Location of Federal Reserve Banks.

It is held, in an opinion of the Attorney General of April 14, that the Federal Reserve Board does not posses the power to change the present location of any Federal Reserve Bank, and that the minimum capitalization of $4,000,000 required by the Federal Reserve Act for Federal Reserve Banks as a condition precedent to commencing business is not a continuing requirement. The conclusions reached by the Attorney General in response to an inquiry submitted by the Federal Reserve Board to the President of the United States are contained in the following paragraphs:

"To sum up my conclusion on the question of whether the Federal Reserve Board can legally change the present location of any Federal Reserve Bank, I am of opinion that the Board has no such power, and that such power is lacking whether there has been alteration or readjustment in the district

lines or not."

"My conclusion as to the second question submitted is that the Federal Reserve Act, in prescribing a minimum capitalization of $4,000,000 for Federal Reserve Banks as a condition precedent to commencing business, does not require that such minimum capitalization shall be preserved under the circumstances."

The text of the opinion follows:

DEPARTMENT OF JUSTICE, Washington, April 14, 1916. SIR: At the request of the Federal Reserve Board, you have submitted the following questions for my opinion:

I. Can the Federal Reserve Board legally change the present location of any Federal Reserve Bank:

(a) In the case where there has been no alteration in the district lines; and

(b) In the case where there has been such readjustment of district lines as in the opinion of the Board necessitates the designation of a new Federal Reserve city in order that due regard may be given to the convenience and customary course of business as required by section 2 of the Federal Reserve Act?

II. Must the Federal Reserve Board, in exercising its admitted power to readjust preserve the $4,000,000 minimum capitaliza

tion required of each Federal Reserve Bank as a condition precedent to the commencement of business?

I.

In my opinion of November 22, 1915, I expressed the view that the Federal Reserve Act does not confer on the Federal Reserve Board the power to abolish any of the existing Federal Reserve Banks or Federal Reserve districts. I believe that the reasoning of that opinion is equally applicable to both branches of the first question now submitted.

Section 2 of the Federal Reserve Act provides:

"As soon as practicable, the Federal Reserve Bank Organization Committee shall designate not less than eight nor more than twelve cities to be known as Federal Reserve cities, and shall divide the continental United States * * * into districts, each district to contain only one of such Federal Reserve cities. The determination of said organization committee shall not be subject to review except by the Federal Reserve Board when organized: Provided, That the districts shall be apportioned with due regard to the convenience and customary course of business and shall not necessarily be coterminous with any State or States. The districts thus created may be readjusted and new districts may from time to time be created by the Federal Reserve Board, not to exceed twelve in all. Such districts shall be known as Federal Reserve districts and may be designated by number.

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"Said organization committee shall be authorized ** * * to make such investigation as may be deemed necessary by the said committee in determining the reserve districts and in designating the cities within such districts where such Federal Reserve Banks shall be severally located."

The same section further provides:

"The said committee shall supervise the organization, in each of the cities designated, of a Federal Reserve Bank, which shall include in its title the name of the city in which it is situated, as 'Federal Reserve Bank of Chicago.'

Since the Act thus provides that each city designated as a Federal Reserve city is to be the location of a Federal Reserve Bank, it follows that a change in the location of a Federal Reserve Bank would in effect be the designation of a new Federal Reserve city and the abandonment of one previously designated. I find no more warrant in the Act for the

abandonment of one Federal Reserve city and the designation of a new one than I do for the abolition of a Federal Reserve district when once established.

The power to designate a new Federal Reserve city (12 cities having been named by the Organization Committee) or to change the location of a Federal Reserve Bank is not expressly conferred by the Act on the Federal Reserve Board. If the Board possesses such power, it is only by implication from the provision that"The determination of said organization committe shall not be subject to review except by the Federal Reserve Board when organized: Provided, That the districts shall be apportioned with due regard to the convenience and customary course of business and shall not necessarily be coterminous with any State or States. The districts thus created may be readjusted and new districts may from time to time be created by the Federal Reserve Board, not to exceed twelve in all."

In my opinion there is no clear indication, either in the provision just quoted or elsewhere in the Act, of an intent to confer on the Federal Reserve Board the power to change the location of Federal Reserve Banks by the designation of new Federal Reserve cities. On the contrary, there are indications of an opposite intent. As stated in my opinion of November 22, 1915, above referred to, "the merely negative statement that the determination of the Organization Committee shall not be subject to review except by the Federal Reserve Board when organized clearly can not be enlarged into an affirmative grant of power to the Board to review and set aside everything done by the Organization Committee. The reasonable view is that by that language Congress meant that the determination of the Organization Committee should not be subject to review at all, except in so far as the subsequent provisions specífically authorize a review by the Federal Reserve Board. The only subsequent provision authorizing a review of the determination of the Organization Committee by the Federal Reserve Board is contained in the sentence, "The districts thus created may be readjusted and new districts may from time to time be created by the Federal Reserve Board, not to exceed 12 in all.''

