The circular and regulation given below were issued by the Board on December 4:

CIRCULAR NO. 20, SERIES OF 1915.

WASHINGTON, December 4, 1915.

GENERAL OPEN-MARKET OPERATIONS.

The Federal Reserve Act in section 14, under the head "Open-market operations," provides that

"Any Federal Reserve Bank may, under the rules and regulations prescribed by the Federal Reserve Board, 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 of the kinds and maturities by this Act made eligible for rediscount, with or without the indorsement of a member bank."

The Act also provides that every Federal Reserve Bank shall have power—

"To deal in gold coin and bullion at home or abroad

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* * to buy and sell * through (its) correspondents or agencies, bills of exchange arising out of actual commercial transactions which have not more than 90 days to run, and which bear the signature of two or more responsible parties."

Several of these classes of transactions have already been provided for in the circulars and regulations heretofore issued by the Federal Reserve Board as follows:

Regulation F, series of 1915, provides for the purchase of warrants, revenue bonds, etc.

In letters to the various Federal Reserve Banks the conditions have been indicated under which bonds and notes of the United States may be dealt in.

In Regulation S, partly superseding Regulation R, series of 1915, conditions have been established for the purchase of bankers' acceptances payable in the United States in dollars and growing out of foreign trade operations and out of certain domestic transactions.

There remain still to be dealt with the purchase and sale of "cable transfers" and bills of exchange, both domestic and foreign, of the kinds and maturities by this Act made eligible for rediscount, and bankers' acceptances payable in foreign countries and in foreign currencies.

The present circular and regulation is intended to cover these items. The Board wishes particularly to call attention to the purpose of the open-market section of the Federal Reserve Act. It enables the Federal Reserve Banks to exert a steadying influence upon prevailing rates of interest by the use of their purchasing power whenever conditions make such influence desirable, and when, owing to the lack of applications for rediscounts, they are unable to influence rates through the latter means. It also affords to the Federal Reserve Banks the opportunity of purchasing in the open market, paper with a view to providing for their expenses and dividends. The Board is of the opinion that the Federal Reserve Banks should, when occasion warrants, stand ready to engage in open-market transactions, as buyers or sellers, to the extent that it is necessary to carry out the purposes of

the Act.

The Federal Reserve Board does not wish to be understood as encouraging expansion of credits at times and under conditions when there should be contraction, but rather as holding the view that the Federal Reserve. Banks, taking cognizance of the conditions in their respective districts, should avail themselves of the powers granted by the Act as explained in our letter of October 8, 1915, just as they have done in connection with other open-market powers conferred upon them

REGULATION T, SERIES OF 1915.

WASHINGTON, December 4, 1915.

GENERAL OPEN-MARKET OPERATIONS.

I. Definition.

Open-market operations, as contemplated under the Federal Reserve Act, are all those transactions authorized by section 14 of the Act which involve dealings with persons or institutions-whether or not members of the Federal Reserve System-and which do not require the indorsement of a member bank.

II. Operations provided for in this regulation. The present regulation deals with operations in cable transfers and foreign and domestic bills of exchange and bankers' acceptances payable in foreign countries and in foreign currencies. The statutory requirements pertaining thereto have already been set forth in the accompanying circular.

III. Cable transfers and foreign bills of exchange.

In order to carry on open-market transactions in cable transfers and foreign bills of exchange (including foreign bankers' acceptances)—that is, payments to be made in,

or bills payable in, foreign countries-it will be necessary for Federal Reserve Banks to open accounts with correspondents or establish agencies in foreign countries. Such bills of exchange and foreign acceptances must comply with the applicable requirements of sections 13 and 14. As the law prescribes that these connections are to be established only with the consent of the Federal Reserve Board, Federal Reserve Banks will be required to communicate with the Federal Reserve Board whenever they are ready to enter these foreign fields.

The Federal Reserve Board realizes that in dealing in foreign exchange the Federal Reserve Banks must necessarily have wide discretion in determining the rates at which they will buy or sell. It is not necessary that the bills shall have been actually accepted at the time of purchase. The Federal Reserve Board, however, will require that unaccepted "long bills," payable in foreign countries, when purchased, unless secured by documents, shall bear one satisfactory indorsement other than those of the drawer or acceptor, preferably that of a banker. Federal Reserve Banks should exercise due caution in dealing in foreign bills, and boards of directors should fix a limit within which the acceptances or bills of a single firm may be taken.

IV. Domestic bills of exchange.

A bill of exchange may be defined as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a certain sum in money to, or to the order of, a specified person or to bearer.

A domestic bill of exchange is payable in dollars in the United States.

The Federal Reserve Board has determined that a bill, in order to be eligible for purchase under section 14 by a Federal Reserve Bank, at the rate to be established for open-market operations

(a) Must be a bill the proceeds of which have been used, or are to be used, in producing, purchasing, carrying, or marketing goods in one or more steps of production, manufacture, and distribution; but shall not be eligible if its proceeds have been used, or are to be used, for a permanent or fixed investment of any kind; for example, land, buildings, machinery, etc., or for any investment of a merely speculative character.

(b) Must have been drawn by a domestic or foreign firm, company, corporation, or individual upon a firm, company, corporation, or individual in the United States; but need not bear the indorsement of a member bank.

(c) Must have been accepted by the drawee prior to the purchase by a Federal Reserve Bank unless accompanied and secured by approved warehouse receipts, bills of lading, or other such documents covering readily marketable goods.

V. Domestic bills-Conditions of purchase. (a) Before purchasing domestic bills of exchange, the Federal Reserve Bank must secure statements concerning the condition and standing of the drawer of the paper, and, if possible, also of the acceptor of the bill, sufficient to satisfy the bank as to the nature and quality of the paper to be purchased.

(b) No Federal Reserve Bank will be permitted to purchase bills of any one drawer, or issued upon any one maker, to an amount to exceed in the aggregate a percentage of its capital, to be fixed from time to time by the Federal Reserve Board, except when secured by approved warehouse receipts, bills of lading, or other such documents covering readily marketable goods. The aggregate amount drawn on any one acceptor, purchased by Federal Reserve Banks, shall not exceed a reasonable percentage of the stated net worth of the parties whose names appear upon the paper.

VI. Rates.

Federal Reserve Banks desiring to engage in openmarket transactions in domestic bills of exchange shall communicate to the Federal Reserve Board the rate they desire to establish, for review and determination.

CIRCULAR NO. 11, SERIES OF 1915.

WASHINGTON, December 27, 1915.

ELIGIBILITY OF CANDIDATES FOR DIRECTORSHIPS.

The Federal Reserve Board has adopted under date of December 23 the following resolution:

Whereas, It is the opinion of the Federal Reserve Board that persons holding political or public office in the service of the United States, or of any State, Territory, county, district, political subdivision, or municipality thereof, or acting as members of political party committees, can not consistently with the spirit and underlying principles of the Federal Reserve Act, serve as directors or officers of Federal Reserve Banks.

Resolved, That the Federal Reserve Board hereby expresses to the member banks its opinion that no such persons should henceforward be elected or act as directors or officers of Federal Reserve Banks; and prescribes as a condition of eligibility that candidates for election shall comply with the terms of this resolution.

Resolved further, That copies of this resolution be sent to every member bank and Federal Reserve Bank and to all directors of Federal Reserve Banks.

While the Board is of the opinion that the policy outlined in this resolution should become effective at once, directors of Federal Reserve Banks elected prior to the date of its adoption will not be required to resign their positions as such directors until the end of the term for which they were elected.

The following opinions of counsel have been authorized for publication by the Board since the last edition of the Bulletin:

Dividends on Surrendered Stock.

Member banks surrendering stock on account of liquidation or reduction in capital or surplus are entitled to cash-paid subscriptions plus one-half of 1 per cent per month from date of subscription, not to exceed the book

value thereof. If surrendered because of transfer to an

other district member banks are entitled to accrued divi

dend certificates.

DECEMBER 20, 1915.

