FEDERAL RESERVE BOARD

WASHINGTON

ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL*RESERVE BOARD

X-6350

July 27, 1929,

Dear Sir;

Hie committee consisting of Mr. Rounds of the Federal Reserve Bank of New York and Mr. Smead of the Board's staff, which was appointed t>y the last Govefcndrs1 conference to cohfef With Treasury offi-cials and express the opinion of the conference that the Federal reserve agents' redemption fund should "be discontinued has submitted a further report, a copy of which is attAche^ hereto* in whidh it mtihEes t certain redotimendations with regard to the retire^ meftt of Federal reserve notes. Before presenting this report to the Federal Reserve Board or taking it up with the Treasury Department, I would like to have an expression of your views with regard to the advisability of adopting the recommendations con-tained in the Committee's report. The Federal Re-serve Agent is also "being asked whether or not he favors the recommendations contained in the report.

Very truly yours,

Udmund Piatt, Vice Governor.

Enclosure.

TO GOVERNORS OF ALL F. R. BANKS.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

To" Federal Reserve Board SUBJECT: Retirement of Federal Reserve Notes

From Mr. Rounds - Mr. Smead

In accordance with a resolution adopted at the last Governors' Con-ference , the Chairman appointed the undersigned a committee "to confer with Treas-ury officials and express the opinion of the conference that an effort should he made to do away with the Federal reserve agents' fund (redemption fund for Federal reserve notes) if agreeable to the Treasury." The committee has since conferred with officials of the Treasury, and under date of July 12 submitted a report to the Federal Reserve Board together with a draft of a letter to the Secretary of the Treasury re commending the discontinuance of the ftind. The Board approved this letter, and on July 23 the Secretary of the Treasury authorized the discon-tinuance of the gents' redemption funds.

In considering this subject another matter relating to the redemption of Federal reserve notes came to our attention, with respect to which we desire to report further to the Fedoral Reserve Board. The procedure for the redemption of Federal reserve note's which has hoen followed for several years by all Federal reserve banks has boon as follows; Federal reserve notes are shipped to tho Treasurer of the United States by the Federal reserve banks, the lowers and uppers separately. On the date of shipment the Fedoral reserve banks charge the notes to the account "Mutilated Federal reserve notes forwarded for redemption". Upon receipt of the notes at the Treasury Department a bundle count is made, after which the Treasurer telegraphs the Federal reserve bank acknowledging receipt of the same, whereupon the Federal reserve bank credits mutilated notes forwarded for redemption and both the bank and the agent reduce the amount of Federal reserve notes outstanding. This procedure makes it necessary for Federal reserve banks to maintain collateral with the Federal reserve agent against notes in transit to Washington for redemption, as well as against notes in actual circulation and notes in the hands of the Federal! reserve banks.

Some of the Federal reserve banks, particularly the Federal Reserve Bank of Atlanta, have at times experienced difficulty in maintaining their deposit reserves above the minimum required bgr law because of the large amount of gold ifliich they had to deposit with the Federal reserve agent as collateral security for 09%standing notes, such gold not being permitted to be counted, as a part of the reserve required against deposits. The Atlanta bank usually has a relatively large volume of notes outstanding, partly because it has to keep a supply of issued Botes at the head office and its four branches and the Savannah Agency„ but largely because of the substantial volume, of notes it has to maintain at its sgency in Havana. This bank would like to be relieved of the necessity of carrying collat-eral with the Federal reserve agent against notes in transit to Washington, which since the new-size currency was issued have at times been in excess of $5,000,OCX), and has suggested to the committee that it be permitted to reduCj| the amount of Federal reserve notes outstanding andx consequently' the collateral/with the Federal reserve agent at the time of shipping Federal reserve notes to Washington for re-demption. It is not believed that it would be permissible under the Federal Reserve Act for the Atlanta bank to adopt tiiis procedure unless it turned the Fed-eral reserve notes over to the agent for shipment to Washington,

X-6 3^A

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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e e After giving consideration to this matter We believe that it would he desir-able for all Federal reserve banks to retire Federal reserve not6s dn the date bf shipment to Washington rather than on the date of arrival at Washington. This would require that the Federal reserve notes he turned over to the Federal reserve agent and that shipment to Washington be made to the Comptroller of the Currency for the agents' accounts, rather than to the Treasurer of the United States for tiie account of the banks as at present. As a matter of fact the Federal Reserve Act clearly contemplated that this procedure should be followed, the last sentence of paragraph 4 of Section 16 of the Act reading as follows; "Federal reserve notes unfit for circulation shall he returned by the Federal reserve agents to the Comp-troller of the Currency for cancellation and destruction". If this suggestion is adopted it will be sufficient for each Federal reserve agent to designate a man in his department or possibly in the currency department of the bank to package count the Federal reserve notes prepared for shipment to Washington by the Federal re-serve bank and for the shipment to be made in the name of the Federal reserve agent. In this case fche notes, of course, would be shipped to the Comptroller of the Currency instead of to the Treasurer of the United States. There is a prece-dent for designating an employee in the banking department to act for the Federal reserve agent, in the arrangement that has been in force for many years whereby collateral pledged against Federal reserve notes is held in the joint custody of the Federal reserve bank and agent , the agent having designated an employee in the discount department to act in his behalf.

Under the present procedure both halves of all Federal reserve notes are shipped to the Treasurer of the United States, the lowers being given a 100 per cent count in the National Bank Redemption Agency, after which the uppers are turn-ed over to the Federal Reserve Issue and Redemption Division of the Comptroller's office, where they are also given a complete count. There is, therefore, at pre-sent a 100 per cent count of these notes in each redemption agency, whereas tho procedure followed with respect to all United States currency calls for a 100 per cent count of the lowers and a 10 per cent count of the uppers. The reason for a second complete count of the Federal reserve notes is that Federal reserve notes are sorted according to the bank of issue and any errors in sorting that are not detected result * 3 errors in the circulation figures of the respective banks.

We obtained from the National Bank Redemption Agency a record of the errors discovered in the second count during the month of May 1929. and found that . 535 such errors were detected, involving a dollar value of this anount being less than one/two-hundredths of one per cent of the $122,000,000 of notes handled in that month. Undoubtedly a considerable number of these errors would offset each other so far as circulation figures are concerned, but even though there were no offset it is our view that the amount involved is not sufficient to justify the added expense of a second 100 per cenftount. We have no doubt but that if a third or fourth count were made there would still be additional errors detected.

It is recommended, therefore, that arrangements be made to have Federal re-serve notes retired by the banks turning them over to the Federal reserve agents, that shipments of lowers be made to the Comptroller of the Currency in the name of the Federal reserve agent where they will bo giveu a 100 per cent count, and that uppers continue to be shipped to the national^ank Redemption Agency and that that agency give them a 10 per cent or test count oftly.

L. R. Rounds E. L. Smead

July 26, 1929. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis