Raichle v. Federal Reserve Bank of New York

• Decision Date: 15 July 1929
• Docket Number: No. 354.,354.
• Citation: 34 F.2d 910
• Parties: RAICHLE v. FEDERAL RESERVE BANK OF NEW YORK.
• Court: U.S. Court of Appeals — Second Circuit

34 F.2d 910 (1929)

RAICHLE v. FEDERAL RESERVE BANK OF NEW YORK.

No. 354.

Circuit Court of Appeals, Second Circuit.

July 15, 1929.

Frank G. Raichle, of Buffalo, N. Y. (Robert L. Owen, of Washington, D. C., and Carlos C. Alden and Ethan W. Judd, both of Buffalo, N. Y., of counsel), for appellant.

Newton D. Baker, of Cleveland, Ohio, and Walter S. Logan, of New York City, for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge (after stating the facts as above).

The wrongs charged against the bank are (a) spreading propaganda concerning an alleged money shortage and increasing volume of collateral loans; (b) setting about to restrict the supply of credit available for investment purposes by engaging in open market transactions through the sale of its securities; (c) raising the rediscount rate for its member banks in order to reduce the volume of security loans; (d) coercing member banks to call collateral loans by declining to rediscount eligible commercial paper for such member banks.

Three principal questions must be considered:

(1) Are the foregoing acts, irrespective of the alleged purpose to reduce the volume of brokers' loans, within the power of the Federal Reserve Bank?

(2) If the acts are, generally speaking, lawful, are they rendered unlawful because the purpose was to reduce the volume of brokers' loans?

(3) Is the Federal Reserve Board a necessary party to the action?

The Federal Reserve Act (12 USCA § 221 et seq.) marked the end of a long struggle and was thought to afford the solution of many difficulties. When the Independent Treasury Bill (9 Stat. 59) was passed in 1846, the effect was completely to divorce the government from all connection with the money market, by making it its own banker and by keeping government funds in the vaults of independent treasury office banks. The public then had to depend on state banks for currency and credit, with a result that in times of financial stress is well known.

To meet the necessities of the Civil War, national banks were established. They became the official depositories of the government and furnished an enlarged currency, because of their ability to issue circulating notes against government bonds deposited with the Treasurer of the United States. They were required to maintain reserves in certain cities, based upon a percentage of their deposits. As the government debts of the Civil War became liquidated, the means for issuing currency lessened, though the business requirements of the country were expanding. In such a situation business prosperity inevitably promoted monetary stringency. Moreover, as the reserves were deposited in relatively few banks in the metropolitan centers, when financial stringencies arose, pressure always came on the banks, their deposits would be withdrawn, the rates for call loans would advance, and a liquidation of collateral and depreciation of values would ensue.

While the national banking system was a great improvement over what went before, it provided no central regulating force, and furnished no adequate means for controlling interest rates, or preventing or lessening financial stringencies and panics. The usual method of furnishing funds needed for business was for the Treasury to deposit moneys from its vaults in the national banks and to withdraw these deposits, if they were used too much in speculation. This was a rather ineffectual way of dealing with complicated and difficult situations. It was dependent too much upon the determination of a single official and lacked the information and guidance that a scientific federal banking system would afford.

To remedy the difficulties we have mentioned, the Federal Reserve Act was passed. The Federal Reserve Banks have national charters and their stockholders are member banks. Each Federal Reserve Bank has nine directors, three chosen from the member banks, three selected as representatives from industry, and three designated by the Federal Reserve Board — a central body consisting of the Secretary of the Treasury, the Comptroller of the Currency, and six other members appointed by the President with the consent of the Senate. This board is given, by law, the power to exercise general supervision over Federal Reserve Banks. It is in terms empowered to examine the affairs of each Federal Reserve Bank and to publish weekly a statement showing the condition of each bank, as well as a consolidated statement of all the banks in the system. It is also specifically empowered to permit, or in certain cases to require, Federal Reserve Banks to rediscount the discounted paper of other reserve banks, and to suspend, for a limited time, reserve requirements, and it is empowered to review and determine rates of discount to be charged by Federal Reserve Banks "which shall be fixed with a view of accommodating commerce and business."

Furthermore a Federal Advisory Council is created by the act, with a delegate member from each Federal Reserve Bank. This council is authorized to confer with the Federal Reserve Board on general business conditions, to make oral or written representations concerning matters within the jurisdiction of the board, and to call for information and to make recommendations in regard to discount rates, rediscount business, note issues, reserve conditions in the various districts, the purchase and sale of gold and securities by reserve banks, open market operations by those banks, and the general affairs of the Reserve Banking System.

The foregoing outline shows the broad purposes of the Act and the wide powers of supervision and control given to the Federal Reserve Board over the whole Reserve System. The congressional report of Senator Glass stated the objects of the act as follows:

"(1) Establishment of a more nearly uniform rate of discount throughout the United States, and thereby the furnishing of a certain kind of preventive against overexpansion of credit which should be similar in all parts of the country.

"(2) General economy of reserves, in order that such reserves might be held ready for use in protecting the banks of any section of the country, and for enabling them to go on meeting their obligations, instead of suspending payments, as so often in the past.

"(3) Furnishing of an elastic currency by the abolition of the existing bond-secured note issue in whole or in part, and the substitution of a freely issued and adequately protected system of bank notes, which should be available to all institutions which had the proper class of paper for presentation.

"(4) Management and commercial use of the funds of the government which are now isolated in the Treasury and subtreasuries in large amounts.

"(5) General supervision of the banking business and furnishing of stringent and careful oversight.

"(6) Creation of market for commercial paper."

To carry out the purposes of the act, Federal Reserve Banks, subject to the supervision of the Federal Reserve Board, are authorized to act as government depositories and fiscal agents; to receive and maintain the legal reserves of member banks; upon endorsement of member banks to discount notes, drafts, and bills of exchange arising out of actual commercial transactions, but not "notes, drafts, or bills covering merely investments, or issued for the purposes of carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the government of the United States"; to make advances to member banks on their promissory notes for not more than 15 days at rates to be established by the Federal Reserve Banks, subject to the review and determination of the Federal Reserve Board, provided such promissory notes are secured by eligible paper, or by bonds, or notes of the United States, to receive Federal Reserve notes upon deposit of eligible paper, or gold, or gold certificates, provided a gold reserve of not less than 40 per cent. of such notes is maintained. USCA tit. 12, c. 3, §§ 341-361.

Federal Reserve Banks may also, under rules and regulations prescribed by the Federal Reserve Board, engage in "open market operations"; that is to say, purchase and sell in the open market at home or abroad cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities eligible for rediscount. They may deal in gold coin and bullion at home and abroad; buy and sell, at home and abroad, bonds and notes of the United States, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued by any state, county, district, political subdivision, or municipality in the United States, such purchases to be made in accordance with regulations prescribed by the Federal Reserve Board. They may purchase from member banks, and sell, bills of exchange arising out of commercial transactions, and may "establish from time to time, subject to review and determination by the Federal Reserve Board, rates of discount to be charged by the Federal Reserve Bank for each class of paper, which shall be fixed with a view of accommodating commerce and business." They may establish accounts with other Federal Reserve Banks, with the consent and upon the order and direction of the Federal Reserve Board, and, under regulations to be prescribed by said board, may open accounts and establish agencies in foreign countries for the purpose of purchasing, selling, and collecting bills of exchange. They may purchase and sell in the open market, either from or to domestic banks, firms, corporations, or individuals, acceptances of Federal Intermediate Credit Banks and of national agricultural credit corporations whenever the Federal Reserve Board shall declare that the public interest so requires. USCA tit. 12, c. 3, §§ 353-357.

The foregoing provisions enable the Federal Reserve Banks, without waiting for applications from their member banks for loans or rediscounts, to adjust the...