Sir: This office has been requested to give an opinion on the following questions:

What dividends, if any, is a member bank entitled to receive on stock in its Federal Reserve Bank which is surrendered and canceled before the payment of the first regular dividend(a) On account of liquidation of such member bank;

(b) On account of a reduction in the capital or surplus of such member bank; and

(c) On account of the withdrawal of its membership as a result of its becoming ineligible to hold stock in the Federal Reserve Bank by reason of changes made by the Federal Reserve Board in the geographical limits of its district. Before dealing with these specific questions it is necessary to consider the status of a member bank as a stockholder of a Federal Reserve Bank. Ordinarily a stockholder of a corporation is entitled to share in the net earnings of such corporation after the payment of expenses and the discharge of any obligations such as interest on bonds, preferred stock, etc., which constitute a prior lien on such earnings. In the case of Federal Reserve Banks, however, section 7 of the Federal Reserve Act, relating to the division of earnings of such banks, provides as follows:

After all necessary expenses of a Federal Reserve Bank have been paid or provided for, the stockholders shall be entitled to receive an

annual dividend of 6 per cent on the paid-in capital stock, which dividend shall be cumulaAfter the aforesaid dividend claims have

tive.

been fully met, all the net earnings shall be paid to the United States as a franchise tax, except that one-half of such net earnings shall be paid into a surplus fund until it shall amount to 40 per cent of the paid-in capital stock of such bank.

From this it will appear that the stockholders are limited to a cumulative dividend of 6 per cent; that is to say, if they remain stockholders of the Federal Reserve Bank they are entitled to receive an amount equal to 6 per cent on their cash-paid subscriptions, and if the earnings during any one year are insufficient the unpaid dividends become a charge on the future earnings of the bank.

The stock held by member banks can not, under the terms of the Act, be transferred or hypothecated. Accordingly, when a member bank for any reason ceases to be a stockholder, or finds it necessary to surrender the whole or any part of its stock in a Federal Reserve Bank, it can dispose of it only to the Federal Reserve Bank and the Act undertakes to provide a cash surrender value for such stock.

Section 5 of the Federal Reserve Act provides in part that-

When a member bank reduces its capital stock it shall surrender a proportionate amount Reserve Bank, and when a member bank volof its holdings in the capital of said Federal untarily liquidates it shall surrender all of its holdings of the capital stock of said Federal Reserve Bank and be released from its stock subscriptions not previously called. In either case the shares surrendered shall be canceled and the member bank shall receive in payment therefor, under regulations to be prescribed by the Federal Reserve Board, a sum equal to its cash-paid subscriptions on the shares surrenthe period of the last dividend, not to exceed dered and one-half of 1 per cent a month from the book value thereof, less any liability of such member bank to the Federal Reserve Bank.

From an analysis of this language it appears that the Federal Reserve Bank has a lien on its stock for any liability of the member bank to the Federal Reserve Bank. That subject to this lien the member bank surrendering its

stock is entitled to receive an amount equal to its cash-paid subscriptions plus one-half of 1 per cent a month from the date of the last dividend, provided, this sum does not exceed the book value of the stock of the Federal Reserve Bank.

Where a member bank surrenders the whole or any part of its stock after the payment of the first dividend to the stockholders by the Federal Reserve Bank, the amount it is entitled to receive is clearly specified by the terms of the Act. The question under consideration, however, is what amount a member bank surrendering the whole or any part of its stock is entitled to receive where the stock is surrendered and canceled before the payment of the first dividend.

Considering that part of section 5 above quoted, without reference to other provisions of the Act, it might be contended that member banks are entitled to receive no dividends if they surrender stock in the Federal Reserve Bank before the payment of the first dividend by the Federal Reserve Bank. Such a conclusion, however, must be based upon the assumption that Congress intended to penalize banks surrendering stock before the payment of the first dividend and this assumption is repugnant to that part of section 7 which provides that "the stockholders shall be entitled to receive an annual dividend of 6 per cent on the paid-in capital stock, which dividend shall be cumulative.”

If the stock of Federal Reserve Banks could be transferred and sold a member bank could, in disposing of such stock, reasonably demand a price equivalent to its cash-paid subscription plus accrued dividends, since such dividends are cumulative. It can hardly be contended, therefore, that Congress intended to prohibit member banks from receiving their due proportion of the earnings of Federal Reserve Banks merely because they exercise their right to withdraw by liquidation, which right is specifically given, or because they surrender stock on account of a reduction in their capital or surplus in accordance with the specific requirements of the Act.

In other words, it can not be assumed that Congress intended to impose a penalty for doing what it specifically authorized or permitted member banks to do, and considering the general purpose and intent of the Act the conclusion appears to be fully justified that such banks are entitled to receive dividends of onehalf of 1 per cent per month on their cash-paid subscriptions whether the stock held by such banks is surrendered and canceled before or after the payment of the first dividend to the stockholders of their Federal Reserve Bank. It is necessary, however, to distinguish between the rights of a stockholding bank, which continues its membership in a Federal Reserve Bank, and one which terminates its membership by liquidation or which surrenders a part of its holdings on account of a reduction in its capital or surplus.