Again, as stated in that opinion, "a reading of the Act shows at once that the Organization Committee was created not merely for the purpose of attending to the formalities of organization or to serve as a stop-gap until

the Federal Reserve Board should come into existence, but that it had an independent function to perform and to that end was invested with wide powers. That is to say, its function was to organize the system as contradistinguished from the function of the Federal Reserve Board, which was primarily to administer the system.

The duty of designating Federal Reserve cities belonged to the Reserve Bank Organization Committee as a part of the organization of the system, and the committee was required by the Act to designate not less than 8 nor more than 12 cities. This duty is named first among those imposed upon the Organization Committee, and it is imposed by the same provision of section 2 which required the committee to divide the United States into Federal Reserve districts. The same considerations that indicate an intention that the several districts should be permanent would also indicate that the designation of the cities was not to be made for temporary purposes, but was intended to be permanent, subject, of course, to change by Congress. The designation was to be made only after thorough investigation, and the same machinery was provided to facilitate both the determination of the districts and the designation of the cities. Thus, section 2 provides:

"Said Organization Committee shall be authorized to employ counsel and expert aid, to take testimony, * * * and to make such investigation as may be deemed neces* * * in determining the reserve districts and in designating the cities within such districts where such Federal Reserve Banks shall be severally located."

In my opinion, this coupling of the duty of determining the districts with the duty of designating the Federal Reserve cities within the several districts shows an intention on the part of Congress that the cities so designated are to constitute the fixed centers in the scheme or system of division, the duty of designating the cities being coordinate with the duty of forming districts around them. It was left to the discretion of the Organization Committee whether it should designate the full number of Federal Reserve cities and establish the full number of Federal Reserve districts permitted by the Act. The committee elected to designate and establish the full number authorized, thereby practically suspending the operation of the provision of the Act that "new districts may from time to time be created by the Fed

and the remainder of the subscription, or any part thereof, shall be subject to call when deemed necessary by the Federal Reserve Board * *

Section 4 contains the following provision: "When the minimum amount of capital stock prescribed by this Act for the organization of any Federal Reserve Bank shall have been subscribed and allotted, the Organization Committee shall designate any five banks * * to execute a certificate of organization. *

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Upon the filing of such certificate with the Comptroller of the Currency, the said Federal Reserve Bank shall become a body corporate." The decrease of capital stock is authorized by the following provision of section 5:

"The outstanding capital stock shall be increased from time to time as member banks increase their capital stock and surplus, or as additional banks become members, and may be decreased as member banks reduce their capital stock or surplus or cease to be members."

Additional provisions relating to the decrease of capital stock are found in sections 5 and 6, as follows:

"SEC. 5.

When a member bank reduces its capital stock it shall surrender a proportionate amount of its holdings in the capital of said Federal Reserve Bank, and when a member bank voluntarily liquidates, it shall surrender all of its holdings of the capital stock of said Federal Reserve Bank and be released from its stock subscription not previously called. In either case the shares surrendered shall be canceled and the member bank shall receive in payment therefor*** a sum equal to its cash-paid subscriptions on the shares surrendered * * * less any liability of such member bank to the Federal Reserve Bank.

"SEC. 6. If any member bank shall be declared insolvent * * the stock held by it in said Federal Reserve Bank shall be canceled * * * and all cash-paid subscriptions on said stock, with one-half of one per cent per month from the period of last dividend, not to exceed the book value thereof, shall be first applied to all debts of the insolvent momber bank to the Federal Reserve Bank, and the balance, if any, shall be paid to the receiver of the insolvent bank. Whenever the capital stock of a Federal Reserve Bank is reduced, either on account of a reduction in capital stock of any member bank or of the

liquidation or insolvency of such bank, the board of directors shall cause to be executed a certificate to the Comptroller of the Currency showing such reduction of capital stock and the amount repaid to such bank." In section 9 it is provided:

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"If at any time * * a member bank has failed to comply with * * the regulations of the Federal Reserve Board, it shall be within the power of the said Board, after hearing, to require such bank to surrender its stock in the Federal Reserve Bank; * and said Federal Reserve Bank_shall, upon notice from the Federal Reserve Board, be required to suspend said bank from further privileges of membership, and shall within thirty days of such notice cancel and retire its stock and make payment therefor in the manner herein provided."

