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f e d e r a l r e s e r v e b o a r d

4 8 9

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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  s t .

  zbs  4 9 0

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 .

  6 2 4 8 - a

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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 .

  6 2 4 g - a