In either case the interest of the stockholder surrendering the whole or part of its stock is converted into a claim against the Federal Reserve Bank for the cash surrender value of stock. The amount of this claim becomes fixed as of the date of the surrender and cancellation of the stock. As a stockholder it is entitled to cumulative dividends up to this time, but when its status is converted from that of a stockholder to that of a creditor holding a claim against the bank for the cash surrender value of the stock it is no longer entitled to cumulative dividends out of the future earnings of the Federal Reserve Bank.

It is, therefore, necessary to determine(a) From what date such dividends may be said to accrue.

(b) When the right to cumulative dividends ceases.

(c) The maximum amount which may be paid for stock surrendered under circumstances above recited.

Considering these three questions in the order in which they appear:

(a) In an opinion filed with the Board under date of October 7, 1915, and supplemental opinion under date of November 5, 1915, this office reached the conclusion that dividends should accrue from the date of actual payment

of subscriptions, provided, such payments are made at the time or subsequent to the date fixed in the call of the Organization Committee or the Federal Reserve Board for the payment of the first subscription.

(b) As above shown, the right to cumulative dividends ceases from the date of the surrender and cancellation of stock at which time the stockholder becomes a creditor of the bank to the extent of the cash surrender value of the stock.

(c) The maximum amount any member bank surrendering its stock is entitled to receive is fixed by the terms of the act at an amount equal to the cash-paid subscription plus one-half of 1 per cent per month, provided such amount does not exceed the book value of the stock of the Federal Reserve Bank. The book value is determined by adding together the capital, surplus, and undivided profits and by dividing this amount by the number of shares of the Federal Reserve Bank which are outstanding at that time.

As it is customary, however, for banks to carry on their books certain expenses on the asset side of the ledger, and certain earnings on the liability side in accounts other than the surplus and undivided profits accounts, it is, of course, necessary to deduct from the gross earnings all expenses to date and to carry the net balance into the undivided profit account in order to determine the actual book value of the stock of the Federal Reserve Bank.

Where the expenses exceed the gross earnings and where there is no surplus or undivided profit account from which this net debit balance may be deducted, the book value of the stock will be less than par. In such case the cash surrender value of the stock of the Federal Reserve Bank will be limited to an amount less than the cash-paid subscription.

In this connection attention is called to the fact that Federal Reserve Banks are carrying in their expense accounts the expenses of organization, which include the cost of preparing plates and dies, of purchasing distinctive paper, and of printing Federal reserve notes. Many of the notes so printed are still unissued and

will be used in the future. To this extent this item will represent expenses paid in advance. There are probably other items which are in the nature of investments-that is to say, which represent unused supplies on hand. It would be inequitable to require such items to be charged off during the first few months of operation and banks would be justified in apportioning this expense and charging off such proportion as may seem equitable under all the circumstances, rather than to show an impairment of capital.

If the net balance, after deducting expenses from earnings, shows an amount which would ordinarily be carried to the account of undivided profits, or to the surplus account, a member bank surrendering its stock should be entitled to its proportionate share of such net earnings.

Answering specifically the questions submitted, this office is accordingly of the opinion that member banks surrendering stock in Federal Reserve Banks before the payment of the first dividend are entitled to receive for such stock an amount equal to their cashpaid subscriptions plus one-half of 1 per cent per month from the date of subscription, provided such subscriptions were not paid prior to the date fixed by the Organization Committee or the Federal Reserve Board for the first payment of subscription and provided further that the aggregate of such cashpaid subscriptions and dividends of one-half of 1 per cent per month does not exceed the book value of the stock of the Federal Reserve Bank, this cash surrender value to be applied when member banks surrender stock (a) on account of liquidation of such member banks and (b) on account of the reduction in the capital or surplus of such member banks.

Where stock is surrendered on account of a transfer of membership of a member bank to another Federal Reserve Bank by reason of a change in the geographical limits of a Federal Reserve District, a slightly different situation results. In this case the surrender of the stock results from the action of the Federal Reserve Board in changing the dis