t h e bank o f issue,
settlement between Federal reserve banks i s made i n t h e gold settlement
fund cl ea ri ng . Upon re ce ip t o f notice from t h e Treasury that such Federal
reserve notes have been received
an d
package counted
th e
Federal reserve
S t .
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banks a n d agents of Now York a n d Chicago merely reduce on t h e i r books the
amount of Federal reserve notes outstanding. I n t h e case of t he other t en
banks t h e United States Treasurer charges t h e redemption fund of t h e agent
and c r e d i t s t h e redemption fund of t he bank with t h e amount of notes r e -
ceived,
a n d
corresponding entr ies
a r e
made
by th e
bank
a n d
agent
i n
thei r
redemption funds, a n d i n addition they reduce th e amount of Federal reserve
not es ou ts ta nd in g. When not es a r e sent t o t h e Treasury b y t h e bank of
i ssue t h e Treasurer , i n t h e case o f nine o f t h e banks, ch ar ge s t h e redemp-
tion fund of t he agent a n d c r e d i t s t h e redemption fund, o f t h e bank f o r t h e
amount
of
shipment.
I n t h e
case
of th e New
York
an d
Chicago banks
t h e
Treasury merely notifies
t h e
bank
a n d t h e
agent
of t he
r e c e i p t
of t he
ship-
ment a n d they make t h e necessary en t r ies t o reduce t h e amount of Federal
y reser ve notes outsta nding. I n t h e case of the San Francisco bank t h e
Treasury no t i f ies
t h e
Federal Reserve Board
o f t h e
r e c e i p t
of t he
shipment
and the Board charges t h e agent i n t h e gold fund an d c r e d i t s t h e bank i n th e
gold settlement fund.
I n a l l of t h e
above cases
t h e
work would
b e
s impl i f ied mater ia l ly
and a
considerable amount
of
bookkeeping made unnecessary
i f a l l
banks
handled t h e e n t r i e s t h e same as do the Federal Reserve Banks of New York and
Chicago.
The only other redemptions of Sederal reserve notes a r e t h e
relatively small amounts which find their
way
i n t o
t h e
Treasury mostly
through banks
i n
Washington.
I t i s t h e
presen t p ract ice
o f t h e
Treasury
t o
charge these notes t o t h e stents' gold redemption fund and t h i s i s t h e only
purpose f o r which t h e redemption fund of the Federal reserve agent a t New
York i s -used. These redemptions cou ld very we ll b e made ou t o f t he bank 's
gold redemption fund.
From t h e above i t would seem that there i s now no real occasion
f o r t h e
maintenance
of two
separate redemption funds.
I f one o f t h e
funds
i s t o b e el iminated i t would, under th e Federal Reserve A c t , have to be
t h e agents ' fund and a s t he el imination of such fund would simplify materially
t h e number o f en t r ies requ i red a t t h e Treasury and the Federal reserve banks
i t s
elimination would seem
to be
des i rab le .
( S t .
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