It will be observed from the foregoing quotations that the Federal Reserve Act expressly provides that no Federal Reserve Bank shall commence business with a subscribed capital of less than $4,000,000. (Sec. 2.) They were each to be organized when the minimum amount of capital stock had been subscribed. (Sec. 4.) Only three-sixths of the capital subscribed is required to be paid in, the remainder being left "subject to call when deemed necessary by the Federal Reserve Board." (Sec. 2.)

The Act specifically provides for the decrease of capital stock (1) as member banks reduce their capital stock; and (2) as they cease to be members. (Sec. 5.)

Member banks may cease to be members for any of four causes

(a) Voluntary liquidation (sec. 5);

(b) Insolvency (sec. 6);

(c) Violation of regulations of Federal Reserve Board (sec. 9);

(d) Transfer from one Federal district to another through readjustment of districts (sec. 2).

The Act specifically requires the cancellation of capital stock where membership ceases under (a), (b), or (c). (Secs. 5, 6, and 9.)

No specific provision is made for cancellation of capital stock where membership ceases under (d).

While the minimum capital had to be subscribed in order to commence business, the maintenance of that minimum is nowhere prescribed by the Act. The fact that the Board is to determine whether more than half the subscription is to be paid in seems to indicate that the minimum to be subscribed was fixed

as a precaution to make sure that ample credit should be pledged to insure the success of the system.

Not only is the maintenance of the minimum not prescribed, but express provision is made for reducing the capital stock as, or whenever, member banks cease to be members. This language is general and includes in its terms all cases in which member banks cease to be members. It is coupled with no expressed condition that the minimum capitalization be preserved; and since the Federal Reserve Act required the organization of the Federal Reserve Banks upon the subscription of the minimum, it is obvious that any reduction whatever made after commencing business might reduce the capital below the minimum.

It is plain that a member bank can be a member only of the Federal Reserve Bank of the district in which both are located. This is obvious from the nature of the Federal Reserve districts and is assumed in sections 2, 4, and 9. Of necessity, therefore, when the Federal Reserve Board, in the exercise of its power to readjust, transfers a member bank from one district to another, such transferred bank must cease to be a member of the Federal Reserve Bank of the district from which it is transferred. When it thus ceases to be a member, the capital of the Federal Reserve Bank may be reduced; and there is nothing in the Act requiring the reduction to be made subject to the maintenance of a minimum capital.

It is to be noted that section 5 provides that the capital stock shall be increased and may be decreased under the conditions therein mentioned. Succeeding provisions of sections 5, 6, and 9, however, make it clear that may is here used in the sense of shall, as applied to cases arising under (a), (b), and (c). It seems reasonable to infer that it is used in the same sense as applied to (d). But whether so used or used in its more literal sense is here immaterial, for so far as the answer to the question submitted is concerned, the result is the same whether the Board is required or merely authorized to reduce the capital when member banks cease to be members.

Nor can any significance be attached to the fact that specific provision is made for reducing the capital stock of a Federal Reserve Bank in cases arising under (a), (b), and (c), while the Act is silent as to cases arising under (d). The cases specifically provided for include cases where the member banks cease to be members as the direct result of their own acts or conduct. Cases under (d) arise where banks cease to be

members as an incident of the exercise of the power of the Federal Reserve Board to readjust districts. The grant of the specific power to readjust carries with it, as fully as if expressed in the Act, the power to do what is necessarily incidental. (Broom's Maxims, 7th ed., 505; 199 U. S., 12.)

My conclusion as to the second question submitted is that the Federal Reserve Act, in prescribing a minimum capitalization of $4,000,000 for Federal Reserve Banks as a condition precedent to commencing business, does not require that such minimum capitalization shall be preserved under the circumstances. Very respectfully,

Acceptances Not Subject to Stamp Tax.

The following ruling as to revenue stamps on acceptances has been made by the Acting Commissioner of Internal Revenue, Treasury Department, and no stamps need be used: APRIL 3, 1916.

Hon. CHARLES S. HAMLIN,

Governor Federal Reserve Board,
Washington, D. C.

SIR: In response to your communication of the 27th ultimo, inclosing copy of a letter received, you are advised that drafts, acceptancos, overdrafts, and post-dated checks are not taxable under the act of October 22, 1914, as promissory notes:

Your attention is invited to paragraph I of T. D. 2170, as follows:

(1) In view of the decision made by the Supreme Court of the United States in the case of the United States v. Isham (17 Wall., 496), that "the liability of an instrument to a stamp duty, as well as the amount of such duty, is determined by the form and face of the instrument, and can not be affected by proof of facts outside of tho instrument itsolf," this office is of the opinion that drafts, acceptances, overdrafts, and post-dated checks are not taxable under the above act as promissory notes, even though they are used in such a way as to perform some of the functions of a promissory note.

Respectfully,

DAVID A. GATES, Acting Commissioner.